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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 2003
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 0-11428
INFORMATION RESOURCES, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2947987
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 North Clinton Street, Chicago, Illinois 60661
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 726-1221
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares of the registrant's common stock, $.01 par value per share
outstanding, as of October 31, 2003 was 31,287,225.
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 4 - Controls and Procedures 20
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 21
Signatures 22
2
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,122 $ 8,968
Accounts receivable, net 67,924 85,453
Prepaid expenses and other 12,848 15,801
----------- -----------
Total Current Assets 94,894 110,222
----------- -----------
Property and equipment, at cost 243,993 234,857
Accumulated depreciation (192,267) (171,478)
----------- -----------
Net property and equipment 51,726 63,379
Deferred income taxes 6,067 6,286
Investments 12,991 13,165
Other assets 174,780 166,145
----------- -----------
$ 340,458 $ 359,197
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,367 $ 3,639
Accounts payable 56,109 66,614
Accrued compensation and benefits 15,095 17,797
Accrued property, payroll and other taxes 4,014 1,876
Accrued expenses 7,187 6,207
Accrued restructuring costs 1,794 7,838
Deferred revenue 29,934 36,247
----------- -----------
Total Current Liabilities 117,500 140,218
----------- -----------
Long-term debt 2,180 4,495
Other liabilities 9,831 10,812
STOCKHOLDERS' EQUITY
Preferred stock-authorized, 1,000,000 shares,
$.01 par value; none issued -- --
Common stock - authorized 60,000,000 shares,
$.01 par value; 30,727,260 and
29,808,550 shares issued and
outstanding, respectively 310 301
Additional paid-in capital 206,266 202,857
Retained earnings 6,874 6,906
Accumulated other comprehensive loss (2,503) (6,392)
----------- -----------
Total Stockholders' Equity 210,947 203,672
----------- -----------
$ 340,458 $ 359,197
=========== ===========
The accompanying notes are an integral part of these statements.
3
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Information services revenues $ 136,029 $ 140,561 $ 416,061 $ 413,512
Costs and expenses:
Information services sold (122,854) (127,190) (377,708) (373,321)
Selling, general and administrative expenses (12,214) (11,931) (34,560) (34,938)
Special charges, net (727) - (2,999) (7,152)
--------- --------- --------- ---------
(135,795) (139,121) (415,267) (415,411)
--------- --------- --------- ---------
Operating income (loss) 234 1,440 794 (1,899)
Interest expense (123) (241) (470) (584)
Other, net (260) 46 (324) 189
Equity in (losses) earnings of affiliated companies (10) 246 (118) 512
Minority interest (expense) benefit (3) - 61 395
--------- --------- --------- ---------
Income (loss) before income taxes and cumulative effect of
accounting change (162) 1,491 (57) (1,387)
Income tax benefit (expense) 71 (641) 25 239
--------- --------- --------- ---------
Income (loss) before cumulative
effect of accounting change (91) 850 (32) (1,148)
Cumulative effect of accounting change -
impairment of goodwill - - - (7,065)
--------- --------- --------- ---------
Net income (loss) $ (91) $ 850 $ (32) $ (8,213)
========= ========= ========= =========
Net income (loss) per common share before cumulative
effect of accounting change - basic $ - $ .03 $ - $ (.04)
========= ========= ========= =========
Net income (loss) per common share - basic $ - $ .03 $ - $ (.28)
========= ========= ========= =========
Net income (loss) per common and common equivalent share
before cumulative effect of accounting change - diluted $ - $ .03 $ - $ (.04)
========= ========= ========= =========
Net income (loss) per common and
common equivalent share - diluted $ - $ .03 $ - $ (.28)
========= ========= ========= =========
Weighted average common shares - basic 30,272 29,579 29,969 29,534
========= ========= ========= =========
Weighted average common and
common equivalent shares - diluted 30,272 29,920 29,969 29,534
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
4
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (32) $ (8,213)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of deferred data procurement costs 109,175 98,637
Depreciation 18,946 20,380
Amortization of capitalized software costs and intangibles 1,266 2,352
Special charges, net of cash paid (6,044) (1,922)
Deferred income tax benefit (25) (239)
Equity in losses (earnings) of affiliated companies and minority
interests 57 (907)
Impairment of goodwill - 7,065
Other (60) 625
Change in assets and liabilities:
Accounts receivable 17,559 (2,031)
Prepaid expenses and other 2,953 390
Accounts payable and accrued liabilities (10,089) (5,696)
Deferred revenue (6,313) 957
Other, net (4,070) (1,303)
---------- ----------
Net cash provided by operating activities 123,323 110,095
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred data procurement costs (110,617) (105,905)
Purchase of property, equipment and software (6,538) (10,972)
Capitalized software costs (2,371) (1,435)
Other, net 3 193
---------- ----------
Net cash used by investing activities (119,523) (118,119)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net bank borrowings (repayments) - 1,779
Purchases of Common Stock - (1,196)
Proceeds from issuance of stock and exercise of stock options 3,161 1,840
Net repayments of capitalized leases (2,939) (3,177)
---------- ----------
Net cash provided (used) by financing activities 222 (754)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,132 429
---------- ----------
Net increase (decrease) in cash and cash equivalents 5,154 (8,349)
Cash and cash equivalents at beginning of period 8,968 13,708
---------- ----------
Cash and cash equivalents at end of period $ 14,122 $ 5,359
========== ==========
The accompanying notes are an integral part of these statements.
5
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Principles of consolidation: The condensed consolidated financial
statements include the accounts of Information Resources, Inc. and all wholly or
majority owned subsidiaries and affiliates (collectively the "Company").
Minority interests reflect the non-Company owned stockholder interests in
international operations. The equity method of accounting is used for
investments in which the Company has a 20% to 50% ownership interest because it
exercises significant influence over operating and financial policies. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Interim financial statements: The interim financial statements are
unaudited, but include all adjustments (consisting of normal recurring
adjustments) necessary, in the opinion of management, for a fair statement of
financial position and results of operations for the period presented. The
preparation of interim financial statements necessarily relies on estimates,
requiring the use of caution in estimating results for the full year based on
interim results of operations.
Income (loss) per common and common equivalent share: Net income (loss)
per share is based upon the weighted average number of shares of common stock
outstanding during each period. Net income (loss) per common and common
equivalent share - diluted is based upon the weighted average number of shares
of common stock and common stock equivalents, entirely comprised of stock
options, outstanding during each period. For the first three quarters of 2003
and 2002, all stock options aggregating 7,958,456 shares and 8,909,924 shares,
respectively, were excluded from the weighted average shares outstanding
calculation because they were anti-dilutive. For the third quarter of 2003 and
2002, stock options aggregating 7,958,456 shares and 6,238,930 shares,
respectively, were excluded from the weighted average shares outstanding
calculation because they were anti-dilutive.
Stock-Based Compensation: Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based COMPENSATION," as amended by Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock. The Company
grants options at the quoted market price of the stock and therefore recognizes
no compensation expense.
6
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
The following table illustrates the effect on the net income (loss) and
net income (loss) per share for the third quarter and the nine months ended
September 30, 2003 and 2002 if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
(in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported $ (91) $ 850 $ (32) $ (8,213)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (694) (842) (2,235) (2,654)
------ ------- ------- --------
Net income (loss), pro forma $ (785) $ 8 $(2,267) $(10,867)
====== ======= ======= ========
Earnings (loss) per share:
Basic -- as reported $ - $ .03 $ - $ (.28)
====== ======= ======= ========
Basic -- pro forma $ (.03) $ - $ (.08) $ (.37)
====== ======= ======= ========
Diluted -- as reported $ - $ .03 $ - $ (.28)
====== ======= ======= ========
Diluted -- pro forma $ (.03) $ - $ (.08) $ (.37)
====== ======= ======= ========
The above table is based upon the valuation of option grants using the
Black-Scholes pricing model for traded options with assumed risk-free interest
rates of 2.87% and 3.82% for 2003 and 2002, respectively; stock price volatility
factor of 86.6% for 2003 and 2002; and an expected life of the options of five
years. Using the foregoing assumptions, the calculated weighted-average fair
value of options granted in 2003 and 2002 was $.88 and $5.40, respectively.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the input
assumptions can materially affect the fair value estimate, in management's
opinion, the model does not necessarily provide a reliable single measure of the
fair value of its employee stock options.
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during the period was as
follows (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2003 2002
---- ----
Interest $474 $572
Income taxes 913 340
7
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
Non-cash investing and financing activities are excluded from the
consolidated statement of cash flows. During the nine months ended September 30,
2003 and 2002, the Company acquired computer and data collection equipment for
$.4 million and $4.8 million, respectively, in exchange for capital lease
obligations.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable were as follows (in thousands):
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
Billed $ 56,131 $ 70,216
Unbilled 17,106 19,832
-------- --------
73,237 90,048
Allowance for doubtful accounts (5,313) (4,595)
-------- --------
$ 67,924 $ 85,453
======== ========
NOTE 4 - INVESTMENTS AND OTHER ASSETS
Investments were as follows (in thousands):
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
Mosaic InfoForce, L.P., at cost plus equity in
undistributed earnings $ 4,727 $ 4,845
Datos Information Resources, at cost plus equity in
undistributed earnings 3,963 4,009
GfK Panel Services Benelux B.V., at cost 1,315 1,315
Middle East Market Research Bureau, at cost 2,758 2,768
Other 228 228
-------- --------
$ 12,991 $ 13,165
======== ========
Other assets were as follows (in thousands):
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
Deferred data procurement costs -
net of accumulated amortization of
$157,631 in 2003 and $152,635 in 2002 $167,367 $160,615
Capitalized software costs - net of
accumulated amortization of $1,998
in 2003 and $2,315 in 2002 5,639 4,341
Other - net of accumulated amortization of $6,050
in 2003 and $5,867 in 2002 1,774 1,189
-------- --------
$174,780 $166,145
======== ========
8
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 5 - LONG-TERM DEBT
Long-term debt was as follows (in thousands):
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
Bank borrowings $ - $ -
Capitalized leases and other 5,547 8,134
-------- --------
5,547 8,134
Less current maturities (3,367) (3,639)
-------- --------
$ 2,180 $ 4,495
======== ========
In July 2002, the Company entered into a $40.0 million credit facility
which expires in July 2005. The facility has floating rate interest options that
range between 2.25% and 3.00% over LIBOR and commitment fees of up to 0.50%
payable on the unused portion. Under the credit facility, the maximum commitment
of funds available for borrowings is limited by a defined borrowing base formula
related to eligible accounts receivable, which fluctuates during the quarter.
Borrowings under the facility are secured by the Company's assets. As of
September 30, 2003, the Company had $12.2 million of borrowing availability, net
of letters of credit, under the revolving credit facility.
On November 4, 2003, the Company's credit facility was reduced to $25
million pursuant to an agreement with the Company's lenders on October 22, 2003.
Also, pursuant to this agreement, the lenders consented to among other things,
the acquisition by Gingko Acquisition Corp. of all of the outstanding capital
stock of the Company and, in connection with such acquisition, agreed to release
their security interest in certain of the Company's assets if and when Gingko
Acquisition Corp. acquires 53% or more of the outstanding capital stock of the
Company. All other terms and conditions remain unchanged. See Note 9.
The financial covenants in the credit agreement, as well as in the
lease agreement for the Company's Chicago headquarters, require the Company to
maintain a minimum tangible net worth and to meet certain cash flow coverage and
leverage ratios. The agreements also limit the Company's ability to declare
dividends or make distributions to holders of capital stock, or redeem or
otherwise acquire shares of capital stock of the Company. The bank credit
agreement contains covenants which restrict the Company's ability to incur
additional indebtedness. As of September 30, 2003, the Company was in compliance
with all covenants.
9
\
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
The comprehensive income (loss) summary shown below sets forth certain
items that affect stockholders' equity but are excluded from the presentation of
net earnings. The components of comprehensive income (loss) were as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
------ ----- ------- -------
Net income (loss) $ (91) $ 850 $ (32) $(8,213)
Foreign currency translation
adjustment 455 173 3,889 3,809
------ ------- ------ -------
Comprehensive income (loss) $ 364 $ 1,023 $3,857 $(4,404)
====== ======= ====== =======
NOTE 7 - SEGMENT INFORMATION
The Company's business information services are conducted almost
exclusively in the United States and Europe. The Company's operations in other
markets account for approximately 1% of consolidated revenues. The Company
considers revenues from third parties and the aggregation of operating profit
(loss), equity earnings (losses) and minority interests ("Operating Results") on
a geographic basis to be the most meaningful measure of the operating
performance of each respective geographic segment and of the Company as a whole.
The following table presents certain information regarding the
operations of the Company by geographic segments (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- -----
Revenues:
U.S. Services $ 94,779 $ 104,202 $ 296,593 $ 309,009
International Services 41,250 36,359 119,468 104,503
---------- ---------- --------- ----------
Total Revenue $ 136,029 $ 140,561 $ 416,061 $ 413,512
========== ========== ========= ==========
Operating Results:
U.S. Services $ 4,088 $ 5,221 $ 14,132 $ 17,762
International Services:
Operating loss (400) (2,020) (5,054) (7,976)
Equity in losses of
affiliated companies - - - (78)
Minority interest (expense) benefit (3) - 61 395
---------- ---------- --------- ----------
Subtotal--International Services (403) (2,020) (4,993) (7,659)
Corporate and other expenses including
equity in affiliated companies (2,737) (1,515) (5,403) (3,943)
Special charges, net (a) (727) - (2,999) (7,152)
---------- ---------- --------- ----------
Operating Results 221 1,686 737 (992)
Interest expense and other, net (383) (195) (794) (395)
---------- ---------- --------- ----------
Income (loss) before income taxes $ (162) $ 1,491 $ (57) $ (1,387)
========== ========== ========= ==========
10
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
(a) Special charges for U.S. Services were $.7 million for the three months
ended September 30, 2003. Special charges for U.S. Services and International
Services were $3.0 million and $0.0 million, respectively, for the nine months
ended September 30, 2003 and $6.0 million and $1.1 million, respectively, for
the nine months ended September 30, 2002.
NOTE 8 - SPECIAL CHARGES
Since 1999, the Company has undertaken major initiatives as described
below resulting in significant or incremental expenditures that have been
classified as special charges in the Statement of Operations.
2003 Workforce Reductions: In the second and third quarters of 2003,
the Company eliminated approximately 140 full-time employees or approximately 6%
of its total workforce in the United States. The total charge for severance and
other costs approximates $3.3 million.
2002 Workforce Reduction: In the fourth quarter of 2002, the Company
eliminated approximately 5% of its total workforce in the United States and
Europe through layoffs and the elimination of open positions. Approximately 140
full-time employees were terminated in the fourth quarter of 2002 and the
beginning of 2003. A charge of $7.8 million was recorded in the fourth quarter
of 2002 for severance and other costs related to the layoffs when communication
of such benefits had been made to affected employees.
Project Delta: In the third quarter of 1999, the Company initiated a
comprehensive program named Project Delta. The objective of Project Delta was to
improve productivity and operating efficiencies to reduce the Company's ongoing
cost structure in its U.S. operations. The work outlined as part of Project
Delta was completed during the third quarter of 2001.
Transition of German Production to U.S. Facility: The Company made the
decision in the fourth quarter of 1999 to transfer production services for
Information Resources GfK GmbH from an external vendor in Germany to the
Company's U.S. headquarters facility in order to enhance its InfoScan offering
in Germany and to reduce future production costs. The transition of German
production to the U.S. facility began in the first quarter of 2000 and was
completed in the first quarter of 2002. 2002 charges of $1.1 million consisted
primarily of parallel processing and temporary workforce expenses.
Information Technology Assessment: During the fourth quarter of 2001,
the Company began a review of its information technology operations to assess
potential restructuring costs and benefits. The review included initial
assessments of database design, transition planning and cost and savings
estimates and was completed in the second quarter of 2002. This project resulted
in cost savings, process efficiencies and a plan for continuous improvement of
the technology infrastructure. Charges of $6.3 million during 2002 related
primarily to consulting fees paid to a third party.
11
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
The following tables reflect special charges incurred and cash payments
made during the nine months ended September 30, 2003 and 2002 (in thousands):
2003 ACTIVITY
LIABILITY AT ------------- LIABILITY AT
DECEMBER 31, 2002 PROVISION CASH SEPTEMBER 30, 2003
------------------ --------- -------- -------------------
SPECIAL CHARGES
2003 workforce reductions $ - $ 3,281 $ (2,354) $ 927
2002 workforce reduction 7,619 (282) (6,552) 785
Project Delta
Discontinued activities 219 - (137) 82
--------- --------- -------- ----------
$ 7,838 $ 2,999 $ (9,043) $ 1,794
========= ========= ======== ==========
LIABILITY 2002 ACTIVITY
(RECEIVABLE) AT ------------- LIABILITY AT
DECEMBER 31, 2001 PROVISION CASH SEPTEMBER 30, 2002
------------------ --------- -------- -------------------
SPECIAL CHARGES
Project Delta
Termination benefits $ 634 $ (240) $ (394) $ -
Discontinued activities 265 - (15) 250
Transition of German production
to U.S. facility 592 1,131 (1,723) -
Information technology
assessment 1,413 6,261 (7,674) -
OTHER ITEMS (1,036) - 1,036 -
--------- --------- -------- ----------
$ 1,868 $ 7,152 $ (8,770) $ 250
========= ========= ======== ==========
NOTE 9 - OTHER EVENTS
On September 8, 2003 the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with Gingko Corporation and Gingko Acquisition Corp.
Pursuant to the Merger Agreement, Gingko Acquisition Corp. commenced a tender
offer for all of the Company's outstanding common shares. As of November 4,
2003, Gingko Acquisition Corp. had accepted for payment all of the approximately
19,366,962 shares of common stock, or 62% of the outstanding common stock, that
were tendered. Gingko Acquisition Corp. commenced a subsequent offering period
which will expire on November 21, 2003 for the remaining outstanding shares of
the Company. Gingko Acquisition Corp. will then be merged into the Company with
the Company as the surviving entity and all remaining public shareholders will
receive the merger consideration in exchange for their shares of the Company.
The transaction is expected to be completed by the end of the year or early in
2004.
12
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51" ("Interpretation"). The
Interpretation requires the consolidation of entities in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interest in the entity. Currently, entities are
generally consolidated by an enterprise when it has a controlling financial
interest through ownership of a majority voting interest in the entity.
During 2000, the Company and Mosaic Group, Inc. formed a joint venture
company, Mosaic InfoForce, L.P. ("MIF"), in which the Company has a 49%
ownership interest and Mosaic Group, Inc., through wholly-owned subsidiaries,
owns the remainder. The Company's domestic causal and custom audit data
collection and merchandising services are provided by MIF pursuant to an
agreement that expires in 2010. The Company has evaluated its investment in MIF
and determined that it will begin consolidating MIF as of December 31, 2003. The
equity interest of MIF not owned by the Company will be reported as minority
interest upon consolidation.
MIF was financed with a $1.9 million initial equity contribution made
by the Company and an additional $2.1 million equity contribution made by Mosaic
Group, Inc., through wholly-owned subsidiaries. The Company capitalized $7.4
million in connection with the formation of MIF, which is currently being
accounted for using the equity method of accounting. As of September 30, 2003,
the Company has guaranteed $.6 million of MIF equipment capital leases that the
Company would be obligated to pay in the event MIF cannot make the payments
required under the leases. The capital leases have varying expiration dates
through 2004.
13
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following narrative discusses the results of operations, liquidity
and capital resources for the Company on a consolidated basis. This section
should be read in conjunction with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained therein.
OVERVIEW
The Company's market is very competitive and as a result of certain
trends and general economic conditions, the industry is facing a number of
challenges. Specifically, increasing customer consolidation among consumer
packaged goods ("CPG") manufacturers has caused the overall market for retail
tracking services to contract. In addition, retail tracking services offered by
the Company and its competitors, particularly in the U.S., now cover less of the
total marketplace than in prior years as a result of the decision by Wal-Mart in
2001 to discontinue providing its point-of-sale data to third party data
suppliers, including the Company and ACNielsen, and the emergence and growth of
new channels of trade that do not release point-of-sale data for inclusion in
retail tracking services. Further, general global economic conditions have
resulted in pricing pressure and reductions in overall customer spending on
retail tracking services. In addition, the Company has filed an antitrust
lawsuit against The Dun & Bradstreet Corp., A.C. Nielsen Co. (now owned by VNU,
N.V.) and IMS International, Inc. in which the Company alleges that it was the
target of numerous anticompetitive practices by the defendants aimed at
excluding the Company from the markets for retail tracking services. The Company
believes that such practices continue to impair its ability to compete in the
markets and to respond to the conditions confronting the industry. The Company
expects these conditions to continue to impact the consumer packaged goods
industry and the demand for retail tracking services for the foreseeable future.
For the nine months ended September 30, 2003, the Company's U.S. retail
tracking revenues, which comprise 73% of the U.S. business, declined by 4%
compared to the same period in 2002. The decline is the result of the financial
lag of customer losses in 2002, including the loss of the Procter & Gamble
("P&G") retail tracking contract in the U.S., that were not fully offset by
revenues generated from new customers and increased spending by existing
customers during the period.
Panel and analytics revenues were flat for the nine months ended
September 30, 2003 compared to the prior year primarily due to the loss of the
contractual P&G panel business in the U.S. Absent the impact of the P&G loss,
for the nine months ended September 30, 2003, the U.S. panel and analytics
business was 5% higher compared to the prior year as a result of increased
spending by existing customers, the addition of new customers and the
introduction of new products and services.
The International operating loss was lower for the first nine months of
2003 compared to the prior year. The loss continues to be driven primarily by
the Company's German operation as a result of difficulties encountered in
connection with the transition to a new service in that country. The Company
believes that most of the operational difficulties in Germany have been
addressed and that results will continue to improve during the remainder of
2003. International operating results for the period ended September 30, 2003,
excluding Germany, improved by approximately $1.7 million over the prior year
largely due to expense reductions. Absent the losses attributable to the German
business, the International operation would have reflected a profit for the nine
months ended September 30, 2003.
14
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
On September 8, 2003 the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with Gingko Corporation and Gingko Acquisition Corp.
Pursuant to the Merger Agreement, Gingko Acquisition Corp. commenced a tender
offer for all of the Company's outstanding common shares. As of November 4,
2003, Gingko Acquisition Corp. had accepted for payment all of the approximately
19,366,962 shares of common stock, or 62% of the outstanding common stock, that
were tendered. Gingko Acquisition Corp. commenced a subsequent offering period
which will expire on November 21, 2003 for the remaining outstanding shares of
the Company. Gingko Acquisition Corp. will then be merged into the Company with
the Company as the surviving entity and all remaining public shareholders will
receive the merger consideration in exchange for their shares of the Company.
The transaction is expected to be completed by the end of the year or early in
2004.
RESULTS OF OPERATIONS
The Company's consolidated net loss was $.1 million or $.00 per diluted
share for the third quarter of 2003 compared to a consolidated net income of $.9
million or $.03 per diluted share for the corresponding 2002 quarter. The
Company's consolidated net loss was $32 thousand or $.00 per diluted share for
the nine months ended September 30, 2003 compared to a consolidated net loss of
$8.2 million or $.28 per diluted share for the corresponding 2002 period. 2003
year-to-date results were positively impacted by lower special charges compared
to the prior year. Additionally, 2002 results included a charge of $7.1 million
relating to the cumulative effect of an accounting change for goodwill.
Third Quarter Versus Prior Year
Consolidated revenues for the quarter ended September 30, 2003 were
$136.0 million, a decrease of 3% over the corresponding quarter in 2002. U.S.
revenues were $94.8 million, a decrease of 9% compared to the prior year,
reflecting the loss of the P&G U.S. retail tracking contract. U.S. retail
tracking revenues declined by 6% from the prior year and U.S. panel and
analytics revenues decreased by 13% primarily due to the impact of the P&G loss
in the U.S. International revenues increased 13% to $41.3 million over the prior
year, however, on a local currency basis, International revenues increased 2%.
Consolidated costs of information services sold decreased 3% to $122.9
million for the three months ended September 30, 2003 compared to $127.2 million
for the third quarter of 2002. This decrease is primarily the result of savings
in a number of areas as a result of the Company's ongoing costs saving efforts
that were partially offset by foreign currency exchange effects and higher costs
relating to investments in new business initiatives.
Consolidated selling, general and administrative expenses increased 2%
to $12.2 million for the three months ended September 30, 2003 compared to $11.9
million for the third quarter of 2002. Expenses in the third quarter of 2003
included transaction costs of $1.6 million related to the pending tender offer
transaction for all of the Company's outstanding common shares. These costs were
offset by lower compensation in 2003 compared to the prior year.
Earnings before interest and other and taxes were $.2 million for the
third quarter of 2003 compared to $1.7 million in the prior year. Results
declined due to an increase in corporate professional fee expenses relating to
the pending tender offer transaction, a decrease in U.S. results primarily due
to the loss of the U.S. retail tracking contract with P&G and higher special
charges in 2003 which were partially offset by an improvement in International
results.
Special charges are discussed below. Interest and other expenses were
$.4 million for the third quarter of 2003, an increase of $.2 million over the
prior year.
15
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Third Quarter Year to Date Versus Prior Year
Consolidated revenues were $416.1 million for the nine months ended
September 30, 2003, an increase of 1% over the corresponding period of 2002.
U.S. revenues decreased 4% to $296.6 million for the nine months ended September
30, 2003 compared to the prior year. U.S. retail tracking revenues declined by
4% compared to the corresponding period in 2002 and U.S. panel and analytics
revenues were flat compared to the prior year. International revenues increased
by 14% to $119.5 million compared to the prior year, however, on a local
currency basis, International revenues decreased 1%.
Consolidated costs of information services sold increased 1% to $377.7
million for the nine months ended September 30, 2003 compared to costs of $373.3
million for the corresponding period of 2002. This increase is primarily the
result of foreign currency exchange effects. While the Company incurred
additional costs in certain areas including investments in new business
initiatives, these costs were generally offset by savings in a number of other
areas as a result of the Company's ongoing cost saving efforts.
Consolidated selling, general and administrative expenses decreased 1%
to $34.6 million for the nine months ended September 30, 2003 compared to $34.9
million for the prior year. This decline is attributable to lower compensation
that was partially offset by foreign currency exchange effects and professional
fees of $2.3 million incurred in connection with the pending tender offer
transaction.
For the first nine months of 2003, the Company's earnings before
interest and other and taxes were $.7 million compared to a loss of $1.0 million
in the prior year. The increase was the result of improved International results
and lower special charges that were partially offset by a decline in the U.S.
results and higher corporate expenses.
Special charges are discussed below. Interest and other expenses were
$.8 million for the nine months ended September 30, 2003, an increase of $.4
million over the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current cash resources include its $14.1 million
consolidated cash balance and $12.2 million available, net of letters of credit,
under the Company's bank revolving credit facility as of September 30, 2003. The
Company anticipates that it will have sufficient funds from these sources and
internally generated funds from its U.S. operations to satisfy its cash needs
for the foreseeable future. The Company's bank credit agreement, which contains
covenants restricting the Company's ability to incur additional indebtedness,
expires in July 2005. The credit facility includes financial and non-financial
covenants discussed below. The Company expects to be in compliance with all of
its covenants during the remainder of 2003, however, if the Company violates a
covenant that the bank group is unwilling to amend or waive, and the bank group
declares a default under the credit agreement, liquidity could be negatively
impacted.
Financings
In July 2002, the Company entered into a $40.0 million credit facility
which expires in July 2005. The facility has floating rate interest options that
range between 2.25% and 3.00% over LIBOR and commitment fees of up to 0.50%
payable on the unused portion. Under the credit facility, the maximum commitment
of funds available for borrowings is limited by a defined borrowing base formula
related to eligible accounts receivable, which fluctuates during the quarter.
Borrowings under the facility are secured by the Company's assets. The financial
covenants in the credit agreement, as well as in the lease agreement for the
Company's Chicago headquarters, require the Company to maintain a minimum
tangible net worth and to meet certain flow coverage
16
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
and leverage ratios. The agreements also limit the Company's ability to declare
dividends or make distributions to holders of capital stock, or redeem or
otherwise acquire shares of capital stock of the Company. As of September 30,
2003, the Company was in compliance with all covenants.
On November 4, 2003, the Company's credit facility was reduced to $25
million pursuant to an agreement with the Company's lenders on October 22, 2003.
Also, pursuant to this agreement, the lenders consented to among other things,
the acquisition by Gingko Acquisition Corp. of all of the outstanding capital
stock of the Company and, in connection with such acquisition, agreed to release
their security interest in certain of the Company's assets if and when Gingko
Acquisition Corp. acquires 53% or more of the outstanding capital stock of the
Company. All other terms and conditions remain unchanged.
Cash Flow
Consolidated net cash provided by operating activities during the first
nine months of 2003 was $123.3 million, compared to $110.1 million for the same
period in 2002. This increase was primarily attributable to improved earnings in
2003 and to changes in accounts receivable, accounts payable and accruals and
deferred revenue resulting from the timing of collections and payments.
Consolidated cash used in net investing activities was $119.5 million
in the first nine months of 2003 compared to $118.1 million for the same period
in 2002. Investing activity in 2003 reflects higher expenditures for data
procurement, primarily due to the impact of foreign currency, that were
partially offset by lower capital expenditures.
Consolidated cash flow provided by net financing activities was $.2
million for the first nine months of 2003 compared to a use of $.8 million for
the same period in 2002. During the nine months ended September 30, 2003, the
Company had $0 net bank borrowings compared to $1.8 million in 2002.
Other Deferred Costs and Capital Expenditures
Consolidated deferred data procurement expenditures were $110.6 million
for the nine months ended September 30, 2003 and $105.9 million for the same
period in 2002. These expenditures are amortized over a period of 28 months and
include payments and services to retailers for point-of-sale data and other
costs related to collecting, reviewing and verifying panel, causal and other
data which are an essential part of the Company's database. Such expenditures
for the Company's U.S. business were $60.6 million and $61.8 million, while
amortization expense was $60.5 million and $58.6 million for the periods ended
September 30, 2003 and 2002, respectively. Expenditures for the Company's
International business were $50.0 million and $44.1 million, while amortization
expense was $48.7 million and $40.0 million for the periods ended September 30,
2003 and 2002, respectively. International data expenditures for the first three
quarters of 2003 were higher than the prior year due to the impact of foreign
currency.
Consolidated capital expenditures were $6.5 million and $11.0 million
for the nine months ended September 30, 2003 and 2002, respectively. Capital
expenditures for the Company's U.S. business were $3.8 million and $7.7 million,
while depreciation expense was $15.0 million and $16.9 million for the nine
months ended September 30, 2003 and 2002, respectively. The decrease in U.S.
capital expenditures is primarily due to the timing of projects. The Company's
International capital expenditures were $2.7 million and $3.3 million while
depreciation expense was $3.9 million and $3.5 million for the nine months ended
September 30, 2003 and 2002, respectively.
17
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Consolidated capitalized software development costs, primarily in the
U.S., were $2.4 million for the first three quarters of 2003 and $1.4 million
for the corresponding period in 2002.
Impact of Inflation
Inflation has slowed in recent years, however the Company's results of
operations are impacted by rising prices given the labor intensive nature of the
business. The Company passes increased costs on to customers with multi-year
contracts by adjusting sales prices through consumer price index increases to
the extent provided for in such contracts.
SPECIAL CHARGES
Since 1999, the Company has undertaken major initiatives as described
below resulting in significant or incremental expenditures that have been
classified as special charges in the Statement of Operations.
2003 Workforce Reductions: In the second and third quarters of 2003,
the Company eliminated approximately 140 full-time employees or approximately 6%
of its total workforce in the United States. The total charge for severance and
other costs approximates $3.3 million.
2002 Workforce Reduction: In the fourth quarter of 2002, the Company
eliminated approximately 5% of its total workforce in the United States and
Europe through layoffs and the elimination of open positions. Approximately 140
full-time employees were terminated in the fourth quarter of 2002 and the
beginning of 2003. A charge of $7.8 million was recorded in the fourth quarter
of 2002 for severance and other costs related to the layoffs when communication
of such benefits had been made to affected employees.
Project Delta: In the third quarter of 1999, the Company initiated a
comprehensive program named Project Delta. The objective of Project Delta was to
improve productivity and operating efficiencies to reduce the Company's ongoing
cost structure in its U.S. operations. The work outlined as part of Project
Delta was completed during the third quarter of 2001.
Transition of German Production to U.S. Facility: The Company made the
decision in the fourth quarter of 1999 to transfer production services for
Information Resources GfK GmbH from an external vendor in Germany to the
Company's U.S. headquarters facility in order to enhance its InfoScan offering
in Germany and to reduce future production costs. The transition of German
production to the U.S. facility began in the first quarter of 2000 and was
completed in the first quarter of 2002. 2002 charges of $1.1 million consisted
primarily of parallel processing and temporary workforce expenses.
Information Technology Assessment: During the fourth quarter of 2001,
the Company began a review of its information technology operations to assess
potential restructuring costs and benefits. The review included initial
assessments of database design, transition planning and cost and savings
estimates and was completed in the second quarter of 2002. This project resulted
in cost savings, process efficiencies and a plan for continuous improvement of
the technology infrastructure. Charges of $6.3 million during 2002 related
primarily to consulting fees paid to a third party.
18
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
The following tables reflect special charges incurred and cash payments
made during the nine months ended September 30, 2003 and 2002 (in thousands):
2003 Activity
LIABILITY AT ---------------------- LIABILITY AT
DECEMBER 31, 2002 PROVISION CASH SEPTEMBER 30, 2003
----------------- --------- -------- ------------------
SPECIAL CHARGES
2003 workforce reductions $ - $ 3,281 $ (2,354) $ 927
2002 workforce reduction 7,619 (282) (6,552) 785
Project Delta
Discontinued activities 219 - (137) 82
----------------- --------- -------- ------------------
$ 7,838 $ 2,999 $ (9,043) $ 1,794
================= ========= ======== ==================
LIABILITY 2002 ACTIVITY
(RECEIVABLE) AT ---------------------- LIABILITY AT
DECEMBER 31, 2001 PROVISION CASH SEPTEMBER 30, 2002
----------------- --------- -------- ------------------
SPECIAL CHARGES
Project Delta
Termination benefits $ 634 $ (240) $ (394) $ -
Discontinued activities 265 - (15) 250
Transition of German production
to U.S. facility 592 1,131 (1,723) -
Information technology
assessment 1,413 6,261 (7,674) -
OTHER ITEMS (1,036) - 1,036 -
----------------- --------- -------- ------------------
$ 1,868 $ 7,152 $ (8,770) $ 250
================= ========= ======== ==================
2003 Restructuring Charges: Management reviews the operations and
related costs on a continuous basis. Although firm restructuring plans are not
in place, the possibility exists that additional charges may be required in the
fourth quarter of 2003 and beyond.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51" ("Interpretation"). The
Interpretation requires the consolidation of entities in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interest in the entity. Currently, entities are
generally consolidated by an enterprise when it has a controlling financial
interest through ownership of a majority voting interest in the entity.
19
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
During 2000, the Company and Mosaic Group, Inc. formed a joint venture
company, Mosaic InfoForce, L.P. ("MIF"), in which the Company has a 49%
ownership interest and Mosaic Group, Inc., through wholly-owned subsidiaries,
owns the remainder. The Company's domestic causal and custom audit data
collection and merchandising services are provided by MIF pursuant to an
agreement that expires in 2010. The Company has evaluated its investment in MIF
and determined that it will begin consolidating MIF as of December 31, 2003. The
equity interest of MIF not owned by the Company will be reported as minority
interest upon consolidation.
MIF was financed with a $1.9 million initial equity contribution made
by the Company and an additional $2.1 million equity contribution made by Mosaic
Group, Inc., through wholly-owned subsidiaries. The Company capitalized $7.4
million in connection with the formation of MIF, which is currently being
accounted for using the equity method of accounting. As of September 30, 2003,
the Company has guaranteed $.6 million of MIF equipment capital leases that the
Company would be obligated to pay in the event MIF cannot make the payments
required under the leases. The capital leases have varying expiration dates
through 2004.
FORWARD LOOKING INFORMATION
Certain matters discussed in this Quarterly Report on Form 10-Q are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those anticipated. These
risks and uncertainties are described in reports and other documents filed by
the Company with the Securities and Exchange Commission including the Company's
Annual Report on Form 10-K for the year 2002.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2003, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation, the Company's management, including the Chief
Executive Officer and Chief Financial Officer, concluded that the Company's
disclosure controls and procedures were effective as of September 30, 2003.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
September 30, 2003.
20
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description of Exhibit
- ----------- --------------------------------------------------------------
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes -
Oxley Act
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes -
Oxley Act
32.1 Chief Executive Officer Certification of Periodic Report
32.2 Chief Financial Officer Certification of Periodic Report
99.1 Consent and Release dated October 22, 2003 relating to the
Revolving Credit Agreement
99.2 Fifth Amendment to Lease and Waiver Agreement for headquarters
lease dated as of June 13, 2003
b. Reports on Form 8-K.
During the third quarter of 2003, the Company filed a Current Report on
Form 8-K on July 24, 2003, covering Item 12, which contained the press release
announcing the Company's second quarter 2003 results of operations.
During the third quarter of 2003, the Company filed a Current Report on
Form 8-K on September 10, 2003, covering Items 5, 7 and 9 which contained the
press release announcing that the Company entered into an Agreement and Plan of
Merger, dated as of September 7, 2003, with Gingko Corporation and Gingko
Acquisition Corp.
21
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFORMATION RESOURCES, INC.
---------------------------
(Registrant)
/s/ Andrew G. Balbirer
----------------------------------------
Andrew G. Balbirer
Executive Vice President
and Chief Financial Officer
(Authorized Officer of Registrant)
/s/ Mary K. Sinclair
----------------------------------------
Mary K. Sinclair
Controller
(Principal Accounting Officer)
November 13, 2003
22