10-Q 1 c80873e10vq.txt QUARTERLY REPORT 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

2 INFORMATION RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)

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)

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)

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):

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):

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):

NOTE 4 - INVESTMENTS AND OTHER ASSETS Investments were as follows (in thousands):

Other assets were as follows (in thousands):

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):

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):

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):

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):

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 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

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

INFORMATION RESOURCES INC 10-Q