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, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ----- to -----
Commission file number 0-13163
Acxiom Corporation
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 71-0581897
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P.O. Box 2000, 301 Industrial Boulevard,
Conway, Arkansas 72033-2000
(Address of Principal Executive Offices) (Zip Code)
(501) 336-1000
(Registrant's Telephone Number, Including Area Code)
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
The number of shares of Common Stock, $ 0.10 par value per share,
outstanding as of November 5, 1998 was 77,620,167.
<PAGE>
Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Company for which report is filed:
ACXIOM CORPORATION
The condensed consolidated financial statements included herein have been
prepared by Registrant, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of the Registrant's
management, however, all adjustments necessary for a fair statement of the
results for the periods included herein have been made and the disclosures
contained herein are adequate to make the information presented not misleading.
All such adjustments are of a normal recurring nature.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
September 30, March 31,
1998 1998
------- -------
Assets
Current assets:
Cash and cash equivalents $ 11,163 127,304
Trade accounts receivable, net 157,198 118,281
Refundable income taxes 19,431 98
Other current assets 43,003 42,785
------- -------
Total current assets 230,795 288,468
------- -------
Property and equipment 333,943 301,393
Less - Accumulated depreciation and
amortization 151,365 115,709
------- -------
Property and equipment, net 182,578 185,684
------- -------
Software, net of accumulated amortization 40,541 37,017
Excess of cost over fair value of net assets
acquired 92,959 73,851
Other asset 108,122 76,819
------- -------
$654,995 661,839
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt 9,066 9,500
Trade accounts payable 25,331 21,946
Accrued payroll and related expenses 17,216 17,612
Accrued merger and integration costs 58,936 -
Other accrued expenses 16,021 20,867
Deferred revenue 5,521 11,197
------- -------
Total current liabilities 132,091 81,122
------- -------
Long-term debt, excluding current installments 218,594 244,257
Deferred income taxes 34,056 34,055
Stockholders' equity:
Common stock 7,822 7,405
Additional paid-in capital 136,380 121,129
Retained earnings 127,354 177,158
Foreign currency translation adjustment 1,357 676
Unearned ESOP compensation (594) (1,782)
Treasury stock, at cost (2,065) (2,181)
------- -------
Total stockholders' equity 270,254 302,405
------- -------
Commitments and contingencies
$654,995 661,839
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
For the Three Months Ended
--------------------------
September 30
--------------------------
1998 1997
------- -------
Revenue $174,358 135,876
Operating costs and expenses:
Salaries and benefits 68,998 48,864
Computer, communications and other
equipment 27,933 22,009
Data costs 27,073 21,589
Other operating costs and expenses 24,676 23,266
Special charges 109,372 -
------- -------
Total operating costs and expenses 258,052 115,728
------- -------
Income (loss) from operations (83,694) 20,148
------- -------
Other income (expense):
Interest expense (4,323) (2,166)
Other, net 2,367 1,600
------- -------
(1,956) (566)
------- -------
Earnings (loss) before income taxes (85,650) 19,582
Income taxes (24,490) 7,375
------- -------
$ (61,160) 12,207
======= =======
Earnings (loss) per share:
Basic $ (0.82) 0.17
======= =======
Diluted $ (0.82) 0.15
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
For the Six Months Ended
------------------------
September 30
------------------------
1998 1997
======= =======
Revenue $ 333,168 259,828
Operating costs and expenses:
Salaries and benefits 130,186 95,577
Computer, communications and other
equipment 52,549 42,628
Data costs 52,562 42,584
Other operating costs and expenses 52,482 43,976
Special charges 109,372 -
------- -------
Total operating costs and expenses 397,151 224,765
------- -------
Income (loss) from operations (63,983) 35,063
------- -------
Other income (expense):
Interest expense (8,399) (4,429)
Other, net 4,857 2,429
------- -------
(3,542) (2,000)
------- -------
Earnings (loss) before income taxes (67,525) 33,063
Income taxes (17,721) 12,456
------- -------
Net earnings (loss) $ (49,804) 20,607
======= =======
Earnings (loss) per share:
Basic $ (0.67) 0.29
======= =======
Diluted $ (0.67) 0.26
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the Six Months Ended
------------------------
September 30
------------------------
1998 1997
------- -------
Cash flows from operating activities:
Net earnings (loss) $ (49,804) 20,607
Non-cash operating activities:
Depreciation and amortization 30,058 21,781
Gain on disposal of assets (13) (963)
Provision for returns and doubtful accounts 1,549 520
Deferred income taxes (1) 4,727
ESOP principal payments 1,188 1,188
Non-cash component of special charges 108,117 -
Changes in operating assets and liabilities:
Accounts receivable (37,937) (14,093)
Other assets (39,920) (18,244)
Accounts payable and other liabilities (14,600) 16,584
------- -------
Net cash provided (used) by operating
activities (1,363) 32,107
------- -------
Cash flows from investing activities:
Disposition of assets 135 27,898
Development of software (18,843) (9,176)
Capital expenditures (47,187) (41,164)
Purchases of marketable securities - (5,777)
Sales of marketable securities 7,761 10,398
Investments in joint ventures (8,145) (4,853)
Net cash paid in acquisitions (22,296) (1,841)
------- -------
Net cash used by investing activities (88,575) (24,515)
------- -------
Cash flows from financing activities:
Proceeds from debt 40,186 14,158
Payments of debt (82,205) (28,961)
Sale of common stock 15,784 5,265
------- -------
Net cash used by financing activities (26,235) (9,538)
------- -------
Effect of exchange rate changes on cash 32 (28)
------- -------
Net decrease in cash and cash equivalents (116,141) (1,974)
Cash and cash equivalents at beginning of
period 127,304 9,695
------- -------
Cash and cash equivalents at end of period $ 11,163 7,721
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 8,210 4,125
Income taxes 3,502 2,772
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain note information has been omitted because it has not change
significantly from that reflected in Notes 1 through 16 of the Notes to
Consolidated Financial Statements filed as a part of Item 14 of Registrant's
1998 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission ("SEC") on June 23, 1998, as amended by Amendment No. 1 thereto,
filed with the SEC on July 29, 1998, and by Amendment No. 2 thereto, filed with
the SEC on August 4, 1998.
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. On September 17, 1998, the Company acquired all of the outstanding capital
stock of May & Speh, Inc. ("May & Speh") by exchanging .80 shares of the
Company's stock for each share of May & Speh stock. Accordingly, the
Company exchanged 20,858,923 shares of its common stock for all of the
outstanding shares of capital stock of May & Speh. Additionally, the
Company assumed all of the currently outstanding options granted under May
& Speh's stock option plans, with the result that 4,289,202 shares of the
Company's common stock became subject to issuance upon exercise of such
options. The Company also assumed May & Speh's convertible subordinated
debt, which is now convertible into 5,783,000 shares of the Company's
common stock. The acquisition was accounted for as a pooling-of-interests
and, accordingly, the condensed consolidated financial statements have been
restated as if the combining companies had been combined for all periods
presented. Included in the statement of operations for the period ended
September 30, 1998 are revenues of $66.6 million and earnings before income
taxes of $15.1 million for May & Speh for the period from April 1, 1998 to
September 17, 1998. For the six months ended September 30, 1997, May & Speh
had revenue of $49.5 million and earnings before income taxes of $11.2
million.
In the quarter ended September 30, 1998, the Company recorded special
charges totaling $109.4 million related to merger and integration charges
associated with the May & Speh merger and the write down of other impaired
assets. The charge consisted of approximately $10.7 million of transaction
costs to be paid to investment bankers, accountants, and attorneys; $6.8
million in associate-related reserves, principally employment contract
termination costs and severance costs; $40.5 million in contract
termination costs; $11.5 million for the write down of software; $29.3
million for the write down of property and equipment; $7.8 million for the
write down of goodwill and other assets; and $2.8 million in other write
downs and accruals. Approximately $100.8 million of the charge was for
duplicative assets or costs directly attributable to the May & Speh merger.
The remaining $8.6 million related to other impaired assets which were
impaired during the quarter, primarily $5.7 million related to goodwill and
shut-down costs associated with the closing of certain business locations
in New Jersey, Malaysia, and the Netherlands, which occurred during the
quarter.
The following table shows the balances which were accrued as of September
30, 1998 (dollars in thousands):
Transaction costs $9,163
Associate-related reserves 6,783
Contract termination costs 40,500
Other accruals 2,490
------
$58,936
======
<PAGE>
The Company expects that most of the transaction costs and
associate-related reserves will be paid in cash during the next three to
six months. The contract termination costs will be paid out over the next
18 months. The other accruals will be paid out over periods ranging up to
five years.
The Company is still negotiating with certain software vendors to
consolidate systems software contracts and as a result may incur up to an
additional $10 million in termination costs. Such negotiations are expected
to be finalized in the next fiscal quarter and the impact will be recorded
at that time.
Effective April 1, 1998, the Company purchased the outstanding stock of
NormAdress, a French company located in Paris. NormAdress provides database
and direct marketing services to its customers. The purchase price was 20
million French Francs (approximately $3.4 million) in cash and other
additional cash consideration of which approximately $900,000 is guaranteed
and the remainder is based on the future performance of NormAdress. The
acquisition was accounted for as a purchase and, accordingly, the results
of operations of NormAdress are included in the condensed consolidated
statements of operations as of the purchase date. The purchase price
exceeded the fair value of net assets acquired by approximately $4.1
million. The resulting excess of cost over net assets acquired is being
amortized using the straight-line method over its estimated economic life
of 20 years. The pro forma combined results of operations, assuming the
acquisition occurred at the beginning of the periods presented, are not
materially different from the historical results of operations reported.
Effective May 1, 1998, May & Speh acquired substantially all of the assets
of SIGMA Marketing Group, Inc. ("Sigma"), a full-service database marketing
company headquartered in Rochester, New York. Under the terms of the
agreement, May & Speh paid $15 million at closing for substantially all of
Sigma's assets, and will pay the former owners up to an additional $6
million, the substantial portion of which is contingent on certain
operating objectives being met. Sigma's former owners were also issued
warrants to acquire 276,800 shares of the Company's common stock at a price
of $17.50 per share in connection with the transaction.
Sigma's results of operations are included in the Company's consolidated
results of operations beginning May 1, 1998. This acquisition was accounted
for as a purchase. The pro forma effect of the acquisition is not material
to the Company's results of operations for the periods reported.
On October 1, 1998, the Company announced the execution of a letter of
intent to acquire Computer Graphics of Arizona, Inc. ("Computer Graphics")
and all of its affiliated companies in a stock-for-stock merger. The merger
is expected to be completed prior to the Company's fiscal year end, subject
to the completion of the Company's due diligence review and subject to the
absence of any material adverse changes in Computer Graphics' business
prior to closing. Computer Graphics, a privately held enterprise
headquartered in Phoenix, Arizona, is a computer service bureau principally
serving financial services direct marketers.
<PAGE>
2. Included in other assets are unamortized conversion costs in the amount of
$29.3 million and $30.9 million at September 30, 1998 and March 31, 1998,
respectively. Noncurrent receivables from software license, data, and
equipment sales are also included in other assets in the amount of $16.2
million and $20.3 million at September 30, 1998 and March 31, 1998,
respectively. The current portion of such receivables is included in other
current assets in the amount of $10.5 million and $9.5 million as of
September 30, 1998 and March 31, 1998, respectively.
3. Long-term debt consists of the following (dollars in thousands):
September 30, March 31,
1998 1998
5.25% convertible subordinated notes $ 115,000 115,000
due 2003;convertible at the option of
the holder into shares of common stock at
a conversion price of $19.89 per share;
redeemable at the option of the Company at
any time after April 3, 2001
Unsecured revolving credit agreement - 36,445
6.92% Senior notes due March 30, 2007, payable 30,000 30,000
in annual installments of $4,286 commencing
March 30, 2001; interest is payable semi-annually
3.12% Convertible note, interest and principal 25,000 25,000
due April 30, 1999; partially collateralized by
letter of credit; convertible at maturity into
two million shares of common stock
Capital leases on land, buildings and equipment 21,908 22,507
payable in monthly payments of $357 of principal
and interest; remaining terms of from five to
twenty years; interest rates at approximately 8%
8.5% unsecured term loan; quarterly principal 8,600 9,000
payments of $200 plus interest with the balance
due in 2005
9.75% Senior notes, due May 1, 2000, payable in 4,286 6,429
annual installments of $2,143 each May 1;
interest is payable semi-annually
Other capital leases, debt and long-term 22,866 9,376
liabilities ------- -------
Total long-term debt 227,660 253,757
Less current installments 9,066 9,500
------- -------
Long-term debt, excluding
current installments $ 218,594 244,257
======= =======
<PAGE>
The 3.12% convertible note, although due within the next year, continues to be
classified as long-term debt because the Company intends to use available
funding under the revolving credit agreement to refinance the note on a
long-term basis in the event the holder of the note elects to receive cash at
maturity. Currently, the Company expects the holder to convert the note into
common stock, which would not require the Company to pay any cash at maturity.
The holder of the 8.5% term loan, which was made to May & Speh, has the right to
demand payment due to a change in control. The lender has not exercised that
right, and the Company presently intends to renegotiate the loan on a long-term
basis. If the lender does demand repayment, the Company will pay off the loan
with available funds from the unsecured revolving credit agreement. Therefore,
the Company continues to classify the term loan as long-term.
Also as a result of the merger with May & Speh, the Company was required to
offer to repurchase the 5.25% convertible subordinated notes at face value. The
Company does not expect the holders to accept the offer, as the face value of
the notes is less than the value of the shares into which they are convertible.
Accordingly, these notes continue to be classified as long-term.
At September 30, 1998, due to the merger with May & Speh and the special charges
booked during the quarter, the Company was in violation of certain restrictive
covenants under the unsecured revolving credit agreement and the 9.75% senior
notes. The violations of the revolving credit agreement have been waived by the
lender. The violations under the senior notes are expected to be waived also,
although the Company has not yet received the waiver. In the event the waiver is
not received, the Company could pay off the loan with available funds under the
revolving credit agreement, and as a result this loan is still classified as
long-term.
In connection with the construction of the Company's new headquarters building
and a new customer service facility in Little Rock, Arkansas, the Company has
entered into 50/50 joint ventures between the Company and local real estate
developers. In each case, the Company is guaranteeing portions of the
construction loans for the buildings. The aggregate amount of the guarantees at
September 30, 1998 was $4.2 million. The total cost of the two building projects
is expected to be approximately $19.5 million.
<PAGE>
4. The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," during the year ended March 31, 1998. Below is a
calculation and reconciliation of the numerator and denominator of basic
and diluted earnings (loss) per share (dollars in thousands, except per
share amounts):
For the Quarter Ended For the Six Months Ended
--------------------- ------------------------
September September September September
30 30 30 30
--------- --------- --------- ---------
1998 1997 1998 1997
------ ------ ------ ------
Basic earnings (loss)
per share:
Numerator - net
earnings (loss) $(61,160) 12,207 (49,804) 20,607
====== ====== ====== ======
Denominator (weighted
average shares
outstanding) 74,713 72,096 73,998 71,914
====== ====== ====== ======
Earnings (loss)
per share $ (.82) .17 (.67) .29
====== ===== ====== ======
Diluted earnings (loss)
per share:
Numerator:
Net earnings (loss) $(61,160) 12,207 (49,804) 20,607
Interest expense on
convertible debt (net
of tax effect) - 111 - 222
------ ------ ------ ------
$(61,160) 12,318 (49,804) 20,829
====== ====== ====== ======
Denominator:
Weighted average shares
out-standing 74,713 72,096 73,998 71,914
Effect of common stock
option and warrants - 6,785 - 6,556
Convertible debt - 2,000 - 2,000
------ ------ ------ ------
74,713 80,881 73,998 80,470
====== ====== ====== ======
Earnings (loss) per share $ (.82) .15 (.67) .26
====== ====== ====== ======
All potentially dilutive securities were excluded from the above calculations
for the quarter and six months ended September 30, 1998 because they were
antidilutive in accordance with Statement No. 128. Common stock options and
warrants which were excluded were 6,743,000 and 6,939,000 for the quarter and
six months, respectively. Potentially dilutive shares related to the convertible
debt which were excluded were 7,783,000 for both the quarter and six months.
Also, interest expense on the convertible debt (net of income tax effect)
excluded in computing diluted earnings (loss) per share was $1,057,000 and
$2,125,000 for the quarter and six months, respectively.
<PAGE>
Options to purchase shares of common stock that were outstanding during the
quarter and six months ended September 30, 1997 but were not included in the
computation of diluted earnings per share because the option exercise price was
greater than the average market price of the common shares are shown below:
For the Quarter Ended For the Six Months Ended
--------------------- ------------------------
September 30, 1997 September 30, 1997
--------------------- ------------------------
Number of shares under 1,287 1,663
option (in thousands)
Range $19.84 - $34.75 $15.70 - $34.75
============== ==============
5. Trade accounts receivable are presented net of allowances for doubtful
accounts, returns, and credits of $4.1 million and $3.6 million at
September 30, 1998 and March 31, 1998, respectively.
6. The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," as of April 1, 1998. Statement No. 130
establishes standards for reporting and displaying comprehensive income and
its components in a financial statement that is displayed with the same
prominence as other financial statements. Statement No. 130 also requires
the accumulated balance of other comprehensive income to be displayed
separately in the equity section of the consolidated balance sheet. The
accumulated balance of other comprehensive income, which consists solely of
foreign currency translation adjustment, as of September 30, 1998 and March
31, 1998 was $1.4 million and $0.7 million, respectively. The adoption of
this statement had no impact on operations or stockholders' equity.
Comprehensive loss was $60.6 million for the quarter ended September 30,
1998 and comprehensive income was $11.6 million for the quarter ended
September 30, 1997. Comprehensive loss was $49.1 million for the six months
ended September 30, 1998 and comprehensive income was $20.3 million for the
six months ended September 30, 1997.
<PAGE>
Form 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On May 26, 1998, the Company entered into a merger agreement with May & Speh,
Inc. ("May & Speh"). May & Speh, headquartered in Downers Grove, Illinois,
provides computer-based information management services with a focus on direct
marketing and information technology outsourcing services. The merger, which was
completed September 17, 1998, has been accounted for as a pooling-of-interests.
Accordingly, the condensed consolidated financial statements have been restated
as if the combining companies had been combined for all periods presented. See
note 1 to the condensed consolidated financial statements for a more detailed
discussion of the merger transaction.
Results of Operations
Consolidated revenue was a record $174.4 million for the quarter ended September
30, 1998, a 28% increase over the same quarter a year ago. Each of the Company's
operating divisions showed strong growth over the previous year. For the six
months ended September 30, 1998, revenue was $333.2 million, an increase of 28%
over revenue of $259.8 million for the same period a year ago.
The following table shows the Company's revenue by division for the quarters
ended September 30, 1998 and 1997 (dollars in millions):
1998 1997 % Increase
---- ---- ----------
Services $ 46.9 $ 34.5 +36%
Alliances 43.4 34.0 +28
Data Products 37.8 33.7 +12
May & Speh 36.4 25.9 +41
International 9.9 7.8 +27
----- ----- ---
$174.4 $135.9 +28%
===== ===== ===
Services Division revenue of $46.9 million reflects a 36% increase over the
prior year despite only 7% growth in the contract with Allstate Insurance
Company ("Allstate"). However, this was more than offset by strong results from
the Citibank, High Tech, Publishing, Insurance, Retail, Telecommunications, and
Utilities business units. The Services Division also benefited from revenue of
$3.8 million in the current year's quarter related to the acquisition of Buckley
Dement, which was purchased effective October 1, 1997.
Alliances Division revenue of $43.4 million increased 28% over the same quarter
a year ago. The Financial Services group continued to post strong gains,
increasing 28% over the same period a year ago. The Strategic Alliances business
unit was up 76% over the prior year primarily due to a server sale included in
the quarter. The Trans Union, Polk, and ADP business units also reported revenue
gains of 30%, 24%, and 7%, respectively.
<PAGE>
Data Products Division revenue grew 12% compared to last year. Included in the
prior year results was the impact of the Pro CD retail business for part of the
quarter plus the impact of the consumer file license sold to infoUSA, Inc.
(formerly American Business Information, Inc.) as part of the sale of the Pro CD
retail business in August of last year. Excluding the effect of these two items
from the year-earlier results, the Data Products Division posted a 30% gain over
the same quarter last year. DMI grew 23%, DataQuick grew 22% and the Acxiom Data
Group (InfoBase)including results from the Acxiom Data Network(SM) reflected 49%
growth after adjusting for the Pro CD items noted above.
The May & Speh Division reported $36.4 million revenue for the quarter
reflecting a 41% increase over the same quarter a year ago. May & Speh's direct
marketing services increased 17% while their outsourcing services grew 81%,
including the impact of the recently signed outsourcing contract with Waste
Management, Inc.
The International Division revenue of $9.9 million grew 27% over the
year-earlier period reflecting 58% growth in data warehouse and list processing
services, partly mitigated by slightly lower revenue from fulfillment services.
For the six months ended September 30, 1998, Services Division revenue was up
32% versus the prior year, Alliances Division was up 31%, Data Products Division
was up 17%, May & Speh was up 35%, and the International Division was up 28%.
The Company's operating expenses for the quarter included $109.4 million for
special charges, which are merger and integration charges associated with the
May & Speh merger and the write down of other impaired assets. The charges
consisted of approximately $10.7 million of transaction costs, $6.8 million in
associate-related reserves, $40.5 million in contract termination costs, $11.5
million for the write down of software, $29.3 million for the write down of
property and equipment, $7.8 million for the write down of goodwill and other
assets, and $2.8 million in other accruals. See note 1 to the condensed
consolidated financial statements for further information about the special
charges.
Salaries and benefits for the quarter grew $20.1 million or 41% over the prior
year's second quarter, primarily as a result of increased headcount to support
growth, including the hiring of approximately 75 new associates under the new
Waste Management outsourcing contract. The remainder of the increase is due to
higher incentive accruals and the effect of the Sigma and Buckley Dement
acquisitions. For the six months ended September 30, 1998, salaries and benefits
increased 36%. Computer, communications and other equipment costs rose $5.9
million or 27% higher than the second quarter in the prior year, reflecting
higher software costs and the impact of capital expenditures. For the six
months, computer, communications and other equipment costs were up 23%. Data
costs grew $5.4 million or 25% over the prior year reflecting the growth in data
revenue, combined with the impact of migrating to fixed cost data provider
contracts, higher compilation costs at DataQuick due to the high level of
refinancing, and costs associated with incremental sources of data. For the six
month period, data costs increased 23%. Other operating costs and expenses grew
$1.4 million or 6% from the year-earlier period. Increases in these costs were
offset by costs associated with a server sale in the year-
<PAGE>
earlier period. For the six months ended September 30, 1998 the increase in
other operating costs and expenses was 19%.
Due to the special charges, the Company recorded a loss from operations for the
quarter of $83.7 million, compared to income from operations of $20.1 million in
the second quarter of the prior year. Excluding the impact of the special
charges, income from operations would have been $25.7 million for the quarter,
an increase of 27% over the same period a year ago. For the six months, the
Company recorded a loss from operations of $64.0 million compared to income from
operations of $35.1 million for the prior year. Again excluding the impact of
the special charges, income from operations would have been $45.4 million, an
increase of 29% over the same period a year ago.
Interest expense increased by $2.2 million compared to the previous year's
second quarter as a result of higher average debt levels. Approximately $1.5
million of the increase is due to the issuance of
<PAGE>
the 5.25% convertible debt, which was issued by May & Speh in March 1998. For
the six months, interest expense was up $4.0 million, and again most of the
increase was due to the convertible debt. Other income and expense for both the
quarter and six months consists primarily of interest income from long-term
receivables related to customer contracts and investment income earned by May &
Speh on cash balances and marketable securities prior to the merger.
The Company's effective tax rate, before special charges, was 37.4% for both the
quarter and the six month period, compared to 37.7% for both time periods in the
prior year. Portions of the special charges may not be deductible for tax
purposes and therefore the tax benefit recorded on the special charges was only
30.5%. Combining both the normal tax accrual with the estimated tax benefit of
the special charges results in a 28.6% tax rate for the second quarter and a
26.2% rate for the six months ended September 30, 1998. The Company continues to
expect the normal rate for fiscal 1999 to remain in the 37-39% range. This
estimate is based on current tax law and current estimates of earnings, and is
subject to change.
The Company recorded a net loss of $61.2 million for the quarter and $49.8
million for the six months, compared to net earnings of $12.2 million for the
quarter and $20.6 million for the six months in the previous year. Loss per
share on both a basic and diluted basis were $.82 and $.67 for both the quarter
and six months, respectively. Excluding the impact of the special charges,
earnings per share would have been $.20 basic and $.18 diluted for the quarter
and $.35 basic and $.32 diluted for the six month period.
Capital Resources and Liquidity
Working capital at September 30, 1998 totaled $98.7 million compared to $207.3
million at March 31, 1998. The balance at March 31, 1998 included $109.8 million
in cash and cash equivalents at May & Speh as a result of the issuance of the
$115 million convertible debt. Since the merger, the Company has used available
cash to pay down debt. At September 30, 1998, the Company had available credit
lines of $119.9 million of which none was outstanding. The
<PAGE>
Company's debt-to-capital ratio (capital defined as long-term debt plus
stockholders' equity) was 45% at September 30, 1998. Included in the debt
component of this calculation is $140 million of convertible debt, which if
excluded from the debt for the purposes of this calculation would reflect a 23%
debt-to-capital ratio.
Cash used by operating activities was $1.4 million for the six months ended
September 30, 1998 compared to cash provided by operating activities of $32.1
million in the same period in the previous year. Earnings before interest,
taxes, depreciation, and amortization ("EBITDA"), excluding the non-cash impact
of the special charges recorded in the second quarter, increased by 33% compared
to a year ago. The resulting operating cash flow was reduced by $92.5 million in
the current year and $15.8 million in the previous year due to the net change in
operating assets and liabilities, including increases in accounts receivable for
each year. EBITDA is not intended to represent cash flows for the period, is not
presented as an alternative to operating income as an indicator of operating
performance, may not be comparable to other similarly titled measures of other
companies, and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. However, EBITDA is a relevant measure of the Company's
operations and cash flows and is used internally as a surrogate measure of cash
provided by operating activities.
Investing activities used $88.6 million in the six months ended September 30,
1998 compared to $24.5 million in the year-earlier period. Investing activities
in the current period included $47.2 million in capital expenditures, compared
to $41.2 million in the previous year, and $18.8 million in software
development, compared to $9.2 million in the previous year. Investing activities
also included $22.3 million paid in the acquisitions of NormAdress and Sigma,
and additional earn-out payments made for acquisitions recorded in previous
years. The acquisitions of NormAdress and Sigma are discussed more fully in note
1 to the condensed consolidated financial statements. Investing activities also
included $8.1 million invested in joint ventures, including $4.0 million of
additional investment in Bigfoot International, Inc., an emerging technology
company that provides services and tools for internet e-mail users, and $3.2
million invested in Ceres Integrated Solutions, a provider of software and
analytical services to large retailers. Investing activities in the current year
also include the proceeds of sales of marketable securities, which were owned by
May and Speh prior to the merger with the Company.
Financing activities in the current period used $26.2 million, consisting
primarily of the net repayment of debt under the revolving line of credit.
Financing activities also included $15.8 million in sales of stock, including
$12.2 million received from Trans Union Corporation ("Trans Union") for the
purchase of 4 million shares of stock under a warrant which was issued to Trans
Union in 1992 in conjunction with the data center management agreement between
Trans Union and the Company.
Construction has begun on the Company's new headquarters building and a new
customer service facility in Little Rock, Arkansas. Both of these buildings are
scheduled to be completed and occupied before the end of fiscal 1999. Each
building is being built pursuant to a 50/50 joint venture between the Company
and local real estate developers. The total cost of the headquarters and
customer service projects is expected to be approximately $7.5 million and $12.0
million,
<PAGE>
respectively. The Company expects other capital expenditures to total
approximately $85-90 million in fiscal 1999.
While the Company does not have any other material contractual commitments for
capital expenditures, additional investments in facilities and computer
equipment continue to be necessary to support the growth of the business. In
addition, new outsourcing or facilities management contracts frequently require
substantial up-front capital expenditures in order to acquire or replace
existing assets. In some cases, the Company also sells software, hardware, and
data to customers under extended payment terms or notes receivable collectible
over one to eight years. These arrangements also require up-front expenditures
of cash, which are repaid over the life of the agreement. Management believes
that the combination of existing working capital, anticipated funds to be
generated from future operations, and the Company's available credit lines is
sufficient to meet the Company's current operating needs as well as to fund the
anticipated levels of expenditures. If additional funds are required, the
Company would use existing credit lines to generate cash, followed by either
additional borrowings to be secured by the Company's assets or the issuance of
additional equity securities in either public or private offerings. Management
believes that the Company has significant unused capacity to raise capital which
could be used to support future growth.
Year 2000
Many computer systems ("IT Systems') and equipment and instruments with embedded
microprocessors ("non-IT systems") were designed to only recognize the last two
digits of a calendar year. With the arrival of the Year 2000, these systems and
microprocessors may encounter operating problems due to their inability to
distinguish years after 1999 from years preceding 1999. This could manifest in a
system failure or miscalculations causing disruption of operations, including,
among other things, a temporary inability to process or transmit data, or engage
in normal business activities. As a result, the Company is engaged in an
extensive project to remediate or replace its date-sensitive IT systems and
non-IT systems.
The following discussion of the implications of the Year 2000 issue for the
Company contains numerous forward-looking statements based on inherently
uncertain information. The information presented is based on the Company's best
estimates, which were derived utilizing a number of assumptions of future
events, including the continued availability of internal and external resources,
third party modifications, and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ. Although
the Company believes it will be able to make the necessary modifications in
advance, there can be no guarantee that failure to correctly modify the systems
would not have a material adverse effect on the Company.
Since 1996 the Company has been engaged in an enterprise-wide effort ("the
Project") to address the risks associated with the Year 2000 problem, both
internal and external. Under the Project, the Company has established a project
office comprised of representatives from each of the operating divisions of the
Company. A Company readiness champion and project leader are responsible for the
readiness process which includes deliverables such as plans, reviews, and
<PAGE>
appropriate sign offs by the appropriate business unit leaders and the Company's
Year 2000 leadership. The Project also includes the dissemination of internal
communications and status reports on a regular basis to senior leadership.
The Company believes that it has identified and evaluated its internal Year 2000
issues and that sufficient resources are being devoted to renovating IT and
non-IT systems that are not already "Year 2000 ready." The Company is operating
on an internal deadline of December 31, 1998, and expects any residual activity
to conclude before March 31, 1999. This will allow the Company to focus on
additional testing efforts and integration of the Year 2000 programs of recent
acquisitions during the remainder of 1999.
The Project involves four phases: (1) planning; (2) remediation; (3) testing;
and (4) certification. The planning phase involves developing a detailed
inventory of applications and systems, identifying the scope of necessary
remediation to each application or system, and establishing a conversion
schedule. During the remediation phase, source codes are actually converted,
date fields are expanded or windowed, and the remediated system is tested to
ensure it is functionally the same as the existing production version. In the
testing phase, test data is prepared and the application is tested using a
variety of Year 2000 scenarios. The certification phase validates that a system
can run successfully in a Year 2000 environment and appropriate internal sign
offs have been obtained.
The following chart indicates the estimated state of completion, as well as the
planned date of completion of each phase of the project. It is important to note
that each project must complete the previous phase before moving to the next
phase.
Current Planned Planned
October December December
1998 1998 1999
------- -------- --------
Planning 90% 100% 100%
Remediation 70% 90% 100%
Testing 60% 80% 100%
Certification 20% 75% 100%
With regard to the Company's operational platforms (hardware, operating systems
and vendor software) in the Company's primary data center located at the
headquarters location, mainframes are currently 95% Year 2000 ready and servers
are 89% Year 2000 ready.
The financial impact of the Year 2000 Project to the Company has not been, and
is not expected to be, material to its financial position or results of
operations in any given fiscal year. The costs to date associated with the Year
2000 effort primarily represent a reallocation of existing Company resources.
Because of the range of possible issues and the large number of variables
involved (including the Year 2000 readiness of any entities acquired by the
Company), it is impossible to accurately quantify the potential cost of problems
if the Company's remediation efforts or the efforts of those with whom it does
business are not successful. Such costs and any
<PAGE>
failure of such remediation efforts could result in a loss of business, damage
to the Company's reputation, and legal liability.
The Company currently believes that with modifications to existing software and
conversions to new software, the Year 2000 issues can be mitigated. But the
systems of vendors on which the Company's systems rely may not be converted in a
timely fashion, or a vendor or customer may fail to convert its software or may
implement a conversion that is incompatible with the Company's systems, which
could have a material adverse impact on the Company.
In order to assess the readiness status of the Company's vendors, the Company
has contacted each vendor, via written and/or telephone inquiries, regarding its
Year 2000 status and has set up an internal database of this information. The
Company is in the process of obtaining written commitments from each vendor that
the products supplied to the Company are or will be (by a date certain) Year
2000 ready. As of October 31, 1998, the Company had received responses to 78% of
its inquiries. The Company is also relying on representations made or contained
in its vendors' web sites. The Company has also identified and is communicating
with customers to determine if such customers have an effective plan in place to
address their Year 2000 issues, and to determine the extent of the Company's
vulnerability to the failure of such customers to remediate their own Year 2000
issues.
The Company believes that the most likely risks of serious Year 2000 business
disruptions are external in nature, such as disruptions in telecommunications,
electric, or transportation services. In addition, the Company places a high
degree of reliance on computer systems of third parties, such as customers and
computer hardware and software suppliers. Although the Company is assessing the
readiness of these third parties and preparing contingency plans, there can be
no guarantee that the failure of these third parties to modify their systems in
advance of December 31, 1999 would not have a material adverse effect on the
Company. Of all the external risks, the Company believes the most reasonably
likely worst case scenario would be a business disruption resulting from an
extended and/or extensive communications failure.
In an effort to reduce the risks associated with the Year 2000 problem, the
Company has established and is currently continuing to develop Year 2000
contingency plans that build upon existing disaster recovery and contingency
plans. Examples of the Company's existing contingency plans include alternative
power supplies and communication lines. Contingency planning for possible Year
2000 disruptions will continue to be defined, improved and implemented.
Notwithstanding any contingency plan of the Company, the failure to correct a
material Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations. Such failures could materially
and adversely affect the Company's results of operations, liquidity and
financial condition. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third party vendors and customers, the Company is unable to determine at this
time whether the consequences of Year 2000 failures will have a material impact
on the Company's results of operations, liquidity or financial condition. The
Project is expected to significantly reduce the
<PAGE>
Company's level of uncertainty about the Year 2000 problem and, in particular,
about the Year 2000 compliance and readiness of its material third party vendors
and customers. The Company believes that the continued implementation of the
Project will reduce the possibility of significant interruptions to the
Company's normal business operations.
Other Information
The Company has had a long-term contractual relationship with Allstate. The
initial contract had a five-year term beginning in September, 1992. The contract
is automatically renewed for one-year periods if no cancellation notice is given
six months prior to an anniversary date, after the five-year term. The contract
currently extends until September, 1999. The Company is currently in
negotiations with Allstate to further extend the relationship and provide for an
additional five-year contract with a five-year renewal option.
Certain statements in this quarterly report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements, which are not statements of historical fact, may
contain estimates, assumptions, projections and/or expectations regarding the
Company's financial position, results of operations, market position, product
development, regulatory matters, growth opportunities and growth rates,
acquisition and divestiture opportunities, and other similar forecasts and
statements of expectation. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," and "should," and variations of these
words and similar expressions, are intended to identify these forward-looking
statements. Such forward-looking statements are not guarantees of future
performance. They involve known and unknown risks, uncertainties, and other
factors which may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Representative examples of such factors are discussed in more detail in the
Company's Annual Report on Form 10-K and include, among other things, the
possible adoption of legislation or industry regulation concerning certain
aspects of the Company's business; the removal of data sources and/or marketing
lists from the Company; the ability of the Company to retain customers who are
not under long-term contracts with the Company; technology challenges; Year 2000
issues; the risk of damage to the Company's data centers or interruptions in the
Company's telecommunications links; acquisition integration; the effects of
postal rate increases; and other market factors. See "Additional Information
Regarding Forward-looking Statements" in the Company's Annual Report on Form
10-K.
<PAGE>
Form 10-Q
ACXIOM CORPORATION
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held on September
17, 1998. At the meeting, the shareholders approved the election of
three directors. Voting results for each individual nominee were as
follows: Rodger S. Kline, 41,391,659 votes for and 2,625,625 votes
withheld; Robert A. Pritzker, 43,051,159 votes for and 966,125 votes
withheld; and James T. Womble, 41,388,836 votes for and 2,628,448 votes
withheld. The shareholders also approved the issuance of up to
31,100,000 shares of common stock pursuant to the Amended and Restated
Merger Agreement dated as of May 26, 1998, by and among Acxiom
Corporation, ACX Acquisition Co., Inc. and May & Speh, Inc. Voting
results for the merger proposal were as follows: 38,288,590 votes for,
118,338 votes withheld, and 76,676 votes abstaining from the vote.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Forms 8-K.
A report was filed on September 18, 1998, which reported the
shareholders' approval of the merger with May & Speh, Inc.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Acxiom Corporation
Dated: November 16, 1998
By: /s/ Robert S. Bloom
------------------------------------
(Signature)
Robert S. Bloom
Chief Financial Officer
(Chief Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibits to Form 10-Q
Exhibit Number Exhibit
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 11,163
<SECURITIES> 0
<RECEIVABLES> 157,198
<ALLOWANCES> 4,100
<INVENTORY> 0
<CURRENT-ASSETS> 230,795
<PP&E> 333,943
<DEPRECIATION> 151,365
<TOTAL-ASSETS> 654,995
<CURRENT-LIABILITIES> 132,091
<BONDS> 218,594
0
0
<COMMON> 7,822
<OTHER-SE> 262,432
<TOTAL-LIABILITY-AND-EQUITY> 654,995
<SALES> 0
<TOTAL-REVENUES> 333,168
<CGS> 0
<TOTAL-COSTS> 397,151
<OTHER-EXPENSES> (4,857)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,399
<INCOME-PRETAX> (67,525)
<INCOME-TAX> (17,721)
<INCOME-CONTINUING> (49,804)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,804)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> (.67)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING IS A RESTATED FINANCIAL DATA SCHEDULE AS A RESULT OF THE POOLING
OF INTERESTS WITH MAY & SPEH.
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 105,205
<SECURITIES> 0
<RECEIVABLES> 132,869
<ALLOWANCES> 3,400
<INVENTORY> 0
<CURRENT-ASSETS> 283,945
<PP&E> 316,493
<DEPRECIATION> 122,636
<TOTAL-ASSETS> 716,253
<CURRENT-LIABILITIES> 75,578
<BONDS> 281,465
0
0
<COMMON> 7,414
<OTHER-SE> 308,962
<TOTAL-LIABILITY-AND-EQUITY> 716,253
<SALES> 0
<TOTAL-REVENUES> 158,810
<CGS> 0
<TOTAL-COSTS> 139,099
<OTHER-EXPENSES> (2,490)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,076
<INCOME-PRETAX> 18,125
<INCOME-TAX> 6,769
<INCOME-CONTINUING> 11,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,356
<EPS-PRIMARY> .15
<EPS-DILUTED> .14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING IS A RESTATED FINANCIAL DATA SCHEDULE AS A RESULT OF THE POOLING
OF INTERESTS WITH MAY & SPEH.
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 7,721
<SECURITIES> 0
<RECEIVABLES> 101,131
<ALLOWANCES> 4,500
<INVENTORY> 0
<CURRENT-ASSETS> 154,139
<PP&E> 268,849
<DEPRECIATION> 100,599
<TOTAL-ASSETS> 469,335
<CURRENT-LIABILITIES> 67,404
<BONDS> 107,403
0
0
<COMMON> 7,391
<OTHER-SE> 257,327
<TOTAL-LIABILITY-AND-EQUITY> 469,335
<SALES> 0
<TOTAL-REVENUES> 259,828
<CGS> 0
<TOTAL-COSTS> 224,765
<OTHER-EXPENSES> (2,429)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,429
<INCOME-PRETAX> 33,063
<INCOME-TAX> 12,456
<INCOME-CONTINUING> 20,607
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,607
<EPS-PRIMARY> .29
<EPS-DILUTED> .26
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING IS A RESTATED FINANCIAL DATA SCHEDULE AS A RESULT OF THE POOLING
OF INTERESTS WITH MAY & SPEH.
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 5,867
<SECURITIES> 0
<RECEIVABLES> 105,513
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 156,313
<PP&E> 258,355
<DEPRECIATION> 96,746
<TOTAL-ASSETS> 454,917
<CURRENT-LIABILITIES> 48,397
<BONDS> 132,686
0
0
<COMMON> 7,364
<OTHER-SE> 241,889
<TOTAL-LIABILITY-AND-EQUITY> 454,917
<SALES> 0
<TOTAL-REVENUES> 123,952
<CGS> 0
<TOTAL-COSTS> 109,037
<OTHER-EXPENSES> (829)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,263
<INCOME-PRETAX> 13,481
<INCOME-TAX> 5,081
<INCOME-CONTINUING> 8,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,400
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
