SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 8-K
CURRENT REPORT
-----------------------
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
December 1, 1999
DATE OF REPORT (Date of earliest event reported)
ACXIOM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-13163 71-0581897
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification Number)
incorporation)
1 Information Way
Little Rock, Arkansas 72202
(Address of principal executive offices)
(Zip Code)
(501) 252-1000
(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events.
On May 28, 1999, registrant acquired Computer Graphics of Arizona,
Inc., and all of its affiliated companies in a stock-for-stock merger.
Registrant accounted for the transaction as a pooling of interests. Because of
this transaction, if registrant desires to file a registration statement under
the Securities Act of 1933, registrant will be required to prepare restated
financial statements reflecting such transaction.
Registrant prepared restated supplemental consolidated financial
statements reflecting the above-described transaction and filed them as Exhibit
99 to its Report on Form 8-K dated June 18, 1999 so that registrant could
incorporate such financial statements into any future registration statements by
reference to this report.
On August 16, 1999, the Company filed its financial statements for the
three months ended June 30, 1999 incorporating the results of operations of
Computer Graphics of Arizona, Inc. on a retroactive basis.
Registrant has prepared restated consolidated financial statements as
of March 31, 1999 and 1998 and for each of the years in the three-year period
ended March 31, 1999 reflecting the above described transaction and is filing
them as Exhibit 99 to this Current Report on Form 8-K so that registrant may
incorporate such financial statements into any future registration statements by
reference to this report.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On May 26, 1998, we entered into a merger agreement with May & Speh, Inc.
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, our
consolidated financial statements have been restated as if the combining
companies had been combined for all periods presented. See note 2 to the
Consolidated Financial Statements for a more detailed discussion of the merger
transaction.
On May 28, 1999, Acxiom acquired Computer Graphics and all of its
affiliated companies in a stock-for-stock merger. The acquired companies provide
computer-based information management services with a focus on direct marketing
as well as other related data-based products. The transaction was accounted for
as a pooling of interests. The Consolidated Financial Statements have also been
restated to reflect this transaction. See note 2 to the Consolidated Financial
Statements for a more detailed discussion of the merger transactions.
Results of Operations
For the fiscal year ended March 31, 1999, we recorded the highest annual
revenue, earnings, and earnings per share in our history, excluding the special
charges discussed more fully below. Consolidated revenue was a record $754.1
million in 1999, up 27% from 1998. For fiscal 1998, revenue growth was 19% over
the previous year.
In 1999 and 1998 we had one major customer who accounted for more than 10%
of revenue, and in 1997 we had two major customers who accounted for more than
10% of revenue. Allstate accounted for 10.9%, 12.6%, and 13.6% in 1999, 1998 and
1997, respectively, and Trans Union accounted for 11.3% in 1997. The Trans Union
data center management agreement and marketing services agreement both expire in
2005. The Allstate agreement has been extended and now expires in 2004. Revenues
under long term contracts (defined as contracts having an initial term of three
years or longer) were 51%, 53%, and 51% of consolidated revenues for 1999, 1998
and 1997, respectively.
The following table shows our revenue by business segment for each of the
years in the three-year period ended March 31, 1999 and the percentage changes
between years (dollars in millions):
<PAGE>
<TABLE>
<CAPTION>
1998 1997
to to
1999 1998 1997 1999 1998
------ ------ ------ ---- ----
<S> <C> <C> <C> <C> <C>
Services............................... $444.0 $331.7 $274.8 +34% +21%
Data Products.......................... 186.7 155.2 135.4 +20 +15
Information Technology Management...... 164.5 128.4 109.5 +28 +17
Intercompany eliminations(/1/)......... (41.1) (23.0) (20.5) +79 +12
------ ------ ------
$754.1 $592.3 $499.2 +27 +19
====== ====== ======
</TABLE>
- --------------
(1) Represents Data Products sold to the Services segment customers.
The Services segment, the Company's largest segment, provides data
warehousing, database management, list processing and consulting services to
large corporations in a number of industries. Revenue growth for this segment
has been strong, with fiscal 1999 growing 34% over the previous year after a 21%
increase in 1998. This performance has been fueled by a business trend to
develop data warehouses to implement customer relationship management
applications and one-to-one marketing initiatives for our clients.
The Data Products segment provides data content, primarily in support of
our customers' direct marketing activities. Revenue growth for this segment in
fiscal 1999 grew 20% over the previous year after a 15% increase in 1998. One of
the channels for the Data Products segment is the customers of the Services
segment. For internal reporting purposes, these revenues are included in both
segments and then adjusted within the intercompany elimination. As evidenced by
the intercompany eliminations in the previous table, revenues from customers of
the Services segment grew strongly in 1999, increasing 79% over the prior year
after a 12% increase in 1998.
The Information Technology Management segment reflects outsourcing
services, primarily in the areas of data center, client/server and network
management. Revenue growth for this segment in fiscal 1999 grew 28% over the
previous year after a 17% increase in 1998. This segment is experiencing strong
growth as a result of a trend towards business process outsourcing due to
increased complexity and changes in technology. Growth in this segment was
fueled by increases of 48% and 35% for May & Speh's outsourcing business in 1999
and 1998, respectively.
The following table presents operating expenses for each of the years in
the three-year period ended March 31, 1999 and the percentage change between
years (dollars in millions):
<TABLE>
<CAPTION>
1998 to 1997 to
1999 1998 1997 1999 1998
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Salaries and benefits............... $283.7 $219.3 $178.7 +29% +23%
Computer, communications and other
equipment.......................... 111.9 87.5 77.6 +28 +13
Data costs.......................... 111.4 93.4 80.8 +19 +16
Other operating costs and expenses.. 129.7 106.5 93.9 +22 +13
Special charges..................... 118.7 4.7 -- NM NM
------ ------ ------
$755.4 $511.4 $431.0 +48 +19
====== ====== ======
</TABLE>
Salaries and benefits increased by 29% from 1998 to 1999 and by 23% from
1997 to 1998 principally due to increased headcount to support the growth of the
business and merit increases, combined with increases in incentive compensation,
new outsourcing business, and the impact of acquisitions during the year.
Computer, communications and other equipment costs increased 28% from 1998
to 1999, after rising 13% from 1997 to 1998. The increases in 1999 and 1998
reflect depreciation on capital expenditures and amortization of software cost
expenditures made to accommodate business growth. In 1998, the percentage
increase was lessened due to the Trans Union pass-through expenses recorded in
1997.
<PAGE>
Data costs grew 19% in 1999 and 16% in 1998. These costs are a direct
result of growth in the Data Products segment and increased data purchases under
our contract with Allstate.
Other operating costs and expenses increased by 22% in 1999. Facilities
costs increased $5.5 million, primarily due to a new building in Downers Grove,
Illinois. Outside services and temporary help costs increased $8.7 million,
primarily to support growth in new Information Technology Management outsourcing
contracts. The remainder of the increase was in office supplies, travel and
entertainment expenses, and advertising, offset by a decrease in cost of sales
for client/server equipment of $3.6 million. In total, the percentage increase
in other operating costs and expenses was less than the percentage increase in
revenue. Other operating costs and expenses increased 13% in 1998. The increase
is primarily attributable to acquisitions, client/server sales noted above, an
increase in bad debt expense, and volume-related increases, somewhat reduced by
the impact of the sale of the Pro CD retail and direct marketing unit.
In the second and third quarters of fiscal 1999, we recorded special
charges which totaled $118.7 million. These charges were merger and integration
expenses 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, $8.1 million in associate-related reserves, $48.5 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
2 to the Consolidated Financial Statements for further information about the
special charges. In 1998, May & Speh recorded a $4.7 million special charge,
primarily for severance costs.
Total spending on capitalized software and research and development expense
was $36.3 million in 1999, compared to $35.1 million in 1998 and $23.7 million
in 1997. Research and development expense was $17.8 million, $13.7 million, and
$13.0 million for 1999, 1998, and 1997, respectively.
Excluding the effect of the special charges on both years, income from
operations would have been $117.4 million in 1999, an increase of 37% over the
income from operations of $85.6 million in 1998. Income from operations in 1998
would have reflected an increase of 26% over 1997. The operating margin for
1999, 1998, and 1997 would have been 15.6%, 14.5%, and 13.7%, respectively.
Operating margins for the Services and Information Technology Management
segments are generally higher than that of the Data Products segment. For fiscal
1999, operating margins were 20.4%, 8.2%, and 21.2% for the Services, Data
Products, and Information Technology Management segments, respectively.
Interest expense increased by $7.3 million in 1999 and by $4.3 million in
1998. The increase is due primarily to increased debt levels, including $115
million of convertible debt issued by May & Speh in March, 1998, increases in
our revolving credit agreement, and increases in enterprise software license
liabilities.
Other, net is primarily composed of interest income on noncurrent
receivables and invested cash of $6.4 million in 1999, $2.9 million in 1998 and
$1.6 million in 1997. Other, net for 1998 also includes $0.9 million of gain on
the disposal of the Pro CD retail and direct marketing business compared with a
$2.6 million charge in 1997 due to a write-off from the sale of a facility
related to a previously disposed of unit.
Our effective tax rate, excluding the special charges, was 37.3%, 37.3%,
and 37.7% for 1999, 1998, and 1997, respectively. In each year, the effective
rate exceeded the U.S. statutory rate because of state income taxes, partially
offset by research and experimentation tax credits. In 1999, the effect of the
special charges increased the effective tax rate as certain of the special
charges are not deductible for federal or state tax purposes.
The net loss was $15.1 million in 1999 including the special charges noted
above. Excluding the effect of the special charges, net earnings would have been
$66.8 million. Net earnings were $47.2 million in 1998, or $50.1 million
excluding the special charges. Net earnings were $38.9 million in 1997. Basic
earnings per share, excluding the special charges, would have been $0.86, $0.68,
and $0.55 in 1999, 1998, and 1997, respectively. Diluted earnings per share
would have been $0.78, $0.61, and $0.49, respectively.
<PAGE>
Seasonal and Quarterly Comparisons
Our operations have not proven to be significantly seasonal, although our
traditional direct marketing operations experience slightly higher revenues in
our second and third quarters. This seasonal impact should decrease as we
continue to move toward long-term strategic partnerships with more predictable
revenues. The following table sets forth certain quarterly financial information
for the quarters indicated.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data(/1/):
Revenue................ $129,390 $141,739 $152,892 $168,308 $164,512 $180,030 $193,910 $215,605
Income from operations. 15,006 21,000 25,525 24,078 20,321 26,665 35,333 35,044
Net earnings........... 8,265 12,575 15,035 14,241 11,737 15,473 19,944 19,631
Percentage of
Revenue(/1/):
Income from operations. 11.6% 14.8% 16.7% 14.3% 12.4% 14.8% 18.2% 16.3%
Net earnings........... 6.4 8.9 9.8 8.5 7.1 8.6 10.3 9.1
</TABLE>
- --------------
(1) Excludes special charges for the fiscal year ended March 31, 1998 related
to May & Speh severance costs and for the fiscal year ended March 31, 1999
related to merger and integration charges associated with the May & Speh
merger and the write down of other impaired assets.
Capital Resources and Liquidity
Working capital at March 31, 1999 totaled $134.1 million compared to $210.5
million a year previously. At March 31, 1999, we had available credit lines of
$126.5 million, of which $55.4 million was outstanding. Our debt-to-capital
ratio (capital defined as long-term debt plus stockholders' equity) was 48% at
March 31, 1999, compared to 45% at March 31, 1998. Included in long-term debt
are two convertible debt facilities totaling $140 million, of which $25.0
million was converted to equity in April 1999. Assuming both of these facilities
will convert to equity, our debt-to-capital ratio would be reduced to 27% as of
March 31, 1999. Total stockholders' equity increased to $357.8 million at March
31, 1999, from $308.2 million at March 31, 1998.
In May 1999, we arranged a $25.0 million increase in our current revolving
credit facility. This temporary increase will expire on July 31, 1999. As of
June 17, 1999, $139.9 million was outstanding compared to $55.4 million at March
31, 1999. The increase in the amount outstanding under our revolving credit
facility was the result of acquisition payments, capital expenditures and
working capital needs. We intend to use the net proceeds of this offering to pay
down a portion of the outstanding balance of this facility.
Cash provided by operating activities was $60.4 million for 1999 compared
to $65.5 million in 1998 and $44.2 million in 1997. Excluding the impact of
special charges, cash provided by operating activities was $88.8 million, $70.2
million and $44.2 million in 1999, 1998 and 1997, respectively. Earnings before
interest, taxes, depreciation, and amortization ("EBITDA"), again excluding the
impact of the special charges, increased by 34% in 1999 after also increasing
34% in 1998. The operating cash flow was reduced by $124.1 million in 1999,
$55.7 million in 1998, and $50.8 million in 1997 due to the net change in
operating assets and liabilities. The change primarily reflects higher current
and noncurrent receivables, partially offset by higher accounts payable and
accrued liabilities resulting from the growth of our business. EBITDA is not
intended to represent operating cash flow, 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 our operations and cash flows and is used internally as a
surrogate measure of cash provided by operating activities.
Investing activities used $190.3 million in 1999, $86.8 million in 1998,
and $108.3 million in 1997. Investing activities in 1999 included $127.9 million
in capital expenditures, compared to $68.1 million in 1998 and $65.3 million in
1997. The increase in capital expenditures was principally due to purchases of
data center equipment to support our outsourcing agreements, as well as the
<PAGE>
purchase of additional data center equipment in our core data centers.
Approximately one-half of the capital expenditures in 1999 were related to
customer-specific projects or contractual customer requirements. We occupied a
new building in Downers Grove, Illinois in fiscal 1999 and two new buildings in
Little Rock, Arkansas in the first quarter of fiscal 2000.
Investing activities during 1999 also include $18.5 million in capitalized
software development costs, compared to $21.4 million in 1998 and $10.7 million
in 1997. The capitalized costs in 1998 included $8.1 million capitalized by May
& Speh on a project that was completed during 1998. Excluding the decrease
related to this project at May & Speh, capitalized software development costs
increased $5.2 million from 1998 to 1999, primarily due to capitalized software
costs related to the Acxiom Data Network. The remainder of the capitalized
software costs includes software tools and databases developed for customers in
all three segments of our business. Investing activities also reflect cash paid
for acquisitions of $46.0 million in 1999, $19.8 million in 1998, and $16.2
million in 1997. These outflows were partially offset in 1998 by $15.3 million
received from the sale of assets, including $13.0 million from the sale of the
retail and direct marketing assets of Pro CD. Notes 2 and 15 to our Consolidated
Financial Statements discuss the acquisitions and dispositions in more detail.
Investing activities also reflect the investment of $10.4 million in 1999 and
$6.1 million in 1998 in joint ventures. These investments include approximately
$4.0 million invested in each of 1999 and 1998 in Bigfoot International, Inc.,
an emerging company that provides services and tools for Internet e-mail users,
and $3.2 million invested in fiscal 1999 in Ceres Integrated Solutions, LLC, a
provider of software and analytical services to large retailers. Investing
activities also include purchases and sales of marketable securities. These
securities were purchased by May & Speh prior to the merger. As of March 31,
1999, we no longer held any marketable securities.
Financing activities in 1999 provided $24.9 million of cash, including
sales of stock through our stock option and employee stock purchase plans and
the exercise of a warrant by Trans Union for the purchase of 4.0 million shares.
This warrant was issued to Trans Union in 1992 in conjunction with our data
center management agreement with Trans Union. Financing activities in 1998
provided $127.4 million of cash, including the issuance of the $115.0 million
convertible debt by May & Speh in March 1998. Financing activities in 1997
included the issuance of $30.0 million in senior notes and the issuance of $43.0
million of common stock by May & Speh.
During fiscal 1999, construction was substantially completed on our new
headquarters building and a new customer service facility in Little Rock,
Arkansas. These two buildings were built pursuant to 50/50 joint ventures
between us and local real estate investors and were occupied in the first
quarter of fiscal 2000. We have also occupied a new building in Downers Grove,
Illinois. During fiscal 2000, we expect to begin construction on a new customer
service facility in Conway, Arkansas as well as another customer service
facility in Little Rock, Arkansas. The Conway facility is expected to be
completed in February 2000 and to cost approximately $12.0 million. The Little
Rock facility is expected to cost approximately $28.0 million and construction
is expected to last from August 1999 to July 2001. Financing plans for these two
buildings are not yet complete, although the City of Little Rock has committed
to issue revenue bonds for the Little Rock facility.
While we do 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 our 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, we also sell 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. We have also been, and will likely continue to
be, actively pursuing acquisitions. As a result, we expect that it will be
necessary to raise additional capital during the next fiscal year. We believe
that capital could be raised by negotiating an increase in our current revolving
credit agreement, by incurring other debt on either a secured or unsecured
basis, or by the issuance of additional equity securities in either public or
private offerings. We believe we have significant unused capacity to raise
capital which could be used to support future growth.
<PAGE>
Item 7. Financial Statements and Exhibits
(c) Exhibits
23.1 Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers LLP
99 Consolidated Financial Statements of Acxiom
Corporation (as restated to reflect the acquisition
of Computer Graphics of Arizona, Inc., and all of its
affiliated companies on May 28, 1999)
<PAGE>
SIGNATURE
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 hereunto duly authorized.
ACXIOM CORPORATION
By: /s/ Catherine L. Hughes
----------------------------------
Catherine L. Hughes
Secretary and Corporate Counsel
Date: December 30, 1999
<PAGE>
Exhibit Index
Number in
Exhibit Table Exhibit
23.1 Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers LLP
99 Consolidated Financial Statements of Acxiom Corporation (as
restated to reflect the acquisition of Computer Graphics of
Arizona, Inc., and all of its affiliated companies on May
28, 1999)
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
Acxiom Corporation:
We consent to incorporation by reference in the registration statements (No.
333-72009 on Form S-3 and No. 33-17115, No. 33-37609, No. 33-37610, No.
33-42351, No. 33-72310, No. 33-72312, No. 33-63423, No. 333-03391, No. 333-63633
and No. 333-91395 on Form S-8) of Acxiom Corporation of our report dated May 28,
1999, except as to note 1(b), which is as of August 16, 1999, relating to the
consolidated financial statements and related consolidated financial statement
schedule of Acxiom Corporation and subsidiaries as of March 31, 1999 and 1998,
and for each of the years in the three-year period ended March 31, 1999 which
report appears in this current report on Form 8-K of Acxiom Corporation.
/s/ KPMG LLP
Little Rock, Arkansas
November 29, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-72009) and Form S-8 (No. 33-17115, No. 33-37609,
No. 33-37610, No. 33-42351, No. 33-72310, No. 33-72312, No. 33-63423, No.
333-03391, No. 333-63633 and No. 333-91395) of Acxiom Corporation of our report
dated November 1, 1996, which appears in this Current Report on Form 8-K of
Acxiom Corporation, relating to the consolidated statements of operations, of
stockholders' equity and of cash flows of May & Speh, Inc. for the year ended
September 30, 1996 (not presented separately herein).
PricewaterhouseCoopers LLP
Chicago, Illinois
November 29, 1999
EXHIBIT 99
ACXIOM CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports............................................. F-2
Consolidated Balance Sheets--March 31, 1999 and 1998...................... F-4
Consolidated Statements of Operations--Years ended March 31,
1999, 1998 and 1997...................................................... F-5
Consolidated Statements of Stockholders' Equity--Years ended
March 31, 1999, 1998 and 1997............................................ F-6
Consolidated Statements of Cash Flows--Years ended March 31,
1999, 1998 and 1997...................................................... F-8
Notes to Consolidated Financial Statements................................ F-9
Financial Statement Schedule--Valuation and Qualifying
Accounts--Years ended March 31, 1999, 1998 and 1997...................... F-26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Acxiom Corporation:
We have audited the accompanying consolidated financial statements of
Acxiom Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
consolidated financial statements of May & Speh, Inc., a wholly-owned
subsidiary, which statements reflect total revenues constituting 15 percent of
the related consolidated total during the year ended March 31, 1997. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for May & Speh,
Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Acxiom Corporation and subsidiaries
as of March 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the years in the three-year period ended March 31, 1999,
in conformity with generally accepted accounting principles. Also in our
opinion, based on our audits and the report of other auditors, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
KPMG LLP
Little Rock, Arkansas
May 28, 1999, except as to note 1(b),
which is as of August 16, 1999
F-2
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors and Stockholders of May & Speh, Inc.
In our opinion, the consolidated statements of operations, of cash flows and of
changes in stockholders' equity of May & Speh, Inc. (not presented separately
herein) present fairly, in all material respects, its results of operations and
its cash flows for the year ended September 30, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
November 1, 1996
F-3
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
ASSETS -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents... $ 12,604 $117,652
Marketable securities....... -- 11,794
Trade accounts receivable,
net (note 12)................ 184,799 122,413
Refundable income taxes
(note 9)................... 12,651 7,670
Deferred income taxes (note
9)......................... 30,643 2,868
Other current assets (note
5)......................... 61,302 32,307
-------- --------
Total current assets.... 301,999 294,704
Property and equipment, net of
accumulated depreciation and
amortization (notes 4
and 6)....................... 226,381 187,258
Software, net of accumulated
amortization of $17,941 in
1999 and $11,642 in 1998
(note 3) .................... 37,400 38,673
Excess of cost over fair value
of net assets acquired, net
of accumulated amortization
of $13,517 in 1999 and $8,585
in 1998 (note 2) ............ 122,483 73,851
Other assets (note 5)......... 201,537 87,148
-------- --------
$889,800 $681,634
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
<S> <C> <C>
Current liabilities:
Current installments of
long-term debt (note 6).... $ 23,355 $ 10,466
Trade accounts payable...... 60,216 22,876
Accrued expenses:
Merger and integration
costs (note 2)........... 33,181 --
Payroll................... 18,224 18,466
Other..................... 25,744 20,846
Deferred revenue............ 7,195 11,547
-------- --------
Total current
liabilities............ 167,915 84,201
Long-term debt, excluding
current installments (note
6)........................... 325,223 254,240
Deferred income taxes (note
9)........................... 38,889 34,968
Stockholders' equity (notes 2,
6, 8 and 9):
Common stock................ 8,106 7,592
Additional paid-in capital.. 186,011 122,038
Retained earnings........... 167,013 182,155
Accumulated other
comprehensive income
(loss)..................... (324) 676
Unearned ESOP compensation.. -- (2,055)
Treasury stock, at cost..... (3,033) (2,181)
-------- --------
Total stockholders'
equity................. 357,773 308,225
Commitments and contingencies
(notes 2, 6, 7, 10, 11 and
14)..........................
-------- --------
$889,800 $681,634
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue (notes 2 and 12)........................ $754,057 $592,329 $499,232
Operating costs and expenses (notes 2, 3, 7, 10
and 11):
Salaries and benefits......................... 283,659 219,339 178,684
Computer, communications and other equipment.. 111,876 87,529 77,631
Data costs.................................... 111,395 93,382 80,758
Other operating costs and expenses............ 129,764 106,470 93,953
Special charges (note 2)...................... 118,747 4,700 --
-------- -------- --------
Total operating costs and expenses.......... 755,441 511,420 431,026
-------- -------- --------
Income (loss) from operations............... (1,384) 80,909 68,206
-------- -------- --------
Other income (expense):
Interest expense.............................. (17,393) (10,091) (5,840)
Other, net.................................... 6,478 4,402 183
-------- -------- --------
Total other income.......................... (10,915) (5,689) (5,657)
-------- -------- --------
Earnings (loss) before income taxes............. (12,299) 75,220 62,549
Income taxes (note 9)........................... 2,843 28,065 23,605
-------- -------- --------
Net earnings (loss)......................... $(15,142) $ 47,155 $ 38,944
======== ======== ========
Earnings (loss) per share:
Basic......................................... $ (.19) $ .64 $ .55
======== ======== ========
Diluted....................................... $ (.19) $ .58 $ .49
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended March 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Common stock
----------------- Additional
Number of paid-in
shares Amount capital
---------- ------ ----------
<S> <C> <C> <C>
Balances at March 31, 1996........................ 66,859,872 $6,686 $ 53,088
Pro CD merger (note 2).......................... 3,313,324 331 2,647
Sale of common stock............................ 4,381,362 438 46,828
Tax benefit of stock options exercised (note 9). -- -- 2,232
Issuance of common stock warrants............... -- -- 1,300
Employee stock awards and shares issued to
employee benefit plans,
net of treasury shares repurchased............. -- -- 1,359
ESOP compensation earned........................ -- -- --
Comprehensive income:
Foreign currency translation.................. -- -- --
Net earnings.................................. -- -- --
---------- ------ --------
Total comprehensive income..................
Balances at March 31, 1997........................ 74,554,558 7,455 107,454
May & Speh merger (note 2)...................... 72,160 7 115
Sale of common stock............................ 1,235,971 124 9,158
Tax benefit of stock options exercised (note 9). -- -- 2,763
Employee stock awards and shares issued to
employee benefit plans,
net of treasury shares repurchased............. 57,529 6 2,548
ESOP compensation earned........................ -- -- --
Comprehensive income:
Foreign currency translation.................. -- -- --
Net earnings.................................. -- -- --
---------- ------ --------
Total comprehensive income..................
Balances at March 31, 1998........................ 75,920,218 7,592 122,038
Sale of common stock............................ 4,000,000 400 11,850
Tax benefit of stock options and warrants
exercised (note 9)............................. -- -- 36,393
Issuance of warrants (note 2)................... -- -- 2,676
Employee stock awards and shares issued to
employee benefit plans,
net of treasury shares repurchased............. 1,144,198 114 13,054
ESOP compensation earned........................ -- -- --
Comprehensive loss:
Foreign currency translation.................. -- -- --
Net loss...................................... -- -- --
---------- ------ --------
Total comprehensive loss....................
Balances at March 31, 1999........................ 81,064,416 $8,106 $186,011
========== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Accumulated Treasury stock Total
other Unearned ------------------- stockholders'
Comprehensive Retained comprehensive ESOP Number of equity
income (loss) earnings income (loss) compensation shares Amount (note 7)
- - ------------- -------- ------------- ------------ ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ 96,514 $ (863) $(8,906) (1,242,242) $(2,323) $144,196
(4,752) -- -- -- -- (1,774)
-- -- -- -- -- 47,266
-- -- -- -- -- 2,232
-- -- -- -- -- 1,300
-- -- -- 145,912 (192) 1,167
-- -- 3,134 -- -- 3,134
1,141 -- 1,141 -- -- -- 1,141
38,944 38,944 -- -- -- -- 38,944
-------- -------- ------ ------- ---------- ------- --------
$ 40,085
========
130,706 278 (5,772) (1,096,330) (2,515) 237,606
4,294 -- 1,188 -- -- 5,604
-- -- -- -- -- 9,282
-- -- -- -- -- 2,763
-- -- -- 259,410 334 2,888
-- -- 2,529 -- -- 2,529
398 -- 398 -- -- -- 398
47,155 47,155 -- -- -- -- 47,155
-------- -------- ------ ------- ---------- ------- --------
$ 47,553
========
182,155 676 (2,055) (836,920) (2,181) 308,225
-- -- -- -- -- 12,250
-- -- -- -- -- 36,393
-- -- -- -- -- 2,676
-- -- -- 104,649 (852) 12,316
-- -- 2,055 -- -- 2,055
(1,000) -- (1,000) -- -- -- (1,000)
(15,142) (15,142) -- -- -- -- (15,142)
-------- -------- ------ ------- ---------- ------- --------
$(16,142)
========
$167,013 $ (324) -- (732,271) $(3,033) $357,773
======== ====== ======= ========== ======= ========
</TABLE>
F-7
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................... $ (15,142) $ 47,155 $ 38,944
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization................. 64,097 49,808 35,640
Loss (gain) on disposal or impairment of
assets....................................... 26 (960) 2,412
Provision for returns and doubtful accounts... 2,223 3,094 4,462
Deferred income taxes......................... (23,854) 12,143 8,163
Tax benefit of stock options and warrants
exercised.................................... 36,393 2,763 2,232
ESOP compensation............................. 2,055 2,529 3,134
Special charges............................... 118,747 4,700 --
Changes in operating assets and liabilities:
Accounts receivable.......................... (61,286) (29,670) (24,683)
Other assets................................. (62,446) (41,998) (16,930)
Accounts payable and other liabilities....... 27,983 20,624 (9,218)
Merger and integration costs................. (28,385) (4,700) --
--------- -------- ---------
Net cash provided by operating activities... 60,411 65,488 44,156
--------- -------- ---------
Cash flows from investing activities:
Proceeds from the disposition of assets....... 733 15,340 2,385
Proceeds from sale of marketable securities... 11,794 19,021 12,919
Purchases of marketable securities............ -- (5,778) (31,366)
Cash received in merger....................... -- -- 21
Development of software....................... (18,544) (21,411) (10,715)
Capital expenditures.......................... (127,880) (68,093) (65,286)
Investments in joint ventures................. (10,400) (6,072) --
Net cash paid in acquisitions (note 2)........ (45,983) (19,841) (16,223)
--------- -------- ---------
Net cash used in investing activities....... (190,280) (86,834) (108,265)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from debt............................ 18,939 125,820 39,509
Payments of debt.............................. (18,607) (10,542) (20,994)
Sale of common stock.......................... 24,566 12,171 48,433
--------- -------- ---------
Net cash provided by financing activities... 24,898 127,449 66,948
--------- -------- ---------
Effect of exchange rate changes on cash........ (77) 2 --
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................... (105,048) 106,105 2,839
Cash and cash equivalents at beginning of year. 117,652 11,547 12,132
--------- -------- ---------
Cash and cash equivalents at end of year....... $ 12,604 $117,652 $ 14,971
========= ======== =========
Supplemental cash flow information:
Cash paid (received) during the year for:
Interest...................................... $ 15,608 $ 9,350 $ 5,147
Income taxes.................................. (4,715) 13,360 15,936
Noncash financing and investing activities:
Issuance of warrants.......................... 2,676 -- 1,300
Enterprise software licenses acquired under
software obligation.......................... 74,638 10,949 --
Acquisition of property and equipment under
capital lease................................ -- 14,939 11,373
Convertible debt issued in acquisition (note
2)........................................... -- -- 25,000
========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) Description of Business
Acxiom Corporation ("Acxiom" or the "Company") provides information
management solutions using customer, consumer and business data, primarily for
marketing applications. Business segments of the Company provide list services,
data warehousing, consulting, data content, fulfillment services, and
outsourcing and facilities management services primarily in the United States
(U.S.) and United Kingdom (U.K.).
(b) Basis of Presentation and Principles of Consolidation
The consolidated financial statements give retroactive effect
to the merger of Acxiom Corporation and Computer Graphics of Arizona, Inc. on
May 28, 1999, which has been accounted for as a pooling of interests as
described in Note 2 to the consolidated financial statements. On August 16,
1999, the Company filed its financial statements for the three months ended
June 30, 1999 incorporating the results of operations of Computer Graphics
of Arizona, Inc. on a retroactive basis.
The consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Investments in 20% to 50%
owned entities are accounted for using the equity method and investments in
less than 20% owned entities are accounted for at cost.
(c) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(d) Marketable Securities
Marketable securities are stated at cost which approximates fair market
value; gains and losses are recognized in the period realized. The Company has
classified its securities as available for sale.
(e) Accounts Receivable
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's receivables are from a large number of customers. Accordingly,
the Company's credit risk is affected by general economic conditions. Although
the Company has several large individual customers, concentrations of credit
risk are limited because of the diversity of the Company's customers.
Trade accounts receivable are presented net of allowances for doubtful
accounts and credits of $5.6 million and $3.8 million in 1999 and 1998,
respectively.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
calculated on the straight-line method over the estimated useful lives of the
assets as follows: buildings and improvements, 5-31.5 years; office furniture
and equipment, 3-12 years; and data processing equipment, 2-10 years.
Property held under capitalized lease arrangements is included in property
and equipment, and the associated liabilities are included with long-term debt.
Property and equipment taken out of service and held for sale is recorded at
net realizable value and depreciation is ceased.
F-9
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g) Software and Research and Development Costs
Capitalized and purchased software costs are amortized on a straight-line
basis over the remaining estimated economic life of the product, or the
amortization that would be recorded by using the ratio of gross revenues for a
product to total current and anticipated future gross revenues for that
product, whichever is greater. Research and development costs incurred prior to
establishing technological feasibility of software products are charged to
operations as incurred.
(h) Excess of Cost Over Fair Value of Net Assets Acquired
The excess of acquisition costs over the fair values of net assets acquired
in business combinations treated as purchase transactions ("goodwill") is being
amortized on a straight-line basis over 15 to 40 years from acquisition dates.
The Company periodically evaluates the existence of goodwill impairment on the
basis of whether the goodwill is fully recoverable from the projected,
undiscounted net cash flows of the related business unit. The amount of
goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average
cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
(i) Revenue Recognition
Revenue from services, including consulting, list processing and data
warehousing, and from information technology outsourcing services, including
facilities management contracts, are recognized as services are performed. In
the case of long-term outsourcing contracts, capital expenditures incurred in
connection with the contract are capitalized and amortized over the term of the
contract whereby profit is recognized under the contracts at a consistent rate
of margin as services are performed under the contract. In certain outsourcing
contracts, additional revenue is recognized based upon attaining certain annual
margin improvements or cost savings over performance benchmarks as specified in
the contracts. Such additional revenue is recognized when it is determinable
that such benchmarks have been met.
Revenue from sales and licensing of software and data are recognized when
the software and data are delivered, the fee for such data is fixed or
determinable, and collectibility of such fee is probable. Software and data
file maintenance is recognized over the term of the agreements. In the case of
multiple-element software and data arrangements, revenue is allocated to the
respective elements based upon their relative fair values. Billed but unearned
portions of revenue are deferred.
(j) Income Taxes
The Company and its domestic subsidiaries file a consolidated Federal income
tax return. The Company's foreign subsidiaries file separate income tax returns
in the countries in which their operations are based.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(k) Foreign Currency Translation
The balance sheets of the Company's foreign subsidiaries are translated at
year-end rates of exchange, and the statements of earnings are translated at
the weighted average exchange rate for the period. Gains or losses
F-10
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
resulting from translating foreign currency financial statements are included
in accumulated other comprehensive income (loss) in the statement of
stockholders' equity.
(l) Earnings Per Share
A reconciliation of the numerator and denominator of basic and diluted
earnings (loss) per share is shown below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Basic earnings per share:
Numerator-net earnings (loss)................ $(15,142) $47,155 $38,944
======== ======= =======
Denominator-weighted average shares
outstanding................................. 77,840 74,070 71,150
======== ======= =======
Earnings (loss) per share.................... $ (.19) $ .64 $ .55
======== ======= =======
Diluted earnings per share:
Numerator:
Net earnings (loss)........................ $(15,142) $47,155 $38,944
Interest expense on convertible debt (net
of tax effect)............................ -- 465 445
-------- ------- -------
$(15,142) $47,620 $39,389
======== ======= =======
Denominator:
Weighted average shares outstanding.......... 77,840 74,070 71,150
Effect of common stock options............... -- 3,593 3,782
Effect of common stock warrant............... -- 3,015 3,004
Convertible debt............................. -- 2,102 2,000
-------- ------- -------
77,840 82,780 79,936
======== ======= =======
Earnings (loss) per share...................... $ (.19) $ .58 $ .49
======== ======= =======
</TABLE>
All potentially dilutive securities were excluded from the above
calculations for the year ended March 31, 1999 because they were antidilutive.
The equivalent share effects of common stock options and warrants which were
excluded were 5,632. Potentially dilutive shares related to the convertible
debt which were excluded were 7,783. Also, interest expense on the convertible
debt (net of income tax effect) excluded in computing diluted loss per share
was $4,257.
Options to purchase shares of common stock that were outstanding during
1999, 1998 and 1997 but were not included in the computation of diluted
earnings (loss) per share because the option exercise price was greater than
the average market price of the common shares are shown below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Number of shares under option. 1,491 2,176 1,432
Range of exercise prices...... $24.24-$54.00 $15.94-$35.92 $18.61-$35.00
</TABLE>
(m) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
F-11
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(n)Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(o)Reclassifications
To conform to the 1999 presentation, certain accounts for 1998 and 1997 have
been reclassified. The reclassifications had no effect on net earnings for 1998
and 1997.
(2) Acquisitions
On May 28, 1999, the Company completed the acquisition of Computer Graphics
of Arizona, Inc. ("Computer Graphics") and all of its affiliated companies in a
stock-for-stock merger. The Company issued 1,871,343 shares of its common stock
in exchange for all outstanding common stock of Computer Graphics. Computer
Graphics, a privately held enterprise headquartered in Phoenix, Arizona, is a
computer service business principally serving financial services direct
marketers. The acquisition was accounted for as a pooling of interests, and,
accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the accounts and results of
operations of Computer Graphics.
Effective January 1, 1999, the Company acquired three database marketing
units from Deluxe Corporation ("Deluxe"). The purchase price was $23.6 million,
of which $18.0 million was paid in cash at closing and the remainder was paid
in April 1999. Deluxe's results of operations are included in the Company's
consolidated results of operations beginning January 1, 1999. This acquisition
was accounted for as a purchase. The excess of cost over net assets acquired of
$21.9 million is being amortized using the straight-line method over 15 years.
The pro forma effect of the acquisition is not material to the Company's
consolidated results of operations for the periods reported.
On September 17, 1998, the Company issued 20,858,923 shares of its common
stock in exchange for all outstanding capital stock of May & Speh, Inc. ("May &
Speh"). Additionally, the Company assumed all of the 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. This business combination has been accounted for as a pooling
of interests and, accordingly, the consolidated financial statements for
periods prior to the combination have been restated to include the accounts and
results of operations of May & Speh.
The results of operations previously reported by Acxiom, May & Speh and
Computer Graphics and the combined amounts presented in the accompanying
consolidated financial statements are summarized below.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Acxiom...................................... $729,984 $465,065 $402,016
May & Speh.................................. -- 103,955 77,223
Computer Graphics........................... 24,073 23,309 19,993
-------- -------- --------
Combined.................................... $754,057 $592,329 $499,232
======== ======== ========
Net earnings (loss):
Acxiom...................................... $(16,430) $ 35,597 $ 27,512
May & Speh.................................. -- 10,458 10,223
Computer Graphics........................... 1,288 1,100 1,209
-------- -------- --------
Combined.................................... $(15,142) $ 47,155 $ 38,944
======== ======== ========
</TABLE>
F-12
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Included in the statement of operations for the year ended March 31, 1999
are revenue of $66.6 million and net earnings of $9.3 million for May & Speh
for the period from April 1, 1998 to September 17, 1998.
Prior to the combination, May & Speh's fiscal year ended September 30. In
recording the pooling-of-interests combination, May & Speh's consolidated
financial statements as of and for the year ended March 31, 1998 were combined
with Acxiom's consolidated financial statements for the same period and May &
Speh's consolidated financial statements as of and for the year ended September
30, 1996 were combined with Acxiom's consolidated financial statements as of
and for the year ended March 31, 1997. May & Speh's unaudited consolidated
results of operations for the six months ended March 31, 1997 included revenue
of $42.9 million and net earnings of $4.3 million. An adjustment has been made
to retained earnings as of March 31, 1997 to record the net earnings of May &
Speh for the six months ended March 31, 1997.
During the year ended March 31, 1999, the Company recorded special charges
totaling $118.7 million related to 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 to be
paid to investment bankers, accountants, and attorneys; $8.1 million in
associate-related reserves, principally employment contract termination costs
and severance costs; $48.5 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.
The transaction costs are fees which were incurred as a direct result of the
merger transaction. The associate-related reserves include 1) payments to be
made under a previously existing employment agreement with one terminated May &
Speh executive in the amount of $3.5 million, 2) payments to be made under
previously existing employment agreements with seven May & Speh executives who
are remaining with Acxiom, but are entitled to payments totaling $3.6 million
due to the termination of their employment agreements, and 3) involuntary
termination benefits aggregating $1.0 million to seven May & Speh and Company
employees whose positions have been or will be eliminated. One of the seven
positions, for which $0.7 million was accrued, was not related to the May &
Speh merger, but related to a Company associate whose position was eliminated
as a result of the closure of the Company's New Jersey business location. As of
March 31, 1999, one of the seven associates has been terminated.
The contract termination costs are costs which have been incurred to
terminate duplicative software contracts. The amounts recorded represent cash
payments which the Company has made or will make to the software vendors to
terminate existing May & Speh agreements.
For all other write downs and costs, the Company performed an analysis as
required under Statement of Financial Accounting Standards ("SFAS") No. 121 to
determine whether and to what extent any assets were impaired as a result of
the merger. The analysis included estimating expected future cash flows from
each of the assets which were expected to be held and used by the Company.
These expected cash flows were compared to the carrying amount of each asset to
determine whether an impairment existed. If an impairment was indicated, the
asset was written down to its fair value. Quoted market prices were used to
estimate fair value when market prices were available. In cases where quoted
prices were not available, the Company estimated fair value using internal
valuation sources. In the case of assets to be disposed of, the Company
compared the carrying value of the asset to its estimated fair value, and if an
impairment was indicated, wrote the asset down to its estimated fair value.
Approximately $110.1 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
F-13
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the year, 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. Special charges in 1998 relate to employee
severance payments made to former May & Speh executives.
The following table shows the balances which were initially accrued as of
September 30, 1998, and the changes in those balances during the remainder of
the year ended March 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1998 Additions Payments 1999
------------- --------- -------- ---------
<S> <C> <C> <C> <C>
Transaction costs.............. $ 9,163 -- $ 9,163 --
Associate-related reserves..... 6,783 $1,375 3,804 $ 4,354
Contract termination costs..... 40,500 -- 13,500 27,000
Other accruals................. 3,745 -- 1,918 1,827
------- ------ ------- -------
$60,191 $1,375 $28,385 $33,181
======= ====== ======= =======
</TABLE>
The associate-related reserves and contract termination costs will be
substantially paid out during fiscal 2000. The other accruals will be paid out
over periods ranging up to five years.
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 excess of cost over net assets acquired of
$23.2 million is being amortized using the straight-line method over 20 years.
The pro forma effect of the acquisition is not material to the Company's
consolidated results of operations for the periods reported.
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. Normadress' results of
operations are included in the Company's consolidated results of operations
beginning April 1, 1998. This acquisition was accounted for as a purchase. The
excess of cost over net assets acquired of $5.7 million is being amortized
using the straight-line method over 20 years. The pro forma effect of the
acquisition is not material to the Company's consolidated results of operations
for the periods reported.
Effective October 1, 1997, the Company acquired 100% ownership of
MultiNational Concepts, Ltd. ("MultiNational") and Catalog Marketing Services,
Inc. (d/b/a Shop the World by Mail), entities under common control
(collectively "STW"). Total consideration was $4.6 million (net of cash
acquired) and other cash consideration based on the future performance of STW.
MultiNational, headquartered in Hoboken, New Jersey, is an international
mailing list and database maintenance provider for consumer catalogers
interested in developing foreign markets. Shop the World by Mail, headquartered
in Sarasota, Florida, provides cooperative customer acquisition programs, and
also produces an international catalog of catalogs whereby end-customers in
over 60 countries can order catalogs from around the world.
Also effective October 1, 1997, the Company acquired Buckley Dement, L.P.
and its affiliated company, KM Lists, Incorporated (collectively "Buckley
Dement"). Buckley Dement, headquartered in Skokie, Illinois,
F-14
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
provides list brokerage, list management, promotional mailing and fulfillment,
and merchandise order processing to pharmaceutical, health care, and other
commercial customers. Total consideration was $14.2 million (net of cash
acquired) and other cash consideration based on the future performance of
Buckley Dement.
Both the Buckley Dement and STW acquisitions are accounted for as purchases
and their operating results are included with the Company's results beginning
October 1, 1997. The purchase price for the two acquisitions exceeded the fair
value of net assets acquired by $12.6 million and $5.2 million for Buckley
Dement and STW, respectively. The resulting excess of cost over net assets
acquired is being amortized over 20 years. The pro forma effect of the
acquisitions are not material to the Company's consolidated results of
operations for the periods reported.
On April 9, 1996, the Company issued 3,313,324 shares of its common stock
for all of the outstanding common stock and common stock options of Pro CD,
Inc., ("Pro CD"). Headquartered in Danvers, Massachusetts, Pro CD is a
publisher of reference software on CD-ROM. The business combination was
accounted for as a pooling-of-interests. The stockholders' equity and
operations of Pro CD were not material in relation to those of the Company. As
such, the Company recorded the combination by restating stockholders' equity as
of April 1, 1996, without restating prior years' financial statements to
reflect the pooling-of-interests. At April 1, 1996 Pro CD's liabilities
exceeded its assets by $1.8 million.
Also in April, 1996, the Company acquired the assets of Direct Media/DMI,
Inc. ("DMI") for $25 million and the assumption of certain liabilities of DMI.
The $25 million purchase price was payable in three years, and could, at DMI's
option, be paid in two million shares of Acxiom common stock in lieu of cash
plus accrued interest. Subsequent to March 31, 1999, the holder of the
convertible note elected to receive the two million shares of the Company's
common stock in lieu of cash. Headquartered in Greenwich, Connecticut, DMI
provides list brokerage, management and consulting services to business-to-
business and consumer list owners and mailers. At April 1, 1996 the liabilities
assumed by the Company exceeded the fair value of the net assets acquired from
DMI by approximately $1.0 million. The resulting excess of purchase price over
fair value of net assets acquired of $26.0 million is being amortized over 20
years. The acquisition has been accounted for as a purchase, and accordingly,
the results of operations of DMI are included in the consolidated results of
operations from the date of its acquisition.
Also subsequent to March 31, 1999, the Company acquired the assets of
Horizon Systems, Inc. ("Horizon") for $16.0 million in cash and common stock of
the Company and the assumption of certain liabilities of Horizon, and other
cash and stock considerations based on the future performance of Horizon.
(3) Software and Research and Development Costs
The Company recorded amortization expense related to internally developed
computer software of $8.3 million, $5.9 million and $5.4 million in 1999, 1998
and 1997, respectively. Additionally, research and development costs of $17.8
million, $13.7 million and $13.0 million were charged to operations during
1999, 1998 and 1997, respectively.
F-15
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Property and Equipment
Property and equipment is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land................................................... $ 8,224 $ 8,427
Buildings and improvements............................. 92,417 75,969
Office furniture and equipment......................... 36,765 24,777
Data processing equipment.............................. 204,435 194,392
-------- --------
341,841 303,565
Less accumulated depreciation and amortization......... 115,460 116,307
-------- --------
$226,381 $187,258
======== ========
</TABLE>
(5) Other Assets
Included in other assets are unamortized outsourcing capital expenditure
costs in the amount of $28.4 million and $25.0 million as of March 31, 1999 and
1998, respectively. Noncurrent receivables from software license, data, and
equipment sales are also included in other assets in the amount of $24.9
million and $20.3 million as of March 31, 1999 and 1998, respectively. The
current portion of such receivables is included in other current assets in the
amount of $24.6 million and $9.5 million as of March 31, 1999 and 1998,
respectively. Certain of the noncurrent receivables have no stated interest
rate. In such cases, such receivables have been discounted using an appropriate
imputed interest rate based upon the customer, type of agreement, collateral
and payment terms. This discount is being recognized into income using the
interest method. Also included in other assets are capitalized software license
agreements of $103.5 million and $19.8 million as of March 31, 1999 and 1998,
respectively.
F-16
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Long-Term Debt
Long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
5.25% Convertible subordinated notes due 2003......... $115,000 $115,000
Unsecured revolving credit agreement.................. 55,384 36,445
6.92% Senior notes due March 30, 2007, payable in
annual installments of $4,286 commencing March 30,
2001; interest is payable semi-annually.............. 30,000 30,000
3.12% Convertible note, interest and principal due
April 30, 1999; convertible at maturity into two
million shares of common stock (note 2).............. 25,000 25,000
Capital leases on land, buildings and equipment
payable in monthly payments of $357 of principal and
interest; remaining terms of from five to twenty
years; interest rates at approximately 8%............ 20,587 22,818
Software license liabilities payable over terms of
from five to seven years; effective interest rates at
approximately 6%..................................... 76,748 10,949
8.5% unsecured term loan; quarterly principal payments
of $200 plus interest with the balance due in 2003... 9,000 9,800
9.75% Senior notes, due May 1, 2000, payable in annual
installments of $2,143 each May 1; interest is
payable semi-annually................................ 4,286 6,429
ESOP loan (note 11)................................... -- 1,782
Other capital leases, debt and long-term liabilities.. 12,573 6,483
-------- --------
Total long-term debt................................ 348,578 264,706
Less current installments............................. 23,355 10,466
-------- --------
Long-term debt, excluding current installments...... $325,223 $254,240
======== ========
</TABLE>
In March 1998, May & Speh completed an offering of $115 million 5.25%
convertible subordinated notes due 2003. The notes are convertible at the
option of the holder into shares of the Company's common stock at a conversion
price of $19.89 per share. The notes also are redeemable, in whole or in part,
at the option of the Company at any time on or after April 3, 2001. The total
net proceeds to the Company were approximately $110.8 million after deducting
underwriting discounts and commissions and estimated offering expenses.
The unsecured revolving credit agreement, which expires January 31, 2003
provides for revolving loans and letters of credit in amounts of up to $125
million. The terms of the credit agreement provide for interest at the prime
rate (or, at other alternative market rates at the Company's option). At March
31, 1999, the effective rate was 6.275%. The agreement requires a commitment
fee equal to 3/16 of 1% on the average unused portion of the loan. The Company
also has another unsecured line of credit amounting to $1.5 million of which
none was outstanding at March 31, 1999 or 1998. The other unsecured line
expires August 31, 1999 and bears interest at approximately the same rate as
the revolving credit agreement.
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 with 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
March 31, 1999 was $8.2 million. The total cost of the two building projects is
expected to be approximately $19.5 million.
F-17
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the terms of certain of the above borrowings, the Company is required
to maintain certain tangible net worth levels and working capital, debt-to-
equity and debt service coverage ratios. At March 31, 1999, due to the merger
with May & Speh and the special charges booked during the year, the Company was
in violation of certain restrictive covenants under the unsecured revolving
credit agreement and the 9.75% senior notes. The violations of each of these
agreements has been waived by the respective lenders. The violations occurred
as a result of the net loss reported by the Company for the quarter ended
September 30, 1998. Since these calculations are performed using the latest
four quarters' income statements and cash flows, the violation has been waived
through the June 30, 1999 quarter. After this date the violations will have
been cured since the bulk of the special charges will no longer be included in
the 12-month period of the applicable calculations. The aggregate maturities of
long-term debt for the five years ending March 31, 2004 are as follows: 2000,
$23.4 million; 2001, $27.8 million; 2002, $23.6 million; 2003, $112.2 million;
and 2004, $132.3 million.
(7) Leases
The Company leases data processing equipment, office furniture and
equipment, land and office space under noncancellable operating leases. Future
minimum lease payments under noncancellable operating leases for the five years
ending March 31, 2004 are as follows: 2000, $22.9 million; 2001, $18.0 million;
2002, $12.0 million; 2003, $8.9 million; and 2004, $7.2 million.
Total rental expense on operating leases was $24.7 million, $15.2 million
and $18.4 million for the years ended March 31, 1999, 1998 and 1997,
respectively.
(8) Stockholders' Equity
The Company has authorized 200 million shares of $.10 par value common stock
and 1 million shares of $1.00 par value preferred stock. The Board of Directors
of the Company may designate the relative rights and preferences of the
preferred stock when and if issued. Such rights and preferences could include
liquidation preferences, redemption rights, voting rights and dividends and the
shares could be issued in multiple series with different rights and
preferences. The Company currently has no plans for the issuance of any shares
of preferred stock.
On March 29, 1996, May & Speh completed an initial public offering of
3,350,000 shares of its common stock (2,680,000 shares as adjusted for merger
with Acxiom) and on April 24, 1996 completed the offering of an additional
1,005,000 shares of common stock (804,000 shares as adjusted) that were subject
to an over-allotment granted to the underwriters of the offering. Total net
proceeds from the offering were approximately $43.5 million.
On March 30, 1998, May & Speh also completed an offering of 325,000 shares
of its common stock (260,000 shares as adjusted). Total net proceeds were
approximately $3.5 million.
In connection with its data center management agreement entered into in
August, 1992 with Trans Union LLC, the Company issued a warrant, which expired
on August 31, 2000 and entitled Trans Union to acquire up to 4 million
additional shares of newly-issued common stock. The exercise price for the
warrant stock was $3.06 per share through August 31, 1998 and increased $.25
per share in each of the two years subsequent to August 31, 1998. The warrant
was exercised for 4 million shares on August 31, 1998. The Company intends to
record $68.0 million as additional sales discounts on its tax return for the
difference in the fair value of the stock on the date the warrant was exercised
and the fair value of the warrant on the date the warrant was issued (note 9).
F-18
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has for its U.S. employees a Key Employee Stock Option Plan
("Plan") for which 15.2 million shares of the Company's common stock have been
reserved. The Company has for its U.K. employees a U.K. Share Option Scheme
("Scheme") for which 1.6 million shares of the Company's common stock have been
reserved. These plans provide that the option price, as determined by the Board
of Directors, will be at least the fair market value at the time of the grant.
The term of nonqualified options is also determined by the Board of Directors.
Incentive options granted under the plans must be exercised within 10 years
after the date of the option. At March 31, 1999, 3,427,678 shares and 822,763
shares are available for future grants under the Plan and the Scheme,
respectively.
May & Speh had options outstanding under two separate plans at March 31,
1998. Generally, such options vest and become exercisable in five equal annual
increments beginning one year after the issue date and expire 10 years after
the issue date except in the event of change in control of May & Speh all
options become fully vested and exercisable. Pursuant to the merger, the
Company assumed all of the currently outstanding options granted under the May
& Speh plans with the result that shares of the Company's common stock become
subject to issuance upon exercise of such options.
Activity in stock options was as follows:
<TABLE>
<CAPTION>
Weighted
average Number of
Number of price shares
shares per share exercisable
---------- --------- -----------
<S> <C> <C> <C>
Outstanding at March 31, 1996........... 9,509,746 $ 7.18 3,467,728
Granted............................... 1,300,811 17.29
Pro CD acquisition (note 2)........... 294,132 1.76
Exercised............................. (835,369) 2.41
Terminated............................ (93,255) 7.29
----------
Outstanding at March 31, 1997........... 10,176,065 8.31 3,974,265
May & Speh acquisition (note 2)....... 217,440 16.89
Granted............................... 2,143,176 14.88
Exercised............................. (977,511) 3.86
Terminated............................ (157,190) 11.89
----------
Outstanding at March 31, 1998 11,401,980 9.63 5,316,861
Granted............................... 1,066,891 27.82
Exercised............................. (937,411) 6.95
Terminated............................ (115,462) 12.96
----------
Outstanding at March 31, 1999........... 11,415,998 12.19 7,913,294
==========
</TABLE>
F-19
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The per share weighted-average fair value of stock options granted during
fiscal 1999, 1998 and 1997 was $13.43, $9.91 and $8.61, respectively, on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: Dividend yield of 0% for 1999, 1998 and 1997;
risk-free interest rate of 5.44% in 1999, 6.79% in 1998, 6.71% in 1997;
expected option life of 10 years for 1999, 1998 and 1997; and expected
volatility of 40.48% in 1999, 38.69% in 1998 and 34.85% in 1997.
Following is a summary of stock options outstanding as of March 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------- -----------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
exercise Options contractual per Options per
prices outstanding life share exercisable share
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.38 - 2.54 1,239,220 6.33 years $ 2.19 1,148,996 $ 2.23
2.56 - 3.13 1,367,719 4.81 years 2.83 1,190,833 2.79
3.37 - 6.25 2,261,009 5.06 years 5.42 1,616,736 5.29
7.43 - 11.75 1,372,414 6.76 years 10.37 1,146,462 10.44
11.82 - 15.63 1,265,951 7.32 years 13.88 949,646 13.98
15.69 - 18.13 1,350,611 10.67 years 16.55 1,168,925 16.47
18.38 - 24.81 1,849,793 8.21 years 22.54 550,589 22.33
24.84 - 51.97 677,947 13.11 years 33.61 141,107 27.64
52.05 - 54.00 31,334 14.61 years 52.08 -- --
---------- ----------- ------ --------- ------
11,415,998 7.30 years $12.19 7,913,294 $ 9.49
========== =========== ====== ========= ======
</TABLE>
The Company applies the provisions of Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for the stock based
compensation plans. Accordingly, no compensation cost has been recognized by
the Company in the accompanying consolidated statements of operations for any
of the fixed stock options granted. Had compensation cost for options granted
been determined on the basis of the fair value of the awards at the date of
grant, consistent with the methodology prescribed by SFAS No. 123, the
Company's net earnings (loss) would have been reduced/increased to the
following pro forma amounts for the years ended March 31 (dollars in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C> <C>
Net earnings (loss)....................... As reported $(15,142) $47,155 $38,944
Pro forma (32,302) 40,725 37,881
Basic earnings (loss) per share........... As reported (.19) .64 .55
Pro forma (.41) .55 .53
Diluted earnings (loss) per share......... As reported (.19) .58 .49
Pro forma (.41) .50 .48
</TABLE>
Pro forma net earnings (loss) reflect only options granted after fiscal
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the
options' vesting period of 8-9 years and compensation cost for options granted
prior to April 1, 1995 is not considered.
The Company maintains an employee stock purchase plan which provides for the
purchase of shares of common stock at 85% of the market price. There were
129,741, 125,151 and 110,332 shares purchased under the plan during the years
ended March 31, 1999, 1998 and 1997, respectively.
F-20
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Income Taxes
Total income tax expense (benefit) was allocated as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Income from operations...................... $ 2,843 $28,065 $23,605
Stockholders' equity, for expenses for tax
purposes in excess of amounts recognized
for financial reporting purposes:
Compensation.............................. (9,178) (2,763) (2,232)
Sale discounts (note 8)................... (27,215) -- --
-------- ------- -------
$(33,550) $25,302 $21,373
======== ======= =======
</TABLE>
Income tax expense (benefit) attributable to earnings (loss) from operations
consists of (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Current expense:
Federal....................................... $ 18,285 $12,889 $13,714
Foreign....................................... 1,165 1,206 83
State......................................... 7,247 1,827 1,645
-------- ------- -------
26,697 15,922 15,442
-------- ------- -------
Deferred expense (benefit):
Federal....................................... (14,780) 9,792 5,979
Foreign....................................... (248) 23 687
State......................................... (8,826) 2,328 1,497
-------- ------- -------
(23,854) 12,143 8,163
-------- ------- -------
Total tax expense........................... $ 2,843 $28,065 $23,605
======== ======= =======
</TABLE>
The actual income tax expense (benefit) attributable to earnings (loss) from
operations differs from the expected tax expense (benefit) (computed by
applying the U.S. Federal corporate tax rate of 35% to earnings (loss) before
income taxes) as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Computed expected tax expense (benefit)....... $(4,305) $26,327 $21,892
Increase (reduction) in income taxes resulting
from:
Nondeductible merger and integration
expenses................................... 7,836 -- --
State income taxes, net of Federal income
tax benefit................................ (1,026) 2,701 2,042
Research and experimentation credits........ (265) (715) (683)
Other....................................... 603 (248) 354
------- ------- -------
$ 2,843 $28,065 $23,605
======= ======= =======
</TABLE>
F-21
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at March 31, 1999 and 1998
are presented below (dollars in thousands).
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses not currently deductible for tax
purposes.......................................... $ 20,633 $ 2,150
Investments, principally due to differences in
basis for tax and financial reporting purposes.... 328 676
Net operating loss carryforwards................... 7,986 --
Other.............................................. 1,696 846
-------- --------
Total deferred tax assets........................ 30,643 3,672
-------- --------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation....................... (12,887) (11,099)
Intangible assets, principally due to differences
in amortization................................... (3,624) (2,212)
Capitalized software and other costs expensed as
incurred for tax purposes......................... (20,501) (20,618)
Installment sale gains for tax purposes............ (1,877) (1,843)
-------- --------
Total deferred tax liabilities................... (38,889) (35,772)
-------- --------
Net deferred tax liability....................... $ (8,246) $(32,100)
======== ========
</TABLE>
At March 31, 1999, the Company had available tax benefits associated with
state tax operating loss carryforwards of $45.7 million which expire annually
in varying amounts to 2014. The deferred tax effect of such carryforwards are
included above.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based upon the Company's
history of substantial profitability and taxable income and its utilization of
tax planning strategies, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences, net of
any valuation allowances.
(10) Related Party Transactions
The Company leases certain equipment from a business partially owned by an
officer. Rent expense under these leases was approximately $797,000 during the
years ended March 31, 1999, 1998 and 1997, respectively. Under the terms of the
lease in effect at March 31, 1999 the Company will make monthly lease payments
of $66,000 through December, 2001. The Company has agreed to pay the
difference, if any, between the sales price of the equipment and 70 percent of
the lessor's related loan balance (approximately $5.0 million at March 31,
1999) should the Company elect to exercise its early termination rights or not
extend the lease beyond its initial five year term and the lessor sells the
equipment as a result thereof.
(11) Retirement Plans
The Company has a retirement savings plan which covers substantially all
domestic employees. The Company also offers a non-qualified
deferred compensation plan for certain management
F-22
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
employees. The Company matches 50% of the employee's salary deferred
contributions under both plans up to 6% annually and may contribute additional
amounts to the plans from the Company's earnings at the discretion of the Board
of Directors.
Effective October 1, 1988, May & Speh established the May & Speh, Inc.
Employee Stock Ownership Plan ("ESOP") for the benefit of substantially all of
its employees. May & Speh borrowed $22,500,000 from a bank ("ESOP Loan") and
loaned the proceeds to the ESOP for the purpose of providing the ESOP
sufficient funds to purchase 9,887,340 shares of May & Speh's common stock at
$2.28 per share. The terms of the ESOP agreement required May & Speh to make
minimum contributions sufficient to meet the ESOP's debt service obligations.
During the year ended March 31, 1999, the ESOP loan was paid in full and the
ESOP was merged into the Company's retirement savings plan.
Company contributions for the above plans amounted to approximately $4.8
million, $4.3 million and $3.9 million in 1999, 1998 and 1997, respectively.
(12) Major Customers
In 1999 and 1998, the Company had one major customer who accounted for more
than 10% of revenue, and in 1997, the Company had two major customers who
accounted for more than 10% of revenue. Allstate Insurance Company ("Allstate")
accounted for revenue of $82.2 million (10.9%), $74.7 million (12.6%) and $67.7
million (13.6%) in 1999, 1998 and 1997, respectively, and Trans Union accounted
for revenue of $56.6 million (11.3%) in 1997. At March 31, 1999, accounts
receivable from Allstate was $12.0 million.
(13) Foreign Operations
Foreign operations are conducted primarily in the United Kingdom. The
following table shows financial information by geographic area for the years
1999, 1998 and 1997 (dollars in thousands).
<TABLE>
<CAPTION>
United
States Foreign Consolidated
-------- ------- ------------
<S> <C> <C> <C>
1999:
Revenue................................... $712,907 $41,150 $754,057
Long-lived assets......................... 454,631 10,687 465,318
======== ======= ========
1998:
Revenue................................... 557,683 34,646 592,329
Long-lived assets......................... 305,219 7,860 313,079
======== ======= ========
1997:
Revenue................................... 470,812 28,420 499,232
Long-lived assets......................... 207,717 6,106 213,823
======== ======= ========
</TABLE>
(14) Contingencies
The Company is involved in various claims and legal actions in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position or its expected future consolidated results of
operations.
(15) Dispositions
Effective August 22, 1997, the Company sold certain assets of its Pro CD
subsidiary to a wholly-owned subsidiary of American Business Information, Inc.
("ABI"). ABI is now known as infoUSA, Inc. ABI
F-23
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquired the retail and direct marketing operations of Pro CD, along with
compiled telephone book data for aggregate cash proceeds of $18.0 million,
which included consideration for a compiled telephone book data license. The
Company also entered into a data license agreement with ABI under which the
Company will pay ABI $8.0 million over a two-year period, and a technology and
data license agreement under which ABI will pay the Company $8.0 million over a
two-year period. In conjunction with the sale to ABI, the Company also recorded
certain valuation and contingency reserves. Included in other income for the
year ended March 31, 1998 is the gain on disposal related to this transaction
of $855,000.
(16) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash and cash equivalents, marketable securities, trade receivables,
short-term borrowings, and trade payables--The carrying amount approximates
fair value because of the short maturity of these instruments.
Long-term debt--The interest rate on the revolving credit agreement is
adjusted for changes in market rates and therefore the carrying value of
the credit agreement approximates fair value. The estimated fair value of
other long-term debt was determined based upon the present value of the
expected cash flows considering expected maturities and using interest
rates currently available to the Company for long-term borrowings with
similar terms. At March 31, 1999 the estimated fair value of long-term debt
approximates its carrying value.
(17) Segment Information
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") requires reporting segment information consistent
with the way management internally disaggregates an entity's operations to
assess performance and to allocate resources. As required, the Company adopted
the provisions of SFAS 131 in its fiscal 1999 consolidated financial statements
and has presented its prior-year segment information to conform to SFAS 131's
requirements.
The Company's business segments consist of Services, Data Products, and
Information Technology Management. The Services segment substantially consists
of consulting, database and data warehousing and list processing services. The
Data Products segment includes all of the Company's data content products.
Information Technology Management includes information technology outsourcing
and facilities management for data center management, network management,
client server management and other complementary information technology
services. The Company evaluates performance of the segments based on segment
operating income, which excludes special charges. The Company accounts for
sales of certain data products as revenue in both the Data Products segment and
revenue of the Services segment which billed the customer. The duplicate
revenues are eliminated in consolidation.
F-24
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
The following tables present information by business segment (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Services.................................... $444,020 $331,713 $274,751
Data Products............................... 186,706 155,206 135,449
Information Technology Management........... 164,453 128,366 109,497
Intercompany eliminations................... (41,122) (22,956) (20,465)
-------- -------- --------
Total revenue............................. $754,057 $592,329 $499,232
======== ======== ========
Services.................................... $ 90,776 $ 55,302 $ 46,453
Data Products............................... 15,370 15,664 8,878
Information Technology Management........... 34,820 25,808 27,443
Intercompany eliminations................... (20,771) (11,942) (11,639)
Corporate and other......................... (121,579) (3,923) (2,929)
-------- -------- --------
Income (loss) from operations........... $ (1,384) $ 80,909 $ 68,206
======== ======== ========
Services.................................... $ 24,360 $ 17,901 $ 7,900
Data Products............................... 19,214 12,660 8,861
Information Technology Management........... 20,039 16,547 14,046
Corporate and other......................... 484 2,700 4,833
-------- -------- --------
Depreciation and amortization........... $ 64,097 $ 49,808 $ 35,640
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Services................................................ $427,210 $228,115
Data Products........................................... 167,111 130,704
Information Technology Management....................... 238,164 172,834
Corporate and other..................................... 57,315 149,981
-------- --------
Total assets........................................ $889,800 $681,634
======== ========
</TABLE>
(18) Selected Quarterly Financial Data (Unaudited)
The table below sets forth selected financial information for each quarter
of the last two years (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
quarter quarter quarter quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999:
Revenue.................................. $164,512 $180,030 $193,910 $215,605
Income (loss) from operations............ 20,321 (82,707) 25,958 35,044
Net earnings (loss)...................... 11,737 (60,548) 14,038 19,631
Basic earnings (loss) per share.......... .16 (.79) .18 .25
Diluted earnings (loss) per share........ .14 (.79) .16 .22
1998:
Revenue.................................. $129,390 $141,739 $152,892 $168,308
Income from operations................... 15,006 21,000 20,825 24,078
Net earnings............................. 8,265 12,575 12,074 14,241
Basic earnings per share................. .11 .17 .16 .19
Diluted earnings per share............... .10 .15 .15 .17
</TABLE>
F-25
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
Years ended March 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Additions Bad
Balance at charged to Other debts Balance
beginning costs and additions written Bad debts at end
of period expenses (note) off recovered of period
---------- ---------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1999:
Allowance for doubtful
accounts, returns and
credits.............. $3,847 2,373 710 2,026 715 $5,619
====== ===== ===== ===== === ======
1998:
Allowance for doubtful
accounts, returns and
credits.............. $4,898 3,105 224 4,777 397 $3,847
====== ===== ===== ===== === ======
1997:
Allowance for doubtful
accounts, returns and
credits.............. $2,402 4,496 4,800 7,044 238 $4,898
====== ===== ===== ===== === ======
</TABLE>
Note--Other additions represent the valuation accounts acquired in connection
with business combinations.
F-26
