SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ----- to -----
Commission file number 0-13163
Acxiom Corporation
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 71-0581897
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P.O. Box 2000, 301 Industrial Boulevard,
Conway, Arkansas 72033-2000
(Address of Principal Executive Offices) (Zip Code)
(501) 336-1000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock, $ 0.10 par value per share,
outstanding as of February 8, 1999 was 78,128,478.
<PAGE>
Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Company for which report is filed:
ACXIOM CORPORATION
The condensed consolidated financial statements included herein have been
prepared by Registrant, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of the Registrant's
management, however, all adjustments necessary for a fair statement of the
results for the periods included herein have been made and the disclosures
contained herein are adequate to make the information presented not misleading.
All such adjustments are of a normal recurring nature.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
December 31, March 31,
1998 1998
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 3,208 115,510
Marketable securities - 11,794
Trade accounts receivable, net 179,553 118,281
Refundable income taxes 13,619 7,670
Other current assets 46,171 34,615
------- -------
Total current assets 242,551 287,870
------- -------
Property and equipment 319,535 301,393
Less - Accumulated depreciation and 116,841 115,709
amortization ------- -------
Property and equipment, net 202,694 185,684
------- -------
Software, net of accumulated amortization 41,866 38,673
Excess of cost over fair value of net
assets acquired 91,528 73,851
Other assets 165,689 87,072
------- -------
$ 744,328 673,150
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt 13,350 10,466
Trade accounts payable 27,990 21,946
Accrued payroll and related expenses 9,075 18,293
Accrued merger and integration costs 34,881 -
Other accrued expenses 20,753 20,846
Deferred revenue 4,373 11,197
------- -------
Total current liabilities 110,422 82,748
------- -------
Long-term debt, excluding current installments 312,582 254,240
Deferred income taxes 34,966 34,968
Stockholders' equity:
Common stock 7,861 7,405
Additional paid-in capital 139,701 121,130
Retained earnings 139,901 175,946
Foreign currency translation adjustment 901 676
Unearned ESOP compensation - (1,782)
Treasury stock, at cost (2,006) (2,181)
------- -------
Total stockholders' equity 286,358 301,194
------- -------
Commitments and contingencies $ 744,328 673,150
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
For the Three Months Ended
December 31
1998 1997
------- -------
Revenue $ 187,912 147,042
Operating costs and expenses:
Salaries and benefits 64,784 54,332
Computer, communications and other equipment 29,352 22,173
Data costs 25,124 21,741
Other operating costs and expenses 33,688 23,929
Special charges 9,375 4,700
------- -------
Total operating costs and expenses 162,323 126,875
------- -------
Income from operations 25,589 20,167
------- -------
Other income (expense):
Interest expense (4,518) (2,016)
Other, net 860 834
------- -------
(3,658) (1,182)
------- -------
Earnings before income taxes 21,931 18,985
Income taxes 8,172 7,124
------- -------
Net earnings $ 13,759 11,861
======= =======
Earnings per share:
Basic $ 0.18 0.16
==== ====
Diluted $ 0.17 0.15
==== ====
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
For the Nine Months Ended
December 31
1998 1997
------- -------
Revenue $ 521,080 406,870
Operating costs and expenses:
Salaries and benefits 194,970 149,909
Computer, communications and other equipment 81,901 64,801
Data costs 77,686 64,325
Other operating costs and expenses 86,170 67,905
Special charges 118,747 4,700
------- -------
Total operating costs and expenses 559,474 351,640
------- -------
Income (loss) from operations (38,394) 55,230
------- -------
Other income (expense):
Interest expense (12,917) (6,445)
Other, net 5,717 3,263
------- -------
(7,200) (3,182)
------- -------
Earnings (loss) before income taxes (45,594) 52,048
Income taxes (9,549) 19,580
------- -------
Net earnings (loss) $ (36,045) 32,468
======= =======
Earnings (loss) per share:
Basic $ (0.48) 0.45
======= =======
Diluted $ (0.48) 0.41
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the Nine Months Ended
December 31
1998 1997
------- -------
Cash flows from operating activities:
Net earnings (loss) $ (36,045) 32,468
Non-cash operating activities:
Depreciation and amortization 45,696 33,599
Gain on disposal of assets (23) (961)
Provision for returns and doubtful accounts 2,153 696
Deferred income taxes - 4,727
ESOP principal payments 1,782 1,782
Non-cash component of special charges 92,062 -
Changes in operating assets and liabilities:
Accounts receivable (61,130) (28,752)
Other assets (22,936) (26,615)
Accounts payable and other liabilities (16,942) 10,642
------- -------
Net cash provided (used) by operating
activities 4,617 27,586
------- -------
Cash flows from investing activities:
Disposition of assets 693 27,898
Development of software (20,379) (11,271)
Capital expenditures (87,290) (59,797)
Purchases of marketable securities - (5,777
Sales of marketable securities 11,794 17,918
Investments in joint ventures (10,607) (4,942)
Net cash paid in acquisitions (22,296) (20,632)
------- -------
Net cash used by investing activities (128,085) (56,603)
------- -------
Cash flows from financing activities:
Proceeds from debt 90,758 26,605
Payments of debt (98,799) (8,412)
Sale of common stock 19,202 6,731
------- -------
Net cash provided by financing activities 11,161 24,924
------- -------
Effect of exchange rate changes on cash 5 8
------- -------
Net decrease in cash and cash equivalents (112,302) (4,085)
Cash and cash equivalents at beginning of
period 115,510 9,695
------- -------
Cash and cash equivalents at end of period $ 3,208 5,610
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 12,312 4,828
Income taxes 4,732 10,211
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Certain note information has been omitted because it has not changed
significantly from that reflected in Notes 1 through 16 of the Notes to
Consolidated Financial Statements filed as a part of the Registrant's
restated consolidated financial statements as a result of the Registrant's
merger with May & Speh, Inc., as filed with the Securities and Exchange
Commission on a Form 8-K dated February 8, 1999.
<PAGE>
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. On September 17, 1998, the Company acquired all of the outstanding capital
stock of May & Speh, Inc. ("May & Speh") by exchanging .80 shares of the
Company's stock for each share of May & Speh stock. Accordingly, the
Company exchanged 20,858,923 shares of its common stock for all of the
outstanding shares of capital stock of May & Speh. Additionally, the
Company assumed all of the currently outstanding options granted under May
& Speh's stock option plans, with the result that 4,289,202 shares of the
Company's common stock became subject to issuance upon exercise of such
options. The Company also assumed May & Speh's convertible subordinated
debt, which is now convertible into 5,783,000 shares of the Company's
common stock. The acquisition was accounted for as a pooling-of-interests
and, accordingly, the condensed consolidated financial statements have been
restated as if the combining companies had been combined for all periods
presented. Included in the statement of operations for the nine months
ended December 31, 1998 are revenues of $66.6 million and earnings before
income taxes of $15.1 million for May & Speh for the period from April 1,
1998 to September 17, 1998. For the nine months ended December 31, 1997,
May & Speh had revenue of $75.9 million and earnings before income taxes of
$12.2 million.
In the quarter ended September 30, 1998, the Company recorded special
charges totaling $109.4 million related to merger and integration charges
associated with the May & Speh merger and the write down of other impaired
assets. During the quarter ended December 31, 1998, the Company recorded
additional merger and integration charges of $9.4 million, for a total
special charge during the nine-month period of $118.7 million. 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.
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 the
second quarter, primarily $5.7 million related to goodwill and shut-down
costs associated with the closing of certain business locations in New
Jersey, Malaysia, and the Netherlands, which occurred during the second
quarter.
The following table shows the balances which were accrued as of September
30, 1998 and the changes in those balances during the quarter ended
December 31, 1998 (dollars in thousands):
<PAGE>
September 30 Additions Payments December 31
------------ --------- -------- -----------
1998 1998
---- ----
Transaction costs $ 9,163 - 8,938 225
Associate-related reserves 6,783 1,375 2,912 5,246
Contract termination costs 40,500 8,000 21,500 27,000
Other accruals 2,490 - 80 2,410
------ ----- ------ ------
$58,936 9,375 33,430 34,881
====== ===== ====== ======
The Company expects that the remaining transaction costs will be paid in
cash during the next three to six months. The associate-related reserves
will be paid over the next three to nine months. The contract termination
costs will be paid out over the next 15 months. The other accruals will be
paid out over periods ranging up to five years.
Effective April 1, 1998, the Company purchased the outstanding stock of
NormAdress, a French company located in Paris. NormAdress provides database
and direct marketing services to its customers. The purchase price was 20
million French Francs (approximately $3.4 million) in cash and other
additional cash consideration of which approximately $900,000 is guaranteed
and the remainder is based on the future performance of NormAdress. The
acquisition was accounted for as a purchase and, accordingly, the results
of operations of NormAdress are included in the condensed consolidated
statements of operations as of the purchase date. The purchase price
exceeded the fair value of net assets acquired by approximately $4.1
million. The resulting excess of cost over net assets acquired is being
amortized using the straight-line method over its estimated economic life
of 20 years. The pro forma combined results of operations, assuming the
acquisition occurred at the beginning of the periods presented, are not
materially different from the historical results of operations reported.
Effective May 1, 1998, May & Speh acquired substantially all of the assets
of SIGMA Marketing Group, Inc. ("Sigma"), a full-service database marketing
company headquartered in Rochester, New York. Under the terms of the
agreement, May & Speh paid $15 million at closing for substantially all of
Sigma's assets, and will pay the former owners up to an additional $6
million, the substantial portion of which is contingent on certain
operating objectives being met. Sigma's former owners were also issued
warrants to acquire 276,800 shares of the Company's common stock at a price
of $17.50 per share in connection with the transaction. Sigma's results of
operations are included in the Company's consolidated results of operations
beginning May 1, 1998. This acquisition was accounted for as a purchase.
The excess of cost over net assets acquired of $20.2 million is being
amortized using the straight-line method over 40 years. The pro forma
effect of the acquisition is not material to the Company's results of
operations for the periods reported.
<PAGE>
On December 31, 1998, the Company entered into a definitive agreement to
acquire Computer Graphics of Arizona, Inc. ("Computer Graphics") and all of
its affiliated companies in a stock-for-stock merger. The merger is
expected to be completed prior to the Company's fiscal year end, subject to
the absence of any material adverse changes in Computer Graphics' business
prior to closing and subject to the approval of the shareholders of
Computer Graphics. Computer Graphics, a privately held enterprise
headquartered in Phoenix, Arizona, is a computer service bureau principally
serving financial services direct marketers. This merger is expected to be
accounted for as a pooling-of-interests.
2. Included in other assets are unamortized outsourcing capital expenditure
costs in the amount of $27.6 million and $25.0 million at December 31, 1998
and March 31, 1998, respectively. Noncurrent receivables from software
license, data, and equipment sales are also included in other assets in the
amount of $17.5 million and $20.3 million at December 31, 1998 and March
31, 1998, respectively. The current portion of such receivables is included
in other current assets in the amount of $11.5 million and $9.5 million as
of December 31, 1998 and March 31, 1998, respectively. Other assets also
included $71.3 million and $10.3 million in enterprise systems software
licenses at December 31, 1998 and March 31, 1998, respectively. Such
licenses are amortized over the estimated useful life of the license.
<PAGE>
3. Long-term debt consists of the following (dollars in thousands):
December 31, March 31,
1998 1998
5.25% Convertible subordinated notes $115,000 115,000
due 2003; convertible at the option of
the holder into shares of common stock
at a conversion price of $19.89 per
share; redeemable at the option of the
Company at any time after April 3, 2001
Unsecured revolving credit agreement 50,572 36,445
6.92% Senior notes due March 30, 2007, 30,000 30,000
payable in annual installments of $4,286
commencing March 30, 2001; interest is
payable semi-annually
3.12% Convertible note, interest and 25,000 25,000
principal due April 30, 1999; convertible
at maturity into two million shares of
common stock
Capital leases on land, buildings and 21,706 22,818
equipment payable in monthly payments
of $357 of principal and interest;
remaining terms of from five to twenty
years; interest rates at approximately 8%
8.5% Unsecured term loan; quarterly 9,200 9,800
principal payments of $200 plus interest
with the balance due in 2003
9.75% Senior notes, due May 1, 2000, 4,286 6,429
payable in annual installments of $2,143
each May 1; interest is payable
semi-annually
Enterprise software license liabilities 64,343 10,949
payable over terms of from five to seven
years
Other capital leases, debt and long-term 5,825 8,265
liabilities ------- -------
Total long-term debt 325,932 264,706
Less current installments 13,350 10,466
------- -------
Long-term debt, excluding current $312,582 254,240
installments ======= =======
<PAGE>
The 3.12% convertible note, although due within the next year, continues to
be classified as long-term debt because the Company intends to use
available funding under the revolving credit agreement to refinance the
note on a long-term basis in the event the holder of the note elects to
receive cash at maturity. Currently, the Company expects the holder to
convert the note into common stock, which would not require the Company to
pay any cash at maturity.
The holder of the 8.5% term loan, which was made to May & Speh, has the
right to demand payment due to a change in control. The lender has not
exercised that right, and the Company presently intends to renegotiate the
loan on a long-term basis. If the lender does demand repayment, the Company
will pay off the loan with available funds from the unsecured revolving
credit agreement. Therefore, the Company continues to classify the term
loan as long-term.
Also as a result of the merger with May & Speh, the Company was required to
offer to repurchase the 5.25% convertible subordinated notes at face value.
To date, no holders have accepted the offer. The Company does not expect
the holders to accept the offer, as the face value of the notes is less
than the value of the shares into which they are convertible. Accordingly,
these notes continue to be classified as long-term.
At December 31, 1998, 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.
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 December 31, 1998 was $6.0 million. The total cost of the two
building projects is expected to be approximately $19.5 million.
<PAGE>
4. Below is a calculation and reconciliation of the numerator and denominator
of basic and diluted earnings (loss) per share (dollars in thousands,
except per share amounts):
For the Quarter Ended For the Nine Months Ended
--------------------- -------------------------
December December December December
31 31 31 31
-------- -------- -------- --------
1998 1997 1998 1997
Basic earnings (loss)
per share:
Numerator - net
earnings (loss) $13,759 11,861 (36,045) 32,468
====== ====== ====== ======
Denominator (weighted
average shares
outstanding) 77,692 72,300 75,230 72,042
====== ====== ====== ======
Earnings (loss) per
share $ .18 .16 (.48) .45
=== === === ===
Diluted earnings (loss)
per share:
Numerator:
Net earnings (loss) $13,759 11,861 (36,045) 32,468
Interest expense on
convertible debt
(net of tax effect) 1,083 111 - 334
------ ------ ------ ------
$14,842 11,972 (36,045) 32,802
====== ====== ====== ======
Denominator:
Weighted average shares
out-standing 77,692 72,300 75,230 72,042
Effect of common stock
options and warrants 4,451 6,740 - 6,618
Convertible debt 7,783 2,000 - 2,000
------ ------ ------ ------
89,926 81,040 75,230 80,660
====== ====== ====== ======
Earnings (loss) per share $.17 .15 (.48) .41
=== === === ===
All potentially dilutive securities were excluded from the above
calculations for the nine months ended December 31, 1998 because they were
antidilutive in accordance with Statement of Financial Accounting Standards
No. 128. The effects of common stock options and warrants which were
excluded were 6,110,000. Potentially dilutive shares related to the
convertible debt which were excluded were 7,783,000. Also, interest expense
on the convertible debt (net of income tax effect) excluded in computing
diluted earnings (loss) per share for the nine months was $3,208,000.
<PAGE>
Options to purchase shares of common stock that were outstanding during the
other periods reported, but were not included in the computation of diluted
earnings per share because the option exercise price was greater than the
average market price of the common shares, are shown below:
For the Nine
For the Quarter Ended Months Ended
----------------------------- ------------
December 31 December 31 December 31
----------- ----------- -----------
1998 1997 1997
---- ---- ----
Number of shares
under option (in
thousands) 1,378 1,824 1,716
Range of exercise
prices $24.81 - $54.00 $17.03 - $35.92 $15.70 - $35.92
============== ============== ==============
5. Trade accounts receivable are presented net of allowances for doubtful
accounts, returns, and credits of $4.8 million and $3.6 million at December
31, 1998 and March 31, 1998, respectively.
6. The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," as of April 1, 1998. Statement No. 130
establishes standards for reporting and displaying comprehensive income and
its components in a financial statement that is displayed with the same
prominence as other financial statements. Statement No. 130 also requires
the accumulated balance of other comprehensive income to be displayed
separately in the equity section of the consolidated balance sheet. The
accumulated balance of other comprehensive income, which consists solely of
foreign currency translation adjustment, as of December 31, 1998 and March
31, 1998, was $0.9 million and $0.7 million, respectively. The adoption of
this statement had no impact on operations or stockholders' equity.
Comprehensive income was $13.3 million for the quarter ended December 31,
1998 and was $12.4 million for the quarter ended December 31, 1997.
Comprehensive loss was $35.8 million for the nine months ended December 31,
1998 and comprehensive income was $32.8 million for the nine months ended
December 31, 1997.
<PAGE>
Form 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On May 26, 1998, the Company entered into a merger agreement with May & Speh,
Inc. ("May & Speh"). May & Speh, headquartered in Downers Grove, Illinois,
provides computer-based information management services with a focus on direct
marketing and information technology outsourcing services. The merger, which was
completed September 17, 1998, has been accounted for as a pooling-of-interests.
Accordingly, the condensed consolidated financial statements have been restated
as if the combining companies had been combined for all periods presented. See
note 1 to the condensed consolidated financial statements for a more detailed
discussion of the merger transaction.
Results of Operations
Consolidated revenue was a record $187.9 million for the quarter ended December
31, 1998, a 28% increase over the same quarter a year ago. For the nine months
ended December 31, 1998, revenue was $521.1 million, an increase of 28% over
revenue of $406.9 million for the same period a year ago.
The following table shows the Company's revenue by operating division for the
quarters ended December 31, 1998 and 1997 (dollars in millions):
1998 1997 % Change
---- ---- --------
Services $51.5 $38.1 +35%
Alliances 49.7 39.3 +26
Data Products (direct view) 33.1 33.5 - 1
May & Speh 43.0 26.4 +63
International 10.6 9.7 + 9
----- ----- ---
$187.9 $147.0 +28%
===== ===== ===
Data Products (product view) $45.7 $40.2 +14%
==== ==== ===
Services Division revenue of $51.5 million for the quarter reflects a 35%
increase over the prior year. Revenue related to the Allstate Insurance Company
("Allstate") contract grew 14%. Other Services Division business units reporting
good growth included retail, up 54%; Citicorp, up 44%; pharmaceutical, up 49%;
publishing, up 11%; the technology business unit, which more than doubled; and
the telecommunications business unit, which nearly quadrupled. These increases
were partially offset, however, by the insurance business unit which was flat
compared to the prior year and utilities, which reported lower revenues than the
prior year.
Alliances Division revenue of $49.7 million increased 26% over the same quarter
a year ago. The Financial Services group continued to show strong results, with
revenue up 43% over the prior year. Also, revenue from the Trans Union
Corporation ("Trans Union") business units grew 20%
<PAGE>
and the other Alliances Division business units grew 13%, including the Polk
business unit which grew 23% combined with flat revenue from the strategic
alliances business unit.
Data Products Division revenue of $33.1 million was essentially flat compared to
last year. Within the Data Products Division, the Acxiom Data Group (InfoBase)
grew 40% while Direct Media reported a modest 3% gain over the prior year and
DataQuick fell 13%. Direct Media, which operates in a more mature industry, was
also comparing against strong results in the year ago quarter. DataQuick results
in the prior year benefited from a license of their data to the Polk Company. It
should also be noted that the discussion above presents the Data Products
Division on a direct view, that is, their results from direct sales channels.
Not included are data sales made to customers of the Services and Alliances
Divisions whose data sales are reported in those divisions. Combining these
sales with the direct sales channels (or the "product view") reflects the
primary way the Data Products Division is measured internally. On the product
view, the Data Products Division reported revenues of $45.7 million reflecting a
14% increase over the prior year.
The May & Speh Division reported $43.0 million revenue for the quarter
reflecting a 63% increase over the same quarter a year ago. May & Speh's
outsourcing business more than doubled while direct marketing services grew 17%
over the prior year. The increase in outsourcing includes the impact of the
recently signed outsourcing contract with Waste Management, Inc.
The International Division revenue of $10.6 million grew 9% over the
year-earlier period reflecting 41% growth in data warehouse and list processing
services, partly offset by a 31% decline in fulfillment services. The decline in
fulfillment services is primarily due to a significant project in the prior year
that did not recur in the current year.
For the nine months ended December 31, 1998, Services Division revenue was up
33% versus the prior year, Alliances Division was up 29%, Data Products Division
was up 11%, May & Speh was up 44%, and the International Division was up 21%. In
general, the discussion above related to the third quarter is also relevant to
the increases for the nine months.
Salaries and benefits for the quarter grew $10.5 million or 19% over the prior
year's third quarter, primarily as a result of normal merit increases and
increased headcount to support growth, including the hiring of approximately 75
new associates under the new Waste Management, Inc. outsourcing contract. For
the nine months ended December 31, 1998, salaries and benefits increased 30%,
which also reflects merit increases and increased headcount, but also includes
increases of $4.5 million due to acquisitions, primarily Buckley Dement and
Sigma. Computer, communications and other equipment costs rose $7.2 million or
32% higher than the third quarter in the prior year, reflecting higher software
costs and the impact of capital expenditures. For the nine months, computer,
communications and other equipment costs were up 26% for the same reasons. Data
costs grew $3.4 million or 16% over the prior year reflecting the growth in data
revenue. This growth, combined with the impact of migrating to fixed cost data
provider contracts, higher compilation costs at DataQuick due to the high level
of refinancings, and costs associated with incremental sources of data, caused
data costs for the nine months to increase
<PAGE>
21%. Other operating costs and expenses grew $9.8 million or 41% from the
year-earlier quarter, reflecting higher costs due to the higher revenue along
with increases in advertising, goodwill amortization, consulting, and facilities
costs. For the nine months ended December 31, 1998 the increase in other
operating costs and expenses was 27%, which is in line with the increase in
revenue.
The Company's operating expenses for the quarter included an additional $9.4
million for special charges, which are merger and integration charges associated
with the May & Speh merger and the write down of other impaired assets. Together
with the special charges recorded in the second quarter, the total special
charges for the nine-month period totaled $118.7 million. 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 1 to the condensed
consolidated financial statements for further information about the special
charges. In the third quarter last year, May & Speh recorded a $4.7 million
special charge primarily for severance costs.
Income from operations for the quarter was $25.6 million, an increase of 27%
from the comparable period a year ago. Excluding the impact of the special
charges, income from operations would have been $35.0 million for the current
quarter, compared to $24.9 million in the prior year, an increase of 41%. For
the nine months ended December 31, 1998, the Company recorded a loss from
operations of $38.4 million compared to income from operations of $55.2 million
in the prior year. Again excluding the impact of the special charges, operating
income would have been $80.4 million for the nine months, an increase of 34%
compared to the previous year's total of $59.9 million.
Interest expense increased by $2.5 million compared to the previous year's third
quarter as a result of higher average debt levels. Approximately $1.5 million of
the increase is due to the issuance of the 5.25% convertible debt, which was
issued by May & Speh in March 1998. For the nine months, interest expense was up
$6.5 million for the same reasons. Other income and expense for both the quarter
and nine months consists primarily of interest income from long-term receivables
related to customer contracts and investment income earned by May & Speh on cash
balances and marketable securities prior to the merger.
The Company's effective tax rate, before special charges, was 37.2% for the
quarter and 37.3% for the nine-month period, compared to 37.4% and 37.6% for the
respective periods in the prior year. Portions of the special charges may not be
deductible for tax purposes and therefore the tax benefit recorded on the
special charges was only 31.0%. Combining both the normal tax accrual with the
estimated tax benefit of the special charges results in a 37.3% tax rate for the
third quarter and a 20.9% rate for the nine months ended December 31, 1998. The
Company continues to expect the normal rate for fiscal 1999 to remain in the
37-39% range. This estimate is based on current tax law and current estimates of
earnings, and is subject to change.
<PAGE>
The Company recorded net earnings of $13.8 million for the quarter and a net
loss of $36.0 million for the nine months, compared to net earnings of $11.9
million for the quarter and $32.5 million for the nine months in the previous
year. Earnings per share for the quarter on a basic and diluted basis were $.18
and $.17, respectively. For the nine months, loss per share on both a basic and
diluted basis was $.48. Excluding the impact of the special charges, earnings
per share would have been $.25 basic and $.23 diluted for the quarter and $.61
basic and $.55 diluted for the nine-month period.
Capital Resources and Liquidity
Working capital at December 31, 1998 totaled $132.1 million compared to $205.1
million at March 31, 1998. The balance at March 31, 1998 included $98.0 million
in cash and cash equivalents at May & Speh as a result of the issuance of the
$115 million convertible debt. Since the merger, the Company has used available
cash to pay down debt. At December 31, 1998, the Company had available credit
lines of $126.5 million of which $50.6 million was outstanding. The Company's
debt-to-capital ratio (capital defined as long-term debt plus stockholders'
equity) was 52% at December 31, 1998, compared to 46% at March 31, 1998.
Included in the debt component of this calculation is $140 million of
convertible debt which, if considered equity for the purposes of this
calculation, would reflect a 29% debt-to-capital ratio at December 31, 1998.
Cash provided by operating activities was $4.6 million for the nine months ended
December 31, 1998 compared to cash provided by operating activities of $27.6
million in the same period in the previous year. Earnings before interest,
taxes, depreciation, and amortization ("EBITDA"), excluding the impact of the
special charges recorded in the current year, increased by 36% compared to a
year ago. The resulting operating cash flow was reduced by $101.0 million in the
current year and $44.7 million in the previous year due to the net change in
operating assets and liabilities, including significant increases in accounts
receivable for each year. The Company is taking steps to emphasize collections
of accounts receivable, to mitigate any additional cash flow effects of future
increases. EBITDA is not intended to represent cash flows for the period, is not
presented as an alternative to operating income as an indicator of operating
performance, may not be comparable to other similarly titled measures of other
companies, and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. However, EBITDA is a relevant measure of the Company's
operations and cash flows and is used internally as a surrogate measure of cash
provided by operating activities.
Investing activities used $128.1 million in the nine months ended December 31,
1998 compared to $56.6 million in the year-earlier period. Investing activities
in the current period included $87.3 million in capital expenditures, compared
to $59.8 million in the previous year, and $20.4 million in software
development, compared to $11.3 million in the previous year. The Company expects
additional capital expenditures to total approximately $20 to $25 million in the
fourth quarter. Investing activities also included $22.3 million paid in the
acquisitions of NormAdress, Sigma, and additional earn-out payments made for
acquisitions recorded in previous years. The acquisitions of NormAdress and
Sigma are discussed more fully in note 1 to the condensed consolidated financial
statements. Investing activities also included $10.6 million invested in joint
ventures,
<PAGE>
including $4.0 million of additional investment in Bigfoot International, Inc.,
an emerging technology company that provides services and tools for internet
e-mail users, and $3.3 million invested in Ceres Integrated Solutions, a
provider of software and analytical services to large retailers. Investing
activities in the current year also include the proceeds of sales of marketable
securities, which were owned by May & Speh prior to the merger with the Company.
Financing activities in the current period provided $11.2 million. Financing
activities included $19.2 million in sales of stock, including $12.2 million
received from Trans Union for the purchase of 4 million shares of stock under a
warrant which was issued to Trans Union in 1992 in conjunction with the data
center management agreement between Trans Union and the Company. The remaining
financing activities consisted of net repayments of debt.
Construction is continuing on the Company's new headquarters building and a new
customer service facility in Little Rock, Arkansas. Both of these buildings are
scheduled to be completed and occupied before the end of fiscal 1999. Each
building is being built pursuant to a 50/50 joint venture between the Company
and local real estate developers. The total cost of the headquarters and
customer service projects is expected to be approximately $7.5 million and $12.0
million, respectively.
On January 4, 1999 the Company announced the acquisition of three database
marketing units from Deluxe Corporation. The purchase price was $18 million in
cash with an additional $5.6 million to be paid April 1, 1999. The units are
expected to add over $20 million in annual revenue and to have little impact on
earnings in the current fiscal year.
While the Company does not have any other material contractual commitments for
capital expenditures, additional investments in facilities and computer
equipment continue to be necessary to support the growth of the business. In
addition, new outsourcing or facilities management contracts frequently require
substantial up-front capital expenditures in order to acquire or replace
existing assets. In some cases, the Company also sells software, hardware, and
data to customers under extended payment terms or notes receivable collectible
over one to eight years. These arrangements also require up-front expenditures
of cash, which are repaid over the life of the agreement. Management believes
that the combination of existing working capital, anticipated funds to be
generated from future operations, and the Company's available credit lines is
sufficient to meet the Company's current operating needs as well as to fund the
anticipated levels of expenditures. If additional funds are required, the
Company would use existing credit lines to generate cash, followed by either
additional borrowings to be secured by the Company's assets or the issuance of
additional equity securities in either public or private offerings. Management
believes that the Company has significant unused capacity to raise capital which
could be used to support future growth.
Year 2000
Many computer systems ("IT systems") and equipment and instruments with embedded
microprocessors ("non-IT systems") were designed to only recognize the last two
digits of a
<PAGE>
calendar year. With the arrival of the Year 2000, these systems and
microprocessors may encounter operating problems due to their inability to
distinguish years after 1999 from years preceding 1999. This could manifest in a
system failure or miscalculations causing disruption of operations, including,
among other things, a temporary inability to process or transmit data, or engage
in normal business activities. As a result, the Company remains engaged in an
extensive project to remediate or replace its date-sensitive IT systems and
non-IT systems.
The following discussion of the implications of the Year 2000 issue for the
Company contains numerous forward-looking statements based on inherently
uncertain information. The information presented is based on the Company's best
estimates, which were derived utilizing a number of assumptions of future
events, including the continued availability of internal and external resources,
third party modifications, and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ. Although
the Company believes it is able to make the necessary modifications in advance,
there can be no guarantee that failure to correctly modify the systems would not
have a material adverse effect on the Company.
Since 1996 the Company has been engaged in an enterprise-wide effort ("the
Project") to address the risks associated with the Year 2000 problem, both
internal and external. Under the Project, the Company has established a project
office comprised of representatives from each of the operating divisions of the
Company. A Company readiness champion and project leader are responsible for the
readiness process which includes deliverables such as plans, reviews, and
appropriate sign-offs by the appropriate business unit leaders and the Company's
Year 2000 leadership. The Project also includes the dissemination of internal
communications and status reports on a regular basis to senior leadership.
The Company believes that it has identified and evaluated its internal Year 2000
issues and that sufficient resources are being devoted to renovating IT systems
and non-IT systems that are not already "Year 2000 ready." The Company set an
internal deadline of December 31, 1998 to achieve Year 2000 readiness status,
with any residual activity to conclude before March 31, 1999. This timetable was
developed to allow the Company to focus on additional testing efforts and
integration of the Year 2000 programs of recent acquisitions during the
remainder of 1999. Overall, the Company substantially met this internal
deadline, with remaining exceptions to be completed by March, 31, 1999. Such
exceptions include recent mergers and acquisitions, as well as customer and
vendor driven dependencies.
The Project involves four phases: (1) planning; (2) remediation; (3) testing;
and (4) certification. The planning phase involves developing a detailed
inventory of applications and systems, identifying the scope of necessary
remediation to each application or system, and establishing a conversion
schedule. During the remediation phase, source codes are actually converted,
date fields are expanded or windowed, and the remediated system is tested to
ensure it is functionally the same as the existing production version. In the
testing phase, test data is prepared and the application is tested using a
variety of Year 2000 scenarios. The certification phase validates that a system
can run successfully in a Year 2000 environment and appropriate internal
sign-offs have been obtained.
<PAGE>
The following chart indicates the estimated state of completion, as well as the
planned date of completion of each phase of the project. It is important to note
that each project must complete the previous phase before moving to the next
phase.
Current Planned Planned
January December December
1999 1998 1999
---- ---- ----
Planning 99% 100% 100%
Remediation 93% 90% 100%
Testing 82% 80% 100%
Certification 79% 75% 100%
With regard to the Company's operational platforms (hardware, operating systems
and vendor software) in the Company's primary data center located at the
headquarters location, mainframes and servers are both currently 95%Year 2000
ready.
The financial impact of the Year 2000 Project to the Company has not been, and
is not expected to be, material to its financial position or results of
operations in any given fiscal year. The costs to date associated with the Year
2000 effort primarily represent a reallocation of existing Company resources.
Because of the range of possible issues and the large number of variables
involved (including the Year 2000 readiness of any entities acquired by the
Company), it is impossible to accurately quantify the potential cost of problems
if the Company's remediation efforts or the efforts of those with whom it does
business are not successful. Such costs and any failure of such remediation
efforts could result in a loss of business, damage to the Company's reputation,
and legal liability.
The Company currently believes that with modifications to existing software and
conversions to new software, the Year 2000 issues can be mitigated. But the
systems of vendors on which the Company's systems rely may not be converted in a
timely fashion, or a vendor or customer may fail to convert its software or may
implement a conversion that is incompatible with the Company's systems, which
could have a material adverse impact on the Company.
In order to assess the readiness status of the Company's vendors, the Company
has contacted each vendor, via written and/or telephone inquiries, regarding its
Year 2000 status and has set up an internal database of this information. The
Company is in the process of obtaining written commitments from each vendor that
the products supplied to the Company are or will be (by a date certain) Year
2000 ready. As of February 1, 1999, the Company had received responses to 83% of
its inquiries. The Company is also relying on representations made or contained
in its vendors' web sites. In addition, the Company has identified and is
communicating with customers to determine if such customers have an effective
plan in place to address their Year 2000 issues, and to determine the extent of
the Company's vulnerability to the failure of such customers to remediate their
own Year 2000 issues.
The Company believes that the most likely risks of serious Year 2000 business
disruptions are external in nature, such as disruptions in telecommunications,
electric, or transportation services.
<PAGE>
In addition, the Company places a high degree of reliance on computer systems of
third parties, such as customers and computer hardware and software suppliers.
Although the Company is assessing the readiness of these third parties and
preparing contingency plans, there can be no guarantee that the failure of these
third parties to modify their systems in advance of December 31, 1999 would not
have a material adverse effect on the Company. Of all the external risks, the
Company believes the most reasonably likely worst case scenario would be a
business disruption resulting from an extended and/or extensive communications
failure.
In an effort to reduce the risks associated with the Year 2000 problem, the
Company has established and is currently continuing to develop Year 2000
contingency plans that build upon existing disaster recovery and contingency
plans. Examples of the Company's existing contingency plans include alternative
power supplies and communication lines. Contingency planning for possible Year
2000 disruptions will continue to be defined, improved and implemented.
Notwithstanding any contingency plan of the Company, the failure to correct a
material Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations. Such failures could materially
and adversely affect the Company's results of operations, liquidity and
financial condition. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third party vendors and customers, the Company is unable to determine at this
time whether the consequences of Year 2000 failures will have a material impact
on the Company's results of operations, liquidity or financial condition. The
Project is expected to significantly reduce the Company's level of uncertainty
about the Year 2000 problem and, in particular, about the Year 2000 compliance
and readiness of its material third party vendors and customers. The Company
believes that the continued implementation of the Project will reduce the
possibility of significant interruptions to the Company's normal business
operations.
Other Information
The Company has had a long-term contractual relationship with Allstate. The
initial contract had a five-year term beginning in September, 1992. The contract
is automatically renewed for one-year periods if no cancellation notice is given
six months prior to an anniversary date, after the five-year term. The contract
currently extends until September, 1999. The Company is currently in
negotiations with Allstate to further extend the relationship and provide for an
additional five-year contract with a five-year renewal option.
Certain statements in this quarterly report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements, which are not statements of historical fact, may
contain estimates, assumptions, projections and/or expectations regarding the
Company's financial position, results of operations, market position, product
development, regulatory matters, growth opportunities and growth rates,
acquisition and divestiture opportunities, and other similar forecasts and
statements of expectation. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," and "should," and variations of these
words and similar expressions, are intended to identify these forward-looking
<PAGE>
statements. Such forward-looking statements are not guarantees of future
performance. They involve known and unknown risks, uncertainties, and other
factors which may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Representative examples of such factors are discussed in more detail in the
Company's Annual Report on Form 10-K and include, among other things, the
possible adoption of legislation or industry regulation concerning certain
aspects of the Company's business; the removal of data sources and/or marketing
lists from the Company; the ability of the Company to retain customers who are
not under long-term contracts with the Company; technology challenges; Year 2000
issues; the risk of damage to the Company's data centers or interruptions in the
Company's telecommunications links; acquisition integration; the effects of
postal rate increases; and other market factors. See "Additional Information
Regarding Forward-looking Statements" in the Company's Annual Report on Form
10-K.
<PAGE>
Form 10-Q
ACXIOM CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Forms 8-K.
A report was filed on February 8, 1999, which reported the
Registrant's restated consolidated financial statements as a
result of the Registrant's merger with May & Speh, Inc.
<PAGE>
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Acxiom Corporation
Dated: February 16, 1999
By: /s/ Robert S. Bloom
---------------------------------
(Signature)
Robert S. Bloom
Chief Financial Officer
(Chief Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibits to Form 10-Q
Exhibit Number Exhibit
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 3,208
<SECURITIES> 0
<RECEIVABLES> 179,553
<ALLOWANCES> 4,800
<INVENTORY> 0
<CURRENT-ASSETS> 242,551
<PP&E> 319,535
<DEPRECIATION> 116,841
<TOTAL-ASSETS> 744,328
<CURRENT-LIABILITIES> 110,422
<BONDS> 312,582
0
0
<COMMON> 7,861
<OTHER-SE> 278,497
<TOTAL-LIABILITY-AND-EQUITY> 744,328
<SALES> 0
<TOTAL-REVENUES> 521,080
<CGS> 0
<TOTAL-COSTS> 559,474
<OTHER-EXPENSES> (5,717)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,917
<INCOME-PRETAX> (45,594)
<INCOME-TAX> (9,549)
<INCOME-CONTINUING> (36,045)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,045)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING IS A RESTATED FINANCIAL DATA SCHEDULE AS A RESULT OF THE POOLING
OF INTERESTS WITH MAY & SPEH.
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 5,613
<SECURITIES> 12,896
<RECEIVABLES> 119,942
<ALLOWANCES> 3,937
<INVENTORY> 0
<CURRENT-ASSETS> 168,378
<PP&E> 284,127
<DEPRECIATION> 106,216
<TOTAL-ASSETS> 518,003
<CURRENT-LIABILITIES> 67,849
<BONDS> 140,424
0
0
<COMMON> 7,393
<OTHER-SE> 271,829
<TOTAL-LIABILITY-AND-EQUITY> 518,003
<SALES> 0
<TOTAL-REVENUES> 406,870
<CGS> 0
<TOTAL-COSTS> 351,640
<OTHER-EXPENSES> (3,263)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,445
<INCOME-PRETAX> 52,048
<INCOME-TAX> 19,580
<INCOME-CONTINUING> 32,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,468
<EPS-PRIMARY> .45
<EPS-DILUTED> .41
</TABLE>
