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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
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 8180, 1 Information Way, 72203
Little Rock, Arkansas (Zip Code)
(Address of Principal Executive Offices)
Identification No.)
(501) 342-1000
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).
Yes [X] No [ ]
The number of shares of Common Stock, $ 0.10 par value per share outstanding as of August 2, 2004 was 86,021,054.
1
ACXIOM CORPORATION AND SUBSIDIARIES
INDEX
REPORT ON FORM 10-Q
June 30, 2004
Part I. Financial Information Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2004 and March 31, 2004 (Unaudited) ............ 3
Condensed Consolidated Statements of Earnings for the Three Months ended
June 30, 2004 and 2003 (Unaudited) ................................................................ 4
Condensed Consolidated Statements of Cash Flows for the Three Months ended
June 30, 2004 and 2003 (Unaudited)................................................................. 5-6
Notes to the Condensed Consolidated Financial Statements (Unaudited):
1. Basis of presentation and summary of significant accounting principles........................... 7-8
2. Restructuring, impairment and other charges...................................................... 9
3. Acquisitions and investments..................................................................... 9-10
4. Other current and noncurrent assets.............................................................. 10-11
5. Goodwill......................................................................................... 11
6. Long-term obligations............................................................................ 12
7. Stockholders' equity............................................................................. 13-14
8. Allowance for doubtful accounts.................................................................. 14
9. Segment information.............................................................................. 14-16
10. Comprehensive income ............................................................................ 16
11. Commitments and contingencies.................................................................... 16-17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation........ 18-31
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 32
Item 4. Controls and Procedures..................................................................... 32
Part II. Other Information
Item 1. Legal Proceedings........................................................................... 33
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities ........... 33
Item 6. Exhibits and Reports on Form 8-K............................................................ 33
Signature................................................................................................. 34
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
June 30, March 31,
2004 2004
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,214 $ 14,355
Trade accounts receivable, net 231,488 212,387
Deferred income taxes 15,670 14,032
Refundable income taxes 1,162 2,280
Other current assets 44,384 43,272
------------------- ------------------
Total current assets 303,918 286,326
Property and equipment, net of accumulated depreciation and amortization 279,827 267,088
Software, net of accumulated amortization 62,450 64,553
Goodwill 299,319 282,971
Purchased software licenses, net of accumulated amortization 153,818 157,217
Unbilled and notes receivable, excluding current portions 14,858 13,030
Deferred costs, net 85,619 88,096
Data acquisition costs, net 34,527 36,557
Other assets, net 19,728 19,946
------------------- ------------------
$ 1,254,064 $ 1,215,784
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations $ 71,072 $ 73,245
Trade accounts payable 50,286 41,527
Accrued expenses:
Restructuring 371 2,881
Payroll 26,336 23,979
Other 67,735 63,411
Deferred revenue 80,550 91,060
------------------- ------------------
------------------- ------------------
Total current liabilities 296,350 296,103
------------------- ------------------
Long-term obligations:
Long-term debt and capital leases, net of current installments 258,138 239,327
Software and data licenses, net of current installments 45,829 54,130
------------------- ------------------
Total long-term obligations 303,967 293,457
------------------- ------------------
Deferred income taxes 49,568 39,008
Commitments and contingencies (note 11)
Stockholders' equity:
Common stock 9,324 9,226
Additional paid-in capital 380,499 361,256
Retained earnings 317,922 308,487
Accumulated other comprehensive income 2,108 2,940
Treasury stock, at cost (105,674) (94,693)
------------------- ------------------
Total stockholders' equity 604,179 587,216
------------------- ------------------
$ 1,254,064 $ 1,215,784
=================== ==================
See accompanying notes to condensed consolidated financial statements.
3
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
For the Three Months ended
June 30,
--------------------------------------
2004 2003
------------------- ------------------
Revenue:
Services $ 207,847 $ 192,514
Data 81,147 44,168
------------------- ------------------
Total revenue 288,994 236,682
Operating costs and expenses:
Cost of revenue:
Services 163,549 158,755
Data 51,819 34,637
------------------- ------------------
Total cost of revenue 215,368 193,392
Selling, general and administrative 48,529 33,064
Gains, losses and nonrecurring items, net (344) (1,008)
------------------- ------------------
Total operating costs and expenses 263,553 225,448
------------------- ------------------
Income from operations 25,441 11,234
------------------- ------------------
Other income (expense):
Interest expense (5,070) (4,765)
Other, net 409 765
------------------- ------------------
Total other income (expense) (4,661) (4,000)
------------------- ------------------
Earnings before income taxes 20,780 7,234
Income taxes 7,896 (4,029)
------------------- ------------------
Net earnings $ 12,884 $ 11,263
=================== ==================
Earnings per share:
Basic $ 0.15 $ 0.13
=================== ==================
Diluted $ 0.14 $ 0.13
=================== ==================
See accompanying notes to condensed consolidated financial statements.
4
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the Three Months ended
June 30,
--------------------------------------
2004 2003
------------------- ------------------
Cash flows from operating activities:
Net earnings $ 12,884 $ 11,263
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation, amortization and impairment of long-lived assets 43,997 33,896
Gain on disposal of assets, net - (1,008)
Deferred income taxes 8,849 (6,742)
Changes in operating assets and liabilities:
Accounts receivable (18,661) 6,009
Other assets (1,012) 2,061
Accounts payable and other liabilities (8,833) 2,785
Restructuring and impairment costs (2,510) (139)
------------------ -------------------
Net cash provided by operating activities 34,714 48,125
------------------- ------------------
Cash flows from investing activities:
Proceeds received from the disposition of operations - 7,684
Proceeds received from the disposition of assets - 506
Payments received from investments 284 1,201
Capitalized software development costs (4,107) (6,335)
Capital expenditures (1,823) (1,588)
Deferral of costs (9,610) (6,026)
Investments in joint ventures and other investments - (5,000)
Net cash paid in acquisitions (5,560) -
------------------- ------------------
Net cash used by investing activities (20,816) (9,558)
------------------- ------------------
Cash flows from financing activities:
Proceeds from debt 38,926 53,187
Payments of debt (60,560) (60,655)
Dividends paid (3,449) -
Sale of common stock 19,317 2,850
Acquisition of treasury stock (10,971) (34,665)
------------------- ------------------
Net cash used by financing activities (16,737) (39,283)
------------------- ------------------
Effect of exchange rate changes on cash (302) 87
------------------- ------------------
Net decrease in cash and cash equivalents (3,141) (629)
Cash and cash equivalents at beginning of period 14,355 5,491
------------------- ------------------
$ 11,214 $ 4,862
Cash and cash equivalents at end of period
=================== ==================
5
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Dollars in thousands)
For the Three Months ended
June 30,
--------------------------------------
2004 2003
------------------- ------------------
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 3,334 $ 3,508
Income taxes 100 977
Noncash investing and financing activities:
Acquisition of land in exchange for debt - 2,698
Acquisition of data under long-term obligation - 18,340
Software licenses acquired under software obligation 2,685 8,221
Acquisition of property and equipment under capital leases 20,498 16,803
Construction of assets under construction loan 6,788 -
See accompanying notes to condensed consolidated financial statements.
6
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
These condensed consolidated financial statements have been prepared by Acxiom Corporation ("Registrant", "Acxiom" or "the
Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC" or "the
Commission"). In the opinion of the Registrant's management all adjustments necessary for a fair presentation of the results for
the periods included have been made and the disclosures are adequate to make the information presented not misleading. All such
adjustments are of a normal recurring nature. Certain note information has been omitted because it has not changed significantly
from that reflected in notes 1 through 21 of the Notes to Consolidated Financial Statements filed as part of Item 8 of the
Registrant's annual report on Form 10-K for the fiscal year ended March 31, 2004 ("2004 Annual Report"), as filed with the
Commission on June 14, 2004. This report and the accompanying condensed consolidated financial statements should be read in
connection with the 2004 Annual Report. The financial information contained in this report is not necessarily indicative of the
results to be expected for any other period or for the full
fiscal year ending March 31, 2005.
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 condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States. Actual results could differ from those estimates. Certain of the
accounting policies used in the preparation of these condensed consolidated financial statements are complex and require management
to make judgments and/or significant estimates regarding amounts reported or disclosed in these financial statements.
Additionally,the application of certain of these accounting policies is governed by complex accounting principles and
interpretations thereof. A discussion of the Company's significant accounting principles and the application thereof is included
in note 1 and in Item 7,Management's Discussion and Analysis of Financial Condition and Results of Operations, to the Company's
2004 Annual Report.
Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no
effect on the prior years' net earnings as previously reported. The quarter ended June 30, 2004 statement of earnings provides
consolidated revenue along with revenue and cost of revenue for services and for data. Quarter ended June 30, 2003 amounts have
been reclassified to the current quarter presentation. Such reclassifications, outlined in tables below, had no effect on the
prior quarter's net earnings as previously reported.
7
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
The following table shows the reclassification of the Company's condensed consolidated statement of earnings for the quarter ended
June 30, 2003 (dollars in thousands, except per share amounts):
For the Three For the Three
Months Ended Months Ended
June 30, 2003 June 30, 2003
as Previously
Reported Reclassification Reclassified
------------------- ------------------- -------------------
Revenue:
Total revenue $ 236,682 $ (236,682) $ -
Services - 192,514 192,514
Data - 44,168 44,168
------------------- ------------------- -------------------
Total revenue $ 236,682 $ - $ 236,682
Operating costs and expenses:
Salaries and benefits 88,747 (88,747) -
Computer, communications and other equipment 66,286 (66,286) -
Data costs 30,247 (30,247) -
Other operating costs and expenses 41,176 (41,176) -
Cost of revenue
Services - 158,755 158,755
Data - 34,637 34,637
------------------- ------------------- -------------------
Total cost of revenue 226,456 (33,064) 193,392
Selling, general and administrative - 33,064 33,064
Gains, losses and nonrecurring items, net (1,008) - (1,008)
------------------- ------------------- -------------------
Total operating costs and expenses 225,448 - 225,448
------------------- ------------------- -------------------
Income from operations 11,234 - 11,234
------------------- ------------------- -------------------
Other income (expense):
Interest expense (4,765) - (4,765)
Other, net 765 - 765
------------------- ------------------- -------------------
(4,000) - (4,000)
------------------- ------------------- -------------------
Earnings before income taxes 7,234 - 7,234
Income taxes (4,029) - (4,029)
------------------- ------------------- -------------------
Net earnings $ 11,263 $ - $ 11,263
=================== =================== ===================
Earnings per share:
Basic $ 0.13 $ - $ 0.13
=================== =================== ===================
Diluted $ 0.13 $ - $ 0.13
=================== =================== ===================
8
2. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
During the fourth quarter of fiscal 2004, the Company recorded a charge of $4.0 million in gains, losses and nonrecurring items
related to restructuring. The restructuring charge included $3.7 million for severance and other associate-related charges due to
the termination of approximately 230 associates who were terminated on or prior to March 31, 2004. The remainder of the
restructuring charge consisted of $0.3 million related to termination of a lease at one of the Company's locations. Approximately
$1.1 million of the charge had been paid as of March 31, 2004 and $2.9 million was recorded in accrued impairment costs as of
March 31, 2004. During the quarter ended June 30, 2004 the Company recorded $.05 million of additional restructuring charges for
associate-related termination cost. The following table shows the balances that were accrued for the fiscal year 2004
restructuring plan as well as the changes in those balances during the quarter ended June 30, 2004 (dollars in thousands):
Associate-related Other accruals Total
reserves
------------------ ------------------- ------------------
Fiscal year 2004 restructuring plan amount $ 3,685 $ 300 $ 3,985
Payments (1,104) - (1,104)
------------------ ------------------- ------------------
March 31, 2004 2,581 300 2,881
Additional charges 525 - 525
Payments (2,735) (300) (3,035)
------------------ ------------------- ------------------
June 30, 2004 $ 371 $ - $ 371
================== =================== ==================
3. ACQUISITIONS AND INVESTMENTS
On March 31, 2004, the Company closed the acquisition of the Consodata companies based in England, France and Spain from Seat P.G.
for approximately $27.5 million, net of cash acquired. The acquisition of the Consodata German operation, formerly known as
pan-adress, was closed on April 13, 2004 for approximately $5.0 million, net of cash acquired. The results of operations of the
acquired companies are included in the Company's consolidated results beginning on the purchase date.
On January 6, 2004, the Company completed the acquisition of the Claritas Europe group of companies. The Company paid
approximately $28.7 million for the acquisition, net of cash acquired. The results of operations of the acquired companies are
included in the Company's consolidated results beginning January 1, 2004.
The purchase price allocations for the Consodata and Claritas Europe acquisitions are subject to adjustment as the Company makes
the final determination of the fair values assigned to assets and liabilities acquired. In the quarter ending June 30, 2004, net
adjustments to increase goodwill were made relating to the Consodata companies, excluding the German operations, of $.8 million and
relating to the Claritas Europe companies of $3.5 million.
The following table shows the allocation of Consodata and Claritas Europe purchase prices to assets acquired and liabilities
assumed after adjustments and acquisitions made during the quarter ending June 30, 2004 (dollars in thousands):
Consodata Claritas
------------------- ------------------
Assets acquired:
Cash $ 5,578 $ 12,097
Goodwill 39,744 32,636
Other Intangible assets 1,734 8,677
Other current and noncurrent assets 22,154 41,707
------------------- ------------------
69,210 95,117
Accounts payable, accrued expenses and capital leases assumed 31,163 54,347
------------------- ------------------
Net assets acquired 38,047 40,770
Less cash acquired 5,578 12,097
------------------- ------------------
Net cash paid $ 32,469 $ 28,673
=================== ==================
9
3. ACQUISITIONS AND INVESTMENTS (Continued)
Subsequent to June 30, 2004 the Company has made additional payments in the amount of $7.4 million to the former owners of Claritas
Europe, as a result of adjustments to working capital acquired. In addition, the Company has made a tender offer to the minority
shareholders of Consodata France, under which it expects to pay approximately $3.6 million for the minority shareholders interest.
These additional purchase price payments will be allocated to goodwill in the period of payment.
The purchase price for Claritas Europe continues to be subject to adjustment based on the final determination of purchased working
capital.
As a result of both the Claritas Europe and Consodata acquisitions, management is executing plans to consolidate certain
facilities,eliminate duplicative operations, and terminate or relocate certain associates. The execution of these plans is not
yet complete. In the fiscal year ended March 31, 2004, the Company recorded aggregate accruals in other accrued liabilities of
$15.4 million as of the purchase date of each acquisition for the estimated costs of the integration process, including lease
termination costs, costs of terminating or relocating associates, and for other contract termination costs. At March 31, 2004
approximately $0.9 million of these costs had been paid. During the quarter ended June 30, 2004 the Company recorded additional
accruals and adjustments of $6.0 million, partially associated with the April 2004 acquisition of the Consodata German operations,
and made payments against the accruals of $1.4 million. Further development and execution of these integration plans may cause
further adjustments to these accruals in the future. Any future adjustments will result in adjustments to the goodwill recorded
for the acquisitions.
The following table shows changes to the integration accrual during the period (dollars in thousands):
Total
------------------
March 31, 2004 $ 14,535
Additional accruals 5,968
Payments (1,380)
------------------
June 30, 2004 $ 19,123
==================
4. OTHER CURRENT AND NONCURRENT ASSETS
Unbilled and notes receivable are from the sales of software, data licenses, and equipment and from the sale of divested
operations,net of the current portions of such receivables. Other current assets include the current portion of the unbilled
and notes receivable of $12.6 million and $15.5 million at June 30, 2004 and March 31, 2004, respectively. The remainder of other
current assets consists of prepaid expenses, non-trade receivables and other miscellaneous assets. Except as disclosed below, there
are no allowances recorded against any of the unbilled and notes receivable (dollars in thousands).
June 30, March 31,
2004 2004
------------------ -------------------
Notes receivable from DMI, net of future credits of $2.6 million at June 30, 2004 $ 8,240 $ 8,271
and $2.7 million at March 31, 2004
Notes receivable from other divestitures, net of allowance for uncollectible note
of $0.9 million at June 30, 2004 and March 31, 2004 4,154 4,160
------------------ -------------------
Notes receivable from divestitures 12,394 12,431
Less current portion 4,923 5,823
------------------ -------------------
Long-term portion 7,471 6,608
------------------ -------------------
Unbilled and notes receivable arising from operations 15,106 16,144
Less current portion 7,719 9,722
------------------ -------------------
Long-term portion 7,387 6,422
------------------ -------------------
Unbilled and notes receivable, excluding current portions $ 14,858 $ 13,030
================== ===================
10
4. OTHER CURRENT AND NONCURRENT ASSETS (Continued)
Other noncurrent assets consist of the following (dollars in thousands):
June 30, March 31,
2004 2004
------------------ -------------------
Investments in joint ventures and other investments, net of unrealized gain or $ 8,506 $ 8,181
loss on available-for-sale marketable securities
Other, net 11,222 11,765
------------------ -------------------
$ 19,728 $ 19,946
================== ===================
5. GOODWILL
Goodwill represents the excess of acquisition costs over the fair values of net assets acquired in business combinations. Goodwill
is reviewed at least annually for impairment under a two-part test. Impairment exists to the extent that the reporting unit's
recorded goodwill exceeds the residual fair value assigned to such goodwill. Any impairment that results from the completion of
the two-part test is recorded as a charge to operations during the period in which the impairment test is completed. Completion of
the Company's most recent annual impairment test during the quarter ended June 30, 2004 indicated that no potential impairment of
its goodwill balances exists.
As discussed in note 9 to the condensed consolidated financial statements, during the quarter ended June 30, 2004 the Company
changed its organization and, as a result, has changed the presentation of segment information. The new organization is better
able to assess the operational performance and resource allocation between US and International operations. The balance at March
31, 2004 in the following table has been restated to be consistent with the current quarter presentation.
The changes in the carrying amount of goodwill, by business segment, for the three months ended June 30, 2004 are as follows
(dollars in thousands):
US Services International IT Total
Services and
and Data Data Management
----------------- -------------------- ------------------ -------------------
Balance at March 31, 2004 $ 126,565 $ 82,482 $ 73,924 $ 282,971
Acquisitions - 13,386 - 13,386
Change in foreign currency translation
adjustment - (1,413) - (1,413)
Adjustment of previously recorded goodwill - 4,375 - 4,375
----------------- -------------------- ------------------ -------------------
Balance at June 30, 2004 $ 126,565 $ 98,830 $ 73,924 $ 299,319
================== ==================== ================== ===================
11
6. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (dollars in thousands):
June 30, March 31,
2004 2004
------------------ -------------------
Convertible subordinated notes due February 2009; interest at 3.75% $ 175,000 $ 175,000
Revolving credit agreement 19,829 16,203
Capital leases on land, buildings and equipment payable in monthly payments of
principal plus interest at rates ranging from approximately 3% to 8%; remaining
terms up to fifteen years 86,687 79,448
Other debt and long-term liabilities 28,022 21,539
------------------ -------------------
Total long-term debt and capital leases 309,538 292,190
Less current installments 51,400 52,863
------------------ -------------------
Long-term debt, excluding current installments $ 258,138 $ 239,327
================== ===================
Software license liabilities payable over terms up to seven years; effective $ 59,308 $ 62,437
interest rates at approximately 7%
Long-term data license agreement with related party, due over two years; interest
at 6% 6,193 12,075
------------------ -------------------
Total license liabilities 65,501 74,512
Less current installments 19,672 20,382
------------------ -------------------
License liabilities, excluding current installments $ 45,829 $ 54,130
================== ===================
The Company maintains a revolving credit facility that provides for aggregate borrowings and letters of credit of up to $150
million through July 2006. Borrowings under the revolving credit facility of $19.8 million at June 30, 2004 and $16.2 million at
March 31, 2004 bear interest at LIBOR plus 1.5%, or at an alternative base rate or at the federal funds rate plus 2.0%, depending
upon the type of borrowing and are secured by substantially all of the Company's assets. Weighted average interest rates on the
June 30, 2004 and March 31, 2004 borrowings under the revolving credit facility were 2.69 % and 2.74%, respectively. Outstanding
letters of credit at June 30, 2004 and March 31, 2004 were $2.7 million and $10.0 million, respectively.
Under the terms of certain of the above borrowings, the Company is required to maintain certain tangible net worth levels,
debt-to-cash flow and debt service coverage ratios, among other restrictions. At June 30, 2004, the Company was in compliance with
these covenants and restrictions. Accordingly, the Company has classified all portions of its debt obligations due after June 30,
2005, as long-term in the accompanying condensed consolidated financial statements.
12
7. STOCKHOLDERS' EQUITY
Below is the calculation and reconciliation of the numerator and denominator of basic and diluted earnings per share (in thousands,
except per share amounts):
For the quarter ended
June 30,
--------------------------------------
2004 2003
------------------- ------------------
Basic earnings per share:
Numerator - net earnings $ 12,884 $ 11,263
Denominator - weighted-average shares
outstanding 86,084 86,442
------------------- ------------------
Basic earnings per share $ 0.15 $ 0.13
=================== ==================
Diluted earnings per share:
Numerator:
Net earnings $ 12,884 $ 11,263
Interest expense on convertible
debt (net of tax benefit) 1,017 1,026
------------------- ------------------
13,901 12,289
------------------- ------------------
Denominator:
Weighted-average shares outstanding 86,084 86,442
Dilutive effect of common stock
options and warrants, as computed
under the treasury stock method 3,954 1,603
Dilutive effect of convertible
debt, as computed under the
if-converted method 9,589 9,589
------------------- ------------------
99,627 97,634
------------------- ------------------
Diluted earnings per share $ 0.14 $ 0.13
=================== ==================
At June 30, 2004, the Company had options and warrants outstanding providing for the purchase of approximately 19.5 million shares
of its common stock. Options and warrants to purchase shares of common stock that were outstanding during the periods reported,
but were not included in the computation of diluted earnings per share because the exercise price was greater than the average
market price of the common shares are shown below (in thousands, except per share amounts):
For the quarter ended
June 30,
--------------------------------------
2004 2003
------------------- ------------------
Excluded number of shares under options and 4,907 13,607
warrants
Range of exercise prices $23.63 - $62.06 $14.82 - $62.06
=================== ==================
13
7. STOCKHOLDERS' EQUITY (Continued)
The Company applies the provisions of Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting
for its 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
Statement of Financial Accounting Standards ("SFAS") No. 123, as amended, the Company's net earnings would have been reduced to
the following unaudited pro forma amounts for the periods indicated (dollars in thousands, except per share amounts):
For the quarter ended
June 30,
-----------------------------
2004 2003
-------------- --------------
Net earnings , as reported $ 12,884 $ 11,263
Less: stock-based employee compensation expense under fair
value based method, net of income tax benefit 3,461 2,976
-------------- --------------
Pro forma net earnings $ 9,423 $ 8,287
============== ==============
Earnings per share:
Basic - as reported $ 0.15 $ 0.13
============== ==============
Basic - pro forma $ 0.11 $ 0.10
============== ==============
Diluted - as reported $ 0.14 $ 0.13
============== ==============
Diluted - pro forma $ 0.11 $ 0.09
============== ==============
The per-share weighted-average fair value of stock options granted during the three months ended June 30, 2004 was $11.26 on the
date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: dividend yield of 1%;
risk-free interest rate of 4.78%; expected option life of 10 years and expected volatility of 34%.
8. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are presented net of allowances for doubtful accounts, returns, and credits of $6.5 million and $6.3
million, respectively, at June 30, 2004 and at March 31, 2004.
9. SEGMENT INFORMATION
The Company reports segment information consistent with the way management internally disaggregates its operations to assess
performance and to allocate resources. As discussed in note 3 to the condensed consolidated financial statements, acquisitions
closed primarily in the fourth quarter of the fiscal year ended March 31, 2004, significantly increased the Company's International
operations. This increase accentuated different economic environments, market maturity and operational needs of the International
operations while reducing differentiation between the existing Services segment and the Data and Software Products segment. In the
quarter ended June 30, 2004, the Company changed its organization and, as a result, has changed the presentation of segment
information. The new organization is better able to assess the operational performance and resource allocation between US and
International operations. The IT Management segment was not impacted by this change. Segment information for prior periods has
been restated to conform to the current quarter presentation.
The Company's business segments consist of US Services and Data, International Services and Data and IT Management. The Services
and Data segments for both the US and International segments substantially consist of consulting, database and data warehousing,
list processing services, the Company's data content and software products. IT Management includes information technology
outsourcing and facilities management for data center management, network management, client/server management and other
complementary IT services. The Company evaluates performance of the segments based on segment operating income, which excludes
certain gains, losses and nonrecurring items. Currently, certain
14
9. SEGMENT INFORMATION (Continued)
information technology outsourcing and facilities management revenue is accounted for in both the IT Management segment and the US
Services and Data segment where the client is billed. These revenues are eliminated in consolidation.
Substantially all of the nonrecurring and impairment charges incurred by the Company and discussed in note 2 to the condensed
consolidated financial statements have been recorded in Corporate and other, since the Company does not hold the individual
segments responsible for these charges. The following tables present information by business segment (dollars in thousands):
For the quarter ended
June 30,
--------------------------------------
2004 2003
------------------- ------------------
Revenue:
US Services and Data $ 174,216 $ 162,110
International Services and Data 53,442 13,583
IT Management 64,017 61,945
Intercompany eliminations (2,681) (956)
------------------- ------------------
Total revenue $ 288,994 $ 236,682
=================== ==================
Income from operations:
US Services and Data $ 16,834 $ 8,930
International Services and Data 2,807 (62)
IT Management 5,752 1,524
Intercompany eliminations (296) (165)
Corporate and other 344 1,007
------------------- ------------------
Income from operations $ 25,441 $ 11,234
=================== ==================
In the following two tables segment Revenue and Income from operations for the indicated periods have been restated to conform with
the current quarter presentation:
------------ --------------- ------------- ------------- -----------------
First Second Third Fourth Total
quarter ended quarter ended quarter ended quarter ended fiscal year
June 30, September 30, December 31, March 31, March 31,
2003 2003 2003 2004 2004
------------ -------------- --------------- ------------- -----------------
Revenue:
US Services and Data $ 162,110 $ 169,031 $ 176,151 $ 181,351 $ 688,643
International Services and Data 13,583 15,037 15,547 39,866 84,033
IT Management 61,945 60,967 66,323 62,227 251,462
Intercompany eliminations (956) (3,939) (2,814) (5,607) (13,316)
------------ -------------- --------------- ------------- -----------------
Total revenue $ 236,682 $ 241,096 $ 255,207 $ 277,837 $ 1,010,822
============ ============== =============== ============= =================
Income from operations:
US Services and Data $ 8,930 $ 18,295 $ 31,448 $ 14,590 $ 73,263
International Services and Data (62) 603 531 1,551 2,623
IT Management 1,524 4,028 8,770 2,455 16,777
Intercompany eliminations (165) (209) (815) (584) (1,773)
Corporate and other 1,007 (1) (2,599) 3,987 2,394
------------- -------------- -------------- ------------- ----------------
Income from operations $ 11,234 $ 22,716 $ 37,335 $ 21,999 $ 93,284
============= ============== ============== ============= =================
15
9. SEGMENT INFORMATION (Continued)
------------ -------------- -------------- ------------- -----------------
First Second Third Fourth Total
quarter ended quarter ended quarter ended quarter ended ended
June 30, September 30, December 31, March 31, March 31,
2002 2002 2002 2003 2003
------------ -------------- --------------- ------------- ---------------
Revenue:
US Services and Data $ 156,293 $ 163,760 $ 176,969 $ 163,642 $ 660,664
International Services and Data 12,369 14,427 14,928 13,830 55,554
IT Management 57,147 57,612 66,598 62,392 243,749
Intercompany eliminations (403) (403) (534) (405) (1,745)
------------- ------------- --------------- ------------- ---------------
Total revenue $ 225,406 $ 235,396 $ 257,961 $ 239,459 $ 958,222
============= ============= =============== ============= ================
Income from operations:
US Services and Data $ 20,512 $ 25,046 $ 27,301 $ 17,135 $ 89,994
International Services and Data 178 143 530 (1,296) (445)
IT Management 1,072 2,386 3,976 (3,009) 4,425
Intercompany eliminations (74) 60 (70) 116 32
Corporate and other - - - (38,931) (38,931)
------------- ------------- -------------- ------------- -----------------
Income from operations $ 21,688 $ 27,635 $ 31,737 $ (25,985) $ 55,075
============= ============= ============== ============= =================
10. COMPREHENSIVE INCOME
The balance of accumulated other comprehensive income, which consists of foreign currency translation adjustments and unrealized
gains and losses, net of reclassification adjustments and income tax benefit, on marketable securities classified as
available-for-sale, was $2.1 million at June 30, 2004 and $2.9 million at March 31, 2004. Total comprehensive income was $12.1
million and $13.6 million for the quarters ended June 30, 2004 and 2003 respectively.
11. COMMITMENTS AND CONTINGENCIES
In early August 2003 management determined that the Company had experienced unlawful security breaches of its file transfer
protocol ("FTP") server. Unauthorized access to certain files occurred as a result of information being exchanged between the
Company and a number of clients via the FTP server. Acxiom was among several companies whose security was breached. Law
enforcement authorities have arrested and charged a former employee of one of Acxiom's clients. That person eventually pled
guilty to various computer crimes and is currently incarcerated. As a result of that investigation a second set of unauthorized
intrusions of the same FTP server was discovered. Those intrusions were traced to another company, Snipermail.com, Inc. of Boca
Raton, Florida. On July 21, 2004 a 144-count Federal indictment was issued against the former leader of that company. Six other
persons formerly associated with Snipermail have agreed to cooperate with the government and have entered into agreements with the
government.
In both sets of intrusions only FTP files on a server located outside of the Company's firewall were compromised and not all FTP
files nor all clients were affected. No internal systems or databases were accessed, and there was no breach that penetrated the
Acxiom security firewall. Based on the facts known to management, the Company does not believe that there is any risk of harm to
individuals, and the Company does not expect any material adverse effect from this incident. The investigating government agencies
have publicly stated that there is no evidence to indicate that consumers were subjected to any instances of harm as a result of
these incidents. The United States Department of Justice has complimented the Company on how we responded to the incidents and
worked cooperatively with the government.
The Company has a longstanding commitment to systems and network security. The Company undergoes internal security audits on a
regular basis, and many clients perform audits on the Company's systems as well. The Company initiated a comprehensive review of
its systems and procedures to guard against similar incidents in the future. Management is continuing to implement improvements to
the security systems, practices and procedures.
16
11. COMMITMENTS AND CONTINGENCIES (Continued)
The Company leases data processing equipment, software, office furniture and equipment, land and office space under noncancellable
operating leases. Additionally, the Company has entered into synthetic operating leases for computer equipment, furniture and
aircraft ("Leased Assets"). These synthetic operating lease facilities are accounted for as operating leases under generally
accepted accounting principles and are treated as capital leases for income tax reporting purposes. Initial lease terms under the
synthetic computer equipment and furniture facility range from two to six years, with the Company having the option at expiration of
the initial lease to return the equipment, purchase the equipment at a fixed price, or extend the term of the lease. The lease term
of one aircraft expires in January 2011, with the Company having the option to purchase the aircraft, renew the lease for an
additional twelve months, or return the aircraft to the lessor. In December 2003 the Company entered into a lease for an additional
aircraft which expires in December 2013, with the Company having the option at expiration to purchase the aircraft at a fixed price
or return the aircraft to the lessor.
Since the inception of the facility, the total amount drawn under these synthetic operating lease facilities was $213.3 million and
the Company has a future commitment for lease payments of $35.4 million over the next ten years. In the event the Company elects to
return the Leased Assets, the Company has guaranteed a portion of the residual value to the lessors. Assuming the Company elects to
return the Leased Assets to the lessors at its earliest opportunity under the synthetic lease arrangements and assuming the Leased
Assets have no significant residual value to the lessors, the maximum potential amount of future payments the Company could be
required to make under these residual value guarantees was $10.9 million at June 30, 2004.
The Company also has an aircraft leased from a business controlled by an officer and director of the Company. Should the Company
elect early termination rights under the lease or not extend the lease beyond the initial term and the lessor sells the aircraft,
the Company has guaranteed a residual value of 70% of the then outstanding indebtedness of the lessor, or $3.7 million at June 30,
2004.
In connection with certain of the Company's facilities, the Company has entered into 50/50 joint ventures with local real estate
developers. In each case, the Company is guaranteeing portions of the loans for the buildings. In addition, in connection with the
disposal of certain assets, the Company has guaranteed loans for the buyers of the assets. These guarantees were made by the Company
primarily to facilitate favorable financing terms for those third parties. Should the third parties default on this indebtedness,
the Company would be required to perform under its guarantee. Substantially all of the third-party indebtedness is collateralized by
various pieces of real property. At June 30, 2004, the Company's maximum potential future payments under all of these guarantees of
third-party indebtedness were $5.5 million.
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 all of these matters will not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction and Overview
Acxiom Corporation ("Acxiom" or "the Company") integrates data, services and technology to create and deliver customer and
information management solutions for many of the largest and most respected companies in the world. The core components of Acxiom's
innovative solutions are customer data integration technology ("CDI"), data, database services, information technology ("IT")
outsourcing, consulting and analytics, and privacy leadership. Founded in 1969, Acxiom is headquartered in Little Rock, Arkansas,
with locations throughout the United States ("US") and Europe, and in Australia and Japan.
As a result of the Company's increased international presence and to better enable assessment of operational performance and
resource allocation between US and International operations, in the quarter ended June 30, 2004 the company realigned its Services,
Data and Software Products, and IT Management segments into three operating segments: US Services and Data, International Services
and Data, and IT Management. (See note 9 to the condensed consolidated financial statements.) The Services and Data segments for
both US and International provide data and database services, data integration, consulting and analytic services, data content and
software, and customer marketing activities to large corporations in a number of vertical industries. The IT Management segment
provides outsourcing services primarily in the areas of data center, client/server and network management.
Highlights of the most recently completed fiscal quarter are identified below.
o Revenue of $289.0 million, up 22 percent from $236.7 million in the first quarter a year ago. The net impact of
acquisitions and divestitures contributed 13 percentage points of this 22 percentage-point growth in revenue.
o Income from operations of $25.4 million, an increase of 126 percent compared to $11.2 million in the first quarter a year
ago.
o Pre-tax earnings of $20.8 million, an increase of 187 percent compared to $7.2 million in the first quarter a year ago.
o Diluted earnings per share of $.14, up 8 percent from $.13 the year before. Last year's first-quarter net earnings
benefited from an income tax adjustment of $6.7 million ($.07 per share).
o Operating cash flow of $34.7 million and free cash flow of $19.2 million. The free cash flow of $19.2 million is a non-GAAP
financial measure and a reconciliation to the comparable GAAP measure, operating cash flow, is provided below in the
discussion of Capital Resources and Liquidity - Working Capital and Cash Flow.
o New contracts that are expected to deliver $17 million in annual revenue and renewals that are expected to deliver a total
of $10 million in annual revenue.
The highlights above are intended to identify to the reader some of the more significant events and transactions of the Company
during the quarter ended June 30, 2004. However, these highlights are not intended to be a full discussion of the Company's results
for the quarter. These highlights should be read in conjunction with the following discussion of Results of Operations and Capital
Resources and Liquidity and with the Company's condensed consolidated financial statements and footnotes accompanying this report.
18
Results of Operations
A summary of selected financial information for each of the periods reported is presented below (dollars in millions, except per
share amounts):
For the quarter ended
June 30,
-------------------------------------------
2004 2003 % Change
------------- -------------- --------------
Revenue
Services $ 207.9 $ 192.5 + 8.0%
Data 81.1 44.2 + 83.7
------------- -------------- --------------
$ 289.0 $ 236.7 + 22.1%
Total operating costs and expenses 263.6 225.5 + 16.9
Income from operations 25.4 11.2 + 126.5
Diluted earnings per share 0.14 0.13 + 7.7
============= ============== ==============
Revenues
For the quarter ended June 30, 2004, the Company's revenue was $289.0 million, compared to revenue of $236.7 million in the quarter
ended June 30, 2003, reflecting an increase of $52.3 million or 22.1%. Acquisitions, net of divestitures, contributed 13.5% of this
22.1% increase. Services revenue increased $15.3 million, or 8.0%, while data revenue increased $37.0 million, or 83.7%. The
acquisitions of Claritas Europe and Consodata increased total revenue $36.2 million in the quarter ended June 30, 2004 and
contributed 69.3% of the total increase in revenue for the quarter or 15.3% of the 22.1% increase. During the quarter ended June 30,
2004 new contracts were signed which are expected to contribute annual revenue of $17.5 million and contract renewals are expected
to generate an additional $10.6 million in annual revenue. The Company renewed substantially all contracts which came up for renewal
during the quarter.
The increase in services revenue is primarily attributable to increases in revenue of $7.8 million from clients in the automotive,
security, healthcare, insurance and government industries, as well as an increase in revenue of $4.6 million related to the
Consodata and Claritas Europe acquisitions. All other industries combined resulted in a net $2.7 million increase. Increases from
acquisitions were offset by decreases from divestitures. The increase in data revenue is primarily attributable to the acquisitions
of Claritas Europe and Consodata, which together contributed $31.6 million of data revenue during the first quarter with additional
increases from the InfoBase suite of products, which increased 12%.
The following table shows the Company's revenue by business segment for the quarters ended June 30, 2004 and 2003 (dollars in
millions):
For the quarter ended
June 30,
--------------------------------------------
2004 2003 % Change
-------------- -------------- --------------
US Services and Data $ 174.2 $ 162.1 + 7.5%
International Services and Data 53.4 13.6 + 293.4
IT Management 64.0 61.9 + 3.3
Intercompany eliminations (2.6) (.9) + 180.4
-------------- -------------- --------------
Total Revenue $ 289.0 $ 236.7 + 22.1%
============== ============== ==============
US Services and Data segment revenue for the quarter ended June 30, 2004 increased $12.1 million or 7.5% over the quarter ended June
30, 2003 and includes increases of $11.2 million from clients in the automotive, security, healthcare, insurance and government
industries. All other industries combined resulted in a net $0.9 million increase.
International Services and Data segment revenue for the quarter ended June 30, 2004 increased $39.9 million or 293.4% over the
quarter ended June 30, 2003. The increase is primarily attributable to the acquisitions of Claritas Europe and Consodata, which
contributed $36.2 million of revenue during the quarter. Additionally, the Company's United Kingdom fulfillment operation had an
increase in revenue of $2.9 million.
19
IT Management segment revenue for the quarter ended June 30, 2004 increased $2.1 million or 3.3% over the quarter ended June 30,
2003. These revenue gains were net of a decrease of $4.0 million due to the disposal of the Company's Los Angeles outsourcing data
center operation.
Operating Costs and Expenses
The following table presents the Company's operating costs and expenses for each of the periods reported (dollars in millions):
For the quarter ended
June 30,
--------------------------------------------
2004 2003 % Change
-------------- -------------- --------------
Cost of revenue
Services $ 163.6 $ 158.8 + 3.0%
Data 51.8 34.6 + 49.6
-------------- -------------- --------------
Total cost of revenue 215.4 193.4 + 11.4
Selling, general and administrative 48.5 33.1 + 46.8
Gains, losses and nonrecurring items, net (.3) (1.0) - 65.9
-------------- -------------- --------------
Total operating costs and expenses $ 263.6 $ 225.5 + 16.9%
============== ============== ==============
The cost of services for the quarter ended June 30, 2004 of $163.6 million increased $4.8 million or 3.0% over the quarter ended
June 30, 2003. Cost of services as a percent of Services revenue decreased to 78.7% in the quarter ended June 30, 2004 compared to
82.5% in the quarter ended June 30, 2003. The cost of services increase included $4.4 million of expense related to the Claritas
Europe and Consodata acquisitions. Additional cost increases in both the US and Europe were partially offset by a decrease due to
the disposal of the Company's Los Angeles outsourcing data center operations.
Cost of data includes acquired data, data royalties, compilation costs and the costs of building the Company's various data
products. The cost of data for the quarter ended June 30, 2004 of $51.8 million increased $17.2 million or 49.6% over the quarter
ended June 30, 2003. Cost of data as a percent of Data revenue was 63.9% and 78.4% in the quarters ended June 30, 2004 and 2003,
respectively. The increase in these costs was primarily attributable to the acquisitions of Claritas Europe and Consodata, which
accounted for $14.8 million of the increase. Additionally, the cost of data to support the revenue from Allstate Insurance Company
increased by $2.2 million.
Gross profit margins for services improved to 21.3% in the quarter ended June 30, 2004 which compares with 17.5% for the quarter
ended June 30, 2003. Gross profit margins in the current year benefited from the sale of the Los Angeles outsourcing data center
operations that were sold at the end of the first quarter last year, and from a lower amount of equipment sold in the current year.
The gross profit margins for data were 36.1% in the quarter ended June 30, 2004 which compares with 21.6% for the quarter ended June
30, 2003. The increase in the data gross profit margin reflects improvement in data margins on the Company's US data business and
the higher margin data business of the recently acquired operations of Claritas Europe and Consodata.
Consolidated gross profit was 25.5% in the quarter ended June 30, 2004 which compares with 18.3% for the quarter ended June 30,
2003.
Selling, general and administrative expenses for the quarter ended June 30, 2004 of $48.5 million increased $15.5 million or 46.8%
over the quarter ended June 30, 2003. Selling, general and administrative expense as a percent of total revenue was 16.8% and 14.0%
in the quarters ended June 30, 2004 and 2003, respectively. The selling, general and administrative increase included $12.8 million
of expenses related to the Claritas Europe and Consodata acquisitions. Additionally, other sales and marketing costs increased by
$2.0 million.
20
Gains, losses and nonrecurring items for each of the quarters presented are as follows (in millions):
For the quarter ended
June 30,
-----------------------------
2004 2003
-----------------------------
Gain (loss) on divestitures $ .1 $ (1.0)
Restructuring plan charges and adjustments .5 -
Wards recoveries (.9) -
-----------------------------
Gains, losses and nonrecurring items, net $ (0.3) $ (1.0)
=============================
Gains, losses and nonrecurring items of $.3 million for the quarter ended June 30, 2004 consisted of a recovery from the Montgomery
Wards bankruptcy offset by restructuring charges and a small loss. Gains, losses and nonrecurring items of $1.0 million for the
quarter ended June 30, 2003 consisted of the gain on disposal of the Company's Los Angeles outsourcing data center operations.
Operating Margins
Operating margins for the quarter ended June 30, 2004 were 8.8% compared to 4.7% for the quarter ended June 30, 2003. The
improvement in operating margins reflects higher gross profit margins partially mitigated by higher selling, general and
administrative expenses noted above and by a gain on sale in the prior year.
Other Income (Expense), Income Taxes and Other Items
Interest expense for the quarter ended June 30, 2004 increased $.3 million over the quarter ended June 30, 2003, reflecting slightly
higher average debt levels. The Company's weighted-average interest rate on long-term debt was 4.6% at June 30, 2004 and 4.8% at
June 30, 2003.
Other, net of $.4 million for the quarter ended June 30, 2004 decreased $.4 million compared to the quarter ended June 30, 2003.
Other, net for both periods consists primarily of interest income on notes receivable.
The effective tax rate for the quarter ended June 30, 2004 was 38%. Management expects the effective tax rate for the year ended
March 31, 2005 to also be approximately 38%. The tax expense for the quarter ended June 30, 2003 was impacted by a $6.7 million
release of a liability for previously reserved tax uncertainties due to the completion of an audit by the Internal Revenue Service.
The Company is regularly audited by federal and state tax authorities, which, from time to time, results in proposed assessments
and/or adjustments to certain of the Company's tax positions. As a result of certain tax deductions and exclusions taken by the
Company in recent years for which no specific or clear guidance is included in the Internal Revenue Code and the possibility that
the Company's position with respect to these deductions and/or exclusions could be challenged and disallowed by tax authorities, the
Company has established a deferred tax liability to cover its potential exposure from these tax uncertainties.
Capital Resources and Liquidity
Working Capital and Cash Flow
Working capital at June 30, 2004 totaled $7.6 million, compared to a negative $9.8 million at March 31, 2004. The increase in
working capital is due to an increase in accounts receivable and a decrease in deferred revenue offset by an increase in accounts
payable and accrued expenses. Cash provided by operating activities was $34.7 million in the first quarter of 2004 as compared to
$48.1 million in the first quarter of 2003. The impact of net changes in operating assets and liabilities decreased in the quarter
ended June 30, 2004 by $41.7 million compared to the impact in the prior year primarily as a result of increases in accounts
receivable in the current year compared to a decrease in the prior year. The increase in accounts receivable in the current year was
due to strong collections at March 31, 2004 and lower than expected collections at the end of the June 30, 2004 quarter. The Company
has not changed collection policies or payment terms on contracts.
21
Accounts receivable days sales outstanding ("DSO") was 73 days at June 30, 2004 and 70 days at March 31, 2004 and is calculated as
follows (dollars in thousands):
June 30, March 31,
2004 2004
------------------ -------------------
Numerator - trade accounts receivable, net $ 231,488 $ 212,387
Denominator:
Quarter revenue 288,994 277,837
Number of days in quarter 91 91
------------------ -------------------
Average daily revenue $ 3,176 $ 3,053
------------------ -------------------
Days sales outstanding 73 70
================== ===================
Investing activities used $20.8 million in the quarter ended June 30, 2004 compared to $9.6 million in the prior year's first
quarter. Investing activities in the quarter ended June 30, 2004 included capitalized software development costs of $4.1 million
compared to $6.3 million in the quarter ended June 30, 2003. Cost deferrals were $9.6 million in the quarter ended June 30, 2004
compared to $6.0 million in the quarter ended June 30, 2003. Deferral of costs, which include both salaries and benefits and other
direct and incremental third party costs incurred in connection with setup activities on client contracts, as well as capitalization
of costs related to data acquisition, increased $3.6 million in fiscal 2005 primarily due to increases related to capitalization of
data.
Investing activities in the quarter ended June 30, 2004 reflected net cash paid for acquisitions of $5.6 million related to the
acquisition in April 2004 of the Consodata German operations. Investing activities in the quarter ended June 30, 2003 reflected the
receipt of $7.7 million of proceeds from the disposition of operations, which included $6.7 million related to the sale of the
Company's Los Angeles outsourcing data center operation and $1.0 million collections on a note from the sale of the DMI operation in
a prior year, and $1.2 million cash received from the Company's health care joint venture, which had been liquidated. Investing
activities in the quarter ended June 30, 2003 also included an investment of $5.0 million in Battleaxe, LLC, a limited liability
company formed for the purpose of owning and managing real property in Illinois.
With respect to certain of its investments in joint ventures and other companies, Acxiom has provided cash advances to fund losses
and cash flow deficits. Although the Company has no commitment to continue to do so, it expects to continue funding such losses and
deficits until such time as these investments become profitable. Acxiom may, at its discretion, discontinue providing financing to
these investments during future periods. In the event that Acxiom ceases to provide funding and these investments have not achieved
profitable operations, the Company may be required to record an impairment charge up to the amount of the carrying value of these
investments ($8.3 million at June 30, 2004).
As shown below, the Company generated operating cash flow of $34.7 million and free cash flow of $19.2 million in the quarter ended
June 30, 2004 as compared to $48.1 and $34.7 million of operating cash flow and free cash flow, respectively, in the quarter ended
June 30, 2003 (in thousands):
June 30, June 30,
2004 2003
------------------ -------------------
Operating cash flow $ 34,714 $ 48,125
Proceeds from the disposition of assets - 506
Capitalized software development costs (4,107) (6,335)
Capital expenditures (1,823) (1,588)
Deferral of costs (9,610) (6,026)
------------------ -------------------
Free cash flow $ 19,174 $ 34,682
================== ===================
Free cash flow is not a generally accepted accounting principle ("GAAP") financial measure. A "non-GAAP financial measure" is
defined as a numerical measure of the Company's financial performance, financial position or cash flow that excludes (or includes)
22
amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with
GAAP in the Company's condensed consolidated financial statements. The Company defines free cash flow as cash provided by operating
activities less cash used by investing activities excluding the impact of investments in joint ventures and other business alliances
and cash paid and/or received in acquisitions and dispositions. Free cash flow, as defined by the Company, may not be comparable to
similarly titled measures reported by other companies. Management of the Company has included free cash flow in this filing because
although free cash flow does not represent the amount of money available for the Company's discretionary spending since certain
obligations of the Company must be funded out of free cash flow, management believes that it provides investors with a useful
alternative measure of liquidity by allowing an assessment of the amount of cash available for general corporate and strategic
purposes, including debt payments, after funding operating activities and capital expenditures, capitalized software expenses and
deferred costs. The above table reconciles free cash flow to cash provided by operating activities, the nearest comparable GAAP
measure.
Financing activities in the quarter ended June 30, 2004 used $16.7 million as compared to $39.3 million in the quarter ending June
30, 2003 primarily due to reduced levels of treasury stock acquisition. Proceeds from the sale of common stock through stock options
and the employee stock purchase plan were $19.3 million during the current period compared to $2.9 million in the quarter ended June
30, 2003. The Company also paid a quarterly dividend of $0.04 per share during the first quarter of 2005.
The Company also incurred long-term obligations through non-cash investing and financing activities during the quarter ended June
30, 2004 of $20.5 million for the acquisition of property and equipment under capital leases to service customers, $6.8 million for
the construction of assets under construction loans, and $2.7 million for software licenses acquired under software obligations.
The Company intends to use its future free cash flow to repay debt, to buy back shares of its common stock, for possible future
acquisitions and for payments of dividends.
Credit and Debt Facilities
The Company had available credit lines of $150 million of which $19.8 million was outstanding at June 30, 2004 compared to $16.2
million at March 31, 2004. The Company's debt-to-capital ratio, as calculated below, was 33% at both June 30, 2004 and March 31,
2004 (dollars in thousands).
June 30, March 31,
2004 2004
------------------ -------------------
Numerator - long-term obligations, net of current installments $ 303,967 $ 293,457
------------------ -------------------
Denominator:
Long-term obligations, net of current installments 303,967 293,457
Stockholders' equity 604,179 587,216
------------------ -------------------
$ 908,146 $ 880,673
------------------ -------------------
Debt-to-capital ratio 33% 33%
================== ===================
The foregoing calculation of the debt-to-capital ratio excludes current maturities of long-term obligations in the amounts of $71.1
million and $73.2 million at June 30, 2004 and March 31, 2004, respectively.
Included in long-term obligations at June 30, 2004 and at March 31, 2004 are the Company's 3.75% convertible notes ("3.75% Notes")
in the amount of $175 million. The conversion price for the 3.75% Notes is $18.25 per share. If the Company's common stock price
remains above the conversion price, the 3.75% Notes may be converted to equity.
Off-Balance Sheet Items and Commitments
The Company has entered into synthetic operating lease facilities for computer equipment, furniture and aircraft ("Leased Assets").
These synthetic operating lease facilities are accounted for as operating leases under GAAP and are treated as capital leases for
income tax reporting purposes. Lease terms under the computer equipment and furniture facility range from two to six years, with the
Company having the option at expiration of the initial term to return, or purchase at a fixed price, or extend or renew the term of
the leased equipment. The synthetic lease term for one aircraft expires in January 2011, with the Company having the option at
expiration to either purchase the aircraft at a fixed price, enter into a lease for an additional twelve-month period (with a
23
nominal purchase price paid at the expiration of the renewal period), or return the aircraft in the condition and manner required by
the lease. In December 2003 the Company entered into a synthetic lease for an additional aircraft which expires in November 2013,
with the Company having the option at expiration to purchase the aircraft at a fixed price or return the aircraft to the lessor. In
the event the Company elects to return the Leased Assets, the Company has guaranteed a portion of the residual value to the lessors.
Assuming the Company elects to return the Leased Assets to the lessors at its earliest opportunity under the synthetic lease
arrangements and assuming the Leased Assets have no significant residual value to the lessors, the maximum potential amount of
future payments the Company could be required to make under these residual value guarantees was $10.9 million at June 30, 2004.
Since the inception of the facility, the total amount drawn under these synthetic operating lease facilities was $213.3 million, and
as of June 30, 2004 the Company has a future commitment for lease payments of $35.4 million over the next ten years.
The Company is near completion of a new 97,000 sq. ft. office building and data center in Phoenix, Arizona. Total construction costs
of this facility are expected to be approximately $15 million to $16 million and construction is expected to be completed in the
fall of 2004. The Company also has begun construction on an additional 30,000 sq. ft data center in Little Rock, Arkansas and it is
expected to be completed in late fiscal 2005. Total construction cost of this facility is expected to be $14 million to $15 million.
In connection with certain of the Company's other buildings and facilities, the Company has entered into 50/50 joint ventures with
local real estate developers. In each case, the Company is guaranteeing portions of the loans for the buildings. Additionally, in
connection with the disposal of certain assets, the Company has guaranteed loans for the buyers of the assets. Substantially all of
the third party indebtedness for which the Company has provided guarantees is collateralized by various pieces of real property. The
aggregate amount of the guarantees at June 30, 2004 was $5.5 million.
Outstanding letters of credit, which reduce the borrowing capacity under the Company's revolving credit facility, were $2.7 million
at June 30, 2004 and $10.0 million at March 31, 2004.
24
Contractual Commitments
The following table presents Acxiom's contractual cash obligations and purchase commitments at June 30, 2004 (dollars in thousands).
The column for 2005 represents the nine months ending March 31, 2005. All other columns represent fiscal years ending March 31.
For the years ending March 31
--------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total
-------------------------- ------------ ------------ ------------ ------------ -------------
Long-term obligations
Capital lease
obligations $ 29,691 $ 23,250 $ 15,005 $ 4,176 $ 1,916 $ 12,649 $ 86,687
Software and data
license liabilities 11,252 19,784 13,877 13,656 6,932 - 65,501
Other long-term debt 16,590 1,587 20,586 757 183,331 - 222,851
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total long-term
obligations 57,533 44,621 49,468 18,589 192,179 12,649 375,039
------------ ------------- ------------ ------------ ------------ ------------ -------------
Operating lease and software
license obligations
Synthetic aircraft
leases 2,267 3,022 3,022 3,022 3,022 11,389 25,744
Synthetic equipment
and furniture leases 6,150 2,644 607 253 - - 9,654
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total synthetic
operating leases 8,417 5,666 3,629 3,275 3,022 11,389 35,398
Equipment operating
leases 14,767 11,052 4,052 656 83 - 30,610
Building operating
leases 12,566 15,399 14,352 12,606 10,655 59,384 124,962
Partnerships
building leases 1,593 2,123 2,134 2,144 2,155 43 10,192
Related party
aircraft lease 677 902 376 - - - 1,955
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total operating
lease payments 38,020 35,142 24,543 18,681 15,915 70,816 203,117
Operating software
license obligations 7,227 4,995 3,561 3,515 3,515 3,515 26,328
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total operating
lease and software
license obligations 45,247 40,137 28,104 22,196 19,430 74,331 229,445
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total contractual cash
obligations $ 102,780 $ 84,758 $ 77,572 $ 40,785 $ 211,609 $ 86,980 $ 604,484
============ ============= ============ ============ ============ ============ =============
For the years ending March 31
------------ -------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total
------------ ------------- ------------ ------------ ------------ ------------ -------------
Purchase commitments
on synthetic
aircraft leases $ - $ - $ - $ - $ - $ 18,397 $ 18,397
Purchase commitments
on synthetic
equipment and furniture
leases 388 3,558 464 1,626 - - 6,036
Other purchase
commitments 72,468 23,412 17,762 12,681 5 - 126,328
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total purchase commitments $ 72,856 $ 26,970 $ 18,226 $ 14,307 $ 5 $ 18,397 $ 150,761
============ ============= ============ ============ ============ ============ =============
The related party aircraft lease relates to an aircraft leased from a business owned by an officer and director. The Company has
also agreed to pay the difference, if any, between the sales price of the aircraft and 70% of the related loan balance
(approximately $3.7 million at June 30, 2004) should the Company elect to exercise its early termination rights or not extend the
lease beyond its initial term and the lessor sells the equipment as a result.
The purchase commitments on the synthetic equipment, furniture and aircraft leases assume the leases terminate and are not renewed,
and the Company elects to purchase the assets. The other purchase commitments include contractual commitments for the purchase of
data and open purchase orders for equipment, paper, office supplies, construction of buildings and other items. Other purchase
commitments in some cases will be satisfied by entering into future operating leases, capital leases, or other financing
arrangements, rather than payment of cash.
25
The following table shows contingencies or guarantees under which the Company could be required, in certain circumstances, to make
cash payments as of June 30, 2004 (dollars in thousands):
Residual value guarantee on the synthetic computer equipment and furniture lease $ 4,278
Residual value guarantee on synthetic aircraft lease 6,639
Residual value guarantee on related party aircraft lease 3,683
Guarantees on certain partnership and other loans 5,549
Outstanding letters of credit 2,693
The total of loans "on certain partnerships and other loans," of which the Company guarantees the portion noted in the above table,
are $13.7 million.
While the Company does not have any other material contractual commitments for capital expenditures, minimum levels of investments
in facilities and computer equipment continue to be necessary to support the growth of the business. It is the Company's current
intention generally to lease any new required equipment to better match cash outflows with customer inflows. In some cases, the
Company also sells software and hardware to clients. In addition, new outsourcing or facilities management contracts frequently
require substantial up-front capital expenditures to acquire or replace existing assets. Management believes that the Company's
existing available debt and cash flow from operations will be sufficient to meet the Company's working capital and capital
expenditure requirements for the foreseeable future. The Company also evaluates acquisitions from time to time, which may require
up-front payments of cash. Depending on the size of the acquisition it may be necessary to raise additional capital. If additional
capital becomes necessary as a result of any material variance of operating results from projections or from potential future
acquisitions, the Company would first use available borrowing capacity under its revolving credit agreement, followed by the
issuance of debt or equity securities. However, no assurance can be given that the Company would be able to obtain funding through
the issuance of debt or equity securities at terms favorable to the Company, or that such funding would be available.
For a description of certain risks that could have an impact on results of operations or financial condition, including liquidity
and capital resources, see the "Risk Factors" contained in Part I, Item 1. Business, of the Company's annual report on Form 10-K for
the fiscal year ended March 31, 2004.
Acquisitions and Divestitures
On March 31, 2004, the Company closed the acquisition of the Consodata companies based in England, France and Spain, from Turin-
based Seat P.G., one of the world's leading multi-platform directories companies. The acquisition of the Consodata German operation
was completed on April 13, 2004. Both acquisitions were accounted for as purchases. The total net consideration was approximately
$32.5 million, net of cash acquired. The acquired Consodata companies are expected to add approximately $63 million to $69 million
to the Company's revenue for fiscal 2005, which began April 1, 2004.
On January 6, 2004, the Company announced the completion of the acquisition of the Claritas Europe group of companies from VNU N.V.
The acquisition is accounted for as a purchase and was effective January 1, 2004. Management believes this acquisition, along with
the Consodata acquisition noted above, will provide the Company with significant European data assets that will be complementary to
the Company's service offerings and will give the Company an expanded presence in Europe. The Company paid approximately $28.7
million for the acquisition, net of cash acquired, which includes offices in England, France, The Netherlands, Germany, Spain,
Portugal and Poland. The acquired Claritas companies are expected to add approximately $100 million in annual revenue in fiscal
2005. The results of operations of the acquired companies are included in the Company's consolidated results beginning January 1,
2004. (See note 3 to the condensed consolidated financial statements.)
Subsequent to June 30, 2004 the Company has made additional payments in the amount of $7.4 million to the former owners of Claritas
Europe as a result of adjustments to working capital acquired. The purchase price for Claritas Europe continues to be subject to
adjustment based on the final determination of purchased working capital. In addition, the Company has made a tender offer to the
minority shareholders of Consodata France, under which it expects to pay approximately $3.6 million for the minority shareholders
interest. These additional purchase price payments will be allocated to goodwill in the period of payment.
26
Other Information
In accordance with a data center management agreement dated July 27, 1992 between Acxiom and TransUnion, Acxiom (through its
subsidiary, Acxiom CDC, Inc.) acquired all of TransUnion's interest in its Chicago data center and agreed to provide TransUnion with
various data center management services. In a 1992 letter agreement, Acxiom agreed to use its best efforts to cause one person
designated by TransUnion to be elected to Acxiom's board of directors. TransUnion designated its CEO and President, Harry C.
Gambill, who was appointed to fill a vacancy on the board in November 1992 and was elected at the 1993 annual meeting of
stockholders to serve a three-year term. He was elected to serve additional three-year terms at the 1996, 1999 and 2002 annual
stockholders meetings. Under a second letter agreement, executed in 1994 in connection with an amendment to the 1992 agreement,
which continued the then-current term through 2002, Acxiom agreed to use its best efforts to cause two people designated by
TransUnion to be elected to Acxiom's board of directors. While these undertakings by Acxiom are in effect until the end of the
current term of the agreement, which expires in August 2005, Acxiom has been notified that TransUnion does not presently intend to
designate another individual to serve as director. Acxiom and TransUnion amended the data center management agreement on October 1,
2002, expanding its scope to encompass TransUnion's client/server, network and communications infrastructure. This amendment runs
concurrent with the current term of the data center management agreement. In addition to this agreement, the Company has other
contracts with TransUnion related to data, software and other services. Acxiom recorded revenue from TransUnion of $17.9 million for
the quarter ended June 30, 2004 and $17.3 million for the quarter ended June 30, 2003.
See note 14 to the consolidated financial statements contained in the Company's annual report on Form 10-K for additional
information on certain relationships and related transactions.
Non-US Operations
With the acquisitions of the Claritas Europe group of companies and the Consodata acquisition, the Company now has a larger presence
in the United Kingdom and France, and a new presence in The Netherlands, Germany, Spain, Portugal and Poland. Most of the Company's
exposure to exchange rate fluctuation is due to translation gains and losses as there are no material transactions that cause
exchange rate impact. In general, each of the foreign locations is expected to fund its own operations and cash flows, although
funds may be loaned or invested from the U.S. to the foreign subsidiaries subject to limitations in the Company's revolving credit
facility. These advances are considered to be long-term investments, and any gain or loss resulting from changes in exchange rates
as well as gains or losses resulting from translating the foreign financial statements into U.S. dollars are included in accumulated
other comprehensive income . Exchange rate movements of foreign currencies may have an impact on the Company's future costs or on
future cash flows from foreign investments. The Company has not entered into any foreign currency forward exchange contracts or
other derivative instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
Critical Accounting Policies
We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America. These accounting principles require management to make certain judgments and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods. Consolidated financial statements in the Company's
2004 annual report include a summary of significant accounting policies used in the preparation of Acxiom's consolidated financial
statements. In addition, the Management's Discussion and Analysis filed as part of the 2004 annual report contains a discussion of
the policies which management has identified as the most critical because they require management's use of complex and/or
significant judgments. The following paragraphs are intended to update that discussion only for the critical accounting policies or
estimates which have materially changed since the date of the last annual report.
Revenue Recognition - The Company provides database management and IT outsourcing services under long-term arrangements. These
arrangements may require the Company to perform setup activities such as the design and build of a database for the customer
under the database management contracts and migration of the customer's IT environment under IT outsourcing contracts. In the
case of database management contracts, the customer does not acquire any ownership rights to the Company's intellectual
property used in the database and the database itself provides no benefit to the customer outside of the utilization of the
system during the term of the database management arrangement. In some cases, the arrangements also contain provisions
requiring customer acceptance of the setup activities prior to commencement of the ongoing services arrangement. Up-front fees
27
billed during the setup phase are deferred and setup costs that are direct and incremental to the contract are capitalized and
amortized on a straight-line basis over the service term of the contract. Revenue recognition does not begin until after
customer acceptance in cases where contracts contain acceptance provisions. Once the setup phase is complete and customer
acceptance occurs, the Company recognizes revenue over the remaining service term of the contract. In situations where the
arrangement does not require setup activities or customer acceptance before the Company begins providing services, revenue is
recognized over the contract period and no costs are deferred.
The Company accounts for all elements under its database management and IT outsourcing arrangements as a single unit, since the
initial setup activities performed under the arrangements do not have stand-alone value to the client and the Company is unable
to determine the relative fair values of the delivered elements and the undelivered elements. Therefore, when third party
software, hardware and certain other equipment are sold along with services, the Company records such sales over the related
service period. Additionally, the Company evaluates revenue from the sale of software, hardware and equipment in accordance
with the provisions of Emerging Issues Task Force ("EITF") Issue 99-19, "Reporting Revenue Gross as a Principal versus Net as
an Agent," to determine whether such revenue should be recognized on a gross or a net basis over the term of the related
service agreement. All of the factors in EITF 99-19 are considered with the primary factor being whether the Company is the
primary obligor in the arrangement. "Out-of-pocket" expenses incurred by, and reimbursed to, the Company in connection with
customer contracts are recorded as gross revenue in accordance with EITF Issue 01-14, "Income Statement Characterization of
Reimbursements Received for 'Out-of-Pocket' Expenses Incurred."
Many of the Company's database management and IT outsourcing arrangements include the provision of computer servers or other
equipment which is used in performing the services under the arrangement. The Company evaluates its database management and IT
outsourcing arrangements using the criteria in EITF 01-08, "Determining Whether an Arrangement Contains a Lease." EITF 01-08
became effective for new arrangements or modifications to existing arrangements occurring on or after July 1, 2003. EITF 01-08
requires the Company to determine whether an arrangement contains a lease within a services arrangement and, if so, requires
the lease component to be accounted for separately from the remaining components of the arrangements. The Company evaluates the
provisions of EITF 01-08 to determine first whether the equipment is the subject of a lease. If the equipment is determined to
be the subject of a lease, then the Company must separate the revenue under the arrangement into the amounts related to the
leased equipment and the amounts related to the other services to be provided, using management's best estimate of the relative
fair values of the lease component and the services component. The Company then determines whether the implicit lease to the
customer is a capital lease or an operating lease. If it is a sales-type capital lease the lease revenue is recognized up
front, along with the related cost of sales. In the case of an operating lease, the revenue is recognized on a straight-line
basis over the lease term.
The Company also performs services on a project basis outside of, or in addition to, the scope of long-term arrangements. The
Company recognizes revenue from these services as the services are performed.
Revenues from the licensing of data are recognized upon delivery of the data to the customer in circumstances where no update
or other obligations exist. Revenue from the licensing of data in which the Company is obligated to provide future updates on a
monthly, quarterly or annual basis is recognized on a straight-line basis over the license term. Revenue from the licensing of
data to the customer in circumstances where the license agreement contains a volume cap is recognized in proportion to the
total records to be delivered under the arrangement.
The Company accounts for revenue arrangements with multiple elements in accordance with EITF Issue No. 00-21, "Revenue
Arrangements with Multiple Elements." EITF 00-21 provides guidance on (a) how arrangement consideration should be measured, (b)
whether the arrangement should be divided into separate units of accounting, and (c) how the arrangement consideration should
be allocated among the separate units of accounting. EITF 00-21 also requires disclosure of the accounting policy for
recognition of revenue from multiple-deliverable arrangements and the description and nature of such arrangements. The guidance
of EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. There has
been no material impact to the Company from adoption of EITF 00-21.
In certain multiple element arrangements, including database management and IT outsourcing arrangements, the Company is unable
to assign fair values to the multiple elements. Therefore, when third-party software, hardware and certain other equipment are
sold along with services, the Company records such sales over the related service period. Included in the Company's
consolidated balance sheets are deferred revenues resulting from billings and/or client payments in advance of revenue
recognition.
28
In certain cases, such as hardware or software upgrades sold and/or licensed to existing clients where the Company has no
further obligations with respect to such upgrades or project work, management has determined that revenue recognition upon
delivery of the hardware or software to the client or upon completion of the project work is appropriate. The Company evaluates
revenue from the sale of software, hardware and equipment in accordance with the provisions of Emerging Issues Task Force
("EITF") Issue 99-19, "Reporting Revenue Gross as a Principal versus net as an Agent," to determine whether such revenues
should be recognized on a gross or a net basis over the term of the related service agreement. Each factor in EITF 99-19 is
evaluated, with the primary factor being whether the Company is the primary obligor in the arrangement.
In general, the Company provides services rather than products and, therefore, does not provide end-users with price-protection
or rights of return. The Company's contracts provide a warranty that the services will meet the agreed-upon criteria or any
necessary modifications will be made. The Company ensures that services or products delivered meet the agreed-upon criteria
prior to recognition of revenue.
Valuation of Long-Lived Assets and Goodwill - 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 the undiscounted
cash flows expected to result from the use and eventual disposition of the asset. In cases where cash flows cannot be
associated with individual assets, assets are grouped together in order to associate cash flows with the asset group. If such
assets or asset groups 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.
Goodwill represents the excess of acquisition costs over the fair values of net assets acquired in business combinations
treated as purchase transactions. Under the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is not
amortized, but is reviewed annually for impairment under a two-part test. In the event that part one of the impairment test
indicates potential impairment of goodwill, performance of part two of the impairment test is required. Any impairment that
results from the completion of the two-part test is recorded as a charge to operations during the period in which the
impairment test is completed. The Company performs its annual goodwill impairment evaluation as of the beginning of its fiscal
year. The Company has completed part one of an annual, two-part impairment analysis of its goodwill and has determined that no
impairment of its goodwill existed as of April 1, 2004. Accordingly, step two of the goodwill impairment test was not required
for fiscal 2005. Changes in circumstances may require the Company to perform impairment testing on a more frequent basis. No
assurance can be given by the Company that additional impairment tests will not require an impairment charge during future
periods should circumstances indicate that the Company's goodwill balances are impaired.
In completing step one of the test and making the assessment that no potential impairment of the Company's goodwill existed,
management has made a number of estimates and assumptions. In particular, the growth and discount rates used by management in
determining the fair value of each of the Company's reporting units through a discounted cash flow analysis significantly
affect the outcome of the impairment test, as well as numerous other factors. In performing step one of the impairment
analysis, management has used growth rates ranging from 5 percent up to 300 percent for the International segment and 5 percent
up to 15 percent for all other segments and used a discount rate of 12 percent for all segments, representing an approximation
of the Company's weighted-average cost of capital, which resulted in a sizable excess of fair value over the net assets of each
of the Company's reporting units. Assuming the same growth rates, a discount rate of greater than 20 percent would be necessary
to indicate potential impairment of at least a portion of the Company's goodwill balances, resulting in the need to proceed to
step two of the impairment test. Assuming the 12 percent discount rate but assuming no growth for the US segments and only 3
percent growth for the International segment would also not indicate impairment. Additionally, the Company has determined that
its reporting units should be aggregated up to reportable segments for use in analyzing its goodwill and assessing any
potential impairment thereof, on the basis of similar economic characteristics in accordance with the guidance in SFAS No. 131
and SFAS No. 142. However, should a determination be made that such aggregation of some or all of the Company's reporting units
is not appropriate, the results of step one of the goodwill impairment test might indicate that potential impairment does
exist, requiring the Company to proceed to step two of the test and possibly recording an impairment of its goodwill.
29
Forward-looking Statements
This document and other written reports and oral statements made from time to time by the Company and its representatives contain
forward-looking statements. 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, growth opportunities, economic conditions, and other similar forecasts and statements of expectation. The Company
generally indicates these statements by words or phrases such as "anticipate," "estimate," "plan," "expect," "believe," "intend,"
"foresee," and similar words or phrases. These forward-looking statements are not guarantees of future performance and are subject
to a number of factors and uncertainties that could cause the Company's actual results and experiences to differ materially from the
anticipated results and expectations expressed in such forward-looking statements.
The factors and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the
forward-looking statements include but are not limited to the following:
o the possibility that certain contracts may not be closed or close within the anticipated time frames;
o the possibility that certain contracts may not generate the anticipated revenue or profitability;
o the possibility that negative changes in economic or other conditions might lead to a reduction in demand for the Company's
products and services;
o the possibility that the recovery from the previous three years' economic slowdown may take longer than expected or that
economic conditions in general will not be as expected;
o the possibility that significant clients may experience extreme, severe economic difficulty;
o the possibility that the fair value of certain assets may not be equal to the carrying value of those assets now or in
future time periods;
o the possibility that sales cycles may lengthen;
o the possibility that the Company may not be able to attract and retain qualified technical and leadership associates, or
that we may lose key associates to other organizations;
o the possibility that the Company won't be able to properly motivate the sales force or other associates;
o the possibility that the Company won't be able to achieve cost reductions and avoid unanticipated costs;
o the possibility that the Company won't be able to continue to receive credit upon satisfactory terms and conditions;
o the possibility that competent, competitive products, technologies or services will be introduced into the marketplace by
other companies;
o the possibility that the Company may be subjected to pricing pressure due to market conditions and/or competitive products
and services;
o the possibility that there will be changes in consumer or business information industries and markets;
o the possibility that the Company won't be able to protect proprietary information and technology or to obtain necessary
licenses on commercially reasonable terms;
o the possibility that the Company may encounter difficulties when entering new markets or industries;
o the possibility that there will be changes in the legislative, accounting, regulatory and consumer environments affecting
the business, including but not limited to litigation, legislation, regulations and customs relating to the
Company's ability to collect, manage, aggregate and use data;
o the possibility that data suppliers might withdraw data from the Company, leading to an inability to provide certain
products and services;
o the possibility that the Company may enter into short-term contracts which would affect the predictability of revenues;
o the possibility that the amount of ad hoc, volume-based and project work will not be as expected;
o the possibility that the Company may experience a loss of data center capacity or interruption of telecommunication links
or power sources;
o the possibility that postal rates may increase, thereby leading to reduced volumes of business;
o the possibility that clients may cancel or modify or not renew their agreements with the Company;
30
o the possibility that the services of the United States Postal Service, their global counterparts and other delivery systems
may be disrupted;
o the possibility that the integration of any recently acquired businesses may not be successful;
o with respect to the provision of products or services outside the Company's primary base of operations in the U. S., all of
the above factors apply, along with fluctuations in currency exchange rates and the difficulty of doing business in
numerous sovereign jurisdictions due to differences in culture, laws and regulations;
o the other risks described under the caption "Risk Factors" in the "Business" section of the Company's Annual Report on Form
10-K; and
o the possibility that the Company may be affected by other competitive factors.
In light of these risks, uncertainties and assumptions, the Company cautions readers not to place undue reliance on any
forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements based
on the occurrence of future events, the receipt of new information or otherwise.
31
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Acxiom's earnings are affected by changes in short-term interest rates primarily as a result of its revolving credit agreement,
which bears interest at a floating rate. Acxiom does not use derivative or other financial instruments to mitigate the interest rate
risk. Risk can be estimated by measuring the impact of a near-term adverse movement of 10% in short-term market interest rates. If
short-term market interest rates average 10% more during the next four quarters than during the previous four quarters, there would
be no material adverse impact on Acxiom's results of operations. Acxiom has no material future earnings or cash flow expenses from
changes in interest rates related to its other long-term debt obligations as substantially all of Acxiom's remaining long-term debt
instruments have fixed rates. At both June 30, 2004 and March 31, 2004, the fair value of Acxiom's fixed rate long-term obligations
approximated carrying value.
As noted in note 3 to the condensed, consolidated financial statements, the Company completed the acquisition of Claritas Europe in
January 2004 and Consodata in March and April, 2004. As a result of these acquisitions, the Company now has a larger presence in the
United Kingdom and France and new presence in The Netherlands, Germany, Spain, Portugal and Poland. In general, each of the foreign
locations is expected to fund its own operations and cash flows, although funds may be loaned or invested from the U.S. to the
foreign subsidiaries. Therefore, exchange rate movements of foreign currencies may have an impact on Acxiom's future costs or on
future cash flows from foreign investments. Acxiom has not entered into any foreign currency forward exchange contracts or other
derivative instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
An evaluation as of the end of the period covered by this quarterly report was carried out under the supervision and with
the participation of the Company's management, including the Company Leader (Chief Executive Officer) and Financial
Operations Leader (Chief Financial Officer), of the effectiveness of the design and operation of the Company's "disclosure
controls and procedures," which are defined under SEC rules as controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported within required time periods. Based upon that evaluation, the Company Leader
and Financial Operations Leader concluded that the Company's disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
The Company's management, including the Company Leader (Chief Executive Officer) and the Financial Operations Leader (Chief
Financial Officer), has evaluated any changes in the Company's internal control over financial reporting that occurred
during the quarterly period covered by this report, and has concluded that there was no change during the quarterly period
covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various claims and litigation matters that arise in the ordinary course of the business. None of
these, however, are believed to be material in their nature or scope.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
The table below provides information regarding purchases by Acxiom of its Common Stock during the periods indicated.
Total Number of Shares Maximum Number (or Approximate
Total Number Average Price Purchased as Part of Dollar Value) of Shares that May
of Shares Paid Publicly Announced Plans Yet Be Purchased Under the Plans
Period Purchased Per Share or Programs or Programs
------------------ ------------ ----------------- -------------------------- ------------------------------------
4/1/01 -- 4/30/04 147,500 $ 23.29 147,500 $ 30,359,866
5/1/04 -- 5/31/04 330,000 22.84 330,000 22,823,176
6/1/04 -- 6/30/04 - - - 22,823,176
------------ ----------------- -------------------------- ------------------------------------
Total 477,500 $ 22.98 477,500 $ 22,823,176
============================== ========================== ====================================
The repurchases listed above were made pursuant to a repurchase program adopted by the Board of Directors on October 30,
2002, at which time the Board authorized the repurchase of up to $50 million worth of shares of Acxiom's Common Stock. On
February 5, 2003 the Board increased the cap to $75 million; on May 21, 2003 the Board increased the cap to $125 million;
and on May 26, 2004 the Board increased the cap to $200 million, subject to lender approvals. Lender approval currently
limits repurchases to $125 million, which is the amount used in the table above to calculate the value of stock that may
yet be purchased. The repurchase program has no designated expiration date.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this Report:
31.1 Certification of Company Leader (principal executive officer) pursuant to SEC Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Sections 302 and 404 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Company Financial Operations Leader (principal financial and accounting officer) pursuant
to SEC Rule 13a-14(a)/15d-14(a), as adopted pursuant to Sections 302 and 404 of the Sarbanes-Oxley Act of
2002
32.1 Certification of Company Leader (principal executive officer) pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Company Financial Operations Leader (principal financial and accounting officer) pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
A report was furnished on May 12, 2004, which reported the results of the Company's financial performance for the
fourth quarter and fiscal year ending March 31, 2004.
A report was furnished on June 23, 2004, which reported reclassifications of the Company's statement of operations
format to provide consolidated revenue along with revenue and cost of revenue for services and data. Such
reclassifications had no effect on net earnings as previously reported in the Company's 10-K filed on June 14,
2004.
33
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: August 6, 2004
By: /s/ Jefferson D. Stalnaker
---------------------------------------
(Signature)
Jefferson D. Stalnaker
Company Financial Operations Leader
(principal financial and accounting officer)
34