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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 September 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)
(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 November 1, 2004 was
86,287,525.
1
ACXIOM CORPORATION AND SUBSIDIARIES
INDEX
REPORT ON FORM 10-Q
September 30, 2004
Part I. Financial Information Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2004 and March 31, 2004 (Unaudited) ....... 3
Condensed Consolidated Statements of Earnings for the Three Months ended
September 30, 2004 and 2003 (Unaudited) ........................................................... 4
Condensed Consolidated Statements of Earnings for the Six Months ended
September 30, 2004 and 2003 (Unaudited) ........................................................... 5
Condensed Consolidated Statements of Cash Flows for the Six Months ended
September 30, 2004 and 2003 (Unaudited)............................................................ 6 - 7
Notes to the Condensed Consolidated Financial Statements (Unaudited):
1. Basis of presentation and summary of significant accounting principles........................... 8
2. Restructuring, impairment and other charges...................................................... 8
3. Acquisitions and investments..................................................................... 9 - 10
4. Other current and noncurrent assets.............................................................. 10
5. Goodwill......................................................................................... 11
6. Long-term obligations............................................................................ 12
7. Stockholders' equity............................................................................. 13 - 14
8. Allowance for doubtful accounts.................................................................. 14
9. Segment information.............................................................................. 14 - 15
10. Comprehensive income ............................................................................ 15
11. Commitments and contingencies.................................................................... 15 - 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation........ 17 - 32
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 33
Item 4. Controls and Procedures..................................................................... 33
Part II. Other Information
Item 1. Legal Proceedings........................................................................... 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................. 34
Item 4. Submission of Matters to a Vote of Security Holders......................................... 34
Item 6. Exhibits.................................................................................... 35
Signature................................................................................................. 36
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
September 30, March 31,
2004 2004
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,140 $ 14,355
Trade accounts receivable, net 236,862 212,387
Deferred income taxes 14,288 14,032
Refundable income taxes 915 2,280
Other current assets 48,136 43,272
------------------- ------------------
Total current assets 310,341 286,326
Property and equipment, net of accumulated depreciation and amortization 292,878 267,088
Software, net of accumulated amortization 60,214 64,553
Goodwill 312,168 282,971
Purchased software licenses, net of accumulated amortization 152,206 157,217
Unbilled and notes receivable, excluding current portions 15,675 13,030
Deferred costs, net 84,210 88,096
Data acquisition costs, net 45,009 36,557
Other assets, net 13,273 19,946
------------------- ------------------
$ 1,285,974 $ 1,215,784
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations $ 79,585 $ 73,245
Trade accounts payable 50,778 41,527
Accrued expenses:
Restructuring 190 2,881
Payroll 23,791 23,979
Other 70,902 63,411
Deferred revenue 86,053 91,060
------------------- ------------------
------------------- ------------------
Total current liabilities 311,299 296,103
------------------- ------------------
Long-term obligations:
Long-term debt and capital leases, net of current installments 265,830 239,327
Software and data licenses, net of current installments 41,268 54,130
------------------- ------------------
Total long-term obligations 307,098 293,457
------------------- ------------------
Deferred income taxes 58,892 39,008
Commitments and contingencies (note 11)
Stockholders' equity:
Common stock 9,352 9,226
Additional paid-in capital 384,615 361,256
Retained earnings 332,972 308,487
Accumulated other comprehensive income 3,608 2,940
Treasury stock, at cost (121,862) (94,693)
------------------- ------------------
Total stockholders' equity 608,685 587,216
------------------- ------------------
$ 1,285,974 $ 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
September 30,
--------------------------------------
2004 2003
------------------- ------------------
Revenue:
Services $ 220,072 $ 190,098
Data 79,037 50,998
------------------- ------------------
Total revenue 299,109 241,096
Operating costs and expenses:
Cost of revenue:
Services 168,950 154,429
Data 49,768 36,556
------------------- ------------------
Total cost of revenue 218,718 190,985
Selling, general and administrative 46,020 27,395
------------------- ------------------
Total operating costs and expenses 264,738 218,380
------------------- ------------------
Income from operations 34,371 22,716
------------------- ------------------
Other income (expense):
Interest expense (4,743) (4,889)
Other, net 205 121
------------------- ------------------
Total other income (expense) (4,538) (4,768)
------------------- ------------------
Earnings before income taxes 29,833 17,948
Income taxes 11,337 6,731
------------------- ------------------
Net earnings $ 18,496 $ 11,217
=================== ==================
Earnings per share:
Basic $ 0.22 $ 0.13
=================== ==================
Diluted $ 0.20 $ 0.13
=================== ==================
See accompanying notes to condensed consolidated financial statements.
4
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
For the Six Months ended
September 30,
--------------------------------------
2004 2003
------------------- ------------------
Revenue:
Services $ 427,919 $ 382,612
Data 160,184 95,166
------------------- ------------------
Total revenue 588,103 477,778
Operating costs and expenses:
Cost of revenue:
Services 332,499 313,184
Data 101,587 71,193
------------------- ------------------
Total cost of revenue 434,086 384,377
Selling, general and administrative 94,549 60,459
Gains, losses and nonrecurring items, net (344) (1,008)
------------------- ------------------
Total operating costs and expenses 528,291 443,828
------------------- ------------------
Income from operations 59,812 33,950
------------------- ------------------
Other income (expense):
Interest expense (9,813) (9,654)
Other, net 614 886
------------------- ------------------
Total other income (expense) (9,199) (8,768)
------------------- ------------------
Earnings before income taxes 50,613 25,182
Income taxes 19,233 2,702
------------------- ------------------
Net earnings $ 31,380 $ 22,480
=================== ==================
Earnings per share:
Basic $ 0.36 $ 0.26
=================== ==================
Diluted $ 0.34 $ 0.25
=================== ==================
See accompanying notes to condensed consolidated financial statements.
5
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the Six Months ended
September 30,
--------------------------------------
2004 2003
------------------- ------------------
Cash flows from operating activities:
Net earnings $ 31,380 $ 22,480
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation, amortization and impairment of long-lived assets 89,099 71,036
Gain on disposal of assets, net - (1,008)
Deferred income taxes 19,548 (6,742)
Changes in operating assets and liabilities:
Accounts receivable (26,149) 4,810
Other assets (8,446) 8,827
Accounts payable and other liabilities (6,285) (815)
Restructuring and impairment costs (2,691) (554)
------------------- ------------------
Net cash provided by operating activities 96,456 98,034
------------------- ------------------
Cash flows from investing activities:
Proceeds received from the disposition of operations - 7,684
Proceeds received from the disposition of assets - 698
Payments received from investments 503 1,360
Capitalized software development costs (8,828) (13,631)
Capital expenditures (6,636) (4,624)
Deferral of costs (20,723) (10,032)
Investments in joint ventures and other investments - (5,000)
Net cash paid in acquisitions (16,741) -
------------------- ------------------
Net cash used by investing activities (52,425) (23,545)
------------------- ------------------
Cash flows from financing activities:
Proceeds from debt 98,129 82,473
Payments of debt (135,609) (110,888)
Dividends paid (6,895) -
Sale of common stock 23,671 6,709
Acquisition of treasury stock (27,368) (54,697)
------------------- ------------------
Net cash used by financing activities (48,072) (76,403)
------------------- ------------------
Effect of exchange rate changes on cash (174) 72
------------------- ------------------
Net decrease in cash and cash equivalents (4,215) (1,842)
Cash and cash equivalents at beginning of period 14,355 5,491
------------------- ------------------
Cash and cash equivalents at end of period $ 10,140 $ 3,649
=================== ==================
6
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Dollars in thousands)
For the Six Months ended
September 30,
--------------------------------------
2004 2003
------------------- ------------------
Supplemental cash flow information:
Cash paid (received) during the period for:
Interest $ 9,888 $ 10,302
Income taxes 497 (1,556)
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 5,967 9,212
Acquisition of property and equipment under capital leases and installment
payment arrangements 39,070 31,334
Construction of assets under construction loan 13,111 2,610
See accompanying notes to condensed consolidated financial statements.
7
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 year's net earnings as previously reported.
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
six months ended September 30, 2004 the Company recorded $0.5 million of additional restructuring charges for
associate-related termination cost. The following table shows the balances that were accrued at March 31, 2004
as well as the changes in those balances during the six months ending September 30, 2004 (dollars in thousands):
Associate-related
reserves Other accruals Total
------------------ ------------------- ------------------
Balance at March 31, 2004 $ 2,581 $ 300 $ 2,881
Additional charges 525 - 525
Payments (2,916) (300) (3,216)
------------------ ------------------- ------------------
September 30, 2004 $ 190 $ - $ 190
================== =================== ==================
8
3. ACQUISITIONS AND INVESTMENTS
Subsequent to September 30, 2004 the Company acquired ChinaLOOP, a pioneering business intelligence, customer
relationship management and data management company. ChinaLOOP provides data, database management and data
services to a number of Asian and international clients from its headquarters in Shanghai and additional
operations in Beijing. ChinaLOOP's clients include a number of China-based and multi-national companies,
including Diageo, Financial Times, Nokia, Total, Citroen and Johnson & Johnson. The purchase price was
approximately $7.0 million consisting of $5.5 million paid in cash (net of cash acquired) and warrants with an
estimated value of $1.5 million. The warrants provide for the purchase of 100,000 shares of the Company's stock
at a price of $15 on or after November 1, 2007. Exercise of the warrants is contingent on certain performance
criteria of the acquired business. The warrants also provide the warrant holders with the right to sell the
warrant stock back to the Company upon exercise of the warrants on or after November 1, 2009 at a price of $30
per share. The warrants expire October 24, 2014. The operations of the acquired business will be included in
the Company's operations beginning November 1, 2004. The acquired company's revenue is currently approximately
$2 million per year.
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 $26.9 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
six months ending September 30, 2004, net adjustments to increase goodwill were made relating to the Consodata
companies, excluding the German operations, of $.7 million and relating to the Claritas Europe companies of $3.5
million.
Additionally, during the six months ended September 30, 2004 the Company made additional payments in the amount
of $7.4 million to the former owners of Claritas Europe, as a result of the preliminary determination of
purchased working capital. Also, the Company has made a tender offer to the minority shareholders of Consodata
France, under which it has paid approximately $2.8 million for the minority shareholders' interests. The Company
expects to pay up to approximately $1.2 million for the remaining minority shareholders' interests. In addition,
the Company has paid legal and other professional fees related to the two acquisitions of approximately $1.5
million since March 31, 2004. These additional purchase price payments have been and 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.
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 six months ending September 30, 2004
(dollars in thousands):
Consodata Claritas
------------------- ------------------
Assets acquired:
Cash $ 5,578 $ 12,097
Goodwill 43,353 40,033
Other Intangible assets 1,734 8,677
Other current and noncurrent assets 22,154 41,707
------------------- ------------------
72,819 102,514
Accounts payable, accrued expenses and capital leases assumed 30,988 54,347
------------------- ------------------
Net assets acquired 41,831 48,167
Less cash acquired 5,578 12,097
------------------- ------------------
Net cash paid $ 36,253 $ 36,070
=================== ==================
9
As a result of both the Claritas Europe and Consodata acquisitions, management has executed plans to consolidate
certain facilities, eliminate duplicative operations, and terminate or relocate certain associates. In the
fiscal year ended March 31, 2004, the Company recorded aggregate accruals in other accrued expenses 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 six months ended
September 30, 2004 the Company recorded additional accruals and adjustments of $5.2 million, partially associated
with the April 2004 acquisition of the Consodata German operations, and made payments against the accruals of
$4.5 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 included in other accrued expenses during the period
(dollars in thousands):
Total
------------------
March 31, 2004 $ 14,535
Additional accruals 5,173
Payments (4,549)
------------------
September 30, 2004 $ 15,159
==================
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 $11.1 million and $15.5 million at September 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).
September 30, March 31,
2004 2004
------------------ -------------------
Notes receivable from DMI, net of future credits of $2.5 million at September 30, $ 8,055 $ 8,271
2004 and $2.7 million at March 31, 2004
Notes receivable from other divestitures, net of allowance for uncollectible
note of $.9 million at September 30, 2004 and March 31, 2004 3,958 4,160
------------------ -------------------
Notes receivable from divestitures 12,013 12,431
Less current portion 3,596 5,823
------------------ -------------------
Long-term portion 8,417 6,608
------------------ -------------------
Unbilled and notes receivable arising from operations 14,795 16,144
Less current portion 7,537 9,722
------------------ -------------------
Long-term portion 7,258 6,422
------------------ -------------------
Unbilled and notes receivable, excluding current portions $ 15,675 $ 13,030
================== ===================
Other noncurrent assets consist of the following (dollars in thousands):
September 30, March 31,
2004 2004
------------------ -------------------
Investments in joint ventures and other investments, net of unrealized $ 7,837 $ 8,181
gain or loss on available-for-sale marketable securities
Other, net 5,436 11,765
------------------ -------------------
$ 13,273 $ 19,946
================== ===================
10
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 presentation.
The changes in the carrying amount of goodwill, by business segment, for the six months ended September 30, 2004
are as follows (dollars in thousands):
International
US Services Services and IT
and Data Data Management Total
------------------ ------------------- ------------------ -------------------
Balance at March 31, 2004 $ 126,565 $ 82,482 $ 73,924 $ 282,971
Acquisitions - 24,567 - 24,567
Change in foreign currency translation
adjustment - 430 - 430
Adjustment of previously recorded goodwill - 4,200 - 4,200
------------------ ------------------- ------------------ -------------------
Balance at September 30, 2004 $ 126,565 $ 111,679 $ 73,924 $ 312,168
================== =================== ================== ===================
11
6. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (dollars in thousands):
September 30, March 31,
2004 2004
------------------ -------------------
Convertible subordinated notes due February 2009; interest at 3.75% $ 174,998 $ 175,000
Revolving credit agreement 22,440 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 96,817 79,448
Other debt and long-term liabilities 31,727 21,539
------------------ -------------------
Total long-term debt and capital leases 325,982 292,190
Less current installments 60,152 52,863
------------------ -------------------
Long-term debt, excluding current installments $ 265,830 $ 239,327
================== ===================
Software license liabilities payable over terms up to seven years;
effective interest rates at approximately 7% $ 54,416 $ 62,437
Long-term data license agreement with related party, due over two years;
interest at 6% 6,285 12,075
------------------ -------------------
Total license liabilities 60,701 74,512
Less current installments 19,433 20,382
------------------ -------------------
License liabilities, excluding current installments $ 41,268 $ 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 $22.4 million at
September 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 September 30, 2004 and March
31, 2004 borrowings under the revolving credit facility were 3.29% and 2.74%, respectively. Outstanding letters
of credit at September 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 September 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 September 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 For the six months ended
September 30, September 30,
------------------------------------- --------------------------------------
2004 2003 2004 2003
------------------ ------------------ ------------------- ------------------
Basic earnings per share:
Numerator - net earnings $ 18,496 $ 11,217 $ 31,380 $ 22,480
Denominator - weighted-average shares
outstanding 86,010 85,236 86,047 85,839
------------------ ------------------ ------------------- ------------------
Basic earnings per share $ 0.22 $ 0.13 $ 0.36 $ 0.26
================== ================== =================== ==================
Diluted earnings per share:
Numerator:
Net earnings $ 18,496 $ 11,217 $ 31,380 $ 22,480
Interest expense on convertible
debt (net of tax benefit) 1,017 1,026 2,034 2,051
------------------ ------------------ ------------------- ------------------
19,513 12,243 33,414 24,531
------------------ ------------------ ------------------- ------------------
Denominator:
Weighted-average shares outstanding 86,010 85,236 86,047 85,839
Dilutive effect of common stock
options and warrants, as computed
under the treasury stock method 3,464 1,937 3,709 1,770
Dilutive effect of convertible
debt, as computed under the
if-converted method 9,589 9,589 9,589 9,589
------------------ ------------------ ------------------- ------------------
99,063 96,762 99,345 97,198
------------------ ------------------ ------------------- ------------------
Diluted earnings per share $ 0.20 $ 0.13 $ 0.34 $ 0.25
================== ================== =================== ==================
At September 30, 2004, the Company had options and warrants outstanding providing for the purchase of
approximately 20.3 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 For the six months ended
September 30, September 30,
------------------------------------- --------------------------------------
2004 2003 2004 2003
------------------ ------------------ ------------------- ------------------
Excluded number of shares under options and 6,578 12,716 6,257 13,162
warrants
Range of exercise prices $22.50 - $62.06 $16.35- $62.06 $23.10 - $62.06 $14.82 - $62.06
================== ================== =================== ==================
13
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 For the six months ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net earnings, as reported $ 18,496 $ 11,217 $ 31,380 $ 22,480
Less: stock-based employee compensation expense under fair
value based method, net of income tax benefit 15,677 3,229 19,138 6,205
-------------- -------------- -------------- --------------
Pro forma net earnings $ 2,819 $ 7,988 $ 12,242 $ 16,275
============== ============== ============== ==============
Earnings per share:
Basic - as reported $ 0.22 $ 0.13 $ 0.36 $ 0.26
============== ============== ============== ==============
Basic - pro forma $ 0.03 $ 0.09 $ 0.14 $ 0.19
============== ============== ============== ==============
Diluted - as reported $ 0.20 $ 0.13 $ 0.34 $ 0.25
============== ============== ============== ==============
Diluted - pro forma $ 0.03 $ 0.09 $ 0.14 $ 0.19
============== ============== ============== ==============
During the quarter ended September 30, 2004, the Company's compensation committee voted to vest the unvested 2.1
million options which were out of the money with options prices greater than $22.33. This action caused the
increase in compensation expense noted above under SFAS No. 123 for the quarter ended September 30, 2004.
The per-share weighted-average fair value of stock options granted during the six months ended September 30, 2004
was $10.38 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 4.30%; expected option life of 10 years and
expected volatility of 31%. The per-share weighted-average fair value of stock options granted during the six
months ended September 30, 2003 was $10.11 on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions: dividend yield of 0%; risk-free interest rate of 4.45%; expected
option life of 10 years and expected volatility of 51%.
8. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are presented net of allowances for doubtful accounts, returns, and credits of $6.1
million and $6.3 million, respectively, at September 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.
14
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. Certain 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 For the six months ended
September 30, September 30,
------------------------------------- --------------------------------------
2004 2003 2004 2003
------------------ ------------------ ------------------- ------------------
Revenue:
US Services and Data $ 188,105 $ 169,031 $ 362,321 $ 331,141
International Services and Data 47,893 15,037 101,335 28,620
IT Management 69,325 60,967 133,342 122,912
Intercompany eliminations (6,214) (3,939) (8,895) (4,895)
------------------ ------------------ ------------------- ------------------
Total revenue $ 299,109 $ 241,096 $ 588,103 $ 477,778
================== ================== =================== ==================
Income from operations:
US Services and Data $ 28,300 $ 18,295 $ 45,133 $ 27,225
International Services and Data (607) 603 2,201 541
IT Management 7,548 4,028 13,300 5,552
Intercompany eliminations (870) (210) (1,166) (376)
Corporate and other - - 344 1,008
------------------ ------------------ ------------------- ------------------
Income from operations $ 34,371 $ 22,716 $ 59,812 $ 33,950
================== ================== =================== ==================
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 $3.6 million at September 30, 2004 and $2.9 million at March 31,
2004. Total comprehensive income was $20.0 million and $11.2 million for the quarters ended September 30, 2004
and 2003 respectively and $32.0 million and $24.7 million for the six months ended September 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
15
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 its response to the incidents and its
cooperation 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.
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
$214.5 million and the Company has a future commitment for lease payments of $34.0 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 $8.8 million at September 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 $3.6 million at September 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 September 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.
16
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 ("CDI") technology and
services, 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, China and Japan.
The Company is aligned 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 $299.1 million, up 24 percent from $241.1 million in the second quarter a year ago.
Acquisitions contributed 12 percentage points of this 24 percentage-point growth in revenue.
o Income from operations of $34.4 million, an increase of 51 percent compared to $22.7 million in the
second quarter a year ago.
o Pre-tax earnings of $29.8 million, an increase of 66 percent compared to $17.9 million in the second
quarter a year ago.
o Diluted earnings per share of $0.20, up 54 percent from $0.13 the year before.
o For the six months ended September 30, 2004, operating cash flow of $96.5 million and free cash flow of
$60.3 million. The free cash flow of $60.3 million is a non-GAAP financial measure and a
reconciliation to the comparable GAAP measure, operating cash flow, is provided in the
discussion of Capital Resources and Liquidity - Working Capital and Cash Flow.
o New contracts that are expected to deliver $43 million in annual revenue and renewals that are expected
to deliver a total of $71 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 September 30, 2004. However, these highlights are not intended to be a
full discussion of the Company's results for the quarter or the six months ended September 30, 2004. 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.
17
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 For the six months ended
September 30 September 30,
-------------------------------------------- --------------------------------------------
2004 2003 % Change 2004 2003 % Change
-------------- -------------- -------------- -------------- -------------- --------------
Revenue
Services $ 220.1 $ 190.1 + 15.8% $ 427.9 $ 382.6 + 11.8%
Data 79.0 51.0 + 55.0 160.2 95.2 + 68.3
-------------- -------------- -------------- -------------- -------------- --------------
$ 299.1 $ 241.1 + 24.1% $ 588.1 $ 477.8 + 23.1%
Total operating costs and
expenses 264.7 218.4 + 21.2 528.3 443.8 + 19.0
Income from operations 34.4 22.7 + 51.3 59.8 34.0 + 76.2
Diluted earnings per share 0.20 0.13 + 53.8 0.34 0.25 + 36.0
============== ============== ============== ============== ============== ==============
Revenues
For the quarter ended September 30, 2004, the Company's revenue was $299.1 million, compared to revenue of $241.1
million in the quarter ended September 30, 2003, reflecting an increase of $58.0 million or 24.1 %. The
acquisitions of Claritas Europe and Consodata completed in the fourth quarter of fiscal 2004 and the first quarter
of fiscal 2005 contributed 12.0 percentage points of the 24.1% increase while revenue from existing business
accounted for the rest of the growth. Services revenue increased $30.0 million, or 15.8%, while data revenue
increased $28.0 million, or 55.0%. The increase in services revenue is primarily attributable to increases in
revenue of $11.2 million from clients in the financial services, media and publishing, automotive and background
screening industries, an increase of $8.4 million in IT Management revenue, an increase of $2.5 million in the UK
fulfillment operation, and an increase in revenue of $3.1 million related to the Claritas Europe and Consodata
acquisitions. All other industries combined resulted in a net $4.8 million increase. The industry revenue
figures do not include revenue from the European acquisitions, as these revenues are not broken out by industry.
The increase in data revenue is primarily attributable to the acquisitions of Claritas Europe and Consodata,
which together contributed $25.9 million of data revenue during the second quarter, with additional increases
from the Infobase suite of products and from Allstate Insurance Company.
For the six months ended September 30, 2004, the Company's revenue of $588.1 million, increased $110.3 million,
or 23.1%, when compared to revenue of $477.8 million in the six months ended September 30, 2003. Acquisitions,
net of divestitures, contributed 12.7% of this 23.1% increase. Services revenue for the six months ended
September 30, 2004 increased $45.3 million, or 11.8%, while data revenue increased $65.0 million, or 68.3% . The
increase in services revenue is primarily attributable to increases in revenue of $17.0 million from clients in
the financial services, media and publishing, automotive, background screening and healthcare industries, an
increase of $10.4 million in IT Management revenue, an increase of $5.4 million in the UK fulfillment operation,
and an increase in revenue of $7.7 million related to the acquisitions. All other industries combined resulted
in a net $4.8 million increase. The increase in data revenue is primarily attributable to the acquisitions,
which together contributed $57.5 million of data revenue, with additional increases from the Infobase suite of
products and from Allstate Insurance Company.
During the quarter ended September 30, 2004 new contracts were signed which are expected to contribute annual
revenue of $43 million and contract renewals are expected to generate $71 million in annual revenue. The Company
renewed substantially all contracts which came up for renewal during the quarter.
18
The following table shows the Company's revenue by business segment for each of the periods presented below
(dollars in millions):
For the quarter ended For the six months ended
September 30, September 30,
-------------------------------------------- --------------------------------------------
2004 2003 % Change 2004 2003 % Change
-------------- -------------- -------------- -------------- -------------- --------------
US Services and Data $ 188.1 $ 169.0 + 11.3% $ 362.3 $ 331.2 + 9.4%
International Services and Data 47.9 15.0 + 218.5 101.3 28.6 + 254.1
IT Management 69.3 61.0 + 13.7 133.4 122.9 + 8.5
Intercompany eliminations (6.2) (3.9) + 57.8 (8.9) (4.9) + 81.7
-------------- -------------- -------------- -------------- -------------- --------------
Total Revenue $ 299.1 $ 241.1 + 24.1% $ 588.1 $ 477.8 + 23.1%
============== ============== ============== ============== ============== ==============
US Services and Data segment revenue for the quarter ended September 30, 2004 increased $19.1 million or 11.3%
over the quarter ended September 30, 2003 and includes increases of $12.3 million from clients in the financial
services, media and publishing, automotive and background screening industries. All other industries combined
resulted in a net $6.8 million increase. US Services and Data segment revenue for the six months ended
September 30, 2004 increased $31.2 million or 9.4% over the six months ended September 30, 2003 and includes
increases of $22.5 million from clients in the financial services, media and publishing, automotive, background
screening, insurance, healthcare and government industries. All other industries combined resulted in a net $8.7
million increase.
International Services and Data segment revenue for the quarter ended September 30, 2004 increased $32.9 million
or 218.5% over the quarter ended September 30, 2003. The increase is primarily attributable to the acquisitions
of Claritas Europe and Consodata, which contributed $29.0 million of revenue during the quarter. Additionally,
the Company's United Kingdom fulfillment operation had an increase in revenue of $2.5 million. International
Services and Data segment revenue for the six months ended September 30, 2004 increased $72.7 million or 254.1%
over the six months ended September 30, 2003. The increase is primarily attributable to the acquisitions of
Claritas Europe and Consodata, which contributed $65.3 million of revenue during the six month period.
Additionally, the company's United Kingdom fulfillment operation had an increase in revenue of $5.4 million.
IT Management segment revenue for the quarter ended September 30, 2004 increased $8.4 million or 13.7% over the
quarter ended September 30, 2003. The IT Management increase included $2.3 million in revenue which was also
reported as revenue by the US Services and Data segment, related mostly to new contracts with Services clients.
Additionally, the IT Management segment increased revenue due to a significant new contract signed during the
quarter, as well as increased revenue from existing clients. IT Management segment revenue for the six months
ended September 30, 2004 increased $10.4 million or 8.5% over the six months ended September 30, 2003. The
increase included $4.0 million in revenue which was also reported as revenue by the US Services and Data segment,
related mostly to new contracts with Services clients. Additionally, the IT Management segment increased revenue
due to a significant new contract signed during the second quarter, as well as increased revenue from existing
clients. These revenue gains were net of a decrease of $4.3 million due to the disposal of the Company's Los
Angeles outsourcing data center operation.
19
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 For the six months ended
September 30, September 30,
-------------------------------------------- --------------------------------------------
2004 2003 % Change 2004 2003 % Change
-------------- -------------- -------------- -------------- -------------- --------------
Cost of revenue
Services $ 169.0 $ 154.4 + 9.4% $ 332.5 $ 313.2 + 6.2%
Data 49.7 36.6 + 36.1 101.6 71.2 + 42.7
-------------- -------------- -------------- -------------- -------------- --------------
Total cost of revenue 218.7 191.0 + 14.5 434.1 384.4 + 12.9
-------------- -------------- -------------- -------------- -------------- --------------
Selling, general and
administrative 46.0 27.4 + 68.0 94.5 60.4 + 56.4
Gains, losses and
nonrecurring items, net - - - (.3) (1.0) - (65.9)
-------------- -------------- -------------- -------------- -------------- --------------
Total operating costs and
expenses $ 264.7 $ 218.4 + 21.2% $ 528.3 $ 443.8 + 19.0%
============== ============== ============== ============== ============== ==============
The cost of services for the quarter ended September 30, 2004 of $169.0 million increased $14.5 million or 9.4%
over the quarter ended September 30, 2003. Cost of services as a percent of services revenue decreased to 76.8%
in the quarter ended September 30, 2004 compared to 81.2% in the quarter ended September 30, 2003. The cost of
services increase during the quarter included $3.8 million of expense related to the Claritas Europe and
Consodata acquisitions. Additionally, cost of services was up related to the increase in the IT Management
segment revenue, and to the increase in the UK fulfillment operation revenue. Cost of services for the six
months ended September 30, 2004 increased $19.3 million or 6.2% compared to the six months ended September 30,
2003. Cost of services as a percent of services revenue decreased to 77.7% in the six months ended September 30,
2004 compared to 81.9% in the six months ended September 30, 2003. The cost of services increase during the
six-month period included $8.2 million of expense related to the Claritas Europe and Consodata acquisitions.
Additionally, cost of services was up related to the increase in the IT Management segment revenue, and to the
increase in the UK fulfillment operation revenue. 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 September 30, 2004 of $49.7 million increased
$13.2 million or 36.1% over the quarter ended September 30, 2003. Cost of data as a percent of data revenue was
63.0% and 71.7% in the quarters ended September 30, 2004 and 2003, respectively. The increase in these costs was
primarily attributable to the acquisitions of Claritas Europe and Consodata, which accounted for $11.6 million of
the increase. During the six months ending September 30, 2004 cost of data increased $30.4 million or 42.7% as
compared to the six months ending September 30, 2003. Cost of data as a percent of data revenue was 63.4% and
74.8% in the six months ending September 30, 2004 and 2003, respectively. The acquisitions of Claritas Europe
and Consodata accounted for $26.4 million of the increase in the cost of data, while the cost of data.
Gross profit margin for services improved to 23.2% in the quarter ended September 30, 2004 which compares with
18.8% for the quarter ended September 30, 2003. Gross profit margin for services of 22.3% in the six months
ended September 30, 2004 improved by 4.2% compared to the gross margin of 18.1% for the six months ended
September 30, 2003. The improvement in the gross profit margins is primarily attributable to revenue growth and
to continued focus on cost controls.
The gross profit margin for data was 37.0% in the quarter ended September 30, 2004 which compares with 28.3% for
the quarter ended September 30, 2003. In the six months ended September 30, 2004 the gross profit margin for
data of 36.6% increased by 11.4% over gross profit margin of 25.2% for the six months ended September 30, 2003.
The increase in the data gross profit margin is primarily due to the higher margin data business of the recently
acquired operations of Claritas Europe and Consodata.
In the quarter ended September 30, 2004 total cost of revenue increased $27.7 million or 14.5% as compared to an
increase of $58.0 million or 24.1% in total revenue. This resulted in a 26.9% total company gross profit margin
20
for the quarter ended September 30, 2004 which is a sizable 6.1% margin improvement when compared to a total
company gross profit margin of 20.8% for the quarter ended September 30, 2003. For the six months ending
September 30, 2004 total cost of revenue increased $49.7 million or 12.9% as compared to an increase of $110.3
million or 23.1% in total revenue. The 26.2% total company gross profit margin for the six months ended
September 30, 2004 resulted in a 6.7% margin improvement when compared to a total company gross profit margin of
19.5% for the six months ended September 30, 2003.
Selling, general and administrative expenses for the quarter ended September 30, 2004 of $46.0 million increased
$18.6 million or 68.0% over the quarter ended September 30, 2003. In the quarters ended September 30, 2004 and
2003 selling, general and administrative expense as a percent of total revenue was 15.4% and 11.4%,
respectively. In the six months ended September 30, 2004 and 2003 selling, general and administrative expense as
a percent of total revenue was 16.1% and 12.7%, respectively. The selling, general and administrative increase
included $12.8 million and $25.6 million of expenses related to the Claritas Europe and Consodata acquisitions
during the quarter and six months ending September 30, 2004, respectively.
Gains, losses and nonrecurring items of $0.3 million for the six months ended September 30, 2004 consisted of a
recovery from the Montgomery Wards bankruptcy of $0.9 million offset by restructuring charges and a small loss
relating to a divestiture. Gains, losses and nonrecurring items of $1.0 million for the six months ended
September 30, 2003 consisted of the gain on disposal of the Company's Los Angeles outsourcing data center
operations.
Operating Margins
Operating margin for the quarter ended September 30, 2004 was 11.5% compared to 9.4% for the quarter ended
September 30, 2003. Operating margins for the six months ended September 30, 2004 and September 30, 2003 were
10.2% and 7.1%, respectively reflecting 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 both the quarter and six months ended September 30, 2004 were about the same as in the
comparable period in the prior year. The Company's weighted-average interest rate on long-term debt was 4.7% at
both September 30, 2004 and at September 30, 2003.
Other, net of $.2 million for the quarter ended September 30, 2004 increased $.1 million compared to the quarter
ended September 30, 2003. In the six months ended September 30, 2004 Other, net decreased $.3 million to $.6
million from $.9 million in the six months ended September 30, 2003. Other, net consists primarily of interest
income on notes receivable.
The effective tax rate for the quarter and six months ended September 30, 2004 was 38%. Management expects the
effective tax rate for the year ended March 31, 2005 to also be approximately 38%. Tax expense for the six
months ended September 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.
21
Capital Resources and Liquidity
Working Capital and Cash Flow
Working capital at September 30, 2004 totaled a negative $1.0 million, compared to a negative $9.8 million at
March 31, 2004. The increase in working capital is due primarily to an increase in accounts receivable and other
current assets and a decrease in deferred revenue offset by an increase in accounts payable, accrued expenses and
current installments of long-term obligations.
Cash provided by operating activities was $96.5 million in the six months ended September 30, 2004 as compared to
$98.0 million in the six months ended September 30, 2003. The impact of net changes in operating assets and
liabilities decreased in the six months ended September 30, 2004 by $55.8 million compared to the impact in the
prior year primarily as a result of increases in accounts receivable and other assets in the current year
compared to decreases in the prior year.
Accounts receivable days sales outstanding ("DSO") was 73 days at September 30, 2004 and 70 days at March 31,
2004 and is calculated as follows (dollars in thousands):
September 30, March 31,
2004 2004
------------------ -------------------
Numerator - trade accounts receivable, net $ 236,862 $ 212,387
Denominator:
Quarter revenue 299,109 277,837
Number of days in quarter 92 91
------------------ -------------------
Average daily revenue $ 3,251 $ 3,053
------------------ -------------------
Days sales outstanding 73 70
================== ===================
Investing activities used $52.4 million in the six months ended September 30, 2004 compared to $23.5 million in
the corresponding prior period. Investing activities in the six months ended September 30, 2004 included
capitalized software development costs of $8.8 million compared to $13.6 million in the six months ended
September 30, 2003. Cost deferrals were $20.7 million in the six months ended September 30, 2004 compared to
$10.0 million in the six months ended September 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 $10.7 million in
fiscal 2005 primarily due to increases related to capitalization of data.
Investing activities in the six months ended September 30, 2004 reflected net cash paid for acquisitions of $5.0
million related to the acquisition in April 2004 of the Consodata German operations, $7.4 million paid to the
former owners of Claritas Europe as a result of the preliminary determination of purchased working capital, $2.8
million paid to acquire minority interests in Consodata France, and $1.5 million in fees related to the
acquisitions. Investing activities in the six months ended September 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 six months ended September 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 ($7.7 million at September 30, 2004).
22
As shown below, during the six months ending September 30, 2004 and 2003 the Company generated operating cash
flow of $96.5 million and $98.0 million respectively and free cash flow was $60.3 million and $70.4 million
respectively.
For the quarter ended For the six months ended
September 30, September 30,
----------------------------- -----------------------------
(Dollars in thousands) 2004 2003 2004 2003
-------------- -------------- ------------- ---------------
Operating cash flow $ 61,742 $ 49,909 $ 96,456 $ 98,034
Proceeds from the disposition of assets - 192 - 698
Capitalized software development costs (4,721) (7,296) (8,828) (13,631)
Capital expenditures (4,813) (3,036) (6,636) (4,624)
Deferral of costs (11,113) (4,006) (20,723) (10,032)
-------------- -------------- ------------- ---------------
Free cash flow $ 41,095 $ 35,763 $ 60,269 $ 70,445
============== ============== ============= ===============
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) 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 additional 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 six months ended September 30, 2004 used $48.1 million as compared to $76.4 million
in the six months ending September 30, 2003 primarily due to reduced levels of treasury stock acquisition and
increased sales of common stock. Proceeds from the sale of common stock through stock options and the employee
stock purchase plan were $23.7 million during the current period compared to $6.7 million in the six months ended
September 30, 2003. The Company also paid dividends of $6.9 million during the current fiscal year.
The Company also incurred long-term obligations through non-cash investing and financing activities during the
six months ended September 30, 2004 of $39.1 million for the acquisition of property and equipment under capital
leases and installment payment arrangements to service customers, $13.1 million for the construction of assets
under construction loans, and $6.0 million for software licenses acquired under software obligations. The
majority of property and equipment acquired under capital leases is tied to customers' contracts, matching the
cash inflows from the customers with the cash outflows for the leases.
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, for payments of dividends, and for other general corporate purposes.
23
Credit and Debt Facilities
The Company had available credit lines of $150 million of which $22.4 million was outstanding at September 30,
2004 compared to $16.2 million at March 31, 2004. The Company's debt-to-capital ratio, as calculated below, was
34% at September 30, 2004 and 33% at March 31, 2004 (dollars in thousands).
September 30, March 31,
2004 2004
------------------ -------------------
Numerator - long-term obligations, net of current installments $ 307,098 $ 293,457
------------------ -------------------
Denominator:
Long-term obligations, net of current installments 307,098 293,457
Stockholders' equity 608,685 587,216
------------------ -------------------
$ 915,783 $ 880,673
------------------ -------------------
Debt-to-capital ratio 34% 33%
================== ===================
The foregoing calculation of the debt-to-capital ratio excludes current maturities of long-term obligations in
the amounts of $79.6 million and $73.2 million at September 30, 2004 and March 31, 2004, respectively.
Included in long-term obligations at September 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 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 $8.8 million at September 30, 2004. Since the inception of the facility, the total amount drawn under these
synthetic operating lease facilities was $214.5 million, and as of September 30, 2004 the Company has a future
commitment for lease payments of $34.0 million over the next ten years.
The Company is near completion and has now occupied 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 $15.5 million and
construction is expected to be completed in the third quarter of fiscal 2005. 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 early fiscal 2006. Total construction cost of this facility is expected to be $16 million to $17
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 September 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 September 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 September 30, 2004
(dollars in thousands). The column for 2005 represents the six 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 $ 28,810 $ 29,548 $ 18,011 $ 5,335 $ 2,201 $ 12,912 $ 96,817
Software and data
license liabilities 5,875 20,067 14,082 13,745 6,932 - 60,701
Other long-term debt 17,554 1,749 23,360 920 185,582 - 229,165
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total long-term
obligations 52,239 51,364 55,453 20,000 194,715 12,912 386,683
------------ ------------- ------------ ------------ ------------ ------------ -------------
Operating lease and software
license obligations
Synthetic aircraft leases 1,511 3,022 3,022 3,022 3,022 11,389 24,988
Synthetic equipment and
furniture leases 4,663 3,000 964 402 - - 9,029
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total synthetic
operating leases 6,174 6,022 3,986 3,424 3,022 11,389 34,017
Equipment operating
leases 10,999 12,022 4,730 831 110 - 28,692
Building operating leases 9,174 16,667 15,914 14,512 11,648 65,075 132,990
Partnerships building
leases 1,065 2,123 2,134 2,144 2,155 43 9,664
Related party aircraft
lease 677 902 376 - - - 1,955
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total operating
lease payments 28,089 37,736 27,140 20,911 16,935 76,507 207,318
Operating software
license obligations 5,027 4,995 3,561 3,515 3,515 3,515 24,128
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total operating
lease and software
license obligations 33,116 42,731 30,701 24,426 20,450 80,022 231,446
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total contractual cash
obligations $ 85,355 $ 94,095 $ 86,154 $ 44,426 $ 215,165 $ 92,934 $ 618,129
============ ============= ============ ============ ============ ============ =============
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 1,644 2,497 464 1,862 - - 6,467
Other purchase commitments 71,799 28,113 23,296 18,244 5,551 9,707 156,710
------------ ------------- ------------ ------------ ------------ ------------ -------------
Total purchase commitments $ 73,443 $ 30,610 $ 23,760 $ 20,106 $ 5,551 $ 28,104 $ 181,574
============ ============= ============ ============ ============ ============ =============
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 $3.6 million at September 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 September 30, 2004 (dollars in thousands):
Residual value guarantee on the synthetic computer equipment and furniture lease $ 2,201
Residual value guarantee on synthetic aircraft lease 6,639
Residual value guarantee on related party aircraft lease 3,588
Guarantees on certain partnership and other loans 5,518
Outstanding letters of credit 2,673
The total of loans "on certain partnerships and other loans," of which the Company guarantees the portion noted
in the above table, are $13.6 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 facilities 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 might use
available borrowing capacity under its revolving credit agreement, followed by the issuance of other 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
Subsequent to September 30, 2004 the Company acquired ChinaLOOP, a pioneering business intelligence, customer
relationship management and data management company. ChinaLOOP provides data, database management and data
services to a number of Asian and international clients from its headquarters in Shanghai and additional
operations in Beijing. ChinaLOOP's clients include a number of China-based and multi-national companies,
including Diageo, Financial Times, Nokia, Total, Citroen and Johnson & Johnson. The purchase price was
approximately $7.0 million consisting of $5.5 million paid in cash (net of cash acquired) and warrants with an
estimated value of $1.5 million. The warrants provide for the purchase of 100,000 shares of the Company's stock
at a price of $15 on or after November 1, 2007. Exercise of the warrants is contingent on certain performance
criteria of the acquired business. The warrants also provide the warrant holders with the right to sell the
warrant stock back to the Company upon exercise of the warrants on or after November 1, 2009 at a price of $30
per share. The warrants expire October 24, 2014. The operations of the acquired business will be included in
the Company's operations beginning November 1, 2004. The acquired company's revenue is currently approximately
$2 million per year.
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
26
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 March 31, 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 the preliminary determination of purchased working capital. In
addition, the Company has made a tender offer to the minority shareholders of Consodata France, under which it
has paid approximately $2.8 million for the minority shareholders' interests. The Company expects to pay up to
approximately $1.2 million for the remaining minority shareholders' interests. In addition, the Company has paid
legal and other professional fees related to the two acquisitions of $1.5 million since March 31, 2004. These
additional purchase price payments have been and will be allocated to goodwill in the period of payment.
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. During the quarter ended September
30, 2004, the agreement was extended to run through December 31, 2010. In conjunction with the latest amendment,
Acxiom is now only required to use its best efforts to cause one designate by TransUnion to be elected to the
board. Effective September 30, 2004 the Company amended a previous data supply agreement with TransUnion under
which it will acquire data from TransUnion through December 31, 2010. The Company will pay TransUnion $5.5
million per year for data over the contract period. In addition to these agreements, the Company has other
contracts with TransUnion related to data, software and other services. Acxiom recorded revenue from TransUnion
of $43.0 million and $34.8 million for the six months ending September 30, 2004 and September 30, 2003,
respectively.
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, the Consodata acquisition, and the ChinaLOOP
acquisition the Company now has a larger presence in the United Kingdom and France, and a new presence in The
Netherlands, Germany, Spain, Portugal, Poland and China. 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.
27
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 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.
28
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.
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.
29
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.
Alternatively, 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.
30
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 changes in accounting pronouncements (including the proposed accounting
pronouncement changes which will require expensing of stock options grants and other equity
compensation awards) may occur and may impact these projections;
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;
31
o the possibility that we may experience failures or breaches of our network and data security systems,
leading to potential adverse publicity, negative customer reaction, or liability to third
parties;
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;
o the possibility that we will not successfully complete customer contract requirements on time or meet
the service levels specified in the contracts, which may result in contract penalties or lost
revenue;
o the possibility that we experience processing errors which result in credits to customers,
re-performance of services or payment of damages to customers;
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.
32
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 September 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. Subsequent to September 30, 2004 the
Company completed the acquisition of ChinaLOOP. 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, Poland
and China. 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.
33
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. Unregistered Sales of Equity Securities and Use of Proceeds.
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
------------------ -------------- --------------- -------------------------- ------------------------------------
7/1/01 -- 7/31/04 503,157 $ 22.33 503,157 $ 11,587,480
8/1/04 -- 8/31/04 237,963 21.69 237,963 81,425,081
9/1/04 -- 9/30/04 - - - 81,425,081
-------------- --------------- -------------------------- ------------------------------------
Total 741,120 $ 22.13 741,120 $ 81,425,081
============== =============== ========================== ====================================
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 limitations for
repurchases was increased effective August 17, 2004 from $125 million to $200 million. The amount used
in the table above to calculate the value of stock that may yet be purchased reflects the lower of board
or lender approval effective at the end of the reporting period. The repurchase program has no
designated expiration date.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on August 4, 2004. At the meeting, the
shareholders voted on the following two proposals:
1) A proposal for the election of four directors - Voting results for each individual nominee were
as follows: Dr. Mary L. Good, 72,884,532 votes for and 4,932,044 votes withheld; Rodger S.
Kline, 60,940,703 votes for and 16,875,879 votes withheld; Stephen M. Patterson, 73,387,130
votes for and 4,429,452 votes withheld; and James T. Womble, 60,929,362 votes for and
16,887,220 votes withheld. These four elected directors will serve with the other current
Board members: William T. Dillard II, Harry C. Gambill, and Thomas F. (Mack) McLarty, III,
whose terms will expire at the 2005 annual meeting, and Dr. Ann Die Hasselmo, William J.
Henderson, and Charles D. Morgan, whose terms will expire at the 2006 Annual Meeting.
2) A proposal to increase the number of shares available to be issued under the Company's 2000
Associate Stock Option Plan by 950,000 shares - Voting results for this proposal were as
follows: 48,016,280 votes for; 19,875,708 votes against and 341,835 votes abstained.
34
Item 6. Exhibits
(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
10(a) Fourth Amendment to Second Amended and Restated Credit Agreement, dated as of August
17, 2004
35
ACXIOM CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
Acxiom Corporation
Dated: November 8, 2004
By: /s/ Jefferson D. Stalnaker
--------------------------------------------------
(Signature)
Jefferson D. Stalnaker
Company Financial Operations Leader
(principal financial and accounting officer)
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