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 JuneSeptember 30, 2002
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,
Little Rock, Arkansas 72203
(Address of Principal Executive Offices) (Zip Code)
(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
The number of shares of Common Stock, $ 0.10 par value per share, outstanding as of August 8,November 4, 2002 was
88,026,023.89,207,662.
ACXIOM CORPORATION AND SUBSIDIARIES
INDEX
REPORT ON FORM 10-Q
JUNESEPTEMBER 30, 2002
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of JuneSeptember 30, 2002 and March
31, 2002 (Unaudited) 2
Condensed Consolidated Statements of Operations for the Three Months Ended
JuneSeptember 30, 2002 and 2001 (Unaudited)
3
Condensed Consolidated Statements of Cash FlowsOperations for the ThreeSix Months Ended
JuneSeptember 30, 2002 and 2001 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 2002 and 2001 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 56 - 1315
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 1416 - 2430
Item 3. Quantitative and Qualitative Disclosures about Market Risk 2531
Item 4. Controls and Procedures 32
Part II. Other Information
Item 1. Legal Proceedings 2633
Item 2. Changes in Securities and Use of Proceeds 33
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 6. Exhibits and Reports on FormFrom 8-K 2634
Signature 2735
Certifications 36 - 39
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
JuneSeptember 30, March 31,
2002 2002
---------------------------------- ------------------
Assets
Current assets:
Cash and cash equivalents $ 2,27926,392 $ 5,676
Trade accounts receivable, net 185,883196,077 185,579
Deferred income taxes 48,716 48,716
Refundable income taxes 3,406- 41,652
Other current assets 85,78082,160 78,602
---------------------------------- ------------------
Total current assets 326,064353,345 360,225
Property and equipment, net of accumulated depreciation and
amortization 179,757167,822 181,775
Software, net of accumulated amortization 66,52570,339 61,437
Goodwill 181,941215,515 174,655
Purchased software licenses, net of 170,219 169,854
accumulated amortization 171,092 169,854
Unbilled and notes receivable, excluding 34,547 40,358
current portions 27,178 40,358
Deferred costs, net of accumulated amortization 119,961118,725 125,843
Other assets, net 38,07833,123 42,687
---------------------------------- ------------------
$ 1,117,0921,157,139 $ 1,156,834
================================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt 29,39834,352 23,274
Trade accounts payable 26,94627,522 29,472
Accrued expenses:
Restructuring and impairment costs 2,4561,653 3,022
Payroll 12,25812,581 17,612
Other 33,37732,589 43,176
Income taxes 5,320 -
Deferred revenue 60,35859,409 61,114
---------------------------------- ------------------
Total current liabilities 164,793173,426 177,670
---------------------------------- ------------------
Long-term debt, excluding current installments 343,327328,647 396,850
Deferred income taxes 78,82878,213 71,383
Commitments and contingencies
Stockholders' equity:
Common stock 8,7948,925 8,734
Additional paid-in capital 287,876319,607 281,355
Retained earnings 242,256257,782 231,791
Accumulated other comprehensive loss (6,029)(6,758) (8,609)
Treasury stock, at cost (2,753)(2,703) (2,340)
---------------------------------- ------------------
Total stockholders' equity 530,144576,853 510,931
---------------------------------- ------------------
$ 1,117,0921,157,139 $ 1,156,834
================================== ==================
See accompanying notes to condensed consolidated financial statements.
2
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
For the Three Months Ended
JuneSeptember 30,
2002 2001
----------- ----------------------------------- ------------------------
Revenue $ 225,406235,396 $ 205,038215,204
Operating costs and expenses:
Salaries and benefits 74,792 93,54875,050 77,584
Computer, communications and other equipment 63,026 81,72763,829 51,609
Data costs 28,944 30,78929,787 29,921
Other operating costs and expenses 37,413 46,40843,197 36,129
Gains, losses and nonrecurring items, net (457) 45,342
----------- -----------(4,102) -
------------------------ ------------------------
Total operating costs and expenses 203,718 297,814
----------- -----------207,761 195,243
------------------------ ------------------------
Income (loss) from operations 21,688 (92,776)
----------- -----------27,635 19,961
------------------------ ------------------------
Other income (expense):
Interest expense (5,327) (6,742)(5,068) (7,213)
Other, net (9) (791)1,551 (1,591)
------------- ----------- -----------
(5,336) (7,533)
----------- -----------------------------------
(3,517) (8,804)
------------------------ ------------------------
Earnings (loss) before income taxes 16,352 (100,309)24,118 11,157
Income taxes 5,887 (36,670)
----------- -----------8,592 4,128
------------------------ ------------------------
Net earnings (loss) $ 10,46515,526 $ (63,639)
=========== ===========7,029
======================== ========================
Earnings (loss) per share:
Basic $ 0.120.18 $ (0.71)
=========== ===========0.08
======================== ========================
Diluted $ 0.120.17 $ (0.71)
=========== ===========0.08
======================== ========================
See accompanying notes to condensed consolidated financial statements.
3
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
For the Six Months Ended
September 30,
2002 2001
------------------ -----------------
Revenue $ 460,802 $ 420,242
Operating costs and expenses:
Salaries and benefits 149,842 171,132
Computer, communications and other equipment 126,855 133,336
Data costs 58,731 60,710
Other operating costs and expenses 80,610 82,537
Gains, losses and nonrecurring items, net (4,559) 45,342
------------------ -----------------
Total operating costs and expenses 411,479 493,057
------------------ -----------------
Income (loss) from operations 49,323 (72,815)
------------------ -----------------
Other income (expense):
Interest expense (10,395) (13,955)
Other, net 1,542 (2,382)
------------------ -----------------
(8,853) (16,337)
------------------ -----------------
Earnings (loss) before income taxes 40,470 (89,152)
Income taxes 14,479 (32,542)
------------------ -----------------
Net earnings (loss) $ 25,991 $ (56,610)
================== =================
Earnings (loss) per share:
Basic $ 0.29 $ (0.63)
================== =================
Diluted $ 0.28 $ (0.63)
================== =================
See accompanying notes to condensed consolidated financial statements.
4
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the ThreeSix Months Ended
JuneSeptember 30,
2002 2001
-------------- ------------------------------ -------------------
Cash flows from operating activities:
Net earnings (loss) $ 10,46525,991 $ (63,639)(56,610)
Adjustments to reconcile net earnings (loss) to net cash provided
(used) by operating activities:operations:
Depreciation and amortization 28,174 42,44656,259 65,871
Loss (gain) on disposal or impairment of assets, net - 45,354(51) 45,639
Deferred income taxes 7,552 (34,742)
Changes in operating assets and liabilities:
Accounts receivable 85 15,654(6,907) 1,684
Other assets 34,079 (5,194)45,966 28,220
Accounts payable and other liabilities (19,546) (37,024)(13,752) (11,750)
Restructuring and impairment costs (566) (2,135)
-------------- -------------(1,369) (8,292)
----------------- -------------------
Net cash provided (used) by operating activities 60,243 (39,280)
-------------- -------------113,689 30,020
----------------- -------------------
Cash flows from investing activities:
Proceeds received from the disposition of assets 45200 127
Proceeds received (used) from the disposition of operations 259 (2,423)
Capitalized software development costs (8,652) (5,935)(17,610) (11,399)
Capital expenditures (1,916) (8,867)(4,916) (8,789)
Deferral of costs (3,240) (8,612)(7,348) (26,702)
Investments in joint ventures and other investments (1,052) (3,689)(5,747)
Proceeds from sale and leaseback transaction 7,729 1,964
Net cash paid in acquisitions (772)(8,272) -
-------------- ------------------------------ -------------------
Net cash used by investing activities (15,587) (26,976)
-------------- -------------(31,010) (52,969)
----------------- -------------------
Cash flows from financing activities:
Proceeds from debt 73,707 102,11382,516 129,169
Payments of debt (127,972) (20,861)(156,700) (94,198)
Sale of common stock, net of repurchases 6,168 3,21012,141 6,461
Payments on equity forward contracts - (22,544)
-------------- -------------(23,547)
----------------- -------------------
Net cash (used) provided by financing activities (48,097) 61,918
-------------- -------------(62,043) 17,885
----------------- -------------------
Effect of exchange rate changes on cash 44 (9)
-------------- -------------80 4
----------------- -------------------
Net decreaseincrease (decrease) in cash and cash equivalents (3,397) (4,347)20,716 (5,060)
Cash and cash equivalents at beginning of period 5,676 14,176
-------------- ------------------------------ -------------------
Cash and cash equivalents at end of period $ 2,27926,392 $ 9,829
============== =============9,116
================= ===================
Supplemental cash flow information:
Cash paid (received) during the period for:
Interest $ 6,70213,453 $ 6,71411,333
Income taxes (39,906) 12,192(40,281) 12,783
Noncash investing and financing activities:
Note receivable received in exchange for sale of operations 736 -
Issuance of warrants 1,317 -
Equity forward contracts settled through term note - 64,169
Enterprise software licenses acquired under software obligation 2,828 -
Acquisition of property and equipment under capital lease 2,310 -
============== ============================== ===================
See accompanying notes to condensed consolidated financial statements.
45
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, however, 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 Notesnotes 1 through 21 of the Notes to Consolidated Financial Statements
filed as a part of Item 14 of the Registrant's 2002 annual report on Form 10-K for the fiscal year ended March 31, 2002 ("2002
Annual Report"), as filed with the Commission on May 15, 2002. This report and the accompanying financial statements should
be read in connection with the annual report for the fiscal year ended
March 31, 2002.2002 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, 2003.
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 complex 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 full discussion of the Company's significant accounting principles and the
application thereof is discussedincluded in note 1 and in management's discussionItem 7, Management's Discussion and analysisAnalysis of financial conditionFinancial Condition and
resultsResults of operationsOperations, to the Company's annual report on Form 10-K.2002 Annual Report.
Effective January 1, 2001, the Company changed its method of accounting for certain transactions, retroactive to April 1,
2000, in accordance with SEC Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements." The cumulative effect of
the change resulted in a charge to earnings of $37.5 million, net of income taxes, and was included in the Company's condensed
consolidated financial statements for the three months ended June 30, 2000 (not included herein). For
the quarters ended JuneSeptember 30, 2002 and 2001, and for the six months ended September 30, 2002 and 2001, the Company
recognized approximately $4.2$3.9 million and $5.1$4.9 million, respectively, and approximately $8.1 million and $10.0 million,
respectively, in revenue that was included in the SAB 101 cumulative effect adjustment.
5Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had
no impact on net earnings (loss) as previously reported.
6
2. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
Restructuring and Impairment Charges
On June 25, 2001, the Company announced a restructuring plan ("Restructuring Plan") for significant cost-reduction efforts,
including workforce reductions, the sale and leaseback of a significant amount of its computer equipment, and certain other
restructuring activities, asset impairments and other adjustments and accruals totaling $45.3 million. The charges recorded
by the Company and included in gains, losses and nonrecurring items, net in the June 30, 2001 condensed consolidated financial
statements include a loss on the sale-leaseback transaction of $31.2 million; $8.3 million in associate-related
reserves,
principally employment contract termination and severance costs;reserves; $3.6 million for lease and contract termination costs and $2.2 million for abandoned or otherwise impaired assets and
transaction costs. In addition to the above charges,Additionally, the Company recorded accelerated depreciation and amortization and certain other charges of approximately $25.8
million during the quarter ended June 30, 2001, on certain software and long-lived assets that are no longer in service or
have otherwise been deemed impaired under the appropriate accounting literature, primarily Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed," or SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."impaired.
Sale Leaseback Transaction
On June 29, 2001, in connection with the Restructuring Plan, the Company entered into an agreement whereby it sold equipment
with a net book value of $50.7 million to Technology Investment Partners, LLC ("TIP") and recorded a loss on this sale of
$31.2 million. Simultaneous with the sale of this equipment, the Company also agreed to lease the equipment under a capital
lease from TIP for a period of thirty-six months. The Company received $2.0 million of the sale proceeds from TIP during
July 2001 and received an additional $4.0 million of the sales proceeds during December 2001. The remainingOn August 30, 2002, the
Company amended its agreement with TIP whereby it reacquired from TIP certain equipment under the original sale and
leaseback arrangement that had not previously been funded by TIP. Simultaneous with this transaction, the Company entered
into an agreement with Merrill Lynch Capital ("MLC") whereby a portion of the repurchased equipment under the amended TIP
agreement was sold to MLC for net sales proceeds have been
appliedof $7.7 million. The agreement with MLC also provides a leaseback
provision, accounted for as a prepaymentcapital lease by the Company, whereby the Company is obligated to lease the equipment from MLC
for a period of the lease.thirty-six months.
Included in property and equipment at JuneSeptember 30, 2002 and March 31, 2002, is equipment of $13.0$8.6 million and $14.7 million,
respectively, net of accumulated depreciation and amortization, related to the assets under thisthese leaseback arrangement.arrangements.
Included in long-term debt at JuneSeptember 30, 2002 and March 31, 2002, is aare capital lease obligationobligations under these leaseback
arrangements in the amount of $5.2$12.2 million and $5.6 million, respectively, representing sales proceeds to be repaid to TIP under the leaseback
provision of the agreement.respectively.
Montgomery Wards Bankruptcy
During the fourth quarter of the year ended March 31, 2001, the Company recorded a charge totaling $34.6 million relating to
the bankruptcy filing of Montgomery Ward ("Wards"), a significant customer of the Information Technology ("IT") Management
segment, for the write-down of impaired assets and for certain ongoing obligations that have no future benefit to the
Company. As of June 30, 2001, the Company is no longer providingobligated to provide services to Wards.
67
The following table shows the balances related to the Restructuring Plan and to Wards that were included in the
restructuring and impairment accruals as of March 31, 2002 and the changes in those balances during the periodsix months ended
JuneSeptember 30, 2002 (dollars in thousands):
March 31, Less payments JuneSeptember 30,
2002 Payments 2002
-------------- -------------- ----------------------- -------- -------------
Associate-related reserves $ 600 $(325) $ 275(419) $ 181
Contract termination costs 2,025 (200) 1,825(823) 1,202
Transaction costs and other accruals 397 (41) 356
-------------- -------------- --------------
$ 3,022 $(566) $ 2,456
============== ============== ==============(127) 270
--------- -------- -------------
$3,022 $(1,369) $1,653
========= ========= =============
The remaining accruals will be paid out over periods ranging up to three years.
Other
During the quarter ended June 30, 2000, the compensation committee ("the Committee") of the Company committed to pay in cash
$6.3 million of "over-attainment" incentive that was attributable to results of operations in prior years. This
"over-attainment" was additional incentive to be paid in excess of the Company's normal at-risk incentive pay. In accordance
with the Company's over-attainment plan, the amount accrued was to be paid over a three-year period, assuming continued
performance of the Company. During the quarter ended September 30, 2001, the Company paid, and recorded as a reduction of
the accrual, $2.2 million of the over-attainment incentive. As of September 30, 2002, the Committee discontinued the
over-attainment incentive and determined that the remaining accrual would not be paid under the over-attainment plan based
on recent operating results. Accordingly, the remaining accrual of $4.1 million was reversed through gains, losses and
nonrecurring items, net, which is where the expense was originally recorded.
3. ACQUISITIONS
Effective August 12, 2002, the Company acquired certain assets and assumed certain liabilities of an employment screening
business owned by Trans Union, LLC ("Trans Union"), a related party. This employment screening business was incorporated as
Acxiom Information Security Systems, Inc. ("AISS") and offers a range of services including criminal and civil records
search, education and reference verification, and other verification services for its customers. Management believes AISS
will provide the Company with additional products and services and will support the Company's initiatives in the screening,
identification and security areas. The aggregate purchase price of $34.6 million consisted of cash of $10.0 million (of
which $7.5 million was paid at closing and $2.5 million was paid on October 1, 2002), 664,562 shares of common stock valued
at $10.5 million and warrants to purchase 1,272,024 shares of common stock, at an exercise price of $16.32, valued at $14.1
million. If the value of the 664,562 shares of common stock on August 12, 2003 (twelve months after the closing date) is
less than $10.0 million, the Company will be required to pay additional cash consideration in the amount of the deficit, but
not more than $5.0 million. If the value of those shares on August 12, 2003 is greater than $13.0 million, Trans Union will
be required to return shares of common stock in the amount of the excess, but not more than $5.0 million worth of common
stock. The results of operations of AISS are included in the Company's consolidated results from the date of acquisition.
The pro forma effect of this acquisition is not material to the Company's consolidated results for any of the periods
presented.
8
Effective June 1, 2002, the Company entered into an agreement with Publishing & Broadcasting Limited ("PBL") whereby Acxiom
purchased PBL's 50% ownership interest in an Australian joint venture ("Australian JV") for cash of $0.8 million (net of
cash acquired) and a note payable of $1.4 million, such that Acxiom now owns 100% of the JV operations.Australian operation.
Additionally, the purchase agreement provides that Acxiom may pay PBL additional consideration, based on a percentage of the
JV's operatingAustralian operation's results through March 31, 2007, and also provides PBL the option to repurchase between 25% and 49% of
the Australian JV subsequent to March 31, 2007, at an option price specified in the purchase agreement. The following table shows the total investment in the JV and the allocation
of the investment to assets acquired and liabilities assumed (dollars in thousands):
Cash (net of cash acquired) $ 772
Note payable 1,364
Previous investment in JV 5,662
----------------
$ 7,798
================
Goodwill $ 5,828
Other assets acquired 3,047
Liabilities assumed (1,077)
----------------
$ 7,798
================
The results of
operations of the JVAustralian business are included in the Company's condensed consolidated financial statements beginning
June 1, 2002. Prior to that time, the Company accounted for the Australian JV as an equity investment in accordance with the provisions of
Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock."method investment. The pro
forma effect of this acquisition is not material to the Company's consolidated results for any of the periods presented.
Management believes the Australian market is an important and potentially lucrative component of the Company's long-term global strategy. Sole ownership of the JVAustralian operation will enable the Company to more quickly and effectively
capitalize on that opportunity.
7The following table shows the initial allocation of the Australian JV and the AISS purchase prices to assets acquired and
liabilities assumed (dollars in thousands):
Australian JV AISS
------------- -----------
Assets acquired:
Cash $ 592 $ --
Goodwill 5,828 32,275
Other current and noncurrent assets 3,047 3,118
------------- -----------
9,467 35,393
Accounts payable and accrued expenses assumed 1,077 771
------------- -----------
Net assets acquired 8,390 34,622
Less:
Cash acquired 592 --
Common stock issued -- 10,525
Warrants issued for the purchase of
common stock -- 14,097
Previous investment in Australian JV 5,662 --
Note payable 1,364 2,500
------------ ------------
Net cash paid $ 772 $ 7,500
============ ============
9
4. DIVESTITURES
During the year ended March 31, 2002, the Company sold three of its business operations, including SIGMA, a database marketing
operation headquartered in Rochester, New York; Buckley Dement, a list brokerage and fulfillment operation located in Skokie,
Illinois; and a minor portion of its
U.K.United Kingdom operations located in Spain and Portugal. Additionally, duringDuring the quarter ended June 30, 2002, the Company sold the
remaining portion of its assets located in Spain, which primarily itsconsisted of tax loss carryforwards. Gross proceeds from
the sale of these operations were $15.9 million, consisting of cash of $6.8 million and notes receivable of $9.1 million.
At JuneSeptember 30, 2002 and March 31, 2002, notes receivable relating to these transactions of $5.8$4.8 million and $5.2 million,
respectively, are included in the accompanying condensed consolidated financial statements. The Company recorded a net loss of $0.9 million duringgain
associated with the year
ended March 31, 2002 and a gaindisposition in Spain of $0.5 million during the quartersix months ended JuneSeptember 30, 2002, associated with these dispositions. The
aggregate net loss of $0.4 million recorded by the Company reflects the write-off of $1.9 million of goodwill during fiscal
2002, andincluding the
write-off of $0.1 million of goodwill during the quarter ended June 30, 2002 (see note 6).
Effective July 31, 2002, the Company sold its print shop business located in Chatsworth, California. Gross sales proceeds
from the sale were $0.7 million, consisting entirely of notes receivable. The gain on the sale of this print shop business,
which includes the write-off of $0.1 million of goodwill (see note 6), was not material.
5. OTHER CURRENT AND NONCURRENT ASSETS AND LIABILITIES
Unbilled and notes receivable are from the sales of software, data licenses, equipment sales and from the sale of divested
operations (see note 4), net of the current portions of such receivables. Certain of the unbilled and notes receivable from
software and data licenses and equipment sales have no stated interest rate and have been discounted using an imputed interest
rate that approximates the fair market rate, generally 8%, based on the customer, type of agreement, collateral and payment
terms. The term of these notes is generally three years or less. This discount is being recognized into income using the
interest method and is included as a component of other, net in the accompanying condensed consolidated statements of
operations.
Other current assets include the current portion
of the unbilled and notes receivable of $39.5$38.7 million and $38.4 million at JuneSeptember 30, 2002 and March 31, 2002,
respectively. Other current assets also include prepaid expenses, non-trade receivables and other miscellaneous assets of
$46.3$43.5 million and $40.2 million at JuneSeptember 30, 2002 and March 31, 2002, respectively.
Deferred revenue consists of amounts billed in excess of revenue recognized on sales and/or licensing of software, data
licenses, services and equipment. Deferred revenues are recorded as revenue in accordance with the Company's revenue
recognition policies (see note 1 to the Company's 2002 annual report on Form 10-K).
Other noncurrent assets consist of the following (dollars in thousands):
JuneSeptember 30, March 31,
2002 2002
--------------- ----------------------------- ---------
Investments in joint ventures and other companies,investments, net of
unrealized loss on available-for-sale marketable securities $ 21,253 $ 27,394$19,496 $27,394
Other, net 16,82513,627 15,293
--------------- ---------------
$ 38,078 $ 42,687
=============== ===============
8-------------- ---------
$33,123 $42,687
============== =========
10
The Company defers costs associated with a customer once work is begun, after obtaining a signed contract or other definitive
agreement. These deferred costs primarily consist of up-front costs and generally include salary and related costs and certain
other costs, all of which are both direct and incremental to the associated contract, and are amortized over the service period
of the contract. In the event that it is determined that these deferred costs will not be recovered under a contract, the costs
are written off in the period such determination is made.
6. GOODWILL
The changes in the carrying amount of goodwill, by business segment, for the quartersix months ended JuneSeptember 30, 2002, are as
follows (dollars in thousands):
Data and
Software
Services Products IT Management Services Products Total
----------- -------- ------------- ----------------- ------------------ ---------------
Balance----------
Balances at March 31, 2002 $ 97,833 $1,533 $ 75,289 $ 174,655
Acquisition$75,289 $174,655
2002
Acquisitions (note 3) 5,82839,594 -- -- 5,828
Disposal39,594
Divestitures (note 4) (84) -- -- (84)
Change in foreign(131) (215)
Foreign currency translation adjustment 1,5421,481 -- -- 1,5421,481
---------- -------- ------------- ----------------- ------------------ ---------------
Balance----------
Balances at JuneSeptember 30, 2002 $ 105,119$138,824 $1,533 $ 75,289 $ 181,941$75,158 $215,515
========== ======== ============= ================= ================== =========================
7. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
JuneSeptember 30, 2002 March 31,
2002 ---------------- ----------------2002
------------- ---------
Convertible subordinated notes due 2009; interest at 3.75% $ 175,000$175,000 $ 175,000
Software license liabilities payable over terms up to seven
years; effective interest rates at approximately 6% 89,39184,300 88,444
Term note, due 2005 64,169 64,169
Convertible subordinated notes, repaid April 2002 -- 62,589
Capital leases on land, buildings and equipment payable in
monthly payments of principal plus interest at
approximately 8%; remaining terms up to fifteen years 18,54226,665 18,878
Revolving credit agreement 13,023 --
Other capital leases, debt and long-term liabilities 12,60012,865 11,044
---------------- ----------------------------- ---------
Total long-term debt 372,725362,999 420,124
Less current installments 29,39834,352 23,274
---------------- ----------------------------- ---------
Long-term debt, excluding current installments $ 343,327 $ 396,850
================ ================
9
Borrowings under the328,647 $396,850
============= ===========
The Company maintains a revolving credit facility that provides for aggregate borrowings of $13.0 million at June 30, 2002 (none at March 31, 2002)up to $175 million. Any future
borrowings under this facility will bear interest at LIBOR plus 2.25%, or at an alternative base rate plus 0.75% or at the
Federal funds rate plus 1.75%, depending upon the type of borrowing. At June 30, 2002, the average interest rate under this credit facility was approximately 3.81% per annum. All
borrowings under this credit facilityborrowing, are secured by substantially all of the Company's
assets and are due January 2005. There were no borrowings outstanding under this facility at either September 30, 2002 or
March 31, 2002.
On September 21, 2001, the Company executed an agreement for the settlement of certain equity forward contracts through
borrowings of $64.2 million from a bank under a term loan facility. The borrowings under this term loan bear interest,
11
payable semiannually, at LIBOR plus 3.75% or an alternative base rate. At JuneSeptember 30, 2002, the interest rate under this
facility was 5.61%. The borrowings under this facility are secured by substantially all of the Company's assets.
Under the terms of some 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 JuneSeptember 30, 2002, the Company was in
compliance with these covenants and restrictions. Accordingly, the Company has classified all portions of its debt
obligations due beyond JuneSeptember 30, 2003 as long-term in the accompanying condensed consolidated financial statements.
8. STOCKHOLDERS' EQUITY
Below is the calculation and reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share
(in thousands, except per share amounts):
For the quarter ended JuneFor the six months ended
September 30, September 30,
2002 2001 ------------------------ -------------------------2002 2001
---------------- --------------- ----------------- -----------------
Basic earnings (loss) per share:
Numerator - net earnings (loss) $ 10,46515,526 $ (63,639)7,029 $ 25,991 $ (56,610)
Denominator - weighted-average
shares outstanding 87,781 89,931
------------------------ -------------------------88,481 89,856 88,131 89,894
outstanding
---------------- --------------- ----------------- -----------------
Basic earnings (loss)
per share $ 0.120.18 $ (0.71)
======================== =========================0.08 $ 0.29 $ (0.63)
================ =============== ================= =================
Diluted earnings (loss) per share:
Numerator:
Net earnings (loss) $ 10,46515,526 $ (63,639)7,029 $ 25,991 $ (56,610)
Interest expense on
convertible debt
(net of tax benefit) 1,050 -- ------------------------ -------------------------2,100 --
---------------- --------------- ----------------- -----------------
$ 11,51516,576 $ (63,639)
------------------------ -------------------------
10
For the quarter ended
June 30,
2002 2001
------------------------ -------------------------7,029 $ 28,091 $ (56,610)
---------------- --------------- ----------------- -----------------
Denominator:
Weighted-average shares
outstanding 87,781 89,93188,481 89,856 88,131 89,894
Dilutive effect of common
stock options and warrants,
as computed under the 2,354 1,264 2,411 --
treasury stock method 2,468 --
Dilutive effect of
convertible debt, as
computed under the
if-converted method 9,589 -- ------------------------ -------------------------
99,838 89,931
------------------------ -------------------------9,589 --
---------------- --------------- ----------------- -----------------
100,424 91,120 100,131 89,894
---------------- --------------- ----------------- -----------------
Diluted earnings (loss)
per share $ 0.120.17 $ (0.71)
======================== =========================
All0.08 $ 0.28 $ (0.63)
================ =============== ================= =================
12
The equivalent share effect of the convertible debt was excluded from the above calculations for the quarter ended September
30, 2001, and the equivalent share effect of all stock options, stock warrants, equity forward contracts and convertible
debt were excluded from the above calculations for the quartersix months ended JuneSeptember 30, 2001, because such items were
antidilutive. The equivalent share effect of convertible debt excluded for the quarter ended September 30, 2001 was 5.8
million, and the equivalent share effect of the convertible debt and the equivalent share effect of the common stock options
and stock warrants excluded for the quartersix months ended JuneSeptember 30, 2001, were 5.8 million and 2.01.6 million, respectively. Interest
expense on convertible debt (net of income tax effect) excluded in computing diluted lossearnings (loss) per share for the
quarter and for the six months ended JuneSeptember 30, 2001, was $0.9 million.$1.0 million and $1.9 million, respectively.
At JuneSeptember 30, 2002, the Company had options and warrants outstanding providing for the purchase of approximately 19.522.0
million shares of its common stock. Options and warrants to purchase shares of common stock that were outstanding during
the quarter
ended June 30, 2002,periods reported, but were not included in the computation of diluted earnings (loss) 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 JuneFor the six months ended
September 30, September 30,
2002 ------------------------------2001 2002 2001
------------------ ------------------ -------------------- --------------------
Excluded number of
shares outstanding under options
and warrants 9,56311,426 13,929 10,495 11,641
Range of exercise
prices $17.49$16.45 - 62.06 ==============================$11.50 - 62.06 $16.45 - 62.06 $11.50 - 62.06
================== ================== ==================== ====================
13
The Company applies the provisions of Accounting Principles Board 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 condensed 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, the Company's net earnings
(loss) would have been reduced to the following 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,
2002 2001 2002 2001
-------------- ------------- ------------- -------------
Net earnings (loss) As reported $ 15,526 $ 7,029 $ 25,991 $ (56,610)
============== ============= ============= =============
Pro forma $ 12,942 $ (48) $ 20,683 $ (70,467)
============== ============= ============= =============
Basic earnings (loss) As reported $ 0.18 $ 0.08 $ 0.29 $ (0.63)
per share
============== ============= ============= =============
Pro forma $ 0.15 $ 0.00 $ 0.23 $ (0.78)
============== ============= ============= =============
Diluted earnings (loss)
per share As reported $ 0.17 $ 0.08 $ 0.28 $ (0.63)
============== ============= ============= =============
Pro forma $ 0.14 $ 0.00 $ 0.23 $ (0.78)
============== ============= ============= =============
Pro forma net earnings (loss) reflect only options granted after fiscal 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings (loss) amounts
presented above because compensation cost is reflected over the options' vesting period of up to nine years and compensation
cost for options granted prior to April 1, 1995 is not considered.
9. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are presented net of allowances for doubtful accounts, returns, and credits of $6.6 million and $6.3 million respectively, at
Juneboth September 30, 2002 and at March 31, 2002.
10. MAJOR CUSTOMERS
No single customer accounted for more than 10% of revenue during the quarter or the six months ended JuneSeptember 30, 2002.
DuringFor the quarter and the six months ended JuneSeptember 30, 2001, the Company had one customer, Allstate Insurance Company, which
accounted for $24.4$21.5 million (11.9%(10.0%) and $45.9 million (10.9%), respectively, of revenue.
1114
11. SEGMENT INFORMATION
The following tables present information by business segment (dollars in thousands):
For the quarter ended JuneFor the six months ended
September 30, September 30,
2002 2001 ------------------2002 2001
---------------- ---------------- ---------------- -------------------
Revenue:
Services $ 169,369 $ 149,427$178,893 $161,941 $348,262 $311,368
Data and Software Products 38,372 32,85045,059 39,633 83,431 72,483
IT Management 56,461 52,96656,907 53,261 113,368 106,227
Intercompany eliminations (38,796) (30,205)
------------------(45,463) (39,631) (84,259) (69,836)
---------------- ---------------- ---------------- -------------------
$ 225,406 $ 205,038
==================$235,396 $215,204 $460,802 $420,242
================ ================ ================ ===================
Income (loss) from operations:
Services $ 20,96225,042 $ (13,040)17,411 $ 46,004 $ 4,371
Data and Software Products 2,670 (3,243)8,636 3,134 11,306 (109)
IT Management 1,072 (278)2,386 1,758 3,458 1,480
Intercompany eliminations (3,025) 3,243(8,429) (2,342) (11,454) 901
Corporate and other -- -- 9 (79,458)
---------------------------------- ---------------- ---------------- -------------------
$ 21,68827,635 $ (92,776)
==================19,961 $ 49,323 $(72,815)
================ ================ ================ ===================
Substantially all of the nonrecurring charges incurred with the Restructuring Plan discussed in note 2 have been recorded in
Corporate and other, since the Company does not hold individual segments responsible for these charges. During the quarter
ended June 30, 2002, the Company revised certain of its internal cost allocations to distribute substantially all recurring
costs to the business segments. Accordingly, the prior year's segment information has been restated to conform to the
current year presentation.
12. COMPREHENSIVE INCOME (LOSS)
The balance of accumulated other comprehensive loss, which consists of foreign currency translation adjustments and
unrealized depreciation, net of reclassification adjustments, on marketable securities classified as available-for-sale, was
$6.0$6.8 million and $8.6 million at JuneSeptember 30, 2002 and March 31, 2002, respectively. Comprehensive income (loss) was
income of $12.2$14.8 million and $7.7 million, respectively, for the quarterquarters ended JuneSeptember 30, 2002 and was a loss of $64.12001, and $27.8 million and
$(56.4) million, respectively, for the quartersix-month periods ended JuneSeptember 30, 2002 and 2001.
13. CONTINGENCIES
Refer to Part II, Item 1 for a description of legal proceedings.
14. SUBSEQUENT EVENTS
Effective August 12, 2002, the Company acquired the assets and assumed certain liabilities of an employment screening business
owned by Trans Union, LLC ("Trans Union"), a related party. This employment screening business offers a range of services
including criminal and civil records search, education and reference verification, and other verification services for its
12
customers. Management believes the acquired business will provide the Company with additional products and services and will
support the Company's initiatives in the identification and security arena, including with governmental agencies. The aggregate
purchase price of $35 million consisted of cash of $10 million (of which $7.5 million was paid at closing and $2.5 million is
payable on October 1, 2002) and 664,562 shares of common stock valued at $10.5 million and warrants to purchase 1,272,024
shares of common stock valued at $14.5 million. If the value of the 664,562 shares of common stock twelve months after the
closing date is less than $10 million, the Company will be required to pay additional cash consideration in the amount of the
deficit, but not more than $5 million. If the value of those shares twelve months after the closing date is greater than $13
million, Trans Union will be required to return shares of common stock in the amount of the excess, but not more than $5
million worth of common stock. The Company has not yet completed the allocation of the purchase price to the net assets
acquired. The results of operations of this acquired business will be included in the Company's consolidated results from the
date of acquisition. The acquired business generates annual revenues of approximately $14 million. The pro forma effect of this
acquisition is not material to the Company's consolidated results for any of the periods presented.
1315
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Acxiom Corporation ("Acxiom", "Registrant" or "the Company") integrates data, services and technology to create and deliver
customer and information management solutions for many of the largest, most respected companies in the world. The core
components of Acxiom's innovative solutions are customer data integration ("CDI") technology, data content, 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, and in the United Kingdom ("U.K."), France
and Australia.
Results of Operations
For the quarter ended JuneSeptember 30, 2002, consolidated revenue was $225.4$235.4 million, reflecting a 10%9% increase from the previous
year. Adjusting 2001the prior year for divested operations (see note 4 to the condensed consolidated financial statements), the
increase in revenue was 16%12%. Also excluding current year revenue from Acxiom Information Security Systems, Inc. ("AISS") and the
Company's Australian operations, which were acquired in the current year, the increase is 11%. The increase in revenue for the
quarter reflects increases in customer demand for Acxiom products and services and the layering effect of recognition of
subscription revenue from contracts signed in current and prior quarters as the Company provides service. For the six months
ended September 30, 2002, consolidated revenue was $460.8 million, up 10% from the same period a year ago. Again, adjusting 2001
for divested operations, the increase in consolidated revenue for the six-month period was 14%. Excluding revenue from current
year acquisitions, the increase is 13%. Overall, revenue increased 21% for the quarter and 23% year to date in a group of
industries that the Company has identified as "high opportunities": financial services, insurance, media, retail, automotive,
governmental and travel and entertainment. Revenue was down 5% for both the quarter and year to date in another group of
industries including telecommunications, technology, health and other miscellaneous areas.
The table below shows the Company's revenue by business segment for the quarters and for the six months ended JuneSeptember 30, 2002
and 2001 (dollars in millions).
JuneFor the quarter ended For the six months ended
September 30, September 30,
% %
2002 2001 % Change ---------------- --------------- -----------------2002 2001 Change
----------- ----------- ----------- ------------ ----------- ----------
Services $169.4 $149.4 +13%$ 178.9 $ 161.9 +10% $ 348.3 $ 311.3 +12%
Data and Software Products 38.4 32.8 +1745.1 39.6 +14 83.4 72.5 +15
IT Management 56.4 53.056.9 53.3 + 7 113.4 106.2 + 7 7
Intercompany eliminations
(38.8) (30.2) +28
---------------- --------------- -----------------
$225.4 $205.0eliminations (45.5) (39.6) +15 (84.3) (69.8) +21
----------- ----------- ----------- ------------ ----------- ----------
$ 235.4 $ 215.2 +9% $ 460.8 $ 420.2 +10%
================ =============== ============================ =========== =========== ============ =========== ==========
16
The Services segment, the Company's largest segment, provides data warehousing, list processing and consulting services to large
corporations in a number of vertical industries. Segment revenue of $169.4$178.9 million in the current quarter increased 13%10% over the
prior year. Excluding divested operations, this segment grew 21%15% as compared to the same quarter a year ago. For the six months
ended September 30, 2002, the Services segment revenue increased 12% over the same period a year ago (17% increase after
adjusting the prior year for divested operations). Excluding both the divested operations and current year acquisitions, the
revenue increases for the quarter and six months were 12% and 16%, respectively. The increase in Services segment revenues year
over year reflects increased customer demand and layering of contracts signed in current and prior quarters as
discussed above. The Company also experienced a return of some project-based revenue, primarilyis generally due to increases in the financial services industry,
which some customers had previously delayed"high opportunities" industries, partially offset by decreases in the
past three quarters.telecommunications, technology, health and other miscellaneous industries as previously discussed.
The Data and Software Products segment provides data content and software primarily in support of the Services segment customers'
activities. Segment revenue of $38.4$45.1 million during the quarter ended JuneSeptember 30, 2002 increased 17%14% as compared to the
quarter ended JuneSeptember 30, 2001. For the six-month period, Data and Software Products segment revenue was $83.4 million, an
increase of 15% over the prior year. The increase in segment revenue as compared to the prior year amount is primarily
attributable to an increasestrong growth in software products (which includes AbiliTec-enabled services) and strategic data products
including reference and data licenses sales.
14
analytics products, offset by declines in list products and enhancement data.
The IT Management segment consists of outsourcing services primarily in the areas of data center, client server and network
management. IT Management segment revenue of $56.4$56.9 million in the JuneSeptember 30, 2002 quarter reflects an increase of 7% over the
prior year's JuneSeptember quarter. IT Management revenue was up 7% as well for the six-month period to $113.4 million. This
increase for both the quarter and the six-month period is primarily attributable to additional outsourcing contracts signed over
the last year.several quarters.
Certain revenues, including certain data and software product revenue, are reported both as revenue in the segment which owns the
customer relationship (generally the Services segment) as well as the Data and Software Products segment which owns the product
development, maintenance, sales support, etc. These duplicate revenues are eliminated in consolidation. The intercompany
elimination increased 28%15% for the quarter and 21% for the six-month period, reflecting the increase in data and software product
revenue recorded through the Services segment.
17
The following table presents operating expenses for the quarters and for the six months ended JuneSeptember 30, 2002 and 2001
(dollars in millions):
JuneFor the quarter ended For the six months ended
September 30, September 30,
% %
2002 2001 % Change -------------- --------------- ---------------2002 2001 Change
----------- ----------- ----------- ----------- ------------- -----------
Salaries and benefits $ 74.875.1 $ 93.677.6 - 20%3% $ 149.8 $ 171.1 - 12%
Computer, communications
and other equipment 63.0 81.763.8 51.6 +24 126.9 133.4 - 235
Data costs 29.0 30.829.8 29.9 -- 58.8 60.7 - 63
Other operating costs
and expenses 37.4 46.443.2 36.1 +20 80.6 82.6 - 192
Gains, losses and
nonrecurringnon-recurring items, net (0.5)(4.1) -- -- (4.6) 45.3 -101
-------------- --------------- ---------------
$203.7 $297.8-110
----------- ----------- ---------- ----------- ------------- -----------
$ 207.8 $ 195.2 + 6% $ 411.5 $ 493.1 - 32%
============== =============== ===============17%
=========== =========== ========== =========== ============= ===========
Salaries and benefits for the quarter decreased 20%3% from the prior year. For the six months, salaries and benefits decreased
12%. This decrease is primarily attributable to the work force reductions that were a component of the restructuring plan
discussed below and certain mandatory and voluntary salary reductions effective April 2001. The Company's associates received stock options at the time of these mandatory and voluntary salary
reductions. The voluntary portion of the salary
reduction was reinstated on April 1, 2002, and one-half of the involuntary portion of the salary reduction was reinstated August
1, 2002. The remaining portion of the involuntary salary reduction is scheduled to bewas reinstated on November 1, 2002, contingent upon the Company achieving certain performance targets.2002. The net impact of
reinstatement of the voluntary and involuntary salary reductions is expected to be approximately $16 million during fiscal 2003,
of which approximately $9.5$6 million relateshad been incurred during the six months ended September 30, 2002. The Company is also
continuing to benefit internally from the April voluntary reinstatement.deployment of AbiliTec-enabled processing to control incremental headcount.
Computer, communications and other equipment costs decreased 23%for the quarter ended September 30, 2002 increased 24% over the same quarter
in the prior year. For the six months ended September 30, 2002, computer, communications and other equipment costs decreased 5%
over the prior year. Adjusting for divested operations, current year acquisitions and for the additionalaccelerated depreciation and amortization
and other charges of approximately $25.8 million taken during the prior year on other assets that are no longer in service or
were otherwise deemed impaired, these costs increased 29% for the year-to-date period. Although the year-over-year increase is
29%, as adjusted for the items discussed above, the increase from the quarter ended June 30, 2001, these costs increased
34%2002 was only 1.3%. The increase reflects increases in leased data processing equipment and software amortization.Management
believes the investments made during the past twelve months will enable the Company to become more efficient.
Capitalized software, including purchased and internally developed, is evaluated for impairment on an annual basis, or when
events or changes in circumstances indicate the carrying amount of the asset might not be recoverable. At JuneSeptember 30, 2002,
the Company's most recent impairment analysis of its software indicates that no impairment exists. However, no assurance can be
given that future analysis of the Company's capitalized software will not result in an impairment charge.
1518
Data costs for the quarter decreased 6% fromdeclined slightly as compared to the prior year. DecreasesFor the six months, these costs decreased 3%. The
decrease in data costs areis primarily the result of lower Allstate Insurance Company ("Allstate") business in the current quarter,six-month period,
offset in part by increases in data and data licenses sales.
Other operating costs and expenses for the quarter decreasedincreased by 19%20% compared to the same quarter a year ago,ago. Adjusting for
divested operations and current year acquisitions, these costs increased 21%. For the six months ended September 30, 2002, other
operating costs declined 2% as compared to the prior year, although these costs increased 5% after adjusting for divested
operations, current year acquisitions and accelerated depreciation and amortization and other charges of approximately $25.8
million discussed above. These costs increased year over year primarily as a result of lowerincreased postage and other mailing
related costs, combined with slightly higher other operating expenses for advertising (down 55%),including travel and entertainment, (down 23%),administration and
consulting costs (down 47%) and administrative costs (down 35%).
These lower expenses primarily reflect initiatives taken to reduce the Company's cost structure.related costs.
Gains, losses and nonrecurring items, net was a gain of $0.5$4.6 million for the current quartersix-month period as a result of the disposal
in the first quarter of the remaining assets located in Spain, which consisted primarily of tax loss carryforwards (see note 4 to
the condensed consolidated financial statements).
On June 25, 2001, and the Company announced a restructuring plan ("Restructuring Plan") for significant cost-cutting efforts, including
workforce reductions,reversal in the sale and leasebacksecond quarter of a significant amount of its computer equipment, and certain other restructuring
activities, asset impairments, and other adjustments and accruals. The aggregate amount of these Restructuring Plan charges
recorded$4.1 million accrual for
"over-attainment" incentives that will not be paid by the Company totaled $45.3 million and is included in gains, losses and nonrecurring items, net for the quarter ended
June 30, 2001 (see note 2 to the condensed consolidated financial
statements). In addition, duringGains, losses and nonrecurring items, net for the quartersix months ended JuneSeptember 30, 2001 was a loss of $45.3 million
as a result of the Company recorded accelerated depreciation and amortization and other charges of approximately $25.8 millionrestructuring plan announced on certain other
assets that are no longer in service or were otherwise deemed impaired.June 25, 2001 ("Restructuring Plan") (see note 2 to the condensed consolidated
financial statements).
Income from operations for the current quarter of $21.7was $27.6 million, increased $114.5compared to $20.0 million from the prior year.a year ago. Excluding gains, losses
and nonrecurring items, net;net, divested operations and current year acquisitions, the current quarter income from operations would
have been $23.7 million as compared to the prior year amount, as adjusted, of $19.8 million. For the six months ended September
30, 2002, income from operations of $49.3 million increased $122.1 million from the prior year. Again, excluding gains, losses
and nonrecurring items, net, divested operations and current year acquisitions, and also adjusting for the accelerated
depreciation and amortization discussed above; divested operations;above and approximately $18 million of operating expenses incurred during the first
quarter of the prior year that willdid not recur as a result of the Restructuring Plan, operating income increased $26.1$30.9 million for
the current quartersix-month period from a loss of $(4.9)$14.9 million in the prior year quarter to income of $21.2$45.8 million in the current quarter.year.
Interest expense for the quarter of $5.3$5.1 million ($10.4 million for the six-month period) decreased from $6.7$7.2 million during the
same quarter last year ($14.0 million for the prior year six-month period), reflecting a combination of significantly lower
average debt levels this year and lower weighted-average interest rates. Other, net decreasedchanged from $0.8$1.6 million expense in last
year's firstsecond quarter to $9 thousand expense$1.6 million income in this year's second quarter primarily due to the consolidation of the Australian
joint venture, which was recorded on the equity method in the prior year. The current year income primarily includes interest
income on notes receivable. Other, net for the six months ended September 30, 2002 was income of $1.3$1.5 million, largely offset by losses from the Australian joint venture.compared to
expense of $2.4 million a year ago.
19
Earnings before income taxes of $16.4$24.1 million for the current quarter increased $116.7$13.0 million over the same quarter a year ago.
Excluding the gains, losses and nonrecurring items, net, from both years;the divested operations and current year acquisitions, earnings before
income taxes would have been $20.2 million in the current quarter compared to $11.1 million in the prior year. For the six
months ended September 30, 2002, earnings before income taxes of $40.5 million increased $129.7 million over the prior period
loss of $89.2 million. Excluding the gains, losses and nonrecurring items, net, divested operations, current year acquisitions
and excluding the accelerated depreciation and amortization recorded
during the quarter ended June 30, 2001; excluding divested operations;discussed above and excluding approximately $18 million of operating expenses
incurred during the first quarter of the prior year that willdid not recur as a result of the Restructuring Plan, the change from the
prior year would have been an increase of approximately $27.1$37.2 million for the threesix months ended JuneSeptember 30, 2002 to earnings of
$15.9$37.0 million from a loss of $(11.2)$0.2 million for the quartersix months ended JuneSeptember 30, 2001.
16
The Company's effective tax rate was 36%35.6% in the current quarter and 36.6%35.8% for the current six-month period, compared to 37% for
the prior year quarter and 36.5% in the prior year.six-month period ended September 30, 2001. The Company currently expects itsan effective
tax rate to remain atof approximately 36% for fiscal 2003. This estimate is based on current tax law and current estimates of earnings.
Basic and dilutedDiluted earnings (loss) per share for the current quarter was $0.12$0.17 compared to $0.08 a loss of $(0.71)year ago, and $0.28 for the current
six-month period compared to $(0.63) a year ago. Excluding the special charges included in gains, losses and nonrecurring items,
net; the accelerated depreciation and amortization recorded during the prior year; divested operations; current year
acquisitions; and approximately $18 million of operating expenses incurred during the first quarter of the prior year that willdid
not recur as a result of the Restructuring Plan, diluted earnings (loss) per share would have been a loss of
$(0.07)$0.14 for the current quarter and
$0.26 for the six months ended JuneSeptember 30, 2002, and would have been $0.08 for the prior year quarter and zero for the six
months ended September 30, 2001.
Capital Resources and Liquidity
Working capital at JuneSeptember 30, 2002 totaled $161.3$179.9 million compared to $182.6 million at March 31, 2002. At JuneSeptember 30,
2002, the Company had available credit lines under its revolving credit facility of $175 million of which $13.0 millionnone was outstanding.
The Company's debt-to-capital ratio (capital defined as long-term debt plus stockholders' equity) was 39%36% at JuneSeptember 30, 2002,
compared to 44% at March 31, 2002 and 39% at June 30, 2002. The decrease largely relates to strong cash flow during the current
quarter and the payoff of the 5.25% convertible subordinated notes ("5.25%
Notes") in April 2002.year. Included in long-term debt at both JuneSeptember 30, 2002 and March 31, 2002, are the Company's 3.75% convertible notes in the
amount of $175 million.million ("3.75% Notes"). The conversion price for the convertible notes3.75% Notes is $18.25 per share. If the price of the
Company's common stock increases above the conversion price, this debtthe 3.75% Notes may be converted to equity. Total stockholders'
equity has increased to $530.1$576.9 million at JuneSeptember 30, 2002 from $510.9 million at March 31, 2002, primarily due to the net
income reported during the current quarter andsix-month period, proceeds from the sale of common stock.stock, and shares of common stock and
warrants for the purchase of shares of common stock issued in connection with an acquisition discussed below.
20
Cash provided by operating activities was $60.2$113.7 million for the quartersix months ended JuneSeptember 30, 2002, compared to $39.3$30.0 million used by
operating activities
for the same period in the prior year. Operating cash flowThe largest single component in the year-to-year change was increased by $14.1net income of $26.0 million
in the current year and was reduced by $28.7as compared to a loss of $56.6 million in the prior year due to the net change in operating assets and liabilities. The changeyear. Operating cash flow in the current period primarily reflectsincludes
a refund of Federal income taxes received in June 2002 in the amount of approximately $40 million as a result of the utilization
of Federal tax loss carrybacks. Accounts receivable days sales outstanding ofwere 70 days at September 30, 2002, compared to 72
days at June 30, 2002 compared toand 63 days at March 31, 2002 and 75 days at June 30, 2001, increased primarily as a result of lower than expected
collections at the end of June.2002.
Investing activities used $15.6$31.0 million for the quarterfiscal year-to-date period ended JuneSeptember 30, 2002, compared to $27.0$53.0 million a
year previously. Investing activities in the current year include capitalized software development costs of $8.7$17.6 million ($5.911.4
million in 2001), capital expenditures of $1.9$4.9 million ($8.98.8 million in 2001) and $3.2$7.3 million of cost deferrals ($8.626.7 million
in 2001). Capitalized software costs in the current quarteryear include capitalization of the Company's recently announced new data
products, new security products and Acxiom's new customer data integration technology. Capital expenditures decreased compared
to the previous year due to measures the Company initiated to control costs, as well as the Company's decision to generally lease
equipment which is required to support customers to match cash inflows from customer contracts and cash outflows. Deferral of
costs, which are primarily salaries and 17
benefits and other direct and incremental third party costs, are being amortizedwere higher in the prior
year due to capitalization of equipment acquired in connection with customer solutions for which the customer has paid at
inception of the contract. The Company also defers revenue related to these transactions and amortizes both the deferred cost
and deferred revenue over the life of the related service agreement.
Deferral of costs in the prior year was higher due to capitalization under certain customer projects that have now been completed.contract. Investing activities during the current year also include advances made to
fund certain investments and joint ventures operations of $1.1 million, compared to $3.7$5.7 million in the prior year, and $0.8$8.3 million
of cash paid in the current quarter for the acquisition
of the Australian joint venture discussed below (net of cash acquired) for acquisitions in the current year as discussed below, and $7.7 million of cash proceeds
during the current year from a sale leaseback transaction discussed in note 2 to the accompanying condensed consolidated
financial statements.
Effective August 12, 2002, the Company acquired certain assets and assumed certain liabilities of an employment screening
business owned by Trans Union, LLC ("Trans Union"), a related party. This employment screening business was incorporated as
Acxiom Information Security Systems, Inc. ("AISS") and offers a range of services including criminal and civil records search,
education and reference verification, and other verification services for its customers. Management believes AISS will provide
the Company with additional products and services and will support the Company's initiatives in the screening, identification and
security areas. The aggregate purchase price of $34.6 million consisted of cash of $10.0 million (of which $7.5 million was paid
at closing and $2.5 million was paid on October 1, 2002), 664,562 shares of common stock valued at $10.5 million and warrants to
purchase 1,272,024 shares of common stock, at an exercise price of $16.32, valued at $14.1 million. If the value of the 664,562
shares of common stock on August 12, 2003 (twelve months after the closing date) is less than $10.0 million, the Company will be
required to pay additional cash consideration in the amount of the deficit, but not more than $5.0 million. If the value of
those shares on August 12, 2003 is greater than $13.0 million, Trans Union will be required to return shares of common stock in
the amount of the excess, but not more than $5.0 million worth of common stock (see note 3 to the condensed consolidated
financial statements). Based on the closing price of the Company's common stock of $12.60 per share on October 31, 2002, the
value of the 664,562 shares of common stock was $8.4 million. Accordingly, had this adjustment to the purchase price been
determined as of October 31, 2002, the Company would be required to pay Trans Union $1.6 million of additional cash
consideration, which would be charged to additional paid-in capital.
21
Effective June 1, 2002, the Company entered into an agreement with Publishing & Broadcasting Limited ("PBL") whereby Acxiom
purchased PBL's 50% ownership interest in an Australian joint venture ("Australian JV") for cash of $0.8 million (net of cash
acquired) and a note payable of $1.4 million, such that Acxiom now owns 100% of the JV operations.Australian operation. Additionally, the
purchase agreement provides that Acxiom may pay PBL additional consideration, based on a percentage of the JV's operatingAustralian operation's
results through March 31, 2007, and also provides PBL the option to repurchase between 25% and 49% of the Australian JV
subsequent to March 31, 2007, at an option price specified in the purchase agreement. The Australian JV purchase price, together
with Acxiom's previously recorded investment in the Australian JV, resulted in an excess of the purchase price over the fair
value of net assets acquired of $5.8 million (see note 43 to thesethe condensed consolidated financial statements).
With respect to certain of its investments, Acxiom has provided cash advances to fund losses and cash flow deficits of $1.1
million during the quartersix months ended JuneSeptember 30, 2002. Although Acxiom has no commitment to continue to do so, the Company may
continue to fund such losses and deficits until such time as certain of these investments become profitable. Additionally,
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 its investments ($21.323.5 million at JuneSeptember 30, 2002)2002,
excluding the valuation allowance of $4.0 million for temporary impairment). Also, during the current quarter,year, the Company recorded
unrealized losses on certain of its investments as a component of other comprehensive income (loss) in the amount of $0.3$1.5
million, net of related income tax effect. In the event that declines in the value of its investments continue, the Company may
be required to record further unrealized losses as a component of other comprehensive income (loss) and/or "other than temporary"
impairment as a charge to earnings.
Financing activities in the current year used $48.1$62.0 million, a large portion of which relates to net repayments of the Company's
revolving credit facility and certain other of the Company's credit facilities. Financing activities in the prior year provided
$17.9 million primarily due to proceeds received from debt. Proceeds from the sale of common stock through stock options and the
employee stock purchase plan were $6.2$12.1 million in the current year and $3.2$6.5 million respectively, during the quarters ended June 30,
2002 and 2001. Financing activities inprior year. Additionally, during
the prior year, provided $61.9the Company paid $23.5 million primarily due to proceeds received from debt.on certain equity forward contracts.
The Company has entered into certain synthetic operating lease facilities for computer equipment, furniture and an aircraft.
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. These synthetic lease arrangements provide the Company with
a more cost-effective way to acquire equipment than alternative financing arrangements and better match inflows of cash from
customer contracts to outflows related to lease payments. Lease terms under the computer equipment and furniture facility range
from three to seven 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.
Monthly payments under these facilities are approximately $4 million. The Company's
potential future purchase commitment over the next twelve months, should it elect to purchase the equipment upon expiration of the
initial term, is approximately $12.9 million.
1822
The lease term under the aircraft facility expires in January 2010, with the Company having the option at expiration to either
purchase the aircraft at a fixed price, renew the lease for an additional twelve month period (with a nominal purchase price being
paid at the expiration of the renewal period) or return the aircraft in the condition and manner required by the lease.
As of JuneSeptember 30, 2002, the total amount drawn under these synthetic operating lease facilities was $177.5$180.4 million and the
remaining capacity for additional funding (for computer equipment and furniture only) was $76.0$73.1 million. The Company has made
aggregate payments of $86.1$98.1 million through JuneSeptember 30, 2002, and has a remaining commitment under these synthetic operating lease facilities of
$77.6 million payable over the next nine years.2002.
The Company has also entered into a real estate synthetic lease arrangement with respect to a facility under construction in
Little Rock, Arkansas and land in Phoenix, Arizona. This synthetic lease arrangement provides the Company with more desirable
terms than other alternative construction financing options. Under the arrangement, the Company has agreed to lease each
property for an initial term of five years with an option to renew for an additional two years, subject to certain conditions.
The lessors have committed to fund up to a maximum of $45.8 million for the construction of the Little Rock building and
acquisition of the land at both sites. At JuneSeptember 30, 2002, the remaining amount of the commitment available from the lessors
was approximately $9.4$7.7 million. The Little Rock building is expected to cost approximately $30 to $35 million, including
interest during construction, and is expected to be completed in OctoberDecember 2002. The impact of the leasing arrangement is
expected to reduce operating cash flow by approximately $3 million per year over the term of the lease, which will be partially
offset by reductions in current leased facilities. At any time during the term of the lease, Acxiom may, at its option, purchase
the land and building for a price approximately equal to the amount expended by the lessors. If the Company does not purchase
the land and building, the Company has guaranteed a residual value of 87% of the land and construction costs or approximately $40
million at the end of the lease term. During June 2002, the Financial Accounting Standards Board ("FASB") issued an exposure
draft entitled "Consolidation of Certain Special-Purpose Entities." The provisions of this exposure draft, in its current form,
could impact the Company's accounting for this real estate synthetic lease arrangement, as discussed in the New Accounting
Pronouncements portion of this report. For a full discussion of futureHowever, management does not think this exposure draft will impact the Company's current
accounting for the synthetic operating lease facilities for computer equipment, furniture and the aircraft.
23
The following table presents Acxiom's contractual cash obligations includingand purchase commitments at September 30, 2002 (dollars in
thousands):
For the periods ending March 31, (1)
-------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
--------- --------- ---------- ---------- ---------- ----------- -----------
Long-term debt
$ 21,055 $ 23,375 $ 21,712 $ 76,781 $ 13,281 $ 206,795 $ 362,999
--------- --------- ---------- ---------- ---------- ----------- -----------
Synthetic
airplane lease 689 1,378 1,378 1,378 1,378 5,167 11,368
Synthetic equipment
and furniture
leases 18,316 25,972 8,243 1,695 607 304 55,137
Synthetic real
estate lease 1,500 3,000 3,000 1,500 -- -- 9,000
--------- --------- ---------- ---------- ---------- ----------- -----------
Total synthetic
leases 20,505 30,350 12,621 4,573 1,985 5,471 75,505
Equipment operating
leases 11,356 20,348 14,834 6,628 1,596 -- 54,762
Building operating
leases 4,420 8,096 7,062 5,674 5,503 42,690 73,445
Partnerships
building leases 1,187 2,373 2,301 2,084 2,084 4,665 14,694
Related party
airplane lease 451 902 902 902 902 2,707 6,766
--------- --------- ---------- ---------- ---------- ----------- -----------
Total lease payments 37,919 62,069 37,720 19,861 12,070 55,533 225,172
Operating software
license obligations under6,675 11,389 4,415 4,235 -- -- 26,714
--------- --------- ---------- ---------- ---------- ----------- -----------
Total operating
lease and software
license obligations 44,594 73,458 42,135 24,096 12,070 55,533 251,886
--------- --------- ---------- ---------- ---------- ----------- -----------
Total contractual
cash obligations $ 65,649 $ 96,833 $ 63,847 $ 100,877 $ 25,351 $ 262,328 $ 614,885
========= ========= ========== ========== ========== =========== ===========
Purchase commitment
on synthetic
airplane lease -- -- -- -- -- 4,398 4,398
Purchase commitments
on synthetic
equipment and
furniture leases 3,774 22,246 5,489 2,109 1,626 -- 35,244
leases
Purchase commitment
on synthetic
real estate lease -- -- -- 45,800 -- -- 45,800
--------- --------- ---------- ---------- ---------- ----------- -----------
Total purchase
commitments $ 3,774 $ 22,246 $ 5,489 $ 47,909 $ 1,626 $ 4,398 $85,442
========= ========= ========== ========== ========== =========== ===========
(1) Contractual cash obligations and purchase commitments for fiscal 2003 represent amounts for the period from October 1, 2002
through March 31, 2003. All other years represent contractual cash obligations and purchase commitments for the twelve
months ending March 31.
24
The synthetic lease term for the aircraft expires in January 2010, with the company having the option at expiration to either
purchase the aircraft at a fixed price, renew the 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. The purchase
commitment on the synthetic airplane lease arrangements discussed above, see
Item 7assumes the lease terminates and is not renewed, and the Company elects to purchase
the aircraft.
The purchase commitments on the synthetic equipment and furniture leases assume the leases terminate and are not renewed, and the
Company elects to purchase the assets. The purchase commitment on the synthetic real estate lease assumes the Company elects to
purchase the building from the lessor at the end of the Company'soriginal lease term. The Company also has the option to renew the lease
for two one-year periods, or to allow the lessor to sell the building.
The following table shows certain other contingencies or guarantees under which the Company could be required, in certain
circumstances, to make cash payments as of September 30, 2002 annual report(dollars in thousands):
Residual value guarantee on Form 10-K.
19
In connection withrelated
party airplane lease $ 4,363
Residual value guarantee on the
constructionsynthetic real estate lease 40,000
Contingent cash payment on AISS
acquisition 5,000
Guarantees on certain partnerships'
indebtedness and other loans 5,715
Outstanding letters of certaincredit 10,658
===============
The total of the Company'spartnerships' indebtedness and other buildings and facilities,loans, of which the Company has entered into 50/50
joint ventures with local real estate developers. In each case,guarantees the Companyportion noted above, is guaranteeing portions$14.1
million.
The related party airplane lease relates to an aircraft leased from a business partially owned by an officer of the loans for the
buildings. The aggregate amount of the guarantees at June 30, 2002 was $5.8 million.Company. The
Company has agreed to pay the difference, if any, between the sales price of the aircraft and 70% of the related loan balance
should the Company elect to exercise its early termination rights or not recordedextend the guarantee
obligation orlease beyond its initial term and the underlying assets inlessor
sells the accompanying condensed consolidated financial statements.equipment as a result.
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 should be
noted, however, that the Company has spent considerable capital over recent years building the AbiliTec infrastructure. 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 sellslicenses software and sells hardware to customers. In addition, new outsourcing or
facilities management contracts frequently require substantial up-front capital expenditures in order to acquire or replace
existing assets. We believeManagement believes that ourthe Company's existing available debt and cash flow from operations will be sufficient
to meet ourits working capital and capital expenditure requirements for the foreseeable future.
25
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 our operating results from ourthe Company's projections or from potential future acquisitions, the Company could
use available borrowing capacity under its revolving credit agreement, and/or 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 other debt or equity
securities at terms favorable to the Company, or that such funding would be available.
The Company has never paid cash dividends on its common stock. TheIt is possible that dividends may be declared in the future if
the board of directors determines that conditions warrant the payment of dividends. For the present, however, the Company presently
intends to retain its earnings to provide funds for its businesscurrent operations and for the continued expansion of its business. Thus, it does not anticipate paying cash dividends in the foreseeable
future.
Other Information
No single customer accounted for more than 10% of revenue during the quarter or the six months ended JuneSeptember 30, 2002. During the quarter ended June 30,
2001, theThe
Company had one customer, Allstate, which accounted for $24.4$21.5 million (11.9%(10.0%) of revenue.
Effective August 12, 2002,revenue during the Company acquiredquarter ended September 30,
2001, and $45.9 million (10.9%) of revenue during the assets and assumed certain liabilities of an employment screening business owned
by Trans Union, LLC ("Trans Union"), a related party. This employment screening business offers a range of services including
criminal and civil records search, education and reference verification, and other verification services for its customers.
Management believes the acquired business will provide the Company with additional products and services and will support the
Company's initiatives in the identification and security arena, including with governmental agencies. The aggregate purchase price
of $35 million consisted of cash of $10 million (of which $7.5 million was paid at closing and $2.5 million is payable on October 1,
2002) and 664,562 shares of common stock valued at $10.5 million and warrants to purchase 1,272,024 shares of common stock valued at
$14.5 million. If the value of the 664,562 shares of common stock twelvesix months after the closing date is less than $10 million, the
20
Company will be required to pay additional cash consideration in the amount of the deficit, but not more than $5 million. If the
value of those shares twelve months after the closing date is greater than $13 million, Trans Union will be required to return
shares of common stock in the amount of the excess, but not more than $5 million worth of common stock. The Company has not yet
completed the allocation of the purchase price to the net assets acquired. The results of operations of this acquired business will
be included in the Company's consolidated results from the date of acquisition. The acquired business generates annual revenues of
approximately $14 million. The pro forma effect of this acquisition is not material to the Company's consolidated results for any of
the periods presented.ended September 30, 2001.
In accordance with a data center management agreement dated July 27, 1992 between Acxiom and Trans Union, Acxiom (through its
subsidiary, Acxiom CDC, Inc.) acquired all of Trans Union's interest in its Chicago data center and agreed to provide Trans Union
with various data center management services. The current term of the agreement expires in 2005. In a 1992 letter agreement,
Acxiom agreed to use its best efforts to cause one person designated by Trans Union to be elected to Acxiom's board of
directors. Trans Union 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, Acxiom agreed to use its best efforts to cause two people
designated by Trans Union to be elected to Acxiom's board of directors. In addition to Mr. Gambill, Trans Union designated
Robert A. Pritzker, an executive officer of Marmon Industrial Corporation, who was appointed to fill a newly created position on
Acxiom's board of directors in October 1994. Mr. Pritzker was elected to serve a three-year term at the 1995 annual meeting and
was elected to serve a second three-year term at the 1998 annual meeting. Mr. Pritzker resigned from the board in May 2000, to
attend to other business obligations. While these undertakings by Acxiom are in effect until the end of the current term of the
agreement, Acxiom has been notified that Trans Union does not presently intend to designate another individual to serve as
director. DuringAcxiom recorded revenue from Trans Union of approximately $13.2 million for the quarter ended JuneSeptember 30, 2002 Acxiom
recordedand
approximately $12.9$25.8 million in revenue from Trans Union.for the six months ended September 30, 2002. All revenues received from Trans Union have been in
accordance with the pricing terms established under the agreements.
Effective April 1, 2002, Acxiom and Trans Union entered into a marketing joint venture that will serve as a sales agent for both
parties for certain existing mutual clients. The purpose of the joint venture is to provide these joint clients with
leading-edge solutions that leverage the strengths of both parties. Expected to serve a small number of financial service
26
clients, the joint venture will market substantially all of the products and services currently offered by Acxiom and Trans
Union, as well as any new products and services that may be agreed upon. The parties have agreed to share equally the aggregate
incremental increase (or decrease) in revenue and direct expenses generated from any client supported by the joint venture. If
either party determines that its participation in the joint venture is economically disadvantageous, it may terminate the
arrangement after certain negotiation procedures specified in the agreement have occurred. The results of operations from this
joint venture were not material for the quarter or for the six months ended JuneSeptember 30, 2002.
21
New Accounting Pronouncements
The FASB currently has outstanding in exposure draft format, a proposed Statement of Financial Accounting Standards ("SFAS"),
"Accounting for Financial Instruments with Characteristics of Liabilities, Equity or Both." This exposure draft, in its current
form, could have a significant impact on the Company's accounting for its convertible debt obligations by requiring some amount of
those convertible debt obligations to be classified as equity. The issuance of a final SFAS is expected during fiscal 2003. The
Company will continue to monitor the progress of this exposure draft and its potential impact on the Company's financial position
and/or results of operations.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections." Under the provisions of SFAS No. 145, gains and losses from the early extinguishment of debt are no
longer classified as an extraordinary item, net of income taxes, but are included in the determination of pretax earnings. The
effective date for SFAS No. 145 is for fiscal years beginning after May 15, 2002, with early application encouraged. Upon
adoption, the Company will reclassify all gains and losses from the extinguishment of debt previously reported as an
extraordinary item to pretax earnings.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
addresses accounting and reporting for costs associated with exit or disposal activities by requiring that a liability for a cost
associated with an exit or disposal activity be recognized and measured at fair value only when the liability is incurred. SFAS
No. 146 also nullifies Emerging Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31, 2002.
The FASB currently has outstanding in exposure draft format, a proposed Statement of Financial Accounting Standards ("SFAS"),
"Accounting for Financial Instruments with Characteristics of Liabilities, Equity or Both." This exposure draft, in its current
form, could have a significant impact on the Company's accounting for its convertible debt obligations by requiring some amount
of those convertible debt obligations to be classified as equity. The issuance of a final SFAS is expected during fiscal 2003.
The Company will continue to monitor the progress of this exposure draft and its potential impact on the Company's financial
position and/or results of operations.
In May 2002, the FASB issued an exposure draft entitled "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" as a proposed interpretation of SFAS No. 5, 57 and 107 ("Proposed
Interpretation"). Under the provisions of the Proposed Interpretation, a guarantor would be required to recognize, at the
inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. A guarantor
would also be required to make additional disclosures in its financial statements about obligations under certain guarantees
issued. The Proposed Interpretation, if issued as an authoritative pronouncement in its current form, would require the Company
27
to recognize a liability in its consolidated financial statements equal to the fair value of its guarantees, including any
guarantees issued in connection with its synthetic equipment and real estate lease arrangements. The provisions of the Proposed
Interpretation, in its current form, would be effective in the first interim period of the first fiscal year beginning after
September 15, 2002, as a cumulative effect of a change in accounting principle. The Company will continue to monitor this
Proposed Interpretation and the potential impact to its consolidated financial statements.
As previously discussed, the FASB issued an exposure draft in June 2002 entitled "Consolidation of Certain Special-Purpose
Entities."Entities" ("Exposure Draft"). Under the provisions of the exposure draft,Exposure Draft, the underlying assets, liabilities and results of
activities of a large number of special-purpose entities ("SPE's") would be required to be consolidated into the financial
statements of its primary beneficiary. Accordingly, Acxiomthe Company may be required to record on its consolidated balance sheet the underlying real estate asset and
related depreciation expense and the underlying debt and related debtinterest expense associated with the real estate synthetic lease
arrangement discussed above should the exposure draftExposure Draft be issued in its current form. The provisions of the exposure draft,Exposure Draft, in
its current form, would be effective and applied to all SPE's existing as of the beginning of the year of the first fiscal year
or interim period beginning after March 15, 2003. However, no final authoritative pronouncement has been issued and the exposure draftExposure
Draft may change prior to issuance in its final form. The Company will continue to monitor this exposure draftExposure Draft and the potential
impact on its consolidated financial statements.
In October 2002, the FASB issued an exposure draft entitled "Accounting for Stock-Based Compensation - Transition and Disclosure"
as an amendment of SFAS No. 123. This exposure draft provides alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation. In addition, it would require more prominent disclosures
about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in
both annual and interim financial statements. The provisions of this exposure draft, in its current form, would be effective for
fiscal years ending after December 15, 2002, and for financial reports containing condensed financial statements for interim
periods beginning after December 15, 2002. The Company will continue to monitor this exposure draft and its potential impact to
the Company's consolidated financial statements.
Forward-looking Statements
This document and other written reports and oral statements made from time to time by us and our representatives contain
forward-looking statements. These statements, which are not statements of historical fact, may contain estimates, assumptions,
projections and/or expectations regarding our financial position, results of operations, market position, product development,
22
growth opportunities, economic conditions, and other similar forecasts and statements of expectation. We generally indicate
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 our actual results and experiences to differ materially from the anticipated
results and expectations expressed in such forward-looking statements.
28
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 complexity and uncertainty regarding the development of new high technologies;
o the possible loss of market share through competition or the acceptance of our technological offerings on a less rapid
basis than expected;
o the possibility that economic or other conditions might lead to a reduction in demand for our products and services;
o the possibility that the current economic slowdown may worsen and/or persist for an unpredictable period of time;
o the possibility that economic conditions will not improve as rapidly as expected;
o the possibility that significant customers may experience extreme, severe economic difficulty;
o the possibility that sales cycles may lengthen;
o the continued ability to attract and retain qualified technical and leadership associates and the possible loss of
associates to other organizations;
o the ability to properly motivate our sales force and other associates;
o the ability to achieve cost reductions and avoid unanticipated costs;
o the continued availability of credit upon satisfactory terms and conditions;
o the introduction of competent, competitive products, technologies or services by other companies;
o changes in consumer or business information industries and markets;
o our ability to protect proprietary information and technology or to obtain necessary licenses on commercially reasonable
terms;
o the difficulties encountered when entering new markets or industries;
23
o changes in the legislative, accounting, regulatory and consumer environments affecting our business, including but not
limited to litigation, legislation, regulations and customs relating to our ability to collect, manage, aggregate and
use data;
o the possibility that data suppliers might withdraw data from us, leading to our inability to provide certain products and
services;
29
o the effect of our short-term contracts on the predictability of our revenues or the possibility that customers may cancel
or modify their agreements with us;
o the possibility that the amount of ad hoc project work will not be as expected;
o the potential loss of data center capacity or interruption of telecommunication links or power sources;
o postal rate increases that could lead to reduced volumes of business;
o the potential disruption of the services of the United States Postal Service;
o the successful integration of acquired businesses and strategic alliances;
o with respect to the providing of products or services outside our primary base of operations in the United States, all of
the above factors and the difficulty of doing business in numerous sovereign jurisdictions due to differences in
culture, laws and regulations; and
o other competitive factors.
In light of these risks, uncertainties and assumptions, we caution readers not to place undue reliance on any forward-looking
statements. We undertake 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.
2430
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Acxiom's earnings are affected by changes in short-term interest rates primarily as a result of its revolving credit agreement
and term note, which bear 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 JuneSeptember 30, 2002 and March 31,
2002, the fair value of Acxiom's fixed rate long-term obligations approximated carrying value.
Although Acxiom conducts business in foreign countries, principally the United Kingdom, foreign currency translation gains and
losses are not material to Acxiom's consolidated financial position, results of operations or cash flows. Accordingly, Acxiom is
not currently subject to material foreign exchange rate risks from the effects that exchange rate movements of foreign currencies
would have on Acxiom's future costs or on future cash flows it would receive from its foreign investment. To date, 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.
2531
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
As required under the Sarbanes-Oxley Act of 2002, within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of the Company's management, including the
Registrant's Company Leader (Chief Executive Officer) and its Company 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 Registrant's Company Leader and
its Company Financial Operations Leader concluded that the Company's disclosure controls and procedures were effective.
(b) Changes in Internal Controls
Except as discussed in the following paragraph, there were no significant changes in the Company's internal controls or
other factors that could significantly affect these controls subsequent to the date of their evaluation.
On October 14, 2002, the Company retained Ernst & Young LLP ("E&Y") to "co-source" the management and operation of
an internal audit function. Under this "co-source" arrangement, both E&Y and the Company will provide management and
staff for the internal audit function, under the direction of Company management. On October 30, 2002, the audit committee
of the board of directors approved this arrangement.
32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.Proceedings
On September 20, 1999, the Company and certain of its directors and officers were sued by an individual shareholder in
a purported class action filed in the United States District Court for the Eastern District of Arkansas ("the
Court"). The action alleges that the defendants violated Section 11 of the Securities Act of 1933 ("the 1933 Act") in
connection with the July 23, 1999 public offering of 5,421,000 shares of the common stock of the Company. In
addition, the action seeks to assert liability against the Company Leader pursuant to Section 15 of the 1933 Act. The
action seeks to have a class certified of all purchasers of the stock sold in the public offering. Two additional
suits were subsequently filed in the same venue against the same defendants and asserting the same allegations. On
March 29, 2001, the Court granted the defendants' motion to dismiss. The plaintiffs appealed the decision to dismiss
to the United States Court of Appeals for the Eighth Circuit. On July 15, 2002, the Eighth Circuit upheld the Court's
motion to dismiss. Subsequent todismiss, and on September 11, 2002, the Eighth Circuit's decision,Circuit denied the plaintiffs have filed aplaintiff's petition for rehearing, which is currently pendingrehearing.
The Company is involved in various other claims and litigation matters that arise in the ordinary course of the
business. None of these, however, are believed to be material in their nature or scope.
Item 2. Changes in Securities and Use of Proceeds
Effective August 12, 2002, the Company issued 664,562 shares of common stock valued at $10.5 million and warrants to
purchase 1,272,024 shares of common stock valued at $14.1 million in partial consideration for the acquisition of
certain assets of an employment screening business owned by Trans Union, a related party. The warrants have a term of
fifteen years and may be exercised at any time prior to August 12, 2017, for an exercise price of $16.32 per share. A
detailed description of this transaction is contained in Part I, Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operation - Liquidity and Capital Resources." The shares and warrants issued to
Trans Union were not registered under the Securities Act of 1933, but rather were issued in reliance upon the
exemption from registration afforded by Section 4(2) thereof. In relying on such exemption, the Company considered
several factors including the sophistication of Trans Union, and the fact that Trans Union represented that it would
hold the shares and warrants for investment purposes and not with a view to further public distribution.
33
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on August 7, 2002. At the meeting, the shareholders voted
on the following three proposals:
1) A proposal for the election of four directors - Voting results for each individual nominee were as follows:
General Wesley K. Clark, 79,392,941 votes for and 2,625,868 votes withheld; Mr. William T. Dillard, 79,221,025
votes for and 2,797,784 votes withheld; Mr. Harry C. Gambill, 68,023,314 votes for and 13,995,495 votes
withheld; and Mr. Thomas F. (Mack) McLarty, III, 79,309,564 votes for and 2,709,245 votes withheld. These four
elected directors will serve with the other six Board members: Dr. Ann Hayes Die, Mr. William J. Henderson,
and Mr. Charles D. Morgan, whose terms will expire at the 2003 Annual Meeting and Mr. Rodger S. Kline, Mr.
Stephen M. Patterson, and Mr. James T. Womble, whose terms will expire at the 2004 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 2.0 million shares - Voting results for this proposal were as follows: 60,043,979 votes for;
21,581,304 votes against and 393,526 votes abstained.
3) A stockholder proposal regarding the independence of the Board of Directors' nominating committee - Voting
results for this proposal were as follows: 21,973,808 votes for; 46,400,966 votes against; 422,807 votes
abstained and 13,221,228 non-votes.
34
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
10(h)Report:
10(a) First Amendment to Amended and Restated Credit Agreement, dated as of May 13, 2002.
10(b) Second Amendment to Term Credit Agreement dated as of May 13, 2002 between Acxiom Corporation Leadership Team Compensation Plan - Fiscal Year 2003and JP
Morgan Chase Bank.
10(c) Fifth Amendment to the Participation Agreement and certain operative agreements dated as of February 28,
2002.
10(d) Sixth Amendment to the Participation Agreement and certain operative agreements dated as of May 13, 2002.
10(d) Seventh Amendment to the Participation Agreement and certain operative agreements dated as of October 24,
2002.
99.1 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
99.2 Certification of Company Financial Operations Leader (principal financial officer) pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
A report was filed on May 16, 2002, which reported that the Audit Committee of the Board of Directors of the
Company dismissed the Company's independent auditors, Arthur Andersen LLP, and engaged the services of KPMG LLP as
its independent auditors, effective May 16, 2002.
26Not applicable
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: August 14,November 12, 2002
By: /s/ Jefferson D. Stalnaker
-----------------------------------------------------------------------------------------------
(Signature)
Jefferson D. Stalnaker
Company Financial Operations Leader
(principal financial and accounting officer)
36
ACXIOM CORPORATION AND SUBSIDIARIES
CERTIFICATION
I, Charles D. Morgan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Acxiom Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of and
for the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and
37
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: November 12, 2002
By: /s/ Charles D. Morgan
--------------------------------------------------
(Signature)
Charles D. Morgan
Company Leader
(principal executive officer)
38
ACXIOM CORPORATION AND SUBSIDIARIES
CERTIFICATION
I, Jefferson D. Stalnaker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Acxiom Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of and
for the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and
39
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: November 12, 2002
By: /s/ Jefferson D. Stalnaker
-----------------------------------------
(Signature)
Jefferson D. Stalnaker
Company Financial Operations Leader
(principal financial and accounting officer)
40
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
10(h)Report:
10(a) First Amendment to Amended and Restated Credit Agreement, dated as of May 13, 2002.
10(b) Second Amendment to Term Credit Agreement dated as of May 13, 2002 between Acxiom Corporation Leadership Team Compensation Plan - Fiscal Year 2003and JP
Morgan Chase Bank.
10(c) Fifth Amendment to the Participation Agreement and certain operative agreements dated as of February 28,
2002.
10(d) Sixth Amendment to the Participation Agreement and certain operative agreements dated as of May 13, 2002.
10(d) Seventh Amendment to the Participation Agreement and certain operative agreements dated as of October 24,
2002.
99.1 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
99.2 Certification of Company Financial Operations Leader (principal financial officer) pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
A report was filed on May 16, 2002, which reported that the Audit Committee of the Board of Directors of the
Company dismissed the Company's independent auditors, Arthur Andersen LLP, and engaged the services of KPMG LLP as
its independent auditors, effective May 16, 2002.Not applicable