SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999 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 February 2, 2000 was 86,595,765.
1
Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Company for which report is filed:
ACXIOM CORPORATION
The condensed consolidated financial statements included herein have been
prepared by Registrant, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of the Registrant's
management, however, all adjustments necessary for a fair statement of the
results for the periods included herein have been made and the disclosures
contained herein are adequate to make the information presented not misleading.
All such adjustments are of a normal recurring nature.
2
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
December 31, March 31,
1999 1999
------------ ------------
Assets
------
Current assets:
Cash and cash equivalents $ 17,929 12,604
Trade accounts receivable, net 214,557 184,799
Refundable income taxes - 12,651
Deferred income taxes 30,643 30,643
Other current assets 82,592 61,302
------------ ------------
Total current assets 345,721 301,999
------------ ------------
Property and equipment 361,835 341,841
Less - Accumulated depreciation and amortization 123,384 115,460
------------ ------------
Property and equipment, net 238,451 226,381
------------ ------------
Software, net of accumulated amortization 48,311 37,400
Excess of cost over fair value of net assets acquired 161,032 122,483
Other assets 241,013 201,537
------------ ------------
$ 1,034,528 889,800
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt 19,071 23,355
Trade accounts payable 32,886 60,216
Accrued merger and integration costs 16,648 33,181
Accrued payroll and related expenses 16,854 18,224
Other accrued expenses 27,316 25,744
Deferred revenue 10,967 7,195
Income taxes 37,649 -
------------ ------------
Total current liabilities 161,391 167,915
------------ ------------
Long-term debt, excluding current installments 308,375 325,223
Deferred income taxes 38,889 38,889
Stockholders' equity
Common stock 8,656 8,106
Additional paid-in capital 290,058 186,011
Retained earnings 230,540 167,013
Accumulated other comprehensive income (loss) (306) (324)
Treasury stock, at cost (3,075) (3,033)
------------ ------------
Total stockholders' equity 525,873 357,773
------------ ------------
Commitments and contingencies
$ 1,034,528 889,800
============ ============
See accompanying notes to condensed consolidated financial statements.
3
FORM 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
For the Three Months Ended
December 31
1999 1998
------------ ------------
Revenue $ 244,303 193,910
Operating costs and expenses:
Salaries and benefits 95,490 67,588
Computer, communications and other equipment 36,400 29,779
Data costs 25,825 26,142
Other operating costs and expenses 40,199 35,068
Special charges - 9,375
------------ ------------
Total operating costs and expenses 197,914 167,952
------------ ------------
Income from operations 46,389 25,958
------------ ------------
Other income (expense):
Interest expense (5,624) (4,518)
Other, net 1,598 957
------------ ------------
(4,026) (3,561)
------------ ------------
Earnings before income taxes 42,363 22,397
Income taxes 15,885 8,359
------------ ------------
Net earnings $ 26,478 14,038
------------ ------------
Earnings per share:
Basic $ .31 .18
------------ ------------
Diluted $ .29 .16
------------ ------------
See accompanying notes to condensed consolidated financial statements.
4
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
For the Nine Months Ended
December 31
1999 1998
------------ ------------
Revenue $ 702,649 538,452
Operating costs and expenses:
Salaries and benefits 271,040 202,653
Computer, communications and other equipment 109,143 82,967
Data costs 80,473 80,577
Other operating costs and expenses 125,475 89,936
Special charges - 118,747
------------ ------------
Total operating costs and expenses 586,131 574,880
------------ ------------
Income (loss) from operations 116,518 (36,428)
------------ ------------
Other income (expense):
Interest expense (17,977) (12,917)
Other, net 3,098 5,871
------------ ------------
(14,879) (7,046)
------------ ------------
Earnings (loss) before income taxes 101,639 (43,474)
Income taxes 38,112 (8,701)
------------ ------------
Net earnings (loss) $ 63,527 (34,773)
============ ============
Earnings (loss) per share:
Basic $ .75 (.45)
============ ============
Diluted $ .71 (.45)
============ ============
See accompanying notes to condensed consolidated financial statements.
5
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the Nine Months Ended
December 31
1999 1998
---------- ----------
Cash flows from operating activities:
Net earnings (loss) $ 63,527 (34,773)
Non-cash operating activities:
Depreciation and amortization 62,281 45,696
Loss (gain) on disposal of assets 311 (23)
Provision for returns and doubtful accounts 685 2,153
ESOP compensation - 2,055
Special charges - 118,747
Changes in operating assets and liabilities:
Accounts receivable (22,195) (60,848)
Other assets (28,646) (24,741)
Accounts payable and other liabilities (5,012) (17,323)
Merger and integration costs (16,533) (26,685)
--------- ----------
Net cash provided by operating activities 54,418 4,258
--------- ----------
Cash flows from investing activities:
Disposition of assets 1,424 693
Development of software (25,465) (20,379)
Capital expenditures (88,084) (87,435)
Proceeds from sale and leaseback transaction 34,763 -
Sales of marketable securities - 11,794
Investments in joint ventures (4,246) (10,607)
Net cash paid in acquisitions (32,897) (22,296)
--------- ----------
Net cash used by investing activities (114,505) (128,230)
--------- ----------
Cash flows from financing activities:
Proceeds from debt 190,882 90,758
Payments of debt (191,447) (97,951)
Sale of common stock 66,028 19,202
--------- ----------
Net cash provided by financing activities 65,463 12,009
--------- ----------
Effect of exchange rate changes on cash (51) 5
--------- ----------
Net increase (decrease) in cash and cash equivalents 5,325 (111,958)
Cash and cash equivalents at beginning of period 12,604 117,652
---------- ----------
Cash and cash equivalents at end of period $ 17,929 5,694
---------- ----------
Supplemental cash flow information:
Cash paid (received) during the period for:
Interest $ 21,987 12,312
Income taxes (12,190) 5,580
---------- ----------
See accompanying notes to condensed consolidated financial statements.
6
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Certain note information has been omitted because it has not changed
significantly from that reflected in Notes 1 through 18 of the Notes to
Supplemental Consolidated Financial Statements filed as a part of the
Registrant's restated consolidated financial statements as a result of the
Registrant's merger with Computer Graphics of Arizona, Inc. and all of its
affiliated companies, as filed with the Securities and Exchange Commission on a
Form 8-K dated June 21, 1999.
7
ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. During the year ended March 31, 1999, the Company recorded special charges
totaling $118.7 million related to merger and integration charges
associated with the May & Speh merger and the write down of other impaired
assets.
The following table shows the balances which were accrued as of March
31,1999 and the changes in those balances during the nine months ended
December 31, 1999 (dollars in thousands):
March 31, December 31,
1999 Payments 1999
---- -------- ----
Associate-related reserves $ 4,354 1,957 2,397
Contract termination costs 27,000 13,500 13,500
Other accruals 1,827 1,076 751
-------- -------- ----------
$ 33,181 16,533 16,648
======== ======== ==========
The bulk of the associate-related reserves and contract termination costs
will be paid during the current fiscal year. The other accruals will be
paid out over periods ranging up to five years.
On May 28, 1999, the Company completed the acquisition of Computer Graphics
of Arizona, Inc. ("Computer Graphics") and all of its affiliated companies
in a stock-for-stock merger. The Company issued 1,871,343 shares of its
common stock in exchange for all the outstanding common stock of Computer
Graphics. Computer Graphics, a privately held enterprise headquartered in
Phoenix, Arizona, is a computer service bureau principally serving
financial services direct marketers. This acquisition was accounted for as
a pooling-of-interests and, accordingly, the consolidated financial
statements for periods prior to the combination have been restated to
include the accounts and results of operations of Computer Graphics.
Included in the statement of operations for the nine months ended December
31, 1999 are revenues of $5.3 million and earnings before income taxes of
$1.7 million for Computer Graphics for the period from April 1, 1999 to May
28, 1999. For the nine months ended December 31, 1998 Computer Graphics had
revenues of $17.4 million and earnings before income taxes of $2.1 million.
Effective April 1, 1999, the Company acquired the assets of Horizon
Systems, Inc. ("Horizon") for $16.5 million in cash and common stock and
the assumption of certain liabilities of Horizon, and other cash and stock
consideration based on the future performance of Horizon. The acquisition
has been accounted for as a purchase and, accordingly, the results of
operations of Horizon are included in the consolidated results of
operations from the date of the acquisition. The excess of the purchase
price over the net assets acquired of $14.1 million is being amortized over
20 years.
Effective August 1, 1999 the Company acquired all of the issued and
outstanding common stock of Access Communication Systems, Inc. ("Access")
for 300,000 shares of the
8
Company's common stock, valued at $6.3 million. The acquisition has been
accounted for as a purchase and, accordingly, the results of operations of
Access are included in the consolidated results of operations from the date
of acquisition. The excess of the purchase price over the net assets
acquired of $8.6 million is being amortized over 20 years.
Effective December 15, 1999 the Company acquired the net assets of Litton
Enterprise Solutions ("LES") for cash of $17.3 million. The acquisition has
been accounted for as a purchase and, accordingly, the results of
operations of LES are included in the consolidated results from the date of
acquisition. The excess of the purchase price over the net assets acquired
of $18.9 million is being amortized over 20 years.
The pro forma effect of the above purchase acquisitions is not material to
the Company's consolidated results of operations for the periods reported.
2. Included in other assets are unamortized deferred expenses and outsourcing
capital expenditure costs in the amount of $47.3 million and $28.4 million
at December 31, 1999 and March 31, 1999, respectively. These costs are
amortized over the life of the related contract. Noncurrent receivables
from software license, data, and equipment sales are also included in other
assets in the amount of $39.4 million and $24.9 million at December 31,
1999 and March 31, 1999, respectively. The current portion of such
receivables is included in other current assets in the amount of $41.2
million and $24.6 million as of December 31, 1999 and March 31, 1999,
respectively. Other assets also included $118.5 million and $103.5 million
in capitalized software license agreements at December 31, 1999 and March
31, 1999, respectively. These licenses are enterprise-wide agreements for
systems software from several vendors with terms of from five to seven
years. The licenses are being amortized over their estimated useful lives.
The offsetting liabilities for the present value of the future payments are
included in long-term debt. Also included in other assets are investments
in unconsolidated joint ventures in the amount of $21.8 million and $16.9
million at December 31, 1999 and March 31, 1999 respectively.
9
3. Long-term debt consists of the following (dollars in thousands):
December 31, March 31,
1999 1999
------------ ------------
5.25% Convertible subordinated notes due 2003; convertible $ 115,000 115,000
at the option of the holder into shares of common stock at
a conversion price of $19.89 per share; redeemable at the
option of the Company at any time after April 3, 2001
Unsecured revolving credit agreement 75,690 55,384
6.92% Senior notes due March 30, 2007, payable in annual 30,000 30,000
installments of $4,286 commencing March 30, 2001; interest
is payable semi-annually
3.12% Convertible note, interest and principal due April 30, - 25,000
1999; convertible at maturity into two million shares of
common stock
Capital leases on land, buildings and equipment payable in 18,630 20,587
monthly payments of $357 of principal and interest; remaining
terms of from five to twenty years; interest rates at
approximately 8%
Software license liabilities payable over terms of from five 69,631 76,748
to seven years; effective interest rates at approximately 6%
8.5% Unsecured term loan; quarterly principal payments of $200 8,600 9,000
plus interest with the balance due in 2003
9.75% Senior notes, due May 1, 2000, payable in annual 2,143 4,286
installments of $2,143 each May 1; interest is
payable semi-annually
Other capital leases, debt and long-term liabilities 7,752 12,573
---------- ----------
Total long-term debt 327,446 348,578
Less current installments 19,071 23,355
---------- ----------
Long-term debt, excluding current installments $ 308,375 325,223
========== ==========
10
In April 1999, the holder of the 3.12% convertible note exchanged the note
for two million shares of the Company's common stock. Accordingly, the
balance of the debt and related accrued interest of $2.1 million has been
reclassified into equity.
In connection with the construction of the Company's new headquarters
building and a new customer service facility in Little Rock, Arkansas, the
Company has entered into 50/50 joint ventures with local real estate
developers. In each case, the Company is guaranteeing portions of the loans
for the buildings. The aggregate amount of the guarantees at December 31,
1999 was approximately $4.6 million.
On December 29, 1999 the Company completed a new unsecured revolving credit
agreement with a group of commercial banks and completely repaid the
balance due under the prior revolving credit agreement. The new agreement
expires December 29, 2002 unless extended in accordance with the terms of
the agreement. The new agreement provides for revolving loans and letters
of credit in amounts of up to $275 million and provides for interest at
various market rates at the Company's option, included the prime rate, a
LIBOR-based rate and a rate based on the federal funds rate. The agreement
requires a commitment fee of 0.3% on the average unused portion of the loan
commitment.
11
4. Below is a calculation and reconciliation of the numerator and denominator
of basic and diluted earnings per share (dollars in thousands, except per
share amounts):
For the Quarter Ended For the Nine Months Ended
--------------------- -------------------------
December 31, December 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Basic earnings (loss) per share:
Numerator - net earnings (loss) $ 26,478 14,038 63,527 (34,773)
========== ========== ========== ==========
Denominator:
Weighted average shares
Outstanding 85,895 79,563 84,474 77,100
========== ========== ========== ==========
Earnings (loss) per share: $ .31 .18 .75 (.45)
========== ========== ========== ==========
Diluted earnings (loss) per share:
Numerator:
Net earnings (loss) $ 26,478 14,038 63,527 (34,773)
Interest expense on
convertible debt
(net of tax effect) 943 1,083 2,829 --
---------- ---------- ---------- ----------
$ 27,421 15,121 66,356 (34,773)
========== ========== ========== ==========
Denominator:
Weighted average shares
Outstanding 85,895 79,563 84,474 77,100
Effect of common stock
options and warrants 2,942 4,451 3,547 --
Convertible debt 5,783 7,783 5,783 --
---------- ---------- ---------- ----------
94,620 91,797 93,804 77,100
========== ========== ========== ==========
Earnings (loss) per share $ .29 .16 .71 (.45)
========== ========== ========== ==========
12
Options to purchase shares of common stock that were outstanding during the
periods reported, but were not included in the computation of diluted
earnings per share because the option exercise price was greater than the
average market price of the common shares, are shown below:
For the Quarter Ended For the Nine Months Ended
--------------------- -------------------------
December 31, December 31, December 31,
1999 1998 1999
---- ---- ----
Number of shares under
option (in thousands) 6,122 1,378 3,849
Range of exercise prices $17.93 - 54.00 $24.81 - 54.00 $17.93 - 54.00
============== ============== ==============
All potentially dilutive securities were excluded from the diluted earnings
per share calculations for the nine months ended December 31, 1998 because
they were antidilutive. The number of shares under stock options and
warrants excluded from the earnings per share computation was 6,110,000.
Potentially dilutive shares related to convertible debt which were excluded
were 7,783,000. Interest expense on the convertible debt (net of tax
effect) excluded in computing diluted earnings (loss) per share was
$3,208,000.
5. Trade accounts receivable are presented net of allowances for doubtful
accounts, returns, and credits of $6.7 million and $5.6 million at December
31, 1999 and March 31, 1999, respectively.
13
6. The following tables present information by business segment (dollars in
thousands):
For the Quarter Ended For the Nine Months Ended
--------------------- -------------------------
December 31, December 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Services $ 156,115 115,069 448,873 317,537
Data Products 60,684 45,784 168,583 137,591
Information Technology
(I.T.) Management 50,127 45,642 139,116 113,718
Intercompany eliminations (22,623) (12,585) (53,923) (30,394)
--------- ------- ------- -------
Total revenue $ 244,303 193,910 702,649 538,452
========= ======= ======= =======
Services 36,869 23,809 95,620 62,281
Data Products 10,191 2,865 18,230 14,359
Information Technology
(I. T.) Management 12,425 12,901 34,686 26,415
Intercompany eliminations (11,315) (6,311) (26,966) (15,140)
Corporate and other (1,781) (7,306) (5,052) (124,343)
--------- ------- ------- -------
Income (loss)
from operations $ 46,389 25,958 116,518 (36,428)
========= ======= ======= =======
7. On July 28, 1999 the Company completed a secondary offering of 1,500,000
shares of its common stock. In addition, four shareholders of the Company
sold 4,011,076 shares of common stock. In connection with the offering, the
Company granted an over-allotment option to the underwriters to purchase up
to an additional 800,000 shares. The underwriters exercised the option on
August 17, 1999 for 500,000 shares, bringing the total shares sold by the
Company to 2,000,000. The net proceeds to the Company, after deducting
underwriting discounts and offering expenses, were approximately $51.3
million.
8. On September 30, 1999 the Company entered into a synthetic lease
arrangement under which a lessor committed to purchase and lease to the
Company up to $100 million of
14
equipment under a master lease agreement. The initial funding was
approximately $32.5 million paid directly to the Company for the sale and
leaseback of existing equipment, purchased generally over the previous 18
months, and an additional $3.7 million for new equipment which was paid
directly to vendors. In the third quarter, the Company funded an additional
$6.7 million under the arrangement, bringing the total amount drawn under
the synthetic lease to $42.9 million. There was no gain or loss on the sale
and leaseback transaction. The leases, which have minimum terms of 24
months for the sale and leaseback on the used equipment portion and 36
months for the new equipment portion, are being accounted for as operating
leases.
9. The accumulated balance of other comprehensive loss, which consists solely
of foreign currency translation adjustment, was $0.3 million as of both
December 31, 1999 and March 31, 1999. Comprehensive income was $25.8
million and $63.5 million for the quarter and nine months ended December
31, 1999, respectively. Comprehensive income was $13.6 million for the
quarter ended December 31, 1998 and comprehensive loss was $35.0 million
for the nine months ended December 31, 1998.
10. In December 1999 the Company entered into an equity forward purchase
agreement with a commercial bank under which the Company will purchase 3.1
million shares of its common stock at an average total cost of
approximately $20.81 per share for a total notional amount of $64.5
million. The cost of the equity forward will be accounted for as a
component of stockholders' equity. If the market value of the stock exceeds
$20.81 per share, the Company has the option of settling the contract by
receiving cash or stock worth the excess of the market value over $20.81.
If the market value of the stock is less than $20.81 per share, the Company
has the option of settling the contract by paying the amount by which the
market value is less than $20.81 per share. The Company can also settle the
contract by paying the full notional amount and taking delivery of the
stock. The shares remain issued and outstanding until the forward purchase
contract is settled. The Company has the option to settle the contract at
any time prior to March 31, 2002, when the contract is required to be
settled.
15
Form 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On May 28, 1999, the Company completed the acquisition of Computer Graphics of
Arizona, Inc. ("Computer Graphics") and all of its affiliated companies in a
stock-for-stock merger. The acquisition was accounted for as a pooling-of-
interests, and accordingly, the consolidated financial statements for periods
prior to the combination have been restated to include the accounts and results
of operations of Computer Graphics.
Results of Operations
- ---------------------
For the quarter ended December 31, 1999, consolidated revenue was $244.3
million, up 26% from the same quarter a year ago. For the nine months ended
December 31, 1999, revenue was $702.6 million, an increase of 30% over the same
period in the prior year.
The following table shows the Company's revenue by business segment for the
quarters ended December 31, 1999 and 1998 (dollars in millions):
December 31, December 31, %
1999 1998 Change
---- ---- ------
Services $ 156.1 $ 115.1 +36%
Data Products 60.7 45.8 +33
I. T. Management 50.1 45.6 +10
Intercompany eliminations (22.6) (12.6) +80
------- ------- ---
$ 244.3 $ 193.9 +26%
======= ======= ===
Services segment revenue grew 36% for the quarter when compared to the same
quarter in the prior year. This growth was spread among vertical industries and
came despite a decline in revenue from the Allstate business unit of 9% from the
prior year as a result of lower volumes and decreased margins. The Financial
Services Division reported an increase of 38% from the third quarter in the
prior year. Other increases included retail which more than doubled over the
prior year, telecommunications which was up 21%, media up 36%, pharmaceutical up
20%, and the Sigma business unit up 50%. The International Division increased
34% over the prior year.
The Data Products segment third quarter revenue increased by 33% over the prior
year. Direct Media grew only 3% over the year-earlier period, while InfoBase and
DataQuick grew a combined 50%.
Revenues from I. T. Management for the quarter increased 10% over the prior
year. This growth was heavily impacted as a result of the discontinuation of the
Waste Management contract during the second quarter. Excluding the impact of
Waste Management, revenue increased over 80% compared to the prior year. During
the quarter, the Company signed an outsourcing contract with a major financial
services customer with a term of 10 years and an aggregate revenue over the
contract term of $250 million.
16
For the nine months ended December 31, 1999, Services segment revenue was up
41%, Data Products was up 23%, and I. T. Management increased 22%. The
discussion above related to the third quarter is also generally applicable to
understanding the revenue increases for the nine month period.
Salaries and benefits grew 41% for the quarter. This increase primarily reflects
a 17% increase in headcount associated with the growth of the business, normal
merit increases, increased benefit costs, the impact of acquisitions and higher
incentive accruals over the prior year. Salaries and benefits before incentive
compensation increased 32% over the prior year. For the nine months ended
December 31, 1999, salaries and benefits increased 34%, which also generally
reflects both headcount and normal salary increases resulting from the growth in
the business. Headcount increases are partially driven by acquisitions and new
outsourcing contracts signed since the comparable period in the prior year.
Computer, communications and other equipment costs for the quarter increased
22%, reflecting increased depreciation and software costs associated with the
increased revenue volume, primarily in the I. T. Management business. For the
nine months ended December 31, 1999, computer, communications and other
equipment costs were up 32%.
Data costs decreased 1% for the quarter, reflecting lower Allstate volumes
combined with the impact of fixed cost contracts from other data providers. For
the nine months, data costs decreased less than 1%.
Other operating costs and expenses increased 15% for the quarter principally due
to higher facility costs and goodwill amortization, along with higher cost of
sales related to sales of client/server equipment during the quarter. These
server sales are sometimes part of our data warehouse solution being delivered
to our customers. For the nine months, other operating costs and expenses
increased 40%, principally for the same reasons noted above.
Income from operations for the quarter was $46.4 million, compared to $26.0
million in the prior year. The prior year included special charges of $9.4
million which were merger and integration charges associated with the May & Speh
merger and the write down of other impaired assets. Excluding the special
charges, operating margin increased from 18.2% to 19.0% for the quarter. For the
nine months ended December 31, 1999, income from operations was $116.5 million,
compared to a loss from operations in the prior year of $36.4 million. Again
excluding the special charges in the prior year of $118.7 million, operating
margin increased from 15.3% to 16.6% for the nine months.
Interest expense increased by $1.1 million in the current quarter compared to
the same quarter a year ago, as a result of higher debt levels. The increase for
the nine months was $5.1 million for the same reason. Other income increased
$0.6 million from the previous year due to equity in the earnings of
investments. For the nine month period, other income decreased by $2.8 million
due to reduced interest income from invested cash related to the $115 million
May & Speh convertible debt offering which was completed in March of 1998. The
Company's effective tax rate for both the quarter and nine months was 37.5%. The
effective tax rate in the prior year was impacted by the special charges, which
were not fully deductible for tax purposes. The Company recorded net earnings of
$26.5 million for the quarter and $63.5 million for the nine months, compared to
net earnings of $14.0 million for the quarter and a net loss of $34.8 million
for the
17
nine months in the previous year. Earnings per share for the quarter on
a basic and diluted basis were $.31 and $.29, respectively. For the nine months,
earnings per share on a basic and diluted basis were $.75 and $.71,
respectively.
Capital Resources and Liquidity
- -------------------------------
Working capital at December 31, 1999 totaled $184.3 million compared to $134.1
million at March 31, 1999. At December 31, 1999, the Company had available
credit lines of $276.5 million of which $77.2 million was outstanding. On
December 29, 1999 the Company completed a new unsecured revolving credit
agreement with a group of commercial banks and completely repaid the balance due
under the prior revolving credit agreement. The new agreement expires December
29, 2002 unless extended in accordance with its terms and provides for revolving
loans and letters of credit in amounts of up to $275 million and provides for
interest at various alternative market rates at the Company's option, including
the prime rate, a LIBOR-based rate and a rate based on the Federal Funds rate.
The Company's debt-to-capital ratio (capital defined as long-term debt plus
stockholders' equity) was 37% at December 31, 1999 compared to 48% at March 31,
1999. Included in long-term debt at March 31, 1999 were two convertible debt
facilities totaling $140 million, of which $25 million was converted to equity
in April, 1999. The conversion price of the remaining $115 million convertible
debt is $19.89 per share. The market price of the Company's common stock has
been in excess of this conversion price for most of the current fiscal year,
although it was below the conversion price during much of the third quarter. If
the price of the Company's common stock stays above the conversion price,
management expects this debt to be converted to equity as well. Assuming that
the remaining $115 million converts to equity, the Company's debt-to-capital
ratio would be reduced to 23% at December 31, 1999. From March 31, 1999 to
December 31, 1999, total stockholders' equity increased 47% to $525.9 million.
Cash provided by operating activities was $54.4 million for the nine months
ended December 31, 1999, compared with $4.3 million for the same period in the
prior year. Included in cash provided by operating activities were merger and
integration costs for the nine months ended December 31, 1999 and 1998 of $16.5
million and $26.7 million, respectively. Excluding the impact of these costs,
cash provided by operating activities more than doubled, increasing from $30.9
million to $71.0 million. Also, excluding special charges, earnings before
interest, taxes, depreciation, and amortization ("EBITDA"), increased by 36%
compared to a year ago. EBITDA is not intended to represent cash flows for the
period, is not presented as an alternative to operating income as an indicator
of operating performance, may not be comparable to other similarly titled
measures of other companies, and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles. However, EBITDA is a relevant measure of the
Company's operations and cash flows and is used internally as a surrogate
measure of cash provided by operating activities. The resulting operating cash
flow in both the current and prior year was reduced by the change in operating
assets and liabilities. Days sales outstanding was 78 days at December 31, 1999
compared to 80 days at March 31, 1999. The days sales outstanding calculation
reflects the impact of adjusting revenue and receivables for long-term
receivables included in other assets and pass-through amounts receivable
associated with some outsourcing contracts and value added taxes in the United
Kingdom. These adjustments are made to properly reflect receivables and revenues
on a comparable basis. The Company has set a target of 72 days sales outstanding
18
for March 31, 2000. The Company has designated 10% of its leadership bonus plans
toward achieving this goal.
Investing activities used $114.5 million in the nine months ended December 31,
1999 compared to $128.2 million in the prior year. Investing activities included
$88.1 million in capital expenditures, compared to $87.4 million in the prior
year. Capital expenditures are principally purchases of data center equipment to
support the Company's outsourcing agreements, as well as the purchase of
additional data center equipment in the Company's core data centers and
construction of new facilities discussed below. Capital expenditures were
partially offset by the sale and leaseback of equipment under a synthetic
leasing arrangement entered into in September 1999. The Company has obtained a
commitment from a financial institution for up to $100 million in equipment
leases under this leasing facility. At September 30, 1999, the Company obtained
funding for $36.2 million of assets. Of this amount, $32.5 million was paid to
the Company for previously purchased assets and the remainder was paid directly
to vendors for asset purchases which were in process. In the third quarter, the
Company funded an additional $6.7 million under the arrangement, bringing the
total drawn under the synthetic lease to $42.9 million. Investing activities
also included development of software of $25.5 million in the current year,
compared to $20.4 million in the prior year. The current year includes the
capitalized portion of investments being made in Acxiom Data Network and
Abilitec technology of approximately $11.3 million, discussed below under the
"Outlook" section. Investing activities also include cash paid for acquisitions,
including the purchase of Horizon Systems, Inc. in April 1999, the purchase of
Access Communication Systems, Inc., in August 1999, and the purchase of Litton
Enterprise Solutions, Inc., in December 1999.
Free cash flow (defined as cash provided by operating activities less cash used
by investing activities) went from a negative $124.0 million for the nine months
ended December 31, 1998 to a negative $60.1 million for the nine months ended
December 31, 1999. Free cash flow for the nine months ended December 31, 1999
included $16.5 million of merger and integration costs and $37.1 million for
joint venture investments and acquisitions which, if excluded, would result in a
free cash flow of a negative $6.4 million. For the quarter ended December 31,
1999, excluding these same items, free cash flow was $21.2 million.
Financing activities provided $65.5 million for the nine months ended December
31, 1999, compared to $12.0 million in the previous year. Most of the amount
provided through debt proceeds represents borrowing under the revolving credit
agreements. Financing activities also include the proceeds of approximately
$51.3 million related to the sale of two million shares of stock in a secondary
public offering, as well as sales of common stock under existing option and
warrant agreements.
During fiscal 1999, construction was substantially completed on the Company's
new headquarters building and a new customer service facility in Little Rock,
Arkansas. These two buildings were built pursuant to 50/50 joint ventures
between the Company and local real estate investors. The Company has now
occupied both of these buildings. During the current fiscal year, the Company
has begun construction on a new customer service facility in Conway, Arkansas
and expects to begin construction on another customer service facility in Little
Rock. The Conway project is expected to be completed in the spring of 2000 and
to cost approximately $12.0 million. The Little Rock building is expected to
cost approximately $30.0 to $35.0 million and construction is expected to last
from April 2000 to September 2001. The Company has
19
secured construction and permanent financing for the Conway project through a
local bank. The City of Little Rock has committed to issue revenue bonds for the
Little Rock project.
While the Company does not have any other material contractual commitments for
capital expenditures, additional investments in facilities and computer
equipment continue to be necessary to support the growth of the business. In
addition, new outsourcing or facilities management contracts frequently require
substantial up-front capital expenditures in order to acquire or replace
existing assets. In some cases, the Company also sells hardware and software to
customers under extended payment terms or notes receivable collectible generally
over three years. These arrangements also require up-front expenditures of cash,
which are repaid over the life of the agreement. 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, the Company would first use
available borrowing capacity under its new revolving credit agreement, followed
by the issuance of other debt or equity securities. The Company completed a
secondary offering of common stock July 28, 1999 under which 1.5 million shares
of stock were sold. The Company granted an option to the underwriters under
which they could purchase an additional 800,000 shares at a price of $25.85 per
share. The underwriters exercised the option for 500,000 shares on August 17,
1999. The total net proceeds from these stock sales after deducting underwriting
discounts and offering expenses were approximately $51.3 million.
In December 1999 the Company entered into an equity forward purchase agreement
with a financial institution under which the Company will purchase 3.1 million
shares of its common stock at an average total cost of approximately $20.81 per
share. In accordance with the terms of the contract, the shares remain issued
and outstanding until the forward purchase contract is settled. The agreement
may be settled in cash or in net shares of common stock. The Company has the
option to settle the contract at any time prior to March 31, 2002, when the
contract is required to be settled. The Company's intention is to settle the
contract by paying for and taking delivery of the 3.1 million shares, but the
arrangement allows the contract to be settled by paying cash, if the price upon
settlement is below the contract price, or by receiving cash if the market price
upon settlement is above the contract price.
Year 2000
- ---------
Many computer systems ("IT Systems') and equipment and instruments with embedded
microprocessors ("non-IT systems") were designed to only recognize the last two
digits of a calendar year. With the arrival of the Year 2000, these systems and
microprocessors may encounter operating problems due to their inability to
distinguish years after 1999 from years preceding 1999. This could manifest in a
system failure or miscalculations causing disruption of operations, including,
among other things, a temporary inability to process or transmit data, or engage
in normal business activities. As a result, the Company has previously engaged
in an extensive project to remediate or replace its date-sensitive IT systems
and non-IT systems.
The following discussion of the implications of the Year 2000 issue for the
Company contains numerous forward-looking statements based on inherently
uncertain information. The information presented is based on the Company's best
estimates, which were derived utilizing a number of assumptions of future
events, including the continued availability of internal and external resources,
third party modifications, and other factors. However, there can be no
20
guarantee that these estimates will be achieved and actual results could differ.
Although the Company believes it will be able to make the necessary
modifications in advance, there can be no guarantee that failure to correctly
modify the systems would not have a material adverse effect on the Company.
From 1996 through 1999, the Company was engaged in an enterprise-wide effort
("the Project") to address the risks associated with the Year 2000 problem, both
internal and external. Under the Project, the Company established a project
office comprised of representatives from each of the operating divisions of the
Company. A Company readiness champion and project leader were responsible for
the readiness process, which included deliverables such as plans, reviews, and
appropriate sign-offs by the appropriate business unit leaders and the Company's
Year 2000 leadership. The Project also included the dissemination of internal
communications and status reports on a regular basis to senior leadership.
The Company set an internal deadline of December 31, 1998 to achieve Year 2000
readiness status, with any residual activity to conclude before March 31, 1999.
Overall, this objective was achieved as outlined in the Project and exceptions
were managed closely throughout 1999. The original timeline was developed to
allow the Company to focus on mergers and acquisitions as well as
customer-driven dependencies. While the core Project substantially ended on
March 31, 1999, a transition strategy was implemented moving the Company from a
project mode to a standards-based maintenance mode. On-going activities based on
the transition strategy included reviewing or enhancing contingency plans,
continuing vendor product analysis and evaluation, establishing the Year 2000
readiness of acquisitions, and maintaining the readiness standing of existing
operations through purchasing and quality processes.
The Project involved four phases: (1) planning; (2) remediation; (3) testing;
and (4) certification. The planning phase involved developing a detailed
inventory of applications and systems, identifying the scope of necessary
remediation to each application or system, and establishing a conversion
schedule. During the remediation phase, source codes were actually converted,
date fields were expanded or windowed, and the remediated system was tested to
ensure it was functionally the same as the existing production version. In the
testing phase, test data was prepared and the application was tested using a
variety of Year 2000 scenarios. The certification phase validated that a system
could run successfully in a Year 2000 environment and appropriate internal
sign-offs were obtained.
The following chart indicates the estimated state of completion from each phase
of the Project. It is important to note that each phase of the Project was
required to be completed before moving to the next phase.
Current Planned Planned
December December December
1999 1998 1999
---- ---- ----
Planning 100% 100% 100%
Remediation 100% 90% 100%
Testing 100% 80% 100%
Certification 100% 75% 100%
The financial impact of the Project to the Company has not been, and is not
expected to be, material to its financial position or results of operations in
any given fiscal year. The costs to
21
date associated with the Year 2000 effort primarily represent a reallocation of
existing Company resources. Because of the range of possible issues and the
large number of variables involved (including the Year 2000 readiness of any
entities acquired by the Company), it is impossible to accurately quantify the
potential cost of problems if the Company's remediation efforts or the efforts
of those with whom it does business are not successful. Such costs and any
failure of such remediation efforts could result in a loss of business, damage
to the Company's reputation, and legal liability.
The Company currently believes that with modifications to existing software and
conversions to new software, the Year 2000 issues have been mitigated. But a
vendor or customer may have failed to convert its software or may have
implemented a conversion that is incompatible with the Company's systems, which
could have a material adverse impact on the Company.
In order to assess the readiness status of the Company's vendors, the Company
contacted each vendor, via written and/or telephone inquiries, regarding its
Year 2000 status and set up an internal database of this information. The
Company obtained, when possible, written commitments from each vendor that the
products supplied to the Company are or will be (by a date certain) Year 2000
ready. As of March 31, 1999, the Company had received responses to 89% of its
inquiries. The Company also relied on representations made or contained in its
vendors' web sites. The responses received were analyzed and where necessary,
testing was undertaken. Year 2000 ready versions of vendor products were
obtained, as available, and moved onto production platforms. The Company has
also identified and communicated with customers to determine if customers had an
effective plan in place to address their Year 2000 issues, and to determine the
extent of the Company's vulnerability to the failure of customers to remediate
their own Year 2000 issues.
During the Year 2000 rollover event, from midnight December 30, 1999, through
midnight January 2, 2000, the Company staffed a Response Command Center around
the clock in Conway, Arkansas and monitored Year 2000 issues in all Company
locations worldwide. Additionally, all Company data centers and account teams
were on alert status throughout this period. On Saturday, January 1, 2000, the
Company exercised critical production systems and equipment to identify if they
were operating correctly. Like most well prepared companies, the Company did not
experience any significant Year 2000 related issues during the rollover period
or thereafter.
The Company believes that the most likely risks of serious Year 2000 business
disruptions continue to be external in nature, such as disruptions in
telecommunications, electric, or transportation services. In addition, the
Company places a high degree of reliance on computer systems of third parties,
such as customers and computer hardware and software suppliers. Although the
Company has assessed the readiness of these third parties and prepared
contingency plans, there can be no guarantee that the failure of these third
parties to modify their systems would not have a material adverse effect on the
Company. Of all the external risks, the Company believes the most reasonably
likely worst case scenario would be a business disruption resulting from an
extended and/or extensive communications failure.
In an effort to mitigate any remaining risks associated with the Year 2000
problem, efforts to maintain and enhance our state of readiness will continue
beyond January 1, 2000. Some of the follow on activities include ensuring that
existing operations remain Year 2000 Ready, continuing vendor product analysis
and evaluation, establishing the Year 2000 readiness of acquisitions, and
reviewing or enhancing contingency plans. The Company will continue to
22
maintain awareness and address the Year 2000 problem from both a leadership and
operational perspective throughout this year.
Despite the best efforts of the Company, the failure to correct a material Year
2000 problem could result in an interruption in, or a failure of, certain normal
business activities or operations. Any failures could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third party vendors and
customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The Project is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material third party vendors and customers. The Company believes that the
implementation of the Project and ongoing Year 2000 activities will reduce the
possibility of significant interruptions to the Company's normal business
operations.
Outlook
- -------
The Acxiom Data Network and AbiliTec technology are becoming an increasingly
important part of the solutions our customers are buying, significantly
impacting most of our new business and helping us grow more strongly during this
quarter. We believe that these products will be a key to our future growth.
AbiliTec is a technology that we believe will revolutionize the way companies
use and manage information about their customers. AbiliTec will provide our
customers substantial value by enabling them to have a single view of their
customer relationships. AbiliTec offers four major benefits to companies intent
on optimizing Customer Relationship Management (CRM) initiatives by:
. Customer data integration across multiple customer files
. Understanding of customers in real time
. Enhancement and correction of customer internal data with external
data
. Greater speed and accuracy
The CRM market is expected to reach $16.8 billion by 2003 with a compound annual
growth rate of 49 percent over the next five years according to Boston-based AMR
Research, Inc.
AbiliTec unifies customer and prospect data bases from virtually any source and
allows this data to work in new ways for a broad range of applications,
including Enterprise Resource Planning (ERP), Customer Relationship Management
(CRM), business-to-business, data warehousing, e-commerce, e-tailing, customer,
consumer and business data content and more. We believe AbiliTec represents the
next generation of customer data integration capabilities, and has given us more
than a two-year lead over any competitor in customer data integration.
During the third quarter, the Company announced the successful validation of the
AbiliTec technology as a result of the completion of a recent 100-day internal
project. That project resulted in substantial improvements in the speed and
accuracy of combining (or appending) data and substantially improved the
accurate matching of valid names and addresses. The technology has been further
validated by recent licensing of the AbiliTec technology including a recent
announcement by Land's End. AbiliTec will be used in conjunction with Land's
End's existing
23
in-house systems for enhancing the accuracy of its customer addresses to reduce
duplicate mailings and to create efficiencies that provide immediate return on
their investment.
We believe that increasing customer acceptance of AbiliTec will result in its
adoption as the industry standard for integrating consumer and business
information into e-commerce applications along with enterprise application for
Fortune 1000 type companies. We also believe there is a substantial Acxiom Data
Network and AbiliTec opportunity to service the Fortune 1000 type companies as
well as the small office/home office market by leveraging our channel partner
relationships. We expect AbiliTec to become "the powerful engine room" driving
CRM applications within a few years.
As a result of the events outlined above, we will significantly increase our
investment in the technology in order to maximize this opportunity. Based on our
current expectations for the remainder of our fiscal year, we believe that
opportunities and savings in other areas should offset the increased investment.
However, as we ramp up this investment, next fiscal year's earnings per share
growth may be impacted and could be in the 15 - 20% range as a result of these
investments which include incremental spending in marketing and branding, global
development, education, training and implementation. We expect the investment
period to be approximately 2 to 2 1/2 years. As the more efficient AbiliTec
delivered products become a predominant part of our total revenue, we anticipate
the results of our investment will produce margins well above current levels.
Further, we also currently expect revenues to grow in excess of 25% during the
investment period.
Certain statements in this quarterly report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements, which are not statements of historical fact, may
contain estimates, assumptions, projections and/or expectations regarding the
Company's financial position, results of operations, market position, product
development, regulatory matters, growth opportunities and growth rates,
acquisition and divestiture opportunities, and other similar forecasts and
statements of expectation. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," and "should," and variations of these
words and similar expressions, are intended to identify these forward-looking
statements. Such forward-looking statements are not guarantees of future
performance. They involve known and unknown risks, uncertainties, and other
factors which may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
forward-looking statements include: statements concerning the Company's need for
additional capital and the ability to raise additional capital; statements
concerning the Company's ability to remediate date sensitive IT-systems and
non-IT systems in conjunction with the arrival of the year 2000 and the impact
of those efforts, and their success or failure, on the Company's future results
of operations; statements concerning future earnings per share growth;
statements concerning the length and future impact of the Company's investment
in Acxiom Data Network and AbiliTec products on the Company's future revenue and
margins; statements concerning the benefits of AbiliTec for our customers;
statements concerning any competitive lead; statements concerning the impact of
implementation of Acxiom Data Network and AbiliTec technology in CRM
applications; statements concerning the momentum of CRM application and
e-commerce initiatives; statements concerning the future growth and size of the
CRM market; statements concerning AbiliTec becoming an industry standard;
statements concerning the impact of impending passage of legislation in the U.S.
banking industry; statements concerning efficiency gains related to the
implementation of AbiliTec; and statements concerning potential growth of
24
international markets. Other factors may cause actual results to differ
materially from those in the forward-looking statements. Representative factors
include: the complexity and uncertainty regarding the development of new high
technology products, such as the Acxiom Data Network and AbiliTec, and the loss
of market share through competition or the acceptance of these or other products
on a less rapid basis than expected; the introduction of competent products or
technologies by other companies; changes in the business information industries
and markets; the Company's ability to protect proprietary information and
technology or to obtain necessary licenses on commercially reasonable terms; the
Company's ability to complete the implementation of its Year 2000 plans and its
customers ability to complete their Year 2000 plans on a timely basis; a
reduction in demand for the Company's products and services resulting from its
customers' Year 2000 issues; the continued ability to attract and retain
qualified technical associates and the possible loss of associates to other
organizations; the ability to motivate its sales force; the ability to achieve
cost reductions; changes in the regulatory environment affecting the Company's
business, including but not limited to legislation relating to the Company's
ability to collect and use data; data suppliers might withdraw data from the
Company, leading to the Company's inability to provide certain products and
services; short-term contracts affect the predictability of the Company's
revenues; the potential loss of data center capacity or interruption of
telecommunication links; postal rate increases that could lead to reduced volume
of business; Acxiom's customers may cancel or modify their agreements with the
Company; and other market factors. Other factors are detailed from time to time
in the Company's periodic reports and registration statements. The Company
undertakes no obligation to publicly release any revision to any forward looking
statement to reflect any future events or circumstances. See "Additional
Information Regarding Forward-looking Statements" in the Company's Annual Report
on Form 10-K.
25
Form 10-Q
ACXIOM CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal 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 action alleges that the defendants violated
Section 11 of the Securities Act of 1933 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 Securities Act of 1933.
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. The cases are in their infancy and no
substantive filings have been made subsequent to the initial
complaints. The Company believes the allegations are without merit and
the defendants intend to vigorously contest the cases, and at the
appropriate time, seek their dismissal.
There are various other litigation matters that arise in the normal
course of the business of the Company. None of which, however, are
believed to be material in their nature or scope.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10 Purchase and Sale Agreement, Blocks 14 and 15, Pope's Addition
to the City of Little Rock by and between Stephens Group, Inc.
and Acxiom Corporation dated October 15, 1999 and its
amendment thereto dated November 15, 1999.
27 Financial Data Schedule
(b) Reports on Forms 8-K.
A report was filed on December 1, 1999, which reported restated
consolidated financial statements in connection with the May 1999
acquisition of Computer Graphics of Arizona, Inc. and included the
restated consolidated financial statements as an exhibit.
26
Form 10-Q
ACXIOM CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Acxiom Corporation
Dated: February 10, 2000
By: /s/ Robert S. Bloom
---------------------------------------
(Signature)
Robert S. Bloom
Chief Financial Officer
(Chief Accounting Officer)
27