NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
1.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|
Basis of presentation
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 Registrants management all adjustments necessary for a fair presentation of the results for the periods included have been made and the disclosures are adequate to make the information presented not misleading. All such adjustments are of a normal recurring nature except during the quarter ended September 30, 2007, the Company adjusted an accrual by recording $1.5 million of additional expense. This accrual should have been recorded in prior periods. The Company believes, in accordance with Accounting Principles Board Opinion number 28, paragraph 29, that this adjustment will not be material to its full year results for fiscal 2008. In addition, management does not believe the adjustment is material to the amounts reported by the Company for any previous periods. This cumulative adjustment is included in selling, general and administrative expense for the three and six-month
periods ended September 30, 2007.
Certain note information has been omitted because it has not changed significantly from that reflected in notes 1 through 22 of the Notes to Consolidated Financial Statements filed as part of Item 8 of the Registrants annual report on Form 10-K for the fiscal year ended March 31, 2007 (2007 Annual Report), as filed with the Commission on May 30, 2007. This report and the accompanying condensed consolidated financial statements should be read in connection with the 2007 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, 2008.
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ from those estimates. Certain of the accounting policies used in the preparation of these condensed consolidated financial statements are complex and require management to make judgments and/or significant estimates regarding amounts reported or disclosed in these financial statements. Additionally, the application of certain of these accounting policies is governed by complex accounting principles and interpretations thereof. A discussion of the Companys significant accounting principles and the application thereof is included in note 1 and in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations, to the Companys 2007 Annual Report.
Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no effect on the prior years net earnings as previously reported.
9
2.
EARNINGS (LOSS) PER SHARE AND STOCKHOLDERS EQUITY:
Earnings (Loss) Per Share
A reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share is shown below (in thousands, except per share amounts):
|
|
For the quarter ended
September 30
|
|
For the six months ended
September 30
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Numerator net earnings (loss)
|
|
$
10,542
|
|
$
21,716
|
|
$
(979)
|
|
$
39,524
|
Denominator weighted-average shares outstanding
|
|
80,646
|
|
86,000
|
|
79,993
|
|
87,078
|
Basic earnings (loss) per share
|
|
$
0.13
|
|
$
0.25
|
|
$
(0.01)
|
|
$
0.45
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Numerator net earnings (loss)
|
|
$
10,542
|
|
$
21,716
|
|
$
(979)
|
|
$
39,524
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
80,646
|
|
86,000
|
|
79,993
|
|
87,078
|
Dilutive effect of common stock options, warrants, and restricted stock as computed under the treasury stock method
|
|
1,839
|
|
2,203
|
|
-
|
|
2,235
|
|
|
82,485
|
|
88,203
|
|
79,993
|
|
89,313
|
Diluted earnings (loss) per share
|
|
$
0.13
|
|
$
0.25
|
|
$
(0.01)
|
|
$
0.44
|
At September 30, 2007, the Company had options and warrants outstanding providing for the purchase of approximately 11.4 million shares of common stock. Due to the net loss incurred by the Company, the effect of options, warrants and restricted stock of 1.9 million shares was excluded from the earnings per share calculation for the six months ended September 30, 2007 since the impact on the calculation was antidilutive. Options and warrants that were outstanding during the periods presented, but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares are shown below (in thousands, except per share amounts):
|
|
For the quarter ended
September 30
|
|
For the six months ended
September 30
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Number of shares outstanding under options and warrants
|
|
3,408
|
|
3,368
|
|
3,001
|
|
3,381
|
Range of exercise prices
|
|
$24.53-$268.55
|
|
$24.50-$268.55
|
|
$25.00-$268.55
|
|
$24.52- $268.55
|
Stockholders Equity
The Company did not declare dividends on its common stock in the six months ended September 30, 2007 and declared dividends of $0.10 per share in the six months ended September 30, 2006.
10
During the six months ended September 30, 2006, 0.6 million shares were repurchased pursuant to the Companys common stock repurchase program for an aggregate purchase price of $13.9 million. Cash paid for repurchases differs from the aggregate purchase price due to trades at the end of the quarter and prior quarter, which were settled shortly after the end of their respective purchase periods. Cash paid for repurchases in the six months ended September 30, 2006 was $15.4 million. In addition, the Company repurchased 11.1 million shares for approximately $278 million under its Dutch Auction self tender offer in September 2006 (see note 7). There were no shares repurchased under the Companys common stock repurchase program in the six months ended September 30, 2007. On October 26, 2007 the board of directors adopted a new common stock repurchase program, which ended the previous
common stock repurchase program. Under the new common stock repurchase program, the Company may purchase up to $75 million worth of its common stock over the next twelve months.
|
3.
|
SHARE-BASED COMPENSATION:
|
Share-based Compensation Plans
Options and Equity Compensation
The Company has stock option plans and equity compensation plans (collectively referred to as the share-based plans) administered by the compensation committee of the board of directors under which options and restricted stock were outstanding as of September 30, 2007.
The Company has reserved 30.1 million shares of the Companys common stock for awards pursuant to the Companys share-based plans of which approximately 0.8 million shares were available for grant at September 30, 2007.
The Companys 2005 Equity Compensation Plan provides that all associates (employees, officers, directors, affiliates, independent contractors or consultants) are eligible to receive awards (grant of any option, stock appreciation right, restricted stock award, restricted stock unit award, performance award, performance share, performance unit, qualified performance-based award, or other stock unit award) pursuant to the plan with the terms and conditions applicable to an award set forth in applicable grant documents.
Incentive stock option awards granted pursuant to the share-based plans cannot be granted with an exercise price less than 100% of the per-share market value of the Companys shares at the date of grant and have a maximum duration of ten years from the date of grant. Board policy has required that nonqualified options be priced at or above the fair market value of the common stock at the time of grant with a maximum duration of twelve years.
Restricted stock units may be issued pursuant to the 2005 Equity Compensation Plan and represent the right to receive shares in the future by way of an award agreement which includes vesting provisions. Award agreements can further provide for forfeitures triggered by certain prohibited activities, such as breach of confidentiality. All restricted stock units will be expensed over the vesting period as adjusted for estimated forfeitures.
Qualified Employee Stock Purchase Plan
In addition to the share-based plans, the Company maintains a qualified employee stock purchase plan (ESPP) that permits substantially all employees to purchase shares of common stock at 85% of the market price. The number of shares available for issuance at September 30, 2007 was approximately 1.7 million.
Approximately 0.1 million shares were purchased under the ESPP during the six months ended September 30, 2007. The total expense to the Company in the six months ended September 30, 2007 for the discount to the market price was approximately $0.3 million.
Stock Option Activity
The Company granted 150,000 stock options in the six months ended September 30, 2007. The per-share weighted-average fair value of the stock options granted during the six months ended September 30, 2007 was $7.21. This valuation was determined using a customized binomial lattice approach with the following weighted-average assumptions: dividend yield of 0.9%; risk-free interest rate of 4.9%; expected option life of 5.7 years and expected volatility of 20.4%. There were no stock options granted in the six months ended September 30, 2006.
11
Option activity for the six months ended September 30, 2007 was as follows:
|
|
Number
of shares subject to options
|
|
Weighted-average exercise price
per share
|
|
Weighted-average remaining contractual term (in years)
|
|
Aggregate intrinsic value
(in thousands)
|
Outstanding at March 31, 2007
|
|
11,784,406
|
|
$
21.52
|
|
|
|
|
Granted
|
|
150,000
|
|
$
27.71
|
|
|
|
|
Exercised
|
|
(1,904,342)
|
|
$
18.95
|
|
|
|
$
5,086
|
Forfeited or cancelled
|
|
(95,275)
|
|
$
26.86
|
|
|
|
|
Outstanding at September 30, 2007
|
|
9,934,789
|
|
$
22.06
|
|
7.98
|
|
$
21,208
|
Exercisable at September 30, 2007
|
|
9,545,139
|
|
$
21.99
|
|
7.90
|
|
$
20,578
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Acxioms closing stock price on the last trading day of its second quarter of fiscal 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had vested option holders exercised their options on September 30, 2007. This amount changes based upon changes in the fair market value of Acxioms stock.
Following is a summary of stock options outstanding and exercisable as of September 30, 2007:
|
|
Options outstanding
|
|
Options exercisable
|
Range of
exercise price
per share
|
|
Options
outstanding
|
|
Weighted- average remaining contractual life
|
|
Weighted-average
exercise price
per share
|
|
Options
exercisable
|
|
Weighted-average
exercise price
per share
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.11 - $ 9.62
|
|
186,405
|
|
6.20 years
|
|
$
6.16
|
|
139,542
|
|
$
5.83
|
$ 10.17 - $ 14.68
|
|
1,528,257
|
|
8.68 years
|
|
$
12.24
|
|
1,523,580
|
|
$
12.24
|
$ 15.00 - $ 19.82
|
|
2,261,390
|
|
7.91 years
|
|
$
16.64
|
|
2,258,280
|
|
$
16.64
|
$ 20.12 - $ 24.53
|
|
2,987,724
|
|
8.49 years
|
|
$
22.80
|
|
2,987,724
|
|
$
22.80
|
$ 25.00 - $ 27.10
|
|
1,763,752
|
|
7.74 years
|
|
$
26.57
|
|
1,428,752
|
|
$
26.66
|
$ 27.11 - $ 39.12
|
|
884,429
|
|
6.48 years
|
|
$
35.70
|
|
884,429
|
|
$
35.70
|
$ 40.50 - $ 75.55
|
|
318,520
|
|
6.81 years
|
|
$
44.64
|
|
318,520
|
|
$
44.64
|
$168.61 - $268.55
|
|
4,312
|
|
2.39 years
|
|
$
208.61
|
|
4,312
|
|
$
208.61
|
|
|
9,934,789
|
|
7.98 years
|
|
$
22.06
|
|
9,545,139
|
|
$
21.99
|
Total expense related to stock options for the six months ended September 30, 2007 was approximately $1.0 million. Future expense for these options is expected to be approximately $3.3 million over the next six years.
Restricted Stock Unit Activity
Non-vested restricted stock units as of September 30, 2007 and changes during the six-month period ended September 30, 2007 were as follows:
|
|
Number
of shares
|
|
Weighted average fair value per
share at grant date
(in thousands)
|
|
Weighted-average remaining contractual term (in years)
|
Outstanding at March 31, 2007
|
|
451,750
|
|
$
23.79
|
|
3.35
|
Granted
|
|
79,000
|
|
25.21
|
|
3.60
|
Vested
|
|
(94,114)
|
|
24.43
|
|
|
Forfeited or cancelled
|
|
(4,252)
|
|
20.87
|
|
|
Outstanding at September 30, 2007
|
|
432,384
|
|
$
23.92
|
|
2.98
|
12
During the six months ended September 30, 2007, the Company granted restricted stock units covering 79,000 shares of common stock with a value at the date of grant of $2.0 million. The value at the date of grant is determined by reference to quoted market prices for the shares, less an immaterial calculated discount to reflect the fact that the restricted shares do not pay dividends until they are vested. Restricted stock units vest in equal annual increments over four years. The expense related to restricted stock for the six months ended September 30, 2007 for all restricted stock units was $1.7 million. Future expense for these restricted stock units is expected to be approximately $10.3 million over the next four years.
On August 28, 2007, the Company acquired EchoTarget, Inc., an on-line behavioral targeting and ad-serving company based in New York. The Company paid $1.8 million net of cash acquired and executed a promissory note in the amount of $0.3 million which is payable in two equal annual installments. The total purchase price of $2.1 million does not include amounts, if any, payable under an earnout arrangement under which the Company may pay up to an additional $2.1 million over a two-year period ending March 30, 2010. Payment, if any, under the earnout agreement will be treated as compensation expense when earned. The operations of EchoTarget are included in the consolidated results beginning September 1, 2007. The annual revenues of EchoTarget are less than $0.5 million. Due to the immateriality to the consolidated results, no pro forma disclosures have been included.
On March 27, 2007, the Company acquired Kefta, Inc. (Kefta), a leader in real-time, dynamic personalization solutions for the Internet. The Company paid $8.9 million, net of cash acquired, for Kefta not including amounts, if any, payable pursuant to the terms and conditions of two deferred payment agreements. The first deferred payment agreement is a deferred cash compensation agreement that requires the Company to pay up to $1.5 million if three of Keftas key employees are retained by the Company for eight consecutive quarters following the acquisition. The second deferred payment agreement is an earnout agreement that allows for payment of up to $1.5 million if the acquired business achieves certain revenue goals. The Company has accrued $0.4 million for the retention bonus and $0.2 million had been paid as of September 30, 2007. No accrual was recorded for the earnout agreement.
On March 15, 2007, the Company purchased Harbinger Associates, LLC and its wholly owned subsidiary Harbinger Technologies, Inc. (Harbinger) from ICx Technologies, Inc. Harbinger is an international consulting and technology firm that develops software tools and training programs for personnel involved in homeland defense, national security and the prevention of international terrorism. The Company paid $9.5 million in cash, net of cash acquired, and executed a promissory note for another $1.3 million to acquire Harbinger. The interest-free promissory note requires a $1 million payment on March 15, 2008 and the remaining $0.3 million payment on March 15, 2009.
On December 29, 2006, the Company completed the acquisition of certain assets of the Equitec division of Henry Group, Ltd. (Equitec), a consulting and analytics company headquartered in Cleveland, Ohio. The Company paid approximately $14.7 million in cash for Equitec, and issued shares of the Companys common stock with an approximate value of $3.6 million. The $18.3 million purchase price paid for Equitec does not include amounts, if any, payable pursuant to the terms and conditions of an earnout agreement under which the Company may pay up to an additional $12 million based on Equitecs achievement of certain operating targets over the period ending March 31, 2009. A portion of the earnout payments that are dependent on continued employment will be charged to compensation expense if the operating targets are met.
In August 2005, the Company completed the acquisition of InsightAmerica, Inc. (IA), a privately held company based in Broomfield, Colorado. IA specializes in fraud prevention and risk mitigation services. The Company paid approximately $34.6 million in cash for IA, net of cash acquired, and not including amounts payable pursuant to the terms and conditions of an earnout agreement. The Company paid an additional $2.4 million during the quarter ending December 31, 2005. The Company completed negotiations to settle the earnout and made a final payment of $1.0 million in the second quarter of fiscal 2008.
13
The following table shows the allocation of EchoTarget, Kefta, Harbinger, Equitec and IA purchase prices to assets acquired and liabilities assumed (dollars in thousands):
|
EchoTarget
|
|
Kefta
|
|
Harbinger
|
|
Equitec
|
|
IA
|
Assets acquired:
|
|
|
|
|
|
|
|
|
|
Cash
|
$
13
|
|
$
75
|
|
$
74
|
|
$
-
|
|
$
541
|
Goodwill
|
2,032
|
|
8,061
|
|
7,652
|
|
14,100
|
|
30,085
|
Other intangible assets
|
-
|
|
2,000
|
|
2,375
|
|
4,100
|
|
7,000
|
Other current and noncurrent assets
|
87
|
|
447
|
|
1,308
|
|
79
|
|
6,716
|
|
2,132
|
|
10,583
|
|
11,409
|
|
18,279
|
|
44,342
|
Accounts payable, accrued expenses and capital leases assumed
|
32
|
|
1,323
|
|
559
|
|
-
|
|
5,850
|
Net assets acquired
|
2,100
|
|
9,260
|
|
10,850
|
|
18,279
|
|
38,492
|
Less:
|
|
|
|
|
|
|
|
|
|
Cash acquired
|
13
|
|
75
|
|
74
|
|
-
|
|
541
|
Common stock issued
|
-
|
|
-
|
|
-
|
|
3,610
|
|
-
|
Promissory note
|
300
|
|
-
|
|
1,300
|
|
-
|
|
-
|
Accrued liabilities
|
-
|
|
331
|
|
-
|
|
-
|
|
-
|
Net cash paid
|
$
1,787
|
|
$
8,854
|
|
$
9,476
|
|
$
14,669
|
|
$
37,951
|
The allocations of purchase price for the EchoTarget, Kefta, Harbinger and Equitec acquisitions are preliminary and subject to revisions as more detailed analyses are completed and additional information about fair value of assets and liabilities becomes available. Any change in the estimated fair value of the net assets of the acquired companies will change the amount of purchase price allocable to goodwill.
As a result of the acquisition of Digital Impact in fiscal 2006 and the acquisition of Claritas Europe and Consodata in fiscal 2004 and 2005, management formulated plans to consolidate certain facilities, eliminate duplicative operations, and terminate or relocate certain associates. The Company recorded aggregate accruals in other accrued liabilities for the estimated costs of the integration process, including lease termination costs, costs of terminating or relocating associates, and for other contract termination costs. The table below shows adjustments and payments related to these accruals during the six months ended September 30, 2007.
(dollars in thousands)
|
|
Associate-related reserves
|
|
Lease and related reserves
|
|
Other contract termination reserves
|
|
Total
|
Balance at March 31, 2007
|
|
$
253
|
|
$
1,219
|
|
$
1,205
|
|
$
2,677
|
Adjustments
|
|
-
|
|
-
|
|
(705)
|
|
(705)
|
Payments
|
|
(5)
|
|
(391)
|
|
(159)
|
|
(555)
|
Change in foreign currency translation adjustment
|
|
16
|
|
68
|
|
66
|
|
150
|
Balance at September 30, 2007
|
|
$
264
|
|
$
896
|
|
$
407
|
|
$
1,567
|
The remaining items are expected to be paid through approximately April 2008.
14
5.
OTHER CURRENT AND NONCURRENT ASSETS:
Unbilled and notes receivable are from the sales of software, data licenses, and equipment and from the sale of divested operations, net of the current portions of such receivables. Other current assets include the current portion of the unbilled and notes receivable of $6.8 million and $10.9 million at September 30, 2007 and March 31, 2007, respectively. There are no allowances recorded against any of the unbilled and notes receivable (dollars in thousands).
|
|
September 30,
2007
|
|
March 31,
2007
|
Notes receivable from divestitures
|
|
$
2,823
|
|
$
4,932
|
Less current portion
|
|
2,294
|
|
3,940
|
Long-term portion
|
|
529
|
|
992
|
Unbilled and notes receivable arising from operations
|
|
17,265
|
|
22,714
|
Less current portion
|
|
4,509
|
|
6,964
|
Long-term portion
|
|
12,756
|
|
15,750
|
Unbilled and notes receivable, excluding current portions
|
|
$
13,285
|
|
$
16,742
|
Other current assets consist of the following (dollars in thousands):
|
|
September 30,
2007
|
|
March 31,
2007
|
Current portion of unbilled and notes receivable
|
|
$
6,803
|
|
$
10,904
|
Prepaid expenses
|
|
21,246
|
|
23,736
|
Non-trade receivables
|
|
5,478
|
|
7,432
|
Other miscellaneous assets
|
|
18,894
|
|
17,180
|
Other current assets
|
|
$
52,421
|
|
$
59,252
|
Other noncurrent assets consist of the following (dollars in thousands):
|
|
September 30,
2007
|
|
March 31,
2007
|
Investments in marketable and nonmarketable securities
|
|
$
4,052
|
|
$
4,299
|
Acquired intangible assets, net
|
|
15,057
|
|
15,747
|
Other miscellaneous noncurrent assets
|
|
3,626
|
|
3,205
|
Other assets
|
|
$
22,735
|
|
$
23,251
|
The acquired intangible assets noted above include customer relationship intangibles acquired through purchase acquisitions, net of accumulated amortization.
Goodwill represents the excess of acquisition costs over the fair values of net assets acquired in business combinations. Goodwill is reviewed at least annually for impairment under a two-part test. Impairment exists to the extent that the reporting units recorded goodwill exceeds the residual fair value assigned to such goodwill. Any impairment that results from the completion of the two-part test is recorded as a charge to operations during the period in which the impairment test is completed. Completion of the Companys most recent annual impairment test indicated that no potential impairment of its goodwill balances existed as of April 1, 2007.
15
The carrying amount of goodwill, by business segment, for the six months ended September 30, 2007 is presented in the following table.
(dollars in thousands)
|
Information Services
|
|
Information Products
|
|
Infrastructure Management
|
|
Total
|
Balance at March 31, 2007
|
$
323,709
|
|
$
154,306
|
|
$
44,031
|
|
$
522,046
|
EchoTarget acquisition
|
2,032
|
|
-
|
|
-
|
|
2,032
|
Purchase adjustments
|
(620)
|
|
(1,990)
|
|
-
|
|
(2,610)
|
Change in foreign currency translation adjustment
|
2,272
|
|
5,299
|
|
-
|
|
7,571
|
Balance at September 30, 2007
|
$
327,393
|
|
$
157,615
|
|
$
44,031
|
|
$
529,039
|
The Company revised its segments, effective April 1, 2007 (see note 9). As a result of the revision to the segments, the balances recorded at March 31, 2007 have been reallocated to the new segments based on the relative fair value of the segments at March 31, 2007.
|
7.
|
LONG-TERM OBLIGATIONS:
|
Long-term obligations consist of the following (dollars in thousands):
|
|
September 30,
2007
|
|
March 31,
2007
|
Term loan credit agreement
|
|
$
544,000
|
|
$
547,000
|
Capital leases and installment payment obligations on land, buildings and equipment payable in monthly payments of principal plus interest at rates ranging from approximately 3% to 12%; remaining terms up to fifteen years
|
|
100,425
|
|
121,399
|
Warrants
|
|
1,577
|
|
1,651
|
Other debt and long-term liabilities
|
|
43,845
|
|
41,135
|
Total long-term debt and capital leases
|
|
689,847
|
|
711,185
|
Less current installments
|
|
70,866
|
|
80,001
|
Long-term debt, excluding current installments
|
|
$
618,981
|
|
$
631,184
|
|
|
|
|
|
|
|
|
|
|
Software license liabilities payable over terms up to seven years; effective interest rates ranging from approximately 5% to 7%
|
|
$
31,337
|
|
$
44,615
|
Less current installments
|
|
24,327
|
|
26,920
|
License liabilities, excluding current installments
|
|
$
7,010
|
|
$
17,695
|
Effective September 15, 2006, the Company entered into an amended and restated credit agreement allowing (1) term loans up to an aggregate principal amount of $600 million and (2) revolving credit facility borrowings consisting of revolving loans, letter of credit participations and swing-line loans up to an aggregate amount of $200 million. The term loan is payable in quarterly principal installments of $1.5 million through September 2011, followed by quarterly principal installments of $150 million through June 2012, followed by a final installment of $70 million due September 15, 2012. The term loan also allows prepayments before maturity. Revolving loan commitments and all borrowings of revolving loans mature on September 15, 2011. The credit agreement is secured by the accounts receivable of Acxiom and its domestic subsidiaries, as well as by the outstanding stock of certain Acxiom subsidiaries.
On September 15, 2006, the Company borrowed the entire amount of the term loan. Term loan proceeds were used to purchase shares of the Companys common stock pursuant to the terms of its Dutch auction self-tender offer for approximately $278 million, to pay certain fees of approximately $6.4 million related to entering into the credit agreement and to pay off an existing revolving loan of approximately $267 million. The remainder of the term loan proceeds was used to retire additional debt or for general corporate purposes.
16
Revolving credit facility borrowings under the new facility currently bear interest at LIBOR plus 1.5% or at an alternative base rate or at the Federal Funds rate plus 2.25%, depending on the type of borrowing. Term loan borrowings currently bear interest at LIBOR plus 1.75%. There were no revolving loan borrowings outstanding at September 30, 2007 or March 31, 2007. The Company had available borrowing capacity of approximately $186.2 million under the revolving credit facility at September 30, 2007, representing the full amount of the facility less the outstanding letters of credit. The interest rate on term loan borrowings outstanding at September 30, 2007 was 7.5%. Outstanding letters of credit at September 30, 2007 were $13.8 million.
Under the terms of certain of the above borrowings, the Company is required to maintain certain debt-to-cash flow and debt service coverage ratios, among other restrictions. At September 30, 2007, the Company was in compliance with these covenants and restrictions. In addition, if certain financial ratios and other conditions are not satisfied, the revolving credit facility limits the Companys ability to pay dividends in excess of $30 million in any fiscal year (plus additional amounts in certain circumstances).
|
8.
|
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
|
Trade accounts receivable are presented net of allowances for doubtful accounts, returns and credits of $9.3 million at September 30, 2007 and $8.3 million at March 31, 2007.
The Company reports segment information consistent with the way management internally disaggregates its operations to assess performance and to allocate resources. In the six months ended September 30, 2007, the Company realigned its business segments to better reflect the way management assesses the business. The Companys new business segments consist of Information Services, Information Products and Infrastructure Management. Information Services develops, sells and delivers industry-tailored solutions globally through the integration of products, services and consulting. Information Products develops and sells all global data products as well as domestic fraud and risk mitigation products. Infrastructure Management develops and delivers information technology products and services such as IT outsourcing and transformational solutions. The Company evaluates performance of the segments based on
segment operating income, which excludes certain gains, losses and other items.
Substantially all of the nonrecurring and impairment charges incurred by the Company have been recorded in Corporate and other, since the Company does not hold the individual segments responsible for these charges. The following tables present information by business segment (dollars in thousands):
|
For the quarter ended
|
For the six months ended
|
|
September 30
|
September 30
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Revenue:
|
|
|
|
|
|
|
|
|
Information services
|
|
$
190,650
|
|
$
182,611
|
|
$
372,207
|
|
$
355,828
|
Information products
|
|
108,230
|
|
104,433
|
|
204,904
|
|
199,869
|
Infrastructure management
|
|
112,883
|
|
119,283
|
|
226,403
|
|
239,774
|
Eliminations
|
|
(60,737)
|
|
(58,008)
|
|
(114,320)
|
|
(110,447)
|
Total revenue
|
|
$
351,026
|
|
$
348,319
|
|
$
689,194
|
|
$
685,024
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
Information services
|
|
$
27,757
|
|
$
33,633
|
|
$
52,689
|
|
$
64,305
|
Information products
|
|
6,822
|
|
5,303
|
|
2,438
|
|
3,091
|
Infrastructure management
|
|
12,573
|
|
11,763
|
|
24,878
|
|
25,857
|
Corporate and other
|
|
(26,795)
|
|
(8,834)
|
|
(55,510)
|
|
(15,073)
|
Income from operations
|
|
$
20,357
|
|
$
41,865
|
|
$
24,495
|
|
$
78,180
|
|
|
|
|
|
|
|
|
|
The revenue attributed to the Infrastructure Management segment above includes revenue from internal customers of approximately $31 million for quarterly periods reported and $62 million for six-month periods reported. These intersegment revenues, as well as revenues from external customers which are counted as revenues by multiple segments, are shown as eliminations in the table above.
17
10.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES:
As discussed below, the following table shows the balances that were accrued for restructuring plans and the Spain closure as well as the changes in those balances during the six months ended September 30, 2007 (dollars in thousands):
Restructuring plans:
|
|
Associate-related reserves
|
|
Ongoing
contract costs
|
|
Other accruals
|
|
Total
|
Balance at March 31, 2007
|
|
$
2,293
|
|
$
1,511
|
|
$
144
|
|
$
3,948
|
Payments
|
|
(4,264)
|
|
(145)
|
|
-
|
|
(4,409)
|
Restructuring accrual
|
|
5,034
|
|
-
|
|
-
|
|
5,034
|
Balance at September 30, 2007
|
|
$
3,063
|
|
$
1,366
|
|
$
144
|
|
$
4,573
|
|
|
|
|
|
|
|
|
|
Spain closure:
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
$
278
|
|
$
93
|
|
$
4,589
|
|
$
4,960
|
Adjustments
|
|
-
|
|
-
|
|
60
|
|
60
|
Payments
|
|
(206)
|
|
(95)
|
|
(1,341)
|
|
(1,642)
|
Change in foreign currency translation adjustment
|
|
10
|
|
2
|
|
286
|
|
298
|
Balance at September 30, 2007
|
|
$
82
|
|
$
-
|
|
$
3,594
|
|
$
3,676
|
Restructuring Plans
During the quarter ended September 30, 2007, the Company recorded a total of $5.2 million in restructuring charges included in gains, losses and other items in the consolidated statement of operations. The expense includes severance and other associate-related payments to be made to approximately 278 associates who were notified during the quarter that they were to be involuntarily terminated. Of the $5.2 million, $2.4 million remained accrued as of September 30, 2007. These costs are expected to be paid out in the third quarter of fiscal 2008.
In March 2007, the Company recorded a total of $2.5 million in restructuring charges included in gains, losses and other items in the consolidated statement of operations. The charges included $1.5 million in severance and other associate-related reserves for payments to be made to approximately 105 associates who were notified in March that they were to be involuntarily terminated and $0.3 million in fees paid to terminate contract workers. In the first quarter of fiscal 2008, the Company adjusted its original estimate with an additional severance accrual for $0.2 million. All of the accrued costs were paid as of September 30, 2007.
During the quarter ended September 30, 2005, the Company recorded a total of $13.0 million in restructuring and other impairment charges included in gains, losses and other items in the consolidated statement of operations. The charges included $6.8 million in severance and other associate-related reserves for payments to be made to approximately 160
associates who were notified during the quarter that they were to be involuntarily terminated; $3.7 million in lease termination costs or costs to be incurred after exiting certain leased facilities; and $2.5 million in other costs including the write-off of certain non-productive assets and other contract termination costs. The table above shows the portion of the above charges which are yet to be paid as of September 30, 2007 (dollars in thousands). The remaining accrued costs of $2.2 million are expected to be paid out over the terms of the related leases or contracts, of which the longest one runs through fiscal 2012.
Spain Closure
In the fourth quarter of fiscal 2007, the Company announced plans to shut down its operations in Spain. Upon the completion of this closure, the Company recorded $6.6 million of exit costs including $0.7 million severance costs, $3.9 million in accruals for contingent liabilities related to governmental data protection claims pending in Spain, and $2.0 million in asset write offs and other accruals. The Company recorded an additional $0.3 million of expense during the six months ended September 30, 2007. Of this amount, $3.7 million remained accrued as of September 30, 2007 and is expected to be paid out in the remainder of fiscal 2008.
18
Terminated Acquisition of the Company
On May 16, 2007, the Company announced it had entered into an agreement to be acquired by Silver Lake and ValueAct Capital, at a price of $27.10 per share plus the assumption of outstanding debt. On October 1, 2007, the Company announced that this transaction had been terminated. As of September 30, 2007, the Company has incurred transaction related expenses of $17.4 million which are included in gains, losses and other items. Of this amount, $1.6 million was accrued but not paid as of September 30, 2007. Per the terms of the merger termination agreement, which was signed October 1, 2007, Silver Lake and ValueAct were required to pay the Company a settlement fee of $65 million. This settlement fee was received on October 10, 2007 and recorded in gains, losses and other items during the third quarter of fiscal 2008.
Leased Asset Disposal
During the quarter ended September 30, 2007, the Company entered into an agreement to dispose of a leased asset. Under the terms of the lease, the Company is required to make a termination payment to the lessor and the lessor will sell the asset and pay the proceeds to the Company. The Company has accrued in gains, losses and other items, the estimated net payment to terminate the lease and dispose of the asset. The actual disposal will occur in the third quarter of fiscal 2008. The $2.3 million accrual is included in other accrued liabilities on the condensed consolidated balance sheet.
Gains, Losses and Other Items
Gains, losses and other items for each of the quarters presented are as follows (dollars in thousands):
|
|
For the quarter ended
September 30
|
|
For the six months ended
September 30
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Terminated acquisition expenses
|
|
$
2,264
|
|
$
-
|
|
$
17,358
|
|
$
-
|
Fiscal 2008 restructuring plan
|
|
5,190
|
|
-
|
|
5,190
|
|
-
|
Fiscal 2007 restructuring plan adjustment
|
|
-
|
|
-
|
|
171
|
|
-
|
Loss on lease termination
|
|
2,310
|
|
-
|
|
2,310
|
|
-
|
Spain closure adjustment
|
|
168
|
|
-
|
|
293
|
|
-
|
|
|
$
9,932
|
|
$
-
|
|
$
25,322
|
|
$
-
|
Impairment
The Company reviews the recoverability of its capitalized costs whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test of recoverability is performed by comparing the carrying value of the asset to its undiscounted expected future cash flows. If such review indicates that the carrying amount of an asset exceeds the sum of its expected future cash flows, the assets carrying amount is written down to its estimated fair value. Fair value is determined by an internally developed discounted projected cash flow analysis of the asset. Due to a renegotiation of two contracts with two different outsourcing customers, the first of which occurred in the quarter ending June 30, 2007 and the second in the quarter ending September 30, 2007, the Company performed a test for potential impairment of the related capitalized costs at June 30, 2007 and
September 30, 2007. The Company determined that the future cash flows relating to these renegotiated outsourcing contracts would not be sufficient to recover the costs that were capitalized. Based on these analyses, the Company recorded a write-down of $5.2 million in the first quarter for one contract and another $4.4 million in the second quarter for the second contract relating to the capitalized costs of these contracts. The combined $9.6 million charge is recorded in cost of revenue in the accompanying condensed consolidated statement of operations and in the Corporate segment for segment disclosures. In addition as a result of the restructuring activities in the quarter ended September 30, 2007, the Company abandoned and wrote off $0.4 million in capitalized software. This is included in cost of revenue in the accompanying condensed consolidated statement of operations and in the Corporate segment.
19
11.
COMMITMENTS AND CONTINGENCIES:
Legal Matters
Linda Brooks and Richard Fresco v. Auto Data Direct, Inc., et al., (U.S. Dist. Court, S.D. Florida, 03-61063) is a putative class action lawsuit, removed to federal court in May 2003, filed against Acxiom and several other information providers. The plaintiffs allege that the defendants obtained and used drivers license data in violation of the federal Drivers Privacy Protection Act. To date, a class has not been certified. Among other things, the plaintiffs seek injunctive relief, statutory damages, and attorneys fees. While certain defendants have agreed to conditionally settle the case, Acxiom will continue to defend the case vigorously in that it believes it has acted in conformity with the applicable law. Two companion cases, Sharon Taylor, et al., v. Acxiom, et al., (U.S. District Court, E.D. Texas, 207CV001) and Sharon Taylor, et al. v. Biometric Access Company, et al., (U.S. District
Court, E.D. Texas, 2:07-CV-00018
)
, were filed in January 2007.
The Company is involved in a number of actions with the Data Protection Authority of Spain, involving alleged improper usage of individuals data. The total claims sought by the Data Protection Authority may be as high as $10.6 million. The Company is negotiating with the Data Protection Authority in an attempt to settle the claims, and the Company maintains that the Companys usage of data has been in compliance with the applicable law. However, upon advice of counsel and after review of the pending claims, the Company accrued $3.9 million as part of the cost of closure of the Spain office (see note 10). The amount accrued represents legal fees incurred to date along with an estimate of the amount which will be required to ultimately settle the claims.
In the opinion of management, none of the above cases will have a material adverse effect on the Companys consolidated financial position, results of operations, or cash flows.
The Company is involved in various other claims and legal actions in the ordinary course of business. In the opinion of management, the ultimate disposition of all of these matters will not have a material adverse effect on the Companys consolidated financial position, results of operations or cash flows.
Commitments
The Company leases data processing equipment, software, office furniture and equipment, land and office space under noncancellable operating leases. Additionally, the Company has entered into synthetic operating leases for computer equipment, furniture and aircraft (Leased Assets). These synthetic operating lease facilities are accounted for as operating leases under generally accepted accounting principles and are treated as capital leases for income tax reporting purposes. Initial lease terms under the synthetic computer equipment and furniture facility range from two to six years, with the Company having the option at expiration of the initial lease to return the equipment, purchase the equipment at a fixed price, or extend the term of the lease.
The Company has a future commitment for synthetic lease payments of $20.5 million over the next five years. In the event the Company elects to return the Leased Assets, the Company has guaranteed a portion of the residual value to the lessors. Assuming the Company elects to return the Leased Assets to the lessors at its earliest opportunity under the synthetic lease arrangements and assuming the Leased Assets have no significant residual value to the lessors, the maximum potential amount of future payments the Company could be required to make under these residual value guarantees was $12.4 million at September 30, 2007.
The Company also has an aircraft leased from a business controlled by an officer and director of the Company. Should the Company elect early termination rights under the lease or not extend the lease beyond the initial term and the lessor sells the aircraft, the Company has guaranteed a residual value of 70% of the then outstanding indebtedness of the lessor, or $2.4 million at September 30, 2007.
In connection with certain of the Companys facilities, the Company has entered into 50/50 joint ventures with local real estate developers. In each case, the Company is guaranteeing portions of the loans for the buildings. In addition, in connection with the disposal of certain assets, the Company has guaranteed loans for the buyers of the assets. These guarantees were made by the Company primarily to facilitate favorable financing terms for those third parties. Should the third parties default on this indebtedness, the Company would be required to perform under its guarantee. Substantially all of the third-party indebtedness is collateralized by various pieces of real property. At September 30, 2007 the Companys maximum potential future payments under all of these guarantees of third-party indebtedness were $4.9 million.
20
12.
UNCERTAIN TAX POSITIONS:
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48) that clarifies the accounting and recognition for income tax positions taken or expected to be taken on tax returns. The Company adopted the provisions of FIN 48 as of the beginning of its 2008 fiscal year. As a result of its adoption of FIN 48, the Company made no adjustments to retained earnings. In addition, the Company anticipates no changes to the amount of unrecognized tax benefits in the next twelve months.
As of the beginning of its 2008 fiscal year, the total amount of reserves for income taxes is $3.8 million. The entire amount of the $3.8 million, if recognized, would affect the effective tax rate. Any prospective adjustments to the reserve for income taxes will be recorded as an increase or decrease to the provision for income taxes and would impact the effective tax rate.
The Company accrues penalties and interest related to reserves for income taxes in the provision for income taxes. The amount of penalties and interest accrued as of the beginning of the 2008 fiscal year is $0.7 million.
The Company files a consolidated U.S. income tax return and tax returns in various state and local jurisdictions. The Companys subsidiaries also file tax returns in various foreign jurisdictions. In addition to the U.S., the Companys major taxing jurisdictions include the United Kingdom, France, Germany, and the Netherlands. The number of years with open tax examinations varies depending on the tax jurisdiction. In the U.S., the Internal Revenue Service (IRS) has completed its examination of the Companys federal income tax returns for fiscal years through 2002 and has commenced an examination of the Companys federal income tax returns for fiscal years 2003-2005, for which the Company anticipates no adverse adjustments. The status of foreign tax examinations varies by jurisdiction. The Company does not anticipate any material adjustments to its financial statements resulting from
tax examinations currently in progress.
21
PART I. FINANCIAL INFORMATION