<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period from to
--------------------------- ----------------------------
Commission file number 0-13217
M/A/R/C Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-1781525
- ------------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7850 North Belt Line Road, Irving, Texas 75063
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(972)506-3400
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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 report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,022,283 shares as of
September 30, 1998.
<PAGE> 2
THE M/A/R/C GROUP
INDEX
(UNAUDITED)
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountant's Report..................................................i
Consolidated Balance Sheets
September 30, 1998, and December 31, 1997......................................1
Consolidated Statements of Income
Three Months Ended September 30, 1998, and 1997................................2
Consolidated Statements of Operations
Nine Months Ended September 30, 1998, and 1997.................................3
Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 1998...........................................4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998, and 1997.................................5
Consolidated Notes to Financial Statements.......................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................7-11
</TABLE>
<PAGE> 3
PRICEWATERHOUSECOOPERS LLP
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Shareholders of The M/A/R/C Group
We have reviewed the accompanying consolidated balance sheet of The M/A/R/C
Group as of September 30, 1998, the related condensed consolidated statements of
income and cash flows for the three-month periods ended September 30, 1998, and
1997, the condensed consolidated statements of operations, and cash flows for
the nine-month periods ended September 30, 1998, and 1997, and the consolidated
statement of changes in shareholders' equity for the nine-month period ended
September 30, 1998. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated February 23, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1997,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
PriceWaterhouseCoopers LLP
October 27, 1998
i
<PAGE> 4
PART I. FINANCIAL INFORMATION
THE M/A/R/C GROUP
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997
-------------- -------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments $ 4,796 $ 6,374
Trade accounts receivable, net 11,467 14,512
Expenditures billable to clients, net 8,274 5,888
Notes receivable 10 12
Federal income tax receivable 588 741
Deferred income taxes receivable 378 400
Prepaid expenses and other current assets 2,440 2,307
---------- ----------
Total Current Assets 27,953 30,234
---------- ----------
Notes receivable, less current portion 54 67
Property and equipment, less accumulated depreciation of
$18,072,000 and $15,802,000, respectively 31,744 29,344
Investments at cost 7,761 7,365
Intangibles, less accumulated amortization of $1,604,000
and $3,039,000, respectively 6,051 1,987
Prepaid pension costs and other assets 6,395 5,977
---------- ----------
TOTAL ASSETS $ 79,958 $ 74,974
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion, long-term debt $ 747 $ 747
Trade accounts payable 1,605 1,425
Advance payments from clients 2,153 2,615
Other accrued liabilities 2,046 1,709
---------- ----------
Total Current Liabilities 6,551 6,496
Long-term debt, less current portion 20,967 17,453
Deferred taxes payable and other liabilities 3,265 3,464
---------- ----------
Total Liabilities 30,783 27,413
---------- ----------
Stockholders' Equity:
Common stock, $1 par value, 15,000,000 shares authorized,
6,688,500 and 6,530,033 issued, respectively 6,688 6,530
Capital in excess of par value 13,244 10,951
Retained earnings 42,347 42,907
Less treasury stock at cost, 1,383,614 and 1,356,197 shares, respectively (8,847) (8,286)
Unearned compensation (2,563) (2,725)
Unearned ESOP shares (1,694) (1,816)
---------- ----------
Total Stockholders' Equity 49,175 47,561
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 79,958 $ 74,974
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE> 5
THE M/A/R/C GROUP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998, AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(Dollars in Thousands,
Except Per Share Data)
<S> <C> <C>
Revenues $ 23,167 $ 23,747
Costs and expenses 21,542 21,187
------------ ------------
Operating income 1,625 2,560
Interest and other income (expense) net (313) (270)
------------ ------------
Income before taxes 1,312 2,290
Federal and state income tax provision 465 802
------------ ------------
NET INCOME $ 847 $ 1,488
============ ============
Net income per share - Basic $ .17 $ .31
============ ============
Net income per share - Diluted $ .16 $ .29
============ ============
Weighted average common shares outstanding - Basic 5,017,585 4,837,018
============ ============
Weighted average common shares outstanding - Diluted 5,190,931 5,170,366
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 6
THE M/A/R/C GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998, AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(Dollars in Thousands,
Except Per Share Data)
<S> <C> <C>
Revenues $ 67,641 $ 72,449
Costs and expenses 66,440 65,188
------------ ------------
Operating income 1,201 7,261
Interest and other income (expense) net (368) (92)
------------ ------------
Income before taxes 833 7,169
Federal and state income tax provision 215 2,304
------------ ------------
NET INCOME $ 618 $ 4,865
============ ============
Net income per share - Basic $ .12 $ 1.02
============ ============
Net income per share - Diluted $ .12 $ .97
============ ============
Weighted average common shares outstanding - Basic 4,955,277 4,759,708
============ ============
Weighted average common shares outstanding - Diluted 5,150,186 5,005,957
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 7
THE M/A/R/C GROUP
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Common Capital in Unearned Cost of
Stock, $1 Excess of Retained Unearned ESOP Treasury
Par Value Par Value Earnings Compensation Shares Stock
--------- --------- --------- ------------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 6,530 $ 10,951 $ 42,907 ($ 2,725) ($ 1,816) ($ 8,286)
Exercise options/warrants 56 316
Purchase treasury stock (561)
Amortization of compensation 162
Dividends paid ($0.225 per share) (1,178)
Release of ESOP shares 236 122
Acquisition of idm 102 1,741
Net income (loss) 618
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1998 $ 6,688 $ 13,244 $ 42,347 ($ 2,563) ($ 1,694) ($ 8,847)
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 8
THE M/A/R/C GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
Net cash flow from operating activities:
Net income (loss) $ 618 $ 4,865
Noncash items:
Depreciation and amortization 3,276 2,760
ESOP Expense 358 401
Amortization of unearned compensation 162 161
(Gain) loss on sale or property and equipment (13) 0
Bad-debt expense 571 354
(Gain) loss on equity-method investment (25) (114)
Net (increase) in receivables and
expenditures billable to clients 1,875 (6,907)
Net (increase) decrease in prepaid expenses and other assets (684) (348)
Increase (decrease) in trade accounts payable (309) (544)
Increase (decrease) in accrued liabilities and other liabilities (137) (781)
--------- ---------
Net cash provided by operating activities 5,692 (153)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (3,673) (3,707)
Net (additions to) reductions in notes receivable 15 224
Purchase of idm (4,144) 0
Net (increase in) reduction of investments (474) (150)
Disposition of property and equipment -- 127
--------- ---------
Net cash used by investing activities (8,276) (3,506)
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in customer advances (462) (1,283)
Acquisition (payment) of short-term debt -- 0
Acquisition (payment) of long-term debt 2,835 (826)
Issuance of common stock 372 1,859
Cash dividends paid (1,178) (1,146)
Issue/(purchase of) treasury stock (561) (83)
--------- ---------
Net cash provided (used) by financing activities 1,006 (1,479)
--------- ---------
Net increase (decrease) in cash (1,578) (5,138)
Cash and short-term investments at December 31 6,374 9,327
--------- ---------
Cash and short-term investments at September 30 $ 4,796 $ 4,189
========= =========
Schedule of noncash investing activity:
Acquisition of idm
Cash paid $ 4,144
Common stock issued 102
Capital in excess of par 1,741
---------
5,987
=========
Net assets consolidated $ 1,542
Goodwill recorded 4,445
---------
$ 5,987
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 9
THE M/A/R/C GROUP
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to
present fairly the Company's consolidated financial position as of
September 30, 1998, the consolidated results of its operations for both
the three and nine months ended September 30, 1998, and September 30,
1997, and its consolidated cash flows for the nine months ended September
30, 1998, and September 30, 1997. Certain prior-period amounts have been
reclassified to be consistent with current-year presentation.
2. These condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not
include all disclosures normally required by generally accepted accounting
principles or those normally made in the Company's Annual Report on Form
10-K. The December 31, 1997, condensed balance sheet data was derived from
audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. Accordingly, the
financial statements and related notes in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, should be read in
conjunction with the accompanying condensed consolidated financial
statements.
3. On January 24, 1997, the Board of Directors of the Company authorized
a three-for-two stock split to be effected in the form of a 50% stock
dividend. All share, per share, option and warrant amounts, and related
prices have been restated for all periods presented to reflect the split
paid on February 28, 1997, to shareholders of record on February 7, 1997.
4. The Company adopted Statement of Financial Accounting Standards No.
128, Earnings Per Share (SFAS 128) for the period ending December 31,
1997. SFAS 128 specifies the computation, presentation, and disclosure
requirements for basic and fully diluted earnings per share.
6
<PAGE> 10
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The M/A/R/C Group is a marketing information services company, providing
service to over 200 clients nationwide. The majority of our clients are large
public companies. The Company offers a wide range of marketing information
services through its two operating companies: Marketing And Research Counselors
and Targetbase Marketing.
The following Management's Discussion is presented comparing the nine
months ended September 30, 1998, with the nine months ended September 30, 1997,
and the three months ended September 30, 1998, with the three months ended
September 30, 1997. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998, WITH
NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues decreased to $67,641,000 for the nine-month period ended
September 30, 1998, compared with revenues of $72,449,000 for the nine-month
period ended September 30, 1997. Production and administrative expenses were
98.2% of revenues, compared with 90.0% for the prior year.
For the nine months this year, the Company recorded operating income of
$1,201,000 compared with operating income of $7,261,000 last year for the same
period.
The Company's Research division has not performed well through nine
months, a period in which it recorded revenues of $30,272,000 and operating
losses totaling approximately $1,973,000. Most of the problems occurred in the
first quarter when revenues dropped to $8,924,000, approximately a 31% decline
from prior-year levels. Management reacted by reducing fixed costs. Revenues
have now stabilized at 1997 levels with half of our top 15 clients in this
division, and in the third quarter, we recorded operating income of
approximately 6% on revenues of $10,929,000. Our focus now is on building the
business back profitably. We continue to work toward realigning our business
development
7
<PAGE> 11
THE M/A/R/C GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
and client service functions to better support our suite of analytic products.
We are tailoring our product offerings to specific opportunities in the
telecommunications, energy, financial services, health care, and package goods
segments.
Targetbase, our database marketing division, has enjoyed a 21% increase
in revenues for the nine-month period to a level of $37,369,000, including
$2,287,000 from our U.K. subsidiary. Operating income in this division has been
approximately $3,175,000 for the nine-month period. Operating income was
negatively impacted this year by one-time charges in the first quarter of
$1,131,000 associated with client work and the fact that costs for developing
our new software platform as well as our interactive capabilities are outpacing
revenues. The Company is planning to reduce our internal costs for developing
interactive programs and is aggressively focusing on building an installed base
for ARM(TM) 2.0 (our new software platform) so it can better demonstrate ARM's
functional benefits for potential clients. Seven of our top ten clients in this
division are showing individual revenue increases of more than 10% compared with
1997. Our U.K. subsidiary continues to enjoy revenue growth in the 35% range
when compared with last year and has made a marginal contribution to profits
after goodwill and interest charges associated with the acquisition.
Net interest and other income decreased $276,000 to ($368,000) for the
comparable nine months. The prior-year period includes a net nonrecurring
benefit of $391,000 ($.08 per share) associated with certain life insurance
proceeds and the write-down of an investment.
The Company reported net income of $618,000, or $.12 a share on a diluted
basis, for the nine months of 1998 compared with net income of $4,865,000, or
$.97 per share on a diluted basis a year ago.
8
<PAGE> 12
THE M/A/R/C GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The weighted average number of shares outstanding (diluted) increased to
5,150,186 from 5,005,957 last year. In accordance with Statement of Position
93-6, "Employer's Accounting for Employee Stock Option Plans," the Company did
not treat as outstanding for calculating earnings per share 282,603 shares held
in the Employee Stock Ownership Plan that have not been released to
participants. The Company repurchased 33,007 shares of its stock during the
nine-month period ended September 30, 1998.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998, WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues for the third quarter ended September 30, 1998, were $23,167,000
compared with $23,747,000 for the similar period in 1997.
Production and administrative expenses were 93.0% for the period compared
with 89.2% for the prior year.
Operating income declined to $1,625,000 from $2,560,000 for the
prior-year comparable period. The Company's Research division performed better
than expected in the third quarter. On revenues of $10,929,000, the division
generated operating income of approximately 6%. Cost reductions combined with
improvements in revenues when measured against the first quarter of 1998
restored the division to profitability.
Targetbase Marketing continued to show solid sales increases in the third
quarter, rising 27% to $12,238,000. Our U.K. subsidiary contributed sales of
$1,212,000 in the quarter. Operating income in the quarter was approximately 8%
reflecting the fact that revenues from our ARM(TM) brand and
9
<PAGE> 13
THE M/A/R/C GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
customer management software product suite and our interactive business are not
yet sufficient to cover the operating costs incurred associated with these
important initiatives.
Net interest and other income declined ($43,000) to ($313,000).
Net income for the three-month period ended September 30, 1998, fell to a
level of $847,000, or $.16 a share on a diluted basis, from 1,488,000, or $.29 a
share on a diluted basis, the year before.
The weighted average number of shares outstanding (diluted) increased to
5,190,931 from 5,170,336 last year. In accordance with Statement of Position
93-6, "Employer's Accounting for Employee Stock Option Plans," the Company did
not treat as outstanding for calculating earnings per share 282,603 shares held
in the Employee Stock Ownership Plan that have not been released to
participants. The Company repurchased 7,507 shares of its stock during the
three-month period ended September 30, 1998.
CAPITAL RESOURCES AND LIQUIDITY
From December 31, 1997, to September 30, 1998, cash and short-term
investments decreased $1,578,000. Most of the decline resulted from capital
investments made during the nine months measured against decreased cash flow
from operations. The Company feels its September 30, 1998, cash and short-term
investment position of $4,796,000, the temporary investment position of
$7,761,000, the working capital position of $21,402,000, and the remaining
unused bank line of credit of approximately $5,900,000 are adequate to support
the Company's cash requirements for operating and capital expenditures.
10
<PAGE> 14
THE M/A/R/C GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
YEAR 2000
The Company began work on the Year 2000 compliance issue in 1998. To date
we have inventoried our IT and non-IT environments, both internal and external,
and assessed them for compliance. Our primary exposure resides in software that
processes the databases we manage, software that is used in our statistical
analysis work, and our interviewing and tabulating software. We are currently
building our test plans and our test environment. The Company will spend
approximately $400,000 bringing our various applications, operating systems, and
hardware into compliance. Very little funds have been spent to date. We are
slated to complete testing by the end of April 1999, with all remediation and
contingency planning completed by the end of June 1999. Management believes the
modifications to our proprietary software are relatively minor, and that our
overall risks are quite modest in nature. A reasonable worst-case scenario
resulting from one or more of these software systems being noncompliant might be
our inability to service one or more of our clients for a short period of time.
11
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The M/A/R/C Group
----------------------------
(Registrant)
Date: November 6, 1998 /s/ SHARON M. MUNGER
--------------------------- ----------------------------
Sharon M. Munger
(Chairman of the Board and
Chief Executive Officer)
Date: November 6, 1998 /s/ HAROLD R. CURTIS
--------------------------- ----------------------------
Harold R. Curtis
(Chief Financial Officer)
12
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
Exhibit 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,796
<SECURITIES> 7,761
<RECEIVABLES> 11,863
<ALLOWANCES> 396
<INVENTORY> 8,274
<CURRENT-ASSETS> 27,953
<PP&E> 49,816
<DEPRECIATION> 18,072
<TOTAL-ASSETS> 79,958
<CURRENT-LIABILITIES> 6,551
<BONDS> 20,967
6,688
0
<COMMON> 0
<OTHER-SE> 42,487
<TOTAL-LIABILITY-AND-EQUITY> 79,958
<SALES> 67,641
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 66,440
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 368
<INCOME-PRETAX> 833
<INCOME-TAX> 215
<INCOME-CONTINUING> 618
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 618
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
