<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition 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 (IRS Employer Identification No.)
incorporation or organization)
7850 North Belt Line Road 75063
Irving, Texas (ZIP Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 506-3400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common stock NASDAQ
Indicate by check mark whether the Registrant (1) has filed all reports 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 .
--- ---
As of March 17, 1999, 5,003,641 common shares were outstanding, and the
aggregate market value of the common shares held by nonaffiliates (based upon
the closing price of these shares on the National Association of Securities
Dealers National Market System) was approximately $52,538,231 (includes the
market value of shares in ESOT participants' accounts).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated part or parts of this report:
The Registrant's Annual Report to Shareholders for the year ended December
31, 1998--Parts I, II and IV; the Registrant's definitive Proxy Statement
to be filed with the Securities and Exchange Commission not later than 120
days after the end of the fiscal year covered by this report--Part III; and
the Exhibits listed on page 16. There is a total of 17 pages in this
document.
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TABLE OF CONTENTS
M/A/R/C INC.
FORM 10-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a
Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 11
PART III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 11
Item 12. Security Ownership of Certain Beneficial Owners
and Management 11
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 12
Index to Exhibits 16
Signatures 17
</TABLE>
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PART I
ITEM 1. BUSINESS.
BACKGROUND AND RECENT DEVELOPMENTS
Marketing And Research Counselors, Inc., the predecessor of M/A/R/C Inc.
(the "Registrant"), was organized in 1965 as a majority owned subsidiary of
Tracy-Locke Company, Inc. ("Tracy-Locke"), an advertising agency. In connection
with the acquisition of Tracy-Locke by BBDO International, Inc. ("BBDO"), the
Registrant was organized in 1981 as a wholly owned subsidiary of Tracy-Locke to
hold the stock of Marketing And Research Counselors, Inc. and certain of the
Tracy-Locke film, audio, and advertising operations not to be acquired by BBDO.
All of the stock of the Registrant was distributed to the shareholders of
Tracy-Locke in February 1982. Once separated from Tracy-Locke, the Registrant
disposed of its operations unrelated to marketing research.
In January 1985, the Registrant and certain shareholders of the Registrant
sold an aggregate of 2,860,923 shares of common stock at a per share price to
the public of $3.70. The Registrant received net proceeds of approximately
$5,500,000 from its sale of 1,687,500 shares of common stock.
In January 1991, the Registrant renamed itself The M/A/R/C Group, and
placed each of its marketing information businesses into four separate operating
companies. Consolidation of operations in 1994 resulted in the Registrant's two
current operating divisions: Targetbase Marketing, a full-service database
marketing agency, and M/A/R/C Research, a customer marketing research firm. In
August 1995, the Registrant organized Digital Marketing Services, Inc. ("DMS")
with America Online Incorporated and now owns 30% of DMS and accounts for its
ownership under the equity method of accounting. In May of 1998, the registrant
completed the acquisition of Targetbase Marketing Ltd. (TBS), a database
marketing firm headquartered in Middlesbrough, United Kingdom. TBS is part of
the registrant's Targetbase Marketing division. These designated primary
businesses are considered two segments for accounting purposes.
Information concerning the Registrant's revenues, operating profit, and
assets is included in the financial statements incorporated by reference into
Item 8 of this report.
Since the Registrant's initial public offering in January 1985, three
stock splits have been paid in the form of stock dividends. In December 1985, a
three-for-two split; in February 1992, a six-for-five split; and in February
1997, a three-for-two split. All references to shares and per share data in this
report have been adjusted to reflect all such stock splits.
The Registrant's principal executive offices and corporate headquarters
are located at 7850 North Belt Line Road, Irving, Texas 75063, and its telephone
number is (972) 506-3400.
GENERAL
Through its two operating companies, M/A/R/C Research and Targetbase
Marketing, the Registrant provides marketing services to large consumer and
business product and service companies. The Registrant has designed and
developed proprietary, computer-based systems for providing an integrated
offering of marketing intelligence services. The marketing research services
include forecasting the business impact of marketing strategies through market
segmentation, market testing, market forecasting and market tracking. The
Registrant also provides a full complement of database marketing services that
include marketing consulting, database construction and management, creative
design and production, and strategic analysis.
ORGANIZATION
The Registrant provides marketing services to more than 200 clients who
market consumer, business, or industrial products or services.
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M/A/R/C RESEARCH
The majority of the Registrant's customer marketing research activities
are conducted through its M/A/R/C Research operating company.
The purpose of the customer marketing research performed by the
Registrant is to evaluate and forecast the business impact of clients' marketing
strategies and execution. Data is gathered, processed, and analyzed about
clients' products or services and the population to which they are marketed.
Clients use the data collected by the Registrant and the resulting analyses to
assist in determining, among other things, the most valuable customer segments
to pursue, what types of products or services to introduce or discontinue, and
what types of marketing and advertising strategies to use to attract and retain
customers.
The Registrant generally contracts separately with clients for each
research project. The typical project has a duration of several months except
for market tracking projects which generally run for a year with an option for
annual renewal. The process for initiating a project includes consultation with
the client to define the scope of information required, preparation of a study
plan outlining the specifications for data collection and analysis, and
negotiation of a price estimate. Upon approval, the Registrant designs the
questionnaire, designates the sampling requirements, and initiates the data
collection. After interviewing is completed, data are validated and processed,
analysis is conducted, and results accompanied by recommendations are presented
to the client.
M/A/R/C Research gathers data from target consumers and businesses
through the telephone, face-to-face, the mail, and online networks. The data is
gathered through telephone interviewers utilizing telephone service centers
located in Denton, Texas, and Killeen, Texas. M/A/R/C Research has approximately
250 CRT-equipped interviewing positions. The Registrant also uses marketing
research field supervisors in local markets to conduct face-to-face or telephone
interviews through their interviewers. Data are further collected by mailed
questionnaires and through interactive online services by way of a joint venture
with America Online as well as an exclusive agreement with Peapod Interactive.
M/A/R/C Research's data collection capabilities, when combined with the function
of its ACRS software to fully integrate all aspects of the marketing research
process, significantly reduce the time required to complete most projects.
Building upon the scope of advanced data collection technology and
resources, M/A/R/C Research is staffed by professionals with training and
experience in advanced marketing research methods and analysis as well as
business application of marketing intelligence. The staff consults with clients
on business problem definition, solution design, and marketing strategy
implementation.
The principle services provided by M/A/R/C Research are designed to
address strategic marketing intelligence needs and can be segmented into four
categories: market segmentation, market testing, market forecasting, and market
tracking:
Market segmentation studies identify distinct groups of consumers or
businesses according to their similarity on relevant dimensions such as
their need for products and/or the benefits they are seeking or their
purchase volume and brand loyalty. These results can be used to
identify unmet needs and corresponding new product opportunities as
well as to determine how consumers perceive particular brands versus
competition and how to develop strategies to enhance a product's
position. Additionally, these results can be used to target advertising
and marketing activities to the most desirable and valuable groups of
consumers.
Market testing studies may be conducted to evaluate any element of the
marketing mix. The predominant types of market testing conducted are
concept tests which determine consumer
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acceptance of a new product, service or advertising concept, and
product tests which determine the strengths and weaknesses of a
particular product among consumers.
Market forecasting studies size the potential business impact of sales
and return on investment of different marketing strategies. M/A/R/C
Research has developed a family of proprietary research and modeling
services styled "Assessor Market Modeling System" that provides
guidance to clients across all phases of the marketing process through
its market modeling technology. It is used worldwide to forecast sales
potential for new as well as repositioned products and services.
Additionally, the results can be used to size target market
opportunities and to optimize spending across different advertising
media and promotion tactics.
Market tracking consists of conducting a continuing study or series of
similar studies over a period of time to determine changes or trends in
customer acceptance or reaction to products, services, advertising
campaigns, etc. The Customer Satisfaction tracking programs offered by
M/A/R/C Research are used to identify the drivers of satisfaction with
a product or service and to track changes in satisfaction over time.
The results of these programs are used to identify improvement
opportunities in manufacturing and marketing processes and are linked
to predictions of how these improvements will impact sales and return
on investment.
TARGETBASE MARKETING
The Registrant's Targetbase Marketing operating company is a
full-service database marketing agency offering the full complement of analytic,
technology, and creative services needed to target marketing activities directly
to clients' high potential customers and prospects. The purpose of the database
marketing performed by the Registrant is to improve the return on marketing
investments by targeting customers and prospects that represent the most value
to a product or service. Data is gathered, processed, and analyzed to create a
strategic business analysis that identifies the most valuable target groups and
appropriate direct marketing strategies for reaching these target groups.
Targetbase creates and maintains marketing databases of both existing customers
and high potential prospects of client products and services and executes
marketing and promotional programs directed at these databases. The
implementation of these closed-loop marketing programs can incorporate a variety
of response-oriented techniques, such as contests, coupons, and frequency
incentives as well as a variety of media, including mail, telephone, direct TV,
and online interactive.
Targetbase generally works on an exclusive basis with a client in a
product category. Once a client has selected Targetbase as its database
marketing agency, a scope of work is defined and a team of professional staff
with the skills required to accomplish the scope of work is assigned to the
client. Compensation formats generally include a retainer fee for the dedicated
team and/or management of a marketing database and variable fees for
project-specific costs.
The customer data housed in the marketing databases for clients
represent the foundation of the marketing intelligence used to build effective
direct marketing strategies and programs for clients. The Registrant has
developed proprietary software for managing and accessing marketing databases to
support the integration of its full complement of database marketing services.
Targetbase's proprietary ARM system is scalable to the size of the database,
allows for customization to individual clients, and provides functional access
to both internal staff groups as well as to clients for planning and
implementing programs.
Targetbase provides services in all three of the necessary segments of
strategic business analysis, technology, and creative production:
Strategic business analysis is performed to identify the high potential
customer and prospect target groups for client products and services
and to develop direct marketing strategies that
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will yield a high return on related marketing investments. Services
include market segmentation, media mix analysis, ROI analysis of
strategic options and program concepts, and loyalty analysis. The
results of these analyses are used to screen and select additions to
the database audience, develop communication strategies to the
audience, and select the appropriate media through which to reach the
audience. These techniques are also used to evaluate ROI on the
investments that are made by the client.
Technology services are used to enable the database marketing
strategy. Targetbase's advanced technology assists in the targeting
process by providing a means to efficiently segment the marketplace
and tailor various marketing strategies to multiple target groups.
Services include technology consulting for design and integration with
client systems as well as ongoing database management and development
of tailored decision support tools.
Creative services translate the marketing strategy into advertising
messages and promotional programs that attract and retain business for
client products and services. Full creative capabilities have been
developed with expertise in a variety of industries and a variety of
media including print, direct TV, and online interactive.
Response-oriented programs are designed to yield valuable customer
feedback which is incorporated into the database to expand client
information about its customers and to refine the targeting and
creative process for future programs.
PROPRIETARY SOFTWARE
The Registrant has developed data processing and data communications
capabilities, with a large staff of systems analysts and programmers trained to
design software for marketing research, telemarketing, and database marketing.
The proprietary software developed by the Registrant includes the Automated
Custom Research System ("ACRS") and the Acquisition Retention and Maximization
System ("ARM(TM)"). ACRS is an effective marketing research software system
because it integrates all facets of the marketing research process into one
on-line system and is capable of handling complex studies. ARM(TM) is the
software used for managing and accessing marketing databases. ARM(TM) is an
advanced tool for database marketing because it incorporates production and
analytical processes along with scalability and customization. The Registrant's
systems analysts and programmers continually enhance the systems.
CLIENTS
The Registrant directs its marketing efforts toward companies having
relatively sophisticated and comprehensive research and marketing needs; these
companies tend to be global suppliers of consumer goods and business services.
During the year ended December 31, 1998, one client accounted for 11% of
the Registrant's revenues.
Because the Registrant generally performs its marketing research
assignments on a custom basis, it has no long-term contracts to perform customer
marketing research.
FEE ARRANGEMENTS
The Registrant's research assignments generally are obtained by
competitive estimating based on a specified fee. Therefore, the ability of the
Registrant to realize a profit on a particular research project depends on its
ability to accurately estimate in advance the costs involved in the project.
Database marketing assignments, however, are usually defined in terms of the
scope of work and are longer term in nature. Typically a team of professional
staff is assigned to the client and compensation
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arrangements tend toward retainers for the dedicated staff and variable fees for
other work. Revenues are recognized as services are performed and billed to
clients.
COMPETITION
The business in which the Registrant is principally engaged is highly
competitive and is characterized by a large number of relatively small
organizations and a few concerns of substantial resources. The Registrant
frequently competes with small specialty companies having low overhead. While
precise information about the industry is not available, the May 25, 1998, issue
of Advertising Age rated the Registrant as the fifteenth largest marketing
research company in the United States. Additionally, the Registrant's database
marketing agency was ranked as the fourteenth largest direct response agency in
the United States by the Direct Marketing Association in its May 1998 report.
The Registrant is also subject to competition from marketing and research
departments of various companies, advertising agencies, and business consulting
firms. The Registrant believes that the principal methods of competition in the
customer marketing research business are the quality of information;
consistency; the ability to direct, acquire and report on marketing programs in
a short period of time; and price. The Registrant believes that the principal
methods of competition in the database marketing business are the quality of
database construction and management, creative design and production, strategic
analysis, price, and marketing consulting.
EMPLOYEES
At December 31, 1998, the Registrant employed 518 full-time staff
employees and approximately 592 part-time hourly employees for data gathering
and processing purposes. The permanent staff is composed primarily of marketing
and research consultants and specialists. Turnover at the Registrant is low at
the present time; however, the possibility of key personnel leaving always
exists.
SERVICE MARKS
The Registrant has obtained federal and state registration of several
service marks and has filed service mark applications for certain other names
and designs. Management believes that the Registrant's marketing efforts, timely
implementation of technological advances, responsiveness to customer
requirements, depth of technical expertise, and high level of customer support
enhance the value of its service marks and overall goodwill of the Registrant.
These service marks are held by a wholly owned subsidiary of the Registrant and
are licensed to the Registrant's operating companies.
EXECUTIVE OFFICERS
Set forth below is certain information concerning the executive officers
of the Registrant:
<TABLE>
<CAPTION>
Name Age Position with the Registrant
---- --- ----------------------------
<S> <C> <C>
Cecil B. Phillips 74 Chairman Emeritus since January 1998;
Chairman of the Board from August 1993
to January 1998; Chairman of the Board
and Chief Executive Officer from May
1983 to August 1993; President of the
Registrant from July 1965 to November
1986; Chief Operating Officer of the
Registrant from February 1982 to May
1983; Director since 1981.
Sharon M. Munger 52 Chairman of the Board and Chief
Executive Officer since January 1998;
President and Chief Executive Officer
from August 1993 to January 1998;
President and Chief Operating Officer of
the Registrant from November 1986 to
August 1993; President and Chief
Operating Officer of the
</TABLE>
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Registrant's Marketing Services Group
from December 1984 to November 1986;
Executive Vice President of Marketing
And Research Counselors from May 1983 to
December 1984; Senior Vice President of
Marketing And Research Counselors from
January 1981 to May 1983; Director since
1983.
Jack D. Wolf 45 President and Chief Operating Officer
since January 1998; Executive Vice
President of the Registrant from
November 1990 to January 1998; President
of Targetbase Marketing since January 1,
1991; Senior Vice President of the
Registrant from November 1986 to
December 1990; Executive Vice President
from October 1984 to November 1986;
Senior Vice President from June 1984 to
October 1984; Vice President from June
1981 to June 1984.
Corinne F. Maginnis 51 Executive Vice President of the
Registrant since November 1990;
President of the Registrant's Quality
Strategies subsidiary from January 1991
to November 1994; Senior Vice President
of the Registrant from November 1986 to
December 1990; Executive Vice President
from January 1985 to November 1986;
Senior Vice President from July 1984 to
January 1985; Vice President from
January 1983 to July 1984; Research
Associates Manager from September 1982
to January 1983. Ms. Maginnis is the
sister of Sharon M. Munger, President
and Chief Executive Officer of the
Registrant.
Daniel J. Sutherland 46 President of M/A/R/C Research since
September 1998.
Harold R. Curtis 60 Executive Vice President of the
Registrant since April 1998; Senior Vice
President from November 1986 to April
1998; Chief Financial Officer, Secretary
and Treasurer of the Registrant since
1982.
The executive officers of the Registrant were elected to hold office until the
annual meeting of the directors of the Registrant, which meeting immediately
follows the annual meeting of shareholders, or until their respective successors
are elected and have qualified. No arrangements or understandings exist between
the listed officers and other persons pursuant to which any of the individuals
listed above were to be selected as officers.
ITEM 2. PROPERTIES.
As of December 31, 1998, the Registrant was leasing approximately 97,713
square feet in Atlanta, Georgia; Chicago, Illinois; Greensboro, North Carolina;
Newport Beach, California; Killeen, Texas; Los Angeles, California; and Irving,
Texas. The aggregate lease payments of the Registrant for the year ended
December 31, 1998, amounted to $1,265,000.
The Registrant also owns a 16,000 square foot building in Denton, Texas.
The Registrant purchased a warehouse in December 1983 at an approximate cost of
$475,000 and completely refurbished and converted it into office space and a
telephone interviewing facility at an approximate cost of $1,100,000.
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In May 1984 the Registrant purchased 9.36 acres of undeveloped land in the
Las Colinas area of Irving, Texas, for a purchase price of $1,643,000. In April
1985, the Registrant sold approximately 4.3 acres of the land for $816,000 and
entered into related agreements with the purchaser of the property to construct
and lease to the Registrant a corporate headquarters facility on that portion of
the site. The Registrant's facilities were completed in April 1986 and presently
serve as the principal offices of the Registrant. The facility has approximately
141,500 net square feet of space. On May 1, 1991, the Registrant renegotiated
its lease for 9.25 years (111 months). The Registrant exercised its option to
purchase the facility in March 1996 for approximately $20,600,000. The purchase
price was financed with new debt in the form of an $11,200,000 mortgage loan
from a life insurance company and approximately $9,400,000 in bank debt.
The Registrant believes that the properties used in its operations are
fully utilized, suitable, and adequate for present operations.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant is not a party to any material legal proceedings, nor, to
the Registrant's knowledge, are there any other material legal proceedings
contemplated against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Registrant did not submit any matters to a vote of its security
holders during the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Registrant's Common Stock was held by approximately 492 holders of
record as of March 17, 1999, as traded in the over-the-counter market under the
Nasdaq symbol "MARC."
The following table sets forth, for the periods indicated, the high and
low closing sale prices for the Registrant's Common Stock on the Nasdaq National
Market System. From February 1982 until the Registrant's public offering on
January 29, 1985 (see "Business--Background and Recent Developments"), the
Registrant's Common Stock was occasionally traded in the over-the-counter
market. The bid prices reflect inter-dealer prices without retail markups,
markdowns, or commissions and do not necessarily represent actual transactions.
Nasdaq National Market System quotations, which began on January 29, 1985, are
based on actual transactions and not bid prices.
Bid Quotation
or Sale Price
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Calendar Year 1997
First Quarter $12.67 $12.00
Second Quarter 17.88 15.84
Third Quarter 22.67 20.67
Fourth Quarter 20.21 18.17
Calendar Year 1998
First Quarter 16.56 14.58
Second Quarter 17.71 14.96
Third Quarter 15.46 14.33
Fourth Quarter 13.50 12.32
Calendar Year 1999
(Through January 1999) 11.63 10.50
</TABLE>
Beginning with the second quarter of 1995, the Registrant began paying
quarterly dividends at an annual rate of $.27 per share, currently paying at an
annual rate of $.30 per share. Although the terms of the credit agreement
between the Registrant and its principal lending bank impose requirements with
respect to the Registrant's working capital, ratio of current assets to current
liabilities, tangible net worth and other financial conditions, these
requirements do not currently materially limit the Registrant's ability to pay
dividends.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data on page 3 of the Annual Report to Shareholders for
the year ended December 31, 1998, is incorporated herein by reference.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 7 through 9 of the Annual Report to Shareholders for the
year ended December 31, 1998, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
The financial statement information and supplemental data required in
response to this Item is incorporated herein by reference to pages 10 through 37
of the Annual Report to Shareholders for the year ended December 31, 1998.
Certain financial statement schedules are included in Part IV (Item 14(a))
of this report.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
The Registrant has had no disagreements on accounting and financial
disclosures with its independent accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required in response to this item with respect to executive
officers of the Registrant is set forth above in "Item 1. Business." The
information with respect to directors of the Registrant is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary
data included in Part II of this report are incorporated by
reference from the Registrant's Annual Report to Shareholders for
the year ended December 31, 1998, from the respective page numbers
indicated:
<TABLE>
<CAPTION>
Page Reference in
Item Annual Report
---- -----------------
<S> <C>
Report of independent accountants 38
Financial statements 10-37
Consolidated balance sheets as of December 31, 1998,
and December 31, 1997 10-11
Consolidated statements of income and comprehensive income
for the years ended December 31, 1998, 1997, and 1996 12
Consolidated statements of changes in shareholders'
equity for the years ended December 31, 1998,
1997, and 1996 13
Consolidated statements of cash flows for the years
ended December 31, 1998, 1997, and 1996 14
Notes to consolidated financial statements 15-37
</TABLE>
(2) Financial Statement Schedules.
The following supplemental schedules can be found on the indicated
pages in this report:
<TABLE>
<CAPTION>
Page in This Report
Item -------------------
----
<S> <C>
Report of independent accountants on
financial statement schedule 13
Financial statement schedule for the
years ended December 31, 1998, 1997, and 1996
Schedule II - Valuation and qualifying accounts 14
Consent of independent accountants 15
</TABLE>
Schedules other than those listed above have been omitted since
they either are not required, are not applicable, or the required
information is shown in the financial statements or related notes
in the Annual Report.
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REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of M/A/R/C Inc. has been
incorporated by reference in this Form 10-K from the 1998 annual report to
shareholders of M/A/R/C Inc. on page 38 therein. In connection with our audits
of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein when read in conjunction with the related financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 18, 1999
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M/A/R/C INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C(1) Column D Column E
(a)
Balance at Additions
Beginning of charged to costs Balance at
Description Period and expenses Deductions end of period
----------- ------------ ---------------- ---------- -------------
(amounts in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for
doubtful accounts $341 $ 54 $ 0 $395
---- ---- ----- ----
Year ended December 31, 1997
Allowance for
doubtful accounts $241 $100 $ 0 $341
---- ---- ----- ----
Year ended December 31, 1996
Allowance for
doubtful accounts $241 $ 0 $ 0 $241
---- ----- ----- ----
</TABLE>
Notes:
(a) Column "C(2)" is omitted as the answer would be "none."
14
<PAGE> 15
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
M/A/R/C, Inc. on Form S-8 of our report dated February 18, 1999, on our audits
of the consolidated financial statements and financial statement schedules of
M/A/R/C, Inc. as of December 31, 1998, and 1997, and for the years ended
December 31, 1998, 1997, and 1996, which report is incorporated by reference
in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
March 29, 1999
15
<PAGE> 16
(3) Exhibits.
3.3 Restated Articles of Incorporation of the Registrant (3.3)***
3.4 Restated Bylaws of the Registrant (3.4)***
4.3 Loan Agreement, dated as of July 1, 1984, between City of
Denton Industrial Development Authority and Registrant, in
the principal amount of $1,350,000, and related agreements
(4.3)*
10.1 Registrant's Employee Stock Ownership Plan and Trust
Agreement and Amendment Number One to the Plan (10.1)**
10.2 Amendment Two to Registrant's Employee Stock Ownership
Plan (10.2)*
10.3 Registrant's First Amended Pension Plan and Trust Agreement
and Second Amendment to the Plan (10.2)**
10.4 Third Amendment to Registrant's Pension Plan (10.4)*
10.5 Registrant's 1983 Stock Option Plan (10.5)**
10.6 Amendment No. 1 to Registrant's 1983 Stock Option
Plan (10.6)*
10.9 Supplemental Executive Retirement Plan (10.9)***
10.11 1991 Executive Stock Plan (10.11) ****
11.1 Statement Re: Computation of Per Share Earnings*****
13.1 Annual Report to Shareholders of the Registrant for year
ended December 31, 1998 (portions of which are incorporated
herein by reference)
27 Financial Data Schedule
- ----------
* Incorporated by reference to the exhibit shown in parentheses filed
with Registrant's Registration Statement on Form S-1
(File No. 2-94849).
** Incorporated by reference to the exhibit shown in parentheses filed
with Registrant's Annual Report on Form 10-K for the year ended March
31, 1984.
*** Incorporated by reference to the exhibit shown in parentheses filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990.
**** Incorporated by reference to the exhibit shown in parentheses filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992.
***** Incorporated by reference to page 18 of the Registrant's Annual
Report for the year ended December 31, 1998.
(b) None
(c) None
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized, in Dallas, Texas, on the 30th day of
March, 1999.
M/A/R/C INC.
By: /s/ H. R. Curtis
--------------------------
Harold R. Curtis
Executive Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Cecil B. Phillips Chairman Emeritus March 30, 1999
- ----------------------------------- and Director
Cecil B. Phillips
/s/ H. R. Curtis Executive Vice President, March 30, 1999
- ----------------------------------- Principal Financial and
Harold R. Curtis Accounting Officer
/s/ Sharon M. Munger Principal Executive March 30, 1999
- -----------------------------------
Sharon M. Munger Officer and Director
/s/ Jack D. Wolf President and Director March 30, 1999
- -----------------------------------
Jack D. Wolf
/s/ Edward R. Anderson Director March 30, 1999
- -----------------------------------
Edward R. Anderson
/s/ John H. Friedman Director March 30, 1999
- -----------------------------------
John H. Friedman
/s/ Elmer L. Taylor, Jr. Director March 30, 1999
- -----------------------------------
Elmer L. Taylor, Jr.
/s/ Rolan G. Tucker Director March 30, 1999
- -----------------------------------
Rolan G. Tucker
/s/ Thomas Vacchiano, Jr. Director March 30, 1999
- -----------------------------------
Thomas Vacchiano, Jr.
</TABLE>
16
<PAGE> 18
THE M/A/R/C GROUP
REPORT ON AUDITS OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
The M/A/R/C Group:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, changes in
shareholders' equity, and cash flows present fairly, in all material respects,
the financial position of The M/A/R/C Group and its subsidiaries at December 31,
1998, and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
February 18, 1999
2
<PAGE> 20
THE M/A/R/C GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS (dollars in thousands) 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,335 $ 3,850
Investments 1,511 2,524
Trade accounts receivable, less
allowance for doubtful accounts
of $395 and $341, respectively 11,925 14,512
Expenditures billable to clients, net 6,851 5,888
Notes receivable 10 12
Prepaid expenses 1,531 1,524
Federal income tax receivable 580 741
Deferred income taxes 404 400
Other current assets 998 783
------- -------
Total current assets 27,145 30,234
Notes receivable, less current portion 52 67
Property and equipment, net 32,678 29,344
Investments - noncurrent 7,072 7,365
Cash surrender value of life insurance 3,874 3,387
Intangibles, less accumulated amortization
of $2,947 and $3,039, respectively 6,022 1,987
Other assets 2,049 2,590
------- -------
Total assets $78,892 $74,974
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 21
THE M/A/R/C GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
LIABILITIES (dollars in thousands) 1998 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 2,845 $ 1,425
Current portion of long-term debt 1,480 747
Advance payments from clients 2,265 2,615
Accrued liabilities 682 1,709
-------- --------
Total current liabilities 7,272 6,496
Long-term debt 19,879 17,453
Deferred income taxes 292 820
Deferred compensation and other 5,059 2,644
-------- --------
Total liabilities 32,502 27,413
-------- --------
Commitments and contingencies (Note 7)
SHAREHOLDERS' EQUITY (dollars in thousands,
except share amounts)
Common stock, $1.00 par value, 15,000,000 shares
authorized, 6,691,500 shares and 6,530,033
shares issued, respectively 6,692 6,530
Capital in excess of par value 13,226 10,951
Retained earnings 41,518 42,907
Accumulated other comprehensive income (loss) (1,641) --
Treasury stock at cost 1,415,414 and 1,356,197
shares, respectively (9,211) (8,286)
Unearned compensation (2,509) (2,725)
Unearned ESOP shares (1,685) (1,816)
-------- --------
Total shareholders' equity 46,390 47,561
-------- --------
Total liabilities and shareholders' equity $ 78,892 $ 74,974
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 22
THE M/A/R/C GROUP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues $ 88,911 $ 96,709 $ 85,459
Production and administrative expenses 88,253 87,328 77,487
----------- ----------- -----------
Operating income 658 9,381 7,972
Other income (expense):
Interest and other income 1,212 1,880 880
Interest and other expense (1,892) (2,240) (1,476)
----------- ----------- -----------
Income (loss) before taxes (22) 9,021 7,376
Provision (benefit) for income taxes (126) 2,946 2,686
----------- ----------- -----------
Net income 104 6,075 4,690
Other comprehensive income (loss):
Adjustment for minimum pension
liability, net of tax (1,641) -- 1,822
----------- ----------- -----------
Comprehensive income (loss) $ (1,537) $ 6,075 $ 6,512
=========== =========== ===========
Earnings per share (basic) $ .02 $ 1.27 $ 1.07
----------- ----------- -----------
Earnings per share (diluted) $ .02 $ 1.21 $ 1.00
=========== =========== ===========
Weighted average shares outstanding (basic) 4,967,200 4,785,237 4,387,818
----------- ----------- -----------
Weighted average shares outstanding (diluted) 5,145,600 5,034,307 4,696,017
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 23
THE M/A/R/C GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Accumulated
Common Capital in Other
Stock, $1 Excess of Comprehensive Retained Comprehensive
(dollars in thousands, except share amounts) Par Value Par Value Income Earnings Income
--------- ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $5,676 $ 4,963 $34,758 ($1,822)
------ ------- ------- -------
Exercise of common stock options
and warrants 612 2,019
Purchase of treasury stock
Retirement of treasury stock (96) (922)
Issued restricted stock 315 2,835
Retirement of restricted stock (219) (954)
Amortization of compensation expense
Release of ESOP shares 211
Dividends paid ($.27 per share) (1,173)
Comprehensive income (loss):
Other comprehensive income (loss)
Adjustment for minimum pension
liability $1,822 1,822
Net income 4,690
-------
Comprehensive income (loss) $6,512 4,690
------ ------- ====== -------
Balance at December 31, 1996 $6,288 $ 8,152 $38,275 --
====== ======= ======= ========
Exercise of common stock options
and warrants 276 2,441
Purchase of treasury stock
Retirement of restricted stock (34) (234)
Amortization of compensation expense
Release of ESOP shares 592
Dividends paid ($.30 per share) (1,443)
Comprehensive income (loss):
Net income 6,075 6,075
-------
Comprehensive income (loss) $6,075
------ ------- ====== ------- --------
Balance at December 31, 1997 $6,530 $10,951 $42,907 --
====== ======= ======= ========
Exercise of stock options and warrants 60 467
Common stock issued in acquisition
of subsidiary 102 1,741
Purchase of treasury stock
Amortization of compensation expense
Release of ESOP shares 67
Dividends paid ($.30 per share) (1,493)
Comprehensive income (loss):
Other comprehensive income (loss)
Adjustment for minimum pension
liability (1,641) (1,641)
Net income 104 104
-------
Comprehensive income (loss) ($1,537)
------ ------- ======= ------- -------
Balance at December 31, 1998 $6,692 $13,226 $41,518 $(1,641)
====== ======= ======= =======
<CAPTION>
Treasury Stock Unearned
----------------- Unearned ESOP
(dollars in thousands, except share amounts) Shares Cost Compensation Shares
-------- ---- ------------ --------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 1,315,588 $(7,760) $(1,440) ($1,934)
--------- ------- ------- -------
Exercise of common stock options
and warrants
Purchase of treasury stock 130,098 (1,432)
Retirement of treasury stock (95,353) 1,018
Issued restricted stock (3,150)
Retirement of restricted stock 1,172
Amortization of compensation expense 210
Release of ESOP shares 163
Dividends paid ($.27 per share)
Comprehensive income (loss):
Other comprehensive income (loss)
Adjustment for minimum pension
liability
Net income
Comprehensive income (loss)
--------- ------- ------- -------
Balance at December 31, 1996 1,350,333 $(8,174) $(3,208) $(1,771)
========= ======= ======= =======
Exercise of common stock options
and warrants
Purchase of treasury stock 5,864 (112)
Retirement of restricted stock 268
Amortization of compensation expense 215
Release of ESOP shares (45)
Dividends paid ($.30 per share)
Comprehensive income (loss):
Net income
Comprehensive income (loss)
--------- ------- ------- -------
Balance at December 31, 1997 1,356,197 $(8,286) $(2,725) $(1,816)
========= ======= ======= =======
Exercise of stock options and warrants
Common stock issued in acquisition
of subsidiary
Purchase of treasury stock 59,217 (925)
Amortization of compensation expense 216
Release of ESOP shares 131
Dividends paid ($.30 per share)
Comprehensive income (loss):
Other comprehensive income (loss)
Adjustment for minimum pension
liability
Net income
Comprehensive income (loss)
--------- ------- ------- -------
Balance at December 31, 1998 1,415,414 $(9,211) $(2,509) $(1,685)
========= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 24
THE M/A/R/C GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended
December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 104 $ 6,075 $ 4,690
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,873 3,862 3,039
(Gain) loss on sale of assets 119 (12) (12)
ESOP expense 198 547 374
(Gain) loss on equity-method investment (87) (424) (226)
(Increase) decrease in income taxes receivable 161 (741) 56
(Decrease) increase in deferred income taxes (532) (505) 994
(Decrease) increase in income taxes payable -- (581) 581
(Increase) decrease in receivables and
expenditures billable to clients 3,411 (4,071) 13
Decrease (increase) in prepaids, intangibles, and
other assets (535) 62 (929)
(Decrease) increase in trade accounts payable 931 (635) (12)
(Decrease) increase in customer advances (350) (922) 1,392
(Decrease) increase in accrued liabilities (1,302) (384) 636
Increase (decrease) in deferred compensation
and other liabilities 2,415 408 (4,577)
Reduction (recognition) of pension liability, net of tax (1,641) -- 1,822
-------- -------- --------
Net cash provided by operating activities 7,765 2,679 7,841
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment (6,029) (4,433) (23,811)
Proceeds from sale of assets -- 137 6
Purchase of investments - held to maturity (1,716) (4,407) (600)
Maturity of investments - held to maturity 3,003 3,805 1,445
Purchase of idm (4,144) -- --
Collection of notes receivable 17 227 60
-------- -------- --------
Net cash used in investing activities (8,869) (4,671) (22,900)
-------- -------- --------
Cash flows from financing activities:
Decrease in book overdraft -- -- (457)
Issuance of debt 5,810 -- 20,920
Payment of debt (3,330) (1,395) (1,332)
Issuance of common stock 527 2,717 3,590
Purchase of treasury stock (925) (112) (414)
Payment of dividends (1,493) (1,443) (1,173)
-------- -------- --------
Net cash provided by (used in) financing activities 589 (233) 21,134
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (515) (2,225) 6,075
Cash and cash equivalents at beginning of period 3,850 6,075 --
-------- -------- --------
Cash and cash equivalents at end of period $ 3,335 $ 3,850 $ 6,075
======== ======== ========
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>
Cash payments for interest expense were $1,664, $1,743, and $1,080, and cash
payments for income taxes were $0, $3,517, and $1,055, for 1998, 1997, and 1996,
respectively.
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 25
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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 Fortune 500
companies. The M/A/R/C Group offers a wide range of marketing information
services through our two operating companies: M/A/R/C Research and Targetbase
Marketing.
The financial statements include the accounts of M/A/R/C Inc. (the Company) and
its wholly owned companies and corporations and equity investments. All
intercompany accounts have been eliminated in consolidation. The Company refers
to itself as The M/A/R/C Group.
On November 3, 1997, the Company acquired 25% of Intelligent Database Marketing
Limited (idm), a database marketing company headquartered in Middlesbrough,
England. As part of the agreement, the Company had the option to acquire the
remaining 75% of idm over the next two years. The Company paid $1,523,000 in
cash for its 25% interest. On May 28, 1998, the Company paid $5,987,000 in cash
and common stock for the remaining 75%, bringing its investment to a total of
$7,510,000. The Company accounted for the acquisition by the purchase method of
accounting, and accordingly, the results of operations and cash flows of idm are
included in the Company's consolidated financial statements subsequent to the
date of acquisition. Goodwill totaling $5,821,000 was recorded and is being
amortized over 30 years. In September of 1998, idm changed its name to
Targetbase Business Solutions Ltd. (TBS).
Assuming the acquisition of TBS occurred as of January 1, 1998, and January 1,
1997, the Company's unaudited pro forma net revenue would have been $89,860,000
and $100,358,000, net income would have been $176,000 and $6,100,000, and
diluted earnings per share would have been $.03 and $1.21 for the years ended
December 31, 1998, and 1997, respectively. The unaudited pro forma financial
information is not necessarily indicative of actual results had the transactions
occurred at the beginning of these periods, nor does it represent results of
future operations of the combined companies.
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 effected periods presented to reflect the split paid on
February 28, 1997, to shareholders of record on February 7, 1997.
The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires the use of management's
estimates. These estimates are subjective in nature and involve matters of
judgment. Actual amounts could differ from these estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. The carrying amount approximates fair value due to the short
maturity of those instruments.
8
<PAGE> 26
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenues
Revenues from marketing research, database marketing, and consulting projects
are recognized as services are performed. The Company presents reimbursed client
printing and mailing list costs on a net basis.
Expenditures Billable to Clients
Expenditures billable to clients represent costs related to database marketing,
marketing research, and other services. Expenditures relating to presentations
to prospective clients are expensed as incurred.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided principally using the straight-line method over estimated useful lives
as follows:
Buildings 20 to 40 years
Furniture and equipment 3 to 10 years
Leasehold improvements 1 to 10 years
When assets are sold, retired, or disposed of, any resulting gain or loss is
recognized.
The Company periodically reviews the carrying value of its property and
equipment to determine if circumstances exist indicating an impairment in the
carrying value or that depreciation periods should be modified. If facts or
circumstances support the possibility of impairment, the Company will prepare a
projection of the undiscounted future operating cash flows. In cases when the
Company does not expect to recover its carrying value, the Company recognizes an
impairment loss. Management of the Company does not believe that there are any
factors or circumstances indicating impairment of any of its property and
equipment.
Maintenance and Repairs
Maintenance and repairs for equipment and facilities are expensed, except that
substantial renewals which prolong the life of the asset beyond the date
previously contemplated are capitalized. Amounts expensed were $889,000,
$621,000, and $641,000, for the years ended December 31, 1998, 1997, and 1996,
respectively.
Capitalized Software Costs
Capitalized development and software costs relate to amounts expended during the
development of various products. Capitalized costs are amortized over the
estimated useful life of the product, typically ranging from three to five
years. Upon completion of development, future costs associated with maintenance
of the product are expensed as incurred. Total amortization expense was $69,000,
$0, and $0, for the years ended December 31, 1998, 1997, and 1996, respectively.
9
<PAGE> 27
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments
The Company has deemed all of its securities to be held-to-maturity securities,
which are securities that management has the positive intent and ability to hold
until maturity. These securities include tax-exempt governmental securities.
Held-to-maturity securities are stated at cost, adjusted for accretion of
discount or amortization of premium. Discounts or premiums are accreted or
amortized to interest income over the terms of the securities using the
straight-line method, which approximates the interest method. The fair values of
investments are based on quoted market prices for those or similar investments.
Adoption of Authoritative Statements
In 1998, the Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. SFAS 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
In 1998, the Company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 supersedes SFAS 14, Financial Reporting for Segments of a
Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers.
In 1998, the Company adopted Statement of Financial Accounting Standards No. 132
("SFAS 132"), "Employers' Disclosures About Pensions and Other Postretirement
Benefits." SFAS 132 revises the employers' disclosures about pension and other
postretirement benefit plans but does not change the measurement or recognition
of those plans. It standardizes the disclosure requirements and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis and eliminates certain other
disclosures. SFAS 132 is effective for fiscal years beginning after December 31,
1997, and statement of disclosures for earlier periods provided for comparative
purposes is required.
Intangibles
Intangible assets, primarily composed of goodwill which represents the excess of
the cost of an acquisition over the fair value of the net assets acquired, are
recorded at cost at the date of acquisition. Amortization of intangibles is
provided using the straight-line method for periods of 7 to 30 years for
identifiable assets.
10
<PAGE> 28
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Income Taxes
Deferred tax liabilities and assets are recognized for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
Deferred income taxes arise from temporary differences between financial and tax
reporting, principally relating to depreciation, capitalized development costs,
the supplemental executive retirement plan, installment sales, and pension
costs. See Note 10 for the components of deferred tax assets and liabilities and
provision for income taxes.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings Per Share" ("EPS"), beginning with the quarter ended December
31, 1997. SFAS 128 requires basic EPS to be computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period and diluted EPS to reflect the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. All prior-period EPS data
has been restated to conform to the provisions of SFAS 128. See Note 13 for the
computation and reconciliation of the numerators and the denominators of the
basic and diluted per share computation.
Foreign Currency Translation
Financial statements of foreign subsidiaries not maintained using U.S. dollars
are remeasured into the U.S. dollar functional currency for consolidation and
reporting purposes. Assets and liabilities of non-U.S. operations are translated
into U.S. dollars at the exchange rate in effect at the balance sheet date.
Revenues and expenses of non-U.S. operations are translated at the weighted
average exchange rate during the year. Resulting translation adjustments are
reflected in shareholders' equity. Foreign currency transaction gains and losses
are included in results of operations.
11
<PAGE> 29
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - NOTES RECEIVABLE
Notes receivable consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
(dollars in thousands) 1998 1997
------------ ------------
<S> <C> <C>
Note receivable, monthly installments of $1
through September 1999, bearing interest of 7% $ 8 $19
Note receivable bearing interest at prime plus 1%,
interest only through January 1998, thereafter
due in equal annual installments through
January 2005 54 54
Note receivable from former employee bearing
interest at 4.66% due in equal monthly installments
through April 2002 -- 6
--- ---
62 79
Less current portion 10 12
--- ---
$52 $67
=== ===
</TABLE>
The prime rate of interest at December 31, 1998, was 7.75%.
12
<PAGE> 30
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
(dollars in thousands) 1998 1997
------- -------
<S> <C> <C>
Land and buildings $23,785 $22,653
Furniture and equipment 23,591 19,838
Leasehold improvements 2,773 2,655
------- -------
50,149 45,146
Less accumulated depreciation and amortization 17,471 15,802
------- -------
$32,678 $29,344
======= =======
</TABLE>
13
<PAGE> 31
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVESTMENTS
The amortized cost and estimated market value of investment securities as
of December 31, 1998, and 1997, were (dollars in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
1998 Cost Gains Losses Fair Value
---- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tax-exempt bonds:
Maturing within 1 year $ 1,511 $ 79 -- $ 1,590
Maturing after 1 through 5 years 2,488 156 $ (5) 2,639
Maturing after 5 through 10 years 913 31 -- 944
Maturing after 10 years 3,564 363 (25) 3,902
------- ------- ------- -------
$ 8,476 $ 629 $ (30) $ 9,075
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
1997 Cost Gains Losses Fair Value
---- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tax-exempt bonds:
Maturing within 1 year $ 2,524 $ 114 -- $ 2,638
Maturing after 1 through 5 years 3,277 193 ($ 2) 3,468
Maturing after 5 through 10 years 1,407 32 (2) 1,437
Maturing after 10 years 2,681 301 (18) 2,964
-------- -------- -------- --------
$ 9,889 $ 640 ($ 22) $ 10,507
======== ======== ======== ========
</TABLE>
In 1998, the Company had $107,000 of other investments.
14
<PAGE> 32
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LONG-TERM DEBT
In March 1996, the Company exercised its option to acquire the corporate
headquarters for $20,617,000. The Company financed $11,212,000 of the
purchase price with a conventional mortgage. The mortgage loan, which bears
interest at a fixed rate of 8.93%, is scheduled for ten years of payments
on an amortization of 25 years. Annual principal payments are approximately
$147,000, with a final payment of $9,307,000 due March 2006. The principal
balance of the mortgage loan at December 31, 1998, was $10,844,000. The
remainder of the purchase price of the corporate headquarters facility was
financed under a four-year $12,000,000 revolving line of credit. During
1998, the agreement with the bank was amended to increase the available
line of credit to $16,000,000. Principal payments are scheduled quarterly
at $150,000 plus interest with the final reduction of unpaid principal and
interest due July 1, 2001. Interest on the bank debt is based on either the
bank's prime rate or LIBOR plus 1.0% at the option of the Company. The
principal balance of the bank loan at December 31, 1998, was $8,838,000
which includes $2,000,000 incurred in the acquisition of the subsidiary
during May 1998. The four-year revolving line of credit with the bank
requires the Company to maintain certain levels of debt coverage,
liabilities to net worth, and current assets to current liabilities. The
bank charges an unused facility fee between .38% and .50% annually.
During 1998, the Company entered into capital leases in the aggregate
amount of $1,329,000. Monthly payments are scheduled for four years. At
December 31, 1998, $1,035,000 of the capital lease obligation remained
outstanding. The total balance of long-term debt also includes $614,000
associated with the subsidiary acquired during the year.
Maturities of long-term debt for years ending December 31 are as follows:
<TABLE>
<S> <C>
1999 $ 1,480,000
2000 1,402,000
2001 7,975,000
2002 281,000
2003 and thereafter 10,221,000
------------
$21,359,000
</TABLE>
Based on the borrowing rates currently available to the Company for similar
types of borrowing arrangements, the fair value of the mortgage loan would
be $11,718,000. The bank debt is at an adjustable rate; therefore, the
carrying value approximates fair value.
15
<PAGE> 33
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan to provide pension benefits
to substantially all employees. The benefits are based on years of service
and the employee's compensation. The Company's funding policy is to make
annual contributions that meet or exceed minimum funding requirements.
Statement of Financial Accounting Standards No. 87, "Employers' Accounting
for Pension Costs," requires that an additional pension liability be
recognized when the accumulated pension benefit obligation exceeds the fair
value of pension plan assets. At December 31, 1998, this liability was the
sum of the unfunded accumulated benefit obligation and the prepaid pension
asset. Shareholders' equity was reduced by a corresponding amount, net of
tax. No additional liability was required at December 31, 1997, or 1996.
16
<PAGE> 34
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - EMPLOYEE BENEFIT PLANS (Continued)
The following table sets forth the plan's funded status and amounts
recognized in the Company's financial statements:
<TABLE>
<CAPTION>
December 31, December 31,
(dollars in thousands) 1998 1997
------------ ------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning $ 7,071 $ 5,860
Service cost 553 395
Interest cost 574 483
Actuarial (gains) and losses 812 782
Benefits paid (441) (449)
------- -------
Benefit obligation, ending $ 8,569 $ 7,071
Change in plan assets:
Fair value of plan assets, beginning $ 6,215 $ 5,211
Actual return on plan assets 215 953
Contributions by employer 77 500
Benefits paid (441) (449)
------- -------
Fair value of plan assets, ending $ 6,066 $ 6,215
Accumulated benefit obligation $ 6,820 $ 5,697
Projected benefit obligation $ 8,569 $ 7,071
Fair value of plan assets 6,066 6,215
------- -------
Funded status of plan ($2,503) ($ 856)
Unrecognized prior service cost (39) (52)
Unrecognized net actuarial gain or loss 4,326 3,211
Unrecognized transition obligation or asset (8) (10)
------- -------
Net amount recognized $ 1,776 $ 2,293
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 1,776 $ 2,293
Additional minimum liability (2,530) --
Accumulated other comprehensive income 2,530 --
------- -------
Net amount recognized $ 1,776 $ 2,293
Weighted-average assumptions:
Discount rate 7.00% 7.25%
Expected return on plan assets 12.00% 12.00%
Rate of compensation increase 3.90% 3.90%
</TABLE>
17
<PAGE> 35
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - EMPLOYEE BENEFIT PLANS (Continued)
Pension costs are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
(dollars in thousands) 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 553 $ 395 $ 453
Interest cost 574 483 488
Expected return on assets (750) (620) (465)
Amortization of transition obligation
(asset) (3) (3) (3)
Recognized (gain) loss 232 210 316
Prior service cost recognized (13) (13) (5)
----- ----- -----
Net periodic benefit cost (income) $ 593 $ 452 $ 784
Assumptions as of:
Discount rate 7.25% 7.75% 7.25%
Expected return on plan assets 12.00% 12.00% 12.00%
Rate of compensation increase 3.90% 3.90% 3.90%
</TABLE>
The accumulated benefit obligation includes the actuarial present value of the
vested benefits to which an active employee is entitled, if employment is
terminated immediately. Benefits are payable monthly commencing on the latter of
age 65, 66, or 67 (in accordance with Social Security retirement age policy), or
the participant's date of retirement.
Additionally, all salaried employees are eligible for participation in the
employer stock ownership plan (ESOP) and the fully insured health and benefit
contract in 1998, 1997, and 1996. The ESOP/401(k) allows employer contributions
under Section 401(k) of the Internal Revenue Code. Company contributions are
determined by the Compensation Committee of the Board of Directors based on the
performance of the Company. The Company absorbs the costs incurred for the
administration of the ESOP/401(k). Included in the Company's results of
operations are the following costs:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
(dollars in thousands) 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Pension plan $ 593 $ 452 $ 784
ESOP/401(k) 836 865 552
Health and benefit 1,678 1,786 1,468
</TABLE>
18
<PAGE> 36
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - EMPLOYEE BENEFIT PLANS (Continued)
In January 1993, the Company loaned $2,500,000 to the ESOP for the acquisition
of 458,277 shares of the Company's common stock. The loan is being repaid over a
15-year period. The rate of interest on the loan is 7.04%. As of December 31,
1998, and 1997, shares allocated to plan participants totaled 183,311 and
152,760 shares, respectively. All remaining shares from the January 1993
acquisition are committed to be released ratably over the remaining life of the
ESOP loan. Dividends on allocated shares are paid to participant accounts.
Through 1996, dividends on the unallocated shares were reinvested in the
Company's common stock and allocated to participants. Beginning in 1997,
dividends on unallocated shares were used to repay the loan. The fair market
value of the unearned ESOP shares at December 31, 1998, and 1997, was $2,922,000
and $5,499,000, respectively.
The Company has individual supplemental executive retirement plans for the
Chairman Emeritus, two former officers, and two current officers of the Company.
As of December 31, 1998, of the five participants, four are fully vested in the
plan. The Chairman Emeritus and two former Senior Vice Presidents, or their
beneficiaries, are drawing benefits. As of December 31, 1998, and 1997, the
Company has accrued $1,774,000 and $1,904,000, respectively, for benefits due
under the plans. The Company recognizes annual service cost for the plans, plus
interest on the accumulated balance. Amounts expensed, including interest, for
the years ended December 31, 1998, 1997, and 1996, were $195,000, $195,000, and
$229,000, respectively.
The Company follows the provisions of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," which requires recognition of the
cost of providing postretirement benefits, such as medical and life insurance
coverage, over the employee service period based upon the estimated amount and
timing of future benefit payments. The Company currently provides medical and
life insurance benefits for five retired employees. Executive officers and their
dependents are also entitled to receive benefits upon retirement. The costs of
these benefits charged to expense during the years ended December 31, 1998,
1997, and 1996, were approximately $14,000, $16,000, and $16,000, respectively.
The Company's obligation under SFAS No. 106 at December 31, 1998, and 1997, was
not material.
19
<PAGE> 37
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Through March 1996, the Company leased space for its corporate headquarters
facility under an operating lease. The Company exercised an option to purchase
the facility in March 1996. The Company also leases office space and certain
equipment under operating lease agreements that have an initial term or
remaining noncancelable lease term in excess of one year. Minimum annual future
rentals under the terms of the above leases are as follows:
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999 $1,998,000
2000 1,736,000
2001 1,189,000
2002 827,000
2003 338,000
----------
$6,088,000
</TABLE>
Lease expense for facilities and equipment was $2,537,000, $1,841,000, and
$2,559,000, for the years ended December 31, 1998, 1997, and 1996, respectively.
The Company provides a letter of credit from a bank for $106,000, in lieu of
paying deposits for facility rentals.
20
<PAGE> 38
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CONCENTRATIONS OF CREDIT RISK
The Company provides marketing information services primarily to
consumer-product companies. The Company performs ongoing credit evaluations of
its customers. The Company's ten largest customers accounted for approximately
57% of sales in 1998 and approximately 55% and 82% of trade accounts receivable
and work in process, respectively, at December 31, 1998. One customer accounted
for $9,458,000, or 11% of total revenues in 1998.
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash investments. The Company from time to
time maintains cash and cash equivalents in accounts with major financial
institutions in excess of the amount insured by the Federal Deposit Insurance
Corporation. Management believes credit risk related to these deposits is
minimal.
The Company invests its excess cash in deposits with major banks, government
securities, tax-exempt securities, and money market type securities. The Company
has $5,111,000 of its $8,476,000 investment in tax-exempt bonds in the state of
Texas.
21
<PAGE> 39
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No.107, "Disclosures about Fair
Value of Financial Instruments," requires all entities to disclose the fair
value of certain financial instruments in their financial statements.
Accordingly, the Company reports the carrying amount of cash and cash
equivalents, accounts payable, accrued expenses and other liabilities at cost,
which approximates fair value due to the short maturity of these instruments.
The Company's line of credit accrues interest at an adjustable rate; therefore,
the carrying value approximates fair value.
22
<PAGE> 40
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES
Income tax expense on income before income taxes consists of (dollars in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
Current provision:
<S> <C> <C> <C>
Federal ($ 329) $ 2,794 $ 2,373
State -- 397 259
------- ------- -------
(329) 3,191 2,632
Deferred provision 203 (245) 54
------- ------- -------
Provision for income taxes charged
to operations (126) 2,946 2,686
Shareholders' equity - pension component (851) -- 939
------- ------- -------
Comprehensive provision for income taxes ($ 977) $ 2,946 $ 3,625
======= ======= =======
</TABLE>
Reconciliations of the U.S. corporate income tax rate and the effective tax rate
on income before income taxes are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
U.S. corporate tax rate 34% 34% 34%
Income before taxes ($ 22) $9,021 $7,376
------ ------ ------
Tax expense at statutory rates (7) 3,067 2,508
Tax-exempt income (199) (200) (203)
Officers' life insurance (14) (247) 41
Meals and entertainment 38 43 82
State income tax - (135) (88)
Differences between financial reporting
and tax bases of fixed assets 5 13 14
Other 51 8 73
------- --------- ---------
Federal income tax (126) 2,549 2,427
State income tax - 397 259
--------- -------- --------
Provision for income taxes charged
to operations (126) 2,946 2,686
Shareholders' equity - pension component (851) - 939
------- ---------- --------
Comprehensive provision for income
taxes ($ 977) $2,946 $3,625
====== ====== ======
</TABLE>
23
<PAGE> 41
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (Continued)
The components of the net deferred tax liability as of December 31, 1998, and
1997, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------- ---------------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
ASSETS
Differences between book and tax
bases of property and equipment,
excluding building -- $ 587 -- $ 427
Allowance for expenditures billable
to clients $ 288 -- $ 284 --
Accounts receivable allowance for
doubtful accounts 116 -- 116 --
Liability for director retirement plan -- 244 -- 237
Other liabilities -- 288 -- 294
Excess of book over tax amortization -- 243 -- 177
Unrecognized net pension obligation -- 851 -- --
------- ------- ------- -------
Deferred tax assets 404 2,213 400 1,135
------- ------- ------- -------
LIABILITIES
Differences between financial reporting
and tax bases of building acquired -- 972 -- 928
Differences between financial reporting
and tax reporting of sales of fixed
assets -- 258 -- 232
Prepaid pension asset -- 592 -- 792
Excess tax over book amortization
of intangibles -- -- -- 3
Capitalized software -- 683 -- --
------- ------- ------- -------
Deferred tax liability -- 2,505 -- 1,955
------- ------- ------- -------
Net current/noncurrent deferred tax
asset (liability) $ 404 $ (292) $ 400 $ (820)
------- ------- ------- -------
Net deferred tax asset (liability) $ 112 $ (420)
======= =======
</TABLE>
24
<PAGE> 42
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTIONS AND WARRANTS
1983 Stock Option Plan
In March 1993, the 1983 Incentive Stock Option Plan approved by shareholders was
terminated, leaving no additional options available for grant under the plan.
The 1983 Plan provided for issuance of shares upon exercise of the options and
Limited Stock Appreciation Rights (Limited SARs).
Shares under option relating to the 1983 Stock Option Plan for the periods ended
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Number Weighted Number Weighted Number Weighted
Of Shares Average Of Shares Average Of Shares Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period 21,140 $ 4.94 44,868 $ 5.19 407,817 $ 4.21
Options canceled (4,500) 5.17 (900) 5.17 (5,895) 5.17
Options exercised (15,740) 4.86 (22,828) 5.44 (357,054) 4.07
Options outstanding at
end of period 900 5.17 21,140 4.94 44,868 5.19
Options exercisable at
end of period 900 5.17 21,140 4.94 34,668 5.26
</TABLE>
25
<PAGE> 43
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTIONS AND WARRANTS (Continued)
1991 Nonstatutory Executive Stock Plan
On April 19, 1991, the Board of Directors adopted a Nonstatutory Executive Stock
Plan, reserving 360,000 shares of the Company's common stock for issuance. The
term of each option shall not exceed ten years. The Committee may set the price,
vesting requirement, and exercise terms of options granted under the Plan at its
discretion. In September 1994, the Board of Directors amended the plan changing
the aggregate number of shares available for grant to 810,000 shares of common
stock. As of December 31, 1998, 278,880 shares had been exercised, and 183,405
shares remained available for grant. There were no stock options granted under
the 1991 Nonstatutory Executive Stock Plan for either of the years 1998 or 1997.
Shares under option relating to the 1991 Nonstatutory Executive Stock Option
Plan for the periods ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Number Weighted Number Weighted Number Weighted
Of Shares Average Of Shares Average Of Shares Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices
---------- -------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period 391,815 $ 8.62 612,795 $ 7.91 465,525 $ 6.39
Options granted -- -- -- -- 188,250 11.26
Options canceled -- -- (15,600) 7.46 (22,980) 6.33
Options exercised (44,100) 7.15 (205,380) 6.56 (18,000) 6.02
Options outstanding at
end of period 347,715 8.81 391,815 8.62 612,795 7.91
Options exercisable at
end of period 200,496 8.01 146,925 7.39 298,260 6.91
</TABLE>
26
<PAGE> 44
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTIONS AND WARRANTS (Continued)
1997 Stock Option Plan
The M/A/R/C Group 1997 Stock Option Plan was approved by shareholders on April
17, 1997. The plan presently provides for the issuance of Incentive Stock
Options, Nonincentive Stock Options, and Limited SARs The aggregate number of
shares of common stock which may be issued upon exercise of options granted
under the plan is 500,000. During 1998, 265,930 shares were canceled and
repriced in an exchange offer authorized by the Board of Directors. In August
1998, holders of performance-based stock options exchanged, on a share-for-share
basis, for new options vesting at the rate of 20% per year over the next five
years beginning August 6, 1998. The new options have an exercise price of $15.00
per share, the market price of M/A/R/C stock as of August 6, 1998. As of
December 31, 1998, none of the outstanding options to acquire 471,150 shares
were exercisable.
<TABLE>
<CAPTION>
1998 1997
---- ----
Number Weighted Number Weighted
Of Shares Average Of Shares Average
Underlying Exercise Underlying Exercise
Options Prices Options Prices
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of period 258,930 $18.56 -- --
Options granted 478,150 14.69 258,930 $18.56
Options canceled (265,930) 18.49 -- --
Options exercised -- -- -- --
Options outstanding at
end of period 471,150 14.68 258,930 18.56
Options exercisable at
end of period -- -- -- --
</TABLE>
27
<PAGE> 45
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11- STOCK OPTIONS AND WARRANTS (Continued)
The following summarizes information about all stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$5.17 to $6.33 173,865 1.73 $ 6.32 133,296 $ 6.32
$11.17 to $13.88 261,750 4.59 $ 11.97 68,100 $ 11.27
$14.38 to $15.00 384,150 5.59 $ 14.97 -- --
- ---------------- ------- ---- ------- ------- -------
$5.17 to $15.00 819,765 4.45 $ 12.18 201,396 $ 8.00
</TABLE>
In 1995, the Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock-Based Compensation," which provides the Company the option
of recognizing the cost of options granted based on fair values of the options
at the time of grant. The Company has decided not to elect the cost-recognition
provisions of SFAS 123.
The weighted-average fair value of the 478,150 options granted during 1998 was
$14.69 per option. The weighted-average fair value of the 258,930 options
granted during 1997 was $7.83 per option. The weighted average fair value of the
188,250 options granted during 1996 was $3.71 per option. The fair value of each
stock option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for grants
in 1998, 1997, and 1996: dividend yield between 2% and 2.4%; risk-free interest
rates range from 4.7% to 6.3%; expected lives of the options range from two to
seven years; and volatility factors range from 35% to 60%.
Had the compensation expense for the 478,150 options granted during 1998 and the
188,250 options granted during 1996 been based on the fair value pricing model
described above, additional compensation expense (net of tax) of $268,000 and
$66,000 would have been recognized in 1998 and 1996, respectively. The 258,930
options granted in 1997, which accounted for $169,000 of the $260,000 in
additional compensation expense reported in 1997, were canceled in 1998.
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1995. The Company
anticipates making awards in the future under its stock-based compensation
plans.
28
<PAGE> 46
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTIONS AND WARRANTS (Continued)
Stock Warrants
The Company issued warrants on 500,400 shares of its common stock in January of
1993 to seven senior executives. The warrants were sold for their estimated fair
market value of $.55 each. Each warrant represented the right to purchase one
share of the Company's common stock at prices ranging from $4.30 to $5.00 per
share prior to March 1, 1997. On January 18, 1993, the Board of Directors
authorized the issuance of 500,400 shares of restricted common stock of the
Company. Such shares were issued in tandem with the 500,400 warrants. The
exercise of a warrant resulted in the corresponding loss of a restricted share.
All warrants for the 500,400 shares of common stock have been exercised.
Concurrent with the exercise of the warrants, an equal number of the restricted
shares were returned to the Company and retired.
The Company has warrants on its common stock issued as follows:
<TABLE>
<CAPTION>
1998
----
Warrants Exercise Price
-------- -----------------
<S> <C> <C>
Warrants outstanding at beginning
of period 106,500 $ 7.17 to $15.00
Warrants granted 42,500 $15.00 to $16.00
Warrants exercised - -
Warrants outstanding at the end of
the period 149,000 $ 7.17 to $16.00
</TABLE>
Restricted Stock
In January 1996, the Company issued 315,000 shares of restricted common stock
valued at the then market price of $10.00 per share to the Chief Executive
Officer and one Executive Vice President of the Company. The related deferred
compensation is presented as a reduction to shareholders' equity. As the
restriction on these shares lapses ratably over a 15-year period, compensation
expense of approximately $210,000 is being recognized annually.
29
<PAGE> 47
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTIONS
The Company has a director retirement plan for all directors who are not
employees of the Company. Benefits are payable to any director who completes
five years or more of service when the director retires from the Board of
Directors and continue for a period of time equal to the term of service on the
Board. The directors' benefit under the plan is equal to the average of the
annual retainer and committee fees paid during the three years served with the
highest compensation. The amounts expensed in 1998, 1997, and 1996, were
approximately $72,000, $70,000, and $122,000, respectively. In January of 1997,
the Board of Directors approved the discontinuation of the retirement plan for
all outside directors whose initial term of service begins after January 24,
1997.
30
<PAGE> 48
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EARNINGS PER SHARE
Computation of basic and diluted earnings per share in accordance with SFAS 128
are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
------------------- ------------------- --------------------
Basic Diluted Basic Diluted Basic Diluted
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income available to common
shareholders $ 104 $ 104 $6,075 $6,075 $4,690 $4,690
====== ====== ====== ====== ====== ======
Weighted average number of
common shares outstanding 4,967 4,967 4,785 4,785 4,388 4,388
====== ====== ======
Effect of dilutive securities:
Dilutive stock options and
warrants 179 249 308
------ ------ ------
5,146 5,034 4,696
====== ====== ======
Earnings per share:
Net income $ .02 $ .02 $ 1.27 $ 1.21 $ 1.07 $ 1.00
====== ====== ====== ====== ====== ======
</TABLE>
For the effect of SFAS 123 on the earnings per share, see Note 11.
31
<PAGE> 49
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - INTERIM FINANCIAL INFORMATION
(Unaudited)
The following represents unaudited interim financial information for the years
ended December 31, 1998, and 1997 (dollars in thousands, except per share and
share amounts).
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 20,399 $ 24,075 $ 23,167 $ 21,270
Costs and expenses 21,609 23,290 21,542 21,812
----------- ----------- ----------- -----------
Operating income (loss) (1,210) 785 1,625 542
Interest and other income
(expense) (41) (14) (313) (312)
----------- ----------- ----------- -----------
Income (loss) before taxes (1,251) 771 1,312 (854)
Income taxes (benefit) (522) 272 465 (341)
----------- ----------- ----------- -----------
Comprehensive income (loss):
Other comprehensive income,
net of tax -- -- -- (1,641)
Net income (loss) (729) 499 847 (513)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (729) $ 499 $ 847 $ (2,154)
=========== =========== =========== ===========
Earnings (loss) per share (diluted) $ (.15) $ .10 $ .16 $ (.10)
=========== =========== =========== ===========
Weighted average shares
outstanding (diluted) 4,884,791 5,158,610 5,190,931 5,135,300
</TABLE>
32
<PAGE> 50
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - INTERIM FINANCIAL INFORMATION (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 22,684 $ 26,019 $ 23,747 $ 24,259
Costs and expenses 20,472 23,529 21,187 22,140
----------- ----------- ----------- -----------
Operating income 2,212 2,490 2,560 2,119
Interest and other income
(expense) (163) 340 (270) (267)
----------- ----------- ----------- -----------
Income before taxes 2,049 2,830 2,290 1,852
Income taxes 738 765 802 641
----------- ----------- ----------- -----------
Comprehensive income:
Net income 1,311 2,065 1,488 1,211
----------- ----------- ----------- -----------
Comprehensive income $ 1,311 $ 2,065 $ 1,488 $ 1,211
=========== =========== =========== ===========
Earnings per share (diluted) $ .27 $ .41 $ .29 $ .24
=========== =========== =========== ===========
Weighted average shares
outstanding (diluted) 4,858,600 5,062,552 5,170,366 5,135,300
</TABLE>
33
<PAGE> 51
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - SEGMENT INFORMATION
As stated in Note 1, in 1998, the Company adopted SFAS 131. Under SFAS 131, the
Company is comprised of two reportable segments: (1) Targetbase Marketing and
(2) M/A/R/C Research.
The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies." The Company evaluates segment
performance based on segment operating income, which is defined as income before
income taxes, interest income, interest expense, and certain general corporate
income and expense items (including equity investment income) which are not
directly attributable to the operations of the reportable segment. Segment
assets are comprised of the accounts receivable and expenditures billable to
clients which are attributable to the reporting segments. Segment data includes
a charge allocating all corporate overhead and reflects intersegment activity
transferred at cost. Revenues presented are to external clients.
The Company is organized primarily on the basis of products and services offered
in the customer marketing research business and the database marketing business.
The table below presents information about reported segments for the years
ending December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
Targetbase M/A/R/C Targetbase M/A/R/C
(dollars in thousands) Marketing Research Consolidated Marketing Research Consolidated
---------- -------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues(1) $ 49,288 $ 39,814 $ 88,911 $ 41,825 $ 54,884 $ 96,709
-------- -------- -------- -------- -------- --------
Operating income (loss)(2) 3,208 (2,716) 658 7,293 2,088 9,381
-------- -------- -------- -------- -------- --------
Not reflected in segments:
Interest income 994 1,067
Interest expense (1,860) (1,784)
Other income (expense), net 12 780
Equity in subs 174 (423)
-------- --------
(680) (360)
-------- --------
Income (loss) before taxes $ (22) $ 9,021
======== ========
Segments assets(3) $ 13,316 $ 6,130 $ 18,776 $ 12,141 $ 8,776 $ 20,400
<CAPTION>
1996
----
Targetbase M/A/R/C
(dollars in thousands) Marketing Research Consolidated
---------- -------- ------------
<S> <C> <C> <C>
Revenues(1) $ 34,490 $ 50,696 $ 85,459
-------- -------- --------
Operating income (loss)(2) 5,144 2,814 7,972
-------- -------- --------
Not reflected in segments:
Interest income 880
Interest expense (1,249)
Other income (expense), net (2)
Equity in subs (225)
--------
(596)
--------
Income (loss) before taxes $ 7,376
========
Segments assets(3) $ 9,260 $ 7,997 $ 16,709
</TABLE>
(1) Reserve adjustments totaling ($191,000) in 1998 and $273,000 in 1996
reflected in consolidated revenues were not allocated to to the segments.
(2) Income totaling $166,000 in 1998 and $14,000 in 1996 reflected in
consolidated operating income were not allocated to the segments.
(3) Reserve amounts totaling $670,000 in 1998, $517,000 in 1997 and $548,000 in
1996 are reflected in consolidated segment assets. These reserves were not
allocated to the segments.
34
<PAGE> 52
THE M/A/R/C GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - SEGMENT INFORMATION (Continued)
The following is revenue and long-lived asset information by geographic area as
of and for the years ended December 31:
<TABLE>
<CAPTION>
Revenues Long-Lived Assets
------------------------------- -------------------------------
(dollars in thousands) 1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
United States $85,611 $96,709 $85,459 $30,915 $29,344 $28,317
Foreign 3,300 -- -- 1,763 -- --
</TABLE>
Geographic revenue is based on the country in which the legal subsidiary is
domiciled. Foreign revenue reflected in the schedule represents revenue of a
subsidiary subsequent to acquisition during 1998.
One customer accounted for 11% of consolidated revenues in 1998, all residing in
the Company's Targetbase segment.
35
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.3 Restated Articles of Incorporation of the Registrant (3.3)***
3.4 Restated Bylaws of the Registrant (3.4)***
4.3 Loan Agreement, dated as of July 1, 1984, between City of
Denton Industrial Development Authority and Registrant, in
the principal amount of $1,350,000, and related agreements
(4.3)*
10.1 Registrant's Employee Stock Ownership Plan and Trust
Agreement and Amendment Number One to the Plan (10.1)**
10.2 Amendment Two to Registrant's Employee Stock Ownership
Plan (10.2)*
10.3 Registrant's First Amended Pension Plan and Trust Agreement
and Second Amendment to the Plan (10.2)**
10.4 Third Amendment to Registrant's Pension Plan (10.4)*
10.5 Registrant's 1983 Stock Option Plan (10.5)**
10.6 Amendment No. 1 to Registrant's 1983 Stock Option
Plan (10.6)*
10.9 Supplemental Executive Retirement Plan (10.9)***
10.11 1991 Executive Stock Plan (10.11) ****
11.1 Statement Re: Computation of Per Share Earnings*****
13.1 Annual Report to Shareholders of the Registrant for year
ended December 31, 1998 (portions of which are incorporated
herein by reference)
27 Financial Data Schedule
</TABLE>
- ----------
* Incorporated by reference to the exhibit shown in parentheses filed
with Registrant's Registration Statement on Form S-1
(File No. 2-94849).
** Incorporated by reference to the exhibit shown in parentheses filed
with Registrant's Annual Report on Form 10-K for the year ended March
31, 1984.
*** Incorporated by reference to the exhibit shown in parentheses filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990.
**** Incorporated by reference to the exhibit shown in parentheses filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992.
***** Incorporated by reference to page 18 of the Registrant's Annual
Report for the year ended December 31, 1998.
(b) None
(c) None
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,335
<SECURITIES> 8,583
<RECEIVABLES> 11,925
<ALLOWANCES> 395
<INVENTORY> 6,851
<CURRENT-ASSETS> 27,145
<PP&E> 50,149
<DEPRECIATION> 17,471
<TOTAL-ASSETS> 78,892
<CURRENT-LIABILITIES> 7,272
<BONDS> 19,879
0
0
<COMMON> 6,692
<OTHER-SE> 39,698
<TOTAL-LIABILITY-AND-EQUITY> 78,892
<SALES> 88,911
<TOTAL-REVENUES> 88,911
<CGS> 0
<TOTAL-COSTS> 88,253
<OTHER-EXPENSES> 680
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (22)
<INCOME-TAX> (126)
<INCOME-CONTINUING> 104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
