UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
Commission file number 0-27824
SPAR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
580 White Plains Road, Tarrytown, New York 10591
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 332-4100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K . [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Rule 12b-2 of the Act.) YES [ ] NO [X]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on June 30, 2004, based on the closing price of
the Common Stock as reported by the Nasdaq Small Cap Market on such date, was
approximately $4,799,006.
The number of shares of the Registrant's Common Stock outstanding as of
December 31, 2004, was 18,858,972 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PART I
Page
Item 1. Business 2
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
Item 9A. Controls and Procedures 26
Item 9B. Other Information 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation and Other Information of SPAR Group, Inc. 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 35
Item 13. Certain Relationships and Related Transactions 36
Item 14. Principal Accountant Fees and Services 37
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
Signatures 43
PART I
Statements contained in this Annual Report on Form 10-K of SPAR Group,
Inc. ("SGRP", and together with its subsidiaries, the "SPAR Group" or the
"Company"), include "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including, in
particular and without limitation, the statements contained in the discussions
under the headings "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause the Company's actual results, performance and achievements, whether
expressed or implied by such forward-looking statements, to not occur or be
realized or to be less than expected. Such forward-looking statements generally
are based upon the Company's best estimates of future results, performance or
achievement, current conditions and the most recent results of operations.
Forward-looking statements may be identified by the use of forward-looking
terminology such as "may", "will", "expect", "intend", "believe", "estimate",
"anticipate", "continue" or similar terms, variations of those terms or the
negative of those terms. You should carefully consider such risks, uncertainties
and other information, disclosures and discussions which contain cautionary
statements identifying important factors that could cause actual results to
differ materially from those provided in the forward-looking statements.
Although the Company believes that its plans, intentions and
expectations reflected in or suggested by such forward-looking statements are
reasonable, it cannot assure that such plans, intentions or expectations will be
achieved in whole or in part. You should carefully review the risk factors
described herein and any other cautionary statements contained in this Annual
Report on Form 10-K. All forward-looking statements attributable to the Company
or persons acting on its behalf are expressly qualified by the risk factors (see
Item 1 - Certain Risk Factors) and other cautionary statements in this Annual
Report on Form 10-K. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Item 1. Business.
GENERAL
The SPAR Group, Inc., a Delaware corporation ("SGRP"), and its
subsidiaries (together with SGRP, the "SPAR Group" or the "Company"), is a
supplier of merchandising and other marketing services throughout the United
States and internationally. In 2002, the Company sold its Incentive Marketing
Division, SPAR Performance Group, Inc. ("SPGI"). The Company's operations are
divided into two divisions: the Domestic Merchandising Services Division and the
International Merchandising Services Division. The Domestic Merchandising
Services Division provides merchandising services, in-store event staffing,
product sampling, database marketing, technology services, teleservices and
marketing research to manufacturers and retailers in the United States. The
various services are primarily performed in mass merchandisers, drug store
chains, convenience and grocery stores. The International Merchandising Services
Division established in July 2000, currently provides similar merchandising
services through a wholly owned subsidiary in Canada, through 51% owned joint
venture subsidiaries in India, South Africa and Turkey, and through a 50% owned
joint venture in Japan. The Company recently established a 50% owned joint
venture in China and a 51% owned joint venture subsidiary in Romania and expects
to offer merchandising services in these countries in 2005.
Continuing Operations
Domestic Merchandising Services Division
The Company's Domestic Merchandising Services Division provides
nationwide merchandising and other marketing services primarily on behalf of
consumer product manufacturers and retailers at mass merchandisers, drug store
chains and grocery stores. Included in its customers are home entertainment,
general merchandise, health and beauty care, consumer goods and food products
companies in the United States.
Merchandising services primarily consist of regularly scheduled
dedicated routed services and special projects provided at the store level for a
specific retailer or single or multiple manufacturers primarily under single or
multi-year contracts or agreements. Services also include stand-alone
large-scale implementations. These services may include sales enhancing
activities such as ensuring that client products authorized for distribution are
in stock
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and on the shelf, adding new products that are approved for distribution but not
presently on the shelf, setting category shelves in accordance with approved
store schematics, ensuring that shelf tags are in place, checking for the
overall salability of client products and setting new and promotional items and
placing and/or removing point of purchase and other related media advertising.
Specific in-store services can be initiated by retailers or manufacturers, and
include new store openings, new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. The
Company also provides in-store event staffing services, database marketing,
technology services, teleservices and marketing research services.
International Merchandising Services Division
In July 2000, the Company established its International Merchandising
Services Division, operating through a wholly owned subsidiary, SPAR Group
International, Inc. ("SGI"), to focus on expanding its merchandising services
business worldwide. The Company has expanded its international business as
follows:
May 2001, the Company entered Japan through a 50% owned joint venture
headquartered in Osaka.
June 2003, the Company entered Canada by acquiring an existing business through
its wholly-owned Canadian subsidiary, headquartered in Toronto.
July 2003, the Company entered Turkey through a 51% owned joint venture
subsidiary headquartered in Istanbul.
April 2004, the Company entered South Africa through a 51% owned joint venture
subsidiary headquartered in Durban.
April 2004, the Company entered India through a 51% owned joint venture
subsidiary headquartered in New Delhi.
December 2004, the Company established a 51% owned joint venture subsidiary
headquartered in Bucharest, Romania.
In February 2005, the Company announced the establishment of a 50% owned joint
venture headquartered in Hong Kong, China.
Discontinued Operations
Incentive Marketing Division
As part of a strategic realignment in the fourth quarter of 2001, the
Company made the decision to divest its Incentive Marketing Division, operating
through its subsidiary, SPAR Performance Group, Inc. ("SPGI"). The Company
explored various alternatives for the sale of SPGI and subsequently sold the
business to SPGI's employees through the establishment of an employee stock
ownership plan on June 30, 2002. In December of 2003, SPGI changed its name to
STIMULYS, Inc.
Technology Division
In October 2002, the Company dissolved its Technology Division
established in March 2000 for the purpose of marketing its proprietary
Internet-based computer software.
INDUSTRY OVERVIEW
Domestic Merchandising Services Division
According to industry estimates over two billion dollars are spent
annually on domestic retail merchandising services. The merchandising services
industry includes manufacturers, retailers, food brokers, and professional
service merchandising companies. The Company believes there is a continuing
trend for major manufacturers to move increasingly toward third parties to
handle in-store merchandising. The Company also believes that its merchandising
services bring added value to retailers, manufacturers and other businesses.
Retail merchandising services enhance sales by making a product more visible and
available to consumers. These services primarily include placing orders, shelf
maintenance, display placement, reconfiguring products on store shelves,
replenishing
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products and providing in-store event staffing services. The Company provides
other marketing services such as test market research, mystery shopping,
teleservices, database marketing and promotion planning and analysis.
The Company believes merchandising services previously undertaken by
retailers and manufacturers have been increasingly outsourced to third parties.
Historically, retailers staffed their stores as needed to ensure inventory
levels, the advantageous display of new items on shelves, and the maintenance of
shelf schematics. In an effort to improve their margins, retailers decreased
their own store personnel and increased their reliance on manufacturers to
perform such services. Initially, manufacturers attempted to satisfy the need
for merchandising services in retail stores by utilizing their own sales
representatives. However, manufacturers discovered that using their own sales
representatives for this purpose was expensive and inefficient. Therefore,
manufacturers have increasingly outsourced the merchandising services to third
parties capable of operating at a lower cost by (among other things) serving
multiple manufacturers simultaneously.
Another significant trend impacting the merchandising segment is the
tendency of consumers to make product purchase decisions once inside the store.
Accordingly, merchandising services and in-store product promotions have
proliferated and diversified. Retailers are continually remerchandising and
remodeling entire stores to respond to new product developments and changes in
consumer preferences. The Company estimates that these activities have increased
in frequency over the last five years, such that most stores are re-merchandised
or remodeled approximately every twenty-four months. Both retailers and
manufacturers are seeking third parties to help them meet the increased demand
for these labor-intensive services.
International Merchandising Services Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in marketing
their products. As evidenced in the United States, retailer and manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
also believes that the difficulties encountered by these programs are only
exacerbated by the logistics of operating in foreign markets. This environment
has created an opportunity for the Company to exploit its Internet-based
technology and business model that are successful in the United States. In July
2000, the Company established its International Merchandising Services Division
to cultivate foreign markets, modify the necessary systems and implement the
Company's business model worldwide by expanding its merchandising services
business off shore. The Company formed an International Merchandising Services
Division task force consisting of members of the Company's information
technology, operations and finance groups to evaluate and develop foreign
markets. In 2001, the Company and a leading Japanese based distributor
established a joint venture to provide the latest in-store merchandising
services to the Japanese market. In 2003, the Company expanded its international
presence to Canada and Turkey by acquiring the business of a Canadian
merchandising company and entering into a start-up joint venture subsidiary in
Turkey. In 2004, the Company established 51% owned joint venture subsidiaries in
South Africa, India and Romania and in early 2005 a 50% owned joint venture in
China. Key to the Company's international strategy is the translation of several
of its proprietary Internet-based logistical, communications and reporting
software applications into the native language of any market the Company enters.
As a result of this requirement for market penetration, the Company has
developed translation software that can quickly convert its proprietary software
into various languages. Through its computer facilities in Auburn Hills,
Michigan, the Company provides worldwide access to its proprietary logistical,
communications and reporting software. In addition, the Company maintains
personnel in Greece and Australia to assist in its international efforts. The
Company is actively pursuing expansion into various other markets.
PIA ACQUISITION
SPAR Acquisition, Inc., and its subsidiaries (the "SPAR Companies") are
the original predecessor of the current Company and were founded in 1967. On
July 8, 1999, the Company completed a reverse merger with the SPAR Companies
(the "PIA Acquisition"), and then changed its name to SPAR Group, Inc., from PIA
Merchandising Services, Inc. (prior to such merger, "PIA"). Pursuant to the PIA
Acquisition, the SPAR Companies were deemed to have "acquired" PIA and its
subsidiaries prior to the PIA Acquisition (the "PIA Companies") which was
treated as a purchase of the PIA Companies for accounting purposes, with the
books and records of the Company being adjusted to reflect the historical
operating results of the SPAR Companies.
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BUSINESS STRATEGY
As the marketing services industry continues to grow, consolidate and
expand both in the United States and internationally, large retailers and
manufacturers are increasingly outsourcing their marketing needs to third-party
providers. The Company believes that offering marketing services on a national
and global basis will provide it with a competitive advantage. Moreover, the
Company believes that successful use of and continuous improvements to a
sophisticated technology infrastructure, including its proprietary
Internet-based software, is key to providing clients with a high level of
customer service while maintaining efficient, low cost operations. The Company's
objective is to become an international retail merchandising and marketing
service provider by pursuing its operating and growth strategy, as described
below.
Increased Sales Efforts:
The Company is seeking to increase revenues by increasing sales to its
current customers, as well as, establishing long-term relationships with new
customers, many of which currently use other merchandising companies for various
reasons. The Company believes its technology, field implementation and other
competitive advantages will allow it to capture a larger share of this market
over time. However, there can be no assurance that any increased sales will be
achieved.
New Products:
The Company is seeking to increase revenues through the internal
development and implementation of new products and services that add value to
its customers' retail merchandising related activities, some of which have been
identified and are currently being tested for feasibility and market acceptance.
However, there can be no assurance that any new products of value will be
developed or that any such new product can be successfully marketed.
Acquisitions:
The Company is seeking to acquire businesses or enter into joint
ventures or other arrangements with companies that offer similar merchandising
services both in the United States and worldwide. The Company believes that
increasing its industry expertise, adding product segments, and increasing its
geographic breadth will allow it to service its clients more efficiently and
cost effectively. As part of its acquisition strategy, the Company is actively
exploring a number of potential acquisitions, predominately in its core
merchandising service businesses (which includes in-store event staffing
services). Through such acquisitions, the Company may realize additional
operating and revenue synergies and may leverage existing relationships with
manufacturers, retailers and other businesses to create cross-selling
opportunities. However, there can be no assurance that any of the acquisitions
will occur or whether, if completed, the integration of the acquired businesses
will be successful or the anticipated efficiencies and cross-selling
opportunities will occur.
In December of 2003, the Company entered into an agreement to purchase
the business and certain assets of Bert Fife & Associates, Inc., and related
Companies ("Fife"), which specialized in providing in-store product
demonstrations. As part of the agreement the Company entered into a one year
consulting agreement with the President of Fife. The purchase was completed in
January 2004. In April 2004, the Company established a joint venture subsidiary
in South Africa. The joint venture subsidiary is headquartered in Durban and is
owned 51% by the Company. Also in April 2004, the Company announced the
establishment of a joint venture subsidiary in India and started operations
during the third quarter. The joint venture subsidiary is headquartered in New
Delhi and is 51% owned by the Company. In January 2005, the Company announced
the establishment of a joint venture subsidiary in Romania and is owned 51% by
the Company. In February 2005, the Company announced the establishment of a
joint venture in China which is 50% owned by the Company.
Improve Operating Efficiencies:
The Company will continue to seek greater operating efficiencies. The
Company believes that its existing field force and technology infrastructure can
support additional customers and revenue in the Domestic Merchandising Services
Division. At the corporate level, the Company will continue to streamline
certain administrative functions, such as accounting and finance, insurance,
strategic marketing and legal support.
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Leverage and Improve Technology:
The Company intends to continue to utilize computer (including hand-held
computers), Internet, and other technology to enhance its efficiency and ability
to provide real-time data to its customers, as well as, maximize the speed of
communication, and logistical deployment of its merchandising specialists.
Industry sources indicate that customers are increasingly relying on marketing
service providers to supply rapid, value-added information regarding the results
of marketing expenditures on sales and profits. The Company (together with
certain of its affiliates) has developed and owns proprietary Internet-based
software technology that allows it to utilize the Internet to communicate with
its field management, schedule its store-specific field operations more
efficiently, receive information and incorporate the data immediately, quantify
the benefits of its services to customers faster, respond to customers' needs
quickly and implement programs rapidly. The Company has successfully modified
and is currently utilizing certain of its software applications in connection
with its international ventures. The Company believes that it can continue to
improve, modify and adapt its technology to support merchandising and other
marketing services for additional customers and projects in the United States
and in other foreign markets. The Company also believes that its proprietary
Internet-based software technology gives it a competitive advantage in the
marketplace.
DESCRIPTION OF SERVICES
The Company currently provides a broad array of merchandising and other
marketing services on a national, regional and local basis to leading home
entertainment, general merchandise, consumer goods, food, and health and beauty
care manufacturers and retail companies through its Domestic Merchandising
Services Division.
The Company currently operates internationally serving some of the
world's leading companies. The Company believes its full-line capabilities
provide fully integrated solutions that distinguish the Company from its
competitors. These capabilities include the ability to develop plans at one
centralized division headquarter location, effect chain wide execution,
implement rapid, coordinated responses to its clients' needs and report on a
real time Internet enhanced basis. The Company also believes its international
presence, industry-leading technology, centralized decision-making ability,
local follow-through, ability to recruit, train and supervise merchandisers,
ability to perform large-scale initiatives on short notice, and strong retailer
relationships provide the Company with a significant advantage over local,
regional or other competitors.
Domestic Merchandising Services Division
The Company provides a broad array of merchandising services on a
national, regional, and local basis to manufacturers and retailers in the United
States. The Company provides its merchandising and other marketing services
primarily on behalf of consumer product manufacturers at mass merchandiser, drug
and retail grocery chains. The Company currently provides three principal types
of merchandising and marketing services: syndicated services, dedicated services
and project services.
Syndicated Services
Syndicated services consist of regularly scheduled, routed merchandising
services provided at the retail store level for various manufacturers. These
services are performed for multiple manufacturers, including, in some cases,
manufacturers whose products are in the same product category. Syndicated
services may include activities such as:
o Reordering and replenishment of products
o Ensuring that the clients' products authorized for distribution
are in stock and on the shelf
o Adding new products that are approved for distribution but not
yet present on the shelf
o Designing and implementing store planogram schematics
o Setting product category shelves in accordance with approved
store schematics
o Ensuring that product shelf tags are in place
o Checking for overall salability of the clients' products
o Placing new product and promotional items in prominent positions
Dedicated Services
Dedicated services consist of merchandising services, generally as
described above, which are performed for a specific retailer or manufacturer by
a dedicated organization, including a management team working exclusively
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for that retailer or manufacturer. These services include many of the above
activities detailed in syndicated services, as well as, new store set-ups, store
remodels and fixture installations. These services are primarily based on
agreed-upon rates and fixed management fees.
Project Services
Project services consist primarily of specific in-store services
initiated by retailers and manufacturers, such as new store openings, new
product launches, special seasonal or promotional merchandising, focused product
support, product recalls, in-store product demonstrations and in-store product
sampling. The Company also performs other project services, such as new store
sets and existing store resets, re-merchandising, remodels and category
implementations, under annual or stand-alone project contracts or agreements.
Other Marketing Services
Other marketing services performed by the Company include:
Event Staffing Services - Performing in-store product demonstrations or
product sampling.
Test Market Research - Testing promotion alternatives, new products and
advertising campaigns, as well as packaging, pricing, and location
changes, at the store level.
Mystery Shopping - Calling anonymously on retail outlets (e.g. stores,
restaurants, banks) to check on distribution or display of a brand and
to evaluate products, service of personnel, conditions of store, etc.
Database Marketing - Managing proprietary information to permit easy
access, analysis and manipulation for use in direct marketing
campaigns.
Data Collection - Gathering sales and other information systematically
for analysis and interpretation.
Teleservices - Maintaining a teleservices center in its Auburn Hills,
Michigan, facility that performs inbound and outbound telemarketing
services, including those on behalf of certain of the Company's
manufacturing clients.
The Company believes that providing merchandising and other marketing
services timely, accurately and efficiently, as well as, delivering timely and
accurate reports to its clients, are two key components that will be critical to
its success. The Company has developed Internet-based logistic deployment,
communications, and reporting systems that improve the productivity of its
merchandising specialists and provide timely data and reports to its customers.
The Company's merchandising specialists use hand-held computers, personal
computers and laptop computers to report the status of each store they service
upon completion either through the Internet or using Interactive Voice Response
("IVR") through its Auburn Hills telecommunication center. Merchandising
specialists report on a variety of issues such as store conditions (e.g. out of
stocks, inventory, display placement) or they may scan and process new orders
for products. This information is reported, analyzed and displayed in a variety
of reports that can be accessed by both the Company and its customers via the
Internet. These reports can depict the status of every merchandising project in
real time.
Through the Company's automated labor tracking system, its merchandising
specialists communicate work assignment completion information via the Internet
or telephone, enabling the Company to report hours, mileage, and other
completion information for each work assignment on a daily basis and providing
the Company with daily, detailed tracking of work completion. This technology
allows the Company to schedule its merchandising specialists more efficiently,
quickly quantify the benefits of its services to customers, rapidly respond to
customers' needs and rapidly implement programs. The Company believes that its
technological capabilities provide it with a competitive advantage in the
marketplace.
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International Merchandising Services Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in marketing
their products. As evidenced in the United States, retailer and manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
also believes that the difficulties encountered by these programs are only
exacerbated by the logistics of operating in foreign markets. This environment
has created an opportunity for the Company to exploit its Internet-based
technology and business model that are successful in the United States.
In July 2000, the Company established its International Merchandising
Services Division to cultivate foreign markets, modify the necessary systems and
implement the Company's business model worldwide by expanding its merchandising
services business off shore. The Company formed an International Merchandising
Services Division task force consisting of members of the Company's information
technology, operations and finance groups to evaluate and develop foreign
markets. In 2001, the Company and a leading Japanese based distributor
established a joint venture to provide the latest in-store merchandising
services to the Japanese market. In 2003, the Company expanded its international
presence to Canada by acquiring a Canadian merchandising company and Turkey by
entering into a start-up joint venture. In 2004, the Company established 51%
owned joint venture subsidiaries in South Africa, India and Romania and in early
2005, a 50% owned joint venture in China.
Key to the Company's international strategy is the translation of
several of its proprietary Internet-based logistical, communications and
reporting software applications into the native language of any market the
Company enters. As a result of this requirement for market penetration, the
Company has developed translation software that can quickly convert its
proprietary software into various languages. Through its computer facilities in
Auburn Hills, Michigan, the Company provides worldwide access to its proprietary
logistical, communications and reporting software. In addition, the Company
maintains personnel in Greece and Australia to assist in its international
efforts. The Company is actively pursuing expansion into various other markets.
SALES AND MARKETING
Domestic Merchandising Services Division
The Company's sales efforts within its Domestic Merchandising Services
Division are structured to develop new business in national, regional and local
markets. The Company's corporate business development team directs its efforts
toward the senior management of prospective clients. Sales strategies developed
at the Company's headquarters are communicated to the Company's sales force for
execution. The sales force, located nationwide, work from both Company and home
offices. In addition, the Company's corporate account executives play an
important role in the Company's new business development efforts within its
existing manufacturer and retailer client base.
As part of the retailer consolidation, retailers are centralizing most
administrative functions, including operations, procurement and category
management. In response to this centralization and the growing importance of
large retailers, many manufacturers have reorganized their selling organizations
around a retailer team concept that focuses on a particular retailer. The
Company has responded to this emerging trend and currently has retailer teams in
place at select retailers.
The Company's business development process includes a due diligence
period to determine the objectives of the prospective client, the work required
to satisfy those objectives and the market value of such work to be performed.
The Company employs a formal cost development and proposal process that
determines the cost of each element of work required to achieve the prospective
client's objectives. These costs, together with an analysis of market rates, are
used in the development of a formal quotation that is then reviewed at various
levels within the organization. The pricing of this internal proposal must meet
the Company's objectives for profitability, which are established as part of the
business planning process. After approval of this quotation, a detailed proposal
is presented to and approved by the prospective client.
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International Merchandising Services Division
The Company's marketing efforts within its International Merchandising
Services Division are three fold. First, the Company endeavors to develop new
markets through acquisitions. The Company's international acquisition team,
whose primary focus is to seek out and develop acquisitions throughout the
world, consists of personnel located in the United States, Greece and Australia.
Personnel from information technology, field operations, client services and
finance support the international acquisition team. Second, the Company offers
global merchandising solutions to customers that have worldwide distribution.
This effort is spearheaded out of the Company's headquarters in the United
States. Third the Company develops local markets through various joint ventures
or subsidiaries throughout the world.
CUSTOMERS
Domestic Merchandising Services Division
In its Domestic Merchandising Services Division, the Company currently
represents numerous manufacturers and /or retail clients in a wide range of
retail outlets in the United States including:
o Mass Merchandisers
o Drug
o Grocery
o Other retail trade groups (e.g. Discount, Home Centers)
The Company also provides database, research and other marketing
services to the consumer packaged goods industry.
One customer accounted for 14%, 8%, and 6% of the Company's net revenues
for the years ended December 31, 2004, 2003, and 2002, respectively. This
customer also accounted for approximately 29%, 13%, and 4% of accounts
receivable at December 31, 2004, 2003, and 2002, respectively.
In addition, approximately 16%, 17%, and 24% of net revenues for the
years ended December 31, 2004, 2003, and 2002, respectively, resulted from
merchandising services performed for manufacturers and others in stores operated
by Kmart. These customers also accounted for approximately 22% of accounts
receivable at December 31, 2004. While the Company's customers and the resultant
contractual relationships are with various manufacturers and not Kmart, a
significant reduction of this retailer's stores or cessation of this retailer's
business would negatively impact the Company.
Another customer, a division of a major retailer, accounted for 26%,
30%, and 26% of the Company's net revenues for the years ended December 31,
2004, 2003, and 2002, respectively. This customer also accounted for
approximately 4%, 30%, and 43% of accounts receivable at December 31, 2004,
2003, and 2002, respectively. On August 2, 2004, this customer was sold by its
parent.
International Merchandising Services Division
The Company believes that the potential international customers for this
division have similar profiles to its Domestic Merchandising Services Division
customers. The Company is currently operating in Japan, Canada, Turkey, South
Africa and India. The Company announced the establishment of a 51% owned joint
venture subsidiary in Romania in late 2004 and a 50% owned joint venture in
China in early 2005. The Company is actively pursuing expansion into Europe and
other markets.
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COMPETITION
The marketing services industry is highly competitive. The Company's
competition in the Domestic and International Merchandising Services Divisions
arises from a number of large enterprises, many of which are national or
international in scope. The Company also competes with a large number of
relatively small enterprises with specific client, channel or geographic
coverage, as well as with the internal marketing and merchandising operations of
its clients and prospective clients. The Company believes that the principal
competitive factors within its industry include development and deployment of
technology, breadth and quality of client services, cost, and the ability to
execute specific client priorities rapidly and consistently over a wide
geographic area. The Company believes that its current structure favorably
addresses these factors and establishes it as a leader in the mass merchandiser
and chain drug store channels of trade. The Company also believes it has the
ability to execute major national and international in-store initiatives and
develop and administer national and international retailer programs. Finally,
the Company believes that, through the use and continuing improvement of its
proprietary Internet software, other technological efficiencies and various cost
controls, the Company will remain competitive in its pricing and services.
TRADEMARKS
The Company has numerous registered trademarks. Although the Company
believes its trademarks may have value, the Company believes its services are
sold primarily based on breadth and quality of service, cost, and the ability to
execute specific client priorities rapidly and consistently over a wide
geographic area. See "Industry Overview" and "Competition".
EMPLOYEES
Worldwide the Company utilizes a labor force of approximately 7,700
people.
As of December 31, 2004, the Company's Domestic Merchandising Services
Division's labor force consisted of approximately 6,500 people. Approximately
150 were full-time employees and 15 were part-time employees of the Company. Of
the 150 full-time Company employees, 143 were engaged in operations and 7 were
engaged in sales. The Company's Domestic Merchandising Services Division
utilizes the services of its affiliate, SPAR Management Services, Inc. ("SMSI"),
to schedule and supervise its field force, which consists of the independent
contractors furnished by another affiliate SPAR Marketing Services, Inc. ("SMS")
(see Item 13 - Certain Relationships and Related Transactions, below) as well as
the Company's field employees. Approximately 6,300 independent contractors and
approximately 50 full-time field managers are furnished principally through SMS
and SMSI, respectively.
As of December 31, 2004, the Company's International Merchandising
Services Division's labor force consisted of approximately 1,200 people.
Approximately 50 full-time employees were engaged in operations and 3 were
engaged in sales. The International Division's field force consisted of
approximately 700 full time employees, 70 part time employees and approximately
380 independent contractors.
The Company currently utilizes certain of its Domestic Merchandising
Services Division's employees, as well as, the services of certain employees of
its affiliates, SMSI and SPAR Infotech, Inc. ("SIT"), to support the
International Merchandising Services Division. However, dedicated employees will
be added to that division as the need arises. The Company's affiliate, SIT, also
provides programming and other assistance to the Company's various divisions
(see Item 13 - Certain Relationships and Related Transactions, below).
The Company, SMS, SMSI and SIT consider their relations with their
respective employees and independent contractors to be good.
CERTAIN RISK FACTORS
There are various risks associated with the Company's growth and
operating strategy. Certain (but not all) of these risks are discussed below.
-10-
Dependency on Largest Customers
As discussed above in Customers, the Company does a significant amount
of business with one customer and performs a significant amount of services in
Kmart. The loss of this customer or the loss of Kmart related business and the
failure to attract new large customers, could significantly decrease the
Company's revenues and such decreased revenues could have a material adverse
effect on the Company's business, results of operations and financial condition.
Dependence on Trend Toward Outsourcing
The business and growth of the Company depends in large part on the
continued trend toward outsourcing of marketing services, which the Company
believes has resulted from the consolidation of retailers and manufacturers, as
well as, the desire to seek outsourcing specialists and reduce fixed operation
expenses. There can be no assurance that this trend in outsourcing will
continue, as companies may elect to perform such services internally. A
significant change in the direction of this trend generally, or a trend in the
retail, manufacturing or business services industry not to use, or to reduce the
use of, outsourced marketing services such as those provided by the Company,
could significantly decrease the Company's revenues and such decreased revenues
could have a material adverse effect on the Company's business, results of
operations and financial condition or the desired increases in the Company's
business, revenues and profits.
Failure to Successfully Compete
The marketing services industry is highly competitive and the Company
has competitors that are larger (or part of larger holding companies) and may be
better financed. In addition, the Company competes with: (i) a large number of
relatively small enterprises with specific customer, channel or geographic
coverage; (ii) the internal marketing and merchandising operations of its
customers and prospective customers; (iii) independent brokers; and (iv) smaller
regional providers. Remaining competitive in the highly competitive marketing
services industry requires that the Company monitor and respond to trends in all
industry sectors. There can be no assurance that the Company will be able to
anticipate and respond successfully to such trends in a timely manner. If the
Company is unable to successfully compete, it could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
If certain competitors were to combine into integrated marketing
services companies, or additional marketing service companies were to enter into
this market, or existing participants in this industry were to become more
competitive, it could have a material adverse effect on the Company's business,
results of operations and financial condition or the desired increases in the
Company's business, revenues and profits.
Variability of Operating Results and Uncertainty in Customer Revenue
The Company has experienced and, in the future, may experience
fluctuations in quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary and from time to time and may
result in reduced revenue include: (i) the number of active customer projects;
(ii) seasonality of customer products; (iii) customer delays, changes and
cancellations in projects; (iv) the timing requirements of customer projects;
(v) the completion of major customer projects; (vi) the timing of new
engagements; (vii) the timing of personnel cost increases; and (viii) the loss
of major customers. In particular, the timing of revenues is difficult to
forecast for the home entertainment industry because timing is dependent on the
commercial success of particular product releases. In the event that a
particular release is not widely accepted by the public, the Company's revenue
could be significantly reduced. In addition, the Company is subject to revenue
uncertainties resulting from factors such as unprofitable customer work and the
failure of customers to pay. The Company attempts to mitigate these risks by
dealing primarily with large credit-worthy customers, by entering into written
or oral agreements with its customers and by using project budgeting systems.
These revenue fluctuations could materially and adversely affect the Company's
business, results of operations and financial condition or the desired increases
in the Company's business, revenues and profits.
Failure to Develop New Products
A key element of the Company's growth strategy is the development and
sale of new products. While several new products are under current development,
there can be no assurance that the Company will be able to successfully develop
and market new products. The Company's inability or failure to devise useful
merchandising or marketing
-11-
products or to complete the development or implementation of a particular
product for use on a large scale, or the failure of such products to achieve
market acceptance, could adversely affect the Company's ability to achieve a
significant part of its growth strategy and the absence of such growth could
have a material adverse effect on the Company's business, results of operations
and financial condition or the desired increases in the Company's business,
revenues and profits.
Inability to Identify, Acquire and Successfully Integrate Acquisitions
Another key component of the Company's growth strategy is the
acquisition of businesses across the United States and worldwide that offer
similar merchandising or marketing services. The successful implementation of
this strategy depends upon the Company's ability to identify suitable
acquisition candidates, acquire such businesses on acceptable terms, finance the
acquisition and integrate their operations successfully with those of the
Company. There can be no assurance that such candidates will be available or, if
such candidates are available, that the price will be attractive or that the
Company will be able to identify, acquire, finance or integrate such businesses
successfully. In addition, in pursuing such acquisition opportunities, the
Company may compete with other entities with similar growth strategies, these
competitors may be larger and have greater financial and other resources than
the Company. Competition for these acquisition targets could also result in
increased prices of acquisition targets and/or a diminished pool of companies
available for acquisition.
The successful integration of these acquisitions also may involve a
number of additional risks, including: (i) the inability to retain the customers
of the acquired business; (ii) the lingering effects of poor customer relations
or service performance by the acquired business, which also may taint the
Company's existing businesses; (iii) the inability to retain the desirable
management, key personnel and other employees of the acquired business; (iv) the
inability to fully realize the desired efficiencies and economies of scale: (v)
the inability to establish, implement or police the Company's existing
standards, controls, procedures and policies on the acquired business; (vi)
diversion of management attention; and (vii) exposure to customer, employee and
other legal claims for activities of the acquired business prior to acquisition.
In addition, any acquired business could perform significantly worse than
expected.
The inability to identify, acquire, finance and successfully integrate
such merchandising or marketing services business could have a material adverse
effect on the Company's growth strategy and could limit the Company's ability to
significantly increase its revenues and profits.
Uncertainty of Financing for, and Dilution Resulting from, Future Acquisitions
The timing, size and success of acquisition efforts and any associated
capital commitments cannot be readily predicted. Future acquisitions may be
financed by issuing shares of the Company's Common Stock, cash, or a combination
of Common Stock and cash. If the Company's Common Stock does not maintain a
sufficient market value, or if potential acquisition candidates are otherwise
unwilling to accept the Company's Common Stock as part of the consideration for
the sale of their businesses, the Company may be required to obtain additional
capital through debt or equity financings. To the extent the Company's Common
Stock is used for all or a portion of the consideration to be paid for future
acquisitions, dilution may be experienced by existing stockholders. There can be
no assurance that the Company will be able to obtain the additional financing it
may need for its acquisitions on terms that the Company deems acceptable.
Failure to obtain such capital would materially adversely affect the Company's
ability to execute its growth strategy.
Reliance on the Internet
The Company relies on the Internet for the scheduling, coordination and
reporting of its merchandising and marketing services. The Internet has
experienced, and is expected to continue to experience, significant growth in
the numbers of users and amount of traffic as well as increased attacks by
hackers and other saboteurs. To the extent that the Internet continues to
experience increased numbers of users, frequency of use or increased bandwidth
requirements of users, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on the
Internet by this continued growth or that the performance or reliability of the
Internet will not be adversely affected. Furthermore, the Internet has
experienced a variety of outages and other delays as a result of accidental and
intentional damage to portions of its infrastructure, and could face such
outages and delays in the future of similar or greater effect. Any protracted
disruption in Internet service would increase the Company's costs of operation
and reduce efficiency and performance, which could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
-12-
Economic and Retail Uncertainty
The markets in which the Company operates are cyclical and subject to
the effects of economic downturns. The current political, social and economic
conditions, including the impact of terrorism on consumer and business behavior,
make it difficult for the Company, its vendors and its customers to accurately
forecast and plan future business activities. Substantially all of the Company's
key customers are either retailers or those seeking to do product merchandising
at retailers. If the retail industry experiences a significant economic
downturn, a reduction in product sales could significantly decrease the
Company's revenues. The Company also has risks associated with its customers
changing their business plans and/or reducing their marketing budgets in
response to economic conditions, which could also significantly decrease the
Company's revenues. Such revenue decreases could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
Significant Stockholders: Voting Control and Market Illiquidity
Mr. Robert G. Brown, founder, director, Chairman, President and Chief
Executive Officer of the Company, beneficially owns approximately 45.5% of the
Company's outstanding Common Stock, and Mr. William H. Bartels, founder,
director, and Vice Chairman of the Company beneficially owns approximately 29.4%
of the Company's outstanding Common Stock. These stockholders have, should they
choose to act together, and under certain circumstances Mr. Brown acting alone
has, the ability to control all matters requiring stockholder approval,
including the election of directors and the approval of mergers and other
business combination transactions.
In addition, although the Company Common Stock is quoted on the Nasdaq
Small Cap Market, the trading volume in such stock may be limited and an
investment in the Company's securities may be illiquid because the founders own
a significant amount of the Company's stock.
Dependence Upon and Potential Conflicts in Services Provided by Affiliates
The success of the Company's domestic business is dependent upon the
successful execution of its field services by SPAR Marketing Services, Inc.
("SMS"), and SPAR Management Services, Inc. ("SMSI"), as well as the programming
services provided by SPAR Infotech, Inc. ("SIT"), each of which is an affiliate,
but not a subsidiary, of the Company, and none of which is consolidated in the
Company's financial statements. SMS provides substantially all of the field
representatives used by the Company in conducting its domestic business (87% of
field expense in 2004), and SMSI provides substantially all of the field
management services used by the Company in conducting its business. These
services provided to the Company by SMS and SMSI are on a cost-plus basis
pursuant to contracts that are cancelable on 60 days notice prior to December 31
of each year, commencing in 1997, or with 180 days notice at any other time. SIT
provides substantially all of the Internet programming services and other
computer programming needs used by the Company in conducting its business (see
Item 13 - Certain Relationships and Related Transactions, below), which are
provided to the Company by SIT on an hourly charge basis pursuant to a contract
that is cancelable on 30 days notice. The Company has determined that the
services provided by SMS, SMSI and SIT are at rates favorable to the Company.
SMS, SMSI and SIT (collectively, the "SPAR Affiliates") are owned solely
by Mr. Robert G. Brown, founder, director, Chairman, President and Chief
Executive Officer of the Company, and Mr. William H. Bartels, founder, director,
and Vice Chairman of the Company, each of whom are also directors and executive
officers of each of the SPAR Affiliates (see Item 13 - Certain Relationships and
Related Transactions, below). In the event of any dispute in the business
relationships between the Company and one or more of the SPAR Affiliates, it is
possible that Messrs. Brown and Bartels may have one or more conflicts of
interest with respect to those relationships and could cause one or more of the
SPAR Affiliates to renegotiate or cancel their contracts with the Company or
otherwise act in a way that is not in the Company's best interests.
While the Company's relationships with SMS, SMSI and SIT are excellent,
there can be no assurance that the Company could (if necessary under the
circumstances) replace the field representatives and management currently
provided by SMS and SMSI, respectively, or replace the Internet and other
computer programming services provided by SIT, in sufficient time to perform its
customer obligations or at such favorable rates in the event the SPAR Affiliates
no longer performed those services. Any cancellation, other nonperformance or
material pricing increase under those affiliate contracts could have a material
adverse effect on the Company's business, results of operations and financial
condition or the desired increases in the Company's business, revenues and
profits.
-13-
The Company has not paid and does not intend to pay cash Dividends
The Company has not paid dividends in the past, intends to retain any
earnings or other cash resources to finance the expansion of its business and
for general corporate purposes, and does not intend to pay dividends in the
future. In addition, the Company's Credit Facility with Webster Business Credit
Corporation ("Webster") (see Note 5 to the Financial Statements - Lines of
Credit) restricts the payment of dividends without Webster's prior consent.
Risks Associated with International Joint Ventures
While the Company endeavors to limit its exposure for claims and losses
in any international joint ventures through contractual provisions, insurance
and use of single purpose entities for such ventures, there can be no assurance
that the Company will not be held liable for the claims against and losses of a
particular international joint venture under applicable local law or local
interpretation of any joint venture or insurance provisions. If any such claims
and losses should occur, be material in amount and be successfully asserted
against the Company, such claims and losses could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
Risks Associated with Foreign Currency
The Company also has foreign currency exposure associated with its
international joint venture subsidiaries and joint ventures. In 2004, these
exposures are primarily concentrated in the Canadian dollar, Japanese yen and
South African rand.
Risks Associated with International Business
The Company's expansion strategy includes expansion into various
countries around the world. While the Company endeavors to limit its exposure by
entering only countries where the political, social and economic environments
are conducive to doing business in that country there can be no assurances that
the respective business environments will remain favorable.
Item 2. Properties.
The Company maintains its corporate headquarters in approximately 6,000
square feet of leased office space located in Tarrytown, New York, under a lease
with a term expiring in May 2006.
The Company leases certain office and storage facilities for its
corporate headquarters, divisions and subsidiaries under operating leases, which
expire at various dates during the next five years. Most of these leases require
the Company to pay minimum rents, subject to periodic adjustments, plus other
charges, including utilities, real estate taxes and common area maintenance.
-14-
The following is a list of the locations where the Company maintains
leased facilities for its division offices and subsidiaries:
Location Office Use Approximate Square Footage
-------------------------- -------------------------------------- ---------------------------------
Domestic:
Tarrytown, NY Corporate Headquarters 6,000
Auburn Hills, MI Regional Office and Warehouse 27,000
Cincinnati, OH Regional Office 5,300
International:
Canada
Toronto, Ontario Headquarters 4,000
Japan
Osaka Headquarters 1,200
Tokyo Regional Office 1,000
Nagoya Regional Office 600
Hukuoka Regional Office 400
Turkey
Istanbul Headquarters 4,600
South Africa
Durban Headquarters 3,100
Port Elizabeth Regional Office 900
Western Cape Regional Office 2,900
Johannesburg Regional Office 2,000
India
New Delhi Headquarters 4,300
Although the Company believes that its existing facilities are adequate
for its current business, new facilities may be added should the need arise in
the future.
Item 3. Legal Proceedings.
Safeway Inc. ("Safeway"), filed a Complaint against the PIA
Merchandising Co., Inc. ("PIA Co."), a wholly owned subsidiary of the Company,
and Pivotal Sales Company ("Pivotal"), a wholly owned subsidiary of PIA Co., and
SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001, and has
subsequently amended it. Safeway alleges causes of action for breach of
contract, breach of implied contract, breach of fiduciary duty, conversion,
constructive fraud, breach of trust, unjust enrichment, and accounting fraud.
Safeway has most recently alleged monetary damages in the principal sum of
$3,000,000 and probable interest of $1,000,000 and has also demanded unspecified
costs. PIA Co., Pivotal and SGRP filed cross-claims against Safeway on or about
March 11, 2002, and amended them on or about October 15, 2002, alleging causes
of action by them against Safeway for breach of contract, interference with
economic relationship, unfair trade practices and unjust enrichment and seeking
damages and injunctive relief. Mediation between the parties occurred in 2004,
but did not result in a settlement. PIA Co., Pivotal and SGRP are vigorously
defending Safeway's allegations. It is not possible at this time to determine
the likelihood of the outcome of this lawsuit. However, if Safeway prevails
respecting its allegations, and PIA Co., Pivotal and SGRP lose on their
cross-claims and counterclaims, that result could have a material adverse effect
on the Company. The Company anticipates that this matter will be resolved in
2005.
In addition to the above, the Company is a party to various other legal
actions and administrative proceedings arising in the normal course of business.
In the opinion of Company's management, disposition of these other matters are
not anticipated to have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-15-
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Price Range of Common Stock
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq Small Cap
Market.
2004 2003
------------------------ -------------------------
High Low High Low
First Quarter $ 3.44 $ 2.30 $ 3.60 $ 2.42
Second Quarter 2.33 0.85 5.55 3.05
Third Quarter 1.50 0.75 5.32 3.17
Fourth Quarter 1.80 0.36 4.57 3.00
As of December 31, 2004, there were approximately 700 beneficial
shareholders of the Company's Common Stock.
Dividends
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of the business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
The Company's Credit Facility with Webster Business Credit Corporation
(see Note 5 to the Financial Statements - Lines of Credit) restricts the payment
of dividends without Webster's prior consent.
Item 6. Selected Financial Data.
The following selected condensed consolidated financial data sets forth,
for the periods and the dates indicated, summary financial data of the Company
and its subsidiaries. The selected financial data have been derived from the
Company's financial statements.
-16-
SPAR Group, Inc.
Condensed Consolidated Statements of Operations
-----------------------------------------------
(In thousands, except per share data)
Year Ended December 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 51,370 $ 64,859 $ 69,612 $ 70,891 $ 81,459
Cost of revenues 33,644 42,338 40,331 40,883 50,278
---------------------------------------------------------------------
Gross profit 17,726 22,521 29,281 30,008 31,181
Selling, general and administrative expenses 20,222 20,967 18,804 19,380 24,761
Impairment charges 8,141 - - - -
Depreciation and amortization 1,399 1,529 1,844 2,682 2,383
---------------------------------------------------------------------
Operating (loss) income (12,036) 25 8,633 7,946 4,037
Other (income) expense (754) 237 (26) 107 (790)
Interest expense 220 269 363 561 1,326
---------------------------------------------------------------------
(Loss) income from continuing operations before
provision for income taxes and minority interest (11,502) (481) 8,296 7,278 3,501
Income tax provision 853 58 2,998 3,123 780
---------------------------------------------------------------------
(Loss) income from continuing operations before
minority interest (12,355) (539) 5,298 4,155 2,721
---------------------------------------------------------------------
Minority interest 87 - - - -
Discontinued operations:
Loss from discontinued operations net of tax
benefits of $935 and $858, respectively - - - (1,597) (1,399)
Estimated loss on disposal of discontinued
operations, including provision of $1,000 for
losses during phase-out period and disposal
costs net of tax benefit of $2,618 - - - (4,272) -
---------------------------------------------------------------------
Net (loss) income $ (12,268) $ (539) $ 5,298 $ (1,714) $ 1,322
=====================================================================
Basic/diluted net (loss) income per common share:
Net (loss) income from continuing operations $ (0.65) $ (0.03) $ 0.28 $ 0.23 $ 0.15
---------------------------------------------------------------------
Discontinued operations:
Loss from discontinued operations - - - (0.09) (0.08)
Estimated loss on disposal of discontinued
operations - - - (0.23) -
---------------------------------------------------------------------
Net loss from discontinued operations - - - (0.32) (0.08)
---------------------------------------------------------------------
Basic/diluted net (loss) income $ (0.65) $ (0.03) $ 0.28 $ (0.09) $ 0.07
=====================================================================
Weighted average shares outstanding
- basic 18,859 18,855 18,761 18,389 18,185
- diluted 18,859 18,855 19,148 18,467 18,303
-17-
December 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
----------- --------- ----------- ----------- -----------
BALANCE SHEET DATA:
Working capital (deficiency) $ 962 $ 4,085 $ 6,319 $ 8,476 $ (2,273)
Total assets $ 15,821 $ 28,137 $ 28,800 $ 41,155 $ 48,004
Lines of credit, current $ 4,956 $ 4,084 $ - $ 57 $ 1,143
Lines of credit and other long-term debt(1) $ 218 $ 270 $ 383 $ 13,287 $ 10,093
Total stockholders' equity $ 3,714 $ 16,023 $ 16,592 $ 10,934 $ 12,240
(1) Prior to 2003, the Company's lines of credit were charged to long-term
liabilities (net of current portion).
-18-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
- --------
In the United States, the Company provides merchandising services to
manufacturers and retailers principally in mass merchandiser, drug store,
grocery, and other retail trade classes through its Domestic Merchandising
Services Division. Internationally, the Company provides in-store merchandising
services through a wholly owned subsidiary in Canada, 51% owned joint venture
subsidiaries in Turkey, South Africa and India and a 50% owned joint venture in
Japan. In December 2004, the Company established a 51% owned joint venture
subsidiary in Romania. In February 2005, the Company established a 50% owned
joint venture in China. In 2004, the Company consolidated Canada, Turkey, South
Africa, India and Japan into the Company's financial statements. Romania did not
have operations in 2004.
In December 2001, the Company decided to divest its Incentive Marketing
Division and recorded an estimated loss on disposal of SPAR Performance Group,
Inc., now called STIMULYS, Inc. ("SPGI"), of approximately $4.3 million, net of
taxes, including a $1.0 million reserve recorded for the anticipated cost to
divest SPGI and any anticipated losses through the divestiture date.
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly owned
subsidiary of the Company, entered into a Stock Purchase and Sale Agreement with
Performance Holdings, Inc. ("PHI"), a Delaware corporation headquartered in
Carrollton, Texas. Pursuant to that agreement, SIM sold all of the stock of
SPGI, its subsidiary, to PHI for $6.0 million. As a condition of the sale, PHI
issued and contributed 1,000,000 shares of its common stock to Performance
Holdings, Inc. Employee Stock Ownership Plan, which became the only shareholder
of PHI.
SIM's results (including those of SPGI) were reclassified as
discontinued operations for all periods presented. The results of operations of
the discontinued business segment are shown separately below net income from
continuing operations. Accordingly, the 2002 consolidated statements of
operations of the Company have been prepared, and its 2001 and 2000 consolidated
statement of operations have been restated, to report the results of
discontinued operations of SIM (including those of SPGI) separately from the
continuing operations of the Company (see Item 6 - Selected Financial Data,
above).
Critical Accounting Policies & Estimates
- ----------------------------------------
The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Note 2 to the Financial
Statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition, depreciation methods,
asset impairment recognition, business combination accounting, and discontinued
business accounting. While the estimates and judgments associated with the
application of these policies may be affected by different assumptions or
conditions, the Company believes the estimates and judgments associated with the
reported amounts are appropriate in the circumstances. Four critical accounting
policies are consolidation of subsidiaries, revenue recognition, allowance for
doubtful accounts and sales allowances, and internal use software development
costs:
Consolidation of subsidiaries
The Company consolidates its 100% owned subsidiaries. The Company also
consolidates its 51% owned joint venture subsidiaries and its 50% owned
joint ventures where the Company is the primary beneficiary because the
Company believes this presentation is fairer and more meaningful. Rule
3A-02 of Regulation S-X, Consolidated Financial Statements of the
Registrant and its Subsidiaries, states that consolidated statements are
presumed to be more meaningful, that majority owned subsidiaries (more
than 50%) generally should be consolidated, and that circumstances may
require consolidation of other subsidiaries to achieve a fairer
presentation of its financial condition and results. In addition, the
Company has determined that under Financial Accounting Standards Board
Interpretation Number 46, as revised December 2003, Consolidation of
Variable Interest Entities ("FIN 46(R)"), the Company is the primary
beneficiary of its 51% owned joint venture subsidiaries and its 50%
owned joint ventures, which accordingly requires consolidation of those
entities into the Company's financial statements.
Revenue Recognition
The Company's services are provided under contracts or agreements that
consist primarily of service fees and per unit fee arrangements.
Revenues under service fee arrangements are recognized when the service
is performed.
-19-
The Company's per unit contracts or agreements provide for fees to be
earned based on the retail sales of client's products to consumers. The
Company recognizes per unit fees in the period such amounts become
determinable and are reported to the Company.
Allowance for Doubtful Accounts and Sales Allowances
The Company continually monitors the validity of its accounts receivable
based upon current customer credit information and financial condition.
Balances that are deemed to be uncollectible after the Company has
attempted reasonable collection efforts are written off through a charge
to the bad debt allowance and a credit to accounts receivable. Accounts
receivable balances are stated at the amount that management expects to
collect from the outstanding balances. The Company provides for probable
uncollectible amounts through a charge to earnings and a credit to bad
debt allowance based on management's assessment of the current status of
individual accounts. Based on management's assessment, the Company
established an allowance for doubtful accounts of $761,000 and $515,000
at December 31, 2004 and 2003, respectively. The Company also recorded a
reserve for sales allowances for potential customer credits of $448,000
at December 31, 2003. Bad debt and sales allowance expenses were
$366,000, $825,000, and $262,000 in 2004, 2003, and 2002, respectively.
Internal Use Software Development Costs
In accordance with SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, the Company capitalizes
certain costs associated with its internally developed software.
Specifically, the Company capitalizes the costs of materials and
services incurred in developing or obtaining internal use software.
These costs include but are not limited to the cost to purchase
software, write program code and payroll, related benefits and travel
expenses for those employees who are directly involved with and who
devote time to its software development projects. Capitalized software
development costs are amortized over three years.
The Company capitalized $559,000, $1,004,000, and $772,000 of costs
related to software developed for internal use in 2004, 2003, and 2002,
respectively.
The Company also recorded a net impairment charge of capitalized
software related to lost clients totaling approximately $442,000 in
2004.
Results of operations
The following table sets forth selected financial data and such data as
a percentage of net revenues for the periods indicated.
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
--------------------------------------------------------------------------------
(dollars in millions)
Dollars % Dollars % Dollars %
-------------- ----------- ----------- ----------- ----------- -----------
Net revenues $ 51.4 100.0% $ 64.9 100.0% $ 69.6 100.0%
Cost of revenues 33.6 65.5 42.3 65.3 40.3 57.9
Selling, general & administrative expenses 20.2 39.4 21.0 32.3 18.8 27.0
Impairment charges 8.1 15.8 - - - -
Depreciation & amortization 1.4 2.7 1.5 2.3 1.8 2.6
Other (income) expenses, net (0.4) (1.0) 0.5 0.8 0.4 0.6
-------------- ----------- ----------- ----------- ----------- -----------
(Loss) income before income tax provision (11.5) (22.4) (0.4) (0.7) 8.3 11.9
Provision for income taxes 0.9 1.7 0.1 0.1 3.0 4.3
-------------- ----------- ----------- ----------- ----------- -----------
(Loss) income before minority interest (12.4) (24.1)% (0.5) (0.8)% 5.3 7.6%
Minority interest 0.1 0.2 - - - -
-------------- ----------- -----------
Net (loss) income $ (12.3) (23.9)% $ (0.5) (0.8)% $ 5.3 7.6%
============== =========== ===========
-20-
Results from continuing operations for the twelve months ended December 31,
- --------------------------------------------------------------------------------
2004, compared to twelve months ended December 31, 2003
- -------------------------------------------------------
Net Revenues
Net revenues from operations for the twelve months ended December 31,
2004, were $51.4 million, compared to $64.9 million for the twelve months ended
December 31, 2003, a decrease of $13.5 million or 20.8%. The decrease of $13.5
million in net revenues consists of a decrease in domestic revenue of $21.1
million or 32.9% partially offset by increases in international revenue of $7.7
million. The decrease in domestic revenue is a result of the loss of several
significant customers partially offset by revenue from new customers in 2004.
The international revenue increase of $7.7 million was primarily a result of the
South African acquisition, the Japan consolidation and a full year of Canadian
operations.
Cost of Revenues
Cost of revenues from operations consists of in-store labor and field
management wages, related benefits, travel and other direct labor-related
expenses. Cost of revenues decreased by $8.7 million in 2004 and as a percentage
of net revenues was 65.5% for the twelve months ended December 31, 2004, which
was consistent with 65.3% for the twelve months ended December 31, 2003.
Approximately 87% and 85% of the field services were purchased from the
Company's affiliate, SMS, in 2004 and 2003, respectively (see Item 13 - Certain
Relationships and Related Transactions, below). SMS's increased share of field
services resulted from its more favorable cost structure
Operating Expenses
Operating expenses include selling, general and administrative expenses,
impairment charges, depreciation and amortization. Selling, general and
administrative expenses include corporate overhead, project management,
information technology, executive compensation, human resource, legal and
accounting expenses. The following table sets forth the operating expenses as a
percentage of net revenues for the time periods indicated:
Year Ended Year Ended Increase
December 31, 2004 December 31, 2003 (decrease)
---------------------------- ------------------------------ -------------
(dollars in millions)
Dollars % Dollars % %
-------------- ------------ --------------- ------------- -------------
Selling, general & administrative $ 20.2 39.4% $ 21.0 32.3% (3.6)%
Impairment charges 8.1 15.8 - - -
Depreciation and amortization 1.4 2.8 1.5 2.3 (8.5)%
-------------- ------------ --------------- -------------
Total operating expenses $ 29.7 58.0% $ 22.5 34.6% 32.3%
============== ============ =============== =============
Selling, general and administrative expenses decreased by $0.8 million,
or 3.6%, for the twelve months ended December 31, 2004, to $20.2 million
compared to $21.0 million for the twelve months ended December 31, 2003.
Domestic selling, general and administrative expenses totaled $16.7 million for
2004 and were reduced $3.3 million from $19.9 million in 2003. The reduction of
16.1% was a result of cost reduction programs initiated in 2004 as a result of
the loss of certain large customers partially offset by restructure costs of
$480,000 expensed in 2004 compared to no expense in 2003. Restructure costs
included office lease and employee severance costs. The domestic cost reductions
were partially offset by increases of $2.5 million in international selling,
general and administrative expenses resulting from the consolidation of Japan,
the acquisition of South Africa, and a full year of Canadian operations, as well
as, the Turkey and India joint venture startups.
Impairment charges were $8.1 million for 2004 (see Note 3 to the
Financial Statements -Impairment Charges). Impairment charges resulting from the
loss of certain large customers consisted of $7.6 million of goodwill
impairment, $1.2 million for the impairment of other assets partially offset by
the reduction of $1.4 million (net of taxes) of other liabilities related to the
PIA Acquisition. In addition there was approximately $700,000 of goodwill
impairment associated with the Canadian subsidiary.
Depreciation and amortization charges of $1.4 million in 2004 was
consistent with $1.5 million in 2003.
-21-
Other Income/Other Expense
Other income was approximately $754,000 for 2004 versus other expense of
$237,000 for 2003. In 2004, other income consisted of approximately $640,000
resulting from the release of specific reserves related to the refinancing of
the SPGI notes and approximately $114,000 of foreign currency translation gains.
In 2003, other expense consisted primarily of the Company's share of its 50%
owned Japan joint venture losses accounted for on the equity method. In 2004,
the Japan joint venture was consolidated into the Company's financial
statements.
Interest Expense
Interest expense totaled $220,000 for 2004 and was consistent with
interest expense of $269,000 for 2003.
Income Taxes
The provision for income taxes was $853,000 and $58,000 for 2004 and
2003, respectively. During 2004, as a result of the loss of several significant
clients, current year losses and the lack of certainty of a return to
profitability in the next twelve months, the Company recorded a full valuation
allowance against its net deferred tax assets resulting in a charge totaling
approximately $750,000. The 2004 tax provision of $853,000 consists of the
valuation allowance and minimum state taxes of approximately $103,000. The tax
provision for 2003 reflects minimum tax requirements for state filings.
Net (Loss) Income
The SPAR Group had a net loss of approximately $12.3 million or $0.65
per basic and diluted share for 2004, compared to a net loss of approximately
$539,000 or $0.03 per basic and diluted shares for 2003.
Off Balance Sheet Arrangements
None.
-22-
Results from continuing operations for the twelve months ended December 31,
- --------------------------------------------------------------------------------
2003, compared to twelve months ended December 31, 2002
- -------------------------------------------------------
Net Revenues
Net revenues from operations for the twelve months ended December 31,
2003, were $64.9 million, compared to $69.6 million for the twelve months ended
December 31, 2002, a 6.8% decrease. The decrease of 6.8% in net revenues is
primarily attributed to decreased business in mass merchandiser chains. The
decrease in net revenues was caused by decreased per unit fee revenue resulting
from lower retail sales of customer products and the loss of a particular
client, partially offset by increases in service fee revenue.
Cost of Revenues
Cost of revenues from operations consists of in-store labor and field
management wages, related benefits, travel and other direct labor-related
expenses. Cost of revenues increased by $2.0 million in 2003 and as a percentage
of net revenues was 65.3% for the twelve months ended December 31, 2003,
compared to 57.9% for the twelve months ended December 31, 2002, a 5.0%
increase. Approximately 85% and 76% of the field services were purchased from
the Company's affiliate, SMS, in 2003 and 2002, respectively (see Item 13 -
Certain Relationships and Related Transactions, below). SMS's increased share of
field services resulted from its more favorable cost structure. The increase in
cost as a percentage of net revenues is primarily a result of a decrease in per
unit fee revenues that do not have a proportionate decrease in cost. As
discussed above under Critical Accounting Policies/Revenue Recognition, the
Company's revenue consists of: (1) service fee revenue, which is earned when the
merchandising services are performed and, therefore, has proportionate costs in
the period the services are performed; and (2) per unit fee revenue, which is
earned when the client's product is sold to the consumer at retail, not when the
services are performed and, therefore, does not have proportionate costs in the
period the revenue is earned. Since the merchandising service and the related
costs associated with per unit fee revenue are normally performed prior to the
retail sale, and the retail sales of client products are influenced by numerous
factors including consumer tastes and preferences, and not solely by the
merchandising service performed, in any given period, the cost of per unit fee
revenues may not be directly proportionate to the per unit fee revenue.
Operating Expenses
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resource, legal and accounting expenses. The
following table sets forth the operating expenses as a percentage of net
revenues for the time periods indicated:
Year Ended Year Ended Increase
December 31, 2003 December 31, 2002 (decrease)
---------------------------- ------------------------------ -------------
(dollars in millions)
Dollars % Dollars % %
-------------- ------------ --------------- ------------- -------------
Selling, general & administrative $ 21.0 32.3% $ 18.8 27.0% 12.0%
Depreciation and amortization 1.5 2.3 1.8 2.6 (17.1)%
-------------- ------------ --------------- -------------
Total operating expenses $ 22.5 34.6% $ 20.6 29.6% 9.4%
============== ============ =============== =============
Selling, general and administrative expenses increased by $2.2 million,
or 12.0%, for the twelve months ended December 31, 2003, to $21.0 million
compared to $18.8 million for the twelve months ended December 31, 2002. This
increase was due primarily to increases in travel related expense of $0.4
million, postage and material expense of $0.6 million, stock option expense for
non-employees of $0.4 million and increase in bad debt expense of $0.6 million.
Depreciation and amortization decreased by $315,000 for the twelve
months ended December 31, 2003, primarily due to older, higher priced assets
becoming fully depreciated.
-23-
Interest Expense
Interest expense decreased $94,000 to $269,000 for the twelve months
ended December 31, 2003, from $363,000 for the twelve months ended December 31,
2002, due to decreased average debt levels as well as decreased interest rates
in 2003.
Income Taxes
The provision for income taxes was $58,000 and $3.0 million for the
twelve months ended December 31, 2003 and December 31, 2002, respectively. The
tax provision for 2003 reflects minimum tax requirements for state filings. The
effective tax rate was 36.1% for 2002.
Net (Loss) Income
The SPAR Group had a net loss of approximately $539,000 or $0.03 per
basic and diluted share for the twelve months ended December 31, 2003, compared
to a net income of approximately $5.3 million or $0.28 per basic and diluted
shares for the twelve months ended December 31, 2002 because of the factors
described above.
Off Balance Sheet Arrangements
None.
Liquidity and Capital Resources
In 2004, the Company had a net loss of $12.3 million. Included in the
net loss were non-cash charges of $8.1 million for impairment, $0.7 million for
deferred tax asset valuation adjustments, $1.4 million for depreciation and $0.1
million for minority interests in losses of subsidiaries.
Net cash provided by operating activities for 2004, was $1.4 million,
compared with net cash provided by operations of $3.4 million for 2003. The
decrease of $2.0 million in cash provided by operating activities is primarily
due to net operating losses offset by decreases in deferred taxes and
restructuring charges.
Net cash used in investing activities for 2004, was $1.3 million,
compared with net cash used of $2.9 million for 2003. The decrease in net cash
used in investing activities resulted was a result of fewer acquisitions of new
businesses and lower purchases of property and equipment in 2004.
Net cash provided by financing activities for 2004, was $0.9 million,
compared with net cash used in financing activities of $0.5 million for 2003.
The increase in net cash provided by financing activities in 2004 was primarily
a result of the consolidation of our Japan joint venture into the Company's
financial statements in 2004.
The above activity resulted in a change in cash and cash equivalents for
2004 of $0.9 million.
At December 31, 2004, the Company had positive working capital of $1.0
million as compared to $4.1 million at December 31, 2003. The decrease in
working capital is due to decreases in accounts receivable and deferred taxes,
increases in accounts payable, customer deposits and lines of credit, partially
offset by increases in cash and decreases in accrued expenses and other current
liabilities, accrued expenses due to affiliates and restructuring charges. The
Company's current ratio was 1.08 and 1.34 at December 31, 2004 and 2003,
respectively.
In January 2003, the Company and Webster Business Credit Corporation,
then known as Whitehall Business Credit Corporation ("Webster"), entered into
the Third Amended and Restated Revolving Credit and Security Agreement (as
amended, collectively, the "Credit Facility"). The Credit Facility provided a
$15.0 million revolving credit facility that matures on January 23, 2006. The
Credit Facility allowed the Company to borrow up to $15.0 million based upon a
borrowing base formula as defined in the agreement (principally 85% of
"eligible" accounts receivable). On May 17, 2004, the Credit Facility was
amended to among other things, reduce the revolving credit facility from $15.0
million to $10.0 million, change the interest rate and increase reserves against
collateral. The amendment provides for interest to be charged at a rate based in
part upon the earnings before interest, taxes, depreciation and amortization.
The average interest rate for 2004 was 5.1%. At December 31, 2004, the Credit
Facility bears interest at Webster's "Alternative Base Rate" plus 0.75% (a total
of 6.0% per annum), or LIBOR plus 3.25%. The Credit Facility is secured by all
of the assets of the Company and its domestic subsidiaries. In connection with
the May 17, 2004, amendment, Mr. Robert Brown, a
-24-
Director, the Chairman, President and Chief Executive Officer and a major
stockholder of theCompany and Mr. William Bartels, a Director, the Vice Chairman
and a major stockholder of the Company, provided personal guarantees totaling
$1.0 million to Webster. On August 20, 2004, the Credit Facility was further
amended in connection with the waiver of certain covenant violations (see
below). The amendment, among other things, reduced the revolving credit facility
from $10.0 million to $7.0 million, changed the covenant compliance testing for
certain covenants from quarterly to monthly and reduced certain advance rates.
On November 15, 2004, the Credit Facility was further amended to delete any
required minimum Net Worth and minimum Fixed Charge Coverage Ratio covenant
levels for the period ending December 31, 2004. The amendments did not change
the future covenant levels. The Credit Facility also limits certain expenditures
including, but not limited to, capital expenditures and other investments.
The Company was in violation of certain monthly covenants at December
31, 2004, and expects to be in violation at future measurement dates. Webster
issued a waiver for the December 31, 2004 covenant violations. However, there
can be no assurances that Webster will issue such waivers in the future.
Because of the requirement to maintain a lock box arrangement with
Webster, Webster's ability to invoke a subjective acceleration clause at its
discretion and the expected future covenant violations, borrowings under the
Credit Facility are classified as current at December 31, 2004, and December 31,
2003, in accordance with EITF 95-22. Balance Sheet Classification of Borrowings
Outstanding Under Revolving Credit Agreements That Include Both a Subjective
Acceleration Clause and a Lock-Box Agreement.
The revolving loan balances outstanding under the Credit Facility were
$4.1 million at December 31, 2004, and December 31, 2003. There were letters of
credit outstanding under the Credit Facility of $0.7 million at December 31,
2004, and December 31, 2003. As of December 31, 2004, the Company had unused
availability under the Credit Facility of $1.4 million out of the remaining
maximum $2.2 million unused revolving line of credit after reducing the
borrowing base by outstanding loans and letters of credit.
In 2001, the Japanese joint venture SPAR FM Japan, Inc. entered into a
revolving line of credit arrangement with Japanese banks for 300 million yen or
$2.7 million (based upon the exchange rate at September 30, 2004). At September
30, 2004, SPAR FM Japan, Inc. had 100 million yen or approximately $900,000 loan
balance outstanding under the line of credit. The line of credit is effectively
guarantied by the Company and the joint venture partner, Paltac Corporation. The
average interest rates on the borrowings under the Japanese line of credit for
its short-term bank loans at September 30, 2004 and 2003 were 1.375% and 1.375%
per annum, respectively.
The Company's international model is to partner with local merchandising
companies and combine their knowledge of the local market with the Company's
proprietary software and expertise in the merchandising business. In 2001, the
Company established its first joint venture and has continued this strategy. As
of this filing, the Company is currently operating in Japan, Canada, Turkey,
South Africa and India. The Company also announced the establishment of joint
ventures in Romania and China.
Certain of these joint ventures and joint venture subsidiaries are
marginally profitable while others are operating at a loss. None of these
entities have excess cash reserves. In the event of continued losses, the
Company may be required to provide additional cash infusions into these joint
ventures and joint venture subsidiaries.
Management believes that based upon the results of Company's cost saving
initiatives and the existing credit facilities, sources of cash availability
will be sufficient to support ongoing operations over the next twelve months.
However, delays in collection of receivables due from any of the Company's major
clients, or a significant further reduction in business from such clients, or
the inability to acquire new clients, or the Company's inability to remain
profitable, or the inability to obtain bank waivers for future covenant
violations could have a material adverse effect on the Company's cash resources
and its ongoing ability to fund operations.
-25-
Certain Contractual Obligations
The following table contains a summary of certain of the Company's
contractual obligations by category as of December 31, 2004 (in thousands).
- --------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by Period
- --------------------------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
year years
- --------------------------------------------------------------------------------------------------------------------
Credit Facilities $ 4,956 $ 4,956 $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations 1,468 776 651 41 -
- --------------------------------------------------------------------------------------------------------------------
Total $ 6,424 $ 5,732 $ 651 $ 41 $ -
- --------------------------------------------------------------------------------------------------------------------
In addition to the above table, at December 31, 2004, the Company had
$737,337 in outstanding Letters of Credit.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company's accounting policies for financial instruments and
disclosures relating to financial instruments require that the Company's
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and lines of credit.
The Company considers carrying amounts of current assets and liabilities in the
consolidated financial statements to approximate the fair value for these
financial instruments because of the relatively short period of time between
origination of the instruments and their expected realization. The Company
monitors the risks associated with interest rates and financial instrument
positions. The Company's investment policy objectives require the preservation
and safety of the principal, and the maximization of the return on investment
based upon the safety and liquidity objectives.
The Company is exposed to market risk related to the variable interest
rate on its lines of credit. As of December 31, 2004, the variable interest rate
on the Company's lines of credit were 6.0% on its domestic line of credit and
1.4% on its Japanese line of credit.
The Company has foreign currency exposure associated with its
international 100% owned subsidiary, its 51% owned joint venture subsidiaries
and its 50% owned joint ventures. In 2004, these exposures are primarily
concentrated in the Canadian dollar, Japanese yen and South African rand. At
December 31, 2004, international assets totaled $2.8 million and international
liabilities totaled $3.8 million. For 2004, international revenues totaled $8.2
million and the Company's share of the net losses was approximately $500,000.
Investment Portfolio
The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments.
Domestically, excess cash is normally used to pay down its revolving line of
credit. Internationally, excess cash is used to fund operations.
Item 8. Financial Statements and Supplementary Data.
See Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) as of the end of the period
covering this report. Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission's rules and
forms.
-26-
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls during the
twelve months covered by this report or from the end of the reporting period to
the date of this Form 10-K.
The Company has established a plan and has begun to document and test
its internal controls over financial reporting required by Section 404 of the
Sarbanes-Oxley Act of 2002.
Item 9B. Other Information.
In November 2004 and January 2005, the Company entered into separate
operating lease agreements between SMS and the Company's wholly owned
subsidiaries, SPAR Marketing Force, Inc. ("SMF") and SPAR Canada Company ("SPAR
Canada"). Each lease has a 36 month term and has representations, covenants and
defaults customary for the leasing industry. The leases are for handheld
computers to be used by field merchandisers in the performance of various
merchandising services in the United States and Canada (see Item 13 - Certain
Relationships and Related Transactions).
-27-
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers
- --------------------------------
The following table sets forth certain information in connection with
each person who is or was at December 31, 2004, an executive officer and/or
director for the Company.
Name Age Position with SPAR Group, Inc.
- ---- --- ------------------------------
Robert G. Brown. . . . . . . . 62 Chairman, Chief Executive Officer,
President and Director
William H. Bartels . . . . . . 61 Vice Chairman and Director
.. .
Robert O. Aders (1). . . . . . 77 Director, Chairman Governance
Committee
Jack W. Partridge (1) . . . . . 59 Director, Chairman Compensation
Committee
Jerry B. Gilbert (1) . . . . . 70 Director
Lorrence T. Kellar (1) . . . . 67 Director, Chairman Audit Committee
Charles Cimitile. . . . . . . . 50 Chief Financial Officer, Treasurer
and Secretary
Kori G. Belzer . . . . . . . . . 39 Chief Operating Officer
Patricia Franco. . . . . . . . . 44 Chief Information Officer
James R. Segreto . . . . . . . . 56 Vice President, Controller
__________________________
(1) Member of the Board's Governance, Compensation and Audit Committees
Robert G. Brown serves as the Chairman, Chief Executive Officer,
President and a Director of SGRP and has held such positions since July 8, 1999,
the effective date of the merger of the SPAR Marketing Companies with PIA
Merchandising Services, Inc. (the "Merger"). Mr. Brown served as the Chairman,
President and Chief Executive Officer of the SPAR Marketing Companies
(SPAR/Burgoyne Retail Services, Inc. ("SBRS") since 1994, SPAR, Inc. ("SINC")
since 1979, SPAR Marketing, Inc. ("SMNEV") since November 1993, and SPAR
Marketing Force, Inc. ("SMF") since 1996).
William H. Bartels serves as the Vice Chairman and a Director of SGRP
and has held such positions since July 8, 1999 (the effective date of the
Merger). Mr. Bartels served as the Vice Chairman, Secretary, Treasurer and
Senior Vice President of the SPAR Marketing Companies (SBRS since 1994, SINC
since 1979, SMNEV since November 1993 and SMF since 1996).
Robert O. Aders serves as a Director of SGRP and has done so since July
8, 1999. He has served as the Chairman of the Governance Committee since May 9,
2003. Mr. Aders has served as Chairman of The Advisory Board, Inc., an
international consulting organization since 1993, and also as President Emeritus
of the Food Marketing Institute ("FMI") since 1993. Immediately prior to his
election to the Presidency of FMI in 1976, Mr. Aders was Acting Secretary of
Labor in the Ford Administration. Mr. Aders was the Chief Executive Officer of
FMI from 1976 to 1993. He also served in The Kroger Co., in various executive
positions from 1957 to 1974 and was Chairman of the Board from 1970 to 1974. Mr.
Aders also serves as a Director of Checkpoint Systems, Inc., Sure Beam
Corporation and Telepanel Systems, Inc.
-28-
Jack W. Partridge serves as a Director of SGRP and has done so since
January 29, 2001. He has served as the Chairman of the Compensation Committee of
SGRP since May 9, 2003. Mr. Partridge is President of Jack W. Partridge &
Associates. He previously served as Vice Chairman of the Board of The Grand
Union Company from 1998 to 2000. Mr. Partridge's service with Grand Union
followed a distinguished 23-year career with The Kroger Company, where he served
as Group Vice President, Corporate Affairs, and as a member of the Senior
Executive Committee, as well as various other executive positions. Mr. Partridge
has been a leader in industry and community affairs for over two decades. He has
served as Chairman of the Food Marketing Institute's Government Relations
Committee, the Food and Agriculture Policy Task Force, and as Chairman of the
Board of The Ohio Retail Association. He has also served as Vice Chairman of the
Cincinnati Museum Center and a member of the boards of the United Way of
Cincinnati, the Childhood Trust, Second Harvest and the Urban League.
Jerry B. Gilbert serves as a Director of SGRP and has done so since June
4, 2001. Mr. Gilbert served as Vice President of Customer Relations for Johnson
& Johnson's Consumer and Personal Care Group of Companies from 1989 to 1997. Mr.
Gilbert joined Johnson & Johnson in 1958 and from 1958 to 1989 held various
executive positions. Mr. Gilbert also served on the Advisory Boards of the Food
Marketing Institute, the National Association of Chain Drug Stores and the
General Merchandise Distributors Council (GMDC) where he was elected the first
President of the GMDC Educational Foundation. He was honored with lifetime
achievement awards from GMDC, Chain Drug Review, Drug Store News and the Food
Marketing Institute. He is the recipient of the prestigious National Association
of Chain Drug Stores (NACDS) Begley Award, as well as the National Wholesale
Druggists Association (NWDA) Tim Barry Award. In June 1997, Mr. Gilbert received
an Honorary Doctor of Letters Degree from Long Island University.
Lorrence T. Kellar serves as a Director and the Chairman of the Audit
Committee of SGRP and has done so since April 2, 2003. Mr. Kellar had a 31-year
career with The Kroger Co., where he served in various financial capacities,
including Group Vice President for real estate and finance, and earlier, as
Corporate Treasurer. He was responsible for all of Kroger's real estate
activities, as well as facility engineering, which coordinated all store
openings and remodels. Mr. Kellar subsequently served as Vice President, real
estate, for Kmart. He currently is Vice President of Continental Properties
Company, Inc. Mr. Kellar also serves on the boards of Frisch's Restaurants and
Multi-Color Corporation and is a trustee of the Acadia Realty Trust. He also is
a major patron of the arts and has served as Chairman of the Board of the
Cincinnati Ballet.
Charles Cimitile serves as the Chief Financial Officer, Secretary and
Treasurer of SGRP and has done so since November 24, 1999. Mr. Cimitile served
as Chief Financial Officer for GT Bicycles from 1996 to 1999 and Cruise Phone,
Inc. from 1995 through 1996. Prior to 1995, he served as the Vice President
Finance, Secretary and Treasurer of American Recreation Company Holdings, Inc.
and its predecessor company.
Kori G. Belzer serves as the Chief Operating Officer of SGRP and has
done so since January 1, 2004. Ms. Belzer also serves as Chief Operating Officer
of SPAR Management Services, Inc. ("SMSI"), and SPAR Marketing Services, Inc.
("SMS"), each an affiliate of SGRP (see Item 13 - Certain Relationships and
Related Transactions, below), and has done so since 2000. The Audit Committee
determined that Ms. Belzer also served during 2003 as the de facto chief
operating officer of SGRP through her position as Chief Operating Officer of
SMSI and SMS. Prior to 2000, Ms. Belzer served as Vice President Operations of
SMS from 1997 to 2000, and as Regional Director of SMS from 1995 to 1997. Prior
to 1995, she served as Client Services Manager for SPAR/Servco, Inc.
-29-
Patricia Franco serves as the Chief Information Officer of SGRP and
President of the SPAR International Merchandising Services Division and has done
so since January 1, 2004. Ms. Franco also serves as Senior Vice President of
SPAR Infotech, Inc. ("SIT"), an affiliate of SGRP (see Item 13 - Certain
Relationships and Related Transactions, below), and has done so since January 1,
2003. The Audit Committee determined that Ms. Franco also served during 2003 as
the de facto chief information officer of SGRP as well as, the de facto
President of the SPAR International Merchandising Services Division, through her
position as Senior Vice President of SIT. Prior to 2003, Ms. Franco served in
various management capacities with SIT, SMS and their affiliates.
James R. Segreto serves as Vice President, Controller of SGRP and has
done so since July 8, 1999, the effective date of the Merger. From 1997 through
the Merger, he served in the same capacity for SMS. Mr. Segreto served as Chief
Financial Officer for Supermarket Communications Systems, Inc. from 1992 to 1997
and LM Capital, LLP from 1990 to 1992. Prior to 1992, he served as Controller of
Dorman Roth Foods, Inc.
Audit Committee Composition and Financial Expert
The Audit Committee currently consists of Messrs. Kellar (its Chairman),
Aders, Gilbert and Partridge, each of whom has been determined by the Governance
Committee and the Board to meet the independence requirements for audit
committee members under Nasdaq Rule 4200(a)(14). In connection with his
re-nomination as a Director, the Governance Committee and the Board
re-determined that Mr. Kellar was qualified to be the "audit committee financial
expert" as required by applicable law and the SEC Rules.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Exchange Act ("Section 16(a)") requires the
Company's directors and certain of its officers and persons who own more than
10% of the Company's Common Stock (collectively, "Insiders"), to file reports of
ownership and changes in their ownership of the Company's Common Stock with the
Commission. Insiders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it
for the year ended December 31, 2004, or written representations from certain
reporting persons for such year, the Company believes that its Insiders complied
with all applicable Section 16(a) filing requirements for such year, with the
exception that Robert G. Brown, William H. Bartels, Jack W. Partridge and Robert
O. Aders untimely filed certain Statements of Changes in Beneficial Ownership on
Form 4. Kori Belzer and Patricia Franco became filers in March of 2004. All such
Section 16(a) filing requirements have since been completed by each of the
aforementioned individuals.
Ethics Codes
The Company has adopted codes of ethical conduct applicable to all of
its directors, officers and employees, as approved and recommended by the Audit
Committee and Governance Committee and adopted by the Board on May 3, 2004, in
accordance with Nasdaq Rules. These codes of conduct consist of: (1) the SPAR
Group Code of Ethical Conduct for its Directors, Senior Executives and Employees
Dated (as of) May 1, 2004; and (2) the SPAR Group Statement of Policy Regarding
Personal Securities Transaction in SGRP Stock and Non-Public Information Dated,
Amended and Restated as of May 1, 2004, which amends, restates and completely
replaces its existing similar statement of policy. Both Committees were involved
because authority over ethics codes shifted from the Audit Committee to the
Governance Committee with the adoption of the committee charters on May 18,
2004. Copies of these codes and policies are posted and available to
stockholders and the public on the Company's web site (www.SPARinc.com).
-30-
Item 11. Executive Compensation and Other Information of SPAR Group, Inc.
Executive Compensation
- ----------------------
The following table sets forth all compensation received for services
rendered to the Company in all capacities for the years ended December 31, 2004,
2003, and 2002 (except for amounts paid to SMS, SMSI and SIT, see Item 13 -
Certain Relationships and Related Transactions, below) (i) by the Company's
Chief Executive Officer, and (ii) each of the other four most highly compensated
executive officers of the Company and its affiliates who were serving as
executive officers of the Company or performing equivalent functions for the
Company through an affiliate, at December 31, 2004 (collectively, the "Named
Executive Officers").
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Underlying All Other
Options Compensation
Name and Principal Positions Year Salary ($) Bonus ($) (#)(1) ($)(2)
- ---------------------------- ---- ---------- --------- ------ ------
Robert G. Brown 2004 114,000 (3) -- -- 1,800
Chief Executive Officer, Chairman of the 2003 180,000 (3) -- -- 2,200
Board, President, and Director 2002 164,340 (3) -- -- 2,040
William H. Bartels 2004 114,000 (3) -- -- 1,620
Vice Chairman and Director 2003 180,000 (3) -- -- 2,007
2002 164,340 (3) -- -- 2,040
Charles Cimitile 2004 220,000 -- 25,000 1,800
Chief Financial Officer, Treasurer and 2003 221,700 20,000 20,000 2,200
Secretary 2002 215,564 15,000 20,000 2,040
Kori G. Belzer 2004 147,990 -- 25,000 1,495
Chief Operating Officer 2003 147,067 19,000 26,750 1,843
Patricia Franco 2004 147,900 10,000 25,000 1,493
Chief Information Officer 2003 145,875 20,000 37,500 1,718
________________________
(1) In June 2004, Mr. Brown and Mr. Bartels voluntarily surrendered for
cancellation their options for the purchase of the following shares of
common stock under the 2000 Plan: 382,986 and 235,996, respectively.
In September 2004, Mr. Cimitile, Ms. Belzer and Ms. Franco voluntarily
surrendered for cancellation their options for the purchase of the
following shares of common stock under the 2000 Plan: 55,000, 76,140 and
87,500 respectively. Also in September 2004, Ms. Franco voluntarily
surrendered for cancellation her options for the purchase 10,000 shares of
common stock under the 1995 Plan.
(2) Other compensation represents the Company's 401k contribution.
(3) Does not include amounts paid to SMS, SMSI, SIT and Affinity Insurance Ltd.
(see Item 13 - Certain Relationships and Related Transactions, below)
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Stock Option Grants in Last Fiscal Year
The following table sets forth information regarding each grant of stock
options made during the year ended December 31, 2004, to each of the Named
Executive Officers. No stock appreciation rights ("SAR's") were granted during
such period to such person.
Individual Grants
----------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Potential Realizable Value at
Options Employees in Exercise Expiration Assumed Annual Rates of Stock
Name Granted(2)(#) Period (%) Price ($/Sh) Date Price Appreciation for Option(1)
- ---- ------------------------------------------------------------------------------------------
5% ($) 10% ($)
------------------------------------------------------------------------------------------
Charles Cimitile 25,000 16.1 2.39 3/31/14 37,596 95,226
Kori G. Belzer 25,000 16.1 2.39 3/31/14 37,596 95,226
Patricia Franco 25,000 16.1 2.39 3/31/14 37,596 95,226
____________
(1) The potential realizable value is calculated based upon the term of the
option at its time of grant. It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option.
(2) These options vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
Aggregated Stock Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth the number of shares of Common Stock of
the Company purchased by each of the Named Executive Officers in the exercise of
stock options during the year ended December 31, 2004, the value realized in the
purchase of such shares (the market value at the time of exercise less the
exercise price to purchase such shares), and the number of shares that may be
purchased and value of the exercisable and unexercisable options held by each of
the Named Executive Officers at December 31, 2004.
Number of Securities Underlying Value of Unexercised
Unexercised Options at Fiscal In-the-Money Options at Fiscal
Year-End (#) Year-End ($)
---------------------------------- --------------------------------
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------------- --------------- ---------------- ---------------- -------------- ----------------
Robert G. Brown -- -- -- 95,746 -- --
William H. Bartels -- -- -- 58,999 -- --
Charles Cimitile -- -- 25,000 85,000 10,625 --
Kori G. Belzer -- -- 11,500 94,500 4,513 88
Patricia Franco -- -- 11,500 79,500 4,513 88
Stock Option and Purchase Plans
The Company has four stock option plans: the Amended and Restated 1995
Stock Option Plan ("1995 Plan"), the 1995 Director's Plan ("Director's Plan"),
the Special Purpose Stock Option Plan (the "Special Purpose Plan"), and the 2000
Stock Option Plan ("2000 Plan").
The 1995 Plan provided for the granting of either incentive or
nonqualified stock options to specific employees, consultants, and directors of
the Company for the purchase of up to 3,500,000 shares of the Company's common
stock. The options had a term of ten years from the date of issuance, except in
the case of incentive stock options granted to greater than 10% stockholders for
which the term was five years. The exercise price of nonqualified stock options
must have been equal to at least 85% of the fair market value of the Company's
common stock at the date of grant. Since 2000, the Company has not granted any
new options under this plan. During 2004, 1,500 options to purchase shares of
the Company's common stock were exercised and options to purchase 26,625 shares
of the Company's stock were cancelled
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under this plan. At December 31, 2004, options to purchase 15,125 shares of the
Company's common stock remain outstanding under this plan. The 1995 Plan was
superseded by the 2000 Plan with respect to all new options issued.
The Director's Plan was a stock option plan for non-employee directors
and provided for the purchase of up to 120,000 shares of the Company's common
stock. Since 2000, the Company has not granted any new options under this plan.
During 2004, no options to purchase shares of the Company's common stock were
exercised under this plan. At December 31, 2004, 20,000 options to purchase
shares of the Company's common stock remained outstanding under this plan. The
Director's Plan has been replaced by the 2000 Plan with respect to all new
options issued.
On July 8, 1999, in connection with the merger, the Company established
the Special Purpose Plan of PIA Merchandising Services, Inc. to provide for the
issuance of substitute options to the holders of outstanding options granted by
SPAR Acquisition, Inc. There were 134,114 options granted at $0.01 per share.
Since July 8, 1999, the Company has not granted any new options under this plan.
During 2004, 21,000 options to purchase shares of the Company's common stock
were exercised under this plan. At December 31, 2004, options to purchase 4,750
shares of the Company's common stock remain outstanding under this plan.
On December 4, 2000, the Company adopted the 2000 Plan, as the successor
to the 1995 Plan and the Director's Plan with respect to all new options issued.
The 2000 Plan provides for the granting of either incentive or nonqualified
stock options to specified employees, consultants, and directors of the Company
for the purchase of up to 3,600,000 (less those options still outstanding under
the 1995 Plan or exercised after December 4, 2000 under the 1995 Plan). The
options have a term of ten years, except in the case of incentive stock options
granted to greater than 10% stockholders for whom the term is five years. The
exercise price of nonqualified stock options must be equal to at least 85% of
the fair market value of the Company's common stock at the date of grant
(although typically the options are issued at 100% of the fair market value),
and the exercise price of incentive stock options must be equal to at least the
fair market value of the Company's common stock at the date of grant. During
2004, options to purchase 476,417 shares of the Company's common stock were
granted, options to purchase 53,302 shares of the Company's common stock were
exercised and options to purchase 1,345,542 shares of the Company's stock were
voluntarily surrendered and cancelled under this plan. At December 31, 2004,
options to purchase 1,251,383 shares of the Company's common stock remain
outstanding under this plan and options to purchase 1,618,719 shares of the
Company's common stock were available for grant under this plan.
In 2001, SGRP adopted its 2001 Employee Stock Purchase Plan (the "ESP
Plan"), which replaced its earlier existing plan, and its 2001 Consultant Stock
Purchase Plan (the "CSP Plan"). These plans were each effective as of June 1,
2001. The ESP Plan allows employees of the Company, and the CSP Plan allows
employees of the affiliates of the Company (see Item 13 - Certain Relationships
and Related Transactions, below), to purchase SGRP's Common Stock from SGRP
without having to pay any brokerage commissions. On August 8, 2002, SGRP's Board
approved a 15% discount for employee purchases of Common Stock under the ESP
Plan and recommended that its affiliates pay a 15% cash bonus for affiliate
consultant purchases of Common Stock under the CSP Plan.
Compensation of Directors
The Company's Compensation Committee administers the compensation plan
for its outside Directors as well as the compensation for its executives. Each
member of the Company's Board who is not otherwise an employee or officer of the
Company or any subsidiary or affiliate of the Company (each, an "Eligible
Director") is eligible to receive the compensation contemplated under such plan.
In January 2001, SGRP adopted the Director Compensation Plan for its
outside Directors, as approved by the Board, as amended (the "Directors
Compensation Plan"). SGRP's Compensation Committee administers the Directors
Compensation Plan as well as the compensation for SGRP's executives.
Under the Directors Compensation Plan, each member of SGRP's Board who
is not otherwise an employee or officer of SGRP or any subsidiary or affiliate
of SGRP (each, a "Non-Employee Director") is eligible to receive director's fees
of $30,000 per annum (plus an additional $5,000 per annum for the Audit
Committee Chairman), payable quarterly. Each quarterly installment of such
director's fees ($7,500 plus an additional $1,250 for the Audit Committee
Chairman) is paid half in cash and half in stock options to purchase shares of
SGRP's common stock. Prior to May 2004, SGRP issued such stock options with an
exercise price of $0.01 per share. The number of option shares issued was
calculated by dividing the amount of compensation to be paid in stock options by
the closing stock price at the end of each quarter. In May 2004, the
Compensation Committee approved and recommended and the Board adopted a change
in this policy to instead issue such stock options for the purchase of common
stock with an exercise price equal to 100% of the fair
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market value of SGRP's common stock at the end of each quarter. The number of
option shares to be issued will be equal to three times the quotient of the
amount of compensation to be paid in stock options divided by the closing stock
price at the end of each quarter. The Compensation Committee and the Board
determined that this revised policy more fairly compensated the Non-Employee
Directors.
In addition upon acceptance of the directorship, each Non-Employee
Director receives options to purchase 10,000 shares of SGRP's common stock with
an exercise price equal to 100% of the fair market value of SGRP's common stock
at the date of grant, options to purchase 10,000 additional shares of SGRP's
common stock with an exercise price equal to 100% of the fair market value of
SGRP's common stock at the date of grant after one year of service and options
to purchase 10,000 additional shares of SGRP's common stock with an exercise
price equal to 100% of the fair market value of SGRP's common stock at the date
of grant for each additional year of service thereafter.
All of those options to Non-Employee Directors have been and will be
granted under the 2000 Plan described above, under which each member of the
Board is eligible to participate. Non-Employee Directors will be reimbursed for
all reasonable expenses incurred during the course of their duties. There is no
additional compensation for committee participation, phone meetings, or other
Board activities.
Severance Agreements
The Company has entered into a Change of Control Severance Agreement
with each of Patricia Franco, the Company's Chief Information Officer, and Kori
G. Belzer, the Company's Chief Operating Officer, each providing for a lump sum
severance payment and other accommodations from the Company to the employee
under certain circumstances if, pending or following a change in control, the
employee leaves for good reason or is terminated other than in a termination for
cause. The payment is equal to the sum of the employee's monthly salary times a
multiple equal to 24 months less the number of months by which the termination
of employment followed the change in control plus the maximum bonus that would
have been paid to the employee (not to exceed 25% of the employee's annual
salary).
Compensation Committee Interlocks and Insider Participation
No member of the Board's Compensation Committee was at any time during
the year ended December 31, 2004, or at any other time an officer or employee of
the Company. No executive officer or board member of the Company serves as a
member of the board of directors or compensation committee of any other entity,
that has one or more executive officers serving as a member of the Company's
Board or Compensation Committee, except for the positions of Messrs. Brown and
Bartels as directors and officers of the Company (including each of its
subsidiaries) and each of its affiliates, including SMS, SMSI and SIT (see Item
13 - Certain Relationships and Related Transactions, below).
-34-
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners of the Company
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of March 15, 2005 by: (i) each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the Company's common stock; (ii) each of the Company's
directors; (iii) each of the Named Executive Officers in the Summary
Compensation Table; and (iv) the Company's directors and such Named Executive
Officers as a group. Except as indicated in the footnotes to this table, the
persons named in the table, based on information provided by such persons, have
sole voting and sole investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to community property laws where
applicable.
Number of Shares
Title of Class Name and Address of Beneficial Owner Beneficially Owned Percentage
Common Shares Robert G. Brown (1) 8,622,407 (2) 45.5%
Common Shares William H. Bartels (1) 5,549,842 (3) 29.4%
Common Shares Robert O. Aders (1) 134,543 (4) *
Common Shares Jack W. Partridge (1) 78,633 (5) *
Common Shares Jerry B. Gilbert (1) 71,974 (6) *
Common Shares Lorrence T. Kellar (1) 68,602 (7) *
Common Shares Charles Cimitile (1) 107,500 (8) *
Common Shares Kori G. Belzer (1) 97,951 (9) *
Common Shares Patricia Franco (1) 141,998 (10) *
Common Shares Richard J. Riordan (11)
300 South Grand Avenue, Suite 2900
Los Angeles, California 90071 1,209,922 6.4%
Common Shares Heartland Advisors, Inc. (12)
790 North Milwaukee Street
Milwaukee, Wisconsin 53202 1,300,000 6.9%
Common Shares Executive Officers and Directors 14,873,450 79.0%
* Less than 1%
(1) The address of such owners is c/o SPAR Group, Inc. 580 White Plains
Road, Tarrytown, New York 10591.
(2) Includes 1,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown,
James R. Brown, Sr. and William H. Bartels are trustees. Includes
95,747 shares issuable upon exercise of options.
(3) Excludes 1,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown,
James R. Brown, Sr. and William H. Bartels are trustees, beneficial
ownership of which are disclaimed by Mr. Bartels. Includes 58,999
shares issuable upon exercise of options.
(4) Includes 62,889 shares issuable upon exercise of options.
(5) Includes 67,665 shares issuable upon exercise of options.
(6) Includes 71,974 shares issuable upon exercise of options.
(7) Includes 62,454 shares issuable upon exercise of options.
(8) Includes 107,500 shares issuable upon exercise of options.
(9) Includes 96,000 shares issuable upon exercise of options.
(10) Includes 88,500 shares issuable upon exercise of options.
(11) Share ownership was confirmed with the Company's stock transfer agent
and the principal.
(12) All information regarding share ownership is taken from and furnished
in reliance upon the Schedule 13G (Amendment No. 9), filed by Heartland
Advisors, Inc. with the Securities and Exchange Commission on December
31, 2004.
-35-
Equity Compensation Plans
The following table contains a summary of the number of shares of Common
Stock of the Company to be issued upon the exercise of options, warrants and
rights outstanding at December 31, 2004, the weighted-average exercise price of
those outstanding options, warrants and rights, and the number of additional
shares of Common Stock remaining available for future issuance under the plans
as at December 31, 2004.
Equity Compensation Plan Information
----------------------------- -------------------------- ------------------------- -------------------------
Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance of
warrants and rights (#) warrants and rights ($) options, warrants and
Plan category rights (#)
----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans 1,291,258 $1.66 1,618,719
approved by security
holders
----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans
not approved by security
holders -- -- --
----------------------------- -------------------------- ------------------------- -------------------------
Total 1,291,258 $1.66 1,618,719
----------------------------- -------------------------- ------------------------- -------------------------
Item 13. Certain Relationships and Related Transactions.
Mr. Robert G. Brown, a Director, the Chairman, President and Chief
Executive Officer and a major stockholder of the Company, and Mr. William H.
Bartels, a Director, the Vice Chairman and a major stockholder of the Company,
are executive officers and the sole stockholders and directors of SPAR Marketing
Services, Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI"), and SPAR
Infotech, Inc. ("SIT").
SMS and SMSI provided approximately 99% of the Company's field
representatives (through its independent contractor field force) and
approximately 92% of the Company's field management at a total cost of
approximately $24.0 million, $36.0 million, and $30.5 million for 2004, 2003,
and 2002, respectively. Pursuant to the terms of the Amended and Restated Field
Service Agreement dated as of January 1, 2004, SMS provides the services of
SMS's field force of approximately 6,300 independent contractors to the Company.
Pursuant to the terms of the Amended and Restated Field Management Agreement
dated as of January 1, 2004, SMSI provides approximately 50 full-time national,
regional and district managers to the Company. For those services, the Company
has agreed to reimburse SMS and SMSI for all of their costs of providing those
services and to pay SMS and SMSI each a premium equal to 4% of their respective
costs, except that for 2004 SMSI agreed to concessions that reduced the premium
paid by approximately $640,000 for 2004. Total net premiums (4% of SMS and SMSI
costs less 2004 concessions) paid to SMS and SMSI for services rendered were
approximately $320,000, $1,350,000, and $1,100,000 for 2004, 2003, and 2002,
respectively. The Company has been advised that Messrs. Brown and Bartels are
not paid any salaries as officers of SMS or SMSI so there were no salary
reimbursements for them included in such costs or premium. However, since SMS
and SMSI are "Subchapter S" corporations, Messrs. Brown and Bartels benefit from
any income of such companies allocated to them.
SIT provided substantially all of the Internet computer programming
services to the Company at a total cost of approximately $1,170,000, $1,610,000,
and $1,630,000 for 2004, 2003, and 2002, respectively. SIT provided
approximately 34,000, 47,000, and 46,000 hours of Internet computer programming
services to the Company for 2004, 2003, and 2002, respectively. Pursuant to the
Amended and Restated Programming and Support Agreement dated as of January 1,
2004, SIT continues to provide programming services to the Company for which the
Company has agreed to pay SIT competitive hourly wage rates for time spent on
Company matters and to reimburse the related out-of-pocket expenses of SIT and
its personnel. The average hourly billing rate was $34.71, $34.24, and $35.10
for 2004, 2003, and 2002, respectively. The Company has been advised that no
hourly charges or business expenses for Messrs. Brown and Bartels were charged
to the Company by SIT for 2004. However, since SIT is a "Subchapter S"
corporation, Messrs. Brown and Bartels benefit from any income of such company
allocated to them.
In November 2004 and January 2005, the Company entered into separate
operating lease agreements between SMS and the Company's wholly owned
subsidiaries, SPAR Marketing Force, Inc. ("SMF") and SPAR Canada Company ("SPAR
Canada"). Each lease has a 36 month term and has representations, covenants and
defaults customary for the leasing industry. The SMF lease has a monthly payment
of $20,318 and is for handheld computers to be used by field merchandisers in
the performance of various merchandising services in the United States. These
handheld computers had an original purchase price of $632,200. The SPAR Canada
lease has a monthly payment of $3,326 and is for handheld
-36-
computers to be used by field merchandisers in the performance of various
merchandising services in Canada. These handheld computers had an original
purchase price of $105,000.
The Company's agreements with SMS, SMSI and SIT are periodically
reviewed by the Company's Audit Committee, which includes an examination of the
overall fairness of the arrangements. In February 2004, the Audit Committee
approved separate amended and restated agreements with each of SMS, SMSI and
SIT, effective as of January 1, 2004. The restated agreements extend the
contract maturities for four years, strengthened various contractual provisions
in each agreement and continued the basic economic terms of the existing
agreements, except that the restated agreement with SMSI provides for temporary
concessions to the Company by SMSI totalling approximately $640,000 for 2004.
In July 1999, SMF, SMS and SIT entered into a Software Ownership
Agreement with respect to Internet job scheduling software jointly developed by
such parties. In addition, SPAR Trademarks, Inc. ("STM"), SMS and SIT entered
into trademark licensing agreements whereby STM has granted non-exclusive
royalty-free licenses to SIT, SMS and SMSI for their continued use of the name
"SPAR" and certain other trademarks and related rights transferred to STM, a
wholly owned subsidiary of the Company.
Messrs. Brown and Bartels also collectively own, through SMSI, a
minority (less than 5%) equity interest in Affinity Insurance Ltd., which
provides certain insurance to the Company.
In April 2003, all previously outstanding amounts due certain
stockholders under certain notes were paid in full.
In the event of any material dispute in the business relationships
between the Company and SMS, SMSI, or SIT, it is possible that Messrs. Brown or
Bartels may have one or more conflicts of interest with respect to these
relationships and such dispute could have a material adverse effect on the
Company.
Item 14. Principal Accountant Fees and Services.
On October 4, 2004, Ernst & Young LLP ("E&Y") resigned as the
independent registered public accounting firm for the Company and its
subsidiaries. The resignation was effective upon completion of E&Y's review of
the interim financial information for the Company's third fiscal quarter ended
September 30, 2004, and the filing of the Company's quarterly report on Form
10-Q for such period.
In January 2005, the Company, with the approval of the Company's Audit
Committee, appointed Rehmann Robson ("Rehmann") as its independent registered
public accounting firm to audit the financial statements of the Company for its
year ending December 31, 2004.
The Company and its subsidiaries did not engage Rehmann or E&Y to
provide advice regarding financial information systems design or implementation,
but did engage E&Y for tax consulting services related to the PHI/SPGI ESOP in
2003 (for which E&Y was paid $3,778), due diligence services for the IMS
acquisition during 2003 (for which E&Y was paid $14,334) and for tax services in
2003 (for which E&Y was paid $2,295). No other non-audit services were performed
by Rehmann or E&Y in 2004 or 2003. Since 2003, as required by law, each
non-audit service performed by the Company's auditor either (i) was approved in
advance on a case-by-case basis by the Company's Audit Committee, or (ii) fit
within a pre-approved "basket" of non-audit services of limited amount, scope
and duration established in advance by the Company's Audit Committee. In
connection with the standards for independence of the Company's independent
public accountants promulgated by the Securities and Exchange Commission, the
Audit Committee considers (among other things) whether the provision of such
non-audit services would be compatible with maintaining the independence of
Rehmann or E&Y.
Audit Fees
During the Company's fiscal year ended December 31, 2004 and 2003,
respectively, fees billed by E&Y for all audit services rendered to the Company
and its subsidiaries were $100,203 and $179,362, respectively. Audit services
principally include fees for the Company's audits and 10-Q filing reviews. Since
2003, as required by law, the choice of the Company's auditor and the audit
services to be performed by it have been approved in advance by the Company's
Audit Committee.
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PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Index to Financial Statements filed as part of this report:
Reports of Independent Registered Public Accounting Firms
- Rehmann Robson. F-1
- Ernst & Young LLP. F-2
Consolidated Balance Sheets as of December 31, 2004, and
December 31, 2003. F-3
Consolidated Statements of Operations for the years ended
December 31, 2004, December 31, 2003, and December 31, 2002. F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2004, December 31, 2003, and December 31, 2002. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, December 31, 2003, and December 31, 2002. F-6
Notes to Financial Statements. F-7
2. Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts for the three
years ended December 31, 2004. F-30
3. Exhibits.
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc. (referred to
therein under its former name PIA), as amended (incorporated
by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-80429), as filed with the Securities
and Exchange Commission ("SEC") on December 14, 1995 (the
"Form S-1")), and the Certificate of Amendment filed with the
Secretary of State of the State of Delaware on July 8, 1999
(which, among other things, changes the Company's name to SPAR
Group, Inc.) (incorporated by reference to Exhibit 3.1 to the
Company's Form 10-Q for the 3rd Quarter ended September 30,
1999).
3.2 Amended and Restated By-Laws of SPAR Group, Inc. adopted on
May 18, 2004 (incorporated by reference to the Company's
report on Form 8-K, as filed on May 27, 2004).
3.3 Amended and Restated Charter of the Audit Committee of the
Board of Directors of SPAR Group, Inc., adopted May 18, 2004
(incorporated by reference to the Company's report on Form
8-K, as filed on May 27, 2004).
3.4 Charter of the Compensation Committee of the Board of
Directors of SPAR Group, Inc. adopted on May 18, 2004
(incorporated by reference to the Company's report on Form
8-K, as filed on May 27, 2004).
3.5 Charter of the Governance Committee of the Board of Directors
of SPAR Group, Inc. adopted on May 18, 2004 (incorporated by
reference to the Company's report on Form 8-K, as filed on May
27, 2004).
3.6 SPAR Group, Inc. Statement of Policy Respecting Stockholder
Communications with Directors, adopted on May 18, 2004
(incorporated by reference to the Company's report on Form
8-K, as filed on May 27, 2004).
-38-
3.7 SPAR Group, Inc. Statement of Policy Regarding Director
Qualifications and Nominations, adopted on May 18, 2004
(incorporated by reference to the Company's report on Form
8-K, as filed on May 27, 2004).
4.1 Registration Rights Agreement entered into as of January 21,
1992, by and between RVM Holding Corporation, RVM/PIA, a
California Limited Partnership, The Riordan Foundation and
Creditanstalt-Bankverine (incorporated by reference to the
Form S-1).
10.1 2000 Stock Option Plan, as amended, (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.2 2001 Employee Stock Purchase Plan (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.3 2001 Consultant Stock Purchase Plan (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.4 Amended and Restated Field Service Agreement dated and
effective as of January 1, 2004, by and between SPAR Marketing
Services, Inc., and SPAR Marketing Force, Inc. (incorporated
by reference to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 2004, as filed on May 21,
2004).
10.5 Amended and Restated Field Management Agreement dated and
effective as of January 1, 2004, by and between SPAR
Management Services, Inc., and SPAR Marketing Force, Inc.
(incorporated by reference to the Company's quarterly report
on Form 10-Q for the quarter ended March 31, 2004, as filed on
May 21, 2004).
10.6 Amended and Restated Programming and Support Agreement dated
and effective as of January 1, 2004, by and between SPAR
InfoTech, Inc., and SPAR Marketing Force, Inc. (incorporated
by reference to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 2004, as filed on May 21,
2004).
10.7 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Marketing Services, Inc., and SPAR Trademarks,
Inc. (incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 31, 2002).
10.8 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Infotech, Inc., and SPAR Trademarks, Inc.
(incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 31, 2002).
10.9 Stock Purchase and Sale Agreement by and among Performance
Holdings, Inc. and SPAR Incentive Marketing, Inc., effective
as of June 30, 2002 (incorporated by reference to the
Company's Form 10-Q for the quarter ended June 30, 2002).
10.10 Revolving Credit, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to
the Company's Form 10-Q for the quarter ended June 30, 2002).
10.11 Term Loan, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to
the Company's Form 10-Q for the quarter ended June 30, 2002).
10.12 Promissory Note in the principal amount of $764,271.00 by
STIMULYS, Inc., in favor of SPAR Incentive Marketing, Inc.,
dated as of September 10, 2004, as filed herewith.
-39-
10.13 Payoff and Release Letter by and between STIMULYS, Inc., and
SPAR Incentive Marketing, Inc., dated as of September 10,
2004, as filed herewith.
10.14 Sales Proceeds Agreement by and between STIMULYS, Inc. and
SPAR Incentive Marketing, Inc., dated as of September 10,
2004, as filed herewith.
10.15 Third Amended and Restated Revolving Credit and Security
Agreement by and among Whitehall Business Credit Corporation
(the "Lender") with SPAR Marketing Force, Inc., SPAR Group,
Inc., SPAR, Inc., SPAR/Burgoyne Retail Services, Inc., SPAR
Incentive Marketing, Inc., SPAR Trademarks, Inc., SPAR
Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., SPAR Group International, Inc., SPAR
Technology Group, Inc., SPAR/PIA Retail Services, Inc., Retail
Resources, Inc., Pivotal Field Services Inc., PIA
Merchandising Co., Inc., Pacific Indoor Display Co. and
Pivotal Sales Company (collectively, the "Existing
Borrowers"), dated as of January 24, 2003 (incorporated by
reference to the Company's Form 10-K for the fiscal year ended
December 31, 2002).
10.16 Waiver And Amendment No. 3 To Third Amended And Restated
Revolving Credit And Security Agreement entered into as of
March 26, 2004 (incorporated by reference to the Company's
report on Form 8-K, as filed on May 26, 2004).
10.17 Joinder, Waiver And Amendment No. 4 To Third Amended And
Restated Revolving Credit And Security Agreement entered into
as of May 17, 2004 (incorporated by reference to the Company's
report on Form 8-K, as filed on May 26, 2004).
10.18 Waiver and Amendment to Third Amended and Restated Revolving
Credit and Security Agreement by and among the Lender and the
Borrowers dated as of January 2004 (incorporated by reference
to the Company's report on Form 10-K/A for the year ended
December 31, 2003, as filed on June 28, 2004).
10.19 Waiver and Amendment No. 5 to Third Amended and Restated
Revolving Credit and Security Agreement among Webster Business
Credit Corporation, SPAR Group, Inc., and certain of its
subsidiaries dated as of August 20, 2004 (incorporated by
reference to the Company's quarterly report of the quarter
ended June 30, 2004, as filed on August 23, 2004).
10.20 Waiver and Amendment No. 6 to Third Amended and Restated
Revolving Credit and Security Agreement among Webster Business
Credit Corporation, SPAR Group, Inc., and certain of its
subsidiaries dated as of November 12, 2004 (incorporated by
reference to the Company's quarterly report for the quarter
ended September 30, 2004, filed November 17, 2004).
10.21 Waiver to the Third Amended and Restated Revolving Credit and
Security Agreement among Webster Business Credit Corporation,
SPAR Group, Inc., and certain of its subsidiaries dated as of
March 31, 2004, as filed herewith.
10.22 Consent, Joinder, Release and Amendment Agreement dated as of
October 31, 2003, by and among the Lender, the Existing
Borrowers and SPAR All Store Marketing, Inc., as a Borrower
(incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 31, 2003).
10.23 Change in Control Severance Agreement between Kori Belzer and
SPAR Group, Inc., dated as of August 12, 2004 (incorporated by
reference to the Company's quarterly report of the quarter
ended June 30, 2004, as filed on August 23, 2004).
10.24 Change in Control Severance Agreement between Patricia Franco
and SPAR Group, Inc., dated as of August 12, 2004
(incorporated by reference to the Company's quarterly report
of the quarter ended June 30, 2004, as filed on August 23,
2004).
-40-
10.25 Master Lease Agreement by and between SPAR Marketing Services,
Inc. and SPAR Marketing Force, Inc. dated as of November 2004
relating to lease of handheld computer equipment, as filed
herewith.
10.26 Master Lease Agreement by and between SPAR Marketing Services,
Inc. and SPAR Canada Company dated as of January 2005 relating
to lease of handheld computer equipment, as filed herewith.
10.27 Joint Venture Agreement dated as of March 26, 2004, by and
between Solutions Integrated Marketing Services Ltd. and SPAR
Group International, Inc. as filed herewith.
10.28 Joint Venture Shareholders Agreement between Friedshelf 401
(Proprietary) Limited, SPAR Group International, Inc., Derek
O'Brien, Brian Mason, SMD Meridian CC, Meridian Sales &
Mnrechandisign (Western Cape) CC, Retail Consumer Marketing
CC, Merhold Holding Trust in respect of SGRP Meridian
(Proprietary) Limited, dated as of June 25, 2004, as filed
herewith.
10.29 Joint Venture Agreement dated as of July 21, 2003, by and
between CEO Produksiyon Tanitim ve Arastirma Hizmetleri Ltd
Sti and SPAR Group International, Inc., as filed herewith.
10.30 Joint Venture Agreement dated as of May 1, 2001, by and
between Paltac Corporation and SPAR Group, Inc., as filed
herewith.
10.31 Agreement on Amendment dated as of August 1, 2004, by and
between SPAR Group, Inc. and SPAR FM Japan, Inc., as filed
herewith.
10.32 Joint Venture Agreement dated as of January 26, 2005, by and
between Best Mark Investments Holdings Ltd and SPAR
International Ltd. as filed herewith.
10.33 Joint Venture Agreement dated as of December 14, 2004, by and
between Field Insights S.R.L. and SPAR Group International,
Inc., as filed herewith.
14.1 Code of Ethical Conduct for the Directors, Senior Executives
and Employees, of SPAR Group, Inc., dated May 1, 2004
(incorporated by reference to the Company's Form 8-K filed on
May 5, 2004).
14.2 Statement of Policy Regarding Personal Securities Transaction
in Company Stock and Non-Public Information, as amended and
restated on May 1, 2004 (incorporated by reference to the
Company's Form 8-K filed on May 5, 2004).
21.1 List of Subsidiaries.
23.1 Consent of Rehmann Robson.
23.2 Consent of Ernst & Young LLP.
31.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, and filed herewith.
31.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, and filed herewith.
32.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
-41-
32.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
(b) Reports on Form 8-K.
Form 8-K - Changes in Registrant's Certifying Accountant filed on
October 8, 2004, respecting the resignation of Ernst & Young LLP as the
Company's Independent Auditors.
Form 8-K - Results of Operations and Financial Condition filed on
November 12, 2004, attaching press release respecting financial results
for the third quarter ended September 30, 2004.
Form 8-K - Unscheduled Material Events filed on February 4, 2005
respecting, appointment of Rehmann Robson as the Company's Independent
Auditors.
-42-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to the report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SPAR Group, Inc.
By: /s/ Robert G. Brown
--------------------------------------
Robert G. Brown
President, Chief Executive Officer and
Chairman of the Board
Date: April 12, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment to the report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Robert G. Brown President, Chief Executive Officer, Director,
- ----------------------- and Chairman of the Board
Robert G. Brown
Date: April 12, 2005
/s/ William H. Bartels Vice Chairman and Director
- -----------------------
William H. Bartels
Date: April 12, 2005
/s/ Robert O. Aders Director
- -----------------------
Robert O. Aders
Date: April 12, 2005
/s/ Jack W. Partridge Director
- -----------------------
Jack W. Partridge
Date: April 12, 2005
/s/ Jerry B. Gilbert Director
- -----------------------
Jerry B. Gilbert
Date: April 12, 2005
/s/ Lorrence T. Kellar Director
- -----------------------
Lorrence T. Kellar
Date: April 12, 2005
/s/ Charles Cimitile Chief Financial Officer, Treasurer and
- ----------------------- Secretary (Principal Financial and
Charles Cimitile Accounting Officer)
Date: April 12, 2005
-43-
Report of Registered Public Accounting Firm
The Board of Directors and Stockholders
SPAR Group, Inc. and Subsidiaries
Tarrytown, New York
We have audited the consolidated balance sheet of SPAR Group, Inc. and
Subsidiaries as of December 31, 2004, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. Our
audit also included the financial statement schedule (2004 information only)
listed in the Index at Item 15(a). These consolidated financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
(2004 information only) based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of SPAR Group, Inc. and Subsidiaries as of December 31, 2004,
and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial schedule (2004
information only), when considered in relation to the consolidated financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
/s/ Rehmann Robson
Troy, Michigan
February 28, 2005
F-1
Report of Registered Public Accounting Firm
The Board of Directors and Stockholders
SPAR Group, Inc. and Subsidiaries
Tarrytown, New York
We have audited the consolidated balance sheet of SPAR Group, Inc. and
Subsidiaries, as of December 31, 2003 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 2003. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These consolidated financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SPAR
Group, Inc. and Subsidiaries at December 31, 2003, and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 2, the Company adopted Statement of Accounting Standards
No. 142 effective January 1, 2002.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 13, 2004
F-2
SPAR Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31,
--------------------------------------------
2004 2003
---------------------- --------------------
Assets
Current assets:
Cash and cash equivalents $ 887 $ 24
Accounts receivable, net 11,307 13,942
Prepaid expenses and other current assets 657 658
Deferred income taxes - 1,305
---------------------- --------------------
Total current assets 12,851 15,929
Property and equipment, net 1,536 2,099
Goodwill 798 8,749
Deferred income taxes - 434
Other assets 636 926
---------------------- --------------------
Total assets $ 15,821 $ 28,137
====================== ====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,158 $ 1,373
Accrued expenses and other current liabilities 2,391 4,081
Accrued expenses due to affiliates 987 1,091
Restructuring charges 250 685
Customer deposits 1,147 530
Lines of credit 4,956 4,084
---------------------- --------------------
Total current liabilities 11,889 11,844
Other long-term liabilities 12 270
Minority interest 206 -
---------------------- --------------------
Total liabilities 12,107 12,114
Commitments and contingencies (Note - 7)
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 3,000,000
Issued and outstanding shares - none - -
Common stock, $.01 par value:
Authorized shares - 47,000,000
Issued and outstanding shares -
18,858,972 - 2004 and 2003 189 189
Treasury stock (108) (384)
Accumulated other comprehensive loss (86) (7)
Additional paid-in capital 11,011 11,249
Accumulated (deficit) retained earnings (7,292) 4,976
---------------------- --------------------
Total stockholders' equity 3,714 16,023
---------------------- --------------------
Total liabilities and stockholders' equity $ 15,821 $ 28,137
====================== ====================
See accompanying notes.
F-3
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
------------------------------------------------------
2004 2003 2002
------------------------------------------------------
Net revenues $ 51,370 $ 64,859 $ 69,612
Cost of revenues 33,644 42,338 40,331
------------------------------------------------------
Gross profit 17,726 22,521 29,281
Selling, general and administrative expenses 20,222 20,967 18,804
Impairment charges 8,141 - -
Depreciation and amortization 1,399 1,529 1,844
------------------------------------------------------
Operating (loss) income (12,036) 25 8,633
Interest expense 220 269 363
Other (income) expense (754) 237 (26)
------------------------------------------------------
(Loss) income before provision for income taxes and (11,502) (481) 8,296
minority interest
Provision for income taxes 853 58 2,998
------------------------------------------------------
Net (loss) income before minority interest (12,355) (539) 5,298
Minority interest 87 - -
------------------------------------------------------
Net (loss) income $ (12,268) $ (539) $ 5,298
======================================================
Basic/diluted net (loss) income per common share:
Net (loss) income - basic/diluted $ (0.65) $ (0.03) $ 0.28
======================================================
Weighted average common shares - basic 18,859 18,855 18,761
======================================================
Weighted average common shares - diluted 18,859 18,855 19,148
======================================================
See accompanying notes.
F-4
SPAR Group, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(In thousands)
Common Stock
----------------------------------- Accumulated
Additional Other Total
Treasury Paid-In Earnings Comprehensive Stockholders'
Shares Amount Stock Capital Retained (Loss) Equity
------------------------------------------------------------------------------------------
Balance at January 31, 2002 18,583 $ 186 $ - $ 10,531 $ - $ - $ 10,934
- 217
Stock options exercised and employee
stock purchase plan purchases 242 2 - 388 - 390
Purchase of treasury stock - - (30) - - (30)
Net income - - - - 5,298 5,298
------------------------------------------------------------------------------------------
Balance at December 31, 2002 18,825 188 (30) 10,919 5,515 - 16,592
Stock options exercised and employee
stock purchase plan purchases 34 1 570 (86) - - 485
Issuance of stock options to non-
employees for services - - - 416 - - 416
Purchase of treasury stock - - (924) - - - (924)
Comprehensive loss:
Foreign currency translation loss (7) (7)
Net loss (539) (539)
--------------
Comprehensive loss (546)
------------------------------------------------------------------------------------------
Balance at December 31, 2003 18,859 189 (384) 11,249 4,976 (7) 16,023
Stock options exercised and employee
stock purchase plan purchases - - 276 (316) - - (40)
Issuance of stock options to non-
employees for services - - - 78 - - 78
Comprehensive loss:
Foreign currency translation loss (79) (79)
Net loss (12,268) (12,268)
--------------
Comprehensive loss (12,347)
------------------------------------------------------------------------------------------
Balance at December 31, 2004 18,859 $ 189 $ (108) $ 11,011 $ (7,292) $ (86) $ 3,714
==========================================================================================
See accompanying notes.
F-5
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
------------------------------------------------------
2004 2003 2002
------------------------------------------------------
Operating activities
Net (loss) income $ (12,268) $ (539) $ 5,298
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Impairment charges 8,141 - -
Minority interest earnings in subsidiaries (87) - -
Share of loss in joint venture - 270 -
Deferred tax asset adjustments 710 (131) 2,022
Depreciation 1,399 1,529 1,844
Issuance of stock options for service 78 416 -
Changes in operating assets and liabilities:
Accounts receivable 2,635 2,516 4,686
Prepaid expenses and other assets (126) (330) (354)
Accounts payable, accrued expenses, other current
liabilities and customer deposits 756 422 (538)
Accrued expenses due to affiliates (104) 133 347
Restructuring charges 250 (904) (593)
------------------------------------------------------
Net cash provided by operating activities 1,384 3,382 12,712
Investing activities
Purchases of property and equipment (1,260) (1,456) (1,172)
Deposit related to acquisition 350 (350) -
Acquisition of businesses (399) (1,091) -
------------------------------------------------------
Net cash used in investing activities (1,309) (2,897) (1,172)
Financing activities
Net borrowings (payments) on lines of credit 872 3,936 (11,139)
Other long-term liabilities 35 - (57)
Proceeds from employee stock purchase plan and exercised
options (40) 485 390
Payments to certain stockholders - (3,951) (704)
Purchase of treasury stock - (924) (30)
------------------------------------------------------
Net cash provided by (used in) financing activities 867 (454) (11,540)
Translation loss (79) (7) -
Net change in cash 863 24 -
Cash at beginning of period 24 - -
------------------------------------------------------
Cash at end of period $ 887 $ 24 $ -
======================================================
Supplemental disclosure of cash flows information
Interest paid $ 180 $ 241 $ 686
======================================================
Income taxes paid $ 86 $ 578 $ 200
======================================================
See accompanying notes.
F-6
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2004
1. Business and Organization
The SPAR Group, Inc., a Delaware corporation ("SGRP"), and its subsidiaries
(together with SGRP, the "SPAR Group" or the "Company"), is a supplier of
merchandising and other marketing services throughout the United States and
internationally. The Company also provides database marketing, technology
services, teleservices and marketing research.
SPAR Acquisition, Inc., and its subsidiaries (the "SPAR Companies") are the
original predecessor of the Company and were founded in 1967. On July 8, 1999,
SGRP completed a reverse merger with the SPAR Companies (the "PIA Acquisition"),
and then changed its name to SPAR Group, Inc., from PIA Merchandising Services,
Inc. (prior to such merger, "PIA"). Pursuant to the PIA Acquisition, the SPAR
Companies were deemed to have "acquired" PIA and its subsidiaries prior to the
PIA Acquisition (the "PIA Companies"), which was treated as a purchase of the
PIA Companies for accounting purposes, with the books and records of the Company
being adjusted to reflect the historical operating results of the SPAR
Companies. In 2002, the Company sold its Incentive Marketing Division, SPAR
Performance Group, Inc. ("SPGI").
The Company's continuing operations are now divided into two divisions: the
Domestic Merchandising Services Division and the International Merchandising
Services Division. The Domestic Merchandising Services Division provides
merchandising services, in-store product demonstrations, product sampling,
database marketing, technology services, teleservices and marketing research to
manufacturers and retailers in the United States. The various services are
primarily performed in mass merchandisers, drug store chains, convenience and
grocery stores. The International Merchandising Services Division, established
in July 2000, currently provides merchandising services through a wholly owned
subsidiary in Canada, through 51% owned joint venture subsidiaries in Turkey,
South Africa, India and Romania and through 50% owned joint ventures in Japan
and China. The Company continues to focus on expanding its merchandising
services business throughout the world.
Domestic Merchandising Services Division
The Company's Domestic Merchandising Services Division provides nationwide
merchandising and other marketing services primarily on behalf of consumer
product manufacturers and retailers at mass merchandisers, drug store chains and
retail grocery stores. Included in its customers are home entertainment, general
merchandise, health and beauty care, consumer goods and food products companies
in the United States.
Merchandising services primarily consist of regularly scheduled dedicated routed
services and special projects provided at the store level for a specific
retailer or single or multiple manufacturers primarily under single or
multi-year contracts or agreements. Services also include stand-alone
large-scale implementations. These services may include sales enhancing
activities such as ensuring that client products authorized for distribution are
in stock and on the shelf, adding new products that are approved for
distribution but not presently on the shelf, setting category shelves in
accordance with approved store schematics, ensuring that shelf tags are in
place, checking for the overall salability of client products and setting new
and promotional items and placing and/or removing point of purchase and other
related media advertising. Specific in-store services can be initiated by
retailers or manufacturers, and include new store openings, new product
launches, special seasonal or promotional merchandising, focused product support
and product recalls. The Company also provides in-store product demonstration
and in-store product sampling services, database marketing, technology services,
teleservices and marketing research services.
F-7
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
1. Business and Organization (continued)
International Merchandising Services Division
In July 2000, the Company established its International Merchandising Services
Division, through a wholly owned subsidiary, SPAR Group International, Inc.
("SGI"), to focus on expanding its merchandising services business worldwide as
follows:
May 2001, the Company entered Japan through a 50% owned joint venture
headquartered in Osaka.
June 2003, the Company entered Canada by acquiring an existing business through
its wholly owned Canadian subsidiary, headquartered in Toronto.
July 2003, the Company entered Turkey through a 51% owned joint venture
subsidiary headquartered in Istanbul.
April 2004, the Company entered South Africa through a 51% owned joint venture
subsidiary headquartered in Durban.
April 2004, the Company entered India through a 51% owned joint venture
subsidiary headquartered in New Delhi.
December 2004, the Company established a 51% owned joint venture subsidiary
headquartered in Bucharest, Romania.
In February 2005, the Company announced the establishment of a 50% owned joint
venture headquartered in Hong Kong, China.
Discontinued Operations - Incentive Marketing Division
In the fourth quarter of 2001, the Company made the decision to divest its
interest in SPGI.
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly-owned
subsidiary of the Company, entered into a Stock Purchase Agreement with
Performance Holdings, Inc. ("PHI"), a Delaware corporation headquartered in
Carrollton, Texas. SIM sold all of the stock of its subsidiary, SPGI, to PHI for
$6.0 million. As a condition of the sale, PHI issued and contributed 1,000,000
shares of its common stock to Performance Holdings, Inc. Employee Stock
Ownership Plan, which became the only shareholder of PHI.
The $6.0 million sales price was evidenced by two Term Loans, an Initial Term
Loan totaling $2.5 million and an Additional Term Loan totaling $3.5 million
(collectively the "Term Loans"). The Term Loans were guarantied by SPGI and
secured by pledges of all assets of PHI and SPGI. The Term Loans had interest
rates of 12% per annum through December 31, 2003. On January 1, 2004 the
interest rate changed to 8.9% per annum. Because the collection of the notes
depended on the future operations of PHI, the $6.0 million notes were fully
reserved.
Also in connection with the sale, the Company agreed to provide a discretionary
revolving line of credit to SPGI not to exceed $2.0 million (the "SPGI
Revolver") through September 30, 2005. The SPGI Revolver was secured by a pledge
of all the assets of SPGI and was guarantied by SPGI's parent, Performance
Holdings, Inc. The SPGI Revolver provided for advances in excess of the
borrowing base through September 30, 2003. As of October 1, 2003, the SPGI
Revolver was adjusted, as per the agreement, to include a borrowing base
calculation (principally 85% of "eligible" accounts receivable). In September
F-8
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
1. Business and Organization (continued)
2003, SPGI requested and the Company agreed to provide advances of up to $1.0
million in excess of the borrowing base through September 30, 2004. In December
of 2003, SPGI changed its name to STIMULYS, Inc ("STIMULYS"). On April 30, 2004,
as a result of various defaults by STIMULYS, the Company amended the
discretionary line of credit by eliminating advances in excess of STIMULYS'
borrowing base and reducing the maximum amount of the revolving line to the
greater of $1.0 million or the borrowing base. Under the SPGI Revolver terms,
STIMULYS was required to deposit all of its cash receipts to the Company's lock
box.
On September 10, 2004, in consideration for a new Promissory Note totaling
$764,271 (which represented the amount outstanding under the SPGI Revolver at
that time) and in the event of a change in control of STIMULYS, a share in the
net proceeds resulting from such change in control, the Company terminated the
SPGI Revolver and the Term Loans. SPAR also released its security interest in
any collateral previously pledged by STIMULYS. The first payment due under the
Promissory Note was received on October 29, 2004. Due to the collection risk
associated with the Promissory Note, the Company has established a reserve for
the remaining amount due, including interest of approximately $355,000 at
December 31, 2004.
As a result of the termination of the SPGI Revolver, the reserve for collection
of advances and accrued interest under the SPGI Revolver previously established
by the Company totaling approximately $984,000 was no longer required. The
release of this reserve, net of the new reserve required for the Promissory
Note, resulted in Other Income totaling approximately $640,000 for 2004.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Company consolidates its 100% owned subsidiaries. The Company also
consolidates its 51% owned joint venture subsidiaries and its 50% owned joint
ventures where the Company is the primary beneficiary because the Company
believes this presentation is fairer and more meaningful. Rule 3A-02 of
Regulation S-X, Consolidated Financial Statements of the Registrant and its
Subsidiaries, states that consolidated statements are presumed to be more
meaningful, that majority owned subsidiaries (more than 50%) generally should be
consolidated, and that circumstances may require consolidation of other
subsidiaries to achieve a fairer presentation of its financial condition and
results. In addition, the Company has determined that under Financial Accounting
Standards Board Interpretation Number 46, as revised December 2003,
Consolidation of Variable Interest Entities ("FIN 46(R)"), the Company is the
primary beneficiary of its 51% owned joint venture subsidiaries and its 50%
owned joint ventures, which accordingly requires consolidation of those entities
into the Company's financial statements. All significant intercompany accounts
and transactions have been eliminated.
In 2004, due to the amendment of a royalty agreement between the Company and its
50% owned Japanese joint venture, the Company has determined that in accordance
with FIN 46(R) it is the primary beneficiary of the Japanese joint venture, and
has consolidated the Japanese financial results for 2004 in accordance with the
provisions of FIN 46(R). The Japanese joint venture's fiscal year ended on
September 30, 2004 and accordingly its financial statements were audited as of
that date. In connection with the consolidation the Company began reporting the
Japanese joint venture's financial results as of and for the period ending
September 30, 2004. Therefore, for 2004, the Company's consolidated financial
statements only include the Japanese joint venture financial results for nine
months ended September 30, 2004. In 2004, the Japanese joint venture recorded
revenue of approximately $2.6 million, total assets of approximately $822,000,
total liabilities of approximately $1.2 million and a deficit of approximately
$445,000. In 2003 and 2002, prior
F-9
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
to the amendment of the royalty agreement, the investment in the Japanese joint
venture was accounted for using the equity method based upon the Company's 50%
ownership.
At December 31, 2004, international assets totaled $2.8 million and
international liabilities totaled $3.8 million. For 2004, international revenues
totaled $8.2 million and the Company's share of the net losses was approximately
$500,000.
Cash Equivalents
The Company considers all highly liquid short-term investments with maturities
of three months or less at the time of acquisition to be cash equivalents. Cash
equivalents are stated at a cost, which approximates fair value.
Revenue Recognition
The Company's services are provided under contracts or agreements. The Company
bills its clients based upon service fee or unit fee arrangements. Revenues
under service fee arrangements are recognized when the service is performed. The
Company's per unit fee arrangements provide for fees to be earned based on the
retail sales of a client's products to consumers. The Company recognizes per
unit fees in the period such amounts become determinable and are reported to the
Company.
Unbilled Accounts Receivable
Unbilled accounts receivable represent services performed but not billed.
Doubtful Accounts, Sales Allowances and Credit Risks
The Company continually monitors the validity of its accounts receivable based
upon current customer credit information and financial condition. Balances that
are deemed to be uncollectible after the Company has attempted reasonable
collection efforts are written off through a charge to the bad debt allowance
and a credit to accounts receivable. Accounts receivable balances are stated at
the amount that management expects to collect from the outstanding balances. The
Company provides for probable uncollectible amounts through a charge to earnings
and a credit to bad debt allowance based on management's assessment of the
current status of individual accounts. Based on management's assessment, the
Company established an allowance for doubtful accounts of $761,000 and $515,000
at December 31, 2004 and 2003, respectively. The Company also recorded a reserve
for sales allowances for potential customer credits of $448,000 at December 31,
2003. Bad debt and sales allowance expenses were $366,000, $825,000, and
$262,000 in 2004, 2003, and 2002, respectively.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated on a straight-line basis over estimated useful lives
of the related assets, which range from three to seven years. Leasehold
improvements are depreciated over the shorter of their estimated useful lives or
lease term, using the straight-line method.
F-10
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
Internal Use Software Development Costs
In accordance with SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, the Company capitalizes certain costs
associated with its internally developed software. Specifically, the Company
capitalizes the costs of materials and services incurred in developing or
obtaining internal use software. These costs include but are not limited to the
cost to purchase software, the cost to write program code, payroll, payroll
related benefits and travel expenses for those employees who are directly
involved with and who devote time to the Company's software development
projects. Capitalized software development costs are amortized over three years.
The Company capitalized $559,000, $1,004,000, and $772,000 of costs related to
software developed for internal use in 2004, 2003, and 2002, respectively.
In 2004, the Company recorded an impairment charge against capitalized software
costs due to the loss of certain clients during the year (see Note 3 -
Impairment Charges).
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that an assets's carrying amount may be higher
than its fair value. If an asset is considered to be impaired, the impairment
charge recognized is the excess of the asset's carrying value over the asset's
fair value (see Note 3 - Impairment Charges).
Fair Value of Financial Instruments
The Company's balance sheets include the following financial instruments:
accounts receivable, accounts payable and a lines of credit. The Company
considers the carrying amounts of current assets and liabilities in the
financial statements to approximate the fair value for these financial
instruments, because of the relatively short period of time between origination
of the instruments and their expected realization or payment. The carrying
amount of the lines of credit approximates fair value because the obligations
bear interest at a floating rate. The carrying amount of long-term debt to
certain stockholders approximated fair value because the then current effective
interest rates reflected the market rate for unsecured debt with similar terms
and remaining maturities.
Excess Cash
The Company's domestic cash balances are generally utilized to pay its bank line
of credit. International cash balances are maintained in liquid cash accounts
and are utilized to fund daily operations.
Major Customers
One customer accounted for 14%, 8%, and 6% of the Company's net revenues
for the years ended December 31, 2004, 2003, and 2002, respectively. This
customer also accounted for approximately 29%, 13%, and 4% of accounts
receivable at December 31, 2004, 2003, and 2002, respectively.
In addition, approximately 16%, 17%, and 24% of net revenues for the years ended
December 31, 2004, 2003, and 2002, respectively, resulted from merchandising
services performed for manufacturers and others in stores operated by Kmart.
These customers also accounted for approximately 22% of accounts receivable at
December 31, 2004. While the Company's customers and the resultant contractual
F-11
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
relationships are with various manufacturers and not Kmart, a significant
reduction of this retailer's stores or cessation of this retailer's business
would negatively impact the Company.
Another customer, a division of a major retailer, accounted for 26%, 30%, and
26% of the Company's net revenues for the years ended December 31, 2004, 2003,
and 2002, respectively. This customer also accounted for approximately 4%, 30%,
and 43% of accounts receivable at December 31, 2004, 2003, and 2002,
respectively. On August 2, 2004, this customer was sold by its parent.
As discussed above, the Company does a significant amount of business with one
customer and performs a significant amount of services in Kmart. The loss of
this customer or the loss of Kmart related business and the failure to attract
new large customers, could significantly decrease the Company's revenues and
such decreased revenues could have a material adverse effect on the Company's
business, results of operations and financial condition.
Foreign Currency Rate Fluctuations
The Company has foreign currency exposure associated with its international
wholly owned subsidiaries, 51% owned joint venture subsidiaries and 50% owned
joint ventures. In 2004, these exposures are primarily concentrated in the
Canadian dollar, South African rand and Japanese yen. At December 31, 2004,
international assets totaled $2.8 million and international liabilities totaled
$3.8 million. For 2004, international revenues totaled $8.2 million and the
Company's share of the net losses was approximately $500,000.
Interest Rate Fluctuations
At December 31, 2004 the Company's outstanding debt totaled $5.0 million, which
consisted of domestic variable-rate (6.0%) debt of $4.1 million and
international variable rate (1.4%) debt of $0.9 million. Based on 2004 average
outstanding borrowings under variable-rate debt, a one-percentage point increase
in interest rates would negatively impact annual pre-tax earnings and cash flows
by approximately $50,000.
Income Taxes
Deferred tax assets and liabilities represent the future tax return consequences
of certain timing differences that will either be taxable or deductible when the
assets and liabilities are recovered or settled. Deferred taxes are also
recognized for operating losses that are available to offset future taxable
income and tax credits that are available to offset future income taxes. In the
event the future consequences of differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities result in a net
deferred tax asset, an evaluation is required of the probability of being able
to realize the future benefits indicated by such asset. A valuation allowance is
provided when it is more likely than not that some portion or the entire
deferred tax asset will not be realized.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation, requires disclosure of the fair value method of accounting
for stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. The Company has chosen, under the provisions of SFAS No. 123, to
continue to account for employee stock-based
F-12
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
transactions under Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees.
Under the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS 148, no compensation cost has been recognized
for the stock option grants to Company employees. Compensation cost for the
Company's option grants to Company employees has been determined based on the
fair value at the grant date consistent with the provisions of SFAS No. 123, the
Company's net (loss) income and pro forma net (loss) income per share from
continuing operations would have been reduced to the adjusted amounts indicated
below (in thousands, except per share data):
Twelve Months Ended December 31,
----------------------------------------------
2004 2003 2002
----------------------------------------------
Net (loss) income, as reported $ (12,268) $ (539) $ 5,298
Stock based employee compensation expense
under the fair market value method 454 1,005 1,844
----------------------------------------------
Pro forma net (loss) income $ (12,722) $ (1,544) $ 3,454
Basic and diluted net (loss) income per share, as
reported $ (0.65) $ (0.03) $ 0.28
Basic and diluted net (loss) income per share, pro forma $ (0.67) $ (0.08) $ 0.18
The pro forma effect on net (loss) income is not representative of the pro forma
effect on net (loss) income in future years because the options vest over
several years and additional awards may be made in the future.
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0% for all years; volatility factor of expected
market price of common stock of 150%, 154%, and 172% for 2004, 2003, and 2002,
respectively; risk-free interest rate of 4.23%, 4.27%, and 4.03%; and expected
lives of six years.
Net (Loss) Income Per Share
Basic net (loss) income per share amounts are based upon the weighted average
number of common shares outstanding. Diluted net (loss) income per share amounts
are based upon the weighted average number of common and potential common shares
outstanding except for periods in which such potential common shares are
anti-dilutive. Potential common shares outstanding include stock options and are
calculated using the treasury stock method.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-13
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
Goodwill
The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, in the first quarter of 2002. Therefore,
goodwill is no longer amortized but is subject to annual impairment tests in
accordance with that Statement. At June 30, 2004, the Company performed the
required impairment test discussed in FAS 142. The Company calculated the fair
value of each business unit for which goodwill was recorded to determine if
there was an impairment. The fair value of each unit was based upon the estimate
of the discounted cash flow generated by the respective business unit. As a
result of these calculations, it was determined that there were impairments to
the goodwill associated with the PIA Acquisition on July 8, 1999 and acquisition
of the Company's Canadian subsidiary in June 2003. Therefore, the Company
recorded an impairment charge of approximately $8.4 million (see Note 3 -
Impairment Charges).
Changes to goodwill for the years ended December 31, 2004, 2003, and 2002 were
as follows:
2004 2003 2002
--------------- ---------------- ----------------
Beginning of the year $ 8,749 $ 7,858 $ 8,357
Impairment charges (8,350) - -
Changes in deferred tax assets related to use
of PIA net operating losses acquired - - (499)
Adjustment to merger related and restructure
liabilities - (89) -
Acquisitions 399 980 -
--------------- ---------------- ----------------
End of the year $ 798 $ 8,749 $ 7,858
=============== ================ ================
Translation of Foreign Currencies
The financial statements of the foreign entities consolidated into SPAR Group,
Inc. consolidated financial statements were translated into United States dollar
equivalents at exchange rates as follows: balance sheet accounts for assets and
liabilities at year-end rates and equity and the income statement accounts at
average exchange rates for the year. The resulting translation gains and losses
are reflected in accumulated other comprehensive gain or losses in the statement
of stockholders' equity. Foreign currency transaction gains and losses are
reflected in net earnings.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment,
(SFAS 123R). SFAS 123R addresses the accounting for share-based payments to
employees, including grants of employee stock options. Under the new standard,
companies will no longer be able to account for share-based compensation
transactions using the intrinsic method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees. Instead, the Company will be required
to account for such transactions using a fair-value method and recognize the
expense in the consolidated statement of income. SFAS 123R will be effective for
periods beginning after June 15, 2005 and allows, but does not require, the
Company to restate the full fiscal year of 2005 to reflect the impact of
expensing share-based payments under SFAS 123R. The Company has not yet
determined which fair-value method and transitional provision it will follow.
See Note 2 - Stock-Based Compensation for the pro forma impact on net income and
net income per share from calculating stock-based compensation costs under the
fair value alternative of SFAS
F-14
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
123. However, the calculation of compensation cost for share-based payment
transactions after the effective date of SFAS 123R may be different from the
calculation of compensation cost under SFAS 123, but such differences have not
yet been quantified.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the 2004 presentation.
3. Impairment Charges
Goodwill
During 2004, in accordance with the requirements of SFAS 142, the Company
determined that there were impairments of the goodwill amounts associated with
certain of its reporting entities.
In April 2004, the Company's largest customer announced that they signed
definitive agreements for the sale of its business to two purchasers. The sale
was completed on August 2, 2004. This customer accounted for 26%, 30%, and 26%
of the Company's net revenues for the twelve months ended December 31, 2004,
2003, and 2002, respectively and was the last remaining profitable business
related to the PIA Acquisition on July 8, 1999. At June 30, 2004, the Company
had $7.6 million of goodwill remaining that was related to the PIA Acquisition.
As a result of the loss of this major client, the Company does not expect a
positive cash flow from this business unit. Therefore, the Company has recorded
an impairment of the PIA related goodwill resulting in a non-cash charge of $7.6
million to the results of the operations for 2004.
In June 2003, the Company began its Canadian operations through the acquisition
of substantially all of the business and assets of Impulse Marketing Services,
Inc. In connection with this acquisition, the Company recorded goodwill of
$712,000. At the time of the acquisition, it was expected that the Canadian
subsidiary would be profitable. However, the Canadian subsidiary has operated at
a loss since its acquisition. As a result of the continued losses and the
failure to attract new customers the Company does not expect to receive positive
cash flow from this unit. Therefore, the Company has recorded an impairment of
the related goodwill resulting in a non-cash charge of $712,000 for 2004.
Capitalized Internal Use Software Development Costs
Historically, the Company has capitalized costs of computer software developed
for internal use. Some of the costs capitalized were associated with certain
clients to whom the Company no longer provides merchandising services. As a
result of the loss of these clients, the Company recorded an impairment charge
for the net book value of internally developed software costs of approximately
$442,000 for 2004.
Other Assets and Liabilities
Also, in connection with the PIA Acquisition, certain tax deferred assets
related to the PIA net operating loss carry forward benefits were recognized.
The Company also recorded as an impairment charge, a $750,000 valuation
allowance on these deferred tax assets.
F-15
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
3. Impairment Charges (continued)
The Company had approximately $2.1 million accrued for restructure costs and PIA
Acquisition related costs. As a result of the PIA business impairment, the
Company evaluated these accruals and determined that only $0.4 million is
required. The Company applied the $1.7 million ($1.4 million net of tax effect)
reduction in PIA related acquisition liabilities against the related goodwill
thereby reducing the impairment charges recognized for 2004.
In addition to the above, the Company has recorded an impairment of other assets
totaling $68,000 for 2004.
The above net impairment of $8.1 million is shown in the accompanying
consolidated statement of operations in 2004 as "Impairment charges".
4. Supplemental Balance Sheet Information
Accounts receivable, net, consists of the following (in thousands):
December 31,
------------------------------------
2004 2003
------------------------------------
Trade $ 8,178 $ 10,333
Unbilled 3,600 4,551
Non-trade 290 21
------------------------------------
12,068 14,905
Less:
Allowance for doubtful accounts (761) (515)
Sales allowances - (448)
------------------------------------
$ 11,307 $ 13,942
====================================
Property and equipment consists of the following (in thousands):
December 31,
------------------------------------
2004 2003
------------------------------------
Equipment $ 5,397 $ 4,784
Furniture and fixtures 547 550
Leasehold improvements 138 141
Capitalized software development costs 1,629 2,128
------------------------------------
7,711 7,603
Less accumulated depreciation and amortization 6,175 5,504
------------------------------------
$ 1,536 $ 2,099
====================================
December 31,
-------------------------------------
Prepaid expenses and other current assets (in thousands): 2004 2003
-------------------------------------
Prepaid insurance $ 214 $ 245
Tax refund due 62 244
Prepaid rents 49 70
Other 332 99
-----------------------------------
$ 657 $ 658
=====================================
F-16
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
4. Supplemental Balance Sheet Information (continued)
December 31,
-------------------------------------
Accrued expenses and other current liabilities (in thousands): 2004 2003
-------------------------------------
Merger related payables $ 450 $ 1,495
STIMULYS cash deposits - 794
SPGI Revolver - 740
Accrued medical expenses 225 100
Taxes payable 345 139
Accrued accounting and legal expenses 192 219
Accrued salaries payable 328 241
Other 851 353
-------------------------------------
$ 2,391 $ 4,081
=====================================
5. Lines of Credit
In January 2003, the Company and Webster Business Credit Corporation, then known
as Whitehall Business Credit Corporation ("Webster"), entered into the Third
Amended and Restated Revolving Credit and Security Agreement (as amended,
collectively, the "Credit Facility"). The Credit Facility provided a $15.0
million revolving credit facility that matures on January 23, 2006. The Credit
Facility allowed the Company to borrow up to $15.0 million based upon a
borrowing base formula as defined in the agreement (principally 85% of
"eligible" accounts receivable). On May 17, 2004, the Credit Facility was
amended to among other things, reduce the revolving credit facility from $15.0
million to $10.0 million, change the interest rate and increase reserves against
collateral. The amendment provides for interest to be charged at a rate based in
part upon the earnings before interest, taxes, depreciation and amortization.
The average interest rate for 2004 was 5.1%. At December 31, 2004, the Credit
Facility bears interest at Webster's "Alternative Base Rate" plus 0.75% (a total
of 6.0% per annum), or LIBOR plus 3.25%. The Credit Facility is secured by all
of the assets of the Company and its domestic subsidiaries. In connection with
the May 17, 2004, amendment, Mr. Robert Brown, a Director, the Chairman,
President and Chief Executive Officer and a major stockholder of the Company and
Mr. William Bartels, a Director, the Vice Chairman and a major stockholder of
the Company, provided personal guarantees totaling $1.0 million to Webster. On
August 20, 2004, the Credit Facility was further amended in connection with the
waiver of certain covenant violations (see below). The amendment, among other
things, reduced the revolving credit facility from $10.0 million to $7.0
million, changed the covenant compliance testing for certain covenants from
quarterly to monthly and reduced certain advance rates. On November 15, 2004,
the Credit Facility was further amended to delete any required minimum Net Worth
and minimum Fixed Charge Coverage Ratio covenant levels for the period ending
December 31, 2004. The amendments did not change the future covenant levels. The
Credit Facility also limits certain expenditures including, but not limited to,
capital expenditures and other investments.
The Company was in violation of certain monthly covenants at December 31, 2004,
and expects to be in violation at future measurement dates. Webster issued a
waiver for the December 31, 2004 covenant violations. However, there can be no
assurances that Webster will issue such waivers in the future.
Because of the requirement to maintain a lock box arrangement with Webster,
Webster's ability to invoke a subjective acceleration clause at its discretion,
and the expected future covenant violations, borrowings under the Credit
Facility are classified as current at December 31, 2004 and 2003, in accordance
with EITF 95-22. Balance Sheet Classification of Borrowings Outstanding Under
Revolving Credit Agreements That Include Both a Subjective Acceleration Clause
and a Lock-Box Agreement.
F-17
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
5. Lines of Credit (continued)
The revolving loan balances outstanding under the Credit Facility were $4.1
million at December 31, 2004, and December 31, 2003. There were letters of
credit outstanding under the Credit Facility of $0.7 million at December 31,
2004, and December 31, 2003. As of December 31, 2004, the SPAR Group had unused
availability under the Credit Facility of $1.4 million out of the remaining
maximum $2.2 million unused revolving line of credit after reducing the
borrowing base by outstanding loans and letters of credit.
In 2001, the Japanese joint venture SPAR FM Japan, Inc. entered into a revolving
line of credit arrangement with Japanese banks for 300 million yen or $2.7
million (based upon the exchange rate at September 30, 2004). At September 30.
2004, SPAR FM Japan, Inc. had 100 million yen or approximately $900,000 loan
balance outstanding under the line of credit. The line of credit is effectively
guarantied by the Company and the joint venture partner, Paltac Corporation. The
average interest rates on the borrowings under the Japanese line of credit for
its short-term bank loans at September 30, 2004 and 2003 were 1.375% and 1.375%
per annum, respectively.
6. Income Taxes
The provision for income tax expense from continuing operations is summarized as
follows (in thousands):
December 31,
----------------------------------------------------------
2004 2003 2002
----------------- ------------------ -------------------
Current $ 103 $ 189 $ 476
Deferred 750 (131) 2,522
----------------- ------------------ -------------------
$ 853 $ 58 $ 2,998
================= ================== ===================
The provision for income taxes from continuing operations is different from that
which would be obtained by applying the statutory federal income tax rate to
income before income taxes. The items causing this difference are as follows (in
thousands):
December 31,
--------------------------------------------------------
2004 2003 2002
--------------- ---------------- ----------------
(Benefit) provision for income taxes at
federal statutory rate $ (3,911) $ (77) $ 2,821
State income taxes, net of federal benefit 117 95 175
Permanent differences 1,613 41 (48)
Change in valuation allowance 3,013 - -
Other 21 (1) 50
--------------- ---------------- ----------------
Provision for income taxes $ 853 $ 58 $ 2,998
=============== ================ ================
F-18
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
6. Income Taxes (continue)
Deferred taxes consist of the following (in thousands):
December 31,
------------------------------------
2004 2003
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 5,230 $ 3,876
Restructuring 266 309
Deferred revenue 384 -
SIM reserve against loan commitment 135 304
Allowance for doubtful accounts and other receivable 288 323
Other 455 559
Valuation allowance (6,139) (3,126)
------------------------------------
Total deferred tax assets 619 2,245
Deferred tax liabilities:
Capitalized software development costs 619 506
------------------------------------
Total deferred tax liabilities 619 506
------------------------------------
Net deferred tax assets $ - $ 1,739
====================================
At December 31, 2004, the Company has net operating loss carryforwards (NOLs) of
$10.2 million, related to the PIA Acquisition available to reduce future federal
taxable income. The $10.2 million PIA related net operating loss carryforwards
begin to expire in the year 2012. Section 382 of the Internal Revenue Code
restricts the annual utilization of the NOLs incurred prior to a change in
ownership. Such a change in ownership had occurred in 1999, thereby restricting
the NOL's prior to such date available to the Company to approximately $657,500
per year. In addition, the Company has NOLs related to its current losses
totaling $4.1 million. The $4.1 million net operating loss carryfowards begin to
expire in the year 2023.
As a result of the loss of several significant clients, current year losses and
the lack of certainty of a return to profitably in the next twelve months, the
Company has established a valuation allowance equal to the total of its net
deferred tax assets of $6.1 million.
The Company does not provide for U.S. income taxes on the undistributed earnings
of its foreign subsidiaries since, at the present time, management considers
them to be permanently invested in the subsidiary.
F-19
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
7. Commitments and Contingencies
Lease Commitments
The Company leases equipment and certain office space in several cities, under
non-cancelable operating lease agreements. Certain leases require the Company to
pay its share of any increases in operating expenses and real estate taxes. Rent
expense was approximately $1.0 million, $0.9 million, and $1.0 million for 2004,
2003, and 2002, respectively. At December 31, 2004, future minimum commitments
under all non-cancelable operating lease arrangements are as follows (in
thousands):
2005 $ 776
2006 569
2007 82
2008 40
2009 1
------------------
Total $ 1,468
===================
International Commitments
The Company's international model is to partner with local merchandising
companies and combine their knowledge of the local market with the Company's
proprietary software and expertise in the merchandising business. In 2001, the
Company established its first joint venture and has continued this strategy. As
of this filing, the Company is currently operating in Japan, Canada, Turkey,
South Africa and India. The Company also announced the establishment of joint
ventures in Romania and China.
Certain of these joint ventures and joint venture subsidiaries are marginally
profitable while others are operating at a loss. None of these entities have
excess cash reserves. In the event of continued losses, the Company may be
required to provide additional cash infusions into these joint ventures and
joint venture subsidiaries.
Legal Matters
Safeway Inc. ("Safeway"), filed a Complaint against the PIA
Merchandising Co., Inc. ("PIA Co."), a wholly owned subsidiary of the Company,
and Pivotal Sales Company ("Pivotal"), a wholly owned subsidiary of PIA Co., and
SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001, and has
subsequently amended it. Safeway alleges causes of action for breach of
contract, breach of implied contract, breach of fiduciary duty, conversion,
constructive fraud, breach of trust, unjust enrichment, and accounting fraud.
Safeway has most recently alleged monetary damages in the principal sum of
$3,000,000 and probable interest of $1,000,000 and has also demanded unspecified
costs. PIA Co., Pivotal and SGRP filed cross-claims against Safeway on or about
March 11, 2002, and amended them on or about October 15, 2002, alleging causes
of action by them against Safeway for breach of contract, interference with
economic relationship, unfair trade practices and unjust enrichment and seeking
damages and injunctive relief. Mediation between the parties occurred in 2004,
but did not result in a settlement. PIA Co., Pivotal and SGRP are vigorously
defending Safeway's allegations. It is not possible at this time to determine
the likelihood of the outcome of this lawsuit. However, if Safeway prevails
respecting its allegations, and PIA Co., Pivotal and SGRP lose on their
cross-claims and counterclaims, that result could have a material adverse effect
on the Company. The Company anticipates that this matter will be resolved in
2005.
In addition to the above, the Company is a party to various other legal actions
and administrative proceedings arising in the normal course of business. In the
opinion of Company's management, disposition
F-20
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
7. Commitments and Contingencies (continued)
of these other matters are not anticipated to have a material adverse effect on
the financial position, results of operations or cash flows of the Company.
8. Treasury Stock
The Company initiated a share repurchase program in 2002, which allowed for
repurchase of up to 100,000 shares. In 2003, the Board of Directors authorized
the repurchase of an additional 122,000 shares increasing the total to 222,000
shares.
The following table summarizes the Company's treasury stock activity for the
years 2004 and 2003.
Quantity Amount
------------------------------------
Treasury Stock, January 1, 2003 9,783 $ 30,073
Purchases 211,315 923,714
Used to fulfill:
Employee Stock Purchases (9,848) (30,297)
Options Exercised (135,194) (539,383)
------------------------------------
Treasury Stock, December 31, 2003 76,056 384,107
Used to fulfill:
Options Exercised (54,148) (276,007)
------------------------------------
Treasury Stock, December 31, 2004 21,908 $ 108,100
====================================
9. Employee Benefits
Stock Purchase Plans
The Company has Employee and Consultant Stock Purchase Plans (the "SP Plans").
The SP Plans allow employees and consultants of the Company to purchase common
stock without having to pay any commissions on the purchases. On August 8, 2002,
the Company's Board of Directors approved a 15% discount for employee purchases
and recommended that its affiliates (see Note 10 - Related-Party Transactions)
approve a 15% cash bonus for affiliate consultant purchases. The maximum amount
that any employee or consultant can contribute to the SP Plans per quarter is
$6,250, and the total number of shares reserved by the Company for purchase
under the SP Plans is 500,000.
Shares purchased by employees and consultants under the SP Plans were 43,023,
22,561, and 10,104 for 2004, 2003, and 2002, respectively.
The Company's expense as a result of the 15% discount offered to employees and
consultants were approximately $10,000, $11,000, and $4,000 for 2004, 2003, and
2002, respectively.
Retirement/Pension Plans
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible
employees. Employer contributions were approximately $97,000, $87,000, and
$117,000 for 2004, 2003, and 2002, respectively.
F-21
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
9. Employee Benefits (continued)
In 2003 and 2002, certain of the Company's employees were covered by
union-sponsored, collectively bargained, multi-employer pension plans. Pension
expense related to these plans was approximately $32,000 and $60,000 for the
years ended December 31, 2003 and 2002, respectively. There were no employees
under union contract in 2004.
10. Related-Party Transactions
Mr. Robert G. Brown, a Director, the Chairman, President and Chief Executive
Officer and a major stockholder of the Company, and Mr. William H. Bartels, a
Director, the Vice Chairman and a major stockholder of the Company, are
executive officers and the sole stockholders and directors of SPAR Marketing
Services, Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI"), and SPAR
Infotech, Inc. ("SIT").
SMS and SMSI provided approximately 99% of the Company's field representatives
(through its independent contractor field force) and approximately 92% of the
Company's field management at a total cost of approximately $24.0 million, $36.0
million, and $30.5 million for 2004, 2003, and 2002, respectively. Pursuant to
the terms of the Amended and Restated Field Service Agreement dated as of
January 1, 2004, SMS provides the services of SMS's field force of approximately
6,300 independent contractors to the Company. Pursuant to the terms of the
Amended and Restated Field Management Agreement dated as of January 1, 2004,
SMSI provides approximately 50 full-time national, regional and district
managers to the Company. For those services, the Company has agreed to reimburse
SMS and SMSI for all of their costs of providing those services and to pay SMS
and SMSI each a premium equal to 4% of their respective costs, except that for
2004 SMSI agreed to concessions that reduced the premium paid by approximately
$640,000 for 2004. Total net premiums (4% of SMS and SMSI costs less 2004
concessions) paid to SMS and SMSI for services rendered were approximately
$320,000, $1,350,000, and $1,100,000 for 2004, 2003, and 2002, respectively. The
Company has been advised that Messrs. Brown and Bartels are not paid any
salaries as officers of SMS or SMSI so there were no salary reimbursements for
them included in such costs or premium. However, since SMS and SMSI are
"Subchapter S" corporations, Messrs. Brown and Bartels benefit from any income
of such companies allocated to them.
SIT provided substantially all of the Internet computer programming services to
the Company at a total cost of approximately $1,170,000, $1,610,000, and
$1,630,000 for 2004, 2003, and 2002, respectively. SIT provided approximately
34,000, 47,000, and 46,000 hours of Internet computer programming services to
the Company for 2004, 2003, and 2002, respectively. Pursuant to the Amended and
Restated Programming and Support Agreement dated as of January 1, 2004, SIT
continues to provide programming services to the Company for which the Company
has agreed to pay SIT competitive hourly wage rates for time spent on Company
matters and to reimburse the related out-of-pocket expenses of SIT and its
personnel. The average hourly billing rate was $34.71, $34.24, and $35.10 for
2004, 2003, and 2002, respectively. The Company has been advised that no hourly
charges or business expenses for Messrs. Brown and Bartels were charged to the
Company by SIT for 2004. However, since SIT is a "Subchapter S" corporation,
Messrs. Brown and Bartels benefit from any income of such company allocated to
them.
F-22
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
10. Related-Party Transactions (continued)
Through arrangements with the Company, SMS, SMSI and SIT participate in various
benefit plans, insurance policies and similar group purchases by the Company,
for which the Company charges them their allocable shares of the costs of those
group items and the actual costs of all items paid specifically for them. All
transactions between the Company and the above affiliates are paid and/or
collected by the Company in the normal course of business.
The following transactions occurred between the Company and the above affiliates
(in thousands):
Twelve Months Ended December 31,
-------------------------------------------------
2004 2003 2002
-------------------------------------------------
Services provided by affiliates:
Independent contractor services (SMS) $ 19,944 $ 28,411 $ 23,262
=================================================
Field management services (SMSI) $ 4,502 $ 7,600 $ 7,280
=================================================
Internet and software program
consulting services (SIT) $ 1,172 $ 1,607 $ 1,626
=================================================
Accrued expenses due to affiliates (in
thousands): December 31,
2004 2003
---------------------------------
SPAR Marketing Services, Inc. $ 987 $ 1,091
=================================
In addition to the above, through the services of Affinity Insurance, Ltd., the
Company purchased insurance coverage for its casualty and property insurance
risk for approximately $1.1 million for each of the three years ended December
31, 2004, 2003, and 2002. The Company's CEO and Vice Chairman own, through SMSI,
a minority (less than 5%) equity interest in Affinity.
11. Stock Options
The Company has four stock option plans: the Amended and Restated 1995 Stock
Option Plan ("1995 Plan"), the 1995 Director's Plan ("Director's Plan"), the
Special Purpose Stock Option Plan ("Special Purpose Plan"), and the 2000 Stock
Option Plan ("2000 Plan").
The 1995 Plan provided for the granting of either incentive or nonqualified
stock options to specific employees, consultants, and directors of the Company
for the purchase of up to 3,500,000 shares of the Company's common stock. The
options had a term of ten years from the date of issuance, except in the case of
incentive stock options granted to greater than 10% stockholders for which the
term was five years. The exercise price of nonqualified stock options must have
been equal to at least 85% of the fair market value of the Company's common
stock at the date of grant. Since 2000, the Company has not granted any new
options under this plan. During 2004, 1,500 options to purchase shares of the
Company's common stock were exercised and options to purchase 26,625 shares of
the Company's stock were cancelled under this plan. At December 31, 2004,
options to purchase 15,125 shares of the Company's common stock remain
outstanding under this plan. The 1995 Plan was superseded by the 2000 Plan with
respect to all new options issued.
F-23
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
11. Stock Options (continued)
The Director's Plan was a stock option plan for non-employee directors and
provided for the purchase of up to 120,000 shares of the Company's common stock.
Since 2000, the Company has not granted any new options under this plan. During
2004, no options to purchase shares of the Company's common stock were exercised
under this plan. At December 31, 2004, 20,000 options to purchase shares of the
Company's common stock remained outstanding under this plan. The Director's Plan
has been replaced by the 2000 Plan with respect to all new options issued.
On July 8, 1999, in connection with the merger, the Company established the
Special Purpose Plan of PIA Merchandising Services, Inc. to provide for the
issuance of substitute options to the holders of outstanding options granted by
SPAR Acquisition, Inc. There were 134,114 options granted at $0.01 per share.
Since July 8, 1999, the Company has not granted any new options under this plan.
During 2004, 21,000 options to purchase shares of the Company's common stock
were exercised under this plan. At December 31, 2004, options to purchase 4,750
shares of the Company's common stock remain outstanding under this plan.
On December 4, 2000, the Company adopted the 2000 Plan, as the successor to the
1995 Plan and the Director's Plan with respect to all new options issued. The
2000 Plan provides for the granting of either incentive or nonqualified stock
options to specified employees, consultants, and directors of the Company for
the purchase of up to 3,600,000 (less those options still outstanding under the
1995 Plan or exercised after December 4, 2000 under the 1995 Plan). The options
have a term of ten years, except in the case of incentive stock options granted
to greater than 10% stockholders for whom the term is five years. The exercise
price of nonqualified stock options must be equal to at least 85% of the fair
market value of the Company's common stock at the date of grant (although
typically the options are issued at 100% of the fair market value), and the
exercise price of incentive stock options must be equal to at least the fair
market value of the Company's common stock at the date of grant. During 2004,
options to purchase 476,417 shares of the Company's common stock were granted,
options to purchase 53,302 shares of the Company's common stock were exercised
and options to purchase 1,345,542 shares of the Company's stock were voluntarily
surrendered and cancelled under this plan. At December 31, 2004, options to
purchase 1,251,383 shares of the Company's common stock remain outstanding under
this plan and options to purchase 1,618,719 shares of the Company's common stock
were available for grant under this plan.
F-24
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
11. Stock Options (continued)
The following table summarizes stock option activity under the Company's plans:
Weighted Average
Shares Exercise Price
----------------------------------------
Options outstanding, December 31, 2001 2,483,727 $ 1.42
Granted 332,792 $ 2.01
Exercised (230,463) 1.23
Canceled or expired (487,875) 5.05
---------------------
Options outstanding, December 31, 2002 2,098,181 $ 1.52
Granted 401,020 $ 3.51
Exercised (143,641) 1.17
Canceled or expired (92,750) 2.38
---------------------
Options outstanding, December 31, 2003 2,262,810 $ 1.85
Granted 476,417 $ 1.47
Exercised (75,802) 0.49
Canceled or expired (1,372,167) 6.18
---------------------
Options outstanding, December 31, 2004 1,291,258 $ 1.66
Option price range at end of year $0.01 to $14.00
2004 2003 2002
--------------------------------------------------
Grant Date weighted average fair value of
options granted during the year $ 1.43 $ 2.33 $ 1.60
F-25
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
11. Stock Options (continued)
The following table summarizes information about stock options outstanding at
December 31, 2004:
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Weighted
Number Average Weighted Number
Outstanding at Remaining Average Exercisable at Weighted
Range of December 31, 2004 Contractual Life Exercise December 31, Average
Exercise Prices Price 2004 Exercise Price
-------------------- ---------------------------------------------------- --------------------------------
Less than $1.00 273,536 8.1 years $ 0.71 230,336 $ 0.70
$1.01 - $2.00 783,347 7.0 years 1.31 697,972 1.30
$2.01 - $4.00 192,875 8.4 years 2.75 61,196 2.88
Greater than $4.00 41,500 5.1 years 9.37 41,126 9.42
------------------ -----------------
Total 1,291,258 1,030,630
================== =================
In 2004, the Company recorded an expense of approximately $103,000 under the
provision of SFAS No. 123 dealing with stock option grants to non-employees for
stock option grants that were awarded to the employees of the Company's
affiliates. The Company determines the fair value of the options granted to
non-employees using the Black-Scholes valuation model and expenses that value
over the service period. Until an option is vested, the fair value of the option
continues to be updated through the vesting date. The options granted have a ten
(10) year life and vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
12. Notes Payable to Certain Stockholders
In April 2003, all previously outstanding amounts due certain stockholders under
certain notes bearing interest at 8.0% were paid in full.
13. Geographic Data
A summary of the Company's net revenue, operating (loss) income and long lived
assets by geographic area as of and for the year ended December 31, is as
follows (in thousands):
Twelve Months Ended December 31,
----------------------------------------------
2004 2003 2002
----------------------------------------------
Net revenue:
United States $ 43,163 $ 64,305 $ 69,612
International 8,207 554 -
----------------------------------------------
Total net revenue $ 51,370 $ 64,859 $ 69,612
==============================================
F-26
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
13. Geographic Data (continued)
Twelve Months Ended December 31,
----------------------------------------------
2004 2003 2002
----------------------------------------------
Operating (loss) income:
United States $ (10,559) $ 893 $ 9,100
International (1,477) (868) (467)
----------------------------------------------
Total operating (loss) income $ (12,036) $ 25 $ 8,633
==============================================
December 31,
-------------------------------------
Long lived assets: 2004 2003
-------------------------------------
United States $ 2,484 $ 11,632
International 486 576
-------------------------------------
Total long lived assets $ 2,970 $ 12,208
=====================================
International revenues disclosed above were based upon revenues reported by the
Company's foreign subsidiaries and joint ventures. No one international
geographic market is greater than 10% of consolidated net revenue for the twelve
months ended December 31, 2004.
14. Restructuring Charges
In 1999, in connection with the PIA Acquisition, the Company's Board of
Directors approved a plan to restructure the operations of the PIA Companies.
Restructuring costs were composed of committed costs required to integrate the
SPAR Companies' and the PIA Companies' field organizations and the consolidation
of administrative functions to achieve beneficial synergies and costs savings.
At June 30, 2004, the Company evaluated its restructuring reserves and
determined that certain restructuring reserves were no longer necessary (see
Note 3 - Impairment Charges).
In July 2004, as a result of the loss of several significant customers and the
pending sale of the Company's largest customer, the Company entered into a plan
to restructure and reduce its field force, as well as, its selling, general and
administrative cost structure to reflect its lower revenue base. These
reductions consist of personnel reductions, personnel related expenses and
office closings. As a result of the July restructuring, the Company expensed
approximately $480,000 in the quarter ending September 30, 2004, approximately
$230,000 for severance benefits and approximately $250,000 for office leases
that the Company ceased using. At December 31, 2004, the Company had
approximately $250,000 reserved for future restructure payments that are
expected to be paid in 2005. The Company records restructure expenses in the
selling, general and administrative section of its consolidated operating
statements.
F-27
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
14. Restructuring Charges (continued)
The following table displays a roll forward of the liabilities for restructuring
charges from January 1, 2001 to December 31, 2004 (in thousands):
Equipment Office
Employee Lease Lease
Separation Settlements Settlements Total
--------------- ---------------- ---------------- --------------
January 1, 2001 balance $ 487 $ 2,770 $ 544 $ 3,801
Adjustments in restructuring charges (132) - - (132)
2001 payments (355) (1,008) (124) (1,487)
--------------- ---------------- ---------------- --------------
December 31, 2001 balance $ - $ 1,762 $ 420 $ 2,182
2002 payments - (593) - (593)
--------------- ---------------- ---------------- --------------
December 31, 2002 balance $ - $ 1,169 $ 420 $ 1,589
Adjustments in restructuring charges - 98 (185) (87)
2003 payments (817) (817)
--------------- ---------------- ---------------- --------------
December 31, 2003, balance $ - $ 450 $ 235 $ 685
Impairment charge (see Note 3 - Impairment
Charges) - (450) (235) (685)
2004 restructure plan 230 - 250 480
2004 payments (230) - - (230)
--------------- ---------------- ---------------- --------------
December 31, 2004, balance $ - $ - $ 250 $ 250
=============== ================ ================ ==============
15. Net (Loss) Income Per Share
The following table sets forth the computations of basic and diluted net (loss)
income per share (in thousands, except per share data):
Twelve Months Ended December 31,
--------------------------------------------------
2004 2003 2002
--------------------------------------------------
Numerator:
Net (loss) income $ (12,268) $ (539) $ 5,298
Denominator:
Shares used in basic net (loss) income per share
calculation 18,859 18,855 18,761
Effect of diluted securities:
Employee stock options - - 387
--------------------------------------------------
Shares used in diluted net (loss) income per
share calculations 18,859 18,855 19,148
==================================================
Basic and diluted net (loss) income per common
share: $ (0.65) $ (0.03) $ 0.28
The computation of dilutive loss per share excluded anti-dilutive stock options
to purchase approximately 430,000 and 657,000 shares as of December 31, 2004 and
2003, respectively.
F-28
16. Quarterly Financial Data (Unaudited)
Quarterly data for 2004 and 2003 was as follows (in thousands, except earnings
per share data):
Quarter
-------------------------------------------------------------
First Second Third Fourth
-------------------------------------------------------------
Year Ended December 31, 2004:
Net revenues $ 12,803 $ 11,932 $ 10,683 $ 15,952
Gross profit 4,109 3,115 3,720 6,782
-------------------------------------------------------------
Net (loss) income $ (790) $ (12,177) $ 210 $ 489
=============================================================
Basic/diluted net (loss) income per
common share $ (0.04) $ (0.65) $ 0.01 $ 0.03
=============================================================
Year Ended December 31, 2003:
Net revenues $ 18,738 $17,351 $ 16,615 $ 12,155
Gross profit 7,487 6,205 5,235 3,594
-------------------------------------------------------------
Net income (loss) $ 1,278 $ 608 $ (345) $ (2,080)
=============================================================
Basic/diluted net income (loss) per
common share $ 0.07 $ 0.03 $ (0.02) $ (0.11)
=============================================================
2004
The lost business and subsequent impairment charges were the primary factors for
the losses incurred in the first two quarters of 2004. However, primarily as a
result of the restructure plan initiated in the third quarter, the Company was
profitable in the second half of 2004.
2003
In the fourth quarter 2003, the Company experienced certain charges to revenue
and cost of sales that did not occur in 2004. These charges accounted for
approximately 50% of the loss in 2003 fourth quarter. The Company also
experienced lower revenues from per unit fee contracts in the fourth quarter
resulting from decreased retail sales of some of the Company's larger clients'
products, as well as the loss of a particular client earlier in the year.
F-29
SPAR Group, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(In thousands)
Balance at Charged to
Beginning of Costs and Balance at End
Period Expenses Deductions of Period
-----------------------------------------------------------------
Year ended December 31, 2004:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 515 $ 366 $ 120 (1) $ 761
Sales allowances $ 448 $ - $ 448 $ -
Year ended December 31, 2003:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 301 $ 377 $ 163 (1) $ 515
Sales allowances $ - $ 448 $ - $ 448
Year ended December 31, 2002:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 325 $ 262 $ 286 (1) $ 301
(1) Uncollectible accounts written off, net of recoveries
F-30
PROMISSORY NOTE
New York, New York
U.S.$764,271.00 (as of) September 10, 2004
FOR VALUE RECEIVED, the undersigned, STIMULYS, INC. (f/k/a SPAR
Performance Group, Inc.), a corporation organized under the laws of the State of
Delaware and currently having an address at 2245 Keller Way, Carrollton, Texas
75006 (the "Borrower"), hereby promises to pay to the order of SPAR INCENTIVE
MARKETING, INC. (or the then current endorsee and holder(s) of this promissory
note, as applicable, the "Lender"), at its office at 580 White Plains Road,
Tarrytown, New York 10591, or at such other place as may be designated from time
to time in writing by the Lender, the principal sum of SEVEN HUNDRED SIXTY FOUR
THOUSAND TWO HUNDRED SEVENTY ONE U.S. DOLLARS (U.S.$764,271.00), or such other
amount as may be advanced and outstanding hereunder, together with interest, all
as provided in this promissory note (as the same may be supplemented, renewed,
extended, modified, amended, restated or replaced from time to time in the
manner provided herein, this "Note").
Section 1. Certain Defined Terms. Capitalized terms used and not
otherwise defined in this Note shall have the meanings respectively assigned to
them in the relevant Loan Instrument (as hereinafter defined). Definitions shall
be applicable equally to the singular and plural forms of the terms defined,
each use of a neuter, masculine, feminine or plural pronoun shall be deemed to
refer to the form of pronoun appropriate to the circumstance, and each other
reference to or by gender shall include reference to each other or neuter gender
appropriate to the circumstance, in each case as the context may permit or
require. The following capitalized terms and non-capitalized words and phrases
shall have the meanings respectively assigned to them: "Bankruptcy Proceeding"
shall mean the filing or submission of any petition or other document for
relief, bankruptcy, insolvency, receivership or other remedy, or the existence
of any case, action, suit, or proceeding, whether voluntary or involuntary,
under the United States Bankruptcy Code, or any other present or future
applicable law respecting bankruptcy, reorganization, insolvency, readjustment
of debts, relief of debtors, dissolution or liquidation, any corresponding
applicable law of any state, province or foreign jurisdiction, or any succeeding
applicable law, and any rules and regulations promulgated thereunder, in each
case as the same may have been and hereafter may be adopted, supplemented,
modified, amended, restated or replaced from time to time. "Business Day" shall
mean any day during which the Lender is open for business in New York, New York,
other than any Saturday, Sunday or other applicable legal holiday. "Collateral"
shall mean any asset or property of any kind securing all or any part of
Obligations or any Surety's Obligations, whether directly or indirectly, whether
now existing or hereafter acquired or created, whether granted by the Borrower,
any Surety or any other person (individually, jointly, severally or otherwise),
and whether or not disclosed to the Borrower or any Surety, if any. "Default"
shall mean any event that, with the giving or receipt of notice, the acquisition
of knowledge or the passage of time (or any combination thereof), would
constitute an Event of Default. "Event of Default" shall have the meaning
assigned to it in Section 12 hereof. "Guarantor" and "Guarantors" shall
respectively mean any one or more of THOMAS F. HUNTER, an individual currently
residing in the State of Texas, and JOHN HARPER HAWKINS III, an individual
currently residing in the State of Texas. "Guaranty" shall mean the Guaranty
Agreement among the Guarantors and the Lender dated as of August 30, 2004, as
the same may be supplemented, renewed, extended, modified, amended, restated or
replaced from time to time in the manner provided therein. "Loan" and "Loans"
shall respectively mean any or more of the principal amounts outstanding from
time to time (including future advances) respecting any and all of the loans and
other advances made and amounts paid by the Lender from time to time to or on
behalf or for the benefit of the Borrower, or otherwise owed from time to time
to the Lender by the Borrower, under or pursuant to this Note or any other Loan
Instrument, in each case (i) including, without limitation, those so made, paid
or outstanding during the pendency of any Bankruptcy Proceeding, and (ii)
whether requested, received, used or repayable by the Borrower individually,
jointly, severally or otherwise. "Loan Instrument" and "Loan Instruments" shall
respectively mean any one or more of this Note, any letter of credit
application, guaranty, security agreement, hypothecation, assignment, mortgage
or other instrument, agreement or document with or issued or given by the
Borrower or any Surety creating, evidencing, governing, supporting, securing,
perfecting, recognizing, subordinating or respecting (in whole or in part) any
of the Obligations or Surety's Obligations, and all waivers, consents,
agreements, reports, statements, certificates, schedules and other documents
executed by the requisite person(s) pursuant to or in connection with any of the
foregoing and accepted or delivered by the Lender, in each case as each may have
been and hereafter may be executed, supplemented, renewed, extended, modified,
amended, restated or replaced from time to time in the manner provided therein,
whether before, as of or after the date hereof. "Material Adverse Effect" shall
mean any material and adverse effect, whether individually or in the aggregate,
upon (a) the assets, business, cash flow, expenses, liabilities, operations,
properties, prospects, reputation, taxation or condition (financial or
otherwise) of the Borrower, (b) the ability of the Borrower to pay or otherwise
satisfy (as and when due) any of the Obligations, or (c) any part of the
Collateral or its value or the validity, enforceability, perfection or priority
of any security interest of the Lender in any Collateral.
"Obligations" shall mean any and all (i) Loans (including future advances), and
(ii) other amounts to be paid and all other obligations to be performed or
otherwise satisfied by the Borrower under this Note or any other Loan Instrument
(whether individually, jointly, severally or otherwise); in each case including,
without limitation, (A) those so made, paid or outstanding, accrued, accruing or
otherwise arising or applicable under any Loan Instrument during the pendency of
any Bankruptcy Proceeding, irrespective of whether or to what extent such
amounts accrue or are allowed or allowable as claims in any such proceeding, (B)
whether requested, received, used, owed or repayable by the Borrower
individually, jointly, severally or otherwise, and (C) all accrued and unpaid
interest thereon (including, without limitation, any and all interest and other
amounts accrued, accruing or otherwise arising or applicable under any Loan
Instrument during the pendency of any Bankruptcy Proceeding, irrespective of
whether or to what extent such interest, fees and other amounts accrue or are
allowed or allowable as claims in any such proceeding). "Surety" and "Sureties"
shall respectively mean any one or more of: the Guarantors; and any other
co-obligor, indemnitor, guarantor, pledgor or surety of, or any other person
providing any Credit Support for, any of the Obligations or any Surety's
Obligations; in each case whether or not disclosed to the Borrower or any other
Surety. "Surety's Adverse Effect" shall mean any material and adverse effect,
whether individually or in the aggregate, upon (a) the assets, business, cash
flow, expenses, income, liabilities, operations, properties, prospects,
reputation or condition, financial or otherwise, of any Surety, (b) the ability
of any Surety to pay or otherwise satisfy (as and when due) any of its
obligations under any of the Loan Instruments, or (c) any collateral provided by
any Surety or its value or the validity, enforceability, perfection or priority
of any security interest of the Lender therein. "Surety's Obligations" shall
mean any and all of: the "Guarantors' Obligations" under (and as defined in) the
Guaranty; and the other Credit Support from, and any and all other obligations
of, any Surety under any Loan Instrument; in each case whether or not disclosed
to the Borrower or any other Surety.
Section 2. Loans and Obligations. (a) The Borrower represents, warrants
and acknowledges to and covenants and agrees with the Lender that: (i) pursuant
to its Revolving Credit, Guaranty and Security Agreement with the Lender dated
as of June 30, 2002, and the Revolving Promissory Note issued pursuant thereto
(as the same may have been and hereafter may be supplemented, modified, amended,
restated or replaced from time to time in the manner provided therein, the
"Revolving Documents"), the Lender has made loans on a revolving basis to the
Borrowers that were outstanding as of the date hereof in the aggregate principal
amount of $694,271.00 (the "Existing Revolving Loans"), and the Lender has
caused to be issued a Letter of Credit in the face amount of $70,000.00 for the
benefit of the Borrower (the "Existing Letter of Credit"); (ii) the Revolving
Documents and the Existing Revolving Loans, as well as the Borrower's obligation
to immediately and fully reimburse the Lender for any drawing under the Existing
Letter of Credit (the "Existing Reimbursement Obligations"), were not subject as
of the date of this Note to any defense, counterclaim, setoff, right of
recoupment, abatement, reduction or other claim or determination of the
Borrower; (iii) the Borrower has issued this Note in order to fully pay and
satisfy the Existing Revolving Loans and to amend, restate and replace the
Existing Reimbursement Obligations as provided in subsection (b) of this
Section; (iv) the Lender shall be deemed to have advanced to itself (at the
request and for the benefit of the Borrower) on the date hereof the full amount
of the Existing Revolving Loans in order to fully pay and satisfy the
outstanding principal balance thereof; (v) as a result, the principal balance of
the Loans and the Letter of Credit outstanding on the date hereof under and
evidenced by this Note is and shall be equal to $764,271.00 (and is subject to
increase as provided in subsection (b), below); (v) the Loans and other
Obligations of the Borrower are not subject as of the date of this Note to any
defense, counterclaim, setoff, right of recoupment, abatement, reduction or
other claim or determination, (vi) the Note and Guaranty shall continue in full
force and effect after the date hereof; (vii) all remaining availability under
the Revolving Documents has been terminated; and (viii) except for the deemed
advance described above and in subsection (b), below, no Loan advances are
available to the Borrower under this Note.
(b) The Borrower shall reimburse the Lender on demand for any and all
advances made by the issuer thereof under the Existing Letter of Credit, each
such advance shall be deemed to be an advance of Loan principal hereunder and
part of the "Loans" and "Obligations" evidenced hereby. Such reimbursement
obligations shall be deemed to have continued, amended, restated and completely
replaced the Existing Reimbursement Obligations, but shall not be deemed to have
been a payment or satisfaction thereof.
(c) This Note evidences any and all amounts outstanding from time to
time (including future advances) in respect of any and all loans and other
advances made and amounts paid by the Lender in its discretion from time to time
to or on behalf or for the benefit of the Borrower, or otherwise now or from
time to time hereafter owed to the Lender by the Borrower, under or pursuant to
this Note (each of which is a Loan hereunder), in each case (i) including,
without limitation, those so made, paid or outstanding during the pendency of
any Bankruptcy Proceeding, (ii) whether requested, received, used or repayable
by the Borrower individually, jointly, severally or otherwise, and (iii)
together with all accrued and unpaid interest thereon (including, without
limitation, any and all interest and other amounts accrued, accruing or
otherwise arising or applicable under any Loan Instrument during the pendency of
any Bankruptcy Proceeding, irrespective of
whether or to what extent such interest, fees and other amounts accrue or are
allowed or allowable as claims in any such proceeding).
Section 3. Voluntary and Mandatory Payments. (a) The Borrower shall
repay the entire principal balance then outstanding under the Loans and all of
the other monetary Obligations then outstanding in full on the first to occur
(the "Maturity Date") of: (a) twenty Business Days from the date of this Note;
or (b) the acceleration of the Obligations as contemplated by this Note, any
other Loan Instrument or applicable law. The Borrower may voluntarily elect to
prepay the Loans in full at any time, or in part from time to time, in each case
without any premium or penalty. Nothing contained in this Note or any other Loan
Instrument shall be construed as a waiver or modification of any term or
provision of this Note or any other Loan Instrument respecting the payment of
any expense, indemnity or reimbursement on demand.
(b) Notwithstanding anything in this Note to the contrary, the parties
agree: (i) $70,000 of the amount of this Note represents the $70,000 letter of
credit (the "LOC") issued by Webster Bank to Airline Reporting Corporation
(ARC), (ii) unless it has been drawn upon, this amount is not due and payable
prior to or on the Maturity Date of this Note, (iii) the LOC will be returned
(undrawn upon) to the Lender and Webster Bank for cancellation by no later than
nineteen business days from the date of this Note (the "LOC Surrender Date"),
(iv) if the LOC is so returned by the LOC Surrender Date, this $70,000 amount
will be considered paid in full, (v) no interest or fee will will accrue and be
payable for this LOC at any time prior to the first to occur of any drawing on
the LOC and the LOC Surrender Date, (vi) if any drawing shall be made on the
LOC, the amount of such drawing shall be deemed a funded Loan under this Note
and shall be due and payable on the Maturity Date, (vii) if the LOC has not been
returned to the Lender and Webster Bank by the LOC Surrender Date, the full
undrawn LOC amount shall be deemed a funded Loan under this Note and shall be
due and payable on the Maturity Date, and (viii) any such funded Loan shall bear
interest as provided herein from and after the date deemed funded.
Section 4. Interest; Default Interest. (a) Except as otherwise provided
in this Section, the Loans shall bear interest on the unpaid principal balance
of those Loans outstanding from time to time, from and including the date hereof
through and including the date such principal balance of such Loans is repaid in
full (including, without limitation, any and all interest, fees and other
amounts accrued, accruing or otherwise arising or applicable during the pendency
of any Bankruptcy Proceeding, irrespective of whether such interest, fees and
other amounts are allowed or allowable as claims in any such proceeding), at the
rate of 8.935% per annum. Interest on the Loans shall be computed on the basis
of the actual number of days elapsed and a year of 360 days and shall be payable
by the Borrower in arrears: (i) in full on the Maturity Date; and (ii) on demand
after the Maturity Date.
(b) Any payment of principal, interest or other amount that is not paid
when due under this Note or any other Loan Instrument, and all of the Loans
after notice from the Lender during the continuance of any Default or Event of
Default under this Note or any other Loan Instrument, shall, to the extent
permitted by applicable law, bear interest (computed on the basis of the actual
number of days elapsed and a year of 360 days) until repaid in full at an annual
rate equal to 18% per annum, which interest rate shall be payable by the
Borrower with respect to such amount(s) instead of the rate (if any) established
by this Section with respect thereto, and which interest amount(s) shall be
payable upon demand; in each case (1) subject, however, to the maximum rate
permitted by Applicable Law as provided in Section 6 hereof, and (2) including,
without limitation, any and all interest, fees and other amounts accrued,
accruing or otherwise arising or applicable during the pendency of any
Bankruptcy Proceeding, irrespective of whether such interest, fees and other
amounts are allowed or allowable as claims in any such proceeding.
Section 5. Maximum Interest Rate. It is the intention of the Borrower
and the Lender that the interest (as defined under applicable law) that may be
charged to, collected from or received from the Borrower under this Note shall
not exceed the maximum rate permissible under applicable law. Accordingly,
anything in this Note to the contrary notwithstanding, in the event any interest
(as so defined) is charged to, collected from or received from the Borrower
under this Note in excess of such maximum lawful rate, then the excess of such
payment over that maximum rate shall be applied to the reduction of the
outstanding principal balance of the Loans under this Note and the other
outstanding Obligations (without any prepayment premium or penalty), and any
portion of such excess payment remaining after payment and satisfaction of the
Obligations in full shall be returned by the Lender to the Borrower.
Section 6. Waiver of Presentment, Etc. Presentment for payment, notice
of dishonor, protest and notice of protest are hereby each absolutely,
unconditionally, irrevocably and expressly waived forever by the Borrower.
Section 7. Payments and Applications. All payments of principal,
interest, fees and other amounts due the Lender pursuant to this Note or any
other Loan Instrument shall be made in U.S. Dollars in immediately available
funds by 2:00 P.M. (New York City time) on the date payment is due to the Lender
at its offices at SPAR Incentive Marketing, Inc., 580 White Plains Road,
Tarrytown, New York 10591, or as otherwise instructed by the Lender. Should any
payment become due and payable on other than a Business Day, the maturity
thereof shall be extended to the next succeeding Business Day, and, in the case
of any payment of principal, interest shall be payable thereon at the rate per
annum specified in this Note during such extension. The Borrower hereby
authorizes the Lender at any time and from time to time (in the discretion of
the Lender) to deduct from any account of the Borrower with the Lender, or to
direct any affiliate, custodian or designee of the Lender holding any account of
the Borrower at the direction or for the benefit of the Lender to deduct from
such account, all or any part of any amount (whether principal, interest or
otherwise) that has become due and payable under this Note or any other Loan
Instrument, all without any notice to or further consent from the Borrower. In
debiting any such account, the Obligations shall be deemed to have been paid or
repaid only to the extent of the funds actually available in and debited from
such account notwithstanding any internal procedure of the debiting person to
the contrary. Except as otherwise provided in this Note or any other Loan
Instrument, any funds received by the Lender from or on behalf of the Borrower
(including the net proceeds from any collateral) may be applied by the Lender to
the following items in such order and manner as may be determined by the Lender
in its sole and absolute discretion to the extent permitted by applicable law:
(i) the payment of accrued and unpaid interest on the Loans and any breakage or
other amounts (if any) required by this Note; (ii) the payment of due and unpaid
principal on the Loans; (iii) the payment to or reimbursement of the Lender for
any fees and expenses for which it is entitled to be paid or reimbursed pursuant
to any of the provisions of this Note or any other Loan Instrument; (iv) the
establishment or maintenance of any cash collateral required or permitted under
this Note or any other Loan Instrument; and (v) the payment in full of all other
Obligations.
Section 8. Certain Representations Respecting the Borrower. The
Borrower represents and warrants to the Lender as follows in each subsection of
this Section, as of the date hereof and as of the date of each Loan or other
advance or any readvance, renewal or extension thereof: (a) the full, complete
and correct legal name of the Borrower is set forth in the first paragraph of
this Note and on the signature page hereto, and except as otherwise disclosed to
the Lender in writing, has never been changed and is and has been the only name
ever used by the Borrower; (b) the Borrower is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware,
maintains its chief executive office at the address set forth for it on the
signature page, below, is duly qualified and in good standing to do business in
each such location, and except as otherwise disclosed to the Lender in writing
has not had its organizational state or chief executive office location anywhere
else within the past six years; (c) the Organizational Documents of the Borrower
have all been duly adopted, executed and filed to the extent required by
applicable law, and the Borrower has the legal capacity, power, authority and
unrestricted right to execute and deliver this Note and each of the other Loan
Instruments to which the Borrower is or will be a party and to perform all of
the Borrower's obligations hereunder and thereunder; (d) the execution and
delivery by the Borrower of this Note and each of the other Loan Instruments to
which the Borrower is or will be a party and the performance by the Borrower of
all of the obligations of the Borrower hereunder and thereunder (i) have been
duly authorized by all requisite action on the part of the Borrower and all
requisite action on the part of each direct or indirect general partner,
manager, trustee or similar principal of such Borrower that is not a natural
person, as applicable, (ii) will not violate or be in conflict with any term or
provision of (A) any applicable law (including, without limitation, any
applicable usury or similar law), (B) any judgment, order, writ, injunction,
decree or consent of any court or other judicial authority applicable to the
Borrower or any material part of the Borrower's assets and properties, or (C)
any Organizational Document of the Borrower or of any direct or indirect general
partner, manager, trustee or similar principal of such Borrower that is not a
natural person, as applicable, (iii) will not violate, be in conflict with or
constitute a default (with or without the giving or receipt of notice, the
acquisition of knowledge or the passage of time or any combination thereof)
under any term or provision of any of the Material Documents, and (iv) except as
specifically contemplated by any Loan Instrument, will not result in the
creation or imposition of any security interest, lien, encumbrance or other
adverse claim of any nature upon any of its assets and properties; (e) no
consent, approval or authorization of, or registration, declaration or filing
with, any governmental authority or other person (whether under any Material
Document or otherwise) is required as a condition precedent, concurrent or
subsequent to or in connection with the due and valid execution, delivery and
performance by the Borrower of this Note or any other Loan Instrument to which
the Borrower is or will be a party or the legality, validity, binding effect or
enforceability of any of the terms and provisions of this Note and the other
Loan Instruments; (f) the Borrower is not regulated by or otherwise subject to
any applicable law that directly or indirectly limits or otherwise restricts or
governs its ability to incur, continue or repay indebtedness or provide any
Credit Support or to encumber any of its assets and properties as security for
the indebtedness of itself or any other person; (g) this Note is, and each of
the other Loan Instruments to which the Borrower is or will be a party when
executed and delivered will be, a legal, valid and binding obligation of the
Borrower, enforceable against the Borrower in accordance with their respective
terms and provisions; (h) there is no action, suit, investigation or proceeding
(whether or not purportedly on behalf of the Borrower, any Surety, any of their
respective
principals, executives or affiliates or any issuer or holder of any Collateral)
pending or (to the best knowledge of the Borrower) threatened or contemplated at
law, in equity, in arbitration or by or before any other governmental authority
involving or affecting (A) the Borrower or, to the best knowledge of the
Borrower, any Surety, any of their respective principals, executives or
affiliates or any issuer or holder of any Collateral that, if adversely
determined, would be reasonably likely to have a Material Adverse Effect or
Surety's Adverse Effect, individually or in the aggregate with other events, (B)
any alleged criminal act or activity (other than a traffic misdemeanor or lesser
traffic violation) on the part of the Borrower or, to the best knowledge of the
Borrower, any Surety or any of their respective principals, executives or
affiliates, (C) any part of the Obligations, (D) any Collateral granted by the
Borrower or (to the knowledge of the Borrower) any Surety, or (E) any of the
transactions contemplated in this Note or any other Loan Instrument; (i) the
financial statements and reports and any related notes and schedules respecting
the Borrower delivered to the Lender prior to the date hereof, as well as those
delivered after the date hereof (whenever delivered), if any, (i) were prepared
in accordance with generally accepted accounting principles consistently applied
throughout the period covered thereby, and (ii) are complete, accurate and a
fair presentation of the Borrower's financial condition as of the date thereof
and the Borrower's results from operations and income for the period covered
thereby (subject in the case of interim statements to normal year-end audit
adjustments), and since date of the latest financials preceding the date hereof,
no event or events have occurred that individually or in the aggregate has had,
will have or could have a Material Adverse Effect or Surety's Adverse Effect;
(j) after giving effect to the Loans and the other direct and indirect
liabilities of the Borrower arising under this Note and the other Loan
Instruments, whether absolute or contingent (treating all Credit Support and all
unused availability under lines of credit, commitments and other indebtedness as
fully funded indebtedness in the maximum amount thereof), the Borrower (A) is
solvent (i.e., the aggregate fair value of its assets exceeds the sum of its
liabilities), (B) has adequate working capital, and (C) is able to pay its debts
as they mature; (k) the Borrower has never been the subject of any Bankruptcy
Proceeding, and the Borrower is not currently taking or considering or planning
to take, and the Borrower has never taken or considered or planned to take, any
action to initiate or participate in any Bankruptcy Proceeding or any of the
other actions specified in subsection (e) or (f) of the "Events of Default"
Section of any non-demand Note, and to the knowledge of the Borrower no other
person is currently considering or planning, or has ever considered or planned,
to take any of those actions; (l) the Loans have been requested and will be or
have been used by the Borrower or any Surety for business purposes and not for
consumer purposes, and no part of the proceeds of the Loans or other credit from
the Lender has been or will be used at any time in any way or for any purpose
that violates or is inconsistent with any applicable Margin Stock Regulations;
(m) the Borrower and the Sureties (i) are engaged as an integrated group in the
business of incentive promotions and travel services, selling or leasing goods
and providing services in connection therewith, and providing to each other the
required services and facilities for those integrated operations, (ii) are
seeking the Loans and other credit for the purpose of funding those integrated
operations and certain other approved working capital requirements of the
Borrower and the Sureties, and (iii) each expect to derive financial and other
benefit, directly or indirectly, in return for undertaking their respective
obligations under this Note and the other Loan Instruments, both individually
and as a member of the integrated group; and (n) no representation or warranty
of the Borrower made or contained in this Note or any other Loan Instrument
(whether with respect to the Borrower, any Surety or otherwise) and no report,
statement, certificate, schedule or other document or information furnished or
to be furnished by or on behalf of the Borrower or any Surety in connection with
the transactions contemplated by this Note and the other Loan Instruments
(whether with respect to the Borrower, any Surety or otherwise) contains or will
contain a misstatement of a material fact or omits or will omit to state a
material fact required to be stated therein in order to make it, in the light of
the circumstances under which made, not misleading.
Section 9. Certain Covenants of the Borrower. The Borrower covenants
and agrees with the Lender that it will comply in all respects on a timely basis
(except as otherwise expressly provided) and at its own expense with each, and
will not cause, suffer or permit any violation of any, of the terms and
provisions of this Section, from the date hereof and until the Obligations have
been fully paid and satisfied and this Note shall have no further force or
effect, unless the Lender (in its sole and absolute discretion) shall consent
otherwise in writing:
(a) The Borrower shall give, or cause to be given, immediate written
notice to the Lender of: (i) any change in the name (whether change in legal
name, use of other name or otherwise), name(s) of controlling equity owner(s),
the state or other jurisdiction of incorporation or other organization or the
location of the chief executive office, of the Borrower, as applicable , or, to
the best knowledge of the Borrower, the name (whether change in legal name, use
of other name or otherwise) name(s) of controlling equity owner(s), the state or
other jurisdiction of incorporation or other organization or the location of the
chief executive office of any Surety or any issuer or holder of any Collateral;
(ii) the institution or threat of, or any adverse determination or change in,
any action, suit, investigation or proceeding (whether or not purportedly on
behalf of the Borrower, any Surety, any of their respective principals,
executives or
affiliates or any issuer or holder of any Collateral) at law, in equity, in
arbitration or by or before any other governmental authority involving or
affecting (A) the Borrower or, to the best knowledge of the Borrower, any
Surety, any of their respective principals, executives or affiliates or any
issuer or holder of any Collateral that, if adversely determined, would be
reasonably likely to have a Material Adverse Effect or Surety's Adverse Effect,
individually or in the aggregate with other events, (B) any alleged criminal act
or activity (other than a traffic misdemeanor or lesser traffic violation) on
the part of the Borrower or, to the best knowledge of the Borrower, any Surety
or any of their respective principals, executives or affiliates, (C) any part of
the Obligations, (D) any Collateral granted by the Borrower or (to the knowledge
of the Borrower) any Surety, or (E) any of the transactions contemplated in this
Note or any other Loan Instrument; (iii) any change in location or any loss of
or other material and adverse change in any Collateral (to the knowledge of the
Borrower) granted by any Surety; (iv) any act or event known to the Borrower
that in any material respect violates, is in conflict with, results in a breach
of or constitutes a default (with or without the giving or receipt of notice,
the acquisition of knowledge or the passage of time or any combination thereof)
under any term or provision of any of the Organizational Documents or other
Material Documents; (v) any nonpayment or other Default or Event of Default
under this Note or any other Loan Instrument, or any other nonpayment,
misrepresentation, nonperformance or other breach or default in or with respect
to any of the Borrower's Obligations; or (vi) any other event if such event,
individually or in the aggregate with other events, has had, will have or could
have any Material Adverse Effect or Surety's Adverse Effect.
(b) The Borrower shall provide to the Lender such financial statements,
accounts, reports, certificates, tax returns, statements, documents and other
information as the Lender from time to time may request, each in such form and
substance as may be acceptable to the Lender. From time to time upon the request
of the Lender, the Borrower (upon receipt) will furnish copies to the Lender,
and will direct such other persons (including the issuers and preparers) as the
Lender may request to furnish copies directly to the Lender, of any and all
financial statements, account statements, notices and other reports and
information pertaining to the Collateral as the Lender may request. At all
reasonable times and as often as the Lender reasonably may request, the Borrower
shall permit representatives designated by the Lender to (A) have complete and
unrestricted access to the premises of the Borrower and the books and records of
the Borrower, and make copies of, or excerpts from, those books and records, and
(B) discuss the accounts, assets, business, cash flow, expenses, income,
liabilities, operations, properties, prospects, reputation or condition,
financial or otherwise, of the Borrower or any Collateral with the Borrower's
accountants and other representatives.
(c) The Borrower at all times shall do, or cause to be done, all
things, or proceed with due diligence with any actions or courses of action,
that may be necessary: (i) to maintain its due organization, valid existence and
good standing under the laws of its state of organization; and (ii) to preserve
and keep in full force and effect all foreign and other qualifications, licenses
and registrations in those jurisdictions in which the failure to do so would be
reasonably likely to have a Material Adverse Effect. The Borrower: (A) shall at
all times maintain its full and unrestricted right, power and authority, and
shall not, and shall not cause, suffer or permit anyone else to, take or fail to
take any action (with respect to itself or otherwise), or offer, commit or enter
into to any agreement or arrangement, that would, or could, in any way restrict,
limit, make subject to third-party approval or otherwise impair its right, power
or authority, (x) to carry on its business as now conducted, (y) to execute,
deliver or be a party under this Note or any other Loan Instrument to which it
is or becomes a party or any supplement, modification or amendment thereto or
restatement or replacement thereof from time to time in the manner provided
therein, or (z) to perform any of its obligations under this Note or any other
Loan Instrument; and (B) shall not, and shall not cause, suffer or permit, any
supplement, modification or amendment to any of Organizational Documents of the
Borrower, or of any direct or indirect general partner, manager, trustee or
similar principal of the Borrower that is a corporation, limited liability
company or similar entity, as applicable, that would further limit, restrict,
impair or make subject to approval any such power or authority or would
otherwise be adverse to any such execution, delivery, participation or
performance. The Borrower shall at all times: (1) do business exclusively under
its own name(s) and employer and taxpayer identification numbers, hold itself
out to the public as a legal entity separate and distinct from any other person
(and not as a department or division of someone else), and correct any
misunderstandings known to it regarding the separate identity of the Borrower;
(2) use its own separate stationery, invoices and checks; (3) use its own logos
and trademarks and not share any common logo or trademark with any other person;
(4) observe all corporate or equivalent formalities for maintaining its status
as a valid separate entity; and (5) maintain its records, books of account, bank
accounts and other assets and properties separate and apart from those of any
other person and not commingle any of them with those of any other person.
Section 10. Events of Default. Each of the following events shall
constitute a default under this Note (each an "Event of Default"): (a) any
representation or warranty made in, or any report, statement, certificate,
schedule or other document or information furnished in connection with, this
Note or any of the other Loan Instruments shall prove to have been false or
misleading in any material respect when made or furnished or deemed made or
furnished (whether prior to, on or after the date hereof); (b) any default
(whether in whole or in part) shall occur and be continuing in the payment of
any principal, interest or other amount (i) under this Note or any other Loan
Instrument, or (ii) under any other indebtedness, obligation or liability of the
Borrower, any Surety or any of their respective principals or other affiliates
owed to the Lender or any of its affiliates; (c) any
other default in the due observance or performance of any term or provision of
this Note and the other Loan Instruments shall occur (whether in whole or in
part), which default is not described in any other subsection of this Section;
(d) any default (whether in whole or in part) shall occur and be continuing (i)
in the payment of any principal, interest or other amount owed under any other
indebtedness, obligation or liability (other than the Obligations) now or
hereafter owed (whether individually, jointly, severally or otherwise, and
whether on or after the date hereof) by the Borrower, any Surety or any of their
respective principals or other affiliates, or (ii) in the due observance or
performance of any term or provision of any instrument, agreement or document
(other than a Loan Instrument) evidencing or respecting any such other
indebtedness, liability or obligation, including (without limitation) any and
all any indebtedness or other obligation (other than the Obligations) for any
(A) money borrowed, debt issue, deferred purchase price, letter of credit,
acceptance, or commitment or line of credit, (B) cap, swap, exchange, forward
contract or other option or hedge, whether interest, currency, equity or
otherwise, (C) capital lease, (D) affiliate advance, (E) preferred stock with
mandatory payments or redemptions, (F) unfunded pension obligations, or (G)
other credit, or under any Credit Support from the referenced person respecting
any such indebtedness or any other obligation of any other person, in each case
however evidenced and whether owed to the Lender, any of its affiliates or any
other person, and in each case which default is not described in any other
subsection of this Section, and such default shall continue beyond any
applicable grace and cure periods thereunder; (e) the Borrower, any Surety or
any of their respective principals or other affiliates shall (i) fails to, be
unable to or otherwise does not generally pay its debts as they become due, (ii)
conceal, remove or transfer any of its assets and properties in violation or
evasion of any bankruptcy, fraudulent conveyance or similar applicable law,
(iii) make an assignment for the benefit of its creditors, (iv) petition or
apply for or consent to the appointment of a receiver, trustee, assignee,
custodian, sequestrator, liquidator or similar official for itself or any of its
assets and properties, (v) commence a voluntary case for relief as a debtor
under the United States Bankruptcy Code, (vi) file with or otherwise submit to
any governmental authority any petition, answer or other document seeking (A)
reorganization, (B) an arrangement with creditors or (C) to take advantage of
any other present or future applicable law respecting bankruptcy,
reorganization, insolvency, readjustment of debts, relief of debtors,
dissolution or liquidation, (vii) file or otherwise submit any answer or other
document admitting or failing to contest the material allegations of a petition
or other document filed or otherwise submitted against it in any proceeding
under any such applicable law, (viii) be adjudicated a bankrupt or insolvent, or
(ix) take any action for the purpose of effectuating, approving or consenting to
any of the other actions or events described in this subsection; (f) any case,
proceeding or other action shall be commenced against the Borrower, any Surety
or any of their respective principals or other affiliates for the purpose of
effecting, or an order, judgment or decree shall be entered by any court of
competent jurisdiction approving (whether in whole or in part), anything
specified in subsection (e) of this Section, or any receiver, trustee, assignee,
custodian, sequestrator, liquidator or other official shall be appointed with
respect to the Borrower, any Surety or any of their respective principals or
other affiliates or all or a substantial part of the assets and properties of
the Borrower, any Surety or any of their respective principals or other
affiliates ; (g) one or more final judgments for the payment of money shall be
rendered against the Borrower, any Surety or any of their respective principals
or other affiliates and the same shall remain undischarged for a period of 30
days during which levy and execution shall not be effectively stayed or
contested in good faith; (h) any seizure, levy, attachment, distraint, loss,
destruction, termination, foreclosure or other material impairment,
deterioration or diminution (whether in whole or in part) shall occur with
respect to all or any part of any Collateral or other material assets and
properties of the Borrower, any Surety or any of their respective principals or
other affiliates (other than fully insured casualty losses); (i) any Loan
Instrument or any security interest granted thereunder (or the intended
perfection or priority thereof) for any reason shall (in whole or in part) cease
to be in full force or effect or shall be contested, challenged or repudiated by
or on behalf of the Borrower or any Surety; (j) the Borrower, any Surety or any
of their respective principals or other affiliates shall be or become the
subject of or a party to any criminal indictment or conviction (other than a
misdemeanor); (k) the failure in business or termination of current employment
of the Borrower, any Surety or any of their respective principals or other
affiliates, any merger, consolidation, reorganization, liquidation, sale of
substantially all of its assets, or change in ownership or control of the
Borrower or any Surety, or the death or permanent disability of the Borrower or
any Surety or any of their respective principals; or (l) any event or events
shall occur that (individually or in the aggregate with any other event(s)) have
had or could have a Material Adverse Effect or Surety's Adverse Effect, as
determined by the Lender in the exercise of its reasonable judgment, and the
Lender shall have given the Borrower notice of such determination.
Section 11. Enforcement. During the continuance of any Default or Event
of Default under this Note or any other Loan Instrument, the Lender shall be
entitled in its sole and absolute discretion at any time: (i) to declare this
Note, and any and all principal, interest and other amounts due under this Note
and/or any other Loan Instrument, to be immediately due and payable upon written
notice to the Borrower, all without presentment, protest, demand or notice of
any kind, all of which are hereby absolutely, unconditionally, irrevocably and
expressly waived forever by the Borrower; and (ii) to exercise or otherwise
enforce (from time to time) any one or more of the rights, powers, privileges,
remedies and interests of the Lender under this Note, any other Loan Instrument
or applicable law; provided, however, that in the event of the occurrence of any
of the
events respecting the Borrower set forth in subsection (e) or (f) of the
definition of Event of Default, the Loans and all of the other monetary
Obligations shall be accelerated and immediately due and payable as stated
above. The Lender may (without limitation), at any time and from time (in the
Lender's sole and absolute discretion), exercise or otherwise enforce any right,
power, privilege, remedy or interest of the Lender under this Note, any other
Loan Instrument or applicable law: (a) at law, in equity, in rem or in any other
forum available under applicable law; (b) without notice except as otherwise
expressly provided in this Note; (c) without any demand for payment except as
otherwise expressly provided in this Note; (d) without pursuing, exhausting or
otherwise exercising or enforcing any other right, power, privilege, remedy or
interest that the Lender may have against or in respect of the Borrower, any
Surety or any other person or thing; and (e) without regard to any act or
omission of the Lender or any other person. The Lender may institute one or more
proceedings (which may be separate proceedings) with respect to this Note and
each of the other Loan Instruments in such order and at such times as the Lender
may elect in its sole and absolute discretion. This Note or any other Loan
Instrument may be enforced without the presence or participation of any
co-obligor (joint or several) or Surety, whether through lack of jurisdiction,
venue or service or otherwise; and the Borrower shall not raise, and the
Borrower hereby absolutely, unconditionally, irrevocably and expressly waives
forever, any objection or defense respecting the need for any such presence or
participation.
Section 12. Reinstatement. In the event any payment of or any
application of any amount, asset or property to any of the Obligations, or any
part thereof, at any time is rescinded or must otherwise be restored or returned
by the Lender upon the insolvency, bankruptcy or reorganization of the Borrower,
any Surety or any other person, whether by order of any court, by any settlement
approved by any court, or otherwise, then the terms and provisions of this Note
shall continue to apply, or shall be reinstated if not then in effect, as the
case may be, with respect to the Obligations so rescinded, restored or returned,
all as though such payment or application had never been made.
Section 13. Waivers of Notice, Etc. The Borrower hereby absolutely,
unconditionally, irrevocably and expressly waives forever each and all of the
following: (a) acceptance and notice of any acceptance of this Note or any other
Loan Instrument; (b) notice of any action taken or omitted in reliance hereon;
(c) presentment and notice of any presentment; (d) demand for payment and notice
of any such demand; (e) dishonor and notice of any dishonor; (f) protest and
notice of any protest; (g) notice of any nonpayment or other event that
constitutes, or with the giving of notice or the passage of time (or both) would
constitute, any nonpayment, nonperformance, misrepresentation or other breach or
default under this Note or any other Loan Instrument; (h) notice of any material
and adverse effect, whether individually or in the aggregate, upon (i) the
assets, business, cash flow, expenses, income, liabilities, operations,
properties, prospects, reputation or condition (financial or otherwise) of the
Borrower, any Surety or any other person, (ii) the ability of any of them to pay
or otherwise satisfy (as and when due) any of their respective obligations under
any of the Loan Instruments, or (iii) any collateral securing the obligations of
any of them under the Loan Instruments or its value or the validity,
enforceability, perfection or priority of any security interest of the Lender
therein; and (i) any other proof, notice or demand of any kind whatsoever with
respect to any or all of the Obligations or Surety's Obligations or promptness
in making any claim or demand under this Note or any other Loan Instrument. No
act or omission of any kind in connection with any of the foregoing shall in any
way impair or otherwise affect the legality, validity, binding effect or
enforceability of any term or provision of this Note or any other Loan
Instrument or any of the Obligations or Surety's Obligations.
Section 14. Consent to Jurisdiction, Etc. The Borrower hereby consents
and agrees that the Supreme Court of the State of New York for the County of New
York and the United States District Court for the Southern District of New York
each shall have personal jurisdiction and proper venue with respect to any
dispute between the Lender and the Borrower under or related to this Note or any
other Loan Instrument; provided that the foregoing consent shall not deprive the
Lender of the right in its sole and absolute discretion to voluntarily commence
or participate in any action, suit or proceeding in any other court having
jurisdiction and venue over the Borrower. The preceding consents to jurisdiction
and venue have been made by the Borrower and accepted by the Lender in reliance
(at least in part) on Section 5-1402 of the General Obligations Law of the State
of New York, as amended (as and to the extent applicable), and other applicable
law. The Borrower will not raise, and hereby absolutely, unconditionally,
irrevocably and expressly waives forever, any objection or defense in any such
dispute to any such jurisdiction as an inconvenient forum. The Borrower hereby
absolutely, unconditionally, irrevocably and expressly waives forever personal
service of any summons, complaint or other notice or process in any such
dispute, which each may be sent by mail, courier or any of the other means
permitted for notices under this Note or any other Loan Instrument to the
Borrower at the address specified herein. The Borrower acknowledges and agrees
that a final judgment in any such action, suit or proceeding shall be conclusive
and binding upon the Borrower and may be enforced against the Borrower or any of
its assets or properties in any other appropriate jurisdiction selected by the
Lender (in its sole and absolute discretion) by an action, suit or proceeding in
such other jurisdiction. To the extent that the Borrower may be entitled to
immunity (whether by reason of sovereignty or otherwise) from suit in any
jurisdiction, from the jurisdiction of any court or
from any other legal process, the Borrower hereby absolutely, unconditionally,
irrevocably and expressly waives forever such immunity.
Section 15. Waiver of Set Off, Etc. The Borrower hereby absolutely,
unconditionally, irrevocably and expressly waives forever, and agrees that the
Borrower will not exercise or otherwise enforce, any and all rights of
extension, stay, moratorium, setoff, counterclaim, recoupment, abatement or
reduction or other claim or determination respecting any payment due under this
Note or any other Loan Instrument that may now or hereafter be accorded to the
Borrower under applicable law or otherwise. To the extent not required as a
compulsory counterclaim, the Borrower (a) shall pursue separate exercise and
enforcement of any right, power, privilege, remedy or interest retained (and not
waived) by the Borrower under this Note, the other Loan Instruments or
applicable law, and (b) shall not seek to exercise or otherwise enforce any such
right, power, privilege, remedy or interest in any proceeding instituted by the
Lender under or in respect of this Note or any other Loan Instrument, whether
through joinder, consolidation, setoff, recoupment, abatement, reduction,
counterclaim, defense or otherwise. In any dispute with the Lender, the Borrower
covenants and agrees that the Borrower will not seek, recover or retain any, and
the Borrower hereby absolutely, unconditionally, irrevocably and expressly
waives forever any and all, special, exemplary, punitive and/or consequential
damages (whether through action, suit, counterclaim or otherwise) to the extent
waiver is not limited under applicable law.
Section 16. Relationship of the Borrower and the Lender, Etc. The
Borrower represents, warrants and acknowledges to and covenants and agrees with
the Lender that: (a) the Lender is acting solely in the capacity of lender
respecting this Note, the other Loan Instruments and the Collateral; (b) the
sole relationship of the Borrower with the Lender is that of debtor and
creditor, respectively , and no term or provision of this Note or any other Loan
Instrument is intended to create, nor shall any such term or provision be deemed
or construed to have created, any joint venture, partnership, trust, agency or
other fiduciary or advisory relationship with the Borrower, any Surety or any of
their respective affiliates; (c) the Borrower has received and independently and
fully reviewed and evaluated the Note and the other Loan Instruments, the
obligations and transactions contemplated hereunder and thereunder and the
potential effects of such obligations and transactions on the assets, business,
cash flow, expenses, income, liabilities, operations, properties, prospects,
reputation, taxation and condition (financial or otherwise) of each of the
Borrower, the Sureties and their respective affiliates, if any (each a "Business
Attribute"), which review and evaluation was made (i) together with legal
counsel and (to the extent deemed prudent by the Borrower) financial and other
advisors to the Borrower, (d) the Borrower has not received, the Borrower is not
relying upon, and none of the Sureties has received or is relying upon, any oral
or written advice, analysis, representation or warranty, counsel, promise or
assurance of any kind whatsoever from the Lender, any of its affiliates or any
of their respective officers, attorneys or other representatives (whether with
respect to any Business Attribute or otherwise), including (without limitation),
any tax, accounting or legal advice or counsel; (e) the Borrower is not relying
upon, and none of the Sureties is relying upon, any expertise, business acumen,
industry knowledge or other guidance of any kind whatsoever of the Lender, any
of its affiliates or any of their respective officers, attorneys or other
representatives (whether with respect to any Business Attribute or otherwise),
including (without limitation) any aspect of the ownership, operation,
development, financing or taxation of any thereof; (f) no counsel to the Lender
has in any way provided any tax or other legal counsel, analysis, advice or
assurance to, or has in any way otherwise represented, the Borrower, any Surety
or any of their respective affiliates or other representatives, whether in
connection with any Loan Instrument or otherwise (and each such counsel may rely
on this clause (f) as if directly addressed to them and is an intended third
party beneficiary hereof); (g) the Lender, its affiliates and its other
representatives may be providing debt financing, equity capital or other
services (including financial advisory services) to other companies or persons
in respect of which the Borrower, any Surety or any of their respective
affiliates may have conflicting interests regarding the transactions described
herein and otherwise, and that neither the Lender nor any of its affiliates or
representatives has any obligation to use in connection with the transactions
contemplated by any Loan Instrument, or to advise the Borrower, any Surety or
any of their respective affiliates of, or furnish to any of them, any
confidential or other information obtained by the Lender or any of their
affiliates or representatives from or with respect to other transactions,
companies or persons; and (h) by accepting or approving any certificate,
statement, report or other document or information required to be given to the
Lender (whether as a required notice or report, for approval or otherwise), or
any alleged performance of anything required to be observed, performed or
fulfilled by the Borrower, or any Surety, pursuant to this Note or any other
Loan Instrument, neither the Lender nor any of its representatives shall have,
or shall be deemed or construed to have, made any representation or warranty to
or agreement with the Borrower, or any Surety with respect thereto or affirmed
the sufficiency, the legality, enforceability, effectiveness or financial impact
or other effect thereof.
Section 17. Reliance on Representations, Etc. The Lender shall be
entitled to rely, and in entering into this Note and the other Loan Instruments
and making any Advances or other Loans in fact has relied, upon the
representations, warranties and other information respecting the Borrower, each
Surety and each other persons contained in this Note and the other Loan
Instruments notwithstanding (A) any credit information that at any time may have
been or from time to time hereafter may be sought, obtained or reviewed by the
Lender
or (B) any other investigation, analysis or evaluation that at any time may have
been made or from time to time hereafter may be made by the Lender or its
designees of all or any part of the assets, business, cash flow, expenses,
income, liabilities, operations, properties, prospects, reputation or condition
(financial or otherwise) of the Borrower, any Surety, any of their respective
principals or other affiliates (if any), or any other person.
Section 18. Lender's Right of Setoff, Etc. The Lender in its sole and
absolute discretion is hereby authorized at any time and from time to time
during the continuance of any nonpayment or other Default or Event of Default
under this Note or any other Loan Instrument, or any other nonpayment,
misrepresentation, nonperformance or other breach or default in or with respect
to any of the Obligations, in each case without notice to the Borrower (any such
notice being hereby absolutely, unconditionally, irrevocably and expressly
waived forever by the Borrower), to set off (directly or through any of the
affiliates, custodians, participants and designees of the Lender) and apply to
or against any and all of the Obligations (whether now or hereafter created,
acquired or existing) any and all (a) deposits (whether general or special, time
or demand, provisional or final, or individual or joint) and other assets and
properties at any time held in the possession, custody or control of the Lender
and any of its affiliates, custodians, participants and designees (including,
without limitation, any items held in any investment management or custody
account), and (b) indebtedness or other amount or obligation at any time owing
by the Lender or any of its affiliates or participants, to or for the credit,
account or benefit of the Borrower, in each case whether or not the Lender shall
have made any demand for the payment and/or performance of any such obligations
(in whole or in part) from the Borrower, any Surety or any other person,
declared any default under this Note or any other Loan Instrument, accelerated
any of the Obligations or other non-demand obligations under any Loan
Instrument, or made any other demand or taken any other action, whether under
this Note, any other Loan Instrument or otherwise, and although any such
obligations may be contingent or unmatured (in whole or in part). Without
limiting the foregoing, the Borrower hereby grants to the Lender a continuing
security interest in and to all such possessory deposits, assets and properties
of and all such indebtedness and other obligations owed to the Borrower; and the
Borrower hereby authorizes each such holder to so set off and apply such amounts
at such times and in such manner as the Lender may direct pursuant to this
Section, in each case to the fullest extent possible as if the person making the
setoff were a direct creditor of the Borrower in the full amount of the
Obligations. The Lender shall endeavor to notify the Borrower after any such
setoff and application; provided, however, that the failure to give such notice
shall not affect the validity of such setoff and application. In debiting any
such account, the Obligations shall be deemed to have been paid or repaid only
to the extent of the funds actually available in that account notwithstanding
any internal procedure of the Lender or any of its affiliates, custodians,
participants and designees to the contrary. The rights of the Lender under this
Section are in addition to and without limitation of any other rights, powers,
privileges, remedies and other interests (including, without limitation, other
rights of set off and security interests) that the Lender may have under this
Note, any other Loan Instrument, any other document or transaction with the
Borrower, or applicable law.
Section 19. Exculpation and Indemnification. The Lender and its
participants, affiliates, custodians and designees, and their respective
shareholders, partners, members, directors, officers, managers, employees,
attorneys and agents (together with the Lender, each an "Indemnitee"), shall not
incur any liability for any acts or omissions (and the Borrower hereby
absolutely, unconditionally, irrevocably and expressly waives and releases
forever any and all related claims and actions against each Indemnitee), and
each Indemnitee shall be indemnified, reimbursed and held harmless by the
Borrower on demand by the Lender), and (at the request of the Lender) defended
at the expense of the Borrower with counsel selected by the Lender, from and
against any and all claims, liabilities, losses and expenses (including, without
limitation, the disbursements, expenses and fees of their respective attorneys)
that may be imposed upon, incurred by, or asserted against any Indemnitee, in
each case arising out of or related directly or indirectly to this Note, any
other Loan Instrument, any of the Collateral, any of the Loans or the
application of any proceeds thereof, or any environmental claim, except to the
extent occasioned by the Indemnitee's own acts or omissions breaching a duty
owed to the Borrower and amounting to gross negligence or willful misconduct as
finally determined pursuant to applicable law by a governmental authority having
jurisdiction. The preceding exception for gross negligence or willful misconduct
is not intended (and shall not be deemed or construed) to in any way qualify,
condition, diminish, restrict, limit or otherwise affect any other exculpation,
indemnification, release, waiver, consent, acknowledgment, authorization or
other term or provision of this Note or any other Loan Instrument.
Section 20. Notices. Except as otherwise expressly provided, any
notice, request, demand or other communication permitted or required to be given
under this Note or any other Loan Instrument shall be in writing, shall be sent
by one of the following means to the addressee at the address set forth above or
below (or at such other address as shall be designated hereunder by notice to
the other parties and persons receiving copies, effective upon actual receipt)
and shall be deemed conclusively to have been given: (a) on the first Business
Day following the day timely deposited with Federal Express (or other equivalent
national or international overnight courier) or United States Express Mail, with
the cost of delivery prepaid or for the account of the sender; (b) on the fifth
Business Day following the day duly sent by certified or registered United
States mail, postage prepaid
and return receipt requested; or (c) when otherwise actually received by the
addressee on a Business Day (or on the next Business Day if received after the
close of normal business hours or on any non-Business Day), including (without
limitation) any telecopy. Refusal to accept delivery of any item shall be deemed
to be receipt of such item by the refusing party. Notices also may be given by
telephone to the extent and for the purposes provided in this Note or any other
Loan Instrument. The Borrower acknowledges and agrees that the Lender may record
any and all telephone calls with the Borrower and its representatives without
any further or specific notice of any such recording.
Section 21. Expenses, Etc. The Borrower shall pay or reimburse on
demand any and all costs and expenses incurred by the Lender, whether directly
or indirectly, in connection with (a) the preparation, execution and delivery of
the Lender's term sheet or commitment letter, (b) any syndication of this
facility, (c) the preparation, execution and closing of this Note and the other
Loan Instruments, and all waivers, releases, discharges, satisfactions,
modifications and amendments thereof and approvals and consents with respect
thereto, (d) all payments made and actions taken thereunder in the name or on
behalf of the Borrower under this Note or any other Loan Instrument, (e) all
periodic audits and other evaluations and the ongoing monitoring of the
Collateral (including, without limitation, the per diem fees and expenses of the
Lender and its designees in performing such audits and other evaluations), (f)
all searches (whether respecting financing statements, unpaid taxes and other
security interests, liens and encumbrances or otherwise) and credit
verifications, (g) all surveys and appraisals, title examinations and insurance,
and surety bond premiums, (h) all mortgage recording, documentary, transfer,
intangible, note or other similar taxes and revenue stamps, and all filings and
recordings, and (i) the administration, maintenance, enforcement and
adjudication of this Note, any other Loan Instrument and the rights, powers,
privileges, remedies and other interests of the Lender thereunder and under
applicable law, in each case including (without limitation) the disbursements,
expenses and fees of counsel to the Lender (including, without limitation, the
allocated costs of in-house counsel), currently Jenkens & Gilchrist Parker
Chapin LLP, and the disbursements, expenses and fees of any local or special
counsel retained by the Lender or its counsel.
Section 22. Agreement Absolute, Survival of Representations, Etc. Each
of the payment obligations, representations and warranties (as of the date(s)
made or deemed made), covenants, waivers and other agreements and obligations of
the Borrower contained in this Note and the other Loan Instruments: (a) are and
shall be absolute, irrevocable and unconditional, irrespective of (among other
things) the validity, legality, binding effect or enforceability of any of the
other terms and provisions of this Note or any other Loan Instrument or any
other act, circumstance or other event described in this Section; (b) shall
survive and remain and continue in full force and effect in accordance with
their respective terms and provisions following and without regard to (i) the
execution and delivery of this Note or any other Loan Instrument and the
performance or non-performance of any Obligations or Surety's Obligations under
any Loan Instrument, (ii) any advance, accrual, payment, repayment or readvance
of any amount under any Loan Instrument, or the inception, creation,
acquisition, increase, decrease, satisfaction or existence from time to time of
any Obligations or Surety's Obligations under any Loan Instrument, in each case
irrespective of the fact that from time to time the outstanding balance of the
Loans and other monetary Obligations may be zero, (iii) any waiver,
modification, extension, renewal, consolidation, spreading, amendment or
restatement of or other change in any term or provision of (A) this Note or any
other Loan Instrument or (B) any one or more of the Loans or other Obligations
or any Surety's Obligations, including (without limitation) any extension or
other change in the time, manner, place or other term of payment or performance
of any of the foregoing, in each case except as and to the extent expressly
modified by the terms and provisions of any such extension, change, waiver,
modification, renewal, consolidation, spreading, amendment or restatement, (iv)
any full, partial or non-exercise of any of the rights, powers, privileges,
remedies and interests of the Lender under any Loan Instrument or applicable
law, against the Borrower, any Surety or any other person or with respect to any
of the Obligations, any Surety's Obligations, any other obligations or any
collateral or security interest therein, which exercise or enforcement may be
delayed, discontinued or otherwise not pursued or exhausted for any or no reason
whatsoever, or which may be waived, omitted or otherwise not exercised or
enforced (whether intentionally or otherwise), (v) any surrender, repossession,
sequestration, foreclosure, conveyance or assignment (by deed in lieu or
otherwise), sale, lease or other realization, dealing, liquidation or
disposition respecting any collateral or setoff respecting any account or other
asset in accordance with any Loan Instrument or applicable law (except as and to
the extent the Obligations have been permanently reduced by the application of
the net proceeds thereof), (vi) the perfected or non-perfected status or
priority of any mortgage or other security interest in any such collateral,
which may be held without recordation, filing or other perfection (whether
intentionally or otherwise), (vii) any release, settlement, adjustment,
subordination or impairment of all or any part of the Obligations, any Surety's
Obligations, any other obligations or any collateral or any security interest
therein under or with respect to any Loan Instrument or applicable law, whether
intentionally or otherwise (except as and to the extent expressly modified by
the terms and provisions of any such release, settlement or adjustment), (viii)
any extension, stay, moratorium or statute of limitations or similar time
constraint under any applicable law, (ix) any investigation, analysis or
evaluation by the Lender or its designees of the assets, business, cash flow,
expenses, income, liabilities, operations, properties,
prospects, reputation or condition (financial or otherwise) of the Borrower, any
Surety, or any other person, (x) any application to any obligations of the
Borrower or any Surety other than any Obligations or Surety's Obligations of (A)
any payments from such person not specifically designated for application to the
Obligations or Surety's Obligations or (B) any proceeds of collateral from such
person other than from the Collateral, (xi) any sale, conveyance, assignment,
participation or other transfer by the Lender (in whole or in part) to any other
person of any one or more of this Note or any of the Loan Instruments or any one
or more of the rights, powers, privileges, remedies or interests of the Lender
herein or therein, or (xii) any act or omission on the part of the Lender or any
other person or any other act, event or circumstance that otherwise might
constitute a legal or equitable defense, counterclaim or discharge of a
borrower, co-obligor, indemnitor, guarantor, pledgor or surety; in each case in
such manner and order, upon such terms and provisions and subject to such
conditions as the Lender may deem necessary or desirable in its sole and
absolute discretion, without notice to or further assent from the Borrower, any
Surety, or any other person (except for such notices as may be expressly
required to be given to such party under the applicable Loan Instrument), and
without affecting any of the rights, powers, privileges, remedies and other
interests of the Lender under this Note, the other Loan Instruments and
applicable law; (c) shall not be subject to any defense, counterclaim, setoff,
right of recoupment, abatement, reduction or other claim or determination that
the Borrower, any Surety, or any other person may have against the Lender, any
Surety or any other person; (d) shall not be diminished or qualified by the
death, disability, dissolution, reorganization, insolvency, bankruptcy,
custodianship or receivership of the Borrower, any Surety, or any other person,
or the inability of any of them to pay their respective debts or perform or
otherwise satisfy their respective obligations as they become due for any reason
whatsoever; and (e) shall remain and continue in full force and effect without
regard to any of the foregoing acts, events or circumstances (i) until all of
the Obligations have been fully paid and satisfied and (ii) thereafter with
respect to any and all acts, events or circumstances occurring prior to such
payment and satisfaction and any and all resulting claims, liabilities, losses
and expenses (including, without limitation, the attorneys' disbursements,
expenses and fees), whenever incurred or asserted.
Section 23. Severability. In the event that any term or provision of
this Note or any other Loan Instrument shall be finally determined to be
superseded, invalid, illegal or otherwise unenforceable pursuant to applicable
law by a governmental authority having jurisdiction and venue, that
determination shall not impair or otherwise affect the validity, legality or
enforceability (a) by or before that governmental authority of the remaining
terms and provisions of this Note or any other Loan Instrument, which shall be
enforced as if the unenforceable term or provision were deleted, or (b) by or
before any other governmental authority of any of the terms and provisions of
this Note or any other Loan Instrument.
Section 24. No Waiver by Action, Cumulative Rights, Etc. Any waiver or
consent respecting this Note or any other Loan Instrument shall be effective
only if in writing and signed by the Lender and then only in the specific
instance and for the specific purpose for which given. No waiver or consent
shall be deemed (regardless of frequency given) to be a further or continuing
waiver or consent. The failure or delay (in whole or in part) of the Lender to
require performance of, or to exercise or otherwise enforce any of the rights or
remedies of the Lender with respect to, any term or provision of this Note or
any other Loan Instrument shall in no way affect the right of the Lender at a
later time to exercise or otherwise enforce any such term or provision. No
notice to or demand on the Borrower or any Surety in any case shall entitle such
party to any other or further notice or demand. No acceptance by the Lender of
(A) any partial or late payment shall constitute (or be deemed or construed to
be) a satisfaction or waiver of the full amount then due or the resulting
Default or Event of Default, or (B) any payment during the continuance of any
Default or Event of Default shall constitute (or be deemed or construed to be) a
waiver or cure thereof; and in each case the Lender may accept or reject any
such payment without affecting any Obligations or any Surety's Obligations or
any of the rights, powers, privileges, remedies and other interests of the
Lender under this Note, the other Loan Instruments and applicable law. All
representations, warranties, covenants, agreements and obligaitons of the
Borrower in this Note and all rights, powers, privileges, remedies and other
interests of the Lender under this Note, the other Loan Instruments or
applicable law are cumulative and not alternatives.
Section 25. Successors and Assigns, Assignment and Intended
Beneficiaries. Whenever in this Note or any other Loan Instrument reference is
made to any party, such reference shall be deemed to include the successors,
assigns, heirs and legal representatives of such party, and, without limiting
the generality of the foregoing, all representations, warranties, covenants and
other agreements made by or on behalf of the Borrower in this Note or any other
Loan Instrument shall inure to the benefit of the participants and other
successors and assigns of the Lender; provided, however, that nothing herein
shall be deemed to authorize or permit the Borrower to assign any of the
Borrower's rights or obligations under this Note or any other Loan Instrument to
any other person (whether or not an affiliate of the Borrower), and the Borrower
covenants and agrees that the Borrower shall not make any such assignment. The
Lender from time to time may assign to one or more financial institutions,
institutional investors or other persons all or any portion(s) of the rights and
interests and/or obligations of the Lender under this Note or any other Loan
Instrument, including (without limitation) the
assignment to any Federal Reserve Lender (as collateral or otherwise) of all or
any portion(s) of the rights of the Lender to payments of principal and/or
interest under this Note or any other Loan Instrument, and may take any and all
reasonable actions necessary or appropriate in connection with any such
assignment, all without notice to or consent of the Borrower or any other
person. The Lender from time to time also may sell to one or more financial
institutions, institutional investors or other persons a participation interest
in all or any undivided portion of the rights, powers, privileges, remedies and
interests of the Lender under this Note or any other Loan Instrument. The Lender
from time to time may furnish and disclose financial statements, documents and
other information pertaining to the Borrower to any potential assignee or
participant. The representations, warranties and other terms and provisions of
this Note and the other Loan Instruments are for the exclusive benefit of the
parties hereto, and, except as otherwise expressly provided herein, no other
person, including creditors of any party hereto, shall have any right or claim
against any party by reason of any of those terms and provisions or be entitled
to enforce any of those terms and provisions against any party.
Section 26. Governing Law, Amendments, Etc. This Note has been made (or
shall be deemed to have been made) and has been delivered and accepted by the
Lender in the City, County and State of New York. This Note and the other Loan
Instruments shall be governed by and construed in accordance with the applicable
laws pertaining in the State of New York (other than those conflict of law rules
that would defer to the substantive laws of another jurisdiction). This
governing law election has been made by the Borrower and accepted by the Lender
in reliance (at least in part) on Section 5-1401 of the General Obligations Law
of the State of New York, as amended (as and to the extent applicable), and
other applicable law. This Note or any other Loan Instrument may have been
executed in two or more counterpart copies of the entire document or of
signature pages to the document, each of which may have been executed by one or
more of the parties thereto, but all of which, when taken together, shall
constitute a single agreement binding upon all of the parties hereto or thereto,
as the case may be. The section and other headings contained in this Note and
the other Loan Instruments are for reference purposes only and shall not affect
the meaning or interpretation of this Note or any other Loan Instrument. The
Borrower hereby authorizes the Lender to fill in any and all blanks and to
correct any and all typographical or clerical errors in this Note or any other
Loan Instrument at any time as determined by the Lender, all without any notice
to or any further consent from the Borrower. Except as otherwise provided in the
preceding sentence, except as otherwise expressly provided in this Note with
respect hereto or any other Loan Instrument with respect thereto and except as
otherwise provided or permitted under applicable law with respect to any Uniform
Commercial Code financing statement, modification, continuation or the like,
each and every modification and amendment of this Note or any other Loan
Instrument shall be in writing and signed by all of the parties hereto or
thereto, as applicable, and each and every waiver of, or consent to any
departure from, any representation, warranty, covenant or other term or
provision of this Note or any other Loan Instrument shall be in writing and
signed by each affected party hereto or thereto, as applicable.
Section 27. Waiver of Jury Trial; All Waivers Intentional, Etc.. In any
action, suit or proceeding in any jurisdiction brought by the Lender against the
Borrower, or vice versa, the Borrower and the Lender each hereby absolutely,
unconditionally, irrevocably and expressly waives forever trial by jury. This
waiver of jury trial by the Borrower, and each other waiver, release,
relinquishment or similar surrender of rights (however expressed) made by the
Borrower in this Agreement or any other Loan Instrument to which the Borrower is
a party, has been absolutely, unconditionally, irrevocably, knowingly and
intentionally made by the Borrower.
Section 28. Entire Agreement. The Lender has not (directly or
indirectly) offered, made, accepted or acknowledged any representation,
warranty, promise, assurance or other agreement or understanding (whether
written, oral, express, implied or otherwise) to, with or for the benefit of the
Borrower, any Surety or any of their respective affiliate or representatives
respecting any of the matters contained in this Note and the other Loan
Instruments except for those expressly set forth in this Note and the other Loan
Instruments. This Note and the other Loan Instruments contain the entire
agreement and understanding of the parties and supersede and completely replace
all prior and other representations, warranties, promises, assurances and other
agreements and understandings (whether written, oral, express, implied or
otherwise) among the parties with respect to the matters contained in this Note
and the other Loan Instruments.
IN WITNESS WHEREOF, the Borrower has executed and delivered this Note
as of the date first written above.
STIMULYS, INC.
(f/k/a SPAR Performance Group, Inc.)
By: /s/ Thomas F. Hunter
------------------------------------------
Thomas F. Hunter , President
The Borrower's Address For Notice And Service:
2245 Keller Way, Carrollton, Texas 75006
STATE OF
: SS.:
COUNTY OF
On this _____ day of September, 2004, before me personally came THOMAS
HUNTER, to me known, who, being by me duly sworn, did depose and say: that he
resides at 2601 Wake Forest Drive, Plano, TX 75093; that he is the PRESIDENT of
STIMULYS, INC., the corporation described in and which executed the above
instrument; and that he (or she) signed his (or her) name thereto by order of
the board of directors of said corporation.
/s/ Thomas F. Hunter
----------------------------------------
(Signature and office of
individual taking acknowledgment.)
SPAR INCENTIVE MARKETING, INC.
STIMULYS, Inc. September 10, 2004
Performance Holdings, Inc.
2245 Keller Way
Carrollton, Texas 75006
Attention: Mr. Thomas Hunter, President
RE: PAYOFF AND RELEASE UNDER REVOLVING LOAN, GUARANTY AND SECURITY AGREEMENT
------------------------------------------------------------------------
Gentlemen:
You, STIMULYS, INC., a Delaware corporation formerly known as SPAR
Performance Group, Inc. ("SI"), and PERFORMANCE HOLDINGS, INC., a Delaware
corporation ("Holdings", and together with SI, each a "you" or "Loan Party" and
collectively "you" or the "Loan Parties"), and we, SPAR INCENTIVE MARKETING,
INC. ("we" or the "Lender"), are parties to a Revolving Credit, Guaranty and
Security Agreement dated as of June 30, 2002 (as the same may have been
supplemented, modified, amended, restated or replaced from time to time in the
manner provided therein, the "Revolving Loan Agreement"), under which SI is the
"Borrower" and Holdings is the "Guarantor", and pursuant to which SI issued its
$2,000,000.00 Revolving Promissory Note (as the same may have been supplemented,
modified, amended, restated or replaced from time to time in the manner provided
therein, the "Revolving Note"). Capitalized terms and non-capitalized words and
phrases used and not otherwise defined herein shall have the meanings
respectively assigned to them in the Revolving Loan Agreement.
The Loan Parties and the Lender have agreed to terminate their relationship
under the Revolving Loan Agreement, all upon the terms and provisions and
subject to the conditions hereinafter set forth.
1. Payoff and Payoff Date. The Loan Parties have proposed to repay the
Loans outstanding and restate the letter of credit reimbursement obligations
under the Revolving Loan Agreement on September 10, 2004 (the "Proposed Payoff
Date"), by the issuance of the Lender's Promissory Note in the principal amount
of U.S..$764,271.00 (the "New Note"), supported by the Guaranty (as defined
therein) (the "New Guaranty").
2. Termination of Credit Availability and Release of Liens: Upon our
receipt of your fully executed original copies of the New Note, the New Guaranty
and this letter agreement: (a) your credit availability shall be deemed to have
been forever extinguished under the Revolving Loan Agreement and you have no
remaining rights under the Revolving Loan Agreement or any other Loan
Instrument; (b) except as otherwise provided in sections 3(b), 3(c), 4 and 8,
below, the Revolving Loan Agreement and Revolving Note are hereby deemed fully
paid and satisfied (or restated and continued in the case of the letter of
credit reimbursement obligations), extinguished and of no further force or
effect; and (c) subject to section 4, below, any and all security interests and
liens that you have heretofore granted to us under the Revolving Loan Agreement
("Collateral") are hereby released and terminated. If and to the extent
requested by you, we will execute and deliver to you a termination statement
under the Uniform Commercial Code for filing in each office in which any
financing statement respecting the Collateral has been filed, each in such form
and substance as may be acceptable to us. Any and all such actions shall be
without any recourse to or representation or warranty by us whatsoever and shall
be at your sole cost and expense.
3. Release and Discharge. You acknowledge and agree that (a) you have no
claim, counterclaim, injury or other cause of action or determination arising
out of, or directly or indirectly related to, the Revolving Loan Agreement, any
other Loan Instrument, the Collateral, the Purchase Agreement, any Purchase
Document, or the maintenance, administration, enforcement or adjudication
thereof, against us, any of our affiliates, successors, assigns, participants or
designees, or any of our or their respective directors, officers, employees,
attorneys, agents or other representatives, (b) your exculpation,
indemnification and similar agreements under the Revolving Loan Agreement,
together with the applicable provisions of Articles VIII and IX of the Revolving
Loan Agreement, shall continue in full force and effect after the Repayment Date
as and to the extent contemplated herein, and (c) this acknowledgment and
release is not intended (and shall not be deemed or construed) to in any way
qualify, condition, diminish, restrict, limit or otherwise affect any (and is in
addition to each) other release, waiver, consent, acknowledgment, exculpation,
indemnification or other similar term or provision of the Revolving Loan
Agreement or any other Loan Instrument.
4. Release of Claims Against Lender. Each Loan Party hereby intentionally,
knowingly, expressly, unconditionally and irrevocably forever releases,
discharges and acquits the Lender, each of the Lender's affiliates, successors,
assigns, participants or designees, and each of their respective directors,
officers, employees, attorneys, agents or other representatives, from and
respecting each and every Claim or Loss (as such terms are hereinafter defined)
respecting, arising under or out of, or directly or indirectly related to, any
event or circumstance occurring or otherwise existing prior to the date hereof,
including (without limitation) any such event or circumstance pertaining to,
arising under or out of, or directly or indirectly related to, the Revolving
Loan Agreement, any other Loan Instrument, the Collateral, the Stock Purchase
Agreement or any other Stock Purchase Document, or the creation, maintenance,
administration, enforcement or adjudication thereof. "Claim" shall mean any
claim, counterclaim, right of recoupment or abatement, injury, harm, exposure,
action, suit, investigation, proceeding, demand or other cause of action or
determination, in each case whether known or unknown and whether now or
hereafter existing, arising or determined. "Loss" shall mean any loss, damage,
injury, harm, detriment, decline in value, lost opportunity, liability, Claim,
settlement, judgment, award, fine, penalty, Tax (as hereinafter defined), fee,
charge, cost or expense (including any disbursement, expense or reasonable fee
or other reasonable amount paid to any attorney or other professional advisor
and any costs of investigation), in each case whether known or unknown and
whether now or hereafter existing. "Tax" shall mean (i) any tax or other
governmental assessment, levy or imposition of any kind or nature, including
(without limitation) (A) any income tax, franchise tax, capital gains tax, gross
receipts tax, capital tax, goods and services tax, value added tax, surtax,
excise tax, ad valorem tax, land or other transfer tax, stamp tax, sales tax,
use or consumption tax, property tax, inventory tax, occupancy tax, employment
tax, labor tax, Social Security, Medicare, Medicaid, withholding tax, payroll
tax, gift tax, estate tax, inheritance tax, health or drug tax or premium, or
poll tax, or (B) any Social Security, Medicare, Medicaid, insurance or other
retirement, health or drug tax, assessment, levy, imposition, premium or other
payment mandated by Applicable Law, or (ii) any interest, fine, penalty, fee or
expense on or related to any of the foregoing; in each case whether domestic to
the United States of America or foreign, whether federal, provincial, state,
county or local, whenever arising or asserted, and whether or not accrued,
acknowledged or contested. Each Loan Party hereby acknowledges, certifies,
represents and warrants to and covenants and agrees with the Lender that: (a) as
of the date hereof, none of the Loan Parties nor any of their respective
directors, officers, employees, attorneys, agents or other representatives knows
or has reason to know of any such Claim or Loss or any such underlying event or
circumstance; (b) this release, discharge and acquittal has been given by the
Loan Parties to induce the Lender to enter into this letter agreement and accept
the New Note and New Guaranty and is not intended by the parties (and shall not
be deemed or construed) to be any admission or evidence of any Claim against the
Lender or liability on the part of the Lender or any of its representatives for
any Claim or Loss; and (c) this release, discharge and acquittal is not intended
(and shall not be deemed or construed) to in any way qualify, condition,
diminish, restrict, limit or otherwise affect any (and is in addition to each)
other release, waiver, consent, acknowledgment, exculpation, indemnification or
other similar term or provision of the New Note and New Guaranty and of those
continuing under the Revolving Loan Agreement as provided in sections 3(b) and
3(c), above.
5. Reinstatement. In the event any payment of the Loans or other
Obligations, or any part thereof, at any time is rescinded or must otherwise be
restored or returned by us upon the insolvency, bankruptcy or reorganization of
you or any co-obligor, guarantor, surety or pledgor under the Loan Instruments
(whether by order of any court or other governmental authority, by any
settlement or otherwise), then the terms and provisions of the Revolving Loan
Agreement and other Loan Instruments to which you are a party shall be
reinstated to the extent of the payment(s) so rescinded, restored or returned,
all as though such payment had never been made.
6. Relationship of the Loan Parties and the Lender, Etc. Each Loan Party
acknowledges, certifies, represents and warrants to and covenants and agrees
with the Lender that: (a) the Lender is acting solely in the capacity of lender
respecting this letter; (b) the sole relationship of the Loan Parties with the
Lender is that of debtor and creditor, respectively, and no term or provision of
this letter agreement or any other transaction document is intended to create,
nor shall any such term or provision be deemed or construed to have created, any
joint venture, partnership, trust, agency or other fiduciary or advisory
relationship with any Loan Party, any Surety or any of their respective
affiliates or representatives; (c) each Loan Party is experienced in the
ownership, operation and financing of its current and contemplated business,
assets and properties; (d) each Loan Party has received and independently and
fully reviewed and evaluated this letter agreement and the other transaction
documents, the obligations and transactions contemplated hereunder and
thereunder and the potential effects of such obligations and transactions on the
assets, business, cash flow, expenses, income, liabilities, operations,
properties, prospects, reputation,
-2-
taxation and condition (financial or otherwise) of each of the Loan Parties, the
Sureties and their respective affiliates, if any (each a "Business Attribute"),
which review and evaluation was made together with legal counsel and (to the
extent deemed prudent by such Loan Party) financial and other advisors to such
Loan Party, (e) no Loan Party or Surety has received or is relying upon any oral
or written advice, analysis, representation or warranty, counsel, promise or
assurance of any kind whatsoever from the Lender, any of its affiliates or any
of their respective officers, attorneys or other representatives (whether with
respect to any Business Attribute or otherwise), including (without limitation),
any tax, accounting or legal advice or counsel; (f) no Loan Party or Surety is
relying upon any expertise, business acumen, industry knowledge or other
guidance of any kind whatsoever of or from the Lender, any of its affiliates or
any of their respective officers, attorneys or other representatives (whether
with respect to any Business Attribute or otherwise), including (without
limitation) any aspect of the ownership, operation, development, financing or
taxation of any thereof; and (g) no counsel to the Lender has in any way
provided any tax or other legal counsel, analysis, advice or assurance to, or
has in any way otherwise represented, any Loan Party, any Surety or any of their
respective affiliates or other representatives, whether in connection with any
transaction document or otherwise, and each such counsel may rely on this clause
(g) as if directly addressed to such counsel and is an intended third party
beneficiary hereof.
7. Pay-Off Letter Terminates. If we have not received your fully executed
original copies of the New Note, the New Guaranty and this letter agreement by
September 13, 2004, this pay-off letter agreement shall be null and void and of
no further force or effect.
8. Miscellaneous. This letter agreement (a) may be executed in two or more
counterpart copies of the entire document or of signature pages to the document,
(b) shall take effect upon execution by you and us, which execution copies may
be delivered by telecopy or other electronic transmission (with hard copies to
follow), (c) is a "Loan Instrument" under (and as defined in) the Revolving Loan
Agreement, and (d) shall be governed by and construed in accordance with the
applicable terms and provisions of the Revolving Loan Agreement as if this
letter agreement were the "Agreement" referred to therein, which terms and
provisions are incorporated herein by reference as if fully set forth herein
(and which shall not be affected by the termination of the Revolving Loan
Agreement provided above).
If the foregoing correctly sets forth our agreement with you, please sign
and return the enclosed copy of this letter to acknowledge your agreement.
Very truly yours,
SPAR INCENTIVE MARKETING, INC.
By: /s/ James R. Segreto
--------------------------------------------
James R. Segreto, Vice President, Controller
STIMULYS, INC.
(f/k/a known as SPAR Performance Group, Inc.)
By: /s/ Thomas Hunter
-------------------------------------
Thomas Hunter, President
PERFORMANCE HOLDINGS, INC.
By: /s/ Thomas Hunter
---------------------------------------
Thomas Hunter, President
-3-
STATE OF TEXAS )
: SS.:
COUNTY OF DALLAS )
On this 13th day of September, 2004, before me personally came THOMAS
HUNTER, to me known, who, being by me duly sworn, did depose and say: that he
resides at 2601 Wake Forest Drive, Plano, TX 75093; that he is the PRESIDENT of
STIMULYS, INC., the corporation described in and which executed the above
instrument; and that he (or she) signed his (or her) name thereto by order of
the board of directors of said corporation.
/s/ Staci B. Harper
-------------------------------------------
(Signature and office of individual
taking acknowledgment.)
STATE OF TEXAS )
: SS.:
COUNTY OF DALLAS )
On this 13th day of September, 2004, before me personally came THOMAS
HUNTER, to me known, who, being by me duly sworn, did depose and say: that he
resides at 2601 Wake Forest Drive, Plano, TX 75093; that he is the PRESIDENT of
PERFORMANCE HOLDINGS, INC., the corporation described in and which executed the
above instrument; and that he signed his name thereto by order of the board of
directors of said corporation.
/s/ Staci B. Harper
-------------------------------------------
(Signature and office of individual
taking acknowledgment.)
STATE OF NEW YORK )
: SS.:
COUNTY OF WESTCHESTER )
On this 13th day of September, 2004, before me personally came JAMES R.
SEGRETO, to me known, who, being by me duly sworn, did depose and say: that he
resides at 126 Middleton Place, Bronxville, New York 10708; that he is the VICE
PRESIDENT, CONTROLLER of SPAR INCENTIVE MARKETING, INC., the corporation
described in and which executed the above instrument; and that he signed his
name thereto by order of the board of directors of said corporation.
/s/ Mindy Asiedu
-------------------------------------------
(Signature and office of individual
taking acknowledgment.)
ATTACHMENT A
PAYOFF AND RELEASE UNDER REVOLVING LOAN, GUARANTY AND SECURITY AGREEMENT
AND
PROMISSORY NOTE
Notwithstanding anything to the contrary in this Promissory Note or Payoff
and Release Under Revolving Loan, Guaranty and Security Agreement, the
parties agree that the amount of the Promissory Note will be reduced by
mutual agreement of the parties after examination of certain amounts.
The Promissory Note will be reduced by:
A. Any amount by which the General Ledger of SPAR is less than $1,301,332
on June 30, 2002 or less than $791,303 on July 31, 2004. STIMULYS will
be allowed to send in auditors to verify this number and all expenses
will be borne by STIMULYS. The maximum reduction for A will be
$90,000.
B. Any charges for any unused line fees and Letter of Credit fees included
in the Promissory Note that are not valid under the Revolving Credit,
Guaranty and Security Agreement among SPAR Performance Group, Inc.,
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc. dated as
of June 30, 2002 ("the Revolving Credit Agreement"). Notwithstanding
the Revolving Credit Agreement, if SPAR did not incur unused line fees
and/or Letter of Credit fees with Webster bank during the same time
period the Promissory Note will be reduced by any amount included for
unused line fees and Letter of Credit fees. The maximum adjustment for
B will be $60,000.
C. Any amount included in the Promissory Note for medical expenses paid by
SPAR after July 31, 2002 for medical claims submitted prior to July 31,
2002 or for medical claims submitted by persons who elected COBRA prior
to July 31, 2002 and paid monthly COBRA insurance to SPAR to the extent
such amounts were included in the promissory note and to the extend
that payments on behalf of people on COBRA exceeded the amounts paid to
SPAR for the COBRA. The maximum adjustment for C will be $63,000.
The parties further agree that the amount to be paid in twenty days following
the execution of the promissory note is $422,000. Any remaining balance in
excess of (i) amount in the Promissory Note for J&G legal bills for the Texas
litigation (approximately $31,000) and (ii) for the ARC Letter of Credit
($70,000) (both (i) and (ii) will be paid within 90 days of this signing of the
promissory note) will be paid on the following timetable with interest at 6% per
annum with interest not paid on (i) and (ii):
a. Any amount up to $50,000 will be paid six calendar months after
signing the Promissory Note;
b. Any amount greater than $50,000 but less than $100,000 will be paid
twelve months after signing the Promissory Note;
c. Any amount over $100,000 will be paid twenty-four months after signing
the Promissory Note;
d. Any outstanding balance may be pre-paid without penalty.
Any amounts not paid as scheduled will be charged an interest of 18% per year.
SALE PROCEEDS AGREEMENT
This Sale proceeds Agreement (the "Agreement") is entered into this 10th day of
September 2004 (the "Effective Date"), among Stimulys, Inc., a Delaware
corporation and any successors (collectively "Stimulys"), whose address is 2245
Keller Way, Carrollton, Texas 75006, and Spar Incentive Marketing, Inc., a
Delaware corporation ("Spar"), whose address is 580 White Plains Road, 6th
Floor, Tarrytown, New York 10591.
RECITALS
A. Stimulys is a wholly-owned subsidiary of Performance Holdings, Inc., a
Delaware corporation ("PHI"). PHI is indebted to Spar in the amount of
approximately $7,664,019 as of the Effective Date, pursuant to (i) two Term
Promissory Notes dated as of June 30, 2002 (the "Term Notes") in the original
principal amounts of $2,500,000 and $3,500,000, respectively, issued by PHI, as
borrower, to Spar, as lender, and (ii) that certain Term Loan, Guaranty and
Security Agreement dated as of June 30, 2002 (the "Term Loan Agreement") among
PHI, as borrower, Stimulys, as guarantor, and Spar, as lender. The loan made
pursuant to the Term Notes and the Term Loan Agreement is referred to as the
"Term Loan."
B. All assets of PHI and Stimulys are pledged as collateral to secure
repayment of the Term Loan.
C. The parties wish to restructure the obligations of Stimulys and PHI to
Spar pursuant to the Term Loan. The parties wish to enter into this Agreement to
memorialize the terms of such restructuring.
TERMS AND PROVISIONS
In consideration of the mutual promises made in this Agreement and other
good and valuable consideration, the receipt and sufficiency of which are
acknowledged, the parties agree as follows:
1. Definitions. As used in this Agreement, the following terms shall have
the meanings indicated:
- "Change of Control" means either (i) a sale, transfer or other
disposition of over 50% of the assets of Stimulys outside the ordinary
course of Stimulys' business, to a Non-Affiliate that is not related
to any of the stockholders in the broadcast definition, (ii) a merger,
consolidation or similar transaction the result of which is that the
owner of over 50% of Stimulys' assets is a Non-Affiliate, or (iii) a
sale of over 50% of the common stock or other voting securities of
Stimulys, the result of which is that more than 50% of Stimulys'
voting securities are Controlled by one or more Non-Affiliates. Any
transaction in which an Initial Owner and/or its affiliate increases
its ownership percentage in Stimulys to over 50% shall also be
considered a change in control. The change in control covers either a
single transfer or a change in control by a series of transfers or
sale that cumulatively exceeds 50%.
- "Control" "Controlled by" and "Controlling" means, with respect to the
voting securities of a given entity, the right to direct the voting or
disposition of such voting securities, where due to ownership of the
voting securities, contractual right, or otherwise.
- "Hunter Securities" means all equity or other type of securities in
Stimulys or any related companies or affiliates fully or partly owned
or Controlled directly or indirectly in whole or in part by Thomas
Hunter or by any member of his immediate family.
- "Initial Owner" or "Initial Owners" means shareholders included on
Exhibit ___ in their respective percentages and their wholly owned
subsidiaries.
- "Net Proceeds" means (i) in the case of an asset sale that constitutes
a Change of Control transaction, the aggregate cash or other
consideration received by Stimulys in respect of such transaction, or
(ii) in the case of a Change of Control transaction other than a sale
of assets, the aggregate cash or other consideration received by the
selling parties in respect of such transaction (provided that if the
transaction involved less than 100% ownership of Stimulys, such cash
proceeds shall be deemed increased for purposes of this definition to
the amount that would have been received if the transaction involved
100% ownership of Stimulys); in each case net of direct costs relating
to such transaction (including without limitation, legal, accounting
and investment banking fees, and sales commissions) and net of the
amount of Stimulys' outstanding indebtedness (provided that such
indebtedness shall be excluded only if and to the extent such
indebtedness did not reduce the appraised value of Stimulys by the
amount of such indebtedness, and is assumed directly or indirectly by
the purchaser).
- "Non-Affiliate" means (i) one or more persons, entity or entities that
are not Initial Owners.
- Non-Tax Distribution" means any dividend or other distribution to
Stimulys' equity owners in excess of the amount necessary to satisfy
the obligations of such equity owners to pay all local, state and
federal income taxes due or to become due before or during the year in
which the distribution is made as a result of their ownership interest
in Stimulys (assuming a tax rate applicable to such distributions
equal to the sum of the highest incremental local, state and federal
income tax rates applicable at the time to individuals) if and only if
Stimulys is a non-taxable entity.
2. Commitment Regarding Sale Proceeds.
A. Base Commitment. Upon the occurrence of a Change of Control
transaction, Stimulys or the selling parties, as the case may be, shall
distribute or cause to be distributed to Spar a portion of the Net Proceeds
from such Change of Control transaction, within 30 days of receipt of the
Net Proceeds, equal to the sum of:
-2-
(i) Twenty-Three and One-Half percent (23 1/2%) of the first
$10,000,000 of Net Proceeds; and
(ii) Fifteen percent (15%) of any Net Proceeds in excess of
$10,000,000.
The proceeds to which Spar is entitled pursuant to this Section 2.A shall be in
the same form (i.e., cash, securities, other consideration, or any combination
of the foregoing) and proportions as the consideration received by the seller(s)
in the applicable Change of Control transaction, unless the parties affected
thereby otherwise agree.
B. Right of First Refusal to Spar. As a condition to the entry by
Stimulys into a Change of Control transaction, Stimulys shall first be
required to: (i) secure an appraisal of Stimulys by a nationally recognized
business appraisal company with expertise in valuing companies such as
Stimulys, (ii) provide Spar a copy of the appraisal report, together with a
written offer, which shall remain in effect for a period of thirty days and
shall be legally binding on Stimulys, to sell all of Stimulys' assets
(unless the parties shall agree to a stock sale or another form of sale
transaction) to Spar for cash equal to 90% of the sum of (x) the appraisal
value of Stimulys shown in the appraisal report plus (y) the amount of
Stimulys' outstanding indebtedness (provided that such indebtedness shall
be added to the appraised value only if and to the extent such indebtedness
did not reduce the appraised value of Stimulys, and is not assumed directly
or indirectly by SPAR).
If Spar elects to exercise such right to purchase Stimulys' assets for
90% of the appraised value of Stimulys plus the amount of Stimulys'
indebtedness (if applicable), the parties shall proceed forthwith to
preparation of asset purchase and sale documents in form customary and
reasonable for a transaction of that type and size, and shall close such
purchase and sale as soon as is reasonably practicable.
Because the sale to Spar in that instance shall constitute a Change of
Control transaction, Spar shall be entitled to receive a portion of the Net
Proceeds from the transaction, which may be deducted from the sale price if
requested by Spar.
If Spar does not elect to exercise its right to purchase Stimulys'
assets, Stimulys and its owners shall be free to pursue a sale transaction
within six months thereafter for a price no less than 90% of the appraised
value shown in the appraisal and under the same terms and conditions
offered to SPAR.
C. Distributions Prior to Change of Control. If approved by Stimulys'
Board of Directors and subject to the availability of distributable funds
thereof, Stimulys may make distributions to its equity owners from time to
time. To the extent any such distribution constitutes a Non-Tax
Distribution, Spar shall be entitled to a payment equal to 30.72% of such
Non-Tax Distribution until total distributions to Spar pursuant to this
Section 2.C equal $2,350,000, after which Spar shall be entitled to further
distributions equal to 17.65% of any subsequent Non-Tax Distributions.
Notwithstanding the preceding, there will be no Non-Tax Distributions made
unless (A) Stimulys' cumulative
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net income after taxes from the effective date of this agreement to the
date of the Non-Tax Distribution exceeds two million dollars
($2,000,000.00) and Stimulys' Tangible Net deficit (negative tangible net
worth) is no less than minus four million seven hundred thousand dollars
($4,700,000.00) after any non-tax distribution). For purposes of
clarification, if the Tangible Net Deficit is $(4,700,001.00), a Non-Tax
Distribution cannot be made, if the Tangible Net Deficit is
$(4,699,999.00), a Non-Tax Distribution can be made. In any given year,
total Non-Tax Distributions will be limited to 30% of the prior years net
income after taxes as reported in Stimulys' year and audited financial
statements. Prior to issuance, any Non-Tax Distribution must be approved by
the Stimulys Lender/Lenders in effect at that time. Spar's approval will
not be required. No distributions will be made in the two years prior to a
sale.
D. Escrow of Shares. In order to ensure that Spar received the portion
of the proceeds of a Change of Control transaction as set out in Section
2.A above, as a condition to the effectiveness of this Agreement Thomas
Hunter shall tender the certificate(s) evidencing the Hunter Securities to
a mutually acceptable neutral party serving as Escrow Agent under an Escrow
Agreement to be executed contemporaneously herewith, which shall be in the
form attached hereto as Exhibit A (the "Escrow Agreement"). The escrow
arrangement shall not affect Mr. Hunter's ability to vote the Hunter
Securities or to receive distributions in respect of such securities.
E. Restriction on Non-Change of Control Transactions. Neither Stimulys
nor its owners shall be entitled to conduct any sale of Stimulys' assets or
stock to a third party entity that does not result in a Change of Control,
unless (i) the acquirer shall have assumed in writing all of the
obligations of Stimulys under this Agreement, (ii) the Escrow Agreement
shall have been modified to apply to the acquirer entity in lieu of
Stimulys, and (iii) Thomas Hunter shall have tendered all equity securities
he Controls or will Control in the acquiring entity to the Escrow Agent as
contemplated in Section 2.D above.
3. Release of Term Loan. Spar acknowledges that the commitments of Stimulys
made in Section 2 above fully and finally satisfy all indebtedness of any part
in respect of the Term Loan. Accordingly, Spar hereby releases PHI and Stimulys
from any and all claims, demands, liability or causes of action in respect of
the Term Loan, including without limitation all obligations of PHI and Stimulys
under the Term Notes, the Term Loan Agreement, and all other documents,
instruments, agreements and other writing entered into by PHI, Stimulys or Spar
in order to give effect to the Term Loan.
4. Release of Collateral. Without limiting the generality of Section 3
above, Spar acknowledges that any security interest it has in any collateral
pledged pursuant to the Term Loan Agreement is hereby forever released. Spar
agrees to assist Stimulys with and to cooperate (including without limitation
execution and filing (at Stimulys' expense) of UCC-3 Partial Termination
Statements) in the termination of Spar's security interest in collateral of
either Stimulys or PHI, other than Spar's security interest in the accounts
receivable of Stimulys, all as reasonably requested by Stimulys or PHI from time
to time.
-4-
5. Mutual Release.
A. Release by Spar. Spar, on behalf of itself and its affiliates,
successors, assigns, divisions, parents, subsidiaries, employees, agents,
directors, officers, shareholders, attorneys, successors and assigns
(collectively referred to as the "Spar Parties"), hereby releases, acquits and
forever discharges Stimulys, its affiliates (including without limitation PHI),
successors, assigns, divisions, parents, subsidiaries, employees, agents,
directors, officers, shareholders, attorneys, successors and assigns
(collectively referred to as the "Stimulys Parties") of and from any and all
liabilities, claims, remedies, demands, suits or causes of action of whatsoever
kind or character, in whole or in part whether choate or inchoate, which the
Spar Parties now have or ever have had against the Stimulys Parties arising from
any occurrence or transaction between the Spar Parties and the Stimulys Parties
from the beginning of time to the date hereof; provided, -------- however, that
notwithstanding the foregoing, nothing in this Section 5.A shall be construed as
or shall have the effect of ------- releasing any obligation of any of the
Stimulys Parties under this Agreement or any other document or agreement entered
into simultaneously herewith.
B. Release by Stimulys. Stimulys, on behalf of itself and the other
Stimulys Parties, hereby releases, acquits and forever discharges the Spar
Parties and from any and all liabilities, claims, remedies, demands, suits or
causes of action of whatsoever kind or character, in whole or in part, whether
choate or inchoate, which the Stimulys Parties now have or ever have had against
the Spar Parties arising from any occurrence or transaction between the Spar
Parties and the Stimulys Parties from the beginning of time to the date hereof;
provided, however, that notwithstanding the foregoing, nothing in this Section
6.A shall be construed as or shall have the effect of releasing any obligation
of any of the Spar Parties under this Agreement or any other document or
agreement entered into simultaneously herewith.
6. Management of Company. At all times while this Agreement is in effect,
Stimulys shall be managed in a normal and customary manner, consistent with past
practices.
7. Provision of Financial Information. No later than 120th day after the
end of each fiscal year of Stimulys, Stimulys shall provide Spar its financial
statements for the prior fiscal year, prepared in accordance with Generally
Accepted Accounting Principles consistently applied, including all accompanying
footnotes audited by a non-related accounting firm acceptable and approved by
the Stimulys Lender/Lenders in effect at that time. Stimulys shall also provide
quarterly unaudited statements or such other statements as would be normally
maintained and usual.
8. Expenses. The parties agree each will be responsible for and bear all of
its own costs and expenses in connection with the transactions contemplated by
this Agreement, including, but not limited to, all attorneys, accountants,
investment advisors or other professional fees incurred by the parties. The
parties agree that no broker or finder is or will be due any fee or other
compensation in connection with the transactions contemplated by this Agreement.
No expenses incurred by any party shall be assumed to be paid by any other party
without the written permission of the responsible party.
-5-
9. Disclosure. Except as and to the extent required by law, without the
prior written consent of the other party neither Stimulys nor Spar will make,
and each will direct its representatives not to make, directly or indirectly,
any public comment, statement or communication with respect to, or otherwise to
disclose or to permit the disclosure of the existence of discussions regarding
this transaction or any of the terms, conditions, or other aspects of the
transaction described in this Agreement, except to their banks, auditors and
legal or financial advisors. If a Party is required by law to make any such
disclosure, such Party shall first notify the other party of the content of the
proposed disclosure, the reasons such disclosure is required by law, and the
time and place that the disclosure will be made. SPAR will be allowed to provide
that information which in its sole judgment is required to be filed as part of
any official documents filed with the SEC or other governmental or regulatory
agencies. Such information shall include any required press release.
10. Entire Agreement; Amendments. The provisions of this Agreement
constitute the entire and only agreement between the parties with respect to the
subject matter hereof and supersede all prior agreements, commitments,
representations, understandings, or negotiations, oral or written, and all other
communications relating to the subject matter hereof. No amendment or
modification of any of the provisions of this Agreement will be effective unless
set forth in a document that purports to amend this Agreement and is executed by
all parties hereto.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
counterparts collectively shall constitute one instrument representing the
agreement between the parties hereto. It shall not be necessary that any one
counterpart be signed by all of the parties hereto as long as each of the
parties has signed at least one counterpart.
12. Governing Law and Venue. The validity, construction, and performance of
this Agreement shall be governed by and in accordance with the laws of the State
of New York (other than those choice of law rules that would defer to the
substantive laws of another jurisdiction). This governing law election has been
made by the parties in reliance (at least in part) on Section 5-1401 of the
General Obligations Law of the State of New York, as amended (as and to the
extent applicable), and other applicable law. Each party hereby consents and
agrees that the Supreme Court of the State of New York for the County of
Westchester and the United States District Court for the Southern District of
New York, County of Westchester, each shall have personal jurisdiction and
proper venue with respect to any dispute between the parties under or related to
this Agreement; provided that the foregoing consent shall not deprive either
party of the right in its sole and absolute discretion to voluntarily commence
or participate in any action, suit or proceeding in any other court having
jurisdiction and venue over the other party. The preceding consents to
jurisdiction and venue have been made by the parties in reliance (at least in
part) on Section 5-1402 of the General Obligations Law of the State of New York,
as amended (as and to the extent applicable), and other applicable law. Each
party will not raise, and hereby absolutely, unconditionally, irrevocably and
expressly waives forever, any objection or defense in any such dispute to any
such New York jurisdiction as an inconvenient forum.
13. Interpretation. The parties acknowledge that each party and its counsel
have reviewed and negotiated the terms and provisions of this Agreement and have
contributed to its
-6-
revision. Accordingly, the normal rule of construction, to the effect that
ambiguities are resolved against the drafting party, shall not be employed in
the interpretation of this Agreement; and its terms and provisions shall be
construed fairly as to all parties hereto and not in favor of or against any
party, regardless of which party is generally responsible for the preparation of
this Agreement.
-7-
Exhibit A
To
Sale Proceds Agreement
Escrow Agreement
[See attachment]
EXECUTION
The parties have executed this Sale Proceeds Agreement as of the Effective Date.
STIMULYS:
By: /s/ Thomas Hunter
----------------------------------------------
Thomas Hunter, President
SPAR:
SPAR INCENTIVE MARKETING, INC.
By: /s/ Robert Brown
----------------------------------------------
Robert Brown, Chairman & CEO
Performance Holdings and other current stockholders need to sign as a party and
be bound by the change in control and payment provisions in case they sell the
stock of Stimulys. This is contemplated as a business matter by Section 2A but
is not enforceable against PHI and the other stockholders without its
participation in the agreement.
WAIVER TO THIRD AMENDED AND RESTATED
REVOLVING CREDIT AND SECURITY AGREEMENT
THIS WAIVER (this "Waiver") is entered into as of March 31, 2005, by
and among SPAR MARKETING FORCE, INC. ("SMF"), SPAR, INC. ("SPAR"), SPAR/BURGOYNE
RETAIL SERVICES, INC ("SBRS"), SPAR GROUP, INC. ("SGI"), SPAR INCENTIVE
MARKETING, INC. ("SIM"), SPAR TRADEMARKS, INC. ("STM"), SPAR MARKETING, INC.
(DE) ("SMIDE"), SPAR MARKETING, INC. (NV) ("SMINV"), SPAR ACQUISITION, INC.
("SAI"), SPAR TECHNOLOGY GROUP, INC. ("STG"), SPAR/PIA RETAIL SERVICES, INC.
("Pia Retail"), RETAIL RESOURCES, INC. ("Retail"), PIVOTAL FIELD SERVICES, INC.
("Pivotal Field"), PIA MERCHANDISING CO., INC. ("PIA"), PACIFIC INDOOR DISPLAY
CO. ("Pacific"), PIVOTAL SALES COMPANY ("Pivotal"), SPAR ALL STORE MARKETING
SERVICES, INC., ("SAS") and SPAR BERT FIFE, INC. ("SBFI") (each a "Borrower" and
collectively "Borrowers") and WEBSTER BUSINESS CREDIT CORPORATION (formerly
known as Whitehall Business Credit Corporation) ("Lender").
BACKGROUND
The Borrowers and Lender are parties to that certain Third Amended and
Restated Revolving Credit and Security Agreement dated January 24, 2003 (as
amended, restated, supplemented or otherwise modified from time to time, the
"Loan Agreement") pursuant to which Lender provides the Borrowers with certain
financial accommodations.
The Borrowers have violated certain covenants and have requested Lender
waive the resulting Events of Default and Lender is willing to do so.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrowers by
Lender, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. All capitalized terms not otherwise defined or amended herein
shall have the meanings given to them in the Loan Agreement.
2. Waiver. Subject to the satisfaction of Section 3 below, Lender hereby waives
the Event of Default which has occurred as a result Borrowers' non-compliance
with Section 12(r) due to Borrowers' failure to achieve EBITDA for October, 2004
and December, 2004 at the requisite level for each such month. Notwithstanding
the foregoing, the waiver of the Events of Default set forth above does not
establish a course of conduct between Borrowers and Lender and Borrowers hereby
agree that Lender is not obligated to waive any future Events of Default under
the Loan Agreement.
3. Conditions of Effectiveness. This Waiver shall become effective as of the
date hereof, provided that Lender shall have received four (4) copies of this
Waiver executed by the Borrowers and the limited guarantors (each a "Limited
Guarantor") and the guarantor ("Guarantor") listed on the signature page hereto.
4. Representations, Warranties and Covenants. Each of the Borrowers hereby
represents, warrants and covenants as follows:
(a) This Waiver and the Loan Agreement constitute legal, valid and
binding obligations of each of the Borrowers and are enforceable against each of
the Borrowers in accordance with their respective terms.
(b) Upon the effectiveness of this Waiver, each of the Borrowers hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agrees that all such
covenants, representations and warranties shall be deemed to have been remade as
of the effective date of this Waiver.
(c) No Borrower has any defense, counterclaim or offset with respect to
the Loan Agreement or the Obligations.
5. Effect on the Loan Agreement.
(a) Except as specifically amended herein, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(b) Except as set forth in Section 2 hereof, the execution, delivery
and effectiveness of this Waiver shall not operate as a waiver of any right,
power or remedy of Lender, nor constitute a waiver of any provision of the Loan
Agreement, or any other documents, instruments or agreements executed and/or
delivered under or in connection therewith.
6. Governing Law. This Waiver shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns and shall be
governed by and construed in accordance with the laws of the State of New York
(other than those conflict of law rules that would defer to the substantive law
of another jurisdiction).
7. Release. Borrowers and Guarantors hereby release, remise, acquit and forever
discharge Lender, Lender's employees, agents, representatives, consultants,
attorneys, fiduciaries, officers, directors, partners, predecessors, successors
and assigns, subsidiary corporations, parent corporations, and related corporate
divisions (all of the foregoing hereinafter called the "Released Parties"), from
any and all actions and causes of action, judgments, executions, suits, debts,
claims, demands, liabilities, obligations, damages and expenses of any and every
character, known or unknown, direct and/or indirect, at law or in equity, of
whatsoever kind or nature, for or because of any matter or things done, omitted
or suffered to be done by any of the Released Parties prior to and including the
date of execution hereof, and in any way directly or indirectly arising out of
or in any way connected to this Waiver or the Ancillary Agreements (all of the
foregoing hereinafter called the "Released Matters"). Borrowers acknowledge that
the agreements
2
in this Section are intended to be in full satisfaction of all or
any alleged injuries or damages arising in connection with the Released Matters.
8. Headings. Section headings in this Waiver are included herein for convenience
of reference only and shall not constitute a part of this Waiver for any other
purpose.
9. Counterparts; Facsimile Signatures. This Waiver may be executed by the
parties hereto in one or more counterparts of the entire document or of the
signature pages hereto, each of which shall be deemed an original and all of
which taken together shall constitute one and the same agreement. Any signature
received by facsimile transmission shall be deemed an original signature hereto.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, this Waiver has been duly executed as of the day and year
first written above.
WEBSTER BUSINESS CREDIT CORPORATION
By: /s/ Joseph Zautra
------------------------------------
Name: Joseph Zautra
Its: Vice President
AGREED TO:
----------
SPAR MARKETING FORCE, INC.
SPAR, INC.
SPAR/BURGOYNE RETAIL SERVICES, INC.
SPAR GROUP, INC.
SPAR INCENTIVE MARKETING, INC.
SPAR TRADEMARKS, INC.
SPAR MARKETING, INC. (DE)
SPAR MARKETING, INC. (NV)
SPAR ACQUISITION, INC.
SPAR TECHNOLOGY GROUP, INC.
SPAR/PIA RETAIL SERVICES, INC.
RETAIL RESOURCES, INC.
PIVOTAL FIELD SERVICES, INC.
PIA MERCHANDISING CO., INC.
PACIFIC INDOOR DISPLAY CO.
PIVOTAL SALES COMPANY
SPAR GROUP, INC.
SPAR ALL STORE MARKETING SERVICES, INC.
SPAR BERT FIFE, INC.
By: /s/ Charles Cimitile
------------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer of each of
the foregoing entities
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
CONSENTED AND AGREED TO BY:
- ---------------------------
/s/ William H. Bartels
- ------------------------------
WILLIAM H. BARTELS, Limited Guarantor
/s/ Robert G. Brown
- ------------------------------
ROBERT G. BROWN, Limited Guarantor
PIA MERCHANDISING LIMITED, Guarantor
By: /s/ Charles Cimitile
-------------------------------
Name: Charles Cimitile
Its: Chief Financial Officer
Master Lease Agreement
Lessor: SPAR Marketing Services, Inc. Lessee: SPAR Marketing Force, Inc.
Address: 580 White Plains Road Address: 1791 Harmon Road
Tarrytown, NY 10591 Auburn Hills, MI 48326
TERMS AND CONDITIONS OF LEASE
The undersigned Lessee hereby requests Lessor to purchase the personal property
described in any Equipment Schedule hereunder (herein called "Equipment") from
the supplier(s) listed in any Equipment Schedule hereunder (herein called
"Vendor" and/or "Manufacturer", as applicable) and to lease the Equipment to
Lessee on the terms and conditions of the lease set forth below.
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the
Equipment, all upon the terms and provisions and subject to the conditions set
forth in this Master Lease Agreement (as the same may be supplemented, modified,
amended, restated or replaced from time to time in the manner provided herein,
this "Lease").
In consideration of the foregoing, the mutual covenants and agreements
hereinafter set forth, and other good and valuable consideration (the receipt
and adequacy of which is hereby acknowledged by the parties), the parties hereto
hereby agree as follows:
1. NO WARRANTIES BY LESSOR. Lessee has selected the Equipment and may have
entered into certain purchase, licensing, or maintenance agreements
with the Vendor and/or Manufacturer (herein referred to as an
"Acquisition Agreement") covering the Equipment as further described in
Paragraph 25 hereof. If Lessee has entered into any Acquisition
Agreement, each agreement shall provide for certain rights and
obligations of the party thereto with respect to the Equipment, and
Lessee shall perform all of the obligations set forth in each
Acquisition Agreement as if this Lease did not exist. LESSOR MAKES NO
WARRANTY, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING
THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESSES
FOR ANY PARTICULAR PURPOSE, AND, AS TO LESSOR, LESSEE LEASES THE
EQUIPMENT "AS IS" AND "WHERE IS". LESSOR SHALL HAVE NO LIABILITY FOR
ANY LOSS, DAMAGE OR EXPENSE OF ANY KIND WHATSOEVER RELATING THERETO,
INCLUDING (WITHOUT LIMITATION) ANY SPECIAL, INDIRECT, INCIDENTAL OR
CONSQUENTIAL DAMAGES OF ANY CHARACTER.
2. CLAIMS AGAINST VENDOR AND/OR MANUFACTURER. If the Equipment is not
properly installed, does not operate as represented or warranted by
Vendor and/or Manufacturer, or is unsatisfactory for any reason, Lessee
shall make any claim on account thereof solely against Vendor and/or
Manufacturer pursuant to the Acquisition Agreement, if any, and shall,
nevertheless, pay Lessor all rent payable under this Lease. All
warranties from Vendor and/or Manufacturer are, to the extent they are
assignable, hereby assigned to Lessee for the term of this Lease or
until an Event of Default occurs hereunder, for Lessee's exercise at
Lessee's expense. Lessee may directly inquire with Vendor and/or
Manufacturer to receive an accurate and complete statement of such
warranties, including any disclaimers or limitations of such warranties
or of any remedies with respect thereto.
3. VENDOR NOT AN AGENT. Lessee understands and agrees that neither Vendor,
nor any sales representative or other agent of Vendor, is an agent of
Lessor. Sales representatives or agents of Vendor, and persons that are
not employed by Lessor (including brokers and agents) are not
authorized to waive or alter any term or condition of this Lease, and
no representation as to the Equipment or any other matter by Vendor or
any other person that is not employed by Lessor (including brokers or
agents) shall in any way affect Lessee's duty to pay the rent and
perform its other obligations as set forth in this Lease.
4. NON-CANCELLABLE LEASE. This Lease and any Equipment Schedule hereto
cannot be cancelled or terminated except as expressly provided herein.
Lessee agrees that its obligation to pay all rent and other sums
payable hereunder and the rights of Lessor in and to such rent are
absolute and unconditional and are not subject to any abatement,
reduction, setoff, defense, counterclaim or recoupment due or alleged
to be due to, or by reason of, any past, present or future claims which
Lessee may have against Lessor, any assignee, any Manufacturer or
Vendor, or against any person for any reason whatsoever.
5. ORDERING EQUIPMENT. Lessee shall arrange for delivery of the Equipment
so that it can be accepted in accordance with Paragraph 6 hereof within
90 days after the date on which Lessor accepts Lessee's offer to enter
into this Lease with respect to any Equipment Schedule or by such other
date as may be set forth in
an Equipment Schedule or Approval Letter issued by Lessor as the
Approval Expiration Date. Unless otherwise specified on the Equipment
Schedule, Lessee shall be responsible for all transportation, packing,
installation, testing and other charges in connection with the
delivery, installation and use of the Equipment. Lessee hereby
authorizes Lessor to insert in any Equipment Schedule hereunder the
serial numbers and other identification data of Equipment when
determined by Lessor.
6. ACCEPTANCE. Lessee acknowledges that for purposes of receiving or
accepting the Equipment from Vendor, Lessee is acting on Lessor's
behalf. Upon delivery of the Equipment to Lessee and Lessee's
inspection thereof, Lessee shall furnish Lessor a written statement (a)
acknowledging receipt of the Equipment in good condition and repair and
(b) accepting it as satisfactory in all respects for the purposes of
this Lease (the "Certificate of Acceptance"). Unless otherwise set
forth in the applicable Equipment Schedule, the first day of the month
following receipt and acceptance of the Equipment covered by an
Equipment Schedule shall be the Rent Commencement Date therefor.
However, should Lessee have a previous lease with Lessor which is
active at the time of acceptance of the Equipment under the Equipment
Schedule and said lease and the current Equipment Schedule hereunder
shall have the same invoice address then the Rent Commencement Date
shall occur in the month immediately following acceptance of the
Equipment on the rent payment due date established with Lessee for said
previous active lease. Lessor is authorized to fill in on any Equipment
Schedule hereunder the Rent Commencement Date in accordance with the
foregoing.
7. TERMINATION BY LESSOR. If, by the Approval Expiration Date, the
Equipment described in any Equipment Schedule has not been delivered to
Lessee and accepted by Lessee as provided in Paragraph 6 hereof, or if
other conditions of Lessor's Approval Letter, if any, have not been
met, then Lessor may, at its option, terminate this Lease and its
obligations hereunder with respect to such Equipment Schedule at any
time after the expiration of such 90 days or any date after the
Approval Expiration Date, as applicable. Lessor shall give Lessee
written notice whether or not it elects to exercise such option within
10 days after Lessor's receipt of Lessee's written request for such
notice.
8. TERM. The term of this Lease shall be comprised of an Interim Term and
an Initial Term. The Interim Term shall commence on the date the
Certificate of Acceptance is executed by Lessee (the "Acceptance Date")
and terminate on the Rent Commencement Date. The Initial Term of this
Lease shall begin on the Rent Commencement Date, and shall terminate on
the later of (i) the last day of the last month of the Initial Term (as
that Term is set forth in the applicable Equipment Schedule hereto) or
(ii) the date Lessee fulfills all Lessee's obligations hereunder.
9. RENTAL. The rental amount payable to Lessor by Lessee for the Equipment
will be set forth in the Equipment Schedule(s) ("Rental Amount). As the
first rent payment for the Equipment, Lessee shall pay Lessor in
immediately available funds on the Rent Commencement Date the sum of,
(i) the Rental Amount, and (ii) Interim Rent in an amount equal to
1/3Oth of the Rental Amount times the number of days from and including
the Acceptance Date through but excluding the Rent Commencement Date,
and subsequent rent payments shall be due on the same day of each
calendar period as indicated on the Equipment Schedule for the balance
of the Initial Term. Rent payments shall be due whether or not Lessee
has received any notice that such payments are due. All rent payments
shall be paid to Lessor at its address set forth above or as otherwise
directed by Lessor in writing.
10. RENEWAL If no default shall have occurred and be continuing, Lessee
shall be entitled to renew this Lease with respect to all, but not less
than all, of the Equipment covered by an Equipment Schedule for a
minimum 12 month period at an amount equal to the fair market rental
value thereof, in use and operational, in the condition required by
this Lease, payable on a periodic basis, as mutually agreed by Lessor
and Lessee ("Renewal Rent). Lessee must give Lessor written notice of
its intention to exercise said option, which notice must be received by
Lessor at least 90 days before expiration of the Initial Term. The
first installment of the Renewal Rent shall be due at expiration of the
Initial Term of this Lease. Should Lessee fail to comply with the
provisions described above covering renewal, upon expiration of the
Initial Term, the term of this Lease shall be automatically extended
for a term of 3 months. Thereafter, the term of this Lease will be
extended for subsequent full month periods, on a month to month basis,
until Lessee has given at least 90 days written notice terminating this
Lease. Such termination will take effect upon completion of all
Lessee's obligations under this Lease (including payment of all
periodic rental payments due during such 90 day period, as provided in
Paragraph 9 of this Lease). At any time after the expiration of the
Initial Term, if this Lease has been automatically extended as set
forth herein, Lessor reserves the right to terminate this Lease by 30
days written notice to Lessee.
11. LOCATION; INSPECTION; LABELS. The Equipment shall be delivered to and
shall not be removed without Lessor's prior written consent from the
"Equipment Location" shown on the related Equipment Schedule, or if
none is specified, Lessee's billing address shown above. Lessor shall
have the right to inspect the Equipment at any reasonable time. If
Lessor supplies Lessee with labels stating that the Equipment is owned
by Lessor, Lessee shall affix such labels to and keep them in a
prominent place on the Equipment.
12. REPAIRS; USE; ALTERATIONS. Lessee, at its own cost and expense, shall
keep the Equipment in good repair and working order, in the same
condition as when delivered to Lessee, reasonable wear and tear
excepted, and in accordance with the manufacturer's recommended
specifications; shall use the Equipment lawfully; shall not alter the
Equipment without Lessor's prior written consent, shall use the
Equipment in compliance with any existing Manufacturer's service and
warranty requirements and any insurance policies applicable to the
Equipment and shall furnish all parts and servicing required therefor.
All parts, repairs, additions, alterations and attachments placed on or
incorporated into the Equipment which cannot be removed without damage
to the Equipment shall immediately become part of the Equipment and
shall be the property of the Lessor. Lessee will obtain and maintain
all permits, licenses and registrations necessary to lawfully operate
the facility where the Equipment is located. Lessee shall comply with
all applicable environ- mental and industrial hygiene laws, rules and
regulations (including but not limited to federal, state, and local
environmental protection, occupational, health and safety or similar
laws, ordinances and restrictions). Lessee shall, not later than 5 days
after the occurrence, provide Lessor with copies of any report required
to be filed with governmental agencies regulating environmental claims.
Lessee shall immediately notify Lessor in writing of any existing,
pending or threatened investigation, inquiry, claim or action by any
governmental authority in connection with any law, rule or regulation
relating to industrial hygiene or environmental conditions that could
affect the Equipment.
13. MAINTENANCE. If the Equipment is such that Lessee is not normally
capable of maintaining it, Lessee, at its expense, shall enter into and
maintain in full force and effect throughout the Initial Term and any
renewal term, Vendor and/or Manufacturer's standard maintenance
contract, and shall comply with all its obligations thereunder. An
alternate source of maintenance may be used with Lessor's prior written
consent. Such consent shall be granted if, in Lessor's reasonable
opinion, the Equipment will be maintained in an equivalent state of
good repair, condition and working order.
14. SURRENDER. Provided that Lessee does not exercise the purchase option
as set forth in Paragraph 27 hereof, upon the expiration of the Initial
Term, or any renewal term, or upon demand by Lessor made pursuant to
Paragraph 21 of this Lease, Lessee, at its expense, shall return all,
but not less than all, of the Equipment by delivering it to such place
or on board such carrier, packed for shipping, as Lessor may specify.
Lessee agrees that the Equipment, when returned, shall be in the same
condition as when delivered to Lessee, reasonable wear and tear
excepted, and in a condition which will permit Lessor to be eligible
for Manufacturer's standard maintenance contract without incurring any
expense to repair or rehabilitate such Equipment. Lessee shall be
liable for reasonable and necessary expenses to place the Equipment in
such condition. Lessee shall remain liable for the condition of the
Equipment until it is received and accepted at the destination
designated by Lessor as set forth above. If any items of Equipment are
missing or damaged when returned, such occurrence shall be treated as
an event of Loss or Damage with respect to such missing or damaged
items and shall be subject to the terms specified in Paragraph 15
below. Lessee shall provide Lessor with a Letter of Maintainability
from the Manufacturer of the Equipment, which letter shall state that
the Equipment will be eligible for the Manufacturer's standard
maintenance contract when sold or leased to a third party. Lessee shall
give Lessor prior written notice that it is returning the Equipment as
provided above, and such notice must be received by Lessor at least 90
days prior to such return. Should Lessee fail to comply with the
provisions described above covering surrender, upon expiration of the
Initial Term, the term of this Lease shall be automatically extended
for a term of 3 months. Thereafter, the term of this Lease will be
extended for subsequent full month periods, on a month to month basis,
until Lessee has given at least 90 days written notice terminating this
Lease. Such termination will take effect upon completion of all
Lessee's obligations under this Lease (including payment of all
periodic rental payments due during such 90 day period, as provided in
Paragraph 9 of this Lease). At any time after the expiration of the
Initial Term, if this Lease has been automatically extended as set
forth herein. Lessor reserves the right to terminate this Lease by 30
days written notice to Lessee.
15. LOSS OR DAMAGE. Lessee shall bear the entire risk of loss, theft,
destruction of or damage to the Equipment or any item thereof (herein
"Loss or Damage") from any cause whatsoever. No Loss or Damage shall
relieve Lessee of the obligation to pay rent or of any other obligation
under this Lease. In the event of Loss or Damage, Lessee, at the option
of Lessor; shall: (a) place the same in good condition and repair; (b)
replace the same with like equipment acceptable to Lessor in good
condition and repair with clear title thereto in Lessor; or (c) pay to
Lessor the total of the following amounts: (i) the total rent and other
amounts due and owing at the time of such payment, plus (ii) an amount
calculated by Lessor which is the present value at 5% per annum simple
interest discount of all rent and other amounts payable by Lessee with
respect to said item from date of such payment to date of expiration of
its Initial Term, plus (iii) the "reversionary value" of the Equipment,
which shall be determined by Lessor as the total cost of the Equipment
less 60% of the total rent (net of sales/use taxes, if any) required to
be paid pursuant to Paragraph 9. Upon Lessor's receipt of such payment,
Lessee and/or Lessee's insurer shall be entitled to Lessor's interest
in said item, for salvage purposes, in its then condition and location,
"as-is ", without any warranty, express or implied.
16. INSURANCE. Lessee shall provide, maintain and pay for (a) all risk
property insurance against the loss or theft of or damage to the
Equipment, for the full replacement value thereof, naming Lessor as a
loss payee, and (b) commercial general liability insurance (and if
Lessee is a doctor; hospital or other health care provider, medical
malpractice insurance). All such policies shall name Lessor as an
additional insured and shall have combined single limits in amounts
acceptable to Lessor. All such insurance policies shall be endorsed to
be primary and non-contributory to any policies maintained by Lessor.
In addition Lessee shall cause Lessor to be named as an additional
insured on any excess or umbrella policies purchased by Lessee. A copy
of each paid-up policy evidencing such insurance (appropriately
authenticated by the insurer) or a certificate of the insurer providing
such coverage proving that such policies have been issued, providing
the coverage required hereunder shall be delivered to Lessor prior to
the Rent Commencement Date. All insurance shall be placed with
companies satisfactory to Lessor and shall contain the insurer's
agreement to give 30 days written notice to Lessor before cancellation
or any material change of any policy of insurance.
17. TAXES. Lessee shall reimburse to Lessor (or pay directly if, but only
if, instructed by Lessor) all charges and taxes (local, State and
federal) which may now or hereafter be imposed or levied upon the sale,
purchase, ownership, leasing, possession or use of the Equipment;
excluding, however; all income taxes levied on (a) any rental payments
made to Lessor hereunder; (b) any payment made to Lessor in connection
with Loss or Damage to the Equipment under Paragraph 15 hereof, or (c)
any payment made to Lessor in connection with Lessee's exercise of its
purchase option under Paragraph 27 hereof.
18. LESSOR'S PAYMENT. If Lessee fails to provide or maintain said
insurance, to pay said taxes, charges and fees, or to discharge any
levies, liens and encumbrances created by Lessee, Lessor shall have the
right, but shall not be obligated, to obtain such insurance, pay such
taxes, charges and fees, or effect such discharge. In that event,
Lessee shall remit to Lessor the cost thereof with the next rent
payment.
19. INDEMNITY. (a) General Indemnity. Lessee shall indemnify Lessor against
and hold Lessor harmless from any and all claims, actions, damages,
costs, expenses including reasonable attorneys' fees, obligations,
liabilities and liens (including any of the foregoing arising or
imposed under the doctrines of "strict liability" or "product
liability" and including without limitation the cost of any fines,
remedial action, damage to the environment and cleanup and the fees and
costs of consultants and experts), arising out of the manufacture,
purchase, lease, ownership, possession, operation, condition, return or
use of the Equipment, or by operation of law, excluding however, any of
the foregoing resulting from the gross negligence or willful misconduct
of Lessor. Lessee agrees that upon written notice by Lessor of the
assertion of such a claim, action, damage, obligation, liability or
lien, Lessee shall assume full responsibility for the defense thereof.
Lessee's choice of counsel shall be mutually acceptable to both Lessee
and Lessor. This indemnity also extends to any environmental claims
arising out of or relating to prior acts or omissions of any party
whatsoever. The provisions of this paragraph shall survive termination
of this Lease with respect to events occurring prior to such
termination.
(b) Tax Indemnity. Lessee acknowledges that Lessor shall be
entitled to all tax benefits of ownership with respect to the
Equipment (the "Tax Benefits"), including but not limited to,
(i) the accelerated cost recovery deductions determined in
accordance with Section 168(b)(1) of the Internal Revenue Code
of 1986 for the Equipment based on the original cost of the
Equipment to Lessor (ii) deductions for interest on any
indebtedness incurred by Lessor to finance the Equipment and
(iii) sourcing of income and losses attributable to this
Lease, to the United States. Lessee represents that the
Equipment shall be depreciable for Federal tax purposes
utilizing the MACRS Recovery Period as set forth in the
Equipment Schedule, with such depreciation commencing as of
the date of Equipment acceptance by Lessee as set forth on the
Certificate of Acceptance. Lessee agrees to take no action
inconsistent with the foregoing or any action which would
result in the loss, disallowance or unavailability to Lessor
of all or any part of the Tax Benefits. Lessee hereby
indemnifies and holds harmless Lessor and its assigns from and
against (i) the loss, disallowance, unavailability or
recapture of all or any part of the Tax Benefits resulting
from any action, statement, misrepresentation or breach of
warranty or covenant by Lessee of any nature whatsoever
including but not limited to the breach of any
representations, warranties or covenants contained in this
paragraph, plus (ii) all interest, penalties, fines or
additions to tax resulting from such loss, disallowance,
unavailability or recapture, plus (iii) all taxes required to
be paid by Lessor upon receipt of the indemnity set forth in
this paragraph. Any payments made by Lessee to reimburse
Lessor for lost Tax Benefits shall be calculated (i) on the
assumption that Lessor is subject to the maximum Federal
Corporate Income Tax with respect to each year and that all
Tax Benefits are currently utilized, and (ii) without regard
to whether Lessor or any members of a consolidated group of
which Lessor is also a member is then subject to any increase
in tax as a result of the loss of Tax Benefits. For the
purposes of this paragraph, "Lessor" includes for all tax
purposes the consolidated taxpayer group of which Lessor is a
part.
(c) Payment. The amounts payable pursuant to this Paragraph 19
shall be payable upon demand of Lessor, accompanied by a
statement describing in reasonable detail such claim, action,
damage, cost, expense, fee, obligation, liability, lien or tax
and setting forth the computation of the amount so payable,
which computation shall be binding and conclusive upon Lessee,
absent manifest error. The indemnities and assumptions of
liabilities and obligations contained in this Paragraph 19
shall continue in full force and effect notwithstanding the
expiration or other termination of this Lease.
20. DELINQUENT PAYMENTS. (a) Service Charge. Since it would be impractical
or extremely difficult to fix Lessor's actual damages for collecting
and accounting for a late payment, if any payment to Lessor required
herein (including, but not limited to, rental, renewal, tax, purchase
and other amounts) is not paid on or before its due date, Lessee shall
pay to Lessor an amount equal to 5% of any such late payment. (b)
Interest. Lessee shall also pay interest on any such late payment from
the due date thereof until the date paid at the littlest of 18% per
annum or the maximum rate allowed by law.
21. DEFAULT; REMEDIES. Any of the following shall constitute an "Event of
Default" under this Lease: If (a) Lessee fails to pay when due any rent
or other amount required herein to be paid by Lessee and such
non-payment continues for more than seven days after notice thereof
from Lessor, or (b) Lessee makes an assignment for the benefit of
creditors, whether voluntary or involuntary, or (c) a petition is filed
by or against Lessee under any bankruptcy, insolvency or similar
legislation, or (d) Lessee violates or fails to perform any provision
of either this Lease or any Acquisition Agreement, or violates or fails
to perform any covenant or representation made by Lessee herein, and
fails to correct the same within seven days after notice thereof from
Lessor, or (e) Lessee makes a bulk transfer of furniture, furnishings,
fixtures or other equipment or inventory, or (f) Lessee ceases doing
business as a going concern or terminates its existence, or (g) Lessee
consolidates with, merges with or into, or conveys or leases all or
substantially all of its assets as an entirety to any person or engages
in any other form of reorganization, or there is a change in the legal
structure of Lessee, in each case it results, in the opinion of the
Lessor, in a material adverse change in Lessee's ability to perform its
obligations under this Lease, or (h) any representation or warranty
made by Lessee in this Lease or in any other document or agreement
furnished by Lessee to Lessor shall prove to have been false or
misleading in any material respect when made or when deemed to have
been made, or (i) Lessee shall be in default under any material
obligation for the payment of borrowed money or the deferred purchase
price of, or for the payment of any rent due with respect to, any real
or personal property and such default continues for more than seven
days after notice thereof from Lessor, or (j) Lessee shall be in
default under any other agreement now existing or hereafter made with
Lessor or any of Lessor's affiliates and such default continues for
more than seven days after notice thereof from Lessor, or (k) any event
or condition described in the foregoing clauses (b), (c), (e), (f),
(g), (h) (in clauses (g) and (h) substituting the phrase "guaranty or
other credit support document" for the word "Lease"), (i) or (j) shall
have occurred with respect to any guarantor of, or other party liable
in whole or in part for, Lessee's obligations hereunder, or such
guarantor or other party shall have defaulted in the observance or
performance of any covenant, condition or agreement to be observed or
performed by it under the guaranty or other credit support document
pursuant to which it is liable for Lessee's obligations hereunder, or
such guaranty or other credit support document shall have been revoked
or terminated or shall have otherwise ceased, for any reason, to be in
full force and effect. An Event of Default with respect to any
Equipment Schedule shall constitute an Event of Default for all
Equipment Schedules. Lessee shall promptly notify Lessor of the
occurrence of any Event of Default upon Lessee's receipt of notice or
knowledge thereof (other than pursuant to Lessor's notice).
If an Event of Default occurs, Lessor shall have the right to
exercise any one or more of the following remedies in order to protect
the interests and reasonably expected profits and bargains of Lessor:
(a) Lessor may terminate this Lease with respect to all or any part of
the Equipment, (b) Lessor may recover from Lessee all rent and other
amounts then due and as they shall thereafter become due hereunder, (c)
Lessor may take possession of any or all items of Equipment, wherever
the same may be located, without demand or notice, without any court
order or other process of law and without liability to Lessee for any
damages occasioned by such taking of possession, and any such taking of
possession shall not constitute a termination of this Lease, (d) Lessor
may recover from Lessee, with respect to any and all items of
Equipment, and with or without repossessing the Equipment the sum of
(1) the total amount due and owing to Lessor at the item of such
default, plus (2) an amount calculated by Lessor which is the present
value at 5% per annum simple interest discount of all rent and other
amounts payable by Lessee with respect to said item(s) form date of
such payment to date of expiration of its Initial Term, plus (3) the
"reversionary value" of the Equipment, which shall be determined by
Lessor as the total cost of the Equipment less 60% of the total rent
(net of sales/use taxes, if any) required to be paid pursuant to
Paragraph 9, and which the parties agree is a reasonable estimate of
such value; and upon the payment of all amounts described in clauses
(1), (2) and (3) above, Lessee will become entitled to the Equipment AS
IS, WHERE IS, without warranty whatsoever; provided, however, that if
the Lessor shall sell, lease or otherwise dispose of the Equipment in a
commercially reasonable manner, with or without notice and on public or
private bid, and apply the net proceeds thereof (after deducting all
expenses, including attorneys' fees incurred in connection therewith),
to the sum of (1), (2) and (3) above, and e) Lessor may pursue any
other remedy available at law or in equity, including but not limited
to seeking damages or specific performance and/or obtaining an
injunction.
No right or remedy herein conferred upon or reserved to Lessor
is exclusive of any right or remedy herein or by law or equity provided
or permitted; but each shall be cumulative of every other right or
remedy given hereunder or now or hereafter existing at law or in equity
or by statue or otherwise, and may be enforced concurrently therewith
or from time to time, but Lessor shall not be entitled to recover a
greater amount in damages than Lessor could have gained by receipt of
the of Lessee's full, timely and complete performance of its
obligations pursuant to the terms of this Lease plus accrued delinquent
payments under Paragraph 21.
22. LESSOR'S EXPENSE. Lessee shall pay Lessor all costs and expenses,
including attorney's fees and the fees of collection agencies, incurred
by Lessor in enforcing any of the terms, conditions, or provisions
hereof or in protecting Lessor's rights herein. Lessee's obligation
hereunder includes all such costs and expenses experienced by Lessor
(a) prior to filing of an action, (b) in connection with an action
which is dismissed, and (c) in the enforcement of any judgment.
Lessee's obligation to pay Lessor's attorney's fees incurred in
enforcing any judgment is a separate obligation of Lessee, severable
from Lessee's other obligations hereunder, which obligation will
survive such judgment and will not be deemed to have been merged into
such judgment.
23. OWNERSHIP; PERSONAL PROPERTY. The Equipment shall at all times remain
the property of Lessor and Lessee shall have no right, title or
interest therein or thereto except as expressly set forth in this Lease
and the Equipment shall at all times be and remain personal property
notwithstanding that the Equipment or any part thereof may now be, or
hereafter become, in any manner, affixed or attached to real property
or any improvements thereon.
24. NOTICES. Any notice, request, demand or other communication permitted
or required to be given to a party under this Lease shall be in writing
and shall be sent to the addressee at the address set forth above or on
the Equipment Schedule (or at such other address as shall be designated
by notice to the other party and persons receiving copies), effective
upon actual receipt (or refusal to accept delivery) by the addressee on
any business day or the first business day following receipt after the
close of normal business hours or on any non-business day, by (a) FedEx
(or other equivalent national or international overnight courier) or
United States Express Mail, (b) certified, registered, priority or
express United States mail, return receipt requested, (c) telecopy or
(d) messenger, by hand or any other means of actual delivery
25. ACQUISITION AGREEMENTS. If the Equipment is subject to any Acquisition
Agreement, Lessee as part of this Lease, transfers and assigns to
Lessor all of its rights, but none of its obligations (except for
Lessee's obligation to pay for the Equipment conditioned upon Lessee's
acceptance in accordance with Paragraph 6), in and to the Acquisition
Agreement, including but not limited to the right to take title to the
Equipment. Lessee shall indemnify and hold Lessor harmless in
accordance with Paragraph 19 from any liability resulting from any
Acquisition Agreement as well as liabilities resulting from any
Acquisition Agreement Lessor is required to enter into on behalf of
Lessee or with Lessee for purposes of this Lease.
26. UPGRADES. Any existing lease between Lessor and Lessee subject to an
"upgrade" program shall continue in full force and effect and shall be
kept free of default by Lessee (even if the Equipment covered by the
existing lease is sold. traded-in, etc.) until any such existing lease
is cancelled by Lessor when, if applicable, the new Equipment is
accepted by Lessee for all purposes of this Lease.
27. PURCHASE OPTION. If no default shall have occurred and be continuing,
Lessee shall be entitled, at its option upon written notice to Lessor,
which notice must be received by Lessor at least 90 days prior to the
end of either the Initial Term or any renewal term of any Equipment
Schedule, to purchase all, but not less than all, of the Equipment
covered by such Equipment Schedule from Lessor at the end of the
Initial Term or any renewal term for such Equipment Schedule at a
purchase price equal to the then fair market value of the Equipment in
use and operational, in the condition required by this Lease, as
mutually agreed by Lessor and Lessee. On a date which is no later than
the expiration date of the Initial Term or any renewal term, as
applicable, Lessee shall pay to Lessor the purchase price for the
Equipment covered by such Equipment Schedule (plus any taxes levied
thereon) and Lessor shall sell the Equipment "as-is where-is" without
any warranties express or implied.
28. RELATED EQUIPMENT SCHEDULES. In the event that any Equipment Schedule
hereunder shall include Equipment that may become attached to, affixed
to, or used in connection with Equipment covered under another
Equipment Schedule hereunder ("Related Equipment Schedule"), Lessee
acknowledges the following: (a) if Lessee elects to exercise a purchase
option or renewal option under any Equipment Schedule, if provided; or
(b) if Lessee elects to return the Equipment under any Equipment
Schedule as described in Paragraph 14, then Lessor, at its discretion,
may require the similar disposition of all Related Equipment Schedules
as provided for by this Lease.
29. EQUIPMENT SCHEDULES. An executed Equipment Schedule that incorporates
by reference the terms of this Master Lease Agreement, marked
"Original," shall be the original of this Lease for the Equipment
described therein for all purposes. All other executed counterparts of
this Lease shall be marked "Duplicate." Unless specified otherwise
therein, in the event any written rider or other agreement is attached
to and made a part of an Equipment Schedule, the terms and conditions
of said written agreement shall apply only to said Equipment Schedule
and shall not apply to any other Equipment Schedule made a part of this
Lease. In the event Lessee issues a purchase order to Lessor covering
Equipment to be leased hereunder, it is agreed that such purchase order
is issued for purposes of authorization and Lessee's internal use only,
and. none of its terms and conditions shall modify the terms and
conditions of this Lease and/or related documentation, or affect
Lessor's responsibility to Lessee as defined in this Lease. To the
extent this Lease constitutes chattel paper, as such term is defined in
the Uniform Commercial Code of the applicable jurisdiction, no security
interest in this Lease may be created through the transfer of
possession of any counterpart other than the Original of this Lease.
30. GENERAL REPRESENTATIONS OF THE PARTIES. Each party represents and
warrants to the other party that, as of the date hereof, as of the date
of the execution of each Equipment Schedule and as of the date of each
extension, modification or amendment of this Lease and each Equipment
Schedule, and covenants and agrees with the other party that for so
long as any Equipment is leased pursuant hereto: (a) such party is and
will continue to be a corporation or other entity duly organized,
validly existing and in good standing under the laws of its state of
organization and maintains its chief executive office at the
address(es) set forth for it either on the signature page to this Lease
(and any Equipment Schedule entered into pursuant hereto) or in the
introduction thereto, or as otherwise set forth in a written notice to
the other party; (b) such party has and will maintain the legal
capacity, power, authority and unrestricted right to execute and
deliver this Lease (and any Equipment Schedule entered into pursuant
hereto) and to perform all of its obligations hereunder; (c) the
execution and delivery by such party of this Lease (and any Equipment
Schedule entered into pursuant hereto) and the performance by such
party of all of its obligations hereunder will not violate or be in
conflict with any term or provision of (i) any applicable law, (ii) any
judgment, order, writ, injunction, decree or consent of any court or
other judicial authority applicable to such party or any material part
of such party's assets and properties, (iii) any of the organizational
or governing documents of such party, or (iv) any material agreement,
document or obligation to which it is a party, and such party will not
adopt any such conflicting organizational or governing document or
enter into any such conflicting agreement, document or obligation; (d)
no consent, approval or authorization of, or registration, declaration
or filing with, any governmental authority or other person (including
any equity holder of any party) is required as a condition precedent,
concurrent or subsequent to or in connection with the due and valid
execution, delivery and performance by such party of this Lease (and
any Equipment Schedule entered into pursuant hereto) or the legality,
validity, binding effect or enforceability of any of the terms and
provisions of this Lease (and any Equipment Schedule entered into
pursuant hereto); (d) this Lease (and any Equipment Schedule entered
into pursuant hereto) is a legal, valid and binding obligation of such
party, enforceable against such party in accordance with their
respective terms and provisions; and (e) each party has independently
and fully reviewed and evaluated this Lease (and any Equipment Schedule
entered into pursuant hereto) and all related documents, the
contemplated obligations and transactions and the potential effects of
such obligations and transactions on the assets, business, cash flow,
expenses, income, liabilities, operations, properties, prospects,
reputation, taxation or condition (financial or otherwise) of such
party and its affiliates, which review and evaluation was made together
with the officers, directors and other representatives of such party,
its legal counsel and (to the extent deemed prudent by such party)
other legal counsel and financial and other advisors to such party, and
such party hereby absolutely, unconditionally, irrevocably, expressly
and forever assumes any and all attendant risks and waives any and all
rights, claims, defenses or objections with respect thereto
31. LESSEE'S REPRESENTATIONS. Lessee represents and warrants to Lessor
that, as of the date hereof, as of the date of the execution of each
Equipment Schedule and as of the date of each extension, modification
or amendment of this Lease and each Equipment Schedule, and covenants
and agrees with the Lessor that for so long as any Equipment is leased
pursuant hereto: (a) the Equipment is being leased hereunder for
business purposes and is not being and will not be used for any illicit
or illegal business or scheme; (b) the financial information (if any)
respecting Lessee furnished to Lessor is complete, accurate and fairly
presents the financial condition of the Customer; (d) the credit,
financial and other information furnished or to be furnished by or on
behalf of Lessee to Lessor is true and correct and does not and will
not contain a misstatement of a material fact or omit to state a
material fact required to be stated therein in order to make it, in the
light of the circumstances under which made, not misleading; and (f)
there does not exist any pending or threatened action or proceeding
before any court or administrative agency which might materially
adversely affect Lessee's financial condition or operations
32. FINANCIAL STATEMENTS. Lessee agrees to furnish to Lessor (i) as soon as
available, and in any event within 120 days after the last day of each
fiscal year of Lessee, a copy of the financial statements of Lessee as
of the end of such fiscal year, certified by an independent certified
public accounting firm: (ii) as soon as available, and in any event
within 60 days after the last day of each quarter of Lessee's fiscal
year, a copy of quarterly financial statements certified by the
principal financial officer of Lessee; and (iii) such additional
information concerning Lessee as Lessor may reasonably request.
33. GOOD FAITH DEPOSIT REQUIREMENT. Lessee agrees, with respect to each
transaction, to pay the Good Faith Deposit specified in Lessor's
proposal for such transaction or in the Equipment Schedule related
thereto. This Good Faith Deposit is given in consideration for Lessor's
costs and expenses in investigating and appraising and/or establishing
credit for Lessee. This Good Faith Deposit shall not be refunded unless
Lessor declines to accept Lessee's offer to enter into this Lease. Upon
Lessor's acceptance of Lessee's offer to enter into this Lease, unless
otherwise specified in the proposal or Equipment Schedule, the amount
shall be applied to the first period's rent payment. Lessee
acknowledges that Lessor's act of depositing any Good Faith Deposit
into Lessor's bank account shall not in itself constitute Lessor's
acceptance of Lessee's offer to enter into this Lease.
34. INTERPRETATION, SEVERABILITY, ETC. The parties acknowledge and agree
that the terms and provisions of this Lease and the Equipment Schedules
have been negotiated, shall be construed fairly as to all parties
hereto, and shall not be construed in favor of or against any party.
The term "including" shall mean "including (without limitation)",
whether or not so stated. The terms "including", "including, but not
limited to", "including (without limitation)" and similar phrases (i)
mean that the items specifically listed after such term are examples of
the provision preceding such term and are not intended to be all
inclusive, (ii) shall not in any way limit (or be deemed or construed
to limit) the generality of the provision preceding such term, and
(iii) shall not in any way preclude (or be deemed or construed to
preclude) any other applicable item encompassed by the general
provision preceding such term. In the event that any term or provision
of this Lease or any Equipment Schedule shall be finally determined to
be superseded, invalid, illegal or otherwise unenforceable pursuant to
applicable law by an authority having jurisdiction and venue, that
determination shall not impair or otherwise affect the validity,
legality or enforceability (a) by or before that authority of the
remaining terms and provisions of this Lease and the Equipment
Schedules, which shall be enforced as if the unenforceable term or
provision were deleted or reduced pursuant to the next sentence, as
applicable, or (b) by or before any other authority of any of the terms
and provisions of this Lease and the Equipment Schedules. If any term
or provision of this Lease or any Equipment Schedule is held to be
unenforceable because of the scope or duration of any such provision,
the parties agree that any court making such determination shall have
the power, and is hereby requested, to reduce the scope or duration of
such term or provision to the maximum permissible under applicable law
so that said term or provision shall be enforceable in such reduced
form.
35. MISCELLANEOUS. Lessor reserves the right to charge Lessee fees for its
provision of additional administrative services related to this Lease
requested by Lessee. Lessee shall provide Lessor with such corporate
resolutions, opinions of counsel, financial statements, and other
documents (including documents for filing or recording) as Lessor may
request from time to time. LESSEE HEREBY APPOINTS LESSOR OR ITS
ASSIGNEE ITS TRUE AND LAWFUL ATTORNEY IN FACT TO EXECUTE ON BEHALF OF
LESSEE ALL UNIFORM COMMERCIAL CODE FINANCING STATEMENTS OR OTHER
DOCUMENTS WHICH, IN LESSOR'S DETERMINATION, ARE NECESSARY TO SECURE
LESSOR'S INTEREST IN SAID EQUIPMENT. The filing of UCC Financing
Statements is precautionary and shall not be evidence that this Lease
is intended as security. If for any reason this agreement is determined
not to be a lease, Lessee hereby grants Lessor a security interest in
this Lease, the Equipment or collateral pertaining thereto and the
proceeds thereof, including release, sale or disposition of the
Equipment or other collateral. If more than one Lessee is named in this
Lease, the liability of each shall be joint and several. Time is of the
essence with respect to this Lease.
36. FORCE MAJEURE. Notwithstanding any other term or provision of this
Lease (and any Equipment Schedule entered into pursuant hereto), no
party shall be responsible for or be in breach of or default under this
Lease (and any Equipment Schedule entered into pursuant hereto) for any
performance delay or failure that is the result of any and all acts of
God and other acts, events, circumstances, impediments or occurrences
beyond the control of the delayed person (each a "Force Majeure"),
including (without limitation) any (i) accident or mishap not caused by
the delayed person, (ii) assault, attack, battle, blockade, bombing,
embargo, police action, siege or other act of defense, offense,
terrorism or war (whether or not declared), in each case whether
civilian, militia, military or otherwise and whether domestic or
foreign, (iii) governmental regulation or decree or other act or
failure to act of any governmental authority or other regulatory body,
in each case whether civil, military or otherwise and whether domestic
or foreign, (iv) earthquake, explosion, fire, flood, hurricane or other
natural or man-made calamity or disaster, (v) epidemic, environmental
contamination or other natural or man-made pestilence or toxic exposure
(whether biological, chemical, radiological or otherwise), or any
quarantine or other restriction arising therefrom, (vi) failure of,
interruption in or impairment of any delivery, internet, mail,
monetary, power,
telecommunication, transmission, transportation or utility system or
any other service, product or equipment provided or maintained by a
third party, (vii) lockout, strike or similar labor interruptions,
(viii) insurrection, riot or other civil disturbance, (ix) hacking or
other unauthorized access, spamming, virus, trojan or other
unauthorized program, or other computer or technological tampering or
attack, or (x) sabotage or other criminal or intentionally disruptive
third party act, in each case together with any and all consequential
disruptions, delays, effects or other acts, events, circumstances,
impediments or occurrences and irrespective of how localized or
widespread. Upon prompt notice to the other party, the party affected
by any Force Majeure shall be excused from performance hereunder to the
extent and for so long as its performance hereunder is prevented or
restricted by a Force Majeure (and the other party shall likewise be
excused from performance of its obligations hereunder relating to such
delayed or failed performance to the same extent and for the same
duration); provided that the party so affected shall use reasonable
efforts (without increased cost) to avoid, mitigate or remove such
Force Majeure and to minimize the consequences thereof, and both
parties shall resume performance hereunder with the utmost dispatch
whenever such non-performance causes are removed.
37. NO WAIVER BY ACTION, ETC. Any failure of the Lessor to require strict
performance by the Lessee or any waiver by Lessor of any provision
herein shall not be construed as a consent or waiver of any other
breach of the same or of any other provision. Any waiver or consent
from either party respecting any provision of this Lease or any related
document shall be effective only in the specific instance for which
given and shall not be deemed, regardless of frequency given, to be a
further or continuing waiver or consent. The failure or delay of any
party at any time to require performance of, or to exercise or enforce
its rights or remedies with respect to, any provision of this Lease
shall not affect such party's right at a later time to exercise or
enforce any such provision. No notice to or demand on any party shall
entitle such party to any other notice or demand in similar or other
circumstances. Any acceptance by or on behalf of a party of (A) any
partial or late payment, reimbursement or performance shall not
constitute a satisfaction or waiver of the obligation then due or the
resulting default, or (B) any payment, reimbursement or performance of
any obligation during the continuance of any default shall not
constitute a waiver or cure thereof, and the party or its designee may
accept or reject any such payment, reimbursement or performance without
affecting any obligation or any of the party's rights, powers,
privileges, remedies and other interests under this Lease, any related
document or applicable law. All rights, powers, privileges, remedies
and other interests of each party hereunder are cumulative and not
alternatives, and they are in addition to (and shall not limit) any
other right, power, privilege, remedy or other interest of such party
under this Lease, any related document or applicable law.
38. SUCCESSORS AND ASSIGNS; ASSIGNMENT; INTENDED BENEFICIARIES. This Lease
and each related document shall be binding upon and inure to the
benefit of the successors, permitted assigns and legal representatives
of each party (including, without limitation, any assignee of
substantially all of the business or assets of any party or any
successor by merger). Neither party may assign any of its rights or
obligations under this Lease or any related document to any other
person without the consent of the other party; provided, however, that
either party may assign its rights and obligations hereunder in whole
or in part to any of its affiliates (without, however, relieving the
assignor of any of its obligations hereunder) by giving the other party
a copy of such assignment. Without limiting the generality of the
foregoing, Lessee acknowledges and agrees that Lessor may pledge this
Lease and all accounts, payment intangibles, general intangibles and
other rights and interest arising hereunder to one or more lender(s),
such lender(s) shall be entitled upon default to enforce any and all of
the rights, powers, privileges, remedies and interests of Lessor as so
assigned in accordance with this Lease, the applicable loan documents
and applicable law, and such lender(s) shall not be responsible or
liable for any of the acts, omissions, duties, liabilities or
obligations of Lessor or any of its affiliates under this Lease or
otherwise. Except as otherwise provided in this Lease, the
representations, agreements and other provisions of this Lease are for
the exclusive benefit of the parties hereto, and no other person
(including, without limitation, any creditor of a party) shall have any
right or claim against any party by reason of any of those provisions
or be entitled to enforce any of those provisions against any party.
39. COUNTERPARTS, GOVERNING LAW, AMENDMENTS, ETC. This Lease shall be
effective on the date as of which this Lease shall be executed and
delivered by the parties hereto. This Lease or any related document may
be executed in two or more counterpart copies of the entire document or
of signature pages to the document, each of which may be executed by
one or more of the parties hereto and may be sent by fax or other
electronic means,, but all of which, when taken together, shall
constitute a single agreement binding upon all of the parties hereto.
This Lease and all related documents shall be governed by and construed
in accordance with the applicable laws pertaining, in the State of New
York (other than those conflict of law rules that would defer to the
substantive laws of another jurisdiction). The headings contained in
this Lease or any related document are for reference purposes only and
shall not affect the meaning or interpretation of this Lease or any
related document. Each and every supplement or modification to or
amendment or restatement of this Lease or any related document shall be
in writing and signed by all of the parties hereto, and each and every
waiver of, or consent to any departure from, any term or provision of
this Lease or any related document shall be in writing and signed by
each affected party hereto.
40. WAIVER OF JURY TRIAL; ALL WAIVERS INTENTIONAL, ETC. In any action, suit
or proceeding in any jurisdiction brought against Lessor by Lessee, or
vice versa, each party hereby absolutely, unconditionally, irrevocably
and expressly waives forever trial by jury. This waiver of jury trial
by each party, and each other waiver, release, relinquishment or
similar surrender of rights (however expressed) made by a party in this
Lease, has been absolutely, unconditionally, irrevocably, knowingly and
intentionally made by such party.
41. ENTIRE AGREEMENT. No party or any of its representatives has made,
accepted or acknowledged any representation, warranty, promise,
assurance, agreement, obligation or understanding (oral or otherwise)
to, with or for the benefit of the other party or any of its
representatives other than as expressly set forth in this Lease. This
Lease and any Approval Letter issued by Lessor and any Equipment
Schedule hereunder contains the entire agreement of the parties, and
supersedes and completely replaces all prior and other communications,
discussions and other representations, warranties, promises,
assurances, agreements and understandings (oral, implied or otherwise)
between the parties, with respect to the matters contained in this
Lease.
IN WITNESS WHEREOF, the parties have executed this Master Lease Agreement
effective as of the first date it is executed by Lessee below.
SPAR Marketing Services, Inc. (Lessor) SPAR Marketing Force, Inc. (Lessee) Date
As of
11/1/04
/s/ Robert G. Brown /s/ Charles Cimitile
- -------------------------------------- --------------------------------------------------
Name: Robert G. Brown Name: Charles Cimitile
Title: Chairman & Chief Executive Title: Chief Financial Officer
Officer
Home Office: 580 White Plains Road
Tarrytown, NY 10591
[Letterhead of SPAR MARKETING SERVICES, INC.]
MERCHANDISING * MARKETING INTELLIGENCE * DATABASE MARKETING * TELESERVICES *
E-COMMERCE
SERVICES DEFINED BY THE RETURN THEY GENERATE
----------------------
THIS IS COUNTERPART NO. OF 3 SERIALLY NUMBERED COUNTERPARTS. TO THE EXTENT THAT
THIS DOCUMENT CONSTITUTES CHATTEL PAPER UNDER THE UNIFORM COMMERCIAL CODE, NO
SECURITY INTEREST IN THIS DOCUMENT MAY BE CREATED THROUGH THE TRANSFER AND
POSSESSION OF ANY COUNTERPART OTHER THAN COUNTERPART NO. 1.
EQUIPMENT LEASING SCHEDULE NO. 001
Dated: as of November 1, 2004
(this "Schedule")
Incorporating by Reference
Master Lease Agreement dated as of November 1, 2004
between
SPAR Marketing Services, Inc., as "Lessor",
and
SPAR Marketing Force, Inc., as "Lessee"
(as the same may be supplemented or amended from time to time
in the manner provided therein the "Master Agreement")
LESSEE AGREES TO LEASE THE HEREIN DESCRIBED EQUIPMENT FROM LESSOR, AND LESSOR BY
ACCEPTANCE OF THIS SCHEDULE, AGREES TO LEASE THE EQUIPMENT TO LESSEE ON THE
TERMS AND CONDITIONS SET FORTH IN THIS SCHEDULE, WHICH HEREBY INCORPORATES
HEREIN BY REFERENCE ALL OF THE TERMS AND PROVISIONS OF THE MASTER AGREEMENT WITH
THE SAME FORCE AND EFFECT AS THOUGH FULLY SET FORTH HEREIN.
..
Rental Commencement Date: 11/1/04
- -----------------------------------
Purchased From: Cost
--------------- ----
SSE Products, Inc.
d/b/a SSE Technologies
Handheld Computer Series
9500 with supporting modems and cables
previously purchased $400,000.00
Term: 36 Months
Lease Rate Factor: 3.168%
Monthly Rental Payment: $12,672.00
Good Faith Deposit Amount:
USING TOMORROW'S TOOLS TO SOLVE TODAY'S CHALLENGES
- --------------------------------------------------------------------------------
SPAR MARKETING SERVICES, INC. CORPORATE OFFICE
* 580 WHITE PLAINS ROAD *TARRYTOWN, NY 10591
Phone 914-332-4100 * Fax 914-332-0741 *
Email: servingyou@sparinc.com * Website: www.sparinc.com
[Letterhead of SPAR MARKETING SERVICES, INC.]
MERCHANDISING * MARKETING INTELLIGENCE * DATABASE MARKETING * TELESERVICES *
E-COMMERCE
SERVICES DEFINED BY THE RETURN THEY GENERATE
THIS SCHEDULE, TOGETHER WITH THE MASTER AGREEMENT AND THE OTHER DOCUMENTS
REFERRED TO HEREIN AND THEREIN AND/OR EXECUTED IN CONNECTION HEREWITH OR
THEREWITH, CONSTITUTE THE ENTIRE AGREEMENT BETWEEN LESSOR AND LESSEE AS TO THE
LEASING OF THE EQUIPMENT. LESSEE ACKNOWLEDGES THAT ON OR BEFORE LESSEE'S
EXECUTION AND DELIVERY OF THIS SCHEDULE IT RECEIVED A COPY OF THE PURCHASE ORDER
AND OTHER PURCHASE CONTRACTS EVIDENCING THE ACQUISITION OF THE EQUIPMENT BY
LESSOR .
BY EXECUTION OF THIS SCHEDULE, THE
UNDERSIGNED CERTIFIES THAT HE/SHE HAS READ
THIS SCHEDULE, HAS EXECUTED AND ENTERED INTO
THIS SCHEDULE ON BEHALF OF LESSEE AND IS
DULY AUTHORIZED TO DO SO
LESSOR LESSEE
/s/ Robert G. Brown /s/ Charles Cimitile
- ------------------------------ ------------------------------
Robert G. Brown Charles Cimitile
Chairman and Chief Executive Officer Chief Financial Officer
SPAR Marketing Services, Inc. SPAR Marketing Force, Inc.
USING TOMORROW'S TOOLS TO SOLVE TODAY'S CHALLENGES
- --------------------------------------------------------------------------------
SPAR MARKETING SERVICES, INC. CORPORATE OFFICE
* 580 WHITE PLAINS ROAD *TARRYTOWN, NY 10591
Phone 914-332-4100 * Fax 914-332-0741 *
Email: servingyou@sparinc.com * Website: www.sparinc.com
[Letterhead of SPAR MARKETING SERVICES, INC.]
MERCHANDISING * MARKETING INTELLIGENCE * DATABASE MARKETING * TELESERVICES *
E-COMMERCE
SERVICES DEFINED BY THE RETURN THEY GENERATE
THIS IS COUNTERPART NO. OF 3 SERIALLY NUMBERED COUNTERPARTS. TO THE EXTENT THAT
THIS DOCUMENT CONSTITUTES CHATTEL PAPER UNDER THE UNIFORM COMMERCIAL CODE, NO
SECURITY INTEREST IN THIS DOCUMENT MAY BE CREATED THROUGH THE TRANSFER AND
POSSESSION OF ANY COUNTERPART OTHER THAN COUNTERPART NO. 1.
EQUIPMENT LEASING SCHEDULE NO. 002
Dated: as of January 4, 2005
(this "Schedule")
Incorporating by Reference
Master Lease Agreement dated as of November 1, 2004
between
SPAR Marketing Services, Inc., as "Lessor",
and
SPAR Marketing Force, Inc., as "Lessee"
(as the same may be supplemented or amended from time to time
in the manner provided therein the "Master Agreement")
LESSEE AGREES TO LEASE THE HEREIN DESCRIBED EQUIPMENT FROM LESSOR, AND LESSOR BY
ACCEPTANCE OF THIS SCHEDULE, AGREES TO LEASE THE EQUIPMENT TO LESSEE ON THE
TERMS AND CONDITIONS SET FORTH IN THIS SCHEDULE, WHICH HEREBY INCORPORATES
HEREIN BY REFERENCE ALL OF THE TERMS AND PROVISIONS OF THE MASTER AGREEMENT WITH
THE SAME FORCE AND EFFECT AS THOUGH FULLY SET FORTH HEREIN.
..
Rental Commencement Date: 1/4/05
- ---------------------------------
Purchased From: Cost
--------------- ----
SSE Products, Inc.
d/b/a SSE Technologies/Insight
Handheld Computer Series
9500 with supporting modems and cables previously
purchased $135,509.18
Term: 36 Months
Lease Rate Factor: 3.168%
Monthly Rental Payment: $4,293.00
USING TOMORROW'S TOOLS TO SOLVE TODAY'S CHALLENGES
- --------------------------------------------------------------------------------
SPAR MARKETING SERVICES, INC. CORPORATE OFFICE
* 580 WHITE PLAINS ROAD *TARRYTOWN, NY 10591
Phone 914-332-4100 * Fax 914-332-0741 *
Email: servingyou@sparinc.com * Website: www.sparinc.com
[Letterhead of SPAR MARKETING SERVICES, INC.]
MERCHANDISING * MARKETING INTELLIGENCE * DATABASE MARKETING * TELESERVICES *
E-COMMERCE
SERVICES DEFINED BY THE RETURN THEY GENERATE
THIS SCHEDULE, TOGETHER WITH THE MASTER AGREEMENT AND THE OTHER DOCUMENTS
REFERRED TO HEREIN AND THEREIN AND/OR EXECUTED IN CONNECTION HEREWITH OR
THEREWITH, CONSTITUTE THE ENTIRE AGREEMENT BETWEEN LESSOR AND LESSEE AS TO THE
LEASING OF THE EQUIPMENT. LESSEE ACKNOWLEDGES THAT ON OR BEFORE LESSEE'S
EXECUTION AND DELIVERY OF THIS SCHEDULE IT RECEIVED A COPY OF THE PURCHASE ORDER
AND OTHER PURCHASE CONTRACTS EVIDENCING THE ACQUISITION OF THE EQUIPMENT BY
LESSOR .
BY EXECUTION OF THIS SCHEDULE, THE
UNDERSIGNED CERTIFIES THAT HE/SHE HAS READ
THIS SCHEDULE, HAS EXECUTED AND ENTERED INTO
THIS SCHEDULE ON BEHALF OF LESSEE AND IS
DULY AUTHORIZED TO DO SO
LESSOR LESSEE
/s/ Robert G. Brown /s/ Charles Cimitile
- ------------------------------ ------------------------------
Robert G. Brown Charles Cimitile
Chairman and Chief Executive Officer Chief Financial Officer
SPAR Marketing Services, Inc. SPAR Marketing Force, Inc.
[Letterhead of SPAR MARKETING SERVICES, INC.]
MERCHANDISING * MARKETING INTELLIGENCE * DATABASE MARKETING * TELESERVICES *
E-COMMERCE
SERVICES DEFINED BY THE RETURN THEY GENERATE
THIS IS COUNTERPART NO. OF 3 SERIALLY NUMBERED COUNTERPARTS. TO THE EXTENT THAT
THIS DOCUMENT CONSTITUTES CHATTEL PAPER UNDER THE UNIFORM COMMERCIAL CODE, NO
SECURITY INTEREST IN THIS DOCUMENT MAY BE CREATED THROUGH THE TRANSFER AND
POSSESSION OF ANY COUNTERPART OTHER THAN COUNTERPART NO. 1.
EQUIPMENT LEASING SCHEDULE NO. 003
Dated: as of January 31, 2005
(this "Schedule")
Incorporating by Reference
Master Lease Agreement dated as of November 1, 2004
between
SPAR Marketing Services, Inc., as "Lessor",
and
SPAR Marketing Force, Inc., as "Lessee"
(as the same may be supplemented or amended from time to time
in the manner provided therein the "Master Agreement")
LESSEE AGREES TO LEASE THE HEREIN DESCRIBED EQUIPMENT FROM LESSOR, AND LESSOR BY
ACCEPTANCE OF THIS SCHEDULE, AGREES TO LEASE THE EQUIPMENT TO LESSEE ON THE
TERMS AND CONDITIONS SET FORTH IN THIS SCHEDULE, WHICH HEREBY INCORPORATES
HEREIN BY REFERENCE ALL OF THE TERMS AND PROVISIONS OF THE MASTER AGREEMENT WITH
THE SAME FORCE AND EFFECT AS THOUGH FULLY SET FORTH HEREIN.
..
Rental Commencement Date: 1/31/05
Purchased From: Cost
--------------- ----
SSE Products, Inc.
d/b/a SSE Technologies/Insight
105 Handheld Computers Series
9550 50% payment, invoice $83,813.63
#63718 Modems and cords 11957.83
Cables 918.44
----------
$96,689.90
Term: 36 Months
Lease Rate Factor: 3.168%
Monthly Rental Payment: $3,353.00
Good Faith Deposit Amount:
THIS SCHEDULE, TOGETHER WITH THE MASTER AGREEMENT AND THE OTHER DOCUMENTS
REFERRED TO HEREIN AND THEREIN AND/OR EXECUTED IN CONNECTION HEREWITH OR
THEREWITH, CONSTITUTE THE ENTIRE AGREEMENT BETWEEN LESSOR AND LESSEE AS TO THE
LEASING OF THE EQUIPMENT. LESSEE ACKNOWLEDGES THAT ON OR BEFORE LESSEE'S
EXECUTION AND DELIVERY OF THIS SCHEDULE IT RECEIVED A COPY OF THE PURCHASE ORDER
AND OTHER PURCHASE CONTRACTS EVIDENCING THE ACQUISITION OF THE EQUIPMENT BY
LESSOR .
BY EXECUTION OF THIS SCHEDULE, THE
UNDERSIGNED CERTIFIES THAT HE/SHE HAS READ
THIS SCHEDULE, HAS EXECUTED AND ENTERED INTO
THIS SCHEDULE ON BEHALF OF LESSEE AND IS
DULY AUTHORIZED TO DO SO
LESSOR LESSEE
/s/ Robert G. Brown /s/ Charles Cimitile
- ------------------------------ ------------------------------
Robert G. Brown Charles Cimitile
Chairman and Chief Executive Officer Chief Financial Officer
SPAR Marketing Services, Inc. SPAR Marketing Force, Inc.
USING TOMORROW'S TOOLS TO SOLVE TODAY'S CHALLENGES
- --------------------------------------------------------------------------------
SPAR MARKETING SERVICES, INC. CORPORATE OFFICE
* 580 WHITE PLAINS ROAD *TARRYTOWN, NY 10591
Phone 914-332-4100 * Fax 914-332-0741 *
Email: servingyou@sparinc.com * Website: www.sparinc.com
Master Lease Agreement
Lessor: SPAR Marketing Services, Inc. Lessee: SPAR Canada Company
Address: 580 White Plains Road Address: 1100 Shephard Avenue West,
Tarrytown, NY 10591 Suite 360
Toronto, ON M3K2B3
TERMS AND CONDITIONS OF LEASE
The undersigned Lessee hereby requests Lessor to purchase the personal property
described in any Equipment Schedule hereunder (herein called "Equipment") from
the supplier(s) listed in any Equipment Schedule hereunder (herein called
"Vendor" and/or "Manufacturer", as applicable) and to lease the Equipment to
Lessee on the terms and conditions of the lease set forth below.
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the
Equipment, all upon the terms and provisions and subject to the conditions set
forth in this Master Lease Agreement (as the same may be supplemented, modified,
amended, restated or replaced from time to time in the manner provided herein,
this "Lease").
In consideration of the foregoing, the mutual covenants and agreements
hereinafter set forth, and other good and valuable consideration (the receipt
and adequacy of which is hereby acknowledged by the parties), the parties hereto
hereby agree as follows:
1. NO WARRANTIES BY LESSOR. Lessee has selected the Equipment and may have
entered into certain purchase, licensing, or maintenance agreements
with the Vendor and/or Manufacturer (herein referred to as an
"Acquisition Agreement") covering the Equipment as further described in
Paragraph 25 hereof. If Lessee has entered into any Acquisition
Agreement, each agreement shall provide for certain rights and
obligations of the party thereto with respect to the Equipment, and
Lessee shall perform all of the obligations set forth in each
Acquisition Agreement as if this Lease did not exist. LESSOR MAKES NO
WARRANTY, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING
THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESSES
FOR ANY PARTICULAR PURPOSE, AND, AS TO LESSOR, LESSEE LEASES THE
EQUIPMENT "AS IS" AND "WHERE IS". LESSOR SHALL HAVE NO LIABILITY FOR
ANY LOSS, DAMAGE OR EXPENSE OF ANY KIND WHATSOEVER RELATING THERETO,
INCLUDING (WITHOUT LIMITATION) ANY SPECIAL, INDIRECT, INCIDENTAL OR
CONSQUENTIAL DAMAGES OF ANY CHARACTER.
2. CLAIMS AGAINST VENDOR AND/OR MANUFACTURER. If the Equipment is not
properly installed, does not operate as represented or warranted by
Vendor and/or Manufacturer, or is unsatisfactory for any reason, Lessee
shall make any claim on account thereof solely against Vendor and/or
Manufacturer pursuant to the Acquisition Agreement, if any, and shall,
nevertheless, pay Lessor all rent payable under this Lease. All
warranties from Vendor and/or Manufacturer are, to the extent they are
assignable, hereby assigned to Lessee for the term of this Lease or
until an Event of Default occurs hereunder, for Lessee's exercise at
Lessee's expense. Lessee may directly inquire with Vendor and/or
Manufacturer to receive an accurate and complete statement of such
warranties, including any disclaimers or limitations of such warranties
or of any remedies with respect thereto.
3. VENDOR NOT AN AGENT. Lessee understands and agrees that neither Vendor,
nor any sales representative or other agent of Vendor, is an agent of
Lessor. Sales representatives or agents of Vendor, and persons that are
not employed by Lessor (including brokers and agents) are not
authorized to waive or alter any term or condition of this Lease, and
no representation as to the Equipment or any other matter by Vendor or
any other person that is not employed by Lessor (including brokers or
agents) shall in any way affect Lessee's duty to pay the rent and
perform its other obligations as set forth in this Lease.
4. NON-CANCELLABLE LEASE. This Lease and any Equipment Schedule hereto
cannot be cancelled or terminated except as expressly provided herein.
Lessee agrees that its obligation to pay all rent and other sums
payable hereunder and the rights of Lessor in and to such rent are
absolute and unconditional and are not subject to any abatement,
reduction, setoff, defense, counterclaim or recoupment due or alleged
to be due to, or by reason of, any past, present or future claims which
Lessee may have against Lessor, any assignee, any Manufacturer or
Vendor, or against any person for any reason whatsoever.
5. ORDERING EQUIPMENT. Lessee shall arrange for delivery of the Equipment
so that it can be accepted in accordance with Paragraph 6 hereof within
90 days after the date on which Lessor accepts Lessee's offer to enter
into this Lease with respect to any Equipment Schedule or by such other
date as may be set forth in
an Equipment Schedule or Approval Letter issued by Lessor as the
Approval Expiration Date. Unless otherwise specified on the Equipment
Schedule, Lessee shall be responsible for all transportation, packing,
installation, testing and other charges in connection with the
delivery, installation and use of the Equipment. Lessee hereby
authorizes Lessor to insert in any Equipment Schedule hereunder the
serial numbers and other identification data of Equipment when
determined by Lessor.
6. ACCEPTANCE. Lessee acknowledges that for purposes of receiving or
accepting the Equipment from Vendor, Lessee is acting on Lessor's
behalf. Upon delivery of the Equipment to Lessee and Lessee's
inspection thereof, Lessee shall furnish Lessor a written statement (a)
acknowledging receipt of the Equipment in good condition and repair and
(b) accepting it as satisfactory in all respects for the purposes of
this Lease (the "Certificate of Acceptance"). Unless otherwise set
forth in the applicable Equipment Schedule, the first day of the month
following receipt and acceptance of the Equipment covered by an
Equipment Schedule shall be the Rent Commencement Date therefor.
However, should Lessee have a previous lease with Lessor which is
active at the time of acceptance of the Equipment under the Equipment
Schedule and said lease and the current Equipment Schedule hereunder
shall have the same invoice address then the Rent Commencement Date
shall occur in the month immediately following acceptance of the
Equipment on the rent payment due date established with Lessee for said
previous active lease. Lessor is authorized to fill in on any Equipment
Schedule hereunder the Rent Commencement Date in accordance with the
foregoing.
7. TERMINATION BY LESSOR. If, by the Approval Expiration Date, the
Equipment described in any Equipment Schedule has not been delivered to
Lessee and accepted by Lessee as provided in Paragraph 6 hereof, or if
other conditions of Lessor's Approval Letter, if any, have not been
met, then Lessor may, at its option, terminate this Lease and its
obligations hereunder with respect to such Equipment Schedule at any
time after the expiration of such 90 days or any date after the
Approval Expiration Date, as applicable. Lessor shall give Lessee
written notice whether or not it elects to exercise such option within
10 days after Lessor's receipt of Lessee's written request for such
notice.
8. TERM. The term of this Lease shall be comprised of an Interim Term and
an Initial Term. The Interim Term shall commence on the date the
Certificate of Acceptance is executed by Lessee (the "Acceptance Date")
and terminate on the Rent Commencement Date. The Initial Term of this
Lease shall begin on the Rent Commencement Date, and shall terminate on
the later of (i) the last day of the last month of the Initial Term (as
that Term is set forth in the applicable Equipment Schedule hereto) or
(ii) the date Lessee fulfills all Lessee's obligations hereunder.
9. RENTAL. The rental amount payable to Lessor by Lessee for the Equipment
will be set forth in the Equipment Schedule(s) ("Rental Amount). As the
first rent payment for the Equipment, Lessee shall pay Lessor in
immediately available funds on the Rent Commencement Date the sum of,
(i) the Rental Amount, and (ii) Interim Rent in an amount equal to
1/3Oth of the Rental Amount times the number of days from and including
the Acceptance Date through but excluding the Rent Commencement Date,
and subsequent rent payments shall be due on the same day of each
calendar period as indicated on the Equipment Schedule for the balance
of the Initial Term. Rent payments shall be due whether or not Lessee
has received any notice that such payments are due. All rent payments
shall be paid to Lessor at its address set forth above or as otherwise
directed by Lessor in writing.
10. RENEWAL If no default shall have occurred and be continuing, Lessee
shall be entitled to renew this Lease with respect to all, but not less
than all, of the Equipment covered by an Equipment Schedule for a
minimum 12 month period at an amount equal to the fair market rental
value thereof, in use and operational, in the condition required by
this Lease, payable on a periodic basis, as mutually agreed by Lessor
and Lessee ("Renewal Rent). Lessee must give Lessor written notice of
its intention to exercise said option, which notice must be received by
Lessor at least 90 days before expiration of the Initial Term. The
first installment of the Renewal Rent shall be due at expiration of the
Initial Term of this Lease. Should Lessee fail to comply with the
provisions described above covering renewal, upon expiration of the
Initial Term, the term of this Lease shall be automatically extended
for a term of 3 months. Thereafter, the term of this Lease will be
extended for subsequent full month periods, on a month to month basis,
until Lessee has given at least 90 days written notice terminating this
Lease. Such termination will take effect upon completion of all
Lessee's obligations under this Lease (including payment of all
periodic rental payments due during such 90 day period, as provided in
Paragraph 9 of this Lease). At any time after the expiration of the
Initial Term, if this Lease has been automatically extended as set
forth herein, Lessor reserves the right to terminate this Lease by 30
days written notice to Lessee.
11. LOCATION; INSPECTION; LABELS. The Equipment shall be delivered to and
shall not be removed without Lessor's prior written consent from the
"Equipment Location" shown on the related Equipment Schedule, or if
none is specified, Lessee's billing address shown above. Lessor shall
have the right to inspect the Equipment at any reasonable time. If
Lessor supplies Lessee with labels stating that the Equipment is owned
by Lessor, Lessee shall affix such labels to and keep them in a
prominent place on the Equipment.
12. REPAIRS; USE; ALTERATIONS. Lessee, at its own cost and expense, shall
keep the Equipment in good repair and working order, in the same
condition as when delivered to Lessee, reasonable wear and tear
excepted, and in accordance with the manufacturer's recommended
specifications; shall use the Equipment lawfully; shall not alter the
Equipment without Lessor's prior written consent, shall use the
Equipment in compliance with any existing Manufacturer's service and
warranty requirements and any insurance policies applicable to the
Equipment and shall furnish all parts and servicing required therefor.
All parts, repairs, additions, alterations and attachments placed on or
incorporated into the Equipment which cannot be removed without damage
to the Equipment shall immediately become part of the Equipment and
shall be the property of the Lessor. Lessee will obtain and maintain
all permits, licenses and registrations necessary to lawfully operate
the facility where the Equipment is located. Lessee shall comply with
all applicable environ- mental and industrial hygiene laws, rules and
regulations (including but not limited to federal, state, and local
environmental protection, occupational, health and safety or similar
laws, ordinances and restrictions). Lessee shall, not later than 5 days
after the occurrence, provide Lessor with copies of any report required
to be filed with governmental agencies regulating environmental claims.
Lessee shall immediately notify Lessor in writing of any existing,
pending or threatened investigation, inquiry, claim or action by any
governmental authority in connection with any law, rule or regulation
relating to industrial hygiene or environmental conditions that could
affect the Equipment.
13. MAINTENANCE. If the Equipment is such that Lessee is not normally
capable of maintaining it, Lessee, at its expense, shall enter into and
maintain in full force and effect throughout the Initial Term and any
renewal term, Vendor and/or Manufacturer's standard maintenance
contract, and shall comply with all its obligations thereunder. An
alternate source of maintenance may be used with Lessor's prior written
consent. Such consent shall be granted if, in Lessor's reasonable
opinion, the Equipment will be maintained in an equivalent state of
good repair, condition and working order.
14. SURRENDER. Provided that Lessee does not exercise the purchase option
as set forth in Paragraph 27 hereof, upon the expiration of the Initial
Term, or any renewal term, or upon demand by Lessor made pursuant to
Paragraph 21 of this Lease, Lessee, at its expense, shall return all,
but not less than all, of the Equipment by delivering it to such place
or on board such carrier, packed for shipping, as Lessor may specify.
Lessee agrees that the Equipment, when returned, shall be in the same
condition as when delivered to Lessee, reasonable wear and tear
excepted, and in a condition which will permit Lessor to be eligible
for Manufacturer's standard maintenance contract without incurring any
expense to repair or rehabilitate such Equipment. Lessee shall be
liable for reasonable and necessary expenses to place the Equipment in
such condition. Lessee shall remain liable for the condition of the
Equipment until it is received and accepted at the destination
designated by Lessor as set forth above. If any items of Equipment are
missing or damaged when returned, such occurrence shall be treated as
an event of Loss or Damage with respect to such missing or damaged
items and shall be subject to the terms specified in Paragraph 15
below. Lessee shall provide Lessor with a Letter of Maintainability
from the Manufacturer of the Equipment, which letter shall state that
the Equipment will be eligible for the Manufacturer's standard
maintenance contract when sold or leased to a third party. Lessee shall
give Lessor prior written notice that it is returning the Equipment as
provided above, and such notice must be received by Lessor at least 90
days prior to such return. Should Lessee fail to comply with the
provisions described above covering surrender, upon expiration of the
Initial Term, the term of this Lease shall be automatically extended
for a term of 3 months. Thereafter, the term of this Lease will be
extended for subsequent full month periods, on a month to month basis,
until Lessee has given at least 90 days written notice terminating this
Lease. Such termination will take effect upon completion of all
Lessee's obligations under this Lease (including payment of all
periodic rental payments due during such 90 day period, as provided in
Paragraph 9 of this Lease). At any time after the expiration of the
Initial Term, if this Lease has been automatically extended as set
forth herein. Lessor reserves the right to terminate this Lease by 30
days written notice to Lessee.
15. LOSS OR DAMAGE. Lessee shall bear the entire risk of loss, theft,
destruction of or damage to the Equipment or any item thereof (herein
"Loss or Damage") from any cause whatsoever. No Loss or Damage shall
relieve Lessee of the obligation to pay rent or of any other obligation
under this Lease. In the event of Loss or Damage, Lessee, at the option
of Lessor; shall: (a) place the same in good condition and repair; (b)
replace the same with like equipment acceptable to Lessor in good
condition and repair with clear title thereto in Lessor; or (c) pay to
Lessor the total of the following amounts: (i) the total rent and other
amounts due and owing at the time of such payment, plus (ii) an amount
calculated by Lessor which is the present value at 5% per annum simple
interest discount of all rent and other amounts payable by Lessee with
respect to said item from date of such payment to date of expiration of
its Initial Term, plus (iii) the "reversionary value" of the Equipment,
which shall be determined by Lessor as the total cost of the Equipment
less 60% of the total rent (net of sales/use taxes, if any) required to
be paid pursuant to Paragraph 9. Upon Lessor's receipt of such payment,
Lessee and/or Lessee's insurer shall be entitled to Lessor's interest
in said item, for salvage purposes, in its then condition and location,
"as-is ", without any warranty, express or implied.
16. INSURANCE. Lessee shall provide, maintain and pay for (a) all risk
property insurance against the loss or theft of or damage to the
Equipment, for the full replacement value thereof, naming Lessor as a
loss payee, and (b) commercial general liability insurance (and if
Lessee is a doctor; hospital or other health care provider, medical
malpractice insurance). All such policies shall name Lessor as an
additional insured and shall have combined single limits in amounts
acceptable to Lessor. All such insurance policies shall be endorsed to
be primary and non-contributory to any policies maintained by Lessor.
In addition Lessee shall cause Lessor to be named as an additional
insured on any excess or umbrella policies purchased by Lessee. A copy
of each paid-up policy evidencing such insurance (appropriately
authenticated by the insurer) or a certificate of the insurer providing
such coverage proving that such policies have been issued, providing
the coverage required hereunder shall be delivered to Lessor prior to
the Rent Commencement Date. All insurance shall be placed with
companies satisfactory to Lessor and shall contain the insurer's
agreement to give 30 days written notice to Lessor before cancellation
or any material change of any policy of insurance.
17. TAXES. Lessee shall reimburse to Lessor (or pay directly if, but only
if, instructed by Lessor) all charges and taxes (local, State and
federal) which may now or hereafter be imposed or levied upon the sale,
purchase, ownership, leasing, possession or use of the Equipment;
excluding, however; all income taxes levied on (a) any rental payments
made to Lessor hereunder; (b) any payment made to Lessor in connection
with Loss or Damage to the Equipment under Paragraph 15 hereof, or (c)
any payment made to Lessor in connection with Lessee's exercise of its
purchase option under Paragraph 27 hereof.
18. LESSOR'S PAYMENT. If Lessee fails to provide or maintain said
insurance, to pay said taxes, charges and fees, or to discharge any
levies, liens and encumbrances created by Lessee, Lessor shall have the
right, but shall not be obligated, to obtain such insurance, pay such
taxes, charges and fees, or effect such discharge. In that event,
Lessee shall remit to Lessor the cost thereof with the next rent
payment.
19. INDEMNITY. (a) General Indemnity. Lessee shall indemnify Lessor against
and hold Lessor harmless from any and all claims, actions, damages,
costs, expenses including reasonable attorneys' fees, obligations,
liabilities and liens (including any of the foregoing arising or
imposed under the doctrines of "strict liability" or "product
liability" and including without limitation the cost of any fines,
remedial action, damage to the environment and cleanup and the fees and
costs of consultants and experts), arising out of the manufacture,
purchase, lease, ownership, possession, operation, condition, return or
use of the Equipment, or by operation of law, excluding however, any of
the foregoing resulting from the gross negligence or willful misconduct
of Lessor. Lessee agrees that upon written notice by Lessor of the
assertion of such a claim, action, damage, obligation, liability or
lien, Lessee shall assume full responsibility for the defense thereof.
Lessee's choice of counsel shall be mutually acceptable to both Lessee
and Lessor. This indemnity also extends to any environmental claims
arising out of or relating to prior acts or omissions of any party
whatsoever. The provisions of this paragraph shall survive termination
of this Lease with respect to events occurring prior to such
termination.
(b) Tax Indemnity. Lessee acknowledges that Lessor shall be
entitled to all tax benefits of ownership with respect to the
Equipment (the "Tax Benefits"), including but not limited to,
(i) the accelerated cost recovery deductions determined in
accordance with Section 168(b)(1) of the Internal Revenue Code
of 1986 for the Equipment based on the original cost of the
Equipment to Lessor (ii) deductions for interest on any
indebtedness incurred by Lessor to finance the Equipment and
(iii) sourcing of income and losses attributable to this
Lease, to the United States. Lessee represents that the
Equipment shall be depreciable for Federal tax purposes
utilizing the MACRS Recovery Period as set forth in the
Equipment Schedule, with such depreciation commencing as of
the date of Equipment acceptance by Lessee as set forth on the
Certificate of Acceptance. Lessee agrees to take no action
inconsistent with the foregoing or any action which would
result in the loss, disallowance or unavailability to Lessor
of all or any part of the Tax Benefits. Lessee hereby
indemnifies and holds harmless Lessor and its assigns from and
against (i) the loss, disallowance, unavailability or
recapture of all or any part of the Tax Benefits resulting
from any action, statement, misrepresentation or breach of
warranty or covenant by Lessee of any nature whatsoever
including but not limited to the breach of any
representations, warranties or covenants contained in this
paragraph, plus (ii) all interest, penalties, fines or
additions to tax resulting from such loss, disallowance,
unavailability or recapture, plus (iii) all taxes required to
be paid by Lessor upon receipt of the indemnity set forth in
this paragraph. Any payments made by Lessee to reimburse
Lessor for lost Tax Benefits shall be calculated (i) on the
assumption that Lessor is subject to the maximum Federal
Corporate Income Tax with respect to each year and that all
Tax Benefits are currently utilized, and (ii) without regard
to whether Lessor or any members of a consolidated group of
which Lessor is also a member is then subject to any increase
in tax as a result of the loss of Tax Benefits. For the
purposes of this paragraph, "Lessor" includes for all tax
purposes the consolidated taxpayer group of which Lessor is a
part.
(c) Payment. The amounts payable pursuant to this Paragraph 19
shall be payable upon demand of Lessor, accompanied by a
statement describing in reasonable detail such claim, action,
damage, cost, expense, fee, obligation, liability, lien or tax
and setting forth the computation of the amount so payable,
which computation shall be binding and conclusive upon Lessee,
absent manifest error. The indemnities and assumptions of
liabilities and obligations contained in this Paragraph 19
shall continue in full force and effect notwithstanding the
expiration or other termination of this Lease.
20. DELINQUENT PAYMENTS. (a) Service Charge. Since it would be impractical
or extremely difficult to fix Lessor's actual damages for collecting
and accounting for a late payment, if any payment to Lessor required
herein (including, but not limited to, rental, renewal, tax, purchase
and other amounts) is not paid on or before its due date, Lessee shall
pay to Lessor an amount equal to 5% of any such late payment. (b)
Interest. Lessee shall also pay interest on any such late payment from
the due date thereof until the date paid at the littlest of 18% per
annum or the maximum rate allowed by law.
21. DEFAULT; REMEDIES. Any of the following shall constitute an "Event of
Default" under this Lease: If (a) Lessee fails to pay when due any rent
or other amount required herein to be paid by Lessee and such
non-payment continues for more than seven days after notice thereof
from Lessor, or (b) Lessee makes an assignment for the benefit of
creditors, whether voluntary or involuntary, or (c) a petition is filed
by or against Lessee under any bankruptcy, insolvency or similar
legislation, or (d) Lessee violates or fails to perform any provision
of either this Lease or any Acquisition Agreement, or violates or fails
to perform any covenant or representation made by Lessee herein, and
fails to correct the same within seven days after notice thereof from
Lessor, or (e) Lessee makes a bulk transfer of furniture, furnishings,
fixtures or other equipment or inventory, or (f) Lessee ceases doing
business as a going concern or terminates its existence, or (g) Lessee
consolidates with, merges with or into, or conveys or leases all or
substantially all of its assets as an entirety to any person or engages
in any other form of reorganization, or there is a change in the legal
structure of Lessee, in each case it results, in the opinion of the
Lessor, in a material adverse change in Lessee's ability to perform its
obligations under this Lease, or (h) any representation or warranty
made by Lessee in this Lease or in any other document or agreement
furnished by Lessee to Lessor shall prove to have been false or
misleading in any material respect when made or when deemed to have
been made, or (i) Lessee shall be in default under any material
obligation for the payment of borrowed money or the deferred purchase
price of, or for the payment of any rent due with respect to, any real
or personal property and such default continues for more than seven
days after notice thereof from Lessor, or (j) Lessee shall be in
default under any other agreement now existing or hereafter made with
Lessor or any of Lessor's affiliates and such default continues for
more than seven days after notice thereof from Lessor, or (k) any event
or condition described in the foregoing clauses (b), (c), (e), (f),
(g), (h) (in clauses (g) and (h) substituting the phrase "guaranty or
other credit support document" for the word "Lease"), (i) or (j) shall
have occurred with respect to any guarantor of, or other party liable
in whole or in part for, Lessee's obligations hereunder, or such
guarantor or other party shall have defaulted in the observance or
performance of any covenant, condition or agreement to be observed or
performed by it under the guaranty or other credit support document
pursuant to which it is liable for Lessee's obligations hereunder, or
such guaranty or other credit support document shall have been revoked
or terminated or shall have otherwise ceased, for any reason, to be in
full force and effect. An Event of Default with respect to any
Equipment Schedule shall constitute an Event of Default for all
Equipment Schedules. Lessee shall promptly notify Lessor of the
occurrence of any Event of Default upon Lessee's receipt of notice or
knowledge thereof (other than pursuant to Lessor's notice).
If an Event of Default occurs, Lessor shall have the right to
exercise any one or more of the following remedies in order to protect
the interests and reasonably expected profits and bargains of Lessor:
(a) Lessor may terminate this Lease with respect to all or any part of
the Equipment, (b) Lessor may recover from Lessee all rent and other
amounts then due and as they shall thereafter become due hereunder, (c)
Lessor may take possession of any or all items of Equipment, wherever
the same may be located, without demand or notice, without any court
order or other process of law and without liability to Lessee for any
damages occasioned by such taking of possession, and any such taking of
possession shall not constitute a termination of this Lease, (d) Lessor
may recover from Lessee, with respect to any and all items of
Equipment, and with or without repossessing the Equipment the sum of
(1) the total amount due and owing to Lessor at the item of such
default, plus (2) an amount calculated by Lessor which is the present
value at 5% per annum simple interest discount of all rent and other
amounts payable by Lessee with respect to said item(s) form date of
such payment to date of expiration of its Initial Term, plus (3) the
"reversionary value" of the Equipment, which shall be determined by
Lessor as the total cost of the Equipment less 60% of the total rent
(net of sales/use taxes, if any) required to be paid pursuant to
Paragraph 9, and which the parties agree is a reasonable estimate of
such value; and upon the payment of all amounts described in clauses
(1), (2) and (3) above, Lessee will become entitled to the Equipment AS
IS, WHERE IS, without warranty whatsoever; provided, however, that if
the Lessor shall sell, lease or otherwise dispose of the Equipment in a
commercially reasonable manner, with or without notice and on public or
private bid, and apply the net proceeds thereof (after deducting all
expenses, including attorneys' fees incurred in connection therewith),
to the sum of (1), (2) and (3) above, and e) Lessor may pursue any
other remedy available at law or in equity, including but not limited
to seeking damages or specific performance and/or obtaining an
injunction.
No right or remedy herein conferred upon or reserved to Lessor
is exclusive of any right or remedy herein or by law or equity provided
or permitted; but each shall be cumulative of every other right or
remedy given hereunder or now or hereafter existing at law or in equity
or by statue or otherwise, and may be enforced concurrently therewith
or from time to time, but Lessor shall not be entitled to recover a
greater amount in damages than Lessor could have gained by receipt of
the of Lessee's full, timely and complete performance of its
obligations pursuant to the terms of this Lease plus accrued delinquent
payments under Paragraph 21.
22. LESSOR'S EXPENSE. Lessee shall pay Lessor all costs and expenses,
including attorney's fees and the fees of collection agencies, incurred
by Lessor in enforcing any of the terms, conditions, or provisions
hereof or in protecting Lessor's rights herein. Lessee's obligation
hereunder includes all such costs and expenses experienced by Lessor
(a) prior to filing of an action, (b) in connection with an action
which is dismissed, and (c) in the enforcement of any judgment.
Lessee's obligation to pay Lessor's attorney's fees incurred in
enforcing any judgment is a separate obligation of Lessee, severable
from Lessee's other obligations hereunder, which obligation will
survive such judgment and will not be deemed to have been merged into
such judgment.
23. OWNERSHIP; PERSONAL PROPERTY. The Equipment shall at all times remain
the property of Lessor and Lessee shall have no right, title or
interest therein or thereto except as expressly set forth in this Lease
and the Equipment shall at all times be and remain personal property
notwithstanding that the Equipment or any part thereof may now be, or
hereafter become, in any manner, affixed or attached to real property
or any improvements thereon.
24. NOTICES. Any notice, request, demand or other communication permitted
or required to be given to a party under this Lease shall be in writing
and shall be sent to the addressee at the address set forth above or on
the Equipment Schedule (or at such other address as shall be designated
by notice to the other party and persons receiving copies), effective
upon actual receipt (or refusal to accept delivery) by the addressee on
any business day or the first business day following receipt after the
close of normal business hours or on any non-business day, by (a) FedEx
(or other equivalent national or international overnight courier) or
United States Express Mail, (b) certified, registered, priority or
express United States mail, return receipt requested, (c) telecopy or
(d) messenger, by hand or any other means of actual delivery
25. ACQUISITION AGREEMENTS. If the Equipment is subject to any Acquisition
Agreement, Lessee as part of this Lease, transfers and assigns to
Lessor all of its rights, but none of its obligations (except for
Lessee's obligation to pay for the Equipment conditioned upon Lessee's
acceptance in accordance with Paragraph 6), in and to the Acquisition
Agreement, including but not limited to the right to take title to the
Equipment. Lessee shall indemnify and hold Lessor harmless in
accordance with Paragraph 19 from any liability resulting from any
Acquisition Agreement as well as liabilities resulting from any
Acquisition Agreement Lessor is required to enter into on behalf of
Lessee or with Lessee for purposes of this Lease.
26. UPGRADES. Any existing lease between Lessor and Lessee subject to an
"upgrade" program shall continue in full force and effect and shall be
kept free of default by Lessee (even if the Equipment covered by the
existing lease is sold. traded-in, etc.) until any such existing lease
is cancelled by Lessor when, if applicable, the new Equipment is
accepted by Lessee for all purposes of this Lease.
27. PURCHASE OPTION. If no default shall have occurred and be continuing,
Lessee shall be entitled, at its option upon written notice to Lessor,
which notice must be received by Lessor at least 90 days prior to the
end of either the Initial Term or any renewal term of any Equipment
Schedule, to purchase all, but not less than all, of the Equipment
covered by such Equipment Schedule from Lessor at the end of the
Initial Term or any renewal term for such Equipment Schedule at a
purchase price equal to the then fair market value of the Equipment in
use and operational, in the condition required by this Lease, as
mutually agreed by Lessor and Lessee. On a date which is no later than
the expiration date of the Initial Term or any renewal term, as
applicable, Lessee shall pay to Lessor the purchase price for the
Equipment covered by such Equipment Schedule (plus any taxes levied
thereon) and Lessor shall sell the Equipment "as-is where-is" without
any warranties express or implied.
28. RELATED EQUIPMENT SCHEDULES. In the event that any Equipment Schedule
hereunder shall include Equipment that may become attached to, affixed
to, or used in connection with Equipment covered under another
Equipment Schedule hereunder ("Related Equipment Schedule"), Lessee
acknowledges the following: (a) if Lessee elects to exercise a purchase
option or renewal option under any Equipment Schedule, if provided; or
(b) if Lessee elects to return the Equipment under any Equipment
Schedule as described in Paragraph 14, then Lessor, at its discretion,
may require the similar disposition of all Related Equipment Schedules
as provided for by this Lease.
29. EQUIPMENT SCHEDULES. An executed Equipment Schedule that incorporates
by reference the terms of this Master Lease Agreement, marked
"Original," shall be the original of this Lease for the Equipment
described therein for all purposes. All other executed counterparts of
this Lease shall be marked "Duplicate." Unless specified otherwise
therein, in the event any written rider or other agreement is attached
to and made a part of an Equipment Schedule, the terms and conditions
of said written agreement shall apply only to said Equipment Schedule
and shall not apply to any other Equipment Schedule made a part of this
Lease. In the event Lessee issues a purchase order to Lessor covering
Equipment to be leased hereunder, it is agreed that such purchase order
is issued for purposes of authorization and Lessee's internal use only,
and. none of its terms and conditions shall modify the terms and
conditions of this Lease and/or related documentation, or affect
Lessor's responsibility to Lessee as defined in this Lease. To the
extent this Lease constitutes chattel paper, as such term is defined in
the Uniform Commercial Code of the applicable jurisdiction, no security
interest in this Lease may be created through the transfer of
possession of any counterpart other than the Original of this Lease.
30. GENERAL REPRESENTATIONS OF THE PARTIES. Each party represents and
warrants to the other party that, as of the date hereof, as of the date
of the execution of each Equipment Schedule and as of the date of each
extension, modification or amendment of this Lease and each Equipment
Schedule, and covenants and agrees with the other party that for so
long as any Equipment is leased pursuant hereto: (a) such party is and
will continue to be a corporation or other entity duly organized,
validly existing and in good standing under the laws of its state of
organization and maintains its chief executive office at the
address(es) set forth for it either on the signature page to this Lease
(and any Equipment Schedule entered into pursuant hereto) or in the
introduction thereto, or as otherwise set forth in a written notice to
the other party; (b) such party has and will maintain the legal
capacity, power, authority and unrestricted right to execute and
deliver this Lease (and any Equipment Schedule entered into pursuant
hereto) and to perform all of its obligations hereunder; (c) the
execution and delivery by such party of this Lease (and any Equipment
Schedule entered into pursuant hereto) and the performance by such
party of all of its obligations hereunder will not violate or be in
conflict with any term or provision of (i) any applicable law, (ii) any
judgment, order, writ, injunction, decree or consent of any court or
other judicial authority applicable to such party or any material part
of such party's assets and properties, (iii) any of the organizational
or governing documents of such party, or (iv) any material agreement,
document or obligation to which it is a party, and such party will not
adopt any such conflicting organizational or governing document or
enter into any such conflicting agreement, document or obligation; (d)
no consent, approval or authorization of, or registration, declaration
or filing with, any governmental authority or other person (including
any equity holder of any party) is required as a condition precedent,
concurrent or subsequent to or in connection with the due and valid
execution, delivery and performance by such party of this Lease (and
any Equipment Schedule entered into pursuant hereto) or the legality,
validity, binding effect or enforceability of any of the terms and
provisions of this Lease (and any Equipment Schedule entered into
pursuant hereto); (d) this Lease (and any Equipment Schedule entered
into pursuant hereto) is a legal, valid and binding obligation of such
party, enforceable against such party in accordance with their
respective terms and provisions; and (e) each party has independently
and fully reviewed and evaluated this Lease (and any Equipment Schedule
entered into pursuant hereto) and all related documents, the
contemplated obligations and transactions and the potential effects of
such obligations and transactions on the assets, business, cash flow,
expenses, income, liabilities, operations, properties, prospects,
reputation, taxation or condition (financial or otherwise) of such
party and its affiliates, which review and evaluation was made together
with the officers, directors and other representatives of such party,
its legal counsel and (to the extent deemed prudent by such party)
other legal counsel and financial and other advisors to such party, and
such party hereby absolutely, unconditionally, irrevocably, expressly
and forever assumes any and all attendant risks and waives any and all
rights, claims, defenses or objections with respect thereto
31. LESSEE'S REPRESENTATIONS. Lessee represents and warrants to Lessor
that, as of the date hereof, as of the date of the execution of each
Equipment Schedule and as of the date of each extension, modification
or amendment of this Lease and each Equipment Schedule, and covenants
and agrees with the Lessor that for so long as any Equipment is leased
pursuant hereto: (a) the Equipment is being leased hereunder for
business purposes and is not being and will not be used for any illicit
or illegal business or scheme; (b) the financial information (if any)
respecting Lessee furnished to Lessor is complete, accurate and fairly
presents the financial condition of the Customer; (d) the credit,
financial and other information furnished or to be furnished by or on
behalf of Lessee to Lessor is true and correct and does not and will
not contain a misstatement of a material fact or omit to state a
material fact required to be stated therein in order to make it, in the
light of the circumstances under which made, not misleading; and (f)
there does not exist any pending or threatened action or proceeding
before any court or administrative agency which might materially
adversely affect Lessee's financial condition or operations
32. FINANCIAL STATEMENTS. Lessee agrees to furnish to Lessor (i) as soon as
available, and in any event within 120 days after the last day of each
fiscal year of Lessee, a copy of the financial statements of Lessee as
of the end of such fiscal year, certified by an independent certified
public accounting firm: (ii) as soon as available, and in any event
within 60 days after the last day of each quarter of Lessee's fiscal
year, a copy of quarterly financial statements certified by the
principal financial officer of Lessee; and (iii) such additional
information concerning Lessee as Lessor may reasonably request.
33. GOOD FAITH DEPOSIT REQUIREMENT. Lessee agrees, with respect to each
transaction, to pay the Good Faith Deposit specified in Lessor's
proposal for such transaction or in the Equipment Schedule related
thereto. This Good Faith Deposit is given in consideration for Lessor's
costs and expenses in investigating and appraising and/or establishing
credit for Lessee. This Good Faith Deposit shall not be refunded unless
Lessor declines to accept Lessee's offer to enter into this Lease. Upon
Lessor's acceptance of Lessee's offer to enter into this Lease, unless
otherwise specified in the proposal or Equipment Schedule, the amount
shall be applied to the first period's rent payment. Lessee
acknowledges that Lessor's act of depositing any Good Faith Deposit
into Lessor's bank account shall not in itself constitute Lessor's
acceptance of Lessee's offer to enter into this Lease.
34. INTERPRETATION, SEVERABILITY, ETC. The parties acknowledge and agree
that the terms and provisions of this Lease and the Equipment Schedules
have been negotiated, shall be construed fairly as to all parties
hereto, and shall not be construed in favor of or against any party.
The term "including" shall mean "including (without limitation)",
whether or not so stated. The terms "including", "including, but not
limited to", "including (without limitation)" and similar phrases (i)
mean that the items specifically listed after such term are examples of
the provision preceding such term and are not intended to be all
inclusive, (ii) shall not in any way limit (or be deemed or construed
to limit) the generality of the provision preceding such term, and
(iii) shall not in any way preclude (or be deemed or construed to
preclude) any other applicable item encompassed by the general
provision preceding such term. In the event that any term or provision
of this Lease or any Equipment Schedule shall be finally determined to
be superseded, invalid, illegal or otherwise unenforceable pursuant to
applicable law by an authority having jurisdiction and venue, that
determination shall not impair or otherwise affect the validity,
legality or enforceability (a) by or before that authority of the
remaining terms and provisions of this Lease and the Equipment
Schedules, which shall be enforced as if the unenforceable term or
provision were deleted or reduced pursuant to the next sentence, as
applicable, or (b) by or before any other authority of any of the terms
and provisions of this Lease and the Equipment Schedules. If any term
or provision of this Lease or any Equipment Schedule is held to be
unenforceable because of the scope or duration of any such provision,
the parties agree that any court making such determination shall have
the power, and is hereby requested, to reduce the scope or duration of
such term or provision to the maximum permissible under applicable law
so that said term or provision shall be enforceable in such reduced
form.
35. MISCELLANEOUS. Lessor reserves the right to charge Lessee fees for its
provision of additional administrative services related to this Lease
requested by Lessee. Lessee shall provide Lessor with such corporate
resolutions, opinions of counsel, financial statements, and other
documents (including documents for filing or recording) as Lessor may
request from time to time. LESSEE HEREBY APPOINTS LESSOR OR ITS
ASSIGNEE ITS TRUE AND LAWFUL ATTORNEY IN FACT TO EXECUTE ON BEHALF OF
LESSEE ALL UNIFORM COMMERCIAL CODE FINANCING STATEMENTS OR OTHER
DOCUMENTS WHICH, IN LESSOR'S DETERMINATION, ARE NECESSARY TO SECURE
LESSOR'S INTEREST IN SAID EQUIPMENT. The filing of UCC Financing
Statements is precautionary and shall not be evidence that this Lease
is intended as security. If for any reason this agreement is determined
not to be a lease, Lessee hereby grants Lessor a security interest in
this Lease, the Equipment or collateral pertaining thereto and the
proceeds thereof, including release, sale or disposition of the
Equipment or other collateral. If more than one Lessee is named in this
Lease, the liability of each shall be joint and several. Time is of the
essence with respect to this Lease.
36. FORCE MAJEURE. Notwithstanding any other term or provision of this
Lease (and any Equipment Schedule entered into pursuant hereto), no
party shall be responsible for or be in breach of or default under this
Lease (and any Equipment Schedule entered into pursuant hereto) for any
performance delay or failure that is the result of any and all acts of
God and other acts, events, circumstances, impediments or occurrences
beyond the control of the delayed person (each a "Force Majeure"),
including (without limitation) any (i) accident or mishap not caused by
the delayed person, (ii) assault, attack, battle, blockade, bombing,
embargo, police action, siege or other act of defense, offense,
terrorism or war (whether or not declared), in each case whether
civilian, militia, military or otherwise and whether domestic or
foreign, (iii) governmental regulation or decree or other act or
failure to act of any governmental authority or other regulatory body,
in each case whether civil, military or otherwise and whether domestic
or foreign, (iv) earthquake, explosion, fire, flood, hurricane or other
natural or man-made calamity or disaster, (v) epidemic, environmental
contamination or other natural or man-made pestilence or toxic exposure
(whether biological, chemical, radiological or otherwise), or any
quarantine or other restriction arising therefrom, (vi) failure of,
interruption in or impairment of any delivery, internet, mail,
monetary, power,
telecommunication, transmission, transportation or utility system or
any other service, product or equipment provided or maintained by a
third party, (vii) lockout, strike or similar labor interruptions,
(viii) insurrection, riot or other civil disturbance, (ix) hacking or
other unauthorized access, spamming, virus, trojan or other
unauthorized program, or other computer or technological tampering or
attack, or (x) sabotage or other criminal or intentionally disruptive
third party act, in each case together with any and all consequential
disruptions, delays, effects or other acts, events, circumstances,
impediments or occurrences and irrespective of how localized or
widespread. Upon prompt notice to the other party, the party affected
by any Force Majeure shall be excused from performance hereunder to the
extent and for so long as its performance hereunder is prevented or
restricted by a Force Majeure (and the other party shall likewise be
excused from performance of its obligations hereunder relating to such
delayed or failed performance to the same extent and for the same
duration); provided that the party so affected shall use reasonable
efforts (without increased cost) to avoid, mitigate or remove such
Force Majeure and to minimize the consequences thereof, and both
parties shall resume performance hereunder with the utmost dispatch
whenever such non-performance causes are removed.
37. NO WAIVER BY ACTION, ETC. Any failure of the Lessor to require strict
performance by the Lessee or any waiver by Lessor of any provision
herein shall not be construed as a consent or waiver of any other
breach of the same or of any other provision. Any waiver or consent
from either party respecting any provision of this Lease or any related
document shall be effective only in the specific instance for which
given and shall not be deemed, regardless of frequency given, to be a
further or continuing waiver or consent. The failure or delay of any
party at any time to require performance of, or to exercise or enforce
its rights or remedies with respect to, any provision of this Lease
shall not affect such party's right at a later time to exercise or
enforce any such provision. No notice to or demand on any party shall
entitle such party to any other notice or demand in similar or other
circumstances. Any acceptance by or on behalf of a party of (A) any
partial or late payment, reimbursement or performance shall not
constitute a satisfaction or waiver of the obligation then due or the
resulting default, or (B) any payment, reimbursement or performance of
any obligation during the continuance of any default shall not
constitute a waiver or cure thereof, and the party or its designee may
accept or reject any such payment, reimbursement or performance without
affecting any obligation or any of the party's rights, powers,
privileges, remedies and other interests under this Lease, any related
document or applicable law. All rights, powers, privileges, remedies
and other interests of each party hereunder are cumulative and not
alternatives, and they are in addition to (and shall not limit) any
other right, power, privilege, remedy or other interest of such party
under this Lease, any related document or applicable law.
38. SUCCESSORS AND ASSIGNS; ASSIGNMENT; INTENDED BENEFICIARIES. This Lease
and each related document shall be binding upon and inure to the
benefit of the successors, permitted assigns and legal representatives
of each party (including, without limitation, any assignee of
substantially all of the business or assets of any party or any
successor by merger). Neither party may assign any of its rights or
obligations under this Lease or any related document to any other
person without the consent of the other party; provided, however, that
either party may assign its rights and obligations hereunder in whole
or in part to any of its affiliates (without, however, relieving the
assignor of any of its obligations hereunder) by giving the other party
a copy of such assignment. Without limiting the generality of the
foregoing, Lessee acknowledges and agrees that Lessor may pledge this
Lease and all accounts, payment intangibles, general intangibles and
other rights and interest arising hereunder to one or more lender(s),
such lender(s) shall be entitled upon default to enforce any and all of
the rights, powers, privileges, remedies and interests of Lessor as so
assigned in accordance with this Lease, the applicable loan documents
and applicable law, and such lender(s) shall not be responsible or
liable for any of the acts, omissions, duties, liabilities or
obligations of Lessor or any of its affiliates under this Lease or
otherwise. Except as otherwise provided in this Lease, the
representations, agreements and other provisions of this Lease are for
the exclusive benefit of the parties hereto, and no other person
(including, without limitation, any creditor of a party) shall have any
right or claim against any party by reason of any of those provisions
or be entitled to enforce any of those provisions against any party.
39. COUNTERPARTS, GOVERNING LAW, AMENDMENTS, ETC. This Lease shall be
effective on the date as of which this Lease shall be executed and
delivered by the parties hereto. This Lease or any related document may
be executed in two or more counterpart copies of the entire document or
of signature pages to the document, each of which may be executed by
one or more of the parties hereto and may be sent by fax or other
electronic means,, but all of which, when taken together, shall
constitute a single agreement binding upon all of the parties hereto.
This Lease and all related documents shall be governed by and construed
in accordance with the applicable laws pertaining, in the State of New
York (other than those conflict of law rules that would defer to the
substantive laws of another jurisdiction). The headings contained in
this Lease or any related document are for reference purposes only and
shall not affect the meaning or interpretation of this Lease or any
related document. Each and every supplement or modification to or
amendment or restatement of this Lease or any related document shall be
in writing and signed by all of the parties hereto, and each and every
waiver of, or consent to any departure from, any term or provision of
this Lease or any related document shall be in writing and signed by
each affected party hereto.
40. WAIVER OF JURY TRIAL; ALL WAIVERS INTENTIONAL, ETC. In any action, suit
or proceeding in any jurisdiction brought against Lessor by Lessee, or
vice versa, each party hereby absolutely, unconditionally, irrevocably
and expressly waives forever trial by jury. This waiver of jury trial
by each party, and each other waiver, release, relinquishment or
similar surrender of rights (however expressed) made by a party in this
Lease, has been absolutely, unconditionally, irrevocably, knowingly and
intentionally made by such party.
41. ENTIRE AGREEMENT. No party or any of its representatives has made,
accepted or acknowledged any representation, warranty, promise,
assurance, agreement, obligation or understanding (oral or otherwise)
to, with or for the benefit of the other party or any of its
representatives other than as expressly set forth in this Lease. This
Lease and any Approval Letter issued by Lessor and any Equipment
Schedule hereunder contains the entire agreement of the parties, and
supersedes and completely replaces all prior and other communications,
discussions and other representations, warranties, promises,
assurances, agreements and understandings (oral, implied or otherwise)
between the parties, with respect to the matters contained in this
Lease.
IN WITNESS WHEREOF, the parties have executed this Master Lease Agreement
effective as of the first date it is executed by Lessee below.
SPAR Marketing Services, Inc. (Lessor) SPAR Canada Company (Lessee) Date
As of
1/4/05
/s/ Robert G. Brown /s/ Charles Cimitile
- -------------------------------------- --------------------------------------------------
Name: Robert G. Brown Name: Charles Cimitile
Title: Chairman & Chief Executive Title: Chief Financial Officer
Officer
Home Office: 580 White Plains Road
Tarrytown, NY 10591
[Letterhead of SPAR MARKETING SERVICES, INC.]
MERCHANDISING * MARKETING INTELLIGENCE * DATABASE MARKETING * TELESERVICES *
E-COMMERCE
SERVICES DEFINED BY THE RETURN THEY GENERATE
----------------------
THIS IS COUNTERPART NO. OF 3 SERIALLY NUMBERED COUNTERPARTS. TO THE EXTENT THAT
THIS DOCUMENT CONSTITUTES CHATTEL PAPER UNDER THE UNIFORM COMMERCIAL CODE, NO
SECURITY INTEREST IN THIS DOCUMENT MAY BE CREATED THROUGH THE TRANSFER AND
POSSESSION OF ANY COUNTERPART OTHER THAN COUNTERPART NO. 1.
EQUIPMENT LEASING SCHEDULE NO. 001
Dated: as of January 4, 2005
(this "Schedule")
Incorporating by Reference
Master Lease Agreement dated as of January 4, 2005
between
SPAR Marketing Services, Inc., as "Lessor",
and
SPAR Canada Company, as "Lessee"
(as the same may be supplemented or amended from time to time
in the manner provided therein the "Master Agreement")
LESSEE AGREES TO LEASE THE HEREIN DESCRIBED EQUIPMENT FROM LESSOR, AND LESSOR BY
ACCEPTANCE OF THIS SCHEDULE, AGREES TO LEASE THE EQUIPMENT TO LESSEE ON THE
TERMS AND CONDITIONS SET FORTH IN THIS SCHEDULE, WHICH HEREBY INCORPORATES
HEREIN BY REFERENCE ALL OF THE TERMS AND PROVISIONS OF THE MASTER AGREEMENT WITH
THE SAME FORCE AND EFFECT AS THOUGH FULLY SET FORTH HEREIN.
..
Rental Commencement Date: 1/4/05
- -----------------------------------
Purchased From: Cost
--------------- ----
SSE Products, Inc.
d/b/a SSE Technologies
Handheld Computer Series
9500 with supporting modems and cables
previously purchased $105,000.00
Term: 36 Months
Lease Rate Factor: 3.168%
Monthly Rental Payment: $3,326.00
USING TOMORROW'S TOOLS TO SOLVE TODAY'S CHALLENGES
- --------------------------------------------------------------------------------
SPAR MARKETING SERVICES, INC. CORPORATE OFFICE
* 580 WHITE PLAINS ROAD *TARRYTOWN, NY 10591
Phone 914-332-4100 * Fax 914-332-0741 *
Email: servingyou@sparinc.com * Website: www.sparinc.com
[Letterhead of SPAR MARKETING SERVICES, INC.]
MERCHANDISING * MARKETING INTELLIGENCE * DATABASE MARKETING * TELESERVICES *
E-COMMERCE
SERVICES DEFINED BY THE RETURN THEY GENERATE
THIS SCHEDULE, TOGETHER WITH THE MASTER AGREEMENT AND THE OTHER DOCUMENTS
REFERRED TO HEREIN AND THEREIN AND/OR EXECUTED IN CONNECTION HEREWITH OR
THEREWITH, CONSTITUTE THE ENTIRE AGREEMENT BETWEEN LESSOR AND LESSEE AS TO THE
LEASING OF THE EQUIPMENT. LESSEE ACKNOWLEDGES THAT ON OR BEFORE LESSEE'S
EXECUTION AND DELIVERY OF THIS SCHEDULE IT RECEIVED A COPY OF THE PURCHASE ORDER
AND OTHER PURCHASE CONTRACTS EVIDENCING THE ACQUISITION OF THE EQUIPMENT BY
LESSOR .
BY EXECUTION OF THIS SCHEDULE, THE
UNDERSIGNED CERTIFIES THAT HE/SHE HAS READ
THIS SCHEDULE, HAS EXECUTED AND ENTERED INTO
THIS SCHEDULE ON BEHALF OF LESSEE AND IS
DULY AUTHORIZED TO DO SO
LESSOR LESSEE
/s/ Robert G. Brown /s/ Charles Cimitile
- ------------------------------ ------------------------------
Robert G. Brown Charles Cimitile
Chairman and Chief Executive Officer Chief Financial Officer
SPAR Marketing Services, Inc. SPAR Marketing Force, Inc.
USING TOMORROW'S TOOLS TO SOLVE TODAY'S CHALLENGES
- --------------------------------------------------------------------------------
SPAR MARKETING SERVICES, INC. CORPORATE OFFICE
* 580 WHITE PLAINS ROAD *TARRYTOWN, NY 10591
Phone 914-332-4100 * Fax 914-332-0741 *
Email: servingyou@sparinc.com * Website: www.sparinc.com
JOINT VENTURE AGREEMENT
This Joint Venture Agreement is made as of this 26th day of March 2004
By and Between
Solutions Integrated Marketing Services Ltd, a company incorporated and existing
under the [Indian] Companies Act, 1956, and having its registered office at 3rd
Floor, Chandra Bhawan 67-68, Nehru Place, New Delhi, India, 110019 (hereinafter
called "SOLUTIONS"),
And
SPAR Group International, Inc. a company organized and existing under the laws
of the State of Nevada, having its principal place of business at 580 White
Plains Road, Tarrytown, NY, USA (hereinafter called "SPAR"),
WITNESSETH THAT:
WHEREAS:
1. SOLUTIONS is an integrated marketing-services company offering a broad
range of marketing. & sales support services to a large number of
clients, in India, South Asia, ASEAN & other markets. Retail solutions
& merchandising services are part of this broad portfolio of services,
and SOLUTIONS knowledge as well as human resources with respect to the
retailing businesses in India;
2. SPAR is engaged in the retail solution businesses in the USA, having
computer software useful for agency, assistance, instruction and
reporting of storefront activities and also having operational know-how
with respect to such software;
3. In pursuance of the Statement of Understanding recorded on December 22,
2003, the Parties now intend to establish and develop a joint venture
company in India to undertake the business of conducting retail
solutions businesses in the Territory (hereinafter defined); and
4. The Parties are desirous of recording inter alia their intention and
agreement as regards the establishment of the proposed joint venture
company under the name and style "SPAR Solutions India Private Limited"
("Company"), it's management and capital structure, and the
responsibilities to be undertaken by each party in connection with the
formation and operation of the said Company.
NOW, THEREFORE, in consideration of the mutual covenants and agreement herein
contained, the parties hereto agree as follows:
I. In this Agreement each of the following expressions, unless repugnant
to the context, shall have the meaning hereinbelow assigned:
"Act" shall mean the [Indian] Companies Act, 1956 and the rules and
regulations made thereunder and shall include any re-enactment's
thereof, amendments and or modifications thereto for the time being in
force.
"Affiliate" means, with respect to either Party or any third Person,
any other Person which, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control
with, such Party. The term "control" means the power to vote ten
percent (10%) or more of the securities or other equity interests of a
Person having ordinary voting power, or the possession, directly or
indirectly, of any other power to direct or cause the direction of the
management and policies of a Person, whether through ownership of
voting securities, by contract or otherwise.
"Agreed Form" shall mean in the context of any document a version of
such document as mutually agreed to and initialed by both Parties.
"Agreement" or "this Agreement" shall mean this Joint Venture Agreement
as amended, modified or supplemented by the Parties hereto in writing
from time to time.
"Approval(s)" shall mean all authorisations, approvals, clearances,
permissions, consents, validations, confirmations, licenses, and
exemptions of, registrations and filings with and reports to any
central, state, municipal or local authority, or political subdivision
thereof, and any government or any person exercising executive,
legislative, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled,
through stock or capital ownership or otherwise, by any of the
foregoing ,required to be obtained in order to implement the provisions
of this Agreement.
"Board" or "Board of Directors" shall mean the board of directors of
the Company, as reconstituted from time to time.
"Business" shall have the meaning assigned to it in Article 2 below.
"Company" means an Indian company to be incorporated by the Parties,
for the purpose of implementation of the joint venture project of SPAR
and ,SOLUTIONS, under the name and style "SPAR Solutions India Private
Limited" or such other name as may be approved by the Registrar of
Companies, Delhi & Haryana.
"Closing Date" shall have the meaning set forth in Article 5.3 below.
"Deed of Adherence" means the deed or instrument to be entered into
between a transferor Shareholder and a transferee of Shares whereby the
transferee agrees to adhere to and be bound by the terms of this
Agreement.
"Effective Date" shall have the meaning assigned to it in Article 31 of
this Agreement.
"Governmental Body" shall mean any court or tribunal in any
jurisdiction or any public, governmental, legislative or regulatory
body, agency, department, commission, board, bureau or other authority
or instrumentality.
2
"Party" and "Parties" shall mean SOLUTIONS and SPAR, individually and
collectively as the context may require.
"Person" means an individual, corporation, limited liability company,
partnership, association, trust, business trust, joint venture, joint
stock company, pool, syndicate, sole proprietorship, unincorporated
organization, Governmental Body or other form of entity or group
thereof.
"Security Interests" means and includes any interest or equity of any
person, authority or body (including, without prejudice to the
generality of the foregoing, any right to acquire, option or right of
pre-emption, or requirement for consent) or any mortgage, charge,
pledge, lien, or assignment or any other encumbrance, priority or
security interest over or in the relevant property or arrangement of
whatsoever nature which restrict or affect negatively the value, or
impedes or restricts the right to enjoy such property.
"Share" means an equity share of the Company of face value of Rupees
10/- each issued by the Company from time to time.
"Shareholder" means a holder of Shares of the Company and registered in
the Register of Members of the Company.
"Territory" shall mean the geographical territory and extent of the
Republic of India.
"Transfer" means the disposal of any interest in the Shares including
by way of sale or assignment or the grant or the creation of any
Security Interest over, including any option or right of pre-emption
over the Shares or the mortgage of, creation of charge over or the
subjecting of the Shares to an encumbrance.
II. Unless otherwise stated or unless the context otherwise requires, in
this Agreement:
(a) Headings are for convenience only and shall not affect its
interpretation.
(b) References to the Agreement shall mean and include an
appropriate reference to the schedules, exhibits and annexes
hereto.
(c) References to statutes shall be a reference to the statutory
enactment's, rules and regulations (as modified, amended or
re-enacted as of the appropriate date) in force.
CHAPTER 1: FORMATION OF THE COMPANY
Article 1. Establishment of the Company
(a) Promptly after the Effective Date of this Agreement, SOLUTIONS shall be
responsible for incorporation of the Company as a private limited
company in the State of Delhi under the provisions of the Act.
3
(i) For the purposes of incorporation of the said Company,
SOLUTIONS shall nominate two resident Indians as the
subscribers to the Memorandum and Articles of Association of
the Company and shall subscribe to a minimum of 10,000 equity
Shares in order to comply with the minimum paid up capital of
Rs. 1,00,000/(Rupees One Lakh Only) prescribed under the Act.
(ii) The nominees of SOLUTIONS shall be the first Directors of the
Company.
(iii) The Company will be incorporated with an authorised share
capital of Rs. 50,00,000/- (Rupees Fifty Lakhs Only) divided
into 5,00,000 Shares (Five Lakhs Only) of par value of Rs.
10/- (Rupees Ten Only) each. Upon incorporation of the
Company, the Parties shall cause the Company to enter into a
deed or instrument in the nature of a deed of adherence to be
executed by the Company in Agreed Form (attached hereto as
Exhibit A) to evidence its agreement to adhere to and be bound
by the terms hereof. It is agreed that the process of
incorporation of the Company shall be initiated no later than
15 days from the Effective Date and SOLUTIONS shall use
reasonable endeavours to complete the incorporation process
within 60 days of the Effective Date. It is agreed that SPAR
will provide and render all assistance as may be required by
SOLUTIONS for the purposes of incorporation of the said
Company.
(b) The Company shall be incorporated under the name and style "SPAR
Solutions India Private Limited" (or such other name as may be approved
by the Registrar of Companies, Delhi & Haryana) and shall conduct its
Business operations under such name. However, it is clarified that such
name is suggestive and that in the event, for any reason the Company
cannot be incorporated with such a name, this shall not entitle any
Party hereto to resile from its obligations under this Agreement and in
such an event the Parties shall endeavour to agree upon another name
for the Company.
(c) The main objects included in the Memorandum of Association of the
Company will be such that the Company shall be entitled to carry on the
Business. The Parties shall at all times mutually agree upon any
modifications or amendments to the Memorandum of Association and/or the
Articles of Association of the Company which are contrary to or a
change in the terms of this Agreement. In case of any conflict between
this Agreement and the Memorandum of Association and Articles of
Association of the Company, the provisions of this Agreement shall
prevail as between SOLUTIONS and SPAR.
Upon incorporation of the Company, and upon fulfillment of the terms of
Article 5.2 hereof, a Board Meeting of the Company shall be held
whereat in particular the Board of Directors shall:
(i) approve the allotment of Shares to SPAR such that SPAR holds
51% of the entire Share capital of the Company;
(ii) approve the transfer of Shares held by the subscribers to
SOLUTIONS and also approve the allotment of such number of
Shares as would be necessary to ensure that SOLUTIONS holds
49% of the entire Share capital of the Company;
4
(iii) appoint the nominees of SPAR on the Board of Directors of the
Company;
(iv) take on record the terms of this Agreement and the deed of
adherence to be executed by the Company in the Agreed Form
attached to this Agreement to evidence the Company's agreement
to adhere to and be bound by the terms of this Agreement and
authorise a representative of the Company to execute the said
deed of adherence; and
(v) shall take necessary steps to call for an extraordinary
general meeting of the Shareholders to adopt the memorandum of
association and articles of association of the Company amended
to reflect the provisions of this Agreement (being
substantially in the form attached hereto as Exhibit A).
All expenses for the setting up and incorporation of the Company will be paid by
the Company. Upon incorporation the said Company shall reimburse all
incorporation expenses to SOLUTIONS. If this Agreement is not consummated each
Party shall pay its own costs.
Article 2. Business Purpose
The Business of the Company shall consist of the following:
1. Provide retail i.e. instore merchandising services in relation to
setting up and merchandising of retail stores;
2. Agency, assistance, instruction and report of instore or retail
merchandising activities;
3. Implementation of market research and analysis (of results thereof)
pertaining to retail merchandising;
4. Assembly of setups used for retail merchandising;
5. Consulting regarding store management;
6. Development and sale of management system regarding retail
merchandising;
7. Designing and sale of database pertaining to retail merchandising; and
Article 3. Memorandum of Association and Articles of Association
Upon incorporation of the Company and upon fulfillment of the terms of Article
5.2 hereof, the Parties hereby undertake to take all necessary actions to give
effect to the Agreed Form of the Memorandum of Association and the Articles of
Association of the Company amended to reflect the provisions of this Agreement
(attached hereto as Exhibit B).
Article 4. Conditions to Subscription.
4.1. Conditions Precedent: Each of the following is a condition precedent to
the obligation of each of SPAR and SOLUTIONS to subscribe for the
Shares of the Company as described in Article 5.1
5
(a) the execution of a License Agreement between SPAR and the
Company in the Agreed Form attached hereto as Exhibit C in
terms whereof SPAR shall be obliged to localize and set up
software provided by SPAR to work in India, consult on the
organisation of merchandising services, train the Company's
personnel in how to operate the merchandising software and
give advice on budgeting and development of each business plan
(the "License Agreement");
(b) the execution of a User Agreement between SOLUTIONS and the
Company in the Agreed Form attached hereto as Exhibit D for
the provision of office space, facilities and services to the
Company ("User Agreement");
(c) to the extent required, receipt of all regulatory Approvals
whether from the Government of India through the Foreign
Investment Promotion Board/ Secretariat for Industrial
Assistance or the Reserve Bank of India or any other
Governmental Body, as may be required for the consummation of
the transactions contemplated hereunder;
(d) Passing of a resolution by the Board of Directors of the
Company for issue of the Shares in the manner as detailed in
Article 5 hereunder.
Each Party agrees to notify the other Party that the conditions
precedent set forth in this aforesaid Article have been satisfied or
waived in accordance with the provisions of this Agreement.
4.2. Failure to Satisfy Conditions. In the event that all of the conditions
precedent set forth in Article 4.1 are not satisfied or waived (to the
extent waivable) to the mutual satisfaction of SOLUTIONS and SPAR on or
before May 30, 2004, either Party shall have the right to terminate
this Agreement by giving written notice to the other Party. Upon any
such termination, this Agreement shall be of no further force or
effect, and neither Party shall have any further obligations hereunder,
except that Article 30 and 36 and the Parties' respective obligations
thereunder, shall survive any such termination.
Article 5. Subscription and Issuance
5.1. The initial issued, subscribed and paid up equity Share capital of the
Company shall be Indian Rupees Rs 36,76,000, which shall be subscribed
to and held as follows:
Party Percentage Number Equity capital
Ownership of Shares (in Rupees)
SPAR 51% 187476 Rs 18,74,760
SOLUTIONS 49% 180124 Rs 18,01,240
TOTAL 100% 367600 3676000
5.2. For the purposes. of this Agreement and in order to enable the issuance
of the number of fully paid Shares referred to in Article 5.1 by the
Company to SPAR and SOLUTIONS, promptly after all of the conditions
precedent set forth in Article 4.1 are satisfied or waived (to the
extent waivable) to the mutual satisfaction of SOLUTIONS and SPAR, and
not more than thirty (30) days thereafter:
6
(a) SPAR shall be obliged to pay into the account of the Company,
as payment towards Share subscription a sum of Rs 18,74,760
(Indian Rupees Eighteen Lakhs Seventy Four Thousand Seven
Hundred and Sixty Only) ("SPAR Subscription Amount"); and
(b) SOLUTIONS shall be obliged to pay into the account of the
Company as payment towards Share subscription a sum of Rs
18,01,240 (Indian Rupees Eighteen Lakhs One Thousand Two
Hundred and Forty Only) ("Solutions Subscription Amount").
In the event one of the Parties does not pay their respective
subscription amount, within twenty four hours of the expiry of the
aforesaid thirty (30) days and the other Party has paid its respective
subscription amount, the Company shall within a reasonable period of
time and subject to receipt of requisite Approvals if any, return the
respective subscription amount received from such Party who has made
the payment and this Agreement shall stand terminated. In the event of
such termination of this Agreement, SOLUTIONS and/or SPAR shall take
all such steps as may be necessary to wind up the Company in accordance
with the provisions of the Act or alternately take all such steps as
may be necessary to change tl1e name of the Company in accordance with
the Act, such that the name of the Company does not include reference
to SPAR or SOLUTIONS as the case may be.
5.3. The Parties agree that within twenty four hours of receipt by the
Company of both the SPAR Subscription Amount and the Solutions
Subscription Amount, the Company shall simultaneously issue and allot
to SPAR and SOLUTIONS the number of Shares referred to in Article 5.1.
The date on which such allotment occurs shall be the "Closing Date".
Upon such issue and allotment of the Shares of the Company, SPAR shall
hold Shares representing 51% of the paid up equity Share capital of the
Company and SOLUTIONS shall hold 49% of the paid up equity Share
capital of the Company. In addition, the Parties shall ensure that the
Company makes all such filings and satisfies all such reporting
requirements as may be necessary in terms of the Foreign Exchange
Management Act, 1999 and the Regulations issued thereunder, and the
Act, in a timely manner;
On the Closing Date, the issued and paid-up Share capital of the
Company shall be Rs 36,76,000/- (Indian Rupee equivalent of USD
75,000)/- divided into 367600 Shares of face value of Rupees 10 each.
Article 6A Representations and Warranties and Indemnification
1. Representations and Warranties of SPAR: SPAR hereby represents and
warrants that:
(a) SPAR is a company duly incorporated and validly existing in
good standing under laws of Nevada and it has the corporate
power to own its property and to carry on its business as now
being conducted.
(b) SPAR has full power and authority to enter into this
Agreement, to subscribe to, purchase and own the Shares so as
to have a 51% percentage ownership of the
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outstanding equity Shares of the Company and to perform its
other obligations under this Agreement, all of which have been
duly authorized by all proper and necessary corporate action
by SPAR. No consent or approval of stockholders or consent or
approval of, notice to or filing with any governmental
authority is required as a condition to the validity or
enforceability of this Agreement as to SPAR.
(c) This Agreement constitutes the valid and legally binding
agreement of SPAR enforceable in accordance with its terms.
(d) There are no provisions of its memorandum of association,
articles of association or other organizational documents, and
no proceedings pending or threatened before any court or
governmental or administrative agency, that would reasonably
be expected to affect the validity or enforceability of this
Agreement as to SPAR or that would reasonably be expected to
materially adversely affect the financial condition or
operations of SPAR.
(e) SPAR is not a party to or otherwise bound by any contract or
agreement which in any manner would prohibit SPAR from
subscribing to or owning its 51% percentage ownership in the
Company or performing any of its other obligations under this
Agreement.
2. Representations and Warranties of SOLUTIONS: SOLUTIONS hereby
represents and warrants that:
(a) SOLUTIONS is a corporation duly organized and validly existing
in good standing under the laws of India and it has the
corporate power to own its property and to carry on its
business as now being conducted.
(b) SOLUTIONS has full power and authority to enter into this
Agreement, to subscribe to, purchase and own Shares so as to
have a 49% percentage ownership of the outstanding Shares of
the Company and to perform its other obligations under this
Agreement, all of which have been duly authorized by all
proper and necessary corporate action by SOLUTIONS. No consent
or approval of stockholders or consent or approval of, notice
to or filing with any governmental authority is required as a
condition to the validity or enforceability of this Agreement
as to SOLUTIONS.
(c) This Agreement constitutes the valid and legally binding
agreement of SOLUTIONS enforceable in accordance with its
terms.
(d) There are no provisions of its organizational documents, and
no proceedings pending or threatened before any court or
governmental or administrative agency, that would reasonably
be expected to affect the validity or enforceability of this
Agreement as to SOLUTIONS or that would reasonably be expected
to materially adversely affect the financial condition or
operations of SOLUTIONS.
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(e) SOLUTIONS is not a party to or otherwise bound by any contract
or agreement which in any manner would prohibit SOLUTIONS.
from subscribing to or owning its 49% percentage ownership in
the Company or performing any of its other obligations under
this Agreement.
3. Indemnification
(a) A Shareholder ("Indemnifying Shareholder") shall indemnify and
hold harmless the other Shareholder (the "Indemnified
Shareholder"), their nominee Directors on the Board of
Directors of the Company from and against any and all costs,
losses, claims, damages and liabilities, including reasonable
attorneys' fees, incurred by the Indemnified Shareholders or
such other Persons, arising out of (i) any representation or
warranty of the Indemnifying Shareholder hereunder being
untrue or incorrect and/or (ii) the Indemnifying Shareholder's
failure to comply with any of its obligations under this
Agreement including the other terms, conditions or agreements
contained herein.
(b) The Company, to the extent permitted by applicable law, shall
indemnify and hold harmless each relevant Shareholder and
their nominee Directors on the Board of Directors of the
Company (each an "Indemnified Person") from and against any
and all costs, losses, claims, damages and liabilities,
including reasonable attorneys' fees, incurred by such
Indemnified Person or to which such Indemnified Person may be
subject arising out of or in connection with any legal action
(and the defense thereof) commenced as a result of, or in
connection with or arising out of the Indemnified Person's
actions or position with respect to the Company, except to the
extent of the fraud, gross negligence or willful misconduct of
the Indemnified Person.
If an Indemnified Shareholder makes a claim under this Article 6A (3) for
payment or reimbursement of expenses, the same shall be paid or reimbursed
promptly upon receipt of appropriate documentation relating thereto and shall be
paid in full by the Party to whom the claim is made.
Article 6B Additional Fund Requirements
Additional fund requirements of the Company in excess of the Share capital may
be met either through:
(i) the cash flow from time to time of the Company;
(ii) the borrowings facilities which the Company has from all
sources including from one or more Shareholders or through
borrowings from such reputable financial institutions or banks
as the Board of Directors may from time to time determine;
provided, however, the Company shall not raise funds through a
stock market transaction unless SPAR and SOLUTIONS mutually
agree to do so.
(iii) the issue of such additional securities as are permitted under
the Act (including additional equity Shares, subject to
Article 10.2 hereof).
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Notwithstanding the foregoing the Parties as Shareholders may decide
that any monies referred to above may be made available to the Company
in such other manner as may be agreed between them.
It is understood that and it is a term of this Agreement that any
borrowings by the Company shall always be consistent with sound
financial policies.
CHAPTER II: GENERAL MEETING OF SHAREHOLDERS
Article 7. Annual and Extraordinary General Meeting
Annual General Meeting: Subject to the provisions of the Act and the Articles of
Association of the Company, the Annual General Meeting of the Shareholders of
the Company shall be convened by a resolution of the Board of Directors of the
Company and held at the registered office of the Company. The Company shall hold
in each year in addition to any other meetings of the Shareholders of the
Company, a general meeting as its "Annual General Meeting" and shall specify the
meeting as such in the notice calling it. The Parties agree and undertake that
they shall exercise their voting rights at meetings of the Shareholders in such
a manner so as to ensure that the provisions of this Agreement are upheld.
Extraordinary General Meeting: Subject to the provisions of the Act and the
Articles of Association of the Company, an Extraordinary General Meeting of the
Company shall be convened by a resolution of the Board of Directors of the
Company whenever deemed necessary. Such meetings shall be held upon the issuance
of a notice in this behalf, which written notice shall be as per the
requirements under the Act and shall be held with at least 21 days notice,
provided that shorter notice may be given with the consent of the Shareholders
of the Company.
Article 8. Quorum
The quorum for the General Meetings of Shareholders of the Company shall
constitute of at least one duly appointed representative each of SPAR and
SOLUTIONS. No business shall be transacted at any General Meeting unless the
requisite quorum is present.
Article 9. Resolution
Except as expressly otherwise provided in the Act, including any subsequent
legislation substituting the same, this Agreement and all resolutions of the
General Meeting of Shareholders of the Company shall be adopted by the
affirmative vote of the Shareholders holding a majority of the Shares present or
represented at meeting for which there is quorum.
Article 10. Important Matters
Any resolution on the following matters by the General Meeting of the
Shareholders of the Company shall require the affirmative vote of at least
three-fourths of the votes of the Shareholders present:
1. Any amendment or modification of the Memorandum and Articles of
Association of the Company;
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2. Increase or decrease in the authorized capital or paid-up Share capital
of the Company beyond the limit specified in Article 5.1 hereinabove;
3. Issuance of new Shares or any other kind of equity securities or
instruments convertible into equity securities or the decision to
undertake a Public Offering (as defined on Article29);
4. Issuance of debentures;
5. Transfer of any part or whole of Business of the Company or any change
in the Business of the Company;
6. Any and all matters relating to dividends of the Company;
7. Dissolution, voluntary winding up or amalgamation of the Company;
8. Change in number or length of tenure of Directors on the Board of the
Company;
9. Investment in other companies by the Company.
CHAPTER IV: BOARD OF DIRECTORS AND OFFICERS
Article 11. Appointment of Board of Directors of the Company
The Board of Directors of the Company shall consist of four (4) Directors; two
(2) of whom shall be nominated by SPAR and two (2) of whom shall be nominated by
SOLUTIONS. In case of any increase or decrease in the total number of Directors,
the representation stipulated above shall be unchanged and pro-rata at all
times. The Directors shall not be entitled to receive any compensation.
The Chairman of the Board of Directors of the Company for the first three years
from the Closing Date shall be a nominee of SOLUTIONS. In case of equality of
votes, the Chairman shall not have a second/ casting vote.
The management of the Company shall vest with the Board of Directors and all
decisions at the Board shall be by way of majority vote. The nominee Directors
of either Party shall hold office at the pleasure of their respective nominators
and shall be subject to removal by their respective nominating Party. Each Party
agrees to vote for appointment or removal of a Director who has been nominated
by the other Party, upon request of the other Party.
In the event the Company appoints a Managing Director or a Chief Executive
Officer ("CEO") or a Chief Operating Officer ("COO"), such Managing Director or
CEO or COO shall be a nominee of SOLUTIONS and shall be subject to the
superintendence of the Board and shall have general management and control of
the affairs and business (including the Business) of the Company and shall see
that all orders and resolutions of the Board are carried into effect. The powers
of the Managing Director, CEO and COO shall be as set out in Exhibit E including
power to implement or take any actions pursuant to an approved Business plan
even where such actions are covered under the affirmative vote matters under
Article 16.
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The Board shall appoint an Alternate Director to act for a Director (referred to
as the "Original Director") during his absence for a period of not less than 3
(three) months from the state in which the meetings of the Board are ordinarily
held. Either Party shall be entitled to nominate an Alternate Director to act
for its nominated Original Director. The Parties hereto shall ensure that the
Board appoints only such persons to be the Alternate Director, who shall not
hold office for a period longer than that permitted to the Original Director.
All nominations, determinations and removals of Directors and/or their
alternates shall be by notice in writing signed by the duly authorized
officer/representative of the Party nominating, determining or removing such
Director and such notice shall be addressed to the Board, and delivered to the
Company at its registered office.
Any casual vacancy in the office of a Director who is liable to retire by
rotation, or for any other reason, may be filled by the Board provided however,
that if a Director whose office shall be so vacated be a nominee of SPAR or
SOLUTIONS, the person to be appointed to fill such vacancy shall also be a
person selected by SPAR or SOLUTIONS as the case may be, and such person shall
hold office up to the date to which the Director in whose place he is appointed
would have held office.
Article 12. Appointment of Officers
Officers of the Company in terms of the provisions of the Act, shall be
appointed by the Board of Directors and serve at their pleasure.
Article 13. Office of Director
The term of office of each Director shall expire at the close of the Annual
General Meeting.
Article 14. Quorum
Each Director shall have one (1) voting right in the Board of Directors. The
quorum for a meeting of the Board shall be two directors or 1/3rd whichever is
greater of the Board for the time being and there shall be no such quorum
present unless at least one nominee each of SPAR and SOLUTIONS or their
Alternate Director(s), if any, are present. Provided that if within half an hour
from the time appointed for the meeting a quorum is not present, the meeting
shall stand adjourned to the same day in the next week at the same time and
place and the Directors present at such meeting shall constitute the quorum. All
resolutions shall be adopted by majority of the votes of the Directors present.
Circular resolutions shall be said to be passed only if, of the Directors
entitled to vote in respect of the said resolutions, a majority approve the said
resolution.
It is clarified that the right to nominate the number of Directors referred to
in this Article
(a) shall vest in SPAR so long as SPAR holds not less than 51% of the then
existing equity share capital of the Company; and
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(b) shall vest in SOLUTIONS so long as SOLUTIONS holds not less than 49% of
the then existing equity share capital of the Company.
In the event either of SPAR or SOLUTIONS transfer the Shares registered
in their respective names to a third party, in accordance with this
Agreement, then in such an event, the transferring Party shall procure
that its nominees on the Board of Directors of the Company resign from
the Directorship of the Company.
If on account of issue of additional equity Shares as contemplated in
Article 6B (iii) and the consequent failure of either Party to
subscribe and pay for such additional Shares, the relative shareholding
of either Party is reduced then the following shall apply
(i) Where the shareholding of a Party falls below 26% but is more
than 10% of the then existing equity share capital of the
Company then such Party shall be entitled to appoint only one
(1) Director to the Board and shall cause the. other Directors
nominated by it to resign.
(ii) Where the shareholding of either Party falls below 10% such
Party shall not have the right to nominate a Director.
Upon such resignation, the vacancy(ies) on the Board shall be filled in
with a nominee(s) of the Party whose shareholding has not been diluted.
It is clarified that in case of a Transfer of all its Shares by a Party
to a third Person in accordance with the provisions of this Agreement,
contemporaneously with such Transfer, the transferor Shareholder shall
cause its nominee Directors to resign and upon such Transfer the
transferee of the Shares shall be entitled to appoint such number of
Directors as the transferor Shareholder was entitled to appoint
immediately prior to such Transfer. Thereafter the rights of such
transferee shareholder shall be subject to the terms and conditions of
this Agreement as applicable to the transferor Shareholder.
Article 15. Meeting of the Board of Directors
The meetings of the Board of Directors shall be held once in each quarter.
Additional meetings of the Board shall be held when necessary, both of which
shall be convened in accordance with the provisions of the Act. At least seven
(7) days notice shall be given to each of the directors (and their respective
alternates, if any) in respect of each meeting of the Board of Directors, at the
address notified from time to time by each director (and alternate, if
applicable) to the Company. Notice may be waived or a meeting may be called by
giving notice of less than seven (7) days with the consent of all the directors.
To the extent permitted by the Act and the Memorandum and Articles of
Association of the Company, the Board may meet through the mode of
teleconferences, videoconference, if the need arises provided that no
teleconference or videoconference shall be conducted unless written confirmation
for participation by the requisite quorum of the Directors as required has been
received prior to the meetings by such mode as required and such Directors
record their presence on the commencement of such conference and also at the
termination of it. The minutes of the meetings of the Board of Directors held
through such teleconferences, videoconferences shall be recorded and the
decisions taken during any such meeting shall be recorded in writing and
confirmed by all the Directors present for the said
13
meeting, by circulation within the next three days of such meeting of the Board
of Directors and the foregoing shall constitute the Board's decision as if taken
by a resolution by circulation.
Article 16. Important Matters
Any resolutions on the following matters by the Board of Directors requires the
affirmative vote of one nominee each of SPAR and SOLUTIONS respectively:
1. Any proposal to convene a General Meeting of the Shareholders of the
Company or action by the Board of Directors for the matters as provided
in Article 10 hereof;
2. Any investment or commitment of the Company in amounts individually in
excess of Indian Rupee equivalent of $100,000 (One hundred thousand
dollars) or in the aggregate in excess of $100,000 (One hundred
thousand dollars);
3. Any loan or credit taken by the Company in excess of Indian Rupee
equivalent of $100,000 (One hundred thousand dollars);
4. Execution, amendment or termination of agreements or commitments with
SPAR, SOLUTIONS or their subsidiaries or affiliates;
5. Adoption or amendment of the annual budgets and Business plan of the
Company;
6. Adoption or any material modification of major regulations or
procedures, including any employee rules or handbook of the Company;
7. Change of the statutory auditors of the Company as provided in Article
18(a);
8. Initiating or settling any litigation, arbitration or other formal
dispute settlement procedures or forgiveness of any obligation owed to
the Company in excess of Indian Rupee equivalent of one hundred
thousand dollars ($100,000);
9. Approval of annual closing of the books of the Company and the
Company's annual financial statements, and changing of accounting
policies and practices or the Company's accounting periods;
10. Establishment or amendment to the conditions of employment of officers;
11. No sale or disposition of or granting a lien, security interest or
similar obligation with respect to, in one or a series of related
transactions of the Company or with respect to any major strategic
asset of the Company that is crucial to its business;
12. Formation of any subsidiary of the Company, entry into (or subsequent
termination of) any joint venture, partnership or similar agreements;
13. Entering into, amending or terminating any contract with/or commitment
to any Director or shareholder; and
14. Entering into any agreement or commitment to provide goods or services
outside India.
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CHAPTER V: AUDIT
Article 17. Accounting Period
The accounting periods of the Company shall be from 1st day of January and shall
end on the 31st day of December of each year.
Article 18. Statutory Auditors
(a) A Statutory Auditor shall be appointed by the Board of the Company and
the Delhi office of the Indian affiliate of Ernst & Young shall be the
first Statutory Auditors of the Company ("Auditors");
(b) The Board of Directors of the Company shall appoint the internal
auditors of the Company. Such internal auditor of the Company shall be
a firm nominated by SOLUTIONS in consultation with SPAR.
The cost of the statutory audit and the cost of the internal audit and tax audit
shall be borne by the Company.
Article 19. Inspection of Accounting Records and Books
The Company shall yearly arrange audit of the accounting records and books and
shall submit a report of such audit to each of the parties hereto within thirty
(30) days from the completion of the audit.
The Auditors shall audit the accounting records and books of the Company and any
other matters relating, directly or indirectly, to the financial condition of
the Company. Any fee for the certified public accountant for inspection and
audit mentioned above shall be borne by the Company. The Company shall keep true
and correct accounting records and books with regard to all of its operations in
accordance with generally accepted accounting principles consistently applied
("GAAP") in Territory. All accounting records and books shall be kept ready for
inspection by the Parties hereto or by their authorized representative. If
requested by SPAR, the Company shall cooperate with respect to each financial
period to provide such information as required by SPAR to reconcile the
Company's financial statements with U.S. GAAP reporting requirements of SPAR.
The costs associated with preparation/reconciliation of accounts of the Company
as per U.S. GAAP shall be borne by the Company.
In addition, either Party may, at its discretion, and at its individual expense,
engage accountants (other than the Auditors referred to above) to conduct an
independent audit of the Company's books and records of account and its business
and activities. The aforesaid accountants shall have the absolute right on
behalf of such Party to examine, inspect, and copy the books and records of
account of the Company during its normal business.
15
Article 20. Increase of Capital
In case of capital increase of the Company after its incorporation, SOLUTIONS
and SPAR shall have the preemptive right to the new Shares to be issued for such
capital increase in proportion to their respective shareholdings in the Company.
Article 21. Dividend Payout
The declaration of dividends by the Company in respect of its Shares shall
always be consistent with sound financial policy having regard to the financial
requirements and cash resources of the Company and in accordance with the
provisions of the Act and other applicable statutory provisions. For the first
three years from the Closing Date and subject to the approval of the Board.
CHAPTER VI: TRANSFER OF SHARES
Article 22. Restrictions on Transfer of Shares
(i) Except as provided in Article 23 hereof and subject to the provisions
of the Act neither Party hereto shall, without the prior written
consent of the other Party, which consent shall not be unreasonably
withheld, Transfer all or any part of its shares of the Company to any
third Person. In addition, all Transfers shall be made subject to the
requirement that the transferee enter into a Deed of Adherence
satisfactory to the non-transferring Shareholder(s). Any Transfer made
in violation of this Article 22(i) shall be null and void, and the
Company shall not register such Transfer.
(ii) Notwithstanding the restrictions on Transfer contained in Article
22(i), either Party may transfer the Shares to a majority owned and
controlled Affiliate but subject to such Approvals as may be required,
if any. In any such event, it shall be a condition precedent to the
right of the transferring Party to transfer the Shares to its Affiliate
that such Affiliate execute a Deed of Adherence which has been approved
in writing by each of the nontransferring Shareholders. If any such
transferee Affiliate ceases to be an Affiliate of the transferring
Party at any time during the term of this Agreement, the applicable
Shares shall be transferred back to the transferor Party or one of its
Affiliates on the same terms. SOLUTIONS and SPAR agree to comply with
all laws, rules and regulations, by-laws and requirements applicable to
such Transfer to a Party's Affiliate and to cause their respective
representatives on the Board of Directors of the Company to vote in
favor of such Transfer.
Article 23. Right of First Refusal and Call Option
1. Right of First Refusal:
(A) After three (3) years from the Closing Date, if either Party hereto
(hereinafter called "Selling Party") wishes to transfer and sell all
but not less than all of its Shares ("Offered Shares"), the Selling
Party shall furnish to the other Party (hereinafter called "Other
Party") a written notice of such proposed transfer and sale which
notice will also specify the offered sale price and other major terms
and conditions of such proposed sale;
16
The Other Party shall have a right to purchase such Offered Shares at
the price and on the terms mentioned in the offer notice by giving the
Selling Party a written notice of its intention to purchase the Offered
Shares which sale and purchase shall be completed within ninety (90)
days from the receipt of Selling Party's offer notice.
The Other Party may by notice in writing within the said period of 90
days require the fair value of the Offered Shares to be determined by
the internationally recognized Indian firm of chartered accountants and
such determination shall be made within 30 days of the said request for
fair valuation being made and the Parties agree to co-operate for such
determination. Upon determination of the fair value of the Offered
Shares, the Other Party shall be entitled to issue an acceptance notice
agreeing to purchase the Offered Shares at the fair value so determined
within 15 days from the date of such determination. In such an event
such sale and purchase shall take place within 60 days from the date of
such determination and the Other Party shall pay to the Selling Party
the purchase price, and the Selling Party shall deliver to the Other
Party, share certificates in original representing all of the Offered
Shares, free and clear of any liens and duly executed share transfer
forms.
(B) In case no acceptance notice is received from the Other Party or the
sale and purchase of Offered Shares is not completed within 90 days of
the receipt of the Seller's offer notice or within 60 days of
determination of the fair value, the Selling Party may offer to sell
such Offered Shares to a third party upon the terms and conditions not
less favourable than those described in its offer notice. Such sale and
purchase of the Offered Shares to the third party shall be completed
within 60 days after the expiry of the said 90 days or 60 days period
as the case may be and the third party shall pay to the Selling Party
the purchase price, and the Selling Party shall deliver to the third
party, share certificates in original representing all of the Offered
Shares, free and clear of any liens and duly executed share transfer
forms.
Unless otherwise agreed by the Other Party in writing, all Transfers to
the proposed transferee shall be made subject to the requirement that
the proposed transferee enter into a Deed of Adherence with the Selling
Party, satisfactory to the Other Party, and the Other Party shall be a
confirming party to such Deed of Adherence. Any Transfer made in
violation of this Article 23(1) shall be null and void, and the Company
shall not register such Transfer. The Parties shall cooperate to effect
the closing of such purchase and sale of the Shares of the Company in
the manner and within the time periods specified above.
2. Call Option: Within 30 days of the third anniversary of the Closing
Date and thereafter within 30 days of every subsequent anniversary of
the Closing Date, either Party ("Purchasing Party") may at any time
make a written offer to buy all of the other Party's Shares ("Other
Party") in the Company. The Purchasing Party shall furnish to the Other
Party a written notice of such proposed purchase, the offered purchase
price and other major terms and conditions of such proposed purchase.
The Other Party shall then, either accept the offer and sell all of its
Shares under the terms and conditions offered, or in its sole
discretion offer to purchase the Purchasing Party's Shares on same
terms and conditions. If the Other Party does not respond to the offer
within one hundred and twenty (120) days of receipt of the notice from
the Purchasing Party, the Other Party shall
17
be deemed to have accepted the offer to sell its Shares to the
Purchasing Party. The Parties shall cooperate to effect the closing of
such purchase and sale of all of the Shares of the Company held by the
Other Party within 120 days of the decision or deemed decision of the
Other Party.
In case a notice to purchase the Purchasing Party's Shares is issued by
the Other Party, the Parties shall co-operate to effect the closing of
such purchase and sale of all of the Shares of the Company held by the
Purchasing Party~
At any such closing, the Purchasing Party shall pay to the Other Party
the purchase price, and the Purchasing Party shall deliver to the Other
Party, the original Share certificates representing all of the
Purchasing Party's Shares held in the Company, free and clear of any
liens and duly executed Share transfer forms. In case both the Parties
give notices, the Party first receiving the notice shall be considered
as the Other Party.
3. Change of ownership
Upon a Change of Ownership Event, the Unaffected Party shall have the right, but
shall not be obliged, to purchase all the Shares of the Company held by the
Affected Party. For this purpose the Parties agree as under:
(a) within a period of 30 days after the Unaffected Party receives notice
of the Change of Ownership Event, the Unaffected Party shall be
entitled to serve notice upon the Affected Party conveying it's
intention to purchase the Shares then owned by the Affected Party;
(b) the transfer of the Shares then owned by the Affected Party to the
Unaffected Party shall take place at a fair value to be determined by
an internationally recognised Indian firm of chartered accountants
which shall be identified by the Unaffected Party;
(c) within 15 days from the date of determination of the fair value, the
Unaffected Party shall be entitled to serve notice upon the Affected
Party requiring the Affected Party to sell to the Unaffected Party all
the Shares then held by the Affected Party at the fair value so
determined, it is understood that upon receipt of such a notice the
Affected Party shall be required to and shall sell all the Shares then
held by it to the Unaffected Party at the fair value so determined; and
(d) such sale and purchase shall be completed, subject to receipt of the
necessary Approvals, within a period of 60 days from the date of
determination of the fair value of the shares. At such closing (when
such sale and purchase is to be completed) the Unaffected Party shall
pay to the Affected Party the purchase price, and the Affected Party
shall deliver to the Unaffected Party, share certificates in original
representing all of the Shares then held by the Affected Party, free
and clear of any liens and duly executed share transfer forms.
For the purposes of this Article 23(3):
"Affected Party" means a Shareholder, in connection with whom a Change
of Ownership Event takes place;
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"Change of Ownership Event" means, with respect to a Shareholder, the
first to occur of any of the following events during the term of this
Agreement:
(a) any Person or group of Persons acting in concert, directly or
indirectly, (i) acquires or obtains the right through the
exercise of any warrant, option, or any other right held by
such Person or group of Persons to acquire, more than 50% of
the issued and paid up shares of a Shareholder, and/or (ii)
acquires the right, whether through an agreement or otherwise,
to direct or cause the direction of, or control, the
management of a Shareholder; or
(b) any business combination, merger, amalgamation or
consolidation by a Shareholder with any Person or group of
Persons whereby such Persons possesses, directly or
indirectly, the power to direct or cause the direction of, or
control, the management of such Shareholder.
"Unaffected Party" means a Shareholder other than the Affected Party.
Article 24. Cooperation in Financing
1. During the first twelve (12) months from the Effective Date, the
Company is expected to require a total working capital up to Rs.
29,70,000/- (amount being equivalent to Indian Rupee equivalent of
$66,000). The Parties agree to arrange for the same in the following
manner: SPAR will provide up to Rs. 15,14,700/- (being an amount
equivalent to $33,660) as loan to the Company, while SOLUTIONS will
arrange for up to Rs. 14,55,300/- (being an amount equal to $32,340)
through a local bank.
2. The Company may borrow an additional amount when it needs additional
funds, if such borrowing is approved in advance by the Board of
Directors as an important matter under Article 16 herein.
3. If SOLUTIONS pays any creditors of the Company due to a guarantee made
by SOLUTIONS to such creditors in favor of the Company, SPAR shall
reimburse SOLUTIONS for half of the amount paid by SOLUTIONS, but only
if the Company's borrowing of such funds and' SOLUTIONS guaranty of the
Company's obligations have been expressly agreed to in advance by SPAR
in writing or in a Board resolution, for which both SPAR-nominated
directors have voted affirmatively.
CHAPTER VII: ROLE OF CONTRACTING PARTIES
Article 25. Provision of Office Space and Facility
1. SOLUTIONS shall in terms of the User Agreement provide office space and
facilities, staff service for general affairs and finance, and intra-
company network services, which are determined, at SOLUTION's sole
discretion, necessary for the operation of Company after the
consultation between the both Parties, to the Company at no charge for
a period of three (3) years from the Closing Date. In the event that
SOLUTIONS cannot provide and apportion such office space, facilities
and services within its existing facilities then SOLUTIONS will
reimburse to the Company the actual cost apportioned for such office
19
space, facilities and services procured by the Company such that the
Company does not incur any cost for the office space, facilities and
services for three (3) years from the date of the Company obtaining
such described space and services. In years two (2) and three (3), the
Company will pay for staff exceeding eight people if the Company is
profitable in the immediately preceding year.
2. SPAR for first three (3) years from the Closing Date will provide up to
four thousand five hundred (4,500) hours of business support annually.
This support may be in the form of general business, consultation or
programming support to modify or enhance the merchandising software.
SPAR will maintain ownership of all software. If support provided by
SPAR exceeds four thousand five hundred (4,500) hours the additional
hours will be billed by SPAR to the Company at Indian Rupee equivalent
of Fifty-five dollars ($55.00) per hour on the date of such payment.
However a lower price will be charged for programming costs if a less
expensive way to hire IT staff is found mutually acceptable to the
Parties hereto. The Company will be able to hire its own IT staff as
appropriate.
3. If SPAR wishes to sell all its Shares in terms of Article 23 to a third
party then in that case notwithstanding such sale SPAR shall be
committed to lend its name to the Company for an additional year at no
extra cost and provide software to the Company under the License
Agreement for an additional year subject to obtaining of necessary
Approvals if any, at the following cost:
First 6 months: out of pocket expenses,
Next 6 months: Indian Rupee equivalent of
$ 3000/month + out of pocket expenses
4. SOLUTIONS agrees that its operating expenses may not be allocated to
the Company.
Article 26. Personnel
SOLUTIONS and SPAR shall, at their own judgment, second to the Company their
respective personnel who are appropriate for the start-up of business of the
Company for a period of one (1) year from the Effective Date without any
consideration. In principle, the Parties seconding such personnel shall be
responsible for the payment of salaries and benefits and all other matters
concerning the employment of the personnel so seconded by the Parties to the
Company.
SOLUTIONS and SPAR will each set up project teams and all salaries for current
employees of either SOLUTIONS or SPAR shall be borne by the company now paying
them.
Article 27. Training
Each Party hereto shall provide appropriate training for mutually accepted
periods of time to the employees of the Company for the Company's operation at
its own site or any other location. The said training shall be made upon the
Company's request and any necessary expenses including travel for the training
shall be borne by the Company, except as otherwise provided in License Agreement
or the User Agreement.
20
Article 28. Non-Competition
For three (3) years from the Closing Date of this Agreement, neither SPAR nor
SOLUTIONS shall without the prior consent of the other, engage in, whether
directly or indirectly, in the provision of services being similar to the
Business as described in Article 2 in this Agreement in the Territory. However,
in the event that SPAR enters into a contract with a customer that covers more
than one country and the scope of such agreement includes services in Territory,
such services being similar to the Business as defined in this Agreement, SPAR
shall not be prohibited from entering into or performing such agreement,
provided that SPAR shall make commercially reasonable efforts to enable the
Company to participate in and be fairly compensated for providing services to
any such customer. Similarly, in the event that SOLUTIONS enters into a contract
with a customer for providing integrated marketing services in India or outside,
such services being similar to the Business as defined in this Agreement, and
the scope of such agreement includes some retail merchandising, SOLUTIONS shall
not be prohibited from entering into or performing such agreement, provided that
SOLUTIONS shall make commercially reasonable efforts to enable the Company or
SPAR (in territories outside India) to participate in and be fairly compensated
for providing services to any such customer. Provided further that delay or
failure to make commercially reasonable efforts as stated above shall not
restrict SOLUTIONS or SPAR to undertake activities or implement such agreement
as aforesaid. It is clarified that this Article shall also cease to apply upon
termination of this Agreement.
CHAPTER VIII: AMENDMENT FOR PUBLIC OFFERING
Article 29. Public Offering
Both Parties acknowledge that the Company may attempt to become a listed company
or over-the-counter company on the Territory Stock Exchange or any other stock
exchange or public market in Territory (Public Offering). Both Parties
acknowledge that the number of issued Shares, the number of Shareholders, the
paid-up capital and profit transaction with each Party, the seconded employees
of the Company will be reviewed and instructed for amendment by the relevant
governmental or regulatory authorities in accordance with those bodies' rules or
guidelines for Public Offering. If both Parties agree to undertake a Public
Offering subject to Article 10 above, both Parties shall discuss and reasonably
cooperate with each other to amend the Articles of Association of the Company
and/or the License Agreement in order to complete the Public Offering of the
Company. Any changes to the License Agreement will be effective upon
consummation of the Public Offering (but not before), and subject to the
approval of the Boards of Directors of the Company, SOLUTIONS and SPAR. The
public offering of Shares to the public by the Company shall be completed in
accordance with the applicable provisions of the Act and the rules and
regulations with respect thereto issued by the Securities Exchange Board of
India from time to time, and such other applicable provisions of Indian law.
21
CHAPTER IX: CONFIDENTIALITY
Article 30. Confidential Information
SOLUTIONS and SPAR shall keep secret and retain in strict confidence any and all
confidential information that may be disclosed by one Party to the other or to
the Company or such confidential information that may be disclosed by the
Company to either Party and use it only for the purpose of giving effect to the
provisions of this Agreement and shall not disclose it to a third party without
the prior written consent of the other Party unless the receiving party can
demonstrate that such information: (i) has become public other than as a result
of disclosure by the receiving party, (ii) was available to the receiving party
prior to the disclosure by the disclosing party with the right to disclose, or
(iii) has been independently acquired or developed by the receiving party. The
Parties agree that (i) the use of any such confidential information by the other
Party for any purpose other than managing their respective investment in the
Company, or (ii) the disclosure or divulgence of any such confidential
information to third persons would result in damages to and otherwise adversely
affect the business and affairs of the Company. The Parties agree that the said
confidential information will be disclosed to the personnel of either Parties
and/or the Company on a need to know basis.
CHAPTER X: GENERAL PROVISIONS
Article 31. Effective Date
This Agreement shall become effective on the date the Agreement is executed by
the Parties hereto ("Effective Date").
Article 32. Termination
1. If either Party Transfers all its Shares in the Company to the other
Party hereto in accordance with Article 23 hereof, this Agreement shall
terminate. If either Party Transfers its Shares in the Company to a
third party, unless expressly agreed by the non-transferring Party in
writing, this Agreement shall be assigned to and binding upon such
third party, provided that the assigning party shall remain liable for
all legal acts with respect to this Agreement or the Company that
occurred before the Effective Date of such assignment.
2. (a) Either Party not in breach of this Agreement, save and except an
event of breach by either Party of their respective obligations under
Article 24 of this Agreement, may terminate this Agreement by written
notice to the other Party if any breach shall not have been corrected
by the other Party in breach within ninety (90) days after written
notice is given by such Party not in breach complaining of such breach.
(b) In the event of breach by either Party of their respective
obligations under Article 24 of this Agreement, the Party not
in breach shall have a right to terminate this Agreement, by
written notice to the other Party, in the event such breach is
not corrected by the Party in breach within ten (10) days
after the written notice is given by such Party not in breach
complaining of such breach.
22
3. Either Party may terminate this Agreement by giving notice in the event
of one or more of the following:
(a) Appointment of a trustee or receiver for all or any part of
the assets of the other Party;
(b) Insolvency or bankruptcy of the other Party;
(c) Assignment of the other Party for the benefit of creditor;
(d) Attachment of the assets of the other Party;
(e) Expropriation of the business or assets of the other Party;
and
(f) Dissolution, liquidation or winding up of the other Party.
If either Party is involved in any of the events enumerated in (a) through (f)
above, it shall immediately notify the other Party of the occurrence of such
event.
4. In case of the termination of this Agreement pursuant to Article 32.2
or Article 32.3, the Party terminating in accordance with this
Agreement shall have an option to purchase the Shares of the other
Party at the book value to be decided by an internationally recognized
accounting firm that is not the principal accounting firm of either
Party, if either Party so requests, or to have the Company dissolved.
Provided that any such purchase of the nature aforesaid will be subject
to receipt of all regulatory Approvals, as may be applicable. In case
the Party terminating this Agreement does not offer to purchase the
Shares of the other Party and/or any such purchase is not completed
within 120 days of such termination inclusive of the time required to
obtain regulatory approvals, the other Party shall have the right to
sell the Shares to any other third party or shall have the right to
require dissolution of the Company. Provided that, the right to
dissolution shall be exercisable within 30 days after the expiry of the
said 120 days period.
5. Upon termination of this Agreement or SPAR's ceasing to hold at least
51% of the Shares in the Company, the License Agreement. and the User
Agreement shall terminate immediately if still in effect, unless
otherwise agreed to by the Parties hereto.
Article 33. Force Majeure
Neither Party shall be liable to the other Party for failure or delay in the
performance of any of its obligations under this Agreement for the time and to
the extent such failure or delay is caused by riots, civil commotions, wars,
hostilities between nations, governmental laws, orders or regulations,
embargoes, actions by the government or any agency thereof, acts of God, storms,
fires, accidents, strikes, sabotages, explosions, acts of terrorism or other
similar contingencies beyond the reasonable control of the respective Parties.
23
Article 34. Notices
All notices, reports and other communications given or made in accordance with
or in connection with this Agreement shall be made in writing and may be given
either by (i) personal delivery, email or facsimile (ii) overnight delivery or
(iii) registered air mail, if properly posted, with postage fully prepaid, in an
envelope properly addressed to the respective Parties at the address set forth
below or to such changed address as may be given by either Party to the other by
such written notice. Any notice, etc by personal delivery or overnight delivery
or facsimile transmission shall be deemed to have been given (7) days after the
dispatch. In any event, if any notice, etc. is received other than the regular
business hours of the recipient, it shall be deemed to have been given as of the
following business day of the recipient.
To: SOLUTIONS Solutions Integrated Marketing Services Ltd.
ATT: Srikant Sastri, Managing Director
3rd Floor, Chandra Bhaan 67-68, Nehru Place,
New Delhi, India, 11 00 19
E-mail id: srikant@.solutions-intg.com
Facsimile Number: 91-11-26226592
SPAR SPAR Group, Inc.
ATT: Robert G. Brown, Chairman and CEO
580 White Plains Road, Tarrytown, NY, USA, 10591
E-mail id:rbrown@sparinc.com
Facsimile Number: +19143320741
Article 35. Assignment
This Agreement and the rights and obligations hereunder are personal to the
Parties hereto, and shall not be assigned by either of the Parties to any third
party without the prior written consent of the other Party.
Article 36. Dispute Resolution/Arbitration
36.1. General. SPAR and SOLUTIONS agree to use their commercially reasonable
efforts to resolve any dispute, deadlock, conflict, disagreement,
controversy or claim between the Parties arising out of or relating to
this Agreement including any deadlock in respect of any matter at the
Board of Director level of the Company (a "Dispute") in a timely and
diligent manner in accordance with this Article 36. SPAR and SOLUTIONS
intend that the arbitration procedures outlined in Article 36.3 is to
be used only if the efforts by the Parties to resolve a Dispute, which
efforts shall be made in good faith, under Article 36.2 are
unsuccessful.
36.2. Senior Management. Any Dispute shall be, within 30 days of the same
arising, referred to by either Party to the Senior Management of
SOLUTIONS and SPAR. Such notice of reference shall include a statement
of the referring Party's position. Within ten (10) days of receipt of
such notice of reference of a Dispute, the Senior Management of both
Parties shall meet at a mutually acceptable time and place, and
thereafter, as often as they reasonably deem necessary, to attempt to
resolve the Dispute. All reasonable requests for
24
information made by one Party to the other Party shall be honored.
Senior Management shall take such steps as are mutually agreeable to
attempt to resolve such Dispute. If the Dispute is not resolved to the
mutual satisfaction of the Parties despite the good faith efforts of
Senior Management within thirty (30) days after it has been referred to
Senior Management, either Party may require that the Dispute be
resolved by binding arbitration as provided in Article 36.3.
"Senior Management" for the purposes hereof means, in case of SPAR, the
representatives of SPAR on the Board of the Company and in case of
SOLUTIONS means the representatives of SOLUTIONS on the Board of the
Company.
36.3. Any Dispute which is not resolved under the procedures established in
Article 36.2 shall be resolved by binding arbitration in New Delhi
pursuant to Arbitration and Conciliation Act, 1996 of India if
initiated by SOLUTIONS, or in New York City in accordance with the
International Arbitration Rules of the American Arbitration Association
if the arbitration is invoked by SPAR. It is clarified that if one
Party initiates the arbitration proceedings then the other Party shall
raise all counterclaims in that arbitration proceedings only. The
arbitration shall be conducted by three (3) arbitrators and the
proceedings shall be in English.
Article 37. Implementation
The Parties hereby agree, for themselves, their successors, heirs and legal
representatives, to vote at Shareholders' meetings, and to cause the Directors
they nominate to vote at Board meetings and to carry out their duties, to
prepare, execute and deliver or cause to be prepared, executed and delivered
such further instruments and documents, to take such other actions and to cause
the Articles of Association of the Company, Company work rules and other rules
and Commercial registry and any other document to be amended or adopted as may
be reasonably required to effect the provisions and intent of this Agreement and
the transactions contemplated hereby.
Article 38. Governing Law
This Agreement and all questions arising out of or under this Agreement shall be
governed by and interpreted in accordance with the laws of India.
Article 39. Waiver
Any failure of either Party to enforce, at any time or for any period of time,
any of the provisions of this Agreement shall not be construed as a waiver of
such provisions or of the right of such Party thereafter to enforce each and
every such provision.
Article 40. Entire Agreement
This Agreement constitutes the entire and only agreement between the Parties
hereto with respect to the subject matter of this Agreement and supersedes any
other prior commitments, agreements or understandings, written or verbal, that
the Parties hereto may have had. No modification, change and amendment of this
Agreement shall be binding upon the Parties hereto
25
except by mutual express consent in writing of subsequent date signed by
authorized officer or representative of each of the Parties hereto.
Article 41. Headings
The headings of articles and paragraphs used in this Agreement are inserted for
convenience of reference only and shall not affect the interpretation of the
respective articles and paragraphs of this Agreement.
Article 42. Language
This Agreement has been executed in the English.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed
in two (2) copies by their respective duly authorized officer or representative
as of the day first above written.
Solutions Integrated Marketing Services Ltd.
Signature: /s/ Srikant Sastri
-----------------------------
Name: Srikant Sastri
Title: Managing Director
SPAR Group International, Inc.
Signature: /s/ Robert G Brown
-----------------------------
Name: Robert G Brown
Title: Chairman and CEO
JOINT VENTURE SHAREHOLDERS AGREEMENT
between
FRIEDSHELF 401 (PROPRIETARY) LIMITED
and
SPAR GROUP INTERNATIONAL, INC.
and
DEREK O'BRIEN
and
BRIAN MASON
and
SMD MERIDIAN CC
and
MERIDIAN SALES & MERCHANDISING (WESTERN CAPE) CC
and
RETAIL CONSUMER MARKETING CC
and
MERHOLD HOLDING TRUST
in respect of
SGRP MERIDIAN (PROPRIETARY) LIMITED ("THE COMPANY")
Mallinicks Attorneys
Telephone +27 21 410 2200
Fax +27 21 410 9000
3rd Floor Granger Bay Court
Beach Road, V&A Waterfront
Cape Town 8001
PO Box 3667 Cape Town 8000
TABLE OF CONTENTS
1. CONDITIONS PRECEDENT.....................................................3
2. EFFECTIVE DATE...........................................................4
3. ESTABLISHMENT............................................................5
4. BUSINESS PURPOSES........................................................5
5. LOCATION.................................................................5
6. MEMORANDUM AND ARTICLES OF ASSOCIATION...................................5
7. CAPITAL..................................................................6
8. PREPARATION OF ESTABLISHMENT OF THE COMPANY..............................6
9. SECTION 197 TRANSFER.....................................................8
10. ORDINARY AND EXTRAORDINARY GENERAL MEETINGS..............................9
11. QUORUM AND RESOLUTION....................................................9
12. MINORITY PROTECTIONS....................................................10
13. EARNINGS AND LOSSES.....................................................10
14. CAPITAL CONTRIBUTIONS...................................................11
15. DIRECTORS...............................................................11
16. ACCOUNTING PERIOD.......................................................18
17. AUDITORS................................................................18
18. INSPECTION OF ACCOUNTING RECORDS AND BOOKS..............................18
19. INCREASE OF CAPITAL.....................................................19
20. DEADLOCK................................................................19
21. RESTRICTIONS ON TRANSFER OF SHARES......................................20
22. PRE-EMPTIVE RIGHT AND OPTION............................................20
23. CO-OPERATION IN FINANCING...............................................22
24. BUSINESS AND SOFTWARE SUPPORT...........................................22
25. NON-COMPETITION.........................................................23
26. PUBLIC OFFERING.........................................................25
27. CONFIDENTIAL INFORMATION................................................25
28. TERMINATION.............................................................26
29. FORCE MAJEURE...........................................................27
30. NOTICES.................................................................27
31. ASSIGNMENT..............................................................28
32. ARBITRATION.............................................................28
33. IMPLEMENTATION..........................................................29
34. GOVERNING LAW...........................................................29
35. WAIVER..................................................................29
36. JOINT AND SEVERAL.......................................................30
37. CO-OPERATION AND GOOD FAITH.............................................30
38. ENTIRE AGREEMENT........................................................30
39. COSTS...................................................................31
40. HEADINGS AND INTERPRETATION.............................................31
Page 2
This agreement is made as on this day of 2004 by and between Friedshelf 401
(Pty) Ltd (registration number 2004/000538/07), a company organised and existing
under the laws of the Republic of South Africa (hereinafter called
"Friedshelf"), SPAR Group International Inc. a company organized and existing
under the laws of the State of Nevada, USA, having its principal place of
business at 580 White Plains Road, Tarrytown, NY, USA, 10591 (hereinafter called
"SPAR"), SMD Meridian CC (CK No. 2001/062950/23), Meridian Sales & Merchandising
(Western Cape) CC (CK No. 1998/55070/23), Retail Consumer Marketing CC (CK No.
1996/00917/23) and Friedshelf Holding Trust (registration no. IT 151/99) Derek
Michael O'Brien (identity number 451011 5047 18 9 ("O'Brien") and Brian Peter
Mason, identity number 551201 5030 08 2 ("Mason").
RECORDAL
WHEREAS, SMD Meridian CC, Meridian Sales & Merchandising (Western Cape) CC,
Retail Consumer Marketing CC and Merhold Holding Trust (together referred to as
the "Meridian Entities") are engaged in the business of retail solution and
merchandising services in South Africa, having a wide range of clients and also
having knowledge and human resources with respect to retailing businesses in
South Africa;
WHEREAS, SPAR is engaged in retail solution businesses in the USA, having
computer software useful for agency, assistance, instruction and reporting of
storefront activities and also having operational know-how with respect to such
software;
WHEREAS, Friedshelf and SPAR have incorporated a company, SGRP Meridian (Pty)
Ltd (the "Company") (registration number 2003/012518/07), the equity whereof
will be held as to 49% (forty nine percent) by Friedshelf and as to 51% (fifty
one percent) by SPAR to jointly conduct a retail solution business in South
Africa (hereinafter called "territory"); and
WHEREAS, SPAR proposes to contribute a software licence agreement, annexed
hereto as annexure "A", software set-up, software training, computer hardware
and business support to the Company;
WHEREAS, the Meridian Entities and Friedshelf will procure that they contribute
the existing client base and certain office equipment and office supplies of the
Meridian Entities to the Company and WHEREAS such client base will require the
proper rendering of services to ensure its optimal use, the Company undertakes
to appoint Friedshelf or such other company as agreed between SPAR, Mason and
O'Brien as a consultant to the Company to oversee and
Page 3
manage the day-to-day operations and management of the business in accordance
with the terms of the consultancy agreement annexed hereto as annexure "B".
NOW, THEREFORE, in consideration of the mutual covenants and agreement herein
contained, the parties hereto agree as follows:
1. CONDITIONS PRECEDENT
1.1 This agreement is conditional on the satisfaction of the
following conditions precedent:
1.1.1 that the net turnover of the Meridian Entities for
the financial year ending 30 September 2003, will not
be less than R38 000 000,00 (thirty eight million
Rand), calculated on the same basis and using the
same accounting policies and principles as used in
the 30 September 2003 year-end accounts previously
disclosed to SPAR which are attached hereto as
annexure "C" (the "Accounts");
1.1.2 that the net turnover of the Meridian Entities for
the 6 (six) months ending 31 March 2004, will not be
less than R15 000 000,00 (fifteen million Rand),
calculated on the same basis and using the same
accounting policies and principles as used in the
Accounts;
1.1.3 that the Meridian Entities will not have an
accumulated loss in excess of R1 100 000,00 (one
million one hundred thousand Rand) for the financial
year ending 30 September 2003, calculated on the same
basis and using the same accounting policies as used
in the Accounts;
1.1.4 that the Meridian Entities will not have an
accumulated loss in excess of R1 350 000,00 (one
million three hundred and fifty thousand Rand) for
the 6 (six) months ending 31 March 2004, calculated
on the same basis and using the same accounting
policies as used in the Accounts;
1.1.5 that the Meridian Entities and Friedshelf will
transfer to the Company the legal and beneficial
ownership of the Meridian client
Page 4
base and such office equipment and office supplies
utilised by the Meridian Entities necessary to
properly conduct of their business;
1.1.6 the completion, to the satisfaction of SPAR, of a
financial and legal due diligence on the Meridian
Entities and Friedshelf; and
1.1.7 that Friedshelf, or such other company as agreed
between SPAR, Mason and O'Brien, will enter into a
consultancy agreement with the Company in the form
annexed hereto as annexure "B";
1.2 The conditions precedent are stipulated for the benefit of
SPAR who shall be entitled, in its sole discretion, to waive
them, either in whole or in part.
1.3 Unless the conditions precedent are fulfilled or waived (as
the case may be), by 1 May 2004 (or such later date as may be
mutually agreed between the parties) this agreement shall be
of no force or effect.
1.4 The parties shall use all reasonable endeavours to procure the
fulfillment of the conditions precedent.
1.5 Should this agreement become of no force or effect by reason
of the provisions of clause 1.3, then the parties shall be
restored, as near as may be possible, to the position in which
they would have been had this agreement not been entered into
and no shareholder shall have any claims against the other as
a result of the failure of the conditions precedent, except
for such damages (if any) as may result from a breach the
provisions of clause 1.4.
2. EFFECTIVE DATE
This agreement shall become effective on 1 April 2004, regardless of
the date of execution hereof.
Page 5
ORGANIZATION OF THE COMPANY
- ---------------------------
3. ESTABLISHMENT
It is recorded that the parties have caused the "Company" to be
incorporated under the laws of the Republic of South Africa.
4. BUSINESS PURPOSES
The business purposes of the Company shall include but not be limited
to the following:
4.1 providing retail merchandising and product demonstration
services
4.2 agency, assistance, instruction and report of storefront sales
activities;
4.3 implementation of market research and analysis of results
thereof;
4.4 assembly of setups used for sales promotion;
4.5 consulting regarding store management;
4.6 development and sale of management system regarding retailing;
4.7 designing and sale of database; and
4.8 any and all businesses incidental or relating to any of the
foregoing.
5. LOCATION
The Company shall have its main office at such address as shall be
mutually agreed between the shareholders.
6. MEMORANDUM AND ARTICLES OF ASSOCIATION
The memorandum and articles of association of the Company shall be in
the form attached hereto as annexure "D".
Page 6
7. CAPITAL
7.1 The Company is a private company duly incorporated in
accordance with the company laws of the Republic of South
Africa and shall, at the effective date, have an authorised
share capital of R1 000.00 (one thousand Rand) divided into 1
000 (one thousand) shares with a par value of R1.00 (one Rand)
each, ranking pari passu in all respects.
7.2 On the effective date or so soon thereafter as reasonably
possible:
7.2.1 SPAR shall subscribe in cash for 510 (five hundred
and ten) shares in the Company at their par value;
and
7.2.2 Friedshelf shall subscribe in cash for 490 (four
hundred and ninety) shares in the Company at their
par value.
7.3 The issued share capital of the Company will accordingly be
held as follows:
7.3.1 Friedshelf: 490 (four hundred and ninety) shares
representing 49% (forty nine percent) of the
Company's total issued share capital; and
7.3.2 SPAR: 510 (five hundred and ten) shares representing
51% (fifty one percent) of the Company's total issued
share capital.
PREPARATION OF ESTABLISHMENT OF THE NEW COMPANY
- -----------------------------------------------
8. PREPARATION OF ESTABLISHMENT OF THE COMPANY
8.1 Each party shall take its role as described below for the
preparation of the commencement of the Company's business.
8.2 SPAR shall, for no consideration:
8.2.1 make certain proprietary software available to the
Company pursuant to a licence agreement to the value
of US$540 000 (five hundred and forty thousand US
dollars), such licence agreement to be in the form
attached hereto as annexure "C" (the "license
agreement"). For reference, the license agreement
includes the obligations of SPAR to:
Page 7
8.2.1.1 localize and set up software provided by
SPAR to work in South Africa;
8.2.1.2 consult on the organization of merchandising
services: and;
8.2.1.3 give advice on budgeting and development of
each business plan.
8.2.2 provide software set up to the Company to the value
of US$40 000.00;
8.2.3 provide software training to the Company to the value
of US$25 000.00;
8.2.4 provide computer hardware set up to the Company to
the value of US$20 000.00; and
8.2.5 provide 3 (three) years' business support to the
Company to the value of US$165 000.00.
8.3 The Meridian Entities, Mason and O'Brien undertake or
undertake to procure that Friedshelf shall, for no
consideration:
8.3.1 contribute the existing business of the Meridian
Entities to the Company which business shall comprise
at least the client base, certain office equipment
and office supplies;
8.3.2 arrange meetings with their existing clients to
promote the Company's business; and
8.3.3 contribute the employees employed by the Meridian
Entities as at 1 April 2004 to the Company.
8.4 For the avoidance of doubt, it is recorded that the Company is
not:
8.4.1 acquiring any of the accounts receivable, accounts
payable, fixed assets or stock in trade or
inventories of the Meridian Entities; and
8.4.2 acquiring any of the assets of the Meridian Entities,
other than the client base, office supplies and
office furniture; and
Page 8
8.4.3 assuming any liabilities of the Meridian Entities.
9. SECTION 197 TRANSFER
9.1 As a consequence of the contributions made by the Meridian
Entities to the Company in accordance with clause 8.3, part of
the business of the Meridian Entities will be transferred to
the Company on 1 April 2004 ("date of transfer") and
accordingly, the parties agree that Section 197 of the Labour
Relations Act, No. 66 of 1995 ("the LRA"), as amended, is
applicable to the transfer. Accordingly, the following
provisions will apply as between the Company and the
employees:
9.1.1 the Company is automatically substituted in the place
of the Meridian Entities in respect of all contracts
of employment of the employees in existence
immediately before the date of transfer;
9.1.2 all the rights and obligations between the Meridian
Entities and an employee at the time of the transfer
continue in force as if they had been rights and
obligations between the Company and the employee;
9.1.3 anything done before the transfer by or in relation
to the Meridian Entities, including the dismissal of
an employee or the commission of an unfair labour
practice or act of unfair discrimination, is
considered to have been done by or in relation to the
Company; and
9.1.4 the transfer does not interrupt an employee's
continuity of employment and an employee's contract
of employment continues with the Company as if with
the Meridian Entities.
9.2 The Company shall be bound by any arbitration award (referred
to in 197(5)(b)(1)) and any collective agreements (referred to
in 197(5)(b)(ii) and (iii)) which were applicable to the
employees prior to the date of transfer.
9.3 The parties acknowledge that in terms of Section 197 of the
LRA, the parties are required to agree in writing to a
valuation (hereinafter referred to as the statutory valuation)
in respect of the items listed in Section 197(7)(a)(i)-(iii).
The parties have agreed to the statutory valuation which
written agreement is annexed hereto as Annexure "E".
Page 9
9.4 The Meridian Entities, Mason and O'Brien warrant and represent
to the Company and to SPAR that there are no claims whether
actual or pending, against any of the Meridian Entities in
respect of any of the employees to be transferred to the
Company pursuant to this clause 9.
9.5 The Meridian Entities, Mason and O'Brien undertake to
indemnify the Company against any claim of whatsoever nature
arising out of a breach of the warranty and representation set
out in 9.4 together with all costs associated therewith.
GENERAL MEETING OF SHAREHOLDERS
10. ORDINARY AND EXTRAORDINARY GENERAL MEETINGS
10.1 The annual general meeting of shareholders shall be convened
by resolution of the board of directors and held in South
Africa or any other place within 3 (three) months after the
expiration of each financial year end of the Company or at any
other time agreed to by the shareholders (subject to
compliance with the Companies Act 61 of 1973).
10.2 An extraordinary general meeting of the shareholders shall be
convened by a resolution of the board of directors whenever
deemed necessary.
11. QUORUM AND RESOLUTION
11.1 A quorum necessary for a valid meeting of the shareholders
shall be at least so many shareholders representing 55% (fifty
five percent) of the Company's total issued share capital.
11.2 All resolutions of shareholders shall be adopted by the
affirmative vote of shareholders holding not less than 55%
(fifty five percent) of the Company's total issued share
capital save for those resolutions which, in terms of the
Companies Act 61 of 1973, require a higher level of acceptance
to be effective.
Page 10
12. MINORITY PROTECTIONS
Notwithstanding anything to the contrary contained in this agreement or
the memorandum and articles of association of the Company, a majority
shareholder vote shall consist of at least 55% (fifty five percent) of
the Company's total issued share capital to be considered a valid
majority. Any shareholder vote consisting of less than 55% (fifty five
percent) of the Company's total issued share capital shall be
considered a minority.
EARNINGS AND LOSSES
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13. EARNINGS AND LOSSES
13.1 SPAR and Friedshelf shall, subject to 13.2 below, share in the
net earnings or losses of the Company based upon their
respective ownership.
13.2 Notwithstanding 13.1 above, for the first three years of the
Company's operation after the effective date (the "Maximum
Loss Period"), if in any year during the Maximum Loss Period
the net loss of the Company exceeds R2 200 000,00 (two million
two hundred thousand Rand) (the Annual Maximum Loss"),
Friedshelf, O'Brien and Mason jointly and severally undertake
to make a cash payment to the Company equal to the amount of
the Company's net loss in excess of the Annual Maximum Loss
(the "Annual Maximum Loss Payment"), provided that, in
calculating the Annual Maximum Loss for the first 12 (twelve)
month period during the Maximum Loss Period, the parties
shall, in calculating whether the Company's loss is in excess
of the Annual Maximum Loss, allow up to the amount of R500
000,00 (five hundred thousand Rand) to be excluded from the
calculation of any Annual Maximum Loss which the Company may
incur, provided that Friedshelf can reasonably demonstrate to
SPAR that such amount of up to R500 000,00 (five hundred
thousand Rand) represents start-up costs incurred by the
Company in establishing and setting up the new joint venture
business. For the avoidance of doubt, the allowance of R500
000,00 (five hundred thousand Rand) in respect of the start-up
costs of the Company shall only apply in respect of the first
12 (twelve) months following the effective date and not
thereafter.
Page 11
13.3 Any payment pursuant to clause 13.2 shall increase the
shareholders' equity in the Company.
13.4 The Annual Maximum Loss Payment shall be paid by Friedshelf
and/or O'Brien and/or Mason to the Company within 45
(forty-five) days after the issue of the annual audit report
by the Company's auditors.
13.5 Given that the effective date of this agreement is 1 April
2004, the Annual Maximum Loss Payment calculated for the
period ending December 31, 2004 will be calculated on a
nine-month period, being the 9 (nine) month period from the
effective date to 31 December 2004.
13.6 If any Annual Maximum Loss Payment calculation is for less
than a 12 month period, the Annual Maximum Loss shall be
reduced by an amount equal to the Annual Maximum Loss
multiplied by the product of the remainder of 12 minus the
number of months included in the calculation divided by
twelve.
13.7 It is the intention of the parties that the Maximum Loss
Period shall continue for a period of 36 (thirty six) months
commencing on the effective date. Therefore, a short-period
Annual Maximum Loss Payment will be calculated for the period
of 1 January 2007 through 31 March 2007.
13.8 If the effective date of this agreement is later than 1 April
2004, the period on which the short-period Annual Maximum Loss
Payment is calculated shall be adjusted so that the Maximum
Loss Period shall equal 36 (thirty six) months.
14. CAPITAL CONTRIBUTIONS
Capital contributions necessary for the working capital of the Company
will be made as to 51% (fifty one percent) by SPAR and as to 49% (forty
nine percent) by Friedshelf.
BOARD OF DIRECTORS AND OFFICERS
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15. DIRECTORS
15.1 The overall supervision, control and management of the affairs
of the Company shall be vested in the board who shall be
entitled to delegate the
Page 12
day-to-day running and management of the business of the
Company to officers nominated by the board.
15.2 Friedshelf and SPAR shall each be entitled but shall not be
obliged to appoint two directors to the board and to remove
any such director or to replace any such director who is so
removed or who ceases for any other reason to be a director of
the Company.
15.3 Each director shall be appointed for an initial term of one
year and shall on the expiry of the initial period be entitled
to stand for re-election.
15.4 The shareholders may appoint additional non-executive
directors to the board to add value and expertise to the
Company at a fee to be agreed between the board and such
non-executive directors.
15.5 Each director shall be entitled, in writing, to appoint any
other director as his alternate at any meeting of directors
and such alternate shall be entitled to exercise the vote of
the director whom he represents in accordance with the
instructions of such director or in the absence thereof in
such manner that the alternate deems fit, in addition to the
vote which he may exercise in his capacity as director.
15.6 Any appointment and/or removal and/or replacement in terms of
this clause shall be made by written notice to the Company,
signed by the shareholder exercising such right and shall be
operative as soon as such written notice is received at the
registered offices of the Company.
15.7 The quorum necessary for the transacting of business of the
board shall be at least 3 (three) directors.
15.8 If a quorum is not present at a directors' meeting, the
chairman of the meeting shall postpone such meeting for a
period of 7 (seven) days and notice of such postponed meeting
including the date, time and place of such postponed meeting
shall be sent to the directors in terms of the provisions of
this agreement.
15.9 If a quorum is not present at a postponed meeting as referred
to in clause 15.8 and after proper notice has been given, any
directors' resolution to be taken at such meeting shall:
Page 13
15.9.1 fall away and be of no effect; and
15.9.2 be referred to a shareholders' meeting to be convened
for that purpose within 14 (fourteen) days of such
postponed meeting.
15.10 The Company undertakes to procure that:-
15.10.1 at least 7 (seven) days' prior written notice shall
be given to the directors of any directors' meetings
provided that the directors may unanimously agree to
reduce this period or waive the requirement for any
particular meeting;
15.10.2 at least 7 (seven) days before any directors'
meeting, the agenda of the matters to be discussed at
such directors' meeting is given to the directors. If
the agenda for the meeting is not given timeously to
the directors, no meeting shall be held until the
agenda is given timeously to the directors, unless
the directors unanimously agree otherwise.
15.11 The following provisions shall apply to voting by directors:
15.11.1 each director shall have 1 (one) vote on all matters
submitted to the board;
15.11.2 the affirmative vote of the majority of directors
shall be required to approve any proposed resolution
which shall include, but not be limited to,
resolutions relating to the following matters;;
15.11.2.1 any amendment or modification to the
articles of association;
15.11.2.2 any increase or decrease in the
authorised share capital or paid-in
capital of the company;
15.11.2.3 any issuance of new shares or any other
kind of equity securities or instruments
convertible into equity securities or
the decision to undertake a public
offering as contemplated in clause 26;
15.11.2.4 any issuance of debentures;
Page 14
15.11.2.5 any change in number or length of tenure
of directors;
15.11.2.6 the establishment or the acquisition and
purchase of other businesses, either
directly or indirectly by means of
purchasing shares in or assets of the
company to which such business may
belong;
15.11.2.7 any change in the main business of the
company;
15.11.2.8 any disposal of the business or the
assets of the Company (in the case of
assets, otherwise than for full value in
the normal course of business of the
Company);
15.11.2.9 the appointment of or dismissal of
senior executives of the Company;
15.11.2.10 any matter relating to the financing or
capital of borrowings of the Company
which would have the effect of directly
or indirectly reducing the proportionate
shareholding of any shareholder in the
Company;
15.11.2.11 the payment of any dividend by the
Company;
15.11.2.12 the issue or giving of any guarantees,
suretyships, letters of comfort or other
similar undertakings of any nature
whatsoever;
15.11.2.13 the pledging, mortgaging, hypothecating
or encumbering of any assets of the
company in any manner whatsoever;
15.11.2.14 the borrowing of any money or the
incurring of any debt otherwise than in
accordance with the annual budget;
15.11.2.15 any capital expenditure in excess of the
annual budget from time to time;
Page 15
15.11.2.16 any change in the basis of accounting or
accounting policies from those used
during the immediately preceding
financial year otherwise than in
accordance with Generally Accepted
Accounting Practice;
15.11.2.17 the purchase, sale, hiring, letting or
sub-letting of any immovable property
otherwise than in accordance with the
Company's annual budget;
15.11.2.18 any agreement between the company and
any shareholder or any associated
Company of any shareholder;
15.11.2.19 the determination of the scope of any
director's or group of directors'
authority and the delegation of any
powers including the power to
re-delegate;
15.11.2.20 any decision not to insure (or to insure
for a lesser amount) against such risks
as may be recommended by the Company's
insurance brokers;
15.11.2.21 any termination of or amendment to the
Company's retirement or medical aid
funding (if any);
15.11.2.22 the delegation of the functions or
actions referred to above in this clause
15 to any one director or committee of
directors or any other person or
persons;
15.11.2.23 any proposal to the general meeting of
shareholders or action by the board of
directors for the matters as provided in
clause 15 hereof;
15.11.2.24 any investment or commitment of the
Company in amounts individually in
excess of R150 000.00 (one hundred and
fifty thousand Rand) or in the aggregate
in excess of R250 000 .00 (two hundred
and fifty thousand Rand).
Page 16
15.11.2.25 any loan or credit taken by the Company
otherwise than in the ordinary course of
business or in excess of R150 000.00
(one hundred and fifty thousand Rand);
15.11.2.26 execution, amendment or termination of
agreements or commitments with
Friedshelf, SPAR or their subsidiaries
or affiliates;
15.11.2.27 adoption or amendment of the annual
budgets and business plan subject to
consequent approval by the shareholder's
general meeting;
15.11.2.28 adoption or any material modification of
major regulations or procedures,
including any employee rules or
handbook;
15.11.2.29 initiating or settling any litigation,
arbitration or other formal dispute
settlement procedures or forgiveness of
any obligation owed to the Company in
excess of R150 000.00 (one hundred and
fifty thousand Rand);
15.11.2.30 approval of the Company's annual
financial statements and changing of the
Company's accounting policies and
practices;
15.11.2.31 establishment or amendment to the
conditions of employment of the
Company's officers;
15.11.2.32 the formation of any subsidiary of the
Company, entry into (or subsequent
termination of) any joint venture,
partnership or similar agreements;
15.11.2.33 entering into, amending or terminating
any contract with/or commitment to any
director or shareholder; and
15.11.2.34 entering into any agreement or
commitment to provide goods or services
outside the territory;
Page 17
15.11.3 should the board be unable to pass or reach a
decision on any resolution then that resolution will
be deemed to constitute a deadlock. Such deadlock
between the directors will not afford a ground for
the winding-up of the Company but will, at the
request of any director, then be dealt with in
accordance with the provisions of clause 20
(Deadlock);
15.11.4 the directors' remuneration and fees will be
determined from time to time by the shareholders and
shall constitute market-related packages taking all
relevant factors into consideration provided that any
director who is employed by the Company shall not be
entitled to additional remuneration for holding a
board position.
15.12 The shareholders may appoint the chairman of the board, who
shall have neither a second nor casting vote at any board or
shareholders' meeting.
15.13 The board hereby appoints Brian Mason as its managing director
to manage the day-to-day business of the Company.
15.14 Meetings of the board will be held at least quarterly provided
that any director shall by written notice, accompanied by the
full agenda for the meeting, to the Company (at its registered
office) and to all of the directors, have the right, at any
time, to convene a meeting of the board.
15.15 A resolution of the directors of the Company signed by all the
directors of the Company shall be valid and effective as if it
had been adopted at a duly convened meeting of directors. Any
such resolution may consist of several documents in like form,
each signed by one or more of such directors.
15.16 Directors of the Company may participate in and act at any
board meeting through the use of a conference telephone or
other communication equipment by means of which all persons
participating in the meeting can hear each other. Such
participation shall constitute attendance and presence in
person at the meetings by the person or persons so
participating.
15.17 The directors shall be entitled to be reimbursed by the
Company in respect of all reasonable costs and expenses
properly incurred by them in respect of the exercise and
performance of their duties provided that the appropriate
Page 18
documentation in substantiation thereof shall be submitted to
the Company upon request.
15.18 A written record of all meetings of the board of directors and
all decisions made by it shall be made as promptly as
practicable after each meeting of the board of directors by
any director nominated by the board or any other person
nominated by the board and such record shall be kept by the
company and signed by each of the directors.
16. ACCOUNTING PERIOD
Each accounting period of the Company shall end on the 31st day of
December in each year.
17. AUDITORS
17.1 Notwithstanding anything to the contrary contained in this
agreement or in the Company's articles of association, SPAR
shall have the sole and absolute discretion and right to
nominate and vary the auditors of the Company. The initial
appointee shall be Ernst & Young.
17.2 Notwithstanding clause 17.1 above, any shareholder shall have
the right, at its own expense, to appoint an independent
auditor to conduct a review of the Company's financial
position for any purpose contemplated in this agreement or
otherwise and the parties shall afford such auditor reasonable
access to the Company's accounting books and records.
18. INSPECTION OF ACCOUNTING RECORDS AND BOOKS
18.1 The Company shall arrange an annual audit on the accounting
records and books and shall submit a report of such audit to
each shareholder within thirty (30) days from the completion
of the audit.
18.2 The auditors of the Company shall be appointed from a list of
the top five South African accounting firms. Such accounting
firm shall audit the accounting records and books of the
Company and any other matters relating, directly or
indirectly, to the financial condition of the Company. The
auditors'
Page 19
fee for the inspection and audit mentioned above shall be
borne by the Company.
18.3 The Company shall keep true and accurate accounting records
and books with regard to all of its operations in accordance
with generally accepted accounting principals consistently
applied ("GAAP") in the territory. All accounting records and
books shall be kept ready for inspection by the shareholders
or by their authorized representative. If requested by SPAR,
the Company shall co-operate with respect to each financial
period to provide such information as required by SPAR to
reconcile the Company's financial statements with U.S. GAAP
reporting requirements of SPAR.
19. INCREASE OF CAPITAL
If at any time after its formation, the Company increases its share
capital, Friedshelf and SPAR shall have a pre-emptive right to new
shares to be issued for such capital increase in proportion to their
respective shareholding in the Company.
20. DEADLOCK
20.1 Should:
20.1.1 there be any deadlock at any meeting of directors
and/or at any general meeting of the Company; or
20.1.2 a quorum at any meeting of directors and/or at any
general meeting of the Company be broken;
then in such event the parties shall attempt to resolve these
issues by mediation as soon as possible and failing such
resolution within 21 (twenty one) business days after having
been referred to mediation, any director or shareholder (as
the case may be) shall be entitled by written notice to the
Company to claim that all or any of the matters which were
under discussion and/or were to be discussed at that meeting,
be submitted to and decided by arbitration in terms of clause
32.
20.2 Notwithstanding that a deadlock may have arisen in terms of
clause 20.1, such deadlock shall not alone constitute a ground
for any shareholder to apply to court for the winding up of
the Company.
Page 20
TRANSFER OF SHARES
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21. RESTRICTIONS ON TRANSFER OF SHARES
Except as provided in clause 22 hereof, no shareholder shall, without
the prior written consent of the other shareholder, assign, sell,
transfer, pledge, mortgage, or otherwise dispose of all or any part of
its shares (including its right to subscribe to new shares) in the
Company to any third party.
22. PRE-EMPTIVE RIGHT AND OPTION
22.1 After three (3) years from the effective date of this
agreement, if either party hereto (hereinafter called "selling
party") wishes to transfer and sell all but not part of its
shares in the Company, the selling party shall furnish to the
other party (hereinafter called "recipient") a written notice
of the proposed purchaser, the offer purchase price for the
shares and any other material terms and conditions of the
proposed sale.
22.2 The recipient shall have the right to purchase such shares by
giving the selling party written notice of its intention to
purchase the same within ninety (90) days from the date of
receipt by the recipient of the selling party's notice, upon
the same terms and conditions as described in the selling
party's notice.
22.3 In the event that the recipient elects to purchase the selling
party's shares within the 90 (ninety) day period referred to
in clause 22.2, the recipient shall be obliged to complete the
sale and purchase of the shares within 14 (fourteen days (or
such further period of time as may be agreed between the
selling party and the recipient) of receipt by the selling
party of the recipient's notice of its intention to purchase
the shares, failing which, the selling party shall be entitled
to sell the shares at the same price and on the same terms and
conditions as described in the selling party's notice given in
terms of clause 22.1.
22.4 The selling party may sell such shares at the same price and
on the same terms and conditions as described in its notice
after ninety (90) days have elapsed after the date of the
recipient's receipt of such notice unless the recipient gives
a notice to the selling party of its intention to acquire the
selling party's shares.
Page 21
22.5 Any person to whom shares in the Company are transferred
pursuant to this clause 22 shall be bound by the terms of this
agreement.
22.6 Three (3) years after the effective date of this agreement,
either party (the "offeror") may at any time make a written
offer (which shall specify the price offered per share) to buy
all of the other party's (the "recipient") shares in the
Company. The recipient shall then, either accept the offer and
sell all of its shares under the terms and conditions of the
offer, or purchase the offeror's shares at the same price and
on the same terms and conditions as stipulated in the written
offer.
22.7 If the recipient does not respond in writing to the initial
offer within 120 (one hundred and twenty) days of receipt of
the written offer, the recipient shall be deemed to have
accepted the offer to sell its shares to the offeror.
22.8 The parties shall co-operate to effect the closing of such
purchase and sale of the shares held by the selling party
within 14 (fourteen) days of the elapse of the period of 120
(one hundred and twenty) days referred to above (or such
further period as may be agreed between the parties).
22.9 At such closing, the purchasing party shall pay to the selling
party the purchase price in cash, and the selling party shall
deliver to the purchasing party share certificates
representing all of the selling party's shares held in the
Company, free and clear of any liens and encumbrances.
22.10 For the avoidance of doubt, neither SPAR nor Friedshelf shall
have the right to sell, cede, alienate or in any way transfer
any of its shares in the Company for a period of 3 (three)
years from the effective date.
22.11 For the purposes of this agreement, an offer shall be deemed
to be received at the following times:
22.11.1 if delivered by hand during the normal business hours
of the addressee at the addressee's domicilium for
the time being, it shall be presumed, until the
contrary is proved, to have been received by the
addressee at the time of delivery; or
22.11.2 if given by telex or by facsimile, it shall be deemed
(in the absence of proof to the contrary) to have
been received within 24 (twenty
Page 22
four) hours of transmission where it is transmitted
during normal business hours of the receiving
instrument and within 48 (forty eight) hours of
transmission where it is transmitted outside those
business hours.
23. CO-OPERATION IN FINANCING
23.1 SPAR and Friedshelf shall agree on an initial amount of
working capital for the Company and will provide working
capital loans to the Company on the same terms.
23.2 SPAR will provide a loan equal to 51% (fifty one percent) of
the Company's necessary working capital and Friedshelf will
provide a loan equal to 49% (forty nine percent) of the
Company's necessary working capital.
23.3 The interest rate of the shareholder loans shall equal the
"prime rate". For the purposes of clause 23.3, "prime rate"
means the rate of interest per annum which is equal to
Standard Bank Limited's published minimum lending rate of
interest per annum, compounded monthly in arrears, charged by
such bank on the unsecured overdrawn current accounts of its
most favoured corporate clients in the private sector from
time to time. (In the case of a dispute as to the rates so
payable, the rate shall be certified by any manager or
assistant manager of any branch of the said bank, whose
decision shall be final and binding on the parties).
23.4 Any future working capital loans will be provided on the same
basis.
ROLE OF CONTRACTING PARTIES
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24. BUSINESS AND SOFTWARE SUPPORT
24.1 SPAR shall for the first three (3) years provide up to 3 000
(three thousand) hours of business support in aggregate. This
support may be in the form of general business, consultation
or programming support to modify or enhance the merchandising
software. SPAR will maintain ownership of all software.
24.2 If support provided by SPAR exceeds 3 000 (three thousand)
hours the additional hours will billed by SPAR to the Company
at fifty five USD ($55.00)
Page 23
per hour. However a lower price will be charged for
programming costs if a less expensive way to hire IT staff is
found.
24.3 The Company will be able to hire its own IT staff as
appropriate.
25. NON-COMPETITION
25.1 For the duration of this agreement, SPAR, Friedshelf, the
Meridian Entities, Mason and O'Brien and their affiliates
undertake to each other that they will not without the prior
consent of the others of them, engage in, whether directly or
indirectly, merchandising services (as defined in the license
agreement) in Southern Equatorial Africa, including but not
limited to Angola, Zambia, Zimbabwe, Malawi, Mozambique,
Namibia, Botswana, Lesotho, Swaziland, South Africa,
Madagascar, Mauritius and the Seychelles (the "territory" for
the purposes of this clause 25) or any other business then
competitive with the Company in the territory, provided that
if the Company shall during any 12 (twelve) month period
commencing 1 December 2005, generate less than US$50 000,00
(fifty thousand US dollars) in revenue in any financial year
in any of the countries comprising the territory, then SPAR
shall no longer be bound by the non-compete provisions set out
in this clause 25 insofar as such non-compete provisions
relate to the country in which revenue has fallen below US$50
000,00 (fifty thousand US dollars) in any year.
25.2 Notwithstanding clause 25.1 above, in the event that SPAR
enters into an agreement with a customer that covers more than
one country and the scope of such agreement includes services
in the territory, SPAR shall not be prohibited from entering
into or performing such agreement, provided that SPAR shall be
obliged to notify the Company of such agreement(s) (including
global agreements) and the SPAR shall use all reasonable
endeavours to procure that the Company has a right of first
refusal to enter into and perform such agreement(s).
25.3 In the event that the Company elects to enter into and perform
such agreement(s) it shall, within 3 (three) days of receiving
such notification from SPAR, notify SPAR in writing of its
intention to enter into and perform such agreement(s) on the
terms and conditions offered to SPAR.
Page 24
25.4 In the event that the Company fails within such 3 (three) day
period to notify SPAR of its election or, alternatively,
elects not to enter into and perform such agreement(s), the
Company shall be deemed to have waived its rights to
participate in such agreement(s) and SPAR shall be entitled to
enter into and perform such agreement(s) for its own benefit,
provided that it shall not be on terms (whether as to price,
conditions or any other material factor) which is more
advantageous than that offered to the Company.
25.5 It is recorded that Mason and O'Brien are members in Prestige
Retail Services CC ("PRS"), a close corporation which provides
services to Spar Group Limited ("SGL"). It is hereby agreed,
subject to 25.7 below, that such interest in PRS will not
constitute a breach of the non-competition provisions
contained in this clause 25.
25.6 Mason, O'Brien, the Meridian Entities and Friedshelf undertake
to SPAR and to the Company that they will procure that the
client base of PRS will not be extended beyond the single
existing client of SGL.
25.7 The Meridian Entities, Friedshelf, Mason and O'Brien warrant
and represent to the Company and to SPAR that:
25.7.1 the only customer or client of PRS is SGL;
25.7.2 the annual nett profit of PRS before taxes will not
exceed R500 000.00 (five hundred thousand Rand);
25.7.3 Mason and O'Brien will not together, in any single
week, commit or spend in excess of 5 (five) hours of
their combined time during normal working hours in
relation to the business of PRS; and
25.7.4 the rendering of services by Mason and O'Brien to PRS
will not materially adversely interfere or affect
their ability to fully and properly perform their
obligations to the Company pursuant to the terms of
the consultancy agreement.
25.8 In the event that SGL agrees, the Company shall be entitled to
acquire the members' interest or business of PRS, for a
nominal amount of R100.00 (one hundred Rand).
Page 25
AMENDMENT FOR PUBLIC OFFERING
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26. PUBLIC OFFERING
The shareholders acknowledge that the Company may attempt to become a
listed company or over-the-counter company on the territory Stock
Exchange or any other stock exchange or public market in the territory
(public offering). The shareholders acknowledge that conversion of the
Company type and structure, the number of issued shares, the number of
shareholders, the paid-up capital and profit transaction with each
shareholder will be reviewed and instructed for amendment by the
relevant governmental or regulatory authorities in accordance with
those bodies' rules or guidelines for public offering. If the
shareholders agree to undertake a public offering, they shall discuss
and reasonably co-operate with each other to amend the articles of
association and/or the license agreement in order to complete the
public offering of the Company. Any changes to the license agreement
(annexed hereto as annexure "A") will be effective upon consummation of
the public offering (but not before), and subject to the approval of
the boards of directors of the Company, Friedshelf and SPAR.
CONFIDENTIALITY
- ---------------
27. CONFIDENTIAL INFORMATION
Friedshelf and SPAR shall for the duration of this agreement, keep
secret and retain in strict confidence any and all confidential
information and use it only for the purpose of this agreement and
shall not disclose it to a third party without the prior written
consent of the other party unless the receiving party can demonstrate
that such information: (i) has become public other than as a result
of disclosure by the receiving party, (ii) was available to the
receiving party prior to the disclosure by the disclosing party with
the right to disclose, or (iii) has been independently acquired or
developed by the receiving party.
Page 26
GENERAL PROVISIONS
- ------------------
28. TERMINATION
28.1 If either shareholder transfers its shares in the Company to
the other party hereto in accordance with clause 22 hereof,
this agreement shall terminate.
28.2 If either shareholder transfers its shares in the Company to
another party, unless expressly agreed by the non-transferring
party in writing, this agreement shall be assigned to and
binding upon such third party, provided that the assigning
shareholder shall remain liable for all legal acts with
respect to this agreement or the Company which occurred before
the effective date of such assignment.
28.3 If any shareholder breaches a material term of this agreement
and fails to remedy such breach within ninety (90) days of
written notice being given to such shareholder the shareholder
not in breach shall be entitled to cancel this agreement
without prejudice to any other rights or remedies which such
shareholder may have.
28.4 Either shareholder may terminate this agreement by giving
notice in the event of one or more of the following:
28.4.1 appointment of a trustee or receiver for all or any
part of the assets of the other party;
28.4.2 insolvency or bankruptcy of the other party;
28.4.3 assignment of the other party for the benefit of
creditor;
28.4.4 attachment of the assets of the other party;
28.4.5 expropriation of the business or assets of the other
party; and
28.4.6 dissolution or liquidation of the other shareholder.
If either shareholder is involved in any of the events
enumerated in 28.4.1 through 28.4.6 above, it shall
immediately notify the other shareholder of the occurrence of
such event.
Page 27
28.5 In the event of the termination of this agreement pursuant to
clause 28.3 or clause 28.4, the shareholder terminating in
accordance with this agreement shall have an option to
purchase the shares of the other shareholder at the book value
to be decided by an internationally recognized accounting firm
that is not the principal accounting firm of either
shareholder or to have the Company dissolved.
28.6 Upon termination of this agreement or SPAR's ceasing to hold
at least 51% (fifty one percent) of the shares in the Company,
the license agreement shall terminate immediately if still in
effect, unless otherwise agreed by the shareholders.
29. FORCE MAJEURE
Neither shareholder shall be liable to the other shareholder for
failure or delay in the performance of any of its obligations under
this agreement for the time and to the extent such failure or delay is
caused by riots, civil commotions, wars, hostilities between nations,
governmental laws, orders or regulations, embargoes, actions by the
government or any agency thereof, acts of God, storms, fires,
accidents, strikes, sabotages, explosions, or other similar
contingencies beyond the reasonable control of the respective parties.
30. NOTICES
30.1 The parties hereby choose domicilia citandi et executandi for
all purposes under this agreement at the following respective
addresses:
Meridian: No.16 Ennisdale Drive, Durban North, 4051, Kwa-
Zulu Natal, South Africa;
SPAR: SPAR Group, Inc. Attention: Mr. Robert G. Brown,
Chairman 580 White Plains Road, Tarrytown, NY,
USA 10591;
Friedshelf: No.16 Ennisdale Drive, Durban North, 4051, Kwa-
Zulu Natal, South Africa, contact: Brian Mason.
30.2 Each of the parties shall be entitled from time to time, by
written notice to the other to vary its domicilium to any
other address which is not a post office box or post restante.
Page 28
30.3 Any notice given and any payment made by a party to any of the
others (the "addressee") which:
30.3.1 is delivered by hand during the normal business hours
of the addressee at the addressee's domicilium for
the time being shall be presumed, unless the contrary
is proved by the addressee, to have been received by
the addressee at the time of delivery;
30.3.2 is posted by prepaid registered post to the addressee
at the addressee's domicilium for the time being
shall be presumed, unless the contrary is proved by
the addressee, to have been received by the addressee
on the seventh day after the date of posting.
30.4 Where, in terms of this agreement any communication is
required to be in writing, the term "writing" shall include
communications by telex and/or facsimile. Communications by
telex and/or facsimile shall, unless the contrary is proved by
the addressee, be deemed to have been received by the
addressee 24 (twenty four) hours after the time of
transmission.
31. ASSIGNMENT
This agreement and the rights and obligations hereunder are personal to
the parties hereto, and shall not be assigned by either of the parties
to any third.
32. ARBITRATION
All disputes, controversies, or differences which may arise between the
parties hereto, out of or in relation to or in connection with this
agreement, or arising out of deadlock referred to in clause 21, shall
be finally settled by arbitration in the territory in accordance with
the rules of the Arbitration Foundation of Southern Africa ("AFSA")
except where provided otherwise in this agreement. Prior to any
dispute, difference or agreement being referred to arbitration the
parties shall seek to resolve the matter as follows:
32.1 The matter shall be referred to the chief executives of each
party for consideration but if they are not able to resolve
the matter within ninety (90) days provisions as to
arbitration shall take effect.
Page 29
32.2 The arbitration shall be conducted by three (3) arbitrators in
English in accordance with AFSA and the laws of South Africa
shall be applied to the dispute. In case of a dispute each
party shall appoint one arbitrator. The party having appointed
its arbitrator shall give notice to the other party of such
appointment upon which the other party shall appoint its
arbitrator within 7 days of notice. The third arbitrator shall
be chosen by the two arbitrators appointed by the parties
within 7 days of their appointment. In case the arbitrators
cannot agree on the third arbitrator the third arbitrator
shall be appointed by AFSA. The arbitrators shall conclude the
dispute within 6 months upon their first gathering. Such
period can only be extended by mutual written agreement of the
parties. The decision of the arbitrators shall be final and
legally binding upon both parties
33. IMPLEMENTATION
The shareholders hereby agree, for themselves, their successors, heirs
and legal representatives, to vote at shareholders' meetings, and to
cause the directors they nominate to vote at board meetings and to
carry out their duties, to prepare, execute and deliver or cause to be
prepared, executed and delivered such further instruments and
documents, to take such other actions and to cause the articles of
association of the Company to be amended or adopted as may be
reasonably required to effect the provisions and intent of this
agreement and the transactions contemplated hereby.
34. GOVERNING LAW
This agreement shall be governed by and interpreted in accordance with
the laws of the Republic of South Africa.
35. WAIVER
Any failure of either party to enforce, at any time or for any period
of time, any of the provisions of this agreement shall not be construed
as a waiver of such provisions or of the right of such party thereafter
to enforce each and every such provision.
Page 30
36. JOINT AND SEVERAL
36.1 Friedshelf, Derek O'Brien and Brian Mason shall be jointly and
severally liable to SPAR for the due performance of all the
obligations of the Meridian Entities and Friedshelf under this
agreement.
36.2 The said parties do hereby waive the legal exceptions of
excussion, division and cession of action, the full meaning
whereof they acknowledge themselves to be fully acquainted.
37. CO-OPERATION AND GOOD FAITH
37.1 The parties agree, during the currency of this agreement, not
to enter into an agreement or do anything which may conflict
with this agreement or be detrimental to its aims and
objectives or which will prejudice the business, development
and activities of the parties.
37.2 Each of the parties undertakes to display the highest degree
of good faith towards the other parties in all matters
relating to this agreement and furthermore undertakes, in
favour of all the other parties, to refrain from doing or
cause anything to be done, whatsoever which may prejudice or
harm (whether actually or potentially) the goodwill, image or
business operations and acumen of any of the parties to this
agreement. The provisions of this paragraph shall survive the
expiry of this agreement, provided however that the provisions
thereof shall not at any time preclude any of the parties
during the currency of this agreement or thereafter, to take
whatever steps a party may deem necessary against a party in
breach of the terms and conditions of this agreement so as to
protect the interests of the parties not in default.
38. ENTIRE AGREEMENT
This agreement constitutes the entire and only agreement between the
parties hereto with respect to the subject matter of this agreement and
supersedes any other commitments, agreements or understandings, written
or verbal, that the parties hereto may have had. No modification,
change and amendment of this agreement shall be binding upon the
parties hereto except by mutual express consent in writing of
subsequent date signed by authorized officer or representative of each
of the parties hereto.
Page 31
39. COSTS
39.1 Subject to 39.2, prior to the effective date, SPAR, Friedshelf
and Meridian shall be responsible for and pay their own costs
and expenses associated with the establishment of the Company
(including all travel costs) and including all costs
associated with the negotiation and preparation of the
necessary legal documentation.
39.2 Each party shall be responsible for and shall pay all legal,
accounting and other costs incurred by it in carrying out its
due diligence investigation on any other party to this
transaction.
39.3 All legal costs incurred after the effective date shall be
paid by the Company.
40. HEADINGS AND INTERPRETATION
40.1 The headings of articles and paragraphs used in this agreement
are inserted for convenience of reference only and shall not
affect the interpretation of the respective articles and
paragraphs of this agreement.
40.2 In the event that there is any inconsistency between the terms
of this agreement and the Company's articles of association,
the terms of this agreement shall prevail.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed
in two (2) copies by their respective duly authorized officer or representative
as of the day first above written.
SIGNED AT ON THE DAY OF 2004.
AS WITNESSES:
For and on behalf of
1.............................. FRIEDSHELF 401 (PTY) LTD
2.............................. /s/ Derek O'Brien
-------------------------------
being duly authorised thereto
Page 32
SIGNED AT ON THE DAY OF 2004.
AS WITNESSES:
For and on behalf of
1. ............................ SPAR GROUP INTERNATIONAL INC
2.............................. /s/ Robert G. Brown
-------------------------------
being duly authorised thereto
SIGNED AT ON THE DAY OF 2004.
AS WITNESSES:
For and on behalf of
1..............................
SGRP MERIDIAN (PTY) LTD
2.............................. /s/ Brian Mason
-------------------------------
being duly authorised thereto
SIGNED AT ON THE DAY OF 2004.
AS WITNESSES:
1............................... /s/ Derek O'Brien
------------------------------
DEREK O'BRIEN
2. ............................
SIGNED AT ON THE DAY OF 2004.
AS WITNESSES:
1................................ /s/ Brian Mason
------------------------------
BRIAN MASON
2................................
Page 33
SIGNED AT ON THE DAY OF 2004.
AS WITNESSES:
For and on behalf of
1................................ SMD MERIDIAN CC
2.............................. /s/ Brian Mason
-------------------------------
being duly authorised thereto
SIGNED AT ON THE DAY OF 2004.
AS WITNESSES:
For and on behalf of
1................................ MERIDIAN SALES & MERCHANDISING
(WESTERN CAPE) CC
2.............................. /s/ Brian Mason
-------------------------------
being duly authorised thereto
SIGNED AT ON THE DAY OF 2004.
AS WITNESSES:
For and on behalf of
1................................ RETAIL CONSUMER MARKETING CC
2.............................. /s/ Brian Mason
-------------------------------
being duly authorised thereto
SIGNED AT ON THE DAY OF 2004.
AS WITNESSES:
For and on behalf of
1................................ MERHOLD HOLDING TRUST
2.............................. /s/ Brian Mason
-------------------------------
being duly authorised thereto
Page 34
ANNEXURE "A"
------------
AGREED FORM LICENCE AGREEMENT
-----------------------------
Page 35
ANNEXURE "B"
------------
CONSULTANCY AGREEMENT
---------------------
Page 36
ANNEXURE "C"
------------
30 SEPTEMBER YEAR-END ACCOUNTS FOR THE MERIDIAN ENTITITES
---------------------------------------------------------
Page 37
ANNEXURE "D"
------------
MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE COMPANY
-----------------------------------------------------
Page 38
ANNEXURE "E"
------------
STATUTORY VALUATION IN RELATION TO TRANSFERRING EMPLOYEES
---------------------------------------------------------
JOINT VENTURE AGREEMENT
-----------------------
This Agreement is made as of this 21st day of July, 2003 by and between CEO
Produksigon Tanitim ve Arastirma Hizmetleri Ltd Sti, a company organized and
existing under the law of Turkey and having principal place of business at 81/2
Buyukdere Cad Kugu Is Merkezi, Mecidiyekoy, Istanbul, Turkey, 34387 (hereinafter
called "CEO"), and SPAR Group International, Inc. a company organized and
existing under the laws of the State of Nevada, USA, having its principal place
of business at 580 White Plains Road, Tarrytown, NY, USA, 10591 (hereinafter
called "SPAR"),
WITNESSETH THAT:
WHEREAS, CEO is engaged in the retail solution businesses in Turkey, having a
wide range of clients and also having various knowledge and human resources with
respect to the retailing businesses in Turkey;
WHEREAS, SPAR is engaged in the retail solution businesses in the USA, having
computer software useful for agency, assistance, instruction and reporting of
storefront activities and also having operational know-how with respect to such
software; and
WHEREAS, CEO and SPAR are desirous of organizing a corporation to jointly
conduct retail solution businesses in Turkey (hereinafter called "Territory").
NOW, THEREFORE, in consideration of the mutual covenants and agreement herein
contained, the parties hereto agree as follows:
CHAPTER I: ORGANIZATION OF THE NEW COMPANY
-------------------------------
Article 1. Establishment
Promptly after the effective date of this Agreement, the parties hereto shall
cause a new company to be organized under the laws of Territory (hereinafter
called "SPAR Turkey Ltd"). Upon formation, New Company shall become a party to
this Agreement.
Article 2. Business Purposes
The business purposes of the New Company shall consist of the following:
-1-
1. Provide retail merchandising and product demonstration services
2. Agency, assistance, instruction and report of storefront sales activities;
3. Implementation of market research and analysis of results thereof;
4. Assembly of setups used for sales promotion;
5. Consulting regarding store management;
6. Development and sale of management system regarding retailing;
7. Designing and sale of database; and
8. Any and all businesses incidental or relating to any of the foregoing.
Article 3. Trade Name
The New Company shall be named in Territory as "SPAR Alan Pazarlama Hizmetleri
Limited Sirketi" and in English as SPAR Turkey Ltd.
Article 4. Location
The New Company shall have its main office at 81/4 Buyukdere Cad Kugu Is
Merkezi, Mecidiyekoy, Istanbul, Turkey, 34387.
Article 5. Articles of Incorporation
The Articles of Incorporation of the New Company shall be in the form attached
hereto as Exhibit A.
Article 6. Capital
The total number of shares which New Company shall be authorized to issue shall
be 10000 that par value of each share shall be $10 (ten USD). At the time of
establishment of New Company, shares shall be issued and fully subscribed by the
parties hereto as follow:
-2-
o CEO: (49%) 4900 shares
o SPAR: (51%) 5100 shares
All the shares to be issued by New Company shall be nominal and ordinary shares
Article 7. Payment
Each of the parties hereto shall at the same proportions and at the same dates
pay in Turkish Liras and in cash the cash the amount equivalent to its
subscribed shares at par value upon issuance of the shares of New Company.
Number of shares may change according to the value of $100.000 at the time of
incorporation.
CHARPTER II: PREPARATION OF ESTABLISHMENT OF THE NEW COMPANY
-----------------------------------------------
Article 8. Preparation of Establishment of the New Company
Each party shall take its role as described below for the preparation of the
commencement of New Company's business. Any expenses and costs necessary for
such preparation shall be borne by each party. SPAR shall enter into with New
Company a license agreement in the form attached hereto as Exhibit B (the
"License Agreement"). For reference, the License Agreement includes the
obligations of SPAR to:
1. localize and set up software provided by SPAR to work in Turkey;
2. consult on the organization of merchandising services: and;
3. train the New Company's personnel in how to operate the merchandising
software;
4. give advice on budgeting and development of each business plan.
SPAR Turkey Ltd shall
1. provide office and facility space to New Company under the terms of a
supply agreement described in Article 25 herein
2. arrange meetings with current clients to promote New Company's services
-3-
CHAPTER III: GENERAL MEETING OF SHAREHOLDERS
-------------------------------
Article 9. Ordinary and Extraordinary General Meeting
The Ordinary General Meeting of Shareholders shall be convened by resolution of
the Board of Directors and held in Turkey or any other vicinal place within 3
months, from the last day of each accounting period of New Company.
An Extraordinary General Meeting shall be convened by a resolution of the Board
of Directors whenever deemed necessary.
Article 10. Quorum and Resolution
Except as expressly otherwise provided in the Articles of Incorporation of New
Company and the provisions of Turkish Commercial Code, and this Agreement all
resolutions of the General Meeting of Shareholders shall be adopted by the
presence and affirmative vote of Shareholders holding at least two thirds of the
shares..
Article 11. Important Matters
In addition to such matters as required by the Articles of Incorporation of New
Company or the Commercial Code, any resolutions of the following matters by the
General Meeting of Shareholders require the presence and the affirmative vote of
shareholders holding at least 2/3 of the capital.
1. any amendment or modification of the Articles of Incorporation;
2. increase or decrease in the authorized capital or paid-in capital;
3. issuance of new shares or any other kind of equity securities or
instruments convertible into equity securities or the decision to
undertake a Public Offering (as defined on Article 29);
4. issuance of debentures;
5. transfer of any part or whole of business;
6. any and all matters relating to dividends of New Company;
-4-
7. dissolution or amalgamation;
8. change in number or length of tenure of Directors;
CHAPTER IV: BOARD OF DIRECTORS AND OFFICERS
-------------------------------
Article 12. Election of Directors
The Board of Directors of the New Company shall consist of four (4) Directors;
two (2) of whom shall be elected from among those appointed by CEO and 2 whom
shall be elected from those appointed by SPAR. The Chairman of the Board of
Directors shall be elected from the Directors by the mutual consultation of both
parties. In case of any increase or decrease in the number of Directors, the
representation stipulated above shall be unchanged and pro-rata at all times.
Article 13. Election of Officers
Officers shall be appointed by the Board of directors and serve at their
pleasure.
Article 14. Office of Director
The term of office of each Director shall expire at the close of the Ordinary
General Meeting of Shareholders, which relates to the closing of accounts last
to occur within three (3) years from his assumption of office.
Article 15. Quorum
Each Director shall have one (1) voting right in the Board of Directors. Except
as otherwise required in the Articles of Incorporation of New Company, this
Agreement or a majority of the Directors shall constitute a quorum at any
meeting of their Board of Directors, and all resolutions shall be adopted by the
affirmative vote of more than two-thirds of the votes of the Directors present.
Article 16. Ordinary Meeting of the Board of Directors
The Ordinary Meeting of the Board of Directors shall be held quarterly, and an
Extraordinary Meeting of the board of Directors shall be held when necessary,
both of which shall be convened in accordance with the provisions of the
Articles of Incorporation. To the extent then permitted, any meeting of the
Board of Directors may be held by interactive video conference
-5-
or other similar electronic or telephonic means, and any action that may be
taken by the Board of Directors at a meeting thereof (whether in person or video
conference) may be effected in lieu of such meeting by unanimous written consent
resolution executed by each member of the Board of Directors. The parties hereto
confirm that the prevailing interpretation in Territory is that meetings of
boards of directors may be held by interactive videoconference. For any proposed
meeting of the Board of Directors for which SPAR requests, SPAR Turkey Ltd and
SPAR shall cooperate to arrange for such meetings to be held by video
conference. A written record in Turkish of all meetings of the Board of
Directors and all decisions maybe by it together with English translation
thereof shall be made as promptly as practicable after each meeting of the Board
of Directors by one of the Board selected by the Board of Directors at each
meeting, kept in the records of the Company and signed or sealed by each of the
Directors.
Article 17. Important Matters
In addition to such matter as required by Articles of Incorporation of New
Company, the following matters of the Board of Directors meeting shall require
the affirmative vote of more than two-thirds of the votes of the Directors:
1. Any proposal to the General Meeting of Shareholders or action by the
Board of Directors for the matters as provided in Article 11 hereof;
2. any investment or commitment of New Company in amounts individually in
excess of $100,000 (one hundred thousand USD or in the aggregate in
excess of $100,000 (one hundred thousand USD);
3. any loan or credit taken by New Company
4. execution, amendment or termination of agreements or commitments with
CEO, SPAR or their subsidiaries or affiliates;
5. adoption or amendment of the annual budgets and business plan subject
to consequent approval by the Shareholder's General Meeting;
6. adoption or any material modification of major regulations or
procedures, including any employee rules or handbook;
-6-
7. change of the auditing firm as provided in Article 20;
8. initiating or settling any litigation, arbitration or other formal
dispute settlement procedures or forgiveness of any obligation owed to
the New Company in excess of $100,000 (one hundred thousand USD);
9. preparation of annual closing of the books of New Company and the New
Company's annual financial statements, and changing of accounting
policies and practices
10. establishment or amendment to the condition of employment of New
Company officers, provided that the affirmatives vote of SPAR-nominated
Directors shall not be withheld unreasonably;
11. No sale at disposition of or granting a lien, security interest or
similar obligation with respect to, in one or a series of related
transactions of New Company or with respect to any major strategic
asset of New Company that crucial to New Company' business;
12. Formation of any subsidiary of New Company, entry into (or subsequent
termination of) any joint venture, partnership or similar agreements;
13. entering into, amending or terminating any contract with/or commitment
to any Director or shareholder except for cases foreseen in art 539/2
of the TCC regarding appointment and dismissal of Directors; and
14. entering into any agreement or commitment to provide goods or services
outside Turkey.
CHAPTER V: AUDIT
-----
Article 18. Accounting Period
The accounting periods of New Company shall end on the 30th day of December of
each year.
Article 19. Statutory Auditors (where required)
A Statutory Auditor shall be appointed by (company), county and (proposed
person) shall be the initial Statutory Auditor.
-7-
Article 20. Inspection of Accounting Records and Books
The New Company shall yearly arrange audit on the accounting records and books
and shall submit a report of such audit to each of the parties hereto within
thirty (30) days from the completion of the audit.
Ernst & Young shall be the accounting firm engaged by New Company. Such
accounting firm shall audit the accounting records and books of New Company and
any other matters relating, directly or indirectly, to the financial condition
of New Company. Any fee for the certified public accountant for inspection and
audit mentioned above shall be borne by New Company. New Company shall keep true
and correct accounting records and books with regard to all of its operations in
accordance with generally accepted accounting principals consistently applied
("GAAP") in Territory. All accounting records and books shall be kept ready for
inspection by the parties hereto or by their authorized representative. If
requested by SPAR, New Company shall cooperate with respect to each financial
period to provide such information as required by SPAR to reconcile New
Company's financial statements with U.S. GAAP reporting requirements of SPAR.
Article 21. Increase of Capital
In case of capital increase of the New Company after its establishment, CEO and
SPAR shall have the preemptive right to new shares to be issued for such capital
increase in proportion to their respective shareholdings in the New Company.
CHAPTER VI: TRANSFER OF SHARES
------------------
Article 22. Restrictions on Transfer of Shares
Except as provided in Article 23 hereof, neither party hereto shall, without the
prior written consent of the other party, assign, sell, transfer, pledge,
mortgage, or otherwise dispose of all or any part of its shares (including its
right to subscribe to new shares) of the New Company to any third parties.
Article 23. Preemptive Right and Option
1. After three (3) years from the effective date of this Agreement, if
either party hereto (hereinafter called "Selling Party") wishes to
transfer and sell all but not less than all of its shares, the Selling
Party shall furnish to the other Party (hereinafter called "Other
-8-
Party") a written notice of a proposed purchaser, the offered purchase
price and other major terms and conditions of such proposed sale.
The Other Party shall have a right to purchase such shares by giving
Selling Party a written notice of its intention to purchase the same
within ninety (90) days from the receipt of Selling Party's notice,
upon the same terms and conditions as described in the Selling Party's
notice. The Selling Party may sell such shares upon the terms and
conditions as described in its notice after ninety (90) days from the
date of Other Party's receipt of such notice unless Other Party gives a
notice for its purchase of the shares to Selling Party. Unless agreed
by the. Other Party in writing, any transferee party shall be subject
to this Agreement.
2. After three (3) years from the effective date of this Agreement, either
party may at any time make a written offer to buy all of the other
Party's shares in the New Company. The Other Party shall then, either
accept the offer and sell all of its shares under the terms and
conditions offered, or purchase the offering party's shares at the same
terms and conditions. If the party receiving the initial offer does not
respond to the initial offer within one hundred and twenty (120) days,
the party receiving the offer shall be deemed to have accepted the
offer to sell its shares. The parties shall cooperate to effect the
closing of such purchase and sale of all of the shares of the New
Company held by the Selling Party within 120 days of the decision or
deemed decision of the second party. At such closing, the purchasing
party shall pay to the Selling Party the purchase price in cash, and
the Selling Party shall deliver to the purchasing party share
certificates representing all of the Selling Party's shares held in the
New Company, free and clear of any liens.
Article 24. Cooperation in Financing
1. The New Company may borrow up to $50,000 (fifty thousand USD) as its
operating funds, which shall be guaranteed by CEO if necessary. CEO
shall make its reasonable efforts to enable such borrowing. The terms
of the borrowing and any agreement between New Company and CEO with
respect to CEO guarantee shall be matters subject to Section 18 hereof.
-9-
2. The New Company may borrow an additional $50,000 (fifty thousand USD)
when it needs additional funds, if such borrowing is approved in
advance by the Board of Directors as an important matter under Article
19 herein.
3. If CEO pays any creditors of the New Company due to a guarantee made by
CEO to such creditors in favor of the New Company, SPAR shall reimburse
CEO for half of the amount paid by CEO, but only if the New Company's
borrowing of such funds and CEO guaranty of the New Company's
obligations have been expressly agreed to in advance by SPAR in writing
or in a Board resolution, for which both SPAR nominated directors have
voted affirmatively.
CHAPTER VII: ROLE OF CONTRACTING PARTIES
----------------------------
Article 25. Supply of Office and Facility
1. CEO shall supply offices and facilities, staff service for general
affairs and finance, and intra company network services, which are
determined, at CEO's sole discretion, necessary for the operation of
New Company after the consultation between the both parties, to New
Company at no charge for a period of three (3) years. In the event that
CEO cannot provide such services within its existing facilities then
CEO will reimburse to SPAR Turkey Ltd the cost of such described office
and facilities so that SPAR Turkey Ltd will incur no cost for the
described space and services for three (3) years.
2. SPAR for first three (3) years will provide up to three thousand
(3,000) hours of business support annually. This support may be in the
form of general business, consultation or programming support to modify
or enhance the merchandising software. SPAR will maintain ownership of
all software. If support provided by SPAR exceeds three thousand
(3,000) hours the additional hours will billed by SPAR to SPAR Turkey
Ltd at fifty five USD ($55.00) per hour. However a lower price will be
charged for programming costs if a less expensive way to hire IT staff
is found. SPAR Turkey Ltd will be able to hire its own IT staff as
appropriate.
3. CEO agrees that its operating expenses may not be allocated to SPAR
Turkey Ltd.
-10-
Article 26. Personnel
CEO shall, at its own judgment, second to New Company its personnel who are
appropriate for the startup of business of New Company for a period of one year
without any consideration. In principal, New Company shall be responsible for
the payment of salaries and benefits for such personnel and all other matters
concerning their employment; however CEO shall, at its own judgment, pay such
salaries, etc.
Article 27. Training
Each party hereto shall provide the appropriate training to the employees for
New Company's operation at its own site. The said training shall be made upon
New Company's request and any necessary expenses for the training shall be borne
by New Company, except as otherwise provided in License Agreement or the Supply
Agreement.
Article 28. Non-Competition
For five (5) years from the Execution Date of this Agreement, neither SPAR nor
CEO shall without the prior consent of the other, engage in, whether directly or
indirectly, Merchandising Services (as defined in the License Agreement) in
Territory or any other business then competitive with New company in Territory.
However, in the event that SPAR enters into a contract with a customer that
covers more than one country and the scope of such agreement includes services
in Territory, SPAR shall not be prohibited from entering into or performing such
agreement, provided that SPAR shall make commercially reasonable efforts to
enable New Company to participate in and be fairly compensated for providing
services to any such customer.
CHAPTER VIII: AMENDMENT FOR PUBLIC OFFERING
-----------------------------
Article 29. Public Offering
Both parties acknowledge that the New Company may attempt to become a listed
company or over-the counter company on the Territory Stock Exchange or any other
stock exchange or public market in Territory (public Offering). Both parties
acknowledge that conversion of the company type and structure, the number of
issued shares, the number of shareholders, the paid-up capital and profit
transaction with each party, the seconded employees of New Company will be
reviewed and instructed for amendment by the relevant governmental or regulatory
authorities
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in accordance with those bodies' rules or guidelines for Public Offering. If
both parties agree to undertake a Public Offering pursuant to Article 11 above,
both parties shall discuss and reasonably cooperate with each other to amend the
Articles of Agreement and/or the License Agreement in order to complete the
Public Offering of New Company. Any changes to the License Agreement will be
effective upon consummation of the Public Offering (but not before), and subject
to the approval of the Boards of Directors of the New Company, CEO and SPAR.
CHAPTER IX: CONFIDENTIALITY
---------------
Article 30. Confidential Information
CEO and SPAR shall keep secret and retain in strict confidence any and all
confidential information and use it only for the purpose of this Agreement and
shall not disclose it to a third party without the prior written consent of the
other party unless the receiving party can demonstrate that such information:
(i) has become public other than as a result of disclosure by the receiving
party, (ii) was available to the receiving party prior to the disclosure by the
disclosing party with the right to disclose, or (iii) has been independently
acquired or developed by the receiving party.
CHAPTER X: GENERAL PROVISIONS
------------------
Article 31. Effective Date
This Agreement shall become effective at the time of execution hereof.
Article 32. Termination
1. If either party transfers its shares in the New Company to the other
party hereto in accordance with Article 24 hereof, this Agreement shall
terminate. If either party transfers its shares in the New Company to
another party, unless expressly agreed by the non-transferring party in
writing, this Agreement shall be assigned to and binding upon such
third party, provided that the assigning party shall remain liable for
all legal acts with respect to this Agreement or the New Company
occurred before the Effective Date of such assignment.
2. Either party not in breach of this Agreement may terminate this
Agreement by written notice to the other party if any breach shall not
have been corrected by the other party
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in breach within ninety (90) days after written notice is given by such
party not in breach complaining of such breach.
3. Either party may terminate this Agreement by giving notice in the event
of one or more of the following:
(a) Appointment of a trustee or receiver for all or any part of
the assets of the other party;
(b) Insolvency or bankruptcy of the other party;
(c) Assignment of the other party for the benefit of creditor;
(d) Attachment of the assets of the other party;
(e) Expropriation of the business or assets of the other party;
and
(f) Dissolution or liquidation of the other party.
If either party is involved in any of the events enumerated in (a) through (f)
above, it shall immediately notify the other party of the occurrence of such
event.
4. In case of the termination of this Agreement pursuant to Article 32.2
or Article 32.3, the party terminating in accordance with this
Agreement shall have an option to purchase the shares of the other
party at the book value to be decided by an internationally recognized
accounting firm that is not the principal accounting firm of either
party, if either party so requests, or to have the New Company
dissolved.
5. Upon termination of this Agreement or SPAR's ceasing to hold at least
51% of the shares in New Company, the License Agreement shall terminate
immediately if still in effect, unless otherwise agreed by the parties.
Article 33. Force Majeure
Neither party shall be liable to the other party for failure or delay in the
performance of any of its obligations under this Agreement for the time and to
the extent such failure or delay is caused by riots, civil commotions, wars,
hostilities between nations, governmental laws, orders or
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regulations, embargoes, actions by the government or any agency thereof, acts of
God, storms, fires, accidents, strikes, sabotages, explosions, or other similar
contingencies beyond the reasonable control of the respective parties.
Article 34. Notices
All notices, reports and other communications given or made in accordance with
or in connection with this Agreement shall be made in writing and may be given
either by (i) personal delivery, (ii) overnight delivery or (iii) registered air
mail, if properly posted, with postage fully prepaid, in an envelope properly
addressed to the respective parties at the address set forth below or to such
changed address as may be given by either party to the other by such written
notice. Any notice, etc by personal delivery or overnight delivery or facsimile
transmission shall be deemed to have been given (7) days after the dispatch.
In any event, if any notice, etc. is received other than the regular business
hours of the recipient, it shall be deemed to have been given as of the
following business day of the recipient.
To: CEO 81/2 Buyukdere Cad Kugu Is Merkezi,
Mecidiyekoy, Istanbul, Turkey;
SPAR SPAR Group, Inc. ATT Robert G. Brown, Chairman
580 White Plains Road, Tarrytown, NY, USA
Article 35. Assignment
This Agreement and the rights and obligations hereunder are personal to the
parties hereto, and shall not be assigned by either of the parties to any third.
Article 36. Arbitration
All dispute, controversies, or differences which may arise between the parties
hereto, out of or in relation to or in connections with this Agreement, shall be
finally settled by arbitration in Territory in accordance with the relevant
arbitration provisions of the Turkish Civil Procedure Act except where provided
otherwise in this Agreement. Prior to any dispute, difference or agreement being
referred to arbitration the parties shall seek to resolve the matter as follows;
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The matter shall be referred to the chief executives of each party for
consideration but if they are not able to resolve the matter within ninety (90)
days provisions as to arbitration shall take effect.
The arbitration shall be conducted by three (3) arbitrators in English and in
Turkish in accordance with the Turkish Civil Procedure Act and the provisions of
this agreement and Turkish Laws shall be applied to the dispute. In case of a
dispute each party shall appoint one arbitrator. The party having appointed its
arbitrator shall give notice to the other party of such appointment upon which
the other party shall appoint its arbitrator within 7 days of notice.
The third arbitrator shall be chosen by the two arbitrators appointed by the
parties within 7 days of their appointment. In case the arbitrators cannot agree
on the third arbitrator the third Arbitrator shall be appointed by the Court.
The arbitrators shall conclude the dispute within 6 months upon their first
gathering. Such period can only be extended by mutual written agreement of the
Parties. The decision of the arbitrators shall be final and legally binding upon
both parties
Article 37. Implementation
The Shareholders hereby agree, for themselves, their successors, heirs and legal
representatives, to vote at Shareholders' meetings, and to cause the Directors
they nominate to vote at Board meetings and to carry out their duties, to
prepare, execute and deliver or cause to be prepared, executed and delivered
such further instruments and documents, to take such other actions and to cause
the Articles of Incorporation of New Company, New Company work rules and other
rules and Commercial registry and any other document to be amended or adopted as
may be reasonably required to effect the provisions and intent of this Agreement
and the transactions contemplated hereby.
Article 38. Governing Law
This Agreement and all questions arising out of or under this Agreement shall be
governed by and interpreted in accordance with the laws of Territory.
Article 39. Waiver
1. Any failure of either party to enforce, at any time or for any period
of time, any of the provisions of this Agreement shall not be construed
as a waiver of such provisions or of the right of such party thereafter
to enforce each and every such provision.
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Article 40. Entire Agreement
This Agreement constitutes the entire and only agreement between the parties
hereto with respect to the subject matter of this Agreement and supersedes any
other commitments, agreements or understandings, written or verbal, that the
parties hereto may have had. No modification, change and amendment of this
Agreement shall be binding upon the parties hereto except by mutual express
consent in writing of subsequent date signed by authorized officer or
representative of each of the parties hereto.
Article 41. Headings
The headings of articles and paragraphs used in this Agreement are inserted for
convenience of reference only and shall not affect the interpretation of the
respective articles and paragraphs of this Agreement.
Article 42. Language
This Agreement has been executed in the English and Turkish. If there is any
discrepancy or inconsistency between the English and the Turkish versions, the
English version shall prevail.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in two (2) copies by their respective duly authorized officer or representative
as of the day first above written.
CEO
Signature: /s/ Atilla Akalin
---------------------
Name: Atilla Akalin
Title: Managing Director
Spar Group International, Inc.
Signature: /s/ Robert G. Brown
---------------------
Name: Robert G. Brown
Title: Chairman and CEO
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JOINT VENTURE AGREEMENT
This Agreement made as of this 1 day of May, 2001 by and between Paltac
Corporation, a company organized and existing under the law of Japan and having
its principal place of business at 1-5-9, Minamikyuhoji-machi, Chuo-ku, Osaka,
Japan (hereinafter called "PALTAC") and Spar Group, Inc., a company organized
and existing under the law of State of Delaware, having its principal place of
business at 580 White Plains Road, Tarrytown, NY, USA (hereinafter called
"SPAR"),
WITNESSETH THAT:
WHEREAS, PALTAC is engaged in the retail solution businesses in Japan, having a
wide range of clients and also having various knowledge and human resources with
respect to the retailing businesses in Japan;
WHEREAS, SPAR is engaged in the retail solution businesses in the USA, having
computer software useful for agency, assistance, instruction and reporting of
storefront activities and also having operational know-how with respect to such
software; and
WHEREAS, PALTAC and SPAR are desirous of organizing a corporation to jointly
conduct retail solution businesses in Japan (hereinafter called "Territory").
NOW, THEREFORE, in consideration of the mutual covenants and agreement herein
contained, the parties agree as follows:
CHAPTER I
ORGANIZATION OF THE NEW COMPANY
Article 1. Establishment
Promptly after the effective date of this Agreement, the parties hereto shall
cause a new company to be organized under the laws of Japan as a stock company
(hereinafter called "New Company").
Upon formation, New Company shall become a party to this Agreement.
Upon formation, New Company shall become a party to this Agreement.
Article 2. Business Purposes
The business purposes of New Company shall consist of the followings:
(1) Agency, assistance, instruction and report of storefront sales activities;
(2) Implementation of market research and analysis of results thereof;
(3) Manufacturing and sale of setups used for sales promotion;
(4) Consulting regarding store management;
(5) Development and sale of management system regarding retailing;
(6) Designing and sale of database; and
(7) Any and all businesses incidental or relating to any of the foregoing.
Article 3. Trade Name
New Company shall be named in Japanese as Kabushiki Kaisha SPAR FM JAPAN and in
English as SPAR FM JAPAN, INC.
Article 4. Location
New Company shall have its main office at 1-5-9, Minamikyuhoji-machi, Chuo-ku,
Osaka, Japan.
Article 5. Articles of Incorporation
The Articles of Incorporation of New Company shall be in the form attached
hereto as Exhibit A.
Article 6. Capital
The total number of shares which New Company shall be authorized to issue shall
be 1600 and the par value of each share shall be (Y)50,000. At the time of
establishment of New Company, 400 shares shall be issued and fully subscribed by
the parties hereto as follows:
PALTAC: 200 shares, (Y)10,000,000
SPAR: 200 shares, (Y)10,000,000
All the shares to be issued by New Company shall be nominal and ordinary shares.
Article 7. Payment
Each of the parties hereto shall pay in Japanese Yen and in cash the amount
equivalent to its subscribed shares at par value upon issuance of the shares of
New Company.
CHAPTER II
PREPARATION OF ESTABLISHMENT OF NEW COMPANY
Article 8. Preparation of Establishment of New Company
Each party shall take its role as described below for the preparation of the
commencement of New Company's businesses. Any expenses and costs necessary for
such preparation shall be borne by each party.
A. SPAR shall enter into with New Company a license agreement in the form
attached hereto as Exhibit B (the "License Agreement"). For reference, the
License Agreement includes the obligations of SPAR to:
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(1) localize and set up software provided by SPAR to work in Japan;
(2) consult on the organization of merchandising services; and
(3) train the New Company's personnel in how to operate the merchandising
software.
Also, SPAR shall give advice on budgeting and development of each business plan.
B. PALTAC shall:
(1) arrange contracts with clients;
(2) provide office and facility space to New Company under the terms of a
supply agreement described in Article 26 herein;
(3) set up fast Internet connections for accessing reports and systems;
(4) prepare and send out instructions to merchandisers;
(5) hire merchandisers under terms agreed upon in advance by SPAR and PALTAC;
(6) gain retailers' permission to do in-store merchandising; and
(7) preparation of annual budget and business plan to be submitted to the Board
of Directors.
CHAPTER III
GENERAL MEETING OF SHAREHOLDERS
Article 9. Ordinary and Extraordinary General Meeting
The Ordinary General Meeting of Shareholders shall be convened by resolution of
the Board of Directors and held in Osaka city, Japan or any other vicinal place
within 3 months from the last day of each accounting period of New Company.
An Extraordinary General Meeting shall be convened by resolution of the Board of
Directors wherever deemed necessary.
Article 10. Quorum
A quorum of the General Meeting of Shareholders shall be the shareholders
present either in person or by proxy representing at least 51 % of all the
issued and outstanding shares of New Company.
Article 11. Resolution
Except as expressly otherwise provided in the Articles of Incorporation of New
Company, this Agreement or the Commercial Code of Japan (Law No. 48 of March 9,
1899, as amended, the
-3-
"Commercial Code"), all resolutions of the General Meeting of Shareholders shall
be adopted by the affirmative vote of shareholders holding at least 51 % of the
shares represented at a meeting for which there is a quorum.
Article 12. Important Matters
In addition to such matters as required by the Articles of Incorporation of New
Company or the Commercial Code, any resolutions of the following matters by the
General Meeting of Shareholders shall require the affirmative vote of at least
two-thirds of the votes of the shareholders present:
(1) any amendment or modification of the Articles of Incorporation;
(2) increase or decrease in the authorized capital or paid-in capital;
(3) issuance of new shares or any other kind of equity securities or
instruments convertible into equity securities or the decision to undertake
a Public Offering (as defined in Article 30);
(4) issuance of debentures;
(5) transfer of any part or whole of business;
(6) any and all matters relating to dividends of New Company;
(7) dissolution or amalgamation;
(8) change in number or length of tenure of Directors;
CHAPTER IV
BOARD OF DIRECTORS AND OFFICERS
Article 13. Election of Directors
The Board of Directors of New Company shall consist of 4 Directors; 2 of whom
shall be elected from among those appointed by PALTAC and 2 of whom shall be
elected from among those appointed by SPAR. The Chairman of the Board of
Directors shall be elected from the Directors by the mutual consultation of both
parties and Robert Brown shall be the initial Chairman of the Board of
Directors. In case of any increase or decrease in the number of Directors, the
representation stipulated above shall be unchanged and pro-rata at all times.
Article 14. Election of Officers
A President & Chief Executive Officer (CEO) and a Vice President & Chief
Operating Officer (COO) shall be appointed from among Directors appointed by
PALTAC by the consultation with SPAR. The President & CEO shall be the
Representative Director. The initial President & CEO shall be Juro Yamagishi and
the initial Vice President & COO shall be Shunichiro Tajiri.
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Article 15. Office of Director
The term of office of each Director shall expire at the close of the Ordinary
General Meeting of Shareholders which relates to the closing of accounts last to
occur within 2 years from his assumption of office.
Article 16. Quorum
Each Director shall have 1 voting right in the Board of Directors. Except as
expressly otherwise required in the Articles of Incorporation of New Company,
this Agreement, or the Commercial Code, a majority of the Directors shall
constitute a quorum at any meeting of the Board of Directors, and all
resolutions shall be adopted by the affirmative vote of more than two-thirds of
the votes of the Directors present.
Article 17. Ordinary Meeting of the Board of Directors
The Ordinary Meeting of the Board of Directors shall be held quarterly, and an
Extraordinary Meeting of the Board of Directors shall be held when necessary,
both of which shall be convened in accordance with the provisions of the
Articles of Incorporation. To the extent then permitted by the Commercial Code
or prevailing interpretation thereof, any meeting of the Board of Directors may
be held by interactive video conference or other similar electronic or
telephonic means, and any action that may be taken by the Board of Directors at
a meeting thereof (whether in person or video conference) may be effected in
lieu of such meeting by a unanimous written consent resolution executed by each
member of the Board of Directors. The parties hereto confirm that the prevailing
interpretation in Japan is that meetings of boards of directors may be held by
interactive video conference. For any proposed meeting of the Board of Directors
for which SPAR requests, PALTAC and SPAR shall cooperate to arrange for such
meetings to be held by video conference. A written record in Japanese of all
meetings of the Board of Directors and all decisions made by it together with
English translation thereof shall be made as promptly as practicable after each
meeting of the Board of Directors by one of the Directors selected by the Board
of Directors at each meeting, kept in the records of the Company and signed or
sealed by each of the Directors.
Article 18. Important Matters
In addition to such matters as required by the Articles of Incorporation of New
Company or the Commercial Code, the following matters of the Board of Directors'
meeting shall require the affirmative vote of more than two-thirds of the votes
of the Directors:
(1) any proposal to the General Meeting of Shareholders or action by the Board
of Directors for the matters as provided in Article 12 hereof;
(2) any investment or commitment of New Company in amounts individually in
excess of (Y)10,000,000 or in the aggregate in excess of(Y)10,000,000;
(3) any loan or credit taken by New Company in amounts individually in excess
of (Y)10,000,000 or in the aggregate in excess of(Y)10,000,000;
-5-
(4) execution, amendment or termination of agreements or commitments with
PALTAC, SPAR or their subsidiaries or affiliates;
(5) adoption or amendment of the annual budgets and business plan;
(6) adoption or any material modification of major regulations or procedures,
including any employee rules or handbook;
(7) change of the auditing firm as provided in Article 21;
(8) initiating or settling any litigation, arbitration or other formal dispute
settlement procedures or forgiveness of any obligation owed the New Company
in excess of (Y)10,000,000;
(9) approval of annual closing of the books of the New Company and the New
Company's annual financial statements, and changing of accounting policies
and practices or the New Company's accounting periods;
(10) establishment or amendment to the conditions of employment of New Company
Officers, provided that the affirmative vote of SPAR-nominated Directors
shall not be withheld unreasonably;
(11) selling, otherwise disposing of or granting a lien, security interest or
similar obligation with respect to, in one or a series of related
transactions, 10% or more of the net assets of New Company or with respect
to any major strategic asset of New Company that is crucial to New
Company's business;
(12) formation of any subsidiary of New Company, entry into ( or subsequent
termination of) any joint venture, partnership or similar agreement;
(13) entering into, amending or terminating any contract with or commitment to
any Director or shareholder; and
(14) entering into any agreement or commitment to provide goods or services
outside of Japan.
CHAPTER V
AUDIT
Article 19. Accounting Period
The accounting periods of New Company shall end on the 30th day of September
each year.
Article 20. Statutory Auditor
A Statutory Auditor shall be appointed by PALTAC, and Yoshiyuki Hakoda shall be
the initial Statutory Auditor.
-6-
Article 21. Inspection of Accounting Records and Books
New Company shall yearly arrange audit on the accounting records and books and
shall submit a report of such audit to each of the parties hereto within 30 days
from the completion of the audit.
Century Ota Showa & Co. shall be the initial accounting firm engaged by New
Company, however, if requested by either P ALTAC or SPAR, New Company shall
engage as its accounting firm an internationally recognized accounting firm that
is not the principal accounting firm of either of P ALTAC or SPAR. Such
accounting firm shall audit the accounting records and books of New Company and
any other matters relating, directly or indirectly, to the financial conditions
of New Company. Any fee for the certified public accountant for inspection and
audit mentioned above shall be borne by New Company. New Company shall keep true
and correct accounting records and books with regard to all of its operations in
accordance with generally accepted accounting principles consistently applied
("GAAP") in Japan. All accounting records and books shall be kept ready for
inspection by the parties hereto or by their authorized representative. If
requested by SPAR, New Company shall cooperate with respect to each financial
period to provide such information as required by SPAR to reconcile New
Company's financial statements with U.S. GAAP reporting requirements of SPAR.
Article 22. Increase of Capital
In case of capital increase of New Company after its establishment, PALTAC and
SPAR shall have the preemptive right to new shares to be issued for such capital
increase in proportion to their respective shareholdings in New Company.
CHAPTER VI
TRANSFER OF SHARES
Article 23. Restrictions on Transfer of Shares
Except as provided in Article 24 hereof, neither party hereto shall, without the
prior written consent of the other party, assign, sell, transfer, pledge,
mortgage or otherwise dispose of all or any part of its shares (including its
right to subscribe to new shares) of New Company to any third parties.
Article 24. Preemptive Right and Option
1. After 3 years from the effective date of this Agreement, if either party
hereto (hereinafter called "Selling Party") wishes to transfer and sell all but
not less than all of its shares, Selling Party shall furnish to the other party
(hereinafter called "Other Party") a written notice of a proposed purchaser, the
offered purchase price and other major terms and conditions of such proposed
sale.
The Other Party shall have a right to purchase such shares by giving Selling
Party a written notice of its intention to purchase the same within 90 days from
the receipt of Selling Party's notice, upon the same terms and conditions as
described in the Selling Party's notice. The Selling Party may sell such shares
upon the terms and conditions as described in its notice after 90 days from the
date of Other Party's receipt of such notice unless Other Party gives a notice
for its
-7-
purchase of the shares to Selling Party. Unless agreed by the Other Party in
writing, any transferree party shall be subject to this Agreement.
2. After 3 years from the effective date of this Agreement, either party may at
any time make a written offer to buy all of the other party's shares in the New
Company. The other party shall then either accept the offer and sell all of its
shares under the terms and conditions offered, or purchase the offering party's
shares at the same terms and conditions. If the party receiving the initial
offer does not respond to the initial offer within 120 days, the party receiving
the offer shall be deemed to have accepted the offer to sell its shares. The
parties shall cooperate to effect the closing of such purchase and sale of all
of the shares of the New Company held by the selling party within 120 days of
the decision or deemed decision of the second party. At such closing, the
purchasing party shall pay to the selling party the purchase price in cash, and
the selling party shall deliver to the purchasing party share certificates
representing all of the selling party's shares held in New Company, free and
clear of any liens.
Article 25. Cooperation in Financing
1. New Company may borrow up to (Y)300,000,000 as its operating funds, which
shall be guaranteed by PALTAC if necessary. PALTAC shall make its reasonable
efforts to enable such borrowing. The terms of the borrowing and any agreement
between New Company and PALTAC with respect to PALTAC's guarantee shall be
matters subject to Section 18 hereof.
2. New Company may borrow an additional (Y)300,000,000 when it needs additional
funds, if such borrowing is approved in advance by the Board of Directors as an
important matter under Article 18 herein.
3. If PALTAC pays any creditors of New Company due to a guaranty made by PALTAC
to such creditors in favor of New Company, SPAR shall reimburse PALTAC for half
of the amount paid by PALTAC, but only if New Company's borrowing of such funds
and PALTAC's guaranty of New Company's obligations have been expressly agreed to
in advance by SPAR in writing or in a Board resolution for which both
SPAR-nominated directors have voted affirmatively.
CHAPTER VII
ROLE OF CONTRACTING PARTIES
Article 26. Supply of Office and Facility
PALTAC shall supply offices and facilities, staff service for general affairs
and finance, and intra company network service, which are determined, at PALTACs
sole discretion, necessary for the operation of New Company after the
consultation between the both parties, to New Company at no charge.
Article 27. Personnel
PALTAC shall, at its own judgement, second to New Company its personnel who are
appropriate for the start-up of businesses of New Company for a period of 1 year
without any
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consideration. In principle, New Company shall be responsible for the payment of
salaries and benefits for such personnel and all other matters concerning their
employment; however, PALTAC shall, at its own judgement, pay such salaries, etc.
Article 28. Training
Each party shall provide the appropriate training to employees of New Company
for New Company's operation at its own site. The said training shall be made
upon New Company's request and any necessary expenses for the training shall be
borne by New Company, except as otherwise provided in the License Agreement or
the Supply Agreement.
Article 29. Non-Competition
For 5 years from the Execution Date of this Agreement, neither SPAR nor PALTAC
shall, without the prior written consent of the other, engage in, whether
directly or indirectly, Merchandising Services (as defined in the License
Agreement) in Japan or any other businesses then competitive with New Company in
Japan. However, in the event that SPAR enters into a contract with a customer
that covers more than one country and the scope of such agreement includes
services in Japan, SPAR shall not be prohibited from entering into or performing
such agreement, provided that SPAR shall make commercially reasonable efforts to
enable New Company to participate in and be fairly compensated for providing
services to any such customer.
CHAPTER VIII
AMENDMENT FOR PUBLIC OFFERING
Article 30. Public Offering
Both parties acknowledge that New Company may attempt to become a listed company
or over-the-counter company on the Osaka Stock Exchange, Tokyo Stock Exchange or
any other stock exchange or public market in Japan ( Public Offering ). Both
parties acknowledge that the number of issued shares, the number of
shareholders, the paid-up capital, profit, transaction with each party, the
seconded employees of New Company will be reviewed and instructed for amendment
by the relevant governmental or regulatory authorities in accordance with those
bodies' rules or guidelines for a Public Offering. If both parties agree to
undertake a Public Offering pursuant to Article 12 above, both parties shall
discuss and reasonably cooperate with each other to amend this Agreement and/or
the License Agreement in order to complete the Public Offering of New Company.
Any changes to the License Agreement will be effective upon consummation of the
Public Offering (but not before), and subject to the approval of the boards of
directors of New Company, PALTAC and SPAR.
CHAPTER IX
CONFIDENTIALITY
Article 31. Confidential Information
PALTAC and SPAR shall keep secret and retain in strict confidence any and all
confidential information and use it only for the purpose of this Agreement and
shall not disclose it to a third
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party without the prior written consent of the disclosing party unless the
receiving party can demonstrate that such information (i) has become public
other than as a result of disclosure by the receiving party, (ii) was available
to the receiving party prior to the disclosure by the disclosing party with the
right to disclose, or (iii) has been independently acquired or developed by the
receiving party.
CHAPTER X
GENERAL PROVISIONS
Article 32. Effective Date
This Agreement shall become effective at the time of execution hereof.
Article 33. Termination
1. If either party transfers its shares in New Company to the other party hereto
in accordance with Article 24 hereof, this Agreement shall terminate. If either
party transfers its shares in New Company to another party, unless expressly
agreed by the non-transferring party in writing, this Agreement shall be
assigned to and binding upon such third party, provided that the assigning party
shall remain liable for all legal acts with respect to this Agreement or New
Company from before the Effective Date of such assignment.
2. Either party not in breach of this Agreement may terminate this Agreement by
written notice to the other party if any breach shall not have been corrected by
the other party in breach within 60 days after written notice is given by such
party not in breach complaining of such breach.
3. Either Party may terminate this Agreement without giving a notice in the
event of one or more of the followings:
(a) Appointment of a trustee or receiver for all or any part of the assets of
the other party;
(b) Insolvency or bankruptcy of the other party;
(c) Assignment of the other party for the benefit of creditor;
(d) Attachment of the assets of the other party;
(e) Expropriation of the business or assets of the other party; and
(f) Dissolution or liquidation of the other party.
If either party is involved in any of the events enumerated in (a) through (f)
above, it shall immediately notify the other party of the occurrence of such
event.
4. In case of the termination of this Agreement pursuant to Article 32.2 or
Article 32.3, the party terminating in accordance with this Agreement shall have
an option to purchase the shares of the other party at the book value to be
decided by an internationally recognized accounting
-10-
firm that is not the principal accounting firm of either party, if either party
so requests, or to have New Company dissolved.
5. Upon termination of this Agreement or SPAR's ceasing to hold at least 50% of
the shares in New Company, the License Agreement shall terminate immediately if
still in effect.
Article 34. Force Majeure
Neither party shall be liable to the other party for failure or delay in the
performance of any of its obligations under this Agreement for the time and to
the extent such failure or delay is caused by riots, civil commotions, wars,
hostilities between nations, governmental laws, orders or regulations,
embargoes, actions by the government or any agency thereof, acts of God, storms,
fires, accidents, strikes, sabotages, explosions, or other similar contingencies
beyond the reasonable control of the respective parties.
Article 35. Notice
All notices, reports and other communications given or made in accordance with
or in connection with this Agreement shall be made in writing and may be given
either by (i) personal delivery, (ii) telex or facsimile transmission or (iii)
registered air mail, if properly posted, with postage fully prepaid, in an
envelope properly addressed to the respective parties at the address set forth
below or to such changed address as may be given by either party to the other by
such written notice. Any such notice, etc. by personal delivery or telex or
facsimile transmission shall be deemed to have been given as of the date so
delivered or transmitted. Any such notice, etc. by registered air mail shall be
deemed to have been given 7 days after the dispatch. In any event, if any
notice, etc. is received other than the regular business hours of the recipient,
it shall be deemed to have been given as of the following business day of the
recipient.
To: PALTAC; 1-5-9, Minamikyuhoji-machi, Chuo-ku, Osaka, Japan
SPAR; 580 White Plains Road, Tarrytown, NY, USA
Article 36. Assignment
This Agreement and the rights and obligations hereunder are personal to the
parties hereto, and shall not be assigned by either of the parties to any third
party.
Article 37. Arbitration
All dispute, controversies, or differences which may arise between the parties
hereto, out of or in relation to or in connection with this Agreement, shall be
finally settled by arbitration in Osaka, Japan in accordance with the rules of
the Japan Commercial Arbitration Association if initiated by SPAR, or in New
York City in accordance with the International Arbitration Rules of the American
Arbitration Association if initiated by PALTAC. The arbitration shall be
conducted by 3 arbitrators in the English and the Japanese languages. The
arbitration award shall be final and legally binding upon both parties.
-11-
Article 38. Implementation
The shareholders hereby agree, for themselves, their successors, heirs and legal
representatives, to vote at shareholders' meetings, and to cause the Directors
they nominate to vote at Board meetings and to carry out their duties, to
prepare, execute and deliver or cause to be prepared, executed and delivered
such further instruments and documents, to take such other actions and to cause
the Articles of Incorporation of New Company, New Company work rules and other
rules and Commercial Registry and any other document to be amended or adopted as
may be reasonably required to effect the provisions and intent of this Agreement
and the transactions contemplated hereby.
Article 39. Governing Law
This Agreement and all questions arising out of or under this Agreement shall be
governed by and interpreted in accordance with the laws of Japan.
Article 40. Waiver
Any failure of either party to enforce, at any time or for any period of time,
any of the provision of this Agreement shall not be construed as a waiver of
such provisions or of the right of such party thereafter to enforce each and
every such provision.
Article 41. Entire Agreement
This Agreement constitutes the entire and only agreement between the parties
hereto with respect to the subject matter of this Agreement and supersedes any
other commitments, agreements or understandings, written or verbal, that the
parties hereto may have had. No modification, change and amendment of this
Agreement shall be binding upon the parties hereto except by mutual express
consent in writing of subsequent date signed by authorized officer or
representative of each of the parties hereto.
Article 42. Headings
The headings of articles and paragraphs used in this Agreement are inserted for
convenience of reference only and shall not affect the interpretation of the
respective articles and paragraphs of this Agreement.
Article 43. Language
This Agreement has been executed in the English and the Japanese languages. If
there is any discrepancy or inconsistency between the English and the Japanese
versions, the English version shall prevail.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in 2 copies by their respective duly authorized officer or representative as of
the day first above written.
Paltac Corporation
Signature:
/s/ Kunio Mikita
Name: Kunio Mikita
Title: Representative Director & President
Spar Group, Inc.
Signature:
/s/ Robert G. Brown
Name: Robert G. Brown
Title: Chairman & CEO
-13-
August 1, 2004
AGREEMENT ON AMENDMENT
SPAR Group, Inc. (hereinafter referred to as "SPAR") and SPAR FM Japan, Inc.
(hereinafter referred to as the "Company") agreed to amend the License Agreement
executed as of May 1, 2001 between SPAR and the Company (hereinafter referred to
as the "License Agreement") concerning the royalty, pursuant to Article 3 of the
Agreement executed as of April 30, 2004 among SPAR, Company and PALTAC Inc.
(hereinafter referred to as "PALTAC") (hereinafter referred to as the "Renewed
Agreement").
1. SPAR and the Company agree to amend the existing Article 5 of the
License Agreement. The existing Article 5 shall become Section 5.2 of
the License Agreement and the following provision shall be added as
Section 5.1 of the License Agreement.
"5.1 Royalty The Company shall pay to SPAR the amount to be separately
agreed upon between the Company and SPAR through mutual consultation as
a royalty for the license granted by SPAR under Articles 2 and 3 of
this License Agreement (provided that such amount shall be reviewed
every two years). The Company shall report to SPAR the amount of sales
from January 1 of any year to December 31 of such year by the end of
February of the next year, and shall pay an appropriately calculated
royalty by bank transfer to the account designated by SPAR by the end
of March of such next year (provided that the Company may deduct
necessary bank transfer fees from such royalty amount)."
2. The amendment stipulated in this Agreement shall be deemed to have
become effective on and from May 1, 2004.
IN WITNESS WHEREOF, the parties executed this Agreement on Amendment as of the
date first written above.
MEMORANDUM OF AGREEMENT
August 1, 2004
SPAR Group, Inc. (hereinafter referred to as "SPAR") and SPAR FM Japan, Inc.
(hereinafter referred to as the "Company") agreed as follows through mutual
consultation concerning the royalty under Section 5.1 of the License Agreement
as of May 1, 2001, as modified pursuant to the Agreement on Amendment executed
as of August 1, 2004 between the parties (hereinafter referred to as the
"License Agreement").
1. The amount payable under Section 5.1 of the License Agreement shall be
0.5% of the sales amount of the Company.
2. The above provision shall be effective from May 1, 2004 through
December 31, 2005. The parties shall consult with each other in or
after September 2005 to determine the amount to be paid for the
subsequent period
IN WITNESS WHEREOF, the parties executed this Memorandum of Agreement as of the
date first written above.
SPAR GROUP, INC.
By: Robert G .Brown
/s/ Robert G. Brown
-----------------------------------
(sign or seal)
Title: Chairman & CEO
PALTAC CORPORATION
By: Kunio Mikita
/s/ Kunio Mikita
-----------------------------------
(sign or seal)
Title: President & CEO
SPAR FM JAPAN, K.K.
By: Kiyotaka Shimoda
/s/ Kiyotaka Shimoda
-----------------------------------
(sign or seal)
Title: President & CEO
August 1, 2004
AGREEMENT ON AMENDMENT
SPAR Group, Inc. (hereinafter referred to as "SPAR"), SPAR FM Japan, Inc.
(hereinafter referred to as the "Company") and PALTAC Corporation (hereinafter
referred to as "PALTAC") agreed to amend the Joint Venture Agreement executed as
of May 1, 2001 between SPAR and PALTAC concerning economic conditions involving
provision of offices, facilities, personnel and other items, pursuant to Article
3 of the Agreement as of April 30, 2004 (hereinafter referred to as the "Renewed
Agreement"). All parties to this Agreement hereby confirm that the following
represents the agreement made among such parties.
1. SPAR, PALTAC and the Company agree to delete and replace the existing
Article 26 of the Joint Venture Agreement in its entirety with the
following provision.
"Article 26 . Other Cooperation
26.1 Other than the warranty stipulated in the preceding Article 25, PALTAC
shall provide the New Company, through their mutual consultation, offices,
facilities, and general affairs and accounting personnel that PALTAC deems
necessary to manage the New Company at its sole discretion, services relating to
the non-clerical operations of the New Company provided by PALTAC's employees
who are dispatched as directors of the New Company, and internal network
service.
26.2 Separately from this provision the New Company and PALTAC shall determine
through negotiation the amount of consideration to be paid for the warranty in
the preceding Article 25 and the cooperation in the preceding Section 26.1 by
the New Company to PALTAC (provided that the New Company and PALTAC may modify
the amount of such consideration every two years through negotiation). The
Company shall report to PALTAC the amount of sales from January 1 of any year to
December 31 of such year by the end of February of the next year, and shall pay
an appropriately calculated consideration by bank transfer to the account
designated by PALTAC by the end of March of such next year (provided that the
New Company may deduct necessary bank transfer fees from such consideration
amount).
26.3 The purpose of the payment of the consideration in the preceding Section
26.2 shall not be for distribution of profits, but for compensation for expenses
of the New Company paid by PALTAC on behalf of the New Company."
IN WITNESS WHEREOF, the parties execute this Agreement on Amendment as of the
date first written above.
SPAR GROUP, INC.
By: Robert G .Brown
/s/ Robert G. Brown
-----------------------------------
(sign or seal)
Title: Chairman & CEO
PALTAC CORPORATION
By: Kunio Mikita
/s/ Kunio Mikita
-----------------------------------
(sign or seal)
Title: President & CEO
JOINT VENTURE AGREEMENT
This Agreement is made as of this , 2005 by and between:
1. Best Mark Investments Holdings Ltd., a corporation duly organized and
existing under the laws of the British Virgin Islands with it's a
registered office at Arias, Fabrega & Fabrega Trust Co. BVI Limited,
325 Waterfront Drive, Omar Hodge Building, 2nd Floor, Wickham's Cay,
Road Town, Tortola, British Virgin Islands (hereinafter referred to as
"SIMS"), which is a wholly owned subsidiary of Sims Trading Company
Limited, a company organized and existing under the law of Hong Kong
and having its registered office at 10th Floor, DCH Building, 20 Kai
Cheung Road, Kowloon Bay, Hong Kong (hereinafter referred to as "Sims
Trading"); and
2. SPAR International Ltd., a company organized and existing under the
laws of the Cayman Islands, having its a registered office in
Georgetown, Grand Cayman with an office 580 White Plains Road,
Tarrytown, NY, USA (hereinafter called "SPAR"),
WITNESSETH THAT:
WHEREAS, SIMS is a wholly owned subsidiary of Sims Trading which is engaged in
the retail solution businesses in Hong Kong and China, having a wide range of
clients and also having various knowledge and human resources with respect to
the retailing businesses in Hong Kong and China.
WHEREAS, SPAR is engaged in the retail solution businesses in the USA, having
computer software useful for agency, assistance, instruction and reporting of
storefront activities and also having operational know-how with respect to such
software; and
WHEREAS, SIMS and SPAR are desirous of organizing a Hong Kong corporation to
acquire a company in China to conduct a retail solution businesses in China and
will further consider whether to extend the retail solution businesses to Hong
Kong (Hong Kong and China are collectively referred to as "Territory").
NOW, THEREFORE, in consideration of the mutual covenants and agreement herein
contained, the parties hereto agree as follows:.
CHAPTHER I: ORGANIZATION OF THE NEW COMPANY
-------------------------------
Article 1. Establishment
Promptly after the effective date of this Agreement, the parties hereto shall
cause a new company to be organized under the laws of Hong Kong (hereinafter
called "SPAR China"). SPAR China shall then
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form a wholly owned subsidiary in the rest of China and upon formation, The
wholly owned subsidiary and SPAR China shall become a party to this Agreement
(herein referred to as the "New Companies").
Article 2. Business Purposes
The business purposes of the New Companies shall consist of the following:
1. Provide retail merchandising and product demonstration services;
2. Agency, assistance, instruction and report of storefront sales activities;
3. Implementation of market research and analysis of results thereof;
4. Installation of displays for new product launch, cut-ins and category resets;
5. Re-ordering and replenishment; .
6. Assembly of setups used for sales promotion;
7. POSM management/POP monitoring;
8. Consulting regarding store management;
9. Development and sale of management system regarding retailing;
10. Designing and sale of data; and
11. Any and all businesses incidental or relating to any of the foregoing.
Article 3. Trade Name
The New Companies shall be named in the Territory as SPAR China Ltd. or as
mutually agreed between the parties. However at a future date and with written
notice the name of the companies may be changed to reflect the equal shared
ownership of the New Companies by Sims Trading using the name "Sims" or "DCH" at
its discretion.
Article 4. Location
SPAR China shall have its main office in Hong Kong.
Article 5. Articles of Association
The Articles of Association of SPAR China shall be attached as Exhibit A hereto.
-2-
Article 6. Capital
The total number of shares which SPAR China shall be authorized to issue shall
be 5,000,000 that par value of each share shall be HK$1.00. At the time of
establishment of SPAR China shares shall be issued and fully subscribed by the
parties hereto as follow:
o SIMS 50% HK$800,000.00
o SPAR: 50% HK$800,000.00
All the shares to be issued by SPAR China shall be ordinary shares
Article 7. Payment
Each of the parties hereto shall pay in Hong Kong dollars and in cash the amount
equivalent to its subscribed shares at par value upon issuance of the shares of
SPAR China.
CHAPTER II. PREPARATION OF ESTABLISHMENT OF THE NEW COMPANIES
-------------------------------------------------
Article 8. Preparation of Establishment of SPAR China
Each party shall take its role as described below for the preparation of the
commencement of SPAR China business. Any expenses and costs necessary for such
preparation shall be borne by each party.
SPAR shall enter into with SIMS on behalf of SPAR China Ltd. a license agreement
in the form attached hereto as Exhibit B (the "License Agreement"). For
reference, the License Agreement includes the obligations of SPAR to:
1. localize, set up, maintain and enhance software provided by SPAR to
work in China;
2. localize, set up, maintain and enhance software provided by SPAR to
work in Hong Kong at the option of the New Companies;
3. consult on the organization of merchandising services;
4. train the New Companies' personnel in how to operate the merchandising
software;
5. give advice on budgeting and development of each business plan;
6. provide 24 hours/day/365days/year IT system support and problem solving
services to the New Companies with no consideration for time
differences;
7. Promote the New Companies' services to SPAR US customers with
operations in the Territory.
-3-
Sims Trading shall:
1. provide office space, facility and other back office and support
services to the New Companies under the terms described in Article 26
herein;
2. arrange meetings with current clients to promote the New Companies'
services;
3. transfer such business as is practical to the New Companies currently
performed by Sims Trading on behalf of Sims Trading's principals at
charges to be agreed between the parties hereto. [Need to determine
pricing.]
CHAPTER III: GENERAL MEETING OF SHAREHOLDERS
-------------------------------
Article 9. Annual General Meeting and Extraordinary General Meeting
The Annual General Meeting of Shareholders shall be held in Hong Kong or any
other vicinal place within 3 months from the day of each accounting period of
SPAR China.
An Extraordinary General Meeting shall be convened whenever deemed necessary by
the parties hereto.
Article 10. Quorum
A quorum of the General Meeting of Shareholders shall be the parties hereto
present either in person or by proxy.
Article 11. Resolution
Except as expressly otherwise provided in the Articles of Association of SPAR
China Ltd. and this Agreement, all resolutions of the General Meeting of
shareholders shall be adopted by the affirmative vote of shareholders holding at
least 52% of the shares present or represented at meeting for which there is
quorum or by written resolutions of all shareholders.
Article 12. Important Matters
In addition to such matters as required by the Articles of Association of SPAR
China and the Companies Ordinance (Chapter 32, Laws of Hong Kong), any
resolutions of the following matters by the General Meeting of shareholders
require the affirmative vote of at lease three quarters of the votes of the
shareholders present:
1. any amendment or modification of the Articles of Association;
-4-
2. increase or decrease in the authorized capital or paid-up capital;
3. issuance of new shares or any other kind of equity securities or
instruments convertible into equity securities or the decision to
undertake a Public Offering (as defined in Article 30);
4. issuance of debentures;
5. transfer of any part or whole of business
6. any and all matters relating to dividends of SPAR China;
7. dissolution or amalgamation;
8. change in number or length of tenure of Directors;
CHAPTER IV: BOARD OF DIRECTORS AND OFFICERS
-------------------------------
Article 13. Election of Directors
The Board of Directors of the SPAR China shall consist of four (4) Directors;
two (2) of whom shall be elected from among those appointed by SIMS and 2 of
whom shall be elected from those appointed by SPAR. The Chairman of the Board of
Directors shall be elected from the Directors by the mutual consultation of both
parties. In case of any increase or decrease in the number of Directors, the
representation stipulated above shall be unchanged and pro-rata at all times.
Article 14. Election of Officers
Officers shall be appointed by the Board of directors and serve at their
pleasure.
Article 15. Office of Director
The term of office of each Director shall expire at the close of each Annual
General Meeting of Shareholders, which relates to the closing of the annual
accounts, but each of the Directors are eligible for re-election.
Article 16. Quorum
Each Director shall have one (1) voting right in the Board of Directors. The
quorum at meetings of the Directors shall be two (2) Directors, provided that at
least one of the Directors appointed by SPAR
-5-
and at least one of the Directors appointed by SIMS. All resolutions shall be
adopted by the affirmative vote of more than two-thirds of the votes of the
Directors that are in attendance or by proxy.
Article 17. Meetings of the Board of Directors
The Ordinary Meetings of the Board of Directors shall be held quarterly and an
Extraordinary Meeting of the Board of Directors shall be held when necessary,
and shall be convened in accordance with the provisions of the Articles of
Association and this Agreement To the extent then permitted, any meeting of the
Board of Directors may be held by interactive video conference or other similar
electronic or telephonic means, and any action that may be taken by the Board of
Directors at a meeting thereof (whether in person or video conference) may be
effected in lieu of such meeting by unanimous written consent resolution
executed by each member of the Board of Directors. The parties hereto confirm
that the prevailing interpretation in Territory is that meetings of boards of
directors may be held by interactive videoconference. A written record in
English of all meetings of the Board of Directors and all Board decisions shall
be made available as promptly as practicable after each meeting of the Board of
Directors. At each meeting, one Director shall be selected by the attending
Directors to act as the Secretary of the meeting and keep the records of the
meeting. The records of the meeting shall be confirmed by the signature of each
of the Directors.
Article 18. Important Matters
In addition to such matters as required by the Articles of Association of SPAR
China, the following matters of the Board of Directors meeting shall require the
unanimous vote of all Directors:
1. Any proposal to the shareholders or action by the Board of Directors
for the matters as provided in Article 12 hereof;
2. any investment or commitment of SPAR China in amounts individually in
excess of HK $200,000.00 or in the aggregate in excess of
HK$400,000.00;
3. any loan or credit taken by SPAR China;
4. execution, amendment or termination of agreements or commitments with
SIMS, SPAR or their subsidiaries or affiliates;
5. adoption or amendment of the annual budgets and business plan;
6. adoption or any material modification of major regulations or
procedures, including any employee rules or handbook;
-6-
7. change of the auditing firm as provided in Article 21;
8. initiating or settling any litigation, arbitration or other formal
dispute settlement procedures or forgiveness of any obligation owed to
SPAR China in excess of HK$200,000.00;
9. approval of annual closing of the books of SPAR China and SPAR China's
annual financial statements, and changing of accounting policies and
practices or SPAR China's accounting periods;
10. No sale at disposition of or granting a lien, security interest or
similar obligation with respect to, in one or a series of related
transactions of SPAR China or with respect to any major strategic asset
of SPAR China that is crucial to SPAR China's business;
11. Formation of any subsidiary of SPAR China, entry into (or subsequent
termination of) any joint venture, partnership or similar agreements;
12. Entering into amending or terminating agreement or commitment to
provide goods or services outside the Territory.
13. Appointment or dismissal of the President or Chief Executive Officer.
CHAPTER V: AUDIT
-----
Article 19. Accounting Period
The accounting periods of SPAR China shall end on the 31st day of December of
each year.
Article 20. Statutory Auditors
A Statutory Auditor shall be appointed by SPAR China where required by law.
Article 21. Inspection of Accounting Records and Books
The accounting records and books of SPAR China shall be audited annually. SPAR
China shall submit a report of such audit to each of the parties hereto within
thirty (30) days from the completion of the audit.
Ernst & Young or KPMG or another mutually accepted international auditing firm
shall be the auditing firm engaged by SPAR China. This auditing firm shall audit
the accounting records and books of the New Companies and any other matters
relating, directly or indirectly, to the financial conditions of New Companies.
Any fee for the certified public accountant for inspection and audit mentioned
-7-
above shall be borne by New Companies. SPAR China shall keep true and correct
accounting records and books with regard to all of its operations in accordance
with generally accepted accounting principals consistently applied ("GAAP") in
Territory. All accounting records and books shall be kept ready for inspection
by the parties hereto or by their authorized representative. If requested by
SPAR, SPAR China shall cooperate with respect to each financial period to
provide such information as required by SPAR to reconcile SPAR China's financial
statements with U.S. GAAP reporting requirements of SPAR.
Article 22. Increase of Capital
In case of capital increase of SPAR China after its establishment, SIMS and SPAR
shall have the preemptive right to new shares to be issued for such capital
increase in proportion to their respective shareholdings in SPAR China.
CHAPTER VI: TRANSFER OF SHARES
------------------
Article 23. Restrictions on Transfer of Shares
Except as provided in Article 24 hereof, neither party hereto shall, without the
prior written consent of the other party, assign, sell, transfer, pledge,
mortgage, or otherwise dispose of all or any part of its shares (including its
right to subscribe to new shares) of SPAR China to any third parties.
Article 24. Preemptive Right and Option
1. After five (5) years from the effective date of this Agreement, if either
party hereto (hereinafter called "Selling Party") wishes to transfer and sell
all but not less than all of its shares, the Selling Party shall furnish to the
other shareholder in SPAR China (hereinafter called "Other Party") a written
notice ("Sale Notice") of the proposed sale. The Sale Notice should include the
offered sale price to be determined in accordance with sub-paragraph (3) hereof
and other major terms and conditions of such proposed sale. Except with the
consent of the Other Party, a Sale Notice shall be irrevocable.
2. The Other Party shall have a right to purchase such shares by giving Selling
Party a written notice of its intention to purchase the same within ninety (90)
days ("Acceptance Period") from the receipt of Selling Party's notice, upon the
same terms and conditions as described in the Selling Party's notice. The
Selling Party may sell such shares upon the terms and conditions as described in
its notice after ninety (90) days from the date of Other Party's receipt of such
notice. Unless agreed by the Other Party in writing, any transferee party shall
be subject to this Agreement.
-8-
3. The sale price for the shares shall be the price as may be determined, at the
request of the Other Party and at the cost of SPAR China, by the Auditors of the
New Companies (acting as experts and not as arbitrators) on the basis of the net
asset value and net profit after tax as shown in the latest audited accounts of
the New Companies (whichever is greater), provided that if at the date of the
Sale Notice the market value as between a willing seller and a willing buyer
acting at arm's length of any of the assets of SPAR China is greater or less by
ten percent (10%) or more than the book value of such assets then the market
value of such assets shall be substituted for the book value thereof in
computing the fair value of the shares.
4. If the Other Party does not give notice to the Selling Party within the
Acceptance Period that the Other Party is willing to proceed with the purchase,
the Selling Party shall be at liberty, within a period of sixty (60) days from
the expiration of the Acceptance Period, to sell and transfer the shares
(subject to sub-paragraph 7 hereof) at any price but not less than the sale
price to any other third party(ies) as the Selling Party shall determine,
provided that the shareholders of SPAR China in shareholders' meeting shall
first be reasonably satisfied as to the financial position and other conditions
of such third party(ies) and its or their ability to comply with the obligations
of the Selling Party before registering the transfer.
5. Notwithstanding anything to the contrary (expressly or implied) herein
contained, upon registration of the Other Party or third party(ies) as the
shareholder(s) of all the shares of the Selling Party of and in SPAR China the
Selling Party shall cease to be bound by the terms and provisions of this
Agreement and its rights under this Agreement shall be extinguished but without
prejudice to any rights accrued or accruing by the virtue of any antecedent
breach of any term or provision hereof.
6. The remaining shareholders shall procure that SPAR China release forthwith
any Director(s) of SPAR China appointed by the Selling Party after the sale or
transfer of the shares by the Selling Party from all their offices and
employments with SPAR China and the Selling Party shall upon request of the
remaining shareholders procure that any such Director(s) resign forthwith all
their offices and employments with SPAR China without payment of any
compensation by the SPAR China to such Director(s) in respect thereof and shall
indemnify SPAR China against any claim by any such Director(s) in connection
with such loss of office and employment.
7. Any transfer of shares in SPAR China pursuant to Article 24 shall be
conditional upon the transferee entering into an agreement with the existing
shareholder(s) whereby the transferee shall agree to be bound by and to observe
and perform the terms and conditions of this Agreement.
Article 25. Cooperation in Financing
1. SPAR China may borrow up to HK$8,000,000 as its operating funds which shall
be guaranteed by
-9-
Sims Trading if necessary. As a condition precedent to Sims Trading executing
any guarantee or providing any form of security to the Lender as security for
the facility, SPAR has to execute a guarantee or provide other forms of security
in favour of Sims Trading as security for up to half of Sims Trading's
liabilities, costs and expenses (legal or otherwise) under such facility. The
terms of the borrowing and any agreement between SPAR China and Sims Trading
with respect to Sims Trading guarantee shall be matters subject to Article 18
hereof.
2. SPAR China may borrow an additional HK$8,000,000 when it needs additional
funds, if such borrowing is approved in advance by the Board of Directors as an
important matter under Article 18 herein.
3. If Sims Trading is required to pay any amounts under Article 25(1) and 25(2)
due to a guarantee made by Sims Trading for such amounts in favor of SPAR China,
SPAR shall forthwith reimburse Sims Trading for half of the amount paid or
payable by Sims Trading. SPAR's failure to comply this Article 25(3) will
entitle Sims Trading to enforce its rights against SPAR under any of the deeds,
guarantee or documents executed by SPAR in favour of Sims Trading pursuant to
Article 25(1) hereof.
CHAPTER VII: ROLE OF CONTRACTING PARTIES
---------------------------
Article 26. Supply of Office and Facility
1. Sims Trading shall at Sims Trading's sole discretion supply offices and
facilities, staff service for general affairs and finance, and intra company
network services building on the infrastructure of Sims Trading's four regional
offices, namely, Guangzhou, Shenzhen, Shanghai and Beijing, which are necessary
for the operation of the New Companies after the consultation between both
parties, and at no charge to the New Companies for a period of four (4) years.
PROVIDED ALWAYS THAT (a) Sims Trading's total incremental cash expenses under
this Article 26(1) in the 4-year period shall not in any event exceed
HK$1,750,000; and (b) any such incremental cash expenses exceeding the said
limit of HK$1,750,000 shall be borne by the New Companies absolutely and the New
Companies shall settle in favour of Sims Trading in full all the expenses each
month without delay; and (c) any office(s) of the New Companies to be set up
outside Sims Trading's four regional offices in China shall be at the sole and
absolute discretion of Sims Trading and in reaching its decision, Sims Trading
shall be entitled to take into accounts matters including without limitation,
the profitability of customers' needs and requests for the New Companies'
services, feasibility studies and prospect of development and expansion of the
business.
2. SPAR for first four (4) years will provide up to a total of four thousand
(4,000) hours of business
-10-
support. This support may be in the form of general business, consultation or
programming support to modify or enhance the merchandising software. SPAR will
maintain ownership of all software. Ownership of any of the information and
database of SPAR China clients shall belong to SPAR China absolutely. If support
provided exceeds four thousand (4,000) hours the additional hours will be billed
by SPAR to SPAR China at US$55.00 per hour. Coach travel for work performed on
behalf of the Joint Venture by SPAR or SIMS or Sims Trading would be paid for by
SPAR China.
3. Both Parties agree that their operating expenses, which include the
management hours of the Directors and other senior management staff, may not be
allocated to SPAR China in the first five (5) years.
Article 27. Personnel
Sims Trading shall, at its own judgment, second to SPAR China its personnel who
are appropriate for the start-up of business of the New Companies for a period
of one (1) year without any consideration. In principal, SPAR China shall be
responsible for the payment of salaries and benefits for full time personnel and
all other matters concerning their employment; however Sims Trading shall, at
its own judgment, pay such salaries and benefits as necessary to maintain the
profitability of SPAR China.
Article 28. Training
Each party hereto shall provide the appropriate training to the employees for
the New Companies' operation at its own site. The said training shall be made
upon SPAR China's request and any necessary expenses for the training shall be
borne by SPAR China, except as otherwise provided in License Agreement as
provided by article 26.
Article 29. Non-Competition
For five (5) years from the Execution Date of this Agreement, neither SPAR nor
Sims Trading shall without the prior written consent of the other, engage in,
whether directly or indirectly, Merchandising Services (as defined in the
License Agreement) in Territory or any other business then competitive with SPAR
China in Territory save and except that Sims Trading shall be allowed without
any restrictions whatsoever to continue to carry on its Merchandising Services
under Twin Tiger International Limited in Hong Kong any time whether during the
subsistence of this Agreement or after its termination. In the event that SPAR
enters into an agreement with a customer that covers more than one country and
the scope of such agreement includes service in the Territory, SPAR shall not be
prohibited from entering into or performing such agreement, provided that SPAR
shall be obliged to notify SPAR
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China of such agreement(s) (including global agreements) and SPAR shall use all
reasonable efforts to procure that SPAR China has a right of first refusal to
enter into and perform such agreements and the terms so offered to SPAR China
shall always be no less favourable than the terms so offered to any subsequent
parties. Notwithstanding any provisions to the contrary herein, in the event
that any Merchandising Services or any other business then competitive with SPAR
China in the Territory is carried out by SPAR directly or indirectly and whether
alone or jointly with any other third party(ies) whatsoever, SIMS shall be
entitled to charge a commission on the gross fees so received by SPAR at rate to
be fairly and reasonably determined by both parties and in any event the charges
for the merchandising services shall not be lower than the standard rate charged
by SPAR China.
For the avoidance of doubt, SPAR China has been granted the non-transferable and
exclusive license to use the Licensed Technology (as defined in the License
Agreement) in the Territory under the License Agreement. During the subsistence
of this Agreement and the License Agreement, SPAR shall not further license the
Licensed Technology to any other party(ies) in the Territory whether or not for
the purpose of providing such Merchandising Services or any other business then
competitive with SPAR China which SPAR China has exercised its first right of
refusal to take up.
Sims Trading may also continue to offer services to Sims Trading's clients that
exist on the date of execution of contract as long as they are similar to
services offered prior to the execution of this contract and Sims Trading has
made reasonable effort to transfer such business to the New Companies.
CHAPTER VIII: AMENDMENT FOR PUBLIC OFFERING
-----------------------------
Article 30. Public Offering
Both parties acknowledge that SPAR China may attempt to become a listed company
or over-the-counter company on the Territory Stock Exchange or any other stock
exchange or public market in Territory (the "Public Offering"). Both parties
acknowledge that the number of issued shares, the number of shareholders, the
paid-up capital and profit transaction with each party, the seconded employees
of SPAR China will be reviewed and instructed for amendment by the relevant
governmental or regulatory authorities in accordance with those bodies' rules or
guidelines for Public Offerings. If both parties agree to undertake a Public
Offering pursuant to Article 12 above, both parties shall discuss and reasonably
cooperate with each other to amend the Articles of Agreement and/or the License
Agreement in order to complete the Public Offering of SPAR China. Any changes to
the License Agreement will be effective upon consummation of the Public Offering
(but not before),
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and subject to the approval of the Boards of Directors of SPAR China, SIMS and
SPAR.
CHAPTER IX: CONFIDENTIALITY
---------------
Article 31. Confidential Information
SIMS and SPAR shall keep secret and retain in strict confidence any and all
confidential information and use it only for the purpose of this Agreement and
shall not disclose it to a third party without the prior written consent of the
other party unless the receiving party can demonstrate that such information:
(i) has become public other than as a result of disclosure by the receiving
party, (ii) was available to the receiving party prior to the disclosure by the
disclosing party with the right to disclose, or (iii) has been independently
acquired or developed by the receiving party.
CHAPTER X: GENERAL PROVISIONS
------------------
Article 32. Effective Date and Duration
1. This Agreement shall become effective at the time of execution hereof.
2. Subject to the following provisions of Article 33, this Agreement shall
take effect from the effective date and shall continue in force for a
term of five (5) years. This Agreement shall automatically renew for
successive five (5) year periods following the end of each preceding
five (5) year period unless one of the parties hereto serves a written
notice of termination to the other six (6) months before the end of
each period before termination can take effect.
Article 33. Termination
1. If either party transfers its shares in SPAR China to the other party
hereto in accordance with Article 24 hereof, this Agreement shall be
terminated after completion of the transfer of shares under Article 24.
If either party transfers its shares in SPAR China to another party,
unless expressly agreed by the non-transferring party in writing, this
Agreement shall be assigned to and binding upon such third party,
provided that the assigning party shall remain liable for all legal
acts with respect to this Agreement or the SPAR China occurred before
the Effective Date of such assignment.
2. In the event of a breach of this Agreement, the party not in breach of
this Agreement, may terminate this Agreement by written notice to the
party in breach of this Agreement if such breach shall not have been
corrected by the party in breach within ninety (90) days after written
notice is given by
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the party not in breach.
3. Either party may terminate this Agreement by giving notice in the event
of one or more of the following:
(a) Appointment of a trustee or receiver for all or any part of the assets
of the other party;
(b) Insolvency or bankruptcy of the other party;
(c) Assignment of the other party for the benefit of creditor;
(d) Attachment of the assets of the other party;
(e) Expropriation of the business or assets of the other party; and
(f) Dissolution or liquidation of the other party.
If either party is involved in any of the events enumerated in (a) through (f)
above, it shall immediately notify the other party of the occurrence of such
event.
4. In case of the termination of this Agreement pursuant to Article 33.2 or
Article 33.3, the party terminating in accordance with this Agreement shall have
an option to purchase the shares of the other party at the book value to be
decided by an internationally recognized accounting firm that is not the
principal accounting firm of either party, if either party so requests, or to
have SPAR China dissolved.
5. Upon termination of this Agreement or SPAR's ceasing to hold at least 50% of
the shares in SPAR China, the License Agreement shall be terminable within two
(2) years thereafter.
6. Upon the termination of this Agreement or if SPAR wishes to sell all or part
of its shares in SPAR China to a third party or SIMS or Sims Trading, SPAR is
committed to supply:
(a) its name for two additional years at no cost; and
(b) its software to SPAR China for additional 2 years at the
following cost:
(i) First 12 months: out of pocket costs
(ii) Next 12 months: $3,000 / month + out of pocket costs
and
(c) SIMS or Sims Trading will have an option to license the
software for two additional years at a fair market fee to be
mutually agreed to and which both parties will arrive at in
good faith negotiations.
Article 34. Force Majeure
Neither party shall be liable to the other party for failure or delay in the
performance of any of its obligations under this Agreement for the time and to
the extent such failure or delay is caused by riots, civil commotions, wars,
hostilities between nations, governmental laws, orders or regulations,
embargoes, actions by the government or any agency thereof, acts of God, storms,
fires, accidents, strikes, sabotages, explosions, or other similar contingencies
beyond the reasonable control of the
-14-
respective parties.
Article 35. Notices
All notices (including without limitation notices for arbitration), reports and
other communications given or made in accordance with or in connection with this
Agreement shall be made in writing and may be given either by (i) personal
delivery, (ii) overnight delivery or (iii) registered air mail, if properly
posted, with postage fully prepaid, in an envelope properly addressed to the
respective parties at the address set forth below or to such changed address as
may be given by either party to the other by such written notice. Any notice,
etc by personal delivery or overnight delivery or facsimile transmission shall
be deemed to have been given (7) days after the dispatch. In any event, if any
notice, etc. is received other than the regular business hours of the recipient,
it shall be deemed to have been given as of the following business day of the
recipient.
For SIMS,
To: Best Mark Investments Holdings Ltd.
c/o Sims Trading Company Ltd.
10/F, DCH Building, 20 Kai Cheung Road, Kowloon Bay, Hong Kong
Attn: Glenn Smith, CEO
For SPAR,
To: SPAR International Ltd.
580 White Plains Road, Tarrytown, NY, USA
Attn: Robert G Brown, Chairman and CEO
Article 36. Assignment
This Agreement and the rights and obligations hereunder are personal to the
parties hereto, and shall not be assigned by either of the parties to any third.
Article 37. Arbitration
All dispute, controversies, or differences which may arise between the parties
hereto, out of or in relation to or in connections with this Agreement, shall be
finally settled by arbitration in Territory in accordance with the rules of the
Territory Commercial Arbitration Association if initiated by SPAR, or in New
York City in accordance with the International Arbitration Rules of the American
Arbitration Association if initiated by SIMS. The arbitration shall be conducted
by a single arbitrator in English.
-15-
The arbitration shall be final and legally binding upon both parties.
Article 38. Implementation
The Shareholders hereby agree, for themselves, their successors, heirs and legal
representatives, to vote at Shareholders' meetings, and to cause the Directors
they nominate to vote at Board meetings and to carry out their duties, to
prepare, execute and deliver or cause to be prepared, executed and delivered
such further instruments and documents, to take such other actions and to cause
the Articles of Incorporation of SPAR China , SPAR China work rules and other
rules and Commercial registry and any other document to be amended or adopted as
may be reasonably required to effect the provisions and intent of this Agreement
and the transactions contemplated hereby.
Article 39. Governing Law
This Agreement and all questions arising out of or under this Agreement shall be
governed by and interpreted in accordance with the laws of The Hong Kong Special
Administrative Region.
Article 40. Waiver
Any failure of either party to enforce, at any time or for any period of time,
any of the provisions of this Agreement shall not be construed as a waiver of
such provisions or of the right of such party thereafter to enforce each and
every such provision.
Article 41. Entire Agreement
This Agreement constitutes the entire and only agreement between the parties
hereto with respect to the subject matter of this Agreement and supersedes any
other commitments, agreements or understandings, written or verbal, that the
parties hereto may have had. No modification, change and amendment of this
Agreement shall be binding upon the parties hereto except by mutual express
consent in writing of subsequent date signed by authorized officer or
representative of each of the parties hereto.
Article 42. Headings
The headings of articles and paragraphs used in this Agreement are inserted for
convenience of reference only and shall not affect the interpretation of the
respective articles and paragraphs of this
-16-
Agreement.
Article 43. Language
This Agreement has been executed in the English.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in two (2) copies by their respective duly authorized officer or representative
as of the day first above written.
SIGNED BY: WITNESSED BY:
Best Mark Investments Holdings Ltd.
Signature: /s/ Glen Robert Sturrock Smith Signature: /s/ Mary Lee
------------------------ --------------------
Name: Glen Robert Sturrock Smith Name: Mary Lee
Title: Director Company: SIMS Trading
Company Ltd.
Title: Financial Controller
SIGNED BY: WITNESSED BY:
Spar International Ltd.
Signature: /s/ Robert G Brown Signature:/s/ Mindy Asiedo
------------------------ --------------------
Name: Robert G Brown Name: Mindy Asiedo
Title: Chairman & Chief Executive Officer Company: Notary
Title:
-17-
JOINT VENTURE AGREEMENT
This Agreement is made as of this 14th day of December, 2004 by and between
Field Insights S.R.L, a company organized and existing under the law of Romania
and having its headquarters at Aleea Ilioara nr. 1, Bloc PM29, Sc. B, Etaj 4,
Ap. 55, Sector 3, Bucharest, Romania (hereinafter called "FI"), Spar Group
International Inc., a Nevada corporation, with an office at 580 White Plains
Road, Tarrytown New York, USA (hereinafter called "SPAR"), and Adinel Tudor, a
Romanian citizen identified with Identity Card series DP no. 104864, Personal
Numerical Code 1771115100037, domiciled at Calea Dorobantilor nr. 73, Ap. 3,
Sector 1, Bucharest ("Tudor"),
WITNESSETH THAT:
WHEREAS, FI is engaged in the retail solution businesses in Romania, having a
wide range of clients and also having various knowledge and human resources with
respect to the retailing businesses in Romania;
WHEREAS, SPAR is engaged in the retail solution businesses in the USA, having
computer software useful for agency, assistance, instruction and reporting of
storefront activities and also having operational know-how with respect to such
software; and
WHEREAS, FI and SPAR are desirous of organizing a corporation to jointly conduct
retail solution businesses in Romania (hereinafter called "Territory").
NOW, THEREFORE, in consideration of the mutual covenants and agreement herein
contained, the parties hereto agree as follows:
CHAPTER I: ORGANIZATION OF THE NEW COMPANY
-------------------------------
Article l. Establishment
Promptly after the effective date of this Agreement, the parties hereto shall
cause a new company to be organized under the laws of Territory (hereinafter
called "SPAR Romania S.R.L." or "New Company"). Upon formation, New Company
shall become a party to this Agreement through approval by the General Meeting
of Shareholders of New Company and signature for acknowledgement of all original
copies.
Article 2. Business Purposes
The business purposes of the New Company shall consist of the following:
1. Provide retail merchandising and product demonstration services;
2. Agency, assistance, instruction and report of storefront sales activities;
3. Implementation of market research and analysis of results thereof;
4. Assembly of setups used for sales promotion;
5. Consulting regarding store management;
6. Development and sale of management system regarding retailing;
7. Designing and sale of database; and
8. Any and all businesses incidental or relating to any of the foregoing.
Article 3. Trade Name
The New Company shall be named in Territory as S.C. SPAR Romania S.R.L. and in
English as SPAR Romania Ltd.
Article 4. Location
The New Company shall have its headquarters at Strada Vasile Lascar nr.
18, ap. 8, etaj 1, Sector 2, 020491
Bucharest, Romania.
Article 5. Constitutive Act
The Constitutive Act of the New Company shall be in the form attached hereto as
Exhibit A.
Article 6. Capital
The total number of shares which New Company shall issue at incorporation shall
be fifteen thousand shares and the par value of each share shall be 100,000
Romanian lei. At the time of establishment of New Company, shares shall be
issued and fully subscribed by the parties hereto as follows:
o SPAR: 51% 7,650 social parts
o FI: 42% 6,300 social parts
o Tudor: 7% 1,050 social parts.
All the shares to be issued by New Company shall be nominal and ordinary shares.
2
Article 7. Payment
Each of the parties hereto shall pay in Romanian lei and in cash the amount
equivalent to its subscribed shares at par value upon issuance of the shares of
New Company.
CHAPTER II: PREPARATION OF ESTABLISHMENT OF THE NEW COMPANY
-----------------------------------------------
Article 8. Preparation of Establishment of the New Company
Each party shall take its role as described below for the preparation of the
commencement of New Company's business. All expenses in connection with this
Agreement, the setting up of the New Company and the preparation of the
commencement of New Company's business will be advanced by FI and/or SPAR and
reimbursed by the New Company if set up. If the joint venture is not completed,
each party will pay their own costs.
SPAR shall enter into New Company with a license agreement in the form attached
hereto as Exhibit B (the "License Agreement"). For reference, the License
Agreement includes the obligations of SPAR to:
1. localize and set up software provided by SPAR to work in Territory; and
2. consult on the organization of merchandising services; and
3. train the New Company's personnel in how to operate the merchandising
software; and
4. give advice on budgeting and development of each business plan
and FI shall
1. provide office and facility space to New Company under the terms of a supply
agreement described in Article 26 herein; and
2. arrange meetings with current clients to promote New Company's services
CHAPTER III: GENERAL MEETING OF SHAREHOLDERS
-------------------------------
Article 9. Ordinary and Extraordinary General Meeting
The Ordinary General Meeting of Shareholders shall be convened by resolution of
the Board of Directors and held in Territory or any other place that FI and SPAR
may agree within 3 months from the last day of each accounting period of New
Company.
3
An Extraordinary General Meeting shall be convened by a resolution of the Board
of Directors whenever deemed necessary.
Article 10. Quorum
A quorum of the General Meeting of Shareholders shall be the shareholders
present either in person or by proxy representing at least 51% of all the paid
share capital of New Company.
Article 11. Resolution
Except as expressly otherwise provided in the Constitutive Act of New Company or
this Agreement, all resolutions of the General Meeting of Shareholders shall be
adopted by the affirmative vote of Shareholders holding at least 51% of the
shares present or represented at meeting for which there is quorum.
Article 12. Important Matters
In addition to such matters as required by the Constitutive Act of New Company
or the applicable laws in Romania, any resolutions of the following matters by
the General Meeting of Shareholders require the affirmative vote of shareholders
representing at least two-thirds of the paid-in social capital:
1. any amendment or modification of the Constitutive Act;
2. increase, decrease or change of structure in the social capital, but only
subject to provisions of Chapter VI;
3. issuance of new shares or any other kind of equity securities or
instruments convertible into equity securities or the decision to undertake
a Public Offering (as defined on Article 30);
4. issuance of debentures;
5. transfer of any part or whole of business;
6. approval, rejection or change of the balance sheet, profit assignment and
dividends of New Company;
7. splitting, dissolution or amalgamation;
8. dismissal, replacement, change of powers, change in number or length of
tenure of Directors, subject to the rights of FI and SPAR under Article 13;
4
9. any decision given by the applicable laws or by the Constitutive Act to the
Directors.
CHAPTER IV: BOARD OF DIRECTORS AND OFFICERS
-------------------------------
Article 13. Election of Directors
The Board of Directors of the New Company shall consist of four (4) Directors;
two (2) of whom shall be elected from among those appointed by FI and 2 whom
shall be elected by those appointed by SPAR. The Chairman of the Board of
Directors shall be elected from the Directors by the mutual consultation of both
parties. In case of any increase or decrease in the number of Directors, the
representation stipulated above shall be unchanged and pro-rata at all times.
Article 14. Election of Officers
Officers shall be appointed by the Board of directors and serve at the pleasure
of the Board of Directors. The Chief Executive Officer of New Company shall in
any case be elected from among candidates nominated by FI.
Article 15. Office of Director
The term of office of each Director shall expire at the close of the Ordinary
General Meeting of Shareholders, which relates to the closing of accounts last
to occur within three (3) years from his assumption of office.
Article 16. Quorum
Each Director shall have one (1) voting right in the Board of Directors. Except
as otherwise required in the Constitutive Act of New Company or this Agreement,
a majority of the Directors shall constitute a quorum at any meeting of their
Board of Directors, and all resolutions shall be adopted by the affirmative vote
of more than two-thirds of the votes of the Directors present.
5
Article 17. Ordinary Meeting of the Board of Directors
The Ordinary Meeting of the Board of Directors shall be held quarterly, and an
Extraordinary Meeting of the board of Directors shall be held when necessary,
both of which shall be convened in accordance with the provisions of the
Constitutive Act. To the extent then permitted, any meeting of the Board of
Directors may be held by interactive video conference or other similar
electronic or telephonic means, and any action that may be taken by the Board of
Directors at a meeting thereof (whether in person or video conference) may be
effected in lieu of such meeting by unanimous written consent resolution
executed by each member of the Board of Directors. The parties hereto confirm
that the interpretation in Territory is that meetings of boards of directors may
be held by interactive videoconference if stipulated expressly in the
Constitutive Act of SPAR Romania S.R.L. For any proposed meeting of the Board of
Directors for which SPAR requests, SPAR Romania S.R.L. and SPAR shall cooperate
to arrange for such meetings to be held by video conference. A written record in
Romanian of all meetings of the Board of Directors and all decisions made by it
together with English translation thereof shall be made as promptly as
practicable after each meeting of the Board of Directors by one of the Board
selected by the Board of Directors at each meeting, kept in the records of the
Company and signed or sealed by each of the Directors.
Article 18. Important Matters
In addition to such matter as required by Constitutive Act of New Company, the
following matters of the Board of Directors meeting shall require the
affirmative vote of more than two-thirds of the votes of the Directors:
1. Any proposal to the General Meeting of Shareholders or action by the Board
of Directors for the matters as provided in Article 12 hereof;
2. any investment or commitment of New Company in amounts individually in
excess of US$50,000 or in the aggregate in excess of US$50,000;
3. any loan or credit taken by New Company;
4. execution, amendment or termination of agreements or commitments with FI,
SPAR or their subsidiaries or affiliates;
5. adoption or amendment of the annual budgets and business plan;
6. adoption or any material modification of major regulations or procedures,
including any employee rules or handbook;
7. change of the auditing firm as provided in Article 21;
8. initiating or settling any litigation, arbitration or other formal dispute
settlement procedures or forgiveness of any obligation owed to the New
Company in excess of US$25,000;
6
9. approval of annual closing of the books of New Company and the New
Company's annual financial statements, and changing of accounting policies
and practices or the New Company's accounting periods;
10. establishment or amendment to the condition of employment of New Company
officers, provided that the affirmatives vote of SPAR-nominated Directors
shall not be withheld unreasonably;
11. sale or disposition of or granting a lien, security interest or similar
obligation with respect to, in one or a series of related transactions of
New Company or with respect to any major strategic asset of New Company
that is crucial to New Company' business;
12. Formation of any subsidiary of New Company, entry into (or subsequent
termination of) any joint venture, partnership or similar agreements;
13. entering into, amending or terminating any contract with/or commitment to
any Director or shareholder; and
14. entering into any agreement or commitment to provide goods or services
outside Territory.
CHAPTER V: AUDIT
-----
Article 19. Accounting Period
The accounting periods of New Company shall end on the 31st day of December of
each year or another date if permitted by applicable law.
Article 20. Statutory Auditors (where required)
A Statutory Auditor shall be appointed by New Company if required by applicable
law. The parties confirm that presently a Statutory Auditor is not required.
Article 21. Inspection of Accounting Records and Books
The New Company shall yearly arrange audit on the accounting records and books
and shall submit a report of such audit to each of the parties hereto within
thirty (30) days from the completion of the audit.
7
An internationally recognized auditing firm shall be the accounting firm engaged
by New Company. Such accounting firm shall audit the accounting records and
books of New Company and any other matters relating, directly or indirectly, to
the financial condition of New Company. Any fee for the certified public
accountant for inspection and audit mentioned above shall be borne by New
Company. New Company shall keep true and correct accounting records and books
with regard to all of its operations in accordance with generally accepted
accounting principals consistently applied ("GAAP") in Territory. All accounting
records and books shall be kept ready for inspection by the parties hereto or by
their authorized representative. If requested by SPAR, New Company shall
cooperate with respect to each financial period to provide such information as
required by SPAR to reconcile New Company's financial statements with U.S. GAAP
reporting requirements of SPAR. SPAR and FI shall each have the right at any
time to have an outside auditor inspect all the books and records of New
Company, and New Company shall cooperate fully with any such audit.
Article 22. Increase of Capital
In case of capital increase of the New Company after its establishment, FI,
Tudor and SPAR shall have the preemptive right to new shares to be issued for
such capital increase in proportion to their respective shareholdings in the New
Company.
CHAPTER VI: TRANSFER OF SHARES
------------------
Article 23. Restrictions on Transfer of Shares
Except as provided in Article 24 hereof, no party hereto shall, without the
prior written consent of each other party, assign, sell, transfer, pledge,
mortgage, or otherwise dispose of all or any part of its shares (including its
right to subscribe to new shares) of the New Company to any third parties.
Article 24. Preemptive Right and Option
1. At no time may any party transfer less than all of its shares. After three
(3) years from the effective date of this Agreement, if any party hereto
(hereinafter called "Selling Party") wishes to transfer and sell all but not
less than all of its shares, the Selling Party shall furnish to the other
parties (hereinafter called "Other Parties") a written notice of a proposed
purchaser, the offered purchase price and other major terms and conditions of
such proposed sale.
2. If the Selling Party is SPAR, then FI and Tudor shall jointly have a right to
purchase such shares by giving Selling Party a written notice of their intention
to purchase the same within ninety (90)
8
days from the receipt of Selling Party's notice, upon the same terms and
conditions as described in the Selling Party's notice. In such case, the Selling
Party may sell such shares upon the terms and conditions as described in its
notice after ninety (90) days from the date of FI's receipt of such notice
unless FI and Tudor give notice for their purchase of the shares to Selling
Party. If the Selling Party is not SPAR, then SPAR shall have a right to
purchase such shares by giving Selling Party a written notice of its intention
to purchase the same within ninety (90) days from the receipt of Selling Party's
notice, upon the same terms and conditions as described in the Selling Party's
notice. In such case, the Selling Party may sell such shares upon the terms and
conditions as described in its notice after ninety (90) days from the date of
SPAR's receipt of such notice unless SPAR gives a notice for its purchase of the
shares to Selling Party. In either case, unless agreed by the Other Parties in
writing, any transferee party shall be subject to this Agreement.
Notwithstanding anything to the contrary above, (1) FI may not transfer its
shares unless Tudor transfers his shares at the same time, as part of the same
transaction and on the same terms; and (2) Tudor may not transfer his shares
unless FI transfers its shares at the same time, as part of the same transaction
and on the same terms, except for the case where Tudor transfers his shares to
FI.
3. After three (3) years from the effective date of this Agreement, SPAR may at
any time make a written offer to buy all of the Other Parties' shares in the New
Company. Each Other Party shall then either accept the offer and sell all of its
shares under the terms and conditions offered, or FI alone or pro rata with
Tudor (if Tudor shall so elect) may purchase SPAR's shares at the same terms and
conditions. If any party receiving the initial offer does not respond to the
initial offer within one hundred and twenty (120) days, such party receiving the
offer shall be deemed to have accepted the offer to sell its shares. After three
(3) years from the effective date of this Agreement, FI may at any time make a
written offer to buy all of the SPAR's shares in the New Company. SPAR shall
then either accept the offer and sell all of its shares under the terms and
conditions offered, or purchase FI' shares and Tudor's shares at the same terms
and conditions. If SPAR does not respond to the initial offer within one hundred
and twenty (120) days, SPAR shall be deemed to have accepted the offer to sell
its shares. In any case, the parties shall cooperate to effect the closing of
such purchase and sale of all of the shares of the New Company held by the
Selling Party within 120 days of the decision or deemed decision of the second
party. At such closing, the purchasing party shall pay to the Selling Party the
purchase price in cash, and the Selling Party shall deliver to the purchasing
party all of the Selling Party's shares held in the New Company, free and clear
of any liens.
4. Each party shall vote in favor of any transfer effected pursuant to Article
24(1, 2 and 3) at the shareholders meeting approving such transfer.
9
5.
5.1 Notwithstanding the general arbitration provisions in Article 37, should:
5.1.1 there be any deadlock at any meeting of the Board of Directors
and/or at any General Meeting of
Shareholders of New Company; or
5.1.2 a quorum at any meeting of the Board of Directors and/or at any
General Meeting of Shareholders of New
Company be broken;
then in such event the parties shall attempt to resolve these issues by
mediation as soon as possible and failing such resolution within twenty-one (21)
business days after having been referred to mediation, any director or
shareholder (as the case may be) shall be entitled by written notice to New
Company to claim that all or any of the matters which were under discussion
and/or to be discussed at that meeting, be submitted to and decided by
arbitration in terms of Article 37.
5.2 Notwithstanding that a deadlock may have arisen in terms of clause 5.1, such
deadlock shall not alone constitute a ground for any shareholder to apply to
court for the winding up of New Company.
Article 25. Cooperation in Financing
1. The New Company may borrow up to US$25,000 as its operating funds, which
shall be guaranteed by FI in its discretion. FI shall make its reasonable
efforts to enable such borrowing. The terms of the borrowing and any agreement
between New Company and FI with respect to FI guarantee shall be matters subject
to Article 18 hereof.
2. The New Company may borrow an additional US$50,000 when it needs additional
funds, if such borrowing is approved in advance by the Board of Directors as an
important matter under Article 18 herein.
3. If FI pays any creditors of the New Company due to a guarantee made by FI to
such creditors in favor of the New Company, SPAR and Tudor shall reimburse FI
pro rata with their respective share capital percentage in New Company as at the
date of reimbursement, but only if the New Company's borrowing of such funds and
FI guaranty of the New Company's obligations have been expressly agreed to in
advance by SPAR in writing or in a Board resolution, for which all
SPAR-nominated directors have voted affirmatively.
4. For the first three years of operations subsequent to the effective date of
this Agreement (the "Maximum Loss Period"), if for any year the net loss of the
New Company exceeds US$20,000 (the "Annual Maximum Loss"), FI shall make a cash
payment to the New Company equal to the amount of the net loss in excess of the
Annual Maximum Loss (the "Annual Maximum Loss Payment"), which payment shall be
in the form of a fully subordinated, non-amortizing, interest-free loan with an
initial term of the later of one year and the date following the close of any
fiscal year where the New Company has profits, which term shall be automatically
extended by successive 12-month periods until
10
such loan shall have been repaid from a quota not less than one-third of the New
Company's profits determined as sum of the accounting profits at the end of the
fiscal year and the total amount of the investments made throughout the
respective fiscal year, such payment to occur within 45 days after the issuance
of the annual audit report by the outside auditing firm specified in Article 21.
CHAPTER VII: ROLE OF CONTRACTING PARTIES
---------------------------
Article 26. Supply of Office and Facility
1. Based on a supply agreement ("Supply Agreement") to be concluded between SPAR
Romania S.R.L. and FI, FI shall supply offices and facilities, staff service for
general affairs and finance, and intra company network services, which are
determined, at FI's sole discretion, necessary for the operation of New Company
after the consultation between FI and SPAR, to New Company at no charge for a
period of three (3) years up to a maximum value of US$ 200,000.
2. SPAR for first three (3) years will provide up to three thousand (3,000)
hours of business support annually. This support may be in the form of general
business, consultation or programming support to modify or enhance the
merchandising software. SPAR will maintain ownership of all software. If support
provided by SPAR exceeds three thousand (3,000) hours the additional hours will
be billed by SPAR to SPAR Romania Ltd. at fifty five US$55.00 per hour. However
a lower price will be charged for programming costs if a less expensive way to
hire IT staff is found. SPAR Romania Ltd. will be able to hire its own IT staff
if cost effective for the JV and appropriate.
3. If after three (3) years from the effective date of this Agreement, SPAR
sells its interest to a third party or FI or Tudor, SPAR is committed to supply:
3.1 Its name for an additional year at no cost; and
3.2 Its Licensed Technology (as defined in the License Agreement) to
the New Company for an additional year at the following cost:
3.2.1 First six (6) months: out of pocket costs; and
3.2.2 Next six (6) months: US$3,000/month plus out of pocket
costs.
At the end of such additional year, in the case of both clauses 3.1 and 3.2, the
New Company shall immediately cease using the name "SPAR" and the License
Agreement shall be terminated.
4. FI agrees that its operating expenses may not be allocated to SPAR Romania
Ltd.
5. SPAR and FI shall set up project teams as they may agree to supervise the
operations of the joint venture. All salaries of any such employees shall
be borne by the respective parties.
11
6. All marketing agents and other employees involved only in supervising
marketing agents shall be engaged by and at the cost of New Company.
Article 27. Personnel
FI shall, at its own judgment, second to New Company at least one non-marketing
management level employee appropriate for the start-up of business of New
Company for a period of one (1) year without any consideration.
Article 28. Training
SPAR and FI shall provide the appropriate training to the employees for New
Company's operation at its own site. The said training shall be made upon New
Company's request and any necessary expenses for the training shall be borne by
New Company, except as otherwise provided in License Agreement or the Supply
Agreement.
Article 29. Non-Competition
For five (5) years from the Execution Date of this Agreement, neither SPAR
without the consent of FI, nor FI or Tudor without the consent of SPAR, shall
engage in, whether directly or indirectly, Merchandising Services (as defined in
the License Agreement) in Territory or any other business then competitive with
New company in Territory. However, in the event that SPAR enters into a contract
with a customer that covers more than one country and the scope of such
agreement includes services in Territory, SPAR shall not be prohibited from
entering into or performing such agreement, provided that SPAR shall make
commercially reasonable efforts to enable New Company to participate in and be
fairly compensated for providing services to any such customer.
CHAPTER VIII: AMENDMENT FOR PUBLIC OFFERING
-----------------------------
Article 30. Public Offering
The parties acknowledge that the New Company may attempt to become a listed
company or over-the-counter company on the Bucharest Stock Exchange or any other
stock exchange or public market in Territory (Public Offering). The parties
acknowledge that the number of issued shares, the number of shareholders, the
paid-up capital and profit transaction with each party, the seconded employees
of New Company will be reviewed and instructed for amendment by the relevant
governmental or
12
regulatory authorities in accordance with those bodies' rules or guidelines for
Public Offering. If SPAR and FI agree to undertake a Public Offering pursuant to
Article 12 above, all parties shall discuss and reasonably cooperate with each
other to amend the Constitutive Act and/or the License Agreement in order to
complete the Public Offering of New Company. Any changes to the License
Agreement will be effective upon consummation of the Public Offering (but not
before), and subject to the approval of the Boards of Directors of the New
Company, FI and SPAR.
CHAPTER IX: CONFIDENTIALITY
---------------
Article 31. Confidential Information
FI, Tudor and SPAR shall keep secret and retain in strict confidence any and all
confidential information and use it only for the purpose of this Agreement and
shall not disclose it to a third party without the prior written consent of the
other party unless the receiving party can demonstrate that such information:
(i) has become public other than as a result of disclosure by the receiving
party, (ii) was available to the receiving party prior to the disclosure by the
disclosing party with the right to disclose, or (iii) has been independently
acquired or developed by the receiving party. These confidentiality provisions
shall survive termination of this Agreement.
CHAPTER X: GENERAL PROVISIONS
------------------
Article 32. Effective Date
This Agreement shall become effective at the time of execution hereof.
Article 33. Termination
1. If SPAR transfers its shares in the New Company to FI or Tudor, or FI and
Tudor transfer their respective social parts in the New Company to SPAR, in
accordance with Article 24 hereof, this Agreement shall terminate. If any party
transfers its shares in the New Company to another party, unless expressly
agreed by the non-transferring parties in writing, this Agreement shall be
assigned to and binding upon such third party, provided that the assigning party
shall remain liable for all legal acts with respect to this Agreement or the New
Company occurred before the effective date of such assignment.
13
2. If SPAR is not in breach of this Agreement, it may terminate this Agreement
by written notice to the other parties if any breach by either other party shall
not have been corrected by such other party in breach within ninety (90) days
after written notice is given by SPAR. If neither FI nor Tudor is in breach of
this Agreement, FI may terminate this Agreement by written notice to the other
parties if any breach by SPAR shall not have been corrected by SPAR within
ninety (90) days after written notice is given by FI. If FI or SPAR disputes the
exercise of any rights under this provision, such disputing party may invoke the
arbitration provisions in Article 37.
3. SPAR may terminate this Agreement by giving notice in the event of one or
more of the following with respect to FI or Tudor, and FI may terminate this
Agreement by giving notice in the event of one or more of the following with
respect to SPAR:
(a) Appointment of a trustee or receiver for all or any part of its assets;
(b) Insolvency or bankruptcy;
(c) Assignment for the benefit of any creditor;
(d) Attachment of assets;
(e) Expropriation of business or assets; and
(f) Dissolution or liquidation.
If any party is involved in any of the events enumerated in (a) through (f)
above, it shall immediately notify the other parties of the occurrence of such
event.
4. In case of the termination of this Agreement pursuant to Article 33.2 or
Article 33.3, the party terminating in accordance with this Agreement shall have
an option to purchase the shares of the other parties at the book value to be
decided by an internationally recognized accounting firm that is not the
principal accounting firm of either party, if either party so requests, or to
have the New Company dissolved.
5. Upon termination of this Agreement or SPAR's ceasing to hold at least 51% of
the shares in New Company, the License Agreement shall terminate immediately if
still in effect, unless otherwise agreed by the parties.
Article 34. Force Majeure
No party shall be liable to any other party for failure or delay in the
performance of any of its obligations under this Agreement for the time and to
the extent such failure or delay is caused by riots, civil commotions, wars,
hostilities between nations, governmental laws, orders or regulations,
14
embargoes, actions by the government or any agency thereof, acts of God, storms,
fires, accidents, strikes, sabotages, explosions, or other similar contingencies
beyond the reasonable control of the respective parties.
Article 35. Notices
All notices, reports and other communications given or made in accordance with
or in connection with this Agreement shall be made in writing and may be given
either by (i) personal delivery, (ii) overnight delivery or (iii) registered air
mail, if properly posted, with postage fully prepaid, in an envelope properly
addressed to the respective parties at the address set forth below or to such
changed address as may be given by either party to the other by such written
notice. Any notice, etc by personal delivery or overnight delivery or facsimile
transmission shall be deemed to have been given (7) days after the dispatch. In
any event, if any notice, etc. is received other than the regular business hours
of the recipient, it shall be deemed to have been given as of the following
business day of the recipient.
To: FI 18 Vasile Lascar Street, apt. 8, 1st floor, 020491
Bucharest 2, Romania;
SPAR Spar Group International Inc.,
ATT Robert G. Brown, Chairman
580 White Plains Road, Tarrytown New York, USA
Tudor Calea Dorobantilor nr. 73, Ap. 3, Sector 1, Bucharest
Article 36. Assignment
This Agreement and the rights and obligations hereunder are personal to the
parties hereto, and shall not be assigned by either of the parties to any third.
Article 37. Arbitration
All dispute, controversies, or differences which may arise between SPAR, on the
one hand, and FI or Tudor, on the other hand, out of or in relation to or in
connections with this Agreement, shall be finally settled by arbitration in
Territory in accordance with the rules of the International Arbitration Court of
the Bucharest Chamber of Commerce and Industry if initiated by SPAR, or in New
York City in accordance with the International Arbitration Rules of the American
Arbitration Association if initiated by any other party hereto. The arbitration
shall be conducted by three (3) arbitrators in
15
English and in Romanian. The arbitration shall be final and legally binding upon
both parties.
Article 38. Implementation
The Shareholders hereby agree, for themselves, their successors, heirs and legal
representatives, to vote at Shareholders' meetings, and to cause the Directors
they nominate to vote at Board meetings and to carry out their duties, to
prepare, execute and deliver or cause to be prepared, executed and delivered
such further instruments and documents, to take such other actions and to cause
the Constitutive Act of New Company, New Company work rules and other rules and
Commercial registry and any other document to be amended or adopted as may be
reasonably required to effect the provisions and intent of this Agreement and
the transactions contemplated hereby.
Article 39. Governing Law
This Agreement and all questions arising out of or under this Agreement shall be
governed by and interpreted in accordance with the laws of Territory.
Article 40. Waiver
Any failure of any party to enforce, at any time or for any period of time, any
of the provisions of this Agreement shall not be construed as a waiver of such
provisions or of the right of such party thereafter to enforce each and every
such provision.
Article 41. Entire Agreement
This Agreement constitutes the entire and only agreement among the parties
hereto with respect to the subject matter of this Agreement and supersedes any
other commitments, agreements or understandings, written or verbal, that the
parties hereto may have had. No modification, change and amendment of this
Agreement shall be binding upon the parties hereto except by mutual express
consent in writing of subsequent date signed by authorized officer or
representative of each of the parties hereto or of the party against whom
enforcement is sought.
Article 42. Headings
The headings of articles and paragraphs used in this Agreement are inserted for
convenience of reference only and shall not affect the interpretation of the
respective articles and paragraphs of this Agreement.
16
Article 43. Language
This Agreement has been executed in the English and Romanian language. If there
is any discrepancy or inconsistency between the English and the Romanian
versions, the English version shall prevail.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in four (4) copies by their respective duly authorized officer or representative
as of the day first above written.
FIELD INSIGHTS S.R.L.
Signature: /s/ Laurentiu Nicolae Belu
--------------------------
Name: Laurentiu Nicolae Belu
Title: Managing Director
Spar Group International Inc.
Signature: /s/ Robert G Brown
--------------------------
Name: Robert G Brown
Title: Chairman and CEO
Adinel Tudor
Signature: /s/ Adinel Tudor
--------------------------
Name: Adinel Tudor
SPAR Romania S.R.L.
Signature:
--------------------------
Name:
Title:
Date:
17
Exhibit 21.1
SPAR Group, Inc.
List of Subsidiaries
100% Owned Subsidiaries...........................State/Country of Incorporation
- ----------------------- ------------------------------
PIA Merchandising Co., Inc............................................California
PIA Merchandising Limited....................................Nova Scotia, Canada
Pacific Indoor Display Co., Inc.......................................California
Pivotal Field Services, Inc...............................................Nevada
Pivotal Sales Company.................................................California
Retail Resources, Inc.....................................................Nevada
SPAR Acquisition, Inc.....................................................Nevada
SPAR All Store Marketing Services, Inc....................................Nevada
SPAR Bert Fife, Inc.......................................................Nevada
SPAR/Burgoyne Retail Services, Inc. (f/k/a SPAR Retail
Information, Inc.)........................................................Ohio
SPAR Canada Company..........................................Nova Scotia, Canada
SPAR Canada, Inc..........................................................Nevada
SPAR Group International, Inc.............................................Nevada
SPAR Inc., (f/k/a SPAR/Burgoyne Information Services, Inc.)...............Nevada
SPAR Incentive Marketing, Inc...........................................Delaware
SPAR International LTD............................................Cayman Islands
SPAR Marketing, Inc.......................................................Nevada
SPAR Marketing, Inc. (f/k/a SPAR Acquisition, Inc.).....................Delaware
SPAR Marketing Force, Inc.................................................Nevada
SPAR Megaforce, Inc.......................................................Nevada
SPAR/PIA Retail Services, Inc.............................................Nevada
SPAR Technology Group, Inc. (f/k/a SPARinc.com, Inc.).....................Nevada
SPAR Trademarks, Inc......................................................Nevada
51% Owned International Subsidiaries.....................................Country
- ------------------------------ -------
SGRP Meridian (Pty), Ltd............................................South Africa
SPAR Merchandising Romania, Ltd..........................................Romania
SPAR Solutions India Private Limited.......................................India
SPAR Turkey, Inc..........................................................Turkey
50% Owned International Joint Ventures...................................Country
- -------------------------------- -------
SGRP China Ltd.............................................................China
SPAR FM Japan, Inc.........................................................Japan
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement Form
S-8 No. 333-07377 pertaining to the 1995 Stock Option Plans, in Registration
Statement Form S-8 No. 333-53400 pertaining to the Special Purpose Stock Option
Plan, in Registration Statement Form S-8 No. 333-73000 pertaining to the 2001
Employee Stock Purchase Plan, in Registration Statement Form S-8 No. 333-73002
pertaining to the 2000 Stock Option Plan and in Registration Statement Form S-8
No. 333-72998 pertaining to the 2001 Consultant Stock Purchase Plan of SPAR
Group, Inc. of our report dated February 28, 2005, with respect to the December
31, 2004 consolidated financial statements of SPAR Group, Inc. included in the
Annual Report (Form 10-K), for the year ended December 31, 2004.
/s/ Rehmann Robson
Troy, Michigan
April 5, 2005
Ex-2
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement Form
S-8 No. 333-07377 pertaining to the 1995 Stock Option Plans, in Registration
Statement Form S-8 No. 333-53400 pertaining to the Special Purpose Stock Option
Plan, in Registration Statement Form S-8 No. 333-73000 pertaining to the 2001
Employee Stock Purchase Plan, in Registration Statement Form S-8 No. 333-73002
pertaining to the 2000 Stock Option Plan and in Registration Statement Form S-8
No. 333-72998 pertaining to the 2001 Consultant Stock Purchase Plan of SPAR
Group, Inc. of our report dated February 13, 2004, with respect to the December
31, 2003 and 2002 consolidated financial statements and schedule of SPAR Group,
Inc. included in the Annual Report (Form 10-K), for the year ended December 31,
2004.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 6, 2005
Ex-2
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert G. Brown, certify that:
1. I have reviewed this annual report on Form 10-K of SPAR Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 12, 2005 /s/ Robert G. Brown
----------------------------
Robert G. Brown
Chairman, President and
Chief Executive Officer
Ex-3
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Charles Cimitile, certify that:
1. I have reviewed this annual report on Form 10-K of SPAR Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 12, 2005 /s/ Charles Cimitile
---------------------
Charles Cimitile
Chief Financial Officer, Treasurer and Secretary
Ex-3
EXHIBIT 32.1
Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K for the year ended December
31, 2004 (the "Report"), by SPAR Group, Inc. (the "Registrant"), the undersigned
hereby certifies that, to his knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
/s/ Robert G. Brown
------------------------------------
Robert G. Brown
Chairman, President and
Chief Executive Officer
April 12, 2005
A signed original of this written statement required by Section 906 has been
provided to SPAR Group, Inc. and will be retained by SPAR Group, Inc., and
furnished to the Securities and Exchange Commission or its staff upon request.
Ex-3
EXHIBIT 32.2
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K for the year ended December
31, 2004 (the "Report"), by SPAR Group, Inc. (the "Registrant"), the undersigned
hereby certifies that, to his knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
/s/ Charles Cimitile
--------------------
Charles Cimitile
Chief Financial Officer, Treasurer and Secretary
April 12, 2005
A signed original of this written statement required by Section 906 has been
provided to SPAR Group, Inc. and will be retained by SPAR Group, Inc., and
furnished to the Securities and Exchange Commission or its staff upon request.
Ex-4