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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT ON FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2001
Commission file number 0-27824
SPAR GROUP, INC.
Delaware 33-0684451
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
580 WHITE PLAINS ROAD, TARRYTOWN, NEW YORK 10591
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
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 .
The aggregate market value of the Common Stock of the Registrant held
by non-affiliates of the Registrant on March 27, 2002, based on the closing
price of the Common Stock as reported by the Nasdaq SmallCap Market on such
date, was approximately $43,675,787.
The number of shares of the Registrant's Common Stock outstanding as of
March 27, 2002 was 18,585,441 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PART I
PAGE
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 17
Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 25
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 25
Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation and Other Information of SPAR Group, Inc. 28
Item 12. Security Ownership of Certain Beneficial Owners and Management 32
Item 13. Certain Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 34
Signatures 36
-i-
PART I
THIS ANNUAL REPORT ON FORM 10-K INCLUDES "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
ABOUT THE SPAR GROUP'S PLANS AND STRATEGIES UNDER THE HEADINGS "BUSINESS" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." ALTHOUGH THE SPAR GROUP 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. ALL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE SPAR GROUP OR
PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED BY THE CAUTIONARY
STATEMENTS IN THE ANNUAL REPORT ON FORM 10-K.
ITEM 1. BUSINESS.
GENERAL
The SPAR Group, Inc., a Delaware corporation formerly known as PIA
Merchandising Services, Inc. ("SPAR Group" or the "Company") is a supplier of
in-store merchandising and marketing services throughout the United States and
Canada. The Company also provides database marketing, teleservices, marketing
research, and Internet-based software. As part of a strategic realignment in the
fourth quarter of 2001, the Company made the decision to divest its Incentive
Marketing Division, SPAR Performance Group, Inc. ("SPGI"). The Company is
exploring various alternatives for the sale of SPGI, including the sale of the
business to employees through the establishment of an employee stock ownership
plan. The Company anticipates that the divestiture of SPGI will occur in the
first half of 2002. As a result of this decision, the Company's continuing
operations are now divided into three divisions: the Merchandising Services
Division, the Technology Division and the International Division. The
Merchandising Services Division provides merchandising services, database
marketing, teleservices and marketing research to manufacturers and retailers
primarily in the mass merchandiser, video, discount drug store and grocery
industries. In March 2000, the Company announced the formation of a Technology
Division for the purpose of marketing its proprietary Internet-based computer
software. In November 2000, the Company established its International Division
to expand its merchandising services business off shore, with an initial focus
on Japan and the Pacific Rim region.
CONTINUING OPERATIONS
Merchandising Services Division
The Company's Merchandising Services Division consists of (1) SPAR
Marketing, Inc., a Delaware corporation ("SMI") (an intermediate holding
company), SPAR Marketing Force, Inc. ("SMF"), SPAR Marketing, Inc., a Nevada
corporation ("SMNEV"), SPAR/Burgoyne Retail Services, Inc. ("SBRS"), and SPAR,
Inc. ("SINC") (collectively, the "SPAR Marketing Companies"), and (2) PIA
Merchandising Co. Inc., Pacific Indoor Display d/b/a Retail Resources, Pivotal
Sales Company and PIA Merchandising Ltd. (collectively, "PIA" or the "PIA
Companies"). The SPAR Marketing Companies, the original predecessor of which was
founded in 1967, provide nationwide retail merchandising and marketing services
to home video, DVD, general merchandise, health and beauty care products,
consumer goods and food products companies. The PIA Companies, through a
predecessor of the Company first organized in 1943, also are suppliers of
in-store merchandising services throughout the United States and were "acquired"
by the SPAR Marketing Companies for accounting purposes pursuant to the Merger
on July 8, 1999 (See Merger and Restructuring, below). The PIA Companies provide
these services primarily on behalf of consumer product manufacturers and
retailers at mass merchandisers, drug and retail grocery stores. The Company
currently operates in all 50 states and Canada and provides a broad range of
in-store merchandising and other marketing services to many of the nation's
leading companies.
-1-
Merchandising services generally consist of special projects or
regularly scheduled routed services provided at stores for a specific retailer
or multiple manufacturers primarily under single or multi-year contracts.
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 shelf
tags are in place, checking for the overall salability of client products and
selling new and promotional items. Specific in-store services can be initiated
by retailers and manufacturers, such as new product launches, special seasonal
or promotional merchandising, focused product support and product recalls. The
Company also provides database marketing, teleservices and research services.
Technology Division
In March 2000, the Company established its Technology Division, SPAR
Technology Group, Inc., to separately market its application software products
and services. The Company has developed and is utilizing several Internet-based
software products. In addition, the Company has developed and sold
internet-based software in its other divisions. The Technology Division was
established to market these applications to businesses with multiple locations
and large workforces or numerous distributors desiring to improve day-to-day
efficiency and overall productivity.
International Division
The Company believes there is a significant market for its
merchandising services throughout the world. The domestic merchandising services
business has been developed utilizing Internet-based technology that can be
modified to accommodate foreign markets. In November 2000, the International
Division, SPAR Group International, Inc., was established to cultivate foreign
markets, modify the necessary systems and implement the Company's merchandising
services business model worldwide with an initial focus on Japan and the Pacific
Rim region.
In 2000, SPAR Group International, Inc. and a leading Japanese based
distributor established a jointly owned company to provide the latest in-store
merchandising services to the Japanese market. As part of the joint venture
agreement, the Company translated into Japanese and made available to the joint
venture several of its proprietary internet-based software applications. The
Joint Venture is currently utilizing these applications in their daily
operations.
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, SPAR
Performance Group, Inc. ("SPGI"). The Company is exploring various alternatives
for the sale of SPGI, including the sale of the business to SPGI's employees
through the establishment of an employee stock ownership plan. The Company
anticipates that the divestiture of SPGI will occur in the first half of 2002.
The Company's Incentive Marketing Division was created in January 1999
through the Company's purchase of the business and substantially all of the
assets of BIMA Group, Inc., a Texas corporation ("BIMA" or "MCI") originally
founded in 1987 and formerly known as MCI Performance Group, Inc. The purchase
was made by the Company's indirect subsidiary SPGI, formerly known as SPAR MCI
Performance Group, Inc. SPGI provides a wide variety of consulting, creative,
program administration, travel and merchandise fulfillment, and training
services to companies seeking to retain and motivate employees, salespeople,
dealers, distributors, retailers, and consumers toward certain actions or
objectives. SPGI's strategy enables companies
-2-
to outsource the entire design, implementation and fulfillment of incentive
programs in a one-stop, "umbrella" shopping approach. SPGI typically consults
with a client to design the most effective plan to achieve the client's goals.
SPGI then provides services necessary to implement the program, generates
detailed efficiency progress reports, and reports on the return on investment
upon completion of the program.
INDUSTRY OVERVIEW
CONTINUING OPERATIONS
Merchandising Services Division
According to industry estimates over two billion dollars are spent
annually on domestic merchandising services. The merchandising industry includes
manufacturers, retailers, food brokers, and professional service merchandising
companies. The Company believes the continuing trend is 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 products, and other
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 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 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
and 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.
Technology Division
The Company believes there is a current trend towards consolidation in
business. This trend is creating larger, more complex companies that have
multiple locations and large workforces covering wide geographical areas. The
Company also believes there is a growing trend of companies utilizing the
Internet and Internet-based software. The Company has historically developed and
utilized Internet-based software to manage its national businesses, including
its national field force, with greater efficiency and communication speed than
previously possible with paper based systems. In addition, the Company has
developed and sold internet-based software in its other divisions. The Company
believes its software transcends the merchandising services industry and can be
utilized in many other industries that have businesses with multiple locations
and large workforces or numerous distributors.
-3-
International 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 will only be exacerbated by the logistics of operating in foreign
markets. The Company believes this environment will create an opportunity to
exploit its Internet-based technology and business model that are successful in
the United States. In November 2000, the Company established its International
Division, SPAR Group International, Inc., 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 has formed
an International Division task force consisting of members of the Company's
information technology, operations and finance groups to evaluate and develop
foreign markets. The initial focus of the International Division has been on the
Pacific Rim region. In Japan, SPAR Group International, Inc. and a leading
Japanese based distributor established a jointly owned company to provide the
latest in-store merchandising services to the Japanese market. As part of the
joint venture agreement, the Company translated into Japanese and made available
to the joint venture several of its proprietary internet-based software
applications. Upon successful implementation of the Company's business model in
these areas, the Company intends to expand to other markets.
DISCONTINUED OPERATIONS
Incentive Marketing Division
Industry surveys indicate that over $28 billion is spent annually on
premium incentive and promotion fulfillment. The Company believes that U.S.
companies are increasingly using third party incentive providers as a more
efficient and cost effective means to increase the productivity of their
employees. Premium incentives are performance-determined rewards used to
motivate employees, salespeople, dealers, and consumers, and are also used to
differentiate a product, service or store. Third party premium incentive
providers can offer a customized, unique, turnkey solution specifically tailored
to a company's needs. Additionally, incentive premium providers are able to
capitalize on supplier relationships and to realize volume discounts,
particularly on travel and merchandise.
MERGER AND RESTRUCTURING
On July 8, 1999, SG Acquisition, Inc., a Nevada corporation ("PIA
Acquisition"), a wholly owned subsidiary of the Company, then named PIA
Merchandising Services, Inc. ("PIA Delaware"), merged into and with SPAR
Acquisition, Inc., a Nevada corporation ("SAI") (the "Merger"), pursuant to the
Agreement and Plan of Merger dated as of February 28, 1999, as amended (the
"Merger Agreement"), by and among the Company and certain of the PIA Companies
and SPAR Marketing Companies (among others). In connection with the Merger, PIA
Delaware changed its name to SPAR Group, Inc. (which will be referred to
post-Merger individually as "SGRP" or the "Company"). Although the SPAR
Marketing Companies and SPGI became subsidiaries of PIA Delaware (now SGRP) as a
result of this "reverse" Merger, the transaction has been accounted for as a
purchase by SAI of the PIA Companies, with the books and records of SGRP being
adjusted to reflect the historical operating results of the SPAR Marketing
Companies and SPGI (together with certain intermediate holding companies, the
"SPAR Companies").
-4-
BUSINESS STRATEGY
As the marketing services industry continues to grow, consolidate and
expand internationally large retailers and manufacturers are increasingly
outsourcing their marketing needs to third-party providers. The Company believes
that offering marketing services in multi-use sectors on a national and global
basis will provide it with a competitive advantage. Moreover, the Company
believes that developing a sophisticated technology infrastructure, including
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 integrated service provider by
pursuing its operating strategy, as described below.
Capitalize on Cross-Selling Opportunities. The Company intends to
leverage its current client relationships by cross-selling the range of services
offered by the Company. The Company believes that its retail merchandising
services can be packaged with its database marketing services to provide a high
level of customer service, and that additional cross-selling opportunities will
increase if, as management intends, the Company acquires businesses in other
sectors of the marketing services industry. The Company also intends to offer
its proprietary Internet-based software to existing Merchandising Services
clients.
Achieve Operating Efficiencies. The Company intends to achieve greater
operating efficiencies within its Divisions. The Company believes that, its
existing field force and technology infrastructure can support additional
customers and revenue in the Merchandising Services Division. At the corporate
level, the Company will continue to combine certain administrative functions,
such as accounting and finance, insurance, strategic marketing and legal
support.
Leverage and Implement Technology. The Company intends 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.
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 and respond to customers' needs
and implement programs more rapidly. The Company believes that the usefulness of
certain software applications it has developed transcends the merchandising and
marketing services industry and can be marketed to other industries. The Company
has successfully modified and is currently utilizing certain of its software
applications in connection with its Japanese joint venture. The Company also
believes that it can continue to modify and adapt its technology to support
merchandising and marketing services in other foreign markets. The Company
believes that its proprietary Internet-based software technology gives them a
competitive advantage in the marketplace.
DESCRIPTION OF SERVICES
The Company currently provides a broad array of merchandising and
marketing services on a national, regional and local basis to leading
entertainment, consumer goods, food, health and beauty care products and retail
companies through its Merchandising Services Division.
The Company currently operates in all 50 states and Canada serving some
of the nation's leading companies. The Company believes its full-line capability
of developing plans at one centralized division headquarter location, executing
chain wide, fully integrated national solutions, and implementing rapid,
coordinated responses to its clients' needs on a real time basis differentiate
the Company from its competitors. The Company also believes its national
presence, centralized decision-making ability, local follow-through, ability to
recruit, train and supervise merchandisers, ability to perform large-scale
initiatives on short notice,
-5-
and strong retailer relationships provide the Company with a competitive
advantage over local, regional or other competitors.
Merchandising Services Division
The Company provides a broad array of merchandising services on a
national, regional, and local basis to manufacturers and retailers. The Company
provides its merchandising and sales 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 sales
services: syndicated services, dedicated services and project services.
Syndicated Services
Syndicated services consist of regularly scheduled, routed
merchandising services provided at the 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, replenishment of product
o Ensuring that the client's products authorized for distribution
are in stock and on the shelf
o Adding in new products that are approved for distribution but not
present on the shelf
o Designing store schematics
o Setting category shelves in accordance with approved store
schematics
o Ensuring that shelf tags are in place
o Checking for overall salability of the client's products
o Placing new product and promotional items
Dedicated Services
Dedicated services consist of merchandising services, generally as
described above, that are performed for a specific retailer or manufacturer by a
dedicated organization, including a management team, working exclusively for
that retailer or manufacturer. These services are primarily based on agreed-upon
hourly rates and fixed management fees under multi-year contracts.
Project Services
Project services consist primarily of specific in-store services
initiated by retailers and manufacturers, such as new product launches, special
seasonal or promotional merchandising, focused product support and product
recalls. These services are used typically for large-scale implementations
requiring over 30 days. The Company also performs other project services, such
as new store sets and existing store resets, re-merchandising, remodels and
category implementations, under shared service contracts or stand-alone project
contracts.
Other Marketing Services
Other marketing services performed by the Company include:
Test Market Research - Testing promotion alternatives, new products
and advertising campaigns, as well as packaging, pricing, and
location changes, at the store level.
-6-
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 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
manufacturer clients.
It is critical that the above services be provided timely, accurately,
and efficiently. Client reporting is also critical. The Company has developed
Internet-based information tracking and data accumulation system applications
that improve the productivity of its merchandising specialists and provide
timely data to its customers. The Company's merchandising specialists use
Interactive Voice Response (IVR) or utilize hand-held computers, personal
computers and laptop computers to report through the Internet the status of each
store they service upon completion. Merchandising specialists may report on
store conditions (e.g. out of stocks, inventory, display placement) or process
new orders for scanned products. This information is analyzed and displayed on
graphical execution maps, which can be accessed by both the Company and its
customers via the Internet. These execution maps visually depict the status of
every merchandising project in real time.
The Company has also developed an automated labor tracking system.
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.
Technology Division
The Company believes there is a current trend towards consolidation in
business. This trend is creating larger, more complex companies that have
multiple locations and large workforces covering wide geographical areas. The
Company also believes there is a growing trend of companies utilizing the
Internet and Internet-based software. The Company has historically developed and
utilized Internet-based software to manage its national businesses, including
its national field force, with greater efficiency and communication speed than
previously possible with paper based systems (see preceding paragraph). In
addition, the Company has developed and sold internet-based software in its
other divisions. The Company believes its software transcends the merchandising
services industry and can be utilized in many other industries that have
businesses with multiple locations and large workforces or numerous
distributors.
International 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 believes that the difficulties encountered by these
programs will only be exacerbated by the logistics of operating in foreign
markets. The Company believes this environment will create an opportunity to
exploit its Internet-based technology and business model that are successful in
the United States. The Company has
-7-
formed a task force consisting of information technology, operations and finance
to evaluate and develop foreign markets. The initial focus of the International
Division, SPAR Group International, Inc., has been on the Pacific Rim region.
SPAR Group International, Inc. and a leading Japanese based distributor
established a jointly owned company to provide the latest in-store merchandising
services to the Japanese market. Upon successful implementation of the Company's
business model in these areas, the Company intends to expand to other markets.
DISCONTINUED OPERATIONS
Incentive Marketing Division
SPGI provides a wide variety of consulting, creative, program
administration, and travel and merchandise fulfillment services to companies
seeking to retain and motivate employees, salespeople, dealers, distributors,
retailers, and consumers toward certain actions or objectives. SPGI's strategy
is to allow companies to outsource the entire design, implementation and
fulfillment of incentive programs in a one-stop, "umbrella" shopping approach.
SPGI consults with a client to design the most effective plan to achieve the
client's goals. SPGI then provides the services necessary to implement the
program, generates detailed efficiency progress reports and calculates the
return on investment upon completion of the program.
The SPGI process typically begins when a client desires assistance in
developing a performance improvement program. SPGI's senior consultants work
with the client to develop programs that improve productivity by delivering
positive reinforcement in ways that are meaningful to employees and supportive
of the client's business strategy. A wide range of reward options is available,
including cash, travel, and merchandise. Most formal compensation programs
deliver cash to plan participants, while premium incentives tend to make greater
use of non-financial rewards. SPGI has experience in all forms of incentives and
therefore can provide its clients with the most appropriate program design. SPGI
is capable of assisting its clients in the writing, designing and printing of
the program elements. Teams of creative directors, copywriters, graphic
designers and print specialists develop campaigns for incentive programs,
meetings, trade shows and consumer promotions.
In addition, SPGI provides its clients with travel or merchandise
fulfillment alternatives as well as a series of innovative product specific
alternatives. While the majority of SPGI's product fulfillment is in the travel
area, SPGI provides a wide variety of catalog merchandise awards. Through an
informal arrangement with some of the country's largest mass merchandise
retailers, SPGI can provide its clients with programs that offer the flexibility
of in-home reward ordering. SPGI also provides its clients with custom
merchandise, special catalogs, retail certificates and a Local Purchase Option
("LPO"). The LPO allows winning participants to select and redeem merchandise
from a series of participating merchants.
SALES AND MARKETING
CONTINUING OPERATIONS
Merchandising Services Division
The Company's sales efforts within its Merchandising Services Division
are structured to develop new business in national and local markets. The
Company's corporate business development team directs its efforts toward the
senior management of prospective clients. Sales efforts are principally guided
through the Company's sales workforce, located nationwide, who primarily work
from 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.
-8-
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 discount and drug chains.
The Company's business development process includes a due diligence
period to determine the objectives of the prospective client, the work to be
performed to satisfy those objectives and the market value of the 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 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 the prospective client. After the elements of
service and corresponding rates are agreed upon, a contract is prepared and
executed.
Technology Division
The Company's sales effort within its Technology Division is structured
to develop new business in national and local markets. The Technology Division's
corporate business development team directs its efforts toward the senior
management of prospective clients. Current sales efforts are principally guided
through the Company's corporate headquarters in Tarrytown, New York. The Company
intends to leverage existing clients as well as generate new clients through a
focused sales and marketing approach.
International Division
The Company's marketing efforts within its International Division are
designed to develop new business internationally. The Division's corporate
business development team, located in the Company's corporate headquarters,
targets specific areas and develops strategic relationships to cultivate
business.
DISCONTINUED OPERATIONS
Incentive Marketing Division
The Company's Incentive Division sales effort is organized on a
regional basis to serve national clients. Today SPGI has three regional sales
operations, each with a senior sales person working from their home office. All
selling is done on a local market basis, while all program design and execution
is completed at the Dallas headquarters.
As in the Merchandising Services Division, the Incentive Division's
business development process encompasses a due diligence period to determine the
objectives of the prospective client, the work to be performed to satisfy those
objectives and the market value of the 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 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 the
prospective client. Following agreement regarding the elements of service and
corresponding rates, a contract is prepared and executed.
-9-
CUSTOMERS
Merchandising Services Division
In its Merchandising Services Division, the Company currently
represents numerous manufacturers and retail clients in a wide range of retail
outlets 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 automotive and consumer packaged goods industries.
One customer accounted for 25% and 20% of the Company's net revenues
for the years ended December 31, 2001 and 2000, respectively. This customer also
accounted for approximately 23% of accounts receivable at both December 31, 2001
and 2000.
Approximately 31% and 18% of net revenues for the years ended December
31, 2001 and 2000, respectively, resulted from merchandising services performed
for others at the stores of one retailer that recently filed for protection
under the U.S. Bankruptcy Code. While the Company's customers and the resultant
contractual relationships are with the manufacturers and not this retailer, a
cessation of this retailer's business would negatively impact the Company.
Technology Division
The Company has historically developed and utilized Internet-based
software to manage its national businesses, including its national field force,
with greater efficiency and communication speed than previously possible with
paper based systems. In addition, the Company has developed and sold
internet-based software in its other divisions. The Company believes its
software transcends the merchandising services industry and can be utilized in
many other industries that have businesses with multiple locations and large
workforces or numerous distributors.
International Division
The Company believes that the potential international customers for
this division have similar profiles to its Merchandising Services Division
customers. The initial focus of the International Division has been on Japan and
the Pacific Rim region. Upon successful implementation of the Company's business
model in these areas, the Company intends to expand to other markets.
DISCONTINUED OPERATIONS
Incentive Marketing Division
In the Company's Incentive Marketing Division, SPGI currently provides
services to various clients. These clients are principally large corporate
clients that encompass a broad range of industries including the food, drug,
communications, and automotive manufacturing industry.
-10-
COMPETITION
The marketing services industry is highly competitive.
CONTINUING OPERATIONS
Merchandising Services Division
Competition in the Company's Merchandising Services Division arises
from a number of large enterprises, many of which are national 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 merchandise and chain drug channels of trade, as well as a
leading provider of in-store services to the video industry. The Company also
believes it has the ability to execute major national in-store initiatives and
develop and administer national retailer programs. Finally, the Company believes
that, through the use of its proprietary Internet software, other technological
efficiencies and various cost controls, the Company will remain competitive in
its pricing and services.
Technology Division
Competition in the Company's Technology Division arises from a number
of large business application software developers, many of which are national
and international in scope. The Company also competes with a large number of
relatively small enterprises with specific industry, system or geographic
coverage, as well as with the internal information technology of its prospective
clients. The Company has historically developed and utilized Internet-based
software to manage its national businesses, including its national field force,
with greater efficiency and communication speed than previously possible with
paper based systems. In addition, the Company has developed and sold
internet-based software in its other divisions. The Company believes this
software transcends the merchandising services industry and can be utilized in
many other industries that have businesses with multiple locations and large
workforces or numerous distributors. The Company believes it can be competitive
in its pricing and services.
International Division
Competition in the Company's International Division arises from a
number of large enterprises, many of which are national and 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 its Internet-based technology and current business model are
competitive advantages that will allow it to compete in this area.
DISCONTINUED OPERATIONS
Incentive Marketing Division
The incentive marketing industry is populated by large national
players, each of which has significantly greater financial and marketing
resources than SPGI, and hundreds of small regional and local companies.
-11-
SPGI believes that the principle competitive factors in the industry are client
service and innovation.
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
As of December 31, 2001, the Company's Merchandising Services
Division's labor force consisted of approximately 8,240 people, approximately
240 full-time employees, approximately 3,700 part-time employees and 4,300
independent contractors (furnished principally through related parties, see Item
13 - Certain Relationships and Related Affiliate Transactions, below), of which
approximately 180 full-time employees were engaged in operations and 17 were
engaged in sales. Approximately 7 of the Company's employees are covered by
contracts with labor unions. The Company considers its relations with its
employees and its employees' unions to be good. The Company's Merchandising
Services Division also utilized the services of its affiliates, SPAR Marketing
Services, Inc. ("SMS") and SPAR Management Services, Inc. ("SMSI"), to schedule
and supervise its field force, including its own part-time employees as well as
the independent contractors furnished by SMS (see Item 13 - Certain
Relationships and Related Affiliate Transactions, below).
The Company's Technology Division has 3 employees engaged in sales. The
Company currently utilizes its existing Merchandising Division's employees, as
well as, the services of certain employees of its affiliates, SMS, SMSI and SPAR
Infotech, Inc. ("SIT"), to staff the Technology Division and the International
Division. However, dedicated employees will be added to those divisions 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 Affiliate Transactions, below).
As of December 31, 2001, the Company's Incentive Marketing Division's
labor force consisted of approximately 68 full-time employees, of which 51 were
engaged in operations and 9 were engaged in sales.
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 2004.
The Company leases certain office and storage facilities for its
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.
-12-
The following is a list of the locations where the Company maintains
leased facilities for its division offices and subsidiaries:
Location Office Use
- --------------------------------------------------------------------------------
Tarrytown, NY Corporate Headquarters and Administration
Auburn Hills, MI Regional Office, Warehouse and Teleservices Center
Eden Prairie, MN Regional Office
Mahwah, NJ Regional Office
Cincinnati, OH Regional Office
Tampa, FL Regional Office
Carrollton, TX SPGI Headquarters and Warehouse
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.
On June 14, 2000, Argonaut Insurance Co. filed a complaint alleging
damages of approximately $883,000 plus interest against the Company in Orange
County Superior Court, Santa Ana, California, Case No. 00CC07125 with respect to
alleged breach of contract. On February 14, 2002 this case was settled for
$700,000.
On October 24, 2001, Safeway Inc. filed a complaint alleging damages of
approximately $3.6 million plus interest and costs and alleged punitive damages
in an unspecified amount against the Company in Alameda County Superior Court,
California, Case No. 2001028498 with respect to (among other things) alleged
breach of contract. This case is being vigorously contested by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-13-
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
National Market. Prior to July 9, 1999, the Company's stock was traded on the
Nasdaq National Market under the symbol "PIAM".
1999
----------------------------
High Low
First Quarter $5.630 $2.750
Second Quarter 5.000 1.880
Third Quarter -- --
Fourth Quarter -- --
Subsequent to July 9, 1999, the Company's stock was traded on the Nasdaq
National market under the symbol "SGRP" until November 15, 1999, when it moved
to the Nasdaq Small Cap Market.
1999 2000 2001
-------------------------- -------------------------- --------------------------
High Low High Low High Low
First Quarter -- -- $ 5.5000 $ 2.6250 $ 1.6094 $ .5625
Second Quarter -- -- 3.3750 1.2500 1.3000 .7000
Third Quarter $ 5.8100 $ 3.0000 2.0625 1.2188 2.2700 .8700
Fourth Quarter 5.1300 2.5000 1.8750 .2188 2.8000 .9200
As of December 31, 2001, there were approximately 722 beneficial
shareholders of the Company's Common Stock.
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.
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. Included below are the statements of operations
with respect to the years ending December 31, 2001, December 31, 2000, and
December 31, 1999, and selected balance sheet data as of December 31, 2001,
December 31, 2000, and December 31, 1999.
-14-
SPAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(unaudited)
(In thousands, except per share data)
====================================================================================================================================
NINE
MONTHS YEAR
YEAR ENDED ENDED ENDED
DEC 31, DEC 31, DEC 31, DEC 31, MAR 31,
2001 2000 1999 1998 1998
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 70,891 $ 81,459 $ 79,613 $ 32,601 $ 36,804
Cost of revenues 40,883 50,278 50,499 16,217 19,417
-------- -------- -------- -------- --------
Gross profit 30,008 31,181 29,114 16,384 17,387
Selling, general and administrative expenses 19,380 24,761 23,213 9,978 12,087
Depreciation and amortization 2,682 2,383 1,204 142 161
-------- -------- -------- -------- --------
Operating income 7,946 4,037 4,697 6,264 5,139
Other expense (income) 107 (790) (90) (149) 36
Interest expense 561 1,326 976 304 354
-------- -------- -------- -------- --------
Income from continuing operations before provision for
income taxes 7,278 3,501 3,811 6,109 4,749
Income tax provision 3,123 780 3,743 -- --
-------- -------- -------- -------- --------
Income from continuing operations 4,155 2,721 68 6,109 4,749
Discontinued operations:
Loss from discontinued operations, net of tax benefits
of $935, $858 and $595, respectively (1,597) (1,399) (563) -- --
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 $ (1,714) $ 1,322 $ (495) $ 6,109 $ 4,749
======== ======== ======== ======== ========
Unaudited pro forma data (1):
- -----------------------------
Income from continuing operations before provision for
income taxes $ 3,811 $ 6,109 $ 4,749
Pro forma income tax provision 1,840 2,253 1,751
-------- -------- --------
Pro forma income from continuing operations 1,971 3,856 2,998
Pro forma loss from discontinued operations net of pro
forma tax benefit of $429 (729) -- --
-------- -------- --------
Pro forma net income $ 1,242 $ 3,856 $ 2,998
======== ======== ========
Basic/diluted net income (loss) per common share:
- -------------------------------------------------
Actual/Pro forma income from continuing operations $ 0.23 $ 0.15 $ 0.13 $ 0.30 $ 0.24
-------- -------- -------- -------- --------
Discontinued operations:
Actual/Pro forma loss from discontinued operations (0.09) (0.08) (0.05) -- --
Estimated loss on disposal of discontinued operations (0.23) -- -- -- --
-------- -------- -------- -------- --------
Loss from discontinued operations (0.32) (0.08) (0.05) -- --
-------- -------- -------- -------- --------
Detail/Pro-forma net (loss) income $ (0.09) $ 0.07 $ 0.08 $ 0.30 $ 0.24
======== ======== ======== ======== ========
Actual/Pro forma weighted average shares outstanding
- basic 18,389 18,185 15,361 12,659 12,659
Actual/Pro forma weighted average shares outstanding
- diluted 18,467 18,303 15,367 12,659 12,659
-15-
YEARS ENDED
------------------------------------------------------------------
DEC 31, DEC 31, DEC 31, DEC 31, MAR 31,
2001 2000 1999 1998 1998
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
- -------------------
Working capital $ 8,476 $ (2,273) $ (639) $ (2,214) $ 3,412
Total assets 41,155 48,004 54,110 14,865 10,896
Current portion of long-term debt 57 1,143 1,147 685 675
Long-term debt net of current portion 13,287 10,093 16,009 311 828
Total stockholders' equity 10,934 12,240 10,886 (1,405) 3,142
====================================================================================================================================
(1) The unaudited pro forma income tax information is presented in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," as if the Company had been subject to federal and state
income taxes for all periods presented.
-16-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company provides merchandising services to manufacturers and
retailers principally in mass merchandiser, drug, grocery, and other retail
trade classes through its Merchandising Services Division. In March 2000, the
Company established its Technology Division to separately market its software
applications, products and services. Although such products and services were in
part available through the Company's other divisions prior to the establishment
of the Technology Division, the historical revenues and expenses related to such
software products and services generally were not maintained separately. In
November 2000, the Company established its International Division. Through a
joint venture with a leading Japan wholesaler, the Company provides in-store
merchandising services to the Japanese market. The Company accounts for its
investment in the joint venture utilizing the equity method. For 2001, the
Company recorded the joint venture results in Other Expense.
As required, upon an acquisition, the acquired company's results of
operations are not included in the acquirer's results of operations prior to the
date of acquisition. The merger between the SPAR Companies and the PIA Companies
completed on July 8, 1999 (the "Merger"), was deemed to be an acquisition of the
PIA Companies (including SGRP, then known as PIA) by the SPAR Companies (see
Notes 1 and 3 to the Financial Statements). Therefore, the following discussions
include only the results of SGRP and the other PIA Companies subsequent to July
8, 1999.
In December 2001, the Company concluded that the Incentive Marketing
Division (SPGI) business was no longer consistent with the Company's future
growth strategies and decided to divest SPGI. As a result of this decision, the
Company reviewed the goodwill associated with SPGI and recorded an estimated
loss on disposal of discontinued operations of approximately $4.3 million, net
of taxes. In addition, a $1.0 million reserve was recorded in 2001 for the
anticipated cost to divest SPGI and any anticipated losses through the
divestiture date.
As required, SPGI's results have been reclassified as discontinued
operations for all periods presented. The results of operations of the
discontinued business segment is shown separately below net income from
continuing operations. Accordingly, the 2001 consolidated statements of
operations of the Company have been prepared, and its 2000 and 1999 consolidated
statement of operations have been restated, to report the results of
discontinued operations of SPGI separately from the continuing operations of the
Company, and the following discussions reflect such restatement.
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. Two of the more
significant areas of estimation are unbilled receivables and the accounts
receivable allowance for bad debt. Historically, the Company's estimates on such
items have not differed materially from the actual results.
-17-
RESULTS OF OPERATIONS
The following table sets forth selected financial data and data as a
percentage of net revenues for the periods indicated.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
------------------------- ------------------------------ --------------------------
(amounts in millions)
Amount % Amount % Amount %
----------- ------------ ------------- ---------- ---------- ---------
Net revenues $ 70.9 100.0% $ 81.5 100.0% $ 79.6 100.0%
Cost of revenues 40.9 57.7 50.3 61.7 50.5 63.4
Selling, general & administrative expenses 19.4 27.4 24.8 30.4 23.2 29.2
Depreciation & amortization 2.7 3.8 2.4 2.9 1.2 1.5
Other expenses 0.6 0.8 0.5 0.7 0.9 1.1
Income from continuing operations before
income tax provision 7.3 10.3 3.5 4.3 3.8 4.8
Income tax provision 3.1 4.4 0.8 1.0 3.7 4.7
----------- ------------ ------------- ---------- ---------- ---------
Income from continuing operations 4.2 5.9 2.7 3.3 0.1 0.1
Discontinued operations:
Loss from discontinued operations of,
net of tax benefits (1.6) (1.4) (0.6)
Estimated loss on disposal of discontinued
operations (4.3) -- --
----------- ------------ ------------- ---------- ---------- ---------
Net (loss) income $ (1.7) $ 1.3 $ (0.5)
=========== ============ ============= ========== ========== =========
Unaudited pro forma data:
Income from continuing operations before
provision for income taxes $ 3.8 4.8%
Pro forma income tax provision 1.8 2.3
---------- ---------
Pro forma income from continuing
operations 2.0 2.5
Pro forma loss from discontinued
operations (0.7)
---------- ---------
Pro forma net income $ 1.2
========== =========
-18-
RESULTS FROM CONTINUING OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001
COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 2000
Net Revenues from continuing operations for the twelve months ended
December 31, 2001, were $70.9 million, compared to $81.5 million for the twelve
months ended December 31, 2000, a 12.9% decrease. In 2001, net revenues were
provided almost exclusively from the Merchandising Services Division. The
decrease of 12.9% in net revenues is primarily attributed to discontinued
in-store merchandising programs acquired in the Merger with the PIA Companies.
The Technology Division recorded $6,000 in net revenue in 2001.
Cost of revenues from continuing operations consists of in-store labor
and field management wages, related benefits, travel and other direct
labor-related expenses, of which approximately 37% were purchased from the
Company's affiliate, SMS in 2001 (see Item 13 - Certain Relationships and
Related Transactions, below). Cost of revenues as a percentage of net revenues
decreased 4.0% to 57.7% for the twelve months ended December 31, 2001, compared
to 61.7% for the twelve months ended December 31, 2000. This decrease is
principally attributable to reduced merchandiser labor costs due to efficiencies
realized in 2001 from the continued consolidation of the multi-level field
organization acquired in the Merger with the PIA Companies.
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 resources expenses, 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, 2001 December 31, 2000 (decr.)
-------------------------------- ----------------------------------- -------------
(amounts in millions)
Amount % Amount % %
--------------- ------------- ---------------- --------------- -------------
Selling, general & administrative $ 19.4 27.4% $ 24.8 30.4% (21.7) %
Depreciation and amortization 2.7 3.8 2.4 2.9 12.6
--------------- ------------- ---------------- ---------------
Total operating expenses $ 22.1 31.2% $ 27.2 33.3% (18.7)%
=============== ============= ================ =============== =============
Selling, general and administrative expenses decreased by $5.4 million,
or 21.7%, for the twelve months ended December 31, 2001, to $19.4 million
compared to $24.8 million for the twelve months ended December 31, 2000. This
decrease was due primarily to efficiencies resulting from the Merger with the
PIA Companies. Selling, general and administrative expenses for the Technology
Division were $0.8 million and $0.4 million for the twelve months ended December
31, 2001, and December 31, 2000, respectively.
Depreciation and amortization increased by $0.3 million for the twelve
months ended December 31, 2001, due primarily to the amortization of customized
internal software costs capitalized under SOP 98-1.
-19-
OTHER EXPENSE
For 2001, the Company has recognized a loss of $107,000 from its share
in the Japan joint venture.
OTHER INCOME
In January 2000, the Company sold its investment in an affiliate for
approximately $1.5 million. The sale resulted in a gain of approximately $0.8
million, which is included in other income.
INTEREST EXPENSE
Interest expense decreased $0.7 million to $0.6 million for the twelve
months ended December 31, 2001, from $1.3 million for the twelve months ended
December 31, 2000, due to decreased debt levels, as well as decreased interest
rates in 2001.
INCOME TAXES
The provision for income taxes was $3.1 million and $0.8 million for
the twelve months ended December 31, 2001 and December 31, 2000, respectively.
The effective tax rate was 42.9% and 22.3% for 2001 and 2000, respectively. The
increase in the effective tax rate and the resultant taxes in 2001 is primarily
due to the $0.8 million deferred tax benefit that resulted from a change in the
Company's valuation allowance in 2000 that did not reoccur in 2001.
DISCONTINUED OPERATIONS
Year Ended Year Ended
December 31, 2001 December 31, 2000
------------------------- -------------------------
(amounts in millions)
Amount % Amount %
------------ ---------- ----------- ----------
Net revenues $ 31.2 100.0% $ 28.1 100.0%
Cost of revenue 26.0 83.4 22.7 81.0
Selling, general and administrative expenses 5.7 18.4 5.7 20.2
Depreciation & amortization 1.2 3.4 1.2 4.2
Net revenues from the Incentive Marketing Division for the twelve
months ended December 31, 2001, were $31.2 million, compared to $28.1 million
for the twelve months ended December 31, 2000, an 11.2% increase. The increase
in net revenues is primarily due to an increase in project revenues, principally
from new clients.
Cost of revenues in the Incentive Marketing Division consists of direct
labor, independent contractor expenses, food, beverages, entertainment and
travel costs. Cost of revenue as a percentage of net revenues increased 2.4% to
83.4% for the twelve months ended December 31, 2001, compared to 81.0% for the
twelve months ended December 31, 2000, primarily due to the program mix, with
higher cost programs accounting for a greater portion of the revenues in 2001.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses which include corporate overhead, project management, information
systems, executive compensation, human resources expenses, legal and accounting
expenses were $5.7 million for the twelve months ended December 31, 2001, and
2000. Depreciation and amortization were $1.2 million for the twelve months
ended December 31, 2001, and 2000.
-20-
NET (LOSS)/INCOME
The SPAR Group had a net loss of approximately $1.7 million or $0.09
per basic and diluted share for the twelve months ended December 31, 2001,
compared to net income of $1.3 million or $0.07 per basic and diluted share for
the twelve months ended December 31, 2000. The decrease in net income of $3.0
million or $0.16 per basic and diluted share is primarily due to a net loss for
discontinued operations of approximately $4.3 million or $0.23 per basic and
diluted share, partially offset by an increase of approximately $1.4 million or
$0.07 per basic and diluted share of net income from continuing operations. The
increase in net income from continuing operations per basic and diluted share is
primarily the result of increased gross profit margins and substantial
reductions in selling, general and administrative expenses.
RESULTS FROM CONTINUING OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1999
Net revenues from continuing operations for the twelve months ended
December 31, 2000, were $81.5 million, compared to $79.6 million for the twelve
months ended December 31, 1999, a 2.3% increase. The increase in net revenues is
primarily attributed to an increase in the former SPAR Companies merchandising
net revenue of approximately $2.5 million for the twelve months ended December
31, 2000, over the net revenue for the twelve months ended December 31, 1999. In
addition, net revenues for the twelve months ended December 31, 2000, included
$23.4 million of net revenues of the former PIA companies' merchandising
operations for the first six months of 2000, with no comparable revenue in the
first six months of 1999, offset by discontinued programs of the PIA Companies
in 2000. Neither the Technology nor International Divisions recorded net
revenues for the period.
Cost of revenue from continuing operations consist of in-store labor
and field management wages, related benefits, travel and other direct
labor-related expenses, of which approximately 19% were purchased from the
Company's affiliate, SMS in 2000 (see Item 13 - Certain Relationships and
Related Transactions, below). Cost of revenues as a percentage of net revenues
decreased 1.7% to 61.7% for the twelve months ended December 31, 2000, compared
to 63.4% for the twelve months ended December 31, 1999. This decrease is
principally attributable to reduced merchandiser labor costs due to efficiencies
realized in 2000 from the consolidation of the multi-level field organization
acquired in the Merger with the PIA Companies, in part furnished through the
Company's affiliates, SMS and SMSI (see Item 13 - Certain Relationships and
Related Transactions, below).
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 resources expenses and accounting expenses. The
following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
Year Ended Year Ended
December 31, 2000 December 31, 1999 Increase
---------------------------- ---------------------------- -----------
(amounts in millions)
Amount % Amount % %
-------------- ----------- ------------ ------------- -----------
Selling, general & administrative $ 24.8 30.4% $ 23.2 29.2% 6.7%
Depreciation and amortization 2.4 2.9 1.2 1.5 97.9%
-------------- ----------- ------------ -------------
Total operating expenses $ 27.2 33.3% $ 24.4 30.7% 11.2%
============== =========== ============ ============= ===========
-21-
Selling, general and administrative expenses increased by $1.6 million
or 6.7% for the twelve months ended December 31, 2000, to $24.8 million compared
to $23.2 million for the twelve months ended December 31, 1999. This increase
was primarily due to the inclusion of the PIA Companies' selling, general and
administrative expenses for the first six months of 2000 totaling $5.9 million
with no comparable PIA expenses in the first six months of 1999, as well as
Technology Division and International Division selling, general and
administrative expenses in 2000 totaling $0.4 million offset by reductions in
the selling, general and administrative expenses of the PIA Companies in 2000
and non-recurring expenses totaling $1.4 million in 1999.
Depreciation and amortization increased by $1.2 million for the twelve
months ended December 31, 2000, due primarily to the amortization of goodwill
associated with the acquisition of the PIA Companies in the Merger and an
increase in depreciation and amortization of customized internal software costs
capitalized under SOP 98-1.
OTHER INCOME
In January 2000, the Company sold its investment in an affiliate for
approximately $1.5 million. The sale resulted in a gain of approximately $0.8
million, which is included in other income.
INTEREST EXPENSE
Interest expense increased $0.3 million for the twelve months ended
December 31, 2000, over the twelve months ended December 31, 1999, due to
increased debt associated with the PIA acquisition, as well as increased
interest rates in 2000.
INCOME TAXES
The provision for income taxes was $0.8 million and $3.7 million for
the twelve months ended December 31, 2000, and December 31, 1999, respectively.
In 1999, the Company incurred a one-time charge totaling $3.1 million dollars
for income taxes resulting from the termination of the Subchapter S status of
certain of the SPAR Companies for federal and state tax purposes. Exclusive of
the one-time charge, the effective tax rate was 22.3% and 16.9% for 2000 and
1999, respectively. The difference between the effective tax rate and the
statutory rates is primarily due to changes in the deferred tax valuation
allowance, in both 2000 and 1999 as well as a tax benefit attributable to
subchapter S earnings in 1999.
DISCONTINUED OPERATIONS
Year Ended Year Ended
December 31, 2000 December 31, 1999
-------------------------- --------------------------
(amounts in millions)
Amount % Amount %
------------ ----------- ----------- -----------
Net revenues $ 28.1 100.0% $ 36.9 100.0%
Cost of revenues 22.7 81.0 30.4 82.4
Selling, general and administrative expenses 5.7 20.2 6.0 16.2
Depreciation and amortization 1.2 4.2 1.0 2.7
Net revenues from the Incentive Marketing Division for the twelve
months ended December 31, 2000, were $28.1 million, compared to $36.9 million
for the twelve months ended December 31, 1999, a 24.0% decrease. The decrease in
net revenues is primarily due to a decrease in project revenue principally from
a single customer.
-22-
Cost of revenues in the Incentive Marketing Division consists of direct
labor, independent contractor expenses, food, beverages, entertainment and
travel costs. Cost of revenues from the Incentive Marketing Division, as a
percentage of net revenues decreased 1.4% to 81.0% for the twelve months ended
December 31, 2000, compared to 83.5% for the twelve months ended December 31,
1999, primarily due to a more favorable product mix in 2000.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses which include corporate overhead, project management, information
systems, executive compensation, human resources expenses and accounting
expenses were $5.7 million and $6.0 million, a decrease of 5.5%, for the twelve
months ended December 31, 2000, and December 31, 1999, respectively.
ACTUAL/PRO FORMA NET INCOME
The SPAR Group had actual net income of approximately $1.3 million or
$0.07 per basic and diluted share for the twelve months ended December 31, 2000,
and pro forma net income of approximately $1.2 million or $0.08 per pro forma
basic and diluted share for the twelve months ended December 31, 1999. The
decrease in net income per basic and diluted share is the result of the shares
issued in conjunction with the reverse merger on July 8, 1999 being outstanding
for all of 2000.
LIQUIDITY AND CAPITAL RESOURCES
In the twelve months ended December 31, 2001, the Company had a net
loss of $1.7 million. Net cash used by operating activities for the twelve
months ended December 31, 2001, was $0.2 million, compared with net cash
provided by operations of $6.3 million for the twelve months ended December 31,
2000. Cash used by operating activities in 2001 was primarily a result of net
operating profits and decreases in prepaid expenses and deferred taxes, offset
by decreases in accounts payable and other liabilities, restructuring charges,
and deferred revenue.
Net cash used in investing activities for the twelve months ended
December 31, 2001, was $1.7 million, compared with net cash used of $0.5 million
for the twelve months ended December 31, 2000. The net cash used in investing
activities in 2001 resulted primarily from the purchases of property and
equipment. In 2000, purchases of property and equipment were offset by the gain
from the sale of an affiliate.
Net cash provided by financing activities for the twelve months ended
December 31, 2001, was $2.0 million, compared with net cash used by financing
activities of $7.9 million for the twelve months ended December 31, 2000. The
net cash provided by financing activities in 2001 was primarily due to
borrowings on the line of credit offset by repayments of debt.
The above activity resulted in no change in cash and cash equivalents
for the twelve months ended December 31, 2001.
At December 31, 2001, the Company had working capital of $8.5 million
as compared to negative working capital of $2.3 million at December 31, 2000.
The increase in working capital is due to increases in prepaid expenses and
deferred income taxes as well as decreases in accounts payable and other current
liabilities, restructuring and other charges and deferred revenue. The Company's
current ratio was 1.52 and 0.91 at December 31, 2001, and 2000, respectively.
In 1999, IBJ Whitehall Business Credit Corporation ("IBJ Whitehall")
and the members of the SPAR Group (other than PIA Canada) (collectively, the
"Borrowers") entered into a Revolving Credit, Term Loan and Security Agreement
as amended (the "Bank Loan Agreement"). The Bank Loan Agreement provides the
Borrowers with a $15.0 million Revolving Credit
-23-
facility and a $2.5 million term loan. The Revolving Credit facility allows the
Borrowers to borrow up to $15.0 million based upon a borrowing base formula as
defined in the Agreement (principally 85% of "eligible" accounts receivable).
The Bank Loan Agreement's revolving credit loans of $15.0 million were scheduled
to mature on September 21, 2002. On March 1, 2002, IBJ Whitehall extended the
maturity date to February 28, 2003. The Term Loan amortized in equal monthly
installments of $83,334 and was repaid in full as of December 31, 2001. The
revolving loans bear interest at IBJ Whitehall's "Alternate Base Rate" plus
one-half of one percent (0.50%) (a total of 5.25% per annum at December 31,
2001). In addition, the Borrowers are required to make mandatory prepayments in
an amount equal to 25% of Excess Cash Flow, as defined in the Bank Loan
Agreement, for each fiscal year, to be applied first to the Term Loan and then
to the revolving credit loans (subject to the Borrowers' ability to re-borrow
revolving advances in accordance with the terms of the Bank Loan Agreement). In
July 2001, the Company made an additional $250,000 payment on the Term Loan as a
result of the Excess Cash Flow requirement. The facility is secured with all the
assets of the Company and its subsidiaries.
The Bank Loan Agreement contains an option for the Bank to purchase
16,667 shares of common stock of the Company for $0.01 per share in the event
that the Company's average closing share price over a ten consecutive trading
day period exceeds $15.00 per share. This option expires September 22, 2002.
The Bank Loan Agreement contains certain financial covenants that must
be met by the Borrowers on a consolidated basis, among which are a minimum "Net
Worth", a "Fixed Charge Coverage Ratio", a minimum ratio of Debt to EBITDA, and
a minimum EBITDA, as such terms are defined in the Bank Loan Agreement. The
Company was in compliance worth such financial covenants on December 31, 2001,
with the exception of the minimum net worth covenant (due to the estimated loss
on disposal of discontinued operations), for which a waiver was obtained from
IBJ Whitehall.
The balances outstanding on the revolving line of credit were $11.3
million and $7.8 million at December 31, 2001, and December 31, 2000,
respectively. As of December 31, 2001, based upon the borrowing base formula,
the SPAR Group had availability of $2.9 million of the $3.7 million unused
revolving line of credit.
As of December 31, 2001, the Company is obligated, under certain
circumstances, to pay costs in connection with the Merger (restructure charges)
of approximately $2.2 million. In addition, the Company incurred substantial
cost in connection with the transaction, including legal, accounting and
investment banking fees estimated to be an aggregate unpaid obligation as of
December 31, 2001, of approximately $1.2 million. The Company has also accrued
approximately $1.2 million for expenses incurred by PIA prior to the Merger,
which have not been paid as of December 31, 2001. Management believes the
current bank credit facilities are sufficient to fund operations and working
capital, including the current maturities of debt obligations, but may not be
sufficient to reduce certain of the pre-Merger obligations of the PIA Companies
inherited in the Merger.
In 1999 and prior years, certain principal stockholders of the Company
each made loans to certain SPAR Companies in the aggregate amount of $4.3
million to facilitate the acquisition of the PIA Companies and the assets of Old
MCI. These stockholders were also owed $1.9 million in unpaid distributions
relating to the former status of certain of the operating SPAR Companies as
Subchapter S Corporations (see Note 12 to the Financial Statements). Those
amounts were converted into promissory notes issued to these certain
stockholders severally by SMF, SINC and SPGI prior to the Merger, which
aggregated $6.2 million. During 2001, with the consent of the Company those
stockholders applied approximately $402,000 of such indebtedness in payment of
the exercise price of certain of their respective stock options to purchase
shares of common stock of the Company. As of December 31, 2001, a total of $4.7
million remained outstanding under these notes with an interest rate of 8% and
are due on demand. The current Bank Loan Agreement contains certain restrictions
on the repayment of stockholder debt.
-24-
Management believes that based upon the Company's current working
capital position and the existing credit facilities, funding 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 reduction in business from such clients, or the inability to acquire
new clients, would have a material adverse effect on the Company's cash
resources and its ongoing ability to fund operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk related to the variable interest
rate on the line of credit and the variable yield on its cash and cash
equivalents. 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 long term debt.
The Company considers carrying amounts of current assets and liabilities in the
condensed 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
carrying amounts of long-term debt approximate fair value because the obligation
bears interest at a floating rate. 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.
Currently, the Company's international operations are not material and,
therefore, the risk related to foreign currency exchange rates is not material.
INVESTMENT PORTFOLIO
The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments. Excess
cash is normally used to pay down the revolving line of credit.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 of this Annual Report on form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-25-
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, 2001, an executive officer and/or
director for the Company.
NAME AGE POSITION WITH SPAR GROUP, INC.
Robert G. Brown. . . . . . . . . . . . 59 Chairman, Chief Executive Officer, President and Director
William H. Bartels . . . . . . . . . . 58 Vice Chairman and Director
Robert O. Aders (1). . . . . . . . . 74 Director
Jack W. Partridge (1) . . . . . . . . 56 Director
Jerry B. Gilbert (1) . . . . . . . . . . 67 Director
George W. Off (1). . . . . . . . . . . 54 Director
Charles Cimitile. . . . . . . . . . . . . 47 Chief Financial Officer and Secretary
James H. Ross 68 Treasurer
- --------------------------
(1) Member of the Board's Compensation and Audit Committees
Robert G. Brown serves as the Chairman, the Chief Executive Officer,
the President and a Director of the Company 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 SMF acquired its assets and business in
1996).
William H. Bartels serves as the Vice Chairman and a Director of the
Company 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 SMF acquired its assets and
business in 1996), and has been responsible for the Company's sales and
marketing efforts, as well as for overseeing joint ventures and acquisitions.
Robert O. Aders serves as a Director of the Company and has done so
since July 8, 1999. 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
-26-
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
1957-1974 and was Chairman of the Board from 1970 to 1974. Mr. Aders also serves
as a Director of FMI, the Stedman Nutrition Foundation at Duke Medical Center,
Coinstar, Inc., The Source Information Management Company and Telepanel Systems,
Inc.
Jack W. Partridge serves as a Director of the Company and has done so
since January 29, 2001. 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
also 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 the Company 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 1958-1989 held
various executive positions. Mr. Gilbert also serves 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 Wholesalers
Druggist (NWDA) Tim Barry Award. In June 1997, Mr. Gilbert received an Honorary
Doctor of Letters Degree from Long Island University.
George W. Off serves as Director of the Company and has done so since
July 1, 2001. Mr. Off was Chairman of the Board of Directors of Catalina
Marketing Corporation, a New York Stock Exchange listed company, from July 1998
until he retired in July 2000. He served as President and Chief Executive
Officer of Catalina from 1994 to 1998. Prior to that, Mr. Off was President and
Chief Operating Officer from 1992 to 1994 and Executive Vice President from 1990
to 1992. Catalina is a leading supplier of in-store electronic scanner-activated
consumer promotions.
Charles Cimitile serves as the Chief Financial Officer and Secretary of
the Company 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,
Treasurer and Secretary of American Recreation Company Holdings, Inc. and its
predecessor company.
James H. Ross serves as the Treasurer of the Company and has held such
positions since July 8, 1999 (the effective date of the Merger). Mr. Ross has
been the Chief Financial Officer of the SPAR Marketing Companies since 1991, and
was the General Manager of SBRS from 1994-1999. In September 2001, Mr. Ross
retired from full-time employment. Mr. Ross continues to serve the Company on a
consulting basis.
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.
-27-
Based solely on its review of the copies of such forms received by
it, or written representations from certain reporting persons that no Forms 5
were required for those persons, the Company believes that its Insiders complied
with all applicable Section 16(a) filing requirements for 2001.
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, 2001,
December 31, 2000, and December 31, 1999, (i) by the Company's Chief Executive
Officer, and (ii) each of the other four most highly compensated executive
officers of the Company who were serving as executive officers at December 31,
2001 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION(1) COMPENSATION AWARDS
------------------------ -----------------------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY($) BONUS($) OPTIONS(#)(2) ($)(3)
- ---------------------------- ---- --------- -------- ------------- ------------
Robert G. Brown 2001 141,202 -- 765,972 --
Chief Executive Officer, Chairman of the 2000 16,800 -- -- --
Board, President, and Director 1999 7,500 -- 765,972 --
William H. Bartels 2001 139,230 -- 471,992 --
Vice Chairman and Director 2000 16,800 -- -- --
1999 16,307 -- 471,992 --
Charles Cimitile 2001 188,000 -- 75,000 --
Chief Financial Officer 2000 188,000 -- 25,000 --
1999 17,090 -- 75,000 --
James H. Ross (4) 2001 101,773 7,500 43,000 1,557
Treasurer and Vice President 2000 94,800 9,000 5,000 3,337
1999 99,237 12,408 92,665 2,187
------------------------
(1) For accounting purposes, the Merger is treated as an acquisition
of PIA Merchandising Services, Inc., by the SPAR Marketing
Companies and related entities. Accordingly, these figures
represent the compensation paid by the Company since July 8,
1999, the effective date of the Merger, and the SPAR Marketing
Companies prior to that date.
(2) In January 2001, each of the above officers voluntarily
surrendered for cancellation their options for the purchase of
the following numbers of shares of common stock under the 1995
Plan: Mr. Brown - 765,972; Mr. Bartels - 471,992; Mr. Cimitile -
75,000; and Mr. Ross - 40,000.
(3) Other compensation represents the Company's 401k contribution.
(4) In September 2001, Mr. Ross retired from full-time employment.
Mr. Ross continues to serve the Company on a consulting basis.
-28-
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, 2001, 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
SECURITIES PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE AT
UNDERLYING OPTIONS GRANTED ASSUMED ANNUAL RATES OF STOCK PRICE
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE PRICE EXPIRATION APPRECIATION FOR OPTION(1)
NAME (#) PERIOD (%) ($/SH) DATE 5% ($) 10% ($)
- --------------------- ---------------- --------------- -------------- ---------- ------------- ---------------
Robert G. Brown 382,986 (2) 14.9 1.30 8/2/11 274,496 676,097
191,493 (3) 7.5 10.00 8/2/11 -0- -0-
191,493 (3) 7.5 10.00 8/2/06 -0- -0-
---------------- --------------- ------------- ---------------
765,972 29.9 274,496 676,097
William H. Bartels 235,996 (2) 9.2 1.30 8/2/11 169,145 416,611
153,846 (3) 6.0 10.00 8/2/11 -0- -0-
82,151 (3) 3.2 10.00 8/2/06 -0- -0-
---------------- --------------- ------------- ---------------
471,992 18.4 169,145 416,611
Charles Cimitile 75,000 (2) 2.9 1.30 8/2/11 53,755 132,400
James H. Ross 41,000 (2) 1.6 1.30 8/2/11 29,386 72,378
2,000 (4) .1 1.10 5/9/11 1,213 2,987
---------------- --------------- ------------- ---------------
43,000 1.7 30,599 75,365
- ------------
(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 vested 50% on the date of grant, 25% on the first
anniversary of the date of grant and 25% on the second anniversary of
the date of grant.
(3) These options vest 100% when the market price of the stock is equal to
$10.00.
(4) These options vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth the number of shares that may be
purchased and value of the exercisable and unexercisable options held by each of
the Named Executive Officers at December 31, 2001.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT FISCAL
YEAR-END (#) YEAR-END ($)
--------------------------------------- -------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------ ------------------ ---------------- ------------------
Robert G. Brown -- 574,478 -- 93,831
William H. Bartels -- 353,994 -- 57,819
Charles Cimitile 43,750 56,250 25,656 40,219
James H. Ross 21,250 26,250 11,256 16,039
-29-
STOCK OPTION AND PURCHASE PLANS
The Company has five stock option plans: the 1990 Stock Option Plan
("1990 Plan"), the Amended and Restated 1995 Stock Option Plan ("1995 Plan"),
the 1995 Director's Plan ("Director's Plan"), the Special Purpose Stock Option
Plan and the 2000 Stock Option Plan ("2000 Plan").
The 1990 Plan is a nonqualified option plan providing for the issuance
of up to 830,558 shares of common stock to officers, directors and key
employees. The options have a term of ten years and one week and are either
fully vested or will vest ratably no later than five years from the grant date.
Since 1995, the Company has not granted any new options under this plan.
The 1995 Plan provided 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 3,500,000 shares of the Company's common
stock. The options have a term of ten years, except in the case of incentive
stock options granted to greater than 10% stockholders for which 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. Since 2000, the Company has not granted any new options under this Plan.
During 2001, options to purchase 2,349,825 shares of the Company's common stock
under the 1995 Plan were voluntarily surrendered and cancelled. No options to
purchase shares of the Company's common stock were exercised under this Plan
during 2001. At December 31, 2001, options to purchase 81,125 shares of the
Company's common stock remain outstanding under this Plan. The 1995 Plan has
been replaced by the 2000 Plan.
The Director's Plan was a stock option plan for non-employee directors
and provided for the purchase of up to 100,000 shares of the Company's common
stock. Since 2000, the Company has not granted any new options under this Plan.
During 2001, no options to purchase shares of the Company's common stock were
exercised under this Plan. At December 31, 2001, no 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.
On July 8, 1999, in connection with the merger, the Company established
the Special Purpose Stock Option 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 2001, no options to purchase shares of the Company's
common stock were exercised under this Plan. At December 31, 2001, options to
purchase 25,750 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 are issued at 100%), 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 2001, options to
purchase 2,567,344 shares of the Company's common stock were granted under this
Plan. Options to purchase 309,492 shares of the Company's common stock were
exercised under this Plan during 2001. At December 31, 2001, options to purchase
2,356,852 shares of the Company's common stock remain outstanding under this
Plan and options to purchase 852,531 of the Company's common stock were
available for grant under this Plan.
-30-
In 2001, the Company adopted its 2001 Employee Stock Purchase Plan (the
"ESP Plan"), which replaces 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 its subsidiaries, and
the CSP Plan allows employees of the affiliates of the Company (see Item 13 -
Certain Relationships and Related Transactions, below), to purchase the
Company's Common Stock from the Company without having to pay any brokerage
commissions. The purchase price for the Common Stock under the ESP Plan has been
(and likely will continue to be), and under CSP Plan always will be, 100% of
fair market value, as defined in the Plans.
COMPENSATION OF DIRECTORS
The Company's Compensation Committee administers its compensation plan
for its outside Directors. 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, the Company adopted a new Director Compensation Plan.
Under the new plan, each non-employee director receives twenty thousand dollars
($20,000) per annum. Payments are made quarterly in equal installments. It is
intended that each quarterly payment will be 50% in cash ($2,500) and 50%
($2,500) in stock options to purchase shares of the Company's common stock with
an exercise price of $0.01 per share. The number of shares of the Company's
common stock that can be purchased under each option granted will be determined
based upon the closing stock price at the end of each quarter. In addition, each
non-employee director will receive options to purchase an additional 10,000
shares of the Company's common stock upon acceptance of the directorship, 2,500
additional shares of the Company's common stock after one year of service and
2,500 additional shares of the Company's common stock for each additional year
of service thereafter. The options will have an exercise price equal to the
closing price of the Company's common stock on the day of grant. All of the
options have been and will be granted under the 2000 Plan described above, under
which each member of the SPAR 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Board's Compensation Committee was at any time during
the year ended December 31, 2001 or at any other time an officer or employee of
the Company. 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), no executive officer or board member of the
Company serves as a member of the Company's 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.
-31-
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 December 31, 2001 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 executive officers named in the Summary
Compensation Table; and (iv) the Company's directors and 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) 7,884,241(2) 41.2%
Common Shares William H. Bartels (1) 5,149,487(3) 26.9%
Common Shares James H. Ross (1) 105,115(4) *
Common Shares Robert O. Aders (1) 46,671(5) *
Common Shares Charles Cimitile (1) 43,750(6) *
Common Shares Jerry B. Gilbert (1) 13,402(7) *
Common Shares George W. Off (1) 9,085(8) *
Common Shares Jack W. Partridge (1) 7,561(9) *
Common Shares Richard J. Riordan 1,209,922 6.3%
300 S. Grand Avenue, Suite 2900
Los Angeles, CA 90071
Common Shares Heartland Advisors, Inc. (10) 1,568,100 8.2%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Common Shares Executive Officers and Directors 13,259,312 69.2%
* Less than 1%
(1) The address of such owners is c/o SPAR Group, Inc. 580 White Plains
Road, Tarrytown, New York.
(2) Includes 1,813,000 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.
(3) Excludes 1,813,000 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.
(4) Includes 21,250 shares issuable upon exercise of options.
(5) Includes 11,971 shares issuable upon exercise of options.
(6) Includes 43,750 shares issuable upon exercise of options.
(7) Includes 13,402 shares issuable upon exercise of options.
(8) Includes 2,585 shares issuable upon exercise of options.
(9) Includes 7,561 shares issuable upon exercise of options.
(10) All information regarding share ownership is taken from and furnished
in reliance upon the Schedule 13G (Amendment No. 7), filed by Heartland
Advisors, Inc. with the Securities and Exchange Commission on January
31, 2002.
-32-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Robert G. Brown, a Director, the Chairman and the Chief Executive
Officer of the Company, and Mr. William H. Bartels, a Director and the Vice
Chairman of the Company (collectively, the "SMS Principals"), are the sole
stockholders and executive officers and directors of SPAR Marketing Services,
Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI"), SPAR Infotech, Inc.
("SIT"), and certain other affiliated companies.
SMS and SMSI (through SMS) provided approximately 54% of the Company's
field representatives (through its independent contractor field force) and all
of the Company's field management services at a total cost of $15.1 million and
$9.6 million for the twelve months ended December 31, 2001, and 2000,
respectively. Under the terms of the Field Service Agreement, SMS provides the
services of approximately 4,300 field representatives and through SMSI provides
approximately 90 full-time national, regional and district managers to the SPAR
Marketing Companies as they may request from time to time, for which the Company
has agreed to pay SMS for all of its costs of providing those services plus 4%.
However, SMS may not charge the Company for any past taxes or associated costs
for which the SMS Principals have agreed to indemnify the SPAR Companies.
Although the SMS Principals were not paid any salaries as officers of SMS or
SMSI, SMS and SMSI are "Subchapter S" corporations, and accordingly the SMS
Principals benefit from any income of such companies allocated to them.
SIT provided computer programming services to the Company at a total
cost of $1,185,000 and $769,000 for the twelve months ended December 31, 2001,
and 2000, respectively. Under the terms of the programming agreement between SMF
and SIT effective as of October 1, 1998 (the "Programming Agreement"), SIT
continues to provide programming services to SMF as SMF may request from time to
time, for which SMF has agreed to pay SIT competitive hourly wage rates and to
reimburse SIT's out-of-pocket expenses (see Note 10 to the Financial
Statements). Although the SMS Principals were not paid any salaries as officers
of SIT, SIT is a "Subchapter S" corporation, and accordingly the SMS Principals
would benefit from any income allocated to them if SIT were to be profitable.
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, in connection with the Merger.
The SMS Principals also owned an indirect minority (less than 5%)
equity interest in Affinity Insurance, Ltd., which provides certain insurance to
the Company (See Note 10 to the Financial Statements).
At December 31, 2001, the Company owed a total of $4.7 million to the
SMS Principals (See Item 7 - Liquidity and Capital Resources and Note 12 to the
Financial Statements).
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 that could have a material adverse effect on the
Company (see Note 10 to the Financial Statements).
-33-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. INDEX TO FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT:
Independent Auditors' Report. F-1
Consolidated Balance Sheets as of December 31, 2001, and December 31, 2000. F-2
Consolidated and Combined Statements of Operations for the years ended
December 31, 2001, and December 31, 2000, and December 31, 1999. F-3
Consolidated and Combined Statements of Stockholders' Equity for the years
ended December 31, 2001, and December 31, 2000, and December 31, 1999. F-4
Consolidated and Combined Statements of Cash Flows for the years ended
December 31, 2001, and December 31, 2000, and December 31, 1999. F-5
Notes to Financial Statements. F-6
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2001,
and December 31, 2000, and December 31, 1999. F-36
3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
3.1 Certificate of Incorporation of SPAR Group, Inc., 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 to Exhibit 3.1 to the Company's Form 10-Q for the 3rd
Quarter ended September 30, 1999).
3.2 By-laws of PIA (incorporated by reference to the above
referenced Form S-1).
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 Amended and Restated 1995 Stock Option Plan (incorporated
by reference of Exhibit 10.2 to the Company's Form 10-Q for
the 2nd Quarter ended July 3, 1998).
10.2 1995 Stock Option Plan for Non-employee Directors
(incorporated by reference to the above referenced Form
S-1).
-34-
10.3 Special Purpose Stock Option Plan (incorporated by
reference to Exhibit 10.13 of the Company's Form 10-Q for
the 2nd Quarter ended July 2, 1999).
10.4 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).
10.5 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).
10.6 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).
10.7 Service Agreement dated as of January 4, 1999, by and
between SPAR Marketing Force, Inc., and SPAR Marketing
Services, Inc. [incorporated by reference to the Company's
Form 10-K/A (Amendment No. 1) for the fiscal year ended
December 31, 1999].
10.8 Business Manager Agreement dated as of July 8, 1999, by and
between SPAR Marketing Force, Inc. and SPAR Marketing
Services, Inc. [incorporated by reference to the Company's
Form 10-K/A (Amendment No. 1) for the fiscal year ended
December 31, 1999].
10.9 Second Amended and Restated Revolving Credit, Term Loan and
Security Agreement by and among IBJ 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 MCI Performance Group, Inc., SPAR
Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., PIA Merchandising, Co., Inc., Pacific
Indoor Display Co., Inc., and Pivotal Sales Company
(collectively, the "SPAR Borrowers") dated as of September
22, 1999 (incorporated by reference to the Company's
initial Form 10-K for the fiscal year ended December 31,
1999).
10.10 Waiver and Amendment No. 1 to Second Amended and Restated
Revolving Credit, Term Loan and Security Agreement dated
as of December 8, 1999, by and among the SPAR Borrowers
and the Lender (incorporated by reference to the Company's
initial Form 10-K for the fiscal year ended December 31,
1999).
10.11 Amendment No. 2 to Second Amended and Restated Revolving
Credit, Term Loan and Security Agreement by and among the
SPAR Borrowers and the Lender, entered into as of April 21,
2000.
10.12 Third Amended and Restated Revolving Credit Note issued by
SPAR Borrowers, in the amount of Fifteen million dollars
($15,000,000), to the Lender, dated as of April 21, 2000.
10.13 Amendment No. 3 to Second Amended and Restated Revolving
Credit, Term Loan and Security Agreement by and among the
SPAR Borrowers and the Lender, entered into as of March 1,
2002.
10.14 Amendment No. 4 to Second Amended and Restated Revolving
Credit, Term Loan and Security Agreement by and among the
SPAR Borrowers and the Lender, entered into as of March 1,
2002.
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP.
(B) REPORTS ON FORM 8-K.
None.
-35-
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 1, 2002
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
/s/ William H. Bartels Vice Chairman and Director
- -------------------------
William H. Bartels
/s/ Robert O. Aders Director
- -------------------------
Robert O. Aders
/s/ Jack W. Partridge Director
- -------------------------
Jack W. Partridge
/s/ Jerry B. Gilbert Director
- -------------------------
Jerry B. Gilbert
/s/ George W. Off Director
- -------------------------
George W. Off
/s/ Charles Cimitile Chief Financial Officer
- ------------------------- and Secretary (Principal Financial and
Charles Cimitile Accounting Officer)
-36-
FINANCIAL STATEMENTS
SPAR Group, Inc. and Subsidiaries
Years Ended December 31, 2001 and 2000
Report of Independent Auditors
The Board of Directors and Stockholders of
SPAR Group, Inc. and Subsidiaries
We have audited the consolidated balance sheets of SPAR Group, Inc. and
Subsidiaries as of December 31, 2001 and 2000 and the related consolidated and
combined statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 and combined financial statements referred to
above present fairly, in all material respects, the financial position of SPAR
Group, Inc. and Subsidiaries at December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the consolidated and combined
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/Ernst & Young LLP
Minneapolis, Minnesota
February 15, 2002
SPAR Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
DECEMBER 31
2001 2000
----------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 21,144 19,471
Prepaid expenses and other current assets 440 611
Deferred income taxes 3,241 1,718
--------------------------------------
Total current assets 24,825 21,800
Property and equipment, net 2,644 3,132
Goodwill and other intangibles, net 8,357 10,350
Deferred income taxes 389 1,082
Other assets 110 144
Net long-term assets from discontinued operations 4,830 11,496
--------------------------------------
Total assets $41,155 $48,004
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 440 $ 2,923
Accrued expenses and other current liabilities 5,868 8,644
Restructuring and other charges, current 1,597 2,205
Due to certain stockholders 2,655 3,137
Net current liabilities from discontinued operations 5,732 6,023
Current portion of long-term debt 57 1,143
--------------------------------------
Total current liabilities 16,349 24,075
Line of credit and long-term liabilities, net of current portion 11,287 8,093
Long-term debt due to certain stockholders 2,000 2,000
Restructuring and other charges, long term 585 1,596
Commitments and contingencies
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 - 18,584,360--2001;
18,272,330--2000 186 182
Additional paid-in capital 10,531 10,127
Retained earnings 217 1,931
--------------------------------------
Total stockholders' equity 10,934 12,240
--------------------------------------
Total liabilities and stockholders' equity $41,155 $48,004
======================================
See accompanying notes.
F-2
SPAR Group, Inc. and Subsidiaries
Consolidated and Combined Statements of Operations
(In Thousands, Except Per Share Data)
YEAR ENDED DECEMBER 31
2001 2000 1999
------------------------------------------------------
Net revenues $70,891 $81,459 $79,613
Cost of revenues 40,883 50,278 50,499
------------------------------------------------------
Gross profit 30,008 31,181 29,114
Selling, general, and administrative expenses 19,380 24,761 23,213
Depreciation and amortization 2,682 2,383 1,204
------------------------------------------------------
Operating income 7,946 4,037 4,697
Other (expense) income (107) 790 90
Interest expense (561) (1,326) (976)
------------------------------------------------------
Income from continuing operations before provision
for income taxes 7,278 3,501 3,811
Nonrecurring income tax charge for termination of
Subchapter S elections - - 3,100
Provision for income taxes 3,123 780 643
------------------------------------------------------
Net income from continuing operations 4,155 2,721 68
Discontinued operations:
Loss from discontinued operations, net of tax
benefits of $938, $858 and $595, respectively (1,597) (1,399) (563)
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 $ (1,714) $ 1,322 $ (495)
======================================================
Unaudited pro forma information:
Income from continuing operations before
provision for income tax $ 3,811
Pro forma income tax provision 1,840
-------------------
1,971
Pro forma loss from discontinued operations, net
of pro forma tax benefit of $429 (729)
-------------------
Pro forma net income $ 1,242
===================
Basic/diluted net income (loss) per common share:
Actual/pro forma income from continuing
operations $ 0.23 $ 0.15 $ 0.13
Actual/pro forma loss from discontinued
operations (0.32) (0.08) (0.05)
------------------------------------------------------
Actual/pro forma net (loss) income $ (0.09) $ 0.07 $ 0.08
======================================================
Actual/pro forma weighted average shares
outstanding - basic 18,389 18,185 15,361
======================================================
Actual/pro forma weighted average shares
outstanding - diluted 18,467 18,303 15,367
======================================================
See accompanying notes.
F-3
SPAR Group, Inc. and Subsidiaries
Consolidated and Combined Statement of Stockholders' Equity
(In Thousands)
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED STOCKHOLDERS'
-----------------------------
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------------------------------------------------------------------------
Balance at December 31, 1998 $ (1,405)
Net income through July 8, 1999 1,996
Net distributions to stockholders (332)
Stock option compensation 752
Deferred tax provision - termination of
Subchapter S election (3,100)
----------------
Balance at July 8, 1999 $ (2,089)
================
Reorganization prior to reverse merger with PIA 12,659 $127 $ (2,216) $ - $ (2,089)
Reverse merger with PIA 5,494 55 12,307 - 12,362
Issuance of common stock 2 - 4 - 4
Net income July 9, 1999 to December 31, 1999 - - - 609 609
--------------------------------------------------------------------------
Balance at December 31, 1999 18,155 182 10,095 609 10,886
Stock options exercised and employee stock
purchase plan purchases 117 - 32 - 32
Net income - - - 1,322 1,322
--------------------------------------------------------------------------
Balance at December 31, 2000 18,272 182 10,127 1,931 12,240
Stock options exercised and employee stock
purchase plan purchases 312 4 404 - 408
Net loss - - - (1,714) (1,714)
--------------------------------------------------------------------------
Balance at December 31, 2001 18,584 $186 $10,531 $ 217 $10,934
==========================================================================
See accompanying notes.
F-4
SPAR Group, Inc. and Subsidiaries
Consolidated and Combined Statements of Cash Flows
(In Thousands)
YEAR ENDED DECEMBER 31
2001 2000 1999
------------------------------------------------------
OPERATING ACTIVITIES
Net (loss) income $(1,714) $ 1,322 $ (495)
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation 2,217 1,839 881
Amortization 1,630 1,725 1,301
Equity earnings of affiliate - - (91)
Estimated loss on disposal of discontinued
operations 4,272 - -
Taxes on termination of Subchapter
S corporation election - - 3,100
Stock related compensation - - 752
Gain on sale of affiliate - (790) -
Changes in operating assets and liabilities:
Accounts receivable 13 5,318 (4,497)
Prepaid expenses and other current assets 318 (346) 36
Deferred income taxes 1,710 (185) -
Accounts payable and other liabilities (5,938) (2,024) (3,294)
Restructuring and other charges (1,487) (2,766) -
Deferred revenue (1,264) 2,240 (2,666)
------------------------------------------------------
Net cash (used in) provided by operating activities (243) 6,333 (4,973)
INVESTING ACTIVITIES
Purchases of property and equipment (1,744) (1,941) (2,105)
Purchase of businesses, net of cash acquired - (62) 7,109
Sale of investment in affiliate - 1,500 -
------------------------------------------------------
Net cash (used in) provided by investing activities (1,744) (503) 5,004
FINANCING ACTIVITIES
Net borrowings (payments) on line of credit 3,526 (5,596) 9,207
Proceeds from term loan - - 3,000
Payments on long-term debt (1,465) (1,113) (1,254)
Net payments of long-term debt due to
Spar Marketing Services, Inc. - - (685)
Net payments to certain stockholders (482) (182) 3,500
Payments of note payable, MCI - (1,045) (9,577)
Distributions to certain stockholders - - (3,062)
Proceeds from issuance of common stock 408 32 4
------------------------------------------------------
Net cash provided by (used in) financing activities 1,987 (7,904) 1,133
------------------------------------------------------
Net (decrease) increase in cash - (2,074) 1,164
Cash at beginning of year - 2,074 910
------------------------------------------------------
Cash at end of year $ - $ - $ 2,074
======================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 1,892 $ 1,394 $ 892
======================================================
NON-CASH TRANSACTIONS:
Distributions payable to certain stockholders $ - $ - $ 1,332
Equipment purchased with capital leases - - 518
See accompanying notes.
F-5
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements
December 31, 2001
1. BUSINESS AND ORGANIZATION
The SPAR Group, Inc., a Delaware corporation formerly known as PIA Merchandising
Services, Inc. (SPAR Group or the Company), is a supplier of in-store
merchandising and marketing services throughout the United States and Canada.
The Company also provides database marketing, teleservices, marketing research
and Internet-based software. As part of a strategic realignment in the fourth
quarter of 2001, the Company made the decision to divest its Incentive Marketing
Division, SPAR Performance Group, Inc. (SPGI). The Company is exploring various
alternatives for the sale of SPGI, including the sale of the business to SPGI's
employees through the establishment of an employee stock ownership plan. The
Company anticipates that the divestiture of SPGI will occur in the first half of
2002. As a result of this decision, the Company's continuing operations are now
divided into three divisions: the Merchandising Services Division, the
Technology Division, and the International Division. The Merchandising Services
Division provides merchandising services, database marketing, teleservices and
marketing research to manufacturers and retailers primarily in the mass
merchandiser, video, discount drug store and grocery industries. In March 2000,
the Company established its Technology Division for the purpose of marketing its
proprietary Internet-based computer software. In November 2000, the Company
established its International Division to focus on expanding its merchandise
services business worldwide. The Incentive Marketing Division designs and
implements premium incentives, manages meetings, group travel, and training
programs principally for corporate clients.
MERCHANDISING SERVICES DIVISION
The Company's Merchandising Services Division consists of (1) SPAR Marketing,
Inc. (SMI) (an intermediate holding company), SPAR Marketing Force, Inc. (SMF),
SPAR Marketing, Inc., (SMNEV), SPAR/Burgoyne Retail Services, Inc. (SBRS), and
SPAR, Inc. (SINC) (collectively, the SPAR Marketing Companies) and (2) PIA
Merchandising, Co., Inc., Pacific Indoor Display d/b/a Retail Resources, Pivotal
Sales Company and PIA Merchandising Ltd. (collectively, PIA or the PIA
Companies). The SPAR Marketing Companies, the original predecessor of which was
founded in 1967, provides nationwide retail merchandising and marketing services
to home video, consumer goods and food products companies. The PIA Companies, a
predecessor of the Company first organized in 1943, also is a supplier of
in-store merchandising services
F-6
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
1. BUSINESS AND ORGANIZATION (CONTINUED)
throughout the United States, and was "acquired" by the SPAR Marketing Companies
for accounting purposes pursuant to the Merger on July 8, 1999 (see Note 3,
Business Combinations - PIA Reverse Merger, below). The PIA Companies provide
these services primarily on behalf of consumer product manufacturers and
retailers at mass merchandisers, drug chains and retail grocery stores.
The Company currently operates in all 50 states and Canada and provides a broad
range of in-store merchandising and other marketing services to many of the
nation's leading companies.
Merchandising services generally consist of special projects or regularly
scheduled routed services provided at the store level for a specific retailer or
multiple manufacturers primarily under single or multi-year contracts. Services
also include stand-alone large-scale implementations. These services may include
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 selling new
and promotional items. Specific in-store services can be initiated by retailers
and manufacturers, such as new product launches, special seasonal or promotional
merchandising, focused product support and product recalls. These services are
used typically for large-scale implementations requiring over 30 days to
complete. The Company also provides database marketing, teleservices and
research services.
TECHNOLOGY DIVISION
In March 2000, the Company established its Technology Division, SPAR Technology
Group, Inc., to separately market its proprietary application software products
and services. The Company has developed and is utilizing several Internet-based
software products. In addition, the Company has developed and sold
Internet-based software in its other divisions. The Technology Division was
established to market these applications to businesses with multiple locations
and large workforces or numerous distributors desiring to improve day-to-day
efficiency and overall productivity.
INTERNATIONAL DIVISION
In November 2000, the Company established its International Division, SPAR Group
International, Inc., to focus on expanding its merchandising services business
world-wide.
F-7
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
1. BUSINESS AND ORGANIZATION (CONTINUED)
DISCONTINUED OPERATIONS - INCENTIVE MARKETING DIVISION
The Company's Incentive Marketing Division was created in January 1999 through
the Company's purchase of the business and substantially all of the assets of
BIMA Group, Inc., formerly known as MCI Performance Group, Inc. (see Note 3).
The purchase was made by the Company's indirect subsidiary, SPAR Performance
Group, Inc. (SPGI). SPGI provides a wide variety of consulting, creative,
program administration, travel and merchandise fulfillment, and training
services to companies seeking to retain and motivate employees, salespeople,
dealers, distributors, retailers and consumers toward certain actions or
objectives.
In December 2001, the Company concluded that SPGI's business was no longer
consistent with the Company's future growth strategies and decided to divest
SPGI. As a result of this decision, the Company reviewed the goodwill associated
with SPGI and recorded an impairment of goodwill totaling $4.3 million, net of
taxes. In addition, a $1.0 million reserve was recorded in 2001 for the
anticipated cost to divest of SPGI and any anticipated losses through the date
of divestiture, which is expected to be in the first half of 2002.
The 2001, 2000 and 1999 consolidated statements of operations have been restated
to report the results of discontinued operations separately from continuing
operations. Operating results of the discontinued operations are summarized as
follows:
YEARS ENDED DECEMBER 31
2001 2000 1999
--------------------------------------------------
Net sales $31,202 $28,070 $36,912
Less:
Cost of sales 26,032 22,692 30,425
Selling, general and administrative
expenses 5,736 5,654 5,981
Interest expense 804 800 686
Depreciation 306 322 174
Amortization 859 859 804
------------------------------------------------
OPERATING LOSS (2,535) (2,257) (1,158)
Actual/pro forma provision for income tax
benefit (938) (858) (595)
------------------------------------------------
ACTUAL/PRO FORMA NET LOSS $(1,597) $(1,399) $ (563)
================================================
F-8
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
1. BUSINESS AND ORGANIZATION (CONTINUED)
Net non-current assets and current liabilities of discontinued operations,
classified separately in the 2001 and 2000 balance sheets, are summarized below:
2001 2000
----------------------------------------
Net non-current assets of discontinued operations:
Property and equipment $ 444 $ 429
Goodwill and other intangibles, net 4,386 11,135
Long-term liabilities - (68)
--------------------------------------
4,830 11,496
Net current liabilities of discontinued operations:
Accounts receivable, net 2,050 3,736
Prepaid expenses and other current assets 228 268
Prepaid program costs 3,470 3,543
Accounts payable (1,642) (2,927)
Accrued expenses and other current liabilities (1,727) (2,289)
Deferred revenue (7,090) (8,354)
Current portion of long-term debt (21) -
Other current charges (1,000) -
----------------------------------------
$(5,732) $ (6,023)
========================================
Other current charges represent the estimated costs to dispose of SPGI and the
estimated losses from operations expected prior to the disposal of the business.
F-9
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
CONSOLIDATION/COMBINATION
Through July 8, 1999, the combined financial statements include operating
companies owned by the same two stockholders (the SPAR Companies). On July 8,
1999, the SPAR Companies reorganized and completed a "reverse" merger with the
PIA Companies (see Note 3). From July 8, 1999, the consolidated financial
statements include the accounts of the SPAR Group, Inc. and its wholly owned
subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
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.
REVENUE RECOGNITION
The Company's services are provided under contracts, which consist primarily of
service fees and per unit fee arrangements. Revenues under service fee
arrangements are recognized when the service is performed. The Company's per
unit contracts 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.
The Company also performs services on a specific project basis over a specified
period ranging from one to 12 months. Revenues related to these projects are
recognized on a percentage of completion method as services are performed or
costs are incurred.
The Company also performs project-based services in SPGI, and the resultant
revenues are recognized upon the completion of the project.
F-10
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent services performed that are pending
billing until the requisite documents have been processed or projects have been
completed.
AGENCY FUNDS
Cash balances available for the administration of a customer's bonus program are
deposited in accounts with financial institutions in which the Company acts as
agent for a client pending payment settlement. Balances will fluctuate based
upon the receipt of funds from the client. These funds are considered neither an
asset nor liability of the Company. The balance of funds held in agency accounts
totaled approximately $147,796 and $691,155 as of December 31, 2001 and 2000,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation and amortization are calculated on a straight-line basis over
estimated useful lives of the related assets, which range from three to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or lease term, using the straight-line method.
INTERNAL USE SOFTWARE DEVELOPMENT COSTS
The SPAR Group adopted SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, as of January 1, 1999, which required
the capitalization of certain costs incurred in connection with developing or
obtaining internal use software. Capitalized software development costs are
amortized over three years.
In 2001, 2000, and 1999, the Company capitalized $430,000, $994,000, and
$1,021,000 of costs related to software developed or obtained for internal use.
F-11
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets consist primarily of refundable deposits.
DEFERRED REVENUE
Client payments received in advance of merchandising services performed are
classified as deferred revenue.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the recoverability of long-lived assets, whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable and the undiscounted cash flows estimated to be generated by those
total assets are less than the assets' carrying amount, in accordance with
criteria established by Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets. A loss is recognized for the
difference between the carrying amount and the estimated fair value of the
asset.
Prior to December 31, 2001, the Company amortized all goodwill over 15 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and long-term debt.
The Company considers 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. The carrying amounts of
long-term debt approximate fair value because the obligation bears interest at a
variable rate. The carrying amount of notes payable to certain stockholders
approximate fair value because the current effective rates reflect the market
rate for debt with similar terms and remaining maturities.
F-12
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK AND OTHER RISKS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company has
minimal cash as excess cash is generally utilized to pay its bank line of
credit.
One customer accounted for 25% and 20% of net revenues for the years ended
December 31, 2001 and 2000, respectively. This customer approximated 23% of
accounts receivable at both December 31, 2001 and 2000.
Approximately 31% and 18% of net revenues for the years ended December 31, 2001
and 2000, respectively, resulted from merchandising services performed for
others at one retailer that recently filed for protection under the U.S.
Bankruptcy Code. While the Company's customers and the resultant contractual
relationships are with the manufacturers and not the retailer, a cessation of
this retailer's business would negatively impact the Company.
INCOME TAXES
From commencement through July 8, 1999, certain of the SPAR Companies had
elected, to be taxed as subchapter S corporations with the exception of
SPAR/Burgoyne Retail Services, Inc., SPAR Acquisition, Inc., SPAR Incentive
Marketing, Inc. and SPAR Marketing, Inc., which were taxed as C corporations.
The stockholders of the subchapter S companies included the applicable SPAR
Company's corporate income in their personal income tax returns. Accordingly,
these subchapter S companies were not subject to federal corporate income tax
during the period for which they were S corporations. In certain states, income
taxes were a direct responsibility of the Company.
In connection with the Company's July 1999 reorganization, the subchapter S
status of each applicable SPAR Company was terminated. Income taxes are provided
for the tax effects of transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related primarily to
differences between the basis of assets and liabilities for financial and tax
reporting. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
F-13
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 financial
reporting bases and tax bases of the Company's assets and liabilities result in
net deferred tax assets, an evaluation of the probability of being able to
realize the future benefits indicated by such asset is required. 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 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 transactions under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
The Company has disclosed in Note 11 to the consolidated financial statements
actual and pro forma basic and diluted net income (loss) per share as if the
Company had applied the fair value method of accounting.
PRO FORMA EARNINGS PER SHARE
Basic earnings per share amounts are based upon the weighted average number of
common shares outstanding. Diluted earnings per share amounts are based upon the
weighted average number of common and potential common shares for each period
represented. Potential common shares include stock options, using the treasury
stock method.
F-14
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the consolidated and combined 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill will no longer be amortized but
will be subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of Statement is expected to result in an increase in
net income from continued operations of approximately $0.8 million ($0.04 per
share based on current outstanding shares) per year. During 2002, the Company
will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which is
effective for fiscal years beginning after June 15, 2002. This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of Accounting Principles Board (APB) Opinion
No. 30, Reporting the Results of Operations for a disposal of a segment of a
business. The adoption of this pronouncement is not expected to have a material
impact on the Company's consolidated results of operations, financial position,
or cash flows.
F-15
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the 2001 presentation.
3. BUSINESS COMBINATIONS
MCI ACQUISITION
On January 15, 1999, SPGI acquired substantially all the business and assets
(the MCI Acquisition) of BIMA Group, Inc., a Texas corporation formerly known as
MCI Performance Group, Inc. (MCI), pursuant to their Asset Purchase Agreement
dated as of December 23, 1998, as amended (the MCI Purchase Agreement). The
transaction was accounted for as a purchase and consisted of consideration of
$1.8 million cash, an $8.8 million note (as amended) payable to MCI (the MCI
Note) and the assumption of certain agreed-upon liabilities (the MCI Purchase
Price).
The MCI Purchase Price was allocated to the assets acquired by SPGI, as agreed
upon in a schedule to the MCI Purchase Agreement, which generally used their
respective carrying values, as these carrying values were deemed to represent
fair market values of those assets and liabilities. The excess purchase price
paid by SPGI for the business and assets of MCI over the fair value of those
assets was $13.0 million, and was being amortized using the straight-line method
over 15 years. (See Note 1 Discontinued Operations.)
PIA REVERSE MERGER
On July 8, 1999, SG Acquisition, Inc., (PIA Acquisition), a wholly owned
subsidiary of PIA Merchandising Services, Inc., (PIA Delaware), merged into and
with SPAR Acquisition, Inc., (SAI) (the Merger) pursuant to the Agreement and
Plan of Merger dated as of February 28, 1999, as amended (the Merger Agreement),
by and among (i) PIA Delaware, PIA Merchandising Co., Inc. (PIA California), and
PIA Acquisition (collectively, the PIA Parties), and (ii) SAI, SPAR Marketing,
Inc. (SMI), SPAR Marketing Force, Inc. (SMF), SPAR Marketing, Inc. (SMNEV),
SPAR, Inc. (SINC), SPAR/Burgoyne Retail Services, Inc. (SBRS), SPAR Incentive
Marketing, Inc. (SIM), SPAR Performance Group, Inc. (SPGI) and SPAR Trademarks,
Inc. (STM) (each a SPAR Company and collectively, the SPAR Companies).
F-16
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
PIA Delaware (pre-Merger only), PIA California and each of the PIA California's
direct and indirect subsidiaries (i.e., Pacific Indoor Display Co., Inc.
(Pacific), Pivotal Sales Company (Pivotal) and PIA Merchandising Limited (PIA
Canada), may be referred to individually as a "PIA Company" and collectively as
the "PIA Companies."
In connection with the Merger, PIA Delaware changed its name to SPAR Group, Inc.
(referred to post-Merger individually as SGRP or the Company). Although the SPAR
Companies became subsidiaries of PIA Delaware (now SGRP) as a result of this
"reverse" Merger, the transaction was accounted for as required under generally
accepted accounting principles as a purchase by the SPAR Companies of the PIA
Companies, with the books and records of SGRP being adjusted to reflect the
historical operating results of the SPAR Companies.
In the transaction, the former shareholders and optionholders of SAI received
approximately 12.7 million shares of common stock and 134,114 common stock
options, respectively. The purchase price of approximately $12.3 million was
allocated based on the estimated fair value of the assets of the PIA Companies
deemed for accounting purposes to have been acquired by the SPAR Companies.
The goodwill that resulted from the Merger was calculated after giving effect to
the merger costs of the PIA Companies totaling $2.4 million and the anticipated
restructuring costs that are directly related to the Merger totaling $9.4
million (see Note 13, below). The excess purchase price deemed paid by the SPAR
Companies for the assets of the PIA Companies over the fair value of those
assets was $13.7 million and is being amortized, prior to December 31, 2001,
using the straight-line method over 15 years. In 2000, the amount of goodwill
related to this transaction was adjusted with an increase of approximately $2.0
million for additional pre-merger related liabilities and restructure related
costs and a decrease of approximately $1.8 million as a result of a change in
the valuation allowance on deferred taxes. In 2001, the amount of goodwill
related to this transaction decreased approximately $1.2 million as a result of
the reduction of estimates associated with pre-merger related liabilities and
restructure reserves.
F-17
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
4. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts receivable, net, consists of the following (in thousands):
DECEMBER 31
2001 2000
------------------------------------
Trade $16,366 $16,453
Unbilled 5,095 5,666
Non-trade 8 -
------------------------------------
21,469 22,119
Less allowance for doubtful accounts and other 325 2,648
------------------------------------
$21,144 $19,471
====================================
Goodwill and other intangibles, net, consists of the following (in thousands):
DECEMBER 31
2001 2000
------------------------------------
Goodwill and other intangibles $10,512 $11,734
Less accumulated amortization 2,155 1,384
------------------------------------
$ 8,357 $10,350
====================================
Property and equipment consists of the following (in thousands):
DECEMBER 31
2001 2000
------------------------------------
Equipment $3,818 $2,817
Furniture and fixtures 509 518
Leasehold improvements 123 123
Capitalized software development costs 2,504 2,073
------------------------------------
6,954 5,531
Less accumulated depreciation and amortization 4,310 2,399
------------------------------------
$2,644 $3,132
====================================
F-18
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
4. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
Accrued expenses and other current liabilities consists of the following (in
thousands):
DECEMBER 31
2001 2000
---------------------------
Accrued salaries and other related costs $1,831 $1,929
Accrued medical and compensation insurance 4 165
Amounts held on behalf of third parties - 82
Accrued merger related costs 2,397 3,661
Other 1,636 2,807
---------------------------
$5,868 $8,644
===========================
5. LINE OF CREDIT AND LONG-TERM LIABILITIES
In 1999, IBJ Whitehall Business Credit Corporation ("IBJ Whitehall") and the
members of the SPAR Group (other than PIA Canada) (collectively, the Borrowers)
entered into a Revolving Credit, Term Loan and Security Agreement as amended
(the Bank Loan Agreement). The Bank Loan Agreement provides the Borrowers with a
$15.0 million Revolving Credit facility and a $2.5 million term loan. The
Revolving Credit facility allows the Borrowers to borrow up to $15.0 million
based upon a borrowing base formula as defined in the Agreement (principally 85%
of "eligible" accounts receivable). The Bank Loan Agreement's revolving credit
loans of $15.0 million were scheduled to mature on September 21, 2002. On March
1, 2002, IBJ Whitehall extended the maturity date to February 28, 2003. The Term
Loan amortized in equal monthly installments of $83,334 and was repaid in full
as of December 31, 2001. The revolving loans bear interest at IBJ Whitehall's
"Alternate Base Rate" plus one-half of one percent (0.50%) (a total of 5.25% per
annum at December 31, 2001). In addition, the Borrowers are required to make
mandatory prepayments in an amount equal to 25% of Excess Cash Flow, as defined
in the Bank Loan Agreement, for each fiscal year, to be applied first to the
Term Loan and then to the revolving credit loans (subject to the Borrowers'
ability to re-borrow revolving advances in accordance with the terms of the Bank
Loan Agreement). In July 2001, the Company made an additional $250,000 payment
on the Term Loan as a result of the Excess Cash Flow requirement. The facility
is secured with all the assets of the Company and its subsidiaries.
F-19
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
5. LINE OF CREDIT AND LONG-TERM LIABILITIES (CONTINUED)
The Bank Loan Agreement contains an option for the Bank to purchase 16,667
shares of common stock of the Company for $0.01 per share in the event that the
Company's average closing share price over ten consecutive trading day period
exceeds $15.00 per share. This option expires September 22, 2002.
The Bank Loan Agreement contains certain financial covenants which must be met
by the Borrowers on a consolidated basis, among which are a minimum "Net Worth,"
a "Fixed Charge Coverage Ratio," a minimum ratio of Debt to EBITDA and a minimum
EBITDA, as such terms are defined in the Bank Loan Agreement. The Company was in
compliance with such financial covenants at December 31, 2001, with the
exception of the minimum net worth covenant (due to the estimated loss on
disposal of discontinued operations) for which a waiver was obtained from IBJ
Whitehall.
The balances outstanding on the revolving line of credit were $11.3 million and
$7.8 million at December 31, 2001 and December 31, 2000, respectively. As of
December 31, 2001 based upon the borrowing base formula, the SPAR Group had
availability of $2.9 million of the $3.7 million unused revolving line of
credit.
The Company's line of credit and long-term liabilities consist of the following
at December 31 (in thousands):
2001 2000
---------------------------
Revolving line of credit, maturing February 2003 $11,287 $7,761
Term loan - 1,250
Other long-term liabilities 57 225
---------------------------
11,344 9,236
Current maturities of long-term liabilities 57 1,143
---------------------------
$11,287 $8,093
===========================
Maturities of long-term debt at December 31, 2001 are as follows (in thousands):
Year ending December 31:
2002 $ 57
2003 11,287
-------
$11,344
=======
F-20
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
6. INCOME TAXES
The provision for income tax (benefit) expense from continuing operations is
summarized as follows (in thousands):
2001 2000 1999
------------------------------------------------------
Current $3,081 $533 $643
Deferred 42 247 -
------------------------------------------------------
$3,123 $780 $643
======================================================
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):
YEARS ENDED DECEMBER 31
2001 2000
-----------------------
Provision for income taxes at federal statutory rate $2,475 $1,190
State income taxes, net of federal benefit 317 140
Other permanent differences 317 321
Change in valuation allowance - (825)
Other 14 (46)
-----------------------
Provision for income taxes $3,123 $ 780
=======================
F-21
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Deferred taxes consist of the following (in thousands):
DECEMBER 31
2001 2000
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $4,150 $5,750
Restructuring 879 1,444
Accrued compensation, vacation and pension 229 290
Accrued insurance 217 545
Allowance for doubtful accounts and other receivable 166 1,065
Estimated loss on disposal of incentive business SPGI 2,618 -
Other, net 290 387
Valuation allowance (3,622) (4,259)
------------------------------------
Total deferred tax assets 4,927 5,222
Deferred tax liabilities:
Nonrecurring charge for termination of Subchapter S election 797 1,993
Capitalized software development costs 500 429
------------------------------------
Total deferred tax liabilities 1,297 2,422
------------------------------------
Net deferred tax assets $3,630 $2,800
====================================
At December 31, 2001, the Company has net operating loss carryforwards (NOLs) of
$10.9 million available to reduce future federal taxable income. The Company's
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 has occurred
in connection with the PIA Merger, thereby restricting the NOLs available to the
Company to approximately $12.5 million over 18 years.
The Company has established a valuation allowance for the deferred tax assets
related to the available NOLs that are deductible for years subsequent to 2003
totaling $3,622,000. The entire $3,622,000 valuation allowance at December 31,
2001 if realized will result in a reduction of goodwill associated with the PIA
acquisition.
F-22
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Deferred tax assets have been offset by a valuation allowance as deemed
necessary based on the Company's estimates of its future sources of taxable
income and the expected timing of temporary difference reversals.
In 2001, the Company realized the benefit of certain deferred tax assets and
recorded a $637,000 change in its valuation allowance. A portion of the benefit
recorded resulted in a $250,000 reduction of goodwill associated with the PIA
acquisition.
In 2000, the Company realized the benefit of certain deferred tax assets and
recorded a $2,680,000 change in its valuation allowance. The benefit recorded
resulted in a $825,000 reduction of tax expense and a $1,855,000 reduction of
Goodwill associated with the PIA acquisition.
As a result of the July 8, 1999 PIA Merger (see Note 3), the subchapter S status
of each applicable SPAR Company was terminated for federal and state tax
purposes, and the SPAR Group recorded a deferred tax charge against income of
$3.1 million for the cumulative differences between the financial reporting and
income tax basis of certain assets and liabilities existing at that date.
Additionally, each such SPAR Company was required to change its method of
accounting from the cash basis to the accrual basis for income tax reporting
purposes.
The SPAR Group expects to be able to offset the deferred tax liability by
utilizing a deferred tax asset from the benefit of the PIA Companies' net
operating loss carryforwards. The individuals who were the stockholders of the
applicable SPAR Companies at that time were obligated to pay the 1999 and prior
income taxes relating to taxable income during the periods up to the Merger
date.
The pro forma disclosure on the statement of operations reflect adjustments to
present the provision for income taxes as if the applicable SPAR Company had not
been S corporations. The pro forma provisions for income taxes for the year
ended December 31, 1999, of $1.8 million from continuing operations is computed
using a combined federal and state tax rate of 37% of taxable income.
F-23
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The one-time, non-cash stock related compensation expense recorded in the year
ended December 31, 1999 of approximately $752,000 is not tax-deductible by the
SPAR Group for federal and state income tax purposes. In addition, the
amortization of purchased goodwill generated by the reverse Merger is not
tax-deductible. The pro forma tax provision for the year ended December 31, 1999
has been adjusted for the effects of these non-tax-deductible items.
7. COMBINED SHAREHOLDERS' EQUITY
Prior to the July 8, 1999 Merger, the subchapter S status of each applicable
SPAR Company was terminated for federal and state tax purposes. As of July 8,
1999, undistributed earnings of the SPAR Group were reclassified to additional
paid-in capital.
8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases equipment and certain office space in several cities, under
non-cancelable operating lease agreements. Certain leases contain escalation
clauses and require the Company to pay its share of any increases in operating
expenses and real estate taxes. Rent expense was approximately $1.0 million,
$1.1 million, and $1.4 million for the years ended December 31, 2001, 2000, and
1999, respectively. At December 31, 2001, future minimum commitments under all
noncancelable operating lease arrangements are as follows (in thousands):
2002 $1,176
2003 918
2004 779
2005 511
2006 492
--------------
$3,876
==============
F-24
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL MATTERS
In June 2000, Argonaut Insurance Co. filed a complaint alleging damages of
approximately $883,000 plus interest against the Company in Orange County
Superior Court, Santa Ana, California Case No. 00CC07125 with respect to alleged
breach of contract. In February 2002, this case was settled for $700,000. The
liability was accrued at December 31, 2001, as part of the accrued merger
related costs.
On October 24, 2001, Safeway Inc. filed a complaint alleging damages of
approximately $3.6 million plus interest and costs and alleged punitive damages
in an unspecified amount against the Company in Alameda County Superior Court,
California, Case No. 2001028498 with respect to (among other things) alleged
breach of contract. This case is being vigorously contested by the Company.
The Company is a party to various legal actions and administrative proceedings
arising in the normal course of business. In the opinion of Company management,
disposition of these matters are not anticipated to have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
9. EMPLOYEE BENEFITS
RETIREMENT/PENSION PLANS
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible
employees. Employer contributions were approximately $93,000, $64,000, and
$63,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
Certain of the Company's PIA employees are covered by union-sponsored,
collectively bargained, multi-employer pension plans. Pension expense related to
these plans was approximately $77,000, $24,000, and $30,000 for the years ended
December 31, 2001, 2000, and 1999, respectively.
F-25
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
9. EMPLOYEE BENEFITS (CONTINUED)
STOCK PURCHASE PLANS
The Company has an Employee and Consultant Stock Purchase Plans (SP Plans). The
SP Plans allow employees and consultants of the Company to purchase common stock
at a discount, without having to pay any commissions on the 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. During 2001, 2000 and 1999, the
Company issued 2,638 shares, 452 shares, and 7,568 shares of common stock, at a
weighted average price of $1.90, $3.03, and $2.71 per share, respectively.
10. RELATED-PARTY TRANSACTIONS
The SPAR Group, Inc. is affiliated through common ownership with SPAR Marketing
Services, Inc. (SMS), SPAR Management Services, Inc., Affinity (f/k/a Infinity)
Insurance Ltd. and SPAR Infotech, Inc.
The Company purchases field management services and the use of independent
contractor services from SPAR Management Services, Inc. and SPAR Marketing
Services, Inc., respectively.
The Company purchases Internet consulting services from SPAR Infotech, Inc.
The following transactions occurred between the SPAR Companies and the above
affiliates (in thousands):
YEARS ENDED DECEMBER 31
2001 2000 1999
-----------------------------------
Services provided by affiliates:
Independent contractor services $8,337 $5,177 $4,111
===================================
Field management services $6,779 $4,388 $4,344
===================================
Internet consulting services $1,185 $ 769 $ 608
===================================
Services provided to affiliates:
Management services $ 390 $ 692 $ 665
===================================
F-26
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
10. RELATED-PARTY TRANSACTIONS (CONTINUED)
Through the services of Affinity Insurance, Ltd., the Company purchased
insurance coverage for its casualty and property insurance risk, for
approximately $1,085,000, $994,000 and $959,000 for the years ended December 31,
2001, December 31, 2000 and December 31, 1999, respectively (in thousands).
DECEMBER 31
2001 2000
----------------------
Balance due to (from) affiliates included in accrued
liabilities:
SPAR Management Services, Inc. $ - $(26)
SPAR Marketing Services, Inc. 611 582
SPAR Infotech, Inc. - (4)
----------------------
$611 $552
======================
In 1999, the Company had an investment in an affiliate, which provided
telemarketing and related services. In 2000, the Company sold its interests in
the affiliate for $1.5 million and recorded a gain of approximately $790,000
that was included in other income.
In 2000, the Company's affiliate SMS settled its claim with the Internal Revenue
Service. As a result of this settlement, the $500,000 contingent liability
amount the Company had accrued at December 31, 1999 was reversed with a
corresponding credit made to cost of revenues.
11. STOCK OPTIONS
The Company has five stock option plans: the 1990 Stock Option Plan (1990 Plan),
the Amended and Restated 1995 Stock Option Plan (1995 Plan), the 1995 Director's
Plan (Director's Plan), the Special Purpose Stock Option Plan, and the 2000
Stock Option Plan (2000 Plan).
The 1990 Plan is a nonqualified option plan providing for the issuance of up to
830,558 shares of common stock to officers, directors, and key employees. The
options have a term of ten years and one week and are either fully vested or
will vest ratably no later than five years from the grant date. Since 1995, the
Company has not granted any new options under this plan.
F-27
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
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 have a term of ten years, except in the case of incentive stock options
granted to greater than 10% stockholders for which 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. Since
2000, the Company has not granted any new options under this Plan. During 2001,
options to purchase 2,349,825 shares of the Company's common stock under the
1995 Plan were voluntarily surrendered and canceled, and no options to purchase
shares of the Company's common stock were exercised under this Plan. At December
31, 2001, options to purchased 81,125 shares of the Company's common stock
remain outstanding under this Plan. The 1995 Plan has been replaced by the 2000
Plan.
The Director's Plan was a stock option plan for non-employee directors and
provided for the purchase of up to 100,000 shares of the Company's common stock.
Since 2000, the Company has not granted any new options under this Plan. During
2001, no options to purchase shares of the Company's common stock were exercised
under this Plan. At December 31, 2001, no 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.
On July 8, 1999, in connection with the merger, the Company established the
Special Purpose Stock Option 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 2001, no options to purchase shares of the Company's common
stock were exercised under this Plan. At December 31, 2001, options to purchase
25,750 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
F-28
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
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 are issued at 100%), 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 2001,
options to purchase 2,567,344 shares of the Company's common stock were granted
under this Plan. Options to purchase 309,492 shares of the Company's common
stock were exercised under this Plan during 2001. At December 31, 2001, options
to purchase 2,356,852 shares of the Company's common stock remain outstanding
under this Plan and options to purchase 852,531 shares of the Company's common
stock were available for grant under this Plan.
The following table summarizes stock option activity under the Company's plans:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------------------------------
Options outstanding at July 8, 1999, date of reverse
merger 1,438,285 $5.91
Granted 2,294,858 4.82
Exercised (10,811) 2.78
Canceled or expired (416,810) 5.51
----------------
Options outstanding, December 31, 1999 3,305,522 5.22
Granted 479,500 2.59
Exercised (115,864) .27
Canceled or expired (679,309) 5.94
----------------
Options outstanding, December 31, 2000 2,989,849 4.82
Granted 2,564,844 2.48
Exercised (309,492) 1.30
Canceled or expired (2,761,474) 5.00
----------------
Options outstanding, December 31, 2001 2,483,727 2.63
================
Option price range at end of year $0.01 TO $14.00
F-29
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
2001 2000 1999
--------------------------------------------------
Weighted average fair value of options
granted during the year $1.28 $2.59 $4.94
In January 2001, 2,349,825 options issued under the 1995 Stock Option Plan with
a weighted average exercise price of $4.97 were cancelled. In August 2001,
replacement options were granted under the Company's 2000 Plan.
The following table summarizes information about stock options outstanding at
December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, AVERAGE
EXERCISE PRICES 2001 LIFE PRICE 2001 EXERCISE PRICE
-------------------- ------------------------------------------------- -------------------------------
Less than $1.00 219,769 9.0 years $0.56 77,144 $ 0.22
$1.01 - $2.00 1,838,994 8.2 years 1.34 388,917 1.30
$2.01 - $4.00 41,125 8.1 years 3.16 15,375 3.13
Greater than $4.00 383,839 9.2 years 9.97 29,500 11.10
----------------- -------------
Total 2,483,727 8.4 years 2.63 510,936 1.75
================== =============
Outstanding warrants are summarized below:
SHARES EXERCISE
SUBJECT TO PRICE PER
WARRANTS SHARE
------------------------------------
Balance, December 31, 2001 96,395 $2.78 - $8.51
The above warrants expire at various dates from 2002 through 2004.
F-30
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. No compensation cost has been
recognized for the stock option plans. Had compensation cost for the Company's
option plans been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the Company's net income (loss)
and pro forma net income (loss) per share from continuing operations would have
been reduced to the adjusted amounts indicated below (in thousands, except per
share data):
YEAR ENDED DECEMBER 31
2001 2000 1999
----------------------------------------------
Actual/pro forma net (loss) income, as reported $(1,714) $1,322 $1,242
Pro forma net loss, as adjusted (585) (635) (1,011)
Actual/pro forma basic and diluted net (loss)
income per share, as reported $ (0.09) $ 0.07 $ 0.08
Actual/pro forma basic and diluted net loss per
share, as adjusted $ (0.03) $(0.03) $(0.07)
The pro forma effect on net income is not representative of the pro forma effect
on net 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 187%, 237%, and 186% for 2001, 2000, and 1999,
respectively; risk-free interest rate of 5.14%, 6.89%, and 5.65%; and expected
lives of six years.
F-31
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
12. NOTES PAYABLE TO CERTAIN STOCKHOLDERS
Former principal stockholders of the SPAR Companies each made loans to certain
SPAR Companies in the aggregate amount of $4.3 million to facilitate the
acquisition of the PIA Companies and the acquisition of the assets of MCI. These
stockholders also were owed $1.9 million in unpaid distributions relating to the
former status of most of the operating SPAR Companies as subchapter S
corporations. Those amounts totaling $6.2 million were converted into promissory
notes issued to these certain stockholders severally by SMF, SINC and SPGI prior
to the Merger.
As of December 31, 2001, notes payable to certain stockholders total $4.7
million, which have an interest rate of 8.0% and are due on demand. The current
bank agreements contain certain restrictions on the repayment of stockholder
debt and accordingly $2.0 million at both December 31, 2001 and 2000 is
classified as long-term.
13. SEGMENTS
As a result of the Company's decision to divest its Incentive Marketing
Division, the Company now operates solely in the Merchandising Services Industry
Segment.
14. RESTRUCTURING AND OTHER CHARGES
In connection with the PIA Merger, the Company's Board of Directors approved a
plan to restructure the operations of the PIA Companies. Restructuring costs are
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.
F-32
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
14. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
The following table displays a rollforward of the liabilities for restructuring
and other charges from July 8, 1999 Merger to December 31, 2001 (in thousands):
INITIAL PERIOD ENDED ADJUSTMENTS YEAR ENDED
RESTRUCTURING DECEMBER 31, DECEMBER 31, IN DECEMBER 31, DECEMBER 31,
AND OTHER 1999 1999 RESTRUCTURING 2000 2000
CHARGES DEDUCTIONS BALANCE CHARGES DEDUCTIONS BALANCE
------------------------------------------------------------------------------------------
Type of cost:
Employee separation $1,606 $ (491) $1,115 $ 748 $(1,376) $ 487
Equipment lease
settlements 2,740 (326) 2,414 1,367 (1,011) 2,770
Office lease settlements 1,794 (252) 1,542 (619) (379) 544
Redundant assets 957 (957) - - - -
------------------------------------------------------------------------------------------
$7,097 $(2,026) $5,071 $ 1,496 $(2,766) $3,801
==========================================================================================
ADJUSTMENTS IN YEAR ENDED
DECEMBER 31, 2000 RESTRUCTURING DECEMBER 31, 2001 DECEMBER 31, 2001
BALANCE CHARGES DEDUCTIONS BALANCE
-------------------------------------------------------------------------------
Type of cost:
Employee separation $ 487 $(132) $ (355) $ -
Equipment lease settlements 2,770 - (1,008) 1,762
Office lease settlements 544 - (124) 420
-------------------------------------------------------------------------------
$3,801 $(132) $(1,487) $2,182
===============================================================================
The maturities of long-term restructuring and other charges at December 31, 2001
are as follows (in thousands):
2002 $1,597
2003 350
2004 235
Management believes that the remaining reserves for restructuring are adequate
to complete its plan.
At December 31, 2001, the SPAR Group is obligated, under certain circumstances,
to pay other costs in connection with the Merger of approximately $2.2 million.
In addition, the Company incurred substantial cost in connection with the
transaction, including legal, accounting and investment banking fees estimated
to be an aggregate unpaid obligation of approximately $1.2 million at December
31, 2001 (see Note 4). The SPAR Group has also accrued approximately $1.2
million for expenses incurred by PIA prior to the Merger, which have not been
paid (see Note 4).
F-33
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
15. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share (in thousands, except per share data):
YEAR ENDED DECEMBER 31
2001 2000 1999
--------------------------------------------------
Numerators:
Actual/pro forma net income from continuing
operations $ 4,155 $2,721 $1,971
Actual loss from operations of discontinued division (5,869) (1,399) (729)
--------------------------------------------------
Actual net (loss) income $(1,714) $1,322 $1,242
==================================================
Denominator:
Shares used in basic earnings per share calculation 18,389 18,185 15,361
Effect of diluted securities:
Employee stock options 78 118 6
--------------------------------------------------
Shares used in diluted earnings per share
calculations 18,467 18,303 15,367
==================================================
Actual basic and diluted earnings per common share:
Income from continuing operations $ 0.23 $0.15 $0.13
Loss from operations of discontinued division (0.32) (0.08) (0.05)
--------------------------------------------------
Net (loss) income $(0.09) $0.07 $0.08
==================================================
F-34
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for 2001 and 2000 was as follows (in thousands, except earnings
per share amounts):
QUARTER
FIRST SECOND THIRD FOURTH
-------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001
Net revenues $14,941 $16,091 $19,025 $20,834
Gross profit 6,193 6,231 7,356 10,228
Income from continuing operations 147 700 1,263 2,045
Income (loss) from discontinued operations 530 (381) (686) (5,332)
-------------------------------------------------------------
Net income (loss) $ 677 $ 319 $ 577 $(3,287)(1)
=============================================================
Basic/diluted net income (loss) per
common share:
Actual income from continuing
operations $ 0.01 $ 0.04 $ 0.07 $ 0.11
Income (loss) from discontinued
operations 0.03 (0.02) (0.04) (0.29)
-------------------------------------------------------------
Net income (loss) $ 0.04 $ 0.02 $ 0.03 $ (0.18)
=============================================================
YEAR ENDED DECEMBER 31, 2000
Net revenues $24,682 $21,866 $16,535 $18,376
Gross profit 8,158 8,186 6,710 8,127
Income from continuing operations 675 603 431 1,012
Loss from discontinued operations (259) (490) (331) (319)
-------------------------------------------------------------
Net income $ 416 $ 113 $ 100 $ 693(2)
=============================================================
Basic/diluted net income (loss) per
common share:
Actual income from continuing
operations $ 0.04 $0.03 $0.03 $ 0.06
Loss from discontinued operations (0.02) (0.02) (0.02) (0.02)
-------------------------------------------------------------
Net income $ 0.02 $0.01 $0.01 $ 0.04
=============================================================
(1) Includes a $4,272,000 estimated loss on disposal of SPGI.
(2) Includes the realization of approximately $637,000 of income tax benefit as
a result of the change in the deferred income tax valuation allowance.
F-35
SPAR Group, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(In Thousands)
BALANCE AT
BEGINNING OF CHARGED TO COSTS CHARGED TO BALANCE AT END
PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS (1) OF PERIOD
---------------------------------------------------------------------------------
Year ended December 31, 2001:
Deducted from asset accounts:
Allowance for doubtful
accounts $2,648 $ 472 $ - $2,795 $ 325
Year ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful
accounts $2,035 $1,304 $ - $ 691 $2,648
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 605 $ 986 $1,221(2) $ 777 $2,035
(1) Uncollectible accounts written off, net of recoveries.
(2) $1,221 charged to other accounts represents the amounts acquired through
the PIA acquisition.
F-36
AMENDMENT NO. 2
TO
SECOND AMENDED AND RESTATED
REVOLVING CREDIT, TERM LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 2 ("Amendment") is entered into as of April 21, 2000, by
and between SPAR Marketing Force, Inc., SPAR, Inc., SPAR/Burgoyne Retail
Services, Inc., SPAR Group, Inc., SPAR Incentive Marketing, Inc., SPAR
Trademarks, Inc., SPAR Performance Group, Inc. (f/k/a SPAR MCI Performance
Group, Inc.), SPAR Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., PIA Merchandising Co., Inc., Pacific Indoor Display Co., Inc.
and Pivotal Sales Company (each a "Borrower" and collectively, the "Borrowers")
and IBJ Whitehall Business Credit Corporation ("Lender").
BACKGROUND
Borrowers and Lender are parties to a Second Amended and Restated Revolving
Credit, Term Loan and Security Agreement dated as of September 22, 1999 (as
amended, supplemented, restated or otherwise modified from time to time, the
"Loan Agreement") pursuant to which Lender provides Borrowers with certain
financial accommodations.
Borrowers have requested that Lender amend certain provisions of the Loan
Agreement and Lender is willing to do so on the terms and conditions hereafter
set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of credit
heretofore or hereafter made to or for the account of the Borrowers by Lender,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 3 below, the following defined terms in Section
1(A) of the Loan Agreement are hereby amended in their entirety to provide as
follows:
"Maximum Revolving Amount" shall mean $15,000,000.
"Revolving Credit Note" shall mean the $15,000,000 Third Amended and
Restated Revolving Credit Note dated as of April 21, 2000 executed by the
Borrowers in favor of Lender.
3. Conditions of Effectiveness. This Amendment shall become effective upon
satisfaction of the following conditions precedent: (a) Lender shall have
received four (4) copies of this Amendment executed by each Borrower and
consented and agreed to by the Guarantors and (b) such other certificates,
instruments, documents and agreements as may be required by Lender or its
counsel, each of which shall be in form and substance satisfactory to Lender and
its counsel.
4. Representations and Warranties. Each Borrower hereby represents and
warrants as follows:
(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of such Borrower and are
enforceable against such Borrower in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, such Borrower hereby
reaffirms that all continuing covenants, representations and warranties made in
the Loan Agreement, to the extent the same are not amended hereby, are true and
correct in all material respects and agrees that all such continuing covenants,
representations and warranties shall be deemed to have been remade as of the
effective date of this Amendment, excluding, however, those events subject to an
express written waiver or consent from us or those expressly permitted or not
prohibited by the covenants, provided, however, that any representation or
warranty incorporating schedules speak only as of the Closing Date, subject to
Borrower's obligation under Section 12(m) of the Loan Agreement to notify Lender
of certain occurrences or events.
(c) No Event of Default or Default has occurred and is continuing or
would exist after giving effect to this Amendment, excluding, however, those
events subject to an express written waiver or consent from us.
(d) As of the date hereof, no Borrower has any defense, counterclaim
or offset with respect to the Loan Agreement.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of this Amendment hereof, each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words
of like import shall mean and be a reference to the Loan Agreement as amended
hereby.
(b) 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.
(c) Except as expressly provided in this Amendment, the execution,
delivery and effectiveness of this Amendment 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 Amendment 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.
7. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
2
8. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all of
which when taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and
year first written above.
SPAR MARKETING FORCE, INC.
SPAR, INC.
SPAR/BURGOYNE RETAIL SERVICES, INC.
SPAR INCENTIVE MARKETING, INC.
SPAR TRADENAMES, INC.
SPAR MCI PERFORMANCE GROUP, INC.
SPAR MARKETING, INC. (DE)
SPAR MARKETING, INC. (NV)
SPAR ACQUISITION, INC., as Borrowers
By:
--------------------------------------------------
Name: James H. Ross
Title: Chief Financial Officer of each of the
foregoing corporations
PIA MERCHANDISING CO., INC.
PACIFIC INDOOR DISPLAY CO., INC.
PIVOTAL SALES COMPANY
SPAR GROUP, INC., as Borrowers
By:
--------------------------------------------------
Name: James H. Ross
Title: Treasurer of each of the
foregoing corporations
IBJ WHITEHALL BUSINESS CREDIT CORPORATION
By:
--------------------------------------------------
Name:
Title:
[SIGNATURES CONTINUED ON THE FOLLOWING PAGE]
3
CONSENTED AND AGREED TO:
- ----------------------------------
Robert G. Brown, a Guarantor
- ----------------------------------
William H. Bartels, a Guarantor
PIA MERCHANDISING LIMITED,
a Guarantor
By:
-------------------------------
Name: James H. Ross
Title: Treasurer
4
THIRD AMENDED AND RESTATED
REVOLVING CREDIT NOTE
$15,000,000 New York, New York
As of April 21, 2000
This Third Amended and Restated Revolving Credit Note is executed and
delivered under and pursuant to the terms of that certain Amendment No. 2 to
Second Amended and Restated Revolving Credit, Term Loan and Security Agreement
dated as of April 21, 2000 (as amended, restated, supplemented or modified from
time to time, the "Amendment" and together with the Second Amended and Restated
Revolving Credit, Term Loan and Security Agreement dated as of September 22,
1999 as amended, restated, supplemented or modified from time to time, the "Loan
Agreement") by and among SPAR GROUP, INC., a Delaware corporation with an office
at 580 White Plains Road, Tarrytown, New York 10591, SPAR MARKETING FORCE, INC.,
a Nevada corporation with an office at 580 White Plains Road, Tarrytown, New
York 10591 ("SMF"), SPAR, INC., a Nevada corporation with an office at 580 White
Plains Road, Tarrytown, New York 10591 ("SPAR") SPAR/BURGOYNE RETAIL SERVICES,
INC., an Ohio corporation with an office at 580 White Plains Road, Tarrytown,
New York 10591 ("SBRS"), SPAR INCENTIVE MARKETING, INC., a Delaware corporation
with an office at 580 White Plains Road, Tarrytown, New York 10591 ("SIM"), SPAR
TRADEMARKS, INC., a Nevada corporation with an office at 580 White Plains Road,
Tarrytown, New York 10591 ("STI"), SPAR PERFORMANCE GROUP, INC. (f/k/a SPAR MCI
Performance Group, Inc.), a Delaware corporation with an office at 580 White
Plains Road, Tarrytown, New York 10591 ("SMCI"), SPAR MARKETING, INC., a
Delaware corporation with an office at 580 White Plains Road, Tarrytown, New
York 10591 ("SMIDE"), SPAR MARKETING, INC., a Nevada corporation with an office
at 1757 Northfield Drive, Rochester Hills, Michigan 48309 ("SMINV"), SPAR
ACQUISITION, INC., a Nevada corporation with an office at 580 White Plains Road,
Tarrytown, New York 10591 ("SAI"), PIA MERCHANDISING CO., INC., a California
corporation with an office at 580 White Plains Road, Tarrytown, New York 10591
("PIA"), PACIFIC INDOOR DISPLAY CO., INC., a California corporation with an
office at 580 White Plains Road, Tarrytown, New York 10591 ("Pacific"), PIVOTAL
SALES COMPANY, a California corporation with an office at 580 White Plains Road,
Tarrytown, New York 10591 ("Pivotal") (SMF, SPAR, SBRS, SIM, STI, SMCI, SMIDE,
SMINV, SAI, PIA, Pacific and Pivotal, each a "Borrower" and jointly and
severally, the "Borrowers") and IBJ WHITEHALL BUSINESS CREDIT CORPORATION
("Lender"). Capitalized terms not otherwise defined herein shall have the
meanings as provided in the Loan Agreement.
FOR VALUE RECEIVED, Borrowers hereby jointly and severally promise to
pay to the order of Lender, at its offices located at One State Street, New
York, New York 10004 or at such other place as Lender may from time to time
designate to Borrowing Agent in writing:
(i) the principal sum of FIFTEEN MILLION AND 00/100 DOLLARS
($15,000,000) or, if different, such amount of Revolving Advances as may be due
and owing under the Loan Agreement, payable in full on the last day of the Term,
subject to acceleration upon the occurrence of an Event of Default or earlier
termination of the Loan Agreement; and
(ii) interest on the principal amount of this Note from time to time
outstanding, payable at the Revolving Interest Rate in accordance with the
provisions of the
Loan Agreement. Upon and after the occurrence of an Event of Default, and during
the continuation thereof, interest shall be payable at the Default Rate. In no
event, however, shall interest exceed the maximum interest rate permitted by
law.
This Note is the Revolving Credit Note referred to in the Loan
Agreement and is secured by the liens granted pursuant to the Loan Agreement and
the Ancillary Agreements, is entitled to the benefits of the Loan Agreement and
the Ancillary Agreements and is subject to all of the agreements, terms and
conditions therein contained.
This Note may be voluntarily prepaid, in whole or in part, on the
terms and conditions set forth in the Loan Agreement.
If an Event of Default under Section 19(ix) of the Loan Agreement
shall occur, then this Note shall immediately become due and payable, without
notice, together with reasonable attorneys' fees if the collection hereof is
placed in the hands of an attorney to obtain or enforce payment hereof. If any
other Event of Default shall occur under the Loan Agreement or any of the
Ancillary Agreements, which is not cured within any applicable grace period,
then this Note may, as provided in the Loan Agreement, be declared to be
immediately due and payable, without notice, together with reasonable attorneys'
fees if the collection hereof is placed in the hands of an attorney to obtain or
enforce payment hereof.
This Note amends and restates in its entirety and is given in
substitution for (but not in satisfaction of) that certain Second Amended and
Restated Revolving Credit Note dated as of September 2, 1999 executed by
Borrowers in favor of IBJ Whitehall Business Credit Corporation.
This Note is being delivered in the State of New York, and shall be
construed and enforced in accordance with the laws of such State.
2
Each Borrower expressly waives any presentment, demand, protest,
notice of protest, or notice of any kind except as expressly provided in the
Loan Agreement.
SPAR GROUP, INC.
PIA MERCHANDISING CO., INC.
PACIFIC INDOOR DISPLAY CO., INC.
PIVOTAL SALES COMPANY
By:
------------------------------------------
Name: James H. Ross
Title: Treasurer of each of the foregoing
entities
SPAR MARKETING FORCE, INC.
SPAR, INC.
SPAR/BURGOYNE RETAIL SERVICES,
INC.
SPAR INCENTIVE MARKETING, INC.
SPAR TRADEMARKS, INC.
SPAR PERFORMANCE GROUP, INC.
SPAR MARKETING, INC. (DE)
SPAR MARKETING, INC. (NV)
SPAR ACQUISITION, INC.
By:
------------------------------------------
Name: James H. Ross
Title: Chief Financial Officer of each
of the foregoing entities
3
STATE OF NEW YORK )
:ss.:
COUNTY OF ___________ )
On the ___ day of __________, 2002, before me personally came
_____________, to me known, who being by me duly sworn, did depose and say that
he is the Treasurer of SPAR GROUP, INC., PIA MERCHANDISING CO., INC., PACIFIC
INDOOR DISPLAY CO., INC. and PIVOTAL SALES COMPANY and the Chief Financial
Officer of SPAR MARKETING FORCE, INC., SPAR, INC., SPAR/BURGOYNE RETAIL
SERVICES, INC., SPAR INCENTIVE MARKETING, INC., SPAR TRADEMARKS, INC., SPAR
PERFORMANCE GROUP, INC., SPAR MARKETING, INC. (DE), SPAR MARKETING, INC. (NV),
and SPAR ACQUISITION, INC., the corporations described in and which executed the
foregoing instrument; and that he signed his name thereto by order of the board
of directors of each such corporation
-------------------------------
Notary Public
AMENDMENT NO. 3 TO
SECOND AMENDED AND RESTATED
REVOLVING CREDIT, TERM LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 3 ("Amendment") is entered into as of March 1, 2002, by and
between SPAR Marketing Force, Inc., SPAR, Inc., SPAR/Burgoyne Retail Services,
Inc., SPAR Group, Inc., SPAR Incentive Marketing, Inc., SPAR Trademarks, Inc.,
SPAR Performance Group, Inc. (f/k/a SPAR MCI Performance Group, Inc.), SPAR
Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR Acquisition, Inc., PIA
Merchandising Co., Inc., Pacific Indoor Display Co., Inc. and Pivotal Sales
Company (each a "Borrower" and collectively, the "Borrowers") and IBJ Whitehall
Business Credit Corporation ("Lender").
BACKGROUND
Borrowers and Lender are parties to a Second Amended and Restated Revolving
Credit, Term Loan and Security Agreement dated as of September 22, 1999 (as
amended, supplemented or otherwise modified from time to time, the "Loan
Agreement"), pursuant to which Lender provides Borrowers with certain financial
accommodations.
Borrowers have requested that Lender amend certain provisions of the Loan
Agreement and Lender is willing to do so on the terms and conditions hereafter
set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of credit
heretofore or hereafter made to or for the account of the 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 herein shall
have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 3 below, the Loan Agreement is hereby amended as
follows:
(a) Section 1(A) of the Loan Agreement is amended as follows:
(i) the following defined terms are added in their appropriate
alphabetical order:
"Third Amendment" shall mean this Amendment No. 3 to Second
Amended and Restated Revolving Credit, Term Loan and Security Agreement
dated as of March 1, 2002.
"Third Amendment Effective Date" shall mean the date on which all
conditions precedent set forth in the Third Amendment shall be satisfied.
"Special Advance Amount" shall mean $500,000.
(ii) the following defined terms are amended in their entirety to
provide as follows:
"EBITDA" shall mean for any period the sum of (i) earnings before
interest and income taxes of Borrowers on a consolidated basis for such
period (excluding extraordinary gains and losses) plus (ii) depreciation
expenses of Borrowers on a consolidated basis for such period, plus (iii)
amortization expenses of Borrowers on a consolidated basis for such period
plus (iv) any non-recurring expenses incurred by Borrowers in connection
with the Merger Transaction.
"General Intangibles" shall mean and include, as to each
Borrower, all of such Borrower's "general intangibles" as defined in the
UCC, whether now owned or hereafter acquired, including, without
limitation, all payment intangibles, all choses in action, causes of
action, corporate or other business records, inventions, designs, patents,
patent applications, equipment formulations, manufacturing procedures,
quality control procedures, trademarks, trademark applications, service
marks, trade secrets, goodwill, copyrights, design rights, software,
computer information, source codes, codes, records and dates,
registrations, licenses, franchises, customer lists, tax refunds, tax
refund claims, computer programs, all claims under guaranties, security
interests or other security held by or granted to such Borrower to secure
payment of any of the Receivables by a Customer, all rights of
indemnification and all other intangible property of every kind and nature
(other than Receivables).
"Individual Maximum Revolving Advance Amount" shall mean (i) with
respect to the SPAR Borrowers, $15,000,000 and (ii) with respect to the PIA
Borrowers, $15,000,000.
"Inventory" shall mean and include as to each Borrower, all of
such Borrower's "inventory" as defined in the UCC, whether now owned or
hereafter acquired, including, without limitation, goods, merchandise and
other personal property, wherever located, to be furnished under any
consignment arrangement, contract of service or held for sale or lease, all
raw materials, work in process, finished goods and materials and supplies
of any kind, nature or description which are or might be used or consumed
in such Borrower's business or used in selling or furnishing such goods,
merchandise and other personal property, and all documents of title or
other documents representing them.
"Receivables" shall mean and include as to each Borrower, all of
such Borrower's "accounts" as defined in the UCC, contract rights,
instruments (including those evidencing indebtedness among the Borrowers
and their Affiliates), documents, chattel paper (including electronic
chattel paper), general intangibles relating to accounts, drafts and
acceptances, credit card receivables and all other forms of obligations
2
owing to such Borrower arising out of or in connection with the sale or
lease of Inventory or the rendition of services or the licensing of any
general intangible rights, and all supporting obligations, all guarantees
and other security therefor, in each case whether secured or unsecured, now
existing or hereafter created, and whether or not specifically sold or
assigned to Agent hereunder.
"Revised Article 9" shall mean revised Article 9 of the UCC.
"Term" shall mean the Closing Date through February 28, 2003
subject to acceleration upon the occurrence of an Event of Default
hereunder or other termination hereunder.
"Unbilled Receivables Availability" means the amount of Revolving
Advances against Eligible Unbilled Receivables Lender may from time to time
during the term of this Agreement make available to (a) Borrowers (other
than SMCI up to 70%) ("Unbilled Receivables Advance Rate") of the net face
amount of Borrowers' (other than SMCI) Eligible Unbilled Receivables and
(b) SMCI up to 60% of the net face amount of SMCI's Eligible Unbilled
Receivables.
(b) Section 2(a)(A) of the Loan Agreement is amended as follows:
(i) Subsection (y) is amended in its entirety to provide as
follows:
"(y) an amount equal to the sum of:
(i) Receivables Availability of the SPAR Borrowers, plus
(ii) Unbilled Receivables Availability of the SPAR
Borrowers, plus
(iii) the Special Advance Amount, minus
(iv) the aggregate amount of outstanding Letters of Credit
made to or for the benefit of SPAR Borrowers, minus
(v) the Leased Premises Reserve and such other reserves as
Lender may reasonably deem proper and necessary from
time to time."
(ii) The last sentence thereof is amended in its entirety to
provide as follows:
"The sum of 2(a)(A)(i) plus (ii) plus (iii) minus (v) shall
be referred to as the "SPAR Borrowers Formula Amount"."
(c) Section 2(a)(B) of the Loan Agreement is amended as follows:
3
(i) Subsection (y)(iii) is amended by deleting the "." at the end
thereof and replacing it with "; minus",
(ii) a new Subsection (y)(iv) is added to provide as follows:
"(iv) such other reserves as Lender may reasonably deem
proper and necessary from time to time."
(iii) the last sentence thereof is amended in its entirety to
provide as follows:
"The sum of 2(a)(B)(i) plus (ii) minus (iv) shall be
referred to as the "PIA Borrowers Formula Amount"."
(d) Section 3(a)(i) of the Loan Agreement is amended in its entirety
to provide as follows:
"(i) make a mandatory prepayment hereunder at any time that the
aggregate outstanding principal balance of the Revolving Advances
made by Lender to (x) Borrowers hereunder is in excess of the
lesser of the Maximum Revolving Amount or the Formula Amount, in
each case less the aggregate amount of outstanding Letters of
Credit, (y) to the SPAR Borrowers is in excess of the lesser of
the Individual Maximum Revolving Advance Amount of the SPAR
Borrowers or the SPAR Borrowers Formula Amount, in each case less
the aggregate amount of outstanding Letters of Credit made to or
for the benefit of the SPAR Borrowers, or (z) to the PIA
Borrowers is in excess of the lesser of the Individual Maximum
Revolving Advance Amount of the PIA Borrowers or the PIA
Borrowers Formula Amount, in each case less the aggregate amount
of outstanding Letters of Credit made to or for the benefit of
the PIA Borrowers, in each case in an amount equal to such
excess, and"
(e) A new Section 5(b)(vii) is added at the end of Section 5(b) of the
Loan Agreement to provide as follows:
"(vii) Special Advance Fees.
SPAR Borrowers shall pay to Lender (x) a fee equal to $833
per month commencing on the first day of the month following the
Amendment No. 3 Effective Date and on the first day of each month
thereafter during the Term, and (y) a Special Advance use fee to
the extent the outstanding Revolving Advances to the SPAR
Borrowers and the undrawn amount of outstanding Letters of Credit
issued for the account of the SPAR Borrowers exceeds the SPAR
Borrowers Formula Amount (calculated as if the Special Advance
Amount was $0), equal to two percent (2%) per annum of such
excess, calculated daily on the basis of a 360-day year for the
actual number of days elapsed but payable monthly, in arrears on
the first day of each month following the Amendment No. 3
4
Effective Date and the last day of the Term. All overadvance fees
payable hereunder shall be deemed earned in full on the date when
the same is due and payable hereunder and shall not be subject to
rebate or proration upon termination of this Agreement for any
reason."
(f) Section 6 of the Loan Agreement is amended by: (i) amending
Section 6(b) in its entirety to provide as follows:
"(b) Each Borrower authorizes Lender to file one or more
financing statements and any subsequent continuations or
amendments thereto deemed necessary by Lender (the "Financing
Statements"), describing the Collateral and containing any other
information required under Part 5 of Revised Article 9. Each
Borrower agrees to furnish any such information to Lender
promptly upon request. Each Borrower agrees to execute (i) any
such Financing Statements if so requested by Lender, but
understands and agrees that such Financing Statements may be
filed without such Borrower's signature where permitted; and (ii)
other documents necessary, in the reasonable determination of
Lender, to obtain and perfect the security interests evidenced
hereby, all in form reasonably satisfactory to Lender. The Lender
shall endeavor to send a copy of the filing of any such Financing
Statement to the Borrowers; provided, however, the failure to
send that copy shall not affect the validity or enforceability of
any such filing. The Lender shall not be liable for any mistake
in or failure to file any financing statement, modification,
continuation or other perfection document. The Borrowers will pay
the costs of filing the aforesaid documents or filing or
recording this Agreement in all public offices wherever filing or
recording is deemed by Lender to be necessary or desirable. Any
Financing Statements may, to the extent a signature is necessary,
be signed by Lender on behalf of any Borrower, and may be filed
at any time in any jurisdiction whether or not Revised Article 9
is then in effect in that jurisdiction. If any Receivable becomes
evidenced by a promissory note or any other instrument for the
payment of money, Borrowers will immediately deliver such
instrument to Lender appropriately endorsed or assigned.",
(ii) adding a new Section 6(c) at the end of Section 6(b) hereof
to provide as follows:
"(c) Each Borrower shall at any time and from time to time, take
such steps as Lender may request for Lender to obtain "control"
of any Investment Property, Deposit Accounts, Letter-of-Credit
Rights or electronic Chattel Paper (as such terms are defined in
Revised Article 9), to the extent that any of the foregoing may
be proceeds of any Collateral, with any agreements establishing
control to be in form and substance reasonably satisfactory to
Lender." and
5
(iii) adding a new Section 6(d) at the end of Section 6(c) hereof
to provide as follows:
"(d) Borrowers shall promptly provide Lender with written notice
of all commercial tort claims over $250,000, such notice to
contain the case title together with the applicable court and
brief description of the claim(s). Upon delivery of each such
notice, Borrowers shall be deemed to hereby grant to Lender a
security interest and lien in and to such commercial tort claims
and all proceeds thereof. The Borrowers may, so long as no Event
of Default exists, without notice to or the consent of the
Lender, pursue any course of action relating to any commercial
tort claims."
(g) Section 12 of the Loan Agreement is amended by: (i) amending the
first sentence of section 12(l) to provide as follows;
"such Borrower's (i) federal tax identification number and
(ii) organizational identification number issued by each
Borrower's state of incorporation or organization or a statement
that no such number has been listed is set forth on Schedule
12(l)."
(ii) deleting sections 12(r)(i) and 12(r)(ii) and amending
section 12(r) to provide as follows:
"(r) commencing with the fiscal quarter ending December 31, 2001
and at the end of each fiscal quarter thereafter, it shall cause
to be maintained at all times EBITDA for Borrowers on a
consolidated basis of not less than $7,750,000 with respect to
the twelve months then ended;",
(iii) deleting the word "and" at the end of "(y)", (iv) deleting
the "." at the end of "(z)" and replacing it with ";", (v) deleting the "."
at the end of "(aa)" and replacing it with "; and" and (vi) adding a new
subsection (bb) at the end thereof to provide as follows:
"(bb) the SPAR Borrowers shall not permit the sum of outstanding
Revolving Advances to the SPAR Borrowers and the undrawn amount
of outstanding Letters of Credit issued for the account of the
SPAR Borrowers to exceed the SPAR Borrowers Formula Amount
(calculated as if the Special Advance Amount was $0) for at least
twenty (20) consecutive Business Days during each fiscal
quarter."
(h) Schedule 12(l) to the Loan Agreement is amended in its entirety
and replaced with Schedule 12(l) attached hereto.
3. Conditions of Effectiveness. This Amendment shall become effective as of
November __, 2001 upon Lender's receipt of: (i) four (4) copies of this
Amendment executed by Borrower and consented and agreed to by the Guarantors,
(ii) the Third Amended and Restated Revolving Credit Note executed by Borrowers,
(iii) an amendment fee in the amount of $10,000, which fee shall be charged to
the Borrowers' loan account as a Revolving Advance, and (iv)
6
such other certificates, instruments, documents and agreements as may be
required by Lender or its counsel, each of which shall be in form and substance
satisfactory to Lender and its counsel.
4. Representations and Warranties. Each Borrower hereby represents and
warrants as follows:
(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of such Borrower and are
enforceable against such Borrower in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, such Borrower hereby
reaffirms that all continuing covenants, representations and warranties made in
the Loan Agreement, to the extent the same are not amended hereby, are true and
correct in all material respects and agrees that all such continuing covenants,
representations and warranties shall be deemed to have been remade as of the
effective date of this Amendment, excluding, however, those events subject to an
express written waiver or consent from us or those expressly permitted or not
prohibited by the covenants, provided, however, that any representation or
warranty incorporating schedules speak only as of the Closing Date, subject to
Borrower's obligation under Section 12(m) of the Loan Agreement to notify Lender
of certain occurrences or events.
(c) No Event of Default or Default has occurred and is continuing or
would exist after giving effect to this Amendment, excluding, however, those
events subject to an express written waiver or consent from us.
(d) As of the date hereof, Borrower has no defense, counterclaim or
offset with respect to the Loan Agreement.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of this Amendment hereof, each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words
of like import shall mean and be a reference to the Loan Agreement as amended
hereby.
(b) 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.
(c) Except as expressly provided in this Amendment, the execution,
delivery and effectiveness of this Amendment 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 Amendment 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.
7
7. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
8. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all of
which when taken together shall constitute one and the same agreement.
8
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and
year first written above.
SPAR MARKETING FORCE, INC.
SPAR, INC.
SPAR/BURGOYNE RETAIL SERVICES, INC.
SPAR INCENTIVE MARKETING, INC.
SPAR TRADENAMES, INC.
SPAR PERFORMANCE GROUP, INC.
SPAR MARKETING, INC. (DE)
SPAR MARKETING, INC. (NV)
SPAR ACQUISITION, INC., as Borrowers
By:
------------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer of
each of the foregoing entities
PIA MERCHANDISING CO., INC.
PACIFIC INDOOR DISPLAY CO., INC.
PIVOTAL SALES COMPANY
SPAR GROUP, INC., as Borrowers
By:
------------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer of
each of the foregoing corporations
IBJ WHITEHALL BUSINESS CREDIT
CORPORATION
By:
------------------------------------------
Name:
Title:
CONSENTED AND AGREED TO:
- ------------------------------
Robert G. Brown, a Guarantor
- ------------------------------
William H. Bartels, a Guarantor
PIA MERCHANDISING LIMITED,
a Guarantor
By:
---------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
SCHEDULE 12(l)
--------------
FEDERAL TAX IDENTIFICATION NUMBER AND ORGANIZATIONAL IDENTIFICATION NUMBER
AMENDMENT NO. 4 TO
SECOND AMENDED AND RESTATED
REVOLVING CREDIT, TERM LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 4 ("Amendment") is entered into as of March __, 2002, by
and between SPAR Marketing Force, Inc., SPAR, Inc., SPAR/Burgoyne Retail
Services, Inc., SPAR Group, Inc., SPAR Incentive Marketing, Inc., SPAR
Trademarks, Inc., SPAR Performance Group, Inc. (f/k/a SPAR MCI Performance
Group, Inc.), SPAR Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., PIA Merchandising Co., Inc., Pacific Indoor Display Co., Inc.
and Pivotal Sales Company (each a "Borrower" and collectively, the "Borrowers")
and IBJ Whitehall Business Credit Corporation ("Lender").
BACKGROUND
Borrowers and Lender are parties to a Second Amended and Restated Revolving
Credit, Term Loan and Security Agreement dated as of September 22, 1999 (as
amended, supplemented or otherwise modified from time to time, the "Loan
Agreement"), pursuant to which Lender provides Borrowers with certain financial
accommodations.
Borrowers have requested that Lender waive the net worth covenant for the
year ending December 31, 2001 and to amend certain provisions of the Loan
Agreement and Lender is willing to do so on the terms and conditions hereafter
set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of credit
heretofore or hereafter made to or for the account of the 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 herein shall
have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 4 below, the Loan Agreement is hereby amended as
follows:
(a) Section 1(A) of the Loan Agreement is amended by adding the
following defined terms in their appropriate alphabetical order:
"Fourth Amendment" shall mean this Amendment No. 4 to Second
Amended and Restated Revolving Credit, Term Loan and Security
Agreement dated as of March __, 2002.
"Fourth Amendment Effective Date" shall mean the date on which
all conditions precedent set forth in the Fourth Amendment shall be
satisfied.
(b) Section 12(o) of the Loan Agreement is amended in its entirety to
provide as follows;
"(o) it shall cause to be maintained for Borrowers on a
consolidated basis at the end of the fiscal quarter ending December
31, 2001 Net Worth of at least $10,875,000 and it shall increase such
Net Worth at the end of each fiscal quarter thereafter by at least an
additional $100,000 for each fiscal quarter;"
3. Waiver. Subject to the conditions precedent set forth in Section 4
below, Lender hereby waives the Events of Default which have occurred as a
result of Borrowers' non-compliance with Section 12(o) of the Loan Agreement for
the fiscal quarter ending December 31, 2001 to the extent the Net Worth for
Borrowers on a consolidated basis at such date was not less than $10,875,000.
4. Conditions of Effectiveness. This Amendment shall become effective as of
the Fourth Amendment Effective Date upon Lender's receipt of: (i) four (4)
copies of this Amendment executed by Borrower and consented and agreed to by the
Guarantors, and (ii) such other certificates, instruments, documents and
agreements as may be required by Lender or its counsel, each of which shall be
in form and substance satisfactory to Lender and its counsel.
5. Representations and Warranties. Each Borrower hereby represents and
warrants as follows:
(a) This Amendment and the Loan Agreement, as amended hereby, constitute
legal, valid and binding obligations of such Borrower and are enforceable
against such Borrower in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, such Borrower hereby
reaffirms that all continuing covenants, representations and warranties made in
the Loan Agreement, to the extent the same are not amended hereby, are true and
correct in all material respects and agrees that all such continuing covenants,
representations and warranties shall be deemed to have been remade as of the
effective date of this Amendment, excluding, however, those events subject to an
express written waiver or consent from us or those expressly permitted or not
prohibited by the covenants, provided, however, that any representation or
warranty incorporating schedules speak only as of the Closing Date, subject to
Borrower's obligation under Section 12(m) of the Loan Agreement to notify Lender
of certain occurrences or events.
(c) No Event of Default or Default has occurred and is continuing or would
exist after giving effect to this Amendment, excluding, however, those events
subject to an express written waiver or consent from us.
(d) As of the date hereof, Borrower has no defense, counterclaim or offset
with respect to the Loan Agreement.
6. Effect on the Loan Agreement.
(a) Upon the effectiveness of this Amendment hereof, each reference in the
Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of
like import shall mean and be a reference to the Loan Agreement as amended
hereby.
2
(b) 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.
(c) Except as expressly provided in this Amendment, the execution, delivery
and effectiveness of this Amendment 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.
7. Governing Law. This Amendment 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.
8. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
9. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all of
which when taken together shall constitute one and the same agreement.
[SIGNATURE PAGES TO FOLLOW]
3
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and
year first written above.
SPAR MARKETING FORCE, INC.
SPAR, INC.
SPAR/BURGOYNE RETAIL SERVICES, INC.
SPAR INCENTIVE MARKETING, INC.
SPAR TRADENAMES, INC.
SPAR PERFORMANCE GROUP, INC.
SPAR MARKETING, INC. (DE)
SPAR MARKETING, INC. (NV)
SPAR ACQUISITION, INC., as Borrowers
By:
-------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer of
each of the foregoing entities
PIA MERCHANDISING CO., INC.
PACIFIC INDOOR DISPLAY CO., INC.
PIVOTAL SALES COMPANY
SPAR GROUP, INC., as Borrowers
By:
-------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer of
each of the foregoing corporations
IBJ WHITEHALL BUSINESS CREDIT CORPORATION
By:
-------------------------------------
Name:
Title:
CONSENTED AND AGREED TO:
- ---------------------------------
Robert G. Brown, a Guarantor
- ---------------------------------
William H. Bartels, a Guarantor
PIA MERCHANDISING LIMITED,
a Guarantor
By:
------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
Exhibit 21.1 - List of Subsidiaries - -------------------------------------------------------------------------------- SUBSIDIARY INCORPORATION - -------------------------------------------------------------------------------- PIA Merchandising Co., Inc. California - -------------------------------------------------------------------------------- Pacific Indoor Display Co. California - -------------------------------------------------------------------------------- Pivotal Sales Company California - -------------------------------------------------------------------------------- SPAR Acquisition, Inc. Nevada - -------------------------------------------------------------------------------- SPAR Incentive Marketing, Inc. Delaware - -------------------------------------------------------------------------------- SPAR Trademarks, Inc. Nevada - -------------------------------------------------------------------------------- SPAR Marketing, Inc. (f/k/a SPAR Acquisition, Inc.) Delaware - -------------------------------------------------------------------------------- SPAR Performance Group, Inc. Delaware - -------------------------------------------------------------------------------- SPAR Marketing Force, Inc. Nevada - -------------------------------------------------------------------------------- SPAR Marketing, Inc. Nevada - -------------------------------------------------------------------------------- SPAR, Inc. (f/k/a SPAR/Burgoyne Information Services, Inc.) Nevada - -------------------------------------------------------------------------------- SPAR/Burgoyne Retail Services, Inc. (f/k/a SPAR Retail Ohio Information, Inc.) - -------------------------------------------------------------------------------- SPAR/PIA Retail Services, Inc. Nevada - -------------------------------------------------------------------------------- SPAR Group International, Inc. Nevada - -------------------------------------------------------------------------------- SPARinc.com, Inc. Nevada - -------------------------------------------------------------------------------- Retail Resources, Inc. Nevada - -------------------------------------------------------------------------------- Pivotal Field Services, Inc. Nevada - -------------------------------------------------------------------------------- PIA Merchandising Ltd. Canada - --------------------------------------------------------------------------------
Exhibit 23.1
Consent of Independent Auditors
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 l5, 2002 appearing in this Annual
Report on Form 10-K of SPAR Group, Inc. for the year ended December 31, 2001.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 27, 2002