SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the first quarterly period ended March 31, 2002
Commission file number: 0-27824
SPAR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
State of Incorporation IRS Employer Identification No.
580 White Plains Road, Tarrytown, New York, 10591
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (914) 332-4100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: [ X ] Yes
On May 7, 2002, there were 18,586,878 shares of Common Stock outstanding.
SPAR GROUP, INC.
Index
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 2002 and December 31, 2001.............................3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2002 and March 31, 2001...............4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2002 and
March 31, 2001.........................................................5
Notes to Condensed Consolidated Financial Statements...................6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................8
Item 3: Quantitative and Qualitative Disclosures About Market Risk............15
PART II: OTHER INFORMATION
Item 1: Legal Proceedings.....................................................16
Item 2: Changes in Securities and Use of Proceeds.............................16
Item 3: Defaults upon Senior Securities.......................................16
Item 4: Submission of Matters to a Vote of Security Holders...................16
Item 5: Other Information.....................................................16
Item 6: Exhibits and Reports on Form 8-K......................................16
SIGNATURES....................................................................17
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SPAR GROUP, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
MARCH 31, DECEMBER 31,
2002 2001
---------------------------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 18,381 21,144
Prepaid expenses and other current assets 557 440
Deferred income taxes 3,241 3,241
---------------------------------
Total current assets 22,179 24,825
Property and equipment, net 2,321 2,644
Goodwill and other intangibles, net 8,357 8,357
Deferred income taxes 389 389
Other assets 28 110
Net assets from discontinued operations 4,824 4,830
---------------------------------
Total assets $ 38,098 $ 41,155
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 877 $ 440
Accrued expenses and other current liabilities 6,251 5,868
Restructuring and other charges, current 1,507 1,597
Due to certain stockholders 2,455 2,655
Current portion of long-term debt - 57
Net liabilities from discontinued operations 5,822 5,732
---------------------------------
Total current liabilities 16,912 16,349
Line of credit and long-term liabilities, net of current portion 7,269 11,287
Long-term debt due to certain stockholders 2,000 2,000
Restructure and other charges, long-term 497 585
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 - 18,585,441 - March 31, 2002 and
18,582,615 - December 31, 2001 186 186
Additional paid-in capital 10,535 10,531
Retained earnings 699 217
---------------------------------
Total stockholders' equity 11,420 10,934
---------------------------------
Total liabilities and stockholders' equity $ 38,098 $ 41,155
=================================
Note: The Balance Sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include any of
the information and footnotes required by Generally Accepted Accounting
Principles for complete financial statements
See accompanying notes.
3
SPAR GROUP, INC.
Condensed Consolidated Statements of Operations
(unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
2002 2001
--------- ---------
Net revenues $ 16,046 $ 14,941
Cost of revenues 9,751 8,748
--------- ---------
Gross profit 6,295 6,193
Selling, general and administrative expenses 4,967 4,770
Depreciation and amortization 417 630
--------- ---------
Operating income 911 793
Interest expense 48 153
Other expense 82 -
--------- ---------
Income before provision for income taxes 781 640
Provision for income taxes 299 273
--------- ---------
Income from continuing operations 482 367
Income from discontinued operations, net - 310
--------- ---------
Net income $ 482 $ 677
========= =========
Basic/diluted net income per common share:
Income from continuing operations $ 0.03 $ 0.02
Income from discontinued operations, net - 0.02
--------- ---------
Net Income $ 0.03 $ 0.04
========= =========
Weighted average common shares - basic 18,584 18,272
========= =========
Weighted average common shares - diluted 18,951 18,322
========= =========
See accompanying notes.
4
SPAR GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited) (In thousands)
THREE MONTHS ENDED
--------------------------------------
MARCH 31, MARCH 31,
2002 2001
----------------- -----------------
OPERATING ACTIVITIES
Net income $ 482 $ 677
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation 417 437
Amortization 193
Changes in operating assets and liabilities:
Accounts receivable 2,763 2,486
Prepaid expenses and other current assets and prepaid
program costs (35) (118)
Accounts payable, accrued expenses and other current
liabilities 820 (528)
Restructuring charges (178) (649)
Discontinued operations, net 96 (2,444)
----------------- -----------------
Net cash provided by operating activities 4,365 54
INVESTING ACTIVITIES
Purchases of property and equipment (94) (283)
----------------- -----------------
Net cash used in investing activities (94) (283)
FINANCING ACTIVITIES
Net (payments of) borrowings on line of credit (4,018) 520
Net proceeds from employee stock purchase plan 4 -
Net payments of other long-term debt (57) (291)
Net payments to certain shareholders (200) -
----------------- -----------------
Net cash (used in) provided by financing activities (4,271) 229
Net change in cash - -
Cash at beginning of period - -
----------------- -----------------
Cash at end of period $ - $ -
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 165 $ 582
================= =================
See accompanying notes.
5
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of SPAR Group, Inc. (the "Company"), and its subsidiaries (collectively, the
"SPAR Group") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. This financial information should be read in conjunction with the
consolidated financial statements and notes thereto for the Company as contained
in Form 10-K for the year ended December 31, 2001, as filed with the Securities
Exchange Commission on April 1, 2002. The results of operations for the interim
periods are not necessarily indicative of the operating results for the entire
year.
2. 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.
The Company recognized termination costs in accordance with EITF 95-3,
Recognition of Liabilities in Connection with a Business Combination.
The following table displays a roll-forward of the liabilities for
restructuring and other charges from December 31, 2001 to March 31, 2002 (in
thousands):
DECEMBER 31, MARCH 31,
2001 QUARTER ENDED MARCH 2002
RESTRUCTURING AND 31, 2002 RESTRUCTURING
OTHER CHARGES DEDUCTIONS AND OTHER CHARGES
----------------------------------------------------------------
Type of cost:
Equipment lease settlements $ 1,762 $ 178 $ 1,584
Office lease settlements 420 0 420
----------------------------------------------------------------
$ 2,182 $ 178 $ 2,004
================================================================
Management believes that the remaining reserves for restructuring are
adequate to complete its plan.
6
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
3. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share (in thousands, except per share data):
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
2002 2001
--------- ---------
Numerator:
Net income from continuing operations $ 482 $ 367
Income from operations of discontinued division - 310
--------- ---------
Actual net income $ 482 $ 677
========= =========
Denominator
Shares used in basic earnings per share calculation 18,584 18,272
Effect of diluted securities:
Employee stock options 367 50
--------- ---------
Shares used in diluted earnings per share calculation 18,951 18,322
========= =========
Actual basic and diluted earnings per common share:
Income from continuing operations $ 0.03 $ 0.02
Other expense - 0.02
--------- ---------
Net income $ 0.03 $ 0.04
========= =========
4. OTHER EXPENSE
The Company recognized a loss of $82,000 for the three months ended
March 31, 2002, for its share of the Japan joint venture loss.
7
SPAR GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, including, in particular, the statements about the
Company's plans and strategies under the headings "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Although the Company
believes that its plans, intentions and expectations reflected in or suggested
by such forward-looking statements are reasonable, it cannot assure that such
plans, intentions or expectations will be achieved. Certain, but not all,
factors that could cause actual results to differ materially from the
forward-looking statements made in this Quarterly Report on Form 10-Q are set
forth in this Quarterly Report on Form 10-Q. All forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified by the cautionary statements contained in this Quarterly Report on
Form 10-Q or on the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, as previously filed with the Security Exchange Commission.
The Company does not undertake any obligation to update or revise any
forward-looking statement or risk factor or to publicly announce any revisions
to any of them to reflect future events, developments or circumstances.
OVERVIEW
The Company is a supplier of in-store merchandising and marketing
services throughout the United States, Canada, and Japan. 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
the SPGI 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.
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").
8
SPAR GROUP, INC.
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
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, SPAR
Technology Group, Inc., 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. 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.
9
SPAR GROUP, INC.
RESULTS OF OPERATIONS
The following table sets forth selected financial data and data as a percentage
of net revenues for the periods indicated.
Three Months Ended
-----------------------------------------
March 31, 2002 March 31, 2001
-------------------- --------------------
(amounts in thousands) Incr.
Amount $ Amount $ (Decr.)
-------- ------ -------- ------ ---------
Net revenues $16,046 100.0% $14,941 100.0% 7.4%
Cost of revenues 9,751 60.8% 8,748 58.6% 11.5%
Selling, general, and administrative expense 4,967 31.0% 4,770 31.9% 4.1%
Depreciation and amortization 417 2.6% 630 4.2% (33.8)%
Interest expense 48 0.3% 153 1.0% (68.6)%
Other expense 82 0.5% 0 0% (100.0)%
-------- ------ -------- ------
Income before provision for income taxes 781 4.9% 640 4.3% 22.0%
Provision for income taxes 299 1.9% 273 1.8% 9.5%
-------- ------ -------- ------ ---------
Income from continuing operations 482 3.0% 367 2.5% 31.3%
Income from discontinued operations, net 0 310
-------- --------
Net income $482 $677
======== ========
10
SPAR GROUP, INC.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Net revenues from continuing operations for the three months ended March
31, 2002, were $16.0 million, compared to $14.9 million for the three months
ended March 31, 2001, a 7.4% increase. The increase of 7.4% in net revenues is
primarily attributed to increased business in mass merchandiser and drug store
chains. The Technology Division recorded no revenue for the periods.
One customer accounted for 28% and 19% of the Company's net revenues for
the three months ended March 31, 2002, and 2001, respectively. This customer
also accounted for approximately 19% and 20% of accounts receivable at March 31,
2002 and 2001, respectively.
Approximately 22% and 24% of the Company's net revenues for the three
months ended March 31, 2002, and 2001, 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 significant reduction of this retailer's stores or cessation of this
retailer's business would negatively impact the Company.
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 59.5% and 35.4% were purchased
from the Company's affiliates, SPAR Marketing Services, Inc. and SPAR Management
Services, Inc. in the three month periods ending March 31, 2002, and 2001,
respectively. Cost of revenues as a percentage of net revenues increased 2.2% to
60.8% for the three months ended March 31, 2002, compared to 58.6% for the three
months ended March 31, 2001. This increase is principally attributable to the
mix of business.
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:
Three Months Ended
------------------------------------------------------------------------
Incr.
March 31, 2002 March 31, 2001 (Decr.)
--------------------------- -------------------------- -----------
Amount % Amount % %
------------ ----------- ----------- ---------- -----------
(amounts in millions)
Selling, general and administrative $ 5.0 31.0% $ 4.8 31.9% 4.1%
Depreciation and amortization 0.4 2.6 0.6 4.2 (33.8)
------------ ----------- ----------- ----------
Total Operating Expenses $ 5.4 33.6% $ 5.4 36.1% (0.3)%
============ =========== =========== ==========
Selling, general and administrative expenses increased by $0.2 million,
or 4.1%, for the three months ended March 31, 2002, to $5.0 million compared to
$4.8 million for the three months ended
11
SPAR GROUP, INC.
March 31, 2001 due primarily to increased spending on information technology.
Selling, general and administrative expenses for the Technology Division were
$0.1 million and $0.3 million for the three months ended March 31, 2002, and
March 31, 2001, respectively. The decrease was a result of lower development
spending.
Depreciation and amortization decreased by $0.2 million for the three
months ended March 31, 2002, due primarily to the change in accounting rules for
goodwill amortization adopted by the Company effective January 1, 2002.
INTEREST EXPENSE
Interest expense decreased $0.1 million for the three months ended
March 31, 2002, over the three months ended March 31, 2001, due to decreased
debt levels, as well as, decreased interest rates in 2002.
OTHER EXPENSE
The Company recognized a loss of $82,000 for the three months ended
March 31, 2002 for its share of the Japan joint venture loss.
INCOME TAXES
The income tax provision in the first quarter of 2002 represents a
combined federal and state income tax rate of 38% compared to 43% for the first
quarter of 2001.
INCOME FROM CONTINUING OPERATIONS
The Company had income from continuing operations of $0.5 million in
the first quarter of 2002 or $0.3 per basic and diluted share compared to income
from continuing operations of $0.4 million or $0.02 per basic and diluted share
in the corresponding period in 2001.
RESULTS OF DISCONTINUED OPERATIONS
- ----------------------------------
Three Months Ended
------------------------------------------------------------------------
Incr.
March 31, 2002 March 31, 2001 (Decr.)
--------------------------- -------------------------- -----------
(amounts in millions)
Amount % Amount % %
------- ------ -------- ------ -------
Net revenues $ 8.0 100.0% $ 12.7 100.0% (36.9)%
Cost of revenues 6.8 84.4% 10.1 79.1% (67.3)%
Selling, general and administrative 1.2 15.5% 1.6 12.6% (22.4)%
Depreciation and amortization 0.1 0.8% 0.3 2.3% (76.8)%
12
SPAR GROUP, INC.
Net revenues from the Incentive Marketing Division for the three months
ended March 31, 2002, were $8.0 million, compared to $12.7 million for the three
months ended March 31, 2001, a 36.9% decrease. The decrease in net revenues is
primarily due to a decrease in project revenues.
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 5.3% to
84.4% for the three months ended March 31, 2002, compared to 79.1% for the three
months ended March 31, 2001, primarily due to the program mix, with higher cost
programs accounting for a greater portion of the revenues in 2002.
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 declined $0.4 to $1.2 million for the three months ended March 31, 2002
from $1.6 million for the three months ended March 31, 2001 due to reduced
selling expenses. Depreciation and amortization were $0.1 million and $0.3
million for the three months ended March 31, 2002, and 2001 respectively. The
decrease of $0.2 million is directly attributed to the change in accounting
treatment for goodwill expense in 2002.
NET INCOME
The Company had net income of $0.5 million in the first quarter of 2002
or $0.03 per basic and diluted share compared to net income of $0.7 million or
$0.04 per basic and diluted share in the corresponding period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 31, 2002, the Company had a net income
of $0.5 million. Net cash provided by operating activities for the three months
ended March 31, 2002, was $4.4 million, compared with net cash provided by
operations of $0.1 million for the three months ended March 31, 2001. Cash
provided by operating activities in 2002 was primarily a result of net operating
profits and decreases in accounts receivable and increases in accounts payable,
accrued expenses and other current liabilities, partially offset by decreases in
restructuring charges.
Net cash used in investing activities for the three months ended March
31, 2002, was $0.1 million, compared with net cash used of $0.3 million for the
three months ended March 31, 2001. The net cash used in investing activities in
2002 resulted primarily from the purchases of property and equipment.
Net cash used by financing activities for the three months ended March
31, 2002, was $4.3 million, compared with net cash provided by financing
activities of $0.2 million for the three months ended March 31, 2001. The net
cash used by financing activities in 2002 was primarily due to repayment of the
line of credit, shareholder and other long-term debt.
13
SPAR GROUP, INC.
The above activity resulted in no change in cash and cash equivalents
for the three months ended March 31, 2002.
At March 31, 2002, the Company had positive working capital of $5.3
million as compared to positive working capital of $8.5 million at March 31,
2001. The decrease in working capital is due to a decrease in accounts
receivable offset by increases in accounts payable and accrued expenses. The
Company's current ratio was 1.31 and 1.52 at March 31, 2002, and 2001,
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 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. As of March 31, 2002, IBJ Whitehall extended the maturity date to July
31, 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 March 31, 2002). 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 twelve month EBITDA
requirement, and a minimum EBITDA, as such terms are defined in the Bank Loan
Agreement. The Company was in compliance with such financial covenants on March
31, 2002.
The balances outstanding on the revolving line of credit were $7.3
million and $11.3 million at March 31, 2002, and December 31, 2001,
respectively. As of March 31, 2002, based upon the borrowing base formula, the
SPAR Group had availability of $2.0 million of the $7.7 million unused revolving
line of credit.
As of March 31, 2002, the Company is obligated, under certain
circumstances, to pay costs in connection with the Merger (restructure charges)
of approximately $2.0 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
March 31, 2002, of approximately $1.1 million. The Company has also accrued
approximately $1.0 million for expenses incurred by PIA prior to the Merger,
which have not been paid as of March 31, 2002. Management believes the current
bank credit facilities are sufficient to fund operations and working capital,
including
14
SPAR GROUP, INC.
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
SPGI. 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. 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 2002, $0.2 million of such
indebtedness has been repaid by the Company. As of March 31, 2002, a total of
$4.5 million remained outstanding under these notes, which have an interest rate
of 8% and are due on demand. The current Bank Loan Agreement contains certain
restrictions on the repayment of stockholder debt and accordingly $2.0 million
at both March 31, 2002 and December 31, 2001 is classified as long-term.
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 3. 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. 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 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 revenue derived from international operations
is 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, as
available cash is generally utilized to pay down the outstanding line of credit.
The Company invests its cash and cash equivalents in investments in high-quality
and highly liquid investments consisting of taxable money market instruments.
15
SPAR GROUP, INC.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No change.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Item 2(a): Not applicable
Item 2(b): Not applicable
Item 2(c): Not Applicable
Item 2(d): Not Applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS.
10.15 Amendment No. 5 to Second Amended and Restated Revolving
Credit, Term Loan and Security Agreement by and among the
SPAR Borrowers and the Lender, effective as of March 31,
2002, and filed herewith.
REPORTS ON FORM 8-K.
NONE.
16
SPAR GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2002 SPAR Group, Inc., Registrant
By: /s/ Charles Cimitile
-------------------------------------
Charles Cimitile
Chief Financial Officer and Secretary
17
AMENDMENT NO. 5 TO
SECOND AMENDED AND RESTATED
REVOLVING CREDIT, TERM LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 5 ("Amendment") is effective as of March 31, 2002 and entered
into as of May 14, 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 extent the term of the facility
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 as follows:
(i) the following defined terms in their appropriate
alphabetical order:
"Fifth Amendment" shall mean this Amendment No. 5 to Second
Amended and Restated Revolving Credit, Term Loan and Security
Agreement effective as of March 31, 2002.
(ii) the following defined terms are amended and restated in
their entirety to provide as follows:
"Term" shall mean the Closing Date through July 31, 2003 subject
to acceleration upon the occurrence of an Event of Default hereunder
or other termination hereunder.
(b) Section 2(j) of the Loan Agreement is amended in its entirety to
provide as follows:
"(j) Intentionally Omitted."
3. Conditions of Effectiveness. This Amendment shall become effective
as of March 31, 2002 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.
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.
2
(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.
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.
[SIGNATURE PAGES TO FOLLOW]
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: /s/ Charles Cimitile
--------------------------------------------
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: /s/ Charles Cimitile
--------------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer of
each of the foregoing corporations
IBJ WHITEHALL BUSINESS CREDIT CORPORATION
By: /s/ Joseph Zautra
--------------------------------------------
Name: Joseph Zautra
Title: Vice President
CONSENTED AND AGREED TO:
/s/ Robert G. Brown
- --------------------------------
Robert G. Brown, a Guarantor
/s/ William H. Bartels
- --------------------------------
William H. Bartels, a Guarantor
PIA MERCHANDISING LIMITED,
a Guarantor
By: /s/ Charles Cimitile
-----------------------------
Name: Charles Cimitile
Title: Chief Financial Officer