UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
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, 2002
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 X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K _____.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Rule 12b-2 of the Act.) YES NO X
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The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on June 30, 2002, based on the closing price of
the Common Stock as reported by the Nasdaq Small Cap Market on such date, was
approximately $ 12,147,050.
The number of shares of the Registrant's Common Stock outstanding as of
December 31, 2002 was 18,824,527 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 2
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation and Other Information of SPAR Group, Inc. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 35
Item 13. Certain Relationships and Related Transactions 36
Item 14. Controls and Procedures 37
Item 15. Principal Accountant Fees and Services 37
PART IV
Item 16. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
Signatures 40
PART I
STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K OF SPAR GROUP,
INC. (THE "COMPANY"), INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT,
INCLUDING, IN PARTICULAR AND WITHOUT LIMITATION, THE STATEMENTS CONTAINED IN THE
DISCUSSIONS UNDER THE HEADINGS "BUSINESS" AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS, WHETHER
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS, TO NOT OCCUR OR BE
REALIZED OR TO BE LESS THAN EXPECTED. SUCH FORWARD-LOOKING STATEMENTS GENERALLY
ARE BASED UPON THE COMPANY'S BEST ESTIMATES OF FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENT, BASED UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF
OPERATIONS. FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL", "EXPECT", "INTEND",
"BELIEVE", "ESTIMATE", "ANTICIPATE", "CONTINUE" OR SIMILAR TERMS, VARIATIONS OF
THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. YOU SHOULD CAREFULLY CONSIDER SUCH
RISKS, UNCERTAINTIES AND OTHER INFORMATION, DISCLOSURES AND DISCUSSIONS WHICH
CONTAIN CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROVIDED IN THE FORWARD-LOOKING
STATEMENTS.
ALTHOUGH THE COMPANY BELIEVES THAT ITS PLANS, INTENTIONS AND
EXPECTATIONS REFLECTED IN OR SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CANNOT ASSURE THAT SUCH PLANS, INTENTIONS OR EXPECTATIONS WILL BE
ACHIEVED IN WHOLE OR IN PART. YOU SHOULD CAREFULLY REVIEW THE RISK FACTORS
DESCRIBED HEREIN AND ANY OTHER CAUTIONARY STATEMENTS CONTAINED IN THIS ANNUAL
REPORT ON FORM 10-K. ALL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY
OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED BY THE RISK FACTORS (SEE
ITEM 1 - CERTAIN RISK FACTORS) AND OTHER CAUTIONARY STATEMENTS IN THIS ANNUAL
REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR
REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.
ITEM 1. BUSINESS.
GENERAL
SPAR Group, Inc., a Delaware corporation ("SPAR Group", "SGRP" or the
"Company"), is a supplier of in-store merchandising and marketing services both
throughout the United States and internationally. The Company's operations are
divided into two divisions: the Merchandising Services Division and the
International Division. The Merchandising Services Division provides
merchandising services, database marketing, teleservices and marketing research
to manufacturers and retailers with product distribution primarily in mass
merchandisers, drug chains and grocery stores in the United States. The
International Division established in July 2000, currently provides
merchandising services through a joint venture in Japan and focuses on expanding
the Company's merchandising services business throughout the world.
CONTINUING OPERATIONS
Merchandising Services Division
The Company provides nationwide retail merchandising and marketing
services to home entertainment, PC software, general merchandise, health and
beauty care, consumer goods and food products companies in mass merchandisers,
drug chains and retail grocery stores in the United States. Merchandising
services primarily consist of regularly scheduled dedicated routed services and
special projects provided at the store level for a specific retailer or multiple
manufacturers primarily under single or multi-year contracts. Services also
include stand-alone large-scale implementations such as new store openings, new
product launches, special seasonal or promotional merchandising, focused product
support and product recalls. These services may include sales enhancing
activities such as ensuring that client products authorized for distribution are
in stock and on the shelf, adding new products that are approved for
distribution but not presently on the shelf, setting category shelves in
accordance with approved store schematics, ensuring that shelf tags are in
place, checking for the overall salability of client products and
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setting new and promotional items placing, and/or removing point of purchase and
other related media advertising. Specific in-store services can be initiated by
retailers or manufacturers, and include new store openings, new product
launches, special seasonal or promotional merchandising, focused product support
and product recalls.
The Company'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 are
the original predecessor of the current Company and were founded in 1967. The
PIA Companies, first organized in 1943, are also a predecessor of the Company
and a supplier of in-store merchandising services throughout the United States,
and were deemed "acquired" by the SPAR Marketing Companies for accounting
purposes pursuant to the Merger on July 8, 1999 (see Merger and Restructuring,
below).
International Division
In July 2000, the Company established its International Division, SPAR
Group International, Inc. ("SGI"), to focus on expanding its merchandising
services business world-wide. Also in July 2000, the Company entered into a
joint venture with a large Japanese distributor and together established SPAR FM
to provide merchandising services in Japan.
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 explored various alternatives for
the sale of SPGI and subsequently sold the business to SPGI's employees through
the establishment of an employee stock ownership plan on June 30, 2002.
Technology Division
In October 2002, the Company dissolved its Technology Division that was
established in March 2000 for the purpose of marketing its proprietary
Internet-based computer software.
INDUSTRY OVERVIEW
Merchandising Services Division
According to industry estimates over two billion dollars are spent
annually on domestic retail merchandising services. The merchandising industry
includes manufacturers, retailers, food brokers, and professional service
merchandising companies. The Company believes there is a continuing trend for
major manufacturers to move increasingly toward third parties to handle in-store
merchandising. The Company also believes that its merchandising services bring
added value to retailers, manufacturers and other businesses. Retail
merchandising services enhance sales by making a product more visible and
available to consumers. These services primarily include placing orders, shelf
maintenance, display placement, reconfiguring products on store shelves,
replenishing products, and providing product sampling, and also include other
services such as test market research, mystery shopping, teleservices, database
marketing and promotion planning and analysis.
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The Company believes merchandising services previously undertaken by
retailers and manufacturers have been increasingly outsourced to third parties.
Historically, retailers staffed their stores as needed to ensure inventory
levels, the advantageous display of new items on shelves, and the maintenance of
shelf schematics. In an effort to improve their margins, retailers decreased
their own store personnel and increased their reliance on manufacturers to
perform such services. Initially, manufacturers attempted to satisfy the need
for merchandising services in retail stores by utilizing their own sales
representatives. However, manufacturers discovered that using their own sales
representatives for this purpose was expensive and inefficient. Therefore,
manufacturers have increasingly outsourced the merchandising services to third
parties capable of operating at a lower cost by (among other things) serving
multiple manufacturers simultaneously.
Another significant trend impacting the merchandising segment is the
tendency of consumers to make product purchase decisions once inside the store.
Accordingly, merchandising services and in-store product promotions have
proliferated and diversified. Retailers are continually remerchandising and
remodeling entire stores to respond to 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.
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 are only
exacerbated by the logistics of operating in foreign markets. This environment
has created an opportunity for the Company to exploit its Internet-based
technology and business model that are successful in the United States. In July
2000, the Company established its International Division, which operates through
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 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 was on the
Pacific Rim region. In Japan, SPAR Group International, Inc. and a leading
Japanese based distributor established a joint venture to provide the latest
in-store merchandising services to the Japanese market. As part of the joint
venture agreement, the Company translated several of its proprietary
Internet-based logistical, communications and reporting software applications
into Japanese. Through its Auburn Hills, Michigan server, the Company provides
the joint venture access to this logistical, communications and reporting
software. More recently, the Company has begun to focus on other potential
merchandising markets worldwide and has hired representatives in Greece and
Australia to assist in those efforts. The Company is actively pursuing expansion
into various other markets.
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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 is referred to
post-Merger individually as "SPAR Group", "SGRP" or the "Company"). Although the
SPAR Marketing Companies and SPGI became subsidiaries of PIA Delaware (now the
Company) 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 the Company being adjusted to reflect the historical operating
results of the SPAR Marketing Companies and SPGI (together with certain
intermediate holding companies, the "SPAR Companies").
BUSINESS STRATEGY
As the marketing services industry continues to grow, consolidate and
expand both in the United States and internationally, large retailers and
manufacturers are increasingly outsourcing their marketing needs to third-party
providers. The Company believes that offering marketing services on a national
and global basis will provide it with a competitive advantage. Moreover, the
Company believes that successful use of and continuous improvements to a
sophisticated technology infrastructure, including its proprietary
Internet-based software, is key to providing clients with a high level of
customer service while maintaining efficient, low cost operations. The Company's
objective is to become an international retail merchandising and marketing
service provider by pursuing its operating and growth strategy, as described
below.
Increased Sales Efforts:
The Company is seeking to increase revenues by increasing sales to its
current customers, as well as, establishing long-term relationships with new
customers, many of which currently use other merchandising companies for various
reasons. The Company believes its technology, field implementation and other
competitive advantages will allow it to capture a larger share of this market
over time. However, there can be no assurance that any increased sales will be
achieved.
New Products:
The Company is seeking to increase revenues through the internal
development and implementation of new products and services that add value to
its customers' retail merchandising related activities, some of which have been
identified and are currently being tested for feasibility and market acceptance.
However, there can be no assurance that any new products of value will be
developed or that any such new product can be successfully marketed.
Acquisitions:
The Company is seeking to acquire businesses or enter into joint
ventures or other arrangements with companies that offer similar merchandising
services both in the United States and worldwide. The Company believes that
increasing industry expertise, adding product segments, and increasing its
geographic breadth will allow it to service its clients more efficiently and
cost effectively. As part of its acquisition strategy, SPAR is actively
exploring a number of potential acquisitions, predominately in its core
merchandising service businesses. Through such acquisitions, the Company may
realize additional operating and revenue synergies and may leverage existing
relationships with manufacturers, retailers and other businesses to create
cross-selling opportunities. However, there can be no assurance that any of the
acquisitions
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will occur or whether, if completed, the integration of the acquired businesses
will be successful or the anticipated efficiencies and cross-selling
opportunities will occur. The Company is not currently a party to any definitive
and binding purchase arrangement with respect to any contemplated acquisition.
Improve Operating Efficiencies:
The Company will continue to seek greater efficiencies. 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 streamline certain administrative
functions, such as accounting and finance, insurance, strategic marketing and
legal support.
Leverage and Improve Technology:
The Company intends to continue to utilize computer (including hand-held
computers), Internet, and other technology to enhance its efficiency and ability
to provide real-time data to its customers, as well as, maximize the speed of
communication, and logistical deployment of its merchandising specialists.
Industry sources indicate that customers are increasingly relying on marketing
service providers to supply rapid, value-added information regarding the results
of marketing expenditures on sales and profits. The Company (together with
certain of its affiliates) has developed and owns proprietary Internet-based
software technology that allows it to utilize the Internet to communicate with
its field management, schedule its store-specific field operations more
efficiently, receive information and incorporate the data immediately, quantify
the benefits of its services to customers faster, respond to customers' needs
quickly and implement programs rapidly. The Company has successfully modified
and is currently utilizing certain of its software applications in connection
with its Japanese joint venture. The Company believes that it can continue to
improve, modify and adapt its technology to support merchandising and marketing
services for additional customers and projects in the United States and in other
foreign markets. The Company also believes that its proprietary Internet-based
software technology gives it a competitive advantage in the marketplace.
DESCRIPTION OF SERVICES
The Company currently provides a broad array of merchandising and
marketing services on a national, regional and local basis to leading home
entertainment, general merchandise, consumer goods, food, and health and beauty
care manufacturers and retail companies through its Merchandising Services
Division.
The Company currently operates throughout the United States serving some
of the nation's leading companies. The Company believes its full-line
capabilities provide fully integrated national solutions that distinguish the
Company from its competitors. These capabilities include the ability to develop
plans at one centralized division headquarter location, effect chain wide
execution, implement rapid, coordinated responses to its clients' needs and
report on a real time Internet enhanced basis. The Company also believes its
national presence, industry-leading technology, centralized decision-making
ability, local follow-through, ability to recruit, train and supervise
merchandisers, ability to perform large-scale initiatives on short notice, and
strong retailer relationships provide the Company with a significant advantage
over local, regional or other competitors.
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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 marketing services primarily on behalf of
consumer product manufacturers at mass merchandiser, drug and retail grocery
chains. The Company currently provides three principal types of merchandising
and marketing services: syndicated services, dedicated services and project
services.
Syndicated Services
Syndicated services consist of regularly scheduled, routed merchandising
services provided at the retail store level for various manufacturers usually
under annual or multi-year contracts. These services are performed for multiple
manufacturers, including, in some cases, manufacturers whose products are in the
same product category. Syndicated services may include activities such as:
o Reordering and replenishment of products
o Ensuring that the client's products authorized for distribution
are in stock and on the shelf
o Adding new products that are approved for distribution but not yet
present on the shelf
o Designing and implementing store planogram schematics
o Setting product category shelves in accordance with approved store
schematics
o Ensuring that product shelf tags are in place
o Checking for overall salability of the client's products
o Placing new product and promotional items in prominent positions
Dedicated Services
Dedicated services consist of merchandising services, generally as
described above, which are performed for a specific retailer or manufacturer by
a dedicated organization, including a management team working exclusively for
that retailer or manufacturer. These services include many of the above
activities detailed in syndicated services, as well as, new store set-ups, store
remodels and fixture installations. These services are primarily based on
agreed-upon rates and fixed management fees under multi-year contracts.
Project Services
Project services consist primarily of specific in-store services
initiated by retailers and manufacturers, such as new store openings, new
product launches, special seasonal or promotional merchandising, focused product
support and product recalls. The Company also performs other project services,
such as new store sets and existing store resets, re-merchandising, remodels and
category implementations, under annual or stand-alone project contracts.
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.
Mystery Shopping - Calling anonymously on retail outlets (e.g. stores,
restaurants, banks) to check on distribution or display of a brand and
to evaluate products, service of personnel, conditions of store, etc.
Database Marketing - Managing proprietary information to permit easy
access, analysis and manipulation for use in direct marketing
campaigns.
Data Collection - Gathering sales and other information systematically
for analysis and interpretation.
Teleservices - Maintaining a teleservices center in its Auburn Hills,
Michigan, facility that performs inbound and outbound telemarketing
services, including those on behalf of certain of the Company's
manufacturing clients.
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The Company believes that providing merchandising and other services
timely, accurately and efficiently, as well as, delivering timely and accurate
reports to its clients, are two key components of its success. The Company has
developed Internet-based logistical deployment, communications, and reporting
systems that improve the productivity of its merchandising specialists and
provide timely data and reports to its customers. The Company's merchandising
specialists use hand-held computers, personal computers and laptop computers to
report through the Internet and Interactive Voice Response (IVR) to report
through its Auburn Hills teleservices center 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 scan and
process new orders for 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.
Through the Company's automated labor tracking system, its
merchandising specialists communicate work assignment completion information via
the Internet or telephone, enabling the Company to report hours, mileage, and
other completion information for each work assignment on a daily basis and
providing the Company with daily, detailed tracking of work completion. This
technology allows the Company to schedule its merchandising specialists more
efficiently, quickly quantify the benefits of its services to customers, rapidly
respond to customers' needs and rapidly implement programs. The Company believes
that its technological capabilities provide it with a competitive advantage in
the marketplace.
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 are only
exacerbated by the logistics of operating in foreign markets. The Company
believes such factors have created an opportunity to exploit its Internet-based
technology and business model that are successful in the United States. The
Company has 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 joint venture to provide the latest in-store
merchandising services to the Japanese market. The Company is actively pursuing
expansion to other markets.
SALES AND MARKETING
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 strategies developed at the
Company's headquarters are communicated to the Company's sales force for
execution. The sales force, located nationwide, work from both Company and home
offices. In addition, the Company's corporate account executives play an
important role in the Company's new business development efforts within its
existing manufacturer and retailer client base.
As part of the retailer consolidation, retailers are centralizing most
administrative functions, including operations, procurement and category
management. In response to this centralization and the growing importance of
large retailers, many manufacturers have reorganized their selling organizations
around a retailer team concept that focuses on a particular retailer. The
Company has responded to this emerging trend and currently has retailer teams in
place at select discount and drug chains.
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The Company's business development process includes a due diligence
period to determine the objectives of the prospective client, the work required
to be performed to satisfy those objectives and the market value of such work to
be performed. The Company employs a formal cost development and proposal process
that determines the cost of each element of work required to achieve the
prospective client's objectives. These costs, together with an analysis of
market rates, are used in the development of a formal quotation that is then
reviewed at various levels within the organization. The pricing of this internal
proposal must meet the Company's objectives for profitability, which are
established as part of the business planning process. After approval of this
quotation, a detailed proposal is presented to the prospective client. After the
elements of service and corresponding rates are agreed upon, a contract is
prepared and executed.
International Division
The Company's marketing efforts within its International Division are
designed to develop new business internationally. The Company has recently hired
representatives in Europe and Australia to help in these efforts. The Division's
corporate business development team targets specific areas and develops
strategic relationships to cultivate business for worldwide expansion.
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
in the United States including:
o Mass Merchandisers
o Drug
o Grocery
o Other retail trade groups (e.g. Discount, Home Centers)
The Company also provides database, research and other marketing
services to the automotive and consumer packaged goods industries.
One customer accounted for 26%, 25% and 20% of the Company's net
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
This customer also accounted for approximately 40%, 24% and 26% of accounts
receivable at December 31, 2002, 2001 and 2000, respectively.
A second customer accounted for 11%, 9% and 5% of the Company's net
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
This second customer also accounted for approximately 5%, 4% and 4% of accounts
receivable at December 31, 2002, 2001 and 2000, respectively.
Approximately 24%, 31%, and 18% of net revenues for the years ended
December 31, 2002, 2001, and 2000, respectively, resulted from merchandising
services performed for others at Kmart stores. Kmart filed for protection under
the U.S. Bankruptcy Code in January 2002. During 2002, Kmart closed a
significant number of stores in the United States. While the Company's customers
and the resultant contractual relationships are with the manufacturers and not
this retailer, the Company's business would be negatively impacted if this
retailer were to close all or most of its stores.
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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 had been on Japan and the
Pacific Rim region. The Company is actively pursuing expansion to Europe and
other markets.
COMPETITION
The marketing services industry is highly competitive.
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 merchandiser and chain drug channels of trade, as well as a
leading provider of in-store services to the home entertainment 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 and continuing improvement of its
proprietary Internet software, other technological efficiencies and various cost
controls, the Company will remain competitive in its pricing and services.
TRADEMARKS
The Company has numerous registered trademarks. Although the Company
believes its trademarks may have value, the Company believes its services are
sold primarily based on breadth and quality of service, cost, and the ability to
execute specific client priorities rapidly and consistently over a wide
geographic area. See "--Industry Overview" and "--Competition".
EMPLOYEES
As of December 31, 2002, the Company's Merchandising Services Division's
labor force consisted of approximately 9,500 people, approximately 300 full-time
employees, approximately 2,600 part-time employees and approximately 6,600
independent contractors (furnished principally through related parties, see Item
13 - Certain Relationships and Related Transactions, below), of which 193
full-time employees were engaged in operations and 11 were engaged in sales. The
Company considers its relations with its employees to be good. The Company's
Merchandising Services Division also utilized the services of its affiliate,
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 another affiliate SPAR Marketing Services, Inc. ("SMS")
(see Item 13 - Certain Relationships and Related Transactions, below).
The Company currently utilizes its existing Merchandising Division's
employees, as well as, the services of certain employees of its affiliates, SMSI
and SPAR Infotech, Inc. ("SIT"), to staff the International Division. However,
dedicated employees will be added to that division as the need arises. The
Company's affiliate, SIT, also provides programming and other assistance to the
Company's various divisions (see Item 13 - Certain Relationships and Related
Transactions, below).
CERTAIN RISK FACTORS
There are various risks associated with the Company's growth and
operating strategy. Certain (but not all) of these risks are discussed below.
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DEPENDENCY ON LARGEST CUSTOMERS
One customer accounted for 26%, 25% and 20% of the Company's net
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
This customer also accounted for approximately 40%, 24% and 26% of accounts
receivable at December 31, 2002, 2001 and 2000, respectively. A second customer
accounted for 11%, 9% and 5% of the Company's net revenues for the years ended
December 31, 2002, 2001, and 2000, respectively. This second customer also
accounted for approximately 5%, 4% and 4% of accounts receivable at December 31,
2002, 2001 and 2000, respectively. The loss of either such customer and the
failure to attract new large customers, could significantly decrease the
Company's revenues and such decreased revenues could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, approximately 24%, 31%, and 18% of net revenues for the
years ended December 31, 2002, 2001, and 2000, respectively, resulted from
merchandising services performed for manufacturers and others at Kmart, which is
currently operating under Chapter 11 of the Federal Bankruptcy Code. During
2002, Kmart closed a significant number of stores in the United States. There
can be no assurance that this retailer will continue to operate all or any of
its remaining stores. While the Company's customers and the resultant
contractual relationships are with the manufacturers and not this retailer, if
this retailer were to close all or most of its stores, such closures could
significantly decrease the Company's revenues and could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
DEPENDENCE ON TREND TOWARD OUTSOURCING
The business and growth of the Company depends in large part on the
continued trend toward outsourcing of marketing services, which the Company
believes has resulted from the consolidation of retailers and manufacturers, as
well as the desire to seek outsourcing specialists and reduce fixed operation
expenses. There can be no assurance that this trend in outsourcing will
continue, as companies may elect to perform such services internally. A
significant change in the direction of this trend generally, or a trend in the
retail, manufacturing or business services industry not to use, or to reduce the
use of, outsourced marketing services such as those provided by the Company,
could significantly decrease the Company's revenues and such decreased revenues
could have a material adverse effect on the Company's business, results of
operations and financial condition or the desired increases in the Company's
business, revenues and profits.
FAILURE TO SUCCESSFULLY COMPETE
The marketing services industry is highly competitive and the Company
has competitors that are larger (or part of larger holding companies) and may be
better financed. In addition, the Company competes with: (i) a large number of
relatively small enterprises with specific customer, channel or geographic
coverage; (ii) the internal marketing and merchandising operations of its
customers and prospective customers; (iii) independent brokers; and (iv) smaller
regional providers. Remaining competitive in the highly competitive marketing
services industry requires that the Company monitor and respond to trends in all
industry sectors. There can be no assurance that the Company will be able to
anticipate and respond successfully to such trends in a timely manner. If the
Company is unable to successfully compete, it could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
If certain competitors were to combine into integrated marketing
services companies, or additional marketing service companies were to enter into
this market, or existing participants in this industry were to become more
competitive, it could have a material adverse effect on the Company's business,
results of operations and financial condition or the desired increases in the
Company's business, revenues and profits.
-11-
VARIABILITY OF OPERATING RESULTS AND UNCERTAINTY IN CUSTOMER REVENUE
The Company has experienced and, in the future, may experience
fluctuations in quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary and from time to time and may
result in reduced revenue include: (i) the number of active customer projects;
(ii) customer delays, changes and cancellations in projects; (iii) the timing
requirements of customer projects; (iv) the completion of major customer
projects; (v) the timing of new engagements; (vi) the timing of personnel cost
increases; and (vii) the loss of major customers. In particular, the timing of
revenues is difficult to forecast for the home entertainment industry because
timing is dependent on the commercial success of particular releases of
particular customers. In the event that a particular release is not widely
accepted by the public, the Company's revenue could be significantly reduced. In
addition, the Company is subject to revenue uncertainties resulting from factors
such as unprofitable customer work and the failure of customers to pay. The
Company attempts to mitigate these risks by dealing primarily with large
credit-worthy customers, by entering into written agreements with its customers
and by using project budgeting systems. These revenue fluctuations could
materially and adversely affect the Company's business, results of operations
and financial condition or the desired increases in the Company's business,
revenues and profits.
FAILURE TO DEVELOP NEW PRODUCTS
A key element of the Company's growth strategy is the development and
sale of new products. While several new products are under current development,
there can be no assurance that the Company will be able to successfully develop
and market new products. The Company's inability or failure to devise useful
merchandising or marketing products or to complete the development or
implementation the development of a particular product for use on a large
scale, or the failure of such products to achieve market acceptance, could
adversely affect the Company's ability to achieve a significant part of its
growth strategy and the absence of such growth could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
INABILITY TO IDENTIFY, ACQUIRE AND SUCCESSFULLY INTEGRATE ACQUISITIONS
Another key component of the Company's growth strategy is the
acquisition of businesses across the United States and worldwide that offer
similar merchandising or marketing services. The successful implementation of
this strategy depends upon the Company's ability to identify suitable
acquisition candidates, acquire such businesses on acceptable terms and
integrate their operations successfully with those of the Company. There can be
no assurance that such candidates will be available or, if such candidates are
available, that the price will be attractive or that the Company will be able to
identify, acquire or integrate such businesses successfully. In addition, in
pursuing such acquisition opportunities, the Company may compete with other
entities with similar growth strategies, these competitors may be larger and
have greater financial and other resources than the Company. Competition for
these acquisition targets could also result in increased prices of acquisition
targets and/or a diminished pool of companies available for acquisition.
The successful integration of these acquisitions also may involve a
number of additional risks, including: (i) the inability to retain the customers
of the acquired business; (ii) the lingering effects of poor customer relations
or service performance by the acquired business, which also may taint the
Company's existing businesses; (iii) the inability to retain the desirable
management, key personnel and other employees of the acquired business; (iv) the
inability to fully realize the desired efficiencies and economies of scale: (v)
the inability to establish, implement or police the Company's existing
standards, controls, procedures and policies on the acquired business; (vi)
diversion of management attention; and (vii) exposure to customer, employee and
other legal claims for activities of the acquired business prior to acquisition.
And of course, any acquired business could perform significantly worse than
expected.
-12-
The inability to identify, acquire and successfully integrate such
merchandising or marketing services business could have a material adverse
effect on the Company's growth strategy and could limit the Company's ability to
significantly increase its revenues and profits.
UNCERTAINTY OF FINANCING FOR, AND DILUTION RESULTING FROM, FUTURE ACQUISITIONS
The timing, size and success of such acquisition efforts and any
associated capital commitments cannot be readily predicted. Future acquisitions
may be financed by issuing shares of the Company's Common Stock, cash, or a
combination of Common Stock and cash. If the Company's Common Stock does not
maintain a sufficient market value, or if potential acquisition candidates are
otherwise unwilling to accept the Company's Common Stock as part of the
consideration for the sale of their businesses, the Company may be required to
obtain additional capital through debt or equity financings. To the extent the
Company's Common Stock is used for all or a portion of the consideration to be
paid for future acquisitions, dilution may be experienced by existing
stockholders. There can be no assurance that the Company will be able to obtain
the additional financing it may need for its acquisitions on terms that the
Company deems acceptable. Failure to obtain such capital would materially
adversely affect the Company's ability to execute its growth strategy.
RELIANCE ON THE INTERNET
The Company relies on the Internet for the scheduling, coordination and
reporting of its merchandising and marketing services. The Internet has
experienced, and is expected to continue to experience, significant growth in
the numbers of users and amount of traffic as well as increased attacks by
hackers and other saboteurs. To the extent that the Internet continues to
experience increased numbers of users, frequency of use or increased bandwidth
requirements of users, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on the
Internet by this continued growth or that the performance or reliability of the
Internet will not be adversely affected. Furthermore, the Internet has
experienced a variety of outages and other delays as a result of accidental and
intentional damage to portions of its infrastructure, and could face such
outages and delays in the future of similar or greater effect. Any protracted
disruption in Internet service would increase the Company's costs of operation
and reduce efficiency and performance, which could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
ECONOMIC AND RETAIL UNCERTAINTY
The markets in which the Company operates are cyclical and subject to
the effects of economic downturns. The current political, social and economic
conditions, including the impact of terrorism on consumer and business behavior,
make it difficult for the Company, its vendors and its customers to accurately
forecast and plan future business activities. Substantially all of the Company's
key customers are either retailers or those seeking to do product merchandising
at retailers. If the retail industry experiences a significant economic
downturn, a reduction in product sales could significantly decrease the
Company's revenues. The Company also has risks associated with its customers
changing their business plans and/or reducing their marketing budgets in
response to economic conditions, which also could also significantly decrease
the Company's revenues. Such revenue decreases could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
SIGNIFICANT STOCKHOLDERS: VOTING CONTROL AND MARKET ILLIQUIDITY
Mr. Robert G. Brown, a founder, a director, the Chairman, President and
Chief Executive Officer of the Company, beneficially owns approximately 44.0% of
the Company's outstanding Common Stock, and Mr. William H. Bartels, a founder, a
director, and a Vice Chairman of the Company beneficially owns approximately
27.7% of the Company's outstanding Common Stock. These stockholders have, should
they choose to act together, and under certain circumstances Mr. Brown acting
alone has, the ability to control all matters requiring
-13-
stockholder approval, including the election of directors and the approval of
mergers and other business combination transactions.
In addition, although the Company Common Stock is quoted on the Nasdaq
Small Cap Market, the trading volume in such stock may be limited and an
investment in the Company's securities may be illiquid because the founders own
a significant amount of the Company's stock.
DEPENDENCE UPON AND POTENTIAL CONFLICTS IN SERVICES PROVIDED BY AFFILIATES
The success of the Company's business is dependent upon the successful
execution of its field services by SPAR Marketing Services, Inc. ("SMS"), SPAR
Management Services, Inc. ("SMSI"), and programming services provided by SPAR
Infotech, Inc. ("SIT"), each of which is an affiliate but not a subsidiary of
the Company, and none of which is consolidated in the Company's financial
statements or results. SMS provides substantially all of the field
representatives used by the Company in conducting its business (76% of field
expense in 2002). SMSI provides substantially all of the field management
services used by the Company in conducting its business. SIT provides
substantially all of the Internet programming services and other programming
needs used by the Company in conducting its business (see Item 13 - Certain
Relationships and Related Transactions, below), which are provided to the
Company by SMS and SMSI on a cost-plus basis pursuant to contracts that are
cancelable on 60 days notice prior to December 31 of each year and by SIT on an
hourly charge basis pursuant to a contract that is cancelable on 30 days notice.
The Company has determined that these services are provided at rates favorable
to the Company.
SMS, SMSI, SIT and certain other affiliated companies (collectively, the
"SPAR Affiliates") are owned solely by Mr. Robert G. Brown, a founder, a
director, the Chairman, President and Chief Executive Officer of the Company,
and Mr. William H. Bartels, a founder, a director, and a Vice Chairman of the
Company, who also are each directors and executive officers of the SPAR
Affiliates (see Item 13 - Certain Relationships and Related Transactions,
below). In the event of any dispute in the business relationships between the
Company and one or more of the SPAR Affiliates, it is possible that Messrs.
Brown and Bartels may have one or more conflicts of interest with respect to
those relationships and could cause one or more of the SPAR Affiliates to
renegotiate or cancel their contracts with the Company or otherwise act in a way
that is not in the Company's best interests.
While the Company's relationships with SMS, SMSI, SIT and the other SPAR
Affiliates are excellent, there can be no assurance that the Company could (if
necessary under the circumstances) replace the field representatives and
management currently provided by SMS and SMSI, respectively, or replace the
Internet and other programming services provided by SIT, in sufficient time to
perform its customer obligations or at such favorable rates in the event the
SPAR Affiliates no longer performed those services. Any cancellation, other
nonperformance or material pricing increase under those affiliate contracts
could have a material adverse effect on the Company's business, results of
operations and financial conditions or the desired increases in the Company's
business, revenues and profits.
THE COMPANY HAS NOT PAID AND DOES NOT INTEND TO PAY CASH DIVIDENDS
The Company has not paid dividends in the past, intends to retain any
earnings or other cash resources to finance the expansion of its business and
for general corporate purposes, and does not intend to pay dividends in the
future.
RISKS ASSOCIATED WITH INTERNATIONAL JOINT VENTURES
While the Company endeavors to limit its exposure for claims and losses
in any international joint ventures through contractual provisions, insurance
and use of single purpose subsidiaries for such ventures, there can be no
assurance that the Company will not be held liable for the claims against and
losses of a
-14-
particular international joint venture under applicable local law or local
interpretation of any joint venture or insurance provisions. If any such claims
and losses should occur, be material in amount and be successfully asserted
against the Company, such claims and losses could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
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.
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
Auburn Hills, MI Regional Office, Warehouse and Teleservices Center
Eden Prairie, MN Regional Office
Cincinnati, OH Regional Office
Largo, FL Regional Office
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 October 24, 2001, Safeway Inc., a former customer of the PIA
Companies, 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. On or about
December 30, 2002, the Court approved the filing of Safeway Inc.'s Second
Amended Complaint, which alleges causes of action for (among other things)
breach of contract against the Company, PIA Merchandising Co., Inc. and Pivotal
Sales Company. The Second Amended Complaint was filed with the Court on January
13, 2003, and does not specify the amount of monetary damages sought. No
punitive or exemplary damages are sought in Safeway Inc.'s Second Amended
Complaint. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-15-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq Small Cap
Market.
2001 2002
------------------------ --------------------------
High Low High Low
First Quarter $ 1.6094 $ .5625 $ 2.4100 $ 1.6000
Second Quarter 1.3000 .7000 2.5000 2.0000
Third Quarter 2.2700 .8700 2.8200 1.9600
Fourth Quarter 2.8000 .9200 4.9200 1.9100
As of December 31, 2002, there were approximately 700 beneficial
shareholders of the Company's Common Stock
DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of the business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected condensed consolidated financial data sets forth,
for the periods and the dates indicated, summary financial data of the Company
and its subsidiaries. The selected financial data have been derived from the
Company's financial statements, which have been audited by independent public
accountants.
-16-
SPAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31, NINE
MONTHS
ENDED
DECEMBER 31,
2002 2001 2000 1999(2) 1998(2)
----------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 69,612 $ 70,891 $ 81,459 $ 79,613 $ 32,601
Cost of revenues 40,331 40,883 50,278 50,499 16,217
----------- --------- -------- -------- --------
Gross profit 29,281 30,008 31,181 29,114 16,384
Selling, general and administrative expenses 18,804 19,380 24,761 23,213 9,978
Depreciation and amortization 1,844 2,682 2,383 1,204 142
----------- --------- -------- -------- --------
Operating income 8,633 7,946 4,037 4,697 6,264
Other (income) expense (26) 107 (790) (90) (149)
Interest expense 363 561 1,326 976 304
----------- --------- -------- -------- --------
Income from continuing operations before provision for
income taxes 8,296 7,278 3,501 3,811 6,109
Income tax provision 2,998 3,123 780 3,743 -
----------- --------- -------- -------- --------
Income from continuing operations 5,298 4,155 2,721 68 6,109
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 income (loss) $ 5,298 $ (1,714) $ 1,322 $ (495) $ 6,109
Unaudited pro forma data (1):
Income from continuing operations before provision for $ 3,811 $ 6,109
-------- --------
income taxes
Pro forma income tax provision 1,840 2,253
-------- --------
Pro forma income from continuing operations 1,971 3,856
Pro forma loss from discontinued operations net of
pro forma tax benefit of $429 (729) -
-------- --------
Pro forma net income $ 1,242 $ 3,856
Basic/diluted net income (loss) per common share:
Actual/Pro forma income from continuing operations $ 0.28 $ 0.23 $ 0.15 $ 0.13 $ 0.30
----------- --------- -------- -------- --------
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) -
----------- --------- -------- -------- --------
Actual/Pro-forma net income (loss) $ 0.28 $ (0.09) $ 0.07 $ 0.08 $ 0.30
=========== ======== ======== ======== ========
Actual/Pro forma weighted average shares outstanding 18,761 18,389 18,185 15,361 12,659
- basic
Actual/Pro forma weighted average shares outstanding
- diluted 19,148 18,467 18,303 15,367 12,659
-17-
December 31,
--------------------------------------------------------
2002 2001 2000 1999(2) 1998(2)
-------- -------- --------- --------- ----------
BALANCE SHEET DATA:
- ------------------
Working capital (deficiency) $ 6,319 $ 8,476 $ (2,273) $ (639) $ (2,214)
Total assets 29,757 41,155 48,004 54,110 14,865
Current portion of long-term debt - 57 1,143 1,147 685
Line of credit and long-term debt, net 148 13,287 10,093 16,009 311
Total stockholders' equity (deficit) 16,592 10,934 12,240 10,886 (1,405)
======== ======== ======== ========= ========
(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.
(2) In July 1999, PIA and the Spar Companies merged with the SPAR Companies
deemed the accounting acquirer. The results of operations include the
results of PIA from the acquisition date forward.
-18-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In the United States, 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. The
Company established its International Division in July 2000, and through a joint
venture with a leading Japanese 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.
In December 2001, the Company decided to divest its Incentive Marketing
Division and recorded an estimated loss on disposal of SPAR Incentive Marketing,
Inc. ("SIM") of approximately $4.3 million, net of taxes, including a $1.0
million reserve recorded for the anticipated cost to divest SPGI and any
anticipated losses through the divestiture date.
On June 30, 2002, SIM wholly-owned subsidiary of the Company, entered
into a Stock Purchase and Sale Agreement with Performance Holdings, Inc.
("PHI"), a Delaware corporation headquartered in Carrollton, Texas. SIM sold all
of the stock of its subsidiary SPAR Performance Group, Inc. ("SPGI"), to PHI for
$6.0 million. As a condition of the sale, PHI issued and contributed 1,000,000
shares of its common stock to Performance Holdings, Inc. Employee Stock
Ownership Plan which became the only shareholder of PHI.
As required, SIM'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 2002 consolidated statements of
operations of the Company have been prepared, and its 2001 and 2000 consolidated
statement of operations have been restated, to report the results of
discontinued operations of SIM separately from the continuing operations of the
Company, and the following discussions reflect such restatement.
In October 2002, the Company dissolved its Technology Division that was
established in March 2000 for the purpose of marketing its proprietary
Internet-based computer software. The operations of this subsidiary were not
material.
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 critical accounting
policies are revenue recognition. allowance for doubtful accounts:
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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company continually monitors the collectability of its accounts
receivable based upon current customer credit information available.
Utilizing this information, the Company has established an allowance for
doubtful accounts of $301,000 and $325,000 at December 31, 2002 and
2001, respectively. Historically, the Company's estimates have not
differed materially from the actual results.
-19-
RESULTS OF OPERATIONS
The following table sets forth selected financial the data and data as
a percentage of net revenues for the periods indicated.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
-------------------------------------------------------------------------------
(dollars in millions)
Dollars % Dollars % Dollars %
-------------- ---------- ----------- ----------- ------------ -----------
Net revenues $ 69.6 100.0% $ 70.9 100.0% $ 81.5 100.0%
Cost of revenues 40.3 57.9 40.9 57.7 50.3 61.7
Selling, general & administrative expenses 18.8 27.0 19.4 27.4 24.8 30.4
Depreciation & amortization 1.8 2.6 2.7 3.8 2.4 2.9
Other income & expenses, net 0.4 0.6 0.6 0.8 0.5 0.7
-------------- ---------- ----------- ----------- ----------- -----------
Income from continuing operations before income 8.3 11.9 7.3 10.3 3.5 4.3
tax provision
Income tax provision 3.0 4.3 3.1 4.4 0.8 1.0
-------------- ---------- ----------- ----------- ----------- -----------
Income from continuing operations 5.3 7.6% 4.2 5.9% 2.7 3.3%
Discontinued operations:
Loss from discontinued operations, net of tax
benefits - (1.6) (1.4)
Estimated loss on disposal of discontinued
operations, net of tax benefits - (4.3) -
-------------- ----------- ------------
Net income (loss) $ 5.3 $ (1.7) $ 1.3
============== =========== ============
-20-
RESULTS FROM CONTINUING OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
2002, COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 2001
- -------------------------------------------------------
Net Revenues from continuing operations for the twelve months ended
December 31, 2002, were $69.6 million, compared to $70.9 million for the twelve
months ended December 31, 2001, a 1.8% decrease. The decrease of 1.8% in net
revenues is primarily attributed to decreased business in mass merchandiser and
drug store chains.
Cost of revenues from continuing operations consists of in-store labor
and field management wages, related benefits, travel and other direct
labor-related expenses. Cost of revenues as a percentage of net revenues of
57.9% for the twelve months ended December 31, 2002, was consistent with the
57.7% for the twelve months ended December 31, 2001. Approximately 76% and 37%
of the field services were purchased from the Company's affiliate, SMS, in 2002
and 2001, respectively (see Item 13 - Certain Relationships and Related
Transactions, below). SMS's increased share of field services resulted from its
more favorable cost structure.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resource 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, 2002 December 31, 2001 (decr.)
---------------------------- ------------------------------ -------------
(dollars in millions)
Dollars % Dollars % %
-------------- ------------ --------------- ------------- -------------
Selling, general & administrative $ 18.8 27.0% $ 19.4 27.4% (3.0) %
Depreciation and amortization 1.8 2.6 2.7 3.8 (31.3)
-------------- ------------ --------------- -------------
Total operating expenses $ 20.6 29.6% $ 22.1 31.2% (6.4)%
============== ============ =============== =============
Selling, general and administrative expenses decreased by $0.6 million,
or 3.0%, for the twelve months ended December 31, 2002, to $18.8 million
compared to $19.4 million for the twelve months ended December 31, 2001. This
decrease was due primarily to a reduction in the SG&A work force and related
expenses, as well as lower information technology costs.
Depreciation and amortization decreased by $0.9 million for the twelve
months ended December 31, 2002, primarily due to the change in accounting rules
for goodwill amortization adopted by the Company effective January 1, 2002.
INTEREST EXPENSE
Interest expense decreased $0.2 million to $0.4 million for the twelve
months ended December 31, 2002, from $0.6 million for the twelve months ended
December 31, 2001, due to decreased debt levels, as well as decreased interest
rates in 2002.
-21-
INCOME TAXES
The provision for income taxes was $3.0 million and $3.1 million for the
twelve months ended December 31, 2002, and December 31, 2001, respectively. The
effective tax rate was 36.1% and 42.9% for 2002 and 2001, respectively. The
decrease in the effective tax rate in 2002 is primarily due to the non
amortization of goodwill (as discussed in Note 2 to the financial statements)
that was previously expensed in 2001 and was not deductible for tax purposes.
DISCONTINUED OPERATIONS
Six Months Ended Year Ended
June 30, 2002 December 31, 2001
-------------------- -----------------------
(dollars in millions)
Dollars % Dollars %
--------- --------- --------- ----------
Net revenues $ 15.7 100.0% $ 31.2 100.0%
Cost of revenues 13.1 83.2 26.0 83.4
Selling, general and administrative expenses 2.8 17.9 5.7 18.4
Depreciation and amortization 0.1 0.8 1.2 3.4
The Incentive Marketing Division was divested in June 2002 under a plan
adopted in 2001. Net revenues from the Incentive Marketing Division for the six
months ended June 30, 2002, were $15.7 million, compared to $31.2 million for
the twelve months ended December 31, 2001.
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 of 83.2% for the
six months ended June 30, 2002, was consistent with the 83.4% for the twelve
months ended December 31, 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 resource expenses, legal and accounting
expenses were $2.8 million for the six months ended June 30, 2002, and $5.7
million for the twelve months ended December 31, 2001. Depreciation and
amortization was $0.1 million for the six months ended June 30, 2002 compared
to $1.2 million for the twelve months ended December 31, 2001, reflecting the
change in accounting rules for goodwill adopted by the Company effective January
1, 2002.
NET INCOME/(LOSS)
The SPAR Group had a net income from continuing operations of
approximately $5.3 million or $0.28 per basic and diluted share for the twelve
months ended December 31, 2002, compared to a net income from continuing
operations of approximately $4.2 million or $0.23 per basic and diluted shares
for the twelve months ended December 31, 2001. The increase in net income from
continuing operations is primarily the result of substantial reductions in
selling, general and administrative expenses and a change in accounting for
goodwill amortization. The SPAR Group had a net income of approximately $5.3
million or $0.28 per basic and diluted share for the twelve months ended
December 31, 2002, compared to a net loss of $1.7 million or $0.09 per basic and
diluted share for the twelve months ended December 31, 2001. The increase in
total net income includes the effect of the $4.3 million loss in 2001 on
disposal of discontinued operations.
-22-
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. The decrease of 12.9% in net
revenues is primarily attributed to discontinued in-store merchandising programs
by the PIA Companies.
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 37% and 19% were purchased from the Company's
affiliate, SMS in 2001 and 2000 respectively (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 of 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 resource 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 Increase
December 31, 2001 December 31, 2000 (decr.)
------------------------ ------------------------- ----------
(dollars in millions)
Dollars % Dollars % %
------------ ---------- ----------- ------------ ----------
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 primarily due to the efficiencies resulting from the continued
integration 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.
OTHER EXPENSE
For 2001, the Company 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.
-23-
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
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
---------------------- -----------------------
(dollars in millions)
Dollars % Dollars %
----------- --------- ----------- ----------
Net revenues $ 31.2 100.0% $ 28.1 100.0%
Cost of revenues 26.0 83.4 22.7 81.0
Selling, general and administrative expenses 5.7 18.4 5.7 20.2
Depreciation and 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 was primarily due to an increase in project revenue 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 revenues from the Incentive Marketing Division, 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 programming 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 resource expenses and accounting expenses
were $5.7 million for the twelve months ended December 31, 2001 and 2000.
Depreciation and amortization was $1.2 million for the twelve months ended
December 31, 2001 and 2000.
NET (LOSS)/INCOME
The SPAR Group had a net income from continuing operations of
approximately $4.2 million or $0.23 per basic and diluted share for the year
ended December 31, 2002, compared to a net income from continuing operations of
approximately $2.7 million or $0.15 per basic and diluted share for the year
ended December 31, 2002.
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. The SPAR
Group had a net loss of approximately $1.7 million or $0.09 per basic and
diluted share for the year ended December 31, 2001, compared to net income of
$1.3 million or $0.07 per basic and diluted share for the year 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 from 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.
-24-
LIQUIDITY AND CAPITAL RESOURCES
In the twelve months ended December 31, 2002, the Company had a net
income of $5.3 million. Net cash provided by operating activities for the twelve
months ended December 31, 2002, was $12.7 million, compared with net cash used
by operations of $0.2 million for the twelve months ended December 31, 2001.
Cash provided by operating activities in 2002 was primarily a result of net
operating profits and decreases in accounts receivable and deferred tax assets,
increases in accounts payable and other accrued liabilities, partially offset by
decreases in restructuring charges and increases in prepaid expenses.
Net cash used in investing activities for the twelve months ended
December 31, 2002, was $1.2 million, compared with net cash used of $1.7 million
for the twelve months ended December 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 twelve months ended
December 31, 2002, was $11.5 million, compared with net cash provided by
financing activities of $2.0 million for the twelve months ended December 31,
2001. The net cash used by financing activities in 2002 was primarily due to
payments on the line of credit.
The above activity resulted in no change in cash and cash equivalents
for the twelve months ended December 31, 2002.
At December 31, 2002, the Company had positive working capital of $6.3
million as compared to $8.5 million at December 31, 2001. The decrease in
working capital is due to decreases in accounts receivable and deferred taxes,
increases in accrued expenses, and other current liabilities, and a
reclassification of stockholder debt, partially off set by decreases in accounts
payable, increases in prepaid expenses and net change in current assets and
liabilities from discontinued operations. Excess cash generated was utilized to
pay down the line of credit. The Company's current ratio was 1.49 and 1.52 at
December 31, 2002, and 2001, respectively.
In January 2003, the Company and Whitehall Business Credit Corporation
("Whitehall"), as successor to the business of IBJ Whitehall Business Credit
Corporation, entered into the Third Amended and Restated Revolving Credit and
Security Agreement and related documents (the "New Credit Facility"). The New
Credit Facility provides the Company and its subsidiaries other than PIA
Merchandising Limited (collectively, the "Borrowers") with a $15.0 million
Revolving Credit Facility that matures on January 23, 2006. 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 New Credit Facility bears interest at
Whitehall's "Alternative Base Rate" or LIBOR plus two and one-half percent and
is secured by all the assets of the Company and its subsidiaries.
The New Credit Facility replaces a previous 1999 agreement between the
Company and IBJ Whitehall Business Credit Corporation (the "Old Credit
Facility") that was scheduled to mature on February 28, 2003. The Old Credit
Facility as amended provided for a $15.0 million Revolving Credit Facility, as
well as, a $2.5 million Term Loan. The Revolving Credit facility allowed 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 Term Loan amortized in equal monthly installments of $83,334 and was repaid
in full as of December 31, 2001. The revolving loan interest rate was
Whitehall's "Alternate Base Rate" plus one-half of one percent (0.50%) (a total
of 4.75% per annum at December 31, 2002).
-25-
Both Credit Facilities contain an option for Whitehall 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 on July 31, 2003.
Both Credit Facilities contain 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 capital expenditure limitation and a
minimum EBITDA, as such terms are defined in the respective agreement. The
Company was in compliance with all such financial covenants at December 31,
2002.
The balances outstanding on the revolving line of credit were $0.1
million and $11.3 million at December 31, 2002 and December 31, 2001,
respectively. As of December 31, 2002, based upon the borrowing base formula,
the SPAR Group had availability of $11.1 million of the $14.9 million unused
revolving line of credit.
As of December 31, 2002, a total of approximately $4.0 million remained
outstanding under notes with certain stockholders. These notes have an interest
rate of 8% and are due on demand. The Company paid $3.0 million in January 2003
and expects to pay the remaining balance of approximately $1.0 million in 2003.
The current Bank Loan Agreement contains certain restrictions on the repayment
of stockholder debt.
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, could have a material adverse effect on the Company's cash
resources and its ongoing ability to fund operations.
In connection with the sale of SPGI on June 30, 2002, the Company agreed
to provide a discretionary revolving line of credit to SPGI not to exceed $2.0
million (the "Revolver") through September 30, 2005. The Revolver is secured by
a pledge of all the assets of SPGI and is guaranteed by PMI. To date, there have
been no advances against the Revolver. Under the Revolver terms, SPGI is
required to deposit all of its cash to the Company's lockbox. At December 31,
2002, the Company had cash deposits due SPGI totalling approximately $0.9
million.
CERTAIN CONTRACTUAL OBLIGATIONS
The following table contains a summary of certain of the Company's
contractual obligations by category as at December 31, 2002 (in thousands).
PAYMENTS DUE BY PERIOD
Less than 1 More than 5
CONTRACTUAL OBLIGATIONS Total year 1-3 years 3-5 years years
----------------------- ----- ---- --------- --------- -----
Long-Term Debt Obligations $ 148 $ 148 $ - $ - $ -
Due to Stockholders 3,951 3,951
Operating Lease Obligations 2,996 1,004 1,393 599 -
Other Contractual Obligations included on
the Registrant's Balance Sheet 1,035 1,035 - - -
Total $ 8,130 $ 6,138 $ 1,393 $ 599 $ -
In addition to the above, the Company had contingent libailtities to SPGI of
approximately $2.0 million (see above).
-26-
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
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
amount of the line of credit approximates fair value because the obligation
bears interest at a floating rate. The carrying amount of debt due to certain
stockholders approximates fair value because the obligation bears interest at a
market 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 16 of this Annual Report on form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-27-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information in connection with
each person who is or was at December 31, 2002, an executive officer and/or
director for the Company.
NAME AGE POSITION WITH SPAR GROUP, INC.
Robert G. Brown. . . . . . 60 Chairman, Chief Executive Officer,
President and Director
William H. Bartels . . . . 59 Vice Chairman and Director
Robert O. Aders (1). . . . 75 Director
Jack W. Partridge (1) . . . 57 Director
Jerry B. Gilbert (1) . . . 68 Director
George W. Off (1). . . . . 55 Director
Charles Cimitile. . . . . . 48 Chief Financial Officer and Secretary
James H. Ross. . . . . . . . 69 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 PIA 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 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 Source-Interlink Co., Checkpoint Systems,
Inc., Sure Beam Corporation and Telepanel Systems, Inc.
-28-
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 has
served as Chairman of the Food Marketing Institute's Government Relations
Committee, the Food and Agriculture Policy Task Force, and as Chairman of the
Board of The Ohio Retail Association. He has also served as Vice Chairman of the
Cincinnati Museum Center and a member of the boards of the United Way of
Cincinnati, the Childhood Trust, Second Harvest and the Urban League.
Jerry B. Gilbert serves as a Director of 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 Wholesale
Druggists Association (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 is Chairman and Chief Executive Officer of Checkpoint
Systems, Inc. since August 2002. He serves as a Director of Telephone and Data
Systems since 1997. 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.
Based solely on its review of the copies of such forms received by it
for the year ended December 31, 2002, or written representations from certain
reporting persons for such year, the Company believes that its Insiders complied
with all applicable Section 16(a) filing requirements for such year, with the
exception that Robert G. Brown, William H. Bartels, Jack W. Partridge, Robert O.
Aders, Jerry B. Gilbert and George W. Off untimely filed certain Statements of
Changes in Beneficial Ownership on Form 4. All such Section 16(a) filing
requirements have since been completed by each of the aforementioned
individuals.
-29-
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, 2002,
2001 and 2000 (i) by the Company's Chief Executive Officer, and (ii) each of the
other three most highly compensated executive officers of the Company who were
serving as executive officers at December 31, 2002 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------- ------------------------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY ($) BONUS ($) OPTIONS (#)(1) ($)(2)
- ---------------------------- -------- ------------ ----------- -------------- -------------
Robert G. Brown 2002 164,340 -- -- 2,040
Chief Executive Officer, Chairman of 2001 141,202 -- 765,972 --
the Board, President, and Director 2000 16,800 -- 765,972 --
William H. Bartels 2002 164,340 -- -- 2,040
Vice Chairman and Director 2001 139,230 -- 471,992 --
2000 16,800 -- -- --
Charles Cimitile 2002 230,564 -- 20,000 2,040
Chief Financial Officer 2001 188,000 -- 75,000 --
2000 188,000 -- 25,000 --
James H. Ross (3) 2002 72,043 5,000 -- --
Treasurer and Vice President 2001 101,773 7,500 43,000 1,557
2000 94,800 9,000 5,000 3,337
- ------------------------
(1) 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.
(2) Other compensation represents the Company's 401k contribution.
(3) In September 2001, Mr. Ross retired from full-time employment. Mr. Ross
continues to serve the Company on a consulting basis.
-30-
SUMMARY ADDITIONAL COMPENSATION TABLE (FROM AFFILIATED COMPANIES)
Robert G. Brown and William H. Bartels (the "SMS Principals") are the
sole owners of SPAR Marketing Services, Inc. ("SMS"), SPAR Management Services,
Inc. ("SMSI"), and SPAR Infotech, Inc. ("SIT"), which provide significant
services to the Company as more fully described in Item 13 - Certain
Relationships and Related Transactions. Although the SMS Principals were not
paid any salaries as officers of SMS, SMSI or SIT, each of those companies are
"Subchapter S" corporations, and accordingly the SMS Principals benefit from any
income of such companies allocated to them, all of which income (or
substantially all of which income, but not loss, in the case of SIT) is earned
from the performance of services for the Company. The following table sets forth
all income allocated to the SMS Principals by SMS, SMSI or SIT for the years
ended December 31, 2002, 2001 and 2000.
SMS INCOME SMSI INCOME SIT LOSS
NAME YEAR ($) ($) ($)(1)
----------- ------------ ----------
Robert G. Brown 2002 494,987 174,092 (85,183)
2001 211,117 16,477 (227,370)
2000 262,744 150,685 (318,034)
William H. Bartels 2002 314,992 110,787 (54,208)
2001 134,348 10,486 (144,690)
2000 167,202 95,891 (202,387)
(1) The subchapter "S" income/loss allocated to the SMS Principals by SIT
includes losses on activities unrelated to the Company's business.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding each grant of stock
options made during the year ended December 31, 2002, to each of the Named
Executive Officers. No stock appreciation rights ("SAR's") were granted during
such period to such person.
INDIVIDUAL GRANTS
----------------------------------------------------------
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE EXPIRATION PRICE APPRECIATION FOR OPTION(1)
OPTIONS EMPLOYEES IN PRICE ($/SH) DATE
NAME GRANTED (#) PERIOD (%) 5% ($) 10% ($)
------------------------------------------------------------------------------------------
Charles Cimitile 10,000 (2) 3.0 1.78 2/14/12 27,614 41,971
10,000 (2) 3.0 2.45 5/09/12 38,008 57,770
--------------- --------------- -------------- ----------------
20,000 6.0 65,622 99,741
- ------------
(1) The potential realizable value is calculated based upon the term of the
option at its time of grant. It is calculated by assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option.
(2) These options vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
-31-
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The following table sets forth the number of shares of Common Stock of
the Company purchased by each of the Named Executive Officers in the exercise of
stock options during the year ended December 31, 2002, the value realized in the
purchase of such shares (i.e., the market value at the time of exercise less the
exercise price to purchase such shares), and the number of shares that may be
purchased and value of the exercisable and unexercisable options held by each of
the Named Executive Officers at December 31, 2002.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT FISCAL
YEAR-END (#) YEAR-END ($)
---------------------------------- --------------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------------- ---------------- ---------------- ---------------- -------------- ----------------
Robert G. Brown 95,746 100,533 -- 478,733 -- 179,047
William H. Bartels 58,999 61,949 -- 294,995 -- 110,328
Charles Cimitile -- -- 68,750 51,250 137,000 87,975
James H. Ross -- -- 33,250 14,750 63,965 29,570
STOCK OPTION AND PURCHASE PLANS
The Company has four stock option plans: the Amended and Restated 1995
Stock Option Plan (1995 Plan), the 1995 Director's Plan (Director's Plan), the
Special Purpose Stock Option Plan, and the 2000 Stock Option Plan (2000 Plan).
The 1995 Plan provided for the granting of either incentive or
nonqualified stock options to specific employees, consultants, and directors of
the Company for the purchase of up to 3,500,000 shares of the Company's common
stock. The options had a term of ten years from the date of issuance, except in
the case of incentive stock options granted to greater than 10% stockholders for
which the term was five years. The exercise price of nonqualified stock options
must have been equal to at least 85% of the fair market value of the Company's
common stock at the date of grant. Since 2000, the Company has not granted any
new options under this Plan. At December 31, 2002, options to purchase 72,000
shares of the Company's common stock remain outstanding under this Plan. The
1995 Plan was superceded by the 2000 Stock Option Plan with respect to all new
options issued.
The Director's Plan was a stock option plan for non-employee directors
and provided for the purchase of up to 120,000 shares of the Company's common
stock. Since 2000, the Company has not granted any new options under this Plan.
During 2002, no options to purchase shares of the Company's common stock were
exercised under this Plan. At December 31, 2002, 20,000 options to purchase
shares of the Company's common stock remained outstanding under this Plan. The
Director's Plan has been replaced by the 2000 Plan with respect to all new
options issued.
On July 8, 1999, in connection with the merger, the Company established
the Special Purpose 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 2002, no options to purchase shares of the Company's
common stock were exercised under this Plan. At December 31, 2002, options to
purchase 25,750 shares of the Company's common stock remain outstanding under
this Plan.
-32-
On December 4, 2000, the Company adopted the 2000 Plan, as the successor
to the 1995 Plan and the Director's Plan with respect to all new options issued.
The 2000 Plan provides for the granting of either incentive or nonqualified
stock options to specified employees, consultants, and directors of the Company
for the purchase of up to 3,600,000 (less those options still outstanding under
the 1995 Plan or exercised after December 4, 2000 under the 1995 Plan). The
options have a term of ten years, except in the case of incentive stock options
granted to greater than 10% stockholders for whom the term is five years. The
exercise price of nonqualified stock options must be equal to at least 85% of
the fair market value of the Company's common stock at the date of grant
(although typically the options are issued at 100% of the fair market value),
and the exercise price of incentive stock options must be equal to at least the
fair market value of the Company's common stock at the date of grant. During
2002, options to purchase 332,792 shares of the Company's common stock were
granted, options to purchase 230,463 shares of the Company's common stock were
exercised and options to purchase 481,250 shares of the Company's stock were
cancelled under this Plan. At December 31, 2002, options to purchase 1,980,431
shares of the Company's common stock remain outstanding under this Plan and
options to purchase 1,079,614 shares of the Company's common stock were
available for grant under this Plan.
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. On August 8, 2002, the Company's Board of Directors approved a 15%
discount for employee purchases of Common Stock under the ESP Plan and a 15%
cash bonus for affiliate consultant purchases of Common Stock under the CSP
Plan.
COMPENSATION OF DIRECTORS
The Company's Compensation Committee administers the compensation plan
for its outside Directors. 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 the Director Compensation Plan,
which was amended by the Compensation Committee in February of 2003. Under the
amended plan, each non-employee director receives thirty thousand dollars
($30,000) per annum (increased from twenty thousand dollars ($20,000) per annum
for 2002 and 2001) and the Chairman of the Audit Committee will receive an
additional $5,000 per annum. Payments are made quarterly in equal installments.
It is intended that each quarterly payment will be 50% in cash ($3,750, up from
$2,500 for 2002 and 2001) and 50% ($3,750, up from $2,500 for 2002 and 2001) in
stock options to purchase shares of the Company's common stock with an exercise
price of $0.01 per share (plus an additional $1,250 per quarter for the Chairman
of the Audit Committee, half in cash and half in $.01 stock options). The number
of shares of the Company's common stock that can be purchased under each $.01
stock option granted will be determined based upon the closing stock price at
the end of each quarter. In addition, each non-employee director receives
options to purchase 10,000 shares of the Company's common stock upon acceptance
of the directorship, 2,500 additional options to purchase shares of the
Company's common stock after one year of service and 2,500 additional options to
purchase shares of the Company's common stock for each additional year of
service thereafter. These 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.
-33-
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Board's Compensation Committee was at any time during
the year ended December 31, 2002 or at any other time an officer or employee of
the Company. No executive officer or board member of the Company serves as a
member of the board of directors or compensation committee of any other entity,
that has one or more executive officers serving as a member of the Company's
Board or Compensation Committee, except for the positions of Messrs. Brown and
Bartels as directors and officers of the Company (including each of its
subsidiaries) and each of its affiliates, including SMS, SMSI and SIT (see Item
13 - Certain Relationships and Related Transactions, below).
-34-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF THE COMPANY
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of March 21, 2003 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.
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES BENEFICIALLY OWNED PERCENTAGE
- -------------- ----------------------------------------------------- ------------------ ----------
Common Shares Robert G. Brown (1) 8,517,905(2) 44.0%
Common Shares William H. Bartels (1) 5,370,194(3) 27.7%
Common Shares James H. Ross (1) 117,615(4) *
Common Shares Robert O. Aders (1) 76,919(5) *
Common Shares Charles Cimitile (1) 73,750(6) *
Common Shares Jack W. Partridge (1) 24,259(7) *
Common Shares George W. Off (1) 23,283(8) *
Common Shares Jerry B. Gilbert (1) 17,600(9) *
Common Shares Richard J. Riordan (10) 1,209,922 6.2%
300 S. Grand Avenue, Suite 2900
Los Angeles, CA 90071
Common Shares Heartland Advisors, Inc. (11) 1,547,900 8.0%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Common Shares Executive Officers and Directors 14,221,525 73.4%
* Less than 1%
(1) The address of such owners is c/o SPAR Group, Inc. 580 White Plains Road,
Tarrytown, New York.
(2) Includes 1,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown, James
R. Brown, Sr. and William H. Bartels are trustees. Includes 143,620 shares
issuable upon exercise of options.
(3) Excludes 1,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown, James
R. Brown, Sr. and William H. Bartels are trustees, beneficial ownership of
which are disclaimed by Mr. Bartels. Includes 115,385 shares issuable upon
exercise of options.
(4) Includes 33,750 shares issuable upon exercise of options.
(5) Includes 26,919 shares issuable upon exercise of options.
(6) Includes 73,750 shares issuable upon exercise of options.
(7) Includes 13,291 shares issuable upon exercise of options.
(8) Includes 16,783 shares issuable upon exercise of options.
(9) Includes 17,600 shares issuable upon exercise of options.
(10) Represents record ownership as of March 21, 2003.
(11) All information regarding share ownership is taken from and furnished in
reliance upon the Schedule 13G (Amendment No. 9), filed by Heartland
Advisors, Inc. with the Securities and Exchange Commission on February 13,
2003.
-35-
EQUITY COMPENSATION PLANS
The following table contains a summary of the number of shares of Common
Stock of the Company to be issued upon the exercise of options, warrants and
rights outstanding at December 31, 2002, the weighted-average exercise price of
those outstanding options, warrants and rights, and the number of additional
shares of Common Stock remaining available for future issuance under the plans
as at December 31, 2002.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance of
Plan category warrants and rights (#) warrants and rights ($) options, warrants and
rights (#)
Equity compensation plans
approved by security
holders 2,098,181 1.52 1,079,614
Equity compensation plans
not approved by security
holders - - -
Total 2,098,181 1.52 1,079,614
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 71% of the Company's
field representatives (through its independent contractor field force) and
substantially all of the Company's field management services at a total cost of
approximately $30.5 million and $15.1 million for the twelve months ended
December 31, 2002, and 2001, respectively. Under the terms of the Field Service
Agreement, SMS provides the services of approximately 6,600 field
representatives and 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 (see Item 11 - Summary Additional Compensation Table
- - Affiliated Companies above).
SIT provided Internet computer programming services to the Company at a
total cost of approximately $1,626,000 and $1,185,000 for the twelve months
ended December 31, 2002, and 2001, 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.
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.
-36-
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.
The SMS Principals also owned an indirect minority (less than 5%) equity
interest in Affinity Insurance Ltd., which provides certain insurance to the
Company.
At December 31, 2002, the Company owed a total of $4.0 million to the
SMS Principals (See Item 7-Liquidity and Capital Resources and Note 10 to the
Financial Statements), $3.0 million of which has since been repaid.
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.
ITEM 14. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, Robert Brown, and Chief Financial
Officer, Charles Cimitile, have reviewed the Company's disclosure controls and
procedures within 90 days prior to the filing of this report. Based upon this
review, these officers believe that the Company's disclosure controls and
procedures are effective in ensuring that material information related to the
Company is made known to them by others within the Company.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls during the
twelve months covered by this report or from the end of the reporting period to
the date of this Form 10-K.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Company and its subsidiaries did not engage Ernst & Young LLP
("E&Y") to provide advice regarding financial information systems design or
implementation, but did engage E&Y for consulting services related to the ESOP
during 2002 (for which E&Y was paid $13,700) and for tax services in 2002 and
2001 (for which E&Y was paid $13,500 and $107,952 respectively). No other
non-audit services were performed by E&Y in 2002 or 2001. Commencing in 2003,
all non-audit services to be performed by the Company's auditor will require
approval by the Company's Audit Committee on a case-by-case basis. In connection
with the standards for independence of the Company's independent public
accountants promulgated by the Securities and Exchange Commission, the Audit
Committee would consider whether the provision of such non-audit services would
be compatible with maintaining the independence of E&Y.
AUDIT FEES
During the Company's fiscal year ended December 31, 2002, and 2001,
respectively, fees billed by Ernst & Young LLP for all audit services rendered
to the Company and its subsidiaries were $143,000 and $159,700, respectively.
Audit services principally include fees for the Company's audits and 10-Q filing
reviews.
-37-
PART IV
ITEM 16. 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, 2002, and
December 31, 2001. F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, and December 31, 2001, and December 31, 2000. F-3
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2002, and December 31, 2001, and
December 31, 2000. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, and December 31, 2001, and December 31, 2000. F-5
Notes to Consolidated Financial Statements. F-6
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts for the three
years ended December 31, 2002. F-28
3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc. (referred to
therein under its former name PIA), as amended (incorporated by
reference to the Company's Registration Statement on Form S-1
(Registration No. 33-80429), as filed with the Securities and
Exchange Commission ("SEC") on December 14, 1995 (the "Form
S-1")), and the Certificate of Amendment filed with the
Secretary of State of the State of Delaware on July 8, 1999
(which, among other things, changes the Company's name to SPAR
Group, Inc.) (incorporated by reference to Exhibit 3.1 to the
Company's Form 10-Q for the 3rd Quarter ended September 30,
1999).
3.2 By-laws of the Company (referred to therein under its former
name 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 2000 Stock Option Plan, as amended, (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.2 2001 Employee Stock Purchase Plan (incorporated by reference to
the Company's Proxy Statement for the Company's Annual meeting
held on August 2, 2001, as filed with the SEC on July 12, 2001).
10.3 2001 Consultant Stock Purchase Plan (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
-38-
10.4 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).
10.5 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).
10.6 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Marketing Services, Inc., and SPAR Trademarks,
Inc., filed herewith.
10.7 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Infotech, Inc., and SPAR Trademarks, Inc., filed
herewith
10.8 [Reserved].
10.9 Stock Purchase and Sale Agreement by and among Performance
Holdings, Inc. and SPAR Incentive Marketing, Inc., effective as
of June 30, 2002 (incorporated by reference to the Company's
Form 10-Q for the quarter ended June 30, 2002).
10.10 Revolving Credit, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to the
Company's Form 10-Q for the quarter ended June 30, 2002).
10.11 Term Loan, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to the
Company's Form 10-Q for the quarter ended June 30, 2002).
10.11 Amendment No. 7 to Second Amended and Restated Revolving Credit,
Term Loan and Security Agreement by and among the SPAR Borrowers
and the Lender, effective as of October 31, 2002 (incorporated
by reference to the Company's Form 10-Q for the quarter ended
September 30, 2002).
10.12 Third Amended and Restated Revolving Credit and Security
Agreement by and among Whitehall Business Credit Corporation
(the "Lender") with SPAR Marketing Force, Inc., SPAR Group,
Inc., SPAR, Inc., SPAR/Burgoyne Retail Services, Inc., SPAR
Incentive Marketing, Inc., SPAR Trademarks, Inc., SPAR
Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., SPAR Group International, Inc., SPAR
Technology Group, Inc., SPAR/PIA Retail Services, Inc., Retail
Resources, Inc., Pivotal Field Services Inc., PIA Merchandising
Co., Inc., Pacific Indoor Display Co. and Pivotal Sales Company
(collectively, the "Borrowers"), dated as of January 24, 2003,
and filed herewith.
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP.
99.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
99.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
(B) REPORTS ON FORM 8-K.
None.
-39-
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: March 31, 2003
---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amendment to the report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Robert G. Brown President, Chief Executive Officer, Director and
- ------------------------- Chairman of the Board
Robert G. Brown
Date: March 31, 2003
/s/ William H. Bartels Vice Chairman and Director
- -------------------------
William H. Bartels
Date: March 31, 2003
/s/ Robert O. Aders Director
- -------------------------
Robert O. Aders
Date: March 31, 2003
/s/ Jack W. Partridge Director
- -------------------------
Jack W. Partridge
Date: March 31, 2003
/s/ Jerry B. Gilbert Director
- -------------------------
Jerry B. Gilbert
Date: March 31, 2003
/s/ George W. Off Director
- -------------------------
George W. Off
Date: March 31, 2003
/s/ Charles Cimitile Chief Financial Officer
- ------------------------- and Secretary (Principal Financial and
Charles Cimitile Accounting Officer)
Date: March 31, 2003
-40-
CERTIFICATIONS
I, Robert G. Brown, certify that:
1. I have reviewed this annual report on Form 10-K of SPAR Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Robert G. Brown
-------------------
Robert G. Brown
Chairman, President and Chief
Executive Officer
-41-
CERTIFICATIONS
I, Charles Cimitile, certify that:
1. I have reviewed this annual report on Form 10-K of SPAR Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Charles Cimitile
--------------------
Charles Cimitile
Chief Financial Officer
-42-
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, 2002 and 2001 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 16(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 financial statements referred to above present
fairly, in all material respects, the financial position of SPAR Group, Inc. and
Subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, 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 financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2, the Company adopted Statement of Accounting Standards
No. 142 effective January 1, 2002.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 7, 2003
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
DECEMBER 31,
2002 2001
----------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 17,415 21,144
Prepaid expenses and other current assets 783 440
Deferred income taxes 903 3,241
----------------------------------------
Total current assets 19,101 24,825
Property and equipment, net 1,972 2,644
Goodwill 7,858 8,357
Deferred income taxes 705 389
Other assets 121 110
Net long-term assets from discontinued operations - 4,830
----------------------------------------
Total assets $ 29,757 $ 41,155
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 422 $ 440
Accrued expenses and other current liabilities 6,097 5,257
Accrued expenses, due to affiliates 958 611
Restructuring charges, current 1,354 1,597
Due to certain stockholders 3,951 2,655
Net current liabilities from discontinued operations - 5,732
Current portion of long-term debt - 57
----------------------------------------
Total current liabilities 12,782 16,349
Line of credit 148 11,287
Long-term debt due to certain stockholders - 2,000
Restructuring charges, long term 235 585
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 - 18,824,527 -- 2002;
18,582,615 -- 2001 188 186
Treasury stock (30) -
Additional paid-in capital 10,919 10,531
Retained earnings 5,515 217
----------------------------------------
Total stockholders' equity 16,592 10,934
----------------------------------------
Total liabilities and stockholders' equity $ 29,757 $ 41,155
========================================
See accompanying notes.
F-2
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
2002 2001 2000
------------------------------------------------------
Net revenues $ 69,612 $ 70,891 $ 81,459
Cost of revenues 40,331 40,883 50,278
------------------------------------------------------
Gross profit 29,281 30,008 31,181
Selling, general, and administrative expenses 18,804 19,380 24,761
Depreciation and amortization 1,844 2,682 2,383
------------------------------------------------------
Operating income 8,633 7,946 4,037
Other (income) expense (26) 107 (790)
Interest expense 363 561 1,326
------------------------------------------------------
Income from continuing operations before provision
for income taxes 8,296 7,278 3,501
Provision for income taxes 2,998 3,123 780
------------------------------------------------------
Net income from continuing operations 5,298 4,155 2,721
Discontinued operations:
Loss from discontinued operations, net of tax
benefits of $938 and $858 for 2001 and 2000,
respectively - (1,597) (1,399)
Estimated loss on disposal of discontinued
operations in 2001, net of tax benefit of
$2,618 - (4,272) -
------------------------------------------------------
Net income (loss) $ 5,298 $ (1,714) $ 1,322
======================================================
Basic/diluted net income (loss) per common share:
Income from continuing operations $ 0.28 $ 0.23 $ 0.15
Loss from discontinued operations - (0.32) (0.08)
------------------------------------------------------
Net income (loss) $ 0.28 $ (0.09) $ 0.07
======================================================
Weighted average shares outstanding - basic 18,761 18,389 18,185
======================================================
Weighted average shares outstanding - diluted 19,148 18,467 18,303
======================================================
See accompanying notes.
F-3
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
COMMON STOCK
---------------------------------------
ADDITIONAL TOTAL
TREASURY PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCK CAPITAL EARNINGS EQUITY
---------------------------------------------------------------------------------
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 311 4 - 404 - 408
Net loss - - - - (1,714) (1,714)
-------------------------------------------------------------------------------
Balance at December 31, 2001 18,583 $186 - $ 10,531 $ 217 $10,934
-------------------------------------------------------------------------------
Stock options exercised and employee
stock purchase plan purchases 242 2 - 388 - 390
Purchase of treasury stock - - (30) - - (30)
Net income - - - - 5,298 5,298
-------------------------------------------------------------------------------
Balance at December 31, 2002 18,825 $ 188 $ (30) $ 10,919 $ 5,515 $16,592
===============================================================================
See accompanying notes.
F-4
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
2002 2001 2000
------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 5,298 $ (1,714) $ 1,322
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 1,844 2,217 1,839
Amortization - 1,630 1,725
Estimated loss on disposal of discontinued
operations - 4,272 -
Gain on sale of affiliate - - (790)
Changes in operating assets and liabilities:
Accounts receivable 3,729 13 5,318
Prepaid expenses and other current assets (354) 318 (346)
Deferred income taxes 2,022 1,710 (185)
Accounts payable, accrued expenses and other
current liabilities 766 (7,202) 216
Restructuring charges (593) (1,487) (2,766)
------------------------------------------------------
Net cash provided (used in) by operating activities 12,712 (243) 6,333
INVESTING ACTIVITIES
Purchases of property and equipment (1,172) (1,744) (1,941)
Purchase of businesses, net of cash acquired - - (62)
Sale of investment in affiliate - - 1,500
------------------------------------------------------
Net cash used in investing activities (1,172) (1,744) (503)
FINANCING ACTIVITIES
Net (payments) borrowings on line of credit (11,139) 3,526 (5,596)
Payments on long-term debt (57) (1,465) (1,113)
Net payments to certain stockholders (704) (482) (182)
Payments of note payable, MCI - - (1,045)
Proceeds from issuance of common stock 390 408 32
Purchase of treasury stock (30) - -
------------------------------------------------------
Net cash (used in) provided by financing activities (11,540) 1,987 (7,904)
------------------------------------------------------
Net decrease in cash - - (2,074)
Cash at beginning of year - - 2,074
------------------------------------------------------
Cash at end of year $ - $ - $ -
======================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 686 $ 1,892 $ 1,394
======================================================
See accompanying notes.
F-5
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2002
1. BUSINESS AND ORGANIZATION
The SPAR Group, Inc., a Delaware corporation ("SPAR Group", "SGRP", or the
"Company"), is a supplier of in-store merchandising and marketing services
throughout the United States and internationally. The Company also provides
database marketing, teleservices and marketing research. 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 explored various alternatives for the sale of SPGI and subsequently
sold the business to SPGI's employees through the establishment of an employee
stock ownership plan on June 30, 2002. In addition, in October 2002, the Company
dissolved its Technology Division that was established in March 2000 for the
purpose of marketing its proprietary Internet-based computer software. The
Company's continuing operations are now divided into two divisions: the
Merchandising Services Division and the International Division. The
Merchandising Services Division provides merchandising services, database
marketing, teleservices and marketing research to manufacturers and retailers
with product distribution primarily in mass merchandisers, drug chains and
grocery stores in the United States. The International Division established in
July 2000, currently provides merchandising services through a joint venture in
Japan and focuses on expanding the Company's merchandising services business
throughout the world.
MERCHANDISING SERVICES DIVISION
The Company's Merchandising Services Division consists of 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") PIA Merchandising, Co., Inc., Pacific Indoor Display
d/b/a Retail Resources, Pivotal Sales Company and PIA Merchandising Ltd. The
Merchandising Services Division provides nationwide retail merchandising and
marketing services to home entertainment, PC software, general merchandise,
health and beauty care, consumer goods and food products companies in the United
States. The Company provides these services primarily on behalf of consumer
product manufacturers and retailers at mass merchandisers, drug chains and
retail grocery stores.
Merchandising services primarily consist of regularly scheduled dedicated routed
services and special projects provided at the store level for a specific
retailer or single or multiple manufacturers primarily under single or
multi-year contracts. Services also include stand-alone large-scale
implementations. These services may include sales enhancing activities such as
ensuring that client products authorized for distribution are in stock and on
the shelf, adding new products that are approved for distribution but not
presently on the shelf, setting category shelves in accordance with approved
store schematics, ensuring that shelf tags are in place, checking for the
overall salability of client products and setting new and promotional items and
placing and/or removing point of purchase and other related media advertising.
Specific in-store services can be initiated by retailers or manufacturers, and
include new store openings, new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. The
Company also provides database marketing, teleservices and research services.
F-6
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
1. BUSINESS AND ORGANIZATION (CONTINUED)
INTERNATIONAL DIVISION
In July 2000, the Company established its International Division, SPAR Group
International, Inc. ("SGI"), to focus on expanding its merchandising services
business world-wide. Currently, the Company provides merchandising services in
Japan through a joint venture with a large Japanese distributor and is actively
pursuing expansion into other markets.
DISCONTINUED OPERATIONS - INCENTIVE MARKETING DIVISION
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly-owned
subsidiary of the Company, entered into a Stock Purchase and Sale Agreement with
Performance Holdings, Inc. ("PHI"), a Delaware corporation headquartered in
Carrollton, Texas. SIM sold all of the stock of its subsidiary, SPGI to PHI for
$6.0 million. As a condition of the sale, PHI issued and contributed 1,000,000
shares of its common stock to Performance Holdings, Inc. Employee Stock
Ownership Plan, which became the only shareholder of PHI.
The $6.0 million sales price was evidenced by two Term Loans, an Initial Term
Loan totaling $2.5 million and an Additional Term Loan totaling $3.5 million
(collectively the "Term Loans"). The Term Loans are guarantied by SPGI and
secured by pledges of all the assets of PHI and SPGI. The Term Loans bear
interest at a rate of 12% per annum through December 31, 2003. On January 1,
2004, and on January 1 each year thereafter, the interest rate is adjusted to
equal the higher of the median or mean of the High Yield Junk Bond interest rate
as reported in the Wall Street Journal (or similar publication or service if the
Wall Street Journal no longer reports such rate) on the last business day in the
immediately preceding December. The Initial Term Loan is required to be repaid
in quarterly installments that increase over the term of the loan, commencing
March 31, 2003, with a balloon payment required at maturity on June 30, 2007. In
addition to the preceding payments of the Initial Term Loan, PHI is required to
make annual mandatory prepayments of the Term Loans on February 15th of each
year, commencing on February 15, 2004, equal to:
o 40% of the amount of Adjusted Cash Flow (as defined in the Revolver)
for the immediately preceding fiscal year ended December 31; and
o 35% of the amount of excess targeted Adjusted Cash Flow (as defined in
the Revolver) for the immediately preceding fiscal year ended December
31.
These payments will be applied first to accrued and unpaid interest on the Term
Loans and Revolver, then to the Additional Term Loan until repaid, and then to
the Initial Term Loan. Because collection of the notes depends on the future
operations of PHI, the $6.0 million notes were fully reserved pending
collection.
In addition to the Term Loans, SIM agreed to provide a discretionary revolving
line of credit to SPGI not to exceed $2.0 million (the "Revolver"). The Revolver
is secured by a pledge of all the assets of SPGI and is guaranteed by PHI. The
Revolver provides for advances in excess of the borrowing base through September
30, 2003. Through September 30, 2003, the Revolver bears interest at the higher
of the Term Loans interest rate or the prime commercial lending rate as
announced in the Wall Street Journal plus 4.0% per annum. As of October 1, 2003,
the Revolver will include a borrowing base calculation (principally 85% of
eligible accounts receivable). Prior to September 1, 2003, SPGI may request that
SIM provide advances of up to $1,000,000 in excess of the borrowing base. If
advances are limited to the borrowing base on and after October 1, 2003, the
interest rate will be reduced to the higher of the Term Loans interest rate less
4.0% per annum or the prime commercial lending rate as announced in the Wall
Street Journal plus 4.0%
F-7
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
1. BUSINESS AND ORGANIZATION (CONTINUED)
per annum. If SPGI requests that advances be allowed in excess of the borrowing
base, the interest rate will remain unchanged.
Due to the speculative nature of the loan SIM has established a reserve for
collection of approximately $0.8 million against the $2.0 million Revolver
commitment. This revenue is included in other current liabilities.
In December 2001, the Company reviewed the goodwill associated with SPGI and
recorded an impairment of goodwill totaling $4.3 million, net of taxes,
including a $1.0 million reserve was recorded in 2001 for the cost to dispose of
SPGI and the anticipated losses through the date of divestiture, June 30, 2002.
Operating losses of $682,000 incurred from January 1, 2002, through June 30,
2002, the date of divestiture, were charged against the aforementioned reserve.
In addition, $318,000 of costs to dispose of SPGI were also charged against the
reserve. The 2001 and 2000 consolidated statements of operations were restated
to report the results of discontinued operations separately from continuing
operations. Operating results of the discontinued operations are summarized as
follows (in thousands):
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
2002 2001 2000
--------------------------------------------------
Net sales $15,735 $31,202 $28,070
Less:
Cost of sales 13,092 26,032 22,692
Selling, general and administrative expenses 2,814 5,736 5,654
Interest expense 383 804 800
Depreciation 128 306 322
Amortization - 859 859
--------------------------------------------------
OPERATING LOSS (682) (2,535) (2,257)
Provision for income tax benefit (259) (938) (858)
--------------------------------------------------
NET LOSS $ (423) $ (1,597) $(1,399)
==================================================
F-8
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
1. BUSINESS AND ORGANIZATION (CONTINUED)
Net non-current assets and current liabilities of discontinued operations,
classified separately in the 2001 balance sheet, are summarized below (in
thousands):
2001
---------------
Net non-current assets of discontinued operations:
Property and equipment $ 444
Goodwill and other intangibles, net 4,386
---------------
$ 4,830
===============
Net current liabilities of discontinued operations:
Accounts receivable, net 2,050
Prepaid expenses and other current assets 228
Prepaid program costs 3,470
Accounts payable (1,642)
Accrued expenses and other current liabilities (1,727)
Deferred revenue (7,090)
Current portion of long-term debt (21)
Other current charges (1,000)
---------------
$(5,732)
===============
Other current charges represent the costs to dispose of SPGI and the losses from
operations expected prior to the disposal of the business on June 30, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 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.
UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent services performed but not billed.
F-9
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company continually monitors the collectability of its account receivable
based upon current customer credit information available. Utilizing this
information, the Company has established an allowance for doubtful accounts of
$301,000 and $325,000 at December 31, 2002 and 2001, 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 Company under the rules of SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, capitalizes certain costs
incurred in connection with developing or obtaining internal use software.
Capitalized software development costs are amortized over three years.
The Company capitalized $774,000, $430,000, and $994,000 of costs related to
software developed for internal use in 2002, 2001 and 2000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment, 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. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's balance sheets include the following financial instruments:
accounts receivable, accounts payable and a line of credit. The Company
considers the carrying amounts of current assets and liabilities in the
financial statements to approximate the fair value for these financial
instruments, because of the relatively short period of time between origination
of the instruments and their expected realization or payment. The carrying
amount of the line of credit approximates fair value because the obligation
bears interest at a floating rate. The carrying amount of long-term debt to
certain stockholders approximates fair value because the current effective
interest rates reflect the market rate for unsecured debt with similar terms and
remaining maturities.
F-10
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
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 accounts receivable. The Company has minimal
cash as excess cash is generally utilized to pay its bank line of credit.
One customer accounted for 26%, 25% and 20% of net revenues for the years ended
December 31, 2002, 2001 and 2000, respectively. This customer approximated 40%,
24% and 26% of accounts receivable at December 31, 2002, 2001, and 2000,
respectively.
A second customer accounted for 11%, 9% and 5% of the Company's net revenues for
the years ended December 31, 2002, 2001, and 2000, respectively. This second
customer also accounted for approximately 5%, 4% and 4% of accounts receivable
at December 31, 2002, 2001 and 2000, respectively.
Approximately 24%, 31%, and 18% of net revenues for the years ended December 31,
2002, 2001, and 2000, respectively, resulted from merchandising services
performed for others at Kmart stores. Kmart filed for protection under the U.S.
Bankruptcy Code in January 2002. During 2002, Kmart closed a significant number
of stores in the United States. While the Company's customers and the resultant
contractual relationships are with the manufacturers and not this retailer, the
Company's business would be negatively impacted if this retailer were to close
all or most of its stores.
INCOME TAXES
Deferred tax assets and liabilities represent the future tax return consequences
of certain timing differences that will either be taxable or deductible when the
assets and liabilities are recovered or settled. Deferred taxes are also
recognized for operating losses that are available to offset future taxable
income and tax credits that are available to offset future income taxes. In the
event the future consequences of differences between 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.
F-11
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 9 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.
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 outstanding for
each period represented. Potential common shares outstanding include stock
options, using the treasury stock method.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-12
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, in the first quarter of 2002. Under the
new rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statement. During 2002, the Company
performed the required impairment tests of goodwill. As a result of these tests,
there was no effect on the earnings and financial position of the Company.
The following table presents the results of the Company for all periods
presented on a comparable basis (in thousands except per share information):
2002 2001 2000
------------------- ------------------- --------------------
Reported net income (loss) $ 5,298 $ (1,714) $ 1,322
Add: Goodwill amortization - 771 866
------------------- ------------------- --------------------
Adjusted net income (loss) $ 5,298 $ (943) $ 2,188
=================== =================== ====================
Basic and diluted net income (loss)
per share:
Reported net income (loss) $ 0.28 $ (0.09) $ 0.07
Add: Goodwill amortization - 0.04 0.05
------------------- ------------------- --------------------
Adjusted net income (loss) $ 0.28 $ (0.05) $ 0.12
=================== =================== ====================
Prior to 2002, the Company amortized all goodwill over 15 years.
In 2001, the amount of goodwill related to the July 1999 merger of SPAR
Companies and PIA Merchandising Services, Inc. ("PIA") decreased approximately
$1.2 million as a result of the reduction of estimates associated with
pre-merger related liabilities and restructure reserves. In 2002, the amount of
goodwill related to this transaction decreased approximately $0.5 million as a
result of a change in the valuation allowance required on deferred tax assets
related to the PIA operating loss carryforward.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the 2002 presentation.
F-13
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts receivable, net, consists of the following (in thousands):
DECEMBER 31,
2002 2001
-----------------------------------
Trade $ 11,973 $ 16,366
Unbilled 5,743 5,095
Non-trade - 8
-----------------------------------
17,716 21,469
Less allowance for doubtful accounts 301 325
-----------------------------------
$ 17,415 $ 21,144
===================================
Property and equipment consists of the following (in thousands):
DECEMBER 31,
2002 2001
-----------------------------------
Equipment $ 4,175 $ 3,792
Furniture and fixtures 509 509
Leasehold improvements 138 123
Capitalized software development costs 3,278 2,504
-----------------------------------
8,100 6,928
Less accumulated depreciation and amortization 6,128 4,284
-----------------------------------
$ 1,972 $ 2,644
===================================
F-14
3. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
Accrued expenses and other current liabilities consists of the following (in
thousands):
DECEMBER 31,
2002 2001
------------------------------
Accrued salaries and other related costs $ 321 $1,224
Accrued merger related costs 1,945 2,397
Due to SPGI (cash deposits) 917 -
Other 2,914 1,636
------------------------------
$6,097 $5,257
==============================
4. LINE OF CREDIT AND LONG-TERM LIABILITIES
In January 2003, the Company and Whitehall Business Credit Corporation
("Whitehall"), entered into the Third Amended and Restated Revolving Credit and
Security Agreement (the "New Credit Facility"). The New Credit Facility provides
the Borrowers with a $15.0 million Revolving Credit Facility that matures on
January 23, 2006. 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 New Credit
Facility bears interest at Whitehall's "Alternative Base Rate" or LIBOR plus two
and one-half percent and is secured by all the assets of the Company and its
subsidiaries.
The New Credit Facility replaces a previous 1999 agreement between the Company
and IBJ Whitehall Business Credit Corporation (the "Old Credit Facility") that
was scheduled to mature on February 28, 2003. The Old Credit Facility as amended
provided for a $15.0 million Revolving Credit Facility, as well as a $2.5
million Term Loan. The Revolving Credit facility allowed 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 Term Loan
amortized in equal monthly installments of $83,334 and was repaid in full as of
December 31, 2001. The revolving loans bore interest at Whitehall's "Alternate
Base Rate" plus one-half of one percent (0.50%) (a total of 4.75% per annum at
December 31, 2002).
Both Credit Facilities contain an option for Whitehall 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 on July 31, 2003.
Both Credit Facilities contain 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 capital expenditure limitation and a minimum
EBITDA, as such terms are defined in the respective agreement. The Company was
in compliance with all such financial covenants at December 31, 2002.
The balances outstanding on the revolving line of credit under the Old Credit
Facility were $0.1 million and $11.3 million at December 31, 2002, and December
31, 2001, respectively. As of December 31, 2002, based upon the borrowing base
formula, the SPAR Group had availability under the Old Credit Facility of $11.1
million of the $14.9 million unused revolving line of credit. Availability would
have been the same under the New Credit Facility had it been in effect on
December 31, 2002.
F-15
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
4. LINE OF CREDIT AND LONG-TERM LIABILITIES (CONTINUED)
The Company's line of credit and long-term liabilities consist of the following
at December 31 (in thousands):
2002 2001
---------------------------
Revolving line of credit, maturing February 2003 $148 $11,287
Other long-term liabilities - 57
---------------------------
$148 11,344
Current maturities of long-term liabilities - 57
---------------------------
$148 $11,287
===========================
5. INCOME TAXES
The provision for income tax expense from continuing operations is summarized as
follows (in thousands):
YEAR ENDED DECEMBER 31,
2002 2001 2000
----------------- ------------------ ------------------
Current $ 476 $ 109 -
Deferred 2,522 3,014 $780
----------------- ------------------ ------------------
$2,998 $3,123 $780
================= ================== ==================
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):
YEAR ENDED DECEMBER 31,
2002 2001 2000
----------- ----------- ----------
Provision for income taxes at federal
statutory rate $2,821 $2,475 $1,190
State income taxes, net of federal benefit 175 317 140
Permanent differences (48) 317 321
Change in valuation allowance - - (825)
Other 50 14 (46)
----------- ----------- ----------
Provision for income taxes $2,998 $3,123 $ 780
=========== =========== ==========
F-16
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
5. INCOME TAXES (CONTINUED)
Deferred taxes consist of the following (in thousands):
DECEMBER 31,
2002 2001
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $3,876 $4,150
Restructuring 454 879
Accrued compensation and related benefits 160 446
SIM reserve against loan commitment 320 -
Allowance for doubtful accounts and other receivable 114 166
Loss on disposal of incentive business SPGI - 2,618
Other 206 290
Valuation allowance (3,126) (3,622)
------------------------------------
Total deferred tax assets 2,004 4,927
Deferred tax liabilities:
Nonrecurring charge for termination of Subchapter S election - 797
Capitalized software development costs 396 500
------------------------------------
Total deferred tax liabilities 396 1,297
------------------------------------
Net deferred tax assets $1,608 $3,630
====================================
At December 31, 2002, the Company has net operating loss carryforwards (NOLs) of
$10.2 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 had occurred
in 1999, thereby restricting the NOLs prior to such date available to the
Company to approximately $657,500 per year.
The Company has established a valuation allowance for the deferred tax assets
related to the available NOLs that are deductible for years subsequent to 2005
totaling $3,126,000. The $3,126,000 valuation allowance at December 31, 2002
when realized will result in a reduction of goodwill associated with the PIA
acquisition. In 2002 and 2001, the Company reduced the valuation allowance and
goodwill by $499,000 and $250,000 respectively. In 2001, in addition to the
goodwill adjustment discussed above, the Company also realized the benefit of
certain deferred tax assets and decreased the valuation allowance by $387,000.
F-17
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
6. 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,
$1.0 million, and $1.1 million for the years ended December 31, 2002, 2001, and
2000, respectively. At December 31, 2002, future minimum commitments under all
non-cancelable operating lease arrangements are as follows (in thousands):
2003 $1,004
2004 831
2005 562
2006 545
2007 54
MATTERS
On October 24, 2001, Safeway Inc., a former customer of the PIA Companies, 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
with respect to (among other things) alleged breach of contract with the PIA
companies. On or about December 30, 2002, the Court approved the filing of
Safeway Inc.'s Second Amended Complaint, which alleges causes of action for
(among other things) breach of contract against the Company, PIA Merchandising
Co., Inc. and Pivotal Sales Company. The Second Amended Complaint was filed with
the Court on January 13, 2003, and does not specify the amount of monetary
damages sought. No punitive or exemplary damages are sought in Safeway Inc.'s
Second Amended Complaint. 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.
F-18
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
7. EMPLOYEE BENEFITS
RETIREMENT/PENSION PLANS
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible
employees. Employer contributions were approximately $117,000, $118,000, and
$68,000 for the years ended December 31, 2002, 2001, and 2000, 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 $60,000, $77,000, and $24,000 for the years ended
December 31, 2002, 2001, and 2000, respectively.
STOCK PURCHASE PLANS
The Company has Employee and Consultant Stock Purchase Plans (the "SP Plans").
The SP Plans allow employees and consultants of the Company to purchase common
stock, without having to pay any commissions on the purchases. On August 8,
2002, the Company's Board of Directors approved a 15% discount for employee
purchases and a 15% cash bonus for affiliate consultant purchases. The maximum
amount that any employee or consultant can contribute to the SP Plans per
quarter is $6,250, and the total number of shares reserved by the Company for
purchase under the SP Plans is 500,000. During 2002, 2001 and 2000, the Company
sold 10,104 shares, 2,638 shares, and 452 shares of common stock, at a weighted
average price of $2.51, $1.90, and $3.03 per share, respectively.
F-19
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
8. RELATED-PARTY TRANSACTIONS
The SPAR Group, Inc. is affiliated through common ownership with SPAR Marketing
Services, Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI") and SPAR
Infotech, Inc. ("SIT"). SMS and SMSI (through SMS) provided approximately 71% of
the Company's field representatives (through its independent contractor field
force) and substantially all of the Company's field management services. Under
the terms of the Field Service Agreement, SMS provides the services of
approximately 6,600 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%.
SIT provided Internet computer programming services to the Company. Under the
terms of the programming agreement between SMF and SIT effective as of October
1, 1998, 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
The following transactions occurred between the SPAR Companies and the above
affiliates (in thousands):
YEAR ENDED DECEMBER 31,
2002 2001 2000
--------------------------------------------------
Services provided by affiliates:
Independent contractor services $ 23,262 $ 8,337 $ 5,177
==================================================
Field management services $ 7,280 $ 6,779 $ 4,388
==================================================
Internet and software program consulting services $ 1,626 $ 1,185 $ 769
==================================================
Services provided to affiliates:
Management services $ 732 $ 390 $ 692
==================================================
Balance due to (from) affiliates included in
accrued liabilities (in thousands): DECEMBER 31,
2002 2001 2000
-----------------------------------------
SPAR Management Services, Inc. $ - $ - $ (26)
SPAR Marketing Services, Inc. 932 611 582
SPAR Infotech, Inc. 26 - (4)
-----------------------------------------
$ 958 $ 611 $ 552
=========================================
In addition to the above, through the services of Affinity (f/k/a Infinity)
Insurance, Ltd., the Company purchased insurance coverage for its casualty and
property insurance risk for approximately $1,128,000, 1,085,000 and $994,000 for
the years ended December 31, 2002, 2001, and 2000, respectively.
The Company had an investment in an affiliate that provided telemarketing and
related services that was sold in 2000 for $1.5 million, for 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.
F-20
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
9. STOCK OPTIONS
The Company has four stock option plans: the Amended and Restated 1995 Stock
Option Plan (1995 Plan), the 1995 Director's Plan (Director's Plan), the Special
Purpose Stock Option Plan, and the 2000 Stock Option Plan (2000 Plan).
The 1995 Plan provided for the granting of either incentive or nonqualified
stock options to specific employees, consultants, and directors of the Company
for the purchase of up to 3,500,000 shares of the Company's common stock. The
options had a term of ten years from the date of issuance, except in the case of
incentive stock options granted to greater than 10% stockholders for which the
term was five years. The exercise price of nonqualified stock options must have
been equal to at least 85% of the fair market value of the Company's common
stock at the date of grant. Since 2000, the Company has not granted any new
options under this Plan. At December 31, 2002, options to purchase 72,000 shares
of the Company's common stock remain outstanding under this Plan. The 1995 Plan
was superceded by the 2000 Stock Option Plan with respect to all new options
issued.
The Director's Plan was a stock option plan for non-employee directors and
provided for the purchase of up to 120,000 shares of the Company's common stock.
Since 2000, the Company has not granted any new options under this Plan. At
December 31, 2002, 20,000 options to purchase shares of the Company's common
stock remained outstanding under this Plan. The Director's Plan has been
replaced by the 2000 Plan with respect to all new options issued.
On July 8, 1999, 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 2002, no options
to purchase shares of the Company's common stock were exercised under this Plan.
At December 31, 2002, 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 from the date of issuance 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 for tax
purposes 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 such options are issued at
100% of the fair market value), and the exercise price of incentive stock
options must be equal to at least the fair market value of the Company's common
stock at the date of grant. At December 31, 2002, options to purchase 1,980,431
shares of the Company's common stock remain outstanding under this Plan and
options to purchase 1,079,614 shares of the Company's common stock were
available for grant under this Plan.
F-21
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
9. STOCK OPTIONS (CONTINUED)
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 Note 8 - Related
Party Transactions), to purchase the Company's Common Stock from the Company
without having to pay any brokerage commissions. On August 8, 2002, the
Company's Board of Directors approved a 15% discount for employee purchases of
Common Stock under the ESP Plan and a 15% cash bonus for affiliate consultant
purchases of Common Stock under the CSP Plan.
The following table summarizes stock option activity under the Company's plans:
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
---------------------------------
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 1.31
Exercised (309,492) 1.30
Canceled or expired (2,761,474) 5.00
-------------------
Options outstanding, December 31, 2001 2,483,727 1.42
Granted 332,792 2.01
Exercised (230,463) 1.23
Canceled or expired (487,875) 5.05
-------------------
Options outstanding, December 31, 2002 2,098,181 1.52
Option price range at end of year $0.01 to $14.00
F-22
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
9. STOCK OPTIONS (CONTINUED)
2002 2001 2000
--------------------------------------------------
Weighted average grant date fair value of
options granted during the year $1.60 $1.28 $1.68
The following table summarizes information about stock options outstanding at
December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, 2002 CONTRACTUAL EXERCISE DECEMBER 31, AVERAGE
EXERCISE PRICES LIFE PRICE 2002 EXERCISE PRICE
-------------------- -------------------------------------------------- --------------------------------
Less than $1.00 217,593 8.0 years $0.53 137,343 $ 0.42
$1.01 - $2.00 1,629,588 6.6 years 1.34 815,927 1.30
$2.01 - $4.00 219,000 9.1 years 2.49 24,750 3.13
Greater than $4.00 32,000 4.7 years 10.63 29,000 11.21
------------------ ----------------
Total 2,098,181 7.0 years 1.52 1,007,020 1.51
================== ================
Outstanding warrants are summarized below:
SHARES SUBJECT EXERCISE PRICE
TO WARRANTS PER SHARE
---------------------------------
Balance, December 31, 2002 113,062 $0.01 - $8.51
The above warrants expire at various dates from 2003 through 2004.
F-23
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
9. STOCK OPTIONS (CONTINUED)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation as amended by SFAS 148. No compensation
cost has been recognized for the stock option 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,
2002 2001 2000
----------------------------------------------
Net income (loss), as reported $ 5,298 $ (1,714) $ 1,322
Stock based employee compensation (benefit) expense
under the fair market value method 1,844 (1,129) 1,957
----------------------------------------------
Pro forma net income (loss) 3,454 (585) (635)
Basic and diluted net income (loss) per share, as
reported $ 0.28 $ (0.09) $ 0.07
Basic and diluted net income (loss) per share $ 0.18 $ (0.03) $ (0.03)
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 85%, 187%, and 237% for 2002, 2001, and 2000,
respectively; risk-free interest rate of 4.03%, 5.14%, and 6.89%; and expected
lives of six years.
10. NOTES PAYABLE TO CERTAIN STOCKHOLDERS
As of December 31, 2002, notes payable to certain stockholders total
approximately $4.0 million, which bear an interest rate of 8.0% and are due on
demand. In January 2003, $3.0 million was repaid to such stockholders. While the
New Credit Facility contains certain restrictions on the repayment of
stockholder debt, the Company anticipates paying the remaining balance in 2003.
11. SEGMENTS
As a result of the Company's divestiture of its Incentive Marketing Division,
the Company now operates solely in the Merchandising Services Industry Segment
both in the domestic and international markets.
12. RESTRUCTURING CHARGES
In 1999, the Company's Board of Directors approved a plan to restructure the
operations of the PIA Companies. Restructuring costs were composed of committed
costs required to integrate the SPAR Companies and the PIA Companies' field
organizations and the consolidation of administrative functions to achieve
beneficial synergies and costs savings.
F-24
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
12. RESTRUCTURING CHARGES (CONTINUED)
The following table displays a roll forward of the liabilities for restructuring
charges from December 31, 1999 to December 31, 2002 (in thousands):
EQUIPMENT OFFICE
EMPLOYEE LEASE LEASE
SEPARATION SETTLEMENTS SETTLEMENTS TOTAL
----------------- --------------- ------------------ ------------
December 31, 1999 Balance $ 1,115 $ 2,414 $ 1,542 $ 5,071
Adjustments in Restructuring Charges 748 1,367 (619) 1,496
2000 payments (1,376) (1,011) (379) (2,766)
----------------- --------------- ------------------ ------------
December 31, 2000 Balance 487 2,770 544 3,801
Adjustments in Restructuring Charges (132) -- -- (132)
2001 payments (355) (1,008) (124) (1,487)
----------------- --------------- ------------------ ------------
December 31, 2001 Balance -- 1,762 420 2,182
2002 payments -- (593) -- (593)
----------------- --------------- ------------------ ------------
DECEMBER 31, 2002 BALANCE $ -- $ 1,169 $ 420 $ 1,589
================= =============== ================== ============
The maturities of restructuring charges at December 31, 2002, are as follows (in
thousands):
2003 1,354
2004 235
Management believes that the remaining reserves for restructuring are adequate
to complete its plan.
F-25
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
13. 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,
2002 2001 2000
--------------------------------------------------
Numerators:
Net income from continuing operations $ 5,298 $ 4,155 $ 2,721
Loss from operations of discontinued division - (5,869) (1,399)
--------------------------------------------------
Net income (loss) $ 5,298 $ (1,714) $ 1,322
==================================================
Denominator:
Shares used in basic earnings per share calculation 18,761 18,389 18,185
Effect of diluted securities:
Employee stock options 387 78 118
--------------------------------------------------
Shares used in diluted earnings per share
calculations 19,148 18,467 18,303
==================================================
Basic and diluted earnings per common share:
Income from continuing operations $ 0.28 $ 0.23 $ 0.15
Loss from operations of discontinued division - (0.32) (0.08)
--------------------------------------------------
Net income (loss) $ 0.28 $ (0.09) $ 0.07
==================================================
F-26
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for 2002 and 2001 was as follows (in thousands, except earnings
per share data):
QUARTER
FIRST SECOND THIRD FOURTH
-------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002:
Net revenues $ 16,046 $ 17,542 $ 17,775 $ 18,249
Gross profit 6,295 6,951 7,015 9,020
Net income $ 482 $ 1,068 $ 1,213 $ 2,535
=============================================================
Basic/diluted net income per
common share $ 0.03 $ 0.06 $ 0.06 $ 0.13
=============================================================
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)(1)
-------------------------------------------------------------
Net income (loss) $ 677 $ 319 $ 577 $ (3,287)
=============================================================
Basic/diluted net income (loss) per common share:
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)
=============================================================
(1) Includes a $4,272,000 estimated loss on disposal of SPGI
F-27
SPAR Group, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(In thousands)
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
PERIOD EXPENSES DEDUCTIONS (1) OF PERIOD
-----------------------------------------------------------------
Year ended December 31, 2002:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 325 $ 262 $ 286 $ 301
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
(1) Uncollectible accounts written off, net of recoveries.
F-28
EXHIBIT 10.6
TRADEMARK LICENSE AGREEMENT
---------------------------
Introduction
------------
This Trademark License Agreement, dated as of July 8, 1999 (as the
same may be supplemented, modified, amended, restated or replaced from time to
time in the manner provided herein, this "Agreement"), is by and between SPAR
Marketing Services, Inc., a Nevada corporation currently having an address at
303 South Broadway, Suite 140, Tarrytown, New York 10591(the "Licensee"), and
SPAR Trademarks, Inc., a Nevada corporation currently having an address at 303
South Broadway, Suite 140, Tarrytown, New York 10591 (the "Licensor"). The
Licensor and the Licensee are sometimes referred to herein individually as a
"Party" and collectively as the "Parties".
Recitals
--------
The Licensor is the owner of the Trademarks (as these and the other
capitalized terms used in these Recitals are defined in Section 1, below) with
respect to the Products and Services, and the Licensee desires to use the
Trademarks in the Territory in connection with the Products and Services. The
Licensor is willing to grant to the Licensee the nonexclusive right and license
to use the Trademarks on and in connection with the Products and Services in the
Territory, all upon the terms and provisions and subject to the conditions set
forth in this Agreement.
Agreement
---------
In consideration of the foregoing, the mutual covenants and agreements
hereinafter set forth, and other good and valuable consideration (the receipt
and adequacy of which is hereby acknowledged by the Parties), the Parties hereto
hereby agree as follows:
Section 1. Definitions. Each use in this Agreement of a neuter pronoun
shall be deemed to include references to the masculine and feminine variations
thereof, and vice versa, and a singular pronoun shall be deemed to include a
reference to the plural variation thereof, and vice versa, in each case as the
context may permit or require. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Merger Agreement (as
hereinafter defined). As used in this Agreement, the following capitalized terms
and non-capitalized words and phrases shall have the meanings respectively
assigned to them below, which meanings shall be applicable equally to the
singular and plural forms of the terms so defined:
(1) "Merger Effective Time" shall mean the "Effective Time" under (and
as defined in) the Agreement and Plan of Merger dated as of February 28, 1999,
among the SPAR Companies and the PIA Companies (which is the time the merger
thereunder takes effect and the SPAR Companies and PIA Companies come under
common control), as the same may be supplemented, modified, amended, restated or
replaced from time to time in the manner provided therein (the "Merger
Agreement").
(2) "PIA Company" and "PIA Companies" shall respectively mean any one
or more of PIA Merchandising Services, Inc., a Delaware corporation, SG
Acquisition, Inc., a Nevada corporation (which is merging into SPAR Acquisition,
Inc.), PIA Merchandising Co., Inc., a California corporation, and their
respective subsidiaries as of the Merger Effective Time.
(3) "Products" shall mean the products claimed in the registrations
for the Trademarks listed in Exhibit A hereto and any other products for which
the Licensor has such Trademark rights.
(4) "Representative" of any Party shall mean any of its directors,
officers, employees, attorneys, heirs, executors, administrators, or agents, any
of such Party's sublicensees, affiliates, successors and assigns, or any of
their respective directors, officers, employees, attorneys, heirs, executors,
administrators, or agents.
(5) "Services" shall mean the services claimed in the registrations
for the Trademarks listed in Exhibit A hereto and any other services for which
the Licensor has such Trademark rights.
-1-
(6) "SPAR Company" and "SPAR Companies" shall respectively mean any
one or more of SPAR Acquisition, Inc., a Nevada corporation, SPAR Marketing,
Inc., a Delaware corporation, SPAR Marketing, Inc., a Nevada corporation, SPAR
Marketing Force, Inc., a Nevada corporation, SPAR, Inc., a Nevada corporation,
SPAR/Burgoyne Retail Services, Inc., an Ohio corporation, SPAR Incentive
Marketing, Inc., a Delaware corporation, SPAR MCI Performance Group, Inc., a
Delaware corporation, and SPAR Trademarks, Inc., a Nevada corporation.
(7) "Territory" shall mean the United States and Canada.
(8) "Trademark" and "Trademarks" shall respectively mean any and all
of the registered trademarks of the Licensor registered in the United States and
Canada listed in Exhibit A hereto, any additional registered trademarks of the
Licensor deriving or containing any Trademark, and any and all renewals thereof.
Section 2. Grant of License and Affiliate Sublicenses; Limits on Use.
(1) License. Subject to the terms and conditions herein contained, the
Licensor hereby grants to the Licensee a royalty-free, nonexclusive license to
use: (i) the Trademarks (alone or as part of other words or phrases) on and in
connection the Products and Services in the Territory; and (ii) to the extent
the Licensor has any right, title or interest therein, the name "SPAR" (alone or
as part of other words or phrases) in its legal and/or trade name and on or in
connection with any products or services other than the Products and Services.
(2) Sublicenses. The Licensee from time to time may add one or more
subsidiaries or affiliates (but only those under common ownership and control
with the Licensee) as a sublicensee under this Agreement (each a "Sublicensee"
and collectively "Sublicensees"). Each Sublicensee hereby assumes and agrees to
be bound by the terms, provisions and conditions as set forth in this Agreement
as if it were the "Licensee" and a "Party" hereunder. In the event the control
or ownership of any Sublicensee, its business or substantially all of its assets
are sold or transferred so that such Sublicensee, business or assets cease to be
under common ownership and control with the Licensee, such subsidiary or
affiliate shall automatically cease to be a Sublicensee hereunder from and after
such sale or transfer, without, however, relieving or otherwise affecting any of
the obligations of such former Sublicensees with respect to its obligations with
respect to actions or events arising prior to such sale or transfer.
(3) License May Follow Group Sale. In the event that the control or
ownership of all or substantially all of the Licensee and Sublicensees or all or
substantially all of their businesses or assets are sold or transferred (a
"Group Sale"), this Agreement may be transferred (in whole) as part of such
Group Sale by written notice to the Licensor and (if an asset sale) the
assumption of this Agreement by the purchasers by the delivery to the Licensor
of an assumption agreement in form and substance reasonably acceptable to the
Licensor, duly executed by the new Licensee. Any entity not included in the
Group Sale shall automatically cease to be a Licensee or Sublicensee hereunder
from and after such sale or transfer, without, however, relieving or otherwise
affecting any of its obligations with respect to actions or events arising prior
to such sale or transfer.
(4) No Unpermitted Users. No Party shall cause, suffer, or permit any
of its affiliates or cause any other person to use any Trademark in any material
respect unless such person is a permitted Licensee or Sublicensee hereunder.
Section 3. Term. The term of this Agreement shall commence on the date
of this Agreement and continue through December 31, 2098 (as and if extended
pursuant to this Section, the "Term"). The Term of this Agreement is
automatically renewable for additional consecutive ninety-nine year terms. If
the Licensee (in the Licensee's sole and absolute discretion) chooses not to
renew, a written request from the Licensee seeking termination must be received
by the Licensor at least 90 days prior to the scheduled end of the then current
Term. The Term is also subject to earlier termination as provided in this
Agreement. Upon the termination of this Agreement by the Licensee, (i) the right
and license to use the Trademarks granted to the Licensee hereunder shall
forthwith terminate, (ii) the Licensee shall promptly thereafter shall cease and
desist from using the marks on or in connection with the Products or Services,
and (iii) the Licensee shall, promptly upon receipt of the written request of
the Licensor, without charge, execute any and all documents, and record them
with any and all appropriate governmental agencies within the
-2-
Territory, as may be necessary to remove the Trademarks from its company name
and to otherwise reasonably evidence that the Licensee no longer has the right
and license to use the Trademarks; provided, however, that upon such termination
of this Agreement, the Licensee shall have the right to continue to sell any
existing inventory of the Products and to use the Trademarks in connection with
such sale for a period of up to three months after the effective date of
termination of this Agreement.
Section 4. Non-Exclusivity of License; Limits on Licensor's Use and Licensing
Rights: Validity of Trademarks.
(1) Retained Rights and Limits on Use. The Licensee acknowledges and
agrees that, all rights in the Trademarks, other than those specifically granted
in this Agreement, are reserved by the Licensor, and the Licensor may (during
the Term or thereafter) specifically grant other licenses to use the Trademarks
on or in connection with (i) any one or more of the Products and Services within
or outside the Territory or (ii) any other products or services within or
outside the Territory to the extent it has rights therein.
(2) Ownership and Validity of Trademarks. The Licensee acknowledges
and agrees that the Licensor is the legal, valid and exclusive owner of the
Trademarks. The Licensee covenants and agrees that it will not, individually or
with any other licensee or person, at any time during the term of this Agreement
or thereafter, directly or indirectly, challenge, contest or aid in challenging
or contesting (i) the legality or validity of any of the Trademarks, (ii) the
ownership by the Licensor of any of the Trademarks, or (iii) the title of or
registration by the Licensor of any of the Trademarks, in each case whether such
Trademarks are now existing or hereafter acquired, created or obtained and all
renewals thereof.
Section 1. Compliance with Applicable Law. The Licensee covenants and
agrees with the Licensor that, during the Term of this Agreement, unless the
Licensor (in its sole and absolute discretion) consents otherwise in writing,
the Licensee shall comply with all applicable laws, rules, regulations and
ordinances in effect at any time and from time to time in the Territory in
connection with the Products and Services utilizing any of the Trademarks if the
non-compliance therewith would materially impair the prestige and goodwill of
the Trademarks.
Section 5. Standards of Quality. The Licensee acknowledges to and
covenants and agrees with the Licensor that, during the Term of this Agreement,
unless the Licensor (in its sole and absolute discretion) consents otherwise in
writing: (a) none of the Products or Services shall fail in any material respect
to meet the standards of quality with respect to the Trademarks in place at the
time of commencement of this Agreement ("Standards of Quality") if such failure
would materially impair the prestige and goodwill of the Trademarks; and (b)
none of the Products or Services of the Licensee shall otherwise materially
impair the prestige and goodwill of the Trademarks.
Section 6. Registration for the Trademarks in the Territory.
(1) Registration Maintenance. During the term of this Agreement, the
Licensor shall undertake, in its own name, to renew and maintain registration
for the Trademarks in the Territory. The Licensee shall cooperate with the
Licensor in the execution, filing and prosecution of any such instrument(s) or
document(s) as the Licensor from time to time may reasonably request (i) to
obtain renewal and/or maintain registration for the Trademarks in the Territory
and (ii) to confirm the Licensor's ownership rights therein. The Licensor makes
no representation or warranty hereby that the registrations for the Trademarks
will be renewable or maintainable in the Territory, and the failure to renew or
maintain the registrations thereof shall not be deemed a breach hereof by the
Licensor.
(2) Costs and Expenses. Any and all costs and expenses (including,
without limitation, the fees and expenses of attorneys and other professionals)
incurred by the Licensor in the renewal or maintenance of any of the Trademarks
in the Territory shall be borne by the Licensor.
Section 7. Royalties. The license granted under this Agreement is
royalty-free. The Licensee shall not be required to account to the Licensor with
respect to its use of the Trademarks.
-3-
Section 8. Representations and Warranties Respecting the Licensee. The
Licensee represents and warrants to the Licensor that, as of the date hereof and
as of the date of each amendment, renewal or extension hereof or assumption
hereof, except as otherwise disclosed to the Licensor in writing: (a) the
Licensee is a corporation duly incorporated, validly existing and in good
standing under the laws its state of incorporation; (b) the Licensee has the
legal capacity, power, authority and unrestricted right to execute and deliver
this Agreement and to perform all of its obligations hereunder; (c) the
execution and delivery by the Licensee of this Agreement and the performance by
the Licensee of all of its obligations hereunder will not violate or be in
conflict with any term or provision of (i) any applicable law, (ii) any
judgment, order, writ, injunction, decree or consent of any court or other
judicial authority applicable to the Licensee or any material part of the
Licensee's assets and properties, (iii) any of its organizational documents, or
(iv) any material agreement or document to which it is a party or subject or
that applies to any material part of the Licensee's assets and properties; (d)
no consent, approval or authorization of, or registration, declaration or filing
with, any governmental authority or other person is required as a condition
precedent, concurrent or subsequent to or in connection with the due and valid
execution, delivery and performance by the Licensee of this Agreement or the
legality, validity, binding effect or enforceability of any of the terms and
provisions of this Agreement; and (e) this Agreement is a legal, valid and
binding obligation of the Licensee, enforceable against the Licensee in
accordance with its terms and provisions.
Section 9. Representations and Warranties Respecting the Licensor. The
Licensor represents and warrants to the Licensee that, as of the date hereof and
as of the date of each amendment, renewal or extension hereof or assumption
hereof, except as otherwise disclosed to the Licensee in writing: (a) the
Licensor is a corporation duly incorporated, validly existing and in good
standing under the laws its state of incorporation; (b) the Licensor has the
legal capacity, power, authority and unrestricted right to execute and deliver
this Agreement and to perform all of its obligations hereunder; (c) the
execution and delivery by the Licensor of this Agreement and the performance by
the Licensor of all of its obligations hereunder will not violate or be in
conflict with any term or provision of (i) any applicable law, (ii) any
judgment, order, writ, injunction, decree or consent of any court or other
judicial authority applicable to the Licensor or any material part of the
Licensor's assets and properties, (iii) any of its organizational documents, or
(iv) any material agreement or document to which it is a party or subject or
that applies to any material part of the Licensor's assets and properties; (d)
no consent, approval or authorization of, or registration, declaration or filing
with, any governmental authority or other person is required as a condition
precedent, concurrent or subsequent to or in connection with the due and valid
execution, delivery and performance by the Licensor of this Agreement or the
legality, validity, binding effect or enforceability of any of the terms and
provisions of this Agreement; (e) this Agreement is a legal, valid and binding
obligation of the Licensor, enforceable against the Licensor in accordance with
its terms and provisions; (f) the Licensor is the registered, legal and
beneficial owner of the Trademarks; (g) the Licensor has full power and
authority and the unrestricted right to grant the licenses contemplated
hereunder; (h) the license of the Trademarks hereunder is made free and clear of
any and all liens or encumbrances; (i) the Trademark registrations are in full
force and effect; and (j) the Licensor has no knowledge of any infringements or
competing claims with respect to any Trademark.
Section 10. Termination.
(1) Termination for Cause. The Licensor shall have the right to
terminate this Agreement (and the licenses and other rights, remedies and
interests granted to the Licensee hereunder), and end the Term, by written
notice to the Licensee in the event the Licensee shall default in the
performance or satisfaction of any of the terms and provisions of this
Agreement, which violation or failure shall have continued for more than thirty
(30) days after notice thereof by the Licensor to the Licensee and which
violation or failure has materially impaired the prestige and goodwill of the
Trademarks, provided, however, that if such default is capable of being cured
and if the Licensee shall have commenced to cure such default within such period
and shall proceed continuously in good faith and with due diligence to cure such
default, then such thirty day period shall instead be such longer period as may
be reasonably necessary to effect such cure (not to exceed 180 days).
(2) Termination Without Prejudice; Certain Continuing Provisions. The
termination of this Agreement (and the licenses and other rights, remedies and
interests granted to the Licensee hereunder), for any reason, shall be without
prejudice to any other right or remedy the Licensor may have, including (without
limitation) the right of the Licensor to recover from the Licensee any and all
(i) damages to which it may be entitled by reason of the happening of the event
giving rise to such termination or any other event
-4-
and (ii) reimbursements, indemnifications and other amounts that remain
unsatisfied by the Licensors hereunder, which rights and remedies all shall
survive any such termination hereunder. In addition, the terms and provisions of
this subsection and Sections 12 through 21 hereof shall survive any such
termination hereunder.
Section 11. Infringement.
(1) Defense of Infringements. In the event that legal proceeding shall
be instituted by any third party with respect to the alleged infringement by the
Trademarks on the rights of any third party, the Licensor shall have the right,
at its option and expense and either in its name, in the name of the Licensee,
or in the name of both the Licensor and the Licensee, to be represented by
counsel selected by the Licensor, and to defend against, negotiate, settle or
otherwise deal with such proceeding. The Licensee may participate in or (if the
Licensor elects not to do so) defend any such proceeding at its own cost and
expense (subject to reimbursement by the Licensor of reasonable costs and
expenses if the Licensee prevails in such proceeding) and with counsel of its
choice; provided, however, that if the Licensor defends the proceeding, the
Licensor shall control such proceeding. The Licensee shall not settle such
proceeding, or any claim or demand, admit liability or take any action with
respect thereto without the prior written consent of the Licensor, which shall
not be unreasonably withheld.
(2) No Liability for Continuing Unauthorized Use. If any of the
Trademarks shall be declared by a court of competent jurisdiction to be an
infringement on the rights of any third party so that the Licensee may not
thereafter continue in the use thereof, or if the Licensee shall unlawfully use
any of the Trademarks after the Term, the Licensor shall not be liable to the
Licensee or any other person or entity for any damages or otherwise as a result
of continuing use by the Licensee after such declaration or the end of the Term.
(3) Notice and Prosecution of Infringement. The Licensee shall
promptly notify the Licensor of any infringement, counterfeiting or passing-off
of any of the Trademarks of which it has actual knowledge, whether by the use of
any of the Trademarks or otherwise, but shall not take any action, legal or
otherwise, with respect to such infringement, counterfeiting or passing-off
without prior notice to the Licensor. In the event that the Licensee deems legal
proceedings to be reasonably necessary to enjoin any third party with respect to
the alleged infringement, counterfeiting or passing-off of any of the
Trademarks, the Licensor shall have the right, at its option and expense and
either in its name, in the name of the Licensee, or in the name of both the
Licensor and the Licensee, to be represented by counsel selected by the
Licensor, and to prosecute, negotiate, settle or otherwise deal with such
proceeding. The Licensee may participate in or (if the Licensor elects not to do
so) prosecute any such proceeding at its own cost and expense (subject to
reimbursement by the Licensor of reasonable costs and expenses if the Licensee
prevails in such proceeding) and with counsel of its choice; provided, however,
that if the Licensor prosecutes the proceeding, the Licensor shall control such
proceeding. The Licensee shall not settle such proceeding, or any claim or
demand, release any liability or take any action with respect thereto without
the prior written consent of the Licensor, which shall not be unreasonably
withheld.
(4) Licensee and Licensor Cooperation. The Licensee will cooperate
fully with the Licensor at the Licensor's expense in any such action the
Licensor may decide to take, and, if requested by the Licensor, shall join with
the Licensor in such actions as the Licensor may deem advisable for the
protection of the Trademarks or the Licensor's rights. The Licensor will
cooperate fully with the Licensor at the Licensee's expense (subject to
reimbursement as provided above) in any such permitted action the Licensee may
decide to take, and, if requested by the Licensee, shall join with the Licensee
in such actions as the Licensor may deem advisable for the protection of the
Trademarks or the Licensee's rights.
(5) Costs and Expenses. Except as otherwise provided above, any and
all costs and expenses (including, without limitation, the fees and expenses of
attorneys and other professionals) incurred in the protection or defense of any
of the Trademarks in the Territory, or the defense of any use or application of
the Trademarks, shall be borne by the Licensor.
Section 12. Expenses of and Indemnity by the Licensee.
(1) The Licensee will pay and discharge, at its own expense, any and
all expenses, charges, fees and taxes (other than as provided in subsection (b)
of this Section and Section 6 hereof) arising
-5-
out of or incidental to the carrying on of the Licensee's business, and the
Licensee will indemnify and hold the Licensor harmless from any and all claims
that may be imposed on the Licensor for such expenses, charges, fees and taxes.
(2) Except as otherwise provided in Section 10 hereof, the Licensee
shall indemnify, defend (with counsel selected by the Licensee and reasonably
acceptable to the Licensor) and hold the Licensor and its representatives and
agents harmless from, against and with respect to any claim, suit, loss, damage,
demands, injuries or expense (including the reasonable fees and expenses of
attorneys and other professionals) arising out of or related directly or
indirectly to any Product, Service, or other Trademark bearing item sold or
provided by the Licensee or any other act or omission of the Licensee, except to
the extent attributable to the bad faith, negligence or willful misconduct of
the Licensor or its representatives.
Section 13. Relationship between the Parties. The rights, powers,
privileges, remedies and interests accorded to the Licensor under this Agreement
and applicable law are for the protection of the Licensor, not the Licensee, and
no term or provision of this Agreement is intended (or shall be deemed or
construed) to impose on the Licensor any duty or obligation to the Licensee to
monitor or police any of the activities of the Licensee. No term or provision of
this Agreement is intended to create, nor shall any such term or provision be
deemed or construed to have created, any employment, joint venture, partnership,
trust, agency or other fiduciary relationship between the Licensee and the
Licensor or constitute the Licensee as an employee, joint venturer, partner,
trustee, agent or other representative for or of the Licensor. The Licensee
shall not be entitled or have any power or authority to bind or obligate the
Licensor in any manner whatsoever or to hold itself out as an employee, joint
venturer, partner, trustee, agent or other representative for or of the
Licensor.
Section 14. Waiver of Jury Trial. In any action, suit or proceeding in
any jurisdiction brought against any Party by any other Party, each Party hereby
irrevocably waives trial by jury.
Section 15. Consent to New York Jurisdiction and Venue, Etc. Each
Party hereby consents and agrees that the Supreme Court of the State of New York
for the County of Westchester and the United States District Court for the
Southern District of New York each shall have personal jurisdiction and proper
venue with respect to any dispute between the Parties; provided that the
foregoing consent shall not deprive any Party of the right in its discretion to
voluntarily commence or participate in any other forum having jurisdiction and
venue. In any dispute, no Party will raise, and each Party hereby expressly and
irrevocably waives, any objection or defense to any such jurisdiction as an
inconvenient forum.
Section 16. Notices. Except as otherwise expressly provided, any
notice, request, demand or other communication permitted or required to be given
under this Agreement shall be in writing, shall be sent by one of the following
means to the addressee at the address set forth above (or at such other address
as shall be designated hereunder by notice to the other parties and persons
receiving copies, effective upon actual receipt) and shall be deemed
conclusively to have been given: (i) on the first Business Day following the day
timely deposited with Federal Express (or other equivalent national overnight
courier) or United States Express Mail, with the cost of delivery prepaid or for
the account of the sender; (ii) on the fifth Business Day following the day duly
sent by certified or registered United States mail, postage prepaid and return
receipt requested; or (iii) when otherwise actually received by the addressee on
a Business Day (or on the next Business Day if received after the close of
normal business hours or on any non-business day).
Section 17. Further Assurances. Each Party agrees to do such further
acts and things and to execute and deliver such statements, assignments,
agreements, instruments and other documents as the other Party from time to time
reasonably may request in order to (a) evidence or confirm the transfer or
issuance of any stock or Asset or (b) effectuate the purpose and the terms and
provisions of this Agreement, each in such form and substance as may be
acceptable to the Parties.
Section 18. Interpretation, Headings, Severability, Etc. The parties
acknowledge and agree that the terms and provisions of this Agreement have been
negotiated, shall be construed fairly as to all parties hereto, and shall not be
construed in favor of or against any party. The section headings contained in
this Agreement are for reference purposes only and shall not affect the meaning
or interpretation of this Agreement. In the event that any term or provision of
this Agreement (other than Section 1 hereof) shall be finally determined to be
superseded, invalid, illegal or otherwise unenforceable pursuant to applicable
law by a governmental authority having jurisdiction and venue, that
determination shall not impair or otherwise
-6-
affect the validity, legality or enforceability (a) by or before that authority
of the remaining terms and provisions of this Agreement, which shall be enforced
as if the unenforceable term or provision were deleted or reduced pursuant to
the next sentence, as applicable, or (b) by or before any other authority of any
of the terms and provisions of this Agreement. If any term or provision of this
Agreement is held to be unenforceable because of the scope or duration of any
such provision, the parties agree that any court making such determination shall
have the power, and is hereby requested, to reduce the scope or duration of such
term or provision to the maximum permissible under applicable law so that said
term or provision shall be enforceable in such reduced form.
[END OF PAGE]
-7-
Section 19. Successors and Assigns; Assignment; Intended
Beneficiaries. Whenever in this Agreement reference is made to any person, such
reference shall be deemed to include the successors, assigns, heirs and legal
representatives of such person, and, without limiting the generality of the
foregoing, all representations, warranties, covenants and other agreements made
by or on behalf of any Party in this Agreement shall inure to the benefit of the
successors, assigns, heirs and legal representatives of each other Party;
provided, however, that nothing herein shall be deemed to authorize or permit
the Licensee to assign any of its rights or obligations under this Agreement to
any other person, and the Licensee covenants and agrees that it shall not make
any such assignment, except as otherwise provided in Section 1 hereof or with
the prior written consent of the Licensor. The representations, warranties and
other terms and provisions of this Agreement are for the exclusive benefit of
the Parties hereto, and, except as otherwise expressly provided herein, no other
person (including creditors of any party hereto) shall have any right or claim
against any Party by reason of any of those terms and provisions or be entitled
to enforce any of those terms and provisions against any Party.
Section 20. No Waiver by Action, Etc. Any waiver or consent respecting
any representation, warranty, covenant or other term or provision of this
Agreement shall be effective only in the specific instance and for the specific
purpose for which given and shall not be deemed, regardless of frequency given,
to be a further or continuing waiver or consent. The failure or delay of a Party
at any time or times to require performance of, or to exercise its rights with
respect to, any representation, warranty, covenant or other term or provision of
this Agreement in no manner (except as otherwise expressly provided herein)
shall affect its right at a later time to enforce any such provision. No notice
to or demand on any Party in any case shall entitle such Party to any other or
further notice or demand in the same, similar or other circumstances. All
rights, powers, privileges, remedies and other interests of each Party hereunder
are cumulative and not alternatives, and they are in addition to and shall not
limit (except as otherwise expressly provided herein) any other right, power,
privilege, remedy or other interest of such Party under this Agreement or
applicable law.
Section 21. Counterparts; New York Governing Law; Amendments; Entire
Agreement. This Agreement shall be effective as of the date first written above
when executed by Parties and delivered to the Licensor. This Agreement may have
been executed in two or more counterpart copies of the entire document or of
signature pages to the document, each of which may be executed by one or more of
the Parties hereto, but all of which, when taken together, shall constitute a
single agreement binding upon all of the Parties hereto. This Agreement shall be
governed by and construed in accordance with the applicable laws pertaining in
the State of New York (other than those that would defer to the substantive laws
of another jurisdiction). Each and every modification and amendment of this
Agreement shall be in writing and signed by all of the Parties, and each and
every waiver of, or consent to any departure from, any representation, warranty,
covenant or other term or provision of this Agreement shall be in writing and
signed by each affected Party. This Agreement contains the entire agreement of
the parties and supersedes all prior and other representations, agreements and
understandings (oral or otherwise) between the parties with respect to the
matters contained herein.
IN WITNESS WHEREOF, the Parties have duly executed and delivered this
Agreement as of the date first above written.
SPAR Marketing Services, Inc.
By: /s/ Robert G. Brown
-------------------------------------
Robert G. Brown
Chief Executive Officer
SPAR Trademarks, Inc.
By: /s/ Robert G. Brown
-------------------------------------
Robert G. Brown
Chief Executive Officer
EXHIBIT A
---------
United States
Mark Reg. No. Reg. Date
---- -------- ---------
SPAR 1,357,128 August 27, 1985
SPAR & design 1,357,132 August 27, 1985
SPAR & design 1,387,743 March 25, 1986
SPAR 1,441,909 June 9, 1987
SPAR 1,597,275 May 22, 1990
Canada
Mark Reg. No. Reg. Date
---- -------- ---------
SPAR 337,986 March 11, 1988
SPAR & design 337,987 March 11, 1988
SPAR & design 341,996 June 23, 1988
SPAR 349,073 December 16, 1988
SPAR & design 390,182 November 15, 1991
EXHIBIT 10.7
TRADEMARK LICENSE AGREEMENT
---------------------------
INTRODUCTION
------------
THIS TRADEMARK LICENSE AGREEMENT, dated as of July 8, 1999 (as
the same may be supplemented, modified, amended, restated or replaced from time
to time in the manner provided herein, this "Agreement"), is by and between SPAR
INFOTECH, INC., a Nevada corporation currently having an address at 303 South
Broadway, Suite 140, Tarrytown, New York 10591(the "Licensee"), and SPAR
TRADEMARKS, INC., a Nevada corporation currently having an address at 303 South
Broadway, Suite 140, Tarrytown, New York 10591 (the "Licensor"). The Licensor
and the Licensee are sometimes referred to herein individually as a "Party" and
collectively as the "Parties".
RECITALS
--------
The Licensor is the owner of the Trademarks (as these and the
other capitalized terms used in these Recitals are defined in Section 1, below)
with respect to the Products and Services, and the Licensee desire to use the
Trademarks in the Territory in connection with the Products and Services. The
Licensor is willing to grant to the Licensee the nonexclusive right and license
to use the Trademarks on and in connection with the Products and Services in the
Territory, all upon the terms and provisions and subject to the conditions set
forth in this Agreement.
AGREEMENT
---------
In consideration of the foregoing, the mutual covenants and
agreements hereinafter set forth, and other good and valuable consideration (the
receipt and adequacy of which is hereby acknowledged by the Parties), the
Parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS. Each use in this Agreement of a neuter
pronoun shall be deemed to include references to the masculine and feminine
variations thereof, and vice versa, and a singular pronoun shall be deemed to
include a reference to the plural variation thereof, and vice versa, in each
case as the context may permit or require. As used in this Agreement, the
following capitalized terms and non-capitalized words and phrases shall have the
meanings respectively assigned to them below, which meanings shall be applicable
equally to the singular and plural forms of the terms so defined:
(a) "Business Competitive With the Licensee" shall mean any
substantial business activity in collecting, analyzing and/or disseminating
scanner data, ex-factory shipment data and/or other similar information.
(b) "Business Competitive With Marketing Force" shall mean any
substantial business activity conducted by any person that is competitive with
any substantial business activity conducted by any SPAR Company or PIA Company
at the Merger Effective Time (whether or not such person's activity is actually
conducted in competition with any SPAR Company or PIA Company), excluding,
however, any Business Competitive With the Licensee (whether or not so conducted
by any SPAR Company or PIA Company).
(c) "Merger Effective Time" shall mean the "Effective Time"
under (and as defined in) the Agreement and Plan of Merger dated as of February
28, 1999, among the SPAR Companies and the PIA Companies (which is the time the
merger thereunder takes effect and the SPAR Companies and PIA Companies come
under common control), as the same may be supplemented, modified, amended,
restated or replaced from time to time in the manner provided therein.
-1-
(d) "PIA Company" and "PIA Companies" shall respectively mean
any one or more of PIA MERCHANDISING SERVICES, INC., a Delaware corporation, SG
ACQUISITION, INC., a Nevada corporation (which is merging into SPAR Acquisition,
Inc.), PIA MERCHANDISING CO., INC., a California corporation, and their
respective subsidiaries as of the Merger Effective Time.
(e) "Products" shall mean the products claimed in the
registrations for the Trademarks listed in Exhibit A hereto and any other
products for which the Licensor has such Trademark rights.
(f) "Representative" of any Party shall mean any of its
directors, officers, employees, attorneys, heirs, executors, administrators, or
agents, any of such Party's sublicensees, affiliates, successors and assigns, or
any of their respective directors, officers, employees, attorneys, heirs,
executors, administrators, or agents.
(g) "Services" shall mean the services claimed in the
registrations for the Trademarks listed in Exhibit A hereto and any other
services for which the Licensor has such Trademark rights.
(h) "SPAR Company" and "SPAR Companies" shall respectively
mean any one or more of SPAR ACQUISITION, INC., a Nevada corporation, SPAR
MARKETING, INC., a Delaware corporation, SPAR MARKETING, INC., a Nevada
corporation, SPAR MARKETING FORCE, INC., a Nevada corporation, SPAR, INC., a
Nevada corporation, SPAR/BURGOYNE RETAIL SERVICES, INC., an Ohio corporation,
SPAR INCENTIVE MARKETING, INC., a Delaware corporation, SPAR MCI PERFORMANCE
GROUP, INC., a Delaware corporation, and SPAR TRADEMARKS, INC., a Nevada
corporation.
(i) "Territory" shall mean the United States and Canada.
(j) "Trademark" and "Trademarks" shall respectively mean any and all of the
registered trademarks of the Licensor registered in the United States and Canada
listed in Exhibit A hereto, any additional registered trademarks of the Licensor
deriving or containing any Trademark, and any and all renewals thereof.
Section 2. Grant of License and Affiliate Sublicenses; Limits
on Use.
(a) License. Subject to the terms and conditions herein
contained, the Licensor hereby grants to the Licensee a royalty-free,
nonexclusive license to use: (i) the Trademarks (alone or as part of other words
or phrases) on and in connection the Products and Services in the Territory; and
(ii) to the extent the Licensor has any right, title or interest therein, the
name "SPAR" (alone or as part of other words or phrases) in its legal and/or
trade name and on or in connection with any products or services other than the
Products and Services.
(b) Sublicenses. The Licensee from time to time may add one or
more subsidiaries or affiliates (but only those under common ownership and
control with the Licensee) as a sublicensee under this Agreement (each a
"Sublicensee" and collectively "Sublicensees"). Each Sublicensee hereby assumes
and agrees to be bound by the terms, provisions and conditions as set forth in
this Agreement as if it were the "Licensee" and a "Party" hereunder. In the
event the control or ownership of any Sublicensee, its business or substantially
all of its assets are sold or transferred so that such Sublicensee, business or
assets cease to be under common ownership and control with the Licensee, such
subsidiary or affiliate shall automatically cease to be a Sublicensee hereunder
from and after such sale or transfer, without, however, relieving or otherwise
affecting any of the obligations of such former Sublicensees with respect to its
obligations with respect to actions or events arising prior to such sale or
transfer.
(c) License May Follow Group Sale. In the event that the
control or ownership of all or substantially all of the Licensee and
Sublicensees or all or substantially all of their businesses or assets are
-2-
sold or transferred (a "Group Sale"), this Agreement may be transferred (in
whole) as part of such Group Sale by written notice to the Licensor and (if an
asset sale) the assumption of this Agreement by the purchasers by the delivery
to the Licensor of an assumption agreement in form and substance reasonably
acceptable to the Licensor, duly executed by the new Licensee; provided,
however, that this Agreement may not be so transferred to anyone whose business
is in any material respect a Business Competitive With Marketing Force. Any
entity not included in the Group Sale shall automatically cease to be a Licensee
or Sublicensee hereunder from and after such sale or transfer, without, however,
relieving or otherwise affecting any of its obligations with respect to actions
or events arising prior to such sale or transfer.
(d) Limits on the Licensee's Use of Trademarks. Neither the
Licensee nor any of its Sublicensees shall use any Trademark in any material
respect in any Business Competitive With Marketing Force.
(e) No Unpermitted Users. No Party shall cause, suffer, or
permit any of its affiliates or cause any other person to use any Trademark in
any material respect unless such person is a permitted Licensee or Sublicensee
hereunder.
Section 3. Term. The term of this Agreement shall commence on
the date of this Agreement and continue through December 31, 2098 (as and if
extended pursuant to this Section, the "Term"). The Term of this Agreement is
automatically renewable for additional consecutive ninety-nine year terms. If
the Licensee (in the Licensee's sole and absolute discretion) chooses not to
renew, a written request from the Licensee seeking termination must be received
by the Licensor at least 90 days prior to the scheduled end of the then current
Term. The Term is also subject to earlier termination as provided in this
Agreement. Upon the termination of this Agreement by the Licensee, (i) the right
and license to use the Trademarks granted to the Licensee hereunder shall
forthwith terminate, (ii) the Licensee shall promptly thereafter shall cease and
desist from using the marks on or in connection with the Products or Services,
and (iii) the Licensee shall, promptly upon receipt of the written request of
the Licensor, without charge, execute any and all documents, and record them
with any and all appropriate governmental agencies within the Territory, as may
be necessary to remove the Trademarks from its company name and to otherwise
reasonably evidence that the Licensee no longer has the right and license to use
the Trademarks; provided, however, that upon such termination of this Agreement,
the Licensee shall have the right to continue to sell any existing inventory of
the Products and to use the Trademarks in connection with such sale for a period
of up to three months after the effective date of termination of this Agreement.
Section 4. Non-Exclusivity of License; Limits on Licensor's
Use and Licensing Rights: Validity of Trademarks.
(a) Retained Rights and Limits on Use. The Licensee
acknowledges and agrees that, all rights in the Trademarks, other than those
specifically granted in this Agreement, are reserved by the Licensor, and the
Licensor may (during the Term or thereafter) specifically grant other licenses
to use the Trademarks on or in connection with (i) any one or more of the
Products and Services within or outside the Territory or (ii) any other products
or services within or outside the Territory to the extent it has rights therein;
provided, however, that the Licensor covenants and agrees that neither the
Licensor nor any of its affiliates (as sublicensees or otherwise) shall (A) use
any Trademark in any material respect in any Business Competitive With the
Licensee, or (B) license or otherwise grant any rights in or to any Trademark to
any person whose business is in any material respect a Business Competitive With
the Licensee.
(b) Ownership and Validity of Trademarks. The Licensee
acknowledges and agrees that the Licensor is the legal, valid and exclusive
owner of the Trademarks. The Licensee covenants and agrees that it will not,
individually or with any other licensee or person, at any time during the term
of this Agreement or thereafter, directly or indirectly, challenge, contest or
aid in challenging or contesting (i) the
-3-
legality or validity of any of the Trademarks, (ii) the ownership by the
Licensor of any of the Trademarks, or (iii) the title of or registration by the
Licensor of any of the Trademarks, in each case whether such Trademarks are now
existing or hereafter acquired, created or obtained and all renewals thereof.
Section 1. Compliance with Applicable Law. The Licensee
covenants and agrees with the Licensor that, during the Term of this Agreement,
unless the Licensor (in its sole and absolute discretion) consents otherwise in
writing, the Licensee shall comply with all applicable laws, rules, regulations
and ordinances in effect at any time and from time to time in the Territory in
connection with the Products and Services utilizing any of the Trademarks if the
non-compliance therewith would materially impair the prestige and goodwill of
the Trademarks.
Section 5. Standards of Quality. The Licensee acknowledges to
and covenants and agrees with the Licensor that, during the Term of this
Agreement, unless the Licensor (in its sole and absolute discretion) consents
otherwise in writing: (a) none of the Products or Services shall fail in any
material respect to meet the standards of quality with respect to the Trademarks
in place at the time of commencement of this Agreement ("Standards of Quality")
if such failure would materially impair the prestige and goodwill of the
Trademarks; and (b) none of the Products or Services of the Licensee shall
otherwise materially impair the prestige and goodwill of the Trademarks.
Section 6. Registration for the Trademarks in the Territory.
(a) Registration Maintenance. During the term of this
Agreement, the Licensor shall undertake, in its own name, to renew and maintain
registration for the Trademarks in the Territory. The Licensee shall cooperate
with the Licensor in the execution, filing and prosecution of any such
instrument(s) or document(s) as the Licensor from time to time may reasonably
request (i) to obtain renewal and/or maintain registration for the Trademarks in
the Territory and (ii) to confirm the Licensor's ownership rights therein. The
Licensor makes no representation or warranty hereby that the registrations for
the Trademarks will be renewable or maintainable in the Territory, and the
failure to renew or maintain the registrations thereof shall not be deemed a
breach hereof by the Licensor.
(b) Costs and Expenses. Any and all costs and expenses
(including, without limitation, the fees and expenses of attorneys and other
professionals) incurred by the Licensor in the renewal or maintenance of any of
the Trademarks in the Territory shall be borne by the Licensor.
Section 7. Royalties. The license granted under this Agreement
is royalty-free. The Licensee shall not be required to account to the Licensor
with respect to its use of the Trademarks.
Section 8. Representations and Warranties Respecting the
Licensee. The Licensee represents and warrants to the Licensor that, as of the
date hereof and as of the date of each amendment, renewal or extension hereof or
assumption hereof, except as otherwise disclosed to the Licensor in writing: (a)
the Licensee is a corporation duly incorporated, validly existing and in good
standing under the laws its state of incorporation; (b) the Licensee has the
legal capacity, power, authority and unrestricted right to execute and deliver
this Agreement and to perform all of its obligations hereunder; (c) the
execution and delivery by the Licensee of this Agreement and the performance by
the Licensee of all of its obligations hereunder will not violate or be in
conflict with any term or provision of (i) any applicable law, (ii) any
judgment, order, writ, injunction, decree or consent of any court or other
judicial authority applicable to the Licensee or any material part of the
Licensee's assets and properties, (iii) any of its organizational documents, or
(iv) any material agreement or document to which it is a party or subject or
that applies to any material part of the Licensee's assets and properties; (d)
no consent, approval or authorization of, or registration, declaration or filing
with, any governmental authority or other person is required as a condition
precedent, concurrent or subsequent to or in connection with the due and valid
execution, delivery and
-4-
performance by the Licensee of this Agreement or the legality, validity, binding
effect or enforceability of any of the terms and provisions of this Agreement;
and (e) this Agreement is a legal, valid and binding obligation of the Licensee,
enforceable against the Licensee in accordance with its terms and provisions.
Section 9. Representations and Warranties Respecting the
Licensor. The Licensor represents and warrants to the Licensee that, as of the
date hereof and as of the date of each amendment, renewal or extension hereof or
assumption hereof, except as otherwise disclosed to the Licensee in writing: (a)
the Licensor is a corporation duly incorporated, validly existing and in good
standing under the laws its state of incorporation; (b) the Licensor has the
legal capacity, power, authority and unrestricted right to execute and deliver
this Agreement and to perform all of its obligations hereunder; (c) the
execution and delivery by the Licensor of this Agreement and the performance by
the Licensor of all of its obligations hereunder will not violate or be in
conflict with any term or provision of (i) any applicable law, (ii) any
judgment, order, writ, injunction, decree or consent of any court or other
judicial authority applicable to the Licensor or any material part of the
Licensor's assets and properties, (iii) any of its organizational documents, or
(iv) any material agreement or document to which it is a party or subject or
that applies to any material part of the Licensor's assets and properties; (d)
no consent, approval or authorization of, or registration, declaration or filing
with, any governmental authority or other person is required as a condition
precedent, concurrent or subsequent to or in connection with the due and valid
execution, delivery and performance by the Licensor of this Agreement or the
legality, validity, binding effect or enforceability of any of the terms and
provisions of this Agreement; (e) this Agreement is a legal, valid and binding
obligation of the Licensor, enforceable against the Licensor in accordance with
its terms and provisions; (f) the Licensor is the registered, legal and
beneficial owner of the Trademarks; (g) the Licensor has full power and
authority and the unrestricted right to grant the licenses contemplated
hereunder; (h) the license of the Trademarks hereunder is made free and clear of
any and all liens or encumbrances; (i) the Trademark registrations are in full
force and effect; and (j) the Licensor has no knowledge of any infringements or
competing claims with respect to any Trademark.
Section 10. Termination.
(a) Termination for Cause. The Licensor shall have the right
to terminate this Agreement (and the licenses and other rights, remedies and
interests granted to the Licensee hereunder), and end the Term, by written
notice to the Licensee in the event the Licensee shall default in the
performance or satisfaction of any of the terms and provisions of this
Agreement, which violation or failure shall have continued for more than thirty
(30) days after notice thereof by the Licensor to the Licensee and which
violation or failure has materially impaired the prestige and goodwill of the
Trademarks, provided, however, that if such default is capable of being cured
and if the Licensee shall have commenced to cure such default within such period
and shall proceed continuously in good faith and with due diligence to cure such
default, then such thirty day period shall instead be such longer period as may
be reasonably necessary to effect such cure (not to exceed 180 days).
(b) Termination Without Prejudice; Certain Continuing
Provisions. The termination of this Agreement (and the licenses and other
rights, remedies and interests granted to the Licensee hereunder), for any
reason, shall be without prejudice to any other right or remedy the Licensor may
have, including (without limitation) the right of the Licensor to recover from
the Licensee any and all (i) damages to which it may be entitled by reason of
the happening of the event giving rise to such termination or any other event
and (ii) reimbursements, indemnifications and other amounts that remain
unsatisfied by the Licensors hereunder, which rights and remedies all shall
survive any such termination hereunder. In addition, the terms and provisions of
this subsection and Sections 12 through 21 hereof shall survive any such
termination hereunder.
-5-
Section 11. Infringement.
(a) Defense of Infringements. In the event that legal
proceeding shall be instituted by any third party with respect to the alleged
infringement by the Trademarks on the rights of any third party, the Licensor
shall have the right, at its option and expense and either in its name, in the
name of the Licensee, or in the name of both the Licensor and the Licensee, to
be represented by counsel selected by the Licensor, and to defend against,
negotiate, settle or otherwise deal with such proceeding. The Licensee may
participate in or (if the Licensor elects not to do so) defend any such
proceeding at its own cost and expense (subject to reimbursement by the Licensor
of reasonable costs and expenses if the Licensee prevails in such proceeding)
and with counsel of its choice; provided, however, that if the Licensor defends
the proceeding, the Licensor shall control such proceeding. The Licensee shall
not settle such proceeding, or any claim or demand, admit liability or take any
action with respect thereto without the prior written consent of the Licensor,
which shall not be unreasonably withheld.
(b) No Liability for Continuing Unauthorized Use. If any of
the Trademarks shall be declared by a court of competent jurisdiction to be an
infringement on the rights of any third party so that the Licensee may not
thereafter continue in the use thereof, or if the Licensee shall unlawfully use
any of the Trademarks after the Term, the Licensor shall not be liable to the
Licensee or any other person or entity for any damages or otherwise as a result
of continuing use by the Licensee after such declaration or the end of the Term.
(c) Notice and Prosecution of Infringement. The Licensee shall
promptly notify the Licensor of any infringement, counterfeiting or passing-off
of any of the Trademarks of which it has actual knowledge, whether by the use of
any of the Trademarks or otherwise, but shall not take any action, legal or
otherwise, with respect to such infringement, counterfeiting or passing-off
without prior notice to the Licensor. In the event that the Licensee deems legal
proceedings to be reasonably necessary to enjoin any third party with respect to
the alleged infringement, counterfeiting or passing-off of any of the
Trademarks, the Licensor shall have the right, at its option and expense and
either in its name, in the name of the Licensee, or in the name of both the
Licensor and the Licensee, to be represented by counsel selected by the
Licensor, and to prosecute, negotiate, settle or otherwise deal with such
proceeding. The Licensee may participate in or (if the Licensor elects not to do
so) prosecute any such proceeding at its own cost and expense (subject to
reimbursement by the Licensor of reasonable costs and expenses if the Licensee
prevails in such proceeding) and with counsel of its choice; provided, however,
that if the Licensor prosecutes the proceeding, the Licensor shall control such
proceeding. The Licensee shall not settle such proceeding, or any claim or
demand, release any liability or take any action with respect thereto without
the prior written consent of the Licensor, which shall not be unreasonably
withheld.
(d) Licensee and Licensor Cooperation. The Licensee will
cooperate fully with the Licensor at the Licensor's expense in any such action
the Licensor may decide to take, and, if requested by the Licensor, shall join
with the Licensor in such actions as the Licensor may deem advisable for the
protection of the Trademarks or the Licensor's rights. The Licensor will
cooperate fully with the Licensor at the Licensee's expense (subject to
reimbursement as provided above) in any such permitted action the Licensee may
decide to take, and, if requested by the Licensee, shall join with the Licensee
in such actions as the Licensor may deem advisable for the protection of the
Trademarks or the Licensee's rights.
(e) Costs and Expenses. Except as otherwise provided above,
any and all costs and expenses (including, without limitation, the fees and
expenses of attorneys and other professionals) incurred in the protection or
defense of any of the Trademarks in the Territory, or the defense of any use or
application of the Trademarks, shall be borne by the Licensor.
-6-
Section 12. Expenses of and Indemnity by the Licensee.
(a) The Licensee will pay and discharge, at its own expense,
any and all expenses, charges, fees and taxes (other than as provided in
subsection (b) of this Section and Section 6 hereof) arising out of or
incidental to the carrying on of the Licensee's business, and the Licensee will
indemnify and hold the Licensor harmless from any and all claims that may be
imposed on the Licensor for such expenses, charges, fees and taxes.
(b) Except as otherwise provided in Section 10 hereof, the
Licensee shall indemnify, defend (with counsel selected by the Licensee and
reasonably acceptable to the Licensor) and hold the Licensor and its
representatives and agents harmless from, against and with respect to any claim,
suit, loss, damage, demands, injuries or expense (including the reasonable fees
and expenses of attorneys and other professionals) arising out of or related
directly or indirectly to any Product, Service, or other Trademark bearing item
sold or provided by the Licensee or any other act or omission of the Licensee,
except to the extent attributable to the bad faith, negligence or willful
misconduct of the Licensor or its representatives.
Section 13. Relationship between the Parties. The rights,
powers, privileges, remedies and interests accorded to the Licensor under this
Agreement and applicable law are for the protection of the Licensor, not the
Licensee, and no term or provision of this Agreement is intended (or shall be
deemed or construed) to impose on the Licensor any duty or obligation to the
Licensee to monitor or police any of the activities of the Licensee. No term or
provision of this Agreement is intended to create, nor shall any such term or
provision be deemed or construed to have created, any employment, joint venture,
partnership, trust, agency or other fiduciary relationship between the Licensee
and the Licensor or constitute the Licensee as an employee, joint venturer,
partner, trustee, agent or other representative for or of the Licensor. The
Licensee shall not be entitled or have any power or authority to bind or
obligate the Licensor in any manner whatsoever or to hold itself out as an
employee, joint venturer, partner, trustee, agent or other representative for or
of the Licensor.
Section 14. Waiver of Jury Trial. In any action, suit or
proceeding in any jurisdiction brought against any Party by any other Party,
each Party hereby irrevocably waives trial by jury.
Section 15. Consent to New York Jurisdiction and Venue, Etc.
Each Party hereby consents and agrees that the Supreme Court of the State of New
York for the County of Westchester and the United States District Court for the
Southern District of New York each shall have personal jurisdiction and proper
venue with respect to any dispute between the Parties; provided that the
foregoing consent shall not deprive any Party of the right in its discretion to
voluntarily commence or participate in any other forum having jurisdiction and
venue. In any dispute, no Party will raise, and each Party hereby expressly and
irrevocably waives, any objection or defense to any such jurisdiction as an
inconvenient forum.
Section 16. Notices. Except as otherwise expressly provided,
any notice, request, demand or other communication permitted or required to be
given under this Agreement shall be in writing, shall be sent by one of the
following means to the addressee at the address set forth above (or at such
other address as shall be designated hereunder by notice to the other parties
and persons receiving copies, effective upon actual receipt) and shall be deemed
conclusively to have been given: (i) on the first Business Day following the day
timely deposited with Federal Express (or other equivalent national overnight
courier) or United States Express Mail, with the cost of delivery prepaid or for
the account of the sender; (ii) on the fifth Business Day following the day duly
sent by certified or registered United States mail, postage prepaid and return
receipt requested; or (iii) when otherwise actually received by the addressee on
a Business Day (or on the next Business Day if received after the close of
normal business hours or on any non-business day).
Section 17. Further Assurances. Each Party agrees to do such
further acts and things and to execute and deliver such statements, assignments,
agreements, instruments and other documents as the other Party from time to time
reasonably may request in order to (a) evidence or confirm the transfer or
-7-
issuance of any stock or Asset or (b) effectuate the purpose and the terms and
provisions of this Agreement, each in such form and substance as may be
acceptable to the Parties.
Section 18. Interpretation, Headings, Severability, Etc. The
parties acknowledge and agree that the terms and provisions of this Agreement
have been negotiated, shall be construed fairly as to all parties hereto, and
shall not be construed in favor of or against any party. The section headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement. In the event that any term or
provision of this Agreement (other than Section 1 hereof) shall be finally
determined to be superseded, invalid, illegal or otherwise unenforceable
pursuant to applicable law by a governmental authority having jurisdiction and
venue, that determination shall not impair or otherwise affect the validity,
legality or enforceability (a) by or before that authority of the remaining
terms and provisions of this Agreement, which shall be enforced as if the
unenforceable term or provision were deleted or reduced pursuant to the next
sentence, as applicable, or (b) by or before any other authority of any of the
terms and provisions of this Agreement. If any term or provision of this
Agreement is held to be unenforceable because of the scope or duration of any
such provision, the parties agree that any court making such determination shall
have the power, and is hereby requested, to reduce the scope or duration of such
term or provision to the maximum permissible under applicable law so that said
term or provision shall be enforceable in such reduced form.
Section 19. Successors and Assigns; Assignment; Intended
Beneficiaries. Whenever in this Agreement reference is made to any person, such
reference shall be deemed to include the successors, assigns, heirs and legal
representatives of such person, and, without limiting the generality of the
foregoing, all representations, warranties, covenants and other agreements made
by or on behalf of any Party in this Agreement shall inure to the benefit of the
successors, assigns, heirs and legal representatives of each other Party;
provided, however, that nothing herein shall be deemed to authorize or permit
the Licensee to assign any of its rights or obligations under this Agreement to
any other person, and the Licensee covenants and agrees that it shall not make
any such assignment, except as otherwise provided in Section 1 hereof or with
the prior written consent of the Licensor. The representations, warranties and
other terms and provisions of this Agreement are for the exclusive benefit of
the Parties hereto, and, except as otherwise expressly provided herein, no other
person (including creditors of any party hereto) shall have any right or claim
against any Party by reason of any of those terms and provisions or be entitled
to enforce any of those terms and provisions against any Party.
Section 20. No Waiver by Action, Etc. Any waiver or consent
respecting any representation, warranty, covenant or other term or provision of
this Agreement shall be effective only in the specific instance and for the
specific purpose for which given and shall not be deemed, regardless of
frequency given, to be a further or continuing waiver or consent. The failure or
delay of a Party at any time or times to require performance of, or to exercise
its rights with respect to, any representation, warranty, covenant or other term
or provision of this Agreement in no manner (except as otherwise expressly
provided herein) shall affect its right at a later time to enforce any such
provision. No notice to or demand on any Party in any case shall entitle such
Party to any other or further notice or demand in the same, similar or other
circumstances. All rights, powers, privileges, remedies and other interests of
each Party hereunder are cumulative and not alternatives, and they are in
addition to and shall not limit (except as otherwise expressly provided herein)
any other right, power, privilege, remedy or other interest of such Party under
this Agreement or applicable law.
[END OF PAGE]
-8-
Section 21. Counterparts; New York Governing Law; Amendments;
Entire Agreement. This Agreement shall be effective as of the date first written
above when executed by Parties and delivered to the Licensor. This Agreement may
have been executed in two or more counterpart copies of the entire document or
of signature pages to the document, each of which may be executed by one or more
of the Parties hereto, but all of which, when taken together, shall constitute a
single agreement binding upon all of the Parties hereto. This Agreement shall be
governed by and construed in accordance with the applicable laws pertaining in
the State of New York (other than those that would defer to the substantive laws
of another jurisdiction). Each and every modification and amendment of this
Agreement shall be in writing and signed by all of the Parties, and each and
every waiver of, or consent to any departure from, any representation, warranty,
covenant or other term or provision of this Agreement shall be in writing and
signed by each affected Party. This Agreement contains the entire agreement of
the parties and supersedes all prior and other representations, agreements and
understandings (oral or otherwise) between the parties with respect to the
matters contained herein.
IN WITNESS WHEREOF, the Parties have duly executed and
delivered this Agreement as of the date first above written.
SPAR INFOTECH, INC.
By: /s/ Robert G. Brown
------------------------------------------
Robert G. Brown
Chief Executive Officer
SPAR TRADEMARKS, INC.
By: /s/ Robert G. Brown
------------------------------------------
Robert G. Brown
Chief Executive Officer
-9-
SCHEDULE A
----------
United States
Mark Reg. No. Reg. Date
SPAR 1,357,128 August 27, 1985
SPAR & design 1,357,132 August 27, 1985
SPAR & design 1,387,743 March 25, 1986
SPAR 1,441,909 June 9, 1987
SPAR 1,597,275 May 22, 1990
Canada
Mark Reg. No. Reg. Date
SPAR 337,986 March 11, 1988
SPAR & design 337,987 March 11, 1988
SPAR & design 341,996 June 23, 1988
SPAR 349,073 December 16, 1988
SPAR & design 390,182 November 15, 1991
-10-
EXHIBIT 10.12
================================================================================
THIRD AMENDED AND RESTATED REVOLVING CREDIT
AND
SECURITY AGREEMENT
================================================================================
WHITEHALL BUSINESS CREDIT CORPORATION
(LENDER)
WITH
SPAR MARKETING FORCE, INC.
SPAR GROUP, INC.
SPAR, INC.
SPAR/BURGOYNE RETAIL SERVICES, INC.
SPAR INCENTIVE MARKETING, INC.
SPAR TRADEMARKS, INC.
SPAR MARKETING, INC. (DE)
SPAR MARKETING, INC. (NV)
SPAR ACQUISITION, INC.
SPAR GROUP INTERNATIONAL, INC.
SPAR TECHNOLOGY GROUP, INC.
SPAR/PIA RETAIL SERVICES, INC.
RETAIL RESOURCES, INC.
PIVOTAL FIELD SERVICES, INC.
PIA MERCHANDISING CO., INC.
PACIFIC INDOOR DISPLAY CO.
AND
PIVOTAL SALES COMPANY
(BORROWERS)
================================================================================
January 24, 2003
================================================================================
THIRD AMENDED AND RESTATED REVOLVING CREDIT
AND SECURITY AGREEMENT
----------------------
Third Amended and Restated Revolving Credit and Security Agreement
("Agreement") dated January 24, 2003 among SPAR MARKETING FORCE, INC., a
corporation organized under the laws of the State of Nevada ("SMF"), SPAR, INC.,
a corporation organized under the laws of the State of Nevada ("SPAR"),
SPAR/BURGOYNE RETAIL SERVICES, INC., a corporation organized under the laws of
the State of Ohio ("SBRS"), SPAR GROUP, INC., a corporation organized under the
laws of the State of Delaware ("SGI"), SPAR INCENTIVE MARKETING, INC., a
corporation organized under the laws of the State of Delaware ("SIM"), SPAR
TRADEMARKS, INC., a corporation organized under the laws of the State of Nevada
("STM"), SPAR MARKETING, INC. (DE), a corporation organized under the laws of
the State of Delaware ("SMIDE"), SPAR MARKETING, INC. (NV), a corporation
organized under the laws of the State of Nevada ("SMINV"), SPAR ACQUISITION,
INC., a corporation organized under the laws of the State of Nevada ("SAI"),
SPAR GROUP INTERNATIONAL, INC., a corporation organized under the laws of the
State of Nevada ("International"), SPAR TECHNOLOGY GROUP, INC., a corporation
organized under the laws of the State of Nevada ("STG"), SPAR/PIA RETAIL
SERVICES, INC., a corporation organized under the laws of the State of Nevada
("Pia Retail"), RETAIL RESOURCES, INC., a corporation organized under the laws
of the State of Nevada ("Retail"), PIVOTAL FIELD SERVICES, INC., a corporation
organized under the laws of the State of Nevada ("Pivotal Field"), PIA
MERCHANDISING CO., INC., a corporation organized under the laws of the State of
California ("PIA"), PACIFIC INDOOR DISPLAY CO., a corporation organized under
the laws of the State of California ("Pacific") and PIVOTAL SALES COMPANY, a
corporation organized under the laws of the State of California ("Pivotal"),
(each a "Borrower" and collectively, "Borrowers"), and WHITEHALL BUSINESS CREDIT
CORPORATION ("Lender").
BACKGROUND
----------
SMF entered into a Revolving Credit and Security Agreement with Lender (as
successor to IBJ Schroder Bank & Trust Company, IBJ Schroder Business Credit
Corporation and IBJ Whitehall Business Credit Corporation) dated March 4, 1996
(as same may have been amended, modified or supplemented, the "Original Loan
Agreement"). Thereafter, certain Borrowers signatory thereto and Lender entered
into the First Amended and Restated Revolving Credit, Term Loan and Security
Agreement dated as of March 10, 1999 (as same may have been amended, modified or
supplemented, the "First Amended Loan Agreement"). Finally, certain Borrowers
signatory thereto (the "Existing Borrowers") and Lender entered into the Second
Amended and Restated Revolving Credit, Term Loan and Security Agreement dated as
of September 22, 1999 (as same may be amended, modified or supplemented, (the
"Second Amended Loan Agreement"). By execution of this Agreement, Borrowers and
Lender wish to amend and restate the Second Amended Loan Agreement on the terms
and conditions herein set forth and to add International as a Borrower.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings herein contained, the parties hereto hereby agree as follows:
AMENDMENT AND RESTATEMENT
-------------------------
As of the date of this Agreement, the terms, conditions, covenants,
agreements, representations and warranties contained in the Second Amended Loan
Agreement shall be deemed amended and restated in their entirety as follows and
the Second Amended Loan Agreement shall be consolidated with and into and
superseded by this Agreement; provided, however, that nothing contained in this
Agreement shall impair limit or effect the security interests heretofore
granted, pledged and/or assigned to Lender as security for the Obligations to
Lender under the Second Amended Loan Agreement, except as otherwise herein
provided.
1. (A) General Definitions. When used in this Agreement, the following
terms shall have the following meanings:
"Advance Rates" shall mean, collectively, the Receivables Advance Rate
and the Unbilled Receivables Advance Rate.
"Affiliate" of any Person shall mean (a) any Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with such Person, or (b) any Person who is a director
or officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of
any Person described in clause (a) above. For purposes of this definition,
control of a Person shall mean the power, direct or indirect, (i) to vote 20% or
more of the securities having ordinary voting power for the election of
directors of such Person, or (ii) to direct or cause the direction of the
management and policies of such Person whether by contract or otherwise.
"Agreement" shall have the meaning set forth in the preamble hereof.
"Alternate Base Rate" shall mean, for any day, a rate per annum equal
to the higher of (i) the Federal Funds Rate in effect on such day plus 1/2 of 1%
and (ii) the Base Rate in effect on such day.
"Ancillary Agreements" shall mean all agreements, instruments, and
documents including, without limitation, mortgages, guaranties, pledges, powers
of attorney, consents, assignments, contracts, notices, security agreements,
trust agreements whether heretofore, concurrently, or hereafter executed by or
on behalf of Borrowers or delivered to Lender, relating to this Agreement or to
the transactions contemplated by this Agreement.
"Authority" shall have the meaning set forth in Section 12(f)(iii)
hereof.
"Bank" shall mean Webster Bank together with its successors and
assigns.
"Base Rate" shall mean the base commercial lending rate of Lender as
publicly announced to be in effect from time to time, such rate to be adjusted
automatically, without notice, on the effective date of any change in such rate.
This rate of interest is determined from time to time by Lender as a means of
pricing some loans to its customers and is neither tied to
2
any external rate of interest or index nor does it necessarily reflect the
lowest rate of interest actually charged by Lender to any particular class or
category of customers of Lender.
"Blocked Account" shall have the meaning set forth in Section 23
hereof.
"Borrower" or "Borrowers" shall have the meaning set forth in the
preamble to this Agreement and shall extend to all permitted successors and
assigns of such Persons.
"Borrowing Agent" shall mean SMF.
"Business Day" shall mean with respect to Eurodollar Rate Loans, any
day on which commercial banks are open for domestic and international business,
including dealings in Dollar deposits in London, England and New York, New York
and with respect to all other matters, any day other than a day on which
commercial banks in New York are authorized or required by law to close.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss.ss.9601 et seq.
"Change of Ownership" shall mean (a) any transfer (whether in one or
more transactions) of common stock of any Borrower that results in more than 50%
on a fully diluted basis of the common stock of any Borrower being held by
Persons other than the Original Owners (including for the purposes of the
calculation of percentage ownership, any shares of common stock into which any
capital stock of any Borrower is convertible or for which any such shares of the
capital stock of any Borrower or of any other Person may be exchanged and any
shares of common stock issuable upon exercise of any warrants, options or
similar rights which may at the time of calculation be held by such Persons) or
(b) any merger, consolidation or sale of substantially all of the property or
assets of any Borrower other than a merger, consolidation or sale of
substantially all of the property or assets of one Borrower to, with, or into,
another Borrower.
"Closing Date" shall mean January 24, 2003 or such other date as may
be agreed upon by the parties hereto.
"Collateral" shall mean and include:
(a) all Receivables;
(b) all Equipment;
(c) all General Intangibles;
(d) all Inventory;
(e) all Investment Property (exclusive of the stock of SPG);
3
(f) all Subsidiary Stock;
(g) all Leasehold Interests;
(h) all of each Borrower's right, title and interest in and to:
(i) its respective goods and other property including, but not limited to all
merchandise returned or rejected by Customers, relating to or securing any of
the Receivables; (ii) all of each Borrower's rights as a consignor, a consignee,
an unpaid vendor, mechanic, artisan, or other lienor, including stoppage in
transit, setoff, detinue, replevin, reclamation and repurchase; (iii) all
additional amounts due to any Borrower from any Customer relating to the
Receivables; (iv) other property, including warranty claims, relating to any
goods securing this Agreement; (v) all of each Borrower's contract rights,
rights of payment which have been earned under a contract right, letter of
credit rights (whether or not the letter of credit is evidenced by a writing),
instruments (including promissory notes), documents, chattel paper, warehouse
receipts, deposit accounts, and money; (vi) if and when obtained by any
Borrower, all real and personal property of third parties in which such Borrower
has been granted a lien or security interest as security for the payment or
enforcement of Receivables; and (vii) all supporting obligations that secure
payment or performance of any account, chattel paper, document, general
intangible or investment property and any other goods, personal property or real
property now owned or hereafter acquired in which any Borrower has expressly
granted a security interest or may in the future grant a security interest to
Lender hereunder, under any Ancillary Agreement, or in any amendment or
supplement hereto or thereto, or under any other agreement between Lender and
any Borrower;
(i) all of each Borrower's ledger sheets, ledger cards,
files, correspondence, records, books of account, business papers, computers,
computer software (whether owned by any Borrower or in which it has an
interest), computer programs, tapes, disks and documents relating to (a), (b),
(c), (d), (e), (f), (g) or (h) of this definition; and
(j) all proceeds and products of (a), (b), (c), (d), (e),
(f), (g), (h) and (i) of this definition in whatever form, including, but not
limited to: cash, deposit accounts (whether or not comprised solely of
proceeds), certificates of deposit, insurance proceeds (including hazard, flood
and credit insurance), negotiable instruments and other instruments for the
payment of money, chattel paper, security agreements, documents, eminent domain
proceeds, condemnation proceeds and tort claim proceeds.
"Consents" shall mean all filings and all licenses, permits,
consents, approvals, authorizations, qualifications and orders of governmental
authorities and other third parties, domestic or foreign, necessary to carry on
Borrower's business, including, without limitation, any Consents required under
all applicable federal, state or other applicable law.
"Current Assets" at a particular date, shall mean all cash, cash
equivalents, accounts and inventory of Borrowers on a consolidated basis and all
other items which would, in conformity with GAAP, be included by GAAP under
current assets on a balance sheet of Borrowers on a consolidated basis as at
such date; provided, however, that such amounts shall not include (a) any
amounts for any indebtedness owing by an Affiliate of any Borrower, unless
4
such indebtedness arose in connection with the sale of goods or other property
or the rendition of services in the ordinary course of business and would
otherwise constitute current assets in conformity with GAAP, (b) any shares of
stock issued by an Affiliate of any Borrower, (c) the cash surrender value of
any life insurance policy (d) any assets which would be classified as intangible
assets under GAAP, or (e) any prepaid expenses.
"Current Liabilities" at a particular date, shall mean all
amounts which would, in conformity with GAAP, be included by GAAP under current
liabilities on a balance sheet of Borrowers on a consolidated basis as at such
date, but in any event including, without limitation, the amounts of (a) all
indebtedness payable on demand, or, at the option of the Person to whom such
indebtedness is owed, not more than twelve (12) months after such date, (b) any
payments in respect of any indebtedness (whether installment, serial maturity,
sinking fund payment or otherwise) required to be made not more than twelve (12)
months after such date, (c) all reserves in respect of liabilities or
indebtedness payable on demand or, at the option of the Person to whom such
indebtedness is owed, not more than twelve (12) months after such date, the
validity of which is contested at such date, and (d) all accruals for federal or
other taxes measured by income payable within a twelve (12) month period
excluding Revolving Advances and Shareholder Notes.
"Customer" shall mean and include the account debtor with respect
to any Receivable and/or the prospective purchaser of goods, services or both
with respect to any contract or contract right, and/or any party who enters into
or proposes to enter into any contract or other arrangement with any Borrower,
pursuant to which such Borrower is to deliver any personal property or perform
any services.
"Default" shall mean an event which, with the giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Rate" shall mean a rate equal to two (2%) percent per
annum in excess of the applicable Revolving Interest Rate or per annum rate for
Letter of Credit Fees.
"Depository Accounts" shall have the meaning set forth in Section
23 hereof.
"Dollar" and the sign "$" shall mean lawful money of the United
States of America.
"Domestic Rate Loan" shall mean any Loan that bears interest
based upon the Alternate Base Rate.
"Earnings Before Interest and Taxes" shall mean for any period
the sum of (i) net income (or loss) of Borrowers on a consolidated basis for
such period (excluding extraordinary gains and extraordinary losses per GAAP),
plus (ii) all interest expense of Borrowers on a consolidated basis for such
period, plus (iii) all charges against income of Borrowers on a consolidated
basis for such period for federal, state and local taxes.
"EBITDA" shall mean for any period the sum of (i) Earnings Before
Interest and Taxes for such period 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, less (iv) capitalized cash
expenses of International and any other such capitalized expenses of any
Borrower which expenses were previously deducted from net income in calculating
Earnings Before Interest and Taxes.
"Eligible Receivables" shall mean and include with respect to
each Borrower each Receivable of such Borrower arising in the ordinary course of
such Borrower's business which Lender, in its sole credit judgment exercised in
good faith, shall deem to be an Eligible Receivable, based on the following
criteria and such other considerations as Lender may from time to time
reasonably deem appropriate. A Receivable shall not be deemed eligible unless
such Receivable is subject to Lender's perfected security interest and no other
lien other than Permitted Liens, and is evidenced by an invoice, bill of lading
or other documentary evidence satisfactory to Lender. In addition, no Receivable
shall be an Eligible Receivable if:
(a) it arises out of a sale made by any Borrower to a
Subsidiary or Affiliate of any Borrower or to a Person controlled by a
Subsidiary or Affiliate of any Borrower unless such sale was on an arms-length
basis and the aggregate amount of all such arms-length sales to a Subsidiary or
Affiliate of any Borrower or to a Person controlled by a Subsidiary or Affiliate
of any Borrower is less than $1,000,000, provided, however, such sales in excess
of $1,000,000 in the aggregate shall not constitute Eligible Receivables to the
extent of such excess unless approved by Lender in writing (and otherwise
constitute Eligible Receivables);
(b) it is due or unpaid more than ninety (90) days after the
original invoice date;
(c) fifty percent (50%) or more of the Receivables from the
Customer are not deemed Eligible Receivables hereunder. Such percentage may, in
Lender's sole discretion exercised in good faith, be increased or decreased from
time to time;
(d) any covenant, representation or warranty contained in
this Agreement with respect to such Receivable has been breached;
(e) the Customer shall (i) apply for, suffer, or consent to
the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property
or call a meeting of its creditors, (ii) admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of its
present business, (iii) make a general assignment for the benefit of creditors,
(iv) commence a voluntary case under any state or federal bankruptcy laws (as
now or hereafter in effect), (v) be adjudicated a bankrupt or insolvent, (vi)
file a petition seeking to take advantage of any other law providing for the
relief of debtors, (vii) acquiesce to, or fail to have dismissed, any petition
which is filed against it in any involuntary case under such bankruptcy laws, or
(viii) take any action for the purpose of effecting any of the foregoing;
6
(f) the sale is to a Customer outside the continental United
States of America, unless the sale is on letter of credit, guaranty or
acceptance terms, in each case acceptable to Lender in its sole discretion
exercised in good faith;
(g) the sale to the Customer is on a bill-and-hold,
guaranteed sale, sale-and-return, sale on approval, consignment or any other
repurchase or return basis or is evidenced by chattel paper;
(h) Lender believes, in its sole judgment exercised in good
faith, that collection of such Receivable is insecure or that such Receivable
may not be paid by reason of the Customer's financial inability to pay;
(i) the Customer is the United States of America, any state
or any department, agency or instrumentality of any of them, unless the
applicable Borrower effectuates an assignment of its right to payment of such
Receivable to Lender pursuant to the Assignment of Claims Act of 1940, as
amended (31 U.S.C. Sub-Section 3727 and 41 U.S.C. Sub-Section 15 et seq.) or has
otherwise complied with other applicable statutes or ordinances;
(j) the goods giving rise to such Receivable have not been
shipped and delivered to and accepted by the Customer or the services giving
rise to such Receivable have not been performed by the applicable Borrower and
accepted by the Customer or the Receivable otherwise does not represent a final
sale;
(k) such Receivable causes the aggregate amount of
Receivables of the Customer to exceed a credit limit determined by Lender in its
sole discretion exercised in good faith;
(l) the Receivable is subject to any offset, deduction,
defense, dispute, or counterclaim, to the extent of such offset, deduction,
defense, dispute or counterclaim unless such amount exceeds fifty percent (50%)
of the otherwise Eligible Receivable (notwithstanding the amount of such offset,
deduction, defense, dispute or counterclaim), or the Customer is also a creditor
or supplier of a Borrower or the Receivable is contingent in any respect or for
any reason; provided, however, to the extent any Customer is a creditor or
supplier to any or all Borrowers, then so long as not more than $250,000 is owed
to such Customer by such Borrower or Borrowers, no offset need be taken against
Receivables due from such Customer;
(m) the applicable Borrower has made any agreement with a
Customer for any deduction therefrom, except for discounts or allowances made in
the ordinary course of business, all of which discounts or allowances are
reflected in the calculation of the face value of each respective invoice
related thereto;
(n) shipment of the merchandise or the rendition of services
has not been completed;
(o) any return, rejection or repossession of the merchandise
has occurred;
7
(p) such Receivable is not payable to a Borrower; or
(q) such Receivable is not otherwise satisfactory to Lender
as determined in good faith by Lender in the exercise of its discretion in a
reasonable manner.
"Eligible Unbilled Receivables" at any date, shall mean
Receivables of Borrowers created no more than sixty (60) days prior to such date
which, but for the fact invoices for payment have not yet been sent to
Customers, would constitute Eligible Receivables hereunder.
"Equipment" shall mean and include as to each Borrower all of
such Borrower's goods (other than Inventory) whether now owned or hereafter
acquired and wherever located including, without limitation, all equipment,
machinery, apparatus, motor vehicles, fittings, furniture, furnishings,
fixtures, parts, accessories and all replacements and substitutions therefor or
accessions thereto.
"Eurodollar Rate Loan" shall mean a Loan at any time that bears
interest based on the Eurodollar Rate.
"Eurodollar Rate" shall mean for any Eurodollar Rate Loan for the
then current Interest Period relating thereto the rate per annum (such
Eurodollar Rate to be adjusted to the next higher 1/100 of one (1%) percent)
equal to the quotient of (a) LIBOR, divided by (b) a number equal to 1.00 minus
the aggregate of the rates (expressed as a decimal) of reserve requirements
current on the day that is two Business Days prior to the beginning of the
Interest Period (including without limitation basic, supplemental, marginal and
emergency reserves) under any regulation promulgated by the Board of Governors
of the Federal Reserve System (or any other governmental authority having
jurisdiction over Bank) as in effect from time to time, dealing with reserve
requirements prescribed for Eurocurrency funding including any reserve
requirements with respect to "Eurocurrency liabilities" under Regulation D of
the Board of Governors of the Federal Reserve System.
"Event of Default" shall mean the occurrence of any of the events
set forth in Section 19.
"Excess Cash Flow" for any fiscal period shall mean EBITDA of
Borrowers on a consolidated basis for such fiscal period minus capital
expenditures made by Borrowers on a consolidated basis during such fiscal period
minus Fixed Charges.
"Federal Funds Rate" shall mean, for any day, the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or if such rate is not so published for
any day which is a Business Day, the average of quotations for such day on such
transactions received by Lender from three Federal funds brokers of recognized
standing selected by Lender.
8
"Fixed Charge Coverage Ratio" shall mean and include with respect
to any fiscal period the ratio of (a) (i) EBITDA of Borrowers on a consolidated
basis, minus (ii) Non-Financed Capital Expenditures made during such period
(including, without limitation, expenditures for software) to (b) Fixed Charges.
"Fixed Charges" shall mean the sum (without duplication) of (i)
all interest payments made on the Loans hereunder, plus (ii) all dividends or
other distributions to stockholders and other payments made or paid with respect
to any indebtedness for money borrowed (excluding the principal amount of
Revolving Advances but including all payments made on capitalized leases) during
such period (including, without limitation, payments permitted under Section
12(n)(iii)), plus (iii) income or franchise taxes paid in cash during such
period, plus (iv) payments on the Shareholders Notes during such period under
Section 12(n)(iv) of this Agreement, plus, (v) PIA and SPAR Merger Payments made
during such period.
"Formula Amount" shall have the meaning set forth in Section 2(a)
hereof.
"GAAP" shall mean generally accepted accounting principles,
practices and procedures in the United States of America in effect from time to
time.
"General Intangibles" shall mean and include as to each Borrower
all of such Borrower's general intangibles, whether now owned or hereafter
acquired including, without limitation, all payment intangibles, choses in
action, commercial tort claims, causes of action, corporate or other business
records, inventions, designs, patents, patent applications, equipment
formulations, manufacturing procedures, quality control procedures, trademarks,
service marks, trade secrets, goodwill, copyrights, design rights,
registrations, licenses, license fees, franchises, customer lists, tax refunds,
tax refund claims, overpayments, overpayment claims, reclamation rights,
computer programs and computer software, 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).
"Guarantor" shall mean any Person who may hereafter guarantee
payment or performance of the whole or any part of the Obligations and
"Guarantors" means collectively all such Persons. As of the Closing Date, the
existing Guaranties of William Bartels and Robert Brown shall be terminated and
of no force and effect.
"Guaranty" shall mean any guaranty of the obligations of
Borrowers executed by a Guarantor in favor of Lender.
"Hazardous Substance" shall mean, without limitation, any
flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde
foam insulation, polychlorinated byphenyls, petroleum and petroleum products,
methane, hazardous materials, hazardous wastes, hazardous or toxic substances or
related materials as defined in CERCLA, the Hazardous Materials Transportation
Act, as amended (49 U.S.C. Sections 1801, et seq.), RCRA or any other applicable
environmental law and in the regulations adopted pursuant thereto.
9
"Holdings" shall mean SPAR Group, Inc.
"Interest Period" shall mean the period provided for any
Eurodollar Rate Loan pursuant to Section 4(b).
"Inventory" shall mean and include as to each Borrower all of
such Borrower's now owned or hereafter acquired inventory, goods, merchandise
and other personal property, wherever located, to be furnished under any
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.
"Investment Property" shall mean and include as to each Borrower,
all such Borrowers' now owned or hereafter acquired securities (whether
certificated or uncertificated), stocks, mutual fund shares, money market shares
and U.S. Government securities or other "investment property" as defined in the
Uniform Commercial Code.
"Issuer" shall mean any Person who issues a Letter of Credit
and/or accepts a draft pursuant to the terms hereof.
"Leased Premises Reserve" shall mean the equivalent of three (3)
months rental charges for each of the following leased premises of Borrowers for
which a Landlord Waiver in form and substance satisfactory to Lender has not
been received by Lender: (i) 1791 Harmon Road, Auburn Hills, Michigan, and (ii)
580 White Plains Road, Tarrytown, New York.
"Leasehold Interest" shall mean all of each Borrower's right,
title and interest in and to real property owned by a Person other that a
Borrower, whether as tenant, lessee, licensee, operator or otherwise.
"Lender" shall have the meaning ascribed to such term in the
Preamble and shall include each person which is a transferee, successor or
assign of Lender.
"Letter of Credit Fees" shall have the meaning set forth in
Section 5(b)(v).
"Letters of Credit" shall have the meaning set forth in Section
2A(a).
"LIBOR" shall mean for any Eurodollar Rate Loan for the then
current Interest Period relating thereto, the rate per annum quoted by Lender to
Borrowing Agent two (2) Business Days prior to the first day of such Interest
Period as the rate available to Bank in the interbank market for offshore Dollar
deposits in immediately available funds for a period equal to such Interest
Period and in an amount equal to the amount of such Eurodollar Rate Loan.
"Loans" means the Revolving Advances, the Letters of Credit and
all other extensions of credit hereunder.
10
"Maximum Revolving Amount" means $15,000,000.
"Net Worth" shall mean, at a particular date (a) the aggregate
amount of all assets of Borrowers on a consolidated basis as may be properly
classified as such in accordance with GAAP consistently applied less (b) the
aggregate amount of all liabilities of Borrowers on a consolidated basis, in
accordance with GAAP, consistently applied.
"New Borrower" or "New Borrowers" shall mean, individually and
collectively, International, STG, PIA Retail, Retail and Pivotal Field.
"Non-Financed Capital Expenditures" shall mean capital
expenditures not financed with proceeds of purchase money financing permitted in
Section 12(n)(i)(A).
"Obligations" shall mean and include all Loans, all advances,
debts, liabilities, obligations, covenants and duties owing by each Borrower to
Lender (or any corporation that directly or indirectly controls or is controlled
by or is under common control with Lender) of every kind and description
(whether or not evidenced by any note or other instrument and whether or not for
the payment of money or the performance or non-performance of any act), direct
or indirect, absolute or contingent, due or to become due, contractual or
tortious, liquidated or unliquidated, whether existing by operation of law or
otherwise now existing or hereafter arising including, without limitation, any
debt, liability or obligation owing from any Borrower to others which Lender may
have obtained by assignment or otherwise and further including, without
limitation, all interest, charges or any other payments any Borrower is required
to make by law or otherwise in each case arising under or as a result of this
Agreement and the Ancillary Agreements, together with all reasonable expenses
and reasonable attorneys' fees chargeable to Borrowers' account or incurred by
Lender in connection with Borrowers' account whether provided for herein or in
any Ancillary Agreement.
"Original Closing Date" shall mean March 4, 1996.
"Original Owners" shall mean (1) as to Holdings; Robert G. Brown
and William H. Bartels and any Permitted Transferees, (2) as to PIA and SAI;
Holdings; (3) as to Pacific and Pivotal; PIA, (4) as to SIM, STM and SMF; SAI,
(5) as to SPG; SIM and (6) as to SMF, SMINV, SPAR, SBRS; SMIDE.
"Payment Office" shall mean initially One State Street, New York,
New York 10004; thereafter, such other office of Lender in New York, New York,
if any, which it may designate by notice to Borrowing Agent to be the Payment
Office.
"Permitted Liens" shall mean: (i) liens of carriers,
warehousemen, mechanics and materialmen incurred in the ordinary course of
business securing sums (a) not overdue or (b)
11
being diligently contested in good faith, provided that adequate reserves with
respect thereto are maintained on the books of Borrowers in conformity with GAAP
and no such lien shall have any effect on the priority of the liens in favor of
Lender; (ii) liens incurred in the ordinary course of business in connection
with worker's compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (a) not
overdue or (b) being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on the books of Borrowers in
conformity with GAAP; (iii) liens in favor of Lender; (iv) liens for taxes (a)
not yet due or (b) being diligently contested in good faith, provided that
adequate reserves with respect thereto are maintained on the books of Borrowers
in conformity with GAAP; (v) liens incurred in respect of judgments and awards
not exceeding $250,000 in the aggregate and which are satisfied, vacated,
discharged, stayed or bonded within 30 days from the making thereof; (vi) in the
case of real estate, easements, rights-of-way, restrictions, covenants or other
agreements of record and other similar charges or encumbrances not interfering
with the ordinary conduct of the business of Borrowers; (vii) security or
similar deposits made, or collateral pledged to secure performance bonds
delivered, in the ordinary course of business to secure the performance of
tenders, bids, leases or contracts not to exceed $250,000; (viii) the security
interests (including leases treated as security interests) in assets purchased
or leased with financings permitted by Section 12(n)(i) hereof so long as they
respectively secure only the corresponding purchase money indebtedness or
capitalized lease obligations; and (ix) liens specified on Schedule 1(a) hereto
including any renewals or extensions thereof, but those liens or pledges shall
not be increased or extended to other indebtedness unless otherwise permitted by
the terms and provisions of this Agreement.
"Permitted Transferees" shall mean with respect to any person,
his/her parents, spouse, siblings and/or any of their children, or a trust for
the benefit of any of them, provided, that, with respect to any such trust, such
Person retains the sole right to vote such common stock.
"Person" shall mean an individual, partnership, corporation,
limited liability company, limited liability partnership, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
"PIA and SPAR Merger Payments" shall mean payments made to
vendors on payables associated with the acquisition of PIA under the SPAR Merger
Agreement as detailed in Disclosure Schedule 1 to be delivered to Lender.
"Pledge Agreements" shall mean collectively, the Pledge
Agreements executed by each of Holdings, PIA, SAI, SIM and SMF in favor of
Lender pursuant to which each such Person pledges 100% of the stock of each of
its Subsidiaries to Lender as Collateral for the Obligations.
"Principal Shareholders" shall mean William Bartels and Robert
Brown.
"Receivables" shall mean and include as to each Borrower all of
such Borrower's accounts (including, without limitation, all health-care
insurance receivables), contract rights, instruments (including those evidencing
indebtedness owed to Borrowers by their Affiliates), documents, chattel paper
(whether tangible or electronic), general intangibles relating to accounts,
drafts and acceptances, and all other forms of obligations owing to such
Borrower arising out of or in connection with the sale or lease of Inventory or
the rendition of services, all guarantees and other security therefor, whether
secured or unsecured, now existing or hereafter created, and whether or not
specifically sold or assigned to Lender hereunder.
12
"Receivables Advance Rate" shall have the meaning set forth in
the definition of Receivables Availability.
"Receivables Availability" means 85% ("Receivables Advance Rate")
of the net face amount of Borrowers' Eligible Receivables, subject to Section
2(c) hereof.
"Revolving Advances" shall mean Loans made other than Letters of
Credit.
"Revolving Credit Note" shall mean the $15,000,000 Fifth Amended
and Restated Revolving Credit Note dated as of January 24, 2003 executed by
Borrowers in favor of Lender.
"Revolving Interest Rate" shall mean an interest rate per annum
equal to (a) the Alternate Base Rate with respect to Domestic Rate Loans and (b)
the sum of the Eurodollar Rate plus two and one-half percent (2.50%) with
respect to Eurodollar Rate Loans.
"Second Amended Loan Agreement Closing Date" shall mean September
22, 1999.
"Shareholder Notes" shall mean the promissory notes to the
Principal Shareholders from those Borrowers and in the amounts set forth in
Exhibit A hereto.
"SPAR Merger Agreement" shall mean that certain Agreement and
Plan of Merger, dated as of February 28, 1999 (as the same may be supplemented,
modified, amended, restated or replaced from time to time in the manner provided
therein), made by and among PIA Merchandising Services, Inc., SG Acquisition,
Inc., PIA Merchandising Co., Inc., the Borrowers, and SPAR Acquisition, Inc.,
SPAR Marketing, Inc., SPAR Incentive Marketing, Inc., SPAR MCI Performance
Group, Inc., and SPAR Trademarks, Inc. (the Borrowers, SPAR Acquisition, Inc.,
SPAR Marketing, Inc., SPAR Incentive Marketing, Inc., SPAR MCI Performance
Group, Inc., and SPAR Trademarks, Inc. are referred to therein collectively as
the "SPAR Parties".)
"SPG" shall mean SPAR Performance Group, Inc. (f/k/a SPAR MCI
Performance Group, Inc.), a Delaware corporation.
"SPG Holdings" shall mean Performance Holdings, Inc., a Delaware
corporation.
"SPG Holdings Term Loan Agreement" shall mean that certain Term
Loan, Guaranty and Security Agreement entered into as of June 30, 2002 by and
between SIM and SPG Holdings.
"SPG Holdings Term Notes" shall mean collectively, (i) that
certain Term Note in the amount of $2,500,000 and (ii) that certain Term Note in
the amount of $3,500,000, in each case issued by SPG Holdings in favor of SIM.
"SPG Loan Agreement" shall mean that certain Revolving Credit,
Guaranty and Security Agreement dated as of June 30, 2002 among SIM, SPG
Holdings and SPG.
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"SPG Loans" shall mean loans made by SGI pursuant to an SPG Loan
Agreement.
"Stock Purchase Agreement" shall mean that certain Stock Purchase
and Sale Agreement dated as of June 30, 2002 by and between SPG Holdings and
SIM.
"Subordinated Right" and "Subordinated Rights" shall respectively
mean for each Borrower any and all subrogation, contribution and other similar
rights of such Borrower against or in respect of (i) any other Borrower, or (ii)
any of their respective assets and properties, whether resulting from any
payment made by such Borrower or otherwise; in each case whether now or
hereafter existing, acquired or created.
"Subsidiary" shall mean a corporation or other entity of whose
shares of stock or other ownership interests having ordinary voting power (other
than stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors of such
corporation, or other Persons performing similar functions for such entity, are
owned, directly or indirectly, by such Person.
"Subsidiary Stock" means all of the issued and outstanding shares
of stock owned by (1) PIA of Pacific and Pivotal, (2) SAI of SIM, STM and SMIDE,
(3) SMIDE of SMF, SMINV, SPAR and SBRS and (4) SGI of PIA and SAI.
"Supplemental Amount" shall mean, for each period of time, the
amount set forth below opposite such time period:
Time Period Supplemental Amount
Closing Date through 3/31/2003 $1,500,000
04/01/2003 through 06/30/2003 $1,300,000
07/01/2003 through 09/30/2003 $1,100,000
10/01/2003 through 12/31/2003 $900,000
01/01/2004 through 03/31/2004 $700,000
04/01/2004 through 06/30/2004 $500,000
07/01/2004 through 09/30/2004 $300,000
10/01/2004 through 12/31/2004 $100,000
01/01/2005 and thereafter $0
"Term" shall mean the Closing Date through January 24, 2006
subject to acceleration upon the occurrence of an Event of Default hereunder or
other termination hereunder.
"Transactions" shall mean the transactions contemplated by this
Agreement.
"Unbilled Receivables Availability" means 70% ("Unbilled
Receivables Advance Rate") of the net face amount of Eligible Unbilled
Receivables, subject to Section 2(c) hereof.
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"UCC Article 9" shall mean Article 9 of the Uniform Commercial
Code as in effect in the State of New York on July 1, 2001, as same may be
amended from time to time.
"Undrawn Availability" at a particular date shall mean an amount
equal to (a) the lesser of (i) the Formula Amount or (ii) the Maximum Revolving
Amount, minus (b) the outstanding amount of Loans.
"Uniform Commercial Code" shall mean the Uniform Commercial Code
as adopted in the State of New York as same may be amended from time to time.
"Working Capital" at a particular date shall mean the excess, if
any, of Current Assets over Current Liabilities at such date.
(B) Accounting Terms. As used in this Agreement, the Revolving
Credit Note, the Ancillary Agreements or any certificate, report or other
document made or delivered pursuant to this Agreement, accounting terms not
defined in Section 1 or elsewhere in this Agreement and accounting terms partly
defined in Section 1 to the extent not defined, shall have the respective
meanings given to them under GAAP.
(C) Uniform Commercial Code Terms. All terms used herein and
defined in the Uniform Commercial Code as adopted in the State of New York shall
have the meaning given therein unless otherwise defined herein. Without limiting
the foregoing, the terms "accounts," "chattel paper," "instruments," "general
intangibles," "payment intangibles," "support obligations," "securities,"
"investment property," "documents," "supporting obligations," "deposit
accounts," "payment intangibles," "software," "letter of credit rights,"
"inventory," "equipment" and "fixtures," as and when used in the description of
Collateral, shall have the meanings given to such terms in Articles 8 or 9 of
the Uniform Commercial Code.
(D) Certain Matters of Construction. The terms "herein", "hereof"
and "hereunder" and other words of similar import refer to this Agreement as a
whole and not to any particular section, paragraph or subdivision. Any pronoun
used shall be deemed to cover all genders. Wherever appropriate in the context,
terms used herein in the singular also include the plural and vice versa. All
references to statutes and related regulations shall include any amendments of
same and any successor statutes and regulations. Unless otherwise provided in
the respective definitions thereof, all references to any instruments or
agreements, including, without limitation, references to any of the Ancillary
Agreements and Shareholder Notes shall include any and all modifications or
amendments thereto and any and all extensions, restatements or renewals thereof
(but without waiving the necessity of obtaining any required consent hereunder
to any such modification, amendment, extension, restatement or renewal).
2. Revolving Advances.
------------------
(a) Borrowing Base. Subject to the terms and conditions set forth
herein and in the Ancillary Agreements, Lender will (at the request of Borrowing
Agent) make Revolving Advances to the Borrowers from time to time during the
Term which, in the aggregate at any
15
time outstanding, will not exceed the lesser of (x) the Maximum Revolving Amount
less the aggregate amount of outstanding Letters of Credit or (y) an amount
equal to the sum of:
(i) Receivables Availability, plus
(ii) Unbilled Receivables Availability, plus
(iii) the Supplemental Amount, minus
(iv) the aggregate amount of outstanding Letters of Credit, minus
(v) the Leased Premises Reserve and such other reserves as
Lender may reasonably deem proper and necessary from time to time.
The sum of 2(a)(y)(i) plus (ii) plus (iii) minus (v) shall be referred
to as the "Formula Amount".
(b) Notwithstanding the limitations set forth above or elsewhere in
this Agreement, Lender retains the right to lend Borrowers (at Borrowing Agent's
request) or permit to continue outstanding from time to time such amounts in
excess of such limitations as Lender may determine in its sole discretion.
(c) Borrowers acknowledge that the exercise of Lender's discretionary
rights hereunder, which rights shall be exercised in good faith, may result
during the Term in one or more increases or decreases in the Advance Rates in
the event Lender determines in good faith that there has been a material adverse
change in the quality of the applicable class of eligible assets and such
material adverse change is not otherwise reflected in the applicable reserves
(as modified), and Borrowers hereby consent to any such increases or decreases
in the Advance Rates which may limit or restrict advances requested by
Borrowers. Lender will notify Borrowing Agent of any change in the Advance Rates
or any new eligibility criteria for Eligible Receivables or Eligible Unbilled
Receivables, the proposed effective date thereof and the reasons therefore;
provided that new Advance Rate(s) shall not take effect sooner than 7 Business
Days after such notice without the Borrowers consent; and provided, however,
that failure by Lender to give any such notice shall not give rise to any cause
of action by Borrowers against Lender. In the event Lender reduces any Advance
Rate, Borrowers shall have a period of 120-days following receipt of Lender's
notice of such reduction within which to repay the Loans and other Obligations
in full and terminate the Agreement, and in such case Borrowers shall not be
required to pay the fee specified in Section 18 hereof or any other premium or
penalty. In the event Borrowers have obtained a written commitment within such
120-day period from a lender that would create a facility to fund such
prepayments, and Borrowers and such new lender are proceeding in good faith to
close such facility, the Borrowers shall have an additional period of thirty
(30) days following the expiration of such 120-day period within which to close
such facility and prepay the Loans and other Obligations without the payment of
such fee or other premium or penalty.
16
(d) If Borrowers do not pay any interest, fees, costs or charges to
Lender when due, Borrowers shall thereby be deemed to have requested, and Lender
is hereby authorized at its discretion to make and charge to Borrowers' account,
a Revolving Advance to Borrowers as of such date in an amount equal to such
unpaid interest, fees, costs or charges.
(e) Any sums expended by Lender due to any Borrower's failure to
perform or comply with its obligations under this Agreement, including but not
limited to the payment of taxes, insurance premiums or leasehold obligations,
shall be charged to Borrowers' account as a Revolving Advance and added to the
Obligations.
(f) Lender will account to Borrowing Agent monthly with a statement of
all Revolving Advances and other advances, charges and payments made pursuant to
this Agreement, and such account rendered by Lender shall be deemed final,
binding and conclusive upon Borrowers unless Lender is notified by Borrowing
Agent in writing to the contrary within thirty (30) days of the date each
account was rendered specifying the item or items to which objection is made.
(g) During the Term, Borrowers may borrow, prepay and reborrow
Revolving Advances, all in accordance with the terms and conditions hereof. Any
prepayment in full shall be subject to the provisions of Section 18 hereof, if
applicable. No reduction in the Maximum Revolving Amount shall occur without an
amendment to this Agreement.
(h) Borrowers shall apply the proceeds of the Revolving Loans to
provide for their working capital needs, to finance capital expenditures and to
repay Shareholder Notes as permitted under Section 12(n)(iv) hereof.
(i) The aggregate balance of Revolving Advances plus Letters of Credit
outstanding at any time shall not exceed the lesser of the Formula Amount or the
Maximum Revolving Amount.
(j) In no event shall the aggregate outstanding balance of Revolving
Advances plus Letters of Credit utilized by, or for the benefit of, (a)
International exceed $3,000,000, (b) STG exceed $2,000,000 or (c) PIA Retail,
Retail and Pivotal exceed $500,000 individually.
2A. Letters of Credit.
(a) Subject to the terms and conditions hereof, Lender shall issue or
cause the issuance of standby Letters of Credit by the Issuer ("Letters of
Credit") on behalf of Borrowers provided, however, that Lender will not be
required to issue or cause to be issued any Letters of Credit to the extent that
the face amount of such Letters of Credit would then cause the sum of (A) (i)
the outstanding Revolving Advances plus (ii) outstanding Letters of Credit (with
the requested Letter of Credit being deemed to be outstanding for purposes of
this calculation) to exceed the lesser of (x) the Maximum Revolving Amount or
(y) the Formula Amount. The maximum amount of outstanding Letters of Credit
shall not exceed $1,000,000 in the aggregate at any time. All disbursements or
payments related to Letters of Credit shall be deemed to be
17
Revolving Advances and shall bear interest at the Revolving Interest Rate;
Letters of Credit that have not been drawn upon shall not bear interest.
(b) Borrowing Agent may request Lender to issue or cause the issuance
of a Letter of Credit by delivering to Lender at the Payment Office, Lender's
and/or Issuer's standard form of Letter of Credit Application and Letter of
Credit and Security Agreement (collectively, the "Letter of Credit Application")
completed to the satisfaction of Lender, and such other certificates, documents
and other papers and information as Lender may reasonably request. Letters of
Credit shall be subject to the terms and conditions set forth in the Letter of
Credit Application.
(c) Each Letter of Credit shall, among other things, (i) provide for
the payment of sight drafts when presented for honor thereunder in accordance
with the terms thereof and when accompanied by the documents described therein
and (ii) have an expiry date in no event later than the last day of the Term.
Each Letter of Credit Application and each Letter of Credit shall be subject to
the Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500, and any amendments or
revision thereof adhered to by the Issuer and, to the extent not inconsistent
therewith, the laws of the State of New York provided, however, if any Borrower
requests the issuance of any Letter of Credit having an expiry date later than
the last day of the Term, then on the last day of the Term Borrowers will cause
cash to be deposited and maintained in an account with Lender, as cash
collateral in an amount equal to one hundred and five percent (105%) of such
Letters of Credit, such cash collateral to be required without the necessity of
any demand, but otherwise to be held by Lender in accordance with the second
paragraph of Section 5(b)(v).
(d) In connection with the issuance of any Letter of Credit, each
Borrower shall indemnify, save and hold Lender and each Issuer harmless from any
loss, cost, expense or liability, including, without limitation, payments made
by Lender or any Issuer, and expenses and reasonable attorneys' fees incurred by
Lender arising out of, or in connection with, any Letter of Credit to be issued
or created for any Borrower. Borrowers shall be bound by Lender's or any
Issuer's regulations and good faith interpretations of any Letter of Credit
issued for Borrowers' account, although this interpretation may be different
from any Borrower's own; and, neither Lender, nor any Issuer nor any of their
correspondents shall be liable for any error, negligence, or mistakes, whether
of omission or commission, in following any Borrower's or Borrowing Agent's
instructions or those contained in any Letter of Credit or of any modifications,
amendments or supplements thereto or in issuing or paying any Letter of Credit,
except for Lender's or any Issuer's or such correspondents' gross (not mere)
negligence or willful misconduct.
(e) Borrowing Agent shall authorize and direct Issuer to name the
applicable Borrower as the "Applicant" or "Account Party" therein and to deliver
to Lender all instruments, documents, and other writings and property received
by the Issuer pursuant to the Letter of Credit and to accept and rely upon
Lender's instructions and agreements with respect to all matters arising in
connection with the Letter of Credit, the application therefor or any acceptance
created thereunder.
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(f) In connection with all Letters of Credit issued or caused to be
issued or created by Lender under this Agreement, each Borrower hereby appoints
Lender, or its designee, as its attorney, with full power and authority (i) to
sign and/or endorse such Borrower's name upon any warehouse or other receipts,
letter of credit applications and acceptances; (ii) to sign such Borrower's name
on bills of lading; (iii) to clear Inventory through the United States of
America Customs Department ("Customs") in the name of such Borrower or Lender or
Lender's designee, and to sign and deliver to Customs officials powers of
attorney in the name of such Borrower for such purpose; and (iv) to complete in
such Borrower's name or Lender's, or in the name of Lender's designee, any
order, sale or transaction, obtain the necessary documents in connection
therewith, and collect the proceeds thereof. Neither Lender nor its attorneys
will be liable for any acts or omissions nor for any error of judgment or
mistakes of fact or law, except for Lender's or its attorney's gross (not mere)
negligence or willful misconduct. This power, being coupled with an interest, is
irrevocable as long as any Letters of Credit remain outstanding.
3. Repayment of Loans.
------------------
(a) Borrowers shall be required to (i) make a mandatory prepayment
hereunder at any time that the aggregate outstanding principal balance of the
Revolving Advances made by Lender to Borrowers hereunder together with
outstanding Letters of Credit is in excess of the lesser of the Maximum
Revolving Amount or the Formula Amount in an amount equal to such excess, (ii)
repay on the expiration of the Term (x) the then aggregate outstanding principal
balance of Revolving Advances made by Lender to Borrowers hereunder together
with accrued and unpaid interest, fees and charges and (y) all other amounts
owed Lender under this Agreement and the Ancillary Agreements, and (iii) if any
Borrower requests the issuance of any Letter of Credit having an expiry date
later than the last day of the Term, on the last day of the Term, cause cash to
be deposited and maintained in an account with Lender, as cash collateral in an
amount equal to one hundred and five percent (105%) of such Letters of Credit,
such cash collateral to be required without the necessity of any demand, but
otherwise to be held by Lender in accordance with the second paragraph of
Section 5(b)(v).
(b) Each Borrower agrees that, in computing the charges under this
Agreement, all items of payment shall be deemed applied by Lender on account of
the Obligations one (1) Business Day following the Business Day Lender receives
such remittances in good funds via wire transfer or electronic depository check
from either the Blocked Account bank or Depository Account bank. Lender shall
reverse any credit previously made to Borrowers' account for the amount of any
credit returned to Lender unpaid and said reversal of credit may result in the
need for a Revolving Advance for such reversal and related fees.
4. (a) Procedure for Revolving Advances. In accordance with Section 25
hereof, Borrowing Agent may notify Lender prior to 12:00 noon on a Business Day
of a Borrower's request to incur, on that day, a Revolving Advance hereunder.
All Revolving Advances shall be disbursed from whichever office or other place
Lender may designate from time to time and, together with any and all other
Obligations of Borrowers to Lender, shall be charged to Borrowers' account on
Lender's books. The proceeds of each Revolving Advance made by Lender shall be
made available to the applicable Borrower on the day so requested by way of
credit to such Borrower's operating account maintained with Lender or such other
bank as
19
Borrowing Agent may designate following notification to Lender. Any and all
Obligations due and owing hereunder may be charged to Borrowers' account and
shall constitute Revolving Advances. Lender shall give Borrowing Agent prompt
written notice of any and all Revolving Advances (other than interest and fees
pursuant to Section 5 hereof) made pursuant to Lender's authority hereunder to
charge Borrowers' account or make any Revolving Advance sufficient to cover any
amount due hereunder to Lender; provided, however, that failure by Lender to
give any such notice shall not give rise to any cause of action by Borrowers
against Lender.
(b) Notwithstanding the provisions of subsection (a) above, in the
event any Borrower desires to obtain a Eurodollar Rate Loan, Borrowing Agent
shall give Lender at least three (3) Business Days' prior written notice,
specifying (i) the date of the proposed borrowing (which shall be a Business
Day), (ii) the type of borrowing and the amount on the date of such Loan to be
borrowed, which amount shall be $500,000 or, if greater, an integral multiple of
$100,000, and (iii) the duration of the first Interest Period therefor. Interest
Periods for Eurodollar Rate Loans shall be for one, two, three or six months. No
Eurodollar Rate Loan shall be made available to Borrowers during the continuance
of [a Default or] an Event of Default.
(c) Each Interest Period of a Eurodollar Rate Loan shall commence on
the date such Eurodollar Rate Loan is made and shall end on such date as
Borrowing Agent may elect as set forth in (b)(iii) above provided that the exact
length of each Interest Period shall be determined in accordance with the
practice of the interbank market for offshore Dollar deposits and no Interest
Period shall end after the last day of the Term.
Borrowing Agent shall elect the initial Interest Period applicable to a
Eurodollar Rate Loan by its notice of borrowing given to Lender pursuant to
Section 4(b) or by its notice of conversion given to Lender pursuant to Section
4(d), as the case may be. Borrowing Agent shall elect the duration of each
succeeding Interest Period by giving irrevocable written notice to Lender of
such duration not less than three (3) Business Days prior to the last day of the
then current Interest Period applicable to such Eurodollar Rate Loan. If Lender
does not receive timely notice of the Interest Period elected by Borrowing
Agent, Borrowing Agent shall be deemed to have elected to convert to a Domestic
Rate Loan subject to Section 4(d) hereinbelow.
(d) Provided that no Event of Default shall have occurred and be
continuing, any Borrower may, on the last Business Day of the then current
Interest Period applicable to any outstanding Eurodollar Rate Loan, or on any
Business Day with respect to Domestic Rate Loans, convert any such loan or
portion thereof into a loan of another type in the same aggregate principal
amount provided that any conversion of a Eurodollar Rate Loan shall be made only
on the last Business Day of the then current Interest Period applicable to such
Eurodollar Rate Loan. If Borrowing Agent on behalf of any Borrower desires to
convert a Loan, it shall give Lender not less than three (3) Business Days'
prior written notice to convert from a Domestic Rate Loan to a Eurodollar Rate
Loan or one (1) Business Day's prior written notice to convert from a Eurodollar
Rate Loan to a Domestic Rate Loan, specifying the date of such conversion, the
Loans to be converted and if the conversion is from a Domestic Rate Loan to a
Eurodollar Rate Loan, the duration of the first Interest Period therefor. After
giving effect to each such conversion, there shall not be outstanding more than
six (6) Eurodollar Rate Loans, in the aggregate.
20
(e) At their option and upon three (3) Business Days' prior written
notice, Borrowers may prepay the Eurodollar Rate Loans in whole at any time or
in part from time to time, without premium or penalty, but with accrued interest
on the principal being prepaid to the date of such repayment. Borrowers shall
specify the date of prepayment of Loans which are Eurodollar Rate Loans and the
amount of such prepayment. In the event that any prepayment of a Eurodollar Rate
Loan is required or permitted on a date other than the last Business Day of the
then current Interest Period with respect thereto, Borrowers shall indemnify
Lender therefor in accordance with Section 4(f) hereof.
(f) Borrowers shall indemnify Lender and hold Lender harmless from and
against any and all losses or expenses that Lender may sustain or incur as a
consequence of any prepayment or any default by any Borrower in the payment of
the principal of or interest on any Eurodollar Rate Loan or failure by any
Borrower to complete a borrowing of, a prepayment of or conversion of or to a
Eurodollar Rate Loan after notice thereof has been given, including (but not
limited to) any breakage cost payable by Lender to lenders of funds obtained by
it in order to make or maintain its Eurodollar Rate Loans hereunder.
(g) Notwithstanding any other provision hereof, if any applicable law,
treaty, regulation or directive, or any change therein or in the interpretation
or application thereof, shall make it unlawful for Lender (for purposes of this
subsection (g), the term "Lender" shall include Lender and the office or branch
where Lender or any corporation or bank controlling such Lender makes or
maintains any Eurodollar Rate Loans) to make or maintain its Eurodollar Rate
Loans, the obligation of Lender to make Eurodollar Rate Loans hereunder shall
forthwith be cancelled and Borrowers shall, if any affected Eurodollar Rate
Loans are then outstanding, promptly upon request from Lender, either pay all
such affected Eurodollar Rate Loans or convert such affected Eurodollar Rate
Loans to Domestic Rate Loans. If any such payment or conversion of any
Eurodollar Rate Loan is made on a day that is not the last day of the Interest
Period applicable to such Eurodollar Rate Loan, Borrowers shall pay Lender, upon
Lender's request, such amount or amounts as may be necessary to compensate
Lender for any loss or expense sustained or incurred by Lender in respect of
such Eurodollar Rate Loan as a result of such payment or conversion, including
(but not limited to) any interest or other amounts payable by Lender to lenders
of funds obtained by Lenders in order to make or maintain such Eurodollar Rate
Loan. A certificate as to any additional amounts payable pursuant to the
foregoing sentence submitted by Lender to Borrowing Agent or any Borrower shall
be conclusive absent manifest error.
5. Interest and Fees.
------------------
(a) Interest.
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(i) Interest on Loans shall be payable in arrears on the first
day of each month with respect to Domestic Rate Loans and, with respect to
Eurodollar Rate Loans, at the end of each Interest Period; provided, that
interest on Eurodollar Rate Loans for periods in excess of three (3) months
shall be paid on the three-month anniversary of the initial Eurodollar Rate Loan
or renewal thereof, with the balance of interest paid at the end of the Interest
Period. Interest charges shall be computed on the actual principal amount of
Revolving Advances
21
outstanding during the month at a rate per annum equal to the applicable
Revolving Interest Rate. Whenever, subsequent to the date of this Agreement, the
Alternate Base Rate is increased or decreased, the applicable Revolving Interest
Rate for Domestic Rate Loans shall be similarly changed without notice or demand
of any kind by an amount equal to the amount of such change in the Alternate
Base Rate during the time such change or changes remain in effect. The
Eurodollar Rate shall be adjusted with respect to Eurodollar Rate Loans without
notice or demand of any kind on the effective date of any change in the Reserve
Percentage as of such effective date. Lender shall endeavor to give notice of
such change to the Borrowers; provided, however Lender shall have no liability
for the failure to so notify.
(ii) Interest shall be computed on the basis of actual days
elapsed over a 360-day year. At Lender's option, Lender may charge Borrowers'
account for the applicable amount of such interest.
(iii) Upon the occurrence and during the continuance of an Event
of Default, interest and the Letter of Credit Fees shall be payable at the
Default Rate.
(iv) Notwithstanding the foregoing, in no event shall interest
exceed the maximum rate permitted under any applicable law or regulation, and if
any provision of this Agreement or an Ancillary Agreement is in contravention of
any such law or regulation, such provision shall be deemed amended to provide
for interest at said maximum rate and any excess amount shall either be applied,
at Lender's option, to the outstanding Revolving Advances in such order as
Lender shall determine or refunded by Lender to Borrowers.
(v) Borrowers shall pay principal, interest and all other amounts
payable hereunder, or under any Ancillary Agreement, without any deduction
whatsoever, including, but not limited to, any deduction for any set-off or
counterclaim.
(b) Fees.
----
(i) Closing Fee. Upon the execution of this Agreement, Borrowers
shall pay to Lender a closing fee in an amount equal to $50,000 which shall be
fully earned, nonrefundable and due on the Closing Date. The closing fee may be
charged to Borrowers' account.
(ii) Unused Line Fee. In the event the average closing daily
unpaid balances of all Revolving Advances plus all outstanding Letters of Credit
hereunder during any calendar month is less than the Maximum Revolving Amount,
Borrower shall pay to Lender a fee at a rate per annum equal to one quarter of
one percent (.25%) on the amount by which the Maximum Revolving Amount exceeds
such average daily unpaid balance. Such fee shall be calculated on the basis of
a year of 360 days and actual days elapsed, and shall be charged to Borrowers'
account on the first day of each month with respect to the prior month.
(iii) Collateral Evaluation Fee. Borrowers shall pay Lender a
collateral evaluation fee equal to $2,000 per month commencing on the first day
of the month following the Closing Date and on the first day of each month
thereafter during the Term. The collateral
22
evaluation fee shall be deemed earned in full on the date when same is due and
payable hereunder and shall not be subject to rebate or proration upon
termination of this Agreement for any reason.
(iv) Collateral Monitoring Fee. Upon Lender's performance of any
reasonable and customary collateral monitoring - namely any field examination,
collateral analysis or other business analysis, the need for which is to be
determined by Lender and which monitoring is undertaken by Lender or for
Lender's benefit, an amount equal to $750 per day, per person, for each person
employed to perform such monitoring together with all reasonable and customary
costs, disbursements and expenses incurred by Lender and the person performing
such collateral monitoring shall be charged to Borrowers' account; provided,
however, Lender shall not charge Borrowers' account for the performance of more
than three (3) field examinations in any calendar year unless an Event of
Default shall have occurred.
(v) Letter of Credit Fees.
----------------------
Borrowers shall pay (x) to Lender, fees for each Letter of
Credit for the period from and excluding the date of issuance of same to and
including the date of expiration or termination, equal to the average daily face
amount of each outstanding Letter of Credit multiplied by two and one-quarter
percent (2.25%) per annum, such fees to be calculated on the basis of a 360-day
year for the actual number of days elapsed and to be payable monthly in arrears
on the first day of each month and on the last day of the Term and (y) to the
Issuer, any and all fees and expenses as agreed upon by the Issuer and Borrowers
in connection with any Letter of Credit, including, without limitation, in
connection with the opening, amendment or renewal of any such Letter of Credit
and any acceptances created thereunder and shall reimburse Lender for any and
all fees and expenses, if any, paid by Lender to the Issuer (all of the
foregoing fees, the "Letter of Credit Fees") in accordance with Schedule 5(b)(v)
for standard items. All such charges shall be deemed earned in full on the date
when the same are due and payable hereunder and shall not be subject to rebate
or proration upon the termination of this Agreement for any reason. Any such
charge in effect at the time of a particular transaction shall be the charge for
that transaction, notwithstanding any subsequent change in the Issuer's
prevailing charges for that type of transaction. All Letter of Credit Fees
payable hereunder shall be deemed earned in full on the date when the same are
due and payable hereunder and shall not be subject to rebate or proration upon
the termination of this Agreement for any reason.
On demand following an Event of Default, Borrowers will
cause cash to be deposited and maintained in an account with Lender, as cash
collateral, in an amount equal to one hundred and five percent (105%) of the
outstanding Letters of Credit, and each Borrower hereby irrevocably authorizes
Lender, in its discretion, on such Borrower's behalf and in such Borrower's
name, to open such an account and to make and maintain deposits therein, or in
an account opened by such Borrower, in the amounts required to be made by such
Borrower, out of the proceeds of Receivables or other Collateral or out of any
other funds of Borrowers coming into Lender's possession at any time. Lender
will invest such cash collateral (less applicable reserves) in such short-term
money-market items as to which Lender and Borrowers mutually agree and the net
return on such investments shall be credited to such account and constitute
additional cash collateral. Borrowers may not withdraw amounts credited to any
such
23
account except upon payment and performance in full of all Obligations and
termination of this Agreement.
(vi) Success Fee. On or before July 31, 2003, Lender have the
right to purchase 16,667 shares of the common stock of SGI from SGI at a
purchase price of one penny per share at Lender's option at any time after the
average closing price on the NASDAQ Stock Exchange of SGI's common stock over
any consecutive ten (10) trading day period (the "Average Share Price") shall be
at least $15.00 per share. Such purchase shall be effectuated by three (3)
business days prior written notice from Lender to SGI. Lender's right to
purchase SGI's common stock shall be deemed a right earned in full on the Second
Amended Loan Agreement Closing Date and shall not be subject to adjustment upon
termination of this Agreement for any reason. Any sale of such stock by Lender
shall be subject to any and all restrictions imposed under any and all
applicable federal, state and local securities laws. Lender's right to purchase
shares of SGI as per this Section 5(b)(iv) shall expire August 1, 2003.
(vii) Supplemental Amount Fees. Borrowers shall pay to Lender a
Supplemental Amount use fee to the extent the outstanding Revolving Advances to
the Borrowers and the undrawn amount of outstanding Letters of Credit issued for
the account of the Borrowers exceeds the Formula Amount (calculated as if the
Supplemental Amount was $0), equal to one percent (1%) per annum of such excess
(with the excess amount upon which such fee is payable being capped at the
Supplemental Amount in effect at the time such Revolving Advances and Letters of
Credit were outstanding), 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 and the last day of the Term. All 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.
(c) Increased Costs. In the event that any adoption of or change in
any applicable law, treaty or governmental regulation, or any change in the
interpretation or application thereof, or compliance by Lender therewith (for
purposes of this Section 5(c), the term "Lender" shall include Lender and any
corporation or bank controlling Lender) and the office or branch where Lender
(as so defined) makes or maintains any Eurodollar Rate Loans with any request or
directive (whether or not having the force of law) from any central bank or
other financial, monetary or other authority, shall:
(i) subject Lender to any tax of any kind whatsoever with respect
to this Agreement or change the basis of taxation of payments to Lender of
principal, fees, interest or any other amount payable hereunder or under any
Ancillary Agreements (except for changes in the rate of tax on the overall net
income of Lender, the components of such income or the calculation of such
income by the jurisdiction in which it maintains its principal office);
(ii) impose, modify or hold applicable any reserve, special
deposit, assessment or similar requirement against assets held by, or deposits
in or for the account of, advances or loans by, or other credit extended by, any
office of Lender, including (without limitation) pursuant to Regulation D of the
Board of Governors of the Federal Reserve System; or
24
(iii) impose on Lender or the interbank Eurodollar market any
other condition with respect to this Agreement or any Ancillary Agreements; and
the result of any of the foregoing is to increase the cost to Lender of making,
renewing or maintaining its Loans hereunder by an amount that Lender deems to be
material or to reduce the amount of any payment (whether of principal, interest
or otherwise) in respect of any of the Loans by an amount that Lender deems to
be material, then, to the extent the base rate does not reflect such increased
costs, in any case Borrowers shall promptly pay Lender, upon its demand, such
additional amount as will compensate Lender for such additional cost or such
reduction, as the case may be provided that the foregoing shall not apply to
increased costs which are reflected in the Eurodollar Rate. Lender shall certify
the amount and calculation of such additional cost or reduced amount to
Borrowers, and such certification shall be conclusive absent manifest error.
(d) Capital Adequacy.
-----------------
(i) In the event that Lender shall have determined that any
adoption of or change in any applicable law, rule, regulation or guideline
regarding capital adequacy, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Lender therewith (for purposes of this Section 5(d), the term "Lender" shall
include Lender and any corporation or bank controlling Lender) and the office or
branch where Lender (as so defined) makes or maintains any Eurodollar Rate Loans
with any request or directive regarding capital adequacy (whether or not having
the force of law) of any such authority, central bank or comparable agency, has
or would have the effect of reducing the rate of return on Lender's capital as a
consequence of its obligations hereunder to a level below that which Lender
could have achieved but for such adoption, change or compliance (taking into
consideration Lender's policies with respect to capital adequacy) by an amount
deemed by Lender to be material, then, from time to time, then, to the extent
the base rate does not reflect such changes, Borrowers shall pay upon demand to
Lender such additional amount or amounts as will compensate Lender for such
reduction. In determining such amount or amounts, Lender may use any reasonable
averaging or attribution methods.
(ii) A certificate of Lender setting forth such amount or amounts
as shall be necessary to compensate Lender with respect to Section 5(d)(i)
hereof, and calculation thereof, when delivered to Borrowers shall be conclusive
absent manifest error.
(e) Basis For Determining Interest Rate Inadequate or Unfair. In the
event that Lender shall have determined that:
(i) reasonable means do not exist for ascertaining the Eurodollar
Rate for any Interest Period; or
(ii) Dollar deposits in the relevant amount and for the relevant
maturity are not available in the London interbank Eurodollar market, with
respect to an outstanding Eurodollar Rate Loan, a proposed Eurodollar Rate Loan,
or a proposed conversion of a Domestic Rate Loan into a Eurodollar Rate Loan,
then Lender shall give Borrowing Agent prompt written,
25
telephonic or telegraphic notice of such determination. If such notice is given,
(i) any such requested Eurodollar Rate Loan shall be made as a Domestic Rate
Loan, unless Borrowing Agent shall notify Lender no later than 10:00 a.m. (New
York City time) two (2) Business Days prior to the date of such proposed
borrowing, that its request for such borrowing shall be cancelled or made as an
unaffected type of Eurodollar Rate Loan, (ii) any Domestic Rate Loan or
Eurodollar Rate Loan which was to have been converted to an affected type of
Eurodollar Rate Loan shall be continued as or converted into a Domestic Rate
Loan, or, if Borrowing Agent shall notify Lender, no later than 10:00 a.m. (New
York City time) two (2) Business Days prior to the proposed conversion, shall be
maintained as an unaffected type of Eurodollar Rate Loan, and (iii) any
outstanding affected Eurodollar Rate Loans shall be converted into a Domestic
Rate Loan, or, if Borrowing Agent shall notify Lender, no later than 10:00 a.m.
(New York City time) two (2) Business Days prior to the last Business Day of the
then current Interest Period applicable to such affected Eurodollar Rate Loan,
shall be converted into an unaffected type of Eurodollar Rate Loan, on the last
Business Day of the then current Interest Period for such affected Eurodollar
Rate Loans. Until such notice has been withdrawn, Lender shall have no
obligation to make an affected type of Eurodollar Rate Loan or maintain
outstanding affected Eurodollar Rate Loans and Borrowers shall not have the
right to convert a Domestic Rate Loan or an unaffected type of Eurodollar Rate
Loan into an affected type of Eurodollar Rate Loan.
(f) The protection of Section 5(c) and Section 5(d) shall be available
to Lender regardless of any possible contention of invalidity or inapplicability
with respect to the applicable law, regulation or condition. In the event the
impact of any adoption or change referred to in Section 5(c) or Section 5(d)
does not affect all institutions which are similar to Lender to a similar extent
as the effect upon Lender, and the cost imposed upon Borrowers by Lender
pursuant to Section 5(c) or Section 5(d) exceeds $25,000, then Borrowers shall
have the right to terminate this Agreement and prepay all obligations within one
hundred and twenty (120) days of such imposition without the requirement of
paying any early termination fee pursuant to Section 18 hereof.
6. Security Interest.
-----------------
(a) To secure the prompt payment to Lender of the Obligations,
Existing Borrowers hereby acknowledge, confirm and agree that Lender has and
shall continue to have a continuing security interest in and upon all of the
Collateral heretofore granted to Lender pursuant to the Second Amended Loan
Agreement, and to the extent not otherwise granted thereunder, each Borrower
(including, without limitation, International) hereby assigns, pledges and
grants to Lender a continuing security interest in and to all of its Collateral,
whether now owned or existing or hereafter acquired or arising and wheresoever
located (whether or not the same is subject to Article 9 of the Uniform
Commercial Code). All of each Borrower's ledger sheets, files, records, books of
account, business papers and documents relating to its Collateral shall, until
delivered to or removed by Lender, be kept by such Borrower in trust for Lender
until all Obligations have been paid in full. Each confirmatory assignment
schedule or other form of assignment hereafter executed by any Borrower shall be
deemed to include the foregoing grant, whether or not the same appears therein.
26
(b) Lender may file one or more financing statements, continuation
statements and amendments thereto disclosing Lender's security interest in the
Collateral and describing the Collateral as all assets of the applicable
Person(s) or words of similar effect and which contain any other information
required by Part 5 of UCC Article 9 for the sufficiency or filing acceptance of
any financing statements, continuations statements or amendments, each without
any Borrower's signature appearing thereon or Lender may sign on Borrower's
behalf as provided in Section 14 hereof. Upon a Borrower's request, Lender shall
provide such Borrower with copies of any and all financing statements and
modifications filed by Lender. The parties agree that a carbon, photographic or
other reproduction of this Agreement shall be sufficient as a financing
statement. 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.
(c) Each Borrower hereby confirms and ratifies the Lender's
authorization to file all UCC financing statements filed by Lender with respect
to such Borrower on or prior to the Closing Date.
7. Representations Concerning the Collateral. Each Borrower represents and
warrants (each of which such representations and warranties shall be deemed
repeated upon the making of each request for a Revolving Advance and made as of
the time of each and every Revolving Advance hereunder):
(a) all the Collateral: (i) is owned by such Borrower free and clear
of all claims, liens, security interests and encumbrances (including without
limitation any claims of infringement), except (A) those in Lender's favor and
(B) Permitted Liens; and (ii) is not subject to any agreement prohibiting the
granting of a security interest or requiring notice of or consent to the
granting of a security interest;
(b) all Receivables (i) represent complete bona fide transactions
which require no further act under any circumstances on such Borrower's part to
make such Receivables payable by the Customers, except for Receivables whereby
such Borrower estimates its time spent and bills Receivables on such basis, (ii)
to the best of such Borrower's knowledge, are not subject to any present, future
or contingent offsets or counterclaims (other than allowances, accommodations,
compromises or adjustments made in the ordinary course of business or which have
the effect of reducing availability under this Agreement), and (iii) do not
represent bill and hold sales, consignment sales, guaranteed sales, sale or
return or other similar understandings or obligations of any Affiliate or
Subsidiary of such Borrower.
8. Covenants Concerning the Collateral. During the Term, each Borrower
covenants that it shall:
(a) not dispose of any of the Collateral whether by sale, lease or
otherwise except for (i) the sale of Inventory in the ordinary course of
business, and (ii) the disposition or transfer of obsolete or worn-out Equipment
in the ordinary course of business during any fiscal year having an aggregate
fair market value of not more than $250,000 in the aggregate for such Borrower
and only to the extent that (x) the proceeds of any such disposition are used to
acquire
27
replacement Equipment which is subject to Lender's first priority security
interest or (y) the proceeds of which are remitted to Lender in reduction of the
Obligations;
(b) not encumber, mortgage, pledge, assign or grant any security
interest in any Collateral or any of such Borrower's other assets to anyone
other than Lender except for Permitted Liens;
(c) disclose in appropriate footnotes under GAAP in any financial
statement prepared by it to disclose Lender's security interest in the
Collateral;
(d) defend the Collateral against the claims and demands of all
parties;
(e) keep and maintain the Equipment in good operating condition,
except for ordinary wear and tear, and shall make all reasonable and necessary
repairs and replacements thereof so that the value and operating efficiency
shall at all times be maintained and preserved. No Borrower shall permit any
such items to become a fixture to real estate or accessions to other personal
property if such items have an original cost in excess of $250,000 in the
aggregate;
(f) not extend the payment terms of any Receivable in excess of
$250,000 without prompt notice thereof to Lender;
(g) at any time and from time to time, take such steps as Lender may
reasonably request (i) to obtain an acknowledgment, in form and substance
reasonably satisfactory to Lender, of any bailee having possession of any of the
Collateral, stating that the bailee holds such Collateral for Lender, (ii) to
obtain "control" of any letter-of-credit rights, deposit accounts or electronic
chattel paper (as such terms are defined in UCC Article 9 with corresponding
provisions thereof defining what constitutes "control" for such items of
Collateral), with any agreements establishing control to be in form and
substance reasonably satisfactory to Lender, and (iii) otherwise to insure the
continued perfection and priority of Lender's security interest in any of the
Collateral and of its rights therein;
(h) if such Borrower acquires a "commercial tort claim" (as such term
is defined in UCC Article 9) in excess of $250,000, promptly notify Lender in
writing therein providing a reasonable description and summary thereof, and upon
delivery thereof to Lender, such Borrower shall be deemed to thereby grant to
Lender (and each Borrower hereby grants to Lender) a security interest and lien
in and to such commercial tort claim and all proceeds thereof, all upon the
terms of and governed by this Agreement[, provided, that so long as no Default
has occurred, this provision shall not limit Borrowers' right to litigate any
such claims]; and
(i) perform all other steps requested by Lender to create and maintain
in Lender's favor a valid perfected first security interest in all Collateral.
9. Collection and Maintenance of Collateral and Records. Lender may at any
time verify each Borrower's Receivables utilizing an audit control company or
any other agent of Lender. Lender or Lender's designee may notify Customers, at
any time following the occurrence and during the continuance of and Event of
Default, of Lender's security interest in
28
Receivables, collect them directly and charge the collection costs and expenses
to Borrowers' account. In the event that, notwithstanding the provisions of
Section 23 hereof, any Borrower receives any amount representing the proceeds of
any Collateral, such Borrower shall receive all such amounts for Lender's
benefit in trust as Lender's trustee and immediately deposit such payments in
accordance with Section 23 hereof. On a weekly basis, or more frequently if
requested by Lender (including, without limitation, on a daily basis), each
Borrower shall provide Lender with schedules describing all Receivables created
or acquired by such Borrower since the date of the previous schedule of
Receivables created or acquired and shall execute and deliver confirmatory
written assignments of such Receivables to Lender, but such Borrower's failure
to execute and deliver such schedules or written confirmatory assignments of
such Receivables shall not affect or limit Lender's security interest or other
rights in and to the Receivables. Each Borrower shall furnish, at Lender's
reasonable request, copies of contracts, invoices or the equivalent, and any
original shipping and delivery receipts for all merchandise sold or services
rendered and such other documents and information as Lender may reasonably
require. Each Borrower shall also provide Lender on a monthly (within ten (10)
days after the end of each month) or more frequent basis, as reasonably
requested by Lender, a detailed or aged trial balance of all of such Borrower's
existing Receivables specifying the names and balances due for each Customer and
such other information pertaining to the Receivables as Lender may request. Each
Borrower shall provide Lender on a monthly (within ten (10) days after the end
of each month), or more frequent basis, as requested by Lender, an aged trial
balance of such Borrower's existing accounts payable. Each Borrower shall
provide Lender, as requested by Lender, such other schedules, documents and/or
information regarding the Collateral as Lender may require.
10. Inspections. At all times during normal business hours, Lender shall
have the right to (a) visit and inspect each Borrower's properties and the
Collateral, (b) inspect, audit and make extracts from each Borrower's relevant
books and records, including, but not limited to, management letters prepared by
independent accountants, and (c) discuss with each Borrower's principal
officers, and independent accountants, such Borrower's business, assets,
liabilities, financial condition, results of operations and business prospects.
Each Borrower will deliver to Lender any instrument necessary for Lender to
obtain records from any service bureau maintaining records for such Borrower. At
the request of Lender, SIM shall arrange with SPG to have Lender or its
employees or agents designated as SIM's representative for purposes of Section
5.03 of the SPG Loan Agreement. This Section 10 does not change the
effectiveness of the proviso to Section 5(b)(iv). Prior to the occurrence of an
Event of Default, Lender shall provide Borrowers with at least two (2) Business
Days prior notice of its intention to exercise rights under this Section 10.
Lender shall be reasonable in exercising its rights under this Section 10.
11. Financial Information. Borrowers shall provide Lender (a) as soon as
available, but in any event within one hundred twenty (120) days after the end
of Borrowers' fiscal year, a balance sheet on a consolidated basis as at the end
of such fiscal year and the related statements of income, retained earnings and
changes in cash flow for such fiscal year, setting forth in comparative form the
figures as at the end of and for the previous fiscal year, which shall have been
reported on by independent certified public accountants who shall be reasonably
satisfactory to Lender and shall be accompanied by an unqualified audit report
issued by such
29
independent certified public accountants, together with the Form 10-K submitted
by Borrowers to the Securities and Exchange Commission (unless an extension has
been granted by the Securities and Exchange Commission, in which case the Form
10-K shall be delivered to Lender when due to the Securities and Exchange
Commission); (b) as soon as available, but in any event within one hundred
twenty (120) days after the end of Borrowers' fiscal year, a balance sheet and
the related statements of income for each business segment of Borrowers on a
consolidated and consolidating (by segment) basis as at the end of each of
Borrowers' fiscal years which have been internally prepared by Borrowers; (c) as
soon as available, but in any event within forty-five (45) days after the close
of each month and quarter, the balance sheet and the related statements of
income for each business segment of Borrowers on a consolidated and
consolidating (by segment) basis as at the end of such month and quarter and the
related statements of retained earnings and changes in cash flow for each
business segment of Borrowers on a consolidated basis for such month and
quarter, which have been internally prepared by Borrowers, it being understood
that the statements of retained earnings and cash flow will be provided only as
part of the Form 10-Q submitted by Borrowers to the Securities and Exchange
Commission; (d) as soon as available, but in any event within forty-five (45)
days after the close of each quarter, the Form 10-Q submitted by Borrowers to
the Securities and Exchange Commission (unless an extension has been granted by
the Securities and Exchange Commission, in which case the Form 10-Q shall be
delivered to Lender when due to the Securities and Exchange Commission); and (e)
as soon as available, but in any event within five (5) Business Days after any
Borrower's receipt thereof, all financial statements of SPG that are delivered
to Borrowers pursuant to the terms of the SPG Loan Agreement. All financial
statements required under (a), (b), (c), (d) and (e) above shall be prepared in
accordance with GAAP, subject to year-end adjustments in the case of monthly and
quarterly statements. Internally prepared financial statements referenced herein
shall be provided on a basis consistent with current practices and formats.
Together with the financial statements furnished pursuant to (a) above,
Borrowers shall deliver a certificate of Borrowers' certified public accountants
addressed to Lender stating that (i) they have caused this Agreement and the
Ancillary Agreements to be reviewed and (ii) in making the examination necessary
for the issuance of such financial statements, nothing has come to their
attention to lead them to believe that any Event of Default exists and, in
particular, they have no knowledge of any Event of Default or, if such is not
the case, specifying such Event of Default and its nature, when it occurred and
whether it is continuing. At the times the financial statements are furnished
pursuant to (a), (b) and (c) above, a certificate of each Borrower's President
or Chief Financial Officer shall be delivered to Lender stating that, based on
an examination sufficient to enable him to make an informed statement, no Event
of Default exists, or, if such is not the case, specifying such Event of Default
and its nature, when it occurred, whether it is continuing and the steps being
taken by Borrowers with respect to such event. If any internally prepared
financial information, including that required under this Section, is
unsatisfactory in any reasonable manner to Lender, Lender may request that
Borrowers' independent certified public accountants review same.
In addition to the foregoing financial statements, Borrowers shall furnish
Lender no less than thirty (30) days after the beginning of each fiscal year
commencing with fiscal year 2003, a month by month projected operating budget
and cash flow for such fiscal year (including an income statement for each month
and a balance sheet as at the end of the last month in each fiscal quarter),
such projections to be accompanied by a certificate signed by Borrower's
30
President or Chief Financial Officer to the effect that such projections have
been prepared on the basis of sound financial planning practice consistent with
past budgets and financial statements and that such officer has no reason to
question the reasonableness of any material assumptions on which such
projections were prepared.
12. Additional Representations, Warranties and Covenants. Each Borrower
represents and warrants (each of which such representations and warranties shall
be deemed repeated upon the making of a request for a Revolving Advance and made
as of the time of each Revolving Advance made hereunder, excluding, however,
those events subject to an express written waiver or consent from Lender or
those expressly permitted or not prohibited by the covenants), and covenants
that:
(a) Such Borrower is duly incorporated and in good standing under the
laws of the states listed on Schedule 12(a) and is qualified to do business and
is in good standing in the states listed on Schedule 12(a), which constitute all
states in which qualification and good standing are necessary for Borrower to
conduct its business and own its property and where the failure to so qualify
would have a material adverse effect on such Borrower or its business; and such
Borrower has delivered to Lender true and complete copies of its certificate of
incorporation and by-laws and will promptly notify Lender of any amendment or
changes thereto.
(b) Except as set forth on Schedule 12(b) hereof, such Borrower has no
Subsidiaries;
(c) the execution, delivery and performance of this Agreement and the
Ancillary Agreements (i) have been duly authorized, (ii) are not in
contravention of such Borrower's certificate of incorporation, by-laws or of any
material indenture, material agreement or material undertaking to which such
Borrower is a party or by which such Borrower is bound and (iii) are within such
Borrower's corporate powers;
(d) this Agreement and the Ancillary Agreements executed and delivered
by such Borrower are such Borrower's legal, valid and binding obligations,
enforceable in accordance with their terms;
(e) such Borrower keeps and will continue to keep all of its books and
records concerning the Collateral at such Borrower's executive offices located
at the addresses set forth on Schedule 12(e) and will not move such books and
records without giving Lender at least thirty (30) days prior written notice;
(f) (i) the operation of such Borrower's business is and will continue
to be in compliance in all material respects with all applicable federal, state
and local laws, including but not limited to all applicable environmental laws
and regulations;
(ii) in the event such Borrower obtains, gives or receives notice
of any release or threat of release of a reportable quantity of any Hazardous
Substances on its property in violation of any applicable law (any such event
being hereinafter referred to as a "Hazardous
31
Discharge") or receives any notice of violation, request for information or
notification that it is potentially responsible for investigation or cleanup of
environmental conditions on its property, demand letter or complaint, order,
citation, or other written notice with regard to any Hazardous Discharge or
violation of any environmental laws affecting its property or such Borrower's
interest therein (any of the foregoing is referred to herein as an
"Environmental Complaint") from any governmental Person or entity, including any
state agency responsible in whole or in part for environmental matters in the
state in which such property is located or the United States Environmental
Protection Agency (any such governmental Person or entity hereinafter the
"Authority"), then such Borrower shall, within five (5) Business Days, give
written notice of same to Lender detailing facts and circumstances of which any
Borrower is aware giving rise to the Hazardous Discharge or Environmental
Complaint and periodically inform Lender of the status of the matter. Such
information is to be provided to allow Lender to protect its security interest
in the Collateral and is not intended to create nor shall it create any
obligation upon Lender with respect thereto;
(iii) such Borrower shall respond promptly to any Hazardous
Discharge for which such Borrower is or may be responsible or liable or
Environmental Complaint directed at such Borrower alleging such Borrower's
responsibility or liability and take all necessary action in order to safeguard
the health of any Person and to avoid subjecting the Collateral to any lien,
charge, claim or encumbrance. If such Borrower shall fail to respond promptly to
any such Hazardous Discharge or Environmental Complaint or such Borrower shall
fail to comply with any of the requirements of any environmental laws to which
such Borrower is subject, Lender may, but without the obligation to do so, to
the extent reasonably required to protect, and for the sole purpose of
protecting, Lender's interest in Collateral: (A) give such notices or (B) enter
onto such Borrower's property (or authorize third parties to enter onto such
property) and take such actions as Lender (or such third parties as directed by
Lender) deem reasonably necessary or advisable, to clean up, remove, mitigate or
otherwise deal with any such Hazardous Discharge or Environmental Complaint.
Lender shall endeavor to give notice thereof to the Borrowers; provided, however
Lender shall have no liability for the failure to so notify. All reasonable
costs and expenses incurred by Lender (or such third parties) in the exercise of
any such rights, including any sums paid in connection with any judicial or
administrative investigation or proceedings, fines and penalties, together with
interest thereon from the date expended at the Default Rate for Domestic Rate
Loans constituting Revolving Advances shall be paid upon demand by such
Borrower, and until paid shall be added to and become a part of the Obligations
secured by the liens created by the terms of this Agreement or any other
agreement between Lender and any or all Borrowers;
(iv) Borrowers shall defend and indemnify Lender and hold Lender
harmless from and against all loss, liability, damage and expense, claims,
costs, fines and penalties, including attorney's fees, suffered or incurred by
Lender under or on account of any environmental laws (including, without
limitation, the assertion of any lien thereunder) with respect to any Hazardous
Discharge, the presence of any hazardous substances affecting any Borrower's
property (whether or not the same originates or emerges from any Borrower's
property or any contiguous real estate) including any loss of value of the
Collateral as a result of the foregoing, except to the extent such loss,
liability, damage and expense is attributable to any Hazardous Discharge
resulting from actions on the part of Lender. Each Borrower's obligations
32
under this Section 12(f) shall arise upon the discovery of the presence of any
Hazardous Substances on any Borrower's property, whether or not any federal,
state, or local environmental agency has taken or threatened any action in
connection with the presence of any hazardous substances. Each Borrower's
obligation and the indemnifications hereunder shall survive the termination of
this Agreement; and
(iii) for purposes of this Section 12(f) all references to any
Borrower's property shall be deemed to include all of each Borrower's right,
title and interest in and to all owned and/or leased premises;
(g) based upon the Employee Retirement Income Security Act of 1974
("ERISA"), and the regulations and published interpretations thereunder: (i) no
Borrower maintains or contributes to any plan other than those listed on
Schedule 12(g) hereto; (ii) no Borrower has engaged in any Prohibited
Transactions as defined in paragraph 406 of ERISA and paragraph 4975 of the
Internal Revenue Code, as amended; (iii) each Borrower has met all applicable
minimum funding requirements under paragraph 302 of ERISA in respect of its
plans; (iv) no Borrower has any knowledge of any event or occurrence which would
cause the Pension Benefit Guaranty Corporation to institute proceedings under
Title IV of ERISA to terminate any employee benefit plan(s); (v) no Borrower has
any fiduciary responsibility for investments with respect to any plan existing
for the benefit of persons other than such Borrower's employees; and (vi) no
Borrower has withdrawn, completely or partially, from any multi-employer pension
plan so as to incur liability under the Multiemployer Pension Plan Amendments
Act of 1980;
(h) the Borrowers (taken as a whole) are solvent, able to pay their
debts as they mature, have capital sufficient to carry on their business and all
businesses in which they are about to engage and the fair saleable value of
their assets (calculated on a going concern basis) is in excess of the amount of
their liabilities;
(i) there is no pending or threatened litigation, actions or
proceeding known to any Borrower which involve the possibility (if adversely
determined) of materially and adversely affecting such Borrower's business,
assets, operations, condition or prospects, financial or otherwise, or the
Collateral or the ability of such Borrower to perform this Agreement except as
disclosed on Disclosure Schedule 12(i);
(j) all balance sheets and income statements which have been delivered
to Lender since December 31, 1999 fairly, accurately and properly state such
Borrower's financial condition as at the indicated dates or for the indicated
periods on a basis consistent with that of previous financial statements and
there has been no material adverse change in such Borrower's financial condition
as reflected in such statements since the date thereof and such statements do
not fail to disclose any fact or facts which might materially and adversely
affect such Borrower's financial condition except as corrected in subsequent
statements;
(k) (x) such Borrower possesses all of the material licenses, patents,
copyrights, trademarks, tradenames and permits necessary to conduct its
business, (y) there has been no assertion or claim of violation or infringement
with respect thereof and (z) all such licenses, patents, copyrights, trademarks,
tradenames and permits are listed on Schedule 12(k);
33
(l) such Borrower's federal tax identification number is set forth on
Schedule 12(l). Such Borrower has filed all federal, state and local tax returns
and other reports each is required by law to file and has paid all taxes in
excess of $10,000, assessments, fees and other governmental charges that are due
and payable. The provision for taxes on the books of such Borrower are adequate
for all years not closed by applicable statutes, and for the current fiscal
year, and such Borrower does not have any knowledge of any deficiency or
additional assessment in connection therewith not provided for on its books.
Such Borrower will pay or discharge when due all taxes, assessments and
governmental charges or levies imposed upon it except for items contested in
good faith and disclosed to Lender;
(m) it will promptly inform Lender in writing of: (i) the commencement
of all proceedings and investigations by or before and/or the receipt of any
notices from, any governmental or nongovernmental body and all actions and
proceedings in any court or before any arbitrator against or in any way
concerning any of such Borrower's properties, assets or business, which might
singly or in the aggregate, have a materially adverse effect on such Borrower;
(ii) any amendment of such Borrower's certificate of incorporation or by-laws;
(iii) any change in such Borrower's business, assets, liabilities, condition
(financial or otherwise), results of operations or business prospects which has
had or could be reasonably likely to have a materially adverse effect on such
Borrower; (iv) any Event of Default; (v) any default or any event which with the
passage of time or giving of notice or both would constitute a default under any
agreement for the payment of money to which such Borrower is a party or by which
such Borrower or any of such Borrower's properties may be bound which would have
a material adverse effect on such Borrower's business, operations, property or
condition (financial or otherwise) or the Collateral; (vi) any change in the
location of such Borrower's executive offices; (vii) any change in the location
of such Borrower's Inventory or Equipment from the locations listed on Schedule
12(m) attached hereto to a location not listed on Schedule 12(m), (viii) any
change in such Borrower's corporate name; (ix) any material delay in any
Borrower's performance of any of its obligations to any Customer and of any
assertion of any material claims, offsets or counterclaims by any Customer and
of any allowances, credits and/or other monies granted by it to any Customer;
(x) furnish to and inform Lender of all material adverse information relating to
the financial condition of any Customer; (xi) any material return of goods;
(xii) any amendment to either the SPG Loan Agreement or the SPG Holdings Term
Loan Agreement; and (xiii) any material default by (A) SPG or SPG Holdings under
the SPG Loan Agreement or (B) SPG Holdings under the SPG Holdings Term Loan
Agreement.
(n) it will not:
(i) create, incur, assume or suffer to exist any
indebtedness (exclusive of trade debt) whether secured or
unsecured other than Borrowers' indebtedness to Lender, except
for (A) purchase money indebtedness incurred in the purchase of
Equipment in the ordinary course of business so long as each
obligation for purchase money indebtedness is secured only by the
Equipment purchased, (B) obligations constituting indebtedness
under GAAP arising under capitalized leases entered into in the
ordinary course of business and (C) indebtedness evidenced by the
Shareholder Notes; provided, however, that the aggregate
34
amounts permitted under clauses (A) and (B) shall not exceed
$2,000,000 per annum in the aggregate for all Borrowers in any
fiscal year.
(ii) declare, pay or make any dividend or distribution on
any shares of its common stock or preferred stock or apply any of
its funds, property or assets to the purchase, redemption or
other retirement of any common or preferred stock; provided,
however, Borrowers shall be permitted to make stock purchases in
the aggregate of up to $500,000, provided, that the Borrowers
shall have Undrawn Availability of not less than $2,500,000 for
the ten day period prior to such buyback and after giving affect
to such buyback;
(iii) directly or indirectly, repurchase, redeem, retire,
acquire in advance of maturity or prepay any indebtedness in
excess of $500,000 in the aggregate (other than to Lender or any
other Borrowers permitted in this section) other than non-cash
exchanges (other than for tax consequences with any distributions
to shareholders for tax consequences to be a distribution which
is included in Fixed Charges) of Shareholder Notes for common
stock or as otherwise permitted by Section 12(n)(iv) hereof;
(iv) make any principal payment in cash on the Shareholder
Notes other than (A) on or after the Closing Date, a one time
payment in the amount of $3,000,000 less prepayments of up to
$1,000,000 made on and after December 31, 2002 and before the
Closing Date; provided, however that no such payment shall be
made if as of the date of such payment (1) the Borrowers shall
have an average Undrawn Availability of less than $2,500,000 for
the previous Fiscal Quarter (assuming the Supplemental Amount was
$0), or (2) after giving effect to such payment the Borrowers
shall have an Undrawn Availability of less than $2,500,000
(inclusive of the Supplemental Amount), (B) a payment after March
31, 2003 (1) in the amount of $500,000; provided, however that no
such payment shall be made if as of the date of such payment (x)
the Borrowers shall have an average Undrawn Availability of less
than $2,500,000 (inclusive of the Supplemental Amount) for the
previous Fiscal Quarter or (y) after giving effect to such
payment the Borrowers shall have an Undrawn Availability of less
than $2,500,000 (inclusive of the Supplemental Amount) and (2) in
the amount of up to $500,000; provided, however that no such
payment shall be made if (w) such payment is greater than fifty
percent (50%) of the Excess Cash Flow of Borrowers for the twelve
months ending on March 31, 2003, (x) as of the date of such
payment the Borrowers shall have an Undrawn Availability of less
than $2,500,000 for the previous Fiscal Quarter (assuming the
Supplemental Amount was $0), (y) as of the date of such payment
after giving effect to such payment the Borrowers shall have an
Undrawn Availability of less than $2,500,000 (inclusive of the
Supplemental Amount) or (z) as of the date of such payment Lender
has not received Borrowers' certified financial statements for
the Fiscal Year ending on December 31, 2002, (C) if necessary,
payments of up to $250,000 per Fiscal Quarter thereafter;
provided, however that no such payments shall be made if as of
the date of such payment (1) the Borrowers
35
shall have an Undrawn Availability of less than $2,500,000 for
the previous Fiscal Quarter (inclusive of the Supplemental
Amount), or (2) after giving effect to such payment the Borrowers
shall have an average Undrawn Availability of less than
$2,500,000 (inclusive of the Supplemental Amount); provided,
further that no payments may be made on the Shareholder Notes if,
(A) prior to making any such payment, Borrowers fail to deliver a
compliance certificate evidencing their compliance with the
Undrawn Availability and Fixed Charge Coverage Ratio covenants
set forth in this Section 12(n) or (B) after giving effect to any
such payment, (i) the Borrowers shall have, on a consolidated
basis, a Fixed Charge Coverage Ratio as of the date of such
payment with respect to the previous twelve (12) fiscal months
then ended (for purposes of this proviso, clause (iv) of the
defined term Fixed Charges shall be deemed to include the
proposed payment as well as any actual payments made during the
applicable twelve (12) month fiscal period) of not less than 1.3
to 1.0 (for purposes of measuring the Fixed Charge Coverage Ratio
with respect to the initial $3,000,000 of payments on the
Shareholder Notes, so long as any initial payment on the
Shareholder Notes is made on or before March 31, 2003 the Fixed
Charge Coverage Ratio requirement shall have been met) and (ii) a
Default or an Event of Default shall have occurred or would occur
after giving affect to any such payments;
(v) make advances, loans or extensions of credit to any
Person, except for (A) the granting of customary payment terms to
customers, (B) loans or advances by Borrowers to employees in the
ordinary course of business, including for purposes of
relocation, provided that such loans and advances do not exceed
$250,000 in the aggregate during any fiscal year, (C) services,
advances and transfers among Borrowers made in the ordinary
course of business provided that such services, advances and
transfers are paid for or repaid, as the case may be, within
ninety (90) days, (D) loans made on June 30, 2002 by SIM to SPG
Holdings pursuant to the SPG Holdings Term Loan Agreement, and
(E) loans made by SGI to SPG pursuant to the SPG Loan Agreement,
provided, however, that the initial amount of SPG Loans under the
SPG Loan Agreement shall not exceed $2,300,000, provided,
further, that the outstanding amount of SPG Loans shall not
exceed $3,500,000;
(vi) become either directly or contingently liable upon the
obligations of any Person by assumption, endorsement or guaranty
thereof or otherwise, except for (A) checks and other instruments
endorsed for collection or deposit in the ordinary course of
business, (B) any guaranty of any obligation of a Subsidiary or
Affiliate of any Borrower if such Borrower could have incurred
such obligation directly under this Agreement, (C) any guaranty
of any loan to an employee of any Borrower if such Borrower could
have made such loan directly under this Section, or (D) any other
guaranty so long as the amount of the guaranteed obligations
under this clause (D) shall not exceed $500,000 in the aggregate;
36
(vii) enter into any merger, consolidation or other
reorganization with or into any other Person (other than a
Borrower) or acquire all or a portion of the assets or stock of
any Person (other than a Borrower) or permit any other Person
(other than a Borrower) to consolidate with or merge with it (so
long as the surviving Person of any merger or consolidation with
a Borrower or the acquiring Person of any acquisition of a
Borrower is a Borrower);
(viii) form any Subsidiary or enter into any partnership,
joint venture or similar arrangement;
(ix) materially change the nature of the business in which
it is presently engaged;
(x) change its fiscal year or make any changes in accounting
treatment and reporting practices or in the tax reporting
treatment except as required by GAAP or except as required by law
and upon written notice to Lender;
(xi) enter into any transaction with any Affiliate, except
in ordinary course on arms-length terms;
(xii) bill Receivables under any name except the present
name of such Borrower or
(xiii) amend either the SPG Loan Agreement or the SPG
Holdings Term Loan Agreement in a manner which materially
adversely affects the rights of Lender;
(o) it shall cause to be maintained for Borrowers on a consolidated
basis at the end of the fiscal quarter ending December 31, 2002 Net Worth of at
least $13,500,000 and it shall increase such net worth at the end of each fiscal
quarter thereafter by at least $100,000;
(p) commencing with the fiscal quarter ending December 31, 2002, it
shall maintain a Fixed Charge Coverage Ratio for Borrowers on a consolidated
basis at the end of each fiscal quarter with respect to the four (4) fiscal
quarters then ended of not less than 1.10 to1.0;
(q) it will not make capital expenditures (including, without
limitation, expenditures for software and assets acquired through capitalized
lease transactions) in any fiscal year in an aggregate amount in excess of
$2,000,000 for all Borrowers;
(r) commencing with the fiscal quarter ending December 31, 2002, the
Borrowers shall maintain EBITDA not less than $7,750,000 at the end of each
fiscal quarter with respect to the four (4) fiscal quarters then ended;
(s) all financial projections of each Borrower's performance prepared
by Borrowers or at Borrowers' direction and delivered to Lender will represent,
at the time of
37
delivery to Lender, each Borrower's best estimate of such Borrower's future
financial performance and will be based upon assumptions which are reasonable in
light of such Borrower's past performance and then current business conditions;
(t) none of the proceeds of the Revolving Advances hereunder will be
used directly or indirectly to "purchase" or "carry" "margin stock" or to repay
indebtedness incurred to "purchase" or "carry" "margin stock" within the
respective meanings of each of the quoted terms under Regulation U of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect;
(u) it will bear the full risk of loss from any loss of any nature
whatsoever with respect to the Collateral. At it's own cost and expense in
amounts and with carriers acceptable to Lender, it shall (i) keep all its
insurable properties and properties in which it has an interest insured against
the hazards of fire, flood, sprinkler leakage, those hazards covered by extended
coverage insurance and such other hazards, and for such amounts, as is customary
in the case of companies engaged in businesses similar to each Borrower's
including, without limitation, business interruption insurance; (ii) maintain a
bond or insurance in such amounts as is customary in the case of companies
engaged in businesses similar to each Borrower's insuring against larceny,
embezzlement or other criminal misappropriation of insured's officers and
employees who may either singly or jointly with others at any time have access
to the assets or funds of any Borrower either directly or through authority to
draw upon such funds or to direct generally the disposition of such assets;
(iii) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others; (iv) maintain all
such worker's compensation or similar insurance as may be required under the
laws of any state or jurisdiction in which such Borrower is engaged in business;
(v) furnish Lender with (x) copies of all policies and evidence of the
maintenance of such policies at least thirty (30) days before any expiration
date, and (y) appropriate loss payable endorsements in form and substance
satisfactory to Lender, naming Lender as loss payee and providing that as to
Lender the insurance coverage shall not be impaired or invalidated by any act or
neglect of any Borrower and the insurer will provide Lender with at least thirty
(30) days notice prior to cancellation. Each Borrower shall instruct the
insurance carriers that in the event of any loss thereunder, the carriers shall
make payment for such loss to Lender and not to such Borrower and Lender
jointly. If any insurance losses are paid by check, draft or other instrument
payable to any Borrower and Lender jointly, Lender may endorse such Borrower's
name thereon and do such other things as Lender may deem advisable to reduce the
same to cash. Lender is hereby authorized to adjust and compromise claims. All
loss recoveries received by Lender upon any such insurance may be applied to the
Obligations, in such order as Lender in its sole discretion shall determine
(which prepayment shall be without any premium or penalty or any reduction in
the Maximum Revolving Amount). Any surplus shall be paid by Lender to the
applicable Borrower or applied as may be otherwise required by law. Each
Borrower acknowledges that it shall remain liable for any Obligations remaining
unpaid after any such application in accordance with the terms of this
Agreement;
(v) on or before the Closing Date Lender shall receive complete copies
of the SPG Loan Agreement, the SPG Holdings Term Loan Agreement, the SPG
Holdings Term Notes and the Stock Purchase Agreement (including all exhibits,
schedules and disclosure letters
38
referred to therein or delivered pursuant thereto, if any) and all amendments
thereto, waivers relating thereto and other side letters or agreements affecting
the terms thereof. None of such documents and agreements has been amended or
supplemented, nor have any of the provisions thereof been waived, except
pursuant to a written agreement or instrument which has heretofore been
delivered to Lender. Borrowers will enforce all of its rights under the SPG Loan
Agreement, the SPG Holdings Term Loan Agreement, the SPG Holdings Term Notes and
the Stock Purchase Agreement and all documents executed in connection therewith
including, but not limited to, all indemnification rights, and pursue all
remedies available to it with diligence and in good faith in connection with the
enforcement of any such rights; and
(w) if share price is not available in readily accessible public
sources, within five (5) days after the last Business Day of each month,
Borrowers shall deliver to Lender a report listing the Average Share Price for
the month then ended.
13. Conditions Precedent.
13.1 Conditions to Initial Advances. The agreement of Lender to make the
Revolving Advances requested to be made on the Closing Date is subject to the
satisfaction, or waiver by Lender, immediately prior to or concurrently with the
making of such Revolving Advances, of the following conditions precedent:
(i) Notes. Lender shall have received the Revolving Credit Note
duly executed and delivered by an authorized officer of each Borrower;
(ii) Filings, Registrations and Recordings. Each document
(including, without limitation, any Uniform Commercial Code financing statement)
required by this Agreement, any related agreement or under law or reasonably
requested by Lender to be filed, registered or recorded in order to create, in
favor of Lender, a perfected security interest in or lien upon the Collateral
shall have been properly filed, registered or recorded in each jurisdiction in
which the filing, registration or recordation thereof is so required or
requested, and Lender shall have received an acknowledgment copy, or other
evidence satisfactory to it, of each such filing, registration or recordation
and satisfactory evidence of the payment of any necessary fee, tax or expense
relating thereto;
(iii) Corporate Proceedings of Borrowers. Lender shall have
received copy of the resolutions in form and substance reasonably satisfactory
to Lender, of the Board of Directors of each Borrower authorizing (i) the
execution, delivery and performance of this Agreement and the Ancillary
Agreements and (ii) the granting by such Borrower of the security interests in
and liens upon the Collateral in each case certified by the Secretary or an
Assistant Secretary of such Borrower as of the Closing Date; and, such
certificate shall state that the resolutions thereby certified have not been
amended, modified, revoked or rescinded as of the date of such certificate;
(iv) Incumbency Certificates of Borrowers. Lender shall have
received a certificate of the Secretary or an Assistant Secretary or other
officer of Borrower, dated the Closing Date, as to the incumbency and signature
of the officers of such Borrower executing this
39
Agreement, any certificate or other documents to be delivered by it pursuant
hereto, together with evidence of the incumbency of such Secretary or Assistant
Secretary;
(v) Certificates. Lender shall have received a copy of the
Articles or Certificate of Incorporation of each Borrower and all amendments
thereto, certified by the Secretary of State or other appropriate official of
its jurisdiction of incorporation together with copies of the By-Laws of each
Borrower and all agreements of each Borrower's shareholders certified as
accurate and complete by the Secretary of such Borrower;
(vi) Good Standing Certificates. Lender shall have received good
standing certificates for each Borrower, issued by the Secretary of State or
other appropriate official of each Borrower's jurisdiction of incorporation and
each jurisdiction where the conduct of each Borrower's business activities or
the ownership of its properties necessitates qualification;
(vii) Legal Opinion. Lender shall have received the executed
legal opinions of Jenkens & Gilchrist Parker Chapin LLP in form and substance
satisfactory to Lender which shall cover such matters incident to the
transactions contemplated by this Agreement, the Notes, the Pledge Agreements
and the Ancillary Agreements as Lender may reasonably require and Borrower
hereby authorizes and directs such counsel to deliver such opinions to Lender;
(viii) No Litigation. (x) No litigation, investigation or
proceeding before or by any arbitrator or governmental authority shall be
continuing or threatened against any Borrower or against the officers or
directors of any Borrower (A) in connection with the this Agreement or the
Ancillary Agreements or any of the transactions contemplated thereby and which,
in the reasonable opinion of Lender, is deemed material or (B) which if
adversely determined, would, in the reasonable opinion of Lender, have a
material adverse effect on the business, assets, operations or condition
(financial or otherwise) of any Borrower; and (y) no injunction, writ,
restraining order or other order of any nature materially adverse to any
Borrower or the conduct of its business or inconsistent with the due
consummation of the Transactions shall have been issued by any governmental
authority;
(ix) Financial Condition Certificate. Lender shall have received
an executed Officers Certificate in form and substance satisfactory to Lender.
(x) Collateral Examination. Lender shall have completed
Collateral examinations and received appraisals, the results of which shall be
satisfactory in form and substance to Lender, of the Receivables, Inventory,
General Intangibles and Equipment of each Borrower and all books and records in
connection therewith;
(xi) Fees. Lender shall have received all fees payable to Lender
on or prior to the Closing Date pursuant to Section 5(b) hereof;
(xii) Ancillary Agreements. Lender shall have received executed
copies of the Pledge Agreements and all Ancillary Agreements listed in Lender's
checklist of closing documents dated the Closing Date, each in form and
substance satisfactory to Lender;
40
(xiii) Insurance. Lender shall have received in form and
substance satisfactory to Lender, certified copies of each Borrower's casualty
insurance policies, together with loss payable endorsements on Lender's standard
form of loss payee endorsement naming Lender as loss payee, and certified copies
of each Borrower's liability insurance policies, together with endorsements
naming Lender as a co-insured;
(xiv) Payment Instructions. Lender shall have received written
instructions from Borrowers directing the application of proceeds of the
Revolving Advances made pursuant to this Agreement and stating that such
Borrower has Eligible Receivables and Eligible Unbilled Receivables (based upon
the objective criteria set forth in this Agreement) in amounts sufficient in
value and amount to support Revolving Advances in the amount by or on behalf of
Borrower on the date of such certificate;
(xv) Blocked Accounts. Lender shall have received duly executed
agreements establishing the Blocked Accounts or Depository Accounts with
financial institutions acceptable to Lender for the collection or servicing of
the Receivables and proceeds of the Collateral;
(xvi) Consents. Lender shall have received (a) any and all
Consents necessary to permit the effectuation of the transactions contemplated
by this Agreement and the Ancillary Agreements and (b) such Consents and waivers
of such third parties as might assert claims with respect to the Collateral
listed in Lender's checklist of closing documents dated the Closing Date;
(xvii) Intercompany Documentation. Lender shall have received (a)
complete copies of the SPG Loan Agreement, the SPG Holdings Term Loan Agreement,
the SPG Holdings Term Notes and the Stock Purchase Agreement (including all
exhibits, schedules and disclosure letters referred to therein or delivered
pursuant thereto, if any) and all amendments thereto, waivers relating thereto
and other side letters or agreements affecting the terms thereof and (b)
evidence satisfactory to it that the contract issues and past due Receivables
with a key Customer have been resolved;
(xviii) No Adverse Material Change. (i) Since September 30, 2002,
there shall not have occurred (x) any material adverse change in the condition,
financial or otherwise, operations, properties or prospects of Borrowers, (y)
any material damage or destruction to any of the Collateral or any material
depreciation in the value thereof and (z) any event, condition or state of facts
which would reasonably be expected materially and adversely to affect the
business, financial condition or results of operations of Borrowers and (ii) no
representations made or information supplied to Lender shall have been proven to
be inaccurate or misleading in any material respect;
(xviii) Closing Certificate. Lender shall have received a closing
certificate signed by the Chief Financial Officer of each Borrower dated as of
the Closing Date, stating that (i) all representations and warranties set forth
in this Agreement and the Ancillary Agreements are true and correct on and as of
such date, (ii) Borrowers on such date is in
41
compliance with all the terms and provisions set forth in this Agreement and the
Ancillary Agreements, (iii) on such date no Default or Event of Default has
occurred or is continuing and (iv) each Borrower is in compliance in all
material respects with all relevant federal, state and local regulations;
(xix) Disclosure Schedules. Lender shall have received the
Disclosure Schedules;
(xix) Compliance with Laws. Each Borrower is in compliance with
all relevant federal, state and local regulations; and
(xxi) Other. All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
Transactions shall be satisfactory in form and substance to Lender and its
counsel.
13.2 Conditions to Each Revolving Advance. The agreement of Lender to make
any Revolving Advance or issue any Letter of Credit requested to be made on any
date (including, without limitation, its initial Revolving Advance), is subject
to the satisfaction of the following conditions precedent as of the date such
Revolving Advance is made or such Letter of Credit is issued:
(i) Representations and Warranties. Each of the representations
and warranties made by Borrowers in or pursuant to this Agreement and any
related agreements to which it is a party shall be true and correct in all
material respects on and as of such date as if made on and as of such date, and
each of the representations and warranties contained in any certificate,
document or financial or other statement furnished at any time under or in
connection with this Agreement or any related agreement shall be true and
correct in all material respects on and as of the date made;
(ii) No Default. No Event of Default or Default shall have
occurred and be continuing on such date, or would exist after giving effect to
the Revolving Advances requested to be made, on such date; provided, however
that Lender in its sole discretion, may continue to make Revolving Advances and
issue Letters of Credit notwithstanding the existence of an Event of Default or
Default and that any Revolving Advances so made shall not be deemed a waiver of
any such Event of Default or Default; and
(iii) Maximum Revolving Advances. In the case of any Revolving
Advances requested to be made or Letters of Credit requested to be issued, after
giving effect thereto, the aggregate Revolving Advances and outstanding Letters
of Credit shall not exceed the lesser of the Formula Amount or the Maximum
Revolving Amount.
Each request for a Revolving Advance or Letter of Credit by any Borrower or
Borrowing Agent hereunder shall constitute a representation and warranty by each
Borrower as of the date of such request that the conditions contained in this
subsection shall have been satisfied.
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14. Power of Attorney. Each Borrower hereby appoints Lender or any other
Person whom Lender may designate as such Borrower's attorney, with power to: (i)
endorse such Borrower's name on any checks, notes, acceptances, money orders,
drafts or other forms of payment or security that may come into Lender's
possession; (ii) sign such Borrower's name on any invoice or bill of lading
relating to any Receivables, drafts against customers, schedules and assignments
of Receivables, notices of assignment, financing statements and other public
records, verifications of account and notices to or from customers; (iii) verify
the validity, amount or any other matter relating to any Receivable by mail,
telephone, telegraph or otherwise with Customers; (iv) execute customs
declarations and such other documents as may be required to clear Inventory
through Customs; (v) do all things necessary to carry out this Agreement and any
Ancillary Agreement; and (vi) notify the post office authorities to change the
address for delivery of such Borrower's mail to an address designated by Lender,
and to receive, open and dispose of all mail addressed to such Borrower. Each
Borrower hereby ratifies and approves all acts of the attorney. Neither Lender
nor the attorney will be liable for any acts or omissions or for any error of
judgment or mistake of fact or law, other than those occasioned by gross (not
mere) negligence or willful misconduct. This power, being coupled with an
interest, is irrevocable so long as any Receivable which is assigned to Lender
or in which Lender has a security interest remains unpaid and until the
Obligations have been fully satisfied. Lender shall not exercise this power
under clauses (i), (ii), (iv), (v) and (vi) until on or after the occurrence and
continuation of an Event of Default.
15. Expenses. Borrowers shall pay all of Lender's reasonable out-of-pocket
costs and expenses, including without limitation reasonable fees and
disbursements of counsel and appraisers, in connection with the preparation,
execution and delivery of this Agreement and the Ancillary Agreements, and in
connection with the prosecution or defense of any action, contest, dispute, suit
or proceeding concerning any matter in any way arising out of, related to or
connected with this Agreement or any Ancillary Agreement. Borrowers shall also
pay all of Lender's out-of-pocket costs and expenses, including without
limitation reasonable fees and disbursements of counsel, in connection with (a)
the preparation, execution and delivery of any waiver, any amendment thereto or
consent proposed or executed in connection with the transactions contemplated by
this Agreement or the Ancillary Agreements, (b) Lender's obtaining performance
of the Obligations under this Agreement and any Ancillary Agreements, including,
but not limited to, the enforcement or defense of Lender's security interests,
assignments of rights and liens hereunder as valid perfected security interests,
(c) any attempt to inspect, verify, protect, collect, sell, liquidate or
otherwise dispose of any Collateral, and (d) any consultations in connection
with any of the foregoing. Borrowers shall also pay Lender's customary bank
charges for all bank services performed or caused to be performed by Lender for
any Borrower at Borrowing Agent's request or on any Borrower's behalf. All such
costs and expenses together with all filing, recording and search fees, taxes
and interest payable by Borrowers to Lender shall be payable on demand and shall
be secured by the Collateral. If any tax by any governmental authority is or may
be imposed on or as a result of any transaction between Borrowers and Lender
which Lender is or may be required to withhold or pay, each Borrower agrees to
indemnify and hold Lender harmless in respect of such taxes, and Borrowers will
repay to Lender the amount of any such taxes which shall be charged to
Borrowers' account; and until Borrowers shall furnish Lender with indemnity
therefor (or supply Lender with evidence satisfactory to it that due provision
for the payment thereof has been made), Lender
43
may hold without interest any balance standing to Borrowers' credit and Lender
shall retain its security interests in any and all Collateral.
16. Successors and Assigns; Assignments.
------------------------------------
(i) This Agreement shall be binding upon and inure to the benefit
of Borrowers, Lender, all future holders of the Revolving Credit Note and their
respective successors and assigns, except that no Borrower may assign or
transfer any of its respective rights or obligations under this Agreement
without the prior written consent of Lender.
(ii) Lender may assign any or all of the Obligations together
with any or all of the security therefor and any transferee shall succeed to all
of Lender's rights with respect thereto. Upon such transfer, Lender shall be
released from all responsibility for the Collateral to the extent same is
assigned to any transferee. Lender may from time to time sell or otherwise grant
participations in any of the Obligations and the holder of any such
participation shall, subject to the terms of any agreement between Lender and
such holder, be entitled to the same benefits as Lender with respect to any
security for the Obligations in which such holder is a participant. Each
Borrower agrees that each such holder may exercise any and all rights of
banker's lien, set-off and counterclaim with respect to its participation in the
Obligations as fully as though Borrowers were directly indebted to such holder
in the amount of such participation.
17. Waivers. Each Borrower waives presentment and protest of any instrument
and notice thereof, notice of default and all other notices to which such
Borrower might otherwise be entitled.
18. Term of Agreement. This Agreement shall continue in full force and
effect until the expiration of the Term. Borrowers may terminate this Agreement
at any time upon thirty (30) days' prior written notice upon payment in full of
the Obligations; provided, that Borrowers pay an early termination fee in an
amount equal to the Required Percentage of the Maximum Revolving Amount. For the
purposes hereof, Required Percentage shall mean (a) 1.50% from the Closing Date
to and including the date immediately preceding the first anniversary of the
Closing Date, (b) .75% from the first anniversary of the Closing Date to and
including the date immediately preceding the second anniversary of the Closing
Date, and (c) 0% thereafter.
19. Events of Default. The occurrence of any of the following shall
constitute an Event of Default:
(i) failure to make payment of any of the Obligations when
required hereunder;
(ii) failure to pay any taxes in excess of $10,000 when due
unless such taxes are being contested in good faith by appropriate proceedings
and with respect to which adequate reserves have been provided on the applicable
Borrower's books;
44
(iii) failure to perform under and/or committing any breach of
this Agreement or any Ancillary Agreement or any other agreement between any
Borrower and Lender;
(iv) occurrence of a default under any agreement to which any
Borrower is a party with third parties which is not cured within any applicable
grace period and which has a material adverse affect upon such Borrower's
business, operations, property or condition (financial or otherwise) including
all leases for any premises where any Borrower's books, records, Inventory or
Equipment is located;
(v) any representation, warranty or statement made by any
Borrower hereunder, in any Ancillary Agreement, any certificate, statement or
document delivered pursuant to the terms hereof, or in connection with the
transactions contemplated by this Agreement should at any time prove to have
been false or misleading when made, in any material respect;
(vi) an attachment or levy is made upon any of Borrowers' assets
having an aggregate value in excess of $500,000 in the aggregate for all
Borrowers, or a judgment is rendered against any Borrower or any of Borrowers'
property involving a liability of more than $500,000 in the aggregate for all
Borrowers, which shall not have been vacated, discharged, stayed or bonded
pending appeal within forty (40) days from the entry thereof;
(vii) any change in any Borrower's condition or affairs
(financial or otherwise) which in Lender's opinion impairs the Collateral or the
ability of any Borrower to perform its Obligations, said determination to be
made by Lender in good faith;
(viii) any lien created hereunder or under any Ancillary
Agreement for any reason ceases to be or is not a valid and perfected lien
having a first priority interest, excluding, however, (i) liens upon Collateral
that may be collected, sold or otherwise disposed of from time to time as
contemplated under this Agreement or any Ancillary Agreement or (ii) liens whose
perfection lapses through the action or inaction of Lender based upon accurate
information timely provided to Lender by Borrowers;
(ix) if any Borrower shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its property, (ii)
make a general assignment for the benefit of creditors, (iii) commence a
voluntary case under the federal bankruptcy laws (as now or hereafter in
effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vi) acquiesce to, or fail to have dismissed, within forty-five (45) days, (x)
any petition filed against it in any involuntary case under such bankruptcy
laws, or (y) any proceeding or petition seeking the appointment of a receiver,
custodian, trustee or liquidator of itself or all or a substantial part of its
property, or (vii) take any action for the purpose of effecting any of the
foregoing;
(x) any Borrower shall admit in writing its inability, or be
generally unable, to pay its debts as they become due, or cease operations of
its present business;
45
(xi) any Guarantor, any Affiliate or any Subsidiary shall (i)
apply for or consent to the appointment of, or the taking possession by, a
receiver, custodian, trustee or liquidator of itself or of all or a substantial
part of its property, (ii) admit in writing its inability, or be generally
unable, to pay its debts as they become due or cease operations of its present
business, (iii) make a general assignment for the benefit of creditors, (iv)
commence a voluntary case under the federal bankruptcy laws (as now or hereafter
in effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vii) acquiesce to, or fail to have dismissed, within forty-five (45) days, (x)
any petition filed against it in any involuntary case under such bankruptcy
laws, or (y) any proceeding or petition seeking the appointment of a receiver,
custodian, trustee or liquidator of itself or all or a substantial part of its
property or (viii) take any action for the purpose of effecting any of the
foregoing;
(xii) any Borrower directly or indirectly sells, assigns,
transfers, conveys, or suffers or permits to occur any sale, assignment,
transfer or conveyance of any of its assets in the aggregate in excess of
$500,000 or any interest therein, except as permitted in, or not prohibited by,
this Agreement or any Ancillary Agreement;
(xiii) any Borrower fails to generally operate its business in
the ordinary course of business;
(xiv) Lender shall in good faith deem itself insecure or unsafe
or shall fear diminution in value, removal or waste of the Collateral;
(xv) a default by any Borrower in the payment, when due, of any
principal of or interest on any indebtedness for money borrowed with an
outstanding principal amount in excess of $250,000;
(xvi) any Change of Ownership;
(xvii) termination or material breach of any Guaranty or similar
suretyship agreement executed and delivered to Lender in connection with the
Obligations of Borrowers, or if any Guarantor attempts to terminate, challenges
the validity of, or its liability under any such Guaranty or similar suretyship
agreement; or
(xviii) a default by SIM of any of its obligations under the SPG
Loan Agreement.
20. Remedies. Upon the occurrence of an Event of Default pursuant to
Section 19(ix) herein, all Obligations shall be immediately due and payable and
this Agreement shall be deemed terminated; upon the occurrence and continuation
of any other of the Events of Default, Lender shall have the right to demand
repayment in full of all Obligations by written notice to Borrowing Agent
whether or not otherwise due. Until all Obligations have been fully satisfied,
Lender shall retain its security interest in all Collateral. Lender shall have,
in addition to all other rights provided herein, the rights and remedies of a
secured party under the Uniform
46
Commercial Code, and under other applicable law, all other legal and equitable
rights to which Lender may be entitled, including without limitation, the right
to take immediate possession of the Collateral, to require Borrowers to assemble
the Collateral, at Borrowers' expense, and to make it available to Lender at a
place designated by Lender which is reasonably convenient to both parties and to
enter any of the premises of Borrowers or wherever the Collateral shall be
located, with or without force or process of law, and to keep and store the same
on said premises until sold. Further, Lender may, at any time or times after
default by Borrowers, sell and deliver all Collateral held by or for Lender at
public or private sale for cash, upon credit or otherwise, at such prices and
upon such terms as Lender, in Lender's sole discretion, deems advisable or
Lender may otherwise recover upon the Collateral in any commercially reasonable
manner as Lender, in its sole discretion, deems advisable. Except as to that
part of the Collateral which is perishable or threatens to decline speedily in
nature or is of a type customarily sold on a recognized market, the requirement
of reasonable notice shall be met if such notice is mailed postage prepaid to
Borrowing Agent at its address as shown in Lender's records, at least ten (10)
days before the time of the event of which notice is being given. Lender may be
the purchaser at any sale, if it is public. In connection with the exercise of
the foregoing remedies, Lender is granted permission to use all of each
Borrower's trademarks, tradenames, tradestyles, patents, patent applications,
licenses, franchises and other proprietary rights which are used in connection
with (a) Inventory for the purpose of disposing of such Inventory and (b)
Equipment for the purpose of completing the manufacture of unfinished goods. The
proceeds of sale shall be applied first to all costs and expenses of sale,
including attorneys' fees, and second to the payment (in whatever order Lender
elects) of all Obligations. Lender will return any excess to Borrowers or as
otherwise required by law and Borrowers shall remain liable to Lender for any
deficiency.
21. Waiver; Cumulative Remedies. Failure by Lender to exercise any right,
remedy or option under this Agreement or any supplement hereto or any other
agreement between Borrowers and Lender or delay by Lender in exercising the
same, will not operate as a waiver; no waiver by Lender will be effective unless
it is in writing and then only to the extent specifically stated. Lender's
rights and remedies under this Agreement will be cumulative and not exclusive of
any other right or remedy which Lender may have.
22. Application of Payments. Each Borrower irrevocably waives the right to
direct the application of any and all payments at any time or times hereafter
received by Lender from or on any Borrower's behalf and each Borrower hereby
irrevocably agrees that Lender shall have the continuing exclusive right to
apply and reapply any and all payments received at any time or times hereafter
against the Obligations hereunder in such manner as Lender may deem advisable
notwithstanding any entry by Lender upon any of Lender's books and records.
23. Establishment of a Lockbox Account, Dominion Account. All proceeds of
Collateral shall, at the direction of Lender, be deposited by the applicable
Borrower into a lockbox account, dominion account or such other "blocked
account" ("Blocked Accounts") as Lender may require pursuant to an arrangement
with such bank as may be selected by Borrowers and be acceptable to Lender.
Borrowers shall issue to any such bank an irrevocable letter of instruction
directing said bank to transfer such funds so deposited to Lender, either to any
account maintained by Lender at said bank or by wire transfer to appropriate
account(s) of
47
Lender. All funds deposited in such Blocked Account shall immediately become the
property of Lender and shall be applied to the Obligations in accordance with
the terms of this Agreement, and Borrowers shall obtain the agreement by such
bank to waive any offset rights against the funds so deposited. Lender assumes
no responsibility for such Blocked Account arrangement, including without
limitation, any claim of accord and satisfaction or release with respect to
deposits accepted by any bank thereunder. Alternatively, Lender may establish
depository accounts ("Depository Accounts") in the name of Lender at a bank or
banks for the deposit of such funds and Borrowers shall deposit all proceeds of
Collateral or cause same to be deposited, in kind, in such Depository Accounts
of Lender in lieu of depositing same to the Blocked Accounts.
24. Revival. Each Borrower further agrees that to the extent any Borrower
makes a payment or payments to Lender, which payment or payments or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy act, state or federal law, common law or equitable cause,
then, to the extent of such payment or repayment, the obligation or part thereof
intended to be satisfied shall be revived and continued in full force and effect
as if said payment had not been made.
25. Notice. Any notice or request hereunder may be given to Borrowers or to
Lender at their respective addresses set forth below or at such other address as
may hereafter be specified in a notice designated as a notice of change of
address under this Section. Any notice or request hereunder shall be given by
(a) hand delivery, (b) overnight courier, (c) registered or certified mail,
return receipt requested, (d) telex or telegram, subsequently confirmed by
registered or certified mail, or (e) telecopy to the number set out below (or
such other number as may hereafter be specified in a notice designated as a
notice of change of address) with telephone communication to a duly authorized
officer of the recipient confirming its receipt as subsequently confirmed by
registered or certified mail. Any notice or other communication required or
permitted pursuant to this Agreement shall be deemed given (i) when personally
delivered to any officer of the party to whom it is addressed, (ii) on the
earlier of actual receipt thereof or five (5) days following posting thereof by
certified or registered mail, postage prepaid, or (iii) upon actual receipt
thereof when sent by a recognized overnight delivery service or (iv) upon actual
receipt thereof when sent by telecopier to the number set forth below, in each
case addressed to each party at its address set both below or at such other
address as has been furnished in writing by a party to the other by like notice:
(A) If to Lender at: Whitehall Business Credit Corporation
One State Street
New York, New York 10004
Attention: Joseph Zautra
Telephone: (212) 806-4538
Telecopier: (212) 806-4530
48
with a copy to: Hahn & Hessen LLP
488 Madison Avenue
New York, New York 10022
Attention: Steven J. Seif, Esq.
Telephone: (212) 736-1000
Telecopier: (212) 594-7167
(B) If to Borrowing
Agent or any
Borrower at: The SPAR Group
580 White Plains Road
Tarrytown, New York 10591
Attention: Charles Cimitile, Chief
Financial Officer
Telephone: (914) 332-4100
Telecopier: (914) 332-0741
with a copy to: Jenkens & Gilchrist Parker Chapin LLP
405 Lexington Avenue
New York, New York 10174
Attention: Lawrence David Swift, Esq.
Telephone: (212) 704-6147
Telecopier: (212) 704-6159
26. Governing Law and Waiver of Jury Trial. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK. LENDER SHALL HAVE THE RIGHTS AND REMEDIES OF A SECURED PARTY UNDER
APPLICABLE LAW INCLUDING, BUT NOT LIMITED TO, THE UNIFORM COMMERCIAL CODE OF NEW
YORK. EACH BORROWER AGREES THAT ALL ACTIONS AND PROCEEDINGS RELATING DIRECTLY OR
INDIRECTLY TO THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR ANY OTHER OBLIGATIONS
SHALL BE LITIGATED IN THE FEDERAL DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW
YORK OR, AT LENDER'S OPTION, IN ANY OTHER COURTS LOCATED IN NEW YORK STATE OR
ELSEWHERE AS LENDER MAY SELECT AND THAT SUCH COURTS ARE CONVENIENT FORUMS AND
EACH BORROWER SUBMITS TO THE PERSONAL JURISDICTION OF SUCH COURTS. EACH BORROWER
WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS THAT SERVICE OF PROCESS UPON
SUCH BORROWER MAY BE MADE BY FEDERAL EXPRESS OR SIMILAR OVERNIGHT SERVICE OR BY
CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, IN EACH CASE DIRECTED TO
SUCH BORROWER AT SUCH BORROWER'S ADDRESS APPEARING ON LENDER'S RECORDS, AND
SERVICE SO MADE SHALL BE DEEMED COMPLETED (A) ONE (1) BUSINESS DAY AFTER THE
SAME SHALL HAVE BEEN SENT VIA FEDERAL EXPRESS OR SIMILAR OVERNIGHT SERVICE OR
(B) FIVE (5) BUSINESS DAYS AFTER THE SAME SHALL HAVE BEEN MAILED BY CERTIFIED OR
REGISTERED MAIL, RETURN RECEIPT REQUESTED (UNLESS THE RETURN RECEIPT SHOWS
ACTUAL RECEIPT OCCURRED EARLIER THAN THE DEEMED FIVE
49
BUSINESS DAY PERIOD, IN WHICH CASE THE DATE OF ACTUAL RECEIPT WILL CONTROL).
EACH PARTY HERETO WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BETWEEN ANY BORROWER, LENDER AND EACH BORROWER WAIVES THE RIGHT TO
ASSERT IN ANY ACTION OR PROCEEDING INSTITUTED BY LENDER WITH REGARD TO THIS
AGREEMENT OR ANY OF THE OBLIGATIONS ANY OFFSETS OR COUNTERCLAIMS WHICH IT MAY
HAVE.
27. Limitation of Liability. Each Borrower acknowledges and understands
that in order to assure repayment of the Obligations hereunder Lender may be
required to exercise any and all of Lender's rights and remedies hereunder and
agrees that neither Lender nor any of Lender's agents shall be liable for acts
taken or omissions made in connection herewith or therewith except for actual
gross (not mere) negligence or willful misconduct.
28. Entire Understanding. This Agreement and the Ancillary Agreements
contain the entire understanding between Borrowers and Lender and any promises,
representations, warranties or guarantees not herein contained shall have no
force and effect unless in writing, signed by each Borrower's and Lender's
respective officers. Neither this Agreement, the Ancillary Agreements, nor any
portion or provisions thereof may be changed, modified, amended, waived,
supplemented, discharged, cancelled or terminated orally or by any course of
dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged.
29. Indemnity. Each Borrower shall indemnify Lender and each of its
officers, directors, employees, and agents from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses and disbursements of any kind or nature whatsoever (including,
without limitation, fees and disbursements of counsel) which may be imposed on,
incurred by, or asserted against Lender in any litigation, proceeding or
investigation instituted or conducted by any governmental agency or
instrumentality or any other Person with respect to any aspect of, or any
transaction contemplated by, or referred to in, or any matter related to, this
Agreement, whether or not Lender is a party thereto, except to the extent that
any of the foregoing arises out of the willful misconduct or gross (not mere)
negligence of the party being indemnified.
30. Severability. Wherever possible each provision of this Agreement or the
Ancillary Agreements shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement or the
Ancillary Agreements shall be prohibited by or invalid under applicable law such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
thereof.
31. Captions. All captions are and shall be without substantive meaning or
content of any kind whatsoever.
32. Counterparts. This Agreement may be executed in one or more
counterparts, all of which when taken together shall constitute one and the same
agreement.
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33. Construction. The parties acknowledge that each party and its counsel
have reviewed this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
34. Publicity. Subject to the prior approval (which approval shall not be
unreasonably withheld or delayed) by Borrowing Agent with respect to Lender and
by Lender with respect to any Borrower, any party hereto may make appropriate
announcements of the financial arrangement entered into by and among Borrowers
and Lender, including, without limitation, announcements which are commonly
known as tombstones, in such publications and to such selected parties as the
announcing party shall in its sole and absolute discretion deem appropriate.
35. Borrowing Agency Provisions.
(i) Borrowers hereby irrevocably designate Borrowing Agent to be
their attorney and agent and in such capacity to borrow, sign and endorse notes,
and execute and deliver all instruments, documents, writings and further
assurances now or hereafter required hereunder, on behalf of Borrowers, and
hereby authorize Lender to pay over or credit all loan proceeds hereunder in
accordance with the request of Borrowing Agent.
(ii) The handling of this credit facility as a co-borrowing
facility with a borrowing agent in the manner set forth in this Agreement is
solely as an accommodation to Borrowers and at their request. Lender shall not
incur liability to Borrowers as a result thereof. To induce Lender to do so and
in consideration thereof, each Borrower hereby indemnifies Lender and holds
Lender harmless from and against any and all liabilities, expenses, losses,
damages and claims of damage or injury asserted against Lender by any Person
arising from or incurred by reason of the handling of the financing arrangements
of Borrowers as provided herein, reliance by Lender on any request or
instruction from Lender or any other action taken by Lender with respect to this
Section 35 except due to gross negligence (but not mere negligence) or willful
misconduct by the indemnified party.
(iii) All Obligations shall be joint and several, and each
Borrower shall be obligated to make payment (with the understanding that any
payment made by any Borrower shall be applied to reduce the amount of the Loans
and the remaining payment obligations of all of the Borrowers) upon the maturity
of the Obligations by acceleration or otherwise, and, unless Lender otherwise
agrees in writing, such obligation and liability on the part of each Borrower
shall in no way be affected by any renewals and forbearance granted by Lender to
any Borrower, failure of Lender to give any Borrower notice of borrowing or any
other notice, any failure of Lender to pursue to preserve its rights against any
Borrower, the release by Lender of any Collateral now or thereafter acquired
from any Borrower, and such agreement by each Borrower to pay upon any notice
issued pursuant thereto is unconditional and unaffected by prior recourse by
Lender to another Borrower or any Collateral for such Borrower's Obligations or
the lack thereof.
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(iv) In the event any Borrower is deemed to be a Guarantor or
surety of any other Borrower, then, to the extent such Borrower is deemed to be
a Guarantor or surety, such Borrower hereby (a) agrees that its guaranty
obligation hereunder is a continuing guaranty of payment and performance and not
of collection and that its obligations shall not be discharged until payment and
performance, in full, of the Obligations has occurred; and (b) waives any and
all suretyship defenses, including, without limitation, with respect to: (1) the
genuineness, validity, regularity, enforceability or any future amendment of, or
change in, this Agreement, any Ancillary Agreement or any other agreement,
document or instrument to which any Borrower is or may become a party; (2) the
absence of any action to enforce this Agreement or any Ancillary Agreement or
the waiver or consent by Lender with respect to any of the provisions hereof or
thereof; (3) the existence, value or condition of, or failure to perfect its
Lien against, any security for the Obligations or any action, or the absence of
any action, by Lender in respect thereof (including the release of any such
security); (4) the insolvency of any Borrower; (5) any change in the commitment,
advance rates, Formula Amount, Maximum Revolving Amount or any related
provision; (6) the advance, repayment (including complete repayment) and
readvance of Loans from time to time; (7) any extension or change in the time,
manner, place and other terms and provisions of payment or performance of any of
the Obligations; (8) any waiver, modification, renewal, amendment or restatement
of this Agreement or any Ancillary Agreement (except as and to the extent
expressly modified by such action); (9) any acceptance by the Lender of any
partial or late payment or payment during any default; (10) any surrender,
repossession, foreclosure, sale, leases or other realization, dealing,
liquidation, setoff or disposition respecting any collateral in accordance with
this Agreement any Ancillary Agreement or applicable law; (11) any
investigation, analysis or evaluation by the Lender or its designees respecting
any Borrower or any other person; or (12) any other action or circumstances that
might otherwise constitute a legal or equitable discharge or defense of a surety
or guarantor.
Each Borrower shall be regarded, and shall be in the same position, as principal
debtor with respect to the Obligations guaranteed hereunder.
36. Subordination of Subrogation and Contribution Rights, Etc. Each
Borrower covenants and agrees that until the Obligations have been fully paid
and satisfied, any and all Subordinated Rights of such Borrower shall be
subordinate to the Obligations and such Borrower shall not be entitled to any
payment or satisfaction (in whole or in part) until, all of the Obligations have
been fully paid and satisfied. Until such time (if ever) as the Obligations have
been fully paid and satisfied and this Agreement has been terminated: (A) no
Borrower shall seek any payment or exercise or enforce any right, power,
privilege, remedy or interest that such Borrower may have with respect to any
Subordinated Right and (B) any payment, asset or property delivered to or for
the benefit of any Borrower in respect of any Subordinated Right shall be
accepted in trust for the benefit of the Lender and shall be promptly paid or
delivered to the Lender to be credited and applied to the payment and
satisfaction of the Obligations, whether contingent, matured or unmatured, or to
be held by the Lender as additional collateral, as the Lender may elect in its
sole and absolute discretion.
37. Joinder. As of the date hereof, New Borrowers are hereby added as
parties to all Obligations under this Agreement, and all references to any
"Borrower" or "Borrowers" hereunder shall be deemed to include New Borrowers.
Each New Borrower hereby adopts this
52
Agreement, assumes in full, and acknowledges that it is jointly and severally
liable for, the payment, discharge, satisfaction and performance of all
Obligations under this Agreement and the Ancillary Agreements (to which all
Borrowers are a party) as if it were an original signatory thereunder. Each New
Borrower hereby confirms its grant to Lender of a continuing lien and security
interest in all presently existing and hereafter arising Collateral which such
New Borrower now or hereafter owns or has an interest in, wherever located, to
secure the prompt payment and performance of the Obligations. Schedule 37 sets
forth all Persons (including joint ventures) in which any New Borrower has an
interest. Each New Borrower shall execute such Ancillary Agreements as Lender
may reasonably request in order to ensure a first priority perfected security
interest in favor of Lender in such investments (limited to the economic benefit
of such investments in "pass through" entities such as joint ventures,
partnerships or limited liability companies).
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IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and
year first above written.
SPAR MARKETING FORCE, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
SPAR, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
SPAR/BURGOYNE RETAIL SERVICES, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
SPAR INCENTIVE MARKETING, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
SPAR TRADEMARKS, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
i
SPAR MARKETING, INC. (DE)
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
SPAR MARKETING, INC. (NV)
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
SPAR ACQUISITION, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
SPAR GROUP INTERNATIONAL, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
SPAR TECHNOLOGY GROUP, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
ii
SPAR/PIA RETAIL SERVICES, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
RETAIL RESOURCES, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
PIVOTAL FIELD SERVICES, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
PIA MERCHANDISING CO., INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
PACIFIC INDOOR DISPLAY CO.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
iii
PIVOTAL SALES COMPANY
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
SPAR GROUP, INC.
By: /s/ Charles Cimitile
------------------------------------
Name: Charles Cimitile
Title: Chief Financial Officer
WHITEHALL BUSINESS CREDIT CORPORATION
By: /s/ Joseph J. Zautra
------------------------------------
Name: Joseph J. Zautra
Title: Vice President
iv
EXHIBITS
Exhibit 1(a) Revolving Credit Note
Exhibit A Shareholder Notes
SCHEDULES
Schedule 1 Permitted Liens
Schedule 5(b)(v) Letter of Credit Fees
Schedule 12(a) State of Incorporation and Qualification
Schedule 12(b) Subsidiaries
Schedule 12(e) Books and Records
Schedule 12(g) Plans
Schedule 12(k) Licenses, Patents, Trademarks and Copyrights
Schedule 12(l) Federal Tax Identification Number
Schedule 12(m) Inventory Locations
Schedule 37 Persons in which International has an interest
v
Schedule 5(b)(v)
----------------
WEBSTER BANK
SCHEDULE OF SELECTED CHARGES
STANDBY LETTER OF CREDIT
Issuance.........................................$150
Amendment........................................$ 75
Cancellation.....................................$ 50
vi
TABLE OF CONTENTS
Page
----
1. (A) General Definitions...............................................2
(B) Accounting Terms.....................................................15
(C) Uniform Commercial Code Terms........................................15
(D) Certain Matters of Construction......................................15
2. Revolving Advances...................................................15
2A. Letters of Credit....................................................17
3. Repayment of Loans...................................................19
4. Procedure for Revolving Advances.....................................19
5. Interest and Fees....................................................21
(a) Interest..................................................21
(b) Fees......................................................22
(c) Increased Costs...........................................24
(d) Capital Adequacy..........................................25
(e) Basis For Determining Interest Rate Inadequate or Unfair..25
6. Security Interest....................................................26
7. Representations Concerning the Collateral............................27
8. Covenants Concerning the Collateral..................................27
9. Collection and Maintenance of Collateral and Records.................28
10. Inspections..........................................................29
11. Financial Information................................................29
12. Additional Representations, Warranties and Covenants.................31
13. Conditions Precedent.................................................39
13.1 Conditions to Initial Advances............................39
13.2 Conditions to Each Revolving Advance......................42
14. Power of Attorney....................................................43
15. Expenses.............................................................43
16. Successors and Assigns; Assignments..................................44
17. Waivers..............................................................44
18. Term of Agreement....................................................44
19. Events of Default....................................................44
20. Remedies.............................................................46
21. Waiver; Cumulative Remedies..........................................47
22. Application of Payments..............................................47
23. Establishment of a Lockbox Account, Dominion Account.................47
24. Revival..............................................................48
25. Notice ..............................................................48
26. Governing Law and Waiver of Jury Trial...............................49
27. Limitation of Liability..............................................50
28. Entire Understanding.................................................50
29. Indemnity............................................................50
30. Severability.........................................................50
vii
31. Captions.............................................................50
32. Counterparts.........................................................50
33. Construction.........................................................51
34. Publicity............................................................51
35. Borrowing Agency Provisions..........................................51
36. Subordination of Subrogation and Contribution Rights, Etc............52
36. Joinder..............................................................52
viii
Exhibit 21.1
SPAR GROUP, INC.
LIST OF SUBSIDIARIES
SUBSIDIARY........................................ .......STATE OF INCORPORATION
- ---------- ----------------------
PIA Merchandising Co., Inc...........................................California
PIA Merchandising Limited...........................................Nova Scotia
Pacific Indoor Display Co............................................California
Pivotal Sales Company................................................California
SPAR Acquisition, Inc....................................................Nevada
SPAR Incentive Marketing, Inc..........................................Delaware
SPAR Group International, Inc............................................Nevada
SPAR Trademarks, Inc.....................................................Nevada
SPAR Marketing, Inc. (f/k/a SPAR Acquisition, Inc.)....................Delaware
SPAR Marketing Force, Inc................................................Nevada
SPAR Marketing, Inc......................................................Nevada
SPAR/PIA Retail Services, Inc............................................Nevada
SPAR, Inc. (f/k/a SPAR/Burgoyne Information Services, Inc.)..............Nevada
Pivotal Field Services, Inc..............................................Nevada
Retail Resources, Inc....................................................Nevada
SPAR/Burgoyne Retail Services, Inc. (f/k/a SPAR Retail
Information, Inc.).........................................................Ohio
SPAR Technology Group, Inc. (f/k/a SPARinc.com, Inc.)....................Nevada
SPAR All Store Marketing Services, Inc...................................Nevada
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 7, 2003, appearing in this Annual
Report on Form 10-K of SPAR Group, Inc., for the year ended December 31, 2002.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 28, 2003
EXHIBIT 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the year ended December
31, 2002 (the "Report"), by SPAR Group, Inc. (the "Registrant"), the undersigned
hereby certifies that, to his knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Registrant.
/s/ Robert G. Brown
------------------------------------------
Robert G. Brown
Chairman, President and Chief
Executive Officer
(Chief executive officer)
March 31, 2003
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN
PROVIDED TO SPAR GROUP, INC. AND WILL BE RETAINED BY SPAR GROUP, INC., AND
FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
EXHIBIT 99.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the year ended December
31, 2002 (the "Report"), by SPAR Group, Inc. (the "Registrant"), the undersigned
hereby certifies that, to his knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Registrant.
/s/ Charles Cimitile
------------------------------------
Charles Cimitile
Chief Financial Officer
March 31, 2003
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN
PROVIDED TO SPAR GROUP, INC. AND WILL BE RETAINED BY SPAR GROUP, INC., AND
FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.