UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2003
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ____________ to
_____________
Commission file number 0-27824
SPAR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
580 White Plains Road, Tarrytown, New York 10591
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 332-4100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock,
par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Rule 12b-2 of the Act.) YES [ ] NO [X]
The aggregate market value of the Common Stock of the Registrant held
by non-affiliates of the Registrant on June 30, 2003, based on the closing price
of the Common Stock as reported by the Nasdaq National Market on such date, was
approximately $20,892,441.
The number of shares of the Registrant's Common Stock outstanding as of
December 31, 2003, was 18,858,972 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PART I
Page
Item 1. Business 2
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 27
Item 9A. Controls and Procedures 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 34
Item 13. Certain Relationships and Related Transactions 35
Item 14. Principal Accountant Fees and Services 36
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 37
Signatures 39
PART I
STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K OF SPAR GROUP,
INC. ("SGRP", AND TOGETHER WITH ITS SUBSIDIARIES, THE "SPAR GROUP" OR THE
"COMPANY"), INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING, IN
PARTICULAR AND WITHOUT LIMITATION, THE STATEMENTS CONTAINED IN THE DISCUSSIONS
UNDER THE HEADINGS "BUSINESS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS". FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD
CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS, WHETHER
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS, TO NOT OCCUR OR BE
REALIZED OR TO BE LESS THAN EXPECTED. SUCH FORWARD-LOOKING STATEMENTS GENERALLY
ARE BASED UPON THE COMPANY'S BEST ESTIMATES OF FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENT, CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY", "WILL", "EXPECT", "INTEND", "BELIEVE", "ESTIMATE",
"ANTICIPATE", "CONTINUE" OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE
NEGATIVE OF THOSE TERMS. YOU SHOULD CAREFULLY CONSIDER SUCH RISKS, UNCERTAINTIES
AND OTHER INFORMATION, DISCLOSURES AND DISCUSSIONS WHICH CONTAIN CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROVIDED IN THE FORWARD-LOOKING STATEMENTS.
ALTHOUGH THE COMPANY BELIEVES THAT ITS PLANS, INTENTIONS AND
EXPECTATIONS REFLECTED IN OR SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CANNOT ASSURE THAT SUCH PLANS, INTENTIONS OR EXPECTATIONS WILL BE
ACHIEVED IN WHOLE OR IN PART. YOU SHOULD CAREFULLY REVIEW THE RISK FACTORS
DESCRIBED HEREIN AND ANY OTHER CAUTIONARY STATEMENTS CONTAINED IN THIS ANNUAL
REPORT ON FORM 10-K. ALL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY
OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED BY THE RISK FACTORS (SEE
ITEM 1 - CERTAIN RISK FACTORS) AND OTHER CAUTIONARY STATEMENTS IN THIS ANNUAL
REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR
REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.
Item 1. Business.
GENERAL
SPAR Group, Inc., a Delaware corporation ("SGRP", and together with its
subsidiaries, the "SPAR Group" or the "Company"), is a supplier of merchandising
and other 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, product
demonstrations, product sampling, 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 in Japan, Canada and Turkey.
Continuing Operations
Merchandising Services Division
The Company provides nationwide merchandising and other 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 or agreements.
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 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. In 2003, the Company added in-store product demonstration
and in-store product sampling services
-2-
to its merchandising service offerings. Marketing services consist of database
marketing, teleservices and marketing research.
The Company's Merchandising Services Division consists of the following
wholly owned subsidiaries, (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 SPAR All Store
Marketing Services, Inc. ("SASMS"), SPAR Megaforce, Inc. ("SMEGA") and SPAR Bert
Fife, Inc. ("SFIFE"); 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,
through a wholly owned subsidiary, SPAR Group International, Inc. ("SGI"), to
focus on expanding its merchandising services business worldwide. In May 2001,
the Company entered into a joint venture with a large Japanese distributor to
provide merchandising services in Japan. In June 2003, the Company expanded its
merchandising services into Canada. In July 2003, the Company established a
joint venture based in Istanbul to provide merchandising services throughout
Turkey. The start-up joint venture is 51% owned by the Company.
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. In
December of 2003, SPGI changed its name to STIMULYS, Inc.
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 services
industry includes manufacturers, retailers, food brokers, and professional
service merchandising companies. The Company believes there is a continuing
trend for major manufacturers to move increasingly toward third parties to
handle in-store merchandising. The Company also believes that its merchandising
services bring added value to retailers, manufacturers and other businesses.
Retail merchandising services enhance sales by making a product more visible and
available to consumers. These services primarily include placing orders, shelf
maintenance, display placement, reconfiguring products on store shelves,
replenishing products, providing in-store demonstrations and product sampling,
and also include other services such as test market research, mystery shopping,
teleservices, database marketing and promotion planning and analysis.
The Company believes merchandising services previously undertaken by
retailers and manufacturers have been increasingly outsourced to third parties.
Historically, retailers staffed their stores as needed to ensure inventory
levels, the advantageous display of new items on shelves, and the maintenance of
shelf schematics. In an effort to improve their margins, retailers 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
-3-
stores by utilizing their own sales representatives. However, manufacturers
discovered that using their own sales representatives for this purpose was
expensive and inefficient. Therefore, manufacturers have increasingly outsourced
the merchandising services to third parties capable of operating at a lower cost
by (among other things) serving multiple manufacturers simultaneously.
Another significant trend impacting the merchandising segment is the
tendency of consumers to make product purchase decisions once inside the store.
Accordingly, merchandising services and in-store product promotions have
proliferated and diversified. Retailers are continually remerchandising and
remodeling entire stores to respond to new product developments and changes in
consumer preferences. The Company estimates that these activities have increased
in frequency over the last five years, such that most stores are re-merchandised
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
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. In 2001, the Company and
a leading Japanese based distributor established a joint venture to provide the
latest in-store merchandising services to the Japanese market. In 2003, the
Company expanded its international presence to Canada and Turkey by acquiring
the business of a Canadian merchandising company and entering into a start-up
joint venture in Turkey. Key to the Company's international strategy is the
translation of several of its proprietary Internet-based logistical,
communications and reporting software applications into the native language of
any market the Company enters. As a result of this requirement for market
penetration, the Company has developed translation software that can quickly
convert its proprietary software into various languages. Through its computer
facilities in Auburn Hills, Michigan, the Company provides worldwide access to
its proprietary logistical, communications and reporting software. In addition,
the Company maintains offices in Greece and Australia to assist in its
international efforts. The Company is actively pursuing expansion into various
other markets.
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 "SGRP" and together with its subsidiaries as the "SPAR Group",
or the "Company"). Although the SPAR Marketing Companies and SPGI became
subsidiaries of PIA Delaware (now SGRP) as a result of this "reverse" Merger,
the transaction has been accounted for as a purchase by the SPAR Marketing
Companies 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 (together with certain intermediate holding companies and subsidiaries
formed after the merger, 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
-4-
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, the Company is actively
exploring a number of potential acquisitions, predominately in its core
merchandising service businesses (which includes in-store product demonstration
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
will occur or whether, if completed, the integration of the acquired businesses
will be successful or the anticipated efficiencies and cross-selling
opportunities will occur.
In February 2003, the Company purchased the business and certain assets
of All Store Marketing Services, Inc. ("ASMS"), a Texas corporation that
specialized in providing in-store product demonstrations. In connection with the
acquisition of ASMS, the Company entered into an employment agreement with the
President of ASMS for a period of two years. In June 2003, the Company purchased
the business and certain assets of Impulse Marketing Solutions ("IMS"), a
Canadian company that specialized in providing merchandising services in Canada.
In connection with the purchase of the business and certain assets of IMS, the
Company entered into a consulting agreement with a corporation that furnishes
the services of the former President and a second senior officer of IMS, which
agreement expires on December 31, 2006. In July 2003, the Company entered into a
joint venture agreement with a company based in Istanbul to provide
retail-merchandising services throughout Turkey. The start-up joint venture
limited liability company will operate under the English name of SPAR Turkey
Ltd. and is 51% owned by the Company. In December of 2003, the Company acquired
the business and certain assets of NMI Acquisition Partners, LLC (also known as
Megaforce), a Georgia company that specialized in providing in-store
merchandising services throughout the United States, and employs the former
President of Megaforce. In December of 2003, the Company entered into an
agreement to purchase the business and certain assets of Bert Fife & Associates,
Inc., and related Companies ("Fife"), which specialized in providing in-store
product demonstrations. As part of the agreement the Company entered into a one
year consulting agreement with the President of Fife. The purchase was completed
in January 2004. The effect of these acquisitions and joint ventures was not
considered material to the Company's financial statements or results of
operations for 2003.
Improve Operating Efficiencies:
The Company will continue to seek greater operating efficiencies. The
Company believes that its existing field force and technology infrastructure can
support additional customers and revenue in the 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.
-5-
Leverage and Improve Technology:
The Company intends to continue to utilize computer (including
hand-held computers), Internet, and other technology to enhance its efficiency
and ability to provide real-time data to its customers, as well as, maximize the
speed of communication, and logistical deployment of its merchandising
specialists. Industry sources indicate that customers are increasingly relying
on marketing service providers to supply rapid, value-added information
regarding the results of marketing expenditures on sales and profits. The
Company (together with certain of its affiliates) has developed and owns
proprietary Internet-based software technology that allows it to utilize the
Internet to communicate with its field management, schedule its store-specific
field operations more efficiently, receive information and incorporate the data
immediately, quantify the benefits of its services to customers faster, respond
to customers' needs quickly and implement programs rapidly. The Company has
successfully modified and is currently utilizing certain of its software
applications in connection with its international ventures. The Company believes
that it can continue to improve, modify and adapt its technology to support
merchandising and other marketing services for additional customers and projects
in the United States and in other foreign markets. The Company also believes
that its proprietary Internet-based software technology gives it a competitive
advantage in the marketplace.
DESCRIPTION OF SERVICES
The Company currently provides a broad array of merchandising and other
marketing services on a national, regional and local basis to leading home
entertainment, general merchandise, consumer goods, food, and health and beauty
care manufacturers and retail companies through its 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.
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 other marketing services primarily on behalf of
consumer product manufacturers at mass merchandiser, drug and retail grocery
chains. The Company currently provides three principal types of merchandising
and marketing services: syndicated services, dedicated services and project
services.
Syndicated Services
Syndicated services consist of regularly scheduled, routed
merchandising services provided at the retail store level for various
manufacturers. These services are performed for multiple manufacturers,
including, in some cases, manufacturers whose products are in the same product
category. Syndicated services may include activities such as:
o Reordering and replenishment of products
o Ensuring that the clients' products authorized for distribution
are in stock and on the shelf
o Adding new products that are approved for distribution but not
yet present on the shelf
o Designing and implementing store planogram schematics
o Setting product category shelves in accordance with approved
store schematics
o Ensuring that product shelf tags are in place
o Checking for overall salability of the clients' products
o Placing new product and promotional items in prominent positions
-6-
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.
Project Services
Project services consist primarily of specific in-store services
initiated by retailers and manufacturers, such as new store openings, new
product launches, special seasonal or promotional merchandising, focused product
support product recalls, in-store product demonstrations and in-store product
sampling. The Company also performs other project services, such as new store
sets and existing store resets, re-merchandising, remodels and category
implementations, under annual or stand-alone project contracts or agreements.
Other Marketing Services
Other marketing services performed by the Company include:
Test Market Research - Testing promotion alternatives, new products and
advertising campaigns, as well as packaging, pricing, and location
changes, at the store level.
Mystery Shopping - Calling anonymously on retail outlets (e.g. stores,
restaurants, banks) to check on distribution or display of a brand and
to evaluate products, service of personnel, conditions of store, etc.
Database Marketing - Managing proprietary information to permit easy
access, analysis and manipulation for use in direct marketing
campaigns.
Data Collection - Gathering sales and other information systematically
for analysis and interpretation.
Teleservices - Maintaining a teleservices center in its Auburn Hills,
Michigan, facility that performs inbound and outbound telemarketing
services, including those on behalf of certain of the Company's
manufacturing clients.
The Company believes that providing merchandising and other marketing
services timely, accurately and efficiently, as well as, delivering timely and
accurate reports to its clients, are two key components of its success. The
Company has developed Internet-based logistic deployment, communications, and
reporting systems that improve the productivity of its merchandising specialists
and provide timely data and reports to its customers. The Company's
merchandising specialists use hand-held computers, personal computers and laptop
computers to report 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.
-7-
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
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. In 2001, the Company and
a leading Japanese based distributor established a joint venture to provide the
latest in-store merchandising services to the Japanese market. In 2003, the
Company expanded its international presence to Canada and Turkey by acquiring a
Canadian merchandising company and entering into a start-up joint venture in
Turkey. Key to the Company's international strategy is the translation of
several of its proprietary Internet-based logistical, communications and
reporting software applications into the native language of any market the
Company enters. As a result of this requirement for market penetration, the
Company has developed translation software that can quickly convert its
proprietary software into various languages. Through its computer facilities in
Auburn Hills, Michigan, the Company provides worldwide access to its proprietary
logistical, communications and reporting software. In addition, the Company
maintains offices in Greece and Australia to assist in its international
efforts. The Company is actively pursuing expansion into various 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, regional and local markets.
The Company's corporate business development team directs its efforts toward the
senior management of prospective clients. Sales strategies developed at the
Company's headquarters are communicated to the Company's sales force for
execution. The sales force, located nationwide, work from both Company and home
offices. In addition, the Company's corporate account executives play an
important role in the Company's new business development efforts within its
existing manufacturer and retailer client base.
As part of the retailer consolidation, retailers are centralizing most
administrative functions, including operations, procurement and category
management. In response to this centralization and the growing importance of
large retailers, many manufacturers have reorganized their selling organizations
around a retailer team concept that focuses on a particular retailer. The
Company has responded to this emerging trend and currently has retailer teams in
place at select discount and drug chains.
The Company's business development process includes a due diligence
period to determine the objectives of the prospective client, the work 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 and approved by the prospective
client.
International Division
The Company's marketing efforts within its International Division are
designed to develop new business internationally. The Company maintains offices
in Greece and Australia to assist in these efforts. The Division's corporate
business development team targets specific areas and develops strategic
relationships to cultivate business for worldwide expansion.
-8-
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, a division of a major retailer, accounted for 30%, 26%
and 25% of the Company's net revenues for the years ended December 31, 2003,
2002 and 2001, respectively. This customer also accounted for approximately 30%,
43% and 24% of accounts receivable at December 31, 2003, 2002 and 2001,
respectively. In late 2003, the customer's parent company announced that it was
exploring strategic opportunities, including the sale of this division. In the
event of a sale, there can be no assurances that any purchaser will continue to
use the services of the Company. The loss of this business could have a material
adverse effect on the Company's business, results of operations and financial
condition.
A second customer accounted for 10%, 11% and 9% of the Company's net
revenues for the years ended December 31, 2003, 2002 and 2001, respectively.
This second customer also accounted for approximately 9%, 5% and 4% of accounts
receivable at December 31, 2003, 2002 and 2001, respectively. As of March 2004,
the Company will no longer be providing services for this customer. Failure to
attract new large customers could significantly impede the growth of the
Company's revenues, which could have a material adverse effect on the Company's
future business, results of operations and financial condition.
In addition, approximately 17%, 24% and 31% of net revenues for the
years ended December 31, 2003, 2002 and 2001, respectively, resulted from
merchandising services performed for manufacturers and others at Kmart. Kmart
filed for protection under the U.S. Bankruptcy Code in January of 2002 and
emerged from bankruptcy in May of 2003. During its time in bankruptcy, Kmart
closed a number of stores in the United States. While the Company's customers
and the resultant contractual relationships are with various manufacturers and
not Kmart, a significant reduction of this retailer's stores or cessation of
this retailer's business would negatively impact the Company. As of August 31,
2003, one customer discontinued its merchandising programs with the Company.
Some, but not all, of these programs were performed at Kmart stores. This
customer accounted for 10%, 17% and 12% of the business generated from Kmart for
the twelve-months ended December 31, 2003, 2002 and 2001, respectively.
International Division
The Company believes that the potential international customers for
this division have similar profiles to its Merchandising Services Division
customers. The Company is currently operating in Japan, Canada and Turkey. 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 store channels of trade. 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
-9-
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, 2003, the Company's Merchandising Services
Division's labor force consisted of approximately 6,750 people, of which
approximately 170 full-time employees and approximately 500 part-time employees
are employed by the Company and approximately 6,000 independent contractors and
approximately 80 full-time employees are furnished principally through related
parties, (see Item 13 - Certain Relationships and Related Transactions, below),
of which 243 full-time employees were engaged in operations and 13 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.
Dependency on Largest Customers
One customer, a division of a major retailer, accounted for 30%, 26%
and 25% of the Company's net revenues for the years ended December 31, 2003,
2002 and 2001, respectively. This customer also accounted for approximately 30%,
43% and 24% of accounts receivable at December 31, 2003, 2002 and 2001,
respectively. In late 2003, the customer's parent company announced that it was
exploring strategic opportunities including the sale of this division. In the
event of a sale, there can be no assurances that any purchaser will continue to
use the services of the Company. The loss of this business could have a material
adverse effect on the Company's business, results of operations and financial
condition.
A second customer accounted for 10%, 11% and 9% of the Company's net
revenues for the years ended December 31, 2003, 2002 and 2001, respectively.
This second customer also accounted for approximately 9%, 5% and 4% of accounts
receivable at December 31, 2003, 2002 and 2001, respectively. As of March 2004,
the Company will no longer be providing services for this customer. Failure to
attract new large customers could significantly impede the growth of the
Company's revenues, which could have a material adverse effect on the Company's
future business, results of operations and financial condition.
In addition, approximately 17%, 24% and 31% of net revenues for the
years ended December 31, 2003, 2002 and 2001, respectively, resulted from
merchandising services performed for manufacturers and others at Kmart. Kmart
filed for protection under the U.S. Bankruptcy Code in January of 2002 and
emerged from bankruptcy in May of 2003. During its time in bankruptcy, Kmart
closed a number of stores in the United States. While the Company's customers
and the resultant contractual relationships are with various manufacturers and
not Kmart, a significant reduction of this retailer's stores or cessation of
this retailer's business would negatively impact the Company. As of August 31,
2003, one customer discontinued its merchandising programs with the Company.
Some but not all of these programs were performed at Kmart stores. This customer
accounted for 10%, 17%, and 12% of the business generated from Kmart for the
twelve-months ended December 31, 2003 2002 and 2001, respectively.
-10-
Dependence on Trend Toward Outsourcing
The business and growth of the Company depends in large part on the
continued trend toward outsourcing of marketing services, which the Company
believes has resulted from the consolidation of retailers and manufacturers, as
well as, the desire to seek outsourcing specialists and reduce fixed operation
expenses. There can be no assurance that this trend in outsourcing will
continue, as companies may elect to perform such services internally. A
significant change in the direction of this trend generally, or a trend in the
retail, manufacturing or business services industry not to use, or to reduce the
use of, outsourced marketing services such as those provided by the Company,
could significantly decrease the Company's revenues and such decreased revenues
could have a material adverse effect on the Company's business, results of
operations and financial condition or the desired increases in the Company's
business, revenues and profits.
Failure to Successfully Compete
The marketing services industry is highly competitive and the Company
has competitors that are larger (or part of larger holding companies) and may be
better financed. In addition, the Company competes with: (i) a large number of
relatively small enterprises with specific customer, channel or geographic
coverage; (ii) the internal marketing and merchandising operations of its
customers and prospective customers; (iii) independent brokers; and (iv) smaller
regional providers. Remaining competitive in the highly competitive marketing
services industry requires that the Company monitor and respond to trends in all
industry sectors. There can be no assurance that the Company will be able to
anticipate and respond successfully to such trends in a timely manner. If the
Company is unable to successfully compete, it could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
If certain competitors were to combine into integrated marketing
services companies, or additional marketing service companies were to enter into
this market, or existing participants in this industry were to become more
competitive, it could have a material adverse effect on the Company's business,
results of operations and financial condition or the desired increases in the
Company's business, revenues and profits.
Variability of Operating Results and Uncertainty in Customer Revenue
The Company has experienced and, in the future, may experience
fluctuations in quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary and from time to time and may
result in reduced revenue include: (i) the number of active customer projects;
(ii) 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 product releases of
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 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.
-11-
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.
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 acquisition efforts and any associated
capital commitments cannot be readily predicted. Future acquisitions may be
financed by issuing shares of the Company's Common Stock, cash, or a combination
of Common Stock and cash. If the Company's Common Stock does not maintain a
sufficient market value, or if potential acquisition candidates are otherwise
unwilling to accept the Company's Common Stock as part of the consideration for
the sale of their businesses, the Company may be required to obtain additional
capital through debt or equity financings. To the extent the Company's Common
Stock is used for all or a portion of the consideration to be paid for future
acquisitions, dilution may be experienced by existing stockholders. There can be
no assurance that the Company will be able to obtain the additional financing it
may need for its acquisitions on terms that the Company deems acceptable.
Failure to obtain such capital would materially adversely affect the Company's
ability to execute its growth strategy.
Reliance on the Internet
The Company relies on the Internet for the scheduling, coordination and
reporting of its merchandising and marketing services. The Internet has
experienced, and is expected to continue to experience, significant growth in
the numbers of users and amount of traffic as well as increased attacks by
hackers and other saboteurs. To the extent that the Internet continues to
experience increased numbers of users, frequency of use or increased bandwidth
requirements of users, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on the
Internet by this continued growth or that the performance or reliability of the
Internet will not be adversely affected. Furthermore, the Internet has
experienced a variety of outages and other delays as a result of accidental and
intentional damage to portions of its infrastructure, and could face such
outages and delays in the future of similar or greater effect. Any protracted
disruption in Internet service would increase the Company's costs of operation
and reduce efficiency and performance, which could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
-12-
Economic and Retail Uncertainty
The markets in which the Company operates are cyclical and subject to
the effects of economic downturns. The current political, social and economic
conditions, including the impact of terrorism on consumer and business behavior,
make it difficult for the Company, its vendors and its customers to accurately
forecast and plan future business activities. Substantially all of the Company's
key customers are either retailers or those seeking to do product merchandising
at retailers. If the retail industry experiences a significant economic
downturn, a reduction in product sales could significantly decrease the
Company's revenues. The Company also has risks associated with its customers
changing their business plans and/or reducing their marketing budgets in
response to economic conditions, which could also significantly decrease the
Company's revenues. Such revenue decreases could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
Significant Stockholders: Voting Control and Market Illiquidity
Mr. Robert G. Brown, founder, director, Chairman, President and Chief
Executive Officer of the Company, beneficially owns approximately 45.7% of the
Company's outstanding Common Stock, and Mr. William H. Bartels, founder,
director, and Vice Chairman of the Company beneficially owns approximately 29.7%
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 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
National 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"), and
SPAR Management Services, Inc. ("SMSI"), as well as the programming services
provided by SPAR Infotech, Inc. ("SIT"), each of which is an affiliate, but not
a subsidiary, of the Company, and none of which is consolidated in the Company's
financial statements. SMS provides substantially all of the field
representatives used by the Company in conducting its business (85% of field
expense in 2003), and SMSI provides substantially all of the field management
services used by the Company in conducting its business. These services provided
to the Company by SMS and SMSI are on a cost-plus basis pursuant to contracts
that are cancelable on 60 days notice prior to December 31 of each year,
commencing in 1997, or with 180 days notice at any other time. SIT provides
substantially all of the Internet programming services and other computer
programming needs used by the Company in conducting its business (see Item 13 -
Certain Relationships and Related Transactions, below), which are provided to
the Company by SIT on an hourly charge basis pursuant to a contract that is
cancelable on 30 days notice. The Company has determined that the services
provided by SMS, SMSI and SIT are at rates favorable to the Company.
SMS, SMSI, SIT and certain other affiliated companies (collectively,
the "SPAR Affiliates") are owned solely by Mr. Robert G. Brown, founder,
director, Chairman, President and Chief Executive Officer of the Company, and
Mr. William H. Bartels, founder, director, and Vice Chairman of the Company, 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.
-13-
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 computer programming services provided by SIT, in sufficient
time to perform its customer obligations or at such favorable rates in the event
the SPAR Affiliates no longer performed those services. Any cancellation, other
nonperformance or material pricing increase under those affiliate contracts
could have a material adverse effect on the Company's business, results of
operations and financial condition or the desired increases in the Company's
business, revenues and profits.
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 entities for such ventures, there can be no assurance
that the Company will not be held liable for the claims against and losses of a
particular international joint venture under applicable local law or local
interpretation of any joint venture or insurance provisions. If any such claims
and losses should occur, be material in amount and be successfully asserted
against the Company, such claims and losses could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
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 is exploring various leasing
options, including an extension of its existing lease.
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
Toronto, Ontario CAN 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.
-14-
Item 3. Legal Proceedings.
On October 24, 2001, Safeway Inc., a former customer of the PIA
Merchandising Co., Inc., and Pivotal Sales Company, 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
National Market.
2002 2003
------------------------- ---------------------------
High Low High Low
First Quarter $ 2.41 $ 1.60 $ 3.60 $ 2.42
Second Quarter 2.50 2.00 5.55 3.05
Third Quarter 2.82 1.96 5.32 3.17
Fourth Quarter 4.92 1.91 4.57 3.00
As of December 31, 2003, there were approximately 600 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,
------------------------------------------------------------
2003 2002 2001 2000 1999(2)
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 64,859 $ 69,612 $ 70,891 $ 81,459 $ 79,613
Cost of revenues 42,338 40,331 40,883 50,278 50,499
-------- -------- -------- -------- --------
Gross profit 22,521 29,281 30,008 31,181 29,114
Selling, general and administrative expenses 20,967 18,804 19,380 24,761 23,213
Depreciation and amortization 1,529 1,844 2,682 2,383 1,204
-------- -------- -------- -------- --------
Operating income 25 8,633 7,946 4,037 4,697
Other expense (income) 237 (26) 107 (790) (90)
Interest expense 269 363 561 1,326 976
-------- -------- -------- -------- --------
(Loss) income from continuing operations before
provision for income taxes (481) 8,296 7,278 3,501 3,811
Income tax provision 58 2,998 3,123 780 3,743
-------- -------- -------- -------- --------
(Loss) income from continuing operations (539) 5,298 4,155 2,721 68
Discontinued operations:
Loss from discontinued operations net of tax benefits
of $935, $858 and $595, respectively - - (1,597) (1,399) (563)
Estimated loss on disposal of discontinued
operations, including provision of $1,000 for
losses during phase-out period and disposal costs
net of tax benefit of $2,618 - - (4,272) - -
-------- -------- -------- -------- --------
Net (loss) income $ (539) $ 5,298 $ (1,714) $ 1,322 $ (495)
======== ======== ======== ======== ========
Unaudited pro forma data (1)
--------
Income from continuing operations before provision for
income taxes $ 3,811
Pro forma income tax provision 1,840
--------
Pro forma income from continuing operations 1,971
Pro forma loss from discontinued operations net of
pro forma tax benefit of $429 (729)
Pro forma net income $ 1,242
========
Basic/diluted net (loss) income per common share:
Actual/Pro forma (loss) income from continuing
operations $ (0.03 ) $ 0.28 $ 0.23 $ 0.15 $ 0.13
-------- -------- -------- -------- --------
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 (loss) income $ (0.03) $ 0.28 $ (0.09) $ 0.07 $ 0.08
======== ======== ======== ======== ========
Actual/Pro forma weighted average shares outstanding
- basic 18,855 18,761 18,389 18,185 15,361
Actual/Pro forma weighted average shares outstanding
- diluted 18,855 19,148 18,467 18,303 15,367
-17-
December 31,
-------------------------------------------------------
2003 2002 2001 2000 1999(2)
------ ------ ------ ------ ------
BALANCE SHEET DATA:
- -------------------
Working capital (deficiency) $ 4,085 $ 6,319 $ 8,476 $ (2,273) $ (639)
Total assets 27,870 28,800 41,155 48,004 54,110
Current portion of long-term debt 4,084 - 57 1,143 1,147
Line of credit and long-term debt, net 270 383 13,287 10,093 16,009
Total stockholders' equity 16,023 16,592 10,934 12,240 10,886
======== ======== ======== ======== ========
(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.
Overview
In the United States, the Company provides merchandising services to
manufacturers and retailers principally in mass merchandiser, drug store,
grocery, and other retail trade classes through its Merchandising Services
Division. Internationally, the Company provides in-store merchandising services
through a wholly owned subsidiary in Canada and a 50% owned joint venture in
Japan. The Company also owns a 51% interest in a joint venture established to
provide merchandising services in Turkey. The Company accounts for its
investment in the Japanese joint venture utilizing the equity method and
consolidates both Canada and Turkey into the Company's financial statements.
In December 2001, the Company decided to divest its Incentive Marketing
Division and recorded an estimated loss on disposal of SPAR Performance Group,
Inc., now called STIMULYS, Inc. ("SPGI"), of approximately $4.3 million, net of
taxes, including a $1.0 million reserve recorded for the anticipated cost to
divest SPGI and any anticipated losses through the divestiture date.
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly
owned subsidiary of the Company, entered into a Stock Purchase and Sale
Agreement with Performance Holdings, Inc. ("PHI"), a Delaware corporation
headquartered in Carrollton, Texas. Pursuant to that agreement, SIM sold all of
the stock of SPGI, its subsidiary, to PHI for $6.0 million. As a condition of
the sale, PHI issued and contributed 1,000,000 shares of its common stock to
Performance Holdings, Inc. Employee Stock Ownership Plan, which became the only
shareholder of PHI.
SIM's results (including those of SPGI) were reclassified as
discontinued operations for all periods presented. The results of operations of
the discontinued business segment are shown separately below net income from
continuing operations. Accordingly, the 2002 consolidated statements of
operations of the Company have been prepared, and its 2001 and 2000 consolidated
statement of operations have been restated, to report the results of
discontinued operations of SIM (including those of SPGI) separately from the
continuing operations of the Company, 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.
Critical Accounting Policy & Estimates
The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Note 2 to the Financial
Statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition, depreciation methods,
asset impairment recognition, business combination accounting, and discontinued
business accounting. While the estimates and judgments associated with the
application of these policies may be affected by different assumptions or
conditions, the Company believes the estimates and judgments associated with the
reported amounts are appropriate in the circumstances. Three critical accounting
policies are revenue recognition, allowance for doubtful accounts and sales
allowance, and internal use software development costs:
Revenue Recognition
The Company's services are provided under contracts or agreements that
consist primarily of service fees and per unit fee arrangements. Revenues under
service fee arrangements are recognized when the service is performed. The
Company's per unit contracts or agreements provide for fees to be earned based
on the retail sales of client's products to consumers. The Company recognizes
per unit fees in the period such amounts become determinable and are reported to
the Company.
-19-
Allowance for Doubtful Accounts and Sales Allowance
The Company continually monitors the collectability of its accounts
receivable based upon current customer credit information and other
information available. Utilizing this information, the Company has
established an allowance for doubtful accounts of $515,000 and $301,000
at December 31, 2003 and 2002, respectively. The Company also recorded
a sales allowance of $448,000 to properly reflect potential customer
credits as of December 31, 2003.
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 $1,004,000, $772,000 and $430,000 of costs
related to software developed for internal use in 2003, 2002 and 2001,
respectively.
Results of operations
The following table sets forth selected financial data and such data as
a percentage of net revenues for the periods indicated.
Year Ended Year Ended Year Ended
December 31, 2003 December 31, 2002 December 31, 2001
-------------------------------------------------------------------------------
(dollars in millions)
Dollars % Dollars % Dollars %
-------------- ---------- ----------- ----------- ------------ -----------
Net revenues $ 64.9 100.0% $ 69.6 100.0% $ 70.9 100.0%
Cost of revenues 42.3 65.3 40.3 57.9 40.9 57.7
Selling, general & administrative expenses 21.0 32.3 18.8 27.0 19.4 27.4
Depreciation & amortization 1.5 2.3 1.8 2.6 2.7 3.8
Other income & expenses, net 0.5 0.8 0.4 0.6 0.6 0.8
-------------- ---------- ----------- ----------- ----------- -----------
(Loss) income from continuing operations before (0.4) (0.7) 8.3 11.9 7.3 10.3
income tax provision
Income tax provision 0.1 0.1 3.0 4.3 3.1 4.4
-------------- ---------- ----------- ----------- ----------- -----------
(Loss) income from continuing operations (0.5) (0.8)% 5.3 7.6% 4.2 5.9%
Discontinued operations:
Loss from discontinued operations, net of tax
benefits - - (1.6)
Estimated loss on disposal of discontinued
operations, net of tax benefits - - (4.3)
-------------- ----------- ------------
Net (loss) income $ (0.5) $ 5.3 $ (1.7)
============== =========== ============
-20-
Results from continuing operations for the twelve months ended December 31,
2003, compared to twelve months ended December 31, 2002
Net Revenues
Net Revenues from operations for the twelve months ended December 31,
2003, were $64.9 million, compared to $69.6 million for the twelve months ended
December 31, 2002, a 6.8% decrease. The decrease of 6.8% in net revenues is
primarily attributed to decreased business in mass merchandiser chains. The
decrease in net revenues was caused by decreased per unit fee revenue resulting
from lower retail sales of customer products and the loss of a particular
client, partially offset by increases in service fee revenue.
Cost of Revenues
Cost of revenues from operations consists of in-store labor and field
management wages, related benefits, travel and other direct labor-related
expenses. Cost of revenues increased by $2.0 million in 2003 and as a percentage
of net revenues was 65.3% for the twelve months ended December 31, 2003,
compared to 57.9% for the twelve months ended December 31, 2002, a 5.0%
increase. Approximately 85% and 76% of the field services were purchased from
the Company's affiliate, SMS, in 2003 and 2002, respectively (see Item 13 -
Certain Relationships and Related Transactions, below). SMS's increased share of
field services resulted from its more favorable cost structure. The increase in
cost as a percentage of net revenues is primarily a result of a decrease in per
unit fee revenues that do not have a proportionate decrease in cost. As
discussed above under Critical Accounting Policies/Revenue Recognition, the
Company's revenue consists of: (1) service fee revenue, which is earned when the
merchandising services are performed and, therefore, has proportionate costs in
the period the services are performed; and (2) per unit fee revenue, which is
earned when the client's product is sold to the consumer at retail, not when the
services are performed and, therefore, does not have proportionate costs in the
period the revenue is earned. Since the merchandising service and the related
costs associated with per unit fee revenue are normally performed prior to the
retail sale, and the retail sales of client products are influenced by numerous
factors including consumer tastes and preferences, and not solely by the
merchandising service performed, in any given period, the cost of per unit fee
revenues may not be directly proportionate to the per unit fee revenue.
Operating Expenses
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resource 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, 2003 December 31, 2002 (decrease)
------------------- ------------------- ---------
(dollars in millions)
Dollars % Dollars % %
------- ---- ------- ---- ----
Selling, general & administrative $ 21.0 32.3% $ 18.8 27.0% 12.0%
Depreciation and amortization 1.5 2.3 1.8 2.6 (17.1)%
------- ---- ------- ---- ----
Total operating expenses $ 22.5 34.6% $ 20.6 29.6% 9.4%
======= ==== ======= ==== ====
Selling, general and administrative expenses increased by $2.2 million,
or 12.0%, for the twelve months ended December 31, 2003, to $21.0 million
compared to $18.8 million for the twelve months ended December 31, 2002. This
increase was due primarily to increases in travel related expense $0.4 million,
postage and material expense $0.6 million, stock option expense for
non-employees $0.4 million and increase in bad debt expense $0.6 million.
Depreciation and amortization decreased by $315,000 for the twelve
months ended December 31, 2003, primarily due to older, higher priced assets
becoming fully depreciated.
-21-
Interest Expense
Interest expense decreased $94,000 to $269,000 for the twelve months
ended December 31, 2003, from $363,000 for the twelve months ended December 31,
2002, due to decreased debt levels as well as decreased interest rates in 2003.
Income Taxes
The provision for income taxes was $0.1 million and $3.0 million for
the twelve months ended December 31, 2003 and December 31, 2002, respectively.
The tax provision for 2003 reflects minimum tax requirements for state filings.
The effective tax rate was 36.1% for 2002.
Net (Loss) Income
The SPAR Group had a net loss of approximately $539,000 or $0.03 per
basic and diluted share for the twelve months ended December 31, 2003, compared
to a net income of approximately $5.3 million or $0.28 per basic and diluted
shares for the twelve months ended December 31, 2002 because of the factors
described above.
Off Balance Sheet Arrangements
None.
-22-
Results from continuing operations for the twelve months ended December 31,
2002, compared to twelve months ended December 31, 2001
Net Revenues
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
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
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 (decrease)
---------------------------- ------------------------------ -------------
(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.
-23-
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 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.
Liquidity and Capital Resources
In the twelve months ended December 31, 2003, the Company had a net
loss of $539,000. Net cash provided by operating activities for the twelve
months ended December 31, 2003, was $3.4 million, compared with net cash
provided by operations of $12.7 million for the twelve months ended December 31,
2002. Cash provided by operating activities in 2003 was primarily a result of
decreases in accounts receivable, increases in accounts payable and other
current liabilities, partially offset by decreases in restructuring charges, and
by increases in prepaid expenses and deferred tax assets and net operating
losses.
-24-
Net cash used in investing activities for the twelve months ended
December 31, 2003, was $2.9 million, compared with net cash used of $1.2 million
for the twelve months ended December 31, 2002. The net cash used in investing
activities in 2003 resulted primarily from the purchases of property and
equipment and acquisition of businesses.
Net cash used in financing activities for the twelve months ended
December 31, 2003, was $0.5 million, compared with net cash used in financing
activities of $11.5 million for the twelve months ended December 31, 2002. The
net cash used in financing activities in 2003 was primarily due to payments to
shareholders and purchases of treasury stock, partially offset by borrowings on
the line of credit.
The above activity resulted in no change in cash and cash equivalents
for the twelve months ended December 31, 2003 as all excess cash is utilized to
pay down the line of credit.
At December 31, 2003, the Company had positive working capital of $4.1
million as compared to $6.3 million at December 31, 2002. The decrease in
working capital is due to decreases in accounts receivable and deferred taxes,
increases in other current liabilities and accounts payable, and an increase in
the Company's bank line of credit, partially offset by, increases in prepaid
expenses. The Company's current ratio was 1.35 and 1.53 at December 31, 2003 and
2002, 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 (as amended, collectively, the "New
Credit Facility"). The New Credit Facility provides the Company with a $15.0
million revolving credit facility that matures on January 23, 2006. The New
Credit Facility allows the Company to borrow up to $15.0 million based upon a
borrowing base formula as defined in the agreement (principally 85% of
"eligible" accounts receivable). The New Credit Facility bears interest at
Whitehall's "Alternative Base Rate" (a total of 4.0% per annum at December 31,
2003) 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, as amended,
between the Company and Whitehall (the "Old Credit Facility") that was scheduled
to mature on February 28, 2003. The Old Credit Facility provided for a $15.0
million revolving credit facility, as well as, a $2.5 million term loan. The old
revolving facility allowed the Company to borrow up to $15.0 million based upon
a borrowing base formula as defined in the old agreement (principally 85% of
"eligible" accounts receivable). The term loan under the Old Credit Facility
amortized in equal monthly installments of $83,334 and was repaid in full as of
December 31, 2001.
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 expired on July 31, 2003.
The New Credit Facility contains certain financial covenants (amending,
restating, and replacing those contained in the Old Credit Facility) that 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 such financial covenants at December 31, 2003,
except for the "Fixed Charge Coverage Ratio" and minimum "EBITDA", for which the
Company has secured a waiver from Whitehall.
The balances outstanding on the revolving line of credit were $4.1
million under the New Revolving Facility at December 31, 2003, and $148,000
under the Old Revolving Facility as of December 31, 2002. In addition, the
Company had outstanding Letters of Credit of $737,337 at December 31, 2003, and
$842,418 at December 31, 2002. As of December 31, 2003, based upon the borrowing
base formula, the Company had availability of $4.6 million of the $10.9 million
unused revolving line of credit under the New Revolving Facility.
In April 2003, all previously outstanding amounts due certain
stockholders under certain notes were paid in full.
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.
-25-
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 PHI. The SPGI
Revolver provides for advances in excess of the borrowing base through September
30, 2003. As of October 1, 2003, the SPGI Revolver was adjusted, as per the
agreement, to include a borrowing base calculation (principally 85% of
"eligible" accounts receivable). In September 2003, SPGI requested and the
Company agreed to provide advances of up to $1.0 million in excess of the
borrowing base through September 30, 2004. Under the Revolver terms, SPGI is
required to deposit all of its cash to the Company's lockbox. At December 31,
2003, the Company had cash deposits due SPGI totaling approximately $794,000.
Certain Contractual Obligations
The following table contains a summary of certain of the Company's
contractual obligations by category as of December 31, 2003 (in thousands).
- --------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by Period
- --------------------------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
year years
- --------------------------------------------------------------------------------------------------------------------
New Credit Facility $ 4,084 $ 4,084 $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations 2,221 947 1,163 111
- --------------------------------------------------------------------------------------------------------------------
Total $ 6,305 $ 5,031 $ 1,163 $ 111 $ -
- --------------------------------------------------------------------------------------------------------------------
In addition to the above table, the Company had agreed to provide a
discretionary line of credit to SPGI not to exceed $2.0 million through
September 30, 2005. At December 31, 2003, the Company had $737,337 in
outstanding Letters of Credit.
In May 2001, the Company and Paltac, Inc. ("Paltac"), a large Japanese
distributor, entered into a joint venture to create a Japanese company, SPAR FM.
SPAR FM entered into a Yen 300 million Revolving Credit Agreement with a
Japanese bank. The bank required Paltac guarantee the outstanding balance on the
revolving credit facility. As part of the joint venture agreement, should Paltac
be required to make a payment on its guarantee to the bank, then the Company has
agreed to remit to Paltac 50% of any such payment up to a maximum of Yen 150
million or approximately $1.4 million. As of December 31, 2003, SPAR FM has
borrowed Yen 100 million under its Revolving Credit Agreement. Therefore, the
Company's current exposure to Paltac respecting outstanding loans to SPAR FM at
December 31, 2003 would be Yen 50 million or approximately $470,000.
-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 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 its revolving line of credit.
Item 8. Financial Statements and Supplementary Data.
See Item 15 of this Annual Report on form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) as of the end of the period
covering this report. Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission's rules and
forms. There were no material changes in the Company's internal control over
financial reporting during the fourth quarter of 2003.
-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, 2003, an executive officer and/or
director for the Company or performing an equivalent function for the Company
through an affiliate.
Name Age Position with SPAR Group, Inc. and its affiliates
- ---- --- -------------------------------------------------
Robert G. Brown. ................ 61 Chairman, Chief Executive Officer, President and Director
William H. Bartels ............. 60 Vice Chairman and Director
Robert O. Aders (1) ............ 76 Director, Chairman Governance Committee
Jack W. Partridge (1) ........... 58 Director, Chairman Compensation Committee
Jerry B. Gilbert (1) ........... 69 Director
Lorrence T. Kellar (1) ......... 66 Director, Chairman Audit Committee
Charles Cimitile ................. 49 Chief Financial Officer, Treasurer and Secretary
Kori G. Belzer ................... 38 Chief Operating Officer, SPAR Management Services, Inc.
Patricia Franco .................. 43 Sr. Vice President, SPAR Infotech, Inc.
James R. Segreto ................. 55 Controller
- --------------------------
(1) Member of the Board's Governance, Compensation and Audit Committees
Robert G. Brown serves as the Chairman, Chief Executive Officer,
President and a Director of 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 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 1996).
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 served on the Advisory Boards of
the Food Marketing Institute, the National Association of Chain Drug Stores and
the General Merchandise Distributors Council (GMDC) where he was elected the
first President of the GMDC Educational Foundation. He was honored with lifetime
achievement awards from GMDC, Chain Drug Review, Drug Store News and the Food
Marketing Institute. He is the recipient of the prestigious National Association
of Chain Drug Stores (NACDS) Begley Award, as well as the National Wholesale
Druggists Association (NWDA) Tim Barry Award. In June 1997, Mr. Gilbert received
an Honorary Doctor of Letters Degree from Long Island University.
Lorrence T. Kellar serves as a Director and the Chairman of the Audit
Committee of the Company and has done so since April 2, 2003. Mr. Kellar had a
31-year career with The Kroger Co., where he served in various financial
capacities, including Group Vice President for real estate and finance, and
earlier, as Corporate Treasurer. He was responsible for all of Kroger's real
estate activities, as well as facility engineering, which coordinated all store
openings and remodels. Mr. Kellar subsequently served as Vice President, real
estate, for K-Mart. He currently is Vice President of Continental Properties
Company, Inc. Mr. Kellar also serves on the boards of Frisch's Restaurants and
Multi-Color Corporation and is a trustee of the Acadia Realty Trust. He also is
a major patron of the arts and has served as Chairman of the Board of the
Cincinnati Ballet.
Charles Cimitile serves as the Chief Financial Officer, Treasurer 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.
Kori G. Belzer serves as the de facto chief operating officer of the
Company's field force through her position as Chief Operating Officer of SPAR
Management Services, Inc. ("SMSI"), and of SPAR Marketing Services, Inc.
("SMS"), each an affiliate of the Company (see Item 13 - Certain Relationships
and Related Transactions), and has done so since January 1, 2003, as determined
by the Company's Audit Committee. Prior to 2003, Ms. Belzer served as Chief
Operating Officer of SMSI and SMS from 2000 through 2002, as Vice President
Operations of SMS from 1997 through 2000, and as Regional Director of SMS from
1995 through 1997. Prior to 1995, she served as Client Services Manager for
SPAR/Servco, Inc.
Patricia Franco serves as the de facto chief information officer of the
Company through her position as Senior Vice President of SPAR Infotech, Inc.
("SIT"), an affiliate of the Company (see Item 13 - Certain Relationships and
Related Transactions), also serves as the de facto President of the
International Division, and has done so since January 1, 2003, as determined by
the Company's Audit Committee. Prior to 2003, Ms. Franco served in various
management capacities with SIT, SMS and their affiliates.
James R. Segreto serves as Vice President and Controller of the Company
and has done so since July 8, 1999, the effective date of the Merger. From 1997
through the Merger, he served in the same capacity for SMS. Mr. Segreto served
as Chief Financial Officer for Supermarket Communications Systems, Inc. from
1992 through 1997 and LM Capital, LLP from 1990 through 1992. Prior to 1992, he
served as controller of Dorman Roth Foods, Inc.
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, 2003, 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, and Jerry B. Gilbert untimely filed certain Statements of Changes in
Beneficial Ownership on Form 4. Kori Belzer and Patricia Franco became filers in
March of 2004. All such Section 16(a) filing requirements have since been
completed by each of the aforementioned individuals.
-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, 2003,
2002 and 2001 (i) by the Company's Chief Executive Officer, and (ii) each of the
other four most highly compensated executive officers of the Company and its
affiliates, who were serving as executive officers of the Company or performing
equivalent functions for the Company through an affiliate, at December 31, 2003
(collectively, the "Named Executive Officers").
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
------------------------- ---------------------------
Securities
Underlying All Other
Options Compensation
Name and Principal Positions Year Salary ($) Bonus ($) (#)(1) ($)(2)
- ---------------------------- ---- ---------- --------- ------ ------
Robert G. Brown 2003 180,000 -- -- 2,200
Chief Executive Officer, Chairman of the 2002 164,340 -- -- 2,040
Board, President, and Director 2001 141,202 -- 765,972 --
William H. Bartels 2003 180,000 -- -- 2,007
Vice Chairman and Director 2002 164,340 -- -- 2,040
2001 139,230 -- 471,992 --
Charles Cimitile 2003 221,700 20,000 20,000 2,200
Chief Financial Officer, Treasurer and Secretary 2002 215,564 15,000 20,000 2,040
2001 188,000 -- 75,000 --
Kori G. Belzer 2003 147,067 19,000 26,750 1,843
Chief Operating Officer, SPAR Management
Services, Inc.
Patricia Franco 2003 145,875 20,000 37,500 1,718
Sr. Vice President, SPAR Infotech, Inc.
------------------------
(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.
(2) Other compensation represents the Company's 401k contribution.
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, 2003, 2002 and 2001.
-30-
SIT Income
Name Year SMS Income SMSI Income (Loss) (1)
------------------------ -------- --------------- ----------------- ----------------
Robert G. Brown 2003 $ 667,756 $ 177,214 $ 33,591
2002 494,987 174,092 (85,183)
2001 211,117 16,477 (227,370)
William H. Bartels 2003 $ 424,937 $ 112,773 $ 21,376
2002 314,992 110,787 (54,208)
2001 134,348 10,486 (144,690)
(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, 2003, 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 ($/Sh) Date ----------------------------------
Name Granted (2)(#) Period (%) 5% ($) 10% ($)
- ---- ----------------------------------------------------------------------------------------------
Charles Cimitile 20,000 5.0 2.99 2/13/13 37,608 95,306
Kori G. Belzer 20,500 5.0 2.99 2/13/13 38,548 97,688
6,000 1.5 3.80 5/9/13 14,339 36,337
250 0.1 4.65 8/7/13 731 1,853
--------------- --------------- ------------- -----------------
26,750 6.6 53,618 135,878
Patricia Franco 20,500 5.1 2.99 2/13/13 38,548 97,688
16,000 4.0 3.80 5/9/13 38,237 96,900
750 0.2 4.65 8/7/13 2,193 5,558
250 0.1 3.89 11/5/13 612 1,550
--------------- --------------- ------------- -----------------
37,500 9.4 79,590 201,696
- ------------
(1) The potential realizable value is calculated based upon the term of the
option at its time of grant. It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option.
(2) These options vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
-31-
Aggregated Stock Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth the number of shares of Common Stock of
the Company purchased by each of the Named Executive Officers in the exercise of
stock options during the year ended December 31, 2003, the value realized in the
purchase of such shares (the market value at the time of exercise less the
exercise price to purchase such shares), and the number of shares that may be
purchased and value of the exercisable and unexercisable options held by each of
the Named Executive Officers at December 31, 2003.
Number of Securities Underlying Value of Unexercised
Unexercised Options at Fiscal In-the-Money Options at Fiscal
Year-End (#) Year-End ($)
---------------------------------- --------------------------------
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------------- --------------- ---------------- ---------------- -------------- ----------------
Robert G. Brown -- -- 95,746 382,986 $181,917 $702,779
William H. Bartels -- -- 58,999 235,996 112,098 437,713
Charles Cimitile -- -- 98,750 41,250 196,206 36,569
Kori G. Belzer -- -- 81,000 76,140 156,134 86,603
Patricia Franco -- -- 97,250 66,250 168,122 46,996
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, 2003, options to purchase 43,250
shares of the Company's common stock remain outstanding under this Plan. The
1995 Plan was superseded 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 2003, no options to purchase shares of the Company's common stock were
exercised under this Plan. At December 31, 2003, 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 2003, no options to purchase shares of the Company's
common stock were exercised under this Plan. At December 31, 2003, options to
purchase 25,750 shares of the Company's common stock remain outstanding under
this Plan.
On December 4, 2000, the Company adopted the 2000 Plan, as the
successor to the 1995 Plan and the Director's Plan with respect to all new
options issued. The 2000 Plan provides for the granting of either incentive or
nonqualified stock options to specified employees, consultants, and directors of
the Company for the purchase of up to 3,600,000 (less those options still
outstanding under the 1995 Plan or exercised after December 4, 2000 under the
1995 Plan). The options have a term of ten years, except in the case of
incentive stock options granted to greater than 10% stockholders for whom the
term is five years. The exercise price of nonqualified stock options must be
equal to at least 85% of the fair market value of the Company's common stock at
the date of grant (although typically 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 2003, options to purchase 401,020 shares of the Company's common
stock were granted, options to purchase 143,641 shares of the Company's common
stock were exercised and
-32-
options to purchase 86,500 shares of the Company's stock were cancelled under
this Plan. At December 31, 2003, options to purchase 2,180,060 shares of the
Company's common stock remain outstanding under this Plan and options to
purchase 743,344 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
recommended that its affiliates pay a 15% cash bonus for affiliate consultant
purchases of Common Stock under the CSP Plan.
Compensation of Directors
The Company's Compensation Committee administers the compensation plan
for its outside Directors as well as the compensation for its executives. Each
member of the Company's Board who is not otherwise an employee or officer of the
Company or any subsidiary or affiliate of the Company (each, an "Eligible
Director") is eligible to receive the compensation contemplated under such plan.
In January 2001, 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 upon acceptance of the directorship, each
non-employee director receives options to purchase 10,000 shares of the
Company's common stock with an exercise price equal to 100% of the fair market
value of the Company's common stock at the date of grant, 10,000 additional
options to purchase shares of the Company's common stock with an exercise price
equal to 100% of the fair market value of the Company's common stock at the date
of grant after one year of service and 10,000 additional options to purchase
shares of the Company's common stock with an exercise price equal to 100% of the
fair market value of the Company's common stock at the date of grant for each
additional year of service thereafter. All of the options have been and will be
granted under the 2000 Plan described above, under which each member of the SPAR
Board is eligible to participate. Non-employee directors will be reimbursed for
all reasonable expenses incurred during the course of their duties. There is no
additional compensation for committee participation, phone meetings, or other
Board activities.
Compensation Committee Interlocks and Insider Participation
No member of the Board's Compensation Committee was at any time during
the year ended December 31, 2003, 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).
-33-
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 22, 2004 by: (i) each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the Company's common stock; (ii) each of the Company's
directors; (iii) each of the Named Executive Officers in the Summary
Compensation Table; and (iv) the Company's directors and such Named Executive
Officers as a group. Except as indicated in the footnotes to this table, the
persons named in the table, based on information provided by such persons, have
sole voting and sole investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to community property laws where
applicable.
Number of Shares
Beneficially
Title of Class Name and Address of Beneficial Owner Owned Percentage
-------------- ------------------------------------ ---------------- ----------
Common Shares Robert G. Brown (1) 8,727,266 (2) 45.7%
Common Shares William H. Bartels (1) 5,638,379 (3) 29.7%
Common Shares Robert O. Aders (1) 86,203 (4) *
Common Shares Jack W. Partridge (1) 30,668 (5) *
Common Shares Jerry B. Gilbert (1) 24,009 (6) *
Common Shares Lorrence T. Kellar (1) 14,310 (7) *
Common Shares Charles Cimitile (1) 109,647 (8) *
Common Shares Kori G. Belzer (1) 116,718 (9) *
Common Shares Patricia Franco (1) 162,675 (10) *
Common Shares Heartland Advisors, Inc. (11) 1,300,000 6.9%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Common Shares Executive Officers and Directors 14,909,875 79.4%
* Less than 1%
(1) The address of such owners is c/o SPAR Group, Inc. 580 White Plains
Road, Tarrytown, New York 10591.
(2) Includes 1,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown,
James R. Brown, Sr. and William H. Bartels are trustees. Includes
325,539 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 229,275
shares issuable upon exercise of options.
(4) Includes 36,203 shares issuable upon exercise of options.
(5) Includes 19,700 shares issuable upon exercise of options.
(6) Includes 24,009 shares issuable upon exercise of options.
(7) Includes 13,310 shares issuable upon exercise of options.
(8) Includes 108,750 shares issuable upon exercise of options.
(9) Includes 115,515 shares issuable upon exercise of options.
(10) Includes 109,875 shares issuable upon exercise of options.
(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 December
31, 2003.
-34-
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, 2003, 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, 2003.
Equity Compensation Plan Information
----------------------------- -------------------------- ------------------------- -------------------------
Plan category Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance of
warrants and rights (#) warrants and rights ($) options, warrants and
rights (#)
----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans 2,269,060 $1.85 743,344
approved by security
holders
----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans
not approved by security
holders -- -- --
----------------------------- -------------------------- ------------------------- -------------------------
Total 2,269,060 $1.85 743,344
----------------------------- -------------------------- ------------------------- -------------------------
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") and SPAR Management Services, Inc. ("SMSI"), and SPAR Infotech,
Inc. ("SIT").
SMS and SMSI (through SMS) provided approximately 92% 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 $36.0 million and $30.5 million for the twelve months ended
December 31, 2003, and 2002, respectively. Under the terms of the Field Service
Agreement, SMS provides the services of approximately 6,000 field
representatives and SMSI provides approximately 80 full-time national, regional
and district managers to the Company as they may request from time to time, for
which the Company has agreed to pay SMS and SMSI (through SMS) for all of their
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 Company. 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).
Ms. Kori Belzer is the Chief Operating Officer of SMSI and SMS. The
Company's Audit Committee has determined that Ms. Belzer functions (and has
functioned since January 1, 2003) as the de facto chief operating officer of the
Company's field force, which as noted above, is managed by SMSI and largely
provided by SMS, and accordingly, Ms. Belzer has been included in the Company's
list of Named Executive Officers in Item 10 above. Ms. Belzer's compensation and
business expenses are part of the costs covered by the "cost plus" contract
described above, and accordingly, are indirectly paid by the Company. Ms. Belzer
also participates in the CSP Plan and, from time to time, receives options to
purchase the Company's stock pursuant to the 2000 Plan (see Item 10-Stock Option
and Purchase Plans). Ms. Belzer's compensation is reviewed annually by the
Company's Compensation Committee.
SIT provided Internet computer programming services to the Company at a
total cost of approximately $1,607,400 and $1,626,000 for the twelve months
ended December 31, 2003 and 2002, respectively. Under the terms of the
programming agreement between the Company and SIT effective as of October 1,
1998, as amended (the "Programming Agreement"), SIT continues to provide
programming services to the Company as the Company may request from time to
time, for which the Company 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.
-35-
Ms. Patricia Franco is a Senior Vice President of SIT and is in charge
of its day-to-day operations. The Company's Audit Committee has determined that
Ms. Franco functions (and has functioned since January 1, 2003) as the de facto
chief information officer of the Company, as well as the de facto President of
the International Division and accordingly, Ms. Franco has been included in the
Company's list of Named Executive Officers in Item 10 above. Ms. Franco's
compensation is paid by SIT, which charges the Company $80.00 per hour for time
spent by Ms. Franco on Company matters. For the year ended December 31, 2003,
the Company paid $132,600 to SIT for the use of Ms. Franco's services. Ms.
Franco also participates in the CSP Plan and, from time to time, receives
options to purchase the Company's stock pursuant to the 2000 Plan (see Item 10 -
Stock Option and Purchase Plans). Ms. Franco's compensation is reviewed annually
by the Company's Compensation Committee.
The Company's agreements with SMS, SMSI and SIT are periodically
reviewed by the Company's Audit Committee, which includes an examination of the
overall fairness of the arrangements and the resulting income to the SMS
Principals. In February 2004, the Audit Committee approved separate amended and
restated agreements with each of SMS, SMSI and SIT, effective as of January 1,
2004. The restated agreements extend the contract maturities for four years,
strengthened various contractual provisions in each agreement and continued the
basic economic terms of the existing agreements, except that the restated
agreement with SMSI provides for a temporary reduction in SMSI's fees for 2004.
In July 1999, SMF, SMS and SIT entered into a Software Ownership
Agreement with respect to Internet job scheduling software jointly developed by
such parties. In addition, SPAR Trademarks, Inc. ("STM"), SMS and SIT entered
into trademark licensing agreements whereby STM has granted non-exclusive
royalty-free licenses to SIT, SMS and SMSI for their continued use of the name
"SPAR" and certain other trademarks and related rights transferred to STM, a
wholly owned subsidiary of the Company.
The SMS Principals also own, through SMSI, a minority (less than 5%)
equity interest in Affinity Insurance Ltd., which provides certain insurance to
the Company.
In April 2003, all previously outstanding amounts due certain
stockholders under certain notes were paid in full.
In the event of any material dispute in the business relationships
between the Company and SMS, SMSI, or SIT, it is possible that Messrs. Brown or
Bartels may have one or more conflicts of interest with respect to these
relationships and such dispute that could have a material adverse effect on the
Company.
Item 14. 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 tax consulting services related to the
PHI/SPGI ESOP in 2003 and 2002 (for which E&Y was paid $3,778 and $13,500
respectively), due diligence services for the IMS acquisition during 2003 (for
which E&Y was paid $14,334) and for tax services in 2003 and 2002 (for which E&Y
was paid $2,295 and $13,500 respectively). No other non-audit services were
performed by E&Y in 2003 or 2002. Since 2003, as required by law, each non-audit
service performed by the Company's auditor either (i) was approved in advance on
a case-by-case basis by the Company's Audit Committee, or (ii) fit within a
pre-approved "basket" of non-audit services of limited amount, scope and
duration established in advance by the Company's Audit Committee. In connection
with the standards for independence of the Company's independent public
accountants promulgated by the Securities and Exchange Commission, the Audit
Committee considers (among other things) whether the provision of such non-audit
services would be compatible with maintaining the independence of E&Y.
Audit Fees
During the Company's fiscal year ended December 31, 2003 and 2002,
respectively, fees billed by Ernst & Young LLP for all audit services rendered
to the Company and its subsidiaries were $179,362 and $143,000, respectively.
Audit services principally include fees for the Company's audits and 10-Q filing
reviews. Since 2003, as required by law, the choice of the Company's auditor and
the audit services to be performed by it have been approved in advance by the
Company's Audit Committee.
-36-
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Index to Financial Statements filed as part of this report:
Independent Auditors' Report. F-1
Consolidated Balance Sheets as of December 31, 2003, and December 31, 2002. F-2
Consolidated Statements of Operations for the years ended
December 31, 2003, December 31, 2002, and December 31, 2001. F-3
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2003, December 31, 2002, and December 31, 2001. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, December 31, 2002, and December 31, 2001. F-5
Notes to Financial Statements. F-6
2. Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts for the three years ended December 31, 2003. F-27
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).
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).
-37-
10.6 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Marketing Services, Inc., and SPAR Trademarks,
Inc. (incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 31, 2002.)
10.7 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Infotech, Inc., and SPAR Trademarks, Inc.
(incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 31, 2002.)
10.8 [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).
10.12 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).
10.13 Third Amended and Restated Revolving Credit and Security
Agreement by and among Whitehall Business Credit Corporation
(the "Lender") with SPAR Marketing Force, Inc., SPAR Group,
Inc., SPAR, Inc., SPAR/Burgoyne Retail Services, Inc., SPAR
Incentive Marketing, Inc., SPAR Trademarks, Inc., SPAR
Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., SPAR Group International, Inc., SPAR
Technology Group, Inc., SPAR/PIA Retail Services, Inc., Retail
Resources, Inc., Pivotal Field Services Inc., PIA
Merchandising Co., Inc., Pacific Indoor Display Co. and
Pivotal Sales Company (collectively, the "Existing
Borrowers"), dated as of January 24, 2003 (incorporated by
reference to the Company's Form 10-K for the fiscal year ended
December 31, 2002).
10.14 Consent, Joinder, Release and Amendment Agreement dated as of
October 31, 2003, by and among the Lender, the Existing
Borrowers and SPAR All Store Marketing, Inc., as a Borrower,
as filed herewith.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
31.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, and filed herewith.
31.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, and filed herewith.
32.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
32.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
(b) Reports on Form 8-K.
None.
-38-
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 30, 2004
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 30, 2004
/s/ William H. Bartels Vice Chairman and Director
- -----------------------------
William H. Bartels
Date: March 30, 2004
/s/ Robert O. Aders Director
- -----------------------------
Robert O. Aders
Date: March 30, 2004
/s/ Jack W. Partridge Director
- -----------------------------
Jack W. Partridge
Date: March 30, 2004
/s/ Jerry B. Gilbert Director
- -----------------------------
Jerry B. Gilbert
Date: March 30, 2004
/s/ Lorrence T. Kellar Director
- -----------------------------
Lorrence T. Kellar
Date: March 30, 2004
/s/ Charles Cimitile Chief Financial Officer
- ----------------------------- Treasurer and Secretary (Principal Financial
Charles Cimitile and Accounting Officer)
Date: March 30, 2004
-39-
Report of Independent Auditors
The Board of Directors and Stockholders
SPAR Group, Inc. and Subsidiaries
We have audited the consolidated balance sheets of SPAR Group, Inc. and
Subsidiaries, as of December 31, 2003 and 2002 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2003. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with 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 also 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 financial statements referred to above present fairly, in
all material respects, the financial position of SPAR Group, Inc. and
Subsidiaries at December 31, 2003 and 2002 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003, 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, present fairly in all materiel respects the information set forth
therein.
As discussed in Note 2, the Company adopted Statement of Accounting Standards
No. 142, effective January 1, 2002.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 13, 2004
F-1
SPAR Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31,
---------------------
2003 2002
-------- --------
Assets
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 13,942 16,458
Prepaid expenses and other current assets 415 783
Deferred income taxes 1,305 903
-------- --------
Total current assets 15,662 18,144
Property and equipment, net 2,099 1,972
Goodwill 8,749 7,858
Deferred income taxes 434 705
Other assets 926 121
-------- --------
Total assets $ 27,870 $ 28,800
======== ========
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 1,445 $ 422
Accrued expenses and other current liabilities 4,367 5,140
Accrued expenses, due to affiliates 996 958
Restructuring charges, current 685 1,354
Due to certain stockholders - 3,951
Line of credit, short term 4,084 -
-------- --------
Total current liabilities 11,577 11,825
Line of credit - 148
Restructuring charges, long term - 235
Other long term liabilities 270 -
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 -
18,858,972 - 2003
18,824,527 - 2002 189 188
Additional paid-in capital 11,249 10,919
Accumulated other comprehensive loss (7) -
Retained earnings 4,976 5,515
Treasury stock (384) (30)
-------- --------
Total stockholders' equity 16,023 16,592
-------- --------
Total liabilities and stockholders' equity $ 27,870 $ 28,800
======== ========
See accompanying notes.
F-2
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
Net revenues $ 64,859 $ 69,612 $ 70,891
Cost of revenues 42,338 40,331 40,883
-------- -------- --------
Gross profit 22,521 29,281 30,008
Selling, general, and administrative expenses 20,967 18,804 19,380
Depreciation and amortization 1,529 1,844 2,682
-------- -------- --------
Operating income 25 8,633 7,946
Other expense (income) 237 (26) 107
Interest expense 269 363 561
-------- -------- --------
(Loss) income from continuing operations before
provision for income taxes (481) 8,296 7,278
Provision for income taxes 58 2,998 3,123
-------- -------- --------
Net (loss) income from continuing operations (539) 5,298 4,155
======== ======== ========
Discontinued operations:
Loss from discontinued operations, net of tax
benefit of $938 - - (1,597)
Estimated loss on disposal of discontinued
operations, net of tax benefit of $2,618 - - (4,272)
-------- -------- --------
Net (loss) income $ (539) $ 5,298 $ (1,714)
======== ======== ========
Basic/diluted net (loss) income per common share:
(Loss) income from continuing operations $ (0.03) $ 0.28 $ 0.23
Loss from discontinued operations - - (0.32)
-------- -------- --------
Net (loss) income $ (0.03) $ 0.28 $ (0.09)
======== ======== ========
Weighted average shares outstanding - basic 18,855 18,761 18,389
======== ======== ========
Weighted average shares outstanding - diluted 18,855 19,148 18,467
======== ======== ========
See accompanying notes.
F-3
SPAR Group, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(In thousands)
Common Stock Accumulated Total
------------------------------------ Additional Other Stock-
Treasury Paid-In Retained Comprehensive holders'
Shares Amount Stock Capital Earnings (Loss) Equity
------------------------------------------------------------------------------------------
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
Stock options exercised and employee
stock purchase plan purchases 34 1 570 (86) - - 485
Issuance of stock options to non-
employees for services - - - 416 - - 416
Purchase of treasury stock - - (924) - - - (924)
Comprehensive loss:
Foreign currency translation loss (7) (7)
Net loss (539) (539)
Comprehensive loss (546)
------------------------------------------------------------------------------------------
Balance at December 31, 2003 18,859 $ 189 $ (384) $ 11,249 $ 4,976 $ (7) $ 16,023
==========================================================================================
See accompanying notes.
F-4
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
--------------------------------
2003 2002 2001
------ ------ ------
Operating activities
Net (loss) income $ (539) $ 5,298 $ (1,714)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 1,529 1,844 2,217
Amortization - - 1,630
Estimated loss on disposal of discontinued
operations - - 4,272
Issuance of stock options for services 416 - -
Share of loss in joint venture 270 - -
Changes in operating assets and liabilities:
Accounts receivable 2,516 4,686 13
Prepaid expenses and other current assets (87) (354) 318
Deferred income taxes (131) 2,022 1,710
Accounts payable, accrued expenses and other
current liabilities 288 (191) (7,202)
Restructuring charges (904) (593) (1,487)
------ ------ ------
Net cash provided by (used in) operating activities 3,358 12,712 (243)
Investing activities
Purchases of property and equipment (1,456) (1,172) (1,744)
Deposit related to acquisition (350) - -
Acquisition of businesses (1,091) - -
------ ------ ------
Net cash used in investing activities (2,897) (1,172) (1,744)
Financing activities
Net borrowings (payments) on line of credit 3,936 (11,139) 3,526
Payments on long-term debt - (57) (1,465)
Payments to certain stockholders (3,951) (704) (482)
Proceeds from employee stock purchase plan and
exercised options 485 390 408
Purchase of treasury stock (924) (30) -
------ ------ ------
Net cash (used in) provided by financing activities (454) (11,540) 1,987
Net effect of exchange rates on cash (7) - -
Net decrease in cash - - -
Cash at beginning of year - - -
------ ------ ------
Cash at end of year - $ - $ -
====== ====== ======
Supplemental disclosure of cash flow information
Interest paid $ 241 $ 686 $1,892
====== ====== ======
Income taxes paid $ 578 $ 200 $ 68
====== ====== ======
See accompanying notes
F-5
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
1. Business and Organization
The SPAR Group, Inc., a Delaware corporation, ("SGRP"), and its subsidiaries
(together with SGRP, the "SPAR Group" or the "Company"), is a supplier of
merchandising and other marketing services throughout the United States and
internationally. The Company also provides database marketing, teleservices and
marketing research. In 2002, the Company sold its Incentive Marketing Division,
SPAR Performance Group, Inc. ("SPGI"). The Company's continuing operations are
now divided into two divisions: the Merchandising Services Division and the
International Division. The Merchandising Services Division provides
merchandising services, in-store product demonstrations, product sampling,
database marketing, teleservices and marketing research to manufacturers and
retailers with product distribution primarily in mass merchandisers, drug store
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 the acquisition of a merchandising company in Canada
in June 2003. The Company has also established a start-up joint venture in
Turkey. The Company continues to focus on expanding its merchandising services
business throughout the world.
Merchandising Services Division
The Company's Merchandising Services Division provides nationwide merchandising
and other marketing services primarily on behalf of consumer product
manufacturers and retailers at mass merchandisers, drug store chains and retail
grocery stores. Included in its customers are home entertainment, PC software,
general merchandise, health and beauty care, consumer goods and food products
companies in the United States.
Merchandising services primarily consist of regularly scheduled dedicated routed
services and special projects provided at the store level for a specific
retailer or single or multiple manufacturers primarily under single or
multi-year contracts or agreements. Services also include stand-alone
large-scale implementations. These services may include sales enhancing
activities such as ensuring that client products authorized for distribution are
in stock and on the shelf, adding new products that are approved for
distribution but not presently on the shelf, setting category shelves in
accordance with approved store schematics, ensuring that shelf tags are in
place, checking for the overall salability of client products and setting new
and promotional items and placing and/or removing point of purchase and other
related media advertising. Specific in-store services can be initiated by
retailers or manufacturers, and include new store openings, new product
launches, special seasonal or promotional merchandising, focused product support
and product recalls. In 2003, the Company added in-store product demonstration
and in-store product sampling services to its merchandising service offerings.
The Company also provides database marketing, teleservices and marketing
research services.
F-6
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
1. Business and Organization (continued)
International Division
In July 2000, the Company established its International Division to focus on
expanding its merchandising services business worldwide. In May 2001, the
Company entered into a joint venture with a large Japanese distributor to
provide merchandising services in Japan. In June 2003, the Company expanded its
merchandising services into Canada through the purchase of the business and
certain assets of Impulse Marketing Services Inc. In July 2003, the Company
entered into a joint agreement with a company based in Istanbul to provide
retail-merchandising services throughout Turkey. The start-up joint venture will
operate under the name SPAR Turkey Ltd. and is 51% owned by the Company.
Discontinued Operations - Incentive Marketing Division
In the fourth quarter of 2001, the Company made the decision to divest its
interest in SPGI.
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly-owned
subsidiary of the Company, entered into a Stock Purchase 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. In December of 2003,
SPGI changed its name to STIMULYS, Inc.
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. At December 31, 2003, PHI and SPGI were in default of various
covenants under the agreements.
F-7
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
1. Business and Organization (continued)
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 guarantied by PHI. The
Revolver provides for advances in excess of the borrowing base through September
30, 2005. Through September 30, 2003, the Revolver calculated 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. In September 2003,
SPGI requested and the Company agreed to provide advances of up to $1.0 million
in excess of the borrowing base through September 30, 2004. As of October 1,
2003, the Revolver includes a borrowing base calculation (principally 85% of
eligible accounts receivable).
Due to the speculative nature of the loan, and as a result of various defaults,
the Company has included in other current liabilities an $0.8 million reserve
against the $2.0 million Revolver commitment.
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 recorded in 2001 for the cost to dispose of
SPGI and the anticipated losses through the date of divestiture, June 30, 2002.
The Company continues to assess whether SPGI is a variable interest entity under
FASB Interpretation No. 46 "Consolidation of Variable Interest Entities", and,
if so, whether or not the Company may be required to consolidate SPGI in its
financial statements.
Operating losses of $682,000 incurred from January 1, 2002, through June 30,
2002, the date of divestiture, were charged against such $1.0 million reserve.
In addition, $318,000 of costs to dispose of SPGI were also charged against such
reserve. The 2001 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
-------- --------
Net sales $ 15,735 $ 31,202
Less:
Cost of sales 13,092 26,032
Selling, general and administrative expenses 2,814 5,736
Interest expense 383 804
Depreciation 128 306
Amortization - 859
-------- --------
Operating loss (682) (2,535)
Provision for income tax benefit (259) (938)
-------- --------
Net loss $ (423) $ (1,597)
======== ========
F-8
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
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 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. Cash
equivalents are stated at a cost, which approximates fair value.
Revenue Recognition
The Company's services are provided under contracts or agreements, 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 or agreements provide for fees to be earned based on the retail
sales of client's products to consumers. The Company recognizes per unit fees in
the period such amounts become determinable.
Unbilled Accounts Receivable
Unbilled accounts receivable represent services performed but not billed.
Allowance for Doubtful Accounts and Sales Allowance
The Company continually monitors the collectability of its accounts receivable
based upon current customer credit information and other information available.
Utilizing this information, the Company has established an allowance for
doubtful accounts of $515,000 and $301,000 at December 31, 2003 and 2002,
respectively. The Company also recorded a sales allowance of $448,000 to
properly reflect potential customer credits as of December 31, 2003.
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 $1,004,000, $772,000 and $430,000 of costs related to
software developed for internal use in 2003, 2002 and 2001, respectively.
F-9
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
2. Summary of Significant Accounting Policies (continued)
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.
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, a division of a major retailer, accounted for 30%, 26% and 25% of
the Company's net revenues for the years ended December 31, 2003, 2002 and 2001,
respectively. This customer also accounted for approximately 30%, 43% and 24% of
accounts receivable at December 31, 2003, 2002 and 2001, respectively. In late
2003, the customer's parent company announced that it was exploring strategic
opportunities including the sale of this division. In the event of a sale, there
can be no assurances that any purchaser will continue to use the services of the
Company. The loss of this business could have a material adverse effect on the
Company's business, results of operations and financial condition.
A second customer accounted for 10%, 11% and 9% of the Company's net revenues
for the years ended December 31, 2003, 2002 and 2001, respectively. This second
customer also accounted for approximately 9%, 5% and 4% of accounts receivable
at December 31, 2003, 2002 and 2001, respectively. As of March 2004, the Company
will no longer be providing services for this customer. Failure to attract new
large customers could significantly impede the growth of the Company's revenues,
which could have a material adverse effect on the Company's future business,
results of operations and financial condition.
F-10
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
2. Summary of Significant Accounting Policies (continued)
In addition, approximately 17%, 24% and 31% of net revenues for the years ended
December 31, 2003, 2002 and 2001, respectively, resulted from merchandising
services performed for manufacturers and others at Kmart. Kmart filed for
protection under the U.S. Bankruptcy Code in January of 2002 and emerged from
bankruptcy in May of 2003. During its time in bankruptcy, Kmart closed a number
of stores in the United States. While the Company's customers and the resultant
contractual relationships are with various manufacturers and not Kmart, a
significant reduction of this retailer's stores or cessation of this retailer's
business would negatively impact the Company. As of August 31, 2003, one
customer discontinued its merchandising programs with the Company. Some but not
all of these programs were performed at Kmart stores. This customer accounted
for 10%, 17% and 12% of the business generated from Kmart for the twelve-months
ended December 31, 2003, 2002 and 2001, respectively.
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 also are
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 basis
and tax basis of the Company's assets and liabilities result in net deferred tax
assets, an evaluation is required of the probability of being able to realize
the future benefits indicated by such asset. A valuation allowance is provided
when it is more likely than not that some portion or the entire deferred tax
asset will not be realized.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation, requires disclosure of the fair value method of accounting
for stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. The Company has chosen, under the provisions of SFAS No. 123, to
continue to account for employee stock-based transactions under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Under the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS 148, no compensation cost has been recognized
for the stock option grants to Company employees. Compensation cost for the
Company's option grants to Company employees has been determined based on the
fair value at the grant date consistent with the provisions of SFAS No. 123, the
Company's net (loss) income and pro forma net (loss) income per share from
continuing operations would have been reduced to the adjusted amounts indicated
below (in thousands, except per share data):
F-11
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
2. Summary of Significant Accounting Policies (continued)
Twelve Months Ended December 31,
----------------------------
2003 2002 2001
----- ----- ------
Net (loss) income, as reported $ (539) $ 5,298 $(1,714)
Stock based employee compensation (benefit) expense
Under the fair market value method 1,005 1,844 (1,129)
----- ----- ------
Pro forma net (loss) income $(1,544) $ 3,454 $ (585)
Basic and diluted net (loss) income per share, as $ (0.03) $ 0.28 $ (0.09)
reported
Basic and diluted net (loss) income per share, pro forma $ (0.08) $ 0.18 $ (0.03)
The pro forma effect on net (loss) 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 154%, 172% and 187% for 2003, 2002 and 2001,
respectively; risk-free interest rate of 4.27%, 4.03% and 5.14%; and expected
lives of six years.
Net (Loss) Income Per Share
Basic net (loss) income per share amounts are based upon the weighted average
number of common shares outstanding. Diluted net (loss) income per share amounts
are based upon the weighted average number of common and potential common shares
outstanding except for periods in which such potential common shares are
anti-dilutive. Potential common shares outstanding include stock options, 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, 2003
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 2003, 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):
2003 2002 2001
------------------- ------------------- --------------------
Reported net (loss) income $ (539) $ 5,298 $ (1,714)
Add: Goodwill amortization - - 771
------------------- ------------------- --------------------
Adjusted net (loss) income $ (539) $ 5,298 $ (943)
=================== =================== ====================
Basic and diluted net (loss) income per share:
Reported net (loss) income $ (0.03) $ 0.28 $ (0.09)
Add: Goodwill amortization - - 0.04
------------------- ------------------- --------------------
Adjusted net (loss) income $ (0.03) $ 0.28 $ (0.05)
=================== =================== ====================
Prior to 2002, the Company amortized all goodwill over 15 years.
Changes to goodwill for the years ended December 31, 2003 and 2002 were as
follows:
2003 2002
----------------- ------------------
Beginning of the year $ 7,858 $ 8,357
Changes in deferred tax assets related
to use of PIA net operating losses
acquired - (499)
Adjustment to merger related and
restructure liabilities (89) -
Acquisitions 980 -
----------------- ------------------
End of the year $ 8,749 $ 7,858
================= ==================
In 2003, the Company completed two acquisitions totaling approximately $1.1
million. The purchase prices were allocated to the fair value of the assets
acquired with approximately $0.1 million in equipment and the remainder of $1.0
million allocated to tax deductible goodwill.
In 2003, the Company also paid approximately $0.4 million as a deposit related
to a third acquisition that closed in 2004. The total purchase price will
approximate $0.9 million.
F-13
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
2. Summary of Significant Accounting Policies (continued)
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the 2003 presentation.
3. Supplemental Balance Sheet Information
Accounts receivable, net, consists of the following (in thousands):
December 31,
2003 2002
------------------------------------
Trade $ 10,333 $ 11,016
Unbilled 4,551 5,743
Non-trade 21 -
------------------------------------
14,905 16,759
Less:
- Allowance for doubtful accounts (515) (301)
- Sales allowance (448) -
------------------------------------
$ 13,942 $ 16,458
====================================
Property and equipment consists of the following (in thousands):
December 31,
2003 2002
------------------------------------
Equipment $ 4,784 $ 4,175
Furniture and fixtures 550 509
Leasehold improvements 141 138
Capitalized software development costs 2,128 2,216
------------------------------------
7,603 7,038
Less accumulated depreciation and amortization 5,504 5,066
------------------------------------
$ 2,099 $ 1,972
====================================
F-14
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
3. Supplemental Balance Sheet Information (continued)
Accrued expenses and other current liabilities consists of the following (in
thousands):
December 31,
2003 2002
------------------------------------
Accrued salaries and other related costs $ 343 $ 623
Accrued merger related costs 1,495 1,945
Due to SPGI (STIMULYS) (cash deposits) 794 917
Other 1,735 1,655
------------------------------------
$ 4,367 $ 5,140
====================================
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 (as amended, collectively, the "Credit Facility") including
amendments made by the Consent, Joinder, Release and Amendment Agreement dated
as of October 31, 2003. The Credit Facility provides a $15.0 million revolving
credit facility that matures on January 23, 2006. The Credit Facility allows the
Company to borrow up to $15.0 million based upon a borrowing base formula as
defined in the agreement (principally 85% of "eligible" accounts receivable).
The Credit Facility bears interest at Whitehall's "Alternative Base Rate" (a
total of 4.0% per annum at December 31, 2003) or LIBOR plus two and one-half
percent and is secured by all the assets of the Company and its subsidiaries.
The Credit Facility contains certain financial covenants which must be met by
the Company 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 agreement. The Company was in
compliance with such financial covenants at December 31, 2003, except for the
"Fixed Charge Coverage Ratio", and minimum EBITDA, for which the Company has
secured a waiver from Whitehall.
Because of the requirement to maintain a lock box arrangement with Whitehall and
Whitehall's ability to invoke a subjective acceleration clause at its
discretion, borrowings are classified as current at December 31, 2003, in
accordance with EITF 95-22.
The balances outstanding on the revolving line of credit under the Credit
Facility were $4.1 million and $148,000 at December 31, 2003 and December 31,
2002, respectively. As of December 31, 2003, based upon the borrowing base
formula, the SPAR Group had availability under the Credit Facility of $4.6
million of the $10.9 million unused revolving line of credit.
A prior credit facility contained 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 expired on July 31, 2003.
F-15
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
5. Income Taxes
The provision for income tax expense from continuing operations is summarized as
follows (in thousands):
December 31,
2003 2002 2001
----------------- ------------------ -------------------
Current $ 189 $ 476 $ 109
Deferred (131) 2,522 3,014
----------------- ------------------ -------------------
$ 58 $ 2,998 $ 3,123
================= ================== ===================
The provision for income taxes from continuing operations is different from that
which would be obtained by applying the statutory federal income tax rate to
income before income taxes. The items causing this difference are as follows (in
thousands):
December 31,
2003 2002 2001
--------------- ---------------- ----------------
Provision for income taxes at federal
statutory rate $ (77) $ 2,821 $ 2,475
State income taxes, net of federal benefit 95 175 317
Permanent differences 41 (48) 317
Other (1) 50 14
--------------- ---------------- ----------------
Provision for income taxes $ 58 $ 2,998 $ 3,123
=============== ================ ================
F-16
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
5. Income Taxes (continued)
Deferred taxes consist of the following (in thousands):
December 31,
2003 2002
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 3,876 $ 3,876
Restructuring 309 454
Accrued compensation and related benefits - 160
SIM reserve against loan commitment 304 320
Allowance for doubtful accounts and other receivable 323 114
Other 559 206
Valuation allowance (3,126) (3,126)
------------------------------------
Total deferred tax assets 2,245 2,004
Deferred tax liabilities:
Capitalized software development costs 506 396
------------------------------------
Total deferred tax liabilities 506 396
------------------------------------
Net deferred tax assets $ 1,739 $ 1,608
====================================
At December 31, 2003, the Company has net operating loss carryforwards (NOL's)
of $10.2 million, primarily related to the PIA reverse merger, 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 NOL's incurred prior to a
change in ownership. Such a change in ownership had occurred in 1999, thereby
restricting the NOL's prior to such date available to the Company to
approximately $657,500 per year.
The Company has established a valuation allowance for the deferred tax assets
related to the available NOL's that are deductible for years subsequent to 2005
totaling $3,126,000. The $3,126,000 valuation allowance at December 31, 2003,
when realized will result in a reduction of goodwill associated with the PIA
acquisition. Due to the loss in 2003, the Company did not reduce the valuation
allowance or goodwill associated with PIA NOL's. In 2002, the Company reduced
the valuation allowance and goodwill by $499,000.
F-17
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
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 require the Company to
pay its share of any increases in operating expenses and real estate taxes. Rent
expense was approximately $0.9 million, $1.0 million, and $1.0 million for the
years ended December 31, 2003, 2002 and 2001, respectively. At December 31,
2003, future minimum commitments under all non-cancelable operating lease
arrangements are as follows (in thousands):
2004 $ 947
2005 651
2006 512
2007 91
2008 20
Joint Venture Guarantee
In May 2001, the Company and Paltac, Inc. ("Paltac"), a large Japanese
distributor, entered into a joint venture to create a Japanese company, SPAR FM.
SPAR FM entered into a Yen 300 million Revolving Credit Agreement with a
Japanese bank. The bank required Paltac guarantee the outstanding balance on the
revolving credit facility. As part of the joint venture agreement, should Paltac
be required to make a payment on its guarantee to the bank, then the Company has
agreed to remit to Paltac 50% of any such payment up to a maximum of Yen 150
million or approximately $1.4 million. As of December 31, 2003, SPAR FM has
borrowed Yen 100 million under its Revolving Credit Agreement. Therefore, the
Company's current exposure to Paltac respecting outstanding loans to SPAR FM at
December 31, 2003 would be Yen 50 million or approximately $470,000. The Company
has recorded approximately Yen 0.3 million in long-term liabilities for its
share of the cumulative losses associated with this joint venture.
Legal Matters
On October 24, 2001, Safeway Inc., a former customer of the PIA Merchandising
Co., Inc. and Pivotal Sales Company, 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.
F-18
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
7. Employee Benefits
Retirement/Pension Plans
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible
employees. Employer contributions were approximately $87,000, $117,000 and
$118,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Certain of the Company's employees are covered by union-sponsored, collectively
bargained, multi-employer pension plans. Pension expense related to these plans
was approximately $32,000, $60,000 and $77,000 for the years ended December 31,
2003, 2002 and 2001, 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 recommended that its affiliates approve a 15% cash bonus for affiliate
consultant purchases. The maximum amount that any employee or consultant can
contribute to the SP Plans per quarter is $6,250, and the total number of shares
reserved by the Company for purchase under the SP Plans is 500,000. During 2003,
the Company transferred from Treasury Stock, for purchase under the plans, 9,848
shares at a weighted average price of $3.04 and purchased 12,713 shares at a
weighted average price of $3.57. During 2002 and 2001, the Company issued 10,104
shares, and 2,638 shares of common stock, at a weighted average price of $2.51
and $1.90 per share, respectively.
8. Related-Party Transactions
The Company. is affiliated through common ownership with SPAR Marketing
Services, Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI") and SPAR
Infotech, Inc. ("SIT"). The Company's CEO and Vice Chairman are sole owners of
these affiliates. SMS and SMSI (through SMS) provided approximately 92% 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
6,000 field representatives and SMSI provides approximately 80 full-time
national, regional and district managers to the Company 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 the Company and SIT effective as of
October 1, 1998, SIT continues to provide programming services to the Company,
for which the Company has agreed to pay SIT competitive hourly wage rates and to
reimburse SIT's out-of-pocket expenses.
F-19
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
8. Related-Party Transactions (continued)
The following transactions occurred between the Company and the above affiliates
(in thousands):
Twelve Months Ended December 31,
2003 2002 2001
-------------------------------------------------
Services provided by affiliates:
Independent contractor services (SMS) $28,411 $ 23,262 $ 8,337
=================================================
Field management services (SMSI) $ 7,600 $ 7,280 $ 6,779
=================================================
Internet and software program
consulting services (SIT) $ 1,607 $ 1,626 $ 1,185
=================================================
Services provided to affiliates:
Field management services (SMSI) $ 805 $ 732 $ 390
=================================================
Balance due to affiliates included in
accrued expenses (in thousands): December 31,
2003 2002 2001
-------------------------------------------------
SPAR Marketing Services, Inc. $ 996 $ 932 $ 611
SPAR Infotech, Inc. - 26 -
-------------------------------------------------
$ 996 $ 958 $ 611
=================================================
In addition to the above, through the services of Affinity Insurance, Ltd., the
Company purchased insurance coverage for its casualty and property insurance
risk for approximately $1.1 million for each of the three years ended December
31, 2003, 2002 and 2001. The Company's CEO and Vice Chairman own, through SMSI,
a minority (less than 5%) equity interest in Affinity.
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, 2003, options to purchase 43,250 shares
of the Company's common stock remain outstanding under this Plan. The 1995 Plan
was superseded by the 2000 Stock Option Plan with respect to all new options
issued.
F-20
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
9. Stock Options (continued)
The Director's Plan was a stock option plan for non-employee directors and
provided for the purchase of up to 120,000 shares of the Company's common stock.
Since 2000, the Company has not granted any new options under this Plan. During
2003, no options to purchase shares of the Company's common stock were exercised
under this Plan. At December 31, 2003, 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 2003, no options to purchase shares of the Company's common
stock were exercised under this Plan. At December 31, 2003, options to purchase
25,750 shares of the Company's common stock remain outstanding under this Plan.
On December 4, 2000, the Company adopted the 2000 Plan, as the successor to the
1995 Plan and the Director's Plan with respect to all new options issued. The
2000 Plan provides for the granting of either incentive or nonqualified stock
options to specified employees, consultants, and directors of the Company for
the purchase of up to 3,600,000 (less those options still outstanding under the
1995 Plan or exercised after December 4, 2000 under the 1995 Plan). The options
have a term of ten years, except in the case of incentive stock options granted
to greater than 10% stockholders for whom the term is five years. The exercise
price of nonqualified stock options must be equal to at least 85% of the fair
market value of the Company's common stock at the date of grant (although
typically 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 2003,
options to purchase 401,020 shares of the Company's common stock were granted,
options to purchase 143,641 shares of the Company's common stock were exercised
and options to purchase 86,500 shares of the Company's stock were cancelled
under this Plan. At December 31, 2003, options to purchase 2,180,060 shares of
the Company's common stock remain outstanding under this Plan and options to
purchase 743,344 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, 2003
9. Stock Options (continued)
The following table summarizes stock option activity under the Company's plans:
Weighted Average
Exercise Price
Shares
----------------------------------------
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
Granted 401,020 $ 3.51
Exercised (143,641) 1.17
Canceled or expired (86,500) 2.38
---------------------
Options outstanding, December 31, 2003 2,269,060 $ 1.85
Option price range at end of year $0.01 to $14.00
2003 2002 2001
--------------------------------------------------
Grant Date weighted average fair value of
options granted during the year $ 2.33 $ 1.60 $ 1.28
F-22
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
9. Stock Options (continued)
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Weighted
Number Average Weighted Number
Outstanding at Remaining Average Exercisable at Weighted
Range of December 31, Contractual Exercise December 31, Average
Exercise Prices 2003 Life Price 2003 Exercise Price
-------------------- -------------------------------------------------- --------------------------------
Less than $1.00 184,972 7.2 years $0.45 147,222 $0.38
$1.01 - $2.00 1,513,088 6.5 years 1.35 1,270,614 1.32
$2.01 - $4.00 473,750 8.9 years 3.02 62,194 2.61
Greater than $4.00 97,250 7.8 years 6.69 27,000 11.67
------------------ -----------------
Total 2,269,060 1,507,030
================== =================
Outstanding warrants are summarized below: Shares Subject Exercise Price
to Warrants Per Share
------------------------------------
Balance, December 31, 2003 96,395 $2.78 - $8.51
The above warrants expire at various dates during 2004.
In 2003, the Company recorded an expense of $415,000 under the provision of SFAS
No. 123 dealing with stock option grants to non-employees for stock option
grants that were awarded to the employees of the Company's affiliates. The
Company determines the fair value of the options granted to non-employees using
the Black-Scholes valuation model and expenses that value over the service
period. Until an option is vested, the fair value of the option continues to be
updated through the vesting date. The options granted have a ten (10) year life
and vest over four-year periods at a rate of 25% per year, beginning on the
first anniversary of the date of grant.
10. Notes Payable to Certain Stockholders
In April 2003, all previously outstanding amounts due certain stockholders under
certain notes bearing interest at 8.0% were paid in full.
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.
F-23
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
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.
The following table displays a roll forward of the liabilities for restructuring
charges from December 31, 2000 to December 31, 2003 (in thousands):
Equipment Office
Employee Lease Lease
Separation Settlements Settlements Total
--------------- ---------------- ---------------- --------------
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
Adjustments in restructuring charges - 98 (185) (87)
2003 payments (817) (817)
--------------- ---------------- ---------------- --------------
December 31, 2003, balance $ - $ 450 $ 235 $ 685
All remaining restructuring charges at December 31, 2003 are expected to be
utilized in 2004. Management believes that the remaining reserves for
restructuring are adequate to complete its plan.
F-24
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
13. Net (Loss) Income Per Share
The following table sets forth the computations of basic and diluted net (loss)
income per share (in thousands, except per share data):
Twelve Months Ended December 31,
2003 2002 2001
--------------------------------------------------
Numerators:
Net (loss) income from continuing operations $ (539) $ 5,298 $ 4,155
Loss from operations of discontinued division - - (5,869)
--------------------------------------------------
Net (loss) income $ (539) $ 5,298 $ (1,714)
==================================================
Denominator:
Shares used in basic net (loss) income per share
calculation 18,855 18,761 18,389
Effect of diluted securities:
Employee stock options - 387 78
--------------------------------------------------
Shares used in diluted net (loss) income per
share calculations 18,855 19,148 18,467
==================================================
Basic and diluted net (loss) income per common share:
(Loss) income from continuing operations $ (0.03) $ 0.28 $ 0.23
Loss from operations of discontinued division - - (0.32)
--------------------------------------------------
Net (loss) income $ (0.03) $ 0.28 $ (0.09)
==================================================
The computation of dilutive loss per share excluded anti-dilutive stock options
to purchase 657,000 shares as of December 31, 2003.
F-25
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2003
14. Quarterly Financial Data (Unaudited)
Quarterly data for 2003 and 2002 was as follows (in thousands, except earnings
per share data):
Quarter
First Second Third Fourth
-------- -------- -------- --------
Year Ended December 31, 2003:
Net revenues $ 18,738 $ 17,351 $ 16,615 $ 12,155
Gross profit 7,487 6,205 5,235 3,594
-------- -------- -------- --------
Net income (loss) $ 1,278 $ 608 $ (345) $ (2,080)
======== ======== ======== ========
Basic/diluted net income (loss) per
common share $ 0.07 $ 0.03 $ (0.02) $ (0.11)
======== ======== ======== ========
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
======== ======== ======== ========
In the fourth quarter 2003, the Company experienced certain charges to revenue
and cost of sales that are not expected to recur in the future. These charges
accounted for approximately 50% of the loss in 2003 fourth quarter.
However, the Company did experience lower revenues from per unit fee contracts
in the fourth quarter caused by decreased retail sales of some of the Company's
larger clients products and the loss of a particular client earlier in the year.
F-26
SPAR Group, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(In thousands)
Balance at
Beginning of Charged to Costs Balance at End
Period and Expenses Deductions (1) of Period
------------------------------------------------------------------------
Year ended December 31, 2003: Deducted from asset accounts:
Allowance for doubtful
accounts $ 301 $ 377 $ 163 $ 515
Sales allowances $ - $ 448 $ - $ 448
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
(1) Uncollectible accounts written off, net of recoveries.
F-27
EXHIBIT 10.14
CONSENT, JOINDER, RELEASE AND AMENDMENT AGREEMENT
THIS CONSENT, JOINDER, RELEASE AND AMENDMENT AGREEMENT (this
"Agreement") is entered into as of October 31, 2003, by and among SPAR MARKETING
FORCE, INC. ("SMF"), SPAR, INC. ("SPAR"), SPAR/BURGOYNE RETAIL SERVICES, INC
("SBRS"), SPAR GROUP, INC. ("SGI"), SPAR INCENTIVE MARKETING, INC. ("SIM"), SPAR
TRADEMARKS, INC. ("STM"), SPAR MARKETING, INC. (DE) ("SMIDE"), SPAR MARKETING,
INC. (NV) ("SMINV"), SPAR ACQUISITION, INC. ("SAI"), SPAR GROUP INTERNATIONAL,
INC. ("International"), SPAR TECHNOLOGY GROUP, INC. ("STG"), SPAR/PIA RETAIL
SERVICES, INC. ("Pia Retail"), RETAIL RESOURCES, INC. ("Retail"), PIVOTAL FIELD
SERVICES, INC. ("Pivotal Field"), PIA MERCHANDISING CO., INC. ("PIA"), PACIFIC
INDOOR DISPLAY CO. ("Pacific"), PIVOTAL SALES COMPANY ("Pivotal") (each an
"Existing Borrower" and collectively, "Existing Borrowers"), SPAR ALL STORE
MARKETING SERVICES, INC., ("SAS") and WHITEHALL BUSINESS CREDIT CORPORATION
("Lender").
BACKGROUND
The Existing Borrowers and Lender are parties to that certain Third
Amended and Restated Revolving Credit and Security Agreement dated January 24,
2003 (as amended, restated, supplemented or otherwise modified from time to
time, the "Loan Agreement") pursuant to which Lender provides the Existing
Borrowers with certain financial accommodations.
SGI, the direct or indirect parent of all of the other Existing
Borrowers, has formed SAS, a Nevada corporation that is a wholly-owned
Subsidiary of SGI, and Spar Canada, Inc., a Nevada corporation ("SCI"), that is
a wholly-owned Unrestricted Subsidiary (as defined herein) of SGI. SCI has
formed SPAR Canada Company, a Nova Scotia unlimited liability company ("SCC") as
a wholly-owned Unrestricted Subsidiary of SCI.
The Existing Borrowers and SAS (together, but excluding International,
each a "Borrower" and collectively the "Borrowers") each desire to add SAS as a
Borrower and release International as a Borrower under (and as defined in) the
Loan Agreement, and the Lender has agreed to do so. In addition, the consent of
Lender under the Loan Agreement was required in connection with the formation of
SAS, SCI and SCC, which consent is hereby given. To avoid the necessity of
obtaining the consent of Lender for certain transactions in the future, Lender
and Borrowers seek to amend the Loan Agreement to permit certain new
acquisitions and investments.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrowers by
Lender, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise defined or amended herein
shall have the meanings given to them in the Loan Agreement.
2. Joinder and Release.
(a) SAS hereby consents to being added and obligated as an additional
Borrower under the Loan Agreement and the Ancillary Agreements, and the
Borrowers and the Lender hereby agree that all references to "Borrower" or
"Borrowers" thereunder and under the Ancillary Agreements shall be deemed to
include SAS, and the definition of "Borrower" and "Borrowers" in the Loan
Agreement is hereby amended to include SAS.
(b) Effective as of the Amendment No. 1 Effective Date, SAS hereby
adopts the Loan Agreement and assumes in full, and acknowledges that it is
jointly and severally liable for, the payment, discharge, satisfaction, and
performance of all Obligations under the Loan Agreement and under the Ancillary
Agreements. SAS hereby grants to Lender a continuing lien and security interest
in all presently existing and hereafter arising Collateral that it now or
hereafter owns or has an interest in, wherever located, to secure the prompt
repayment of any and all Obligations owed to Lender and to secure the prompt
performance by Borrowers of each and all of their covenants and obligations
under the Loan Agreement and under the Ancillary Agreements. Lender's Lien and
security interest in the Collateral shall attach to all Collateral without
further act on the part of Lender or SAS.
(c) Lender hereby releases International as a Borrower under the Loan
Agreement and the Ancillary Agreements, and Borrowers and Lender hereby agree
that all references to "Borrower" or "Borrowers" thereunder and under the
Ancillary Agreements shall be deemed to exclude International.
3. Amendment. Subject to the satisfaction of Section 5 below, the Loan Agreement
is hereby amended as follows:
(a) The definition of "Borrower" and "Borrowers" appearing in the
preamble of the Loan Agreement are hereby amended to delete International.
(b) Section 1(A) is amended as follows:
(i) The definition of "EBITDA" is amended by deleting clause
(iv) appearing therein and by inserting, in lieu thereof, the
following:
"(iv) capitalized expenses of any Borrower or
Guarantor which expenses were previously deducted from net
income in calculating Earnings Before Interest and Taxes".
2
(ii) The following defined terms are amended and restated in
its entirety to provide as follows:
"Fixed Charge Coverage Ratio" shall mean 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, capitalized expenditures for software) to (b)
Fixed Charges.
"Fixed Charges" shall mean the sum (without duplication) with
respect to any fiscal period of (i) all interest payments made
on the Loans hereunder during such period, 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, plus,
(vi) capitalized expenses incurred in connection with
investments made by any Borrower in any Unrestricted
Subsidiary during such period, plus, (vii) the remainder for
such period (excluding all capital contributions and loans
made prior to September 1, 2003) of (A) all capital
contributions and/or loans made by any Borrower to any
Unrestricted Subsidiary during such period, minus, (B) all
returns of capital, distributions and/or repayment of loans
made to such Borrower from or on behalf of such Unrestricted
Subsidiary during such period.
(iii) The following defined terms are added in their
appropriate alphabetical order to provide as follows:
"Aggregate Consideration" shall mean, for all Borrowers with
respect to each acquisition, an amount equal to the sum of (i)
the cash purchase price for the assets acquired pursuant to
such acquisition, plus, (ii) the aggregate amount of
liabilities assumed for such acquisition, plus, (iii) any
amounts payable to any Seller where aggregate payments are in
excess of $250,000 per year for all employees, plus, (iv)
Excess Contingent Payments, the payment of which is incurred
in connection with the closing of the proposed acquisition
(included in each of (i) through (iii) are payments which may
be deferred so long as the amount of such payment is known at
the time of the closing of the proposed acquisition).
3
"Amendment No. 1" shall mean the Consent, Joinder and
Amendment to the Loan Agreement, dated as of October 31, 2003,
among the Borrowers (including SAS) and Lender.
"Amendment No. 1 Effective Date" shall mean the date which all
of the conditions precedent set forth in Section 5 of
Amendment No. 1 have been satisfied.
"Contingent Payments" shall mean payments made to any Seller,
in connection with the acquisition by any Borrower of all or a
portion of the stock or all or substantially all of the assets
of such Seller, which payments shall be contingent on the
financial performance of the entity being acquired.
"Contract Criteria" shall mean the criteria utilized by any
Borrower in determining Contingent Payments, which criteria
shall be linked to earnings.
"Excess Contingent Payments" shall mean the remainder (which
at no time shall be less than zero) of (a) Contingent
Payments, minus (b) the remainder (which at no time shall be
less than zero) of with respect to the acquired business (i)
the product of (x) the projected Contract Criteria and (y) the
number of years Contingent Payments will be made, minus (ii)
the product of (x) the actual corresponding Contract Criteria
for the four (4) quarter period ending no more than three (3)
months prior to such acquisition and (y) the number of years
Contingent Payments will be made. Schedule 1 attached hereto
and made a part hereof sets forth examples of the above
calculation. In the event a criteria, other than the Contract
Criteria, is used by any Borrower in determining Contingent
Payments, Borrower shall equate such criteria to a Contract
Criteria and provide Lender with an estimate and analysis
substantially similar to those set forth on Schedule 1. Upon
receipt of such estimate and analysis, Lender shall determine
the allowable Excess Contingent Payments.
"Permitted Acquisitions" shall mean the acquisition of all or
a portion of the assets of a Person, formed or incorporated
under the laws of any State or Commonwealth of the United
States of America, by one or more Borrowers (a) that occurs at
a time when (i) aggregate Undrawn Availability (inclusive of
the Supplemental Amount) is greater than $2,500,000 after
giving effect to the proposed acquisition and (ii) no Default
or Event of Default has occurred or would occur after giving
effect to the proposed acquisition; (b) with Aggregate
Consideration in an amount not to exceed $1,500,000 in the
aggregate from the Amendment No. 1
4
Effective Date through the last day of the Term, for all such
transactions for all Borrowers; (c) that has not specifically
been consented to by Lender and (d) pursuant to documentation
in form and substance reasonably satisfactory to Lender and
its counsel; provided, however, that in the event the
acquiring entity of any acquisition is not a Borrower, (x)
such acquiring entity would be required to be joined as a
Borrower under the Loan Agreement pursuant to a Joinder
Agreement substantially in the form of Exhibit 1 to Amendment
No. 1 or (y) provided that Lender did not approve such
acquiring entity to be joined as a Borrower under the Loan
Agreement, such acquiring entity would be required to become a
Guarantor pursuant to a Guaranty in form and substance
satisfactory to Lender and, as security for all of the
obligations under the Guaranty, to pledge all of its assets to
Lender pursuant to a Guarantor Security Agreement in form and
substance satisfactory to Lender."
"SAS" shall mean SPAR All Store Marketing Services, Inc., a
Nevada corporation.
"SCC" shall mean SPAR Canada Company, a Nova Scotia unlimited
liability company.
"SCI" shall mean SPAR Canada, Inc., a Nevada corporation.
"Seller" shall mean any entity engaged in the sale of all or a
portion of the stock or all or substantially all of the assets
of a business or any person having an equity, membership,
partnership or other capital interest in the Seller pursuant
to an acquisition, employment or consulting agreement.
"Spar FM Credit Facility" shall mean that certain credit
facility entered into between Spar, FM, a joint venture and
Mizuho and UFJ in the amount of $2,400,000 pursuant to which
Paltac, Inc. has guaranteed the entire amount of such credit
facility and SGI has indemnified Paltac, Inc. for fifty
percent (50%) of the outstanding principal balance at any one
time.
"Unrestricted Subsidiary" shall mean any Subsidiary of any
Borrower designated as such by the Board of Directors of such
Borrower. The Board of Directors may designate any Subsidiary
of such Borrower to be an Unrestricted Subsidiary if (i) such
Subsidiary is formed primarily for the purpose of investing in
or investing in an entity that is investing in entities, joint
ventures or other businesses established under the laws of a
foreign country, (ii) such Subsidiary is and remains a
wholly-owned Subsidiary of
5
such Borrower, (iii) no Default or Event of Default is
existing or will occur as a consequence of such investment,
(iv) such Subsidiary and each of its Subsidiaries has not at
the time of designation, and does not thereafter, create,
incur, issue, assume, guarantee, or otherwise become directly
or indirectly liable with respect to any indebtedness pursuant
to which the obligee has recourse to any Collateral of any
Borrower or any Guarantor, and (v) such Subsidiary has not
guaranteed or otherwise directly or indirectly provided credit
support for any indebtedness of any Borrower or any Guarantor
or any Subsidiary of any Borrower or any Guarantor. Each such
designation shall be evidenced by filing with Lender a
certified copy of the resolution giving effect to such
designation and a certificate of the Secretary or other
authorized officer certifying that such designation complied
with the foregoing conditions. International, SCI and SCC are
hereby designated Unrestricted Subsidiaries as of Amendment
No. 1 Effective Date and shall remain as such provided the
only assets of such entities consist of direct or indirect
ownership interests in other Unrestricted Subsidiaries or
entities, joint ventures or other businesses established under
the laws of a foreign country. Any Subsidiary or joint venture
of an Unrestricted Subsidiary shall be deemed an Unrestricted
Subsidiary for purposes of this Agreement. Any Subsidiary
deemed an Unrestricted Subsidiary shall neither be joined as a
Borrower under the Loan Agreement nor become a Guarantor.
(iv) The definition of "Permitted Lien" is hereby amended by
the addition of the following new clause at the end thereof (before the
period):
"; and (x) liens upon any asset or property of any
Unrestricted Subsidiary."
(c) Section 2(j) is amended and restated in its entirety to provide as
follows:
"(a) In no event shall the aggregate outstanding
balance of Revolving Advances plus Letters of Credit
utilized by, or for the benefit of, (a) STG exceed
$2,000,000 or (b) PIA Retail, Retail and Pivotal
exceed $500,000 individually."
(d) Section 12(n)(i) is amended and restated in its entirety to provide
as follows:
"(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
6
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, (C)
indebtedness of SCC guaranteed (on an unsecured
basis) by SGI in an amount not to exceed $500,000,
and (D) indebtedness incurred in connection with the
closing of any Permitted Acquisitions (except for
indebtedness assumed as permitted under and subject
to the limitations contained in the definition of
"Permitted Acquisitions"); provided, however, that
the aggregate 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.
(e) Section 12(n)(ii) is amended and restated in its entirety to
provide as follows:
"(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 issued by
it; provided, however, Borrowers shall be permitted
to make stock purchases in the aggregate of up to (x)
$900,000 during fiscal year ending December 31, 2003
(the "2003 Limit"); provided, that up to $300,000 of
any unutilized 2003 Limit may be carried over and
utilized in any succeeding fiscal years, and (y)
$500,000 during any fiscal year ending after January
1, 2004, provided, that the Borrowers shall have
average Undrawn Availability of not less than
$2,500,000 for the ten day period prior to each such
buyback and would have Undrawn Availability of not
less than $2,500,000 after giving affect to each such
buyback;"
(f) Section 12(n)(v) is amended by deleting the word "and" before
clause (E) and adding the following new clause at the end thereof (before the
semi-colon):
"and (F) any investment made by any Borrower in any
Unrestricted Subsidiary, in the form of a capitalized
expense, capital contribution or loan, for purposes
of investing in or investing in an entity which is
investing in entities or participating in joint
ventures formed under the laws of a foreign country,
provided that such investment shall not exceed
$500,000 in the aggregate for all Borrowers made in
all Unrestricted Subsidiaries during any fiscal year
(with such limitation for fiscal year 2003 to be
applicable only with respect to investments during
the period September 1, 2003 through December 31,
2003).
(g) Section 12(n)(vi) is amended by deleting the word "or" before
clause (D) and adding the following new clause at the end thereof (before the
semi-colon):
7
", or (E) in connection with the Spar FM Credit
Facility up to an amount not to exceed $1,200,000 in
the aggregate;
(h) Section 12(n)(vii) is amended and restated in its entirety to
provide as follows:
"(vii) enter into any merger, consolidation or other
reorganization with or into any other Person (other
than a Borrower) or, other than pursuant to a
Permitted Acquisition, acquire all or a portion of
the stock or all or substantially all of the assets
of any Person (other than a Borrower or an
Unrestricted Subsidiary) 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);"
(i) Section 12(n)(viii) is amended and restated in its entirety to
provide as follows:
"(viii) form any Subsidiary or enter into any
partnership, joint venture or similar arrangement
other than an Unrestricted Subsidiary or pursuant to
a Permitted Acquisition;"
(j) Section 12(n)(xi) is amended and restated in its entirety to
provide as follows:
"(xi) enter into any transaction with any Affiliate,
except in ordinary course on arms-length terms, and
except for investments, capital contributions and
loans permitted in Unrestricted Subsidiaries
hereunder and the repayment thereof;"
(k) Section 19(viii) is amended and restated in its entirety to provide
as follows:
"(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, (ii) liens
whose perfection lapses through the action or
inaction of Lender notwithstanding accurate
information timely provided to Lender by Borrowers,
(iii) liens upon any asset or property of any
Unrestricted Subsidiary, or (iv) liens upon
Collateral having a value secured in an amount not to
exceed $100,000 in the aggregate for all Borrowers;"
8
(l) Section 19(xi) is amended and restated in its entirety to provide
as follows:
"(xi) any Guarantor or any Subsidiary (other than an
Unrestricted Subsidiary, provided, however,
outstanding liabilities of such Unrestricted
Subsidiary shall not exceed $500,000) 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;
4. Consent. Subject to the satisfaction of Section 5 below Lender hereby
consents to (i) the formation and joinder of SAS, (ii) the acquisition by SAS
pursuant to, and on substantially the terms set forth in, the Asset Purchase and
Sale Agreement dated as of February 28, 2003 between All Store Marketing
Services, Inc. and SAS, (iii) the formation of SCI and (iv) the formation of and
acquisition by SCC pursuant to, and substantially on the terms set forth in, the
Asset Purchase and Sale Agreement dated (as of) June 14, 2003, between SCC and
Kaboom Entertainment Inc., and the Consulting Agreement dated (as of) June 14,
2003, between Devco Productions Inc. and SCC.
5. Conditions of Effectiveness. This Agreement shall become effective as of the
date hereof, provided that the following conditions shall have been satisfied
(unless any condition is waived by Lender): Lender shall have received (i) four
(4) copies of this Agreement executed by the Borrowers (including SAS), (ii) an
Officer's Certificate, together with attachments, substantially identical to
those provided in connection with the closing of the Loan Agreement as same
applies to SAS, (iii) an opinion of counsel from Jenkens & Gilchrist Parker
Chapin LLP covering the items which were opined upon in its January 24, 2003
opinion letter as such items apply to SAS, (iv) a Secretary's Certificate and
resolutions, all in form and substance satisfactory to Lender and its counsel
for SAS, (v) four (4) executed copies of an amendment to the Pledge Agreement of
SGI, pursuant to which all of the stock of SAS is pledged to Lender, such
amendment to be in form and substance satisfactory to Lender, (vi) stock
certificates and stock powers with respect to all of the stock of SAS, and (vii)
such other certificates, instruments, documents, agreements and opinions of
counsel as may be required by Lender or its counsel, each of which shall be in
form and substance satisfactory to Lender and its counsel.
9
6. Representations, Warranties and Covenants. Each of the Borrowers (including
SAS) hereby represents, warrants and covenants as follows:
(a) This Agreement and the Loan Agreement constitute legal, valid and
binding obligations of each of the Borrowers and are enforceable against each of
the Borrowers in accordance with their respective terms.
(b) Upon the effectiveness of this Agreement, each of the Borrowers
hereby reaffirms all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agrees that all such
covenants, representations and warranties shall be deemed to have been remade as
of the effective date of this Agreement.
(c) No Borrower has any defense, counterclaim or offset with respect to
the Loan Agreement or the Obligations.
7. Effect on the Loan Agreement.
(a) Except as specifically amended herein, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(b) The execution, delivery and effectiveness of this Agreement shall
not operate as a waiver of any right, power or remedy of Lender, nor constitute
a waiver of any provision of the Loan Agreement, or any other documents,
instruments or agreements executed and/or delivered under or in connection
therewith.
8. Governing Law. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns and shall be
governed by and construed in accordance with the laws of the State of New York
(other than those conflict of law rules that would defer to the substantive law
of another jurisdiction).
9. Headings. Section headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
10. Counterparts; Facsimile Signatures. This Agreement may be executed by the
parties hereto in one or more counterparts of the entire document or of the
signature pages hereto, each of which shall be deemed an original and all of
which taken together shall constitute one and the same agreement. Any signature
received by facsimile transmission shall be deemed an original signature hereto.
[Remainder of page intentionally left blank]
10
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year
first written above.
SPAR MARKETING FORCE, INC.
By:___________________________
Name:
Title:
SPAR, INC.
By:___________________________
Name:
Title:
SPAR MARKETING FORCE, INC.
By:___________________________
Name:
Title:
SPAR, INC.
By:___________________________
Name:
Title:
SPAR/BURGOYNE RETAIL SERVICES,
INC.
By:___________________________
Name:
Title:
SPAR INCENTIVE MARKETING, INC.
By:___________________________
Name:
Title:
11
SPAR TRADEMARKS, INC.
By:___________________________
Name:
Title:
SPAR MARKETING, INC. (DE)
By:___________________________
Name:
Title:
SPAR MARKETING, INC. (NV)
By:___________________________
Name:
Title:
SPAR ACQUISITION, INC.
By:___________________________
Name:
Title:
SPAR GROUP INTERNATIONAL, INC.
By:___________________________
Name:
Title:
SPAR TECHNOLOGY GROUP, INC.
By:___________________________
Name:
Title:
12
SPAR/PIA RETAIL SERVICES, INC.
By:___________________________
Name:
Title:
RETAIL RESOURCES, INC.
By:___________________________
Name:
Title:
PIVOTAL FIELD SERVICES, INC.
By:___________________________
Name:
Title:
PIA MERCHANDISING CO., INC.
By:___________________________
Name:
Title:
PACIFIC INDOOR DISPLAY CO.
By:___________________________
Name:
Title:
13
PIVOTAL SALES COMPANY
By:___________________________
Name:
Title:
SPAR GROUP, INC.
By:___________________________
Name:
Title:
SPAR ALL STORE MARKETING
SERVICES, INC.
By:___________________________
Name:
Title:
WHITEHALL BUSINESS CREDIT
CORPORATION
By:___________________________
Name:
Its:
14
Schedule I
Example 1:
If the contract criteria for a Contingent Payment of $150,000 per year for 5
years required that the acquired business must have EBIT of $500,000 for each
year, and the historical EBIT for the last twelve months of the acquired
business prior to acquisition was $600,000, the Excess Contingent Payments would
be $750,000, calculated as follows:
(a) Contingent Payments = $750,000 ($150,000 x 5)
minus
(b) The remainder (but not less than zero) of:
(i) the projected contract criteria results for the payment period
= $2,500,000 ($500,000 projected EBIT x 5),
minus
(ii) actual corresponding contract criteria = $3,000,000
( $600,000 EBIT x 5).
Equals $750,000 minus ($2,500,000 minus $3,000,000) = $750,000.
Example 2:
If the contract criteria for a Contingent Payment of $150,000 per year for 5
years required that the acquired business must have EBIT of $500,000 for each
year, and the historical EBIT for the last twelve months of the acquired
business prior to acquisition was $200,000, the Excess Contingent Payments would
be $0, calculated as follows:
(a) Contingent Payments = $750,000 ($150,000 x 5)
minus
(b) The remainder (but not less than zero) of:
(i) the projected contract criteria results for the payment period
= $2,500,000 ( $500,000 projected EBIT x 5),
minus
15
(ii) Actual corresponding contract criteria = $1,000,000
( $200,000 EBIT x 5).
Equals $750,000 minus ($2,500,000 minus $1,000,000) = $0.
Example 3:
If the contract criteria for a Contingent Payment of $150,000 per year for 5
years required that the acquired business must have EBIT of $500,000 for each
year, and the historical EBIT for the last twelve months of the acquired
business prior to acquisition was $400,000, the Excess Contingent Payments would
be $250,000, calculated as follows:
(a) Contingent Payments = $750,000 ($150,000 x 5)
minus
(b) The remainder (but not less than zero) of:
(i) the projected contract criteria results for the payment period
= $2,500,000 ( $500,000 projected EBIT x 5),
minus
(ii) Actual corresponding contract criteria = $2,000,000
( $400,000 EBIT x 5).
Equals $750,000 minus ($2,500,000 minus $2,000,000) =
$250,000.
Example 4:
[Excess Contingent Payment calculation when Contingent Payments are based upon
a percentage of sales]
16
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 Field Services............................................................Nevada
Pivotal Sales Company.........................................................California
Retail Resources, Inc.............................................................Nevada
SPAR Acquisition, Inc.............................................................Nevada
SPAR All Store Marketing Services, Inc............................................Nevada
SPAR Bert Fife, Inc...............................................................Nevada
SPAR/Burgoyne Retail Services, Inc. (f/k/a SPAR Retail Information, Inc.)...........Ohio
SPAR Canada Company..........................................................Nova Scotia
SPAR Canada, Inc..................................................................Nevada
SPAR Group International, Inc.....................................................Nevada
SPAR Inc. (f/k/a SPAR/Burgoyne Information Services, Inc.)........................Nevada
SPAR Incentive Marketing, Inc...................................................Delaware
SPAR International LTD....................................................Cayman Islands
SPAR Japan, Inc....................................................................Japan
SPAR Marketing, Inc...............................................................Nevada
SPAR Marketing, Inc. (f/k/a SPAR Acquisition, Inc.).............................Delaware
SPAR Marketing Force, Inc.........................................................Nevada
SPAR Megaforce, Inc...............................................................Nevada
SPAR/PIA Retail Services, Inc.....................................................Nevada
SPAR Technology Group, Inc. (f/k/a SPARinc.com, Inc.).............................Nevada
SPAR Trademarks, Inc..............................................................Nevada
SPAR Turkey, Inc..................................................................Turkey
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 13, 2004, with respect to the
consolidated financial statements of SPAR Group, Inc. included in the Annual
Report (Form 10-K), for the year ended December 31, 2003.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 29, 2004
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert G. Brown, certify that:
1. I have reviewed this annual report on Form 10-K of SPAR Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 30, 2004 /s/ Robert G. Brown
-------------------
Robert G. Brown
Chairman, President and
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Charles Cimitile, certify that:
1. I have reviewed this annual report on Form 10-K of SPAR Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 30, 2004 /s/ Charles Cimitile
--------------------
Charles Cimitile
Chief Financial Officer, Treasurer and Secretary
EXHIBIT 32.1
Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K for the year ended December
31, 2003 (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
March 30, 2004
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 32.2
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K for the year ended December
31, 2003 (the "Report"), by SPAR Group, Inc. (the "Registrant"), the undersigned
hereby certifies that, to his knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
/s/ Charles Cimitile
------------------------------------------------
Charles Cimitile
Chief Financial Officer, Treasurer and Secretary
March 30, 2004
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.
