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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT ON FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the year ended January 1,December 31, 1999
Commission file number 0-27824
PIA MERCHANDISING SERVICES,SPAR GROUP, INC.
Delaware 33-0684451
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
incorporation or organization)
19900 MACARTHUR BLVD, SUITE 900, IRVINE, CA 92612
580 WHITE PLAINS ROAD, SIXTH FLOOR, TARRYTOWN, NEW YORK 10591
Registrant's telephone number, including area code: (949) 476-2200(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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 19, 1999,30, 2000, based on the closing price
of the Common Stock as reported by the Nasdaq NationalSmallCap Market on such date, was
approximately $10,723,899.$56,797,963.
The number of shares of the Registrant's Common Stock outstanding as of
March 19, 199930, 2000 was 5,477,84618,175,348 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days of January 1,December 31, 1999 in connection with the Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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PIA MERCHANDISING SERVICES,SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PART I
PAGE
Item 1. Business 3
Item 2. Properties 1512
Item 3. Legal and Administrative Proceedings 1513
Item 4. Submission of Matters to a Vote of Security Holders 1513
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 1614
Item 6. Selected Consolidated Financial Data 1714
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 17
Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 2526
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 26
Disclosure 25
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 2627
Signatures 2830
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PART I
THIS ANNUAL REPORT ON FORM 10-K INCLUDES " FORWARD-LOOKING"FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT INCLUDING, IN PARTICULAR, THE STATEMENTS ABOUT PIA'STHE SPAR GROUP'S
PLANS AND STRATEGIES UNDER THE HEADINGS "BUSINESS" AND "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." ALTHOUGH PIATHE
SPAR GROUP BELIEVES THAT ITS PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN OR
SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT ASSURE
THAT SUCH PLANS, INTENTIONS OR EXPECTATIONS WILL BE ACHIEVED. IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS
MADE IN THIS ANNUAL REPORT ON FORM 10-K ARE SET FORTH UNDER THE HEADING "RISK
FACTORS" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. ALL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO PIATHE SPAR GROUP OR PERSONS ACTING ON
ITS BEHALF ARE EXPRESSLY QUALIFIED BY THE CAUTIONARY STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-K.
SEE THE GLOSSARY AT PAGE 13 FOR A DESCRIPTION OF CERTAIN TERMS THAT ARE
USED THROUGHOUT THIS ANNUAL
REPORT ON FORM 10-K.
ITEM 1. BUSINESS
GENERAL
The SPAR Group, Inc., a Delaware corporation formerly known as PIA
Merchandising Services, Inc. ("PIA"SPAR Group" or the "Company") is a supplier of
in-store merchandising and salesmarketing services, inand premium incentive marketing
services throughout the United States and Canada. The Company also provides
database marketing, teleservices, marketing research, and Internet-based
software. The Company's operations are divided into three divisions: the
Merchandising Services Division, the Incentive Marketing Division, and the
Internet Division. The Merchandising Services Division provides merchandising
services, database marketing, teleservices and marketing research to
manufacturers and retailers primarily in the mass merchandiser, video, chain,
discount drug store and grocery industries. The Incentive Marketing Division
designs and implements premium incentives, manages meetings, group travel and
training programs principally for corporate clients. In March 2000, the Company
announced the formation of an Internet Division for the purpose of marketing its
proprietary Internet-based computer software.
Merchandising Services Division
The Company's Merchandising Services Division consists of (1) SPAR
Marketing, Inc. ("SMI") (an intermediate holding company), SPAR Marketing Force,
Inc. ("SMF"), SPAR Marketing, Inc., a Nevada corporation ("SMNEV"),
SPAR/Burgoyne Retail Services, Inc. ("SBRS"), and SPAR, Inc. ("SINC")
(collectively, the "SPAR Marketing Companies"), and (2) PIA Merchandising Co.
Inc., Pacific Indoor Display d/b/a Retail Resources, Pivotal Sales Company and
PIA Merchandising Ltd. (collectively, "PIA" or the "PIA Companies"). The SPAR
Marketing Companies, the original predecessor of which was founded in 1967,
provide nationwide retail merchandising and marketing services to home video,
consumer goods and food products companies. The PIA Companies, through a
predecessor of the Company first organized in 1943, also are suppliers of
in-store merchandising and sales services throughout the United States and
Canada, and were "acquired" by the SPAR Companies for accounting purposes
pursuant to the Merger on July 8, 1999 (See Merger and Restructuring, below).
The PIA Companies provide these services primarily on behalf of consumer product
manufacturers consumer service companies and retailers at approximately 17,000mass merchandisers, drug and retail grocery stores, 6,000 mass merchandiser and 8,800 drug
stores. The Company currently operates in all 50 states and provides three principal typesa broad
range of services: sharedin-store merchandising and other marketing services where an associate represents multiple clients; dedicatedto many of the
nation's leading companies.
Merchandising services where associates work for one specific client; and project services, where
associates perform specified in-store activities.
Shared servicesgenerally consist of special projects or
regularly scheduled routed merchandising services provided at the stores for a specific
retailer or multiple manufacturers primarily under multi-yearmultiple year contracts.
SharedServices also include stand-alone large-scale implementations. These services
may include activities such as:as ensuring that client'sclient products authorized for
distribution are in stock and on the shelf, adding in new products that are
approved for distribution but not presentpresently 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 clients'client products and selling
new product and promotional items. In 1998, PIA developed a new strategy for routed merchandising services.
The stores are selected for routed merchandisingSpecific in-store services based on two sets of
criteria. The first is the store's weekly All Commodity Volume ("ACV"). The
higher the sales volume of a store, the greater the need for merchandising
services and more frequent visits to the store are required. The second
criterion is based on retailer discipline. This is a subjective determination
and therefore based on retail conditions, schematic discipline and competitive
activity. This new market strategy provides our clients with an added focused
approach to meeting their merchandising needs.
Dedicated services generally consist of merchandising services as
described above except that dedicated services are performed for a specific
retailer or manufacturer by a dedicated organization. The merchandisers and
management team work exclusively for that retailer or manufacturer. These
services are normally provided under multi-year contracts.
For both shared service clients and dedicated service clients, the Company
also performs project services. Project services consist primarily of specific
in-store servicescan be initiated by
retailers and manufacturers, such as new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. These
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services typically are used typically for large-scale implementations over 30 days. The
Company also performsprovides database marketing, teleservices and research services.
Incentive Marketing Division
The Company's Incentive Marketing Division was created in January, 1999
through the Company's purchase of the business and substantially all of the
assets of BIMA Group, Inc., a Texas corporation ("BIMA" or "MCI") originally
founded in 1987 and formerly known as MCI Performance Group, Inc. The purchase
was made by the Company's indirect subsidiary SPAR Performance Group, Inc.,
formerly known as SPAR MCI Performance Group, Inc. ("SPGI"). SPGI provides a
wide variety of consulting, creative, program administration, travel and
merchandise fulfillment, and training services to companies seeking to retain
and motivate employees, salespeople, dealers, distributors, retailers, and
consumers toward certain actions or objectives. SPGI's strategy enables
companies to outsource the entire design, implementation and fulfillment of
incentive programs in a one-stop, "umbrella" shopping approach. SPGI typically
consults with a client to design the most effective plan to achieve the client's
goals. SPGI then provides services necessary to implement the program, generates
detailed efficiency progress reports, and reports on the return on investment
upon completion of the program.
Internet Division
In March 2000, the Company established its Internet Division to
separately market its application software products and services. The Company
has developed and is utilizing several Internet-based software products. The
Internet Division was established to market these applications to businesses
with multiple locations and large workforces desiring to improve day-to-day
efficiency and overall productivity.
INDUSTRY OVERVIEW
Merchandising Services Division
According to estimates by ING Baring Furman Selz the merchandising
industry generates two billion dollars annually. The merchandising industry
includes manufacturers, retailers, food brokers, and professional service
merchandising companies. Furthermore, they estimate that professional
merchandising companies control approximately 50% of this market share and
believe that half of this business is growing at 15% to 20% per year. According
to a recent industry survey, more than 75% of the manufacturers are moving to
third parties to handle in-store merchandising. The Company believes that its
merchandising services bring added value to retailers, manufacturers and other
projectbusinesses. Retail merchandising services enhance sales by making a product more
visible and available to consumers. These services primarily include shelf
maintenance, display placement, reconfiguring products on store shelves,
replenishing products and placing orders, and other services, such as new store setstest
market research, mystery shopping, teleservices, database marketing and
existing store resets, re-merchandising, remodelspromotion planning and category implementations, under shared service contracts or stand-alone project
contracts.
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As part of its shared and dedicatedanalysis.
Merchandising services PIA also collects and
provides to certain clients a variety of merchandising data that is category,
product and store specific.
PIA, organized in 1943, initially provided merchandising services in
grocery retail chains on behalf of manufacturers. In mid-1988, it was determined
that a national merchandising company could capitalize on developments within
the retail grocery industrypreviously undertaken by providing merchandising services to a variety of
manufacturers in the industry. Until 1989, the Company operated exclusively in
grocery retail chains in California and Arizona. In 1990, PIA implemented a
national expansion strategy to cover the grocery trade. In 1993, the Company
expanded to address additional retail channels, including mass merchandiser,
chain drug and discount drug stores. In 1994, PIA began offering dedicated
services to retailers, and manufacturers. In 1997, the Company established a
corporate and division infrastructure for its project services business. The
Company currently performs its services primarily on behalf of approximately 805
consumer product manufacturers.
INDUSTRY OVERVIEW
A number of trends have impacted the retail industry and have created a
demand for providers of third party merchandising services such as those offered
by the Company.
SHIFT OF MERCHANDISING SERVICES
Historically, employees of retailers, consumer product manufacturers
and foodindependent brokers principally performed merchandising functions. Retailershave been increasingly outsourced to third parties.
Historically, retailers staffed their stores as needed to ensure in-stock conditions,inventory
levels, the placementadvantageous display of new items on shelves, and the maintenance of
shelf schematics to approved standards.schematics. Manufacturers typically deployed their own sales people in an effortrepresentatives to
ensure that their products were in distribution and properly positioneddisplayed on the shelves.
However, the primary function of these sales people was to sell the
manufacturers' productsshelves and promotions,were properly
spaced and not to perform significant in-store
services at the shelf level. In addition, foodpositioned. Independent brokers performed retail
merchandisesimilar services on behalf
of the manufacturer in conjunction with their
sales efforts. Brokers also often performed work at the shelf level at the
request of the retailer and their principal client, the manufacturer.
The average grocery store carries approximately 22,000 items. In an
effort to maintain or improve their margins, grocery retailers have broadened
their product offerings and services from traditional grocery, household and
health and beauty care products to include new product categories such as
general merchandise and service departments such as bakery, deli and prepared
fast foods.manufacturers they represented. The Company believes that as a result, these retailers have shifted
employee hours away from the traditional maintenance of packaged goods in orderan effort to
support these new categories and service departments. The Company further
believes retailers have converted many hours of basic merchandising work from
full-time professionals to part-time labor, who are generally less skilled and
trained. These trends have caused poorer shelf conditions and an increasing
number of out-of-stock items, resulting in lost sales. As a result,improve their margins, retailers are increasingly relyingincreasing their reliance on manufacturers
and food brokers among others, to support their in-store needsperform such as new store sets and existing store resets,
re-merchandising, remodels and category implementations.services. Initially, manufacturers deployedattempted to
satisfy their need for merchandising services in retail stores by utilizing
their own sales professionals to perform these
retailer-mandated services.representatives. However, manufacturers found the deployment ofdiscovered that using
their own sales professionals to perform retail-merchandising services wererepresentatives for this purpose was expensive and not an
effective use of their resources. As manufacturers' costs to perform theseinefficient.
Therefore, manufacturers have increasingly outsourced the merchandising services grew and shelf integrity declined, manufacturers began to outsource
these merchandising activities
to third parties such as the Company.
The outsourcing trend to third party merchandisers has resulted in an
increasing numbercapable of organizations providing services tooperating at a lower cost by serving multiple
manufacturers and
retailers. Certain retailers and manufacturers have chosen to consolidate in
order to reduce the number of third parties they have to manage, to achieve
consistent execution of their retail merchandising strategies, and to customize
the scope of services performed on their behalf.simultaneously.
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RETAILER CONSOLIDATION
As retailer-mandated activitiesAnother 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
continuedproliferated and diversified. Retailers are continually re-merchandising and
remodeling entire stores to increase in both
number and type, with a corresponding increase in the amount of labor requiredrespond to complete them, manufacturers have increased their use of third party
suppliers. For example, additional category implementation activities are
required to effect retailers' in-store schematics. Schematics are changing more
frequently as the result of a growing number of new product introductions each
year. Retailers continue to require numerous resets, re-merchandising,developments and
remodels in response to the increasing number of changes in
the product mix. PIAconsumer preferences. The Company estimates that these activities have doubledincreased
in frequency over the last five years, sosuch that most stores are currently re-merchandised
orand remodeled approximately every 24twenty-four months. In
certain areasBoth retailers and
manufacturers are seeking third parties to help them meet the increased demand
for these labor-intensive services.
Incentive Marketing Division
According to PROMO Magazine's 1999 annual report of the countrypromotion
industry, spending on the promotion of products and services in 1998 was $85.4
billion, up $6 billion or 8% from the 1997 level. The Company participates in
the premium incentive and promotion fulfillment sectors. These sectors
collectively account for $28.7 billion or 34% of the promotion industry as a
whole and grew 5.0% and 17.2%, respectively, during 1998. The Company believes
that U.S. companies are increasingly using third party incentive providers as a
more efficient and cost effective means to increase the productivity of their
employees. Third party incentive premium providers can offer a customized,
unique, turnkey solution specifically tailored to a company's needs.
Additionally, incentive premium providers are able to capitalize on supplier
relationships and to realize volume discounts, particularly on travel and
merchandise.
Premium incentives are performance-determined rewards used to motivate
employees, salespeople, dealers, and consumers, and are also used to
differentiate a product, service or store. According to the Incentive Federation
Survey, only 26.0% of U.S. businesses are using premium incentives to motivate
employees and the majority of these businesses are large companies (with over
1,000 employees). The Company anticipates that this market segment will grow as
additional companies realize the value of using incentives to motivate
employees, sales forces and consumers.
The three most commonly used incentives are cash, travel and
merchandise. Consumer promotions, including direct premium offers (using travel
or merchandise in conjunction with certaina purchase of a product or service),
sweepstakes (promotions that require only chance to win) and self-liquidating
premiums (offering travel or merchandise premiums to consumers at a price that
covers the marketer's costs) generate the most attention. However, most
incentive expenditures are for trade incentives designed to motivate salespeople
to sell and retailers these activities are
conducted annually.
INCREASE IN MERCHANDISING SERVICES REQUIRED IN OTHER RETAIL CHANNELS
Unliketo buy and display products. Recent trends include the
growth of retail certificates or debit or cash cards in the merchandise
fulfillment sector (the segment of the premium incentive sector concerned with
providing merchandise as rewards in incentive programs). The travel fulfillment
sector (the segment of the premium incentive sector concerned with providing
travel as rewards in incentive programs) has seen growth in individual and group
travel as well as meeting registration services (fee-based services used to
simplify the process of signing up individuals to attend a meeting or seminar).
Internet Division
The Company believes there is a current trend towards consolidation in
business today. This trend is creating larger, more complex companies that have
multiple locations and large workforces covering large geographical areas. The
Company also believes there is a growing trend of companies utilizing the
Internet and Internet-based software. The Company has historically developed and
utilized Internet-based software to manage its national businesses, including
its national field force, with greater efficiency and communication speed than
previously possible with paper based systems. The Company believes this software
transcends the merchandising services performed for grocery retailers, work
performed by manufacturersindustry and can be utilized in mass merchandiser, chain drugmany other
industries that have businesses with multiple locations and other retail
formats has historically been much less demanding. In these retail channels,
retailers performed mostlarge workforces.
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MERGER AND RESTRUCTURING
On July 8, 1999, SG Acquisition, Inc., a Nevada corporation ("PIA
Acquisition"), a wholly owned subsidiary of their own merchandising work. However, the Company, believes that as these retailers become more competitive, they are attempting to
maintain their margins by requesting more support from the manufacturer
community to provide merchandising services similar to those providedthen named PIA
Merchandising Services, Inc. ("PIA Delaware"), merged into and with SPAR
Acquisition, Inc., a Nevada corporation ("SAI") (the "Merger") pursuant to the
grocery retailers. These retailers have become increasingly importantAgreement 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 manufacturers, causing manufacturersSPAR Group, Inc. (which will be referred to
provide greater retail focuspost-Merger individually as "SGI" or the "Company"). Although the SPAR Companies
became subsidiaries of PIA Delaware (now SGI) as a result of this "reverse"
Merger, the transaction has been accounted for as required under GAAP as a
purchase by SAI of the PIA Companies, with the books and supportrecords of SGI being
adjusted to reflect the historical operating results of the SPAR Marketing
Companies and SPGI (together with certain intermediate holding companies, the
"SPAR Companies").
In connection with the Merger of the Company's subsidiary with SAI, the
Company's Board of Directors approved a plan to restructure the operations of
PIA. Restructure costs are composed of committed costs required to integrate the
SPAR Marketing Companies and PIA's field organizations and the consolidation of
administrative functions to achieve beneficial synergies and cost savings. As
part of the PIA merger, the Company identified various cost reductions that
would be realized by the merger. A detailed 29-point program was initiated by
the Company with nine transition teams being formed within management to affect
the cost cuts and ensure out-of-stock conditionsthe projected savings levels were achieved. As of
December 31, 1999, the Company had eliminated 15 PIA field offices, and reduced
PIA's workforce by approximately 250 hourly employees, thereby reducing monthly
selling, general and administrative expenses by approximately $900,000 per
month. The Company plans to continue to implement the cost cutting measures
throughout the first two quarters of 2000 until the desired savings levels are
reduced, authorized items are available,reached. In addition, the Company has converted the PIA field workforce from a
relatively fixed cost basis to a variable cost basis.
BUSINESS STRATEGY
As the marketing services industry continues to grow and general product conditions are good. Manufacturers have become particularly
sensitive to the requirements of seasonal and promotional activities, which
require rapid and effective in-store support in order to maximize sales.
INCREASE IN USE OF INFORMATION TECHNOLOGIES
Information technology is playing an increasingly important role in the
retail industry, particularly in light of industry initiatives towards efficient
consumer response ("ECR") and category management. Retailers and manufacturers
have expanded their use of information technology to manage product distribution
in stores, item placements on the shelves, and off-shelf displays. In
particular,consolidate,
large retailers and manufacturers are increasingly looking for causal data
(e.g., display, pricingoutsourcing their marketing
needs to third-party providers. The Company believes that offering marketing
services in multi-use sectors on a national basis will provide it with a
competitive advantage. Moreover, the Company believes that developing a
sophisticated technology infrastructure, including proprietary Internet-based
software, is key to providing clients with a high level of customer service
while maintaining efficient, low cost operations. The Company's objective is to
become a national integrated service provider by pursuing its operating
strategy, as described below.
Capitalize on Cross-Selling Opportunities. The Company intends to
leverage its current client relationships by cross-selling the range of services
offered by the Company. The Company believes that its retail merchandising and
product adjacency information)database marketing services can be packaged with its premium incentive services
to provide a high level of customer service, and that is category and
store specific. Both retailers and manufacturers use this information to make
decisions regarding ECR categoryadditional cross-selling
opportunities will increase if, as management shelf management, and new product
promotion plans. It also gives retailersintends, the ability to tailor their stores to
regional demographics.
BUSINESS STRATEGY
PIA believes the increasing demand for national solutions to
manufacturers' diverse merchandising requirements, together with the
consolidationCompany acquires
businesses in other sectors of the retail industry, has increasedmarketing services industry. The Company also
intends to offer its proprietary Internet-based software to existing
Merchandising Services and Incentive Marketing clients.
Achieve Operating Efficiencies. The Company intends to achieve greater
operating efficiencies within its Divisions. The Company believes that, its
existing field force and technology infrastructure can support additional
customers and revenue in the growthMerchandising Services Division. In the Incentive
Marketing Division, the Company believes that it can realize volume purchasing
advantages with respect to travel and merchandise fulfillment. At the corporate
level, the Company will seek to combine certain administrative functions, such
as accounting and finance, insurance, strategic marketing and legal support.
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Leverage Divisional Autonomy. The Company intends to conduct its
operations on a decentralized basis whereby management of outsourcing.
The increase in required merchandising services,each Division will be
responsible for its day-to-day operations, sales relationships and the
increased useidentification of information technology,additional acquisition candidates in their respective sectors.
A company-wide team of senior management will fosterprovide the growthDivisions with
strategic oversight and guidance with respect to acquisitions, finance,
marketing, operations and cross-selling opportunities. The Company believes that
a decentralized management approach will result in better customer service by
allowing management of those companies that can
provide these solutions, haveeach Division the flexibility to implement policies and
make decisions based on the needs of their respective customers.
Implement Technology. The Company intends to utilize computer, Internet,
and other technology to enhance its efficiency and ability to provide real-time
data to its customers. Industry sources indicate that customers are increasingly
relying on marketing service providers to supply rapid, value-added information
regarding the results of marketing expenditures on sales and profits. The
Company (together with certain of its affiliates )has developed and owns
proprietary Internet-based software technology that allows it to communicate
with its field management over the Internet, schedule its field operations more
efficiently, receive information over the Internet and incorporate the data
immediately, quantify the benefits of its services to customers more quickly and
respond to the changing retail
environmentcustomers' needs and have the financial resources to provide rapid deployment of
merchandising resources. The Company has developed a strategy it believes will
address these industry trends. The major components of PIA's strategy are as
follows:
POSITION THE COMPANY AS A NATIONAL, FULL SERVICE RETAIL SOLUTIONS COMPANY
PIA's objective is to strengthen its position as a leading national
supplier of retail solutions by expanding the services it will offer including
category management, data gathering, interpretation and management, to both its
existing and prospective manufacturer clients and its newer and prospective
retailer clients, and to offer its existing and newer services in additional
retail channels.
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SERVE EMERGING DEMAND FOR DEDICATED SERVICES
PIA believes certain retailers and manufacturers will increasingly
prefer merchandising service on a dedicated basis, and the significant size of
such contracts requires substantial financial, recruitment, deployment,
reporting and management capabilities.implement programs more rapidly. The Company
believes it is positioned
well to serve this emerging need for dedicated services.
INCREASE THE COMPANY'S UTILIZATION OF INFORMATION TECHNOLOGY
The Company has been focusing Information Technology resources on
applications, which help improve productivity of field merchandisers. PIA
believes a commitment to technology will provide a long term competitive
advantage. The Company believes the technology it develops will present
increased opportunities for PIA on project specific requests from manufacturers.
PIA also expects to use technology to expand its informational services and
consulting capabilities. Additionally, the Company will continue to providethat its proprietary Internet-based software program, Merchandisers Toolbox, to certain retailers. This
program is designed to managetechnology gives them a
competitive advantage in the deployment of manufacturer supplied labor, to
measure their performance against the retailers' in-store plans and to develop
databases that include a "blueprint" of a store by category. The Company also
expects its key account managers will continue to use various shelf technology
programs, which the Company licenses from A.C. Nielsen, IRI and Intactix.marketplace.
DESCRIPTION OF SERVICES
The Company provides a broad array of merchandising and marketing
services on a national, regional and local basis to manufacturersleading entertainment,
consumer goods, food products and retailers. PIAretail companies through its Merchandising
Services Division, and also provides premium incentive services through its
Incentive Marketing Division.
The Company currently operates in all 50 states and Canada serving some
of the nation's leading companies. The Company believes its full-line capability
of developing plans at one centralized headquarters location, executing chain
wide, fully integrated national solutions, and implementing rapid, coordinated
responses to its clients' needs on a real time basis differentiatesdifferentiate the Company
from its competitors. The Company also believes its 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 itthe Company with a competitive advantage
over local, regional or retailer specific competitors.
Merchandising Services Division
The Company provides a broad array of merchandising services on a
national, regional, and local basis to manufacturers and retailers. The Company
provides its merchandising and sales services primarily on behalf of consumer
product manufacturers at approximately 17,000mass merchandiser, drug and retail grocery 6,000 mass merchandiser and 8,800 drug stores. PIAThe
Company currently provides three principal types of merchandising and sales
services: shared services, dedicated services and project services.
SHARED SERVICESShared Services
Shared services consist of regularly scheduled, routed merchandising
services provided at the store level for manufacturers. PIA'sThe Company's shared
services are performed for multiple manufacturers, including, in some cases,
manufacturers whose products are in the same product category. Shared services
may include activities such as:
-o Reordering, replenishment of product
o Ensuring that the client's products authorized for distribution
are in stock and on the shelf
-o Adding in new products that are approved for distribution but not
present on the shelf
-o Designing store schematics
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o Setting category shelves in accordance with approved store
schematics
-o Ensuring that shelf tags are in place
-o Checking for the overall salability of clients'the client's products
and
- Sellingo Placing new product and promotional items.
The Company's shared services are performed principally by full-time retail
sales merchandisers, retail sales specialists and key account managers, along
with district and division manager supervision.
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RETAIL SALES MERCHANDISERS
PIA's retail sales merchandisers ("RSM") perform shared service coverage
at the store level. These services include a review of the retailer's shelves
and the appropriate store (or chain) prepared shelf schematic to ensure all
clients' approved products are available for sale in the store, that such
products have the approved shelf placement and number of facings (the horizontal
and vertical space occupied by a package front) on the shelf, and the approved
shelf tag is in position. If a product is not in distribution, the RSM adds the
product to the shelf if it is available in the store's product storage area. If
a product is unavailable, the RSM prepares a place on the shelf for this product
and a shelf tag. The presence of a shelf tag is critical to a store's ability to
reorder an individual stock-keeping unit ("SKU") from the distribution center.
The RSM checks for the presence of and replaces, if necessary, the shelf tags
for all client SKUs. The RSM also reviews all SKUs for product freshness, if
appropriate, and for general salability.
KEY ACCOUNT MANAGERS
On behalf of its manufacturer clients, PIA selectively deploys key account
managers ("KAMs") inside of the major retail chains. These KAMs, assigned
exclusively to a single retailer, work with that retailer's headquarters staff
in the execution of category management initiatives and in the development and
implementation of shelf schematics. The KAMs provide both the manufacturer and
PIA with a headquarters' perspective of the retailer and its primary objectives
at the store level. The KAMs work with manufacturer clients to develop and
achieve their merchandising goals, including those related to product
distribution, shelf placement, the number of facings for particular products,
and product adjacencies. The KAMs also work with manufacturer clients to gain
retailer authorization for new products and approval of new category schematics
that are compatible with the retailer's own category management strategies. PIA
generally attempts to position its KAMs within the retailer's organization in a
leadership capacity, both in category management and vendor deployment
activities. The KAMs typically are placed within the retailer's shelf technology
department and are equipped with the specific shelf technology software utilized
by the retailer. The KAMs work with the retailer in the development of new shelf
schematics, category layouts and, in some cases, total store space plans. The
Company is also training its KAMs in category management in order to provide
further value to both the Companies' manufacturer clients and to the retailer.
DEDICATED SERVICESitems
Dedicated Services
Dedicated services consist of merchandising services, generally as
described above, that are performed for a specific retailer or manufacturer by a
dedicated organization, including a management team, working exclusively for
that retailer or manufacturer.manufacturer, primarily in the drug store industry. These
services provided are primarily based on agreedagreed-upon hourly rates and fixed management
fees under multi-year contracts.
The Company believes it pioneered the concept of dedicated service in 1994
with a program designed for Thrifty-PayLess Drug Stores. The program covered 995
stores, and PIA was responsible for implementing product selection changes and
resetting all categories to meet Thrifty-PayLess' category management plans. In
implementing the program, PIA was able to ensure placement of new products on
the shelf within five days of availability and completed section changes within
ten days. In 1996, Rite Aid acquired Thrifty-PayLess and the contract was not
renewed beyond December 1996.
In 1997, PIA started a dedicated program with CVS/Revco to convert Revco
stores to the CVS format. The conversion project was a total re-merchandising of
all Revco stores to the new CVS format. PIA moved gondolas, built new gondolas,
and installed new fixtures and re-planogramed all categories to the CVS
conversion plan. In 1999, PIA will be responsible for new store set ups and
special projects for CVS/Revco in the state of Ohio.
The Company has not expanded the dedicated service concept during fiscal
year 1998. Net revenues have decreased from 34.6% in 1997 to 31.9% in 1998,
primarily due to project completions of the CVS/Revco conversions.
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8
PROJECT SERVICESProject Services
Project services consist primarily of specific in-store services
initiated by retailers and manufacturers, such as new product launches, special
seasonal or promotional merchandising, focused product support and product
recalls. These services are used typically for large-scale implementations
requiring over 30 days. The Company also performs other project services, such
as new store sets and existing store resets, re-merchandising, remodels and
category implementations, under shared service contracts or stand-alone project
contracts.
RELATED SERVICES
INFORMATION TECHNOLOGY SERVICES
PIA has been focusing information systems resources on applications,
which help improve productivity of field merchandisers. The Labor Tracking
System ("LTS") was introduced to PIA's 12 service centers in 1998. This
proprietary application records actual time spent on each work initiative. The
benefits of the system include real-time reporting, improved client billing,Other Merchandising and more efficient management of the field labor.
In August 1998, the Work Generator System was implemented. This system
schedules sharedMarketing Services
Other merchandising and marketing services and project work from a central system. It reduces the
travel timeperformed by coordinating shared service work with project work. The system
provides associates with a daily schedule of work assignments and expected
completion times.
In September 1998, the Company
began using Symbol scannersinclude:
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 to capture
inventorycheck on
distribution or display of a brand and returned inventory datato evaluate products.
Database Marketing - Managing proprietary information to permit easy
access, analysis and manipulation for Buena Vista Home Entertainment
("BVHE"). BVHE retrieves the scanneruse in direct marketing
campaigns.
Data Collection - Gathering information daily via the Internet from
PIA's server. This information is usedsystematically for daily updates to BVHE's vendor
managed inventory system.
PIA also expanded the use ofanalysis
and interpretation.
Teleservices - Maintaining a teleservices center in its Interactive Voice Response ("IVR")
system. Hourly status updates can now be provided to clients on critical new
item launches, such as BVHE's video releases. The IVR system can process 2,500
calls per day. This gives the Company the ability to give clients
up-to-the-minute status on any work that uses the IVR system.
TELEMARKETING SERVICES
PIA owns 20% of Ameritel, Inc., a companyAuburn Hills
facility that performs inbound and outbound telemarketing services,
including those on behalf of certain of PIA'sthe Company's manufacturer
clients.
Ameritel provides telemarketing salesInformation Technology Services
The Company has developed Internet-based information tracking system
applications that improve productivity of field merchandisers. The Company's
merchandising specialists use Interactive Voice Response (IVR) and hand-held
computers to upload (through the Internet) the status of each store they service
immediately upon completion. This information is analyzed and displayed on
graphical execution maps, which can be accessed by both the Company and its
customers via the Internet, that visually depict the status of every
merchandising project in real time. In addition, this technology allows the
Company to schedule its field operations more efficiently, quantify the benefits
of its services for
manufacturers that sell directly into smaller, independent retail stores.to customers more quickly, respond to customers' needs and
implement programs more rapidly. The Company believes that its affiliationtechnological
efficiencies provide it with Ameritel provides an additional
merchandising solution for some packaged product manufacturers and retailer
clients.a competitive advantage in the marketplace.
8
The Company in conjunction with Ameritel,has also developed an automated interface between the Ameritel Vantive system and the LTS. PIAlabor tracking system.
Company associates now
telephonecommunicate work assignment completion information to Ameritel. PIA associates are
ablevia the
Internet or telephone, enabling the Company to report hours, mileage, and other
completion information for each work assignment on a daily basis. The information is used to update the LTS the next
day. This provides
the 12 service centersCompany with daily, detailed tracking of work completion.
RETAIL AND SECONDARY HEADQUARTERS SELLING SERVICES
The Company deploys retail sales specialists ("RSS")Incentive Marketing Division
SPGI provides a wide variety of consulting, creative, program
administration, and travel and merchandise fulfillment services to provide product
selling support forcompanies
seeking to retain and motivate employees, salespeople, dealers, distributors,
retailers, and consumers toward certain manufacturers at the retail store and secondary
retailer's headquarters buying offices. These services are performed principally
for manufacturers that chooseactions or objectives. SPGI's strategy
is to allow companies to outsource their sales functionthe entire design, implementation and
fulfillment of incentive programs in a one-stop, "umbrella" shopping approach.
SPGI consults with a client to design the most effective plan to achieve the
client's goals. SPGI then provides the services necessary to implement the
program, generates detailed efficiency progress reports and calculates the
return on investment upon completion of the program.
The SPGI process typically begins when a client desires assistance in
developing a performance improvement program. SPGI's senior consultants work
with the client to develop programs that improve productivity by delivering
positive reinforcement in ways that are meaningful to employees and supportive
of the client's business strategy. A wide range of reward options is available,
including cash, travel, and merchandise. Most formal compensation programs
deliver cash to plan participants, while premium incentives tend to make greater
use of non-financial rewards. SPGI has experience in all forms of incentives and
therefore can provide its clients with the most appropriate program design. SPGI
is capable of assisting its clients in the writing, designing and printing of
the program elements. Teams of creative directors, copywriters, graphic
designers and print specialists develop campaigns for calls on
wholesaler-supplied individual storesincentive programs,
meetings, trade shows and consumer promotions.
In addition, SPGI provides its clients with travel or small chains. Sales services performed
bymerchandise
fulfillment alternatives as well as a series of innovative product specific
alternatives. While the RSS's includemajority of SPGI's product sales, selling pointfulfillment is in the travel
area, SPGI provides a wide variety of sale promotions, discountcatalog merchandise awards. Through an
informal arrangement with some of the country's largest mass merchandise
retailers, SPGI can provide its clients with programs that offer the flexibility
of in-home reward ordering. SPGI also provides its clients with custom
merchandise, special catalogs, retail certificates and allowance programsa Local Purchase Option
("LPO"). The LPO allows winning participants to select and shelf merchandising plans.
8
9redeem merchandise
from a series of participating merchants.
SALES AND MARKETING
Merchandising Services Division
The Company's sales efforts within its Merchandising Services Division
are structured to develop new business in national and local markets. At the national level, PIA'sThe
Company's corporate business development team directs its efforts toward the
senior management of prospective clients. At the regional level, salesSales efforts are principally guided
through PIA's 12 service center officesthe Company's sales workforce, located nationwide.
Thenationwide, who primarily work
from home offices. In addition, the Company's corporate account executives play
an important role in PIA'sthe Company's new business development efforts within its
existing manufacturer and retailer client base.
The corporate account executives are generally located in the clients'
corporate headquarters. The corporate account executives plan merchandising and
product introductions with the manufacturer so that PIA can achieve the
objectives of such clients' major new product and promotional initiatives. In
addition, the corporate account executives present PIA's services to the sales
and marketing executives of these clients, and utilize marketing data provided
by IRI, A.C. Nielsen and others in an effort to ascertain additional market
opportunities for such clients at the local level. Client service managers areAs part of the Company's geographic division teams and work with the local
management of the Company's clients. The client service manager's primary
responsibility is to work with the client to establish specific, measurable
objectives for PIA, and to market additional services. As part of this process,
the division account executive is responsible for developing retail
merchandising solutions for such objectives.
As part of 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. PIAThe
Company has also responded to this emerging trend by establishing client service offices
that are fully staffed to provide the PIA client and the retailer with access to
all of PIA's services. PIA currently has retailer
teams in place at Wal*Mart
(Rogers, Arkansas), Kmart (Detroit, Michigan)several discount and Eckerd Drug (Tampa, Florida).drug stores.
9
The Company's business development process encompasses a due diligence
period to determine the objectives of the prospective client, the work to be
performed to satisfy those objectives and the market value of the work to be
performed. PIAThe 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 quotation approval form that is
presented to the Company's proposal committee for approval. The pricing of this
internal proposal must meet PIA'sthe Company's objectives for profitability, which
are established as part of the business planning process. After approval of this
quotation by the proposal committee, a detailed proposal is presented to the
prospective client. Following agreement regarding the elements of service and
corresponding rates, a contract is prepared and executed.
See "--Customers."For the year ended December 31, 1999, net revenues from Merchandising
Services and Incentive Marketing Services accounted for 68.3% and 31.7%
respectively of total net revenues. Prior to that period Merchandising Services
comprised 100% of total net revenues.
Incentive Marketing Division
The Company's Incentive Division sales effort is organized on a
regional basis to serve national clients. Today SPGI has seven regional sales
operations, each with a senior sales person working from their home office. All
selling is done on a local market basis, while all program design and execution
is completed at the Dallas headquarters.
As in the Merchandising Services Division, the Incentive Division's
business development process encompasses a due diligence period to determine the
objectives of the prospective client, the work to be performed to satisfy those
objectives and the market value of the work to be performed. The Company employs
a formal cost development and proposal process that determines the cost of each
element of work required to achieve the prospective client's objectives. These
costs, together with an analysis of market rates, are used in the development of
a quotation approval form that is presented to the Company's proposal committee
for approval. 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 by the proposal committee, a
detailed proposal is presented to the prospective client. Following agreement
regarding the elements of service and corresponding rates, a contract is
prepared and executed.
CUSTOMERS
PIAIn its Merchandising Services Division, the Company currently
represents approximately 805 manufacturer clients, including
approximately 648 branded productnumerous manufacturers and approximately 157 private
label manufacturers. Before 1993, the Company represented its manufacturerretail clients primarily in thea wide range of retail
grocery industry. Beginning in 1993, the Company
found that additional opportunities to provide its services existed throughout
the much broader marketplace. This marketplace included mass merchandiser, chain
drugoutlets including:
o Mass Merchandisers
o Chain and deep discountdeep-discount drug stores
as well as in othero Other retail trade groups
such
as home improvement centers, computer/electronic stores, toy stores, convenience
storeso Retail grocery
The Company also provides database, research and office supply stores. As a result,other marketing services to
major automotive manufacturers.
In addition, the Company has contracted withcurrently provides services to various clients
in its Incentive Marketing Division. These clients are principally large
corporate clients that encompass a broad range of industries including the food,
drug, communications, and automotive manufacturing industry.
10
COMPETITION
The marketing services industry is highly competitive. Competition in
the Company's Merchandising Services Division arises from a number of manufacturers to provide serviceslarge
enterprises, many of which are national in several additional retail
markets, and has agreed to provide services toscope. The Company also competes with
a large number of retailers directly.
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COMPETITION
The third-party merchandising industry is highly competitive and is
comprised of an increasing number of merchandising companiesrelatively small enterprises with either
specific retailer, retailclient, channel or
geographic coverage, as well as food
brokers. These companies tend to compete with the Company primarily in the
retail grocery channel,internal marketing and somemerchandising
operations of them may have a greater presence in certain
of the retailers in whose stores the Company performs its services.clients and prospective clients. The Company also competes with several companiesbelieves that are national in scope, such as
Powerforce, Alpha One, Pimms, and SPAR Marketing Force. These companies compete
with PIA principally in the mass merchandiser, chain drug and deep discount drug
retail channels. PIA believes 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. PIA recently entered into an agreement with SPAR Marketing ForceThe Company believes that its current structure favorably
addresses these factors and certainestablishes it as a leader in the mass merchandise
and chain drug channels of trade, as well as a leading provider of in-store
services to the video industry. The Company also believes it has the ability to
execute major national in-store initiatives and develop and administer national
retailer programs. Finally, the Company believes that, through the use of its
affiliates ("SPAR Group")proprietary Internet software, other technological efficiencies and various cost
controls, the Company will remain competitive in its pricing and services.
The incentive marketing industry is populated by large national
players, each of which PIA will essentially be
acquiredhas significantly greater financial and marketing
resources than the Company, and hundreds of small regional and local companies.
By establishing a network of merchandise, travel, and database operations, and
then consolidating regional sales companies, the Company believes it would fill
a substantial market by SPAR Group in a merger in which allproviding clients with an alternative to the outstanding Common Stock of
SPAR will be exchanged for approximately 12.3 million shares of PIA Common
Stock. See "--Recent Transaction." Afternational
competitors that offers the merger, the SPAR Group shareholders
will own approximately 69% of PIA Common Stock.same integrated program service at substantially
lower cost.
TRADEMARKS
SPAR(R) and PIA(R) is aare registered trademarktrademarks of the Company. In
addition, the Company has recently commenced the process of registering the
service mark for the termterms Precision Merchandising.Merchandising and SPARinc.com. 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."
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note 14 to the Financial Statements included in this Annual Report
on Form 10-K.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREA
Revenues generated by PIA Merchandising Ltd., a Canadian subsidiary
acquired in July 1999, accounted for less than 1% of the total revenues for the
fiscal year ended December 31, 1999. All other revenues were derived from
business within United States.
EMPLOYEES
As of January 1,December 31, 1999, the CompanyCompany's Merchandising Services Division
employed approximately 1,1095,400 people, approximately 400 full-time employees,
approximately 3,500 part-time employees and 1,500 independent contractors, of
which approximately 200 full-time employees were engaged in operations and 11
were engaged in sales. As of December 31, 1999, the Company's Incentive
Marketing Division employed approximately 71 full-time employees, of whomwhich
approximately 83 worked16 employees were engaged in executive,
administrativeoperations and clerical capacities at the Company's corporate headquarters,
and 1,026 of whom workedapproximately 9 were
engaged in division offices nationwide. In addition, the
Company employed 1,030 part-time employees.sales. Approximately 180182 of the Company's employees are covered by
contracts with labor unions. The Company considers its relations with its
employees and its employees' unions to be good.
The Company
also uses the services of up to 3,000 flextime personnel whose payroll is
generated through a company not affiliated with PIA.
RECENT TRANSACTION
On February 28, 1999, PIA entered into an agreement with SPAR Group, a
privately held affiliated group of companies to merge in a stock transaction.
Under the agreement, PIA will issue approximately 12.3 million shares of PIA
Common Stock to the stockholders of SPAR Group. SPAR Group is a privately owned
provider of retail marketing and sales services offering merchandising support,
incentive and motivation marketing programs, information management, marketing
research, data base marketing and promotional analysis and forecasting. The
transaction will be accounted for as a reverse acquisition in which SPAR Group
is deemed to be the accounting acquirer. SPAR Group has annual revenues of
approximately $75 million. After the merger, SPAR Group stockholders will own
approximately 69% of PIA Common Stock. The transaction requires regulatory and
stockholder approval and is expected to close in May 1999.
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RISK FACTORS
The following risk factors should be carefully reviewed in addition to
the other information contained in this annual report on Form 10-K
HISTORY OF LOSSES
During the years ended December 31, 1997 and January 1, 1999, the
Company incurred significant losses and experienced substantial negative cash
flow. PIA had net losses of $15.1 million for the fiscal year ended 1997 and
$4.3 million for fiscal year 1998. Losses in 1997 were primarily caused by
margin reductions from the loss of shared service clients, inefficiencies in
field labor execution, poor pricing decisions for some client contracts and
higher business unit overhead costs. The recognition of $5.4 million in
restructuring and other charges was also responsible for the losses. Losses in
1998 primarily were caused by margin reductions and from a decline in revenues
due to loss of shared service clients and completion of dedicated projects. The
Company expects to have further losses for the first quarter of fiscal 1999. As
noted in Recent Transaction, the Company has entered into a merger agreement
with SPAR Group. Should this merger not be completed, the Company will be
required to significantly reduce its operating costs to minimize the effects of
further reductions in revenues and operating losses. PIA cannot guarantee that
it will not sustain further losses. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
LOSS OF BUSINESS
PIA's business mix has changed significantly over the last year, and is
expected to continue to change during 1999, in response to client needs, and the
evolving third party merchandising industry. Due in part to the completion of a
major dedicated client program, and the loss of several shared service clients,
sales have declined over the last 18 months, and no sizable new dedicated
business has been sold to compensate for these losses. The Company has reduced
its dedicated management and personnel infrastructure accordingly.
INDUSTRY CONSOLIDATION; CONCENTRATED CLIENT BASE
The retail and manufacturing industries are undergoing consolidation
processes that result in larger but fewer retailers and suppliers. PIA's success
depends in part upon its ability to maintain its existing clients and to obtain
new clients. Because of industry consolidation, PIA has lost certain clients,
and this trend could continue to have a negative effect on PIA's client base and
results of operations. PIA's ten largest clients generated approximately 75% of
PIA's net revenues for the year ended January 1, 1999, and approximately 69% for
the year ended December 31, 1997. During the year ended January 1, 1999 none of
PIA's manufacturer or retailer clients accounted for greater than 10% of net
revenues other than Eckerd Drug Stores, CVS Pharmacy Incorporated and Buena
Vista Home Entertainment, which account for 15.6%, 12.6% and 10.6%,
respectively. During the year ended December 31, 1997, none of PIA's
manufacturer or retailer clients accounted for greater than 10% of net revenues
other than Buena Vista Home Entertainment and Eckerd Drug Stores which
accounted for 16.0% and 13.6% of net revenues, respectively. The majority of the
Company's contracts with its clients for shared services have multi-year terms.
PIA believes the uncollectibility of amounts due from any of its large clients,
a significant reduction in business from such clients, or the inability to
attract new clients, could have a material adverse effect on the Company's
results of operations.
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UNCERTAINTY OF COMMISSION INCOME
Approximately 15% of the Company's net revenues for the year ended
January 1, 1999 were earned under commission-based contracts. These contracts
provide for commissions based on a percentage of the client's net sales of
certain of its products to designated retailers. Under certain of these
contracts, the Company generally receives a draw on a monthly or quarterly
basis, which is then applied against commissions earned. Adjustments are made on
a monthly or quarterly basis upon receipt of reconciliations between commissions
earned from the client and the draws previously received. The reconciliations
typically result in commissions owed to the Company in excess of previous draws;
however, the Company cannot predict with accuracy the level of its clients'
commission-based sales. Accordingly, the amount of commissions in excess of or
less than the draws previously received will fluctuate and can significantly
affect the Company's operating results in any quarter.
CONTROL BY CERTAIN STOCKHOLDERS
Riordan, Lewis & Haden ("RLH"), a private investment firm, beneficially
owns approximately 29.7% of PIA's outstanding Common Stock. PIA's directors and
officers, in the aggregate, beneficially own approximately 16.2% of PIA's
outstanding Common Stock (excluding the shares owned by Riordan, Lewis & Haden
which are deemed to be beneficially owned by Mr. Haden and Mr. Lewis). While not
controlling a majority of the outstanding shares, RLH, and the directors and
officers acting together generally will have significant influence with respect
to the election of directors and other matters submitted to the PIA
stockholders, including amendments to PIA's charter and Bylaws and approval of
certain mergers or similar transactions and sales of all or substantially all of
PIA's assets. If the merger with the SPAR Group is consummated the current
stockholders of SPAR Group will beneficially own approximately 69% of PIA's
outstanding Common Stock. Accordingly, if they act as a group they will
generally be able to elect all directors and they will have the power to prevent
or cause a change in control of PIA. Such concentration of ownership could have
the effect of making it more difficult for a third party to acquire control of
PIA in the future, and may discourage third parties from attempting to do so.
RESTRICTIONS ON DIVIDENDS
The Company has never paid dividends on its capital stock, and currently
intends to retain any earnings or other cash resources to finance future growth.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BY-LAWS AND DELAWARE LAW
The Company's Board of Directors has the authority to issue up to 3,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of PIA.
In addition, PIA is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which will prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. The application of Section 203 also could have the effect
of delaying or preventing a change of control of PIA. Certain provisions of
PIA's Certificate of Incorporation and Bylaws could delay or make more difficult
a merger, tender offer or proxy contest involving PIA. For example, PIA's
Bylaws, a special meeting of stockholders may be called only upon the request of
holders of at least 30% of the shares entitled to vote. Any delay in change of
control due to these provisions could adversely affect the market price of PIA's
Common Stock, which could adversely affect the market price of PIA 's Common
Stock.
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GLOSSARY
The following glossary includes definitions of certain general industry
terms as well as terms relating specifically to the company.
CATEGORY - A segment or sub-segment of a department within a retail
outlet. For example, the health and beauty care department consists of
several categories such as oral care and shampoo; and the shampoo section
is divided into sub-categories such as salon formulas and dandruff
control.
CATEGORY MANAGEMENT - A process for managing a retailer's or a
manufacturer's business that recognizes categories as strategic business
units for the purpose of planning sales and profit objectives.
CAUSAL DATA - Data that defines the factors within a retail outlet that
impact sales. These factors usually include display, pricing and product
adjacency information.
EFFICIENT CONSUMER RESPONSE (ECR) - A grocery industry strategy in which
retailers and manufacturers incorporate the principles of efficient
replenishment with effective assortment and promotion of products.
FACING - The horizontal and vertical space occupied by a package front
when displayed on a store shelf.
KEY ACCOUNT MANAGER (KAM) - A KAM is assigned exclusively to a single
retailer and works with that retailer's corporate headquarters staff in
the execution of category management initiatives and in the development
and implementation of shelf schematics.
MASS MERCHANDISER - The segment of retailers that offers multi-departments
in a single location, each of which is typically quite large (at least
75,000 square feet). Examples include Kmart and Wal*Mart.
NEW STORE SET - The initial merchandising of a new retail outlet that was
either built or acquired.
OUT-OF-STOCK - A situation that exists when a product normally carried by
a retailer is temporarily unavailable. This means that shelf allocation
exists, but inventory has been depleted.
RE-MERCHANDISING - A retail unit that is enhanced by the relocation of
sections, aisles and/or departments, and usually involves the total store.
REMODEL - A retail unit that is enhanced by enlargement and/or redesign.
Structural changes most often result in departments and/or services being
added or deleted, which requires the relocation of most products and
sections within the store.
RESET - Relocation of products within a given category or section of a
retail store. A reset typically involves removal of all products from the
retailer's shelves, restocking of products and reallocation of space.
RETAIL AND SECONDARY HEADQUARTERS SELLING - Refers to the selling of
products and/or taking of orders in chains which do not operate their own
warehouses and in stores having the authority to purchase and/or approve
orders.
RETAIL SALES MERCHANDISERS (RSM) - An RSM is a full-time associate who
performs shared service coverage at the store level.
RETAIL SALES SPECIALIST (RSS) - A retail sales specialist provides product
selling support for certain manufacturers at the retail store and
secondary retailers headquarters buying offices.
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RETAILER - An operator of retail stores or groups of retail stores that
are also referred to as chains.
SCHEMATIC - A diagram that lists the specific location and shelf space to
be allocated for all items within a section. The schematic also contains
data relating to merchandising such as width, depth of shelving, shelf
elevations and height of gondola.
SHARED SERVICES - A group of associates who perform specific functions for
multiple clients on each store visit.
STOCK KEEPING UNIT (SKU) - A unit of product having its own unique
size/weight and product description.
VOID - A situation that exists when a retailer does not carry a product
and there is no allocated space or reorder tag present.
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ITEM 2. PROPERTIES.
The Company maintains its corporate headquarters in approximately 20,00012,000
square feet of leased office space located in Irvine, California,Tarrytown, New York, under a lease
with a term expiring in February 2000.May 2004.
The Company leases certain office and storage facilities for its
divisions and subsidiaries under operating leases, which expire at various dates
during the next five years. Most of these leases require the Company to pay
minimum rents, subject to periodic adjustments, plus other charges, including
utilities, real estate taxes and common area maintenance.
The following is a list of the locations where the Company maintains
leased facilities for its division offices and subsidiaries:
Location Office Use
- --------------------------------------------------------------------------------
Scottsdale, Arizona Southfield, Michigan
Rogers, Arkansas Chesterfield MissouriTarrytown, NY Corporate Headquarters and Administration
Auburn Hills, MI Regional Office and Teleservices Center
Eden Prairie, MN Regional Office
Mahwah, NJ Regional Office
Cincinnati, OH Regional Office
Tampa, FL Regional Office
Irvine, California Edison, New Jersey
Pleasanton, California Albuquerque, New Mexico
Englewood, Colorado Blue Ash, Ohio
Tampa, Florida Cranberry Township, Pennsylvania
Norcross, Georgia Carrollton, Texas
Oakwood Terrace, Illinois Houston, Texas
Overland Park, Kansas Bellevue, Washington
Woburn, MassachusettsCA Regional Office
Carrolton, TX 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.
Certain of the above facilities may be closed or subleased as the
Company streamlines its operations.12
ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS.
On February 25, 1998,September 23, 1999, Information Leasing Corporation ("ILC") filed a
complaint for breach of contracts, claim and delivery, and conversion against
the Company in Orange County Superior Court, Santa Ana, California, Case No.
814820, with respect to certain equipment leased to the PIA Companies by ILC,
which complaint sought judgment to recover the principal sum of $1,535,869.68,
plus taxes, fees, liens, and its Canadian subsidiary were
served with two Statements of Claim in the Ontario court (General Division)late charges, immediate possession of the Provinceleased
equipment, compensation for the reasonable value thereof, and costs and
attorneys' fees. The Company is currently attempting to negotiate a settlement.
Pursuant to that certain Asset Purchase Agreement dated as of Ontario, Canada, filedDecember
22, 1998, among BIMA Group, Inc. (f/k/a MCI Performance Group, Inc.) ("BIMA"),
John H. Wile, SPAR Performance Group, Inc.(f/k/a SPAR MCI Performance Group,
Inc.) ("SPGI"), and a company formerly known as SPAR Group, Inc., as amended by
Merchandising Consultants Associates
("MCA") asserting claims for alleged breachthe First Amendment thereto dated as of Confidentiality AgreementsJanuary 15, 1999, Second Amendment dated
as of September 22, 1999 (the "Second Amendment"), and Third Amendment dated as
of October 19, 1996 and July 17, 1997. Both of these lawsuits assert that1, 1999 (the "Third Amendment"), SPGI would be obligated to pay
"Earn-Out Consideration" to BIMA if the Company and its subsidiary improperly used confidential information providedbusiness met certain financial
performance criteria as set forth therein. SPGI has fully paid the amount
outstanding under the Promissory Note pursuant to the Asset Purchase Agreement
with respect to the original purchase price, as adjusted by MCA as part of the Company's due diligence concerning its proposed acquisition
of MCA, including alleged clientele, contracts, financial statements and
business opportunities of MCA. In addition, MCA contends that the Company
breached and allegedly renegedSecond
Amendment. Based upon the terms for acquisitionunaudited balance sheet of MCA containedBIMA as of January 15,
1999, SPGI estimates that no "Earn-Out Consideration" is due to BIMA. BIMA has
asserted that it is owed approximately $5,000,000 in a Letter of Intent betweenEarn Out Consideration, but
such Earn Out Consideration calculation has not been agreed to by SPGI. If the
parties dated July 17, 1997, which by its
express terms was non-binding. The Statements of Claim seek damages totaling
$10.2 million.
The Company denies all wrongdoingcannot agree upon such amount, BIMA has threatened that legal
proceedings may ensue with respect to this matter. If sued, SPGI would
vigorously contest such matter. SPGI and intendsBIMA intend to defend itself
aggressivelycontinue negotiations,
and have orally agreed to use arbitrators (assuming mutually acceptable
procedures can be adopted), in this action. It is not possibleorder to predict the outcome of this
action at this time.resolve such "Earn Out Consideration"
dispute.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
1513
16
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. The Common Stock isPrior to July 9, 1999, the Company's stock was traded on the Nasdaq
National Market under the symbol "PIAM".
- -------------------------------------- ------------------------ ----------------------- ------------------------
1997 1998 ------------------ -----------------1999
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
High Low High Low ------- ------ ------ ------High Low
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
First Quarter $11.000 $5.125 $6.500 $5.000 $5.630 $2.750
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Second Quarter 7.125 5.375 8.156 3.688 5.000 1.880
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Third Quarter 8.250 5.125 6.844 4.125 - -
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Fourth Quarter 9.000 4.875 4.875 2.000 - -
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Subsequent to July 9, 1999, the Company's stock was traded on the Nasdaq
National Market under the symbol "SGRP" until November 15, 1999, when it moved
to the Nasdag Small Cap Market.
- -------------------------------------- ------------------------ ----------------------- ------------------------
1997 1998 1999
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
High Low High Low High Low
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
First Quarter $ - $ - $ - $ - $ - $ -
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Second Quarter - - - - - -
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Third Quarter - - - - 5.810 3.000
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Fourth Quarter - - - - 5.130 2.500
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
As of March 19,December 31, 1999, there were approximately 872150 holders of record
of the Company'sSPAR Group's Common Stock.
The CompanySPAR Group 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 itsthe business. Any
payment of future dividends will be at the discretion of the Board of Directors
of the CompanySPAR Group 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.
16
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated or combined financial data sets
forth, for the periods and the dates indicated, summary consolidated financial data of the
Company and its subsidiaries. Below are the statements of operations with
respect to the three yearsyear ending December 31, 1996,1999, the nine-month period ending
December 31, 1997 and January 1, 1999 is the consolidated
statement of operations1998, and the consolidatedyear ending March 31, 1998, and the balance sheet
data as of December 31, 19971999 and January 1, 1999 haveDecember 31, 1998. This data was derived from
and are qualified by reference
to the audited consolidated financial statements included elsewhere in this Form 10-K. These statements10-K and should be read in
conjunction with suchthe financial statements and the related notes thereto inas well
as "Management's Discussion and Analysis of Financial Condition and Results of
Operations."Operations", also included in this Form 10-K.
14
NINE
YEAR ENDED MONTHS YEARS ENDED
-----------------------------------------------------------------ENDED -----------
DEC 31, DEC 31, DECMAR 31, DECMAR 31, JAN 1,
1994 1995MAR 31,
1999 1998 1998 1997 1996
1997 1999
--------- --------- --------- --------- ---------==== ==== ==== ==== ====
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net revenues $116,525 $ 80,44932,601 $ 104,79136,804 $ 119,94035,574 $ 128,208 $ 121,788
Operating expenses:
Field services costs 61,876 81,320 94,841 119,830 105,44814,425
Cost of revenues 81,288 16,217 19,417 21,754 7,679
------------------------------------------------------------------
Gross profit 35,237 16,384 17,387 13,820 6,746
Selling, expenses 9,028 10,339 11,133 10,482 8,245
Generalgeneral and administrative expenses 5,800 6,810 8,081 10,234 11,788
Restructure and other charges -- -- -- 5,420 --28,830 9,978 12,087 13,250 6,839
Depreciation and amortization 339 497 595 997 1,129
--------- --------- --------- --------- ---------
Total operating expenses 77,043 98,966 114,650 146,963 126,610
--------- --------- --------- --------- ---------2,182 142 161 227 191
------ ------ ------ ------ -----
Operating income (loss) 3,406 5,825 5,290 (18,755) (4,822)4,225 6,264 5,139 343 (284)
Other income (725) (465) 895 895 611
--------- --------- --------- --------- ---------(expense) (1,572) (155) (390) (766) (99)
------ ------ ------ ------ -----
Income (loss) before provision (benefit) for income
taxes 2,681 5,360 6,185 (17,860) (4,211)2,653 6,109 4,749 (423) (383)
Income tax provision (benefit) 101 1,829 2,426 (2,761) 55
--------- --------- --------- --------- ---------3,148 - - - -
------ ------ ------ ------ -----
Net income (loss) $ 2,580(495) $ 3,5316,109 $ 3,7594,749 $ (15,099)(423) $ (4,266)(383)
======== ======== ========= ======== ========
Unaudited pro forma information (1):
Net income (loss) before income tax provision $ 2,653 $ 6,109 $ 4,749 $ (423) $ (383)
Pro forma income tax provision (benefit) 1,411 2,253 1,751 (156) (141)
------ ------ ------ ------ -----
Pro forma net income (loss) $ 1,242 $ 3,856 $ 2,998 $ (267) $ (242)
======== ======== ========= ========= ========= =========
Net======== ========
Pro forma net income (loss) per share - basic(1)basic (2) $ 0.880.08 $ 1.130.30 $ 0.700.24 $ (2.72)(0.02) $ (0.78)(0.02)
======== ======== ========= ========= ========= ========= =========
Weighted======== ========
Pro forma weighted average shares - basic(1) 2,923 3,117 5,370 5,551 5,439basic (2) 15,361 12,659 12,659 12,659 12,659
======== ======== ========= ========= ========= ========= =========
Net======== ========
Pro forma net income (loss) per share - diluted(1)diluted (2) $ 0.680.08 $ 0.890.30 $ 0.630.24 $ (2.72)(0.02) $ (0.78)(0.02)
======== ======== ========= ========= ========= ========= =========
Weighted======== ========
Pro forma weighted average shares - diluted(1) 3,895 3,981 5,990 5,551 5,439diluted (2) 15,367 12,659 12,659 12,659 12,659
======== ======== ========= ========= ========= ========= ================= ========
DecDEC 31, DecDEC 31, DecMAR 31, DecMAR 31, Jan 1,
1994 1995MAR 31,
1999 1998 1998 1997 1996
1997 1999
-------- -------- -------- -------- --------==== ==== ==== ==== ====
(in thousands)
BALANCE SHEET DATA:
BALANCE SHEET DATA:
Working capital $ 3,642(639) $ 7,131 $32,737 $15,938 $13,844(2,214) $ 3,412 $ 1,319 $ 1,665
Total assets 10,224 16,086 47,672 36,467 26,05463,087 14,865 10,896 8,868 10,129
Current portion of long-term debt 277 -- -- -- --1,147 685 675 656 975
Long-term debt, net of current portion 3,274 3,400 -- -- 2,00016,009 311 828 937 1,389
Total stockholders' equity 2,481 5,988 36,718 18,67 14,72410,886 (1,405) 3,142 935 1,017
(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.
15
(2) Net income (loss) per share has been restatedis presented for all applicable periods
presented in
accordance with the adoption of SFAS No. 128 Earnings per share.
1716
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
PIAThe Company provides merchandising services to manufacturers and
retailers principally in grocery, mass merchandiser, and chain, and discount drug stores.
Forand grocery
stores through its Merchandising Services Division. In addition, the years ended December 31, 1997,SPAR
Group's Incentive Marketing Division designs and January 1, 1999,implements premium incentives,
manages meetings and group travel for principally corporate clients. In March
2000, the Company generated approximately 74%established its Internet Division to separately market its
applications, software products and 59% of its net revenues from manufacturer
clientsservices. Although such products and
26% and 41% from retailer clients, respectively.
Duringservices were in part available through the five years that ended January 1, 1999, noneCompany's other divisions prior to
the establishment of the Company's
manufacturer or retailer clients accounted for greater than 10%Internet Division, the historical revenues and expenses
related to such software products and services generally were not maintained
separately and have been included below in the discussion of the Company's
net revenues, other than Thrifty-Payless, which accounted for approximately 13%condition and
results of net revenues for the year ended December 31, 1995,Merchandising Services Division and BVHEIncentive Marketing Division.
According to Generally Accepted Accounting Principles, upon an
acquisition, the acquired company's results of operations are not included in
the acquirer's results of operations prior to the date of acquisition. The SPAR
companies acquired substantially all of the assets of BIMA on January 16, 1999
(the "MCI Acquisition"). (See Notes 2 and S.C. Johnson
which accounted for 11.7%3 to the Financial Statements.) Under
GAAP, the SPAR/PIA merger completed on July 9, 1999 was deemed to be an
acquisition of PIA by SPAR. (See Notes 2 and 10.3%3 to the Financial Statements).
Therefore, the following discussions include only the results of net revenues, respectively, forSPGI subsequent
to January 15, 1999 and the year
ended December 31, 1996, and BVHE and Eckerd Drug Stores which accounted for
approximately 16.0% and 13.6% respectively,results of net revenues for the year ended
December 31, 1997, and Eckerd Drug Store, CVS Pharmacy, and BVHE which accounted
for approximately 15.6%, 12.6% , and 10.6% respectively, of net revenues for the
year ended January 1,PIA subsequent to July 8, 1999.
During the fiscal year 1998,third quarter of 1999, the Company continuedSPAR Group restructured its
operations by integrating the SPAR Marketing Companies and the PIA Companies'
field organizations and consolidating administrative functions where possible to
experience a
declineachieve beneficial synergies and cost savings. Although significant cost savings
were achieved during the third and fourth quarters of 1999, not all synergistic
programs had been implemented, and further cost savings are expected to be
achieved in its shared service business. Shared services consistthe first and second quarters of regularly
scheduled, routed merchandising services provided at the store level for
manufacturers, primarily under multi-year contracts. Due in part to industry
consolidation, increased competition,2000.
RESULTS OF OPERATIONS
The following table sets forth selected financial data and performance, the Company lost a number
of shared service clients in 1997 and 1998. The Company has historically
required a significant fixed management and personnel infrastructure to support
shared services. Accordingly, the loss of shared services business, without
offsetting gains, had a material adverse effect on the Company's results of
operations in 1997 and 1998. These losses have been partially offset with
additional project revenue from shared service clients. In 1997 and 1998, shared
service client's accounted for $83.8 and $83.0 million in net revenue and
dedicated clients accounted for $44.4 and $38.8 million in net revenue,
respectively. The Company believes revenues in fiscal year 1999 from shared
service clients will decline as a result of the wind-down of the lost business.
The Company's profitability has been adversely affected by the loss of
its dedicated client services business in 1998. However, this decline has been
offset by an increase in gross margin, both in absolute amount anddata as a
percentage of net revenues for the periods indicated.
YEAR ENDED DECEMBER NINE MONTHS ENDED YEAR ENDED
31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
---------------------------------------------------------------
Net revenues $ 116.5 100.0% $ 32.6 100.0% $ 36.8 100.0%
---------------------------------------------------------------
Cost of revenues 81.3 69.8 16.2 49.7 19.4 52.7
Selling, general & administrative expenses 28.8 24.7 10.0 30.7 12.1 32.9
Depreciation & amortization 2.2 1.9 0.1 0.3 0.2 0.5
Other expenses 1.6 1.4 0.2 0.6 0.4 1.1
---------------------------------------------------------------
Income before income tax provision 2.6 2.2 6.1 18.7 4.7 12.8
Provision for income taxes 3.1 2.7 - - - -
---------------------------------------------------------------
Net income (loss) $ (0.5) (0.4%) $ 6.1 18.7% $ 4.7 12.8%
===============================================================
Unaudited pro forma information:
Income before income tax provision $ 2.6 2.2% $ 6.1 18.7% $ 4.7 12.8%
Pro forma provision for income taxes 1.4 1.2 2.3 7.1 1.7 4.6
---------------------------------------------------------------
Net income $ 1.2 1.0% $ 3.8 11.6% $ 3.0 8.2%
===============================================================
17
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998
- ----
NET REVENUES
Net revenues for the twelve months ended December 31, 1999, increased
by $83.9 million or 257.4% from the nine months ended December 31, 1998, due
principally to the merger with the PIA Companies and the MCI Acquisition as a resultwell
as the inclusion of 12 months of SPAR's revenues in 1999. All of the effectsnet
revenues derived from the acquisition of improved labor
productivitythe PIA Companies and service cost reductionthe MCI
Acquisition since their respective dates of acquisition were included in the
field. Dedicated services consist
of merchandising services that are performed for a specific retailer or
manufacturer by a dedicated organization, including a management team, working
exclusively for that retailer or manufacturer. The nettwelve months ended December 31, 1999, with no comparable revenues associated with
dedicated clients decreased as a percentage of overall net revenues, from 34.6%
in 1997 to 31.9% in 1998.
Due to the change in business mix, and resulting negative impact on
margins, the Company realigned its cost structure, and, in the third quarter of
1997, recorded a charge of $5.4 million for restructuring and other costs
associated with the realignment of management structure and the organization.
The Company continues to review its organizational structure and the fixed and
variable costs associated with delivery of its services. It is anticipated that
further organizational changes will take place in the fiscal year 1999, as the
Company puts structure, programs and processes in place to reduce its fixed
overhead in line with lower revenue levels.nine
months ended December 31, 1998.
18
19
The following table sets forth net revenues by division in dollars and
as a percentage of total net revenues for the periods indicated:
Year Ended Nine Months Ended
December 31, 1999 December 31, 1998 Change
(amounts in millions) Amount % Amount % %
----------- ------------ ----------- ----------- ------------
Merchandising Services $ 79.6 68.3% $ 32.6 100.0% 144.2%
Incentive Marketing 36.9 31.7 - - -
----------- ------------ ----------- ----------- ------------
Net revenues $ 116.5 100.0% $ 32.6 100.0% 257.4%
=========== ============ =========== =========== ============
Merchandising Services net revenues for the twelve months ended
December 31, 1999, were $79.6 million, compared to $32.6 million for the nine
months ended December 31, 1998, a 144.2% increase. The increase in net revenues
is primarily attributed to the inclusion of $38.0 million of net revenues of the
PIA Companies' merchandising operations since their acquisition, as well as the
inclusion of 12 months of SPAR's revenues in 1999. Subsequent to the PIA merger,
the Company determined certain financial dataPIA merchandising programs were expensive to
manage, required high fixed costs and did not provide maximum value to the
respective customers. Attempts to reduce the costs of these programs and satisfy
the customer were unsuccessful. Consequently, these programs will no longer
continue in the year 2000. These programs represented approximately 29% of 1999
Merchandising Services' net revenues.
Incentive Marketing net revenues for the twelve months ended December
31, 1999, were $36.9 million, with no comparable net revenues for the nine
months ended December 31, 1998. The increase in net revenues is attributable
entirely to the inclusion of net revenues of SPGI since the MCI Acquisition.
COST OF REVENUES
Cost of revenues in the Merchandising Services segment consist of
in-store labor (including travel expenses) and field management. Cost of
revenues in the Company's Incentive Marketing segment consists of direct labor,
independent contractor expenses, food, beverage, entertainment and travel costs.
Cost of revenues for the twelve months ended December 31, 1999, were $81.3
million or 69.8% of net revenues, compared to $16.2 million or 49.7% of net
revenues for the nine months ended December 31, 1998,.
The following table sets forth cost of revenues by segment in dollars and
as a percentage of segment net revenues for the periods indicated:
Year Ended December Nine Months Ended
31, 1999 December 31, 1998 Change
(amounts in millions) Amount % Amount % %
----------- ------------ ----------- ----------- ------------
Merchandising Services $ 50.5 63.4% $ 16.2 49.7% 211.7%
Incentive Marketing 30.8 83.5 - - -
----------- ------------ ----------- ----------- ------------
Total cost of revenues $ 81.3 69.8% $ 16.2 49.7% 401.9%
=========== ============ =========== =========== ============
19
Merchandising Services cost of revenues as a percentage of net revenues
increased 211.7% to 63.4% for the twelve months ended December 31, 1999,
compared to 49.7% for the nine months ended December 31, 1998. This increase is
principally attributable to the higher labor cost structure of the PIA
Companies' field organization. The SPAR Group has taken steps to control and
improve gross profits and has implemented synergy plans to control direct costs
(see Restructuring and Other Charges, Note 14, to the Financial Statements
included in this Form 10-K).
Incentive Marketing cost of revenues as a percentage of net revenues
was 83.5 % for the twelve months ended December 31, 1999, with no comparable
cost of revenues for the nine months ended December 31, 1998.
20
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 resources expenses, and accounting expenses. The
following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
YEARS ENDED
---------------------------------------------
DECEMBERYear Ended December Nine Months Ended
31, DECEMBER1999 December 31, JANUARY 1,
1996 1997 1999
============ ============ ==========
Net revenues 100.0% 100.0% 100.0%
Operating expenses:
Field services costs 79.1 93.5 86.6
Selling expenses 9.3 8.2 6.8
General and administrative expenses 6.7 8.0 9.7
Restructure and other charges 0.0 4.2 0.0
Depreciation and amortization 0.5 0.8 0.9
------ ------ ------
Total operating expenses 95.6 114.7 104.0
------ ------ ------
Operating income (loss) 4.4 (14.7) (4.0)
Other income 0.8 0.7 0.5
------ ------ ------
Income (loss) before provision (benefit) for income taxes 5.2 (14.0) (3.5)
Provision (benefit) for income taxes 2.0 (2.2) --
------ ------ ------
Net income (loss) 3.2% (11.8)% (3.5)%
====== ====== ======
YEAR ENDED JANUARY 1, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES
For fiscal year 1998, net revenues were $121.8 million, compared to
$128.2 million in 1997, a 5.0% decrease. Shared service and project client net
revenues decreased from $83.8 million in 1997 to $83.0 million in 1998, a
decrease of $0.8 million or 1.0%. In 1998, the traditional shared services,
consisting of regularly scheduled routed merchandising service, decreased from
$44.9 million in 1997 to $40.1 million. This decrease of $4.8 million or 10.7%
was due in part to industry consolidation, increased competition and client
reorganization of marketing strategy. During the same period project revenues
for shared service clients increased by $4.0 million or 10.3% primarily due to a
major client switching from a dedicated program to a shared service program. The
Company's dedicated client net revenues declined from $44.4 million in 1997 to
$38.8 million in 1998, representing a 12.6% decrease. This decrease in dedicated
client net revenues resulted primarily from the completion of a major drug chain
dedicated program. Management expects that net revenues from dedicated clients
will decrease in 1999 due to the completion of a $15.0 million project in the
last quarter of 1998.
The following table sets forth net revenues by client type as a percentage of
net revenues for the periods indicated:
YEARS ENDED
------------------------------------------------------------------
DECEMBER 31, JANUARY 1,
1997 1999 CHANGE
------------------ ------------------- ------------------
(dollars1998 Change
(amounts in millions) AMOUNTAmount % AMOUNTAmount % AMOUNT %
------- ------- ------- ------- ------- --------------------------------------------------------------------
Shared serviceSelling, general & administrative $ 28.8 24.7% $ 10.0 30.7% 188.0%
Depreciation and project client net revenuesamortization 2.2 1.9 0.1 0.3 2100.0%
-------------------------------------------------------------
Total operating expenses $ 83.8 65.4%31.0 26.6% $ 83.0 68.1% $ (0.8) (1.0)%
Dedicated client net revenues 44.4 34.6 38.8 31.9 (5.6) (12.6)
------- ----- ------- ----- ------ -----
Net revenues $ 128.2 100.0% $ 121.8 100.0% $ (6.4) (5.0)%
======= ===== ======= ===== ====== =====10.1 31.0% 206.9%
=============================================================
19
20
OPERATING EXPENSES
Field service costs were $105.4Selling, general and administrative expenses increased by 188.0% for
the twelve months ended December 31, 1999, to $28.8 million in the fiscal year 1998 compared to $119.8$10.0
million in 1997, representing a decrease of $14.4 million, or 12.0%.
As a percentage of net revenues, field service costs were 93.5% of net revenues
in 1997 versus 86.6% of net revenues infor the nine months ended December 31, 1998. Field service costs are comprised
principally of field labor and related costs and overhead expenses required to
provide services to both dedicated and shared service clients. The decrease in
field service costs is primarily due to significant labor efficiency savings
from new labor deployment systems and controls and a decline in services due to
the completion of a dedicated project in the third quarter 1998.
Selling expenses were $8.2 million in 1998, compared to $10.5 million in
the prior year. As a percentage of net
revenues, selling, expenses were 6.8% in
1998, compared to 8.2% in 1997. This decrease in costs, both in absolute amount
and as a percentage of net revenues, is a result of lower staffing and travel
expenses.
Generalgeneral and administrative expenses increased 15.2%decreased to 24.7% for
the twelve months ended December 31, 1999, from 30.7% for the nine months ended
December 31, 1998. This increase in 1998 to $11.8
million, compared to $10.2 million in 1997. This increasedollars was due primarily to consultingthe inclusion
of both SPGI and promotional expensesthe PIA Companies' higher overhead structure during 1999, a non
recurring expense of $1.0$.8 million salary and salary related
expenses of $0.5 million to support technology advancements, office equipment
and leases of $0.7 million, offset by a reduction in bad debt provision of $0.8
million due to improved collection of outstanding accounts.
Restructuring and other charge payments of $5.0 million did not
significantly differresulting from the initialgrant of options and
issuance of stock to a consultant, the result of approximately $.6 million of
non recurring merger related selling, general and administrative expenses, as
well as the inclusion of 12 months of SPAR's selling, general and administrative
expenses in 1999. The decrease in selling, general and administrative expenses
as percentage of net revenue reflects the results of the partial implementation
of the Company's restructuring plan during 1999, and other charges expense.
In addition, accrued liabilities forthe increase in revenue
resulting from the acquisitions of the PIA and SPGI businesses. Through December
1999, operating initiatives have reduced selling, general and administrative
expenses by approximately $.9 million per month. The Company expects that the
continued implementation of its restructuring at January 1, 1999 of $0.4
millionplan during 2000 will be sufficient to pay remaining employee separation costsfurther
reduce selling, general and special computer equipment under long-term operating leases no longeradministrative expenses in use.
(See Note F-12).the future.
Depreciation and amortization increased by $2.1 million for the twelve
months ended December 31, 1999, due primarily to the amortization of goodwill
recognized by the purchases of the PIA Companies and the business and assets of
MCI, as well as from depreciation and amortization of customized internal
software costs capitalized (under SOP 98-1) in previous periods.
OTHER EXPENSES
Other expenses were $1.1increased $1.4 million infor the twelve months ended
December 31, 1999, over the nine month period ended December 31, 1998, compareddue to
$1.0increased interest expenses resulting from increased borrowings on the bank
revolving line of credit and term loan and MCI seller financing.
INCOME TAXES
Income taxes increased to $3.1 million in 1997, anfor the twelve months ended
December 31, 1999, from zero for the nine months ended December 31, 1998. The
increase of $0.1 million aswas a result of depreciation, amortization on computer hardware, software development costs for
shelf technology and for general business purposes.
OTHER INCOME
Interest income decreased 42.2% or $0.3 million in 1998 compared to
1997, due to lower cash balances available for investment in 1998.
Equity in earnings of affiliate represents the Company's sharetermination of the earningssubchapter S status of Ameritel, Inc., a full service telemarketing company. Equitycertain
of earnings of affiliate increased 55.2% or 0.1 million in 1998 compared to 1997.
During 1996, the Company exercised its option to increase its ownership of
Ameritel to 20%SPAR companies for federal and is now required for financial reporting purposes to
recognize its equity interest in Ameritel's earnings.state tax purposes.
21
PRO FORMA INCOME TAXES
Income tax expense was approximately $0.1 million in 1998, compared to
anThe pro forma income tax benefit of $2.8 million in 1997, representing an effective rate of
1.3%provisions for the twelve months ended December
31, 1999, and (15.5)%, respectively. Thenine months ended December 31, 1998, tax rate differed from the expectedhave been computed using a
combined federal and state income tax rate of 35% due to a valuation allowance36.9% after adjusting for the
effects of $1.6 million on the
Company's deferred tax asset, caused by anon-tax deductible items.
PRO FORMA NET INCOME
The SPAR Group had pro forma net operating loss carryforward
created in 1998 and the uncertainty over the future utilization of such
carryforwards. An income tax benefit in 1997 was derived from carrying back
net operating losses to previous years and obtaining an income tax refund of
$2.9 million.
NET LOSS
The Company incurred a net loss of approximately $4.3$1.2 million
in 1998,
$0.78for the twelve months ended December 31, 1999, or $0.08 per pro forma basic and
diluted share compared to apro forma net lossincome of $3.8 million or $0.30 per pro
forma basic and diluted share for the nine months ended December 31, 1998. The
decrease in pro forma net income is primarily the result of the inclusion of
approximately $15.1$1.9 million or $2.72 per diluted share, in 1997.losses generated by the PIA Companies and
Incentive Marketing Division for the six and eleven and one half months,
respectively, ended December 31, 1999. The improved performance duringCompany is currently consolidating
and restructuring the operations of the PIA Companies to reduce labor and
administrative costs (see Restructuring and Other Charges, Note 14, to the
Financial Statements included in this Form 10-K).
NINE MONTHS ENDED DECEMBER 31, 1998, COMPARED TO TWELVE MONTHS ENDED MARCH 31,
- ------------------------------------------------------------------------------
1998
- ----
NET REVENUES
Net revenues for the nine months ended December 31, 1998, were $32.6
million, as compared to net revenues for the twelve months ended March 31, 1998,
of $36.8 million. On an annualized basis, net revenues for the nine-month period
ended December 31, 1998, would have been $43.5 million, an 18.2% increase over
the prior twelve-month period. The increase was primarily due to labor efficiency savings from utilizing new labor systems and
controls, reduction in field service costs from the implementationincreased sales
of the 1997
restructure programs. The loss incurred in 1998 is primarily a result of margin
reductions because of reductions in dedicated clients and higher business unit
overhead rates.
20
21
NEW FINANCIAL MODEL
The Company has developed a new financial model with which its business
can be analyzed to assistin-store merchandising, predominantly in the understandinghome video sector.
COST OF REVENUES
Cost of the operating resultsrevenues consists of in-store labor (including travel expenses)
and impactfield management. Cost of various cost functions within the organization. This model follows
more standard metrics and allows the Company to analyze and manage at the
business unit level. The following table illustrates this financial modelrevenues for the yearsnine months ended December 31,
19971998, and January 1, 1999.
Management expects to continue to review the business results based on
the comparable financial statement format contained in this Form 10-K until
comparisons can be made using the new financial model.
YEARS ENDED
--------------------------------------------------------
DECEMBER 31 JANUARY 1
1997 1999
----------------------- -----------------------
(dollars in millions)
AMOUNT % AMOUNT %
------ ------ ------ ------
Net revenues $128.2 100.0% $121.8 100.0%
Direct business unit field expense 98.7 77.0 88.9 73.0
------ ------ ------ ------
Gross margin 29.5 23.0 32.9 27.0
Overhead and allocated field expense 26.6 20.7 20.8 17.1
------ ------ ------ ------
Business unit margin 2.9 2.3 12.1 9.9
------ ------ ------ ------
Selling, general and administrative expenses 15.3 11.9 15.8 12.9
Restructure and non-recurring charges 5.4 4.2 0.0 0.0
------ ------ ------ ------
Total selling, general and administrative expenses 20.7 16.1 15.8 12.9
------ ------ ------ ------
Earnings (loss) before interest, taxes, depreciation
and amortization (EBITDA) (17.8) (13.8) (3.7) (3.0)
Depreciation and amortization (1.0) (0.8) (1.1) (0.9)
Other income 0.9 0.7 0.6 0.5
Income tax benefit (provision) 2.8 2.1 (0.1) (0.1)
------ ------ ------ ------
Net loss $(15.1) (11.8)% $ (4.3) (3.5)%
====== ====== ====== ======
YEAR ENDED DECEMBERtwelve months ended March 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES
For 1997, net revenues1998 were $128.2$16.2 million compared to $119.9and $19.4
million, in 1996, a 6.9% increase. The Company's dedicated client net revenues had grown
from $21.9 million in 1996 to $44.4 million in 1997, a 102.7% increase. This
increase in dedicated client net revenues resulted from the addition of two
major new clients. Shared service and project client net revenues decreased from
$98.0 million in 1996 to $83.8 million in 1997, a decrease of $14.2 million or
14.5%. In 1997, the traditional shared services, consisting of regularly
scheduled routed merchandising services, decreased from $68.4 million in 1996 to
$44.9 million in 1997. Resulting in a decrease of $23.5 million or 34.4%, while
project revenues for shared clients increased to $9.3 million or 31.4%
21
22
The following table sets forth net revenues by client type as a percentage of
net revenues for the periods indicated:
YEARS ENDED
-------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
1996 1997 CHANGE
-------------------- ------------------- --------------------
(dollars in millions)
AMOUNT % AMOUNT % AMOUNT %
------ ------ ------ ------ ------ ------
Shared service and project client net revenues $ 98.0 81.7% $ 83.8 65.4% $(14.2) (14.5)%
Dedicated client net revenues 21.9 18.3 44.4 34.6 22.5 102.7
------ ------ ------ ------ ------ ------
Net revenues $119.9 100.0% $128.2 100.0% $ 8.3 6.9 %
====== ====== ====== ====== ====== ======
OPERATING EXPENSES
In 1997, field service costs increased $25.0 million, or 26.3%, to
$119.8 million, as compared to $94.8 million in 1996.respectively. As a percentage of net revenues, field service costs were 79.1%cost of revenues for the
nine months ended December 31, 1998, decreased slightly to 49.7% of net
revenues, in 1996 versus 93.5% of
net revenues in 1997. Field service costs are comprised principally of field
laborcompared to 52.7% for the twelve months ended March 31, 1998.
OPERATING EXPENSES
Operating expenses include selling, general and their related costs,administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management information systems,
executive compensation, human resources expenses, required to provide
services to both dedicated and shared service clients. The increase in field
service costs is due primarily to labor costs required to provide the necessary
level of business support for dedicated clients. In addition, the Company did
not adequately decrease shared client service laboraccounting expenses.
Selling, general and overhead costs as the
net revenue from this client base decreased.
Sellingadministrative expenses were $10.5$10.0 million in 1997, compared to $11.1for the
nine months ended December 31, 1998, versus $12.1 million in 1996.for the twelve months
ended March 31, 1998. As a percentage of net revenues, selling, general and
administrative expenses were 8.2% in 1997,30.7% for the nine months ended December 31, 1998,
compared to 9.3% in 1996.32.9% for the twelve months ended March 31, 1998. This decrease is
primarily the result of higher net revenues and continued cost controls
implemented by the Company during the nine months ended December 31, 1998.
Depreciation and amortization decreased approximately $19,000 for the
nine months ended December 31, 1998, compared to the twelve months ended March
31, 1998. However, on an annualized basis, depreciation and amortization for the
nine month period ended December 31, 1998, would have been approximately
$189,000, an increase of approximately $28,000, an amount consistent with the
increase in costs, both in absolute amountfixed assets during the nine month period ended December 31, 1998.
22
OTHER EXPENSES
Other expenses decreased to approximately $155,000 for the nine months
ended December 31, 1998 from approximately $390,000 for the twelve months ended
March 31, 1998. As a percentage of net revenue, other expenses decreased to 0.6%
for the nine months ended December 31, 1998, from 1.1% for the twelve months
ended March 31, 1998.
PRO FORMA INCOME TAXES
The pro forma income tax provisions for the nine months ended December
31, 1998, and astwelve months ended March 31, 1998, have been computed using a
combined federal and state income tax rate of 36.9% after adjusting for the
effects of non-tax deductible items.
PRO FORMA NET INCOME
As a result of the factors discussed above, pro forma net income
increased to $3.8 million or $0.30 per pro forma basic and diluted share for the
nine months ended December 31, 1998, from $3.0 million or $0.24 per pro forma
basic and diluted share for the twelve months ended March 31, 1998. On an
annualized basis, pro forma net income for the nine months ended December 31,
1998, would have been $5.1 million, a 70% increase over the twelve months ended
March 31, 1998. As a percentage of net revenues, is a result of lower staffing and travels.
General and administrative expensespro forma net income increased
25.9% in 1997 to $10.2
million, compared to $8.1 million in 1996. The increase in general and
administrative expenses was due to increases in expenses that were required to
support overall business growth, including a larger dedicated client base. The
major increases included executive salaries and salary related expenses of $0.3
million, recruiting, employment and training of $0.3 million, and consulting,
legal and office lease expense of $0.6 million. In addition, increased costs
were experienced due to termination costs.
During 1997, the Company experienced declining gross margins, and
resultant operating losses, due to service performance issues and the loss of
several shared clients. This decline in margins has resulted in insufficient
margin dollars to cover the overhead structure, which had developed at the field
level and in the general corporate area. In the quarter ended September 30,
1997, the Company began to address these conditions by restructuring its
operations. The Company redirected its focus in the quarter ended September 30,
1997, on a more disciplined and functional structure. These strategies resulted
in a $5.4 million charge11.7% for the restructuring and other additional charges. The
restructure and other charges consisted of $1.5 million of identified severance,
lease costs in various management and administrative functions and $2.1 million
in write-downs and accruals associated withnine months ended December 31, 1998, from 8.2% for the redirection of the Company's
technology strategies. Additional charges consist primarily of $1.3 million of
reserves, write-offs related to unprofitable contracts and $0.5 million of costs
associated with changes in the Company's service delivery model.
Depreciation and amortization expenses were $1.0 million in 1997
compared to $0.6 million in 1996. The depreciation and amortization on computer
hardware and the software development costs for shelf technology increased this
expense $0.4 million.
22
23
OTHER INCOME
Interest income decreased slightly in 1997 compared to 1996, due to
lower cash balances available for investment in 1997. Other income included
interest income on the net proceeds from the Company's initial public offering,
which took place intwelve
months ended March 1996.
Equity in earnings of affiliate represents the Company's share of the
earnings of Ameritel, Inc., a full service telemarketing company. Equity in
earnings of affiliate increased by 33.3% in 1997 compared to 1996. During 1996,
the Company exercised its option to increase its ownership of Ameritel to 20%
and is now required for financial reporting purposes to recognize its equity
interest in Ameritel earnings.
INCOME TAXES
Income tax benefit was approximately $2.8 million in 1997, compared to
income tax expense of $2.4 million in 1996, representing an effective rate of
(15.5%) and 39.2%, respectively. The 1997 tax benefit rates differed from the
expected Federal and tax rate of 35% due to a valuation allowance of $3.6
million on the Company's deferred tax asset, caused by a net operating loss
carryforward created in 1997.
NET LOSS
The Company incurred a net loss of approximately $15.1 million in 1997,
$2.72 per diluted share, compared to net income of approximately $3.8 million,
or $0.63 per diluted share, in 1996. The net loss for 1997 included the net
impact, after related tax benefit, of restructure and other charges of $4.6
million, or $0.83 per diluted share. The loss incurred in 1997 is primarily a
result of margin reductions due to reductions in shared service clients and
start up expenses on dedicated client services, inefficiencies in field labor
execution, poor pricing decisions for some client contracts, higher business
unit overhead costs and the recognition of restructure charges and other
non-reoccurring charges.31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
On March 1, 1996,In the Company completed an initial public offeringtwelve months ended December 31, 1999, the SPAR Group had
pre-tax income of its Common Stock, raising $26.5$2.6 million and experienced a negative operating cash flow of
$5.0 million. PriorAs previously noted, the Merger with PIA was consummated on July
8, 1999, and is expected to this offering,reduce fixed costs and create synergies directly
impacting the Company's
primary sourcesSPAR Group's profitability and cash flow.
The SPAR Group experienced a net increase in cash and cash equivalents
of financing were senior borrowings from a bank under a$1.2 million for the twelve months ended December 31, 1999. With the existing
revolving line of credit, subject to availability, timely collection of
receivables, and subordinated borrowings from two stockholders. Asthe SPAR Group's current working capital position, management
believes the funding of January 1, 1999,operations over the Company usednext twelve months will be
sufficient to maintain on-going operations.
DEBT
Prior to the proceeds from the offering to repay
bank debtMerger, SMF had a loan facility comprised of $3.4 million, to repurchase 507,000 sharesa term loan
of the Company's stock
for approximately $3.0 million and to fund the Company's operating losses in
1997 and 1998. During the year ended January 1, 1999, the Company had a net
decrease in cash of $1.9 million, resulting from its operating losses and
restructure charge payments and a reduction in accounts payable, that were
offset partially by a reduction in accounts receivable, income tax receivable
and proceeds of $2.0 million from its line of credit.
In March 1997, the Company's Board of Directors approved a stock
repurchase programan asset based revolving credit facility under which the Companyit was
authorizedable to repurchaseborrow up to 1,000,000 sharesa maximum of Common Stock from time$6.0 million depending upon its borrowing base
availability (See Note 5 to time in the open market, depending
on market conditions. This program was fundedFinancial Statements), which has been superseded
by proceeds from(and continued as part of) the initial
public offering. Ascurrent facility described below.
In 1999, IBJ Whitehall and the members of July 14, 1997, the Company repurchased an aggregate of
507,000 shares of its Common Stock for an aggregate price of approximately $3.0
million. No further repurchases are currently planned.
In December 1998,SPAR Group (other than
PIA Merchandising Co., Inc. ("PIA Co."Canada) (collectively, the "Borrowers") and another
subsidiary of PIA entered into a loanRevolving Credit,
Term Loan and security agreementSecurity Agreement (the "Bank Loan Agreement"), pursuant to which
the Borrowers are permitted to borrow up to a maximum of $14 million on a
revolving credit basis, and $2.5 million on a term basis (the "Term Loan"). The
revolving loans bear interest at IBJ Whitehall's "Alternate Base Rate I" plus
one-half of one percent (0.50%) (a total of 9.5% per annum at December 31,
1999), and the Term Loan bears interest at such "Alternate Based Rate II" plus
three-quarters of one percent (0.75%) (a total of 10.0% per annum at December
31, 1999). The Bank Loan Agreement's revolving credit loans of $1.5 million and
$12.5 million are scheduled to mature on June 30, 2000, and September 21, 2002,
respectively. The Term Loan amortizes in equal monthly installments of $83,334
each. In addition, the Borrowers are required to make mandatory prepayments in
an amount equal to 25% of Excess Cash Flow, as defined in the Bank Loan
Agreement, for each fiscal year, to be applied first to the Term Loan and then
to the revolving credit loans (subject to the Borrowers'
23
ability to re-borrow revolving advances in accordance with Mellonthe terms of the Bank
N.A.Loan Agreement). The agreement providesfacility is secured with the assets of the SPAR Group.
The Bank Loan Agreement contains an option for the Bank to purchase
16,667 shares of common stock of the Company for $0.01 per share in the event
that the Company's average closing share price over ten consecutive trading day
period exceeds $15.00 per share. This option expires September 22, 2002.
The Bank Loan Agreement contains certain financial covenants that must
be met by the Borrowers on a consolidated basis, among which are a minimum "Net
Worth," a "Fixed Charge Coverage Ratio", a minimum ratio of Debt to EBITDA, and
a minimum EBITDA, as such terms are defined in the Bank Loan Agreement.
The balance outstanding on the revolving line of credit that allows maximum
borrowing of $20.0was $13.3
million and requires PIA Co. to borrow and maintain a minimum
balance of $2.0 million. The three-year credit facility will be used for working
capital purposes and potential acquisitions.
Cash and cash equivalents totaled $11.1 million at January 1, 1999
compared with $13.0$4.1 million at December 31, 1997. At January 1, 1999, and 1998, respectively. As of
December 31, 1997,1999, the CompanySPAR Group had working capitalunused availability under the line of
$13.8 million and $15.9
million, respectively, and current ratios of 2.50 and 1.95, respectively.
23
24credit to borrow up to an additional $700,000.
CASH AND CASH EQUIVALENTS
Net cash used in operating activities in 1998for the twelve months ended
December 31, 1999, was $3.4$5.0 million, compared with $2.8net cash provided of $5.3
million in 1997.for the nine months ended December 31, 1998. This use of cash for
operating activities in 19981999 resulted from an increase in accounts receivable
consistent with the increase in revenues subsequent to the PIA and MCI
acquisitions, as well as decreases in accounts payable and deferred revenue (net
of the PIA and MCI acquisitions).
Net cash provided from investing activities for the twelve months ended
December 31, 1999, was $5.0 million, compared with net cash used of $731,000 for
the nine months ended December 31, 1998. The increase in net cash provided from
investing activities resulted primarily from the purchases of PIA and MCI during
1999, net operating losses of $4.3 million and a reduction in
accrued liabilities primarily attributed to the Company's 1997 restructuring and
other charges and a reduction in accounts payable of $2.2 million related to a
reduction in third party payroll liability. These uses were offset by an income
tax refund of $2.9 million outstanding in 1997 and a decrease in account
receivable of $5.1 million from improved collection of outstanding accounts. Net
cash used in investing activities for 1998 was $0.7 million compared to $0.8
million in 1997 from additions to property and equipment and internally
developed software.acquired.
Net cash provided by financing activities for 1998the twelve months ended
December 31, 1999, was $2.1$1.1 million, compared towith net cash used inby financing
activities of $2.9 million$910,000 for the nine months ended December 31, 1998. The increase
in 1997. In 1998net cash provided from financing activities was primarily due to borrowings
made during 1999 on the Company received net proceeds from the issuance of common
stock of $0.1 million and increased theCompany's line of credit by $2.0 million.credit.
The above activity resulted in a decreasenet increase in cash and cash
equivalents of $1.9$1.2 million for the yeartwelve months ended January 1, 1999.December 31, 1999,
compared to a net decrease of $1.0 million for the nine months ended December
31, 1998.
Cash and cash equivalents totaled $2.1 million at December 31, 1999,
compared with $910,000 at December 31, 1998. At December 31, 1999, the Company
had negative working capital of $639,000 as compared to negative working capital
at December 31, 1998 of $2.2 million, and current ratios of 1.0 and 0.9 as of
December 31, 1999, and 1998, respectively.
Cash and cash equivalents and the timely collection of its receivables
provide the Company'sSPAR Group's current liquidity. However, the potential uncollectibilityof delays in
collection of receivables due from any of PIA'sthe SPAR Group's major clients, or a
significant reduction in business from such clients, or the inability to acquire
new clients, would have ana material adverse material effect on the Company'sSPAR Group's cash
resources and its ongoing ability to fund operations.
24
The Company had a 4.3 million loss and experienced a decrease in cash
and cash equivalents of $1.9 million for the year ended January 1, 1999.
However, with the addition of the revolving line of credit, timely collection of
receivables, and the Company's positive working capital position, management
believes the funding of operations over the next twelve months will be
sufficient.
PIA may incur additional indebtedness in 1999 in connection with the
merger. SPAR Group acquired the assets of an incentive marketing company in
January 1999. A portion of the purchase price was paid through the issuance of a
promissory note in the principal amount of $12,422,189 (plus an earnout, if
any), which matures on September 15, 1999. In addition, the stockholders of SPAR
Group loaned SPAR Group $2,958,000 to facilitate the acquisition. If this
indebtedness is not repaid before the transaction with PIA is consummated, the
combined company will assume these obligations. PIA will also be obligated, under certain circumstances, to pay
severance compensation to its employees and other costs in connection with the
merger. Further, PIA will incurMerger of approximately $5.4 million. In addition, the Company incurred
substantial costscost in connection with the transaction, including legal, fees of approximately $0.4
millionaccounting
and investment banking fees estimated to be an aggregate unpaid obligation of
approximately $1.0$1.3 million. The SPAR Group has also accrued approximately $2.4
million for expenses incurred by PIA has
entered into discussionsprior to the Merger, which have not been
paid. Management believes the current bank credit facilities are sufficient to
fund operations, and working capital, including the current maturities of debt
obligations, but may not be sufficient to reduce obligations of the Merger with
Mellon Bank toPIA. The Company is currently negotiating with its bank for an increase in its
credit line to enable
itfacility to meet the non-operational credit needs and is also working to
secure additional long-term capital. However, there can be no assurances that
the Company will be successful in these negotiations.
The transfer of the Company's securities to the Nasdaq SmallCap Market
also could affect its cash needsability to raise equity capital.
Certain former principal stockholders of the SPAR Companies each made
loans to certain SPAR Companies in connection with the mergeraggregate amount of $4.3 million to
facilitate the acquisition of the PIA Companies and future potential
acquisitionsthe assets of Old MCI. These
stockholders also were owed $1.9 million in 1999.unpaid distributions relating to the
former status of certain of the operating SPAR Companies as Subchapter S
Corporations (See Note 13 to the Financial Statements). Those amounts were
converted into promissory notes issued to these certain stockholders severally
by SMF, SINC and SPGI prior to the Merger, which aggregated $6.2 million. As of
December 31, 1999, a total of $5.8 million remained outstanding under these
notes.
YEAR 2000 SOFTWARE COSTS
Many currently installed computerAs of the filing date of this Annual Report on Form 10-K, the Company
has not experienced any Year 2000 issues arising from its systems or those of
its material vendors and software productssuppliers. If there are codedongoing Year 2000 issues that
might arise at a later date, the Company has contingency plans in place to
accept only two digit entriesaddress these issues. The Company continues to maintain contact with third
parties with whom it has material relationships, such as vendors, suppliers and
financial institutions, with respect to the third parties' Year 2000 compliance
and any ongoing Year 2000 issues that might arise at a later date. The Company
has incurred costs of approximately $500,000 in the date code field. As a result, many
date-sensitive computer applications will fail beginning January 1, 2000 because
they are unable to process dates properly beyond December 31, 1999. PIA has
reviewed its computer systems to identify areas that could be affected byconnection with identifying,
assessing, remediating and testing Year 2000 issues and has implemented a plan to resolve these issues.
PIA has substantially completed the evaluation of its information
technology infrastructure, software, hardware and communications systems. PIA
believes that its critical hardware and software applications are currently Year
2000 compliant. Completion of PIA's plan to upgrade all hardware and software
applications to be Year 2000 compliant is expected by the third quarter of 1999.
Third party vendors are also being reviewed for Year 2000 compliance and PIA
expects this risk assessment to be complete by the second quarter of 1999. PIA's
assessment and evaluation efforts include testing systems, inquiries of third
parties and other research. By implementing significant systems upgrades, PIA
believes that it has substantially reduced its potential internal exposure to
Year 2000 problems.
In the event that certain systems fail to function properly, manual
processes will be implemented. Due to the nature of the business, PIA does not anticipate a system failureexpect to cease the operations, as operations are not
deemed to be systems dependent. Additionally, PIA plans to be capable of
operatingincur
material costs in the eventfuture. These costs have consisted primarily of personnel
expense for employees who have had only a systems failureportion of any vendor.
24
25
PIA will utilize internal resourcestheir time dedicated to reprogram, or replace and test
the software for Year 2000 modifications. The total cost of the
Year 2000 project is estimated at $67,000remediation effort. It has been the Company's policy to expense these
costs as incurred. These costs were expensed prior to December 31, 1999, and
is beinghave been funded through operating cash flows. OfIn light of the total project cost, approximately $6,000 was expensed inCompany's
efforts, the fiscal year 1998Year 2000 issue has had no material adverse effect to date on the
business or results of operations of the Company, and the remaining $61,000 will be expensed in 1999. It is not expected that these costs willto have a
material effectimpact on the results of
operations.
The extent and magnitude ofCompany's financial condition. However, there can be no
assurance that the Company or any third parties will not have ongoing Year 2000
problem as it will affect PIA
externally, both before and after January 1, 2000, is difficult to predict or
quantify for a number of reasons. These include the lack of control over systemsissues that are used by third parties that are critical to PIA's operation, the
complexity of testing inter-connected networks and applications that depend on
third party networks. If any of these third parties experience Year 2000
problems, it couldmay have a material adverse effect on PIA.
PIA is not currently aware of any material operational issues associated
with preparing its internal systems for the Year 2000, orCompany's business,
operating results and financial condition in the adequacy of
critical third party systems. PIA has not developed a contingency plan in case
it does not achieve Year 2000 compliance on or before December 31, 1999. The
results of its evaluation and assessment efforts do not indicate a need for
contingency planning. PIA intends to continue assessing its Year 2000
compliance, implementing compliance plans and communicating with third parties
about their Year 2000 compliance. If PIA's continued efforts indicate that
contingency planning is prudent, PIA will undertake appropriate planning at that
time.future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The CompanySPAR Group is exposed to market risk related to changes inthe variable
interest rates. A discussionrate on the line of credit and term note and the Company'svariable yield on its
cash and cash equivalents. The SPAR Group's accounting policies for financial
instruments and further disclosures relating to financial instruments is
includedrequire that the
SPAR Group's consolidated balance sheets include the following financial
instruments: cash and cash equivalents, accounts receivable, accounts payable
and long term debt. The SPAR Group considers carrying amounts of current assets
and liabilities in the Summaryconsolidated financial statements to approximate the fair
value for these financial instruments, because of Significant Accounting Policies in the Notes to
Consolidated Financial Statements.relatively short period of
time between origination of the instruments and their expected realization. The
Company'scarrying amounts of long-term debt approximate fair value because the obligation
bears interest at a floating rate. The SPAR Group monitors the risks associated
with interest rates and financial instrument positions. The Company'sSPAR Group's
investment policy
25
objectives require the preservation and safety of the principal, and the
maximization of the return on investment based upon the safety and liquidity
objectives.
The SPAR Group's revenue derived from international operations is not
material and, therefore, the risk related to foreign currency exchange rates is
not material.
INVESTMENT PORTFOLIO
The CompanySPAR Group has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments. The CompanySPAR
Group invests its cash and cash equivalents andin investments in high-quality and
highly liquid investments consisting of taxable money market instruments,
corporate bonds and some tax-exempt securities. The average yields on the
Company's investments in fiscal 1998 resulted primarily from investments and
averaged approximately 4.9%. As of January 1, 1999, PIA's cash and cash
equivalents and investments consisted primarily of taxable money market
instruments, corporate and tax-exempt securities with maturities of less than
one year with an average yield of approximately 3.7%.
DEBT
The Company's debt is comprised of a line of credit with Mellon Bank
N.A. and requires monthly interest payments based on a variable interest rate
applied to the outstanding loan balance. If there were a 1% change in the
interest rate based upon, the Company's minimum borrowing requirement of
$2,000,000, interest expense would increase or decrease by $20,000 per annum.instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
26
PART III
ITEMS 10, 11, 12 AND 13.
The information required in these items 10, 11, 1210,11,12 and 13 of this Form
10-K is incorporated by reference to those portions of the Company's 19992000 Proxy
Statement, which contains such information.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(A) 1. INDEX TO FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT:
Independent Auditors' Report F-1
Consolidated and Combined Balance Sheets as of December 31, 19971999 and
January 1, 1999December 31, 1998 F-2
Consolidated and Combined Statements of Operations for the three years
inyear ended
December 31, 1999, for the nine month period ended January 1, 1999 F-4December 31,
1998, and the year ended March 31, 1998 F-3
Consolidated and Combined Statements of Stockholders' Equity for the
three years
inyear ended December 31, 1999, for the nine month period ended
January 1, 1999 F-5December 31, 1998, and the year ended March 31, 1998 F-4
Consolidated and Combined Statements of Cash Flows for the three years inyear ended
December 31, 1999, for the nine month period ended January 1, 1999 F-6December 31,
1998, and the year ended March 31, 1998 F-5
Notes to Consolidated Financial Statements for the three years
in the period ended January 1, 1999 F-8F-6
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts for the three years inended
December 31, 1999 the nine month period ended January 1, 1999 F-25December 31, 1998,
and the year ended March 31, 1998 F-39
3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc.,
as amended. (incorporated by reference to the
Company's Registration Statement on Form S-1
(Registration No. 33-80429) as filed with the
Securities and Exchange Commission on December 14,
1995 (the "Form S-1") and to Exhibit 3.1 to the
Company's Form 10-Q for the 3rd Quarter ended
September 30, 1999).
3.2 By-laws of PIA (incorporated by reference to the
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 1990 Stock Option Plan (incorporated by reference
to the Form S-1).
10.2 Amended and Restated 1995 Stock Option Plan
(incorporated by reference of Exhibit 10.2 to the
Company's Form 10-Q for the 2nd Quarter ended July
3, 1998).
10.3 1995 Stock Option Plan for Non-employee Directors
(incorporated by reference to the Form S-1).
27
10.4+* Employment Agreement dated as of June 25, 1997
between PIA and Terry R. Peets (incorporated by
reference to Exhibit 10.5 to the Company's Form
10-Q for the 2nd Quarter ended June 30, 1997)
10.5+* Certificate of Incorporation of PIA
3.2 * By-laws of PIA
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-Bankvering.
10.1 * 1990 Stock Option Plan
10.2 Amended and Restated 1995 Stock Option Plan (incorporated by
reference of Exhibit 10.2 to the Company's Form 10Q for the
2nd Quarter ended July 3, 1998).
10.3 * 1995 Stock Option Plan for Non-employee Directors
10.4 Employment Agreement dated as of June 25, 1997 between
PIA and Terry R. Peets (incorporated by reference to
Exhibit 10.5 to the Company's Form 10-Q for the 2nd
Quarter ended June 30, 1997)
10.5 Severance Agreement dated as of February 20, 1998
between PIA and Cathy L. Wood (incorporated by
reference to Exhibit 10.5 to the Company's Form
10-Q for the 1st Quarter ended April 30, 1998)
26
27
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.6 Severance Agreement dated as of August 10, 1998 between
PIA and Clinton E. Owens (incorporated by reference to
Exhibit 10.6 to the Company's Form 10-Q for the 3rd
Quarter ended October 2, 1998)
10.7 Amendment No. 1 to Employment Agreement dated as of
October 1, 1998 between PIA and Terry R. Peets
(filed herein)
10.8 Amended and Restated Severance Compensation Agreement
dated as of October 1, 1998 between PIA and Cathy L. Wood
(filed herein)
10.9 Loan and Security Agreement dated December 7, 1998 among Mellon
Bank, N.A., PIA Merchandising Co., Inc., Pacific Indoor Display
Co. and PIA. (filed herein)
10.10 Agreement and Plan of Merger dated as of February 28,
1999 among PIA, S.G. Acquisition, Inc., PIA
Merchandising Co., Inc., SPAR Acquisition, In., SPAR
Marketing, Inc., SPAR Marketing Force, Inc., SPAR, Inc.,
SPAR/Burgoyne Retail Services, Inc., SPAR Incentive
Marketing, Inc., SPAR MCI Performance Group, Inc. and
SPAR Trademarks, Inc. (filed herein)
10.11 Voting Agreement dated as of February 28, 1999 among
PIA, Clinton E. Owens, RVM/PIA, California limited
partnership, Robert G. Brown and William H. Bartels
(filed herein)
21.1 * Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
27.110.6* Severance Agreement dated as of August 10, 1998
between PIA and Clinton E. Owens (incorporated by
reference to Exhibit 10.6 to the Company's Form
10-Q for the 3rd Quarter ended October 2, 1998)
10.7+* Amendment No. 1 to Employment Agreement dated as
of October 1, 1998 between PIA and Terry R. Peets.
10.8+* Amended and Restated Severance Compensation
Agreement dated as of October 1, 1998 between PIA
and Cathy L. Wood.
10.9+ Loan and Security Agreement dated December 7, 1998
among Mellon Bank, N.A., PIA Merchandising Co.,
Inc., Pacific Indoor Display Co. and PIA.
10.10+ Agreement and Plan of Merger dated as of February
28, 1999 among PIA, SG Acquisition, Inc., PIA
Merchandising Co., Inc., SPAR Acquisition, Inc.,
SPAR Marketing, Inc., SPAR Marketing Force, Inc.,
SPAR, Inc., SPAR/Burgoyne Retail Services, Inc.,
SPAR Incentive Marketing, Inc., SPAR MCI
Performance Group, Inc. and SPAR Trademarks, Inc.
10.11+ Voting Agreement dated as of February 28, 1999
among PIA, Clinton E. Owens, RVM/PIA, California
limited partnership, Robert G. Brown and William
H. Bartels.
10.12* Amendment No. 2 to Employment Agreement dated as
of February 11, 1999 between PIA and Terry R.
Peets (incorporated by reference to Exhibit 10.12
to the Company's Form 10-Q for the 2nd Quarter
ended April 2, 1999).
10.13 Special Purpose Stock Option Plan (incorporated by
reference to Exhibit 10.13 of the Company's Form
10-Q for the 2nd Quarter ended July 2, 1999.
10.14 Amendment No. 1 to Severance Agreement dated as of
May 18, 1999 between the Company and Cathy L. Wood
(incorporated by reference to Exhibit 10.14 of the
Company's Form 10-Q for the 3rd Quarter ended
September 30, 1999).
10.15+ Second Amended and Restated Revolving Credit, Term
+ Loan and Security Agreement by and among IBJ
Whitehall Business Credit Corporation with SPAR
Marketing Force, Inc., SPAR Group, Inc., SPAR,
Inc., SPAR/Burgoyne Retail Services, Inc., SPAR
Incentive Marketing, Inc., SPAR Trademarks, Inc.,
SPAR MCI Performance Group, Inc., SPAR Marketing,
Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., PIA Merchandising, Co., Inc.,
Pacific Indoor Display Co., Inc., and Pivotal
Sales Company dated as of September 22, 1999.
10.16+ Waiver and Amendment No. 1 to Second Amended and
+ Restated Revolving Credit, Term Loan and Security
Agreement by and between SPAR Marketing Force,
Inc., SPAR, Inc., SPAR/Burgoyne Retail Services,
Inc., SPAR Group, Inc., SPAR Incentive Marketing,
Inc., SPAR Trademarks, Inc., SPAR Performance
Group, Inc. (f/k/a SPAR MCI Performance Group,
Inc.), SPAR Marketing, Inc. (DE), SPAR Marketing,
Inc. (NV), SPAR Acquisition, Inc., PIA
Merchandising Co., Inc., Pacific Indoor Display
Co., Inc. and Pivotal Sales Company (each a
"Borrower" and collectively, the "Borrowers") and
IBJ Whitehall Business Credit Corporation
("Lender") dated as of December 8, 1999.
21.1+ Subsidiaries of the Company
+
23.1+ Consent of Ernst & Young LLP
+
27.1+ Financial Data Schedule
*Filed+
+ Previously filed with initial Form 10-K for the
fiscal year ended January 1, 1999.
+ Filed herewith.
+
* Management contract or compensatory plan or
arrangement required to be filed as an Exhibitexhibit
pursuant to applicable rules of the Company's Registration Statement on Form S-1
(Registration No. 33-80429) on December 14, 1995.
(b)Securities and
Exchange Commission.
28
(B) REPORTS ON FORM 8-K.
None
27Form 8-K dated July 8, 1999 and filed with the Commission on July 23,
1999. Form 8-K/A dated July 8, 1999 and filed with the Commission on
September 20, 1999.
29
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1943, the Registrant has duly caused this amendment to the
report to be signed on its behalf by the undersigned, thereunto duly authorized.
PIA MERCHANDISING SERVICES,SPAR GROUP, INC.
By: /s/ Terry R. Peets
-------------------------------
Terry R. PeetsRobert G. Brown
-----------------------
Robert G. Brown
President, Chief Executive Officer and
DirectorChairman of the Board
Date: March 30, 1999
-------------------------------April 12, 2000
--------------
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
DATE
- --------- ----- ----
/s/ Clinton E. OwensRobert G. Brown President, Chief Executive Officer and Chairman of the Board March 30, 1999April 12, 2000
- -------------------------
Clinton E. OwensRobert G. Brown
/s/ Terry R. PeetsWilliam H. Bartels Vice Chairman, Senior Vice President, Chief Executive March 30, 1999Treasurer and Director April 12, 2000
- -------------------------
Officer and Director
Terry R. PeetsWilliam H. Bartels
/s/ Cathy L. Wood Executive Vice President, March 30, 1999
- -------------------------Charles Cimitile Chief Financial Officer April 12, 2000
- ------------------------- and
Cathy L. Wood Secretary (Principal Financial and Accounting Officer)
Charles Cimitile
/s/ Patrick W. CollinsRobert O. Aders Director March 30, 1999April 12, 2000
- -------------------------
Patrick W. Collins
/s/ John A. Colwell Director March 30, 1999
- -------------------------
John A. Colwell
/s/ Joseph H. Coulombe Director March 30, 1999
- -------------------------
Joseph H. Coulombe
/s/ Patrick C. Haden Director March 30, 1999
- -------------------------
Patrick C. HadenRobert O. Aders
/s/ J. Christopher Lewis Director March 30, 1999April 12, 2000
- -------------------------
J. Christopher Lewis
2830
29
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS:
Consolidated balance sheets as of December 31, 1997 and January 1, 1999 F-2
Consolidated statements of operations for each of the three years
in the period ended January 1, 1999 F-4
Consolidated statements of stockholders' equity for each
of the three years in the period ended January 1, 1999 F-5
Consolidated statements of cash flows for each of the three years
in the period ended January 1, 1999 F-6
Notes to consolidated financial statements for each of the three years
in the period ended January 1, 1999 F-8
Schedule II - Valuation and qualifying accounts F-25
29
30
INDEPENDENT AUDITORS' REPORTReport of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Stockholders of
PIA Merchandising Services,SPAR Group, Inc.:
We have audited the accompanying consolidated balance sheetssheet of PIA
Merchandising Services,SPAR Group, Inc. and subsidiaries (the Company) as of
December 31, 1997 and January 1, 1999, the combined balance sheet of SPAR Group, Inc. as of December
31, 1998, and the related consolidated or combined statements of operations,
stockholders' equity and cash flows for each of the three years inyear ended December 31, 1999, the
periodnine months ended January 1, 1999.December 31, 1998 and the year ended March 31, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a) 2.. These consolidated financial statements and financial
statement schedule isare the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
auditing
standards.in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, suchthe consolidated and combined financial statements referred to
above present fairly, in all material respects, the consolidated financial position of PIA Merchandising
Services,SPAR
Group, Inc. and subsidiaries as ofat December 31, 19971999 and January 1, 1999,1998, and the results of theirits operations and
theirits cash flows for each of the three years
inyear ended December 31, 1999, the periodnine months ended
January 1, 1999December 31, 1998 and the year ended March 31, 1998, in conformity with
accounting principles generally accepted accounting principles.in the United States. Also, in our
opinion, suchthe related financial statement schedule, when considered in relation
to the consolidated and combined financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
Deloitte/s/ Ernst & ToucheYoung LLP
Costa Mesa, California
February 18, 1999
(Except for Note 14, as to which the date is February 28, 1999)Minneapolis, Minnesota
March 3, 2000
F-1
31
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETSSPAR Group, Inc.
Consolidated and Combined Balance Sheets
(In thousands, except share data)
DECEMBERDecember 31
JANUARY 1,
1997 1999 ----------- ----------1998
---------------------------------
Assets
Current assets:
CURRENT ASSETS:
Cash and cash equivalents $ 12,9872,074 $ 11,064910
Accounts receivable, net (Note 3) 16,053 11,222
Income tax refund receivable (Note 6) 2,905 8128,858 10,627
Prepaid expenses and other current assets 816 712
---------- ---------1,134 708
Prepaid program costs 2,777 -
Investment in affiliate 710 -
Due from certain stockholders - 1,500
---------------------------------
Total current assets 32,761 23,079
PROPERTY AND EQUIPMENT,35,553 13,745
Property and equipment, net (Note 3) 2,416 1,991
INVESTMENTS AND OTHER ASSETS:
Investment in affiliate (Note 4) 418 5533,459 827
Goodwill and other intangibles, net 23,767 -
Other assets 872 431
---------- ---------308 293
---------------------------------
Total investmentsassets $63,087 $14,865
=================================
Liabilities and stockholders' equity (deficit) Current liabilities:
Line of credit and notes payable $ 857 $ 4,150
Accounts payable 7,419 1,534
Accrued expenses and other assets 1,290 984
---------- ---------
Total assets $ 36,467 $ 26,054
========== =========
See notes to consolidated financial statements
F-2
32
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, JANUARY 1,
1997 1999
------------ ----------
CURRENT LIABILITIES:
Accounts payable $ 3,442 $ 1,194
Other current liabilities (Note 3) 13,334 7,951
Income taxes9,954 2,808
Deferred revenue 6,341 -
Restructuring and other charges 5,404 -
Due to affiliates 178 205
Due to certain stockholders 3,847 6,577
Note payable (Note 6) 47 90
-------- --------to MCI 1,045 -
Current portion of long-term debt 1,147 685
---------------------------------
Total current liabilities 16,823 9,235
LINE OF CREDIT AND LONG-TERM LIABILITIES (Note 5) 966 2,095
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Notes 1036,192 15,959
Line of credit and 11)long-term liabilities, net of current portion 14,009 311
Long-term debt due to certain stockholders 2,000 -
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value;value:
Authorized shares - 3,000,000
shares authorized; none issuedIssued and outstanding shares - none - - Common stock, $.01 par value;
15,000,000value:
Authorized shares authorized; 5,392,558- 47,000,000
Issued and 5,477,846outstanding shares issued and
outstanding- 18,154,666 as of December 31, 1997
and January 1, 1999 respectively 59 60182 -
Additional paid-in capital 33,429 33,740
Accumulated deficit (11,806) (16,072)
Less treasury stock at cost (507,000 shares at
December 31, 1997 and January 1, 1999) (3,004) (3,004)
-------- --------(deficit) 10,095 -
Retained earnings 609 -
-----------------
Total stockholders' equity 18,678 14,724
-------- --------(deficit) 10,886 (1,405)
---------------------------------
Total liabilities and stockholders' equity $ 36,467 $ 26,054
======== ========(deficit) $63,087 $14,865
=================================
See notes to consolidated financial statements
F-3accompanying notes.
F-2
33
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)SPAR Group, Inc.
Consolidated and Combined Statements of Operations
(In thousands, except per share data)
YEARS ENDED
-----------------------------------------------
DECEMBERNine Months
Year ended ended Year ended
December 31, DECEMBERDecember 31, JANUARY 1,
1996 1997March 31,
1999 ------------ ------------ ----------1998 1998
-------------------------------------------------
NET REVENUES (Note 13) $ 119,940 $ 128,208 $ 121,788
OPERATING EXPENSES:
Field service costs 94,841 119,830 105,448Net revenues $116,525 $32,601 $36,804
Cost of revenues 81,288 16,217 19,417
-------------------------------------------------
Gross profit 35,237 16,384 17,387
Selling, expenses 11,133 10,482 8,245
Generalgeneral and administrative expenses (Notes 7, 8 and 9) 8,081 10,234 11,788
Restructuring and other charges (Note 2) 5,42028,830 9,978 12,087
Depreciation and amortization 595 997 1,129
--------- --------- ---------
Total operating expenses 114,650 146,963 126,610
--------- --------- ---------
OPERATING INCOME (LOSS) 5,290 (18,755) (4,822)
OTHER INCOME:2,182 142 161
-------------------------------------------------
Operating income 4,225 6,264 5,139
Other income (expense) 90 149 (36)
Interest expense (46) (25)
Interest(1,662) (304) (354)
-------------------------------------------------
(1,572) (155) (390)
-------------------------------------------------
Income before provision for income 869 799 487
Equity intaxes 2,653 6,109 4,749
Provision for income taxes:
Nonrecurring charge for termination of Subchapter S election 3,100 - -
Income taxes 48 - -
-------------------------------------------------
Net income (loss) $ (495) $ 6,109 $ 4,749
=================================================
Unaudited pro forma information:
Income before income tax provision $ 2,653 $ 6,109 $ 4,749
Pro forma income tax provision 1,411 2,253 1,751
-------------------------------------------------
Pro forma net income $ 1,242 $ 3,856 $ 2,998
=================================================
Pro forma basic earnings of affiliate (Note 4) 72 96 149
--------- --------- ---------
Total other income 895 895 611
--------- --------- ---------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 6,185 (17,860) (4,211)
INCOME TAX PROVISION (BENEFIT) (Note 6) 2,426 (2,761) 55
--------- --------- ---------
NET INCOME (LOSS) $ 3,759 $ (15,099) $ (4,266)
========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE (Note 12) $ 0.70 $ (2.72) $ (0.78)
========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE (Note 12) $ 0.63 $ (2.72) $ (0.78)
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES - BASIC 5,370 5,551 5,439
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES - DILUTED 5,990 5,551 5,439
========= ========= =========per share $0.08 $0.30 $0.24
=================================================
Pro forma basic weighted average common shares 15,361 12,659 12,659
=================================================
Pro forma diluted earnings per share $0.08 $0.30 $0.24
=================================================
Pro forma diluted weighted average common shares 15,367 12,659 12,659
=================================================
See notes to consolidated financial statementsaccompanying notes.
F-3
SPAR Group, Inc.
Consolidated and Combined Statement of Stockholders' Equity
(In thousands)
Retained
Common Stock Additional Earnings Total
----------------------------- Paid-In (Accumulated Stockholders'
Shares Amount Capital Deficit) Equity
--------------------------------------------------------------------------
Balance at March 31, 1997 $ 935
Net income 4,749
Net distributions to stockholders (2,542)
----------------
Balance at March 31, 1998 3,142
Net income 6,109
Net distributions to stockholders (10,656)
----------------
Balance at December 31, 1998 (1,405)
Net income through July 8, 1999 1,996
Net distributions to stockholders (332)
Stock option compensation 752
Deferred tax provision - termination of
Subchapter S election (3,100)
----------------
Balance at July 8, 1999 $ (2,089)
================
Reorganization prior to reverse merger with PIA 12,659 $127 $ (2,216) $ - $ (2,089)
Reverse merger with PIA 5,494 55 12,307 - 12,362
Issuance of common stock 2 - 4 - 4
Net income July 9, 1999 to December 31, 1999 - - - 609 609
--------------------------------------------------------------------------
Balance at December 31, 1999 18,155 $182 $10,095 $609 $10,886
==========================================================================
See accompanying notes.
F-4
34
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Years ended December 31, 1996SPAR Group, Inc.
Consolidated and 1997 and January 1, 1999Combined Statements of Cash Flows
(In thousands)
RETAINED
COMMON STOCK TREASURY STOCK ADDITIONAL EARNINGS TOTAL
--------------------- -------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY
-------- -------- -------- -------- --------- ------------ -------------Nine Months
Year ended ended Year ended
December 31, December 31, March 31,
1999 1998 1998
-------------------------------------------------
OPERATING ACTIVITIES
BALANCE, January 1, 1996 3,564 $ 6,454 -- $ -- $ -- $ (466) $ 5,988
Change in stated par value of
shares from no par to $.01 (6,418) 6,418
Stock issued to the public 2,138 21 26,499 26,520
Stock options exercised 58 1 334 335
Tax benefit related to exercise of stock
options 116 116
Cashless exercise of warrants (Note 11) 131
Net income 3,759 3,759
-------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1996 5,891 58 33,367 3,293 36,718
Stock options exercised 9 1 62 63
Repurchase of common stock (507) 507 (3,004) (3,004)
Net loss (15,099) (15,099)
-------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1997 5,393 59 507 (3,004) 33,429 (11,806) 18,678
Stock options exercised 30 88 88
Employee stock purchases 12 45 45
Shares issued as bonus (Note 10) 43 1 178 179
Net loss (4,266) (4,266)
-------- -------- -------- -------- -------- -------- --------
BALANCE, January 1, 1999 5,478 $ 60 507 $ (3,004) $ 33,740 $(16,072) $ 14,724
======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements
F-5
35
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,759 $(15,099) $ (4,266)(495) $6,109 $4,749
Adjustments to reconcile net income (loss) to net cash used in(used in)
provided by operating activities:
Depreciation 881 131 152
Amortization 1,301 11 9
Provision for doubtful accounts and amortization 595 997 1,129others, net 845 - -
Equity in earnings of affiliate (72) (96) (149)
Deferred income taxes, net (167) 360
Provision for doubtful receivables and other, net 105 918 (270)
Restructuring and other charges (Note 2) 5,420(91) - -
Taxes on termination of Subchapter S corporation election 3,100 - -
Stock related compensation 752 - -
Changes in operating assets and liabilities:
Accounts receivable (10,522) 5,659 5,101
Income tax refund receivable (2,905) 2,824(5,342) (2,578) (484)
Prepaid expenses and other current assets 74 (252) 104
Other assets 213 (744) 44136 (371) (217)
Due from affiliates - 60 72
Accounts payable (1,066) 2,670 (2,248)
Other currentand other liabilities 5,657 173 (5,204)
Income taxes payable (228) (64) 43
Other liabilities 131 (871)
-------- -------- --------(3,294) 1,957 (815)
Due to affiliates - (57) (356)
Deferred revenue (2,666) - (467)
-------------------------------------------------
Net cash used in(used in) provided by operating activities (1,652) (2,832) (3,366)
CASH FLOWS FROM(4,973) 5,262 2,643
INVESTING ACTIVITIES:ACTIVITIES
Purchases of property and equipment (332) (759) (516)
Capitalization(2,105) (731) (160)
Purchase of software development costs (1,987) (174)
Investment in affiliate (150)
-------- -------- --------businesses, net of cash acquired 7,109 - -
-------------------------------------------------
Net cash used inprovided by (used in) investing activities (2,469) (759) (690)
See notes to consolidated financial statements
F-6
36
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEARS ENDED
---------------------------------------------
DECEMBER 31, DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------ ----------
CASH FLOWS FROM5,004 (731) (160)
FINANCING ACTIVITIES:
Principal payments on long-term debt $ (3,400) $ -- $ --ACTIVITIES
Net proceeds from line of credit 9,207 1,748 346
Proceeds from term loan 3,000 - -
Net (payments of) proceeds from long-term debt 2,000due to
Spar Marketing Services, Inc. (685) (281) 409
Due to (from) certain stockholders 3,500 (1,500) (1,297)
Payments of note payable, MCI (9,577) - -
Payment of other long-term debt (1,254) (225) (500)
Distributions to certain stockholders (3,062) (5,282) (42)
Proceeds from issuance of common stock to the public 26,520
Proceeds from issuance of common stock 335 63 133
Repurchase of common stock (3,004)
-------- -------- --------4 - -
-------------------------------------------------
Net cash provided by(usedby (used in) financing activities 23,455 (2,941) 2,133
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 19,334 (6,532) (1,923)
CASH AND CASH EQUIVALENTS,1,133 (5,540) (1,084)
-------------------------------------------------
Net increase (decrease) in cash 1,164 (1,009) 1,399
Cash at beginning of period 185 19,519 12,987
-------- -------- --------
CASH AND CASH EQUIVALENTS,910 1,919 520
-------------------------------------------------
Cash at end of period $2,074 $ 19,519 $ 12,987 $ 11,064
======== ======== ========910 $1,919
=================================================
SUPPLEMENTAL DISCLOSURESDISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 892 $ 300 $ 353
=================================================
Non-cash transactions:
Distributions payable to certain stockholders $1,332 $6,577 $2,500
=================================================
Equipment purchased with capital leases $ 518 $ - Cash paid (refunded) during the year for:
Interest $ 69 $ -- $ 25
======== ======== ========
Income taxes $ 2,853 $ 129 $ (2,753)
======== ======== ========-
=================================================
See accompanying notes.
F-5
SPAR Group, Inc.
Notes 10 and 11 to consolidated financial statements for description of
noncash transactions.
See notes to consolidated financial statements
F-7
37
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1,Financial Statements
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Description -BUSINESS AND ORGANIZATION
The SPAR Group, Inc., a Delaware corporation formerly known as PIA Merchandising
Services, Inc. and subsidiaries
("Company"SPAR Group" or the "Company") providesis a supplier of in-store
merchandising and marketing services, and premium incentive marketing services
throughout the United States and Canada. The Company also provides database
marketing, teleservices, marketing research and Internet-based software. The
Company's operations are divided into three divisions: the Merchandising
Services Division, the Incentive Marketing Division, and the Internet Division.
The Merchandising Services Division provides merchandising services, database
marketing, teleservices, and marketing research to manufacturers and retailers
primarily in the mass merchandiser, video, chain, discount drug store and
grocery industries. The Incentive Marketing Division designs and implements
premium incentives, manages meetings, group travel and training programs
principally for corporate clients. In March 2000, the Company announced the
formation of an Internet Division for the purpose of marketing its proprietary
internet-based computer software.
MERCHANDISING SERVICES DIVISION
The Company's Merchandising Services Division consists of (1) SPAR Marketing,
Inc. ("SMI") (an intermediate holding company), Spar Marketing Force, Inc.
("SMF"), SPAR Marketing, Inc., a Nevada corporation ("SMNEV"), SPAR/Burgoyne
Retail Services, Inc. ("SBRS"), and SPAR, Inc. ("SINC") (collectively, the "SPAR
Marketing Companies") and (2) PIA Merchandising, Co., Inc., Pacific Indoor
Display d/b/a Retail Resources, Pivotal Sales Company and PIA Merchandising Ltd.
(collective, "PIA" or the "PIA Companies"). The SPAR Marketing Companies, the
original predecessor of which was founded in 1967, provide nationwide retail
merchandising and marketing services to home video, consumer goods and food
products companies. The PIA Companies, through a predecessor of the Company
first organized in 1943, also are suppliers of in-store merchandising and sales
services throughout the United States and Canada, and were "acquired" by the
SPAR Companies for accounting purposes pursuant to the Merger on July 8, 1999
(See Note 3, Business Combinations - PIA Reverse Merger, below). The PIA
Companies provide these services primarily on behalf of brandedconsumer product
manufacturers and retailers at retail grocery stores, mass merchandisers, drug stores and discount drugretail
grocery stores. The Company'sCompany currently operates in all 50 states and provides a
broad range of in-store merchandising and other marketing services to many of
the nation's leading companies.
F-6
SPAR Group, Inc.
Notes to Financial Statements (continued)
1. BUSINESS AND ORGANIZATION (CONTINUED)
Merchandising services generally consist of special projects or regularly
scheduled routed services provided at the stores for a specific retailer or
multiple manufacturers primarily under multiple year contracts. Services also
include checking for authorized distribution ofstand-alone large-scale implementations. These services may include
activities such as ensuring that client products cuttingauthorized for distribution are
in stock and on the shelf, adding new products that are approved for
distribution but not presentpresently 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 clients'client products and performingselling new
and promotional items. Specific in-store services can be initiated by retailers
and manufacturers, such as new product launches, special seasonal or promotional
merchandising, focused product support and promotion
selling.product recalls. These services are
used typically for large-scale implementations requiring over 30 days to
complete. The Company also performs special in-store projects, suchprovides database marketing, telservices and research
services.
INCENTIVE MARKETING DIVISION
The Company's Incentive Marketing Division was created in January, 1999 through
the Company's purchase of the business and substantially all of the assets of
BIMA Group, Inc., a Texas corporation ("BIMA" or "MCI") originally founded in
1987 and formerly known as new
store setsMCI Performance Group, Inc. (see Note 3) The purchase
was made by the Company's indirect subsidiary, SPAR Performance Group, Inc.,
formerly known as SPAR MCI Performance Group, Inc. ("SPGI"). SPGI provides a
wide variety of consulting, creative, program administration, travel and
existing store resets, remerchandisings, remodelsmerchandise fulfillment, and category implementations,training services to companies seeking to retain
and executesmotivate employees, salespeople, dealers, distributors, retailers, and
maintains pointconsumers toward certain actions or objectives. SPGI's strategy enables
companies to outsource the entire design, implementation and fulfillment of
purchase
displaysincentive programs in a one-stop, "umbrella" shopping approach. SPGI typically
consults with a client to design the most effective plan to achieve the client's
goals. SPGI then provides services necessary to implement the program, generates
detailed efficiency progress reports, and materials.reports on the return on investment
upon completion of the program.
F-7
SPAR Group, Inc.
Notes to Financial Statements (continued)
1. BUSINESS AND ORGANIZATION (CONTINUED)
INTERNET DIVISION
In addition,March 2000, the Company collectsestablished its Internet Division to separately
market its application software products and provides to
certain clients a variety of merchandising data that is category and
store-specific.services. The Company has developed
and is also a supplierutilizing several Internet-based software products. The Internet Division
was established to market these applications to businesses with multiple
locations and large workforces desiring to improve day-to-day efficiency and
overall productivity.
See Note 13 for further descriptions of regularly scheduled,
shared merchandising services in the United States. The Company's
management has evaluated the allocation of resources in assessing
performance and determined the Company operates in three operating
segments, dedicated services, shared services and project services (Note
13)operating
segments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE OF FISCAL YEAR END
Effective April 1, 1998, the SPAR Group, Inc. changed its year end for financial
statement purposes to a calendar year.
BASIS OF PRESENTATION
CONSOLIDATION/COMBINATION
Through July 8, 1999, the combined financial statements include operating
companies owned by the same two stockholders (the "SPAR Companies"). Principles of Consolidation - TheOn July 8,
1999, the SPAR Companies reorganized and completed a "reverse" merger with the
PIA Companies (see Note 3). From July 8, 1999, the consolidated financial
statements include the accounts of PIA Merchandising Services,the SPAR Group, Inc. and its wholly
ownedwholly-owned
subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The equity method of accounting is
used for the Company's investment in affiliate (Note 4).
Cash Equivalents -CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with original maturities
of three months or less at the time of acquisition to be cash equivalents.
Accounts Receivable and Credit Risk - During the ordinary course of the
Company's business, the Company grants trade credit to its clients, which
consist primarily of packaged goods manufacturers and retailers. The
Company's ten largest clients generated approximately 57.0%, 69.0% and
75.0% of the Company's net revenues for the fiscal years ended December
31, 1996, December 31, 1997 and January 1, 1999, respectively.
During the fiscal year ended January 1, 1999, three of the Company's
clients accounted for 15.6%, 12.6% and 10.6% of the Company's net
revenues. During 1997, two clients accounted for 16.0% and 13.6% of the
Company's net revenues. Given the significant amount of net revenues
derived from certain clients, collectibility issues arising from financial
difficulties of any of these clients or the loss of any such clients could
have a material adverse effect on the Company's business. Unbilled
accounts receivable represent merchandising services performed that are
pending billing until the requisite documents have been processed or
projects have been completed (Note 3).
Property and Equipment - Property and equipment are stated at cost and
depreciated on the straight-line method over estimated useful lives,
ranging from three to seven years. Leasehold improvements are amortized
over the estimated useful life of the asset or the term of the lease,
whichever is shorter.
F-8
38
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACHSPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
The Company has chosen to early adopt Statement of Position ("SOP") No. 98
-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use as of January 1, 1998. The SOP provides guidance in
accounting for the costs of computer software developed or obtained for
internal use. The effects of the adoption of the SOP have been reflected
in the 1998 consolidated financial statements and are not material.
Other Assets - Other assets consist primarily of refundable deposits.
Deferred Revenue - Client payments received in advance of merchandising
services performed are classified as deferred revenue (Note 3).
Amounts Held on Behalf of Third Parties - Amounts held on behalf of third
parties arise from agreements with retailers to provide services for their
private label manufacturers' products and represent amounts to be utilized
for certain future services including merchandising-related expenditures
on behalf of the retailers (Note 3). These agreements renew annually and
are cancelable on December 31 of each year or upon ninety-day written
notice by either party.
Revenue Recognition -SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's services are provided under various
types of contracts, which consist primarily of
fixed fee and commission-based arrangements. UnderRevenues under fixed fee
arrangements revenues are recognized monthly based on a fixed monthly fee per month overfor a service period of
typically one year, as defined in the contract.year.
The Company's commission-based contracts provide for commissions to be earned
based on a specified percentage of the client's net sales of certain products to designated retail
chains. In conjunction with these
commission arrangements, theThe Company receives draws on a monthly basis,draws, which are to be applied againstrecognized as commissions
earned. These monthly draws approximate estimated minimum revenue to be earned
on theeach contract and are
recognized on a monthly basis, overfor a service period of typically one-year.one year. The Company
recognizes adjustments on commission-based sales in the period such amounts
become determinable. Commissions are usually owed to the Company in excess of
draws received.
The Company also performs services on a specific project basis. Revenues
related to these projects are recognized as services are performed or
costs are incurred. Certain of the Company's contracts are to perform
project workbasis over a specified
period ranging from one to twelve months. Revenue underRevenues related to these types of contracts isprojects are
recognized essentially on thea percentage of completion method.method as services are performed or
costs are incurred. Provisions for estimated losses on uncompleted contracts are
recorded in the period in which such losses are determinable.
Field Service Costs - Field service costsThe Company also performs project based services, and the resultant revenues are
comprised principallyrecognized upon the completion of field labor and related costs and expenses required to provide sharedthe project.
UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent merchandising services project activities, key account management and related
technology costs, as well as field overhead required to supportperformed that are
pending billing until the activities of these groups of employees.requisite documents have been processed or projects
have been completed.
F-9
39
PIA MERCHANDISING SERVICES, INC.SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AGENCY FUNDS
Cash balances available for the administration of a customer's bonus program are
deposited in accounts with financial institutions in which the Company acts as
agent for a client pending payment settlement. Balances will fluctuate based
upon the receipt of funds from the client. These funds are considered neither an
asset nor liability of the Company. The balance of funds held in agency accounts
totaled approximately $11,000 and $35 million as of December 31, 1999 and 1998,
respectively.
PROPERTY AND SUBSIDIARIES
NOTES TO CONSOLIDATEDEQUIPMENT
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.
OTHER ASSETS
Other assets consist primarily of refundable deposits.
DEFERRED REVENUE
Client payments received in advance of merchandising services performed are
classified as deferred revenue.
F-10
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the recoverability of long-lived assets, whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable and the undiscounted cash flows estimated to be generated by those
total assets are less than the assets' carrying amount, in accordance with
criteria established by Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets." A loss is recognized for
the difference between the carrying amount and the estimated fair value of the
asset. The Company made no adjustment to the carrying values of the assets
during the year ended December 31, 1999, the nine months ended December 31, 1998
and the year ended March 31, 1998.
FAIR VALUE OF FINANCIAL STATEMENTS
FOR EACHINSTRUMENTS
The Company's balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and long-term debt.
The Company considers carrying amounts of current assets and liabilities in the
financial statements to approximate the fair value for these financial
instruments, because of the relatively short period of time between origination
of the instruments and their expected realization. The carrying amounts of
long-term debt approximates fair value because the obligation bears interest at
a variable rate. The carrying amount of notes payable approximates fair value
since the current effective rates reflect the market rate for debt with similar
terms and remaining maturities.
CONCENTRATION OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1,CREDIT RISK AND OTHER RISKS
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
places its cash with high credit quality financial institutions and investment
grade short-term investments, which limit the amount of credit exposure.
F-11
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
No single customer accounted for more than 10% of net revenues for the year
ended December 31, 1999. Three customers approximated 50% of net revenues for
the nine months ended December 31, 1998 and 51% of net revenues for the year
ended March 31, 1998, respectively. Additionally, one customer approximated 18%
of accounts receivable at December 31, 1999, while three customers approximated
50% and 49% of accounts receivable at December 31, 1998 and March 31, 1998,
respectively.
INCOME TAXES
From commencement through July 8, 1999, certain of the SPAR Companies had
elected, by the consent of their stockholders, to be taxed under the provisions
of subchapter S of the Internal Revenue Code (the "Code") with the exception of
SPAR/Burgoyne Retail Services, Inc., SPAR Acquisition, Inc., SPAR Incentive
Marketing, Inc. and SPAR Marketing, Inc., which were taxed as C corporations.
Under the provisions of the Code, the stockholders of the subchapter S companies
included the applicable SPAR Company's corporate income in their personal income
tax returns. Accordingly, these subchapter S companies were not subject to
federal corporate income tax during the period for which they were S
corporations. Certain states in which these subchapter S companies did business
do not accept certain provisions under subchapter S of the Code and, as a
result, income taxes in these states were a direct responsibility of the
Company.
The unaudited pro forma income tax information included in the statements of
operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Stock-Based Compensation -Income Taxes," as if the Company had been
subject to federal and state income taxes for all periods presented.
In connection with the Company's July 1999 reorganization, the subchapter S
status of each applicable SPAR Company was terminated. Income taxes are provided
for the tax effects of transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related primarily to
differences between the basis of assets and liabilities for financial and tax
reporting. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
F-12
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
deductible when the assets and liabilities are recovered or settled. Deferred
taxes are also recognized for operating losses that are available to offset
future taxable income and tax credits that are available to offset future income
taxes. In the event the future consequences of differences between financial
reporting bases and tax bases of the Company's assets and liabilities result in
deferred tax assets, an evaluation of the probability of being able to realize
the future benefits indicated by such asset is required. A valuation allowance
is provided when it is more likely than not that some portion or the entire
deferred tax asset will not be realized.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-BasedStock
Based Compensation, requires disclosure of fair value method of accounting for
stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. The Company has chosen, under the provisions of SFAS No. 123, to
continue to account for employee stock-based transactions under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
The Company has disclosed in Note 11 to the consolidated financial statements
pro forma diluted net income (loss) and net income (loss) per share as if the
Company had applied the fair value method of accounting.
Income Taxes - Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between
the basis of assets and liabilities for financial and tax reporting. The
deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Deferred taxes are also recognized for operating losses that are available
to offset future taxable income and tax credits that are available to
offset future income taxes. In the event the future consequences of
differences between financial reporting bases and tax bases of the
Company's assets and liabilities result in deferred tax assets, an
evaluation of the probability of being able to realize the future benefits
indicated by such asset is required. A valuation allowance is provided
when it is more likely than not that some portion or the entire deferred
tax asset will not be realized.
Comprehensive Income - The Company has adopted SFAS No. 130, Reporting
Comprehensive Income. For the years ended January 1, 1999, December 31,
1997 and December 31, 1996, the Company has no reported differences
between net income (loss) and comprehensive income (loss). Therefore,
statements of comprehensive income (loss) have not been presented.
Earnings Per Share - The Company has adopted SFAS No. 128, Earnings per
Share, which replaces the presentation of "Primary" earnings per share
with "Basic" earnings per share and the presentation of "Fully Diluted"
earnings per share with "Diluted" earnings per share. Prior periods have
been restated to reflect the change in presentation.
BasicPRO FORMA EARNINGS PER SHARE
Pro forma basic earnings per share amounts are based upon the weighted-averageweighted average
number of common shares outstanding. DilutedPro forma diluted earnings per share
amounts are based upon the weighted-averageweighted average number of common and potential
common shares for each period presented.represented. Potential common shares include stock
options, using the treasury stock method. Vendor Concentration - In additionThe pro forma basic and pro forma
diluted earnings per share amounts for periods prior to July 8, 1999 are based
upon 12,659,000 shares, although these shares were issued on July 9, 1999, as
required to comply with SFAS No. 128 and the Company's own employees, the
Company utilizes a force of trained merchandisers employed by a
third-party payrolling company engaged principally in the performance of
retailer-mandatedSecurities and project activities. For the fiscal years ended
December 31, 1996, December 31, 1997 and January 1, 1999, the Company
paid this payrolling company approximately $31,145,000, $38,936,000 and
$32,213,000, respectively (Note 3)Exchange Commission
Staff Accounting Bulletin 98 (SAB 98).
F-10F-13
40
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACHSPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
Use of Estimates -SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the consolidated and combined financial statements in
conformity with generally accepted accounting principles 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 thesethose estimates.
Fair ValueINTERNAL USE SOFTWARE DEVELOPMENT COSTS
Accounting for the Costs of Financial Instruments -Computer Software Developed or Obtained for Internal
Use, SOP 98-1. 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 amountsSPAR Group has adopted SOP 98-1 as of current assets and liabilities in
the consolidated financial statements to approximate the fair value for
these financial instruments, because of the relatively short period of
time between origination of the instruments and their expected
realization. The carrying amounts of long-term debt approximate fair value
because the obligation bears interest at a floating rate.
Change in Fiscal Year - Effective January 1, 1998,1999, which
requires the capitalization of certain costs incurred in connection with
developing or obtaining internal use software. Prior to the adoption of SOP
98-1, the Company changed its
fiscalexpensed all internal use software related costs as incurred.
The effect of adopting the SOP was to increase pro forma net income for the year end for financial statement purposes from a calendar year to a
52/53-week fiscal year. Beginning with fiscal year 1998, the Company's
fiscal year will end on the Friday closest to December 31. The years
ended December 31, 19971999 by approximately $980,000 and January 1, 1999 each consist of approximately 52
weeks. The Company does not believe that this change has a material impact
on the financial statements.
New Accounting Pronouncements - The Company has adopted SFAS No. 131.
Disclosure About Segments of an Enterprise$0.06 per pro forma basic
and Related Information. In
accordance with SFAS No. 131, the Company has disclosed in Note 13 certain
information about the Company's products and major customers.diluted earnings per share.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
which the Company is required to adopt effective in its fiscal year 2000. SFAS
No. 133 will require the Company to record all derivatives on the balance sheet
at fair value. The Company does not currently engage in hedging activities and
will continue to evaluate the effect of adopting SFAS No. 133. The Company is
expected to adopt SFAS No. 133 in its fiscal year 2000.
F-11RECLASSIFICATIONS
Certain amounts presented for fiscal 1998 have been reclassified to conform to
the 1999 presentations.
F-14
41
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1,SPAR Group, Inc.
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS
MCI ACQUISITION
On January 15, 1999, 2. RESTRUCTURING AND OTHER CHARGES
During 1997,SPGI acquired substantially all the Company experienced declining gross marginsbusiness and resultant
operating losses, dueassets
(the "MCI Acquisition") of BIMA Group, Inc., a Texas corporation formerly known
as MCI Performance Group, Inc. ("MCI"), pursuant to service performance issuestheir Asset Purchase
Agreement dated as of December 23, 1998, as amended (the "MCI Purchase
Agreement"). The transaction was accounted for as a purchase and consisted of
consideration of $1.8 million cash, an $8.8 million note (as amended) payable to
MCI (the "MCI Note") and the lossassumption of several
shared clients. This declinecertain agreed-upon liabilities (the
"MCI Purchase Price").
The MCI Purchase Price was allocated to the assets acquired by SPGI as agreed
upon in marginsa schedule to the MCI Purchase Agreement, which generally used their
respective carrying values, as these carrying values were deemed to represent
fair market values of those assets and liabilities.
The total purchase consideration does not reflect contingent consideration
related to earn-out arrangements included in the MCI Purchase Agreement. The MCI
Purchase Agreement provides for a post-closing adjustment whereby additional
contingent consideration will be payable to MCI in the event that earnings
before taxes for the year ended March 31, 1999 (as defined in the MCI Purchase
Agreement) exceed $3.5 million. The Company has determined that there is no
additional earn-out consideration to be paid.
The excess purchase price paid by SPGI for the business and assets of MCI over
the fair value of those assets was $13 million, subject to change from the
contingent earn-out arrangement, and is being amortized using the straight-line
method over 15 years.
PIA REVERSE MERGER
On July 8, 1999, SG Acquisition, Inc., a Nevada corporation ("PIA Acquisition"),
a wholly-owned subsidiary of PIA Merchandising Services, Inc., a Delaware
corporation ("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 (i) PIA Delaware, PIA Merchandising Co., Inc., a California
corporation
F-15
SPAR Group, Inc.
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
("PIA California"), and PIA Acquisition (collectively, the "PIA Parties"), and
(ii) SAI, SPAR Marketing, Inc., a Delaware corporation ("SMI"), SPAR Marketing
Force, Inc., a Nevada corporation, ("SMF") SPAR Marketing, Inc., a Nevada
corporation ("SMNEV"), SPAR, Inc., a Nevada corporation ("SINC"), SPAR/Burgoyne
Retail Services, Inc., an Ohio corporation ("SBRS"), SPAR Incentive Marketing,
Inc., a Delaware corporation ("SIM"), SPAR Performance Group, Inc., a Delaware
corporation ("SPGI") and SPAR Trademarks, Inc., a Nevada corporation ("STM")
(each a "SPAR Company" and collectively, the "SPAR Companies").
PIA Delaware (pre-Merger only), PIA California and each of the PIA California's
direct and indirect subsidiaries (i.e., Pacific Indoor Display Co., Inc., a
California corporation ("Pacific")), Pivotal Sales Company, a California
corporation ("Pivotal") and PIA Merchandising Limited, a corporation organized
under the laws of Nova Scotia ("PIA Canada"), may be referred to individually as
a "PIA Company" and collectively as the "PIA Companies."
In connection with the Merger, PIA Delaware changed its name to SPAR Group, Inc.
(which will be referred to post-Merger individually as "SGI" or the "Company").
Although the SPAR Companies became subsidiaries of PIA Delaware (now SGI) as a
result of this "reverse" Merger, the transaction has been accounted for as
required under generally accepted accounting principles as a purchase by the
SPAR Companies of the PIA Companies, with the books and records of SGI being
adjusted to reflect the historical operating results of the SPAR Companies.
In the transaction, the former shareholders and optionholders of SAI received
approximately 12.7 million shares of common stock and 134,114 common stock
options, respectively. The purchase price of approximately $12.3 million has
been allocated based on the estimated fair value of the assets of the PIA
Companies deemed for accounting purposes to have been acquired by the SPAR
Companies.
F-16
SPAR Group, Inc.
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
The goodwill that resulted from the Merger was calculated after giving effect to
the merger costs of the PIA Companies totaling $2.4 million and the anticipated
restructuring costs that are directly related to the Merger totaling $7.4
million (see Note 14, below). The excess purchase price deemed paid by the SPAR
Companies for the assets of the PIA Companies over the fair value of those
assets was $11.7 million and is being amortized using the straight-line method
over 15 years.
BUSINESS COMBINATIONS - PRO FORMA RESULTS
In accordance with generally accepted accounting principles, the operating
results of SPGI and the PIA Companies have been included in insufficient margin
dollars to cover the overhead structure, which had developedcondensed
consolidated statements of operations from the dates of the respective
acquisitions (see Note 1). The pro forma unaudited results below assume the
acquisitions occurred at the field level
and in the general corporate area. In the quarter ended September 30, 1997, the
Company addressed these conditions by restructuring its operations, focusing on
a more disciplined and functional operational structure, and redirecting its
technology strategies, resulting in a $5,420,000 charge for restructuring and
other charges. The restructuring charges consistbeginning of $1,522,000 identified
severance of corporate and field employees and lease costs in various management
and administrative functions. The restructuring charges also include $2,121,000
in the write downs and accruals associated with the abandonment of certain
internally developed software and specialized computer equipment under long-term
operating leases due to a redirectioneach of the Company's technology strategies
(Note 3). Other charges consisted primarily of $1,297,000 of reserves and write
offs related to unprofitable contracts, and $480,000 of costs associated with
changes in the Company's service delivery model. At January 1, 1999, $428,000 is
remaining in accrued liabilities in the accompanying consolidated balance sheet
consisting of $410,000 to specialized computer equipment under long-term
operating leases no longer in use and $18,000 to employee separation costs.
The following table displays a rollforward of the liabilities for restructuring
and other charges fromperiods ended December 31,
1996 to January 1, 1999 and 1998 (in thousands)thousands, except per share amounts):
INITIAL DECEMBERNine Months
Year ended ended
December 31, JANUARY 1,
RESTRUCTURING 1997 1997December 31,
1999 1998
1999
TYPE OF COST AND OTHER CHARGES DEDUCTIONS BALANCE DEDUCTIONS BALANCE
- ---------------------------------- ------------------- ------------ -------------- ------------ ------------------------------------------------------
Employee SeparationNet revenues $ 1,372161,123 $ (885)147,189
==========================================
Operating (loss) income $ 487(4,854) $ (469)912
==========================================
Pro forma net (loss) income $ 18
Facility Closing 150 150 (150)
Technology writedown
and related operating leases 2,121 (1,086) 1,035 (625) 410
Unprofitable Contracts 1,297 (797) 500 (500)
Other 480 (338) 142 (142)
------- ------- ------- ------- -------(4,490) $ 5,420 $(3,106)19
==========================================
Pro forma basic (loss) earnings per share $ 2,314 $(1,886)(0.25) $ 428
======= ======= ======= ======= =======0.00
==========================================
Pro forma diluted (loss) earnings per share $ (0.25) $ 0.00
==========================================
Basic weighted average common shares 18,155 18,155
==========================================
Diluted weighted average common shares 18,161 18,161
==========================================
Management believes thatF-17
SPAR Group, Inc.
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
The pro forma statements of operations reflect incremental amortization of
goodwill, interest expense, increases in bonuses to new SPGI management and
provisions for federal and state income taxes.
The pro forma statements of operations for the remaining reservesyear ended December 31, 1999 and
the nine months ended December 31, 1998, include $3.5 million and $800,000 of
non-recurring charges by PIA Companies, respectively. These charges include
$3.0 million in merger and acquisition transaction costs, $500,000 in banking
cancellation fees for restructuringthe year ended December 31, 1999 and $800,000 of purchased
consulting services related to the PIA Companies redirection of its technology
strategy incurred in the nine months ended December 31, 1998.
The pro forma results are adequate
to complete its plan.
F-12
42
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
3.not necessarily indicative of what actually would have
occurred if the acquisitions had been completed as of the beginning of each of
the periods presented, nor are they necessarily indicative of future
consolidated results.
4. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts receivable, net, consist of the following (in thousands):
DECEMBERDecember 31
JANUARY 1,
1997 1999 ------------ ----------1998
------------------------------------
Trade $20,057 $ 15,411 $ 9,5117,087
Unbilled 2,034 2,3589,796 4,145
Non-trade 59 174
-------- --------
17,504 12,043915 -
------------------------------------
30,768 11,232
Less: Allowance for doubtful accounts and other (1,451) (821)
-------- --------
$ 16,053 $ 11,222
======== ========1,910 605
------------------------------------
$28,858 $10,627
====================================
PropertyF-18
SPAR Group, Inc.
Notes to Financial Statements (continued)
4. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
Goodwill and equipment,other intangibles, net, consistconsists of the following (in thousands):
DECEMBERDecember 31
JANUARY 1,
1997 1999 ------------ ----------1998
------------------------------------
EquipmentGoodwill and other intangibles $25,068 $ 3,680 $ 3,873
Furniture and fixtures 662 719
Leasehold improvements 160 165
Capitalized software development costs 902 1,076
-------- --------
5,404 5,833-
Less accumulated depreciation and amortization (2,988) (3,842)
-------- --------1,301 -
------------------------------------
$23,767 $ 2,416 $ 1,991
======== ========-
====================================
During 1997, the Company recorded certain restructuring charges (Note 2).
In connection with the restructuring, the Company recorded a charge of
approximately $1,000,000 for the impairment of capitalized software costs.
F-13
43
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
Other current liabilities consistProperty and equipment consists of the following (in thousands):
DECEMBERDecember 31
JANUARY 1,
1997 1999 ------------ ----------1998
------------------------------------
Equipment $2,058 $1,059
Furniture and fixtures 1,313 55
Leasehold improvements 150 74
Capitalized software development costs 1,159 -
------------------------------------
4,680 1,188
Less accumulated depreciation and amortization 1,221 361
------------------------------------
$3,459 $ 827
====================================
Accrued expenses and other current liabilities consists of the following (in
thousands):
December 31
1999 1998
------------------------------------
Accrued salaries and other related costs $ 1,237 $ 1,123
Accrued payroll to third party 2,847 1,557$2,359 $1,559
Accrued medical and compensation insurance 1,456 1,906
Deferred revenue 1,039 4261,765 -
Amounts held on behalf of third parties 1,116 6411,108 -
Accrued rebate 2,200
Restructuringmerger related costs 1,475 4282,693 -
Other 1,964 1,870
------- -------
$13,334 $ 7,951
======= =======2,029 1,249
------------------------------------
$9,954 $2,808
====================================
4. INVESTMENT IN AFFILIATE
During 1996, the Company increased its voting ownership in Ameritel
Corporation, a full-service telemarketing company,F-19
SPAR Group, Inc.
Notes to 20%. Accordingly,
the Company changed its method of carrying the investment from cost to
equity as required by generally accepted accounting principles. The change
in method was not material to the carrying value of the investment in the
accompanying financial statements.
Following is a summary of condensed unaudited financial information
pertaining to Ameritel Corporation (in thousands):
DECEMBER 31, JANUARY 1,
1997 1999
------------ ----------
Current assets $1,545 $2,816
Noncurrent assets 1,252 3,786
Current liabilities 1,443 1,827
Long-term liabilities 128 2,803
Stockholders' equity 1,226 1,972
Net income for the year 523 746
F-14
44
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999Financial Statements (continued)
5. LINE OF CREDIT On December 10, 1998,AND LONG-TERM LIABILITIES
Prior to the Company enteredPIA Merger (see Note 3), SMF was party to a long-termRevolving Credit and
Security Agreement dated March 4, 1996 with IBJ Whitehall Business Credit
Corporation (as successor to IBJ Schroder Bank and Trust Company) ("IBJ
Whitehall") consisting of an asset based revolving line of
credit agreement a bank to provide an asset-based credit facility with
maximum borrowingunder which
it was able to borrow up to $20.0 million. Under thisa maximum of $6.0 million depending upon its
borrowing base availability. This agreement the line is
to expire on December 7, 2001. Allwas amended and restated as of March
11, 1999 adding SBRS and SINC under a single loan facility with IBJ Whitehall
consisting of a term loan of $3.0 million and an asset based revolving credit
facility under which it was able to borrow up to a maximum of $6.0 million
depending upon its borrowing base availability. This facility has been
superseded by (and continued as part of) the facility described below.
In 1999, IBJ Whitehall and the members of the SPAR Group (other than PIA Canada)
(collectively, the "Borrowers") entered into a Revolving Credit, Term Loan and
Security Agreements (the "Bank Loan Agreement"), pursuant to which the
Borrowers are permitted to borrow up to a maximum of $14 million on a revolving
credit basis, and $3.0 million on a term basis (the "Term Loan"). The revolving
loans bear interest at IBJ Whitehall's "Alternate Base Rate I" plus one-half of
one percent (0.50%) (a total of 9.5% per annum at December 31, 1999), and the
agent bank's prime rateTerm Loan bears interest at such "Alternate Base Rate II" plus 0.25 % (7.75%three-quarters of
one percent (0.75%) (a total of 10.0% per annum at January 1, 1999, or
8.0%), orDecember 31, 1999). The Bank
Loan Agreement's revolving credit loans of $1.5 million and $12.5 million are
scheduled to mature on June 30, 2000 and September 22, 2002, respectively. The
Term Loan amortizes in equal monthly installments of $83,334 each beginning in
March 1999. In addition, the London Interbank Offered Rate ("LIBOR") plus 2.75% (5.06% at
January 1, 1999, or 7.81%) atBorrowers are required to make mandatory
prepayments in an amount equal to 25% of Excess Cash Flow, as defined in the
Bank Loan Agreements, for each fiscal year, to be applied first to the Term Loan
and then to the revolving credit loans (subject to the Borrowers' ability to
re-borrow revolving advances in accordance with the terms of the Bank Loan
Agreement). The facility is secured with the assets of the SPAR Group.
The Bank Loan Agreement contains an option for the Bank to purchase 16,667
shares of common stock of the Company for $0.01 per share in the event that the
Company's option.average closing share price over a ten consecutive trading day period
exceeds $15.00 per share. This option expires September 22, 2002.
F-20
SPAR Group, Inc.
Notes to Financial Statements (continued)
5. LINE OF CREDIT AND LONG-TERM LIABILITIES (CONTINUED)
The Bank Loan Agreement contains certain financial covenants which must be met
by the Borrowers on a consolidated basis, among which are a minimum "Net Worth,"
a "Fixed Charge Coverage Ratio," a minimum ratio of Debt to EBITDA, and a
minimum EBITDA, as such terms are defined in the Bank Loan Agreement.
The balances outstanding on this line of credit was $13.3 million and $4.1
million at December 31, 1999 and 1998, respectively. As of January 1,December 31, 1999,
the outstanding balance onSPAR Group had unused availability under the line of credit to borrow up to
an additional $700,000.
On December 31, 1998, the Company had outstanding $685,000 due to SPAR Marketing
Service, Inc. ("SMS"). The Company agreed to repay the amounts borrowed using
the same terms contained within the loan agreement between the bank and SMS.
This loan was $2,000,000.repaid in its entirety by the Company in 1999.
The Company's available borrowing is the sumline of 80% of all eligible accounts
receivable, plus 100% of eligible cash collateral less outstanding
revolving credit loan.
Under the termsand long-term liabilities consist of the following
at December 31:
1999 1998
------------------------------------
Revolving line of credit, maturing September 2002 $12,500 $ -
Term loan 2,250 -
Long-term debt due to affiliate - 686
Other long-term liabilities 406 310
------------------------------------
15,156 996
Current maturities of long-term liabilities 1,147 685
------------------------------------
$14,009 $311
====================================
Maturities of long-term debt agreement, the Company is subjectat December 31, 1999 are as follows:
Year ending December 31:
2000 $ 1,147
2001 1,259
2002 12,750
-------------------
$15,156
===================
F-21
SPAR Group, Inc.
Notes to certain financial covenants. Key covenants require the Company to maintain
a minimum current ratio, total liabilities to tangible net worth ratio,
tangible net worth, working capital, and net income. At January 1, 1999,
the Company complied with all such covenants. As of January 1, 1999,
available borrowings were $4,796,000.Financial Statements (continued)
6. INCOME TAXES
As a result of the July 8, 1999 PIA Merger (see Note 3), the subchapter S status
of each applicable SPAR Company was terminated for federal and state tax
purposes, and the SPAR Group recorded a deferred tax charge against income of
$3.1 million for the cumulative differences between the financial reporting and
income tax basis of certain assets and liabilities existing at that date.
Additionally, each such SPAR Company was required to change its method of
accounting from the cash basis to the accrual basis for income tax reporting
purposes.
The SPAR Group expects to be able to offset the deferred tax liability by
utilizing a deferred tax asset from the benefit of the PIA Companies' net
operating loss carryforwards. The individuals who were the stockholders of the
applicable SPAR Companies at that time are obligated to pay the 1999 income
taxes relating to taxable income during the period up to the Merger date.
The provision (benefit)for income taxes for the year ended December 31, 1999 was $48,000.
The provision for income taxes is summarized below for the years
ended December 31, 1996, December 31, 1997 and January 1, 1999 (in
thousands):
YEARS ENDED
-------------------------------------------
DECEMBER 31, DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------ ----------
Current income taxes:
Federal $ 2,163 $(3,082) $ --
State 430 (19) 55
------- ------- -------
2,593 (3,101) 55
Deferred income taxes:
Federal (135) (2,846) (1,554)
State (32) (380) (1)
------- ------- -------
(167) (3,226) (1,555)
Increase in valuation allowance 3,566 1,555
------- ------- -------
Provision (benefit) for income taxes $ 2,426 $(2,761) $ 55
======= ======= =======
F-15
45
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
Reconciliation between the provision (benefit) for income taxes as
requireddifferent from that which would be obtained by
applying the statutory federal statutoryincome tax rate of 35% to that included in
the financial statements isincome before income taxes.
The items causing this difference are as follows (in thousands):
YEARS ENDED
-------------------------------------------
DECEMBERYear ended
December 31,
DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------ -----------------------------
Provision (benefit) for income taxes at federal statutory rate $ 2,165 $(6,251) $(1,473)$902
Tax attributable to subchapter S earnings (695)
State income taxes, net of federal benefit 259 (12) 1435
Other permanent differences (31)170
Change in valuation allowance 3,566 1,555(404)
Other 33 (64) (41)
------- ------- -------40
-------------------
Provision (benefit) for income taxes $ 2,426 $(2,761) $ 55
======= ======= =======48
===================
F-22
SPAR Group, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Deferred taxes consist of the following (in thousands):
DECEMBERDecember 31,
JANUARY 1,
1997 1999
------------ -----------------------------
Net operating loss carryforwards $ 1,877 $ 3,880
State tax provision (270) (146)$4,625
Restructuring 2,093
Nonrecurring charge for termination of Subchapter S election (2,790)
Accrued compensation, 131 229vacation and pension 590
Accrued insurance 427 793581
Allowance for doubtful accounts and other receivable 1,158 312
Depreciation (180) (52)967
Other, net 423
105
------- --------------------------
Deferred tax assets 3,566 5,1216,489
Valuation allowance (3,566) (5,121)
------- -------(6,489)
-------------------
Net deferred taxes $ -- $ --
======= =======-
===================
At January 1,December 31, 1999, the Company has net operating loss carry forwardscarryforwards (NOLs) of
$10,688,000approximately $12 million available to reduce future federal taxable income and
$3,815,000 available to reduce future California State taxable income. The
Company has Federal and CaliforniaCompany's net operating loss carry forwards whichcarryforwards begin expiringto expire in the year 2012 and 2002, respectively.2012. The
Company has established a full valuation allowance for the deferred tax assets
due to the uncertainty of its continuing losses.
F-16net taxable position.
Section 382 of the Internal Revenue Code restricts the annual utilization of the
NOLs incurred prior to a change in ownership. Such a change in ownership has
occurred in connection with the PIA Merger, thereby restricting the NOLs
available to the Company to approximately $12.5 million over 19 years.
The pro forma disclosures on the statement of operations reflect adjustments to
record provisions for income taxes as if the applicable SPAR Company had not
been S corporations. The pro forma provisions for income taxes for the year
ended December 31, 1999, the nine months ended December 31, 1998 and the year
ended March 31, 1998, of $1.4 million, $2.2 million and $1.8 million,
respectively, are computed using a combined federal and state tax rate of 37% of
taxable income.
F-23
46SPAR Group, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The recording of a one-time, non-cash stock related compensation expense in the
year ended December 31, 1999 of approximately $752,000 is not tax deductible by
the SPAR Group for federal and state income tax purposes. In addition, the
amortization of purchased goodwill generated by the reverse Merger is not tax
deductible. The pro forma tax provision for the year ended December 31, 1999 has
been adjusted for the effects of these non-tax deductible items.
7. COMMON STOCK
Common stock of the companies included in the SPAR Companies at December 31,
1998 is as follows:
Shares
Shares Issued and
Authorized Outstanding Par Value
------------------ --------------------------------------
Spar Inc. 2,500 72 None
Spar/Burgoyne Retail Services, Inc. 2,500 72 None
Spar Marketing Force, Inc. 2,500 72 None
Spar Marketing, Inc. (Nevada) 100 72 None
Spar Acquisition, Inc. 50,000,000 72 $.01
Spar MCI Performance Group, Inc. 2,500 72 None
Spar Marketing, Inc. (Delaware) 1,000 72 $.01
Prior to the July 8, 1999 Merger, the subchapter S status of each applicable
SPAR Company was terminated for federal and state tax purposes. As of July 8,
1999, undistributed earnings of the SPAR Group were reclassified to Additional
Paid-In Capital.
F-24
SPAR Group, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases equipment and certain office space in several cities, under
non-cancelable operating lease agreements. Certain leases contain escalation
clauses and require the Company to pay its share of any increases in operating
expenses and real estate taxes. Rent expense was approximately $2.8 million for
the year ended December 31, 1999, $754,000 for the nine months ended December
31, 1998 and $871,000 for the year ended March 31, 1998. At December 31, 1999,
future minimum commitments under all noncancelable operating lease arrangements
are as follows (in thousands):
2000 $2,050
2001 1,810
2002 1,540
2003 1,053
2004 577
-------------------
$7,030
===================
LEGAL MATTERS
On September 23, 1999, Information Leasing Corporation ("IFC") filed a complaint
for breach of contracts, claim and delivery, and conversion against the Company
in Orange County Superior Court, Santa Ana, California, Case no. 814820, with
respect to certain equipment leased to the PIA MERCHANDISING SERVICES, INC.Companies by IFC, which complaint
sought judgment to recover the principal sum of $1,535,869.68, plus taxes, fees,
liens and late charges, immediate possession of the leased equipment,
compensation for the reasonable value thereof, and costs and attorneys' fees.
The Company is currently attempting to negotiate a settlement.
F-25
SPAR Group, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARYCONTINGENCIES (CONTINUED)
Pursuant to that certain Asset Purchase Agreement dated as of December 22, 1998,
among BIMA Group, Inc. (f/k/a MCI Performance Group, Inc.) ("BIMA"), John H.
Wile, SPAR Performance Group, Inc. (f/k/a SPAR MCI Performance Group, Inc.)
("SPGI"), and a company formerly known as SPAR Group, Inc., as amended by the
First Amendment thereto dated as of January 15, 1999, Second Amendment dated as
of September 22, 1999 (the "Second Amendment"), and Third Amendment dated as of
October 1, 1999 7.(the "Third Amendment"), SPGI would be obligated to pay
"Earn-Out Consideration" to BIMA if the business met certain financial
performance criteria as set forth therein. SPGI has fully paid the amount
outstanding under the Promissory Note pursuant to the Asset Purchase Agreement
with respect to the original purchase price, as adjusted by the Second
Amendment. Based upon the unaudited balance sheet of BIMA as of January 15,
1999, SPGI estimates that no "Earn-Out Consideration" is due to BIMA. BIMA has
asserted that it is owed approximately $5,000,000 in Earn-Out Consideration, but
such Earn-Out Consideration calculation has not been agreed to by SPGI. If the
parties cannot agree upon such amount, BIMA has threatened that legal proceeding
may ensue with respect to this matter. If sued, SPGI would vigorously contest
such matter. SPGI and BIMA intend to continue negotiations, and have orally
agreed to use arbitrators (assuming mutually acceptable procedures can be
adopted), in order to resolve such "Earn-Out Consideration" dispute.
The Company is a party to various legal actions and administrative proceedings
arising in the normal course of business. In the opinion of Company's
management, dispositions 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-26
SPAR Group, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTINGENCY
SMS, a related party, has been audited by the Internal Revenue Service with
respect to whether certain field representatives should be classified as
independent contractors or employees for federal employment tax purposes for the
tax years ended December 31, 1991 and 1992. The dispute has worked its way
through the Internal Revenue Service appeals process and SMS intends to file a
petition with the Federal District Court. If it is found that the field
representatives should be classified as employees, SMS could be liable for
employment taxes and related penalties and interest. The outcome of this dispute
and the amount of the contingent liability are not determinable at this time. If
a liability is assessed and SMS is unable to pay, the IRS may seek to collect
all or a portion of the tax liability from the Company due to its common control
and business relationship with SMS. The Company is not currently a party to this
lawsuit. However, an unfavorable outcome could impact the costs of future
operations. The Company believes an adequate provision for the contingent
liability has been made in the accompanying financial statements as of December
31, 1999 and 1998, respectively. Similar claims have been filed against SMS by
certain states. However, SMS is confident defending its position against these
state claims because of prior success in several states, and SMS will continue
to vigorously defend its position against any future state claims that may
arise. For example, SMS prevailed on a similar claim by the State of California,
which had instituted administrative proceedings against SMS. The administrative
law judge agreed with SMS's classification of field representatives as
independent contractors. The State of California has declined to file a further
appeal and has refunded payments made by SMS under protest during the appeal
process.
9. EMPLOYEE BENEFITS
Pension Plans -PENSION PLANS
Certain of the Company's PIA employees are covered by union-sponsored,
collectively bargained, multi-employer pension plans. Pension expense related to
these plans was approximately $172,000,
$178,000 and $202,000$30,000 for the yearsyear ended December 31, 1996, December 31,
1997 and January 1, 1999, respectively. The administrators have advised
the Company that there were no withdrawal liabilities as of December 1990,
the most recent date for which an analysis was made. The Company has no
current intention of withdrawing from any of these plans.
Retirement Plan -1999.
F-27
SPAR Group, Inc.
Notes to Financial Statements (continued)
9. EMPLOYEE BENEFITS (CONTINUED)
RETIREMENT PLANS
The Company has a 401(k)-retirement plan Profit Sharing Plan covering substantially all employees not participating in the pension plans. Eligible employees, as
defined by the 401(k) plan, may elect to contribute up to 15%eligible
employees. Employer contributions of their
total compensation; not to exceed the amount allowed by the Internal
Revenue Service code guidelines. The Company makes matching contributions
to the 401(k) plan each year equal to 50% of the employee contributions,
not to exceed 4% of the total compensation, and can also make
discretionary matching contributions. Employee contributions are fully
vested at all times, and the Company's matching contributions vest over
five years. The Company's matching contributions were approximately $468,000, $506,000 and $471,000$63,000 for the yearsyear ended
December 31, 1996,
December 31, 1997 and January 1, 1999, respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating leases and leases
certain computer and office equipment under two- to five-year operating
lease agreements. Total rent expense relating to these leases was
approximately $2,756,000, $6,369,000 and $5,646,000$14,400 for the yearsnine months ended December 31, 1996, December1998 and
$37,000 were made to the plan during the year ended March 31, 1997 and January 1, 1999, respectively,
with sublease income of $101,000 in fiscal year 1998.
The following table sets forth future minimum lease payments under
noncancelable operating leases as of January 1, 1999 (in thousands):
Fiscal Year:
Rent Sublease Total
------ -------- ------
1999 $4,038 $ (261) $3,777
2000 1,882 1,882
2001 1,238 1,238
2002 903 903
2003 147 147
------ ------ ------
Total future minimum lease payments $8,208 $ (261) $7,947
====== ====== ======
F-17
47
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
9. RELATED-PARTY TRANSACTIONS
The Company receives legal services from a law firm previously affiliated
with its principal stockholder and paid approximately $516,000, $189,000
and $114,000 for such legal services during the years ended December 31,
1996, December 31, 1997 and January 1, 1999, respectively.
The Company has an investment in an affiliate, which provides
telemarketing and related services (Note 4). The Company paid
approximately $524,000 and $898,000 during the years ended December 31,
1997 and January 1, 1999, respectively. Approximately $50,000 was payable
to the affiliate at January 1, 1999.
10. STOCK TRANSACTIONS AND WARRANTS
In March 1996, the Company completed an initial stock offering and sold
1,788,000 shares of its common stock, at a net price of $13.02 per share.
An additional 349,800 shares of common stock were sold also at a net
$13.02 per share, pursuant to an underwriters over-allotment provision.
The net proceeds of the approximately $26.5 million raised by the Company
were used, in part, to repay existing bank debt.
During the three fiscal years 1996, 1997 and 1998, the Company issued the
following shares of common stock, 57,798 shares, 8,107 shares, and 30,328
shares, respectively as a result of options that were exercised (Note 11).
The income tax effect of any difference between the market price of the
Company's common stock at the grant date and the market price at the
exercise date is credited to additional paid-in capital, as required.
On February 17, 1997, the Company adopted an Employee Stock Purchase Plan ("ESP Plan"). The ESP Plan
allows employees of the Company to purchase common stock at a discount, without
having to pay any commissions on the purchases. The discount is the greater of
15% of the fair market value ("FMV") at the end of the reportable period or the
difference between the FMV at the beginning and end of the reportable period.
The maximum amount that any employee can contribute to the ESPES Plan per quarter
is $6,250, and the total number of shares reserved by the Company for purchase
under the ESP Plan is 200,000.180,576. During 1998,1999, the Company issued 12,2907,568 shares of
common stock, at a weighted average price of $3.69$2.71 per share.
In May10. RELATED PARTY TRANSACTIONS
The SPAR Companies are affiliated through common ownership with SPAR Marketing
Services, Inc., SPAR Retail Services, Inc., (f/k/a SPAR/Burgoyne, Inc.), SPAR
Group, Inc., IDS SPAR Pty, Ltd. (Aust.), SPAR Ltd., (U.K.), Garden Island, Inc.,
SPAR Marketing Pty Ltd. (Aust.), WR Services, Inc., SR Services Inc., Infinity
Insurance Ltd. and SPAR Infotech, Inc.
The Company purchases field management services and the use of independent
contractor services from SPAR Marketing Services, Inc.
The Company also purchased internet consulting services from SPAR Infotech, Inc.
F-28
SPAR Group, Inc.
Notes to Financial Statements (continued)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
The following transactions occurred between the SPAR Companies and the above
affiliates (in thousands):
Year ended Nine Months ended Year ended
December 31, December 31, March 31
1999 1988 1998
---------------- ---------------------- -----------------
Services provided by affiliates:
Independent contractor services $4,111 $2,763 $3,233
================ ====================== =================
Field management services $4,344 $2,049 $2,964
================ ====================== =================
Internet consulting services $ 608 $ - $ -
================ ====================== =================
Services provided to affiliates:
Management services $ 665 $ 417 $ 576
================ ====================== =================
Through the services of Infinity Insurance, Ltd., the Company issued 42,670 shares of common stock to two
employees as compensationpurchased
insurance coverage for servicesits casualty and recorded $179,000 of
compensation expense.
F-18
48
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
During February 1996, 100,000 warrants issued in conjunction with a 1992
line of creditproperty insurance risk, for
approximately $959,000 for the purchase of 152,405 shares of common stockyear ended December 31, 1999, $375,000 for the
nine months ended December 31, 1998 and $318,000 during the year ended March 31,
1998 (in thousands).
December 31
1999 1998
------------------------------------
Balance due to affiliates:
Spar Marketing Services, Inc. $ 29 $205
Spar/Infotech, Inc. 196 -
------------------------------------
$225 $205
====================================
The Company has an investment in an affiliate, which provides telemarketing and
related services. The Company paid approximately $386,000 during the year ended
December 31, 1999. Approximately $580,000 was payable to the affiliate at
$1.82
per share, were exercised through a cashless exercise, based on the
estimated fair market value of the Company's common stock, at the date of
exercise of $14.00, reduced the number of shares issuedDecember 31, 1999.
F-29
SPAR Group, Inc.
Notes to 87,000. During
October 1996, the remaining warrants to purchase 52,405 shares of common
stock at $1.82 per share were exercised through a cashless exercise, based
on the estimated fair value of the Company's common stock at the date of
exercise of $12.75, reduced the number of shares issued to 44,924.Financial Statements (continued)
11. STOCK OPTIONS
TheIn 1999, the Company recorded a non-cash, non-tax deductible charge of
approximately $752,000 resulting from the grant of 134,114 options at $0.01 per
share and the issuance of 200,000 shares to a consultant prior to the reverse
merger.
As a result of the reverse merger with PIA, the Company has three stock option
plans: the 1990 Stock Option Plan (1990
Plan)("1990 Plan"), the 1995 Stock Option Plan
(1995 Plan),("1995 Plan") and the 1995 Director's Plan (Director's Plan)("Director's Plan").
The 1990 Plan is a nonqualified option plan providing for the issuance of up to
810,811683,109 shares of common stock to officers, directors and key employees. The
options have a term of 10ten years and one week and are either fully vested or
will vest ratably no later than five years from the grant date. DuringSince 1995, the Company elected toPIA
has no longer grantgranted options under this plan.
The 1995 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 1,300,0003,500,000 shares of the Company's common stock. The
options have a term of ten years, except in the case of incentive stock options
granted to greater than ten-percent10% stockholders of the Company, for which the term is
five years. The exercise price of nonqualified stock options must be equal to at
least 85% of the fair market value of the Company's common stock at the date of
grant; the exercise price of incentive stock options must be equal to at least
the fair market value of the Company's common stock at the date of grant. At
January 1,December 31, 1999, options to purchase 281,746500,256 shares were available for grant
under this plan.
The Director's Plan is a stock option plan for nonemployee directors and
provides for the purchase of up to 100,000 shares of the Company's common stock.
An option to purchase 1,500 shares of the Company's common stock shall be
granted automatically each year to each director, following the Company's annual
stockholders' meeting. The exercise price of options issued under this plan
shall be not less than the fair market value of the Company's common stock on
the date of grant. Each option under this plan shall vest and become exercisable
in full on the first anniversary of its grant date, provided the optionee
F-30
SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
is reelected as a director of the Company. The maximum term of options granted
under the plan is ten years and one day, subject to earlier termination
following an optionee's cessation of service with the Company. At January 1,December 31,
1999, options to purchase 89,50086,500 shares were available for grant under this
plan.
F-19The following table summarizes activity under the Company's 1990 Plan, 1995 Plan
and Director's Plan:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------------------------------------
Options outstanding at July 8, 1999, date of reverse
merger 1,438,285 $5.91
Options granted 2,294,858 4.82
Options exercised (10,811) 2.78
Options canceled or expired (416,810) 5.51
------------------
Options outstanding, December 31, 1999 3,305,522 $5.22
==================
Option price range at end of year $0.01 to $14.00
Option price range for exercised shares $2.78
Weighted average fair value of options granted during
the year $4.94
F-31
49
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1,SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number
Outstanding at Remaining Average Exercisable at Weighted
Range of December 31, Contractual Life Exercise December 31, Average
Exercise Prices 1999 Life Price 1999 Exercise Price
- --------------------- -------------------------------------------------------------------------------------
Less than $4.00 149,114 9.50 years $ 0.21 141,614 $ 0.12
$4.01 - $5.00 1,627,262 9.46 years 4.98 78,000 4.62
$5.01 to $6.25 1,357,482 8.57 years 5.58 697,875 5.63
Greater than 6.25 171,664 4.67 years 9.01 171,664 9.01
------------------ -------------------
Total 3,305,522 8.85 years $ 5.22 1,089,153 $ 5.37
================== ===================
Outstanding warrants are summarized below:
Shares Subject Exercise Price
to Warrants Per Share
------------------------------------
Balance, March 31, 1998 - $ -
Balance, December 31, 1998 - -
Balance, December 31, 1999 96,395 $2.78 - $8.51
The above warrants expire at various dates from 2002 through 2004.
F-32
SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. No compensation cost has been
recognized for the stock option plans. The impact of stock options granted
prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1996, 1997 and 1998 pro forma adjustments may not be
indicative of future period pro forma adjustments, when the calculation
will apply to all applicable future stock options. Had compensation cost for the Company's
option plans been determined based on the fair value at the grant date for
awards in 1996, 1997 and 19981999 consistent with the provisions of SFAS No. 123, the Company's pro
forma net income (loss) and net income (loss) per share would have been reduced
to the pro formaadjusted amounts indicated below:
Years Ended
------------------------------------------------
DECEMBER 31, DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------ ----------
Net income (loss), as reported (in thousands) $ 3,759 $ (15,099) $ (4,266)
Net income (loss), pro forma (in thousands) $ 3,564 $ (15,808) $ (5,420)
Basic net income (loss) per share, as reported $ 0.70 $ (2.72) $ (0.78)
Basic net income (loss) per share, pro forma $ 0.66 $ (2.85) $ (1.00)
Diluted net income (loss) per share, as reported $ 0.63 $ (2.72) $ (0.78)
Diluted net income (loss) per share, pro forma $ 0.60 $ (2.85) $ (1.00)
below (in thousands, except per share data):
Year ended
December 31,
1999
-------------------
Pro forma net income, as reported $1,242
Pro forma net loss, as adjusted (1,011)
Pro forma basic net income per share, as reported 0.08
Pro forma basic net loss per share, as adjusted (0.07)
Pro forma diluted net income per share, as reported 0.08
Pro forma diluted net loss per share, as adjusted (0.07)
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes option-pricing model, using the return on a ten yearten-year
treasury bill, with the following weighted-averageweighted average assumptions used for grants
in 1998:1999: dividend yield of 0%; expected volatility of 104.6%186.38%; risk-free
interest rate of 4.7%5.65%; and expected lives of six years.
The following weighted-average assumptions12. NOTES PAYABLE TO CERTAIN STOCKHOLDERS
Former principal stockholders of the SPAR Companies each made loans to certain
SPAR Companies in the aggregate amount of $4.3 million to facilitate the
acquisition of the PIA Companies and the acquisition of the assets of MCI. These
stockholders also were used for grantsowed $1.9 million in 1997:
dividend yieldunpaid distributions relating to the
former status of 0%; expected weighted-average volatilitymost of 79.5%;
risk-freethe operating SPAR Companies as subchapter S
corporations. Those amounts were converted into promissory notes issued to these
certain stockholders severally by SMF, SINC and SPGI prior to the Merger, which
aggregated $6.2 million.
F-33
SPAR Group, Inc.
Notes to Financial Statements (continued)
12. NOTES PAYABLE TO CERTAIN STOCKHOLDERS (CONTINUED)
Notes payable to certain stockholders total $5.9 million as of December 31, 1999
and bear an interest rate of 6.2%; and expected lives8%, due on demand. The current bank agreements
contain certain restrictions on the repayment of six years.stockholder debt. The following assumptions were used for grants in 1996: dividend yieldCompany
has classified $2 million of 0%;
expected volatility of 101.7%; risk-free interest rate of 6.3%; and
expected lives of six years.
F-20
50
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
The following table summarizes activity under the Company's 1990 Plan,
1995 Plan and Directors' Plan:
YEARS ENDED
--------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, JANUARY 1,
1996 1997 1999
---------------------------- ---------------------------- ----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ---------- ---------- ---------- ----------
Options
outstanding,
beginning of year 791,356 $ 6.76 883,202 $ 8.12 1,526,851 $ 6.10
Options granted 234,540 $ 13.57 938,325 $ 5.55 350,500 $ 5.49
Options exercised (57,798) $ 5.85 (8,107) $ 7.77 (30,328) $ 2.91
Options canceled
or expired (84,896) $ 9.25 (286,569) $ 10.45 (408,738) $ 6.51
---------- ---------- ----------
Options
outstanding,
end of year 883,202 $ 8.12 1,526,851 $ 6.10 1,438,285 $ 5.91
========== ========== ==========
Option price
range at
end of year $ 2.78 to $ 2.78 to $ 2.78 to
$ 14.00 $ 14.00 $ 14.00
Option price
range for $ 2.78 to $ 7.40 to $ 2.78 to
exercised shares $ 9.81 $ 8.51 $ 5.32
Weighted-average
fair value of
options granted
during the year $ 11.18 $ 4.01 $ 5.49
F-21
51
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
The following table summarizes information about fixed-price stock options
outstanding at January 1, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE JANUARY 1, CONTRACTUAL EXERCISE JANUARY 1, EXERCISE
PRICES 1999 LIFE PRICE 1999 PRICE
--------------- -------------- ----------- --------- -------------- ---------
$2.78 129,729 3.17 $ 2.78 129,729 $ 2.78
$3.69-$6.25 1,005,119 8.91 $ 5.51 208,537 $ 5.55
$7.40-$9.81 263,302 5.09 $ 7.75 261,275 $ 7.74
$14.00 40,135 7.51 $ 14.00 35,135 $ 14.00
--------- ---------
$2.78 to $14.00 1,438,285 7.65 $ 5.91 634,676 $ 6.35
========= =========
Outstanding warrants are summarized below:
SHARES EXERCISE
SUBJECT TO PRICE PER
WARRANTS SHARE
----------- -------------
Balance, January 1, 1996 248,800 $1.82 - $8.51
Exercised (152,405) $1.82
--------
Balance, December 31, 1996 96,395 $2.78 - $8.51
--------
Balance, December 31, 1997 96,395 $2.78 - $8.51
--------
Balance, January 1, 1999 96,395 $2.78 - $8.51
========
The above warrants expire at various dates from 2002 through 2004.
F-22
52
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
12. EARNINGS PER SHARE
YEARS ENDED
------------------------------------------------
DECEMBER 31, DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------ ----------
(in thousands, except per share data)
Basic:
Weighted-average common shares outstanding 5,370 5,551 5,439
Net income (loss) $ 3,759 $(15,099) $ (4,266)
======== ======== ========
Basic earnings per share $ 0.70 $ (2.72) $ (0.78)
======== ======== ========
Diluted:
Weighted-average common shares - basic 5,370 5,551 5,439
Potential common shares 620
-------- -------- --------
Weighted-average common shares - diluted 5,990 5,551 5,439
======== ======== ========
Net income (loss) $ 3,759 $(15,099) $ (4,266)
======== ======== ========
Diluted earnings per share $ 0.63 $ (2.72) $ (0.78)
======== ======== ========
F-23
53
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999these notes payable as long-term debt.
13. SEGMENTS
Utilizing the management approach, the CompanySPAR Group has broken down its business
based upon the nature of services provided i.e.(i.e., dedicated,merchandising services and
incentive marketing services). The Merchandising Services Division consists of
SMI (an intermediate holding company), SMF, SMNEV, SBRS and SINC (collectively,
the "SPAR Marketing Companies") and the PIA Companies (see Note 1). The
Incentive Marketing Division consists of each of SIM (an intermediate holding
company) and SPGI (see Note 1). Merchandising services generally consist of
regularly scheduled, routed services provided at the stores for a specific
retailer or multiple manufacturers primarily under multiple year contracts.
Services also include stand-alone large scale implementations. These services
may include activities such as ensuring that clients' products authorized for
distribution are in stock and on the shelf, adding in new products that are
approved for distribution but not present 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 clients' products, selling new
product and promotional items. Specific in-store services can be initiated by
retailers and manufacturers, such as new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. These
services are used typically for large-scale implementations over 30 days. The
Merchandising Services Division of the SPAR Group also performs other project
services, such as new store sets and existing store resets, re-merchandising,
remodels and category implementations, multi-year shared service contracts or
stand-alone project contracts.
F-34
SPAR Group, Inc.
Notes to Financial Statements (continued)
13. SEGMENTS (CONTINUED)
The Incentive Marketing Division generally consists of designing and
project.implementing premium incentives, managing meetings and group travel for clients
throughout the United States. These services may include providing a variety of
consulting, creative, program administrative, travel and merchandise fulfillment
services to companies seeking to motivate employees, salespeople, dealers,
distributors, retailers and consumers toward certain action or objectives. The
Company does not allocate operating
expenses to these segments, nor does it allocate specific assets to these
segments. Therefore,following table presents segment information reported in the following
includes only net revenues (in thousands):
BUSINESS SEGMENTS
--------------------------------------------------------------
DEDICATED SHARED SERVICE PROJECTS TOTAL
-------- -------------- -------- --------Merchandising Services Incentive Marketing Total
---------------------------- ---------------------------- ----------------------------
Nine Months Nine Months Nine Months
Year ended ended Year ended ended Year ended ended
December 31, December 31, December 31, December 31, December 31, December 31,
1999 1998 1999 1998 1999 1998
---------------------------- ---------------------------- ----------------------------
Fiscal year 1998
Net revenues $79,612 $32,601 $36,912 $ 38,766- $116,524 $32,601
Cost of revenues 50,499 16,217 30,789 - 81,288 16,217
---------------------------- ---------------------------- ----------------------------
Gross profit 29,113 16,384 6,123 - 35,236 16,384
SG&A 23,213 9,978 5,617 - 28,830 9,978
---------------------------- ---------------------------- ----------------------------
EBITDA $ 40,2165,900 $ 42,806 $121,788
======== ======== ======== ========
Fiscal6,406 $ 506 $ - $ 6,406 $ 6,406
============================ ============================ ============================
Net income (loss) $ 663 $ 6,109 $ (1,158) $ - $ (495) $ 6,109
============================ ============================ ============================
Total Assets $48,761 $14,865 $14,326 $ - $ 63,087 $14,865
============================ ============================ ============================
14. RESTRUCTURING AND OTHER CHARGES
In connection with the PIA Merger, the Company's Board of Directors approved a
plan to restructure the operations of the PIA Companies. Restructuring costs are
composed of committed costs required to integrate the SPAR Companies and the PIA
Companies' field organizations and the consolidation of administrative functions
to achieve beneficial synergies and costs savings.
The SPAR Group will recognize termination costs in accordance with EITF 95-3,
Recognition of Liabilities in Connection with a Business Combination.
F-35
SPAR Group, Inc.
Notes to Financial Statements (continued)
14. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
The following table displays a rollforward of the liabilities for restructuring
and other charges from July 8, 1999 Merger to December 31, 1999 (in thousands):
Initial Period ended
Restructuring December 31, December 31,
and Other 1999 1999
Chareges Deductions Balance
-----------------------------------------------------------
Type of cost:
Employee separation $1,606 $ 491 $1,115
Equipment lease settlements 3,073 326 2,747
Office lease settlements 1,794 252 1,542
Redundant assets 957 957 -
-----------------------------------------------------------
$7,430 $2,026 $5,404
===========================================================
Management believes that the remaining reserves for restructuring are adequate
to complete its plan.
In addition, to the above restructuring costs, the Company incurred substantial
costs in connection with the PIA transaction, including legal, accounting and
investment banking fees estimated to be an aggregate unpaid obligation of
approximately $1.3 million. The SPAR Group has also accrued approximately $2.4
million for expenses incurred by PIA prior to the Merger, which have not been
paid. Management believes the current bank credit facilities are sufficient to
fund operations and working capital, including the current maturities of debt
obligations, but may not be sufficient to reduce obligations of the Merger with
PIA. The Company is currently negotiating with its bank for an increase in its
credit facility to meet the non-operational credit needs and is also working to
secure additional long-term capital. However, there can be no assurances that
the Company will be successful in these negotiations.
F-36
SPAR Group, Inc.
Notes to Financial Statements (continued)
15. EARNINGS PER SHARE
The following table sets forth the computations of pro forma basic and diluted
earnings per share (in thousands, except per share data):
Nine Months
Year ended ended Year ended
December 31, December 31, March 31,
1999 1998 1998
-------------------------------------------------
Numerator:
Pro forma net income $ 1,242 $ 3,856 $ 2,998
=================================================
Denominator:
Shares used in pro forma basic earnings per share
calculation1 15,361 12,659 12,659
Effect of diluted securities:
Employee stock options 6 - -
Warrants - - -
-------------------------------------------------
Shares used in pro forma diluted earnings per share
calculations1 15,367 12,659 12,659
=================================================
Pro forma basic earnings per share1 $ 0.08 $ 0.30 $ 0.24
=================================================
Pro forma diluted earnings per share1 $ 0.08 $ 0.30 $ 0.24
=================================================
1 The pro forma basic and pro forma diluted earnings per share amounts are
based upon 12,659,000 shares on January 1, 1998, although these shares were
issued on July 9, 1999, as required to comply with SFAS No. 128 and the
Securities and Exchange Commission Staff Accounting Bulletin 98 (SAB 98).
F-37
SPAR Group, Inc.
Notes to Financial Statements (continued)
16. TRANSITION PERIOD - CHANGE OF FISCAL YEAR END
Effective April 1, 1998, the Spar Group, Inc. changed its year end for financial
statement purposes to a calendar year. The unaudited results below are presented
for comparative purposes.
Nine Months Ended December 31
1998 1997
------------------------------------
(unaudited)
Net revenues $32,601 $27,202
====================================
Gross profit $16,384 $12,623
====================================
Unaudited pro forma information:
Pro forma provision for income taxes $ 44,4232,253 $ 44,9321,114
Pro forma net income $ 38,853 $128,208
======== ======== ======== ========
Fiscal year 1996
Net revenues3,856 $ 21,8941,904
Pro forma basic earnings per share $ 68,4460.30 $ 29,600 $119,940
======== ======== ======== ========0.15
Pro forma basic weighted average common shares 12,659 12,659
Pro forma diluted earnings per share $ 0.30 $ 0.15
Pro forma diluted weighted average common shares 12,659 12,659
During the years ended January 1, 1999, December 31, 1997 and December 31,
1996, sales to two major customers (three major customers for year ended
January 1, 1999) totaled $47.3 million, 38.0 million and $26.4 million,
respectively.
14. SUBSEQUENT EVENT
On February 28, 1999, the Company signed a definitive agreement with theF-38
SPAR Group, to merge in a stock transaction involving the issuance of
approximately 12.3 million of PIA stock to the shareholders of the SPAR
Group. The transaction is subject to shareholder and regulatory approval.
After the merger, SPAR Group shareholders will own approximately 69% of
PIA Common Stock. The Companies expect to complete the transaction by May
1999.
F-24
54
EXHIBIT 11.1
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
SCHEDULEInc.
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)Valuation and Qualifying Accounts
(In Thousands)
ADDITIONS WRITE OFFS
BALANCE AT CHARGED TO AND BALANCE AT
BEGINNING COSTS AND ALLOWANCE END
OF YEAR EXPENSES(1) CHARGES OF YEAR
---------- ------------ ----------- ---------Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
----------------------------------------------------------------------
Year ended December 31, 1999:
Deducted from asset accounts:
DESCRIPTION
Year ended December 31, 1996 -
Allowance for doubtful accounts and other $ 424 $ 105 $ 54 $ 583
Year$605 $1,202 $1,057 (2) $954 (3) $1,910
Nine months ended December 31, 1997 -1998:
Deducted from asset accounts:
Allowance for doubtful accounts and other$568 $ 583299 $ 918- $262 (3) $ (50) $ 1,451605
Year ended January 1, 1999 -March 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts and other$321 $ 1,451477 $ (270)- $230 (1) $ (360) $ 821
(1) Includes amounts charged to revenues for rebates, price adjustments and other.568
F-251) Includes Accounts Receivable determined to be uncollectible which were
written off.
2) $1,057 charged to Other Accounts represents the amounts acquired through
the SPG and PIA acquisitions.
3) Uncollectible accounts written off, net of recoveries.
F-39
55
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 * Certificate of Incorporation of PIA
3.2 * By-laws of PIA
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-Bankvering.
10.1 * 1990 Stock Option Plan
10.2 Amended and Restated 1995 Stock Option Plan-------------
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc.,
as amended. (incorporated by reference of Exhibit 10.2 to the Company's Form 10Q for the
2nd Quarter ended July 3, 1998).
10.3 * 1995 Stock Option Plan for Non-employee Directors
10.4 Employment Agreement dated as of June 25, 1997 between
PIA and Terry R. Peets (incorporated by reference to
Exhibit 10.5 to the Company's Form 10-Q for the 2nd
Quarter ended June 30, 1997)
10.5 Severance Agreement dated as of February 20, 1998
between PIA and Cathy L. Wood (incorporated by reference
to Exhibit 10.5 to the Company's Form 10-Q for the 1st
Quarter ended April 30, 1998)
10.6 Severance Agreement dated as of August 10, 1998 between
PIA and Clinton E. Owens (incorporated by reference to
Exhibit 10.6 to the Company's Form 10-Q for the 3rd
Quarter ended October 2, 1998)
10.7 Amendment No. 1 to Employment Agreement dated as of
October 1, 1998 between PIA and Terry R. Peets
(filed herein)
10.8 Amended and Restated Severance Compensation Agreement
dated as of October 1, 1998 between PIA and Cathy L. Wood
(filed herein)
10.9 Loan and Security Agreement dated December 7, 1998 among
Mellon Bank, N.A., PIA Merchandising Co., Inc., Pacific
Indoor Display Co. and PIA. (filed herein)
10.10 Agreement and Plan of Merger dated as of February 28,
1999 among PIA, S.G. Acquisition, Inc., PIA
Merchandising Co., Inc., SPAR Acquisition, In., SPAR
Marketing, Inc., SPAR Marketing Force, Inc., SPAR, Inc.,
SPAR/Burgoyne Retail Services, Inc., SPAR Incentive
Marketing, Inc., SPAR MCI Performance Group, Inc. and
SPAR Trademarks, Inc. (filed herein)
10.11 Voting Agreement dated as of February 28, 1999 among
PIA, Clinton E. Owens, RVM/PIA, California limited
partnership, Robert G. Brown and William H. Bartels
(filed herein)
21.1 * Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
- -------------
* Filed as an Exhibit to the
Company's Registration Statement on Form S-1
(Registration No. 33-80429) as filed with the
Securities and Exchange Commission on December 14,
1995.1995 (the "Form S-1") and to Exhibit 3.1 to the
Company's Form 10-Q for the 3rd Quarter ended
September 30, 1999).
3.2 By-laws of PIA (incorporated by reference to the
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 1990 Stock Option Plan (incorporated by reference
to the Form S-1).
10.2 Amended and Restated 1995 Stock Option Plan
(incorporated by reference of Exhibit 10.2 to the
Company's Form 10-Q for the 2nd Quarter ended July
3, 1998).
10.3 1995 Stock Option Plan for Non-employee Directors
(incorporated by reference to the Form S-1).
10.4+* Employment Agreement dated as of June 25, 1997
between PIA and Terry R. Peets
(incorporated by reference to Exhibit 10.5 to the
Company's Form 10-Q for the 2nd Quarter ended June
30, 1997)
10.5+* Severance Agreement dated as of February 20, 1998
between PIA and Cathy L. Wood (incorporated by
reference to Exhibit 10.5 to the Company's Form
10-Q for the 1st Quarter ended April 30, 1998)
10.6* Severance Agreement dated as of August 10, 1998
between PIA and Clinton E. Owens (incorporated by
reference to Exhibit 10.6 to the Company's Form
10-Q for the 3rd Quarter ended October 2, 1998)
10.7+* Amendment No. 1 to Employment Agreement dated as
of October 1, 1998 between PIA and Terry R. Peets.
10.8+* Amended and Restated Severance Compensation
Agreement dated as of October 1, 1998 between PIA
and Cathy L. Wood.
10.9+ Loan and Security Agreement dated December 7, 1998
among Mellon Bank, N.A., PIA Merchandising Co.,
Inc., Pacific Indoor Display Co. and PIA.
10.10+ Agreement and Plan of Merger dated as of February
28, 1999 among PIA, SG Acquisition, Inc., PIA
Merchandising Co., Inc., SPAR Acquisition, Inc.,
SPAR Marketing, Inc., SPAR Marketing Force, Inc.,
SPAR, Inc., SPAR/Burgoyne Retail Services, Inc.,
SPAR Incentive Marketing, Inc., SPAR MCI
Performance Group, Inc. and SPAR Trademarks, Inc.
10.11+ Voting Agreement dated as of February 28, 1999
among PIA, Clinton E. Owens, RVM/PIA, California
limited partnership, Robert G. Brown and William
H. Bartels.
10.12* Amendment No. 2 to Employment Agreement dated as
of February 11, 1999 between PIA and Terry R.
Peets (incorporated by reference to Exhibit 10.12
to the Company's Form 10-Q for the 2nd Quarter
ended April 2, 1999).
10.13 Special Purpose Stock Option Plan (incorporated by
reference to Exhibit 10.13 of the Company's Form
10-Q for the 2nd Quarter ended July 2, 1999.
10.14 Amendment No. 1 to Severance Agreement dated as of
May 18, 1999 between the Company and Cathy L. Wood
(incorporated by reference to Exhibit 10.14 of the
Company's Form 10-Q for the 3rd Quarter ended
September 30, 1999).
10.15+ Second Amended and Restated Revolving Credit, Term
+ Loan and Security Agreement by and among IBJ
Whitehall Business Credit Corporation with SPAR
Marketing Force, Inc., SPAR Group, Inc., SPAR,
Inc., SPAR/Burgoyne Retail Services, Inc., SPAR
Incentive Marketing, Inc., SPAR Trademarks, Inc.,
SPAR MCI Performance Group, Inc., SPAR Marketing,
Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., PIA Merchandising, Co., Inc.,
Pacific Indoor Display Co., Inc., and Pivotal
Sales Company dated as of September 22, 1999.
10.16+ Waiver and Amendment No. 1 to Second Amended and
+ Restated Revolving Credit, Term Loan and Security
Agreement by and between SPAR Marketing Force,
Inc., SPAR, Inc., SPAR/Burgoyne Retail Services,
Inc., SPAR Group, Inc., SPAR Incentive Marketing,
Inc., SPAR Trademarks, Inc., SPAR Performance
Group, Inc. (f/k/a SPAR MCI Performance Group,
Inc.), SPAR Marketing, Inc. (DE), SPAR Marketing,
Inc. (NV), SPAR Acquisition, Inc., PIA
Merchandising Co., Inc., Pacific Indoor Display
Co., Inc. and Pivotal Sales Company (each a
"Borrower" and collectively, the "Borrowers") and
IBJ Whitehall Business Credit Corporation
("Lender")dated as of December 8, 1999.
21.1+ Subsidiaries of the Company
+
23.1+ Consent of Ernst & Young LLP
+
27.1+ Financial Data Schedule
+
+ Previously filed with initial Form 10-K for the
fiscal year ended January 1, 1999.
+ Filed herewith.
+
* Management contract or compensatory plan or
arrangement required to be filed as an exhibit
pursuant to applicable rules of the Securities and
Exchange Commission.