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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT ON FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 20012002
Commission file number 0-27824
SPAR GROUP, INC.
Delaware 33-0684451
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
580 WHITE PLAINS ROAD, TARRYTOWN, NEW YORK 10591
Registrant's telephone number, including area code: (914) 332-4100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock,
par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ._____.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Rule 12b-2 of the Act.) YES NO X
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The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 27,June 30, 2002, based on the closing price of
the Common Stock as reported by the Nasdaq SmallCapSmall Cap Market on such date, was
approximately $43,675,787.$ 12,147,050.
The number of shares of the Registrant's Common Stock outstanding as of
March 27,December 31, 2002 was 18,585,44118,824,527 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PART I
PAGE
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 17
Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 25
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 25
Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation and Other Information of SPAR Group, Inc. 28
Item 12. Security Ownership of Certain Beneficial Owners and Management 32PAGE
Item 1. Business 2
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation and Other Information of SPAR Group, Inc. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 35
Item 13. Certain Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 34
Signatures 36
-i-Item 14. Controls and Procedures 37
Item 15. Principal Accountant Fees and Services 37
PART IV
Item 16. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
Signatures 40
PART I
STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K INCLUDESOF SPAR GROUP,
INC. (THE "COMPANY"), INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT,
INCLUDING, IN PARTICULAR AND WITHOUT LIMITATION, THE STATEMENTS ABOUTCONTAINED IN THE
SPAR GROUP'S PLANS AND STRATEGIESDISCUSSIONS UNDER THE HEADINGS "BUSINESS" AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS, WHETHER
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS, TO NOT OCCUR OR BE
REALIZED OR TO BE LESS THAN EXPECTED. SUCH FORWARD-LOOKING STATEMENTS GENERALLY
ARE BASED UPON THE COMPANY'S BEST ESTIMATES OF FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENT, BASED UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF
OPERATIONS." FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL", "EXPECT", "INTEND",
"BELIEVE", "ESTIMATE", "ANTICIPATE", "CONTINUE" OR SIMILAR TERMS, VARIATIONS OF
THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. YOU SHOULD CAREFULLY CONSIDER SUCH
RISKS, UNCERTAINTIES AND OTHER INFORMATION, DISCLOSURES AND DISCUSSIONS WHICH
CONTAIN CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROVIDED IN THE FORWARD-LOOKING
STATEMENTS.
ALTHOUGH THE SPAR GROUPCOMPANY 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.ACHIEVED IN WHOLE OR IN PART. YOU SHOULD CAREFULLY REVIEW THE RISK FACTORS
DESCRIBED HEREIN AND ANY OTHER CAUTIONARY STATEMENTS CONTAINED IN THIS ANNUAL
REPORT ON FORM 10-K. ALL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE SPAR GROUPCOMPANY
OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED BY THE RISK FACTORS (SEE
ITEM 1 - CERTAIN RISK FACTORS) AND OTHER CAUTIONARY STATEMENTS IN THETHIS ANNUAL
REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR
REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.
ITEM 1. BUSINESS.
GENERAL
The
SPAR Group, Inc., a Delaware corporation formerly known as PIA
Merchandising Services, Inc. ("SPAR Group", "SGRP" or the
"Company"), is a supplier of in-store merchandising and marketing services both
throughout the United States and Canada.internationally. The Company also provides database marketing, teleservices, marketing
research, and Internet-based software. As part of a strategic realignment in the
fourth quarter of 2001, the Company made the decision to divest its Incentive
Marketing Division, SPAR Performance Group, Inc. ("SPGI"). The Company is
exploring various alternatives for the sale of SPGI, including the sale of the
business to employees through the establishment of an employee stock ownership
plan. The Company anticipates that the divestiture of SPGI will occur in the
first half of 2002. As a result of this decision, the Company's continuing operations are
now divided into threetwo divisions: the Merchandising Services
Division, the Technology Division and the
International Division. The Merchandising Services Division provides
merchandising services, database marketing, teleservices and marketing research
to manufacturers and retailers with product distribution primarily in the mass
merchandiser, video, discountmerchandisers, drug storechains and grocery industries. In March 2000,stores in the Company announced the formation of a Technology
Division for the purpose of marketing its proprietary Internet-based computer
software. In November 2000, the Company established itsUnited States. The
International Division to expand itsestablished in July 2000, currently provides
merchandising services through a joint venture in Japan and focuses on expanding
the Company's merchandising services business off shore, with an initial focus
on Japan andthroughout the Pacific Rim region.world.
CONTINUING OPERATIONS
Merchandising Services Division
The Company's Merchandising Services Division consists of (1) SPAR
Marketing, Inc., a Delaware corporation ("SMI") (an intermediate holding
company), SPAR Marketing Force, Inc. ("SMF"), SPAR Marketing, Inc., a Nevada
corporation ("SMNEV"), SPAR/Burgoyne Retail Services, Inc. ("SBRS"), and SPAR,
Inc. ("SINC") (collectively, the "SPAR Marketing Companies"), and (2) PIA
Merchandising Co. Inc., Pacific Indoor Display d/b/a Retail Resources, Pivotal
Sales Company and PIA Merchandising Ltd. (collectively, "PIA" or the "PIA
Companies"). The SPAR Marketing Companies, the original predecessor of which was
founded in 1967, provideprovides nationwide retail merchandising and marketing
services to home video, DVD,entertainment, PC software, general merchandise, health and
beauty care, products,
consumer goods and food products companies. The PIA Companies, through a
predecessor of the Company first organizedcompanies in 1943, also are suppliers of
in-store merchandising services throughout the United States and were "acquired"
by the SPAR Marketing Companies for accounting purposes pursuant to the Merger
on July 8, 1999 (See Merger and Restructuring, below). The PIA Companies provide
these services primarily on behalf of consumer product manufacturers and
retailers at mass merchandisers,
drug chains and retail grocery stores. The Company
currently operatesstores in all 50 states and Canada and provides a broad range of
in-store merchandising and other marketing services to many of the nation's
leading companies.
-1-
United States. Merchandising
services generallyprimarily consist of regularly scheduled dedicated routed services and
special projects or
regularly scheduled routed services provided at storesthe store level for a specific retailer or multiple
manufacturers primarily under single or multi-year contracts. Services also
include stand-alone large-scale implementations.implementations such as new store openings, new
product launches, special seasonal or promotional merchandising, focused product
support and product recalls. These services may include sales enhancing
activities such as ensuring that client products authorized for distribution are
in stock and on the shelf, adding new products that are approved for
distribution but not presently on the shelf, setting category shelves in
accordance with approved store schematics, ensuring that shelf tags are in
place, checking for the overall salability of client products and
selling-2-
setting new and promotional items.items placing, and/or removing point of purchase and
other related media advertising. Specific in-store services can be initiated by
retailers or manufacturers, and manufacturers, such asinclude new store openings, new product
launches, special seasonal or promotional merchandising, focused product support
and product recalls.
The Company's Merchandising Services Division consists of (1) SPAR
Marketing, Inc. ("SMI") (an intermediate holding company), SPAR Marketing Force,
Inc. ("SMF"), SPAR Marketing, Inc., ("SMNEV"), SPAR/Burgoyne Retail Services,
Inc. ("SBRS"), and SPAR, Inc. ("SINC"") (collectively, the "SPAR Marketing
Companies"); and (2) PIA Merchandising, Co., Inc., Pacific Indoor Display d/b/a
Retail Resources, Pivotal Sales Company and PIA Merchandising Ltd.
(collectively, "PIA" or the "PIA Companies"). The SPAR Marketing Companies are
the original predecessor of the current Company and were founded in 1967. The
PIA Companies, first organized in 1943, are also provides database marketing, teleservicesa predecessor of the Company
and research services.
Technologya supplier of in-store merchandising services throughout the United States,
and were deemed "acquired" by the SPAR Marketing Companies for accounting
purposes pursuant to the Merger on July 8, 1999 (see Merger and Restructuring,
below).
International Division
In MarchJuly 2000, the Company established its Technology Division, SPAR
Technology Group, Inc., to separately market its application software products
and services. The Company has developed and is utilizing several Internet-based
software products. In addition, the Company has developed and sold
internet-based software in its other divisions. The Technology Division was
established to market these applications to businesses with multiple locations
and large workforces or numerous distributors desiring to improve day-to-day
efficiency and overall productivity.
International Division
The Company believes there is a significant market for its
merchandising services throughout the world. The domestic merchandising services
business has been developed utilizing Internet-based technology that can be
modified to accommodate foreign markets. In November 2000, the International Division, SPAR
Group International, Inc. ("SGI"), was established to cultivate foreign
markets, modify the necessary systems and implement the Company'sfocus on expanding its merchandising
services business model worldwideworld-wide. Also in July 2000, the Company entered into a
joint venture with an initial focus on Japana large Japanese distributor and the Pacific
Rim region.
In 2000,together established SPAR Group International, Inc. and a leading Japanese based
distributor established a jointly owned companyFM
to provide the latest in-store
merchandising services to the Japanese market. As part of the joint venture
agreement, the Company translated into Japanese and made available to the joint
venture several of its proprietary internet-based software applications. The
Joint Venture is currently utilizing these applications in their daily
operations.Japan.
DISCONTINUED OPERATIONS
Incentive Marketing Division
As part of a strategic realignment in the fourth quarter of 2001, the
Company made the decision to divest its Incentive Marketing Division, SPAR
Performance Group, Inc. ("SPGI"). The Company is exploringexplored various alternatives for
the sale of SPGI including the sale ofand subsequently sold the business to SPGI's employees through
the establishment of an employee stock ownership plan. Theplan on June 30, 2002.
Technology Division
In October 2002, the Company anticipatesdissolved its Technology Division that was
established in March 2000 for the divestiturepurpose of SPGI will occur in the first half of 2002.
The Company's Incentive Marketing Division was created in January 1999
through the Company's purchase of the business and substantially all of the
assets of BIMA Group, Inc., a Texas corporation ("BIMA" or "MCI") originally
founded in 1987 and formerly known as MCI Performance Group, Inc. The purchase
was made by the Company's indirect subsidiary SPGI, formerly known as SPAR MCI
Performance Group, Inc. SPGI provides a wide variety of consulting, creative,
program administration, travel and merchandise fulfillment, and training
services to companies seeking to retain and motivate employees, salespeople,
dealers, distributors, retailers, and consumers toward certain actions or
objectives. SPGI's strategy enables companies
-2-
to outsource the entire design, implementation and fulfillment of incentive
programs in a one-stop, "umbrella" shopping approach. SPGI typically consults
with a client to design the most effective plan to achieve the client's goals.
SPGI then provides services necessary to implement the program, generates
detailed efficiency progress reports, and reports on the return on investment
upon completion of the program.marketing its proprietary
Internet-based computer software.
INDUSTRY OVERVIEW
CONTINUING OPERATIONS
Merchandising Services Division
According to industry estimates over two billion dollars are spent
annually on domestic retail merchandising services. The merchandising industry
includes manufacturers, retailers, food brokers, and professional service
merchandising companies. The Company believes thethere is a continuing trend is for
major manufacturers to move increasingly toward third parties to handle in-store
merchandising. The Company also believes that its merchandising services bring
added value to retailers, manufacturers and other businesses. Retail
merchandising services enhance sales by making a product more visible and
available to consumers. These services primarily include placing orders, shelf
maintenance, display placement, reconfiguring products on store shelves,
replenishing products, and providing product sampling, and also include other
services such as test market research, mystery shopping, teleservices, database
marketing and promotion planning and analysis.
-3-
The Company believes merchandising services previously undertaken by
retailers and manufacturers have been increasingly outsourced to third parties.
Historically, retailers staffed their stores as needed to ensure inventory
levels, the advantageous display of new items on shelves, and the maintenance of
shelf schematics. In an effort to improve their margins, retailers decreased
their own store personnel and increased their reliance on manufacturers to
perform such services. Initially, manufacturers attempted to satisfy the need
for merchandising services in retail stores by utilizing their own sales
representatives. However, manufacturers discovered that using their own sales
representatives for this purpose was expensive and inefficient. Therefore,
manufacturers have increasingly outsourced the merchandising services to third
parties capable of operating at a lower cost by (among other things) serving
multiple manufacturers simultaneously.
Another significant trend impacting the merchandising segment is the
tendency of consumers to make product purchase decisions once inside the store.
Accordingly, merchandising services and in-store product promotions have
proliferated and diversified. Retailers are continually remerchandising and
remodeling entire stores to respond to new product developments and changes in
consumer preferences. The Company estimates that these activities have increased
in frequency over the last five years, such that most stores are re-merchandised
and remodeled approximately every twenty-four months. Both retailers and
manufacturers are seeking third parties to help them meet the increased demand
for these labor-intensive services.
Technology Division
The Company believes there is a current trend towards consolidation in
business. This trend is creating larger, more complex companies that have
multiple locations and large workforces covering wide geographical areas. The
Company also believes there is a growing trend of companies utilizing the
Internet and Internet-based software. The Company has historically developed and
utilized Internet-based software to manage its national businesses, including
its national field force, with greater efficiency and communication speed than
previously possible with paper based systems. In addition, the Company has
developed and sold internet-based software in its other divisions. The Company
believes its software transcends the merchandising services industry and can be
utilized in many other industries that have businesses with multiple locations
and large workforces or numerous distributors.
-3-
International Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in marketing
their products. As evidenced in the United States, retailer and manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
also believes that the difficulties encountered by these programs willare only be
exacerbated by the logistics of operating in foreign markets. The Company believes thisThis environment
will createhas created an opportunity for the Company to exploit its Internet-based
technology and business model that are successful in the United States. In NovemberJuly
2000, the Company established its International Division, which operates through
SPAR Group International, Inc., to cultivate foreign markets, modify the
necessary systems and implement the Company's business model worldwide by
expanding its merchandising services business off shore. The Company has formed an
International Division task force consisting of members of the Company's
information technology, operations and finance groups to evaluate and develop
foreign markets. The initial focus of the International Division has beenwas on the
Pacific Rim region. In Japan, SPAR Group International, Inc. and a leading
Japanese based distributor established a jointly owned companyjoint venture to provide the latest
in-store merchandising services to the Japanese market. As part of the joint
venture agreement, the Company translated into Japanese and made available
to the joint venture several of its proprietary
internet-basedInternet-based logistical, communications and reporting software applications. Upon successful implementation of the Company's business model in
these areas,applications
into Japanese. Through its Auburn Hills, Michigan server, the Company intendsprovides
the joint venture access to expandthis logistical, communications and reporting
software. More recently, the Company has begun to focus on other potential
merchandising markets worldwide and has hired representatives in Greece and
Australia to assist in those efforts. The Company is actively pursuing expansion
into various other markets.
DISCONTINUED OPERATIONS
Incentive Marketing Division
Industry surveys indicate that over $28 billion is spent annually on
premium incentive and promotion fulfillment. The Company believes that U.S.
companies are increasingly using third party incentive providers as a more
efficient and cost effective means to increase the productivity of their
employees. Premium incentives are performance-determined rewards used to
motivate employees, salespeople, dealers, and consumers, and are also used to
differentiate a product, service or store. Third party premium incentive
providers can offer a customized, unique, turnkey solution specifically tailored
to a company's needs. Additionally, incentive premium providers are able to
capitalize on supplier relationships and to realize volume discounts,
particularly on travel and merchandise.-4-
MERGER AND RESTRUCTURING
On July 8, 1999, SG Acquisition, Inc., a Nevada corporation ("PIA
Acquisition"), a wholly owned subsidiary of the Company, then named PIA
Merchandising Services, Inc. ("PIA Delaware"), merged into and with SPAR
Acquisition, Inc., a Nevada corporation ("SAI") (the "Merger"), pursuant to the
Agreement and Plan of Merger dated as of February 28, 1999, as amended (the
"Merger Agreement"), by and among the Company and certain of the PIA Companies
and SPAR Marketing Companies (among others). In connection with the Merger, PIA
Delaware changed its name to SPAR Group, Inc. (which will beis referred to
post-Merger individually as "SPAR Group", "SGRP" or the "Company"). Although the
SPAR Marketing Companies and SPGI became subsidiaries of PIA Delaware (now SGRP)the
Company) as a result of this "reverse" Merger, the transaction has been
accounted for as a purchase by SAI of the PIA Companies, with the books and
records of SGRPthe Company being adjusted to reflect the historical operating
results of the SPAR Marketing Companies and SPGI (together with certain
intermediate holding companies, the "SPAR Companies").
-4-
BUSINESS STRATEGY
As the marketing services industry continues to grow, consolidate and
expand both in the United States and internationally, large retailers and
manufacturers are increasingly outsourcing their marketing needs to third-party
providers. The Company believes that offering marketing services in multi-use sectors on a national
and global basis will provide it with a competitive advantage. Moreover, the
Company believes that developingsuccessful use of and continuous improvements to a
sophisticated technology infrastructure, including its proprietary
Internet-based software, is key to providing clients with a high level of
customer service while maintaining efficient, low cost operations. The Company's
objective is to become an international integratedretail merchandising and marketing
service provider by pursuing its operating and growth strategy, as described
below.
Capitalize on Cross-Selling Opportunities.Increased Sales Efforts:
The Company intendsis seeking to leverageincrease revenues by increasing sales to its
current clientcustomers, as well as, establishing long-term relationships by cross-sellingwith new
customers, many of which currently use other merchandising companies for various
reasons. The Company believes its technology, field implementation and other
competitive advantages will allow it to capture a larger share of this market
over time. However, there can be no assurance that any increased sales will be
achieved.
New Products:
The Company is seeking to increase revenues through the rangeinternal
development and implementation of new products and services offered bythat add value to
its customers' retail merchandising related activities, some of which have been
identified and are currently being tested for feasibility and market acceptance.
However, there can be no assurance that any new products of value will be
developed or that any such new product can be successfully marketed.
Acquisitions:
The Company is seeking to acquire businesses or enter into joint
ventures or other arrangements with companies that offer similar merchandising
services both in the Company.United States and worldwide. The Company believes that
increasing industry expertise, adding product segments, and increasing its
retailgeographic breadth will allow it to service its clients more efficiently and
cost effectively. As part of its acquisition strategy, SPAR is actively
exploring a number of potential acquisitions, predominately in its core
merchandising servicesservice businesses. Through such acquisitions, the Company may
realize additional operating and revenue synergies and may leverage existing
relationships with manufacturers, retailers and other businesses to create
cross-selling opportunities. However, there can be packaged with its database marketing services to provide a high
levelno assurance that any of customer service,the
acquisitions
-5-
will occur or whether, if completed, the integration of the acquired businesses
will be successful or the anticipated efficiencies and that additional cross-selling
opportunities will increase if, as management intends, the Company acquires businesses in other
sectors of the marketing services industry.occur. The Company also intendsis not currently a party to offer
its proprietary Internet-based softwareany definitive
and binding purchase arrangement with respect to existing Merchandising Services
clients.
Achieveany contemplated acquisition.
Improve Operating Efficiencies.Efficiencies:
The Company intendswill continue to achieveseek greater operating efficiencies within its Divisions.efficiencies. The Company
believes that its existing field force and technology infrastructure can support
additional customers and revenue in the Merchandising Services Division. At the
corporate level, the Company will continue to combinestreamline certain administrative
functions, such as accounting and finance, insurance, strategic marketing and
legal support.
Leverage and Implement Technology.Improve Technology:
The Company intends to continue to utilize computer (including hand-held
computers), Internet, and other technology to enhance its efficiency and ability
to provide real-time data to its customers.customers, as well as, maximize the speed of
communication, and logistical deployment of its merchandising specialists.
Industry sources indicate that customers are increasingly relying on marketing
service providers to supply rapid, value-added information regarding the results
of marketing expenditures on sales and profits. The Company (together with
certain of its affiliates) has developed and owns proprietary Internet-based
software technology that allows it to utilize the Internet to communicate with
its field management, schedule its store-specific field operations more
efficiently, receive information and incorporate the data immediately, quantify
the benefits of its services to customers faster, and respond to customers' needs
quickly and implement programs more rapidly. The Company believes that the usefulness of
certain software applications it has developed transcends the merchandising and
marketing services industry and can be marketed to other industries. The Company has successfully modified
and is currently utilizing certain of its software applications in connection
with its Japanese joint venture. The Company also
believes that it can continue to
improve, modify and adapt its technology to support merchandising and marketing
services for additional customers and projects in the United States and in other
foreign markets. The Company also believes that its proprietary Internet-based
software technology gives themit a competitive advantage in the marketplace.
DESCRIPTION OF SERVICES
The Company currently provides a broad array of merchandising and
marketing services on a national, regional and local basis to leading home
entertainment, general merchandise, consumer goods, food, and health and beauty
care productsmanufacturers and retail companies through its Merchandising Services
Division.
The Company currently operates in all 50 states and Canadathroughout the United States serving some
of the nation's leading companies. The Company believes its full-line
capability
of developingcapabilities provide fully integrated national solutions that distinguish the
Company from its competitors. These capabilities include the ability to develop
plans at one centralized division headquarter location, executingeffect chain wide
fully integrated national solutions, and implementingexecution, implement rapid, coordinated responses to its clients' needs and
report on a real time basis differentiate
the Company from its competitors.Internet enhanced basis. The Company also believes its
national presence, industry-leading technology, centralized decision-making
ability, local follow-through, ability to recruit, train and supervise
merchandisers, ability to perform large-scale initiatives on short notice, -5-
and
strong retailer relationships provide the Company with a competitivesignificant advantage
over local, regional or other competitors.
-6-
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 salesmarketing services primarily on behalf of
consumer product manufacturers at mass merchandiser, drug and retail grocery
chains. The Company currently provides three principal types of merchandising
and salesmarketing services: syndicated services, dedicated services and project
services.
Syndicated Services
Syndicated services consist of regularly scheduled, routed merchandising
services provided at the retail store level for various manufacturers.manufacturers usually
under annual or multi-year contracts. These services are performed for multiple
manufacturers, including, in some cases, manufacturers whose products are in the
same product category. Syndicated services may include activities such as:
o Reordering and replenishment of productproducts
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 yet
present on the shelf
o Designing and implementing store planogram schematics
o Setting product category shelves in accordance with approved store
schematics
o Ensuring that product shelf tags are in place
o Checking for overall salability of the client's products
o Placing new product and promotional items in prominent positions
Dedicated Services
Dedicated services consist of merchandising services, generally as
described above, thatwhich are performed for a specific retailer or manufacturer by
a dedicated organization, including a management team working exclusively for
that retailer or manufacturer. These services include many of the above
activities detailed in syndicated services, as well as, new store set-ups, store
remodels and fixture installations. These services are primarily based on
agreed-upon
hourly rates and fixed management fees under multi-year contracts.
Project Services
Project services consist primarily of specific in-store services
initiated by retailers and manufacturers, such as new store openings, 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 contractsannual or stand-alone project contracts.
Other Marketing Services
Other marketing services performed by the Company include:
Test Market Research - Testing promotion alternatives, new products and
advertising campaigns, as well as packaging, pricing, and location
changes, at the store level.
-6-
Mystery Shopping - Calling anonymously on retail outlets (e.g. stores,
restaurants, banks) to check on distribution or display of a brand and
to evaluate products, service of personnel, conditions of store, etc.
Database Marketing - Managing proprietary information to permit easy
access, analysis and manipulation for use in direct marketing
campaigns.
Data Collection - Gathering sales and other information systematically
for analysis and interpretation.
Teleservices - Maintaining a teleservices center in its Auburn Hills,
Michigan, facility that performs inbound and outbound telemarketing
services, including those on behalf of certain of the Company's
manufacturermanufacturing clients.
It is critical-7-
The Company believes that the aboveproviding merchandising and other services be provided
timely, accurately and efficiently. Client reporting is also critical.efficiently, as well as, delivering timely and accurate
reports to its clients, are two key components of its success. The Company has
developed Internet-based information trackinglogistical deployment, communications, and data accumulation system applicationsreporting
systems that improve the productivity of its merchandising specialists and
provide timely data and reports to its customers. The Company's merchandising
specialists use
Interactive Voice Response (IVR) or utilize hand-held computers, personal computers and laptop computers to
report through the Internet and Interactive Voice Response (IVR) to report
through its Auburn Hills teleservices center the status of each store they
service upon completion. Merchandising specialists may report on store
conditions (e.g. out of stocks, inventory, display placement) or scan and
process new orders for scanned products. This information is analyzed and displayed on
graphical execution maps, which can be accessed by both the Company and its
customers via the Internet. These execution maps visually depict the status of
every merchandising project in real time.
The Company has also developed anThrough the Company's automated labor tracking system.
Merchandisingsystem, its
merchandising specialists communicate work assignment completion information via
the Internet or telephone, enabling the Company to report hours, mileage, and
other completion information for each work assignment on a daily basis and
providing the Company with daily, detailed tracking of work completion. This
technology allows the Company to schedule its merchandising specialists more
efficiently, quickly quantify the benefits of its services to customers, rapidly
respond to customers' needs and rapidly implement programs. The Company believes
that its technological capabilities provide it with a competitive advantage in
the marketplace.
Technology Division
The Company believes there is a current trend towards consolidation in
business. This trend is creating larger, more complex companies that have
multiple locations and large workforces covering wide geographical areas. The
Company also believes there is a growing trend of companies utilizing the
Internet and Internet-based software. The Company has historically developed and
utilized Internet-based software to manage its national businesses, including
its national field force, with greater efficiency and communication speed than
previously possible with paper based systems (see preceding paragraph). In
addition, the Company has developed and sold internet-based software in its
other divisions. The Company believes its software transcends the merchandising
services industry and can be utilized in many other industries that have
businesses with multiple locations and large workforces or numerous
distributors.
International Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in marketing
their products. As evidenced in the United States, retailer and manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
believes that the difficulties encountered by these programs willare only be
exacerbated by the logistics of operating in foreign markets. The Company
believes this environment will createsuch factors have created an opportunity to exploit its Internet-based
technology and business model that are successful in the United States. The
Company has
-7-
formed a task force consisting of information technology, operations
and finance to evaluate and develop foreign markets. The initial focus of the
International Division, SPAR Group International, Inc., has been on the Pacific
Rim region. SPAR Group International, Inc. and a leading Japanese based
distributor established a jointly owned companyjoint venture to provide the latest in-store
merchandising services to the Japanese market. Upon successful implementation of the Company's
business model in these areas, theThe Company intends to expandis actively pursuing
expansion to other markets.
DISCONTINUED OPERATIONS
Incentive Marketing Division
SPGI provides a wide variety of consulting, creative, program
administration, and travel and merchandise fulfillment services to companies
seeking to retain and motivate employees, salespeople, dealers, distributors,
retailers, and consumers toward certain actions or objectives. SPGI's strategy
is to allow companies to outsource the entire design, implementation and
fulfillment of incentive programs in a one-stop, "umbrella" shopping approach.
SPGI consults with a client to design the most effective plan to achieve the
client's goals. SPGI then provides the services necessary to implement the
program, generates detailed efficiency progress reports and calculates the
return on investment upon completion of the program.
The SPGI process typically begins when a client desires assistance in
developing a performance improvement program. SPGI's senior consultants work
with the client to develop programs that improve productivity by delivering
positive reinforcement in ways that are meaningful to employees and supportive
of the client's business strategy. A wide range of reward options is available,
including cash, travel, and merchandise. Most formal compensation programs
deliver cash to plan participants, while premium incentives tend to make greater
use of non-financial rewards. SPGI has experience in all forms of incentives and
therefore can provide its clients with the most appropriate program design. SPGI
is capable of assisting its clients in the writing, designing and printing of
the program elements. Teams of creative directors, copywriters, graphic
designers and print specialists develop campaigns for incentive programs,
meetings, trade shows and consumer promotions.
In addition, SPGI provides its clients with travel or merchandise
fulfillment alternatives as well as a series of innovative product specific
alternatives. While the majority of SPGI's product fulfillment is in the travel
area, SPGI provides a wide variety of catalog merchandise awards. Through an
informal arrangement with some of the country's largest mass merchandise
retailers, SPGI can provide its clients with programs that offer the flexibility
of in-home reward ordering. SPGI also provides its clients with custom
merchandise, special catalogs, retail certificates and a Local Purchase Option
("LPO"). The LPO allows winning participants to select and redeem merchandise
from a series of participating merchants.
SALES AND MARKETING
CONTINUING OPERATIONS
Merchandising Services Division
The Company's sales efforts within its Merchandising Services Division
are structured to develop new business in national and local markets. The
Company's corporate business development team directs its efforts toward the
senior management of prospective clients. Sales effortsstrategies developed at the
Company's headquarters are principally guided
throughcommunicated to the Company's sales workforce,force for
execution. The sales force, located nationwide, who primarily work from companyboth Company and home
offices. In addition, the Company's corporate account executives play an
important role in the Company's new business development efforts within its
existing manufacturer and retailer client base.
-8-
As part of the retailer consolidation, retailers are centralizing most
administrative functions, including operations, procurement and category
management. In response to this centralization and the growing importance of
large retailers, many manufacturers have reorganized their selling organizations
around a retailer team concept that focuses on a particular retailer. The
Company has responded to this emerging trend and currently has retailer teams in
place at select discount and drug chains.
-8-
The Company's business development process includes a due diligence
period to determine the objectives of the prospective client, the work required
to be performed to satisfy those objectives and the market value of thesuch work to
be performed. The Company employs a formal cost development and proposal process
that determines the cost of each element of work required to achieve the
prospective client's objectives. These costs, together with an analysis of
market rates, are used in the development of a formal quotation that is then
reviewed at various levels within the organization. The pricing of this internal
proposal must meet the Company's objectives for profitability, which are
established as part of the business planning process. After approval of this
quotation, a detailed proposal is presented to the prospective client. After the
elements of service and corresponding rates are agreed upon, a contract is
prepared and executed.
Technology Division
The Company's sales effort within its Technology Division is structured
to develop new business in national and local markets. The Technology Division's
corporate business development team directs its efforts toward the senior
management of prospective clients. Current sales efforts are principally guided
through the Company's corporate headquarters in Tarrytown, New York. The Company
intends to leverage existing clients as well as generate new clients through a
focused sales and marketing approach.
International Division
The Company's marketing efforts within its International Division are
designed to develop new business internationally. The Company has recently hired
representatives in Europe and Australia to help in these efforts. The Division's
corporate business development team located in the Company's corporate headquarters, targets specific areas and develops
strategic relationships to cultivate business.
DISCONTINUED OPERATIONS
Incentive Marketing Division
The Company's Incentive Division sales effort is organized on a
regional basis to serve national clients. Today SPGI has three regional sales
operations, each with a senior sales person working from their home office. All
selling is done on a local market basis, while all program design and execution
is completed at the Dallas headquarters.
As in the Merchandising Services Division, the Incentive Division's
business development process encompasses a due diligence period to determine the
objectives of the prospective client, the work to be performed to satisfy those
objectives and the market value of the work to be performed. The Company employs
a formal cost development and proposal process that determines the cost of each
element of work required to achieve the prospective client's objectives. These
costs, together with an analysis of market rates, are used in the development of
a formal quotation that is reviewed at various levels within the organization.
The pricing of this internal proposal must meet the Company's objectives for profitability, which are established as part of the business planning process.
After approval of this quotation, a detailed proposal is presented to the
prospective client. Following agreement regarding the elements of service and
corresponding rates, a contract is prepared and executed.
-9-
worldwide expansion.
CUSTOMERS
Merchandising Services Division
In its Merchandising Services Division, the Company currently represents
numerous manufacturers and retail clients in a wide range of retail outlets
in the United States including:
o Mass Merchandisers
o Drug
o Grocery
o Other retail trade groups (e.g. Discount, Home Centers)
The Company also provides database, research and other marketing
services to the automotive and consumer packaged goods industries.
One customer accounted for 26%, 25% and 20% of the Company's net
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
This customer also accounted for approximately 23%40%, 24% and 26% of accounts
receivable at both December 31, 2002, 2001 and 2000.2000, respectively.
A second customer accounted for 11%, 9% and 5% of the Company's net
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
This second customer also accounted for approximately 5%, 4% and 4% of accounts
receivable at December 31, 2002, 2001 and 2000, respectively.
Approximately 24%, 31%, and 18% of net revenues for the years ended
December 31, 2002, 2001, and 2000, respectively, resulted from merchandising
services performed for others at the stores of one retailer that recentlyKmart stores. Kmart filed for protection under
the U.S. Bankruptcy Code.Code in January 2002. During 2002, Kmart closed a
significant number of stores in the United States. While the Company's customers
and the resultant contractual relationships are with the manufacturers and not
this retailer, a
cessation of this retailer'sthe Company's business would be negatively impact the Company.
Technology Division
The Company has historically developed and utilized Internet-based
softwareimpacted if this
retailer were to manageclose all or most of its national businesses, including its national field force,
with greater efficiency and communication speed than previously possible with
paper based systems. In addition, the Company has developed and sold
internet-based software in its other divisions. The Company believes its
software transcends the merchandising services industry and can be utilized in
many other industries that have businesses with multiple locations and large
workforces or numerous distributors.stores.
-9-
International Division
The Company believes that the potential international customers for this
division have similar profiles to its Merchandising Services Division customers.
The initial focus of the International Division hashad been on Japan and the
Pacific Rim region. Upon successful implementation of the Company's business
model in these areas, theThe Company intendsis actively pursuing expansion to expand toEurope and
other markets.
DISCONTINUED OPERATIONS
Incentive Marketing Division
In the Company's Incentive Marketing Division, SPGI currently provides
services to various clients. These clients are principally large corporate
clients that encompass a broad range of industries including the food, drug,
communications, and automotive manufacturing industry.
-10-
COMPETITION
The marketing services industry is highly competitive.
CONTINUING OPERATIONS
Merchandising Services Division
Competition in the Company's Merchandising Services Division arises from
a number of large enterprises, many of which are national in scope. The Company
also competes with a large number of relatively small enterprises with specific
client, channel or geographic coverage, as well as with the internal marketing
and merchandising operations of its clients and prospective clients. The Company
believes that the principal competitive factors within its industry include
development and deployment of technology, breadth and quality of client
services, cost, and the ability to execute specific client priorities rapidly
and consistently over a wide geographic area. The Company believes that its
current structure favorably addresses these factors and establishes it as a
leader in the mass merchandisemerchandiser and chain drug channels of trade, as well as a
leading provider of in-store services to the videohome entertainment industry. The
Company also believes it has the ability to execute major national in-store
initiatives and develop and administer national retailer programs. Finally, the
Company believes that, through the use and continuing improvement of its
proprietary Internet software, other technological efficiencies and various cost
controls, the Company will remain competitive in its pricing and services.
Technology Division
Competition in the Company's Technology Division arises from a number
of large business application software developers, many of which are national
and international in scope. The Company also competes with a large number of
relatively small enterprises with specific industry, system or geographic
coverage, as well as with the internal information technology of its prospective
clients. The Company has historically developed and utilized Internet-based
software to manage its national businesses, including its national field force,
with greater efficiency and communication speed than previously possible with
paper based systems. In addition, the Company has developed and sold
internet-based software in its other divisions. The Company believes this
software transcends the merchandising services industry and can be utilized in
many other industries that have businesses with multiple locations and large
workforces or numerous distributors. The Company believes it can be competitive
in its pricing and services.
International Division
Competition in the Company's International Division arises from a
number of large enterprises, many of which are national and international in
scope. The Company also competes with a large number of relatively small
enterprises with specific client, channel or geographic coverage, as well as
with the internal marketing and merchandising operations of its clients and
prospective clients. The Company believes that the principal competitive factors
within its industry include development and deployment of technology, breadth
and quality of client services, cost, and the ability to execute specific client
priorities rapidly and consistently over a wide geographic area. The Company
believes its Internet-based technology and current business model are
competitive advantages that will allow it to compete in this area.
DISCONTINUED OPERATIONS
Incentive Marketing Division
The incentive marketing industry is populated by large national
players, each of which has significantly greater financial and marketing
resources than SPGI, and hundreds of small regional and local companies.
-11-
SPGI believes that the principle competitive factors in the industry are client
service and innovation.
TRADEMARKS
The Company has numerous registered trademarks. Although the Company
believes its trademarks may have value, the Company believes its services are
sold primarily based on breadth and quality of service, cost, and the ability to
execute specific client priorities rapidly and consistently over a wide
geographic area. See "--Industry Overview" and "--Competition".
EMPLOYEES
As of December 31, 2001,2002, the Company's Merchandising Services Division's
labor force consisted of approximately 8,2409,500 people, approximately 240300 full-time
employees, approximately 3,7002,600 part-time employees and 4,300approximately 6,600
independent contractors (furnished principally through related parties, see Item
13 - Certain Relationships and Related Affiliate Transactions, below), of which approximately 180193
full-time employees were engaged in operations and 1711 were engaged in sales. Approximately 7 of the Company's employees are covered by
contracts with labor unions. The
Company considers its relations with its employees and its employees' unions to be good. The Company's
Merchandising Services Division also utilized the services of its affiliates, SPAR Marketing
Services, Inc. ("SMS") andaffiliate,
SPAR Management Services, Inc. ("SMSI"), to schedule and supervise its field
force, including its own part-time employees as well as the independent
contractors furnished by SMSanother affiliate SPAR Marketing Services, Inc. ("SMS")
(see Item 13 - Certain Relationships and Related Affiliate Transactions, below).
The Company's Technology Division has 3 employees engaged in sales.
The Company currently utilizes its existing Merchandising Division's
employees, as well as, the services of certain employees of its affiliates, SMS, SMSI
and SPAR Infotech, Inc. ("SIT"), to staff the Technology Division and the International Division. However,
dedicated employees will be added to those divisionsthat division as the need arises. The
Company's affiliate, SIT, also provides programming and other assistance to the
Company's various divisions (see Item 13 - Certain Relationships and Related
Affiliate Transactions, below).
AsCERTAIN RISK FACTORS
There are various risks associated with the Company's growth and
operating strategy. Certain (but not all) of these risks are discussed below.
-10-
DEPENDENCY ON LARGEST CUSTOMERS
One customer accounted for 26%, 25% and 20% of the Company's net
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
This customer also accounted for approximately 40%, 24% and 26% of accounts
receivable at December 31, 2002, 2001 and 2000, respectively. A second customer
accounted for 11%, 9% and 5% of the Company's Incentive Marketing Division's
labor force consistednet revenues for the years ended
December 31, 2002, 2001, and 2000, respectively. This second customer also
accounted for approximately 5%, 4% and 4% of accounts receivable at December 31,
2002, 2001 and 2000, respectively. The loss of either such customer and the
failure to attract new large customers, could significantly decrease the
Company's revenues and such decreased revenues could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, approximately 68 full-time24%, 31%, and 18% of net revenues for the
years ended December 31, 2002, 2001, and 2000, respectively, resulted from
merchandising services performed for manufacturers and others at Kmart, which is
currently operating under Chapter 11 of the Federal Bankruptcy Code. During
2002, Kmart closed a significant number of stores in the United States. There
can be no assurance that this retailer will continue to operate all or any of
its remaining stores. While the Company's customers and the resultant
contractual relationships are with the manufacturers and not this retailer, if
this retailer were to close all or most of its stores, such closures could
significantly decrease the Company's revenues and could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
DEPENDENCE ON TREND TOWARD OUTSOURCING
The business and growth of the Company depends in large part on the
continued trend toward outsourcing of marketing services, which the Company
believes has resulted from the consolidation of retailers and manufacturers, as
well as the desire to seek outsourcing specialists and reduce fixed operation
expenses. There can be no assurance that this trend in outsourcing will
continue, as companies may elect to perform such services internally. A
significant change in the direction of this trend generally, or a trend in the
retail, manufacturing or business services industry not to use, or to reduce the
use of, outsourced marketing services such as those provided by the Company,
could significantly decrease the Company's revenues and such decreased revenues
could have a material adverse effect on the Company's business, results of
operations and financial condition or the desired increases in the Company's
business, revenues and profits.
FAILURE TO SUCCESSFULLY COMPETE
The marketing services industry is highly competitive and the Company
has competitors that are larger (or part of larger holding companies) and may be
better financed. In addition, the Company competes with: (i) a large number of
relatively small enterprises with specific customer, channel or geographic
coverage; (ii) the internal marketing and merchandising operations of its
customers and prospective customers; (iii) independent brokers; and (iv) smaller
regional providers. Remaining competitive in the highly competitive marketing
services industry requires that the Company monitor and respond to trends in all
industry sectors. There can be no assurance that the Company will be able to
anticipate and respond successfully to such trends in a timely manner. If the
Company is unable to successfully compete, it could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
If certain competitors were to combine into integrated marketing
services companies, or additional marketing service companies were to enter into
this market, or existing participants in this industry were to become more
competitive, it could have a material adverse effect on the Company's business,
results of operations and financial condition or the desired increases in the
Company's business, revenues and profits.
-11-
VARIABILITY OF OPERATING RESULTS AND UNCERTAINTY IN CUSTOMER REVENUE
The Company has experienced and, in the future, may experience
fluctuations in quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary and from time to time and may
result in reduced revenue include: (i) the number of active customer projects;
(ii) customer delays, changes and cancellations in projects; (iii) the timing
requirements of customer projects; (iv) the completion of major customer
projects; (v) the timing of new engagements; (vi) the timing of personnel cost
increases; and (vii) the loss of major customers. In particular, the timing of
revenues is difficult to forecast for the home entertainment industry because
timing is dependent on the commercial success of particular releases of
particular customers. In the event that a particular release is not widely
accepted by the public, the Company's revenue could be significantly reduced. In
addition, the Company is subject to revenue uncertainties resulting from factors
such as unprofitable customer work and the failure of customers to pay. The
Company attempts to mitigate these risks by dealing primarily with large
credit-worthy customers, by entering into written agreements with its customers
and by using project budgeting systems. These revenue fluctuations could
materially and adversely affect the Company's business, results of operations
and financial condition or the desired increases in the Company's business,
revenues and profits.
FAILURE TO DEVELOP NEW PRODUCTS
A key element of the Company's growth strategy is the development and
sale of new products. While several new products are under current development,
there can be no assurance that the Company will be able to successfully develop
and market new products. The Company's inability or failure to devise useful
merchandising or marketing products or to complete the development or
implementation the development of a particular product for use on a large
scale, or the failure of such products to achieve market acceptance, could
adversely affect the Company's ability to achieve a significant part of its
growth strategy and the absence of such growth could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
INABILITY TO IDENTIFY, ACQUIRE AND SUCCESSFULLY INTEGRATE ACQUISITIONS
Another key component of the Company's growth strategy is the
acquisition of businesses across the United States and worldwide that offer
similar merchandising or marketing services. The successful implementation of
this strategy depends upon the Company's ability to identify suitable
acquisition candidates, acquire such businesses on acceptable terms and
integrate their operations successfully with those of the Company. There can be
no assurance that such candidates will be available or, if such candidates are
available, that the price will be attractive or that the Company will be able to
identify, acquire or integrate such businesses successfully. In addition, in
pursuing such acquisition opportunities, the Company may compete with other
entities with similar growth strategies, these competitors may be larger and
have greater financial and other resources than the Company. Competition for
these acquisition targets could also result in increased prices of acquisition
targets and/or a diminished pool of companies available for acquisition.
The successful integration of these acquisitions also may involve a
number of additional risks, including: (i) the inability to retain the customers
of the acquired business; (ii) the lingering effects of poor customer relations
or service performance by the acquired business, which also may taint the
Company's existing businesses; (iii) the inability to retain the desirable
management, key personnel and other employees of the acquired business; (iv) the
inability to fully realize the desired efficiencies and economies of scale: (v)
the inability to establish, implement or police the Company's existing
standards, controls, procedures and policies on the acquired business; (vi)
diversion of management attention; and (vii) exposure to customer, employee and
other legal claims for activities of the acquired business prior to acquisition.
And of course, any acquired business could perform significantly worse than
expected.
-12-
The inability to identify, acquire and successfully integrate such
merchandising or marketing services business could have a material adverse
effect on the Company's growth strategy and could limit the Company's ability to
significantly increase its revenues and profits.
UNCERTAINTY OF FINANCING FOR, AND DILUTION RESULTING FROM, FUTURE ACQUISITIONS
The timing, size and success of such acquisition efforts and any
associated capital commitments cannot be readily predicted. Future acquisitions
may be financed by issuing shares of the Company's Common Stock, cash, or a
combination of Common Stock and cash. If the Company's Common Stock does not
maintain a sufficient market value, or if potential acquisition candidates are
otherwise unwilling to accept the Company's Common Stock as part of the
consideration for the sale of their businesses, the Company may be required to
obtain additional capital through debt or equity financings. To the extent the
Company's Common Stock is used for all or a portion of the consideration to be
paid for future acquisitions, dilution may be experienced by existing
stockholders. There can be no assurance that the Company will be able to obtain
the additional financing it may need for its acquisitions on terms that the
Company deems acceptable. Failure to obtain such capital would materially
adversely affect the Company's ability to execute its growth strategy.
RELIANCE ON THE INTERNET
The Company relies on the Internet for the scheduling, coordination and
reporting of its merchandising and marketing services. The Internet has
experienced, and is expected to continue to experience, significant growth in
the numbers of users and amount of traffic as well as increased attacks by
hackers and other saboteurs. To the extent that the Internet continues to
experience increased numbers of users, frequency of use or increased bandwidth
requirements of users, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on the
Internet by this continued growth or that the performance or reliability of the
Internet will not be adversely affected. Furthermore, the Internet has
experienced a variety of outages and other delays as a result of accidental and
intentional damage to portions of its infrastructure, and could face such
outages and delays in the future of similar or greater effect. Any protracted
disruption in Internet service would increase the Company's costs of operation
and reduce efficiency and performance, which 51 were
engaged incould have a material adverse
effect on the Company's business, results of operations and 9 were engagedfinancial condition
or the desired increases in sales.the Company's business, revenues and profits.
ECONOMIC AND RETAIL UNCERTAINTY
The markets in which the Company operates are cyclical and subject to
the effects of economic downturns. The current political, social and economic
conditions, including the impact of terrorism on consumer and business behavior,
make it difficult for the Company, its vendors and its customers to accurately
forecast and plan future business activities. Substantially all of the Company's
key customers are either retailers or those seeking to do product merchandising
at retailers. If the retail industry experiences a significant economic
downturn, a reduction in product sales could significantly decrease the
Company's revenues. The Company also has risks associated with its customers
changing their business plans and/or reducing their marketing budgets in
response to economic conditions, which also could also significantly decrease
the Company's revenues. Such revenue decreases could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
SIGNIFICANT STOCKHOLDERS: VOTING CONTROL AND MARKET ILLIQUIDITY
Mr. Robert G. Brown, a founder, a director, the Chairman, President and
Chief Executive Officer of the Company, beneficially owns approximately 44.0% of
the Company's outstanding Common Stock, and Mr. William H. Bartels, a founder, a
director, and a Vice Chairman of the Company beneficially owns approximately
27.7% of the Company's outstanding Common Stock. These stockholders have, should
they choose to act together, and under certain circumstances Mr. Brown acting
alone has, the ability to control all matters requiring
-13-
stockholder approval, including the election of directors and the approval of
mergers and other business combination transactions.
In addition, although the Company Common Stock is quoted on the Nasdaq
Small Cap Market, the trading volume in such stock may be limited and an
investment in the Company's securities may be illiquid because the founders own
a significant amount of the Company's stock.
DEPENDENCE UPON AND POTENTIAL CONFLICTS IN SERVICES PROVIDED BY AFFILIATES
The success of the Company's business is dependent upon the successful
execution of its field services by SPAR Marketing Services, Inc. ("SMS"), SPAR
Management Services, Inc. ("SMSI"), and programming services provided by SPAR
Infotech, Inc. ("SIT"), each of which is an affiliate but not a subsidiary of
the Company, and none of which is consolidated in the Company's financial
statements or results. SMS provides substantially all of the field
representatives used by the Company in conducting its business (76% of field
expense in 2002). SMSI provides substantially all of the field management
services used by the Company in conducting its business. SIT provides
substantially all of the Internet programming services and other programming
needs used by the Company in conducting its business (see Item 13 - Certain
Relationships and Related Transactions, below), which are provided to the
Company by SMS and SMSI on a cost-plus basis pursuant to contracts that are
cancelable on 60 days notice prior to December 31 of each year and by SIT on an
hourly charge basis pursuant to a contract that is cancelable on 30 days notice.
The Company has determined that these services are provided at rates favorable
to the Company.
SMS, SMSI, SIT and certain other affiliated companies (collectively, the
"SPAR Affiliates") are owned solely by Mr. Robert G. Brown, a founder, a
director, the Chairman, President and Chief Executive Officer of the Company,
and Mr. William H. Bartels, a founder, a director, and a Vice Chairman of the
Company, who also are each directors and executive officers of the SPAR
Affiliates (see Item 13 - Certain Relationships and Related Transactions,
below). In the event of any dispute in the business relationships between the
Company and one or more of the SPAR Affiliates, it is possible that Messrs.
Brown and Bartels may have one or more conflicts of interest with respect to
those relationships and could cause one or more of the SPAR Affiliates to
renegotiate or cancel their contracts with the Company or otherwise act in a way
that is not in the Company's best interests.
While the Company's relationships with SMS, SMSI, SIT and the other SPAR
Affiliates are excellent, there can be no assurance that the Company could (if
necessary under the circumstances) replace the field representatives and
management currently provided by SMS and SMSI, respectively, or replace the
Internet and other programming services provided by SIT, in sufficient time to
perform its customer obligations or at such favorable rates in the event the
SPAR Affiliates no longer performed those services. Any cancellation, other
nonperformance or material pricing increase under those affiliate contracts
could have a material adverse effect on the Company's business, results of
operations and financial conditions or the desired increases in the Company's
business, revenues and profits.
THE COMPANY HAS NOT PAID AND DOES NOT INTEND TO PAY CASH DIVIDENDS
The Company has not paid dividends in the past, intends to retain any
earnings or other cash resources to finance the expansion of its business and
for general corporate purposes, and does not intend to pay dividends in the
future.
RISKS ASSOCIATED WITH INTERNATIONAL JOINT VENTURES
While the Company endeavors to limit its exposure for claims and losses
in any international joint ventures through contractual provisions, insurance
and use of single purpose subsidiaries for such ventures, there can be no
assurance that the Company will not be held liable for the claims against and
losses of a
-14-
particular international joint venture under applicable local law or local
interpretation of any joint venture or insurance provisions. If any such claims
and losses should occur, be material in amount and be successfully asserted
against the Company, such claims and losses could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
ITEM 2. PROPERTIES.
The Company maintains its corporate headquarters in approximately 6,000
square feet of leased office space located in Tarrytown, New York, under a lease
with a term expiring in May 2004.
The Company leases certain office and storage facilities for its
divisions and subsidiaries under operating leases, which expire at various dates
during the next five years. Most of these leases require the Company to pay
minimum rents, subject to periodic adjustments, plus other charges, including
utilities, real estate taxes and common area maintenance.
-12-
The following is a list of the locations where the Company maintains
leased facilities for its division offices and subsidiaries:
Location Office Use
- --------------------------------------------------------------------------------LOCATION OFFICE USE
------------------------------------------------------------------------
Tarrytown, NY Corporate Headquarters and Administration
Auburn Hills, MI Regional Office, Warehouse and Teleservices Center
Eden Prairie, MN Regional Office
Mahwah, NJ Regional Office
Cincinnati, OH Regional Office
Tampa,Largo, FL Regional Office
Carrollton, TX SPGI Headquarters and Warehouse
Although the Company believes that its existing facilities are adequate
for its current business, new facilities may be added should the need arise in
the future.
ITEM 3. LEGAL PROCEEDINGS.
On June 14, 2000, Argonaut Insurance Co. filed a complaint alleging
damages of approximately $883,000 plus interest against the Company in Orange
County Superior Court, Santa Ana, California, Case No. 00CC07125 with respect to
alleged breach of contract. On February 14, 2002 this case was settled for
$700,000.
On October 24, 2001, Safeway Inc., a former customer of the PIA
Companies, filed a complaint alleging damages of approximately $3.6 million plus
interest and costs and alleged punitive damages in an unspecified amount against
the Company in Alameda County Superior Court, California, Case No. 2001028498
with respect to (among other things) alleged breach of contract. On or about
December 30, 2002, the Court approved the filing of Safeway Inc.'s Second
Amended Complaint, which alleges causes of action for (among other things)
breach of contract against the Company, PIA Merchandising Co., Inc. and Pivotal
Sales Company. The Second Amended Complaint was filed with the Court on January
13, 2003, and does not specify the amount of monetary damages sought. No
punitive or exemplary damages are sought in Safeway Inc.'s Second Amended
Complaint. This case is being vigorously contested by the Company.
The Company is a party to various legal actions and administrative
proceedings arising in the normal course of business. In the opinion of Company
management, disposition of these matters are not anticipated to have a material
adverse effect on the financial position, results of operations or cash flows of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-13--15-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq NationalSmall Cap
Market.
Prior to July 9, 1999, the Company's stock was traded on the
Nasdaq National Market under the symbol "PIAM".
1999
----------------------------2001 2002
------------------------ --------------------------
High Low High Low
First Quarter $5.630 $2.750$ 1.6094 $ .5625 $ 2.4100 $ 1.6000
Second Quarter 5.000 1.8801.3000 .7000 2.5000 2.0000
Third Quarter -- --2.2700 .8700 2.8200 1.9600
Fourth Quarter -- --
Subsequent to July 9, 1999, the Company's stock was traded on the Nasdaq
National market under the symbol "SGRP" until November 15, 1999, when it moved
to the Nasdaq Small Cap Market.
1999 2000 2001
-------------------------- -------------------------- --------------------------
High Low High Low High Low
First Quarter -- -- $ 5.5000 $ 2.6250 $ 1.6094 $ .5625
Second Quarter -- -- 3.3750 1.2500 1.3000 .7000
Third Quarter $ 5.8100 $ 3.0000 2.0625 1.2188 2.2700 .8700
Fourth Quarter 5.1300 2.5000 1.8750 .2188 2.8000 .9200
4.9200 1.9100
As of December 31, 2001,2002, there were approximately 722700 beneficial
shareholders of the Company's Common Stock.Stock
DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of the business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected condensed consolidated financial data sets forth,
for the periods and the dates indicated, summary financial data of the Company
and its subsidiaries. Included below areThe selected financial data have been derived from the
Company's financial statements, of operations
with respect to the years ending December 31, 2001, December 31, 2000, and
December 31, 1999, and selected balance sheet data as of December 31, 2001,
December 31, 2000, and December 31, 1999.
-14-which have been audited by independent public
accountants.
-16-
SPAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(unaudited)
(In thousands, except per share data)
====================================================================================================================================
YEAR ENDED DECEMBER 31, NINE
MONTHS
YEAR
YEAR ENDED
ENDED ENDED
DECDECEMBER 31,
DEC 31, DEC 31, DEC 31, MAR 31,2002 2001 2000 1999 1998 1998
-------- -------- -------- -------- --------1999(2) 1998(2)
----------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 69,612 $ 70,891 $ 81,459 $ 79,613 $ 32,601
$ 36,804
Cost of revenues 40,331 40,883 50,278 50,499 16,217
19,417
-------- ------------------- --------- -------- -------- --------
Gross profit 29,281 30,008 31,181 29,114 16,384 17,387
Selling, general and administrative expenses 18,804 19,380 24,761 23,213 9,978
12,087
Depreciation and amortization 1,844 2,682 2,383 1,204 142
161
-------- ------------------- --------- -------- -------- --------
Operating income 8,633 7,946 4,037 4,697 6,264
5,139
Other (income) expense (income)(26) 107 (790) (90) (149)
36
Interest expense 363 561 1,326 976 304
354
-------- ------------------- --------- -------- -------- --------
Income from continuing operations before provision for
income taxes 8,296 7,278 3,501 3,811 6,109
4,749
Income tax provision 2,998 3,123 780 3,743 -- --
-------- ---------
----------- --------- -------- -------- --------
Income from continuing operations 5,298 4,155 2,721 68 6,109 4,749
Discontinued operations:
Loss from discontinued operations net of tax benefits
of $935, $858 and $595, respectively - (1,597) (1,399) (563) -- ---
Estimated loss on disposal of discontinued operations,
including provision of $1,000 for losses during
phase-out period and disposal costs
net of tax benefit of $2,618 - (4,272) -- -- -- --
-------- --------- - -
----------- --------- -------- -------- --------
Net income (loss) income$ 5,298 $ (1,714) $ 1,322 $ (495) $ 6,109
$ 4,749
======== ======== ======== ======== ========
Unaudited pro forma data (1):
- -----------------------------
Income from continuing operations before provision for income taxes $ 3,811 $ 6,109
$ 4,749-------- --------
income taxes
Pro forma income tax provision 1,840 2,253 1,751
--------
-------- --------
Pro forma income from continuing operations 1,971 3,856 2,998
Pro forma loss from discontinued operations net of
pro forma tax benefit of $429 (729) -- --
---------
-------- --------
Pro forma net income $ 1,242 $ 3,856
$ 2,998
======== ======== ========
Basic/diluted net income (loss) per common share:
- -------------------------------------------------
Actual/Pro forma income from continuing operations $ 0.28 $ 0.23 $ 0.15 $ 0.13 $ 0.30
$ 0.24
-------- ------------------- --------- -------- -------- --------
Discontinued operations:
Actual/Pro forma loss from discontinued operations - (0.09) (0.08) (0.05) -- ---
Estimated loss on disposal of discontinued operations - (0.23) -- -- -- --
-------- --------- - -
----------- --------- -------- -------- --------
Loss from discontinued operations - (0.32) (0.08) (0.05) -- ---
----------- --------- -------- -------- --------
-------- --------
Detail/Actual/Pro-forma net income (loss) income$ 0.28 $ (0.09) $ 0.07 $ 0.08 $ 0.30
$ 0.24
=================== ======== ======== ======== ========
Actual/Pro forma weighted average shares outstanding - basic18,761 18,389 18,185 15,361 12,659
12,659- basic
Actual/Pro forma weighted average shares outstanding
- diluted 18,467 18,303 15,367 12,659 12,659
-15-19,148 18,467 18,303 15,367 12,659
-17-
YEARS ENDED
------------------------------------------------------------------
DEC
December 31,
DEC 31, DEC 31, DEC 31, MAR 31,--------------------------------------------------------
2002 2001 2000 1999 1998 19981999(2) 1998(2)
-------- -------- -------- -------- ----------------- --------- ----------
BALANCE SHEET DATA:
- -------------------------------------
Working capital (deficiency) $ 6,319 $ 8,476 $ (2,273) $ (639) $ (2,214)
$ 3,412
Total assets 29,757 41,155 48,004 54,110 14,865 10,896
Current portion of long-term debt - 57 1,143 1,147 685
675
Long-termLine of credit and long-term debt, net of current portion148 13,287 10,093 16,009 311
828
Total stockholders' equity (deficit) 16,592 10,934 12,240 10,886 (1,405)
3,142
============================================================================================================================================ ======== ======== ========= ========
(1) The unaudited pro forma income tax information is presented in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," as if the Company had been subject to federal and state
income taxes for all periods presented.
-16-(2) In July 1999, PIA and the Spar Companies merged with the SPAR Companies
deemed the accounting acquirer. The results of operations include the
results of PIA from the acquisition date forward.
-18-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
TheIn the United States, the Company provides merchandising services to
manufacturers and retailers principally in mass merchandiser, drug, grocery, and
other retail trade classes through its Merchandising Services Division. In March 2000, the
Company established its Technology Division to separately market its software
applications, products and services. Although such products and services were in
part available through the Company's other divisions prior to the establishment
of the Technology Division, the historical revenues and expenses related to such
software products and services generally were not maintained separately. In
November 2000, theThe
Company established its International Division. ThroughDivision in July 2000, and through a joint
venture with a leading JapanJapanese wholesaler, the Company provides in-store
merchandising services to the Japanese market. The Company accounts for its
investment in the joint venture utilizing the equity method.
For 2001, the
Company recorded the joint venture results in Other Expense.
As required, upon an acquisition, the acquired company's results of
operations are not included in the acquirer's results of operations prior to the
date of acquisition. The merger between the SPAR Companies and the PIA Companies
completed on July 8, 1999 (the "Merger"), was deemed to be an acquisition of the
PIA Companies (including SGRP, then known as PIA) by the SPAR Companies (see
Notes 1 and 3 to the Financial Statements). Therefore, the following discussions
include only the results of SGRP and the other PIA Companies subsequent to July
8, 1999.
In December 2001, the Company concluded that thedecided to divest its Incentive Marketing
Division (SPGI) business was no longer consistent with the Company's future
growth strategies and decided to divest SPGI. As a result of this decision, the
Company reviewed the goodwill associated with SPGI and recorded an estimated loss on disposal of discontinued operationsSPAR Incentive Marketing,
Inc. ("SIM") of approximately $4.3 million, net of taxes. In addition,taxes, including a $1.0
million reserve was recorded in 2001 for the anticipated cost to divest SPGI and any
anticipated losses through the divestiture date.
On June 30, 2002, SIM wholly-owned subsidiary of the Company, entered
into a Stock Purchase and Sale Agreement with Performance Holdings, Inc.
("PHI"), a Delaware corporation headquartered in Carrollton, Texas. SIM sold all
of the stock of its subsidiary SPAR Performance Group, Inc. ("SPGI"), to PHI for
$6.0 million. As a condition of the sale, PHI issued and contributed 1,000,000
shares of its common stock to Performance Holdings, Inc. Employee Stock
Ownership Plan which became the only shareholder of PHI.
As required, SPGI'sSIM's results have been reclassified as discontinued
operations for all periods presented. The results of operations of the
discontinued business segment is shown separately below net income from
continuing operations. Accordingly, the 20012002 consolidated statements of
operations of the Company have been prepared, and its 20002001 and 19992000 consolidated
statement of operations have been restated, to report the results of
discontinued operations of SPGISIM separately from the continuing operations of the
Company, and the following discussions reflect such restatement.
In October 2002, the Company dissolved its Technology Division that was
established in March 2000 for the purpose of marketing its proprietary
Internet-based computer software. The operations of this subsidiary were not
material.
The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Note 2 to the Financial
Statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition, depreciation methods,
asset impairment recognition, business combination accounting, and discontinued
business accounting. While the estimates and judgments associated with the
application of these policies may be affected by different assumptions or
conditions, the Company believes the estimates and judgments associated with the
reported amounts are appropriate in the circumstances. Two critical accounting
policies are revenue recognition. allowance for doubtful accounts:
REVENUE RECOGNITION
The Company's services are provided under contracts, which consist
primarily of service fees and per unit fee arrangements. Revenues under
service fee arrangements are recognized when the more
significant areasservice is performed.
The Company's per unit contracts provide for fees to be earned based on
the retail sales of estimation are unbilled receivables andclient's products to consumers. The Company
recognizes per unit fees in the period such amounts become determinable.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company continually monitors the collectability of its accounts
receivable based upon current customer credit information available.
Utilizing this information, the Company has established an allowance for
bad debt.doubtful accounts of $301,000 and $325,000 at December 31, 2002 and
2001, respectively. Historically, the Company's estimates on such
items have not
differed materially from the actual results.
-17--19-
RESULTS OF OPERATIONS
The following table sets forth selected financial the data and data as
a percentage of net revenues for the periods indicated.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
DECEMBER 31, 1999
------------------------- ------------------------------ --------------------------
(amounts-------------------------------------------------------------------------------
(dollars in millions)
AmountDollars % AmountDollars % AmountDollars %
-------------- ---------- ----------- ----------- ------------ ------------- ---------- ---------- --------------------
Net revenues $ 69.6 100.0% $ 70.9 100.0% $ 81.5 100.0%
$ 79.6 100.0%
Cost of revenues 40.3 57.9 40.9 57.7 50.3 61.7 50.5 63.4
Selling, general & administrative expenses 18.8 27.0 19.4 27.4 24.8 30.4
23.2 29.2
Depreciation & amortization 1.8 2.6 2.7 3.8 2.4 2.9
1.2 1.5
Other income & expenses, net 0.4 0.6 0.6 0.8 0.5 0.7
0.9 1.1-------------- ---------- ----------- ----------- ----------- -----------
Income from continuing operations before income tax provision8.3 11.9 7.3 10.3 3.5 4.3
3.8 4.8tax provision
Income tax provision 3.0 4.3 3.1 4.4 0.8 1.0
3.7 4.7-------------- ---------- ----------- ------------ ------------- ---------- ---------- -------------------- ----------- -----------
Income from continuing operations 5.3 7.6% 4.2 5.95.9% 2.7 3.3 0.1 0.13.3%
Discontinued operations:
Loss from discontinued operations, of,
net of tax
benefits - (1.6) (1.4) (0.6)
Estimated loss on disposal of discontinued
operations, net of tax benefits - (4.3) -- ---
-------------- ----------- ------------
------------- ---------- ---------- ---------
Net income (loss) income$ 5.3 $ (1.7) $ 1.3
$ (0.5)============== =========== ============ ============= ========== ========== =========
Unaudited pro forma data:
Income from continuing operations before
provision for income taxes $ 3.8 4.8%
Pro forma income tax provision 1.8 2.3
---------- ---------
Pro forma income from continuing
operations 2.0 2.5
Pro forma loss from discontinued
operations (0.7)
---------- ---------
Pro forma net income $ 1.2
========== =========
-18--20-
RESULTS FROM CONTINUING OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
2002, COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 2001
- -------------------------------------------------------
Net Revenues from continuing operations for the twelve months ended
December 31, 2002, were $69.6 million, compared to $70.9 million for the twelve
months ended December 31, 2001, a 1.8% decrease. The decrease of 1.8% in net
revenues is primarily attributed to decreased business in mass merchandiser and
drug store chains.
Cost of revenues from continuing operations consists of in-store labor
and field management wages, related benefits, travel and other direct
labor-related expenses. Cost of revenues as a percentage of net revenues of
57.9% for the twelve months ended December 31, 2002, was consistent with the
57.7% for the twelve months ended December 31, 2001. Approximately 76% and 37%
of the field services were purchased from the Company's affiliate, SMS, in 2002
and 2001, respectively (see Item 13 - Certain Relationships and Related
Transactions, below). SMS's increased share of field services resulted from its
more favorable cost structure.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resource expenses, legal and accounting expenses.
The following table sets forth the operating expenses as a percentage of net
revenues for the time periods indicated:
Year Ended Year Ended Increase
December 31, 2002 December 31, 2001 (decr.)
---------------------------- ------------------------------ -------------
(dollars in millions)
Dollars % Dollars % %
-------------- ------------ --------------- ------------- -------------
Selling, general & administrative $ 18.8 27.0% $ 19.4 27.4% (3.0) %
Depreciation and amortization 1.8 2.6 2.7 3.8 (31.3)
-------------- ------------ --------------- -------------
Total operating expenses $ 20.6 29.6% $ 22.1 31.2% (6.4)%
============== ============ =============== =============
Selling, general and administrative expenses decreased by $0.6 million,
or 3.0%, for the twelve months ended December 31, 2002, to $18.8 million
compared to $19.4 million for the twelve months ended December 31, 2001. This
decrease was due primarily to a reduction in the SG&A work force and related
expenses, as well as lower information technology costs.
Depreciation and amortization decreased by $0.9 million for the twelve
months ended December 31, 2002, primarily due to the change in accounting rules
for goodwill amortization adopted by the Company effective January 1, 2002.
INTEREST EXPENSE
Interest expense decreased $0.2 million to $0.4 million for the twelve
months ended December 31, 2002, from $0.6 million for the twelve months ended
December 31, 2001, due to decreased debt levels, as well as decreased interest
rates in 2002.
-21-
INCOME TAXES
The provision for income taxes was $3.0 million and $3.1 million for the
twelve months ended December 31, 2002, and December 31, 2001, respectively. The
effective tax rate was 36.1% and 42.9% for 2002 and 2001, respectively. The
decrease in the effective tax rate in 2002 is primarily due to the non
amortization of goodwill (as discussed in Note 2 to the financial statements)
that was previously expensed in 2001 and was not deductible for tax purposes.
DISCONTINUED OPERATIONS
Six Months Ended Year Ended
June 30, 2002 December 31, 2001
-------------------- -----------------------
(dollars in millions)
Dollars % Dollars %
--------- --------- --------- ----------
Net revenues $ 15.7 100.0% $ 31.2 100.0%
Cost of revenues 13.1 83.2 26.0 83.4
Selling, general and administrative expenses 2.8 17.9 5.7 18.4
Depreciation and amortization 0.1 0.8 1.2 3.4
The Incentive Marketing Division was divested in June 2002 under a plan
adopted in 2001. Net revenues from the Incentive Marketing Division for the six
months ended June 30, 2002, were $15.7 million, compared to $31.2 million for
the twelve months ended December 31, 2001.
Cost of revenues in the Incentive Marketing Division consists of direct
labor, independent contractor expenses, food, beverages, entertainment and
travel costs. Cost of revenue as a percentage of net revenues of 83.2% for the
six months ended June 30, 2002, was consistent with the 83.4% for the twelve
months ended December 31, 2001.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses which include corporate overhead, project management, information
systems, executive compensation, human resource expenses, legal and accounting
expenses were $2.8 million for the six months ended June 30, 2002, and $5.7
million for the twelve months ended December 31, 2001. Depreciation and
amortization was $0.1 million for the six months ended June 30, 2002 compared
to $1.2 million for the twelve months ended December 31, 2001, reflecting the
change in accounting rules for goodwill adopted by the Company effective January
1, 2002.
NET INCOME/(LOSS)
The SPAR Group had a net income from continuing operations of
approximately $5.3 million or $0.28 per basic and diluted share for the twelve
months ended December 31, 2002, compared to a net income from continuing
operations of approximately $4.2 million or $0.23 per basic and diluted shares
for the twelve months ended December 31, 2001. The increase in net income from
continuing operations is primarily the result of substantial reductions in
selling, general and administrative expenses and a change in accounting for
goodwill amortization. The SPAR Group had a net income of approximately $5.3
million or $0.28 per basic and diluted share for the twelve months ended
December 31, 2002, compared to a net loss of $1.7 million or $0.09 per basic and
diluted share for the twelve months ended December 31, 2001. The increase in
total net income includes the effect of the $4.3 million loss in 2001 on
disposal of discontinued operations.
-22-
RESULTS FROM CONTINUING OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
2001, COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 2000
- -------------------------------------------------------
Net Revenuesrevenues from continuing operations for the twelve months ended
December 31, 2001, were $70.9 million, compared to $81.5 million for the twelve
months ended December 31, 2000, a 12.9% decrease. In 2001, net revenues were
provided almost exclusively from the Merchandising Services Division. The decrease of 12.9% in net
revenues is primarily attributed to discontinued in-store merchandising programs
acquired in the Merger withby the PIA Companies.
The Technology Division recorded $6,000 in net revenue in 2001.
Cost of revenuesrevenue from continuing operations consistsconsist of in-store labor and
field management wages, related benefits, travel and other direct labor-related
expenses, of which approximately 37% and 19% were purchased from the Company's
affiliate, SMS in 2001 and 2000 respectively (see Item 13 - Certain
Relationships and Related Transactions, below). Cost of revenues as a percentage
of net revenues decreased 4.0% to 57.7% for the twelve months ended December 31,
2001, compared to 61.7% for the twelve months ended December 31, 2000. This
decrease is principally attributable to reduced merchandiser labor costs due to
efficiencies realized in 2001 from the continued consolidation of the
multi-level field organization acquired in the Merger withof the PIA Companies.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resourcesresource expenses legal and accounting expenses. The
following table sets forth the operating expenses as a percentage of net
revenues for the time periods indicated:
Year Ended Year Ended Increase
December 31, 2001 December 31, 2000 (decr.)
-------------------------------- ----------------------------------- -------------
(amounts------------------------ ------------------------- ----------
(dollars in millions)
AmountDollars % AmountDollars % %
--------------- ------------- ---------------- --------------- ------------------------- ---------- ----------- ------------ ----------
Selling, general & administrative $ 19.4 27.4% $ 24.8 30.4% (21.7)%
Depreciation and amortization 2.7 3.8 2.4 2.9 12.6
--------------- ------------- ---------------- ---------------12.6%
------------ ---------- ----------- ------------
Total operating expenses $ 22.1 31.2% $ 27.2 33.3% (18.7)%
=============== ============= ================ =============== ========================= ========== =========== ============
Selling, general and administrative expenses decreased by $5.4 million
or 21.7%, for the twelve months ended December 31, 2001, to $19.4 million
compared to $24.8 million for the twelve months ended December 31, 2000. This
decrease was primarily due primarily to the efficiencies resulting from the Mergercontinued
integration with the PIA Companies. Selling, general, and administrative
expenses for the Technology Division were $0.8 million and $0.4 million for the
twelve months ended December 31, 2001 and December 31, 2000, respectively.
Depreciation and amortization increased by $0.3 million for the twelve
months ended December 31, 2001, due primarily to the amortization of customized
internal software costs capitalized under SOP 98-1.
-19-
OTHER EXPENSE
For 2001, the Company has recognized a loss of $107,000 from its share in
the Japan joint venture.Joint Venture.
OTHER INCOME
In January 2000, the Company sold its investment in an affiliate for
approximately $1.5 million. The sale resulted in a gain of approximately $0.8
million, which is included in other income.
-23-
INTEREST EXPENSE
Interest expense decreased $0.7 million to $0.6 million for the twelve
months ended December 31, 2001, from $1.3 million for the twelve months ended
December 31, 2000, due to decreased debt levels, as well as decreased interest
rates in 2001.
INCOME TAXES
The provision for income taxes was $3.1 million and $0.8 million for the
twelve months ended December 31, 2001, and December 31, 2000, respectively. The
effective tax rate was 42.9% and 22.3% for 2001 and 2000, respectively. The
increase in the effective tax rate and the resultant taxes in 2001 is primarily
due to the $0.8 million deferred tax benefit that resulted from a change in the
Company's valuation allowance in 2000 that did not reoccur in 2001.
DISCONTINUED OPERATIONS
Year Ended Year Ended
December 31, 2001 December 31, 2000
------------------------- -------------------------
(amounts---------------------- -----------------------
(dollars in millions)
AmountDollars % AmountDollars %
------------ --------------------- --------- ----------- ----------
Net revenues $ 31.2 100.0% $ 28.1 100.0%
Cost of revenuerevenues 26.0 83.4 22.7 81.0
Selling, general and administrative expenses 5.7 18.4 5.7 20.2
Depreciation &and amortization 1.2 3.4 1.2 4.2
Net revenues from the Incentive Marketing Division for the twelve months
ended December 31, 2001, were $31.2 million, compared to $28.1 million for the
twelve months ended December 31, 2000, an 11.2% increase. The increase in net
revenues iswas primarily due to an increase in project revenues,revenue principally from
new clients.
Cost of revenues in the Incentive Marketing Division consists of direct
labor, independent contractor expenses, food, beverages, entertainment and
travel costs. Cost of revenuerevenues from the Incentive Marketing Division, as a
percentage of net revenues increased 2.4% to 83.4% for the twelve months ended
December 31, 2001, compared to 81.0% for the twelve months ended December 31,
2000, primarily due to the programprogramming mix, with higher cost programs accounting
for a greater portion of the revenues in 2001.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses which include corporate overhead, project management, information
systems, executive compensation, human resourcesresource expenses legal and accounting expenses
were $5.7 million for the twelve months ended December 31, 2001 and 2000.
Depreciation and amortization werewas $1.2 million for the twelve months ended
December 31, 2001 and 2000.
-20-
NET (LOSS)/INCOME
The SPAR Group had a net income from continuing operations of
approximately $4.2 million or $0.23 per basic and diluted share for the year
ended December 31, 2002, compared to a net income from continuing operations of
approximately $2.7 million or $0.15 per basic and diluted share for the year
ended December 31, 2002.
The increase in net income from continuing operations per basic and
diluted share is primarily the result of increased gross profit margins and
substantial reductions in selling, general and administrative expenses. The SPAR
Group had a net loss of approximately $1.7 million or $0.09 per basic and
diluted share for the twelve monthsyear ended December 31, 2001, compared to net income of
$1.3 million or $0.07 per basic and diluted share for the twelve monthsyear ended December
31, 2000. The decrease in net income of $3.0 million or $0.16 per basic and
diluted share is primarily due to a net loss forfrom discontinued operations of
approximately $4.3 million or $0.23 per basic and diluted share, partially
offset by an increase of approximately $1.4 million or $0.07 per basic and
diluted share of net income from continuing operations.
The
increase in net income from continuing operations per basic and diluted share is
primarily the result of increased gross profit margins and substantial
reductions in selling, general and administrative expenses.
RESULTS FROM CONTINUING OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1999
Net revenues from continuing operations for the twelve months ended
December 31, 2000, were $81.5 million, compared to $79.6 million for the twelve
months ended December 31, 1999, a 2.3% increase. The increase in net revenues is
primarily attributed to an increase in the former SPAR Companies merchandising
net revenue of approximately $2.5 million for the twelve months ended December
31, 2000, over the net revenue for the twelve months ended December 31, 1999. In
addition, net revenues for the twelve months ended December 31, 2000, included
$23.4 million of net revenues of the former PIA companies' merchandising
operations for the first six months of 2000, with no comparable revenue in the
first six months of 1999, offset by discontinued programs of the PIA Companies
in 2000. Neither the Technology nor International Divisions recorded net
revenues for the period.
Cost of revenue from continuing operations consist of in-store labor
and field management wages, related benefits, travel and other direct
labor-related expenses, of which approximately 19% were purchased from the
Company's affiliate, SMS in 2000 (see Item 13 - Certain Relationships and
Related Transactions, below). Cost of revenues as a percentage of net revenues
decreased 1.7% to 61.7% for the twelve months ended December 31, 2000, compared
to 63.4% for the twelve months ended December 31, 1999. This decrease is
principally attributable to reduced merchandiser labor costs due to efficiencies
realized in 2000 from the consolidation of the multi-level field organization
acquired in the Merger with the PIA Companies, in part furnished through the
Company's affiliates, SMS and SMSI (see Item 13 - Certain Relationships and
Related Transactions, below).
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resources expenses and accounting expenses. The
following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
Year Ended Year Ended
December 31, 2000 December 31, 1999 Increase
---------------------------- ---------------------------- -----------
(amounts in millions)
Amount % Amount % %
-------------- ----------- ------------ ------------- -----------
Selling, general & administrative $ 24.8 30.4% $ 23.2 29.2% 6.7%
Depreciation and amortization 2.4 2.9 1.2 1.5 97.9%
-------------- ----------- ------------ -------------
Total operating expenses $ 27.2 33.3% $ 24.4 30.7% 11.2%
============== =========== ============ ============= ===========
-21--24-
Selling, general and administrative expenses increased by $1.6 million
or 6.7% for the twelve months ended December 31, 2000, to $24.8 million compared
to $23.2 million for the twelve months ended December 31, 1999. This increase
was primarily due to the inclusion of the PIA Companies' selling, general and
administrative expenses for the first six months of 2000 totaling $5.9 million
with no comparable PIA expenses in the first six months of 1999, as well as
Technology Division and International Division selling, general and
administrative expenses in 2000 totaling $0.4 million offset by reductions in
the selling, general and administrative expenses of the PIA Companies in 2000
and non-recurring expenses totaling $1.4 million in 1999.
Depreciation and amortization increased by $1.2 million for the twelve
months ended December 31, 2000, due primarily to the amortization of goodwill
associated with the acquisition of the PIA Companies in the Merger and an
increase in depreciation and amortization of customized internal software costs
capitalized under SOP 98-1.
OTHER INCOME
In January 2000, the Company sold its investment in an affiliate for
approximately $1.5 million. The sale resulted in a gain of approximately $0.8
million, which is included in other income.
INTEREST EXPENSE
Interest expense increased $0.3 million for the twelve months ended
December 31, 2000, over the twelve months ended December 31, 1999, due to
increased debt associated with the PIA acquisition, as well as increased
interest rates in 2000.
INCOME TAXES
The provision for income taxes was $0.8 million and $3.7 million for
the twelve months ended December 31, 2000, and December 31, 1999, respectively.
In 1999, the Company incurred a one-time charge totaling $3.1 million dollars
for income taxes resulting from the termination of the Subchapter S status of
certain of the SPAR Companies for federal and state tax purposes. Exclusive of
the one-time charge, the effective tax rate was 22.3% and 16.9% for 2000 and
1999, respectively. The difference between the effective tax rate and the
statutory rates is primarily due to changes in the deferred tax valuation
allowance, in both 2000 and 1999 as well as a tax benefit attributable to
subchapter S earnings in 1999.
DISCONTINUED OPERATIONS
Year Ended Year Ended
December 31, 2000 December 31, 1999
-------------------------- --------------------------
(amounts in millions)
Amount % Amount %
------------ ----------- ----------- -----------
Net revenues $ 28.1 100.0% $ 36.9 100.0%
Cost of revenues 22.7 81.0 30.4 82.4
Selling, general and administrative expenses 5.7 20.2 6.0 16.2
Depreciation and amortization 1.2 4.2 1.0 2.7
Net revenues from the Incentive Marketing Division for the twelve
months ended December 31, 2000, were $28.1 million, compared to $36.9 million
for the twelve months ended December 31, 1999, a 24.0% decrease. The decrease in
net revenues is primarily due to a decrease in project revenue principally from
a single customer.
-22-
Cost of revenues in the Incentive Marketing Division consists of direct
labor, independent contractor expenses, food, beverages, entertainment and
travel costs. Cost of revenues from the Incentive Marketing Division, as a
percentage of net revenues decreased 1.4% to 81.0% for the twelve months ended
December 31, 2000, compared to 83.5% for the twelve months ended December 31,
1999, primarily due to a more favorable product mix in 2000.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses which include corporate overhead, project management, information
systems, executive compensation, human resources expenses and accounting
expenses were $5.7 million and $6.0 million, a decrease of 5.5%, for the twelve
months ended December 31, 2000, and December 31, 1999, respectively.
ACTUAL/PRO FORMA NET INCOME
The SPAR Group had actual net income of approximately $1.3 million or
$0.07 per basic and diluted share for the twelve months ended December 31, 2000,
and pro forma net income of approximately $1.2 million or $0.08 per pro forma
basic and diluted share for the twelve months ended December 31, 1999. The
decrease in net income per basic and diluted share is the result of the shares
issued in conjunction with the reverse merger on July 8, 1999 being outstanding
for all of 2000.
LIQUIDITY AND CAPITAL RESOURCES
In the twelve months ended December 31, 2001,2002, the Company had a net
lossincome of $1.7$5.3 million. Net cash usedprovided by operating activities for the twelve
months ended December 31, 2001,2002, was $0.2$12.7 million, compared with net cash providedused
by operations of $6.3$0.2 million for the twelve months ended December 31, 2000.2001.
Cash usedprovided by operating activities in 20012002 was primarily a result of net
operating profits and decreases in prepaid expensesaccounts receivable and deferred taxes, offset
by decreasestax assets,
increases in accounts payable and other accrued liabilities, partially offset by
decreases in restructuring charges and deferred revenue.increases in prepaid expenses.
Net cash used in investing activities for the twelve months ended
December 31, 2001,2002, was $1.7$1.2 million, compared with net cash used of $0.5$1.7 million
for the twelve months ended December 31, 2000.2001. The net cash used in investing
activities in 20012002 resulted primarily from the purchases of property and
equipment.
In 2000, purchases of property and equipment were offset by the gain
from the sale of an affiliate.
Net cash providedused by financing activities for the twelve months ended
December 31, 2001,2002, was $2.0$11.5 million, compared with net cash usedprovided by
financing activities of $7.9$2.0 million for the twelve months ended December 31,
2000.2001. The net cash providedused by financing activities in 20012002 was primarily due to
borrowingspayments on the line of credit offset by repayments of debt.credit.
The above activity resulted in no change in cash and cash equivalents
for the twelve months ended December 31, 2001.2002.
At December 31, 2001,2002, the Company had positive working capital of $8.5$6.3
million as compared to negative working capital of $2.3$8.5 million at December 31, 2000.2001. The increasedecrease in
working capital is due to decreases in accounts receivable and deferred taxes,
increases in accrued expenses, and other current liabilities, and a
reclassification of stockholder debt, partially off set by decreases in accounts
payable, increases in prepaid expenses and deferred income taxes as well as decreasesnet change in accounts payablecurrent assets and
other current
liabilities restructuring and other charges and deferred revenue.from discontinued operations. Excess cash generated was utilized to
pay down the line of credit. The Company's current ratio was 1.521.49 and 0.911.52 at
December 31, 2001,2002, and 2000,2001, respectively.
In 1999,January 2003, the Company and Whitehall Business Credit Corporation
("Whitehall"), as successor to the business of IBJ Whitehall Business Credit
Corporation, ("IBJ Whitehall")entered into the Third Amended and Restated Revolving Credit and
Security Agreement and related documents (the "New Credit Facility"). The New
Credit Facility provides the members of the SPAR Group (otherCompany and its subsidiaries other than PIA
Canada)Merchandising Limited (collectively, the "Borrowers") entered into a Revolving Credit, Term Loan and Security Agreement
as amended (the "Bank Loan Agreement"). The Bank Loan Agreement provides the
Borrowers with a $15.0 million
Revolving Credit -23-
facility and a $2.5 million term loan.Facility that matures on January 23, 2006. The Revolving Credit
facilityFacility allows the Borrowers to borrow up to $15.0 million based upon a
borrowing base formula as defined in the Agreementagreement (principally 85% of
"eligible" accounts receivable). The Bank Loan Agreement's revolving credit loansNew Credit Facility bears interest at
Whitehall's "Alternative Base Rate" or LIBOR plus two and one-half percent and
is secured by all the assets of $15.0 million werethe Company and its subsidiaries.
The New Credit Facility replaces a previous 1999 agreement between the
Company and IBJ Whitehall Business Credit Corporation (the "Old Credit
Facility") that was scheduled to mature on September 21, 2002. On March 1, 2002, IBJ Whitehall extended the
maturity date to February 28, 2003. The Old Credit
Facility as amended provided for a $15.0 million Revolving Credit Facility, as
well as, a $2.5 million Term Loan. The Revolving Credit facility allowed the
Borrowers to borrow up to $15.0 million based upon a borrowing base formula as
defined in the agreement (principally 85% of "eligible" accounts receivable).
The Term Loan amortized in equal monthly installments of $83,334 and was repaid
in full as of December 31, 2001. The revolving loans bearloan interest at IBJrate was
Whitehall's "Alternate Base Rate" plus one-half of one percent (0.50%) (a total
of 5.25%4.75% per annum at December 31, 2001)2002).
In addition, the Borrowers are required to make mandatory prepayments in
an amount equal to 25% of Excess Cash Flow, as defined in the Bank Loan
Agreement, for each fiscal year, to be applied first to the Term Loan and then
to the revolving credit loans (subject to the Borrowers' ability to re-borrow
revolving advances in accordance with the terms of the Bank Loan Agreement). In
July 2001, the Company made an additional $250,000 payment on the Term Loan as a
result of the Excess Cash Flow requirement. The facility is secured with all the
assets of the Company and its subsidiaries.
The Bank Loan Agreement contains-25-
Both Credit Facilities contain an option for the BankWhitehall to purchase
16,667 shares of common stockCommon Stock of the Company for $0.01 per share in the event
that the Company's average closing share price over a ten consecutive trading
day period exceeds $15.00 per share. This option expires September 22, 2002.
The Bank Loan Agreement containson July 31, 2003.
Both Credit Facilities contain certain financial covenants thatwhich 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,capital expenditure limitation and a
minimum EBITDA, as such terms are defined in the Bank Loan Agreement.respective agreement. The
Company was in compliance worthwith all such financial covenants onat December 31,
2001,
with the exception of the minimum net worth covenant (due to the estimated loss
on disposal of discontinued operations), for which a waiver was obtained from
IBJ Whitehall.2002.
The balances outstanding on the revolving line of credit were $11.3$0.1
million and $7.8$11.3 million at December 31, 2001,2002 and December 31, 2000,2001,
respectively. As of December 31, 2001,2002, based upon the borrowing base formula,
the SPAR Group had availability of $2.9$11.1 million of the $3.7$14.9 million unused
revolving line of credit.
As of December 31, 2001, the Company is obligated, under certain
circumstances, to pay costs in connection with the Merger (restructure charges)
of approximately $2.2 million. In addition, the Company incurred substantial
cost in connection with the transaction, including legal, accounting and
investment banking fees estimated to be an aggregate unpaid obligation as of
December 31, 2001, of approximately $1.2 million. The Company has also accrued
approximately $1.2 million for expenses incurred by PIA prior to the Merger,
which have not been paid as of December 31, 2001. Management believes the
current bank credit facilities are sufficient to fund operations and working
capital, including the current maturities of debt obligations, but may not be
sufficient to reduce certain of the pre-Merger obligations of the PIA Companies
inherited in the Merger.
In 1999 and prior years, certain principal stockholders of the Company
each made loans to certain SPAR Companies in the aggregate amount of $4.3
million to facilitate the acquisition of the PIA Companies and the assets of Old
MCI. These stockholders were also owed $1.9 million in unpaid distributions
relating to the former status of certain of the operating SPAR Companies as
Subchapter S Corporations (see Note 12 to the Financial Statements). Those
amounts were converted into promissory notes issued to these certain
stockholders severally by SMF, SINC and SPGI prior to the Merger, which
aggregated $6.2 million. During 2001, with the consent of the Company those
stockholders applied approximately $402,000 of such indebtedness in payment of
the exercise price of certain of their respective stock options to purchase
shares of common stock of the Company. As of December 31, 2001,2002, a total of $4.7approximately $4.0 million remained
outstanding under these notes with certain stockholders. These notes have an interest
rate of 8% and are due on demand. The Company paid $3.0 million in January 2003
and expects to pay the remaining balance of approximately $1.0 million in 2003.
The current Bank Loan Agreement contains certain restrictions on the repayment
of stockholder debt.
-24-
Management believes that based upon the Company's current working
capital position and the existing credit facilities, funding will be sufficient
to support ongoing operations over the next twelve months. However, delays in
collection of receivables due from any of the Company's major clients, or a
significant reduction in business from such clients, or the inability to acquire
new clients, wouldcould have a material adverse effect on the Company's cash
resources and its ongoing ability to fund operations.
In connection with the sale of SPGI on June 30, 2002, the Company agreed
to provide a discretionary revolving line of credit to SPGI not to exceed $2.0
million (the "Revolver") through September 30, 2005. The Revolver is secured by
a pledge of all the assets of SPGI and is guaranteed by PMI. To date, there have
been no advances against the Revolver. Under the Revolver terms, SPGI is
required to deposit all of its cash to the Company's lockbox. At December 31,
2002, the Company had cash deposits due SPGI totalling approximately $0.9
million.
CERTAIN CONTRACTUAL OBLIGATIONS
The following table contains a summary of certain of the Company's
contractual obligations by category as at December 31, 2002 (in thousands).
PAYMENTS DUE BY PERIOD
Less than 1 More than 5
CONTRACTUAL OBLIGATIONS Total year 1-3 years 3-5 years years
----------------------- ----- ---- --------- --------- -----
Long-Term Debt Obligations $ 148 $ 148 $ - $ - $ -
Due to Stockholders 3,951 3,951
Operating Lease Obligations 2,996 1,004 1,393 599 -
Other Contractual Obligations included on
the Registrant's Balance Sheet 1,035 1,035 - - -
Total $ 8,130 $ 6,138 $ 1,393 $ 599 $ -
In addition to the above, the Company had contingent libailtities to SPGI of
approximately $2.0 million (see above).
-26-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk related to the variable interest
rate on the line of credit and the variable yield on its cash and cash
equivalents. The Company's accounting policies for financial instruments and
disclosures relating to financial instruments require that the Company's
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and long term debt.
The Company considers carrying amounts of current assets and liabilities in the
condensed consolidated financial statements to approximate the fair value for these
financial instruments because of the relatively short period of time between
origination of the instruments and their expected realization. The carrying
amountsamount of long-term debt approximatethe line of credit approximates fair value because the obligation
bears interest at a floating rate. The carrying amount of debt due to certain
stockholders approximates fair value because the obligation bears interest at a
market rate. The Company monitors the risks associated with interest rates and
financial instrument positions. The Company's investment policy objectives
require the preservation and safety of the principal, and the maximization of
the return on investment based upon the safety and liquidity objectives.
Currently, the Company's international operations are not material and,
therefore, the risk related to foreign currency exchange rates is not material.
INVESTMENT PORTFOLIO
The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments. Excess
cash is normally used to pay down the revolving line of credit.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 1416 of this Annual Report on form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-25--27-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information in connection with
each person who is or was at December 31, 2001,2002, an executive officer and/or
director for the Company.
NAME AGE POSITION WITH SPAR GROUP, INC.
Robert G. Brown. . . . . . . . . . . . 59 Chairman, Chief Executive Officer, President and Director
William H. Bartels . . . . . . . . . . 58 Vice Chairman and Director
Robert O. Aders (1). . . . . . . . . 74 Director
Jack W. Partridge (1) . . . . . . . . 56NAME AGE POSITION WITH SPAR GROUP, INC.
Robert G. Brown. . . . . . 60 Chairman, Chief Executive Officer,
President and Director
William H. Bartels . . . . 59 Vice Chairman and Director
Robert O. Aders (1). . . . 75 Director
Jack W. Partridge (1) . . . 57 Director
Jerry B. Gilbert (1) . . . . . . . . . . 67 Director
George W. Off (1). . . . . . . . . . . 54 Director
Charles Cimitile. . . . . . . . . . . . . 47 Chief Financial Officer and Secretary
James H. Ross 68 Director
George W. Off (1). . . . . 55 Director
Charles Cimitile. . . . . . 48 Chief Financial Officer and Secretary
James H. Ross. . . . . . . . 69 Treasurer
- --------------------------
(1) Member of the Board's Compensation and Audit Committees
Robert G. Brown serves as the Chairman, the Chief Executive Officer, the
President and a Director of the Company and has held such positions since July
8, 1999, the effective date of the merger of the SPAR Marketing Companies with
PIA Merchandising Services, Inc. (the "Merger"). Mr. Brown served as the
Chairman, President and Chief Executive Officer of the SPAR Marketing Companies
(SPAR/Burgoyne Retail Services, Inc. ("SBRS") since 1994, SPAR, Inc. ("SINC")
since 1979, SPAR Marketing, Inc. ("SMNEV") since November 1993, and SPAR
Marketing Force, Inc. ("SMF") since SMF acquired its assets and business in
1996).
William H. Bartels serves as the Vice Chairman and a Director of the
Company and has held such positions since July 8, 1999 (the effective date of
the PIA Merger). Mr. Bartels served as the Vice-Chairman, Secretary, Treasurer
and Senior Vice President of the SPAR Marketing Companies (SBRS since 1994, SINC
since 1979, SMNEV since November 1993 and SMF since SMF acquired its assets and
business in 1996), and has been responsible for the Company's sales and
marketing efforts, as well as for overseeing joint ventures and acquisitions.
Robert O. Aders serves as a Director of the Company and has done so
since July 8, 1999. Mr. Aders has served as Chairman of The Advisory Board,
Inc., an international consulting organization since 1993, and also as President
Emeritus of the Food Marketing Institute ("FMI") since 1993. Immediately prior
to his election to the presidencyPresidency of FMI in 1976, Mr. Aders was Acting Secretary
of Labor in the Ford
-26-
Administration. Mr. Aders was the Chief Executive Officer
of FMI from 1976 to 1993. He also served in The Kroger Co., in various executive
positions from 1957-1974 and was Chairman of the Board from 1970 to 1974. Mr.
Aders also serves as a Director of FMI, the Stedman Nutrition Foundation at Duke Medical Center,
Coinstar,Source-Interlink Co., Checkpoint Systems,
Inc., The Source Information Management CompanySure Beam Corporation and Telepanel Systems, Inc.
-28-
Jack W. Partridge serves as a Director of the Company and has done so
since January 29, 2001. Mr. Partridge is President of Jack W. Partridge &
Associates. He previously served as Vice Chairman of the Board of The Grand
Union Company from 1998 to 2000. Mr. Partridge's service with Grand Union
followed a distinguished 23-year career with The Kroger Company, where he served
as Group Vice President, Corporate Affairs, and as a member of the Senior
Executive Committee, as well as various other executive positions. Mr. Partridge
has been a leader in industry and community affairs for over two decades. He alsohas
served as Chairman of the Food Marketing Institute's Government Relations
Committee, the Food and Agriculture Policy Task Force, and as Chairman of the
Board of The Ohio Retail Association. He has also served as Vice Chairman of the
Cincinnati Museum Center and a member of the boards of the United Way of
Cincinnati, the Childhood Trust, Second Harvest and the Urban League.
Jerry B. Gilbert serves as a Director of the Company and has done so
since June 4, 2001. Mr. Gilbert served as Vice President of Customer Relations
for Johnson & Johnson's Consumer and Personal Care Group of Companies from 1989
to 1997. Mr. Gilbert joined Johnson & Johnson in 1958 and from 1958-1989 held
various executive positions. Mr. Gilbert also serves on the Advisory Boards of
the Food Marketing Institute, the National Association of Chain Drug Stores and
the General Merchandise Distributors Council (GMDC) where he was elected the
first President of the GMDC Educational Foundation. He was honored with lifetime
achievement awards from GMDC, Chain Drug Review, Drug Store News and the Food
Marketing Institute. He is the recipient of the prestigious National Association
of Chain Drug Stores (NACDS) Begley Award, as well as the National Wholesalers
DruggistWholesale
Druggists Association (NWDA) Tim Barry Award. In June 1997, Mr. Gilbert received
an Honorary Doctor of Letters Degree from Long Island University.
George W. Off serves as Director of the Company and has done so since
July 1, 2001. Mr. Off is Chairman and Chief Executive Officer of Checkpoint
Systems, Inc. since August 2002. He serves as a Director of Telephone and Data
Systems since 1997. Mr. Off was Chairman of the Board of Directors of Catalina
Marketing Corporation, a New York Stock Exchange listed company, from July 1998
until he retired in July 2000. He served as President and Chief Executive
Officer of Catalina from 1994 to 1998. Prior to that, Mr. Off was President and
Chief Operating Officer from 1992 to 1994 and Executive Vice President from 1990
to 1992. Catalina is a leading supplier of in-store electronic scanner-activated
consumer promotions.
Charles Cimitile serves as the Chief Financial Officer and Secretary of
the Company and has done so since November 24, 1999. Mr. Cimitile served as
Chief Financial Officer for GT Bicycles from 1996 to 1999 and Cruise Phone, Inc.
from 1995 through 1996. Prior to 1995, he served as the Vice President Finance,
Treasurer and Secretary of American Recreation Company Holdings, Inc. and its
predecessor company.
James H. Ross serves as the Treasurer of the Company and has held such
positions since July 8, 1999 (the effective date of the Merger). Mr. Ross has
been the Chief Financial Officer of the SPAR Marketing Companies since 1991, and
was the General Manager of SBRS from 1994-1999. In September 2001, Mr. Ross
retired from full-time employment. Mr. Ross continues to serve the Company on a
consulting basis.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Exchange Act ("Section 16(a)") requires the
Company's directors and certain of its officers and persons who own more than
10% of the Company's Common Stock (collectively, "Insiders"), to file reports of
ownership and changes in their ownership of the Company's Common Stock with the
Commission. Insiders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.
-27-
Based solely on its review of the copies of such forms received by it
for the year ended December 31, 2002, or written representations from certain
reporting persons that no Forms 5
were required for those persons,such year, the Company believes that its Insiders complied
with all applicable Section 16(a) filing requirements for 2001.such year, with the
exception that Robert G. Brown, William H. Bartels, Jack W. Partridge, Robert O.
Aders, Jerry B. Gilbert and George W. Off untimely filed certain Statements of
Changes in Beneficial Ownership on Form 4. All such Section 16(a) filing
requirements have since been completed by each of the aforementioned
individuals.
-29-
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION OF SPAR GROUP, INC.
EXECUTIVE COMPENSATION
The following table sets forth all compensation received for services
rendered to the Company in all capacities for the years ended December 31, 2002,
2001 December 31,and 2000 and December 31, 1999, (i) by the Company's Chief Executive Officer, and (ii) each of the
other fourthree most highly compensated executive officers of the Company who were
serving as executive officers at December 31, 20012002 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION(1)COMPENSATION COMPENSATION AWARDS
------------------------ ------------------------------------------------------ ------------------------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY($SALARY ($) BONUS($BONUS ($) OPTIONS(#)(2)OPTIONS (#)(1) ($)(3)(2)
- ---------------------------- ---- --------- -------- ------------ ----------- -------------- -------------
------------
Robert G. Brown 2002 164,340 -- -- 2,040
Chief Executive Officer, Chairman of 2001 141,202 -- 765,972 --
Chief Executive Officer, Chairman of the 2000 16,800 -- -- -- Board, President, and Director 1999 7,5002000 16,800 -- 765,972 --
William H. Bartels 2002 164,340 -- -- 2,040
Vice Chairman and Director 2001 139,230 -- 471,992 --
Vice Chairman and Director 2000 16,800 -- -- --
1999 16,307Charles Cimitile 2002 230,564 -- 471,992 --
Charles Cimitile20,000 2,040
Chief Financial Officer 2001 188,000 -- 75,000 --
Chief Financial Officer 2000 188,000 -- 25,000 --
1999 17,090 -- 75,000 --
James H. Ross (4)(3) 2002 72,043 5,000 -- --
Treasurer and Vice President 2001 101,773 7,500 43,000 1,557
Treasurer and Vice President 2000 94,800 9,000 5,000 3,337
1999 99,237 12,408 92,665 2,187
- ------------------------
(1) For accounting purposes, the Merger is treated as an acquisition
of PIA Merchandising Services, Inc., by the SPAR Marketing
Companies and related entities. Accordingly, these figures
represent the compensation paid by the Company since July 8,
1999, the effective date of the Merger, and the SPAR Marketing
Companies prior to that date.
(2) In January 2001, each of the above officers voluntarily surrendered for
cancellation their options for the purchase of the following numbers of
shares of common stock under the 1995 Plan: Mr. Brown - 765,972; Mr.
Bartels - 471,992; Mr. Cimitile - 75,000; and Mr. Ross - 40,000.
(3)(2) Other compensation represents the Company's 401k contribution.
(4)(3) In September 2001, Mr. Ross retired from full-time employment. Mr. Ross
continues to serve the Company on a consulting basis.
-28--30-
SUMMARY ADDITIONAL COMPENSATION TABLE (FROM AFFILIATED COMPANIES)
Robert G. Brown and William H. Bartels (the "SMS Principals") are the
sole owners of SPAR Marketing Services, Inc. ("SMS"), SPAR Management Services,
Inc. ("SMSI"), and SPAR Infotech, Inc. ("SIT"), which provide significant
services to the Company as more fully described in Item 13 - Certain
Relationships and Related Transactions. Although the SMS Principals were not
paid any salaries as officers of SMS, SMSI or SIT, each of those companies are
"Subchapter S" corporations, and accordingly the SMS Principals benefit from any
income of such companies allocated to them, all of which income (or
substantially all of which income, but not loss, in the case of SIT) is earned
from the performance of services for the Company. The following table sets forth
all income allocated to the SMS Principals by SMS, SMSI or SIT for the years
ended December 31, 2002, 2001 and 2000.
SMS INCOME SMSI INCOME SIT LOSS
NAME YEAR ($) ($) ($)(1)
----------- ------------ ----------
Robert G. Brown 2002 494,987 174,092 (85,183)
2001 211,117 16,477 (227,370)
2000 262,744 150,685 (318,034)
William H. Bartels 2002 314,992 110,787 (54,208)
2001 134,348 10,486 (144,690)
2000 167,202 95,891 (202,387)
(1) The subchapter "S" income/loss allocated to the SMS Principals by SIT
includes losses on activities unrelated to the Company's business.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding each grant of stock
options made during the year ended December 31, 2001,2002, to each of the Named
Executive Officers. No stock appreciation rights ("SAR's") were granted during
such period to such person.
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE AT
UNDERLYINGSECURITIES TOTAL OPTIONS GRANTED ASSUMED ANNUAL RATES OF STOCK
PRICE
OPTIONSUNDERLYING GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION PRICE EXPIRATION APPRECIATION FOR OPTION(1)
OPTIONS EMPLOYEES IN PRICE ($/SH) DATE
NAME GRANTED (#) PERIOD (%) ($/SH) DATE 5% ($) 10% ($)
- --------------------- ---------------- --------------- -------------- ---------- ------------- ---------------------------------------------------------------------------------------------------------
Robert G. Brown 382,986 (2) 14.9 1.30 8/2/11 274,496 676,097
191,493 (3) 7.5 10.00 8/2/11 -0- -0-
191,493 (3) 7.5 10.00 8/2/06 -0- -0-
---------------- --------------- ------------- ---------------
765,972 29.9 274,496 676,097
William H. Bartels 235,996 (2) 9.2 1.30 8/2/11 169,145 416,611
153,846 (3) 6.0 10.00 8/2/11 -0- -0-
82,151 (3) 3.2 10.00 8/2/06 -0- -0-
---------------- --------------- ------------- ---------------
471,992 18.4 169,145 416,611
Charles Cimitile 75,00010,000 (2) 2.9 1.30 8/3.0 1.78 2/11 53,755 132,400
James H. Ross 41,00014/12 27,614 41,971
10,000 (2) 1.6 1.30 8/2/11 29,386 72,378
2,000 (4) .1 1.103.0 2.45 5/9/11 1,213 2,98709/12 38,008 57,770
--------------- --------------- -------------- ----------------
--------------- ------------- ---------------
43,000 1.7 30,599 75,36520,000 6.0 65,622 99,741
- ------------
(1) The potential realizable value is calculated based upon the term of the
option at its time of grant. It is calculated by assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option.
(2) These options vested 50% on the date of grant, 25% on the first
anniversary of the date of grant and 25% on the second anniversary of
the date of grant.
(3) These options vest 100% when the market price of the stock is equal to
$10.00.
(4) These options vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
-31-
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The following table sets forth the number of shares of Common Stock of
the Company purchased by each of the Named Executive Officers in the exercise of
stock options during the year ended December 31, 2002, the value realized in the
purchase of such shares (i.e., the market value at the time of exercise less the
exercise price to purchase such shares), and the number of shares that may be
purchased and value of the exercisable and unexercisable options held by each of
the Named Executive Officers at December 31, 2001.2002.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT FISCAL
YEAR-END (#) YEAR-END ($)
--------------------------------------- ----------------------------------------------------------------------- --------------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------ ------------------- ---- ----------------- ---------------- ---------------------------------- ---------------- -------------- ----------------
Robert G. Brown 95,746 100,533 -- 574,478478,733 -- 93,831179,047
William H. Bartels 58,999 61,949 -- 353,994294,995 -- 57,819110,328
Charles Cimitile 43,750 56,250 25,656 40,219-- -- 68,750 51,250 137,000 87,975
James H. Ross 21,250 26,250 11,256 16,039-- -- 33,250 14,750 63,965 29,570
-29-
STOCK OPTION AND PURCHASE PLANS
The Company has fivefour stock option plans: the 1990 Stock Option Plan
("1990 Plan"), the Amended and Restated 1995
Stock Option Plan ("1995 Plan")(1995 Plan), the 1995 Director's Plan ("Director's Plan")(Director's Plan), the
Special Purpose Stock Option Plan, and the 2000 Stock Option Plan ("2000 Plan")(2000 Plan).
The 1990 Plan is a nonqualified option plan providing for the issuance
of up to 830,558 shares of common stock to officers, directors and key
employees. The options have a term of ten years and one week and are either
fully vested or will vest ratably no later than five years from the grant date.
Since 1995, the Company has not granted any new options under this plan.
The 1995 Plan provided for the granting of either incentive or
nonqualified stock options to specifiedspecific employees, consultants, and directors of
the Company for the purchase of up to 3,500,000 shares of the Company's common
stock. The options havehad a term of ten years from the date of issuance, except in
the case of incentive stock options granted to greater than 10% stockholders for
which the term iswas five years. The exercise price of nonqualified stock options
must behave been equal to at least 85% of the fair market value of the Company's
common stock at the date of grant. Since 2000, the Company has not granted any
new options under this Plan. During 2001,At December 31, 2002, options to purchase 2,349,825 shares of the Company's common stock
under the 1995 Plan were voluntarily surrendered and cancelled. No options to
purchase shares of the Company's common stock were exercised under this Plan
during 2001. At December 31, 2001, options to purchase 81,12572,000
shares of the Company's common stock remain outstanding under this Plan. The
1995 Plan has
been replacedwas superceded by the 2000 Plan.Stock Option Plan with respect to all new
options issued.
The Director's Plan was a stock option plan for non-employee directors
and provided for the purchase of up to 100,000120,000 shares of the Company's common
stock. Since 2000, the Company has not granted any new options under this Plan.
During 2001,2002, no options to purchase shares of the Company's common stock were
exercised under this Plan. At December 31, 2001, no2002, 20,000 options to purchase
shares of the Company's common stock remained outstanding under this Plan. The
Director's Plan has been replaced by the 2000 Plan.Plan with respect to all new
options issued.
On July 8, 1999, in connection with the merger, the Company established
the Special Purpose Stock Option Plan of PIA Merchandising Services, Inc. to
provide for the issuance of substitute options to the holders of outstanding
options granted by SPAR Acquisition, Inc. There were 134,114 options granted at
$0.01 per share. Since July 8, 1999, the Company has not granted any new options
under this plan. During 2001,2002, no options to purchase shares of the Company's
common stock were exercised under this Plan. At December 31, 2001,2002, options to
purchase 25,750 shares of the Company's common stock remain outstanding under
this Plan.
-32-
On December 4, 2000, the Company adopted the 2000 Plan, as the successor
to the 1995 Plan and the Director's Plan with respect to all new options issued.
The 2000 Plan provides for the granting of either incentive or nonqualified
stock options to specified employees, consultants, and directors of the Company
for the purchase of up to 3,600,000 (less those options still outstanding under
the 1995 Plan or exercised after December 4, 2000 under the 1995 Plan). The
options have a term of ten years, except in the case of incentive stock options
granted to greater than 10% stockholders for whom the term is five years. The
exercise price of nonqualified stock options must be equal to at least 85% of
the fair market value of the Company's common stock at the date of grant
(although typically the options are issued at 100%) of the fair market value),
and the exercise price of incentive stock options must be equal to at least the
fair market value of the Company's common stock at the date of grant. During
2001,2002, options to purchase 2,567,344332,792 shares of the Company's common stock were
granted, under this
Plan. Optionsoptions to purchase 309,492230,463 shares of the Company's common stock were
exercised and options to purchase 481,250 shares of the Company's stock were
cancelled under this Plan during 2001.Plan. At December 31, 2001,2002, options to purchase 2,356,8521,980,431
shares of the Company's common stock remain outstanding under this Plan and
options to purchase 852,5311,079,614 shares of the Company's common stock were
available for grant under this Plan.
-30-
In 2001, the Company adopted its 2001 Employee Stock Purchase Plan (the
"ESP Plan"), which replaces its earlier existing plan, and its 2001 Consultant
Stock Purchase Plan (the "CSP Plan"). These plans were each effective as of June
1, 2001. The ESP Plan allows employees of the Company and its subsidiaries, and
the CSP Plan allows employees of the affiliates of the Company (see Item 13 -13-
Certain Relationships and Related Transactions, below), to purchase the
Company's Common Stock from the Company without having to pay any brokerage
commissions. The purchase priceOn August 8, 2002, the Company's Board of Directors approved a 15%
discount for theemployee purchases of Common Stock under the ESP Plan has been
(and likely will continue to be), and a 15%
cash bonus for affiliate consultant purchases of Common Stock under the CSP
Plan always will be, 100% of
fair market value, as defined in the Plans.Plan.
COMPENSATION OF DIRECTORS
The Company's Compensation Committee administers itsthe compensation plan
for its outside Directors. Each member of the Company's Board who is not
otherwise an employee or officer of the Company or any subsidiary or affiliate
of the Company (each, an "Eligible Director") is eligible to receive the
compensation contemplated under such plan.
In January 2001, the Company adopted a newthe Director Compensation Plan.Plan,
which was amended by the Compensation Committee in February of 2003. Under the
newamended plan, each non-employee director receives thirty thousand dollars
($30,000) per annum (increased from twenty thousand dollars ($20,000) per annum
for 2002 and 2001) and the Chairman of the Audit Committee will receive an
additional $5,000 per annum. Payments are made quarterly in equal installments.
It is intended that each quarterly payment will be 50% in cash ($2,500)3,750, up from
$2,500 for 2002 and 2001) and 50% ($2,500)3,750, up from $2,500 for 2002 and 2001) in
stock options to purchase shares of the Company's common stock with an exercise
price of $0.01 per share.share (plus an additional $1,250 per quarter for the Chairman
of the Audit Committee, half in cash and half in $.01 stock options). The number
of shares of the Company's common stock that can be purchased under each $.01
stock option granted will be determined based upon the closing stock price at
the end of each quarter. In addition, each non-employee director will receivereceives
options to purchase an additional 10,000 shares of the Company's common stock upon acceptance
of the directorship, 2,500 additional options to purchase shares of the
Company's common stock after one year of service and 2,500 additional options to
purchase shares of the Company's common stock for each additional year of
service thereafter. TheThese options will have an exercise price equal to the
closing price of the Company's common stock on the day of grant. All of the
options have been and will be granted under the 2000 Plan described above, under
which each member of the SPAR Board is eligible to participate. Non-employee
directors will be reimbursed for all reasonable expenses incurred during the
course of their duties. There is no additional compensation for committee
participation, phone meetings, or other Board activities.
-33-
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Board's Compensation Committee was at any time during
the year ended December 31, 20012002 or at any other time an officer or employee of
the Company. ExceptNo executive officer or board member of the Company serves as a
member of the board of directors or compensation committee of any other entity,
that has one or more executive officers serving as a member of the Company's
Board or Compensation Committee, except for the positions of Messrs. Brown and
Bartels as directors and officers of the Company (including each of its
subsidiaries) and each of its affiliates, including SMS, SMSI and SIT (see Item
13 - Certain Relationships and Related Transactions, below), no executive officer or board member of the
Company serves as a member of the Company's board of directors or compensation
committee of any other entity, that has one or more executive officers serving
as a member of the Company's Board or Compensation Committee.
-31-.
-34-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF THE COMPANY
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of December 31, 2001March 21, 2003 by: (i) each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the Company's common stock; (ii) each of the Company's
directors; (iii) each of the executive officers named in the Summary
Compensation Table; and (iv) the Company's directors and executive officers as a
group. Except as indicated in the footnotes to this table, the persons named in
the table, based on information provided by such persons, have sole voting and
sole investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws where applicable.
NUMBER OF SHARES
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES BENEFICIALLY OWNED PERCENTAGE
- -------------- ----------------------------------------------------------------------------------------- ------------------ ----------
Common Shares Robert G. Brown (1) 7,884,241(2) 41.2%8,517,905(2) 44.0%
Common Shares William H. Bartels (1) 5,149,487(3) 26.9%5,370,194(3) 27.7%
Common Shares James H. Ross (1) 105,115(4)117,615(4) *
Common Shares Robert O. Aders (1) 46,671(5)76,919(5) *
Common Shares Charles Cimitile (1) 43,750(6)73,750(6) *
Common Shares Jack W. Partridge (1) 24,259(7) *
Common Shares George W. Off (1) 23,283(8) *
Common Shares Jerry B. Gilbert (1) 13,402(7) *
Common Shares George W. Off (1) 9,085(8) *
Common Shares Jack W. Partridge (1) 7,561(9)17,600(9) *
Common Shares Richard J. Riordan (10) 1,209,922 6.3%6.2%
300 S. Grand Avenue, Suite 2900
Los Angeles, CA 90071
Common Shares Heartland Advisors, Inc. (10) 1,568,100 8.2%(11) 1,547,900 8.0%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Common Shares Executive Officers and Directors 13,259,312 69.2%14,221,525 73.4%
* Less than 1%
(1) The address of such owners is c/o SPAR Group, Inc. 580 White Plains Road,
Tarrytown, New York.
(2) Includes 1,813,0001,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown, James
R. Brown, Sr. and William H. Bartels are trustees. Includes 143,620 shares
issuable upon exercise of options.
(3) Excludes 1,813,0001,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown, James
R. Brown, Sr. and William H. Bartels are trustees, beneficial ownership of
which are disclaimed by Mr. Bartels. Includes 115,385 shares issuable upon
exercise of options.
(4) Includes 21,25033,750 shares issuable upon exercise of options.
(5) Includes 11,97126,919 shares issuable upon exercise of options.
(6) Includes 43,75073,750 shares issuable upon exercise of options.
(7) Includes 13,40213,291 shares issuable upon exercise of options.
(8) Includes 2,58516,783 shares issuable upon exercise of options.
(9) Includes 7,56117,600 shares issuable upon exercise of options.
(10) Represents record ownership as of March 21, 2003.
(11) All information regarding share ownership is taken from and furnished in
reliance upon the Schedule 13G (Amendment No. 7)9), filed by Heartland
Advisors, Inc. with the Securities and Exchange Commission on JanuaryFebruary 13,
2003.
-35-
EQUITY COMPENSATION PLANS
The following table contains a summary of the number of shares of Common
Stock of the Company to be issued upon the exercise of options, warrants and
rights outstanding at December 31, 2002, the weighted-average exercise price of
those outstanding options, warrants and rights, and the number of additional
shares of Common Stock remaining available for future issuance under the plans
as at December 31, 2002.
-32-
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance of
Plan category warrants and rights (#) warrants and rights ($) options, warrants and
rights (#)
Equity compensation plans
approved by security
holders 2,098,181 1.52 1,079,614
Equity compensation plans
not approved by security
holders - - -
Total 2,098,181 1.52 1,079,614
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Robert G. Brown, a Director, the Chairman and the Chief Executive
Officer of the Company, and Mr. William H. Bartels, a Director and the Vice
Chairman of the Company (collectively, the "SMS Principals"), are the sole
stockholders and executive officers and directors of SPAR Marketing Services,
Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI"), SPAR Infotech, Inc.
("SIT"), and certain other affiliated companies.
SMS and SMSI (through SMS) provided approximately 54%71% of the Company's
field representatives (through its independent contractor field force) and
substantially all of the Company's field management services at a total cost of
$15.1approximately $30.5 million and $9.6$15.1 million for the twelve months ended
December 31, 2001,2002, and 2000,2001, respectively. Under the terms of the Field Service
Agreement, SMS provides the services of approximately 4,3006,600 field
representatives and through SMSI provides approximately 90 full-time national, regional
and district managers to the SPAR Marketing Companies as they may request from
time to time, for which the Company has agreed to pay SMS for all of its costs
of providing those services plus 4%. However, SMS may not charge the Company for
any past taxes or associated costs for which the SMS Principals have agreed to
indemnify the SPAR Companies. Although the SMS Principals were not paid any
salaries as officers of SMS or SMSI, SMS, and SMSI are "Subchapter S"
corporations, and accordingly the SMS Principals benefit from any income of such
companies allocated to them.them (see Item 11 - Summary Additional Compensation Table
- - Affiliated Companies above).
SIT provided Internet computer programming services to the Company at a
total cost of $1,185,000approximately $1,626,000 and $769,000$1,185,000 for the twelve months
ended December 31, 2001,2002, and 2000,2001, respectively. Under the terms of the
programming agreement between SMF and SIT effective as of October 1, 1998 (the
"Programming Agreement"), SIT continues to provide programming services to SMF
as SMF may request from time to time, for which SMF has agreed to pay SIT
competitive hourly wage rates and to reimburse SIT's out-of-pocket expenses (see Note 10 to the Financial
Statements).expenses.
Although the SMS Principals were not paid any salaries as officers of SIT, SIT
is a "Subchapter S" corporation, and accordingly the SMS Principals would
benefit from any income allocated to them if SIT were to be profitable.
-36-
In July 1999, SMF, SMS and SIT entered into a Software Ownership
Agreement with respect to Internet job scheduling software jointly developed by
such parties. In addition, SPAR Trademarks, Inc. ("STM"), SMS and SIT entered
into trademark licensing agreements whereby STM has granted non-exclusive
royalty-free licenses to SIT, SMS and SMSI for their continued use of the name
"SPAR" and certain other trademarks and related rights transferred to STM, a
wholly owned subsidiary of the Company, in connection with the Merger.Company.
The SMS Principals also owned an indirect minority (less than 5%) equity
interest in Affinity Insurance Ltd., which provides certain insurance to the
Company (See Note 10 to the Financial Statements).Company.
At December 31, 2001,2002, the Company owed a total of $4.7$4.0 million to the
SMS Principals (See Item 7 - Liquidity7-Liquidity and Capital Resources and Note 1210 to the
Financial Statements)., $3.0 million of which has since been repaid.
In the event of any material dispute in the business relationships
between the Company and SMS, SMSI, or SIT, it is possible that Messrs. Brown or
Bartels may have one or more conflicts of interest with respect to these
relationships and such dispute that could have a material adverse effect on the
Company (see Note 10Company.
ITEM 14. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, Robert Brown, and Chief Financial
Officer, Charles Cimitile, have reviewed the Company's disclosure controls and
procedures within 90 days prior to the Financial Statements)filing of this report. Based upon this
review, these officers believe that the Company's disclosure controls and
procedures are effective in ensuring that material information related to the
Company is made known to them by others within the Company.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls during the
twelve months covered by this report or from the end of the reporting period to
the date of this Form 10-K.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Company and its subsidiaries did not engage Ernst & Young LLP
("E&Y") to provide advice regarding financial information systems design or
implementation, but did engage E&Y for consulting services related to the ESOP
during 2002 (for which E&Y was paid $13,700) and for tax services in 2002 and
2001 (for which E&Y was paid $13,500 and $107,952 respectively). -33-No other
non-audit services were performed by E&Y in 2002 or 2001. Commencing in 2003,
all non-audit services to be performed by the Company's auditor will require
approval by the Company's Audit Committee on a case-by-case basis. In connection
with the standards for independence of the Company's independent public
accountants promulgated by the Securities and Exchange Commission, the Audit
Committee would consider whether the provision of such non-audit services would
be compatible with maintaining the independence of E&Y.
AUDIT FEES
During the Company's fiscal year ended December 31, 2002, and 2001,
respectively, fees billed by Ernst & Young LLP for all audit services rendered
to the Company and its subsidiaries were $143,000 and $159,700, respectively.
Audit services principally include fees for the Company's audits and 10-Q filing
reviews.
-37-
PART IV
ITEM 14.16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. INDEX TO FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT:
Independent Auditors' Report. F-1
Consolidated Balance Sheets as of December 31, 2001, and December 31, 2000. F-2
Consolidated and Combined Statements of Operations for the years ended
December 31, 2001, and December 31, 2000, and December 31, 1999. F-3
Consolidated and Combined Statements of Stockholders' Equity for the years
ended December 31, 2001, and December 31, 2000, and December 31, 1999. F-4
Consolidated and Combined Statements of Cash Flows for the years ended
December 31, 2001, and December 31, 2000, and December 31, 1999. F-5
Notes to Financial Statements. F-6
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2001,
and December 31, 2000, and December 31, 1999. F-36
(A)1. INDEX TO FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT:
Independent Auditors' Report. F-1
Consolidated Balance Sheets as of December 31, 2002, and
December 31, 2001. F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, and December 31, 2001, and December 31, 2000. F-3
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2002, and December 31, 2001, and
December 31, 2000. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, and December 31, 2001, and December 31, 2000. F-5
Notes to Consolidated Financial Statements. F-6
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts for the three
years ended December 31, 2002. F-28
3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc. (referred to
therein under its former name PIA), as amended (incorporated by
reference to the Company's Registration Statement on Form S-1
(Registration No. 33-80429), as filed with the Securities and
Exchange Commission ("SEC") on December 14, 1995 (the "Form
S-1")), and the Certificate of Amendment filed with the
Secretary of State of the State of Delaware on July 8, 1999
(which, among other things, changes the Company's name to SPAR
Group, Inc.) (incorporated by reference to Exhibit 3.1 to the
Company's Form 10-Q for the 3rd Quarter ended September 30,
1999).
3.2 By-laws of PIAthe Company (referred to therein under its former
name PIA) (incorporated by reference to the above referenced
Form S-1).
4.1 Registration Rights Agreement entered into as of January 21,
1992, by and between RVM Holding Corporation. RVM/PIA, a
California Limited Partnership, The Riordan Foundation and
Creditanstalt-Bankverine (incorporated by reference to the Form
S-1).
10.1 Amended and Restated 1995 Stock Option Plan (incorporated
by reference of Exhibit 10.2 to the Company's Form 10-Q for
the 2nd Quarter ended July 3, 1998).
10.2 1995 Stock Option Plan for Non-employee Directors
(incorporated by reference to the above referenced Form
S-1).
-34-
10.3 Special Purpose Stock Option Plan (incorporated by
reference to Exhibit 10.13 of the Company's Form 10-Q for
the 2nd Quarter ended July 2, 1999).
10.4 2000 Stock Option Plan, as amended, (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.510.2 2001 Employee Stock Purchase Plan (incorporated by reference to
the Company's Proxy Statement for the Company's Annual meeting
held on August 2, 2001, as filed with the SEC on July 12, 2001).
10.610.3 2001 Consultant Stock Purchase Plan (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.7-38-
10.4 Service Agreement dated as of January 4, 1999, by and between
SPAR Marketing Force, Inc., and SPAR Marketing Services, Inc.
[incorporated(incorporated by reference to the Company's Form 10-K/A
(Amendment No. 1) for the fiscal year ended December 31, 1999]1999).
10.810.5 Business Manager Agreement dated as of July 8, 1999, by and
between SPAR Marketing Force, Inc., and SPAR Marketing Services,
Inc. [incorporated(incorporated by reference to the Company's Form 10-K/A
(Amendment No. 1) for the fiscal year ended December 31, 1999]1999).
10.6 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Marketing Services, Inc., and SPAR Trademarks,
Inc., filed herewith.
10.7 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Infotech, Inc., and SPAR Trademarks, Inc., filed
herewith
10.8 [Reserved].
10.9 Stock Purchase and Sale Agreement by and among Performance
Holdings, Inc. and SPAR Incentive Marketing, Inc., effective as
of June 30, 2002 (incorporated by reference to the Company's
Form 10-Q for the quarter ended June 30, 2002).
10.10 Revolving Credit, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to the
Company's Form 10-Q for the quarter ended June 30, 2002).
10.11 Term Loan, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to the
Company's Form 10-Q for the quarter ended June 30, 2002).
10.11 Amendment No. 7 to Second Amended and Restated Revolving Credit,
Term Loan and Security Agreement by and among IBJthe SPAR Borrowers
and the Lender, effective as of October 31, 2002 (incorporated
by reference to the Company's Form 10-Q for the quarter ended
September 30, 2002).
10.12 Third Amended and Restated Revolving Credit and Security
Agreement by and among Whitehall Business Credit Corporation
(the "Lender") with SPAR Marketing Force, Inc., SPAR Group,
Inc., SPAR, Inc., SPAR/Burgoyne Retail Services, Inc., SPAR
Incentive Marketing, Inc., SPAR Trademarks, Inc., SPAR
MCI Performance Group, Inc., SPAR
Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., SPAR Group International, Inc., SPAR
Technology Group, Inc., SPAR/PIA Retail Services, Inc., Retail
Resources, Inc., Pivotal Field Services Inc., PIA Merchandising
Co., Inc., Pacific Indoor Display Co., Inc., and Pivotal Sales Company
(collectively, the "SPAR Borrowers""Borrowers"), dated as of September
22, 1999 (incorporated by reference to the Company's
initial Form 10-K for the fiscal year ended December 31,
1999).
10.10 WaiverJanuary 24, 2003,
and Amendment No. 1 to Second Amended and Restated
Revolving Credit, Term Loan and Security Agreement dated
as of December 8, 1999, by and among the SPAR Borrowers
and the Lender (incorporated by reference to the Company's
initial Form 10-K for the fiscal year ended December 31,
1999).
10.11 Amendment No. 2 to Second Amended and Restated Revolving
Credit, Term Loan and Security Agreement by and among the
SPAR Borrowers and the Lender, entered into as of April 21,
2000.
10.12 Third Amended and Restated Revolving Credit Note issued by
SPAR Borrowers, in the amount of Fifteen million dollars
($15,000,000), to the Lender, dated as of April 21, 2000.
10.13 Amendment No. 3 to Second Amended and Restated Revolving
Credit, Term Loan and Security Agreement by and among the
SPAR Borrowers and the Lender, entered into as of March 1,
2002.
10.14 Amendment No. 4 to Second Amended and Restated Revolving
Credit, Term Loan and Security Agreement by and among the
SPAR Borrowers and the Lender, entered into as of March 1,
2002.filed herewith.
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP.
99.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
99.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
(B) REPORTS ON FORM 8-K.
None.
-35--39-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to the
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPAR GROUP, INC.
By: /s/ Robert G. Brown
-------------------------------------------------------------------------
Robert G. Brown
President, Chief Executive Officer and
Chairman of the Board
Date: April 1, 2002March 31, 2003
---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amendment to the report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Robert G. Brown President, Chief Executive Officer, Director and
- ------------------------- and Chairman of the Board
Robert G. Brown
Date: March 31, 2003
/s/ William H. Bartels Vice Chairman and Director
- -------------------------
William H. Bartels
Date: March 31, 2003
/s/ Robert O. Aders Director
- -------------------------
Robert O. Aders
Date: March 31, 2003
/s/ Jack W. Partridge Director
- -------------------------
Jack W. Partridge
Date: March 31, 2003
/s/ Jerry B. Gilbert Director
- -------------------------
Jerry B. Gilbert
Date: March 31, 2003
/s/ George W. Off Director
- -------------------------
George W. Off
Date: March 31, 2003
/s/ Charles Cimitile Chief Financial Officer
- ------------------------- and Secretary (Principal Financial and
Charles Cimitile Accounting Officer)
-36-Date: March 31, 2003
-40-
FINANCIAL STATEMENTSCERTIFICATIONS
I, Robert G. Brown, certify that:
1. I have reviewed this annual report on Form 10-K of SPAR Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and Subsidiaries
Years Ended Decemberother financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 20012003 /s/ Robert G. Brown
-------------------
Robert G. Brown
Chairman, President and 2000Chief
Executive Officer
-41-
CERTIFICATIONS
I, Charles Cimitile, certify that:
1. I have reviewed this annual report on Form 10-K of SPAR Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Charles Cimitile
--------------------
Charles Cimitile
Chief Financial Officer
-42-
Report of Independent Auditors
The Board of Directors and Stockholders of
SPAR Group, Inc. and Subsidiaries
We have audited the consolidated balance sheets of SPAR Group, Inc. and
Subsidiaries as of December 31, 20012002 and 20002001 and the related consolidated and
combined
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001.2002. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)16(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated and combined financial statements referred to above present
fairly, in all material respects, the financial position of SPAR Group, Inc. and
Subsidiaries at December 31, 20012002 and 2000,2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001,2002, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the consolidated and combined
financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2, the Company adopted Statement of Accounting Standards
No. 142 effective January 1, 2002.
/s/Ernst & Young LLP
Minneapolis, Minnesota
February 15, 20027, 2003
SPAR Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
DECEMBER 31,
2002 2001
2000
----------------------------------------
ASSETS
Current assets:
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 17,415 21,144 19,471
Prepaid expenses and other current assets 783 440 611
Deferred income taxes 903 3,241
1,718
------------------------------------------------------------------------------
Total current assets 19,101 24,825 21,800
Property and equipment, net 1,972 2,644
3,132
Goodwill and other intangibles, net7,858 8,357 10,350
Deferred income taxes 705 389 1,082
Other assets 121 110 144
Net long-term assets from discontinued operations - 4,830
11,496
------------------------------------------------------------------------------
Total assets $41,155 $48,004
======================================$ 29,757 $ 41,155
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 440422 $ 2,923440
Accrued expenses and other current liabilities 5,868 8,6446,097 5,257
Accrued expenses, due to affiliates 958 611
Restructuring and other charges, current 1,354 1,597 2,205
Due to certain stockholders 3,951 2,655 3,137
Net current liabilities from discontinued operations - 5,732 6,023
Current portion of long-term debt - 57
1,143
------------------------------------------------------------------------------
Total current liabilities 12,782 16,349 24,075
Line of credit and long-term liabilities, net of current portion148 11,287 8,093
Long-term debt due to certain stockholders 2,000- 2,000
Restructuring and other charges, long term 235 585 1,596
Commitments and contingenciesContingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 3,000,000
Issued and outstanding shares - none -- --- -
Common stock, $.01 par value:
Authorized shares - 47,000,000
Issued and outstanding shares - 18,584,360--2001;
18,272,330--200018,824,527 -- 2002;
18,582,615 -- 2001 188 186
182Treasury stock (30) -
Additional paid-in capital 10,919 10,531 10,127
Retained earnings 5,515 217
1,931
------------------------------------------------------------------------------
Total stockholders' equity 16,592 10,934
12,240
------------------------------------------------------------------------------
Total liabilities and stockholders' equity $41,155 $48,004
======================================$ 29,757 $ 41,155
========================================
See accompanying notes.
F-2
SPAR Group, Inc. and Subsidiaries
Consolidated and Combined Statements of Operations
(In Thousands, Except Per Share Data)
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
2002 2001 2000 1999
------------------------------------------------------
Net revenues $70,891 $81,459 $79,613$ 69,612 $ 70,891 $ 81,459
Cost of revenues 40,331 40,883 50,278 50,499
------------------------------------------------------
Gross profit 29,281 30,008 31,181 29,114
Selling, general, and administrative expenses 18,804 19,380 24,761 23,213
Depreciation and amortization 1,844 2,682 2,383 1,204
------------------------------------------------------
Operating income 8,633 7,946 4,037
4,697
Other (expense) income (107) 790 90(income) expense (26) 107 (790)
Interest expense (561) (1,326) (976)363 561 1,326
------------------------------------------------------
Income from continuing operations before provision
for income taxes 8,296 7,278 3,501 3,811
Nonrecurring income tax charge for termination of
Subchapter S elections - - 3,100
Provision for income taxes 2,998 3,123 780 643
------------------------------------------------------
Net income from continuing operations 5,298 4,155 2,721 68
Discontinued operations:
Loss from discontinued operations, net of tax
benefits of $938 and $858 for 2001 and $595,2000,
respectively - (1,597) (1,399) (563)
Estimated loss on disposal of discontinued
operations including provision of $1,000 for
losses during phase-out period and disposal
costs,in 2001, net of tax benefit of
$2,618 - (4,272) - -
------------------------------------------------------
Net income (loss) income$ 5,298 $ (1,714) $ 1,322
$ (495)
======================================================
Unaudited pro forma information:
Income from continuing operations before
provision for income tax $ 3,811
Pro forma income tax provision 1,840
-------------------
1,971
Pro forma loss from discontinued operations, net
of pro forma tax benefit of $429 (729)
-------------------
Pro forma net income $ 1,242
===================
Basic/diluted net income (loss) per common share:
Actual/pro forma incomeIncome from continuing operations $ 0.28 $ 0.23 $ 0.15
$ 0.13
Actual/pro forma lossLoss from discontinued operations - (0.32) (0.08)
(0.05)
------------------------------------------------------
Actual/pro forma netNet income (loss) income$ 0.28 $ (0.09) $ 0.07
$ 0.08
======================================================
Actual/pro forma weightedWeighted average shares outstanding - basic 18,761 18,389 18,185
15,361
======================================================
Actual/pro forma weightedWeighted average shares outstanding - diluted 19,148 18,467 18,303 15,367
======================================================
See accompanying notes.
F-3
SPAR Group, Inc. and Subsidiaries
Consolidated and Combined Statement of Stockholders' Equity
(In Thousands)
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
COMMON STOCK
---------------------------------------
ADDITIONAL TOTAL
COMMON STOCKTREASURY PAID-IN RETAINED STOCKHOLDERS'
-----------------------------
SHARES AMOUNT STOCK CAPITAL EARNINGS EQUITY
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 19981999 18,155 $ (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)182 $ - $ (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 - - -10,095 $ 609 609
--------------------------------------------------------------------------
Balance at December 31, 1999 18,155 182 10,095 609 10,886$10,886
-------------------------------------------------------------------------------
Stock options exercised and employee
stock purchase plan purchases 117 - - 32 - 32
Net income - - - - 1,322 1,322
---------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 18,272 182 - 10,127 1,931 12,240
-------------------------------------------------------------------------------
Stock options exercised and employee
stock purchase plan purchases 312311 4 - 404 - 408
Net loss - - - - (1,714) (1,714)
---------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 18,58418,583 $186 $10,531- $ 10,531 $ 217 $10,934
==========================================================================-------------------------------------------------------------------------------
Stock options exercised and employee
stock purchase plan purchases 242 2 - 388 - 390
Purchase of treasury stock - - (30) - - (30)
Net income - - - - 5,298 5,298
-------------------------------------------------------------------------------
Balance at December 31, 2002 18,825 $ 188 $ (30) $ 10,919 $ 5,515 $16,592
===============================================================================
See accompanying notes.
F-4
SPAR Group, Inc. and Subsidiaries
Consolidated and Combined Statements of Cash Flows
(In Thousands)
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
2002 2001 2000
1999
------------------------------------------------------
OPERATING ACTIVITIES
OPERATING ACTIVITIES
Net income (loss) income $(1,714)$ 5,298 $ (1,714) $ 1,322 $ (495)
Adjustments to reconcile net income (loss) income to net
cash provided by (used in) provided by operating activities:
Depreciation 1,844 2,217 1,839
881
Amortization - 1,630 1,725 1,301
Equity earnings of affiliate - - (91)
Estimated loss on disposal of discontinued
operations - 4,272 - -
Taxes on termination of Subchapter
S corporation election - - 3,100
Stock related compensation - - 752
Gain on sale of affiliate - - (790) -
Changes in operating assets and liabilities:
Accounts receivable 3,729 13 5,318 (4,497)
Prepaid expenses and other current assets (354) 318 (346) 36
Deferred income taxes 2,022 1,710 (185)
-
Accounts payable, accrued expenses and other
current liabilities (5,938) (2,024) (3,294)766 (7,202) 216
Restructuring and other charges (593) (1,487) (2,766) -
Deferred revenue (1,264) 2,240 (2,666)
------------------------------------------------------
Net cash provided (used in) provided by operating activities 12,712 (243) 6,333 (4,973)
INVESTING ACTIVITIES
Purchases of property and equipment (1,172) (1,744) (1,941) (2,105)
Purchase of businesses, net of cash acquired - - (62) 7,109
Sale of investment in affiliate - - 1,500
------------------------------------------------------
Net cash used in investing activities (1,172) (1,744) (503)
FINANCING ACTIVITIES
Net (payments) borrowings on line of credit (11,139) 3,526 (5,596)
Payments on long-term debt (57) (1,465) (1,113)
Net payments to certain stockholders (704) (482) (182)
Payments of note payable, MCI - - (1,045)
Proceeds from issuance of common stock 390 408 32
Purchase of treasury stock (30) - -
------------------------------------------------------
Net cash (used in) provided by investingfinancing activities (1,744) (503) 5,004
FINANCING ACTIVITIES
Net borrowings (payments) on line of credit 3,526 (5,596) 9,207
Proceeds from term loan - - 3,000
Payments on long-term debt (1,465) (1,113) (1,254)
Net payments of long-term debt due to
Spar Marketing Services, Inc. - - (685)
Net payments to certain stockholders (482) (182) 3,500
Payments of note payable, MCI - (1,045) (9,577)
Distributions to certain stockholders - - (3,062)
Proceeds from issuance of common stock 408 32 4(11,540) 1,987 (7,904)
------------------------------------------------------
Net cash provided by (used in) financing activities 1,987 (7,904) 1,133
------------------------------------------------------
Net (decrease) increasedecrease in cash - - (2,074) 1,164
Cash at beginning of year - - 2,074 910
------------------------------------------------------
Cash at end of year $ - $ - $ 2,074-
======================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 686 $ 1,892 $ 1,394
$ 892
======================================================
NON-CASH TRANSACTIONS:
Distributions payable to certain stockholders $ - $ - $ 1,332
Equipment purchased with capital leases - - 518
See accompanying notes.
F-5
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20012002
1. BUSINESS AND ORGANIZATION
The SPAR Group, Inc., a Delaware corporation formerly known as PIA Merchandising
Services, Inc. (SPAR Group("SPAR Group", "SGRP", or the
Company)"Company"), is a supplier of in-store merchandising and marketing services
throughout the United States and Canada.internationally. The Company also provides
database marketing, teleservices and marketing research
and Internet-based software.research. As part of a strategic
realignment in the fourth quarter of 2001, the Company made the decision to
divest its Incentive Marketing Division, SPAR Performance Group, Inc. (SPGI)("SPGI").
The Company is exploringexplored various alternatives for the sale of SPGI including the sale ofand subsequently
sold the business to SPGI's employees through the establishment of an employee
stock ownership plan.plan on June 30, 2002. In addition, in October 2002, the Company
dissolved its Technology Division that was established in March 2000 for the
purpose of marketing its proprietary Internet-based computer software. The
Company anticipates that the divestiture of SPGI will occur in the first half of
2002. As a result of this decision, the
Company's continuing operations are now divided into threetwo divisions: the
Merchandising Services Division, the
Technology Division and the International Division. The
Merchandising Services Division provides merchandising services, database
marketing, teleservices and marketing research to manufacturers and retailers
with product distribution primarily in the mass merchandiser, video, discountmerchandisers, drug storechains and
grocery industries. In March 2000,stores in the Company established its Technology Division for the purpose of marketing its
proprietary Internet-based computer software. In November 2000, the Company
established itsUnited States. The International Division to focusestablished in
July 2000, currently provides merchandising services through a joint venture in
Japan and focuses on expanding its merchandisethe Company's merchandising services business
worldwide. The Incentive Marketing Division designs and
implements premium incentives, manages meetings, group travel, and training
programs principally for corporate clients.throughout the world.
MERCHANDISING SERVICES DIVISION
The Company's Merchandising Services Division consists of (1) SPAR Marketing, Inc.
(SMI)("SMI") (an intermediate holding company), SPAR Marketing Force, Inc. (SMF)("SMF"),
SPAR Marketing, Inc., (SMNEV)("SMNEV"), SPAR/Burgoyne Retail Services, Inc. (SBRS)("SBRS"),
and SPAR, Inc. (SINC) (collectively, the SPAR Marketing Companies) and (2)("SINC") 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,Merchandising Services Division provides nationwide retail merchandising and
marketing services to home video,entertainment, PC software, general merchandise,
health and beauty care, consumer goods and food products companies. The PIA Companies, a
predecessor of the Company first organizedcompanies in 1943, also is a supplier of
in-store merchandising services
F-6
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
1. BUSINESS AND ORGANIZATION (CONTINUED)
throughout the United
States, and was "acquired" by the SPAR Marketing Companies
for accounting purposes pursuant to the Merger on July 8, 1999 (see Note 3,
Business Combinations - PIA Reverse Merger, below).States. The PIA Companies provideCompany provides these services primarily on behalf of consumer
product manufacturers and retailers at mass merchandisers, drug chains and
retail grocery stores.
The Company currently operates in all 50 states and Canada and provides a broad
range of in-store merchandising and other marketing services to many of the
nation's leading companies.
Merchandising services generallyprimarily consist of special projects or regularly scheduled dedicated routed
services and special projects provided at the store level for a specific
retailer or single or multiple manufacturers primarily under single or
multi-year contracts. Services also include stand-alone large-scale
implementations. These services may include sales enhancing activities such as
ensuring that client products authorized for distribution are in stock and on
the shelf, adding new products that are approved for distribution but not
presently on the shelf, setting category shelves in accordance with approved
store schematics, ensuring that shelf tags are in place, checking for the
overall salability of client products and sellingsetting new and promotional items.items and
placing and/or removing point of purchase and other related media advertising.
Specific in-store services can be initiated by retailers or manufacturers, and
manufacturers, such asinclude new store openings, new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. These services are
used typically for large-scale implementations requiring over 30 days to
complete. The
Company also provides database marketing, teleservices and research services.
TECHNOLOGY DIVISION
In March 2000, the Company established its Technology Division,F-6
SPAR Technology
Group, Inc., and Subsidiaries
Notes to separately market its proprietary application software products
and services. The Company has developed and is utilizing several Internet-based
software products. In addition, the Company has developed and sold
Internet-based software in its other divisions. The Technology Division was
established to market these applications to businesses with multiple locations
and large workforces or numerous distributors desiring to improve day-to-day
efficiency and overall productivity.Consolidated Financial Statements (continued)
December 31, 2002
1. BUSINESS AND ORGANIZATION (CONTINUED)
INTERNATIONAL DIVISION
In NovemberJuly 2000, the Company established its International Division, SPAR Group
International, Inc. ("SGI"), to focus on expanding its merchandising services
business world-wide. Currently, the Company provides merchandising services in
Japan through a joint venture with a large Japanese distributor and is actively
pursuing expansion into other markets.
DISCONTINUED OPERATIONS - INCENTIVE MARKETING DIVISION
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly-owned
subsidiary of the Company, entered into a Stock Purchase and Sale Agreement with
Performance Holdings, Inc. ("PHI"), a Delaware corporation headquartered in
Carrollton, Texas. SIM sold all of the stock of its subsidiary, SPGI to PHI for
$6.0 million. As a condition of the sale, PHI issued and contributed 1,000,000
shares of its common stock to Performance Holdings, Inc. Employee Stock
Ownership Plan, which became the only shareholder of PHI.
The $6.0 million sales price was evidenced by two Term Loans, an Initial Term
Loan totaling $2.5 million and an Additional Term Loan totaling $3.5 million
(collectively the "Term Loans"). The Term Loans are guarantied by SPGI and
secured by pledges of all the assets of PHI and SPGI. The Term Loans bear
interest at a rate of 12% per annum through December 31, 2003. On January 1,
2004, and on January 1 each year thereafter, the interest rate is adjusted to
equal the higher of the median or mean of the High Yield Junk Bond interest rate
as reported in the Wall Street Journal (or similar publication or service if the
Wall Street Journal no longer reports such rate) on the last business day in the
immediately preceding December. The Initial Term Loan is required to be repaid
in quarterly installments that increase over the term of the loan, commencing
March 31, 2003, with a balloon payment required at maturity on June 30, 2007. In
addition to the preceding payments of the Initial Term Loan, PHI is required to
make annual mandatory prepayments of the Term Loans on February 15th of each
year, commencing on February 15, 2004, equal to:
o 40% of the amount of Adjusted Cash Flow (as defined in the Revolver)
for the immediately preceding fiscal year ended December 31; and
o 35% of the amount of excess targeted Adjusted Cash Flow (as defined in
the Revolver) for the immediately preceding fiscal year ended December
31.
These payments will be applied first to accrued and unpaid interest on the Term
Loans and Revolver, then to the Additional Term Loan until repaid, and then to
the Initial Term Loan. Because collection of the notes depends on the future
operations of PHI, the $6.0 million notes were fully reserved pending
collection.
In addition to the Term Loans, SIM agreed to provide a discretionary revolving
line of credit to SPGI not to exceed $2.0 million (the "Revolver"). The Revolver
is secured by a pledge of all the assets of SPGI and is guaranteed by PHI. The
Revolver provides for advances in excess of the borrowing base through September
30, 2003. Through September 30, 2003, the Revolver bears interest at the higher
of the Term Loans interest rate or the prime commercial lending rate as
announced in the Wall Street Journal plus 4.0% per annum. As of October 1, 2003,
the Revolver will include a borrowing base calculation (principally 85% of
eligible accounts receivable). Prior to September 1, 2003, SPGI may request that
SIM provide advances of up to $1,000,000 in excess of the borrowing base. If
advances are limited to the borrowing base on and after October 1, 2003, the
interest rate will be reduced to the higher of the Term Loans interest rate less
4.0% per annum or the prime commercial lending rate as announced in the Wall
Street Journal plus 4.0%
F-7
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
1. BUSINESS AND ORGANIZATION (CONTINUED)
DISCONTINUED OPERATIONS - INCENTIVE MARKETING DIVISION
The Company's Incentive Marketing Division was createdper annum. If SPGI requests that advances be allowed in January 1999 through
the Company's purchaseexcess of the business and substantially allborrowing
base, the interest rate will remain unchanged.
Due to the speculative nature of the assetsloan SIM has established a reserve for
collection of BIMA Group, Inc., formerly known as MCI Performance Group, Inc. (see Note 3).
The purchase was made byapproximately $0.8 million against the Company's indirect subsidiary, SPAR Performance
Group, Inc. (SPGI). SPGI provides a wide variety of consulting, creative,
program administration, travel and merchandise fulfillment, and training
services to companies seeking to retain and motivate employees, salespeople,
dealers, distributors, retailers and consumers toward certain actions or
objectives.$2.0 million Revolver
commitment. This revenue is included in other current liabilities.
In December 2001, the Company concluded that SPGI's business was no longer
consistent with the Company's future growth strategies and decided to divest
SPGI. As a result of this decision, the Company reviewed the goodwill associated with SPGI and
recorded an impairment of goodwill totaling $4.3 million, net of taxes. In addition,taxes,
including a $1.0 million reserve was recorded in 2001 for the anticipated cost to divestdispose of
SPGI and anythe anticipated losses through the date of divestiture, which is expectedJune 30, 2002.
Operating losses of $682,000 incurred from January 1, 2002, through June 30,
2002, the date of divestiture, were charged against the aforementioned reserve.
In addition, $318,000 of costs to be indispose of SPGI were also charged against the
first half of 2002.reserve. The 2001 2000 and 19992000 consolidated statements of operations have beenwere restated
to report the results of discontinued operations separately from continuing
operations. Operating results of the discontinued operations are summarized as
follows:follows (in thousands):
YEARSSIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
2002 2001 2000 1999
--------------------------------------------------
Net sales $15,735 $31,202 $28,070 $36,912
Less:
Cost of sales 13,092 26,032 22,692 30,425
Selling, general and administrative expenses 2,814 5,736 5,654
5,981
Interest expense 383 804 800
686
Depreciation 128 306 322
174
Amortization - 859 859
804
--------------------------------------------------------------------------------------------------
OPERATING LOSS (682) (2,535) (2,257)
(1,158)
Actual/pro forma provisionProvision for income tax benefit (259) (938) (858)
(595)
------------------------------------------------
ACTUAL/PRO FORMA--------------------------------------------------
NET LOSS $(1,597)$ (423) $ (1,597) $(1,399)
$ (563)
==================================================================================================
F-8
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
1. BUSINESS AND ORGANIZATION (CONTINUED)
Net non-current assets and current liabilities of discontinued operations,
classified separately in the 2001 and 2000 balance sheets,sheet, are summarized below:
2001 2000
----------------------------------------
Net non-current assets of discontinued operations:
Property and equipment $ 444 $ 429
Goodwill and other intangibles, net 4,386 11,135
Long-term liabilities - (68)
--------------------------------------
4,830 11,496
Net current liabilities of discontinued operations:
Accounts receivable, net 2,050 3,736
Prepaid expenses and other current assets 228 268
Prepaid program costs 3,470 3,543
Accounts payable (1,642) (2,927)
Accrued expenses and other current liabilities (1,727) (2,289)
Deferred revenue (7,090) (8,354)
Current portion of long-term debt (21) -
Other current charges (1,000) -
----------------------------------------
$(5,732) $ (6,023)
========================================
below (in
thousands):
2001
---------------
Net non-current assets of discontinued operations:
Property and equipment $ 444
Goodwill and other intangibles, net 4,386
---------------
$ 4,830
===============
Net current liabilities of discontinued operations:
Accounts receivable, net 2,050
Prepaid expenses and other current assets 228
Prepaid program costs 3,470
Accounts payable (1,642)
Accrued expenses and other current liabilities (1,727)
Deferred revenue (7,090)
Current portion of long-term debt (21)
Other current charges (1,000)
---------------
$(5,732)
===============
Other current charges represent the estimated costs to dispose of SPGI and the
estimated losses from
operations expected prior to the disposal of the business.
F-9
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)business on June 30, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASISPRINCIPLES OF PRESENTATION
CONSOLIDATION/COMBINATION
Through July 8, 1999, the combined financial statements include operating
companies owned by the same two stockholders (the SPAR Companies). On July 8,
1999, the SPAR Companies reorganized and completed a "reverse" merger with the
PIA Companies (see Note 3). From July 8, 1999, theCONSOLIDATION
The consolidated financial statements include the accounts of the SPAR Group, Inc.
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with maturities
of three months or less at the time of acquisition to be cash equivalents.
REVENUE RECOGNITION
The Company's services are provided under contracts, which consist primarily of
service fees and per unit fee arrangements. Revenues under service fee
arrangements are recognized when the service is performed. The Company's per
unit contracts provide for fees to be earned based on the retail sales of
client's products to consumers. The Company recognizes per unit fees in the
period such amounts become determinable.
The Company also performs services on a specific project basis over a specified
period ranging from one to 12 months. Revenues related to these projects are
recognized on a percentage of completion method as services are performed or
costs are incurred.
The Company also performs project-based services in SPGI, and the resultant
revenues are recognized upon the completion of the project.
F-10
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent services performed that are pending
billing untilbut not billed.
F-9
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company continually monitors the requisite documents have been processed or projects have been
completed.
AGENCY FUNDS
Cash balances available for the administrationcollectability of a customer's bonus program are
deposited in accounts with financial institutions in whichits account receivable
based upon current customer credit information available. Utilizing this
information, the Company acts as
agenthas established an allowance for a client pending payment settlement. Balances will fluctuate based
upon the receiptdoubtful accounts of
funds from the client. These funds are considered neither an
asset nor liability of the Company. The balance of funds held in agency accounts
totaled approximately $147,796$301,000 and $691,155 as of$325,000 at December 31, 20012002 and 2000,2001, respectively.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation and amortization are calculated on a straight-line basis over
estimated useful lives of the related assets, which range from three to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or lease term, using the straight-line method.
INTERNAL USE SOFTWARE DEVELOPMENT COSTS
The SPAR Group adoptedCompany under the rules of SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, as of January 1, 1999, which required
the capitalization ofcapitalizes certain costs
incurred in connection with developing or obtaining internal use software.
Capitalized software development costs are amortized over three years.
In 2001, 2000, and 1999, theThe Company capitalized $774,000, $430,000, $994,000, and $1,021,000$994,000 of costs related to
software developed or obtained for internal use.
F-11
SPAR Group, Inc.use in 2002, 2001 and Subsidiaries
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets consist primarily of refundable deposits.
DEFERRED REVENUE
Client payments received in advance of merchandising services performed are
classified as deferred revenue.2000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the recoverability ofits long-lived assets for impairment, whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable and the undiscounted cash flows estimated to be generated by those
total assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount 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 betweenwhich the carrying amount andof the estimatedassets exceeds the fair value of the
asset.
Prior to December 31, 2001, the Company amortized all goodwill over 15 years.assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's balance sheets include the following financial instruments:
cash
and cash equivalents, accounts receivable, accounts payable and long-term debt.a line of credit. The Company
considers the carrying amounts of current assets and liabilities in the
financial statements to approximate the fair value for these financial
instruments, because of the relatively short period of time between origination
of the instruments and their expected realization.realization or payment. The carrying
amountsamount of long-term debt approximatethe line of credit approximates fair value because the obligation
bears interest at a variablefloating rate. The carrying amount of notes payablelong-term debt to
certain stockholders approximateapproximates fair value because the current effective
interest rates reflect the market rate for unsecured debt with similar terms and
remaining maturities.
F-12F-10
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK AND OTHER RISKS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company has minimal
cash as excess cash is generally utilized to pay its bank line of credit.
One customer accounted for 26%, 25% and 20% of net revenues for the years ended
December 31, 2002, 2001 and 2000, respectively. This customer approximated 23%40%,
24% and 26% of accounts receivable at both December 31, 2002, 2001, and 2000.2000,
respectively.
A second customer accounted for 11%, 9% and 5% of the Company's net revenues for
the years ended December 31, 2002, 2001, and 2000, respectively. This second
customer also accounted for approximately 5%, 4% and 4% of accounts receivable
at December 31, 2002, 2001 and 2000, respectively.
Approximately 24%, 31%, and 18% of net revenues for the years ended December 31,
2002, 2001, and 2000, respectively, resulted from merchandising services
performed for others at one retailer that recentlyKmart stores. Kmart filed for protection under the U.S.
Bankruptcy Code.Code in January 2002. During 2002, Kmart closed a significant number
of stores in the United States. While the Company's customers and the resultant
contractual relationships are with the manufacturers and not this retailer, the
retailer, a cessation of
this retailer'sCompany's business would be negatively impact the Company.impacted if this retailer were to close
all or most of its stores.
INCOME TAXES
From commencement through July 8, 1999, certain of the SPAR Companies had
elected, to be taxed as subchapter S corporations with the exception of
SPAR/Burgoyne Retail Services, Inc., SPAR Acquisition, Inc., SPAR Incentive
Marketing, Inc. and SPAR Marketing, Inc., which were taxed as C corporations.
The stockholders of the subchapter S companies included the applicable SPAR
Company's corporate income in their personal income tax returns. Accordingly,
these subchapter S companies were not subject to federal corporate income tax
during the period for which they were S corporations. In certain states, income
taxes were a direct responsibility of the Company.
In connection with the Company's July 1999 reorganization, the subchapter S
status of each applicable SPAR Company was terminated. Income taxes are provided
for the tax effects of transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related primarily to
differences between the basis of assets and liabilities for financial and tax
reporting. The deferredDeferred tax assets and liabilities represent the future tax return consequences
of thosecertain timing differences whichthat will either be taxable or
F-13
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) deductible when the
assets and liabilities are recovered or settled. Deferred taxes are also
recognized for operating losses that are available to offset future taxable
income and tax credits that are available to offset future income taxes. In the
event the future consequences of differences between financial reporting bases
and tax bases of the Company's assets and liabilities result in net deferred tax
assets, an evaluation of the probability of being able to realize the future
benefits indicated by such asset is required. A valuation allowance is provided
when it is more likely than not that some portion or the entire deferred tax
asset will not be realized.
F-11
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation, requires disclosure of fair value method of accounting for
stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. The Company has chosen, under the provisions of SFAS No. 123, to
continue to account for employee stock-based transactions under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
The Company has disclosed in Note 119 to the consolidated financial statements
actual and pro forma basic and diluted net income (loss) per share as if the
Company had applied the fair value method of accounting.
PRO FORMA
EARNINGS PER SHARE
Basic earnings per share amounts are based upon the weighted average number of
common shares outstanding. Diluted earnings per share amounts are based upon the
weighted average number of common and potential common shares outstanding for
each period represented. Potential common shares outstanding include stock
options, using the treasury stock method.
F-14
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the consolidated and combined financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NEWF-12
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued StatementsPOLICIES (CONTINUED)
GOODWILL
The Company adopted Statement of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001.in the first quarter of 2002. Under the
new rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of Statement is expected to result in an increase in
net income from continued operations of approximately $0.8 million ($0.04 per
share based on current outstanding shares) per year.Statement. During 2002, the Company
will perform the first ofperformed the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effectgoodwill. As a result of these tests,
will bethere was no effect on the earnings and financial position of the Company.
In October 2001,The following table presents the FASB issued SFAS No. 144, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which is
effective for fiscal years beginning after June 15, 2002. This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of Accounting Principles Board (APB) Opinion
No. 30, Reporting the Results of Operations for a disposal of a segment of a
business. The adoption of this pronouncement is not expected to have a material
impact on the Company's consolidated results of operations, financial position,
or cash flows.
F-15
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the 2001 presentation.
3. BUSINESS COMBINATIONS
MCI ACQUISITION
On January 15, 1999, SPGI acquired substantially all the business and assets
(the MCI Acquisition) of BIMA Group, Inc., a Texas corporation formerly known as
MCI Performance Group, Inc. (MCI), pursuant to their Asset Purchase Agreement
dated as of December 23, 1998, as amended (the MCI Purchase Agreement). The
transaction was accounted for as a purchase and consisted of consideration of
$1.8 million cash, an $8.8 million note (as amended) payable to MCI (the MCI
Note) and the assumption of certain agreed-upon liabilities (the MCI Purchase
Price).
The MCI Purchase Price was allocated to the assets acquired by SPGI, as agreed
upon in a schedule to the MCI Purchase Agreement, which generally used their
respective carrying values, as these carrying values were deemed to represent
fair market values of those assets and liabilities. The excess purchase price
paid by SPGI for the business and assets of MCI over the fair value of those
assets was $13.0 million, and was being amortized using the straight-line method
over 15 years. (See Note 1 Discontinued Operations.)
PIA REVERSE MERGER
On July 8, 1999, SG Acquisition, Inc., (PIA Acquisition), a wholly owned
subsidiary of PIA Merchandising Services, Inc., (PIA Delaware), merged into and
with SPAR Acquisition, Inc., (SAI) (the Merger) pursuant to the Agreement and
Plan of Merger dated as of February 28, 1999, as amended (the Merger Agreement),
by and among (i) PIA Delaware, PIA Merchandising Co., Inc. (PIA California), and
PIA Acquisition (collectively, the PIA Parties), and (ii) SAI, SPAR Marketing,
Inc. (SMI), SPAR Marketing Force, Inc. (SMF), SPAR Marketing, Inc. (SMNEV),
SPAR, Inc. (SINC), SPAR/Burgoyne Retail Services, Inc. (SBRS), SPAR Incentive
Marketing, Inc. (SIM), SPAR Performance Group, Inc. (SPGI) and SPAR Trademarks,
Inc. (STM) (each a SPAR Company and collectively, the SPAR Companies).
F-16
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
PIA Delaware (pre-Merger only), PIA California and each of the PIA California's
direct and indirect subsidiaries (i.e., Pacific Indoor Display Co., Inc.
(Pacific), Pivotal Sales Company (Pivotal) and PIA Merchandising Limited (PIA
Canada), may be referred to individually as a "PIA Company" and collectively as
the "PIA Companies."
In connection with the Merger, PIA Delaware changed its name to SPAR Group, Inc.
(referred to post-Merger individually as SGRP or the Company). Although the SPAR
Companies became subsidiaries of PIA Delaware (now SGRP) as a result of this
"reverse" Merger, the transaction was accounted for as required under generally
accepted accounting principles as a purchase by the SPAR Companies of the PIA
Companies, with the books and records of SGRP being adjusted to reflect the
historical operating results of the SPAR Companies.
InCompany for all periods
presented on a comparable basis (in thousands except per share information):
2002 2001 2000
------------------- ------------------- --------------------
Reported net income (loss) $ 5,298 $ (1,714) $ 1,322
Add: Goodwill amortization - 771 866
------------------- ------------------- --------------------
Adjusted net income (loss) $ 5,298 $ (943) $ 2,188
=================== =================== ====================
Basic and diluted net income (loss)
per share:
Reported net income (loss) $ 0.28 $ (0.09) $ 0.07
Add: Goodwill amortization - 0.04 0.05
------------------- ------------------- --------------------
Adjusted net income (loss) $ 0.28 $ (0.05) $ 0.12
=================== =================== ====================
Prior to 2002, the transaction, the former shareholders and optionholders of SAI received
approximately 12.7 million shares of common stock and 134,114 common stock
options, respectively. The purchase price of approximately $12.3 million was
allocated based on the estimated fair value of the assets of the PIA Companies
deemed for accounting purposes to have been acquired by the SPAR Companies.
TheCompany amortized all goodwill that resulted from the Merger was calculated after giving effect to
the merger costs of the PIA Companies totaling $2.4 million and the anticipated
restructuring costs that are directly related to the Merger totaling $9.4
million (see Note 13, below). The excess purchase price deemed paid by the SPAR
Companies for the assets of the PIA Companies over the fair value of those
assets was $13.7 million and is being amortized, prior to December 31, 2001,
using the straight-line method over 15 years. In 2000, the amount of goodwill
related to this transaction was adjusted with an increase of approximately $2.0
million for additional pre-merger related liabilities and restructure related
costs and a decrease of approximately $1.8 million as a result of a change in
the valuation allowance on deferred taxes.
In 2001, the amount of goodwill related to this transactionthe July 1999 merger of SPAR
Companies and PIA Merchandising Services, Inc. ("PIA") decreased approximately
$1.2 million as a result of the reduction of estimates associated with
pre-merger related liabilities and restructure reserves. F-17In 2002, the amount of
goodwill related to this transaction decreased approximately $0.5 million as a
result of a change in the valuation allowance required on deferred tax assets
related to the PIA operating loss carryforward.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the 2002 presentation.
F-13
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4.December 31, 2002
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts receivable, net, consists of the following (in thousands):
DECEMBER 31,
2002 2001
2000
-----------------------------------------------------------------------
Trade $16,366 $16,453$ 11,973 $ 16,366
Unbilled 5,743 5,095
5,666
Non-trade - 8
-
-----------------------------------------------------------------------
17,716 21,469 22,119
Less allowance for doubtful accounts and other301 325
2,648
------------------------------------
$21,144 $19,471
====================================
Goodwill and other intangibles, net, consists of the following (in thousands):
DECEMBER 31
2001 2000
------------------------------------
Goodwill and other intangibles $10,512 $11,734
Less accumulated amortization 2,155 1,384
-----------------------------------------------------------------------
$ 8,357 $10,350
====================================17,415 $ 21,144
===================================
Property and equipment consists of the following (in thousands):
DECEMBER 31,
2002 2001
2000
------------------------------------
-----------------------------------
Equipment $3,818 $2,817$ 4,175 $ 3,792
Furniture and fixtures 509 518509
Leasehold improvements 123138 123
Capitalized software development costs 3,278 2,504
2,073
------------------------------------
6,954 5,531-----------------------------------
8,100 6,928
Less accumulated depreciation and amortization 4,310 2,399
------------------------------------
$2,644 $3,132
====================================6,128 4,284
-----------------------------------
$ 1,972 $ 2,644
===================================
F-18F-14
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
4.3. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
Accrued expenses and other current liabilities consists of the following (in
thousands):
DECEMBER 31,
2002 2001
2000
---------------------------------------------------------
Accrued salaries and other related costs $1,831 $1,929
Accrued medical and compensation insurance 4 165
Amounts held on behalf of third parties - 82$ 321 $1,224
Accrued merger related costs 1,945 2,397
3,661Due to SPGI (cash deposits) 917 -
Other 2,914 1,636
2,807
---------------------------
$5,868 $8,644
===========================
5.------------------------------
$6,097 $5,257
==============================
4. LINE OF CREDIT AND LONG-TERM LIABILITIES
In 1999, IBJJanuary 2003, the Company and Whitehall Business Credit Corporation
("IBJ Whitehall") and the
members of the SPAR Group (other than PIA Canada) (collectively, the Borrowers), entered into athe Third Amended and Restated Revolving Credit Term Loan and
Security Agreement as amended
(the Bank Loan Agreement)"New Credit Facility"). The Bank Loan AgreementNew Credit Facility provides
the Borrowers with a $15.0 million Revolving Credit facility and a $2.5 million term loan.Facility that matures on
January 23, 2006. The Revolving Credit facilityFacility allows the Borrowers to borrow
up to $15.0 million based upon a borrowing base formula as defined in the
Agreementagreement (principally 85% of "eligible" accounts receivable). The Bank Loan Agreement's revolving credit
loansNew Credit
Facility bears interest at Whitehall's "Alternative Base Rate" or LIBOR plus two
and one-half percent and is secured by all the assets of $15.0 million werethe Company and its
subsidiaries.
The New Credit Facility replaces a previous 1999 agreement between the Company
and IBJ Whitehall Business Credit Corporation (the "Old Credit Facility") that
was scheduled to mature on September 21, 2002. On March
1, 2002, IBJ Whitehall extended the maturity date to February 28, 2003. The Old Credit Facility as amended
provided for a $15.0 million Revolving Credit Facility, as well as a $2.5
million Term Loan. The Revolving Credit facility allowed the Borrowers to borrow
up to $15.0 million based upon a borrowing base formula as defined in the
agreement (principally 85% of "eligible" accounts receivable). The Term Loan
amortized in equal monthly installments of $83,334 and was repaid in full as of
December 31, 2001. The revolving loans bearbore interest at IBJ Whitehall's "Alternate
Base Rate" plus one-half of one percent (0.50%) (a total of 5.25%4.75% per annum at
December 31, 2001)2002).
In addition, the Borrowers are required to make
mandatory prepayments in an amount equal to 25% of Excess Cash Flow, as defined
in the Bank Loan Agreement, for each fiscal year, to be applied first to the
Term Loan and then to the revolving credit loans (subject to the Borrowers'
ability to re-borrow revolving advances in accordance with the terms of the Bank
Loan Agreement). In July 2001, the Company made an additional $250,000 payment
on the Term Loan as a result of the Excess Cash Flow requirement. The facility
is secured with all the assets of the Company and its subsidiaries.
F-19
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
5. LINE OF CREDIT AND LONG-TERM LIABILITIES (CONTINUED)
The Bank Loan Agreement containsBoth Credit Facilities contain an option for the BankWhitehall to purchase 16,667 shares
of common stockCommon Stock of the Company for $0.01 per share in the event that the
Company's average closing share price over a ten consecutive trading day period
exceeds $15.00 per share. This option expires September 22, 2002.
The Bank Loan Agreement containson July 31, 2003.
Both Credit Facilities contain certain financial covenants which must be met by
the Borrowers on a consolidated basis, among which are a minimum "Net Worth,"Worth", a
"Fixed Charge Coverage Ratio,"Ratio", a minimum ratio of Debt to EBITDAcapital expenditure limitation and a minimum
EBITDA, as such terms are defined in the Bank Loan Agreement.respective agreement. The Company was
in compliance with all such financial covenants at December 31, 2001, with the
exception of the minimum net worth covenant (due to the estimated loss on
disposal of discontinued operations) for which a waiver was obtained from IBJ
Whitehall.2002.
The balances outstanding on the revolving line of credit under the Old Credit
Facility were $11.3$0.1 million and $7.8$11.3 million at December 31, 20012002, and December
31, 2000,2001, respectively. As of December 31, 20012002, based upon the borrowing base
formula, the SPAR Group had availability under the Old Credit Facility of $2.9$11.1
million of the $3.7$14.9 million unused revolving line of credit. Availability would
have been the same under the New Credit Facility had it been in effect on
December 31, 2002.
F-15
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
4. LINE OF CREDIT AND LONG-TERM LIABILITIES (CONTINUED)
The Company's line of credit and long-term liabilities consist of the following
at December 31 (in thousands):
2002 2001 2000
---------------------------
Revolving line of credit, maturing February 2003 $148 $11,287 $7,761
Term loan - 1,250
Other long-term liabilities - 57
225
---------------------------
$148 11,344 9,236
Current maturities of long-term liabilities - 57
1,143
---------------------------
$148 $11,287
$8,093
===========================
Maturities of long-term debt at December 31, 2001 are as follows (in thousands):
Year ending December 31:
2002 $ 57
2003 11,287
-------
$11,344
=======
F-20
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
6.5. INCOME TAXES
The provision for income tax (benefit) expense from continuing operations is summarized as
follows (in thousands):
YEAR ENDED DECEMBER 31,
2002 2001 2000
1999
----------------------------------------------------------------------- ------------------ ------------------
Current $3,081 $533 $643$ 476 $ 109 -
Deferred 42 247 -
------------------------------------------------------2,522 3,014 $780
----------------- ------------------ ------------------
$2,998 $3,123 $780
$643
======================================================================= ================== ==================
The provision for income taxes from continuing operations is different from that
which would be obtained by applying the statutory federal income tax rate to
income before income taxes. The items causing this difference are as follows (in
thousands):
YEARSYEAR ENDED DECEMBER 31,
2002 2001 2000
---------------------------------- ----------- ----------
Provision for income taxes at federal
statutory rate $2,821 $2,475 $1,190
State income taxes, net of federal benefit 175 317 140
Other permanentPermanent differences (48) 317 321
Change in valuation allowance - - (825)
Other 50 14 (46)
---------------------------------- ----------- ----------
Provision for income taxes $2,998 $3,123 $ 780
=======================
F-21=========== =========== ==========
F-16
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6.December 31, 2002
5. INCOME TAXES (CONTINUED)
Deferred taxes consist of the following (in thousands):
DECEMBER 31,
2002 2001
2000
------------------------------------
Deferred tax assets:
Deferred tax assets:
Net operating loss carryforwards $3,876 $4,150
$5,750
Restructuring 454 879 1,444
Accrued compensation vacation and pension 229 290
Accrued insurance 217 545related benefits 160 446
SIM reserve against loan commitment 320 -
Allowance for doubtful accounts and other receivable 114 166
1,065
Estimated lossLoss on disposal of incentive business SPGI - 2,618
-
Other net206 290 387
Valuation allowance (3,126) (3,622) (4,259)
------------------------------------
Total deferred tax assets 2,004 4,927 5,222
Deferred tax liabilities:
Nonrecurring charge for termination of Subchapter S election - 797 1,993
Capitalized software development costs 396 500 429
------------------------------------
Total deferred tax liabilities 396 1,297 2,422
------------------------------------
Net deferred tax assets $1,608 $3,630 $2,800
====================================
At December 31, 2001,2002, the Company has net operating loss carryforwards (NOLs) of
$10.9$10.2 million available to reduce future federal taxable income. The Company's
net operating loss carryforwards begin to expire in the year 2012. Section 382
of the Internal Revenue Code restricts the annual utilization of the NOLs
incurred prior to a change in ownership. Such a change in ownership hashad occurred
in connection with the PIA Merger,1999, thereby restricting the NOLs prior to such date available to the
Company to approximately $12.5 million over 18 years.$657,500 per year.
The Company has established a valuation allowance for the deferred tax assets
related to the available NOLs that are deductible for years subsequent to 20032005
totaling $3,622,000.$3,126,000. The entire $3,622,000$3,126,000 valuation allowance at December 31, 2001 if2002
when realized will result in a reduction of goodwill associated with the PIA
acquisition. F-22
SPAR Group, Inc.In 2002 and Subsidiaries
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Deferred tax assets have been offset by a2001, the Company reduced the valuation allowance as deemed
necessary based on the Company's estimates of its future sources of taxable
income and
the expected timing of temporary difference reversals.goodwill by $499,000 and $250,000 respectively. In 2001, in addition to the
goodwill adjustment discussed above, the Company also realized the benefit of
certain deferred tax assets and recorded a $637,000 change in itsdecreased the valuation allowance. A portion of the benefit
recorded resulted in a $250,000 reduction of goodwill associated with the PIA
acquisition.
In 2000, the Company realized the benefit of certain deferred tax assets and
recorded a $2,680,000 change in its valuation allowance. The benefit recorded
resulted in a $825,000 reduction of tax expense and a $1,855,000 reduction of
Goodwill associated with the PIA acquisition.
As a result of the July 8, 1999 PIA Merger (see Note 3), the subchapter S status
of each applicable SPAR Company was terminated for federal and state tax
purposes, and the SPAR Group recorded a deferred tax charge against income of
$3.1 million for the cumulative differences between the financial reporting and
income tax basis of certain assets and liabilities existing at that date.
Additionally, each such SPAR Company was required to change its method of
accounting from the cash basis to the accrual basis for income tax reporting
purposes.
The SPAR Group expects to be able to offset the deferred tax liabilityallowance by utilizing a deferred tax asset from the benefit of the PIA Companies' net
operating loss carryforwards. The individuals who were the stockholders of the
applicable SPAR Companies at that time were obligated to pay the 1999 and prior
income taxes relating to taxable income during the periods up to the Merger
date.
The pro forma disclosure on the statement of operations reflect adjustments to
present the provision for income taxes as if the applicable SPAR Company had not
been S corporations. The pro forma provisions for income taxes for the year
ended December 31, 1999, of $1.8 million from continuing operations is computed
using a combined federal and state tax rate of 37% of taxable income.
F-23$387,000.
F-17
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The one-time, non-cash stock related compensation expense recorded in the year
ended December 31, 1999 of approximately $752,000 is not tax-deductible by the
SPAR Group for federal and state income tax purposes. In addition, the
amortization of purchased goodwill generated by the reverse Merger is not
tax-deductible. The pro forma tax provision for the year ended December 31, 1999
has been adjusted for the effects of these non-tax-deductible items.
7. COMBINED SHAREHOLDERS' EQUITY
Prior to the July 8, 1999 Merger, the subchapter S status of each applicable
SPAR Company was terminated for federal and state tax purposes. As of July 8,
1999, undistributed earnings of the SPAR Group were reclassified to additional
paid-in capital.
8.2002
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases equipment and certain office space in several cities, under
non-cancelable operating lease agreements. Certain leases contain escalation
clauses and require the Company to pay its share of any increases in operating
expenses and real estate taxes. Rent expense was approximately $1.0 million,
$1.1$1.0 million, and $1.4$1.1 million for the years ended December 31, 2002, 2001, 2000, and
1999,2000, respectively. At December 31, 2001,2002, future minimum commitments under all
noncancelablenon-cancelable operating lease arrangements are as follows (in thousands):
2002 $1,176
2003 918$1,004
2004 779831
2005 511562
2006 492
--------------
$3,876
==============
F-24
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL545
2007 54
MATTERS
In June 2000, Argonaut Insurance Co. filed a complaint alleging damages of
approximately $883,000 plus interest against the Company in Orange County
Superior Court, Santa Ana, California Case No. 00CC07125 with respect to alleged
breach of contract. In February 2002, this case was settled for $700,000. The
liability was accrued at December 31, 2001, as part of the accrued merger
related costs.
On October 24, 2001, Safeway Inc., a former customer of the PIA Companies, filed
a complaint alleging damages of approximately $3.6 million plus interest and
costs and alleged punitive damages in an unspecified amount against the Company
in Alameda County Superior Court,
California, Case No. 2001028498 with respect to (among other things) alleged breach of contract.contract with the PIA
companies. On or about December 30, 2002, the Court approved the filing of
Safeway Inc.'s Second Amended Complaint, which alleges causes of action for
(among other things) breach of contract against the Company, PIA Merchandising
Co., Inc. and Pivotal Sales Company. The Second Amended Complaint was filed with
the Court on January 13, 2003, and does not specify the amount of monetary
damages sought. No punitive or exemplary damages are sought in Safeway Inc.'s
Second Amended Complaint. This case is being vigorously contested by the
Company.
The Company is a party to various legal actions and administrative proceedings
arising in the normal course of business. In the opinion of Company management,
disposition of these matters are not anticipated to have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
9.F-18
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
7. EMPLOYEE BENEFITS
RETIREMENT/PENSION PLANS
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible
employees. Employer contributions were approximately $93,000, $64,000,$117,000, $118,000, and
$63,000$68,000 for the years ended December 31, 2002, 2001, 2000, and 1999,2000, respectively.
Certain of the Company's PIA employees are covered by union-sponsored,
collectively bargained, multi-employer pension plans. Pension expense related to
these plans was approximately $60,000, $77,000, $24,000, and $30,000$24,000 for the years ended
December 31, 2002, 2001, and 2000, and 1999, respectively.
F-25
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
9. EMPLOYEE BENEFITS (CONTINUED)
STOCK PURCHASE PLANS
The Company has an Employee and Consultant Stock Purchase Plans (SP Plans)(the "SP Plans").
The SP Plans allow employees and consultants of the Company to purchase common
stock, at a discount, without having to pay any commissions on the purchases. On August 8,
2002, the Company's Board of Directors approved a 15% discount for employee
purchases and a 15% cash bonus for affiliate consultant purchases. The maximum
amount that any employee or consultant can contribute to the SP Plans per
quarter is $6,250, and the total number of shares reserved by the Company for
purchase under the SP Plans is 500,000. During 2002, 2001 2000 and 1999,2000, the Company
issuedsold 10,104 shares, 2,638 shares, 452 shares, and 7,568452 shares of common stock, at a weighted
average price of $2.51, $1.90, $3.03, and $2.71$3.03 per share, respectively.
10.F-19
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
8. RELATED-PARTY TRANSACTIONS
The SPAR Group, Inc. is affiliated through common ownership with SPAR Marketing
Services, Inc. (SMS)("SMS"), SPAR Management Services, Inc., Affinity (f/k/a Infinity)
Insurance Ltd. ("SMSI") and SPAR
Infotech, Inc. The Company purchases("SIT"). SMS and SMSI (through SMS) provided approximately 71% of
the Company's field representatives (through its independent contractor field
force) and substantially all of the Company's field management services. Under
the terms of the Field Service Agreement, SMS provides the services of
approximately 6,600 field representatives and through SMSI provides
approximately 90 full-time national, regional and district managers to the use of independent
contractor services from SPAR Management Services, Inc. and SPAR
Marketing Services, Inc., respectively.
TheCompanies as they may request from time to time, for which the Company
purchaseshas agreed to pay SMS for all of its costs of providing those services plus 4%.
SIT provided Internet consultingcomputer programming services to the Company. Under the
terms of the programming agreement between SMF and SIT effective as of October
1, 1998, SIT continues to provide programming services to SMF as SMF may request
from SPAR Infotech, Inc.time to time, for which SMF has agreed to pay SIT competitive hourly wage
rates and to reimburse SIT's out-of-pocket expenses
The following transactions occurred between the SPAR Companies and the above
affiliates (in thousands):
YEARS ENDED DECEMBER 31
2001 2000 1999
-----------------------------------
Services provided by affiliates:
Independent contractor services $8,337 $5,177 $4,111
===================================
Field management services $6,779 $4,388 $4,344
===================================
Internet consulting services $1,185 $ 769 $ 608
===================================
YEAR ENDED DECEMBER 31,
2002 2001 2000
--------------------------------------------------
Services provided by affiliates:
Independent contractor services $ 23,262 $ 8,337 $ 5,177
==================================================
Field management services $ 7,280 $ 6,779 $ 4,388
==================================================
Internet and software program consulting services $ 1,626 $ 1,185 $ 769
==================================================
Services provided to affiliates:
Management services $ 732 $ 390 $ 692
==================================================
Balance due to (from) affiliates included in
accrued liabilities (in thousands): DECEMBER 31,
2002 2001 2000
-----------------------------------------
SPAR Management Services, Inc. $ - $ - $ (26)
SPAR Marketing Services, Inc. 932 611 582
SPAR Infotech, Inc. 26 - (4)
-----------------------------------------
$ 958 $ 611 $ 552
=========================================
In addition to affiliates:
Management services $ 390 $ 692 $ 665
===================================
F-26
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
10. RELATED-PARTY TRANSACTIONS (CONTINUED)
Throughthe above, through the services of Affinity (f/k/a Infinity)
Insurance, Ltd., the Company purchased insurance coverage for its casualty and
property insurance risk for approximately $1,085,000,$1,128,000, 1,085,000 and $994,000 and $959,000 for
the years ended December 31, 2002, 2001, December 31,and 2000, and December 31, 1999, respectively (in thousands).
DECEMBER 31
2001 2000
----------------------
Balance due to (from) affiliates included in accrued
liabilities:
SPAR Management Services, Inc. $ - $(26)
SPAR Marketing Services, Inc. 611 582
SPAR Infotech, Inc. - (4)
----------------------
$611 $552
======================
In 1999, therespectively.
The Company had an investment in an affiliate whichthat provided telemarketing and
related services. Inservices that was sold in 2000 the Company sold its interests in
the affiliate for $1.5 million, and recordedfor a gain of
approximately $790,000 that was included in other income.
In 2000, the Company's affiliate SMS settled its claim with the Internal Revenue
Service. As a result of this settlement, the $500,000 contingent liability
amount the Company had accrued at December 31, 1999, was reversed with a
corresponding credit made to cost of revenues.
11.F-20
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
9. STOCK OPTIONS
The Company has fivefour stock option plans: the 1990 Stock Option Plan (1990 Plan), the Amended and Restated 1995 Stock
Option Plan (1995 Plan), the 1995 Director's Plan (Director's Plan), the Special
Purpose Stock Option Plan, and the 2000 Stock Option Plan (2000 Plan).
The 1990 Plan is a nonqualified option plan providing for the issuance of up to
830,558 shares of common stock to officers, directors, and key employees. The
options have a term of ten years and one week and are either fully vested or
will vest ratably no later than five years from the grant date. Since 1995, the
Company has not granted any new options under this plan.
F-27
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
The 1995 Plan provided for the granting of either incentive or nonqualified
stock options to specific employees, consultants, and directors of the Company
for the purchase of up to 3,500,000 shares of the Company's common stock. The
options havehad a term of ten years from the date of issuance, except in the case of
incentive stock options granted to greater than 10% stockholders for which the
term iswas five years. The exercise price of nonqualified stock options must behave
been equal to at least 85% of the fair market value of the Company's common
stock at the date of grant. Since 2000, the Company has not granted any new
options under this Plan. During 2001,At December 31, 2002, options to purchase 2,349,825 shares of the Company's common stock under the
1995 Plan were voluntarily surrendered and canceled, and no options to purchase
shares of the Company's common stock were exercised under this Plan. At December
31, 2001, options to purchased 81,12572,000 shares
of the Company's common stock remain outstanding under this Plan. The 1995 Plan
has been replacedwas superceded by the 2000 Plan.Stock Option Plan with respect to all new options
issued.
The Director's Plan was a stock option plan for non-employee directors and
provided for the purchase of up to 100,000120,000 shares of the Company's common stock.
Since 2000, the Company has not granted any new options under this Plan. During
2001, no options to purchase shares of the Company's common stock were exercised
under this Plan. At
December 31, 2001, no2002, 20,000 options to purchase shares of the Company's common
stock remained outstanding under this Plan. The Director's Plan has been
replaced by the 2000 Plan.Plan with respect to all new options issued.
On July 8, 1999, in connection with the merger, the Company established the Special Purpose Stock Option Plan
of PIA Merchandising Services, Inc. to provide for the issuance of substitute
options to the holders of outstanding options granted by SPAR Acquisition, Inc.
There were 134,114 options granted at $0.01 per share. Since July 8, 1999, the
Company has not granted any new options under this plan. During 2001,2002, no options
to purchase shares of the Company's common stock were exercised under this Plan.
At December 31, 2001,2002, options to purchase 25,750 shares of the Company's common
stock remain outstanding under this Plan.
On December 4, 2000, the Company adopted the 2000 Plan as the successor to the
1995 Plan and the Director's Plan with respect to all new options issued. The
2000 Plan provides for the granting of either incentive or nonqualified stock
options to specified employees, consultants, and directors of the Company for
the purchase of up to 3,600,000 (less those options still outstanding under the
1995 Plan or exercised after December 4, 2000, under the 1995 Plan). The options
have a term of ten years from the date of issuance except in
F-28
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED) the case of
incentive stock options granted to greater than 10% stockholders for whom the
term is five years. The exercise price of nonqualified stock options for tax
purposes must be equal to at least 85% of the fair market value of the Company's
common stock at the date of grant (although typically such options are issued at
100%) of the fair market value), and the exercise price of incentive stock
options must be equal to at least the fair market value of the Company's common
stock at the date of grant. During 2001,At December 31, 2002, options to purchase 2,567,344 shares of the Company's common stock were granted
under this Plan. Options to purchase 309,492 shares of the Company's common
stock were exercised under this Plan during 2001. At December 31, 2001, options
to purchase 2,356,8521,980,431
shares of the Company's common stock remain outstanding under this Plan and
options to purchase 852,5311,079,614 shares of the Company's common stock were
available for grant under this Plan.
F-21
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
9. STOCK OPTIONS (CONTINUED)
In 2001, the Company adopted its 2001 Employee Stock Purchase Plan (the "ESP
Plan"), which replaces its earlier existing plan, and its 2001 Consultant Stock
Purchase Plan (the "CSP Plan"). These plans were each effective as of June 1,
2001. The ESP Plan allows employees of the Company and its subsidiaries, and the
CSP Plan allows employees of the affiliates of the Company (see Note 8 - Related
Party Transactions), to purchase the Company's Common Stock from the Company
without having to pay any brokerage commissions. On August 8, 2002, the
Company's Board of Directors approved a 15% discount for employee purchases of
Common Stock under the ESP Plan and a 15% cash bonus for affiliate consultant
purchases of Common Stock under the CSP Plan.
The following table summarizes stock option activity under the Company's plans:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------------------------------
Options outstanding at July 8, 1999, date of reverse
merger 1,438,285 $5.91
Granted 2,294,858 4.82
Exercised (10,811) 2.78
Canceled or expired (416,810) 5.51
----------------
Options outstanding, December 31, 1999 3,305,522 5.22
Granted 479,500 2.59
Exercised (115,864) .27
Canceled or expired (679,309) 5.94
----------------
Options outstanding, December 31, 2000 2,989,849 4.82
Granted 2,564,844 2.48
Exercised (309,492) 1.30
Canceled or expired (2,761,474) 5.00
----------------
Options outstanding, December 31, 2001 2,483,727 2.63
================
Option price range at end of year $0.01 TOWEIGHTED
AVERAGE EXERCISE
SHARES PRICE
---------------------------------
Options outstanding, December 31, 1999 3,305,522 $5.22
Granted 479,500 2.59
Exercised (115,864) .27
Canceled or expired (679,309) 5.94
-------------------
Options outstanding, December 31, 2000 2,989,849 4.82
Granted 2,564,844 1.31
Exercised (309,492) 1.30
Canceled or expired (2,761,474) 5.00
-------------------
Options outstanding, December 31, 2001 2,483,727 1.42
Granted 332,792 2.01
Exercised (230,463) 1.23
Canceled or expired (487,875) 5.05
-------------------
Options outstanding, December 31, 2002 2,098,181 1.52
Option price range at end of year $0.01 to $14.00
F-29F-22
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11.December 31, 2002
9. STOCK OPTIONS (CONTINUED)
2002 2001 2000 1999
--------------------------------------------------
Weighted average grant date fair value of
options granted during the year $1.60 $1.28 $2.59 $4.94$1.68
In January 2001, 2,349,825 options issued under the 1995 Stock Option Plan with
a weighted average exercise price of $4.97 were cancelled. In August 2001,
replacement options were granted under the Company's 2000 Plan.
The following table summarizes information about stock options outstanding at
December 31, 2001:2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, 2002 CONTRACTUAL EXERCISE DECEMBER 31, AVERAGE
EXERCISE PRICES 2001 LIFE PRICE 20012002 EXERCISE PRICE
-------------------- ------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------
Less than $1.00 219,769 9.0217,593 8.0 years $0.56 77,144$0.53 137,343 $ 0.220.42
$1.01 - $2.00 1,838,994 8.21,629,588 6.6 years 1.34 388,917815,927 1.30
$2.01 - $4.00 41,125 8.1219,000 9.1 years 3.16 15,3752.49 24,750 3.13
Greater than $4.00 383,839 9.232,000 4.7 years 9.97 29,500 11.10
----------------- -------------10.63 29,000 11.21
------------------ ----------------
Total 2,483,727 8.42,098,181 7.0 years 2.63 510,936 1.751.52 1,007,020 1.51
================== =============================
Outstanding warrants are summarized below:
SHARES EXERCISE
SUBJECT TO PRICE PER
WARRANTS SHARE
------------------------------------
Balance, December 31, 2001 96,395 $2.78SHARES SUBJECT EXERCISE PRICE
TO WARRANTS PER SHARE
---------------------------------
Balance, December 31, 2002 113,062 $0.01 - $8.51
The above warrants expire at various dates from 20022003 through 2004.
F-30F-23
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11.December 31, 2002
9. STOCK OPTIONS (CONTINUED)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation.Compensation as amended by SFAS 148. No compensation
cost has been recognized for the stock option plans. Had compensation cost for
the Company's option plans been determined based on the fair value at the grant
date consistent with the provisions of SFAS No. 123, the Company's net income
(loss) and pro forma net income (loss) per share from continuing operations
would have been reduced to the adjusted amounts indicated below (in thousands,
except per share data):
YEAR ENDED DECEMBER 31,
2002 2001 2000 1999
----------------------------------------------
Actual/pro forma netNet income (loss) income,, as reported $(1,714) $1,322 $1,242$ 5,298 $ (1,714) $ 1,322
Stock based employee compensation (benefit) expense
under the fair market value method 1,844 (1,129) 1,957
----------------------------------------------
Pro forma net loss, as adjustedincome (loss) 3,454 (585) (635)
(1,011)
Actual/pro forma basicBasic and diluted net income (loss)
income per share, as
reported $ 0.28 $ (0.09) $ 0.07
$ 0.08
Actual/pro forma basicBasic and diluted net lossincome (loss) per share as adjusted$ 0.18 $ (0.03) $(0.03) $(0.07)$ (0.03)
The pro forma effect on net income is not representative of the pro forma effect
on net income in future years because the options vest over several years and
additional awards may be made in the future.
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0% for all years; volatility factor of expected
market price of common stock of 187%85%, 237%187%, and 186%237% for 2002, 2001, 2000, and 1999,2000,
respectively; risk-free interest rate of 5.14%4.03%, 6.89%5.14%, and 5.65%6.89%; and expected
lives of six years.
F-31
SPAR Group, Inc. and Subsidiaries
Notes to Financial Statements (continued)
12.10. NOTES PAYABLE TO CERTAIN STOCKHOLDERS
Former principal stockholders of the SPAR Companies each made loans to certain
SPAR Companies in the aggregate amount of $4.3 million to facilitate the
acquisition of the PIA Companies and the acquisition of the assets of MCI. These
stockholders also were owed $1.9 million in unpaid distributions relating to the
former status of most of the operating SPAR Companies as subchapter S
corporations. Those amounts totaling $6.2 million were converted into promissory
notes issued to these certain stockholders severally by SMF, SINC and SPGI prior
to the Merger.
As of December 31, 2001,2002, notes payable to certain stockholders total
$4.7approximately $4.0 million, which havebear an interest rate of 8.0% and are due on
demand. The current
bank agreements containIn January 2003, $3.0 million was repaid to such stockholders. While the
New Credit Facility contains certain restrictions on the repayment of
stockholder debt, and accordingly $2.0 million at both December 31, 2001 and 2000 is
classified as long-term.
13.the Company anticipates paying the remaining balance in 2003.
11. SEGMENTS
As a result of the Company's decision to divestdivestiture of its Incentive Marketing Division,
the Company now operates solely in the Merchandising Services Industry Segment.
14.Segment
both in the domestic and international markets.
12. RESTRUCTURING AND OTHER CHARGES
In connection with the PIA Merger,1999, the Company's Board of Directors approved a plan to restructure the
operations of the PIA Companies. Restructuring costs arewere composed of committed
costs required to integrate the SPAR Companies and the PIA Companies' field
organizations and the consolidation of administrative functions to achieve
beneficial synergies and costs savings.
F-32F-24
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14.December 31, 2002
12. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
The following table displays a rollforwardroll forward of the liabilities for restructuring
and other charges from July 8,December 31, 1999 Merger to December 31, 20012002 (in thousands):
INITIAL PERIOD ENDED ADJUSTMENTS YEAR ENDED
RESTRUCTURING DECEMBER 31, DECEMBER 31, IN DECEMBER 31, DECEMBER 31,
AND OTHER 1999 1999 RESTRUCTURING 2000 2000
CHARGES DEDUCTIONS BALANCE CHARGES DEDUCTIONS BALANCE
------------------------------------------------------------------------------------------EQUIPMENT OFFICE
EMPLOYEE LEASE LEASE
SEPARATION SETTLEMENTS SETTLEMENTS TOTAL
----------------- --------------- ------------------ ------------
Type of cost:
Employee separation $1,606December 31, 1999 Balance $ (491) $1,1151,115 $ 2,414 $ 1,542 $ 5,071
Adjustments in Restructuring Charges 748 $(1,376) $1,367 (619) 1,496
2000 payments (1,376) (1,011) (379) (2,766)
----------------- --------------- ------------------ ------------
December 31, 2000 Balance 487 Equipment lease
settlements 2,740 (326) 2,414 1,367 (1,011) 2,770 Office lease settlements 1,794 (252) 1,542 (619) (379) 544 Redundant assets 957 (957) - - - -
------------------------------------------------------------------------------------------
$7,097 $(2,026) $5,071 $ 1,496 $(2,766) $3,801
==========================================================================================
ADJUSTMENTS IN YEAR ENDED3,801
Adjustments in Restructuring Charges (132) -- -- (132)
2001 payments (355) (1,008) (124) (1,487)
----------------- --------------- ------------------ ------------
December 31, 2001 Balance -- 1,762 420 2,182
2002 payments -- (593) -- (593)
----------------- --------------- ------------------ ------------
DECEMBER 31, 2000 RESTRUCTURING DECEMBER 31, 2001 DECEMBER 31, 20012002 BALANCE CHARGES DEDUCTIONS BALANCE
-------------------------------------------------------------------------------
Type of cost:
Employee separation $ 487 $(132)-- $ (355)1,169 $ -
Equipment lease settlements 2,770 - (1,008) 1,762
Office lease settlements 544 - (124) 420 -------------------------------------------------------------------------------
$3,801 $(132) $(1,487) $2,182
===============================================================================$ 1,589
================= =============== ================== ============
The maturities of long-term restructuring and other charges at December 31, 20012002, are as follows (in
thousands):
2002 $1,597
2003 3501,354
2004 235
Management believes that the remaining reserves for restructuring are adequate
to complete its plan.
At December 31, 2001, the SPAR Group is obligated, under certain circumstances,
to pay other costs in connection with the Merger of approximately $2.2 million.
In addition, the Company incurred substantial cost in connection with the
transaction, including legal, accounting and investment banking fees estimated
to be an aggregate unpaid obligation of approximately $1.2 million at December
31, 2001 (see Note 4). The SPAR Group has also accrued approximately $1.2
million for expenses incurred by PIA prior to the Merger, which have not been
paid (see Note 4).
F-33F-25
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15.December 31, 2002
13. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
2002 2001 2000 1999
--------------------------------------------------
Numerators:
Actual/pro forma netNet income from continuing operations $ 5,298 $ 4,155 $2,721 $1,971
Actual loss$ 2,721
Loss from operations of discontinued division - (5,869) (1,399)
(729)
--------------------------------------------------
Actual netNet income (loss) income $(1,714) $1,322 $1,242$ 5,298 $ (1,714) $ 1,322
==================================================
Denominator:
Shares used in basic earnings per share calculation 18,761 18,389 18,185 15,361
Effect of diluted securities:
Employee stock options 387 78 118 6
--------------------------------------------------
Shares used in diluted earnings per share
calculations 19,148 18,467 18,303
15,367
==================================================
Actual basicBasic and diluted earnings per common share:
Income from continuing operations $ 0.28 $ 0.23 $0.15 $0.13$ 0.15
Loss from operations of discontinued division - (0.32) (0.08)
(0.05)
--------------------------------------------------
Net income (loss) income $(0.09) $0.07 $0.08$ 0.28 $ (0.09) $ 0.07
==================================================
F-34F-26
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16.December 31, 2002
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for 20012002 and 20002001 was as follows (in thousands, except earnings
per share amounts)data):
QUARTER
FIRST SECOND THIRD FOURTH
-------------------------------------------------------------
YEAR ENDED DECEMBER 31, 20012002:
Net revenues $14,941 $16,091 $19,025 $20,834$ 16,046 $ 17,542 $ 17,775 $ 18,249
Gross profit 6,295 6,951 7,015 9,020
Net income $ 482 $ 1,068 $ 1,213 $ 2,535
=============================================================
Basic/diluted net income per
common share $ 0.03 $ 0.06 $ 0.06 $ 0.13
=============================================================
YEAR ENDED DECEMBER 31, 2001:
Net revenues $ 14,941 $ 16,091 $ 19,025 $ 20,834
Gross profit 6,193 6,231 7,356 10,228
Income from continuing operations 147 700 1,263 2,045
Income (loss) from discontinued operations 530 (381) (686) (5,332)(1)
-------------------------------------------------------------
Net income (loss) $ 677 $ 319 $ 577 $(3,287)(1)$ (3,287)
=============================================================
Basic/diluted net income (loss) per common share:
Actual incomeIncome from continuing operations $ 0.01 $ 0.04 $ 0.07 $ 0.11
Income (loss) from discontinued
operations 0.03 (0.02) (0.04) (0.29)
-------------------------------------------------------------
Net income (loss) $ 0.04 $ 0.02 $ 0.03 $ (0.18)
=============================================================
YEAR ENDED DECEMBER 31, 2000
Net revenues $24,682 $21,866 $16,535 $18,376
Gross profit 8,158 8,186 6,710 8,127
Income from continuing operations 675 603 431 1,012
Loss from discontinued operations (259) (490) (331) (319)
-------------------------------------------------------------
Net income $ 416 $ 113 $ 100 $ 693(2)
=============================================================
Basic/diluted net income (loss) per
common share:
Actual income from continuing
operations $ 0.04 $0.03 $0.03 $ 0.06
Loss from discontinued operations (0.02) (0.02) (0.02) (0.02)
-------------------------------------------------------------
Net income $ 0.02 $0.01 $0.01 $ 0.04
=============================================================
(1) Includes a $4,272,000 estimated loss on disposal of SPGI.
(2) Includes the realization of approximately $637,000 of income tax benefit as
a result of the change in the deferred income tax valuation allowance.
F-35SPGI
F-27
SPAR Group, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(In Thousands)thousands)
BALANCE AT CHARGED TO
BEGINNING OF CHARGED TO COSTS CHARGED TOAND BALANCE AT END
PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS (1) OF PERIOD
--------------------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 325 $ 262 $ 286 $ 301
Year ended December 31, 2001:
Deducted from asset accounts:
Allowance for doubtful
accounts $2,648$ 2,648 $ 472 $ - $2,7952,795 $ 325
Year ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful
accounts $2,035 $1,304 $ -2,035 $ 1,304 $ 691 $2,648
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 605 $ 986 $1,221(2) $ 777 $2,035
2,648
(1) Uncollectible accounts written off, net of recoveries.
(2) $1,221 charged to other accounts represents the amounts acquired through
the PIA acquisition.
F-36
F-28