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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT ON FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the year ended December 31, 1999
Commission file number 0-27824
SPAR GROUP, INC.
Delaware 33-0684451
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
580 WHITE PLAINS ROAD, SIXTH FLOOR, 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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 30, 2000, based on the closing price
of the Common Stock as reported by the Nasdaq SmallCap Market on such date, was
approximately $56,797,963.
The number of shares of the Registrant's Common Stock outstanding as of
March 30, 2000 was 18,175,348 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days of December 31, 1999 in connection with the Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PART I
PAGE
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal and Administrative 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 Consolidated 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 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 26
Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 27
Signatures 30
PART I
THIS ANNUAL REPORT ON FORM 10-K INCLUDES "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT INCLUDING, IN PARTICULAR, THE STATEMENTS ABOUT THE SPAR GROUP'S
PLANS AND STRATEGIES UNDER THE HEADINGS "BUSINESS" AND "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." ALTHOUGH THE
SPAR GROUP BELIEVES THAT ITS PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN OR
SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT ASSURE
THAT SUCH PLANS, INTENTIONS OR EXPECTATIONS WILL BE ACHIEVED. ALL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE SPAR GROUP OR PERSONS ACTING ON
ITS BEHALF ARE EXPRESSLY QUALIFIED BY THE CAUTIONARY STATEMENTS IN THE ANNUAL
REPORT ON FORM 10-K.
ITEM 1. BUSINESS
GENERAL
The SPAR Group, Inc., a Delaware corporation formerly known as PIA
Merchandising Services, Inc. ("SPAR Group" or the "Company") is a supplier of
in-store merchandising and marketing services, and premium incentive marketing
services throughout the United States and Canada. The Company also provides
database marketing, teleservices, marketing research, and Internet-based
software. The Company's operations are divided into three divisions: the
Merchandising Services Division, the Incentive Marketing Division, and the
Internet Division. The Merchandising Services Division provides merchandising
services, database marketing, teleservices and marketing research to
manufacturers and retailers primarily in the mass merchandiser, video, chain,
discount drug store and grocery industries. The Incentive Marketing Division
designs and implements premium incentives, manages meetings, group travel and
training programs principally for corporate clients. In March 2000, the Company
announced the formation of an Internet Division for the purpose of marketing its
proprietary Internet-based computer software.
Merchandising Services Division
The Company's Merchandising Services Division consists of (1) SPAR
Marketing, Inc. ("SMI") (an intermediate holding company), SPAR Marketing Force,
Inc. ("SMF"), SPAR Marketing, Inc., a Nevada corporation ("SMNEV"),
SPAR/Burgoyne Retail Services, Inc. ("SBRS"), and SPAR, Inc. ("SINC")
(collectively, the "SPAR Marketing Companies"), and (2) PIA Merchandising Co.
Inc., Pacific Indoor Display d/b/a Retail Resources, Pivotal Sales Company and
PIA Merchandising Ltd. (collectively, "PIA" or the "PIA Companies"). The SPAR
Marketing Companies, the original predecessor of which was founded in 1967,
provide nationwide retail merchandising and marketing services to home video,
consumer goods and food products companies. The PIA Companies, through a
predecessor of the Company first organized in 1943, also are suppliers of
in-store merchandising and sales services throughout the United States and
Canada, and were "acquired" by the SPAR Companies for accounting purposes
pursuant to the Merger on July 8, 1999 (See Merger and Restructuring, below).
The PIA Companies provide these services primarily on behalf of consumer product
manufacturers and retailers at mass merchandisers, drug and retail grocery
stores. The Company currently operates in all 50 states and provides a broad
range of in-store merchandising and other marketing services to many of the
nation's leading companies.
Merchandising services generally consist of special projects or
regularly scheduled routed services provided at the stores for a specific
retailer or multiple manufacturers primarily under multiple year contracts.
Services also include stand-alone large-scale implementations. These services
may include 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
new and promotional items. Specific in-store services can be initiated by
retailers and manufacturers, such as new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. These
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services are used typically for large-scale implementations over 30 days. The
Company also provides database marketing, teleservices and research services.
Incentive Marketing Division
The Company's Incentive Marketing Division was created in January, 1999
through the Company's purchase of the business and substantially all of the
assets of BIMA Group, Inc., a Texas corporation ("BIMA" or "MCI") originally
founded in 1987 and formerly known as MCI Performance Group, Inc. The purchase
was made by the Company's indirect subsidiary SPAR Performance Group, Inc.,
formerly known as SPAR MCI Performance Group, Inc. ("SPGI"). SPGI provides a
wide variety of consulting, creative, program administration, travel and
merchandise fulfillment, and training services to companies seeking to retain
and motivate employees, salespeople, dealers, distributors, retailers, and
consumers toward certain actions or objectives. SPGI's strategy enables
companies to outsource the entire design, implementation and fulfillment of
incentive programs in a one-stop, "umbrella" shopping approach. SPGI typically
consults with a client to design the most effective plan to achieve the client's
goals. SPGI then provides services necessary to implement the program, generates
detailed efficiency progress reports, and reports on the return on investment
upon completion of the program.
Internet Division
In March 2000, the Company established its Internet Division to
separately market its application software products and services. The Company
has developed and is utilizing several Internet-based software products. The
Internet Division was established to market these applications to businesses
with multiple locations and large workforces desiring to improve day-to-day
efficiency and overall productivity.
INDUSTRY OVERVIEW
Merchandising Services Division
According to estimates by ING Baring Furman Selz the merchandising
industry generates two billion dollars annually. The merchandising industry
includes manufacturers, retailers, food brokers, and professional service
merchandising companies. Furthermore, they estimate that professional
merchandising companies control approximately 50% of this market share and
believe that half of this business is growing at 15% to 20% per year. According
to a recent industry survey, more than 75% of the manufacturers are moving to
third parties to handle in-store merchandising. The Company believes that its
merchandising services bring added value to retailers, manufacturers and other
businesses. Retail merchandising services enhance sales by making a product more
visible and available to consumers. These services primarily include shelf
maintenance, display placement, reconfiguring products on store shelves,
replenishing products and placing orders, and other services, such as test
market research, mystery shopping, teleservices, database marketing and
promotion planning and analysis.
Merchandising services previously undertaken by retailers, manufacturers
and independent brokers 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. Manufacturers deployed their own sales representatives to
ensure that their products were displayed on the shelves and were properly
spaced and positioned. Independent brokers performed similar services on behalf
of the manufacturers they represented. The Company believes that in an effort to
improve their margins, retailers are increasing their reliance on manufacturers
and brokers to perform such services. Initially, manufacturers attempted to
satisfy their 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 serving multiple
manufacturers simultaneously.
4
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 re-merchandising 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.
Incentive Marketing Division
According to PROMO Magazine's 1999 annual report of the promotion
industry, spending on the promotion of products and services in 1998 was $85.4
billion, up $6 billion or 8% from the 1997 level. The Company participates in
the premium incentive and promotion fulfillment sectors. These sectors
collectively account for $28.7 billion or 34% of the promotion industry as a
whole and grew 5.0% and 17.2%, respectively, during 1998. The Company believes
that U.S. companies are increasingly using third party incentive providers as a
more efficient and cost effective means to increase the productivity of their
employees. Third party incentive premium providers can offer a customized,
unique, turnkey solution specifically tailored to a company's needs.
Additionally, incentive premium providers are able to capitalize on supplier
relationships and to realize volume discounts, particularly on travel and
merchandise.
Premium incentives are performance-determined rewards used to motivate
employees, salespeople, dealers, and consumers, and are also used to
differentiate a product, service or store. According to the Incentive Federation
Survey, only 26.0% of U.S. businesses are using premium incentives to motivate
employees and the majority of these businesses are large companies (with over
1,000 employees). The Company anticipates that this market segment will grow as
additional companies realize the value of using incentives to motivate
employees, sales forces and consumers.
The three most commonly used incentives are cash, travel and
merchandise. Consumer promotions, including direct premium offers (using travel
or merchandise in conjunction with a purchase of a product or service),
sweepstakes (promotions that require only chance to win) and self-liquidating
premiums (offering travel or merchandise premiums to consumers at a price that
covers the marketer's costs) generate the most attention. However, most
incentive expenditures are for trade incentives designed to motivate salespeople
to sell and retailers to buy and display products. Recent trends include the
growth of retail certificates or debit or cash cards in the merchandise
fulfillment sector (the segment of the premium incentive sector concerned with
providing merchandise as rewards in incentive programs). The travel fulfillment
sector (the segment of the premium incentive sector concerned with providing
travel as rewards in incentive programs) has seen growth in individual and group
travel as well as meeting registration services (fee-based services used to
simplify the process of signing up individuals to attend a meeting or seminar).
Internet Division
The Company believes there is a current trend towards consolidation in
business today. This trend is creating larger, more complex companies that have
multiple locations and large workforces covering large geographical areas. The
Company also believes there is a growing trend of companies utilizing the
Internet and Internet-based software. The Company has historically developed and
utilized Internet-based software to manage its national businesses, including
its national field force, with greater efficiency and communication speed than
previously possible with paper based systems. The Company believes this software
transcends the merchandising services industry and can be utilized in many other
industries that have businesses with multiple locations and large workforces.
5
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 be referred to
post-Merger individually as "SGI" or the "Company"). Although the SPAR Companies
became subsidiaries of PIA Delaware (now SGI) as a result of this "reverse"
Merger, the transaction has been accounted for as required under GAAP as a
purchase by SAI of the PIA Companies, with the books and records of SGI being
adjusted to reflect the historical operating results of the SPAR Marketing
Companies and SPGI (together with certain intermediate holding companies, the
"SPAR Companies").
In connection with the Merger of the Company's subsidiary with SAI, the
Company's Board of Directors approved a plan to restructure the operations of
PIA. Restructure costs are composed of committed costs required to integrate the
SPAR Marketing Companies and PIA's field organizations and the consolidation of
administrative functions to achieve beneficial synergies and cost savings. As
part of the PIA merger, the Company identified various cost reductions that
would be realized by the merger. A detailed 29-point program was initiated by
the Company with nine transition teams being formed within management to affect
the cost cuts and ensure the projected savings levels were achieved. As of
December 31, 1999, the Company had eliminated 15 PIA field offices, and reduced
PIA's workforce by approximately 250 hourly employees, thereby reducing monthly
selling, general and administrative expenses by approximately $900,000 per
month. The Company plans to continue to implement the cost cutting measures
throughout the first two quarters of 2000 until the desired savings levels are
reached. In addition, the Company has converted the PIA field workforce from a
relatively fixed cost basis to a variable cost basis.
BUSINESS STRATEGY
As the marketing services industry continues to grow and consolidate,
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 basis will provide it with a
competitive advantage. Moreover, the Company believes that developing a
sophisticated technology infrastructure, including proprietary Internet-based
software, is key to providing clients with a high level of customer service
while maintaining efficient, low cost operations. The Company's objective is to
become a national integrated service provider by pursuing its operating
strategy, as described below.
Capitalize on Cross-Selling Opportunities. The Company intends to
leverage its current client relationships by cross-selling the range of services
offered by the Company. The Company believes that its retail merchandising and
database marketing services can be packaged with its premium incentive services
to provide a high level of customer service, and that additional cross-selling
opportunities will increase if, as management intends, the Company acquires
businesses in other sectors of the marketing services industry. The Company also
intends to offer its proprietary Internet-based software to existing
Merchandising Services and Incentive Marketing clients.
Achieve Operating Efficiencies. The Company intends to achieve greater
operating efficiencies within its Divisions. The Company believes that, its
existing field force and technology infrastructure can support additional
customers and revenue in the Merchandising Services Division. In the Incentive
Marketing Division, the Company believes that it can realize volume purchasing
advantages with respect to travel and merchandise fulfillment. At the corporate
level, the Company will seek to combine certain administrative functions, such
as accounting and finance, insurance, strategic marketing and legal support.
6
Leverage Divisional Autonomy. The Company intends to conduct its
operations on a decentralized basis whereby management of each Division will be
responsible for its day-to-day operations, sales relationships and the
identification of additional acquisition candidates in their respective sectors.
A company-wide team of senior management will provide the Divisions with
strategic oversight and guidance with respect to acquisitions, finance,
marketing, operations and cross-selling opportunities. The Company believes that
a decentralized management approach will result in better customer service by
allowing management of each Division the flexibility to implement policies and
make decisions based on the needs of their respective customers.
Implement Technology. The Company intends to utilize computer, Internet,
and other technology to enhance its efficiency and ability to provide real-time
data to its customers. Industry sources indicate that customers are increasingly
relying on marketing service providers to supply rapid, value-added information
regarding the results of marketing expenditures on sales and profits. The
Company (together with certain of its affiliates )has developed and owns
proprietary Internet-based software technology that allows it to communicate
with its field management over the Internet, schedule its field operations more
efficiently, receive information over the Internet and incorporate the data
immediately, quantify the benefits of its services to customers more quickly and
respond to customers' needs and implement programs more rapidly. The Company
believes that its proprietary Internet-based software technology gives them a
competitive advantage in the marketplace.
DESCRIPTION OF SERVICES
The Company provides a broad array of merchandising and marketing
services on a national, regional and local basis to leading entertainment,
consumer goods, food products and retail companies through its Merchandising
Services Division, and also provides premium incentive services through its
Incentive Marketing Division.
The Company currently operates in all 50 states and Canada serving some
of the nation's leading companies. The Company believes its full-line capability
of developing plans at one centralized headquarters location, executing chain
wide, fully integrated national solutions, and implementing rapid, coordinated
responses to its clients' needs on a real time basis differentiate the Company
from its competitors. The Company also believes its centralized decision-making
ability, local follow-through, ability to recruit, train and supervise
merchandisers, ability to perform large-scale initiatives on short notice, and
strong retailer relationships provide the Company with a competitive advantage
over local, regional or retailer specific competitors.
Merchandising Services Division
The Company provides a broad array of merchandising services on a
national, regional, and local basis to manufacturers and retailers. The Company
provides its merchandising and sales services primarily on behalf of consumer
product manufacturers at mass merchandiser, drug and retail grocery stores. The
Company currently provides three principal types of merchandising and sales
services: shared services, dedicated services and project services.
Shared Services
Shared services consist of regularly scheduled, routed merchandising
services provided at the store level for manufacturers. The Company's shared
services are performed for multiple manufacturers, including, in some cases,
manufacturers whose products are in the same product category. Shared services
may include activities such as:
o Reordering, replenishment of product
o Ensuring that the client's products authorized for distribution
are in stock and on the shelf
o Adding in new products that are approved for distribution but not
present on the shelf
o Designing store schematics
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o Setting category shelves in accordance with approved store
schematics
o Ensuring that shelf tags are in place
o Checking for overall salability of the client's products
o Placing new product and promotional items
Dedicated Services
Dedicated services consist of merchandising services, generally as
described above, that are performed for a specific retailer or manufacturer by a
dedicated organization, including a management team, working exclusively for
that retailer or manufacturer, primarily in the drug store industry. 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 product launches, special
seasonal or promotional merchandising, focused product support and product
recalls. These services are used typically for large-scale implementations
requiring over 30 days. The Company also performs other project services, such
as new store sets and existing store resets, re-merchandising, remodels and
category implementations, under shared service contracts or stand-alone project
contracts.
Other Merchandising and Marketing Services
Other merchandising and marketing services performed by the Company
include:
Test Market Research - Testing promotion alternatives, new products
and advertising campaigns, as well as packaging, pricing, and location
changes, at the store level.
Mystery Shopping - Calling anonymously on retail outlets to check on
distribution or display of a brand and to evaluate products.
Database Marketing - Managing proprietary information to permit easy
access, analysis and manipulation for use in direct marketing
campaigns.
Data Collection - Gathering information systematically for analysis
and interpretation.
Teleservices - Maintaining a teleservices center in its Auburn Hills
facility that performs inbound and outbound telemarketing services,
including those on behalf of certain of the Company's manufacturer
clients.
Information Technology Services
The Company has developed Internet-based information tracking system
applications that improve productivity of field merchandisers. The Company's
merchandising specialists use Interactive Voice Response (IVR) and hand-held
computers to upload (through the Internet) the status of each store they service
immediately upon completion. This information is analyzed and displayed on
graphical execution maps, which can be accessed by both the Company and its
customers via the Internet, that visually depict the status of every
merchandising project in real time. In addition, this technology allows the
Company to schedule its field operations more efficiently, quantify the benefits
of its services to customers more quickly, respond to customers' needs and
implement programs more rapidly. The Company believes that its technological
efficiencies provide it with a competitive advantage in the marketplace.
8
The Company has also developed an automated labor tracking system.
Company associates 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. This provides
the Company with daily, detailed tracking of work completion.
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
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 efforts are principally guided
through the Company's sales workforce, located nationwide, who primarily work
from home offices. In addition, the Company's corporate account executives play
an important role in the Company's new business development efforts within its
existing manufacturer and retailer client base.
As part of the retailer consolidation, retailers are centralizing most
administrative functions, including operations, procurement and category
management. In response to this centralization and the growing importance of
large retailers, many manufacturers have reorganized their selling organizations
around a retailer team concept that focuses on a particular retailer. The
Company has also responded to this emerging trend and currently has retailer
teams in place at several discount and drug stores.
9
The Company's business development process encompasses a due diligence
period to determine the objectives of the prospective client, the work to be
performed to satisfy those objectives and the market value of the work to be
performed. The Company employs a formal cost development and proposal process
that determines the cost of each element of work required to achieve the
prospective client's objectives. These costs, together with an analysis of
market rates, are used in the development of a quotation approval form that is
presented to the Company's proposal committee for approval. The pricing of this
internal proposal must meet the Company's objectives for profitability, which
are established as part of the business planning process. After approval of this
quotation by the proposal committee, a detailed proposal is presented to the
prospective client. Following agreement regarding the elements of service and
corresponding rates, a contract is prepared and executed.
For the year ended December 31, 1999, net revenues from Merchandising
Services and Incentive Marketing Services accounted for 68.3% and 31.7%
respectively of total net revenues. Prior to that period Merchandising Services
comprised 100% of total net revenues.
Incentive Marketing Division
The Company's Incentive Division sales effort is organized on a
regional basis to serve national clients. Today SPGI has seven regional sales
operations, each with a senior sales person working from their home office. All
selling is done on a local market basis, while all program design and execution
is completed at the Dallas headquarters.
As in the Merchandising Services Division, the Incentive Division's
business development process encompasses a due diligence period to determine the
objectives of the prospective client, the work to be performed to satisfy those
objectives and the market value of the work to be performed. The Company employs
a formal cost development and proposal process that determines the cost of each
element of work required to achieve the prospective client's objectives. These
costs, together with an analysis of market rates, are used in the development of
a quotation approval form that is presented to the Company's proposal committee
for approval. The pricing of this internal proposal must meet the Company's
objectives for profitability, which are established as part of the business
planning process. After approval of this quotation by the proposal committee, a
detailed proposal is presented to the prospective client. Following agreement
regarding the elements of service and corresponding rates, a contract is
prepared and executed.
CUSTOMERS
In its Merchandising Services Division, the Company currently
represents numerous manufacturers and retail clients in a wide range of retail
outlets including:
o Mass Merchandisers
o Chain and deep-discount drug stores
o Other retail trade groups
o Retail grocery
The Company also provides database, research and other marketing services to
major automotive manufacturers.
In addition, the Company currently provides services to various clients
in its Incentive Marketing Division. These clients are principally large
corporate clients that encompass a broad range of industries including the food,
drug, communications, and automotive manufacturing industry.
10
COMPETITION
The marketing services industry is highly competitive. Competition in
the Company's Merchandising Services Division arises from a number of 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 merchandise
and chain drug channels of trade, as well as a leading provider of in-store
services to the video industry. The Company also believes it has the ability to
execute major national in-store initiatives and develop and administer national
retailer programs. Finally, the Company believes that, through the use of its
proprietary Internet software, other technological efficiencies and various cost
controls, the Company will remain competitive in its pricing and services.
The incentive marketing industry is populated by large national
players, each of which has significantly greater financial and marketing
resources than the Company, and hundreds of small regional and local companies.
By establishing a network of merchandise, travel, and database operations, and
then consolidating regional sales companies, the Company believes it would fill
a substantial market by providing clients with an alternative to the national
competitors that offers the same integrated program service at substantially
lower cost.
TRADEMARKS
SPAR(R) and PIA(R) are registered trademarks of the Company. In
addition, the Company has recently commenced the process of registering the
service mark for the terms Precision Merchandising and SPARinc.com. Although the
Company believes its trademarks may have value, the Company believes its
services are sold primarily based on breadth and quality of service, cost, and
the ability to execute specific client priorities rapidly and consistently over
a wide geographic area. See "--Industry Overview" and "--Competition."
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note 14 to the Financial Statements included in this Annual Report
on Form 10-K.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREA
Revenues generated by PIA Merchandising Ltd., a Canadian subsidiary
acquired in July 1999, accounted for less than 1% of the total revenues for the
fiscal year ended December 31, 1999. All other revenues were derived from
business within United States.
EMPLOYEES
As of December 31, 1999, the Company's Merchandising Services Division
employed approximately 5,400 people, approximately 400 full-time employees,
approximately 3,500 part-time employees and 1,500 independent contractors, of
which approximately 200 full-time employees were engaged in operations and 11
were engaged in sales. As of December 31, 1999, the Company's Incentive
Marketing Division employed approximately 71 full-time employees, of which
approximately 16 employees were engaged in operations and approximately 9 were
engaged in sales. Approximately 182 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.
11
ITEM 2. PROPERTIES.
The Company maintains its corporate headquarters in approximately 12,000
square feet of leased office space located in Tarrytown, New York, under a lease
with a term expiring in May 2004.
The Company leases certain office and storage facilities for its
divisions and subsidiaries under operating leases, which expire at various dates
during the next five years. Most of these leases require the Company to pay
minimum rents, subject to periodic adjustments, plus other charges, including
utilities, real estate taxes and common area maintenance.
The following is a list of the locations where the Company maintains
leased facilities for its division offices and subsidiaries:
Location Office Use
- --------------------------------------------------------------------------------
Tarrytown, NY Corporate Headquarters and Administration
Auburn Hills, MI Regional Office and Teleservices Center
Eden Prairie, MN Regional Office
Mahwah, NJ Regional Office
Cincinnati, OH Regional Office
Tampa, FL Regional Office
Irvine, CA Regional Office
Carrolton, TX Regional Office
Although the Company believes that its existing facilities are adequate
for its current business, new facilities may be added should the need arise in
the future.
12
ITEM 3. LEGAL PROCEEDINGS.
On September 23, 1999, Information Leasing Corporation ("ILC") filed a
complaint for breach of contracts, claim and delivery, and conversion against
the Company in Orange County Superior Court, Santa Ana, California, Case No.
814820, with respect to certain equipment leased to the PIA Companies by ILC,
which complaint sought judgment to recover the principal sum of $1,535,869.68,
plus taxes, fees, liens, and late charges, immediate possession of the leased
equipment, compensation for the reasonable value thereof, and costs and
attorneys' fees. The Company is currently attempting to negotiate a settlement.
Pursuant to that certain Asset Purchase Agreement dated as of December
22, 1998, among BIMA Group, Inc. (f/k/a MCI Performance Group, Inc.) ("BIMA"),
John H. Wile, SPAR Performance Group, Inc.(f/k/a SPAR MCI Performance Group,
Inc.) ("SPGI"), and a company formerly known as SPAR Group, Inc., as amended by
the First Amendment thereto dated as of January 15, 1999, Second Amendment dated
as of September 22, 1999 (the "Second Amendment"), and Third Amendment dated as
of October 1, 1999 (the "Third Amendment"), SPGI would be obligated to pay
"Earn-Out Consideration" to BIMA if the business met certain financial
performance criteria as set forth therein. SPGI has fully paid the amount
outstanding under the Promissory Note pursuant to the Asset Purchase Agreement
with respect to the original purchase price, as adjusted by the Second
Amendment. Based upon the unaudited balance sheet of BIMA as of January 15,
1999, SPGI estimates that no "Earn-Out Consideration" is due to BIMA. BIMA has
asserted that it is owed approximately $5,000,000 in Earn Out Consideration, but
such Earn Out Consideration calculation has not been agreed to by SPGI. If the
parties cannot agree upon such amount, BIMA has threatened that legal
proceedings may ensue with respect to this matter. If sued, SPGI would
vigorously contest such matter. SPGI and BIMA intend to continue negotiations,
and have orally agreed to use arbitrators (assuming mutually acceptable
procedures can be adopted), in order to resolve such "Earn Out Consideration"
dispute.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq National
Market. Prior to July 9, 1999, the Company's stock was traded on the Nasdaq
National Market under the symbol "PIAM".
- -------------------------------------- ------------------------ ----------------------- ------------------------
1997 1998 1999
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
High Low High Low High Low
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
First Quarter $11.000 $5.125 $6.500 $5.000 $5.630 $2.750
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Second Quarter 7.125 5.375 8.156 3.688 5.000 1.880
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Third Quarter 8.250 5.125 6.844 4.125 - -
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Fourth Quarter 9.000 4.875 4.875 2.000 - -
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Subsequent to July 9, 1999, the Company's stock was traded on the Nasdaq
National Market under the symbol "SGRP" until November 15, 1999, when it moved
to the Nasdag Small Cap Market.
- -------------------------------------- ------------------------ ----------------------- ------------------------
1997 1998 1999
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
High Low High Low High Low
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
First Quarter $ - $ - $ - $ - $ - $ -
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Second Quarter - - - - - -
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Third Quarter - - - - 5.810 3.000
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
Fourth Quarter - - - - 5.130 2.500
- -------------------------------------- ----------- ------------ ----------- ----------- ----------- ------------
As of December 31, 1999, there were approximately 150 holders of record
of the SPAR Group's Common Stock.
The SPAR Group has never declared or paid any cash dividends on its
capital stock and does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. The Company currently intends to retain future
earnings to finance its operations and fund the growth of the business. Any
payment of future dividends will be at the discretion of the Board of Directors
of the SPAR Group and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions in respect to the payment of dividends and other
factors that the Company's Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated or combined financial data sets
forth, for the periods and the dates indicated, summary financial data of the
Company and its subsidiaries. Below are the statements of operations with
respect to the year ending December 31, 1999, the nine-month period ending
December 31, 1998, and the year ending March 31, 1998, and the balance sheet
data as of December 31, 1999 and December 31, 1998. This data was derived from
the financial statements included in this Form 10-K and should be read in
conjunction with the financial statements and the related notes thereto as well
as "Management's Discussion and Analysis of Financial Condition and Results of
Operations", also included in this Form 10-K.
14
NINE
YEAR ENDED MONTHS YEARS ENDED
ENDED -----------
DEC 31, DEC 31, MAR 31, MAR 31, MAR 31,
1999 1998 1998 1997 1996
==== ==== ==== ==== ====
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net revenues $116,525 $ 32,601 $ 36,804 $ 35,574 $ 14,425
Cost of revenues 81,288 16,217 19,417 21,754 7,679
------------------------------------------------------------------
Gross profit 35,237 16,384 17,387 13,820 6,746
Selling, general and administrative expenses 28,830 9,978 12,087 13,250 6,839
Depreciation and amortization 2,182 142 161 227 191
------ ------ ------ ------ -----
Operating income (loss) 4,225 6,264 5,139 343 (284)
Other income (expense) (1,572) (155) (390) (766) (99)
------ ------ ------ ------ -----
Income (loss) before provision (benefit) for income
taxes 2,653 6,109 4,749 (423) (383)
Income tax provision (benefit) 3,148 - - - -
------ ------ ------ ------ -----
Net income (loss) $ (495) $ 6,109 $ 4,749 $ (423) $ (383)
======== ======== ========= ======== ========
Unaudited pro forma information (1):
Net income (loss) before income tax provision $ 2,653 $ 6,109 $ 4,749 $ (423) $ (383)
Pro forma income tax provision (benefit) 1,411 2,253 1,751 (156) (141)
------ ------ ------ ------ -----
Pro forma net income (loss) $ 1,242 $ 3,856 $ 2,998 $ (267) $ (242)
======== ======== ========= ======== ========
Pro forma net income (loss) per share - basic (2) $ 0.08 $ 0.30 $ 0.24 $ (0.02) $ (0.02)
======== ======== ========= ======== ========
Pro forma weighted average shares - basic (2) 15,361 12,659 12,659 12,659 12,659
======== ======== ========= ======== ========
Pro forma net income (loss) per share - diluted (2) $ 0.08 $ 0.30 $ 0.24 $ (0.02) $ (0.02)
======== ======== ========= ======== ========
Pro forma weighted average shares - diluted (2) 15,367 12,659 12,659 12,659 12,659
======== ======== ========= ======== ========
DEC 31, DEC 31, MAR 31, MAR 31, MAR 31,
1999 1998 1998 1997 1996
==== ==== ==== ==== ====
(in thousands)
BALANCE SHEET DATA:
Working capital $ (639) $ (2,214) $ 3,412 $ 1,319 $ 1,665
Total assets 63,087 14,865 10,896 8,868 10,129
Current portion of long-term debt 1,147 685 675 656 975
Long-term debt, net of current portion 16,009 311 828 937 1,389
Total stockholders' equity 10,886 (1,405) 3,142 935 1,017
(1) The unaudited pro forma income tax information is presented in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," as if the Company had been subject to federal and state
income taxes for all periods presented.
15
(2) Net income (loss) per share is presented for all applicable periods in
accordance with the adoption of SFAS No. 128 Earnings per share.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company provides merchandising services to manufacturers and
retailers principally in mass merchandiser, chain, discount drug and grocery
stores through its Merchandising Services Division. In addition, the SPAR
Group's Incentive Marketing Division designs and implements premium incentives,
manages meetings and group travel for principally corporate clients. In March
2000, the Company established its Internet Division to separately market its
applications, software products and services. Although such products and
services were in part available through the Company's other divisions prior to
the establishment of the Internet Division, the historical revenues and expenses
related to such software products and services generally were not maintained
separately and have been included below in the discussion of the condition and
results of the Merchandising Services Division and Incentive Marketing Division.
According to Generally Accepted Accounting Principles, upon an
acquisition, the acquired company's results of operations are not included in
the acquirer's results of operations prior to the date of acquisition. The SPAR
companies acquired substantially all of the assets of BIMA on January 16, 1999
(the "MCI Acquisition"). (See Notes 2 and 3 to the Financial Statements.) Under
GAAP, the SPAR/PIA merger completed on July 9, 1999 was deemed to be an
acquisition of PIA by SPAR. (See Notes 2 and 3 to the Financial Statements).
Therefore, the following discussions include only the results of SPGI subsequent
to January 15, 1999 and the results of PIA subsequent to July 8, 1999.
During the third quarter of 1999, the SPAR Group restructured its
operations by integrating the SPAR Marketing Companies and the PIA Companies'
field organizations and consolidating administrative functions where possible to
achieve beneficial synergies and cost savings. Although significant cost savings
were achieved during the third and fourth quarters of 1999, not all synergistic
programs had been implemented, and further cost savings are expected to be
achieved in the first and second quarters of 2000.
RESULTS OF OPERATIONS
The following table sets forth selected financial data and data as a
percentage of net revenues for the periods indicated.
YEAR ENDED DECEMBER NINE MONTHS ENDED YEAR ENDED
31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
---------------------------------------------------------------
Net revenues $ 116.5 100.0% $ 32.6 100.0% $ 36.8 100.0%
---------------------------------------------------------------
Cost of revenues 81.3 69.8 16.2 49.7 19.4 52.7
Selling, general & administrative expenses 28.8 24.7 10.0 30.7 12.1 32.9
Depreciation & amortization 2.2 1.9 0.1 0.3 0.2 0.5
Other expenses 1.6 1.4 0.2 0.6 0.4 1.1
---------------------------------------------------------------
Income before income tax provision 2.6 2.2 6.1 18.7 4.7 12.8
Provision for income taxes 3.1 2.7 - - - -
---------------------------------------------------------------
Net income (loss) $ (0.5) (0.4%) $ 6.1 18.7% $ 4.7 12.8%
===============================================================
Unaudited pro forma information:
Income before income tax provision $ 2.6 2.2% $ 6.1 18.7% $ 4.7 12.8%
Pro forma provision for income taxes 1.4 1.2 2.3 7.1 1.7 4.6
---------------------------------------------------------------
Net income $ 1.2 1.0% $ 3.8 11.6% $ 3.0 8.2%
===============================================================
17
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998
- ----
NET REVENUES
Net revenues for the twelve months ended December 31, 1999, increased
by $83.9 million or 257.4% from the nine months ended December 31, 1998, due
principally to the merger with the PIA Companies and the MCI Acquisition as well
as the inclusion of 12 months of SPAR's revenues in 1999. All of the net
revenues derived from the acquisition of the PIA Companies and the MCI
Acquisition since their respective dates of acquisition were included in the
twelve months ended December 31, 1999, with no comparable revenues in the nine
months ended December 31, 1998.
18
The following table sets forth net revenues by division in dollars and
as a percentage of total net revenues for the periods indicated:
Year Ended Nine Months Ended
December 31, 1999 December 31, 1998 Change
(amounts in millions) Amount % Amount % %
----------- ------------ ----------- ----------- ------------
Merchandising Services $ 79.6 68.3% $ 32.6 100.0% 144.2%
Incentive Marketing 36.9 31.7 - - -
----------- ------------ ----------- ----------- ------------
Net revenues $ 116.5 100.0% $ 32.6 100.0% 257.4%
=========== ============ =========== =========== ============
Merchandising Services net revenues for the twelve months ended
December 31, 1999, were $79.6 million, compared to $32.6 million for the nine
months ended December 31, 1998, a 144.2% increase. The increase in net revenues
is primarily attributed to the inclusion of $38.0 million of net revenues of the
PIA Companies' merchandising operations since their acquisition, as well as the
inclusion of 12 months of SPAR's revenues in 1999. Subsequent to the PIA merger,
the Company determined certain PIA merchandising programs were expensive to
manage, required high fixed costs and did not provide maximum value to the
respective customers. Attempts to reduce the costs of these programs and satisfy
the customer were unsuccessful. Consequently, these programs will no longer
continue in the year 2000. These programs represented approximately 29% of 1999
Merchandising Services' net revenues.
Incentive Marketing net revenues for the twelve months ended December
31, 1999, were $36.9 million, with no comparable net revenues for the nine
months ended December 31, 1998. The increase in net revenues is attributable
entirely to the inclusion of net revenues of SPGI since the MCI Acquisition.
COST OF REVENUES
Cost of revenues in the Merchandising Services segment consist of
in-store labor (including travel expenses) and field management. Cost of
revenues in the Company's Incentive Marketing segment consists of direct labor,
independent contractor expenses, food, beverage, entertainment and travel costs.
Cost of revenues for the twelve months ended December 31, 1999, were $81.3
million or 69.8% of net revenues, compared to $16.2 million or 49.7% of net
revenues for the nine months ended December 31, 1998,.
The following table sets forth cost of revenues by segment in dollars and
as a percentage of segment net revenues for the periods indicated:
Year Ended December Nine Months Ended
31, 1999 December 31, 1998 Change
(amounts in millions) Amount % Amount % %
----------- ------------ ----------- ----------- ------------
Merchandising Services $ 50.5 63.4% $ 16.2 49.7% 211.7%
Incentive Marketing 30.8 83.5 - - -
----------- ------------ ----------- ----------- ------------
Total cost of revenues $ 81.3 69.8% $ 16.2 49.7% 401.9%
=========== ============ =========== =========== ============
19
Merchandising Services cost of revenues as a percentage of net revenues
increased 211.7% to 63.4% for the twelve months ended December 31, 1999,
compared to 49.7% for the nine months ended December 31, 1998. This increase is
principally attributable to the higher labor cost structure of the PIA
Companies' field organization. The SPAR Group has taken steps to control and
improve gross profits and has implemented synergy plans to control direct costs
(see Restructuring and Other Charges, Note 14, to the Financial Statements
included in this Form 10-K).
Incentive Marketing cost of revenues as a percentage of net revenues
was 83.5 % for the twelve months ended December 31, 1999, with no comparable
cost of revenues for the nine months ended December 31, 1998.
20
OPERATING EXPENSES
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management information systems,
executive compensation, human resources expenses, and accounting expenses. The
following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
Year Ended December Nine Months Ended
31, 1999 December 31, 1998 Change
(amounts in millions) Amount % Amount % %
-------------------------------------------------------------
Selling, general & administrative $ 28.8 24.7% $ 10.0 30.7% 188.0%
Depreciation and amortization 2.2 1.9 0.1 0.3 2100.0%
-------------------------------------------------------------
Total operating expenses $ 31.0 26.6% $ 10.1 31.0% 206.9%
=============================================================
Selling, general and administrative expenses increased by 188.0% for
the twelve months ended December 31, 1999, to $28.8 million compared to $10.0
million for the nine months ended December 31, 1998. As a percentage of net
revenues, selling, general and administrative expenses decreased to 24.7% for
the twelve months ended December 31, 1999, from 30.7% for the nine months ended
December 31, 1998. This increase in dollars was due primarily to the inclusion
of both SPGI and the PIA Companies' higher overhead structure during 1999, a non
recurring expense of $.8 million resulting from the grant of options and
issuance of stock to a consultant, the result of approximately $.6 million of
non recurring merger related selling, general and administrative expenses, as
well as the inclusion of 12 months of SPAR's selling, general and administrative
expenses in 1999. The decrease in selling, general and administrative expenses
as percentage of net revenue reflects the results of the partial implementation
of the Company's restructuring plan during 1999, and the increase in revenue
resulting from the acquisitions of the PIA and SPGI businesses. Through December
1999, operating initiatives have reduced selling, general and administrative
expenses by approximately $.9 million per month. The Company expects that the
continued implementation of its restructuring plan during 2000 will further
reduce selling, general and administrative expenses in the future.
Depreciation and amortization increased by $2.1 million for the twelve
months ended December 31, 1999, due primarily to the amortization of goodwill
recognized by the purchases of the PIA Companies and the business and assets of
MCI, as well as from depreciation and amortization of customized internal
software costs capitalized (under SOP 98-1) in previous periods.
OTHER EXPENSES
Other expenses increased $1.4 million for the twelve months ended
December 31, 1999, over the nine month period ended December 31, 1998, due to
increased interest expenses resulting from increased borrowings on the bank
revolving line of credit and term loan and MCI seller financing.
INCOME TAXES
Income taxes increased to $3.1 million for the twelve months ended
December 31, 1999, from zero for the nine months ended December 31, 1998. The
increase was a result of the termination of the subchapter S status of certain
of the SPAR companies for federal and state tax purposes.
21
PRO FORMA INCOME TAXES
The pro forma income tax provisions for the twelve months ended December
31, 1999, and nine months ended December 31, 1998, have been computed using a
combined federal and state income tax rate of 36.9% after adjusting for the
effects of non-tax deductible items.
PRO FORMA NET INCOME
The SPAR Group had pro forma net income of approximately $1.2 million
for the twelve months ended December 31, 1999, or $0.08 per pro forma basic and
diluted share compared to pro forma net income of $3.8 million or $0.30 per pro
forma basic and diluted share for the nine months ended December 31, 1998. The
decrease in pro forma net income is primarily the result of the inclusion of
approximately $1.9 million in losses generated by the PIA Companies and
Incentive Marketing Division for the six and eleven and one half months,
respectively, ended December 31, 1999. The Company is currently consolidating
and restructuring the operations of the PIA Companies to reduce labor and
administrative costs (see Restructuring and Other Charges, Note 14, to the
Financial Statements included in this Form 10-K).
NINE MONTHS ENDED DECEMBER 31, 1998, COMPARED TO TWELVE MONTHS ENDED MARCH 31,
- ------------------------------------------------------------------------------
1998
- ----
NET REVENUES
Net revenues for the nine months ended December 31, 1998, were $32.6
million, as compared to net revenues for the twelve months ended March 31, 1998,
of $36.8 million. On an annualized basis, net revenues for the nine-month period
ended December 31, 1998, would have been $43.5 million, an 18.2% increase over
the prior twelve-month period. The increase was primarily due to increased sales
of in-store merchandising, predominantly in the home video sector.
COST OF REVENUES
Cost of revenues consists of in-store labor (including travel expenses)
and field management. Cost of revenues for the nine months ended December 31,
1998, and the twelve months ended March 31, 1998 were $16.2 million and $19.4
million, respectively. As a percentage of net revenues, cost of revenues for the
nine months ended December 31, 1998, decreased slightly to 49.7% of net
revenues, compared to 52.7% for the twelve months ended March 31, 1998.
OPERATING EXPENSES
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management information systems,
executive compensation, human resources expenses, and accounting expenses.
Selling, general and administrative expenses were $10.0 million for the
nine months ended December 31, 1998, versus $12.1 million for the twelve months
ended March 31, 1998. As a percentage of net revenues, selling, general and
administrative expenses were 30.7% for the nine months ended December 31, 1998,
compared to 32.9% for the twelve months ended March 31, 1998. This decrease is
primarily the result of higher net revenues and continued cost controls
implemented by the Company during the nine months ended December 31, 1998.
Depreciation and amortization decreased approximately $19,000 for the
nine months ended December 31, 1998, compared to the twelve months ended March
31, 1998. However, on an annualized basis, depreciation and amortization for the
nine month period ended December 31, 1998, would have been approximately
$189,000, an increase of approximately $28,000, an amount consistent with the
increase in fixed assets during the nine month period ended December 31, 1998.
22
OTHER EXPENSES
Other expenses decreased to approximately $155,000 for the nine months
ended December 31, 1998 from approximately $390,000 for the twelve months ended
March 31, 1998. As a percentage of net revenue, other expenses decreased to 0.6%
for the nine months ended December 31, 1998, from 1.1% for the twelve months
ended March 31, 1998.
PRO FORMA INCOME TAXES
The pro forma income tax provisions for the nine months ended December
31, 1998, and twelve months ended March 31, 1998, have been computed using a
combined federal and state income tax rate of 36.9% after adjusting for the
effects of non-tax deductible items.
PRO FORMA NET INCOME
As a result of the factors discussed above, pro forma net income
increased to $3.8 million or $0.30 per pro forma basic and diluted share for the
nine months ended December 31, 1998, from $3.0 million or $0.24 per pro forma
basic and diluted share for the twelve months ended March 31, 1998. On an
annualized basis, pro forma net income for the nine months ended December 31,
1998, would have been $5.1 million, a 70% increase over the twelve months ended
March 31, 1998. As a percentage of net revenues, pro forma net income increased
to 11.7% for the nine months ended December 31, 1998, from 8.2% for the twelve
months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In the twelve months ended December 31, 1999, the SPAR Group had
pre-tax income of $2.6 million and experienced a negative operating cash flow of
$5.0 million. As previously noted, the Merger with PIA was consummated on July
8, 1999, and is expected to reduce fixed costs and create synergies directly
impacting the SPAR Group's profitability and cash flow.
The SPAR Group experienced a net increase in cash and cash equivalents
of $1.2 million for the twelve months ended December 31, 1999. With the existing
revolving line of credit, subject to availability, timely collection of
receivables, and the SPAR Group's current working capital position, management
believes the funding of operations over the next twelve months will be
sufficient to maintain on-going operations.
DEBT
Prior to the Merger, SMF had a loan facility comprised of a term loan
of $3.0 million and an asset based revolving credit facility under which it was
able to borrow up to a maximum of $6.0 million depending upon its borrowing base
availability (See Note 5 to the Financial Statements), which has been superseded
by (and continued as part of) the current facility described below.
In 1999, IBJ Whitehall and the members of the SPAR Group (other than
PIA Canada) (collectively, the "Borrowers") entered into a Revolving Credit,
Term Loan and Security Agreement (the "Bank Loan Agreement"), pursuant to which
the Borrowers are permitted to borrow up to a maximum of $14 million on a
revolving credit basis, and $2.5 million on a term basis (the "Term Loan"). The
revolving loans bear interest at IBJ Whitehall's "Alternate Base Rate I" plus
one-half of one percent (0.50%) (a total of 9.5% per annum at December 31,
1999), and the Term Loan bears interest at such "Alternate Based Rate II" plus
three-quarters of one percent (0.75%) (a total of 10.0% per annum at December
31, 1999). The Bank Loan Agreement's revolving credit loans of $1.5 million and
$12.5 million are scheduled to mature on June 30, 2000, and September 21, 2002,
respectively. The Term Loan amortizes in equal monthly installments of $83,334
each. In addition, the Borrowers are required to make mandatory prepayments in
an amount equal to 25% of Excess Cash Flow, as defined in the Bank Loan
Agreement, for each fiscal year, to be applied first to the Term Loan and then
to the revolving credit loans (subject to the Borrowers'
23
ability to re-borrow revolving advances in accordance with the terms of the Bank
Loan Agreement). The facility is secured with the assets of the SPAR Group.
The Bank Loan Agreement contains an option for the Bank to purchase
16,667 shares of common stock of the Company for $0.01 per share in the event
that the Company's average closing share price over ten consecutive trading day
period exceeds $15.00 per share. This option expires September 22, 2002.
The Bank Loan Agreement contains certain financial covenants that must
be met by the Borrowers on a consolidated basis, among which are a minimum "Net
Worth," a "Fixed Charge Coverage Ratio", a minimum ratio of Debt to EBITDA, and
a minimum EBITDA, as such terms are defined in the Bank Loan Agreement.
The balance outstanding on the revolving line of credit was $13.3
million and $4.1 million at December 31, 1999, and 1998, respectively. As of
December 31, 1999, the SPAR Group had unused availability under the line of
credit to borrow up to an additional $700,000.
CASH AND CASH EQUIVALENTS
Net cash used in operating activities for the twelve months ended
December 31, 1999, was $5.0 million, compared with net cash provided of $5.3
million for the nine months ended December 31, 1998. This use of cash for
operating activities in 1999 resulted from an increase in accounts receivable
consistent with the increase in revenues subsequent to the PIA and MCI
acquisitions, as well as decreases in accounts payable and deferred revenue (net
of the PIA and MCI acquisitions).
Net cash provided from investing activities for the twelve months ended
December 31, 1999, was $5.0 million, compared with net cash used of $731,000 for
the nine months ended December 31, 1998. The increase in net cash provided from
investing activities resulted primarily from the purchases of PIA and MCI during
1999, net of cash acquired.
Net cash provided by financing activities for the twelve months ended
December 31, 1999, was $1.1 million, compared with net cash used by financing
activities of $910,000 for the nine months ended December 31, 1998. The increase
in net cash provided from financing activities was primarily due to borrowings
made during 1999 on the Company's line of credit.
The above activity resulted in a net increase in cash and cash
equivalents of $1.2 million for the twelve months ended December 31, 1999,
compared to a net decrease of $1.0 million for the nine months ended December
31, 1998.
Cash and cash equivalents totaled $2.1 million at December 31, 1999,
compared with $910,000 at December 31, 1998. At December 31, 1999, the Company
had negative working capital of $639,000 as compared to negative working capital
at December 31, 1998 of $2.2 million, and current ratios of 1.0 and 0.9 as of
December 31, 1999, and 1998, respectively.
Cash and cash equivalents and the timely collection of its receivables
provide the SPAR Group's current liquidity. However, the potential of delays in
collection of receivables due from any of the SPAR Group's major clients, or a
significant reduction in business from such clients, or the inability to acquire
new clients, would have a material adverse effect on the SPAR Group's cash
resources and its ongoing ability to fund operations.
24
The SPAR Group is obligated, under certain circumstances, to pay
severance compensation to its employees and other costs in connection with the
Merger of approximately $5.4 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 $1.3 million. The SPAR Group has also accrued approximately $2.4
million for expenses incurred by PIA prior to the Merger, which have not been
paid. Management believes the current bank credit facilities are sufficient to
fund operations, and working capital, including the current maturities of debt
obligations, but may not be sufficient to reduce obligations of the Merger with
PIA. The Company is currently negotiating with its bank for an increase in its
credit facility to meet the non-operational credit needs and is also working to
secure additional long-term capital. However, there can be no assurances that
the Company will be successful in these negotiations.
The transfer of the Company's securities to the Nasdaq SmallCap Market
also could affect its ability to raise equity capital.
Certain 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 assets of Old MCI. These
stockholders also were 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 13 to the Financial Statements). Those amounts were
converted into promissory notes issued to these certain stockholders severally
by SMF, SINC and SPGI prior to the Merger, which aggregated $6.2 million. As of
December 31, 1999, a total of $5.8 million remained outstanding under these
notes.
YEAR 2000 SOFTWARE COSTS
As of the filing date of this Annual Report on Form 10-K, the Company
has not experienced any Year 2000 issues arising from its systems or those of
its material vendors and suppliers. If there are ongoing Year 2000 issues that
might arise at a later date, the Company has contingency plans in place to
address these issues. The Company continues to maintain contact with third
parties with whom it has material relationships, such as vendors, suppliers and
financial institutions, with respect to the third parties' Year 2000 compliance
and any ongoing Year 2000 issues that might arise at a later date. The Company
has incurred costs of approximately $500,000 in connection with identifying,
assessing, remediating and testing Year 2000 issues and does not expect to incur
material costs in the future. These costs have consisted primarily of personnel
expense for employees who have had only a portion of their time dedicated to the
Year 2000 remediation effort. It has been the Company's policy to expense these
costs as incurred. These costs were expensed prior to December 31, 1999, and
have been funded through operating cash flows. In light of the Company's
efforts, the Year 2000 issue has had no material adverse effect to date on the
business or results of operations of the Company, and is not expected to have a
material impact on the Company's financial condition. However, there can be no
assurance that the Company or any third parties will not have ongoing Year 2000
issues that may have a material adverse effect on the Company's business,
operating results and financial condition in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The SPAR Group is exposed to market risk related to the variable
interest rate on the line of credit and term note and the variable yield on its
cash and cash equivalents. The SPAR Group's accounting policies for financial
instruments and disclosures relating to financial instruments require that the
SPAR Group's consolidated balance sheets include the following financial
instruments: cash and cash equivalents, accounts receivable, accounts payable
and long term debt. The SPAR Group considers carrying amounts of current assets
and liabilities in the consolidated financial statements to approximate the fair
value for these financial instruments, because of the relatively short period of
time between origination of the instruments and their expected realization. The
carrying amounts of long-term debt approximate fair value because the obligation
bears interest at a floating rate. The SPAR Group monitors the risks associated
with interest rates and financial instrument positions. The SPAR Group's
investment policy
25
objectives require the preservation and safety of the principal, and the
maximization of the return on investment based upon the safety and liquidity
objectives.
The SPAR Group's revenue derived from international operations is not
material and, therefore, the risk related to foreign currency exchange rates is
not material.
INVESTMENT PORTFOLIO
The SPAR Group has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments. The SPAR
Group invests its cash and cash equivalents in investments in high-quality and
highly liquid investments consisting of taxable money market instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10, 11, 12 AND 13.
The information required in these items 10,11,12 and 13 of this Form
10-K is incorporated by reference to those portions of the Company's 2000 Proxy
Statement, which contains such information.
26
PART IV
ITEM 14. 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 and Combined Balance Sheets as of December 31, 1999 and
December 31, 1998 F-2
Consolidated and Combined Statements of Operations for the year ended
December 31, 1999, for the nine month period ended December 31,
1998, and the year ended March 31, 1998 F-3
Consolidated and Combined Statements of Stockholders' Equity for the
year ended December 31, 1999, for the nine month period ended
December 31, 1998, and the year ended March 31, 1998 F-4
Consolidated and Combined Statements of Cash Flows for the year ended
December 31, 1999, for the nine month period ended December 31,
1998, and the year ended March 31, 1998 F-5
Notes to Financial F-6
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1999 the nine month period ended December 31, 1998,
and the year ended March 31, 1998 F-39
3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc.,
as amended. (incorporated by reference to the
Company's Registration Statement on Form S-1
(Registration No. 33-80429) as filed with the
Securities and Exchange Commission on December 14,
1995 (the "Form S-1") and to Exhibit 3.1 to the
Company's Form 10-Q for the 3rd Quarter ended
September 30, 1999).
3.2 By-laws of PIA (incorporated by reference to the
Form S-1).
4.1 Registration Rights Agreement entered into as of
January 21, 1992 by and between RVM Holding
Corporation. RVM/PIA, a California Limited
Partnership, The Riordan Foundation and
Creditanstalt-Bankverine (incorporated by
reference to the Form S-1).
10.1 1990 Stock Option Plan (incorporated by reference
to the Form S-1).
10.2 Amended and Restated 1995 Stock Option Plan
(incorporated by reference of Exhibit 10.2 to the
Company's Form 10-Q for the 2nd Quarter ended July
3, 1998).
10.3 1995 Stock Option Plan for Non-employee Directors
(incorporated by reference to the Form S-1).
27
10.4+* Employment Agreement dated as of June 25, 1997
between PIA and Terry R. Peets (incorporated by
reference to Exhibit 10.5 to the Company's Form
10-Q for the 2nd Quarter ended June 30, 1997)
10.5+* Severance Agreement dated as of February 20, 1998
between PIA and Cathy L. Wood (incorporated by
reference to Exhibit 10.5 to the Company's Form
10-Q for the 1st Quarter ended April 30, 1998)
10.6* Severance Agreement dated as of August 10, 1998
between PIA and Clinton E. Owens (incorporated by
reference to Exhibit 10.6 to the Company's Form
10-Q for the 3rd Quarter ended October 2, 1998)
10.7+* Amendment No. 1 to Employment Agreement dated as
of October 1, 1998 between PIA and Terry R. Peets.
10.8+* Amended and Restated Severance Compensation
Agreement dated as of October 1, 1998 between PIA
and Cathy L. Wood.
10.9+ Loan and Security Agreement dated December 7, 1998
among Mellon Bank, N.A., PIA Merchandising Co.,
Inc., Pacific Indoor Display Co. and PIA.
10.10+ Agreement and Plan of Merger dated as of February
28, 1999 among PIA, SG Acquisition, Inc., PIA
Merchandising Co., Inc., SPAR Acquisition, Inc.,
SPAR Marketing, Inc., SPAR Marketing Force, Inc.,
SPAR, Inc., SPAR/Burgoyne Retail Services, Inc.,
SPAR Incentive Marketing, Inc., SPAR MCI
Performance Group, Inc. and SPAR Trademarks, Inc.
10.11+ Voting Agreement dated as of February 28, 1999
among PIA, Clinton E. Owens, RVM/PIA, California
limited partnership, Robert G. Brown and William
H. Bartels.
10.12* Amendment No. 2 to Employment Agreement dated as
of February 11, 1999 between PIA and Terry R.
Peets (incorporated by reference to Exhibit 10.12
to the Company's Form 10-Q for the 2nd Quarter
ended April 2, 1999).
10.13 Special Purpose Stock Option Plan (incorporated by
reference to Exhibit 10.13 of the Company's Form
10-Q for the 2nd Quarter ended July 2, 1999.
10.14 Amendment No. 1 to Severance Agreement dated as of
May 18, 1999 between the Company and Cathy L. Wood
(incorporated by reference to Exhibit 10.14 of the
Company's Form 10-Q for the 3rd Quarter ended
September 30, 1999).
10.15+ Second Amended and Restated Revolving Credit, Term
+ Loan and Security Agreement by and among IBJ
Whitehall Business Credit Corporation with SPAR
Marketing Force, Inc., SPAR Group, Inc., SPAR,
Inc., SPAR/Burgoyne Retail Services, Inc., SPAR
Incentive Marketing, Inc., SPAR Trademarks, Inc.,
SPAR MCI Performance Group, Inc., SPAR Marketing,
Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., PIA Merchandising, Co., Inc.,
Pacific Indoor Display Co., Inc., and Pivotal
Sales Company dated as of September 22, 1999.
10.16+ Waiver and Amendment No. 1 to Second Amended and
+ Restated Revolving Credit, Term Loan and Security
Agreement by and between SPAR Marketing Force,
Inc., SPAR, Inc., SPAR/Burgoyne Retail Services,
Inc., SPAR Group, Inc., SPAR Incentive Marketing,
Inc., SPAR Trademarks, Inc., SPAR Performance
Group, Inc. (f/k/a SPAR MCI Performance Group,
Inc.), SPAR Marketing, Inc. (DE), SPAR Marketing,
Inc. (NV), SPAR Acquisition, Inc., PIA
Merchandising Co., Inc., Pacific Indoor Display
Co., Inc. and Pivotal Sales Company (each a
"Borrower" and collectively, the "Borrowers") and
IBJ Whitehall Business Credit Corporation
("Lender") dated as of December 8, 1999.
21.1+ Subsidiaries of the Company
+
23.1+ Consent of Ernst & Young LLP
+
27.1+ Financial Data Schedule
+
+ Previously filed with initial Form 10-K for the
fiscal year ended January 1, 1999.
+ Filed herewith.
+
* Management contract or compensatory plan or
arrangement required to be filed as an exhibit
pursuant to applicable rules of the Securities and
Exchange Commission.
28
(B) REPORTS ON FORM 8-K.
Form 8-K dated July 8, 1999 and filed with the Commission on July 23,
1999. Form 8-K/A dated July 8, 1999 and filed with the Commission on
September 20, 1999.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1943, the Registrant has duly caused this amendment to the
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPAR GROUP, INC.
By: /s/ Robert G. Brown
-----------------------
Robert G. Brown
President, Chief Executive Officer and
Chairman of the Board
Date: April 12, 2000
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amendment to the report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Robert G. Brown President, Chief Executive Officer and Chairman of the Board April 12, 2000
- -------------------------
Robert G. Brown
/s/ William H. Bartels Vice Chairman, Senior Vice President, Treasurer and Director April 12, 2000
- -------------------------
William H. Bartels
/s/ Charles Cimitile Chief Financial Officer April 12, 2000
- ------------------------- and Secretary (Principal Financial and Accounting Officer)
Charles Cimitile
/s/ Robert O. Aders Director April 12, 2000
- -------------------------
Robert O. Aders
/s/ J. Christopher Lewis Director April 12, 2000
- -------------------------
J. Christopher Lewis
30
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Stockholders of
SPAR Group, Inc.
We have audited the consolidated balance sheet of SPAR Group, Inc. as of
December 31, 1999, the combined balance sheet of SPAR Group, Inc. as of December
31, 1998, and the related consolidated or combined statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1999, the
nine months ended December 31, 1998 and the year ended March 31, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). 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. at December 31, 1999 and 1998, and the results of its operations and
its cash flows for the year ended December 31, 1999, the nine months ended
December 31, 1998 and the year ended March 31, 1998, 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.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 3, 2000
F-1
SPAR Group, Inc.
Consolidated and Combined Balance Sheets
(In thousands, except share data)
December 31
1999 1998
---------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,074 $ 910
Accounts receivable, net 28,858 10,627
Prepaid expenses and other current assets 1,134 708
Prepaid program costs 2,777 -
Investment in affiliate 710 -
Due from certain stockholders - 1,500
---------------------------------
Total current assets 35,553 13,745
Property and equipment, net 3,459 827
Goodwill and other intangibles, net 23,767 -
Other assets 308 293
---------------------------------
Total assets $63,087 $14,865
=================================
Liabilities and stockholders' equity (deficit) Current liabilities:
Line of credit and notes payable $ 857 $ 4,150
Accounts payable 7,419 1,534
Accrued expenses and other current liabilities 9,954 2,808
Deferred revenue 6,341 -
Restructuring and other charges 5,404 -
Due to affiliates 178 205
Due to certain stockholders 3,847 6,577
Note payable to MCI 1,045 -
Current portion of long-term debt 1,147 685
---------------------------------
Total current liabilities 36,192 15,959
Line of credit and long-term liabilities, net of current portion 14,009 311
Long-term debt due to certain stockholders 2,000 -
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value:
Authorized shares - 3,000,000
Issued and outstanding shares - none - - Common stock, $.01 par value:
Authorized shares - 47,000,000
Issued and outstanding shares - 18,154,666 as of December 31, 1999 182 -
Additional paid-in capital (deficit) 10,095 -
Retained earnings 609 -
-----------------
Total stockholders' equity (deficit) 10,886 (1,405)
---------------------------------
Total liabilities and stockholders' equity (deficit) $63,087 $14,865
=================================
See accompanying notes.
F-2
SPAR Group, Inc.
Consolidated and Combined Statements of Operations
(In thousands, except per share data)
Nine Months
Year ended ended Year ended
December 31, December 31, March 31,
1999 1998 1998
-------------------------------------------------
Net revenues $116,525 $32,601 $36,804
Cost of revenues 81,288 16,217 19,417
-------------------------------------------------
Gross profit 35,237 16,384 17,387
Selling, general and administrative expenses 28,830 9,978 12,087
Depreciation and amortization 2,182 142 161
-------------------------------------------------
Operating income 4,225 6,264 5,139
Other income (expense) 90 149 (36)
Interest expense (1,662) (304) (354)
-------------------------------------------------
(1,572) (155) (390)
-------------------------------------------------
Income before provision for income taxes 2,653 6,109 4,749
Provision for income taxes:
Nonrecurring charge for termination of Subchapter S election 3,100 - -
Income taxes 48 - -
-------------------------------------------------
Net income (loss) $ (495) $ 6,109 $ 4,749
=================================================
Unaudited pro forma information:
Income before income tax provision $ 2,653 $ 6,109 $ 4,749
Pro forma income tax provision 1,411 2,253 1,751
-------------------------------------------------
Pro forma net income $ 1,242 $ 3,856 $ 2,998
=================================================
Pro forma basic earnings per share $0.08 $0.30 $0.24
=================================================
Pro forma basic weighted average common shares 15,361 12,659 12,659
=================================================
Pro forma diluted earnings per share $0.08 $0.30 $0.24
=================================================
Pro forma diluted weighted average common shares 15,367 12,659 12,659
=================================================
See accompanying notes.
F-3
SPAR Group, Inc.
Consolidated and Combined Statement of Stockholders' Equity
(In thousands)
Retained
Common Stock Additional Earnings Total
----------------------------- Paid-In (Accumulated Stockholders'
Shares Amount Capital Deficit) Equity
--------------------------------------------------------------------------
Balance at March 31, 1997 $ 935
Net income 4,749
Net distributions to stockholders (2,542)
----------------
Balance at March 31, 1998 3,142
Net income 6,109
Net distributions to stockholders (10,656)
----------------
Balance at December 31, 1998 (1,405)
Net income through July 8, 1999 1,996
Net distributions to stockholders (332)
Stock option compensation 752
Deferred tax provision - termination of
Subchapter S election (3,100)
----------------
Balance at July 8, 1999 $ (2,089)
================
Reorganization prior to reverse merger with PIA 12,659 $127 $ (2,216) $ - $ (2,089)
Reverse merger with PIA 5,494 55 12,307 - 12,362
Issuance of common stock 2 - 4 - 4
Net income July 9, 1999 to December 31, 1999 - - - 609 609
--------------------------------------------------------------------------
Balance at December 31, 1999 18,155 $182 $10,095 $609 $10,886
==========================================================================
See accompanying notes.
F-4
SPAR Group, Inc.
Consolidated and Combined Statements of Cash Flows
(In thousands)
Nine Months
Year ended ended Year ended
December 31, December 31, March 31,
1999 1998 1998
-------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (495) $6,109 $4,749
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation 881 131 152
Amortization 1,301 11 9
Provision for doubtful accounts and others, net 845 - -
Equity in earnings of affiliate (91) - -
Taxes on termination of Subchapter S corporation election 3,100 - -
Stock related compensation 752 - -
Changes in operating assets and liabilities:
Accounts receivable (5,342) (2,578) (484)
Prepaid expenses and other current assets 36 (371) (217)
Due from affiliates - 60 72
Accounts payable and other liabilities (3,294) 1,957 (815)
Due to affiliates - (57) (356)
Deferred revenue (2,666) - (467)
-------------------------------------------------
Net cash (used in) provided by operating activities (4,973) 5,262 2,643
INVESTING ACTIVITIES
Purchases of property and equipment (2,105) (731) (160)
Purchase of businesses, net of cash acquired 7,109 - -
-------------------------------------------------
Net cash provided by (used in) investing activities 5,004 (731) (160)
FINANCING ACTIVITIES
Net proceeds from line of credit 9,207 1,748 346
Proceeds from term loan 3,000 - -
Net (payments of) proceeds from long-term debt due to
Spar Marketing Services, Inc. (685) (281) 409
Due to (from) certain stockholders 3,500 (1,500) (1,297)
Payments of note payable, MCI (9,577) - -
Payment of other long-term debt (1,254) (225) (500)
Distributions to certain stockholders (3,062) (5,282) (42)
Proceeds from issuance of common stock 4 - -
-------------------------------------------------
Net cash provided by (used in) financing activities 1,133 (5,540) (1,084)
-------------------------------------------------
Net increase (decrease) in cash 1,164 (1,009) 1,399
Cash at beginning of period 910 1,919 520
-------------------------------------------------
Cash at end of period $2,074 $ 910 $1,919
=================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 892 $ 300 $ 353
=================================================
Non-cash transactions:
Distributions payable to certain stockholders $1,332 $6,577 $2,500
=================================================
Equipment purchased with capital leases $ 518 $ - $ -
=================================================
See accompanying notes.
F-5
SPAR Group, Inc.
Notes to Financial Statements
December 31, 1999
1. BUSINESS AND ORGANIZATION
The SPAR Group, Inc., a Delaware corporation formerly known as PIA Merchandising
Services, Inc. ("SPAR Group" or the "Company") is a supplier of in-store
merchandising and marketing services, and premium incentive marketing services
throughout the United States and Canada. The Company also provides database
marketing, teleservices, marketing research and Internet-based software. The
Company's operations are divided into three divisions: the Merchandising
Services Division, the Incentive Marketing Division, and the Internet Division.
The Merchandising Services Division provides merchandising services, database
marketing, teleservices, and marketing research to manufacturers and retailers
primarily in the mass merchandiser, video, chain, discount drug store and
grocery industries. The Incentive Marketing Division designs and implements
premium incentives, manages meetings, group travel and training programs
principally for corporate clients. In March 2000, the Company announced the
formation of an Internet Division for the purpose of marketing its proprietary
internet-based computer software.
MERCHANDISING SERVICES DIVISION
The Company's Merchandising Services Division consists of (1) SPAR Marketing,
Inc. ("SMI") (an intermediate holding company), Spar Marketing Force, Inc.
("SMF"), SPAR Marketing, Inc., a Nevada corporation ("SMNEV"), SPAR/Burgoyne
Retail Services, Inc. ("SBRS"), and SPAR, Inc. ("SINC") (collectively, the "SPAR
Marketing Companies") and (2) PIA Merchandising, Co., Inc., Pacific Indoor
Display d/b/a Retail Resources, Pivotal Sales Company and PIA Merchandising Ltd.
(collective, "PIA" or the "PIA Companies"). The SPAR Marketing Companies, the
original predecessor of which was founded in 1967, provide nationwide retail
merchandising and marketing services to home video, consumer goods and food
products companies. The PIA Companies, through a predecessor of the Company
first organized in 1943, also are suppliers of in-store merchandising and sales
services throughout the United States and Canada, and were "acquired" by the
SPAR Companies for accounting purposes pursuant to the Merger on July 8, 1999
(See Note 3, Business Combinations - PIA Reverse Merger, below). The PIA
Companies provide these services primarily on behalf of consumer product
manufacturers and retailers at mass merchandisers, drug stores and retail
grocery stores. The Company currently operates in all 50 states and provides a
broad range of in-store merchandising and other marketing services to many of
the nation's leading companies.
F-6
SPAR Group, Inc.
Notes to Financial Statements (continued)
1. BUSINESS AND ORGANIZATION (CONTINUED)
Merchandising services generally consist of special projects or regularly
scheduled routed services provided at the stores for a specific retailer or
multiple manufacturers primarily under multiple year contracts. Services also
include stand-alone large-scale implementations. These services may include
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 new
and promotional items. Specific in-store services can be initiated by retailers
and manufacturers, such as new product launches, special seasonal or promotional
merchandising, focused product support and product recalls. These services are
used typically for large-scale implementations requiring over 30 days to
complete. The Company also provides database marketing, telservices and research
services.
INCENTIVE MARKETING DIVISION
The Company's Incentive Marketing Division was created in January, 1999 through
the Company's purchase of the business and substantially all of the assets of
BIMA Group, Inc., a Texas corporation ("BIMA" or "MCI") originally founded in
1987 and formerly known as MCI Performance Group, Inc. (see Note 3) The purchase
was made by the Company's indirect subsidiary, SPAR Performance Group, Inc.,
formerly known as SPAR MCI Performance Group, Inc. ("SPGI"). SPGI provides a
wide variety of consulting, creative, program administration, travel and
merchandise fulfillment, and training services to companies seeking to retain
and motivate employees, salespeople, dealers, distributors, retailers, and
consumers toward certain actions or objectives. SPGI's strategy enables
companies to outsource the entire design, implementation and fulfillment of
incentive programs in a one-stop, "umbrella" shopping approach. SPGI typically
consults with a client to design the most effective plan to achieve the client's
goals. SPGI then provides services necessary to implement the program, generates
detailed efficiency progress reports, and reports on the return on investment
upon completion of the program.
F-7
SPAR Group, Inc.
Notes to Financial Statements (continued)
1. BUSINESS AND ORGANIZATION (CONTINUED)
INTERNET DIVISION
In March 2000, the Company established its Internet Division to separately
market its application software products and services. The Company has developed
and is utilizing several Internet-based software products. The Internet Division
was established to market these applications to businesses with multiple
locations and large workforces desiring to improve day-to-day efficiency and
overall productivity.
See Note 13 for further descriptions of the Company's services and operating
segments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE OF FISCAL YEAR END
Effective April 1, 1998, the SPAR Group, Inc. changed its year end for financial
statement purposes to a calendar year.
BASIS OF PRESENTATION
CONSOLIDATION/COMBINATION
Through July 8, 1999, the combined financial statements include operating
companies owned by the same two stockholders (the "SPAR Companies"). On July 8,
1999, the SPAR Companies reorganized and completed a "reverse" merger with the
PIA Companies (see Note 3). From July 8, 1999, the consolidated financial
statements include the accounts of 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.
F-8
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's services are provided under contracts, which consist primarily of
fixed fee and commission-based arrangements. Revenues under fixed fee
arrangements are recognized based on a fixed monthly fee for a service period of
typically one year.
The Company's commission-based contracts provide for commissions to be earned
based on a percentage of the client's net sales of products to designated retail
chains. The Company receives monthly draws, which are recognized as commissions
earned. These monthly draws approximate estimated minimum revenue to be earned
on each contract for a service period of typically one year. The Company
recognizes adjustments on commission-based sales in the period such amounts
become determinable. Commissions are usually owed to the Company in excess of
draws received.
The Company also performs services on a specific project basis over a specified
period ranging from one to twelve months. Revenues related to these projects are
recognized on a percentage of completion method as services are performed or
costs are incurred. Provisions for estimated losses on uncompleted contracts are
recorded in the period in which such losses are determinable.
The Company also performs project based services, and the resultant revenues are
recognized upon the completion of the project.
UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent merchandising services performed that are
pending billing until the requisite documents have been processed or projects
have been completed.
F-9
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AGENCY FUNDS
Cash balances available for the administration of a customer's bonus program are
deposited in accounts with financial institutions in which the Company acts as
agent for a client pending payment settlement. Balances will fluctuate based
upon the receipt of funds from the client. These funds are considered neither an
asset nor liability of the Company. The balance of funds held in agency accounts
totaled approximately $11,000 and $35 million as of December 31, 1999 and 1998,
respectively.
PROPERTY AND 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.
OTHER ASSETS
Other assets consist primarily of refundable deposits.
DEFERRED REVENUE
Client payments received in advance of merchandising services performed are
classified as deferred revenue.
F-10
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the recoverability of long-lived assets, whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable and the undiscounted cash flows estimated to be generated by those
total assets are less than the assets' carrying amount, in accordance with
criteria established by Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets." A loss is recognized for
the difference between the carrying amount and the estimated fair value of the
asset. The Company made no adjustment to the carrying values of the assets
during the year ended December 31, 1999, the nine months ended December 31, 1998
and the year ended March 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and long-term debt.
The Company considers carrying amounts of current assets and liabilities in the
financial statements to approximate the fair value for these financial
instruments, because of the relatively short period of time between origination
of the instruments and their expected realization. The carrying amounts of
long-term debt approximates fair value because the obligation bears interest at
a variable rate. The carrying amount of notes payable approximates fair value
since the current effective rates reflect the market rate for debt with similar
terms and remaining maturities.
CONCENTRATION OF CREDIT RISK AND OTHER RISKS
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
places its cash with high credit quality financial institutions and investment
grade short-term investments, which limit the amount of credit exposure.
F-11
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
No single customer accounted for more than 10% of net revenues for the year
ended December 31, 1999. Three customers approximated 50% of net revenues for
the nine months ended December 31, 1998 and 51% of net revenues for the year
ended March 31, 1998, respectively. Additionally, one customer approximated 18%
of accounts receivable at December 31, 1999, while three customers approximated
50% and 49% of accounts receivable at December 31, 1998 and March 31, 1998,
respectively.
INCOME TAXES
From commencement through July 8, 1999, certain of the SPAR Companies had
elected, by the consent of their stockholders, to be taxed under the provisions
of subchapter S of the Internal Revenue Code (the "Code") with the exception of
SPAR/Burgoyne Retail Services, Inc., SPAR Acquisition, Inc., SPAR Incentive
Marketing, Inc. and SPAR Marketing, Inc., which were taxed as C corporations.
Under the provisions of the Code, the stockholders of the subchapter S companies
included the applicable SPAR Company's corporate income in their personal income
tax returns. Accordingly, these subchapter S companies were not subject to
federal corporate income tax during the period for which they were S
corporations. Certain states in which these subchapter S companies did business
do not accept certain provisions under subchapter S of the Code and, as a
result, income taxes in these states were a direct responsibility of the
Company.
The unaudited pro forma income tax information included in the statements of
operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for all periods presented.
In connection with the Company's July 1999 reorganization, the subchapter S
status of each applicable SPAR Company was terminated. Income taxes are provided
for the tax effects of transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related primarily to
differences between the basis of assets and liabilities for financial and tax
reporting. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
F-12
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
deductible when the assets and liabilities are recovered or settled. Deferred
taxes are also recognized for operating losses that are available to offset
future taxable income and tax credits that are available to offset future income
taxes. In the event the future consequences of differences between financial
reporting bases and tax bases of the Company's assets and liabilities result in
deferred tax assets, an evaluation of the probability of being able to realize
the future benefits indicated by such asset is required. A valuation allowance
is provided when it is more likely than not that some portion or the entire
deferred tax asset will not be realized.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation, requires disclosure of fair value method of accounting for
stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. The Company has chosen, under the provisions of SFAS No. 123, to
continue to account for employee stock-based transactions under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
The Company has disclosed in Note 11 to the consolidated financial statements
pro forma diluted net income (loss) and net income (loss) per share as if the
Company had applied the fair value method of accounting.
PRO FORMA EARNINGS PER SHARE
Pro forma basic earnings per share amounts are based upon the weighted average
number of common shares outstanding. Pro forma diluted earnings per share
amounts are based upon the weighted average number of common and potential
common shares for each period represented. Potential common shares include stock
options, using the treasury stock method. The pro forma basic and pro forma
diluted earnings per share amounts for periods prior to July 8, 1999 are based
upon 12,659,000 shares, although these shares were issued on July 9, 1999, as
required to comply with SFAS No. 128 and the Securities and Exchange Commission
Staff Accounting Bulletin 98 (SAB 98).
F-13
SPAR Group, Inc.
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 generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INTERNAL USE SOFTWARE DEVELOPMENT COSTS
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, SOP 98-1. The SPAR Group has adopted SOP 98-1 as of January 1, 1999, which
requires the capitalization of certain costs incurred in connection with
developing or obtaining internal use software. Prior to the adoption of SOP
98-1, the Company expensed all internal use software related costs as incurred.
The effect of adopting the SOP was to increase pro forma net income for the year
ended December 31, 1999 by approximately $980,000 and $0.06 per pro forma basic
and diluted earnings per share.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
which the Company is required to adopt effective in its fiscal year 2000. SFAS
No. 133 will require the Company to record all derivatives on the balance sheet
at fair value. The Company does not currently engage in hedging activities and
will continue to evaluate the effect of adopting SFAS No. 133. The Company is
expected to adopt SFAS No. 133 in its fiscal year 2000.
RECLASSIFICATIONS
Certain amounts presented for fiscal 1998 have been reclassified to conform to
the 1999 presentations.
F-14
SPAR Group, Inc.
Notes to Financial Statements (continued)
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 total purchase consideration does not reflect contingent consideration
related to earn-out arrangements included in the MCI Purchase Agreement. The MCI
Purchase Agreement provides for a post-closing adjustment whereby additional
contingent consideration will be payable to MCI in the event that earnings
before taxes for the year ended March 31, 1999 (as defined in the MCI Purchase
Agreement) exceed $3.5 million. The Company has determined that there is no
additional earn-out consideration to be paid.
The excess purchase price paid by SPGI for the business and assets of MCI over
the fair value of those assets was $13 million, subject to change from the
contingent earn-out arrangement, and is being amortized using the straight-line
method over 15 years.
PIA REVERSE MERGER
On July 8, 1999, SG Acquisition, Inc., a Nevada corporation ("PIA Acquisition"),
a wholly-owned subsidiary of PIA Merchandising Services, Inc., a Delaware
corporation ("PIA Delaware"), merged into and with SPAR Acquisition, Inc., a
Nevada corporation ("SAI") (the "Merger") pursuant to the Agreement and Plan of
Merger dated as of February 28, 1999, as amended (the "Merger Agreement"), by
and among (i) PIA Delaware, PIA Merchandising Co., Inc., a California
corporation
F-15
SPAR Group, Inc.
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
("PIA California"), and PIA Acquisition (collectively, the "PIA Parties"), and
(ii) SAI, SPAR Marketing, Inc., a Delaware corporation ("SMI"), SPAR Marketing
Force, Inc., a Nevada corporation, ("SMF") SPAR Marketing, Inc., a Nevada
corporation ("SMNEV"), SPAR, Inc., a Nevada corporation ("SINC"), SPAR/Burgoyne
Retail Services, Inc., an Ohio corporation ("SBRS"), SPAR Incentive Marketing,
Inc., a Delaware corporation ("SIM"), SPAR Performance Group, Inc., a Delaware
corporation ("SPGI") and SPAR Trademarks, Inc., a Nevada corporation ("STM")
(each a "SPAR Company" and collectively, the "SPAR Companies").
PIA Delaware (pre-Merger only), PIA California and each of the PIA California's
direct and indirect subsidiaries (i.e., Pacific Indoor Display Co., Inc., a
California corporation ("Pacific")), Pivotal Sales Company, a California
corporation ("Pivotal") and PIA Merchandising Limited, a corporation organized
under the laws of Nova Scotia ("PIA Canada"), may be referred to individually as
a "PIA Company" and collectively as the "PIA Companies."
In connection with the Merger, PIA Delaware changed its name to SPAR Group, Inc.
(which will be referred to post-Merger individually as "SGI" or the "Company").
Although the SPAR Companies became subsidiaries of PIA Delaware (now SGI) as a
result of this "reverse" Merger, the transaction has been accounted for as
required under generally accepted accounting principles as a purchase by the
SPAR Companies of the PIA Companies, with the books and records of SGI being
adjusted to reflect the historical operating results of the SPAR Companies.
In the transaction, the former shareholders and optionholders of SAI received
approximately 12.7 million shares of common stock and 134,114 common stock
options, respectively. The purchase price of approximately $12.3 million has
been allocated based on the estimated fair value of the assets of the PIA
Companies deemed for accounting purposes to have been acquired by the SPAR
Companies.
F-16
SPAR Group, Inc.
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
The goodwill that resulted from the Merger was calculated after giving effect to
the merger costs of the PIA Companies totaling $2.4 million and the anticipated
restructuring costs that are directly related to the Merger totaling $7.4
million (see Note 14, below). The excess purchase price deemed paid by the SPAR
Companies for the assets of the PIA Companies over the fair value of those
assets was $11.7 million and is being amortized using the straight-line method
over 15 years.
BUSINESS COMBINATIONS - PRO FORMA RESULTS
In accordance with generally accepted accounting principles, the operating
results of SPGI and the PIA Companies have been included in the condensed
consolidated statements of operations from the dates of the respective
acquisitions (see Note 1). The pro forma unaudited results below assume the
acquisitions occurred at the beginning of each of the periods ended December 31,
1999 and 1998 (in thousands, except per share amounts):
Nine Months
Year ended ended
December 31, December 31,
1999 1998
------------------------------------------
Net revenues $ 161,123 $ 147,189
==========================================
Operating (loss) income $ (4,854) $ 912
==========================================
Pro forma net (loss) income $ (4,490) $ 19
==========================================
Pro forma basic (loss) earnings per share $ (0.25) $ 0.00
==========================================
Pro forma diluted (loss) earnings per share $ (0.25) $ 0.00
==========================================
Basic weighted average common shares 18,155 18,155
==========================================
Diluted weighted average common shares 18,161 18,161
==========================================
F-17
SPAR Group, Inc.
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
The pro forma statements of operations reflect incremental amortization of
goodwill, interest expense, increases in bonuses to new SPGI management and
provisions for federal and state income taxes.
The pro forma statements of operations for the year ended December 31, 1999 and
the nine months ended December 31, 1998, include $3.5 million and $800,000 of
non-recurring charges by PIA Companies, respectively. These charges include
$3.0 million in merger and acquisition transaction costs, $500,000 in banking
cancellation fees for the year ended December 31, 1999 and $800,000 of purchased
consulting services related to the PIA Companies redirection of its technology
strategy incurred in the nine months ended December 31, 1998.
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisitions had been completed as of the beginning of each of
the periods presented, nor are they necessarily indicative of future
consolidated results.
4. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts receivable, net, consist of the following (in thousands):
December 31
1999 1998
------------------------------------
Trade $20,057 $ 7,087
Unbilled 9,796 4,145
Non-trade 915 -
------------------------------------
30,768 11,232
Less: Allowance for doubtful accounts and other 1,910 605
------------------------------------
$28,858 $10,627
====================================
F-18
SPAR Group, Inc.
Notes to Financial Statements (continued)
4. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
Goodwill and other intangibles, net, consists of the following (in thousands):
December 31
1999 1998
------------------------------------
Goodwill and other intangibles $25,068 $ -
Less accumulated amortization 1,301 -
------------------------------------
$23,767 $ -
====================================
Property and equipment consists of the following (in thousands):
December 31
1999 1998
------------------------------------
Equipment $2,058 $1,059
Furniture and fixtures 1,313 55
Leasehold improvements 150 74
Capitalized software development costs 1,159 -
------------------------------------
4,680 1,188
Less accumulated depreciation and amortization 1,221 361
------------------------------------
$3,459 $ 827
====================================
Accrued expenses and other current liabilities consists of the following (in
thousands):
December 31
1999 1998
------------------------------------
Accrued salaries and other related costs $2,359 $1,559
Accrued medical and compensation insurance 1,765 -
Amounts held on behalf of third parties 1,108 -
Accrued merger related costs 2,693 -
Other 2,029 1,249
------------------------------------
$9,954 $2,808
====================================
F-19
SPAR Group, Inc.
Notes to Financial Statements (continued)
5. LINE OF CREDIT AND LONG-TERM LIABILITIES
Prior to the PIA Merger (see Note 3), SMF was party to a Revolving Credit and
Security Agreement dated March 4, 1996 with IBJ Whitehall Business Credit
Corporation (as successor to IBJ Schroder Bank and Trust Company) ("IBJ
Whitehall") consisting of an asset based revolving credit facility under which
it was able to borrow up to a maximum of $6.0 million depending upon its
borrowing base availability. This agreement was amended and restated as of March
11, 1999 adding SBRS and SINC under a single loan facility with IBJ Whitehall
consisting of a term loan of $3.0 million and an asset based revolving credit
facility under which it was able to borrow up to a maximum of $6.0 million
depending upon its borrowing base availability. This facility has been
superseded by (and continued as part of) the facility described below.
In 1999, IBJ Whitehall and the members of the SPAR Group (other than PIA Canada)
(collectively, the "Borrowers") entered into a Revolving Credit, Term Loan and
Security Agreements (the "Bank Loan Agreement"), pursuant to which the
Borrowers are permitted to borrow up to a maximum of $14 million on a revolving
credit basis, and $3.0 million on a term basis (the "Term Loan"). The revolving
loans bear interest at IBJ Whitehall's "Alternate Base Rate I" plus one-half of
one percent (0.50%) (a total of 9.5% per annum at December 31, 1999), and the
Term Loan bears interest at such "Alternate Base Rate II" plus three-quarters of
one percent (0.75%) (a total of 10.0% per annum at December 31, 1999). The Bank
Loan Agreement's revolving credit loans of $1.5 million and $12.5 million are
scheduled to mature on June 30, 2000 and September 22, 2002, respectively. The
Term Loan amortizes in equal monthly installments of $83,334 each beginning in
March 1999. 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 Agreements, for each fiscal year, to be applied first to the Term Loan
and then to the revolving credit loans (subject to the Borrowers' ability to
re-borrow revolving advances in accordance with the terms of the Bank Loan
Agreement). The facility is secured with the assets of the SPAR Group.
The Bank Loan Agreement contains an option for the Bank to purchase 16,667
shares of common stock of the Company for $0.01 per share in the event that the
Company's average closing share price over a ten consecutive trading day period
exceeds $15.00 per share. This option expires September 22, 2002.
F-20
SPAR Group, Inc.
Notes to Financial Statements (continued)
5. LINE OF CREDIT AND LONG-TERM LIABILITIES (CONTINUED)
The Bank Loan Agreement contains certain financial covenants which must be met
by the Borrowers on a consolidated basis, among which are a minimum "Net Worth,"
a "Fixed Charge Coverage Ratio," a minimum ratio of Debt to EBITDA, and a
minimum EBITDA, as such terms are defined in the Bank Loan Agreement.
The balances outstanding on this line of credit was $13.3 million and $4.1
million at December 31, 1999 and 1998, respectively. As of December 31, 1999,
the SPAR Group had unused availability under the line of credit to borrow up to
an additional $700,000.
On December 31, 1998, the Company had outstanding $685,000 due to SPAR Marketing
Service, Inc. ("SMS"). The Company agreed to repay the amounts borrowed using
the same terms contained within the loan agreement between the bank and SMS.
This loan was repaid in its entirety by the Company in 1999.
The Company's line of credit and long-term liabilities consist of the following
at December 31:
1999 1998
------------------------------------
Revolving line of credit, maturing September 2002 $12,500 $ -
Term loan 2,250 -
Long-term debt due to affiliate - 686
Other long-term liabilities 406 310
------------------------------------
15,156 996
Current maturities of long-term liabilities 1,147 685
------------------------------------
$14,009 $311
====================================
Maturities of long-term debt at December 31, 1999 are as follows:
Year ending December 31:
2000 $ 1,147
2001 1,259
2002 12,750
-------------------
$15,156
===================
F-21
SPAR Group, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES
As a result of the July 8, 1999 PIA Merger (see Note 3), the subchapter S status
of each applicable SPAR Company was terminated for federal and state tax
purposes, and the SPAR Group recorded a deferred tax charge against income of
$3.1 million for the cumulative differences between the financial reporting and
income tax basis of certain assets and liabilities existing at that date.
Additionally, each such SPAR Company was required to change its method of
accounting from the cash basis to the accrual basis for income tax reporting
purposes.
The SPAR Group expects to be able to offset the deferred tax liability by
utilizing a deferred tax asset from the benefit of the PIA Companies' net
operating loss carryforwards. The individuals who were the stockholders of the
applicable SPAR Companies at that time are obligated to pay the 1999 income
taxes relating to taxable income during the period up to the Merger date.
The provision for income taxes for the year ended December 31, 1999 was $48,000.
The provision for income taxes is different from that which would be obtained by
applying the statutory federal income tax rate to income before income taxes.
The items causing this difference are as follows (in thousands):
Year ended
December 31,
1999
-------------------
Provision for income taxes at federal statutory rate $902
Tax attributable to subchapter S earnings (695)
State income taxes, net of federal benefit 35
Other permanent differences 170
Change in valuation allowance (404)
Other 40
-------------------
Provision for income taxes $ 48
===================
F-22
SPAR Group, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Deferred taxes consist of the following (in thousands):
December 31,
1999
-------------------
Net operating loss carryforwards $4,625
Restructuring 2,093
Nonrecurring charge for termination of Subchapter S election (2,790)
Accrued compensation, vacation and pension 590
Accrued insurance 581
Allowance for doubtful accounts and other receivable 967
Other, net 423
-------------------
Deferred tax assets 6,489
Valuation allowance (6,489)
-------------------
Net deferred taxes $ -
===================
At December 31, 1999, the Company has net operating loss carryforwards (NOLs) of
approximately $12 million available to reduce future federal taxable income. The
Company's net operating loss carryforwards begin to expire in the year 2012. The
Company has established a full valuation allowance for the deferred tax assets
due to the uncertainty of its net taxable position.
Section 382 of the Internal Revenue Code restricts the annual utilization of the
NOLs incurred prior to a change in ownership. Such a change in ownership has
occurred in connection with the PIA Merger, thereby restricting the NOLs
available to the Company to approximately $12.5 million over 19 years.
The pro forma disclosures on the statement of operations reflect adjustments to
record provisions for income taxes as if the applicable SPAR Company had not
been S corporations. The pro forma provisions for income taxes for the year
ended December 31, 1999, the nine months ended December 31, 1998 and the year
ended March 31, 1998, of $1.4 million, $2.2 million and $1.8 million,
respectively, are computed using a combined federal and state tax rate of 37% of
taxable income.
F-23
SPAR Group, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The recording of a one-time, non-cash stock related compensation expense in the
year ended December 31, 1999 of approximately $752,000 is not tax deductible by
the SPAR Group for federal and state income tax purposes. In addition, the
amortization of purchased goodwill generated by the reverse Merger is not tax
deductible. The pro forma tax provision for the year ended December 31, 1999 has
been adjusted for the effects of these non-tax deductible items.
7. COMMON STOCK
Common stock of the companies included in the SPAR Companies at December 31,
1998 is as follows:
Shares
Shares Issued and
Authorized Outstanding Par Value
------------------ --------------------------------------
Spar Inc. 2,500 72 None
Spar/Burgoyne Retail Services, Inc. 2,500 72 None
Spar Marketing Force, Inc. 2,500 72 None
Spar Marketing, Inc. (Nevada) 100 72 None
Spar Acquisition, Inc. 50,000,000 72 $.01
Spar MCI Performance Group, Inc. 2,500 72 None
Spar Marketing, Inc. (Delaware) 1,000 72 $.01
Prior to the July 8, 1999 Merger, the subchapter S status of each applicable
SPAR Company was terminated for federal and state tax purposes. As of July 8,
1999, undistributed earnings of the SPAR Group were reclassified to Additional
Paid-In Capital.
F-24
SPAR Group, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases equipment and certain office space in several cities, under
non-cancelable operating lease agreements. Certain leases contain escalation
clauses and require the Company to pay its share of any increases in operating
expenses and real estate taxes. Rent expense was approximately $2.8 million for
the year ended December 31, 1999, $754,000 for the nine months ended December
31, 1998 and $871,000 for the year ended March 31, 1998. At December 31, 1999,
future minimum commitments under all noncancelable operating lease arrangements
are as follows (in thousands):
2000 $2,050
2001 1,810
2002 1,540
2003 1,053
2004 577
-------------------
$7,030
===================
LEGAL MATTERS
On September 23, 1999, Information Leasing Corporation ("IFC") filed a complaint
for breach of contracts, claim and delivery, and conversion against the Company
in Orange County Superior Court, Santa Ana, California, Case no. 814820, with
respect to certain equipment leased to the PIA Companies by IFC, which complaint
sought judgment to recover the principal sum of $1,535,869.68, plus taxes, fees,
liens and late charges, immediate possession of the leased equipment,
compensation for the reasonable value thereof, and costs and attorneys' fees.
The Company is currently attempting to negotiate a settlement.
F-25
SPAR Group, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Pursuant to that certain Asset Purchase Agreement dated as of December 22, 1998,
among BIMA Group, Inc. (f/k/a MCI Performance Group, Inc.) ("BIMA"), John H.
Wile, SPAR Performance Group, Inc. (f/k/a SPAR MCI Performance Group, Inc.)
("SPGI"), and a company formerly known as SPAR Group, Inc., as amended by the
First Amendment thereto dated as of January 15, 1999, Second Amendment dated as
of September 22, 1999 (the "Second Amendment"), and Third Amendment dated as of
October 1, 1999 (the "Third Amendment"), SPGI would be obligated to pay
"Earn-Out Consideration" to BIMA if the business met certain financial
performance criteria as set forth therein. SPGI has fully paid the amount
outstanding under the Promissory Note pursuant to the Asset Purchase Agreement
with respect to the original purchase price, as adjusted by the Second
Amendment. Based upon the unaudited balance sheet of BIMA as of January 15,
1999, SPGI estimates that no "Earn-Out Consideration" is due to BIMA. BIMA has
asserted that it is owed approximately $5,000,000 in Earn-Out Consideration, but
such Earn-Out Consideration calculation has not been agreed to by SPGI. If the
parties cannot agree upon such amount, BIMA has threatened that legal proceeding
may ensue with respect to this matter. If sued, SPGI would vigorously contest
such matter. SPGI and BIMA intend to continue negotiations, and have orally
agreed to use arbitrators (assuming mutually acceptable procedures can be
adopted), in order to resolve such "Earn-Out Consideration" dispute.
The Company is a party to various legal actions and administrative proceedings
arising in the normal course of business. In the opinion of Company's
management, dispositions of these matters are not anticipated to have a material
adverse effect on the financial position, results of operations or cash flows of
the Company.
F-26
SPAR Group, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTINGENCY
SMS, a related party, has been audited by the Internal Revenue Service with
respect to whether certain field representatives should be classified as
independent contractors or employees for federal employment tax purposes for the
tax years ended December 31, 1991 and 1992. The dispute has worked its way
through the Internal Revenue Service appeals process and SMS intends to file a
petition with the Federal District Court. If it is found that the field
representatives should be classified as employees, SMS could be liable for
employment taxes and related penalties and interest. The outcome of this dispute
and the amount of the contingent liability are not determinable at this time. If
a liability is assessed and SMS is unable to pay, the IRS may seek to collect
all or a portion of the tax liability from the Company due to its common control
and business relationship with SMS. The Company is not currently a party to this
lawsuit. However, an unfavorable outcome could impact the costs of future
operations. The Company believes an adequate provision for the contingent
liability has been made in the accompanying financial statements as of December
31, 1999 and 1998, respectively. Similar claims have been filed against SMS by
certain states. However, SMS is confident defending its position against these
state claims because of prior success in several states, and SMS will continue
to vigorously defend its position against any future state claims that may
arise. For example, SMS prevailed on a similar claim by the State of California,
which had instituted administrative proceedings against SMS. The administrative
law judge agreed with SMS's classification of field representatives as
independent contractors. The State of California has declined to file a further
appeal and has refunded payments made by SMS under protest during the appeal
process.
9. EMPLOYEE BENEFITS
PENSION PLANS
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 $30,000 for the year ended December 31, 1999.
F-27
SPAR Group, Inc.
Notes to Financial Statements (continued)
9. EMPLOYEE BENEFITS (CONTINUED)
RETIREMENT PLANS
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible
employees. Employer contributions of approximately $63,000 for the year ended
December 31, 1999, $14,400 for the nine months ended December 31, 1998 and
$37,000 were made to the plan during the year ended March 31, 1998.
The Company has an Employee Stock Purchase Plan ("ESP Plan"). The ESP Plan
allows employees of the Company to purchase common stock at a discount, without
having to pay any commissions on the purchases. The discount is the greater of
15% of the fair market value ("FMV") at the end of the reportable period or the
difference between the FMV at the beginning and end of the reportable period.
The maximum amount that any employee can contribute to the ES Plan per quarter
is $6,250, and the total number of shares reserved by the Company for purchase
under the ESP Plan is 180,576. During 1999, the Company issued 7,568 shares of
common stock, at a weighted average price of $2.71 per share.
10. RELATED PARTY TRANSACTIONS
The SPAR Companies are affiliated through common ownership with SPAR Marketing
Services, Inc., SPAR Retail Services, Inc., (f/k/a SPAR/Burgoyne, Inc.), SPAR
Group, Inc., IDS SPAR Pty, Ltd. (Aust.), SPAR Ltd., (U.K.), Garden Island, Inc.,
SPAR Marketing Pty Ltd. (Aust.), WR Services, Inc., SR Services Inc., Infinity
Insurance Ltd. and SPAR Infotech, Inc.
The Company purchases field management services and the use of independent
contractor services from SPAR Marketing Services, Inc.
The Company also purchased internet consulting services from SPAR Infotech, Inc.
F-28
SPAR Group, Inc.
Notes to Financial Statements (continued)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
The following transactions occurred between the SPAR Companies and the above
affiliates (in thousands):
Year ended Nine Months ended Year ended
December 31, December 31, March 31
1999 1988 1998
---------------- ---------------------- -----------------
Services provided by affiliates:
Independent contractor services $4,111 $2,763 $3,233
================ ====================== =================
Field management services $4,344 $2,049 $2,964
================ ====================== =================
Internet consulting services $ 608 $ - $ -
================ ====================== =================
Services provided to affiliates:
Management services $ 665 $ 417 $ 576
================ ====================== =================
Through the services of Infinity Insurance, Ltd., the Company purchased
insurance coverage for its casualty and property insurance risk, for
approximately $959,000 for the year ended December 31, 1999, $375,000 for the
nine months ended December 31, 1998 and $318,000 during the year ended March 31,
1998 (in thousands).
December 31
1999 1998
------------------------------------
Balance due to affiliates:
Spar Marketing Services, Inc. $ 29 $205
Spar/Infotech, Inc. 196 -
------------------------------------
$225 $205
====================================
The Company has an investment in an affiliate, which provides telemarketing and
related services. The Company paid approximately $386,000 during the year ended
December 31, 1999. Approximately $580,000 was payable to the affiliate at
December 31, 1999.
F-29
SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS
In 1999, the Company recorded a non-cash, non-tax deductible charge of
approximately $752,000 resulting from the grant of 134,114 options at $0.01 per
share and the issuance of 200,000 shares to a consultant prior to the reverse
merger.
As a result of the reverse merger with PIA, the Company has three stock option
plans: the 1990 Stock Option Plan ("1990 Plan"), the 1995 Stock Option Plan
("1995 Plan") and the 1995 Director's Plan ("Director's Plan").
The 1990 Plan is a nonqualified option plan providing for the issuance of up to
683,109 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, PIA
has no longer granted options under this plan.
The 1995 Plan provides for the granting of either incentive or nonqualified
stock options to specified employees, consultants and directors of the Company
for the purchase of up to 3,500,000 shares of the Company's common stock. The
options have a term of ten years, except in the case of incentive stock options
granted to greater than 10% stockholders of the Company, for which the term is
five years. The exercise price of nonqualified stock options must be equal to at
least 85% of the fair market value of the Company's common stock at the date of
grant; the exercise price of incentive stock options must be equal to at least
the fair market value of the Company's common stock at the date of grant. At
December 31, 1999, options to purchase 500,256 shares were available for grant
under this plan.
The Director's Plan is a stock option plan for nonemployee directors and
provides for the purchase of up to 100,000 shares of the Company's common stock.
An option to purchase 1,500 shares of the Company's common stock shall be
granted automatically each year to each director, following the Company's annual
stockholders' meeting. The exercise price of options issued under this plan
shall be not less than the fair market value of the Company's common stock on
the date of grant. Each option under this plan shall vest and become exercisable
in full on the first anniversary of its grant date, provided the optionee
F-30
SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
is reelected as a director of the Company. The maximum term of options granted
under the plan is ten years and one day, subject to earlier termination
following an optionee's cessation of service with the Company. At December 31,
1999, options to purchase 86,500 shares were available for grant under this
plan.
The following table summarizes activity under the Company's 1990 Plan, 1995 Plan
and Director's Plan:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------------------------------------
Options outstanding at July 8, 1999, date of reverse
merger 1,438,285 $5.91
Options granted 2,294,858 4.82
Options exercised (10,811) 2.78
Options canceled or expired (416,810) 5.51
------------------
Options outstanding, December 31, 1999 3,305,522 $5.22
==================
Option price range at end of year $0.01 to $14.00
Option price range for exercised shares $2.78
Weighted average fair value of options granted during
the year $4.94
F-31
SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number
Outstanding at Remaining Average Exercisable at Weighted
Range of December 31, Contractual Life Exercise December 31, Average
Exercise Prices 1999 Life Price 1999 Exercise Price
- --------------------- -------------------------------------------------------------------------------------
Less than $4.00 149,114 9.50 years $ 0.21 141,614 $ 0.12
$4.01 - $5.00 1,627,262 9.46 years 4.98 78,000 4.62
$5.01 to $6.25 1,357,482 8.57 years 5.58 697,875 5.63
Greater than 6.25 171,664 4.67 years 9.01 171,664 9.01
------------------ -------------------
Total 3,305,522 8.85 years $ 5.22 1,089,153 $ 5.37
================== ===================
Outstanding warrants are summarized below:
Shares Subject Exercise Price
to Warrants Per Share
------------------------------------
Balance, March 31, 1998 - $ -
Balance, December 31, 1998 - -
Balance, December 31, 1999 96,395 $2.78 - $8.51
The above warrants expire at various dates from 2002 through 2004.
F-32
SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. No compensation cost has been
recognized for the stock option plans. Had compensation cost for the Company's
option plans been determined based on the fair value at the grant date for
awards in 1999 consistent with the provisions of SFAS No. 123, the Company's pro
forma net income (loss) and net income (loss) per share would have been reduced
to the adjusted amounts indicated below (in thousands, except per share data):
Year ended
December 31,
1999
-------------------
Pro forma net income, as reported $1,242
Pro forma net loss, as adjusted (1,011)
Pro forma basic net income per share, as reported 0.08
Pro forma basic net loss per share, as adjusted (0.07)
Pro forma diluted net income per share, as reported 0.08
Pro forma diluted net loss per share, as adjusted (0.07)
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes option-pricing model, using the return on a ten-year
treasury bill, with the following weighted average assumptions used for grants
in 1999: dividend yield of 0%; expected volatility of 186.38%; risk-free
interest rate of 5.65%; and expected lives of six years.
12. 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 were converted into promissory notes issued to these
certain stockholders severally by SMF, SINC and SPGI prior to the Merger, which
aggregated $6.2 million.
F-33
SPAR Group, Inc.
Notes to Financial Statements (continued)
12. NOTES PAYABLE TO CERTAIN STOCKHOLDERS (CONTINUED)
Notes payable to certain stockholders total $5.9 million as of December 31, 1999
and bear an interest rate of 8%, due on demand. The current bank agreements
contain certain restrictions on the repayment of stockholder debt. The Company
has classified $2 million of these notes payable as long-term debt.
13. SEGMENTS
Utilizing the management approach, the SPAR Group has broken down its business
based upon the nature of services provided (i.e., merchandising services and
incentive marketing services). The Merchandising Services Division consists of
SMI (an intermediate holding company), SMF, SMNEV, SBRS and SINC (collectively,
the "SPAR Marketing Companies") and the PIA Companies (see Note 1). The
Incentive Marketing Division consists of each of SIM (an intermediate holding
company) and SPGI (see Note 1). Merchandising services generally consist of
regularly scheduled, routed services provided at the stores for a specific
retailer or multiple manufacturers primarily under multiple year contracts.
Services also include stand-alone large scale implementations. These services
may include activities such as ensuring that clients' products authorized for
distribution are in stock and on the shelf, adding in new products that are
approved for distribution but not present on the shelf, setting category shelves
in accordance with approved store schematics, ensuring that shelf tags are in
place, checking for the overall salability of clients' products, selling new
product and promotional items. Specific in-store services can be initiated by
retailers and manufacturers, such as new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. These
services are used typically for large-scale implementations over 30 days. The
Merchandising Services Division of the SPAR Group also performs other project
services, such as new store sets and existing store resets, re-merchandising,
remodels and category implementations, multi-year shared service contracts or
stand-alone project contracts.
F-34
SPAR Group, Inc.
Notes to Financial Statements (continued)
13. SEGMENTS (CONTINUED)
The Incentive Marketing Division generally consists of designing and
implementing premium incentives, managing meetings and group travel for clients
throughout the United States. These services may include providing a variety of
consulting, creative, program administrative, travel and merchandise fulfillment
services to companies seeking to motivate employees, salespeople, dealers,
distributors, retailers and consumers toward certain action or objectives. The
following table presents segment information (in thousands):
Merchandising Services Incentive Marketing Total
---------------------------- ---------------------------- ----------------------------
Nine Months Nine Months Nine Months
Year ended ended Year ended ended Year ended ended
December 31, December 31, December 31, December 31, December 31, December 31,
1999 1998 1999 1998 1999 1998
---------------------------- ---------------------------- ----------------------------
Net revenues $79,612 $32,601 $36,912 $ - $116,524 $32,601
Cost of revenues 50,499 16,217 30,789 - 81,288 16,217
---------------------------- ---------------------------- ----------------------------
Gross profit 29,113 16,384 6,123 - 35,236 16,384
SG&A 23,213 9,978 5,617 - 28,830 9,978
---------------------------- ---------------------------- ----------------------------
EBITDA $ 5,900 $ 6,406 $ 506 $ - $ 6,406 $ 6,406
============================ ============================ ============================
Net income (loss) $ 663 $ 6,109 $ (1,158) $ - $ (495) $ 6,109
============================ ============================ ============================
Total Assets $48,761 $14,865 $14,326 $ - $ 63,087 $14,865
============================ ============================ ============================
14. RESTRUCTURING AND OTHER CHARGES
In connection with the PIA Merger, the Company's Board of Directors approved a
plan to restructure the operations of the PIA Companies. Restructuring costs are
composed of committed costs required to integrate the SPAR Companies and the PIA
Companies' field organizations and the consolidation of administrative functions
to achieve beneficial synergies and costs savings.
The SPAR Group will recognize termination costs in accordance with EITF 95-3,
Recognition of Liabilities in Connection with a Business Combination.
F-35
SPAR Group, Inc.
Notes to Financial Statements (continued)
14. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
The following table displays a rollforward of the liabilities for restructuring
and other charges from July 8, 1999 Merger to December 31, 1999 (in thousands):
Initial Period ended
Restructuring December 31, December 31,
and Other 1999 1999
Chareges Deductions Balance
-----------------------------------------------------------
Type of cost:
Employee separation $1,606 $ 491 $1,115
Equipment lease settlements 3,073 326 2,747
Office lease settlements 1,794 252 1,542
Redundant assets 957 957 -
-----------------------------------------------------------
$7,430 $2,026 $5,404
===========================================================
Management believes that the remaining reserves for restructuring are adequate
to complete its plan.
In addition, to the above restructuring costs, the Company incurred substantial
costs in connection with the PIA transaction, including legal, accounting and
investment banking fees estimated to be an aggregate unpaid obligation of
approximately $1.3 million. The SPAR Group has also accrued approximately $2.4
million for expenses incurred by PIA prior to the Merger, which have not been
paid. Management believes the current bank credit facilities are sufficient to
fund operations and working capital, including the current maturities of debt
obligations, but may not be sufficient to reduce obligations of the Merger with
PIA. The Company is currently negotiating with its bank for an increase in its
credit facility to meet the non-operational credit needs and is also working to
secure additional long-term capital. However, there can be no assurances that
the Company will be successful in these negotiations.
F-36
SPAR Group, Inc.
Notes to Financial Statements (continued)
15. EARNINGS PER SHARE
The following table sets forth the computations of pro forma basic and diluted
earnings per share (in thousands, except per share data):
Nine Months
Year ended ended Year ended
December 31, December 31, March 31,
1999 1998 1998
-------------------------------------------------
Numerator:
Pro forma net income $ 1,242 $ 3,856 $ 2,998
=================================================
Denominator:
Shares used in pro forma basic earnings per share
calculation1 15,361 12,659 12,659
Effect of diluted securities:
Employee stock options 6 - -
Warrants - - -
-------------------------------------------------
Shares used in pro forma diluted earnings per share
calculations1 15,367 12,659 12,659
=================================================
Pro forma basic earnings per share1 $ 0.08 $ 0.30 $ 0.24
=================================================
Pro forma diluted earnings per share1 $ 0.08 $ 0.30 $ 0.24
=================================================
1 The pro forma basic and pro forma diluted earnings per share amounts are
based upon 12,659,000 shares on January 1, 1998, although these shares were
issued on July 9, 1999, as required to comply with SFAS No. 128 and the
Securities and Exchange Commission Staff Accounting Bulletin 98 (SAB 98).
F-37
SPAR Group, Inc.
Notes to Financial Statements (continued)
16. TRANSITION PERIOD - CHANGE OF FISCAL YEAR END
Effective April 1, 1998, the Spar Group, Inc. changed its year end for financial
statement purposes to a calendar year. The unaudited results below are presented
for comparative purposes.
Nine Months Ended December 31
1998 1997
------------------------------------
(unaudited)
Net revenues $32,601 $27,202
====================================
Gross profit $16,384 $12,623
====================================
Unaudited pro forma information:
Pro forma provision for income taxes $ 2,253 $ 1,114
Pro forma net income $ 3,856 $ 1,904
Pro forma basic earnings per share $ 0.30 $ 0.15
Pro forma basic weighted average common shares 12,659 12,659
Pro forma diluted earnings per share $ 0.30 $ 0.15
Pro forma diluted weighted average common shares 12,659 12,659
F-38
SPAR Group, Inc.
Schedule II - Valuation and Qualifying Accounts
(In Thousands)
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
----------------------------------------------------------------------
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $605 $1,202 $1,057 (2) $954 (3) $1,910
Nine months ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $568 $ 299 $ - $262 (3) $ 605
Year ended March 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $321 $ 477 $ - $230 (1) $ 568
1) Includes Accounts Receivable determined to be uncollectible which were
written off.
2) $1,057 charged to Other Accounts represents the amounts acquired through
the SPG and PIA acquisitions.
3) Uncollectible accounts written off, net of recoveries.
F-39
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc.,
as amended. (incorporated by reference to the
Company's Registration Statement on Form S-1
(Registration No. 33-80429) as filed with the
Securities and Exchange Commission on December 14,
1995 (the "Form S-1") and to Exhibit 3.1 to the
Company's Form 10-Q for the 3rd Quarter ended
September 30, 1999).
3.2 By-laws of PIA (incorporated by reference to the
Form S-1).
4.1 Registration Rights Agreement entered into as of
January 21, 1992 by and between RVM Holding
Corporation. RVM/PIA, a California Limited
Partnership, The Riordan Foundation and
Creditanstalt-Bankverine (incorporated by
reference to the Form S-1).
10.1 1990 Stock Option Plan (incorporated by reference
to the Form S-1).
10.2 Amended and Restated 1995 Stock Option Plan
(incorporated by reference of Exhibit 10.2 to the
Company's Form 10-Q for the 2nd Quarter ended July
3, 1998).
10.3 1995 Stock Option Plan for Non-employee Directors
(incorporated by reference to the Form S-1).
10.4+* Employment Agreement dated as of June 25, 1997
between PIA and Terry R. Peets
(incorporated by reference to Exhibit 10.5 to the
Company's Form 10-Q for the 2nd Quarter ended June
30, 1997)
10.5+* Severance Agreement dated as of February 20, 1998
between PIA and Cathy L. Wood (incorporated by
reference to Exhibit 10.5 to the Company's Form
10-Q for the 1st Quarter ended April 30, 1998)
10.6* Severance Agreement dated as of August 10, 1998
between PIA and Clinton E. Owens (incorporated by
reference to Exhibit 10.6 to the Company's Form
10-Q for the 3rd Quarter ended October 2, 1998)
10.7+* Amendment No. 1 to Employment Agreement dated as
of October 1, 1998 between PIA and Terry R. Peets.
10.8+* Amended and Restated Severance Compensation
Agreement dated as of October 1, 1998 between PIA
and Cathy L. Wood.
10.9+ Loan and Security Agreement dated December 7, 1998
among Mellon Bank, N.A., PIA Merchandising Co.,
Inc., Pacific Indoor Display Co. and PIA.
10.10+ Agreement and Plan of Merger dated as of February
28, 1999 among PIA, SG Acquisition, Inc., PIA
Merchandising Co., Inc., SPAR Acquisition, Inc.,
SPAR Marketing, Inc., SPAR Marketing Force, Inc.,
SPAR, Inc., SPAR/Burgoyne Retail Services, Inc.,
SPAR Incentive Marketing, Inc., SPAR MCI
Performance Group, Inc. and SPAR Trademarks, Inc.
10.11+ Voting Agreement dated as of February 28, 1999
among PIA, Clinton E. Owens, RVM/PIA, California
limited partnership, Robert G. Brown and William
H. Bartels.
10.12* Amendment No. 2 to Employment Agreement dated as
of February 11, 1999 between PIA and Terry R.
Peets (incorporated by reference to Exhibit 10.12
to the Company's Form 10-Q for the 2nd Quarter
ended April 2, 1999).
10.13 Special Purpose Stock Option Plan (incorporated by
reference to Exhibit 10.13 of the Company's Form
10-Q for the 2nd Quarter ended July 2, 1999.
10.14 Amendment No. 1 to Severance Agreement dated as of
May 18, 1999 between the Company and Cathy L. Wood
(incorporated by reference to Exhibit 10.14 of the
Company's Form 10-Q for the 3rd Quarter ended
September 30, 1999).
10.15+ Second Amended and Restated Revolving Credit, Term
+ Loan and Security Agreement by and among IBJ
Whitehall Business Credit Corporation with SPAR
Marketing Force, Inc., SPAR Group, Inc., SPAR,
Inc., SPAR/Burgoyne Retail Services, Inc., SPAR
Incentive Marketing, Inc., SPAR Trademarks, Inc.,
SPAR MCI Performance Group, Inc., SPAR Marketing,
Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., PIA Merchandising, Co., Inc.,
Pacific Indoor Display Co., Inc., and Pivotal
Sales Company dated as of September 22, 1999.
10.16+ Waiver and Amendment No. 1 to Second Amended and
+ Restated Revolving Credit, Term Loan and Security
Agreement by and between SPAR Marketing Force,
Inc., SPAR, Inc., SPAR/Burgoyne Retail Services,
Inc., SPAR Group, Inc., SPAR Incentive Marketing,
Inc., SPAR Trademarks, Inc., SPAR Performance
Group, Inc. (f/k/a SPAR MCI Performance Group,
Inc.), SPAR Marketing, Inc. (DE), SPAR Marketing,
Inc. (NV), SPAR Acquisition, Inc., PIA
Merchandising Co., Inc., Pacific Indoor Display
Co., Inc. and Pivotal Sales Company (each a
"Borrower" and collectively, the "Borrowers") and
IBJ Whitehall Business Credit Corporation
("Lender")dated as of December 8, 1999.
21.1+ Subsidiaries of the Company
+
23.1+ Consent of Ernst & Young LLP
+
27.1+ Financial Data Schedule
+
+ Previously filed with initial Form 10-K for the
fiscal year ended January 1, 1999.
+ Filed herewith.
+
* Management contract or compensatory plan or
arrangement required to be filed as an exhibit
pursuant to applicable rules of the Securities and
Exchange Commission.