UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
ANNUAL REPORT ON FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2002
Commission file number 0-27824
SPAR GROUP, INC.
Delaware 33-0684451
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
580 WHITE PLAINS ROAD, TARRYTOWN, NEW YORK 10591
Registrant's telephone number, including area code: (914) 332-4100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock,
par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K _____.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Rule 12b-2 of the Act.) YES NO X
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The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on June 30, 2002, based on the closing price of
the Common Stock as reported by the Nasdaq Small Cap Market on such date, was
approximately $ 12,147,050.
The number of shares of the Registrant's Common Stock outstanding as of
December 31, 2002 was 18,824,527 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PART I
PAGE
Item 1. Business 2
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation and Other Information of SPAR Group, Inc. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 35
Item 13. Certain Relationships and Related Transactions 36
Item 14. Controls and Procedures 37
Item 15. Principal Accountant Fees and Services 37
PART IV
Item 16. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
Signatures 40
PART I
STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K OF SPAR GROUP,
INC. (THE "COMPANY"), INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT,
INCLUDING, IN PARTICULAR AND WITHOUT LIMITATION, THE STATEMENTS CONTAINED IN THE
DISCUSSIONS UNDER THE HEADINGS "BUSINESS" AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS, WHETHER
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS, TO NOT OCCUR OR BE
REALIZED OR TO BE LESS THAN EXPECTED. SUCH FORWARD-LOOKING STATEMENTS GENERALLY
ARE BASED UPON THE COMPANY'S BEST ESTIMATES OF FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENT, BASED UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF
OPERATIONS. FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL", "EXPECT", "INTEND",
"BELIEVE", "ESTIMATE", "ANTICIPATE", "CONTINUE" OR SIMILAR TERMS, VARIATIONS OF
THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. YOU SHOULD CAREFULLY CONSIDER SUCH
RISKS, UNCERTAINTIES AND OTHER INFORMATION, DISCLOSURES AND DISCUSSIONS WHICH
CONTAIN CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROVIDED IN THE FORWARD-LOOKING
STATEMENTS.
ALTHOUGH THE COMPANY BELIEVES THAT ITS PLANS, INTENTIONS AND
EXPECTATIONS REFLECTED IN OR SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CANNOT ASSURE THAT SUCH PLANS, INTENTIONS OR EXPECTATIONS WILL BE
ACHIEVED IN WHOLE OR IN PART. YOU SHOULD CAREFULLY REVIEW THE RISK FACTORS
DESCRIBED HEREIN AND ANY OTHER CAUTIONARY STATEMENTS CONTAINED IN THIS ANNUAL
REPORT ON FORM 10-K. ALL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY
OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED BY THE RISK FACTORS (SEE
ITEM 1 - CERTAIN RISK FACTORS) AND OTHER CAUTIONARY STATEMENTS IN THIS ANNUAL
REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR
REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.
ITEM 1. BUSINESS.
GENERAL
SPAR Group, Inc., a Delaware corporation ("SPAR Group", "SGRP" or the
"Company"), is a supplier of in-store merchandising and marketing services both
throughout the United States and internationally. The Company's operations are
divided into two divisions: the Merchandising Services Division and the
International Division. The Merchandising Services Division provides
merchandising services, database marketing, teleservices and marketing research
to manufacturers and retailers with product distribution primarily in mass
merchandisers, drug chains and grocery stores in the United States. The
International Division established in July 2000, currently provides
merchandising services through a joint venture in Japan and focuses on expanding
the Company's merchandising services business throughout the world.
CONTINUING OPERATIONS
Merchandising Services Division
The Company provides nationwide retail merchandising and marketing
services to home entertainment, PC software, general merchandise, health and
beauty care, consumer goods and food products companies in mass merchandisers,
drug chains and retail grocery stores in the United States. Merchandising
services primarily consist of regularly scheduled dedicated routed services and
special projects provided at the store level for a specific retailer or multiple
manufacturers primarily under single or multi-year contracts. Services also
include stand-alone large-scale implementations such as new store openings, new
product launches, special seasonal or promotional merchandising, focused product
support and product recalls. These services may include sales enhancing
activities such as ensuring that client products authorized for distribution are
in stock and on the shelf, adding new products that are approved for
distribution but not presently on the shelf, setting category shelves in
accordance with approved store schematics, ensuring that shelf tags are in
place, checking for the overall salability of client products and
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setting new and promotional items placing, and/or removing point of purchase and
other related media advertising. Specific in-store services can be initiated by
retailers or manufacturers, and include new store openings, new product
launches, special seasonal or promotional merchandising, focused product support
and product recalls.
The Company's Merchandising Services Division consists of (1) SPAR
Marketing, Inc. ("SMI") (an intermediate holding company), SPAR Marketing Force,
Inc. ("SMF"), SPAR Marketing, Inc., ("SMNEV"), SPAR/Burgoyne Retail Services,
Inc. ("SBRS"), and SPAR, Inc. ("SINC"") (collectively, the "SPAR Marketing
Companies"); and (2) PIA Merchandising, Co., Inc., Pacific Indoor Display d/b/a
Retail Resources, Pivotal Sales Company and PIA Merchandising Ltd.
(collectively, "PIA" or the "PIA Companies"). The SPAR Marketing Companies are
the original predecessor of the current Company and were founded in 1967. The
PIA Companies, first organized in 1943, are also a predecessor of the Company
and a supplier of in-store merchandising services throughout the United States,
and were deemed "acquired" by the SPAR Marketing Companies for accounting
purposes pursuant to the Merger on July 8, 1999 (see Merger and Restructuring,
below).
International Division
In July 2000, the Company established its International Division, SPAR
Group International, Inc. ("SGI"), to focus on expanding its merchandising
services business world-wide. Also in July 2000, the Company entered into a
joint venture with a large Japanese distributor and together established SPAR FM
to provide merchandising services in Japan.
DISCONTINUED OPERATIONS
Incentive Marketing Division
As part of a strategic realignment in the fourth quarter of 2001, the
Company made the decision to divest its Incentive Marketing Division, SPAR
Performance Group, Inc. ("SPGI"). The Company explored various alternatives for
the sale of SPGI and subsequently sold the business to SPGI's employees through
the establishment of an employee stock ownership plan on June 30, 2002.
Technology Division
In October 2002, the Company dissolved its Technology Division that was
established in March 2000 for the purpose of marketing its proprietary
Internet-based computer software.
INDUSTRY OVERVIEW
Merchandising Services Division
According to industry estimates over two billion dollars are spent
annually on domestic retail merchandising services. The merchandising industry
includes manufacturers, retailers, food brokers, and professional service
merchandising companies. The Company believes there is a continuing trend for
major manufacturers to move increasingly toward third parties to handle in-store
merchandising. The Company also believes that its merchandising services bring
added value to retailers, manufacturers and other businesses. Retail
merchandising services enhance sales by making a product more visible and
available to consumers. These services primarily include placing orders, shelf
maintenance, display placement, reconfiguring products on store shelves,
replenishing products, and providing product sampling, and also include other
services such as test market research, mystery shopping, teleservices, database
marketing and promotion planning and analysis.
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The Company believes merchandising services previously undertaken by
retailers and manufacturers have been increasingly outsourced to third parties.
Historically, retailers staffed their stores as needed to ensure inventory
levels, the advantageous display of new items on shelves, and the maintenance of
shelf schematics. In an effort to improve their margins, retailers decreased
their own store personnel and increased their reliance on manufacturers to
perform such services. Initially, manufacturers attempted to satisfy the need
for merchandising services in retail stores by utilizing their own sales
representatives. However, manufacturers discovered that using their own sales
representatives for this purpose was expensive and inefficient. Therefore,
manufacturers have increasingly outsourced the merchandising services to third
parties capable of operating at a lower cost by (among other things) serving
multiple manufacturers simultaneously.
Another significant trend impacting the merchandising segment is the
tendency of consumers to make product purchase decisions once inside the store.
Accordingly, merchandising services and in-store product promotions have
proliferated and diversified. Retailers are continually remerchandising and
remodeling entire stores to respond to product developments and changes in
consumer preferences. The Company estimates that these activities have increased
in frequency over the last five years, such that most stores are re-merchandised
and remodeled approximately every twenty-four months. Both retailers and
manufacturers are seeking third parties to help them meet the increased demand
for these labor-intensive services.
International Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in marketing
their products. As evidenced in the United States, retailer and manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
also believes that the difficulties encountered by these programs are only
exacerbated by the logistics of operating in foreign markets. This environment
has created an opportunity for the Company to exploit its Internet-based
technology and business model that are successful in the United States. In July
2000, the Company established its International Division, which operates through
SPAR Group International, Inc., to cultivate foreign markets, modify the
necessary systems and implement the Company's business model worldwide by
expanding its merchandising services business off shore. The Company formed an
International Division task force consisting of members of the Company's
information technology, operations and finance groups to evaluate and develop
foreign markets. The initial focus of the International Division was on the
Pacific Rim region. In Japan, SPAR Group International, Inc. and a leading
Japanese based distributor established a joint venture to provide the latest
in-store merchandising services to the Japanese market. As part of the joint
venture agreement, the Company translated several of its proprietary
Internet-based logistical, communications and reporting software applications
into Japanese. Through its Auburn Hills, Michigan server, the Company provides
the joint venture access to this logistical, communications and reporting
software. More recently, the Company has begun to focus on other potential
merchandising markets worldwide and has hired representatives in Greece and
Australia to assist in those efforts. The Company is actively pursuing expansion
into various other markets.
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MERGER AND RESTRUCTURING
On July 8, 1999, SG Acquisition, Inc., a Nevada corporation ("PIA
Acquisition"), a wholly owned subsidiary of the Company, then named PIA
Merchandising Services, Inc. ("PIA Delaware"), merged into and with SPAR
Acquisition, Inc., a Nevada corporation ("SAI") (the "Merger"), pursuant to the
Agreement and Plan of Merger dated as of February 28, 1999, as amended (the
"Merger Agreement"), by and among the Company and certain of the PIA Companies
and SPAR Marketing Companies (among others). In connection with the Merger, PIA
Delaware changed its name to SPAR Group, Inc. (which is referred to
post-Merger individually as "SPAR Group", "SGRP" or the "Company"). Although the
SPAR Marketing Companies and SPGI became subsidiaries of PIA Delaware (now the
Company) as a result of this "reverse" Merger, the transaction has been
accounted for as a purchase by SAI of the PIA Companies, with the books and
records of the Company being adjusted to reflect the historical operating
results of the SPAR Marketing Companies and SPGI (together with certain
intermediate holding companies, the "SPAR Companies").
BUSINESS STRATEGY
As the marketing services industry continues to grow, consolidate and
expand both in the United States and internationally, large retailers and
manufacturers are increasingly outsourcing their marketing needs to third-party
providers. The Company believes that offering marketing services on a national
and global basis will provide it with a competitive advantage. Moreover, the
Company believes that successful use of and continuous improvements to a
sophisticated technology infrastructure, including its proprietary
Internet-based software, is key to providing clients with a high level of
customer service while maintaining efficient, low cost operations. The Company's
objective is to become an international retail merchandising and marketing
service provider by pursuing its operating and growth strategy, as described
below.
Increased Sales Efforts:
The Company is seeking to increase revenues by increasing sales to its
current customers, as well as, establishing long-term relationships with new
customers, many of which currently use other merchandising companies for various
reasons. The Company believes its technology, field implementation and other
competitive advantages will allow it to capture a larger share of this market
over time. However, there can be no assurance that any increased sales will be
achieved.
New Products:
The Company is seeking to increase revenues through the internal
development and implementation of new products and services that add value to
its customers' retail merchandising related activities, some of which have been
identified and are currently being tested for feasibility and market acceptance.
However, there can be no assurance that any new products of value will be
developed or that any such new product can be successfully marketed.
Acquisitions:
The Company is seeking to acquire businesses or enter into joint
ventures or other arrangements with companies that offer similar merchandising
services both in the United States and worldwide. The Company believes that
increasing industry expertise, adding product segments, and increasing its
geographic breadth will allow it to service its clients more efficiently and
cost effectively. As part of its acquisition strategy, SPAR is actively
exploring a number of potential acquisitions, predominately in its core
merchandising service businesses. Through such acquisitions, the Company may
realize additional operating and revenue synergies and may leverage existing
relationships with manufacturers, retailers and other businesses to create
cross-selling opportunities. However, there can be no assurance that any of the
acquisitions
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will occur or whether, if completed, the integration of the acquired businesses
will be successful or the anticipated efficiencies and cross-selling
opportunities will occur. The Company is not currently a party to any definitive
and binding purchase arrangement with respect to any contemplated acquisition.
Improve Operating Efficiencies:
The Company will continue to seek greater efficiencies. The Company
believes that its existing field force and technology infrastructure can support
additional customers and revenue in the Merchandising Services Division. At the
corporate level, the Company will continue to streamline certain administrative
functions, such as accounting and finance, insurance, strategic marketing and
legal support.
Leverage and Improve Technology:
The Company intends to continue to utilize computer (including hand-held
computers), Internet, and other technology to enhance its efficiency and ability
to provide real-time data to its customers, as well as, maximize the speed of
communication, and logistical deployment of its merchandising specialists.
Industry sources indicate that customers are increasingly relying on marketing
service providers to supply rapid, value-added information regarding the results
of marketing expenditures on sales and profits. The Company (together with
certain of its affiliates) has developed and owns proprietary Internet-based
software technology that allows it to utilize the Internet to communicate with
its field management, schedule its store-specific field operations more
efficiently, receive information and incorporate the data immediately, quantify
the benefits of its services to customers faster, respond to customers' needs
quickly and implement programs rapidly. The Company has successfully modified
and is currently utilizing certain of its software applications in connection
with its Japanese joint venture. The Company believes that it can continue to
improve, modify and adapt its technology to support merchandising and marketing
services for additional customers and projects in the United States and in other
foreign markets. The Company also believes that its proprietary Internet-based
software technology gives it a competitive advantage in the marketplace.
DESCRIPTION OF SERVICES
The Company currently provides a broad array of merchandising and
marketing services on a national, regional and local basis to leading home
entertainment, general merchandise, consumer goods, food, and health and beauty
care manufacturers and retail companies through its Merchandising Services
Division.
The Company currently operates throughout the United States serving some
of the nation's leading companies. The Company believes its full-line
capabilities provide fully integrated national solutions that distinguish the
Company from its competitors. These capabilities include the ability to develop
plans at one centralized division headquarter location, effect chain wide
execution, implement rapid, coordinated responses to its clients' needs and
report on a real time Internet enhanced basis. The Company also believes its
national presence, industry-leading technology, centralized decision-making
ability, local follow-through, ability to recruit, train and supervise
merchandisers, ability to perform large-scale initiatives on short notice, and
strong retailer relationships provide the Company with a significant advantage
over local, regional or other competitors.
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Merchandising Services Division
The Company provides a broad array of merchandising services on a
national, regional, and local basis to manufacturers and retailers. The Company
provides its merchandising and marketing services primarily on behalf of
consumer product manufacturers at mass merchandiser, drug and retail grocery
chains. The Company currently provides three principal types of merchandising
and marketing services: syndicated services, dedicated services and project
services.
Syndicated Services
Syndicated services consist of regularly scheduled, routed merchandising
services provided at the retail store level for various manufacturers usually
under annual or multi-year contracts. These services are performed for multiple
manufacturers, including, in some cases, manufacturers whose products are in the
same product category. Syndicated services may include activities such as:
o Reordering and replenishment of products
o Ensuring that the client's products authorized for distribution
are in stock and on the shelf
o Adding new products that are approved for distribution but not yet
present on the shelf
o Designing and implementing store planogram schematics
o Setting product category shelves in accordance with approved store
schematics
o Ensuring that product shelf tags are in place
o Checking for overall salability of the client's products
o Placing new product and promotional items in prominent positions
Dedicated Services
Dedicated services consist of merchandising services, generally as
described above, which are performed for a specific retailer or manufacturer by
a dedicated organization, including a management team working exclusively for
that retailer or manufacturer. These services include many of the above
activities detailed in syndicated services, as well as, new store set-ups, store
remodels and fixture installations. These services are primarily based on
agreed-upon rates and fixed management fees under multi-year contracts.
Project Services
Project services consist primarily of specific in-store services
initiated by retailers and manufacturers, such as new store openings, new
product launches, special seasonal or promotional merchandising, focused product
support and product recalls. The Company also performs other project services,
such as new store sets and existing store resets, re-merchandising, remodels and
category implementations, under annual or stand-alone project contracts.
Other Marketing Services
Other marketing services performed by the Company include:
Test Market Research - Testing promotion alternatives, new products and
advertising campaigns, as well as packaging, pricing, and location
changes, at the store level.
Mystery Shopping - Calling anonymously on retail outlets (e.g. stores,
restaurants, banks) to check on distribution or display of a brand and
to evaluate products, service of personnel, conditions of store, etc.
Database Marketing - Managing proprietary information to permit easy
access, analysis and manipulation for use in direct marketing
campaigns.
Data Collection - Gathering sales and other information systematically
for analysis and interpretation.
Teleservices - Maintaining a teleservices center in its Auburn Hills,
Michigan, facility that performs inbound and outbound telemarketing
services, including those on behalf of certain of the Company's
manufacturing clients.
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The Company believes that providing merchandising and other services
timely, accurately and efficiently, as well as, delivering timely and accurate
reports to its clients, are two key components of its success. The Company has
developed Internet-based logistical deployment, communications, and reporting
systems that improve the productivity of its merchandising specialists and
provide timely data and reports to its customers. The Company's merchandising
specialists use hand-held computers, personal computers and laptop computers to
report through the Internet and Interactive Voice Response (IVR) to report
through its Auburn Hills teleservices center the status of each store they
service upon completion. Merchandising specialists may report on store
conditions (e.g. out of stocks, inventory, display placement) or scan and
process new orders for products. This information is analyzed and displayed on
graphical execution maps, which can be accessed by both the Company and its
customers via the Internet. These execution maps visually depict the status of
every merchandising project in real time.
Through the Company's automated labor tracking system, its
merchandising specialists communicate work assignment completion information via
the Internet or telephone, enabling the Company to report hours, mileage, and
other completion information for each work assignment on a daily basis and
providing the Company with daily, detailed tracking of work completion. This
technology allows the Company to schedule its merchandising specialists more
efficiently, quickly quantify the benefits of its services to customers, rapidly
respond to customers' needs and rapidly implement programs. The Company believes
that its technological capabilities provide it with a competitive advantage in
the marketplace.
International Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in marketing
their products. As evidenced in the United States, retailer and manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
believes that the difficulties encountered by these programs are only
exacerbated by the logistics of operating in foreign markets. The Company
believes such factors have created an opportunity to exploit its Internet-based
technology and business model that are successful in the United States. The
Company has formed a task force consisting of information technology, operations
and finance to evaluate and develop foreign markets. The initial focus of the
International Division, SPAR Group International, Inc., has been on the Pacific
Rim region. SPAR Group International, Inc. and a leading Japanese based
distributor established a joint venture to provide the latest in-store
merchandising services to the Japanese market. The Company is actively pursuing
expansion to other markets.
SALES AND MARKETING
Merchandising Services Division
The Company's sales efforts within its Merchandising Services Division
are structured to develop new business in national and local markets. The
Company's corporate business development team directs its efforts toward the
senior management of prospective clients. Sales strategies developed at the
Company's headquarters are communicated to the Company's sales force for
execution. The sales force, located nationwide, work from both Company and home
offices. In addition, the Company's corporate account executives play an
important role in the Company's new business development efforts within its
existing manufacturer and retailer client base.
As part of the retailer consolidation, retailers are centralizing most
administrative functions, including operations, procurement and category
management. In response to this centralization and the growing importance of
large retailers, many manufacturers have reorganized their selling organizations
around a retailer team concept that focuses on a particular retailer. The
Company has responded to this emerging trend and currently has retailer teams in
place at select discount and drug chains.
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The Company's business development process includes a due diligence
period to determine the objectives of the prospective client, the work required
to be performed to satisfy those objectives and the market value of such work to
be performed. The Company employs a formal cost development and proposal process
that determines the cost of each element of work required to achieve the
prospective client's objectives. These costs, together with an analysis of
market rates, are used in the development of a formal quotation that is then
reviewed at various levels within the organization. The pricing of this internal
proposal must meet the Company's objectives for profitability, which are
established as part of the business planning process. After approval of this
quotation, a detailed proposal is presented to the prospective client. After the
elements of service and corresponding rates are agreed upon, a contract is
prepared and executed.
International Division
The Company's marketing efforts within its International Division are
designed to develop new business internationally. The Company has recently hired
representatives in Europe and Australia to help in these efforts. The Division's
corporate business development team targets specific areas and develops
strategic relationships to cultivate business for worldwide expansion.
CUSTOMERS
Merchandising Services Division
In its Merchandising Services Division, the Company currently represents
numerous manufacturers and retail clients in a wide range of retail outlets
in the United States including:
o Mass Merchandisers
o Drug
o Grocery
o Other retail trade groups (e.g. Discount, Home Centers)
The Company also provides database, research and other marketing
services to the automotive and consumer packaged goods industries.
One customer accounted for 26%, 25% and 20% of the Company's net
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
This customer also accounted for approximately 40%, 24% and 26% of accounts
receivable at December 31, 2002, 2001 and 2000, respectively.
A second customer accounted for 11%, 9% and 5% of the Company's net
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
This second customer also accounted for approximately 5%, 4% and 4% of accounts
receivable at December 31, 2002, 2001 and 2000, respectively.
Approximately 24%, 31%, and 18% of net revenues for the years ended
December 31, 2002, 2001, and 2000, respectively, resulted from merchandising
services performed for others at Kmart stores. Kmart filed for protection under
the U.S. Bankruptcy Code in January 2002. During 2002, Kmart closed a
significant number of stores in the United States. While the Company's customers
and the resultant contractual relationships are with the manufacturers and not
this retailer, the Company's business would be negatively impacted if this
retailer were to close all or most of its stores.
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International Division
The Company believes that the potential international customers for this
division have similar profiles to its Merchandising Services Division customers.
The initial focus of the International Division had been on Japan and the
Pacific Rim region. The Company is actively pursuing expansion to Europe and
other markets.
COMPETITION
The marketing services industry is highly competitive.
Competition in the Company's Merchandising Services Division arises from
a number of large enterprises, many of which are national in scope. The Company
also competes with a large number of relatively small enterprises with specific
client, channel or geographic coverage, as well as with the internal marketing
and merchandising operations of its clients and prospective clients. The Company
believes that the principal competitive factors within its industry include
development and deployment of technology, breadth and quality of client
services, cost, and the ability to execute specific client priorities rapidly
and consistently over a wide geographic area. The Company believes that its
current structure favorably addresses these factors and establishes it as a
leader in the mass merchandiser and chain drug channels of trade, as well as a
leading provider of in-store services to the home entertainment industry. The
Company also believes it has the ability to execute major national in-store
initiatives and develop and administer national retailer programs. Finally, the
Company believes that, through the use and continuing improvement of its
proprietary Internet software, other technological efficiencies and various cost
controls, the Company will remain competitive in its pricing and services.
TRADEMARKS
The Company has numerous registered trademarks. Although the Company
believes its trademarks may have value, the Company believes its services are
sold primarily based on breadth and quality of service, cost, and the ability to
execute specific client priorities rapidly and consistently over a wide
geographic area. See "--Industry Overview" and "--Competition".
EMPLOYEES
As of December 31, 2002, the Company's Merchandising Services Division's
labor force consisted of approximately 9,500 people, approximately 300 full-time
employees, approximately 2,600 part-time employees and approximately 6,600
independent contractors (furnished principally through related parties, see Item
13 - Certain Relationships and Related Transactions, below), of which 193
full-time employees were engaged in operations and 11 were engaged in sales. The
Company considers its relations with its employees to be good. The Company's
Merchandising Services Division also utilized the services of its affiliate,
SPAR Management Services, Inc. ("SMSI"), to schedule and supervise its field
force, including its own part-time employees as well as the independent
contractors furnished by another affiliate SPAR Marketing Services, Inc. ("SMS")
(see Item 13 - Certain Relationships and Related Transactions, below).
The Company currently utilizes its existing Merchandising Division's
employees, as well as, the services of certain employees of its affiliates, SMSI
and SPAR Infotech, Inc. ("SIT"), to staff the International Division. However,
dedicated employees will be added to that division as the need arises. The
Company's affiliate, SIT, also provides programming and other assistance to the
Company's various divisions (see Item 13 - Certain Relationships and Related
Transactions, below).
CERTAIN RISK FACTORS
There are various risks associated with the Company's growth and
operating strategy. Certain (but not all) of these risks are discussed below.
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DEPENDENCY ON LARGEST CUSTOMERS
One customer accounted for 26%, 25% and 20% of the Company's net
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
This customer also accounted for approximately 40%, 24% and 26% of accounts
receivable at December 31, 2002, 2001 and 2000, respectively. A second customer
accounted for 11%, 9% and 5% of the Company's net revenues for the years ended
December 31, 2002, 2001, and 2000, respectively. This second customer also
accounted for approximately 5%, 4% and 4% of accounts receivable at December 31,
2002, 2001 and 2000, respectively. The loss of either such customer and the
failure to attract new large customers, could significantly decrease the
Company's revenues and such decreased revenues could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, approximately 24%, 31%, and 18% of net revenues for the
years ended December 31, 2002, 2001, and 2000, respectively, resulted from
merchandising services performed for manufacturers and others at Kmart, which is
currently operating under Chapter 11 of the Federal Bankruptcy Code. During
2002, Kmart closed a significant number of stores in the United States. There
can be no assurance that this retailer will continue to operate all or any of
its remaining stores. While the Company's customers and the resultant
contractual relationships are with the manufacturers and not this retailer, if
this retailer were to close all or most of its stores, such closures could
significantly decrease the Company's revenues and could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
DEPENDENCE ON TREND TOWARD OUTSOURCING
The business and growth of the Company depends in large part on the
continued trend toward outsourcing of marketing services, which the Company
believes has resulted from the consolidation of retailers and manufacturers, as
well as the desire to seek outsourcing specialists and reduce fixed operation
expenses. There can be no assurance that this trend in outsourcing will
continue, as companies may elect to perform such services internally. A
significant change in the direction of this trend generally, or a trend in the
retail, manufacturing or business services industry not to use, or to reduce the
use of, outsourced marketing services such as those provided by the Company,
could significantly decrease the Company's revenues and such decreased revenues
could have a material adverse effect on the Company's business, results of
operations and financial condition or the desired increases in the Company's
business, revenues and profits.
FAILURE TO SUCCESSFULLY COMPETE
The marketing services industry is highly competitive and the Company
has competitors that are larger (or part of larger holding companies) and may be
better financed. In addition, the Company competes with: (i) a large number of
relatively small enterprises with specific customer, channel or geographic
coverage; (ii) the internal marketing and merchandising operations of its
customers and prospective customers; (iii) independent brokers; and (iv) smaller
regional providers. Remaining competitive in the highly competitive marketing
services industry requires that the Company monitor and respond to trends in all
industry sectors. There can be no assurance that the Company will be able to
anticipate and respond successfully to such trends in a timely manner. If the
Company is unable to successfully compete, it could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
If certain competitors were to combine into integrated marketing
services companies, or additional marketing service companies were to enter into
this market, or existing participants in this industry were to become more
competitive, it could have a material adverse effect on the Company's business,
results of operations and financial condition or the desired increases in the
Company's business, revenues and profits.
-11-
VARIABILITY OF OPERATING RESULTS AND UNCERTAINTY IN CUSTOMER REVENUE
The Company has experienced and, in the future, may experience
fluctuations in quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary and from time to time and may
result in reduced revenue include: (i) the number of active customer projects;
(ii) customer delays, changes and cancellations in projects; (iii) the timing
requirements of customer projects; (iv) the completion of major customer
projects; (v) the timing of new engagements; (vi) the timing of personnel cost
increases; and (vii) the loss of major customers. In particular, the timing of
revenues is difficult to forecast for the home entertainment industry because
timing is dependent on the commercial success of particular releases of
particular customers. In the event that a particular release is not widely
accepted by the public, the Company's revenue could be significantly reduced. In
addition, the Company is subject to revenue uncertainties resulting from factors
such as unprofitable customer work and the failure of customers to pay. The
Company attempts to mitigate these risks by dealing primarily with large
credit-worthy customers, by entering into written agreements with its customers
and by using project budgeting systems. These revenue fluctuations could
materially and adversely affect the Company's business, results of operations
and financial condition or the desired increases in the Company's business,
revenues and profits.
FAILURE TO DEVELOP NEW PRODUCTS
A key element of the Company's growth strategy is the development and
sale of new products. While several new products are under current development,
there can be no assurance that the Company will be able to successfully develop
and market new products. The Company's inability or failure to devise useful
merchandising or marketing products or to complete the development or
implementation the development of a particular product for use on a large
scale, or the failure of such products to achieve market acceptance, could
adversely affect the Company's ability to achieve a significant part of its
growth strategy and the absence of such growth could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
INABILITY TO IDENTIFY, ACQUIRE AND SUCCESSFULLY INTEGRATE ACQUISITIONS
Another key component of the Company's growth strategy is the
acquisition of businesses across the United States and worldwide that offer
similar merchandising or marketing services. The successful implementation of
this strategy depends upon the Company's ability to identify suitable
acquisition candidates, acquire such businesses on acceptable terms and
integrate their operations successfully with those of the Company. There can be
no assurance that such candidates will be available or, if such candidates are
available, that the price will be attractive or that the Company will be able to
identify, acquire or integrate such businesses successfully. In addition, in
pursuing such acquisition opportunities, the Company may compete with other
entities with similar growth strategies, these competitors may be larger and
have greater financial and other resources than the Company. Competition for
these acquisition targets could also result in increased prices of acquisition
targets and/or a diminished pool of companies available for acquisition.
The successful integration of these acquisitions also may involve a
number of additional risks, including: (i) the inability to retain the customers
of the acquired business; (ii) the lingering effects of poor customer relations
or service performance by the acquired business, which also may taint the
Company's existing businesses; (iii) the inability to retain the desirable
management, key personnel and other employees of the acquired business; (iv) the
inability to fully realize the desired efficiencies and economies of scale: (v)
the inability to establish, implement or police the Company's existing
standards, controls, procedures and policies on the acquired business; (vi)
diversion of management attention; and (vii) exposure to customer, employee and
other legal claims for activities of the acquired business prior to acquisition.
And of course, any acquired business could perform significantly worse than
expected.
-12-
The inability to identify, acquire and successfully integrate such
merchandising or marketing services business could have a material adverse
effect on the Company's growth strategy and could limit the Company's ability to
significantly increase its revenues and profits.
UNCERTAINTY OF FINANCING FOR, AND DILUTION RESULTING FROM, FUTURE ACQUISITIONS
The timing, size and success of such acquisition efforts and any
associated capital commitments cannot be readily predicted. Future acquisitions
may be financed by issuing shares of the Company's Common Stock, cash, or a
combination of Common Stock and cash. If the Company's Common Stock does not
maintain a sufficient market value, or if potential acquisition candidates are
otherwise unwilling to accept the Company's Common Stock as part of the
consideration for the sale of their businesses, the Company may be required to
obtain additional capital through debt or equity financings. To the extent the
Company's Common Stock is used for all or a portion of the consideration to be
paid for future acquisitions, dilution may be experienced by existing
stockholders. There can be no assurance that the Company will be able to obtain
the additional financing it may need for its acquisitions on terms that the
Company deems acceptable. Failure to obtain such capital would materially
adversely affect the Company's ability to execute its growth strategy.
RELIANCE ON THE INTERNET
The Company relies on the Internet for the scheduling, coordination and
reporting of its merchandising and marketing services. The Internet has
experienced, and is expected to continue to experience, significant growth in
the numbers of users and amount of traffic as well as increased attacks by
hackers and other saboteurs. To the extent that the Internet continues to
experience increased numbers of users, frequency of use or increased bandwidth
requirements of users, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on the
Internet by this continued growth or that the performance or reliability of the
Internet will not be adversely affected. Furthermore, the Internet has
experienced a variety of outages and other delays as a result of accidental and
intentional damage to portions of its infrastructure, and could face such
outages and delays in the future of similar or greater effect. Any protracted
disruption in Internet service would increase the Company's costs of operation
and reduce efficiency and performance, which could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
ECONOMIC AND RETAIL UNCERTAINTY
The markets in which the Company operates are cyclical and subject to
the effects of economic downturns. The current political, social and economic
conditions, including the impact of terrorism on consumer and business behavior,
make it difficult for the Company, its vendors and its customers to accurately
forecast and plan future business activities. Substantially all of the Company's
key customers are either retailers or those seeking to do product merchandising
at retailers. If the retail industry experiences a significant economic
downturn, a reduction in product sales could significantly decrease the
Company's revenues. The Company also has risks associated with its customers
changing their business plans and/or reducing their marketing budgets in
response to economic conditions, which also could also significantly decrease
the Company's revenues. Such revenue decreases could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
SIGNIFICANT STOCKHOLDERS: VOTING CONTROL AND MARKET ILLIQUIDITY
Mr. Robert G. Brown, a founder, a director, the Chairman, President and
Chief Executive Officer of the Company, beneficially owns approximately 44.0% of
the Company's outstanding Common Stock, and Mr. William H. Bartels, a founder, a
director, and a Vice Chairman of the Company beneficially owns approximately
27.7% of the Company's outstanding Common Stock. These stockholders have, should
they choose to act together, and under certain circumstances Mr. Brown acting
alone has, the ability to control all matters requiring
-13-
stockholder approval, including the election of directors and the approval of
mergers and other business combination transactions.
In addition, although the Company Common Stock is quoted on the Nasdaq
Small Cap Market, the trading volume in such stock may be limited and an
investment in the Company's securities may be illiquid because the founders own
a significant amount of the Company's stock.
DEPENDENCE UPON AND POTENTIAL CONFLICTS IN SERVICES PROVIDED BY AFFILIATES
The success of the Company's business is dependent upon the successful
execution of its field services by SPAR Marketing Services, Inc. ("SMS"), SPAR
Management Services, Inc. ("SMSI"), and programming services provided by SPAR
Infotech, Inc. ("SIT"), each of which is an affiliate but not a subsidiary of
the Company, and none of which is consolidated in the Company's financial
statements or results. SMS provides substantially all of the field
representatives used by the Company in conducting its business (76% of field
expense in 2002). SMSI provides substantially all of the field management
services used by the Company in conducting its business. SIT provides
substantially all of the Internet programming services and other programming
needs used by the Company in conducting its business (see Item 13 - Certain
Relationships and Related Transactions, below), which are provided to the
Company by SMS and SMSI on a cost-plus basis pursuant to contracts that are
cancelable on 60 days notice prior to December 31 of each year and by SIT on an
hourly charge basis pursuant to a contract that is cancelable on 30 days notice.
The Company has determined that these services are provided at rates favorable
to the Company.
SMS, SMSI, SIT and certain other affiliated companies (collectively, the
"SPAR Affiliates") are owned solely by Mr. Robert G. Brown, a founder, a
director, the Chairman, President and Chief Executive Officer of the Company,
and Mr. William H. Bartels, a founder, a director, and a Vice Chairman of the
Company, who also are each directors and executive officers of the SPAR
Affiliates (see Item 13 - Certain Relationships and Related Transactions,
below). In the event of any dispute in the business relationships between the
Company and one or more of the SPAR Affiliates, it is possible that Messrs.
Brown and Bartels may have one or more conflicts of interest with respect to
those relationships and could cause one or more of the SPAR Affiliates to
renegotiate or cancel their contracts with the Company or otherwise act in a way
that is not in the Company's best interests.
While the Company's relationships with SMS, SMSI, SIT and the other SPAR
Affiliates are excellent, there can be no assurance that the Company could (if
necessary under the circumstances) replace the field representatives and
management currently provided by SMS and SMSI, respectively, or replace the
Internet and other programming services provided by SIT, in sufficient time to
perform its customer obligations or at such favorable rates in the event the
SPAR Affiliates no longer performed those services. Any cancellation, other
nonperformance or material pricing increase under those affiliate contracts
could have a material adverse effect on the Company's business, results of
operations and financial conditions or the desired increases in the Company's
business, revenues and profits.
THE COMPANY HAS NOT PAID AND DOES NOT INTEND TO PAY CASH DIVIDENDS
The Company has not paid dividends in the past, intends to retain any
earnings or other cash resources to finance the expansion of its business and
for general corporate purposes, and does not intend to pay dividends in the
future.
RISKS ASSOCIATED WITH INTERNATIONAL JOINT VENTURES
While the Company endeavors to limit its exposure for claims and losses
in any international joint ventures through contractual provisions, insurance
and use of single purpose subsidiaries for such ventures, there can be no
assurance that the Company will not be held liable for the claims against and
losses of a
-14-
particular international joint venture under applicable local law or local
interpretation of any joint venture or insurance provisions. If any such claims
and losses should occur, be material in amount and be successfully asserted
against the Company, such claims and losses could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
ITEM 2. PROPERTIES.
The Company maintains its corporate headquarters in approximately 6,000
square feet of leased office space located in Tarrytown, New York, under a lease
with a term expiring in May 2004.
The Company leases certain office and storage facilities for its
divisions and subsidiaries under operating leases, which expire at various dates
during the next five years. Most of these leases require the Company to pay
minimum rents, subject to periodic adjustments, plus other charges, including
utilities, real estate taxes and common area maintenance.
The following is a list of the locations where the Company maintains
leased facilities for its division offices and subsidiaries:
LOCATION OFFICE USE
------------------------------------------------------------------------
Tarrytown, NY Corporate Headquarters
Auburn Hills, MI Regional Office, Warehouse and Teleservices Center
Eden Prairie, MN Regional Office
Cincinnati, OH Regional Office
Largo, FL Regional Office
Although the Company believes that its existing facilities are adequate
for its current business, new facilities may be added should the need arise in
the future.
ITEM 3. LEGAL PROCEEDINGS.
On October 24, 2001, Safeway Inc., a former customer of the PIA
Companies, filed a complaint alleging damages of approximately $3.6 million plus
interest and costs and alleged punitive damages in an unspecified amount against
the Company in Alameda County Superior Court, California, Case No. 2001028498
with respect to (among other things) alleged breach of contract. On or about
December 30, 2002, the Court approved the filing of Safeway Inc.'s Second
Amended Complaint, which alleges causes of action for (among other things)
breach of contract against the Company, PIA Merchandising Co., Inc. and Pivotal
Sales Company. The Second Amended Complaint was filed with the Court on January
13, 2003, and does not specify the amount of monetary damages sought. No
punitive or exemplary damages are sought in Safeway Inc.'s Second Amended
Complaint. This case is being vigorously contested by the Company.
The Company is a party to various legal actions and administrative
proceedings arising in the normal course of business. In the opinion of Company
management, disposition of these matters are not anticipated to have a material
adverse effect on the financial position, results of operations or cash flows of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-15-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq Small Cap
Market.
2001 2002
------------------------ --------------------------
High Low High Low
First Quarter $ 1.6094 $ .5625 $ 2.4100 $ 1.6000
Second Quarter 1.3000 .7000 2.5000 2.0000
Third Quarter 2.2700 .8700 2.8200 1.9600
Fourth Quarter 2.8000 .9200 4.9200 1.9100
As of December 31, 2002, there were approximately 700 beneficial
shareholders of the Company's Common Stock
DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of the business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected condensed consolidated financial data sets forth,
for the periods and the dates indicated, summary financial data of the Company
and its subsidiaries. The selected financial data have been derived from the
Company's financial statements, which have been audited by independent public
accountants.
-16-
SPAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31, NINE
MONTHS
ENDED
DECEMBER 31,
2002 2001 2000 1999(2) 1998(2)
----------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 69,612 $ 70,891 $ 81,459 $ 79,613 $ 32,601
Cost of revenues 40,331 40,883 50,278 50,499 16,217
----------- --------- -------- -------- --------
Gross profit 29,281 30,008 31,181 29,114 16,384
Selling, general and administrative expenses 18,804 19,380 24,761 23,213 9,978
Depreciation and amortization 1,844 2,682 2,383 1,204 142
----------- --------- -------- -------- --------
Operating income 8,633 7,946 4,037 4,697 6,264
Other (income) expense (26) 107 (790) (90) (149)
Interest expense 363 561 1,326 976 304
----------- --------- -------- -------- --------
Income from continuing operations before provision for
income taxes 8,296 7,278 3,501 3,811 6,109
Income tax provision 2,998 3,123 780 3,743 -
----------- --------- -------- -------- --------
Income from continuing operations 5,298 4,155 2,721 68 6,109
Discontinued operations:
Loss from discontinued operations net of tax benefits
of $935, $858 and $595, respectively - (1,597) (1,399) (563) -
Estimated loss on disposal of discontinued operations,
including provision of $1,000 for losses during
phase-out period and disposal costs
net of tax benefit of $2,618 - (4,272) - - -
----------- --------- -------- -------- --------
Net income (loss) $ 5,298 $ (1,714) $ 1,322 $ (495) $ 6,109
Unaudited pro forma data (1):
Income from continuing operations before provision for $ 3,811 $ 6,109
-------- --------
income taxes
Pro forma income tax provision 1,840 2,253
-------- --------
Pro forma income from continuing operations 1,971 3,856
Pro forma loss from discontinued operations net of
pro forma tax benefit of $429 (729) -
-------- --------
Pro forma net income $ 1,242 $ 3,856
Basic/diluted net income (loss) per common share:
Actual/Pro forma income from continuing operations $ 0.28 $ 0.23 $ 0.15 $ 0.13 $ 0.30
----------- --------- -------- -------- --------
Discontinued operations:
Actual/Pro forma loss from discontinued operations - (0.09) (0.08) (0.05) -
Estimated loss on disposal of discontinued operations - (0.23) - - -
----------- --------- -------- -------- --------
Loss from discontinued operations - (0.32) (0.08) (0.05) -
----------- --------- -------- -------- --------
Actual/Pro-forma net income (loss) $ 0.28 $ (0.09) $ 0.07 $ 0.08 $ 0.30
=========== ======== ======== ======== ========
Actual/Pro forma weighted average shares outstanding 18,761 18,389 18,185 15,361 12,659
- basic
Actual/Pro forma weighted average shares outstanding
- diluted 19,148 18,467 18,303 15,367 12,659
-17-
December 31,
--------------------------------------------------------
2002 2001 2000 1999(2) 1998(2)
-------- -------- --------- --------- ----------
BALANCE SHEET DATA:
- ------------------
Working capital (deficiency) $ 6,319 $ 8,476 $ (2,273) $ (639) $ (2,214)
Total assets 29,757 41,155 48,004 54,110 14,865
Current portion of long-term debt - 57 1,143 1,147 685
Line of credit and long-term debt, net 148 13,287 10,093 16,009 311
Total stockholders' equity (deficit) 16,592 10,934 12,240 10,886 (1,405)
======== ======== ======== ========= ========
(1) The unaudited pro forma income tax information is presented in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," as if the Company had been subject to federal and state
income taxes for all periods presented.
(2) In July 1999, PIA and the Spar Companies merged with the SPAR Companies
deemed the accounting acquirer. The results of operations include the
results of PIA from the acquisition date forward.
-18-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In the United States, the Company provides merchandising services to
manufacturers and retailers principally in mass merchandiser, drug, grocery, and
other retail trade classes through its Merchandising Services Division. The
Company established its International Division in July 2000, and through a joint
venture with a leading Japanese wholesaler, the Company provides in-store
merchandising services to the Japanese market. The Company accounts for its
investment in the joint venture utilizing the equity method.
In December 2001, the Company decided to divest its Incentive Marketing
Division and recorded an estimated loss on disposal of SPAR Incentive Marketing,
Inc. ("SIM") of approximately $4.3 million, net of taxes, including a $1.0
million reserve recorded for the anticipated cost to divest SPGI and any
anticipated losses through the divestiture date.
On June 30, 2002, SIM wholly-owned subsidiary of the Company, entered
into a Stock Purchase and Sale Agreement with Performance Holdings, Inc.
("PHI"), a Delaware corporation headquartered in Carrollton, Texas. SIM sold all
of the stock of its subsidiary SPAR Performance Group, Inc. ("SPGI"), to PHI for
$6.0 million. As a condition of the sale, PHI issued and contributed 1,000,000
shares of its common stock to Performance Holdings, Inc. Employee Stock
Ownership Plan which became the only shareholder of PHI.
As required, SIM's results have been reclassified as discontinued
operations for all periods presented. The results of operations of the
discontinued business segment is shown separately below net income from
continuing operations. Accordingly, the 2002 consolidated statements of
operations of the Company have been prepared, and its 2001 and 2000 consolidated
statement of operations have been restated, to report the results of
discontinued operations of SIM separately from the continuing operations of the
Company, and the following discussions reflect such restatement.
In October 2002, the Company dissolved its Technology Division that was
established in March 2000 for the purpose of marketing its proprietary
Internet-based computer software. The operations of this subsidiary were not
material.
The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Note 2 to the Financial
Statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition, depreciation methods,
asset impairment recognition, business combination accounting, and discontinued
business accounting. While the estimates and judgments associated with the
application of these policies may be affected by different assumptions or
conditions, the Company believes the estimates and judgments associated with the
reported amounts are appropriate in the circumstances. Two critical accounting
policies are revenue recognition. allowance for doubtful accounts:
REVENUE RECOGNITION
The Company's services are provided under contracts, which consist
primarily of service fees and per unit fee arrangements. Revenues under
service fee arrangements are recognized when the service is performed.
The Company's per unit contracts provide for fees to be earned based on
the retail sales of client's products to consumers. The Company
recognizes per unit fees in the period such amounts become determinable.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company continually monitors the collectability of its accounts
receivable based upon current customer credit information available.
Utilizing this information, the Company has established an allowance for
doubtful accounts of $301,000 and $325,000 at December 31, 2002 and
2001, respectively. Historically, the Company's estimates have not
differed materially from the actual results.
-19-
RESULTS OF OPERATIONS
The following table sets forth selected financial the data and data as
a percentage of net revenues for the periods indicated.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
-------------------------------------------------------------------------------
(dollars in millions)
Dollars % Dollars % Dollars %
-------------- ---------- ----------- ----------- ------------ -----------
Net revenues $ 69.6 100.0% $ 70.9 100.0% $ 81.5 100.0%
Cost of revenues 40.3 57.9 40.9 57.7 50.3 61.7
Selling, general & administrative expenses 18.8 27.0 19.4 27.4 24.8 30.4
Depreciation & amortization 1.8 2.6 2.7 3.8 2.4 2.9
Other income & expenses, net 0.4 0.6 0.6 0.8 0.5 0.7
-------------- ---------- ----------- ----------- ----------- -----------
Income from continuing operations before income 8.3 11.9 7.3 10.3 3.5 4.3
tax provision
Income tax provision 3.0 4.3 3.1 4.4 0.8 1.0
-------------- ---------- ----------- ----------- ----------- -----------
Income from continuing operations 5.3 7.6% 4.2 5.9% 2.7 3.3%
Discontinued operations:
Loss from discontinued operations, net of tax
benefits - (1.6) (1.4)
Estimated loss on disposal of discontinued
operations, net of tax benefits - (4.3) -
-------------- ----------- ------------
Net income (loss) $ 5.3 $ (1.7) $ 1.3
============== =========== ============
-20-
RESULTS FROM CONTINUING OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
2002, COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 2001
- -------------------------------------------------------
Net Revenues from continuing operations for the twelve months ended
December 31, 2002, were $69.6 million, compared to $70.9 million for the twelve
months ended December 31, 2001, a 1.8% decrease. The decrease of 1.8% in net
revenues is primarily attributed to decreased business in mass merchandiser and
drug store chains.
Cost of revenues from continuing operations consists of in-store labor
and field management wages, related benefits, travel and other direct
labor-related expenses. Cost of revenues as a percentage of net revenues of
57.9% for the twelve months ended December 31, 2002, was consistent with the
57.7% for the twelve months ended December 31, 2001. Approximately 76% and 37%
of the field services were purchased from the Company's affiliate, SMS, in 2002
and 2001, respectively (see Item 13 - Certain Relationships and Related
Transactions, below). SMS's increased share of field services resulted from its
more favorable cost structure.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resource expenses, legal and accounting expenses.
The following table sets forth the operating expenses as a percentage of net
revenues for the time periods indicated:
Year Ended Year Ended Increase
December 31, 2002 December 31, 2001 (decr.)
---------------------------- ------------------------------ -------------
(dollars in millions)
Dollars % Dollars % %
-------------- ------------ --------------- ------------- -------------
Selling, general & administrative $ 18.8 27.0% $ 19.4 27.4% (3.0) %
Depreciation and amortization 1.8 2.6 2.7 3.8 (31.3)
-------------- ------------ --------------- -------------
Total operating expenses $ 20.6 29.6% $ 22.1 31.2% (6.4)%
============== ============ =============== =============
Selling, general and administrative expenses decreased by $0.6 million,
or 3.0%, for the twelve months ended December 31, 2002, to $18.8 million
compared to $19.4 million for the twelve months ended December 31, 2001. This
decrease was due primarily to a reduction in the SG&A work force and related
expenses, as well as lower information technology costs.
Depreciation and amortization decreased by $0.9 million for the twelve
months ended December 31, 2002, primarily due to the change in accounting rules
for goodwill amortization adopted by the Company effective January 1, 2002.
INTEREST EXPENSE
Interest expense decreased $0.2 million to $0.4 million for the twelve
months ended December 31, 2002, from $0.6 million for the twelve months ended
December 31, 2001, due to decreased debt levels, as well as decreased interest
rates in 2002.
-21-
INCOME TAXES
The provision for income taxes was $3.0 million and $3.1 million for the
twelve months ended December 31, 2002, and December 31, 2001, respectively. The
effective tax rate was 36.1% and 42.9% for 2002 and 2001, respectively. The
decrease in the effective tax rate in 2002 is primarily due to the non
amortization of goodwill (as discussed in Note 2 to the financial statements)
that was previously expensed in 2001 and was not deductible for tax purposes.
DISCONTINUED OPERATIONS
Six Months Ended Year Ended
June 30, 2002 December 31, 2001
-------------------- -----------------------
(dollars in millions)
Dollars % Dollars %
--------- --------- --------- ----------
Net revenues $ 15.7 100.0% $ 31.2 100.0%
Cost of revenues 13.1 83.2 26.0 83.4
Selling, general and administrative expenses 2.8 17.9 5.7 18.4
Depreciation and amortization 0.1 0.8 1.2 3.4
The Incentive Marketing Division was divested in June 2002 under a plan
adopted in 2001. Net revenues from the Incentive Marketing Division for the six
months ended June 30, 2002, were $15.7 million, compared to $31.2 million for
the twelve months ended December 31, 2001.
Cost of revenues in the Incentive Marketing Division consists of direct
labor, independent contractor expenses, food, beverages, entertainment and
travel costs. Cost of revenue as a percentage of net revenues of 83.2% for the
six months ended June 30, 2002, was consistent with the 83.4% for the twelve
months ended December 31, 2001.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses which include corporate overhead, project management, information
systems, executive compensation, human resource expenses, legal and accounting
expenses were $2.8 million for the six months ended June 30, 2002, and $5.7
million for the twelve months ended December 31, 2001. Depreciation and
amortization was $0.1 million for the six months ended June 30, 2002 compared
to $1.2 million for the twelve months ended December 31, 2001, reflecting the
change in accounting rules for goodwill adopted by the Company effective January
1, 2002.
NET INCOME/(LOSS)
The SPAR Group had a net income from continuing operations of
approximately $5.3 million or $0.28 per basic and diluted share for the twelve
months ended December 31, 2002, compared to a net income from continuing
operations of approximately $4.2 million or $0.23 per basic and diluted shares
for the twelve months ended December 31, 2001. The increase in net income from
continuing operations is primarily the result of substantial reductions in
selling, general and administrative expenses and a change in accounting for
goodwill amortization. The SPAR Group had a net income of approximately $5.3
million or $0.28 per basic and diluted share for the twelve months ended
December 31, 2002, compared to a net loss of $1.7 million or $0.09 per basic and
diluted share for the twelve months ended December 31, 2001. The increase in
total net income includes the effect of the $4.3 million loss in 2001 on
disposal of discontinued operations.
-22-
RESULTS FROM CONTINUING OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
2001, COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 2000
- -------------------------------------------------------
Net revenues from continuing operations for the twelve months ended
December 31, 2001, were $70.9 million, compared to $81.5 million for the twelve
months ended December 31, 2000, a 12.9% decrease. The decrease of 12.9% in net
revenues is primarily attributed to discontinued in-store merchandising programs
by the PIA Companies.
Cost of revenue from continuing operations consist of in-store labor and
field management wages, related benefits, travel and other direct labor-related
expenses, of which approximately 37% and 19% were purchased from the Company's
affiliate, SMS in 2001 and 2000 respectively (see Item 13 - Certain
Relationships and Related Transactions, below). Cost of revenues as a percentage
of net revenues decreased 4.0% to 57.7% for the twelve months ended December 31,
2001, compared to 61.7% for the twelve months ended December 31, 2000. This
decrease is principally attributable to reduced merchandiser labor costs due to
efficiencies realized in 2001 from the continued consolidation of the
multi-level field organization of the PIA Companies.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resource expenses and accounting expenses. The
following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
Year Ended Year Ended Increase
December 31, 2001 December 31, 2000 (decr.)
------------------------ ------------------------- ----------
(dollars in millions)
Dollars % Dollars % %
------------ ---------- ----------- ------------ ----------
Selling, general & administrative $ 19.4 27.4% $ 24.8 30.4% (21.7)%
Depreciation and amortization 2.7 3.8 2.4 2.9 12.6%
------------ ---------- ----------- ------------
Total operating expenses $ 22.1 31.2% $ 27.2 33.3% (18.7)%
============ ========== =========== ============
Selling, general and administrative expenses decreased by $5.4 million
or 21.7% for the twelve months ended December 31, 2001, to $19.4 million
compared to $24.8 million for the twelve months ended December 31, 2000. This
decrease was primarily due to the efficiencies resulting from the continued
integration with the PIA Companies. Selling, general, and administrative
expenses for the Technology Division were $0.8 million and $0.4 million for the
twelve months ended December 31, 2001 and December 31, 2000, respectively.
Depreciation and amortization increased by $0.3 million for the twelve
months ended December 31, 2001, due primarily to the amortization of customized
internal software costs capitalized under SOP 98-1.
OTHER EXPENSE
For 2001, the Company recognized a loss of $107,000 from its share in
the Japan Joint Venture.
OTHER INCOME
In January 2000, the Company sold its investment in an affiliate for
approximately $1.5 million. The sale resulted in a gain of approximately $0.8
million, which is included in other income.
-23-
INTEREST EXPENSE
Interest expense decreased $0.7 million to $0.6 million for the twelve
months ended December 31, 2001, from $1.3 million for the twelve months ended
December 31, 2000, due to decreased debt levels, as well as decreased interest
rates in 2001.
INCOME TAXES
The provision for income taxes was $3.1 million and $0.8 million for the
twelve months ended December 31, 2001, and December 31, 2000, respectively. The
increase in the effective tax rate and the resultant taxes in 2001 is primarily
due to the $0.8 million deferred tax benefit that resulted from a change in the
Company's valuation allowance in 2000 that did not reoccur in 2001.
DISCONTINUED OPERATIONS
Year Ended Year Ended
December 31, 2001 December 31, 2000
---------------------- -----------------------
(dollars in millions)
Dollars % Dollars %
----------- --------- ----------- ----------
Net revenues $ 31.2 100.0% $ 28.1 100.0%
Cost of revenues 26.0 83.4 22.7 81.0
Selling, general and administrative expenses 5.7 18.4 5.7 20.2
Depreciation and amortization 1.2 3.4 1.2 4.2
Net revenues from the Incentive Marketing Division for the twelve months
ended December 31, 2001, were $31.2 million, compared to $28.1 million for the
twelve months ended December 31, 2000, an 11.2% increase. The increase in net
revenues was primarily due to an increase in project revenue principally from
new clients.
Cost of revenues in the Incentive Marketing Division consists of direct
labor, independent contractor expenses, food, beverages, entertainment and
travel costs. Cost of revenues from the Incentive Marketing Division, as a
percentage of net revenues increased 2.4% to 83.4% for the twelve months ended
December 31, 2001, compared to 81.0% for the twelve months ended December 31,
2000, primarily due to the programming mix, with higher cost programs accounting
for a greater portion of the revenues in 2001.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses which include corporate overhead, project management, information
systems, executive compensation, human resource expenses and accounting expenses
were $5.7 million for the twelve months ended December 31, 2001 and 2000.
Depreciation and amortization was $1.2 million for the twelve months ended
December 31, 2001 and 2000.
NET (LOSS)/INCOME
The SPAR Group had a net income from continuing operations of
approximately $4.2 million or $0.23 per basic and diluted share for the year
ended December 31, 2002, compared to a net income from continuing operations of
approximately $2.7 million or $0.15 per basic and diluted share for the year
ended December 31, 2002.
The increase in net income from continuing operations per basic and
diluted share is primarily the result of increased gross profit margins and
substantial reductions in selling, general and administrative expenses. The SPAR
Group had a net loss of approximately $1.7 million or $0.09 per basic and
diluted share for the year ended December 31, 2001, compared to net income of
$1.3 million or $0.07 per basic and diluted share for the year ended December
31, 2000. The decrease in net income of $3.0 million or $0.16 per basic and
diluted share is primarily due to a net loss from discontinued operations of
approximately $4.3 million or $0.23 per basic and diluted share, partially
offset by an increase of approximately $1.4 million or $0.07 per basic and
diluted share of net income from continuing operations.
-24-
LIQUIDITY AND CAPITAL RESOURCES
In the twelve months ended December 31, 2002, the Company had a net
income of $5.3 million. Net cash provided by operating activities for the twelve
months ended December 31, 2002, was $12.7 million, compared with net cash used
by operations of $0.2 million for the twelve months ended December 31, 2001.
Cash provided by operating activities in 2002 was primarily a result of net
operating profits and decreases in accounts receivable and deferred tax assets,
increases in accounts payable and other accrued liabilities, partially offset by
decreases in restructuring charges and increases in prepaid expenses.
Net cash used in investing activities for the twelve months ended
December 31, 2002, was $1.2 million, compared with net cash used of $1.7 million
for the twelve months ended December 31, 2001. The net cash used in investing
activities in 2002 resulted primarily from the purchases of property and
equipment.
Net cash used by financing activities for the twelve months ended
December 31, 2002, was $11.5 million, compared with net cash provided by
financing activities of $2.0 million for the twelve months ended December 31,
2001. The net cash used by financing activities in 2002 was primarily due to
payments on the line of credit.
The above activity resulted in no change in cash and cash equivalents
for the twelve months ended December 31, 2002.
At December 31, 2002, the Company had positive working capital of $6.3
million as compared to $8.5 million at December 31, 2001. The decrease in
working capital is due to decreases in accounts receivable and deferred taxes,
increases in accrued expenses, and other current liabilities, and a
reclassification of stockholder debt, partially off set by decreases in accounts
payable, increases in prepaid expenses and net change in current assets and
liabilities from discontinued operations. Excess cash generated was utilized to
pay down the line of credit. The Company's current ratio was 1.49 and 1.52 at
December 31, 2002, and 2001, respectively.
In January 2003, the Company and Whitehall Business Credit Corporation
("Whitehall"), as successor to the business of IBJ Whitehall Business Credit
Corporation, entered into the Third Amended and Restated Revolving Credit and
Security Agreement and related documents (the "New Credit Facility"). The New
Credit Facility provides the Company and its subsidiaries other than PIA
Merchandising Limited (collectively, the "Borrowers") with a $15.0 million
Revolving Credit Facility that matures on January 23, 2006. The Revolving Credit
Facility allows the Borrowers to borrow up to $15.0 million based upon a
borrowing base formula as defined in the agreement (principally 85% of
"eligible" accounts receivable). The New Credit Facility bears interest at
Whitehall's "Alternative Base Rate" or LIBOR plus two and one-half percent and
is secured by all the assets of the Company and its subsidiaries.
The New Credit Facility replaces a previous 1999 agreement between the
Company and IBJ Whitehall Business Credit Corporation (the "Old Credit
Facility") that was scheduled to mature on February 28, 2003. The Old Credit
Facility as amended provided for a $15.0 million Revolving Credit Facility, as
well as, a $2.5 million Term Loan. The Revolving Credit facility allowed the
Borrowers to borrow up to $15.0 million based upon a borrowing base formula as
defined in the agreement (principally 85% of "eligible" accounts receivable).
The Term Loan amortized in equal monthly installments of $83,334 and was repaid
in full as of December 31, 2001. The revolving loan interest rate was
Whitehall's "Alternate Base Rate" plus one-half of one percent (0.50%) (a total
of 4.75% per annum at December 31, 2002).
-25-
Both Credit Facilities contain an option for Whitehall to purchase
16,667 shares of Common Stock of the Company for $0.01 per share in the event
that the Company's average closing share price over a ten consecutive trading
day period exceeds $15.00 per share. This option expires on July 31, 2003.
Both Credit Facilities contain certain financial covenants which must be
met by the Borrowers on a consolidated basis, among which are a minimum "Net
Worth", a "Fixed Charge Coverage Ratio", a capital expenditure limitation and a
minimum EBITDA, as such terms are defined in the respective agreement. The
Company was in compliance with all such financial covenants at December 31,
2002.
The balances outstanding on the revolving line of credit were $0.1
million and $11.3 million at December 31, 2002 and December 31, 2001,
respectively. As of December 31, 2002, based upon the borrowing base formula,
the SPAR Group had availability of $11.1 million of the $14.9 million unused
revolving line of credit.
As of December 31, 2002, a total of approximately $4.0 million remained
outstanding under notes with certain stockholders. These notes have an interest
rate of 8% and are due on demand. The Company paid $3.0 million in January 2003
and expects to pay the remaining balance of approximately $1.0 million in 2003.
The current Bank Loan Agreement contains certain restrictions on the repayment
of stockholder debt.
Management believes that based upon the Company's current working
capital position and the existing credit facilities, funding will be sufficient
to support ongoing operations over the next twelve months. However, delays in
collection of receivables due from any of the Company's major clients, or a
significant reduction in business from such clients, or the inability to acquire
new clients, could have a material adverse effect on the Company's cash
resources and its ongoing ability to fund operations.
In connection with the sale of SPGI on June 30, 2002, the Company agreed
to provide a discretionary revolving line of credit to SPGI not to exceed $2.0
million (the "Revolver") through September 30, 2005. The Revolver is secured by
a pledge of all the assets of SPGI and is guaranteed by PMI. To date, there have
been no advances against the Revolver. Under the Revolver terms, SPGI is
required to deposit all of its cash to the Company's lockbox. At December 31,
2002, the Company had cash deposits due SPGI totalling approximately $0.9
million.
CERTAIN CONTRACTUAL OBLIGATIONS
The following table contains a summary of certain of the Company's
contractual obligations by category as at December 31, 2002 (in thousands).
PAYMENTS DUE BY PERIOD
Less than 1 More than 5
CONTRACTUAL OBLIGATIONS Total year 1-3 years 3-5 years years
----------------------- ----- ---- --------- --------- -----
Long-Term Debt Obligations $ 148 $ 148 $ - $ - $ -
Due to Stockholders 3,951 3,951
Operating Lease Obligations 2,996 1,004 1,393 599 -
Other Contractual Obligations included on
the Registrant's Balance Sheet 1,035 1,035 - - -
Total $ 8,130 $ 6,138 $ 1,393 $ 599 $ -
In addition to the above, the Company had contingent libailtities to SPGI of
approximately $2.0 million (see above).
-26-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk related to the variable interest
rate on the line of credit and the variable yield on its cash and cash
equivalents. The Company's accounting policies for financial instruments and
disclosures relating to financial instruments require that the Company's
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and long term debt.
The Company considers carrying amounts of current assets and liabilities in the
consolidated financial statements to approximate the fair value for these
financial instruments because of the relatively short period of time between
origination of the instruments and their expected realization. The carrying
amount of the line of credit approximates fair value because the obligation
bears interest at a floating rate. The carrying amount of debt due to certain
stockholders approximates fair value because the obligation bears interest at a
market rate. The Company monitors the risks associated with interest rates and
financial instrument positions. The Company's investment policy objectives
require the preservation and safety of the principal, and the maximization of
the return on investment based upon the safety and liquidity objectives.
Currently, the Company's international operations are not material and,
therefore, the risk related to foreign currency exchange rates is not material.
INVESTMENT PORTFOLIO
The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments. Excess
cash is normally used to pay down the revolving line of credit.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 16 of this Annual Report on form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-27-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information in connection with
each person who is or was at December 31, 2002, an executive officer and/or
director for the Company.
NAME AGE POSITION WITH SPAR GROUP, INC.
Robert G. Brown. . . . . . 60 Chairman, Chief Executive Officer,
President and Director
William H. Bartels . . . . 59 Vice Chairman and Director
Robert O. Aders (1). . . . 75 Director
Jack W. Partridge (1) . . . 57 Director
Jerry B. Gilbert (1) . . . 68 Director
George W. Off (1). . . . . 55 Director
Charles Cimitile. . . . . . 48 Chief Financial Officer and Secretary
James H. Ross. . . . . . . . 69 Treasurer
- --------------------------
(1) Member of the Board's Compensation and Audit Committees
Robert G. Brown serves as the Chairman, the Chief Executive Officer, the
President and a Director of the Company and has held such positions since July
8, 1999, the effective date of the merger of the SPAR Marketing Companies with
PIA Merchandising Services, Inc. (the "Merger"). Mr. Brown served as the
Chairman, President and Chief Executive Officer of the SPAR Marketing Companies
(SPAR/Burgoyne Retail Services, Inc. ("SBRS") since 1994, SPAR, Inc. ("SINC")
since 1979, SPAR Marketing, Inc. ("SMNEV") since November 1993, and SPAR
Marketing Force, Inc. ("SMF") since SMF acquired its assets and business in
1996).
William H. Bartels serves as the Vice Chairman and a Director of the
Company and has held such positions since July 8, 1999 (the effective date of
the PIA Merger). Mr. Bartels served as the Vice-Chairman, Secretary, Treasurer
and Senior Vice President of the SPAR Marketing Companies (SBRS since 1994, SINC
since 1979, SMNEV since November 1993 and SMF since SMF acquired its assets and
business in 1996), and has been responsible for the Company's sales and
marketing efforts, as well as for overseeing joint ventures and acquisitions.
Robert O. Aders serves as a Director of the Company and has done so
since July 8, 1999. Mr. Aders has served as Chairman of The Advisory Board,
Inc., an international consulting organization since 1993, and also as President
Emeritus of the Food Marketing Institute ("FMI") since 1993. Immediately prior
to his election to the Presidency of FMI in 1976, Mr. Aders was Acting Secretary
of Labor in the Ford Administration. Mr. Aders was the Chief Executive Officer
of FMI from 1976 to 1993. He also served in The Kroger Co., in various executive
positions from 1957-1974 and was Chairman of the Board from 1970 to 1974. Mr.
Aders also serves as a Director of Source-Interlink Co., Checkpoint Systems,
Inc., Sure Beam Corporation and Telepanel Systems, Inc.
-28-
Jack W. Partridge serves as a Director of the Company and has done so
since January 29, 2001. Mr. Partridge is President of Jack W. Partridge &
Associates. He previously served as Vice Chairman of the Board of The Grand
Union Company from 1998 to 2000. Mr. Partridge's service with Grand Union
followed a distinguished 23-year career with The Kroger Company, where he served
as Group Vice President, Corporate Affairs, and as a member of the Senior
Executive Committee, as well as various other executive positions. Mr. Partridge
has been a leader in industry and community affairs for over two decades. He has
served as Chairman of the Food Marketing Institute's Government Relations
Committee, the Food and Agriculture Policy Task Force, and as Chairman of the
Board of The Ohio Retail Association. He has also served as Vice Chairman of the
Cincinnati Museum Center and a member of the boards of the United Way of
Cincinnati, the Childhood Trust, Second Harvest and the Urban League.
Jerry B. Gilbert serves as a Director of the Company and has done so
since June 4, 2001. Mr. Gilbert served as Vice President of Customer Relations
for Johnson & Johnson's Consumer and Personal Care Group of Companies from 1989
to 1997. Mr. Gilbert joined Johnson & Johnson in 1958 and from 1958-1989 held
various executive positions. Mr. Gilbert also serves on the Advisory Boards of
the Food Marketing Institute, the National Association of Chain Drug Stores and
the General Merchandise Distributors Council (GMDC) where he was elected the
first President of the GMDC Educational Foundation. He was honored with lifetime
achievement awards from GMDC, Chain Drug Review, Drug Store News and the Food
Marketing Institute. He is the recipient of the prestigious National Association
of Chain Drug Stores (NACDS) Begley Award, as well as the National Wholesale
Druggists Association (NWDA) Tim Barry Award. In June 1997, Mr. Gilbert received
an Honorary Doctor of Letters Degree from Long Island University.
George W. Off serves as Director of the Company and has done so since
July 1, 2001. Mr. Off is Chairman and Chief Executive Officer of Checkpoint
Systems, Inc. since August 2002. He serves as a Director of Telephone and Data
Systems since 1997. Mr. Off was Chairman of the Board of Directors of Catalina
Marketing Corporation, a New York Stock Exchange listed company, from July 1998
until he retired in July 2000. He served as President and Chief Executive
Officer of Catalina from 1994 to 1998. Prior to that, Mr. Off was President and
Chief Operating Officer from 1992 to 1994 and Executive Vice President from 1990
to 1992. Catalina is a leading supplier of in-store electronic scanner-activated
consumer promotions.
Charles Cimitile serves as the Chief Financial Officer and Secretary of
the Company and has done so since November 24, 1999. Mr. Cimitile served as
Chief Financial Officer for GT Bicycles from 1996 to 1999 and Cruise Phone, Inc.
from 1995 through 1996. Prior to 1995, he served as the Vice President Finance,
Treasurer and Secretary of American Recreation Company Holdings, Inc. and its
predecessor company.
James H. Ross serves as the Treasurer of the Company and has held such
positions since July 8, 1999 (the effective date of the Merger). Mr. Ross has
been the Chief Financial Officer of the SPAR Marketing Companies since 1991, and
was the General Manager of SBRS from 1994-1999. In September 2001, Mr. Ross
retired from full-time employment. Mr. Ross continues to serve the Company on a
consulting basis.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Exchange Act ("Section 16(a)") requires the
Company's directors and certain of its officers and persons who own more than
10% of the Company's Common Stock (collectively, "Insiders"), to file reports of
ownership and changes in their ownership of the Company's Common Stock with the
Commission. Insiders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it
for the year ended December 31, 2002, or written representations from certain
reporting persons for such year, the Company believes that its Insiders complied
with all applicable Section 16(a) filing requirements for such year, with the
exception that Robert G. Brown, William H. Bartels, Jack W. Partridge, Robert O.
Aders, Jerry B. Gilbert and George W. Off untimely filed certain Statements of
Changes in Beneficial Ownership on Form 4. All such Section 16(a) filing
requirements have since been completed by each of the aforementioned
individuals.
-29-
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION OF SPAR GROUP, INC.
EXECUTIVE COMPENSATION
The following table sets forth all compensation received for services
rendered to the Company in all capacities for the years ended December 31, 2002,
2001 and 2000 (i) by the Company's Chief Executive Officer, and (ii) each of the
other three most highly compensated executive officers of the Company who were
serving as executive officers at December 31, 2002 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------- ------------------------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY ($) BONUS ($) OPTIONS (#)(1) ($)(2)
- ---------------------------- -------- ------------ ----------- -------------- -------------
Robert G. Brown 2002 164,340 -- -- 2,040
Chief Executive Officer, Chairman of 2001 141,202 -- 765,972 --
the Board, President, and Director 2000 16,800 -- 765,972 --
William H. Bartels 2002 164,340 -- -- 2,040
Vice Chairman and Director 2001 139,230 -- 471,992 --
2000 16,800 -- -- --
Charles Cimitile 2002 230,564 -- 20,000 2,040
Chief Financial Officer 2001 188,000 -- 75,000 --
2000 188,000 -- 25,000 --
James H. Ross (3) 2002 72,043 5,000 -- --
Treasurer and Vice President 2001 101,773 7,500 43,000 1,557
2000 94,800 9,000 5,000 3,337
- ------------------------
(1) In January 2001, each of the above officers voluntarily surrendered for
cancellation their options for the purchase of the following numbers of
shares of common stock under the 1995 Plan: Mr. Brown - 765,972; Mr.
Bartels - 471,992; Mr. Cimitile - 75,000; and Mr. Ross - 40,000.
(2) Other compensation represents the Company's 401k contribution.
(3) In September 2001, Mr. Ross retired from full-time employment. Mr. Ross
continues to serve the Company on a consulting basis.
-30-
SUMMARY ADDITIONAL COMPENSATION TABLE (FROM AFFILIATED COMPANIES)
Robert G. Brown and William H. Bartels (the "SMS Principals") are the
sole owners of SPAR Marketing Services, Inc. ("SMS"), SPAR Management Services,
Inc. ("SMSI"), and SPAR Infotech, Inc. ("SIT"), which provide significant
services to the Company as more fully described in Item 13 - Certain
Relationships and Related Transactions. Although the SMS Principals were not
paid any salaries as officers of SMS, SMSI or SIT, each of those companies are
"Subchapter S" corporations, and accordingly the SMS Principals benefit from any
income of such companies allocated to them, all of which income (or
substantially all of which income, but not loss, in the case of SIT) is earned
from the performance of services for the Company. The following table sets forth
all income allocated to the SMS Principals by SMS, SMSI or SIT for the years
ended December 31, 2002, 2001 and 2000.
SMS INCOME SMSI INCOME SIT LOSS
NAME YEAR ($) ($) ($)(1)
----------- ------------ ----------
Robert G. Brown 2002 494,987 174,092 (85,183)
2001 211,117 16,477 (227,370)
2000 262,744 150,685 (318,034)
William H. Bartels 2002 314,992 110,787 (54,208)
2001 134,348 10,486 (144,690)
2000 167,202 95,891 (202,387)
(1) The subchapter "S" income/loss allocated to the SMS Principals by SIT
includes losses on activities unrelated to the Company's business.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding each grant of stock
options made during the year ended December 31, 2002, to each of the Named
Executive Officers. No stock appreciation rights ("SAR's") were granted during
such period to such person.
INDIVIDUAL GRANTS
----------------------------------------------------------
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE EXPIRATION PRICE APPRECIATION FOR OPTION(1)
OPTIONS EMPLOYEES IN PRICE ($/SH) DATE
NAME GRANTED (#) PERIOD (%) 5% ($) 10% ($)
------------------------------------------------------------------------------------------
Charles Cimitile 10,000 (2) 3.0 1.78 2/14/12 27,614 41,971
10,000 (2) 3.0 2.45 5/09/12 38,008 57,770
--------------- --------------- -------------- ----------------
20,000 6.0 65,622 99,741
- ------------
(1) The potential realizable value is calculated based upon the term of the
option at its time of grant. It is calculated by assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option.
(2) These options vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
-31-
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The following table sets forth the number of shares of Common Stock of
the Company purchased by each of the Named Executive Officers in the exercise of
stock options during the year ended December 31, 2002, the value realized in the
purchase of such shares (i.e., the market value at the time of exercise less the
exercise price to purchase such shares), and the number of shares that may be
purchased and value of the exercisable and unexercisable options held by each of
the Named Executive Officers at December 31, 2002.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT FISCAL
YEAR-END (#) YEAR-END ($)
---------------------------------- --------------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------------- ---------------- ---------------- ---------------- -------------- ----------------
Robert G. Brown 95,746 100,533 -- 478,733 -- 179,047
William H. Bartels 58,999 61,949 -- 294,995 -- 110,328
Charles Cimitile -- -- 68,750 51,250 137,000 87,975
James H. Ross -- -- 33,250 14,750 63,965 29,570
STOCK OPTION AND PURCHASE PLANS
The Company has four stock option plans: the Amended and Restated 1995
Stock Option Plan (1995 Plan), the 1995 Director's Plan (Director's Plan), the
Special Purpose Stock Option Plan, and the 2000 Stock Option Plan (2000 Plan).
The 1995 Plan provided for the granting of either incentive or
nonqualified stock options to specific employees, consultants, and directors of
the Company for the purchase of up to 3,500,000 shares of the Company's common
stock. The options had a term of ten years from the date of issuance, except in
the case of incentive stock options granted to greater than 10% stockholders for
which the term was five years. The exercise price of nonqualified stock options
must have been equal to at least 85% of the fair market value of the Company's
common stock at the date of grant. Since 2000, the Company has not granted any
new options under this Plan. At December 31, 2002, options to purchase 72,000
shares of the Company's common stock remain outstanding under this Plan. The
1995 Plan was superceded by the 2000 Stock Option Plan with respect to all new
options issued.
The Director's Plan was a stock option plan for non-employee directors
and provided for the purchase of up to 120,000 shares of the Company's common
stock. Since 2000, the Company has not granted any new options under this Plan.
During 2002, no options to purchase shares of the Company's common stock were
exercised under this Plan. At December 31, 2002, 20,000 options to purchase
shares of the Company's common stock remained outstanding under this Plan. The
Director's Plan has been replaced by the 2000 Plan with respect to all new
options issued.
On July 8, 1999, in connection with the merger, the Company established
the Special Purpose Stock Option Plan of PIA Merchandising Services, Inc. to
provide for the issuance of substitute options to the holders of outstanding
options granted by SPAR Acquisition, Inc. There were 134,114 options granted at
$0.01 per share. Since July 8, 1999, the Company has not granted any new options
under this plan. During 2002, no options to purchase shares of the Company's
common stock were exercised under this Plan. At December 31, 2002, options to
purchase 25,750 shares of the Company's common stock remain outstanding under
this Plan.
-32-
On December 4, 2000, the Company adopted the 2000 Plan, as the successor
to the 1995 Plan and the Director's Plan with respect to all new options issued.
The 2000 Plan provides for the granting of either incentive or nonqualified
stock options to specified employees, consultants, and directors of the Company
for the purchase of up to 3,600,000 (less those options still outstanding under
the 1995 Plan or exercised after December 4, 2000 under the 1995 Plan). The
options have a term of ten years, except in the case of incentive stock options
granted to greater than 10% stockholders for whom the term is five years. The
exercise price of nonqualified stock options must be equal to at least 85% of
the fair market value of the Company's common stock at the date of grant
(although typically the options are issued at 100% of the fair market value),
and the exercise price of incentive stock options must be equal to at least the
fair market value of the Company's common stock at the date of grant. During
2002, options to purchase 332,792 shares of the Company's common stock were
granted, options to purchase 230,463 shares of the Company's common stock were
exercised and options to purchase 481,250 shares of the Company's stock were
cancelled under this Plan. At December 31, 2002, options to purchase 1,980,431
shares of the Company's common stock remain outstanding under this Plan and
options to purchase 1,079,614 shares of the Company's common stock were
available for grant under this Plan.
In 2001, the Company adopted its 2001 Employee Stock Purchase Plan (the
"ESP Plan"), which replaces its earlier existing plan, and its 2001 Consultant
Stock Purchase Plan (the "CSP Plan"). These plans were each effective as of June
1, 2001. The ESP Plan allows employees of the Company and its subsidiaries, and
the CSP Plan allows employees of the affiliates of the Company (see Item 13-
Certain Relationships and Related Transactions, below), to purchase the
Company's Common Stock from the Company without having to pay any brokerage
commissions. On August 8, 2002, the Company's Board of Directors approved a 15%
discount for employee purchases of Common Stock under the ESP Plan and a 15%
cash bonus for affiliate consultant purchases of Common Stock under the CSP
Plan.
COMPENSATION OF DIRECTORS
The Company's Compensation Committee administers the compensation plan
for its outside Directors. Each member of the Company's Board who is not
otherwise an employee or officer of the Company or any subsidiary or affiliate
of the Company (each, an "Eligible Director") is eligible to receive the
compensation contemplated under such plan.
In January 2001, the Company adopted the Director Compensation Plan,
which was amended by the Compensation Committee in February of 2003. Under the
amended plan, each non-employee director receives thirty thousand dollars
($30,000) per annum (increased from twenty thousand dollars ($20,000) per annum
for 2002 and 2001) and the Chairman of the Audit Committee will receive an
additional $5,000 per annum. Payments are made quarterly in equal installments.
It is intended that each quarterly payment will be 50% in cash ($3,750, up from
$2,500 for 2002 and 2001) and 50% ($3,750, up from $2,500 for 2002 and 2001) in
stock options to purchase shares of the Company's common stock with an exercise
price of $0.01 per share (plus an additional $1,250 per quarter for the Chairman
of the Audit Committee, half in cash and half in $.01 stock options). The number
of shares of the Company's common stock that can be purchased under each $.01
stock option granted will be determined based upon the closing stock price at
the end of each quarter. In addition, each non-employee director receives
options to purchase 10,000 shares of the Company's common stock upon acceptance
of the directorship, 2,500 additional options to purchase shares of the
Company's common stock after one year of service and 2,500 additional options to
purchase shares of the Company's common stock for each additional year of
service thereafter. These options will have an exercise price equal to the
closing price of the Company's common stock on the day of grant. All of the
options have been and will be granted under the 2000 Plan described above, under
which each member of the SPAR Board is eligible to participate. Non-employee
directors will be reimbursed for all reasonable expenses incurred during the
course of their duties. There is no additional compensation for committee
participation, phone meetings, or other Board activities.
-33-
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Board's Compensation Committee was at any time during
the year ended December 31, 2002 or at any other time an officer or employee of
the Company. No executive officer or board member of the Company serves as a
member of the board of directors or compensation committee of any other entity,
that has one or more executive officers serving as a member of the Company's
Board or Compensation Committee, except for the positions of Messrs. Brown and
Bartels as directors and officers of the Company (including each of its
subsidiaries) and each of its affiliates, including SMS, SMSI and SIT (see Item
13 - Certain Relationships and Related Transactions, below).
-34-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF THE COMPANY
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of March 21, 2003 by: (i) each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the Company's common stock; (ii) each of the Company's
directors; (iii) each of the executive officers named in the Summary
Compensation Table; and (iv) the Company's directors and executive officers as a
group. Except as indicated in the footnotes to this table, the persons named in
the table, based on information provided by such persons, have sole voting and
sole investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws where applicable.
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES BENEFICIALLY OWNED PERCENTAGE
- -------------- ----------------------------------------------------- ------------------ ----------
Common Shares Robert G. Brown (1) 8,517,905(2) 44.0%
Common Shares William H. Bartels (1) 5,370,194(3) 27.7%
Common Shares James H. Ross (1) 117,615(4) *
Common Shares Robert O. Aders (1) 76,919(5) *
Common Shares Charles Cimitile (1) 73,750(6) *
Common Shares Jack W. Partridge (1) 24,259(7) *
Common Shares George W. Off (1) 23,283(8) *
Common Shares Jerry B. Gilbert (1) 17,600(9) *
Common Shares Richard J. Riordan (10) 1,209,922 6.2%
300 S. Grand Avenue, Suite 2900
Los Angeles, CA 90071
Common Shares Heartland Advisors, Inc. (11) 1,547,900 8.0%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Common Shares Executive Officers and Directors 14,221,525 73.4%
* Less than 1%
(1) The address of such owners is c/o SPAR Group, Inc. 580 White Plains Road,
Tarrytown, New York.
(2) Includes 1,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown, James
R. Brown, Sr. and William H. Bartels are trustees. Includes 143,620 shares
issuable upon exercise of options.
(3) Excludes 1,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown, James
R. Brown, Sr. and William H. Bartels are trustees, beneficial ownership of
which are disclaimed by Mr. Bartels. Includes 115,385 shares issuable upon
exercise of options.
(4) Includes 33,750 shares issuable upon exercise of options.
(5) Includes 26,919 shares issuable upon exercise of options.
(6) Includes 73,750 shares issuable upon exercise of options.
(7) Includes 13,291 shares issuable upon exercise of options.
(8) Includes 16,783 shares issuable upon exercise of options.
(9) Includes 17,600 shares issuable upon exercise of options.
(10) Represents record ownership as of March 21, 2003.
(11) All information regarding share ownership is taken from and furnished in
reliance upon the Schedule 13G (Amendment No. 9), filed by Heartland
Advisors, Inc. with the Securities and Exchange Commission on February 13,
2003.
-35-
EQUITY COMPENSATION PLANS
The following table contains a summary of the number of shares of Common
Stock of the Company to be issued upon the exercise of options, warrants and
rights outstanding at December 31, 2002, the weighted-average exercise price of
those outstanding options, warrants and rights, and the number of additional
shares of Common Stock remaining available for future issuance under the plans
as at December 31, 2002.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance of
Plan category warrants and rights (#) warrants and rights ($) options, warrants and
rights (#)
Equity compensation plans
approved by security
holders 2,098,181 1.52 1,079,614
Equity compensation plans
not approved by security
holders - - -
Total 2,098,181 1.52 1,079,614
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Robert G. Brown, a Director, the Chairman and the Chief Executive
Officer of the Company, and Mr. William H. Bartels, a Director and the Vice
Chairman of the Company (collectively, the "SMS Principals"), are the sole
stockholders and executive officers and directors of SPAR Marketing Services,
Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI"), SPAR Infotech, Inc.
("SIT"), and certain other affiliated companies.
SMS and SMSI (through SMS) provided approximately 71% of the Company's
field representatives (through its independent contractor field force) and
substantially all of the Company's field management services at a total cost of
approximately $30.5 million and $15.1 million for the twelve months ended
December 31, 2002, and 2001, respectively. Under the terms of the Field Service
Agreement, SMS provides the services of approximately 6,600 field
representatives and SMSI provides approximately 90 full-time national, regional
and district managers to the SPAR Marketing Companies as they may request from
time to time, for which the Company has agreed to pay SMS for all of its costs
of providing those services plus 4%. However, SMS may not charge the Company for
any past taxes or associated costs for which the SMS Principals have agreed to
indemnify the SPAR Companies. Although the SMS Principals were not paid any
salaries as officers of SMS or SMSI, SMS, and SMSI are "Subchapter S"
corporations, and accordingly the SMS Principals benefit from any income of such
companies allocated to them (see Item 11 - Summary Additional Compensation Table
- - Affiliated Companies above).
SIT provided Internet computer programming services to the Company at a
total cost of approximately $1,626,000 and $1,185,000 for the twelve months
ended December 31, 2002, and 2001, respectively. Under the terms of the
programming agreement between SMF and SIT effective as of October 1, 1998 (the
"Programming Agreement"), SIT continues to provide programming services to SMF
as SMF may request from time to time, for which SMF has agreed to pay SIT
competitive hourly wage rates and to reimburse SIT's out-of-pocket expenses.
Although the SMS Principals were not paid any salaries as officers of SIT, SIT
is a "Subchapter S" corporation, and accordingly the SMS Principals would
benefit from any income allocated to them if SIT were to be profitable.
-36-
In July 1999, SMF, SMS and SIT entered into a Software Ownership
Agreement with respect to Internet job scheduling software jointly developed by
such parties. In addition, SPAR Trademarks, Inc. ("STM"), SMS and SIT entered
into trademark licensing agreements whereby STM has granted non-exclusive
royalty-free licenses to SIT, SMS and SMSI for their continued use of the name
"SPAR" and certain other trademarks and related rights transferred to STM, a
wholly owned subsidiary of the Company.
The SMS Principals also owned an indirect minority (less than 5%) equity
interest in Affinity Insurance Ltd., which provides certain insurance to the
Company.
At December 31, 2002, the Company owed a total of $4.0 million to the
SMS Principals (See Item 7-Liquidity and Capital Resources and Note 10 to the
Financial Statements), $3.0 million of which has since been repaid.
In the event of any material dispute in the business relationships
between the Company and SMS, SMSI, or SIT, it is possible that Messrs. Brown or
Bartels may have one or more conflicts of interest with respect to these
relationships and such dispute that could have a material adverse effect on the
Company.
ITEM 14. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, Robert Brown, and Chief Financial
Officer, Charles Cimitile, have reviewed the Company's disclosure controls and
procedures within 90 days prior to the filing of this report. Based upon this
review, these officers believe that the Company's disclosure controls and
procedures are effective in ensuring that material information related to the
Company is made known to them by others within the Company.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls during the
twelve months covered by this report or from the end of the reporting period to
the date of this Form 10-K.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Company and its subsidiaries did not engage Ernst & Young LLP
("E&Y") to provide advice regarding financial information systems design or
implementation, but did engage E&Y for consulting services related to the ESOP
during 2002 (for which E&Y was paid $13,700) and for tax services in 2002 and
2001 (for which E&Y was paid $13,500 and $107,952 respectively). No other
non-audit services were performed by E&Y in 2002 or 2001. Commencing in 2003,
all non-audit services to be performed by the Company's auditor will require
approval by the Company's Audit Committee on a case-by-case basis. In connection
with the standards for independence of the Company's independent public
accountants promulgated by the Securities and Exchange Commission, the Audit
Committee would consider whether the provision of such non-audit services would
be compatible with maintaining the independence of E&Y.
AUDIT FEES
During the Company's fiscal year ended December 31, 2002, and 2001,
respectively, fees billed by Ernst & Young LLP for all audit services rendered
to the Company and its subsidiaries were $143,000 and $159,700, respectively.
Audit services principally include fees for the Company's audits and 10-Q filing
reviews.
-37-
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)1. INDEX TO FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT:
Independent Auditors' Report. F-1
Consolidated Balance Sheets as of December 31, 2002, and
December 31, 2001. F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, and December 31, 2001, and December 31, 2000. F-3
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2002, and December 31, 2001, and
December 31, 2000. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, and December 31, 2001, and December 31, 2000. F-5
Notes to Consolidated Financial Statements. F-6
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts for the three
years ended December 31, 2002. F-28
3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc. (referred to
therein under its former name PIA), as amended (incorporated by
reference to the Company's Registration Statement on Form S-1
(Registration No. 33-80429), as filed with the Securities and
Exchange Commission ("SEC") on December 14, 1995 (the "Form
S-1")), and the Certificate of Amendment filed with the
Secretary of State of the State of Delaware on July 8, 1999
(which, among other things, changes the Company's name to SPAR
Group, Inc.) (incorporated by reference to Exhibit 3.1 to the
Company's Form 10-Q for the 3rd Quarter ended September 30,
1999).
3.2 By-laws of the Company (referred to therein under its former
name PIA) (incorporated by reference to the above referenced
Form S-1).
4.1 Registration Rights Agreement entered into as of January 21,
1992, by and between RVM Holding Corporation. RVM/PIA, a
California Limited Partnership, The Riordan Foundation and
Creditanstalt-Bankverine (incorporated by reference to the Form
S-1).
10.1 2000 Stock Option Plan, as amended, (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.2 2001 Employee Stock Purchase Plan (incorporated by reference to
the Company's Proxy Statement for the Company's Annual meeting
held on August 2, 2001, as filed with the SEC on July 12, 2001).
10.3 2001 Consultant Stock Purchase Plan (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
-38-
10.4 Service Agreement dated as of January 4, 1999, by and between
SPAR Marketing Force, Inc., and SPAR Marketing Services, Inc.
(incorporated by reference to the Company's Form 10-K/A
(Amendment No. 1) for the fiscal year ended December 31, 1999).
10.5 Business Manager Agreement dated as of July 8, 1999, by and
between SPAR Marketing Force, Inc., and SPAR Marketing Services,
Inc. (incorporated by reference to the Company's Form 10-K/A
(Amendment No. 1) for the fiscal year ended December 31, 1999).
10.6 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Marketing Services, Inc., and SPAR Trademarks,
Inc., filed herewith.
10.7 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Infotech, Inc., and SPAR Trademarks, Inc., filed
herewith
10.8 [Reserved].
10.9 Stock Purchase and Sale Agreement by and among Performance
Holdings, Inc. and SPAR Incentive Marketing, Inc., effective as
of June 30, 2002 (incorporated by reference to the Company's
Form 10-Q for the quarter ended June 30, 2002).
10.10 Revolving Credit, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to the
Company's Form 10-Q for the quarter ended June 30, 2002).
10.11 Term Loan, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to the
Company's Form 10-Q for the quarter ended June 30, 2002).
10.11 Amendment No. 7 to Second Amended and Restated Revolving Credit,
Term Loan and Security Agreement by and among the SPAR Borrowers
and the Lender, effective as of October 31, 2002 (incorporated
by reference to the Company's Form 10-Q for the quarter ended
September 30, 2002).
10.12 Third Amended and Restated Revolving Credit and Security
Agreement by and among Whitehall Business Credit Corporation
(the "Lender") with SPAR Marketing Force, Inc., SPAR Group,
Inc., SPAR, Inc., SPAR/Burgoyne Retail Services, Inc., SPAR
Incentive Marketing, Inc., SPAR Trademarks, Inc., SPAR
Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., SPAR Group International, Inc., SPAR
Technology Group, Inc., SPAR/PIA Retail Services, Inc., Retail
Resources, Inc., Pivotal Field Services Inc., PIA Merchandising
Co., Inc., Pacific Indoor Display Co. and Pivotal Sales Company
(collectively, the "Borrowers"), dated as of January 24, 2003,
and filed herewith.
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP.
99.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
99.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
(B) REPORTS ON FORM 8-K.
None.
-39-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to the
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPAR GROUP, INC.
By: /s/ Robert G. Brown
--------------------------------------
Robert G. Brown
President, Chief Executive Officer and
Chairman of the Board
Date: March 31, 2003
---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amendment to the report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Robert G. Brown President, Chief Executive Officer, Director and
- ------------------------- Chairman of the Board
Robert G. Brown
Date: March 31, 2003
/s/ William H. Bartels Vice Chairman and Director
- -------------------------
William H. Bartels
Date: March 31, 2003
/s/ Robert O. Aders Director
- -------------------------
Robert O. Aders
Date: March 31, 2003
/s/ Jack W. Partridge Director
- -------------------------
Jack W. Partridge
Date: March 31, 2003
/s/ Jerry B. Gilbert Director
- -------------------------
Jerry B. Gilbert
Date: March 31, 2003
/s/ George W. Off Director
- -------------------------
George W. Off
Date: March 31, 2003
/s/ Charles Cimitile Chief Financial Officer
- ------------------------- and Secretary (Principal Financial and
Charles Cimitile Accounting Officer)
Date: March 31, 2003
-40-
CERTIFICATIONS
I, Robert G. Brown, certify that:
1. I have reviewed this annual report on Form 10-K of SPAR Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Robert G. Brown
-------------------
Robert G. Brown
Chairman, President and Chief
Executive Officer
-41-
CERTIFICATIONS
I, Charles Cimitile, certify that:
1. I have reviewed this annual report on Form 10-K of SPAR Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Charles Cimitile
--------------------
Charles Cimitile
Chief Financial Officer
-42-
Report of Independent Auditors
The Board of Directors and Stockholders of
SPAR Group, Inc. and Subsidiaries
We have audited the consolidated balance sheets of SPAR Group, Inc. and
Subsidiaries as of December 31, 2002 and 2001 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 16(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SPAR Group, Inc. and
Subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2, the Company adopted Statement of Accounting Standards
No. 142 effective January 1, 2002.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 7, 2003
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
DECEMBER 31,
2002 2001
----------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 17,415 21,144
Prepaid expenses and other current assets 783 440
Deferred income taxes 903 3,241
----------------------------------------
Total current assets 19,101 24,825
Property and equipment, net 1,972 2,644
Goodwill 7,858 8,357
Deferred income taxes 705 389
Other assets 121 110
Net long-term assets from discontinued operations - 4,830
----------------------------------------
Total assets $ 29,757 $ 41,155
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 422 $ 440
Accrued expenses and other current liabilities 6,097 5,257
Accrued expenses, due to affiliates 958 611
Restructuring charges, current 1,354 1,597
Due to certain stockholders 3,951 2,655
Net current liabilities from discontinued operations - 5,732
Current portion of long-term debt - 57
----------------------------------------
Total current liabilities 12,782 16,349
Line of credit 148 11,287
Long-term debt due to certain stockholders - 2,000
Restructuring charges, long term 235 585
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 3,000,000
Issued and outstanding shares - none - -
Common stock, $.01 par value:
Authorized shares - 47,000,000
Issued and outstanding shares - 18,824,527 -- 2002;
18,582,615 -- 2001 188 186
Treasury stock (30) -
Additional paid-in capital 10,919 10,531
Retained earnings 5,515 217
----------------------------------------
Total stockholders' equity 16,592 10,934
----------------------------------------
Total liabilities and stockholders' equity $ 29,757 $ 41,155
========================================
See accompanying notes.
F-2
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
2002 2001 2000
------------------------------------------------------
Net revenues $ 69,612 $ 70,891 $ 81,459
Cost of revenues 40,331 40,883 50,278
------------------------------------------------------
Gross profit 29,281 30,008 31,181
Selling, general, and administrative expenses 18,804 19,380 24,761
Depreciation and amortization 1,844 2,682 2,383
------------------------------------------------------
Operating income 8,633 7,946 4,037
Other (income) expense (26) 107 (790)
Interest expense 363 561 1,326
------------------------------------------------------
Income from continuing operations before provision
for income taxes 8,296 7,278 3,501
Provision for income taxes 2,998 3,123 780
------------------------------------------------------
Net income from continuing operations 5,298 4,155 2,721
Discontinued operations:
Loss from discontinued operations, net of tax
benefits of $938 and $858 for 2001 and 2000,
respectively - (1,597) (1,399)
Estimated loss on disposal of discontinued
operations in 2001, net of tax benefit of
$2,618 - (4,272) -
------------------------------------------------------
Net income (loss) $ 5,298 $ (1,714) $ 1,322
======================================================
Basic/diluted net income (loss) per common share:
Income from continuing operations $ 0.28 $ 0.23 $ 0.15
Loss from discontinued operations - (0.32) (0.08)
------------------------------------------------------
Net income (loss) $ 0.28 $ (0.09) $ 0.07
======================================================
Weighted average shares outstanding - basic 18,761 18,389 18,185
======================================================
Weighted average shares outstanding - diluted 19,148 18,467 18,303
======================================================
See accompanying notes.
F-3
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
COMMON STOCK
---------------------------------------
ADDITIONAL TOTAL
TREASURY PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCK CAPITAL EARNINGS EQUITY
---------------------------------------------------------------------------------
Balance at December 31, 1999 18,155 $ 182 $ - $ 10,095 $ 609 $10,886
-------------------------------------------------------------------------------
Stock options exercised and employee
stock purchase plan purchases 117 - - 32 - 32
Net income - - - - 1,322 1,322
-------------------------------------------------------------------------------
Balance at December 31, 2000 18,272 182 - 10,127 1,931 12,240
-------------------------------------------------------------------------------
Stock options exercised and employee
stock purchase plan purchases 311 4 - 404 - 408
Net loss - - - - (1,714) (1,714)
-------------------------------------------------------------------------------
Balance at December 31, 2001 18,583 $186 - $ 10,531 $ 217 $10,934
-------------------------------------------------------------------------------
Stock options exercised and employee
stock purchase plan purchases 242 2 - 388 - 390
Purchase of treasury stock - - (30) - - (30)
Net income - - - - 5,298 5,298
-------------------------------------------------------------------------------
Balance at December 31, 2002 18,825 $ 188 $ (30) $ 10,919 $ 5,515 $16,592
===============================================================================
See accompanying notes.
F-4
SPAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
2002 2001 2000
------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 5,298 $ (1,714) $ 1,322
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 1,844 2,217 1,839
Amortization - 1,630 1,725
Estimated loss on disposal of discontinued
operations - 4,272 -
Gain on sale of affiliate - - (790)
Changes in operating assets and liabilities:
Accounts receivable 3,729 13 5,318
Prepaid expenses and other current assets (354) 318 (346)
Deferred income taxes 2,022 1,710 (185)
Accounts payable, accrued expenses and other
current liabilities 766 (7,202) 216
Restructuring charges (593) (1,487) (2,766)
------------------------------------------------------
Net cash provided (used in) by operating activities 12,712 (243) 6,333
INVESTING ACTIVITIES
Purchases of property and equipment (1,172) (1,744) (1,941)
Purchase of businesses, net of cash acquired - - (62)
Sale of investment in affiliate - - 1,500
------------------------------------------------------
Net cash used in investing activities (1,172) (1,744) (503)
FINANCING ACTIVITIES
Net (payments) borrowings on line of credit (11,139) 3,526 (5,596)
Payments on long-term debt (57) (1,465) (1,113)
Net payments to certain stockholders (704) (482) (182)
Payments of note payable, MCI - - (1,045)
Proceeds from issuance of common stock 390 408 32
Purchase of treasury stock (30) - -
------------------------------------------------------
Net cash (used in) provided by financing activities (11,540) 1,987 (7,904)
------------------------------------------------------
Net decrease in cash - - (2,074)
Cash at beginning of year - - 2,074
------------------------------------------------------
Cash at end of year $ - $ - $ -
======================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 686 $ 1,892 $ 1,394
======================================================
See accompanying notes.
F-5
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2002
1. BUSINESS AND ORGANIZATION
The SPAR Group, Inc., a Delaware corporation ("SPAR Group", "SGRP", or the
"Company"), is a supplier of in-store merchandising and marketing services
throughout the United States and internationally. The Company also provides
database marketing, teleservices and marketing research. As part of a strategic
realignment in the fourth quarter of 2001, the Company made the decision to
divest its Incentive Marketing Division, SPAR Performance Group, Inc. ("SPGI").
The Company explored various alternatives for the sale of SPGI and subsequently
sold the business to SPGI's employees through the establishment of an employee
stock ownership plan on June 30, 2002. In addition, in October 2002, the Company
dissolved its Technology Division that was established in March 2000 for the
purpose of marketing its proprietary Internet-based computer software. The
Company's continuing operations are now divided into two divisions: the
Merchandising Services Division and the International Division. The
Merchandising Services Division provides merchandising services, database
marketing, teleservices and marketing research to manufacturers and retailers
with product distribution primarily in mass merchandisers, drug chains and
grocery stores in the United States. The International Division established in
July 2000, currently provides merchandising services through a joint venture in
Japan and focuses on expanding the Company's merchandising services business
throughout the world.
MERCHANDISING SERVICES DIVISION
The Company's Merchandising Services Division consists of SPAR Marketing, Inc.
("SMI") (an intermediate holding company), SPAR Marketing Force, Inc. ("SMF"),
SPAR Marketing, Inc., ("SMNEV"), SPAR/Burgoyne Retail Services, Inc. ("SBRS"),
and SPAR, Inc. ("SINC") PIA Merchandising, Co., Inc., Pacific Indoor Display
d/b/a Retail Resources, Pivotal Sales Company and PIA Merchandising Ltd. The
Merchandising Services Division provides nationwide retail merchandising and
marketing services to home entertainment, PC software, general merchandise,
health and beauty care, consumer goods and food products companies in the United
States. The Company provides these services primarily on behalf of consumer
product manufacturers and retailers at mass merchandisers, drug chains and
retail grocery stores.
Merchandising services primarily consist of regularly scheduled dedicated routed
services and special projects provided at the store level for a specific
retailer or single or multiple manufacturers primarily under single or
multi-year contracts. Services also include stand-alone large-scale
implementations. These services may include sales enhancing activities such as
ensuring that client products authorized for distribution are in stock and on
the shelf, adding new products that are approved for distribution but not
presently on the shelf, setting category shelves in accordance with approved
store schematics, ensuring that shelf tags are in place, checking for the
overall salability of client products and setting new and promotional items and
placing and/or removing point of purchase and other related media advertising.
Specific in-store services can be initiated by retailers or manufacturers, and
include new store openings, new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. The
Company also provides database marketing, teleservices and research services.
F-6
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
1. BUSINESS AND ORGANIZATION (CONTINUED)
INTERNATIONAL DIVISION
In July 2000, the Company established its International Division, SPAR Group
International, Inc. ("SGI"), to focus on expanding its merchandising services
business world-wide. Currently, the Company provides merchandising services in
Japan through a joint venture with a large Japanese distributor and is actively
pursuing expansion into other markets.
DISCONTINUED OPERATIONS - INCENTIVE MARKETING DIVISION
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly-owned
subsidiary of the Company, entered into a Stock Purchase and Sale Agreement with
Performance Holdings, Inc. ("PHI"), a Delaware corporation headquartered in
Carrollton, Texas. SIM sold all of the stock of its subsidiary, SPGI to PHI for
$6.0 million. As a condition of the sale, PHI issued and contributed 1,000,000
shares of its common stock to Performance Holdings, Inc. Employee Stock
Ownership Plan, which became the only shareholder of PHI.
The $6.0 million sales price was evidenced by two Term Loans, an Initial Term
Loan totaling $2.5 million and an Additional Term Loan totaling $3.5 million
(collectively the "Term Loans"). The Term Loans are guarantied by SPGI and
secured by pledges of all the assets of PHI and SPGI. The Term Loans bear
interest at a rate of 12% per annum through December 31, 2003. On January 1,
2004, and on January 1 each year thereafter, the interest rate is adjusted to
equal the higher of the median or mean of the High Yield Junk Bond interest rate
as reported in the Wall Street Journal (or similar publication or service if the
Wall Street Journal no longer reports such rate) on the last business day in the
immediately preceding December. The Initial Term Loan is required to be repaid
in quarterly installments that increase over the term of the loan, commencing
March 31, 2003, with a balloon payment required at maturity on June 30, 2007. In
addition to the preceding payments of the Initial Term Loan, PHI is required to
make annual mandatory prepayments of the Term Loans on February 15th of each
year, commencing on February 15, 2004, equal to:
o 40% of the amount of Adjusted Cash Flow (as defined in the Revolver)
for the immediately preceding fiscal year ended December 31; and
o 35% of the amount of excess targeted Adjusted Cash Flow (as defined in
the Revolver) for the immediately preceding fiscal year ended December
31.
These payments will be applied first to accrued and unpaid interest on the Term
Loans and Revolver, then to the Additional Term Loan until repaid, and then to
the Initial Term Loan. Because collection of the notes depends on the future
operations of PHI, the $6.0 million notes were fully reserved pending
collection.
In addition to the Term Loans, SIM agreed to provide a discretionary revolving
line of credit to SPGI not to exceed $2.0 million (the "Revolver"). The Revolver
is secured by a pledge of all the assets of SPGI and is guaranteed by PHI. The
Revolver provides for advances in excess of the borrowing base through September
30, 2003. Through September 30, 2003, the Revolver bears interest at the higher
of the Term Loans interest rate or the prime commercial lending rate as
announced in the Wall Street Journal plus 4.0% per annum. As of October 1, 2003,
the Revolver will include a borrowing base calculation (principally 85% of
eligible accounts receivable). Prior to September 1, 2003, SPGI may request that
SIM provide advances of up to $1,000,000 in excess of the borrowing base. If
advances are limited to the borrowing base on and after October 1, 2003, the
interest rate will be reduced to the higher of the Term Loans interest rate less
4.0% per annum or the prime commercial lending rate as announced in the Wall
Street Journal plus 4.0%
F-7
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
1. BUSINESS AND ORGANIZATION (CONTINUED)
per annum. If SPGI requests that advances be allowed in excess of the borrowing
base, the interest rate will remain unchanged.
Due to the speculative nature of the loan SIM has established a reserve for
collection of approximately $0.8 million against the $2.0 million Revolver
commitment. This revenue is included in other current liabilities.
In December 2001, the Company reviewed the goodwill associated with SPGI and
recorded an impairment of goodwill totaling $4.3 million, net of taxes,
including a $1.0 million reserve was recorded in 2001 for the cost to dispose of
SPGI and the anticipated losses through the date of divestiture, June 30, 2002.
Operating losses of $682,000 incurred from January 1, 2002, through June 30,
2002, the date of divestiture, were charged against the aforementioned reserve.
In addition, $318,000 of costs to dispose of SPGI were also charged against the
reserve. The 2001 and 2000 consolidated statements of operations were restated
to report the results of discontinued operations separately from continuing
operations. Operating results of the discontinued operations are summarized as
follows (in thousands):
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
2002 2001 2000
--------------------------------------------------
Net sales $15,735 $31,202 $28,070
Less:
Cost of sales 13,092 26,032 22,692
Selling, general and administrative expenses 2,814 5,736 5,654
Interest expense 383 804 800
Depreciation 128 306 322
Amortization - 859 859
--------------------------------------------------
OPERATING LOSS (682) (2,535) (2,257)
Provision for income tax benefit (259) (938) (858)
--------------------------------------------------
NET LOSS $ (423) $ (1,597) $(1,399)
==================================================
F-8
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
1. BUSINESS AND ORGANIZATION (CONTINUED)
Net non-current assets and current liabilities of discontinued operations,
classified separately in the 2001 balance sheet, are summarized below (in
thousands):
2001
---------------
Net non-current assets of discontinued operations:
Property and equipment $ 444
Goodwill and other intangibles, net 4,386
---------------
$ 4,830
===============
Net current liabilities of discontinued operations:
Accounts receivable, net 2,050
Prepaid expenses and other current assets 228
Prepaid program costs 3,470
Accounts payable (1,642)
Accrued expenses and other current liabilities (1,727)
Deferred revenue (7,090)
Current portion of long-term debt (21)
Other current charges (1,000)
---------------
$(5,732)
===============
Other current charges represent the costs to dispose of SPGI and the losses from
operations expected prior to the disposal of the business on June 30, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SPAR Group, Inc.
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with maturities
of three months or less at the time of acquisition to be cash equivalents.
REVENUE RECOGNITION
The Company's services are provided under contracts, which consist primarily of
service fees and per unit fee arrangements. Revenues under service fee
arrangements are recognized when the service is performed. The Company's per
unit contracts provide for fees to be earned based on the retail sales of
client's products to consumers. The Company recognizes per unit fees in the
period such amounts become determinable.
UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent services performed but not billed.
F-9
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company continually monitors the collectability of its account receivable
based upon current customer credit information available. Utilizing this
information, the Company has established an allowance for doubtful accounts of
$301,000 and $325,000 at December 31, 2002 and 2001, respectively.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation and amortization are calculated on a straight-line basis over
estimated useful lives of the related assets, which range from three to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or lease term, using the straight-line method.
INTERNAL USE SOFTWARE DEVELOPMENT COSTS
The Company under the rules of SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, capitalizes certain costs
incurred in connection with developing or obtaining internal use software.
Capitalized software development costs are amortized over three years.
The Company capitalized $774,000, $430,000, and $994,000 of costs related to
software developed for internal use in 2002, 2001 and 2000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment, whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable and the undiscounted cash flows estimated to be generated by those
total assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's balance sheets include the following financial instruments:
accounts receivable, accounts payable and a line of credit. The Company
considers the carrying amounts of current assets and liabilities in the
financial statements to approximate the fair value for these financial
instruments, because of the relatively short period of time between origination
of the instruments and their expected realization or payment. The carrying
amount of the line of credit approximates fair value because the obligation
bears interest at a floating rate. The carrying amount of long-term debt to
certain stockholders approximates fair value because the current effective
interest rates reflect the market rate for unsecured debt with similar terms and
remaining maturities.
F-10
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK AND OTHER RISKS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. The Company has minimal
cash as excess cash is generally utilized to pay its bank line of credit.
One customer accounted for 26%, 25% and 20% of net revenues for the years ended
December 31, 2002, 2001 and 2000, respectively. This customer approximated 40%,
24% and 26% of accounts receivable at December 31, 2002, 2001, and 2000,
respectively.
A second customer accounted for 11%, 9% and 5% of the Company's net revenues for
the years ended December 31, 2002, 2001, and 2000, respectively. This second
customer also accounted for approximately 5%, 4% and 4% of accounts receivable
at December 31, 2002, 2001 and 2000, respectively.
Approximately 24%, 31%, and 18% of net revenues for the years ended December 31,
2002, 2001, and 2000, respectively, resulted from merchandising services
performed for others at Kmart stores. Kmart filed for protection under the U.S.
Bankruptcy Code in January 2002. During 2002, Kmart closed a significant number
of stores in the United States. While the Company's customers and the resultant
contractual relationships are with the manufacturers and not this retailer, the
Company's business would be negatively impacted if this retailer were to close
all or most of its stores.
INCOME TAXES
Deferred tax assets and liabilities represent the future tax return consequences
of certain timing differences that will either be taxable or deductible when the
assets and liabilities are recovered or settled. Deferred taxes are also
recognized for operating losses that are available to offset future taxable
income and tax credits that are available to offset future income taxes. In the
event the future consequences of differences between financial reporting bases
and tax bases of the Company's assets and liabilities result in net deferred tax
assets, an evaluation of the probability of being able to realize the future
benefits indicated by such asset is required. A valuation allowance is provided
when it is more likely than not that some portion or the entire deferred tax
asset will not be realized.
F-11
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation, requires disclosure of fair value method of accounting for
stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. The Company has chosen, under the provisions of SFAS No. 123, to
continue to account for employee stock-based transactions under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
The Company has disclosed in Note 9 to the consolidated financial statements
actual and pro forma basic and diluted net income (loss) per share as if the
Company had applied the fair value method of accounting.
EARNINGS PER SHARE
Basic earnings per share amounts are based upon the weighted average number of
common shares outstanding. Diluted earnings per share amounts are based upon the
weighted average number of common and potential common shares outstanding for
each period represented. Potential common shares outstanding include stock
options, using the treasury stock method.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-12
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, in the first quarter of 2002. Under the
new rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statement. During 2002, the Company
performed the required impairment tests of goodwill. As a result of these tests,
there was no effect on the earnings and financial position of the Company.
The following table presents the results of the Company for all periods
presented on a comparable basis (in thousands except per share information):
2002 2001 2000
------------------- ------------------- --------------------
Reported net income (loss) $ 5,298 $ (1,714) $ 1,322
Add: Goodwill amortization - 771 866
------------------- ------------------- --------------------
Adjusted net income (loss) $ 5,298 $ (943) $ 2,188
=================== =================== ====================
Basic and diluted net income (loss)
per share:
Reported net income (loss) $ 0.28 $ (0.09) $ 0.07
Add: Goodwill amortization - 0.04 0.05
------------------- ------------------- --------------------
Adjusted net income (loss) $ 0.28 $ (0.05) $ 0.12
=================== =================== ====================
Prior to 2002, the Company amortized all goodwill over 15 years.
In 2001, the amount of goodwill related to the July 1999 merger of SPAR
Companies and PIA Merchandising Services, Inc. ("PIA") decreased approximately
$1.2 million as a result of the reduction of estimates associated with
pre-merger related liabilities and restructure reserves. In 2002, the amount of
goodwill related to this transaction decreased approximately $0.5 million as a
result of a change in the valuation allowance required on deferred tax assets
related to the PIA operating loss carryforward.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the 2002 presentation.
F-13
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts receivable, net, consists of the following (in thousands):
DECEMBER 31,
2002 2001
-----------------------------------
Trade $ 11,973 $ 16,366
Unbilled 5,743 5,095
Non-trade - 8
-----------------------------------
17,716 21,469
Less allowance for doubtful accounts 301 325
-----------------------------------
$ 17,415 $ 21,144
===================================
Property and equipment consists of the following (in thousands):
DECEMBER 31,
2002 2001
-----------------------------------
Equipment $ 4,175 $ 3,792
Furniture and fixtures 509 509
Leasehold improvements 138 123
Capitalized software development costs 3,278 2,504
-----------------------------------
8,100 6,928
Less accumulated depreciation and amortization 6,128 4,284
-----------------------------------
$ 1,972 $ 2,644
===================================
F-14
3. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
Accrued expenses and other current liabilities consists of the following (in
thousands):
DECEMBER 31,
2002 2001
------------------------------
Accrued salaries and other related costs $ 321 $1,224
Accrued merger related costs 1,945 2,397
Due to SPGI (cash deposits) 917 -
Other 2,914 1,636
------------------------------
$6,097 $5,257
==============================
4. LINE OF CREDIT AND LONG-TERM LIABILITIES
In January 2003, the Company and Whitehall Business Credit Corporation
("Whitehall"), entered into the Third Amended and Restated Revolving Credit and
Security Agreement (the "New Credit Facility"). The New Credit Facility provides
the Borrowers with a $15.0 million Revolving Credit Facility that matures on
January 23, 2006. The Revolving Credit Facility allows the Borrowers to borrow
up to $15.0 million based upon a borrowing base formula as defined in the
agreement (principally 85% of "eligible" accounts receivable). The New Credit
Facility bears interest at Whitehall's "Alternative Base Rate" or LIBOR plus two
and one-half percent and is secured by all the assets of the Company and its
subsidiaries.
The New Credit Facility replaces a previous 1999 agreement between the Company
and IBJ Whitehall Business Credit Corporation (the "Old Credit Facility") that
was scheduled to mature on February 28, 2003. The Old Credit Facility as amended
provided for a $15.0 million Revolving Credit Facility, as well as a $2.5
million Term Loan. The Revolving Credit facility allowed the Borrowers to borrow
up to $15.0 million based upon a borrowing base formula as defined in the
agreement (principally 85% of "eligible" accounts receivable). The Term Loan
amortized in equal monthly installments of $83,334 and was repaid in full as of
December 31, 2001. The revolving loans bore interest at Whitehall's "Alternate
Base Rate" plus one-half of one percent (0.50%) (a total of 4.75% per annum at
December 31, 2002).
Both Credit Facilities contain an option for Whitehall to purchase 16,667 shares
of Common Stock of the Company for $0.01 per share in the event that the
Company's average closing share price over a ten consecutive trading day period
exceeds $15.00 per share. This option expires on July 31, 2003.
Both Credit Facilities contain certain financial covenants which must be met by
the Borrowers on a consolidated basis, among which are a minimum "Net Worth", a
"Fixed Charge Coverage Ratio", a capital expenditure limitation and a minimum
EBITDA, as such terms are defined in the respective agreement. The Company was
in compliance with all such financial covenants at December 31, 2002.
The balances outstanding on the revolving line of credit under the Old Credit
Facility were $0.1 million and $11.3 million at December 31, 2002, and December
31, 2001, respectively. As of December 31, 2002, based upon the borrowing base
formula, the SPAR Group had availability under the Old Credit Facility of $11.1
million of the $14.9 million unused revolving line of credit. Availability would
have been the same under the New Credit Facility had it been in effect on
December 31, 2002.
F-15
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
4. LINE OF CREDIT AND LONG-TERM LIABILITIES (CONTINUED)
The Company's line of credit and long-term liabilities consist of the following
at December 31 (in thousands):
2002 2001
---------------------------
Revolving line of credit, maturing February 2003 $148 $11,287
Other long-term liabilities - 57
---------------------------
$148 11,344
Current maturities of long-term liabilities - 57
---------------------------
$148 $11,287
===========================
5. INCOME TAXES
The provision for income tax expense from continuing operations is summarized as
follows (in thousands):
YEAR ENDED DECEMBER 31,
2002 2001 2000
----------------- ------------------ ------------------
Current $ 476 $ 109 -
Deferred 2,522 3,014 $780
----------------- ------------------ ------------------
$2,998 $3,123 $780
================= ================== ==================
The provision for income taxes from continuing operations is different from that
which would be obtained by applying the statutory federal income tax rate to
income before income taxes. The items causing this difference are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
2002 2001 2000
----------- ----------- ----------
Provision for income taxes at federal
statutory rate $2,821 $2,475 $1,190
State income taxes, net of federal benefit 175 317 140
Permanent differences (48) 317 321
Change in valuation allowance - - (825)
Other 50 14 (46)
----------- ----------- ----------
Provision for income taxes $2,998 $3,123 $ 780
=========== =========== ==========
F-16
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
5. INCOME TAXES (CONTINUED)
Deferred taxes consist of the following (in thousands):
DECEMBER 31,
2002 2001
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $3,876 $4,150
Restructuring 454 879
Accrued compensation and related benefits 160 446
SIM reserve against loan commitment 320 -
Allowance for doubtful accounts and other receivable 114 166
Loss on disposal of incentive business SPGI - 2,618
Other 206 290
Valuation allowance (3,126) (3,622)
------------------------------------
Total deferred tax assets 2,004 4,927
Deferred tax liabilities:
Nonrecurring charge for termination of Subchapter S election - 797
Capitalized software development costs 396 500
------------------------------------
Total deferred tax liabilities 396 1,297
------------------------------------
Net deferred tax assets $1,608 $3,630
====================================
At December 31, 2002, the Company has net operating loss carryforwards (NOLs) of
$10.2 million available to reduce future federal taxable income. The Company's
net operating loss carryforwards begin to expire in the year 2012. Section 382
of the Internal Revenue Code restricts the annual utilization of the NOLs
incurred prior to a change in ownership. Such a change in ownership had occurred
in 1999, thereby restricting the NOLs prior to such date available to the
Company to approximately $657,500 per year.
The Company has established a valuation allowance for the deferred tax assets
related to the available NOLs that are deductible for years subsequent to 2005
totaling $3,126,000. The $3,126,000 valuation allowance at December 31, 2002
when realized will result in a reduction of goodwill associated with the PIA
acquisition. In 2002 and 2001, the Company reduced the valuation allowance and
goodwill by $499,000 and $250,000 respectively. In 2001, in addition to the
goodwill adjustment discussed above, the Company also realized the benefit of
certain deferred tax assets and decreased the valuation allowance by $387,000.
F-17
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases equipment and certain office space in several cities, under
non-cancelable operating lease agreements. Certain leases contain escalation
clauses and require the Company to pay its share of any increases in operating
expenses and real estate taxes. Rent expense was approximately $1.0 million,
$1.0 million, and $1.1 million for the years ended December 31, 2002, 2001, and
2000, respectively. At December 31, 2002, future minimum commitments under all
non-cancelable operating lease arrangements are as follows (in thousands):
2003 $1,004
2004 831
2005 562
2006 545
2007 54
MATTERS
On October 24, 2001, Safeway Inc., a former customer of the PIA Companies, filed
a complaint alleging damages of approximately $3.6 million plus interest and
costs and alleged punitive damages in an unspecified amount against the Company
with respect to (among other things) alleged breach of contract with the PIA
companies. On or about December 30, 2002, the Court approved the filing of
Safeway Inc.'s Second Amended Complaint, which alleges causes of action for
(among other things) breach of contract against the Company, PIA Merchandising
Co., Inc. and Pivotal Sales Company. The Second Amended Complaint was filed with
the Court on January 13, 2003, and does not specify the amount of monetary
damages sought. No punitive or exemplary damages are sought in Safeway Inc.'s
Second Amended Complaint. This case is being vigorously contested by the
Company.
The Company is a party to various legal actions and administrative proceedings
arising in the normal course of business. In the opinion of Company management,
disposition of these matters are not anticipated to have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
F-18
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
7. EMPLOYEE BENEFITS
RETIREMENT/PENSION PLANS
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible
employees. Employer contributions were approximately $117,000, $118,000, and
$68,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
Certain of the Company's PIA employees are covered by union-sponsored,
collectively bargained, multi-employer pension plans. Pension expense related to
these plans was approximately $60,000, $77,000, and $24,000 for the years ended
December 31, 2002, 2001, and 2000, respectively.
STOCK PURCHASE PLANS
The Company has Employee and Consultant Stock Purchase Plans (the "SP Plans").
The SP Plans allow employees and consultants of the Company to purchase common
stock, without having to pay any commissions on the purchases. On August 8,
2002, the Company's Board of Directors approved a 15% discount for employee
purchases and a 15% cash bonus for affiliate consultant purchases. The maximum
amount that any employee or consultant can contribute to the SP Plans per
quarter is $6,250, and the total number of shares reserved by the Company for
purchase under the SP Plans is 500,000. During 2002, 2001 and 2000, the Company
sold 10,104 shares, 2,638 shares, and 452 shares of common stock, at a weighted
average price of $2.51, $1.90, and $3.03 per share, respectively.
F-19
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
8. RELATED-PARTY TRANSACTIONS
The SPAR Group, Inc. is affiliated through common ownership with SPAR Marketing
Services, Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI") and SPAR
Infotech, Inc. ("SIT"). SMS and SMSI (through SMS) provided approximately 71% of
the Company's field representatives (through its independent contractor field
force) and substantially all of the Company's field management services. Under
the terms of the Field Service Agreement, SMS provides the services of
approximately 6,600 field representatives and through SMSI provides
approximately 90 full-time national, regional and district managers to the SPAR
Marketing Companies as they may request from time to time, for which the Company
has agreed to pay SMS for all of its costs of providing those services plus 4%.
SIT provided Internet computer programming services to the Company. Under the
terms of the programming agreement between SMF and SIT effective as of October
1, 1998, SIT continues to provide programming services to SMF as SMF may request
from time to time, for which SMF has agreed to pay SIT competitive hourly wage
rates and to reimburse SIT's out-of-pocket expenses
The following transactions occurred between the SPAR Companies and the above
affiliates (in thousands):
YEAR ENDED DECEMBER 31,
2002 2001 2000
--------------------------------------------------
Services provided by affiliates:
Independent contractor services $ 23,262 $ 8,337 $ 5,177
==================================================
Field management services $ 7,280 $ 6,779 $ 4,388
==================================================
Internet and software program consulting services $ 1,626 $ 1,185 $ 769
==================================================
Services provided to affiliates:
Management services $ 732 $ 390 $ 692
==================================================
Balance due to (from) affiliates included in
accrued liabilities (in thousands): DECEMBER 31,
2002 2001 2000
-----------------------------------------
SPAR Management Services, Inc. $ - $ - $ (26)
SPAR Marketing Services, Inc. 932 611 582
SPAR Infotech, Inc. 26 - (4)
-----------------------------------------
$ 958 $ 611 $ 552
=========================================
In addition to the above, through the services of Affinity (f/k/a Infinity)
Insurance, Ltd., the Company purchased insurance coverage for its casualty and
property insurance risk for approximately $1,128,000, 1,085,000 and $994,000 for
the years ended December 31, 2002, 2001, and 2000, respectively.
The Company had an investment in an affiliate that provided telemarketing and
related services that was sold in 2000 for $1.5 million, for a gain of
approximately $790,000 that was included in other income.
In 2000, the Company's affiliate SMS settled its claim with the Internal Revenue
Service. As a result of this settlement, the $500,000 contingent liability
amount the Company had accrued at December 31, 1999, was reversed with a
corresponding credit made to cost of revenues.
F-20
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
9. STOCK OPTIONS
The Company has four stock option plans: the Amended and Restated 1995 Stock
Option Plan (1995 Plan), the 1995 Director's Plan (Director's Plan), the Special
Purpose Stock Option Plan, and the 2000 Stock Option Plan (2000 Plan).
The 1995 Plan provided for the granting of either incentive or nonqualified
stock options to specific employees, consultants, and directors of the Company
for the purchase of up to 3,500,000 shares of the Company's common stock. The
options had a term of ten years from the date of issuance, except in the case of
incentive stock options granted to greater than 10% stockholders for which the
term was five years. The exercise price of nonqualified stock options must have
been equal to at least 85% of the fair market value of the Company's common
stock at the date of grant. Since 2000, the Company has not granted any new
options under this Plan. At December 31, 2002, options to purchase 72,000 shares
of the Company's common stock remain outstanding under this Plan. The 1995 Plan
was superceded by the 2000 Stock Option Plan with respect to all new options
issued.
The Director's Plan was a stock option plan for non-employee directors and
provided for the purchase of up to 120,000 shares of the Company's common stock.
Since 2000, the Company has not granted any new options under this Plan. At
December 31, 2002, 20,000 options to purchase shares of the Company's common
stock remained outstanding under this Plan. The Director's Plan has been
replaced by the 2000 Plan with respect to all new options issued.
On July 8, 1999, the Company established the Special Purpose Stock Option Plan
of PIA Merchandising Services, Inc. to provide for the issuance of substitute
options to the holders of outstanding options granted by SPAR Acquisition, Inc.
There were 134,114 options granted at $0.01 per share. Since July 8, 1999, the
Company has not granted any new options under this plan. During 2002, no options
to purchase shares of the Company's common stock were exercised under this Plan.
At December 31, 2002, options to purchase 25,750 shares of the Company's common
stock remain outstanding under this Plan.
On December 4, 2000, the Company adopted the 2000 Plan as the successor to the
1995 Plan and the Director's Plan with respect to all new options issued. The
2000 Plan provides for the granting of either incentive or nonqualified stock
options to specified employees, consultants, and directors of the Company for
the purchase of up to 3,600,000 (less those options still outstanding under the
1995 Plan or exercised after December 4, 2000, under the 1995 Plan). The options
have a term of ten years from the date of issuance except in the case of
incentive stock options granted to greater than 10% stockholders for whom the
term is five years. The exercise price of nonqualified stock options for tax
purposes must be equal to at least 85% of the fair market value of the Company's
common stock at the date of grant (although typically such options are issued at
100% of the fair market value), and the exercise price of incentive stock
options must be equal to at least the fair market value of the Company's common
stock at the date of grant. At December 31, 2002, options to purchase 1,980,431
shares of the Company's common stock remain outstanding under this Plan and
options to purchase 1,079,614 shares of the Company's common stock were
available for grant under this Plan.
F-21
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
9. STOCK OPTIONS (CONTINUED)
In 2001, the Company adopted its 2001 Employee Stock Purchase Plan (the "ESP
Plan"), which replaces its earlier existing plan, and its 2001 Consultant Stock
Purchase Plan (the "CSP Plan"). These plans were each effective as of June 1,
2001. The ESP Plan allows employees of the Company and its subsidiaries, and the
CSP Plan allows employees of the affiliates of the Company (see Note 8 - Related
Party Transactions), to purchase the Company's Common Stock from the Company
without having to pay any brokerage commissions. On August 8, 2002, the
Company's Board of Directors approved a 15% discount for employee purchases of
Common Stock under the ESP Plan and a 15% cash bonus for affiliate consultant
purchases of Common Stock under the CSP Plan.
The following table summarizes stock option activity under the Company's plans:
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
---------------------------------
Options outstanding, December 31, 1999 3,305,522 $5.22
Granted 479,500 2.59
Exercised (115,864) .27
Canceled or expired (679,309) 5.94
-------------------
Options outstanding, December 31, 2000 2,989,849 4.82
Granted 2,564,844 1.31
Exercised (309,492) 1.30
Canceled or expired (2,761,474) 5.00
-------------------
Options outstanding, December 31, 2001 2,483,727 1.42
Granted 332,792 2.01
Exercised (230,463) 1.23
Canceled or expired (487,875) 5.05
-------------------
Options outstanding, December 31, 2002 2,098,181 1.52
Option price range at end of year $0.01 to $14.00
F-22
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
9. STOCK OPTIONS (CONTINUED)
2002 2001 2000
--------------------------------------------------
Weighted average grant date fair value of
options granted during the year $1.60 $1.28 $1.68
The following table summarizes information about stock options outstanding at
December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, 2002 CONTRACTUAL EXERCISE DECEMBER 31, AVERAGE
EXERCISE PRICES LIFE PRICE 2002 EXERCISE PRICE
-------------------- -------------------------------------------------- --------------------------------
Less than $1.00 217,593 8.0 years $0.53 137,343 $ 0.42
$1.01 - $2.00 1,629,588 6.6 years 1.34 815,927 1.30
$2.01 - $4.00 219,000 9.1 years 2.49 24,750 3.13
Greater than $4.00 32,000 4.7 years 10.63 29,000 11.21
------------------ ----------------
Total 2,098,181 7.0 years 1.52 1,007,020 1.51
================== ================
Outstanding warrants are summarized below:
SHARES SUBJECT EXERCISE PRICE
TO WARRANTS PER SHARE
---------------------------------
Balance, December 31, 2002 113,062 $0.01 - $8.51
The above warrants expire at various dates from 2003 through 2004.
F-23
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
9. STOCK OPTIONS (CONTINUED)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation as amended by SFAS 148. No compensation
cost has been recognized for the stock option plans. Had compensation cost for
the Company's option plans been determined based on the fair value at the grant
date consistent with the provisions of SFAS No. 123, the Company's net income
(loss) and pro forma net income (loss) per share from continuing operations
would have been reduced to the adjusted amounts indicated below (in thousands,
except per share data):
YEAR ENDED DECEMBER 31,
2002 2001 2000
----------------------------------------------
Net income (loss), as reported $ 5,298 $ (1,714) $ 1,322
Stock based employee compensation (benefit) expense
under the fair market value method 1,844 (1,129) 1,957
----------------------------------------------
Pro forma net income (loss) 3,454 (585) (635)
Basic and diluted net income (loss) per share, as
reported $ 0.28 $ (0.09) $ 0.07
Basic and diluted net income (loss) per share $ 0.18 $ (0.03) $ (0.03)
The pro forma effect on net income is not representative of the pro forma effect
on net income in future years because the options vest over several years and
additional awards may be made in the future.
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0% for all years; volatility factor of expected
market price of common stock of 85%, 187%, and 237% for 2002, 2001, and 2000,
respectively; risk-free interest rate of 4.03%, 5.14%, and 6.89%; and expected
lives of six years.
10. NOTES PAYABLE TO CERTAIN STOCKHOLDERS
As of December 31, 2002, notes payable to certain stockholders total
approximately $4.0 million, which bear an interest rate of 8.0% and are due on
demand. In January 2003, $3.0 million was repaid to such stockholders. While the
New Credit Facility contains certain restrictions on the repayment of
stockholder debt, the Company anticipates paying the remaining balance in 2003.
11. SEGMENTS
As a result of the Company's divestiture of its Incentive Marketing Division,
the Company now operates solely in the Merchandising Services Industry Segment
both in the domestic and international markets.
12. RESTRUCTURING CHARGES
In 1999, the Company's Board of Directors approved a plan to restructure the
operations of the PIA Companies. Restructuring costs were composed of committed
costs required to integrate the SPAR Companies and the PIA Companies' field
organizations and the consolidation of administrative functions to achieve
beneficial synergies and costs savings.
F-24
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
12. RESTRUCTURING CHARGES (CONTINUED)
The following table displays a roll forward of the liabilities for restructuring
charges from December 31, 1999 to December 31, 2002 (in thousands):
EQUIPMENT OFFICE
EMPLOYEE LEASE LEASE
SEPARATION SETTLEMENTS SETTLEMENTS TOTAL
----------------- --------------- ------------------ ------------
December 31, 1999 Balance $ 1,115 $ 2,414 $ 1,542 $ 5,071
Adjustments in Restructuring Charges 748 1,367 (619) 1,496
2000 payments (1,376) (1,011) (379) (2,766)
----------------- --------------- ------------------ ------------
December 31, 2000 Balance 487 2,770 544 3,801
Adjustments in Restructuring Charges (132) -- -- (132)
2001 payments (355) (1,008) (124) (1,487)
----------------- --------------- ------------------ ------------
December 31, 2001 Balance -- 1,762 420 2,182
2002 payments -- (593) -- (593)
----------------- --------------- ------------------ ------------
DECEMBER 31, 2002 BALANCE $ -- $ 1,169 $ 420 $ 1,589
================= =============== ================== ============
The maturities of restructuring charges at December 31, 2002, are as follows (in
thousands):
2003 1,354
2004 235
Management believes that the remaining reserves for restructuring are adequate
to complete its plan.
F-25
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
13. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
2002 2001 2000
--------------------------------------------------
Numerators:
Net income from continuing operations $ 5,298 $ 4,155 $ 2,721
Loss from operations of discontinued division - (5,869) (1,399)
--------------------------------------------------
Net income (loss) $ 5,298 $ (1,714) $ 1,322
==================================================
Denominator:
Shares used in basic earnings per share calculation 18,761 18,389 18,185
Effect of diluted securities:
Employee stock options 387 78 118
--------------------------------------------------
Shares used in diluted earnings per share
calculations 19,148 18,467 18,303
==================================================
Basic and diluted earnings per common share:
Income from continuing operations $ 0.28 $ 0.23 $ 0.15
Loss from operations of discontinued division - (0.32) (0.08)
--------------------------------------------------
Net income (loss) $ 0.28 $ (0.09) $ 0.07
==================================================
F-26
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2002
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for 2002 and 2001 was as follows (in thousands, except earnings
per share data):
QUARTER
FIRST SECOND THIRD FOURTH
-------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002:
Net revenues $ 16,046 $ 17,542 $ 17,775 $ 18,249
Gross profit 6,295 6,951 7,015 9,020
Net income $ 482 $ 1,068 $ 1,213 $ 2,535
=============================================================
Basic/diluted net income per
common share $ 0.03 $ 0.06 $ 0.06 $ 0.13
=============================================================
YEAR ENDED DECEMBER 31, 2001:
Net revenues $ 14,941 $ 16,091 $ 19,025 $ 20,834
Gross profit 6,193 6,231 7,356 10,228
Income from continuing operations 147 700 1,263 2,045
Income (loss) from discontinued operations 530 (381) (686) (5,332)(1)
-------------------------------------------------------------
Net income (loss) $ 677 $ 319 $ 577 $ (3,287)
=============================================================
Basic/diluted net income (loss) per common share:
Income from continuing operations $ 0.01 $ 0.04 $ 0.07 $ 0.11
Income (loss) from discontinued
operations 0.03 (0.02) (0.04) (0.29)
-------------------------------------------------------------
Net income (loss) $ 0.04 $ 0.02 $ 0.03 $ (0.18)
=============================================================
(1) Includes a $4,272,000 estimated loss on disposal of SPGI
F-27
SPAR Group, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(In thousands)
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
PERIOD EXPENSES DEDUCTIONS (1) OF PERIOD
-----------------------------------------------------------------
Year ended December 31, 2002:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 325 $ 262 $ 286 $ 301
Year ended December 31, 2001:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 2,648 $ 472 $ 2,795 $ 325
Year ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 2,035 $ 1,304 $ 691 $ 2,648
(1) Uncollectible accounts written off, net of recoveries.
F-28