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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
ANNUAL REPORT ON FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the year ended December 31, 2000
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K .
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 27, 2001, based on the closing price
of the Common Stock as reported by the Nasdaq SmallCap Market on such date, was
approximately $20,556,371.
The number of shares of the Registrant's Common Stock outstanding as of
March 27, 2001 was 18,272,330 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PART I
PAGE
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 15
Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 24
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 24
Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation and Other Information of SPAR Group, Inc. 27
Item 12. Security Ownership of Certain Beneficial Owners and Management 30
Item 13. Certain Relationships and Related Transactions 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
Signatures 34
i
PART I
THIS ANNUAL REPORT ON FORM 10-K INCLUDES "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT INCLUDING, IN PARTICULAR, THE STATEMENTS ABOUT THE SPAR GROUP'S
PLANS AND STRATEGIES UNDER THE HEADINGS "BUSINESS" AND "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." ALTHOUGH THE
SPAR GROUP BELIEVES THAT ITS PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN OR
SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT ASSURE
THAT SUCH PLANS, INTENTIONS OR EXPECTATIONS WILL BE ACHIEVED. ALL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE SPAR GROUP OR PERSONS ACTING ON
ITS BEHALF ARE EXPRESSLY QUALIFIED BY THE CAUTIONARY STATEMENTS IN THE ANNUAL
REPORT ON FORM 10-K.
ITEM 1. BUSINESS.
GENERAL
The SPAR Group, Inc., a Delaware corporation formerly known as PIA
Merchandising Services, Inc. ("SPAR Group" or the "Company") is a supplier of
in-store merchandising and marketing services, and premium incentive marketing
services throughout the United States and Canada. The Company also provides
database marketing, teleservices, marketing research, and Internet-based
software. The Company's operations are divided into four divisions: the
Merchandising Services Division, the Incentive Marketing Division, the Internet
Division and the International Division. The Merchandising Services Division
provides merchandising services, database marketing, teleservices and marketing
research to manufacturers and retailers primarily in the mass merchandiser,
video, chain, discount drug store and grocery industries. The Incentive
Marketing Division designs and implements premium incentives, manages group
meetings, group travel and training programs principally for corporate clients.
In March 2000, the Company announced the formation of an Internet Division for
the purpose of marketing its proprietary Internet-based computer software. In
November 2000, the Company established its International Division to expand its
merchandising services business off shore, with an initial focus on Japan and
the Pacific Rim region.
Merchandising Services Division
The Company's Merchandising Services Division consists of (1) SPAR
Marketing, Inc. ("SMI") (an intermediate holding company), SPAR Marketing Force,
Inc. ("SMF"), SPAR Marketing, Inc., a Nevada corporation ("SMNEV"),
SPAR/Burgoyne Retail Services, Inc. ("SBRS"), and SPAR, Inc. ("SINC")
(collectively, the "SPAR Marketing Companies"), and (2) PIA Merchandising Co.
Inc., Pacific Indoor Display d/b/a Retail Resources, Pivotal Sales Company and
PIA Merchandising Ltd. (collectively, "PIA" or the "PIA Companies"). The SPAR
Marketing Companies, the original predecessor of which was founded in 1967,
provide nationwide retail merchandising and marketing services to home video,
consumer goods and food products companies. The PIA Companies, through a
predecessor of the Company first organized in 1943, also are suppliers of
in-store merchandising and sales services throughout the United States and
Canada, and were "acquired" by the SPAR Marketing Companies for accounting
purposes pursuant to the Merger on July 8, 1999 (See Merger and Restructuring,
below). The PIA Companies provide these services primarily on behalf of consumer
product manufacturers and retailers at mass merchandisers, drug and retail
grocery stores. The Company currently operates in all 50 states and Canada and
provides a broad range of in-store merchandising and other marketing services to
many of the nation's leading companies.
Merchandising services generally consist of special projects or
regularly scheduled routed services provided at the stores for a specific
retailer or multiple manufacturers primarily under multiple year contracts.
Services also include stand-alone large-scale implementations. These services
may include activities such as ensuring that client products authorized for
distribution are in stock and on the shelf, adding new products that are
approved for distribution but not presently on the shelf, setting category
shelves in accordance with approved store schematics, ensuring that shelf tags
are in place, checking for the overall salability of client products and selling
new and promotional items. Specific in-store services can be initiated by
retailers and manufacturers, such as new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. These
-1-
services are used typically for large-scale implementations over 30 days. The
Company also provides database marketing, teleservices and research services.
Incentive Marketing Division
The Company's Incentive Marketing Division was created in January 1999
through the Company's purchase of the business and substantially all of the
assets of BIMA Group, Inc., a Texas corporation ("BIMA" or "MCI") originally
founded in 1987 and formerly known as MCI Performance Group, Inc. The purchase
was made by the Company's indirect subsidiary SPAR Performance Group, Inc.,
formerly known as SPAR MCI Performance Group, Inc. ("SPGI"). SPGI provides a
wide variety of consulting, creative, program administration, travel and
merchandise fulfillment, and training services to companies seeking to retain
and motivate employees, salespeople, dealers, distributors, retailers, and
consumers toward certain actions or objectives. SPGI's strategy enables
companies to outsource the entire design, implementation and fulfillment of
incentive programs in a one-stop, "umbrella" shopping approach. SPGI typically
consults with a client to design the most effective plan to achieve the client's
goals. SPGI then provides services necessary to implement the program, generates
detailed efficiency progress reports, and reports on the return on investment
upon completion of the program.
Internet Division
In March 2000, the Company established its Internet Division,
SPARinc.com, Inc., to separately market its application software products and
services. The Company has developed and is utilizing several Internet-based
software products. The Internet Division was established to market these
applications to businesses with multiple locations and large workforces desiring
to improve day-to-day efficiency and overall productivity.
International Division
In November 2000, the Company established its International Division,
SPAR Group International, Inc., to expand its merchandising services business
off shore, with an initial focus on Japan and the Pacific Rim region. The
Company believes there is a significant market for its merchandising services
throughout the world. The domestic merchandising services business has been
developed utilizing Internet-based technology that can be modified to
accommodate foreign markets. The International Division was established to
cultivate foreign markets, modify the necessary systems and implement the
Company's business model worldwide.
INDUSTRY OVERVIEW
Merchandising Services Division
According to industry estimates the merchandising industry generates
over two billion dollars annually. The merchandising industry includes
manufacturers, retailers, food brokers, and professional service merchandising
companies. The Company believes the current trend is that major manufacturers
are continuing to move to 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 shelf maintenance, display placement, reconfiguring
products on store shelves, replenishing products and placing orders, and other
services, such as test market research, mystery shopping, teleservices, database
marketing and promotion planning and analysis.
Merchandising services previously undertaken by retailers, manufacturers
and independent brokers have been increasingly outsourced to third parties.
Historically, retailers staffed their stores as needed to ensure inventory
levels, the advantageous display of new items on shelves, and the maintenance of
shelf schematics. Manufacturers deployed their own sales representatives to
ensure that their products were displayed on the shelves and were properly
spaced and positioned. Independent brokers performed similar services on behalf
of the manufacturers they represented. The Company believes that in an effort to
improve their margins, retailers are increasing their reliance on manufacturers
and brokers to perform such services. Initially, manufacturers attempted
-2-
to satisfy their need for merchandising services in retail stores by utilizing
their own sales representatives. However, manufacturers discovered that using
their own sales representatives for this purpose was expensive and inefficient.
Therefore, manufacturers have increasingly outsourced the merchandising services
to third parties capable of operating at a lower cost by serving multiple
manufacturers simultaneously.
Another significant trend impacting the merchandising segment is the
tendency of consumers to make product purchase decisions once inside the store.
Accordingly, merchandising services and in-store product promotions have
proliferated and diversified. Retailers are continually re-merchandising and
remodeling entire stores to respond to new product developments and changes in
consumer preferences. The Company estimates that these activities have increased
in frequency over the last five years, such that most stores are re-merchandised
and remodeled approximately every twenty-four months. Both retailers and
manufacturers are seeking third parties to help them meet the increased demand
for these labor-intensive services.
Incentive Marketing Division
According to PROMO Magazine's 1999 annual report of the promotion
industry, spending on the promotion of products and services in 1998 was $85.4
billion, up $6 billion or 8% from the 1997 level. The Company participates in
the premium incentive and promotion fulfillment sectors. These sectors
collectively accounted for $28.7 billion or 34% of the promotion industry as a
whole and grew 5.0% and 17.2%, respectively, during 1998. The Company believes
that U.S. companies are increasingly using third party incentive providers as a
more efficient and cost effective means to increase the productivity of their
employees. Third party incentive premium providers can offer a customized,
unique, turnkey solution specifically tailored to a company's needs.
Additionally, incentive premium providers are able to capitalize on supplier
relationships and to realize volume discounts, particularly on travel and
merchandise.
Premium incentives are performance-determined rewards used to motivate
employees, salespeople, dealers, and consumers, and are also used to
differentiate a product, service or store. According to an Incentive Federation
Survey, only 26.0% of U.S. businesses are using premium incentives to motivate
employees and the majority of these businesses are large companies (with over
1,000 employees). The Company anticipates that this market segment will grow as
additional companies realize the value of using incentives to motivate
employees, sales forces and consumers.
The three most commonly used incentives are cash, travel and
merchandise. Consumer promotions, including direct premium offers (using travel
or merchandise in conjunction with a purchase of a product or service),
sweepstakes (promotions that require only chance to win) and self-liquidating
premiums (offering travel or merchandise premiums to consumers at a price that
covers the marketer's costs) generate the most attention. However, most
incentive expenditures are for trade incentives designed to motivate salespeople
to sell and retailers to buy and display products. Recent trends include the
growth of retail certificates or debit or cash cards in the merchandise
fulfillment sector (the segment of the premium incentive sector concerned with
providing merchandise as rewards in incentive programs). The travel fulfillment
sector (the segment of the premium incentive sector concerned with providing
travel as rewards in incentive programs) has seen growth in individual and group
travel as well as meeting registration services (fee-based services used to
simplify the process of signing up individuals to attend a meeting or seminar).
-3-
Internet Division
The Company believes there is a current trend towards consolidation in
business. This trend is creating larger, more complex companies that have
multiple locations and large workforces covering wide geographical areas. The
Company also believes there is a growing trend of companies utilizing the
Internet and Internet-based software. The Company has historically developed and
utilized Internet-based software to manage its national businesses, including
its national field force, with greater efficiency and communication speed than
previously possible with paper based systems. The Company believes this software
transcends the merchandising services industry and can be utilized in many other
industries that have businesses with multiple locations and large workforces.
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 will only be
exacerbated by the logistics of operating in foreign markets. The Company
believes this environment will create an opportunity to exploit its
Internet-based technology and business model that have been 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 has been on Japan, through a joint
venture with a major Japanese wholesaler, and the Pacific Rim region. Upon
successful implementation of the Company's business model in these areas, the
Company intends to expand to other markets.
MERGER AND RESTRUCTURING
On July 8, 1999, SG Acquisition, Inc., a Nevada corporation ("PIA
Acquisition"), a wholly owned subsidiary of the Company, then named PIA
Merchandising Services, Inc. ("PIA Delaware"), merged into and with SPAR
Acquisition, Inc., a Nevada corporation ("SAI") (the "Merger") pursuant to the
Agreement and Plan of Merger dated as of February 28, 1999, as amended (the
"Merger Agreement"), by and among the Company and certain of the PIA Companies
and SPAR Marketing Companies (among others). In connection with the Merger, PIA
Delaware changed its name to SPAR Group, Inc. (which will be referred to
post-Merger individually as "SGI" or the "Company"). Although the SPAR Marketing
Companies and SPGI became subsidiaries of PIA Delaware (now SGI) as a result of
this "reverse" Merger, the transaction has been accounted for as required under
GAAP as a purchase by SAI of the PIA Companies, with the books and records of
SGI being adjusted to reflect the historical operating results of the SPAR
Marketing Companies and SPGI (together with certain intermediate holding
companies, the "SPAR Companies").
BUSINESS STRATEGY
As the marketing services industry continues to grow, consolidate and
expand internationally large retailers and manufacturers are increasingly
outsourcing their marketing needs to third-party providers. The Company believes
that offering marketing services in multi-use sectors on a national and global
basis will provide it with a competitive advantage. Moreover, the Company
believes that developing a sophisticated technology infrastructure, including
proprietary Internet-based software, is key to providing clients with a high
level of customer service while maintaining efficient, low cost operations. The
Company's objective is to become an international integrated service provider by
pursuing its operating strategy, as described below.
Capitalize on Cross-Selling Opportunities. The Company intends to
leverage its current client relationships by cross-selling the range of services
offered by the Company. The Company believes that its retail merchandising and
database marketing services can be packaged with its premium incentive services
to provide a high level of customer service, and that additional cross-selling
opportunities will increase if, as management intends, the Company acquires
businesses in other sectors of the marketing services industry. The Company also
intends to offer its proprietary Internet-based software to existing
Merchandising Services and Incentive Marketing clients.
-4-
Achieve Operating Efficiencies. The Company intends to achieve greater
operating efficiencies within its Divisions. The Company believes that, its
existing field force and technology infrastructure can support additional
customers and revenue in the Merchandising Services Division. In the Incentive
Marketing Division, the Company believes that it can realize volume purchasing
advantages with respect to travel and merchandise fulfillment. At the corporate
level, the Company will seek to combine certain administrative functions, such
as accounting and finance, insurance, strategic marketing and legal support.
Leverage Divisional Autonomy. The Company intends to conduct its
operations on a decentralized basis whereby management of each Division will be
responsible for its day-to-day operations, sales relationships and the
identification of additional acquisition candidates in their respective sectors.
A company-wide team of senior management will provide the Divisions with
strategic oversight and guidance with respect to acquisitions, finance,
marketing, operations and cross-selling opportunities. The Company believes that
a decentralized management approach will result in better customer service by
allowing management of each Division the flexibility to implement policies and
make decisions based on the needs of their respective customers.
Leverage and Implement Technology. The Company intends 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.
Industry sources indicate that customers are increasingly relying on marketing
service providers to supply rapid, value-added information regarding the results
of marketing expenditures on sales and profits. The Company (together with
certain of its affiliates) has developed and owns proprietary Internet-based
software technology that allows it to communicate with its field management over
the Internet, schedule its store-specific field operations more efficiently,
receive information over the Internet and incorporate the data immediately,
quantify the benefits of its services to customers faster and respond to
customers' needs and implement programs more rapidly. The Company believes that
the usefulness of certain software applications it has developed transcends the
merchandising and marketing services industry and can be marketed to other
industries. The Company also believes that its technology can be modified and
adapted to support merchandising and marketing services in foreign markets. The
Company believes that its proprietary Internet-based software technology gives
them 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
entertainment, consumer goods, food products and retail companies through its
Merchandising Services Division, and also provides premium incentive services
through its Incentive Marketing Division.
The Company currently operates in all 50 states and Canada serving some
of the nation's leading companies. The Company believes its full-line capability
of developing plans at one centralized division headquarter location, executing
chain wide, fully integrated national solutions, and implementing rapid,
coordinated responses to its clients' needs on a real time basis differentiate
the Company from its competitors. The Company also believes its national
presence, centralized decision-making ability, local follow-through, ability to
recruit, train and supervise merchandisers, ability to perform large-scale
initiatives on short notice, and strong retailer relationships provide the
Company with a competitive advantage over local, regional or other competitors.
Merchandising Services Division
The Company provides a broad array of merchandising services on a
national, regional, and local basis to manufacturers and retailers. The Company
provides its merchandising and sales 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 sales
services: syndicated services, dedicated services and project services.
-5-
Syndicated Services
Syndicated services consist of regularly scheduled, routed merchandising
services provided at the store level for various manufacturers. These services
are performed for multiple manufacturers, including, in some cases,
manufacturers whose products are in the same product category. Syndicated
services may include activities such as:
o Reordering, replenishment of product
o Ensuring that the client's products authorized for distribution are
in stock and on the shelf
o Adding in new products that are approved for distribution but not
present on the shelf
o Designing store schematics o Setting category shelves in accordance
with approved store schematics
o Ensuring that shelf tags are in place
o Checking for overall salability of the client's products
o Placing new product and promotional items
Dedicated Services
Dedicated services consist of merchandising services, generally as
described above, that are performed for a specific retailer or manufacturer by a
dedicated organization, including a management team, working exclusively for
that retailer or manufacturer. These services are primarily based on agreed-upon
hourly rates and fixed management fees under multi-year contracts.
Project Services
Project services consist primarily of specific in-store services
initiated by retailers and manufacturers, such as new product launches, special
seasonal or promotional merchandising, focused product support and product
recalls. These services are used typically for large-scale implementations
requiring over 30 days. The Company also performs other project services, such
as new store sets and existing store resets, re-merchandising, remodels and
category implementations, under shared service contracts or stand-alone project
contracts.
Other 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 information systematically for analysis and
interpretation.
Teleservices - Maintaining a teleservices center in its Auburn Hills
facility that performs inbound and outbound telemarketing services,
including those on behalf of certain of the Company's manufacturer
clients.
Information Technology Services
The Company has developed Internet-based information tracking and data
accumulation system applications that improve productivity of merchandising
specialists and provide timely data to its customers. The Company's
merchandising specialists use Interactive Voice Response (IVR) and hand-held
computers to report (through the
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Internet) 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 process new orders for scanned products. This information
is analyzed and displayed on graphical execution maps, which can be accessed by
both the Company and its customers via the Internet, that visually depict the
status of every merchandising project in real time. The Company has also
developed an automated labor tracking system. Company associates communicate
work assignment completion information via the Internet or telephone, enabling
the Company to report hours, mileage, and other completion information for each
work assignment on a daily basis 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.
Incentive Marketing Division
SPGI provides a wide variety of consulting, creative, program
administration, and travel and merchandise fulfillment services to companies
seeking to retain and motivate employees, salespeople, dealers, distributors,
retailers, and consumers toward certain actions or objectives. SPGI's strategy
is to allow companies to outsource the entire design, implementation and
fulfillment of incentive programs in a one-stop, "umbrella" shopping approach.
SPGI consults with a client to design the most effective plan to achieve the
client's goals. SPGI then provides the services necessary to implement the
program, generates detailed efficiency progress reports and calculates the
return on investment upon completion of the program.
The SPGI process typically begins when a client desires assistance in
developing a performance improvement program. SPGI's senior consultants work
with the client to develop programs that improve productivity by delivering
positive reinforcement in ways that are meaningful to employees and supportive
of the client's business strategy. A wide range of reward options is available,
including cash, travel, and merchandise. Most formal compensation programs
deliver cash to plan participants, while premium incentives tend to make greater
use of non-financial rewards. SPGI has experience in all forms of incentives and
therefore can provide its clients with the most appropriate program design. SPGI
is capable of assisting its clients in the writing, designing and printing of
the program elements. Teams of creative directors, copywriters, graphic
designers and print specialists develop campaigns for incentive programs,
meetings, trade shows and consumer promotions.
In addition, SPGI provides its clients with travel or merchandise
fulfillment alternatives as well as a series of innovative product specific
alternatives. While the majority of SPGI's product fulfillment is in the travel
area, SPGI provides a wide variety of catalog merchandise awards. Through an
informal arrangement with some of the country's largest mass merchandise
retailers, SPGI can provide its clients with programs that offer the flexibility
of in-home reward ordering. SPGI also provides its clients with custom
merchandise, special catalogs, retail certificates and a Local Purchase Option
("LPO"). The LPO allows winning participants to select and redeem merchandise
from a series of participating merchants.
-7-
Internet Division
The Company believes there is a current trend towards consolidation in
business. This trend is creating larger, more complex companies that have
multiple locations and large workforces covering wide geographical areas. The
Company also believes there is a growing trend of companies utilizing the
Internet and Internet-based software. The Company has historically developed and
utilized Internet-based software to manage its national businesses, including
its national field force, with greater efficiency and communication speed than
previously possible with paper based systems. The Company believes this software
transcends the merchandising services industry and can be utilized in many other
industries that have businesses with multiple locations and large workforces.
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 will only be
exacerbated by the logistics of operating in foreign markets. The Company
believes this environment will create an opportunity to exploit its
Internet-based technology and business model that have been 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 has been on Japan, through a joint
venture with a major Japanese wholesaler, and the Pacific Rim region. Upon
successful implementation of the Company's business model in these areas, the
Company intends to expand 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 efforts are principally guided
through the Company's sales workforce, located nationwide, who primarily work
from 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 several discount and drug chains.
The Company's business development process encompasses a due diligence
period to determine the objectives of the prospective client, the work to be
performed to satisfy those objectives and the market value of the work to be
performed. The Company employs a formal cost development and proposal process
that determines the cost of each element of work required to achieve the
prospective client's objectives. These costs, together with an analysis of
market rates, are used in the development of a quotation approval form that is
presented to the Company's proposal committee for approval. The pricing of this
internal proposal must meet the Company's objectives for profitability, which
are established as part of the business planning process. After approval of this
quotation by the proposal committee, a detailed proposal is presented to the
prospective client. Following agreement regarding the elements of service and
corresponding rates, a contract is prepared and executed.
For the year ended December 31, 2000, net revenues from Merchandising
Services and Incentive Marketing Services accounted for 74.4% and 25.6%
respectively of total net revenues compared to 68.3% and 31.7% for 1999. Prior
to 1999 Merchandising Services comprised 100% of total net revenues.
-8-
Incentive Marketing Division
The Company's Incentive Division sales effort is organized on a regional
basis to serve national clients. Today SPGI has three regional sales operations,
each with a senior sales person working from their home office. All selling is
done on a local market basis, while all program design and execution is
completed at the Dallas headquarters.
As in the Merchandising Services Division, the Incentive Division's
business development process encompasses a due diligence period to determine the
objectives of the prospective client, the work to be performed to satisfy those
objectives and the market value of the work to be performed. The Company employs
a formal cost development and proposal process that determines the cost of each
element of work required to achieve the prospective client's objectives. These
costs, together with an analysis of market rates, are used in the development of
a quotation approval form that is presented to the Company's proposal committee
for approval. The pricing of this internal proposal must meet the Company's
objectives for profitability, which are established as part of the business
planning process. After approval of this quotation by the proposal committee, a
detailed proposal is presented to the prospective client. Following agreement
regarding the elements of service and corresponding rates, a contract is
prepared and executed.
Internet Division
The Company's sales effort within its Internet Division is structured to
develop new business in national and local markets. The Division's corporate
business development team directs its efforts toward the senior management of
prospective clients. Current sales efforts are principally guided through the
Company's corporate headquarters in Tarrytown, New York. The Company intends to
leverage existing clients as well as generate new clients through a focused
sales and marketing approach.
International Division
The Company's marketing efforts within its International Division are
designed to develop new business internationally. The Division's corporate
business development team, located in the Company's corporate headquarters,
targets specific areas and develops strategic relationships to cultivate
business.
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
including:
o Mass Merchandisers
o Chain and drug stores
o Retail 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.
Incentive Marketing Division
In its Incentive Marketing Division, the Company currently provides
services to various clients. These clients are principally large corporate
clients that encompass a broad range of industries including the food, drug,
communications, and automotive manufacturing industry.
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Internet Division
The Company has historically developed and utilized Internet-based
software to manage its national businesses, including its national field force,
with greater efficiency and communication speed than previously possible with
paper based systems. The Company believes this software transcends the
merchandising services industry and can be utilized in many other industries
that have businesses with multiple locations and large workforces.
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 has been on Japan and the
Pacific Rim region. Upon successful implementation of the Company's business
model in these areas, the Company intends to expand to other markets.
COMPETITION
The marketing services industry is highly competitive.
Merchandising Services Division
Competition in the Company's Merchandising Services Division arises from
a number of large enterprises, many of which are national in scope. The Company
also competes with a large number of relatively small enterprises with specific
client, channel or geographic coverage, as well as with the internal marketing
and merchandising operations of its clients and prospective clients. The Company
believes that the principal competitive factors within its industry include
development and deployment of technology, breadth and quality of client
services, cost, and the ability to execute specific client priorities rapidly
and consistently over a wide geographic area. The Company believes that its
current structure favorably addresses these factors and establishes it as a
leader in the mass merchandise and chain drug channels of trade, as well as a
leading provider of in-store services to the video industry. The Company also
believes it has the ability to execute major national in-store initiatives and
develop and administer national retailer programs. Finally, the Company believes
that, through the use of its proprietary Internet software, other technological
efficiencies and various cost controls, the Company will remain competitive in
its pricing and services.
Incentive Marketing Division
The incentive marketing industry is populated by large national
players, each of which has significantly greater financial and marketing
resources than the Company, and hundreds of small regional and local companies.
The Company believes that the principle competitive factors in the industry are
client service and innovation. By bundling its merchandising, travel and
database capabilities, the Company is able to offer its clients comprehensive,
innovative and flexible programs at a competitive price.
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Internet Division
Competition in the Company's Internet Division arises from a number of
large business application software developers, many of which are national and
international in scope. The Company also competes with a large number of
relatively small enterprises with specific industry, system or geographic
coverage, as well as with the internal information technology of its prospective
clients. The Company has historically developed and utilized Internet-based
software to manage its national businesses, including its national field force,
with greater efficiency and communication speed than previously possible with
paper based systems. The Company believes this software transcends the
merchandising services industry and can be utilized in many other industries
that have businesses with multiple locations and large workforces. The Company
believes it can be competitive in its pricing and services.
International Division
Competition in the Company's International Division arises from a
number of large enterprises, many of which are national and international in
scope. The Company also competes with a large number of relatively small
enterprises with specific client, channel or geographic coverage, as well as
with the internal marketing and merchandising operations of its clients and
prospective clients. The Company believes that the principal competitive factors
within its industry include development and deployment of technology, breadth
and quality of client services, cost, and the ability to execute specific client
priorities rapidly and consistently over a wide geographic area. The Company
believes its Internet-based technology and current business model are
competitive advantages that will allow it to compete in this area.
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".
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note 13 to the Financial Statements included in this Annual Report
on Form 10-K.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Revenues generated outside of the United States, accounted for less than
1% of the total revenues for the twelve months ended December 31, 2000.
EMPLOYEES
As of December 31, 2000, the Company's Merchandising Services Division's
labor force consisted of approximately 7,870 people, approximately 270 full-time
employees, approximately 4,700 part-time employees and 2,900 independent
contractors (furnished principally through related parties, see Item 13) , of
which approximately 200 full-time employees were engaged in operations and 11
were engaged in sales. As of December 31, 2000, the Company's Incentive
Marketing Division employed approximately 68 full-time employees, of which
approximately 15 employees were engaged in operations and approximately 7 were
engaged in sales. Approximately 26 of the Company's employees are covered by
contracts with labor unions. The Company considers its relations with its
employees and its employees' unions to be good. The Company's Internet Division
had one employee engaged in sales. The Company currently utilizes its existing
Merchandising & Incentive Marketing Divisions' employees to staff the Internet
and International Division, however, dedicated employees will be added as the
need arises.
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ITEM 2. PROPERTIES.
The Company maintains its corporate headquarters in approximately 12,000
square feet of leased office space located in Tarrytown, New York, under a lease
with a term expiring in May 2004.
The Company leases certain office and storage facilities for its
divisions and subsidiaries under operating leases, which expire at various dates
during the next five years. Most of these leases require the Company to pay
minimum rents, subject to periodic adjustments, plus other charges, including
utilities, real estate taxes and common area maintenance.
The following is a list of the locations where the Company maintains
leased facilities for its division offices and subsidiaries:
Location Office Use
- ----------------------------- --------------------------------------------------
Tarrytown, NY Corporate Headquarters and Administration
Auburn Hills, MI Regional Office, Warehouse and Teleservices Center
Eden Prairie, MN Regional Office
Mahwah, NJ Regional Office
Cincinnati, OH Regional Office
Tampa, FL Regional Office
Irvine, CA Regional Office
Carrollton, TX Regional Office and Warehouse
Although the Company believes that its existing facilities are adequate
for its current business, new facilities may be added should the need arise in
the future.
ITEM 3. LEGAL PROCEEDINGS.
On September 23, 1999, Information Leasing Corporation ("ILC") filed a
complaint for breach of contracts, claim and delivery, and conversion against
the Company in Orange County Superior Court, Santa Ana, California. On November
16, 2000 this case was settled.
On June 14, 2000, Argonaut Insurance Co. filed a complaint for
approximately $700,000 plus interest against the Company in Orange County
Superior Court, Santa Ana, California, Case No. 00CC07125 with respect to
alleged breach of contract. The Company is attempting to negotiate a settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq National
Market. Prior to July 9, 1999, the Company's stock was traded on the Nasdaq
National Market under the symbol "PIAM".
1998 1999
High Low High Low
First Quarter $6.500 $5.000 $5.630 $2.750
Second Quarter 8.156 3.688 5.000 1.880
Third Quarter 6.844 4.125 - -
Fourth Quarter 4.875 2.000 - -
Subsequent to July 9, 1999, the Company's stock was traded on the Nasdaq
National market under the symbol "SGRP" until November 15, 1999, when it moved
to the Nasdaq Small Cap Market.
1998 1999 2000
High Low High Low High Low
First Quarter $ - $ - $ - $ - $5.5000 $2.6250
Second Quarter - - - - 3.3750 1.2500
Third Quarter - - 5.8100 3.0000 2.0625 1.2188
Fourth Quarter - - 5.1300 2.5000 1.8750 .2188
As of December 31, 2000 there were approximately 139 holders of record
of the SPAR Group's Common Stock.
The SPAR Group has never declared or paid any cash dividends on its
capital stock and does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. The Company currently intends to retain future
earnings to finance its operations and fund the growth of the business. Any
payment of future dividends will be at the discretion of the Board of Directors
of the SPAR Group and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions in respect to the payment of dividends and other
factors that the Company's Board of Directors deems relevant.
On April 5, 2001, the Company received a Nasdaq Staff Determination
indicating that the Company failed to comply with Marketplace Rule 4310(c)(4),
which requires that the Company's common stock have a minimum bid price of $1.00
per share. Therefore, its common stock is subject to delisting from the Nasdaq
SmallCap Market. The Company has requested a hearing from Nasdaq to appeal the
Staff Determination. As of the filing date of this Form 10-K, a hearing date has
not been scheduled. Until Nasdaq rules on the appeal, the Company's common stock
will remain listed and will continue to trade on the Nasdaq SmallCap Market.
There can be no assurance as to when the Nasdaq will rule on the appeal, or that
such ruling will be favorable to the Company. An unfavorable ruling would result
in the immediate delisting of the Company's common stock from the Nasdaq
SmallCap Market. If the Company's common stock is delisted from Nasdaq, the
Company expects that its common stock will trade on the OTC Bulletin Board.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated or combined financial data sets
forth, for the periods and the dates indicated, summary financial data of the
Company and its subsidiaries. Included below are the statements of operations
with respect to the years ending December 31, 2000 and December 31, 1999 and the
nine-month period ending December 31, 1998, and the balance sheet data as of
December 31, 2000 and December 31, 1999. This data was derived from the
financial statements included in this Form 10-K and should be read in
conjunction with the financial statements and the related notes thereto as well
as "Management's Discussion and Analysis of Financial Condition and Results of
Operations", also included in this Form 10-K.
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NINE MONTHS
YEARS ENDED ENDED YEARS ENDED
--------------------- --------------------------------------------
DEC 31, DEC 31, DEC 31, MAR 31, MAR 31,
2000 1999 1998 1998 1997
---- ---- ---- ---- ----
(in thousands except per share data)
STATEMENT OF OPERATIONS DATA:
Net revenues $ 109,529 $ 116,525 $ 32,601 $ 36,804 $35,574
Cost of revenues 72,970 81,288 16,217 19,417 21,754
------------ ------------ ----------- ------------ ---------
Gross profit 36,559 35,237 16,384 17,387 13,820
Selling, general and administrative expenses 30,415 28,830 9,978 12,087 13,250
Depreciation and amortization 3,564 2,182 142 161 227
------------ ------------ ----------- ------------ ---------
Operating income 2,580 4,225 6,264 5,139 343
Other Income (expense) 790 90 149 (36) (253)
Interest expense 2,126 1,662 304 354 513
------------ ------------ ----------- ------------ --------
Income (loss) before provision (benefit) for income
taxes 1,244 2,653 6,109 4,749 (423)
Income tax provision (benefit) (78) 3,148 - - -
------------ ------------ ----------- ------------ ---------
Net income (loss) $ 1,322 $ (495) $ 6,109 $ 4,749 $ (423)
=========== =========== ========== =========== =========
Unaudited pro forma information (1)
Net income (loss) before income tax provision $ 2,653 $ 6,109 $ 4,749 $ (423)
Pro forma income tax provision (benefit) 1,411 2,253 1,751 (156)
------------ ----------- ------------ ---------
Pro forma net income (loss) $ 1,242 $ 3,856 $ 2,998 $ (267)
=========== ========== =========== =========
Actual/Pro forma net income (loss) per share - basic(2) $ 0.07 $ 0.08 $ 0.30 $ 0.24 $ (0.02)
======== ========= ======== ========== =========
Actual/Pro forma weighted average shares - basic (2) 18,185 15,361 12,659 12,659 12,659
======== ========= ======== ========== =========
Actual/Pro forma net income (loss) per share - diluted
(2) $ 0.07 $ 0.08 $ 0.30 $ 0.24 $ (0.02)
======== ========= ========= ========== =========
Actual/Pro forma weighted average shares - diluted (2) 18,303 15,367 12,659 12,659 12,659
======== ========= ======== ========== =========
DEC 31, DEC 31, DEC 31, MAR 31, MAR 31,
2000 1999 1998 1998 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA: (in thousands)
Working capital $ (2,182) $ (639) $ (2,214) $ 3,412 $ 1,319
Total assets 55,618 62,754 14,865 10,896 8,868
Current portion of long-term debt 1,211 2,192 685 675 656
Long-term debt net of current portion 11,849 16,009 311 828 937
Total stockholders' equity 12,240 10,886 (1,405) 3,142 935
==========================================================================================================================
(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) Net income (loss) per share is presented for all applicable periods in
accordance with the adoption of SFAS No. 128 Earnings per share.
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company provides merchandising services to manufacturers and
retailers principally in mass merchandiser, chain, discount drug and grocery
stores through its Merchandising Services Division. In addition, the SPAR
Group's Incentive Marketing Division designs and implements premium incentives,
manages group meetings and group travel principally for corporate clients. In
March 2000, the Company established its Internet Division to separately market
its software applications, products and services. Although such products and
services were in part available through the Company's other divisions prior to
the establishment of the Internet Division, the historical revenues and expenses
related to such software products and services generally were not maintained
separately. For 2000, the revenues for the Internet Division were not
significant and have been included below in the discussion of the condition and
results of the Incentive Marketing Division. In November 2000, the Company
established its International Division to expand its merchandise services
business offshore. There were no revenues for the International Division in
2000.
According to Generally Accepted Accounting Principles, upon an
acquisition, the acquired company's results of operations are not included in
the acquirer's results of operations prior to the date of acquisition. The SPAR
Marketing companies acquired substantially all of the assets of BIMA on January
15, 1999 (the "MCI Acquisition"). (see Notes 1 and 3 to the Financial
Statements). Under GAAP, the SPAR/PIA merger completed on July 8, 1999 was
deemed to be an acquisition of PIA by SPAR. (see Notes 1 and 3 to the Financial
Statements). Therefore, the following discussions include only the results of
SPGI subsequent to January 15, 1999 and the results of PIA subsequent to July 8,
1999.
-15-
RESULTS OF OPERATIONS
The following table sets forth selected financial data and data as a
percentage of net revenues for the periods indicated.
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------------------------------------------------
Amount % Amount % Amount %
------ - ------ - ------ -
Net revenues $ 109.5 100.0% $ 116.5 100.0% $ 32.6 100.0%
Cost of revenues 73.0 66.6 81.3 69.8 16.2 49.7
Selling, general &
administrative expenses 30.4 27.8 28.8 24.7 10.0 30.7
Depreciation & amortization 3.6 3.3 2.2 1.9 0.1 0.3
Other expenses 1.3 1.2 1.6 1.4 0.2 0.6
Income before income tax
provision 1.2 1.1 2.6 2.2 6.1 18.7
Provision for income taxes (.1) (.1) 3.1 2.7 - -
----- ----- ---------- ---------- --------- ---------
Net income (loss) $ 1.3 1.2% $ (0.5) (0.4)% $ 6.1 18.7%
========= ======== ========== ========= ========= =========
Unaudited pro forma
information:
Pro forma Income
before income tax provision $ 2.6 2.2% $ 6.1 18.7%
Pro forma provision for income
taxes 1.4 1.2 2.3 7.1
--- --- --- ---
Pro forma Net income $ 1.2 1.0% $ 3.8 11.6%
========== ======== ========= ========
-16-
TWELVE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO TWELVE MONTHS ENDED DECEMBER
- --------------------------------------------------------------------------------
31, 1999
- --------
NET REVENUES
The twelve months ended December 31, 2000 included a full year of PIA
and SPGI revenues. The twelve months ended December 31, 1999 included only PIA
and MCI revenues since their respective dates of acquisition.
The following table sets forth net revenues by division in dollars and
as a percentage of total net revenues for the periods indicated:
Year Ended Year Ended
December 31, 2000 December 31, 1999 Change
------------------------ ---------------------
(amounts in millions)
Amount % Amount % %
------ - ------ - -
Merchandising Services $ 81.4 74.4% $ 79.6 68.3% 2.3%
Incentive Marketing 28.1 25.6 36.9 31.7 (24.0)
-------- ------- -------- ---- ------
Net revenues $ 109.5 100.0% $ 116.5 100.0% (6.0)%
======== ======= ======== ========= ======
Net revenues for the twelve months ended December 31, 2000, decreased
by $7.0 million or 6.0% from the twelve months ended December 31, 1999, due
principally to a reduction in project revenue.
Merchandising Services net revenues for the twelve months ended
December 31, 2000, were $81.4 million, compared to $79.6 million for the twelve
months ended December 31, 1999, a 2.3% increase. The increase in net revenues is
primarily attributed to an increase in the former SPAR Companies merchandising
net revenue of approximately $2.5 million for the twelve months ended December
31, 2000 vs. the twelve months ended December 31, 1999. In addition, net
revenues for the twelve months ended December 31, 2000 included $23.4 million of
net revenues of the former PIA Companies' merchandising operations for the first
six months of 2000 with no comparable revenue in the first six months of 1999,
offset by discontinued PIA programs in 2000.
Incentive Marketing net revenues for the twelve months ended December
31, 2000 were $28.1 million, compared to $36.9 million for the twelve months
ended December 31, 1999, a 24.0% decrease. The decrease in net revenues is
primarily due to a decrease in project revenue principally from a single
customer.
-17-
COST OF REVENUES
The following table sets forth cost of revenues by division in dollars
and as a percentage of net revenues for the periods indicated:
Year Ended Year Ended
December 31, 2000 December 31, 1999 Change
------------------------ -----------------------
(amounts in millions)
Amount % Amount % %
------ - ------ - -
Merchandising Services $50.3 61.7% $ 50.5 63.4% (0.4)%
Incentive Marketing 22.7 81.0 30.8 83.5 (26.3)
----- ----- ------- ------- -------
Total cost of revenue $73.0 66.6% $ 81.3 69.8% (10.2)%
===== ===== ======= ======= =======
Cost of revenues in the Merchandising Services segment consists of
in-store labor (including travel expenses) and field management. Cost of
revenues in the Company's Incentive Marketing segment consists of direct labor,
independent contractor expenses, food, beverage, entertainment and travel costs.
Cost of revenues for the twelve months ended December 31, 2000, were $73.0
million or 66.6% of net revenues, compared to $81.3 million or 69.8% of net
revenues for the twelve months ended December 31, 1999.
Merchandising Services cost of revenues as a percentage of net revenues
decreased 1.7% to 61.7% for the twelve months ended December 31, 2000, compared
to 63.4% for the twelve months ended December 31, 1999. This decrease is
principally attributable to reduced labor costs due to efficiencies realized in
2000.
Incentive Marketing cost of revenues, as a percentage of net revenues
decreased 2.5% to 81.0% for the twelve months ended December 31, 2000, compared
to 83.5% for the twelve months ended December 31, 1999, primarily due to a more
favorable product mix in 2000.
OPERATING EXPENSES
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resources expenses, 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
December 31, 2000 December 31, 1999 Change
----------------------------------------------
(amounts in millions)
Amount % Amount % %
------ - ------ - -
Selling, general & administrative $ 30.4 27.8% $ 28.8 24.7% 5.5%
Depreciation and amortization 3.6 3.3 2.2 1.9 63.3
------ ----- ------ ----- ------
Total operating expenses $ 34.0 31.1% $ 31.0 26.6% 9.6%
====== ===== ====== ===== ======
Selling, general and administrative expenses increased by $1.6 million,
or 5.5%, for the twelve months ended December 31, 2000, to $30.4 million
compared to $28.8 million for the twelve months ended December 31, 1999. This
increase was primarily due to the inclusion of the PIA Companies' selling,
general and administrative expenses for the first six months of 2000 totaling
$5.9 million with no comparable PIA expenses in the first six months of 1999, as
well as Internet Division and International Division selling, general and
administration expenses
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in 2000 totaling $0.4 million offset by reductions in PIA selling, general and
administration expenses in 2000 and non recurring expenses totaling $1.4 million
in 1999.
Depreciation and amortization increased by $1.4 million for the twelve
months ended December 31, 2000, due primarily to the amortization of goodwill
associated with the purchases of the PIA Companies and the business and assets
of MCI, as well as, an increase in depreciation and amortization of customized
internal software costs capitalized (under SOP 98-1).
OTHER INCOME
In January 2000, the Company sold its investment in an affiliate for
approximately $1.5 million. The sale resulted in a gain of approximately $0.8
million, which is included in other income.
INTEREST EXPENSE
Interest expense increased $0.5 million for the twelve months ended
December 31, 2000, over the twelve months ended December 31, 1999, due to
increased debt associated with the PIA & MCI acquisitions, as well as increased
interest rates in 2000.
INCOME TAXES
Income taxes decreased to a benefit of $0.1 million for the twelve
months ended December 31, 2000, from an expense of $3.1 million for the twelve
months ended December 31, 1999. The decrease was primarily due to a one time
charge in 1999 totaling $3.1 million resulting from the termination of the
subchapter S status of certain of the SPAR companies for federal and state tax
purposes. The 2000 results also reflect the $0.8 million deferred tax benefit
that resulted from a change in the Company's valuation allowance. At December
31, 2000, the Company recognized that it is more likely than not that certain
future tax benefits will be realized through future income. In 2000, as a result
of restructure payments and post merger costs, the Company did not generate any
tax liability for federal income tax purposes. The $0.8 million change in
valuation allowance allocated to operations relates to net deferred tax assets
generated by SPAR Group operations. Management expects these net deferred tax
assets to be realized from the Company's taxable recurring operations in the
next three years.
ACTUAL/PRO FORMA NET INCOME
The SPAR Group had actual net income of approximately $1.3 million or
$0.07 per basic and diluted share for the twelve months ended December 31, 2000,
compared to pro forma net income of $1.2 million or $0.08 per pro forma basic
and diluted share for the twelve months ended December 31, 1999. The decrease in
net income per basic and diluted share is the result of the shares issued in
conjunction with the reverse merger on July 8, 1999 being outstanding for all of
2000.
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998
- ----
NET REVENUES
Net revenues for the twelve months ended December 31, 1999, increased by
$83.9 million or 257.4% from the nine months ended December 31, 1998, due
principally to the merger with the PIA Companies and the MCI Acquisition as well
as the inclusion of twelve months of SPAR's revenues in 1999. All of the net
revenues derived from the acquisition of the PIA Companies and the MCI
Acquisition since their respective dates of acquisition were included in the
twelve months ended December 31, 1999, with no comparable revenues in the nine
months ended December 31, 1998.
The following table sets forth net revenues by division in dollars and
as a percentage of total net revenues for the periods indicated:
-19-
Year Ended Nine Months Ended
December 31, 1999 December 31, 1998 Change
-----------------------------------------------
(amounts in millions)
Amount % Amount % %
------ - ------ - -
Merchandising Services $ 79.6 68.3% $ 32.6 100.0% 144.2%
Incentive Marketing 36.9 31.7 - - -
---- ---- ----- ----- -------
Net revenues $ 116.5 100.0% $ 32.6 100.0% 257.4%
======= ====== ======== ====== ======
Merchandising Services net revenues for the twelve months ended
December 31, 1999, were $79.6 million, compared to $32.6 million for the nine
months ended December 31, 1998, a 144.2% increase. The increase in net revenues
is primarily attributed to the inclusion of $38.0 million of net revenues of the
PIA Companies' merchandising operations since their acquisition, as well as the
inclusion of twelve months of SPAR's revenues in 1999. Subsequent to the PIA
merger, the Company determined certain PIA merchandising programs were expensive
to manage, required high fixed costs and did not provide maximum value to the
respective customers. Attempts to reduce the costs of these programs and satisfy
the customer were unsuccessful. Consequently, these programs no longer continued
in the year 2000. These programs represented approximately 29% of 1999
Merchandising Services' net revenues.
Incentive Marketing net revenues for the twelve months ended December
31, 1999, were $36.9 million, with no comparable net revenues for the nine
months ended December 31, 1998. The increase in net revenues is attributable
entirely to the inclusion of net revenues of SPGI since the MCI Acquisition.
COST OF REVENUES
Cost of revenues in the Merchandising Services segment consists of
in-store labor (including travel expenses) and field management. Cost of
revenues in the Company's Incentive Marketing segment consists of direct labor,
independent contractor expenses, food, beverage, entertainment and travel costs.
Cost of revenues for the twelve months ended December 31, 1999, were $81.3
million or 69.8% of net revenues, compared to $16.2 million or 49.7% of net
revenues for the nine months ended December 31, 1998.
The following table sets forth cost of revenues by segment in dollars and
as a percentage of segment net revenues for the periods indicated:
Year Ended December Nine Months Ended
31, 1999 December 31, 1998 Change
------------------------ -----------------------
(amounts in millions)
Amount % Amount % %
------ - ------ - -
Merchandising Services $ 50.5 63.4% $ 16.2 49.7% 211.7%
Incentive Marketing 30.8 83.5 - - -
---- ---- ----- ------ ------
Total cost of revenues $ 81.3 69.8% $ 16.2 49.7% 401.9%
======== ===== ======== ===== ======
Merchandising Services cost of revenues as a percentage of net revenues
increased 13.7% to 63.4% for the twelve months ended December 31, 1999, compared
to 49.7% for the nine months ended December 31, 1998. This increase is
principally attributable to the higher labor cost structure of the PIA
Companies' field organization.
Incentive Marketing cost of revenues as a percentage of net revenues
was 83.5 % for the twelve months ended December 31, 1999, with no comparable
cost of revenues for the nine months ended December 31, 1998.
-20-
OPERATING EXPENSES
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resources expenses and accounting expenses. The
following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
Year Ended Nine Months Ended
December 31, 1999 December 31, 1998 Change
-------------------------------------------------
(amounts in millions)
Amount % Amount % %
------ - ------ - -
Selling, general & administrative $ 28.8 24.7% $ 10.0 30.7% 188.0%
Depreciation and amortization 2.2 1.9 0.1 0.3 2100.0%
---------- -------- ---------- -------- ---------
Total operating expenses $ 31.0 26.6% $ 10.1 31.0% 206.9%
========== ========= ========== ========= ======
Selling, general and administrative expenses increased by 188.0% for
the twelve months ended December 31, 1999, to $28.8 million compared to $10.0
million for the nine months ended December 31, 1998. As a percentage of net
revenues, selling, general and administrative expenses decreased to 24.7% for
the twelve months ended December 31, 1999, from 30.7% for the nine months ended
December 31, 1998. This increase in dollars was due primarily to the inclusion
of both SPGI and the PIA Companies' higher overhead structure during 1999, a non
recurring expense of $0.8 million resulting from the grant of options and
issuance of stock to a consultant, the result of approximately $0.6 million of
non recurring merger related selling, general and administrative expenses, as
well as the inclusion of twelve months of SPAR's selling, general and
administrative expenses in 1999. The decrease in selling, general and
administrative expenses as percentage of net revenue reflects the results of the
partial implementation of the Company's restructuring plan during 1999, and the
increase in revenue resulting from the acquisitions of the PIA and SPGI
businesses. Through December 1999, operating initiatives reduced selling,
general and administrative expenses by approximately $0.9 million per month.
Depreciation and amortization increased by $2.1 million for the twelve
months ended December 31, 1999, due primarily to the amortization of goodwill
recognized by the purchases of the PIA Companies and the business and assets of
MCI, as well as from depreciation and amortization of customized internal
software costs capitalized (under SOP 98-1).
INTEREST EXPENSE
Interest expense increased $1.4 million for the twelve months ended
December 31, 1999, over the nine month period ended December 31, 1998, due to
increased borrowings on the bank revolving line of credit and term loan and MCI
seller financing.
INCOME TAXES
Income taxes increased to $3.1 million for the twelve months ended
December 31, 1999, from zero for the nine months ended December 31, 1998. The
increase was a result of the termination of the subchapter S status of certain
of the SPAR companies for federal and state tax purposes.
PRO FORMA INCOME TAXES
The pro forma income tax provisions for the twelve months ended
December 31, 1999, and nine months ended December 31, 1998, have been computed
using a combined federal and state income tax rate of 36.9% after adjusting for
the effects of non-tax deductible items.
PRO FORMA NET INCOME
The SPAR Group had pro forma net income of approximately $1.2 million
for the twelve months ended December 31, 1999, or $0.08 per pro forma basic and
diluted share compared to pro forma net income of $3.8
-21-
million or $0.30 per pro forma basic and diluted share for the nine months ended
December 31, 1998. The decrease in pro forma net income is primarily the result
of the inclusion of approximately $1.9 million in losses generated by the PIA
Companies and Incentive Marketing Division for the six and eleven and one half
months, respectively, ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
In the twelve months ended December 31, 2000, the SPAR Group had pre-tax
income of $1.2 million and experienced positive operating cash flow of $6.3
million.
The SPAR Group experienced a net decrease in cash and cash equivalents
of $2.1 million for the twelve months ended December 31, 2000 primarily due to
repayment of debt. Management believes that based upon SPAR Group's current
working capital position and the existing credit facilities, funding will be
sufficient to support ongoing operations over the next twelve months.
DEBT
In 1999, IBJ Whitehall and the members of the SPAR Group (other than
PIA Canada) (collectively, the "Borrowers") entered into a Revolving Credit,
Term Loan and Security Agreement as amended (the "Bank Loan Agreement"). The
Bank Loan Agreement provides the Borrowers with a $15 million Revolving Credit
facility and a $2.5 million term loan. The Revolving Credit facility allows the
Borrowers to borrow up to $15 million based upon a borrowing base formula as
defined in the Agreement (principally 85% of "eligible" accounts receivable).
The Bank Loan Agreement's revolving credit loans of $15.0 million are scheduled
to mature on September 21, 2002. The Term Loan amortizes in equal monthly
installments of $83,334. The revolving loans bear interest at IBJ Whitehall's
"Alternate Base Rate" plus one-half of one percent (0.50%) (a total of 10.0% per
annum at December 31, 2000), and the Term Loan bears interest at such "Alternate
Based Rate" plus three-quarters of one percent (0.75%) (a total of 10.25% per
annum at December 31, 2000). In addition, the Borrowers are required to make
mandatory prepayments in an amount equal to 25% of Excess Cash Flow, as defined
in the Bank Loan Agreement, for each fiscal year, to be applied first to the
Term Loan and then to the revolving credit loans (subject to the Borrowers'
ability to re-borrow revolving advances in accordance with the terms of the Bank
Loan Agreement). The facility is secured with the assets of the SPAR Group.
The Bank Loan Agreement contains an option for the Bank to purchase
16,667 shares of common stock of the Company for $0.01 per share in the event
that the Company's average closing share price over ten consecutive trading day
period exceeds $15.00 per share. This option expires September 22, 2002.
The Bank Loan Agreement contains certain financial covenants that must
be met by the Borrowers on a consolidated basis, among which are a minimum "Net
Worth", a "Fixed Charge Coverage Ratio", a minimum ratio of Debt to EBITDA, and
a minimum EBITDA, as such terms are defined in the Bank Loan Agreement.
The balance outstanding on the revolving line of credit was $7.8
million and $13.3 million at December 31, 2000, and 1999, respectively. As of
December 31, 2000, based upon the borrowing base formula, the SPAR Group had
availability of $4.2 million of the $7.2 million unused revolving line of
credit.
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CASH AND CASH EQUIVALENTS
Net cash provided by operating activities for the twelve months ended
December 31, 2000, was $6.3 million, compared with net cash used of $5.0 million
for the twelve months ended December 31, 1999. Cash provided by operating
activities in 2000 was primarily a result of operating profits, a decrease in
accounts receivable, and increased deferred revenue, offset by a decrease in
restructuring charges, an increase in prepaid expenses and a decrease in
accounts payable and other liabilities.
Net cash used in investing activities for the twelve months ended
December 31, 2000, was $0.5 million, compared with net cash provided of $5.0 for
the twelve months ended December 31, 1999. The net cash used in investing
activities resulted primarily from the purchases of property and equipment
partially offset by cash received from the sale of an investment.
Net cash used in financing activities for the twelve months ended
December 31, 2000, was $7.9 million, compared with net cash provided by
financing activities of $1.1 million for the twelve months ended December 31,
1999. The net cash used by financing activities was primarily due to repayments
of debt.
The above activity resulted in a net decrease in cash and cash
equivalents of $2.1 million for the twelve months ended December 31, 2000,
compared to a net increase of $1.2 million for the twelve months ended December
31, 1999.
At December 31, 2000, the Company had negative working capital of $2.2
million as compared to negative working capital of $0.6 million at December 31,
1999, availability under its revolving credit facility was $4.2 million at
December 31, 2000, compared to $0.7 million at December 31, 1999 and a current
ratio of 0.93 and 1.0 as of December 31, 2000 and 1999 respectively.
Cash and cash equivalents and the timely collection of its receivables
provide the SPAR Group's current liquidity. However, the potential of delays in
collection of receivables due from any of the SPAR Group's major clients, or a
significant reduction in business from such clients, or the inability to acquire
new clients, would have a material adverse effect on the SPAR Group's cash
resources and its ongoing ability to fund operations.
As of December 31, 2000, the SPAR Group is obligated, under certain
circumstances, to pay severance compensation to its employees and other costs in
connection with the Merger (restructure charges) of approximately $3.8 million.
In addition, the Company incurred substantial cost in connection with the
transaction, including legal, accounting and investment banking fees estimated
to be an aggregate unpaid obligation as of December 31, 2000 of approximately
$1.5 million. The SPAR Group has also accrued approximately $2.2 million for
expenses incurred by PIA prior to the Merger, which have not been paid as of
December 31, 2000. Management believes the current bank credit facilities are
sufficient to fund operations and working capital, including the current
maturities of debt obligations, but may not be sufficient to reduce obligations
of the Merger with PIA. The Company is currently working to secure additional
long-term capital to meet the non-operational credit needs. However, there can
be no assurances that the Company will be successful in these negotiations.
In 1999 and prior, certain former principal stockholders of the SPAR
Companies each made loans to certain SPAR Companies in the aggregate amount of
$4.3 million to facilitate the acquisition of the PIA Companies and the assets
of Old MCI. These stockholders were also owed $1.9 million in unpaid
distributions relating to the former status of certain of the operating SPAR
Companies as Subchapter S Corporations (see Note 12 to the Financial
Statements). Those amounts were converted into promissory notes issued to these
certain stockholders severally by SMF, SINC and SPGI prior to the Merger, which
aggregated $6.2 million. As of December 31, 2000, a total of $5.7 million
remained outstanding under these notes, of which approximately $3.5 million have
an interest rate of 8% and are due on demand. The long-term portion totaling
$2.2 million have a fluctuating interest rate equal to the sum of the prime rate
(as reported in The Wall Street Journal from time to time) plus 1%. The current
bank agreements contain certain restrictions on the repayment of stockholder
debt.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The SPAR Group is exposed to market risk related to the variable
interest rate on the line of credit and term note and the variable yield on its
cash and cash equivalents. The SPAR Group's accounting policies for financial
instruments and disclosures relating to financial instruments require that the
SPAR Group's consolidated balance sheets include the following financial
instruments: cash and cash equivalents, accounts receivable, accounts payable
and long term debt. The SPAR Group considers carrying amounts of current assets
and liabilities in the consolidated financial statements to approximate the fair
value for these financial instruments because of the relatively short period of
time between origination of the instruments and their expected realization. The
carrying amounts of long-term debt approximate fair value because the obligation
bears interest at a floating rate. The SPAR Group monitors the risks associated
with interest rates and financial instrument positions. The SPAR Group's
investment policy 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 SPAR Group's revenue derived from international
operations is not material and, therefore, the risk related to foreign currency
exchange rates is not material.
INVESTMENT PORTFOLIO
The SPAR Group has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments. The SPAR
Group invests its cash and cash equivalents in investments in high-quality and
highly liquid investments consisting of taxable money market instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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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, 2000, an executive officer and/or
director for SPAR.
NAME AGE POSITION WITH SPAR GROUP, INC.
Robert G. Brown. . . . . . . . . . 58 Chairman, Chief Executive Officer, President and Director
William H. Bartels . . . . . . . . 57 Vice Chairman and Director
Robert O. Aders(1)(2). . . . . . . 73 Director
Jack W. Partridge(1)(2)(3) . . . . . 55 Director
Charles Cimitile . . . . . . . . . 46 Chief Financial Officer and Secretary
James H. Ross. . . . . . . . . . . 67 Treasurer and Vice President
- --------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Mr. Partridge is appointed Director on January 29, 2001
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). Mr. Brown served as the
Chairman, President and Chief Executive Officer 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).
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 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 FMI, the Stedman Nutrition Foundation at Duke
Medical Center, Coinstar, Inc., The Source Information Management Company and
Telepanel Systems, Inc.
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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 and as Group Vice President-Corporate affairs and a member of the
Senior Executive Committee of The Kroger Company. Mr. Partridge has been a
leader in industry and community affairs for over two decades. He 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.
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.
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 SPAR
Common Stock (collectively, "Insiders"), to file reports of ownership and
changes in their ownership of SPAR Common Stock with the Commission. Insiders
are required by Commission regulations to furnish SPAR with copies of all
Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, SPAR believes that its Insiders complied with all
applicable Section 16(a) filing requirements for fiscal 2000, with the exception
of Mr. William H. Bartels who purchased 10,000 shares of the Company's stock on
December 8, 2000 but failed to file the requisite Form 4 on a timely basis.
-26-
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 SPAR in all capacities for the years ended December 31, 2000,
December 31, 1999 and December 31, 1998.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------- -----------------------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY ($) BONUS ($) OPTIONS (#) ($)(1)
- ---------------------------- ---- ---------- --------- ---------- -------------
Robert G. Brown 2000 16,800 -- -- --
Chief Executive Officer, Chairman of 1999 7,500 -- 765,972 --
the Board, President, and Director 1998 125,000 -- -- 791
William H. Bartels 2000 16,800 -- -- --
Vice Chairman and Director 1999 16,307 -- 471,992 --
1998 75,000 -- -- 1,439
Charles Cimitile 2000 188,000 -- 25,000 --
Chief Financial Officer 1999 17,090 -- 75,000 --
James H. Ross 2000 94,800 9,000 5,000 3,337
Treasurer and Vice President 1999 99,237 12,408 92,665 2,187
1998 80,535 1,710 -- 1,897
------------------------
(1) Other compensation represents the Company's 401k contribution.
-27-
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, 2000, to each of the Named
Executive Officers. No stock appreciation rights ("SAR's") were granted during
such period to such persons.
INDIVIDUAL GRANTS
------------------------------------------------------
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS EXERCISE ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO PRICE EXPIRATION STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES IN ($/SH) DATE FOR OPTION(2)
GRANTED (#) PERIOD (%) -----------------------------
5% ($) 10% ($)
------------ ------------- ------------ ------------ -------------- -------------
Charles Cimitile 25,000(1) 5.2 .625 12/04/10 14,544 22,106
James H. Ross 5,000(1) 1.0 .625 12/04/10 2,909 4,421
- ------------
(1) All such options vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
(2) The potential realizable value is calculated based upon the term of the
option (ten years) at its time of grant. It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option.
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth the number and value of the exercisable
and unexercisable options held by each of the Named Executive Officers at
December 31, 2000.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END (#) FISCAL YEAR-END ($)
---------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- ---------------- ------------- ----------------
Robert G. Brown 95,747 670,225 - -
William H. Bartels 58,999 412,993 - -
Charles Cimitile 18,750 81,250 - 20,313
James H. Ross (1) 10,000 35,000 - 4,063
- ------------
(1) James H. Ross exercised 52,665 options during 2000.
COMPENSATION PLANS
The Company has five stock option plans: the 1990 Stock Option Plan
("1990 Plan"), the Amended and Restated 1995 Stock Option Plan ("1995 Plan") and
the 1995 Director's Plan ("Director's Plan"), the Special Purpose Stock Option
Plan and the 2000 Stock Option Plan ("2000 Plan").
The 1990 plan is a nonqualified option plan providing for the issuance
of up to 830,558 shares of common stock to officers, directors and key
employees. The options have a term of ten years and one week and are either
fully vested or will vest ratably no later than five years from the grant date.
Since 1995, the Company has not granted options under this plan.
-28-
The 1995 Plan provides for the granting of either incentive or
nonqualified stock options to specified employees, consultants and directors of
SPAR Group, Inc. for the purchase of up to 3,500,000 shares of SPAR's common
stock. The options have a term of ten years, except in the case of incentive
stock options granted to greater than 10% stockholders for which the term is
five years. The exercise price of nonqualified stock options must be equal to at
least 85% of the fair market value of SPAR's common stock at the date of grant,
the exercise price of incentive stock options must be equal to at least the fair
market value of SPAR's common stock at the date of grant. At December 31, 2000,
options to purchase 683,523 shares were available for grant under this plan.
The Director's Plan is a stock option plan for non-employee directors
and provides for the purchase of up to 100,000 shares of SPAR's common stock. An
option to purchase 1,500 shares of SPAR's common stock shall be granted
automatically each year to each director, following SPAR's annual stockholder's
meeting. The exercise price of options issued under this plan shall not be less
than the fair market value of SPAR's common stock on the date of grant. Each
option under this plan shall vest and become exercisable in full on the first
anniversary of its grant date, provided the optionee is reelected as a director
of SPAR. The maximum term of options granted under the plan is ten years and one
day, subject to earlier termination following an optionee's cessation of service
with SPAR. At December 31, 2000, options to purchase 91,000 shares were
available for grant under this plan.
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. During 2000, 108,364 options were exercised. At December 31,
2000, 25,750 options remain outstanding under the Plan. The Company did not
issue any new options under this plan in 2000.
In December of 2000, the Company adopted the 2000 Plan, as the
successor to the 1995 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 SPAR Group, Inc. for the
purchase of up to 3,500,000 (less those options still outstanding or previously
exercised 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
which the term is five years. The exercise price of nonqualified stock options
must be equal to at least 85% of the fair market value of SPAR's common stock at
the date of grant (although typically are issued at 100%), and the exercise
price of incentive stock options must be equal to at least the fair market value
of SPAR's common stock at the date of grant. In December 2000, options to
purchase (118,500) shares were granted. At December 31, 2000, 565,023 options to
purchase shares were available for grant under this plan.
In January 2001, options under the 1995 Plan to purchase 2,349,825
shares of the Company's common stock were voluntarily surrendered and cancelled
by 117 employees of and consultants to the Company. The cancelled options will
be available for future grant. The Company expects to grant similar quantities
of options at some future date(s) under the 2000 Plan.
COMPENSATION OF DIRECTORS
During the year ended December 31, 2000, SPAR paid $12,000 to Mr. Aders
for services as a member of the SPAR Board. Mr. Aders was also reimbursed for
certain expenses in connection with his attendance at SPAR Board and committee
meetings. During 2000, Mr. Aders was granted an option to purchase 1,500 shares
of SPAR's common stock at an exercise price of $1.2188 per share. The options
vest ratably over a four-year period. Compensation for each outside director
consists of $3,000 per meeting they attend, up to four meetings per year, and an
additional $500 per meeting for special meetings, including telephonic meetings.
All travel related expenses for these meetings will also be reimbursed.
SPAR 's Compensation Committee administers the Directors Plan. Each
member of the SPAR Board who is not otherwise an employee or officer of SPAR or
any subsidiary of SPAR (each, an "Eligible Director") is eligible to participate
in the Directors Plan. Directors who are consultants of, but not otherwise
employees or officers of, SPAR are Eligible Directors.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee was at any time during the year
ended December 31, 2000 or at any other time an officer or employee of SPAR. No
executive officer of SPAR serves as a member of the SPAR Board or Compensation
Committee of any other entity, which has one or more executive officers serving
as a member of the SPAR Board or Compensation Committee.
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 WITH RESPECT TO THE
BENEFICIAL OWNERSHIP OF SPAR GROUP, INC. COMMON STOCK OUTSTANDING AS OF DECEMBER
31, 2000 BY: (I) EACH PERSON WHO BENEFICIALLY OWNED FIVE PERCENT OR MORE OF THE
OUTSTANDING SHARES OF SPAR GROUP, INC. COMMON STOCK, (II) EACH PERSON WHO WAS A
DIRECTOR OF SPAR GROUP, INC. AND (III) EACH PERSON WHO WAS AN EXECUTIVE OFFICER
OF THE SPAR GROUP, INC.
NUMBER OF SHARES
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE
------------------- --------------
Common Shares Robert G. Brown(1) 7,592,145(2) 39.3%
Common Shares William H. Bartels(1) 4,936,188(3) 25.6%
Common Shares James H. Ross(1) 93,865(4) *
Common Shares Charles Cimitile(1) 18,750(5) *
Common Shares Robert Aders(1) 14,500(6) *
Common Shares Richard J. Riordan(7) 1,209,922 6.3%
300 S. Grand Avenue, Suite 2900
Los Angeles, CA 90071
Common Shares Heartland Advisors, Inc.(8) 1,568,100 8.1%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Common Shares Executive Officers and Directors 12,655,448 65.6%
* Less than 1%
(1) The address of such owners is c/o SPAR Group, Inc. 580 White Plains Road,
Tarrytown, New York.
(2) Includes 1,813,000 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 is a trustee, and includes 95,747
shares issuable upon exercise of options.
(3) Includes 58,999 shares issuable upon exercise of options.
(4) Includes 10,000 shares issuable upon exercise of options.
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(5) Includes 18,750 shares issuable upon exercise of options.
(6) Includes 2,500 shares issuable upon exercise of options.
(7) All information regarding share ownership is taken from and furnished in
reliance upon the Schedule 13G, filed by Richard J. Riordan with the
Securities and Exchange Commission on February 14, 2000.
(8) All information regarding share ownership is taken from and furnished in
reliance upon the Schedule 13G (Amendment No. 7), filed by Heartland
Advisors, Inc. with the Securities and Exchange Commission on January 30,
2001.
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, 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 companies.
SMS and SMSI (through SMS) provided field representative (through its
independent contractor field force) and field management services to the Company
at a total cost of $4.8 million for the nine months ended December 31, 1998,
$8.5 and $9.6 million for the twelve months ended December 31, 1999 and 2000
respectively. Under the terms of the Field Service Agreement, SMS will continue
to provide the services of approximately 2,900 field representatives and through
SMSI will provide 35 regional and district managers to the SPAR Marketing
Companies as they may request from time to time, for which SPAR has agreed to
pay SMS for all of its costs of providing those services plus 4%. However, SMS
may not charge any SPAR Company for any past taxes or associated costs for which
the SAI Principals have agreed to indemnify the SPAR Companies.
SIT provided computer programming services to the Company at a total
cost of $0 for the nine months ended December 31, 1998, $608,000 and $769,000
for the twelve months ended December 31, 1999 and 2000 respectively. Under the
terms of the programming agreement between SMF and SIT effective as of October
1, 1998 (the "Programming Agreement"), SIT continues to provide programming
services to SMF as SMF may request from time to time, for which SMF has agreed
to pay SIT competitive hourly wage rates and to reimburse SIT's out-of-pocket
expenses (see Note 10 to the Financial Statements).
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, STM, SMS and SIT entered into trademark licensing
agreements whereby STM has granted non-exclusive royalty-free licenses to SIT
and SMS for their continued use of the name "SPAR" and certain other trademarks
and related rights transferred to STM in connection with the Merger.
In the event of any material dispute in the business relationships
between SPAR, SMS, SMSI, or SIT, it is possible that Messrs. Brown and Bartels
may have one or more conflicts of interest with respect to these relationships
and dispute that could have a material adverse effect on SPAR Group, Inc. (see
Note 10 to the Financial Statements).
-31-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. INDEX TO FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT:
Independent Auditors' Report. F-1
Consolidated Balance Sheets as of December 31, 2000 and
December 31, 1999. F-2
Consolidated and Combined Statements of Operations for the years
ended December 31, 2000 and December 31, 1999 and for the nine-month
period ended December 31, 1998. F-3
Consolidated and Combined Statements of Stockholders' Equity for the years ended
December 31, 2000 and December 31, 1999 and for the nine-month period
ended December 31, 1998. F-4
Consolidated and Combined Statements of Cash Flows for the years
ended December 31, 2000 and December 31, 1999 and for the nine-month
period ended December 31, 1998. F-5
Notes to Financial Statements. F-6
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2000 and December 31, 1999 and for the nine-month period ended
December 31, 1998. F-42
3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc., as
amended. (incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No.
33-80429) as filed with the Securities and Exchange
Commission on December 14, 1995 (the "Form S-1") and to
Exhibit 3.1 to the Company's Form 10-Q for the 3rd
Quarter ended September 30, 1999).
3.2 By-laws of PIA (incorporated by reference to the Form
S-1).
4.1 Registration Rights Agreement entered into as of January
21, 1992 by and between RVM Holding Corporation.
RVM/PIA, a California Limited Partnership, The Riordan
Foundation and Creditanstalt-Bankverine (incorporated by
reference to the Form S-1).
10.1 1990 Stock Option Plan (incorporated by reference to the
Form S-1).
10.2 Amended and Restated 1995 Stock Option Plan
(incorporated by reference of Exhibit 10.2 to the
Company's Form 10-Q for the 2nd Quarter ended July 3,
1998).
10.3 1995 Stock Option Plan for Non-employee Directors
(incorporated by reference to the Form S-1).
10.4+* Employment Agreement dated as of June 25, 1997 between
PIA and Terry R. Peets (incorporated by reference to
Exhibit 10.5 to the Company's Form 10-Q for the 2nd
-32-
Quarter ended June 30, 1997)
10.5+* Severance Agreement dated as of February 20, 1998
between PIA and Cathy L. Wood (incorporated by reference
to Exhibit 10.5 to the Company's Form 10-Q for the 1st
Quarter ended April 30, 1998)
10.6* Severance Agreement dated as of August 10, 1998 between
PIA and Clinton E. Owens (incorporated by reference to
Exhibit 10.6 to the Company's Form 10-Q for the 3rd
Quarter ended October 2, 1998)
10.7+* Amendment No. 1 to Employment Agreement dated as of
October 1, 1998 between PIA and Terry R. Peets.
10.8+* Amended and Restated Severance Compensation Agreement
dated as of October 1, 1998 between PIA and Cathy L.
Wood.
10.9+ Loan and Security Agreement dated December 7, 1998 among
Mellon Bank, N.A., PIA Merchandising Co., Inc., Pacific
Indoor Display Co. and PIA.
10.10+ Agreement and Plan of Merger dated as of February 28,
1999 among PIA, SG Acquisition, Inc., PIA Merchandising
Co., Inc., SPAR Acquisition, Inc., SPAR Marketing, Inc.,
SPAR Marketing Force, Inc., SPAR, Inc., SPAR/Burgoyne
Retail Services, Inc., SPAR Incentive Marketing, Inc.,
SPAR MCI Performance Group, Inc. and SPAR Trademarks,
Inc.
10.11+ Voting Agreement dated as of February 28, 1999 among
PIA, Clinton E. Owens, RVM/PIA, California limited
partnership, Robert G. Brown and William H. Bartels.
10.12* Amendment No. 2 to Employment Agreement dated as of
February 11, 1999 between PIA and Terry R. Peets
(incorporated by reference to Exhibit 10.12 to the
Company's Form 10-Q for the 2nd Quarter ended April 2,
1999).
10.13 Special Purpose Stock Option Plan (incorporated by
reference to Exhibit 10.13 of the Company's Form 10-Q
for the 2nd Quarter ended July 2, 1999.
10.14 Amendment No. 1 to Severance Agreement dated as of May
18, 1999 between the Company and Cathy L. Wood
(incorporated by reference to Exhibit 10.14 of the
Company's Form 10-Q for the 3rd Quarter ended September
30, 1999).
10.15++ Second Amended and Restated Revolving Credit, Term Loan
and Security Agreement by and among IBJ Whitehall
Business Credit Corporation with SPAR Marketing Force,
Inc., SPAR Group, Inc., SPAR, Inc., SPAR/Burgoyne Retail
Services, Inc., SPAR Incentive Marketing, Inc., SPAR
Trademarks, Inc., SPAR MCI Performance Group, Inc., SPAR
Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., PIA Merchandising, Co., Inc., Pacific
Indoor Display Co., Inc., and Pivotal Sales Company
dated as of September 22, 1999.
10.16++ Waiver and Amendment No. 1 ("Amendment") is entered into
as of December 8, 1999, by and between SPAR Marketing
Force, Inc., SPAR, Inc., SPAR/Burgoyne Retail Services,
Inc., SPAR Group, Inc., SPAR Incentive Marketing, Inc.,
SPAR Trademarks, Inc., SPAR Performance Group, Inc.
(f/k/a SPAR MCI Performance Group, Inc.), SPAR
Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., PIA Merchandising Co., Inc., Pacific
Indoor Display Co., Inc. and Pivotal Sales Company (each
a "Borrower" and collectively, the "Borrowers") and IBJ
Whitehall Business Credit Corporation ("Lender").
10.17** Service Agreement dated as of January 4, 1999 by and
between SPAR Marketing Force, Inc. and SPAR Marketing
Services, Inc.
10.18** Business Manager Agreement dated as of July 8, 1999 by
and between SPAR Marketing Force, Inc. and SPAR
Marketing Services, Inc.
-33-
21.1++ Subsidiaries of the Company
23.1++ Consent of Ernst & Young LLP
+ Previously filed with initial Form 10-K for the fiscal year
ended January 1, 1999. ++ Filed with Form 10-K for the
fiscal year ended December 31, 1999. * Management contract
or compensatory plan or arrangement required to be filed as
an exhibit pursuant to applicable rules of the Securities
and Exchange Commission.
** Filed with Form 10-K/A (Amendment No. 1) for the fiscal
year ended December 31, 1999
(B) REPORTS ON FORM 8-K.
Form 8-K dated July 8, 1999 and filed with the Commission on July 23,
1999.
Form 8-K/A dated July 8, 1999 and filed with the Commission on September
20, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to the
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPAR GROUP, INC.
By:/s/ Robert G. Brown
--------------------------------------------------------------
Robert G. Brown
President, Chief Executive Officer and Chairman of the
Board
Date: April 11, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amendment to the report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Robert G. Brown President, Chief Executive Officer and Chairman of the Board
- -----------------------------
Robert G. Brown
/s/ William H. Bartels Vice Chairman, Senior Vice President and Director
- -----------------------------
William H. Bartels
/s/ James H. Ross Vice President and Treasurer
- -----------------------------
James H. Ross
/s/ Robert O. Aders Director
- -----------------------------
Robert O. Aders
/s/ Charles Cimitile Chief Financial Officer
- -----------------------------and Secretary (Principal Financial and Accounting Officer)
Charles Cimitile
-34-
FINANCIAL STATEMENTS
SPAR Group, Inc.
Years ended December 31, 2000 and 1999 and
Nine-Month Period ended December 31, 1998
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Stockholders of
SPAR Group, Inc.
We have audited the consolidated balance sheets of SPAR Group, Inc. as of
December 31, 2000 and 1999 and the related consolidated or combined statements
of operations, stockholders' equity and cash flows for the years ended December
31, 2000 and 1999 and the nine months ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated and combined financial statements referred to
above present fairly, in all material respects, the financial position of SPAR
Group, Inc. at December 31, 2000 and 1999, and the results of its operations and
its cash flows for the years ended December 31, 2000 and 1999, and the nine
months ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the consolidated
and combined financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 2, 2001
F-1
SPAR Group, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
DECEMBER 31
2000 1999
---------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ 2,074
Accounts receivable, net 23,207 28,525
Prepaid expenses and other current assets 880 1,134
Prepaid program costs 3,542 2,777
Deferred income taxes 1,718 -
Investment in affiliate - 710
---------------------------------
Total current assets 29,347 35,220
Property and equipment, net 3,561 3,459
Goodwill and other intangibles, net 21,485 23,767
Deferred income taxes 1,082 -
Other assets 143 308
---------------------------------
Total assets $55,618 $62,754
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Line of credit and notes payable $ - $ 857
Accounts payable 5,849 7,419
Accrued expenses and other current liabilities 10,178 10,132
Deferred revenue 8,581 6,341
Restructuring and other charges, current 2,205 5,071
Due to certain stockholders 3,505 3,847
Note payable to MCI - 1,045
Current portion of long-term debt 1,211 1,147
---------------------------------
Total current liabilities 31,529 35,859
Line of credit and long-term liabilities, net of current portion 8,093 14,009
Long-term debt due to certain stockholders 2,160 2,000
Restructuring and other charges, long term 1,596 -
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 - 18,272,330--2000; 18,154,666--1999 182 182
Additional paid-in capital 10,127 10,095
Retained earnings 1,931 609
---------------------------------
Total stockholders' equity 12,240 10,886
---------------------------------
Total liabilities and stockholders' equity $55,618 $62,754
=================================
See accompanying notes.
F-2
SPAR Group, Inc.
Consolidated and Combined Statements of Operations
(In thousands, except per share data)
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31,
2000 1999 1998
-------------------------------------------------
Net revenues $109,529 $116,525 $32,601
Cost of revenues 72,970 81,288 16,217
-------------------------------------------------
Gross profit 36,559 35,237 16,384
Selling, general and administrative expenses 30,415 28,830 9,978
Depreciation and amortization 3,564 2,182 142
-------------------------------------------------
Operating income 2,580 4,225 6,264
Other income 790 90 149
Interest expense (2,126) (1,662) (304)
-------------------------------------------------
Income before provision for income taxes 1,244 2,653 6,109
Provision for income taxes (78) 48 -
Nonrecurring income tax charge for termination of Subchapter
S elections - 3,100 -
-------------------------------------------------
Net income (loss) $ 1,322 $ (495) $ 6,109
=================================================
Unaudited pro forma information:
Pro forma income before income tax provision $ 2,653 $ 6,109
Pro forma income tax provision 1,411 2,253
---------------------------------
Pro forma net income $ 1,242 $ 3,856
=================================
Actual/pro forma basic earnings per share $0.07 $0.08 $0.30
=================================================
Actual/pro forma basic weighted average common shares 18,185 15,361 12,659
=================================================
Actual/pro forma diluted earnings per share $0.07 $0.08 $0.30
=================================================
Actual/pro forma diluted weighted average common shares 18,303 15,367 12,659
=================================================
See accompanying notes.
F-3
SPAR Group, Inc.
Consolidated and Combined Statement of Stockholders' Equity
(In thousands)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
----------------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
--------------------------------------------------------------------------
Balance at March 31, 1998 $ 3,142
Net income 6,109
Net distributions to stockholders (10,656)
----------------
Balance at December 31, 1998 (1,405)
Net income through July 8, 1999 1,996
Net distributions to stockholders (332)
Stock option compensation 752
Deferred tax provision - termination of
Subchapter S election (3,100)
----------------
Balance at July 8, 1999 $ (2,089)
================
Reorganization prior to reverse merger with PIA 12,659 $127 $ (2,216) $ - $ (2,089)
Reverse merger with PIA 5,494 55 12,307 - 12,362
Issuance of common stock 2 - 4 - 4
Net income July 9, 1999 to December 31, 1999 - - - 609 609
--------------------------------------------------------------------------
Balance at December 31, 1999 18,155 182 10,095 609 10,886
Exercise of stock options 117 - 32 - 32
Net income - - - 1,322 1,322
--------------------------------------------------------------------------
Balance at December 31, 2000 18,272 $182 $10,127 $1,931 $12,240
==========================================================================
See accompanying notes.
F-4
SPAR Group, Inc.
Consolidated and Combined Statements of Cash Flows
(In thousands)
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31,
2000 1999 1998
-------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $1,322 $ (495) $6,109
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,839 881 131
Amortization 1,725 1,301 11
Provision for doubtful accounts and others, net 612 845 -
Equity in earnings of affiliate - (91) -
Gain on sale of affiliate (790) - -
Taxes on termination of Subchapter S corporation - 3,100 -
election
Stock related compensation - 752 -
Changes in operating assets and liabilities:
Accounts receivable 4,706 (5,342) (2,578)
Prepaid expenses and other current assets (346) 36 (371)
Accounts payable and other liabilities (2,209) (3,294) 2,017
Due to affiliates - - (57)
Restructuring and other charges (2,766) - -
Deferred revenue 2,240 (2,666) -
-------------------------------------------------
Net cash provided by (used in) operating activities 6,333 (4,973) 5,262
INVESTING ACTIVITIES
Purchases of property and equipment (1,941) (2,105) (731)
Purchase of businesses, net of cash acquired (62) 7,109 -
Sale of investment in affiliate 1,500 - -
-------------------------------------------------
Net cash (used in) provided by investing activities (503) 5,004 (731)
FINANCING ACTIVITIES
Net (payments on) proceeds from line of credit (5,596) 9,207 1,748
Proceeds from term loan - 3,000 -
Payments on long-term debt (1,113) (1,254) (225)
Net payments of long-term debt due to Spar Marketing
Services, Inc. - (685) (281)
Net (payments to) proceeds from certain stockholders (182) 3,500 (1,500)
Payments of note payable, MCI (1,045) (9,577) -
Distributions to certain stockholders - (3,062) (5,282)
Proceeds from issuance of common stock 32 4 -
-------------------------------------------------
Net cash (used in) provided by financing activities (7,904) 1,133 (5,540)
-------------------------------------------------
Net (decrease) increase in cash (2,074) 1,164 (1,009)
Cash at beginning of period 2,074 910 1,919
-------------------------------------------------
Cash at end of period $ - $2,074 $ 910
=================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 1,394 $ 892 $ 300
=================================================
Non-cash transactions:
Distributions payable to certain stockholders $ - $1,332 $6,577
=================================================
Equipment purchased with capital leases $ - $ 518 $ -
=================================================
See accompanying notes.
F-5
SPAR Group, Inc.
Notes to Financial Statements
December 31, 2000
1. BUSINESS AND ORGANIZATION
The SPAR Group, Inc., a Delaware corporation formerly known as PIA Merchandising
Services, Inc. ("SPAR Group" or the "Company"), is a supplier of in-store
merchandising and marketing services, and premium incentive marketing services
throughout the United States and Canada. The Company also provides database
marketing, teleservices, marketing research and Internet-based software. The
Company's operations are divided into four divisions: the Merchandising Services
Division, the Incentive Marketing Division, the Internet Division and the
International Division. The Merchandising Services Division provides
merchandising services, database marketing, teleservices and marketing research
to manufacturers and retailers primarily in the mass merchandiser, video, chain,
discount drug store and grocery industries. The Incentive Marketing Division
designs and implements premium incentives, manages meetings, group travel and
training programs principally for corporate clients. In March 2000, the Company
established its Internet Division for the purpose of marketing its proprietary
Internet-based computer software. In November 2000, the Company established its
International Division to focus on expanding its merchandise services business
worldwide.
MERCHANDISING SERVICES DIVISION
The Company's Merchandising Services Division consists of (1) SPAR Marketing,
Inc. ("SMI") (an intermediate holding company), Spar Marketing Force, Inc.
("SMF"), SPAR Marketing, Inc., a Nevada corporation ("SMNEV"), SPAR/Burgoyne
Retail Services, Inc. ("SBRS"), and SPAR, Inc. ("SINC") (collectively, the "SPAR
Marketing Companies") and (2) PIA Merchandising, Co., Inc., Pacific Indoor
Display d/b/a Retail Resources, Pivotal Sales Company and PIA Merchandising Ltd.
(collectively, "PIA" or the "PIA Companies"). The SPAR Marketing Companies, the
original predecessor of which was founded in 1967, provides nationwide retail
merchandising and marketing services to home video, consumer goods and food
products companies. The PIA Companies, through a predecessor of the Company
first organized in 1943, also is a supplier of in-store merchandising and sales
services throughout the United States and Canada, and was "acquired" by the SPAR
Marketing Companies for accounting purposes pursuant to the Merger on July 8,
1999 (see Note 3, Business Combinations - PIA Reverse Merger, below). The PIA
Companies provides these services primarily on behalf of consumer product
manufacturers and retailers at mass merchandisers, drug chains and retail
grocery chains.
F-6
SPAR Group, Inc.
Notes to Financial Statements (continued)
1. BUSINESS AND ORGANIZATION (CONTINUED)
The Company currently operates in all 50 states and Canada and provides a broad
range of in-store merchandising and other marketing services to many of the
nation's leading companies.
Merchandising services generally consist of special projects or regularly
scheduled routed services provided at the store level for a specific retailer or
multiple manufacturers primarily under multiple-year contracts. Services also
include stand-alone large-scale implementations. These services may include
activities such as ensuring that client products authorized for distribution are
in stock and on the shelf, adding new products that are approved for
distribution but not presently on the shelf, setting category shelves in
accordance with approved store schematics, ensuring that shelf tags are in
place, checking for the overall salability of client products and selling new
and promotional items. Specific in-store services can be initiated by retailers
and manufacturers, such as new product launches, special seasonal or promotional
merchandising, focused product support and product recalls. These services are
used typically for large-scale implementations requiring over 30 days to
complete. The Company also provides database marketing, teleservices and
research services.
INCENTIVE MARKETING DIVISION
The Company's Incentive Marketing Division was created in January 1999 through
the Company's purchase of the business and substantially all of the assets of
BIMA Group, Inc., a Texas corporation ("BIMA" or "MCI") originally founded in
1987 and formerly known as MCI Performance Group, Inc. (see Note 3). The
purchase was made by the Company's indirect subsidiary, SPAR Performance Group,
Inc., formerly known as SPAR MCI Performance Group, Inc. ("SPGI"). SPGI provides
a wide variety of consulting, creative, program administration, travel and
merchandise fulfillment, and training services to companies seeking to retain
and motivate employees, salespeople, dealers, distributors, retailers and
consumers toward certain actions or objectives. SPGI's strategy enables
companies to outsource the entire design, implementation and fulfillment of
incentive programs in a one-stop, "umbrella" shopping approach. SPGI typically
consults with a client to design the most effective plan to achieve the client's
goals. SPGI then provides services necessary to implement the program, generates
detailed efficiency progress reports and reports on the return on investment
upon completion of the program.
F-7
SPAR Group, Inc.
Notes to Financial Statements (continued)
1. BUSINESS AND ORGANIZATION (CONTINUED)
INTERNET DIVISION
In March 2000, the Company established its Internet Division, SPARinc.com, Inc.,
to separately market its proprietary application software products and services.
The Company has developed and is utilizing several Internet-based software
products. The Internet Division was established to market these applications to
businesses with multiple locations and large workforces desiring to improve
day-to-day efficiency and overall productivity.
INTERNATIONAL DIVISION
In November 2000, the Company established its International Division, SPAR Group
International, Inc., to focus on expanding its merchandising services business
world wide.
See Note 13 for further descriptions of the Company's services and operating
segments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE OF FISCAL YEAR-END
Effective April 1, 1998, the SPAR Group, Inc. changed its year-end for financial
statement purposes to a calendar year.
BASIS OF PRESENTATION
CONSOLIDATION/COMBINATION
Through July 8, 1999, the combined financial statements include operating
companies owned by the same two stockholders (the "SPAR Companies"). On July 8,
1999, the SPAR Companies reorganized and completed a "reverse" merger with the
PIA Companies (see Note 3). From July 8, 1999, the consolidated financial
statements include the accounts of the SPAR Group, Inc. and its wholly-owned
subsidiaries.
F-8
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 based on a fixed monthly fee for a service period of
typically one year. The Company's per unit contracts provide for fees to be
earned based on the retail sales of client's products to consumers. The Company
recognizes per unit fees in the period such amounts become determinable.
The Company also performs services on a specific project basis over a specified
period ranging from one to twelve months. Revenues related to these projects are
recognized on a percentage of completion method as services are performed or
costs are incurred. Provisions for estimated losses on uncompleted contracts are
recorded in the period in which such losses are determinable.
The Company also performs project-based services, and the resultant revenues are
recognized upon the completion of the project.
UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent merchandising services performed that are
pending billing until the requisite documents have been processed or projects
have been completed.
F-9
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AGENCY FUNDS
Cash balances available for the administration of a customer's bonus program are
deposited in accounts with financial institutions in which the Company acts as
agent for a client pending payment settlement. Balances will fluctuate based
upon the receipt of funds from the client. These funds are considered neither an
asset nor liability of the Company. The balance of funds held in agency accounts
totaled approximately $691,155 and $11,000 as of December 31, 2000 and 1999,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation and amortization are calculated on a straight-line basis over
estimated useful lives of the related assets, which range from three to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or lease term, using the straight-line method.
OTHER ASSETS
Other assets consist primarily of refundable deposits.
DEFERRED REVENUE
Client payments received in advance of merchandising services performed are
classified as deferred revenue.
F-10
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the recoverability of long-lived assets, whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable and the undiscounted cash flows estimated to be generated by those
total assets are less than the assets' carrying amount, in accordance with
criteria established by Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets. A loss is recognized for the
difference between the carrying amount and the estimated fair value of the
asset. The Company made no adjustment to the carrying values of the assets
during the years ended December 31, 2000 and 1999 and the nine months ended
December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and long-term debt.
The Company considers carrying amounts of current assets and liabilities in the
financial statements to approximate the fair value for these financial
instruments because of the relatively short period of time between origination
of the instruments and their expected realization. The carrying amounts of
long-term debt approximate fair value because the obligation bears interest at a
variable rate. The carrying amount of notes payable approximates fair value
since the current effective rates reflect the market rate for debt with similar
terms and remaining maturities.
CONCENTRATION OF CREDIT RISK AND OTHER RISKS
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
places its cash with high credit quality financial institutions and investment
grade short-term investments, which limit the amount of credit exposure.
F-11
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
One customer accounted for 15% of net revenues for the year ended December 31,
2000. No single customer accounted for more than 10% of net revenues for the
year ended December 31, 1999. Three customers approximated 50% of net revenues
for the nine months ended December 31, 1998. Additionally, one customer
approximated 23% and 18% of accounts receivable at December 31, 2000 and 1999,
respectively, while three customers approximated 50% of accounts receivable at
December 31, 1998.
INCOME TAXES
From commencement through July 8, 1999, certain of the SPAR Companies had
elected, by the consent of their stockholders, to be taxed under the provisions
of subchapter S of the Internal Revenue Code (the "Code") with the exception of
SPAR/Burgoyne Retail Services, Inc., SPAR Acquisition, Inc., SPAR Incentive
Marketing, Inc. and SPAR Marketing, Inc., which were taxed as C corporations.
Under the provisions of the Code, the stockholders of the subchapter S companies
included the applicable SPAR Company's corporate income in their personal income
tax returns. Accordingly, these subchapter S companies were not subject to
federal corporate income tax during the period for which they were S
corporations. Certain states in which these subchapter S companies did business
do not accept certain provisions under subchapter S of the Code and, as a
result, income taxes in these states were a direct responsibility of the
Company.
The unaudited pro forma income tax information included in the statements of
operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, as if the Company had been
subject to federal and state income taxes for the year ended December 31, 1999
and the nine-month period ended December 31, 1998.
In connection with the Company's July 1999 reorganization, the subchapter S
status of each applicable SPAR Company was terminated. Income taxes are provided
for the tax effects of transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related primarily to
differences between the basis of assets and liabilities for financial and tax
reporting. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
F-12
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
deductible when the assets and liabilities are recovered or settled. Deferred
taxes are also recognized for operating losses that are available to offset
future taxable income and tax credits that are available to offset future income
taxes. In the event the future consequences of differences between financial
reporting bases and tax bases of the Company's assets and liabilities result in
deferred tax assets, an evaluation of the probability of being able to realize
the future benefits indicated by such asset is required. A valuation allowance
is provided when it is more likely than not that some portion or the entire
deferred tax asset will not be realized.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock Based Compensation, requires disclosure of fair value method of accounting
for stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. The Company has chosen, under the provisions of SFAS No. 123, to
continue to account for employee stock-based transactions under Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. The Company has disclosed in Note 11 to the consolidated financial
statements pro forma diluted net income (loss) and net income (loss) per share
as if the Company had applied the fair value method of accounting.
PRO FORMA EARNINGS PER SHARE
Pro forma basic earnings per share amounts are based upon the weighted average
number of common shares outstanding. Pro forma diluted earnings per share
amounts are based upon the weighted average number of common and potential
common shares for each period represented. Potential common shares include stock
options, using the treasury stock method. The pro forma basic and pro forma
diluted earnings per share amounts for periods prior to July 8, 1999 are based
upon 12,659,000 shares, although these shares were issued on July 9, 1999, as
required to comply with SFAS No. 128 and the Securities and Exchange Commission
Staff Accounting Bulletin 98 ("SAB 98"). Pro forma earnings per share amounts
are presented for the year ended December 31, 1999 and the nine-month period
ended December 31, 1998. Actual basic and diluted earnings per share amounts are
presented for the year ended December 31, 2000.
F-13
SPAR Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the consolidated and combined financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INTERNAL USE SOFTWARE DEVELOPMENT COSTS
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, SOP 98-1. The SPAR Group adopted SOP 98-1 as of January 1, 1999, which
required the capitalization of certain costs incurred in connection with
developing or obtaining internal use software. Prior to the adoption of SOP
98-1, the Company expensed all internal use software related costs as incurred.
The effect of adopting the SOP was to increase net income and pro forma net
income for the years ended December 31, 2000 and 1999 by approximately
$1,052,000 and $980,000, respectively. The impact on actual and pro forma basic
and diluted earnings per share was $0.06 for both years.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial statements to
conform with the 2000 presentation.
F-14
SPAR Group, Inc.
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS
MCI ACQUISITION
On January 15, 1999, SPGI acquired substantially all the business and assets
(the "MCI Acquisition") of BIMA Group, Inc., a Texas corporation formerly known
as MCI Performance Group, Inc. ("MCI"), pursuant to their Asset Purchase
Agreement dated as of December 23, 1998, as amended (the "MCI Purchase
Agreement"). The transaction was accounted for as a purchase and consisted of
consideration of $1.8 million cash, an $8.8 million note (as amended) payable to
MCI (the "MCI Note") and the assumption of certain agreed-upon liabilities (the
"MCI Purchase Price").
The MCI Purchase Price was allocated to the assets acquired by SPGI, as agreed
upon in a schedule to the MCI Purchase Agreement, which generally used their
respective carrying values, as these carrying values were deemed to represent
fair market values of those assets and liabilities.
The excess purchase price paid by SPGI for the business and assets of MCI over
the fair value of those assets was $13 million, and is being amortized using the
straight-line method over 15 years.
PIA REVERSE MERGER
On July 8, 1999, SG Acquisition, Inc., a Nevada corporation ("PIA Acquisition"),
a wholly-owned subsidiary of PIA Merchandising Services, Inc., a Delaware
corporation ("PIA Delaware"), merged into and with SPAR Acquisition, Inc., a
Nevada corporation ("SAI") (the "Merger") pursuant to the Agreement and Plan of
Merger dated as of
F-15
SPAR Group, Inc.
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
February 28, 1999, as amended (the "Merger Agreement"), by and among (i) PIA
Delaware, PIA Merchandising Co., Inc., a California corporation ("PIA
California"), and PIA Acquisition (collectively, the "PIA Parties"), and (ii)
SAI, SPAR Marketing, Inc., a Delaware corporation ("SMI"), SPAR Marketing Force,
Inc., a Nevada corporation, ("SMF"), SPAR Marketing, Inc., a Nevada corporation
("SMNEV"), SPAR, Inc., a Nevada corporation ("SINC"), SPAR/Burgoyne Retail
Services, Inc., an Ohio corporation ("SBRS"), SPAR Incentive Marketing, Inc., a
Delaware corporation ("SIM"), SPAR Performance Group, Inc., a Delaware
corporation ("SPGI") and SPAR Trademarks, Inc., a Nevada corporation ("STM")
(each a "SPAR Company" and collectively, the "SPAR Companies").
PIA Delaware (pre-Merger only), PIA California and each of the PIA California's
direct and indirect subsidiaries (i.e., Pacific Indoor Display Co., Inc., a
California corporation ("Pacific")), Pivotal Sales Company, a California
corporation ("Pivotal") and PIA Merchandising Limited, a corporation organized
under the laws of Nova Scotia ("PIA Canada"), may be referred to individually as
a "PIA Company" and collectively as the "PIA Companies."
In connection with the Merger, PIA Delaware changed its name to SPAR Group, Inc.
(which will be referred to post-Merger individually as "SGI" or the "Company").
Although the SPAR Companies became subsidiaries of PIA Delaware (now "SGI") as a
result of this "reverse" Merger, the transaction has been accounted for as
required under generally accepted accounting principles as a purchase by the
SPAR Companies of the PIA Companies, with the books and records of SGI being
adjusted to reflect the historical operating results of the SPAR Companies.
In the transaction, the former shareholders and optionholders of SAI received
approximately 12.7 million shares of common stock and 134,114 common stock
options, respectively. The purchase price of approximately $12.3 million has
been allocated based on the estimated fair value of the assets of the PIA
Companies deemed for accounting purposes to have been acquired by the SPAR
Companies.
F-16
SPAR Group, Inc.
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
The goodwill that resulted from the Merger was calculated after giving effect to
the merger costs of the PIA Companies totaling $2.4 million and the anticipated
restructuring costs that are directly related to the Merger totaling $9.4
million (see Note 14, below). The excess purchase price deemed paid by the SPAR
Companies for the assets of the PIA Companies over the fair value of those
assets was $13.7 million and is being amortized using the straight-line method
over 15 years. In 2000, the amount of goodwill related to this transaction was
adjusted with an increase of approximately $1.2 million for additional premerger
related liabilities and restructure related costs and decreased approximately
$1.8 million as a result of a change in the valuation allowance on deferred
taxes.
BUSINESS COMBINATIONS - PRO FORMA RESULTS
In accordance with generally accepted accounting principles, the operating
results of SPGI and the PIA Companies have been included in the condensed
consolidated statements of operations from the dates of the respective
acquisitions (see Note 1). The pro forma unaudited results below assume the
acquisitions occurred at the beginning of each of the periods ended December 31,
1999 and 1998 (in thousands, except per share amounts):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
-----------------------------------------
Net revenues $161,123 $147,189
=========================================
Operating (loss) income $ (4,854) $ 912
=========================================
Pro forma net (loss) income $ (4,490) $ 19
=========================================
Pro forma basic (loss) earnings per share $ (0.25) $ 0.00
=========================================
Pro forma diluted (loss) earnings per share $ (0.25) $ 0.00
=========================================
Basic weighted average common shares 18,155 18,155
=========================================
Diluted weighted average common shares 18,161 18,161
=========================================
F-17
SPAR Group, Inc.
Notes to Financial Statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
The pro forma statements of operations reflect incremental amortization of
goodwill, interest expense, increases in bonuses to new SPGI management and
provisions for federal and state income taxes.
The pro forma statements of operations for the year ended December 31, 1999 and
the nine months ended December 31, 1998, include $3.5 million and $800,000 of
non-recurring charges by PIA Companies, respectively. These charges include$3.0
million in merger and acquisition transaction costs, $500,000 in banking
cancellation fees for the year ended December 31, 1999 and $800,000 of purchased
consulting services related to the PIA Companies redirection of its technology
strategy incurred in the nine months ended December 31, 1998.
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisitions had been completed as of the beginning of each of
the periods presented, nor are they necessarily indicative of future
consolidated results.
4. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts receivable, net, consists of the following (in thousands):
DECEMBER 31
2000 1999
------------------------------------
Trade $18,391 $20,057
Unbilled 7,502 9,796
Non-trade 169 915
------------------------------------
26,062 30,768
Less allowance for doubtful accounts and other 2,855 2,243
------------------------------------
$23,207 $28,525
====================================
F-18
SPAR Group, Inc.
Notes to Financial Statements (continued)
4. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
Goodwill and other intangibles, net, consists of the following (in thousands):
DECEMBER 31
2000 1999
------------------------------------
Goodwill and other intangibles $24,511 $25,068
Less accumulated amortization 3,026 1,301
------------------------------------
$21,485 $23,767
====================================
Property and equipment consists of the following (in thousands):
DECEMBER 31
2000 1999
-------------------------------------
Equipment $2,819 $2,058
Furniture and fixtures 1,346 1,313
Leasehold improvements 163 150
Capitalized software development costs 2,293 1,159
-------------------------------------
6,621 4,680
Less accumulated depreciation and amortization 3,060 1,221
------------------------------------
$3,561 $3,459
====================================
Accrued expenses and other current liabilities consists of the following (in
thousands):
DECEMBER 31
2000 1999
------------------------------------
Accrued salaries and other related costs $ 2,918 $ 2,359
Accrued medical and compensation insurance 165 1,765
Amounts held on behalf of third parties 82 1,108
Accrued merger related costs 3,661 2,693
Other 3,352 2,207
------------------------------------
$10,178 $10,132
====================================
F-19
SPAR Group, Inc.
Notes to Financial Statements (continued)
5. LINE OF CREDIT AND LONG-TERM LIABILITIES
Prior to the PIA Merger (see Note 3), SMF was party to a Revolving Credit and
Security Agreement dated March 4, 1996 with IBJ Whitehall Business Credit
Corporation (as successor to IBJ Schroder Bank and Trust Company) ("IBJ
Whitehall") consisting of an asset-based revolving credit facility under which
it was able to borrow up to a maximum of $6.0 million depending upon its
borrowing base availability. This agreement was amended and restated as of March
11, 1999 adding SBRS and SINC under a single loan facility with IBJ Whitehall
consisting of a term loan of $3.0 million and an asset-based revolving credit
facility under which it was able to borrow up to a maximum of $6.0 million
depending upon its borrowing base availability. This facility has been
superseded by (and continued as part of) the facility described below.
In 1999, IBJ Whitehall and the members of the SPAR Group (other than PIA Canada)
(collectively, the "Borrowers") entered into a Revolving Credit, Term Loan and
Security Agreement as amended (the "Bank Loan Agreement"). The Bank Loan
Agreement provides the Borrowers with a $15 million Revolving Credit facility
and a $2.5 million term loan. The Revolving Credit facility allows the Borrowers
to borrow up to $15 million based upon a borrowing base formula, as defined in
the Agreement (principally 85% of "eligible" accounts receivable). The Bank Loan
Agreement's revolving credit loans of $15.0 million are scheduled to mature on
September 21, 2002. The Term Loan amortizes in equal monthly installments of
$83,334. The revolving loans bear interest at IBJ Whitehall's "Alternate Base
Rate" plus one-half of one percent (.50%) (a total of 10.0% per annum at
December 31, 2000), and the Term Loan bears interest at such "Alternate Base
Rate" plus three-quarters of one percent (0.75%) (a total of 10.25% per annum at
December 31, 2000). In addition, the Borrowers are required to make mandatory
prepayments in an amount equal to 25% of Excess Cash Flow, as defined in the
Bank Loan Agreement, for each fiscal year, to be applied first to the Term Loan
and then to the revolving credit loans (subject to the Borrowers' ability to
re-borrow revolving advances in accordance with the terms of the Bank Loan
Agreement). The facility is secured with the assets of the SPAR Group.
The Bank Loan Agreement contains an option for the Bank to purchase 16,667
shares of common stock of the Company for $0.01 per share in the event that the
Company's average closing share price over a ten consecutive trading day period
exceeds $15.00 per share. This option expires September 22, 2002.
F-20
SPAR Group, Inc.
Notes to Financial Statements (continued)
5. LINE OF CREDIT AND LONG-TERM LIABILITIES (CONTINUED)
The Bank Loan Agreement contains certain financial covenants which must be met
by the Borrowers on a consolidated basis, among which are a minimum "Net Worth,"
a "Fixed Charge Coverage Ratio," a minimum ratio of Debt to EBITDA and a minimum
EBITDA, as such terms are defined in the Bank Loan Agreement.
The balances outstanding on this line of credit were $7.8 million and $13.3
million at December 31, 2000 and 1999, respectively. As of December 31, 2000
based upon the borrowing base formula, the SPAR Group had availability of $4.2
million of the $7.2 million unused revolving line of credit.
On December 31, 1998, the Company had outstanding $685,000 due to SPAR Marketing
Service, Inc. ("SMS"). The Company agreed to repay the amounts borrowed using
the same terms contained within the loan agreement between the bank and SMS.
This loan was repaid in its entirety by the Company in 1999.
The Company's line of credit and long-term liabilities consist of the following
at December 31:
2000 1999
------------------------------------
Revolving line of credit, maturing September 2002 $7,761 $12,500
Term loan 1,250 2,250
Other long-term liabilities 293 406
------------------------------------
9,304 15,156
Current maturities of long-term liabilities 1,211 1,147
------------------------------------
$8,093 $14,009
====================================
Maturities of long-term debt at December 31, 2000 are as follows:
Year ending December 31:
2001 $1,211
2002 8,093
-------------------
$9,304
===================
F-21
SPAR Group, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES
As a result of the July 8, 1999 PIA Merger (see Note 3), the subchapter S status
of each applicable SPAR Company was terminated for federal and state tax
purposes, and the SPAR Group recorded a deferred tax charge against income of
$3.1 million for the cumulative differences between the financial reporting and
income tax basis of certain assets and liabilities existing at that date.
Additionally, each such SPAR Company was required to change its method of
accounting from the cash basis to the accrual basis for income tax reporting
purposes.
The SPAR Group expects to be able to offset the deferred tax liability by
utilizing a deferred tax asset from the benefit of the PIA Companies' net
operating loss carryforwards. The individuals who were the stockholders of the
applicable SPAR Companies at that time are obligated to pay the 1999 income
taxes relating to taxable income during he period up to the Merger date.
The provision for income tax (benefit) expense is summarized as follows (in
thousands):
2000 1999 1998
------------------------------------------------------
Current $(325) $48 $-
Deferred 247 - -
------------------------------------------------------
$ (78) $48 $-
======================================================
F-22
SPAR Group, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The provision for income taxes is different from that which would be obtained by
applying the statutory federal income tax rate to income before income taxes.
The items causing this difference are as follows (in thousands):
YEAR ENDED DECEMBER 31
2000 1999
------------------------------------
Provision for income taxes at federal statutory rate $423 $902
Tax attributable to subchapter S earnings - (695)
State income taxes, net of federal benefit 48 35
Other permanent differences 321 170
Change in valuation allowance (825) (404)
Other (45) 40
------------------------------------
Provision for income taxes $ (78) $ 48
====================================
Deferred taxes consist of the following (in thousands):
DECEMBER 31
2000 1999
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $5,750 $5,309
Restructuring 1,444 2,154
Accrued compensation, vacation and pension 290 590
Accrued insurance 545 581
Allowance for doubtful accounts and other receivable 1,065 967
Other, net 387 238
Valuation allowance (4,259) (6,939)
------------------------------------
Total deferred tax assets 5,222 2,900
Deferred tax liabilities:
Nonrecurring charge for termination of Subchapter S
election 1,993 2,790
Capitalized software development costs 429 110
------------------------------------
Total deferred tax liabilities 2,422 2,900
------------------------------------
Net deferred tax assets $2,800 $ -
====================================
F-23
SPAR Group, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Deferred tax assets have been offset by a valuation allowance as deemed
necessary based on the Company's estimates of its future sources of taxable
income and the expected timing of temporary difference reversals.
In 2000, the Company realized the benefit of deferred tax assets and recorded a
$2,680,000 change in its valuation allowance. The benefits recorded resulted in
a $825,000 reduction of tax expense and a $1,855,000 reduction of Goodwill
associated with the PIA acquisition. The entire $4,259,000 valuation allowance
at December 31, 2000 when realized will result in a reduction of goodwill
associated with the PIA acquisition.
At December 31, 2000, the Company has net operating loss carryforwards (NOLs) of
approximately $15 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 has
occurred in connection with the PIA Merger, thereby restricting the NOLs
available to the Company to approximately $12.5 million over 18 years. The
Company has established a valuation allowance for the deferred tax assets
related to the available NOLs that are deductible for years subsequent to 2003.
The pro forma disclosures on the statement of operations reflect adjustments to
record provisions for income taxes as if the applicable SPAR Companies had not
been S corporations. The pro forma provisions for income taxes for the year
ended December 31, 1999 and the nine months ended December 31, 1998, of $1.4
million and $2.2 million, respectively, are computed using a combined federal
and state tax rate of 37% of taxable income.
F-24
SPAR Group, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The recording of a one-time, non-cash stock related compensation expense in the
year ended December 31, 1999 of approximately $752,000 is not tax-deductible by
the SPAR Group for federal and state income tax purposes. In addition, the
amortization of purchased goodwill generated by the reverse Merger is not
tax-deductible. The pro forma tax provision for the year ended December 31, 1999
has been adjusted for the effects of these non-tax-deductible items.
7. COMMON STOCK
Common stock of the companies included in the SPAR Companies at December 31,
1998 is as follows:
SHARES
SHARES ISSUED AND
AUTHORIZED OUTSTANDING PAR VALUE
------------------ --------------------------------------
Spar, Inc. 2,500 72 None
Spar/Burgoyne Retail Services, Inc. 2,500 72 None
Spar Marketing Force, Inc. 2,500 72 None
Spar Marketing, Inc. (Nevada) 100 72 None
Spar Acquisition, Inc. 50,000,000 72 $.01
Spar MCI Performance Group, Inc. 2,500 72 None
Spar Marketing, Inc. (Delaware) 1,000 72 $.01
Prior to the July 8, 1999 Merger, the subchapter S status of each applicable
SPAR Company was terminated for federal and state tax purposes. As of July 8,
1999, undistributed earnings of the SPAR Group were reclassified to additional
paid-in capital.
F-25
SPAR Group, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases equipment and certain office space in several cities, under
non-cancelable operating lease agreements. Certain leases contain escalation
clauses and require the Company to pay its share of any increases in operating
expenses and real estate taxes. Rent expense was approximately $1.1 million and
$2.8 million for the years ended December 31, 2000 and 1999, respectively, and
$754,000 for the nine months ended December 31, 1998. At December 31, 2000,
future minimum commitments under all noncancelable operating lease arrangements
are as follows (in thousands):
2001 $1,766
2002 1,646
2003 1,318
2004 808
2005 511
-------------------
$6,049
===================
LEGAL MATTERS
On September 23, 1999, Information Leasing Corporation ("IFC") filed a complaint
for breach of contracts, claim and delivery, and conversion against the Company
in Orange County Superior Court, Santa Ana, California. In November 2000, this
case was settled and the liability is accrued as part of the restructure charges
(see Note 14).
In June 2000, Argonaut Insurance Co. filed a complaint for approximately
$700,000 plus interest against the Company in Orange County Superior Court,
Santa Ana, California Case No. 00CC07125 with respect to alleged breach of
contract. The Company is attempting to negotiate a settlement.
F-26
SPAR Group, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is a party to various legal actions and administrative proceedings
arising in the normal course of business. In the opinion of Company's
management, dispositions of these matters are not anticipated to have a material
adverse effect on the financial position, results of operations or cash flows of
the Company.
9. EMPLOYEE BENEFITS
PENSION PLANS
Certain of the Company's PIA employees are covered by union-sponsored,
collectively bargained, multi-employer pension plans. Pension expense related to
these plans was approximately $24,000 and $30,000 for the years ended December
31, 2000 and 1999, respectively.
RETIREMENT PLANS
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible
employees. Employer contributions of approximately $70,000 and $63,000 for the
years ended December 31, 2000 and 1999, respectively, and $14,400 for the nine
months ended December 31, 1998 were made to the plan.
The Company has an Employee Stock Purchase Plan ("ESP Plan"). The ESP Plan
allows employees of the Company to purchase common stock at a discount, without
having to pay any commissions on the purchases. The discount is the greater of
15% of the fair market value ("FMV") at the end of the reportable period or the
difference between the FMV at the beginning and end of the reportable period.
The maximum amount that any employee can contribute to the ESP Plan per quarter
is $6,250, and the total number of shares reserved by the Company for purchase
under the ESP Plan is 180,576. During 2000 and 1999, the Company issued 452 and
7,568 shares of common stock, at a weighted average price of $3.03 and $2.71 per
share, respectively.
F-27
SPAR Group, Inc.
Notes to Financial Statements (continued)
10. RELATED PARTY TRANSACTIONS
The SPAR Companies are affiliated through common ownership with SPAR Marketing
Services, Inc., SPAR Management Services, Inc. SPAR Retail Services, Inc.,
(f/k/a SPAR/Burgoyne, Inc.), SPAR Group, Inc., IDS SPAR Pty, Ltd. (Aust.), SPAR
Ltd., (U.K.), Garden Island, Inc., SPAR Marketing Pty Ltd. (Aust.), WR Services,
Inc., SR Services Inc., Infinity Insurance Ltd. and SPAR Infotech, Inc.
The Company purchases field management services and the use of independent
contractor services from SPAR Management Services, Inc. and SPAR Marketing
Services, Inc.
The Company also purchased Internet consulting services from SPAR Infotech, Inc.
The following transactions occurred between the SPAR Companies and the above
affiliates (in thousands):
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31,
2000 1999 1988
---------------------------------------------------------
Services provided by affiliates:
Independent contractor services $5,177 $4,111 $2,763
=========================================================
Field management services $4,388 $4,344 $2,049
=========================================================
Internet consulting services $ 769 $ 608 $ -
=========================================================
Services provided to affiliates:
Management services $ 692 $ 665 $ 417
=========================================================
F-28
SPAR Group, Inc.
Notes to Financial Statements (continued)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
Through the services of Infinity Insurance, Ltd., the Company purchased
insurance coverage for its casualty and property insurance risk, for
approximately $994,000 and $959,000 for the year ended December 31, 2000 and
1999, respectively, and $375,000 for the nine months ended December 31, 1998 (in
thousands).
DECEMBER 31
2000 1999
------------------------------------
Balance due to (from) affiliates included in accrued
liabilities:
Spar Management Services, Inc. $ (26) $ -
Spar Marketing Services, Inc. 582 29
Spar/Infotech, Inc. (4) 196
------------------------------------
$552 $225
====================================
In 1999, the Company had an investment in an affiliate, which provided
telemarketing and related services. The Company paid approximately $386,000
during the year ended December 31, 1999. Approximately $580,000 was payable to
the affiliate at December 31, 1999. In 2000, the Company sold its interests in
the affiliate for $1.5 million and recorded a gain of approximately $790,000
that is 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-29
SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS
In 1999, the Company recorded a non-cash, non-tax-deductible charge of
approximately $752,000 resulting from the grant of 134,114 options at $0.01 per
share and the issuance of 200,000 shares to a consultant prior to the reverse
merger.
The Company has five stock option plans: the 1990 Stock Option Plan ("1990
Plan"), the 1995 Stock Option Plan ("1995 Plan"), the 1995 Director's Plan
("Director's Plan"), Special Purpose Stock Option Plan and the 2000 Stock Option
Plan (the "2000 Plan").
The 1990 Plan is a nonqualified option plan providing for the issuance of up to
830,558 shares of common stock to officers, directors and key employees. The
options have a term of ten years and one week and are either fully vested or
will vest ratably no later than five years from the grant date. Since 1995, The
Company has not granted options under this plan.
The 1995 Plan provides for the granting of either incentive or nonqualified
stock options to specified employees, consultants and directors of the Company
for the purchase of up to 3,500,000 shares of the Company's common stock. The
options have a term of ten years, except in the case of incentive stock options
granted to greater than 10% stockholders of the Company, for which the term is
five years. The exercise price of nonqualified stock options must be equal to at
least 85% of the fair market value of the Company's common stock at the date of
grant; the exercise price of incentive stock options must be equal to at least
the fair market value of the Company's common stock at the date of grant. At
December 31, 2000, options to purchase 683,523 shares were available for grant
under this plan.
The Director's Plan is a stock option plan for nonemployee directors and
provides for the purchase of up to 100,000 shares of the Company's common stock.
An option to purchase 1,500 shares of the Company's common stock shall be
granted automatically each year to each director, following the Company's annual
stockholders' meeting. The exercise price of options issued under this plan
shall not be less than the fair market value of the Company's common stock on
the date of grant. Each option under this plan shall vest and
F-30
SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
become exercisable in full on the first anniversary of its grant date, provided
the optionee is reelected as a director of the Company. The maximum term of
options granted under the plan is ten years and one day, subject to earlier
termination following an optionee's cessation of service with the Company. At
December 31, 2000, options to purchase 91,000 shares were available for grant
under this plan.
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 $.01 per
share. During 2000, 108,364 options were exercised. At December 31, 2000, 25,750
options remain outstanding under the Plan. The Company did not issue any new
options under this plan in 2000.
In December 2000, the Company adopted its 2000 Plan, as the successor to the
1995 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 SPAR Group, Inc. for the purchase of up
to 3,500,000 (less those options still outstanding or previously exercised 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 of the SPAR,
for which the term is five years. The exercise price of nonqualified stock
options must be equal to at least 85% of the fair market value of SPAR's common
stock at the date of grant (although typically are issued at 100%), and the
exercise price of incentive stock options must be equal to at least the fair
market value of SPAR's common stock at the date of grant. In December 2000,
118,500 options to purchase shares were granted under this plan. At December 31,
2000, options to purchase 565,023 shares were available for grant under this
plan.
F-31
SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
The following table summarizes stock option activity under the Company's 1990
Plan, 1995 Plan and Director's Plan:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------------------------------
Options outstanding at July 8, 1999, date of reverse
merger 1,438,285 $5.91
Granted 2,294,858 4.82
Exercised (10,811) 2.78
Canceled or expired (416,810) 5.51
------------------
Options outstanding, December 31, 1999 3,305,522 5.22
Granted 479,500 2.59
Exercised (115,864) .27
Canceled or expired (679,309) 5.94
------------------
Options outstanding, December 31, 2000 2,989,849 $4.82
==================
Option price range at end of year $0.01 TO $14.00
2000 1999
------------------------------------
Weighted average fair value of options granted during
the year $2.59 $4.94
F-32
SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31 CONTRACTUAL EXERCISE DECEMBER 31, AVERAGE
EXERCISE PRICES 2000 LIFE PRICE 2000 EXERCISE PRICE
- --------------------- -------------------------------------------------------------------------------------
Less than $2.00 169,250 9.7 years $ 0.62 25,750 $ 0.01
$2.00 - $4.00 311,250 9.0 years 3.35 42,750 2.99
$4.01 - $5.00 1,496,137 8.5 years 4.99 332,746 4.97
$5.01 to $6.25 982,090 7.9 years 5.52 363,108 5.55
Greater than $6.25 31,122 5.2 years 12.36 31,122 12.36
------------------ -------------------
Total 2,989,849 8.4 years $ 4.82 795,476 $ 5.26
================== ===================
In January 2000, 2,349,825 options with a weighted average exercise price of
$4.97 at December 31, 2000 were cancelled. The cancelled options will be
available for future grant. The Company expects to grant similar quantities of
options at some future date under the 2000 plan.
Outstanding warrants are summarized below:
SHARES SUBJECT EXERCISE PRICE
TO WARRANTS PER SHARE
------------------------------------
Balance, December 31, 1999 96,395 $2.78 - $8.51
Balance, December 31, 2000 96,395 $2.78 - $8.51
The above warrants expire at various dates from 2002 through 2004.
F-33
SPAR Group, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. No compensation cost has been
recognized for the stock option plans. Had compensation cost for the Company's
option plans been determined based on the fair value at the grant date for
awards in 1999 consistent with the provisions of SFAS No. 123, the Company's pro
forma net income (loss) and net income (loss) per share would have been reduced
to the adjusted amounts indicated below (in thousands, except per share data):
YEAR ENDED DECEMBER 31
2000 1999
------------------------------------
Actual/pro forma net income, as reported $1,322 $1,242
Pro forma net loss, as adjusted (635) (1,011)
Actual/pro forma basic and diluted net income per share, as
reported 0.07 0.08
Actual/pro forma basic and diluted net income per share, as
adjusted (0.03) (0.07)
The pro forma effect on net income is not representative of the pro forma effect
on net income in future years because the options in the stock option plan 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, using the return on a ten-year
treasury bill, with the following weighted average assumptions: dividend yield
of 0% for all years; volatility factor of expected market price of common stock
of 237% and 186% for 2000 and 1999, respectively; risk-free interest rate of
6.89% and 5.65%; and expected lives of six years.
F-34
SPAR Group, Inc.
Notes to Financial Statements (continued)
12. NOTES PAYABLE TO CERTAIN STOCKHOLDERS
Former principal stockholders of the SPAR Companies each made loans to certain
SPAR Companies in the aggregate amount of $4.3 million to facilitate the
acquisition of the PIA Companies and the acquisition of the assets of MCI. These
stockholders also were owed $1.9 million in unpaid distributions relating to the
former status of most of the operating SPAR Companies as subchapter S
corporations. Those amounts totaling $6.2 million were converted into promissory
notes issued to these certain stockholders severally by SMF, SINC and SPGI prior
to the Merger.
As of December 31, 2000, notes payable to certain stockholders total $5.7
million of which approximately $3.5 million have an interest rate of 8% and are
due on demand. The long-term portion totaling $2.2 million have a fluctuating
interest rate equal to the sum of the prime rate (as reported in the Wall Street
Journal from time to time) plus 1%. The current bank agreements contain certain
restrictions on the repayment of stockholder debt.
13. SEGMENTS
Utilizing the management approach, the SPAR Group has broken down its business
based upon the nature of services provided (i.e., merchandising services and
incentive marketing services and Internet-based software). The Merchandising
Services Division consists of SMI (an intermediate holding company), SMF, SMNEV,
SBRS and SINC (collectively, the "SPAR Marketing Companies"), the PIA Companies
and the International Division (SPAR Group International, Inc.) (see Note 1).
The Incentive Marketing Division consists of each of SIM (an intermediate
holding company) and SPGI (see Note 1). The Internet Division is SPARinc.com,
Inc. (see Note 1).
F-35
SPAR Group, Inc.
Notes to Financial Statements (continued)
13. SEGMENTS (CONTINUED)
Merchandising services generally consist of regularly scheduled, routed services
provided at the stores for a specific retailer or multiple manufacturers
primarily under multiple-year contracts. Services also include stand-alone large
scale implementations. These services may include activities such as ensuring
that clients' products authorized for distribution are in stock and on the
shelf, adding in new products that are approved for distribution but not present
on the shelf, setting category shelves in accordance with approved store
schematics, ensuring that shelf tags are in place, checking for the overall
salability of clients' products, selling new product and promotional items.
Specific in-store services can be initiated by retailers and manufacturers, such
as new product launches, special seasonal or promotional merchandising, focused
product support and product recalls.
These services are used typically for large-scale implementations over 30 days.
The Merchandising Services Division of the SPAR Group also performs other
project services, such as new store sets and existing store resets,
re-merchandising, remodels and category implementations, multi-year shared
service contracts or stand-alone project contracts.
The Incentive Marketing Division generally consists of designing and
implementing premium incentives, managing meetings and group travel for clients
throughout the United States. These services may include providing a variety of
consulting, creative, program administrative, travel and merchandise fulfillment
services to companies seeking to motivate employees, salespeople, dealers,
distributors, retailers and consumers toward certain action or objectives.
In March 2000, the Company established its Internet Division to separately
market its applications software products and services. Although such products
and services were in part available through the Company's other divisions prior
to the establishment of the Internet Division, the historical revenues and
expenses related to such software products and services generally were not
maintained separately prior to 2000.
F-36
SPAR Group, Inc.
Notes to Financial Statements (continued)
13. SEGMENTS (CONTINUED)
The following table presents segment information (in thousands):
MERCHANDISING SERVICES INCENTIVE MARKETING
------------------------------------------------------------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31, YEAR ENDED DECEMBER 31 DECEMBER 31,
2000 1999 1998 2000 1999 1998
------------------------------------------------------------------------------------
Net revenues $81,459 $79,613 $32,601 $28,012 $36,912 $ -
Cost of revenues 50,278 50,499 16,217 22,678 30,789 -
------------------------------------------------------------------------------------
Gross profit 31,181 29,114 16,384 5,334 6,123 -
SG&A 24,414 23,213 9,978 5,654 5,617 -
------------------------------------------------------------------------------------
EBITDA $ 6,767 $ 5,901 $ 6,406 $ (320) $ 506 $ -
====================================================================================
Net income (loss) $ 3,929 $ 663 $ 6,109 $ (2,301) $ (1,158) $ -
====================================================================================
Total assets $44,184 $48,428 $14,865 $11,471 $14,326 $ -
====================================================================================
INTERNET-BASED
SOFTWARE TOTAL
---------------- ----------------------------------------------
NINE MONTHS
YEAR ENDED ENDED DECEMBER
DECEMBER 31, YEAR ENDED DECEMBER 31 31,
2000 2000 1999 1998
---------------- ----------------------------------------------
Net revenues $ 58 $109,529 $116,525 $32,601
Cost of revenues 14 72,970 81,288 16,217
---------------- ----------------------------------------------
Gross profit 44 36,559 35,237 16,384
SG&A 347 30,415 28,830 9,978
---------------- ----------------------------------------------
EBITDA $(303) $ 6,144 $ 6,407 $ 6,406
================ ==============================================
Net income (loss) $(306) $ 1,322 $ (495) $ 6,109
================ ==============================================
Total assets $ (37) $ 55,618 $ 62,754 $14,865
================ ==============================================
F-37
SPAR Group, Inc.
Notes to Financial Statements (continued)
14. RESTRUCTURING AND OTHER CHARGES
In connection with the PIA Merger, the Company's Board of Directors approved a
plan to restructure the operations of the PIA Companies. Restructuring costs are
composed of committed costs required to integrate the SPAR Companies and the PIA
Companies' field organizations and the consolidation of administrative functions
to achieve beneficial synergies and costs savings.
The SPAR Group will recognize termination costs in accordance with EITF 95-3,
Recognition of Liabilities in Connection with a Business Combination.
The following table displays a rollforward of the liabilities for restructuring
and other charges from July 8, 1999 Merger to December 31, 2000 (in thousands):
INITIAL PERIOD ENDED ADJUSTMENTS YEAR ENDED
RESTRUCTURING DECEMBER 31, DECEMBER 31, IN DECEMBER 31, DECEMBER
AND OTHER 1999 1999 RESTRUCTURING 2000 31, 2000
CHARGES DEDUCTIONS BALANCE CHARGES DEDUCTIONS BALANCE
---------------------------------------------------------------------------------
Type of cost:
Employee separation $1,606 $ (491) $1,115 $ 748 $(1,376) $ 487
Equipment lease
settlements 2,740 (326) 2,414 1,367 (1,011) 2,770
Office lease
settlements 1,794 (252) 1,542 (619) (379) 544
Redundant assets 957 (957) - - - -
---------------------------------------------------------------------------------
$7,097 $(2,026) $5,071 $1,496 $(2,766) $3,801
=================================================================================
The maturities of restructuring and other charges at December 31, 2000 are as
follows:
2001 $2,205
2002 925
2003 350
2004 321
Management believes that the remaining reserves for restructuring are adequate
to complete its plan.
F-38
SPAR Group, Inc.
Notes to Financial Statements (continued)
14. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
At December 31, 2000, the SPAR Group is obligated, under certain circumstances,
to pay severance compensation to its employees and other costs in connection
with the Merger of approximately $3.8 million. In addition, the Company incurred
substantial cost in connection with the transaction, including legal, accounting
and investment banking fees estimated to be an aggregate unpaid obligation of
approximately $1.5 million (see Note 4). The SPAR Group has also accrued
approximately $1.9 million for expenses incurred by PIA prior to the Merger,
which have not been paid (see Note 4). Management believes the current bank
credit facilities are sufficient to fund operations and working capital,
including the current maturities of debt obligations, but may not be sufficient
to reduce obligations of the Merger with PIA. The Company is currently working
to secure additional long-term capital to meet the non-operational credit needs.
However, there can be no assurances that the Company will be successful in these
negotiations.
F-39
SPAR Group, Inc.
Notes to Financial Statements (continued)
15. EARNINGS PER SHARE
The following table sets forth the computations of pro forma basic and diluted
earnings per share (in thousands, except per share data):
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31,
2000 1999 1998
-------------------------------------------------
Numerator:
Actual/pro forma net income $1,322 $1,242 $3,856
=================================================
Denominator:
Shares used in basic earnings per share calculation1 18,185 15,361 12,659
Effect of diluted securities:
Employee stock options 118 6 -
Warrants - - -
-------------------------------------------------
Shares used in diluted earnings per share 18,303 15,367 12,659
calculations1
=================================================
Actual/pro forma basic earnings per share1 $ 0.07 $0.08 $0.30
=================================================
Actual/pro forma diluted earnings per share1 $ 0.07 $0.08 $0.30
=================================================
1 The pro forma basic and pro forma diluted earnings per share amounts are
based upon 12,659,000 shares on January 1, 1998, although these shares were
issued on July 9, 1999, as required to comply with SFAS No. 128 and the
Securities and Exchange Commission Staff Accounting Bulletin 98 ("SAB 98").
F-40
SPAR Group, Inc.
Notes to Financial Statements (continued)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for 2000 and 1999 was as follows (in thousands except earnings
per share amounts):
QUARTER
FIRST SECOND THIRD FOURTH
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
Net revenues $32,447 $28,290 $22,332 $26,460
Gross profit 9,974 9,113 8,227 9,245
Net income 416 113 100 693(1)
Earnings per share:
Basic $.02 $.01 $.01 $.03
Diluted $.02 $.01 $.01 $.03
YEAR ENDED DECEMBER 31, 1999
Net revenues $21,637 $19,923 $36,390 $38,575
Gross profit 7,264 5,841 11,924 10,208
Net income (loss) 1,226 (216) 98 134
Actual/proforma earnings per share:
Basic $.10 $(.02) $.01 $.01
Diluted $.10 $(.02) $.01 $.01
(1)The fourth quarter results included the realization of approximately
$690,000 of income tax benefit as a result of the change in the deferred
income tax valuation allowance.
F-41
SPAR Group, Inc.
Schedule II - Valuation and Qualifying Accounts
(In Thousands)
BALANCE AT CHARGED TO
BEGINNING COSTS AND CHARGED TO BALANCE AT
OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
----------------------------------------------------------------------
Year ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $2,243 $1,434 $ - $822 (2) $2,855
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 605 $1,202 $1,390 (1) $954 (2) $2,243
Nine months ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 568 $ 299 $ - $262 (2) $ 605
(1) $1,390 charged to Other Accounts represents the amounts acquired through the
SPG and PIA acquisitions.
(2) Uncollectible accounts written off, net of recoveries.
F-42