<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the third quarterly period ended September 30, 1999
Commission file number: 0-27824
SPAR GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
- ---------------------- -------------------------------
State of Incorporation IRS Employer Identification No.
580 White Plains Road, Sixth Floor, Tarrytown, New York, 10591
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (914) 332-4100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: [X] Yes
On October 31, 1999, there were 18,154,666 shares of Common Stock
outstanding.
<PAGE> 2
SPAR Group, Inc.
Index
Page
----
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets
As of September 30, 1999 and December 31, 1998...................... 3
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended
September 30, 1999 and September 30, 1998........................... 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and September 30, 1998 ........ 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 16
Item 3: Quantitative and Qualitative Disclosures About Market Risk.......... 25
PART II: OTHER INFORMATION
Item 1: Legal Proceedings................................................... 27
Item 2: Changes in Securities and Use of Proceeds........................... 27
Item 4: Submission of Matters to a Vote of Security Holders................. 28
Item 5: Other Information................................................... 29
Item 6: Exhibits and Reports on Form 8-K.................................... 30
SIGNATURES................................................................... 32
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SPAR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,429 $ 910
Accounts receivable, net of allowance for doubtful
accounts and other of $1,953 and $605 for September 30,
1999 and December 31, 1998, respectively 26,587 10,628
Prepaid expenses and other current assets 7,396 708
Due from certain stockholders -- 1,500
-------- --------
Total current assets 36,412 13,746
Property and Equipment, net (Note 4) 3,005 825
-------- --------
Goodwill, net 22,873 --
Other assets 1,206 293
-------- --------
TOTAL ASSETS $ 63,496 $ 14,864
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,452 $ 1,534
Accrued expenses and other current liabilities 11,604 2,808
Restructuring and other charges (Note 3) 5,680 --
Deferred income tax payable (Note 7) -- --
Due to affiliates 302 205
Deferred revenue 8,223 --
Due to certain stockholders (Note 9) -- 6,577
Line of Credit and notes payable (Note 5) 6,987 4,149
Current portion of long term debt (Note 5) 1,008 685
Note payable to MCI 4,687 --
Notes payable to certain stockholders (Note 9) 6,137 --
-------- --------
Total current liabilities 51,080 15,958
Long-Term Liabilities, other than current portion (Note 5) 1,839 311
-------- --------
Total liabilities 52,919 16,269
-------- --------
Stockholders' Equity:
Common stock and additional paid-in-capital 10,273 (8,232)
Accumulated deficit 304 6,827
-------- --------
Total stockholders' equity (Note 10) 10,577 (1,405)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 63,496 $ 14,864
======== ========
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
Financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
<PAGE> 4
SPAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES $ 36,390 $ 11,095 $ 77,949 $ 30,076
Cost of Revenues 24,466 5,415 52,921 15,133
-------- -------- -------- --------
Gross Profit 11,924 5,680 25,028 14,943
-------- -------- -------- --------
Operating Expenses:
Selling, general and administrative expenses 10,688 3,521 20,427 9,841
Depreciation and amortization 704 34 1,218 104
-------- -------- -------- --------
Total Operating Expenses 11,392 3,555 21,645 9,945
-------- -------- -------- --------
Operating income 532 2,125 3,383 4,998
Other expenses (250) (120) (1,059) (264)
-------- -------- -------- --------
Income Before Provision For Income Taxes 282 2,005 2,324 4,734
Provision for Income Taxes:
Nonrecurring charge for termination
of subchapter S election 3,100 -- 3,100 --
C Corporation taxes 23 -- 23 --
-------- -------- -------- --------
NET INCOME (LOSS) $ (2,841) $ 2,005 $ (799) $ 4,734
======== ======== ======== ========
Unaudited pro forma information:
Historical income before
provision for income tax 282 2,005 2,324 4,734
Pro forma provision for income taxes 184 740 1,216 1,747
-------- -------- -------- --------
Pro Forma net income $ 98 $ 1,265 $ 1,108 $ 2,987
======== ======== ======== ========
Pro Forma Basic Earnings per share $ 0.01 $ 0.10 $ 0.08 $ 0.24
======== ======== ======== ========
Pro Forma Basic weighted average common shares 18,153 12,659 14,350 12,659
======== ======== ======== ========
Pro Forma Diluted Earnings per share $ 0.01 $ 0.10 $ 0.08 $ 0.24
======== ======== ======== ========
Pro Forma Diluted weighted average common shares 18,295 12,659 14,491 12,659
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SPAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (799) $ 4,734
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,218 104
Provision for doubtful accounts and other, net 496 --
Equity in earnings of affiliate (52) --
Taxes on termination of subchapter S Corporation election 3,100 --
Stock related compensation 752 --
Changes in operating assets and liabilities:
Accounts receivable (2,722) (141)
Prepaid expenses and other (3,672) 1,035
Accounts payable and other liabilities (2,926) (450)
------- -------
Net cash provided (used) in operating activities (4,605) 5,282
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (320) (630)
Purchase of business, net of cash acquired 6,845 --
------- -------
Net cash provided (used) in investing activities 6,525 (630)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of Credit 4,807 (321)
Proceeds from certain stockholders 3,500 --
Distributions to certain stockholders (2,773) (4,260)
Payments to note payable, MCI (5,935) --
------- -------
Net cash used by financing activities (401) (4,581)
NET DECREASE IN CASH AND CASH EQUIVALENTS 1,519 71
CASH AND CASH EQUIVALENTS:
Beginning of period 910 (10)
------- -------
End of period $ 2,429 $ 61
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash transactions:
Equipment purchased with capital leases $ 485 $ --
======= =======
Distributions payable to certain stockholders $ 1,333 $ --
======= =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
the Company (as defined in Note 2, below) and its subsidiaries
(collectively, the "SPAR Group") have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. This financial information should be read
in conjunction with the combined financial statements and notes thereto
for the SPAR Companies (as defined in Note 2, below) and the consolidated
financial statements and notes thereto for the PIA Companies (as defined
in Note 2, below) for the year ended December 31, 1998, included in the
Merger Proxy Statement (as defined in Note 2, below). The results of
operations for the interim periods are not necessarily indicative of the
operating results for the year.
The historical results of the SPAR Group, Inc. for the nine month period
ended September 30, 1998 consists of the results of the SPAR Companies for
the six month period ended September 30, 1998 plus the three month period
ended March 31, 1998.
The historical results of operations of the SPAR Group, Inc. for the three
month period and the nine month period ended September 30, 1999 consists
of the SPAR Companies and includes the operations of SPGI (as defined in
Note 2, below) from January 15, 1999, the date it acquired its business
and assets, and the operations of the PIA Companies (as defined in Note 2,
below) from July 8, 1999, the date of the Merger (as defined below), which
for accounting purposes is treated as an acquisition by the SPAR Companies
of the PIA Companies.
Certain amounts have been reclassified in the prior years' combined
financial statements of the SPAR Companies and the consolidated financial
statements of the PIA Companies in order to conform to the current year's
presentation.
Change in Fiscal Year. Effective January 1, 1998, the SPAR Companies
changed their fiscal year end for financial purposes from a March 31
fiscal year to a calendar year.
Accounting for the Costs of Computer Software Developed or Obtained from
Internal Use SOP 98-1. The SPAR Group has adopted SOP 98-1 as of January
1, 1999, which requires the capitalization of certain costs incurred in
connection with developing or obtaining internal use software. Prior to
the adoption of SOP 98-1, the Company expensed all internal use software
related costs as incurred. The effect of adopting the SOP was to increase
pro forma net income for the three months and nine months ended September
30, 1999 by $0.2 million and $0.01 per pro forma basic and diluted
earnings per share, and $0.5 million and $0.04 per pro forma basic and
diluted earnings per share, respectively.
Comprehensive Income - The SPAR Group has adopted SFAS No. 130, Reporting
Comprehensive Income. For the quarter and nine months ended September 30,
1998 and September 30, 1999, the SPAR Group has no reported differences
between net income (loss) and comprehensive income (loss). Therefore,
statements of comprehensive income (loss) have not been presented.
6
<PAGE> 7
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
2. Business Combinations
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. ("Old 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, a $8.8
million note (as amended) payable to Old MCI (the "MCI Note") and the
assumption of certain agreed upon liabilities (the "MCI Purchase Price").
The MCI Purchase Price was allocated to the assets acquired by SPGI as
agreed upon in a schedule to the MCI Purchase Agreement, which generally
used their respective carrying values, as these carrying values were
deemed to represent fair market values of those assets and liabilities.
The total purchase consideration does not reflect contingent consideration
related to earn-out arrangements included in the MCI Purchase Agreement.
The MCI Purchase Agreement provides for a post-closing adjustment whereby
additional contingent consideration will be payable to Old MCI in the
event that EBT (as defined in the MCI Purchase Agreement) exceeds $3.5
million.
The excess purchase price paid by SPGI for the business and assets of Old
MCI over the fair value of those assets was $12.4 million, subject to
change from the contingent earn-out arrangement, and is being amortized
using the straight line method over 15 years.
On July 8, 1999, a wholly owned subsidiary of PIA Merchandising Services,
Inc., a Delaware corporation ("PIA Delaware"), namely SG Acquisition,
Inc., a Nevada corporation ("PIA Acquisition"), merged into and with SPAR
Acquisition, Inc., a Nevada corporation ("SAI") (the "Merger") pursuant to
the Agreement and Plan of Merger dated as of February 28, 1999, as amended
(the "Merger Agreement"), by and among (i) PIA Delaware, PIA Merchandising
Co., Inc., a California corporation ("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"), 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 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"
7
<PAGE> 8
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Merger, the transaction has been accounted for as required under GAAP 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 Company issued approximately 12.7 million shares
of common stock to the former stockholders of SAI and 134,114 options to
the former option-holders of SAI for an aggregate purchase price of $12.3
million. The purchase price 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.
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 $6.9 million (see Note 3, 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 $10.0 million and is
being amortized using the straight-line method over 15 years.
3. 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.
Restructure 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 roll-forward of the liabilities for
restructuring and other charges from July 8, 1999 Merger to September 30,
1999 (in thousands):
<TABLE>
<CAPTION>
Initial Quarter ended
Restructuring and September 30, 1999 September 30, 1999
Type of Cost Other Charges Deductions Balance
------------ ----------------- ------------------ ------------------
<S> <C> <C> <C>
Employee Separation $2,228 $ 100 $2,128
Equipment Lease Settlements 2,242 234 2,008
Office Lease Settements 1,503 -- 1,503
Redundant Assets 998 957 41
------ ------ -------
$6,971 $1,291 $5,680
====== ====== ======
</TABLE>
Management believes that the remaining reserves for restructuring are
adequate to complete its plan.
8
<PAGE> 9
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
4. Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Equipment $2,253 $1,057
Furniture and fixtures 412 55
Leasehold improvements 141 74
Capitalized software development costs 1,026 --
------ ------
3,832 1,186
Less: Accumulated depreciation
and amortization 827 361
------ ------
$3,005 $ 825
====== ======
</TABLE>
5. Bank Facilities
Prior to the Merger, PIA California, Pacific and PIA Delaware (the "PIA
Borrowers") were parties to a Loan and Security Agreement dated December
7, 1998 (the "Mellon Loan Agreement") with Mellon Bank, N.A. ("Mellon").
PIA Borrowers were able to borrow on a revolving credit basis up to a
maximum of $20.0 million depending upon their borrowing base availability.
This facility has been terminated and fully satisfied.
Prior to the Merger, 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 to constitute 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 superceded by (and continued as part of) the
facility described below.
In September 1999, IBJ Whitehall and the members of the SPAR Group (other
than PIA Canada) (collectively, the "Borrowers") entered into a Second
Amended and Restated Revolving Credit, Term Loan and Security Agreement
(the "Bank Loan Agreement"), pursuant to which the Borrowers are permitted
to borrow up to a maximum of $12.5 million on a revolving credit basis,
and $2.5 million on a term basis (the "Term Loan"), all of which Term Loan
is outstanding. The revolving loans bear interest at IBJ Whitehall's
"Alternate Base Rate I" plus one-half of one percent (0.50%) (a total of
9.25% per annum at September 30, 1999), and the Term Loan bears interest
at such "Alternate Base Rate II" plus three-quarters of one percent
(0.75%) (a total of 9.75% per annum at September 30, 1999). The Bank Loan
Agreement is scheduled to mature on September 22, 2002. The Term Loan
amortizes in equal monthly installments of $83,334 each. In addition, the
Borrowers are required to make mandatory prepayments in an amount equal to
25% of Excess Cash Flow for each fiscal year, to
9
<PAGE> 10
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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 line of credit
is secured with the assets of the SPAR Group.
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. At September 30, 1999, the Company did not comply with the
minimum net worth covenant and a waiver was granted by the bank. The
Company cannot guarantee that future waivers will be granted by the bank.
In the event that the bank elects not to grant a waiver for covenant
non-compliance, the bank has the ability to immediately accelerate the
maturity of the credit facility, which could have a material adverse
affect on the Company.
The balance outstanding on this line of credit was $6.8 million and $4.1
million at September 30, 1999 and December 31, 1998, respectively. As of
September 30, 1999, the SPAR Group had unused availability under the line
of credit to borrow up to an additional $5.7 million.
6. Segments
Utilizing the management approach, the SPAR Group has broken down its
business based upon the nature of services provided (i.e., merchandising
services and incentive marketing services). The Merchandising Services
Division consists of SMI (an intermediate holding company), SMF, SMNEV,
SBRS and SINC (collectively, the "SPAR Marketing Companies") and the PIA
Companies. The Incentive Marketing Division consists of each of SIM (an
intermediate holding company) and SPGI. 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 client's 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 and 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 administration, travel and
merchandise fulfillment services to companies seeking to motivate
employees, salespeople, dealers, distributors, retailers and consumers
toward certain action or objectives. The following table presents segment
information (in thousands):
10
<PAGE> 11
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
MERCHANDISING SERVICES INCENTIVE MARKETING TOTAL
---------------------------- ----------------------------- -----------------------------
Three Months Ended Three Months Ended Three Months Ended
---------------------------- ----------------------------- -----------------------------
September 30, September 30, September 30, September 30, September 30, September 30,
1999 1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $29,442 $11,095 $ 6,948 $ -- $36,390 $ 11,095
Cost of Revenues 18,850 5,415 5,616 -- 24,466 5,415
------- ------- ------- ---- ------- -------
Gross Profit 10,592 5,680 1,332 -- 11,924 5,680
S G & A 9,310 3,521 1,378 -- 10,688 3,521
------- ------- ------- ---- ------- -------
EBITDA $ 1,282 $ 2,159 $ (46) $ -- $ 1,236 $ 2,159
======= ======= ======= ==== ======= ========
Total Assets $43,305 $12,298 $20,191 $ -- $63,496 $ 12,298
======= ======= ======= ==== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended Nine Months Ended
---------------------------- ----------------------------- -----------------------------
September 30, September 30, September 30, September 30, September 30, September 30,
1999 1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $49,353 $30,076 $28,596 $ -- $77,949 $30,076
Cost of Revenues 29,532 15,133 23,389 -- 52,921 15,133
------- ------- ------- ---- ------- -------
Gross Profit 19,821 14,943 5,207 -- 25,028 14,943
S G & A 16,440 9,841 3,987 -- 20,427 9,841
------- ------- ------- ---- ------- -------
EBITDA $ 3,381 $ 5,102 $ 1,220 $ -- $ 4,601 $ 5,102
======= ======= ======= ==== ======= ========
Total Assets $43,305 $12,298 $20,191 $ -- $63,496 $12,298
======= ======= ======= ==== ======= ========
</TABLE>
7. Income Taxes
From commencement through July 8, 1999, most of the operating SPAR
Companies had elected to be treated as S Corporations under subchapter S
of the Internal Revenue Code of 1986, as amended. As such, federal income
taxes attributable to income through July 8, 1999 were the responsibility
of the individuals who were the stockholders of the applicable SPAR
Companies at that time.
As a result of the July 8, 1999 Merger, 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
approximately $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 carry forwards. The individuals who were the stockholders
of the applicable SPAR Companies at that time are obligated to pay the
1999 income taxes relating to taxable income during the period up to the
Merger date.
The pro forma disclosures on the statement of operations reflect
adjustments to record provisions for income taxes as if the applicable
SPAR Company had not been S Corporations. The pro forma provisions for
income taxes for three months ended September 30, 1999 and 1998, of $0.2
million and $0.7 million, respectively, are computed using a combined
federal and state of 37%. The pro forma provision for income taxes for the
nine months ended September 30, 1999 and 1998, were $1.2 million and $1.7
million, respectively.
11
<PAGE> 12
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The recording of a one-time, non-cash stock related compensation expense
of approximately $0.8 million is non-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 non-tax deductible.
Pro forma tax disclosures have been adjusted by the non-tax deductibility
of compensation expense and PIA goodwill amortization.
Deferred taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Net operating loss carry forwards $ 6,425
Restructuring charges and other deferred tax assets 2,375
Nonrecurring charge for termination
of subchapter S election (3,100)
-------
Deferred tax assets 5,700
Valuation allowance (5,700)
-------
Net deferred tax $ --
=======
</TABLE>
At July 8, 1999, the PIA Companies had estimated net operating loss carry
forwards of $19.0 million available to reduce future federal taxable
income and $4.0 million available to reduce future California State
taxable income. The Company has Federal and California net operating loss
carry forwards which begin expiring in the year 2012 and 2002,
respectively. The Company has established a valuation allowance for the
portion of the tax benefit associated with net operation loss carry
forwards that are not assured of being realized.
12
<PAGE> 13
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
8. Earnings per Share
The following table sets forth the computations of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Numerator:
Pro forma net income $ 282 $ 2,005 $ 2,324 $ 4,734
======= ======= ======= =======
Denominator:
Shares used in pro forma
basic earnings per share
calculation(1) 18,153 12,659 14,350 12,659
Effect of diluted securities:
Employee stock options 142 -- 141 --
Warrants -- -- -- --
------- ------- ------- -------
Shares used in pro forma diluted
earnings per share calculations(1) 18,295 12,659 14,491 12,659
======= ======= ======= =======
Pro forma basic earnings per share(1) $ 0.01 $ 0.10 $ 0.08 $ 0.24
======= ======= ======= =======
Pro forma diluted earnings per share(1) $ 0.01 $ 0.10 $ 0.08 $ 0.24
======= ======= ======= =======
</TABLE>
- ---------------
(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, 1989 as required to comply with SFAS No. 128 and
the Securities and Exchange Commission Staff Accounting Bulletin 98 (SAB
98).
9. Notes Payable to Certain Stockholders
Certain former principal stockholders of the SPAR Companies each made
loans to certain SPAR Companies in the aggregate amount of $4.3 million to
facilitate the acquisition of the PIA Companies and the assets of Old MCI.
These stockholders also were owed $1.9 million in unpaid distributions
relating to the former status of most of the operating SPAR Companies as
subchapter S Corporations. Those amounts were converted into promissory
notes issued to theses certain stockholders severally by SMF, SINC and
SPGI prior to the Merger, which aggregated $6.2 million.
Notes payable to certain stockholders total $6.1 million as of September
30, 1999 and bear an interest rate of 8%, due on demand.
10. Stockholders' Equity
As a result of 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 and all subsequent earnings
have been treated from July 9, 1999 as earnings of the new SPAR Group
under a C Corporation.
13
<PAGE> 14
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following table displays a roll-forward of the stockholder's equity
(in thousands):
<TABLE>
<CAPTION>
Common Stock Total
---------------- Additional Shareholders'
Shares Amount Paid-In Capital Retained Earnings Equity
------ ------ --------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
JANUARY 1, 1999 $ (1,405)
Stock option compensation 752
Net distributions (332)
Net income through July 8, 1999 1,996
Deterred tax provision-termination
of S-election (3,100)
--------
JULY 8, 1999 $ (2,089)
========
Reorganization prior to the reverse
Merger with PIA 12,659 127 (2,216) (2,089)
Reverse Merger with PIA 5,494 55 12,307 12,362
Net income July 9, 1999 to
September 30, 1999 304 304
------ ----- ------- ----- --------
SEPTEMBER 30, 1999 18,153 $ 182 $10,091 $ 304 $ 10,577
====== ===== ======= ===== ========
</TABLE>
11. Business Combinations - Pro Forma Results
As mentioned in Note 1, 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. The pro forma
results below assume the acquisitions occurred at the beginning of each of
the nine month periods ending September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
NET REVENUES $122,547 $155,238
======== ========
OPERATING INCOME (LOSS) (5,686) 1,800
======== ========
NET INCOME (LOSS) $ (4,691) $ 499
======== ========
BASIC EARNINGS (LOSS) PER SHARE $ (0.26) $ 0.03
======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.26) $ 0.03
======== ========
BASIC WEIGHTED AVERAGE COMMON SHARES 18,153 18,153
======== ========
DILUTED WEIGHTED AVERAGE COMMON SHARES 18,295 18,295
======== ========
</TABLE>
14
<PAGE> 15
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The pro forma Statements of Operations reflect incremental amortization of
goodwill, interest expense, increases in salaries and bonuses to new SPGI
management and provisions for federal and state income taxes.
The pro forma Statement of Operations for the nine months ended September
30, 1999 and 1998 include $2.8 million and $0.8 million of non-recurring
charges by PIA Companies, respectively. These charges include $0.8 million
of purchased consulting services related to the
PIA Companies redirection of its technology strategy incurred in the nine
months ended September 30, 1998, and $2.3 million in merger and
acquisition transaction costs and $0.5 million in banking cancellation
fees for the nine months ended September 30, 1999.
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.
15
<PAGE> 16
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 "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. Important factors that could cause actual
results to differ materially from the forward-looking statements made in this
Quarterly Report on Form 10-Q are set forth under the heading "Risk Factors" in
the Merger Proxy Statement (as defined in Note 2, above) and in this Quarterly
Report on Form 10-Q. All forward-looking statements attributable to the SPAR
Group or persons acting on its behalf are expressly qualified by the cautionary
statements contained in this Quarterly Report on Form 10-Q.
The SPAR Group does not undertake any obligation to update or revise any
forward-looking statement or risk factor or to publicly announce any revisions
to any of them to reflect future events, developments or circumstances.
OVERVIEW
The Company provides merchandising services to manufacturers and retailers
principally in grocery, mass merchandiser, chain, and discount drug stores
through its Merchandising Services Division. In addition, the SPAR Group's
Incentive Marketing Division designs and implements premium incentives, managers
meetings and group travel for principally corporate clients.
During 1999, SPGI acquired the assets of Old MCI on January 15, 1999 and the
SPAR Companies completed the Merger with the PIA Parties on July 8, 1999 (as all
such terms are defined in Note 2, to the Condensed Consolidated Financial
Statements).
Under GAAP, the Merger is treated as an acquisition by the SPAR Companies of the
PIA Companies, and the historical results of the operations of the PIA Companies
are not applicable to the historical results of the operations of the SPAR Group
pre-Merger. Similarly, since SPGI acquired the assets of Old MCI, the historical
results of the operations of Old MCI are not applicable to the historical
results of the operations of the SPAR Group pre-acquisition. Accordingly, the
following discussions (other than with respect to the combined pro forma numbers
discussed in Note 10, to the Condensed Consolidated Financial Statements, and
separately below) do not include any of the revenues and expenses of the PIA
Companies prior to July 9, 1999 (including all of 1998), or any revenues or
expenses of the business acquired by SPGI prior to January 16, 1999 (including
all of 1998), in the revenues and expenses of the SPAR Group prior to such
dates.
For the quarter ended September 30, 1999, the SPAR Group's net revenues
increased by $25.3 million or 227.9% derived principally from the above
acquisitions with no comparable net revenues in 1998. Pro forma net income for
the quarter ended September 30, 1999 was $0.1 million compared to $2.0 million
in the same period of 1998, due principally from the inclusion of lower gross
profit margins from the PIA Companies and the Incentive Marketing Division
operations and additional merger and acquisition related transaction costs.
16
<PAGE> 17
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
For the nine months ended September 30, 1999, the SPAR Group's net revenues
increased by $47.9 million or 159.1% derived principally from the inclusion of
the Incentive Marketing Division's net revenues for approximately 8 1/2 months
and the PIA Companies net revenues for approximately 2 2/3 months with no
comparable net revenues in 1998. Pro forma net income for the nine months ended
September 30, 1999 was $1.1 million compared to $3.0 million in the same period
of 1998, due principally from the inclusion of lower gross profit margins from
the PIA Companies and Incentive Marketing Division operations.
During the third quarter of 1999, the SPAR Group restructured its operations by
integrating the SPAR Companies and the PIA Companies' field organizations and
consolidating administrative functions as required to achieve beneficial
synergies and cost savings. Although significant cost savings were achieved
during the third quarter, not all synergistic programs had been implemented, and
further cost savings are expected to be achieved in the fourth quarter of 1999
and first quarter of 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET REVENUES
Net revenues for the quarter ended September 30, 1999 increased from the
comparable period of 1998 due principally to the acquisition of the PIA
Companies and the MCI Acquisition. All of the net revenues derived from the
acquisition of the PIA Companies and the MCI Acquisition were included in the
quarter ended September 30, 1999 with no comparable revenues in the quarter
ended September 30, 1998. For the third quarter of 1999, net revenues were $36.4
million compared to $11.1 million in the third quarter of 1998, a 227.9%
increase.
The following table sets forth net revenues by division as a percentage of net
revenues for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------ Change
(amounts in millions) Amount % Amount % %
------- ----- ------- ----- ------
<S> <C> <C> <C> <C> <C>
Merchandising services net revenues $ 29.4 80.8% $ 11.1 100.0% 164.9%
Incentive Marketing net revenues 7.0 19.2 -- -- --
------- ----- ------- ----- -----
Net Revenue $ 36.4 100.0% $ 11.1 100.0% 227.9%
======= ===== ======= ===== =====
</TABLE>
Merchandising services net revenues for the quarter ended September 30, 1999
were $29.4 million, compared to $11.1 million in the quarter ended September 30,
1998, a 164.9% increase. The increase in net revenues is primarily attributed to
the inclusion of $19.6 million of net revenues of the PIA Companies'
merchandising operations since their acquisition. In addition, the SPAR
Companies merchandising net revenues decreased by $1.3 million due to the
reduction in project type services.
Incentive marketing net revenues for the quarter ended September 30, 1999 were
$7.0 million, with no comparable net revenues in the quarter ended September 30,
1998. The increase in net revenues is attributable entirely to the inclusion of
net revenues of SPGI since the MCI Acquisition.
17
<PAGE> 18
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
COST OF REVENUES
Cost of revenues for the quarters ended September 30, 1999 and September 30,
1998 were $24.5 million and $5.4 million, respectively. Cost of revenues for the
quarter ended September 30, 1999 was 67% of net revenues, compared to 49% in
1998. The increase in cost of revenues, as a percentage of net revenues, in the
quarter ended September 30, 1999 over 1998 is primarily attributable to the
higher labor cost structure of the PIA Companies field organization and the
integration of the Incentive Marketing Division, which historically has a lower
margin than the SPAR Companies' merchandising segment. The SPAR Group has taken
steps to control and improve gross profits and has implemented synergy plans to
control direct costs (see Restructuring and Other Charges, Note 3).
OPERATING EXPENSES
The following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------ Change
(amounts in millions) Amount % Amount % %
------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative expenses $ 10.7 93.9% $ 3.6 100.0% 197.2%
Depreciation and amortization 0.7 6.1 -- -- --
------- ----- ------ ----- -----
Total Operating Expenses $ 11.4 100.0% $ 3.6 100.0% 216.6%
======= ===== ====== ===== =====
</TABLE>
Selling, general and administrative expenses increased by 197.2% in the third
quarter of 1999 to $10.7 million compared to $3.6 million in the same period of
1998. This increase was due primarily to the inclusion of the PIA Companies and
SPGI general and administrative costs for the entire quarter totaling $7.7
million and SPAR Companies merger and acquisition transaction costs of $0.3
million. This increase was partially offset by a reduction in salaries, wages
and other related benefits of $0.9 million.
Depreciation and amortization increased by $0.7 million in the third quarter of
1999 due primarily to the amortization of goodwill recognized by the acquisition
of the PIA Companies and the MCI Acquisition by the SPAR Group.
OTHER EXPENSES
Interest expense increased in the third quarter of 1999 due to borrowing on the
bank revolving line of credit and term loan, and MCI seller financing.
18
<PAGE> 19
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
PRO FORMA INCOME TAXES
The pro forma income tax provision in the third quarter of 1999 and 1998
represents a combined federal and state income tax rate of 36.9% and minimum
state and local taxes.
PRO FORMA NET INCOME
The SPAR Group had pro forma net income of $0.1 million in the third quarter of
1999 or $0.01 per pro forma basic and diluted share compared to pro forma net
income of $1.3 million or $0.10 per pro forma basic and diluted share. The pro
forma income generated in the third quarter is reduced by the inclusion of the
losses of the PIA Companies and Incentive Marketing Divisions operations for the
quarter by $0.6 million. The Company is currently consolidating and
restructuring the operations of SPAR Group to reduce labor costs and
administrative costs (see Restructuring and Other Charges, Note 3).
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET REVENUES
Net revenues for the nine months ended September 30, 1999 increased from the
comparable period of 1998 due principally to the acquisition of the PIA
Companies and the MCI Acquisition. All of the net revenues derived from the MCI
Acquisition, were included in the nine months ended September 30, 1999 and those
derived from the acquisition of the PIA Companies were included in the third
quarter ended September 30, 1999, with no comparable revenues in the nine months
ended September 30, 1998. For the nine months ended September 30, 1999, net
revenues were $78.0 million compared to $30.1 million in the same period of
1998, a 159.1% increase.
The following table sets forth net revenues by division as a percentage of net
revenues for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------ Change
(amounts in millions) Amount % Amount % %
------- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Merchandising services net revenues $ 49.4 63.3% $ 30.1 100.0% 64.1%
Incentive Marketing net revenues 28.6 36.7 -- -- --
------- ----- ------- ----- -----
Net Revenue $ 78.0 100.0% $ 30.1 100.0% 159.1%
======= ===== ======= ===== =====
</TABLE>
Merchandising services net revenues for the nine months ended September 30, 1999
were $49.4 million, compared to $30.1 million in the nine months ended September
30, 1998, a 64.1% increase. The increase in net revenues is primarily attributed
to the inclusion of $19.6 million of net revenues of the PIA Companies,
merchandising operations since their acquisition.
Incentive marketing net revenues for the nine months ended September 30, 1999
were $28.6 million, with no comparable net revenues in the quarter ended
September 30, 1998. The increase in net revenues is attributable entirely to the
inclusion of net revenues of SPGI since the MCI Acquisition.
19
<PAGE> 20
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
COST OF REVENUES
Cost of revenues for the nine months ended September 30, 1999 and September 30,
1998 were $52.9 million and $15.1 million, respectively. Cost of revenues for
the nine months ended September 30, 1999 was 68% of net revenues, compared to
50% in 1998. The increase in cost of revenues, as a percentage of net revenues,
in the nine months ended September 30, 1999 over 1998 is primarily attributable
to the higher labor cost structure of the PIA Companies field organization and
the integration of the Incentive Marketing Division, which historically has a
lower margin than the SPAR Companies' merchandising segment. The Company has
taken steps to control and improve gross profits and has implemented synergy
plans to control direct costs (see Restructuring and Other Charges, Note 3).
OPERATING EXPENSE
The following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------ Change
(amounts in millions) Amount % Amount % %
-------- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative expenses $ 20.4 94.4% $ 9.8 99.0% 108.2%
Depreciation and amortization 1.2 5.6 0.1 1.0 1100.0
------- ----- ------ ----- ------
Total Operating Expenses $ 21.6 100.0% $ 9.9 100.0% 118.2%
======= ===== ====== ===== ======
</TABLE>
Selling, general and administrative expenses increased by 108.2% in the first
nine months of 1999 to $20.4 million compared to $9.8 million in the same period
of 1998. This increase was due primarily to the inclusion of PIA Companies for
the quarter ended September 30, 1999 and SPGI general and administrative costs
for the entire nine months, totaling $10.3 million, and stock related
compensation of $0.8 million. This increase was partially offset by a reduction
in salaries, wages and other related benefits of $0.3 million and capitalization
of customized internal software costs (under SOP 98-1) of $0.8 million.
Depreciation and amortization increased by $1.1 million in the nine months ended
September 30, 1999 due primarily to the amortization of goodwill recognized by
the purchase by SAI of the PIA Companies and by SPGI of the business and assets
of Old MCI.
OTHER EXPENSES
Interest expense increased in the nine months ended September 30, 1999 due to
borrowing on the bank revolving line of credit and term loan, and MCI seller
financing.
PRO FORMA INCOME TAXES
The pro forma income tax provision in the nine months ended September 30, 1999
and 1998 represents federal and state income taxes based on an effective tax
rate of 36.9% and minimum state and local taxes.
20
<PAGE> 21
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
PRO FORMA NET INCOME
The SPAR Group had net income of approximately $1.1 million in the nine months
ended September 30, 1999 or $0.08 per pro forma basic and diluted share compared
to net income of approximately $3.0 million, or $0.24 per pro forma basic and
diluted share, in the nine months ended September 30, 1998. The income generated
in the nine months ended September 30, 1999 is reduced by the inclusion of the
losses of the PIA Companies and Incentive Marketing Division operations for the
nine months ended September 30, 1999 by $0.4 million. The Company is currently
consolidating and restructuring the operations of the PIA Companies to reduce
labor costs and administrative costs (see Restructuring and Other Charges,
Note 3).
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended September 30, 1999, the SPAR Group had pre-tax income
of $2.3 million and experienced substantial negative operating cash flow. As
noted, the Merger was consummated on July 8, 1999 and is expected to reduce
fixed costs and create synergies directly impacting the SPAR Group's
profitability and cash flow. The SPAR Group cannot guarantee that it will not
sustain losses in the future.
The SPAR Group experienced a net increase in cash and cash equivalents of $1.5
million for the nine months ended September 30, 1999. With the addition of the
revolving line of credit subject to availability, timely collection of
receivables, and the SPAR Group's current working capital position, management
believes the funding of operations over the next twelve months will be
sufficient to maintain operations.
Prior to the Merger, the PIA Borrowers had an asset based loan facility under
which they were able to borrow on a revolving credit basis up to a maximum of
$20.0 million depending upon their borrowing base availability (see Note 2, to
the Condensed Consolidated Financial Statements), which has since been
terminated and satisfied in full. Prior to the Merger, SMF had a loan facility
comprised of a term loan of $3.0 million and an asset based revolving credit
facility under which it was able to borrow up to a maximum of $6.0 million
depending upon its borrowing base availability (see Note 2, to the Condensed
Consolidated Financial Statements), which has been superceded by (and continued
as part of) the current facility described below.
In September 1999, the members of the SPAR Group (other than PIA Canada) entered
into an amended and restated asset based credit facility, pursuant to which
those borrowers are permitted to borrow up to a maximum of $12.5 million on an
asset based revolving credit basis, and have borrowed $2.5 million on a term
basis. This facility is scheduled to mature on September 22, 2002, although
revolving credit loans are automatically repaid as pledged receivables are
collected. The Term Loan amortizes in equal monthly installments of $83,334
each. In addition, the SPAR Group is required to make mandatory prepayments in
an amount equal to 25% of excess cash flow for each fiscal year, to be applied
first to the term loan and then to the revolving credit loans (subject to the
SPAR Group's ability to re-borrow revolving advances in accordance with the
terms of the facility).
Net cash used in operating activities for the nine months ended September 30,
1999 was $4.6 million, compared with net cash provided of $5.3 million for the
comparable period in 1998. This use of cash for operating activities in 1999
resulted primarily from an increase in accounts receivables and prepaid
expenses.
21
<PAGE> 22
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Net cash provided from investing activities for the nine months ended September
30, 1999 and September 30, 1998 was $6.5 million and $(0.6) million,
respectively. Net cash provided from investing activities resulted primarily
from the purchase of businesses, net of cash acquired.
Net cash used by financing activities for the nine months ended September 30,
1999 was $0.4 million, compared with $(4.6) million for the comparable period in
1998. Proceeds from the line of credit and loans from certain shareholders were
used primarily to make payments on the MCI Note.
The above activity resulted in a net increase in cash and cash equivalents of
$1.5 million for the nine months ended September 30, 1999, compared to a net
increase of $0.1 million for the comparable period in 1998.
Cash and cash equivalents totaled $2.4 million at September 30, 1999, compared
with $0.9 million at December 31, 1998. At September 30, 1999 and December 31,
1998, the SPAR Group had negative working capital of $14.7 million and $2.3
million, respectively, and current ratios of 0.7 and 0.9, 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.
The SPAR Group is obligated, under certain circumstances, to pay severance
compensation to its employees and lease obligations in connection with the
Merger of approximately $5.7 million. Further the company incurred substantial
cost in connection with the transaction, including legal, accounting and
investment banking fees estimated to be an aggregate unpaid obligation of
approximately $1.3 million. The SPAR Group has also accrued approximately $2.4
million for expenses incurred at PIA prior to the Merger which have not been
paid.
The SPAR Group is currently not generating sufficient cash from operations to
pay those costs and is relying on bank credit facilities to fund working capital
needs. Bank credit facilities may not be sufficient to fund operations, working
capital and reduce obligations of the Merger with PIA and fund the current
maturities of debt obligations. The Company is currently negotiating with its
bank for an increase in its credit facility to meet these needs. In addition,
the SPAR Group is working to secure additional long term capital to fund
obligations of the Merger and potential future acquisitions, however, there can
be no assurances that sufficient liquidity will be available to fund these cash
needs.
The transfer of the Company's securities to the Nasdaq SmallCap Market also
could affect its ability to raise equity capital. (See Part II, Item 5, below)
In connection with the acquisition of the business and assets of Old MCI by
SPGI, SPGI issued the MCI Note in the amended principal amount of $8.8 million ,
under which SPGI owed $4,687,225 in principal at September 30, 1999, excluding
the earn-out payment, if any, due under the terms of the MCI Purchase Agreement.
On October 1, 1999, SPGI repaid $2.3 million of that amount and issued an
amended and restated note to Old MCI (the "Restated MCI Note") in the principal
amount of $2.4 million , under which $1.1 million in principal amount remains
unpaid and is due in full on November 30, 1999, together with interest at the
rate of 12% per annum.
22
<PAGE> 23
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
In addition, certain former principal stockholders of the SPAR Companies each
made loans to certain SPAR Companies in the aggregate amount of $4.3 million to
facilitate the acquisition of the PIA Companies and the assets of Old MCI. These
stockholders also were owed $1.9 million in unpaid distributions relating to the
former status of most of the operating SPAR Companies as Subchapter S
Corporations (See Note 9, above). 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.
YEAR 2000 SOFTWARE COSTS
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, many
date-sensitive computer applications will fail beginning January 1, 2000 because
they are unable to process dates properly beyond December 31, 1999. The SPAR
Group has reviewed its computer systems to identify areas that could be affected
by Year 2000 issues and has implemented a plan to resolve these issues.
The SPAR Group has substantially completed the evaluation of its information
technology infrastructure, software, hardware and communications systems and
believes that its critical hardware and software applications are currently Year
2000 compliant. Completion of the SPAR Group's plan to upgrade all hardware and
software applications to be Year 2000 compliant is expected by the end of the
fiscal year 1999. Third party vendors are also being reviewed for Year 2000
compliance and SPAR Group expects this risk assessment to be complete by the end
the fiscal year 1999. Assessment and evaluation efforts include testing systems,
inquiries of third parties and other research. By implementing significant
systems upgrades, the SPAR Group believes that it has substantially reduced its
potential internal exposure to Year 2000 problems.
The most likely worst case scenario with respect to Year 2000 involves problems
experienced by staffing suppliers. In such a scenario the SPAR Group's ability
to efficiently deploy the necessary staff to service its clients' needs could be
negatively affected. The SPAR Group does not anticipate that any such effects
would be of a long term nature as it has alternative methods of deploying staff
that do not involve the use of such suppliers. In the event that certain systems
fail to function properly, manual processes will be implemented. Due to the
nature of the business, the SPAR Group does not anticipate a system failure to
cease the operations, as operations are not deemed to be systems dependent.
Additionally, the SPAR Group plans to be capable of operating in the event of a
systems failure of any vendor.
The SPAR Group will utilize internal resources to reprogram, or replace and test
the software for Year 2000 modifications. The total cost of the Year 2000
project is estimated at $0.5 million and is being funded through operating cash
flows. Of the total project cost, approximately $80,000 was expensed in the year
1998, $380,000 was expensed in the first nine months of 1999, and the remaining
$33,000 will be expensed in the last three months of 1999. It is not expected
that these costs will have a material effect on the results of operations.
23
<PAGE> 24
The extent and magnitude of the Year 2000 problem as it will affect the SPAR
Group externally, both before and after January 1, 2000, is difficult to predict
or quantify for a number of reasons. These include the lack of control over
systems that are used by third parties that are critical to the SPAR Group's
operation, the complexity of testing inter-connected networks and applications
that depend on third party networks. If any of these third parties experience
Year 2000 problems, it could have a material adverse effect on the SPAR Group.
The SPAR Group is not currently aware of any material operational issues
associated with preparing its internal systems for the Year 2000, or the
adequacy of critical third party systems. The SPAR Group has not developed a
contingency plan in case it does not achieve Year 2000 compliance on or before
December 31, 1999. The results of its evaluation and assessment efforts do not
indicate a need for contingency planning. The SPAR Group intends to continue
assessing its Year 2000 compliance, implementing compliance plans and
communicating with third parties about their Year 2000 compliance. If the SPAR
Group's continued efforts indicate that contingency planning is prudent, it will
undertake appropriate planning at that time.
24
<PAGE> 25
ITEM 3: 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 it's cash and cash
equivalent. 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.
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. The average
yields on the SPAR Group's investments for the quarter ended September 30, 1999
were approximately 3.6% based on outstanding investments that ranged from $1.4
million to $5.9 million. There were no comparative average yields on the SPAR
Group's investments or outstanding investments for the quarter ended September
30, 1998.
The average yields on the SPAR Group's investments for the nine months ended
September 30, 1999 were approximately 3.3% based on outstanding investments that
ranged from $0.1 million to $5.9 million. There were no comparative average
yields on the SPAR Group's investments or outstanding investments for the nine
months ended September 30, 1998. As of September 30, 1999, SPAR Group's cash and
cash equivalents and investments totaled $2.4 million and consisted primarily of
taxable money market instruments with an average yield of approximately 3.6%. As
of September 30, 1998, SPAR's cash and cash equivalents and investments totaled
$0.1 million and consisted primarily of non-invested funds. If there were a 10%
change in the average yield based upon the SPAR Group's outstanding investments
of $2.4 million, interest income would increase or decrease by approximately
$9,000 per annum.
DEBT
Prior to the Merger, the PIA Borrowers had an asset based loan facility under
which they were able to borrow on a revolving credit basis up to a maximum of
$20.0 million depending upon their borrowing base availability (see Note 2,
above), which has since been terminated and satisfied in full.
Prior to the Merger, SMF had a loan facility comprised of a term loan of $3.0
million and an asset based revolving credit facility under which it was able to
borrow up to a maximum of $6.0 million depending upon its borrowing base
availability (see Note 2, above), which has been superceded by (and continued as
part of) the current facility described below.
25
<PAGE> 26
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
On or about September 22, 1999, the members of the SPAR Group (other than PIA
Canada) entered into an amended and restated asset based credit facility,
pursuant to which those borrowers are permitted to borrow up to a maximum of
$12.5 million on an asset based revolving credit basis, and have borrowed $2.5
million on a term basis. The revolving loans and term loan each requires monthly
interest payments based on a variable interest rate applied to the outstanding
loan balance as of September 30, 1999 of $9.3 million. The revolving loans bear
interest at the lenders "Alternate Base Rate I" plus one-half of one percent
(0.50%) (a total of 9.25% at September 30, 1999), and the term loan bears
interest at such "Alternate Base Rate II" plus three-quarters of one percent
(0.75%) (a total of 9.75% at September 30, 1999). The weighted average interest
rate on borrowings for the quarter ended September 30, 1999 and nine months
ended September 30, 1999 was 9.2% and 9.0%, respectively. The weighted average
interest rate on borrowings for the quarter ended September 30, 1998 and nine
months ended September 30, 1998 was 9.7% and 9.6%, respectively. If there were a
10% change in the interest rate based upon the SPAR Group's average borrowing
requirement of $9.3 million, interest expense would increase or decrease by
$85,000 per annum.
26
<PAGE> 27
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On September 14, 1999, a Summons and Complaint for Breach of Contract
and Account Stated was filed by Pomerantz Payroll Systems, Inc.
("Pomerantz"), against PIA Merchandising Co., Inc., and various of the
PIA Companies in the Superior Court of the State of California, County
of Orange, Case no. 814483, in support of which was filed a Memorandum
of Points and Authorities in Support of Application for Ex Parte Right
to Attach Order and issuance of Writ of Attachment Against Defendant PIA
Merchandising Co., Inc. Pomerantz, which provided temporary labor,
alleged that the Company failed to pay amounts due to Pomerantz under a
Temporary Labor Contract Agreement dated as of November 1, 1992, and
sought payment of approximately $2.2 million. On or about September 27,
1999, the Company and Pomerantz entered into a Settlement Agreement and
Mutual Release providing for the immediate payment of $0.9 million by
the Company to Pomerantz and the full release and satisfaction of all
other claims, amounts and disputes, effective approximately 90 days
thereafter conditioned upon the full and final payment of the foregoing
sum.
On September 23, 1999, Information Leasing Corporation ("IFC") filed a
complaint for breach of contracts, claim and delivery, and conversion
against the Company in Orange County Superior Court, Santa Ana,
California, Case no. 814820, with respect to certain equipment leased to
the PIA Companies by IFC, which complaint sought judgment to recover the
principal sum of $1,535,869.68, plus taxes, fees, liens, and late
charges, immediate possession of the leased equipment, compensation for
the reasonable value thereof, and costs and attorneys' fees. The Company
is currently attempting to negotiate a settlement.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Item 2(a): Stockholders' Ability to Act by Written Consent
On July 8, 1999, the Certificate of Incorporation of the Company was
amended to delete the provision that no action required to be taken or
that may be taken at any annual or special meeting of the Company's
stockholders may be taken without a meeting and denies the power of the
stockholders to consent in writing, without a meeting, to the taking of
any action pursuant to the Delaware law. Pursuant to such amendment, the
Company's stockholders may not have the opportunity to approve certain
corporate actions, in person or by proxy at a meeting of the
stockholders. However, any action taken by the stockholders of the
Company without a meeting will be required to comply with applicable
law, including, without limitation, the General Corporate Law of the
State of Delaware and, if applicable, the rules of the Nasdaq then in
effect.
Item 2(b): Not applicable
Item 2(c): Issuance of Shares in Merger
On July 8, 1999 pursuant to the Merger Agreement, the Company issued an
aggregate of 12,659,487 shares of its common stock to the former
stockholders of SAI in exchange for an equivalent number shares of the
common stock of SAI, except that holders of fractional shares received
cash in lieu of any fractional share. In addition, at the time of the
Merger, the Company assumed all outstanding options to purchase
27
<PAGE> 28
PART II: OTHER INFORMATION (Continued)
common stock of SAI and issued Substitute Options covering an aggregate
of 134,114 shares of the Company's common stock, pursuant to its Special
Purpose Option Plan to the holders of such SAI options. Each Substitute
Option provides the same terms and conditions (including an exercise
price of $.01 per share and vesting effective as of the date of the
Merger) and the right to purchase the same number of shares as the
surrendered options in SAI.
The Company is relying on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, for the issuance
of shares of the Company's Common Stock and substitute options in
connection with the Merger.
Item 2(d): Use of Past Proceeds
PIA Delaware received $26.5 million in net proceeds from its initial
public offering in March 1996. The proceeds were acquired by the SPAR
Companies pursuant to the Merger and, as originally outlined in "Use of
Proceeds" in the PIA Delaware prospectus, were entirely used through the
period ended September 30, 1999, for debt repayment, capital spending
and working capital requirements and to repurchase the Company's Common
Stock.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on July 8, 1999. The
meeting was held to elect the Board of Directors and to vote on six
other proposals. The other proposals were:
Proposal 1: Approve the issuance of shares of the Company's common stock
to the SAI stockholders and the issuance of options to purchase 134,114
shares of the Company's common stock to the holders of SAI options in
exchange for their respective shares of common stock of SAI and SAI
options as consideration for the Merger of a subsidiary of the Company
with and into SAI;
Proposal 2: Amend the Company's Certificate of Incorporation to increase
the number of authorized shares of the Company's common stock from 15
million to 47 million;
Proposal 3: Amend the Company's Certificate of Incorporation to delete
the prohibition on stockholder action by written consent without a
meeting under Delaware law;
Proposal 4: Amend the Company's Certificate of Incorporation to change
the Company's existing name from PIA Merchandising Services, Inc. to
"SPAR Group, Inc.;"
Proposal 5: Authorize an amendment, if deemed necessary by the Board of
Directors in its sole discretion, to the Company's Certificate of
Incorporation to effect a reverse stock split of the issued and
outstanding shares of the Company's common stock, on the
28
<PAGE> 29
PART II: OTHER INFORMATION (Continued)
basis of one of the following ratios: one share in exchange for every
two issued and outstanding shares, one share in exchange for three
issued and outstanding shares or one share for every four issued and
outstanding shares, with the Board of Directors having the discretion to
determine the appropriate ratio to use immediately prior to effecting
the reverse stock split; and
Proposal 6: Amend the Company's Amended and Restated 1995 Stock Option
Plan, subject to consummation of the Merger, to increase the number of
shares of the Company's common stock reserved for issuance upon exercise
of stock options granted from 1.3 million to 3.5 million.
The number of votes cast for each director are set forth below.
For
---------
Patrick W. Collins 3,185,241
J. Christopher Lewis 3,185,241
Terry R. Peets 3,185,241
John A. Colwell 3,190,516
Joseph H. Coulombe 3,185,341
Patrick C. Haden 3,185,341
Clinton E. Owens 3,191,623
Each of the nominees was elected to the Board of Directors. In
connection with the Merger, each of the nominees other than Mr. Collins
and Mr. Lewis resigned and appointed Robert G. Brown and William H.
Bartels (the two principal stockholders of the SPAR Companies) and
Robert O. Aders to fill three of the remaining five vacancies. All of
the Proposals were approved by a majority of the stockholders.
ITEM 5: OTHER INFORMATION
Effective with the open of business on November 15, 1999, the Company's
Common Stock will be listed and quoted on the Nasdaq SmallCap Market
instead of The Nasdaq National Market. The Company further reports that
its continued listing on the Nasdaq SmallCap Market depends upon the
filing of a Nasdaq listing application and successful completion of the
Nasdaq review process. The Company currently intends to promptly file
such application and is also exploring other exchanges on which to list
its Common Stock. This change is pursuant to Nasdaq's notice dated
November 10, 1999, to the Company advising of Nasdaq's determination
that the Company's Common Stock failed to comply with the minimum bid
price and market float requirements for continued listing on the Nasdaq
National Market. The transfer of the Company's securities to the Nasdaq
SmallCap Market could affect its ability to raise equity capital.
29
<PAGE> 30
PART II: OTHER INFORMATION (Continued)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit
3.1 to the Company's Form 10-Q for the 2nd Quarter ended July 2, 1999.)
3.2 By-laws of the Company (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, as amended. (Incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q for the 2nd Quarter ended July 2, 1999.)
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 the Company and Terry R. Peets
(incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q for the 2nd Quarter ended
June 30, 1997).
10.5 Severance Agreement dated as of February 20, 1998 between the Company 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 the Company 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 the Company and
Terry R. Peets (incorporated by reference to Exhibit 10.7 of the Company's Form 10-K/A for the
fiscal year ended January 1, 1999 (the "10-K/A").
10.8 Amended and Restated Severance Compensation Agreement dated as of October 1, 1998 between the
Company and Cathy L. Wood (incorporated by reference to Exhibit 10.8 of the Company's 10-K/A).
10.9 Loan and Security Agreement dated December 7, 1998 among Mellon Bank, N.A., PIA Merchandising
Co., Inc., Pacific Indoor Display Co. and the Company (incorporated by reference to Exhibit
10.9 of the Company's 10-K/A).
10.10 Agreement and Plan of Merger dated as of February 28, 1999 among the Company, S.G. Acquisition,
Inc., PIA Merchandising Co., Inc., SPAR Acquisition, In., SPAR Marketing, Inc., SPAR Marketing
Force, Inc., SPAR, Inc., SPAR/Burgoyne Retail Services, Inc., SPAR Incentive Marketing, Inc.,
SPAR MCI Performance Group, Inc. and SPAR Trademarks, Inc. (incorporated by reference to
Exhibit 10.10 of the Company's 10-K/A).
</TABLE>
30
<PAGE> 31
PART II: OTHER INFORMATION (Continued)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (continued)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.11 Voting Agreement dated as of February 28, 1999 among the Company, Clinton E. Owens, RVM/PIA,
California limited partnership, Robert G. Brown and William H. Bartels (incorporated by
reference to Exhibit 10.11 of the Company's 10-K/A).
10.12 Amendment No 2 to Employment Agreement dated as of February 11, 1999 between the Company and
Terry R. Peets (incorporated by reference to Exhibit 10.12 of the Company's 10-K/A).
10.13 Amended and Restated 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 (filed herein).
27.1 Financial Data Schedule
</TABLE>
(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.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPAR Group, Inc.
(Registrant)
By: /s/ Cathy L. Wood
----------------------------
Cathy L. Wood
Executive Vice President and
Chief Financial Officer
By: /s/ David J. Faulds
----------------------------
David J. Faulds
Vice President
Corporate Controller
Dated: November 18, 1999
-----------------
32
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit
3.1 to the Company's Form 10-Q for the 2nd Quarter ended July 2, 1999.)
3.2 By-laws of the Company (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, as amended. (Incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q for the 2nd Quarter ended July 2, 1999.)
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 the Company and Terry R. Peets
(incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q for the 2nd Quarter ended
June 30, 1997).
10.5 Severance Agreement dated as of February 20, 1998 between the Company 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 the Company 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 the Company and
Terry R. Peets (incorporated by reference to Exhibit 10.7 of the Company's Form 10-K/A for the
fiscal year ended January 1, 1999 (the "10-K/A").
10.8 Amended and Restated Severance Compensation Agreement dated as of October 1, 1998 between the
Company and Cathy L. Wood (incorporated by reference to Exhibit 10.8 of the Company's 10-K/A).
10.9 Loan and Security Agreement dated December 7, 1998 among Mellon Bank, N.A., PIA Merchandising
Co., Inc., Pacific Indoor Display Co. and the Company (incorporated by reference to Exhibit
10.9 of the Company's 10-K/A).
10.10 Agreement and Plan of Merger dated as of February 28, 1999 among the Company, S.G. Acquisition,
Inc., PIA Merchandising Co., Inc., SPAR Acquisition, In., SPAR Marketing, Inc., SPAR Marketing
Force, Inc., SPAR, Inc., SPAR/Burgoyne Retail Services, Inc., SPAR Incentive Marketing, Inc.,
SPAR MCI Performance Group, Inc. and SPAR Trademarks, Inc. (incorporated by reference to
Exhibit 10.10 of the Company's 10-K/A).
10.11 Voting Agreement dated as of February 28, 1999 among the Company, Clinton E. Owens, RVM/PIA,
California limited partnership, Robert G. Brown and William H. Bartels (incorporated by
reference to Exhibit 10.11 of the Company's 10-K/A).
10.12 Amendment No 2 to Employment Agreement dated as of February 11, 1999 between the Company and
Terry R. Peets (incorporated by reference to Exhibit 10.12 of the Company's 10-K/A).
10.13 Amended and Restated 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 (filed herein).
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.14
AMENDMENT NO. 1 TO AMENDED AND RESTATED
SEVERANCE COMPENSATION AGREEMENT
This AMENDMENT NO. 1 TO AMENDED AND RESTATED SEVERANCE COMPENSATION
AGREEMENT (this "Amendment") dated as of May 18, 1999, is made and entered into
by and between PIA Merchandising Services, Inc., a Delaware corporation
("Employer"), and Cathy L. Wood ("Executive").
R E C I T A L S
A. Employer and Executive have entered into that certain Amended and
Restated Severance Compensation Agreement dated as of October 1, 1998 (the
"Severance Compensation Agreement"). Capitalized terms used herein but which are
not otherwise defined shall have the meanings given to such terms in the
Severance Compensation Agreement.
B. Employer is a party to that certain Agreement and Plan of Merger
dated as of February 28, 1999, as amended, pursuant to which a wholly owned
subsidiary of Employer will merge with and into a corporation to be formed to
hold the operating companies of the Spar Group (the "Merger").
C. Pursuant to the terms of the Severance Compensation Agreement,
Executive has the right, in the event of a Change of Control, as such term is
defined in the Severance Compensation Agreement, during the one year period
following such Change of Control, to resign for Good Reason (as such term is
defined in the Severance Compensation Agreement) and receive the same severance
compensation as she would have received as if she were terminated by Employer
without Cause (as such term is defined in the Severance Compensation Agreement).
D. Good Reason is defined in the Severance compensation Agreement to
include, among other things, (i) the assignment to Executive (without
Executive's written consent) of any position, duties or responsibilities which
Executive, in her reasonable judgement, deems to be materially and substantially
less favorable than her position, duties and responsibilities with Executive
immediately prior to such Change of Control or (ii) a change in Executive's
reporting responsibilities, status, titles or offices as in effect immediately
prior to such Change of Control (without Executive's written consent) which
Executive, in her reasonable judgment, deems to be materially adverse to
Executive.
E. Executive and Employer agree and understand that Executive's
position, duties, responsibilities, reporting responsibilities and status will
change in certain respects following the Merger.
F. Executive has agreed to continue to serve as an officer and employee
of Employer at least for a period of time following the Merger.
<PAGE> 2
G. Employer and Executive desire to amend the terms of the Severance
Compensation Agreement as set forth herein to provide that Executive will have
the right to resign at any time during the one-year period following the
consummation of the Merger and receive the same compensation pursuant to the
Severance Compensation Agreement as if she were terminated by Employer without
Cause regardless of whether (and without the need to demonstrate that)
Executive's position, duties, responsibilities, reporting responsibilities,
status, titles or offices have been changed so as to constitute Good Reason as
such term is defined in the Severance Compensation Agreement.
A G R E E M E N T
In consideration of the foregoing recitals and the respective covenants
and agreements contained herein, the parties, intending to be legally bound,
agree as follows:
1. RIGHT TO RESIGN. In the even the Merger is consummated, Executive
shall have the right to resign at any time during the one year period following
the consummation of the Merger and such resignation shall be deemed to be and
constitute (and Executive shall receive the benefits provided for in the
Severance Compensation Agreement upon) a resignation for Good Reason with the
meaning of the Severance Compensation Agreement regardless of whether (and
without the need to demonstrate that) Executive's position, duties,
responsibilities, reporting responsibilities, status, titles or offices have
been changed so as to constitute Good Reason as such term is defined in the
Severance Compensation Agreement.
2. FULL FORCE AND EFFECT. Except as expressly amended hereby, the
Severance and Compensation Agreement shall continue in full force and effect in
accordance with the provisions thereof on the date hereof.
3. GOVERNING LAW. This Amendment shall be construed in accordance with
and governed by the Laws of the State of California without giving effect to the
principles of conflict of laws.
4. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute a single agreement.
2
<PAGE> 3
IN WITNESS WHEREOF, each of the parties has executed this Amendment as
of the dates set forth below.
"EMPLOYER": "EXECUTIVE":
PIA MERCHANDISING SERVICES,
INC., a Delaware corporation
By: /s/ PATRICK C. HADEN /s/ CATHY L. WOOD
--------------------------------------- -------------------------------
Patrick C. Haden, Director Cathy L. Wood
3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,429
<SECURITIES> 0
<RECEIVABLES> 28,540
<ALLOWANCES> 1,953
<INVENTORY> 0
<CURRENT-ASSETS> 36,412
<PP&E> 3,832
<DEPRECIATION> 827
<TOTAL-ASSETS> 63,496
<CURRENT-LIABILITIES> 51,080
<BONDS> 1,839
0
0
<COMMON> 182
<OTHER-SE> 10,395
<TOTAL-LIABILITY-AND-EQUITY> 63,496
<SALES> 36,390
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 24,466
<OTHER-EXPENSES> 11,392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302
<INCOME-PRETAX> 282
<INCOME-TAX> 184
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98<F1>
<EPS-BASIC> 0.01<F1>
<EPS-DILUTED> 0.01<F1>
<FN>
<F1>THE NET INCOME AND BASIC AND DILUTED EPS ARE PRO FORMA (SEE NOTE 8 TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS).
</FN>
</TABLE>
