<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 8, 1999
SPAR GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
Delaware 0-27408 33-0684451
- ---------------------------- ----------- -------------------
<S> <C> <C>
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File No.) Identification No.)
</TABLE>
19900 MacArthur Boulevard, Suite 900, Irvine, California 92612
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (949) 476-2200
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On July 8, 1999, the transactions contemplated by the Agreement and Plan of
Merger dated as of February 28, 1999 and amended on May 14, 1999 (as amended,
the "Merger Agreement") among SPAR Group, Inc., formerly known as PIA
Merchandising Services, Inc. (prior to the merger, "PIA" and after the merger,
the "Company"), SG Acquisition, Inc., a Nevada corporation and prior to the
consummation of the transactions contemplated by the Merger Agreement, a wholly
owned subsidiary of the Company ("PIA Acquisition"), PIA Merchandising, Co.,
Inc., a California corporation and a wholly owned subsidiary of the Company
("PIA Merchandising"), SPAR Acquisition, Inc., a Nevada corporation ("SAI"),
SPAR MCI Performance Group, Inc., a Delaware corporation ("SMCI"), SPAR
Incentive Marketing, Inc., a Delaware corporation ("SIM"), SPAR Marketing Force,
Inc., a Nevada corporation ("SMF"), SPAR Marketing, Inc., a Delaware corporation
("SMI"), SPAR, Inc., a Nevada corporation ("SINC"), SPAR/Burgoyne Retail
Services, Inc., an Ohio corporation ("SBRS"), SPAR Marketing, Inc., a Nevada
corporation ("SMNEV"), and SPAR Trademarks, Inc., a Nevada corporation ("STM,"
and together with SMCI, SIM, SMF, SINC, SMI, SBRS, SMNEV and STM, the "SPAR
Companies") were consummated. Pursuant to the Merger Agreement, on July 8, 1999,
following the approval of the Company's stockholders at the annual meeting of
stockholders held on that date, PIA Acquisition merged with and into SAI (the
"Merger"), with SAI continuing as the surviving corporation and a wholly owned
subsidiary of the Company.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The annual audited combined financial statements of the SPAR Companies
prepared in accordance with Regulation S-X, consisting of the balance sheets as
of December 31, 1998, March 31, 1998 and March 31, 1997 and the related combined
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1998, and the nine-month period ended
December 31, 1998, together with the corresponding Report of Independent Public
Accountants filed with this Current Report on Form 8-K/A are listed in the Index
to Financial Statements on page F-1 of this Current Report on Form 8-K/A. The
annual audited financial statements of MCI Performance Group, Inc. prepared in
accordance with Regulation S-X, consisting of the balance sheets as of December
31, 1998 and December 31, 1997 and the related statements of income,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1998 together with the corresponding Report of
Independent Public Accountants filed with this Current Report on Form 8-K/A are
listed in the Index to Financial Statements on page F-1 of this Current Report
on Form 8-K/A.
(b) Pro Forma Financial Information.
-2-
<PAGE> 3
The unaudited pro forma combined financial statements consisting of the
unaudited pro forma combined balance sheet as of March 31, 1999 and the
unaudited pro forma combined statement of operations for the year ended December
31, 1998 and the three-month period ended March 31, 1999 filed with this Current
Report on Form 8-K/A are listed in the Index to Financial Statements on page F-1
of this Current Report on Form 8-K/A.
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of February 28, 1999 among
the Company, SAI, PIA Merchandising, PIA Acquisition and the SPAR
Companies (incorporated by reference to Exhibit 10.10 of the
Company's Form 10-K, filed with the Securities and Exchange
Commission on March 31, 1999).
2.2 First Amendment to Agreement and Plan of Merger dated as of May
14, 1999, among the Company, SAI, PIA Merchandising, PIA
Acquisition and the SPAR Companies (incorporated by reference to
Exhibit 10.13 of the Company's Form 10-K/A, filed with the
Securities and Exchange Commission on May 25, 1999).
23.1 Consent of Ernst & Young LLP
23.2 Consent of Ernst & Young LLP
99.1 Press Release of the Company dated July 8, 1999 (incorporated by
reference to Exhibit 99.1 of the Company's Current Report on Form
8-K, filed with the Securities and Exchange Commission on July
23, 1999).
</TABLE>
-3-
<PAGE> 4
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 17, 1999
SPAR Group, Inc.
By: /s/ Cathy L. Wood
-------------------------------------
Cathy L. Wood
Executive Vice President,
Chief Financial Officer and Secretary
<PAGE> 5
INDEX TO FINANCIAL STATEMENTS
Audited Combined Financial Statements - SPAR GROUP
Report of Independent Auditors...............................................F-2
Combined Balance Sheets of December 31, 1998,
March 31, 1998 and March 31, 1997...........................................F-3
Combined Statements of Operations for Each of the
Three Years in the Period ended March 31, 1998 and
the Nine Month Period ended December 31, 1998...............................F-4
Combined Statement of Stockholders' Equity for Each
of the Three Years in the Period ended March 31, 1998 and
the Nine Month Period ended December 31, 1998...............................F-5
Combined Statements of Cash Flows for Each of the
Three Years in the Period ended March 31, 1998 and
the Nine Month Period ended December 31, 1998...............................F-6
Notes to Combined Financial Statements for Each of the
Three Years in the Period ended March 31, 1998 and
the Nine Month Period ended December 31, 1998...............................F-7
Audited Financial Statements - MCI PERFORMANCE GROUP, INC.
Report of Independent Auditors..............................................F-14
Balance Sheets as of December 31, 1998 and December 31, 1997................F-15
Statements of Income for Each of the Three Years in the
Period ended December 31, 1998.............................................F-16
Statements of Stockholders' Equity (Deficit) for Each
of the Three Years in the Period ended December 31, 1998...................F-17
Statements of Cash Flows for Each of the Three Years
in the Period ended December 31, 1998......................................F-18
Notes to Financial Statements...............................................F-19
Unaudited Pro Forma Combined Financial Statements
Unaudited Pro Forma Combined Balance Sheet as of March 31, 1999.............F-28
Unaudited Pro Forma Combined Statement of Operations for the:
Year ended December 31, 1998...............................................F-29
Three Month Period ended March 31, 1999....................................F-30
Notes to Unaudited Pro Forma Combined Financial Statements..................F-31
F-1
<PAGE> 6
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
SPAR Companies
We have audited the accompanying combined balance sheets of SPAR Companies
as of March 31, 1997 and 1998 and December 31, 1998 and the related combined
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1998 and the nine month period ended
December 31, 1998. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of SPAR Companies at
March 31, 1997 and 1998 and December 31, 1998, and the combined results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998 and the nine month period ended December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 19, 1999
F-2
<PAGE> 7
SPAR COMPANIES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
------------------------- DECEMBER 31, MARCH 31,
1997 1998 1998 1999
---------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash................................. $ 519,604 $ 1,919,076 $ 909,971 $ 1,980,677
Accounts receivable, less allowance
$321,000 and $568,000 and $605,000
at March 31, 1997 and 1998 and
December 31, 1998, respectively... 7,565,421 8,049,491 10,627,098 14,608,996
Prepaid expenses and other current
assets............................ 98,080 310,277 707,684 811,686
Prepaid program costs................ -- -- -- 2,569,757
Due from stockholder................. -- -- 1,500,000 --
Due from affiliates.................. 132,181 60,000 -- 177,120
---------- ----------- ----------- -----------
Total current assets......... 8,315,286 10,338,844 13,744,753 20,148,236
Property and equipment, net............ 218,470 226,961 827,332 1,552,213
Goodwill, net.......................... -- -- -- 12,140,067
Other assets........................... 334,577 330,124 292,558 301,581
---------- ----------- ----------- -----------
Total assets................. $8,868,333 $10,895,929 $14,864,643 $34,142,097
========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit....................... $2,054,962 $ 2,400,990 $ 4,149,403 $ 3,187,179
Accounts payable..................... 879,255 630,250 1,533,675 2,045,648
Accrued expenses..................... 2,321,007 1,755,020 2,808,357 4,900,614
Due to affiliate..................... 618,086 262,271 205,219 355,413
Deferred revenue..................... 466,919 -- -- 4,086,457
Distributions payable to
stockholders...................... -- 1,203,000 6,577,000 7,399,111
Current portion of long-term debt due
to affiliates..................... 155,959 375,000 375,000 --
Note payable to MCI.................. -- -- -- 8,790,386
Current portion of other long-term
debt.............................. 500,000 300,000 310,000 1,375,991
---------- ----------- ----------- -----------
Total current liabilities.... 6,996,188 6,926,531 15,958,654 32,140,799
Long-term debt due to affiliates, less
current portion...................... 402,374 592,500 311,250 --
Other long-term debt, less current
portion.............................. 535,000 235,000 -- 2,338,260
Stockholders' equity (deficit)......... 934,771 3,141,898 (1,405,261) (336,962)
---------- ----------- ----------- -----------
Total liabilities and
stockholders' equity....... $8,868,333 $10,895,929 $14,864,643 $34,142,097
========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 8
SPAR COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31, MARCH 31,
--------------------------------------- ------------------------- -------------------------
1996 1997 1998 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............. $14,424,502 $35,574,316 $36,804,398 $27,202,398 $32,600,786 $9,602,000 $21,636,548
Cost of revenues......... 7,678,650 21,753,915 19,417,492 14,579,492 16,216,559 4,838,000 14,372,765
----------- ----------- ----------- ----------- ----------- ---------- -----------
Gross profit............. 6,745,852 13,820,401 17,386,906 12,622,906 16,384,227 4,764,000 7,263,783
Selling, general and
administrative
expenses............... 7,029,830 13,476,964 12,248,137 9,310,137 10,120,118 2,938,000 4,950,644
----------- ----------- ----------- ----------- ----------- ---------- -----------
Operating (loss)
income................. (283,978) 343,437 5,138,769 3,312,769 6,264,109 1,826,000 2,313,139
Other income (expense):
Other income
(expense)............ -- (252,746) (36,354) (36,354) 148,832 -- 45,032
Interest income........ 23,085 -- -- -- -- -- --
Interest expense....... (122,523) (513,658) (353,363) (258,363) (304,004) (95,000) (415,809)
----------- ----------- ----------- ----------- ----------- ---------- -----------
(99,438) (766,404) (389,717) (294,717) (155,172) (95,000) (370,777)
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net (loss) income........ $ (383,416) $ (422,967) $ 4,749,052 $ 3,018,052 $ 6,108,937 $1,731,000 $ 1,942,362
=========== =========== =========== =========== =========== ========== ===========
Unaudited pro forma
information:
Net (loss) income
before income tax
provision............ $ (383,416) $ (422,967) $ 4,749,052 $ 3,018,052 $ 6,108,937 $1,731,000 $ 1,942,362
Pro forma income tax
(benefit)
provision............ (132,493) (6,350) 1,751,101 1,112,836 2,252,526 638,265 716,200
----------- ----------- ----------- ----------- ----------- ---------- -----------
Pro forma net (loss)
income (see Note
2)................... $ (250,923) $ (416,617) $ 2,997,951 $ 1,905,216 $ 3,856,411 $1,092,735 $ 1,226,162
=========== =========== =========== =========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 9
SPAR COMPANIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at March 31, 1995................................... $ 512,472
Net loss.................................................. (383,416)
Net contributions from stockholders....................... 887,678
------------
Balance at March 31, 1996................................... 1,016,734
Net income................................................ (422,967)
Net contributions from stockholders....................... 341,004
------------
Balance at March 31, 1997................................... 934,771
Net income................................................ 4,749,052
Net distributions to stockholders......................... (2,541,925)
------------
Balance at March 31, 1998................................... 3,141,898
Net income................................................ 6,108,937
Net distributions to stockholders......................... (10,656,096)
------------
Balance at December 31, 1998................................ $ (1,405,261)
Net income (unaudited).................................... 1,942,362
Net distributions to stockholders (unaudited)............. (874,063)
------------
Balance at March 31, 1999 (unaudited)....................... $ (336,962)
============
</TABLE>
See accompanying notes.
F-5
<PAGE> 10
SPAR COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31, MARCH 31
--------------------------------------- ------------------------- -------------------------
1996 1997 1998 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income............... $ (383,416) $ (422,967) $ 4,749,052 $ 3,018,052 $ 6,108,937 $ 1,731,000 $ 1,942,362
Adjustments to reconcile net
(loss) income to net cash
provided by operating
activities:
Loss on disposal of property
and equipment............. -- 228,533 -- -- -- -- --
Depreciation................ 157,121 186,012 151,816 112,000 130,696 -- 66,292
Amortization................ 33,729 41,455 9,376 7,200 11,250 -- 178,671
Changes in operating assets
and liabilities:
Accounts receivable....... 201,315 102,616 (484,070) (3,016,918) (2,577,607) 2,532,648 (2,284,301)
Note receivable........... (253,000) 253,000 -- -- -- -- --
Prepaid expenses and other
current assets.......... 32,993 (168,451) (217,120) (4,622) (371,091) (203,122) 603,366
Prepaid program cost...... -- -- -- -- -- -- (195,124)
Due from affiliates....... (429,481) 582,357 72,181 89,830 60,000 (17,649) (177,120)
Accounts payable.......... 311,306 67,037 (249,005) (23,866) 903,425 (225,139) 511,973
Accrued expenses.......... 268,667 1,216,401 (565,987) (541,260) 1,053,337 (24,727) 2,092,257
Due to affiliates......... 181,237 436,849 (355,815) (87,654) (57,052) (268,161) 150,194
Deferred revenue.......... 46,020 420,899 (466,919) (245,675) -- (221,244) (3,668,767)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities.......... 166,491 2,943,741 2,643,509 (692,913) 5,261,895 3,303,806 (780,197)
INVESTING ACTIVITIES
Purchases of property and
equipment..................... (91,217) (104,845) (160,307) (71,335) (731,067) (56,356) (279,840)
Purchase of business, net of
cash acquired................. (4,669,717) -- -- -- -- 738,240
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities.................... (4,760,934) (104,845) (160,307) (71,335) (731,067) (56,356) 458,400
FINANCING ACTIVITIES
Net (payments of) proceeds from
line of credit................ $ 3,523,734 $(2,498,772) $ 346,028 $ 2,128,508 $ 1,748,413 $(1,782,480) $ (962,224)
Net (payments of) proceeds from
long-term debt due to Spar
Marketing Services, Inc....... (249,999) (145,835) 409,167 505,417 (281,250) (96,250) (686,250)
Due to (from) stockholders...... 300,000 -- (1,297,000) (432,750) (1,500,000) 1,635,750 2,322,111
Payments of note payable to
MCI........................... -- -- -- -- -- -- (1,625,340)
Payment of other long-term
debt.......................... -- (675,000) (500,000) (375,000) (225,000) (125,000) --
Contributions by (distributions
to) stockholders.............. 887,678 341,004 (41,925) (589,680) (5,282,096) (1,952,245) (874,063)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Proceeds from other long-term
debt.......................... -- -- -- -- -- -- 3,218,269
Net cash provided by (used in)
financing activities.......... 4,461,413 (2,978,603) (1,083,730) 1,236,495 (5,539,933) (2,320,225) 1,392,503
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net (decrease) increase in
cash.......................... (133,030) (139,707) 1,399,472 472,247 (1,009,105) 927,225 1,070,706
Cash at beginning of year....... 792,341 659,311 519,604 519,604 1,919,076 991,851 909,971
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cash at end of year............. $ 659,311 $ 519,604 $ 1,919,076 $ 991,851 $ 909,971 $ 1,919,076 $ 1,980,677
=========== =========== =========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Interest paid................... $ 122,523 $ 513,658 $ 353,363 $ 266,051 $ 300,204 $ 87,312 $ 280,809
=========== =========== =========== =========== =========== =========== ===========
Non-cash transactions:
Distributions payable to
stockholders................ $ -- $ -- $ 2,500,000 $ -- $ 6,577,000 $ -- $ 2,500,000
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 11
SPAR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1998
1. BUSINESS AND ORGANIZATION
The SPAR Companies ("SPAR" or the "Company") is a national marketing
services company that provides retail merchandising and other marketing services
to home video, consumer goods and food products companies, SPAR's services
include in-store merchandising, test market research, mystery shopping, database
management and data collection. SPAR offers these services directly through a
network of in-store merchandising specialists. SPAR also provides teleservices
within an extensive inbound and outbound call center.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE OF FISCAL YEAR END
Effective April 1, 1998, the SPAR Companies changed their year end to
December 31.
BASIS OF PRESENTATION
The combined financial statements include the following operating companies
owned by the same two stockholders. The companies included in the SPAR Companies
are:
Spar, Inc. ("SINC") (formerly Spar/Burgoyne Information Services, Inc.) --
provides merchandising services to manufacturers and distributors, across
most retail trade classes such as mass merchandise, food, drug and home
centers.
Spar/Burgoyne Retail Services, Inc. ("SBRS") -- provides information
gathering and consumer and trade research services and operates nationwide
product retrieval service, performing and conducting consumer and trade
surveys.
Spar Marketing Force, Inc. ("SMF") -- provides merchandising services to
manufacturers and distributors, across most retail trade classes such as
mass merchandise, food, drug and home centers. Spar Marketing Force, Inc.
also provides services for an international automobile manufacturer.
Spar Marketing, Inc. (Nevada, "SMNEV") -- provides merchandising services
to manufacturers and distributors, across most retail trade classes such as
mass merchandise, food, drug and home centers.
Spar Acquisition, Inc. ("SAI") -- a holding company formed in contemplation
of a proposed reorganization. The Company will own SIM, STM and SMID after
completion of the proposed reorganization.
Spar MCI Performance Group, Inc. ("SMCI") -- the wholly-owned subsidiary of
SIM that purchased the assets of Dallas-based MCI Performance Group on
January 15, 1999.
Spar Marketing, Inc. (Delaware "SMI") -- a holding Company formed in
contemplation of a proposed reorganization. The Company will own SI, SBRS,
SMF and SMIN after completion of the proposed reorganization.
Unaudited additional companies, newly formed in 1999 and included in March
31, 1999 combined financial results:
Spar Incentives Marketing, Inc. ("SIM") -- a holding Company formed in
February 1999 in contemplation of a proposed reorganization. The Company
will own SMCI after completion of the proposed reorganization.
Spar Trademarks, Inc. ("STM") -- a newly formed corporation in February
1999 to hold the trademarks of the SPAR Companies.
F-7
<PAGE> 12
SPAR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION
Revenues are recognized as services are performed in accordance with
contract terms. All operating expenses are charged to operations as incurred.
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 customer pending payment settlement. These funds are
considered neither an asset nor liability of the Company. The balance of funds
held in agency accounts totaled approximately $612,000, $997,000 and $35,264,000
as of March 31, 1997 and 1998 and December 31, 1998, respectively.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation and amortization is calculated on a straight-line basis over
estimated useful lives of the related assets, which range from five to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or lease term, using the straight-line method.
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, 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 March 31, 1996, 1997 and
1998 and the nine month period ended December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At March 31, 1997 and 1998 and December 31, 1998, the fair value of the
Company's cash, accounts receivable, and accounts payable approximates carrying
amounts due to the short-term maturities of such instruments. 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.
Three customers approximated 38% and 51% of net revenues for the years
ended March 31, 1997 and 1998, respectively and 50% for the nine month period
ended December 31, 1998. Additionally, three customers approximated 37%, 49% and
50% of accounts receivable at March 31, 1997 and 1998 and December 31, 1998,
respectively.
INCOME TAXES
Historically, the companies in the SPAR Companies have elected, by the
consent of its stockholders, to be taxed under the provisions of subchapter S of
the Internal Revenue Code (the "Code") with the exception
F-8
<PAGE> 13
SPAR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of Spar/Burgoyne Retail Services, Inc. which is taxed as a C corporation. Under
the provisions of the Code, the stockholders of the subchapter S companies
include the 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 do business do not accept certain
provisions under subchapter S of the Code and, as a result, income taxes in
these states are a direct responsibility of the Company. Spar/Burgoyne Retail
Services, Inc. did not recognize income tax expense for the year ended March 31,
1996 as the Company had net operating loss carryforwards to offset any tax
liability. In the years ended March 31, 1997 and 1998 and the nine months ended
December 31, 1998, Spar/Burgoyne Retail Services, Inc. recognized an income tax
provision of approximately $52,000, $12,000 and $-0-, respectively. This expense
is recorded in other expenses.
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 all periods presented.
USE OF ESTIMATES
The preparation of the 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 combined
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
In March 1998, the AICPA issued SOP 98-1, Accounting For the Costs of
Computer Software Developed For or Obtained For Internal Use, (the "SOP"). The
SOP is effective for the Company beginning on January 1, 1999. The SOP will
require the capitalization of certain costs incurred after the date of adoption
in connection with developing or obtaining software for internal use. The
Company currently expenses such costs as incurred. The Company has not yet
assessed what the impact of the SOP will be on the Company's financial position
or results of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31
-------------------- DECEMBER 31,
1997 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
Computer equipment and programs.................. $320,924 $399,310 $ 987,650
Furniture and equipment.......................... 38,212 38,212 124,540
Leasehold improvements........................... 30,752 -- 73,901
-------- -------- ----------
389,888 437,522 1,186,091
Less accumulated depreciation.................... 171,418 210,561 358,759
-------- -------- ----------
$218,470 $226,961 $ 827,332
======== ======== ==========
</TABLE>
4. LINE OF CREDIT
Spar Marketing Force, Inc. ("SMF") has a line of credit with a bank,
wherein SMF can borrow up to $6,000,000 based on eligible accounts receivable.
Borrowings under the line of credit are due on demand with
F-9
<PAGE> 14
SPAR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
4. LINE OF CREDIT (CONTINUED)
interest payable at the bank's "alternate base rate" plus 2.0% (9.75% at
December 31, 1998). The balance outstanding on the line of credit was
$2,054,962, $2,400,990 and $1,519,161 at March 31, 1997 and 1998 and December
31, 1998, respectively. The line of credit is secured by the assets of SMF.
5. LONG-TERM DEBT DUE TO AFFILIATE
The Company's affiliate, Spar Marketing Service, Inc. ("SMS"), had a
long-term loan dated August 1994 with an original balance of $1,000,000 and a
line of credit in the amount of $500,000. SMS refinanced and replaced these
loans with a single facility, long-term loan, on October 29, 1996. The
replacement term loan in the amount of $1,500,000 was due in 48 consecutive
monthly principal installments of $31,250 and interest at the bank's fluctuating
announced rate plus 1.25%. The Company has borrowed these same funds from SMS
and has agreed to repay the amounts borrowed using the same terms contained
within the loan agreement between the bank and SMS. The bank loan was repaid in
its entirety by the SPAR Companies in 1998.
6. COMMON STOCK
Common stock of the companies included in the SPAR Companies at December
31, 1998 is as follows:
<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND
AUTHORIZED OUTSTANDING PAR VALUE
---------- ----------- ---------
<S> <C> <C> <C>
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.............................. 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
</TABLE>
7. 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
$331,000, $816,000 and $871,000 for the years ended March 31, 1996, 1997 and
1998, respectively, and $754,000 for the nine months ended December 31, 1998. At
December 31, 1998, future minimum commitments under all non-cancelable operating
lease arrangements are as follows:
<TABLE>
<S> <C>
1999..................................... $ 854,500
2000..................................... 185,500
2001..................................... 170,200
2002..................................... 135,400
2003..................................... 67,700
----------
$1,413,300
==========
</TABLE>
F-10
<PAGE> 15
SPAR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
7. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
SMS, a related party, has been audited by the Internal Revenue Service with
respect to whether certain field representatives should be classified as
independent contractors or employees for federal employment tax purposes for the
tax years ended December 31, 1991 and 1992. The dispute has worked its way
through the Internal Revenue Service appeals process and SMS intends to file a
petition with the Federal District Court. If it is found that the field
representatives should be classified as employees, SMS could be liable for
employment taxes and related penalties and interest. The outcome of this dispute
and the amount of the contingent liability are not determinable at this time. If
a liability is assessed and SMS is unable to pay, the IRS may seek to collect
all or a portion of the tax liability from the Company due to its common control
and business relationship with SMS. Accordingly, the Company believes an
adequate provision for the contingent liability has been made in the
accompanying combined financial statements as of March 31, 1997 and 1998 and
December 31, 1998, respectively. Similar claims have been filed against SMS by
certain states. However, SMS is confident defending its position against these
state claims because of prior success in several states, and SMS will continue
to vigorously defend its position against any future state claims that may
arise. For example, SMS prevailed on a similar claim by the state of California,
which had instituted administrative proceedings against SMS. The administrative
law judge agreed with SMS's classification of field representatives as
independent contractors. The State of California has declined to file a further
appeal and has refunded payments made by SMS under protest during the appeal
process.
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.
8. PROFIT SHARING PLAN
The SPAR Companies have a 401(k) Profit Sharing Plan covering substantially
all full-time employees. Employer contributions of approximately $31,200,
$31,600 and $37,000 were made to the plan during the years ended March 31, 1996,
1997 and 1998, respectively, and $14,400 for the nine months ended December 31,
1998.
9. PHANTOM STOCK PLAN
The SPAR Companies have a phantom stock plan covering certain members of
management. Phantom shares are granted at the discretion of the Board of
Directors and vest over four years. The Company has accrued approximately
$110,000 related to the phantom stock plan as of December 31, 1998. All
liabilities under the plan are subordinated to bank debt.
10. ACCRUED EXPENSES
The accrued expense balance includes approximately $950,000, $600,000 and
$1,867,000 for salaries and bonus amounts payable at March 31, 1997 and 1998 and
December 31, 1998, respectively.
11. RELATED PARTY TRANSACTIONS
The SPAR Companies are affiliated through common ownership with Spar Retail
Services, Inc. (formerly Spar/Servco, Inc.), Spar Marketing Services, Inc.,
Spar/Burgoyne, Inc., Spar Group, Inc., IDS Spar Pty, Ltd. (Aust.), Spar Ltd.,
(U.K.), Garden Island, Inc., Spar Marketing Pty Ltd. (Aust.), Spar/ Burgoyne
Information Services, Inc., WR Services, Inc., Spar Services Inc., Infinity
Insurance Ltd. and Spar Infotech, Inc.
F-11
<PAGE> 16
SPAR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
11. RELATED PARTY TRANSACTIONS (CONTINUED)
The following transactions occurred between the SPAR Companies and the
above affiliates:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED
------------------------------------ DECEMBER 31,
1996 1997 1998 1998
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Marketing services provided by
affiliates:
Independent contractor services... $4,077,621 $6,250,321 $3,232,500 2,763,222
========== ========== ========== =========
Field management services......... $1,820,000 $3,002,905 $2,964,246 2,049,172
========== ========== ========== =========
Services provided to affiliates:
Management services............... $ 620,000 $ 597,509 $ 576,147 417,403
========== ========== ========== =========
</TABLE>
Through the services of Infinity Insurance, Ltd., the Company purchased
insurance coverage for its casualty and property insurance risk, for
approximately $321,000 and $318,000 during the years ended March 31, 1997 and
1998, respectively, and $375,000 for the nine months ended December 31, 1998. No
services were provided during the year ended March 31, 1996.
<TABLE>
<CAPTION>
MARCH 31,
------------------------------ DECEMBER 31,
1996 1997 1998 1998
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Balance due from affiliates:
Spar Marketing Services, Inc........... $113,538 $ -- $ 60,000 $ --
Spar Group, Inc........................ 600,000 132,181 -- --
-------- -------- -------- --------
$713,538 $132,181 $ 60,000 $ --
======== ======== ======== ========
Balance due to affiliates:
Spar Marketing Services, Inc........... $ -- $576,820 $261,771 $205,219
Spar/Burgoyne, Inc..................... -- -- 500 --
Spar Group, Inc........................ 39,500 41,266 -- --
Spar/Burgoyne Information Services,
Inc................................. 185,824 -- -- --
-------- -------- -------- --------
$225,324 $618,086 $262,271 $205,219
======== ======== ======== ========
</TABLE>
12. ACQUISITION
SPAR Marketing Force, Inc. was organized in late fiscal 1996 to acquire
substantially all of the assets of Marketing Force, Inc. The March 1, 1996
acquisition has been accounted for by the purchase method of accounting.
Accordingly, the purchase price was allocated to the net assets acquired based
on their estimated fair values. The fair value of tangible assets acquired and
liabilities assumed was $7,950,033 and $2,950,033, respectively. The purchase
consisted of (a) $5,000,000 in cash, financed through a revolving bank credit
line and security agreement, and (b) a subordinated promissory note not to
exceed $12,000,000 payable to Marketing Force, Inc. and its affiliate, ADVO,
Inc.
The purchase agreement provided for a post closing adjustment to the
purchase price in the event of a deficiency in the closing business values. The
final assessment of net asset values has resulted in a restructuring of the
subordinated promissory note up to $3,000,000 which is payable only in the event
that SPAR Marketing Force, Inc. completes a public offering of its shares prior
to the year 2000. The consideration related to the subordinated promissory note
will be recorded as additional purchase price when paid.
F-12
<PAGE> 17
SPAR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
13. EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT
MCI PERFORMANCE GROUP, INC.
On January 15, 1999, SMCI completed the purchase of substantially all of
the assets and assumed certain liabilities of Dallas based, MCI Performance
Group, Inc. (MCI). The transaction, to be accounted for as a purchase, consisted
of $1,800,000 cash and an $12,422,189 note payable to the seller. The excess
purchase price over the fair value of the net assets acquired has been allocated
to goodwill. The operations of SMCI from January 15, 1999 have been included in
the Spar Companies' results of operations for the three months ended March 31,
1999. The purchase agreement provides for post closing adjustments whereby the
seller has guaranteed a minimum net worth of $1,500,000 for MCI at the date of
closing and additional contingent consideration will be payable in the event
that SMCI and MCI achieve $3,500,000 in earnings before taxes for the twelve
month period ending March 31, 1999. Additional consideration paid, if any, will
be recorded as an increase to goodwill.
AMENDED REVOLVING LINE OF CREDIT/SECURITY AGREEMENT
In March 1999, the Company amended its revolving line of credit/security
agreement with its bank, to include a $3,000,000 term loan due in monthly
installments of $83,334 through March, 2002.
PIA MERCHANDISING SERVICES, INC.
In May 1999, the Company entered into an amended Plan of Merger with
Irvine, California based, PIA Merchandising Services, Inc. (PIA). The
transaction, to be accounted for as a reverse merger, will consist of a stock
exchange. Prior to the merger, the Companies in the Spar Companies will be
reorganized as direct or indirect subsidiaries of SPAR Acquisition, Inc. (SAI).
Each share of capital stock of Spar Acquisition, Inc. will be converted into its
right to receive one share of PIA stock and each option to acquire one share of
Spar Acquisition, Inc. stock will be converted into a corresponding right to
acquire one share of PIA stock. Initial converted shares and converted options
(if exercised) will together represent 70% of the outstanding shares of PIA
immediately following the merger. The agreement with PIA is subject to PIA
shareholder approval, and is anticipated to be completed in the second calendar
quarter of 1999.
In connection with the merger agreement, the shareholders of the SPAR
Companies have agreed to indemnify PIA stockholders with respect to the
independent contractor contingent liability discussed in Note 7 and the
subordinated promissory note discussed in Note 12.
The affiliate arrangements as described in Notes 5 and 11 will be amended
upon consummation of the merger discussed above so that all continuing
obligations will be similar to terms and conditions of agreements/arrangements
with unaffiliated third parties.
F-13
<PAGE> 18
Report of Independent Auditors
To the Board of Directors and Stockholder
of MCI Performance Group, Inc.
We have audited the accompanying balance sheets of MCI Performance Group, Inc.
as of December 31, 1997 and 1998 and the related statements of income,
stockholder's equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of MCI Performance Group, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 22, 1999, except for Note 11,
as to which the date is June 16, 1999
F-14
<PAGE> 19
MCI Performance Group, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
------------ ------------
(Restated) (Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,709,298 $ 1,194,288
Accounts receivable, less allowance of $162,000 and $219,000 at
December 31, 1997 and 1998, respectively 3,424,812 1,385,895
Employee advances 457,404 522,798
Note receivable -- 750,000
Due from stockholder -- 2,296,272
Prepaid program costs 1,064,292 1,423,879
Prepaid expenses and other current assets 975,595 780,526
------------ -----------
Total current assets 9,631,401 8,353,658
Property and equipment, net 2,275,717 349,635
Other assets 14,297 14,225
------------ -----------
Total assets $ 11,921,415 $ 8,717,518
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities:
Accounts payable $ 4,772,530 $ 631,662
Accrued expenses and other current liabilities 2,569,758 2,152,541
Deferred revenue 4,438,418 5,558,924
Due to stockholder 460,269 1,530,000
------------ -----------
Total current liabilities 12,240,975 9,873,127
Long-term debt, less current portion 1,219,500 --
Stockholder's equity (deficit):
Common stock, $1 par value; 100,000 shares authorized,
3,500 shares issued and outstanding 3,500 3,500
Retained earnings (deficit) (1,542,560) (1,159,109)
------------ -----------
Total stockholder's equity (deficit) (1,539,060) (1,155,609)
------------ -----------
Total liabilities and stockholder's equity (deficit) $ 11,921,415 $ 8,717,518
============ ===========
</TABLE>
See accompanying notes.
F-15
<PAGE> 20
MCI Performance Group, Inc.
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
----------- ------------ -----------
(Restated)
<S> <C> <C> <C>
NET REVENUES $33,361,277 $ 42,294,074 $33,195,765
Cost of revenues 26,351,322 32,472,284 26,107,705
----------- ------------ -----------
Gross profit 7,009,955 9,821,790 7,088,060
OPERATING EXPENSES
Selling, general and administrative expenses 6,570,962 9,757,239 6,781,306
----------- ------------ -----------
Operating income 438,993 64,551 306,754
OTHER INCOME (EXPENSE)
Interest income (expense), net 3,899 (43,374) 76,697
----------- ------------ -----------
Net income $ 442,892 $ 21,177 $ 383,451
=========== ============ ===========
UNAUDITED PRO FORMA INFORMATION
Net income before income tax provision $ 442,892 $ 21,177 $ 383,451
Pro forma income tax provision -- -- --
----------- ------------ -----------
Pro forma net income (See Note 2) $ 442,892 $ 21,177 $ 383,451
=========== ============ ===========
</TABLE>
See accompanying notes.
F-16
<PAGE> 21
MCI Performance Group, Inc.
Statement of Stockholder's Equity (Deficit)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK RETAINED STOCKHOLDER'S
------------------ EARNINGS EQUITY
SHARES AMOUNT (DEFICIT) (DEFICIT)
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 3,500 $3,500 $(2,006,629) $(2,003,129)
Net income -- -- 442,892 442,892
----- ------ ----------- -----------
Balance at December 31, 1996 3,500 3,500 (1,563,737) (1,560,237)
Net income (Restated) -- -- 21,177 21,177
----- ------ ----------- -----------
Balance at December 31, 1997 (Restated) 3,500 3,500 (1,542,560) (1,539,060)
Net income -- -- 383,451 383,451
----- ------ ----------- -----------
Balance at December 31, 1998 (Restated) 3,500 $3,500 $(1,159,109) $(1,155,609)
===== ====== =========== ===========
</TABLE>
See accompanying notes.
F-17
<PAGE> 22
MCI Performance Group, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
----------- ----------- -----------
(Restated)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 442,892 $ 21,177 $ 383,451
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 123,577 155,802 497,980
Changes in operating assets and liabilities:
Accounts receivable 611,622 (2,244,377) 2,038,917
Employee advances 13,158 (363,144) (65,394)
Prepaid program costs (77,588) 2,047,996 (359,587)
Prepaid expenses and other current assets 502 (822,903) 195,141
Accounts payable 732,651 2,400,031 (4,140,868)
Accrued expenses and other current liabilities 626,481 1,159,833 (417,217)
Due to/from stockholder (1,555,859) 1,276,654 (1,226,541)
Deferred revenue 575,999 (1,168,272) 1,120,506
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,493,435 2,462,797 (1,973,612)
INVESTING ACTIVITIES
Net proceeds from disposal of property and equipment
-- -- 839,839
Purchases of property and equipment (54,270) (2,204,277) (161,737)
----------- ----------- -----------
Net cash (used in) provided by investing activities (54,270) (2,204,277) 678,102
FINANCING ACTIVITIES
Proceeds from note payable -- 1,219,500 --
Payment of note payable (58,033) -- (1,219,500)
----------- ----------- -----------
Net cash (used in) provided by financing activities (58,033) 1,219,500 (1,219,500)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,381,132 1,478,020 (2,515,010)
Cash and cash equivalents at beginning of year 850,146 2,231,278 3,709,298
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2,231,278 $ 3,709,298 $ 1,194,288
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Proceeds from sale of the property and equipment
received in the form of a note receivable $ -- $ -- $ 750,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-18
<PAGE> 23
MCI Performance Group, Inc.
Notes to Financial Statements
December 31, 1998
1. BUSINESS AND ORGANIZATION
MCI Performance Group, Inc. ("MCI" or the "Company"), incorporated in Texas in
1987, specializes in designing and implementing premium incentives and managing
meetings and group travel for clients throughout the United States. MCI provides
a wide variety of consulting, creative, program administration and travel and
merchandise fulfillment services to companies seeking to motivate employees,
salespeople, dealers, distributors, retailers and consumers toward certain
action or objectives.
The Company changed its name from MCI Planners, Inc. to MCI Performance Group,
Inc. effective January 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company records revenues at the completion of the program. External direct
costs and cash received in advance of the program are deferred until the program
occurs. The programs are short-term in nature, typically one to six months in
duration from contract signing to event occurrence. Generally, a non-refundable
deposit is received from the customer upon contract execution. The customer is
billed periodically during the program preparation and the remaining amount owed
for services is payable upon the completion of the program. Costs typically
incurred in the months prior to the program are labor costs to develop the
program plan and to make necessary reservations and deposits for facilities,
transportation, and other required entertainment activities. Reimbursable travel
expenditures are netted against reimbursable receipts and are therefore excluded
from the statements of operations. Revenues may vary significantly, from period
to period, depending upon the type of programs and the timing of when programs
are completed. If a client cancels a program after costs have been expensed, the
client is billed for work performed and expenses incurred through the date of
cancellation.
F-19
<PAGE> 24
MCI Performance Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has entered into incentive commission program agreements with
certain airlines which provide for incentive payments ("override") based upon
the Company's achievement of stated targets. The override is payable in cash or
airline tickets, at the airline's option, and is recorded as revenue at the time
there is sufficient information, provided by the airline, to relate actual
performance to the targets to determine the amount earned. Override payable in
tickets is recorded at the fair market value of the tickets received. Override
revenue of approximately $440,000, $1,142,000 and $400,000 was recorded during
the years ended December 31, 1996, 1997 and 1998, respectively.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with maturities of
three months or less to be cash equivalents.
The Company maintains its cash and cash equivalents in bank deposit accounts
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
The Company is required, by the airlines, to maintain a certificate of deposit
to guarantee payment of tickets booked by the Company. At December 31, 1997 and
1998, the Company had placed $77,740 and $81,370, respectively, in a short-term
investment account.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation and amortization is calculated on a straight-line basis over
estimated useful lives of the related assets, which range from five to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or lease term, using the straight-line method.
F-20
<PAGE> 25
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, 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, 1997 and 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of its assets and liabilities
reported in the balance sheets approximates fair value.
CONCENTRATION OF CREDIT RISK AND OTHER RISKS
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company places its cash and cash equivalents with high credit
quality financial institutions and investment grade short-term investments,
which limit the amount of credit exposure. For accounts receivable, the Company
does not require collateral; however, the Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
The Company may also be exposed to risk of loss with respect to credit card
transactions. The Company's risk relates to returned transactions, merchant and
fraud and transmissions of erroneous information. The Company has not incurred
significant losses for these risks to date.
One customer in 1996 and two customers in each of 1997 and 1998 represented
approximately 39%, 39% and 36% of net revenues, respectively.
F-21
<PAGE> 26
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Historically, the Company has elected, by the consent of its stockholder, to be
taxed under the provisions of Subchapter S of the Internal Revenue Code (the
"Code"). Under the provisions of the Code, the stockholder includes the
Company's corporate income in his personal income tax returns. Accordingly, the
Company was not subject to corporate income tax during periods for which it was
an S Corporation.
The unaudited pro forma income tax information included in the statements of
operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for all periods presented. There would
be no income tax expense on a pro forma basis for any of the years presented
because of the availability of pro forma net operating loss carrybacks.
USE OF ESTIMATES
The preparation of the 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.
3. RELATED PARTY TRANSACTIONS
The Company leases office space from a partnership that is owned by the
Company's stockholder. The total amount of rent expense related to this lease
was $450,000, $456,000 and $450,000, during 1996, 1997 and 1998, respectively.
The Company's due to/from stockholder accounts are settled periodically and are
classified as a current asset or liability. Employee advances are also settled
periodically and are classified as a current asset. There are no formal terms of
settlement or interest expense associated with these accounts.
F-22
<PAGE> 27
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
----------- -----------
<S> <C> <C>
Furniture and fixtures $ 360,202 $ 376,176
Equipment 1,564,595 1,579,408
Property held under capital leases 164,916 164,916
Automobiles 53,564 20,778
Charter yacht 1,960,846 25,000
Leasehold improvements 718,582 752,947
----------- -----------
4,822,705 2,919,225
Less accumulated depreciation and amortization (2,546,988) (2,569,590)
----------- -----------
$ 2,275,717 $ 349,635
=========== ===========
</TABLE>
5. LEASE COMMITMENTS
OPERATING LEASES
The Company leases certain facilities under non-cancelable operating lease
agreements. Rent expense, including rent paid to the former stockholder, was
approximately $479,000, $470,000 and $535,000 for the years ended December 31,
1996, 1997 and 1998, respectively. At December 31, 1998, future minimum
commitments under non-cancelable operating lease arrangements are as follows:
<TABLE>
<S> <C>
1999 $44,000
2000 20,000
-------
$64,000
=======
</TABLE>
F-23
<PAGE> 28
5. LEASE COMMITMENTS (CONTINUED)
CAPITAL LEASES
The Company leases certain office and computer equipment under capital leases.
The assets and liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair market value of the
assets. Included in property and equipment are the following assets held under
capital leases:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
--------- ---------
<S> <C> <C>
Computer equipment $ 164,916 $ 164,916
Less accumulated depreciation (91,517) (131,201)
--------- ---------
$ 73,399 $ 33,715
========= =========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
----------- ----
<S> <C> <C>
Note payable to bank in monthly installments at 8.5% interest,
collateralized by a charter yacht. The yacht was sold in 1998 $ 1,261,580 $ --
Less current portion (42,080) --
----------- ----
Long-term debt, less current portion $ 1,219,500 $ --
=========== ====
</TABLE>
F-24
<PAGE> 29
7. EMPLOYEES' SAVINGS PLAN
Employees become eligible after attaining the age of 20 1/2 years and having
been employed by the Company for six months. Employees may contribute up to 25%
of their annual compensation subject to limitations set forth in the Internal
Revenue Code. Employees' contributions vest immediately. The Company maintains a
401(k) plan under which the Company may contribute 25% of an employee's eligible
contributions up to the first 5% of annual compensation. The matching
contribution vests 20% after three years and in increments of 20% each
additional year. The Company's contributions for the years ended December 31,
1996, 1997 and 1998 were $12,576, $63,704 and $17,361, respectively.
8. CONTINGENCIES
LEGAL
The Company is a party to the 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. YEAR 2000 READINESS DISCLOSURE (UNAUDITED)
The Company has conducted an assessment of its computer systems to identify the
systems that could be affected by the "Year 2000" issue. The problem results
from computer programs having been written to define the applicable year using
two digits rather than four digits. The Company believes, with modifications to
existing software, the Year 2000 issue will not pose significant operational
problems for its computer systems. The Company plans to complete any Year 2000
modifications by December 31, 1999. At present, the Company anticipates the
total costs to complete the Year 2000 project will be minimal. Further, the
Company is confident its planning efforts are adequate to ensure there are no
adverse effects on the Company's core business operations and that the
transactions with business partners are fully supported.
F-25
<PAGE> 30
10. SUBSEQUENT EVENT
SALE OF BUSINESS
On January 15, 1999, the Company completed the sale of substantially all of the
assets and certain liabilities to SPAR MCI Performance Group, Inc. The
transaction consisted of $1,800,000 cash and an $12,422,189 note receivable from
the buyer. The sale agreement provides for post-closing adjustments whereby the
Company has guaranteed a minimum net worth of $1,500,000 for the Company at the
date of closing and additional contingent consideration will be receivable in
the event that the Company achieves $3,500,000 earning before taxes for the
twelve month period ending March 31, 1999.
The affiliate arrangements as described in Note 3 have been amended upon
consummation of the asset sale discussed above so that all continuing
obligations will be similar to terms and conditions of agreements/arrangements
with unaffiliated third parties.
11. RESTATEMENT
The Company has restated its 1997 financial statements to reflect costs related
to programs completed in 1997. The restatement resulted in an $841,000 reduction
of previously reported net income, an $841,000 increase to accrued expenses and
a corresponding decrease to shareholders' equity.
The Company also has restated its 1998 and 1997 financial statements to reflect
sales commissions incurred in the respective years. The restatement resulted in
a $750,000 reduction of previously reported 1997 net income, a $750,000 increase
to accrued expenses at December 31, 1998 and 1997 and a corresponding decrease
to stockholder's equity at December 31, 1998 and 1997.
F-26
<PAGE> 31
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements for the
year ended December 31, 1998 give effect to the January 15, 1999 acquisition by
SPAR MCI Performance Group, Inc. ("SPAR MCI"), SMCI of substantially all the
assets of MCI Performance Group, Inc. ("MCI"). The acquisition of MCI has been
accounted for using the purchase method of accounting. The following unaudited
pro forma combined financial statements also give effect to certain
reorganization transactions among the SPAR Companies and to the merger between
SAI and PIA ("the Merger"). The SPAR reorganization transactions will be
accounted for as an exchange of shares between commonly owned companies and the
Merger will be accounted for as a reverse merger ("Reverse Merger") with SPAR
deemed to be the accounting acquirer.
The unaudited pro forma combined financial statements reflect the
following: (i) the MCI acquisition, (ii) the SPAR reorganization transactions,
(iii) the Reverse Merger, (iv) adjustments to allocate the purchase price based
upon the estimated fair value of the assets acquired and the obligations
assumed, and (v) a provision for income taxes, as if the SPAR Companies and MCI
had been taxed as a C Corporation (statement of operations only).
The unaudited pro forma combined statements of operations exclude a
one-time, non-cash and non-tax deductible charge which will be based on the
stock price on the Effective Date (approximately $752,000, or $0.04 per combined
pro forma share, based on the average closing price of $2.25 over the six day
trading period ending May 19, 1999) resulting from the grant of 134,114 options
and issuance of 200,000 shares to a consultant of the SPAR Companies prior to
the Reverse Merger. The 134,114 options and 200,000 shares are included in
determining the pro forma basic and diluted weighted average number of shares.
The unaudited pro forma combined balance sheet gives effect to the SPAR
Reorganization Transactions and the Reverse Merger as if they had occurred on
March 31, 1999. The unaudited pro forma combined statement of operations for the
year ended December 31, 1998 includes the operating results of the SPAR
Companies, MCI and PIA for the year ended December 31, 1998 and gives effect to
the MCI Acquisition and the Reverse Merger as if they had occurred at the
beginning of the period. The unaudited pro forma combined statement of
operations for the three month period ended March 31, 1999, reflects the
operating results of the SPAR Companies and PIA for the three months ended March
31, 1999. The SPAR Companies had a fiscal year of March 31. Effective April 1,
1998, the SPAR Companies changed its fiscal year to December 31. MCI had a
fiscal year ending December 31. PIA has a fiscal year ending December 31. For
purposes of the twelve-month period ended December 31, 1998 unaudited pro forma
combined statement of operations, operating results for the SPAR Companies
include the nine-month period ended December 31, 1998 plus the three-month
period ended March 31, 1998. The SPAR Companies three-month period ended March
31, 1998 included net revenues of $9,602,000 and net income of $1,731,000. The
SPAR Companies three-month period ended March 31, 1999 includes the operations
of MCI from the date of acquisition, January 15, 1999.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what the
SPAR Companies financial position or results of operations would actually have
been if such transactions in fact had occurred on those dates and are not
necessarily representative of the SPAR Companies financial position or results
of operations for any future period. Since PIA and SPAR were not under common
control or management, historical combined results may not be comparable to, or
indicative of, future performance. The unaudited pro forma combined financial
statements should be read in conjunction with the financial statements and notes
thereto included elsewhere in this Form 8-K/A or incorporated by reference
herein.
F-27
<PAGE> 32
SPAR
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SPAR PRO FORMA PRO FORMA
COMPANIES PIA ADJUSTMENTS COMBINED
--------- -------- ------------ ---------
(SEE NOTE 5)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 1,980 $ 7,408 $ -- $ 9,388
Accounts receivable, net.......................... 14,609 11,356 -- 25,965
Prepaid program costs............................. 2,570 -- -- 2,570
Prepaid expenses and other current assets......... 812 691 -- 1,503
Due from affiliates............................... 177 -- -- 177
------- -------- -------- -------
Total current assets...................... 20,148 19,455 -- 39,603
Property and equipment, net......................... 1,552 1,771 (1,671) 1,652
Goodwill, net....................................... 12,140 -- 12,013 24,153
Investment in affiliate............................. -- 570 -- 570
Other assets........................................ 302 369 -- 671
------- -------- -------- -------
Total assets.............................. $34,142 $ 22,165 $ 10,342 $66,649
======= ======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 2,046 $ 996 $ -- $ 3,042
Accrued expenses and other current liabilities.... 4,901 7,662 9,434 21,997
Deferred revenue.................................. 4,086 -- -- 4,086
Line of credit and note payable................... 3,187 -- -- 3,187
Other long-term debt, current portion............. 1,376 -- -- 1,376
Distribution and other amounts due to SPAR
stockholders................................... 7,399 -- (1,773) 5,626
Due to affiliates................................. 356 -- -- 356
Note payable to MCI............................... 8,790 -- -- 8,790
------- -------- -------- -------
Total current liabilities................. 32,141 8,658 7,661 48,460
Line of credit and other long-term debt............. 2,338 2,090 -- 4,428
------- -------- -------- -------
Total liabilities......................... 34,479 10,748 7,661 52,888
Shareholders' equity:
Common stock...................................... -- 60 120 180
Additional paid-in capital........................ -- 30,744 (16,074) 14,670
Accumulated earnings (deficit).................... (337) (19,387) 18,635 (1,089)
------- -------- -------- -------
Total liabilities and stockholders'
equity.................................. $34,142 $ 22,165 $ 10,342 $66,649
======= ======== ======== =======
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements
F-28
<PAGE> 33
SPAR
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
PURCHASE PRO PRO
SPAR ACCOUNTING FORMA PRO FORMA FORMA
COMPANIES MCI ADJUSTMENTS COMBINED PIA ADJUSTMENTS COMBINED
--------- ------- -------------- ---------- ---------- -------------- ----------
(SEE NOTE 3) (SEE NOTE 6)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.......... $42,202 $33,196 $ -- $ 75,398 $ 121,788 $ -- $ 197,186
Cost of revenues...... 21,054 26,108 -- 47,162 105,448 -- 152,610
------- ------- ------- ---------- ---------- ------- ----------
Gross profit.......... 21,148 7,088 -- 28,236 16,340 -- 44,576
Selling, general and
administrative
expenses............ 13,058 6,781 325 20,164 21,162 -- 41,326
Goodwill
amortization........ -- -- 821 821 -- 801 1,622
------- ------- ------- ---------- ---------- ------- ----------
Operating income...... 8,090 307 (1,146) 7,251 (4,822) (801) 1,628
Interest expense
(income)............ 399 (77) 1,262 1,584 (462) -- 1,122
Other (income)
expense............. (149) -- -- (149) (149) -- (298)
------- ------- ------- ---------- ---------- ------- ----------
Income (loss) before
income tax
provision........... 7,840 384 (2,408) 5,816 (4,211) (801) 804
Income tax provision
(benefit)........... -- -- 2,146 2,146 55 (1,609) 592
------- ------- ------- ---------- ---------- ------- ----------
Net income (loss)..... $ 7,840 $ 384 $(4,554) $ 3,670 $ (4,266) $ 808 $ 212
------- ------- ------- ---------- ---------- ------- ----------
Net income (loss) per
share:
Basic............... $ 0.29 $ (0.78) $ 0.01
========== ========== ==========
Diluted............. $ 0.29 $ (0.78) $ 0.01
========== ========== ==========
Shares used in
computing pro forma
net income (loss)
per share:
Basic............... 12,654,807 5,439,000 18,135,773
========== ========== ==========
Diluted............. 12,788,921 5,439,000 18,135,773
========== ========== ==========
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements
F-29
<PAGE> 34
SPAR
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
PURCHASE PRO PRO
SPAR ACCOUNTING FORMA PRO FORMA FORMA
COMPANIES MCI ADJUSTMENTS COMBINED PIA ADJUSTMENTS COMBINED
--------- ----- ------------ ---------- --------- ------------ ----------
(SEE NOTE 3) (SEE NOTE 6)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues................. $21,637 $ 765 $ -- $ 22,402 $ 21,626 $ -- $ 44,028
Cost of revenues............. 14,373 503 -- 14,876 20,069 -- 34,945
------- ----- ------- ---------- --------- ------ ----------
Gross profit................. 7,264 262 -- 7,526 1,557 -- 9,083
Selling, general and
administrative expenses.... 4,780 376 -- 5,156 4,947 -- 10,103
Goodwill amortization........ 171 -- -- 171 -- 200 371
------- ----- ------- ---------- --------- ------ ----------
Operating income............. 2,313 (114) -- 2,199 (3,390) (200) 1,391
Interest expense (income).... 416 -- 49 465 (90) -- 375
Other (income) expense....... (45) -- -- (45) -- -- (45)
------- ----- ------- ---------- --------- ------ ----------
Income (loss) before income
tax provision.............. 1,942 (114) (49) 1,779 (3,300) (200) (1,721)
Income tax provision
(benefit).................. -- -- 657 657 15 (657) 15
------- ----- ------- ---------- --------- ------ ----------
Net income (loss)............ $ 1,942 $(114) $ (706) $ 1,122 $ (3,315) $ 457 $ (1,736)
======= ===== ======= ========== ========= ====== ==========
Net income (loss) per share:
Basic...................... $ 0.09 $ (0.60) $ (0.10)
========== ========= ==========
Diluted.................... $ 0.09 $ (0.60) $ (0.10)
========== ========= ==========
Shares used in computing pro
forma net income (loss) per
share
Basic...................... 12,654,807 5,480,966 18,135,773
========== ========= ==========
Diluted.................... 12,788,921 5,480,966 18,135,773
========== ========= ==========
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-30
<PAGE> 35
SPAR
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. GENERAL
The historical financial statements reflect the financial position and
results of operations of the SPAR Companies, MCI and PIA (individually, the
"Company," and collectively, the "Companies") and were derived from the
respective Companies' financial statements as indicated. The unaudited pro forma
combined financial statements should be read in connection with the audited
historical financial statements and notes thereto of the SPAR Companies (nine
months ended December 31, 1998), MCI (year ended December 31, 1998) and PIA
(year ended December 31, 1998) and the unaudited historical financial statements
of SPAR Companies for the three months ended March 31, 1998. The historical
financial statements included elsewhere herein for each of the Companies, have
been included in accordance with Rule 3-05 of Regulation S-X.
The historical results of operations of the SPAR Companies for the
twelve-month period ended December 31, 1998 includes the nine-month period ended
December 31, 1998 plus the three-month period ended March 31, 1998.
The historical results of operations of the SPAR Companies for the
three-month period ended March 31, 1999 includes the operations of SMCI from
January 15, 1999, the date of such acquisition. (See Note 2).
The historical results of operations of MCI for the three-month period
ended March 31, 1999 includes the operations of MCI from January 1, 1999 to
January 15, 1999, the date of sale to SMCI. (See Note 2).
2. MCI ACQUISITION
On January 15, 1999, SMCI acquired substantially all the assets of MCI. The
transaction accounted for as a purchase, consisted of consideration of
$1,800,000 cash and a $12,422,189 note payable to the seller.
The purchase price has been allocated to MCI's historical assets and
liabilities based on their respective carrying values, as these carrying values
are deemed to represent fair market values of these assets and liabilities.
Additionally, adjustments have been made for assets not purchased and debt and
other liabilities not assumed in the transaction for purposes of determining the
excess of the purchase price over the fair value of the net assets acquired. The
total purchase consideration does not reflect contingent consideration related
to earn-out arrangements included in the MCI Agreement. The MCI Agreement
provides for a post-closing adjustment whereby additional contingent
consideration will be payable to MCI in the event that EBT exceeds $3,500,000.
The allocation of the purchase price is considered preliminary.
F-31
<PAGE> 36
SPAR
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. MCI UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
The following table summarizes unaudited pro forma combined statement of
operations adjustments.
<TABLE>
<CAPTION>
PURCHASE ACCOUNTING ADJUSTMENTS
--------------------------------- PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
----- ----- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Net revenues.................................... $ -- $ -- $ -- $ -- $ --
Cost of revenues................................ -- -- -- -- --
Selling, general and administrative expenses.... 325 -- -- -- 325
Goodwill amortization........................... -- 821 -- -- 821
----- ----- ------- ------- -------
Operating income (loss)......................... (325) (821) -- -- (1,146)
Interest (income) expense....................... -- -- 1,262 -- 1,262
Other (income) expense.......................... -- -- -- -- --
----- ----- ------- ------- -------
Income (loss) before income tax provision....... (325) (821) (1,262) -- (2,408)
Income tax provision............................ -- -- -- 2,146 2,146
----- ----- ------- ------- -------
Net income (loss)............................... $(325) $(821) $(1,262) $(2,146) $(4,554)
===== ===== ======= ======= =======
THREE-MONTH PERIOD ENDED MARCH 31, 1999
Net revenues.................................... $ -- $ -- $ -- $ -- $ --
Cost of revenues................................ -- -- -- -- --
Selling, general and administrative expenses.... -- -- -- -- --
Goodwill amortization........................... -- -- -- -- --
----- ----- ------- ------- -------
Operating income (loss)......................... -- -- -- -- --
Interest expense................................ -- -- 49 -- 49
Other (income) expense.......................... -- -- -- -- --
----- ----- ------- ------- -------
Income (loss) before income tax provision....... -- -- (49) -- (49)
Income tax provision............................ -- -- -- 657 657
----- ----- ------- ------- -------
Net income (loss)............................... $ -- $ -- $ (49) $ (657) $ (706)
===== ===== ======= ======= =======
</TABLE>
- ---------------
(a) Reflects the increase in salaries, bonuses and benefits to new management of
MCI as scheduled from the employment agreements that have been entered into
or that will be entered into upon consummation of the MCI Acquisition.
(b) Reflects the amortization of goodwill to be recorded as a result of the MCI
Acquisition over a 15-year estimated life.
(c) Reflects the increase in interest expense resulting from the increase of
outstanding debt and distributions payable by the Company:
<TABLE>
<CAPTION>
THREE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
SPAR interest expense at a rate of 7.75% on
$8,790 note payable to MCI.................. $ 681 $25
SPAR interest expense at a rate of 7.75% on
$7,400 of the amounts due to the owners of
SPAR........................................ 581 24
------ ---
$1,262 $49
====== ===
</TABLE>
(d) Reflects the incremental provision for federal and state income taxes
assuming all entities were subject to federal and state income tax and
relating to the other statements of operations' adjustments and for income
taxes on S corporation income, assuming a corporate income tax rate of
36.9%.
F-32
<PAGE> 37
SPAR
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. PIA REVERSE MERGER
In 1999, SPAR, through SAI, its newly formed parent, will complete the
Reverse Merger with PIA. The transaction will be accounted for as a purchase
with SPAR being treated as the accounting acquirer.
The estimated purchase price has been allocated based on the estimated fair
value of PIA assets acquired. The allocation of the purchase price is considered
preliminary until such time as the closing of the transaction.
5. PIA UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The following table summarizes unaudited pro forma combined balance sheet
adjustments (in thousands).
<TABLE>
<CAPTION>
REVERSE MERGER ADJUSTMENTS
--------------------------- PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
--------- ------ ------ ------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Property and equipment, net.................. $ (1,671) $ -- $ -- $ -- $ (1,671)
Goodwill, net................................ 12,013 -- -- -- 12,013
-------- ----- ----- ------- --------
Total assets....................... $ 10,342 $ -- $ -- $ -- $ 10,342
======== ===== ===== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses........................... $ 9,434 $ -- $ -- $ -- $ 9,434
Distribution and other amounts due to SPAR
Stockholders............................ -- -- -- (1,773) (1,773)
-------- ----- ----- ------- --------
Total current liabilities.......... 9,434 -- -- (1,773) 7,661
Stockholders' equity:
Common stock............................... (5) -- 125 -- 120
Additional paid-in capital................. (18,474) 752 (125) 1,773 (16,074)
Retained earnings (deficit)................ 19,387 (752) -- -- 18,635
-------- ----- ----- ------- --------
Total stockholders' equity......... 908 -- -- 1,773 2,681
-------- ----- ----- ------- --------
Total liabilities and stockholders'
equity........................... $ 10,342 $ -- $ -- $ -- $ 10,342
======== ===== ===== ======= ========
</TABLE>
(a) Records the purchase accounting for the Reverse Merger of SPAR with PIA.
PIA's market value, for purposes of these pro forma adjustments has been
established at $12,325. This is based on using the number of shares held
prior to and to be retained in the transaction by PIA shareholders
multiplied by the average closing market price of PIA's stock over six
trading days ending on May 19, 1999. The goodwill that will result from the
Reverse Merger is calculated after giving effect to the following: (1) the
PIA merger costs that are accrued from April 3, 1999 through closing
estimated at $1,388, (ii) restructuring costs that are directly related to
the merger estimated at $9,117, plus (iii) any SPAR merger related costs to
be incurred through the closing estimated at $600. The amounts allocated on
a preliminary basis to goodwill may be allocated to other identifiable
intangible assets, such as customer lists, resulting in different
amortization periods. However, management does not anticipate such amounts
to be material.
PIA's restructure cost is composed of committed costs that will be
eliminated during the integration of the SPAR Companies and PIA's field
organizations and the consolidation of administrative functions as required
to achieve beneficial synergies and cost savings.
PIA restructuring costs include $1,671 for assets deemed to be redundant,
$2,757 for property and equipment lease settlements, $3,971 for severance
pay and other employee benefit obligations and $718 for other termination
fees for contracts that are deemed to be redundant. PIA will record any
F-33
<PAGE> 38
SPAR
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. PIA UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
termination costs on its books in accordance with EITF 95-3 Recognition of
Liabilities in Connection with a Business Combination.
(b) Records the one-time, non-cash, non-tax deductible charge of approximately
$752 (based on average closing market price per share of $2.25 over the six
trading day period ending on May 19, 1999) resulting from the grant of
134,114 options at $0.01 per share and issuance of 200,000 shares to a
consultant of SPAR prior to this Reverse Merger.
(c) Records the par value of SPAR's shares that are to be issued and
outstanding and prior to the Reverse Merger with PIA.
(d) Reflects the minimum net worth of the SPAR Companies at the time of closing
as required in the revised merger agreement with PIA.
6. PIA UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
The following table summarizes unaudited pro forma combined statement of
operations adjustments (in thousands).
<TABLE>
<CAPTION>
REVERSE MERGER
ADJUSTMENTS
---------------- PRO FORMA
(a) (b) ADJUSTMENTS
----- ------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Net revenues................................................ $ -- $ -- $ --
Cost of revenues............................................ -- -- --
Selling, general and administrative expenses................ -- -- --
Goodwill amortization....................................... (801) -- (801)
----- ------- -------
Operating income (loss)..................................... (801) -- (801)
Other (income) expense...................................... -- -- --
----- ------- -------
Income (loss) before income tax provision................... (801) -- (801)
Income tax provision (benefit).............................. -- (1,609) (1,609)
----- ------- -------
Net income (loss)........................................... $(801) $ 1,609 $ 808
===== ======= =======
THREE-MONTH PERIOD ENDED MARCH 31, 1999
Net revenues................................................ $ -- $ -- $ --
Cost of revenues............................................ -- --
Selling, general and administrative expenses................ -- -- --
Goodwill amortization....................................... 200 -- 200
----- ------- -------
Operating income (loss)..................................... (200) -- (200)
Interest expense............................................ -- -- --
Other (income) expense...................................... -- -- --
----- ------- -------
Income (loss) before income tax provision................... (200) -- (200)
Income tax provision (benefit).............................. -- (657) (657)
----- ------- -------
Net income (loss)........................................... $(200) $ 657 $ 457
===== ======= =======
</TABLE>
- ---------------
(a) Reflects the amortization of goodwill to be recorded as a result of the
Reverse Merger over a 15-year estimated life.
(b) Reflects the reversal of the provision for federal and state income taxes
assuming the losses of PIA, excluding non-deductible PIA goodwill, would be
used to offset the income of SPAR.
F-34
<PAGE> 39
SPAR
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. PER SHARE DATA
Pro forma net income (loss) per share, basic and diluted, has been prepared
using the following assumptions: (i) the number of shares of PIA Common Stock
issued and outstanding at the date of closing is estimated to be approximately
5,480,966; and (ii) the Amended Exchange Ratio (as defined) is based upon the
product of 2.3333 times the number of issued and outstanding shares of PIA
Common Stock. Therefore, at the date of closing, SAI Stockholders will exchange
their SAI shares for approximately 12,654,807 shares of PIA Common Stock and SAI
option holders will receive approximately 134,114 options that will be
exercisable into PIA Common Stock at $0.01 per share at various dates to be
determined.
For purposes of computing pro forma basic and diluted earnings per share,
all SAI stock and SAI options that will be owned by SAI Stockholders immediately
prior to the merger transaction have been treated as though they were
outstanding from the beginning of the respective period presented in the
unaudited pro forma combined statement of operations.
The diluted weighted average number of shares outstanding does not include
any anti-dilutive effects upon conversion of options outstanding.
8. PIA NONRECURRING CHARGES
The year ended December 31, 1998 unaudited pro forma combined statement of
operations includes $1,038 of nonrecurring charges recorded by PIA. These
charges include $839 of purchased consulting services related to the Company's
redirection of its technology strategy, and $250 in merger transaction costs.
F-35
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of February 28, 1999 among
the Company, SAI, PIA Merchandising, PIA Acquisition and the SPAR
Companies (incorporated by reference to Exhibit 10.10 of the
Company's Form 10-K, filed with the Securities and Exchange
Commission on March 31, 1999).
2.2 First Amendment to Agreement and Plan of Merger dated as of May
14, 1999, among the Company, SAI, PIA Merchandising, PIA
Acquisition and the SPAR Companies (incorporated by reference to
Exhibit 10.13 of the Company's Form 10-K/A, filed with the
Securities and Exchange Commission on May 25, 1999).
23.1 Consent of Ernst & Young LLP
23.2 Consent of Ernst & Young LLP
99.1 Press Release of the Company dated July 8, 1999 (incorporated by
reference to Exhibit 99.1 of the Company's Current Report on Form
8-K, filed with the Securities and Exchange Commission on July
23, 1999).
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-07377) pertaining to the 1990 Stock Option Plan, 1995 Stock
Option Plan and 1995 Stock Option Plan for Nonemployee Directors, (Form S-8
No. 333-49255) pertaining to the Employee Stock Purchase Plan and (Form S-8
No. 333-51997) pertaining to the Miscellaneous Employee Benefits Plan of PIA
Merchandising Services, Inc. of our report dated February 22, 1999 (except
for Note 11, as to which the date is June 16, 1999), with respect to the
financial statements of MCI Performance Group, Inc. included in the Current
Report on Form 8-K/A for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
September 16, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-07377) pertaining to the 1990 Stock Option Plan, 1995 Stock
Option Plan and 1995 Stock Option Plan for Nonemployee Directors, (Form S-8 No.
333-49255) pertaining to the Employee Stock Purchase Plan and (Form S-8 No.
333-51997) pertaining to the Miscellaneous Employee Benefits Plan of PIA
Merchandising Services, Inc. of our report dated May 19, 1999, with respect to
the combined financial statements of SPAR Companies included in the Current
Report on Form 8-K/A for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
September 16, 1999
