UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
Commission file number 0-27824
SPAR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
580 White Plains Road, Tarrytown, New York 10591
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 332-4100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K . [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Rule 12b-2 of the Act.) YES [ ] NO [X]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on June 30, 2004, based on the closing price of
the Common Stock as reported by the Nasdaq Small Cap Market on such date, was
approximately $4,799,006.
The number of shares of the Registrant's Common Stock outstanding as of
December 31, 2004, was 18,858,972 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PART I
Page
Item 1. Business 2
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
Item 9A. Controls and Procedures 26
Item 9B. Other Information 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation and Other Information of SPAR Group, Inc. 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 35
Item 13. Certain Relationships and Related Transactions 36
Item 14. Principal Accountant Fees and Services 37
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
Signatures 43
PART I
Statements contained in this Annual Report on Form 10-K of SPAR Group,
Inc. ("SGRP", and together with its subsidiaries, the "SPAR Group" or the
"Company"), include "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including, in
particular and without limitation, the statements contained in the discussions
under the headings "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause the Company's actual results, performance and achievements, whether
expressed or implied by such forward-looking statements, to not occur or be
realized or to be less than expected. Such forward-looking statements generally
are based upon the Company's best estimates of future results, performance or
achievement, current conditions and the most recent results of operations.
Forward-looking statements may be identified by the use of forward-looking
terminology such as "may", "will", "expect", "intend", "believe", "estimate",
"anticipate", "continue" or similar terms, variations of those terms or the
negative of those terms. You should carefully consider such risks, uncertainties
and other information, disclosures and discussions which contain cautionary
statements identifying important factors that could cause actual results to
differ materially from those provided in the forward-looking statements.
Although the Company believes that its plans, intentions and
expectations reflected in or suggested by such forward-looking statements are
reasonable, it cannot assure that such plans, intentions or expectations will be
achieved in whole or in part. You should carefully review the risk factors
described herein and any other cautionary statements contained in this Annual
Report on Form 10-K. All forward-looking statements attributable to the Company
or persons acting on its behalf are expressly qualified by the risk factors (see
Item 1 - Certain Risk Factors) and other cautionary statements in this Annual
Report on Form 10-K. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Item 1. Business.
GENERAL
The SPAR Group, Inc., a Delaware corporation ("SGRP"), and its
subsidiaries (together with SGRP, the "SPAR Group" or the "Company"), is a
supplier of merchandising and other marketing services throughout the United
States and internationally. In 2002, the Company sold its Incentive Marketing
Division, SPAR Performance Group, Inc. ("SPGI"). The Company's operations are
divided into two divisions: the Domestic Merchandising Services Division and the
International Merchandising Services Division. The Domestic Merchandising
Services Division provides merchandising services, in-store event staffing,
product sampling, database marketing, technology services, teleservices and
marketing research to manufacturers and retailers in the United States. The
various services are primarily performed in mass merchandisers, drug store
chains, convenience and grocery stores. The International Merchandising Services
Division established in July 2000, currently provides similar merchandising
services through a wholly owned subsidiary in Canada, through 51% owned joint
venture subsidiaries in India, South Africa and Turkey, and through a 50% owned
joint venture in Japan. The Company recently established a 50% owned joint
venture in China and a 51% owned joint venture subsidiary in Romania and expects
to offer merchandising services in these countries in 2005.
Continuing Operations
Domestic Merchandising Services Division
The Company's Domestic Merchandising Services Division provides
nationwide merchandising and other marketing services primarily on behalf of
consumer product manufacturers and retailers at mass merchandisers, drug store
chains and grocery stores. Included in its customers are home entertainment,
general merchandise, health and beauty care, consumer goods and food products
companies in the United States.
Merchandising services primarily consist of regularly scheduled
dedicated routed services and special projects provided at the store level for a
specific retailer or single or multiple manufacturers primarily under single or
multi-year contracts or agreements. Services also include stand-alone
large-scale implementations. These services may include sales enhancing
activities such as ensuring that client products authorized for distribution are
in stock
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and on the shelf, adding new products that are approved for distribution but not
presently on the shelf, setting category shelves in accordance with approved
store schematics, ensuring that shelf tags are in place, checking for the
overall salability of client products and setting new and promotional items and
placing and/or removing point of purchase and other related media advertising.
Specific in-store services can be initiated by retailers or manufacturers, and
include new store openings, new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. The
Company also provides in-store event staffing services, database marketing,
technology services, teleservices and marketing research services.
International Merchandising Services Division
In July 2000, the Company established its International Merchandising
Services Division, operating through a wholly owned subsidiary, SPAR Group
International, Inc. ("SGI"), to focus on expanding its merchandising services
business worldwide. The Company has expanded its international business as
follows:
May 2001, the Company entered Japan through a 50% owned joint venture
headquartered in Osaka.
June 2003, the Company entered Canada by acquiring an existing business through
its wholly-owned Canadian subsidiary, headquartered in Toronto.
July 2003, the Company entered Turkey through a 51% owned joint venture
subsidiary headquartered in Istanbul.
April 2004, the Company entered South Africa through a 51% owned joint venture
subsidiary headquartered in Durban.
April 2004, the Company entered India through a 51% owned joint venture
subsidiary headquartered in New Delhi.
December 2004, the Company established a 51% owned joint venture subsidiary
headquartered in Bucharest, Romania.
In February 2005, the Company announced the establishment of a 50% owned joint
venture headquartered in Hong Kong, China.
Discontinued Operations
Incentive Marketing Division
As part of a strategic realignment in the fourth quarter of 2001, the
Company made the decision to divest its Incentive Marketing Division, operating
through its subsidiary, SPAR Performance Group, Inc. ("SPGI"). The Company
explored various alternatives for the sale of SPGI and subsequently sold the
business to SPGI's employees through the establishment of an employee stock
ownership plan on June 30, 2002. In December of 2003, SPGI changed its name to
STIMULYS, Inc.
Technology Division
In October 2002, the Company dissolved its Technology Division
established in March 2000 for the purpose of marketing its proprietary
Internet-based computer software.
INDUSTRY OVERVIEW
Domestic Merchandising Services Division
According to industry estimates over two billion dollars are spent
annually on domestic retail merchandising services. The merchandising services
industry includes manufacturers, retailers, food brokers, and professional
service merchandising companies. The Company believes there is a continuing
trend for major manufacturers to move increasingly toward third parties to
handle in-store merchandising. The Company also believes that its merchandising
services bring added value to retailers, manufacturers and other businesses.
Retail merchandising services enhance sales by making a product more visible and
available to consumers. These services primarily include placing orders, shelf
maintenance, display placement, reconfiguring products on store shelves,
replenishing
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products and providing in-store event staffing services. The Company provides
other marketing services such as test market research, mystery shopping,
teleservices, database marketing and promotion planning and analysis.
The Company believes merchandising services previously undertaken by
retailers and manufacturers have been increasingly outsourced to third parties.
Historically, retailers staffed their stores as needed to ensure inventory
levels, the advantageous display of new items on shelves, and the maintenance of
shelf schematics. In an effort to improve their margins, retailers decreased
their own store personnel and increased their reliance on manufacturers to
perform such services. Initially, manufacturers attempted to satisfy the need
for merchandising services in retail stores by utilizing their own sales
representatives. However, manufacturers discovered that using their own sales
representatives for this purpose was expensive and inefficient. Therefore,
manufacturers have increasingly outsourced the merchandising services to third
parties capable of operating at a lower cost by (among other things) serving
multiple manufacturers simultaneously.
Another significant trend impacting the merchandising segment is the
tendency of consumers to make product purchase decisions once inside the store.
Accordingly, merchandising services and in-store product promotions have
proliferated and diversified. Retailers are continually remerchandising and
remodeling entire stores to respond to new product developments and changes in
consumer preferences. The Company estimates that these activities have increased
in frequency over the last five years, such that most stores are re-merchandised
or remodeled approximately every twenty-four months. Both retailers and
manufacturers are seeking third parties to help them meet the increased demand
for these labor-intensive services.
International Merchandising Services Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in marketing
their products. As evidenced in the United States, retailer and manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
also believes that the difficulties encountered by these programs are only
exacerbated by the logistics of operating in foreign markets. This environment
has created an opportunity for the Company to exploit its Internet-based
technology and business model that are successful in the United States. In July
2000, the Company established its International Merchandising Services Division
to cultivate foreign markets, modify the necessary systems and implement the
Company's business model worldwide by expanding its merchandising services
business off shore. The Company formed an International Merchandising Services
Division task force consisting of members of the Company's information
technology, operations and finance groups to evaluate and develop foreign
markets. In 2001, the Company and a leading Japanese based distributor
established a joint venture to provide the latest in-store merchandising
services to the Japanese market. In 2003, the Company expanded its international
presence to Canada and Turkey by acquiring the business of a Canadian
merchandising company and entering into a start-up joint venture subsidiary in
Turkey. In 2004, the Company established 51% owned joint venture subsidiaries in
South Africa, India and Romania and in early 2005 a 50% owned joint venture in
China. Key to the Company's international strategy is the translation of several
of its proprietary Internet-based logistical, communications and reporting
software applications into the native language of any market the Company enters.
As a result of this requirement for market penetration, the Company has
developed translation software that can quickly convert its proprietary software
into various languages. Through its computer facilities in Auburn Hills,
Michigan, the Company provides worldwide access to its proprietary logistical,
communications and reporting software. In addition, the Company maintains
personnel in Greece and Australia to assist in its international efforts. The
Company is actively pursuing expansion into various other markets.
PIA ACQUISITION
SPAR Acquisition, Inc., and its subsidiaries (the "SPAR Companies") are
the original predecessor of the current Company and were founded in 1967. On
July 8, 1999, the Company completed a reverse merger with the SPAR Companies
(the "PIA Acquisition"), and then changed its name to SPAR Group, Inc., from PIA
Merchandising Services, Inc. (prior to such merger, "PIA"). Pursuant to the PIA
Acquisition, the SPAR Companies were deemed to have "acquired" PIA and its
subsidiaries prior to the PIA Acquisition (the "PIA Companies") which was
treated as a purchase of the PIA Companies for accounting purposes, with the
books and records of the Company being adjusted to reflect the historical
operating results of the SPAR Companies.
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BUSINESS STRATEGY
As the marketing services industry continues to grow, consolidate and
expand both in the United States and internationally, large retailers and
manufacturers are increasingly outsourcing their marketing needs to third-party
providers. The Company believes that offering marketing services on a national
and global basis will provide it with a competitive advantage. Moreover, the
Company believes that successful use of and continuous improvements to a
sophisticated technology infrastructure, including its proprietary
Internet-based software, is key to providing clients with a high level of
customer service while maintaining efficient, low cost operations. The Company's
objective is to become an international retail merchandising and marketing
service provider by pursuing its operating and growth strategy, as described
below.
Increased Sales Efforts:
The Company is seeking to increase revenues by increasing sales to its
current customers, as well as, establishing long-term relationships with new
customers, many of which currently use other merchandising companies for various
reasons. The Company believes its technology, field implementation and other
competitive advantages will allow it to capture a larger share of this market
over time. However, there can be no assurance that any increased sales will be
achieved.
New Products:
The Company is seeking to increase revenues through the internal
development and implementation of new products and services that add value to
its customers' retail merchandising related activities, some of which have been
identified and are currently being tested for feasibility and market acceptance.
However, there can be no assurance that any new products of value will be
developed or that any such new product can be successfully marketed.
Acquisitions:
The Company is seeking to acquire businesses or enter into joint
ventures or other arrangements with companies that offer similar merchandising
services both in the United States and worldwide. The Company believes that
increasing its industry expertise, adding product segments, and increasing its
geographic breadth will allow it to service its clients more efficiently and
cost effectively. As part of its acquisition strategy, the Company is actively
exploring a number of potential acquisitions, predominately in its core
merchandising service businesses (which includes in-store event staffing
services). Through such acquisitions, the Company may realize additional
operating and revenue synergies and may leverage existing relationships with
manufacturers, retailers and other businesses to create cross-selling
opportunities. However, there can be no assurance that any of the acquisitions
will occur or whether, if completed, the integration of the acquired businesses
will be successful or the anticipated efficiencies and cross-selling
opportunities will occur.
In December of 2003, the Company entered into an agreement to purchase
the business and certain assets of Bert Fife & Associates, Inc., and related
Companies ("Fife"), which specialized in providing in-store product
demonstrations. As part of the agreement the Company entered into a one year
consulting agreement with the President of Fife. The purchase was completed in
January 2004. In April 2004, the Company established a joint venture subsidiary
in South Africa. The joint venture subsidiary is headquartered in Durban and is
owned 51% by the Company. Also in April 2004, the Company announced the
establishment of a joint venture subsidiary in India and started operations
during the third quarter. The joint venture subsidiary is headquartered in New
Delhi and is 51% owned by the Company. In January 2005, the Company announced
the establishment of a joint venture subsidiary in Romania and is owned 51% by
the Company. In February 2005, the Company announced the establishment of a
joint venture in China which is 50% owned by the Company.
Improve Operating Efficiencies:
The Company will continue to seek greater operating efficiencies. The
Company believes that its existing field force and technology infrastructure can
support additional customers and revenue in the Domestic Merchandising Services
Division. At the corporate level, the Company will continue to streamline
certain administrative functions, such as accounting and finance, insurance,
strategic marketing and legal support.
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Leverage and Improve Technology:
The Company intends to continue to utilize computer (including hand-held
computers), Internet, and other technology to enhance its efficiency and ability
to provide real-time data to its customers, as well as, maximize the speed of
communication, and logistical deployment of its merchandising specialists.
Industry sources indicate that customers are increasingly relying on marketing
service providers to supply rapid, value-added information regarding the results
of marketing expenditures on sales and profits. The Company (together with
certain of its affiliates) has developed and owns proprietary Internet-based
software technology that allows it to utilize the Internet to communicate with
its field management, schedule its store-specific field operations more
efficiently, receive information and incorporate the data immediately, quantify
the benefits of its services to customers faster, respond to customers' needs
quickly and implement programs rapidly. The Company has successfully modified
and is currently utilizing certain of its software applications in connection
with its international ventures. The Company believes that it can continue to
improve, modify and adapt its technology to support merchandising and other
marketing services for additional customers and projects in the United States
and in other foreign markets. The Company also believes that its proprietary
Internet-based software technology gives it a competitive advantage in the
marketplace.
DESCRIPTION OF SERVICES
The Company currently provides a broad array of merchandising and other
marketing services on a national, regional and local basis to leading home
entertainment, general merchandise, consumer goods, food, and health and beauty
care manufacturers and retail companies through its Domestic Merchandising
Services Division.
The Company currently operates internationally serving some of the
world's leading companies. The Company believes its full-line capabilities
provide fully integrated solutions that distinguish the Company from its
competitors. These capabilities include the ability to develop plans at one
centralized division headquarter location, effect chain wide execution,
implement rapid, coordinated responses to its clients' needs and report on a
real time Internet enhanced basis. The Company also believes its international
presence, industry-leading technology, centralized decision-making ability,
local follow-through, ability to recruit, train and supervise merchandisers,
ability to perform large-scale initiatives on short notice, and strong retailer
relationships provide the Company with a significant advantage over local,
regional or other competitors.
Domestic Merchandising Services Division
The Company provides a broad array of merchandising services on a
national, regional, and local basis to manufacturers and retailers in the United
States. The Company provides its merchandising and other marketing services
primarily on behalf of consumer product manufacturers at mass merchandiser, drug
and retail grocery chains. The Company currently provides three principal types
of merchandising and marketing services: syndicated services, dedicated services
and project services.
Syndicated Services
Syndicated services consist of regularly scheduled, routed merchandising
services provided at the retail store level for various manufacturers. These
services are performed for multiple manufacturers, including, in some cases,
manufacturers whose products are in the same product category. Syndicated
services may include activities such as:
o Reordering and replenishment of products
o Ensuring that the clients' products authorized for distribution
are in stock and on the shelf
o Adding new products that are approved for distribution but not
yet present on the shelf
o Designing and implementing store planogram schematics
o Setting product category shelves in accordance with approved
store schematics
o Ensuring that product shelf tags are in place
o Checking for overall salability of the clients' products
o Placing new product and promotional items in prominent positions
Dedicated Services
Dedicated services consist of merchandising services, generally as
described above, which are performed for a specific retailer or manufacturer by
a dedicated organization, including a management team working exclusively
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for that retailer or manufacturer. These services include many of the above
activities detailed in syndicated services, as well as, new store set-ups, store
remodels and fixture installations. These services are primarily based on
agreed-upon rates and fixed management fees.
Project Services
Project services consist primarily of specific in-store services
initiated by retailers and manufacturers, such as new store openings, new
product launches, special seasonal or promotional merchandising, focused product
support, product recalls, in-store product demonstrations and in-store product
sampling. The Company also performs other project services, such as new store
sets and existing store resets, re-merchandising, remodels and category
implementations, under annual or stand-alone project contracts or agreements.
Other Marketing Services
Other marketing services performed by the Company include:
Event Staffing Services - Performing in-store product demonstrations or
product sampling.
Test Market Research - Testing promotion alternatives, new products and
advertising campaigns, as well as packaging, pricing, and location
changes, at the store level.
Mystery Shopping - Calling anonymously on retail outlets (e.g. stores,
restaurants, banks) to check on distribution or display of a brand and
to evaluate products, service of personnel, conditions of store, etc.
Database Marketing - Managing proprietary information to permit easy
access, analysis and manipulation for use in direct marketing
campaigns.
Data Collection - Gathering sales and other information systematically
for analysis and interpretation.
Teleservices - Maintaining a teleservices center in its Auburn Hills,
Michigan, facility that performs inbound and outbound telemarketing
services, including those on behalf of certain of the Company's
manufacturing clients.
The Company believes that providing merchandising and other marketing
services timely, accurately and efficiently, as well as, delivering timely and
accurate reports to its clients, are two key components that will be critical to
its success. The Company has developed Internet-based logistic deployment,
communications, and reporting systems that improve the productivity of its
merchandising specialists and provide timely data and reports to its customers.
The Company's merchandising specialists use hand-held computers, personal
computers and laptop computers to report the status of each store they service
upon completion either through the Internet or using Interactive Voice Response
("IVR") through its Auburn Hills telecommunication center. Merchandising
specialists report on a variety of issues such as store conditions (e.g. out of
stocks, inventory, display placement) or they may scan and process new orders
for products. This information is reported, analyzed and displayed in a variety
of reports that can be accessed by both the Company and its customers via the
Internet. These reports can depict the status of every merchandising project in
real time.
Through the Company's automated labor tracking system, its merchandising
specialists communicate work assignment completion information via the Internet
or telephone, enabling the Company to report hours, mileage, and other
completion information for each work assignment on a daily basis and providing
the Company with daily, detailed tracking of work completion. This technology
allows the Company to schedule its merchandising specialists more efficiently,
quickly quantify the benefits of its services to customers, rapidly respond to
customers' needs and rapidly implement programs. The Company believes that its
technological capabilities provide it with a competitive advantage in the
marketplace.
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International Merchandising Services Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in marketing
their products. As evidenced in the United States, retailer and manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
also believes that the difficulties encountered by these programs are only
exacerbated by the logistics of operating in foreign markets. This environment
has created an opportunity for the Company to exploit its Internet-based
technology and business model that are successful in the United States.
In July 2000, the Company established its International Merchandising
Services Division to cultivate foreign markets, modify the necessary systems and
implement the Company's business model worldwide by expanding its merchandising
services business off shore. The Company formed an International Merchandising
Services Division task force consisting of members of the Company's information
technology, operations and finance groups to evaluate and develop foreign
markets. In 2001, the Company and a leading Japanese based distributor
established a joint venture to provide the latest in-store merchandising
services to the Japanese market. In 2003, the Company expanded its international
presence to Canada by acquiring a Canadian merchandising company and Turkey by
entering into a start-up joint venture. In 2004, the Company established 51%
owned joint venture subsidiaries in South Africa, India and Romania and in early
2005, a 50% owned joint venture in China.
Key to the Company's international strategy is the translation of
several of its proprietary Internet-based logistical, communications and
reporting software applications into the native language of any market the
Company enters. As a result of this requirement for market penetration, the
Company has developed translation software that can quickly convert its
proprietary software into various languages. Through its computer facilities in
Auburn Hills, Michigan, the Company provides worldwide access to its proprietary
logistical, communications and reporting software. In addition, the Company
maintains personnel in Greece and Australia to assist in its international
efforts. The Company is actively pursuing expansion into various other markets.
SALES AND MARKETING
Domestic Merchandising Services Division
The Company's sales efforts within its Domestic Merchandising Services
Division are structured to develop new business in national, regional and local
markets. The Company's corporate business development team directs its efforts
toward the senior management of prospective clients. Sales strategies developed
at the Company's headquarters are communicated to the Company's sales force for
execution. The sales force, located nationwide, work from both Company and home
offices. In addition, the Company's corporate account executives play an
important role in the Company's new business development efforts within its
existing manufacturer and retailer client base.
As part of the retailer consolidation, retailers are centralizing most
administrative functions, including operations, procurement and category
management. In response to this centralization and the growing importance of
large retailers, many manufacturers have reorganized their selling organizations
around a retailer team concept that focuses on a particular retailer. The
Company has responded to this emerging trend and currently has retailer teams in
place at select retailers.
The Company's business development process includes a due diligence
period to determine the objectives of the prospective client, the work required
to satisfy those objectives and the market value of such work to be performed.
The Company employs a formal cost development and proposal process that
determines the cost of each element of work required to achieve the prospective
client's objectives. These costs, together with an analysis of market rates, are
used in the development of a formal quotation that is then reviewed at various
levels within the organization. The pricing of this internal proposal must meet
the Company's objectives for profitability, which are established as part of the
business planning process. After approval of this quotation, a detailed proposal
is presented to and approved by the prospective client.
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International Merchandising Services Division
The Company's marketing efforts within its International Merchandising
Services Division are three fold. First, the Company endeavors to develop new
markets through acquisitions. The Company's international acquisition team,
whose primary focus is to seek out and develop acquisitions throughout the
world, consists of personnel located in the United States, Greece and Australia.
Personnel from information technology, field operations, client services and
finance support the international acquisition team. Second, the Company offers
global merchandising solutions to customers that have worldwide distribution.
This effort is spearheaded out of the Company's headquarters in the United
States. Third the Company develops local markets through various joint ventures
or subsidiaries throughout the world.
CUSTOMERS
Domestic Merchandising Services Division
In its Domestic Merchandising Services Division, the Company currently
represents numerous manufacturers and /or retail clients in a wide range of
retail outlets in the United States including:
o Mass Merchandisers
o Drug
o Grocery
o Other retail trade groups (e.g. Discount, Home Centers)
The Company also provides database, research and other marketing
services to the consumer packaged goods industry.
One customer accounted for 14%, 8%, and 6% of the Company's net revenues
for the years ended December 31, 2004, 2003, and 2002, respectively. This
customer also accounted for approximately 29%, 13%, and 4% of accounts
receivable at December 31, 2004, 2003, and 2002, respectively.
In addition, approximately 16%, 17%, and 24% of net revenues for the
years ended December 31, 2004, 2003, and 2002, respectively, resulted from
merchandising services performed for manufacturers and others in stores operated
by Kmart. These customers also accounted for approximately 22% of accounts
receivable at December 31, 2004. While the Company's customers and the resultant
contractual relationships are with various manufacturers and not Kmart, a
significant reduction of this retailer's stores or cessation of this retailer's
business would negatively impact the Company.
Another customer, a division of a major retailer, accounted for 26%,
30%, and 26% of the Company's net revenues for the years ended December 31,
2004, 2003, and 2002, respectively. This customer also accounted for
approximately 4%, 30%, and 43% of accounts receivable at December 31, 2004,
2003, and 2002, respectively. On August 2, 2004, this customer was sold by its
parent.
International Merchandising Services Division
The Company believes that the potential international customers for this
division have similar profiles to its Domestic Merchandising Services Division
customers. The Company is currently operating in Japan, Canada, Turkey, South
Africa and India. The Company announced the establishment of a 51% owned joint
venture subsidiary in Romania in late 2004 and a 50% owned joint venture in
China in early 2005. The Company is actively pursuing expansion into Europe and
other markets.
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COMPETITION
The marketing services industry is highly competitive. The Company's
competition in the Domestic and International Merchandising Services Divisions
arises from a number of large enterprises, many of which are national or
international in scope. The Company also competes with a large number of
relatively small enterprises with specific client, channel or geographic
coverage, as well as with the internal marketing and merchandising operations of
its clients and prospective clients. The Company believes that the principal
competitive factors within its industry include development and deployment of
technology, breadth and quality of client services, cost, and the ability to
execute specific client priorities rapidly and consistently over a wide
geographic area. The Company believes that its current structure favorably
addresses these factors and establishes it as a leader in the mass merchandiser
and chain drug store channels of trade. The Company also believes it has the
ability to execute major national and international in-store initiatives and
develop and administer national and international retailer programs. Finally,
the Company believes that, through the use and continuing improvement of its
proprietary Internet software, other technological efficiencies and various cost
controls, the Company will remain competitive in its pricing and services.
TRADEMARKS
The Company has numerous registered trademarks. Although the Company
believes its trademarks may have value, the Company believes its services are
sold primarily based on breadth and quality of service, cost, and the ability to
execute specific client priorities rapidly and consistently over a wide
geographic area. See "Industry Overview" and "Competition".
EMPLOYEES
Worldwide the Company utilizes a labor force of approximately 7,700
people.
As of December 31, 2004, the Company's Domestic Merchandising Services
Division's labor force consisted of approximately 6,500 people. Approximately
150 were full-time employees and 15 were part-time employees of the Company. Of
the 150 full-time Company employees, 143 were engaged in operations and 7 were
engaged in sales. The Company's Domestic Merchandising Services Division
utilizes the services of its affiliate, SPAR Management Services, Inc. ("SMSI"),
to schedule and supervise its field force, which consists of the independent
contractors furnished by another affiliate SPAR Marketing Services, Inc. ("SMS")
(see Item 13 - Certain Relationships and Related Transactions, below) as well as
the Company's field employees. Approximately 6,300 independent contractors and
approximately 50 full-time field managers are furnished principally through SMS
and SMSI, respectively.
As of December 31, 2004, the Company's International Merchandising
Services Division's labor force consisted of approximately 1,200 people.
Approximately 50 full-time employees were engaged in operations and 3 were
engaged in sales. The International Division's field force consisted of
approximately 700 full time employees, 70 part time employees and approximately
380 independent contractors.
The Company currently utilizes certain of its Domestic Merchandising
Services Division's employees, as well as, the services of certain employees of
its affiliates, SMSI and SPAR Infotech, Inc. ("SIT"), to support the
International Merchandising Services Division. However, dedicated employees will
be added to that division as the need arises. The Company's affiliate, SIT, also
provides programming and other assistance to the Company's various divisions
(see Item 13 - Certain Relationships and Related Transactions, below).
The Company, SMS, SMSI and SIT consider their relations with their
respective employees and independent contractors to be good.
CERTAIN RISK FACTORS
There are various risks associated with the Company's growth and
operating strategy. Certain (but not all) of these risks are discussed below.
-10-
Dependency on Largest Customers
As discussed above in Customers, the Company does a significant amount
of business with one customer and performs a significant amount of services in
Kmart. The loss of this customer or the loss of Kmart related business and the
failure to attract new large customers, could significantly decrease the
Company's revenues and such decreased revenues could have a material adverse
effect on the Company's business, results of operations and financial condition.
Dependence on Trend Toward Outsourcing
The business and growth of the Company depends in large part on the
continued trend toward outsourcing of marketing services, which the Company
believes has resulted from the consolidation of retailers and manufacturers, as
well as, the desire to seek outsourcing specialists and reduce fixed operation
expenses. There can be no assurance that this trend in outsourcing will
continue, as companies may elect to perform such services internally. A
significant change in the direction of this trend generally, or a trend in the
retail, manufacturing or business services industry not to use, or to reduce the
use of, outsourced marketing services such as those provided by the Company,
could significantly decrease the Company's revenues and such decreased revenues
could have a material adverse effect on the Company's business, results of
operations and financial condition or the desired increases in the Company's
business, revenues and profits.
Failure to Successfully Compete
The marketing services industry is highly competitive and the Company
has competitors that are larger (or part of larger holding companies) and may be
better financed. In addition, the Company competes with: (i) a large number of
relatively small enterprises with specific customer, channel or geographic
coverage; (ii) the internal marketing and merchandising operations of its
customers and prospective customers; (iii) independent brokers; and (iv) smaller
regional providers. Remaining competitive in the highly competitive marketing
services industry requires that the Company monitor and respond to trends in all
industry sectors. There can be no assurance that the Company will be able to
anticipate and respond successfully to such trends in a timely manner. If the
Company is unable to successfully compete, it could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
If certain competitors were to combine into integrated marketing
services companies, or additional marketing service companies were to enter into
this market, or existing participants in this industry were to become more
competitive, it could have a material adverse effect on the Company's business,
results of operations and financial condition or the desired increases in the
Company's business, revenues and profits.
Variability of Operating Results and Uncertainty in Customer Revenue
The Company has experienced and, in the future, may experience
fluctuations in quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary and from time to time and may
result in reduced revenue include: (i) the number of active customer projects;
(ii) seasonality of customer products; (iii) customer delays, changes and
cancellations in projects; (iv) the timing requirements of customer projects;
(v) the completion of major customer projects; (vi) the timing of new
engagements; (vii) the timing of personnel cost increases; and (viii) the loss
of major customers. In particular, the timing of revenues is difficult to
forecast for the home entertainment industry because timing is dependent on the
commercial success of particular product releases. In the event that a
particular release is not widely accepted by the public, the Company's revenue
could be significantly reduced. In addition, the Company is subject to revenue
uncertainties resulting from factors such as unprofitable customer work and the
failure of customers to pay. The Company attempts to mitigate these risks by
dealing primarily with large credit-worthy customers, by entering into written
or oral agreements with its customers and by using project budgeting systems.
These revenue fluctuations could materially and adversely affect the Company's
business, results of operations and financial condition or the desired increases
in the Company's business, revenues and profits.
Failure to Develop New Products
A key element of the Company's growth strategy is the development and
sale of new products. While several new products are under current development,
there can be no assurance that the Company will be able to successfully develop
and market new products. The Company's inability or failure to devise useful
merchandising or marketing
-11-
products or to complete the development or implementation of a particular
product for use on a large scale, or the failure of such products to achieve
market acceptance, could adversely affect the Company's ability to achieve a
significant part of its growth strategy and the absence of such growth could
have a material adverse effect on the Company's business, results of operations
and financial condition or the desired increases in the Company's business,
revenues and profits.
Inability to Identify, Acquire and Successfully Integrate Acquisitions
Another key component of the Company's growth strategy is the
acquisition of businesses across the United States and worldwide that offer
similar merchandising or marketing services. The successful implementation of
this strategy depends upon the Company's ability to identify suitable
acquisition candidates, acquire such businesses on acceptable terms, finance the
acquisition and integrate their operations successfully with those of the
Company. There can be no assurance that such candidates will be available or, if
such candidates are available, that the price will be attractive or that the
Company will be able to identify, acquire, finance or integrate such businesses
successfully. In addition, in pursuing such acquisition opportunities, the
Company may compete with other entities with similar growth strategies, these
competitors may be larger and have greater financial and other resources than
the Company. Competition for these acquisition targets could also result in
increased prices of acquisition targets and/or a diminished pool of companies
available for acquisition.
The successful integration of these acquisitions also may involve a
number of additional risks, including: (i) the inability to retain the customers
of the acquired business; (ii) the lingering effects of poor customer relations
or service performance by the acquired business, which also may taint the
Company's existing businesses; (iii) the inability to retain the desirable
management, key personnel and other employees of the acquired business; (iv) the
inability to fully realize the desired efficiencies and economies of scale: (v)
the inability to establish, implement or police the Company's existing
standards, controls, procedures and policies on the acquired business; (vi)
diversion of management attention; and (vii) exposure to customer, employee and
other legal claims for activities of the acquired business prior to acquisition.
In addition, any acquired business could perform significantly worse than
expected.
The inability to identify, acquire, finance and successfully integrate
such merchandising or marketing services business could have a material adverse
effect on the Company's growth strategy and could limit the Company's ability to
significantly increase its revenues and profits.
Uncertainty of Financing for, and Dilution Resulting from, Future Acquisitions
The timing, size and success of acquisition efforts and any associated
capital commitments cannot be readily predicted. Future acquisitions may be
financed by issuing shares of the Company's Common Stock, cash, or a combination
of Common Stock and cash. If the Company's Common Stock does not maintain a
sufficient market value, or if potential acquisition candidates are otherwise
unwilling to accept the Company's Common Stock as part of the consideration for
the sale of their businesses, the Company may be required to obtain additional
capital through debt or equity financings. To the extent the Company's Common
Stock is used for all or a portion of the consideration to be paid for future
acquisitions, dilution may be experienced by existing stockholders. There can be
no assurance that the Company will be able to obtain the additional financing it
may need for its acquisitions on terms that the Company deems acceptable.
Failure to obtain such capital would materially adversely affect the Company's
ability to execute its growth strategy.
Reliance on the Internet
The Company relies on the Internet for the scheduling, coordination and
reporting of its merchandising and marketing services. The Internet has
experienced, and is expected to continue to experience, significant growth in
the numbers of users and amount of traffic as well as increased attacks by
hackers and other saboteurs. To the extent that the Internet continues to
experience increased numbers of users, frequency of use or increased bandwidth
requirements of users, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on the
Internet by this continued growth or that the performance or reliability of the
Internet will not be adversely affected. Furthermore, the Internet has
experienced a variety of outages and other delays as a result of accidental and
intentional damage to portions of its infrastructure, and could face such
outages and delays in the future of similar or greater effect. Any protracted
disruption in Internet service would increase the Company's costs of operation
and reduce efficiency and performance, which could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
-12-
Economic and Retail Uncertainty
The markets in which the Company operates are cyclical and subject to
the effects of economic downturns. The current political, social and economic
conditions, including the impact of terrorism on consumer and business behavior,
make it difficult for the Company, its vendors and its customers to accurately
forecast and plan future business activities. Substantially all of the Company's
key customers are either retailers or those seeking to do product merchandising
at retailers. If the retail industry experiences a significant economic
downturn, a reduction in product sales could significantly decrease the
Company's revenues. The Company also has risks associated with its customers
changing their business plans and/or reducing their marketing budgets in
response to economic conditions, which could also significantly decrease the
Company's revenues. Such revenue decreases could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
Significant Stockholders: Voting Control and Market Illiquidity
Mr. Robert G. Brown, founder, director, Chairman, President and Chief
Executive Officer of the Company, beneficially owns approximately 45.5% of the
Company's outstanding Common Stock, and Mr. William H. Bartels, founder,
director, and Vice Chairman of the Company beneficially owns approximately 29.4%
of the Company's outstanding Common Stock. These stockholders have, should they
choose to act together, and under certain circumstances Mr. Brown acting alone
has, the ability to control all matters requiring stockholder approval,
including the election of directors and the approval of mergers and other
business combination transactions.
In addition, although the Company Common Stock is quoted on the Nasdaq
Small Cap Market, the trading volume in such stock may be limited and an
investment in the Company's securities may be illiquid because the founders own
a significant amount of the Company's stock.
Dependence Upon and Potential Conflicts in Services Provided by Affiliates
The success of the Company's domestic business is dependent upon the
successful execution of its field services by SPAR Marketing Services, Inc.
("SMS"), and SPAR Management Services, Inc. ("SMSI"), as well as the programming
services provided by SPAR Infotech, Inc. ("SIT"), each of which is an affiliate,
but not a subsidiary, of the Company, and none of which is consolidated in the
Company's financial statements. SMS provides substantially all of the field
representatives used by the Company in conducting its domestic business (87% of
field expense in 2004), and SMSI provides substantially all of the field
management services used by the Company in conducting its business. These
services provided to the Company by SMS and SMSI are on a cost-plus basis
pursuant to contracts that are cancelable on 60 days notice prior to December 31
of each year, commencing in 1997, or with 180 days notice at any other time. SIT
provides substantially all of the Internet programming services and other
computer programming needs used by the Company in conducting its business (see
Item 13 - Certain Relationships and Related Transactions, below), which are
provided to the Company by SIT on an hourly charge basis pursuant to a contract
that is cancelable on 30 days notice. The Company has determined that the
services provided by SMS, SMSI and SIT are at rates favorable to the Company.
SMS, SMSI and SIT (collectively, the "SPAR Affiliates") are owned solely
by Mr. Robert G. Brown, founder, director, Chairman, President and Chief
Executive Officer of the Company, and Mr. William H. Bartels, founder, director,
and Vice Chairman of the Company, each of whom are also directors and executive
officers of each of the SPAR Affiliates (see Item 13 - Certain Relationships and
Related Transactions, below). In the event of any dispute in the business
relationships between the Company and one or more of the SPAR Affiliates, it is
possible that Messrs. Brown and Bartels may have one or more conflicts of
interest with respect to those relationships and could cause one or more of the
SPAR Affiliates to renegotiate or cancel their contracts with the Company or
otherwise act in a way that is not in the Company's best interests.
While the Company's relationships with SMS, SMSI and SIT are excellent,
there can be no assurance that the Company could (if necessary under the
circumstances) replace the field representatives and management currently
provided by SMS and SMSI, respectively, or replace the Internet and other
computer programming services provided by SIT, in sufficient time to perform its
customer obligations or at such favorable rates in the event the SPAR Affiliates
no longer performed those services. Any cancellation, other nonperformance or
material pricing increase under those affiliate contracts could have a material
adverse effect on the Company's business, results of operations and financial
condition or the desired increases in the Company's business, revenues and
profits.
-13-
The Company has not paid and does not intend to pay cash Dividends
The Company has not paid dividends in the past, intends to retain any
earnings or other cash resources to finance the expansion of its business and
for general corporate purposes, and does not intend to pay dividends in the
future. In addition, the Company's Credit Facility with Webster Business Credit
Corporation ("Webster") (see Note 5 to the Financial Statements - Lines of
Credit) restricts the payment of dividends without Webster's prior consent.
Risks Associated with International Joint Ventures
While the Company endeavors to limit its exposure for claims and losses
in any international joint ventures through contractual provisions, insurance
and use of single purpose entities for such ventures, there can be no assurance
that the Company will not be held liable for the claims against and losses of a
particular international joint venture under applicable local law or local
interpretation of any joint venture or insurance provisions. If any such claims
and losses should occur, be material in amount and be successfully asserted
against the Company, such claims and losses could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
Risks Associated with Foreign Currency
The Company also has foreign currency exposure associated with its
international joint venture subsidiaries and joint ventures. In 2004, these
exposures are primarily concentrated in the Canadian dollar, Japanese yen and
South African rand.
Risks Associated with International Business
The Company's expansion strategy includes expansion into various
countries around the world. While the Company endeavors to limit its exposure by
entering only countries where the political, social and economic environments
are conducive to doing business in that country there can be no assurances that
the respective business environments will remain favorable.
Item 2. Properties.
The Company maintains its corporate headquarters in approximately 6,000
square feet of leased office space located in Tarrytown, New York, under a lease
with a term expiring in May 2006.
The Company leases certain office and storage facilities for its
corporate headquarters, divisions and subsidiaries under operating leases, which
expire at various dates during the next five years. Most of these leases require
the Company to pay minimum rents, subject to periodic adjustments, plus other
charges, including utilities, real estate taxes and common area maintenance.
-14-
The following is a list of the locations where the Company maintains
leased facilities for its division offices and subsidiaries:
Location Office Use Approximate Square Footage
-------------------------- -------------------------------------- ---------------------------------
Domestic:
Tarrytown, NY Corporate Headquarters 6,000
Auburn Hills, MI Regional Office and Warehouse 27,000
Cincinnati, OH Regional Office 5,300
International:
Canada
Toronto, Ontario Headquarters 4,000
Japan
Osaka Headquarters 1,200
Tokyo Regional Office 1,000
Nagoya Regional Office 600
Hukuoka Regional Office 400
Turkey
Istanbul Headquarters 4,600
South Africa
Durban Headquarters 3,100
Port Elizabeth Regional Office 900
Western Cape Regional Office 2,900
Johannesburg Regional Office 2,000
India
New Delhi Headquarters 4,300
Although the Company believes that its existing facilities are adequate
for its current business, new facilities may be added should the need arise in
the future.
Item 3. Legal Proceedings.
Safeway Inc. ("Safeway"), filed a Complaint against the PIA
Merchandising Co., Inc. ("PIA Co."), a wholly owned subsidiary of the Company,
and Pivotal Sales Company ("Pivotal"), a wholly owned subsidiary of PIA Co., and
SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001, and has
subsequently amended it. Safeway alleges causes of action for breach of
contract, breach of implied contract, breach of fiduciary duty, conversion,
constructive fraud, breach of trust, unjust enrichment, and accounting fraud.
Safeway has most recently alleged monetary damages in the principal sum of
$3,000,000 and probable interest of $1,000,000 and has also demanded unspecified
costs. PIA Co., Pivotal and SGRP filed cross-claims against Safeway on or about
March 11, 2002, and amended them on or about October 15, 2002, alleging causes
of action by them against Safeway for breach of contract, interference with
economic relationship, unfair trade practices and unjust enrichment and seeking
damages and injunctive relief. Mediation between the parties occurred in 2004,
but did not result in a settlement. PIA Co., Pivotal and SGRP are vigorously
defending Safeway's allegations. It is not possible at this time to determine
the likelihood of the outcome of this lawsuit. However, if Safeway prevails
respecting its allegations, and PIA Co., Pivotal and SGRP lose on their
cross-claims and counterclaims, that result could have a material adverse effect
on the Company. The Company anticipates that this matter will be resolved in
2005.
In addition to the above, the Company is a party to various other legal
actions and administrative proceedings arising in the normal course of business.
In the opinion of Company's management, disposition of these other matters are
not anticipated to have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-15-
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Price Range of Common Stock
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq Small Cap
Market.
2004 2003
------------------------ -------------------------
High Low High Low
First Quarter $ 3.44 $ 2.30 $ 3.60 $ 2.42
Second Quarter 2.33 0.85 5.55 3.05
Third Quarter 1.50 0.75 5.32 3.17
Fourth Quarter 1.80 0.36 4.57 3.00
As of December 31, 2004, there were approximately 700 beneficial
shareholders of the Company's Common Stock.
Dividends
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of the business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
The Company's Credit Facility with Webster Business Credit Corporation
(see Note 5 to the Financial Statements - Lines of Credit) restricts the payment
of dividends without Webster's prior consent.
Item 6. Selected Financial Data.
The following selected condensed consolidated financial data sets forth,
for the periods and the dates indicated, summary financial data of the Company
and its subsidiaries. The selected financial data have been derived from the
Company's financial statements.
-16-
SPAR Group, Inc.
Condensed Consolidated Statements of Operations
-----------------------------------------------
(In thousands, except per share data)
Year Ended December 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 51,370 $ 64,859 $ 69,612 $ 70,891 $ 81,459
Cost of revenues 33,644 42,338 40,331 40,883 50,278
---------------------------------------------------------------------
Gross profit 17,726 22,521 29,281 30,008 31,181
Selling, general and administrative expenses 20,222 20,967 18,804 19,380 24,761
Impairment charges 8,141 - - - -
Depreciation and amortization 1,399 1,529 1,844 2,682 2,383
---------------------------------------------------------------------
Operating (loss) income (12,036) 25 8,633 7,946 4,037
Other (income) expense (754) 237 (26) 107 (790)
Interest expense 220 269 363 561 1,326
---------------------------------------------------------------------
(Loss) income from continuing operations before
provision for income taxes and minority interest (11,502) (481) 8,296 7,278 3,501
Income tax provision 853 58 2,998 3,123 780
---------------------------------------------------------------------
(Loss) income from continuing operations before
minority interest (12,355) (539) 5,298 4,155 2,721
---------------------------------------------------------------------
Minority interest 87 - - - -
Discontinued operations:
Loss from discontinued operations net of tax
benefits of $935 and $858, respectively - - - (1,597) (1,399)
Estimated loss on disposal of discontinued
operations, including provision of $1,000 for
losses during phase-out period and disposal
costs net of tax benefit of $2,618 - - - (4,272) -
---------------------------------------------------------------------
Net (loss) income $ (12,268) $ (539) $ 5,298 $ (1,714) $ 1,322
=====================================================================
Basic/diluted net (loss) income per common share:
Net (loss) income from continuing operations $ (0.65) $ (0.03) $ 0.28 $ 0.23 $ 0.15
---------------------------------------------------------------------
Discontinued operations:
Loss from discontinued operations - - - (0.09) (0.08)
Estimated loss on disposal of discontinued
operations - - - (0.23) -
---------------------------------------------------------------------
Net loss from discontinued operations - - - (0.32) (0.08)
---------------------------------------------------------------------
Basic/diluted net (loss) income $ (0.65) $ (0.03) $ 0.28 $ (0.09) $ 0.07
=====================================================================
Weighted average shares outstanding
- basic 18,859 18,855 18,761 18,389 18,185
- diluted 18,859 18,855 19,148 18,467 18,303
-17-
December 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
----------- --------- ----------- ----------- -----------
BALANCE SHEET DATA:
Working capital (deficiency) $ 962 $ 4,085 $ 6,319 $ 8,476 $ (2,273)
Total assets $ 15,821 $ 28,137 $ 28,800 $ 41,155 $ 48,004
Lines of credit, current $ 4,956 $ 4,084 $ - $ 57 $ 1,143
Lines of credit and other long-term debt(1) $ 218 $ 270 $ 383 $ 13,287 $ 10,093
Total stockholders' equity $ 3,714 $ 16,023 $ 16,592 $ 10,934 $ 12,240
(1) Prior to 2003, the Company's lines of credit were charged to long-term
liabilities (net of current portion).
-18-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
- --------
In the United States, the Company provides merchandising services to
manufacturers and retailers principally in mass merchandiser, drug store,
grocery, and other retail trade classes through its Domestic Merchandising
Services Division. Internationally, the Company provides in-store merchandising
services through a wholly owned subsidiary in Canada, 51% owned joint venture
subsidiaries in Turkey, South Africa and India and a 50% owned joint venture in
Japan. In December 2004, the Company established a 51% owned joint venture
subsidiary in Romania. In February 2005, the Company established a 50% owned
joint venture in China. In 2004, the Company consolidated Canada, Turkey, South
Africa, India and Japan into the Company's financial statements. Romania did not
have operations in 2004.
In December 2001, the Company decided to divest its Incentive Marketing
Division and recorded an estimated loss on disposal of SPAR Performance Group,
Inc., now called STIMULYS, Inc. ("SPGI"), of approximately $4.3 million, net of
taxes, including a $1.0 million reserve recorded for the anticipated cost to
divest SPGI and any anticipated losses through the divestiture date.
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly owned
subsidiary of the Company, entered into a Stock Purchase and Sale Agreement with
Performance Holdings, Inc. ("PHI"), a Delaware corporation headquartered in
Carrollton, Texas. Pursuant to that agreement, SIM sold all of the stock of
SPGI, its subsidiary, to PHI for $6.0 million. As a condition of the sale, PHI
issued and contributed 1,000,000 shares of its common stock to Performance
Holdings, Inc. Employee Stock Ownership Plan, which became the only shareholder
of PHI.
SIM's results (including those of SPGI) were reclassified as
discontinued operations for all periods presented. The results of operations of
the discontinued business segment are shown separately below net income from
continuing operations. Accordingly, the 2002 consolidated statements of
operations of the Company have been prepared, and its 2001 and 2000 consolidated
statement of operations have been restated, to report the results of
discontinued operations of SIM (including those of SPGI) separately from the
continuing operations of the Company (see Item 6 - Selected Financial Data,
above).
Critical Accounting Policies & Estimates
- ----------------------------------------
The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Note 2 to the Financial
Statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition, depreciation methods,
asset impairment recognition, business combination accounting, and discontinued
business accounting. While the estimates and judgments associated with the
application of these policies may be affected by different assumptions or
conditions, the Company believes the estimates and judgments associated with the
reported amounts are appropriate in the circumstances. Four critical accounting
policies are consolidation of subsidiaries, revenue recognition, allowance for
doubtful accounts and sales allowances, and internal use software development
costs:
Consolidation of subsidiaries
The Company consolidates its 100% owned subsidiaries. The Company also
consolidates its 51% owned joint venture subsidiaries and its 50% owned
joint ventures where the Company is the primary beneficiary because the
Company believes this presentation is fairer and more meaningful. Rule
3A-02 of Regulation S-X, Consolidated Financial Statements of the
Registrant and its Subsidiaries, states that consolidated statements are
presumed to be more meaningful, that majority owned subsidiaries (more
than 50%) generally should be consolidated, and that circumstances may
require consolidation of other subsidiaries to achieve a fairer
presentation of its financial condition and results. In addition, the
Company has determined that under Financial Accounting Standards Board
Interpretation Number 46, as revised December 2003, Consolidation of
Variable Interest Entities ("FIN 46(R)"), the Company is the primary
beneficiary of its 51% owned joint venture subsidiaries and its 50%
owned joint ventures, which accordingly requires consolidation of those
entities into the Company's financial statements.
Revenue Recognition
The Company's services are provided under contracts or agreements that
consist primarily of service fees and per unit fee arrangements.
Revenues under service fee arrangements are recognized when the service
is performed.
-19-
The Company's per unit contracts or agreements provide for fees to be
earned based on the retail sales of client's products to consumers. The
Company recognizes per unit fees in the period such amounts become
determinable and are reported to the Company.
Allowance for Doubtful Accounts and Sales Allowances
The Company continually monitors the validity of its accounts receivable
based upon current customer credit information and financial condition.
Balances that are deemed to be uncollectible after the Company has
attempted reasonable collection efforts are written off through a charge
to the bad debt allowance and a credit to accounts receivable. Accounts
receivable balances are stated at the amount that management expects to
collect from the outstanding balances. The Company provides for probable
uncollectible amounts through a charge to earnings and a credit to bad
debt allowance based on management's assessment of the current status of
individual accounts. Based on management's assessment, the Company
established an allowance for doubtful accounts of $761,000 and $515,000
at December 31, 2004 and 2003, respectively. The Company also recorded a
reserve for sales allowances for potential customer credits of $448,000
at December 31, 2003. Bad debt and sales allowance expenses were
$366,000, $825,000, and $262,000 in 2004, 2003, and 2002, respectively.
Internal Use Software Development Costs
In accordance with SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, the Company capitalizes
certain costs associated with its internally developed software.
Specifically, the Company capitalizes the costs of materials and
services incurred in developing or obtaining internal use software.
These costs include but are not limited to the cost to purchase
software, write program code and payroll, related benefits and travel
expenses for those employees who are directly involved with and who
devote time to its software development projects. Capitalized software
development costs are amortized over three years.
The Company capitalized $559,000, $1,004,000, and $772,000 of costs
related to software developed for internal use in 2004, 2003, and 2002,
respectively.
The Company also recorded a net impairment charge of capitalized
software related to lost clients totaling approximately $442,000 in
2004.
Results of operations
The following table sets forth selected financial data and such data as
a percentage of net revenues for the periods indicated.
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
--------------------------------------------------------------------------------
(dollars in millions)
Dollars % Dollars % Dollars %
-------------- ----------- ----------- ----------- ----------- -----------
Net revenues $ 51.4 100.0% $ 64.9 100.0% $ 69.6 100.0%
Cost of revenues 33.6 65.5 42.3 65.3 40.3 57.9
Selling, general & administrative expenses 20.2 39.4 21.0 32.3 18.8 27.0
Impairment charges 8.1 15.8 - - - -
Depreciation & amortization 1.4 2.7 1.5 2.3 1.8 2.6
Other (income) expenses, net (0.4) (1.0) 0.5 0.8 0.4 0.6
-------------- ----------- ----------- ----------- ----------- -----------
(Loss) income before income tax provision (11.5) (22.4) (0.4) (0.7) 8.3 11.9
Provision for income taxes 0.9 1.7 0.1 0.1 3.0 4.3
-------------- ----------- ----------- ----------- ----------- -----------
(Loss) income before minority interest (12.4) (24.1)% (0.5) (0.8)% 5.3 7.6%
Minority interest 0.1 0.2 - - - -
-------------- ----------- -----------
Net (loss) income $ (12.3) (23.9)% $ (0.5) (0.8)% $ 5.3 7.6%
============== =========== ===========
-20-
Results from continuing operations for the twelve months ended December 31,
- --------------------------------------------------------------------------------
2004, compared to twelve months ended December 31, 2003
- -------------------------------------------------------
Net Revenues
Net revenues from operations for the twelve months ended December 31,
2004, were $51.4 million, compared to $64.9 million for the twelve months ended
December 31, 2003, a decrease of $13.5 million or 20.8%. The decrease of $13.5
million in net revenues consists of a decrease in domestic revenue of $21.1
million or 32.9% partially offset by increases in international revenue of $7.7
million. The decrease in domestic revenue is a result of the loss of several
significant customers partially offset by revenue from new customers in 2004.
The international revenue increase of $7.7 million was primarily a result of the
South African acquisition, the Japan consolidation and a full year of Canadian
operations.
Cost of Revenues
Cost of revenues from operations consists of in-store labor and field
management wages, related benefits, travel and other direct labor-related
expenses. Cost of revenues decreased by $8.7 million in 2004 and as a percentage
of net revenues was 65.5% for the twelve months ended December 31, 2004, which
was consistent with 65.3% for the twelve months ended December 31, 2003.
Approximately 87% and 85% of the field services were purchased from the
Company's affiliate, SMS, in 2004 and 2003, respectively (see Item 13 - Certain
Relationships and Related Transactions, below). SMS's increased share of field
services resulted from its more favorable cost structure
Operating Expenses
Operating expenses include selling, general and administrative expenses,
impairment charges, depreciation and amortization. Selling, general and
administrative expenses include corporate overhead, project management,
information technology, executive compensation, human resource, legal and
accounting expenses. The following table sets forth the operating expenses as a
percentage of net revenues for the time periods indicated:
Year Ended Year Ended Increase
December 31, 2004 December 31, 2003 (decrease)
---------------------------- ------------------------------ -------------
(dollars in millions)
Dollars % Dollars % %
-------------- ------------ --------------- ------------- -------------
Selling, general & administrative $ 20.2 39.4% $ 21.0 32.3% (3.6)%
Impairment charges 8.1 15.8 - - -
Depreciation and amortization 1.4 2.8 1.5 2.3 (8.5)%
-------------- ------------ --------------- -------------
Total operating expenses $ 29.7 58.0% $ 22.5 34.6% 32.3%
============== ============ =============== =============
Selling, general and administrative expenses decreased by $0.8 million,
or 3.6%, for the twelve months ended December 31, 2004, to $20.2 million
compared to $21.0 million for the twelve months ended December 31, 2003.
Domestic selling, general and administrative expenses totaled $16.7 million for
2004 and were reduced $3.3 million from $19.9 million in 2003. The reduction of
16.1% was a result of cost reduction programs initiated in 2004 as a result of
the loss of certain large customers partially offset by restructure costs of
$480,000 expensed in 2004 compared to no expense in 2003. Restructure costs
included office lease and employee severance costs. The domestic cost reductions
were partially offset by increases of $2.5 million in international selling,
general and administrative expenses resulting from the consolidation of Japan,
the acquisition of South Africa, and a full year of Canadian operations, as well
as, the Turkey and India joint venture startups.
Impairment charges were $8.1 million for 2004 (see Note 3 to the
Financial Statements -Impairment Charges). Impairment charges resulting from the
loss of certain large customers consisted of $7.6 million of goodwill
impairment, $1.2 million for the impairment of other assets partially offset by
the reduction of $1.4 million (net of taxes) of other liabilities related to the
PIA Acquisition. In addition there was approximately $700,000 of goodwill
impairment associated with the Canadian subsidiary.
Depreciation and amortization charges of $1.4 million in 2004 was
consistent with $1.5 million in 2003.
-21-
Other Income/Other Expense
Other income was approximately $754,000 for 2004 versus other expense of
$237,000 for 2003. In 2004, other income consisted of approximately $640,000
resulting from the release of specific reserves related to the refinancing of
the SPGI notes and approximately $114,000 of foreign currency translation gains.
In 2003, other expense consisted primarily of the Company's share of its 50%
owned Japan joint venture losses accounted for on the equity method. In 2004,
the Japan joint venture was consolidated into the Company's financial
statements.
Interest Expense
Interest expense totaled $220,000 for 2004 and was consistent with
interest expense of $269,000 for 2003.
Income Taxes
The provision for income taxes was $853,000 and $58,000 for 2004 and
2003, respectively. During 2004, as a result of the loss of several significant
clients, current year losses and the lack of certainty of a return to
profitability in the next twelve months, the Company recorded a full valuation
allowance against its net deferred tax assets resulting in a charge totaling
approximately $750,000. The 2004 tax provision of $853,000 consists of the
valuation allowance and minimum state taxes of approximately $103,000. The tax
provision for 2003 reflects minimum tax requirements for state filings.
Net (Loss) Income
The SPAR Group had a net loss of approximately $12.3 million or $0.65
per basic and diluted share for 2004, compared to a net loss of approximately
$539,000 or $0.03 per basic and diluted shares for 2003.
Off Balance Sheet Arrangements
None.
-22-
Results from continuing operations for the twelve months ended December 31,
- --------------------------------------------------------------------------------
2003, compared to twelve months ended December 31, 2002
- -------------------------------------------------------
Net Revenues
Net revenues from operations for the twelve months ended December 31,
2003, were $64.9 million, compared to $69.6 million for the twelve months ended
December 31, 2002, a 6.8% decrease. The decrease of 6.8% in net revenues is
primarily attributed to decreased business in mass merchandiser chains. The
decrease in net revenues was caused by decreased per unit fee revenue resulting
from lower retail sales of customer products and the loss of a particular
client, partially offset by increases in service fee revenue.
Cost of Revenues
Cost of revenues from operations consists of in-store labor and field
management wages, related benefits, travel and other direct labor-related
expenses. Cost of revenues increased by $2.0 million in 2003 and as a percentage
of net revenues was 65.3% for the twelve months ended December 31, 2003,
compared to 57.9% for the twelve months ended December 31, 2002, a 5.0%
increase. Approximately 85% and 76% of the field services were purchased from
the Company's affiliate, SMS, in 2003 and 2002, respectively (see Item 13 -
Certain Relationships and Related Transactions, below). SMS's increased share of
field services resulted from its more favorable cost structure. The increase in
cost as a percentage of net revenues is primarily a result of a decrease in per
unit fee revenues that do not have a proportionate decrease in cost. As
discussed above under Critical Accounting Policies/Revenue Recognition, the
Company's revenue consists of: (1) service fee revenue, which is earned when the
merchandising services are performed and, therefore, has proportionate costs in
the period the services are performed; and (2) per unit fee revenue, which is
earned when the client's product is sold to the consumer at retail, not when the
services are performed and, therefore, does not have proportionate costs in the
period the revenue is earned. Since the merchandising service and the related
costs associated with per unit fee revenue are normally performed prior to the
retail sale, and the retail sales of client products are influenced by numerous
factors including consumer tastes and preferences, and not solely by the
merchandising service performed, in any given period, the cost of per unit fee
revenues may not be directly proportionate to the per unit fee revenue.
Operating Expenses
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resource, legal and accounting expenses. The
following table sets forth the operating expenses as a percentage of net
revenues for the time periods indicated:
Year Ended Year Ended Increase
December 31, 2003 December 31, 2002 (decrease)
---------------------------- ------------------------------ -------------
(dollars in millions)
Dollars % Dollars % %
-------------- ------------ --------------- ------------- -------------
Selling, general & administrative $ 21.0 32.3% $ 18.8 27.0% 12.0%
Depreciation and amortization 1.5 2.3 1.8 2.6 (17.1)%
-------------- ------------ --------------- -------------
Total operating expenses $ 22.5 34.6% $ 20.6 29.6% 9.4%
============== ============ =============== =============
Selling, general and administrative expenses increased by $2.2 million,
or 12.0%, for the twelve months ended December 31, 2003, to $21.0 million
compared to $18.8 million for the twelve months ended December 31, 2002. This
increase was due primarily to increases in travel related expense of $0.4
million, postage and material expense of $0.6 million, stock option expense for
non-employees of $0.4 million and increase in bad debt expense of $0.6 million.
Depreciation and amortization decreased by $315,000 for the twelve
months ended December 31, 2003, primarily due to older, higher priced assets
becoming fully depreciated.
-23-
Interest Expense
Interest expense decreased $94,000 to $269,000 for the twelve months
ended December 31, 2003, from $363,000 for the twelve months ended December 31,
2002, due to decreased average debt levels as well as decreased interest rates
in 2003.
Income Taxes
The provision for income taxes was $58,000 and $3.0 million for the
twelve months ended December 31, 2003 and December 31, 2002, respectively. The
tax provision for 2003 reflects minimum tax requirements for state filings. The
effective tax rate was 36.1% for 2002.
Net (Loss) Income
The SPAR Group had a net loss of approximately $539,000 or $0.03 per
basic and diluted share for the twelve months ended December 31, 2003, compared
to a net income of approximately $5.3 million or $0.28 per basic and diluted
shares for the twelve months ended December 31, 2002 because of the factors
described above.
Off Balance Sheet Arrangements
None.
Liquidity and Capital Resources
In 2004, the Company had a net loss of $12.3 million. Included in the
net loss were non-cash charges of $8.1 million for impairment, $0.7 million for
deferred tax asset valuation adjustments, $1.4 million for depreciation and $0.1
million for minority interests in losses of subsidiaries.
Net cash provided by operating activities for 2004, was $1.4 million,
compared with net cash provided by operations of $3.4 million for 2003. The
decrease of $2.0 million in cash provided by operating activities is primarily
due to net operating losses offset by decreases in deferred taxes and
restructuring charges.
Net cash used in investing activities for 2004, was $1.3 million,
compared with net cash used of $2.9 million for 2003. The decrease in net cash
used in investing activities resulted was a result of fewer acquisitions of new
businesses and lower purchases of property and equipment in 2004.
Net cash provided by financing activities for 2004, was $0.9 million,
compared with net cash used in financing activities of $0.5 million for 2003.
The increase in net cash provided by financing activities in 2004 was primarily
a result of the consolidation of our Japan joint venture into the Company's
financial statements in 2004.
The above activity resulted in a change in cash and cash equivalents for
2004 of $0.9 million.
At December 31, 2004, the Company had positive working capital of $1.0
million as compared to $4.1 million at December 31, 2003. The decrease in
working capital is due to decreases in accounts receivable and deferred taxes,
increases in accounts payable, customer deposits and lines of credit, partially
offset by increases in cash and decreases in accrued expenses and other current
liabilities, accrued expenses due to affiliates and restructuring charges. The
Company's current ratio was 1.08 and 1.34 at December 31, 2004 and 2003,
respectively.
In January 2003, the Company and Webster Business Credit Corporation,
then known as Whitehall Business Credit Corporation ("Webster"), entered into
the Third Amended and Restated Revolving Credit and Security Agreement (as
amended, collectively, the "Credit Facility"). The Credit Facility provided a
$15.0 million revolving credit facility that matures on January 23, 2006. The
Credit Facility allowed the Company to borrow up to $15.0 million based upon a
borrowing base formula as defined in the agreement (principally 85% of
"eligible" accounts receivable). On May 17, 2004, the Credit Facility was
amended to among other things, reduce the revolving credit facility from $15.0
million to $10.0 million, change the interest rate and increase reserves against
collateral. The amendment provides for interest to be charged at a rate based in
part upon the earnings before interest, taxes, depreciation and amortization.
The average interest rate for 2004 was 5.1%. At December 31, 2004, the Credit
Facility bears interest at Webster's "Alternative Base Rate" plus 0.75% (a total
of 6.0% per annum), or LIBOR plus 3.25%. The Credit Facility is secured by all
of the assets of the Company and its domestic subsidiaries. In connection with
the May 17, 2004, amendment, Mr. Robert Brown, a
-24-
Director, the Chairman, President and Chief Executive Officer and a major
stockholder of theCompany and Mr. William Bartels, a Director, the Vice Chairman
and a major stockholder of the Company, provided personal guarantees totaling
$1.0 million to Webster. On August 20, 2004, the Credit Facility was further
amended in connection with the waiver of certain covenant violations (see
below). The amendment, among other things, reduced the revolving credit facility
from $10.0 million to $7.0 million, changed the covenant compliance testing for
certain covenants from quarterly to monthly and reduced certain advance rates.
On November 15, 2004, the Credit Facility was further amended to delete any
required minimum Net Worth and minimum Fixed Charge Coverage Ratio covenant
levels for the period ending December 31, 2004. The amendments did not change
the future covenant levels. The Credit Facility also limits certain expenditures
including, but not limited to, capital expenditures and other investments.
The Company was in violation of certain monthly covenants at December
31, 2004, and expects to be in violation at future measurement dates. Webster
issued a waiver for the December 31, 2004 covenant violations. However, there
can be no assurances that Webster will issue such waivers in the future.
Because of the requirement to maintain a lock box arrangement with
Webster, Webster's ability to invoke a subjective acceleration clause at its
discretion and the expected future covenant violations, borrowings under the
Credit Facility are classified as current at December 31, 2004, and December 31,
2003, in accordance with EITF 95-22. Balance Sheet Classification of Borrowings
Outstanding Under Revolving Credit Agreements That Include Both a Subjective
Acceleration Clause and a Lock-Box Agreement.
The revolving loan balances outstanding under the Credit Facility were
$4.1 million at December 31, 2004, and December 31, 2003. There were letters of
credit outstanding under the Credit Facility of $0.7 million at December 31,
2004, and December 31, 2003. As of December 31, 2004, the Company had unused
availability under the Credit Facility of $1.4 million out of the remaining
maximum $2.2 million unused revolving line of credit after reducing the
borrowing base by outstanding loans and letters of credit.
In 2001, the Japanese joint venture SPAR FM Japan, Inc. entered into a
revolving line of credit arrangement with Japanese banks for 300 million yen or
$2.7 million (based upon the exchange rate at September 30, 2004). At September
30, 2004, SPAR FM Japan, Inc. had 100 million yen or approximately $900,000 loan
balance outstanding under the line of credit. The line of credit is effectively
guarantied by the Company and the joint venture partner, Paltac Corporation. The
average interest rates on the borrowings under the Japanese line of credit for
its short-term bank loans at September 30, 2004 and 2003 were 1.375% and 1.375%
per annum, respectively.
The Company's international model is to partner with local merchandising
companies and combine their knowledge of the local market with the Company's
proprietary software and expertise in the merchandising business. In 2001, the
Company established its first joint venture and has continued this strategy. As
of this filing, the Company is currently operating in Japan, Canada, Turkey,
South Africa and India. The Company also announced the establishment of joint
ventures in Romania and China.
Certain of these joint ventures and joint venture subsidiaries are
marginally profitable while others are operating at a loss. None of these
entities have excess cash reserves. In the event of continued losses, the
Company may be required to provide additional cash infusions into these joint
ventures and joint venture subsidiaries.
Management believes that based upon the results of Company's cost saving
initiatives and the existing credit facilities, sources of cash availability
will be sufficient to support ongoing operations over the next twelve months.
However, delays in collection of receivables due from any of the Company's major
clients, or a significant further reduction in business from such clients, or
the inability to acquire new clients, or the Company's inability to remain
profitable, or the inability to obtain bank waivers for future covenant
violations could have a material adverse effect on the Company's cash resources
and its ongoing ability to fund operations.
-25-
Certain Contractual Obligations
The following table contains a summary of certain of the Company's
contractual obligations by category as of December 31, 2004 (in thousands).
- --------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by Period
- --------------------------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
year years
- --------------------------------------------------------------------------------------------------------------------
Credit Facilities $ 4,956 $ 4,956 $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations 1,468 776 651 41 -
- --------------------------------------------------------------------------------------------------------------------
Total $ 6,424 $ 5,732 $ 651 $ 41 $ -
- --------------------------------------------------------------------------------------------------------------------
In addition to the above table, at December 31, 2004, the Company had
$737,337 in outstanding Letters of Credit.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company's accounting policies for financial instruments and
disclosures relating to financial instruments require that the Company's
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and lines of credit.
The Company considers carrying amounts of current assets and liabilities in the
consolidated financial statements to approximate the fair value for these
financial instruments because of the relatively short period of time between
origination of the instruments and their expected realization. The Company
monitors the risks associated with interest rates and financial instrument
positions. The Company's investment policy objectives require the preservation
and safety of the principal, and the maximization of the return on investment
based upon the safety and liquidity objectives.
The Company is exposed to market risk related to the variable interest
rate on its lines of credit. As of December 31, 2004, the variable interest rate
on the Company's lines of credit were 6.0% on its domestic line of credit and
1.4% on its Japanese line of credit.
The Company has foreign currency exposure associated with its
international 100% owned subsidiary, its 51% owned joint venture subsidiaries
and its 50% owned joint ventures. In 2004, these exposures are primarily
concentrated in the Canadian dollar, Japanese yen and South African rand. At
December 31, 2004, international assets totaled $2.8 million and international
liabilities totaled $3.8 million. For 2004, international revenues totaled $8.2
million and the Company's share of the net losses was approximately $500,000.
Investment Portfolio
The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments.
Domestically, excess cash is normally used to pay down its revolving line of
credit. Internationally, excess cash is used to fund operations.
Item 8. Financial Statements and Supplementary Data.
See Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) as of the end of the period
covering this report. Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission's rules and
forms.
-26-
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls during the
twelve months covered by this report or from the end of the reporting period to
the date of this Form 10-K.
The Company has established a plan and has begun to document and test
its internal controls over financial reporting required by Section 404 of the
Sarbanes-Oxley Act of 2002.
Item 9B. Other Information.
In November 2004 and January 2005, the Company entered into separate
operating lease agreements between SMS and the Company's wholly owned
subsidiaries, SPAR Marketing Force, Inc. ("SMF") and SPAR Canada Company ("SPAR
Canada"). Each lease has a 36 month term and has representations, covenants and
defaults customary for the leasing industry. The leases are for handheld
computers to be used by field merchandisers in the performance of various
merchandising services in the United States and Canada (see Item 13 - Certain
Relationships and Related Transactions).
-27-
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers
- --------------------------------
The following table sets forth certain information in connection with
each person who is or was at December 31, 2004, an executive officer and/or
director for the Company.
Name Age Position with SPAR Group, Inc.
- ---- --- ------------------------------
Robert G. Brown. . . . . . . . 62 Chairman, Chief Executive Officer,
President and Director
William H. Bartels . . . . . . 61 Vice Chairman and Director
.. .
Robert O. Aders (1). . . . . . 77 Director, Chairman Governance
Committee
Jack W. Partridge (1) . . . . . 59 Director, Chairman Compensation
Committee
Jerry B. Gilbert (1) . . . . . 70 Director
Lorrence T. Kellar (1) . . . . 67 Director, Chairman Audit Committee
Charles Cimitile. . . . . . . . 50 Chief Financial Officer, Treasurer
and Secretary
Kori G. Belzer . . . . . . . . . 39 Chief Operating Officer
Patricia Franco. . . . . . . . . 44 Chief Information Officer
James R. Segreto . . . . . . . . 56 Vice President, Controller
__________________________
(1) Member of the Board's Governance, Compensation and Audit Committees
Robert G. Brown serves as the Chairman, Chief Executive Officer,
President and a Director of SGRP and has held such positions since July 8, 1999,
the effective date of the merger of the SPAR Marketing Companies with PIA
Merchandising Services, Inc. (the "Merger"). Mr. Brown served as the Chairman,
President and Chief Executive Officer of the SPAR Marketing Companies
(SPAR/Burgoyne Retail Services, Inc. ("SBRS") since 1994, SPAR, Inc. ("SINC")
since 1979, SPAR Marketing, Inc. ("SMNEV") since November 1993, and SPAR
Marketing Force, Inc. ("SMF") since 1996).
William H. Bartels serves as the Vice Chairman and a Director of SGRP
and has held such positions since July 8, 1999 (the effective date of the
Merger). Mr. Bartels served as the Vice Chairman, Secretary, Treasurer and
Senior Vice President of the SPAR Marketing Companies (SBRS since 1994, SINC
since 1979, SMNEV since November 1993 and SMF since 1996).
Robert O. Aders serves as a Director of SGRP and has done so since July
8, 1999. He has served as the Chairman of the Governance Committee since May 9,
2003. Mr. Aders has served as Chairman of The Advisory Board, Inc., an
international consulting organization since 1993, and also as President Emeritus
of the Food Marketing Institute ("FMI") since 1993. Immediately prior to his
election to the Presidency of FMI in 1976, Mr. Aders was Acting Secretary of
Labor in the Ford Administration. Mr. Aders was the Chief Executive Officer of
FMI from 1976 to 1993. He also served in The Kroger Co., in various executive
positions from 1957 to 1974 and was Chairman of the Board from 1970 to 1974. Mr.
Aders also serves as a Director of Checkpoint Systems, Inc., Sure Beam
Corporation and Telepanel Systems, Inc.
-28-
Jack W. Partridge serves as a Director of SGRP and has done so since
January 29, 2001. He has served as the Chairman of the Compensation Committee of
SGRP since May 9, 2003. Mr. Partridge is President of Jack W. Partridge &
Associates. He previously served as Vice Chairman of the Board of The Grand
Union Company from 1998 to 2000. Mr. Partridge's service with Grand Union
followed a distinguished 23-year career with The Kroger Company, where he served
as Group Vice President, Corporate Affairs, and as a member of the Senior
Executive Committee, as well as various other executive positions. Mr. Partridge
has been a leader in industry and community affairs for over two decades. He has
served as Chairman of the Food Marketing Institute's Government Relations
Committee, the Food and Agriculture Policy Task Force, and as Chairman of the
Board of The Ohio Retail Association. He has also served as Vice Chairman of the
Cincinnati Museum Center and a member of the boards of the United Way of
Cincinnati, the Childhood Trust, Second Harvest and the Urban League.
Jerry B. Gilbert serves as a Director of SGRP and has done so since June
4, 2001. Mr. Gilbert served as Vice President of Customer Relations for Johnson
& Johnson's Consumer and Personal Care Group of Companies from 1989 to 1997. Mr.
Gilbert joined Johnson & Johnson in 1958 and from 1958 to 1989 held various
executive positions. Mr. Gilbert also served on the Advisory Boards of the Food
Marketing Institute, the National Association of Chain Drug Stores and the
General Merchandise Distributors Council (GMDC) where he was elected the first
President of the GMDC Educational Foundation. He was honored with lifetime
achievement awards from GMDC, Chain Drug Review, Drug Store News and the Food
Marketing Institute. He is the recipient of the prestigious National Association
of Chain Drug Stores (NACDS) Begley Award, as well as the National Wholesale
Druggists Association (NWDA) Tim Barry Award. In June 1997, Mr. Gilbert received
an Honorary Doctor of Letters Degree from Long Island University.
Lorrence T. Kellar serves as a Director and the Chairman of the Audit
Committee of SGRP and has done so since April 2, 2003. Mr. Kellar had a 31-year
career with The Kroger Co., where he served in various financial capacities,
including Group Vice President for real estate and finance, and earlier, as
Corporate Treasurer. He was responsible for all of Kroger's real estate
activities, as well as facility engineering, which coordinated all store
openings and remodels. Mr. Kellar subsequently served as Vice President, real
estate, for Kmart. He currently is Vice President of Continental Properties
Company, Inc. Mr. Kellar also serves on the boards of Frisch's Restaurants and
Multi-Color Corporation and is a trustee of the Acadia Realty Trust. He also is
a major patron of the arts and has served as Chairman of the Board of the
Cincinnati Ballet.
Charles Cimitile serves as the Chief Financial Officer, Secretary and
Treasurer of SGRP and has done so since November 24, 1999. Mr. Cimitile served
as Chief Financial Officer for GT Bicycles from 1996 to 1999 and Cruise Phone,
Inc. from 1995 through 1996. Prior to 1995, he served as the Vice President
Finance, Secretary and Treasurer of American Recreation Company Holdings, Inc.
and its predecessor company.
Kori G. Belzer serves as the Chief Operating Officer of SGRP and has
done so since January 1, 2004. Ms. Belzer also serves as Chief Operating Officer
of SPAR Management Services, Inc. ("SMSI"), and SPAR Marketing Services, Inc.
("SMS"), each an affiliate of SGRP (see Item 13 - Certain Relationships and
Related Transactions, below), and has done so since 2000. The Audit Committee
determined that Ms. Belzer also served during 2003 as the de facto chief
operating officer of SGRP through her position as Chief Operating Officer of
SMSI and SMS. Prior to 2000, Ms. Belzer served as Vice President Operations of
SMS from 1997 to 2000, and as Regional Director of SMS from 1995 to 1997. Prior
to 1995, she served as Client Services Manager for SPAR/Servco, Inc.
-29-
Patricia Franco serves as the Chief Information Officer of SGRP and
President of the SPAR International Merchandising Services Division and has done
so since January 1, 2004. Ms. Franco also serves as Senior Vice President of
SPAR Infotech, Inc. ("SIT"), an affiliate of SGRP (see Item 13 - Certain
Relationships and Related Transactions, below), and has done so since January 1,
2003. The Audit Committee determined that Ms. Franco also served during 2003 as
the de facto chief information officer of SGRP as well as, the de facto
President of the SPAR International Merchandising Services Division, through her
position as Senior Vice President of SIT. Prior to 2003, Ms. Franco served in
various management capacities with SIT, SMS and their affiliates.
James R. Segreto serves as Vice President, Controller of SGRP and has
done so since July 8, 1999, the effective date of the Merger. From 1997 through
the Merger, he served in the same capacity for SMS. Mr. Segreto served as Chief
Financial Officer for Supermarket Communications Systems, Inc. from 1992 to 1997
and LM Capital, LLP from 1990 to 1992. Prior to 1992, he served as Controller of
Dorman Roth Foods, Inc.
Audit Committee Composition and Financial Expert
The Audit Committee currently consists of Messrs. Kellar (its Chairman),
Aders, Gilbert and Partridge, each of whom has been determined by the Governance
Committee and the Board to meet the independence requirements for audit
committee members under Nasdaq Rule 4200(a)(14). In connection with his
re-nomination as a Director, the Governance Committee and the Board
re-determined that Mr. Kellar was qualified to be the "audit committee financial
expert" as required by applicable law and the SEC Rules.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Exchange Act ("Section 16(a)") requires the
Company's directors and certain of its officers and persons who own more than
10% of the Company's Common Stock (collectively, "Insiders"), to file reports of
ownership and changes in their ownership of the Company's Common Stock with the
Commission. Insiders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it
for the year ended December 31, 2004, or written representations from certain
reporting persons for such year, the Company believes that its Insiders complied
with all applicable Section 16(a) filing requirements for such year, with the
exception that Robert G. Brown, William H. Bartels, Jack W. Partridge and Robert
O. Aders untimely filed certain Statements of Changes in Beneficial Ownership on
Form 4. Kori Belzer and Patricia Franco became filers in March of 2004. All such
Section 16(a) filing requirements have since been completed by each of the
aforementioned individuals.
Ethics Codes
The Company has adopted codes of ethical conduct applicable to all of
its directors, officers and employees, as approved and recommended by the Audit
Committee and Governance Committee and adopted by the Board on May 3, 2004, in
accordance with Nasdaq Rules. These codes of conduct consist of: (1) the SPAR
Group Code of Ethical Conduct for its Directors, Senior Executives and Employees
Dated (as of) May 1, 2004; and (2) the SPAR Group Statement of Policy Regarding
Personal Securities Transaction in SGRP Stock and Non-Public Information Dated,
Amended and Restated as of May 1, 2004, which amends, restates and completely
replaces its existing similar statement of policy. Both Committees were involved
because authority over ethics codes shifted from the Audit Committee to the
Governance Committee with the adoption of the committee charters on May 18,
2004. Copies of these codes and policies are posted and available to
stockholders and the public on the Company's web site (www.SPARinc.com).
-30-
Item 11. Executive Compensation and Other Information of SPAR Group, Inc.
Executive Compensation
- ----------------------
The following table sets forth all compensation received for services
rendered to the Company in all capacities for the years ended December 31, 2004,
2003, and 2002 (except for amounts paid to SMS, SMSI and SIT, see Item 13 -
Certain Relationships and Related Transactions, below) (i) by the Company's
Chief Executive Officer, and (ii) each of the other four most highly compensated
executive officers of the Company and its affiliates who were serving as
executive officers of the Company or performing equivalent functions for the
Company through an affiliate, at December 31, 2004 (collectively, the "Named
Executive Officers").
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Underlying All Other
Options Compensation
Name and Principal Positions Year Salary ($) Bonus ($) (#)(1) ($)(2)
- ---------------------------- ---- ---------- --------- ------ ------
Robert G. Brown 2004 114,000 (3) -- -- 1,800
Chief Executive Officer, Chairman of the 2003 180,000 (3) -- -- 2,200
Board, President, and Director 2002 164,340 (3) -- -- 2,040
William H. Bartels 2004 114,000 (3) -- -- 1,620
Vice Chairman and Director 2003 180,000 (3) -- -- 2,007
2002 164,340 (3) -- -- 2,040
Charles Cimitile 2004 220,000 -- 25,000 1,800
Chief Financial Officer, Treasurer and 2003 221,700 20,000 20,000 2,200
Secretary 2002 215,564 15,000 20,000 2,040
Kori G. Belzer 2004 147,990 -- 25,000 1,495
Chief Operating Officer 2003 147,067 19,000 26,750 1,843
Patricia Franco 2004 147,900 10,000 25,000 1,493
Chief Information Officer 2003 145,875 20,000 37,500 1,718
________________________
(1) In June 2004, Mr. Brown and Mr. Bartels voluntarily surrendered for
cancellation their options for the purchase of the following shares of
common stock under the 2000 Plan: 382,986 and 235,996, respectively.
In September 2004, Mr. Cimitile, Ms. Belzer and Ms. Franco voluntarily
surrendered for cancellation their options for the purchase of the
following shares of common stock under the 2000 Plan: 55,000, 76,140 and
87,500 respectively. Also in September 2004, Ms. Franco voluntarily
surrendered for cancellation her options for the purchase 10,000 shares of
common stock under the 1995 Plan.
(2) Other compensation represents the Company's 401k contribution.
(3) Does not include amounts paid to SMS, SMSI, SIT and Affinity Insurance Ltd.
(see Item 13 - Certain Relationships and Related Transactions, below)
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Stock Option Grants in Last Fiscal Year
The following table sets forth information regarding each grant of stock
options made during the year ended December 31, 2004, to each of the Named
Executive Officers. No stock appreciation rights ("SAR's") were granted during
such period to such person.
Individual Grants
----------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Potential Realizable Value at
Options Employees in Exercise Expiration Assumed Annual Rates of Stock
Name Granted(2)(#) Period (%) Price ($/Sh) Date Price Appreciation for Option(1)
- ---- ------------------------------------------------------------------------------------------
5% ($) 10% ($)
------------------------------------------------------------------------------------------
Charles Cimitile 25,000 16.1 2.39 3/31/14 37,596 95,226
Kori G. Belzer 25,000 16.1 2.39 3/31/14 37,596 95,226
Patricia Franco 25,000 16.1 2.39 3/31/14 37,596 95,226
____________
(1) The potential realizable value is calculated based upon the term of the
option at its time of grant. It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option.
(2) These options vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
Aggregated Stock Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth the number of shares of Common Stock of
the Company purchased by each of the Named Executive Officers in the exercise of
stock options during the year ended December 31, 2004, the value realized in the
purchase of such shares (the market value at the time of exercise less the
exercise price to purchase such shares), and the number of shares that may be
purchased and value of the exercisable and unexercisable options held by each of
the Named Executive Officers at December 31, 2004.
Number of Securities Underlying Value of Unexercised
Unexercised Options at Fiscal In-the-Money Options at Fiscal
Year-End (#) Year-End ($)
---------------------------------- --------------------------------
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------------- --------------- ---------------- ---------------- -------------- ----------------
Robert G. Brown -- -- -- 95,746 -- --
William H. Bartels -- -- -- 58,999 -- --
Charles Cimitile -- -- 25,000 85,000 10,625 --
Kori G. Belzer -- -- 11,500 94,500 4,513 88
Patricia Franco -- -- 11,500 79,500 4,513 88
Stock Option and Purchase Plans
The Company has four stock option plans: the Amended and Restated 1995
Stock Option Plan ("1995 Plan"), the 1995 Director's Plan ("Director's Plan"),
the Special Purpose Stock Option Plan (the "Special Purpose Plan"), and the 2000
Stock Option Plan ("2000 Plan").
The 1995 Plan provided for the granting of either incentive or
nonqualified stock options to specific employees, consultants, and directors of
the Company for the purchase of up to 3,500,000 shares of the Company's common
stock. The options had a term of ten years from the date of issuance, except in
the case of incentive stock options granted to greater than 10% stockholders for
which the term was five years. The exercise price of nonqualified stock options
must have been equal to at least 85% of the fair market value of the Company's
common stock at the date of grant. Since 2000, the Company has not granted any
new options under this plan. During 2004, 1,500 options to purchase shares of
the Company's common stock were exercised and options to purchase 26,625 shares
of the Company's stock were cancelled
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under this plan. At December 31, 2004, options to purchase 15,125 shares of the
Company's common stock remain outstanding under this plan. The 1995 Plan was
superseded by the 2000 Plan with respect to all new options issued.
The Director's Plan was a stock option plan for non-employee directors
and provided for the purchase of up to 120,000 shares of the Company's common
stock. Since 2000, the Company has not granted any new options under this plan.
During 2004, no options to purchase shares of the Company's common stock were
exercised under this plan. At December 31, 2004, 20,000 options to purchase
shares of the Company's common stock remained outstanding under this plan. The
Director's Plan has been replaced by the 2000 Plan with respect to all new
options issued.
On July 8, 1999, in connection with the merger, the Company established
the Special Purpose Plan of PIA Merchandising Services, Inc. to provide for the
issuance of substitute options to the holders of outstanding options granted by
SPAR Acquisition, Inc. There were 134,114 options granted at $0.01 per share.
Since July 8, 1999, the Company has not granted any new options under this plan.
During 2004, 21,000 options to purchase shares of the Company's common stock
were exercised under this plan. At December 31, 2004, options to purchase 4,750
shares of the Company's common stock remain outstanding under this plan.
On December 4, 2000, the Company adopted the 2000 Plan, as the successor
to the 1995 Plan and the Director's Plan with respect to all new options issued.
The 2000 Plan provides for the granting of either incentive or nonqualified
stock options to specified employees, consultants, and directors of the Company
for the purchase of up to 3,600,000 (less those options still outstanding under
the 1995 Plan or exercised after December 4, 2000 under the 1995 Plan). The
options have a term of ten years, except in the case of incentive stock options
granted to greater than 10% stockholders for whom the term is five years. The
exercise price of nonqualified stock options must be equal to at least 85% of
the fair market value of the Company's common stock at the date of grant
(although typically the options are issued at 100% of the fair market value),
and the exercise price of incentive stock options must be equal to at least the
fair market value of the Company's common stock at the date of grant. During
2004, options to purchase 476,417 shares of the Company's common stock were
granted, options to purchase 53,302 shares of the Company's common stock were
exercised and options to purchase 1,345,542 shares of the Company's stock were
voluntarily surrendered and cancelled under this plan. At December 31, 2004,
options to purchase 1,251,383 shares of the Company's common stock remain
outstanding under this plan and options to purchase 1,618,719 shares of the
Company's common stock were available for grant under this plan.
In 2001, SGRP adopted its 2001 Employee Stock Purchase Plan (the "ESP
Plan"), which replaced its earlier existing plan, and its 2001 Consultant Stock
Purchase Plan (the "CSP Plan"). These plans were each effective as of June 1,
2001. The ESP Plan allows employees of the Company, and the CSP Plan allows
employees of the affiliates of the Company (see Item 13 - Certain Relationships
and Related Transactions, below), to purchase SGRP's Common Stock from SGRP
without having to pay any brokerage commissions. On August 8, 2002, SGRP's Board
approved a 15% discount for employee purchases of Common Stock under the ESP
Plan and recommended that its affiliates pay a 15% cash bonus for affiliate
consultant purchases of Common Stock under the CSP Plan.
Compensation of Directors
The Company's Compensation Committee administers the compensation plan
for its outside Directors as well as the compensation for its executives. Each
member of the Company's Board who is not otherwise an employee or officer of the
Company or any subsidiary or affiliate of the Company (each, an "Eligible
Director") is eligible to receive the compensation contemplated under such plan.
In January 2001, SGRP adopted the Director Compensation Plan for its
outside Directors, as approved by the Board, as amended (the "Directors
Compensation Plan"). SGRP's Compensation Committee administers the Directors
Compensation Plan as well as the compensation for SGRP's executives.
Under the Directors Compensation Plan, each member of SGRP's Board who
is not otherwise an employee or officer of SGRP or any subsidiary or affiliate
of SGRP (each, a "Non-Employee Director") is eligible to receive director's fees
of $30,000 per annum (plus an additional $5,000 per annum for the Audit
Committee Chairman), payable quarterly. Each quarterly installment of such
director's fees ($7,500 plus an additional $1,250 for the Audit Committee
Chairman) is paid half in cash and half in stock options to purchase shares of
SGRP's common stock. Prior to May 2004, SGRP issued such stock options with an
exercise price of $0.01 per share. The number of option shares issued was
calculated by dividing the amount of compensation to be paid in stock options by
the closing stock price at the end of each quarter. In May 2004, the
Compensation Committee approved and recommended and the Board adopted a change
in this policy to instead issue such stock options for the purchase of common
stock with an exercise price equal to 100% of the fair
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market value of SGRP's common stock at the end of each quarter. The number of
option shares to be issued will be equal to three times the quotient of the
amount of compensation to be paid in stock options divided by the closing stock
price at the end of each quarter. The Compensation Committee and the Board
determined that this revised policy more fairly compensated the Non-Employee
Directors.
In addition upon acceptance of the directorship, each Non-Employee
Director receives options to purchase 10,000 shares of SGRP's common stock with
an exercise price equal to 100% of the fair market value of SGRP's common stock
at the date of grant, options to purchase 10,000 additional shares of SGRP's
common stock with an exercise price equal to 100% of the fair market value of
SGRP's common stock at the date of grant after one year of service and options
to purchase 10,000 additional shares of SGRP's common stock with an exercise
price equal to 100% of the fair market value of SGRP's common stock at the date
of grant for each additional year of service thereafter.
All of those options to Non-Employee Directors have been and will be
granted under the 2000 Plan described above, under which each member of the
Board is eligible to participate. Non-Employee Directors will be reimbursed for
all reasonable expenses incurred during the course of their duties. There is no
additional compensation for committee participation, phone meetings, or other
Board activities.
Severance Agreements
The Company has entered into a Change of Control Severance Agreement
with each of Patricia Franco, the Company's Chief Information Officer, and Kori
G. Belzer, the Company's Chief Operating Officer, each providing for a lump sum
severance payment and other accommodations from the Company to the employee
under certain circumstances if, pending or following a change in control, the
employee leaves for good reason or is terminated other than in a termination for
cause. The payment is equal to the sum of the employee's monthly salary times a
multiple equal to 24 months less the number of months by which the termination
of employment followed the change in control plus the maximum bonus that would
have been paid to the employee (not to exceed 25% of the employee's annual
salary).
Compensation Committee Interlocks and Insider Participation
No member of the Board's Compensation Committee was at any time during
the year ended December 31, 2004, or at any other time an officer or employee of
the Company. No executive officer or board member of the Company serves as a
member of the board of directors or compensation committee of any other entity,
that has one or more executive officers serving as a member of the Company's
Board or Compensation Committee, except for the positions of Messrs. Brown and
Bartels as directors and officers of the Company (including each of its
subsidiaries) and each of its affiliates, including SMS, SMSI and SIT (see Item
13 - Certain Relationships and Related Transactions, below).
-34-
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners of the Company
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of March 15, 2005 by: (i) each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the Company's common stock; (ii) each of the Company's
directors; (iii) each of the Named Executive Officers in the Summary
Compensation Table; and (iv) the Company's directors and such Named Executive
Officers as a group. Except as indicated in the footnotes to this table, the
persons named in the table, based on information provided by such persons, have
sole voting and sole investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to community property laws where
applicable.
Number of Shares
Title of Class Name and Address of Beneficial Owner Beneficially Owned Percentage
Common Shares Robert G. Brown (1) 8,622,407 (2) 45.5%
Common Shares William H. Bartels (1) 5,549,842 (3) 29.4%
Common Shares Robert O. Aders (1) 134,543 (4) *
Common Shares Jack W. Partridge (1) 78,633 (5) *
Common Shares Jerry B. Gilbert (1) 71,974 (6) *
Common Shares Lorrence T. Kellar (1) 68,602 (7) *
Common Shares Charles Cimitile (1) 107,500 (8) *
Common Shares Kori G. Belzer (1) 97,951 (9) *
Common Shares Patricia Franco (1) 141,998 (10) *
Common Shares Richard J. Riordan (11)
300 South Grand Avenue, Suite 2900
Los Angeles, California 90071 1,209,922 6.4%
Common Shares Heartland Advisors, Inc. (12)
790 North Milwaukee Street
Milwaukee, Wisconsin 53202 1,300,000 6.9%
Common Shares Executive Officers and Directors 14,873,450 79.0%
* Less than 1%
(1) The address of such owners is c/o SPAR Group, Inc. 580 White Plains
Road, Tarrytown, New York 10591.
(2) Includes 1,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown,
James R. Brown, Sr. and William H. Bartels are trustees. Includes
95,747 shares issuable upon exercise of options.
(3) Excludes 1,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown,
James R. Brown, Sr. and William H. Bartels are trustees, beneficial
ownership of which are disclaimed by Mr. Bartels. Includes 58,999
shares issuable upon exercise of options.
(4) Includes 62,889 shares issuable upon exercise of options.
(5) Includes 67,665 shares issuable upon exercise of options.
(6) Includes 71,974 shares issuable upon exercise of options.
(7) Includes 62,454 shares issuable upon exercise of options.
(8) Includes 107,500 shares issuable upon exercise of options.
(9) Includes 96,000 shares issuable upon exercise of options.
(10) Includes 88,500 shares issuable upon exercise of options.
(11) Share ownership was confirmed with the Company's stock transfer agent
and the principal.
(12) All information regarding share ownership is taken from and furnished
in reliance upon the Schedule 13G (Amendment No. 9), filed by Heartland
Advisors, Inc. with the Securities and Exchange Commission on December
31, 2004.
-35-
Equity Compensation Plans
The following table contains a summary of the number of shares of Common
Stock of the Company to be issued upon the exercise of options, warrants and
rights outstanding at December 31, 2004, the weighted-average exercise price of
those outstanding options, warrants and rights, and the number of additional
shares of Common Stock remaining available for future issuance under the plans
as at December 31, 2004.
Equity Compensation Plan Information
----------------------------- -------------------------- ------------------------- -------------------------
Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance of
warrants and rights (#) warrants and rights ($) options, warrants and
Plan category rights (#)
----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans 1,291,258 $1.66 1,618,719
approved by security
holders
----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans
not approved by security
holders -- -- --
----------------------------- -------------------------- ------------------------- -------------------------
Total 1,291,258 $1.66 1,618,719
----------------------------- -------------------------- ------------------------- -------------------------
Item 13. Certain Relationships and Related Transactions.
Mr. Robert G. Brown, a Director, the Chairman, President and Chief
Executive Officer and a major stockholder of the Company, and Mr. William H.
Bartels, a Director, the Vice Chairman and a major stockholder of the Company,
are executive officers and the sole stockholders and directors of SPAR Marketing
Services, Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI"), and SPAR
Infotech, Inc. ("SIT").
SMS and SMSI provided approximately 99% of the Company's field
representatives (through its independent contractor field force) and
approximately 92% of the Company's field management at a total cost of
approximately $24.0 million, $36.0 million, and $30.5 million for 2004, 2003,
and 2002, respectively. Pursuant to the terms of the Amended and Restated Field
Service Agreement dated as of January 1, 2004, SMS provides the services of
SMS's field force of approximately 6,300 independent contractors to the Company.
Pursuant to the terms of the Amended and Restated Field Management Agreement
dated as of January 1, 2004, SMSI provides approximately 50 full-time national,
regional and district managers to the Company. For those services, the Company
has agreed to reimburse SMS and SMSI for all of their costs of providing those
services and to pay SMS and SMSI each a premium equal to 4% of their respective
costs, except that for 2004 SMSI agreed to concessions that reduced the premium
paid by approximately $640,000 for 2004. Total net premiums (4% of SMS and SMSI
costs less 2004 concessions) paid to SMS and SMSI for services rendered were
approximately $320,000, $1,350,000, and $1,100,000 for 2004, 2003, and 2002,
respectively. The Company has been advised that Messrs. Brown and Bartels are
not paid any salaries as officers of SMS or SMSI so there were no salary
reimbursements for them included in such costs or premium. However, since SMS
and SMSI are "Subchapter S" corporations, Messrs. Brown and Bartels benefit from
any income of such companies allocated to them.
SIT provided substantially all of the Internet computer programming
services to the Company at a total cost of approximately $1,170,000, $1,610,000,
and $1,630,000 for 2004, 2003, and 2002, respectively. SIT provided
approximately 34,000, 47,000, and 46,000 hours of Internet computer programming
services to the Company for 2004, 2003, and 2002, respectively. Pursuant to the
Amended and Restated Programming and Support Agreement dated as of January 1,
2004, SIT continues to provide programming services to the Company for which the
Company has agreed to pay SIT competitive hourly wage rates for time spent on
Company matters and to reimburse the related out-of-pocket expenses of SIT and
its personnel. The average hourly billing rate was $34.71, $34.24, and $35.10
for 2004, 2003, and 2002, respectively. The Company has been advised that no
hourly charges or business expenses for Messrs. Brown and Bartels were charged
to the Company by SIT for 2004. However, since SIT is a "Subchapter S"
corporation, Messrs. Brown and Bartels benefit from any income of such company
allocated to them.
In November 2004 and January 2005, the Company entered into separate
operating lease agreements between SMS and the Company's wholly owned
subsidiaries, SPAR Marketing Force, Inc. ("SMF") and SPAR Canada Company ("SPAR
Canada"). Each lease has a 36 month term and has representations, covenants and
defaults customary for the leasing industry. The SMF lease has a monthly payment
of $20,318 and is for handheld computers to be used by field merchandisers in
the performance of various merchandising services in the United States. These
handheld computers had an original purchase price of $632,200. The SPAR Canada
lease has a monthly payment of $3,326 and is for handheld
-36-
computers to be used by field merchandisers in the performance of various
merchandising services in Canada. These handheld computers had an original
purchase price of $105,000.
The Company's agreements with SMS, SMSI and SIT are periodically
reviewed by the Company's Audit Committee, which includes an examination of the
overall fairness of the arrangements. In February 2004, the Audit Committee
approved separate amended and restated agreements with each of SMS, SMSI and
SIT, effective as of January 1, 2004. The restated agreements extend the
contract maturities for four years, strengthened various contractual provisions
in each agreement and continued the basic economic terms of the existing
agreements, except that the restated agreement with SMSI provides for temporary
concessions to the Company by SMSI totalling approximately $640,000 for 2004.
In July 1999, SMF, SMS and SIT entered into a Software Ownership
Agreement with respect to Internet job scheduling software jointly developed by
such parties. In addition, SPAR Trademarks, Inc. ("STM"), SMS and SIT entered
into trademark licensing agreements whereby STM has granted non-exclusive
royalty-free licenses to SIT, SMS and SMSI for their continued use of the name
"SPAR" and certain other trademarks and related rights transferred to STM, a
wholly owned subsidiary of the Company.
Messrs. Brown and Bartels also collectively own, through SMSI, a
minority (less than 5%) equity interest in Affinity Insurance Ltd., which
provides certain insurance to the Company.
In April 2003, all previously outstanding amounts due certain
stockholders under certain notes were paid in full.
In the event of any material dispute in the business relationships
between the Company and SMS, SMSI, or SIT, it is possible that Messrs. Brown or
Bartels may have one or more conflicts of interest with respect to these
relationships and such dispute could have a material adverse effect on the
Company.
Item 14. Principal Accountant Fees and Services.
On October 4, 2004, Ernst & Young LLP ("E&Y") resigned as the
independent registered public accounting firm for the Company and its
subsidiaries. The resignation was effective upon completion of E&Y's review of
the interim financial information for the Company's third fiscal quarter ended
September 30, 2004, and the filing of the Company's quarterly report on Form
10-Q for such period.
In January 2005, the Company, with the approval of the Company's Audit
Committee, appointed Rehmann Robson ("Rehmann") as its independent registered
public accounting firm to audit the financial statements of the Company for its
year ending December 31, 2004.
The Company and its subsidiaries did not engage Rehmann or E&Y to
provide advice regarding financial information systems design or implementation,
but did engage E&Y for tax consulting services related to the PHI/SPGI ESOP in
2003 (for which E&Y was paid $3,778), due diligence services for the IMS
acquisition during 2003 (for which E&Y was paid $14,334) and for tax services in
2003 (for which E&Y was paid $2,295). No other non-audit services were performed
by Rehmann or E&Y in 2004 or 2003. Since 2003, as required by law, each
non-audit service performed by the Company's auditor either (i) was approved in
advance on a case-by-case basis by the Company's Audit Committee, or (ii) fit
within a pre-approved "basket" of non-audit services of limited amount, scope
and duration established in advance by the Company's Audit Committee. In
connection with the standards for independence of the Company's independent
public accountants promulgated by the Securities and Exchange Commission, the
Audit Committee considers (among other things) whether the provision of such
non-audit services would be compatible with maintaining the independence of
Rehmann or E&Y.
Audit Fees
During the Company's fiscal year ended December 31, 2004 and 2003,
respectively, fees billed by E&Y for all audit services rendered to the Company
and its subsidiaries were $100,203 and $179,362, respectively. Audit services
principally include fees for the Company's audits and 10-Q filing reviews. Since
2003, as required by law, the choice of the Company's auditor and the audit
services to be performed by it have been approved in advance by the Company's
Audit Committee.
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PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Index to Financial Statements filed as part of this report:
Reports of Independent Registered Public Accounting Firms
- Rehmann Robson. F-1
- Ernst & Young LLP. F-2
Consolidated Balance Sheets as of December 31, 2004, and
December 31, 2003. F-3
Consolidated Statements of Operations for the years ended
December 31, 2004, December 31, 2003, and December 31, 2002. F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2004, December 31, 2003, and December 31, 2002. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, December 31, 2003, and December 31, 2002. F-6
Notes to Financial Statements. F-7
2. Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts for the three
years ended December 31, 2004. F-30
3. Exhibits.
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc. (referred to
therein under its former name PIA), as amended (incorporated
by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-80429), as filed with the Securities
and Exchange Commission ("SEC") on December 14, 1995 (the
"Form S-1")), and the Certificate of Amendment filed with the
Secretary of State of the State of Delaware on July 8, 1999
(which, among other things, changes the Company's name to SPAR
Group, Inc.) (incorporated by reference to Exhibit 3.1 to the
Company's Form 10-Q for the 3rd Quarter ended September 30,
1999).
3.2 Amended and Restated By-Laws of SPAR Group, Inc. adopted on
May 18, 2004 (incorporated by reference to the Company's
report on Form 8-K, as filed on May 27, 2004).
3.3 Amended and Restated Charter of the Audit Committee of the
Board of Directors of SPAR Group, Inc., adopted May 18, 2004
(incorporated by reference to the Company's report on Form
8-K, as filed on May 27, 2004).
3.4 Charter of the Compensation Committee of the Board of
Directors of SPAR Group, Inc. adopted on May 18, 2004
(incorporated by reference to the Company's report on Form
8-K, as filed on May 27, 2004).
3.5 Charter of the Governance Committee of the Board of Directors
of SPAR Group, Inc. adopted on May 18, 2004 (incorporated by
reference to the Company's report on Form 8-K, as filed on May
27, 2004).
3.6 SPAR Group, Inc. Statement of Policy Respecting Stockholder
Communications with Directors, adopted on May 18, 2004
(incorporated by reference to the Company's report on Form
8-K, as filed on May 27, 2004).
-38-
3.7 SPAR Group, Inc. Statement of Policy Regarding Director
Qualifications and Nominations, adopted on May 18, 2004
(incorporated by reference to the Company's report on Form
8-K, as filed on May 27, 2004).
4.1 Registration Rights Agreement entered into as of January 21,
1992, by and between RVM Holding Corporation, RVM/PIA, a
California Limited Partnership, The Riordan Foundation and
Creditanstalt-Bankverine (incorporated by reference to the
Form S-1).
10.1 2000 Stock Option Plan, as amended, (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.2 2001 Employee Stock Purchase Plan (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.3 2001 Consultant Stock Purchase Plan (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.4 Amended and Restated Field Service Agreement dated and
effective as of January 1, 2004, by and between SPAR Marketing
Services, Inc., and SPAR Marketing Force, Inc. (incorporated
by reference to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 2004, as filed on May 21,
2004).
10.5 Amended and Restated Field Management Agreement dated and
effective as of January 1, 2004, by and between SPAR
Management Services, Inc., and SPAR Marketing Force, Inc.
(incorporated by reference to the Company's quarterly report
on Form 10-Q for the quarter ended March 31, 2004, as filed on
May 21, 2004).
10.6 Amended and Restated Programming and Support Agreement dated
and effective as of January 1, 2004, by and between SPAR
InfoTech, Inc., and SPAR Marketing Force, Inc. (incorporated
by reference to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 2004, as filed on May 21,
2004).
10.7 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Marketing Services, Inc., and SPAR Trademarks,
Inc. (incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 31, 2002).
10.8 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Infotech, Inc., and SPAR Trademarks, Inc.
(incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 31, 2002).
10.9 Stock Purchase and Sale Agreement by and among Performance
Holdings, Inc. and SPAR Incentive Marketing, Inc., effective
as of June 30, 2002 (incorporated by reference to the
Company's Form 10-Q for the quarter ended June 30, 2002).
10.10 Revolving Credit, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to
the Company's Form 10-Q for the quarter ended June 30, 2002).
10.11 Term Loan, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to
the Company's Form 10-Q for the quarter ended June 30, 2002).
10.12 Promissory Note in the principal amount of $764,271.00 by
STIMULYS, Inc., in favor of SPAR Incentive Marketing, Inc.,
dated as of September 10, 2004, as filed herewith.
-39-
10.13 Payoff and Release Letter by and between STIMULYS, Inc., and
SPAR Incentive Marketing, Inc., dated as of September 10,
2004, as filed herewith.
10.14 Sales Proceeds Agreement by and between STIMULYS, Inc. and
SPAR Incentive Marketing, Inc., dated as of September 10,
2004, as filed herewith.
10.15 Third Amended and Restated Revolving Credit and Security
Agreement by and among Whitehall Business Credit Corporation
(the "Lender") with SPAR Marketing Force, Inc., SPAR Group,
Inc., SPAR, Inc., SPAR/Burgoyne Retail Services, Inc., SPAR
Incentive Marketing, Inc., SPAR Trademarks, Inc., SPAR
Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., SPAR Group International, Inc., SPAR
Technology Group, Inc., SPAR/PIA Retail Services, Inc., Retail
Resources, Inc., Pivotal Field Services Inc., PIA
Merchandising Co., Inc., Pacific Indoor Display Co. and
Pivotal Sales Company (collectively, the "Existing
Borrowers"), dated as of January 24, 2003 (incorporated by
reference to the Company's Form 10-K for the fiscal year ended
December 31, 2002).
10.16 Waiver And Amendment No. 3 To Third Amended And Restated
Revolving Credit And Security Agreement entered into as of
March 26, 2004 (incorporated by reference to the Company's
report on Form 8-K, as filed on May 26, 2004).
10.17 Joinder, Waiver And Amendment No. 4 To Third Amended And
Restated Revolving Credit And Security Agreement entered into
as of May 17, 2004 (incorporated by reference to the Company's
report on Form 8-K, as filed on May 26, 2004).
10.18 Waiver and Amendment to Third Amended and Restated Revolving
Credit and Security Agreement by and among the Lender and the
Borrowers dated as of January 2004 (incorporated by reference
to the Company's report on Form 10-K/A for the year ended
December 31, 2003, as filed on June 28, 2004).
10.19 Waiver and Amendment No. 5 to Third Amended and Restated
Revolving Credit and Security Agreement among Webster Business
Credit Corporation, SPAR Group, Inc., and certain of its
subsidiaries dated as of August 20, 2004 (incorporated by
reference to the Company's quarterly report of the quarter
ended June 30, 2004, as filed on August 23, 2004).
10.20 Waiver and Amendment No. 6 to Third Amended and Restated
Revolving Credit and Security Agreement among Webster Business
Credit Corporation, SPAR Group, Inc., and certain of its
subsidiaries dated as of November 12, 2004 (incorporated by
reference to the Company's quarterly report for the quarter
ended September 30, 2004, filed November 17, 2004).
10.21 Waiver to the Third Amended and Restated Revolving Credit and
Security Agreement among Webster Business Credit Corporation,
SPAR Group, Inc., and certain of its subsidiaries dated as of
March 31, 2004, as filed herewith.
10.22 Consent, Joinder, Release and Amendment Agreement dated as of
October 31, 2003, by and among the Lender, the Existing
Borrowers and SPAR All Store Marketing, Inc., as a Borrower
(incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 31, 2003).
10.23 Change in Control Severance Agreement between Kori Belzer and
SPAR Group, Inc., dated as of August 12, 2004 (incorporated by
reference to the Company's quarterly report of the quarter
ended June 30, 2004, as filed on August 23, 2004).
10.24 Change in Control Severance Agreement between Patricia Franco
and SPAR Group, Inc., dated as of August 12, 2004
(incorporated by reference to the Company's quarterly report
of the quarter ended June 30, 2004, as filed on August 23,
2004).
-40-
10.25 Master Lease Agreement by and between SPAR Marketing Services,
Inc. and SPAR Marketing Force, Inc. dated as of November 2004
relating to lease of handheld computer equipment, as filed
herewith.
10.26 Master Lease Agreement by and between SPAR Marketing Services,
Inc. and SPAR Canada Company dated as of January 2005 relating
to lease of handheld computer equipment, as filed herewith.
10.27 Joint Venture Agreement dated as of March 26, 2004, by and
between Solutions Integrated Marketing Services Ltd. and SPAR
Group International, Inc. as filed herewith.
10.28 Joint Venture Shareholders Agreement between Friedshelf 401
(Proprietary) Limited, SPAR Group International, Inc., Derek
O'Brien, Brian Mason, SMD Meridian CC, Meridian Sales &
Mnrechandisign (Western Cape) CC, Retail Consumer Marketing
CC, Merhold Holding Trust in respect of SGRP Meridian
(Proprietary) Limited, dated as of June 25, 2004, as filed
herewith.
10.29 Joint Venture Agreement dated as of July 21, 2003, by and
between CEO Produksiyon Tanitim ve Arastirma Hizmetleri Ltd
Sti and SPAR Group International, Inc., as filed herewith.
10.30 Joint Venture Agreement dated as of May 1, 2001, by and
between Paltac Corporation and SPAR Group, Inc., as filed
herewith.
10.31 Agreement on Amendment dated as of August 1, 2004, by and
between SPAR Group, Inc. and SPAR FM Japan, Inc., as filed
herewith.
10.32 Joint Venture Agreement dated as of January 26, 2005, by and
between Best Mark Investments Holdings Ltd and SPAR
International Ltd. as filed herewith.
10.33 Joint Venture Agreement dated as of December 14, 2004, by and
between Field Insights S.R.L. and SPAR Group International,
Inc., as filed herewith.
14.1 Code of Ethical Conduct for the Directors, Senior Executives
and Employees, of SPAR Group, Inc., dated May 1, 2004
(incorporated by reference to the Company's Form 8-K filed on
May 5, 2004).
14.2 Statement of Policy Regarding Personal Securities Transaction
in Company Stock and Non-Public Information, as amended and
restated on May 1, 2004 (incorporated by reference to the
Company's Form 8-K filed on May 5, 2004).
21.1 List of Subsidiaries.
23.1 Consent of Rehmann Robson.
23.2 Consent of Ernst & Young LLP.
31.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, and filed herewith.
31.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, and filed herewith.
32.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
-41-
32.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
(b) Reports on Form 8-K.
Form 8-K - Changes in Registrant's Certifying Accountant filed on
October 8, 2004, respecting the resignation of Ernst & Young LLP as the
Company's Independent Auditors.
Form 8-K - Results of Operations and Financial Condition filed on
November 12, 2004, attaching press release respecting financial results
for the third quarter ended September 30, 2004.
Form 8-K - Unscheduled Material Events filed on February 4, 2005
respecting, appointment of Rehmann Robson as the Company's Independent
Auditors.
-42-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to the report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SPAR Group, Inc.
By: /s/ Robert G. Brown
--------------------------------------
Robert G. Brown
President, Chief Executive Officer and
Chairman of the Board
Date: April 12, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment to the report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Robert G. Brown President, Chief Executive Officer, Director,
- ----------------------- and Chairman of the Board
Robert G. Brown
Date: April 12, 2005
/s/ William H. Bartels Vice Chairman and Director
- -----------------------
William H. Bartels
Date: April 12, 2005
/s/ Robert O. Aders Director
- -----------------------
Robert O. Aders
Date: April 12, 2005
/s/ Jack W. Partridge Director
- -----------------------
Jack W. Partridge
Date: April 12, 2005
/s/ Jerry B. Gilbert Director
- -----------------------
Jerry B. Gilbert
Date: April 12, 2005
/s/ Lorrence T. Kellar Director
- -----------------------
Lorrence T. Kellar
Date: April 12, 2005
/s/ Charles Cimitile Chief Financial Officer, Treasurer and
- ----------------------- Secretary (Principal Financial and
Charles Cimitile Accounting Officer)
Date: April 12, 2005
-43-
Report of Registered Public Accounting Firm
The Board of Directors and Stockholders
SPAR Group, Inc. and Subsidiaries
Tarrytown, New York
We have audited the consolidated balance sheet of SPAR Group, Inc. and
Subsidiaries as of December 31, 2004, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. Our
audit also included the financial statement schedule (2004 information only)
listed in the Index at Item 15(a). These consolidated financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
(2004 information only) based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of SPAR Group, Inc. and Subsidiaries as of December 31, 2004,
and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial schedule (2004
information only), when considered in relation to the consolidated financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
/s/ Rehmann Robson
Troy, Michigan
February 28, 2005
F-1
Report of Registered Public Accounting Firm
The Board of Directors and Stockholders
SPAR Group, Inc. and Subsidiaries
Tarrytown, New York
We have audited the consolidated balance sheet of SPAR Group, Inc. and
Subsidiaries, as of December 31, 2003 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 2003. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These consolidated financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SPAR
Group, Inc. and Subsidiaries at December 31, 2003, and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 2, the Company adopted Statement of Accounting Standards
No. 142 effective January 1, 2002.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 13, 2004
F-2
SPAR Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31,
--------------------------------------------
2004 2003
---------------------- --------------------
Assets
Current assets:
Cash and cash equivalents $ 887 $ 24
Accounts receivable, net 11,307 13,942
Prepaid expenses and other current assets 657 658
Deferred income taxes - 1,305
---------------------- --------------------
Total current assets 12,851 15,929
Property and equipment, net 1,536 2,099
Goodwill 798 8,749
Deferred income taxes - 434
Other assets 636 926
---------------------- --------------------
Total assets $ 15,821 $ 28,137
====================== ====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,158 $ 1,373
Accrued expenses and other current liabilities 2,391 4,081
Accrued expenses due to affiliates 987 1,091
Restructuring charges 250 685
Customer deposits 1,147 530
Lines of credit 4,956 4,084
---------------------- --------------------
Total current liabilities 11,889 11,844
Other long-term liabilities 12 270
Minority interest 206 -
---------------------- --------------------
Total liabilities 12,107 12,114
Commitments and contingencies (Note - 7)
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 3,000,000
Issued and outstanding shares - none - -
Common stock, $.01 par value:
Authorized shares - 47,000,000
Issued and outstanding shares -
18,858,972 - 2004 and 2003 189 189
Treasury stock (108) (384)
Accumulated other comprehensive loss (86) (7)
Additional paid-in capital 11,011 11,249
Accumulated (deficit) retained earnings (7,292) 4,976
---------------------- --------------------
Total stockholders' equity 3,714 16,023
---------------------- --------------------
Total liabilities and stockholders' equity $ 15,821 $ 28,137
====================== ====================
See accompanying notes.
F-3
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
------------------------------------------------------
2004 2003 2002
------------------------------------------------------
Net revenues $ 51,370 $ 64,859 $ 69,612
Cost of revenues 33,644 42,338 40,331
------------------------------------------------------
Gross profit 17,726 22,521 29,281
Selling, general and administrative expenses 20,222 20,967 18,804
Impairment charges 8,141 - -
Depreciation and amortization 1,399 1,529 1,844
------------------------------------------------------
Operating (loss) income (12,036) 25 8,633
Interest expense 220 269 363
Other (income) expense (754) 237 (26)
------------------------------------------------------
(Loss) income before provision for income taxes and (11,502) (481) 8,296
minority interest
Provision for income taxes 853 58 2,998
------------------------------------------------------
Net (loss) income before minority interest (12,355) (539) 5,298
Minority interest 87 - -
------------------------------------------------------
Net (loss) income $ (12,268) $ (539) $ 5,298
======================================================
Basic/diluted net (loss) income per common share:
Net (loss) income - basic/diluted $ (0.65) $ (0.03) $ 0.28
======================================================
Weighted average common shares - basic 18,859 18,855 18,761
======================================================
Weighted average common shares - diluted 18,859 18,855 19,148
======================================================
See accompanying notes.
F-4
SPAR Group, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(In thousands)
Common Stock
----------------------------------- Accumulated
Additional Other Total
Treasury Paid-In Earnings Comprehensive Stockholders'
Shares Amount Stock Capital Retained (Loss) Equity
------------------------------------------------------------------------------------------
Balance at January 31, 2002 18,583 $ 186 $ - $ 10,531 $ - $ - $ 10,934
- 217
Stock options exercised and employee
stock purchase plan purchases 242 2 - 388 - 390
Purchase of treasury stock - - (30) - - (30)
Net income - - - - 5,298 5,298
------------------------------------------------------------------------------------------
Balance at December 31, 2002 18,825 188 (30) 10,919 5,515 - 16,592
Stock options exercised and employee
stock purchase plan purchases 34 1 570 (86) - - 485
Issuance of stock options to non-
employees for services - - - 416 - - 416
Purchase of treasury stock - - (924) - - - (924)
Comprehensive loss:
Foreign currency translation loss (7) (7)
Net loss (539) (539)
--------------
Comprehensive loss (546)
------------------------------------------------------------------------------------------
Balance at December 31, 2003 18,859 189 (384) 11,249 4,976 (7) 16,023
Stock options exercised and employee
stock purchase plan purchases - - 276 (316) - - (40)
Issuance of stock options to non-
employees for services - - - 78 - - 78
Comprehensive loss:
Foreign currency translation loss (79) (79)
Net loss (12,268) (12,268)
--------------
Comprehensive loss (12,347)
------------------------------------------------------------------------------------------
Balance at December 31, 2004 18,859 $ 189 $ (108) $ 11,011 $ (7,292) $ (86) $ 3,714
==========================================================================================
See accompanying notes.
F-5
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
------------------------------------------------------
2004 2003 2002
------------------------------------------------------
Operating activities
Net (loss) income $ (12,268) $ (539) $ 5,298
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Impairment charges 8,141 - -
Minority interest earnings in subsidiaries (87) - -
Share of loss in joint venture - 270 -
Deferred tax asset adjustments 710 (131) 2,022
Depreciation 1,399 1,529 1,844
Issuance of stock options for service 78 416 -
Changes in operating assets and liabilities:
Accounts receivable 2,635 2,516 4,686
Prepaid expenses and other assets (126) (330) (354)
Accounts payable, accrued expenses, other current
liabilities and customer deposits 756 422 (538)
Accrued expenses due to affiliates (104) 133 347
Restructuring charges 250 (904) (593)
------------------------------------------------------
Net cash provided by operating activities 1,384 3,382 12,712
Investing activities
Purchases of property and equipment (1,260) (1,456) (1,172)
Deposit related to acquisition 350 (350) -
Acquisition of businesses (399) (1,091) -
------------------------------------------------------
Net cash used in investing activities (1,309) (2,897) (1,172)
Financing activities
Net borrowings (payments) on lines of credit 872 3,936 (11,139)
Other long-term liabilities 35 - (57)
Proceeds from employee stock purchase plan and exercised
options (40) 485 390
Payments to certain stockholders - (3,951) (704)
Purchase of treasury stock - (924) (30)
------------------------------------------------------
Net cash provided by (used in) financing activities 867 (454) (11,540)
Translation loss (79) (7) -
Net change in cash 863 24 -
Cash at beginning of period 24 - -
------------------------------------------------------
Cash at end of period $ 887 $ 24 $ -
======================================================
Supplemental disclosure of cash flows information
Interest paid $ 180 $ 241 $ 686
======================================================
Income taxes paid $ 86 $ 578 $ 200
======================================================
See accompanying notes.
F-6
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2004
1. Business and Organization
The SPAR Group, Inc., a Delaware corporation ("SGRP"), and its subsidiaries
(together with SGRP, the "SPAR Group" or the "Company"), is a supplier of
merchandising and other marketing services throughout the United States and
internationally. The Company also provides database marketing, technology
services, teleservices and marketing research.
SPAR Acquisition, Inc., and its subsidiaries (the "SPAR Companies") are the
original predecessor of the Company and were founded in 1967. On July 8, 1999,
SGRP completed a reverse merger with the SPAR Companies (the "PIA Acquisition"),
and then changed its name to SPAR Group, Inc., from PIA Merchandising Services,
Inc. (prior to such merger, "PIA"). Pursuant to the PIA Acquisition, the SPAR
Companies were deemed to have "acquired" PIA and its subsidiaries prior to the
PIA Acquisition (the "PIA Companies"), which was treated as a purchase of the
PIA Companies for accounting purposes, with the books and records of the Company
being adjusted to reflect the historical operating results of the SPAR
Companies. In 2002, the Company sold its Incentive Marketing Division, SPAR
Performance Group, Inc. ("SPGI").
The Company's continuing operations are now divided into two divisions: the
Domestic Merchandising Services Division and the International Merchandising
Services Division. The Domestic Merchandising Services Division provides
merchandising services, in-store product demonstrations, product sampling,
database marketing, technology services, teleservices and marketing research to
manufacturers and retailers in the United States. The various services are
primarily performed in mass merchandisers, drug store chains, convenience and
grocery stores. The International Merchandising Services Division, established
in July 2000, currently provides merchandising services through a wholly owned
subsidiary in Canada, through 51% owned joint venture subsidiaries in Turkey,
South Africa, India and Romania and through 50% owned joint ventures in Japan
and China. The Company continues to focus on expanding its merchandising
services business throughout the world.
Domestic Merchandising Services Division
The Company's Domestic Merchandising Services Division provides nationwide
merchandising and other marketing services primarily on behalf of consumer
product manufacturers and retailers at mass merchandisers, drug store chains and
retail grocery stores. Included in its customers are home entertainment, general
merchandise, health and beauty care, consumer goods and food products companies
in the United States.
Merchandising services primarily consist of regularly scheduled dedicated routed
services and special projects provided at the store level for a specific
retailer or single or multiple manufacturers primarily under single or
multi-year contracts or agreements. Services also include stand-alone
large-scale implementations. These services may include sales enhancing
activities such as ensuring that client products authorized for distribution are
in stock and on the shelf, adding new products that are approved for
distribution but not presently on the shelf, setting category shelves in
accordance with approved store schematics, ensuring that shelf tags are in
place, checking for the overall salability of client products and setting new
and promotional items and placing and/or removing point of purchase and other
related media advertising. Specific in-store services can be initiated by
retailers or manufacturers, and include new store openings, new product
launches, special seasonal or promotional merchandising, focused product support
and product recalls. The Company also provides in-store product demonstration
and in-store product sampling services, database marketing, technology services,
teleservices and marketing research services.
F-7
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
1. Business and Organization (continued)
International Merchandising Services Division
In July 2000, the Company established its International Merchandising Services
Division, through a wholly owned subsidiary, SPAR Group International, Inc.
("SGI"), to focus on expanding its merchandising services business worldwide as
follows:
May 2001, the Company entered Japan through a 50% owned joint venture
headquartered in Osaka.
June 2003, the Company entered Canada by acquiring an existing business through
its wholly owned Canadian subsidiary, headquartered in Toronto.
July 2003, the Company entered Turkey through a 51% owned joint venture
subsidiary headquartered in Istanbul.
April 2004, the Company entered South Africa through a 51% owned joint venture
subsidiary headquartered in Durban.
April 2004, the Company entered India through a 51% owned joint venture
subsidiary headquartered in New Delhi.
December 2004, the Company established a 51% owned joint venture subsidiary
headquartered in Bucharest, Romania.
In February 2005, the Company announced the establishment of a 50% owned joint
venture headquartered in Hong Kong, China.
Discontinued Operations - Incentive Marketing Division
In the fourth quarter of 2001, the Company made the decision to divest its
interest in SPGI.
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly-owned
subsidiary of the Company, entered into a Stock Purchase Agreement with
Performance Holdings, Inc. ("PHI"), a Delaware corporation headquartered in
Carrollton, Texas. SIM sold all of the stock of its subsidiary, SPGI, to PHI for
$6.0 million. As a condition of the sale, PHI issued and contributed 1,000,000
shares of its common stock to Performance Holdings, Inc. Employee Stock
Ownership Plan, which became the only shareholder of PHI.
The $6.0 million sales price was evidenced by two Term Loans, an Initial Term
Loan totaling $2.5 million and an Additional Term Loan totaling $3.5 million
(collectively the "Term Loans"). The Term Loans were guarantied by SPGI and
secured by pledges of all assets of PHI and SPGI. The Term Loans had interest
rates of 12% per annum through December 31, 2003. On January 1, 2004 the
interest rate changed to 8.9% per annum. Because the collection of the notes
depended on the future operations of PHI, the $6.0 million notes were fully
reserved.
Also in connection with the sale, the Company agreed to provide a discretionary
revolving line of credit to SPGI not to exceed $2.0 million (the "SPGI
Revolver") through September 30, 2005. The SPGI Revolver was secured by a pledge
of all the assets of SPGI and was guarantied by SPGI's parent, Performance
Holdings, Inc. The SPGI Revolver provided for advances in excess of the
borrowing base through September 30, 2003. As of October 1, 2003, the SPGI
Revolver was adjusted, as per the agreement, to include a borrowing base
calculation (principally 85% of "eligible" accounts receivable). In September
F-8
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
1. Business and Organization (continued)
2003, SPGI requested and the Company agreed to provide advances of up to $1.0
million in excess of the borrowing base through September 30, 2004. In December
of 2003, SPGI changed its name to STIMULYS, Inc ("STIMULYS"). On April 30, 2004,
as a result of various defaults by STIMULYS, the Company amended the
discretionary line of credit by eliminating advances in excess of STIMULYS'
borrowing base and reducing the maximum amount of the revolving line to the
greater of $1.0 million or the borrowing base. Under the SPGI Revolver terms,
STIMULYS was required to deposit all of its cash receipts to the Company's lock
box.
On September 10, 2004, in consideration for a new Promissory Note totaling
$764,271 (which represented the amount outstanding under the SPGI Revolver at
that time) and in the event of a change in control of STIMULYS, a share in the
net proceeds resulting from such change in control, the Company terminated the
SPGI Revolver and the Term Loans. SPAR also released its security interest in
any collateral previously pledged by STIMULYS. The first payment due under the
Promissory Note was received on October 29, 2004. Due to the collection risk
associated with the Promissory Note, the Company has established a reserve for
the remaining amount due, including interest of approximately $355,000 at
December 31, 2004.
As a result of the termination of the SPGI Revolver, the reserve for collection
of advances and accrued interest under the SPGI Revolver previously established
by the Company totaling approximately $984,000 was no longer required. The
release of this reserve, net of the new reserve required for the Promissory
Note, resulted in Other Income totaling approximately $640,000 for 2004.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Company consolidates its 100% owned subsidiaries. The Company also
consolidates its 51% owned joint venture subsidiaries and its 50% owned joint
ventures where the Company is the primary beneficiary because the Company
believes this presentation is fairer and more meaningful. Rule 3A-02 of
Regulation S-X, Consolidated Financial Statements of the Registrant and its
Subsidiaries, states that consolidated statements are presumed to be more
meaningful, that majority owned subsidiaries (more than 50%) generally should be
consolidated, and that circumstances may require consolidation of other
subsidiaries to achieve a fairer presentation of its financial condition and
results. In addition, the Company has determined that under Financial Accounting
Standards Board Interpretation Number 46, as revised December 2003,
Consolidation of Variable Interest Entities ("FIN 46(R)"), the Company is the
primary beneficiary of its 51% owned joint venture subsidiaries and its 50%
owned joint ventures, which accordingly requires consolidation of those entities
into the Company's financial statements. All significant intercompany accounts
and transactions have been eliminated.
In 2004, due to the amendment of a royalty agreement between the Company and its
50% owned Japanese joint venture, the Company has determined that in accordance
with FIN 46(R) it is the primary beneficiary of the Japanese joint venture, and
has consolidated the Japanese financial results for 2004 in accordance with the
provisions of FIN 46(R). The Japanese joint venture's fiscal year ended on
September 30, 2004 and accordingly its financial statements were audited as of
that date. In connection with the consolidation the Company began reporting the
Japanese joint venture's financial results as of and for the period ending
September 30, 2004. Therefore, for 2004, the Company's consolidated financial
statements only include the Japanese joint venture financial results for nine
months ended September 30, 2004. In 2004, the Japanese joint venture recorded
revenue of approximately $2.6 million, total assets of approximately $822,000,
total liabilities of approximately $1.2 million and a deficit of approximately
$445,000. In 2003 and 2002, prior
F-9
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
to the amendment of the royalty agreement, the investment in the Japanese joint
venture was accounted for using the equity method based upon the Company's 50%
ownership.
At December 31, 2004, international assets totaled $2.8 million and
international liabilities totaled $3.8 million. For 2004, international revenues
totaled $8.2 million and the Company's share of the net losses was approximately
$500,000.
Cash Equivalents
The Company considers all highly liquid short-term investments with maturities
of three months or less at the time of acquisition to be cash equivalents. Cash
equivalents are stated at a cost, which approximates fair value.
Revenue Recognition
The Company's services are provided under contracts or agreements. The Company
bills its clients based upon service fee or unit fee arrangements. Revenues
under service fee arrangements are recognized when the service is performed. The
Company's per unit fee arrangements provide for fees to be earned based on the
retail sales of a client's products to consumers. The Company recognizes per
unit fees in the period such amounts become determinable and are reported to the
Company.
Unbilled Accounts Receivable
Unbilled accounts receivable represent services performed but not billed.
Doubtful Accounts, Sales Allowances and Credit Risks
The Company continually monitors the validity of its accounts receivable based
upon current customer credit information and financial condition. Balances that
are deemed to be uncollectible after the Company has attempted reasonable
collection efforts are written off through a charge to the bad debt allowance
and a credit to accounts receivable. Accounts receivable balances are stated at
the amount that management expects to collect from the outstanding balances. The
Company provides for probable uncollectible amounts through a charge to earnings
and a credit to bad debt allowance based on management's assessment of the
current status of individual accounts. Based on management's assessment, the
Company established an allowance for doubtful accounts of $761,000 and $515,000
at December 31, 2004 and 2003, respectively. The Company also recorded a reserve
for sales allowances for potential customer credits of $448,000 at December 31,
2003. Bad debt and sales allowance expenses were $366,000, $825,000, and
$262,000 in 2004, 2003, and 2002, respectively.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated on a straight-line basis over estimated useful lives
of the related assets, which range from three to seven years. Leasehold
improvements are depreciated over the shorter of their estimated useful lives or
lease term, using the straight-line method.
F-10
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
Internal Use Software Development Costs
In accordance with SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, the Company capitalizes certain costs
associated with its internally developed software. Specifically, the Company
capitalizes the costs of materials and services incurred in developing or
obtaining internal use software. These costs include but are not limited to the
cost to purchase software, the cost to write program code, payroll, payroll
related benefits and travel expenses for those employees who are directly
involved with and who devote time to the Company's software development
projects. Capitalized software development costs are amortized over three years.
The Company capitalized $559,000, $1,004,000, and $772,000 of costs related to
software developed for internal use in 2004, 2003, and 2002, respectively.
In 2004, the Company recorded an impairment charge against capitalized software
costs due to the loss of certain clients during the year (see Note 3 -
Impairment Charges).
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that an assets's carrying amount may be higher
than its fair value. If an asset is considered to be impaired, the impairment
charge recognized is the excess of the asset's carrying value over the asset's
fair value (see Note 3 - Impairment Charges).
Fair Value of Financial Instruments
The Company's balance sheets include the following financial instruments:
accounts receivable, accounts payable and a lines of credit. The Company
considers the carrying amounts of current assets and liabilities in the
financial statements to approximate the fair value for these financial
instruments, because of the relatively short period of time between origination
of the instruments and their expected realization or payment. The carrying
amount of the lines of credit approximates fair value because the obligations
bear interest at a floating rate. The carrying amount of long-term debt to
certain stockholders approximated fair value because the then current effective
interest rates reflected the market rate for unsecured debt with similar terms
and remaining maturities.
Excess Cash
The Company's domestic cash balances are generally utilized to pay its bank line
of credit. International cash balances are maintained in liquid cash accounts
and are utilized to fund daily operations.
Major Customers
One customer accounted for 14%, 8%, and 6% of the Company's net revenues
for the years ended December 31, 2004, 2003, and 2002, respectively. This
customer also accounted for approximately 29%, 13%, and 4% of accounts
receivable at December 31, 2004, 2003, and 2002, respectively.
In addition, approximately 16%, 17%, and 24% of net revenues for the years ended
December 31, 2004, 2003, and 2002, respectively, resulted from merchandising
services performed for manufacturers and others in stores operated by Kmart.
These customers also accounted for approximately 22% of accounts receivable at
December 31, 2004. While the Company's customers and the resultant contractual
F-11
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
relationships are with various manufacturers and not Kmart, a significant
reduction of this retailer's stores or cessation of this retailer's business
would negatively impact the Company.
Another customer, a division of a major retailer, accounted for 26%, 30%, and
26% of the Company's net revenues for the years ended December 31, 2004, 2003,
and 2002, respectively. This customer also accounted for approximately 4%, 30%,
and 43% of accounts receivable at December 31, 2004, 2003, and 2002,
respectively. On August 2, 2004, this customer was sold by its parent.
As discussed above, the Company does a significant amount of business with one
customer and performs a significant amount of services in Kmart. The loss of
this customer or the loss of Kmart related business and the failure to attract
new large customers, could significantly decrease the Company's revenues and
such decreased revenues could have a material adverse effect on the Company's
business, results of operations and financial condition.
Foreign Currency Rate Fluctuations
The Company has foreign currency exposure associated with its international
wholly owned subsidiaries, 51% owned joint venture subsidiaries and 50% owned
joint ventures. In 2004, these exposures are primarily concentrated in the
Canadian dollar, South African rand and Japanese yen. At December 31, 2004,
international assets totaled $2.8 million and international liabilities totaled
$3.8 million. For 2004, international revenues totaled $8.2 million and the
Company's share of the net losses was approximately $500,000.
Interest Rate Fluctuations
At December 31, 2004 the Company's outstanding debt totaled $5.0 million, which
consisted of domestic variable-rate (6.0%) debt of $4.1 million and
international variable rate (1.4%) debt of $0.9 million. Based on 2004 average
outstanding borrowings under variable-rate debt, a one-percentage point increase
in interest rates would negatively impact annual pre-tax earnings and cash flows
by approximately $50,000.
Income Taxes
Deferred tax assets and liabilities represent the future tax return consequences
of certain timing differences that will either be taxable or deductible when the
assets and liabilities are recovered or settled. Deferred taxes are also
recognized for operating losses that are available to offset future taxable
income and tax credits that are available to offset future income taxes. In the
event the future consequences of differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities result in a net
deferred tax asset, an evaluation is required of the probability of being able
to realize the future benefits indicated by such asset. A valuation allowance is
provided when it is more likely than not that some portion or the entire
deferred tax asset will not be realized.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation, requires disclosure of the fair value method of accounting
for stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. The Company has chosen, under the provisions of SFAS No. 123, to
continue to account for employee stock-based
F-12
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
transactions under Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees.
Under the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS 148, no compensation cost has been recognized
for the stock option grants to Company employees. Compensation cost for the
Company's option grants to Company employees has been determined based on the
fair value at the grant date consistent with the provisions of SFAS No. 123, the
Company's net (loss) income and pro forma net (loss) income per share from
continuing operations would have been reduced to the adjusted amounts indicated
below (in thousands, except per share data):
Twelve Months Ended December 31,
----------------------------------------------
2004 2003 2002
----------------------------------------------
Net (loss) income, as reported $ (12,268) $ (539) $ 5,298
Stock based employee compensation expense
under the fair market value method 454 1,005 1,844
----------------------------------------------
Pro forma net (loss) income $ (12,722) $ (1,544) $ 3,454
Basic and diluted net (loss) income per share, as
reported $ (0.65) $ (0.03) $ 0.28
Basic and diluted net (loss) income per share, pro forma $ (0.67) $ (0.08) $ 0.18
The pro forma effect on net (loss) income is not representative of the pro forma
effect on net (loss) income in future years because the options vest over
several years and additional awards may be made in the future.
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0% for all years; volatility factor of expected
market price of common stock of 150%, 154%, and 172% for 2004, 2003, and 2002,
respectively; risk-free interest rate of 4.23%, 4.27%, and 4.03%; and expected
lives of six years.
Net (Loss) Income Per Share
Basic net (loss) income per share amounts are based upon the weighted average
number of common shares outstanding. Diluted net (loss) income per share amounts
are based upon the weighted average number of common and potential common shares
outstanding except for periods in which such potential common shares are
anti-dilutive. Potential common shares outstanding include stock options and are
calculated using the treasury stock method.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-13
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
Goodwill
The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, in the first quarter of 2002. Therefore,
goodwill is no longer amortized but is subject to annual impairment tests in
accordance with that Statement. At June 30, 2004, the Company performed the
required impairment test discussed in FAS 142. The Company calculated the fair
value of each business unit for which goodwill was recorded to determine if
there was an impairment. The fair value of each unit was based upon the estimate
of the discounted cash flow generated by the respective business unit. As a
result of these calculations, it was determined that there were impairments to
the goodwill associated with the PIA Acquisition on July 8, 1999 and acquisition
of the Company's Canadian subsidiary in June 2003. Therefore, the Company
recorded an impairment charge of approximately $8.4 million (see Note 3 -
Impairment Charges).
Changes to goodwill for the years ended December 31, 2004, 2003, and 2002 were
as follows:
2004 2003 2002
--------------- ---------------- ----------------
Beginning of the year $ 8,749 $ 7,858 $ 8,357
Impairment charges (8,350) - -
Changes in deferred tax assets related to use
of PIA net operating losses acquired - - (499)
Adjustment to merger related and restructure
liabilities - (89) -
Acquisitions 399 980 -
--------------- ---------------- ----------------
End of the year $ 798 $ 8,749 $ 7,858
=============== ================ ================
Translation of Foreign Currencies
The financial statements of the foreign entities consolidated into SPAR Group,
Inc. consolidated financial statements were translated into United States dollar
equivalents at exchange rates as follows: balance sheet accounts for assets and
liabilities at year-end rates and equity and the income statement accounts at
average exchange rates for the year. The resulting translation gains and losses
are reflected in accumulated other comprehensive gain or losses in the statement
of stockholders' equity. Foreign currency transaction gains and losses are
reflected in net earnings.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment,
(SFAS 123R). SFAS 123R addresses the accounting for share-based payments to
employees, including grants of employee stock options. Under the new standard,
companies will no longer be able to account for share-based compensation
transactions using the intrinsic method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees. Instead, the Company will be required
to account for such transactions using a fair-value method and recognize the
expense in the consolidated statement of income. SFAS 123R will be effective for
periods beginning after June 15, 2005 and allows, but does not require, the
Company to restate the full fiscal year of 2005 to reflect the impact of
expensing share-based payments under SFAS 123R. The Company has not yet
determined which fair-value method and transitional provision it will follow.
See Note 2 - Stock-Based Compensation for the pro forma impact on net income and
net income per share from calculating stock-based compensation costs under the
fair value alternative of SFAS
F-14
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
2. Summary of Significant Accounting Policies (continued)
123. However, the calculation of compensation cost for share-based payment
transactions after the effective date of SFAS 123R may be different from the
calculation of compensation cost under SFAS 123, but such differences have not
yet been quantified.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the 2004 presentation.
3. Impairment Charges
Goodwill
During 2004, in accordance with the requirements of SFAS 142, the Company
determined that there were impairments of the goodwill amounts associated with
certain of its reporting entities.
In April 2004, the Company's largest customer announced that they signed
definitive agreements for the sale of its business to two purchasers. The sale
was completed on August 2, 2004. This customer accounted for 26%, 30%, and 26%
of the Company's net revenues for the twelve months ended December 31, 2004,
2003, and 2002, respectively and was the last remaining profitable business
related to the PIA Acquisition on July 8, 1999. At June 30, 2004, the Company
had $7.6 million of goodwill remaining that was related to the PIA Acquisition.
As a result of the loss of this major client, the Company does not expect a
positive cash flow from this business unit. Therefore, the Company has recorded
an impairment of the PIA related goodwill resulting in a non-cash charge of $7.6
million to the results of the operations for 2004.
In June 2003, the Company began its Canadian operations through the acquisition
of substantially all of the business and assets of Impulse Marketing Services,
Inc. In connection with this acquisition, the Company recorded goodwill of
$712,000. At the time of the acquisition, it was expected that the Canadian
subsidiary would be profitable. However, the Canadian subsidiary has operated at
a loss since its acquisition. As a result of the continued losses and the
failure to attract new customers the Company does not expect to receive positive
cash flow from this unit. Therefore, the Company has recorded an impairment of
the related goodwill resulting in a non-cash charge of $712,000 for 2004.
Capitalized Internal Use Software Development Costs
Historically, the Company has capitalized costs of computer software developed
for internal use. Some of the costs capitalized were associated with certain
clients to whom the Company no longer provides merchandising services. As a
result of the loss of these clients, the Company recorded an impairment charge
for the net book value of internally developed software costs of approximately
$442,000 for 2004.
Other Assets and Liabilities
Also, in connection with the PIA Acquisition, certain tax deferred assets
related to the PIA net operating loss carry forward benefits were recognized.
The Company also recorded as an impairment charge, a $750,000 valuation
allowance on these deferred tax assets.
F-15
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
3. Impairment Charges (continued)
The Company had approximately $2.1 million accrued for restructure costs and PIA
Acquisition related costs. As a result of the PIA business impairment, the
Company evaluated these accruals and determined that only $0.4 million is
required. The Company applied the $1.7 million ($1.4 million net of tax effect)
reduction in PIA related acquisition liabilities against the related goodwill
thereby reducing the impairment charges recognized for 2004.
In addition to the above, the Company has recorded an impairment of other assets
totaling $68,000 for 2004.
The above net impairment of $8.1 million is shown in the accompanying
consolidated statement of operations in 2004 as "Impairment charges".
4. Supplemental Balance Sheet Information
Accounts receivable, net, consists of the following (in thousands):
December 31,
------------------------------------
2004 2003
------------------------------------
Trade $ 8,178 $ 10,333
Unbilled 3,600 4,551
Non-trade 290 21
------------------------------------
12,068 14,905
Less:
Allowance for doubtful accounts (761) (515)
Sales allowances - (448)
------------------------------------
$ 11,307 $ 13,942
====================================
Property and equipment consists of the following (in thousands):
December 31,
------------------------------------
2004 2003
------------------------------------
Equipment $ 5,397 $ 4,784
Furniture and fixtures 547 550
Leasehold improvements 138 141
Capitalized software development costs 1,629 2,128
------------------------------------
7,711 7,603
Less accumulated depreciation and amortization 6,175 5,504
------------------------------------
$ 1,536 $ 2,099
====================================
December 31,
-------------------------------------
Prepaid expenses and other current assets (in thousands): 2004 2003
-------------------------------------
Prepaid insurance $ 214 $ 245
Tax refund due 62 244
Prepaid rents 49 70
Other 332 99
-----------------------------------
$ 657 $ 658
=====================================
F-16
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
4. Supplemental Balance Sheet Information (continued)
December 31,
-------------------------------------
Accrued expenses and other current liabilities (in thousands): 2004 2003
-------------------------------------
Merger related payables $ 450 $ 1,495
STIMULYS cash deposits - 794
SPGI Revolver - 740
Accrued medical expenses 225 100
Taxes payable 345 139
Accrued accounting and legal expenses 192 219
Accrued salaries payable 328 241
Other 851 353
-------------------------------------
$ 2,391 $ 4,081
=====================================
5. Lines of Credit
In January 2003, the Company and Webster Business Credit Corporation, then known
as Whitehall Business Credit Corporation ("Webster"), entered into the Third
Amended and Restated Revolving Credit and Security Agreement (as amended,
collectively, the "Credit Facility"). The Credit Facility provided a $15.0
million revolving credit facility that matures on January 23, 2006. The Credit
Facility allowed the Company to borrow up to $15.0 million based upon a
borrowing base formula as defined in the agreement (principally 85% of
"eligible" accounts receivable). On May 17, 2004, the Credit Facility was
amended to among other things, reduce the revolving credit facility from $15.0
million to $10.0 million, change the interest rate and increase reserves against
collateral. The amendment provides for interest to be charged at a rate based in
part upon the earnings before interest, taxes, depreciation and amortization.
The average interest rate for 2004 was 5.1%. At December 31, 2004, the Credit
Facility bears interest at Webster's "Alternative Base Rate" plus 0.75% (a total
of 6.0% per annum), or LIBOR plus 3.25%. The Credit Facility is secured by all
of the assets of the Company and its domestic subsidiaries. In connection with
the May 17, 2004, amendment, Mr. Robert Brown, a Director, the Chairman,
President and Chief Executive Officer and a major stockholder of the Company and
Mr. William Bartels, a Director, the Vice Chairman and a major stockholder of
the Company, provided personal guarantees totaling $1.0 million to Webster. On
August 20, 2004, the Credit Facility was further amended in connection with the
waiver of certain covenant violations (see below). The amendment, among other
things, reduced the revolving credit facility from $10.0 million to $7.0
million, changed the covenant compliance testing for certain covenants from
quarterly to monthly and reduced certain advance rates. On November 15, 2004,
the Credit Facility was further amended to delete any required minimum Net Worth
and minimum Fixed Charge Coverage Ratio covenant levels for the period ending
December 31, 2004. The amendments did not change the future covenant levels. The
Credit Facility also limits certain expenditures including, but not limited to,
capital expenditures and other investments.
The Company was in violation of certain monthly covenants at December 31, 2004,
and expects to be in violation at future measurement dates. Webster issued a
waiver for the December 31, 2004 covenant violations. However, there can be no
assurances that Webster will issue such waivers in the future.
Because of the requirement to maintain a lock box arrangement with Webster,
Webster's ability to invoke a subjective acceleration clause at its discretion,
and the expected future covenant violations, borrowings under the Credit
Facility are classified as current at December 31, 2004 and 2003, in accordance
with EITF 95-22. Balance Sheet Classification of Borrowings Outstanding Under
Revolving Credit Agreements That Include Both a Subjective Acceleration Clause
and a Lock-Box Agreement.
F-17
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
5. Lines of Credit (continued)
The revolving loan balances outstanding under the Credit Facility were $4.1
million at December 31, 2004, and December 31, 2003. There were letters of
credit outstanding under the Credit Facility of $0.7 million at December 31,
2004, and December 31, 2003. As of December 31, 2004, the SPAR Group had unused
availability under the Credit Facility of $1.4 million out of the remaining
maximum $2.2 million unused revolving line of credit after reducing the
borrowing base by outstanding loans and letters of credit.
In 2001, the Japanese joint venture SPAR FM Japan, Inc. entered into a revolving
line of credit arrangement with Japanese banks for 300 million yen or $2.7
million (based upon the exchange rate at September 30, 2004). At September 30.
2004, SPAR FM Japan, Inc. had 100 million yen or approximately $900,000 loan
balance outstanding under the line of credit. The line of credit is effectively
guarantied by the Company and the joint venture partner, Paltac Corporation. The
average interest rates on the borrowings under the Japanese line of credit for
its short-term bank loans at September 30, 2004 and 2003 were 1.375% and 1.375%
per annum, respectively.
6. Income Taxes
The provision for income tax expense from continuing operations is summarized as
follows (in thousands):
December 31,
----------------------------------------------------------
2004 2003 2002
----------------- ------------------ -------------------
Current $ 103 $ 189 $ 476
Deferred 750 (131) 2,522
----------------- ------------------ -------------------
$ 853 $ 58 $ 2,998
================= ================== ===================
The provision for income taxes from continuing operations is different from that
which would be obtained by applying the statutory federal income tax rate to
income before income taxes. The items causing this difference are as follows (in
thousands):
December 31,
--------------------------------------------------------
2004 2003 2002
--------------- ---------------- ----------------
(Benefit) provision for income taxes at
federal statutory rate $ (3,911) $ (77) $ 2,821
State income taxes, net of federal benefit 117 95 175
Permanent differences 1,613 41 (48)
Change in valuation allowance 3,013 - -
Other 21 (1) 50
--------------- ---------------- ----------------
Provision for income taxes $ 853 $ 58 $ 2,998
=============== ================ ================
F-18
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
6. Income Taxes (continue)
Deferred taxes consist of the following (in thousands):
December 31,
------------------------------------
2004 2003
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 5,230 $ 3,876
Restructuring 266 309
Deferred revenue 384 -
SIM reserve against loan commitment 135 304
Allowance for doubtful accounts and other receivable 288 323
Other 455 559
Valuation allowance (6,139) (3,126)
------------------------------------
Total deferred tax assets 619 2,245
Deferred tax liabilities:
Capitalized software development costs 619 506
------------------------------------
Total deferred tax liabilities 619 506
------------------------------------
Net deferred tax assets $ - $ 1,739
====================================
At December 31, 2004, the Company has net operating loss carryforwards (NOLs) of
$10.2 million, related to the PIA Acquisition available to reduce future federal
taxable income. The $10.2 million PIA related net operating loss carryforwards
begin to expire in the year 2012. Section 382 of the Internal Revenue Code
restricts the annual utilization of the NOLs incurred prior to a change in
ownership. Such a change in ownership had occurred in 1999, thereby restricting
the NOL's prior to such date available to the Company to approximately $657,500
per year. In addition, the Company has NOLs related to its current losses
totaling $4.1 million. The $4.1 million net operating loss carryfowards begin to
expire in the year 2023.
As a result of the loss of several significant clients, current year losses and
the lack of certainty of a return to profitably in the next twelve months, the
Company has established a valuation allowance equal to the total of its net
deferred tax assets of $6.1 million.
The Company does not provide for U.S. income taxes on the undistributed earnings
of its foreign subsidiaries since, at the present time, management considers
them to be permanently invested in the subsidiary.
F-19
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
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 require the Company to
pay its share of any increases in operating expenses and real estate taxes. Rent
expense was approximately $1.0 million, $0.9 million, and $1.0 million for 2004,
2003, and 2002, respectively. At December 31, 2004, future minimum commitments
under all non-cancelable operating lease arrangements are as follows (in
thousands):
2005 $ 776
2006 569
2007 82
2008 40
2009 1
------------------
Total $ 1,468
===================
International Commitments
The Company's international model is to partner with local merchandising
companies and combine their knowledge of the local market with the Company's
proprietary software and expertise in the merchandising business. In 2001, the
Company established its first joint venture and has continued this strategy. As
of this filing, the Company is currently operating in Japan, Canada, Turkey,
South Africa and India. The Company also announced the establishment of joint
ventures in Romania and China.
Certain of these joint ventures and joint venture subsidiaries are marginally
profitable while others are operating at a loss. None of these entities have
excess cash reserves. In the event of continued losses, the Company may be
required to provide additional cash infusions into these joint ventures and
joint venture subsidiaries.
Legal Matters
Safeway Inc. ("Safeway"), filed a Complaint against the PIA
Merchandising Co., Inc. ("PIA Co."), a wholly owned subsidiary of the Company,
and Pivotal Sales Company ("Pivotal"), a wholly owned subsidiary of PIA Co., and
SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001, and has
subsequently amended it. Safeway alleges causes of action for breach of
contract, breach of implied contract, breach of fiduciary duty, conversion,
constructive fraud, breach of trust, unjust enrichment, and accounting fraud.
Safeway has most recently alleged monetary damages in the principal sum of
$3,000,000 and probable interest of $1,000,000 and has also demanded unspecified
costs. PIA Co., Pivotal and SGRP filed cross-claims against Safeway on or about
March 11, 2002, and amended them on or about October 15, 2002, alleging causes
of action by them against Safeway for breach of contract, interference with
economic relationship, unfair trade practices and unjust enrichment and seeking
damages and injunctive relief. Mediation between the parties occurred in 2004,
but did not result in a settlement. PIA Co., Pivotal and SGRP are vigorously
defending Safeway's allegations. It is not possible at this time to determine
the likelihood of the outcome of this lawsuit. However, if Safeway prevails
respecting its allegations, and PIA Co., Pivotal and SGRP lose on their
cross-claims and counterclaims, that result could have a material adverse effect
on the Company. The Company anticipates that this matter will be resolved in
2005.
In addition to the above, the Company is a party to various other legal actions
and administrative proceedings arising in the normal course of business. In the
opinion of Company's management, disposition
F-20
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
7. Commitments and Contingencies (continued)
of these other matters are not anticipated to have a material adverse effect on
the financial position, results of operations or cash flows of the Company.
8. Treasury Stock
The Company initiated a share repurchase program in 2002, which allowed for
repurchase of up to 100,000 shares. In 2003, the Board of Directors authorized
the repurchase of an additional 122,000 shares increasing the total to 222,000
shares.
The following table summarizes the Company's treasury stock activity for the
years 2004 and 2003.
Quantity Amount
------------------------------------
Treasury Stock, January 1, 2003 9,783 $ 30,073
Purchases 211,315 923,714
Used to fulfill:
Employee Stock Purchases (9,848) (30,297)
Options Exercised (135,194) (539,383)
------------------------------------
Treasury Stock, December 31, 2003 76,056 384,107
Used to fulfill:
Options Exercised (54,148) (276,007)
------------------------------------
Treasury Stock, December 31, 2004 21,908 $ 108,100
====================================
9. Employee Benefits
Stock Purchase Plans
The Company has Employee and Consultant Stock Purchase Plans (the "SP Plans").
The SP Plans allow employees and consultants of the Company to purchase common
stock without having to pay any commissions on the purchases. On August 8, 2002,
the Company's Board of Directors approved a 15% discount for employee purchases
and recommended that its affiliates (see Note 10 - Related-Party Transactions)
approve a 15% cash bonus for affiliate consultant purchases. The maximum amount
that any employee or consultant can contribute to the SP Plans per quarter is
$6,250, and the total number of shares reserved by the Company for purchase
under the SP Plans is 500,000.
Shares purchased by employees and consultants under the SP Plans were 43,023,
22,561, and 10,104 for 2004, 2003, and 2002, respectively.
The Company's expense as a result of the 15% discount offered to employees and
consultants were approximately $10,000, $11,000, and $4,000 for 2004, 2003, and
2002, respectively.
Retirement/Pension Plans
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible
employees. Employer contributions were approximately $97,000, $87,000, and
$117,000 for 2004, 2003, and 2002, respectively.
F-21
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
9. Employee Benefits (continued)
In 2003 and 2002, certain of the Company's employees were covered by
union-sponsored, collectively bargained, multi-employer pension plans. Pension
expense related to these plans was approximately $32,000 and $60,000 for the
years ended December 31, 2003 and 2002, respectively. There were no employees
under union contract in 2004.
10. Related-Party Transactions
Mr. Robert G. Brown, a Director, the Chairman, President and Chief Executive
Officer and a major stockholder of the Company, and Mr. William H. Bartels, a
Director, the Vice Chairman and a major stockholder of the Company, are
executive officers and the sole stockholders and directors of SPAR Marketing
Services, Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI"), and SPAR
Infotech, Inc. ("SIT").
SMS and SMSI provided approximately 99% of the Company's field representatives
(through its independent contractor field force) and approximately 92% of the
Company's field management at a total cost of approximately $24.0 million, $36.0
million, and $30.5 million for 2004, 2003, and 2002, respectively. Pursuant to
the terms of the Amended and Restated Field Service Agreement dated as of
January 1, 2004, SMS provides the services of SMS's field force of approximately
6,300 independent contractors to the Company. Pursuant to the terms of the
Amended and Restated Field Management Agreement dated as of January 1, 2004,
SMSI provides approximately 50 full-time national, regional and district
managers to the Company. For those services, the Company has agreed to reimburse
SMS and SMSI for all of their costs of providing those services and to pay SMS
and SMSI each a premium equal to 4% of their respective costs, except that for
2004 SMSI agreed to concessions that reduced the premium paid by approximately
$640,000 for 2004. Total net premiums (4% of SMS and SMSI costs less 2004
concessions) paid to SMS and SMSI for services rendered were approximately
$320,000, $1,350,000, and $1,100,000 for 2004, 2003, and 2002, respectively. The
Company has been advised that Messrs. Brown and Bartels are not paid any
salaries as officers of SMS or SMSI so there were no salary reimbursements for
them included in such costs or premium. However, since SMS and SMSI are
"Subchapter S" corporations, Messrs. Brown and Bartels benefit from any income
of such companies allocated to them.
SIT provided substantially all of the Internet computer programming services to
the Company at a total cost of approximately $1,170,000, $1,610,000, and
$1,630,000 for 2004, 2003, and 2002, respectively. SIT provided approximately
34,000, 47,000, and 46,000 hours of Internet computer programming services to
the Company for 2004, 2003, and 2002, respectively. Pursuant to the Amended and
Restated Programming and Support Agreement dated as of January 1, 2004, SIT
continues to provide programming services to the Company for which the Company
has agreed to pay SIT competitive hourly wage rates for time spent on Company
matters and to reimburse the related out-of-pocket expenses of SIT and its
personnel. The average hourly billing rate was $34.71, $34.24, and $35.10 for
2004, 2003, and 2002, respectively. The Company has been advised that no hourly
charges or business expenses for Messrs. Brown and Bartels were charged to the
Company by SIT for 2004. However, since SIT is a "Subchapter S" corporation,
Messrs. Brown and Bartels benefit from any income of such company allocated to
them.
F-22
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
10. Related-Party Transactions (continued)
Through arrangements with the Company, SMS, SMSI and SIT participate in various
benefit plans, insurance policies and similar group purchases by the Company,
for which the Company charges them their allocable shares of the costs of those
group items and the actual costs of all items paid specifically for them. All
transactions between the Company and the above affiliates are paid and/or
collected by the Company in the normal course of business.
The following transactions occurred between the Company and the above affiliates
(in thousands):
Twelve Months Ended December 31,
-------------------------------------------------
2004 2003 2002
-------------------------------------------------
Services provided by affiliates:
Independent contractor services (SMS) $ 19,944 $ 28,411 $ 23,262
=================================================
Field management services (SMSI) $ 4,502 $ 7,600 $ 7,280
=================================================
Internet and software program
consulting services (SIT) $ 1,172 $ 1,607 $ 1,626
=================================================
Accrued expenses due to affiliates (in
thousands): December 31,
2004 2003
---------------------------------
SPAR Marketing Services, Inc. $ 987 $ 1,091
=================================
In addition to the above, through the services of Affinity Insurance, Ltd., the
Company purchased insurance coverage for its casualty and property insurance
risk for approximately $1.1 million for each of the three years ended December
31, 2004, 2003, and 2002. The Company's CEO and Vice Chairman own, through SMSI,
a minority (less than 5%) equity interest in Affinity.
11. Stock Options
The Company has four stock option plans: the Amended and Restated 1995 Stock
Option Plan ("1995 Plan"), the 1995 Director's Plan ("Director's Plan"), the
Special Purpose Stock Option Plan ("Special Purpose Plan"), and the 2000 Stock
Option Plan ("2000 Plan").
The 1995 Plan provided for the granting of either incentive or nonqualified
stock options to specific employees, consultants, and directors of the Company
for the purchase of up to 3,500,000 shares of the Company's common stock. The
options had a term of ten years from the date of issuance, except in the case of
incentive stock options granted to greater than 10% stockholders for which the
term was five years. The exercise price of nonqualified stock options must have
been equal to at least 85% of the fair market value of the Company's common
stock at the date of grant. Since 2000, the Company has not granted any new
options under this plan. During 2004, 1,500 options to purchase shares of the
Company's common stock were exercised and options to purchase 26,625 shares of
the Company's stock were cancelled under this plan. At December 31, 2004,
options to purchase 15,125 shares of the Company's common stock remain
outstanding under this plan. The 1995 Plan was superseded by the 2000 Plan with
respect to all new options issued.
F-23
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
11. Stock Options (continued)
The Director's Plan was a stock option plan for non-employee directors and
provided for the purchase of up to 120,000 shares of the Company's common stock.
Since 2000, the Company has not granted any new options under this plan. During
2004, no options to purchase shares of the Company's common stock were exercised
under this plan. At December 31, 2004, 20,000 options to purchase shares of the
Company's common stock remained outstanding under this plan. The Director's Plan
has been replaced by the 2000 Plan with respect to all new options issued.
On July 8, 1999, in connection with the merger, the Company established the
Special Purpose Plan of PIA Merchandising Services, Inc. to provide for the
issuance of substitute options to the holders of outstanding options granted by
SPAR Acquisition, Inc. There were 134,114 options granted at $0.01 per share.
Since July 8, 1999, the Company has not granted any new options under this plan.
During 2004, 21,000 options to purchase shares of the Company's common stock
were exercised under this plan. At December 31, 2004, options to purchase 4,750
shares of the Company's common stock remain outstanding under this plan.
On December 4, 2000, the Company adopted the 2000 Plan, as the successor to the
1995 Plan and the Director's Plan with respect to all new options issued. The
2000 Plan provides for the granting of either incentive or nonqualified stock
options to specified employees, consultants, and directors of the Company for
the purchase of up to 3,600,000 (less those options still outstanding under the
1995 Plan or exercised after December 4, 2000 under the 1995 Plan). The options
have a term of ten years, except in the case of incentive stock options granted
to greater than 10% stockholders for whom the term is five years. The exercise
price of nonqualified stock options must be equal to at least 85% of the fair
market value of the Company's common stock at the date of grant (although
typically the options are issued at 100% of the fair market value), and the
exercise price of incentive stock options must be equal to at least the fair
market value of the Company's common stock at the date of grant. During 2004,
options to purchase 476,417 shares of the Company's common stock were granted,
options to purchase 53,302 shares of the Company's common stock were exercised
and options to purchase 1,345,542 shares of the Company's stock were voluntarily
surrendered and cancelled under this plan. At December 31, 2004, options to
purchase 1,251,383 shares of the Company's common stock remain outstanding under
this plan and options to purchase 1,618,719 shares of the Company's common stock
were available for grant under this plan.
F-24
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
11. Stock Options (continued)
The following table summarizes stock option activity under the Company's plans:
Weighted Average
Shares Exercise Price
----------------------------------------
Options outstanding, December 31, 2001 2,483,727 $ 1.42
Granted 332,792 $ 2.01
Exercised (230,463) 1.23
Canceled or expired (487,875) 5.05
---------------------
Options outstanding, December 31, 2002 2,098,181 $ 1.52
Granted 401,020 $ 3.51
Exercised (143,641) 1.17
Canceled or expired (92,750) 2.38
---------------------
Options outstanding, December 31, 2003 2,262,810 $ 1.85
Granted 476,417 $ 1.47
Exercised (75,802) 0.49
Canceled or expired (1,372,167) 6.18
---------------------
Options outstanding, December 31, 2004 1,291,258 $ 1.66
Option price range at end of year $0.01 to $14.00
2004 2003 2002
--------------------------------------------------
Grant Date weighted average fair value of
options granted during the year $ 1.43 $ 2.33 $ 1.60
F-25
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
11. Stock Options (continued)
The following table summarizes information about stock options outstanding at
December 31, 2004:
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Weighted
Number Average Weighted Number
Outstanding at Remaining Average Exercisable at Weighted
Range of December 31, 2004 Contractual Life Exercise December 31, Average
Exercise Prices Price 2004 Exercise Price
-------------------- ---------------------------------------------------- --------------------------------
Less than $1.00 273,536 8.1 years $ 0.71 230,336 $ 0.70
$1.01 - $2.00 783,347 7.0 years 1.31 697,972 1.30
$2.01 - $4.00 192,875 8.4 years 2.75 61,196 2.88
Greater than $4.00 41,500 5.1 years 9.37 41,126 9.42
------------------ -----------------
Total 1,291,258 1,030,630
================== =================
In 2004, the Company recorded an expense of approximately $103,000 under the
provision of SFAS No. 123 dealing with stock option grants to non-employees for
stock option grants that were awarded to the employees of the Company's
affiliates. The Company determines the fair value of the options granted to
non-employees using the Black-Scholes valuation model and expenses that value
over the service period. Until an option is vested, the fair value of the option
continues to be updated through the vesting date. The options granted have a ten
(10) year life and vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
12. Notes Payable to Certain Stockholders
In April 2003, all previously outstanding amounts due certain stockholders under
certain notes bearing interest at 8.0% were paid in full.
13. Geographic Data
A summary of the Company's net revenue, operating (loss) income and long lived
assets by geographic area as of and for the year ended December 31, is as
follows (in thousands):
Twelve Months Ended December 31,
----------------------------------------------
2004 2003 2002
----------------------------------------------
Net revenue:
United States $ 43,163 $ 64,305 $ 69,612
International 8,207 554 -
----------------------------------------------
Total net revenue $ 51,370 $ 64,859 $ 69,612
==============================================
F-26
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
13. Geographic Data (continued)
Twelve Months Ended December 31,
----------------------------------------------
2004 2003 2002
----------------------------------------------
Operating (loss) income:
United States $ (10,559) $ 893 $ 9,100
International (1,477) (868) (467)
----------------------------------------------
Total operating (loss) income $ (12,036) $ 25 $ 8,633
==============================================
December 31,
-------------------------------------
Long lived assets: 2004 2003
-------------------------------------
United States $ 2,484 $ 11,632
International 486 576
-------------------------------------
Total long lived assets $ 2,970 $ 12,208
=====================================
International revenues disclosed above were based upon revenues reported by the
Company's foreign subsidiaries and joint ventures. No one international
geographic market is greater than 10% of consolidated net revenue for the twelve
months ended December 31, 2004.
14. Restructuring Charges
In 1999, in connection with the PIA Acquisition, the Company's Board of
Directors approved a plan to restructure the operations of the PIA Companies.
Restructuring costs were composed of committed costs required to integrate the
SPAR Companies' and the PIA Companies' field organizations and the consolidation
of administrative functions to achieve beneficial synergies and costs savings.
At June 30, 2004, the Company evaluated its restructuring reserves and
determined that certain restructuring reserves were no longer necessary (see
Note 3 - Impairment Charges).
In July 2004, as a result of the loss of several significant customers and the
pending sale of the Company's largest customer, the Company entered into a plan
to restructure and reduce its field force, as well as, its selling, general and
administrative cost structure to reflect its lower revenue base. These
reductions consist of personnel reductions, personnel related expenses and
office closings. As a result of the July restructuring, the Company expensed
approximately $480,000 in the quarter ending September 30, 2004, approximately
$230,000 for severance benefits and approximately $250,000 for office leases
that the Company ceased using. At December 31, 2004, the Company had
approximately $250,000 reserved for future restructure payments that are
expected to be paid in 2005. The Company records restructure expenses in the
selling, general and administrative section of its consolidated operating
statements.
F-27
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2004
14. Restructuring Charges (continued)
The following table displays a roll forward of the liabilities for restructuring
charges from January 1, 2001 to December 31, 2004 (in thousands):
Equipment Office
Employee Lease Lease
Separation Settlements Settlements Total
--------------- ---------------- ---------------- --------------
January 1, 2001 balance $ 487 $ 2,770 $ 544 $ 3,801
Adjustments in restructuring charges (132) - - (132)
2001 payments (355) (1,008) (124) (1,487)
--------------- ---------------- ---------------- --------------
December 31, 2001 balance $ - $ 1,762 $ 420 $ 2,182
2002 payments - (593) - (593)
--------------- ---------------- ---------------- --------------
December 31, 2002 balance $ - $ 1,169 $ 420 $ 1,589
Adjustments in restructuring charges - 98 (185) (87)
2003 payments (817) (817)
--------------- ---------------- ---------------- --------------
December 31, 2003, balance $ - $ 450 $ 235 $ 685
Impairment charge (see Note 3 - Impairment
Charges) - (450) (235) (685)
2004 restructure plan 230 - 250 480
2004 payments (230) - - (230)
--------------- ---------------- ---------------- --------------
December 31, 2004, balance $ - $ - $ 250 $ 250
=============== ================ ================ ==============
15. Net (Loss) Income Per Share
The following table sets forth the computations of basic and diluted net (loss)
income per share (in thousands, except per share data):
Twelve Months Ended December 31,
--------------------------------------------------
2004 2003 2002
--------------------------------------------------
Numerator:
Net (loss) income $ (12,268) $ (539) $ 5,298
Denominator:
Shares used in basic net (loss) income per share
calculation 18,859 18,855 18,761
Effect of diluted securities:
Employee stock options - - 387
--------------------------------------------------
Shares used in diluted net (loss) income per
share calculations 18,859 18,855 19,148
==================================================
Basic and diluted net (loss) income per common
share: $ (0.65) $ (0.03) $ 0.28
The computation of dilutive loss per share excluded anti-dilutive stock options
to purchase approximately 430,000 and 657,000 shares as of December 31, 2004 and
2003, respectively.
F-28
16. Quarterly Financial Data (Unaudited)
Quarterly data for 2004 and 2003 was as follows (in thousands, except earnings
per share data):
Quarter
-------------------------------------------------------------
First Second Third Fourth
-------------------------------------------------------------
Year Ended December 31, 2004:
Net revenues $ 12,803 $ 11,932 $ 10,683 $ 15,952
Gross profit 4,109 3,115 3,720 6,782
-------------------------------------------------------------
Net (loss) income $ (790) $ (12,177) $ 210 $ 489
=============================================================
Basic/diluted net (loss) income per
common share $ (0.04) $ (0.65) $ 0.01 $ 0.03
=============================================================
Year Ended December 31, 2003:
Net revenues $ 18,738 $17,351 $ 16,615 $ 12,155
Gross profit 7,487 6,205 5,235 3,594
-------------------------------------------------------------
Net income (loss) $ 1,278 $ 608 $ (345) $ (2,080)
=============================================================
Basic/diluted net income (loss) per
common share $ 0.07 $ 0.03 $ (0.02) $ (0.11)
=============================================================
2004
The lost business and subsequent impairment charges were the primary factors for
the losses incurred in the first two quarters of 2004. However, primarily as a
result of the restructure plan initiated in the third quarter, the Company was
profitable in the second half of 2004.
2003
In the fourth quarter 2003, the Company experienced certain charges to revenue
and cost of sales that did not occur in 2004. These charges accounted for
approximately 50% of the loss in 2003 fourth quarter. The Company also
experienced lower revenues from per unit fee contracts in the fourth quarter
resulting from decreased retail sales of some of the Company's larger clients'
products, as well as the loss of a particular client earlier in the year.
F-29
SPAR Group, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(In thousands)
Balance at Charged to
Beginning of Costs and Balance at End
Period Expenses Deductions of Period
-----------------------------------------------------------------
Year ended December 31, 2004:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 515 $ 366 $ 120 (1) $ 761
Sales allowances $ 448 $ - $ 448 $ -
Year ended December 31, 2003:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 301 $ 377 $ 163 (1) $ 515
Sales allowances $ - $ 448 $ - $ 448
Year ended December 31, 2002:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 325 $ 262 $ 286 (1) $ 301
(1) Uncollectible accounts written off, net of recoveries
F-30