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(Mark One)
X
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year endedDecember 31, 2006 |
OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934 for the fiscal year ended December 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 for the transition period from _____ to ________
 | 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
(Exact name of registrant as specified in its charter)
| Delaware | 33-0684451 |
|---|---|
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
555 White Plains Road, Suite | 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)12(b) of the Act: Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [X]
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'sRegistrant’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. [ ]10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated“accelerated filer and large accelerated filer"filer” in Rule 12b-2 of the Exchange Act.). Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer[X]Filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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, 2005,2006, based on the closing price of the Common Stock as reported by the Nasdaq Capital Market on such date, was approximately $10,083,534.$4,645,410.
The number of shares of the Registrant'sRegistrant’s Common Stock outstanding as of December 31, 2005,2006, was 18,916,84718,934,182 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Portions of the Registrant’s definitive proxy statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of our fiscal year, for our Annual Meeting of Shareholders, presently scheduled to be held on May 24, 2007, are incorporated by reference into Part III of this Form 10-K.
Statements contained in this Annual Report on Form 10-K of SPAR Group, Inc. ("SGRP"(“SGRP”, and together with its subsidiaries, the "SPAR Group"“SPAR Group” or the "Company"“Company”), include "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act (collectively, the "Securities Laws"“Securities Laws”, including, in particular and without limitation, the statements contained in the discussions under the headings "Business"“Business”, "Risk
Factors"“Risk Factors” and "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations”. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the Company'sCompany’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'sCompany’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"“may”, "will"“will”, "expect"“expect”, "intend"“intend”, "believe"“believe”, "estimate"“estimate”, "anticipate"“anticipate”, "continue"“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 containing cautionary statements or 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 below (see Item 1A -– Risk Factors) 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 all such risk factors and other cautionary statements. 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, except as required by law.
The SPAR Group, Inc. (formerly known as PIA Marketing Services, Inc.), a Delaware corporation ("SGRP"(“SGRP”), and its subsidiaries (together with SGRP, the "SPAR Group"“SPAR Group” or the "Company"“Company”), is a supplier of merchandising and other marketing services throughout the United States and internationally. In 2002,Today the Company sold its Incentive Marketing Division, SPAR Performance Group, Inc.
("SPGI").operates in 12 countries whose population represents approximately 48% of the total world population. The Company'sCompany’s operations are currently divided into two divisions: the Domestic Merchandising Services Division and the International Merchandising Services Division. The Domestic Merchandising Services Division provides merchandising and marketing services, in-store event staffing, product sampling, Radio Frequency Identification ("RFID"(“RFID”) services, technology services and marketing research to manufacturers and retailers in the United States. The various services are primarily performed in mass merchandisers, electronics store chains, drug store chains and convenience and grocery stores. The International Merchandising Services Division was established in July 2000 and through its subsidiaries, the Company currently provides similar merchandising and marketing services through a wholly
owned subsidiary in Japan, Canada, through 51% owned joint venture subsidiaries in
India,Turkey, South Africa, TurkeyIndia, Romania, China, Lithuania, Latvia, Australia and Romania, and through 50% owned joint ventures in
Japan and China. In September 2005, the Company entered into a 51% owned joint
venture subsidiary in Lithuania which is project to begin operations in April
2006.New Zealand. The Company continues to focus on expanding its merchandising and marketing services business throughout the world.
Domestic Merchandising Services Division
The Company'sCompany’s Domestic Merchandising Services Division provides nationwide merchandising and other marketing services primarily on behalf of consumer product manufacturers and retailers at mass merchandisers, electronics store chains, drug store chains and grocery stores. Included in its clients 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
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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, RFID services, technology services and marketing research services.
International Merchandising Services Division
In July 2000, the Company established its International Merchandising Services Division, operating through aits wholly owned subsidiary, SPAR Group International, Inc. ("SGI"(“SGI”), to focus on expanding its merchandising and marketing services business worldwide. The Company has expanded its international business as follows:
| Date Established | Percent Ownership in | Location | |||
|---|---|---|---|---|---|
| May 2001 | 50% | Osaka, Japan | |||
| June 2003 | 100% | Toronto, Canada | |||
| July 2003 | 51% | Istanbul, Turkey | |||
| April 2004 | 51% | Durban, South Africa | |||
| April 2004 | 51% | New Delhi, India | |||
| December 2004 | 51% | Bucharest, Romania | |||
| February 2005 | 50% | Hong Kong, China | |||
| September 2005 | 51% | Siauliai, Lithuania | |||
| April 2006 | 51% | Melbourne, Australia |
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"(“SPGI”). The Company explored various alternatives for the sale of SPGI and subsequently sold the business to SPGI'sSPGI’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, which it had established in March 2000 for the purpose of marketing its proprietary Internet-based computer software.
Domestic Merchandising Services Division
According to industry estimates over two billion dollars areis spent annually on domestic retail merchandising and marketing services. The merchandising and marketing services industry includes manufacturers, retailers, food brokers, and professional service merchandising companies. The Company believes there is a continuing trend for major retailers and manufacturers to move increasingly toward third parties to handle in-store merchandising. The Company also believes that its merchandising and marketing services bring added value to retailers, manufacturers and other businesses. Retail merchandising and marketing services enhance sales by making a product more visible and available to consumers. These services primarily include placing orders, shelf maintenance, display placement, reconfiguring products on store shelves, replenishing products and providing in-store event staffing services. The Company provides other marketing services such as test market research, mystery shopping, and promotion planning and analysis.
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The Company believes merchandising and marketing 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 and marketing services in retail stores by utilizing their own sales representatives. Retailers also used their employees to
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merchandise their stores. However, both the manufacturers and the retailers discovered that using their own sales representatives and employees for this purpose was expensive and inefficient. Therefore, manufacturers and retailers have increasingly outsourced the merchandising and marketing 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 and marketing services and in-store product promotions have proliferated and diversified. Retailers are continually remerchandisingre-merchandising and remodelingre-modeling entire stores in an effort 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.
In addition, the consolidation of many retailers has created opportunities for third party merchandisers when an acquired retailer’s stores are converted to the format of the acquiring retailer. In many cases stores are completely remodeled and re-merchandised after a consolidation.
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 merchandising or marketing their products. As evidenced in the United States, retailer and manufacturer sponsored merchandising and marketing 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'sCompany’s business model worldwide by expanding its merchandising and marketing services business off shore. The Company formed an International Merchandising Services Division task force consisting of members of the Company'sCompany’s information technology, operations and finance groups to evaluate and develop foreign markets. In 2001, the Company and
a leadingestablished its Japanese based distributor established a joint venturesubsidiary to provide the latest in-store merchandising and marketing services to the Japanese market. InSubsequently, the Company translated several of its proprietary Internet-based logistical, communications and reporting software applications into Japanese and successfully implemented its software and business systems in Japan. Since 2003, the Company has expanded its international presence to Canada, Turkey, South Africa, India, Romania, China, Lithuania, Latvia, Australia, and Turkey by
acquiring the business of a Canadian merchandising company and entering into a
start-up joint venture subsidiary in Turkey. In 2004,New Zealand. Today the Company established
51% owned joint venture subsidiariesoperates in South Africa and India. In 2005,12 countries whose population represents approximately 48% of the Company established a 50% owned joint venture in China and 51% owned joint
venture subsidiaries in Romania and Lithuania. The joint venture in Lithuania is
projected to begin operations in April 2006.total world population.
Key to the Company'sCompany’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.,
Financial Information About Geographic and its subsidiaries (the "SPAR Companies") areBusiness Segments
The Company operates both domestically and internationally in the original predecessortwo distinct geographic/business segments described above. Certain financial information regarding the Company’s geographic and business segments, which includes net revenues and operating (loss) income for each of the Companyyears ended December 31, 2006, December 31, 2005, and were foundedDecember 31, 2004, and total assets as of December 31, 2006 and December 31, 2005 is provided in 1967. On July 8,
1999, SPAR Companies completed a reverse merger with SGRP (the "PIA
Acquisition"), and SGRP then changed its nameNote 12 to SPAR Group, Inc., from PIA
Merchandising Services, Inc. (prior to such merger, "PIA"). The SPAR Companies
were deemed to have "purchased" PIA and its subsidiaries (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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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 merchandising and marketing service needs to third-party providers. The Company believes that offering marketing services on a national and global basis will
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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 client service while maintaining efficient, low cost operations. The Company'sCompany’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 clients, as well as, establishing long-term relationships with new clients, 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 clients'clients’ 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 partnerships, joint ventures or other arrangements with companies that offer similar merchandising or marketing 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 and marketing service businesses. Through such acquisitions, the Company may realize additional operating and revenue synergies and may leverage existing relationships with manufacturers, retailers and other businesses to create cross-selling opportunities. However, there can be no assurance that any of the acquisitions 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.
Leverage and Improve Technology:
The Company believes that providing merchandising and marketing services in a timely, accurate and efficient manner, as well as delivering timely, accurate and useful reports to its clients, are key components that are and will continue to be critical to the Company'sCompany’s 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 to its clients. The Company'sCompany’s merchandising specialists use hand-held computers, personal computers or laptop computers to report the status of each store or client product they service. Merchandising specialists report on a variety of issues such as store conditions, status of client products (e.g. out of stocks, inventory, display placement) or they may scan and process new orders for certain products. This information is reported, analyzed and displayed in a variety of reports that can be accessed by both the Company and its clients via the Internet. These reports can depict the status of every merchandising projectprojects in real time.
Through the Company'sCompany’s automated labor tracking system, its merchandising specialists communicate work assignment completion information via the Internet, cellular telephone or telephone,landlines, enabling the Company to report hours 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 clients, rapidly respond to clients'clients’ needs and rapidly
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The Company intends to continue to utilize computer (including hand-held computers), Internet, cellular telephone and other technology to enhance its efficiency and ability to provide real-time data to its clients, as well as, maximize the speed of communication, and logistical deployment of its merchandising specialists. Industry sources indicate that clients are increasingly relying on merchandising and marketing service providers to supply rapid, value-added information regarding the results of merchandising and marketing expenditures on sales and profits. The Company (together
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(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 clients faster, respond to clients'clients’ needs quickly and implement client 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 clients and projects in the United States and in foreign markets. The Company also believes that its proprietary Internet-based software technology gives it a competitive advantage in the marketplace.
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 clients and revenue in the Domestic Merchandising Services Division.
The Company currently provides a broad array of merchandising and marketing services to some of the world'sworld’s leading companies, both domestically and internationally. 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'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.
The Company'sCompany’s operations are currently divided into two divisions: the Domestic Merchandising Services Division and the International Merchandising Services Division. The Domestic Merchandising Services Division provides merchandising and marketing services, product sampling and other in-store event staffing, product sampling, RFID services, technology services and marketing research to manufacturers and retailers in the United States. The various services are primarily performed in mass merchandisers, electronics store chains, drug store chains, convenience and grocery stores. The International Merchandising Services Division established in July 2000, currently provides similar merchandising and marketing services through a wholly owned subsidiary in Canada, through 51%
owned joint venture subsidiaries in India,Japan, Canada, Turkey, South Africa, TurkeyIndia, Romania, China, Lithuania, Latvia, Australia and Romania, and
through 50% owned joint ventures in Japan and China. In September 2005,New Zealand. Today the Company entered into a 51% owned joint venture subsidiaryoperates in Lithuania which is
projected to begin operations in April 2006.
12 countries whose population represents approximately 48% of the total world population.
Domestic Merchandising Services Division
The Company provides a broad array of merchandising and marketing services on a national, regional, and local basis to manufacturers, distributors and retailers in the United States. The Company provides its merchandising and marketing services primarily on behalf of retailers and consumer product manufacturers and distributors at mass merchandiser, electronic, drug and retail grocery chains. The Company currently provides three principal types of merchandising and marketing services: syndicated services, dedicated services and project services.
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Syndicated Services
Syndicated services consist of regularly scheduled, routed merchandising and marketing services provided at the retail store level for various manufacturers and distributors. These services are performed for multiple manufacturers and distributors, including, in some cases, manufacturers and distributors whose products are in the same product category. Syndicated services may include activities such as:
o
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Dedicated Services
Dedicated services consist of merchandising and marketing services, generally as described above, which are performed for a specific retailer or manufacturer by a dedicated organization, including a management team working exclusively for that retailer or manufacturer. These services include many of the above activities detailed in syndicated services, as well as, new store set-ups, store remodels and fixture installations. These services are primarily based on agreed-upon rates and fixed management fees.
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.
In-Store Event Staffing Services
In February of 2003, the Company began to provide in-store event staffing services such as product demonstrations and samplings when it acquired the business and certain assets of a regional company that specialized in providing product samplings, other in-store events and other merchandising and marketing services in Texas and Oklahoma. In December of 2003, the Company expanded this business through the acquisition of the business and certain assets of another regional company that specialized in providing similar services in Louisiana and neighboring areas. The Company continues to provide in-store product samplings in those geographic areas, and is beginning to provide certain in-store product demonstrations to national chains in other target markets nationwide. The Company has also developed additional product offerings in an effort to expand this segment of its business.
Other Marketing Services
Other marketing services performed by the Company include:
Test Market Research - Testing promotion alternatives, new products and
advertising campaigns, as well as packaging, pricing, and location
changes, at the store level.
Mystery Shopping - Calling anonymously on retail outlets (e.g. stores,
restaurants, banks) to check on distribution or display of a brand and
to evaluate products, service of personnel, conditions of store, etc.
Data Collection - Gathering sales and other information systematically
for analysis and interpretation.
RFID - Utilizing technology to track merchandiser performance, product
inventory at store level as well as other related merchandising and
marketing applications.
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| 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. |
| Data Collection - Gathering sales and other information systematically for analysis and interpretation. |
| RFID – Utilizing technology to track merchandiser performance, product inventory at store level as well as other related merchandising and marketing applications. |
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'sCompany’s business model worldwide by expanding its merchandising and marketing services business off shore. The Company formed an International Merchandising Services Division task force consisting of members of the Company'sCompany’s information technology, operations and finance groups to evaluate and develop foreign markets. In 2001, the Company and a leadingestablished its Japanese based
distributor established a 50% owned joint venturesubsidiary to provide the latest in-store merchandising and marketing services to the Japanese market. InSubsequently, the Company translated several of its
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proprietary Internet-based logistical, communications and reporting software applications into Japanese and successfully implemented its software and business systems in Japan. Since 2003, the Company has expanded its international presence to Canada, by acquiring a Canadian
merchandising companyTurkey, South Africa, India, Romania, China, Lithuania, Latvia, Australia, and Turkey by entering into a 51% owned start-up joint
venture subsidiary. In 2004,New Zealand. Today the Company established 51% owned joint venture
subsidiariesoperates in South Africa and India. In 2005,12 countries whose population represents approximately 48% of the Company announced the
establishment of 51% owned joint venture subsidiaries in Romania and Lithuania.
The joint venture subsidiary in Lithuania is projected to begin operations in
April 2006. In 2005, the Company also announced the establishment of a joint
venture in China which is 50% owned by the Company.total world population.
Key to the Company'sCompany’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 strategy 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.
Domestic Merchandising Services Division
The Company'sCompany’s sales efforts within its Domestic Merchandising Services Division are structured to develop new business in national, regional and local markets. The Company'sCompany’s corporate business development team directs its efforts toward the senior management of prospective clients. Sales strategies developed at the Company'sCompany’s headquarters are communicated to the Company'sCompany’s sales force for execution. The sales force, located nationwide, work from both Company and home offices. In addition, the Company'sCompany’s corporate account executives play an important role in the Company'sCompany’s new business development efforts within its existing manufacturer, distributor 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'sCompany’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'sclient’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'sCompany’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'sCompany’s marketing efforts within its International Merchandising Services Division are three fold. First, the Company endeavors to develop new markets through acquisitions. The Company'sCompany’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 clients that have worldwide distribution. This effort is spearheaded out of the Company'sCompany’s headquarters in the United States. Third, the Company develops local markets through various joint ventures or
subsidiaries throughout the world.
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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 chains and stores in the United States, including:
o
The Company also provides event staffing, RFID, research and other marketing services to retailers and the consumer packaged goods industry.
One client accounted for 20%11%, 14%15%, and 8%12% of the Company'sCompany’s domestic net revenues for the years ended December 31, 2006, 2005, 2004, and 2003,2004, respectively. This client also accounted for approximately 13% and 29%10% of the Company's
domesticCompany’s accounts receivable at December 31, 2006 and 2005, and 2004, respectively.
In addition, approximately 16%8%, 16%11%, and 17%14% of the Company's domesticCompany’s net revenues for the years ended December 31, 2006, 2005, 2004, and 2003,2004, respectively, resulted from merchandising services performed for manufacturers and others in stores operated by a leading mass merchandising chain. These clients also accounted for approximately 23%4% and 22%8% of the Company's domesticCompany’s accounts receivable at December 31, 2006 and 2005, and 2004, respectively.
Also, approximately 17%11% and 4%12% of the Company's domesticCompany’s net revenues for the years ended December 31, 20052006 and 2004,2005, respectively, resulted from merchandising services performed for manufacturers and others in stores operated by a leading electronics chain. These clients also accounted for 24%7% and 16%8% of Company's domesticCompany’s accounts receivable at December 31, 2006 and 2005, and 2004,
respectively.
Another client accounted for 10% of the Company's domestic net revenues
for the year ended December 31, 2005. This client also accounted for
approximately 5% of the Company's domestic accounts receivable at December 31,
2005.
International Merchandising Services Division
The Company believes that the potential international clients for this
divisionits International Merchandising Services Division have similar profiles to its Domestic Merchandising Services Divisiondomestic clients. The Company is currently operating in Japan, Canada, Turkey, South Africa, India, Romania, China, Lithuania, Latvia, Australia and in Lithuania as of April 2006.New Zealand. The Company is actively pursuing expansion into Europe, Asia, South America and other markets.
The marketing services industry is highly competitive. The Company'sCompany’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
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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, efficiently and consistently over a wide geographic area. See "Industry Overview"“Industry Overview” and "Competition"“Competition”.
Worldwide the Company utilizesutilized a labor force of approximately 7,9008,300 people. Today the Company operates in 12 countries whose population represents approximately 48% of the total world population.
As of December 31, 2005,2006, the Company'sCompany’s Domestic Merchandising Services Division'sDivision utilized a labor force consisted of approximately 5,8005,200 people. Approximately
113There were 156 full-time employees and 53 were13 part-time employees of the Company. Of the 113156 full-time Company employees, 107146 employees were engaged in office operations, 5 were engaged in field operations and 65 were engaged in sales. Of the 53 part-time Company employees, 40 were engaged in
field merchandising. The Company'sCompany’s Domestic Merchandising Services Division utilizesutilized the services of its affiliate, SPAR Management Services, Inc. ("SMSI"(“SMSI”), to schedule and supervise its field force of merchandising specialists, which consists of independent contractors furnished by SPAR Marketing Services, Inc. ("SMS"(“SMS”), another affiliate of the Company (see Item 13 -– Certain Relationships and Related Transactions, below) as well as the Company'sCompany’s field employees. SMS and SMSI furnishfurnished approximately 5,6005,000 merchandising specialists (all of whom are independent contractors of SMS) and 4451 field managers (all of whom arewere full-time employees of SMSI), respectively.
As of December 31, 2005,2006, the Company'sCompany’s International Merchandising Services Division'sDivision’s labor force consisted of approximately 2,1253,100 people. Approximately 52There were 59 full-time and 8 part-time employees were engaged in operations and 10 were53 full-time employees engaged in sales. The International Division'sDivision’s field force of merchandising
specialists consisted of approximately 74 full time employees, 150 part time246 field management employees and approximately 1,8352,800 merchandising specialists of which approximately 2,200 were Company employees and approximately 600 were independent contractors.
The Company currently utilizes certain of its Domestic Merchandising Services Division'sDivision’s employees, as well as, the services of certain employees of its affiliates, SMSI and SPAR Infotech, Inc. ("SIT"(“SIT”), to support the International Merchandising Services Division. However, dedicated employees will be added to that division as the need arises. The Company'sCompany’s affiliate, SIT, also provides programming and other assistance to the Company'sCompany’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.
There are various risks associated with the Company'sCompany’s growth and operating strategy. The risksrisk factors presented below are the ones that the Company currently considers material based on best estimates and includes "forward-looking statements"“forward-looking statements” within the meaning of the Securities Laws. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the Company'sCompany’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. Additional risks may be facing the Company, the industry, or the economy in general, whether domestically or internationally. The Company may not be aware of some risks and may currently consider other
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You should carefully consider each of the risks described below before deciding to invest in the Company'sCompany’s common stock. If any of the following risks develops into actual events, or any other risks arise and develop into actual events, the Company'sCompany’s business, financial condition or results of operations could be negatively affected, the market price of the Company'sCompany’s common stock could decline and you may lose all or part of your investment.
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As discussed above in Clients, the Company does a significant amount of business with two clientsone client and performs a significant amount of services in a leading mass merchandising chain and a leading electronics chain. The loss of these clients,this client, the loss of the ability to provide merchandising and marketing services in those chains, or the failure to attract new large clients could significantly decrease the Company'sCompany’s revenues and such decreased revenues could have a material adverse effect on the Company'sCompany’s business, results of operations and financial condition.
The business and growth of the Company depends in large part on the continued trend toward outsourcing of merchandising and 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'sCompany’s revenues and such decreased revenues could have a material adverse effect on the Company'sCompany’s business, results of operations and financial condition or the desired increases in the Company'sCompany’s business, revenues and profits.
The merchandising and 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 client, channel or geographic coverage; (ii) the internal merchandising and marketing operations of its clients and prospective clients; (iii) independent brokers; and (iv) smaller regional providers. Remaining competitive in the highly competitive merchandising and 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'sCompany’s business, results of operations and financial condition or the desired increases in the Company'sCompany’s business, revenues and profits.
If certain competitors were to combine into integrated merchandising and marketing services companies, or additional merchandising and 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'sCompany’s business, results of operations and financial condition or the desired increases in the Company'sCompany’s business, revenues and profits.
The Company has not been profitable in three of the last five years (see Item 6. Selected Financial Data). In addition, during this period the Company has violated the covenants of its Credit Facility with Webster Business Credit Corporation (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources).
There can be no assurances that in the future the Company: will be profitable, will not violate covenants of its current or future Credit Facilities, its lenders would waive any violations of such covenants, the Company will continue to have adequate lines of credit, or will continue to have sufficient availability under its lines of credit. Accordingly, continued losses or marginal profitability by the Company, as well as any failure to maintain sufficient availability or lines of credit from the Company’s lenders, could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company has experienced and, in the future, may experience fluctuations in quarterly operating results. Factors that may cause the Company'sCompany’s quarterly operating results to vary and from time to time and may result in reduced revenue and profits include: (i) the number of active client projects; (ii) seasonality of client products; (iii) client delays, changes and cancellations in projects; (iv) the timing requirements of client projects; (v) the completion of major client projects; (vi) the timing of new engagements; (vii) the timing of personnel cost increases; and (viii) the loss of major clients. In particular, the timing of revenues is difficult to forecast for the home entertainment industry because timing is
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dependent on the commercial success of particular product releases. In the event that a particular -11-
Company'sCompany’s revenue could be significantly reduced. In addition, the Company is subject to revenue or profit uncertainties resulting from factors such as unprofitable client work and the failure of clients to pay. The Company attempts to mitigate these risks by dealing primarily with large credit-worthy clients, by entering into written or oral agreements with its clients and by using project budgeting systems. These revenue fluctuations could materially and adversely affect the Company'sCompany’s business, results of operations and financial condition or the desired increases in the Company'sCompany’s business, revenues and profits.
Failure to Develop New Products
A key element of the Company'sCompany’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'sCompany’s inability or failure to devise useful merchandising or marketing 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'sCompany’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'sCompany’s business, results of operations and financial condition or the desired increases in the Company'sCompany’s business, revenues and profits.
Inability to Identify, Acquire and Successfully Integrate Acquisitions
Another key component of the Company'sCompany’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'sCompany’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 clients of the acquired business; (ii) the lingering effects of poor client relations or service performance by the acquired business, which also may taint the Company'sCompany’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:scale; (v) the inability to establish, implement or police the Company'sCompany’s existing standards, controls, procedures and policies on the acquired business; (vi) diversion of management attention; and (vii) exposure to client, 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'sCompany’s growth strategy and could limit the Company'sCompany’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'sCompany’s Common Stock, cash, or a combination of Common Stock and cash. If the Company'sCompany’s Common Stock does not maintain a sufficient market value, or if potential acquisition candidates are otherwise unwilling to accept the Company'sCompany’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'sCompany’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. In addition, 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'sCompany’s ability to execute its growth strategy.
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Reliance on the Internet and Third Party Vendors
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. The Company relies on third-party vendors to provide its Internet access and other services used in its business, and the Company has no control over such third-party providers. Any protracted disruption or material slowdown in Internet or other services could increase the Company'sCompany’s costs of operation and reduce efficiency and performance, which could have a material adverse effect on the Company'sCompany’s business, results of operations and financial condition or the desired increases in the Company'sCompany’s business, revenues and profits.
Economic and Retail Uncertainty
The markets in which the Company operates are cyclical and subject to the effects of economic downturns. The current political, social and economic conditions, including the impact of terrorism on consumer and business behavior, make it difficult for the Company, its vendors and its clients to accurately forecast and plan future business activities. Substantially all of the Company'sCompany’s key clients are either retailers or those seeking to do product merchandising at retailers. IfShould the retail industry experiencesexperience a significant economic downturn, athe resultant reduction in product sales could significantly decrease the Company'sCompany’s revenues. The Company also has risks associated with its clients changing their business plans and/or reducing their marketing budgets in response to economic conditions, which could also significantly decrease the Company'sCompany’s revenues. Such revenue decreases could have a material adverse effect on the Company'sCompany’s business, results of operations and financial condition or the desired increases in the Company'sCompany’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 46% of the Company'sCompany’s outstanding Common Stock, and Mr. William H. Bartels, founder, director,and Vice Chairman of the Company beneficially owns approximately 29%28% of the Company'sCompany’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 Capital Market, the trading volume in such stock may be limited and an investment in the Company'sCompany’s securities may be illiquid because the founders own a significant amount of the Company'sCompany’s stock.
Dependence Upon and Potential Conflicts in Services Provided by Affiliates
The success of the Company'sCompany’s domestic business is dependent upon the successful execution of its field services by SPAR Marketing Services, Inc. ("SMS"(“SMS”), and SPAR Management Services, Inc. ("SMSI"(“SMSI”), as well as the programming services provided by SPAR Infotech, Inc. ("SIT"(“SIT”), each of which is an affiliate, but not a subsidiary, of the Company, and none of which is consolidated in the Company'sCompany’s financial statements. SMS provides substantially all of the merchandising specialists used by the Company in conducting its domestic business (86%(83% of domestic field expense in 2005)2006), and SMSI provides substantially all of the domestic field management services (91%(88% of domestic field management in 2005)2006) 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.
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SMS, SMSI and SIT (collectively, the "SPAR Affiliates"“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'sCompany’s best interests.
While the Company'sCompany’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 merchandising specialists 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 client 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'sCompany’s business, results of operations and financial condition or the desired increases in the Company'sCompany’s business, revenues and profits.
The Company has not paid and does not intend to pay cash Dividends
The Company has not paid dividends in the past, intends to retain any earnings or other cash resources to finance the expansion of its business and for general corporate purposes, and does not intend to pay dividends in the future. In addition, the Company'sCompany’s Credit Facility with Webster Business Credit Corporation ("Webster"(“Webster”) (see Note 5 to the Consolidated Financial Statements -– Lines of Credit and Subsequent Events)Credit) restricts the payment of dividends without Webster'sWebster’s prior consent.
Risks Associated with International Joint VenturesSubsidiaries
While the Company endeavors to limit its exposure for claims and losses in any international joint venturessubsidiary 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 venturesubsidiary under applicable local law or local interpretation of any joint venturesubsidiary agreements 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'sCompany’s business, results of operations and financial condition or the desired increases in the Company'sCompany’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.subsidiaries. In 2005,2006, these exposures are primarily concentrated in the Canadian dollar,Dollar, Japanese yen andYen, South African rand.
Rand and Australian Dollar.
Risks Associated with International Business
The Company'sCompany’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. In the future, the Company'sCompany’s international operations and sales may be affected by the following risks, which may adversely affect United States companies doing business internationally:
o in foreign countries:
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Not applicable.
The Company does not own any real property. The Company leases certain office space and storage facilities for its corporate headquarters, divisions and subsidiaries under various operating leases, which expire at various dates during the nextthenext five years. These leases generally require the Company to pay minimum rents, subject to periodic adjustments, plus other charges, including utilities, real estate taxes and common area maintenance. The Company believes that its relationships with its landlords generally to be good. However, as these leased facilities generally are used for offices and storage, the Company believes that other leased spaces could be readily found and utilized on similar terms should the need arise.
The Company maintains its corporate headquarters in approximately 6,0006,400 square feet of leased office space located in Tarrytown, New York, under an operating lease with a term expiring in May 2006. The Company is exploring
various leasing options, including an extension of its existing lease.31, 2009.
The Company maintains its data processing center and warehouse at itits regional office in Auburn Hills, Michigan, under an operating lease expiring in November 2006. The Company is exploring various leasing options, including an
extension of its existing lease.December 31, 2011.
The Company believes that its existing facilities are adequate for its current business. However, new facilities may be added should the need arise in the future.
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The following is a list of the locations where the Company maintains leased facilities for the listed offices and countries:
| Location | Office Use | Approximate Square Footage | |||
|---|---|---|---|---|---|
| Domestic: | |||||
| Tarrytown, NY | Corporate Headquarters | 6,400 | |||
| Auburn Hills, MI | Regional Office and Warehouse | 25,700 | |||
| International: | |||||
| Canada | |||||
| Toronto, Ontario | Headquarters | 4,100 | |||
| Japan | |||||
| Osaka | Headquarters | 1,700 | |||
| Tokyo | Regional Office | 1,500 | |||
| Nagoya | Regional Office | 700 | |||
| Turkey | |||||
| Istanbul | Headquarters | 3,000 | |||
| South Africa | |||||
| Durban | Headquarters | 2,800 | |||
| Port Elizabeth | Regional Office | 3,000 | |||
| Epping | Regional Office | 650 | |||
| India | |||||
| New Delhi | Headquarters | 1,280 | |||
| Mumbai | Regional Office | 500 | |||
| Romania | |||||
| Bucharest | Headquarters | 770 | |||
| China | |||||
| Shanghai | Headquarters | 400 | |||
| Beijing | Regional Office | 250 | |||
| Guangzhou | Regional Office | 400 | |||
| Shenzhen | Regional Office | 300 | |||
| Lithuania | |||||
| Siauliai | Headquarters | 1,150 | |||
| Australia | |||||
| Melbourne | Headquarters | 3,380 |
Safeway Inc. ("Safeway"(“Safeway”) filed a Complaint against the PIA Merchandising Co., Inc. ("(“PIA Co."”), a wholly owned subsidiary of SGRP, andSPAR Group, Inc. (“SGRP”), Pivotal Sales Company ("Pivotal"(“Pivotal”), a wholly owned subsidiary of PIA Co., and SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001, and has2001. Safeway claims, as subsequently amended, it. Safeway allegesalleged causes of action for breach of contract and breach of implied contract. Safeway has most recently alleged monetary damages in the
principal sum of $3,000,000 and alleged interest of $1,500,000 and has also
demanded unspecified costs. PIA Co. and Pivotal 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 themPIA Co. and Pivotal against Safeway for breach of contract, interference with economic relationship, unfair trade practices and unjust enrichmentenrichment. Trial commenced in March 2006.
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On May 26, 2006, the jury in this case returned a verdict resulting in a net award of $1,307,700 to Pivotal, a SGRP subsidiary. This net award is to be paid by Safeway and resulted from separate jury findings that awarded damages to those SGRP subsidiaries on certain claims and damages to Safeway on other claims. In particular, the jury awarded damages to Pivotal of $5,760,879 for Safeway’s interference with Pivotal’s contractual relationships with third party manufacturers and also awarded $782,400 to Pivotal and PIA for Safeway’s breach of contract with those SGRP subsidiaries. The jury awarded damages to Safeway of $5,235,579 for breach of contract by SGRP and those SGRP subsidiaries. Judgment was entered in favor of Pivotal in September 2006 for $1,307,700. Both parties have filed appeals. Pivotal/SGRP is seeking -16-
damages and injunctive relief. Mediation between the parties occurred in 2004,
but did not result into have Safeway’s judgment overturned. Safeway has asked for a settlement. PIA Co., Pivotal and SGRP are vigorously
defending against 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. and Pivotal lose on their
cross-claims and counterclaims, that result could have a material adverse effectnew trial on the Company.judgment found against them. The appellate process is expected to take fourteen to twenty four months to complete. The Company anticipates that this matter will be resolved inhas recorded both the $1.3 million settlement award and approximately $1.2 million of related legal expenses as a net favorable impact to other income of approximately $100,000 for the year ended December 31, 2006.
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'sCompany’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.
None.
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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 Capital Market.
2005 2004
--------------------- ---------------------
High Low High Low
---- --- ---- ---
First Quarter $ 1.55 $ 0.81 $ 3.44 $ 2.30
Second Quarter 2.48 1.20 2.33 0.85
Third Quarter 2.89 1.50 1.50 0.75
Fourth Quarter 1.80 0.89 1.80 0.36
| 2006 | 2005 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| High | Low | High | Low | |||||||||||
| First Quarter | $ | 1.36 | $ | 0.89 | $ | 1.55 | $ | 0.81 | ||||||
| Second Quarter | 1.40 | 0.90 | 2.48 | 1.20 | ||||||||||
| Third Quarter | 1.13 | 0.90 | 2.89 | 1.50 | ||||||||||
| Fourth Quarter | 1.35 | 0.92 | 1.80 | 0.89 | ||||||||||
As of December 31, 2005,2006, there were approximately 1,1001,300 beneficial shareholders of the Company'sCompany’s Common Stock.
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'sCompany’s earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions in respect to the payment of dividends and other factors that the Company'sCompany’s Board of Directors deems relevant.
The Company'sCompany’s Credit Facility with Webster Business Credit Corporation (see Note 5 to the Consolidated Financial Statements -– Lines of Credit and
Subsequent Events)Credit) restricts the payment of dividends without Webster'sWebster’s prior consent.
During the fiscal year ended December 31, 2005,2006, SGRP did not repurchase any of its equity securities.
The following graph shows a comparison of cumulative total returns for SGRP’s Common Stock, the Nasdaq Stock Market (U.S. Companies) Index and the Nasdaq Stocks (SIC 7380-7389 U.S. Companies) Miscellaneous Business Services Index, Russell 2000 and S&P Advertising for the period during which SGRP’s Common Stock has been registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The graph assumes that the value of an investment in Common Stock and in each such index was $100 on December 31, 2001, and that all dividends have been reinvested.
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The comparison in the graph below is based on historical data and is not intended to forecast the possible future performance of SGRP’s Common Stock.
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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'sCompany’s consolidated financial statements.
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(In thousands, except per share data)
| Year Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||
| STATEMENT OF OPERATIONS DATA: | |||||||||||||||||
| Net revenues | $ | 57,316 | $ | 51,586 | $ | 51,370 | $ | 64,859 | $ | 69,612 | |||||||
| Cost of revenues | 37,463 | 31,939 | 33,644 | 42,338 | 40,331 | ||||||||||||
| Gross profit | 19,853 | 19,647 | 17,726 | 22,521 | 29,281 | ||||||||||||
| Selling, general and administrative expenses | 19,831 | 16,691 | 20,222 | 20,967 | 18,804 | ||||||||||||
| Impairment charges | - | - | 8,141 | - | - | ||||||||||||
| Depreciation and amortization | 746 | 1,031 | 1,399 | 1,529 | 1,844 | ||||||||||||
| Operating (loss) income | (724 | ) | 1,925 | (12,036 | ) | 25 | 8,633 | ||||||||||
| Other (income) expense | (338 | ) | 446 | (754 | ) | 237 | (26 | ) | |||||||||
| Interest expense | 237 | 191 | 220 | 269 | 363 | ||||||||||||
| (Loss) income before provision for income taxes | |||||||||||||||||
| and minority interest | (623 | ) | 1,288 | (11,502 | ) | (481 | ) | 8,296 | |||||||||
| Provision for income taxes | 99 | 242 | 853 | 58 | 2,998 | ||||||||||||
| (Loss) income before minority interest | (722 | ) | 1,046 | (12,355 | ) | (539 | ) | 5,298 | |||||||||
| Minority interest | (101 | ) | 168 | (87 | ) | - | - | ||||||||||
| Net (loss) income | $ | (621 | ) | $ | 878 | $ | (12,268 | ) | $ | (539 | ) | $ | 5,298 | ||||
| Basic/diluted net (loss) income per common share: | |||||||||||||||||
| Basic/diluted net (loss) income | $ | (0.03 | ) | $ | 0.05 | $ | (0.65 | ) | $ | (0.03 | ) | $ | 0.28 | ||||
| Weighted average shares outstanding | |||||||||||||||||
| - basic | 18,934 | 18,904 | 18,859 | 18,855 | 18,761 | ||||||||||||
| - diluted | 18,934 | 19,360 | 18,859 | 18,855 | 19,148 | ||||||||||||
December 31, | |||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||
| BALANCE SHEET DATA: | |||||||||||||||||
| Working capital | $ | 1,638 | $ | 3,120 | $ | 962 | $ | 4,085 | $ | 6,319 | |||||||
| Total assets | 18,077 | 15,417 | 15,821 | 28,137 | 28,800 | ||||||||||||
| Lines of credit, current | 5,318 | 2,969 | 4,956 | 4,084 | - | ||||||||||||
| Lines of credit, long term(1) | - | - | - | - | 148 | ||||||||||||
| Other long-term debt | 504 | 415 | 218 | 270 | 235 | ||||||||||||
| Total stockholders' equity | 4,528 | 4,850 | 3,714 | 16,023 | 16,592 | ||||||||||||
| (1) | Prior to 2003, |
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Statements contained in this "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” include "forward-looking
statements"“forward-looking statements” within the meaning of the Securities Laws and are based on ourthe Company’s best estimates.estimates and determinations. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the Company'sCompany’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.its plans, goals, intentions and/or expectations. Such forward-looking statements generally are based upon the Company'sCompany’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"“may”, "will"“will”, "expect"“expect”, "intend"“intend”, "believe"“believe”, "estimate"“estimate”, "anticipate"“anticipate”, "continue"“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 containing cautionary statements or identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements.
You should carefully review this management discussion and analysis together with the risk factors described above (see Item 1A -– Risk Factors) and the 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 such risk factors and other cautionary statements. Although the Company believes that its plans, goals, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, it cannot assure that such plans, goals, intentions or expectations will be achieved in whole or in part. 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, except as required by law.
The Company’s operations are currently divided into two divisions: the United States,Domestic Merchandising Services Division and the CompanyInternational Merchandising Services Division. The Domestic Merchandising Services Division provides merchandising and marketing services, in-store event staffing, product sampling, Radio Frequency Identification (“RFID”) services, technology services and marketing research to manufacturers and retailers principallyin the United States. The various services are primarily performed in mass merchandiser,merchandisers, electronics store chains, drug store chains and convenience and grocery and other retail trade classes through its
Domesticstores. The International Merchandising Services Division. Internationally, the CompanyDivision was established in July 2000 and currently provides in-storesimilar merchandising and marketing services through a wholly owned subsidiary
in Canada, 51% owned joint venture subsidiaries in Turkey, South Africa, India
and Romania and 50% owned joint ventures in Japan, and China. In 2005 and 2004,
the Company consolidated Canada, Turkey, South Africa, India, Romania, China, Lithuania, Latvia, Australia and Japan intoNew Zealand. The Company continues to focus on expanding its merchandising and marketing services business throughout the Company's financial statements. Also in 2005, the Company consolidated Romania
and China.world.
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"(“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"(“SIM”), a wholly owned subsidiary of the Company, entered into a Stock Purchase and Sale Agreement with Performance Holdings, Inc. ("PHI"(“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 consolidated
statements 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).
The Company'sCompany’s critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the Note 2 to the Consolidated Financial Statements. These policies have been consistently applied in all material respects and address such matters as revenue recognition, depreciation methods, asset impairment recognition, consolidation of subsidiaries and other companies, and discontinued business accounting. While the estimates and -21-
costs:
costs.
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The Company consolidates its 100% owned subsidiaries. The Company also consolidates all of its 51% owned joint venture subsidiaries and all of its 50% owned joint ventures wheresubsidiaries, as the Company believes it is the primary beneficiary in accordance with Financial Accounting Standards Board Interpretation Number 46, as revised December 2003, Consolidation of Variable Interest Entities ("(“FIN 46(R)"”).
The Company'sCompany’s services are provided to its clients under contracts or agreements. The Company bills its clients based upon service fee and per unit fee billing arrangements. Revenues under service fee billing arrangements are recognized when the service is performed. The Company'sCompany’s per unit fee arrangements provide for fees to be earned based on the retail sales of a client'sclient’s products to consumers. The Company recognizes per unit fees in the period such amounts become determinable and are reported to the Company.
The Company continually monitors the validity of its accounts receivable based upon current client 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, net of any applicable reserves or allowances, 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 in part on management'smanagement’s assessment of the current status of individual accounts. Based on management'smanagement’s assessment, the Company established an allowance for doubtful accounts of $400,000, $616,000 and $761,000 at December 31, 2006, 2005 and 2004, respectively. Bad debt and sales allowance expenses were $84,000, $38,000, and $366,000 in 2006, 2005, and $825,000 in 2005, 2004, and 2003, respectively.
In accordance with SOP 98-1,AccountingfortheCostsofComputerSoftwareDevelopedorObtainedforInternalUse, 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 and related benefits and travel expenses for those employees who are directly involved with and who devote time to the Company'sCompany’s software development projects. Capitalized software development costs are amortized over three years.
The Company capitalized $280,000, $346,000, $559,000, and $1,004,000$559,000 of costs related to software developed for internal use in 2006, 2005, 2004, and 2003,2004, respectively, and amortized capitalized software of approximately $371,000, $516,000 $638,000 and $690,000$638,000 for the years ended December 31, 2006, 2005, and 2004, and 2003, respectively.
The
In 2004, the Company also recorded a netan impairment charge ofagainst capitalized software relatedcosts due to lostthe loss of certain clients during the year totaling approximately $442,000 in
2004.
(see Note 3 – Impairment Charges).
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The following table sets forth selected financial data and such data as a percentage of net revenues for the years indicated (in millions).
| Year Ended December 31, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | % | 2005 | % | 2004 | % | |||||||||||||||
| Net revenues | $ | 57.3 | 100.0 | % | $ | 51.6 | 100.0 | % | $ | 51.4 | 100.0 | % | ||||||||
| Cost of revenues | 37.5 | 65.4 | 32.0 | 61.9 | 33.6 | 65.5 | ||||||||||||||
| Selling, general & administrative expenses | 19.8 | 34.6 | 16.7 | 32.4 | 20.2 | 39.4 | ||||||||||||||
| Impairment charges | - | - | - | - | 8.1 | 15.8 | ||||||||||||||
| Depreciation & amortization | 0.7 | 1.3 | 1.0 | 2.0 | 1.4 | 2.7 | ||||||||||||||
| Other (expense) income | (0.1 | ) | (0.2 | ) | 0.6 | 1.2 | (0.4 | ) | (1.0 | ) | ||||||||||
| (Loss) income before income tax provision and | ||||||||||||||||||||
| minority interest | (0.6 | ) | (1.1 | ) | 1.3 | 2.5 | (11.5 | ) | (22.4 | ) | ||||||||||
| Provision for income taxes | 0.1 | 0.2 | 0.2 | 0.4 | 0.9 | 1.7 | ||||||||||||||
| (Loss) income before minority interest | (0.7 | ) | (1.3 | ) | 1.1 | 2.1 | (12.4 | ) | (24.1 | ) | ||||||||||
| Minority interest | (0.1 | ) | (0.2 | ) | 0.2 | 0.4 | (0.1 | ) | (0.2 | ) | ||||||||||
| Net (loss) income | $ | (0.6 | ) | (1.1 | )% | $ | 0.9 | 1.7 | % | $ | (12.3 | ) | (23.9 | )% | ||||||
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Net revenues for the twelve months ended December 31, 2006, were $57.3 million, compared to $51.6 million for the twelve months ended December 31, 2005, an increase of $5.7 million. International net revenues totaled $23.2 million for 2006 increasing 56.1% from $14.9 million in 2005. The increase in international net revenues of $8.3 million was primarily due to additional revenues from international subsidiaries that began operations in 2006 totaling $4.5 million (primarily Australia $3.9 million, Lithuania $442,000 and China $112,000), increased net revenues from subsidiaries with operations continuing from 2005 totaling $3.5 million (primarily Japan $2.3 million, India $0.8 million, Turkey $0.2 million, Romania $0.2 million and Canada $0.1 million) and the inclusion of the Japanese subsidiary’s calendar year fourth quarter 2005 net revenues totaling $1.3 million as a result of the change in the year end reporting for Japan, offset by a decrease in South Africa net revenues totaling $1.0 million, due to the loss of a major client in 2005. Domestic net revenues totaled $34.1 million in 2006 compared to $36.7 million in 2005. The decrease in domestic net revenues of $2.6 million is primarily the result of lower project work and per unit fee billings, partially offset by revenue from new clients in 2006. Included in domestic revenue is $770,000 from the termination of a customer service agreement in 2006.
Cost of revenues consists of in-store labor and field management wages, related benefits, travel and other direct labor-related expenses. Cost of revenues was 65.4% of net revenues for the twelve months ended December 31, 2006, compared to 61.9% for the twelve months ended December 31, 2005. Domestic cost of revenues was 66.2% and 62.9% of net revenues for the twelve months ended December 31, 2006, and 2005, respectively. The increase was primarily attributable to the change in the mix of business, with higher cost project revenues accounting for a greater portion of revenues in the twelve months ended December 31, 2006, as well as a decrease in per unit fee revenues that did not have a proportionate decrease in cost compared to the prior year. As discussed above under Critical Accounting Policies/Revenue Recognition, the Company’s revenue consists of 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. Retail sales of client products are influenced by numerous factors including consumer tastes and preferences, and not solely by the merchandising and marketing service performed. In any given period, the cost of per unit fee revenues may not be directly proportionate to the per unit fee revenue. Internationally, the cost of revenues as a percentage of net revenues was 64.1% and 59.6% for the twelve months ended December 31, 2006, and 2005, respectively. The international cost of revenues percentage increase was primarily attributable to an increase in competitive pricing pressures in Canada and higher cost revenues in Japan accounting for a greater portion of revenue in the twelve months ended December 31, 2006, compared to the prior year.
Approximately 84% of the Company’s domestic cost of revenue in both the twelve months ended December 31, 2006 and 2005, resulted from in-store independent contractor and field management services purchased from the Company’s affiliates, SPAR Marketing Services, Inc. (“SMS”), and SPAR Management Services, Inc. (“SMSI”), respectively. (See Item 13 – Certain Relationships and Related Transactions, below)
Operating expenses consist of selling, general and administrative expenses, 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 for the years indicated (in millions):
| Year Ended December 31, | |||||||||||||||||
| 2006 | % | 2005 | % | Increase (decrease) % | |||||||||||||
| Selling, general & administrative | $ | 19.8 | 34.6 | % | $ | 16.7 | 32.4 | % | 18.8 | % | |||||||
| Depreciation and amortization | 0.7 | 1.3 | 1.0 | 2.0 | (27.6) | % | |||||||||||
| Total operating expenses | $ | 20.5 | 35.9 | % | $ | 17.7 | 34.4 | % | 16.1 | % | |||||||
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Selling, general and administrative expenses increased by approximately $3.1 million, or 18.8%, for the twelve months ended December 31, 2006, to $19.8 million compared to $16.7 million for the twelve months ended December 31, 2005. The $3.1 million increase in selling, general and administrative expenses consisted of an increase in international selling, general and administrative expenses totaling $3.5 million offset by a decreases in domestic selling, general and administrative expenses of $0.4 million. International selling, general and administrative expenses for the twelve months ended December 31, 2006, were $8.7 million compared to $5.2 million for the prior year. The increase of approximately $3.5 million, or 68.8%, was primarily due to $1.6 million of additional selling, general and administrative expenses related to the new international subsidiaries in Australia $1.3 million, China $206,000 and Lithuania $139,000 which began operations in 2006, $1.3 million from increased spending in Japan, additional Japan costs of $544,000 resulting from the additional quarter of expense due to the change in year-end reporting, and approximately $282,000 from increased spending in corporate international business development expenses partially offset by reduced spending in South Africa of approximately $327,000. All other international subsidiaries contributed an increase of $117,000. Domestic selling, general and administrative expenses totaled $11.1 million for 2006 and were reduced $400,000 from $11.5 million in 2005.
Depreciation and amortization charges were $746,000 for the twelve months ended December 31, 2006, compared to $1.0 million for the twelve months ended December 31, 2005. The decrease of approximately $285,000, or 27.6%, was due to lower purchases of property and equipment in recent years.
Other income was approximately $338,000 for twelve months ended December 31, 2006 compared to other expense of approximately $446,000 for the twelve months ended December 31, 2005. Included in other income for 2006 was a favorable $1.3 million judgment awarded in a lawsuit offset by the 2006 related legal expenses of approximately $1.2 million, and the favorable settlement of another lawsuit with a vendor. Other expenses in 2005 resulted from the reclassification of certain legal expenses to other expense from selling, general and administrative expenses to conform to the 2006 presentation.
Interest expense totaled approximately $237,000 for 2006 compared to interest expense of approximately $191,000 for 2005. The increase was a result of higher debt levels and interest rates in 2006.
The provision for income taxes was $99,000 and $242,000 for 2006 and 2005, respectively. The tax provisions were primarily for minimum domestic state taxes due and international tax liabilities. There were no tax provisions for federal tax as the Company reported losses for the twelve months ended December 31, 2006 and 2005.
Minority interest of approximately $(101,000) and $168,000 resulted from the net operating profits and losses of the Company’s 51% owned subsidiaries and its 50% owned subsidiaries for the twelve months ended December 31, 2006 and 2005, respectively.
The SPAR Group had a net loss of approximately $621,000 or $0.03 per share for 2006, compared to a net income of approximately $878,000 or $0.05 per basic and diluted shares for 2005.
None.
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Results from continuing operations for the twelve months ended December 31, 2005, compared to twelve months ended December 31, 2004
- -------------------------------------------------------
Net revenues from operations for the twelve months ended December 31, 2005, were $51.6 million, compared to $51.4 million for the twelve months ended December 31, 2004, an increase of $0.2 million. The increase of $0.2 million in net revenues consists of an increase in international revenue of $6.7 million offset by decreases in domestic revenue of $6.5 million or 15%. The international revenue increase of $6.7 million was primarily attributed to increases in Japan of $3.0 million, Canada of $2.6 million, India of $1.2 million and all others of $0.2 million, partially offset by revenue decrease in South Africa of $0.3 million. The decrease in domestic revenue is a result of the loss of several significant clients partially offset by revenue from new clients in 2005.
Cost of revenues consists of in-store labor and field management wages, related benefits, travel and other direct labor-related expenses. Cost of revenues as a percentage of net revenues was 61.9% for the twelve months ended December 31, 2005, compared to 65.5% for the twelve months ended December 31, 2004. Domestic cost of revenues as a percentage of net revenues was 62.9% and 65.8% for the twelve months ended December 31, 2005, and 2004, respectively. The decrease in cost as a percentage of net revenues is primarily a result of an increase in per unit fee revenues that do not have a proportionate increase in cost. As discussed above under Critical Accounting Policies/Revenue Recognition, the Company'sCompany’s revenue consists of per unit fee revenue, which is earned when the client'sclient’s product is sold to the consumer at retail, not when the services are performed. Retail sales of client products are influenced by numerous factors including consumer tastes and preferences, and not solely by the merchandising and marketing service performed, in any given period, the cost of per unit fee revenues may not be directly proportionate to the per unit fee revenue. Internationally, the cost of revenues as a percentage of net revenues was 59.6% and 63.7% for the twelve months ended December 31, 2005, and 2004, respectively. The international cost of revenue percentage was favorably impacted by the increase in international revenue, which enabled the Company to leverage its infrastructure.
Approximately 87% of the Company'sCompany’s domestic cost of revenue in both the twelve months ended December 31, 2005 and 2004, resulted from in-store independent contractor and field management services purchased from the Company'sCompany’s affiliates, SPAR Marketing Services, Inc. ("SMS"(“SMS”) and SPAR Management Services, Inc. ("SMSI"(“SMSI”) respectively. (See Item 13 -– Certain Relationships and Related Transactions, below)
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 for the years indicated (in millions):
| Year Ended December 31, | |||||||||||||||||
| 2005 | % | 2004 | % | Increase (decrease) % | |||||||||||||
| Selling, general & administrative | $ | 16.7 | 32.4 | % | $ | 20.2 | 39.4 | % | (17.5 | )% | |||||||
| Impairment charges | - | - | 8.1 | 15.8 | - | ||||||||||||
| Depreciation and amortization | 1.0 | 2.0 | 1.4 | 2.7 | (26.3 | )% | |||||||||||
| Total operating expenses | $ | 17.7 | 34.4 | % | $ | 29.7 | 57.9 | % | (40.4 | )% | |||||||
Selling, general and administrative expenses decreased by $2.6$3.5 million, or 13%18%, for the twelve months ended December 31, 2005, to $17.6$16.7 million compared to $20.2 million for the twelve months ended December 31, 2004. Domestic selling, general and administrative expenses totaled $12.2 million for 2005 and were reduced $4.5$5.2 million from $16.7 million in 2004. The reduction of 27%31% was a result of cost reduction programs initiated in the second half of 2004 as a result of the loss of certain large clients. The domestic cost reductions were partially offset by increases of $1.9$1.7 million in international selling, general and administrative expenses primarily a result of increased spending in Canada of
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-26-
approximately $800,000,$550,000, and in Japan of approximately $500,000, with the balance attributable to the joint venture startups in Romania and China, and a full year of operations in South Africa, Turkey, and India.
Impairment charges were $8.1 million for 2004 (see Note 3 to the Consolidated Financial Statements -Impairment–Impairment Charges). Impairment charges resulting from the loss of certain large clients 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 were $1.0 million for the twelve months ended December 31, 2005, compared to $1.4 million for the twelve months ended December 31, 2004. The decrease was a result of reduced capitalized software.
Other incomeexpense was approximately $424,000 and$446,000 compared to other income of $754,000 for twelve months ended December 31, 2005 and 2004, respectively. In 2005, other income consists
primarilyexpense resulted from the reclassification of certain legal expenses to other expense from selling, general and administrative expense to conform to the 2006 presentation partially offset by release of a reserve associated with the PIA Acquisition in July 1999. 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.
Interest expense totaled approximately $191,000 for 2005 compared to interest expense of approximately $220,000 for 2004. The decrease was a result of lower debt levels in 2005 partially offset by increased rates.
The provision for income taxes was $242,000 and $853,000 for 2005 and 2004, respectively. The 2005 provision is primarily for state taxes. The 2004 provision consists primarily of a valuation allowance totaling approximately $750,000 against its net deferred tax assets and state taxes of approximately $103,000.
The SPAR Group had a net income of approximately $878,000 or $0.05 per basic and diluted share for 2005, compared to a net loss of approximately $12.3 million or $0.65 per basic and diluted shares for 2004.
None.
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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 clients partially offset by revenue from new clients 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 years indicated (in millions):
Year Ended December 31, Increase
------------------------------------------------------------- (decrease)
2004 % 2003 % %
-------------- ------------ --------------- ------------- -------------
Selling, general & administrative $ 20.2 39.4% $ 21.0 32.3% (3.6)%
Impairment charges 8.1 15.8 - - -
Depreciation and amortization 1.4 2.7 1.5 2.3 (8.5)%
-------------- ------------ --------------- -------------
Total operating expenses $ 29.7 57.9% $ 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 clients 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
Consolidated Financial Statements -Impairment Charges). Impairment charges
resulting from the loss of certain large clients 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.
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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.
In the twelve months ended December 31, 2005,2006, the Company had a net incomeloss of $878,000.$621,000.
Net cash provided byused in operating activities for the year ended December 31, 2005 and 2004,2006 was $2.5 million, compared to net cash provided by operating activities of $3.4 million and $1.4 million, respectively.in 2005. The increasechange of $2.0approximately $5.9 million in cash provided byused in operating activities is primarily due to increasesdecreases in net income and lower decreasesincreases in accounts receivable.receivable and other assets.
Net cash used in investing activities for the year ended December 31, 2006 and 2005, was $0.6 million, compared with net cash used of $1.3 million for the year
for December 31, 2004.were $516,000 and $628,000, respectively. The decreasechange in net cash used in investing activities was a result of lowerdecreased purchases of property and equipment primarily computer
software and equipment and fewer acquisitions of new businesses in 2005.2006.
Net cash used inprovided by financing activities for the year ended December 31, 20052006 was $1.9$2.3 million, compared with net cash provided byused in financing activities of $0.9$1.9 million for the year ended December 31, 2004.2005. The increasechange in cash usedprovided by financing activities was a result of the Company paying downCompany’s increased borrowing on its lines of credit.
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The above activity resulted in a changedecrease in cash and cash equivalents for the twelve months ended December 31, 20052006 of $1.0 million.
At December 31, 2005, the$766,000.
The Company had positive working capital of $1.6 million and $3.1 million as compared to $1.0 millionfor the twelve months ended December 31, 2006 and 2005, respectively. The Company’s current ratio was 1.13 and 1.31 at December 31, 2004.2006 and 2005, respectively. The increasedecrease in working capital isand current ratio were primarily due to increases in cash, decreases in accounts payable and
lines of credit, accounts payable, accrued liability due to affiliates and decreases in cash partially offset by a decreaseincreases in accounts receivable and increasesdecreases in accrued expenses and other current liabilities and accrued expenses
due to affiliates. The Company's current ratio was 1.31 and 1.08 at December 31,
2005 and 2004, respectively.customer deposits.
In January 2003, the Company (other than SGRP’s foreign subsidiaries) and Webster Business Credit Corporation, then known as Whitehall Business Credit Corporation ("Webster"(“Webster”), entered into the Third Amended and Restated Revolving Credit and Security Agreement (as amended, collectively, the "Credit Facility"“Credit Facility”). The Credit Facility providedprovides for a $15.0$7.0 million revolving credit facility
-27-
that matured online of credit. In January 2006, Webster extended the maturity date to January 23, 2006. The Credit Facility allowed the Company to
borrow up to $15.0 million2009. Borrowings are based upon a borrowing base formula as defined in the agreement (principally 85% of "eligible"“eligible” domestic 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 2005 was 6.9%. At
December 31, 2005, the Credit Facility bears interest at Webster's "Alternative
Base Rate" plus 0.75% (a total of 8.0% 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, Presidentsubsidiaries 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 requiredhas set Minimum Net Worth and minimum Fixed Charge Coverage Ratio
covenant levels for the year ended December 31, 2004. Those amendments did not
change the future covenant levels for 2005.
In January 2006, the Credit Facility was amended to extend its maturity
to January 2009 and to reset the Fixed Charge Coverage Ratio and Minimum Net Worth covenants. It further stipulated that should the Company meet its
covenants for the year ended December 31, 2005, which it has, Webster would
release Mr. Robert Brown and Mr. William Bartels from their obligation to
provide personal guarantees totaling $1.0 million and certain discretionary
reserves. The Credit Facility also limits certain expenditures, including, but not limited to, capital expenditures and other investments.
The Company was not in violationbasic interest rate under the Credit Facility is Webster’s “Alternative Base Rate” plus 0.75% per annum (a total of any covenants8.7% per annum at December 31, 2005,
and does not expect2006), which automatically changes with each change made by Webster in such Alternative Base Rate. The Company at its option, subject to be in violationcertain conditions, may elect to have portions of its loans under the Credit Facility bear interest at future measurement dates. However,
there can be no assurances thatvarious LIBOR rates plus 3.25% per annum based on fixed periods of one, two, three or nine months. The actual average interest rate under the Credit Facility was 8.7% per annum for the twelve months ended December 31, 2006. The Credit Facility is secured by substantially all of the assets of the Company will not be in violation(other than SGRP’s foreign subsidiaries and their assets).
The domestic revolving loan balances outstanding under the Credit Facility were $4.2 million and $2.4 million at December 31, 2006 and 2005, respectively. There were letters of certain
covenants incredit outstanding under the future. ShouldCredit Facility of approximately $453,000 and $552,000 at December 31, 2006 and 2005, respectively. As of December 31, 2006, the Company be in violation, there are no
assurances that Webster will issue such waivers inSPAR Group had unused availability under the future.Credit Facility of $1.5 million out of the remaining maximum $2.3 million unused revolving line of credit after reducing the borrowing base by outstanding loans and letters of credit.
Because of the requirement to maintain a lock box arrangement with Webster and Webster'sWebster’s ability to invoke a subjective acceleration clause at its discretion, borrowings under the Credit Facility are classified as current at December 31, 2005,2006 and December 31, 2004,2005, in accordance with EITF 95-22. 95-22,Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Agreements That Include Both a Subjective Acceleration Clause and a Lock-Box Agreement.Agreement.
The revolving loan balances outstanding underCompany was in violation of Fixed Charge Coverage Ratio covenant at December 31, 2006, and in March 2007 Webster amended the Credit Facility were
$2.4to waive the violation, change the Fixed Charge Coverage Ratio going forward and increase the interest rate by 0.25% per annum. The Company expects that it will comply with the amended covenants in future periods. However, there can be no assurances that the Company will be able to comply with the amended covenants and that if the Company violates the amended covenants, Webster will continue to issue such waivers in the future.
Although Webster does not currently require any personal guarantees from SGRP’s major stockholders, Mr. Robert Brown and Mr. William Bartels, Webster has requested such guarantees in the past. While Messrs. Brown and Bartels have issued personal guarantees in the past there can be no assurances that if Webster requests their guarantees in the future they will continue to issue such guarantees.
The Japanese subsidiary SPAR FM Japan, Inc. has line of credit agreements totaling 100 million and $4.1 millionYen or approximately $840,000 (based upon the exchange rate at December 31, 2005, and December 31, 2004,
respectively. There were letters2006). The outstanding balances under the line of credit outstanding under the Credit Facility
of $0.6agreements were 70 million and $0.7 millionYen or approximately $588,000 at December 31, 2006 and 2005, andrespectively (based upon the exchange rate at those dates). The average interest rate was 1.6% per annum for the twelve months ended December 31, 2004,
respectively. As of2006. In addition, the Japan subsidiary had cash balances totaling 97 million Yen or approximately $815,000 (based upon the exchange rate at December 31, 2006) and 86 million Yen or approximately $723,000 (based upon the exchange rate at December 31, 2005) at December 31, 2006 and 2005 respectively.
In 2006, the Company had unused availability under
the Credit Facility of $3.2 million out of the remaining maximum $4.0 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.Australian subsidiary SPARFACTS Australia Pty. Ltd. entered into a revolving line of credit arrangement with Japanese banksOxford Funding Pty. Ltd. for 300$1.1 million yen(Australian) or $2.7 millionapproximately $789,000 (based upon the exchange rate at September 30, 2005)December 31, 2006). At September
30, 2005, SPAR FM Japan, Inc.December 31, 2006, SPARFACTS Australia Pty. Ltd. had 70 million yen$429,000
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(Australian) or approximately $600,000 loan
balance$339,000 outstanding under the line of credit.credit (based upon the exchange rate at that date). The average interest rate was 10.9% per annum for 2005
and the eight months ended December 31, 2006.
On October 20, 2006, SPAR Canada Company, a wholly owned subsidiary, entered into a secured credit agreement with Royal Bank of Canada providing for a Demand Operating Loan for a maximum borrowing of $1.0 million (Canadian) or approximately $858,000 (based upon the exchange rate at December 31, 2006). The Demand Operating Loan provides for borrowing based upon a borrowing base formula as defined in the agreement (principally 75% of eligible accounts receivable less certain deductions). At December 31, 2006, SPAR Canada Company had $238,000 (Canadian) or approximately $204,000 outstanding under the line of credit (based upon the exchange rate at December 31, 2006). The average interest rate at September 30, 2005 were 1.4%.was 7% per annum for the two months ended December 31, 2006.
The Company'sCompany’s international model is to partner with local merchandising companies and combine theirthe partner’s knowledge of the local market with the Company'sCompany’s proprietary software and expertise in the merchandising and marketing business. In 2001, the Company established its first joint ventureinternational subsidiary and has continued this strategy. As of this filing, the Company is currently operating in Japan, Canada, Turkey, South Africa, India, Romania, China, Lithuania, Latvia, Australia and China. The Company also
announced the establishment of a joint venture subsidiary in Lithuania, which is
projected to begin operations in April 2006.New Zealand through 9 subsidiaries.
Certain of these joint ventures and joint venturethe international subsidiaries are marginally profitable and certainwhile 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. -28-
Company'sCompany’s major clients, or a significant further reduction in business from such clients, or the inability to acquire new clients, or the Company'sCompany’s inability to remain profitable, or the inability to obtain bank waivers in the event of future covenant violations could have a material adverse effect on the Company'sCompany’s cash resources and its ongoing ability to fund operations.
The following table contains a summary of certain of the Company'sCompany’s contractual obligations by category as of December 31, 20052006 (in thousands).
| Contractual Obligations | Payments due by Period | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||
| Credit Facilities | $ | 5,318 | $ | 5,318 | $ | - | $ | - | $ | - | |||||||||||
| Operating Lease Obligations | 2,340 | 766 | 1,173 | 401 | $ | - | |||||||||||||||
| Total | $ | 7,658 | $ | 6,084 | $ | 1,173 | $ | 401 | $ | - | |||||||||||
In addition to the above table, at December 31, 2005,2006, the Company had approximately $550,000$453,000 in outstanding Letters of Credit.
The Company'sCompany’s accounting policies for financial instruments and disclosures relating to financial instruments require that the Company'sCompany’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'sCompany’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.
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The Company is exposed to market risk related to the variable interest rate on its lines of credit. At December 31, 2005,2006, the Company'sCompany’s outstanding debt totaled $3.0$5.3 million, which consisted of domestic variable-rate (8%) debt
of $2.4 million and international variable rate (1.4%) debt of $0.6 million.as noted in the table below (in thousands):
| Location | Variable Interest Rate (1) | Local Currency Amount | US Dollars Equivalent (2) | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| United States | 8.7 | % | 4,187 USD | $ | 4,187 | ||||||
| Japan | 1.6 | % | 70,000 YEN | 588 | |||||||
| Australia | 10.9 | % | 429 AUD | 339 | |||||||
| Canada | 7.0 | % | 238 CAD | 204 | |||||||
| $ | 5,318 | ||||||||||
| (1) | Per annum interest at December 31, 2006 |
| (2) | Based on exchange rate at December 31, 2006 |
Based on 20052006 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 $25,000.$33,000.
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.subsidiaries. In both 20052006 and 2004,2005, these exposures are primarily concentrated in the Canadian dollar,Dollar, South African randRand, Australian Dollar and Japanese yen.Yen. At December 31, 2005,2006, international assets totaled $5.0$5.6 million and international liabilities totaled $7.5$5.7 million. For 2005,2006, international revenues totaled $14.9$23.2 million and the Company'sCompany’s share of the net incomeloss was approximately $167,000.
$630,000.
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.
See Item 15 of this Annual Report on Form 10-K.
None.
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The Company'sCompany’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company'sCompany’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'sCompany’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'sCommission’s rules and forms.
There were no significant changes in the Company'sCompany’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 domestic internal controls over financial reporting and is currently developing a detailed plan to document and test internal controls for its international operations as required by Section 404 of the Sarbanes-Oxley Act of 2002.
None.
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Reference is or was at December 31, 2005, an executive officer and/or
director for the Company.
Reference is made to the information set forth in our definitive proxy statement, which will be filed with the Securities and Exchange Commission for our Annual Meeting of Shareholders, presently scheduled to be held on May 24, 2007, pursuant to Regulation 14A not later than 120 days after the end of our fiscal year, which information is incorporated by reference to this Annual Report on Form 10-K. Notwithstanding the foregoing, information appearing in the sections “Executive Compensation The following table sets forth all compensation received for services
rendered to SGRP in all capacities for the years ended December 31, 2005, 2004,
and 2003 (except for amounts paid to SMS, SMSI and SIT, see Item 13 - Certain
Relationships and Related Transactions, below) (i) by SGRP's Chief Executive
Officer, and (ii) eachReport of the other four most highly compensated executive
officers of SGRPCompensation Committee” and its affiliates who were serving as executive officers of
SGRP or performing equivalent functions for SGRP through an affiliate, at
December 31, 2005 (collectively, the "Named Executive Officers").
Summary Compensation Table
Reference is made to the information set forth certain information regarding beneficial
ownership of SGRP's common stock as of March 15, 2006 by: (i) each person (or
group of affiliated persons) who is known by SGRP to own beneficially more than
5% of SGRP's common stock; (ii) each of SGRP's directors; (iii) each of the
Named Executive Officers in the Summary Compensation Table; and (iv) SGRP'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.
Reference is made to the Certificate of Amendmentinformation set forth in the Company’s definitive proxy statement, which will be filed with the SecretarySecurities and Exchange Commission for our Annual Meeting of StateShareholders, presently scheduled to be held on May 24, 2007, pursuant to Regulation 14A not later than 120 days after the end of the State of Delaware on July 8, 1999
(which, among other things, changes the Company's name to SPAR
Group, Inc.) (incorporatedCompany’s most recent fiscal year, which information is incorporated by reference to Exhibit 3.1this Annual Report on Form 10-K. Notwithstanding the foregoing, information appearing in the sections “Executive Compensation Report of the Compensation Committee” and “Audit Committee Report” shall not be deemed to be incorporated by reference in this Annual Report on Form 10-K.
Reference is made to the Company's Form 10-Qinformation set forth in the Company’s definitive proxy statement, which will be filed with the Securities and Exchange Commission for the 3rd Quarter ended September 30,
1999).
3.2 Amended and Restated By-Lawsour Annual Meeting of SPAR Group, Inc. adoptedShareholders, presently scheduled to be held on May 18, 2004 (incorporated24, 2007, pursuant to Regulation 14A not later than 120 days after the end of the Company’s most recent fiscal year, which information is incorporated by reference to the Company's
reportthis Annual Report on Form 8-K, as filed with10-K. Notwithstanding the SEC on May 27, 2004).
3.3 Amended and Restated Charter offoregoing, information appearing in 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 with the SEC on May 27, 2004).
3.4 Chartersections “Executive Compensation Report of the Compensation Committee” and “Audit Committee of the Board of
Directors of SPAR Group, Inc. adopted on May 18, 2004
(incorporatedReport” shall not be deemed to be incorporated by reference to the Company's reportin this Annual Report on Form 8-K, as filed with the SEC 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 with
the SEC on May 27, 2004).
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3.6 SPAR Group, Inc.10-K.
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| 1. Index to Financial Statements filed as part of this report: | ||
| Reports of Independent Registered Public Accounting Firms | ||
| - Rehmann Robson | F-1 | |
| - Gureli Yeminli Mali Mu(0)avirlik A.(a) | F-2 | |
| - Baker Tilly Klitou and Partners S.R.L | F-3 | |
| - Nagesh Behl & Co. | F-4 | |
| - S. S. Kothari Mehta & Co. | F-5 | |
| - UAB " Rezultatas " | F-6 | |
| - Pitcher Partners | F-7 | |
| Consolidated Balance Sheets as of December 31, 2006, and December 31, 2005 | F-8 | |
| Consolidated Statements of Operations for the years ended | ||
| December 31, 2006, December 31, 2005, and December 31, 2004 | F-9 | |
| Consolidated Statements of Stockholders' Equity for the years | ||
| ended December 31, 2006, December 31, 2005, and December 31, 2004 | F-10 | |
| Consolidated Statements of Cash Flows for the years ended | ||
| December 31, 2006, December 31, 2005, and December 31, 2004 | F-11 | |
| Notes to Consolidated Financial Statements | F-12 | |
| 2. Financial Statement Schedules. | ||
| Schedule II - Valuation and Qualifying Accounts for the three years | ||
| ended December 31, 2006 | F-35 |
| Exhibit Number | Description |
| 3.1 | Certificate of Incorporation of SPAR Group, Inc. (referred to therein under its former name PIA Merchandising Services, Inc.), as amended (incorporated by reference to the Company’s Registration Statement on Form S-1 (Registration No. 33-80429), as filed with the Securities and Exchange Commission (“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 with the SEC 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 with the SEC on May 27, 2004). |
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| 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 with the SEC 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 with the SEC 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 with the SEC on May 27, 2004). |
| 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 with the SEC 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 through May 16, 2006 (incorporated by reference to the Company’s report on Form 10-Q for quarter ended September 30, 2006 as filed with the SEC on November 14, 2006. |
| 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 | Change in Control Severance Agreement between William H. Bartels and SPAR Group, Inc., dated as of March 30, 2007 (filed herewith). |
| 10.5 | Change in Control Severance Agreement between Kori G. Belzer and SPAR Group, Inc., dated as of March 30, 2007 (filed herewith). |
| 10.6 | Change in Control Severance Agreement between Patricia Franco and SPAR Group, Inc., dated as of March 30, 2007 (filed herewith). |
| 10.7 | Change in Control Severance Agreement between James R. Segreto and SPAR Group, Inc., dated as of March 30, 2007 (filed herewith). |
| 10.8 | 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 with the SEC on May 21, 2004). |
| 10.9 | 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 with the SEC on May 21, 2004). |
| 10.10 | 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 with the SEC on May 21, 2004). |
| 10.11 | 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, as filed with the SEC on March 31, 2002). |
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| 10.12 | 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, as filed with the SEC on March 31, 2002). |
| 10.13 | 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 (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
| 10.14 | Amended and Restated Equipment Leasing Schedule 001 to Master Lease Agreement by and between SPAR Marketing Services, Inc., and SPAR Marketing Force, Inc., dated as of November 1, 2004, relating to lease of handheld computer equipment (incorporated by reference to the Company’s quarterly report on Form 10-Q for quarter ended March 31, 2005, as filed with the SEC on May 18, 2005). |
| 10.15 | Amended and Restated Equipment Leasing Schedule 002 to Master Lease Agreement by and between SPAR Marketing Services, Inc., and SPAR Marketing Force, Inc., dated as of January 4, 2005, relating to lease of handheld computer equipment (incorporated by reference to the Company’s quarterly report on Form 10-Q for quarter ended March 31, 2005, as filed with the SEC on May 18, 2005). |
| 10.16 | Amended and Restated Equipment Leasing Schedule 003 to Master Lease Agreement by and between SPAR Marketing Services, Inc., and SPAR Marketing Force, Inc., dated as of January 31, 2005, relating to lease of handheld computer equipment (incorporated by reference to the Company’s quarterly report on Form 10-Q for quarter ended March 31, 2005, as filed with the SEC on May 18, 2005). |
| 10.17 | Equipment Leasing Schedule 004 to Master Lease Agreement by and between SPAR Marketing Services, Inc., and SPAR Marketing Force, Inc., dated as of March 24, 2005, relating to lease of handheld computer equipment (incorporated by reference to the Company’s quarterly report on Form 10-Q for quarter ended March 31, 2005, as filed with the SEC on May 18, 2005). |
| 10.18 | 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 (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
| 10.19 | Amended and Restated Equipment Leasing Schedule 001 to Master Lease Agreement by and between SPAR Marketing Services, Inc., and SPAR Canada Company dated as of January 4, 2005, relating to lease of handheld computer equipment (incorporated by reference to the Company’s quarterly report on Form 10-Q for quarter ended March 31, 2005, as filed with the SEC on May 18, 2005). |
| 10.20 | Joint Venture Agreement dated as of March 26, 2004, by and between Solutions Integrated Marketing Services Ltd. and SPAR Group International, Inc., respecting the Corporation’s subsidiary in India (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
| 10.21 | 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, respecting the Corporation’s subsidiary in South Africa (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
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| 10.22 | 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., respecting the Corporation’s subsidiary in Turkey (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
| 10.23 | Joint Venture Agreement dated as of May 1, 2001, by and between Paltac Corporation and SPAR Group, Inc., respecting the Corporation’s subsidiary in Japan (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
| 10.24 | Agreement on Amendment dated as of August 1, 2004, by and between SPAR Group, Inc. and SPAR FM Japan, Inc., respecting the Corporation’s subsidiary in Japan (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
| 10.25 | Joint Venture Agreement dated as of January 26, 2005, by and between Best Mark Investments Holdings Ltd. and SPAR International Ltd., respecting the Corporation’s subsidiary in China (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
| 10.26 | Joint Venture Agreement dated as of December 14, 2004, by and between Field Insights S.R.L. and SPAR Group International, Inc., respecting the Corporation’s subsidiary in Romania (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
| 10.29 | 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, as filed with the SEC on August 14, 2002). |
| 10.30 | 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, as filed with the SEC on August 14, 2002). |
| 10.31 | 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, as filed with the SEC on August 14, 2002). |
| 10.32 | 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 (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
| 10.33 | Payoff and Release Letter by and between STIMULYS, Inc., and SPAR Incentive Marketing, Inc., dated as of September 10, 2004 (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
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| 10.34 | Sales Proceeds Agreement by and between STIMULYS, Inc. and SPAR Incentive Marketing, Inc., dated as of September 10, 2004 (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
| 10.35 | 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, as filed with the SEC on March 31, 2003). |
| 10.36 | 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 with the SEC on May 26, 2004). |
| 10.37 | 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 with the SEC on May 26, 2004). |
| 10.38 | 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 with the SEC on June 28, 2004). |
| 10.39 | 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 with the SEC on August 23, 2004). |
| 10.40 | 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, as filed with the SEC on November 17, 2004). |
| 10.41 | 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 (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005). |
| 10.42 | 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, 2005 (incorporated by reference to the Company’s quarterly report on Form 10-Q for quarter ended March 31, 2005, as filed with the SEC on May 18, 2005). |
| 10.43 | 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 May 11, 2005 (incorporated by reference to the Company’s quarterly report on Form 10-Q for quarter ended March 31, 2005, as filed with the SEC on May 18, 2005). |
| 10.44 | 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 August 10, 2005, with respect to the fiscal quarter ended June 30, 2005 (incorporated by reference to the Company’s quarterly report on Form 10-Q for quarter ended June 30, 2005, as filed with the SEC on August 15, 2005). |
-36-
| 10.45 | 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 November 10, 2005, with respect to the fiscal quarter ended September 30, 2005 (incorporated by reference to the Company’s quarterly report on Form 10-Q for quarter ended September 30, 2005, as filed with the SEC on November 14, 2005). |
| 10.46 | Amendment No. 7 to the Third Amended and Restated Revolving Credit and Security Agreement dated as of January 18, 2006, by and among, SPAR Marketing Force, Inc., SPAR, Inc., SPAR/Burgoyne Retail Services, Inc., the Registrant, SPAR Incentive Marketing, Inc., SPAR Trademarks, Inc., SPAR Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR Acquisition, Inc., SPAR Technology Group, Inc., SPAR/PIA Retail Services, Inc., Retail Resources, Inc., Pivotal Field Services, Inc., PIA Merchandising Co., Inc., Pacific Indoor Display, Inc., Pivotal Sales Company, SPAR All Store Marketing Services, Inc., and SPAR Bert Fife, Inc., each as a "Borrower" and collectively as the "Borrowers" thereunder, and Webster Business Credit Corporation (formerly known as Whitehall Business Credit Corporation), as the "Lender" thereunder (incorporated by reference to the Company's report on the Form 8-K, as filed with the SEC on January 26, 2006). |
| 10.47 | 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, as filed with the SEC on March 31, 2004). |
| 10.49 | Confirmation of Credit Facilities Letter by Royal Bank of Canada in favor of SPAR Canada Company dated as of October 17, 2006 (filed herewith). |
| 10.50 | General Security Agreement by SPAR Canada Company in favor of Royal Bank of Canada dated as of October 20, 2006 (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, as filed with the SEC 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, as filed with the SEC on May 5, 2004). |
| 21.1 | List of Subsidiaries. |
| 23.1 | Consent of Rehmann Robson. |
| 23.2 | Consent of Gureli Yeminli Mali Musavirlik A.S. |
| 23.3 | Consent of Baker Tilly Klitou and Partners S.R.L. |
| 23.4 | Consent of Nagesh Behl & Co. |
| 23.5 | Consent of S. S. Kothari Mehta & Co. |
| 23.6 | Consent of UAB “Rezultatas” |
| 23.7 | Consent of Pitcher Partners. |
| 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. |
-37-
| 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. |
| 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. |
-38-
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to the report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPAR Group, Inc.
By: /s/ Robert G. Brown
-----------------------------------------
Robert G. Brown
President, Chief Executive Officer and
Chairman of the Board
Date: March 31, 2006
-----------------------------------------
| SPAR Group, Inc. | |
| By:/s/ Robert G. Brown | |
| Robert G. Brown | |
| President, Chief Executive Officer and Chairman of | |
| the Board | |
| Date: April 2, 2007 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment to the report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Robert G. Brown President, Chief Executive Officer, Director,
- --------------------------- and Chairman of the Board
Robert G. Brown
Date: March 31, 2006
/s/ William H. Bartels Vice Chairman and Director
- ---------------------------
William H. Bartels
Date: March 31, 2006
/s/ Robert O. Aders Director
- ---------------------------
Robert O. Aders
Date: March 31, 2006
/s/ Jack W. Partridge Director
- ---------------------------
Jack W. Partridge
Date: March 31, 2006
/s/ Jerry B. Gilbert Director
- ---------------------------
Jerry B. Gilbert
Date: March 31, 2006
/s/ Lorrence T. Kellar Director
- ---------------------------
Lorrence T. Kellar
Date: March 31, 2006
/s/ Charles Cimitile Chief Financial Officer,
- --------------------------- Treasurer and Secretary (Principal Financial and
Charles Cimitile Accounting Officer)
Date: March 31, 2006
-47-
| SIGNATURE | TITLE |
| /s/ Robert G. Brown | President, Chief Executive Officer, Director, |
| Robert G. Brown | and Chairman of the Board |
| Date: April 2, 2007 | |
| /s/ William H. Bartels | Vice Chairman and Director |
| William H. Bartels | |
| Date: April 2, 2007 | |
| /s/ Robert O. Aders | Director |
| Robert O. Aders | |
| Date: April 2, 2007 | |
| /s/ Jack W. Partridge | Director |
| Jack W. Partridge | |
| Date: April 2, 2007 | |
| /s/ Jerry B. Gilbert | Director |
| Jerry B. Gilbert | |
| Date: April 2, 2007 | |
| /s/ Lorrence T. Kellar | Director |
| Lorrence T. Kellar | |
| Date: April 2, 2007 | |
| /s/ C. Manly Molpus | Director |
| C. Manly Molpus | |
| Date: April 2, 2007 | |
| /s/ Charles Cimitile | Chief Financial Officer, |
| Charles Cimitile | Treasurer and Secretary (Principal Financial and Accounting Officer) |
| Date: April 2, 2007 |
-39-
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
SPAR Group, Inc. and Subsidiaries
Tarrytown, New York
We have audited the accompanying consolidated balance sheets of SPAR Group, Inc. and Subsidiaries as of December 31, 20052006 and 2004,2005, and the related consolidated statements of operations, stockholders'stockholders’ equity, and cash flows for each of the three years then ended.in the period ended December 31, 2006. Our audits also included the financial statement schedule for these years as listed in the index at Item 15. These consolidated financial statements and schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We did not audit the financial statements of SPARFACTS Australia PTY LTD.; UAB SPAR RSS Baltic; SPAR Merchandising Romania, Ltd.; SPAR Turkey, Ltd. (SPAR Alan Pazarlama Hizmetleri Limited Sirketi); or SPAR Solutions India Private Limited as of and for the year ended December 31, 2006. These statements reflect total assets constituting 15.6% of consolidated total assets as of December 31, 2006, and total revenues constituting 12.2% of total consolidated revenue for the year then ended. Such financial statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for SPARFACTS Australia PTY LTD.; UAB SPAR RSS Baltic; SPAR Merchandising Romania, Ltd.; SPAR Turkey, Ltd. (SPAR Alan Pazarlama Hizmetleri Limited Sirketi); and SPAR Solutions India Private Limited for 2006, is based solely on the reports of the other auditors. We did not audit the financial statements of SPAR Merchandising Romania, Ltd.; SPAR Turkey, Ltd. (SPAR Alan Pazarlama Hizmetleri Limited Sirketi); or SPAR Solutions India Private Limited as of and for the year ended December 31, 2005. These statements reflect total assets constituting 4.9% of consolidated total assets as of December 31, 2005, and total revenues constituting 2.7% of total consolidated revenue for the year then ended. Such financial statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for SPAR Merchandising Romania, Ltd.; SPAR Turkey, Ltd. (SPAR Alan Pazarlama Hizmetleri Limited Sirketi); and SPAR Solutions India Private Limited for 2005, is based solely on the reports of the other auditors.
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 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 audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors for 2006 and 2005, 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, 20052006 and 2004,2005, and the consolidated results of their operations and their cash flows for the for each of the three years thenin the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial schedule for those years, 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
| /s/ Rehmann Robson |
Troy, Michigan
March 16, 2006
30, 2007
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SPAR Alan Pazarlama Hizmetleri Limited Sirketi
Istanbul, Turkey
We have audited the accompanying balance sheets of Spar Alan Pazarlama Hizmetleri Limited Sirketi (the "Company"“Company”) as at December 31, 2006 and 2005 and the related statement of operations and stockholders'stockholders’ equity for the yearyears then ended. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
audits.
We conducted our auditaudits 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 auditaudits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005 and the result of its operations for the yearyears then ended in conformity with U.S. generally accepted accounting principles.
/s/ Gureli Yeminli Mali Musavirlik A.S.
An independent member of Baker Tilly International
| /s/ Güreli Yeminli Mali Müºavirlik A.S. |
Istanbul, Turkey
March 10, 2006
February 14, 2007
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SPAR Merchandising Romania S.R.L.
Bucharest, Romania
We have audited the accompanying balance sheet of Spar Merchandising Romania SRL (“the Company”) as of 31 December 31,2006 and 2005, and the related statements of operations, stockholders'income, shareholders’ equity, and cash flows for the period from 20 April 20, 2005 to 31 December 2005 and for the year ended 31 2005.December 2006. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
audits.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversite 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 also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of 31 December 2006, and 31 December 2005, and the results of its operations and its cash flows for the period from 20 April 2005 to 31 December 2005 and for the year ended 31 December 2006 in conformity with accounting principles generally accepted in the United States of America.
| /s/ Baker Tilly Klitou and Partners S.R.L. |
Bucharest, Romania
March 21, 2007
F-3
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SPAR Solutions Merchandising Private Limited
New Delhi, India
We have audited the accompanying balance sheets of SPAR Solutions Merchandising Private Limited, a company incorporated under the laws of India, as at 31st December, 2006 and 2005 and the related statements of income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards in the Public Company 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 also includes examining,examination on a test basis, evidence supporting the amountamounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our auditaudits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the companySPAR Solutions Merchandising Private Limited as of December 31, 2006 and 2005, and the results of itstheir operations and itstheir cash flows for the period from
April 20, 2005 to December 31, 2005years then ended in conformity with U.S.accounting principles generally accepted accounting principles.
/s/ Baker Tilly Klitou and Partners S.R.L.
Bucharest, Romania
March 29, 2006
F-3
| /s/ Nagesh Behl & Co. |
New Delhi, India
February 22, 2007
F-4
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SPAR Solutions Merchandising Private Limited
New Delhi, India
We have audited the attached balance sheets of SPAR Solutions Merchandising Private Limited, a company incorporated in India, as at 31st December, 2005 and 2004 and also the Statements of Income, Changes in shareholders'shareholders’ equity and Cash Flows for the years then ended. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 auditaudits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the company as at 31st December 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ S.S. Kothari Mehta & Co.
| /s/ S. S. Kothari Mehta & Co. |
New Delhi, India
March 30, 2006
F-4
F-5
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SPAR Group, Inc. and Subsidiaries
Tarrytown, New York
UAB “SPAR RRS BALTIC”
Vilnius, Lithuania
We have audited the consolidatedaccompanying balance sheet of UAB “SPAR RSS BALTIC” as of December 31, 2006, and related statements of operations, stockholders'income, stockholders’ equity and cash flows of SPAR Group, Inc. and Subsidiariesflow for the year ended December
31, 2003. Our audit also included thethen ended. These financial statement schedule listed in the
Index at Item 15. These consolidated financial statements and schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express as opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards promulgated by the Public Company Accounting Oversight Board. 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 audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of UAB “SPAR RSS BALTIC” as of December 31, 2006, and the results of its operations for the year then ended in conformity with U.S. generally accepted accounting principles.
| /s/ UAB “Rezultatas” |
Vilnius, Lithuania
19 February 2007
F-6
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SPARFACTS
Melbourne, Australia
We have audited the accompanying balance sheet of SPARFACTS Pty Ltd (“the Company”) as of December 31, 2006, and the related statements of operations, stockholders’ equity, and cash flows for the period from March 30, 2006 to December 31, 2006. These financial statements 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 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidatedfinancial position of the Company as at December 31, 2006, and the results of SPAR Group, Inc.'sits operations and its cash flows for the year endedperiod from March 30, 2006, to December 31, 2003,2006, 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.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 13, 2004
F-5
| /s/ Pitcher Partners |
Melbourne, Australia
March 15, 2007
F-7
(In thousands, except share and per share data)
December 31,
-------------------------------------
2005 2004
------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 1,914 $ 887
Accounts receivable, net 10,656 11,307
Prepaid expenses and other current assets 702 657
------------- --------------
Total current assets 13,272 12,851
Property and equipment, net 1,131 1,536
Goodwill 798 798
Other assets 216 636
------------- --------------
Total assets $ 15,417 $ 15,821
============= ==============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,597 $ 2,158
Accrued expenses and other current liabilities 2,639 2,391
Accrued expenses due to affiliates 1,190 987
Restructuring charges 99 250
Customer deposits 1,658 1,147
Lines of credit 2,969 4,956
------------- --------------
Total current liabilities 10,152 11,889
Other long-term liabilities 10 12
Minority interest 405 206
------------- --------------
Total liabilities 10,567 12,107
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 -
18,916,847 - 2005
18,858,972 - 2004 189 189
Treasury stock (1) (108)
Accumulated other comprehensive gain (loss) 17 (86)
Additional paid-in capital 11,059 11,011
Accumulated deficit (6,414) (7,292)
------------- --------------
Total stockholders' equity 4,850 3,714
------------- --------------
Total liabilities and stockholders' equity $ 15,417 $ 15,821
============= ==============
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,148 | $ | 1,914 | ||||
| Accounts receivable, net | 12,982 | 10,656 | ||||||
| Prepaid expenses and other current assets | 553 | 702 | ||||||
| Total current assets | 14,683 | 13,272 | ||||||
| Property and equipment, net | 901 | 1,131 | ||||||
| Goodwill | 798 | 798 | ||||||
| Other assets | 1,695 | 216 | ||||||
| Total assets | $ | 18,077 | $ | 15,417 | ||||
| Liabilities and stockholders' equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,551 | $ | 1,597 | ||||
| Accrued expenses and other current liabilities | 2,864 | 2,639 | ||||||
| Accrued expenses due to affiliates | 1,752 | 1,190 | ||||||
| Restructuring charges | - | 99 | ||||||
| Customer deposits | 560 | 1,658 | ||||||
| Lines of credit | 5,318 | 2,969 | ||||||
| Total current liabilities | 13,045 | 10,152 | ||||||
| Minority interest and other long-term liabilities | 504 | 415 | ||||||
| Total liabilities | 13,549 | 10,567 | ||||||
| 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 - | ||||||||
| 18,934,182 - 2006 | ||||||||
| 18,916,847 - 2005 | 189 | 189 | ||||||
| Treasury stock | (1 | ) | (1 | ) | ||||
| Accumulated other comprehensive gain (loss) | (109 | ) | 17 | |||||
| Additional paid-in capital | 11,484 | 11,059 | ||||||
| Accumulated deficit | (7,035 | ) | (6,414 | ) | ||||
| Total stockholders' equity | 4,528 | 4,850 | ||||||
| Total liabilities and stockholders' equity | $ | 18,077 | $ | 15,417 | ||||
See accompanying notes.
F-6
F-8
(In thousands, except per share data)
Year Ended December 31,
-------------------------------------------------
2005 2004 2003
-------------------------------------------------
Net revenues $ 51,586 $ 51,370 $ 64,859
Cost of revenues 31,939 33,644 42,338
-------------------------------------------------
Gross profit 19,647 17,726 22,521
Selling, general and administrative expenses 17,561 20,222 20,967
Impairment charges - 8,141 -
Depreciation and amortization 1,031 1,399 1,529
-------------------------------------------------
Operating income (loss) 1,055 (12,036) 25
Interest expense 191 220 269
Other (income) expense (424) (754) 237
-------------------------------------------------
Income (loss) before provision for income taxes and 1,288 (11,502) (481)
minority interest
Provision for income taxes 242 853 58
-------------------------------------------------
Net income (loss) before minority interest 1,046 (12,355) (539)
Minority interest 168 (87) -
-------------------------------------------------
Net income (loss) $ 878 $ (12,268) $ (539)
=================================================
Basic/diluted net income (loss) per common share:
Net income (loss) - basic/diluted $ 0.05 $ (0.65) $ (0.03)
=================================================
Weighted average common shares - basic 18,904 18,859 18,855
=================================================
Weighted average common shares - diluted 19,360 18,859 18,855
=================================================
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2004 | ||||||||||||||
| Net revenues | $ | 57,316 | $ | 51,586 | $ | 51,370 | ||||||||||
| Cost of revenues | 37,463 | 31,939 | 33,644 | |||||||||||||
| Gross profit | 19,853 | 19,647 | 17,726 | |||||||||||||
| Selling, general and administrative expenses | 19,831 | 16,691 | 20,222 | |||||||||||||
| Impairment charges | - | - | 8,141 | |||||||||||||
| Depreciation and amortization | 746 | 1,031 | 1,399 | |||||||||||||
| Operating (loss) income | (724 | ) | 1,925 | (12,036 | ) | |||||||||||
| Interest expense | 237 | 191 | 220 | |||||||||||||
| Other (income) expense | (338 | ) | 446 | (754 | ) | |||||||||||
| (Loss) income before provision for income taxes and | (623 | ) | 1,288 | (11,502 | ) | |||||||||||
| minority interest | ||||||||||||||||
| Provision for income taxes | 99 | 242 | 853 | |||||||||||||
| (Loss) income before minority interest | (722 | ) | 1,046 | (12,355 | ) | |||||||||||
| Minority interest | (101 | ) | 168 | (87 | ) | |||||||||||
| Net (loss) income | $ | (621 | ) | $ | 878 | $ | (12,268 | ) | ||||||||
| Basic/diluted net (loss) income per common share: | ||||||||||||||||
| Net (loss) income - basic/diluted | $ | (0.03 | ) | $ | 0.05 | $ | (0.65 | ) | ||||||||
| Weighted average common shares - basic | 18,934 | 18,904 | 18,859 | |||||||||||||
| Weighted average common shares - diluted | 18,934 | 19,360 | 18,859 | |||||||||||||
See accompanying notes.
F-7
F-9
(In thousands)
Common Stock Accumulated
------------------------------- Additional Other Total
Treasury Paid-In Retained Comprehensive Stockholders'
Shares Amount Stock Capital Earnings (Loss)Gain Equity
--------------------------------------------------------------------------------------
Balance at January 1, 2003 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
Stock options exercised and employee
stock purchase plan purchases 58 - 107 (22) - - 85
Issuance of stock options to non-
employees for services - - - 70 - - 70
Comprehensive gain:
Foreign currency translation gain 103 103
Net income 878 878
----------
Comprehensive gain 981
--------------------------------------------------------------------------------------
Balance at December 31, 2005 18,917 $ 189 $ (1) $ 11,059 $ (6,414)$ 17 $ 4,850
=====================================================================================
| Common Stock | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Amount | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Gain | Total Stock-holders' Equity | |||||||||||||||||
| Balance at January 1, 2004 | 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 | |||||||||||||
| Stock options exercised and employee | |||||||||||||||||||||||
| stock purchase plan purchases | 58 | - | 107 | (22 | ) | - | - | 85 | |||||||||||||||
| Issuance of stock options to non- | |||||||||||||||||||||||
| employees for services | - | - | - | 70 | - | - | 70 | ||||||||||||||||
| Comprehensive gain: | |||||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | - | 103 | 103 | ||||||||||||||||
| Net income | - | - | - | - | 878 | - | 878 | ||||||||||||||||
| Comprehensive gain | 981 | ||||||||||||||||||||||
| Balance at December 31, 2005 | 18,917 | $ | 189 | $ | (1 | ) | $ | 11,059 | $ | (6,414) | $ | 17 | $ | 4,850 | |||||||||
| Stock options exercised and employee | |||||||||||||||||||||||
| stock purchase plan purchases | 17 | - | - | 1 | - | - | 1 | ||||||||||||||||
| Issuance of stock options to non- | |||||||||||||||||||||||
| employees for services | - | - | - | 110 | - | - | 110 | ||||||||||||||||
| Issuance of stock options to | |||||||||||||||||||||||
| employees for services | - | - | - | 314 | - | - | 314 | ||||||||||||||||
| Comprehensive loss: | |||||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | - | (126 | ) | (126 | ) | ||||||||||||||
| Net loss | - | - | - | - | (621 | ) | - | (621 | ) | ||||||||||||||
| Comprehensive loss | (747 | ) | |||||||||||||||||||||
| Balance at December 31, 2006 | 18,934 | 189 | (1 | ) | 11,484 | (7,035 | ) | (109 | ) | 4,528 | |||||||||||||
See accompanying notes.
F-8
F-10
(In thousands)
Year Ended December 31,
------------------------------------------------
2005 2004 2003
------------------------------------------------
Operating activities
Net income (loss) $ 878 $ (12,268) $ (539)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Impairment charges - 8,141 -
Minority interest earnings in subsidiaries 168 (87) -
Share of loss in joint venture - - 270
Deferred tax asset adjustments - 710 (131)
Depreciation 1,031 1,399 1,529
Issuance of stock options for service 70 78 416
Changes in operating assets and liabilities:
Accounts receivable 650 2,635 2,516
Prepaid expenses and other assets 375 (126) (330)
Accounts payable, accrued expenses, other current
liabilities and customer deposits 201 756 422
Accrued expenses due to affiliates 203 (104) 133
Restructuring charges (151) 250 (904)
------------------------------------------------
Net cash provided by operating activities 3,425 1,384 3,382
Investing activities
Purchases of property and equipment (628) (1,260) (1,456)
Deposit related to acquisition - 350 (350)
Acquisition of businesses - (399) (1,091)
------------------------------------------------
Net cash used in investing activities (628) (1,309) (2,897)
Financing activities
Net (payments) borrowings on lines of credit (1,987) 872 3,936
Other long-term liabilities 29 35 -
Proceeds from employee stock purchase plan and exercised
options 85 (40) 485
Payments of loans from stockholders - - (3,951)
Purchase of treasury stock - - (924)
------------------------------------------------
Net cash (used in) provided by financing activities (1,873) 867 (454)
Translation gain (loss) 103 (79) (7)
Net change in cash and cash equivalents 1,027 863 24
Cash and cash equivalents at beginning of year 887 24 -
------------------------------------------------
Cash and cash equivalents at end of year $ 1,914 $ 887 $ 24
=================================================
Supplemental disclosure of cash flows information
Interest paid $ 132 $ 180 $ 241
=================================================
Income taxes paid $ 127 $ 86 $ 578
=================================================
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2004 | ||||||||||||||
| Operating activities | ||||||||||||||||
| Net (loss) income | $ | (621 | ) | $ | 878 | $ | (12,268 | ) | ||||||||
| Adjustments to reconcile net income (loss) to net cash | ||||||||||||||||
| provided by operating activities | ||||||||||||||||
| Impairment charges | - | - | 8,141 | |||||||||||||
| Minority interest earnings in subsidiaries | 93 | 168 | (87 | ) | ||||||||||||
| Deferred tax asset adjustments | - | - | 710 | |||||||||||||
| Depreciation | 746 | 1,031 | 1,399 | |||||||||||||
| Issuance of stock options for service | 424 | 70 | 78 | |||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | (2,326 | ) | 650 | 2,635 | ||||||||||||
| Prepaid expenses and other assets | (1,331 | ) | 375 | (126 | ) | |||||||||||
| Accounts payable, accrued expenses, other current | ||||||||||||||||
| liabilities and customer deposits | 82 | 201 | 756 | |||||||||||||
| Accrued expenses due to affiliates | 562 | 203 | (104 | ) | ||||||||||||
| Restructuring charges | (99 | ) | (151 | ) | 250 | |||||||||||
| Net cash (used in) provided by operating activities | (2,470 | ) | 3,425 | 1,384 | ||||||||||||
| Investing activities | ||||||||||||||||
| Purchases of property and equipment | (516 | ) | (628 | ) | (1,260 | ) | ||||||||||
| Deposit related to acquisition | - | - | 350 | |||||||||||||
| Acquisition of businesses | - | - | (399 | ) | ||||||||||||
| Net cash used in investing activities | (516 | ) | (628 | ) | (1,309 | ) | ||||||||||
| Financing activities | ||||||||||||||||
| Net borrowings (payments) on lines of credit | 2,349 | (1,987 | ) | 872 | ||||||||||||
| Other long-term liabilities | (4 | ) | 29 | 35 | ||||||||||||
| Proceeds from employee stock purchase plan and exercised | ||||||||||||||||
| options | 1 | 85 | (40 | ) | ||||||||||||
| Net cash provided by (used in) financing activities | 2,346 | (1,873 | ) | 867 | ||||||||||||
| Translation (loss) gain | (126 | ) | 103 | (79 | ) | |||||||||||
| Net change in cash and cash equivalents | (766 | ) | 1,027 | 863 | ||||||||||||
| Cash and cash equivalents at beginning of year | 1,914 | 887 | 24 | |||||||||||||
| Cash and cash equivalents at end of year | $ | 1,148 | $ | 1,914 | $ | 887 | ||||||||||
| Supplemental disclosure of cash flows information | ||||||||||||||||
| Interest paid | $ | 220 | $ | 132 | $ | 180 | ||||||||||
| Income taxes paid | $ | 131 | $ | 127 | $ | 86 | ||||||||||
See accompanying notes.
F-9
F-11
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005
2006
The SPAR Group, Inc. (formerly known as PIA Merchandising Services, Inc.), a Delaware corporation ("SGRP"(“SGRP”), and its subsidiaries (together with SGRP, the "SPAR Group"“SPAR Group” or the "Company"“Company”), is a supplier of merchandising and other marketing services throughout the United States and internationally. The Company also provides in-store event staffing, product sampling, Radio Frequency Identification ("RFID"(“RFID”) services, technology services and marketing research services.
SPAR Acquisition, Inc., and its subsidiaries (the "SPAR Companies") are
Today the original predecessorCompany operates in 12 countries whose population represents approximately 48% of the Company and were founded in 1967. On July 8, 1999,
SPAR Companies completed a reverse merger with SGRP (the "PIA Acquisition"), and
SGRP then changed its name to SPAR Group, Inc., from PIA Merchandising Services,
Inc. (prior to such merger, "PIA").total world population. The SPAR Companies were deemed to have
"purchased" PIA and its subsidiaries (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'sCompany’s operations are currently divided into two divisions: the Domestic Merchandising Services Division and the International Merchandising Services Division. The Domestic Merchandising Services Division provides merchandising and marketing services, in-store event staffing, product sampling, RFIDRadio Frequency Identification (“RFID”) services, technology services and marketing research to manufacturers and retailers in the United States. The various services are primarily performed in mass merchandisers, electronics store chains, drug store chains and convenience and grocery stores. The International Merchandising Services Division was established in July 2000 and through its subsidiaries, the Company currently provides similar merchandising and marketing services through a wholly owned subsidiary in Japan, Canada, through 51% owned joint venture
subsidiaries in Turkey, South Africa, India, Romania, China, Lithuania, Latvia, Australia, and Romania and through 50% owned
joint ventures in Japan and China. In September 2005, the Company entered into a
51% owned joint venture subsidiary in Lithuania which is projected to begin
operations in April 2006.New Zealand. The Company continues to focus on expanding its merchandising and marketing services business throughout the world.
The Company'sCompany’s Domestic Merchandising Services Division provides nationwide merchandising and other marketing services primarily on behalf of consumer product manufacturers and retailers at mass merchandisers, electronics store chains, drug store chains and grocery stores. Included in its clients 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 event staffing services, RFID services, technology services and marketing research services.
F-10
F-12
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2006
In July 2000, the Company established its International Merchandising Services Division, operating through a wholly owned subsidiary, SPAR Group International, Inc. ("SGI"(“SGI”), to focus on expanding its merchandising and marketing services business worldwide. The Company has expanded its international business as follows:
| Date Established | Percent Ownership in | Location | |||
| May 2001 | 50% | Osaka, Japan | |||
| June 2003 | 100% | Toronto, Canada | |||
| July 2003 | 51% | Istanbul, Turkey | |||
| April 2004 | 51% | Durban, South Africa | |||
| April 2004 | 51% | New Delhi, India | |||
| December 2004 | 51% | Bucharest, Romania | |||
| February 2005 | 50% | Hong Kong, China | |||
| September 2005 | 51% | Siauliai, Lithuania | |||
| April 2006 | 51% | Melbourne, Australia |
In the fourth quarter of 2001, the Company made the decision to divest its interest in SPGI.
SPAR Performance Group, Inc. ("SPGI").
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"(“SIM”), a wholly-owned subsidiary of the Company, entered into a Stock Purchase and Sale Agreement with Performance Holdings, Inc. ("PHI"(“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.
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"“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"“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'sSPGI’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"“eligible” accounts receivable). In September
F-11
F-13
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2006
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"(“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'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'sCompany’s lock box.
On September 10, 2004, the Company terminated the SPGI Revolver and the Term Loans 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.
The Company consolidates its 100% owned subsidiaries. The Company also consolidates all of its 51% owned joint venture subsidiaries and all of its 50% owned joint
ventures wheresubsidiaries as the Company believes it is the primary beneficiary in accordance with Financial Accounting Standards Board Interpretation Number 46, as revised December 2003,Consolidation of Variable Interest Entities (" (“FIN 46(R)"”).
In 2004, due to the amendment of a royalty agreement between the Company and its 50% owned Japanese joint venture,subsidiary, the Company has determined that in accordance with FIN 46(R) it is the primary beneficiary of the Japanese joint venture,subsidiary, and has consolidated the Japanese financial results for 2006, 2005 and 2004 in accordance with the provisions of FIN 46(R). In connection withPrior to 2004 the consolidation ofinvestment in the Japanese joint venture's financial results as of andsubsidiary was accounted for using the period ending
September 30, 2004, the Company's consolidated financial statements only includeequity method.
In 2006, the Japanese joint venture financial results for nine months ended September 30,
2004. In 2005, the Japanese joint venturesubsidiary changed its fiscal year from September 30 to December 31, this report reflects its consolidation31. Therefore for the fiscal years
ending September 30,year ended December 31, 2006, the Company consolidated fifteen months of operations (October 1, 2005 and 2004. The resultsthrough December 31, 2006) for the short period from
October 1, 2005 toJapanese subsidiary. For the year ended December 31, 2005, were not material and will be included with
the Company's 2006 first quarter reporting on Form 10-Q.Company consolidated the results of operations for the twelve month period ended September 30, 2005. In 2003, prior to the
amendment2004, as a result of the royalty agreement, the investmentchange in the Japanese joint venture
was accountedaccounting treatment, the Company consolidated the results of operations for using the equity method based upon the Company's 50%
ownership.
nine months ended September 30, 2004.
All significant intercompany accounts and transactions have been eliminated.
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.
F-12
F-14
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2006
The Company'sCompany’s services are provided to its clients under contracts or agreements. The Company bills its clients based upon service fee or per unit fee arrangements. Revenues under service fee arrangements are recognized when the service is performed. The Company'sCompany’s per unit fee arrangements provide for fees to be earned based on the retail sales of a client'sclient’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 represent services performed but not billed and are included as accounts receivable.
The Company continually monitors the validity of its accounts receivable based upon current client 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, net of any applicable reserves or allowances, 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 in part on management'smanagement’s assessment of the current status of individual accounts. Based on management'smanagement’s assessment, the Company established an allowance for doubtful accounts of $400,000, $616,000 and $761,000 at December 31, 2006, 2005 and 2004, respectively. Bad debt and sales allowance expenses were $84,000, $38,000, and $366,000 in 2006, 2005, and $825,000 in 2005, 2004, and 2003, respectively.
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.
In accordance with SOP 98-1,Accounting for the Costs of Computer Software Developed or Obtained for InternalUse, 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 and related benefits and travel expenses for those employees who are directly involved with and who devote time to the Company'sCompany’s software development projects. Capitalized software development costs are amortized over three years.
F-13
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2. Summary of Significant Accounting Policies (continued)
The Company capitalized $280,000, $346,000, $559,000, and $1,004,000$559,000 of costs related to software developed for internal use in 2006, 2005, 2004, and 2003,2004, respectively, and amortized capitalized software of approximately $371,000, $516,000 $638,000 and $690,000$638,000 for the years ended December 31, 2006, 2005, and 2004, and 2003, respectively.
In 2004, the Company recorded an impairment charge against capitalized software costs due to the loss of certain clients during the year totaling approximately $442,000 (see Note 3 -– Impairment Charges).
F-15
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that an asset'sasset’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'sasset’s carrying value over the asset'sasset’s fair value (see Note 3 -– Impairment Charges).
The Company'sCompany’s balance sheets include the following financial instruments: accounts receivable, accounts payable and 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 Company'sCompany’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.
One client accounted for 20%11%, 14%15%, and 8%12% of the Company's domesticCompany’s net revenues for the years ended December 31, 2005, 2004, and 2003, respectively. This client
also accounted for approximately 13% and 29% of the Company's domestic accounts
receivable at December 31,2006, 2005, and 2004, respectively. This client accounted for approximately 10% of the Company’s accounts receivable at both December 31, 2006 and 2005, respectively.
In addition, approximately 16%8%, 16%11%, and 17%14% of the Company's domesticCompany’s net revenues for the years ended December 31, 2006, 2005, 2004, and 2003,2004, respectively, resulted from merchandising and marketing services performed for manufacturers and others in stores operated by a leading mass merchandising chain. These clients also accounted for approximately 23%4% and 22%8% of the Company's domesticCompany’s accounts receivable at December 31, 2006 and 2005, and 2004, respectively.
Also, approximately 17%11% and 4%12% of the Company's domesticCompany’s net revenues for the years ended December 31, 20052006 and 2004,2005, respectively, resulted from merchandising and marketing services performed for manufacturers and others in stores operated by a leading electronics chain. These clients also accounted for 24%7% and 16%8% of the Company's domesticCompany’s accounts receivable at December 31, 2006 and 2005, and 2004, respectively.
Another client accounted for 10% of the Company's domestic net revenues for the
years ended December 31, 2005. This client also accounted for approximately 5%
of the Company's domestic accounts receivable at December 31, 2005.
F-14
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2. Summary of Significant Accounting Policies (continued)
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.subsidiaries. In both 20052006 and 2004,2005, these exposures are primarily concentrated in the Canadian dollar,Dollar, South African randRand, Australian Dollar and Japanese yen.Yen. At December 31, 2005,2006, international assets totaled $5.0$5.6 million and international liabilities totaled $7.5$5.7 million. For 2005,2006, international revenues totaled $14.9$23.2 million and the Company'sCompany’s share of the net incomeloss was approximately $167,000.
$630,000.
F-16
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
The Company is exposed to market risk related to the variable interest rate on its lines of credit. At December 31, 2005,2006, the Company'sCompany’s outstanding debt totaled $3.0$5.3 million, which
consisted of domestic variable-rate (8%) debt of $2.4 million and international
variable rate (1.4%) debt of $0.6 million. as noted in the table below (in thousands):
| Location | Variable Interest Rate (1) | Local Currency Amount | US Dollars Equivalent (2) | ||||
| United States | 8.7% | 4,187 USD | $4,187 | ||||
| Japan | 1.6% | 70,000 YEN | 588 | ||||
| Australia | 10.9% | 429 AUD | 339 | ||||
| Canada | 7.0% | 238 CAD | 204 | ||||
| $5,318 | |||||||
| (1) | Per annum interest at December 31, 2006 |
| (2) | Based on exchange rate at December 31, 2006 |
Based on 20052006 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 $25,000.
$33,000.
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'sCompany’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.
As of Financial Accounting Standards (SFAS)January 1, 2006, SFAS No. 123, Accounting123(R) became effective and applicable to the Company’s accounting for Stock
Based Compensation, requires disclosureits employee options. The Company had previously followed APB No. 25 and related interpretations when accounting for such options. Under APB No. 25 no compensation expense was recognized by the Company when employee stock options were granted, as the exercise price of the fair value method of accounting
forCompany’s employee stock options and other equity instruments.equaled the market price of the underlying stock on the date of grant. Under SFAS No. 123(R), compensation expense is now recognized in the fair value method,Company’s financial statements when employee stock options are granted. Share-based compensation cost is measured aton the grant date, based on the fair value of the award calculated at that date, and is recognized over the employee’s requisite service period, which generally is usually the options’ vesting period. The Company has chosen, underFair value is calculated using the provisions of SFAS No. 123, to
continue to account for employee stock-based transactions under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
F-15
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2. Summary of Significant Accounting Policies (continued)
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 stockBlack-Scholes option grants to Company employees. Compensation cost for the
Company'spricing model. Until an option grants to Company employees has been determined based onis vested, the fair value at the grant date consistent with the provisions of SFAS No. 123, the
Company's net income (loss) and pro forma net income (loss) per share from
continuing operations would have been reduced to the adjusted amounts indicated
below (in thousands, except per share data):
Year Ended December 31,
--------------------------------------------
2005 2004 2003
--------------------------------------------
Net income (loss), as reported $ 878 $ (12,268) $ (539)
Stock based employee compensation expense
under the fair market value method 426 454 1,005
--------------------------------------------
Pro forma net income (loss) $ 452 $ (12,722) $ (1,544)
Basic and diluted net income (loss) per share, as $ 0.05 $ (0.65) $ (0.03)
reported
Basic and diluted net income (loss) per share, pro forma $ 0.02 $ (0.67) $ (0.08)
The pro forma effect on net income (loss) is not representative of the pro forma
effect on net income (loss) in future years becauseoption continues to be updated through the vesting date. The options granted have a ten (10) year life and vest over several years and additional awards may be made infour-year periods at a rate of 25% per year, beginning on the future.
first anniversary of the date of grant.
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 145%138%, 150%145%, and 154%150% for 2006, 2005, 2004,and
F-17
SPAR Group, Inc. and 2003,Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
2004, respectively; risk-free interest rate of 4.37%4.67%, 4.23%4.37%, and 4.27%;4.23% for 2006, 2005, and 2004, respectively; and expected lives of six years.
Net Income (Loss) Per Share
Basic
Share-based compensation expense related to employee stock option grants totaled approximately $314,000 for the twelve months ended December 31, 2006 and the impact on basic and diluted earnings per share was approximately $0.02.
In 2005 and 2004, 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 income (loss) and pro forma net income (loss) per share from continuing operations would have been reduced to the adjusted amounts indicated below (in thousands, except per share data):
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2005 | 2004 | ||||||
| Net income (loss), as reported | $878 | $(12,268 | ) | ||||
| Stock based employee compensation expense | |||||||
| under the fair market value method | 426 | 454 | |||||
| Pro forma net income (loss) | $452 | $(12,722 | ) | ||||
| Basic and diluted net income (loss) per share, as reported | $0.05 | $ (0.65 | ) | ||||
| Basic and diluted net income (loss) per share, pro forma | $0.02 | $ (0.67 | ) | ||||
Basic net (loss) income per share amounts are based upon the weighted average number of common shares outstanding. Diluted net (loss) income (loss) 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.
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, the amounts disclosed for contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.
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
F-16
F-18
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2006
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'sCompany’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, 2006, 2005, 2004, and 20032004 were as follows (in thousands):
| 2006 | 2005 | 2004 | |||||
|---|---|---|---|---|---|---|---|
| Beginning of the year | $798 | $798 | $ 8,749 | ||||
| Impairment charges | - | - | (8,350 | ) | |||
| Acquisitions | - | - | 399 | ||||
| End of the year | $798 | $798 | $ 798 | ||||
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 were converted at year-end rates, equity at historical rates and 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'stockholders’ equity. Foreign currency transaction gains and losses are reflected in net earnings.
On September 15, 2006, the FASBFSAB issued SFAS 123 (revised 2004), Share-Based Payment,
(SFAS 123R). SFAS 123R addresses the accountingNo. 157, “Fair Value Measurements,” which provides for share-based payments to
employees, including grants of employee stock options. Under the new standard,
companies will no longer be able to accountenhanced guidance for share-based compensation
transactions using the intrinsic methodfair value to measure assets and liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with APB Opiniongenerally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. SFAS No. 25,
Accounting157 is applicable under other accounting pronouncements that either require or permit fair value measurements and does not require any new fair value measurements. SFAS No. 157 is effective for Stock Issued to Employees. Instead, the Company will be required
to accountfinancial statements issued for such transactions using a fair-value method and recognize the
expense in the consolidated statement of income. SFAS 123R will be effective forfiscal years beginning after January 1,November 15, 2007, and interim periods within those fiscal years. SPAR is in the process of analyzing the implications of SFAS No. 157.
On September 13, 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108 on quantifying financial statement misstatements. In summary, SAB No. 108 states that registrants should use both a balance sheet (iron curtain) approach and allows, butan income statement (rollover) approach when quantifying and evaluating the materiality of a misstatement, and contains guidance on correcting errors under the dual approach.
In addition, SAB No. 108 provides transition guidance for correcting errors existing in prior years. If prior-year errors that had been previously considered immaterial (based on the appropriate use of the Company’s prior approach) now are considered material based on the approach in this SAB, the Company does not require, the
Companyneed to restate prior period financial statements. SAB No. 108 is effective for the fullCompany’s annual financial statements beginning with the fiscal year ending December 31, 2007, although earlier application is encouraged for any interim period 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 123. However, the calculation of compensation
cost for share-based payment transactionsCompany’s 2006 fiscal year filed 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.
F-17
F-19
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2006
While the Company is considering the effects of implementing its provisions, the Company’s management does not presently believe that the application of SAB No. 108 will have a material impact on the Company’s consolidated financial position or results of operations.
In July 2006, the FASB issued FASB interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The Company is currently evaluating the impact of FIN 48 on its financial statements.
Certain reclassifications have been made to the prior years'years’ financial statements to conform to the 20052006 presentation.
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'sCompany’s largest client announced that they signed definitive agreements for the sale of itstheir business to two purchasers. The sale was completed on August 2, 2004. This client accounted for 10%, 26%, and 30% of the Company'sCompany’s domestic net revenues for the twelve months ended December 31, 2005, 2004, and 2003, 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 doesdid 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. In June 2004, in accordance with the requirements of SFAS 142 the Company evaluated the recorded goodwill. From June 2003 through June 2004 the Canadian subsidiary had operated at a loss. At the time of the evaluation, the Canadian subsidiary was projecting a loss through the end of 2004 and its return to profitability was uncertain. Based upon its evaluation, the Company recorded an impairment of the related goodwill resulting in a non-cash charge of $712,000 for 2004.
Historically, the Company has capitalized costs of computer software developed for internal use. SomeIn 2004, based upon a review of its capitalized costs of computer software developed for internal use, the Company determined that some of the costs previously capitalized were associated with certain clients to whom the
F-20
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
Company no longer providesprovided merchandising and marketing 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.
At March 31, 2004, 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 was required. The Company applied the $1.7 million ($1.4 million net of tax effect) reduction in PIA related acquisition liabilities against the remaining 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.
F-18
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
3. Impairment Charges (continued)
The above net impairment of $8.1 million is shown in the accompanying consolidated statement of operations in 2004 as "Impairment charges"“Impairment charges”.
In connection with the above Impairment Charges, the Company also recorded a $750,000 valuation allowance related to deferred tax assets resulting from PIA net operating loss carryforwards recorded as a result of the PIA Acquisition.
| December 31, | |||||||
|---|---|---|---|---|---|---|---|
| Accounts receivable, net, consists of the following (in thousands): | 2006 | 2005 | |||||
| Trade | $ 10,112 | $ 7,666 | |||||
| Unbilled | 2,774 | 3,461 | |||||
| Non-trade | 496 | 145 | |||||
| 13,382 | 11,272 | ||||||
| Less: | |||||||
| Allowance for doubtful accounts | (400 | ) | (616 | ) | |||
| $ 12,982 | $ 10,656 | ||||||
| December 31, | |||||||
| Property and equipment consists of the following (in thousands): | 2006 | 2005 | |||||
| Equipment | $ 5,380 | $ 5,202 | |||||
| Furniture and fixtures | 606 | 570 | |||||
| Leasehold improvements | 568 | 568 | |||||
| Capitalized software development costs | 1,508 | 1,228 | |||||
| 8,062 | 7,568 | ||||||
| Less accumulated depreciation and amortization | 7,161 | 6,437 | |||||
| $ 901 | $ 1,131 | ||||||
F-21
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2006
| December 31, | |||||||
|---|---|---|---|---|---|---|---|
| Other assets (in thousands): | 2006 | 2005 | |||||
| Safeway settlement | $ 1,307 | $ - | |||||
| Other | 388 | 216 | |||||
| $ 1,695 | $ 216 | ||||||
| December 31, | |||||||
| Accrued expenses and other current liabilities (in thousands): | 2006 | 2005 | |||||
| Taxes payable | $ 489 | $ 533 | |||||
| Accrued accounting and legal expenses | 219 | 286 | |||||
| Accrued salaries payable | 946 | 937 | |||||
| Other | 1,210 | 883 | |||||
| $ 2,864 | $ 2,639 | ||||||
In January 2003, the Company (other than SGRP’s foreign subsidiaries) 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 provides for a $7.0 million line of credit. In January 2006, Webster extended the maturity date to January 23, 2009. Borrowings are based upon a borrowing base formula as defined in the agreement (principally 85% of “eligible” domestic accounts receivable). The Credit Facility is secured by all of the assets of the Company and its domestic subsidiaries and has set Minimum Fixed Charge Coverage Ratio and Minimum Net Worth covenants. The Credit Facility also limits certain expenditures, including, but not limited to, capital expenditures and other investments.
The basic interest rate under the Credit Facility is Webster’s “Alternative Base Rate” plus 0.75% per annum (a total of 8.7% per annum at December 31, 2006), which automatically changes with each change made by Webster in such Alternative Base Rate. The Company at its option, subject to certain conditions, may elect to have portions of its loans under the Credit Facility bear interest at various LIBOR rates plus 3.25% per annum based on fixed periods of one, two, three or nine months. The actual average interest rate under the Credit Facility was 8.7% per annum for the twelve months ended December 31, 2006. The Credit Facility is secured by substantially all of the assets of the Company (other than SGRP’s foreign subsidiaries and their assets).
The domestic revolving loan balances outstanding under the Credit Facility were $4.2 million and $2.4 million at December 31, 2006 and 2005, respectively. There were letters of credit outstanding under the Credit Facility of approximately $453,000 and $552,000 at December 31, 2006 and 2005, respectively. As of December 31, 2006, the SPAR Group had unused availability under the Credit Facility of $1.5 million out of the remaining maximum $2.3 million unused revolving line of credit after reducing the borrowing base by outstanding loans and letters of credit.
Because of the requirement to maintain a lock box arrangement with Webster and Webster’s ability to invoke a subjective acceleration clause at its discretion, borrowings under the Credit Facility are classified
F-22
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
In January 2003, the Company (other than SGRP's foreign subsidiaries) 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 providedprovides for a $15.0$7.0 million revolving line of credit facility that matured onand as amended in January 2006, extended its maturity until January 23, 2006.2009. The Credit Facility allowed the Company to borrow up to $15.0$7.0 million based upon a borrowing base formula as defined in the agreement (principally 85% of "eligible" domestic 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 2005 was 6.9%. At December 31, 2005, the Credit
Facility bears interest at Webster's "Alternative Base Rate" plus 0.75% (a total
of 8.0% 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,
Presidentsubsidiaries 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 requiredhas set Minimum Net Worth
and minimum Fixed Charge Coverage Ratio covenant levels for the year ended
December 31, 2004. Those amendments did not change the future covenant levels
for 2005.
In January 2006, the Credit Facility was amended to extend its maturity to
January 2009 and to reset the Fixed Charge Coverage Ratio and Minimum Net Worth covenants. It further stipulated that should the Company meet its covenants for
the year ended December 31, 2005, which it has, Webster would release Mr. Robert
Brown and Mr. William Bartels from their obligation to provide personal
guarantees totaling $1.0 million and certain discretionary reserves. The Credit Facility also limits certain expenditures, including, but not limited to, capital expenditures and other investments.
The Company was not in violation of any covenantsFixed Charge Coverage Ratio covenant at December 31, 2005,2006, and does
not expectin March, 2007 Webster amended the Credit Facility to bewaive the violation, change the Fixed Charge Coverage Ratio going forward and increase the interest rate by 0.25% per annum. The Company expects that it will comply with the amended covenants in violation at future measurement dates.periods. However, there can be no assurances that the Company will not be in violation of certainable to comply with the amended covenants in
the future. Shouldand that if the Company be in violation, there are no assurances thatviolates the amended covenants, Webster will continue to issue such waivers in the future.
Because
Although Webster does not currently require any personal guarantees from SGRP’s major stockholders, Mr. Robert Brown and Mr. William Bartels, Webster has requested such guarantees in the past. While Messrs. Brown and Bartels have issued personal guarantees in the past there can be no assurances that if Webster requests their guarantees in the future they will continue to issue such guarantees.
The Japanese subsidiary SPAR FM Japan, Inc. has line of credit agreements totaling 100 million Yen or approximately $840,000 (based upon the requirement to maintain a lock box arrangement with Webster and
Webster's ability to invoke a subjective acceleration clause at its discretion,
borrowings under the Credit Facility are classified as currentexchange rate at December 31, 2005 and 2004, 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.2006). The revolving loanoutstanding balances outstanding under the Credit Facilityline of credit agreements were $2.470 million and $4.1 millionYen or approximately $588,000 at December 31, 2006 and 2005, andrespectively (based upon the exchange rate at those dates). The average interest rate was 1.6% per annum for the twelve months ended December 31, 2004,
respectively. There were letters of credit outstanding under2006. In addition, the Credit Facility
of $0.6Japan subsidiary had cash balances totaling 97 million and $0.7 millionYen or approximately $815,000 (based upon the exchange rate at December 31, 2005,2006) and 86 million Yen or approximately $723,000 (based upon the exchange rate at December 31, 2004,
respectively. As of2005) at December 31, 2006 and 2005 respectively.
In 2006, the SPAR Group had unused availability
under the Credit Facility of $3.2 million out of the remaining maximum $4.0
million unused revolving line of credit after reducing the borrowing base by
outstanding loans and letters of credit.
F-20
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
5. Lines of Credit and Subsequent Events (continued)
In 2001, the Japanese joint venture SPAR FM Japan, Inc.Australian subsidiary SPARFACTS Australia Pty. Ltd. entered into a revolving line of credit arrangement with Japanese banksOxford Funding Pty. Ltd. for 300$1.1 million yen(Australian) or $2.7
millionapproximately $789,000 (based upon the exchange rate at September 30, 2005)December 31, 2006). At September 30,
2005, SPAR FM Japan, Inc.December 31, 2006, SPARFACTS Australia Pty. Ltd. had 70 million yen$429,000 (Australian) or approximately $600,000 loan
balance$339,000 outstanding under the line of credit.credit (based upon the exchange rate at that date). The average interest rate was 10.9% per annum for 2005
and the eight months ended December 31, 2006.
On October 20, 2006, SPAR Canada Company, a wholly owned subsidiary, entered into a secured credit agreement with Royal Bank of Canada providing for a Demand Operating Loan for a maximum borrowing of $1.0 million (Canadian) or approximately $858,000 (based upon the exchange rate at December 31, 2006). The Demand Operating Loan provides for borrowing based upon a borrowing base formula as defined in the agreement (principally 75% of eligible accounts receivable less certain deductions). At December 31, 2006, SPAR Canada Company had $238,000 (Canadian) or approximately $204,000 outstanding under the line of credit (based upon the exchange rate at December 31, 2006). The average interest rate at September 30, 2005 were 1.4%.
was 7% per annum for the two months ended December 31, 2006.
F-23
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
The provision for income tax expense from continuing operations is summarized as follows (in thousands):
| December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2004 | |||||||||
| Current | $ | 99 | $ | 242 | $ | 103 | |||||
| Deferred | - | - | 750 | ||||||||
| $ | 99 | $ | 242 | $ | 853 | ||||||
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, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2004 | |||||||||
| Provision (benefit) for income taxes at | |||||||||||
| federal statutory rate, net of foreign | $ | (273 | ) | $ | 334 | $ | (3,911 | ) | |||
| tax | |||||||||||
| State income taxes, net of federal benefit | 41 | 153 | 117 | ||||||||
| Permanent differences | 36 | 14 | 1,613 | ||||||||
| Change in valuation allowance | 150 | (349 | ) | 3,013 | |||||||
| International tax provisions | 136 | 71 | - | ||||||||
| Other | 9 | 19 | 21 | ||||||||
| Provision for income taxes | $ | 99 | $ | 242 | $ | 853 | |||||
Deferred taxes consist of the following (in thousands):
| December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | |||||||||
| Deferred tax assets: | ||||||||||
| Net operating loss carryforwards | $ | 6,580 | $ | 5,405 | ||||||
| Restructuring | - | 37 | ||||||||
| Deferred revenue | 52 | 536 | ||||||||
| SIM reserve against loan commitment | 147 | 147 | ||||||||
| Allowance for doubtful accounts and other receivable | 150 | 233 | ||||||||
| 123R options expense | 119 | - | ||||||||
| Other | 23 | 61 | ||||||||
| Valuation allowance | (6,358 | ) | (6,208 | ) | ||||||
| Total deferred tax assets | 713 | 211 | ||||||||
| Deferred tax liabilities: | ||||||||||
| Goodwill | 40 | - | ||||||||
| Litigation receivables | 496 | - | ||||||||
| Capitalized software development costs | 177 | 211 | ||||||||
| Total deferred tax liabilities | 713 | 211 | ||||||||
| Net deferred tax assets | $ | - | $ | - | ||||||
F-24
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
At December 31, 2005,2006, the Company has net operating loss carryforwards (NOLs) of $8.2$7.6 million, related to the PIA Acquisition available to reduce future federal taxable income. The $8.2$7.6 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'sNOL’s prior to such date available to the Company to approximately $657,500 per year. In addition, the Company has NOLs related to its prior and current year losses totaling $6.0$9.7 million of which $1.3$1.1 million, expires$5.2 million and $3.4 million expire in 20122023, 2024 and $4.7 million expires in
2023.
2025, respectively.
As a result of the loss of several significant clients, 20042006 losses, a challenging market and the lack of certainty of continued profitability in 2005,2007, the Company established a valuation allowance equal to the total of its net deferred tax assets of $6.2$6.4 million.
The Company does not provide currently for U.S. income taxes on the undistributed earnings of its foreign subsidiaries since, at the present time, management expects any earnings to be reinvested in the foreign subsidiaries and not distributed.
F-22
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
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 $0.9 million,$780,000, $900,000, and $1.0 million for 2006, 2005, and $0.9 million for 2005,
2004, and 2003, respectively. At December 31, 2005,2006, future minimum commitments under all non-cancelable operating lease arrangements are as follows (in thousands):
2006 $ 1,086
2007 524
2008 245
2009 71
2010 61
------------
Total $ 1,987
============
| 2007 | $ | 766 | |||
| 2008 | 531 | ||||
| 2009 | 365 | ||||
| 2010 | 277 | ||||
| 2011 | 277 | ||||
| 2012 | 124 | ||||
| Total | $ | 2,340 | |||
The Company'sCompany’s international model is to partner with local merchandising companies and combine their knowledge of the local market with the Company'sCompany’s proprietary software and expertise in the merchandising business. In 2001, the Company established its first joint ventureinternational subsidiary and has continued this strategy. As of this filing, the Company is currently operating in Japan, Canada, Turkey, South Africa, India, Romania, China, Lithuania, Latvia, Australia and China. In 2005, the Company also announced the
establishment of a joint venture subsidiary in Lithuania, which is projected to
begin operations in April of 2006.
New Zealand through 9 subsidiaries.
Certain of these joint ventures and joint ventureinternational 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 venturessubsidiaries.
F-25
SPAR Group, Inc. and joint venture subsidiaries.
Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
Safeway Inc. ("Safeway"(“Safeway”) filed a Complaint against the PIA Merchandising Co., Inc. ("(“PIA Co."”), a wholly owned subsidiary of SGRP, andSPAR Group, Inc. (“SGRP”), Pivotal Sales Company ("Pivotal"(“Pivotal”), a wholly owned subsidiary of PIA Co., and SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001, and has2001. Safeway claims, as subsequently amended, it.
Safeway allegesalleged causes of action for breach of contract and breach of implied contract. Safeway has most recently alleged monetary damages in the principal
sum of $3,000,000 and alleged interest of $1,500,000 and has also demanded
unspecified costs. PIA Co. and Pivotal 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 themPIA Co. and Pivotal against Safeway for breach of contract, interference with economic relationship, unfair trade practices and unjust enrichmentenrichment. Trial commenced in March 2006.
On May 26, 2006, the jury in this case returned a verdict resulting in a net award of $1,307,700 to Pivotal, a SGRP subsidiary. This net award is to be paid by Safeway and resulted from separate jury findings that awarded damages to those SGRP subsidiaries on certain claims and damages to Safeway on other claims. In particular, the jury awarded damages to Pivotal of $5,760,879 for Safeway’s interference with Pivotal’s contractual relationships with third party manufacturers and also awarded $782,400 to Pivotal and PIA for Safeway’s breach of contract with those SGRP subsidiaries. The jury awarded damages to Safeway of $5,235,579 for breach of contract by SGRP and those SGRP subsidiaries. Judgment was entered in favor of Pivotal in September 2006 for $1,307,700. Both parties have filed appeals. Pivotal/SGRP is seeking damages and injunctive relief. Mediation between the parties occurred in
2004, but did not result into have Safeway’s judgment overturned. Safeway has asked for a settlement. PIA Co., Pivotal and SGRP are
vigorously defending against 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. and Pivotal lose on
their cross-claims and counterclaims, that result could have a material adverse
effectnew trial on the Company.judgment found against them. The appellate process is expected to take fourteen to twenty four months to complete. The Company anticipates that this matter will be resolved
in 2006.
F-23
SPAR Group, Inc.has recorded both the $1.3 million settlement award and Subsidiaries
Notesapproximately $1.2 million of related legal expenses as a net favorable impact to Consolidated Financial Statements (continued)other income of approximately $100,000 for the year ended December 31, 2005
7. Commitments and Contingencies (continued)
2006.
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'sCompany’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.
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'sCompany’s treasury stock activity for the years 2006, 2005, 2004, and 2003.
Quantity Amount
--------------------------------
Treasury Stock, January 1, 2003 9,783 $ 30,073
Purchases 211,315 923,714
Used2004.
| Quantity | Amount | ||||||||||
| Treasury Stock, January 1, 2004 | 76,056 | $ | 384,107 | ||||||||
| Used to fulfill options exercised | (54,148 | ) | (276,007 | ) | |||||||
| Treasury Stock, December 31, 2004 | 21,908 | 108,100 | |||||||||
| Used to fulfill options exercised | (21,654 | ) | (106,888 | ) | |||||||
| Treasury Stock, December 31, 2005 | 254 | $ | 1,212 | ||||||||
| Used to fulfill options exercised | - | - | |||||||||
| Treasury Stock, December 31, 2006 | 254 | $ | 1,212 | ||||||||
F-26
SPAR Group, Inc. and Subsidiaries
Notes to fulfill:
Employee Stock Purchases (9,848) (30,297)
Options Exercised (135,194) (539,383)
--------------------------------
Treasury Stock, Consolidated Financial Statements (continued)
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
Used to fulfill:
Options Exercised (21,654) (106,888)
--------------------------------
Treasury Stock, December 31, 2005 254 $ 1,212
================================
2006
The Company has Employee and Consultant Stock Purchase Plans (the "SP Plans"“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'sCompany’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 31,385, 28,065, and 43,023 for 2006, 2005, and 22,561 for 2005, 2004, and 2003, respectively.
The Company'sCompany’s expense resulting from the 15% discount offered to employees and consultants was approximately $5,200, $5,000, $10,000, and $11,000$10,000 for the years ending December 31, 2006, 2005, and 2004, and 2003, respectively.
F-24
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
9. Employee Benefits (continued)
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible employees. Employer contributions were approximately $29,000, $27,000, and $97,000 and
$87,000 for 2005, 2004, and 2003, respectively.
In 2003, 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 for the year ended December 31, 2003.
There were no employees under union contract in2006, 2005, and 2004.
2004, respectively.
Mr. Robert G. Brown, a Director, the Chairman, President and Chief Executive Officer and a major stockholder of SGRP, and Mr. William H. Bartels, a Director and the Vice Chairman of the Company and a major stockholder of SGRP, are executive officers and the sole stockholders and directors of SPAR Marketing Services, Inc. ("SMS"(“SMS”), SPAR Management Services, Inc. ("SMSI"(“SMSI”), and SPAR Infotech, Inc. ("SIT"(“SIT”).
SMS and SMSI provided approximately 99% of the Company'sCompany’s domestic merchandising specialists in the field (through its independent contractor field force) and approximately 86%78% of the Company'sCompany’s domestic field management at a total cost of approximately $18.9 million, $20.0 million, and $24.4 million for 2006, 2005, and $36.0 million for 2005, 2004,
and 2003, 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'sSMS’s merchandising specialist field force of approximately 5,6005,000 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 4450 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 $730,000, $770,000, and $320,000 for 2006, 2005, and $1,350,000 for 2005, 2004, and 2003, 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"“Subchapter S” corporations, Messrs. Brown and Bartels benefit from any income of such companies allocated to them.
F-27
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
SIT provided substantially all of the Internet computer programming services to the Company at a total cost of approximately $678,000, $771,000, $1,170,000, and $1,610,000$1.2 million for 2006, 2005, 2004, and 2003,2004, respectively. SIT provided approximately 23,000, 25,000, 34,000, and 47,00034,000 hours of Internet computer programming services to the Company for 2006, 2005, 2004, and 2003,2004, 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 $28.87, $30.34, and $34.71 for 2006, 2005, and $34.24 for
2005, 2004, and 2003, 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 2005. However, since SIT is a "Subchapter S"“Subchapter S” corporation, Messrs. Brown and Bartels benefit from any income of such company allocated to them.
F-25
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
10. Related-Party Transactions (continued)
In November 2004 and January 2005, the Company entered into separate operating lease agreements between SMS and the Company'sCompany’s wholly owned subsidiaries, SPAR Marketing Force, Inc. ("SMF"(“SMF”) and SPAR Canada Company ("(“SPAR Canada"Canada”). In May 2005, the Company and SMS amended the lease agreements reducing the total monthly payment. Each lease, as amended, has a 36 month term and representations, covenants and defaults customary for the leasing industry. The SMF lease is for handheld computers to be used by field merchandisers in the performance of various merchandising and marketing services in the United States and has a monthly payment of $17,891. These handheld computers had an original purchase price of $632,200. The SPAR Canada lease is also for handheld computers to be used by field merchandisers in the performance of various merchandising and marketing services in Canada and has a monthly payment of $2,972. These handheld computers had an original purchase price of $105,000. The monthly payments, as amended, are based upon a lease factor of 2.83%.
In March 2005, SMF entered into an additional 36 month lease with SMS for handheld computers. The lease factor is 2.83% and the monthly payment is $2,341. These handheld computers had an original purchase price of $82,727.
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):
| Year Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2004 | |||||||||||||||
| Services provided by affiliates: | |||||||||||||||||
| Independent contractor services (SMS) | $ | 15,094 | $ | 16,333 | $ | 19,944 | |||||||||||
| Field management services (SMSI) | $ | 3,850 | $ | 3,704 | $ | 4,502 | |||||||||||
| Handheld computer leases (SMS) | $ | 278 | $ | 266 | $ | 25 | |||||||||||
| Internet and software program | |||||||||||||||||
| consulting services (SIT) | $ | 678 | $ | 771 | $ | 1,172 | |||||||||||
F-28
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
| Accrued expenses due to affiliates (in thousands): | December 31, | |||||||||||||
| 2006 | 2005 | |||||||||||||
| SPAR Marketing Services, Inc. | $ | 1,238 | $ | 847 | ||||||||||
| SPAR Management Services, Inc. | 346 | 238 | ||||||||||||
| SPAR Infotech, Inc. | 168 | 105 | ||||||||||||
| $ | 1,752 | $ | 1,190 | |||||||||||
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, 2006, 2005, 2004, and 2003.2004. The Company'sCompany’s CEO and Vice Chairman own, through SMSI, a minority (less than 5%) equity interest in Affinity.
F-26
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
SGRP currently has four stock option plans: the 2000 Stock Option Plan ("(“2000 Plan"Plan”), the Special Purpose Stock Option Plan ("(“Special Purpose Plan"Plan”), the Amended and Restated 1995 Stock Option Plan ("(“1995 Plan"Plan”) and the 1995 Director'sDirector’s Plan ("Director's Plan"(“Director’s Plan”).
On December 4, 2000, SGRP adopted the 2000 Plan as the successor to the 1995 Plan and the Director'sDirector’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 SGRP'sSGRP’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 SGRP'sSGRP’s common stock at the date of grant. During 2005,2006, options to purchase 1,334,973338,000 shares of SGRP'sSGRP’s common stock were granted, options to purchase 57,62513,835 shares of the Company'sCompany’s common stock were exercised and options to purchase 440,975190,887 shares of SGRP'sSGRP’s stock were voluntarily surrendered and cancelled under this plan. At December 31, 2005,2006, options to purchase 2,088,2562,221,534 shares of SGRP'sSGRP’s common stock remain outstanding under this plan and options to purchase 724,221557,108 shares of SGRP'sSGRP’s common stock were available for grant under this plan.
On July 8, 1999, in connection with the merger, SGRP 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 options to purchase 134,114 optionsshares granted at $0.01 per share.share under this plan. Since July 8, 1999, SGRP has not granted any new options under this plan. During 2005,
no2006, 3,500 options to purchase shares of the Company'sCompany’s common stock were exercised under this plan. At December 31, 2005,2006, options to purchase 4,7501,250 shares of SGRP'sSGRP’s common stock remain outstanding under this 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 SGRP'sSGRP’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'sCompany’s common stock at the date of grant. Since 2000, the Company has not granted any new options
F-29
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
under this plan. During 2005, 2502006, 1,000 options to purchase shares of SGRP'sSGRP’s common stock were exercised.cancelled. At December 31, 2005,2006, options to purchase 14,37513,375 shares of the Company'sCompany’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'sDirector’s Plan was a stock option plan for non-employee directors and provided for the purchase of up to 120,000 shares of SGRP'sSGRP’s common stock. Since 2000, SGRP has not granted any new options under this plan. During 2005,2006, no options to purchase shares of SGRP'sSGRP’s common stock were exercised under this plan. At December 31, 2005,However, 20,000 options to purchase shares of SGRP'sSGRP’s common stock remainedwere cancelled under this plan. At December 31, 2006, there are no options to purchase shares of SGRP’s common stock that remain outstanding under this plan. The Director'sDirector’s Plan has been replaced by the 2000 Plan with respect to all new options issued.
F-27
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
11. Stock Options (continued)
The following table summarizes stock option activity under SGRP'sSGRP’s plans:
| Shares | Weighted Average Exercise Price | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Options outstanding, January 1, 2004 | 2,262,810 | $ | 1.85 | ||||||
| 2004 | |||||||||
| 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 | ||||||
| 2005 | |||||||||
| Granted | 1,334,973 | $ | 1.32 | ||||||
| Exercised | (57,875 | ) | 1.20 | ||||||
| Canceled or expired | (440,975 | ) | 1.30 | ||||||
| Options outstanding, December 31, 2005 | 2,127,381 | $ | 1.53 | ||||||
| 2006 | |||||||||
| Granted | 338,000 | $ | 0.99 | ||||||
| Exercised | (17,335 | ) | 0.04 | ||||||
| Canceled or expired | (211,887 | ) | 2.71 | ||||||
| Options outstanding, December 31, 2006 | 2,236,159 | $ | 1.35 | ||||||
| Option price range at | $0.01 to |
| 2006 | 2005 | 2004 | |||||
| Grant Date weighted average fair value of | |||||||
| options granted during the year | $0.99 | $1.32 | $1.47 | ||||
F-30
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
The following table summarizes information about stock options outstanding at December 31, 2005:
| Options Outstanding | Options Exercisable | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices | Number Outstanding at December 31, 2006 | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable at December 31, 2006 | Weighted Average Exercise Price | ||||||
| Less than $1.00 | 504,851 | 8.0 years | $0.86 | 232,466 | $0.77 | ||||||
| $1.01 - $2.00 | 1,531,503 | 6.9 years | 1.30 | 921,613 | 1.32 | ||||||
| $2.01 - $4.00 | 178,305 | 6.8 years | 2.70 | 162,619 | 2.64 | ||||||
| Greater than $4.00 | 21,500 | 6.3 years | 5.07 | 21,376 | 5.07 | ||||||
| Total | 2,236,159 | 1,338,074 | |||||||||
The Company recorded expenses of approximately $110,000, $70,000 and Subsidiaries
Notes to Consolidated Financial Statements (continued)$103,000 for the twelve months ended December 31, 2006, 2005 11. Stock Options (continued)
In 2005, the Company recorded an expense of approximately $70,000and 2004, respectively, 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'sCompany’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.
A summary of the Company'sCompany’s net revenue, operating income (loss) and long lived assets by geographic area as of and for the year ended December 31, is as follows (in thousands):
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2004 | |||||||||
| Net revenue: | |||||||||||
| United States | $ 34,082 | $36,701 | $ 43,163 | ||||||||
| International | 23,234 | 14,885 | 8,207 | ||||||||
| Total net revenue | $ 57,316 | $51,586 | $ 51,370 | ||||||||
| Year Months Ended December 31, | |||||||||||
| 2006 | 2005 | 2004 | |||||||||
| Operating (loss) income: | |||||||||||
| United States | $ (228 | ) | $ 1,200 | $(10,559 | ) | ||||||
| International | (496 | ) | 725 | (1,477 | ) | ||||||
| Total operating (loss) income | $ (724 | ) | $ 1,925 | $(12,036 | ) | ||||||
F-31
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
| December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Long lived assets: | 2006 | 2005 | |||||||
| United States | $3,141 | $1,799 | |||||||
| International | 253 | 346 | |||||||
| Total long lived assets | $3,394 | $2,145 | |||||||
International revenues disclosed above were based upon revenues reported by the Company's 100% owned foreignCompany’s nine international subsidiaries. The Japan subsidiary its 51% owned foreign joint venture
subsidiaries and its 50% owned foreign joint ventures. The joint venture in
Japan contributed 16%, 11% and 5% of the consolidated net revenue of the Company for the twelve months ended December 31, 2006, 2005, and 2004, respectively. ForIncluded in the twelve months ended December 31, 2005, and 2004, the wholly owned Canadian
subsidiary contributed 8% and 3% respectively2006 international revenue was an additional quarter of revenue, totaling approximately $1.3 million or 2% of the consolidated net revenue of the Company. The joint ventureCompany, associated with the change in reporting year of the Company’s subsidiary in Japan. The Canadian subsidiary contributed 8%, 8% and 3% of the consolidated net revenue of the Company for the twelve months ended December 31, 2006, 2005, and 2004, respectively. The South AfricaAfrican subsidiary contributed 4%, 7% and 8% to the consolidated net revenue of the Company for the twelve months ended F-29
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
12. Geographic Data (continued)
December 31,2006, 2005 and 2004, respectively.respectively,. The Australian subsidiary contributed 7% to the consolidated net revenue of the Company for the twelve months ended December 31, 2006. Each of the remaining foreign joint
venture subsidiaries contributed less than 5%4% to the consolidated net revenue for the years endingtwelve months ended December 31, 2006, 2005 and 2004.
In July 2004, as a result of the loss of several significant clients and the pending sale of the Company’s largest client, 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 consisted of personnel reductions, personnel related expenses and office closings. As a result of the July 2004 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. By December 31, 2006, the Company’s restructuring reserve was fully utilized.
In 1999, in connection with the PIA Acquisition, the Company'sCompany’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'Companies’ and the PIA Companies'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 clients
F-32
SPAR Group, Inc. and the
pending sale of the Company's largest client, the Company entered into a planSubsidiaries
Notes 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 Consolidated Financial Statements (continued)
December 31, 2005, the Company had
approximately $99,000 reserved for future restructure payments that are expected
to be paid in 2006. The Company records restructure expenses in the selling,
general and administrative section of its consolidated operating statements.
2006
The following table displays a roll forward of the liabilities for restructuring charges from January 1, 20032004 to December 31, 20052006 (in thousands):
| Employee Separation | Equipment Lease Settlements | Office Lease Settlements | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| January 1, 2004, 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 | ||||||
| 2005 payments | - | - | (151 | ) | (151 | ) | ||||||||
| December 31, 2005, balance | $ | - | $ | - | $ | 99 | $ | 99 | ||||||
| 2006 payments | - | - | (99 | ) | (99 | ) | ||||||||
| December 31, 2006, balance | $ | - | $ | - | $ | $ | - | |||||||
The following table sets forth the computations of basic and diluted net income (loss) per share (in thousands, except per share data):
| Year Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2004 | |||||||||||||
| Numerator: | |||||||||||||||
| Net (loss) income | $ | (621 | ) | $ | 878 | $ | (12,268 | ) | |||||||
| Denominator: | |||||||||||||||
| Shares used in basic net (loss) income per share | |||||||||||||||
| calculation | 18,934 | 18,904 | 18,859 | ||||||||||||
| Effect of diluted securities: | |||||||||||||||
| Employee stock options | - | 456 | - | ||||||||||||
| Shares used in diluted net (loss) income per | |||||||||||||||
| share calculations | 18,934 | 19,360 | 18,859 | ||||||||||||
| Basic and diluted net (loss) income per common | |||||||||||||||
| share: | $ | (0.03 | ) | $ | 0.05 | $ | (0.65 | ) | |||||||
The computation of dilutive loss per share for 20042006 and 20032004 excluded anti-dilutive stock options to purchase approximately 430,000249,000 and 657,000430,000 shares as of December 31, 2006 and 2004, respectively.
F-33
SPAR Group, Inc. and 2003, respectively.
Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2006
Quarterly data for 20052006 and 20042005 was as follows (in thousands, except earnings per share data):
| Quarter | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First | Second | Third | Fourth | |||||||||||
| Year Ended December 31, 2006: | ||||||||||||||
| Net revenues | $ | 15,850 | $ | 12,919 | $ | 12,709 | $ | 15,838 | ||||||
| Gross profit | $ | 5,996 | $ | 3,777 | $ | 3,852 | $ | 6,228 | ||||||
| Net income (loss) | $ | 777 | $ | 100 | $ | (1,393 | ) | $ | (105 | ) | ||||
| Basic/diluted net income (loss) per | ||||||||||||||
| common share | $ | 0.04 | $ | 0.01 | $ | 0.07 | ) | $ | (0.01 | ) | ||||
| Year Ended December 31, 2005: | ||||||||||||||
| Net revenues | $ | 14,521 | $ | 12,800 | $ | 11,060 | $ | 13,205 | ||||||
| Gross profit | $ | 5,870 | $ | 4,631 | $ | 3,466 | $ | 5,680 | ||||||
| Net income (loss) | $ | 1,169 | $ | 116 | $ | (1,140 | ) | $ | 733 | |||||
| Basic/diluted net income (loss) per | ||||||||||||||
| common share | $ | 0.06 | $ | 0.01 | $ | (0.06 | ) | $ | 0.04 | |||||
2006
First quarter net revenues were favorably impacted by the inclusion of an additional quarter of revenue, totaling $1.3 million, associated with the change in the reporting year of the Company’s subsidiary in Japan and approximately $800,000 of additional revenue from the termination of a customer service agreement.
Net income for the second quarter 2006 was favorably impacted by approximately $200,000 resulting from a favorable $1.3 million judgment awarded in a lawsuit offset by legal expenses of approximately $1.1 million.
2005
Included in the net income for the fourth quarter of 2005 is approximately $400,000 of other income resulting form the release of a reserve associated with the PIA Acquisition of July 1999.
F-31
F-34
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
14. Net Income (Loss) Per Share (continued)
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.
F-32
SPAR Group, Inc. and Subsidiaries
Schedule II -– Valuation and Qualifying Accounts
(In
(In thousands)
Balance at
Beginning of Charged to Costs Balance at End
Period and Expenses Deductions of Period
-----------------------------------------------------------------
Year ended December 31, 2005:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 761 38 183 (1) $ 616
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
| Balance at Beginning of Period | Charged to Costs and Expenses | Deductions | Balance at End of Period | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended December 31, 2006: | |||||||||||||||
| Deducted from asset accounts: | |||||||||||||||
| Allowance for doubtful | |||||||||||||||
| accounts | $ | 616 | 84 | 300 | (1) | $ | 400 | ||||||||
| Year ended December 31, 2005: | |||||||||||||||
| Deducted from asset accounts: | |||||||||||||||
| Allowance for doubtful | |||||||||||||||
| accounts | $ | 761 | 38 | 183 | (1) | $ | 616 | ||||||||
| Year ended December 31, 2004: | |||||||||||||||
| Deducted from asset accounts: | |||||||||||||||
| Allowance for doubtful | |||||||||||||||
| accounts | $ | 515 | 366 | 120 | (1) | $ | 761 | ||||||||
| Sales allowances | $ | 448 | - | 448 | $ | - | |||||||||
(1) Uncollectible accounts written off, net of recoveries
F-33
F-35