UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934 for the fiscal year ended December 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 for the transition period from _____ to ________
Commission file number 0-27824
SPAR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
580 White Plains Road, Suite 600, Tarrytown, New York 10591
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 332-4100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark 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's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.) Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer[X]
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, based on the closing price of
the Common Stock as reported by the Nasdaq Capital Market on such date, was
approximately $10,083,534.
The number of shares of the Registrant's Common Stock outstanding as of
December 31, 2005, was 18,916,847 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PART I
Page
Item 1. Business 2
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 15
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 29
Item 9A. Controls and Procedures 30
Item 9B. Other Information 30
PART III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation and Other Information of SPAR Group, Inc. 34
Item 12. Security Ownership of Certain Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions 39
Item 14. Principal Accountant Fees and Services 40
Part IV
Item 15. Exhibits, Financial Statement Schedules 41
Signatures 47
PART I
Statements contained in this Annual Report on Form 10-K of SPAR Group,
Inc. ("SGRP", and together with its subsidiaries, the "SPAR Group" or the
"Company"), include "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act (collectively, the
"Securities Laws", including, in particular and without limitation, the
statements contained in the discussions under the headings "Business", "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations". Forward-looking statements involve known and unknown
risks, uncertainties and other factors that could cause the Company's actual
results, performance and achievements, whether expressed or implied by such
forward-looking statements, to not occur or be realized or to be less than
expected. Such forward-looking statements generally are based upon the Company's
best estimates of future results, performance or achievement, current conditions
and the most recent results of operations. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may", "will",
"expect", "intend", "believe", "estimate", "anticipate", "continue" or similar
terms, variations of those terms or the negative of those terms. You should
carefully consider such risks, uncertainties and other information, disclosures
and discussions 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 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.
Item 1. Business.
GENERAL
The SPAR Group, Inc. (formerly known as PIA Marketing Services, Inc.), a
Delaware corporation ("SGRP"), and its subsidiaries (together with SGRP, the
"SPAR Group" or the "Company"), is a supplier of merchandising and other
marketing services throughout the United States and internationally. In 2002,
the Company sold its Incentive Marketing Division, SPAR Performance Group, Inc.
("SPGI"). The Company's operations are 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") 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
currently provides similar merchandising and marketing services through a wholly
owned subsidiary in Canada, through 51% owned joint venture subsidiaries in
India, South Africa, Turkey 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. The Company continues to focus on expanding its merchandising and
marketing services business throughout the world.
Continuing Operations
Domestic Merchandising Services Division
The Company's Domestic Merchandising Services Division provides
nationwide merchandising and other marketing services primarily on behalf of
consumer product manufacturers and retailers at mass merchandisers, 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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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.
International Merchandising Services Division
In July 2000, the Company established its International Merchandising
Services Division, operating through a wholly owned subsidiary, SPAR Group
International, Inc. ("SGI"), to focus on expanding its merchandising and
marketing services business worldwide. The Company has expanded its
international business as follows:
Percent Ownership in Subsidiary or
Date Established Joint Venture 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
The joint venture in Lithuania is projected to begin operations in April 2006.
Discontinued Operations
Incentive Marketing Division
As part of a strategic realignment in the fourth quarter of 2001, the
Company made the decision to divest its Incentive Marketing Division, operating
through its subsidiary, SPAR Performance Group, Inc. ("SPGI"). The Company
explored various alternatives for the sale of SPGI and subsequently sold the
business to SPGI's employees through the establishment of an employee stock
ownership plan on June 30, 2002. In December of 2003, SPGI changed its name to
STIMULYS, Inc.
Technology Division
In October 2002, the Company dissolved its Technology Division, which it
had established in March 2000 for the purpose of marketing its proprietary
Internet-based computer software.
INDUSTRY OVERVIEW
Domestic Merchandising Services Division
According to industry estimates over two billion dollars are spent
annually on domestic retail merchandising 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 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. However, manufacturers discovered
that using their own sales representatives for this purpose was expensive and
inefficient. Therefore, manufacturers 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
remerchandising and remodeling entire stores to respond to new product
developments and changes in consumer preferences. The Company estimates that
these activities have increased in frequency over the last five years, such that
most stores are re-merchandised or remodeled approximately every twenty-four
months. Both retailers and manufacturers are seeking third parties to help them
meet the increased demand for these labor-intensive services.
International Merchandising Services Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in
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'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's information technology, operations and
finance groups to evaluate and develop foreign markets. In 2001, the Company and
a leading Japanese based distributor established a joint venture to provide the
latest in-store merchandising and marketing services to the Japanese market. In
2003, the Company expanded its international presence to Canada and Turkey by
acquiring the business of a Canadian merchandising company and entering into a
start-up joint venture subsidiary in Turkey. In 2004, the Company established
51% owned joint venture subsidiaries in South Africa and India. In 2005, 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. Key to the Company's international
strategy is the translation of several of its proprietary Internet-based
logistical, communications and reporting software applications into the native
language of any market the Company enters. As a result of this requirement for
market penetration, the Company has developed translation software that can
quickly convert its proprietary software into various languages. Through its
computer facilities in Auburn Hills, Michigan, the Company provides worldwide
access to its proprietary logistical, communications and reporting software. In
addition, the Company maintains personnel in Greece and Australia to assist in
its international efforts. The Company is actively pursuing expansion into
various other markets.
PIA ACQUISITION
SPAR Acquisition, Inc., and its subsidiaries (the "SPAR Companies") are
the original predecessor of the 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"). 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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BUSINESS STRATEGY
As the marketing services industry continues to grow, consolidate and
expand both in the United States and internationally, large retailers and
manufacturers are increasingly outsourcing their merchandising and marketing
service needs to third-party providers. The Company believes that offering
marketing services on a national and global basis will provide it with a
competitive advantage. Moreover, the Company believes that successful use of and
continuous improvements to a sophisticated technology infrastructure, including
its proprietary Internet-based software, is key to providing clients with a high
level of client service while maintaining efficient, low cost operations. The
Company's objective is to become an international retail merchandising and
marketing service provider by pursuing its operating and growth strategy, as
described below.
Increased Sales Efforts:
The Company is seeking to increase revenues by increasing sales to its
current 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' retail merchandising related activities, some of which have been
identified and are currently being tested for feasibility and market acceptance.
However, there can be no assurance that any new products of value will be
developed or that any such new product can be successfully marketed.
Acquisitions:
The Company is seeking to acquire businesses or enter into joint
ventures or other arrangements with companies that offer similar merchandising
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'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'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 project
in real time.
Through the Company's automated labor tracking system, its merchandising
specialists communicate work assignment completion information via the Internet
or telephone, enabling the Company to report hours 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'
needs and rapidly
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implement programs. The Company believes that its technological capabilities
provide it with a competitive advantage in the marketplace.
The Company intends to continue to utilize computer (including hand-held
computers), Internet, and other technology to enhance its efficiency and ability
to provide real-time data to its 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 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' 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.
DESCRIPTION OF SERVICES
The Company currently provides a broad array of merchandising and
marketing services to some of the world'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' 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'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, 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, South Africa, Turkey 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.
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 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 Reordering and replenishment of products
o Ensuring that the clients' products authorized for
distribution are in stock and on the shelf
o Adding new products that are approved for distribution but not
yet present on the shelf
o Designing and implementing store planogram schematics
o Setting product category shelves in accordance with approved
store schematics
o Ensuring that product shelf tags are in place
o Checking for overall salability of the clients' products
o Placing new product and promotional items in prominent
positions
Dedicated Services
Dedicated services consist of merchandising 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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International Merchandising Services Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in marketing
their products. As evidenced in the United States, retailer and manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
also believes that the difficulties encountered by these programs are only
exacerbated by the logistics of operating in foreign markets. This environment
has created an opportunity for the Company to exploit its Internet-based
technology and business model that are successful in the United States.
In July 2000, the Company established its International Merchandising
Services Division to cultivate foreign markets, modify the necessary systems and
implement the Company's business model worldwide by expanding its merchandising
and marketing services business off shore. The Company formed an International
Merchandising Services Division task force consisting of members of the
Company's information technology, operations and finance groups to evaluate and
develop foreign markets. In 2001, the Company and a leading Japanese based
distributor established a 50% owned joint venture to provide the latest in-store
merchandising and marketing services to the Japanese market. In 2003, the
Company expanded its international presence to Canada by acquiring a Canadian
merchandising company and Turkey by entering into a 51% owned start-up joint
venture subsidiary. In 2004, the Company established 51% owned joint venture
subsidiaries in South Africa and India. In 2005, 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.
Key to the Company's international strategy is the translation of
several of its proprietary Internet-based logistical, communications and
reporting software applications into the native language of any market the
Company enters. As a result of this 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.
SALES AND MARKETING
Domestic Merchandising Services Division
The Company's sales efforts within its Domestic Merchandising Services
Division are structured to develop new business in national, regional and local
markets. The Company's corporate business development team directs its efforts
toward the senior management of prospective clients. Sales strategies developed
at the Company's headquarters are communicated to the Company's sales force for
execution. The sales force, located nationwide, work from both Company and home
offices. In addition, the Company's corporate account executives play an
important role in the Company's new business development efforts within its
existing manufacturer, 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's business development process includes a due diligence
period to determine the objectives of the prospective client, the work required
to satisfy those objectives and the market value of such work to be performed.
The Company employs a formal cost development and proposal process that
determines the cost of each element of work required to achieve the prospective
client's objectives. These costs, together with an analysis of market rates, are
used in the development of a formal quotation that is then reviewed at various
levels within the organization. The pricing of this internal proposal must meet
the Company's objectives for profitability, which are established as part of the
business planning process. After approval of this quotation, a detailed proposal
is presented to and approved by the prospective client.
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International Merchandising Services Division
The Company's marketing efforts within its International Merchandising
Services Division are three fold. First, the Company endeavors to develop new
markets through acquisitions. The Company's international acquisition team,
whose primary focus is to seek out and develop acquisitions throughout the
world, consists of personnel located in the United States, Greece and Australia.
Personnel from information technology, field operations, client services and
finance support the international acquisition team. Second, the Company offers
global merchandising solutions to clients that have worldwide distribution. This
effort is spearheaded out of the Company's headquarters in the United States.
Third, the Company develops local markets through various joint ventures or
subsidiaries throughout the world.
CLIENTS
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 Mass Merchandisers
o Electronics
o Drug
o Grocery
o Other retail outlets (such as discount stores, home centers, etc.)
The Company also provides event staffing, RFID, research and other
marketing services to the consumer packaged goods industry.
One client accounted for 20%, 14%, and 8% of the Company's domestic 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, 2005 and 2004, respectively.
In addition, approximately 16%, 16%, and 17% of the Company's domestic
net revenues for the years ended December 31, 2005, 2004, and 2003,
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% and 22% of the Company's domestic
accounts receivable at December 31, 2005 and 2004, respectively.
Also, approximately 17% and 4% of the Company's domestic net revenues
for the years ended December 31, 2005 and 2004, respectively, resulted from
merchandising services performed for manufacturers and others in stores operated
by a leading electronics chain. These clients also accounted for 24% and 16% of
Company's domestic accounts receivable at December 31, 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
division have similar profiles to its Domestic Merchandising Services Division
clients. The Company is currently operating in Japan, Canada, Turkey, South
Africa, India, Romania, China and in Lithuania as of April 2006. The Company is
actively pursuing expansion into Europe, Asia, South America and other markets.
COMPETITION
The marketing services industry is highly competitive. The Company's
competition in the Domestic and International Merchandising Services Divisions
arises from a number of large enterprises, many of which are national or
international in scope. The Company also competes with a large number of
relatively small enterprises
-9-
with specific client, channel or geographic coverage, as well as with the
internal marketing and merchandising operations of its clients and prospective
clients. The Company believes that the principal competitive factors within its
industry include development and deployment of technology, breadth and quality
of client services, cost, and the ability to execute specific client priorities
rapidly and consistently over a wide geographic area. The Company believes that
its current structure favorably addresses these factors and establishes it as a
leader in the mass merchandiser, electronics and chain drug store channels of
trade. The Company also believes it has the ability to execute major national
and international in-store initiatives and develop and administer national and
international retailer programs. Finally, the Company believes that, through the
use and continuing improvement of its proprietary Internet software, other
technological efficiencies and various cost controls, the Company will remain
competitive in its pricing and services.
TRADEMARKS
The Company has numerous registered trademarks. Although the Company
believes its trademarks may have value, the Company believes its services are
sold primarily based on breadth and quality of service, cost, and the ability to
execute specific client priorities rapidly, efficiently and consistently over a
wide geographic area. See "Industry Overview" and "Competition".
EMPLOYEES
Worldwide the Company utilizes a labor force of approximately 7,900
people.
As of December 31, 2005, the Company's Domestic Merchandising Services
Division's labor force consisted of approximately 5,800 people. Approximately
113 were full-time employees and 53 were part-time employees of the Company. Of
the 113 full-time Company employees, 107 were engaged in operations and 6 were
engaged in sales. Of the 53 part-time Company employees, 40 were engaged in
field merchandising. The Company's Domestic Merchandising Services Division
utilizes the services of its affiliate, SPAR Management Services, Inc. ("SMSI"),
to schedule and supervise its field force of merchandising specialists, which
consists of independent contractors furnished by SPAR Marketing Services, Inc.
("SMS"), another affiliate of the Company (see Item 13 - Certain Relationships
and Related Transactions, below) as well as the Company's field employees. SMS
and SMSI furnish approximately 5,600 merchandising specialists (all of whom are
independent contractors of SMS) and 44 field managers (all of whom are full-time
employees of SMSI), respectively.
As of December 31, 2005, the Company's International Merchandising
Services Division's labor force consisted of approximately 2,125 people.
Approximately 52 full-time employees were engaged in operations and 10 were
engaged in sales. The International Division's field force of merchandising
specialists consisted of approximately 74 full time employees, 150 part time
employees and approximately 1,835 independent contractors.
The Company currently utilizes certain of its Domestic Merchandising
Services Division's employees, as well as, the services of certain employees of
its affiliates, SMSI and SPAR Infotech, Inc. ("SIT"), to support the
International Merchandising Services Division. However, dedicated employees will
be added to that division as the need arises. The Company's affiliate, SIT, also
provides programming and other assistance to the Company's various divisions
(see Item 13 - Certain Relationships and Related Transactions, below).
The Company, SMS, SMSI and SIT consider their relations with their
respective employees and independent contractors to be good.
Item 1A. Risk Factors
There are various risks associated with the Company's growth and
operating strategy. The risks factors presented below are the ones that the
Company currently considers material based on best estimates and includes
"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'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
-10-
risks immaterial, but any risk may develop at any time into actual events that
adversely affect the Company. There also may be risks that a particular investor
would view differently from the Company, and current analysis may be wrong. The
Company expressly disclaims any obligation to update or revise any
forward-looking statements or any of these risks in whole or in part, whether as
a result of new information, future events or otherwise, except as required by
law.
You should carefully consider each of the risks described below before
deciding to invest in the Company'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's business, financial condition or results of operations
could be negatively affected, the market price of the Company's common stock
could decline and you may lose all or part of your investment.
Dependency on Largest Clients
As discussed above in Clients, the Company does a significant amount of
business with two clients and performs a significant amount of services in a
leading mass merchandising chain and a leading electronics chain. The loss of
these clients, 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's revenues and such decreased revenues could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Dependence on Trend Toward Outsourcing
The business and growth of the Company depends in large part on the
continued trend toward outsourcing of 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's revenues and such
decreased revenues could have a material adverse effect on the Company's
business, results of operations and financial condition or the desired increases
in the Company's business, revenues and profits.
Failure to Successfully Compete
The 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's business, results of operations
and financial condition or the desired increases in the Company's business,
revenues and profits.
If certain competitors were to combine into integrated 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's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
Variability of Operating Results and Uncertainty in Client Revenue
The Company has experienced and, in the future, may experience
fluctuations in quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary and from time to time and may
result in reduced revenue include: (i) the number of active 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 dependent on the commercial
success of particular product releases. In the event that a particular
-11-
release is not widely accepted by the public, the Company's revenue could be
significantly reduced. In addition, the Company is subject to revenue
uncertainties resulting from factors such as unprofitable 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's
business, results of operations and financial condition or the desired increases
in the Company's business, revenues and profits.
Failure to Develop New Products
A key element of the Company's growth strategy is the development and
sale of new products. While several new products are under current development,
there can be no assurance that the Company will be able to successfully develop
and market new products. The Company's inability or failure to devise useful
merchandising or marketing products or to complete the development or
implementation of a particular product for use on a large scale, or the failure
of such products to achieve market acceptance, could adversely affect the
Company's ability to achieve a significant part of its growth strategy and the
absence of such growth could have a material adverse effect on the Company's
business, results of operations and financial condition or the desired increases
in the Company's business, revenues and profits.
Inability to Identify, Acquire and Successfully Integrate Acquisitions
Another key component of the Company's growth strategy is the
acquisition of businesses across the United States and worldwide that offer
similar merchandising or marketing services. The successful implementation of
this strategy depends upon the Company's ability to identify suitable
acquisition candidates, acquire such businesses on acceptable terms, finance the
acquisition and integrate their operations successfully with those of the
Company. There can be no assurance that such candidates will be available or, if
such candidates are available, that the price will be attractive or that the
Company will be able to identify, acquire, finance or integrate such businesses
successfully. In addition, in pursuing such acquisition opportunities, the
Company may compete with other entities with similar growth strategies, these
competitors may be larger and have greater financial and other resources than
the Company. Competition for these acquisition targets could also result in
increased prices of acquisition targets and/or a diminished pool of companies
available for acquisition.
The successful integration of these acquisitions also may involve a
number of additional risks, including: (i) the inability to retain the 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's
existing businesses; (iii) the inability to retain the desirable management, key
personnel and other employees of the acquired business; (iv) the inability to
fully realize the desired efficiencies and economies of scale: (v) the inability
to establish, implement or police the Company's existing standards, controls,
procedures and policies on the acquired business; (vi) diversion of management
attention; and (vii) exposure to 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's growth strategy and could limit the Company's ability to
significantly increase its revenues and profits.
Uncertainty of Financing for, and Dilution Resulting from, Future Acquisitions
The timing, size and success of acquisition efforts and any associated
capital commitments cannot be readily predicted. Future acquisitions may be
financed by issuing shares of the Company's Common Stock, cash, or a combination
of Common Stock and cash. If the Company's Common Stock does not maintain a
sufficient market value, or if potential acquisition candidates are otherwise
unwilling to accept the Company's Common Stock as part of the consideration for
the sale of their businesses, the Company may be required to obtain additional
capital through debt or equity financings. To the extent the Company's Common
Stock is used for all or a portion of the consideration to be paid for future
acquisitions, dilution may be experienced by existing stockholders. 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's ability to execute its growth strategy.
-12-
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's costs of operation and reduce efficiency
and performance, which could have a material adverse effect on the Company's
business, results of operations and financial condition or the desired increases
in the Company's business, revenues and profits.
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's
key clients are either retailers or those seeking to do product merchandising at
retailers. If the retail industry experiences a significant economic downturn, a
reduction in product sales could significantly decrease the Company's revenues.
The Company also has risks associated with its clients changing their business
plans and/or reducing their marketing budgets in response to economic
conditions, which could also significantly decrease the Company's revenues. Such
revenue decreases could have a material adverse effect on the Company's
business, results of operations and financial condition or the desired increases
in the Company's business, revenues and profits.
Significant Stockholders: Voting Control and Market Illiquidity
Mr. Robert G. Brown, founder, director, Chairman, President and Chief
Executive Officer of the Company, beneficially owns approximately 46% of the
Company's outstanding Common Stock, and Mr. William H. Bartels, founder,
director, and Vice Chairman of the Company beneficially owns approximately 29%
of the Company's outstanding Common Stock. These stockholders have, should they
choose to act together, and under certain circumstances Mr. Brown acting alone
has, the ability to control all matters requiring stockholder approval,
including the election of directors and the approval of mergers and other
business combination transactions.
In addition, although the Company Common Stock is quoted on the Nasdaq
Capital Market, the trading volume in such stock may be limited and an
investment in the Company's securities may be illiquid because the founders own
a significant amount of the Company's stock.
Dependence Upon and Potential Conflicts in Services Provided by Affiliates
The success of the Company's domestic business is dependent upon the
successful execution of its field services by SPAR Marketing Services, Inc.
("SMS"), and SPAR Management Services, Inc. ("SMSI"), as well as the programming
services provided by SPAR Infotech, Inc. ("SIT"), each of which is an affiliate,
but not a subsidiary, of the Company, and none of which is consolidated in the
Company's financial statements. SMS provides substantially all of the
merchandising specialists used by the Company in conducting its domestic
business (86% of field expense in 2005), and SMSI provides substantially all of
the field management services (91% in 2005) 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.
-13-
SMS, SMSI and SIT (collectively, the "SPAR Affiliates") are owned solely
by Mr. Robert G. Brown, founder, director, Chairman, President and Chief
Executive Officer of the Company, and Mr. William H. Bartels, founder, director,
and Vice Chairman of the Company, each of whom are also directors and executive
officers of each of the SPAR Affiliates (see Item 13 - Certain Relationships and
Related Transactions, below). In the event of any dispute in the business
relationships between the Company and one or more of the SPAR Affiliates, it is
possible that Messrs. Brown and Bartels may have one or more conflicts of
interest with respect to those relationships and could cause one or more of the
SPAR Affiliates to renegotiate or cancel their contracts with the Company or
otherwise act in a way that is not in the Company's best interests.
While the Company's relationships with SMS, SMSI and SIT are excellent,
there can be no assurance that the Company could (if necessary under the
circumstances) replace the field 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's business, results of
operations and financial condition or the desired increases in the Company'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's Credit Facility with Webster Business Credit
Corporation ("Webster") (see Note 5 to the Consolidated Financial Statements -
Lines of Credit and Subsequent Events) restricts the payment of dividends
without Webster's prior consent.
Risks Associated with International Joint Ventures
While the Company endeavors to limit its exposure for claims and losses
in any international joint ventures through contractual provisions, insurance
and use of single purpose entities for such ventures, there can be no assurance
that the Company will not be held liable for the claims against and losses of a
particular international joint venture under applicable local law or local
interpretation of any joint venture or insurance provisions. If any such claims
and losses should occur, be material in amount and be successfully asserted
against the Company, such claims and losses could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
Risks Associated with Foreign Currency
The Company also has foreign currency exposure associated with its
international joint venture subsidiaries and joint ventures. In 2005, these
exposures are primarily concentrated in the Canadian dollar, Japanese yen and
South African rand.
Risks Associated with International Business
The Company's expansion strategy includes expansion into various
countries around the world. While the Company endeavors to limit its exposure by
entering only countries where the political, social and economic environments
are conducive to doing business in that country there can be no assurances that
the respective business environments will remain favorable. In the future, the
Company's international operations and sales may be affected by the following
risks, which may adversely affect United States companies doing business
internationally:
o Political and economic risks, including political instability;
o Various forms of protectionist trade legislation which currently
exist, or have been proposed, in some foreign countries;
o Expenses associated with customizing products for foreign
countries;
o Laws and business practices that favor local competition;
o Dependence on local vendors;
o Multiple, conflicting and changing governmental laws and
regulations;
o Potentially adverse tax consequences;
o Foreign currency exchange rate fluctuations.
-14-
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties.
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 next 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 6,000
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.
The Company maintains its data processing center and warehouse at it
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.
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.
-15-
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 6,000
Auburn Hills, MI Regional Office and Warehouse 27,000
Cincinnati, OH Regional Office 5,300
International:
--------------
Canada
------
Toronto, Ontario Headquarters 4,000
Japan
-----
Osaka Headquarters 1,000
Tokyo Regional Office 1,700
Nagoya Regional Office 800
Turkey
------
Istanbul Headquarters 1,500
South Africa
------------
Durban Headquarters 2,800
Port Elizabeth Regional Office 900
Epping Regional Office 3,000
Midrand Regional Office 1,700
India
-----
New Delhi Headquarters 1,280
Mumbai Regional Office 500
Bangalore Regional Office 200
Romania
-------
Bucharest Headquarters 770
China
-----
Shanghai Headquarters 400
Beijing Regional Office 70
Guangzhou Regional Office 400
Shenzhen Regional Office 130
Lithuania
---------
Siauliai Headquarters 1,150
Item 3. Legal Proceedings.
Safeway Inc. ("Safeway") filed a Complaint against the PIA Merchandising
Co., Inc. ("PIA Co."), a wholly owned subsidiary of SGRP, and Pivotal Sales
Company ("Pivotal"), a wholly owned subsidiary of PIA Co., and SGRP in Alameda
Superior Court, case no. 2001028498 on October 24, 2001, and has subsequently
amended it. Safeway alleges causes of action for breach of contract 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 them against Safeway for breach of contract,
interference with economic relationship, unfair trade practices and unjust
enrichment and is seeking
-16-
damages and injunctive relief. Mediation between the parties occurred in 2004,
but did not result in a settlement. PIA Co., Pivotal and SGRP are vigorously
defending 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 effect
on the Company. The Company anticipates that this matter will be resolved in
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's management, disposition of these other matters are
not anticipated to have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-17-
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities.
Price Range of Common Stock
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq 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
As of December 31, 2005, there were approximately 1,100 beneficial
shareholders of the Company's Common Stock.
Dividends
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of the business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
The Company's Credit Facility with Webster Business Credit Corporation
(see Note 5 to the Consolidated Financial Statements - Lines of Credit and
Subsequent Events) restricts the payment of dividends without Webster's prior
consent.
Issuer Purchases of Equity Securities
During the fiscal year ended December 31, 2005, SGRP did not repurchase
any of its equity securities.
Item 6. Selected Financial Data.
The following selected condensed consolidated financial data sets forth,
for the periods and the dates indicated, summary financial data of the Company
and its subsidiaries. The selected financial data have been derived from the
Company's consolidated financial statements.
-18-
SPAR Group, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
----------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ------------ ---------- ---------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 51,586 $ 51,370 $ 64,859 $ 69,612 $ 70,891
Cost of revenues 31,939 33,644 42,338 40,331 40,883
---------- ---------- ------------ ---------- ---------
Gross profit 19,647 17,726 22,521 29,281 30,008
Selling, general and administrative expenses 17,561 20,222 20,967 18,804 19,380
Impairment charges - 8,141 - - -
Depreciation and amortization 1,031 1,399 1,529 1,844 2,682
---------- ---------- ------------ ---------- ---------
Operating income (loss) 1,055 (12,036) 25 8,633 7,946
Other (income) expense (424) (754) 237 (26) 107
Interest expense 191 220 269 363 561
---------- ---------- ------------ ---------- ---------
Income (loss) from continuing operations before
provision for income taxes and minority interest 1,288 (11,502) (481) 8,296 7,278
Provision for income taxes 242 853 58 2,998 3,123
---------- ---------- ------------ ---------- ---------
Income (loss) from continuing operations before
minority interest 1,046 (12,355) (539) 5,298 4,155
Minority interest 168 (87) - - -
Discontinued operations:
Loss from discontinued operations net of tax
benefits of $935 - - - - (1,597)
Loss on disposal of discontinued operations,
including provision of $1,000 for losses during
phase-out period and disposal costs net of tax
benefit of $2,618 - - - - (4,272)
---------- ---------- ------------ ---------- ---------
Net income (loss) $ 878 $ (12,268) $ (539) $ 5,298 $ (1,714)
=========== =========== ============ ========== ==========
Basic/diluted net income(loss) per common share:
- ------------------------------------------------
Net income (loss) from continuing operations $ 0.05 $ (0.65) $ (0.03) $ 0.28 $ 0.23
---------- ---------- ------------ ---------- ----------
Discontinued operations:
Loss from discontinued operations - - - - (0.09)
Estimated loss on disposal of discontinued
operations - - - - (0.23)
---------- ---------- ------------ ---------- ----------
Net loss from discontinued operations - - - - (0.32)
---------- ---------- ------------ ---------- ----------
Basic/diluted net income (loss) $ 0.05 $ (0.65) $ (0.03) $ 0.28 $ (0.09)
=========== =========== ============ ========== ==========
Weighted average shares outstanding
- basic 18,904 18,859 18,855 18,761 18,389
- diluted 19,360 18,859 18,855 19,148 18,467
-19-
December 31,
----------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- ---------- ----------
BALANCE SHEET DATA:
- -------------------
Working capital $ 3,120 $ 962 $ 4,085 $ 6,319 $ 8,476
Total assets 15,417 15,821 28,137 28,800 41,155
Lines of credit, current 2,969 4,956 4,084 - -
Lines of credit, long term(1) - - - 148 11,287
Other long-term debt 415 218 270 235 2,585
Total stockholders' equity 4,850 3,714 16,023 16,592 10,934
(1) Prior to 2003, the Company's lines of credit were recorded as long-term.
-20-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Securities Laws and are based on our best
estimates. Forward-looking statements involve known and unknown risks,
uncertainties and other factors that could cause the Company's actual results,
performance and achievements, whether expressed or implied by such
forward-looking statements, to not occur or be realized or to be less than
expected. Such forward-looking statements generally are based upon the Company's
best estimates of future results, performance or achievement, current conditions
and the most recent results of operations. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may", "will",
"expect", "intend", "believe", "estimate", "anticipate", "continue" or similar
terms, variations of those terms or the negative of those terms. You should
carefully consider such risks, uncertainties and other information, disclosures
and discussions 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, 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. 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.
Overview
- --------
In the United States, the Company provides merchandising and marketing
services to manufacturers and retailers principally in mass merchandiser,
electronics, drug store, grocery, and other retail trade classes through its
Domestic Merchandising Services Division. Internationally, the Company provides
in-store 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 and Japan into the
Company's financial statements. Also in 2005, the Company consolidated Romania
and China.
In December 2001, the Company decided to divest its Incentive Marketing
Division and recorded an estimated loss on disposal of SPAR Performance Group,
Inc., now called STIMULYS, Inc. ("SPGI"), of approximately $4.3 million, net of
taxes, including a $1.0 million reserve recorded for the anticipated cost to
divest SPGI and any anticipated losses through the divestiture date.
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly owned
subsidiary of the Company, entered into a Stock Purchase and Sale Agreement with
Performance Holdings, Inc. ("PHI"), a Delaware corporation headquartered in
Carrollton, Texas. Pursuant to that agreement, SIM sold all of the stock of
SPGI, its subsidiary, to PHI for $6.0 million. As a condition of the sale, PHI
issued and contributed 1,000,000 shares of its common stock to Performance
Holdings, Inc. Employee Stock Ownership Plan, which became the only shareholder
of PHI.
SIM's results (including those of SPGI) were reclassified as
discontinued operations for all periods presented. The results of operations of
the discontinued business segment are shown separately below net income from
continuing operations. Accordingly, the 2002 consolidated statements of
operations of the Company have been prepared, and its 2001 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).
Critical Accounting Policies & Estimates
- ----------------------------------------
The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Note 2 to the 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-
judgments associated with the application of these policies may be affected by
different assumptions or conditions, the Company believes the estimates and
judgments associated with the reported amounts are appropriate in the
circumstances. Four critical accounting policies are consolidation of
subsidiaries, revenue recognition, allowance for doubtful accounts and sales
allowances, and internal use software development costs:
Consolidation of subsidiaries and other companies
The Company consolidates its 100% owned subsidiaries. The Company also
consolidates its 51% owned joint venture subsidiaries and its 50% owned
joint ventures where the Company is the primary beneficiary in
accordance with Financial Accounting Standards Board Interpretation
Number 46, as revised December 2003, Consolidation of Variable Interest
Entities ("FIN 46(R)").
Revenue Recognition
The Company's services are provided 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's per unit fee
arrangements provide for fees to be earned based on the retail sales of
a client's products to consumers. The Company recognizes per unit fees
in the period such amounts become determinable and are reported to the
Company.
Allowance for Doubtful Accounts and Sales Allowances
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's assessment of the current status of
individual accounts. Based on management's assessment, the Company
established an allowance for doubtful accounts of $616,000 and $761,000
at December 31, 2005 and 2004, respectively. Bad debt and sales
allowance expenses were $38,000, $366,000, and $825,000 in 2005, 2004,
and 2003, respectively.
Internal Use Software Development Costs
In accordance with SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, the Company capitalizes
certain costs associated with its internally developed software.
Specifically, the Company capitalizes the costs of materials and
services incurred in developing or obtaining internal use software.
These costs include (but are not limited to) the cost to purchase
software, 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's software development projects.
Capitalized software development costs are amortized over three years.
The Company capitalized $346,000, $559,000, and $1,004,000 of costs
related to software developed for internal use in 2005, 2004, and 2003,
respectively, and amortized capitalized software of approximately
$516,000, $638,000 and $690,000 for the years ended December 31, 2005,
2004, and 2003, respectively.
The Company also recorded a net impairment charge of capitalized
software related to lost clients totaling approximately $442,000 in
2004.
-22-
Results of operations
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,
----------------------------------------------------------------------------
2005 % 2004 % 2003 %
-------- ----- -------- ----- -------- ------
Net revenues $ 51.6 100.0% $ 51.4 100.0% $ 64.9 100.0%
Cost of revenues 31.9 61.9 33.6 65.5 42.3 65.3
Selling, general & administrative expenses 17.6 34.0 20.2 39.4 21.0 32.3
Impairment charges - - 8.1 15.8 - -
Depreciation & amortization 1.0 2.0 1.4 2.7 1.5 2.3
Other (income) expenses, net (0.2) (0.4) (0.4) (1.0) 0.5 0.8
-------- ----- -------- ----- -------- -----
Income (loss) before income tax provision and
minority interest 1.3 2.5 (11.5) (22.4) (0.4) (0.7)
Provision for income taxes 0.2 0.5 0.9 1.7 0.1 0.1
-------- ----- -------- ----- -------- -----
Income (loss) before minority interest 1.1 2.0 (12.4) (24.1) (0.5) (0.8)
Minority interest 0.2 0.3 (0.1) (0.2) - -
-------- ----- -------- ----- -------- -----
Net income (loss) $ 0.9 1.7% $ (12.3) (23.9)% $ (0.5) (0.8)%
======== ===== ========= ===== ======= =====
-23-
Results from continuing operations for the twelve months ended December 31,
- --------------------------------------------------------------------------------
2005, compared to twelve months ended December 31, 2004
- -------------------------------------------------------
Net Revenues
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
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'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 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'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'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
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, Increase
------------------------------------------------------------- (decrease)
2005 % 2004 % %
-------------- ------------ --------------- ------------- -------------
Selling, general & administrative $ 17.6 34.0% $ 20.2 39.4% (13.2)%
Impairment charges - - 8.1 15.8 -
Depreciation and amortization 1.0 2.0 1.4 2.7 (26.3)%
-------------- ------------ --------------- -------------
Total operating expenses $ 18.6 36.0% $ 29.7 57.9% (37.5)%
============== ============ =============== =============
Selling, general and administrative expenses decreased by $2.6 million,
or 13%, for the twelve months ended December 31, 2005, to $17.6 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 million from $16.7 million in 2004. The reduction of 27% 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 million in international selling, general
and administrative expenses primarily a result of increased spending in Canada
of
-24-
approximately $800,000, 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 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 Income/Other Expense
Other income was approximately $424,000 and $754,000 for twelve months
ended December 31, 2005 and 2004, respectively. In 2005, other income consists
primarily of the 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
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.
Income Taxes
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.
Net Income (Loss)
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.
Off Balance Sheet Arrangements
None.
-25-
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.
-26-
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.
Liquidity and Capital Resources
In the twelve months ended December 31, 2005, the Company had a net
income of $878,000.
Net cash provided by operating activities for the year ended December
31, 2005 and 2004, was $3.4 million, and $1.4 million, respectively. The
increase of $2.0 million in cash provided by operating activities is primarily
due to increases in net income and lower decreases in accounts receivable.
Net cash used in investing activities for the year ended December 31,
2005, was $0.6 million, compared with net cash used of $1.3 million for the year
for December 31, 2004. The decrease in net cash used in investing activities was
a result of lower purchases of property and equipment primarily computer
software and equipment and fewer acquisitions of new businesses in 2005.
Net cash used in financing activities for the year ended December 31,
2005 was $1.9 million, compared with net cash provided by financing activities
of $0.9 million for the year ended December 31, 2004. The increase in cash used
was a result of the Company paying down on its lines of credit.
The above activity resulted in a change in cash and cash equivalents for
the twelve months ended December 31, 2005 of $1.0 million.
At December 31, 2005, the Company had positive working capital of $3.1
million as compared to $1.0 million at December 31, 2004. The increase in
working capital is due to increases in cash, decreases in accounts payable and
lines of credit, partially offset by a decrease in accounts receivable and
increases 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.
In January 2003, the Company and Webster Business Credit Corporation,
then known as Whitehall Business Credit Corporation ("Webster"), entered into
the Third Amended and Restated Revolving Credit and Security Agreement (as
amended, collectively, the "Credit Facility"). The Credit Facility provided a
$15.0 million revolving credit facility
-27-
that matured on January 23, 2006. The Credit Facility allowed the Company to
borrow up to $15.0 million based upon a borrowing base formula as defined in the
agreement (principally 85% of "eligible" accounts receivable). On May 17, 2004,
the Credit Facility was amended to among other things, reduce the revolving
credit facility from $15.0 million to $10.0 million, change the interest rate
and increase reserves against collateral. The amendment provides for interest to
be charged at a rate based in part upon the earnings before interest, taxes,
depreciation and amortization. The average interest rate for 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, President and Chief Executive Officer and a major
stockholder of the Company and Mr. William Bartels, a Director, the Vice
Chairman and a major stockholder of the Company, provided personal guarantees
totaling $1.0 million to Webster. On August 20, 2004, the Credit Facility was
further amended in connection with the waiver of certain covenant violations
(see below). The amendment, among other things, reduced the revolving credit
facility from $10.0 million to $7.0 million, changed the covenant compliance
testing for certain covenants from quarterly to monthly and reduced certain
advance rates. On November 15, 2004, the Credit Facility was further amended to
delete any required Minimum Net Worth and minimum Fixed Charge Coverage Ratio
covenant levels for the 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 covenants at December 31, 2005,
and does not expect to be in violation at future measurement dates. However,
there can be no assurances that the Company will not be in violation of certain
covenants in the future. Should the Company be in violation, there are no
assurances that Webster will issue such waivers in the future.
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 as current at
December 31, 2005, and December 31, 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.
The revolving loan balances outstanding under the Credit Facility were
$2.4 million and $4.1 million at December 31, 2005, and December 31, 2004,
respectively. There were letters of credit outstanding under the Credit Facility
of $0.6 million and $0.7 million at December 31, 2005, and December 31, 2004,
respectively. As of December 31, 2005, 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. entered into a
revolving line of credit arrangement with Japanese banks for 300 million yen or
$2.7 million (based upon the exchange rate at September 30, 2005). At September
30, 2005, SPAR FM Japan, Inc. had 70 million yen or approximately $600,000 loan
balance outstanding under the line of credit. The average interest rate for 2005
and the interest rate at September 30, 2005 were 1.4%.
The Company's international model is to partner with local merchandising
companies and combine their knowledge of the local market with the Company's
proprietary software and expertise in the merchandising and marketing business.
In 2001, the Company established its first joint venture and has continued this
strategy. As of this filing, the Company is currently operating in Japan,
Canada, Turkey, South Africa, India, Romania and China. The Company also
announced the establishment of a joint venture subsidiary in Lithuania, which is
projected to begin operations in April 2006.
Certain of these joint ventures and joint venture subsidiaries are
marginally profitable and certain 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-
However, delays in collection of receivables due from any of the Company's major
clients, or a significant further reduction in business from such clients, or
the inability to acquire new clients, or the Company's inability to remain
profitable, or the inability to obtain bank waivers in the event of future
covenant violations could have a material adverse effect on the Company's cash
resources and its ongoing ability to fund operations.
Certain Contractual Obligations
The following table contains a summary of certain of the Company's
contractual obligations by category as of December 31, 2005 (in thousands).
- --------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by Period
- --------------------------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
year years
- --------------------------------------------------------------------------------------------------------------------
Credit Facilities $ 2,969 $ 2,969 $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations 1,987 1,086 840 61 -
- --------------------------------------------------------------------------------------------------------------------
Total $ 4,956 $ 4,055 $ 840 $ 61 $ -
- --------------------------------------------------------------------------------------------------------------------
In addition to the above table, at December 31, 2005, the Company had
approximately $550,000 in outstanding Letters of Credit.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company's accounting policies for financial instruments and
disclosures relating to financial instruments require that the Company's
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and lines of credit.
The Company considers carrying amounts of current assets and liabilities in the
consolidated financial statements to approximate the fair value for these
financial instruments because of the relatively short period of time between
origination of the instruments and their expected realization. The Company
monitors the risks associated with interest rates and financial instrument
positions. The Company's investment policy objectives require the preservation
and safety of the principal, and the maximization of the return on investment
based upon the safety and liquidity objectives.
The Company is exposed to market risk related to the variable interest
rate on its lines of credit. At December 31, 2005, the Company's outstanding
debt totaled $3.0 million, which consisted of domestic variable-rate (8%) debt
of $2.4 million and international variable rate (1.4%) debt of $0.6 million.
Based on 2005 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.
The Company has foreign currency exposure associated with its
international 100% owned subsidiary, its 51% owned joint venture subsidiaries
and its 50% owned joint ventures. In both 2005 and 2004, these exposures are
primarily concentrated in the Canadian dollar, South African rand and Japanese
yen. At December 31, 2005, international assets totaled $5.0 million and
international liabilities totaled $7.5 million. For 2005, international revenues
totaled $14.9 million and the Company's share of the net income was
approximately $167,000.
Investment Portfolio
The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments.
Domestically, excess cash is normally used to pay down its revolving line of
credit. Internationally, excess cash is used to fund operations.
Item 8. Financial Statements and Supplementary Data.
See Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-29-
Item 9A. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) as of the end of the period
covering this report. Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission's rules and
forms.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls during the
twelve months covered by this report or from the end of the reporting period to
the date of this Form 10-K.
The Company has established a plan and has begun to document and test
its domestic internal controls over financial reporting required by Section 404
of the Sarbanes-Oxley Act of 2002.
Item 9B. Other Information.
None.
-30-
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers
The following table sets forth certain information in connection with
each person who is or was at December 31, 2005, an executive officer and/or
director for the Company.
Name Age Position with SPAR Group, Inc.
- ---- --- ------------------------------
Robert G. Brown. . . . . . . . . . 63 Chairman, Chief Executive Officer, President and Director
William H. Bartels . . . . . . . . 62 Vice Chairman and Director
Robert O. Aders (1). . . . . . . . 78 Director, Chairman Governance Committee
Jack W. Partridge (1) . . . . . . . 60 Director, Chairman Compensation Committee
Jerry B. Gilbert (1) . . . . . . . 71 Director
Lorrence T. Kellar (1) . . . . . . 68 Director, Chairman Audit Committee
Charles Cimitile. . . . . . . . . . 51 Chief Financial Officer, Treasurer and Secretary
Kori G. Belzer .................... 40 Chief Operating Officer
Patricia Franco ................... 45 Chief Information Officer, President of the SPAR International
Merchandising Division
James R. Segreto .................. 57 Vice President, Controller
__________________________
(1) Member of the Board's Governance, Compensation and Audit Committees
Robert G. Brown serves as the Chairman, Chief Executive Officer,
President and a Director of SGRP and has held such positions since July 8, 1999,
the effective date of the merger of the SPAR Marketing Companies with PIA
Merchandising Services, Inc. (the "Merger"). Mr. Brown served as the Chairman,
President and Chief Executive Officer of the SPAR Marketing Companies
(SPAR/Burgoyne Retail Services, Inc. ("SBRS") since 1994, SPAR, Inc. ("SINC")
since 1979, SPAR Marketing, Inc. ("SMNEV") since November 1993, and SPAR
Marketing Force, Inc. ("SMF") since 1996).
William H. Bartels serves as the Vice Chairman and a Director of SGRP
and has held such positions since July 8, 1999 (the effective date of the
Merger). Mr. Bartels served as the Vice Chairman, Secretary, Treasurer and
Senior Vice President of the SPAR Marketing Companies (SBRS since 1994, SINC
since 1979, SMNEV since November 1993 and SMF since 1996).
Robert O. Aders serves as a Director of SGRP and has done so since July
8, 1999. He has served as the Chairman of the Governance Committee since May 9,
2003. Mr. Aders has served as Chairman of The Advisory Board, Inc., an
international consulting organization since 1993, and also as President Emeritus
of the Food Marketing Institute ("FMI") since 1993. Immediately prior to his
election to the Presidency of FMI in 1976, Mr. Aders was Acting Secretary of
Labor in the Ford Administration. Mr. Aders was the Chief Executive Officer of
FMI from 1976 to 1993. He also served in The Kroger Co., in various executive
positions from 1957 to 1974 and was Chairman of the Board from 1970 to 1974.
-31-
Jack W. Partridge serves as a Director of SGRP and has done so since
January 29, 2001. He has served as the Chairman of the Compensation Committee of
SGRP since May 9, 2003. Mr. Partridge is President of Jack W. Partridge &
Associates. He previously served as Vice Chairman of the Board of The Grand
Union Company from 1998 to 2000. Mr. Partridge's service with Grand Union
followed a distinguished 23-year career with The Kroger Company, where he served
as Group Vice President, Corporate Affairs, and as a member of the Senior
Executive Committee, as well as various other executive positions. Mr. Partridge
has been a leader in industry and community affairs for over three decades. He
has served as Chairman of the Food Marketing Institute's Government Relations
Committee, the Food and Agriculture Policy Task Force, and as Chairman of the
Board of The Ohio Retail Association. He currently serves as a member of the
board of Checkpoint Systems, Inc.
Jerry B. Gilbert serves as a Director of SGRP and has done so since June
4, 2001. Mr. Gilbert served as Vice President of Customer Relations for Johnson
& Johnson's Consumer and Personal Care Group of Companies from 1989 to 1997. Mr.
Gilbert joined Johnson & Johnson in 1958 and from 1958 to 1989 held various
executive positions. Mr. Gilbert also served on the Advisory Boards of the Food
Marketing Institute, the National Association of Chain Drug Stores and the
General Merchandise Distributors Council (GMDC) where he was elected the first
President of the GMDC Educational Foundation. He was honored with lifetime
achievement awards from GMDC, Chain Drug Review, Drug Store News and the Food
Marketing Institute. He is the recipient of the prestigious National Association
of Chain Drug Stores (NACDS) Begley Award, as well as the National Wholesale
Druggists Association (NWDA) Tim Barry Award. In June 1997, Mr. Gilbert received
an Honorary Doctor of Letters Degree from Long Island University.
Lorrence T. Kellar serves as a Director and the Chairman of the Audit
Committee of SGRP and has done so since April 2, 2003. Mr. Kellar had a 31-year
career with The Kroger Co., where he served in various financial capacities,
including Group Vice President for real estate and finance, and earlier, as
Corporate Treasurer. He was responsible for all of Kroger's real estate
activities, as well as facility engineering, which coordinated all store
openings and remodels. Mr. Kellar subsequently served as Vice President, real
estate, for Kmart. He currently is Vice President of Continental Properties
Company, Inc. Mr. Kellar also serves on the boards of Frisch's Restaurants and
Multi-Color Corporation and is a trustee of the Acadia Realty Trust. He also is
a major patron of the arts and has served as Chairman of the Board of the
Cincinnati Ballet.
Charles Cimitile serves as the Chief Financial Officer, Secretary and
Treasurer of SGRP and has done so since November 24, 1999. Mr. Cimitile served
as Chief Financial Officer for GT Bicycles from 1996 to 1999 and Cruise Phone,
Inc. from 1995 through 1996. Prior to 1995, he served as the Vice President
Finance, Secretary and Treasurer of American Recreation Company Holdings, Inc.
and its predecessor company.
Kori G. Belzer serves as the Chief Operating Officer of SGRP and has
done so since January 1, 2004. Ms. Belzer also serves as Chief Operating Officer
of SPAR Management Services, Inc. ("SMSI"), and SPAR Marketing Services, Inc.
("SMS"), each an affiliate of SGRP (see Item 13 - Certain Relationships and
Related Transactions, below), and has done so since 2000. The Audit Committee
determined that Ms. Belzer also served during 2003 as the de facto chief
operating officer of SGRP through her position as Chief Operating Officer of
SMSI and SMS. From 1997 to 2000, Ms. Belzer served as Vice President Operations
of SMS and as Regional Director of SMS from 1995 to 1997. Prior to 1995, she
served as Client Services Manager for SPAR/Servco, Inc.
Patricia Franco serves as the Chief Information Officer of SGRP and
President of the SPAR International Merchandising Services Division and has done
so since January 1, 2004. Ms. Franco also serves as Senior Vice President of
SPAR Infotech, Inc. ("SIT"), an affiliate of SGRP (see Item 13 - Certain
Relationships and Related Transactions, below), and has done so since January 1,
2003. The Audit Committee determined that Ms. Franco also served during 2003 as
the de facto chief information officer of SGRP as well as, the de facto
President of the SPAR International Merchandising Services Division, through her
position as Senior Vice President of SIT. Prior to 2003, Ms. Franco served in
various management capacities with SIT, SMS and their affiliates.
-32-
James R. Segreto serves as Vice President, Controller of SGRP and has
done so since July 8, 1999, the effective date of the Merger. From 1997 through
the Merger, he served in the same capacity for SMS. Mr. Segreto served as Chief
Financial Officer for Supermarket Communications Systems, Inc. from 1992 to 1997
and LM Capital, LLP from 1990 to 1992. Prior to 1992, he served as Controller of
Dorman Roth Foods, Inc.
Audit Committee Composition and Financial Expert
The Audit Committee currently consists of Messrs. Kellar (its Chairman),
Aders, Gilbert and Partridge, each of whom has been determined by the Governance
Committee and the Board to meet the independence requirements for audit
committee members under Nasdaq Rule 4200(a)(14). In connection with his
re-nomination as a Director, the Governance Committee and the Board
re-determined that Mr. Kellar was qualified to be the "audit committee financial
expert" as required by applicable law and the SEC Rules.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Exchange Act ("Section 16(a)") requires SGRP's
directors and certain of its officers and persons who own more than 10% of
SGRP's Common Stock (collectively, "Insiders"), to file reports of ownership and
changes in their ownership of SGRP's Common Stock with the Commission. Insiders
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it
for the year ended December 31, 2005, or written representations from certain
reporting persons for such year, the Company believes that its Insiders complied
with all applicable Section 16(a) filing requirements for such year, with the
exception that Robert G. Brown and William H. Bartels untimely filed certain
Statements of Changes in Beneficial Ownership on Form 4. All such Section 16(a)
filing requirements have since been completed by each of the aforementioned
individuals.
Ethics Codes
SGRP has adopted codes of ethical conduct applicable to all of its
directors, officers and employees, as approved and recommended by the Audit
Committee and Governance Committee and adopted by the Board on May 3, 2004, in
accordance with Nasdaq Rules. These codes of conduct consist of: (1) the SPAR
Group Code of Ethical Conduct for its Directors, Senior Executives and Employees
Dated (as of) May 1, 2004; and (2) the SPAR Group Statement of Policy Regarding
Personal Securities Transaction in SGRP Stock and Non-Public Information Dated,
Amended and Restated as of May 1, 2004, which amends, restates and completely
replaces its existing similar statement of policy. Both Committees were involved
because authority over ethics codes shifted from the Audit Committee to the
Governance Committee with the adoption of the committee charters on May 18,
2004. Copies of these codes and policies are posted and available on the
Company's web site (www.SPARinc.com).
-33-
Item 11. Executive Compensation and Other Information of SPAR Group, Inc.
Executive Compensation
The following table sets forth all compensation received for services
rendered to 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) each of the other four most highly compensated executive
officers of SGRP 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
Long Term
Annual Compensation Compensation Awards
------------------------------ ----------------------------
Securities
Underlying All Other
Options Compensation
Name and Principal Positions Year Salary ($) Bonus ($) (#)(1) ($)(2)
- ------------------------------------------------- ------------ ----------- ----------- -------------
Robert G. Brown 2005 191,100 (3) -- -- 1,230
Chief Executive Officer, Chairman of the 2004 114,000 (3) -- -- 1,800
Board, President, and Director 2003 180,000 (3) -- -- 2,200
William H. Bartels 2005 191,100 (3) -- -- 698
Vice Chairman and Director 2004 114,000 (3) -- -- 1,620
2003 180,000 (3) -- -- 2,007
Charles Cimitile 2005 227,700 20,000 95,000 1,230
Chief Financial Officer, Treasurer and 2004 220,000 -- 25,000 1,800
Secretary 2003 221,700 20,000 20,000 2,200
Kori G. Belzer 2005 152,975 30,000 111,140 888
Chief Operating Officer 2004 147,990 -- 25,000 1,495
2003 147,067 19,000 26,750 1,843
Patricia Franco 2005 152,975 30,000 137,500 947
Chief Information Officer 2004 147,900 10,000 25,000 1,493
2003 145,875 20,000 37,500 1,718
________________________
(1) In June 2004, Mr. Brown and Mr. Bartels voluntarily surrendered for
cancellation their options for the purchase of the following shares of
common stock under the 2000 Plan: 382,986 and 235,996, respectively. In
September 2004, Mr. Cimitile, Ms. Belzer and Ms. Franco voluntarily
surrendered for cancellation their options for the purchase of the
following shares of common stock under the 2000 Plan: 55,000, 76,140 and
87,500 respectively. Also in September 2004, Ms. Franco voluntarily
surrendered for cancellation her options for the purchase 10,000 shares of
common stock under the 1995 Plan.
(2) Other compensation represents the Company's 401k contribution.
(3) Does not include amounts paid to SMS, SMSI, SIT and Affinity Insurance Ltd.
(see Item 13 - Certain Relationships and Related Transactions, below)
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Stock Option Grants in Last Fiscal Year
The following table sets forth information regarding each grant of stock
options made during the year ended December 31, 2005, to each of the Named
Executive Officers. No stock appreciation rights ("SAR's") were granted during
such period to such person.
Individual Grants
----------------------------------------------------------
Number of Percent of Potential Realizable Value at
Securities Total Options Assumed Annual Rates of Stock
Underlying Granted to Price Appreciation for Option(1)
Options Employees in Exercise Expiration ---------------------------------
Name Granted(2) (#) Period (%) Price ($/Sh) Date 5% ($) 10% ($)
- ---- -------------- ---------- ------------ ---- ------ -------
Charles Cimitile 55,000 16.0 1.26 4/14/15 43,582 110,446
20,000 2.5 1.75 5/12/15 22,011 55,781
20,000 2.5 1.10 11/9/15 13,836 35,062
Kori G. Belzer 76,140 22.2 1.26 4/14/15 60,334 152,898
20,000 5.8 1.75 5/12/15 22,011 55,781
15,000 4.4 1.10 11/9/15 10,377 26,297
Patricia Franco 97,500 28.4 1.26 4/14/15 77,260 195,791
25,000 7.3 1.75 5/12/15 27,514 69,726
15,000 4.4 1.10 11/9/15 10,377 26,297
____________
(1) The potential realizable value is calculated based upon the term of the
option at its time of grant. It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option.
(2) These options vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
Aggregated Stock Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth the number of shares of Common Stock of
SGRP purchased by each of the Named Executive Officers in the exercise of stock
options during the year ended December 31, 2005, the value realized in the
purchase of such shares (the market value at the time of exercise less the
exercise price to purchase such shares), and the number of shares that may be
purchased and value of the exercisable and unexercisable options held by each of
the Named Executive Officers at December 31, 2005.
Value of Unexercised
Number of Securities Underlying ------------------------------
Unexercised Options at Fiscal In-the-Money Options at Fiscal
Year-End (#) Year-End ($)
Shares Acquired Value --------------------------------- --------------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ---------------- -------------- --------------- --------------- ------------- ---------------
Robert G. Brown -- -- 95,746 -- -- --
William H. Bartels -- -- 58,999 -- -- --
Charles Cimitile -- -- 107,500 97,500 6,875 --
Kori G. Belzer -- -- 101,000 116,140 2,800 --
Patricia Franco -- -- 91,000 137,500 2,800 --
Stock Option and Purchase Plans
SGRP has four stock option plans: the 2000 Stock Option Plan ("2000
Plan"), the Special Purpose Stock Option Plan ("Special Purpose Plan"), the
Amended and Restated 1995 Stock Option Plan ("1995 Plan") and the 1995
Director's Plan ("Director's Plan").
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On December 4, 2000, SGRP adopted the 2000 Plan as the successor to the
1995 Plan and the Director's Plan with respect to all new options issued. The
2000 Plan provides for the granting of either incentive or nonqualified stock
options to specified employees, consultants, and directors of the Company for
the purchase of up to 3,600,000 (less those options still outstanding under the
1995 Plan or exercised after December 4, 2000 under the 1995 Plan). The options
have a term of ten years, except in the case of incentive stock options granted
to greater than 10% stockholders for whom the term is five years. The exercise
price of nonqualified stock options must be equal to at least 85% of the fair
market value of SGRP'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's common stock at the date of grant. During 2005, options to purchase
1,334,973 shares of SGRP's common stock were granted, options to purchase 57,625
shares of SGRP's common stock were exercised and options to purchase 440,975
shares of SGRP's stock were voluntarily surrendered and cancelled under this
plan. At December 31, 2005, options to purchase 2,088,256 shares of SGRP's
common stock remain outstanding under this plan and options to purchase 724,221
shares of SGRP'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 134,114 options granted at $0.01 per share.
Since July 8, 1999, SGRP has not granted any new options under this plan. During
2005, no options to purchase shares of SGRP's common stock were exercised under
this plan. At December 31, 2005, options to purchase 4,750 shares of SGRP'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'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 SGRP's common
stock at the date of grant. Since 2000, SGRP has not granted any new options
under this plan. During 2005, 250 options to purchase shares of SGRP's common
stock were exercised. At December 31, 2005, options to purchase 14,375 shares of
SGRP's common stock remain outstanding under this plan. The 1995 Plan was
superseded by the 2000 Plan with respect to all new options issued.
The Director's Plan was a stock option plan for non-employee directors
and provided for the purchase of up to 120,000 shares of SGRP's common stock.
Since 2000, SGRP has not granted any new options under this plan. During 2005,
no options to purchase shares of SGRP's common stock were exercised under this
plan. At December 31, 2005, 20,000 options to purchase shares of SGRP's common
stock remained outstanding under this plan. The Director's Plan has been
replaced by the 2000 Plan with respect to all new options issued.
In 2001, SGRP adopted its 2001 Employee Stock Purchase Plan (the "ESP
Plan"), which replaced its earlier existing plan, and its 2001 Consultant Stock
Purchase Plan (the "CSP Plan"). These plans were each effective as of June 1,
2001. The ESP Plan allows employees of the Company, and the CSP Plan allows
employees of the affiliates of the Company (see Item 13 - Certain Relationships
and Related Transactions, below), to purchase SGRP's Common Stock from SGRP
without having to pay any brokerage commissions. On August 8, 2002, the
Company's Board approved a 15% discount for employee purchases of Common Stock
under the ESP Plan and recommended that its affiliates pay a 15% cash bonus for
affiliate consultant purchases of Common Stock under the CSP Plan.
Compensation of Directors
The Compensation Committee administers the compensation plan for its
outside Directors as well as the compensation for its executives. Each member of
SGRP's Board who is not otherwise an employee or officer of SGRP or any
subsidiary or affiliate of SGRP (each, an "Eligible Director") is eligible to
receive the compensation contemplated under such plan.
The Compensation Committee administers the compensation of directors
pursuant to SGRP's Director Compensation Plan for its outside Directors, as
approved and amended by the Board (the "Directors Compensation Plan"), as well
as the compensation for SGRP's executives.
In November 2005, the Compensation Committee approved and recommended
and the Board adopted a change in the Directors Compensation Plan to provide for
the payment of Director Compensation all in cash. Each member of SGRP's Board
who is not otherwise an employee or officer of SGRP or any subsidiary or
affiliate of SGRP (each a "Non-Employee Director") is eligible to receive
director's fees of $30,000 per annum (plus an additional $5,000 per annum for
-36-
the Audit Committee Chairman), payable quarterly. Prior to November 2005,
Director Compensation was paid half in cash and half in stock options to
purchase shares of SGRP's common stock.
In addition, upon acceptance of the directorship, each Non-Employee
Director receives options to purchase 10,000 shares of SGRP's common stock,
options to purchase 10,000 additional shares of SGRP's common stock after one
year of service and options to purchase 10,000 additional shares of SGRP's
common stock for each additional year of service thereafter. All options above
have an exercise price equal to 100% of the fair market value of the SGRP's
common stock at the date of grant.
All of those options to Non-Employee Directors have been and will be
granted under the 2000 Plan described below, under which each member of the
Board is eligible to participate. Non-Employee Directors will be reimbursed for
all reasonable expenses incurred during the course of their duties. There is no
additional compensation for committee participation, phone meetings, or other
Board activities.
Severance Agreements
SGRP has entered into a Change of Control Severance Agreement with each
of Patricia Franco, SGRP's Chief Information Officer, and Kori G. Belzer, SGRP's
Chief Operating Officer, each providing for a lump sum severance payment and
other accommodations from the Company to the employee under certain
circumstances if, pending or following a change in control, the employee leaves
for good reason or is terminated other than in a termination for cause. The
payment is equal to the sum of the employee's monthly salary times a multiple
equal to 24 months less the number of months by which the termination of
employment followed the change in control plus the maximum bonus that would have
been paid to the employee (not to exceed 25% of the employee's annual salary).
Compensation Committee Interlocks and Insider Participation
No member of the Board's Audit, Compensation or Governance Committee was
at any time during the year ended December 31, 2005, or at any other time an
officer or employee of the Company. No executive officer of the Company or Board
member serves as a member of the board of directors, audit, compensation or
governance committee of any other entity that has one or more executive officers
serving as a member of SGRP's Board, Audit Committee, Compensation Committee or
Governance Committee, except for the positions of Messrs. Brown and Bartels as
directors and officers of the Company (including each of its subsidiaries) and
as directors and officers of each of its affiliates, including SMS, SMSI and SIT
(see - Certain Relationships and Related Transactions, below).
-37-
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners of SGRP
The following table sets 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.
Number of Shares
Title of Class Name and Address of Beneficial Owner Beneficially Owned Percentage
-------------- ------------------------------------ ------------------ ----------
Common Shares Robert G. Brown (1) 8,644,218 (2) 45.5%
Common Shares William H. Bartels (1) 5,570,161 (3) 29.4%
Common Shares Robert O. Aders (1) 164,929 (4) *
Common Shares Jack W. Partridge (1) 109,019 (5) *
Common Shares Jerry B. Gilbert (1) 102,360 (6) *
Common Shares Lorrence T. Kellar (1) 102,387 (7) *
Common Shares Charles Cimitile (1) 128,750 (8) *
Common Shares Kori G. Belzer (1) 133,235 (9) *
Common Shares Patricia Franco (1) 175,122 (10) *
Common Shares Richard J. Riordan (11)
300 South Grand Avenue, Suite 2900
Los Angeles, California 90071 1,209,922 6.4%
Common Shares Heartland Advisors, Inc. (12)
790 North Milwaukee Street
Milwaukee, Wisconsin 53202 1,228,000 6.5%
Common Shares Executive Officers and Directors 15,130,181 80.0%
* Less than 1%
(1) The address of such owners is c/o SPAR Group, Inc. 580 White Plains
Road, Tarrytown, New York 10591.
(2) Includes 1,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown,
James R. Brown, Sr. and William H. Bartels are trustees. Includes
95,747 shares issuable upon exercise of options.
(3) Excludes 1,800,000 shares held by a grantor trust for the benefit of
certain family members of Robert G. Brown over which Robert G. Brown,
James R. Brown, Sr. and William H. Bartels are trustees, beneficial
ownership of which are disclaimed by Mr. Bartels. Includes 58,999
shares issuable upon exercise of options.
(4) Includes 93,275 shares issuable upon exercise of options.
(5) Includes 98,051 shares issuable upon exercise of options.
(6) Includes 102,360 shares issuable upon exercise of options.
(7) Includes 96,239 shares issuable upon exercise of options.
(8) Includes 128,750 shares issuable upon exercise of options.
(9) Includes 131,285 shares issuable upon exercise of options.
(10) Includes 121,025 shares issuable upon exercise of options.
(11) Share ownership was confirmed with SGRP's stock transfer agent and the
principal.
(12) All information regarding share ownership is taken from and furnished
in reliance upon the Schedule 13G (Amendment No. 9), filed by Heartland
Advisors, Inc. with the Securities and Exchange Commission on December
31, 2005.
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Equity Compensation Plans
The following table contains a summary of the number of shares of Common
Stock of SGRP to be issued upon the exercise of options, warrants and rights
outstanding at December 31, 2005, the weighted-average exercise price of those
outstanding options, warrants and rights, and the number of additional shares of
Common Stock remaining available for future issuance under the plans as at
December 31, 2005.
Equity Compensation Plan Information
----------------------------- -------------------------- ------------------------- -------------------------
Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance of
warrants and rights (#) warrants and rights ($) options, warrants and
Plan category rights (#)
----------------------------- -------------------------- ------------------------- -------------------------
----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans 2,127,381 $1.53 724,221
approved by security
holders
----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans
not approved by security
holders -- -- --
----------------------------- -------------------------- ------------------------- -------------------------
Total 2,127,381 $1.53 724,221
----------------------------- -------------------------- ------------------------- -------------------------
Item 13. Certain Relationships and Related Transactions.
Mr. Robert G. Brown, a Director, the Chairman, President and Chief
Executive Officer of the Company 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"), SPAR Management Services,
Inc. ("SMSI"), and SPAR Infotech, Inc. ("SIT").
SMS and SMSI provided approximately 99% of the Company's merchandising
specialists in the field (through its independent contractor field force) and
approximately 86% of the Company's field management at a total cost of
approximately $20.0 million, $24.4 million, 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's merchandising specialist field force of approximately 5,600 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 44 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 $770,000,
$320,000, 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"
corporations, Messrs. Brown and Bartels benefit from any income of such
companies allocated to them.
SIT provided substantially all of the Internet computer programming
services to the Company at a total cost of approximately $771,000, $1,170,000,
and $1,610,000 for 2005, 2004, and 2003, respectively. SIT provided
approximately 25,000, 34,000, and 47,000 hours of Internet computer programming
services to the Company for 2005, 2004, and 2003, 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 $30.34, $34.71, 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"
corporation, Messrs. Brown and Bartels benefit from any income of such company
allocated to them.
In November 2004 and January 2005, the Company entered into separate
operating lease agreements between SMS and the Company's wholly owned
subsidiaries, SPAR Marketing Force, Inc. ("SMF") and SPAR Canada Company ("SPAR
Canada"). 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
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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.
The Company's agreements with SMS, SMSI and SIT are periodically
reviewed by SGRP's Audit Committee, which includes an examination of the overall
fairness of the arrangements. In February 2004, the Audit Committee approved
separate amended and restated agreements with each of SMS, SMSI and SIT,
effective as of January 1, 2004. The restated agreements extend the contract
maturities for four years, strengthened various contractual provisions in each
agreement and continued the basic economic terms of the existing agreements,
except that the restated agreement with SMSI provides for temporary concessions
to the Company by SMSI totaling approximately $640,000 for 2004. In February and
May of 2005, the Audit Committee approved the separate handheld computer leases
and amendments.
In July 1999, SMF, SMS and SIT entered into a Software Ownership
Agreement with respect to Internet job scheduling software jointly developed by
such parties. In addition, SPAR Trademarks, Inc. ("STM"), SMS and SIT entered
into trademark licensing agreements whereby STM has granted non-exclusive
royalty-free licenses to SIT, SMS and SMSI for their continued use of the name
"SPAR" and certain other trademarks and related rights transferred to STM, a
wholly owned subsidiary of the Company.
Messrs. Brown and Bartels also collectively own, through SMSI, a
minority (less than 5%) equity interest in Affinity Insurance Ltd., which
provides certain insurance to the Company.
In the event of any material dispute in the business relationships
between the Company and SMS, SMSI, or SIT, it is possible that Messrs. Brown or
Bartels may have one or more conflicts of interest with respect to these
relationships and such dispute could have a material adverse effect on the
Company.
Item 14. Principal Accountant Fees and Services.
On October 4, 2004, Ernst & Young LLP ("E&Y") resigned as the
independent registered public accounting firm for the Company and its
subsidiaries. The resignation was effective upon completion of E&Y's review of
the interim financial information for the Company's third fiscal quarter ended
September 30, 2004, and the filing of the Company's quarterly report on Form
10-Q for such period.
In January 2005, the Company, with the approval of the Company's Audit
Committee, appointed Rehmann Robson ("Rehmann") as its independent registered
public accounting firm.
During the Company's fiscal year ended December 31, 2005 and 2004,
respectively, the Company and its subsidiaries did not engage Rehmann or E&Y to
provide advice regarding financial information systems design or implementation,
but did engage Rehmann in 2005 to review the Company's 2004 tax return and
preliminary 404 documentation for which Rehmann was paid $17,502 and $3,525,
respectively. No other non-audit services were performed by Rehmann in 2005 or
2004. Since 2003, as required by law, each non-audit service performed by the
Company's auditor either (i) was approved in advance on a case-by-case basis by
the Company's Audit Committee, or (ii) fit within a pre-approved "basket" of
non-audit services of limited amount, scope and duration established in advance
by the Company's Audit Committee. In connection with the standards for
independence of the Company's independent public accountants promulgated by the
Securities and Exchange Commission, the Audit Committee considers (among other
things) whether the provision of such non-audit services would be compatible
with maintaining the independence of Rehmann.
Audit Fees
During the Company's fiscal year ended December 31, 2005 and 2004,
respectively, fees billed by Rehmann for all audit services rendered to the
Company and its subsidiaries were $111,002 and $132,225, respectively. Fees paid
to E&Y for all audit services rendered to the Company and its subsidiaries for
the fiscal year ended December 31, 2004 was $100,203. Audit services principally
include fees for the Company's year end and 401K audits and 10-Q filing reviews.
Since 2003, as required by law, the choice of the Company's auditor and the
audit services to be performed by it have been approved in advance by the
Company's Audit Committee.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
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/Musavirlik A.S. F-2
- Baker Tilly Klitou and Partner S.R.L. F-3
- S.S. Kothari Mehta & Co. F-4
- Ernst & Young LLP. F-5
Consolidated Balance Sheets as of December 31, 2005, and
December 31, 2004. F-6
Consolidated Statements of Operations for the years ended
December 31, 2005, December 31, 2004, and December 31, 2003. F-7
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2005, December 31, 2004, and December 31, 2003. F-8
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, December 31, 2004, and December 31, 2003. F-9
Notes to Consolidated Financial Statements. F-10
2. Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts for the three
years ended December 31, 2005. F-33
3. Exhibits.
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc. (referred to
therein under its former name PIA), as amended (incorporated
by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-80429), as filed with the Securities
and Exchange Commission ("SEC") on December 14, 1995 (the
"Form S-1")), and the Certificate of Amendment filed with the
Secretary of State of the State of Delaware on July 8, 1999
(which, among other things, changes the Company's name to SPAR
Group, Inc.) (incorporated by reference to Exhibit 3.1 to the
Company's Form 10-Q for the 3rd Quarter ended September 30,
1999).
3.2 Amended and Restated By-Laws of SPAR Group, Inc. adopted on
May 18, 2004 (incorporated by reference to the Company's
report on Form 8-K, as filed 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).
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).
-41-
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, (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.2 2001 Employee Stock Purchase Plan (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.3 2001 Consultant Stock Purchase Plan (incorporated by reference
to the Company's Proxy Statement for the Company's Annual
meeting held on August 2, 2001, as filed with the SEC on July
12, 2001).
10.4 Amended and Restated Field Service Agreement dated and
effective as of January 1, 2004, by and between SPAR Marketing
Services, Inc., and SPAR Marketing Force, Inc. (incorporated
by reference to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 2004, as filed with the SEC on
May 21, 2004).
10.5 Amended and Restated Field Management Agreement dated and
effective as of January 1, 2004, by and between SPAR
Management Services, Inc., and SPAR Marketing Force, Inc.
(incorporated by reference to the Company's quarterly report
on Form 10-Q for the quarter ended March 31, 2004, as filed
with the SEC on May 21, 2004).
10.6 Amended and Restated Programming and Support Agreement dated
and effective as of January 1, 2004, by and between SPAR
InfoTech, Inc., and SPAR Marketing Force, Inc. (incorporated
by reference to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 2004, as filed with the SEC on
May 21, 2004).
10.7 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Marketing Services, Inc., and SPAR Trademarks,
Inc. (incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 31, 2002, as filed with the SEC
on March 31, 2002).
10.8 Trademark License Agreement dated as of July 8, 1999, by and
between SPAR Infotech, Inc., and SPAR Trademarks, Inc.
(incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 31, 2002, as filed with the SEC on
March 31, 2002).
10.9 Stock Purchase and Sale Agreement by and among Performance
Holdings, Inc. and SPAR Incentive Marketing, Inc., effective
as of June 30, 2002 (incorporated by reference to the
Company's Form 10-Q for the quarter ended June 30, 2002, as
filed with the SEC on August 14, 2002).
10.10 Revolving Credit, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to
the Company's Form 10-Q for the quarter ended June 30, 2002,
as filed with the SEC on August 14, 2002).
10.11 Term Loan, Guaranty and Security Agreement by and among
Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
effective as of June 30, 2002 (incorporated by reference to
-42-
the Company's Form 10-Q for the quarter ended June 30, 2002,
as filed with the SEC on August 14, 2002).
10.12 Promissory Note in the principal amount of $764,271.00 by
STIMULYS, Inc., in favor of SPAR Incentive Marketing, Inc.,
dated as of September 10, 2004 (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).
10.13 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).
10.14 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).
10.15 Third Amended and Restated Revolving Credit and Security
Agreement by and among Whitehall Business Credit Corporation
(the "Lender") with SPAR Marketing Force, Inc., SPAR Group,
Inc., SPAR, Inc., SPAR/Burgoyne Retail Services, Inc., SPAR
Incentive Marketing, Inc., SPAR Trademarks, Inc., SPAR
Marketing, Inc. (DE), SPAR Marketing, Inc. (NV), SPAR
Acquisition, Inc., SPAR Group International, Inc., SPAR
Technology Group, Inc., SPAR/PIA Retail Services, Inc., Retail
Resources, Inc., Pivotal Field Services Inc., PIA
Merchandising Co., Inc., Pacific Indoor Display Co. and
Pivotal Sales Company (collectively, the "Existing
Borrowers"), dated as of January 24, 2003 (incorporated by
reference to the Company's Form 10-K for the fiscal year ended
December 31, 2002, as filed with the SEC on March 31, 2003).
10.16 Waiver And Amendment No. 3 To Third Amended And Restated
Revolving Credit And Security Agreement entered into as of
March 26, 2004 (incorporated by reference to the Company's
report on Form 8-K, as filed with the SEC on May 26, 2004).
10.17 Joinder, Waiver And Amendment No. 4 To Third Amended And
Restated Revolving Credit And Security Agreement entered into
as of May 17, 2004 (incorporated by reference to the Company's
report on Form 8-K, as filed with the SEC on May 26, 2004).
10.18 Waiver and Amendment to Third Amended and Restated Revolving
Credit and Security Agreement by and among the Lender and the
Borrowers dated as of January 2004 (incorporated by reference
to the Company's report on Form 10-K/A for the year ended
December 31, 2003, as filed with the SEC on June 28, 2004).
10.19 Waiver and Amendment No. 5 to Third Amended and Restated
Revolving Credit and Security Agreement among Webster Business
Credit Corporation, SPAR Group, Inc., and certain of its
subsidiaries dated as of August 20, 2004 (incorporated by
reference to the Company's quarterly report of the quarter
ended June 30, 2004, as filed with the SEC on August 23,
2004).
10.20 Waiver and Amendment No. 6 to Third Amended and Restated
Revolving Credit and Security Agreement among Webster Business
Credit Corporation, SPAR Group, Inc., and certain of its
subsidiaries dated as of November 12, 2004 (incorporated by
reference to the Company's quarterly report for the quarter
ended September 30, 2004, as filed with the SEC on November
17, 2004).
10.21 Waiver to the Third Amended and Restated Revolving Credit and
Security Agreement among Webster Business Credit Corporation,
SPAR Group, Inc., and certain of its subsidiaries dated as of
March 31, 2004 (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).
10.22 Consent, Joinder, Release and Amendment Agreement dated as of
October 31, 2003, by and among the Lender, the Existing
Borrowers and SPAR All Store Marketing, Inc., as a Borrower
(incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 31, 2003, as filed with the SEC on
March 31, 2004).
-43-
10.23 Change in Control Severance Agreement between Kori Belzer and
SPAR Group, Inc., dated as of August 12, 2004 (incorporated by
reference to the Company's quarterly report of the quarter
ended June 30, 2004, as filed with the SEC on August 23,
2004).
10.24 Change in Control Severance Agreement between Patricia Franco
and SPAR Group, Inc., dated as of August 12, 2004
(incorporated by reference to the Company's quarterly report
of the quarter ended June 30, 2004, as filed with the SEC on
August 23, 2004).
10.25 Master Lease Agreement by and between SPAR Marketing Services,
Inc. and SPAR Marketing Force, Inc. dated as of November 2004
relating to lease of handheld computer equipment (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 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).
10.27 Joint Venture Agreement dated as of March 26, 2004, by and
between Solutions Integrated Marketing Services Ltd. and SPAR
Group International, Inc. (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).
10.28 Joint Venture Shareholders Agreement between Friedshelf 401
(Proprietary) Limited, SPAR Group International, Inc., Derek
O'Brien, Brian Mason, SMD Meridian CC, Meridian Sales &
Mnrechandisign (Western Cape) CC, Retail Consumer Marketing
CC, Merhold Holding Trust in respect of SGRP Meridian
(Proprietary) Limited, dated as of June 25, 2004 (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 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. (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).
10.30 Joint Venture Agreement dated as of May 1, 2001, by and
between Paltac Corporation and SPAR Group, Inc. (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).
10.31 Agreement on Amendment dated as of August 1, 2004, by and
between SPAR Group, Inc. and SPAR FM Japan, Inc. (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).
10.32 Joint Venture Agreement dated as of January 26, 2005, by and
between Best Mark Investments Holdings Ltd. and SPAR
International Ltd. (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 Joint Venture Agreement dated as of December 14, 2004, by and
between Field Insights S.R.L. and SPAR Group International,
Inc. (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).
10.34 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).
10.35 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,
-44-
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).
10.36 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).
10.37 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).
10.38 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).
10.39 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).
10.40 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).
10.41 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
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).
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
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).
10.43 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).
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).
-45-
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 S.S. Kothari Mehta & Co.
23.5 Consent of Ernst & Young LLP.
31.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, and filed herewith.
31.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, and filed herewith.
32.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
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.
-46-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to the report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SPAR Group, Inc.
By: /s/ Robert G. Brown
-----------------------------------------
Robert G. Brown
President, Chief Executive Officer and
Chairman of the Board
Date: March 31, 2006
-----------------------------------------
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-
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, 2005 and 2004, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. Our audits also included the financial statement schedule for these
years listed in the index at Item 15. These consolidated financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits. We 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
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, 2005 and 2004, and the consolidated results
of their operations and their cash flows for the years then ended, 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
Troy, Michigan
March 16, 2006
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") as at December 31, 2005 and the
related statement of operations and stockholders' equity for the year 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 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 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,
2005 and the result of its operations for the year 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
Istanbul, Turkey
March 10, 2006
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
as of December 31, 2005, and related statements of operations, stockholders'
equity, and cash flows for the period from April 20, 2005 to December 31, 2005.
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 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 amount 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 the company as of December 31,
2005, and the results of its operations and its cash flows for the period from
April 20, 2005 to December 31, 2005 in conformity with U.S. generally accepted
accounting principles.
/s/ Baker Tilly Klitou and Partners S.R.L.
Bucharest, Romania
March 29, 2006
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 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' 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 audit.
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 audit 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.
New Delhi, India
March 30, 2006
F-4
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SPAR Group, Inc. and Subsidiaries
Tarrytown, New York
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of SPAR Group, Inc. and Subsidiaries for the year ended December
31, 2003. Our audit also included the financial statement schedule listed in the
Index at Item 15. These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
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 consolidated results of SPAR Group, Inc.'s
operations and its cash flows for the year ended December 31, 2003, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 13, 2004
F-5
SPAR Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(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
============= ==============
See accompanying notes.
F-6
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(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
=================================================
See accompanying notes.
F-7
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(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
=====================================================================================
See accompanying notes.
F-8
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(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
=================================================
See accompanying notes.
F-9
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005
1. Business and Organization
The SPAR Group, Inc. (formerly known as PIA Merchandising Services, Inc.), a
Delaware corporation ("SGRP"), and its subsidiaries (together with SGRP, the
"SPAR Group" or the "Company"), is a supplier of merchandising and other
marketing services throughout the United States and internationally. The Company
also provides in-store event staffing, product sampling, Radio Frequency
Identification ("RFID") services, technology services and marketing research
services.
SPAR Acquisition, Inc., and its subsidiaries (the "SPAR Companies") are the
original predecessor of the Company and were founded in 1967. On July 8, 1999,
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"). 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'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, 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 Turkey, South Africa, India 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. The Company continues to focus on expanding its
merchandising and marketing services business throughout the world.
Domestic Merchandising Services Division
The Company's Domestic Merchandising Services Division provides nationwide
merchandising and other marketing services primarily on behalf of consumer
product manufacturers and retailers at mass merchandisers, 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
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
1. Business and Organization (continued)
International Merchandising Services Division
In July 2000, the Company established its International Merchandising Services
Division, operating through a wholly owned subsidiary, SPAR Group International,
Inc. ("SGI"), to focus on expanding its merchandising and marketing services
business worldwide. The Company has expanded its international business as
follows:
Percent Ownership in Subsidiary
Date Established or Joint Venture 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
The joint venture in Lithuania is projected to begin operations in April 2006.
Discontinued Operations - Incentive Marketing Division
In the fourth quarter of 2001, the Company made the decision to divest its
interest in SPGI.
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly-owned
subsidiary of the Company, entered into a Stock Purchase and Sale Agreement with
Performance Holdings, Inc. ("PHI"), a Delaware corporation headquartered in
Carrollton, Texas. Pursuant to that agreement, SIM sold all of the stock of
SPGI, its subsidiary, to PHI for $6.0 million. As a condition of the sale, PHI
issued and contributed 1,000,000 shares of its common stock to Performance
Holdings, Inc. Employee Stock Ownership Plan, which became the only shareholder
of PHI.
The $6.0 million sales price was evidenced by two Term Loans, an Initial Term
Loan totaling $2.5 million and an Additional Term Loan totaling $3.5 million
(collectively the "Term Loans"). The Term Loans were guarantied by SPGI and
secured by pledges of all assets of PHI and SPGI. The Term Loans had interest
rates of 12% per annum through December 31, 2003. On January 1, 2004 the
interest rate changed to 8.9% per annum. Because the collection of the notes
depended on the future operations of PHI, the $6.0 million notes were fully
reserved.
Also in connection with the sale, the Company agreed to provide a discretionary
revolving line of credit to SPGI not to exceed $2.0 million (the "SPGI
Revolver") through September 30, 2005. The SPGI Revolver was secured by a pledge
of all the assets of SPGI and was guarantied by SPGI's parent, Performance
Holdings, Inc. The SPGI Revolver provided for advances in excess of the
borrowing base through September 30, 2003. As of October 1, 2003, the SPGI
Revolver was adjusted, as per the agreement, to include a borrowing base
calculation (principally 85% of "eligible" accounts receivable). In September
F-11
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
1. Business and Organization (continued)
2003, SPGI requested and the Company agreed to provide advances of up to $1.0
million in excess of the borrowing base through September 30, 2004. In December
of 2003, SPGI changed its name to STIMULYS, Inc ("STIMULYS"). On April 30, 2004,
as a result of various defaults by STIMULYS, the Company amended the
discretionary line of credit by eliminating advances in excess of STIMULYS'
borrowing base and reducing the maximum amount of the revolving line to the
greater of $1.0 million or the borrowing base. Under the SPGI Revolver terms,
STIMULYS was required to deposit all of its cash receipts to the Company's lock
box.
On September 10, 2004, in consideration for a new Promissory Note totaling
$764,271 (which represented the amount outstanding under the SPGI Revolver at
that time) and in the event of a change in control of STIMULYS, a share in the
net proceeds resulting from such change in control, the Company terminated the
SPGI Revolver and the Term Loans. SPAR also released its security interest in
any collateral previously pledged by STIMULYS. The first payment due under the
Promissory Note was received on October 29, 2004. Due to the collection risk
associated with the Promissory Note, the Company has established a reserve for
the remaining amount due, including interest of approximately $355,000 at
December 31, 2004.
As a result of the termination of the SPGI Revolver, the reserve for collection
of advances and accrued interest under the SPGI Revolver previously established
by the Company totaling approximately $984,000 was no longer required. The
release of this reserve, net of the new reserve required for the Promissory
Note, resulted in Other Income totaling approximately $640,000 for 2004.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Company consolidates its 100% owned subsidiaries. The Company also
consolidates its 51% owned joint venture subsidiaries and its 50% owned joint
ventures where the Company is the primary beneficiary 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, the Company has determined that in accordance
with FIN 46(R) it is the primary beneficiary of the Japanese joint venture, and
has consolidated the Japanese financial results for 2005 and 2004 in accordance
with the provisions of FIN 46(R). In connection with the consolidation of the
Japanese joint venture's financial results as of and for the period ending
September 30, 2004, the Company's consolidated financial statements only include
the Japanese joint venture financial results for nine months ended September 30,
2004. In 2005, the Japanese joint venture changed its fiscal year from September
30 to December 31, this report reflects its consolidation for the fiscal years
ending September 30, 2005 and 2004. The results for the short period from
October 1, 2005 to December 31, 2005 were not material and will be included with
the Company's 2006 first quarter reporting on Form 10-Q. In 2003, prior to the
amendment of the royalty agreement, the investment in the Japanese joint venture
was accounted for using the equity method based upon the Company's 50%
ownership.
All significant intercompany accounts and transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid short-term investments with maturities
of three months or less at the time of acquisition to be cash equivalents. Cash
equivalents are stated at a cost, which approximates fair value.
F-12
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company's services are provided 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's per unit fee arrangements provide for fees to be earned based on the
retail sales of a client's products to consumers. The Company recognizes per
unit fees in the period such amounts become determinable and are reported to the
Company.
Unbilled Accounts Receivable
Unbilled accounts receivable represent services performed but not billed and are
included as accounts receivable.
Doubtful Accounts, Sales Allowances and Credit Risks
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's assessment of the current status of
individual accounts. Based on management's assessment, the Company established
an allowance for doubtful accounts of $616,000 and $761,000 at December 31, 2005
and 2004, respectively. Bad debt and sales allowance expenses were $38,000,
$366,000, and $825,000 in 2005, 2004, and 2003, respectively.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated on a straight-line basis over estimated useful lives
of the related assets, which range from three to seven years. Leasehold
improvements are depreciated over the shorter of their estimated useful lives or
lease term, using the straight-line method.
Internal Use Software Development Costs
In accordance with SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, the Company capitalizes certain costs
associated with its internally developed software. Specifically, the Company
capitalizes the costs of materials and services incurred in developing or
obtaining internal use software. These costs include (but are not limited to)
the cost to purchase software, the cost to write program code, payroll and
related benefits and travel expenses for those employees who are directly
involved with and who devote time to the Company's software development
projects. Capitalized software development costs are amortized over three years.
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 $346,000, $559,000, and $1,004,000 of costs related to
software developed for internal use in 2005, 2004, and 2003, respectively, and
amortized capitalized software of approximately $516,000, $638,000 and $690,000
for the years ended December 31, 2005, 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 (see Note 3 -
Impairment Charges).
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that an asset's carrying amount may be higher
than its fair value. If an asset is considered to be impaired, the impairment
charge recognized is the excess of the asset's carrying value over the asset's
fair value (see Note 3 - Impairment Charges).
Fair Value of Financial Instruments
The Company's balance sheets include the following financial instruments:
accounts receivable, accounts payable and 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.
Excess Cash
The Company's domestic cash balances are generally utilized to pay its bank line
of credit. International cash balances are maintained in liquid cash accounts
and are utilized to fund daily operations.
Major Clients - Domestic
One client accounted for 20%, 14%, and 8% of the Company's domestic 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, 2005 and 2004, respectively.
In addition, approximately 16%, 16%, and 17% of the Company's domestic net
revenues for the years ended December 31, 2005, 2004, and 2003, 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% and 22% of the Company's domestic
accounts receivable at December 31, 2005 and 2004, respectively.
Also, approximately 17% and 4% of the Company's domestic net revenues for the
years ended December 31, 2005 and 2004, 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% and 16% of the Company's domestic accounts receivable at December 31, 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)
Foreign Currency Rate Fluctuations
The Company has foreign currency exposure associated with its international 100%
owned subsidiary, its 51% owned joint venture subsidiaries and its 50% owned
joint ventures. In both 2005 and 2004, these exposures are primarily
concentrated in the Canadian dollar, South African rand and Japanese yen. At
December 31, 2005, international assets totaled $5.0 million and international
liabilities totaled $7.5 million. For 2005, international revenues totaled $14.9
million and the Company's share of the net income was approximately $167,000.
Interest Rate Fluctuations
At December 31, 2005, the Company's outstanding debt totaled $3.0 million, which
consisted of domestic variable-rate (8%) debt of $2.4 million and international
variable rate (1.4%) debt of $0.6 million. Based on 2005 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.
Income Taxes
Deferred tax assets and liabilities represent the future tax return consequences
of certain timing differences that will either be taxable or deductible when the
assets and liabilities are recovered or settled. Deferred taxes are also
recognized for operating losses that are available to offset future taxable
income and tax credits that are available to offset future income taxes. In the
event the future consequences of differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities result in a net
deferred tax asset, an evaluation is required of the probability of being able
to realize the future benefits indicated by such asset. A valuation allowance is
provided when it is more likely than not that some portion or the entire
deferred tax asset will not be realized.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation, requires disclosure of the fair value method of accounting
for stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. The Company has chosen, under the provisions of SFAS No. 123, to
continue to account for employee stock-based 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 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 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 because the options vest over
several years and additional awards may be made in the future.
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0% for all years; volatility factor of expected
market price of common stock of 145%, 150%, and 154% for 2005, 2004, and 2003,
respectively; risk-free interest rate of 4.37%, 4.23%, and 4.27%; and expected
lives of six years.
Net Income (Loss) Per Share
Basic net income (loss) per share amounts are based upon the weighted average
number of common shares outstanding. Diluted net 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.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, 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.
Goodwill
The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, in the first quarter of 2002. Therefore,
goodwill is no longer amortized but is subject to annual impairment tests in
accordance with that Statement. At June 30, 2004, the Company performed the
required impairment test discussed in FAS 142. The Company calculated the fair
value of each business
F-16
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2. Summary of Significant Accounting Policies (continued)
unit for which goodwill was recorded to determine if there was an impairment.
The fair value of each unit was based upon the estimate of the discounted cash
flow generated by the respective business unit. As a result of these
calculations, it was determined that there were impairments to the goodwill
associated with the PIA Acquisition on July 8, 1999 and acquisition of the
Company's Canadian subsidiary in June 2003. Therefore, the Company recorded an
impairment charge of approximately $8.4 million (see Note 3 - Impairment
Charges).
Changes to goodwill for the years ended December 31, 2005, 2004, and 2003 were
as follows (in thousands):
2005 2004 2003
------------ ------------- -------------
Beginning of the year $ 798 $ 8,749 $ 7,858
Impairment charges - (8,350) -
Adjustment to merger related and restructure
liabilities - - (89)
Acquisitions - 399 980
------------ ------------- -------------
End of the year $ 798 $ 798 $ 8,749
============ ============= =============
Translation of Foreign Currencies
The financial statements of the foreign entities consolidated into SPAR Group,
Inc. consolidated financial statements were translated into United States dollar
equivalents at exchange rates as follows: balance sheet accounts for assets and
liabilities 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' equity. Foreign currency
transaction gains and losses are reflected in net earnings.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment,
(SFAS 123R). SFAS 123R addresses the accounting for share-based payments to
employees, including grants of employee stock options. Under the new standard,
companies will no longer be able to account for share-based compensation
transactions using the intrinsic method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees. Instead, the Company will be required
to account for such transactions using a fair-value method and recognize the
expense in the consolidated statement of income. SFAS 123R will be effective for
years beginning after January 1, 2006 and allows, but does not require, the
Company to restate the full fiscal year of 2005 to reflect the impact of
expensing share-based payments under SFAS 123R. The Company has not yet
determined which fair-value method and transitional provision it will follow.
See Note 2 - Stock-Based Compensation for the pro forma impact on net income and
net income per share from calculating stock-based compensation costs under the
fair value alternative of SFAS 123. However, the calculation of compensation
cost for share-based payment transactions after the effective date of SFAS 123R
may be different from the calculation of compensation cost under SFAS 123, but
such differences have not yet been quantified.
F-17
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
2. Summary of Significant Accounting Policies (continued)
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the 2005 presentation.
3. Impairment Charges
Goodwill
During 2004, in accordance with the requirements of SFAS 142, the Company
determined that there were impairments of the goodwill amounts associated with
certain of its reporting entities.
In April 2004, the Company's largest client announced that they signed
definitive agreements for the sale of its business to two purchasers. The sale
was completed on August 2, 2004. This client accounted for 10%, 26%, and 30% of
the Company'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 does not
expect a positive cash flow from this business unit. Therefore, the Company has
recorded an impairment of the PIA related goodwill resulting in a non-cash
charge of $7.6 million to the results of the operations for 2004.
In June 2003, the Company began its Canadian operations through the acquisition
of substantially all of the business and assets of Impulse Marketing Services,
Inc. In connection with this acquisition, the Company recorded goodwill of
$712,000. 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.
Capitalized Internal Use Software Development Costs
Historically, the Company has capitalized costs of computer software developed
for internal use. Some of the costs capitalized were associated with certain
clients to whom the Company no longer provides merchandising 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.
Other Assets and Liabilities
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".
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.
4. Supplemental Balance Sheet Information
Accounts receivable, net, consists of the following (in thousands):
December 31,
----------------------------------
2005 2004
----------------------------------
Trade $ 7,666 $ 8,178
Unbilled 3,461 3,600
Non-trade 145 290
----------------------------------
11,272 12,068
Less:
Allowance for doubtful accounts (616) (761)
----------------------------------
$ 10,656 $ 11,307
==================================
Property and equipment consists of the following (in thousands):
December 31,
----------------------------------
2005 2004
----------------------------------
Equipment $ 5,202 $ 5,397
Furniture and fixtures 570 547
Leasehold improvements 568 138
Capitalized software development costs 1,228 1,629
----------------------------------
7,568 7,711
Less accumulated depreciation and amortization 6,437 6,175
----------------------------------
$ 1,131 $ 1,536
==================================
December 31,
----------------------------------
Accrued expenses and other current liabilities (in thousands): 2005 2004
----------------------------------
Merger related payables $ - $ 450
Accrued medical expenses 136 225
Taxes payable 533 345
Accrued accounting and legal expenses 286 192
Accrued salaries payable 937 328
Other 747 851
----------------------------------
$ 2,639 $ 2,391
==================================
F-19
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
5. Lines of Credit and Subsequent Events
In January 2003, the Company and Webster Business Credit Corporation, then known
as Whitehall Business Credit Corporation ("Webster"), entered into the Third
Amended and Restated Revolving Credit and Security Agreement (as amended,
collectively, the "Credit Facility"). The Credit Facility provided a $15.0
million revolving credit facility that matured on January 23, 2006. The Credit
Facility allowed the Company to borrow up to $15.0 million based upon a
borrowing base formula as defined in the agreement (principally 85% of
"eligible" accounts receivable). On May 17, 2004, the Credit Facility was
amended to among other things, reduce the revolving credit facility from $15.0
million to $10.0 million, change the interest rate and increase reserves against
collateral. The amendment provides for interest to be charged at a rate based in
part upon the earnings before interest, taxes, depreciation and amortization.
The average interest rate for 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,
President and Chief Executive Officer and a major stockholder of the Company and
Mr. William Bartels, a Director, the Vice Chairman and a major stockholder of
the Company, provided personal guarantees totaling $1.0 million to Webster. On
August 20, 2004, the Credit Facility was further amended in connection with the
waiver of certain covenant violations (see below). The amendment, among other
things, reduced the revolving credit facility from $10.0 million to $7.0
million, changed the covenant compliance testing for certain covenants from
quarterly to monthly and reduced certain advance rates. On November 15, 2004,
the Credit Facility was further amended to delete any required Minimum Net Worth
and minimum Fixed Charge Coverage Ratio covenant levels for the 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 covenants at December 31, 2005, and does
not expect to be in violation at future measurement dates. However, there can be
no assurances that the Company will not be in violation of certain covenants in
the future. Should the Company be in violation, there are no assurances that
Webster will issue such waivers in the future.
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 as current 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.
The revolving loan balances outstanding under the Credit Facility were $2.4
million and $4.1 million at December 31, 2005, and December 31, 2004,
respectively. There were letters of credit outstanding under the Credit Facility
of $0.6 million and $0.7 million at December 31, 2005, and December 31, 2004,
respectively. As of December 31, 2005, 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. entered into a revolving
line of credit arrangement with Japanese banks for 300 million yen or $2.7
million (based upon the exchange rate at September 30, 2005). At September 30,
2005, SPAR FM Japan, Inc. had 70 million yen or approximately $600,000 loan
balance outstanding under the line of credit. The average interest rate for 2005
and the interest rate at September 30, 2005 were 1.4%.
6. Income Taxes
The provision for income tax expense from continuing operations is summarized as
follows (in thousands):
December 31,
----------------------------------------------------
2005 2004 2003
------------- ------------- -------------
Current $ 242 $ 103 $ 189
Deferred - 750 (131)
------------- ------------- -------------
$ 242 $ 853 $ 58
============= ============= =============
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,
---------------------------------------------------
2005 2004 2003
----------- ----------- -----------
Provision (benefit) for income taxes at
federal statutory rate, net of foreign tax $ 334 $ (3,911) $ (77)
State income taxes, net of federal benefit 153 117 95
Permanent differences 14 1,613 41
Change in valuation allowance (349) 3,013 -
International tax provisions 71 - -
Other 19 21 (1)
----------- ----------- -----------
Provision for income taxes $ 242 $ 853 $ 58
=========== =========== ===========
F-21
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
6. Income Taxes (continue)
Deferred taxes consist of the following (in thousands):
December 31,
------------------------------
2005 2004
------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 5,405 $ 5,648
Restructuring 37 266
Deferred revenue 536 384
SIM reserve against loan commitment 147 135
Allowance for doubtful accounts and other receivable 233 288
Other 61 455
Valuation allowance (6,208) (6,557)
------------------------------
Total deferred tax assets 211 619
Deferred tax liabilities:
Capitalized software development costs 211 619
------------------------------
Total deferred tax liabilities 211 619
------------------------------
Net deferred tax assets $ - $ -
==============================
At December 31, 2005, the Company has net operating loss carryforwards (NOLs) of
$8.2 million, related to the PIA Acquisition available to reduce future federal
taxable income. The $8.2 million PIA related net operating loss carryforwards
begin to expire in the year 2012. Section 382 of the Internal Revenue Code
restricts the annual utilization of the NOLs incurred prior to a change in
ownership. Such a change in ownership had occurred in 1999, thereby restricting
the NOL's prior to such date available to the Company to approximately $657,500
per year. In addition, the Company has NOLs related to its prior losses totaling
$6.0 million of which $1.3 million expires in 2012 and $4.7 million expires in
2023.
As a result of the loss of several significant clients, 2004 losses and the lack
of certainty of continued profitability in 2005, the Company established a
valuation allowance equal to the total of its net deferred tax assets of $6.2
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
7. Commitments and Contingencies
Lease Commitments
The Company leases equipment and certain office space in several cities, under
non-cancelable operating lease agreements. Certain leases require the Company to
pay its share of any increases in operating expenses and real estate taxes. Rent
expense was approximately $0.9 million, $1.0 million, and $0.9 million for 2005,
2004, and 2003, respectively. At December 31, 2005, 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
============
International Commitments
The Company's international model is to partner with local merchandising
companies and combine their knowledge of the local market with the Company's
proprietary software and expertise in the merchandising business. In 2001, the
Company established its first joint venture and has continued this strategy. As
of this filing, the Company is currently operating in Japan, Canada, Turkey,
South Africa, India, Romania 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.
Certain of these joint ventures and joint venture subsidiaries are marginally
profitable while others are operating at a loss. None of these entities have
excess cash reserves. In the event of continued losses, the Company may be
required to provide additional cash infusions into these joint ventures and
joint venture subsidiaries.
Legal Matters
Safeway Inc. ("Safeway") filed a Complaint against the PIA Merchandising Co.,
Inc. ("PIA Co."), a wholly owned subsidiary of SGRP, and Pivotal Sales Company
("Pivotal"), a wholly owned subsidiary of PIA Co., and SGRP in Alameda Superior
Court, case no. 2001028498 on October 24, 2001, and has subsequently amended it.
Safeway alleges causes of action for breach of contract 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 them against Safeway for breach of contract, interference
with economic relationship, unfair trade practices and unjust enrichment and is
seeking damages and injunctive relief. Mediation between the parties occurred in
2004, but did not result in a settlement. PIA Co., Pivotal and SGRP are
vigorously defending 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
effect on the Company. The Company anticipates that this matter will be resolved
in 2006.
F-23
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
7. Commitments and Contingencies (continued)
In addition to the above, the Company is a party to various other legal actions
and administrative proceedings arising in the normal course of business. In the
opinion of Company's management, disposition of these other matters are not
anticipated to have a material adverse effect on the financial position, results
of operations or cash flows of the Company.
8. Treasury Stock
The Company initiated a share repurchase program in 2002, which allowed for
repurchase of up to 100,000 shares. In 2003, the Board of Directors authorized
the repurchase of an additional 122,000 shares increasing the total to 222,000
shares.
The following table summarizes the Company's treasury stock activity for the
years 2005, 2004, and 2003.
Quantity Amount
--------------------------------
Treasury Stock, January 1, 2003 9,783 $ 30,073
Purchases 211,315 923,714
Used to fulfill:
Employee Stock Purchases (9,848) (30,297)
Options Exercised (135,194) (539,383)
--------------------------------
Treasury Stock, December 31, 2003 76,056 384,107
Used to fulfill:
Options Exercised (54,148) (276,007)
--------------------------------
Treasury Stock, December 31, 2004 21,908 108,100
Used to fulfill:
Options Exercised (21,654) (106,888)
--------------------------------
Treasury Stock, December 31, 2005 254 $ 1,212
================================
9. Employee Benefits
Stock Purchase Plans
The Company has Employee and Consultant Stock Purchase Plans (the "SP Plans").
The SP Plans allow employees and consultants of the Company to purchase common
stock without having to pay any commissions on the purchases. On August 8, 2002,
the Company's Board of Directors approved a 15% discount for employee purchases
and recommended that its affiliates (see Note 10 - Related-Party Transactions)
approve a 15% cash bonus for affiliate consultant purchases. The maximum amount
that any employee or consultant can contribute to the SP Plans per quarter is
$6,250, and the total number of shares reserved by the Company for purchase
under the SP Plans is 500,000.
Shares purchased by employees and consultants under the SP Plans were 28,065,
43,023, and 22,561 for 2005, 2004, and 2003, respectively.
The Company's expense resulting from the 15% discount offered to employees and
consultants was approximately $5,000, $10,000, and $11,000 for the years ending
December 31, 2005, 2004, and 2003, respectively.
F-24
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
9. Employee Benefits (continued)
Retirement/Pension Plans
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible
employees. Employer contributions were approximately $27,000, $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 in 2005 and 2004.
10. Related-Party Transactions
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"), SPAR Management Services, Inc. ("SMSI"), and SPAR
Infotech, Inc. ("SIT").
SMS and SMSI provided approximately 99% of the Company's merchandising
specialists in the field (through its independent contractor field force) and
approximately 86% of the Company's field management at a total cost of
approximately $20.0 million, $24.4 million, 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's merchandising specialist field force of approximately 5,600 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 44 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 $770,000,
$320,000, 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"
corporations, Messrs. Brown and Bartels benefit from any income of such
companies allocated to them.
SIT provided substantially all of the Internet computer programming services to
the Company at a total cost of approximately $771,000, $1,170,000, and
$1,610,000 for 2005, 2004, and 2003, respectively. SIT provided approximately
25,000, 34,000, and 47,000 hours of Internet computer programming services to
the Company for 2005, 2004, and 2003, 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 $30.34, $34.71, 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" 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's wholly owned subsidiaries, SPAR
Marketing Force, Inc. ("SMF") and SPAR Canada Company ("SPAR 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,
--------------------------------------------
2005 2004 2003
--------------------------------------------
Services provided by affiliates:
Independent contractor services (SMS) $ 16,333 $ 19,944 $ 28,411
============================================
Field management services (SMSI) $ 3,704 $ 4,502 $ 7,600
============================================
Handheld computer leases (SMS) $ 266 $ 25 $ -
============================================
Internet and software program
consulting services (SIT) $ 771 $ 1,172 $ 1,607
============================================
Accrued expenses due to affiliates (in thousands): December 31,
2005 2004
---------------------------------
SPAR Marketing Services, Inc. $ 1,190 $ 987
=================================
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, 2005, 2004, and 2003. The Company'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
11. Stock Options
SGRP has four stock option plans: the 2000 Stock Option Plan ("2000 Plan"), the
Special Purpose Stock Option Plan ("Special Purpose Plan"), the Amended and
Restated 1995 Stock Option Plan ("1995 Plan") and the 1995 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'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'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's common stock at the date of grant. During 2005, options to purchase
1,334,973 shares of SGRP's common stock were granted, options to purchase 57,625
shares of the Company's common stock were exercised and options to purchase
440,975 shares of SGRP's stock were voluntarily surrendered and cancelled under
this plan. At December 31, 2005, options to purchase 2,088,256 shares of SGRP's
common stock remain outstanding under this plan and options to purchase 724,221
shares of SGRP'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 134,114 options granted at $0.01 per share. Since
July 8, 1999, SGRP has not granted any new options under this plan. During 2005,
no options to purchase shares of the Company's common stock were exercised under
this plan. At December 31, 2005, options to purchase 4,750 shares of SGRP'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's common stock. The options
had a term of ten years from the date of issuance, except in the case of
incentive stock options granted to greater than 10% stockholders for which the
term was five years. The exercise price of nonqualified stock options must have
been equal to at least 85% of the fair market value of the Company's common
stock at the date of grant. Since 2000, the Company has not granted any new
options under this plan. During 2005, 250 options to purchase shares of SGRP's
common stock were exercised. At December 31, 2005, options to purchase 14,375
shares of the Company's common stock remain outstanding under this plan. The
1995 Plan was superseded by the 2000 Plan with respect to all new options
issued.
The Director's Plan was a stock option plan for non-employee directors and
provided for the purchase of up to 120,000 shares of SGRP's common stock. Since
2000, SGRP has not granted any new options under this plan. During 2005, no
options to purchase shares of SGRP's common stock were exercised under this
plan. At December 31, 2005, 20,000 options to purchase shares of SGRP's common
stock remained outstanding under this plan. The Director's Plan has been
replaced by the 2000 Plan with respect to all new options issued.
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's plans:
Weighted Average
Shares Exercise Price
-------------------------------------
Options outstanding, January 1, 2003 2,098,181 $ 1.52
Granted 401,020 $ 3.51
Exercised (143,641) 1.17
Canceled or expired (92,750) 2.38
---------------
Options outstanding, December 31, 2003 2,262,810 $ 1.85
Granted 476,417 $ 1.47
Exercised (75,802) 0.49
Canceled or expired (1,372,167) 6.18
---------------
Options outstanding, December 31, 2004 1,291,258 $ 1.66
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
Option price range at end of year $0.01 to $14.00
2005 2004 2003
-----------------------------------------
Grant Date weighted average fair value of
options granted during the year $ 1.32 $ 1.43 $ 2.33
The following table summarizes information about stock options outstanding at
December 31, 2005:
Options Outstanding Options Exercisable
---------------------------------------- -----------------------------
Weighted Weighted Number Weighted
Number Average Average Exercisable at Average
Range of Outstanding at Remaining Exercise December 31, Exercise
Exercise Prices December 31, 2005 Contractual Life Price 2005 Price
--------------- ----------------- ---------------- --------- -------------- ----------
Less than $1.00 293,536 7.3 years $ 0.74 242,862 $ 0.71
$1.01 - $2.00 1,569,540 7.8 years 1.32 751,549 1.32
$2.01 - $4.00 222,805 7.8 years 2.66 132,374 2.65
Greater than $4.00 41,500 4.1 years 9.37 41,252 9.40
---------------- --------------
Total 2,127,381 1,168,037
================ ==============
F-28
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
11. Stock Options (continued)
In 2005, the Company recorded an expense of approximately $70,000 under the
provision of SFAS No. 123 dealing with stock option grants to non-employees for
stock option grants that were awarded to the employees of the Company's
affiliates. The Company determines the fair value of the options granted to
non-employees using the Black-Scholes valuation model and expenses that value
over the service period. Until an option is vested, the fair value of the option
continues to be updated through the vesting date. The options granted have a ten
(10) year life and vest over four-year periods at a rate of 25% per year,
beginning on the first anniversary of the date of grant.
12. Geographic Data
A summary of the Company'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,
----------------------------------------------
2005 2004 2003
----------------------------------------------
Net revenue:
------------
United States $ 36,701 $ 43,163 $ 64,305
International 14,885 8,207 554
----------------------------------------------
Total net revenue $ 51,586 $ 51,370 $ 64,859
==============================================
Year Months Ended December 31,
----------------------------------------------
2005 2004 2003
----------------------------------------------
Operating income (loss):
------------------------
United States $ 577 $ (10,559) $ 893
International 478 (1,477) (868)
----------------------------------------------
Total operating income (loss) $ 1,055 $ (12,036) $ 25
==============================================
December 31,
-------------------------------------
Long lived assets: 2005 2004
------------------ -------------------------------------
United States $ 1,799 $ 2,484
International 346 486
-------------------------------------
Total long lived assets $ 2,145 $ 2,970
=====================================
International revenues disclosed above were based upon revenues reported by the
Company's 100% owned foreign subsidiary, its 51% owned foreign joint venture
subsidiaries and its 50% owned foreign joint ventures. The joint venture in
Japan contributed 11% and 5% of the consolidated net revenue of the Company for
the twelve months ended December 31, 2005, and 2004, respectively. For the
twelve months ended December 31, 2005, and 2004, the wholly owned Canadian
subsidiary contributed 8% and 3% respectively of the consolidated net revenue of
the Company. The joint venture subsidiary in South Africa contributed 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, 2005, and 2004, respectively. Each of the remaining foreign joint
venture subsidiaries contributed less than 5% to the consolidated net revenue
for the years ending December 31, 2005, and 2004.
13. Restructuring Charges
In 1999, in connection with the PIA Acquisition, the Company's Board of
Directors approved a plan to restructure the operations of the PIA Companies.
Restructuring costs were composed of committed costs required to integrate the
SPAR Companies' and the PIA Companies' field organizations and the consolidation
of administrative functions to achieve beneficial synergies and costs savings.
At June 30, 2004, the Company evaluated its restructuring reserves and
determined that certain restructuring reserves were no longer necessary (see
Note 3 - Impairment Charges).
In July 2004, as a result of the loss of several significant 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 consist of personnel reductions, personnel related expenses and
office closings. As a result of the July restructuring, the Company expensed
approximately $480,000 in the quarter ending September 30, 2004, approximately
$230,000 for severance benefits and approximately $250,000 for office leases
that the Company ceased using. At December 31, 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.
The following table displays a roll forward of the liabilities for restructuring
charges from January 1, 2003 to December 31, 2005 (in thousands):
Equipment Office
Employee Lease Lease
Separation Settlements Settlements Total
--------------- ---------------- ---------------- ----------
January 1, 2003 balance $ - $ 1,169 $ 420 $ 1,589
Adjustments in restructuring charges - 98 (185) (87)
2003 payments - (817) - (817)
------------ ------------- ------------- ----------
December 31, 2003, balance $ - $ 450 $ 235 $ 685
Impairment charge (see Note 3 - Impairment
Charges) - (450) (235) (685)
2004 restructure plan 230 - 250 480
2004 payments (230) - - (230)
------------ ------------- ------------- ----------
December 31, 2004, balance $ - $ - $ 250 $ 250
2005 payments - - (151) (151)
------------ ------------- ------------- ----------
December 31, 2005, balance $ - $ - $ 99 $ 99
============ ============= ============= ==========
F-30
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2005
14. Net Income (Loss) Per Share
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,
--------------------------------------------------
2005 2004 2003
--------------------------------------------------
Numerator:
Net income (loss) $ 878 $ (12,268) $ (539)
Denominator:
Shares used in basic net income (loss) per share
calculation 18,904 18,859 18,855
Effect of diluted securities:
Employee stock options 456 - -
--------------------------------------------------
Shares used in diluted net income (loss) per
share calculations 19,360 18,859 18,855
==================================================
Basic and diluted net income (loss) per common
share: $ 0.05 $ (0.65) $ (0.03)
The computation of dilutive loss per share for 2004 and 2003 excluded
anti-dilutive stock options to purchase approximately 430,000 and 657,000 shares
as of December 31, 2004 and 2003, respectively.
15. Quarterly Financial Data (Unaudited)
Quarterly data for 2005 and 2004 was as follows (in thousands, except earnings
per share data):
Quarter
-------------------------------------------------------------
First Second Third Fourth
=============================================================
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
=============================================================
Year Ended December 31, 2004:
Net revenues $ 12,803 $ 11,932 $ 10,683 $ 15,952
Gross profit 4,109 3,115 3,720 6,782
-------------------------------------------------------------
Net (loss) income $ (790) $ (12,177) $ 210 $ 489
=============================================================
Basic/diluted net (loss) income per
common share $ (0.04) $ (0.65) $ 0.01 $ 0.03
=============================================================
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
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 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
(1) Uncollectible accounts written off, net of recoveries
F-33