UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
Commission file number 0-27824
SPAR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
580 White Plains Road, Tarrytown, New York 10591
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 332-4100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K . [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Rule 12b-2 of the Act.) YES [ ] NO [X]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on June 30, 2004, based on the closing price of
the Common Stock as reported by the Nasdaq Small Cap Market on such date, was
approximately $4,799,006.
The number of shares of the Registrant's Common Stock outstanding as of
December 31, 2004, was 18,858,972 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PART I
Page
Item 1. Business 2
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
Item 9A. Controls and Procedures 26
Item 9B. Other Information 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation and Other Information of SPAR Group, Inc. 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 35
Item 13. Certain Relationships and Related Transactions 36
Item 14. Principal Accountant Fees and Services 37
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
Signatures 43
PART I
Statements contained in this Annual Report on Form 10-K of SPAR Group,
Inc. ("SGRP", and together with its subsidiaries, the "SPAR Group" or the
"Company"), include "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including, in
particular and without limitation, the statements contained in the discussions
under the headings "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause the Company's actual results, performance and achievements, whether
expressed or implied by such forward-looking statements, to not occur or be
realized or to be less than expected. Such forward-looking statements generally
are based upon the Company's best estimates of future results, performance or
achievement, current conditions and the most recent results of operations.
Forward-looking statements may be identified by the use of forward-looking
terminology such as "may", "will", "expect", "intend", "believe", "estimate",
"anticipate", "continue" or similar terms, variations of those terms or the
negative of those terms. You should carefully consider such risks, uncertainties
and other information, disclosures and discussions which contain cautionary
statements identifying important factors that could cause actual results to
differ materially from those provided in the forward-looking statements.
Although the Company believes that its plans, intentions and
expectations reflected in or suggested by such forward-looking statements are
reasonable, it cannot assure that such plans, intentions or expectations will be
achieved in whole or in part. You should carefully review the risk factors
described herein and any other cautionary statements contained in this Annual
Report on Form 10-K. All forward-looking statements attributable to the Company
or persons acting on its behalf are expressly qualified by the risk factors (see
Item 1 - Certain Risk Factors) and other cautionary statements in this Annual
Report on Form 10-K. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Item 1. Business.
GENERAL
The SPAR Group, Inc., a Delaware corporation ("SGRP"), and its
subsidiaries (together with SGRP, the "SPAR Group" or the "Company"), is a
supplier of merchandising and other marketing services throughout the United
States and internationally. In 2002, the Company sold its Incentive Marketing
Division, SPAR Performance Group, Inc. ("SPGI"). The Company's operations are
divided into two divisions: the Domestic Merchandising Services Division and the
International Merchandising Services Division. The Domestic Merchandising
Services Division provides merchandising services, in-store event staffing,
product sampling, database marketing, technology services, teleservices and
marketing research to manufacturers and retailers in the United States. The
various services are primarily performed in mass merchandisers, drug store
chains, convenience and grocery stores. The International Merchandising Services
Division established in July 2000, currently provides similar merchandising
services through a wholly owned subsidiary in Canada, through 51% owned joint
venture subsidiaries in India, South Africa and Turkey, and through a 50% owned
joint venture in Japan. The Company recently established a 50% owned joint
venture in China and a 51% owned joint venture subsidiary in Romania and expects
to offer merchandising services in these countries in 2005.
Continuing Operations
Domestic Merchandising Services Division
The Company's Domestic Merchandising Services Division provides
nationwide merchandising and other marketing services primarily on behalf of
consumer product manufacturers and retailers at mass merchandisers, drug store
chains and grocery stores. Included in its customers are home entertainment,
general merchandise, health and beauty care, consumer goods and food products
companies in the United States.
Merchandising services primarily consist of regularly scheduled
dedicated routed services and special projects provided at the store level for a
specific retailer or single or multiple manufacturers primarily under single or
multi-year contracts or agreements. Services also include stand-alone
large-scale implementations. These services may include sales enhancing
activities such as ensuring that client products authorized for distribution are
in stock
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and on the shelf, adding new products that are approved for distribution but not
presently on the shelf, setting category shelves in accordance with approved
store schematics, ensuring that shelf tags are in place, checking for the
overall salability of client products and setting new and promotional items and
placing and/or removing point of purchase and other related media advertising.
Specific in-store services can be initiated by retailers or manufacturers, and
include new store openings, new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. The
Company also provides in-store event staffing services, database marketing,
technology services, teleservices and marketing research services.
International Merchandising Services Division
In July 2000, the Company established its International Merchandising
Services Division, operating through a wholly owned subsidiary, SPAR Group
International, Inc. ("SGI"), to focus on expanding its merchandising services
business worldwide. The Company has expanded its international business as
follows:
May 2001, the Company entered Japan through a 50% owned joint venture
headquartered in Osaka.
June 2003, the Company entered Canada by acquiring an existing business through
its wholly-owned Canadian subsidiary, headquartered in Toronto.
July 2003, the Company entered Turkey through a 51% owned joint venture
subsidiary headquartered in Istanbul.
April 2004, the Company entered South Africa through a 51% owned joint venture
subsidiary headquartered in Durban.
April 2004, the Company entered India through a 51% owned joint venture
subsidiary headquartered in New Delhi.
December 2004, the Company established a 51% owned joint venture subsidiary
headquartered in Bucharest, Romania.
In February 2005, the Company announced the establishment of a 50% owned joint
venture headquartered in Hong Kong, China.
Discontinued Operations
Incentive Marketing Division
As part of a strategic realignment in the fourth quarter of 2001, the
Company made the decision to divest its Incentive Marketing Division, operating
through its subsidiary, SPAR Performance Group, Inc. ("SPGI"). The Company
explored various alternatives for the sale of SPGI and subsequently sold the
business to SPGI's employees through the establishment of an employee stock
ownership plan on June 30, 2002. In December of 2003, SPGI changed its name to
STIMULYS, Inc.
Technology Division
In October 2002, the Company dissolved its Technology Division
established in March 2000 for the purpose of marketing its proprietary
Internet-based computer software.
INDUSTRY OVERVIEW
Domestic Merchandising Services Division
According to industry estimates over two billion dollars are spent
annually on domestic retail merchandising services. The merchandising services
industry includes manufacturers, retailers, food brokers, and professional
service merchandising companies. The Company believes there is a continuing
trend for major manufacturers to move increasingly toward third parties to
handle in-store merchandising. The Company also believes that its merchandising
services bring added value to retailers, manufacturers and other businesses.
Retail merchandising services enhance sales by making a product more visible and
available to consumers. These services primarily include placing orders, shelf
maintenance, display placement, reconfiguring products on store shelves,
replenishing
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products and providing in-store event staffing services. The Company provides
other marketing services such as test market research, mystery shopping,
teleservices, database marketing and promotion planning and analysis.
The Company believes merchandising services previously undertaken by
retailers and manufacturers have been increasingly outsourced to third parties.
Historically, retailers staffed their stores as needed to ensure inventory
levels, the advantageous display of new items on shelves, and the maintenance of
shelf schematics. In an effort to improve their margins, retailers decreased
their own store personnel and increased their reliance on manufacturers to
perform such services. Initially, manufacturers attempted to satisfy the need
for merchandising services in retail stores by utilizing their own sales
representatives. However, manufacturers discovered that using their own sales
representatives for this purpose was expensive and inefficient. Therefore,
manufacturers have increasingly outsourced the merchandising services to third
parties capable of operating at a lower cost by (among other things) serving
multiple manufacturers simultaneously.
Another significant trend impacting the merchandising segment is the
tendency of consumers to make product purchase decisions once inside the store.
Accordingly, merchandising services and in-store product promotions have
proliferated and diversified. Retailers are continually remerchandising and
remodeling entire stores to respond to new product developments and changes in
consumer preferences. The Company estimates that these activities have increased
in frequency over the last five years, such that most stores are re-merchandised
or remodeled approximately every twenty-four months. Both retailers and
manufacturers are seeking third parties to help them meet the increased demand
for these labor-intensive services.
International Merchandising Services Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in marketing
their products. As evidenced in the United States, retailer and manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
also believes that the difficulties encountered by these programs are only
exacerbated by the logistics of operating in foreign markets. This environment
has created an opportunity for the Company to exploit its Internet-based
technology and business model that are successful in the United States. In July
2000, the Company established its International Merchandising Services Division
to cultivate foreign markets, modify the necessary systems and implement the
Company's business model worldwide by expanding its merchandising services
business off shore. The Company formed an International Merchandising Services
Division task force consisting of members of the Company's information
technology, operations and finance groups to evaluate and develop foreign
markets. In 2001, the Company and a leading Japanese based distributor
established a joint venture to provide the latest in-store merchandising
services to the Japanese market. In 2003, the Company expanded its international
presence to Canada and Turkey by acquiring the business of a Canadian
merchandising company and entering into a start-up joint venture subsidiary in
Turkey. In 2004, the Company established 51% owned joint venture subsidiaries in
South Africa, India and Romania and in early 2005 a 50% owned joint venture in
China. Key to the Company's international strategy is the translation of several
of its proprietary Internet-based logistical, communications and reporting
software applications into the native language of any market the Company enters.
As a result of this requirement for market penetration, the Company has
developed translation software that can quickly convert its proprietary software
into various languages. Through its computer facilities in Auburn Hills,
Michigan, the Company provides worldwide access to its proprietary logistical,
communications and reporting software. In addition, the Company maintains
personnel in Greece and Australia to assist in its international efforts. The
Company is actively pursuing expansion into various other markets.
PIA ACQUISITION
SPAR Acquisition, Inc., and its subsidiaries (the "SPAR Companies") are
the original predecessor of the current Company and were founded in 1967. On
July 8, 1999, the Company completed a reverse merger with the SPAR Companies
(the "PIA Acquisition"), and then changed its name to SPAR Group, Inc., from PIA
Merchandising Services, Inc. (prior to such merger, "PIA"). Pursuant to the PIA
Acquisition, the SPAR Companies were deemed to have "acquired" PIA and its
subsidiaries prior to the PIA Acquisition (the "PIA Companies") which was
treated as a purchase of the PIA Companies for accounting purposes, with the
books and records of the Company being adjusted to reflect the historical
operating results of the SPAR Companies.
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BUSINESS STRATEGY
As the marketing services industry continues to grow, consolidate and
expand both in the United States and internationally, large retailers and
manufacturers are increasingly outsourcing their marketing needs to third-party
providers. The Company believes that offering marketing services on a national
and global basis will provide it with a competitive advantage. Moreover, the
Company believes that successful use of and continuous improvements to a
sophisticated technology infrastructure, including its proprietary
Internet-based software, is key to providing clients with a high level of
customer service while maintaining efficient, low cost operations. The Company's
objective is to become an international retail merchandising and marketing
service provider by pursuing its operating and growth strategy, as described
below.
Increased Sales Efforts:
The Company is seeking to increase revenues by increasing sales to its
current customers, as well as, establishing long-term relationships with new
customers, many of which currently use other merchandising companies for various
reasons. The Company believes its technology, field implementation and other
competitive advantages will allow it to capture a larger share of this market
over time. However, there can be no assurance that any increased sales will be
achieved.
New Products:
The Company is seeking to increase revenues through the internal
development and implementation of new products and services that add value to
its customers' retail merchandising related activities, some of which have been
identified and are currently being tested for feasibility and market acceptance.
However, there can be no assurance that any new products of value will be
developed or that any such new product can be successfully marketed.
Acquisitions:
The Company is seeking to acquire businesses or enter into joint
ventures or other arrangements with companies that offer similar merchandising
services both in the United States and worldwide. The Company believes that
increasing its industry expertise, adding product segments, and increasing its
geographic breadth will allow it to service its clients more efficiently and
cost effectively. As part of its acquisition strategy, the Company is actively
exploring a number of potential acquisitions, predominately in its core
merchandising service businesses (which includes in-store event staffing
services). Through such acquisitions, the Company may realize additional
operating and revenue synergies and may leverage existing relationships with
manufacturers, retailers and other businesses to create cross-selling
opportunities. However, there can be no assurance that any of the acquisitions
will occur or whether, if completed, the integration of the acquired businesses
will be successful or the anticipated efficiencies and cross-selling
opportunities will occur.
In December of 2003, the Company entered into an agreement to purchase
the business and certain assets of Bert Fife & Associates, Inc., and related
Companies ("Fife"), which specialized in providing in-store product
demonstrations. As part of the agreement the Company entered into a one year
consulting agreement with the President of Fife. The purchase was completed in
January 2004. In April 2004, the Company established a joint venture subsidiary
in South Africa. The joint venture subsidiary is headquartered in Durban and is
owned 51% by the Company. Also in April 2004, the Company announced the
establishment of a joint venture subsidiary in India and started operations
during the third quarter. The joint venture subsidiary is headquartered in New
Delhi and is 51% owned by the Company. In January 2005, the Company announced
the establishment of a joint venture subsidiary in Romania and is owned 51% by
the Company. In February 2005, the Company announced the establishment of a
joint venture in China which is 50% owned by the Company.
Improve Operating Efficiencies:
The Company will continue to seek greater operating efficiencies. The
Company believes that its existing field force and technology infrastructure can
support additional customers and revenue in the Domestic Merchandising Services
Division. At the corporate level, the Company will continue to streamline
certain administrative functions, such as accounting and finance, insurance,
strategic marketing and legal support.
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Leverage and Improve Technology:
The Company intends to continue to utilize computer (including hand-held
computers), Internet, and other technology to enhance its efficiency and ability
to provide real-time data to its customers, as well as, maximize the speed of
communication, and logistical deployment of its merchandising specialists.
Industry sources indicate that customers are increasingly relying on marketing
service providers to supply rapid, value-added information regarding the results
of marketing expenditures on sales and profits. The Company (together with
certain of its affiliates) has developed and owns proprietary Internet-based
software technology that allows it to utilize the Internet to communicate with
its field management, schedule its store-specific field operations more
efficiently, receive information and incorporate the data immediately, quantify
the benefits of its services to customers faster, respond to customers' needs
quickly and implement programs rapidly. The Company has successfully modified
and is currently utilizing certain of its software applications in connection
with its international ventures. The Company believes that it can continue to
improve, modify and adapt its technology to support merchandising and other
marketing services for additional customers and projects in the United States
and in other foreign markets. The Company also believes that its proprietary
Internet-based software technology gives it a competitive advantage in the
marketplace.
DESCRIPTION OF SERVICES
The Company currently provides a broad array of merchandising and other
marketing services on a national, regional and local basis to leading home
entertainment, general merchandise, consumer goods, food, and health and beauty
care manufacturers and retail companies through its Domestic Merchandising
Services Division.
The Company currently operates internationally serving some of the
world's leading companies. The Company believes its full-line capabilities
provide fully integrated solutions that distinguish the Company from its
competitors. These capabilities include the ability to develop plans at one
centralized division headquarter location, effect chain wide execution,
implement rapid, coordinated responses to its clients' needs and report on a
real time Internet enhanced basis. The Company also believes its international
presence, industry-leading technology, centralized decision-making ability,
local follow-through, ability to recruit, train and supervise merchandisers,
ability to perform large-scale initiatives on short notice, and strong retailer
relationships provide the Company with a significant advantage over local,
regional or other competitors.
Domestic Merchandising Services Division
The Company provides a broad array of merchandising services on a
national, regional, and local basis to manufacturers and retailers in the United
States. The Company provides its merchandising and other marketing services
primarily on behalf of consumer product manufacturers at mass merchandiser, drug
and retail grocery chains. The Company currently provides three principal types
of merchandising and marketing services: syndicated services, dedicated services
and project services.
Syndicated Services
Syndicated services consist of regularly scheduled, routed merchandising
services provided at the retail store level for various manufacturers. These
services are performed for multiple manufacturers, including, in some cases,
manufacturers whose products are in the same product category. Syndicated
services may include activities such as:
o Reordering and replenishment of products
o Ensuring that the clients' products authorized for distribution
are in stock and on the shelf
o Adding new products that are approved for distribution but not
yet present on the shelf
o Designing and implementing store planogram schematics
o Setting product category shelves in accordance with approved
store schematics
o Ensuring that product shelf tags are in place
o Checking for overall salability of the clients' products
o Placing new product and promotional items in prominent positions
Dedicated Services
Dedicated services consist of merchandising services, generally as
described above, which are performed for a specific retailer or manufacturer by
a dedicated organization, including a management team working exclusively
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for that retailer or manufacturer. These services include many of the above
activities detailed in syndicated services, as well as, new store set-ups, store
remodels and fixture installations. These services are primarily based on
agreed-upon rates and fixed management fees.
Project Services
Project services consist primarily of specific in-store services
initiated by retailers and manufacturers, such as new store openings, new
product launches, special seasonal or promotional merchandising, focused product
support, product recalls, in-store product demonstrations and in-store product
sampling. The Company also performs other project services, such as new store
sets and existing store resets, re-merchandising, remodels and category
implementations, under annual or stand-alone project contracts or agreements.
Other Marketing Services
Other marketing services performed by the Company include:
Event Staffing Services - Performing in-store product demonstrations or
product sampling.
Test Market Research - Testing promotion alternatives, new products and
advertising campaigns, as well as packaging, pricing, and location
changes, at the store level.
Mystery Shopping - Calling anonymously on retail outlets (e.g. stores,
restaurants, banks) to check on distribution or display of a brand and
to evaluate products, service of personnel, conditions of store, etc.
Database Marketing - Managing proprietary information to permit easy
access, analysis and manipulation for use in direct marketing
campaigns.
Data Collection - Gathering sales and other information systematically
for analysis and interpretation.
Teleservices - Maintaining a teleservices center in its Auburn Hills,
Michigan, facility that performs inbound and outbound telemarketing
services, including those on behalf of certain of the Company's
manufacturing clients.
The Company believes that providing merchandising and other marketing
services timely, accurately and efficiently, as well as, delivering timely and
accurate reports to its clients, are two key components that will be critical to
its success. The Company has developed Internet-based logistic deployment,
communications, and reporting systems that improve the productivity of its
merchandising specialists and provide timely data and reports to its customers.
The Company's merchandising specialists use hand-held computers, personal
computers and laptop computers to report the status of each store they service
upon completion either through the Internet or using Interactive Voice Response
("IVR") through its Auburn Hills telecommunication center. Merchandising
specialists report on a variety of issues such as store conditions (e.g. out of
stocks, inventory, display placement) or they may scan and process new orders
for products. This information is reported, analyzed and displayed in a variety
of reports that can be accessed by both the Company and its customers via the
Internet. These reports can depict the status of every merchandising project in
real time.
Through the Company's automated labor tracking system, its merchandising
specialists communicate work assignment completion information via the Internet
or telephone, enabling the Company to report hours, mileage, and other
completion information for each work assignment on a daily basis and providing
the Company with daily, detailed tracking of work completion. This technology
allows the Company to schedule its merchandising specialists more efficiently,
quickly quantify the benefits of its services to customers, rapidly respond to
customers' needs and rapidly implement programs. The Company believes that its
technological capabilities provide it with a competitive advantage in the
marketplace.
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International Merchandising Services Division
The Company believes another current trend in business is globalization.
As companies expand into foreign markets they will need assistance in marketing
their products. As evidenced in the United States, retailer and manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
also believes that the difficulties encountered by these programs are only
exacerbated by the logistics of operating in foreign markets. This environment
has created an opportunity for the Company to exploit its Internet-based
technology and business model that are successful in the United States.
In July 2000, the Company established its International Merchandising
Services Division to cultivate foreign markets, modify the necessary systems and
implement the Company's business model worldwide by expanding its merchandising
services business off shore. The Company formed an International Merchandising
Services Division task force consisting of members of the Company's information
technology, operations and finance groups to evaluate and develop foreign
markets. In 2001, the Company and a leading Japanese based distributor
established a joint venture to provide the latest in-store merchandising
services to the Japanese market. In 2003, the Company expanded its international
presence to Canada by acquiring a Canadian merchandising company and Turkey by
entering into a start-up joint venture. In 2004, the Company established 51%
owned joint venture subsidiaries in South Africa, India and Romania and in early
2005, a 50% owned joint venture in China.
Key to the Company's international strategy is the translation of
several of its proprietary Internet-based logistical, communications and
reporting software applications into the native language of any market the
Company enters. As a result of this requirement for market penetration, the
Company has developed translation software that can quickly convert its
proprietary software into various languages. Through its computer facilities in
Auburn Hills, Michigan, the Company provides worldwide access to its proprietary
logistical, communications and reporting software. In addition, the Company
maintains personnel in Greece and Australia to assist in its international
efforts. The Company is actively pursuing expansion into various other markets.
SALES AND MARKETING
Domestic Merchandising Services Division
The Company's sales efforts within its Domestic Merchandising Services
Division are structured to develop new business in national, regional and local
markets. The Company's corporate business development team directs its efforts
toward the senior management of prospective clients. Sales strategies developed
at the Company's headquarters are communicated to the Company's sales force for
execution. The sales force, located nationwide, work from both Company and home
offices. In addition, the Company's corporate account executives play an
important role in the Company's new business development efforts within its
existing manufacturer and retailer client base.
As part of the retailer consolidation, retailers are centralizing most
administrative functions, including operations, procurement and category
management. In response to this centralization and the growing importance of
large retailers, many manufacturers have reorganized their selling organizations
around a retailer team concept that focuses on a particular retailer. The
Company has responded to this emerging trend and currently has retailer teams in
place at select retailers.
The Company's business development process includes a due diligence
period to determine the objectives of the prospective client, the work required
to satisfy those objectives and the market value of such work to be performed.
The Company employs a formal cost development and proposal process that
determines the cost of each element of work required to achieve the prospective
client's objectives. These costs, together with an analysis of market rates, are
used in the development of a formal quotation that is then reviewed at various
levels within the organization. The pricing of this internal proposal must meet
the Company's objectives for profitability, which are established as part of the
business planning process. After approval of this quotation, a detailed proposal
is presented to and approved by the prospective client.
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International Merchandising Services Division
The Company's marketing efforts within its International Merchandising
Services Division are three fold. First, the Company endeavors to develop new
markets through acquisitions. The Company's international acquisition team,
whose primary focus is to seek out and develop acquisitions throughout the
world, consists of personnel located in the United States, Greece and Australia.
Personnel from information technology, field operations, client services and
finance support the international acquisition team. Second, the Company offers
global merchandising solutions to customers that have worldwide distribution.
This effort is spearheaded out of the Company's headquarters in the United
States. Third the Company develops local markets through various joint ventures
or subsidiaries throughout the world.
CUSTOMERS
Domestic Merchandising Services Division
In its Domestic Merchandising Services Division, the Company currently
represents numerous manufacturers and /or retail clients in a wide range of
retail outlets in the United States including:
o Mass Merchandisers
o Drug
o Grocery
o Other retail trade groups (e.g. Discount, Home Centers)
The Company also provides database, research and other marketing
services to the consumer packaged goods industry.
One customer accounted for 14%, 8%, and 6% of the Company's net revenues
for the years ended December 31, 2004, 2003, and 2002, respectively. This
customer also accounted for approximately 29%, 13%, and 4% of accounts
receivable at December 31, 2004, 2003, and 2002, respectively.
In addition, approximately 16%, 17%, and 24% of net revenues for the
years ended December 31, 2004, 2003, and 2002, respectively, resulted from
merchandising services performed for manufacturers and others in stores operated
by Kmart. These customers also accounted for approximately 22% of accounts
receivable at December 31, 2004. While the Company's customers and the resultant
contractual relationships are with various manufacturers and not Kmart, a
significant reduction of this retailer's stores or cessation of this retailer's
business would negatively impact the Company.
Another customer, a division of a major retailer, accounted for 26%,
30%, and 26% of the Company's net revenues for the years ended December 31,
2004, 2003, and 2002, respectively. This customer also accounted for
approximately 4%, 30%, and 43% of accounts receivable at December 31, 2004,
2003, and 2002, respectively. On August 2, 2004, this customer was sold by its
parent.
International Merchandising Services Division
The Company believes that the potential international customers for this
division have similar profiles to its Domestic Merchandising Services Division
customers. The Company is currently operating in Japan, Canada, Turkey, South
Africa and India. The Company announced the establishment of a 51% owned joint
venture subsidiary in Romania in late 2004 and a 50% owned joint venture in
China in early 2005. The Company is actively pursuing expansion into Europe and
other markets.
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COMPETITION
The marketing services industry is highly competitive. The Company's
competition in the Domestic and International Merchandising Services Divisions
arises from a number of large enterprises, many of which are national or
international in scope. The Company also competes with a large number of
relatively small enterprises with specific client, channel or geographic
coverage, as well as with the internal marketing and merchandising operations of
its clients and prospective clients. The Company believes that the principal
competitive factors within its industry include development and deployment of
technology, breadth and quality of client services, cost, and the ability to
execute specific client priorities rapidly and consistently over a wide
geographic area. The Company believes that its current structure favorably
addresses these factors and establishes it as a leader in the mass merchandiser
and chain drug store channels of trade. The Company also believes it has the
ability to execute major national and international in-store initiatives and
develop and administer national and international retailer programs. Finally,
the Company believes that, through the use and continuing improvement of its
proprietary Internet software, other technological efficiencies and various cost
controls, the Company will remain competitive in its pricing and services.
TRADEMARKS
The Company has numerous registered trademarks. Although the Company
believes its trademarks may have value, the Company believes its services are
sold primarily based on breadth and quality of service, cost, and the ability to
execute specific client priorities rapidly and consistently over a wide
geographic area. See "Industry Overview" and "Competition".
EMPLOYEES
Worldwide the Company utilizes a labor force of approximately 7,700
people.
As of December 31, 2004, the Company's Domestic Merchandising Services
Division's labor force consisted of approximately 6,500 people. Approximately
150 were full-time employees and 15 were part-time employees of the Company. Of
the 150 full-time Company employees, 143 were engaged in operations and 7 were
engaged in sales. The Company's Domestic Merchandising Services Division
utilizes the services of its affiliate, SPAR Management Services, Inc. ("SMSI"),
to schedule and supervise its field force, which consists of the independent
contractors furnished by another affiliate SPAR Marketing Services, Inc. ("SMS")
(see Item 13 - Certain Relationships and Related Transactions, below) as well as
the Company's field employees. Approximately 6,300 independent contractors and
approximately 50 full-time field managers are furnished principally through SMS
and SMSI, respectively.
As of December 31, 2004, the Company's International Merchandising
Services Division's labor force consisted of approximately 1,200 people.
Approximately 50 full-time employees were engaged in operations and 3 were
engaged in sales. The International Division's field force consisted of
approximately 700 full time employees, 70 part time employees and approximately
380 independent contractors.
The Company currently utilizes certain of its Domestic Merchandising
Services Division's employees, as well as, the services of certain employees of
its affiliates, SMSI and SPAR Infotech, Inc. ("SIT"), to support the
International Merchandising Services Division. However, dedicated employees will
be added to that division as the need arises. The Company's affiliate, SIT, also
provides programming and other assistance to the Company's various divisions
(see Item 13 - Certain Relationships and Related Transactions, below).
The Company, SMS, SMSI and SIT consider their relations with their
respective employees and independent contractors to be good.
CERTAIN RISK FACTORS
There are various risks associated with the Company's growth and
operating strategy. Certain (but not all) of these risks are discussed below.
-10-
Dependency on Largest Customers
As discussed above in Customers, the Company does a significant amount
of business with one customer and performs a significant amount of services in
Kmart. The loss of this customer or the loss of Kmart related business and the
failure to attract new large customers, could significantly decrease the
Company's revenues and such decreased revenues could have a material adverse
effect on the Company's business, results of operations and financial condition.
Dependence on Trend Toward Outsourcing
The business and growth of the Company depends in large part on the
continued trend toward outsourcing of marketing services, which the Company
believes has resulted from the consolidation of retailers and manufacturers, as
well as, the desire to seek outsourcing specialists and reduce fixed operation
expenses. There can be no assurance that this trend in outsourcing will
continue, as companies may elect to perform such services internally. A
significant change in the direction of this trend generally, or a trend in the
retail, manufacturing or business services industry not to use, or to reduce the
use of, outsourced marketing services such as those provided by the Company,
could significantly decrease the Company's revenues and such decreased revenues
could have a material adverse effect on the Company's business, results of
operations and financial condition or the desired increases in the Company's
business, revenues and profits.
Failure to Successfully Compete
The marketing services industry is highly competitive and the Company
has competitors that are larger (or part of larger holding companies) and may be
better financed. In addition, the Company competes with: (i) a large number of
relatively small enterprises with specific customer, channel or geographic
coverage; (ii) the internal marketing and merchandising operations of its
customers and prospective customers; (iii) independent brokers; and (iv) smaller
regional providers. Remaining competitive in the highly competitive marketing
services industry requires that the Company monitor and respond to trends in all
industry sectors. There can be no assurance that the Company will be able to
anticipate and respond successfully to such trends in a timely manner. If the
Company is unable to successfully compete, it could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
If certain competitors were to combine into integrated marketing
services companies, or additional marketing service companies were to enter into
this market, or existing participants in this industry were to become more
competitive, it could have a material adverse effect on the Company's business,
results of operations and financial condition or the desired increases in the
Company's business, revenues and profits.
Variability of Operating Results and Uncertainty in Customer Revenue
The Company has experienced and, in the future, may experience
fluctuations in quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary and from time to time and may
result in reduced revenue include: (i) the number of active customer projects;
(ii) seasonality of customer products; (iii) customer delays, changes and
cancellations in projects; (iv) the timing requirements of customer projects;
(v) the completion of major customer projects; (vi) the timing of new
engagements; (vii) the timing of personnel cost increases; and (viii) the loss
of major customers. In particular, the timing of revenues is difficult to
forecast for the home entertainment industry because timing is dependent on the
commercial success of particular product releases. In the event that a
particular release is not widely accepted by the public, the Company's revenue
could be significantly reduced. In addition, the Company is subject to revenue
uncertainties resulting from factors such as unprofitable customer work and the
failure of customers to pay. The Company attempts to mitigate these risks by
dealing primarily with large credit-worthy customers, by entering into written
or oral agreements with its customers and by using project budgeting systems.
These revenue fluctuations could materially and adversely affect the Company's
business, results of operations and financial condition or the desired increases
in the Company's business, revenues and profits.
Failure to Develop New Products
A key element of the Company's growth strategy is the development and
sale of new products. While several new products are under current development,
there can be no assurance that the Company will be able to successfully develop
and market new products. The Company's inability or failure to devise useful
merchandising or marketing
-11-
products or to complete the development or implementation of a particular
product for use on a large scale, or the failure of such products to achieve
market acceptance, could adversely affect the Company's ability to achieve a
significant part of its growth strategy and the absence of such growth could
have a material adverse effect on the Company's business, results of operations
and financial condition or the desired increases in the Company's business,
revenues and profits.
Inability to Identify, Acquire and Successfully Integrate Acquisitions
Another key component of the Company's growth strategy is the
acquisition of businesses across the United States and worldwide that offer
similar merchandising or marketing services. The successful implementation of
this strategy depends upon the Company's ability to identify suitable
acquisition candidates, acquire such businesses on acceptable terms, finance the
acquisition and integrate their operations successfully with those of the
Company. There can be no assurance that such candidates will be available or, if
such candidates are available, that the price will be attractive or that the
Company will be able to identify, acquire, finance or integrate such businesses
successfully. In addition, in pursuing such acquisition opportunities, the
Company may compete with other entities with similar growth strategies, these
competitors may be larger and have greater financial and other resources than
the Company. Competition for these acquisition targets could also result in
increased prices of acquisition targets and/or a diminished pool of companies
available for acquisition.
The successful integration of these acquisitions also may involve a
number of additional risks, including: (i) the inability to retain the customers
of the acquired business; (ii) the lingering effects of poor customer relations
or service performance by the acquired business, which also may taint the
Company's existing businesses; (iii) the inability to retain the desirable
management, key personnel and other employees of the acquired business; (iv) the
inability to fully realize the desired efficiencies and economies of scale: (v)
the inability to establish, implement or police the Company's existing
standards, controls, procedures and policies on the acquired business; (vi)
diversion of management attention; and (vii) exposure to customer, employee and
other legal claims for activities of the acquired business prior to acquisition.
In addition, any acquired business could perform significantly worse than
expected.
The inability to identify, acquire, finance and successfully integrate
such merchandising or marketing services business could have a material adverse
effect on the Company's growth strategy and could limit the Company's ability to
significantly increase its revenues and profits.
Uncertainty of Financing for, and Dilution Resulting from, Future Acquisitions
The timing, size and success of acquisition efforts and any associated
capital commitments cannot be readily predicted. Future acquisitions may be
financed by issuing shares of the Company's Common Stock, cash, or a combination
of Common Stock and cash. If the Company's Common Stock does not maintain a
sufficient market value, or if potential acquisition candidates are otherwise
unwilling to accept the Company's Common Stock as part of the consideration for
the sale of their businesses, the Company may be required to obtain additional
capital through debt or equity financings. To the extent the Company's Common
Stock is used for all or a portion of the consideration to be paid for future
acquisitions, dilution may be experienced by existing stockholders. There can be
no assurance that the Company will be able to obtain the additional financing it
may need for its acquisitions on terms that the Company deems acceptable.
Failure to obtain such capital would materially adversely affect the Company's
ability to execute its growth strategy.
Reliance on the Internet
The Company relies on the Internet for the scheduling, coordination and
reporting of its merchandising and marketing services. The Internet has
experienced, and is expected to continue to experience, significant growth in
the numbers of users and amount of traffic as well as increased attacks by
hackers and other saboteurs. To the extent that the Internet continues to
experience increased numbers of users, frequency of use or increased bandwidth
requirements of users, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on the
Internet by this continued growth or that the performance or reliability of the
Internet will not be adversely affected. Furthermore, the Internet has
experienced a variety of outages and other delays as a result of accidental and
intentional damage to portions of its infrastructure, and could face such
outages and delays in the future of similar or greater effect. Any protracted
disruption in Internet service would increase the Company's costs of operation
and reduce efficiency and performance, which could have a material adverse
effect on the Company's business, results of operations and financial condition
or the desired increases in the Company's business, revenues and profits.
-12-
Economic and Retail Uncertainty
The markets in which the Company operates are cyclical and subject to
the effects of economic downturns. The current political, social and economic
conditions, including the impact of terrorism on consumer and business behavior,
make it difficult for the Company, its vendors and its customers to accurately
forecast and plan future business activities. Substantially all of the Company's
key customers are either retailers or those seeking to do product merchandising
at retailers. If the retail industry experiences a significant economic
downturn, a reduction in product sales could significantly decrease the
Company's revenues. The Company also has risks associated with its customers
changing their business plans and/or reducing their marketing budgets in
response to economic conditions, which could also significantly decrease the
Company's revenues. Such revenue decreases could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
Significant Stockholders: Voting Control and Market Illiquidity
Mr. Robert G. Brown, founder, director, Chairman, President and Chief
Executive Officer of the Company, beneficially owns approximately 45.5% of the
Company's outstanding Common Stock, and Mr. William H. Bartels, founder,
director, and Vice Chairman of the Company beneficially owns approximately 29.4%
of the Company's outstanding Common Stock. These stockholders have, should they
choose to act together, and under certain circumstances Mr. Brown acting alone
has, the ability to control all matters requiring stockholder approval,
including the election of directors and the approval of mergers and other
business combination transactions.
In addition, although the Company Common Stock is quoted on the Nasdaq
Small Cap Market, the trading volume in such stock may be limited and an
investment in the Company's securities may be illiquid because the founders own
a significant amount of the Company's stock.
Dependence Upon and Potential Conflicts in Services Provided by Affiliates
The success of the Company's domestic business is dependent upon the
successful execution of its field services by SPAR Marketing Services, Inc.
("SMS"), and SPAR Management Services, Inc. ("SMSI"), as well as the programming
services provided by SPAR Infotech, Inc. ("SIT"), each of which is an affiliate,
but not a subsidiary, of the Company, and none of which is consolidated in the
Company's financial statements. SMS provides substantially all of the field
representatives used by the Company in conducting its domestic business (87% of
field expense in 2004), and SMSI provides substantially all of the field
management services used by the Company in conducting its business. These
services provided to the Company by SMS and SMSI are on a cost-plus basis
pursuant to contracts that are cancelable on 60 days notice prior to December 31
of each year, commencing in 1997, or with 180 days notice at any other time. SIT
provides substantially all of the Internet programming services and other
computer programming needs used by the Company in conducting its business (see
Item 13 - Certain Relationships and Related Transactions, below), which are
provided to the Company by SIT on an hourly charge basis pursuant to a contract
that is cancelable on 30 days notice. The Company has determined that the
services provided by SMS, SMSI and SIT are at rates favorable to the Company.
SMS, SMSI and SIT (collectively, the "SPAR Affiliates") are owned solely
by Mr. Robert G. Brown, founder, director, Chairman, President and Chief
Executive Officer of the Company, and Mr. William H. Bartels, founder, director,
and Vice Chairman of the Company, each of whom are also directors and executive
officers of each of the SPAR Affiliates (see Item 13 - Certain Relationships and
Related Transactions, below). In the event of any dispute in the business
relationships between the Company and one or more of the SPAR Affiliates, it is
possible that Messrs. Brown and Bartels may have one or more conflicts of
interest with respect to those relationships and could cause one or more of the
SPAR Affiliates to renegotiate or cancel their contracts with the Company or
otherwise act in a way that is not in the Company's best interests.
While the Company's relationships with SMS, SMSI and SIT are excellent,
there can be no assurance that the Company could (if necessary under the
circumstances) replace the field representatives and management currently
provided by SMS and SMSI, respectively, or replace the Internet and other
computer programming services provided by SIT, in sufficient time to perform its
customer obligations or at such favorable rates in the event the SPAR Affiliates
no longer performed those services. Any cancellation, other nonperformance or
material pricing increase under those affiliate contracts could have a material
adverse effect on the Company's business, results of operations and financial
condition or the desired increases in the Company's business, revenues and
profits.
-13-
The Company has not paid and does not intend to pay cash Dividends
The Company has not paid dividends in the past, intends to retain any
earnings or other cash resources to finance the expansion of its business and
for general corporate purposes, and does not intend to pay dividends in the
future. In addition, the Company's Credit Facility with Webster Business Credit
Corporation ("Webster") (see Note 5 to the Financial Statements - Lines of
Credit) restricts the payment of dividends without Webster's prior consent.
Risks Associated with International Joint Ventures
While the Company endeavors to limit its exposure for claims and losses
in any international joint ventures through contractual provisions, insurance
and use of single purpose entities for such ventures, there can be no assurance
that the Company will not be held liable for the claims against and losses of a
particular international joint venture under applicable local law or local
interpretation of any joint venture or insurance provisions. If any such claims
and losses should occur, be material in amount and be successfully asserted
against the Company, such claims and losses could have a material adverse effect
on the Company's business, results of operations and financial condition or the
desired increases in the Company's business, revenues and profits.
Risks Associated with Foreign Currency
The Company also has foreign currency exposure associated with its
international joint venture subsidiaries and joint ventures. In 2004, these
exposures are primarily concentrated in the Canadian dollar, Japanese yen and
South African rand.
Risks Associated with International Business
The Company's expansion strategy includes expansion into various
countries around the world. While the Company endeavors to limit its exposure by
entering only countries where the political, social and economic environments
are conducive to doing business in that country there can be no assurances that
the respective business environments will remain favorable.
Item 2. Properties.
The Company maintains its corporate headquarters in approximately 6,000
square feet of leased office space located in Tarrytown, New York, under a lease
with a term expiring in May 2006.
The Company leases certain office and storage facilities for its
corporate headquarters, divisions and subsidiaries under operating leases, which
expire at various dates during the next five years. Most of these leases require
the Company to pay minimum rents, subject to periodic adjustments, plus other
charges, including utilities, real estate taxes and common area maintenance.
-14-
The following is a list of the locations where the Company maintains
leased facilities for its division offices and subsidiaries:
Location Office Use Approximate Square Footage
-------------------------- -------------------------------------- ---------------------------------
Domestic:
Tarrytown, NY Corporate Headquarters 6,000
Auburn Hills, MI Regional Office and Warehouse 27,000
Cincinnati, OH Regional Office 5,300
International:
Canada
Toronto, Ontario Headquarters 4,000
Japan
Osaka Headquarters 1,200
Tokyo Regional Office 1,000
Nagoya Regional Office 600
Hukuoka Regional Office 400
Turkey
Istanbul Headquarters 4,600
South Africa
Durban Headquarters 3,100
Port Elizabeth Regional Office 900
Western Cape Regional Office 2,900
Johannesburg Regional Office 2,000
India
New Delhi Headquarters 4,300
Although the Company believes that its existing facilities are adequate
for its current business, new facilities may be added should the need arise in
the future.
Item 3. Legal Proceedings.
Safeway Inc. ("Safeway"), filed a Complaint against the PIA
Merchandising Co., Inc. ("PIA Co."), a wholly owned subsidiary of the Company,
and Pivotal Sales Company ("Pivotal"), a wholly owned subsidiary of PIA Co., and
SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001, and has
subsequently amended it. Safeway alleges causes of action for breach of
contract, breach of implied contract, breach of fiduciary duty, conversion,
constructive fraud, breach of trust, unjust enrichment, and accounting fraud.
Safeway has most recently alleged monetary damages in the principal sum of
$3,000,000 and probable interest of $1,000,000 and has also demanded unspecified
costs. PIA Co., Pivotal and SGRP filed cross-claims against Safeway on or about
March 11, 2002, and amended them on or about October 15, 2002, alleging causes
of action by them against Safeway for breach of contract, interference with
economic relationship, unfair trade practices and unjust enrichment and seeking
damages and injunctive relief. Mediation between the parties occurred in 2004,
but did not result in a settlement. PIA Co., Pivotal and SGRP are vigorously
defending Safeway's allegations. It is not possible at this time to determine
the likelihood of the outcome of this lawsuit. However, if Safeway prevails
respecting its allegations, and PIA Co., Pivotal and SGRP lose on their
cross-claims and counterclaims, that result could have a material adverse effect
on the Company. The Company anticipates that this matter will be resolved in
2005.
In addition to the above, the Company is a party to various other legal
actions and administrative proceedings arising in the normal course of business.
In the opinion of Company's management, disposition of these other matters are
not anticipated to have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-15-
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Price Range of Common Stock
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq Small Cap
Market.
2004 2003
------------------------ -------------------------
High Low High Low
First Quarter $ 3.44 $ 2.30 $ 3.60 $ 2.42
Second Quarter 2.33 0.85 5.55 3.05
Third Quarter 1.50 0.75 5.32 3.17
Fourth Quarter 1.80 0.36 4.57 3.00
As of December 31, 2004, there were approximately 700 beneficial
shareholders of the Company's Common Stock.
Dividends
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of the business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
The Company's Credit Facility with Webster Business Credit Corporation
(see Note 5 to the Financial Statements - Lines of Credit) restricts the payment
of dividends without Webster's prior consent.
Item 6. Selected Financial Data.
The following selected condensed consolidated financial data sets forth,
for the periods and the dates indicated, summary financial data of the Company
and its subsidiaries. The selected financial data have been derived from the
Company's financial statements.
-16-
SPAR Group, Inc.
Condensed Consolidated Statements of Operations
-----------------------------------------------
(In thousands, except per share data)
Year Ended December 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 51,370 $ 64,859 $ 69,612 $ 70,891 $ 81,459
Cost of revenues 33,644 42,338 40,331 40,883 50,278
---------------------------------------------------------------------
Gross profit 17,726 22,521 29,281 30,008 31,181
Selling, general and administrative expenses 20,222 20,967 18,804 19,380 24,761
Impairment charges 8,141 - - - -
Depreciation and amortization 1,399 1,529 1,844 2,682 2,383
---------------------------------------------------------------------
Operating (loss) income (12,036) 25 8,633 7,946 4,037
Other (income) expense (754) 237 (26) 107 (790)
Interest expense 220 269 363 561 1,326
---------------------------------------------------------------------
(Loss) income from continuing operations before
provision for income taxes and minority interest (11,502) (481) 8,296 7,278 3,501
Income tax provision 853 58 2,998 3,123 780
---------------------------------------------------------------------
(Loss) income from continuing operations before
minority interest (12,355) (539) 5,298 4,155 2,721
---------------------------------------------------------------------
Minority interest 87 - - - -
Discontinued operations:
Loss from discontinued operations net of tax
benefits of $935 and $858, respectively - - - (1,597) (1,399)
Estimated loss on disposal of discontinued
operations, including provision of $1,000 for
losses during phase-out period and disposal
costs net of tax benefit of $2,618 - - - (4,272) -
---------------------------------------------------------------------
Net (loss) income $ (12,268) $ (539) $ 5,298 $ (1,714) $ 1,322
=====================================================================
Basic/diluted net (loss) income per common share:
Net (loss) income from continuing operations $ (0.65) $ (0.03) $ 0.28 $ 0.23 $ 0.15
---------------------------------------------------------------------
Discontinued operations:
Loss from discontinued operations - - - (0.09) (0.08)
Estimated loss on disposal of discontinued
operations - - - (0.23) -
---------------------------------------------------------------------
Net loss from discontinued operations - - - (0.32) (0.08)
---------------------------------------------------------------------
Basic/diluted net (loss) income $ (0.65) $ (0.03) $ 0.28 $ (0.09) $ 0.07
=====================================================================
Weighted average shares outstanding
- basic 18,859 18,855 18,761 18,389 18,185
- diluted 18,859 18,855 19,148 18,467 18,303
-17-
December 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
----------- --------- ----------- ----------- -----------
BALANCE SHEET DATA:
Working capital (deficiency) $ 962 $ 4,085 $ 6,319 $ 8,476 $ (2,273)
Total assets $ 15,821 $ 28,137 $ 28,800 $ 41,155 $ 48,004
Lines of credit, current $ 4,956 $ 4,084 $ - $ 57 $ 1,143
Lines of credit and other long-term debt(1) $ 218 $ 270 $ 383 $ 13,287 $ 10,093
Total stockholders' equity $ 3,714 $ 16,023 $ 16,592 $ 10,934 $ 12,240
(1) Prior to 2003, the Company's lines of credit were charged to long-term
liabilities (net of current portion).
-18-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
- --------
In the United States, the Company provides merchandising services to
manufacturers and retailers principally in mass merchandiser, drug store,
grocery, and other retail trade classes through its Domestic Merchandising
Services Division. Internationally, the Company provides in-store merchandising
services through a wholly owned subsidiary in Canada, 51% owned joint venture
subsidiaries in Turkey, South Africa and India and a 50% owned joint venture in
Japan. In December 2004, the Company established a 51% owned joint venture
subsidiary in Romania. In February 2005, the Company established a 50% owned
joint venture in China. In 2004, the Company consolidated Canada, Turkey, South
Africa, India and Japan into the Company's financial statements. Romania did not
have operations in 2004.
In December 2001, the Company decided to divest its Incentive Marketing
Division and recorded an estimated loss on disposal of SPAR Performance Group,
Inc., now called STIMULYS, Inc. ("SPGI"), of approximately $4.3 million, net of
taxes, including a $1.0 million reserve recorded for the anticipated cost to
divest SPGI and any anticipated losses through the divestiture date.
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a wholly owned
subsidiary of the Company, entered into a Stock Purchase and Sale Agreement with
Performance Holdings, Inc. ("PHI"), a Delaware corporation headquartered in
Carrollton, Texas. Pursuant to that agreement, SIM sold all of the stock of
SPGI, its subsidiary, to PHI for $6.0 million. As a condition of the sale, PHI
issued and contributed 1,000,000 shares of its common stock to Performance
Holdings, Inc. Employee Stock Ownership Plan, which became the only shareholder
of PHI.
SIM's results (including those of SPGI) were reclassified as
discontinued operations for all periods presented. The results of operations of
the discontinued business segment are shown separately below net income from
continuing operations. Accordingly, the 2002 consolidated statements of
operations of the Company have been prepared, and its 2001 and 2000 consolidated
statement of operations have been restated, to report the results of
discontinued operations of SIM (including those of SPGI) separately from the
continuing operations of the Company (see Item 6 - Selected Financial Data,
above).
Critical Accounting Policies & Estimates
- ----------------------------------------
The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Note 2 to the Financial
Statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition, depreciation methods,
asset impairment recognition, business combination accounting, and discontinued
business accounting. While the estimates and judgments associated with the
application of these policies may be affected by different assumptions or
conditions, the Company believes the estimates and judgments associated with the
reported amounts are appropriate in the circumstances. Four critical accounting
policies are consolidation of subsidiaries, revenue recognition, allowance for
doubtful accounts and sales allowances, and internal use software development
costs:
Consolidation of subsidiaries
The Company consolidates its 100% owned subsidiaries. The Company also
consolidates its 51% owned joint venture subsidiaries and its 50% owned
joint ventures where the Company is the primary beneficiary because the
Company believes this presentation is fairer and more meaningful. Rule
3A-02 of Regulation S-X, Consolidated Financial Statements of the
Registrant and its Subsidiaries, states that consolidated statements are
presumed to be more meaningful, that majority owned subsidiaries (more
than 50%) generally should be consolidated, and that circumstances may
require consolidation of other subsidiaries to achieve a fairer
presentation of its financial condition and results. In addition, the
Company has determined that under Financial Accounting Standards Board
Interpretation Number 46, as revised December 2003, Consolidation of
Variable Interest Entities ("FIN 46(R)"), the Company is the primary
beneficiary of its 51% owned joint venture subsidiaries and its 50%
owned joint ventures, which accordingly requires consolidation of those
entities into the Company's financial statements.
Revenue Recognition
The Company's services are provided under contracts or agreements that
consist primarily of service fees and per unit fee arrangements.
Revenues under service fee arrangements are recognized when the service
is performed.
-19-
The Company's per unit contracts or agreements provide for fees to be
earned based on the retail sales of client's products to consumers. The
Company recognizes per unit fees in the period such amounts become
determinable and are reported to the Company.
Allowance for Doubtful Accounts and Sales Allowances
The Company continually monitors the validity of its accounts receivable
based upon current customer credit information and financial condition.
Balances that are deemed to be uncollectible after the Company has
attempted reasonable collection efforts are written off through a charge
to the bad debt allowance and a credit to accounts receivable. Accounts
receivable balances are stated at the amount that management expects to
collect from the outstanding balances. The Company provides for probable
uncollectible amounts through a charge to earnings and a credit to bad
debt allowance based on management's assessment of the current status of
individual accounts. Based on management's assessment, the Company
established an allowance for doubtful accounts of $761,000 and $515,000
at December 31, 2004 and 2003, respectively. The Company also recorded a
reserve for sales allowances for potential customer credits of $448,000
at December 31, 2003. Bad debt and sales allowance expenses were
$366,000, $825,000, and $262,000 in 2004, 2003, and 2002, respectively.
Internal Use Software Development Costs
In accordance with SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, the Company capitalizes
certain costs associated with its internally developed software.
Specifically, the Company capitalizes the costs of materials and
services incurred in developing or obtaining internal use software.
These costs include but are not limited to the cost to purchase
software, write program code and payroll, related benefits and travel
expenses for those employees who are directly involved with and who
devote time to its software development projects. Capitalized software
development costs are amortized over three years.
The Company capitalized $559,000, $1,004,000, and $772,000 of costs
related to software developed for internal use in 2004, 2003, and 2002,
respectively.
The Company also recorded a net impairment charge of capitalized
software related to lost clients totaling approximately $442,000 in
2004.
Results of operations
The following table sets forth selected financial data and such data as
a percentage of net revenues for the periods indicated.
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
--------------------------------------------------------------------------------
(dollars in millions)
Dollars % Dollars % Dollars %
-------------- ----------- ----------- ----------- ----------- -----------
Net revenues $ 51.4 100.0% $ 64.9 100.0% $ 69.6 100.0%
Cost of revenues 33.6 65.5 42.3 65.3 40.3 57.9
Selling, general & administrative expenses 20.2 39.4 21.0 32.3 18.8 27.0
Impairment charges 8.1 15.8 - - - -
Depreciation & amortization 1.4 2.7 1.5 2.3 1.8 2.6
Other (income) expenses, net (0.4) (1.0) 0.5 0.8 0.4 0.6
-------------- ----------- ----------- ----------- ----------- -----------
(Loss) income before income tax provision (11.5) (22.4) (0.4) (0.7) 8.3 11.9
Provision for income taxes 0.9 1.7 0.1 0.1 3.0 4.3
-------------- ----------- ----------- ----------- ----------- -----------
(Loss) income before minority interest (12.4) (24.1)% (0.5) (0.8)% 5.3 7.6%
Minority interest 0.1 0.2 - - - -
-------------- ----------- -----------
Net (loss) income $ (12.3) (23.9)% $ (0.5) (0.8)% $ 5.3 7.6%
============== =========== ===========
-20-
Results from continuing operations for the twelve months ended December 31,
- --------------------------------------------------------------------------------
2004, compared to twelve months ended December 31, 2003
- -------------------------------------------------------
Net Revenues
Net revenues from operations for the twelve months ended December 31,
2004, were $51.4 million, compared to $64.9 million for the twelve months ended
December 31, 2003, a decrease of $13.5 million or 20.8%. The decrease of $13.5
million in net revenues consists of a decrease in domestic revenue of $21.1
million or 32.9% partially offset by increases in international revenue of $7.7
million. The decrease in domestic revenue is a result of the loss of several
significant customers partially offset by revenue from new customers in 2004.
The international revenue increase of $7.7 million was primarily a result of the
South African acquisition, the Japan consolidation and a full year of Canadian
operations.
Cost of Revenues
Cost of revenues from operations consists of in-store labor and field
management wages, related benefits, travel and other direct labor-related
expenses. Cost of revenues decreased by $8.7 million in 2004 and as a percentage
of net revenues was 65.5% for the twelve months ended December 31, 2004, which
was consistent with 65.3% for the twelve months ended December 31, 2003.
Approximately 87% and 85% of the field services were purchased from the
Company's affiliate, SMS, in 2004 and 2003, respectively (see Item 13 - Certain
Relationships and Related Transactions, below). SMS's increased share of field
services resulted from its more favorable cost structure
Operating Expenses
Operating expenses include selling, general and administrative expenses,
impairment charges, depreciation and amortization. Selling, general and
administrative expenses include corporate overhead, project management,
information technology, executive compensation, human resource, legal and
accounting expenses. The following table sets forth the operating expenses as a
percentage of net revenues for the time periods indicated:
Year Ended Year Ended Increase
December 31, 2004 December 31, 2003 (decrease)
---------------------------- ------------------------------ -------------
(dollars in millions)
Dollars % Dollars % %
-------------- ------------ --------------- ------------- -------------
Selling, general & administrative $ 20.2 39.4% $ 21.0 32.3% (3.6)%
Impairment charges 8.1 15.8 - - -
Depreciation and amortization 1.4 2.8 1.5 2.3 (8.5)%
-------------- ------------ --------------- -------------
Total operating expenses $ 29.7 58.0% $ 22.5 34.6% 32.3%
============== ============ =============== =============
Selling, general and administrative expenses decreased by $0.8 million,
or 3.6%, for the twelve months ended December 31, 2004, to $20.2 million
compared to $21.0 million for the twelve months ended December 31, 2003.
Domestic selling, general and administrative expenses totaled $16.7 million for
2004 and were reduced $3.3 million from $19.9 million in 2003. The reduction of
16.1% was a result of cost reduction programs initiated in 2004 as a result of
the loss of certain large customers partially offset by restructure costs of
$480,000 expensed in 2004 compared to no expense in 2003. Restructure costs
included office lease and employee severance costs. The domestic cost reductions
were partially offset by increases of $2.5 million in international selling,
general and administrative expenses resulting from the consolidation of Japan,
the acquisition of South Africa, and a full year of Canadian operations, as well
as, the Turkey and India joint venture startups.
Impairment charges were $8.1 million for 2004 (see Note 3 to the
Financial Statements -Impairment Charges). Impairment charges resulting from the
loss of certain large customers consisted of $7.6 million of goodwill
impairment, $1.2 million for the impairment of other assets partially offset by
the reduction of $1.4 million (net of taxes) of other liabilities related to the
PIA Acquisition. In addition there was approximately $700,000 of goodwill
impairment associated with the Canadian subsidiary.
Depreciation and amortization charges of $1.4 million in 2004 was
consistent with $1.5 million in 2003.
-21-
Other Income/Other Expense
Other income was approximately $754,000 for 2004 versus other expense of
$237,000 for 2003. In 2004, other income consisted of approximately $640,000
resulting from the release of specific reserves related to the refinancing of
the SPGI notes and approximately $114,000 of foreign currency translation gains.
In 2003, other expense consisted primarily of the Company's share of its 50%
owned Japan joint venture losses accounted for on the equity method. In 2004,
the Japan joint venture was consolidated into the Company's financial
statements.
Interest Expense
Interest expense totaled $220,000 for 2004 and was consistent with
interest expense of $269,000 for 2003.
Income Taxes
The provision for income taxes was $853,000 and $58,000 for 2004 and
2003, respectively. During 2004, as a result of the loss of several significant
clients, current year losses and the lack of certainty of a return to
profitability in the next twelve months, the Company recorded a full valuation
allowance against its net deferred tax assets resulting in a charge totaling
approximately $750,000. The 2004 tax provision of $853,000 consists of the
valuation allowance and minimum state taxes of approximately $103,000. The tax
provision for 2003 reflects minimum tax requirements for state filings.
Net (Loss) Income
The SPAR Group had a net loss of approximately $12.3 million or $0.65
per basic and diluted share for 2004, compared to a net loss of approximately
$539,000 or $0.03 per basic and diluted shares for 2003.
Off Balance Sheet Arrangements
None.
-22-
Results from continuing operations for the twelve months ended December 31,
- --------------------------------------------------------------------------------
2003, compared to twelve months ended December 31, 2002
- -------------------------------------------------------
Net Revenues
Net revenues from operations for the twelve months ended December 31,
2003, were $64.9 million, compared to $69.6 million for the twelve months ended
December 31, 2002, a 6.8% decrease. The decrease of 6.8% in net revenues is
primarily attributed to decreased business in mass merchandiser chains. The
decrease in net revenues was caused by decreased per unit fee revenue resulting
from lower retail sales of customer products and the loss of a particular
client, partially offset by increases in service fee revenue.
Cost of Revenues
Cost of revenues from operations consists of in-store labor and field
management wages, related benefits, travel and other direct labor-related
expenses. Cost of revenues increased by $2.0 million in 2003 and as a percentage
of net revenues was 65.3% for the twelve months ended December 31, 2003,
compared to 57.9% for the twelve months ended December 31, 2002, a 5.0%
increase. Approximately 85% and 76% of the field services were purchased from
the Company's affiliate, SMS, in 2003 and 2002, respectively (see Item 13 -
Certain Relationships and Related Transactions, below). SMS's increased share of
field services resulted from its more favorable cost structure. The increase in
cost as a percentage of net revenues is primarily a result of a decrease in per
unit fee revenues that do not have a proportionate decrease in cost. As
discussed above under Critical Accounting Policies/Revenue Recognition, the
Company's revenue consists of: (1) service fee revenue, which is earned when the
merchandising services are performed and, therefore, has proportionate costs in
the period the services are performed; and (2) per unit fee revenue, which is
earned when the client's product is sold to the consumer at retail, not when the
services are performed and, therefore, does not have proportionate costs in the
period the revenue is earned. Since the merchandising service and the related
costs associated with per unit fee revenue are normally performed prior to the
retail sale, and the retail sales of client products are influenced by numerous
factors including consumer tastes and preferences, and not solely by the
merchandising service performed, in any given period, the cost of per unit fee
revenues may not be directly proportionate to the per unit fee revenue.
Operating Expenses
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resource, legal and accounting expenses. The
following table sets forth the operating expenses as a percentage of net
revenues for the time periods indicated:
Year Ended Year Ended Increase
December 31, 2003 December 31, 2002 (decrease)
---------------------------- ------------------------------ -------------
(dollars in millions)
Dollars % Dollars % %
-------------- ------------ --------------- ------------- -------------
Selling, general & administrative $ 21.0 32.3% $ 18.8 27.0% 12.0%
Depreciation and amortization 1.5 2.3 1.8 2.6 (17.1)%
-------------- ------------ --------------- -------------
Total operating expenses $ 22.5 34.6% $ 20.6 29.6% 9.4%
============== ============ =============== =============
Selling, general and administrative expenses increased by $2.2 million,
or 12.0%, for the twelve months ended December 31, 2003, to $21.0 million
compared to $18.8 million for the twelve months ended December 31, 2002. This
increase was due primarily to increases in travel related expense of $0.4
million, postage and material expense of $0.6 million, stock option expense for
non-employees of $0.4 million and increase in bad debt expense of $0.6 million.
Depreciation and amortization decreased by $315,000 for the twelve
months ended December 31, 2003, primarily due to older, higher priced assets
becoming fully depreciated.
-23-
Interest Expense
Interest expense decreased $94,000 to $269,000 for the twelve months
ended December 31, 2003, from $363,000 for the twelve months ended December 31,
2002, due to decreased average debt levels as well as decreased interest rates
in 2003.
Income Taxes
The provision for income taxes was $58,000 and $3.0 million for the
twelve months ended December 31, 2003 and December 31, 2002, respectively. The
tax provision for 2003 reflects minimum tax requirements for state filings. The
effective tax rate was 36.1% for 2002.
Net (Loss) Income
The SPAR Group had a net loss of approximately $539,000 or $0.03 per
basic and diluted share for the twelve months ended December 31, 2003, compared
to a net income of approximately $5.3 million or $0.28 per basic and diluted
shares for the twelve months ended December 31, 2002 because of the factors
described above.
Off Balance Sheet Arrangements
None.
Liquidity and Capital Resources
In 2004, the Company had a net loss of $12.3 million. Included in the
net loss were non-cash charges of $8.1 million for impairment, $0.7 million for
deferred tax asset valuation adjustments, $1.4 million for depreciation and $0.1
million for minority interests in losses of subsidiaries.
Net cash provided by operating activities for 2004, was $1.4 million,
compared with net cash provided by operations of $3.4 million for 2003. The
decrease of $2.0 million in cash provided by operating activities is primarily
due to net operating losses offset by decreases in deferred taxes and
restructuring charges.
Net cash used in investing activities for 2004, was $1.3 million,
compared with net cash used of $2.9 million for 2003. The decrease in net cash
used in investing activities resulted was a result of fewer acquisitions of new
businesses and lower purchases of property and equipment in 2004.
Net cash provided by financing activities for 2004, was $0.9 million,
compared with net cash used in financing activities of $0.5 million for 2003.
The increase in net cash provided by financing activities in 2004 was primarily
a result of the consolidation of our Japan joint venture into the Company's
financial statements in 2004.
The above activity resulted in a change in cash and cash equivalents for
2004 of $0.9 million.
At December 31, 2004, the Company had positive working capital of $1.0
million as compared to $4.1 million at December 31, 2003. The decrease in
working capital is due to decreases in accounts receivable and deferred taxes,
increases in accounts payable, customer deposits and lines of credit, partially
offset by increases in cash and decreases in accrued expenses and other current
liabilities, accrued expenses due to affiliates and restructuring charges. The
Company's current ratio was 1.08 and 1.34 at December 31, 2004 and 2003,
respectively.
In January 2003, the Company and Webster Business Credit Corporation,
then known as Whitehall Business Credit Corporation ("Webster"), entered into
the Third Amended and Restated Revolving Credit and Security Agreement (as
amended, collectively, the "Credit Facility"). The Credit Facility provided a
$15.0 million revolving credit facility that matures on January 23, 2006. The
Credit Facility allowed the Company to borrow up to $15.0 million based upon a
borrowing base formula as defined in the agreement (principally 85% of
"eligible" accounts receivable). On May 17, 2004, the Credit Facility was
amended to among other things, reduce the revolving credit facility from $15.0
million to $10.0 million, change the interest rate and increase reserves against
collateral. The amendment provides for interest to be charged at a rate based in
part upon the earnings before interest, taxes, depreciation and amortization.
The average interest rate for 2004 was 5.1%. At December 31, 2004, the Credit
Facility bears interest at Webster's "Alternative Base Rate" plus 0.75% (a total
of 6.0% per annum), or LIBOR plus 3.25%. The Credit Facility is secured by all
of the assets of the Company and its domestic subsidiaries. In connection with
the May 17, 2004, amendment, Mr. Robert Brown, a
-24-
Director, the Chairman, President and Chief Executive Officer and a major
stockholder of theCompany and Mr. William Bartels, a Director, the Vice Chairman
and a major stockholder of the Company, provided personal guarantees totaling
$1.0 million to Webster. On August 20, 2004, the Credit Facility was further
amended in connection with the waiver of certain covenant violations (see
below). The amendment, among other things, reduced the revolving credit facility
from $10.0 million to $7.0 million, changed the covenant compliance testing for
certain covenants from quarterly to monthly and reduced certain advance rates.
On November 15, 2004, the Credit Facility was further amended to delete any
required minimum Net Worth and minimum Fixed Charge Coverage Ratio covenant
levels for the period ending December 31, 2004. The amendments did not change
the future covenant levels. The Credit Facility also limits certain expenditures
including, but not limited to, capital expenditures and other investments.
The Company was in violation of certain monthly covenants at December
31, 2004, and expects to be in violation at future measurement dates. Webster
issued a waiver for the December 31, 2004 covenant violations. However, there
can be no assurances that Webster will issue such waivers in the future.
Because of the requirement to maintain a lock box arrangement with
Webster, Webster's ability to invoke a subjective acceleration clause at its
discretion and the expected future covenant violations, borrowings under the
Credit Facility are classified as current at December 31, 2004, and December 31,
2003, in accordance with EITF 95-22. Balance Sheet Classification of Borrowings
Outstanding Under Revolving Credit Agreements That Include Both a Subjective
Acceleration Clause and a Lock-Box Agreement.
The revolving loan balances outstanding under the Credit Facility were
$4.1 million at December 31, 2004, and December 31, 2003. There were letters of
credit outstanding under the Credit Facility of $0.7 million at December 31,
2004, and December 31, 2003. As of December 31, 2004, the Company had unused
availability under the Credit Facility of $1.4 million out of the remaining
maximum $2.2 million unused revolving line of credit after reducing the
borrowing base by outstanding loans and letters of credit.
In 2001, the Japanese joint venture SPAR FM Japan, Inc. entered into a
revolving line of credit arrangement with Japanese banks for 300 million yen or
$2.7 million (based upon the exchange rate at September 30, 2004). At September
30, 2004, SPAR FM Japan, Inc. had 100 million yen or approximately $900,000 loan
balance outstanding under the line of credit. The line of credit is effectively
guarantied by the Company and the joint venture partner, Paltac Corporation. The
average interest rates on the borrowings under the Japanese line of credit for
its short-term bank loans at September 30, 2004 and 2003 were 1.375% and 1.375%
per annum, respectively.
The Company's international model is to partner with local merchandising
companies and combine their knowledge of the local market with the Company's
proprietary software and expertise in the merchandising business. In 2001, the
Company established its first joint venture and has continued this strategy. As
of this filing, the Company is currently operating in Japan, Canada, Turkey,
South Africa and India. The Company also announced the establishment of joint
ventures in Romania and China.
Certain of these joint ventures and joint venture subsidiaries are
marginally profitable while others are operating at a loss. None of these
entities have excess cash reserves. In the event of continued losses, the
Company may be required to provide additional cash infusions into these joint
ventures and joint venture subsidiaries.
Management believes that based upon the results of Company's cost saving
initiatives and the existing credit facilities, sources of cash availability
will be sufficient to support ongoing operations over the next twelve months.
However, delays in collection of receivables due from any of the Company's major
clients, or a significant further reduction in business from such clients, or
the inability to acquire new clients, or the Company's inability to remain
profitable, or the inability to obtain bank waivers for future covenant
violations could have a material adverse effect on the Company's cash resources
and its ongoing ability to fund operations.
-25-
Certain Contractual Obligations
The following table contains a summary of certain of the Company's
contractual obligations by category as of December 31, 2004 (in thousands).
- --------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by Period
- --------------------------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
year years
- --------------------------------------------------------------------------------------------------------------------
Credit Facilities $ 4,956 $ 4,956 $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations 1,468 776 651 41 -
- --------------------------------------------------------------------------------------------------------------------
Total $ 6,424 $ 5,732 $ 651 $ 41 $ -
- --------------------------------------------------------------------------------------------------------------------
In addition to the above table, at December 31, 2004, the Company had
$737,337 in outstanding Letters of Credit.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company's accounting policies for financial instruments and
disclosures relating to financial instruments require that the Company's
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and lines of credit.
The Company considers carrying amounts of current assets and liabilities in the
consolidated financial statements to approximate the fair value for these
financial instruments because of the relatively short period of time between
origination of the instruments and their expected realization. The Company
monitors the risks associated with interest rates and financial instrument
positions. The Company's investment policy objectives require the preservation
and safety of the principal, and the maximization of the return on investment
based upon the safety and liquidity objectives.
The Company is exposed to market risk related to the variable interest
rate on its lines of credit. As of December 31, 2004, the variable interest rate
on the Company's lines of credit were 6.0% on its domestic line of credit and
1.4% on its Japanese line of credit.
The Company has foreign currency exposure associated with its
international 100% owned subsidiary, its 51% owned joint venture subsidiaries
and its 50% owned joint ventures. In 2004, these exposures are primarily
concentrated in the Canadian dollar, Japanese yen and South African rand. At
December 31, 2004, international assets totaled $2.8 million and international
liabilities totaled $3.8 million. For 2004, international revenues totaled $8.2
million and the Company's share of the net losses was approximately $500,000.
Investment Portfolio
The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments.
Domestically, excess cash is normally used to pay down its revolving line of
credit. Internationally, excess cash is used to fund operations.
Item 8. Financial Statements and Supplementary Data.
See Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) as of the end of the period
covering this report. Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission's rules and
forms.
-26-
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls during the
twelve months covered by this report or from the end of the reporting period to
the date of this Form 10-K.
The Company has established a plan and has begun to document and test
its internal controls over financial reporting required by Section 404 of the
Sarbanes-Oxley Act of 2002.
Item 9B. Other Information.
In November 2004 and January 2005, the Company entered into separate
operating lease agreements between SMS and the Company's wholly owned
subsidiaries, SPAR Marketing Force, Inc. ("SMF") and SPAR Canada Company ("SPAR
Canada"). Each lease has a 36 month term and has representations, covenants and
defaults customary for the leasing industry. The leases are for handheld
computers to be used by field merchandisers in the performance of various
merchandising services in the United States and Canada (see Item 13 - Certain
Relationships and Related Transactions).
-27-
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers
- --------------------------------
The following table sets forth certain information in connection with
each person who is or was at December 31, 2004, an executive officer and/or
director for the Company.
Name Age Position with SPAR Group, Inc.
- ---- --- ------------------------------
Robert G. Brown. . . . . . . . 62 Chairman, Chief Executive Officer,
President and Director
William H. Bartels . . . . . . 61 Vice Chairman and Director
.. .
Robert O. Aders (1). . . . . . 77 Director, Chairman Governance
Committee
Jack W. Partridge (1) . . . . . 59 Director, Chairman Compensation
Committee
Jerry B. Gilbert (1) . . . . . 70 Director
Lorrence T. Kellar (1) . . . . 67 Director, Chairman Audit Committee
Charles Cimitile. . . . . . . . 50 Chief Financial Officer, Treasurer
and Secretary
Kori G. Belzer . . . . . . . . . 39 Chief Operating Officer
Patricia Franco. . . . . . . . . 44 Chief Information Officer
James R. Segreto . . . . . . . . 56 Vice President, Controller
__________________________
(1) Member of the Board's Governance, Compensation and Audit Committees
Robert G. Brown serves as the Chairman, Chief Executive Officer,
President and a Director of SGRP and has held such positions since July 8, 1999,
the effective date of the merger of the SPAR Marketing Companies with PIA
Merchandising Services, Inc. (the "Merger"). Mr. Brown served as the Chairman,
President and Chief Executive Officer of the SPAR Marketing Companies
(SPAR/Burgoyne Retail Services, Inc. ("SBRS") since 1994, SPAR, Inc. ("SINC")
since 1979, SPAR Marketing, Inc. ("SMNEV") since November 1993, and SPAR
Marketing Force, Inc. ("SMF") since 1996).
William H. Bartels serves as the Vice Chairman and a Director of SGRP
and has held such positions since July 8, 1999 (the effective date of the
Merger). Mr. Bartels served as the Vice Chairman, Secretary, Treasurer and
Senior Vice President of the SPAR Marketing Companies (SBRS since 1994, SINC
since 1979, SMNEV since November 1993 and SMF since 1996).
Robert O. Aders serves as a Director of SGRP and has done so since July
8, 1999. He has served as the Chairman of the Governance Committee since May 9,
2003. Mr. Aders has served as Chairman of The Advisory Board, Inc., an
international consulting organization since 1993, and also as President Emeritus
of the Food Marketing Institute ("FMI") since 1993. Immediately prior to his
election to the Presidency of FMI in 1976, Mr. Aders was Acting Secretary of
Labor in the Ford Administration. Mr. Aders was the Chief Executive Officer of
FMI from 1976 to 1993. He also served in The Kroger Co., in various executive
positions from 1957 to 1974 and was Chairman of the Board from 1970 to 1974. Mr.
Aders also serves as a Director of Checkpoint Systems, Inc., Sure Beam
Corporation and Telepanel Systems, Inc.