SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the second quarterly period ended June 30, 2001
Commission file number: 0-27824
SPAR Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
State of Incorporation IRS Employer Identification No.
580 White Plains Road, Tarrytown, New York, 10591
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (914) 332-4100
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 12 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: [X] Yes
On August 3, 2001 there were 18,272,330 shares of Common Stock outstanding.
SPAR Group, Inc.
Index
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets
as of June 30, 2001 and December 31,2000.............................3
Consolidated Statements of Operations
for the six months ended June 30, 2001 and June 30, 2000.............4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and June 30, 2000......................................5
Notes to Financial Statements........................................6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................10
Item 3: Quantitative and Qualitative Disclosures About Market Risk..........18
PART II: OTHER INFORMATION
Item 1: Legal Proceedings.............................................19
Item 2: Changes in Securities and Use of Proceeds.....................19
Item 3: Defaults upon Senior Securities...............................19
Item 4: Submission of Matters to a Vote of Security Holders...........19
Item 5: Other Information.............................................19
Item 6: Exhibits and Reports on Form 8-K..............................19
SIGNATURES...................................................................20
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SPAR GROUP INC.
Consolidated Balance Sheets
(In thousands, except per share data)
JUNE 30, DECEMBER 31,
2001 2000
----------- -----------
(unaudited) (note)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net 19,239 23,207
Prepaid expenses and other current assets 1,306 880
Prepaid program costs 2,196 3,542
Deferred Income Taxes 1,718 1,718
Total current assets 24,459 29,347
Property and equipment, net 3,588 3,561
Goodwill and other intangibles, net 20,370 21,485
Deferred Income Taxes 1,082 1,082
Other assets 223 143
------ ------
Total assets $ 49,722 $ 55,618
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,972 $ 5,849
Accrued expenses and other current 10,044 10,178
liabilities
Deferred revenue 4,839 8,581
Restructuring and other charges, 1,579 2,205
current
Due to certain stockholders, current 3,133 3,505
Current portion of long-term debt 928 1,211
------ ------
Total current liabilities 24,495 31,529
Line of credit & long-term liabilities, 8,549 8,093
net of current portion
Long-term debt due to certain 2,230 2,160
stockholders
Restructuring and other charges,
long-term 1,212 1,596
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 3,000,000
Issued and outstanding shares - none -- --
Common stock, $.01 par value:
Authorized shares - 47,000,000
Issued and outstanding shares - 182 182
18,272,330 as of June 30, 2001 and
December 31, 2000
Additional paid-in capital 10,127 10,127
Retained earnings 2,927 1,931
------ ------
Total stockholders' equity 13,236 12,240
------ ------
Total liabilities and stockholders'
equity 49,722 55,618
====== ======
Note:The Balance Sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include any of the
information and footnotes required by Generally Accepted Accounting
Principles for complete financial statements
SEE ACCOMPANYING NOTES.
3
SPAR GROUP, INC.
Consolidated Statements of Operations
(unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2001 2001 2001
---- ---- ---- ----
Net revenues 23,509 28,290 51,187 60,737
Cost of revenues 15,990 19,177 34,816 42,142
------ ------ ------ ------
Gross profit 7,519 9,113 16,371 18,595
Selling, general and administrative
expenses 5,690 7,567 12,066 15,843
Depreciation and amortization 969 838 1,888 1,638
------ ------ ------ ------
Operating income 860 708 2,417 1,114
Interest expense 332 494 719 951
Other (income) expense -- 5 -- (785)
------ ------ ------ ------
Income before provision for income taxes 528 209 1,698 948
Provision for income taxes 209 96 702 419
Net income 319 113 996 529
Basic earnings per share 0.02 0.01 0.05 0.03
====== ====== ====== ======
Basic weighted average common shares 18,272 18,176 18,272 18,165
====== ====== ====== ======
Diluted earnings per share 0.02 0.01 0.05 0.03
====== ====== ====== ======
Diluted weighted average common shares 18,336 18,299 18,329 18,289
====== ====== ====== ======
SEE ACCOMPANYING NOTES.
4
SPAR Group, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
OPERATING ACTIVITIES
Net income $ 996 $ 529
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 1,073 819
Amortization 815 819
Gain on sale of affiliate -- (790)
Changes in operating assets and
liabilities:
Accounts receivable 3,968 3,608
Prepaid expenses and other assets 840 (166)
Due from affiliates -- (178)
Accounts payable, accrued expenses
and other current liabilities (1,711) (4,726)
Restructuring charges (1,010) (986)
Deferred revenue (3,742) 3,049
------ ------
Net cash provided by operating activities 1,229 1,978
INVESTING ACTIVITIES
Purchases of property and equipment (1,100) (1,016)
Purchases of businesses, net of cash acquired -- (62)
Sale of investment in affiliate -- 1,500
------ ------
Net cash (used in) provided by investing (1,100) 422
activities
FINANCING ACTIVITIES
Net proceeds from (payments on) line of credit 779 (1,710)
Net interest payments to shareholders (302) (189)
Proceeds from exercise of options -- 30
Payments of note payable MCI -- (1,045)
Net payments of other long-term debt (606) (512)
------ ------
Net cash used in financing activities (129) (3,426)
------ ------
Net decrease in cash -- (1,026)
Cash at beginning of period -- 2,074
------ ------
Cash at end of period -- 1,048
=========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ 997 $ 724
=========== ========
NON-CASH TRANSACTIONS:
Reduction of accrued liabilities related to
the purchase of the business $ 300 $ --
=========== ========
SEE ACCOMPANYING NOTES
5
SPAR GROUP, INC.
Notes to Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated and combined financial statements of
the Company and its subsidiaries (collectively, the "SPAR Group") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. This financial information should be read in conjunction with the
combined financial statements and notes thereto for the Company as contained in
Form 10-K and Form 10 K/A (Amendment No. 1) for the year ended December 31,
2000, as filed with the Securities Exchange Commission on April 11, 2001 and
April 20, 2001, respectively. The results of operations for the interim periods
are not necessarily indicative of the operating results for the year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION/COMBINATION
The consolidated financial statements include the accounts of the SPAR
Group, Inc. and its wholly owned subsidiaries.
3. SEGMENTS
Utilizing the management approach, the SPAR Group has broken down its
business based upon the nature of services provided (i.e., merchandising
services, incentive marketing services and Internet-based software). The
Merchandising Services Division consists of SMI (an intermediate holding
company), SMF, SMNEV, SBRS and SINC (collectively, the "SPAR Marketing
Companies"), the PIA Companies and the International Division (SPAR Group
International, Inc.). The Incentive Marketing Division consists of each of SIM
(an intermediate holding company) and SPGI. The Internet Division consists of
SPARinc.com, Inc.
Merchandising services generally consist of regularly scheduled, routed
services provided at the stores for a specific retailer or multiple
manufacturers primarily under multiple-year contracts. Services also include
stand-alone large-scale implementations. Examples of these services are ensuring
that clients' products authorized for distribution are in stock and on the
shelf, adding in new products that are approved for distribution but not present
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 clients' products, new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. Specific
in-store services can be initiated by retailers and/or manufacturers.
These services are used typically for large-scale implementations over 30
days. The Merchandising Services Division of the SPAR Group also performs other
project services, such as new store sets and existing store resets,
re-merchandising, remodels and category implementations, multi-year shared
service contracts or stand-alone project contracts. In November 2000, the
Company established its
6
SPAR GROUP, INC.
Notes to Financial Statements
(unaudited) (continued) International Division to expand its merchandise
services business offshore. There were no revenues for the International
Division in year-to- date 2001 or 2000.
The Incentive Marketing Division generally consists of designing and
implementing premium incentives, managing meetings and group travel for clients
throughout the United States. These services may include providing a variety of
consulting, creative, program administrative, travel and merchandise fulfillment
services to companies seeking to motivate employees, salespeople, dealers,
distributors, retailers and consumers toward certain action or objectives.
In March 2000, the Company established its Internet Division to separately
market its applications software products and services. Although such products
and services were in part available through the Company's other divisions prior
to the establishment of the Internet Division, the historical revenues and
expenses related to such software products and services generally were not
maintained separately prior to 2000.
MERCHANDISING INCENTIVE
SERVICES MARKETING INTERNET BASED TOTAL
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
------------------ ------------------ ------------------ ------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000 2001 2001 2000
-------- -------- -------- -------- -------- -------- --------
Net revenues $ 16,091 $21,866 $ 6,369 $ 6,424 $1,049 $23,509 $28,290
Cost of revenues 9,860 13,680 5,209 5,497 921 15,990 19,177
--------- ------- ------- ------- ------ ------- -------
Gross profit 6,231 8,186 1,160 927 128 7,519 9,113
SG&A 3,964 6,214 1,480 1,353 246 5,690 7,567
--------- ------- ------- ------- ------ ------- -------
EBITDA $ 2,267 $ 1,972 $ (320) $ (426) $ (118) $ 1,829 $ 1,546
========== ======= ======= ======= ====== ======= =======
Net income (loss) 765 931 (420) (818) (26) 319 113
Total Assets $ 32,120 $37,887 $17,466 $19,462 $ 136 $49,722 $57,349
MERCHANDISING INCENTIVE
SERVICES MARKETING INTERNET BASED TOTAL
SIX MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
---------------- ---------------- ---------------- ----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000 2001 2001 2000
-------- -------- -------- -------- -------- -------- --------
Net revenues $ 31,032 $46,548 $18,881 $14,189 $1,274 $51,187 $60,737
Cost of revenues 18,608 30,202 15,091 11,940 1,117 34,816 42,142
--------- ------- ------- ------- ------ ------- -------
Gross profit 12,424 16,346 3,790 2,249 157 16,371 18,595
SG&A 8,443 13,085 3,084 2,758 539 12,066 15,843
--------- ------- ------- ------- ------ ------- -------
EBITDA $ 3,982 $ 3,261 $ 706 $ (509) $ (382) $ 4,306 $ 2,752
========= ======= ======= ======= ====== ======= =======
Net income (loss) 1,209 1,774 82 (1,245) (296) 996 529
Total Assets $ 32,120 $37,887 $17,466 $19,462 $ 136 $49,722 $57,349
========== ======= ======= ======= ====== ======= =======
7
SPAR GROUP,. INC.
Notes to Financial Statements
(unaudited) (continued)
4. RESTRUCTURING AND OTHER CHARGES
In connection with the PIA Merger, the Company's Board of Directors
approved a plan to restructure the operations of the PIA Companies.
Restructuring costs are composed of committed costs required to integrate the
SPAR Companies' and the PIA Companies' field organizations and the consolidation
of administrative functions to achieve beneficial synergies and costs savings.
The SPAR Group recognized termination costs in accordance with EITF 95-3,
RECOGNITION OF LIABILITIES IN CONNECTION WITH A BUSINESS COMBINATION.
The following table displays a roll-forward of the liabilities for
restructuring and other charges from December 31, 2000 to June 30, 2001 (in
thousands):
DECEMBER 31,
2000 SIX MONTHS JUNE 30, 2001
RESTRUCTURING ENDED JUNE RESTRUCTURING
AND OTHER 30, 2001 AND OTHER
CHARGES DEDUCTIONS CHARGES
------------- ---------- ------------
Type of cost:
Employee separation $ 487 $ 243 $ 244
Equipment lease settlements 2,770 669 2,101
Office lease settlements 544 98 446
------------- ---------- ------------
$ 3,801$ $ 1,010 $ 2,791
------------- ---------- ------------
Management believes that the remaining reserves for restructuring are
adequate to complete its plan.
8
SPAR GROUP, INC.
Notes to Financial Statements
(unaudited) (continued)
5. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share (in thousands, except per share data):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Numerator:
Net income $ 319 $ 113 $ 996 $ 529
Denominator:
Shares used in basic earnings
per share calculation 18,272 18,176 18,272 18,165
Effect of diluted securities:
Employee stock options 64 123 57 123
Shares used in diluted earnings
per share calculations 18,336 18,299 18,329 18,289
====== ====== ====== ======
Basic earnings per share $ 0.02 $ 0.01 $ 0.05 $ 0.03
====== ====== ====== ======
Diluted earnings per share $ 0.02 $ 0.01 $ 0.05 $ 0.03
====== ====== ====== ======
6. OTHER INCOME
In January 2000, the Company sold its investment in an affiliate for
approximately $1.5 million. The sale resulted in a gain of approximately
$790,000, which is included in other income.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill will no longer be amortized but
will be subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of approximately $1.4 million ($0.8 per share based on current
outstanding shares) per year. During 2002, the Company will perform the first of
the required impairment tests of goodwill and indefinite lived intangible assets
as of January 1, 2002 and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.
9
SPAR GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, including, in particular, the statements about the SPAR Group's
plans and strategies under the headings "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Although the SPAR Group 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. Important factors that could cause
actual results to differ materially from the forward-looking statements made in
this Quarterly Report on Form 10-Q are set forth in this Quarterly Report on
Form 10-Q. All forward-looking statements attributable to the SPAR Group or
persons acting on its behalf are expressly qualified by the cautionary
statements contained in this Quarterly Report on Form 10-Q.
The SPAR Group does not undertake any obligation to update or revise any
forward-looking statement or risk factor or to publicly announce any revisions
to any of them to reflect future events, developments or circumstances.
OVERVIEW
The Company provides merchandising services to manufacturers and retailers
principally in mass merchandiser, chain, discount drug and grocery stores
through its Merchandising Services Division. In addition, the SPAR Group's
Incentive Marketing Division designs and implements premium incentives, manages
group meetings and group travel principally for corporate clients. In March
2000, the Company established its Internet Division to separately market its
software applications, products and services. Although such products and
services were in part available through the Company's other divisions prior to
the establishment of the Internet Division, the historical revenues and expenses
related to such software products and services generally were not maintained
separately. For 2000, the revenues for the Internet Division were not
significant and have been included below in the discussion of the condition and
results of the Incentive Marketing Division. In November 2000, the Company
established its International Division to expand its merchandise services
business offshore. There were no revenues for the International Division in
year-to-date 2001 or 2000.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
NET REVENUES
The following table sets forth net revenues by division as a percentage of
net revenues for the periods indicated:
Quarter Ended
June 30, 2001 June 30,2000 Increase(decr.)
(amounts in millions)
Amount % Amount % %
------- ------- -------- -------- ---------
Merchandising Services $ 16.1 68.4% $21.9 77.3% (26.4)%
Incentive Marketing 6.4 27.1 6.4 22.7 (0.1)
Internet-Based Software 1.0 4.5 0.0 0.0
---- ------ ---- ------ -------
Net Revenue $ 23.5 100.0% $28.3 100.0% (16.9)%
======= ===== ===== ===== =====
Net revenues for the three months ended June 30, 2001 decreased by $4.8
million or 16.9% from the three months ended June 30, 2000 due principally to
discontinued PIA merchandising programs, partially offset by Internet-Based
Software revenue.
Merchandising Services net revenues for the three months ended June 30,
2001, were $16.1 million, compared to $21.9 million for the three months ended
June 30, 2000. The decrease in net revenues is primarily attributed to
discontinued in-store merchandising programs previously contracted with the
former PIA Companies.
Incentive Marketing net revenues for the three months ended June 30, 2001
were $6.4 million, compared to $6.4 million for the three months ended June 30,
2000.
COST OF REVENUES
The following table sets forth cost of revenues by division as a percentage
of total net revenues for the periods indicated:
Quarter Ended
June 30, 2001 June 30,2000 Change
(amounts in millions)
Amount % Amount % %
------- ------- -------- -------- ---------
Merchandising Services $ 9.9 61.3% $13.7 62.6% (1.3)%
Incentive Marketing 5.2 81.8 5.5 85.6 (3.8)
Internet-Based Software .9 87.8 0.0 0.0
---- ------ ---- ------
Total cost of Revenue $ 16.0 68.0% $19.2 67.8% 0.2%
======= ===== ==== ===== =====
11
SPAR GROUP, INC.
Cost of revenues in the Merchandising Services segment consists of in-store
labor (including travel expenses) and field management. Cost of revenues in the
Company's Incentive Marketing and Internal-Based Software segments consists of
direct labor, independent contractor expenses, food, beverage, entertainment and
travel costs. Cost of revenues for the three months ended June 30, 2001, were
$16.0 million or 68.0% of net revenues, compared to $19.2 million or 67.8% of
net revenues for the three months ended June 30, 2000.
Merchandising Services cost of revenues as a percentage of net revenues
decreased 1.3% to 61.3% for the three months ended June 30, 2001, compared to
62.6% for the three months ended June 30, 2000. This decrease is principally
attributable to reduced labor costs resulting from continued efficiencies
realized in 2001.
Incentive Marketing cost of revenues, as a percentage of net revenues,
decreased 3.8% to 81.8% for the three months ended June 30, 2001, compared to
85.6% for the three months ended June 30, 2000, primarily due to a more
favorable product mix in 2001.
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 system,
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:
Quarter Ended
June 30, 2001 June 30,2000 Increase(decr.)
(amounts in millions)
Amount % Amount % %
------- ------- -------- -------- ---------
Selling, general &
administrative expenses $ 5.7 24.2% $7.6 26.7% (24.8)%
Depreciation & amortization 1.0 4.1 0.8 3.0 15.6
---- ------ ---- ------ ------
Total Operating Expenses $ 6.7 28.3% $8.4 29.7% (20.8)%
======= ===== ==== ===== =====
Selling, general and administrative expenses decreased by $1.9 million, or
24.8%, for the three months ended June 30, 2001, to $5.7 million compared to
$7.6 million for the three months ended June 30, 2000. This decrease was
primarily due to efficiencies resulting from the merger of the PIA Companies'
with the SPAR Operating Companies offset by approximately $400,000 of SG&A
expenses related to the Internet and International Divisions.
Depreciation and amortization increased by $0.2 million for the three
months ended June 30, 2001, due primarily to an increase in depreciation and
amortization of customized internal software costs capitalized (under SOP 98-1).
12
SPAR GROUP, INC.
INTEREST EXPENSE
Interest expense decreased $0.2 million to $0.3 million for the three months
ended June 30, 2001, from $0.5 million for the three months ended June 30, 2000,
due to decreased debt levels, as well as decreased interest rates in 2001.
INCOME TAXES
The income tax provision in the second quarter of 2001 represents a combined
federal and state income tax rate of 39.6% compared to 45.9% for the second
quarter of 2000.
NET INCOME
The SPAR Group had net income of $0.3 million in the second quarter of 2001
or $0.02 per basic and diluted share compared to a net income of $0.1 million or
$0.01 per basic and diluted share in the corresponding period in 2000.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
NET REVENUES
The following table sets forth net revenues by division as a percentage of
total net revenues for the periods indicated:
Six Months Ended
June 30, 2001 June 30,2000 Increase(decr.)
(amounts in millions)
Amount % Amount % %
------- ------- -------- -------- ---------
Merchandising Services $ 31.0 60.6% $46.5 76.6% (33.3)%
Incentive Marketing 18.9 36.9 14.2 23.4 33.1
Internet-Based Software 1.3 2.5 0.0 0.0
---- ------ ---- ------ -------
Net Revenue $ 51.2 100.0% $60.7 100.0% (15.7)%
======= ===== ==== ===== =====
Net revenues for the six months ended June 30, 2001 decreased by $9.5
million or 15.7% from the six-months ended June 30, 2000 due principally to
discontinued PIA merchandising programs, offset by an increase in incentive
project revenue and Internet-Based Software revenue.
Merchandising Services net revenues for the six months ended June 30, 2001
were $31.0 million, compared to $46.5 million in the six months ended June 30,
2000, a 33.3% decrease. The decrease in net revenues is primarily attributed to
discontinued in-store merchandising programs previously contracted with former
PIA Companies.
Incentive Marketing net revenues for the six months ended June 30, 2001 were
$18.9 million, compared to $14.2 million for the six months ended June 30, 2000,
an increase of 33.1%. The increase
13
SPAR GROUP,. INC.
in net revenues is primarily due to an increase in project revenue principally
from new clients. The timing of Incentive Marketing revenue depends upon the
client placement of programs. Therefore, revenue for any given quarter may not
be indicative of total revenue for the year.
COST OF REVENUES
The following table sets forth cost of revenues by division as a percentage
of net revenues for the periods indicated:
Six Months Ended
June 30, 2001 June 30,2000 Change
(amounts in millions)
Amount % Amount % %
------- ------- -------- -------- ---------
Merchandising Services $ 18.6 60.0% $30.2 64.9% (4.9)%
Incentive Marketing 15.1 80.0 11.9 84.2 (4.2)
Internet-Based Software 1.1 87.7 0.0 0.0
---- ------ ---- ------ -------
Total cost of Revenue $ 34.8 68.0% $42.1 69.4% (1.4)%
======= ===== ==== ===== =====
Cost of revenues for the six months ended June 30, 2001 were $34.8 million
or 68.0% of net revenues compared to $42.1 million or 69.4% of net revenues for
the six months ended June 30, 2000.
Merchandising Services cost of revenues as a percentage of net revenues
decreased 4.9% to 60.0% for the six months ended June 30, 2001 compared to 64.9%
for the six months ended June 30, 2000. This decrease is principally
attributable to reduced labor costs resulting from continued efficiencies
realized in 2001.
Incentive Marketing cost of revenues as a percentage of net revenues
decreased 4.2% to 80.0% for the six months ended June 30, 2001 compared to 84.2%
for the six months ended June 30, 2000, primarily due to a more favorable
product mix in 2001.
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 system,
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:
Six Months Ended
June 30, 2001 June 30,2000 Increase(decr.)
(amounts in millions)
Amount % Amount % %
------- ------- -------- -------- ---------
Selling, general &
administrative expenses $ 12.1 23.6% $ 15.8 26.1% (23.8)%
Depreciation & amortization 1.9 3.7 1.6 2.6 15.3
---- ------ ---- ------ ------
Total Operating Expenses $ 14.0 27.3% $ 17.4 28.7% (20.2)%
======= ===== ==== ===== =====
14
SPAR GROUP, INC.
Selling, general and administrative expenses decreased by $3.7 million or
23.8% in the six months ended June 30, 2001 to $12.1 million from $15.8 million
for the six months ended June 30, 2000. This decrease was due primarily to
efficiencies resulting from the merger of the PIA Companies' with the SPAR
Operating Companies offset by approximately $800,000 of SG&A expenses related to
the Internet and International Divisions.
Depreciation and amortization increased by $0.3 million to $1.9 million in
the six months ended June 30, 2001 from $1.6 million in the six months ended
June 30, 2000 due primarily to the amortization of customized internal software
costs capitalized (under SOP 98-1).
INTEREST EXPENSES
Interest expense decreased $0.2 million for the six months ended June 30,
2001 due to decreased debt levels, as well as decreased interest rates in 2001.
OTHER INCOME
In January 2000, the Company sold its investment in an affiliate for
approximately $1.5 million. The sale resulted in a gain of approximately $0.8
million, which is included in other income.
INCOME TAXES
The income tax provision represents a combined federal and state income tax
rate of 41.3% and 44.2% for the six months ended June 30, 2001 and the six
months ended June 30, 2000, respectively.
NET INCOME
The SPAR Group had net income of $1.0 million for the six months ended June
30, 2001 or $0.05 per basic and diluted share compared to net income of $0.5
million or $0.03 per basic and diluted share for the six months ended June 30,
2000.
LIQUIDITY AND CAPITAL RESOURCES
In the six months ended June 30, 2001, the SPAR Group had pre-tax income of
$1.7 million and experienced positive operating cash flow of $1.2 million.
Management believes that based upon SPAR Group's current working capital
position and the existing credit facilities, funding will be sufficient to
support ongoing operations over the next twelve months.
DEBT
In 1999, IBJ Whitehall and the members of the SPAR Group (other than PIA
Canada) (collectively, the "Borrowers") entered into a Revolving Credit, Term
Loan and Security Agreement as amended (the "Bank Loan Agreement"). The Bank
Loan Agreement provided the Borrowers with a $15 million Revolving Credit
facility and a $2.5 million term loan. The Revolving Credit facility allows the
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SPAR GROUP, INC.
Borrowers to borrow up to $15 million based upon a borrowing base formula as
defined in the Agreement (principally 85% of "eligible" accounts receivable).
The Bank Loan Agreement's revolving credit loans of $15.0 million are scheduled
to mature on September 21, 2002. The Term Loan amortizes in equal monthly
installments of $83,334. The revolving loans bear interest at IBJ Whitehall's
"Alternate Base Rate" plus one-half of one percent (0.50%) (a total of 7.25% per
annum at June 30, 2001), and the Term Loan bears interest at such "Alternate
Based Rate" plus three-quarters of one percent (0.75%) (a total of 7.50% per
annum at June 30, 2001). In addition, the Borrowers are required to make
mandatory prepayments in an amount equal to 25% of Excess Cash Flow, as defined
in the Bank Loan Agreement, for each fiscal year, to be applied first to the
Term Loan and then to the revolving credit loans (subject to the Borrowers'
ability to re-borrow revolving advances in accordance with the terms of the Bank
Loan Agreement). The facility is secured with the assets of SPAR Group, Inc. and
its subsidiaries.
The Bank Loan Agreement contains an option for the Bank to purchase 16,667
shares of common stock of the Company for $0.01 per share in the event that the
Company's average closing share price over ten consecutive trading day period
exceeds $15.00 per share. This option expires September 2, 2002.
The Bank Loan Agreement contains certain financial covenants that must be
met by the Borrowers on a consolidated basis, among which are a minimum "Net
Worth", a "Fixed Charge Coverage Ratio", a minimum ratio of Debt to EBITDA, and
a minimum EBITDA, as such terms are defined in the Bank Loan Agreement.
The balance outstanding on the revolving line of credit was $8.5 million and
$7.8 million at June 30, 2001, and December 31, 2000, respectively. As of June
30, 2001, based upon the borrowing base formula, the SPAR Group had availability
of $1.6 million of the $6.5 million unused revolving line of credit.
NOTES PAYABLE TO CERTAIN STOCKHOLDERS
Former principal stockholders of the SPAR Companies each made loans to
certain SPAR Companies in the aggregate amount of $4.3 million to facilitate the
acquisition of the PIA Companies and the acquisition of the assets of MCI. These
stockholders also were owed $1.9 million in unpaid distributions relating to the
former status of most of the operating SPAR Companies as subchapter S
corporations. Those amounts totaling $6.2 million were converted into promissory
notes issued to these certain stockholders severally by SMF, SINC and SPGI prior
to the Merger.
As of June 30, 2001, notes payable to certain stockholders total $5.4
million with an interest rate of 8% and are due on demand.
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SPAR GROUP, INC.
CASH AND CASH EQUIVALENTS
Net cash provided by operating activities for the six months ended June 30,
2001, was $1.2 million, compared with net cash provided of $2.0 million for the
six months ended June 30, 2000. Cash provided by operating activities in 2001
was primarily a result of operating profits, decreases in accounts receivable,
and prepaid expenses, offset by decreases in restructuring charges, accounts
payable and deferred revenue.
Net cash used in investing activities for the six months ended June 30,
2001, was $1.1 million, compared with net cash provided of $0.4 for the six
months ended June 30, 2000. The net cash used in investing activities in 2001
resulted from the purchases of property and equipment.
Net cash used by financing activities for the six months ended June 30,
2001, was $0.1 million, compared with net cash used by financing activities of
$3.4 million for the six months ended June 30, 2000.
The above activity resulted in no change in cash and cash equivalents for
the six months ended June 30, 2001, compared to a net decrease of $1.0 million
for the six months ended June 30, 2000.
At June 30, 2001, the Company had negative working capital of $36 thousand
as compared to negative working capital of $2.2 million at December 31, 2000,
availability under its revolving credit facility was $1.6 million at June 30,
2001, compared to $4.2 million at December 31, 2000 and a current ratio of 1.00
and 0.93 as of June 30, 2001 and December 31, 2000 respectively.
Cash and cash equivalents and the timely collection of its receivables
provide the SPAR Group's current liquidity. However, the potential of delays in
collection of receivables due from any of the SPAR Group's major clients, or a
significant reduction in business from such clients, or the inability to acquire
new clients, would have a material adverse effect on the SPAR Group's cash
resources and its ongoing ability to fund operations.
As of June 30, 2001, the SPAR Group is obligated, under certain
circumstances, to pay severance compensation to its employees and other costs in
connection with the Merger (restructure charges) of approximately $2.8 million.
In addition, the Company incurred substantial cost in connection with the
transaction, including legal and investment banking fees estimated to be an
aggregate unpaid obligation as of June 30, 2001 of approximately $1.4 million.
The SPAR Group has also accrued approximately $1.9 million for expenses incurred
by PIA prior to the Merger, which have not been paid as of June 30, 2001.
Management believes the current bank credit facility is sufficient to fund
operations and working capital, including the current maturities of debt
obligations, but may not be sufficient to reduce obligations of the Merger with
PIA. The Company is currently working to secure additional long-term capital to
meet the non-operational credit needs. However, there can be no assurances that
the Company will be successful in these negotiations.
As of June 30, 2001, a total of $5.4 million of amounts due to certain
stockholders remained outstanding, which have an interest rate of 8% and are due
on demand.
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SPAR GROUP, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The SPAR Group is exposed to market risk related to the variable interest
rate on the line of credit and term note and the variable yield on its cash and
cash equivalents. The SPAR Group's accounting policies for financial instruments
and disclosures relating to financial instruments require that the SPAR Group's
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and long term debt.
The SPAR Group 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 carrying
amounts of long-term debt approximate fair value because the obligation bears
interest at a floating rate. The SPAR Group monitors the risks associated with
interest rates and financial instrument positions. The SPAR Group'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.
Currently, the SPAR Group's revenue derived from international operations is
not material and, therefore, the risk related to foreign currency exchange rates
is not material.
INVESTMENT PORTFOLIO
The SPAR Group has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments. Excess
cash is normally used to pay down the revolving line of credit.
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SPAR GROUP, INC.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No change.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Item 2(a): Not applicable
Item 2(b): Not applicable
Item 2(c): Not Applicable
Item 2(d): Use of Past Proceeds
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS.
NONE.
REPORTS ON FORM 8-K.
NONE.
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SPAR GROUP. INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2001 SPAR Group, Inc., Registrant
By: --------------------------------
Charles Cimitile
Chief Financial Officer and Secretary
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