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 third quarterly period ended September 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 November 6, 2001, there were 18,272,330 shares of Common Stock outstanding.
SPAR GROUP, INC.
Index
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 2001 and December 31, 2000............................3
Condensed Consolidated Statements of Operations
for the nine months ended September 30, 2001 and September 30, 2000.......4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and September 30, 2000...............5
Notes to Condensed Consolidated 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...............20
PART II: OTHER INFORMATION
Item 1: Legal Proceedings........................................................21
Item 2: Changes in Securities and Use of Proceeds................................21
Item 3: Defaults upon Senior Securities..........................................21
Item 4: Submission of Matters to a Vote of Security Holders......................21
Item 5: Other Information........................................................22
Item 6: Exhibits and Reports on Form 8-K.........................................22
SIGNATURES.....................................................................................23
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SPAR GROUP INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------------ ------------------
ASSETS (unaudited) (note)
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 23,340 23,207
Prepaid expenses and other current assets 1,349 880
Prepaid program costs 2,424 3,542
Deferred income taxes 1,718 1,718
------------------ ------------------
Total current assets 28,831 29,347
Property and equipment, net 3,120 3,561
Goodwill and other intangibles, net 19,962 21,485
Deferred income taxes 1,082 1,082
Other assets 223 143
------------------ ------------------
Total assets $ 53,218 $ 55,618
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,108 $ 5,849
Accrued expenses and other current liabilities 10,119 10,178
Deferred revenue 4,684 8,581
Restructuring and other charges, current 1,739 2,205
Due to certain stockholders, current 3,062 3,505
Current portion of long-term debt 380 1,211
------------------ ------------------
Total current liabilities 23,092 31,529
Line of credit & long-term liabilities, net of current portion 13,503 8,093
Long-term debt due to certain stockholders 2,059 2,160
Restructuring and other charges, long-term 751 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 - 18,272,330 as of
September 30, 2001 and December 31, 2000 182 182
Additional paid-in capital 10,127 10,127
Retained earnings 3,504 1,931
------------------ ------------------
Total stockholders' equity 13,813 12,240
------------------ ------------------
Total liabilities and stockholders' equity $ 53,218 $ 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.
Condensed Consolidated Statements of Operations
(unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- -------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------------- ----------------- ----------------- -----------------
Net revenues $ 27,379 $ 22,332 $ 78,566 $ 83,068
Cost of revenues 18,958 14,105 53,773 56,249
---------------- ----------------- ----------------- -----------------
Gross profit 8,421 8,227 24,793 26,819
Selling, general and administrative expenses 6,196 6,721 18,267 22,560
Depreciation and amortization 982 808 2,871 2,447
---------------- ----------------- ----------------- -----------------
Operating income 1,243 698 3,655 1,812
Interest expense 315 467 1,035 1,418
Other income - - - 786
---------------- ----------------- ----------------- -----------------
Income before provision for income taxes 928 231 2,620 1,180
Provision for income taxes 349 131 1,047 550
---------------- ----------------- ----------------- -----------------
Net income $ 579 $ 100 $ 1,573 $ 630
================ ================= ================= =================
Basic earnings per share $ 0.03 $ 0.01 $ 0.09 $ 0.03
================ ================= ================= =================
Basic weighted average common shares 18,272 18,176 18,272 18,165
================ ================= ================= =================
Diluted earnings per share $ 0.03 $ 0.01 $ 0.09 $ 0.03
================ ================= ================= =================
Diluted weighted average common shares 18,391 18,297 18,350 18,290
================ ================= ================= =================
See accompanying notes.
4
SPAR Group, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------------ -----------------
OPERATING ACTIVITIES
Net income $ 1,573 $ 630
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 1,649 1,242
Amortization 1,222 1,205
Gain on sale of affiliate - (790)
Changes in operating assets and liabilities:
Accounts receivable (133) 3,611
Prepaid expenses and other assets 569 (4,347)
Accounts payable, accrued expenses and other current
liabilities (2,499) (4,632)
Restructuring charges (1,311) (2,036)
Deferred revenue (3,897) 5,851
------------------ -----------------
Net cash provided by operating activities (2,827) 734
INVESTING ACTIVITIES
Purchases of property and equipment (1,208) (1,403)
Purchases of business, net of cash acquired - (62)
Sale of investment in affiliate - 1,500
------------------ -----------------
Net cash (used in) provided by investing activities (1,208) 35
FINANCING ACTIVITIES
Net proceeds from (payments on) line of credit 5,742 (869)
Net payments to shareholders (544) (145)
Proceeds from exercise of options - 29
Payments of note payable MCI - (1,045)
Net payments of other long-term debt (1,163) (813)
------------------ -----------------
Net cash provided by (used in) financing activities 4,035 (2,843)
------------------ -----------------
Net decrease in cash - (2,074)
Cash at beginning of period - 2,074
------------------ -----------------
Cash at end of period $ - $ -
================== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 1,216 $ 1,072
================== =================
NON-CASH TRANSACTIONS:
Reduction of accrued liabilities related to the purchase of
the businesses $ 300 $ -
================== =================
Increase in accrued liabilities and restructure charges
associated with reverse merger $ - $ 1,996
================== =================
SEE ACCOMPANYING NOTES.
5
SPAR Group, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
SPAR Group, Inc. ("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 consolidated 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
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries.
3. SEGMENTS
The SPAR Group manages 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 SPAR
Marketing, Inc. ("SMI") (an intermediate holding company), SPAR Marketing Force,
Inc. ("SMF"), SPAR Marketing, Inc. ("SMNEV"), SPAR/Burgoyne Retail Services,
Inc. ("SBRS") and SPAR, Inc. ("SINC") (collectively, the "SPAR Marketing
Companies"), PIA Merchandising Co., Inc., Pacific Indoor Display d/b/a Retail
Resources, Pivotal Sales Company and PIA Merchandising Ltd.("PIA Canada")
(collectively, the "PIA Companies") and the International Division consisting of
SPAR Group International, Inc. The Incentive Marketing Division consists of each
of SPAR Incentive Marketing, Inc. ("SIM")(an intermediate holding company) and
SPAR Performance Group, Inc. ("SPGI"). The Internet Division consists of
SPARinc.com, Inc.
Merchandising services generally consist of regularly scheduled services
provided at retail stores for a specific retailer or one or more manufacturers
under single or multiple-year contracts. Examples of these services are new
product launches, special seasonal or promotional merchandising, focused product
support and product recalls. Services can also include stand alone projects such
as new store and existing store resets, re-merchandising, remodels and category
implementations. 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.
6
SPAR Group, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
The Incentive Marketing Division generally consists of designing and
implementing premium incentives, managing group 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 SERVICES INCENTIVE MARKETING INTERNET TOTAL
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS THREE MONTHS ENDED
ENDED
--------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000 2001 2001 2000
--------------------------------------------------------------------------------------------------------------
Net revenues $ 19,025 $ 16,536 $ 7,376 $ 5,796 $ 978 $ 27,379 $ 22,332
Cost of revenues 11,670 9,825 6,521 4,280 767 18,958 14,105
--------------------------------------------------------------------------------------------------------------
Gross profit 7,355 6,711 855 1,516 211 8,421 8,227
SG&A 4,696 5,319 1,371 1,402 129 6,196 6,721
--------------------------------------------------------------------------------------------------------------
EBITDA $ 2,659 $ 1,392 $ (516) $ 114 $ 81 $ 2,225 $ 1,506
==============================================================================================================
Net income (loss) 1,228 432 (894) (332) 245 579 100
==============================================================================================================
Total Assets $ 37,540 $ 39,811 $ 15,538 $ 22,242 $ 140 $ 53,218 $ 62,053
==============================================================================================================
MERCHANDISING SERVICES INCENTIVE MARKETING INTERNET TOTAL
NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS NINE MONTHS ENDED
ENDED
--------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000 2001 2001 2000
--------------------------------------------------------------------------------------------------------------
Net revenues $ 50,057 $ 63,083 $ 26,257 $ 19,985 $ 2,252 $ 78,566 $ 83,068
Cost of revenues 30,277 40,029 21,612 16,220 1,884 53,773 56,249
--------------------------------------------------------------------------------------------------------------
Gross profit 19,780 23,054 4,645 3,765 368 24,793 26,819
SG&A 13,143 18,400 4,456 4,160 668 18,267 22,560
--------------------------------------------------------------------------------------------------------------
EBITDA $ 6,637 $ 4,654 $ 189 $ (395) $ (300) $ 6,526 $ 4,259
==============================================================================================================
Net income (loss) 2,528 1,709 (905) (1,079) (50) 1,573 630
==============================================================================================================
Total Assets $ 37,540 $ 39,811 $ 15,538 $ 22,242 $ 140 $ 53,218 $ 62,053
==============================================================================================================
4. RESTRUCTURING AND OTHER CHARGES
In connection with the reverse merger of the PIA Companies and related
entities with the SPAR Marketing Companies, SPGI and certain related entities in
July, 1999 (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 Marketing Companies'
and the PIA Companies' field organizations and the consolidation of
administrative functions to achieve beneficial synergies and costs savings.
7
SPAR Group, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
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 September 30, 2001 (in
thousands):
DECEMBER 31, NINE MONTHS SEPTEMBER 30,
2000 ENDED 2001
RESTRUCTURING SEPTEMBER 30, RESTRUCTURING
AND OTHER 2001 AND OTHER
CHARGES DEDUCTIONS CHARGES
-------------------------------------------------------------
Type of cost:
Employee separation $ 487 $ 242 $ 245
Equipment lease settlements 2,770 962 1,808
Office lease settlements 544 107 437
------------------------------------------------------------
$ 3,801 $ 1,311 $ 2,490
============================================================
Management believes that the remaining reserves for restructuring are
adequate to complete its plan.
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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
----------------------------------------------------------------------------
Numerator:
Net income $ 579 $ 100 $ 1,573 $ 630
============================================================================
Denominator:
Shares used in basic earnings per share
calculation 18,272 18,176 18,272 18,165
Effect of diluted securities:
Employee stock options 119 121 78 125
Warrants - - - -
Shares used in diluted earnings per share
calculations 18,391 18,297 18,350 18,290
============================================================================
Basic earnings per share $ 0.03 $ 0.01 $ 0.09 $ 0.03
============================================================================
Diluted earnings per share $ 0.03 $ 0.01 $ 0.09 $ 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.
8
SPAR Group, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
7. RECLASSIFICATION
Certain reclassifications have been made to the 2000 financial statements
to conform with the current year presentation.
8. 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. The nonamortization of
goodwill is expected to result in an increase in net income of approximately
$1.0 million ($0.05 per share based on current outstanding shares) per year for
the next twelve years. The Company will perform the first of the required
impairment tests in the first quarter of 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. 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
SPAR GROUP, INC.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO THREE MONTHS ENDED SEPTEMBER
- -------------------------------------------------------------------------------
30, 2000
- --------
NET REVENUES
- ------------
The following table sets forth net revenues by division and as a percentage
of total net revenues for the periods indicated:
Quarter Ended
------------------------------------------------------------------------------------
September 30, 2001 September 30, 2000 Increase (decr.)
------------------------------------------------------------------------------------
(amounts in millions)
Amount % Amount % %
------------ ----------- ------------ ------------ -----------------
Merchandising Services $ 19.0 69.5% $ 16.5 74.0% 15.1%
Incentive Marketing 7.4 26.9 5.8 26.0 27.3
Internet 1.0 3.6
------------ ----------- ------------ ------------
Net Revenue $ 27.4 100.0% $ 22.3 100.0% 22.6%
======= ====== ======== ======
Net revenues for the three months ended September 30, 2001, increased by
$5.1 million or 22.6% from the three months ended September 30, 2000, due to
increased performance in both the merchandising and incentive marketing segments
as well as an increase in Internet Division revenue.
Merchandising Services net revenues for the three months ended September
30, 2001, were $19.0 million, compared to $16.5 million for the three months
ended September 30, 2000. The increase in net revenues is primarily attributed
to expansion of existing business partially offset by discontinued in-store
merchandising programs previously contracted with the former PIA Companies.
Incentive Marketing net revenues for the three months ended September 30,
2001, were $7.4 million, compared to $5.8 million for the three months ended
September 30, 2000, due primarily to strong travel incentive programs. The
timing of Incentive Marketing revenue and the corresponding cost of revenues
depends upon the client placement of programs. Therefore, revenue or cost of
revenues for any given quarter may not be indicative of total revenue or cost of
revenues for the year.
11
SPAR GROUP, INC.
COST OF REVENUES
- ----------------
The following table sets forth cost of revenues by division and as a
percentage of net revenues for the periods indicated:
Quarter Ended
------------------------------------------------------------------------------------
September 30, 2001 September 30, 2000 Change
------------------------------------------------------------------------------------
(amounts in millions)
Amount % Amount % %
------------ ----------- ------------ ------------ -----------------
Merchandising Services $ 11.7 61.3% $ 9.8 59.4% 1.9%
Incentive Marketing 6.5 88.4 4.3 73.8 14.6
Internet .8 78.4
------------ ------------
Total cost of revenues $ 19.0 69.2% $ 14.1 63.2% 6.0%
======= ========
Cost of revenues for Merchandising Services consist of in-store labor
(including travel expenses) and field management. Cost of revenues for the
Company's Incentive Marketing and Internet segments consist of direct labor,
independent contractor expenses, food, beverage, entertainment and travel costs.
Cost of revenues for the three months ended September 30, 2001, were $19.0
million or 69.2% of net revenues, compared to $14.1 million or 63.2% of net
revenues for the three months ended September 30, 2000.
Merchandising Services cost of revenues as a percentage of net revenues
increased 1.9% to 61.3% for the three months ended September 30, 2001. For the
quarter ending September 30, 2000, merchandising costs were favorably impacted
by the reversal of a provision for a contingent liability totaling $500,000.
Exclusive of this release, the cost of revenues was 62.4% of total revenue for
2000. The improved cost of revenue percentage for 2001 over such adjusted cost
of revenue percentage for 2000 is attributable to reduced labor costs resulting
from continued efficiencies realized in 2001.
Incentive Marketing cost of revenues, as a percentage of net revenues,
increased 14.6% to 88.4% for the three months ended September 30, 2001, compared
to 73.8% for the three months ended September 30, 2000, primarily due to the
program mix, with higher cost programs accounting for a greater portion of sales
in 2001 than in 2000.
12
SPAR GROUP, INC.
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 resources expenses, legal expenses and accounting
expenses. The following table sets forth the operating expenses as a percentage
of total net revenues for the time periods indicated:
Quarter Ended
------------------------------------------------------------------------------------
September 30, 2001 September 30, 2000 Increase (decr.)
------------------------------------------------------------------------------------
(amounts in millions)
Amount % Amount % %
------------ ----------- ------------ ------------ -----------------
Selling, general & administrative expenses $ 6.2 22.6% $ 6.7 30.1% (7.8%)
Depreciation & amortization 1.0 3.6 .8 3.6 21.5
------------ ----------- ------------ ------------
Total Operating Expenses $ 7.2 26.2% $ 7.5 33.7% (4.7%)
========== ===== ======= =====
Selling, general and administrative expenses decreased by $0.5 million, or
7.8%, for the three months ended September 30, 2001, to $6.2 million compared to
$6.7 million for the three months ended September 30, 2000. This decrease was
primarily due to efficiencies resulting from the PIA Merger offset by
approximately $200,000 of SG&A expenses related to the Internet and
International Divisions.
Depreciation and amortization increased by $0.2 million for the three
months ended September 30, 2001, due primarily to an increase in depreciation
and amortization of customized internal software costs capitalized under SOP
98-1.
INTEREST EXPENSE
- ----------------
Interest expense decreased $0.2 million to $0.3 million for the three
months ended September 30, 2001, from $0.5 for the three months ended September
30, 2000, due to decreased debt levels, as well as decreased interest rates in
2001.
INCOME TAXES
- ------------
The income tax provision in the third quarter of 2001 represents a combined
federal and state income tax rate of 37.6% compared to 56.5% for the third
quarter of 2000.
NET INCOME
- ----------
The SPAR Group had net income of $0.6 million in the third quarter of 2001
or $0.03 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.
13
SPAR GROUP, INC.
RESULTS OF OPERATIONS
- ---------------------
NINE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO NINE MONTHS ENDED SEPTEMBER
- -----------------------------------------------------------------------------
30, 2000
- --------
NET REVENUES
The following table sets forth net revenues by division and as a percentage
of total net revenues for the periods indicated:
Nine Months Ended
------------------------------------------------------------------------------------
September 30, 2001 September 30, 2000 Increase (decr.)
------------------------------------------------------------------------------------
(amounts in millions)
Amount % Amount % %
------------ ----------- ------------ ------------ -----------------
Merchandising Services $ 50.1 63.7% $ 63.1 75.9% (20.7%)
Incentive Marketing 26.3 33.4 20.0 24.1 31.4
Internet 2.2 2.9 - - -
------------ ----------- ------------ ------------
Net Revenue $ 78.6 100.0% $ 83.1 100.0% (5.4%)
========= ====== ======== ======
Net revenues for the nine months ended September 30, 2001, decreased by
$4.5 million or 5.4% from the nine months ended September 30, 2000, due
principally to discontinued merchandising programs acquired in the PIA Merger,
offset by increases in Incentive Marketing and Internet Division revenue.
Merchandising Services net revenues for the nine months ended September 30,
2001, were $50.1 million, compared to $63.1 million in the nine months ended
September 30, 2000, a 20.7% decrease. The decrease in net revenues is primarily
attributed to discontinued in-store merchandising programs acquired in the PIA
Merger.
Incentive Marketing net revenues for the nine months ended September 30,
2001, were $26.3 million, compared to $20.0 million for the nine months ended
September 30, 2000, an increase of 31.4%. The increase in net revenues is
primarily due to an increase in project revenue, principally from new clients.
14
SPAR GROUP, INC.
COST OF REVENUES
- ----------------
The following table sets forth cost of revenues by division and as a
percentage of net revenues for the periods indicated:
Nine Months Ended
------------------------------------------------------------------------------------
September 30, 2001 September 30, 2000 Change
------------------------------------------------------------------------------------
(amounts in millions)
Amount % Amount % %
------------ ----------- ------------ ------------ -----------------
Merchandising Services $ 30.3 60.5% $ 40.0 63.5% (3.0%)
Incentive Marketing 21.6 82.3 16.2 81.2 1.1
Internet 1.9 83.6
------------ ------------
Total cost of revenues $ 53.8 68.4% $ 56.2 67.7% 0.7%
========== =========
Cost of revenues for the nine months ended September 30, 2001, were $53.8
million or 68.4% of net revenues compared to $56.2 million or 67.7% of net
revenues for the nine months ended September 30, 2000.
Merchandising Services cost of revenues as a percentage of net revenues
decreased 3.0% to 60.5% for the nine months ended September 30, 2001, compared
to 63.5% for the nine months ended September 30, 2000. This decrease is
principally attributed to reduced labor costs resulting from continued
efficiencies realized in 2001.
Incentive Marketing cost of revenues as a percentage of net revenues
increased 1.1% to 82.3% for the nine months ended September 30, 2001, compared
to 81.2% for the nine months ended September 30, 2000, primarily due to the
program mix, with higher cost programs accounting for a greater portion of
revenues in 2001.
15
SPAR GROUP, INC.
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 resources expenses, legal expenses and accounting
expenses. The following table sets forth the operating expenses as a percentage
of total net revenues for the time periods indicated:
Nine Months Ended
------------------------------------------------------------------------------------
September 30, 2001 September 30, 2000 Increase (decr.)
------------------------------------------------------------------------------------
(amounts in millions)
Amount % Amount % %
------------ ----------- ------------ ------------ -----------------
Selling, general & administrative expenses $ 18.2 23.2% $ 22.6 27.2% (19.1%)
Depreciation & amortization 2.9 3.7 2.4 2.9 17.3
------------ ----------- ------------ ------------
Total Operating Expenses $ 21.1 26.9% $ 25.0 30.1% (15.5%)
========== ====== ======= =====
Selling, general and administrative expenses decreased by $4.4 million or
19.1% in the nine months ended September 30, 2001, to $18.2 million from $22.6
million for the nine months ended September 30, 2000. This decrease was due
primarily to efficiencies resulting from the PIA Merger offset by approximately
$1.0 million of SG&A expenses related to the Internet and International
Divisions.
Depreciation and amortization increased by $0.5 million in the nine months
ended September 30, 2001, due primarily to the amortization of customized
internal software costs capitalized under SOP 98-1.
INTEREST EXPENSES
- -----------------
Interest expense decreased $0.4 million to $1.0 million for the nine months
ended September 30, 2001, from $1.4 million for the nine months ended September
30, 2000, 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 40.0% and 46.6% for the nine months ended September 30, 2001, and the
nine months ended September 30, 2000, respectively.
16
SPAR GROUP, INC.
NET INCOME
- ----------
The SPAR Group had net income of $1.6 million for the nine months ended
September 30, 2001, or $0.09 per basic and diluted share compared to net income
of $0.6 million or $0.03 per basic and diluted share for the nine months ended
September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
In the nine months ended September 30, 2001, the SPAR Group had pre-tax
income of $2.6 million and experienced negative operating cash flow of $2.8
million compared to $1.2 million of pre-tax income and $0.7 million of positive
operating cash flow for the same period in 2000.
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 $15.0 million Revolving Credit
facility and a $2.5 million term loan. The Revolving Credit facility allows the
Borrowers to borrow up to $15.0 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. Subsequent to September 30, 2001, IBJ Whitehall
proposed to extend the maturity date to February 28, 2003, subject to the
execution of definitive documents. 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 6.5% per
annum at September 30, 2001), and the Term Loan bears interest at such
"Alternate Based Rate" plus three-quarters of one percent (0.75%) (a total of
6.75% per annum at September 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). In July 2001, the Company made an additional $250,000 payment
on the Term Loan as a result of the Excess Cash Flow requirement. The facility
is secured with the assets of the Company 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
17
SPAR GROUP, INC.
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 $13.5 million
and $7.8 million at September 30, 2001, and December 31, 2000, respectively. As
of September 30, 2001, based upon the borrowing base formula, the SPAR Group had
availability of $14,000 of the $1.5 million unused revolving line of credit.
NOTES PAYABLE TO CERTAIN STOCKHOLDERS
Former principal stockholders of the SPAR Marketing Companies each made
loans to certain SPAR Marketing Companies and SPGI in the aggregate amount of
$4.3 million to facilitate the acquisition of the PIA Companies and the
acquisition of the assets of MCI Performance Group, Inc. ("MCI"). In July of
1999, in connection with the acquisition of the PIA Companies, all of the
operating companies of the SPAR Marketing Companies were converted to "C"
corporations from subchapter S corporations. At the time of conversion, these
shareholders were owed $1.9 million in unpaid distributions. The amounts
totaling $6.2 million were converted into promissory notes issued to these
certain stockholders severally by SMF, SINC and SPGI prior to the PIA Merger.
As of September 30, 2001, notes payable to certain stockholders total $5.1
million with an interest rate of 8% and are due on demand. The current Bank
agreements contain certain restrictions on the repayment of stockholder debt.
CASH AND CASH EQUIVALENTS
Net cash used by operating activities for the nine months ended September
30, 2001, was $2.8 million, compared with net cash provided of $0.7 million for
the nine months ended September 30, 2000. Cash used by operating activities in
2001 was primarily a result of decreases in restructuring charges, accounts
payable, accrued expenses and other liabilities, and deferred revenue, partially
offset by operating profits, decreases in prepaid expenses and other assets. Net
cash used in investing activities for the nine months ended September 30, 2001,
was $1.2 million, compared with net cash provided of $35,000 for the nine months
ended September 30, 2000. The net cash used in investing activities in 2001
resulted from the purchases of property and equipment.
Net cash provided by financing activities for the nine months ended
September 30, 2001, was $4.0 million, compared with net cash used by financing
activities of $2.8 million for the nine months ended September 30, 2000.
The above activity resulted in no change in cash and cash equivalents for
the nine months ended September 30, 2001, compared to a net decrease of $2.1
million for the nine months ended September 30, 2000.
18
SPAR GROUP, INC.
At September 30, 2001, the Company had positive working capital of $5.7
million as compared to negative working capital of $2.2 million at December 31,
2000. Availability under its revolving credit facility was $14,000 at September
30, 2001, compared to $4.2 million at December 31, 2000, and a current ratio of
1.25 and 0.93 as of September 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 September 30, 2001, the SPAR Group is obligated, under certain
circumstances, to pay severance compensation to its employees and other costs in
connection with the PIA Merger (restructure charges) of approximately $2.5
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 September 30, 2001, of approximately $1.4
million. The SPAR Group has also accrued approximately $1.9 million for expenses
incurred by the PIA Companies prior to the PIA Merger, which have not been paid
as of September 30, 2001. Management believes the current bank credit facilities
are sufficient to fund operations and working capital, including the current
maturities of debt obligations, but may not be sufficient to reduce obligations
of the PIA Merger.
19
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
condensed 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 condensed 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.
20
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): Not applicable.
--------------------------
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on August 2, 2001. The
meeting was held to (1) elect the Board of Directors, (2) approve the adoption
of the 2000 Stock Option Plan, (3) approve the adoption of the 2001 Employee
Stock Purchase Plan, (4) approve the adoption of the 2001 Consultant Stock
Purchase Plan, and (5) to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the year ending December 31, 2001.
The number of votes cast for each proposal are set forth below.
Proposal Number 1 - Election of the Board of Directors:
Name: For: Abstention:
- ----- ---- -----------
Robert G. Brown 17,964,240 79,379
William H. Bartels 17,965,290 78,329
Robert O. Aders 17,965,209 78,410
Jerry B. Gilbert 17,967,709 75,910
George W. Off 17,971,790 71,829
Jack W. Partridge 17,967,709 75,910
21
SPAR GROUP, INC.
Each of the nominees was elected to the Board of Directors.
Proposal Number 2 - Approval of the 2000 Stock Option Plan:
Yes No Abstain Broker, Non-Votes
- ----------------------------------------------------------------------------
16,055,601 126,167 98,946 1,762,905
Proposal Number 3 - Approval of the 2001 Employee Stock Purchase Plan:
Yes No Abstain Broker, Non-Votes
- ----------------------------------------------------------------------------
16,145,201 35,567 99,946 1,762,905
Proposal Number 4 - Approval of the 2001 Consultant Stock Purchase Plan:
Yes No Abstain Broker, Non-Votes
- ----------------------------------------------------------------------------
16,140,181 41,547 98,986 1,762,905
Proposal Number 5 - Ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors for the year ending December 31, 2000:
For: Against: Abstention:
- -------------------------------------------------------
18,040,002 3,557 60
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.20 2001 Employee Stock Purchase Plan (incorporated by reference to
the Company's Definitive Proxy Statement on Form 14A as filed
with the SEC on July 13, 2001).
10.21 2001 Consultant Stock Purchase Plan (incorporated by reference
to the Company's S-8 with respect thereto as filed with the SEC
on November 8, 2001).
REPORTS ON FORM 8-K.
None.
22
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: November 14, 2001 SPAR Group, Inc., Registrant
-----------------
By:/s/ Charles Cimitile
-------------------------------
Charles Cimitile
Chief Financial Officer and Secretary
23