UNITED STATES
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, 2003
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 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 [ ] No
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act): [ ] Yes [ X ] No
On September 30, 2003, there were 18,858,972 shares of Common Stock outstanding.
SPAR Group, Inc.
Index
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets
as of September 30, 2003 and December 31, 2002.....................3
Consolidated Statements of Operations
for the three months and nine months ended
September 30, 2003 and September 30, 2002..........................4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2003
and September 30, 2002.............................................5
Notes to Consolidated Financial Statements.........................6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................12
Item 3: Quantitative and Qualitative Disclosures About Market Risk........24
Item 4: Controls and Procedures...........................................24
PART II: OTHER INFORMATION
Item 1: Legal Proceedings.................................................25
Item 2: Changes in Securities and Use of Proceeds.........................25
Item 3: Defaults upon Senior Securities...................................25
Item 4: Submission of Matters to a Vote of Security Holders...............25
Item 5: Other Information.................................................26
Item 6: Exhibits and Reports on Form 8-K..................................26
SIGNATURES....................................................................27
Certifications................................................................28
2
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SPAR Group, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------------------- --------------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 15,002 16,458
Prepaid expenses and other current assets 1,055 783
Deferred income taxes 707 903
---------------------- --------------------
Total current assets 16,764 18,144
Property and equipment, net 2,166 1,972
Goodwill 8,157 7,858
Deferred income taxes 648 705
Other assets 664 121
---------------------- --------------------
Total assets $ 28,399 $ 28,800
====================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,219 $ 422
Accrued expenses and other current liabilities 2,700 5,140
Accrued expenses, due to affiliates 1,628 958
Restructuring charges, current 772 1,354
Line of credit, short-term 4,673 -
Due to certain stockholders - 3,951
---------------------- --------------------
Total current liabilities 10,992 11,825
Line of credit, long-term - 148
Restructuring charges, long-term - 235
-
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 -
18,858,972 - September 30, 2003
18,824,527 - December 31, 2002 189 188
Treasury stock (710) (30)
Additional paid-in capital 10,872 10,919
Retained earnings 7,056 5,515
---------------------- --------------------
Total stockholders' equity 17,407 16,592
---------------------- --------------------
Total liabilities and stockholders' equity $ 28,399 $ 28,800
====================== ====================
Note: The Balance Sheet at December 31, 2002, has been derived from the
audited financial statements at that date but does not include any of
the information and footnotes required by accounting principles
generally accepted in the United States 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 NINE MONTHS ENDED
--------------------------------------- -----------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
--------------------- ----------------- ------------------- ---------------------
Net revenues $ 16,615 $ 17,775 $ 52,704 $ 51,363
Cost of revenues 11,380 10,760 33,777 31,102
--------------------- ----------------- ------------------- ---------------------
Gross profit 5,235 7,015 18,927 20,261
Selling, general and administrative expenses 5,334 4,571 15,044 14,212
Depreciation and amortization 385 467 1,162 1,345
--------------------- ----------------- ------------------- ---------------------
Operating (loss) income (484) 1,977 2,721 4,704
Interest expense 69 144 209 231
Other expense - 32 28 166
--------------------- ----------------- ------------------- ---------------------
(Loss) income before provision for income taxes (553) 1,801 2,484 4,307
(Benefit) provision for income taxes (208) 588 943 1,544
--------------------- ----------------- ------------------- ---------------------
Net (loss) income $ (345) $ 1,213 $ 1,541 $ 2,763
===================== ================= =================== =====================
Net (loss) income per common share:
Basic $ ( 0.02) $ 0.06 $ 0.08 $ 0.15
Diluted $ ( 0.02) $ 0.06 $ 0.08 $ 0.14
--------------------- ----------------- ------------------- ---------------------
Weighted average common shares - basic 18,859 18,696 18,853 18,700
===================== ================= =================== =====================
Weighted average common shares - diluted 18,859 19,103 19,508 19,118
===================== ================= =================== =====================
See accompanying notes.
4
SPAR Group, Inc.
Consolidated Statements of Cash Flows
(unaudited) (in thousands)
NINE MONTHS ENDED
--------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
--------------------------------------
OPERATING ACTIVITIES
Net income $ 1,541 $ 2,763
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,162 1,345
Changes in operating assets and liabilities:
Accounts receivable 1,456 2,774
Prepaid expenses, other current assets and other assets (816) (239)
Accounts payable, accrued expenses and other current
liabilities (269) 1,741
Deferred taxes 254 -
Restructuring charges (817) (468)
Discontinued operations, net - (902)
--------------------------------------
Net cash provided by operating activities 2,511 7,014
INVESTING ACTIVITIES
Purchases of property and equipment (1,356) (359)
Advances under SPG revolver (703) (212)
Acquisition of businesses (299) -
Other long-term liabilities - 1,021
--------------------------------------
Net cash (used in) provided by investing activities (2,358) 450
FINANCING ACTIVITIES
Net borrowings (payments) on line of credit 4,524 (7,227)
Net proceeds from employee stock purchase plan and
exercised options 198 83
Payments of other long-term debt - (57)
Payments to certain stockholders (3,951) (252)
Purchase of treasury stock (924) (11)
--------------------------------------
Net cash used in financing activities (153) (7,464)
--------------------------------------
Net change in cash - -
--------------------------------------
Cash at beginning and end of period $ - $ -
======================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 174 $ 619
Stock options exercised by reduction of stockholder debt - 202
See accompanying notes.
5
SPAR Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements of SPAR
Group, Inc., and its subsidiaries (collectively, the "Company" or the "SPAR
Group") have been prepared in accordance with accounting principles generally
accepted in the United States 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 accounting
principles generally accepted in the United States 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 in the financial statements. However, these interim financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the Company as contained in Company's Annual
Report on Form 10-K for the year ended December 31, 2002, as filed with the
Securities Exchange Commission on March 31, 2003 (the "Company's Annual Report
on Form 10-K"). The results of operations for the interim periods are not
necessarily indicative of the operating results for the entire year.
2. STOCK OPTIONS
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation as amended by SFAS 148. No compensation
cost has been recognized for the stock option plans under APB 25. Had
compensation cost for the Company's option plans been determined based on the
fair value at the grant date consistent with the provisions of SFAS No. 123, the
Company's net (loss) income and pro forma net (loss) income per share would have
been reduced to the adjusted amounts indicated below (in thousands, except per
share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---------------------------------------------------------------------------------
Net (loss) income, as reported $ (345) $ 1,213 $ 1,541 $ 2,763
Stock based employee compensation
expense under the fair market
value method 274 437 $ 1,188 $ 1,408
---------------------------------------------------------------------------------
Pro forma net (loss) income (619) 776 $ 353 $ 1,355
Basic net (loss) income per
share, as reported $ (0.02) $ 0.06 $ 0.08 $ 0.15
Diluted net (loss) income per
share, as reported $ (0.02) $ 0.06 $ 0.08 $ 0.14
Basic and diluted net (loss)
income per share, pro forma $ (0.03) $ 0.04 $ 0.02 $ 0.07
6
SPAR Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
3. RESTRUCTURING CHARGES
In 1999, the Company's Board of Directors approved a plan to
restructure the operations of the PIA Companies (as defined below - see
Merchandising Services Division, p. 13). Restructuring costs were composed of
committed costs required to integrate the field organizations of the SPAR
Companies and the PIA Companies and the consolidation of their administrative
functions to achieve beneficial synergies and costs savings.
The following table displays a roll forward of the liabilities for
restructuring charges from December 31, 2002 to September 30, 2003 (in
thousands):
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, 2003 SEPTEMBER 30,
2002 DEDUCTIONS 2003
-------------------------------------------------------------------------------
Restructuring charges:
Equipment and office lease
settlements $ 1,589 $ 817 $ 772
Management believes that the remaining reserves for restructuring are
adequate to complete its plan.
4. 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 ENDED NINE MONTHS ENDED
---------------------------------- ------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---------------- ----------------- ----------------- ------------------
Numerator:
Net (loss) income $ (345) $ 1,213 $ 1,541 $ 2,763
Denominator:
Shares used in basic earnings
per share calculation 18,859 18,696 18,853 18,700
Effect of diluted securities:
Employee stock options - 407 655 418
---------------- ----------------- ----------------- ------------------
Shares used in diluted
earnings per share calculation 18,859 19,103 19,508 19,118
================ ================= ================= ==================
Basic and diluted earnings per common share:
Net (loss) income - basic $ (0.02) $ 0.06 $ 0.08 $ 0.15
================ ================= ================= ==================
- diluted $ (0.02) $ 0.06 $ 0.08 $ 0.14
================ ================= ================= ==================
For the three months ended September 30, 2003, the effect of stock
options is not included because their effect would be anti-dilutive.
7
SPAR Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
5. LINE OF CREDIT
In January 2003, the Company and Whitehall Business Credit Corporation
("Whitehall"), as successor to the business of IBJ Whitehall Business Credit
Corporation, entered into the Third Amended and Restated Revolving Credit and
Security Agreement and related documents (the "New Credit Facility"). The New
Credit Facility provides the Company with a $15.0 million revolving credit
facility (the "New Revolving Facility") that matures on January 23, 2006. The
New Revolving Facility allows 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). The New Revolving Facility bears interest at
Whitehall's "Alternate Base Rate" or LIBOR plus two and one-half percent and is
secured by all the assets of the Company and its subsidiaries. The New Revolving
Facility interest rate was Whitehall's "Alternate Base Rate" of 4.0% per annum
at September 30, 2003.
The New Credit Facility replaces a previous 1999 agreement, as amended,
between the Company and Whitehall (the "Old Credit Facility") that was scheduled
to mature on February 28, 2003. The Old Credit Facility provided for a $15.0
million revolving credit facility (the "Old Revolving Facility"), as well as a
$2.5 million term loan. The Old Revolving Facility allowed the Company to borrow
up to $15.0 million based upon a borrowing base formula as defined in the old
agreement (principally 85% of "eligible" accounts receivable). The term loan
under the Old Credit Facility amortized in equal monthly installments of $83,334
and was repaid in full as of December 31, 2001.
The New Credit Facility contains certain financial covenants (amending,
restating and replacing those contained in the Old Credit Facility) that must be
met on a consolidated basis, among which are a minimum "Net Worth", a "Fixed
Charge Coverage Ratio", a capital expenditure limitation and a minimum EBITDA,
as such terms are defined in the respective agreement. The Company was in
compliance with such financial covenants at September 30, 2003, except for the
"Fixed Charge Coverage Ratio" for which the Company has secured a waiver from
Whitehall. The Company's projections indicate that it may be in violation of
certain covenants at December 31, 2003 and accordingly outstanding loans under
the New Credit Facility have been classified as a current liability until such
time as the Company and Whitehall revise such covenants. The Company expects to
revise the aforementioned covenants before December 31, 2003.
The balances outstanding on the revolving lines of credit were $4.7
million under the New Revolving Facility at September 30, 2003, and $148,000
under the Old Revolving Facility at December 31, 2002. In addition, the Company
had outstanding Letters of Credit of $737,337 at September 30, 2003 and $842,418
at December 31, 2002. As of September 30, 2003, based upon the borrowing base
formula, the Company had availability of $4.1 million of the $10.3 million
unused revolving line of credit under the New Revolving Facility.
6. RELATED-PARTY TRANSACTIONS
As of April 2003, all previously outstanding amounts due certain
stockholders under certain notes were paid in full.
The SPAR Group, Inc. is affiliated through common ownership with SPAR
Marketing Services, Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI") and
SPAR Infotech, Inc. ("SIT"). SMS and SMSI (through SMS) provided approximately
93.1% of the Company's field representatives (through its independent contractor
field force) and substantially all of the Company's field management services.
Under the terms of the field service agreement, SMS provides the services of
approximately 6,600 field representatives and SMSI provides approximately 90
8
SPAR Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
full-time national, regional and district managers to the Company as they may
request from time to time, for which the Company has agreed to pay SMS and SMSI
(through SMS) for all of its costs of providing those services plus 4.0%.
SIT provided Internet and other computer programming services to the
Company. Under the terms of the programming agreement between SPAR Marketing
Force, Inc. ("SMF") and SIT effective as of October 1, 1998, SIT continues to
provide programming services to SMF as SMF may request from time to time, for
which SMF has agreed to pay SIT competitive hourly wage rates and to reimburse
SIT's out-of-pocket expenses.
The following transactions occurred between the Company and the above
affiliates (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------------------------------------------------------------------
Services provided by affiliates:
SMS: Independent contractor
field services $ 7,978 $ 6,171 $ 22,932 $ 17,262
========================================================================
SMSI: Field management services $ 1,722 $ 1,911 $ 5,135 $ 5,509
========================================================================
SIT: Internet and computer
programming services $ 359 $ 400 $ 1,215 $ 1,270
========================================================================
Services provided to affiliates:
SMSI Field management services $ 61 $ 73 $ 169 $ 284
========================================================================
Balance of accrued expense due to affiliates: SEPTEMBER 30, DECEMBER 31,
2003 2002
------------------------------------
SMS (SPAR Marketing Services, Inc.) $ 1,628 $ 958
====================================
9
SPAR Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
7. STOCKHOLDER EQUITY
The Company initiated a share repurchase program in 2002, which allowed
for the repurchase of up to 100,000 shares. In 2003, the Board of Directors
authorized the repurchase of an additional 122,000 shares increasing the total
to 222,000 shares. The Company repurchased 9,783 shares in the quarter ended
December 31, 2002 for $30,076 and 211,315 shares during the nine-month period
ended September 30, 2003 for $923,714, for a total repurchase of 221,098 shares
for $953,790. The Company used 72,848 of such shares to issue stock for the
exercise of stock options. As of September 30, 2003, the Company has 148,520
shares of treasury stock at a cost of $709,920.
8. TRANSACTIONS WITH SPAR PERFORMANCE GROUP, INC. ("SPGI")
In connection with the sale of SPAR Performance Group, Inc. ("SPGI") on
June 30, 2002, the Company sold all of the stock of its subsidiary, SPGI. In
connection with the sale, SPGI issued two Term Loans totaling $6.0 million,
which due to their speculative nature have been fully reserved.
The Company also agreed to provide a discretionary revolving line of
credit to SPGI not to exceed $2.0 million (the "SPGI Revolver") through
September 30, 2005. The SPGI Revolver is secured by a pledge of all the assets
of SPGI and is guaranteed by its parent, Performance Holdings, Inc. The SPGI
Revolver provides for advances in excess of the borrowing base through September
30, 2003. As of October 1, 2003, the SPGI Revolver will include a borrowing base
calculation (principally 85% of "eligible" accounts receivable). In September
2003, SPGI requested and the Company agreed to provide advances of up to $1.0
million in excess of the borrowing base through September 30, 2005.
Under the SPGI Revolver terms, SPGI is required to deposit all of its
cash to the Company's lockbox. At September 30, 2003, there was approximately
$700,000 borrowed under the SPGI Revolver of which approximately $200,000 was
secured by eligible accounts receivable.
Due to the speculative nature of the SPGI Revolver, the Company has a
reserve of approximately $800,000 against the $2.0 million SPGI Revolver
commitment as of September 30, 2003. This reserve, net of advances on the
revolver, is included in other current liabilities.
The Company continues to assess whether SPGI is a variable interest
entity under FASB Interpretation No. 46 "Consolidation of Variable Interest
Entities" and if so, whether or not the Company may be required to consolidate
SPGI in its financial statements.
9. CONTINGENT LIABILITIES
In May 2001, a subsidiary of SPAR Group International, Inc. and Paltac,
Inc. ("Paltac"), a large Japanese distributor, entered into a joint venture to
create a Japanese company, SPAR FM. SPAR FM entered into a 300 million Yen
Revolving Credit Agreement with a Japanese bank. The bank required Paltac
guarantee the outstanding balance on the revolving credit facility. As part of
the joint venture agreement, should Paltac be required to make a payment on its
guarantee to the bank, then the Company has
10
SPAR Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
agreed to remit to Paltac 50% of any such payment up to a maximum of 150 million
Yen or approximately $1.2 million. As of September 30, 2003, SPAR FM has
borrowed 100 million Yen under its Revolving Credit Agreement. Therefore, the
Company's current exposure to Paltac respecting outstanding loans to SPAR FM as
of September 30, 2003, would be 50 million Yen or approximately $400,000. Losses
of the joint venture are recognized in the Company's financial statements under
the equity method up to the amount of its investment including guarantees. The
Company believes that it is not the primary beneficiary of the joint venture as
defined under FASB Interpretation No. 46 and thus will not have to consolidate
it. However, the Company will continue to assess the effects of FIN 46 in its
fourth quarter of 2003.
10. ACQUISITIONS AND JOINT VENTURES
In February 2003, the Company purchased the business and certain assets
of All Store Marketing Services, Inc. ("ASMS"), a Texas corporation specializing
in in-store product demonstrations. In connection with the acquisition of ASMS,
the Company entered into an employment agreement with the President of ASMS for
a period of two years. In June 2003, the Company purchased the business and
certain assets of Impulse Marketing Solutions ("IMS"), a Canadian company
specializing in providing merchandising services in Canada. In connection with
the purchase of IMS, the Company entered into a consulting agreement with a
corporation that furnishes the services of the former President and a second
senior officer of IMS, which agreement expires on December 31, 2006. In 2003,
the effect of these acquisitions are not considered material to the Company's
financial statements or results of operations.
In July 2003, the Company entered into a joint venture agreement with
CEO Produksiyon Tanitin ve Arastirma Hizmetleri Ltd Sti based in Istanbul to
provide retail merchandising services throughout Turkey. The start-up joint
venture limited liability company will operate under the English name of SPAR
Turkey Ltd. and is 51% owned by the Company, thus requiring consolidation in the
Company's financial statements.
11. RECLASSIFICATION
Certain amounts in the 2002 financial statements have been reclassified
to conform to the 2003 presentation.
11
SPAR Group, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
Statements contained in this Quarterly Report on Form 10-Q of SPAR
Group, Inc. (the "Company"), include "forward-looking statements" within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"),
including (without limitation) Section 27A thereof, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including (without limitation)
Section 21E thereof. These forward-looking statements include, in particular and
without limitation, the statements contained in the discussions under the
heading "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, based upon 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 and any other cautionary statements contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002, as filed with
the Securities and Exchange Commission on March 31, 2003 (the "Company's 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
the Company's Annual Report on Form 10-K and in this Quarterly Report. 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.
OVERVIEW
- --------
The Company is a supplier of in-store merchandising and marketing
services both throughout the United States and internationally. The Company's
operations are divided into two divisions: the Merchandising Services Division
and the International Division. The Merchandising Services Division provides
merchandising services, database marketing, teleservices and marketing research
to manufacturers and retailers with product distribution primarily in mass
merchandisers, drug chains and grocery stores in the United States. The
International Division established in July 2000, currently provides
merchandising services in Japan, Canada, and most recently, through a start-up
joint venture in Turkey and continues to focus on expanding the Company's
merchandising services business throughout the world.
12
SPAR Group, Inc.
MERCHANDISING SERVICES DIVISION
The Company provides nationwide retail merchandising and marketing
services to home entertainment, general merchandise, health and beauty care,
consumer goods and food products companies in mass merchandisers, drug chains
and retail grocery stores throughout 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 multiple
manufacturers primarily under single or multi-year contracts and arrangements.
Services also include stand-alone large-scale implementations such as new store
openings, new product launches, special seasonal or promotional merchandising,
focused product support and product recalls. These services may include sales
enhancing activities, such as, ensuring client products authorized for
distribution are in stock and on the shelf, adding new products that are
approved for distribution but not presently on the shelf, setting category
shelves in accordance with approved store schematics, ensuring shelf tags are in
place, checking for the overall salability of client products and setting new
and promotional items, 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's Merchandising Services Division consists of: (1) 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"); and (2) PIA Merchandising, Co., Inc., Pacific Indoor Display d/b/a
Retail Resources, Pivotal Sales Company and PIA Merchandising Ltd.
(collectively, "PIA" or the "PIA Companies"). The SPAR Marketing Companies are
the original predecessor of the current Company and were founded in 1967. The
PIA Companies, first organized in 1943, are also a predecessor of the Company
and a supplier of in-store merchandising services throughout the United States,
and were deemed "acquired" by the SPAR Marketing Companies for accounting
purposes pursuant to the Merger on July 8, 1999 (see Merger and Restructuring in
the Company's Annual Report on Form 10-K).
INTERNATIONAL DIVISION
In July 2000, the Company established its International Division, SPAR
Group International, Inc. ("SGI"), to focus on expanding its merchandising
services business worldwide. In May 2001, the Company entered into a joint
venture with a large Japanese distributor and together established SPAR FM to
provide merchandising services in Japan. In June 2003, the Company expanded its
merchandising services into Canada through the creation of its indirect
subsidiary, SPAR Canada Company ("SCC") and SCC's purchase of the business and
certain assets of Impulse Marketing Services Inc. In July 2003, the Company
entered into a joint agreement with CEO Produksiyon Tanitin ve Arastirma
Hizmetleri Ltd Sti based in Istanbul to provide retail merchandising services
throughout Turkey. The start-up joint venture will operate under the name SPAR
Turkey Ltd. and will be 51% owned by the Company.
13
SPAR Group, Inc.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Company's Annual Report on
Form 10-K in 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. Two critical accounting policies are revenue recognition and
allowance for doubtful accounts:
REVENUE RECOGNITION
The Company's services are provided under service fee and per unit fee
contracts or arrangements. Revenues under service fee contracts or
arrangements are recognized when the service is performed. The
Company's per unit fee contracts or arrangements provide for revenue to
be earned based on the retail sales of client's products to consumers.
The Company recognizes per unit fee revenue in the period such amounts
become determinable.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company continually monitors the collectability of its accounts
receivable based upon current customer credit information available.
Utilizing this information, the Company has established an allowance
for doubtful accounts of $444,000 and $301,000 at September 30, 2003
and December 31, 2002, respectively. Historically, the Company's
estimates have not differed materially from the actual results.
14
SPAR Group, Inc.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
The following table sets forth selected financial data and data as a
percentage of net revenues for the periods indicated (in thousands, except
percent data):
Three Months Ended
---------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------ ------------------
% Incr.
Amount % Amount % (Decr.)
------ - ------ - -------
Net revenues $ 16,615 100.0% $ 17,775 100.0% (6.5)%
Cost of revenues 11,380 68.5 10,760 60.5 5.8
Selling, general, and administrative expense 5,334 32.1 4,571 25.7 16.7
Depreciation and amortization 385 2.3 467 2.6 (17.5)
Interest expense 69 0.4 144 0.8 (52.0)
Other expense - - 32 0.2 (100.0)
---------------- --------------- ----------------- ----------------
(Loss) income before provision for income taxes (553) (3.3) 1,801 10.2 (130.7)
Income tax (benefit) provision (208) (1.3) 588 3.3 (135.4)
---------------- --------------- ----------------- ----------------
Net (loss) income $ (345) (2.0)% $ 1,213 6.9% (128.5)%
================ =============== ================= ================
Net revenues from operations for the three months ended September 30,
2003, were $16.6 million, compared to $17.8 million for the three months ended
September 30, 2002, a decrease of 6.5%. The decrease in net revenues from
decreased per unit fee revenue resulting from lower retail sales of customer
products, partially resulting from the discontinued business of one client,
offset by increases in service fee revenue.
One customer accounted for 27.7% and 28.2% of the Company's net
revenues for the three months ended September 30, 2003 and 2002, respectively.
This customer also accounted for approximately 32.6% and 47.0% of accounts
receivable at September 30, 2003, and 2002, respectively.
15
SPAR Group, Inc.
A second customer accounted for 8.2% and 9.6% of the Company's net
revenues for the three months ended September 30, 2003 and 2002, respectively.
This customer also accounted for approximately 2.8% and 2.6% of accounts
receivable at September 30, 2003 and 2002, respectively.
Approximately 13.8% and 16.4% of the Company's net revenues for the
three months ended September 30, 2003, and 2002, respectively, resulted from
merchandising services performed at Kmart for various customers. Kmart filed for
protection under the U.S. Bankruptcy Code in January of 2002 and emerged from
bankruptcy in May of 2003. During its time in bankruptcy, Kmart closed a number
of stores in the United States. While the Company's customers and the resultant
contractual relationships are with various manufacturers and not this retailer,
a significant reduction of this retailer's stores or cessation of this
retailer's business would negatively impact the Company. As of August 31, 2003,
one customer discontinued its merchandising programs with the Company. Some but
not all of these programs were performed at Kmart. This customer accounted for
16.4% and 20.4% of the Kmart business for the three-month periods ended
September 30, 2003 and 2002, respectively.
Cost of revenues consists of field in-store labor and field management
wages, related benefits, travel and other direct labor-related expenses. Cost of
revenues as a percentage of net revenues increased 8.0% to 68.5% for the three
months ended September 30, 2003, compared to 60.5% for the three months ended
September 30, 2002. The increase 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. There
was also additional field in-store labor cost of approximately $300,000
associated with per unit fee revenue business in the three months ended
September 30, 2003.
Approximately 76.5% and 75.2% of the Company's costs of revenue in the
three months ended September 30, 2003, and 2002, respectively, resulted from
field in-store independent contractor and field management services purchased
from the Company's affiliates, SPAR Marketing Services, Inc., and SPAR
Management Services, Inc., respectively.
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 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 (in millions, except percent data):
16
SPAR Group, Inc.
Three Months Ended
------------------------------------------------------------------------
Incr.
September 30, 2003 September 30, 2002 (Decr.)
--------------------------- -------------------------- -----------
Amount % Amount % %
------ - ------ - -
Selling, general and administrative $ 5.3 32.1% $ 4.6 25.7% 16.7%
Depreciation and amortization 0.4 2.3 0.5 2.6 (17.5)
The increase of $0.7 million or 16.7% in selling, general and
administrative (SG&A) expense is due primarily to the expense of the Canadian
operation acquired in June 2003 with no corresponding SG&A expense in the prior
year, as well as an increase in bad debt expense. The Company purchased
approximately $400,000 of information technology from its affiliate SPAR
Infotech, Inc. for both the three months ended September 30, 2003 and 2002,
respectively.
OTHER EXPENSE
Other expense represents the Company's share in the Japanese joint
venture loss totaling $32,266 for the three months ended September 30, 2002.
INCOME TAXES
The income tax provision represents a combined federal and state income
tax rate of approximately 38% and 33% for the three months ended September 30,
2003, and September 30, 2002, respectively. For the three months ended September
30, 2002, the tax rate was favorably impacted by the resolution of tax exposures
accrued in prior years.
NET (LOSS) INCOME
The Company had a net loss of $345,000 for the three months ended
September 30, 2003, or ($0.02) per diluted share compared to net income of $1.2
million or $0.06 per diluted share for the corresponding period last year.
17
SPAR Group, Inc.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
- ------------------------------------------------------------------
SEPTEMBER 30, 2002
- ------------------
The following table sets forth selected financial data and data as a
percentage of net revenues for the periods indicated (in thousands, except
percent data):
Nine Months Ended
---------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------ ------------------
% Incr.
Amount % Amount % (Decr.)
------ - ------ - -------
Net revenues $ 52,704 100.0% $ 51,363 100.0% 2.6%
Cost of revenues 33,777 64.1 31,102 60.6 8.6
Selling, general, and administrative expense 15,044 28.5 14,212 27.7 5.9
Depreciation and amortization 1,162 2.2 1,345 2.6 (13.6)
Interest expense 209 0.4 231 0.4 (9.6)
Other expense 28 0.1 166 0.3 (83.1)
---------------- --------------- ----------------- -----------------
Income before provision for income taxes 2,484 4.7 4,307 8.4 (42.3)
Income tax provision 943 1.8 1,544 3.0 (38.9)
---------------- --------------- ----------------- -----------------
Net income $ 1,541 2.9% $ 2,763 5.4% (44.3)%
================ =============== ================= =================
Net revenues from operations for the nine months ended September 30,
2003, were $52.7 million, compared to $51.4 million for the nine months ended
September 30, 2002, an increase of 2.6%. The increase in net revenues resulted
from increased service fee revenue from a new client partially offset by
decreases in per unit fee revenue resulting from lower retail sales of customer
products, partially resulting from the discontinued business of one client.
One customer accounted for 31.1% and 28.5% of the Company's net
revenues for the nine months ended September 30, 2003 and 2002, respectively.
This customer also accounted for approximately 32.6% and 47.0% of accounts
receivable at September 30, 2003, and 2002, respectively.
A second customer accounted for 9.3% and 10.9% of the Company's net
revenues for the nine months ended September 30, 2003 and 2002, respectively.
This customer also accounted for approximately 2.8% and 2.6% of accounts
receivable at September 30, 2003, and 2002, respectively.
18
SPAR Group, Inc.
Approximately 15.1% and 19.7% of the Company's net revenues for the
nine months ended September 30, 2003, and 2002, respectively, resulted from
merchandising services performed at Kmart for various customers. Kmart filed for
protection under the U.S. Bankruptcy Code in January of 2002 and emerged from
bankruptcy in May of 2003. During its time in bankruptcy, Kmart closed a number
of stores in the United States. While the Company's customers and the resultant
contractual relationships are with various manufacturers and not this retailer,
a significant reduction of this retailer's stores or cessation of this
retailer's business would negatively impact the Company. As of August 31, 2003,
one customer discontinued its merchandising programs with the Company. Some but
not all of these programs were performed at Kmart. This customer accounted for
14.3% and 18.4% of the Kmart business for nine months ending September 30, 2003
and 2002 respectively.
Cost of revenues consists of field in-store labor and field management
wages, related benefits, travel and other direct labor-related expenses. Cost of
revenues as a percentage of net revenues increased 3.5% to 64.1% for the nine
months ended September 30, 2003, compared to 60.6% for the nine months ended
September 30, 2002. The increase 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.
Approximately 80.2% and 73.3% of the Company's costs of revenue in the
nine months ended September 30, 2003, and 2002, respectively, resulted from
field in-store independent contractor and field management services purchased
from the Company's affiliates, SPAR Marketing Services, Inc. ("SMS"), and SPAR
Management Services, Inc. ("SMSI"), respectively.
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 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 (in millions, except percent data):
19
SPAR Group, Inc.
Nine Months Ended
-----------------------------------------------------------------------
Incr.
September 30, 2003 September 30, 2002 (Decr.)
--------------------------- -------------------------- ----------
Amount % Amount % %
------ - ------ - -
Selling, general and administrative $ 15.0 28.5% $ 14.2 27.7% 5.9%
Depreciation and amortization 1.2 2.2 1.3 2.6 (13.6)
The increase of $832,000 or 5.9% in selling, general and administrative
(SG&A) expense is due primarily to the expense of the Canadian operation
acquired in June 2003 with no corresponding SG&A expense in the prior year, as
well as an increase in bad debt expense. The Company purchased $1.2 million and
$1.3 million of information technology from its affiliate SPAR Infotech, Inc.
for the nine months ended September 30, 2003 and 2002, respectively.
OTHER EXPENSE
Other expense represents primarily the Company's share in the Japanese
joint venture loss totaling $37,806 and $166,298 for the nine months ended
September 30, 2003, and September 30, 2002, respectively.
INCOME TAXES
The income tax provision represents a combined federal and state income
tax rate of approximately 38% and 36% for the nine months ended September 30,
2003, and September 30, 2002, respectively. For the nine months ended September
30, 2002, the tax rate was favorably impacted by the resolution of tax exposures
accrued in prior years.
NET INCOME
The Company had net income of $1.5 million for the nine months ended
September 30, 2003, or $0.08 per diluted share compared to net income of $2.8
million or $0.14 per diluted share for the corresponding period last year.
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended September 30, 2003, the Company had net income
of $1.5 million. Net cash provided by operating activities for the nine months
ended September 30, 2003, was $2.5 million compared with net cash provided by
operations of $7.0 million for the nine months ended September 30, 2002. The
decrease in cash provided by operating activities from 2002 to 2003 of $4.5
million was a direct result of a decrease in net income, less collection on
accounts receivable, increased payments for prepaid expenses, accrued
liabilities and restructuring charges.
20
SPAR Group, Inc.
Net cash used in investing activities for the nine months ended
September 30, 2003, was $2.4 million, compared with net cash provided by
investing activities of $450,000 for the nine months ended September 30, 2002.
The net cash used in investing activities in 2003 resulted from the acquisition
of businesses, advances on the SPG revolver, purchases of property and equipment
and the capitalization of software development costs.
Net cash used in financing activities for the nine months ended
September 30, 2003, was $153,000, compared with net cash used in financing
activities of $7.5 million for the nine months ended September 30, 2002. The
decrease of net cash used in financing activities was primarily a result of
borrowings on the line of credit, offset by repayments of stockholder loans and
the purchase of treasury stock.
The above activity resulted in no change in cash and cash equivalents
for the nine months ended September 30, 2003, as the Company utilizes excess
cash to pay down its line of credit.
At September 30, 2003, the Company had positive working capital of $5.8
million as compared to positive working capital of $6.3 million at December 31,
2002. The Company's current ratio was 1.53 at September 30, 2003 and December
31, 2002, respectively.
In January 2003, the Company and Whitehall Business Credit Corporation
("Whitehall"), as successor to the business of IBJ Whitehall Business Credit
Corporation, entered into the Third Amended and Restated Revolving Credit and
Security Agreement and related documents (the "New Credit Facility"). The New
Credit Facility provides the Company with a $15.0 million revolving credit
facility (the "New Revolving Facility") that matures on January 23, 2006. The
New Revolving Facility allows 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). The New Revolving Facility bears interest at
Whitehall's "Alternate Base Rate" or LIBOR plus two and one-half percent and is
secured by all the assets of the Company and its subsidiaries. The New Revolving
Facility interest rate was Whitehall's "Alternate Base Rate" of 4.0% per annum
at September 30, 2003.
The New Credit Facility replaces a previous 1999 agreement, as amended,
between the Company and Whitehall (the "Old Credit Facility") that was scheduled
to mature on February 28, 2003. The Old Credit Facility provided for a $15.0
million revolving credit facility (the "Old Revolving Facility"), as well as, a
$2.5 million term loan. The Old Revolving Facility allowed the Company to borrow
up to $15.0 million based upon a borrowing base formula as defined in the old
agreement (principally 85% of "eligible" accounts receivable). The term loan
under the Old Credit Facility amortized in equal monthly installments of $83,334
and was repaid in full as of December 31, 2001.
The New Credit Facility contains certain financial covenants (amending,
restating and replacing those contained in the Old Credit Facility) that must be
met on a consolidated basis, among which are a minimum "Net Worth", a "Fixed
Charge Coverage Ratio", a capital expenditure limitation and a minimum EBITDA,
as such terms are defined in the respective agreement. The Company was in
compliance with such financial covenants at September 30, 2003, except for the
"Fixed Charge Coverage Ratio", for which the Company has secured a waiver from
Whitehall. The Company's projections indicate that it may be in violation of
certain covenants at December 31, 2003 and accordingly outstanding loans under
the New Credit Facility have been classified as a current liability until such
time as the Company and Whitehall revise such covenants. The Company expects to
revise the aforementioned covenants before December 31, 2003.
21
SPAR Group, Inc.
The balances outstanding on the revolving lines of credit were $4.7
million under the New Revolving Facility at September 30, 2003, and $148,000
under the Old Revolving Facility at December 31, 2002. In addition, the Company
had outstanding Letters of Credit of $737,337 at September 30, 2003 and $842,418
at December 31, 2002, respectively. As of September 30, 2003, based upon the
borrowing base formula, the SPAR Group had availability of $4.1 million of the
$10.3 million unused revolving line of credit under the New Revolving Facility.
As of April 2003, all previously outstanding amounts due certain
stockholders under certain notes were paid in full.
Management believes that based upon the Company's current working
capital position and the existing credit facilities, funding 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 reduction in business from such clients, or the inability to acquire
new clients, would have a material adverse effect on the Company's cash
resources.
In connection with the sale of SPAR Performance Group, Inc. ("SPGI") on
June 30, 2002, as disclosed in the Company's Annual Report on Form 10-K in Note
1 to the Financial Statements, the Company sold all of the stock of its
subsidiary, SPGI. In connection with the sale, SPGI issued two Term Loans
totaling $6.0 million, which due to their speculative nature have been fully
reserved. The Company also agreed to provide a discretionary revolving line of
credit to SPGI not to exceed $2.0 million (the "SPGI Revolver") through
September 30, 2005. The SPGI Revolver is secured by a pledge of all the assets
of SPGI and is guaranteed by its parent, Performance Holdings, Inc. The SPGI
Revolver provides for advances in excess of the borrowing base through September
30, 2003. As of October 1, 2003, the SPGI Revolver will include a borrowing base
calculation (principally 85% of "eligible" accounts receivable). In September
2003, SPGI requested and the Company agreed to provide advances of up to $1.0
million in excess of the borrowing base. Under the SPGI Revolver terms, SPGI is
required to deposit all of its cash to the Company's lockbox. At September 30,
2003, there was approximately $700,000 borrowed under the SPGI Revolver of which
approximately $200,000 was secured by eligible accounts receivable.
Due to the speculative nature of the SPGI Revolver, the Company has
established a reserve for collection of approximately $800,000 against the $2.0
million SPGI Revolver commitment. This reserve is included in other current
liabilities.
22
SPAR Group, Inc.
CERTAIN CONTRACTUAL OBLIGATIONS
The following table contains a summary of certain of the Company's
contractual obligations by category as of September 30, 2003 (in thousands):
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
year years
-------------------------------------------------------------------
New Credit Facility $4,673 $4,673 $ - $ - $ -
Operating Lease Obligations 2,432 946 1,313 173 -
Total $7,105 $5,619 $1,313 $173 $ -
In addition to the above table, the Company had agreed to provide a
discretionary line of credit to SPGI not to exceed $2.0 million through
September 30, 2005. At September 30, 2003, the Company had $737,337 in
outstanding Letters of Credit.
In May 2001, a subsidiary of SPAR Group International, Inc. and Paltac,
Inc. ("Paltac"), a large Japanese distributor, entered into a joint venture to
create a Japanese company, SPAR FM. SPAR FM entered into a 300 million Yen
Revolving Credit Agreement with a Japanese bank. The bank required Paltac
guarantee the outstanding balance on the revolving credit facility. As part of
the joint venture agreement, should Paltac be required to make a payment on its
guarantee to the bank, then the Company has agreed to remit to Paltac 50% of any
such payment up to a maximum of 150 million Yen or approximately $1.2 million.
As of September 30, 2003, SPAR FM has borrowed 100 million Yen under its
Revolving Credit Agreement. Therefore, the Company's current exposure to Paltac
respecting outstanding loans to SPAR FM at September 30, 2003 would be 50
million Yen or approximately $400,000.
23
SPAR Group, Inc.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to the variable interest
rate on the line of credit. 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 long-term debt. 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
carrying amount of the line of credit approximates fair value because the
obligation bears interest at a floating rate. 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.
Currently, the Company's revenue derived from international operations
is not material and, therefore, the risk related to foreign currency exchange
rates is not material.
The Company 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.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of September 30, 2003, the Company's Chief Executive Officer, Robert
Brown, and Chief Financial Officer, Charles Cimitile, have carried out an
evaluation of the effectiveness of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon this evaluation,
these officers believe that the Company's disclosure controls and procedures are
effective to provide reasonable assurance of the timely disclosure to them of
material information related to the Company that is required to be included in
its publicly filed reports or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. For a more complete
description of their evaluation and conclusions, see Exhibits 31.1 and 31.2
hereto.
CHANGES IN INTERNAL CONTROLS
There was no change during the fiscal quarter ended September 30, 2003,
in the Company's internal controls over financial reporting that has materially
affected, or would be reasonably likely to materially affect, the Company's
internal controls over financial reporting.
24
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
Item 3(a) Defaults under Indebtedness: None.
Item 3(b) Defaults under Preferred Stock: Not Applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on August 7, 2003.
The meeting was held (1) to elect the Board of Directors and (2) to
ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 2003.
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 17,341,170 335
William H. Bartels 17,341,170 335
Robert O. Aders 17,341,170 335
Jerry B. Gilbert 17,341,170 335
George W. Off 17,341,170 335
Jack W. Partridge 17,341,170 335
Lorrence T. Kellar 17,341,170 335
Each of the nominees was elected to the Board of Directors.
25
SPAR Group, Inc.
Proposal Number 2 - Ratification of the appointment of Ernst & Young
LLP as the Company's independent auditors for the year ending December
31, 2003:
For: Against: Abstention:
----------------------------------------------------------------
17,321,518 35 19,952
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS.
31.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, and filed herewith.
31.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, and filed herewith.
32.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
32.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
REPORTS ON FORM 8-K.
On August 12, 2003, the Company filed a Current Report on Form 8-K
relating to Item 7, Financial Statements, Pro Forma Financial Information
and Exhibits and Item 12, Results of Operations and Financial Condition,
reporting the issuance of a press release relating to the Company's
financial results for the second quarter ended June 30, 2003.
26
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 13, 2003 SPAR Group, Inc., Registrant
By: /s/ Charles Cimitile
--------------------------------
Charles Cimitile
Chief Financial Officer and duly
authorized signatory
27
Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert G. Brown, certify that:
1. I have reviewed this quarterly report of SPAR Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; and
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures; and
c) Presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 13, 2003 /s/ Robert G. Brown
------------------------------------------------
Robert G. Brown
Chairman, President and Chief Executive Officer
28
Exhibit 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Charles Cimitile, certify that:
1. I have reviewed this quarterly report of SPAR Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; and
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures; and
c) Presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 13, 2003 /s/ Charles Cimitile
------------------------------------
Charles Cimitile
Chief Financial Officer
29
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 2003 (the "Report"), by SPAR Group, Inc. (the
"Registrant"), the undersigned hereby certifies that, to the best of his
knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, as applicable; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Registrant.
/s/ Robert G. Brown
-----------------------------------------------
Robert G. Brown
Chairman, President and Chief Executive Officer
November 13, 2003
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN
PROVIDED TO SPAR GROUP, INC. AND WILL BE RETAINED BY SPAR GROUP, INC., AND
FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
30
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 2003 (the "Report"), by SPAR Group, Inc. (the
"Registrant"), the undersigned hereby certifies that, to the best of his
knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, as applicable; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Registrant.
/s/ Charles Cimitile
--------------------------------------
Charles Cimitile
Chief Financial Officer
November 13, 2003
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN
PROVIDED TO SPAR GROUP, INC. AND WILL BE RETAINED BY SPAR GROUP, INC., AND
FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
31
