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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the second quarterly period ended June 30, 2002
Commission file number: 027824
SPAR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 330684451
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) 3324100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: [ X ] Yes
On August 7, 2002, there were 18,601,997 shares of Common Stock outstanding.
SPAR GROUP, INC.
Index
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 2002 and December 31, 2001........................3
Condensed Consolidated Statements of Operations for
the six months ended June 30, 2002 and June 30, 2001.............4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2002 and
June 30, 2001....................................................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......19
PART II: OTHER INFORMATION
Item 1: Legal Proceedings...............................................20
Item 2: Changes in Securities and Use of Proceeds.......................20
Item 3: Defaults upon Senior Securities.................................20
Item 4: Submission of Matters to a Vote of Security Holders.............20
Item 5: Other Information...............................................20
Item 6: Exhibits and Reports on Form 8-K................................20
SIGNATURES....................................................................22
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SPAR GROUP, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
JUNE 30, DECEMBER 31,
2002 2001
--------------- ---------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net 21,084 21,144
Prepaid expenses and other current assets 446 440
Deferred income taxes 3,241 3,241
------- -------
Total current assets 24,771 24,825
Property and equipment, net 1,926 2,644
Goodwill and other intangibles, net 8,357 8,357
Deferred income taxes 389 389
Other assets 374 110
Net assets from discontinued operations -- 4,830
------- -------
Total assets $35,817 $41,155
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 747 $ 440
Accrued expenses and other current liabilities 7,013 5,868
Restructuring and other charges, current 1,426 1,597
Due to certain stockholders 2,455 2,655
Current portion of long-term debt -- 57
Net liabilities from discontinued operations -- 5,732
------- -------
Total current liabilities 11,641 16,349
Line of credit and long-term liabilities, net of current
portion 9,100 11,287
Long-term debt due to certain stockholders 2,000 2,000
Restructure and other charges, long-term 578 585
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 - 18,600,628 - June 30,
2002 and
18,585,615 - December 31, 2001 186 186
Additional paid-in capital 10,544 10,531
Retained earnings 1,768 217
------- -------
Total stockholders' equity 12,498 10,934
------- -------
Total liabilities and stockholders' equity $35,817 $41,155
======= =======
Note: The Balance Sheet at December 31, 2001 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.
Condensed Consolidated Statements of Operations
(unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
--------------------- ----------------------------------------------------------
Net revenues $17,542 $ 16,091 $33,588 $ 31,032
Cost of revenues 10,591 9,860 20,342 18,608
------- -------- ------- --------
Gross profit 6,951 6,231 13,246 12,424
Selling, general and administrative expenses 4,675 4,210 9,642 8,986
Depreciation and amortization 460 680 877 1,310
------- -------- ------- --------
Operating income 1,816 1,341 2,727 2,128
Interest expense 38 172 86 326
Other expense 52 -- 134 0
------- -------- ------- --------
Income before provision for income taxes 1,726 1,169 2,507 1,802
Provision for income taxes 657 466 956 732
------- -------- ------- --------
Income from continuing operations 1,069 703 1,551 1,070
Loss from discontinued operations, net -- (384) -- (74)
------- -------- ------- --------
Net income $ 1,069 $ 319 $ 1,551 $ 996
======= ======== ======= ========
Basic/diluted net income per common share:
Income from continuing operations $ 0.06 $ 0.04 $ 0.08 $ 0.06
Loss from discontinued operations, net 0.00 (0.02) 0.00 (0.01)
------- -------- ------- --------
Net Income $ 0.06 $ 0.02 $ 0.08 $ 0.05
======= ======== ======= ========
Weighted average common shares - basic 18,593 18,272 18,592 18,272
======= ======== ======= ========
Weighted average common shares - diluted 19,021 18,336 19,021 18,329
======= ======== ======= ========
See accompanying notes
4
SPAR GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited) (In thousands)
SIX MONTHS ENDED
--------------------------------------
JUNE 30, JUNE 30,
2002 2001
----------------- -----------------
OPERATING ACTIVITIES
Net income $ 1,551 $ 996
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation 878 1,073
Amortization -- 815
Changes in operating assets and liabilities:
Accounts receivable 60 3,968
Prepaid expenses and other current assets and prepaid
program costs (6) 920
Other assets (264) (80)
Accounts payable, accrued expenses and other current
liabilities 1,452 (1,711)
Restructuring charges (178) (1,010)
Deferred revenue -- (3,742)
Discontinued operations (902) --
------- -------
Net cash provided by operating activities 2,591 1,229
INVESTING ACTIVITIES
Purchases of property and equipment (160) (1,100)
------- -------
Net cash used in investing activities (160) (1,100)
FINANCING ACTIVITIES
Net (payments of) borrowings on line of credit (2,187) 779
Net proceeds from employee stock purchase plan 13 --
Net payments of other long-term debt (57) (606)
Net payments to certain shareholders (200) (302)
------- -------
Net cash used in financing activities (2,431) (129)
Net change in cash -- --
Cash at beginning of period -- --
------- -------
Cash at end of period $ -- $ --
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 319 $ 997
======= =======
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. , 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 Form 10-K for the
year ended December 31, 2001, as filed with the Securities Exchange Commission
on April 1, 2002. The results of operations for the interim periods are not
necessarily indicative of the operating results for the entire year.
2. SALE OF SPAR PERFORMANCE GROUP, INC.
On June 30, 2002, SPAR Incentive Marketing, Inc. ("SIM"), a
wholly-owned subsidiary of the Company, entered into a Stock Purchase and Sale
Agreement with Performance Holdings, Inc. ("PHI"), a Delaware corporation
headquartered in Carrollton, Texas. SIM sold all of the stock of its subsidiary
SPAR Performance Group, Inc. ("SPG") to PHI for $6.0 million. As a condition of
the sale, PHI issued and contributed 1,000,000 shares of its common stock to
Performance Holdings, Inc. Employee Stock Ownership Plan which became the only
shareholder of PHI.
The $6.0 million sales price was evidenced by two Term Loans, an Initial
Term Loan totaling $2.5 million and an Additional Term Loan totaling $3.5
million (collectively the "Term Loans"). The Term Loans are guaranteed by SPG
and secured by pledges of all the assets of PHI and SPG. The Term Loans bear
interest at a rate of 12% per annum through December 31, 2003. On January 1,
2004 and on January 1 each year thereafter, the interest rate is adjusted to
equal the higher of the median or mean of the High Yield Junk Bond interest rate
as reported in the Wall Street Journal (or similar publication or service if the
Wall Street Journal no longer reports such rate) on the last business day in the
immediately preceding December. The Initial Term Loan is required to be repaid
in quarterly installments that increase over the term of the loan, commencing
March 31, 2003 with a balloon payment required at maturity on June 30, 2007. In
addition to the preceding payments of the Initial Term Loan, PHI is required to
make annual mandatory prepayments of the Term Loans on February 15th of each
year, commencing on February 15, 2004 equal to:
6
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (continued)
o 40% of the amount of Adjusted Cash Flow (as defined in the
Revolver, which is defined below) for the immediately preceding
fiscal year ended December 31; and
o 35% of the amount of excess targeted Adjusted Cash Flow (as
defined in the Revolver) for the immediately preceding fiscal
year ended December 31.
These payments will be applied first to accrued and unpaid interest on
the Term Loans and Revolver (as defined below), then to the Additional Term Loan
until repaid, and then to the Initial Term Loan.
Because collection of the notes depends on the future operations of
PHI, the $6.0 million notes were fully reserved pending collection.
In addition to the Term Loans, SIM agreed to provide a discretionary
revolving line of credit to SPG not to exceed $2.0 million (the "Revolver"). The
Revolver is secured by a pledge of all the assets of SPG and is guaranteed by
PHI. The Revolver provides for advances in excess of the borrowing base through
September 30, 2003. Through September 30, 2003, the Revolver bears interest at
the higher of the Term Loans interest rate or the prime commercial lending rate
as announced in the Wall Street Journal plus 4.0% per annum. As of October 1,
2003, the Revolver will include a borrowing base calculation (principally 85% of
eligible accounts receivable). Prior to September 1, 2003, SPG may request that
SIM provide advances of up to $1,000,000 in excess of the borrowing base. If
advances are limited to the borrowing base on and after October 1, 2003, the
interest rate will be reduced to the higher of the Term Loans interest rate less
4.0% per annum or the prime commercial lending rate as announced in the Wall
Street Journal plus 4.0% per annum. If SPG requests that advances be allowed in
excess of the borrowing base, the interest rate will remain unchanged. On June
30, 2002, there was approximately $1.2 million outstanding under the Revolver.
Due to the speculative nature of the loan SIM has established a reserve for
collection of approximately $1.0 million at June 30, 2002. The net loan of
approximately $0.2 million is included in Other Assets.
7
SPAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (continued)
3. RESTRUCTURING AND OTHER CHARGES
In connection with the PIA Merger, the Company's Board of Directors
approved a plan to restructure the operations of the PIA Companies.
Restructuring costs are composed of committed costs required to integrate the
SPAR Companies' and the PIA Companies' field organizations and the consolidation
of administrative functions to achieve beneficial synergies and costs savings.
The Company 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, 2001 to June 30, 2002 (in
thousands):
SIX MONTHS ENDED
DECEMBER 31, 2001 JUNE 30, 2002 JUNE 30, 2002
RESTRUCTURING AND DEDUCTIONS/ RESTRUCTURING
OTHER CHARGES (ADDITIONS) AND OTHER CHARGES
--------------------------------------------------------------
Restructuring Costs:
Equipment lease settlements $ 1,762 $ 338 $1,424
Office lease settlements 420 -- 420
--------------------------------------------------------------
Total restructuring costs $ 2,182 $ 338 $1,844
Other charges -- (160) 160
--------------------------------------------------------------
Total Restructuring & Other Charges $ 2,182 $ 178 $2,004
==============================================================
Management believes that the remaining reserves for restructuring are
adequate to complete its plan.
8
SPAR GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
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 SIX MONTHS ENDED
------------------------------------- ------------------------------------
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------------------------------- ------------------------------------
Numerator:
Actual net income from continuing
operations $ 1,069 $ 703 $ 1,551 $ 1,070
Actual income from operations of
discontinued division, net -- (384) (74)
-----------------------------------------------------------------------------
Actual net income $ 1,069 $ 319 $ 1,551 $ 996
=============================================================================
Denominator:
Shares used in basic earnings per share
calculation 18,593 18,272 18,592 18,272
Effect of diluted securities:
Employee stock options 428 64 429 57
-----------------------------------------------------------------------------
Shares used in diluted earnings per share
calculation 19,021 18,336 19,021 18,329
=============================================================================
Actual basic and diluted earnings per
common share:
Income from continuing operations $ 0.06 $ 0.04 $ 0.08 $ 0.06
Income from operations of discontinued
division, net -- (0.02) -- (0.01)
-----------------------------------------------------------------------------
Net Income $ 0.06 $ 0.02 $ 0.08 $ 0.05
=============================================================================
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
Company's plans and strategies under the headings "Management's Discussion and
Analysis of Financial Condition and Results of Operations". 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. Certain, but not all,
factors that could cause actual results to differ materially from the
forward-looking statements made in this Quarterly Report on Form 10-Q are set
forth in this Quarterly Report on Form 10-Q. All forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified by the cautionary statements contained in this Quarterly Report on
Form 10-Q or on the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, as previously filed with the Security Exchange Commission on
April 1, 2002.
The Company 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 is a supplier of in-store merchandising and marketing
services throughout the United States, Canada, and Japan. The Company also
provides database marketing, teleservices, marketing research, and
Internet-based software. The Company's operations are divided into three
divisions: the Merchandising Services Division, the Technology Division and the
International Division.
MERCHANDISING SERVICES DIVISION
The Company's Merchandising Services Division consists of (1) SPAR
Marketing, Inc., a Delaware corporation ("SMI") (an intermediate holding
company), SPAR Marketing Force, Inc. ("SMF"), SPAR Marketing, Inc., a Nevada
corporation ("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").
Merchandising services generally consist of special projects or
regularly scheduled routed services provided at stores for a specific retailer
or multiple manufacturers primarily under single or multi-year contracts.
Services also include stand-alone large-scale implementations. These services
may include sales
10
SPAR GROUP, INC.
enhancing activities such as ensuring that client products authorized for
distribution are in stock and on the shelf, adding new products that are
approved for distribution but not presently on the shelf, setting category
shelves in accordance with approved store schematics, ensuring shelf tags are in
place, checking for the overall salability of client products and selling new
and promotional items. Specific in-store services can be initiated by retailers
and manufacturers, such as new product launches, special seasonal or promotional
merchandising, focused product support and product recalls. The Company also
provides database marketing, teleservices and research services.
TECHNOLOGY DIVISION
The Company has developed and is utilizing several Internet-based
software products. In addition, the Company has developed and, in the past, sold
internet-based software through its other divisions. The Technology Division,
SPAR Technology Group, Inc., was established to market these applications to
businesses with multiple locations and large workforces or numerous distributors
desiring to improve day-to-day efficiency and overall productivity.
INTERNATIONAL DIVISION
The Company believes there is a significant market for its
merchandising services throughout the world. The domestic merchandising services
business has been developed utilizing Internet-based technology that can be
modified to accommodate foreign markets. The International Division, SPAR Group
International, Inc., was established to cultivate foreign markets, modify the
necessary systems and implement the Company's merchandising services business
model worldwide with an initial focus on Japan and the Pacific Rim region.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's critical accounting policies, including the assumptions,
judgments and estimations, are disclosed in the form 10-K for the year ended
December 31, 2001, as filed with the Securities Exchange Commission on April 2,
2002. Two of the more significant areas of estimation are unbilled receivables
and the accounts receivable allowance for bad debt. Historically, the Company's
estimates on such items have not differed materially from the actual results.
11
SPAR GROUP, INC.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
- -----------------------------------------------------------------------------
The following table sets forth selected financial data and data as a
percentage of net revenues for the periods indicated.
Three Months Ended
------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
------------- -------------
(amounts in thousands) Incr.
Amount % Amount % (Decr.)
------ - ------ - -------
Net Revenues $17,542 100.0% $16,091 100.0% 9.0%
Cost of revenues 10,591 60.4% 9,860 61.3% 7.4%
Selling, general, and administrative expense 4,675 26.6% 4,210 26.2% 11.0%
Depreciation and amortization 460 2.6% 680 4.2% (32.3)%
Interest expense 38 0.2% 172 1.0% (77.6)%
Other expense 52 0.3% -- 0.0%
-------------------------------------------------------
Income before provision for income taxes 1,726 9.9% 1,169 7.3% 47.6%
Provision for income taxes 657 3.7% 466 2.9% 41.0%
-------------------------------------------------------
Income from continuing operations 1,069 6.2% 703 4.4% 52.1%
Loss from discontinued operations, net -- (384)
------- ------
Net income $ 1,069 $ 319
======= =======
Net revenues from continuing operations for the three months ended June
30, 2002, were $17.5 million, compared to $16.1 million for the three months
ended June 30, 2001, a 9.0% increase. The increase of 9.0% in net revenues is
primarily attributed to increased business in mass merchandiser and drug store
chains.
12
SPAR GROUP, INC.
One customer accounted for 29.1% and 32.3% of the Company's net
revenues for the three months ended June 30, 2002, and 2001, respectively. This
customer also accounted for approximately 38.1% and 15.1% of accounts receivable
at June 30, 2002, and 2001, respectively.
Approximately 19.9% and 24.6% of the Company's net revenues for the
three months ended June 30, 2002, and 2001, respectively, resulted from
merchandising services performed for others at the stores of one retailer that
recently filed for protection under the U.S. Bankruptcy Code. While the
Company's customers and the resultant contractual relationships are with the
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.
Cost of revenues consists of in-store labor and field management wages,
related benefits, travel and other direct labor-related expenses, of which
approximately $8.4 million or 79.2% and $4.3 million or 43.4% were purchased
from the Company's affiliates, SPAR Marketing Services, Inc. and SPAR Management
Services, Inc. in the three months ended June 30, 2002, and 2001, respectively.
Cost of revenues as a percentage of net revenues decreased 0.9% to 60.4% for the
three months ended June 30, 2002, compared to 61.3% for the three months ended
June 30, 2001. This decrease is principally attributable to cost improvements.
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 resources expenses, legal and accounting expenses.
The following table sets forth the operating expenses as a percentage of net
revenues for the time periods indicated:
Three Months Ended
---------------------------------------------------------------------
Incr.
June 30, 2002 June 30, 2001 (Decr.)
----------------------- ------------------------- ----------
Amount % Amount % %
------ - ------ - -
(amounts in millions)
Selling, general and administrative $ 4.7 26.6% $ 4.2 26.2% 11.0%
Depreciation and amortization 0.5 2.6 0.7 4.2 (32.3)
------- ----- ------ -----
Total Operating Expenses $ 5.2 29.2% $ 4.9 30.4% 5.0%
======= ===== ====== =====
Selling, general and administrative expenses increased by $0.5 million,
or 11.0%, for the three months ended June 30, 2002, to $4.7 million compared to
$4.2 million for the three months ended June 30, 2001 due primarily to increased
spending on information technology. The Company purchased $0.4 million of
information technology from its affiliate SPAR Infotech, Inc. for the three
months ended June 30, 2002.
13
SPAR GROUP, INC.
Depreciation and amortization decreased by $0.2 million for the three
months ended June 30, 2002, due primarily to the change in accounting rules for
goodwill amortization adopted by the Company effective January 1, 2002.
INTEREST EXPENSE
Interest expense decreased $0.1 million for the three months ended June
30, 2002, due primarily to decreased interest rates in 2002.
OTHER EXPENSE
The Company recognized a loss of approximately $52,000 for the three
months ended June 30, 2002 for its share of the Japan joint venture loss.
INCOME TAXES
The income tax provision for the three months ended June 30, 2002
represents a combined federal and state income tax rate of 38% compared to 40%
for the three months ended June 30, 2001.
NET INCOME
The Company had net income from continuing operations of $1.1 million
for the three months ended June 30, 2002 or $0.06 per basic and diluted share
compared to income from continuing operations of $0.7 million or $0.04 per basic
and diluted share for the corresponding period last year. For the three months
ending June 30, 2001, the Company had net income of $0.3 million or $0.02 per
basic and diluted share after reporting losses of $0.4 million or $0.02 per
basic and diluted share from discontinued operations.
14
SPAR GROUP, INC.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
- -------------------------------------------------------------------------
The following table sets forth selected financial data and data as a
percentage of net revenues for the periods indicated.
Six Months Ended
--------------------------------------------------------------------
June 30, 2002 June 30, 2001
------------- -------------
(amounts in thousands) Incr.
Amount % Amount % (Decr.)
------ - ------ - -------
Net Revenues $33,588 100.0% $31,032 100.0% 8.2%
Cost of Revenues 20,342 60.6% 18,608 60.0% 9.3%
Selling, general and administrative expense 9,642 28.7% 8,986 28.9% 7.3%
Depreciation and amortization 877 2.6% 1,310 4.2% (33.1)%
Interest expense 86 0.3% 326 1.1% (73.6)%
Other Expense 134 0.4% -- 0.0%
----------------------------------------------
Income before provision for income taxes 2,507 7.4% 1,802 5.8% 39.1%
Provision for income taxes 956 2.8% 732 2.4% 30.6%
----------------------------------------------
Income from continuing operations 1,551 4.6% 1,070 3.4% 45.0%
Loss from discontinued operations, net -- (74)
------- ------
Net Income $ 1,551 $ 996
======= ======
Net revenues for the six months ended June 30, 2002, were $33.6
million, compared to $31.0 million for the six months ended June 30, 2001, an
8.2% increase. The increase of 8.2% in net revenues is primarily attributed to
increased business in mass merchandiser and drug store chains.
One customer accounted for 28.6% and 26.4% of the Company's net
revenues for the six months ended June 30, 2002, and 2001, respectively. This
customer also accounted for approximately 38.1% and 15.1% of accounts receivable
at June 30, 2002, and 2001, respectively.
15
SPAR GROUP, INC.
Approximately 19.5% and 23.4% of the Company's net revenues for the six
months ended June 30, 2002, and 2001, respectively, resulted from merchandising
services performed for others at the stores of one retailer that recently filed
for protection under the U.S. Bankruptcy Code. While the Company's customers and
the resultant contractual relationships are with the 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.
Cost of revenues from continuing operations consists of in-store labor
and field management wages, related benefits, travel and other direct
labor-related expenses, of which approximately $14.7 million or 72.2% and $7.7
million or 41.6% were purchased from the Company's affiliates, SPAR Marketing
Services, Inc. and SPAR Management Services, Inc. in the six months ended June
30, 2002, and 2001, respectively. Cost of revenues as a percentage of net
revenues increased 0.6% to 60.6% for the six months ended June 30, 2002,
compared to 60.0% for the six months ended June 30, 2001. This increase is
principally attributable to the mix of business.
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 resources expenses, legal and accounting expenses.
The following table sets forth the operating expenses as a percentage of net
revenues for the time periods indicated:
Six Months Ended
------------------------------------------------------------------------
Incr.
June 30, 2002 June 30, 2001 (Decr.)
-------------------- ---------------------- --------------
Amount % Amount % %
------ - ------ - -
(amounts in millions)
Selling, general and administrative $ 9.6 28.7% $ 9.0 28.9% 7.3%
Depreciation and amortization 0.9 2.6 1.3 4.2 (33.1)
------- ---- ------- ---- ---
Total Operating Expenses $ 10.5 31.3% $ 10.3 33.2% 2.2%
======= ==== ======= ==== ===
Selling, general and administrative expenses increased by $0.6 million,
or 7.3%, for the six months ended June 30, 2002, to $9.6 million compared to
$9.0 million for the six months ended June 30, 2001 due primarily to increased
spending on information technology. The Company purchased $0.8 million in
information technology from its affiliate SPAR Infotech, Inc.
Depreciation and amortization decreased by $0.4 million for the six
months ended June 30, 2002, due primarily to the change in accounting rules for
goodwill amortization adopted by the Company effective January 1, 2002.
16
SPAR GROUP, INC.
INTEREST EXPENSE
Interest expense decreased $0.2 million for the six months ended June
30, 2002, due to decreased interest rates in 2002.
OTHER EXPENSE
The Company recognized a loss of approximately $134,000 for the six
months ended June 30, 2002 for its share of the Japan joint venture loss.
INCOME TAXES
The income tax provision for the six months ended June 30, 2002
represents a combined federal and state income tax rate of 38% compared to 41.3%
for the six months ended June 30, 2001.
NET INCOME
The Company had net income of $1.6 million for the six months ended
June 30, 2002 or $0.08 per basic and diluted share compared to net income of
$1.0 million or $0.05 per basic and diluted share for the six months ended June
30, 2001. For the six months ended June 30, 2001, net income included a $0.1
million loss or $0.01 per basic and diluted share from discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2002, the Company had a net income of
$1.6 million. Net cash provided by operating activities for the six months ended
June 30, 2002, was $2.6 million, compared with net cash provided by operations
of $1.2 million for the six months ended June 30, 2001. Cash provided by
operating activities in 2002 was primarily a result of net operating profits and
decreases in accounts receivable and increases in accounts payable, accrued
expenses and other current liabilities, partially offset by decreases in
restructuring charges and decrease in net liabilities from discontinued
operations.
Net cash used in investing activities for the six months ended June 30,
2002, was $0.2 million, compared with net cash used of $1.1 million for the six
months ended June 30, 2001. The net cash used in investing activities in 2002
and 2001 was primarily due to purchases of property and equipment.
Net cash used by financing activities for the six months ended June 30,
2002, was $2.4 million, compared with net cash provided by financing activities
of $0.1 million for the six months ended June 30, 2001. The net cash used by
financing activities in 2002 was primarily a result of repayments of the line of
credit, shareholder and other long-term debt.
The above activity resulted in no change in cash and cash equivalents
for the six months ended June 30, 2002.
17
SPAR GROUP, INC.
At June 30, 2002, the Company had positive working capital of $13.1
million as compared to positive working capital of $8.5 million at June 30,
2001. The increase in working capital is due primarily to a decrease in net
liabilities from discontinued operations offset by increases in accounts payable
and accrued expenses and other current liabilities. The Company's current ratio
was 2.13 and 1.52 at June 30, 2002, and 2001, respectively.
In 1999, IBJ Whitehall Business Credit Corporation ("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 provides 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 were scheduled to mature on September
21, 2002. As of March 2, 2002, IBJ Whitehall extended the maturity date to July
31, 2003. The revolving loans bear interest at IBJ Whitehall's "Alternate Base
Rate" plus one-half of one percent (0.50%) (a total of 5.25% per annum at June
30, 2002). The facility is secured with all 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 a ten consecutive trading
day period exceeds $15.00 per share. This option expires September 22, 2002.
The Bank Loan Agreement contains certain financial covenants that must
be met by the Borrowers on a consolidated basis, among which are a minimum "Net
Worth", a "Fixed Charge Coverage Ratio", a minimum twelve month EBITDA
requirement, and a minimum EBITDA, as such terms are defined in the Bank Loan
Agreement. The Company was in compliance with such financial covenants on June
30, 2002.
The balances outstanding on the revolving line of credit were $9.1
million and $11.3 million at June 30, 2002, and December 31, 2001, respectively.
As of June 30, 2002, based upon the borrowing base formula, the SPAR Group had
availability of $5.1 million of the $5.9 million unused revolving line of
credit.
As of June 30, 2002, the Company is obligated, under certain
circumstances, to pay costs in connection with the Merger (restructure charges)
of approximately $1.8 million. In addition, the Company incurred substantial
cost in connection with the transaction, including legal, accounting and
investment banking fees estimated to be an aggregate unpaid obligation as of
June 30, 2002, of approximately $1.1 million. The Company has also accrued
approximately $1.0 million for expenses incurred by PIA prior to the Merger,
which have not been paid as of June 30, 2002. Management believes the current
bank credit facilities are sufficient to fund operations and working capital,
including the current maturities of debt obligations.
18
SPAR GROUP, INC.
As of June 30, 2002, a total of $4.5 million in loans to certain
principal stockholders of the Company remain outstanding, which bear an interest
rate of 8% and are due on demand. During 2002, $0.2 million of such indebtedness
has been repaid by the Company. The current Bank Loan Agreement contains certain
restrictions on the repayment of stockholder debt and accordingly $2.0 million
at both June 30, 2002 and December 31, 2001 is classified as long-term.
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 and its ongoing ability to fund operations.
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 amounts of long-term debt approximate 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.
INVESTMENT PORTFOLIO
The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments, as
available cash is generally utilized to pay down the outstanding line of credit.
19
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
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS.
10.16 Amendment No. 6 to Second Amended and Restated Revolving Credit,
Term Loan and Security Agreement by and among the SPAR Borrowers and
the Lender, effective as of June 30, 2002, and filed herewith.
10.17 Stock Purchase and Sale Agreement by and among Performance
Holdings, Inc. and SPAR Incentive Marketing, Inc., effective as of
June 30, 2002, and filed herewith.
10.18 Revolving Credit, Guaranty and Security Agreement by and among
SPAR Performance Group, Inc., Performance Holdings, Inc. and SPAR
Incentive Marketing, Inc., effective as of June 30, 2002, and filed
herewith.
20
10.19 Term Loan, Guaranty and Security Agreement by and among
Performance Holdings, Inc., SPAR Performance Group, Inc. and SPAR
Incentive Marketing, Inc., effective as of June 30, 2002, and filed
herewith.
99.1 Certification of the CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and filed herewith.
99.2 Certification of the CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and filed herewith.
REPORTS ON FORM 8-K.
NONE.
21
SPAR GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2002 SPAR Group, Inc., Registrant
---------------
By: /s/ Charles Cimitile
------------------------------
Charles Cimitile
Chief Financial Officer
and Secretary
22
EXHIBIT INDEX
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EXHIBITS.
10.16 Amendment No. 6 to Second Amended and Restated Revolving
Credit, Term Loan and Security Agreement by and among the SPAR
Borrowers and the Lender, effective as of June 30, 2002, and
filed herewith.
10.17 Stock Purchase and Sale Agreement by and among Performance
Holdings, Inc. and SPAR Incentive Marketing, Inc., effective as
of June 30, 2002, and filed herewith.
10.18 Revolving Credit, Guaranty and Security Agreement by and among
SPAR Performance Group, Inc., Performance Holdings, Inc. and
SPAR Incentive Marketing, Inc., effective as of June 30, 2002,
and filed herewith.
10.19 Term Loan, Guaranty and Security Agreement by and among
Performance Holdings, Inc., SPAR Performance Group, Inc. and
SPAR Incentive Marketing, Inc., effective as of June 30, 2002,
and filed herewith.
99.1 Certification of the CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and filed herewith.
99.2 Certification of the CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and filed herewith.