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 first quarterly period ended March 31, 2001
Commission file number: 0-27824
SPAR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
State of Incorporation IRS Employer Identification No.
580 White Plains Road, Tarrytown, New York, 10591
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (914) 332-4100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: [ X ] Yes
On May 2, 2001 there were 18,272,330 shares of Common Stock outstanding.
SPAR GROUP, INC.
Index
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets
as of March 31, 2001 and December 31, 2000.........................................3
Consolidated Statements of Operations for
the three months ended March 31, 2001 and March 31, 2000...........................4
Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and
March 31, 2000.....................................................................5
Notes to Financial
Statements.........................................................................6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................................10
Item 3: Quantitative and Qualitative Disclosures About Market Risk........................16
PART II: OTHER INFORMATION
Item 1: Legal Proceedings.................................................................17
Item 2: Changes in Securities and Use of Proceeds.........................................17
Item 3: Defaults upon Senior Securities...................................................17
Item 4: Submission of Matters to a Vote of Security Holders...............................17
Item 5: Other Information.................................................................17
Item 6: Exhibits and Reports on Form 8-K..................................................17
SIGNATURES..............................................................................................18
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SPAR GROUP INC.
Consolidated Balance Sheets
(unaudited)
(In thousands, except share data)
MARCH 31, DECEMBER 31,
2001 2000
---------------------------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 22,141 23,207
Prepaid expenses and other current assets 1,089 880
Prepaid program costs 4,703 3,542
Deferred income taxes 1,718 1,718
---------------------------------
Total current assets 29,651 29,347
Property and equipment, net 3,345 3,561
Goodwill and other intangibles, net 21,077 21,485
Deferred income taxes 1,082 1,082
Other assets 143 143
---------------------------------
Total assets $ 55,298 $ 55,618
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 7,766 $ 5,849
Accrued expenses and other current liabilities 8,914 10,178
Deferred revenue 7,570 8,581
Restructuring and other charges, current 2,016 2,205
Due to certain stockholders 3,255 3,505
Current portion of long-term debt 1,195 1,211
---------------------------------
Total current liabilities 30,716 31,529
Line of credit and long-term liabilities, net of current portion 8,326 8,093
Long-term debt due to certain stockholders 2,203 2,160
Restructure and other charges, long-term 1,136 1,596
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 3,000,000
Issued and outstanding shares - none - -
Common stock, $.01 par value:
Authorized shares - 47,000,000
Issued and outstanding shares - 18,272,300 182 182
Additional paid-in capital 10,127 10,127
Retained earnings 2,608 1,931
---------------------------------
Total stockholders' equity 12,917 12,240
---------------------------------
Total liabilities and stockholders' equity $ 55,298 $ 55,618
=================================
Note: The Balance Sheet at December 31, 2000 has been derived from the audited financial statements at
that date but does not include any of the information and footnotes required by Generally Accepted
Accounting Principles for complete financial statements
SEE ACCOMPANYING NOTES.
3
SPAR Group, Inc.
Consolidated Statements of Operations
(unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000
----------------------------------------------
Net revenues $ 27,678 $ 32,447
Cost of revenues 18,826 22,967
----------------------------------------------
Gross profit 8,852 9,480
Selling, general and administrative expenses 6,375 8,274
Depreciation and amortization 920 801
----------------------------------------------
Operating income 1,557 405
Interest expense 387 456
Other (income) expense - (790)
----------------------------------------------
Income before provision for income taxes 1,170 739
Provision for income taxes 493 323
----------------------------------------------
Net income $ 677 $ 416
Basic earnings per share $ 0.04 $ 0.02
==============================================
Basic weighted average common shares 18,272 18,165
==============================================
Diluted earnings per share $ 0.04 $ 0.02
==============================================
18,322 18,294
Diluted weighted average common shares
==============================================
SEE ACCOMPANYING NOTES.
4
SPAR Group, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2001 2000
----------------- -----------------
OPERATING ACTIVITIES
Net income $ 677 $ 416
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation 512 392
Amortization 408 409
Gain on sale of affiliate - (790)
Changes in operating assets and liabilities:
Accounts receivable 1,066 414
Prepaid expenses and other current assets and prepaid
program costs (1,370) (336)
Due from affiliates - (178)
Accounts payable, accrued expenses and other current
liabilities 653 (7)
Restructuring charges (649) (547)
Deferred revenue (1,011) (461)
----------------- -----------------
Net cash provided by (used in) operating activities 286 (688)
INVESTING ACTIVITIES
Purchases of property and equipment (296) (461)
Goodwill - (61)
Sale of investment in affiliate - 1,500
----------------- -----------------
Net cash (used in) provided by investing activities (296) 978
FINANCING ACTIVITIES
Net proceeds from line of credit 467 368
Payments of note payable MCI - (1,045)
Net payment of other long-term debt (250) (287)
Net payments to certain shareholders (207) (86)
----------------- -----------------
Net cash provided by (used in) financing activities 10 (1,050)
----------------- -----------------
Net decrease in cash - (760)
Cash at beginning of period - 2,074
----------------- -----------------
Cash at end of period $ - $ 1,314
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 324 $ 342
================= =================
SEE ACCOMPANYING NOTES.
5
SPAR GROUP INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated and combined financial
statements of the Company and its subsidiaries (collectively, the "SPAR Group")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. This financial information should be read in
conjunction with the combined financial statements and notes thereto for the
Company as contained in Form 10-K for the year ended December 31, 2000. The
results of operations for the interim periods are not necessarily indicative of
the operating results for the year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION/COMBINATION
The consolidated financial statements include the accounts of the SPAR
Group, Inc. and its wholly owned subsidiaries.
3. SEGMENTS
Utilizing the management approach, the SPAR Group has broken down its
business based upon the nature of services provided (i.e., merchandising
services, incentive marketing services and Internet-based software). The
Merchandising Services Division consists of SMI (an intermediate holding
company), SMF, SMNEV, SBRS and SINC (collectively, the "SPAR Marketing
Companies"), the PIA Companies and the International Division (SPAR Group
International, Inc.). The Incentive Marketing Division consists of each of SIM
(an intermediate holding company) and SPGI. The Internet Division is
SPARinc.com, Inc.
Merchandising services generally consist of regularly scheduled, routed
services provided at the stores for a specific retailer or multiple
manufacturers primarily under multiple-year contracts. Services also include
stand-alone large scale implementations. These services may include activities
such as ensuring that clients' products authorized for distribution are in stock
and on the shelf, adding in new products that are approved for distribution but
not present on the shelf, setting category shelves in accordance with approved
store schematics, ensuring that shelf tags are in place, checking for the
overall salability of clients' products, selling new product 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.
6
SPAR GROUP INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
These services are used typically for large-scale implementations over
30 days. The Merchandising Services Division of the SPAR Group also performs
other project services, such as new store sets and existing store resets,
re-merchandising, remodels and category implementations, multi-year shared
service contracts or stand-alone project contracts.
The Incentive Marketing Division generally consists of designing and
implementing premium incentives, managing meetings and group travel for clients
throughout the United States. These services may include providing a variety of
consulting, creative, program administrative, travel and merchandise fulfillment
services to companies seeking to motivate employees, salespeople, dealers,
distributors, retailers and consumers toward certain action or objectives.
In March 2000, the Company established its Internet Division to
separately market its applications software products and services. Although such
products and services were in part available through the Company's other
divisions prior to the establishment of the Internet Division, the historical
revenues and expenses related to such software products and services generally
were not maintained separately prior to 2000.
MERCHANDISING SERVICES INTERNET BASED
THREE MONTHS ENDED INCENTIVE MARKETING THREE MONTHS TOTAL
THREE MONTHS ENDED ENDED THREE MONTHS ENDED
------------------------ ------------------------- ------------------ -----------------------------
MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31
2001 2000 2001 2000 2001 2001 2000
------------------------ ------------------------- ------------------ -----------------------------
Net revenues $ 14,941 $ 24,682 $ 12,512 $ 7,765 $ 225 $ 27,678 $ 32,447
Cost of
revenues 8,748 16,523 9,882 6,444 196 18,826 22,967
------------------------ ------------------------- ------------------ -----------------------------
Gross profit 6,193 8,159 2,630 1,321 29 8,852 9,480
SG&A 4,477 6,869 1,605 1,405 293 6,375 8,274
------------------------ ------------------------- ------------------ -----------------------------
EBITDA $ 1,716 $ 1,290 $ 1,025 $ (84) $ (264) $ 2,477 $ 1,206
======================== ========================= ================== =============================
Net income
(loss) $ 444 $ 844 $ 503 $ (428) $ (270) $ 677 $ 416
======================== ========================= ================== =============================
Total Assets $ 33,753 $ 40,912 $ 21,408 $ 20,348 $ 140 $ 55,298 $ 61,260
======================== ========================= ================== =============================
7
SPAR GROUP INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. RESTRUCTURING AND OTHER CHARGES
In connection with the PIA Merger, the Company's Board of Directors
approved a plan to restructure the operations of the PIA Companies.
Restructuring costs are composed of committed costs required to integrate the
SPAR Companies' and the PIA Companies' field organizations and the consolidation
of administrative functions to achieve beneficial synergies and costs savings.
The SPAR Group recognized termination costs in accordance with EITF
95-3, RECOGNITION OF LIABILITIES IN CONNECTION WITH A BUSINESS COMBINATION.
The following table displays a roll-forward of the liabilities for
restructuring and other charges from December 31, 2000 to March 31, 2001 (in
thousands):
DECEMBER 31, MARCH 31,
2000 2001
RESTRUCTURING QUARTER ENDED RESTRUCTURING
AND OTHER MARCH 31, 2001 AND OTHER
CHARGES DEDUCTIONS CHARGES
-----------------------------------------------------------
Type of cost:
Employee separation $ 487 $ 123 $ 364
Equipment lease settlements 2,770 462 2,308
Office lease settlements 544 64 480
-----------------------------------------------------------
$ 3,801 $ 649 $ 3,152
===========================================================
Management believes that the remaining reserves for restructuring are
adequate to complete its plan.
8
SPAR GROUP INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
5. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share (in thousands, except per share data):
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2001 2000
---------------------------------
Numerator:
Net income $ 677 $ 416
=================================
Denominator:
Shares used in basic earnings per share calculation 18,272 18,165
Effect of diluted securities:
Employee stock options 50 129
Warrants - -
---------------------------------
Shares used in diluted earnings per share calculation 18,322 18,294
=================================
Basic earnings per share $ 0.04 $ 0.02
=================================
Diluted earnings per share $ 0.04 $ 0.02
=================================
6. OTHER INCOME
In January 2000, the Company sold its investment in an affiliate for
approximately $1.5 million. The sale resulted in a gain of approximately
$790,000, which is included in other income.
9
SPAR GROUP INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, including, in particular, the statements about the SPAR
Group's plans and strategies under the headings "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Although the SPAR
Group believes that its plans, intentions and expectations reflected in or
suggested by such forward-looking statements are reasonable, it cannot assure
that such plans, intentions or expectations will be achieved. Important factors
that could cause actual results to differ materially from the forward-looking
statements made in this Quarterly Report on Form 10-Q are set forth in this
Quarterly Report on Form 10-Q. All forward-looking statements attributable to
the SPAR Group or persons acting on its behalf are expressly qualified by the
cautionary statements contained in this Quarterly Report on Form 10-Q.
The SPAR Group does not undertake any obligation to update or revise
any forward-looking statement or risk factor or to publicly announce any
revisions to any of them to reflect future events, developments or
circumstances.
OVERVIEW
- --------
The Company provides merchandising services to manufacturers and
retailers principally in mass merchandiser, chain, discount drug and grocery
stores through its Merchandising Services Division. In addition, the SPAR
Group's Incentive Marketing Division designs and implements premium incentives,
manages group meetings and group travel principally for corporate clients. In
March 2000, the Company established its Internet Division to separately market
its software applications, products and services. Although such products and
services were in part available through the Company's other divisions prior to
the establishment of the Internet Division, the historical revenues and expenses
related to such software products and services generally were not maintained
separately. For 2000, the revenues for the Internet Division were not
significant and have been included below in the discussion of the condition and
results of the Incentive Marketing Division. In November 2000, the Company
established its International Division to expand its merchandise services
business offshore. There were no revenues for the International Division in
2000.
10
SPAR GROUP INC.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
- -------------------------------------------------------------------------------
NET REVENUES
Quarter Ended
------------------------------------------------------------------------
March 31, 2001 March 31, 2000 Incr.
(Decr.)
-------------------------- ----------------------- ------------------
Amount % Amount % %
------ - ------ - -
(amounts in millions)
Merchandising Services $ 15.0 54.0% $ 24.7 76.2% (39.5)%
Incentive Marketing 12.5 45.2 7.7 23.8 64.0
Internet-Based Software 0.2 0.8 0.0 0.0 100.0
------------ ----------- ----------- ---------- ---------
Net Revenue $ 27.7 100% $ 32.4 100% (14.7)%
============ =========== =========== ========== =========
Net revenues for the three months ended March 31, 2001 decreased by
$4.7 million or 14.7% from the three months ended March 31, 2000 due principally
to discontinued PIA programs, partially offset by an increase in project
revenue.
Merchandising Services net revenues for the three months ended March
31, 2001, were $15.0 million, compared to $24.7 million for the three months
ended March 31, 2000. The decrease in net revenues is primarily attributed to
discontinued in-store merchandising programs previously contracted with programs
from former PIA Companies.
Incentive Marketing net revenues for the three months ended March 31,
2001 were $12.5 million, compared to $7.7 million for the three months ended
March 31, 2000, a 64.0% increase. The increase in net revenues is primarily due
to an increase in program revenue principally from new clients. The timing of
Incentive Marketing revenue depends upon the client placement of programs.
Therefore, revenue for any given quarter may not be indicative of total revenue
for the year.
11
SPAR GROUP INC.
COST OF REVENUES
The following table sets forth cost of revenues by division in dollars
and as a percentage of net revenues by division for the periods indicated:
Quarter Ended
------------------------------------------------------------------------
March 31, 2001 March 31, 2000 Change
In
-------------------------- ----------------------- ------------------
Amount % Amount % %
------ - ------ - -
(amounts in millions)
Merchandising Services $ 8.7 58.6% $ 16.5 66.9% (8.3)%
Incentive Marketing 9.9 79.0 6.5 83.0 (4.0)
Internet-Based Software 0.2 87.2 0.0 0.0 -
------------ -----------
Net Revenue $ 18.8 68.0% $ 23.0 70.8% (2.8)%
======== ===== ======== ===== ======
Cost of revenues in the Merchandising Services segment consists of
in-store labor (including travel expenses) and field management. Cost of
revenues in the Company's Incentive Marketing and Internal-Based Software
segments consists of direct labor, independent contractor expenses, food,
beverage, entertainment and travel costs. Cost of revenues for the three months
ended March 31, 2001, were $18.8 million or 68.0% of net revenues, compared to
$23.0 million or 70.8% of net revenues for the three months ended March 31,
2000.
Merchandising Services cost of revenues as a percentage of net revenues
decreased 8.3% to 58.6% for the three months ended March 31, 2001, compared to
66.9% for the three months ended March 31, 2000. This decrease is principally
attributable to reduced labor costs due to continued efficiencies realized in
2001.
Incentive Marketing cost of revenues, as a percentage of net revenues
decreased 4.0% to 79.0% for the three months ended March 31, 2001, compared to
83.0% for the three months ended March 31, 2000, primarily due to a more
favorable product mix in 2001.
12
SPAR GROUP INC.
OPERATING EXPENSES
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information systems,
executive compensation, human resources expenses, legal and accounting expenses.
The following table sets forth the operating expenses as a percentage of net
revenues for the time periods indicated:
Quarter Ended
------------------------------------------------------------------------
March 31, 2001 March 31, 2000 Incr.
(Decr.)
--------------------------- -------------------------- -----------
Amount % Amount % %
------ - ------ - -
(amounts in millions)
Selling, general & administrative $ 6.4 23.0% $ 8.3 25.5% (23.0)%
Depreciation and amortization 0.9 3.3 0.8 2.5 14.7
------------ ----------- ----------- ----------
Total Operating Expenses $ 7.3 26.3% $ 9.1 28.0% (19.6)%
========= ===== ======= ===== =======
Selling, general and administrative expenses decreased by $1.9 million,
or 23.0%, for the three months ended March 31, 2001, to $6.4 million compared to
$8.3 million for the three months ended March 31, 2000. This decrease was
primarily due to efficiencies resulting from the merger of the PIA Companies'
with the SPAR Operating Companies offset by approximately $400,000 of SG&A
expenses related to the Internet and International Divisions.
Depreciation and amortization increased by $0.1 million for the three
months ended March 31, 2001, due primarily to an increase in depreciation and
amortization of customized internal software costs capitalized (under SOP 98-1).
OTHER INCOME
In January 2000, the Company sold its investment in an affiliate for
approximately $1.5 million. The sale resulted in a gain of approximately $0.8
million, which is included in other income.
INTEREST EXPENSE
Interest expense decreased $0.1 million for the three months ended
March 31, 2001, over the three months ended March 31, 2000, due to decreased
debt levels, as well as, decreased interest rates in 2001.
13
SPAR GROUP INC.
INCOME TAXES
The income tax provision in the first quarter of 2001 represents a
combined federal and state income tax rate of 42% compared to 44% for the first
quarter of 2000.
NET INCOME
The SPAR Group had net income of $0.7 million in the first quarter of
2001 or $0.04 per basic and diluted share compared to net income of $0.4 million
or $0.02 per basic and diluted share in the corresponding period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 31, 2001, the SPAR Group had pre-tax
income of $1.2 million and experienced positive operating cash flow of $0.3
million.
Management believes that based upon SPAR Group's current working capital
position and the existing credit facilities, funding will be sufficient to
support ongoing operations over the next twelve months.
DEBT
In 1999, IBJ Whitehall and the members of the SPAR Group (other than
PIA Canada) (collectively, the "Borrowers") entered into a Revolving Credit,
Term Loan and Security Agreement as amended (the "Bank Loan Agreement"). The
Bank Loan Agreement provides the Borrowers with a $15 million Revolving Credit
facility and a $2.5 million term loan. The Revolving Credit facility allows the
Borrowers to borrow up to $15 million based upon a borrowing base formula as
defined in the Agreement (principally 85% of "eligible" accounts receivable).
The Bank Loan Agreement's revolving credit loans of $15.0 million are scheduled
to mature on September 21, 2002. The Term Loan amortizes in equal monthly
installments of $83,334. The revolving loans bear interest at IBJ Whitehall's
"Alternate Base Rate" plus one-half of one percent (0.50%) (a total of 8.50% per
annum at March 31, 2001), and the Term Loan bears interest at such "Alternate
Based Rate" plus three-quarters of one percent (0.75%) (a total of 8.75% per
annum at March 31, 2001). In addition, the Borrowers are required to make
mandatory prepayments in an amount equal to 25% of Excess Cash Flow, as defined
in the Bank Loan Agreement, for each fiscal year, to be applied first to the
Term Loan and then to the revolving credit loans (subject to the Borrowers'
ability to re-borrow revolving advances in accordance with the terms of the Bank
Loan Agreement). The facility is secured with the assets of the SPAR Group.
The Bank Loan Agreement contains an option for the Bank to purchase
16,667 shares of common stock of the Company for $0.01 per share in the event
that the Company's average closing share price over ten consecutive trading day
period exceeds $15.00 per share. This option expires September 22, 2002.
14
SPAR GROUP INC.
The Bank Loan Agreement contains certain financial covenants that must
be met by the Borrowers on a consolidated basis, among which are a minimum "Net
Worth", a "Fixed Charge Coverage Ratio", a minimum ratio of Debt to EBITDA, and
a minimum EBITDA, as such terms are defined in the Bank Loan Agreement.
The balance outstanding on the revolving line of credit was $8.3
million and $7.8 million at March 31, 2001, and December 31, 2000, respectively.
As of March 31, 2001, based upon the borrowing base formula, the SPAR Group had
availability of $4.0 million of the $6.7 million unused revolving line of
credit.
CASH AND CASH EQUIVALENTS
Net cash provided by operating activities for the three months ended
March 31, 2001, was $0.3 million, compared with net cash used of $0.7 million
for the three months ended March 31, 2000. Cash provided by operating activities
in 2001 was primarily a result of operating profits, a decrease in accounts
receivable, and increased accounts payable, offset by a decrease in
restructuring charges, an increase in prepaid expenses and a decrease in
deferred revenue.
Net cash used in investing activities for the three months ended March
31, 2001, was $0.3 million, compared with net cash provided of $1.0 for the
three months ended March 31, 2000. The net cash used in investing activities
resulted from the purchases of property and equipment.
Net cash provided by financing activities for the three months ended
March 31, 2001, was $10 thousand, compared with net cash used by financing
activities of $1.1 million for the three months ended March 31, 2000.
The above activity resulted in no change in cash and cash equivalents
for the three months ended March 31, 2001, compared to a net decrease of $0.8
million for the three months ended March 31, 2000.
At March 31, 2001, the Company had negative working capital of $1.1
million as compared to negative working capital of $2.2 million at December 31,
2000, availability under its revolving credit facility was $4.0 million at March
31, 2001, compared to $4.2 million at December 31, 2000 and a current ratio of
0.97 and 0.93 as of March 31, 2001 and December 31, 2000 respectively.
Cash and cash equivalents and the timely collection of its receivables
provide the SPAR Group's current liquidity. However, the potential of delays in
collection of receivables due from any of the SPAR Group's major clients, or a
significant reduction in business from such clients, or the inability to acquire
new clients, would have a material adverse effect on the SPAR Group's cash
resources and its ongoing ability to fund operations.
As of March 31, 2001, the SPAR Group is obligated, under certain
circumstances, to pay severance compensation to its employees and other costs in
connection with the Merger (restructure charges) of approximately $3.2 million.
In addition, the Company incurred substantial cost in connection with the
transaction, including legal, accounting and investment banking fees estimated
to be an
15
SPAR GROUP INC.
aggregate unpaid obligation as of March 31, 2001 of approximately $1.4 million.
The SPAR Group has also accrued approximately $2.2 million for expenses incurred
by PIA prior to the Merger, which have not been paid as of March 31, 2001.
Management believes the current bank credit facilities are sufficient to fund
operations and working capital, including the current maturities of debt
obligations, but may not be sufficient to reduce obligations of the Merger with
PIA. The Company is currently working to secure additional long-term capital to
meet the non-operational credit needs. However, there can be no assurances that
the Company will be successful in these negotiations.
As of March 31, 2001, a total of $5.5 million of amounts due to certain
stockholders remained outstanding, of which approximately $3.3 million have an
interest rate of 8% and are due on demand. The long-term portion totaling $2.2
million have a fluctuating interest rate equal to the sum of the prime rate (as
reported in The Wall Street Journal from time to time) plus 1%. The current bank
agreements contain certain restrictions on the repayment of stockholder debt.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The SPAR Group is exposed to market risk related to the variable
interest rate on the line of credit and term note and the variable yield on its
cash and cash equivalents. The SPAR Group's accounting policies for financial
instruments and disclosures relating to financial instruments require that the
SPAR Group's consolidated balance sheets include the following financial
instruments: cash and cash equivalents, accounts receivable, accounts payable
and long term debt. The SPAR Group considers carrying amounts of current assets
and liabilities in the consolidated financial statements to approximate the fair
value for these financial instruments because of the relatively short period of
time between origination of the instruments and their expected realization. The
carrying amounts of long-term debt approximate fair value because the obligation
bears interest at a floating rate. The SPAR Group monitors the risks associated
with interest rates and financial instrument positions. The SPAR Group's
investment policy objectives require the preservation and safety of the
principal, and the maximization of the return on investment based upon the
safety and liquidity objectives.
Currently, the SPAR Group's revenue derived from international
operations is not material and, therefore, the risk related to foreign currency
exchange rates is not material.
INVESTMENT PORTFOLIO
The SPAR Group has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments. The SPAR
Group invests its cash and cash equivalents in investments in high-quality and
highly liquid investments consisting of taxable money market instruments.
16
SPAR GROUP INC.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No change.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Item 2(a): Not applicable
-------------------------
Item 2(b): Not applicable
-------------------------
Item 2(c): Not Applicable
-------------------------
Item 2(d): Use of Past Proceeds
-------------------------------
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS.
NONE.
REPORTS ON FORM 8-K.
NONE.
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SPAR GROUP INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2001 SPAR Group, Inc., Registrant
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By: /s/ Charles Cimitile
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Charles Cimitile
Chief Financial Officer and Secretary
18