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| SGRP > SEC Filings for SGRP > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-2008
Quarterly Report
Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q for the three months ended March 31, 2008 (this "Quarterly Report"), of SPAR Group, Inc. ("SGRP", and together with its subsidiaries, the "SPAR Group" or the "Company"), include "forward-looking statements" (within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act", and together with the Securities Act, the "Securities Laws") that are based on the Company's best estimates. In particular and without limitation, this "Management 's Discussion and Analysis of Financial Condition, Results of Operations, Liquidity and Capital Resources" contains such forward-looking statements, which are included in (among other places) the discussions respecting net revenues from significant clients, significant chain work and international joint ventures, federal taxes and net operating loss carry forwards, commencement of operations and future funding of international joint ventures, credit facilities and covenant compliance, cost savings initiatives, liquidity and sources of cash availability. 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, to not 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, 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", "likely", "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 containing cautionary statements or identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements.
You should carefully review this management discussion and analysis together with the risk factors and other cautionary statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission (the "SEC") on March 31, 2008 (the "Company's Annual Report for 2007 on Form 10-K"), including the risk factors described in Item 1A of that annual report under the caption "Certain Risk Factors" and the changes (if any) in such risk factors described in Item IA of Part II of this Quarterly Report (collectively, "Risk Factors" ), as well as the cautionary statements contained in this Quarterly Report. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified by the Risk Factors and other cautionary statements in this Quarterly Report and in the Company' s Annual Report for 2007 on Form 10-K, which are incorporated by reference into this Quarterly Report. Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, the Company cannot assure that such plans, intentions or expectations will be achieved in whole or in part, that it has identified all potential risks or that it can successfully avoid or mitigate such risks in whole or in part. The Company undertakes no obligation to publicly update or revise any forward-looking statements, or any Risk Factors or other cautionary statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
Today the Company operates in 13 countries whose population represents approximately 48% of the total world population. The Company's operations are currently divided into two divisions: the Domestic Merchandising Services Division and the International Merchandising Services Division. The Domestic Merchandising Services Division provides merchandising and marketing services, in-store event staffing, product sampling, RFID services, technology services and marketing research to manufacturers and retailers in the United States. The various services are primarily performed in mass merchandisers, electronics store chains, drug store chains and convenience and grocery stores. The International Merchandising Services Division was established in July 2000 and through its subsidiaries, the Company currently provides similar merchandising and marketing services in Japan, Canada, Turkey, South Africa, India, Romania, China, Lithuania, Latvia, Estonia, Australia and New Zealand.
Domestic Merchandising Services Division
The Company's Domestic Merchandising Services Division provides nationwide merchandising and other marketing services primarily on behalf of consumer product manufacturers and retailers at mass merchandisers, electronics store chains, drug store chains and grocery stores. Included in its clients are home entertainment, general merchandise, health and beauty care, consumer goods and food product companies in the United States.
Merchandising and marketing services primarily consist of regularly scheduled dedicated routed services and special projects provided at the store level for a specific retailer or single or multiple manufacturers or distributors. Services also include stand-alone large-scale implementations. These services may include sales 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 that shelf tags are in place, checking for the overall salability of client products and setting new and promotional items and placing and/or removing point of purchase and other related media advertising. Specific in-store services can be initiated by retailers or manufacturers or distributors, and include new store openings and existing store resets, re-merchandising, remodels and category implementations, new product launches, special seasonal or promotional merchandising, focused product support and product recalls. The Company also provides in-store product demonstrations, in-store product sampling and other in-store event staffing services, RFID services, technology services and marketing research services.
International Merchandising Services Division
In July 2000, the Company established its International Merchandising Services
Division, operating through a wholly owned subsidiary, SPAR Group International,
Inc. ("SGI"), to focus on expanding its merchandising and marketing services
business worldwide. Currently, the Company's international subsidiaries are as
follows:
Headquarter Date
Location Ownership Percentage Established
Osaka, Japan 50% May 2001
Toronto, Canada 100% June 2003
Istanbul, Turkey 51% July 2003
Durban, South Africa 51% April 2004
New Delhi, India 51% April 2004
Bucharest, Romania 51% December 2004
Hong Kong, China 50% February 2005
Siauliai, Lithuania 51% September 2005
Melbourne, Australia 51% April 2006
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Critical Accounting Policies
There were no material changes during the six months ended June 30, 2008, to the Company's critical accounting policies as reported in the Company's Annual Report for 2007 on Form 10-K.
SPAR Group, Inc.
Results of Operations
Three months ended June 30, 2008, compared to three months ended June 30, 2007
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 June 30,
2008 2007 Increase/
$ % $ % (decrease)
Net revenues $ 18,910 100.0 % $ 12,506 100.0 % 51.2 %
Cost of revenues 13,719 72.5 8,757 70.0 56.7
Selling, general & administrative expense 4,510 23.8 5,137 41.1 (12.2 )
Depreciation and amortization 221 1.2 194 1.6 13.9
Interest expense 81 0.4 93 0.7 (12.9 )
Other expense 521 2.8 18 0.1 N/A
Loss before income tax provision
(benefit) and minority interest (142 ) (0.8 ) (1,693 ) (13.5 ) (91.6 )
Provision for income taxes (benefit) (185 ) (1.0 ) 74 0.6 N/A
Income (loss) before minority interest 43 0.2 (1,767 ) (14.1 ) (102.5 )
Minority interest 40 0.2 (28 ) (0.2 ) N/A
Net income (loss) $ 3 0.0 % $ (1,739 ) (13.9 )% (100.1 )%
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Net Revenues
Net revenues for the three months ended June 30, 2008, were $18.9 million, compared to $12.5 million for the three months ended June 30, 2007, an increase of $6.4 million or 51.2%.
International net revenues totaled $10 million for the three months ended June 30, 2008, compared to $6.6 million for the same period in 2007, an increase of $3.4 million or 51.5%. The increase in 2008 international net revenues was due to net revenue increases provided by the following countries based on expansion from existing clients and new business in; Canada $1.0 million, Japan $995,000, China $442,000, Australia $426,000, India $353,000, Turkey $268,000 and South Africa $23,000 partially offset by net revenue decreases in Romania $64,000 and Lithuania $37,000.
Domestic net revenues totaled $8.9 million in the three months ended June 30, 2008, compared to $5.9 million for the same period in 2007. Domestic net revenues increased $3.0 million due to an increase in project revenue.
Approximately 8% and 14% of the Company's net revenues for the three months ended June 30, 2008 and 2007, respectively, resulted from merchandising services performed for clients at a leading domestic electronics chain. Services performed for these clients in that electronics chain also accounted for approximately 3% and 10% of the Company's accounts receivable at June 30, 2008 and December 31, 2007, respectively. The Company's contractual relationships or agreements are with various clients and not that retail electronics chain.
One client accounted for 6% and 8% of the Company's net revenues for the three months ended June 30, 2008 and 2007, respectively. The client accounted for approximately 3% of the Company's accounts receivable at both June 30, 2008 and December 31, 2007.
The loss of the ability to provide merchandising and marketing services in the above and/or other chains or the loss of this client or other clients could significantly decrease the Company's revenues and could have a material adverse effect on the Company's business, results of operations and financial condition.
Cost of Revenues
Cost of revenues consists of in-store labor and field management wages, related benefits, travel and other direct labor-related expenses. Cost of revenues was 72.5% of net revenues for the three months ended June 30, 2008 and 70.0% for the three months ended June 30, 2007. The increase in cost of revenues as a percent of net revenues of 2.5% is primarily a result of international operations.
Internationally, the cost of revenues was 73.9% of net revenues for the three months ended June 30, 2008 and 66.0% of net revenues for the three months ended June 30, 2007. The international cost of revenues percentage increase was primarily attributed to a mix of higher cost margin business in Canada, China and Turkey.
Domestic cost of revenues was 71.1% of net revenues for the three months ended June 30, 2008 and 74.5% of net revenues for the three months ended June 30, 2007. The decrease in cost of revenues as a percentage of net revenues of 3.4% was due to a favorable mix of business.
Approximately 86% and 87% of the Company's domestic cost of revenues in the three months ended June 30, 2008 and 2007, respectively, resulted from in-store independent contractor and field management services purchased from certain of the Company's affiliates, SPAR Marketing Services, Inc. ("SMS"), and SPAR Management Services, Inc. ("SMSI"), respectively (see Note 6 - Related-Party Transactions).
Selling, General and Administrative Expenses
Selling, general and administrative expenses include corporate overhead, project management, information technology, executive compensation, human resources, and legal and accounting expenses. As a result of continuing efforts to reduce such expenses, selling, general and administrative expenses decreased by $627,000, or 12.2%, for the three months ended June 30, 2008, to $4.5 million compared to $5.1 million for the same period in 2007.
International selling, general and administrative expenses totaled $2.5 million for the three months ended June 30, 2008, compared to $2.6 million for the same period in 2007. The $101,000 decrease in international selling, general and administrative expenses was primarily due to salary related expense reductions in Japan $134,000.
Domestic selling, general and administrative expenses totaled $2.0 million for the three months ended June 30, 2008, compared to $2.6 million for the same period in 2007. The decrease in domestic selling, general and administrative expenses of $527,000 was primarily due to a reduction in salary related expense of $156,000, office related expense of $371,000 (legal cost of $103,000, equipment cost of $68,000 and all other of $200,000).
Depreciation and Amortization
Depreciation and amortization charges for the three months ended June 30, 2008, totaled $221,000 and were comparable to $194,000 for the same period in 2007.
Interest Expense
Interest expense decreased 14.8% to $81,000 from $93,000 for the three months ended June 30, 2008 and 2007, respectively. The decrease was primarily due to decreases in interest rates.
Other Expense
Other expense totaled $521,000 and $18,000 for the three months ended June 30, 2008 and 2007, respectively. Included in other expense for the three months ended June 30, 2008 was approximately $458,000 for non-recurring legal costs, which was the primary reason for the increase in other expenses over the prior period.
Income Taxes
Income tax benefit for the three months ended June 30, 2008 was ($185,000) resulting primarily from a FIN 48 adjustment from international operations. Income taxes for the three months ended June 30, 2007 were approximately $74,000 for minimum domestic state taxes. There were no tax provisions for federal tax as the Company reported a loss for the three months ended June 30, 2008, and provides a valuation allowance against any benefits from operating loss carry forwards.
Minority Interest
Minority interest of approximately $40,000 and ($28,000) resulted from the net operating profits and losses of the Company's 51% owned subsidiaries and 50% owned subsidiaries for the three months ended June 30, 2008 and 2007, respectively.
Net Income (Loss)
The Company reported a net income of $3,000 for the three months ended June 30, 2008, or $0.0 per share, compared to a net loss of $1.7 million, or ($0.09) per share, for the corresponding period last year.
SPAR Group, Inc.
Results of Operations
Six months ended June 30, 2008, compared to six months ended June 30, 2007
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).
Six Months Ended June 30,
2008 2007 Increase/
$ % $ % (decrease)
Net revenues $ 36,364 100.0 % $ 27,919 100.0 % 30.2 %
Cost of revenues 26,203 72.0 19,255 69.0 36.1
Selling, general & administrative expense 9,168 25.2 10,144 36.6 (9.6 )
Depreciation and amortization 429 1.2 391 1.4 9.7
Interest expense 162 0.4 181 0.6 (10.5 )
Other expense 564 1.6 38 (0.2 ) N/A
Loss before income tax provision (benefit)
and minority interest (162 ) (0.4 ) (2,090 ) (7.4 ) (92.2 )
Provision for income taxes (benefit) (21 ) - 141 0.5 (114.9 )
Loss before minority interest (141 ) (0.4 ) (2,231 ) (7.9 ) (93.7 )
Minority interest 106 0.3 16 0.1 N/A
Net loss $ (247 ) (0.7 )% $ (2,247 ) (8.0 )% (89.0 )%
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Net Revenues
Net revenues for the six months ended June 30, 2008, were $36.4 million, compared to $27.9 million for the six months ended June 30, 2007, an increase of $8.5 million or 30.2%.
International net revenues totaled $20.0 million for the six months ended June 30, 2008, compared to $13.6 million for the same period in 2007, an increase of $6.4 million or 48%. The increase in 2008 international net revenues was due to net revenue increases from Canada $1.6 million, Japan $1.5 million, Australia $1.0 million, India $868,000, China $852,000, Turkey $555,000 and South Africa $146,000, partially offset by net revenue decreases in Romania $80,000 and Lithuania $42,000.
Domestic net revenues totaled $16.4 million in the six months ended June 30, 2008, compared to $14.3 million for the same period in 2007. Domestic net revenues increased $2.1 million. The increase in domestic net revenues was due primarily to an increase in project revenues.
Approximately 9% and 13% of the Company's net revenues for the six months ended June 30, 2008 and 2007, respectively, resulted from merchandising services performed for clients at a leading domestic electronics chain. Services performed for these clients in that electronics chain also accounted for approximately 3% and 10% of the Company's accounts receivable at June 30, 2008 and December 31, 2007, respectively. The Company's contractual relationships or agreements are with various clients and not that retail electronics chain.
One client accounted for 7% and 5% of the Company's net revenues for the six months ended June 30, 2008 and 2007, respectively. The client accounted for approximately 3% of the Company's accounts receivable at both June 30, 2008 and December 31, 2007.
The loss of the ability to provide merchandising and marketing services in the above and/or other chains or the loss of this client or other clients could significantly decrease the Company's revenues and could have a material adverse effect on the Company's business, results of operations and financial condition.
Cost of Revenues
Cost of revenues consists of in-store labor and field management wages, related benefits, travel and other direct labor-related expenses. Cost of revenues was 72.1% of net revenues for the six months ended June 30, 2008 and 69.0% for the six months ended June 30, 2007. The increase in cost of revenues as a percent of net revenues of 3.1% is primarily a result of international operations.
Internationally, the cost of revenues was 74.2% of net revenues for the six months ended June 30, 2008 and 67.6% of net revenues for the six months ended June 30, 2007. The international cost of revenues percentage increase was primarily attributed to a mix of higher cost margin business in Canada, China and Turkey.
Domestic cost of revenues was 69.4% of net revenues for the six months ended June 30, 2008 and 70.3% of net revenues for the six months ended June 30, 2007. In the first quarter of 2008, SPAR Management Services, Inc. ("SMS"), an affiliate of the Company, forgave $100,000 of debt owed by the Company for field management expenses. Excluding this transaction, domestic cost of revenue as a percent of net revenues for the six months ending June 30, 2008 was 70.0%, a decrease of (0.3)% compared to the same period in 2007.
Approximately 87% and 84% of the Company's domestic cost of revenues in the six months ended June 30, 2008 and 2007, respectively, resulted from in-store independent contractor and field management services purchased from certain of the Company's affiliates, SPAR Marketing Services, Inc. ("SMS"), and SPAR Management Services, Inc. ("SMSI"), respectively (see Note 6 - Related-Party Transactions).
Selling, General and Administrative Expenses
Selling, general and administrative expenses include corporate overhead, project management, information technology, executive compensation, human resources, and legal and accounting expenses. Selling, general and administrative expenses decreased by $976,000, or 9.6%, for the six months ended June 30, 2008, to $9.2 million compared to $10.2 million for the same period in 2007.
International selling, general and administrative expenses totaled $4.7 million for both the six months ended June 30, 2008 and 2007.
Domestic selling, general and administrative expenses totaled $4.5 million for the six months ended June 30, 2008, compared to $5.4 million for the same period in 2007. The decrease in domestic selling, general and administrative expenses of $919,000 was primarily due to a decrease in salary related expenses of $357,000, reduced building related expenses of $163,000 ($74,000 was related to a one-time charge in 2007 for relocation expenses) and a reduction of $419,000 in office related expenses ($211,000 was related to reduced equipment rental expenses).
Depreciation and Amortization
Depreciation and amortization charges for the six months ended June 30, 2008, totaled $429,000 and were comparable to $391,000 for the same period in 2007.
Interest Expense
Interest expense decreased 10.5% to $162,000 from $181,000 for the six months ended June 30, 2008 and 2007, respectively. The decrease of 10.5% was primarily due to decreases in interest rates.
Other Expense
Other expense totaled $564,000 and $38,000 for the six months ended June 30, 2008 and 2007, respectively. Included in other expense for the six months ended June 30, 2008 was approximately $458,000 for non-recurring legal costs, which was the primary reason for the increase in other expenses over the prior period.
Income Taxes
Income tax benefit for the six months ended June 30, 2008 was approximately ($21,000) resulting from a FIN 48 adjustment from international operations.
Minority Interest
Minority interest of approximately $106,000 and $16,000 resulted from the net operating profits of the Company's 51% owned subsidiaries and 50% owned subsidiaries for the six months ended June 30, 2008 and 2007, respectively.
Net Loss
The Company had a net loss of $247,000 for the six months ended June 30, 2008, or ($0.01) per share, compared to a net loss of 2.2 million, or $0.12 per share, for the corresponding period last year.
Liquidity and Capital Resources
In the six months ended June 30, 2008 the Company had a net loss of $247,000.
Net cash provided by operating activities for the six months ended June 30, 2008 was $2.3 million compared to $3.8 million for the prior year. The decrease in net cash provided by operating activities was primarily due to a decrease in accounts receivable and increase in accounts payable, accrued expenses and other account liabilities.
Net cash used in investing activities for the six months ended June 30, 2008 and June 30, 2007, was approximately $225,000 and $429,000, respectively. The decrease in net cash used in investing activities was a result of decreased purchases of property and equipment.
Net cash used in financing activities for the six months ended June 30, 2008 and 2007, was approximately $1.0 million and $2.9 million, respectively. The decrease in net cash used in financing activities was primarily a result of reduced net payments on lines of credit.
The above activity resulted in an increase in cash and cash equivalents for the six months ended June 30, 2008, of approximately $1.0 million.
At June 30, 2008, the Company had negative working capital of $464,000, as compared to a negative $449,000 at December 31, 2007. The Company's current ratio was 0.97 at June 30, 2008, and 0.97 at December 31, 2007.
In January 2003, the Company (other than SGRP's foreign subsidiaries) and Webster Business Credit Corporation, then known as Whitehall Business Credit Corporation ("Webster"), entered into the Third Amended and Restated Revolving Credit and Security Agreement (as amended, collectively, the "Credit Facility"). The Credit Facility provides for a $5.0 million revolving line of credit maturing on January 23, 2009. In March 2007 the credit facility was further amended to, among other things, delay the Minimum Fixed Coverage ratio until the fourth quarter 2007, establish an EBITDA covenant and increase the interest rate by .25% beginning March 28, 2007. In May 2007 the credit facility was amended to provide for an availability reserve of $500,000. In August 2007 the credit facility was further amended to reduce the availability reserve to $250,000 until November 30, 2007. On November 16, 2007 Webster amended the credit facility to extend the availability reserve of $250,000 indefinitely and to reduce the revolving line of credit from $7.0 to $5.0 million. In February 2008 . . .
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