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| SGRP > SEC Filings for SGRP > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q for the nine months ended September 30, 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 1A 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 nine months ended September 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 September 30, 2008, compared to three months ended September
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 September 30,
2008 2007 Increase/
$ % $ % (decrease)
Net revenues $ 17,271 100.0 % $ 14,365 100.0 % 20.2 %
Cost of revenues 12,237 70.8 10,483 73.0 16.7
Selling, general & )
administrative expense 4,377 25.3 5,074 35.3 (13.7
Depreciation and
amortization 239 1.4 180 1.3 32.8
Interest expense 92 0.5 66 0.5 39.8
Other expense 301 1.7 111 0.8 171.2
Income (loss) before income
tax provision and minority
interest 25 0.1 (1,549 ) (10.9 ) (101.6 )
Provision for income taxes 25 0.1 79 0.5 (68.2 )
Income (loss) before )
minority interest - - (1,628 ) (11.4 ) (100.0
Minority interest 117 (0.7 ) 119 0.8 (1.9 )
Net loss $ (117 ) (0.7 )% $ (1,747 ) (12.2 )% (93.3 )%
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Net Revenues
Net revenues for the three months ended September 30, 2008, were $17.3 million, compared to $14.4 million for the three months ended September 30, 2007, an increase of $2.9 million or 20.2%.
International net revenues totaled $10.8 million for the three months ended September 30, 2008, compared to $8.7 million for the same period in 2007, an increase of $2.1 million or 24.0%. 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 $255,000, Japan $417,000, China $698,000, Australia $469,000, India $348,000, Turkey $91,000, partially offset by net revenue decreases in Romania $68,000, South Africa $61,000 and Lithuania $51,000.
Domestic net revenues totaled $6.5 million in the three months ended September 30, 2008, compared to $5.7 million for the same period in 2007. Domestic net revenues increased $800,000 due to an increase in project revenue.
Approximately 6.4% and 11.1% of the Company's net revenues for the three months ended September 30, 2008 and 2007, respectively, resulted from merchandising services performed for manufacturers and other clients at Circuit City Stores, Inc. ("Circuit City"), a leading domestic electronics chain. Services performed for those clients in Circuit City also accounted for approximately 2.5% and 10% of the Company's accounts receivable at September 30, 2008 and December 31, 2007, respectively. The Company also performed some services directly for Circuit City, which accounted for approximately $171,000 of the Company's receivables at September 30, 2008. Circuit City closed a number of stores in 2008 and filed for protection under the U.S. Bankruptcy Code on November 10, 2008 (at which time it owed approximately $205,000 in unpaid receivables to the Company). There can be no assurance that this retailer will continue to operate all or any of its remaining stores.
While the Company's contractual relationships or agreements are for the most part with various clients and not directly with Circuit City, a significant reduction of this retailer's stores or a significant reduction in this retailer's business 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. In addition, the loss of some of its clients or the
failure to attract new clients could significantly impede the growth of the Company's revenues, which could have a material adverse effect on the Company's future 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 70.8% of net revenues for the three months ended September 30, 2008 and 73.0% for the three months ended September 30, 2007. The decrease in cost of revenues as a percent of net revenues of 2.2% is primarily a result of cost improvement in domestic operations partially offset by increased cost in international operations.
Internationally, the cost of revenues increased to 75.2% of net revenues for the three months ended September 30, 2008 compared to 69.4% of net revenues for the three months ended September 30, 2007. The international cost of revenues percentage increase of 5.8% was primarily attributed to a mix of higher cost margin business in Canada, Australia and Turkey.
Domestic cost of revenues was 63.5% of net revenues for the three months ended September 30, 2008 and 78.6% of net revenues for the three months ended September 30, 2007. The decrease in cost of revenues as a percentage of net revenues of 15.1% was due to a favorable mix of business and a $400,000 one time reduction in service cost from an affiliate (see Note 6, Related Party Transaction).
Approximately 78% and 88% of the Company's domestic cost of revenues in the three months ended September 30, 2008 and 2007, respectively, resulted from in-store merchandiser specialist 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 $697,000, or 13.7%, for the three months ended September 30, 2008, to $4.4 million compared to $5.1 million for the same period in 2007.
International selling, general and administrative expenses totaled $2.2 million for the three months ended September 30, 2008, compared to $2.5 million for the same period in 2007. The $338,000 decrease in international selling, general and administrative expenses was primarily due to salary related expense reductions in China $150,000, Canada $75,000, Australia $61,000 and international development cost of $58,000.
Domestic selling, general and administrative expenses totaled $2.2 million for the three months ended September 30, 2008, compared to $2.6 million for the same period in 2007. The decrease in domestic selling, general and administrative expenses of $360,000 was primarily due to a reduction in salary related expenses of $350,000.
Depreciation and Amortization
Depreciation and amortization charges for the three months ended September 30, 2008, totaled $239,000 and were comparable to $180,000 for the same period in 2007.
Interest Expense
Interest expense increased 39.8% to $92,000 from $66,000 for the three months ended September 30, 2008 and 2007, respectively. The increase was primarily due to increases in borrowings in the domestic division and increases in interest rates in foreign divisions. Interest rates in the domestic division have declined as compared to the same period last year.
Other Expense
Other expense totaled $301,000 and $111,000 for the three months ended September 30, 2008 and 2007, respectively.
Income Taxes
Income tax provision for the three months ended September 30, 2008 was $25,000 resulting primarily from minimum domestic state taxes due. Income taxes for the three months ended September 30, 2007 were approximately $79,000 for minimum domestic state taxes. There were no tax provisions for federal tax as the Company reported a loss for the three months ended September 30, 2008, and provides a valuation allowance against any benefits from operating loss carry forwards.
Minority Interest
Minority interest of approximately $117,000 and $119,000 resulted from the net operating profits and losses of the Company's 51% owned subsidiaries and 50% owned subsidiaries for the three months ended September 30, 2008 and 2007, respectively.
Net Loss
The Company reported a net loss of $117,000 for the three months ended September 30, 2008, or $0.01 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
Nine months ended September 30, 2008, compared to nine months ended September
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).
Nine Months Ended September 30,
2008 2007 Increase/
$ % $ % (decrease)
Net revenues $ 53,635 100.0 % $ 42,284 100.0 % 26.8 %
Cost of revenues 38,440 71.7 29,738 70.3 29.3
Selling, general & )
administrative expense 13,545 25.3 15,218 36.0 (11.0
Depreciation and
amortization 668 1.2 571 1.3 16.9
Interest expense 254 0.5 247 0.6 2.7
Other expense 865 1.6 149 0.4 480.5
Loss before income tax
provision and minority
interest (137 ) (0.3 ) (3,639 ) (8.6 ) (96.3 )
Provision for income taxes 4 - 220 0.5 (98.0 )
Loss before minority )
interest (141 ) (0.3 ) (3,859 ) (9.1 ) (96.4
Minority interest 223 0.4 135 0.3 65.4
Net loss $ (364 ) (0.7 )% $ (3,994 ) (9.4 )% (90.9 )%
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Net Revenues
Net revenues for the nine months ended September 30, 2008, were $53.6 million, compared to $42.3 million for the nine months ended September 30, 2007, an increase of $11.3 million or 26.8%.
International net revenues totaled $30.9 million for the nine months ended September 30, 2008, compared to $22.3 million for the same period in 2007, an increase of $8.6 million or 38.3%. The increase in 2008 international net revenues was due to net revenue increases from Canada $1.8 million, Japan $2.0 million, Australia $1.5 million, India $1.2 million, China $1.5 million, Turkey $647,000 and South Africa $86,000, partially offset by net revenue decreases in Romania $148,000 and Lithuania $93,000.
Domestic net revenues totaled $22.8 million in the nine months ended September 30, 2008, compared to $20.0 million for the same period in 2007. Domestic net revenues increased $2.8 million, due primarily to an increase in project revenues.
Approximately 6.0% and 12.1% of the Company's net revenues for the nine months ended September 30, 2008 and 2007, respectively, resulted from merchandising services performed for manufacturers and other clients at Circuit City Stores, Inc. ("Circuit City"), a leading domestic electronics chain. Services performed for those clients in that electronics chain also accounted for approximately 2% and 10% of the Company's accounts receivable at September 30, 2008 and December 31, 2007, respectively. The Company also performed some services directly for Circuit City, which accounted for approximately $171,000 of the Company's receivables at September 30, 2008. Circuit City closed a number of stores in 2008 and filed for protection under the U.S. Bankruptcy Code on November 10, 2008 (at which time it owed approximately $205,000 in unpaid receivables to the Company). There can be no assurance that this retailer will continue to operate all or any of its remaining stores.
While the Company's contractual relationships or agreements are for the most part with various clients and not directly with Circuit City, a significant reduction of this retailer's stores or a significant reduction in this retailer's business 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 or the desired increases in the Company's business, revenues and profits. In addition, the loss of some of its clients or the failure to attract new clients could
significantly impede the growth of the Company's revenues, which could have a material adverse effect on the Company's future 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 71.7% of net revenues for the nine months ended September 30, 2008 and 70.3% for the nine months ended September 30, 2007.
Internationally, the cost of revenues was 74.6% of net revenues for the nine months ended September 30, 2008 and 68.3% of net revenues for the nine months ended September 30, 2007. The international cost of revenues percentage increase was primarily attributed to a mix of higher cost margin business in Canada, China, Romania, Lithuania and Turkey.
Domestic cost of revenues was 67.7% of net revenues for the nine months ended September 30, 2008 and 72.6% of net revenues for the nine months ended September 30, 2007. SPAR Management Services, Inc. ("SMS"), an affiliate of the Company, reduced its costs to the Company by $500,000 for the nine months ended September 30, 2008, pursuant to the amended Field Service Agreement dated September 24, 2008 (See Note 6 - Related-Party Transactions). Excluding this transaction, domestic cost of revenue as a percent of net revenues for the nine months ending September 30, 2008 was 69.9%, a decrease of 2.7% compared to the same period in 2007.
Approximately 84% and 89% of the Company's domestic cost of revenues in the nine months ended September 30, 2008 and 2007, respectively, resulted from in-store merchandising specialist 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 $1.7 million, or 11.0%, for the nine months ended September 30, 2008, to $13.5 million compared to $15.2 million for the same period in 2007.
International selling, general and administrative expenses declined $394,000 or 5.5% to $6.8 million from $7.2 million for the nine months ended September 30, 2008 as compared to the same period in 2007.
Domestic selling, general and administrative expenses totaled $6.7 million for the nine months ended September 30, 2008, compared to $8.0 million for the same period in 2007. The decrease in domestic selling, general and administrative expenses of $1.3 million was primarily due to a decrease in salary related expenses of $670,000, reduced office and building related expenses of $135,000 ($76,000 was related to a one-time charge in 2007 for relocation expenses), and a reduction of $261,000 in program cost, and a reduction in legal and accounting of $105,000.
Depreciation and Amortization
Depreciation and amortization charges for the nine months ended September 30, 2008, totaled $668,000 and were comparable to $571,000 for the same period in 2007.
Interest Expense
Interest expense increased 2.7% to $254,000 from $247,000 for the nine months ended September 30, 2008 and 2007, respectively. The increase of 2.7% was primarily due to increases in domestic borrowing and increases in foreign interest rates, partially offset by reductions in domestic borrowing rates.
Other Expense
Other expense totaled $865,000 and $149,000 for the nine months ended September 30, 2008 and 2007, respectively. Included in other expense for the nine months ended September 30, 2008 was approximately $740,000 for non-recurring legal costs, which was the primary reason for the increase in other expenses over the prior period.
Income Taxes
Income tax expense for the nine months ended September 30, 2008 was approximately $4,000 resulting from minimum domestic state taxes due.
Minority Interest
Minority interest of approximately $223,000 and $135,000 resulted from the net operating profits of the Company's 51% owned subsidiaries and 50% owned subsidiaries for the nine months ended September 30, 2008 and 2007, respectively.
Net Loss
The Company had a net loss of $364,000 for the nine months ended September 30, 2008, or $0.02 per share, compared to a net loss of $4.0 million, or $0.21 per share, for the corresponding period last year.
Liquidity and Capital Resources
In the nine months ended September 30, 2008 the Company had a net loss of $364,000.
Net cash provided by operating activities was $3.3 million and $3.1 million for the nine months ended September 30, 2008 and 2007, respectively.
Net cash used in investing activities for the nine months ended September 30, 2008 and September 30, 2007, was approximately $1.1 million and $639,000, respectively. The increase in net cash used in investing activities was a result of increased purchases of property and equipment.
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