UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the first quarterly period ended March 31, 2008.

OR

o       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________ to __________.

    

 

Registrant’s telephone number, including area code: (914) 332-4100

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

 

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  o      NO x

 

On March 31, 2008 there were 19,129,177 shares of Common Stock outstanding.

 

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SPAR Group, Inc.

Index

 

 

1

 

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Item 1. Financial Statements

SPAR Group, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

See accompanying notes.

 

2

 

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SPAR Group, Inc.

Consolidated Statements of Operations

(unaudited)

(In thousands, except per share data)

 

 

See accompanying notes

 

3

 

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SPAR Group, Inc.

Consolidated Statements of Cash Flows

(unaudited)(In thousands)

 

 

The Company acquired equipment by entering into capital leases in the amount of $358,000 in the first quarter of 2007.

The Company issued preferred stock in the first quarter of 2008. Upon issuance of the preferred shares the accrued expenses due to affiliates was reduced by $100,000.

See accompanying notes.

 

4

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited)

 

The accompanying unaudited, consolidated financial statements of SPAR Group, Inc., a Delaware corporation (“SGRP”), and its subsidiaries (together with SGRP, 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 considered necessary for a fair presentation have been included in these interim financial statements. However, these interim financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto for the Company as contained in the Company’s Annual Report for 2007 on Form 10-K for the 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”). The Company’s results of operations for the interim periods are not necessarily indicative of its operating results for the entire year.

The Company is a supplier of merchandising and other marketing services throughout the United States and internationally. The Company also provides in-store event staffing, product sampling, radio frequency identification (“RFID”) services, technology services and marketing research.

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. The Company continues to focus on expanding its merchandising and marketing services business throughout the world.

5

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited) (continued)

 

 

The following table sets forth the computations of basic and diluted earnings per share (in thousands, except per share data):

 

 

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 $7.0 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 to $5.0 million. Borrowings are based upon a borrowing base formula as defined in the agreement (principally 85% of “eligible” domestic accounts receivable less certain reserves). The Credit Facility is secured by all of the assets of the Company and its domestic subsidiaries. The Credit Facility also limits certain expenditures, including, but not limited to, capital expenditures and other investments. In addition, Mr. Robert G. Brown, a Director, the Chairman and a major stockholder of SGRP, and Mr. William H. Bartels, a Director, the Vice Chairman and a major stockholder of SGRP, have provided personal guarantees of the Credit Facility totaling $1.0 million.

The basic interest rate under the Credit Facility is Webster’s “Alternative Base Rate” plus 1.0% per annum (a total of 6.25% per annum at March 31, 2008), which automatically changes with each change made by Webster in such Alternative Base Rate. The Company at its option, subject to certain conditions, may elect to have portions of its loans under the Credit Facility bear interest at various LIBOR rates plus 3.25% per annum based on fixed periods of one, two, three or nine months. The actual average interest rate under the Credit Facility was 7.06% per annum for the three months ended March 31, 2008.

 

6

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited) (continued)

 

The domestic revolving loan balances outstanding under the Credit Facility were $3.9 million and $4.9 million at March 31, 2008 and December 31, 2007, respectively. As of March 31, 2008, the SPAR Group had unused availability under the Credit Facility of $120,000 out of the remaining maximum $1.1 million unused revolving line of credit after reducing the borrowing base by outstanding loans.

Because of the requirement to maintain a lock box arrangement with Webster and Webster’s ability to invoke a subjective acceleration clause at its discretion, borrowings under the Credit Facility are classified as current at March 31, 2008 and December 31, 2007, in accordance with EITF 95-22, Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Agreements That Include Both a Subjective Acceleration Clause and a Lock-Box Agreement.

The Company was not in violation of any covenants at March 31, 2008, and does not expect to be in violation at future measurement dates. However, there are no assurances that the Company will not be in violation of certain covenants in the future. Should the Company be in violation, there are no assurances that Webster will issue waivers of any future violations.

The Japanese subsidiary, SPAR FM Japan, Inc., has line of credit agreements totaling 100 million Yen, or approximately $1.0 million (based upon the exchange rate at March 31, 2008). The outstanding balances under the line of credit agreements were 90 million Yen, or approximately $907,000 at March 31, 2008 and 90 million Yen, or approximately $802,000 at December 31, 2007 (based upon the exchange rate at those dates). The average interest rate was 1.88% per annum for the three months ended March 31, 2008. In addition, the Japan subsidiary had cash balances totaling 209 million Yen, or approximately $2.1 million and 137 million Yen, or approximately $1.2 million at March 31, 2008 and December 31, 2007 respectively (based upon the exchange rates at those dates).

The Australian subsidiary, SPARFACTS Australia Pty. Ltd., has a revolving line of credit arrangement with Oxford Funding Pty. Ltd. for $1.1 million (Australian) or approximately $1.0 million (based upon the exchange rate at March 31, 2008). There was no outstanding balance under the line of credit agreement at March 31, 2008 and a balance of $315,000 (Australian) or approximately $276,000 at December 31, 2007 (based upon the exchange rate at that date). The average interest rate was 12.6% per annum for the three months ended March 31, 2008.

SPAR Canada Company, a wholly owned subsidiary, has a credit agreement with Royal Bank of Canada providing for a Demand Operating Loan for a maximum borrowing of $1.0 million (Canadian) or approximately $978,000 (based upon the exchange rate at March 31, 2008). The Demand Operating Loan provides for borrowings based upon a borrowing base formula as defined in the agreement (principally 75% of eligible accounts receivable less certain deductions). The outstanding balances under the line of credit agreement were $236,000 (Canadian) or approximately $231,000 and $140,000 (Canadian) or approximately $143,000 at March 31, 2008 and December 31, 2007, respectively (based upon the exchange rate at those dates). The average interest rate was 6.25% per annum for the three months ended March 31, 2008.

In 2007, the Company capitalized certain equipment leases. The economic substance of the leases is such that the Company is financing the acquisition of the assets through the leases. The equipment has a cost of $582,000, accumulated depreciation of $185,000 and a net book value of $397,000 at March 31, 2008.

 

7

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited) (continued)

 

Annual future minimum lease payments required under the leases, together with their present value as of March 31, 2008 are as follows:

 

 

Mr. Robert G. Brown, a Director, the Chairman and a major stockholder of SGRP, and Mr. William H. Bartels, a Director, the Vice Chairman and a major stockholder of SGRP, are executive officers and the sole stockholders and directors of SPAR Marketing Services, Inc. (“SMS”), SPAR Management Services, Inc. (“SMSI”), and SPAR Infotech, Inc. (“SIT”).

SMS and SMSI provided approximately 99% of the Company’s domestic merchandising specialists field force (through independent contractors) for both the three months ended March 31, 2008 and 2007, and approximately 80% and 78% of the Company’s domestic field management, at a total cost to the Company of approximately $4.4 million and $4.7 million for the three months ended March 31, 2008 and 2007, respectively. Pursuant to the terms of the Amended and Restated Field Service Agreement dated as of January 1, 2004, SMS provides the services of SMS’s merchandising specialist field force of approximately 4,200 independent contractors to the Company. Pursuant to the terms of the Amended and Restated Field Management Agreement dated as of January 1, 2004, SMSI provides 53 full-time national, regional and district managers to the Company. For those services, the Company has agreed to reimburse SMS and SMSI for all of their costs of providing those services and to pay SMS and SMSI each a premium equal to 4% of their respective costs. Total net premiums (4% of SMS and SMSI costs) paid to SMS and SMSI for services rendered were approximately $170,000 and $189,000 for the three months ended March 31, 2008, and 2007, respectively. The Company has been advised that Messrs. Brown and Bartels are not paid any salaries as officers of SMS or SMSI so there were no salary reimbursements for them included in such costs or premium. However, since SMS and SMSI are “Subchapter S” corporations and are owned by Messrs. Brown and Bartels, they benefit from any income of such companies allocated to them.

SIT provided substantially all of the Internet computer programming services purchased by the Company at a total cost of approximately $188,000 and $166,000 for the three months ended March 31, 2008 and 2007, respectively. SIT provided approximately 6,100 and 5,400 hours of Internet computer programming services to the Company for the three months ended March 31, 2008 and 2007, respectively. Pursuant to the Amended and Restated Programming and Support Agreement dated as of September 15, 2007, SIT continues to provide programming services to the Company for which the Company has agreed to pay SIT competitive hourly wage rates for time spent on Company matters and to reimburse the related out-of-pocket expenses of SIT and its personnel. The average hourly billing rate was $30.96 and $30.69 for the three months ended March 31, 2008 and 2007, respectively. The Company has been advised that no hourly charges or business expenses for Messrs. Brown and Bartels were charged to the Company by SIT for the three months ended March 31, 2008 and 2007, respectively. However, since SIT is a “Subchapter S” corporation and is owned by Messrs. Brown and Bartels, they benefit from any income of such company allocated to them.

 

8

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited) (continued)

 

In November 2004 and January 2005, the Company entered into separate operating lease agreements between SMS and the Company’s wholly owned subsidiaries, SPAR Marketing Force, Inc. (“SMF”) and SPAR Canada Company (“SPAR Canada”), respectively. In March 2005 SMF entered into an additional operating lease with SMS. Each lease had a term of 36 months. The equipment leased by SMF and SPAR Canada was handheld computers and the total monthly lease expense for SMF and SPAR Canada was $20,232 and $2,972, respectively.

By March 31, 2008, all of the operating leases noted above had expired. Both SMF and SPAR Canada elected to notify SMS of its intention to continue to lease the equipment for an additional twelve month period. The extended lease payments are based upon the fair market value of the equipment as of the expiration dates and an effective interest rate of 10% per annum. The revised monthly lease payments are $10,050 for SMF and $1,500 for SPAR Canada. SMF and SPAR Canada accrued the cost of the revised lease payments since the expiration of the original leases and in March 2008 SMS forgave the total indebtedness for the accrued monthly lease amounts that were due as of March 31, 2008 totaling $39,000.

In addition to the $39,000 in operating lease payments SMS forgave, SMSI also forgave $100,000 that was owed by the Company for field management expenses as of March 31, 2008. It should also be noted that SMSI forgave an additional $100,000 of the Company's indebtedness in exchange for 89,286 shares of Preferred Stock (see Note 16, Preferred Stock).

Through arrangements with the Company, SMS, SMSI and SIT participate in various benefit plans, insurance policies and similar group purchases by the Company, for which the Company charges them their allocable shares of the costs of those group items and the actual costs of all items paid specifically for them. All transactions between the Company and the above affiliates are paid and/or collected by the Company in the normal course of business.

The following transactions occurred between the Company and the above affiliates (in thousands):

 

 

 

 

In addition to the above, through the services of Affinity Insurance, Ltd. (“Affinity”), the Company purchases insurance coverage for its casualty and property insurance risk. The Company’s Chairman and Vice Chairman own, through SMSI, a minority (less than 5%) equity interest in Affinity.

 

 

9

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited) (continued)

 

The Company grants options to purchase shares of the Company’s common stock to its employees and certain employees of its affiliates. Under SFAS No. 123(R), the Company accounts for its employee and affiliate employee stock option expense as compensation expense in the Company’s financial statements when the stock options are granted. Share-based compensation cost is measured on the grant date, based on the fair value of the award calculated at that date, and is recognized over the requisite service period, which generally is the options’ vesting period. Fair value is calculated using the Black-Scholes option pricing model. The fair value of the option continues to be updated through the vesting date. The options granted have a ten (10) year life and vest over four-year periods at a rate of 25% per year, beginning on the first anniversary of the date of grant.

Based upon the Black-Scholes calculation, share-based compensation expense related to employee stock option grants totaled approximately $49,000 and $80,000 for the three months ended March 31, 2008 and 2007 respectively. Compensation expense related to non-employee stock option grants awarded to the employees of the Company’s affiliates, was approximately $34,000 and $37,000 for the three months ended March 31, 2008 and 2007, respectively. The impact of the total share-based compensation expense on basic/diluted earnings per share was approximately $0.004and $0.006 for the three months ended March 31, 2008 and 2007, respectively.

Customer deposits at March 31, 2008, were approximately $747,000 (approximately $28,000 from domestic operations and approximately $719,000 from international operations) compared to approximately $580,000 at December 31, 2007 (approximately $120,000 from domestic operations and approximately $460,000 from international operations).

International Commitments

The Company’s international business model is to partner with local merchandising companies and combine the Company’s proprietary software and expertise in the merchandising and marketing services business with their partner’s knowledge of the local market. In 2001, the Company established its Japanese subsidiary to provide the latest in-store merchandising and marketing services to the Japanese market. Since 2003, the Company has expanded its international presence to Canada, Turkey, South Africa, India, Romania, China, Lithuania, Latvia, Estonia, Australia, and New Zealand. Today the Company has nine subsidiaries operating in 13 countries whose population represents approximately 48% of the total world population.

Certain of these subsidiaries are profitable, while others are operating at a loss. In the event certain subsidiaries have continued losses, the Company may be required to make additional cash infusions into those subsidiaries.

Legal Matters

Safeway Inc. (“Safeway”) filed a Complaint against PIA Merchandising Co., Inc. (“PIA Co.”), a wholly owned subsidiary of SPAR Group, Inc. (“SGRP”), Pivotal Sales Company (“Pivotal”), a wholly owned subsidiary of PIA Co., and SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001. Safeway claims, as subsequently amended, alleged causes of action for breach of contract and breach of implied contract. PIA Co. and Pivotal filed cross-claims against Safeway on or about March 11, 2002, and amended them on or about October 15, 2002, alleging causes of action by PIA Co. and Pivotal against Safeway for breach of contract, interference with economic relationship, unfair trade practices and unjust enrichment. Trial commenced in March 2006.

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited) (continued)

 

On May 26, 2006, the jury in this case returned a verdict resulting in a net award of $1,307,700 to Pivotal, a SGRP subsidiary. This net award is to be paid by Safeway and resulted from separate jury findings that awarded damages to those SGRP subsidiaries on certain claims and damages to Safeway on other claims. In particular, the jury awarded damages to Pivotal of $5,760,879 for Safeway’s interference with Pivotal’s contractual relationships with third party manufacturers and also awarded $782,400 to Pivotal and PIA for Safeway’s breach of contract with those SGRP subsidiaries. The jury awarded damages to Safeway of $5,235,579 for breach of contract by SGRP and those SGRP subsidiaries. Judgment was entered in favor of Pivotal in September 2006 for $1,307,700. Both parties filed post trial motions but all post trial motions were denied. Notices of Appeal were thereafter filed by both Safeway and Pivotal. Pivotal/SGRP is seeking to have Safeway’s judgment overturned, thereby increasing the award to Pivotal by over $5 million. Safeway has asked for a new trial on the judgment found against it. The appellate process is expected to take fourteen to twenty four months to complete. In the interim, the court ordered a mediation of the dispute, which took place but was not successful in resolving the matter. Accordingly, the appeals will proceed. The Company has recorded the net $1.3 million settlement award in other assets.

Briefing on the appeals commenced in the first quarter of 2008. It is expected that opposition and reply briefs will be completed by July, 2008. Thereafter, an oral argument hearing date will be assigned by the court of appeal.

In addition to the above, the Company is a party to various other legal actions and administrative proceedings arising in the normal course of business. In the opinion of Company’s management, disposition of these other matters are not anticipated to have a material adverse effect on the financial position, results of operations or cash flows of the Company.

A summary of the Company’s net revenues, operating income (loss) and long lived assets by geographic area for the three months ended March 31, 2008 and 2007, respectively, and at March 31, 2008 and December 31, 2007, are as follows (in thousands):

 

 

 

 

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited) (continued)

 

 

 

International revenues disclosed above were based upon revenues reported by the Company’s nine international subsidiaries. The Japan subsidiary contributed 19% and 18% of the consolidated net revenues of the Company for the three months ended March 31, 2008 and 2007, respectively. The Canadian subsidiary contributed 10% and 8% of the consolidated net revenues of the Company for the three months ended March 31, 2008 and 2007, respectively. The Australian subsidiary contributed 11% and 9% of the consolidated net revenues of the Company for the three months ended March 31, 2008 and 2007, respectively. Each of the remaining foreign subsidiaries contributed less than 7% of the consolidated net revenues of the Company for the three ended March 31, 2008 and 2007, respectively.

 

 

 

 

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited) (continued)

 

 

 

The Company has foreign currency exposure associated with its international subsidiaries. In both 2008 and 2007, these exposures are primarily concentrated in the Canadian Dollar, Australian Dollar and Japanese Yen. At March 31, 2008, international assets totaled $10.1 million and international liabilities totaled $14.2 million. International revenues for the three months ended March 31, 2008 and 2007 were $10.0 million and $7.0 million, respectively. The international division reported a net income (loss) of approximately $69,000 and $(118,000) for the three months ended March 31, 2008 and 2007, respectively.

In those countries where the Company had the greater risk for currency exposure, the total assets and liab ilities are as follows (in thousands):

 

Country	Total Assets		Total Liabilities
Canada	$	1,221	$	897
Australia		1,873		1,396
Japan		4,093		3,765

 

The Company is exposed to market risk related to the variable interest rate on its lines of credit. At March 31, 2008, the Company’s outstanding lines of credit totaled approximately $5.0 million, as noted in the table below (in thousands):

 

Based on the 2008 average outstanding borrowings under variable-rate debt, a one-percentage point increase in interest rates would negatively impact pre-tax earnings and cash flows for the three months ended March 31, 2008 by approximately $14,000.

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited) (continued)

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” The statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. SFAS No. 157 is effective January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. There was no material impact from this statement on our financial condition and results of operations.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS No. 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157 and SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.” SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. There was no material impact from this statement on our financial condition and results of operations.

 

In December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations” (“SFAS No. 141(R)”), which replaces SFAS No. 141, “Business Combinations,” and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. SFAS No. 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We expect to adopt this statement on January 1, 2009. SFAS No. 141(R)’s impact on accounting for business combinations is dependent upon acquisitions after the effective date.

In December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements,” which amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS No. 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This statement also requires the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly identified and presented on the face of the consolidated statement of income. Changes in a parent’s ownership interest while the parent retains its controlling financial interest must be accounted for consistently, and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any non-controlling equity investment. The statement also requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This statement applies prospectively to all entities that prepare consolidated financial statements and applies prospectively for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We don’t believe this statement will impact our financial condition or results of operations but may impact the format of our financial statements.

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited) (continued)

 

In March 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Investments and Hedging Activities, an amendment of FASB Statement No. 133”, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS No. 161 is effective for us beginning January 1, 2009. We are currently assessing the potential impact, if any, that adoption of SFAS No. 161 may have in our financial statements.

In July 2006, the FASB issued FASB interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation. FIN 48 requires that interest and penalties that the tax law requires to be paid on the underpayment of taxes should be accrued on the difference between the amount claimed or expected to be claimed on the return and the tax benefit recognized in the financial statements. The Company’s policy is to record this interest and penalties as additional tax expense.

SPAR and its subsidiaries file numerous consolidated, combined and separate company income tax returns in the U.S. Federal jurisdiction and in many U.S. state and foreign jurisdictions. With few exceptions, SPAR is subject to U.S. Federal, state and local income tax examinations for the years 2004 through the present. However, tax authorities have the ability to review years prior to the position taken by the Company to the extent that SPAR utilized tax attributes carried forward from those prior years.

The Company adopted the provisions of FASB Interpretation No. 48 Accounting for uncertainty in Income Taxes, on January 1, 2007. In management’s view, the Company’s tax reserves at March 31, 2008, totaling $182,000 for potential domestic state tax and federal tax liabilities were sufficient to meet the requirements of FIN 48. The reserve for potential international tax liabilities totaling $180,000 was also deemed sufficient to satisfy FIN 48. For the first quarter of 2008 the reserve for FIN 48 exposures increased $23,000.

Details of the Company’s FIN 48 reserves at March 31, 2008 are outlined in the table below (in thousands):

 

 

On March 28, 2008, SGRP filed a “Certificate of Designation of Series “A” Preferred Stock of SPAR Group, Inc.” (the “Preferred Designation”), creating a series of 3,000,000 shares of Preferred Stock designated as “Series A Preferred Stock” with a par value of $0.01 per share (the “Preferred Stock”), which designation had been approved by SGRP’s Board of Directors (the “Board”) on March 27, 2008.

The Preferred Designation provides that each share of Preferred Stock is to be issued at a value equal to the closing bid price of SGRP’s common stock (the “Common Stock”) immediately preceding the day SGRP and the purchaser(s) entered into a binding commitment to issue and acquire Preferred Stock. The Preferred Stock will

 

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SPAR Group, Inc.

Notes to Consolidated Financial Statements

(unaudited) (continued)

 

accrue a 10% dividend payable in either cash (when permitted by law and Nasdaq and authorized by the Board) or common stock when authorized by the Board (valued at the current market price of a share of common stock at the time paid but not less that the initial purchase price of a share of such preferred). All accrued and unpaid dividends and potential dividends must be paid to the holders of the Preferred Stock before any dividends can be paid to the holders of the Common Stock. The face value (purchase price) of the Preferred Stock and all accrued and unpaid dividends and potential dividends must be paid to the holders of the Preferred Stock before any liquidating distributions can be made to the holders of the Common Stock. The consent of all of the holders of the Preferred Stock is required for SGRP to make any changes in the Preferred Designation or issue any other class of preferred stock senior to or pari passu with the Preferred Stock.

The Preferred Stock is redeemable, at the discretion of the Corporation only, for a cash redemption price equal to its face value (purchase price) plus all accrued and unpaid dividends and potential dividends. Each share of Preferred Stock is convertible into one share of Common Stock at the rate of one to one at the option of the holder, which option would be exercisable for so long as the Preferred Stock is outstanding (even if the Corporation has elected to redeem). Such a conversion also requires that the Corporation satisfy all accrued and unpaid dividends and potential dividends at the same time. The Preferred Stock votes with the Common Stock (no class voting) and have voting rights equal to one vote per share of Preferred Stock.

On March 27, 2008, the Board also authorized the issuance of up to 530,000 shares of Preferred Stock to its affiliates, Robert G. Brown and William H. Bartels (who are officers, directors and significant shareholders of SGRP - see Note 6, Related-Party Transactions) in return for (among other things) cash or the reduction of an equivalent debt owed by the Company to SPAR Management Services, Inc. (“SMSI”), an affiliate of SGRP wholly owned by Mr. Brown and Mr. Bartels. On March 31, 2008, the Corporation, Mr. Brown, Mr. Bartels and SMSI entered into an agreement to issue and purchase 89,286 shares of Preferred Stock at $1.12 per share (the closing bid price of SGRP’s Common Stock for the most recent trading day available immediately preceding such agreement date). Pursuant to that agreement, SGRP’s payable to SMSI was reduced by $100,000, and SGRP issued 54,564 shares of Preferred Stock to Mr. Brown and 34,722 shares of Preferred Stock to Mr. Bartels, all effective March 31, 2008. SGRP’s Audit Committee reviewed and unanimously approved this transaction, including the terms of the Preferred Stock and the affiliated relationship of the parties. The offer and sale of such Preferred Stock have not been registered under the Securities Act or other securities laws, as they were a non-public offer and sale made in reliance upon (among other things) Section 4 (2) of the Securities Act.

Certain reclassifications have been made to the 2007 financial statements to conform with the 2008 presentation.

 

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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 carryforwards, 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.

 

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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:

 

Critical Accounting Policies

There were no material changes during the three months ended March 31, 2008, to the Company’s critical accounting policies as reported in the Company’s Annual Report for 2007 on Form 10-K.

 

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Results of Operations

Three months ended March 31, 2008, compared to three months ended March 31, 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).

 

 

Net Revenues

Net revenues for the three months ended March 31, 2008, were $17.5 million, compared to $15.4 million for the three months ended March 31, 2007, an increase of $2.1 million or 13.2%.

International net revenues totaled $10.0 million for the three months ended March 31, 2008, compared to $7.0 million for the same period in 2007, an increase of $3.0 million or 43.4%. The increase in 2008 international net revenues was due to net revenue increases from Australia $618,000, India $515,000, Turkey $287,000, Canada $548,000, Japan $551,000, South Africa $123,000 and China $409,000, partially offset by net revenue decreases in Romania $16,000 and Lithuania $5,000.

Domestic net revenues totaled $7.5 million in the three months ended March 31, 2008, compared to $8.4 million for the same period in 2007. Domestic net revenues decreased $900,000 primarily as a result of the loss of a significant client. Approximately 9% and 12% of the Company’s net revenues for the three months ended March 31, 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 5% and 10% of the Company’s accounts receivable at March 31, 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 6% of the Company’s net revenues for the three months ended March 31, 2008 and 2007, respectively. The client accounted for approximately 6% and 3% of the Company’s accounts receivable at March 31, 2008 and December 31, 2007, respectively.

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 71.5% of net revenues for the three months ended March 31, 2008 and 68.1% for the three months ended March 31, 2007. The increase in cost of revenues as a percent of net revenues of 3.4% is primarily a result of international operations.

 

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Domestic cost of revenues was 67.4% of net revenues for the three months ended March 31, 2008 and 67.3% of net revenues for the three months ended March 31, 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 was 68.7%, an increase of 1.4% directly attributed to a mix in higher cost project work in the quarter ended March 31, 2008 compared to the same period in 2007.

Internationally, the cost of revenues was 74.6% of net revenues for the three months ended March 31, 2008 and 69.0% of net revenues for the three months ended March 31, 2007. The international cost of revenues percentage increase was primarily attributed to higher cost of revenues as a percentage of net revenues in Canada, China and Turkey.

Approximately 89% and 87% of the Company’s domestic cost of revenues in the three months ended March 31, 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 $347,000, or 7.0%, for the three months ended March 31, 2008, to $4.7 million compared to $5.0 million for the same period in 2007.

International selling, general and administrative expenses totaled $2.2 million for the three months ended March 31, 2008, compared to $2.1 million for the same period in 2007. The $44,000 increase in international selling, general and administrative expenses was primarily due to Japan $132,000 and Canada $24,000, partially offset by decreased expenses from Australia of $126,000. All other international subsidiaries resulted in a net increase of $14,000.

Domestic selling, general and administrative expenses totaled $2.5 million for the three months ended March 31, 2008, compared to $2.9 million for the same period in 2007. The decrease in domestic selling, general and administrative expenses of $391,000 was primarily due to a decrease in payroll related expenses of $179,000 and reduced building related expenses of $149,000 ($73,000 was related to a one-time charge in 2007 for relocation expenses). In addition, there was a reduction in operating lease expense for equipment provided by the Company’s affiliate SMS totaling $63,000 (see Note 6, Related-Party Transactions).

Depreciation and Amortization

Depreciation and amortization charges for the three months ended March 31, 2008, totaled $208,000 and were comparable to $197,000 for the same period in 2007.   

Interest Expense

Interest expense totaled $81,000 and $89,000 for the three months ended March 31, 2008 and 2007, respectively.

Other Expense

Other expense totaled $43,000 and $21,000 for the three months ended March 31, 2008 and 2007, respectively.

Income Taxes

Income taxes for the three months ended March 31, 2008 were approximately $164,000 for taxes due on international profits and minimum domestic state taxes. Income taxes for the three months ended March 31, 2007 were approximately $67,000 for minimum domestic state taxes. There were no tax provisions for federal tax as the Company reported a loss for the three months ended March 31, 2008, and provides a valuation allowance against any benefits from operating loss carryforwards.

 

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Minority Interest

Minority interest of approximately $66,000 and $45,000 resulted from the net operating profits of the Company’s 51% owned subsidiaries and 50% owned subsidiaries for the three months ended March 31, 2008 and 2007, respectively.

Net Loss

The Company had a net loss of $250,000 for the three months ended March 31, 2008, or $0.01 per diluted share, compared to a net loss of $509,000, or $0.03 per diluted share, for the corresponding period last year.

Liquidity and Capital Resources

In the three months ended March 31, 2008 the Company had a net loss of $250,000.

Net cash provided by operating activities for the three months ended March 31, 2008 was $2.4 million compared to $3.0 million for the prior year. The decrease in net cash provided by operating activities was primarily due to a smaller decrease in total dollars in accounts receivable, an increase in prepaid expenses and a decrease in accrued expenses due affiliates. This was partially offset by a larger increase in accounts payable and accrued expenses in 2008 as compared to the first quarter of 2007.

Net cash used in investing activities for the three months ended March 31, 2008 and March 31, 2007, was approximately $146,000 and $346,000, 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 three months ended March 31, 2008 and 2007, was approximately $1.1 million and $1.7 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 three months ended March 31, 2008, of approximately $1.2 million.

At March 31, 2008, the Company had negative working capital of $422,000, as compared to a negative $449,000 at December 31, 2007. The Company’s current ratio was 0.98 at March 31, 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 $7.0 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 to $5.0 million. Borrowings are based upon a borrowing base formula as defined in the agreement (principally 85% of “eligible” domestic accounts receivable less certain reserves). The Credit Facility is secured by all of the assets of the Company and its domestic subsidiaries. The Credit Facility also limits certain expenditures, including, but not limited to, capital expenditures and other investments.   In addition, Mr. Robert G. Brown, a Director, the Chairman and a major stockholder of SGRP, and Mr. William H. Bartels, a Director, the Vice Chairman and a major stockholder of SGRP, have provided personal guarantees of the Credit Facility totaling $1.0 million.

 

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The basic interest rate under the Credit Facility is Webster’s “Alternative Base Rate” plus 1.0% per annum (a total of 6.25% per annum at March 31, 2008), which automatically changes with each change made by Webster in such Alternative Base Rate.  The Company at its option, subject to certain conditions, may elect to have portions of its loans under the Credit Facility bear interest at various LIBOR rates plus 3.25% per annum based on fixed periods of one, two, three or nine months. The actual average interest rate under the Credit Facility was 7.06% per annum for the three months ended March 31, 2008.

The domestic revolving loan balances outstanding under the Credit Facility were $3.9 million and $4.9 million at March 31, 2008 and December 31, 2007, respectively. As of March 31, 2008, the SPAR Group had unused availability under the Credit Facility of $120,000 out of the remaining maximum $1.1 million unused revolving line of credit after reducing the borrowing base by outstanding loans.

Because of the requirement to maintain a lock box arrangement with Webster and Webster’s ability to invoke a subjective acceleration clause at its discretion, borrowings under the Credit Facility are classified as current at March 31,2008 and December 31, 2007, in accordance with EITF 95-22, Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Agreements That Include Both a Subjective Acceleration Clause and a Lock-Box Agreement.

The Company was not in violation of any covenants at March 31, 2008, and does not expect to be in violation at future measurement dates. However, there are no assurances that the Company will not be in violation of certain covenants in the future. Should the Company be in violation, there are no assurances that Webster will issue such waivers in the future.

The Japanese subsidiary, SPAR FM Japan, Inc., has line of credit agreements totaling 100 million Yen, or approximately $1.0 million (based upon the exchange rate at March 31, 2008). The outstanding balances under the line of credit agreements were 90 million Yen, or approximately $907,000 at March 31, 2008 and 90 million Yen, or approximately $802,000 at December 31, 2007 (based upon the exchange rate at those dates). The average interest rate was 1.88% per annum for the three months ended March 31, 2008. In addition, the Japan subsidiary had cash balances totaling 209 million Yen, or approximately $2.1 million and 137 million Yen, or approximately $1.2 million at March 31, 2008 and December 31, 2007 respectively (based upon the exchange rates at those dates).

The Australian subsidiary, SPARFACTS Australia Pty. Ltd., has a revolving line of credit arrangement with Oxford Funding Pty. Ltd. for $1.1 million (Australian), or approximately $1.0 million (based upon the exchange rate at March 31, 2008). There was no outstanding balance under the line of credit agreement at March 31, 2008 and a balance of $315,000 (Australian), or approximately $276,000 at December 31, 2007 (based upon the exchange rate at that date). The average interest rate was 12.6% per annum for the three months ended March 31, 2008.

SPAR Canada Company, a wholly owned subsidiary, has a credit agreement with Royal Bank of Canada providing for a Demand Operating Loan for a maximum borrowing of $1.0 million (Canadian), or approximately $978,000 (based upon the exchange rate at March 31, 2008). The Demand Operating Loan provides for borrowings based upon a borrowing base formula as defined in the agreement (principally 75% of eligible accounts receivable less certain deductions). The outstanding balances under the line of credit agreement were $236,000 (Canadian), or approximately $231,000 and $140,000 (Canadian), or approximately $143,000 at March 31, 2008 and December 31, 2007, respectively (based upon the exchange rate at those dates). The average interest rate was 6.25% per annum for the three months ended March 31, 2008.

The Company’s international business model is to partner with local merchandising companies and combine the Company’s proprietary software and expertise in the merchandising and marketing services business with their partner’s knowledge of the local market. In 2001, the Company established its first subsidiary in Japan and has continued this strategy. As of this filing, the Company is currently operating in 13 countries and has 9

 

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international subsidiaries. Certain of these subsidiaries are profitable, while others are operating at a loss. In the event of continued losses, the Company may be required to provide additional cash infusions into those subsidiaries with losses.

Management believes that based upon the Company’s existing credit facilities, projected results of operations and other financing available to the Company (including amounts due to affiliates), sources of cash availability should be sufficient to support ongoing operations over the next twelve months. However, continued losses, delays in collection of receivables due from any of the Company’s major clients, or a significant reduction in business from such clients could have a material adverse effect on the Company’s cash resources and its ongoing ability to fund operations.

Certain Contractual Obligations

The following table contains a summary of certain of the Company’s contractual obligations by category as of March 31, 2008 (in thousands).

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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 lines of credit. The Company carries current assets and liabilities at their stated or face amounts in its consolidated financial statements, as the Company believes those amounts approximate the fair value for these items because of the relatively short period of time between origination of the asset or liability and their expected realization or payment. The Company monitors the risks associated with asset and liability positions, as well as interest rates. The Company’s investment policy objectives require the preservation and safety of the principal, and the maximization of the return on investment based upon its safety and liquidity objectives.

The Company is exposed to market risk related to the variable interest rate on its lines of credit. At March 31, 2008, the Company’s outstanding lines of credit totaled $5.0 million, as noted in the table below (in thousands):

 

Based on the 2008 average outstanding borrowings under variable-rate debt, a one-percentage point increase in interest rates would negatively impact pre-tax earnings and cash flows for the three months ended March 31, 2008 by approximately $14,000.

 

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The Company has foreign currency exposure associated with its international subsidiaries. In both 2008 and 2007, these exposures are primarily concentrated in the Canadian Dollar, Australian Dollar and Japanese Yen. At March 31, 2008, international assets totaled $10.1 million and international liabilities totaled $14.2 million. International revenues for the three months ended March 31, 2008 and 2007 were $10.0 million and $7.0 million, respectively. The international division reported a net income (loss) of approximately $69,000 and $(118,000) for the three months ended March 31, 2008 and 2007, respectively.

In those countries where the Company had the greater risk for currency exposure, the total assets and liabilities are as follows (in thousands):

 

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of the end of the period covering this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls during the three months covered by this report or from the end of the reporting period to the date of this Form 10-Q.

The Company has established a plan, documented and tested its domestic internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002 and has developed a plan to document and test its internal controls as they pertain to its material international subsidiaries.

 

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PART II: OTHER INFORMATION

Safeway Inc. (“Safeway”) filed a Complaint against PIA Merchandising Co., Inc. (“PIA Co.”), a wholly owned subsidiary of SPAR Group, Inc. (“SGRP”), Pivotal Sales Company (“Pivotal”), a wholly owned subsidiary of PIA Co., and SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001. Safeway claims, as subsequently amended, alleged causes of action for breach of contract and breach of implied contract. PIA Co. and Pivotal filed cross-claims against Safeway on or about March 11, 2002, and amended them on or about October 15, 2002, alleging causes of action by PIA Co. and Pivotal against Safeway for breach of contract, interference with economic relationship, unfair trade practices and unjust enrichment. Trial commenced in March 2006.

On May 26, 2006, the jury in this case returned a verdict resulting in a net award of $1,307,700 to Pivotal, a SGRP subsidiary. This net award is to be paid by Safeway and resulted from separate jury findings that awarded damages to those SGRP subsidiaries on certain claims and damages to Safeway on other claims. In particular, the jury awarded damages to Pivotal of $5,760,879 for Safeway’s interference with Pivotal’s contractual relationships with third party manufacturers and also awarded $782,400 to Pivotal and PIA for Safeway’s breach of contract with those SGRP subsidiaries. The jury awarded damages to Safeway of $5,235,579 for breach of contract by SGRP and those SGRP subsidiaries. Judgment was entered in favor of Pivotal in September 2006 for $1,307,700. Both parties filed post trial motions but all post trial motions were denied. Notices of Appeal were thereafter filed by both Safeway and Pivotal. Pivotal/SGRP is seeking to have Safeway’s judgment overturned, thereby increasing the award to Pivotal by over $5 million. Safeway has asked for a new trial on the judgment found against it. The appellate process is expected to take fourteen to twenty four months to complete. In the interim, the court ordered a mediation of the dispute, which took place but was not successful in resolving the matter. Accordingly, the appeals will proceed. The Company has recorded the net $1.3 million settlement award in other assets.

Briefing on the appeals commenced in the first quarter of 2008. It is expected that opposition and reply briefs will be completed by July, 2008. Thereafter, an oral argument hearing date will be assigned by the court of appeal.

In addition to the above, the Company is a party to various other legal actions and administrative proceedings arising in the normal course of business. In the opinion of Company’s management, disposition of these other matters are not anticipated to have a material adverse effect on the financial position, results of operations or cash flows of the Company.

The Company’s Annual Report for 2007 on Form 10-K describes various risk factors applicable to the Company and its businesses in Item 1 under the caption “Certain Risk Factors”, which risk factors are incorporated by reference into this Quarterly Report. There have been no material changes in the Company’s risk factors since the Company’s Annual Report for 2007 on Form 10-K.

Item 2(a): Not applicable

Item 2(b): Not applicable

Item 2(c): Not applicable

 

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Item 3.

Defaults upon Senior Securities

Item 3(a): Defaults under Indebtedness: None.

Item 3(b): Defaults under Preferred Stock: Not applicable.

Not applicable.

Not applicable.

 

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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.

 

 

 

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EXHIBIT INDEX

 

	10.1	Series A Preferred Stock Subscription Agreement dated as of March 31, 2008 by and among SPAR Group, Inc., each of Robert G. Brown and William H. Bartels and SPAR Management Services, Inc., as filed herewith.
	10.2	Debtor Finance Agreement dated as of May 24, 2006 by and among Bendingo Bank Limited ACN and Sparfacts Pty Ltd. together with  Bendingo Bank Limited ACN Standard Terms and Conditions, as filed herewith.
	31.1	Certification of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as filed herewith.
	31.2	Certification of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as filed herewith.
	32.1	Certification of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith.
	32.2	Certification of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith.

 

 

 

 

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Exhibit 10.1

SERIES A PREFERRED STOCK

SUBSCRIPTION AGREEMENT

This Series A Preferred Stock Subscription Agreement (this “Agreement”) is made as of this 31st day of March, 2008, by and among SPAR Group, Inc., a Delaware corporation (the “Corporation”), each of Robert G. Brown and William H. Bartels (each a “Purchaser”, and collectively, the “Purchasers”), and SPAR Management Services, Inc., a Nevada corporation wholly owned by the Purchasers (“SMSI”).

Section 1.           Purchase and Sale of the Preferred Shares. Subject to the terms and conditions of this Agreement, each Purchaser subscribes for and hereby purchases and acquires from the Corporation, and the Corporation hereby sells and issues to each Purchaser, the number of shares of the Corporation’s Series A Preferred Stock, par value $0.01 per share, specified for such Purchaser (collectively, the “Preferred Shares”), at a purchase price of $1.12 per Share:

The Purchasers shall cause SMSI to reduce the Corporation’s payable to it by the aggregate purchase price of $100,000.32 (the “Purchase Price”), as payment in full for all such Preferred Shares. The Purchasers hereby direct SMSI to reduce, and by its signature below, SMSI hereby agrees to reduce and hereby reduces, the outstanding balance of SMSI’s receivables owed by the Corporation in the amount of the Purchase Price (applied oldest to youngest) and will reflect the same on its books and records.

Section 2.           Representations and Covenants of the Corporation. In order to induce them to enter into this Agreement, the Corporation represents and warrants the following to each Purchaser: (a) the Corporation is and will continue to be a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (b) the Corporation has and will maintain full and unrestricted power, authority and legal capacity, and it has been duly authorized and empowered, to the extent necessary to execute and deliver this Agreement and make this Agreement enforceable against it; (c) the Corporation has obtained and will maintain all qualifications, authorizations, approvals and waivers, and it has satisfied and will continue to satisfy all other applicable legal, governance and contractual requirements, to the extent necessary to execute and deliver this Agreement and make this Agreement enforceable against it; (d) this Agreement has been duly executed and delivered by the Corporation, and, upon its execution by the Purchasers, shall constitute the legal, valid and binding obligation of the Corporation, enforceable in accordance with its terms, except to the extent that its enforcement is limited by bankruptcy, insolvency, reorganization or other laws relating to or affecting the enforcement of creditors’ rights generally and by general principles of equity; (e) the authorized capital stock of the Corporation is 50,000,000 shares, consisting of (i) 47,000,000 shares of common stock, par value $.01 per share, and (ii) 3,000,000 shares of preferred stock, par value $.01 per share; (f) the holder’s conversion rights, Corporation’s redemption rights, payment and liquidation preferences over common, and other terms, provisions and conditions respecting the Preferred Shares are stated in the Series A Preferred Stock Designation as filed with the Delaware Secretary of State on March 28, 2008 (the “Series A Designation”); and (g) upon issuance in accordance with the terms of this Agreement, the Preferred Shares will be duly and validly authorized and issued and fully paid and nonassessable.

Section 3.           Representations and Warranties of the Purchaser. In order to induce it to enter into this Agreement, each Purchaser represents and warrants (as to himself only) the following to the Corporation as of the date hereof: (a) the Purchaser has and will maintain full and unrestricted power, authority and legal capacity to the extent necessary to execute and deliver this Agreement and make this Agreement enforceable against him; (b) the Purchaser has obtained and will maintain all qualifications, authorizations, approvals and waivers, and he has satisfied and will continue to satisfy all other applicable legal, governance and contractual requirements, to the extent necessary to execute and deliver this Agreement and make this Agreement enforceable against him; (c) this Agreement has been duly executed and delivered by the Purchaser, and, upon its execution by the Corporation, shall constitute the legal, valid and binding obligation of the Purchaser, enforceable in accordance with its terms, except to the extent that its enforcement is limited by bankruptcy, insolvency, reorganization or other laws relating to or affecting the enforcement of creditors’ rights generally and by general principles of equity; (d) the Purchaser has knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of his investment in the Preferred Shares; (e) the Purchaser understands

 

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that an investment in the Corporation represents a high degree of risk and there is no assurance that the Corporation’s business or operations will be successful; (f) as an officer and director, the Purchaser regularly receives and reviews information pertaining to the Corporation, including (without limitation) the Corporation’s Annual Report on Form 10-K for the Fiscal Year ended December 31, 2008 (the “2007 Annual Report”), the Purchaser has received all of the information that he requested in connection with the decision to purchase the Preferred Shares, the Purchaser has independently reviewed and evaluated the 2007 Annual Report, the Series A Designation, and other information provided by the Corporation in connection with the decision to purchase the Preferred Shares, the Purchaser has had an opportunity to ask questions and receive answers from the Corporation regarding the business, properties, prospects and financial condition of the Corporation, and all such questions have been answered to the full satisfaction of the Purchaser; (g) the Purchaser has considered carefully the risks attendant to an investment in the Corporation and the Preferred Shares (including, without limitation, the Risk Factors described in the 2007 Annual Report), and that, as a consequence of such risks, the Purchaser understands he could lose his entire investment in the Preferred Shares; (h) the Purchaser further understands that (i) neither the offering nor the sale of the Preferred Shares has been registered under the Securities Act of 1933, as amended (the “Securities Act”) or any applicable state laws in reliance upon exemptions from the registration requirements of such laws, (ii) the Preferred Shares must be held by him indefinitely unless the sale or transfer thereof is subsequently registered under the Securities Act and any applicable state laws, or an exemption from such registration requirements is available, and (iii) the Corporation will rely upon the representations and warranties made by the Purchaser in this Agreement in order to establish such exemptions from the registration requirements of the Securities Act and any applicable state laws; (i) the Preferred Shares are being acquired for investment for the Purchaser’s own account, and not as a nominee or agent and not with a view to the resale, transfer or distribution of all or any part of the Preferred Shares; (j) the Purchaser has no present intention of selling, transferring or distributing any of the Preferred Shares, or granting any participation in any of the Preferred Shares, to any individual, entity or other person within the meaning of the Securities Act; and (k) the Purchaser does not have any contracts, understandings, agreements or arrangements to sell, transfer or distribute any of the Preferred Shares, or grant any participation in any of the Preferred Shares, to any individual, entity or other person.

Section 4.           Further Assurances. The parties will, upon reasonable request, execute and deliver all such further assignments, endorsements and other documents as may be necessary in order to implement and perfect the purchase by the Purchasers of the Preferred Shares.

Section 5.           Successors and Assigns; No Third Party Benefits; Headings, Etc. The representations, warranties, covenants and other agreements made by or on behalf of each party in this Agreement shall be binding upon the successors, permitted assigns, heirs and legal representatives of such party and shall inure to the benefit of the successors, permitted assigns, heirs and legal representatives of each other party. The provisions of this Agreement are for the exclusive benefit of the parties hereto, and, except as otherwise expressly provided herein, no other person (including creditors of any party hereto) shall have any right or claim against any party by reason of any of those provisions or be entitled to enforce any of those provisions against any party. The section headings in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.

Section 6.           Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, (a) to the extent applicable, the General Corporation Law and Article 8 of the Uniform Commercial Code of the State of Delaware, each as amended, and (b) to the extent that such Delaware laws are not applicable, the applicable law of the State of New York other than those conflict of law rules that would defer to the substantive laws of any other jurisdiction.

Section 7.           Counterparts and Amendments. This Agreement or any amendment hereto may have been executed in two or more counterparts of the entire document or its signatures pages, any of which may have been delivered by telecopy, pdf or other electronic means, and all of which, when taken together, shall constitute a single agreement binding upon all of the parties hereto. Except for a party’s consent or waiver hereunder (which need only be signed by it), each and every supplement, modification and amendment respecting this Agreement shall be in writing and signed by all of the parties hereto.

Section 8.           Entire Agreement. This Agreement contains the entire agreement of the parties, and supersedes and completely replaces all prior and other communications, discussions and other representations, warranties, promises, assurances, agreements and understandings (whether written, oral, express, implied or otherwise) between the parties, with respect to the matters contained in this Agreement.

 

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

 

	/s/ Robert G. Brown
	Robert G. Brown
	/s/ William H. Bartels
	William H. Bartels

 

 

 

 

 

ACKNOWLEDGED AND AGREED TO:

 

SPAR Management Services, Inc.

 

 

 

 

 

 

 

Exhibit 10.2

 

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STANDARD TERMS AND CONDITIONS

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

 

On you signing and returning to us the offer set out in the Letter of Offer and these Standard Terms, a legally binding contract comes into existence between you and us. You should carefully consider and ensure that you fully understands the terms of the Letter of Offer and these Standard Terms before you sign and accept the Letter of Offer. We recommend that you obtain legal and financial advice before you sign and accept the Letter of Offer. The Standard Terms will also apply to each Security Provider and each Security Provider should carefully consider and ensure that it understands its obligations before signing any documents. We recommend that each Security Provider obtains legal and financial advice before signing the Letter of Offer and any Security.

 

 

 

 

 

 

 

 

 

 

including the costs of our agents, consultants or contractors as we reasonably determine and including such time spent by our and/or our agents' employees at the rate from time to time applicable to our and/or our agents' employees as stipulated by us from time to time but if not otherwise stipulated, at the following rates:

 

Executive Director and Chief Executive Officer or any person performing some or all of the functions of any of those positions - at $380 plus GST per hour;

 

National Sales & Marketing Manager, Chief Financial Officer and Chief Operations Officer or any person performing some or all of the functions of any of those positions - at $292 plus GST per hour;

 

Account Manager, Risk Manager, Technology Manager, Sales or State Manager, Business Development Manager, or any person performing some or all of the functions of any of those positions -at $264 plus GST per hour;

 

Senior Client Services Officer, Risk Officer, Accounts Receivable Manager,

Senior Accounts Officer or any person performing some or all of the functions of any of those positions - at $171 plus GST per hour;

 

Client Services Officer, Accounts Receivable Officer, Accounts Officer,

 

 

 

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STANDARD TERMS AND CONDITIONS

 

Personal Assistant or any person performing some or all of the functions of any of those positions - at $127 plus GST per hour;

 

Team Support Officer, Receptionist or any person performing some or all of the functions of any of those positions - at $98 plus GST per hour.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

pay the Debt on any ground whatsoever;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

You agree that we (or an Authorised Officer or our nominee) is at any time able to enter land or buildings occupied by you without notice to inspect and take copies of any documents relating in any way to any Assigned Debts.

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

 

Subject to clause 4.2.4, you agree that you will not rescind, cancel or vary any sale of goods or other agreement between a Debtor and you which gave rise to an Assigned Debt, without our express consent in writing.

 

 

 

Subject to clause 4.2.4, you agree that you will not assign, charge or otherwise encumber any of your Debts or enter into any other agreement for factoring or discounting them without our prior written consent.

 

 

 

Unless you have given us six months prior notice in writing of your intention to do so, you may not pay, lend or credit your directors any amounts without our prior written consent other than the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

and manager or other controller is appointed to all or part of the undertaking or property of the Debtor;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

by the placing of a notice to that effect in the form annexed as Schedule A to these Terms and Conditions on each invoice.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As security for all moneys owing from time to time by you to us, you as beneficial owner charge in favour of us all freehold and leasehold interests in land and all personal property of whatever description and wherever situated which you now have or during the currency of the Agreement may acquire.

 

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

 

 

 

 

 

The proper law for this Agreement is that of the Relevant State and you and we agree to submit to the jurisdiction of its courts.

 

 

 

 

 

 

 

 

is, in the absence of manifest error, admissible in proceedings and is conclusive evidence of the matters stated.

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

but if a receipt is not on a Business Day or is after 4.00 pm at the place of receipt, it is deemed to be given and received on the next Business Day.

 

 

 

 

You acknowledge and agree that we have not provided or held itself out as providing any financial advice to you whatsoever and that the responsibility of determining the type and amount of any facilities you want is entirely your.

 

 

 

 

 

Unless any provision of this Agreement specifies otherwise, any consent required to be given by us under this Agreement may be given or refused absolutely or subject to any conditions that we may determine in ourabsolute discretion.

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

 

We may from time to time give you written notice of the terms on which the facility provided under this Agreement is to operate. If there is a conflict between such a notice including our original facility letter and this Agreement the terms and conditions of this Agreement prevail unless we determine otherwise.

 

 

Time is of the essence in relation to any payment from you to us under this Agreement.

 

 

 

 

 

 

 

 

This Agreement is collateral to the Collateral Securities and Transaction Documents.

 

 

 

All amounts, rates and other payments payable by you under this Agreement are exclusive of any goods and services tax, broad based consumption tax, value added tax or similar tax ("GST"). If GST is imposed on any supply made by us under or in connection with this Agreement (a "taxable supply") then you must pay to us an additional amount equal to the GST paid by us.

 

 

 

 

 

 

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

 

 

 

 

 

 

In this Agreement unless there is something inconsistent with the context or circumstances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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STANDARD TERMS AND CONDITIONS

 

Schedule A

 

 

#

 

 

 

 

 

 

 

 

SPAR Group, Inc.

 

EXHIBIT 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Gary S. Raymond , certify that:

1.         I have reviewed this quarterly report on Form 10-Q for the three-month period ended March 31, 2008 (this “report”), of SPAR Group, Inc. (the “registrant”);

2.         Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.         Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.         The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

(a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)        Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)        Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

(d)        Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.         The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Ex-1

 

 

SPAR Group, Inc.

 

EXHIBIT 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James R. Segreto , certify that:

1.         I have reviewed this quarterly report on Form 10-Q for the three-month period ended March 31, 2008 (this “report”), of SPAR Group, Inc. (the “registrant”);

2.         Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.         Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.         The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

(a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)        Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)        Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

(d)        Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.         The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Ex-2

 

 

SPAR Group, Inc.

 

EXHIBIT 32.1

Certification of the Chief Executive Officer Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report on Form 10-Q for the three month period ended March 31, 2008 (this “report”), of SPAR Group, Inc. (the “registrant”), the undersigned hereby certifies that, to his knowledge:

1.         The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

2.         The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

 

 

A signed original of this written statement required by Section 906 has been provided to SPAR Group, Inc. and will be retained by SPAR Group, Inc., and furnished to the Securities and Exchange Commission or its staff upon request.

 

Ex-3

 

 

 SPAR Group, Inc.

 

EXHIBIT 32.2

Certification of the Chief Financial Officer Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report on Form 10-Q for the three month period ended March 31, 2008 (this “report”), of SPAR Group, Inc. (the “registrant”), the undersigned hereby certifies that, to his knowledge:

1.         The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

2.         The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

 

 

A signed original of this written statement required by Section 906 has been provided to SPAR Group, Inc. and will be retained by SPAR Group, Inc., and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

Ex-4