1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
ANNUAL REPORT ON-----------------------
FORM 10-K10-K/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 1997January 1, 1999
Commission file number 0-27824
PIA MERCHANDISING SERVICES, INC.
Delaware 33-0684451
(State or other jurisdiction of (I.R.S. Employer ofIdentification No.)
incorporation or organization) Identification No.)
19900 MACARTHUR BLVD, SUITE 900, IRVINE, CA 92612
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (714)(949) 476-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Sectionsection 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 13, 1998,19, 1999, based on the closing price
of the Common Stock as reported by the Nasdaq National Market on such date, was
approximately $19,385,868.$10,723,899.
The number of shares of the Registrant's Common Stock outstanding as of
March 13, 199819, 1999 was 5,392,5585,477,846 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of Stockholders to be held on
May 12, 1998 are incorporated by reference into Part III hereof.None.
================================================================================
2
PIA MERCHANDISING SERVICES, INC.
ANNUAL REPORT ON FORM 10-K10-K/A
INDEX
PART I
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal and Administrative Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 16
Item 6. Selected Consolidated Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 2425
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 2425
PART III
Item 10. Directors and Executive Officers of the Registrant 2426
Item 11. Executive Compensation 2429
Item 12. Security Ownership of Certain Beneficial Owners and Management 2435
Item 13. Certain Relationships and Related Transactions 2438
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 2539
Signatures 2641
2
3
PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS10-K/A INCLUDES "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 24A27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. THESEINCLUDING, IN PARTICULAR, THE STATEMENTS ARE INABOUT PIA'S PLANS AND
STRATEGIES UNDER THE SECOND
PARAGRAPH UNDER "BUSINESS--INDUSTRY OVERVIEW--SHIFT OF MERCHANDISING SERVICES,"
THE SOLE PARAGRAPH UNDER "BUSINESS--INDUSTRY OVERVIEW--INCREASE IN MERCHANDISING
SERVICES REQUIRED IN OTHER RETAIL CHANNELS," THE SOLE PARAGRAPH UNDER
"BUSINESS--BUSINESS STRATEGY--SERVE EMERGING DEMAND FOR DEDICATED SERVICES," THE
SOLE PARAGRAPH UNDER "BUSINESS--BUSINESS STRATEGY--INCREASE THE COMPANY'S
UTILIZATION OF INFORMATION TECHNOLOGY," THE FIRST PARAGRAPH UNDER
"BUSINESS--DESCRIPTION OF SERVICES," THE THIRD PARAGRAPH UNDER
"BUSINESS--RELATED SERVICES--TELEMARKETING SERVICES," THE SOLE PARAGRAPH UNDER
"BUSINESS--TRADEMARKS," THE FIRST PARAGRAPH UNDER "BUSINESS--MANAGEMENT'SHEADINGS "BUSINESS" AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--YEAR
ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996--NET REVENUES,OPERATIONS." THE FIFTH PARAGRAPH UNDER "BUSINESS--MANAGEMENT'S DISCUSSIONALTHOUGH PIA
BELIEVES THAT ITS PLANS, INTENTIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," THE SIXTH PARAGRAPH UNDER
"BUSINESS--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESERVES," AND THE SOLE PARAGRAPH
UNDER "BUSINESS--YEAR 2000 SOFTWARE COSTS."EXPECTATIONS REFLECTED IN OR SUGGESTED
BY SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT ASSURE THAT SUCH
PLANS, INTENTIONS OR EXPECTATIONS WILL BE ACHIEVED. IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS COULDTO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS
AS MADE IN THIS ANNUAL REPORT ON FORM 10-K/A RESULT OF
THE RISK FACTORSARE SET FORTH BELOW UNDER THE HEADING "RISK
FACTORS" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K/A. ALL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO PIA OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED BY THE CAUTIONARY STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-K/A.
SEE THE GLOSSARY AT PAGE 13 FOR A DESCRIPTION OF CERTAIN TERMS THAT ARE
USED THROUGHOUT THIS ANNUAL REPORT ON FORM 10-K.10-K/A.
ITEM 1. BUSINESS
GENERAL
PIA Merchandising Services, Inc. ("PIA" or the "Company") is a supplier
of in-store merchandising and sales services in the United States and Canada.
The Company provides these services primarily on behalf of consumer product
manufacturers, consumer service companies and retailers at approximately 20,00017,000
retail grocery stores, 5,0006,000 mass merchandiser and 13,0008,800 drug stores.
The Company currently provides three principal types of services: shared
services, where an associate represents multiple clients; dedicated services,
where associates work for one specific client; and project services, where
associates perform specialspecified in-store activities.
Shared services consist of regularly scheduled, routed merchandising
services provided at the store levelstores for multiple manufacturers, primarily under
multi-year contracts. PIA's shared service organization performs services for
multiple manufacturers. Shared services may include checking to ensureactivities such as: ensuring
that client's products authorized for distribution are in stock and on the
shelf, adding in new products that are approved for distribution but not present
on the shelf, setting category shelves in accordance with approved store
schematics, ensuring that shelf tags are in place, checking for the overall
salability of clients' products and performingselling new product and promotion selling.promotional items.
In 1998, PIA developed a new strategy for routed merchandising services.
The stores are selected for routed merchandising services based on two sets of
criteria. The first is the store's weekly All Commodity Volume ("ACV"). The
higher the sales volume of a store, the greater the need for merchandising
services and more frequent visits to the store are required. The second
criterion is based on retailer discipline. This is a subjective determination
and therefore based on retail conditions, schematic discipline and competitive
activity. This new market strategy provides our clients with an added focused
approach to meeting their merchandising needs.
Dedicated services generally consist of merchandising services generally as
described above except that dedicated services are performed for a specific
retailer or manufacturer by a dedicated organization, including aorganization. The merchandisers and
management team workingwork exclusively for that retailer or manufacturer. These
services are normally provided under multi-year contracts.
For both shared service clients and dedicated service clients, the Company
also performs project services. Project services consist primarily of specialspecific
in-store services initiated by retailers and manufacturers, such as seasonal, new product
launches, special promotion,seasonal or promotional merchandising, focused product support
and installation activities.product recalls. These services typically are typically used for large-scale
implementations over 30 days. The Company also performs other project services,
such as new store sets and existing store resets, re-merchandisings,re-merchandising, remodels and
category implementations, under shared service contracts or stand-alone project
contracts.
3
4
As part of its shared and dedicated services, PIA also collects and
provides to certain clients a variety of merchandising data that is category,
product and store specific.
3
4
PIA, organized in 1943, initially provided merchandising services in
grocery retail chains on behalf of manufacturers. Until 1989, the Company
operated exclusively in grocery retail chains in California and Arizona. In mid-1988, it was determined
that a national merchandising company could capitalize on developments within
the retail grocery industry by providing merchandising services to a variety of
manufacturers in the industry. Until 1989, the Company operated exclusively in
grocery retail chains in California and Arizona. In 1990, PIA implemented a
national expansion strategy to cover the grocery trade. In 1993, the Company
expanded its focus to address additional retail channels, including mass merchandiser,
chain drug and discount drug stores. In 1994, PIA began offering dedicated
services to retailers and manufacturers. In 1997, the Company established a
corporate and division infrastructure for its project services business. The
Company currently performs its services primarily on behalf of approximately 180805
consumer product manufacturers.
INDUSTRY OVERVIEW
A number of trends have been impactingimpacted the retail industry and are
creatinghave created a
demand for providers of third party merchandising services such as those offered
by the Company.
SHIFT OF MERCHANDISING SERVICES
Historically, merchandising functions were principally performed by employees of retailers, consumer product manufacturers and
food brokers.brokers principally performed merchandising functions. Retailers staffed
their stores as needed to ensure in-stock conditions, the placement of new items
on shelves, and the maintenance of shelf schematics to approved standards.
Manufacturers typically deployed their own sales people in an effort to ensure
that their products were in distribution and properly positioned on the shelves and
were properly spaced and positioned.shelves.
However, the primary function of these sales people was to sell the
manufacturers' products and promotions, and not to perform significant in-store
services at the shelf level. In addition, food brokers performed retail
merchandisingmerchandise services on behalf of the manufacturer in conjunction with their
sales efforts. Brokers also often performed work at the shelf level at the
request of the retailer and their principal client, the manufacturer.
The typicalaverage grocery store carries approximately 22,000 items. In an
effort to maintain or improve their margins, grocery retailers have broadened
their product offerings and services from traditional grocery, household and
health and beauty care products to include new product categories such as
general merchandise and service departments such as bakery, deli and prepared
fast foods. The Company believes that, as a result, these retailers have shifted
employee hours away from the traditional maintenance of packaged goods in order
to support these new categories and service departments. The Company further
believes at the same time, retailers have converted many hours of basic merchandising work from
full-time professionals to part-time labor, who are generally are less skilled and
trained. These trends have caused unsatisfactorypoorer shelf conditions and an increasing
number of out-of-stock items, resulting in lost sales. As a result, retailers
are increasing their relianceincreasingly relying on manufacturers and food brokers, among others, to
support their in-store needs such as new store sets and existing store resets,
re-merchandisings,re-merchandising, remodels and category implementations. Initially,
manufacturer'smanufacturers deployed their sales professionals to perform these
retailer mandated merchandisingretailer-mandated services. However, manufacturers found that the deployment of sales
professionals to perform retail merchandisingretail-merchandising services waswere expensive and not an
effective use of their resources. As manufacturers' costs to perform these
services grew and shelf integrity declined, manufacturers began to outsource
these merchandising activities to third parties such as the Company.
The outsourcing trend to third party merchandisers has resulted in an
increasing number of organizations providing services to manufacturers and
retailers. Certain retailers and manufacturers have chosen to consolidate in
order to reduce the number of third parties they have to manage, to achieve
consistent execution of their retail merchandising strategies, and to customize
the scope of services performed on their behalf.
RETAILER CONSOLIDATION
The retail industry is undergoing a consolidation process that is
resulting in fewer, larger retailers. These retailers tend to have a wider
geographic distribution of stores, yet centralized procurement and
decision-making functions at their corporate headquarters. The consolidation
trend is evidenced by the acquisition of Eckerd Drugstores by J.C. Penney
Company, Inc., the acquisition of Thrifty PayLess, Inc. by Rite Aid Corporation,
and the acquisition of The Vons Companies, Inc. by Safeway, Inc.
4
5
INCREASE IN GROCERY MERCHANDISING SERVICES REQUIREDRETAILER CONSOLIDATION
As retailer-mandated activities have continued to increase in both in
number and type, as well aswith a corresponding increase in the amount of labor required
to performcomplete them, manufacturers have increased their use of third party
suppliers. For example, additional category implementation activities are
required to effect retailers' in-store schematics, whichschematics. Schematics are changing with increasing frequencymore
frequently as the result of a growing number of new product introductions each
year. Further, retailers
are continuing a high level ofRetailers continue to require numerous resets, re-merchandisingsre-merchandising, and
remodels of entire
storesin response to respond to anthe increasing number of changes in the product mix and to keep
their stores fresh and updated in a highly competitive environment.mix. PIA
estimates that these activities have doubled in frequency over the last five years, so that
most stores are currently re-merchandised or remodeled every 24 months. In
certain areas of the country and with certain retailers, these activities are
conducted annually.
INCREASE IN MERCHANDISING SERVICES REQUIRED IN OTHER RETAIL CHANNELS
Unlike the merchandising services performed for grocery retailers, work
performed by manufacturers in mass merchandiser, chain drug and other retail
formats has historically been much less demanding. In these retail channels,
retailers performed most of their own merchandising work. However, the Company
believes that as these retailers have become more competitive, they are attempting to
maintain their margins by increasingly requesting more support from the manufacturer
community to provide merchandising services similar to those provided to the
grocery retailers. Further, theseThese retailers have become increasingly important to
manufacturers, causing these manufacturers to provide greater retail focus and support
to insure thatensure out-of-stock conditions are reduced, authorized items are available,
and general product conditions are favorable. The manufacturersgood. Manufacturers have become particularly
sensitive to the requirements of seasonal and special promotionpromotional activities, which
require rapid and effective in-store support in order to maximize sales results.sales.
INCREASE IN USE OF INFORMATION TECHNOLOGIES
Information technology is playing an increasingly important role in the
retail industry, particularly in light of industry initiatives towards efficient
consumer response ("ECR") and category management. Retailers and manufacturers
have expanded their use of information technology in order to manage product distribution
in stores, item placements on the shelves, and off-shelf displays. In
particular, retailers and manufacturers are increasingly looking for causal data
(e.g., display, pricing and product adjacency information) that is category and
store specific. This information is used by bothBoth retailers and manufacturers use this information to make
decisions regarding ECR category management, and shelf management, issues,and new product
and promotion plans, and enablesplans. It also gives retailers the ability to tailor their stores to
regional demographics.
BUSINESS STRATEGY
PIA believes that the increasing demand for national solutions to
manufacturers' varieddiverse merchandising requirements, together with the
consolidation of the retail industry, has increased the growth of outsourcing in
general.outsourcing.
The increase in required merchandising services, and the increased use of
information technology, will foster the growth of those companies that can
provide these solutions, have the flexibility to respond to the changing retail
environment and have the financial resources to provide rapid deployment of
merchandising resources. The Company has developed a strategy that it believes will
address these industry trends. The major components of PIA's strategy are as
follows:
POSITION THE COMPANY AS A NATIONAL, FULL SERVICE RETAIL SOLUTIONS COMPANY
PIA's objective is to strengthen its position as a leading national
supplier of retail solutions by expanding the services that it will offer including
category management, data gathering, interpretation and management, to both its
existing and prospective manufacturer clients and its newer and prospective
retailer clients, and to offer its existing and newer services in additional
retail channels.
5
6
SERVE EMERGING DEMAND FOR DEDICATED SERVICES
PIA believes that certain retailers and manufacturers will increasingly
prefer merchandising service on a dedicated basis, and that the significant size of
such contracts requires substantial financial, recruitment, deployment,
reporting and management capabilities. The Company believes that it is positioned
well
positioned to serve this emerging need for dedicated services.
INCREASE THE COMPANY'S UTILIZATION OF INFORMATION TECHNOLOGY
The Company has been focusing Information Technology resources on
applications, which help improve productivity of field merchandisers. PIA
believes that a commitment to technology will provide a long-termlong term competitive
advantage. The Company believes that the technology it will developdevelops will present
increased opportunities for PIA on project specific requests from manufacturers.
PIA also expects to use technology to expand its informational services and
consulting capabilities. Additionally, the Company will continue to provide its
proprietary software program, Merchandisers Toolbox, to certain retailers. This
program is designed to manage the deployment of manufacturer supplied labor, to
measure their performance against the retailers' in-store deployment plans and to develop
databases that include a "blueprint" of a store by category. The Company also
expects that its key account managers will continue to use various shelf technology
programs, which the Company licenses from A.C. Nielsen, IRI and Intactix. The Company is currently assessing its
technology needs, understanding that its ability to provide casual data that is
category and store specific is an important value added service.
DESCRIPTION OF SERVICES
The Company provides a broad array of merchandising services on a
national, regional and local basis to manufacturers and retailers. PIA believes
that
its full-line capability of developing plans at one centralized headquarters
location, executing chain wide, fully integrated national solutions and
implementing rapid, coordinated responses to needs on a real time basis
differentiates the Company from its competitors. The Company also believes that its
centralized decision-making ability, local follow-through, ability to recruit,
train and supervise merchandisers, ability to perform large-scale initiatives on
short notice and strong retailer relationships provide it with a competitive
advantage over local, regional or retailer specific competitors.
The Company provides its merchandising and sales services primarily on
behalf of consumer product manufacturers at approximately 20,00017,000 retail grocery,
5,0006,000 mass merchandiser and 13,0008,800 drug stores. PIA currently provides three
principal types of merchandising and sales services: shared services, dedicated
services and project services.
SHARED SERVICES
Shared services consist of regularly scheduled, routed merchandising
services provided at the store level for manufacturers. PIA's shared service
organization performs services
are performed for multiple manufacturers including, in some cases, manufacturers
whose products are in the same product category. Shared services may include
checking to insureactivities such as:
- Ensuring that client product itemsclient's products authorized for distribution are in
stock and on the shelf
adding- Adding in new products that are approved for distribution but not
present on the shelf
setting- Setting category shelves in accordance with approved store
schematics
insuring- Ensuring that shelf tags are in place
checking- Checking for the overall salability of clients' products and
performing- Selling new product and promotion selling.promotional items.
The Company's shared services are performed principally by full-time retail
sales merchandisers, retail sales specialists and key account managers, along
with district and division manager supervision.
6
7
RETAIL SALES MERCHANDISERS
PIA's retail sales merchandisers (RSM)("RSM") perform shared service coverage
at the store level. These services include a review of the retailer's shelves
and the appropriate store (or chain) prepared shelf schematic to insure thatensure all
clients' approved products are available for sale in the store, that such
products have the approved shelf 6
7
placement and number of facings (the horizontal
and vertical space occupied by a package front) on the shelf, and that the approved
shelf tag is in position. If a product is not in distribution, the RSM adds the
product to the shelf if it is available in the store's product storage area. If
a product is unavailable, the RSM prepares a place on the shelf for this product
and a shelf tag. The presence of a shelf tag is critical to a store's ability to
reorder an individual stock-keeping unit ("SKU") from the distribution center.
The RSM checks for the presence of and replaces, if necessary, the shelf tags
for all client SKUs. The RSM also reviews all SKUs for product freshness, if
appropriate, and for general salability.
KEY ACCOUNT MANAGERS
On behalf of its manufacturer clients, PIA selectively deploys key account
managers ("KAMs") inside of the major retail chains. These KAMs, who are assigned
exclusively to a single retailer, work with that retailer's headquarters staff
in the execution of category management initiatives and in the development and
implementation of shelf schematics. The KAMs provide both the manufacturer and
PIA with a headquarters' perspective of the retailer and its primary objectives
at the store level. The KAMs work with manufacturer clients to develop and
achieve their merchandising goals, including those related to product
distribution, shelf placement, the number of facings for particular products,
and product adjacencies. The KAMs also work with manufacturer clients to gain
retailer authorization for new products and approval of new category schematics
that are compatible with the retailer's own category management strategies. PIA
generally attempts to position its KAMs within the retailer's organization in a
leadership capacity, both in category management and vendor deployment
activities. The KAMs typically are typically placed within the retailer's shelf technology
department and are equipped with the specific shelf technology software utilized
by the retailer. Within a number of
retailers, the KAMs also operate Merchandisers Toolbox. See "--Information
Technology Services." The KAMs work with the retailer in the development of new shelf
schematics, category layouts and, in some cases, total store space plans. The
Company is also training its KAMs in category management in order to provide
further value to both the Company'sCompanies' manufacturer clients and to the retailer.
DEDICATED SERVICES
Dedicated services consist of merchandising services, generally as
described above, that are performed for a specific retailer or manufacturer by a
dedicated organization, including a management team, working exclusively for
that retailer or manufacturer. These services provided are provided primarily based on
agreed hourly rates and fixed management fees under multi-year contracts.
The Company believes that it pioneered the concept of dedicated service in 1994
with a program designed for Thrifty-PayLess Drug Stores. The program covered 995
stores, and PIA was responsible for implementing product selection changes and
resetting all categories to meet Thrifty-PayLess' category management plans. In
implementing the program, PIA was able to ensure thatplacement of new products were placed on
the shelf within five days of availability and completed section changes were completed within
ten days. Thrifty-PayLess was acquired byIn 1996, Rite Aid in 1996,acquired Thrifty-PayLess and the contract was not
renewed beyond December 1996.
In 1997, PIA started a dedicated program with CVS/Revco to convert Revco
stores to the CVS format. The conversion project was a total re-merchandising of
all Revco stores to the new CVS format. PIA moved gondolas, built new gondolas,
and installed new fixtures and re-planogramed all categories to the CVS
conversion plan. In 1999, PIA will be responsible for new store set ups and
special projects for CVS/Revco in the state of Ohio.
The Company has not expanded the dedicated service concept during 1996 andfiscal
year 1998. Net revenues have decreased from 34.6% in 1997 which has grown from 18.3% to 34.6%31.9% in 1998,
primarily due to project completions of revenue.the CVS/Revco conversions.
7
8
PROJECT SERVICES
Project services consist primarily of specialspecific in-store services
initiated by retailers and manufacturers, such as seasonal, new product launches, special
promotionseasonal or promotional merchandising, focused product support and installation activities.product
recalls. These services are used typically used for large-scale implementations over
30 days. The Company also performs other project services, such as new store
sets and existing store resets, remerchandisings,re-merchandising, remodels and category
implementations, under shared service contracts or stand-alone project
contracts.
7
8
RELATED SERVICES
INFORMATION TECHNOLOGY SERVICES
RetailersPIA has been focusing information systems resources on applications,
which help improve productivity of field merchandisers. The Labor Tracking
System ("LTS") was introduced to PIA's 12 service centers in 1998. This
proprietary application records actual time spent on each work initiative. The
benefits of the system include real-time reporting, improved client billing, and
manufacturers are expanding their usemore efficient management of the field labor.
In August 1998, the Work Generator System was implemented. This system
schedules shared services and project work from a central system. It reduces the
travel time by coordinating shared service work with project work. The system
provides associates with a daily schedule of work assignments and expected
completion times.
In September 1998, the Company began using Symbol scanners to capture
inventory and returned inventory data for Buena Vista Home Entertainment
("BVHE"). BVHE retrieves the scanner information technology in order to better manage product distribution in stores, item
placements ondaily via the shelves, new product and promotion plans, and off-shelf
displays.Internet from
PIA's server. This information is used for daily updates to make decisions regarding Efficient
ConsumerBVHE's vendor
managed inventory system.
PIA also expanded the use of its Interactive Voice Response category management("IVR")
system. Hourly status updates can now be provided to clients on critical new
item launches, such as BVHE's video releases. The IVR system can process 2,500
calls per day. This gives the Company the ability to give clients
up-to-the-minute status on any work that uses the IVR system.
TELEMARKETING SERVICES
PIA owns 20% of Ameritel, Inc., a company that performs inbound and
shelf management issues, enabling
retailers to tailor stores to the regional demographicsoutbound telemarketing services, including those on behalf of customers. PIA
currentlycertain of PIA's
manufacturer clients. Ameritel provides information-gatheringtelemarketing sales services for
certain of its retailer
and manufacturer clients. Such services include the collection of causal data in
specific store groups, and a variety of other data including the presence of new
items at shelf level, the status of out-of-stocks and distribution voids, and
the number of facings and positioning of product items. PIA personnel using
hand-held data entry devices currently collect this information and through the
completion of specific response questionnaires, which are then read by an
electronic scanner and Interactive Voice Response. The Company presents its
results to the client in a standard or custom format specified by the client.
This information is of particular value to the manufacturermanufacturers that is making
significant advertising and promotion decisions based upon its products' status
at store level. Additionally, both the retailer and the manufacturer need to
understand the level of in-store display activity and point of sale materials
usage in support of specific new item introductions and manufacturer funded
promotion activities.
The Company also provides to certain retailers its proprietary software
program, Merchandisers Toolbox, which is designed to control the deployment of
vendor labor and to measure the performance of such vendors against the
retailers' deployment plans for virtually all retailer-mandated services in suchsell directly into smaller, independent retail stores. The
Company manages this softwarebelieves that its affiliation with Ameritel provides an additional
merchandising solution for some packaged product manufacturers and retailer
clients.
The Company, in conjunction with Ameritel, developed an automated
interface between the Ameritel Vantive system and the LTS. PIA associates now
telephone work assignment completion information to Ameritel. PIA associates are
able to report hours, mileage, and other completion information for each work
assignment on behalf ofa daily basis. The information is used to update the retailer and provides
scheduling for new store sets and existing store resets, remerchandisings,
remodels and category implementations.LTS the next
day. This software also provides reports to
the retailer subsequent to the completion of the project, and details actual
participation against the schedule. These features enhance the retailer's
ability to complete store initiatives quickly. Merchandiser's Toolbox also
provides total store mapping, which ultimately provides the retailer12 service centers with a
"blueprint"daily, detailed tracking of all of its stores by category.work
completion.
RETAIL AND SECONDARY HEADQUARTERS SELLING SERVICES
The Company deploys retail sales specialists (RSS)("RSS") to provide product
selling support for certain manufacturers at the retail store and secondary
retailer's headquarters buying offices. These services are performed principally
for manufacturers that choose to outsource their sales function for calls on
wholesaler-supplied individual stores or small chains. Sales services performed
by the RSS's include product sales, selling point of sale promotions, discount
and allowance programs and shelf merchandising plans.
TELEMARKETING SERVICES
PIA owns 20% of Ameritel, Inc., a company that performs inbound and
outbound telemarketing services, including those on behalf of certain of PIA's
manufacturer clients. Ameritel provides telemarketing sales services for
manufacturers that sell directly into smaller, independent retail stores. The
Company believes that its affiliation with Ameritel provides an additional
merchandising solution for some packaged product manufacturers and retailer
clients.8
9
SALES AND MARKETING
The Company's sales efforts are structured to develop new business in
national and local markets. At the national level, PIA's corporate business
development team directs its efforts toward the senior management of prospective
clients. At the regional level, sales efforts are principally guided bythrough
PIA's seven division12 service center offices located nationwide.
The Company's client servicecorporate account executives play an important role in
PIA's new business development efforts within its existing manufacturer client
base. PrimarilyThe corporate account executives are generally located in the clients'
corporate headquarters, PIA's corporate
account executives play a key role in clients' sales and marketing efforts.headquarters. The corporate account executives plan merchandising and
product introductions with the manufacturer so that PIA can achieve the
objectives of such
8
9 clients' major new product and promotional initiatives. In
addition, the corporate account executives present PIA's services to the sales
and marketing executives of these clients, and utilize marketing data provided
by IRI, A.C. Nielsen and others in an effort to ascertain additional market
opportunities for such clients at the local level. Division account executivesClient service managers are
part of the Company's geographic division teams and work with the local
management of the Company's clients. The division account executive'sclient service manager's primary
responsibility is to work with the client to establish specific, measurable
objectives for PIA, and to market additional services. As part of this process,
the division account executive is responsible for developing retail
merchandising solutions for such objectives.
As part of retailer consolidation, retailers are centralizing most
administrative functions, including operations, procurement and category
management. In response to this centralization and the growing importance of
large retailers, many manufacturers have reorganized their selling organizations
around a retailer team concept that focuses on a particular retailer. PIA has
also responded to this emerging trend by establishing client service offices
that are fully staffed to provide the PIA client and the retailer with access to
all of PIA's services. PIA currently has retailer teams in place at Wal*Mart
(Rogers, Arkansas), Kmart (Detroit, Michigan) and American Stores (Salt Lake
City, Utah)Eckerd Drug (Tampa, Florida).
The Company's business development process encompasses a due diligence
period to determine the objectives of the prospective client, the work to be
performed to satisfy those objectives and the market value of the work to be
performed. PIA employs a formal cost development and proposal process that
determines the cost of each element of work required to achieve the prospective
client's objectives. These costs, together with an analysis of market rates, are
used in the development of a quotation approval form that is presented to the
Company's proposal committee for approval. The pricing must meet PIA's
objectives for profitability, which are established as part of the business
planning process. After approval of this quotation by the proposal committee, a
detailed proposal is presented to the prospective client. Following agreement
regarding the elements of service and corresponding rates, a contract is
prepared and executed. See "--Customers."
CUSTOMERS
PIA currently represents approximately 295805 manufacturer clients, including
approximately 180648 branded product manufacturers and approximately 115157 private
label manufacturers. Prior toBefore 1993, the Company represented its manufacturer
clients primarily in the retail grocery industry. Beginning in that
year,1993, the Company
found that additional opportunities to provide its services existed throughout
the much broader marketplace. This marketplace includingincluded mass merchandiser, chain
drug and deep discount drug stores, as well as in other retail establishmentstrade groups such
as home improvement centers, computer/electronic stores, toy stores, convenience
stores and office supply stores. As a result, the Company has contracted with a
number of manufacturers to provide services in several of
these additional retail
markets, and has agreed to provide services to a number of retailers directly.
9
10
COMPETITION
The third-party merchandising industry is highly competitive and is
comprised of an increasing number of merchandising companies with either
specific retailer, retail channel or geographic coverage, as well as food
brokers. These companies tend to compete with the Company primarily in the
retail grocery channel, and some of them may have a greater presence in certain
of the retailers in whose stores the Company performs its services. The Company
also competes with several companies that are national in scope, such as
Powerforce, Spar/Marketing Force,Alpha One, Pimms, and Alpha One.SPAR Marketing Force. These companies compete
with PIA principally in the mass merchandiser, chain drug and deep discount drug
retail channels. The CompanyPIA believes that the principal competitive factors within its
industry include development of technology breadth and quality of client
services, cost, and the ability to execute specific client priorities rapidly
and consistently over a wide geography.
9
10geographic area.
PIA recently entered into an agreement with SPAR Marketing Force and
certain of its affiliates ("SPAR Group") in which PIA will essentially be
acquired by SPAR Group in a merger in which all the outstanding Common Stock of
SPAR will be exchanged for approximately 12.3 million shares of PIA Common
Stock. See "--Recent Transaction." After the merger, the SPAR Group shareholders
will own approximately 69% of PIA Common Stock.
TRADEMARKS
PIA(R) is a registered trademark of the Company. In addition, the
Company has appliedrecently commenced the process of registering the service mark for
a copyright on its Merchandisers Toolbox software.the term Precision Merchandising. Although the Company believes that its trademarks
may have value, the Company believes that its services are sold primarily based on the basis of
breadth and quality of service, cost, and the ability to execute specific client
priorities rapidly and consistently over a wide geography.geographic area. See "--Industry
Overview" and "--Competition."
EMPLOYEES
As of December 31, 1997,January 1, 1999, the Company employed approximately 1,6371,109
full-time employees, of whom approximately 6483 worked in executive,
administrative and clerical capacities at the Company's corporate headquarters,
and 1,5831,026 of whom worked in division offices nationwide. In addition, the
Company employed 5431,030 part-time employees. Approximately 212180 of the Company's
employees are covered by contracts with labor unions. The Company considers its
relations with its employees and its employees' unions to be good. The Company
also uses the services of up to 3,000 flextime personnel who are payrolledwhose payroll is
generated through a company that is not affiliated with PIA.
RECENT TRANSACTION
On February 28, 1999, PIA entered into an agreement with SPAR Group, a
privately held affiliated group of companies to merge in a stock transaction.
Under the agreement, PIA will issue approximately 12.3 million shares of PIA
Common Stock to the stockholders of SPAR Group. SPAR Group is a privately owned
provider of retail marketing and sales services offering merchandising support,
incentive and motivation marketing programs, information management, marketing
research, data base marketing and promotional analysis and forecasting. The
transaction will be accounted for as a reverse acquisition in which SPAR Group
is deemed to be the accounting acquirer. SPAR Group has annual revenues of
approximately $75 million. After the merger, SPAR Group stockholders will own
approximately 69% of PIA Common Stock. The transaction requires regulatory and
stockholder approval and is expected to close in the second quarter of 1999.
10
11
RISK FACTORS
The following risk factors should be carefully reviewed in addition to
the other information contained in this annual report on Form 10-K
HISTORY OF LOSSES
During the years ended December 31, 19921997 and 1993,January 1, 1999, the
Company incurred significant losses and experienced substantial negative cash
flow. The CompanyPIA had net losses of $3.2 million and $2.6$15.1 million for the yearsfiscal year ended December 31,
19921997 and
1993, respectively. These losses resulted$4.3 million for fiscal year 1998. Losses in 1997 were primarily caused by
margin reductions from additional
field service costs to providethe loss of shared service coverageclients, inefficiencies in
grocery storesfield labor execution, poor pricing decisions for relatively few clientssome client contracts and
higher business unit overhead costs. The recognition of $5.4 million in
newly opened regions duringrestructuring and other charges was also responsible for the Company's continuing
national expansionlosses. Losses in
1992 and 1993,1998 primarily were caused by margin reductions and from a decline in revenues
due to loss of shared service clients and completion of dedicated projects. The
Company expects to have further losses for the write-offfirst quarter of $1.7 millionfiscal 1999. As
noted in goodwill in 1992. In addition,Recent Transaction, the Company has incurred lossesentered into a merger agreement
with SPAR Group. Should this merger not be completed, the Company will be
required to significantly reduce its operating costs to minimize the effects of
further reductions in each quarter
during 1997, resulting in a total net loss of $15.1 million. There can be no
assurancerevenues and operating losses. PIA cannot guarantee that
the Companyit will not sustain further losses. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
LOSS OF SHARED SERVICE BUSINESS
PIA's business mix has changed significantly over the last year, and is
expected to continue to change during 1998,1999, in response to client needs, and the
evolving third party merchandising industry. Due in part to industry
consolidation, increased competition,the completion of a
major dedicated client program, and service performance issues, the Company has lost a substantial amountloss of several shared service businessclients,
sales have declined over the last 1218 months, and no sizable new dedicated
business has notbeen sold any sizeable new shared business to compensate for these losses. Shared services have historically required a significant fixedThe Company has reduced
its dedicated management and personnel infrastructure. The continued loss of shared service
business will negatively affect the Company`s financial performance if it cannot
decrease its cost of delivery of this service.infrastructure accordingly.
INDUSTRY CONSOLIDATION; CONCENTRATED CLIENT BASE
The retail and manufacturing industries are undergoing consolidation
processes that result in larger but fewer larger retailers and suppliers. The Company'sPIA's success
is dependentdepends in part upon its ability to maintain its existing clients and to obtain
new clients. As a resultBecause of industry consolidation, the CompanyPIA has lost certain clients,
and this trend could continue to have a negative effect on the Company'sPIA's client base and
results of operations. The Company'sPIA's ten largest clients generated approximately 57% and 69%75% of
the Company'sPIA's net revenues for the yearsyear ended January 1, 1999, and approximately 69% for
the year ended December 31, 19961997. During the year ended January 1, 1999 none of
PIA's manufacturer or retailer clients accounted for greater than 10% of net
revenues other than Eckerd Drug Stores, CVS Pharmacy Incorporated and 1997,Buena
Vista Home Entertainment, which account for 15.6%, 12.6% and 10.6%,
respectively. During these periods,the year ended December 31, 1997, none of the Company'sPIA's
manufacturer or retailretailer clients accounted for greater than 10% of net revenues
other than Buena Vista Home Video and S.C.
Johnson which accounted for 11.7% and 10.3% of net revenues, respectively, for
the year ended December 31, 1996, and Buena Vista Home VideoEntertainment and Eckerd Drug Stores which
accounted for 16.0% and 13.6% of net revenues, respectively, for
the year ended December 31, 1997.respectively. The majority of the
Company's contracts with its clients for shared services have multi-year terms.
PIA believes that the uncollectibility of amounts due from any of its large clients,
a significant reduction in business from such clients, or the inability to
attract new clients, could have a material adverse effect on the Company's
results of operations.
11
12
UNCERTAINTY OF COMMISSION INCOME
Approximately 14.3%15% of the Company's net revenues for the year ended
December 31, 1997January 1, 1999 were earned under commission-based contracts. These contracts
provide for commissions based on a percentage of the client's net sales of
certain of its products to designated retailers. Under certain of these
contracts, the Company generally receives a draw on a monthly or quarterly
basis, which is then applied against commissions earned. Adjustments are made on
a monthly or quarterly basis upon receipt of reconciliations between commissions
earned from the client and the draws previously received. The reconciliations
typically result in commissions owed to the Company in excess of previous draws;
however, the Company cannot predict with accuracy the level of its clients'
commission-based sales. Accordingly, the amount of commissions in excess of or
less than the draws previously received will fluctuate and can significantly
affect the Company's operating results in any quarter.
11
12
CONTROL BY CERTAIN STOCKHOLDERS
Riordan, Lewis & Haden ("RLH"), a private investment firm, beneficially
owns approximately 30.2%29.7% of the Company'sPIA's outstanding Common Stock, and the Company'sStock. PIA's directors and
officers, in the aggregate, beneficially own approximately 15.3%16.2% of the Company'sPIA's
outstanding Common Stock (excluding the shares owned by Riordan, Lewis & Haden
which are deemed to be beneficially owned by Mr. Haden and Mr. Lewis). AsWhile not
controlling a result, such persons, if they actmajority of the outstanding shares, RLH, and the directors and
officers acting together generally will be ablehave significant influence with respect
to elect allthe election of directors exercise control overand other matters submitted to the business, policies and
affairs of the Company and will have the power to approve or disapprove most
actions requiring stockholder approval,PIA
stockholders, including amendments to the Company'sPIA's charter and By-laws,Bylaws and approval of
certain mergers or similar transactions and sales of all or substantially all of
PIA's assets. If the Company's assets,merger with the SPAR Group is consummated the current
stockholders of SPAR Group will beneficially own approximately 69% of PIA's
outstanding Common Stock. Accordingly, if they act as a group they will
generally be able to elect all directors and they will have the power to prevent
or cause a change in control of PIA. Such concentration of ownership could have
the Company. Ineffect of making it more difficult for a third party to acquire control of
PIA in the future, this situation could make the
acquisition of control of the Company and the removal of existing management
more difficult.may discourage third parties from attempting to do so.
RESTRICTIONS ON DIVIDENDS
The Company has never paid dividends on its capital stock, and currently
intends to retain any earnings or other cash resources to finance future growth.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BY-LAWS AND DELAWARE LAW
The Company's Board of Directors has the authority to issue up to 3,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the Company.PIA.
In addition, the CompanyPIA is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which will prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. The application of Section 203 also could have the effect
of delaying or preventing a change of control of the Company. Further, certainPIA. Certain provisions of
the Company'sPIA's Certificate of Incorporation (e.g., the inability of stockholders of the Company to act by
written consent) and By-laws (e.g., the requirement that the holders of shares
entitled to cast no less than 30% of the votes at a special meeting of
stockholders may call such a special meeting) and of Delaware lawBylaws could delay or make more difficult
a merger, tender offer or proxy contest involving PIA. For example, PIA's
Bylaws, a special meeting of stockholders may be called only upon the Company,request of
holders of at least 30% of the shares entitled to vote. Any delay in change of
control due to these provisions could adversely affect the market price of PIA's
Common Stock, which could adversely affect the market price of the Company'sPIA 's Common
Stock.
12
13
GLOSSARY
The following glossary includes definitions of certain general industry
terms as well as terms relating specifically to the company.
CATEGORY - A segment or sub-segment of a department within a retail
outlet. For example, the health and beauty care department consists of
several categories such as oral care and shampoo; and the shampoo section
is divided into sub-categories such as salon formulas and dandruff
control.
CATEGORY MANAGEMENT - A process for managing a retailer's or a
manufacturer's business that recognizes categories as strategic business
units for the purpose of planning sales and profit objectives.
CAUSAL DATA - Data that defines the factors within a retail outlet that
impact sales. These factors usually include display, pricing and product
adjacency information.
EFFICIENT CONSUMER RESPONSE (ECR) - A grocery industry strategy in which
retailers and manufacturers incorporate the principles of efficient
replenishment with effective assortment and promotion of products.
FACING - The horizontal and vertical space occupied by a package front
when displayed on a store shelf.
KEY ACCOUNT MANAGER (KAM) - A KAM is assigned exclusively to a single
retailer and works with that retailer's corporate headquarters staff in
the execution of category management initiatives and in the development
and implementation of shelf schematics.
MASS MERCHANDISER - The segment of retailers that offers multi-departments
in a single location, each of which is typically quite large (at least
75,000 square feet). Examples include Kmart and Wal*Mart.
NEW STORE SET - The initial merchandising of a new retail outlet that was
either built or acquired.
OUT-OF-STOCK - A situation that exists when a product normally carried by
a retailer is temporarily unavailable. This means that shelf allocation
exists, but inventory has been depleted.
RE-MERCHANDISING - A retail unit that is enhanced by the relocation of
sections, aisles and/or departments, and usually involves the total store.
REMODEL - A retail unit that is enhanced by enlargement and/or redesign.
Structural changes most often result in departments and/or services being
added or deleted, which requires the relocation of most products and
sections within the store.
RESET - Relocation of products within a given category or section of a
retail store. A reset typically involves removal of all products from the
retailer's shelves, restocking of products and reallocation of space.
RETAIL AND SECONDARY HEADQUARTERS SELLING - Refers to the selling of
products and/or taking of orders in chains which do not operate their own
warehouses and in stores having the authority to purchase and/or approve
orders.
RETAIL SALES MERCHANDISERS (RSM) - An RSM is a full-time associate who
performs shared service coverage at the store level.
RETAIL SALES SPECIALIST (RSS) - A retail sales specialist provides product
selling support for certain manufacturers at the retail store and
secondary retailers headquarters buying offices.
13
14
RETAILER - An operator of retail stores or groups of retail stores that
are also referred to as chains.
SCHEMATIC - A diagram that lists the specific location and shelf space to
be allocated for all items within a section. The schematic also contains
data relating to merchandising such as width, depth of shelving, shelf
elevations and height of gondola.
SHARED SERVICES - A group of associates who perform specific functions for
multiple clients on each store visit.
STOCK KEEPING UNIT (SKU) - A unit of product having its own unique
size/weight and product description.
VOID - A situation that exists when a product isretailer does not carried bycarry a retailerproduct
and there is no allocated space or reorder tag present.
14
15
ITEM 2. PROPERTIES.
The Company maintains its corporate headquarters in approximately 27,00020,000
square feet of leased office space located in Irvine, California, under a lease
with a term expiring in February 2000.
The Company leases certain office and storage facilities for its
divisions and subsidiaries under operating leases, which expire at various dates
during the next five years. Most of these leases require the Company to pay
minimum rents, subject to periodic adjustments, plus other charges including
utilities, real estate taxes and common area maintenance.
The following is a list of the locations where the Company maintains
leased facilities for its division offices and subsidiaries:
Scottsdale, Arizona Chesterfield Missouri
Rogers, Arkansas Edison, New Jersey
Irvine, California Albuquerque, New Mexico
Pleasanton, California Charlotte, North Carolina
Englewood, Colorado Blue Ash, Ohio
Ridgefield, Connecticut Wilsonville, Oregon
Clearwater, Florida Cranberry Township, Pennsylvania
Tampa, Florida Carrollton, Texas
Norcross, Georgia Houston, Texas
Oakwood Terrace, Illinois Bountiful, Utah
Overland Park, Kansas Richmond, Virginia
Scottsdale, Arizona Southfield, Michigan
Rogers, Arkansas Chesterfield Missouri
Irvine, California Edison, New Jersey
Pleasanton, California Albuquerque, New Mexico
Englewood, Colorado Blue Ash, Ohio
Tampa, Florida Cranberry Township, Pennsylvania
Norcross, Georgia Carrollton, Texas
Oakwood Terrace, Illinois Houston, Texas
Overland Park, Kansas Bellevue, Washington
Woburn, Massachusetts
Bellevue, Washington
Southfield, Michigan
Although the Company believes that its existing facilities are adequate
for its current business, new facilities may be added should the need arise in
the future. Certain of the above facilities above may be closed or subleased as the
Company streamlines its operations. The financial impact of closing or subleasing a
location is not significant.
ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS.
On February 25, 1998, the Company and its Canadian subsidiary were
served with two Statements of Claim in the Ontario court (General Division) of
the Province of Ontario, Canada, filed by Merchandising Consultants Associates
("MCA") asserting claims for alleged breach of Confidentiality Agreements dated
October 19, 1996 and July 17, 1997. Both of these lawsuits assert that the
Company and its subsidiary improperly used confidential information provided by
MCA as part of the Company's due diligence concerning its proposed acquisition
of MCA, including alleged clientele, contracts, financial statements and
business opportunities of MCA. In addition, MCA contends that the Company
breached and allegedly reneged upon the terms for acquisition of MCA contained
in a Letter of Intent between the parties dated July 17, 1997, which by its
express terms was non-binding. The Statements of Claim seek damages totaling
$10.2 millionmillion.
The Company denies all wrongdoing and intends to aggressively defend itself
aggressively in this action. It is not possible to predict the outcome of this
action at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
15
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq National
Market. The Common Stock is traded on the Nasdaq National Market under the
symbol "PIAM".
1996 1997 -----------------1998
------------------ -----------------
High Low High Low
----------------- ------------------------ ------ ------ ------
First Quarter $19.250 $14.000 $11.000 $5.125 $6.500 $5.000
Second Quarter 28.375 11.250 7.125 5.375 8.156 3.688
Third Quarter 15.250 10.875 8.250 5.125 6.844 4.125
Fourth Quarter 13.125 8.750 9.000 4.875 4.875 2.000
As of March 13, 1998,19, 1999, there were approximately 1,029872 holders of record of
the Company's Common Stock.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of its business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
16
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data sets forth, for the
periods and the dates indicated, summary consolidated financial data of the
Company and its subsidiaries. The selected consolidated statements of operations
data presented belowBelow, with respect to the three years endedending
December 31, 1996, December 31, 1997 and January 1, 1999 is the consolidated
statement of operations and the consolidated balance sheet data atas of December
31, 19961997 and 1997 areJanuary 1, 1999 have derived from, and are qualified by reference
to the audited consolidated financial statements included elsewhere in this Form
10-K. The consolidatedThese statements of operations data for the years ended December 31, 1993, and 1994,
and the consolidated balance sheet data at December 31, 1993, 1994, and 1995,
are derived from the audited consolidated financial statements of the Company
not included herein. The financial data presented below are qualified by
reference to the consolidated financial statements included elsewhere in this
Annual Report on Form 10-K and should be read in conjunction with such financial
statements and related notes thereto andin "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Year Ended DecemberYEARS ENDED
-----------------------------------------------------------------
DEC 31, -----------------------------------------------------------------
1993DEC 31, DEC 31, DEC 31, JAN 1,
1994 1995 1996 1997 =================================================================1999
--------- --------- --------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net revenues $56,155 $80,449 $104,791 $119,940 $128,208$ 80,449 $ 104,791 $ 119,940 $ 128,208 $ 121,788
Operating expenses:
Field services costs 47,318 61,876 81,320 94,841 119,830 105,448
Selling expenses 6,571 9,028 10,339 11,133 10,482 8,245
General and administrative expenses 3,910 5,800 6,810 8,081 10,234 11,788
Restructure and other charges -- -- -- 5,420 -- 5,420
Depreciation and amortization 271 339 497 595 997 -----------------------------------------------------------------1,129
--------- --------- --------- --------- ---------
Total operating expenses 58,070 77,043 98,966 114,650 146,963 -----------------------------------------------------------------126,610
--------- --------- --------- --------- ---------
Operating income (loss) (1,915) 3,406 5,825 5,290 (18,755) Interest (expense)(4,822)
Other income net (640) (725) (465) 823 799
Equity in earnings in affiliate -- -- -- 72 96
-----------------------------------------------------------------895 895 611
--------- --------- --------- --------- ---------
Income (loss) before provision (benefit)
for income taxes (2,555) 2,681 5,360 6,185 (17,860) (4,211)
Income tax provision (benefit) -- 101 1,829 2,426 (2,761) -----------------------------------------------------------------55
--------- --------- --------- --------- ---------
Net income (loss) $(2,555) $ 2,580 $ 3,531 $ 3,759 $(15,099)
=================================================================$ (15,099) $ (4,266)
========= ========= ========= ========= =========
Net income (loss) per share - basic(1) $ (0.92) $ 0.88 $ 1.13 $ 0.70 $ (2.72) -----------------------------------------------------------------$ (0.78)
========= ========= ========= ========= =========
Weighted average shares - basic(1) 2,785 2,923 3,117 5,370 5,551 =================================================================5,439
========= ========= ========= ========= =========
Net income (loss) per share - diluted(1) $ (0.92) $ 0.68 $ 0.89 $ 0.63 $ (2.72) ----------------------------------------------------------------$ (0.78)
========= ========= ========= ========= =========
Weighted average shares - diluted(1) 2,785 3,895 3,981 5,990 5,551 ================================================================5,439
========= ========= ========= ========= =========
DecemberDec 31, --------------------------------------------------------------
1993Dec 31, Dec 31, Dec 31, Jan 1,
1994 1995 1996 1997 ==============================================================1999
-------- -------- -------- -------- --------
(in thousands, except per share data)thousands)
BALANCE SHEET DATA:
Working Capital $ 3,673capital $ 3,642 $ 7,131 $32,737 $15,938 $13,844
Total assets 9,181 10,224 16,086 47,672 36,467 26,054
Current portion of long-term debt 535 277 -- -- -- --
Long-term debt, net of current portion 6,390 3,274 3,400 -- -- 2,000
Total stockholders' equity (deficit) (1,063) 2,481 5,988 36,718 18,67818,67 14,724
- ------------------
(1) Net income (loss) per share has been restated for all applicable periods
presented in accordance with the adoption of SFAS No.128No. 128 Earnings per share.
17
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONSOPERATIONS.
PIA provides merchandising services to manufacturers and retailers
principally in grocery, mass merchandiser and chain and discount drug stores.
For the years ended December 31, 1996,1997, and 1997,January 1, 1999, the Company
generated approximately 88%74% and 74%59% of its net revenues from manufacturer
clients and 12%26% and 26%41% from retailer clients, respectively.
During the five years that ended December 31, 1997,January 1, 1999, none of the Company's
manufacturer or retailer clients accounted for greater than 10% of the Company's
net revenues, other than Thrifty-Payless, which accounted for approximately 13%
of net revenues for the year ended December 31, 1995, and Buena Vista Home
EntertainmentBVHE and S.C. Johnson
which accounted for 11.7% and 10.3% of net revenues, respectively, for the year
ended December 31, 1996, and Buena Vista
Home EntertainmentBVHE and Eckerd Drug Stores which accounted for
approximately 16.0% and 13.6% respectively, of net revenues for the year ended
December 31, 1997.
The Company's profitability has1997, and Eckerd Drug Store, CVS Pharmacy, and BVHE which accounted
for approximately 15.6%, 12.6% , and 10.6% respectively, of net revenues for the
year ended January 1, 1999.
During the fiscal year 1998, the Company continued to be adversely affected by
the loss ofexperience a
decline in its shared service clients.business. Shared services consist of regularly
scheduled, routed merchandising services provided at the store level for
manufacturers, primarily under multi-year contracts. Due in part to industry
consolidation, increased competition, and performance, the Company lost a number
of shared service clients in the last half of 19961997 and continuing in 1997.1998. The Company has historically
required a significant fixed management and personnel infrastructure to support
shared services. Accordingly, the loss of shared services business, without
offsetting gains, hashad a material adverse effect on the Company's results of
operations.operations in 1997 and 1998. These losses have been partially offset with
additional project revenue from shared clients and from an increase in dedicatedservice clients. In 19961997 and 1997,1998, shared
service client's accounted for $98.0$83.8 and $83.8$83.0 million in net revenue and
dedicated clients accountaccounted for $21.9$44.4 and $44.4$38.8 million in net revenue,
respectively. The Company believes that revenues in 1998fiscal year 1999 from shared
service clients will continue to decline as a result of the wind-down of the lost business.
The CompanyCompany's profitability has significantly increasedbeen adversely affected by the loss of
its dedicated client services business with two major drug chain customers.in 1998. However, due to the start up
naturethis decline has been
offset by an increase in gross margin, both in absolute amount and as a
percentage of net revenues, as a result of the effects of improved labor
productivity and service cost reduction in the field. Dedicated services the 1997 margins were lower than margins earnedconsist
of merchandising services that are performed for similar services in prior years.a specific retailer or
manufacturer by a dedicated organization, including a management team, working
exclusively for that retailer or manufacturer. The net revenues associated with
dedicated clients increased,decreased as a percentage of overall net revenues, from 18.3%34.6%
in 19961997 to 34.6 %31.9% in 1997. In the dedicated services business, PIA provides each
manufacturer or retailer client with an organization, including a management
team, that works exclusively for that client.1998.
Due to the change in business mix, and resulting negative impact on
margins, the Company re-alignedrealigned its cost structure, and, in the third quarter of
1997, recorded a charge of $5.4 million for restructuring and other costs
associated with the realignment of the management structure and the organization.
The Company continues to review its organizational structure and the fixed and
variable costs associated with delivery of its services. It is anticipated that
further organizational changes will take place overin the next 12 months,fiscal year 1999, as the
Company puts structure, programs and processes in place to reduce its fixed
overhead. The Company believes these programs and continuing improvements will
resultoverhead in improved performance in the field, aline with lower cost delivery structure and
will return the Company to profitability.revenue levels.
18
19
The following table sets forth certain financial data as a percentage of net
revenues for the periods indicated:
Year Ended DecemberYEARS ENDED
---------------------------------------------
DECEMBER 31, ---------------------------------
1995DECEMBER 31, JANUARY 1,
1996 1997 =================================1999
============ ============ ==========
Net revenues 100.0% 100.0% 100.0%
Operating expenses:
Field services costs 77.6 79.1 93.5 86.6
Selling expenses 9.9 9.3 8.2 6.8
General and administrative expenses 6.5 6.7 8.0 9.7
Restructure and other charges 0.0 4.2 0.0 4.2
Depreciation and amortization 0.5 0.5 0.8 ---------------------------------0.9
------ ------ ------
Total operating expenses 94.5 95.6 114.7 ---------------------------------104.0
------ ------ ------
Operating income (loss) 5.5 4.4 (14.7) Interest (expenses)(4.0)
Other income net (0.4)0.8 0.7 0.6
Equity in earnings in affiliate 0.0 0.1 0.1
---------------------------------0.5
------ ------ ------
Income (loss) before provision (benefit) for income taxes 5.1 5.2 (14.0) (3.5)
Provision (benefit) for income taxes 1.7 2.0 (2.2) -----------------------------------
------ ------ ------
Net income (loss) 3.4% 3.2% (11.8)% =================================(3.5)%
====== ====== ======
YEAR ENDED JANUARY 1, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES
For fiscal year 1998, net revenues were $121.8 million, compared to
$128.2 million in 1997, a 5.0% decrease. Shared service and project client net
revenues decreased from $83.8 million in 1997 to $83.0 million in 1998, a
decrease of $0.8 million or 1.0%. In 1998, the traditional shared services,
consisting of regularly scheduled routed merchandising service, decreased from
$44.9 million in 1997 to $40.1 million. This decrease of $4.8 million or 10.7%
was due in part to industry consolidation, increased competition and client
reorganization of marketing strategy. During the same period project revenues
for shared service clients increased by $4.0 million or 10.3% primarily due to a
major client switching from a dedicated program to a shared service program. The
Company's dedicated client net revenues declined from $44.4 million in 1997 to
$38.8 million in 1998, representing a 12.6% decrease. This decrease in dedicated
client net revenues resulted primarily from the completion of a major drug chain
dedicated program. Management expects that net revenues from dedicated clients
will decrease in 1999 due to the completion of a $15.0 million project in the
last quarter of 1998.
The following table sets forth net revenues by client type as a percentage of
net revenues for the periods indicated:
YEARS ENDED
------------------------------------------------------------------
DECEMBER 31, JANUARY 1,
1997 1999 CHANGE
------------------ ------------------- ------------------
(dollars in millions)
AMOUNT % AMOUNT % AMOUNT %
------- ------- ------- ------- ------- -------
Shared service and project client net revenues $ 83.8 65.4% $ 83.0 68.1% $ (0.8) (1.0)%
Dedicated client net revenues 44.4 34.6 38.8 31.9 (5.6) (12.6)
------- ----- ------- ----- ------ -----
Net revenues $ 128.2 100.0% $ 121.8 100.0% $ (6.4) (5.0)%
======= ===== ======= ===== ====== =====
19
20
OPERATING EXPENSES
Field service costs were $105.4 million in the fiscal year 1998 compared
to $119.8 million in 1997, representing a decrease of $14.4 million, or 12.0%.
As a percentage of net revenues, field service costs were 93.5% of net revenues
in 1997 versus 86.6% of net revenues in 1998. Field service costs are comprised
principally of field labor and related costs and overhead expenses required to
provide services to both dedicated and shared service clients. The decrease in
field service costs is primarily due to significant labor efficiency savings
from new labor deployment systems and controls and a decline in services due to
the completion of a dedicated project in the third quarter 1998.
Selling expenses were $8.2 million in 1998, compared to $10.5 million in
the prior year. As a percentage of net revenues, selling expenses were 6.8% in
1998, compared to 8.2% in 1997. This decrease in costs, both in absolute amount
and as a percentage of net revenues, is a result of lower staffing and travel
expenses.
General and administrative expenses increased 15.2% in 1998 to $11.8
million, compared to $10.2 million in 1997. This increase was due primarily to
consulting and promotional expenses of $1.0 million, salary and salary related
expenses of $0.5 million to support technology advancements, office equipment
and leases of $0.7 million, offset by a reduction in bad debt provision of $0.8
million due to improved collection of outstanding accounts.
Restructuring and other charge payments of $5.0 million did not
significantly differ from the initial restructuring and other charges expense.
In addition, accrued liabilities for restructuring at January 1, 1999 of $0.4
million will be sufficient to pay remaining employee separation costs and
special computer equipment under long-term operating leases no longer in use.
(See Note F-12).
Depreciation and amortization expenses were $1.1 million in 1998
compared to $1.0 million in 1997, an increase of $0.1 million as a result of
depreciation, amortization on computer hardware, software development costs for
shelf technology and for general business purposes.
OTHER INCOME
Interest income decreased 42.2% or $0.3 million in 1998 compared to
1997, due to lower cash balances available for investment in 1998.
Equity in earnings of affiliate represents the Company's share of the
earnings of Ameritel, Inc., a full service telemarketing company. Equity of
earnings of affiliate increased 55.2% or 0.1 million in 1998 compared to 1997.
During 1996, the Company exercised its option to increase its ownership of
Ameritel to 20% and is now required for financial reporting purposes to
recognize its equity interest in Ameritel's earnings.
INCOME TAXES
Income tax expense was approximately $0.1 million in 1998, compared to
an income tax benefit of $2.8 million in 1997, representing an effective rate of
1.3% and (15.5)%, respectively. The 1998 tax rate differed from the expected
federal tax rate of 35% due to a valuation allowance of $1.6 million on the
Company's deferred tax asset, caused by a net operating loss carryforward
created in 1998 and the uncertainty over the future utilization of such
carryforwards. An income tax benefit in 1997 was derived from carrying back
net operating losses to previous years and obtaining an income tax refund of
$2.9 million.
NET LOSS
The Company incurred a net loss of approximately $4.3 million in 1998,
$0.78 per diluted share, compared to a net loss of approximately $15.1 million,
or $2.72 per diluted share, in 1997. The improved performance during 1998 was
primarily due to labor efficiency savings from utilizing new labor systems and
controls, reduction in field service costs from the implementation of the 1997
restructure programs. The loss incurred in 1998 is primarily a result of margin
reductions because of reductions in dedicated clients and higher business unit
overhead rates.
20
21
NEW FINANCIAL MODEL
The Company has developed a new financial model with which its business
can be analyzed to assist in the understanding of the operating results and
impact of various cost functions within the organization. This model follows
more standard metrics and allows the Company to analyze and manage at the
business unit level. The following table illustrates this financial model for
the years ended December 31, 1997 and January 1, 1999.
Management expects to continue to review the business results based on
the comparable financial statement format contained in this Form 10-K until
comparisons can be made using the new financial model.
YEARS ENDED
--------------------------------------------------------
DECEMBER 31 JANUARY 1
1997 1999
----------------------- -----------------------
(dollars in millions)
AMOUNT % AMOUNT %
------ ------ ------ ------
Net revenues $128.2 100.0% $121.8 100.0%
Direct business unit field expense 98.7 77.0 88.9 73.0
------ ------ ------ ------
Gross margin 29.5 23.0 32.9 27.0
Overhead and allocated field expense 26.6 20.7 20.8 17.1
------ ------ ------ ------
Business unit margin 2.9 2.3 12.1 9.9
------ ------ ------ ------
Selling, general and administrative expenses 15.3 11.9 15.8 12.9
Restructure and non-recurring charges 5.4 4.2 0.0 0.0
------ ------ ------ ------
Total selling, general and administrative expenses 20.7 16.1 15.8 12.9
------ ------ ------ ------
Earnings (loss) before interest, taxes, depreciation
and amortization (EBITDA) (17.8) (13.8) (3.7) (3.0)
Depreciation and amortization (1.0) (0.8) (1.1) (0.9)
Other income 0.9 0.7 0.6 0.5
Income tax benefit (provision) 2.8 2.1 (0.1) (0.1)
------ ------ ------ ------
Net loss $(15.1) (11.8)% $ (4.3) (3.5)%
====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES
For 1997, net revenues were $128.2 million, compared to $119.9 million
in 1996, a 6.9% increase. The Company's dedicated client net revenues havehad grown
from $21.9 million in 1996 to $44.4 million in 1997, a 102.7% increase. This
increase in dedicated client net revenues resulted from the addition of two
major new clients. Management expects that net revenues from dedicated clients will
continue to increase as a percentage of the overall net revenues earned. Shared service and project client net revenues decreased from
$98.0 million in 1996 to $83.8 million in 1997, a decrease of $14.2 million or
14.5%. In 1997, the traditional shared services, which consistconsisting of regularly
scheduled routed merchandising services, decreased from $68.4 million in 1996 to
$44.9 million in 19971997. Resulting in a decrease of $23.5 million or 34.4%, while
project revenues for shared service clients increased to $9.3 million or 31.4%
21
22
The following table sets forth net revenues by client type as a percentage of
net revenues for the periods indicated:
Year Ended DecemberYEARS ENDED
-------------------------------------------------------------------------
DECEMBER 31, -----------------------------------------------------------------------DECEMBER 31,
1996 1997 Change
=======================================================================CHANGE
-------------------- ------------------- --------------------
(dollars in millions)
AmountAMOUNT % AmountAMOUNT % AmountAMOUNT %
----------------------------------------------------------------------------- ------ ------ ------ ------ ------
Shared service and project client net revenues $ 98.0 81.7% $ 83.8 65.4% $(14.2) -14.5%(14.5)%
Dedicated client net revenues 21.9 18.3%18.3 44.4 34.6%34.6 22.5 102.7%
-----------------------------------------------------------------------102.7
------ ------ ------ ------ ------ ------
Net revenues $119.9 100.0% $128.2 100.0% $ 8.3 6.9%
=======================================================================6.9 %
====== ====== ====== ====== ====== ======
OPERATING EXPENSES
In 1997, field service costs increased $25.0 million, or 26.3%, to
$119.8 million, as compared to $94.8 million in 1996. As a percentage of net
revenues, field service costs were 79.1% of net revenues in 1996 versus 93.5% of
net revenues in 1997. Field service costs are comprised principally of field
labor and their related costs, and overhead expenses required to provide
services to both dedicated and shared service clients. The increase in field
service costs is due primarily
19
20 to labor costs required to provide the necessary
level of business support for dedicated clients. In addition, the Company did
not adequately decrease shared client service labor and overhead costs as the
net revenue from this client base decreased.
Selling expenses were $10.5 million in 1997, compared to $11.1 million
in the prior year.1996. As a percentage of net revenues, selling expenses were 8.2% in 1997,
compared to 9.3% in 1996. This decrease in costs, both in absolute amount and as
a percentage of net revenues, is a result of lower staffing and travel costs.travels.
General and administrative expenses increased 25.9% in 1997 to $10.2
million, compared to $8.1 million in 1996. The increase in general and
administrative expenses was due to increases in expenses that were required to
support overall business growth, including a larger dedicated client base. The
major increases included executive salaries and salary related expenses of $0.3
million, recruiting, employment and training of $0.2$0.3 million, and consulting,
legal and office lease expense of $0.6 million. In addition, increased costs
were experienced due to termination costs.
During 1997, the Company experienced declining gross margins, and
resultant operating losses, due to service performance issues and the loss of
several shared clients. This decline in margins has resulted in insufficient
margin dollars to cover the overhead structure, which had developed at the field
level and in the general corporate area. In the quarter ended September 30,
1997, the Company began to address these conditions by restructuring its
operations, focusingoperations. The Company redirected its focus in the quarter ended September 30,
1997, on a more disciplined and functional operational structure,
and redirecting it's technologystructure. These strategies resultingresulted
in a $5.4 million charge for the restructuring and other additional charges. The
restructure and other charges consistconsisted of $1.3$1.5 million of identified severance, and
lease costs in various management and administrative functions and $2.0$2.1 million
in write-downs and accruals associated with the redirection of the Company's
technology strategies. OtherAdditional charges consist primarily of $1.3 million of
reserves, and write-offs related to unprofitable contracts and $0.6$0.5 million of costs
associated with changes in the Company's service delivery model.
Depreciation and amortization expenses were $1.0 million in 1997
compared to $0.6 million in 1996, an increase of $0.4 million, as a result of1996. The depreciation and amortization on computer
hardware and the software development costs for shelf technology and for general business purposes.increased this
expense $0.4 million.
22
23
OTHER INCOME
Interest income decreased slightly in 1997 compared to 1996, due to
lower cash balances available for investment in 1997. Other income included
interest income on the net proceeds from the Company's initial public offering,
which took place in March 1996.
Equity in earnings inof affiliate represents the Company's share of the
earnings of Ameritel, Inc., a full service telemarketing company. Equity in
earnings of affiliate increased by 33.3% in 1997 compared to 1996. During 1996,
the Company exercised its option to increase its ownership of Ameritel to 20%
and is now required for financial reporting purposes to recognize its equity
interest in Ameritel'sAmeritel earnings.
BENEFIT FROM
INCOME TAXES
Income tax benefit was approximately $2.8 million in 1997, compared to
income tax expense of $2.4 million in 1996, representing an effective rate of
(15.5%) and 39.2%, respectively. The 1997 tax benefit raterates differed from the
expected federalFederal and tax rate of 35% due to a valuation allowance of $3.6
million on the Company's deferred tax asset, caused by a net operating loss
carry forwardcarryforward created in 1997.
NET LOSS
The Company incurred a net loss of approximately $15.1 million in 1997,
or
$2.72 per diluted share, compared to net income of approximately $3.8 million,
or $0.63 per diluted share, in 1996. The net loss for 1997 included the net
impact, after related tax benefit, of restructure and other charges of $4.6
million, or $0.83 per diluted share. The loss incurred in the current year1997 is primarily a
result of margin reductions due to reductions in shared service clients and
start up expenses on dedicated client services, inefficiencies in field labor
execution, poor 20
21
pricing decisions for some client contracts, higher business
unit overhead costs and the recognition of restructure charges and other
non-recurringnon-reoccurring charges.
NEW FINANCIAL MODEL
The Company has developed a new financial model with which its business
can be analyzed to assist in the understanding of the operating results and
impact of various cost functions within the organization. This model follows
more standard metrics and allows the Company to analyze and manage at the
business unit level. The following table illustrates this financial model for
the year ended December 31, 1997. Comparative information for the same period
last year is not yet available.
Year Ended
December 31, 1997
---------------------
Amount %
---------------------
Net revenues $128.2 100.0%
Direct business unit field expense 98.7 77.0
---------------------
Gross margin 29.5 23.0
Overhead and allocated field expense 26.6 20.7
---------------------
Business unit margin 2.9 2.3
Selling, general and administrative expenses 15.3 11.9
Restructure and non-recurring charges 5.4 4.2
---------------------
Total selling, general and administrative expenses 20.7 16.1
Earnings (Loss) before interest, taxes, depreciation
and amortization (EBITDA) $(17.8) (13.8%)
=====================
Management expects to continue to review the business results on the
basis of the comparable financial statement format contained in this Form 10-K
until such time as comparisons can be made utilizing the new financial model.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET REVENUES
Net revenues increased $15.1 million, or 14.4%, to $119.9 million in 1996
from $104.8 million in 1995. The increase in net revenues was the result of
revenues from a new client of $14.0 million, which contributed 92.7% to the
increase, and a net increase from other clients of $1.1 million, which
contributed 7.3% of the increase. This net increase is comprised of increased
revenues of $12.1 million from existing clients, partially offset by a decline
in revenue of $11.0 million due to client losses.
The net revenue increase in 1996 is a result of an increase in project
business of $14.6 million, representing a 61.8% increase in project revenues
over 1995, and from an increase in dedicated services of $8.3 million,
representing a 61.4% increase in dedicated services over 1995. These increases
were offset by a decrease of $7.8 million, or 11.5%, in revenues from shared
services over 1995.
OPERATING EXPENSES
Field service costs increased $13.5 million, or 16.4%, to $94.8 million in
1996, compared to $81.3 million in 1995. Field service costs are comprised
principally of field labor and related costs and expenses required to provide
21
22
routed coverage, project activities, key account management and related
technology costs, as well as the field overhead required to support the
activities of these groups of associates. The increase in field service costs is
principally due to increases in associated revenue. As a percentage of net
revenues, field service costs increased to 79.1% in 1996 from 77.6% in 1995
primarily due to the negative leverage caused by the loss of shared services
business; increased labor costs associated with a delayed signing of a large new
client in the second quarter of the year; salary increases in the ordinary
course of business; and increased travel costs associated with the larger work
force.
Selling expenses increased $0.8 million, or 7.7%, to $11.1 million in 1996
from $10.3 million in 1995. Selling expenses increased primarily as a result of
higher payroll costs due to increased staffing and travel costs. As a percentage
of net revenues, selling expenses decreased to 9.3% in 1996 from 9.9% in 1995 as
spending continued to increase at a slower rate than revenue.
General and administrative expenses increased $1.3 million, or 18.5%, to
$8.1 million in 1996 from $6.8 million in 1995. General and administrative
expenses increased primarily as a result of higher payroll costs due to
increased staffing in recruitment and training and management information
services that was required to support overall business growth, as well as salary
increases in the ordinary course of business. As a percentage of net revenues,
general and administrative expenses increased to 6.7% in 1996 from 6.5% in 1995.
Depreciation and amortization expenses increased in 1996 from $0.6 million
compared to $0.5 million in 1995 as a result of depreciation on computer
hardware and software upgrades both for shelf technology and for general
business purposes.
OTHER INCOME
Interest income was $0.8 million in 1996, compared to interest expense of
$0.5 in 1995. The income resulted from investments of the proceeds of the
Company's initial public offering on March 1, 1996, and payoff of borrowings of
$3.4 million.
Equity in earnings in affiliate represents the Company's share of the
earnings of Ameritel, Inc. During 1996, the Company exercised its option to
increase its ownership of Ameritel and is now required to recognize its equity
in its earnings.
INCOME TAXES
Income taxes were approximately $2.4 million in 1996 and $1.8 million in
1995, representing an effective rate of 39.2% and 34.1%, respectively. These tax
rates differed from an expected combined Federal and state tax rate of 40% due
principally to a $0.6 million reduction in the valuation allowance caused by the
utilization of net operating loss carry forwards in 1995. As of December 31,
1995, all of the net operating loss carryover had been utilized.
NET INCOME
Net income increased approximately $0.2 million, or 6.5%, to
approximately $3.8 million in 1996, from approximately $3.5 million in 1995,
primarily as a result of the increase in net revenues discussed above, offset by
the increase in operating expenses related to the increase in net revenues.
LIQUIDITY AND CAPITAL RESOURCES
On March 1, 1996, the Company completed an initial public offering of
its Common Stock, raising $26.5 million. Prior to this offering, the Company's
primary sources of financing were senior borrowings from a bank under a
revolving line of credit and subordinated borrowings from two stockholders. As
of December 31, 1997,January 1, 1999, the Company had used the proceeds from the offering to repay
bank debt of $3.4 million, to repurchase 507,000 shares of the Company's stock
for approximately $3.0 million and to fund the Company's operating losses in
1997.
22
231997 and 1998. During the year ended December 31,1997,January 1, 1999, the Company had a net
decrease in cash of $6.5$1.9 million, resulting from its operating losses and
common stock repurchase
program,restructure charge payments and a reduction in accounts payable, that were
offset partially by a reduction in accounts receivable, income tax receivable
and proceeds of $5.7 million.$2.0 million from its line of credit.
In March 1997, the Company's Board of Directors approved a stock
repurchase program under which the Company was authorized to repurchase up to
1,000,000 shares of Common Stock from time to time in the open market, depending
on market conditions. This program was funded by proceeds from the initial
public offering. As of July 14, 1997, the Company repurchased an aggregate of
507,000 shares of its Common Stock for an aggregate price of approximately $3.0
million. No further repurchases are currently planned.
In December 1998, PIA Merchandising Co., Inc. ("PIA Co.") and another
subsidiary of PIA entered into a loan and security agreement with Mellon Bank,
N.A. The agreement provides for a revolving line of credit that allows maximum
borrowing of $20.0 million and requires PIA Co. to borrow and maintain a minimum
balance of $2.0 million. The three-year credit facility will be used for working
capital purposes and potential acquisitions.
Cash and cash equivalents totaled $11.1 million at January 1, 1999
compared with $13.0 million at December 31, 1997,
compared with $19.5 million at December 31,1996.1997. At January 1, 1999 and
December 31, 1997, and
December 31, 1996, the Company had working capital of $15.9$13.8 million and $32.7$15.9
million, respectively, and current ratios of 2.50 and 1.95, and 4.08, respectively.
23
24
Net cash used in operating activities in 19971998 was $2.8$3.4 million, compared
with $1.7$2.8 million in 1996.1997. This use of cash for operating activities in 19971998
resulted primarily from net operating losses offset partially byof $4.3 million and a decreasereduction in
accrued liabilities primarily attributed to the Company's 1997 restructuring and
other charges and a reduction in accounts receivablepayable of $5.7 million. This was$2.2 million related to a
reduction in third party payroll liability. These uses were offset by an income
tax receivable
forrefund of $2.9 million outstanding in 1997 and an increasea decrease in accounts payableaccount
receivable of $2.7$5.1 million related to pending payments to a third party payroll company. The
Company also had a restructuring charge in the third quarterfrom improved collection of $5.4 million.outstanding accounts. Net
cash used in investing activities for 19971998 was $0.7 million compared to $0.8
million forin 1997 from additions to property and equipment and internally
developed software,software. Net cash provided by financing activities for 1998 was $2.1
million, compared to $2.5 million for 1996. Netnet cash used in financing activities for 1997 wasof $2.9 million compared to net cash provided
by financing activities of $23.5 million in
1996.1997. In 1997, the Company
repurchased 507,000 shares of its common stock for approximately $3.0 million.
In 1996,1998 the Company received net proceeds from the issuance of common
stock of $26.5$0.1 million and repaid long-term debtincreased the line of $3.4credit by $2.0 million.
The above activity resulted in a decrease in cash and cash equivalents
of $6.5$1.9 million for the year ended December 31, 1997.
The Company's current liquidity is provided by cashJanuary 1, 1999.
Cash and cash equivalents and the timely collection of its receivables. The Company primarily provides
services to major clients with limited credit risk (See "Risks" Lower).receivables
provide the Company's current liquidity. However, the potential uncollectibility
of amountsreceivables due from any of its largePIA's major clients, or a significant reduction
in business from such clients, or the inability to attractacquire new clients would
have aan adverse material adverse effect on the Company's cash resources and its ongoing
ability to fund operations.
The Company currently has no committed
credit facility available for working capital needs. The Company is currently
negotiating withhad a major financial institution for4.3 million loss and experienced a secured credit facility,
however, there is not assurance that a commitment for a credit facility will be
obtained. Based on the Company's 1998 Business Plan and its cost reduction
program, management believes thatdecrease in cash
and cash equivalents andof $1.9 million for the year ended January 1, 1999.
However, with the addition of the revolving line of credit, timely collection of
its receivablereceivables, and the Company's positive working capital position, management
believes the funding of operations over the next twelve months will be
sufficient to provide for ongoing working
capital needs and generally fundsufficient.
PIA may incur additional indebtedness in 1999 in connection with the
ongoing operationsmerger. SPAR Group acquired the assets of an incentive marketing company in
January 1999. A portion of the business during
1998.purchase price was paid through the issuance of a
promissory note in the principal amount of $12,422,189 (plus an earn out, if
any), which matures on September 15, 1999. As of March 1, 1999, the amount owed
under the note was $9.3 million, excluding the earn out payment, if any. In
addition, the principal stockholders of SPAR Group loaned SPAR Group $2,958,000
to facilitate the acquisition. If this indebtedness is not repaid before the
transaction with PIA is consummated, the combined company will assume these
obligations. PIA will also be obligated, under certain circumstances, to pay
severance compensation to its employees in connection with the merger. Further,
PIA will incur substantial costs in connection with the transaction, including
legal, accounting and investment banking fees estimated to be an aggregate of
approximately $2.4 million and severance payments estimated to be approximately
$3 million. PIA has entered into discussions with its bank to increase its
credit line to enable it to meet cash needs in connection with the merger and
future potential acquisitions in 1999.
YEAR 2000 SOFTWARE COSTS
The CompanyMany currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As a result, many
date-sensitive computer applications will fail beginning January 1, 2000 because
they are unable to process dates properly beyond December 31, 1999. PIA has
conducted a review ofreviewed its computer systems to identify
those areas that could be affected by the "Year 2000"Year
2000 issues and is developing
an implementationhas implemented a plan to resolve these issues.
PIA has substantially completed the evaluation of its information
technology infrastructure, software, hardware and communications systems. PIA
believes that its critical hardware and software applications are currently Year
2000 compliant. Completion of PIA's plan to upgrade all hardware and software
applications to be Year 2000 compliant is expected by the third quarter of 1999.
Third party vendors are also being reviewed for Year 2000 compliance and PIA
expects this risk assessment to be complete by the second quarter of 1999. PIA's
assessment and evaluation efforts include testing systems, inquiries of third
parties and other research. By implementing significant systems upgrades, PIA
believes that it has substantially reduced its potential internal exposure to
Year 2000 problems.
24
25
PIA will utilize internal resources to reprogram, or replace and test
the software for Year 2000 modifications. The Company presently believes,
with modifications to existing softwaretotal cost of the Year 2000
project is estimated at $67,000 and conversions to new software,is being funded through operating cash
flows. Of the total project cost, approximately $6,000 was expensed in the
fiscal year 1998 and the remaining $61,000 will be expensed in 1999. It is not
expected that these costs will have a material effect on the results of
operations.
The extent and magnitude of the Year 2000 problem as it will affect PIA
externally, both before and after January 1, 2000, is difficult to predict or
quantify for a number of reasons. These include the lack of control over systems
that are used by third parties that are critical to PIA's operation, the
complexity of testing inter-connected networks and applications that depend on
third party networks. If any of these third parties experience Year 2000
problems, it could have a material adverse effect on PIA. Due to the nature of
its business, however, PIA does not pose significant operational problems andbelieve that its operations are dependent on
third party systems. Furthermore PIA believes that manual processes
could be implemented if certain systems failed to function properly.
PIA is not anticipatedcurrently aware of any material operational issues associated
with preparing its internal systems for the Year 2000, or the adequacy of
critical third party systems. PIA has not developed a contingency plan in case
it does not achieve Year 2000 compliance on or before December 31, 1999. The
results of its evaluation and assessment efforts do not indicate a need for
contingency planning. PIA intends to becontinue assessing its Year 2000
compliance, implementing compliance plans and communicating with third parties
about their Year 2000 compliance. If PIA's continued efforts indicate that
contingency planning is prudent, PIA will undertake appropriate planning at that
time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk related to changes in interest
rates. A discussion of the Company's accounting policies for financial
instruments and further disclosures relating to financial instruments is
included in the Summary of Significant Accounting Policies in the Notes to
Consolidated Financial Statements. The Company's monitors the risks associated
with interest rates and financial instrument positions.
The Company's revenue derived from international operations is not
material and, therefore, the risk related to foreign currency exchange rates is
not material.
INVESTMENT PORTFOLIO
The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments. The
Company invests its cash and cash equivalents and investments in high-quality
and highly liquid investments consisting of taxable money market instruments,
corporate bonds and some tax-exempt securities. The average yields on the
Company's investments in fiscal 1998 resulted primarily from investments and
averaged approximately 4.9%. As of January 1, 1999, PIA's cash and cash
equivalents and investments consisted primarily of taxable money market
instruments, corporate and tax-exempt securities with maturities of less than
one year with an average yield of approximately 3.7%.
DEBT
The Company's debt is comprised of a line of credit with Mellon Bank
N.A. and requires monthly interest payments based on a variable interest rate
applied to the outstanding loan balance. If there were a 1% change in the
interest rate based upon, the Company's financial positionminimum borrowing requirement of
$2,000,000, interest expense would increase or results of
operations in any given year.decrease by $20,000 per annum.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 of this Annual Report on Form 10-K.10-K/A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
2325
2426
PART III
ITEMS 10, 11, 12ITEM 10. DIRECTORS AND 13.
TheEXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Set forth in the table below is certain information requiredconcerning incumbent
directors and the nominees for election as directors of PIA. Ages are shown as
of March 1, 1999. All of the incumbent directors are also nominees for the
election as directors at PIA's 1999 Annual Meeting of Stockholders. Each nominee
has consented to being named in these items 10, 11, 12 and 13 of this Form 10-K is incorporated by reference10-K/A as a nominee for director and
has agreed to those portionsserve as a director if elected. None of the Company'snominees has any
family relationship to any other nominee or to any executive officer of PIA. No
arrangement or understanding exists between any nominee and any other person or
persons pursuant to which any nominee was or is to be selected as a director or
nominee other than with respect to Mr. Owens who has a contractual right to be
nominated as a director as long as he holds at least 250,000 shares of PIA
Common Stock. Mr. Owens has indicated that he will waive his contractual right
to be nominated to the PIA Board if the merger (the "Merger") with SPAR Group is
consummated. In connection with the consummation of the Merger, each of the
nominees other than Messrs. Collins and Lewis has agreed to resign from the PIA
Board, and Messrs. Collins and Lewis will fill three of the five remaining
vacancies with the following persons designated by SPAR Group: Robert G. Brown
(SPAR Group's Chairman, Chief Executive Officer and President), William H.
Bartels (SPAR Group's Vice Chairman, Senior Vice President and Treasurer) and
Robert O. Aders.
NAME Age Position with PIA
- -------------------------- ------ -----------------------------------------------
Terry R. Peets 54 Chief Executive Officer, President and Director
Patrick W. Collins(1) 70 Director
John A. Colwell 48 Director
Joseph H. Coulombe(2) 68 Director
Patrick C. Haden(1)(2) 46 Director
J. Christopher Lewis 42 Director
Clinton E. Owens 57 Chairman of the Board and Director
- ----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Set forth below is a brief description of the business experience for the
previous five years of all nominees for directors of PIA.
Mr. Peets joined PIA in August 1997 as Chief Executive Officer, President
and Director. Mr. Peets served as Executive Vice President of The Vons
Companies, Inc. from 1995 to April 1997. Prior to joining Vons, Mr. Peets served
in various sales, marketing and operation roles as Senior Vice President for
Ralphs Grocery Company from 1977 to 1994, until he was named Executive Vice
President in 1994. Mr. Peets also serves as a director of Supermarkets Online, a
division of Catalina Marketing Corporation, a provider of in-store electronic
marketing services and Diamond Brands, Inc., a manufacturer and marketer of
branded household products.
Mr. Collins has been a member of the PIA Board since May 1998. Mr. Collins
served as Chief Operating Officer of Ralphs Grocery Company for 18 years, 17 of
which he served as President and one year as Vice Chairman. Mr. Collins also
serves as a director of Catalina Marketing Corporation, a provider of in-store
electronic marketing services, and New Bristol Farms, Inc., a gourmet food
grocery chain.
26
27
Mr. Colwell has been a member of the PIA Board since March 1991, and
currently serves as a consultant to PIA. From February 1997 through August 1997,
Mr. Colwell served as interim Vice Chairman of the Board. Mr. Colwell is sole
proprietor of a consulting and interim management firm bearing his name, and
President of Facility Development Corporation. Since 1991, Mr. Colwell has
served as a Managing Director of Lineberger & Co., a private equity investment
firm. From November 1991 through February 1997, Mr. Colwell was Senior Vice
President of River City Plastics, Inc., a manufacturer of polyvinyl chloride
pipe.
Mr. Coulombe has been a member of the PIA Board since May 1993. Mr.
Coulombe is the founder and former Chief Executive Officer of Trader Joe's, a
specialty food grocery chain. Mr. Coulombe sold Trader Joe's in 1979 and
remained the Chief Executive Officer of Trader Joe's until January 1989. From
February 1995 to April 1995, Mr. Coulombe served as President and Chief
Executive Officer of Sport Chalet, and served as a director of Sport Chalet from
February 1993 to June 1994. From February 1994 to January 1995, Mr. Coulombe
served as Chief Executive Officer of Provigo Corp., the Northern California
subsidiary of Provigo Inc., of Montreal. From June 1992 to January 1994, Mr.
Coulombe served as a member of the Board of Directors of Imperial Bank, a
subsidiary of Imperial Bancorp. Mr. Coulombe also serves as a director of Cost
Plus World Market, a home furnishings store chain, and New Bristol Farms, Inc.,
a gourmet food grocery chain.
Mr. Haden became a member of the PIA Board in August 1988 in connection
with PIA's acquisition. Since 1987, Mr. Haden has been a general partner of
Riordan, Lewis & Haden (RLH), equity investors in California-based enterprises.
RLH's portfolio interests emphasize high growth middle market companies,
especially those in the value added service sector. Mr. Haden also serves as a
director of Tetra Tech, Inc., an environmental engineering and consulting firm,
Data Processing Resources Corporation, a provider of information technology
specialty staffing services, and several privately-held companies.
Mr. Lewis has been a member of the PIA Board since April 1997. Since 1981,
Mr. Lewis has been a general partner of Riordan, Lewis & Haden. Mr. Lewis also
serves as a director of Tetra Tech, Inc., Data Processing Resources Corporation,
SM&A Corporation, California Beach Restaurants, Inc., an owner and operator of
restaurants, and several privately-held companies.
Mr. Owens has been Chairman of PIA since August 1988 and served as Chief
Executive Officer of PIA from August 1988 to August 1997. Mr. Owens has over 30
years experience in the merchandising services and packaged goods industries.
Mr. Owens previously has served as Senior Vice President of Sales and Marketing
of Coca Cola Foods, and has also served in various management positions with RJR
Foods and Procter & Gamble, among others.
DIRECTOR MEETINGS AND COMMITTEES
During fiscal 1998, Proxy
Statementthe PIA Board held nine meetings and took various
actions by written consent. Each incumbent director attended at least 75% of the
aggregate of (i) the total number of meetings held by the PIA Board during
fiscal 1998 and (ii) the total number of meetings held by all committees of the
PIA Board during that period within which containshe was a Director or member of such
committee of the PIA Board.
The standing committees of the PIA Board are the Audit Committee (the
"Audit Committee") and the Compensation Committee (the "Compensation
Committee"). The Audit Committee held two meetings and the Compensation
Committee held one meeting during fiscal 1998. PIA does not have a standing
nominating committee or any committee performing the functions thereof.
The Audit Committee presently consists of Messrs. Haden and Coulombe. The
Audit Committee makes recommendations concerning the engagement of independent
public accountants; reviews with the independent public accountants the plans
for and scope of the audit, reviews the results of the audit; approves the
professional services provided by the independent public accountants; reviews
the independence of the public accountants; and reviews the adequacy and
effectiveness of PIA's internal accounting control.
27
28
The Compensation Committee presently consists of Messrs. Haden and Collins.
The Compensation Committee determines compensation for PIA's executive officers
and administers PIA's stock incentive plans.
EXECUTIVE OFFICERS
Set forth in the table below are the names, ages and positions of the
current executive officers of PIA. Ages are shown as of March 1, 1999. Executive
officers are elected by and serve at the discretion of the PIA Board. None of
the executive officers has any family relationship to any nominee for director
or to any other executive officer of PIA.
NAME Age Position with PIA
- -------------------- ----- ---------------------------------------------------------------
Clinton E. Owens 57 Chairman of the Board and Director
Terry R. Peets 54 Chief Executive Officer, President and Director
Cathy L. Wood 51 Executive Vice President, Chief Financial Officer and Secretary
Donald H. Holman 42 Executive Vice President-- Marketing and Sales
John R. Bain 52 Executive Vice President-- Operations
Mark J. Hallsman 44 Senior Vice President-- Field Logistics and Operations Planning
Set forth below is a brief description of the business experience for the
previous five years of all current executive officers of PIA except Messrs.
Peets and Owens whose business experience has been previously described. In
connection with the consummation of the Merger, each of the above executive
officers has agreed to resign other than Ms. Wood who will remain in her current
position and Mr. Peets who will become Vice Chairman of PIA. If the Merger is
consummated, the other executive officers of PIA will be as follows: Mr. Brown,
Chairman, Chief Executive Officer and President, Mr. Bartels, Vice Chairman and
James R. Ross, Treasurer.
Ms. Wood joined PIA in August 1997 as Executive Vice President, Chief
Financial Officer and Secretary. Ms. Wood served as Vice President and Chief
Financial Officer of Giant Group Ltd., a NYSE listed company specializing in
acquisitions, from 1995 to 1997. From 1989 to 1995, Ms. Wood served in various
capacities at Wherehouse Entertainment, Inc. prior to being named Senior Vice
President and Chief Financial Officer in 1993. From 1972 to 1989, Ms. Wood
served in various credit and lending positions at Mellon Bank, N.A., including
from 1982 to 1989, Vice President of Consumer Products and Retail Credit
Analysis.
Mr. Holman joined PIA in June 1992 and has served as Executive Vice
President of Marketing and Sales since August 1998. From June 1996 to August
1998, Mr. Holman served as PIA's Vice President of Sales. From January 1995 to
June 1996, Mr. Holman served as PIA's Vice President of Business Development and
from June 1992 to December 1994, Mr. Holman served as PIA's Vice President
Division Manager.
Mr. Bain joined PIA in November 1997 as Senior Vice President of Operations
and became Executive Vice President of Operations in August 1998. Mr. Bain
served as Executive Vice President of Shasta Beverages in the Western Division
from October 1995 to November 1997. Before joining Shasta Beverages, Mr. Bain
served as Vice President of Sales and Marketing for Casablanca Food Company, and
Divisional Vice President for Continental Baking Company, from 1992 to 1994.
Mr. Hallsman joined PIA in August 1993 and has served as Senior Vice
President of Field Logistics and Operations Planning since August 1998. From
December 1995 to August 1998, Mr. Hallsman served as PIA's Senior Vice President
of Human Resources and from August 1993 to December 1995, Mr. Hallsman served as
Vice President of Human Resources. From September 1985 to August 1993, Mr.
Hallsman served as Director, Human Resources of Con-Way Western Express, a
provider of short-haul trucking services.
28
29
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act ("Section 16(a)") requires PIA's
directors and certain of its officers and persons who own more than 10% of PIA
Common Stock (collectively, "Insiders"), to file reports of ownership and
changes in their ownership of PIA Common Stock with the Commission. Insiders are
required by Commission regulations to furnish PIA with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5s were
required for those persons, PIA believes that its Insiders complied with all
applicable Section 16(a) filing requirements for fiscal 1998, with the exception
of Messrs. Bain, Colwell, Haden, Holman, Lewis, Owens and Peets and Ms. Wood,
each of which filed a late Form 5 reporting one transaction and Mr. Coulombe who
filed a late Form 5 reporting two transactions.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation received for services
rendered to PIA in all capacities for the three fiscal years ended January 1,
1999 by (i) PIA's Chief Executive Officer during fiscal 1998, and (ii) each of
the other four most highly compensated executive officers of PIA who were
serving as executive officers at the end of fiscal 1998 (collectively, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------- -------------
SECURITIES ALL OTHER
FISCAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY ($)(1) BONUS ($) OPTIONS (#) ($)(2)
- ------------------------------------------------- -------- -------------- ------------ ------------- ------------
Terry R. Peets 1998 $ 253,894 $ -- 35,000 $ 7,667
President and Chief Executive Officer 1997 111,757 -- 250,000 10,675
1996 -- -- -- --
Clinton E. Owens 1998 340,833 -- -- 13,442
Chairman of the Board 1997 400,000 -- -- 34,557
1996 400,000 50,000 -- 36,820
Cathy L. Wood 1998 202,366 -- 65,000 --
Executive Vice President, Chief 1997 96,692 -- 100,000 --
Financial Officer and Secretary 1996 -- -- -- --
John R. Bain 1998 160,625 -- 45,000 2,463
Executive Vice President-- Operations 1997 18,750 -- 25,000 --
1996 -- -- -- --
Donald H. Holman 1998 168,317 -- 52,500 2,966
Executive Vice President-- Marketing and Sales 1997 120,118 -- 15,000 2,434
1996 107,056 9,000 10,000 2,174
- --------
(1) For the year ended December 31, 1996, includes $109,500 and $4,347 deferred
at the election of Messrs. Owens and Holman, respectively; for the year
ended December 31, 1997, includes $2,500, $95,833 and $4,867, deferred at
the election of Messrs. Peets, Owens and Holman, respectively; and for the
year ended January 1, 1999, includes $10,000, $8,802, $9,850 and $5,933,
deferred at the election of Messrs. Peets, Owens, Bain and Holman,
respectively; pursuant
29
30
to PIA's 401(k) Plan and Deferred Compensation Arrangement. See "--
Compensation Plans -- 401(k) Plan" and "-- Deferred Compensation
Arrangement."
(2) Consists of contributions to the 401(k) Plan made by PIA on behalf of each
of Messrs. Peets, Owens, Bain and Holman, respectively. Also includes an
aggregate of $4,236 and $2,630 in insurance premiums paid by PIA on behalf
of Mr. Peets during the years ended December 31, 1997 and January 1, 1999,
respectively, for certain life insurance and disability insurance policies
of which Mr. Peets is the sole beneficiary. Also includes an aggregate of
$29,820, $14,891 and $9,145 in insurance premiums paid by PIA on behalf of
Mr. Owens during the years ended December 31, 1996, December 31, 1997 and
January 1, 1999, respectively, for certain life and disability insurance
policies of which Mr. Owens is the sole beneficiary.
EMPLOYMENT AGREEMENTS, SEVERANCE ARRANGEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Mr. Peets entered into an at will employment agreement with PIA on June 25,
1997. Such agreement is terminable by PIA at any time, subject to, among other
things, severance payments as provided in the employment agreement. From June
25, 1997 through August 9, 1997, Mr. Peets received a salary of $1,200 per day
and from August 10, 1997 to August 9, 1998 he received a salary of $20,834 per
month. Mr. Peets' employment agreement was amended on October 1, 1998 whereby
effective August 10, 1998, Mr. Peets receives a salary of $21,459 per month,
subject to annual review by the PIA Board for possible increases, with a minimum
increase tied to the Los Angeles-Long Beach-Anaheim consumer price index. Mr.
Peets is also entitled to a yearly bonus of up to 100% of his base salary based
upon PIA achieving certain operating results. PIA's obligation to pay a
pro-rated bonus to Mr. Peets upon an acquisition event (such term, as defined in
his employment agreement, includes the consummation of the Merger) is contingent
on PIA achieving certain operating results prior to such event. It is currently
anticipated that no bonus will be payable to Mr. Peets in connection with the
consummation of the Merger. The employment agreement also provides for payment
of Mr. Peets' salary for 18 months if PIA terminates his employment without
cause (as defined in his employment agreement) during the two year period
following a material corporate event (which term, as defined in his employment
agreement, includes the consummation of the Merger) or if Mr. Peets terminates
his employment for material reason (as defined in his employment agreement)
within one year following such event. His employment agreement further provides
that the vesting schedule for Mr. Peets' unvested options (222,500 at January 1,
1999) be accelerated by two years upon the occurrence of an acquisition event.
Mr. Peets' employment agreement was amended further to provide that his consent
to certain actions taken by PIA following the Merger, including the change in
Mr. Peets' title, will not require him to waive his right to resign for material
reason, nor will he be deemed to have waived such right.
Mr. Owens entered into an agreement with PIA on August 10, 1998 that
settles all differences arising out of or relating to Mr. Owen's employment with
PIA. Pursuant to the agreement, Mr. Owens resigned as an employee of PIA and all
its subsidiaries effective November 10, 1998 but continues to serve as Chairman
of the Board and a director of PIA. The agreement provides, among other things,
for severance payments of $37,500 per month for a period of nine months
following the date of his resignation as an employee. In addition, under the
terms of the agreement, Mr. Owens has the right to be nominated to serve on the
PIA Board as long as he holds at least 250,000 shares of PIA Common Stock. Mr.
Owens has indicated that he will waive this right in connection with the Merger.
Ms. Wood entered into a severance agreement with PIA on February 20, 1998
which was amended and restated on October 1, 1998. Ms. Wood or PIA may terminate
the agreement at any time. The agreement provides, among other things, for
payment of Ms. Wood's salary for 18 months if PIA terminates her employment
without cause (as defined in Ms. Wood's severance agreement) during the two year
period following a change of control (such term, as defined in her severance
agreement, includes the consummation of the Merger) or if Ms. Wood terminates
her employment for good reason (as defined in her severance agreement) within
one year following such event. The agreement further provides that the vesting
schedule for her unvested stock options (140,000 at January 1, 1999) shall be
accelerated by two years upon the occurrence of a change of control of PIA
(which includes the Merger). Ms. Wood's agreement was further amended to provide
that her consent to certain actions by PIA following the Merger will not require
her to waive her right to resign for good reason, nor will she be deemed to have
waived such right.
30
31
PIA currently has no written employment or severance contracts with any of
the Named Executive Officers other than as described above.
Messrs. Bain, Holman and Hallsman are entitled to receive severance
payments pursuant to PIA's severance policy. Messrs. Bain and Holman will
receive their salary for 12 months and Mr. Hallsman will receive his salary for
nine months if they are terminated without cause within two years following a
material corporate event (such term, as defined by the PIA Board, includes the
consummation of the Merger). In addition, pursuant to action taken by the PIA
Board, all of the unvested options held by each executive officer of PIA will be
automatically vested in full if such executive officer is terminated without
cause within two years following a material corporate event. The vesting
schedule for such options will be accelerated by two years upon the occurrence
of an acquisition event (such term, as defined by the PIA Board, includes the
consummation of the Merger).
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information 24regarding each grant of stock
options made during the year ended January 1, 1999 to each of the Named
Executive Officers. No stock appreciation rights ("SARs") were granted during
such period to such persons.
INDIVIDUAL GRANTS (1)
-----------------------------------------------------------------
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION FOR OPTION(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------------------
NAME GRANTED (#) PERIOD (%) PRICE ($/SH) DATE 5% ($) 10% ($)
- ----------------------- -------------- --------------- -------------- -------------- --------------- --------------
Terry R. Peets 35,000 10.2 4.500 09/21/08 99,051 251,014
Clinton E. Owens -- -- -- -- -- --
Cathy L. Wood 50,000 14.5 5.870 08/02/08 168,765 428,068
15,000 4.4 4.500 09/21/08 42,450 107,578
John R. Bain 10,000 2.9 4.875 04/07/08 30,659 77,695
35,000 10.2 6.250 08/12/08 137,571 348,631
Donald H. Holman 10,000 2.9 4.875 04/07/08 30,659 77,695
32,500 9.4 6.250 08/12/08 127,744 323,729
10,000 2.9 4.000 10/28/08 25,156 63,750
- ----------
(1) All such options vest over four year periods at an annual rate of 25%
beginning on the first anniversary of the date of grant. Notwithstanding
the foregoing, the vesting schedule for all such options will accelerate by
two years upon the occurrence of an acquisition event (such as the Merger)
and all such options will be fully vested for any officer who is terminated
without cause within two years following an acquisition event.
(2) The potential realizable value is calculated based on the term of the
option (ten years) at its time of grant. It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option.
31
2532
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth the number and value of the exercisable and
unexercisable options held by each of the Named Executive Officers at January 1,
1999. None of the Named Executive Officers exercised any options during the
fiscal year ended January 1, 1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
------------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- -------------- ------------- ----------- -------------
Terry R. Peets 62,500 222,500 0 0
Clinton E. Owens 227,026 -- 0 0
Cathy L. Wood 25,000 140,000 0 0
John R. Bain 6,250 63,750 0 0
Donald H. Holman 11,182 68,750 0 0
- ---------
(1) All options held by PIA Named Executive Officers were out of the money at
January 1, 1999. As of the year ended January 1, 1999 the fair market value
of PIA Common Stock (as reported by the Nasdaq National Market) was $2.50
which was less than the exercise price of the outstanding options.
COMPENSATION PLANS
1990 Stock Option Plan. In June 1990, PIA adopted a stock incentive plan
(as amended, the "1990 Option Plan"), covering 810,811 shares of PIA Common
Stock that may be granted to certain employees and directors to help them to
acquire shares of PIA Common Stock and thereby benefit directly from PIA's
growth, development and financial success. As of January 1, 1999, there were
393,031 options outstanding under the 1990 Option Plan at a weighted average
exercise price of $6.11 per share, and 95,814 shares of PIA Common Stock had
been issued upon exercise of options at a weighted average price of $5.10 per
share. In December 1995, the PIA Board determined that no further option grants
would be made under the 1990 Option Plan.
The 1990 Option Plan is administered by PIA's Compensation Committee.
Officers, key employees, consultants and directors of PIA and its subsidiaries
are eligible to receive grants under the 1990 Option Plan. Stock options granted
under the 1990 Option Plan are priced at no less than 85% of the fair market
value of the PIA Common Stock on the date of the grant.
1995 Option Plan. In December 1995, PIA adopted the 1995 Option Plan. The
1995 Option Plan currently covers 1,300,000 shares of PIA Common Stock that may
be granted to certain employees, directors, consultants and other persons
providing valuable services to PIA. In connection with the consummation of the
Merger, PIA will increase the number of shares under the 1995 Option Plan to
3,500,000. As of January 1, 1999, there were 1,016,254 options outstanding under
the 1995 Option Plan at a weighted average exercise price of $5.69 per share,
and 2,000 shares of PIA Common Stock had been issued upon exercise of options at
a weighted average price of $9.87 per share.
The 1995 Option Plan is administered by PIA's Compensation Committee.
Officers, certain directors, key employees and consultants of PIA and its
subsidiaries are eligible to receive grants under the 1995 Option Plan. In
February 1999, PIA approved the amendment and restatement of the 1995 Option
Plan to provide that, among other things, grants may also be made to other
persons providing valuable services to PIA. Stock options granted under the 1995
Option Plan are priced at not less than the fair market value of the PIA Common
Stock on the date of grant.
32
33
Special Purpose Stock Option Plan. In February 1999, PIA adopted the
Special Purpose Stock Option Plan (the "Special Plan") to provide solely for the
issuance of PIA options ("Substitute Options") to holders of SPAR Group options
in exchange for such SPAR Group options in connection with the Merger. The
Special Plan is administered by the PIA Board. All available options to acquire
stock under the Special Plan will be granted at the effective time of the Merger
and no further Substitute Options may be granted under the Special Plan.
Employee Stock Purchase Plan. On February 17, 1997, PIA adopted an Employee
Stock Purchase Plan ("ESP Plan"). The ESP Plan allows employees of PIA to
purchase PIA Common Stock at a discount, without having to pay any commissions
on the purchases. The maximum amount that any employee can contribute to the ESP
Plan per quarter is $6,250, and the total number of shares which are reserved by
PIA for purchase under the ESP Plan is 200,000. As of January 1, 1999, 12,290
shares of PIA Common Stock had been issued at a weighted average price of $3.69
per share.
401(k) Plan. The PIA Savings and Retirement 401(k) Plan (the "401(k) Plan")
covers all PIA employees that do not participate in the pension plans described
below. An employee may elect to defer, in the form of Company contributions to
the 401(k) Plan on his or her behalf, up to 15% of the total compensation that
would otherwise be paid to the employee, not to exceed the amount allowed by
applicable IRS guidelines. In addition, PIA makes matching contributions to the
401(k) Plan each year equal to 50% of the participant's elective contributions
(not to exceed 4% of the total compensation) for such year, and may also make
additional contributions to the 401(k) Plan for one or more plan years to be
allocated to eligible participants in proportion to their total compensation
(including deferred salary contributions) for the year. Contributions are
allocated to each employee's individual account and are invested in a variety of
mutual funds according to the directions of the employee. Employee contributions
are fully vested and non-forfeitable at all times. Company matching
contributions vest over five years.
Deferred Compensation Arrangement. The Deferred Compensation Arrangement
(the "DCA") permits a certain group of highly compensated employees who are
designated by the PIA Board to defer the receipt of some or all of their
compensation until a subsequent year. Participants are not subject to income tax
on the amount of their contributions to the DCA ("Deferrals"), but those amounts
are subject to federal employment taxes. PIA will generally make matching
contributions on behalf of the contributions made by participants to the DCA and
participants will gain a vested interest in the matching contributions, to the
same extent as under the 401(k) Plan. Participants always have a fully vested
right to their Deferrals. Although no amounts are set aside by PIA to pay the
benefits under the DCA, a trust has been established to "informally" fund the
benefits under the DCA. Participants can direct the manner in which the amounts
held on their behalf under the DCA are invested. Although the DCA is not a
tax-qualified retirement plan, under certain circumstances, a participant's
Deferrals may be transferred to the 401(k) Plan. A participant's benefit under
the DCA will be paid in either a lump sum or in installments, as elected by the
participant.
Exec-U-Care Plan. Under the Exec-U-Care Plan (the "Exec-U-Care Plan"), PIA
provides the Chairman and certain other officers of PIA up to $100,000
supplemental medical coverage in addition to the standard medical coverage
generally offered to such persons by PIA. The Exec-U-Care Plan requires that the
employees covered thereunder have a primary medical insurance plan which meets
certain minimum standards of coverage; the Exec-U-Care Plan then covers the
deductible and certain other expenses not paid for by the basic medical
insurance plan.
Pension Plans. Certain of PIA's employees are covered by union-sponsored,
collectively bargained, multi-employer pension plans. PIA has no current
intention of withdrawing from any of these plans.
Incentive Compensation Plan. PIA has established its Incentive Compensation
Plan (the "Incentive Plan") for the compensation of its employees and
executives. All payments under the Incentive Plan are contingent on PIA
achieving its corporate profit goals, PIA's operating divisions achieving their
profit goals, the employee achieving his/her expected performance level, and
approval by the PIA Board.
33
34
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee was at any time during the year
ended January 1, 1999 or at any other time an officer or employee of PIA. No
executive officer of PIA serves as a member of the PIA Board or compensation
committee of any other entity, which has one or more executive officers serving
as a member of the PIA Board or Compensation Committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
PIA's Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a company will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except for liability (i) for any breach of
their duty of loyalty to the company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit. Pursuant to the merger agreement governing the Merger
of SPAR Group and PIA (the "Merger Agreement"), if the Merger is consummated,
SPAR and PIA have agreed not to amend such provisions limiting personal
liability in PIA's charter documents for six years following the Merger.
PIA's bylaws provide that PIA may indemnify its officers, directors,
employees and other agents to the fullest extent permitted by law. Pursuant to
the Merger Agreement, if the Merger is consummated, PIA and SPAR Group have
agreed to indemnify to the fullest extent permitted by law (i) each of the seven
nominees for director of PIA, (ii) each person who has served as a director of
PIA prior to February 28, 1999, and (iii) each officer holding a title of Senior
Vice President or higher with PIA, PIA Co. or any of PIA Co.'s subsidiaries as
of February 28, 1999 for six years following the consummation of the Merger.
PIA's bylaws also permit it to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether the bylaws would permit
indemnification. PIA currently maintains such insurance and PIA and SPAR Group
have also agreed to maintain PIA's current directors' and officers' liability
insurance for PIA as in effect on the closing date of the Merger for six years
following the Merger.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of PIA in which indemnification will be
required or permitted. PIA is not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
DIRECTOR COMPENSATION
During the year ended January 1, 1999, PIA paid to Messrs. Coulombe and
Edwin Epstein, a former director, an aggregate of $10,500 and $15,750,
respectively, for services as members of the PIA Board and as consultants, and
also reimbursed Messrs. Coulombe and Epstein for certain expenses in connection
with their attendance at PIA Board and committee meetings. Messrs. Haden and
Lewis received no compensation for their services as directors (other than the
grant of options as described in the following paragraphs). Commencing April 1,
1998, Mr. Colwell receives an annual salary of $50,000 for consulting services.
Mr. Colwell is also entitled to receive a success fee in the event certain
transactions (approximately $150,000 in connection with the Merger) are
completed by PIA. Prior to April 1, 1998, Mr. Colwell received a monthly salary
of $16,667 for his services as a director. During fiscal 1998, PIA paid Mr.
Colwell an aggregate of $120,790 for his services as a member of the PIA Board
and consultant, and also reimbursed Mr. Colwell for certain expenses in
connection with his attendance at PIA Board meetings. In addition, beginning in
April 1998, Messrs. Collins and Coulombe receive a $3,000 fee for regular
meetings (up to a maximum of four meetings) and a $500 fee for special meetings
(including telephonic meetings). Mr. Collins deferred receipt of his
compensation until January 1999.
34
35
Under the 1995 Option Plan, on April 8, 1998, PIA granted Messrs. Collins
and Coulombe an option to purchase 10,000 shares and 4,000 shares, respectively,
of PIA Common Stock at an exercise price of $4.875 per share. Such options vest
over four years at an annual rate of 25% beginning on the first anniversary of
the date of grant, provided that such option will automatically vest in full
upon the consummation of the Merger or another acquisition event as described in
the following paragraph.
1995 Stock Option Plan for Nonemployee Directors. PIA adopted its 1995
Stock Option Plan for Nonemployee Directors in December 1995 (the "Nonemployee
Directors Plan"), covering 100,000 shares of PIA Common Stock. Under the
Nonemployee Directors Plan, each of Messrs. Coulombe, Haden and Lewis was
granted an option to purchase 1,500 shares of PIA Common Stock at an exercise
price of $5.32 per share that became fully exercisable on May 12, 1998. Messrs.
Colwell, Coulombe, Haden and Lewis were each granted an option to purchase 1,500
shares of PIA Common Stock at an exercise price of $5.125 per share on May 12,
1998, that will become fully exercisable on the date of PIA's 1999 Annual
Meeting of Stockholders if they are reelected as a director. Notwithstanding the
foregoing, pursuant to action taken by the PIA Board in February 1999, all
options granted to nonemployee directors will automatically vest in full upon
the occurrence of an acquisition event (such term, as defined by the PIA Board,
includes the consummation of the Merger).
PIA's Compensation Committee administers the Nonemployee Directors Plan.
Each member of the PIA Board who is not otherwise an employee or officer of PIA
or any subsidiary of PIA (each, an "Eligible Director") is eligible to
participate in the Nonemployee Directors Plan. Directors who are consultants of,
but not otherwise employees or officers of, PIA are Eligible Directors.
Under the Nonemployee Directors Plan, an option to purchase 1,500 shares of
PIA Common Stock is granted to each Eligible Director immediately following each
annual meeting of stockholders of PIA. Each option vests and becomes exercisable
in full at the next annual meeting of stockholders, provided that the optionee
is reelected as a director of PIA. The maximum term of options granted under the
Nonemployee Directors Plan is ten years and one day, subject to earlier
termination following an optionee's cessation of service with PIA. The exercise
price of stock options granted under the Nonemployee Directors Plan will be the
fair market value of the PIA Common Stock on the date of grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the PIA Common Stock as of March 1, 1999 by: (i) each person (or
group of affiliated persons) who is known by PIA to own beneficially more than
5% of PIA Common Stock; (ii) each of PIA's directors; (iii) each of the Named
Executive Officers; and (iv) PIA's directors and executive officers as a group.
Except as indicated in the footnotes to this table, the persons named in the
table, based on information provided by such persons, have sole voting and sole
investment power with respect to all shares of PIA Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
The proposed Merger with SPAR Group will, if consummated, result in a change in
control of PIA.
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE
- ------------------------------------------- ------------------ ---------
Riordan, Lewis & Haden (1) 1,637,151(2) 29.7%
300 S. Grand Avenue, 29th Floor
Los Angeles, California 90071
Clinton E. Owens (3) 615,802(4) 11.0
35
36
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE
- ------------------------------------------- ------------------ ---------
Heartland Advisors, Inc. 1,423,800(5) 26.0
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
California Community Foundation 480,872(6) 8.7
606 S. Olive Street, Suite 2400
Los Angeles, California 90014
Terry R. Peets (3) 102,500(7) 2.0
Cathy L. Wood (3) 26,000(8) *
Donald H. Holman (3) 18,594(9) *
John R. Bain (3) 8,750(10) *
Patrick W. Collins (3) 2,500(11) *
John A. Colwell (3) 67,011(12) 1.2
Joseph H. Coulombe (3) 18,310(13) *
Patrick C. Haden 1,641,151(14) 29.8
300 S. Grand Avenue, 29th Floor
Los Angeles, California 90071
J. Christopher Lewis 1,641,151(15) 29.8
300 S. Grand Avenue, 29th Floor
Los Angeles, California 90071
All directors and executive officers as a group (11 2,531,899 43.3%
persons)
- ---------------
* Less than 1%.
(1) Shares are owned by RVM/PIA, a California limited partnership managed by
Riordan, Lewis & Haden ("RLH").
(2) Includes 29,729 shares issuable upon exercise of certain warrants to
purchase PIA Common Stock owned by RLH.
(3) The address of such persons is c/o PIA Merchandising Services, Inc., 19900
MacArthur Boulevard, Suite 900, Irvine, California 92718.
(4) Includes 498,394 shares held by Clinton E. and Mary Ann Owens as Trustees
of The Owens Family Trust dated June 20, 1994, 9,300 shares held by Clinton
E. Owens as Trustee of the Welch Trust for Marcia
36
37
Browning and 108,108 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March 1,
1999.
(5) All information regarding share ownership is taken from and furnished in
reliance upon the Schedule 13G (Amendment No. 4), dated January 28, 1999,
filed by Heartland Advisors, Inc. with the Securities and Exchange
Commission on February 2, 1999.
(6) All information regarding share ownership is taken from and furnished in
reliance upon Schedule 13G (Amendment No. 2), dated February 12, 1999,
filed by California Community Foundation with the Securities and Exchange
Commission on February 12, 1999. Includes 66,666 shares issuable upon
exercise of a warrant to purchase PIA Common Stock.
(7) Includes 62,500 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March 1,
1999.
(8) Includes 25,000 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March 1,
1999.
(9) Includes 17,432 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March 1,
1999.
(10) Includes 8,750 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March 1,
1999.
(11) Includes 2,500 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March 1,
1999.
(12) Includes 64,206 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March 1,
1999.
(13) Includes 6,905 shares held by Joseph H. Coulombe as Trustee of The Coulombe
Family Trust dated July 26, 1980 and 11,405 shares issuable upon the
exercise of options which are exercisable as of, or will become exercisable
within 60 days of, March 1, 1999.
(14) Includes 1,637,151 shares (including 29,729 shares issuable upon exercise
of warrants) owned by RLH. Mr. Haden, a director of PIA, may be deemed to
share voting and investment power with respect to all such shares as a
general partner of RLH. No other person, other than J. Christopher Lewis, a
director of PIA, has voting power or investment power with respect to such
shares. Also includes 4,000 shares issuable upon the exercise of options
held by Mr. Haden which are exercisable as of, or will become exercisable
within 60 days of, March 1, 1999.
(15) Includes 1,637,151 shares (including 29,729 shares issuable upon exercise
of warrants) owned by RLH. Mr. Lewis, a director of PIA, may be deemed to
share voting and investment power with respect to all such shares as a
general partner of RLH. No other person, other than Patrick C. Haden, a
director of PIA, has voting power or investment power with respect to such
shares. Also includes 4,000 shares issuable upon the exercise of options
held by Mr. Lewis which are exercisable as of, or will become exercisable
within 60 days of, March 1, 1999.
Immediately following the Merger and assuming full exercise of all
Substitute Options, the holders of SPAR Group stock and the holders of
Substitute Options (assuming full exercise thereof) will hold an aggregate of
37
38
approximately 69.3% of PIA Common Stock then outstanding and the holders of PIA
Common Stock immediately prior to the Merger will hold approximately 30.7% of
the PIA Common Stock then outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
38
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. INDEX TO FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT:
Independent AuditorsAuditors' Report F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996January 1, 1999 F-2
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996, and 1995three years
in the period ended January 1, 1999 F-4
Consolidated Statements of StockholdersStockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995three years
in the period ended January 1, 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995three years in the period
ended January 1, 1999 F-6
Notes to Consolidated Financial Statements for Years Ended December 31,
1997, 1996 and 1995the three years
in the period ended January 1, 1999 F-8 through F-21
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts for the Years Ended
December 31, 1997, 1996 and 1995 F-24three years in
the period ended January 1, 1999 F-25
3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1*3.1 Certificate of Incorporation of PIA (incorporated by reference to the
Company
3.2*Company's Registration Statement on Form S-1 (Registration No.
33-80429) as filed with the Securities and Exchange Commission on
December 14, 1995 (the "Form S-1")
3.2 By-laws of PIA (incorporated by reference to the Company
4.1*Form S-1).
4.1 Registration Rights Agreement entered into as of January 21, 1992 by
and between RVM Holding Corporation. RVM/PIA, a California Limited
Partnership, The Riordan Foundation and Creditanstalt-Bankvering.
10.1*Creditanstalt-Bankverein
(incorporated by reference to the Form S-1).
10.1 1990 Stock Option Plan 10.2*(incorporated by reference to the Form S-1).
10.2 Amended and Restated 1995 Stock Option Plan 10.3*(incorporated by reference
of Exhibit 10.2 to the Company's Form 10-Q for the 2nd Quarter ended
July 3, 1998).
10.3 1995 Stock Option Plan for Non-employee Directors 10.4(incorporated by
reference to the Form S-1).
10.4+* Employment Agreement dated as of June 25, 1997 between PIA and Terry R.
Peets (incorporated by reference to Exhibit 10.5 to the Company's Form
10-Q for the 2nd Quarter ended June 30, 1997)
10.5+* Severance Agreement dated as of February 20, 1998 between PIA and Cathy
L. Wood (incorporated by reference to Exhibit 10.5 to the Company's
Form 10-Q for the 1st Quarter ended April 30, 1998)
39
40
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.6* Severance Agreement dated as of August 10, 1998 between PIA and Clinton
E. Owens (incorporated by reference to Exhibit 10.6 to the Company's
Form 10-Q for the 3rd Quarter ended October 2, 1998).
10.7+* Amendment No. 1 to Employment Agreement dated as of October 1, 1998
between PIA and Terry Peets
21.1*R. Peets.
10.8+* Amended and Restated Severance Compensation Agreement dated as of
October 1, 1998 between PIA and Cathy L. Wood.
10.9+ Loan and Security Agreement dated December 7, 1998 among Mellon Bank,
N.A., PIA Merchandising Co., Inc., Pacific Indoor Display Co. and PIA.
10.10+ Agreement and Plan of Merger dated as of February 28, 1999 among PIA,
S.G. Acquisition, Inc., PIA Merchandising Co., Inc., SPAR Acquisition,
In., SPAR Marketing, Inc., SPAR Marketing Force, Inc., SPAR, Inc.,
SPAR/Burgoyne Retail Services, Inc., SPAR Incentive Marketing, Inc.,
SPAR MCI Performance Group, Inc. and SPAR Trademarks, Inc.
10.11+ Voting Agreement dated as of February 28, 1999 among PIA, Clinton E.
Owens, RVM/PIA, California limited partnership, Robert G. Brown and
William H. Bartels.
21.1 Subsidiaries of the Company 23.1(incorporated by reference to the Form
S-1).
23.1+ Consent of Deloitte & Touche LLP
27.1LLP.
27.1+ Financial Data Schedule
27.2 Restated Financial Data Schedule - 1996
27.3 Restated Financial Data Schedule - 1997
27.4 Restated Financial Data Schedule - 1995Schedule.
+ Previously filed with initial Form 10-K for the fiscal year ended
January 1, 1999.
* FiledManagement contract or compensatory plan or arrangement required to be
filed as an Exhibitexhibit pursuant to applicable rules of the Company's Registration Statement on Form S-1
(Registration No. 33-80429) on December 14, 1995.Securities and
Exchange Commission.
(b) REPORTS ON FORM 8-K.
None.
25None
40
2641
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1943, the Registrant has duly caused this amendment to the
report to be signed on its behalf by the undersigned, thereunto duly authorized.
PIA MERCHANDISING SERVICES, INC.
By: /s/ -----------------------------------Terry R. Peets
-------------------------------
Terry R. Peets
President, Chief Executive Officer and Director
Date:_________________________________ April 30 , 1999
-------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amendment to the report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Clinton E. Owens Chairman of the Board ------------------------------April 30, 1999
- -------------------------
Clinton E. Owens
/s/ Terry R. Peets President, Chief Executive April 30, 1999
- ------------------------- Officer
------------------------------ and Director
Terry R. Peets
/s/ Cathy L. Wood Executive Vice President, April 30, 1999
- ------------------------- Chief Financial ------------------------------ Officer and
Cathy L. Wood Secretary (Principal Financial
Cathy L. Wood
and Accounting Officer)
/s/ Patrick C. Haden Director ------------------------------
Patrick W. Collins
/s/ Director
------------------------------
John A. Colwell
/s/ Director
------------------------------
Joseph H. Coulombe
/s/ Director
------------------------------April 30, 1999
- -------------------------
Patrick C. Haden
/s/ J. Christopher Lewis Director ------------------------------April 30, 1999
- -------------------------
J. Christopher Lewis
2641
2742
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS:
Consolidated balance sheets as of December 31, 19961997 and 1997January 1, 1999 F-2
Consolidated statements of operations for each of the three years
in the period ended December 31, 1997January 1, 1999 F-4
Consolidated statements of stockholders' equity for each
of the three years in the period ended December 31, 1997January 1, 1999 F-5
Consolidated statements of cash flows for each of the three years
in the period ended December 31, 1997January 1, 1999 F-6
Notes to consolidated financial statements for each of the three years
in the period ended December 31, 1997January 1, 1999 F-8
Schedule II - Valuation and qualifying accounts F-25
2843
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
PIA Merchandising Services, Inc.:
We have audited the accompanying consolidated balance sheets of PIA
Merchandising Services, Inc. and subsidiaries (the Company) as of December 31,
19961997 and 1997,January 1, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997.January 1, 1999. Our audits also included the financial statement schedule
listed in Item 14(a)2. These consolidated financial statements and financial
statement schedule areis the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of PIA Merchandising
Services, Inc. and subsidiaries as of December 31, 19961997 and 1997,January 1, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997January 1, 1999 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
DELOITTEDeloitte & TOUCHETouche LLP
Costa Mesa, California
February 12, 199818, 1999
(Except for Note 14, as to which the date is February 28, 1999)
F-1
2944
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31, ----------------------
1996JANUARY 1,
1997 CURRENT ASSETS:1999
----------- ----------
CURRENT ASSETS:
Cash and cash equivalents $19,519 $12,987$ 12,987 $ 11,064
Accounts receivable, net (Note 3) 22,630 16,053 Federal income11,222
Income tax refund receivable (Note 6) 2,905 81
Prepaid expenses and other current assets 564 816 Deferred income taxes (Note 6) 669
------- -------712
---------- ---------
Total current assets 43,382 32,761 23,079
PROPERTY AND EQUIPMENT, net (Note 3) 1,847 2,416 1,991
INVESTMENTS AND OTHER ASSETS:
Investment in affiliate (Note 4) 322 418 Capitalized software development costs, net (Note 1) 1,987553
Other assets 134 872 ------- -------431
---------- ---------
Total investments and other assets 2,443 1,290 ------- -------
$47,672 $36,467
======= =======984
---------- ---------
Total assets $ 36,467 $ 26,054
========== =========
See notes to consolidated financial statements.statements
F-2
3045
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, -------------------------
1996JANUARY 1,
1997 1999
------------ ----------
CURRENT LIABILITIES:
Accounts payable $ 7723,442 $ 3,4421,194
Other current liabilities (Note 3) 9,762 13,334 7,951
Income taxes payable (Note 6) 111 47 90
-------- --------
Total current liabilities 10,645 16,823 DEFERRED INCOME TAXES (Note 6) 309
LONG-TERM LIABILITIES AND9,235
LINE OF CREDIT AND LONG-TERM LIABILITIES (Note 5) 966 2,095
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Notes 10 and 11):
Preferred stock, no par value, $.01 par value;
3,000,000 shares authorized; none issued and
outstanding Common stock, no par value, $.01 par value;
15,000,000 shares authorized; 5,891,4515,392,558 and
5,392,5585,477,846 shares issued and
outstanding as of December 31, 19961997
and 1997,January 1, 1999, respectively 58 59 60
Additional paid-in capital 33,367 33,429 Retained earnings (accumulated deficit) 3,29333,740
Accumulated deficit (11,806) (16,072)
Less treasury stock at cost (507,000 shares at
December 31, 1997)1997 and January 1, 1999) (3,004) (3,004)
-------- --------
Total stockholders' equity 36,718 18,678 14,724
-------- --------
$ 47,672Total liabilities and stockholders' equity $ 36,467 $ 26,054
======== ========
See notes to consolidated financial statements.statements
F-3
3146
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED
-----------------------------------------------
DECEMBER 31, -------------------------------------------
1995DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------ ----------
NET REVENUES $ 104,791(Note 13) $ 119,940 $ 128,208 $ 121,788
OPERATING EXPENSES:
Field service costs 81,320 94,841 119,830 105,448
Selling expenses 10,339 11,133 10,482 8,245
General and administrative expenses (Notes 7, 8 and 9) 6,810 8,081 10,234 11,788
Restructuring and other charges (Note 2) 5,420
Depreciation and amortization 497 595 997 1,129
--------- --------- ---------
Total operating expenses 98,966 114,650 146,963 126,610
--------- --------- ---------
OPERATING INCOME (LOSS) 5,825 5,290 (18,755) (4,822)
OTHER INCOME (EXPENSE):INCOME:
Interest expense (493) (46) (25)
Interest income 28 869 799 487
Equity in earnings of affiliate (Note 4) 72 96 149
--------- --------- ---------
Total other income (expense) (465) 895 895 611
--------- --------- ---------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 5,360 6,185 (17,860) (4,211)
INCOME TAX PROVISION (BENEFIT) (Notes 1 and(Note 6) 1,829 2,426 (2,761) 55
--------- --------- ---------
NET INCOME (LOSS) $ 3,531 $ 3,759 $ (15,099) $ (4,266)
========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE (Note 12) $ 1.13 $ 0.70 $ (2.72) $ (0.78)
========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.89(Note 12) $ 0.63 $ (2.72) $ (0.78)
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES - BASIC 3,117 5,370 5,551 5,439
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES - DILUTED 3,981 5,990 5,551 5,439
========= ========= =========
See notes to consolidated financial statements.statements
F-4
3247
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Years ended December 31, 1996 and 1997 and January 1, 1999
RETAINED
COMMON STOCK TREASURY STOCK ADDITIONAL EARNINGS TOTAL
--------------------- -------------------------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY
-------- -------- -------- -------- --------- ------------ -------------
BALANCE, January 1, 1995 3,0841996 3,564 $ 6,4786,454 -- $ -- $ -- $ (3,997)(466) $ 2,481
Repurchase of common stock (3) (24) (24)
Cashless exercise of warrants (Note 11) 483
Net income 3,531 3,531
-------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1995 3,564 6,454 (466) 5,988
Change in stated par value of
shares from no par to $.01 (6,418) 6,418
Stock issued to the public 2,138 21 26,499 26,520
Stock options exercised 58 1 334 335
Tax benefit related to exercise of stock
options 116 116
Cashless exercise of warrants (Note 11) 131
Net income 3,759 3,759
-------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1996 5,891 58 33,367 3,293 36,718
Stock options exercised 9 1 62 63
Repurchase of common stock (507) 507 (3,004) (3,004)
Net loss (15,099) (15,099)
-------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1997 5,393 59 507 (3,004) 33,429 (11,806) 18,678
Stock options exercised 30 88 88
Employee stock purchases 12 45 45
Shares issued as bonus (Note 10) 43 1 178 179
Net loss (4,266) (4,266)
-------- -------- -------- -------- -------- -------- --------
BALANCE, January 1, 1999 5,478 $ 5960 507 $ (3,004) $ 33,429 $(11,806)33,740 $(16,072) $ 18,67814,724
======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.statements
F-5
3348
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
--------------------------------------------
DECEMBER 31, -----------------------------------
1995DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,5313,759 $(15,099) $ 3,759 $(15,099)(4,266)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 497 595 997 Amortization of other assets and discount on
subordinated debt 891,129
Equity in earnings of affiliate (72) (96) (149)
Deferred income taxes, net (193) (167) 360
Provision for doubtful receivables 354and other, net 105 918 (270)
Restructuring and other charges (Note 3)2) 5,420
Changes in assets and liabilities:
Accounts receivable (6,605) (10,522) 5,659 Federal income5,101
Income tax refund receivable (2,905) 2,824
Prepaid expenses and other current assets 97 74 (252) 104
Other assets (187) 213 (744) 441
Accounts payable 840 (1,066) 2,670 (2,248)
Other current liabilities 946 5,657 173 (5,204)
Income taxes payable 420 (228) (64) Long-term43
Other liabilities 131 (871)
-------- -------- --------
Net cash used in operating activities (211) (1,652) (2,832) (3,366)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (743) (332) (759) (516)
Capitalization of software development costs (1,987) (174)
Investment in affiliate (100) (150)
-------- -------- --------
Net cash used in investing activities (843) (2,469) (759) (690)
See notes to consolidated financial statements.statements
F-6
3449
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEARS ENDED
---------------------------------------------
DECEMBER 31, ------------------------------------
1995DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (includes payments
to a stockholder of $845 in 1995) $ (5,551) $ (3,400) $ -- $ --
Proceeds from long-term debt 5,4002,000
Proceeds from issuance of common stock to the public 26,520
Proceeds from issuance of common stock 335 63 133
Repurchase of common stock (24) (3,004)
-------- -------- --------
Net cash (usedprovided by(used in) provided by financing activities (175) 23,455 (2,941) 2,133
-------- -------- --------
NET INCREASE (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,229) 19,334 (6,532) (1,923)
CASH AND CASH EQUIVALENTS, beginning of period 1,414 185 19,519 12,987
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 185 $ 19,519 $ 12,987 $ 11,064
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid (refunded) during the year for:
Interest $ 390 $ 69 $ -- $ 25
======== ======== ========
Income taxes $ 1,621 $ 2,853 $ 129 $ (2,753)
======== ======== ========
See Notes 1, 10 and 11 to consolidated financial statements for description of
noncash transactions.
See notes to consolidated financial statements.statements
F-7
3550
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997JANUARY 1, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Description - PIA Merchandising Services, Inc. and subsidiaries
(the Company)("Company") provides in-store merchandising services primarily on behalf
of branded product manufacturers at retail grocery stores, mass
merchandisers, drug stores and discount drug stores. The Company's
in-store services include checking for authorized distribution of client
products, cutting in products that are approved for distribution but not present on
the shelf, setting category shelves in accordance with approved store
schematics, ensuring that shelf tags are in place, checking for the overall
salability of clients' products, and performing new product and promotion
selling. The Company also performs special in-store projects, such as new
store sets and existing store resets, remerchandisings, remodels and
category implementations, and executes and maintains point of purchase
displays and materials. In addition, the Company collects and provides to
certain clients a variety of merchandising data that is category and
store specific.store-specific. The Company is also a supplier of regularly scheduled,
shared merchandising services in the United States. The Company was organizedCompany's
management has evaluated the allocation of resources in 1943assessing
performance and was acquired in 1988 by an
individual and a private investment firm. PIA Holding Corporation, the
predecessor ofdetermined the Company was incorporatedoperates in California. In December
1995, the Company's Board of Directors approved a reincorporation of the
Company in the State of Delawarethree operating
segments, dedicated services, shared services, and a change in the Company's name to PIA
Merchandising Services, Inc. The reincorporation was effective concurrent
with the initial public offering of the Company's common stock. The
reincorporation resulted in an increase in authorized preferred stock to
3,000,000 shares, an increase in authorized common stock to 15,000,000
shares, and a change in the par value of both the Company's common stock
and preferred stock from no par value to $.01 par value. This change in
par value resulted in a reclassification of $6,418,000 from common stock
to additional paid-in capital.project services (Note
13).
Principles of Consolidation - The consolidated financial statements
include the accounts of PIA Merchandising Services, Inc. and its wholly-ownedwholly
owned subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. The equity method of accounting is
used for the Company's investment in affiliate (Note 4).
Cash Equivalents - The Company considers all highly-liquidhighly liquid short-term
investments with original maturities of three months or less to be cash
equivalents.
Accounts Receivable and Credit Risk - During the ordinary course of the
Company's business, the Company grants trade credit to its clients, which
consist primarily of packaged goods manufacturers and retailers. The
Company's ten largest clients generated approximately 56%57.0%, 57%69.0% and
69%75.0% of the Company's net revenues for the fiscal years ended December
31, 1995,
1996, and 1997, respectively.
F-8
36
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBERDecember 31, 1997 (CONTINUED)and January 1, 1999, respectively.
During the fiscal year ended December 31, 1997, twoJanuary 1, 1999, three of the Company's
clients accounted for 16%15.6%, 12.6% and 13.6%,10.6% of the Company's net
revenues. During 1996,1997, two clients accounted for 11.7%16.0% and 10.3%,13.6% of the
Company's net revenues. Given the significant amount of net revenues
derived from certain clients, collectibility issues arising from financial
difficulties of any of these clients or the loss of any such clients could
have a material adverse effect on the Company's business. Unbilled
accounts receivable represent merchandising services performed that are
pending billing until the requisite documents have been processed or
projects have been completed (Note 3).
Property and Equipment - Property and equipment are stated at cost and
depreciated on the straight-line method over estimated useful lives,
ranging from three to tenseven years. Leasehold improvements are amortized
over the estimated useful life of the asset or the term of the lease,
whichever is shorter.
F-8
51
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
The Company has chosen to early adopt Statement of Position ("SOP") No. 98
-1, Accounting for the Costs of Computer Software Development Costs - CertainDeveloped or Obtained
for Internal Use as of January 1, 1998. The SOP provides guidance in
accounting for the costs of computer software development costs are
capitalized when incurred. Capitalization of software development costs
begins upon the establishment of technical feasibility and ceases
capitalization when the product is readydeveloped or obtained for
release. Research and
development costs related to software development that has not reached
technological feasibility are expensed as incurred. As of December 31,
1996, software had not reached the release stage; and, therefore,
amortizationinternal use. The effects of the related costs had not begun. During 1997, such product
was completed andadoption of the related software development costs were transferred
to property and equipmentSOP have been reflected
in the 1998 consolidated financial statements and are being amortized over their expected
useful life.not material.
Other Assets - Other assets consist primarily of refundable deposits.
Deferred Revenue - Client payments received in advance of merchandising
services performed are classified as deferred revenue (Note 3).
Amounts Held on Behalf of Third Parties - Amounts held on behalf of third
parties arise from agreements with retailers to provide services for their
private label manufacturers' products and represent amounts to be utilized
for certain future services;services including merchandising-related expenditures
on behalf of the retailers (Note 3). These agreements renew annually and
are cancelable on December 31 of each year or upon ninety-day written
notice by either party.
Revenue Recognition - The Company's services are provided under various
types of contracts, which consist primarily of fixed fee and
commission-based arrangements. Under fixed fee arrangements, revenues are
recognized monthly based on a fixed fee per month over a service period of
typically one year, as defined in the contract.
F-9
37
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
The Company's commission-based contracts provide for commissions to be
earned based on a specified percentage of the client's net sales of
certain products to designated retail chains. In conjunction with these
commission arrangements, the Company receives draws on a monthly basis,
which are to be applied against commissions earned. These draws
approximate estimated minimum revenue to be earned on the contract and are
recognized on a monthly basis, over a service period of typically
one
year.one-year. The Company recognizes adjustments on commission-based sales in
the period such amounts become determinable. Commissions are usually owed
to the Company in excess of draws received.
The Company also performs services on a specific project basis. Revenues
related to these projects are recognized as services are performed or
costs are incurred. Certain of the Company's contracts are to perform
project work over a specified period of time ranging from one to twelve months.
Revenue under these types of contracts is recognized essentially on the
percentage of completion method using the cost-to-cost method. Provisions for estimated losses on
uncompleted contracts are recorded in the period in which such losses are
determinable.
Field Service Costs - Field service costs are comprised principally of
field labor and related costs and expenses required to provide shared
services, project activities, key account management and related
technology costs, as well as field overhead required to support the
activities of these groups of employees.
F-9
52
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
Accounting for Stock-Based Compensation - SFASStatement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, requires disclosure of fair value method of accounting for
stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of
the award and is recognized over the service period, which is usually the
vesting period. The Company has chosen, under the provisions of SFAS No.
123, to continue to account for employee stock-based transactions under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. The Company has disclosed in Note 11 to the
consolidated financial statements pro forma diluted net income (loss) and
net income (loss) per share as if the Company had applied the newfair value
method of accounting.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes (Note 6). Under SFAS No. 109, income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between
the basis of assets and liabilities for financial and tax reporting. The
deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Deferred taxes are also recognized for operating losses that are available
to offset future taxable income and tax credits that are available to
offset future F-10
38
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
income taxes. In the event the future consequences of
differences between financial reporting bases and tax bases of the
Company's assets and liabilities result in deferred tax assets, SFAS No. 109 requires an
evaluation of the probability of being able to realize the future benefits
indicated by such asset.asset is required. A valuation allowance is provided
when it is more likely than not that some portion or all of the entire deferred
tax asset will not be realized.
Comprehensive Income - The Company has adopted SFAS No. 130, Reporting
Comprehensive Income. For the years ended January 1, 1999, December 31,
1997 and December 31, 1996, the Company has no reported differences
between net income (loss) and comprehensive income (loss). Therefore,
statements of comprehensive income (loss) have not been presented.
Earnings Per Share - The Company has adopted SFAS No. 128, Earnings per
Share, which replaces the presentation of "Primary" earnings per share
with "Basic" earnings per share and the presentation of "Fully Diluted"
earnings per share with "Diluted" earnings per share. Prior periods have
been restated to reflect the change in presentation.
Basic earnings per share amounts are based upon the weighted averageweighted-average
number of common shares outstanding. Diluted earnings per share amounts
are based upon the weighted averageweighted-average number of common and potential common
shares for each period presented. Potential common shares include stock
options, using the treasury stock method.
Stock Split - In December 1995, the Company effected a 1-for-1.85 reverse
stock split of its common stock. All share and per share amounts included
in the accompanying financial statements and notes have been restated to
reflect the stock split.
Vendor Concentration - In addition to the Company's own employees, the
Company utilizes a force of trained merchandisers employed by a
third
partythird-party payrolling company engaged principally in the performance of
retailer mandatedretailer-mandated and project activities. For the fiscal years ended
December 31, 1995, 1996, December 31, 1997 and 1997,January 1, 1999, the Company
paid this payrolling company approximately $26,917,000, $31,145,000, $38,936,000 and
$38,936,000,$32,213,000, respectively (Note 3).
F-10
53
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.
Fair Value of Financial Instruments - The Company's consolidated balance
sheet includessheets include the following financial instruments: cash and cash
equivalents, accounts receivable, accounts payable and accounts payable.long term debt. The
Company considers the carrying amounts of current assets and liabilities in
the consolidated financial statements to approximate the fair value for
these financial instruments, because of the relatively short period of
time between origination of the instruments and their expected
realization. The carrying amounts of long-term debt approximate fair value
because the obligation bears interest at a floating rate.
Change in Fiscal Year - Effective January 1, 1998, the Company changed its
fiscal year end for financial statement purposes from a calendar year to a
52/53-week fiscal year. Beginning with fiscal year 1998, the Company's
fiscal year will end on the Friday closest to December 31. The years ended
December 31, 1997 and January 1, 1999 each consist of approximately 52
weeks. The Company does not believe that this change has a material impact
on the financial statements.
New Accounting Pronouncements - The Company has adopted SFAS No. 131.
Disclosure About Segments of an Enterprise and Related Information. In
accordance with SFAS No. 131, the Company has disclosed in Note 13 certain
information about the Company's products and major customers.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which the Company is required to adopt effective in its fiscal
year 2000. SFAS No. 133 will require the Company to record all derivatives
on the balance sheet at fair value. The Company does not currently engage
in hedging activities and will continue to evaluate the effect of adopting
SFAS No. 133. The Company is expected to adopt SFAS No. 133 in its fiscal
year 2000.
F-11
3954
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
New Accounting Pronouncements - For the fiscal years beginning after
December 31, 1997, the Company will adopt SFAS No. 130, Reporting
Comprehensive Income, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information and SFAS No. 132 Employers' Disclosures
About Pensions and Other Postretirement Benefits. The Company is reviewing
the impact of such information on its financial statements.
Reclassifications - Certain amounts as previously reported have been
reclassified to conform to the December 31, 1997 presentation.JANUARY 1, 1999
2. RESTRUCTURING AND OTHER CHARGES
During 1997, the Company experienced declining gross margins and resultant
operating losses, due to service performance issues and the loss of several
shared clients. This decline in margins has resulted in insufficient margin
dollars to cover the overhead structure, which had developed at the field level
and in the general corporate area. In the quarter ended September 30, 1997, the
Company addressed these conditions by restructuring its operations, focusing on
a more disciplined and functional operational structure, and redirecting its
technology strategies, resulting in a $5,420,000 charge for restructuring and
other charges. The restructurerestructuring charges consist of $1,264,000$1,522,000 identified
severance of identified
severancecorporate and field employees and lease costs in various management
and administrative functions and $2,021,000functions. The restructuring charges also include $2,121,000
in writedownsthe write downs and accruals associated with the abandonment of certain
internally developed software and specialized computer equipment under long-term
operating leases due to a redirection of the Company's technology strategies
(Note 3). Other charges consistconsisted primarily of $1,297,000 of reserves and write-offswrite
offs related to unprofitable contracts, and $555,000$480,000 of costs associated with
changes in the Company's service delivery model. At December 31, 1997, $2,314,000January 1, 1999, $428,000 is
remaining in accrued liabilities in the accompanying consolidated balance sheet.
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts receivable, net, consistsheet
consisting of $410,000 to specialized computer equipment under long-term
operating leases no longer in use and $18,000 to employee separation costs.
The following table displays a rollforward of the followingliabilities for restructuring
and other charges from December 31, 1996 to January 1, 1999 (in thousands):
INITIAL DECEMBER 31, --------------------
1996JANUARY 1,
RESTRUCTURING 1997 1997 1998 1999
TYPE OF COST AND OTHER CHARGES DEDUCTIONS BALANCE DEDUCTIONS BALANCE
- ---------------------------------- ------------------- ------------ -------------- ------------ ------------
Trade
Employee Separation $ 21,6031,372 $ 15,411
Unbilled 1,610 2,034
Non-trade 59
--------- ---------
23,213 17,504
Allowance for doubtful accounts(885) $ 487 $ (469) $ 18
Facility Closing 150 150 (150)
Technology writedown
and other (583) (1,451)
--------- ---------related operating leases 2,121 (1,086) 1,035 (625) 410
Unprofitable Contracts 1,297 (797) 500 (500)
Other 480 (338) 142 (142)
------- ------- ------- ------- -------
$ 22,6305,420 $(3,106) $ 16,053
========= ========2,314 $(1,886) $ 428
======= ======= ======= ======= =======
Management believes that the remaining reserves for restructuring are adequate
to complete its plan.
F-12
4055
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)JANUARY 1, 1999
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts receivable, net, consist of the following (in thousands):
DECEMBER 31, JANUARY 1,
1997 1999
------------ ----------
Trade $ 15,411 $ 9,511
Unbilled 2,034 2,358
Non-trade 59 174
-------- --------
17,504 12,043
Allowance for doubtful accounts and other (1,451) (821)
-------- --------
$ 16,053 $ 11,222
======== ========
Property and equipment, net, consist of the following (in thousands):
DECEMBER 31, JANUARY 1,
1997 1999
------------ ----------
Equipment $ 3,680 $ 3,873
Furniture and fixtures 662 719
Leasehold improvements 160 165
Capitalized software development costs 902 1,076
-------- --------
5,404 5,833
Less accumulated depreciation and amortization (2,988) (3,842)
-------- --------
$ 2,416 $ 1,991
======== ========
During 1997, the Company recorded certain restructuring charges (Note 2).
In connection with the restructuring, the Company recorded a charge of
approximately $1,000,000 for the impairment of capitalized software costs.
Property and equipment consist of the following (in thousands):
DECEMBER 31,
-----------------
1996 1997
Equipment $ 3,343 $ 3,680
Furniture and fixtures 641 662
Leasehold improvements 118 160
Capitalized software development costs 902
------- -------
4,102 5,404
Less accumulated depreciation
and amortization (2,255) (2,988)
------- -------
$ 1,847 $ 2,416
======= =======
Other current liabilities consist of the following (in thousands):
DECEMBER 31,
----------------
1996 1997
Accrued salaries and other related costs $ 944 $ 1,237
Accrued payroll to third party 1,952 2,847
Accrued insurance 855 1,456
Deferred revenue 2,479 1,039
Amounts held on behalf of third parties 1,055 1,116
Accrued software costs 603
Accrued rebate 788 2,200
Customer deposits 230 90
Restructuring costs 1,475
Other 856 1,874
------ ------
$9,762 $13,334
====== =======
F-13
4156
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)JANUARY 1, 1999
Other current liabilities consist of the following (in thousands):
DECEMBER 31, JANUARY 1,
1997 1999
------------ ----------
Accrued salaries and other related costs $ 1,237 $ 1,123
Accrued payroll to third party 2,847 1,557
Accrued medical and compensation insurance 1,456 1,906
Deferred revenue 1,039 426
Amounts held on behalf of third parties 1,116 641
Accrued rebate 2,200
Restructuring costs 1,475 428
Other 1,964 1,870
------- -------
$13,334 $ 7,951
======= =======
4. INVESTMENT IN AFFILIATE
During 1996, the Company increased its voting ownership in Ameritel
Corporation, a full servicefull-service telemarketing company, to 20%. Accordingly,
the Company changed its method of carrying the investment from cost to
equity as required by generally accepted accounting principles. The change
in method was not material to the carrying value of the investment in the
accompanying financial statements.
Following is a summary of condensed unaudited financial information
pertaining to Ameritel Corporation (in thousands):
DECEMBER 31, ---------------
1996JANUARY 1,
1997 1999
------------ ----------
Current assets $ 739 $ 1,658$1,545 $2,816
Noncurrent assets 938 1,0781,252 3,786
Current liabilities 172 6661,443 1,827
Long-term liabilities 872 888
Shareholders'128 2,803
Stockholders' equity 633 673
Income1,226 1,972
Net income for the year 361 478523 746
5. LINE OF CREDIT
On January 1, 1997, the Company entered into a line of credit agreement
with a bank. Under this agreement, the line was to mature on May 1, 1998
and bear interest at the bank's reference rate. The line of credit was
canceled on October 3, 1997.
F-14
4257
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)JANUARY 1, 1999
5. LINE OF CREDIT
On December 10, 1998, the Company entered a long-term revolving line of
credit agreement a bank to provide an asset-based credit facility with
maximum borrowing up to $20.0 million. Under this agreement, the line is
to expire on December 7, 2001. All revolving credit loans bear interest at
the agent bank's prime rate plus 0.25 % (7.75% at January 1, 1999, or
8.0%), or the London Interbank Offered Rate ("LIBOR") plus 2.75% (5.06% at
January 1, 1999, or 7.81%) at the Company's option. As of January 1, 1999,
the outstanding balance on the line of credit was $2,000,000. The
Company's available borrowing is the sum of 80% of all eligible accounts
receivable, plus 100% of eligible cash collateral less outstanding
revolving credit loan.
Under the terms of the long-term debt agreement, the Company is subject to
certain financial covenants. Key covenants require the Company to maintain
a minimum current ratio, total liabilities to tangible net worth ratio,
tangible net worth, working capital, and net income. At January 1, 1999,
the Company complied with all such covenants. As of January 1, 1999,
available borrowings were $4,796,000.
6. INCOME TAXES
The provision (benefit) for income taxes is summarized below for the years
ended December 31, 1995, 1996, December 31, 1997 and 1997January 1, 1999 (in
thousands):
YEARS ENDED
-------------------------------------------
DECEMBER 31, -------------------------------
1995DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------ ----------
Current income taxes:
Federal $ 1,538 $ 2,163 $(3,082) $ --
State 484 430 (19) 55
------- ------- -------
2,022 2,593 (3,101) 55
Deferred income taxes:
Federal (173) (135) (2,846) (1,554)
State (20) (32) (380) (1)
------- ------- -------
(193) (167) (3,226) (1,555)
Increase in valuation allowance 3,566 1,555
------- ------- -------
$ 1,829Provision (benefit) for income taxes $ 2,426 $(2,761) $ 55
======= ======= =======
A reconciliationF-15
58
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
Reconciliation between the provision (benefit) for income taxes as
required by applying the federal statutory rate of 35% to that included in
the financial statements is as follows (in thousands):
YEARS ENDED
-------------------------------------------
DECEMBER 31, -------------------------------
1995DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------ ----------
Provision (benefit) for income taxes at
federal statutory rate $ 1,876 $ 2,165 $(6,251) $(1,473)
State income taxes, net of federal benefit 210 259 (12) 14
Other permanent differences 101 (31)
Change in valuation allowance (565) 3,566 1,555
Other 207 33 (64) (41)
------- ------- -------
$ 1,829Provision (benefit) for income taxes $ 2,426 $(2,761) $ 55
======= ======= =======
F-15Deferred taxes consist of the following (in thousands):
DECEMBER 31, JANUARY 1,
1997 1999
------------ ----------
Net operating loss carryforwards $ 1,877 $ 3,880
State tax provision (270) (146)
Accrued compensation 131 229
Accrued insurance 427 793
Allowance for doubtful accounts and other receivable 1,158 312
Depreciation (180) (52)
Other 423 105
------- -------
Deferred tax assets 3,566 5,121
Valuation allowance (3,566) (5,121)
------- -------
Net deferred taxes $ -- $ --
======= =======
At January 1, 1999, the Company has net operating loss carry forwards of
$10,688,000 available to reduce future federal taxable income and
$3,815,000 available to reduce future California State taxable income. The
Company has Federal and California net operating loss carry forwards which
begin expiring in the year 2012 and 2002, respectively. The Company has
established a full valuation allowance for the deferred tax assets due to
its continuing losses.
F-16
4359
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
The Company had a net deferred tax asset of approximately $360,000 at
December 31, 1996. During 1997, the Company accrued a valuation allowance
for the amount of its deferred tax asset.
DECEMBER 31,
-------------------
1996 1997
Net operating loss carryforwards $ -- $ 1,877
State tax provision 28 (270)
Accrued compensation 182 131
Accrued insurance 196 427
Allowance for doubtful accounts receivable 251 1,158
Depreciation (314) (180)
Other 17 423
------- -------
3,566
Valuation allowance (3,566)
------- -------
Net deferred taxes $ 360 $ --
======= =======
JANUARY 1, 1999
7. EMPLOYEE BENEFITS
Pension Plans - Certain of the Company's employees are covered by
union-sponsored, collectively bargained, multi-employer pension plans.
Pension expense related to these plans was approximately $162,000,
$172,000,
$178,000 and $178,000$202,000 for the years ended December 31, 1995, 1996, December 31,
1997 and 1997,January 1, 1999, respectively. The administrators have advised
the Company that there were no withdrawal liabilities as of December 1990,
the most recent date for which an analysis was made. The Company has no
current intention of withdrawing from any of these plans.
Retirement Plan - The Company has a 401(k) retirement-retirement plan covering all
employees not participating in the pension plans. Eligible employees, as
defined by the 401(k) plan, may elect to contribute up to 15% of their
total compensation,compensation; not to exceed the amount allowed by the Internal
Revenue Service code guidelines. The Company makes matching contributions
to the 401(k) plan each year equal to 50% of the employee contributions,
not to exceed 4% of the total compensation, and can also make
discretionary matching contributions. Employee contributions are fully
vested at all times, and the Company's matching contributions vest over
five years. The Company's matching contributions were approximately
$473,000, $468,000, $506,000 and $506,000$471,000 for the years ended December 31, 1995, 1996,
and 1997, respectively.
F-16
44
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBERDecember 31, 1997 (CONTINUED)and January 1, 1999, respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating leases and also leases
certain computer and office equipment under two- to five-year operating
lease agreements. Total rent expense relating to these leases was
approximately $1,913,000, $2,756,000, $6,369,000 and $6,369,000$5,646,000 for the years ended
December 31, 1995, 1996, December 31, 1997 and 1997, respectively.January 1, 1999, respectively,
with sublease income of $101,000 in fiscal year 1998.
The following table sets forth future minimum lease payments under
noncancelable operating leases as of December 31, 1997January 1, 1999 (in thousands):
Year ending December 31:Fiscal Year:
Rent Sublease Total
------ -------- ------
1998
1999 $4,038 $ 6,463
1999 3,948(261) $3,777
2000 1,7611,882 1,882
2001 1,3951,238 1,238
2002 777
Thereafter 35
--------903 903
2003 147 147
------ ------ ------
Total future minimum lease payments $8,208 $ 14,379
========(261) $7,947
====== ====== ======
F-17
60
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
9. RELATED-PARTY TRANSACTIONS
The Company receives legal services from a law firm previously affiliated
with its principal stockholder and paid approximately $83,000, $516,000, $189,000
and $189,000$114,000 for such legal services during the years ended December 31,
1995, 1996, December 31, 1997 and 1997,January 1, 1999, respectively.
The Company has an investment in an affiliate, which provides
telemarketing and related services (Note 4). During 1997, theThe Company paid
approximately $524,000 for such services.and $898,000 during the years ended December 31,
1997 and January 1, 1999, respectively. Approximately $32,000$50,000 was payable
to the affiliate at December 31, 1997.January 1, 1999.
10. STOCK TRANSACTIONS AND WARRANTS
In March 1996, the Company completed an initial stock offering and sold
1,788,000 shares of its common stock, at a net price of $13.02 per share.
An additional 349,800 shares of common stock were sold also at a net
$13.02 per share, pursuant to an underwriters over-allotment provision.
The net proceeds of the approximately $26$26.5 million raised by the Company
were used, in part, to repay existing bank debt.
F-17
45
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
During the three fiscal years 1996, 1997 and 1996,1998, the Company issued 8,107 and 57,798the
following shares of common stock, 57,798 shares, 8,107 shares, and 30,328
shares, respectively as a result of options whichthat were exercised (Note 11).
The income tax effect of any difference between the market price of the
Company's common stock at the grant date and the market price at the
exercise date is credited to additional paid-in capital, as required.
In conjunction withOn February 17, 1997, the Company adopted an Employee Stock Purchase Plan
("ESP Plan"). The ESP Plan allows employees of the Company to purchase
common stock at a subordinated convertible note payablediscount, without having to its
principal stockholder, in July 1993pay any commissions on the
purchases. The discount is the greater of 15% of the fair market value
("FMV") at the end of the reportable period or the difference between the
FMV at the beginning and December 1994, respectively,end of the reportable period. The maximum amount
that any employee can contribute to the ESP Plan per quarter is $6,250,
and the total number of shares reserved by the Company for purchase under
the ESP Plan is 200,000. During 1998, the Company issued warrants for the purchase of 43,243 and 21,62112,290 shares of
common stock, at approximately $.02 and $8.51a weighted average price of $3.69 per share, subject to
adjustment for dilution.share.
In December 1995,May 1998, the July 1993 warrants for the
purchase of 43,243Company issued 42,670 shares of common stock were exercised through a
cashless exercise, based on the fair market valueto two
employees as compensation for services and recorded $179,000 of
the Company's common
stock at the date of exercise of $9.81, which reduced the shares issued to
43,162. The December 1994 warrants expire in 2004.
During December 1995, warrants to purchase 440,433 shares of the Company's
common stock at approximately $.02 per share were exercised through a
cashless exercise, based on the fair market value of the Company's common
stock at the date of exercise of $9.81, which reduced the number of shares
issued to 439,602 (Note 11).compensation expense.
F-18
61
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
During February 1996, 100,000 warrants which were issued in conjunction with a 1992
line of credit for the purchase of 152,405 shares of common stock at $1.82
per share, were exercised through a cashless exercise, based on the
estimated fair market value of the Company's common stock, at the date of
exercise of $14.00, which reduced the number of shares issued to 87,000. During
October 1996, the remaining warrants to purchase 52,405 shares of common
stock at $1.82 per share were exercised through a cashless exercise, based
on the estimated fair value of the Company's common stock at the date of
exercise of $12.75, which reduced the number of shares issued to 44,924.
11. STOCK OPTIONS AND WARRANTS
The Company has three stock option plans: the 1990 Stock Option Plan (1990
Plan), the 1995 Stock Option Plan (1995 Plan), and the 1995 Director's
Plan (Director's Plan).
The 1990 Plan is a nonqualified option plan providing for the issuance of
up to 810,811 shares of common stock to officers, directors and key
employees. The options have a term of 10 years and one week and are either
fully-vestedfully vested or will vest ratably no later than five years from the grant
date. During 1996,1995, the Company elected to no longer grant options under
this plan.
The 1995 Plan provides for the granting of either incentive or
nonqualified stock options to specified employees, consultants and
directors of the Company for the purchase of up to 1,000,0001,300,000 shares of the
Company's common stock. The options have a term of ten years, except in
the case of incentive stock F-18
46
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
options granted to greater than ten percentten-percent
stockholders of the Company, as tofor which the term is five years. The
exercise price of nonqualified stock options must be equal to at least 85%
of the fair market value of the Company's common stock at the date of
grant, andgrant; the exercise price of incentive stock options must be equal to at
least the fair market value of the Company's common stock at the date of
grant. At December 31, 1997,January 1, 1999, options to purchase 115,135281,746 shares were
available for grant.grant under this plan.
The Director's Plan is a stock option plan for nonemployee directors and
provides for the purchase of up to 100,000 shares of the Company's common
stock. An option to purchase 1,500 shares of the Company's common stock
shall be granted automatically each year to each director, following the
Company's annual stockholders' meeting. The exercise price of options
issued under this plan shall be not less than the fair market value of the
Company's common stock on the date of grant. Each option under this plan
shall vest and become exercisable in full on the first anniversary of its
grant date, provided that the optionee is reelected as a director of the
Company. The maximum term of options granted under the plan is ten years
and one day, subject to earlier termination following an optionee's
cessation of service with the Company. At December 31, 1997,January 1, 1999, options to
purchase 94,00089,500 shares were available for grant under this plan.
F-19
62
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. No compensation cost has been
recognized for the stock option plans. The impact of stock options granted
prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1995, 1996, 1997 and 19971998 pro forma adjustments may not be
indicative of future period pro forma adjustments, when the calculation
will apply to all applicable future stock options. Had compensation cost
for the Company's option plans been determined based on the fair value at
the grant date for awards in 1996, 1997 and 19971998 consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have been reduced to the pro forma amounts
indicated below:
1995Years Ended
------------------------------------------------
DECEMBER 31, DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------ ----------
Net income (loss), as reported $3,531(in thousands) $ 3,759 $(15,099)$ (15,099) $ (4,266)
Net income (loss), pro forma $3,507(in thousands) $ 3,564 $(15,808)$ (15,808) $ (5,420)
Basic net income (loss) per share, as reported $ 1.13 $ 0.70 $ (2.72) $ (0.78)
Basic net income (loss) per share, pro forma $ 1.130.66 $ 0.60(2.85) $ (2.85)(1.00)
Diluted net income (loss) per share, as reported $ 0.89 $ 0.63 $ (2.72) $ (0.78)
Diluted net income (loss) per share, pro forma $ 0.87 $ 0.60 $ (2.85) $ (1.00)
The fair value of each option grant is estimated based on the date of
grant using the Black-Scholes option-pricing model, using the return on a
ten year treasury bill, with the following weighted-average assumptions
used for grants in 1998: dividend yield of 0%; expected volatility of
104.6%; risk-free interest rate of 4.7%; and expected lives of six years.
The following weighted-average assumptions were used for grants in 1997:
dividend yield of 0%; expected weighted-average volatility of 79.5%;
risk-free interest rate of 6.2%; and expected lives of 6six years. The
following weighted average assumptions were used for grants in 1996: dividend yield of 0%;
F-19expected volatility of 101.7%; risk-free interest rate of 6.3%; and
expected lives of six years.
F-20
4763
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
expected weighted average volatility of 101.7%; risk-free interest rate of
6.3%; and expected lives of 6 years. The following weighted-average
assumptions used for grants in 1995: dividend yield of 0%; expected
volatility of 0%; risk-free interest rate of 6.4%; and expected lives of
six years.JANUARY 1, 1999
The following table summarizes activity under the Company's 1990 andPlan,
1995 Plan and DirectorsDirectors' Plan:
1995YEARS ENDED
--------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, JANUARY 1,
1996 1997 --------------------- -------------------- ------------------------1999
---------------------------- ---------------------------- ----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ---------- ---------- ---------- ----------
Options
outstanding,
beginning of year 686,002 $ 6.34 791,356 $ 6.76 883,202 $ 8.12 1,526,851 $ 6.10
Options granted 110,273 $ 9.46 234,540 $ 13.57 938,325 $ 5.55 350,500 $ 5.49
Options exercised (57,798) $ 5.85 (8,107) $ 7.77 (30,328) $ 2.91
Options canceled
or expired (4,919) $ 8.51 (84,896) $ 9.25 (286,569) $ 10.45 ------- ------- --------(408,738) $ 6.51
---------- ---------- ----------
Options
outstanding,
end of year 791,356 $ 6.76 883,202 $ 8.12 1,526,851 $ 6.50
======= ======= =========6.10 1,438,285 $ 5.91
========== ========== ==========
Option price
range at
end of year $2.78$ 2.78 to $ 2.78 to $ 2.78 to
$9.81$ 14.00 $ 14.00 $ 14.00
Option price
range for $ 2.78 to $ 7.40 to $ 2.78 to
exercised shares $ 9.81 $ 8.51 Weighted average$ 5.32
Weighted-average
fair value of
options granted
during the year $ 2.9511.18 $ 11.184.01 $ 4.015.49
F-20F-21
4864
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)JANUARY 1, 1999
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1997:January 1, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ---------------------------
WEIGHTED------------------------------------------------- ------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31,JANUARY 1, CONTRACTUAL EXERCISE DECEMBER 31,JANUARY 1, EXERCISE
PRICES 19971999 LIFE PRICE 19971999 PRICE
--------------- -------------- ----------- --------- -------------- ---------
$2.78 158,557 4.20129,729 3.17 $ 2.78 158,557129,729 $ 2.78
$5.25-$3.69-$5.75 808,325 9.406.25 1,005,119 8.91 $ 5.50 50,0005.51 208,537 $ 5.50
$7.00-5.55
$7.40-$10.00 489,429 6.309.81 263,302 5.09 $ 7.65 438,9017.75 261,275 $ 7.657.74
$14.00 70,540 8.60 $14.00 32,635 $14.0040,135 7.51 $ 14.00 35,135 $ 14.00
--------- ---------------
$2.78 to $14.00 1,526,851 7.801,438,285 7.65 $ 6.50 680,0935.91 634,676 $ 6.636.35
========= ================
Outstanding warrants are summarized below:
SHARES EXERCISE
SUBJECT TO PRICE PER
WARRANTS SHARE
----------- -------------
Balance, January 1, 1995 732,477 $.02 - $8.51
Exercised (483,676) $0.02
--------
Balance, December 31, 1995 248,8011996 248,800 $1.82 - $8.51
Exercised (152,405) $1.82
--------
Balance, December 31, 1996 96,39696,395 $2.78 - $8.51
--------
Balance, December 31, 1997 96,39696,395 $2.78 - $8.51
--------
Balance, January 1, 1999 96,395 $2.78 - $8.51
========
The above warrants expire at various dates from 2002 through 2004.
F-21F-22
4965
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)JANUARY 1, 1999
12. EARNINGS PER SHARE
1995YEARS ENDED
------------------------------------------------
DECEMBER 31, DECEMBER 31, JANUARY 1,
1996 1997 1999
------------ ------------ ----------
(in thousands, except per share data)
Basic:
Weighted averageWeighted-average common shares outstanding 3,117 5,370 5,551 5,439
Net income (loss) $ 3,5313,759 $(15,099) $ 3,759 $(15,099)(4,266)
======== ======== ========
Basic earnings per share $ 1.13 $ 0.70 $ (2.72) $ (0.78)
======== ======== ========
Diluted:
Weighted averageWeighted-average common shares - basic 3,117 5,370 5,551 5,439
Potential common shares 864 620
-------- -------- --------
Weighted averageWeighted-average common shares - diluted 3,981 5,990 5,551 5,439
======== ======== ========
Net income $ 3,531(loss) $ 3,759 $(15,099) $ (4,266)
======== ======== ========
Diluted earnings per share $ 0.89 $ 0.63 $ (2.72) $ (0.78)
======== ======== ========
F-23
66
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JANUARY 1, 1999
13. SEGMENTS
Utilizing the management approach, the Company has broken down its
business based upon the nature of services provided, i.e., dedicated,
shared service and project. The Company has adopted SFAS No. 128, Earnings Per Share, effective after
December 15, 1997. As a result,does not allocate operating
expenses to these segments, nor does it allocate specific assets to these
segments. Therefore, segment information reported in the Company's reported earnings per share
for 1996 and 1995 have been restated. The effect of this accounting change
on previously reported earnings per share (EPS) data is as follows:following
includes only net revenues (in thousands):
1995 1996BUSINESS SEGMENTS
--------------------------------------------------------------
DEDICATED SHARED SERVICE PROJECTS TOTAL
-------- -------------- -------- --------
EPS as reported (Primary)
Fiscal year 1998
Net revenues $ 0.8838,766 $ 0.63
Effect of SFAS No. 128 0.25 0.07
-------- --------
EPS as restated (Basic)40,216 $ 1.1342,806 $121,788
======== ======== ======== ========
Fiscal year 1997
Net revenues $ 0.70
44,423 $ 44,932 $ 38,853 $128,208
======== ======== ======== ========
Fiscal year 1996
Net revenues $ 21,894 $ 68,446 $ 29,600 $119,940
======== ======== ======== ========
For both
During the years ended January 1, 1999, December 31, 1997 and December 31,
1996, sales to two major customers (three major customers for year ended
January 1, 1999) totaled $47.3 million, 38.0 million and 1995, there$26.4 million,
respectively.
14. SUBSEQUENT EVENT
On February 28, 1999, the Company signed a definitive agreement with the
SPAR Group to merge in a stock transaction involving the issuance of
approximately 12.3 million of PIA stock to the shareholders of the SPAR
Group. The transaction is no effectsubject to shareholder and regulatory approval.
After the merger, SPAR Group shareholders will own approximately 69% of
restating Fully Diluted EPSPIA Common Stock. The Companies expect to Diluted EPS.
F-22complete the transaction by May
1999.
F-24
5067
EXHIBIT 11.1
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS WRITE OFFS
BALANCE AT CHARGED TO AND BALANCE AT
BEGINNING COSTS AND ALLOWANCE END
OF YEAR EXPENSES DEDUCTIONSEXPENSES(1) CHARGES OF YEAR
---------- ------------ ----------- ---------
DESCRIPTION
Year ended December 31, 1995 -
Allowance for doubtful accounts $ 140 354 (70) $ 424
Year ended December 31, 1996 -
Allowance for doubtful accounts and other $ 424 543 (384)$ 105 $ 54 $ 583
Year ended December 31, 1997 -
Allowance for doubtful accounts and other $ 583 $ 918 (712) $ 789(50) $ 1,451
Year ended January 1, 1999 -
Allowance for doubtful accounts and other $ 1,451 $ (270) $ (360) $ 821
(1) Includes amounts charged to revenues for rebates, price adjustments and other.
F-23
F-25
68
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Certificate of Incorporation of PIA (incorporated by reference to the
Company's Registration Statement on Form S-1 (Registration No.
33-80429) as filed with the Securities and Exchange Commission on
December 14, 1995 (the "Form S-1")
3.2 By-laws of PIA (incorporated by reference to the Form S-1).
4.1 Registration Rights Agreement entered into as of January 21, 1992 by
and between RVM Holding Corporation. RVM/PIA, a California Limited
Partnership, The Riordan Foundation and Creditanstalt-Bankverein
(incorporated by reference to the Form S-1).
10.1 1990 Stock Option Plan (incorporated by reference to the Form S-1).
10.2 Amended and Restated 1995 Stock Option Plan (incorporated by reference
of Exhibit 10.2 to the Company's Form 10-Q for the 2nd Quarter ended
July 3, 1998).
10.3 1995 Stock Option Plan for Non-employee Directors (incorporated by
reference to the Form S-1).
10.4+* Employment Agreement dated as of June 25, 1997 between PIA and Terry R.
Peets (incorporated by reference to Exhibit 10.5 to the Company's Form
10-Q for the 2nd Quarter ended June 30, 1997)
10.5+* Severance Agreement dated as of February 20, 1998 between PIA and Cathy
L. Wood (incorporated by reference to Exhibit 10.5 to the Company's
Form 10-Q for the 1st Quarter ended April 30, 1998)
10.6* Severance Agreement dated as of August 10, 1998 between PIA and Clinton
E. Owens (incorporated by reference to Exhibit 10.6 to the Company's
Form 10-Q for the 3rd Quarter ended October 2, 1998).
10.7+* Amendment No. 1 to Employment Agreement dated as of October 1, 1998
between PIA and Terry R. Peets.
10.8+* Amended and Restated Severance Compensation Agreement dated as of
October 1, 1998 between PIA and Cathy L. Wood.
10.9+ Loan and Security Agreement dated December 7, 1998 among Mellon Bank,
N.A., PIA Merchandising Co., Inc., Pacific Indoor Display Co. and PIA.
10.10+ Agreement and Plan of Merger dated as of February 28, 1999 among PIA,
S.G. Acquisition, Inc., PIA Merchandising Co., Inc., SPAR Acquisition,
In., SPAR Marketing, Inc., SPAR Marketing Force, Inc., SPAR, Inc.,
SPAR/Burgoyne Retail Services, Inc., SPAR Incentive Marketing, Inc.,
SPAR MCI Performance Group, Inc. and SPAR Trademarks, Inc.
10.11+ Voting Agreement dated as of February 28, 1999 among PIA, Clinton E.
Owens, RVM/PIA, California limited partnership, Robert G. Brown and
William H. Bartels.
21.1 Subsidiaries of the Company (incorporated by reference to the Form
S-1).
23.1+ Consent of Deloitte & Touche LLP.
27.1+ Financial Data Schedule.
+ Previously filed with initial Form 10-K for the fiscal year ended
January 1, 1999.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.