SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X][ x ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1996.March 31, 1997.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission file number 0-27824
PIA MERCHANDISING SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19900 MacArthur Blvd., Suite 900, Irvine, CA 92612
(Address of principal executive offices)
(714) 476-2200
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: [X][ X ] Yes [ ] No
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Common Stock, $.01 Par Value: 5,815,2065,899,558 shares as of October 31, 1996.April 30, 1997.
1
PIA Merchandising Services, Inc.
PART I: FINANCIAL INFORMATION PAGE
----
Item 1: Financial Statements
Condensed Consolidated Balance
Sheets as of September 30, 1996March 31, 1997 (Unaudited)
and December 31, 19951996
Condensed Consolidated Statements of
Income for the NineThree Months Ended
September 30, 1996March 31, 1997 (Unaudited) and
September 30, 1995March 31, 1996 (Unaudited)
Condensed Consolidated Statements of
Cash Flows for the NineThree Months Ended
September 30, 1996March 31, 1997 (Unaudited) and
September 30, 1995March 31, 1996 (Unaudited)
Notes to Condensed Consolidated Financial
Statements
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Risk Factors
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
2
PART I: FINANCIAL INFORMATION
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
(IN THOUSANDS)
September 30, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $17,865 $ 185
Accounts receivable, net of allowance
for doubtful accounts 20,682 12,213
Prepaid expenses and other current assets 860 638
Deferred income taxes 493 493
------- -------
Total current assets 39,900 13,529
PROPERTY AND EQUIPMENT, net 1,950 2,110
OTHER ASSETS 914 447
------- -------
$42,764 $16,086
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 743 $ 1,838
Other current liabilities 6,478 4,105
Income taxes payable 228 455
------- -------
Total current liabilities 7,449 6,398
DEFERRED INCOME TAXES 300 300
LONG-TERM DEBT 0 3,400
STOCKHOLDERS' EQUITY 35,015 5,988
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$42,764 $16,086
------- -------
------- -------
(In Thousands)
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $21,791 $ 19,519
Accounts receivable, net of allowance
for doubtful accounts 18,914 22,630
Prepaid expenses and other current assets 1,416 564
Deferred income taxes 669 669
--------- ------------
Total current assets 42,790 43,382
PROPERTY AND EQUIPMENT, net 1,783 1,847
OTHER ASSETS 2,688 2,443
--------- ------------
$47,261 $47,672
--------- ------------
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 823 $ 772
Other current liabilities 10,517 9,762
Income taxes payable 0 111
-------- -----------
Total current liabilities 11,340 10,645
DEFERRED INCOME TAXES 309 309
STOCKHOLDERS' EQUITY 35,612 36,718
--------- ------------
$47,261 $47,672
--------- ------------
--------- ------------
See accompanying notes.
3
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT(In thousands, except per share amounts)
(Unaudited)
For the Three Months Ended March 31,
------------------------------------
1997 1996
---- ----
NET REVENUES $29,356 $26,259
OPERATING EXPENSES:
Field service costs 26,369 20,264
Selling expenses 2,554 2,655
General and administrative expenses 2,449 1,740
Depreciation and amortization 197 147
-------- -------
Total operating expenses 31,569 24,806
-------- -------
OPERATING INCOME (LOSS) (2,213) 1,453
-------- -------
OTHER INCOME:
INTEREST INCOME, NET 231 43
EQUITY IN EARNINGS OF AFFILIATE 24 0
-------- -------
TOTAL OTHER INCOME 255 43
-------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES (1,958) 1,496
(PROVISION) BENEFIT FOR INCOME TAXES 790 (599)
-------- -------
NET INCOME (LOSS) $ (1,168) $ 897
-------- -------
-------- -------
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE AMOUNTS)
(UNAUDITED)
For the Three Months Ended September 30,
----------------------------------------
1996 1995
---- ----
NET REVENUES $33,589 $28,177
OPERATING EXPENSES:
Field service costs 26,483 22,098
Selling expenses 2,885 2,731
General and administrative expenses 2,140 1,653
Depreciation and amortization 154 128$ ( 0.19) $ 0.18
-------- -------
-------- -------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 6,109 4,932
-------- -------
-------- ------- -------
Total operating expenses 31,662 26,610
------- -------
OPERATING INCOME 1,927 1,567
INTEREST INCOME (EXPENSE), NET 261 (99)
------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,188 1,468
PROVISION FOR INCOME TAXES 851 515
------- -------
NET INCOME $ 1,337 $ 953
------- -------
------- -------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.21 $ 0.22
------- -------
------- -------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 6,251 4,309
------- -------
------- -------
See accompanying notes.
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
For the Nine Months Ended September 30,
---------------------------------------
1996 1995
---- ----
NET REVENUES $86,703 $78,517
OPERATING EXPENSES:
Field service costs 68,591 61,458
Selling expenses 8,508 7,711
General and administrative expenses 5,733 4,944
Depreciation and amortization 453 361
------- -------
Total operating expenses 83,285 74,474
------- -------
OPERATING INCOME 3,418 4,043
INTEREST INCOME (EXPENSE), NET 590 (358)
------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES 4,008 3,685
PROVISION FOR INCOME TAXES 1,568 1,293
------- -------
NET INCOME $ 2,440 $ 2,392
------- -------
------- -------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.41 $ 0.56
------- -------
------- -------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 5,972 4,309
------- -------
------- -------
See accompanying notes.4
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
(IN THOUSANDS)
(UNAUDITED)
For the Nine Months Ended September 30,
---------------------------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,440 $ 2,392
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 453 361
Amortization of other assets and discount
on subordinated debt 11 67
Provision for doubtful receivables 282 147
Deferred income taxes, net 0 46
Changes in operating assets and liabilities (8,401) (2,904)
------- ------
Net cash (used in) provided by operating activities (5,215) 109
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (293) (527)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long term debt (3,400) (651)
Repurchase of common stock 0 (24)
Proceeds from issuance of common stock, net 26,588 0
------- ------
Net cash provided by (used in) financing activities 23,188 (675)
------- ------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 17,680 (1,093)
CASH AND CASH EQUIVALENTS,
beginning of period 185 1,414
------- ------
CASH AND CASH EQUIVALENTS,
end of period $17,865 $ 321
------- ------
------- ------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest $ 0 $ 322
Cash paid for income taxes $ 1,820 $1,119
(In thousands)
(Unaudited)
For the Three Months Ended March 31,
------------------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss) (1,168) $ 897
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 197 147
Provision for doubtful receivables 330 76
Changes in operating assets and liabilities 2,941 (1,161)
-------- -------
Net cash (used in) provided by
operating activities 2,300 (41)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (91) (63)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long term debt 0 (3,400)
Proceeds from issuance of common stock, net 63 26,753
-------- -------
Net cash provided by financing activities 63 23,353
-------- -------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 2,272 23,249
CASH AND CASH EQUIVALENTS,
beginning of period 19,519 185
-------- -------
CASH AND CASH EQUIVALENTS,
end of period $ 21,791 $ 23,434
-------- -------
-------- -------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest $ 0 $ 69
Cash paid for income taxes $ 86 $ 320
See accompanying notes.
5
PIA Merchandising Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Three and Nine Months Ended September 30, 1996March 31, 1997
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. This financial information should be read in conjunction
with the consolidated financial statements and notes thereto for the
year ended December 31, 1995,1996, included in the Company's Registration StatementAnnual Report on
Form S-1, which was declared effective on February 29,10-K for the year ended December 31, 1996. Operating results for
the three and nine month periodsperiod ended September 30, 1996March 31, 1997 are not necessarily
indicative of the results that may be expected for the year endedending
December 31, 1996.1997.
2. Net Income perThe Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share,
Net income" which is
effective for financial statements for both interim and annual periods
ending after December 15, 1997. Early adoption of the statement is not
permitted. The company has applied this statement to the 1996 first
quarter and annual results and to the 1997 first quarter results and
determined that the adoption of this statement would not have had a
material impact on the earnings per share is based on the weighted average number of
outstanding shares of common stock and dilutive common equivalent shares
from stock options and warrants (using the treasury stock method).
3. Initial Public Offering
In March 1996, the Company completed its initial public offering of
2,137,800 shares of unissued common stock and 544,000 shares of
outstanding common stock that were offered by certain selling
stockholders. The Company received net proceeds of approximately $26.6
million after deducting expenses and underwriting discounts. Concurrent
with the offering, the Company was reincorporated in Delaware which
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.
4. Line of credit and long-term obligations
In March 1996, $3.0 million of net proceeds from the initial public
offering were usedcalculations for repayment of bank line of credit indebtedness.
these periods.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
PIA Merchandising Services, Inc. (the Company"Company" or PIA)"PIA") provides
merchandising services to manufacturers and retailers principally in grocery,
mass merchandiser and chain and deep discount drug stores. For the quarters
ended September 30,March 31, 1997 and 1996, and 1995, the Company generated approximately 87.8%90.0% and
79.7%87.0% of its net revenues from manufacturer clients, and 12.2%10.0% and 20.3% from
retailer clients, respectively. For the nine month periods ended September
30, 1996 and 1995, the Company generated approximately 86.8% and 79.7% of its
net revenues from manufacturer clients and 13.2% and 20.3%13.0% from
retailer clients, respectively. The mix of the Company's business between
manufacturer and retailer clients historically has not had a material impact
on the Company's cash flows or results of operations.
The Company currently provides three principal types of services: syndicated
services, project services and dedicated services. Syndicated services
consist of regularly scheduled, routed merchandising services provided at the
store level for manufacturers, primarily under one year contracts. Project
services consist primarily of special in-store services initiated by
retailers and manufacturers, which are typically used for large scale
implementations over 30 to 60 days. Dedicated services consist of
merchandising services that are performed for a specific retailer or
manufacturer by a dedicated organization, primarily under multi-year
contracts.
6
During 1996 and the first quarter of 1997, the Company's profitability was
affected by a shift in its business from syndicated services to projects and
dedicated services. The Company's syndicated services business has
historically required a significant fixed management and personnel
infrastructure. Due in part to industry consolidation and increased
competition, the Company lost a number of syndicated services clients during
1996 and the first quarter of 1997, causing a decrease in the profitability
of that business in the last two quarters of 1996 and the first quarter of
1997. PIA has not sold any sizable new syndicated business to compensate for
this loss. The Company believes that revenues in the balance of 1997 from
syndicated services will continue to decline as a result of the wind-down of
the lost business. Because of the fixed nature of the associated costs, the
loss of syndicated business has a material adverse effect on PIA's results of
operations.
The Company continues to experience a significant increase in the demand for
project services. PIA's project revenues have grown from $7.9 in the first
quarter of 1996 to $9.0 in the first quarter of 1997. This increase has
required an investment in management infrastructure and systems to support
this business.
The Company's dedicated services business is also growing rapidly. During
the first quarter of 1997, revenues from dedicated services accounted for
26.8% of total revenues, as compared to 7.1% in the first quarter of 1996.
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.
PIA's quarterly results of operations are subject to certain variability
related to the timing of retailer-mandated activity and the receipt of
commission overrides.commissions. Retailer-mandated activity is typically higher in the second and
third quarters of the year due to retailer scheduling of activity in off-peak
shopping periods. In addition, new product introductions increase during such
periods which require the reset of categories as the new products gain
distribution. The amount of commissions earned by PIA under its
commission-based contracts varies seasonally, and generally corresponds to
the peak selling seasons of the clients that have entered into these types of
contracts. Historically, the Company has recognized greater commission
income in the first and fourth quarters. See "Risk Factors -- Uncertainty of
Commission Income." The Company's quarterly results have in the past been
subject to fluctuations and, thus, the operating results for any quarter are
not necessarily indicative of results for any future period.
7
Results of Operations - ThirdFirst Quarter of Fiscal 19961997 Compared to ThirdFirst Quarter of
Fiscal 1995:1996:
The following table sets forth certain financial data as a percentage of net
revenues for the periods indicated:
Three Months Ended September 30,
--------------------------------
1996 1995
---- ----
Net revenues 100% 100%
Operating expenses:
Field service costs 78.8% 78.4%
Selling expenses 8.6% 9.6%
General and administrative expenses 6.4% 5.9%
Depreciation and amortization 0.5% 0.5%
----- -----
Total operating expenses 94.3% 94.4%
----- -----
Operating income 5.7% 5.6%
Interest (income) expense, net (0.8%) 0.4%
----- -----
Income before provision for income taxes 6.5% 5.2%
Provision for income taxes 2.5% 1.8%
----- -----
Net income 4.0%Three Months Ended March 31,
----------------------------
1997 1996
---- ----
Net revenues 100% 100%
Operating expenses:
Field service costs 89.8 77.2
Selling expenses 8.7 10.1
General and administrative expenses 8.3 6.6
Depreciation and amortization 0.7 0.6
----- -----
Total operating expenses 107.5 94.5
----- -----
Operating income (loss) (7.5) 5.5
Interest income, net 0.8 0.2
Equity in earnings of affiliate 0.1 0.0
----- -----
Income (loss) before provision for income taxes (6.6) 5.7
(Provision) benefit for income taxes 2.7 (2.3)
----- -----
Net income (loss) (3.9)% 3.4%
----- -----
----- -----
Net revenuerevenues increased $5.4$3.1 million, or 19.2%11.8%, to $33.6$29.4 million in the thirdfirst
quarter of 19961997 from $28.2 million for$26.3 in the thirdfirst quarter of 1995.1996. The increase in net
revenue forrevenues was the third quarter includes $5.7result of revenues from new clients of $9.1 million, offset
by a net decrease from other clients of $6.0 million. This net decrease is
comprised of a net decrease in revenuerevenues of $.4 million from services performed for new clients. Aexisting clients,
and a decline in revenues of $5.6 million due to client losses.
The net revenue increase in the first quarter of 1997 was a result of an
increase in project business of $1.1 million, representing a 14.4% increase
in project revenues over the first quarter of 1996, and from ongoing
routed coveragean increase in
dedicated services of $.6$6.0 million, was partiallyrepresenting a 421.0% increase in
dedicated service revenue over the first quarter of 1996. These increases
were offset by increasesa decrease of $4.0 million, or 24.1%, in project
revenuerevenues from
syndicated services over the first quarter of $.3 million during the quarter.1996.
Field service costs increased $4.4$6.1 million, or 19.8%30.1%, to $26.5$26.4 million in the
thirdfirst quarter of 19961997, as compared to $22.1$20.3 million in the thirdfirst quarter of
1995.1996. Field service costs are comprised principally of field labor and
related costs and expenses required to provide both routed and dedicated
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 employees. The increase in field service costs wasis primarily
due to increases in line with the increase in net revenues.revenues from dedicated and project services. As a
percentage of net revenues, field service costs were 78.8%increased to 89.8% in the
thirdfirst quarter of 1997 from 77.2% in the first quarter of 1996 comparedprimarily due
to 78.4%the negative leverage caused by the loss of syndicated services business;
salary increases in the thirdordinary course of business; and increased travel
costs associated with the larger work force.
8
Selling expenses decreased $0.1 million, or 3.8%, to $2.6 million in the
first quarter of 1995.1997 from $2.7 million in the first quarter of 1996.
Selling expenses decreased primarily as a result of $2.9 million were approximately the same as last year.lower staffing and travel
costs. As a percentage of net revenues, selling expenses decreased to 8.6%8.7%
in the thirdfirst quarter of 19961997 from 9.6%10.1% in the thirdfirst quarter of 1995.1996.
General and administrative expenses increased $0.5$0.7 million, or 29.5%40.7%, to $2.1$2.4
million in the thirdfirst quarter of 19961997 from $1.6$1.7 million in the thirdfirst quarter
of 1995.1996. General and administrative expenses increased primarily as a result
of higher payroll costs due to increased staffing in general managementrecruitment and training
and management information services that were required to support overall
business growth, andincreased provision for uncollectible accounts, termination
costs, as well as salary increases in the ordinary course of business. As a
percentage of net revenues, general and administrative expenses amounted to
6.4%8.3% in the thirdfirst quarter 1997 compared to 6.6% in the first quarter of 1996 compared to 5.9% in the third quarter of
1995.1996.
Depreciation and amortization expenses remained approximately the sameincreased slightly as a result of
depreciation of computer hardware and software development costs for the
third quarter of 1996shelf
technology and 1995.
for general business purposes.
Interest income was $0.3 million during the third quarterincreased as a result of 1996. The
interest income resulted from the investment of a portion ofproceeds from the
Company's initial public offering proceedson March 1, 1996.
Equity in earnings of 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 to 20%, and is now required to recognize
its equity interest bearing securities. These
investments produced interest earnings throughout the third quarter of 1996.
The Company had no interest expense during the third quarter of 1996.in Ameritel's earnings.
Income taxes were $0.9tax benefit was approximately $0.8 million in the thirdfirst quarter of
1996 and approximately
$0.51997, compared to income tax expense of $0.6 million in the thirdfirst quarter of
1995,1996, representing an effective rate of 38.9%40.3% and 35.1%40.0%, respectively.
The 1996 and 1995 tax rates differed from an
expected combined federal and state tax rateCompany incurred a net loss of 40% due principally to
interest earned in 1996 from tax exempt securities and to a $0.1 million
reduction in the valuation allowance caused by the utilization of net
operating loss carryforwards in 1995.
Net income increased approximately $0.4 million, or 40.3%, to approximately
$1.3$1.2 million in the thirdfirst
quarter of 1996, from1997, compared to net income of approximately $1.0$0.9 million in the
thirdfirst quarter of 1995,1996, primarily as a result of increased revenues, the
reduction in operating expenses increasing
at a faster rate than revenues, as a percent of salesdiscussed above.
Liquidity and interest income from
investment ofCapital Resources
The Company's primary capital need has been to fund the proceeds ofworking capital
requirements created by its growth in net revenues. On March 1, 1996, the
Company completed an initial public offering.
Resultsoffering of Operations - Nine Months Ended September 30, 1996 Comparedits Common Stock, raising
$26.5 million. Prior to Nine
Months Ended September 30, 1995:
The following table sets forth certain financial data asthis offering, the Company's primary sources of
financing were senior borrowings from a percentagebank under a revolving line of net
revenues for the periods indicated:
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
Net revenues 100% 100%
Operating expenses:
Field service costs 79.2% 78.3%
Selling expenses 9.8% 9.8%
General and administrative expenses 6.6% 6.3%
Depreciation and amortization 0.5% 0.5%
----- -----
Total operating expenses 96.1% 94.9%
----- -----
Operating income 3.9% 5.1%
Interest (income) expense, net (0.7%) 0.5%
----- -----
Income before provision for income taxes 4.6% 4.6%
Provision for income taxes 1.8% 1.6%
----- -----
Net income 2.8% 3.0%
----- -----
----- -----
Net revenue increased $8.2 million, or 10.4%, to $86.7 million incredit
and subordinated borrowings from two stockholders. During the first nine monthsquarter
of 1996 from $78.5 million for1997, the corresponding period of 1995.
TheCompany had a net increase in net revenue includes $6.4cash flow of $2.3 million
in revenue from services
performed for new clients. Revenues for the nine months ended September 30,
1996 from ongoing routed coverage increased $.3 million and project revenue
increased $1.5 million from the corresponding period in 1995.
Field service costs increased $7.1 million, or 11.6%, to $68.6 million in the
first nine months of 1996 compared to $61.5 million for the corresponding
period of 1995. The increase in field service costs was the result of
increased operating costs associated with revenue growth and a reduction of
marginsprincipally due to a strategic decision byreduction in accounts receivable.
9
In January 1997, the Company to maintain employment
levels in field service and field management personnel in anticipationentered into a new credit agreement with a bank,
which provides for an unsecured line of new
businesscredit in the second quarter. Asmaximum amount of
$7,000,000. Borrowings under the line of credit bear interest at the bank's
reference rate, unless the Company elects the specified offshore rate. The
credit agreement contains various covenants which, among other things,
require compliance with certain financial tests such as working capital,
tangible net worth, leverage and profitability. In addition, the credit
agreement imposes certain restrictions on the Company, including the
incurrence of additional indebtedness, the payment of dividends, and the
ability to make acquisitions. No borrowings are currently outstanding under
this facility.
In March 1997, the Company's Board of Directors approved a percentagestock repurchase
program under which the Company is authorized to repurchase up to 1,000,000
shares of net revenues, field
service costs increasedCommon Stock from time to 79.2%time in the first nine monthsopen market, depending on
market conditions. This program is funded by working capital. As of 1996 from 78.3%May 1,
1997, the Company repurchased an aggregate of 367,000 shares of Common Stock
for an aggregate price of $2,149,117.
The Company believes that it's working capital and available line of credit
are sufficient to fund its operations for the corresponding period of 1995.
Selling expenses increased $0.8 million or 10.3%, to $8.5 million in the first
nine months of 1996 from $7.7 million for the corresponding period of 1995.
As a percentage of net revenues, selling expenses were 9.8% in both the first
nine months of 1996 and 1995.
General and administrative expenses increased $0.8 million, or 16.0%, to $5.7
million in the first nine months of 1996 from $4.9 million for the
corresponding period of 1995. General and administrative expenses increased
primarily as a result of higher payroll costs due to increased staffing in
general management and management information services that were required to
support overall business growth, salary increases in the ordinary course of
business, and legal expenses associated with the negotiation of a significant
new contract. As a percentage of net revenues, general and administrative
expenses increased to 6.6% in the first nine months of 1996 from 6.3% for the
corresponding period of 1995. The increase was principally the result of the
increased spending noted above and lower than anticipated net revenues.
Depreciation and amortization expenses remained approximately the same for the
first nine months of 1996 and 1995.
Net interest income was $0.6 million during the first nine months of 1996.
Interest expense in the corresponding period of 1995 was $0.4 million. The
interest income resulted from the investment of a portion of the Company's
initial public offering proceeds in interest bearing securities.
Income taxes were $1.6 million for the first nine months of 1996 and
approximately $1.3 million in the corresponding period of 1995, representing
an effective rate of 39.1% and 35.1%, respectively. The 1996 and 1995 tax
rates differed from an expected combined federal and state tax rate of 40% due
principally to interest earned from tax exempt securities in 1996 and to a
$0.2 million reduction in the valuation allowance caused by the utilization of
net operating loss carryforwards in 1995.
Net income remained approximately the same for the first nine months of 1996
and 1995. Increases in revenues were offset by higher field service costs and
other expenses.
next 12 months.
RISK FACTORS
The following risk factors should be carefully reviewed in addition to the
other information contained in this Quarterly Report on Form 10-Q.
Concentrated Client BaseHISTORY OF LOSSES
During the years ended December 31, 1992 and 1993, the Company incurred
significant losses and experienced substantial negative cash flow. The
Company had net losses of $3.2 million and $2.6 million for the years ended
December 31, 1992 and 1993, respectively. These losses resulted primarily
from additional field service costs to provide routed coverage in grocery
stores for relatively few clients in newly-opened regions during the
Company's continuing national expansion in 1992 and 1993, and from the
write-off of $1.7 million in goodwill in 1992. In addition, the Company
incurred a net loss of $1.2 million for the first quarter of 1997, and
expects its 1997 operating results to be substantially less than the prior
year. There can be no assurance that the Company will not sustain further
losses.
10
LOSS OF SYNDICATED BUSINESS
PIA's business mix has changed significantly over 1996 and the first quarter
of 1997, and is expected to continue to change during the balance of 1997 in
response to client needs and the evolving third party merchandising industry.
Due in part to industry consolidation and increased competition, the Company
has lost a substantial amount of syndicated services business over the last
15 months, and has not sold any sizeable new syndicated business to
compensate for this loss. This business has historically required a
significant fixed management and personnel infrastructure. Accordingly, the
loss of syndicated business, without offsetting gains, has a material adverse
effect on the Company's results of operations.
INDUSTRY CONSOLIDATION; CONCENTRATED CLIENT BASE
The retail industry is undergoing a consolidation process that is resulting
in fewer, larger retailers. The Company's success is dependent in part upon
its ability to maintain its existing clients and to obtain new clients. As a
result of industry consolidation, the Company has lost certain clients, and
this trend could continue to have a negative effect on the Company's client
base and results of operations. The Company's ten largest clients generated
approximately 61.3%74.0% and 59.8%58.4% of the Company's net revenuerevenues for the quarters
ended September 30,March 31, 1996 and 1995, respectively, and 58.1%
and 59.8% of net revenue for the nine month periods ended September 30, 1996
and 1995,1997, respectively. During these periods, none of
the Company's manufacturer or retailer clients accounted for greater than 10%
of net revenues, other than (i) Buena Vista Home Video and S.C. Johnson which
accounted for approximately 16.9%25.6% and 10.7% of net revenues, respectively, for the quarter
ended September 30, 1996; (ii)March 31, 1997, and S.C. Johnson Wax, which accounted for approximately 11.5%13.2% of net
revenues for the nine month period ended September 30, 1996, and 10.6% for the quarter ended September 30, 1995; and (iii) Thrifty Payless, Inc. which accounted for
approximately 15.0% and 14.4% for the quarter and for the nine month period
ended September 30, 1995, respectively.March 31, 1996. The Company's contracts with
its clients rangehave terms ranging from one to five years. PIA believes that the
uncollectibility of amounts due from any of its large clients, the loss of
one or more of such clients, a significant reduction in business from such
clients, or the inability to attract new clients, couldwould have a material
adverse effect on the Company's results of operations.
IncreaseCOMPETITION
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, and food brokers. These
competitors tend to compete with the Company primarily in Services Required Under Fixed Price Contractsthe 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, Pimms and Alpha One. These companies
compete with PIA principally in the mass merchandiser, chain drug and deep
discount drug retail channels.
The Company believes that the principal competitive factors within its
industry include quality of service, cost and the ability to execute specific
client priorities rapidly and consistently over a wide geography. If any of
the Company's major competitors were to seek to gain or retain market share
by reducing its prices, the Company could experience downward pressure on the
prices that it charges for certain elements of its services. The Company has
been forced periodically to adjust its prices to retain certain business.
There can be no assurance that these competitors will not reduce their
prices, or that in the future the Company will not face greater competition
from other national or regional merchandising companies or food brokers.
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INCREASE IN SERVICES REQUIRED UNDER FIXED PRICE CONTRACTS
Manufacturers who sell their products through retail grocery stores generally
are required by the retailer to provide labor support inside these stores for
a variety of purposes, including new store sets and existing store resets,
remerchandisings, remodels and category implementations. The Company has
historically contracted with its manufacturer clients to provide these
services, among others, for a monthly flat fee or, in some cases, for a
commission. Substantially all of the Company's current contracts provide for
one of these two types of arrangements. As requests for retailer-mandated
services and new product introductions by manufacturers have increased over
the past several years, the Company's labor expense has increased without any
related increase in its revenue. Consequently, the Company has reevaluated
its approach to contracting with its clients, and is currently engaged in an
effort to revisehas revised certain of its
existing contracts upon their renewal to implement provisions that charge for
retailer-mandated services separately from traditional merchandising and
shelf maintenance tasks. In addition, the
Company has recently developed a new, standard contract that provides this
activity-based approach to pricing for the Company's more recent customers.
The Company has recently renewed its contracts with two of its major
manufacturer clients using activity-based pricing, and is currently in the
process of renegotiating contracts upon their annual renewal with certain of
its other major clients. However, noNo assurance can be given that PIAthe Company will be
successful in renewing its otherthe remaining contracts on this basis.
If PIA is not
successful in so renegotiating its major contracts, its margins could be
adversely affected.
Uncertainty of Commission IncomeUNCERTAINTY OF COMMISSION INCOME
Approximately 15.3% and 18.4%15.0% of the Company's net revenues for the quarter and nine month period ended September 30, 1996, respectively,March
31, 1997 was 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. Some of these contracts also provide for a guaranteed
minimum compensation to the Company. CommissionsCommission paid to PIA
under these contracts have had a significant effect on the Company's
profitability in certain quarters. 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. In
addition, the amount of commissions earned by the Company under these
contracts varies seasonally, and generally corresponds to the peak selling
seasons of the clients whothat have entered into these types of contracts.
Historically, the Company has recognized greater commission income in its
first and fourth quarters due to the timing of such clients' sales.
DEPENDENCE ON SENIOR MANAGEMENT
The Company is dependent upon the services of its officers and the key
management personnel involved in its field organization. The loss of the
services of one or more of these individuals could have a material adverse
effect on the Company. The Company carries term life insurance on Clinton E.
Owens, the Company's Chairman and Chief Executive Officer.
12
PIA Merchandising Services, Inc.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K.
(27) Financial Data SchedulesSchedule
The Company did not file any reports on Form 8-K during the
three months ended September 30, 1996.March 31, 1997.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIA MERCHANDISING SERVICES, INC.
(Registrant)
By: /s/ Clinton E. Owens
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Clinton E. Owens
Chairman of the Board and
Chief Executive Officer
By: /s/ Roy L. Olofson
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Roy L. Olofson
Executive Vice President and
Chief Financial Officer
Dated: NovemberMay , 1997
14
1996