1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the third quarterly period ended September 30, 1997.
PIA MERCHANDISING SERVICES, INC.
19900 MacArthur Blvd., Suite 900, Irvine, CA 92612
Registrant's telephone number: (714) 476-2200
Commission file number 0-27824
I.R.S. Employer Identification No.: 33-0684451
State of Incorporation: Delaware
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 ] Yes
On October 31, 1997, there were 5,392,558 shares of Common Stock outstanding.
2
PIA Merchandising Services, Inc.
Index
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance
Sheets as of September 30, 1997 (Unaudited)
and December 31, 1996..........................................3
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30,
1997 and 1996 (Unaudited)......................................4
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30,
1997 and 1996 (Unaudited)......................................5
Notes to Condensed Consolidated Financial
Statements (Unaudited).........................................6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................8
Risk Factors.........................................................15
PART II: OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds............................17
Item 6: Exhibits and Reports on Form 8-K.....................................18
SIGNATURES.......................................................................19
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PART 1: FINANCIAL INFORMATION
Item 1: Financial Statements
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(IN THOUSANDS)
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,827 $ 19,519
Accounts receivable, net of allowance for doubtful accounts
of $1,277 and $583 for 1997 and 1996, respectively,
and sales allowance of $711 in 1997 16,971 22,630
Income taxes receivable 4,398 --
Prepaid expenses and other current assets 871 564
Deferred income taxes 669 669
------------ ------------
TOTAL CURRENT ASSETS 36,736 43,382
------------ ------------
PROPERTY AND EQUIPMENT, NET (NOTE 2) 2,456 3,705
------------ ------------
INVESTMENTS & OTHER ASSETS:
Investment in affiliate 399 322
Capitalized software development costs (note 2) -- 129
Other assets 815 134
------------ ------------
TOTAL OTHER ASSETS 1,214 585
------------ ------------
TOTAL ASSETS $ 40,406 $ 47,672
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,696 $ 772
Other current liabilities 12,355 9,762
Income taxes payable -- 111
------------ ------------
TOTAL CURRENT LIABILITIES 14,051 10,645
------------ ------------
LONG TERM LIABILITIES 1,145 309
------------ ------------
TOTAL LIABILITIES 15,196 10,954
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock & additional paid-in-capital 33,487 33,425
Less: Treasury stock (3,004) --
Retained earnings (accumulated deficit) (5,273) 3,293
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 25,210 36,718
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 40,406 $ 47,672
============ ============
See accompanying notes
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PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net Revenues $ 33,995 $ 33,589 $ 94,994 $ 86,703
------------ ------------ ------------ ------------
Operating Expenses:
Field service costs 31,534 26,483 87,541 68,591
Selling expenses 2,867 2,885 7,928 8,508
General and administrative expenses 2,389 2,140 7,074 5,733
Restructure and other non-recurring charges 5,420 -- 5,420 --
Depreciation and amortization 263 154 722 453
------------ ------------ ------------ ------------
Total operating expenses 42,473 31,662 108,685 83,285
------------ ------------ ------------ ------------
Operating Income (Loss) (8,478) 1,927 (13,691) 3,418
Other Income:
Interest income, net 188 261 638 590
Equity in earnings of affiliate 25 -- 77 --
Foreign currency transaction loss (1) -- (2) --
------------ ------------ ------------ ------------
Total other income 212 261 713 590
------------ ------------ ------------ ------------
Income (Loss) Before Benefit (Provision)
For Income Taxes (8,266) 2,188 (12,978) 4,008
Benefit (Provision) For Income Taxes 2,811 (851) 4,413 (1,568)
------------ ------------ ------------ ------------
Net Income (Loss) $ (5,455) $ 1,337 $ (8,565) $ 2,440
============ ============ ============ ============
Net Income (Loss) Per Common And
Common Equivalent Share $ (1.01) $ 0.21 $ (1.53) $ 0.41
============ ============ ============ ============
Weighted Average Common And
Common Equivalent Shares 5,393 6,251 5,605 5,972
See accompanying notes
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PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
(UNAUDITED) (IN THOUSANDS)
For the Nine Months Ended
September 30,
-------------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (8,565) $ 2,440
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 722 453
Provision for doubtful receivables, net 694 135
Equity in net earnings of affiliated companies 77 --
Restructuring and non-recurring charges 5,420 --
Changes in operating assets and liabilities:
Accounts receivable 4,965 (8,605)
Prepaid expenses and other (5,418) (6)
Accounts payable and other liabilities 118 1,278
Income taxes payable (111) (227)
------------ ------------
Net cash used in operating activities (2,098) (4,532)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (358) (282)
Capitalization of software development costs (note 3) (294) (693)
------------ ------------
Net cash used in investing activities (652) (975)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of treasury stock (3,004) --
Repayments of long term debt -- (3,400)
Proceeds from issuance of common stock, net 62 26,587
------------ ------------
Net cash provided by (used in) financing activities (2,942) 23,187
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,692) 17,680
CASH AND CASH EQUIVALENTS,
Beginning of period 19,519 185
------------ ------------
End of period $ 13,827 $ 17,865
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 104 $ 1,820
============ ============
See accompanying notes
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PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
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, 1996, included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996. The results of operations for
the interim periods are not necessarily indicative of the operating
results for the year.
Certain amounts have been reclassified in the prior year's consolidated
financial statements in order to conform with the current year's
presentation.
2. Restructure and Other Non-Recurring Charges
-------------------------------------------
During the first nine months of 1997, the Company experienced declining
gross margins, and resultant operating losses, due to service
performance issues and the loss of several principal 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 charge for
restructure and non-recurring charges. This $5,420 charge includes
$3,285 for restructure charges and $2,135 for non-recurring charges. The
restructure charges consist of $1,264 of identified headcount
reductions and implementation costs in various management and
administrative functions and $2,021 in write-downs and accruals
associated with the redirection of the Company's technology strategies
(see Note 3). Other non-recurring charges consist primarily of $1,297 of
reserves and write-offs related to unprofitable contracts and $555 of
costs associated with changes in the Company's service delivery model.
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PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
3. Property and Equipment
----------------------
As of the year ended December 31, 1996, the Company had capitalized
certain software development costs per accounting policy. These costs
have been reclassified from Other Assets, as previously reported, to
Property and Equipment. As part of the restructuring described in Note
2., the Company has redirected its strategy for deployment of
technology, which has resulted in an impairment of its capitalized
software development costs of approximately $1.0 million. The amounts in
Property and Equipment consist of:
September 30, December 31,
1997 1996
------- -------
Equipment $ 3,483 $ 3,343
Furniture and fixtures 646 641
Leasehold improvements 138 118
Capitalized software development costs 902 1,858
------- -------
5,169 5,960
Less: Accumulated depreciation and amortization (2,713) (2,255)
------- -------
$ 2,456 $ 3,705
======= =======
4. Recent Accounting Pronouncements
--------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." Under SFAS 128, the Company will be required to disclose
basic earnings per share and diluted earnings per share for all periods
for which an income statement is presented, which will replace
disclosure currently being made for primary earnings per share and fully
diluted earnings per share. SFAS 128 requires adoption for fiscal
periods ending after December 15, 1997. The impact on the Company's
primary or fully diluted earnings per share for the quarter and nine
months ended September 30, 1997 and 1996 is immaterial.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company
has not yet determined the impact, if any, of adopting these standards.
SFAS 130 and SFAS 131 are effective for fiscal years beginning after
December 15, 1997.
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
- --------
PIA Merchandising Services, Inc. (the "Company" or "PIA") provides merchandising
services to manufacturers and retailers principally in grocery, mass
merchandiser and chain and deep discount drug stores. For the quarter and nine
months ended September 30, 1997, the Company generated approximately 64.2% and
77.5% of its net revenues from manufacturer clients and 35.8% and 22.5% from
retailer clients, respectively.
The Company's profitability has continued to be adversely affected by the loss
of principal clients (for which PIA provides syndicated and project-type
services) during the last half of 1996 and first part of 1997. The Company's
principal client business has historically required a significant fixed
management and personnel infrastructure to manage and execute service and
project contracts. Due in part to performance issues, industry consolidation and
increased competition, the Company lost a number of principal clients in the
last half of 1996 and the first part of 1997, causing a decrease in the
profitability of that service type in the last two quarters of the year and the
first nine months of 1997. PIA has not engaged any sizable new principal clients
for on-going services to offset this loss. The Company believes that revenues in
1997 from principal clients will continue to decline as a result of the
wind-down of the lost business.
The Company has increased significantly its dedicated client service business
with two major customers. However, this business is at a lower profit margin
than the service historically provided for principal, or syndicated, clients.
Due to the change in business mix, and resulting impact on margin, and failure
to act quickly enough to align the cost structure with the changing mix of
business, in the third quarter of 1997 the Company recognized a charge for
restructuring and other non-recurring costs associated with the realignment of
the management structure servicing principal clients.
The Company continues to experience an increase in the demand for dedicated
client services. The net revenues associated with dedicated clients increased,
as a percentage of overall net revenues, from 24% in the third quarter of 1996
to 31% in the third quarter of 1997, and from 15% in the first nine months of
1996 to 32% in the first nine months of 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.
PIA's quarterly results of operations are subject to certain variability related
to the timing of retailer-mandated activity and the receipt of 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.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The amount of commissions earned by PIA under its commission-based contracts,
typically averaging 14% to 17% of total net revenues, 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."
RESULTS OF OPERATIONS
- ---------------------
NET REVENUES
- ------------
Net revenues for the quarter and nine month period ended September 30, 1997
increased from the comparable period of 1996 due primarily to increases in
services provided for dedicated clients, offset partially by a decrease in net
revenues from principal clients (for syndicated and project services). For the
third quarter of 1997, net revenues were $34.0 million, compared to $33.6
million in the third quarter of 1996, a 1% increase. For the year to date period
of 1997, net revenues were $95.0 million, compared to $86.7 million in the same
period last year, a 10% increase. The Company's dedicated client net revenues
have grown from $8.0 million in the third quarter of 1996 to $10.7 million in
the third quarter of 1997, a 34% increase, and from $12.8 million in the first
nine months of 1996 to $30.2 million in the first nine months of 1997, a 136%
increase. This increase in dedicated client net revenues resulted from 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, as the
net revenues from these two new clients continue to grow at a faster rate than
syndicated and project net revenues from principal clients.
The following table sets forth net revenues by client type as a percentage of
net revenues for the periods indicated:
Quarter Ended September 30,
------------------------------------------------
1997 1996
(in millions) ----------------- ----------------- Change
Amount % Amount % %
------- ------- ------- ------- ------
Principal Client Net Revenues $ 23.3 68.5% $ 25.6 76.2% (9.0%)
Dedicated Client Net Revenues 10.7 31.5% 8.0 23.8% 33.8%
------- ------- ------- ------- ------
Total Net Revenues $ 34.0 100.0% $ 33.6 100.0% 1.2%
======= ======= ======= ======= ======
Nine Months Ended September 30,
------------------------------------------------
1997 1996
----------------- ----------------- Change
Amount % Amount % %
------- ------- ------- ------- ------
Principal Client Net Revenues $ 64.8 68.2% $ 73.9 85.2% (12.3%)
Dedicated Client Net Revenues 30.2 31.8% 12.8 14.8% 135.9%
------- ------- ------- ------- ------
Total Net Revenues $ 95.0 100.0% $ 86.7 100.0% 9.6%
======= ======= ======= ======= ======
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The slight increase in net revenues for the third quarter of 1997 compared to
1996 resulted from an increase in revenue from new clients, primarily dedicated
clients, of $12.9 million, offset by a decrease in revenue from existing
principal clients of $3.3 million and a decrease in revenue of $9.2 million from
clients no longer with the Company. For the nine months ended September 30,
1997, the increase in net revenues, as compared to the comparable period of last
year, resulted from an increase in revenue from new clients, primarily dedicated
clients, of $10.2 million and an increase in revenue from existing, primarily
dedicated, clients of $21.6 million, offset partially by a decrease in revenue
of $23.5 million from clients no longer with the Company.
OPERATING EXPENSES
- ------------------
The following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
Quarter Ended September 30,
------------------------------------------------
1997 1996
(in millions) ----------------- ----------------- Change
Amount % Amount % %
------- ------- ------- ------- ------
Field Service Costs $ 31.5 92.6% $ 26.5 78.9% 18.9%
Selling Expenses 2.9 8.5% 2.9 8.6% 0.0%
General & Administrative Expenses 2.4 7.1% 2.1 6.3% 14.3%
Restructure & Non-Recurring Charges 5.4 15.9% -- 0.0% N/A
Depreciation & Amortization 0.3 0.9% 0.2 0.6% 50.0%
------- ------- ------- ------- ------
Total Operating Expenses $ 42.5 125.0% $ 31.7 94.3% 34.1%
======= ======= ======= ======= ======
Nine Months Ended September 30,
------------------------------------------------
1997 1996
----------------- ----------------- Change
Amount % Amount % %
------- ------- ------- ------- ------
Field Service Costs $ 87.6 92.2% $ 68.6 79.1% 27.7%
Selling Expenses 7.9 8.3% 8.5 9.8% (7.1%)
General & Administrative Expenses 7.1 7.5% 5.7 6.6% 24.6%
Restructure & Non-Recurring Charges 5.4 5.7% -- 0.0% N/A
Depreciation & Amortization 0.7 0.7% 0.5 0.6% 40.0%
------- ------- ------- ------- ------
Total Operating Expenses $ 108.7 114.4% $ 83.3 96.1% 30.5%
======= ======= ======= ======= ======
For the third quarter of 1997, field service costs increased $5.0 million, or
19%, to $31.5 million, as compared to $26.5 million in the third quarter of
1996. For the nine month period ended September 30, 1997, field service costs
increased $19.0 million, or 28%, to $87.6 million, as compared to $68.6 million
in the comparable period of 1996. Field service costs are comprised
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
principally of field labor and related costs and expenses required to provide
services to both principal and dedicated clients and related technology costs.
In addition, included are overhead costs incurred to support the activities of
these groups of employees. The increase in field service costs is due primarily
to costs required to provide the management and supervision necessary to support
the increased business level of dedicated clients. As a percentage of net
revenues, field service costs in the third quarter and nine month period
increased to 93% and 92%, respectively, in 1997 from 79% for both periods in
1996 due to the negative leverage caused by the loss of principal client
business and the impact of increased dedicated client service business mentioned
above.
Selling expenses remained the same amount, $2.9 million, in the third quarter of
1997, compared to the same period last year. For the nine month period ended
September 30, 1997, selling expenses decreased $0.6 million, or 7%, to $7.9
million compared to $8.5 million in the same period last year. As a percentage
of net revenues, selling expenses remained at 9% in the third quarter of 1997,
compared to the third quarter of 1996. For the nine month period ended September
30, 1997, selling expenses decreased to 8% from 10% in the same period of 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.
General and administrative expenses increased 14% in the third quarter of 1997
to $2.4 million, compared to $2.1 million in the same period of 1996. For the
nine month period ended September 30, 1997, general and administrative expenses
increased 25%, from $5.7 million in 1996 to $7.1 million this year. The increase
in general and administrative costs were due primarily to increased staffing in
recruitment and training and management information systems that were required
to support overall business growth, including the increased dedicated client
base. In addition, increased costs were experienced due to higher provisions for
uncollectible accounts and termination costs, as well as salary increases in the
ordinary course of business.
In the quarter ended September 30, 1997, the Company undertook a restructuring
of its operations, focusing on a more disciplined and functional operational
structure, and redirecting its technology strategies. This resulted in a $5.4
million charge for restructure and non-recurring charges, which includes $3.3
million for restructure charges and $2.1 million for non-recurring charges. The
restructure charges consist of $1.3 million of identified headcount reductions
and implementation costs in various management and administrative functions and
$2.0 million in write-downs and accruals associated with the redirection of the
Company's technology strategies (see Note 2). Other non-recurring charges
consist primarily of $1.3 million of reserves and write-offs related to
unprofitable contracts and $0.6 million of costs associated with changes in the
Company's service delivery model.
Depreciation and amortization expenses increased in 1997 for both the third
quarter and the nine month period ended September 30, 1997, as compared to the
same periods of 1996, as a result of depreciation on computer hardware and
software development costs for shelf technology and for general business
purposes.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
OTHER INCOME
- ------------
Interest income decreased in the third quarter of 1997, as compared to the third
quarter of 1996, due to lower cash balances available for investment in 1997.
The third quarter of 1996 included interest income on the net proceeds from the
Company's initial public offering on March 1, 1996. For the nine month period
ended September 30, 1997, interest income increased as compared to the same
period of 1996 due to the full investment period of nine months in 1997 versus
six months in 1996 after the initial public offering.
Equity in earnings of affiliate represents the Company's share of the earnings
of Ameritel, Inc., a full service telemarketing company. During 1996, the
Company exercised its option to increase its ownership of Ameritel to 20%, and
is now required to recognize its equity interest in Ameritel's earnings.
BENEFIT FROM INCOME TAXES
- -------------------------
Income tax benefit was approximately $2.8 million in the third quarter of 1997
compared to income tax expense of $0.9 million in the third quarter of 1996,
representing an effective rate of 34% and 39%, respectively. Income tax benefit
was approximately $4.4 million for the nine month period ended September 30,
1997, compared to income tax expense of $1.6 million in the comparable period of
1996, representing an effective rate of 34% and 39%, respectively.
NET LOSS
- --------
The Company incurred a net loss of approximately $5.5 million in the third
quarter of 1997, or $1.01 per share, compared to net income of approximately
$1.3 million, or $0.21 per share, in the third quarter of 1996. For the nine
month period ended September 30, 1997, the net loss is $8.6 million, or $1.53
per share, compared to net income of $2.4 million, or $0.41 per share, in the
same period of 1996. The net loss for the third quarter and nine months ended
September 30, 1997 included the net impact, after related tax benefit, of
restructure and other non-recurring charges of $3.6 million, or $0.66 per share
for the third quarter of 1997 and $0.64 per share for the nine month period
ended September 30, 1997. The loss incurred in the current year is primarily a
result of margin reductions due to an increased level of lower margin dedicated
client services, inefficiencies in field labor execution, poor pricing decisions
for some client contracts, higher business unit overhead costs and the
recognition of restructure charges, other non-recurring charges and additional
reserves.
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13
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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 third
quarter and the nine months ended September 30, 1997. Comparative information
for the same periods last year is not yet available.
Period Ended September 30, 1997
----------------------------------------
Three Months Nine Months
(in millions) ------------------ -----------------
Amount % Amount %
------- ------- ------- ------
Net Revenues $ 34.0 100.0% $95.0 100.0%
Cost of Revenues:
Direct Business Unit Field Expense 26.2 77.1% 71.3 75.1%
------- ------- ------- ------
Gross Margin 7.8 22.9% 23.7 24.9%
Overhead and Allocated Field Expense 6.5 19.1% 19.9 20.9%
------- ------- ------- ------
Business Unit Margin 1.3 3.8% 3.8 4.0%
Selling, General & Administrative Expenses 3.5 10.3% 10.8 11.4%
------- ------- ------- ------
Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) $ (2.2) (6.5%) $ (7.0) (7.4%)
======= ======= ======= ======
Management expects to continue to review the business results on the basis of
the comparable financial statement format contained in this Form 10-Q until such
time as comparisons can be made utilizing the new financial model.
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. During the nine
month period ended September 30, 1997, the Company had a net decrease in cash
balances of $5.7 million, resulting from its operating losses and Common Stock
repurchase program, offset partially by a reduction in accounts receivable of
$5.0 million.
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
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14
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
proceeds from the initial public offering. As of July 14, 1997, the Company
repurchased an aggregate of 507,000 shares of Common Stock for an aggregate
price of approximately $3.0 million. No further repurchases are currently
planned.
Cash and cash equivalents totaled $13.8 million at September 30, 1997, compared
with $19.5 million at December 31, 1996. At September 30, 1997 and December 31,
1996, the Company had working capital of $22.7 million and $32.7 million,
respectively, and current ratios of 2.6 and 4.1, respectively.
Net cash used for operating activities for the nine months ended September 30,
1997 was $2.1 million, compared to cash used for operating activities of $4.5
million for the comparable period in 1996. This use of cash for operating
activities in 1997 resulted primarily from net operating losses, offset
partially by a decrease in accounts receivable of $5.0 million. This decrease in
accounts receivable was due primarily to payments received from a major
dedicated service client, reducing the amounts outstanding in December 1996. Net
cash used by investing activities for the nine months ended September 30, 1997
was $0.7 million, compared to net cash used for investing activities of $1.0
million for the comparable period in 1996. Net cash used for financing
activities for the nine months ended September 30, 1997 was $2.9 million,
compared to cash generated of $23.2 million for the same period in 1996. In
1997, the Company repurchased 507,000 shares of its Common Stock for
approximately $3.0 million. In 1996, the Company received net proceeds from the
issuance of Common Stock of $26.6 million and repaid long-term debt of $3.4
million.
The above activity resulted in a decrease in cash and cash equivalents of $5.7
million for the nine months ended September 30, 1997.
The Company's current liquidity is provided by cash and cash equivalents and the
timely collection of its receivables. The Company currently has no committed
credit facility available for working capital needs. Management believes that
cash and cash equivalents and the timely collection of its receivables will be
sufficient to provide for on-going working capital needs and generally fund the
on-going operations of the business.
FORWARD-LOOKING STATEMENTS
- --------------------------
This quarterly report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. In addition, the Company may from time to time make oral
forward-looking statements. Actual results are uncertain and may be impacted by
various factors. In particular, certain risks and uncertainties that may impact
the accuracy of the forward-looking statements include the Company's history of
losses, loss of business, concentrated client base and uncertainty of commission
income. As a result, the actual results may differ materially from those
projected in the forward-looking statements.
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RISK FACTORS
It is recommended that this Form 10-Q be read in conjunction with the Company's
1996 Annual Report on Form 10-K. The following risk factors should also be
carefully reviewed in addition to the other information contained in this
Form 10-Q.
HISTORY 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 service 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 $8.6 million for the
first nine months 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.
LOSS OF BUSINESS
PIA's business mix has changed during 1996 and the first nine months of 1997.
This change is due in part to performance issues, industry consolidation and
increased competition. The Company has lost a substantial amount of principal
client business over the last 18 months, and new revenue added has been at lower
margins than the margins of the lost business. The Company has not engaged any
sizable new principal clients for on-going services to offset this loss. The
Company has historically required a significant fixed management and personnel
infrastructure. Accordingly, the loss of principal client business, without
offsetting gains, has a material adverse effect on the Company's results of
operations.
INDUSTRY CONSOLIDATION; CONCENTRATED CLIENT BASE
The retail and manufacturing industries are undergoing a consolidation process
that is resulting in fewer larger retailers and suppliers. 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 74% and 61% of the Company's net revenues for
the quarter ended September 30, 1997 and 1996, respectively. For the nine month
periods ended September 30, 1997 and 1996, respectively, the Company's ten
largest clients generated approximately 71% and 58% of the Company's net
revenues. During the third quarter, none of the Company's manufacturer or
retailer clients accounted for greater than 10% of net revenues, other than
Eckerd Drug Company and Buena Vista Home Video, which accounted for 22% and 14%
of net revenues, respectively. For the nine months ended September 30, 1997,
only Buena Vista Home Video, Eckerd Drug Company and S. C. Johnson accounted for
greater than 10% of net revenues, with 19%, 13% and 11%, respectively. The
Company's contracts with its clients have terms ranging from one to five years.
PIA believes that the uncollectibility of amounts due
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from any of its large clients would have a material adverse effect on the
Company's results of operations.
UNCERTAINTY OF COMMISSION INCOME
Approximately 13% and 14% of the Company's net revenues for the quarter and nine
months ended September 30, 1997, respectively, 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.
Commissions paid to PIA under these contracts have had a significant effect on
the Company's profitability in certain quarters. Under 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. The Company has
historically experienced consistent positive commission reconciliation income.
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 who 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.
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PART II: OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities and Use of Proceeds
Use of Proceeds - The company received $26.5 million in net
proceeds from the initial public offering in March 1996. The
Company, as originally outlined in "Use of Proceeds" in its
prospectus, has used approximately $10.0 million through the
period ended September 1997 for debt repayment, capital spending
and working capital requirements. In addition, $3.0 million has
been used to repurchase the Company's Common Stock.
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
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Item 6. Exhibits and Reports on Form 8-K
(A) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Certificate of Incorporation of the Company (incorporated herein
by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, No. 33-80429).
3.2 By-laws of the Company (incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1,
No. 33-80429).
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 herein by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-1, No. 33-80429).
10.1 1990 Stock Option Plan (incorporated herein by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-1,
No. 33-80429).
10.2 1995 Stock Option Plan (incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1,
No. 33-80429).
10.3 1995 Stock Option Plan for Nonemployee Directors (incorporated
herein by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1, No. 33-80429).
10.4 Employment Agreement dated as of June 25, 1997 between the
Company and Terry R. Peets (incorporated herein by reference to
Exhibit 10.5 to the Company's Form 10-Q for the 2nd Quarter ended
June 30, 1997).
27.1 Financial Data Schedule.
(B) REPORTS ON FORM 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIA MERCHANDISING SERVICES, INC.
(Registrant)
By: /s/ Cathy L. Wood
------------------------------
Cathy L. Wood
Executive Vice President and
Chief Financial Officer
By: /s/ Stephen R. Christie
------------------------------
Stephen R. Christie
Vice President
Corporate Controller
Dated: November 13, 1997
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Certificate of Incorporation of the Company (incorporated herein
by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, No. 33-80429).
3.2 By-laws of the Company (incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1,
No. 33-80429).
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 herein by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-1, No. 33-80429).
10.1 1990 Stock Option Plan (incorporated herein by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-1,
No. 33-80429).
10.2 1995 Stock Option Plan (incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1,
No. 33-80429).
10.3 1995 Stock Option Plan for Nonemployee Directors (incorporated
herein by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1, No. 33-80429).
10.4 Employment Agreement dated as of June 25, 1997 between the
Company and Terry R. Peets (incorporated herein by reference to
Exhibit 10.5 to the Company's Form 10-Q for the 2nd Quarter ended
June 30, 1997).
27.1 Financial Data Schedule.
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