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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 second quarterly period ended July 2, 1999
Commission file number: 0-27824
SPAR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
State of Incorporation IRS Employer 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: (949) 476-2200
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 July 30, 1999 there were 18,153,270 shares of Common Stock
outstanding.
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PIA Merchandising Services, Inc.
Index
PART I: FINANCIAL INFORMATION
THIS FORM 10-Q IS THAT OF PIA MERCHANDISING SERVICES, INC.
(PIA) FOR THE SECOND QUARTER ENDED JULY 2, 1999 AND PRECEDES
THE MERGER BETWEEN SPAR GROUP (SPAR) AND PIA WHICH OCCURRED
ON JULY 8, 1999. THESE FINANCIAL STATEMENTS DO NOT INCLUDE
THE EFFECTS OF THE MERGER OF SPAR AND PIA.
Item 1: Financial Statements
Condensed Consolidated Balance Sheets
As of January 1, 1999 and July 2, 1999............................3
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended
July 3, 1998 and July 2, 1999.....................................4
Condensed Consolidated Statements of Cash Flows
Six Months Ended July 3, 1998 and
July 2, 1999 .....................................................5
Notes to Condensed Consolidated Financial
Statements........................................................6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................9
Risk Factors.....................................................19
Item 3: Quantitative and Qualitative Disclosures About Market Risk.......22
PART II: OTHER INFORMATION
Item 1: Legal Proceedings................................................24
Item 2: Changes in Securities and Use of Proceeds........................24
Item 4: Submission of Matters to a Vote of Security Holders..............24
Item 6: Exhibits and Reports on Form 8-K.................................26
SIGNATURES................................................................28
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PIA MERCHANDISING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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(UNAUDITED) (IN THOUSANDS)
January 1, July 2,
1999 1999
---------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 11,064 $ 3,611
Accounts receivable, net of allowance for
doubtful accounts and other of $821 and $450
for January 1 and July 2,1999, respectively 11,222 11,964
Income tax refund receivable 81 75
Prepaid expenses and other current assets 712 361
-------- --------
Total current assets 23,079 16,011
Property and Equipment, net (note 2) 1,991 1,514
-------- --------
Investments and Other Assets:
Investment in affiliate 553 627
Other assets 431 313
-------- --------
Total investments and other assets 984 940
-------- --------
TOTAL ASSETS $ 26,054 $ 18,465
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,194 $ 864
Income tax payable 90 39
Other current liabilities 7,951 8,545
-------- --------
Total current liabilities 9,235 9,448
Line of Credit & Long-Term Liabilities (note 3) 2,095 82
-------- --------
Total liabilities 11,330 9,530
-------- --------
Stockholders' Equity:
Common stock and additional paid-in-capital 33,800 30,810
Accumulated deficit (16,072) (21,875)
Less treasury stock at cost (3,004) --
-------- --------
Total stockholders' equity 14,724 8,935
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,054 $ 18,465
======== ========
See accompanying notes.
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PIA MERCHANDISING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
--------------------- ---------------------
July 3, July 2, July 3, July 2,
1998 1999 1998 1999
-------- -------- -------- --------
NET REVENUES $ 33,945 $ 21,165 $ 68,684 $ 42,791
-------- -------- -------- --------
Operating Expenses:
Field service costs 28,255 19,573 58,044 39,642
Selling expenses 2,087 1,160 4,366 2,715
General and administrative expenses 3,408 2,728 6,956 5,838
Depreciation and amortization 275 272 557 554
-------- -------- -------- --------
Total operating expenses 34,025 23,733 69,923 48,749
-------- -------- -------- --------
Operating Loss (80) (2,568) (1,239) (5,958)
Other income, net 168 105 316 195
-------- -------- -------- --------
Income (Loss) Before Provision
For Income Taxes 88 (2,463) (923) (5,763)
Provision for Income Taxes (12) (25) (24) (40)
-------- -------- -------- --------
NET INCOME (LOSS) $ 76 $ (2,488) $ (947) $ (5,803)
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.45) $ (0.18) $ (1.06)
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.45) $ (0.18) $ (1.06)
======== ======== ======== ========
BASIC WEIGHTED AVERAGE
COMMON SHARES 5,427 5,481 5,410 5,479
======== ======== ======== ========
DILUTED WEIGHTED AVERAGE
COMMON SHARES 5,557 5,481 5,410 5,479
======== ======== ======== ========
See accompanying notes.
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PIA MERCHANDISING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED) (IN THOUSANDS)
Six Months Ended
---------------------
July 3, July 2,
1998 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (947) $ (5,803)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 557 554
Provision for doubtful accounts & other, net 512 (87)
Equity in earnings of affiliate (77) (80)
Changes in operating assets and liabilities:
Accounts receivable (1,432) (655)
Income tax refund receivable 2,801 6
Prepaid expenses and other 120 469
Accounts payable and other liabilities (4,811) 200
-------- --------
Net cash used in operating activities (3,277) (5,396)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (263) (71)
-------- --------
Net cash used in investing activities (263) (71)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Line of Credit -- (2,000)
Proceeds from issuance of common stock, net 92 14
-------- --------
Net cash provided (used in) by financing activities 92 (1,986)
NET DECREASE IN CASH AND
CASH EQUIVALENTS (3,448) (7,453)
CASH AND CASH EQUIVALENTS:
Beginning of period 12,987 11,064
-------- --------
End of period $ 9,539 $ 3,611
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for income taxes $ 20 $ 100
======== ========
Cash paid for interest $ -- $ 78
======== ========
Common stock issued as payment for accrued incentive $ 168 $ --
======== ========
See accompanying notes.
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PIA MERCHANDISING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation(1)
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 January 1, 1999, included in the Company's Annual Report on
Form 10-K/A for the year ended January 1, 1999. 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 years' consolidated
financial statements in order to conform to the current year's
presentation.
Comprehensive Income - The Company has adopted SFAS No. 130, Reporting
Comprehensive Income. For the quarter and six months ended July 3, 1998
and July 2, 1999, the Company has no reported differences between net
income (loss) and comprehensive income (loss). Therefore, statements of
comprehensive income (loss) have not been presented.
2. Property and Equipment
Property and equipment consist of the following (in thousands):
January 1, July 2,
1999 1999
---------- -------
Equipment $ 3,873 $ 3,934
Furniture and fixtures 719 720
Leasehold improvements 165 174
Capitalized software development costs 1,076 1,076
------- -------
5,833 5,904
Less: Accumulated depreciation
and amortization (3,842) (4,390)
------- -------
$ 1,991 $ 1,514
======= =======
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(1) This Form 10-Q is that of PIA Merchandising Services, Inc. (PIA) for
the second quarter ended July 2, 1999 and precedes the merger between
SPAR Group (SPAR) and PIA which occurred on July 8, 1999. These
financial statements do not include the effects of the merger of SPAR
and PIA.
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PIA MERCHANDISING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Line of Credit
On December 10, 1998, the Company entered into a long-term revolving
line of credit agreement with 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%
(8.00% at July 2, 1999, or 8.25%), or the three month London Interbank
Offered Rate ("LIBOR") plus 2.75% (5.31% at July 2, 1999, or 8.06%) at
the Company's option. As of July 2, 1999, all outstanding balances on
the line of credit were paid. 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
July 2, 1999, the Company did not comply with the total liabilities to
tangible net worth ratio, the tangible net worth and working capital
covenants and a forbearance to the agreement was granted by the bank.
The Company anticipates that it will not be in compliance with future
covenants and that bank forbearances will be requested. As of July 2,
1999, the line of credit had available borrowings of $2,000,000.
4. 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).
Dedicated services generally consist of regularly scheduled, routed
merchandising services performed for a specific retailer or
manufacturer by a dedicated organization. The merchandisers and
management team work exclusively for that retailer or manufacturer.
These services are normally provided under multi-year contracts.
Shared services consist of regularly scheduled, routed merchandising
services provided at the stores for multiple manufacturers, primarily
under multi-year contracts. Shared services may include activities 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
selling new product and promotional items.
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PIA MERCHANDISING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Project services consist primarily of specific in-store services
initiated by retailers and manufacturers, such as new product launches,
special seasonal or promotional merchandising, focused product support
and product recalls. These services are used typically for large-scale
implementations over 30 days. The Company also performs other project
services, such as new store sets and existing store resets,
re-merchandising, remodels and category implementations, under shared
service contracts or stand-alone project contracts.
The Company is unable to allocate operating expenses to these segments,
nor can it allocate specific assets to these segments. The current
financial and operating systems are unable to capture information by
these segments. Therefore, segment information includes only net
revenues (in thousands) as follows:
Business Segments
----------------------------------------------
Dedicated Shared Service Projects Total
--------- -------------- -------- -----
Second Quarter 1999
Net revenues $ 7,406 $ 6,936 $ 6,823 $21,165
======= ======= ======= =======
Second Quarter 1998
Net revenues $12,405 $ 9,616 $11,924 $33,945
======= ======= ======= =======
Six Months 1999
Net revenues $13,167 $15,220 $14,404 $42,791
======= ======= ======= =======
Six Months 1998
Net revenues $22,697 $21,633 $24,354 $68,684
======= ======= ======= =======
During the quarters ended July 3, 1998 and July 2, 1999, sales to two
major customers totaled $11.7 million and $8.6 million, respectively.
5. Merger Agreement
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 shares of PIA stock to the shareholders
of the SPAR Group. On July 8, 1999, the Company and SPAR Group, Inc.
completed the transaction and received shareholder and regulatory
approval. In connection with the merger, the Company amended its
Certificate of Incorporation to, among other things, change its name to
SPAR Group, Inc. Shares of the Company's common stock are listed on the
Nasdaq national Market and traded under the Nasdaq symbol "SGRP".
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act including, in particular, the statements about PIA's plans and strategies
under the headings "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Although PIA believes that its plans, intentions and
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 to differ materially
from the forward-looking statements made in this Quarterly Report on Form 10-Q
are set forth under the heading "Risk Factors" and elsewhere in this Quarterly
Report on Form 10-Q. All forward-looking statements attributable to PIA or
persons acting on its behalf are expressly qualified by the cautionary
statements contained in this Quarterly Report on Form 10-Q.
OVERVIEW
THIS FORM 10-Q IS THAT OF PIA MERCHANDISING SERVICES, INC. (PIA) FOR
THE SECOND QUARTER ENDED JULY 2, 1999 AND PRECEDES THE MERGER BETWEEN
SPAR GROUP (SPAR) AND PIA WHICH OCCURRED ON JULY 8, 1999. THESE
FINANCIAL STATEMENTS DO NOT INCLUDE THE EFFECTS OF THE MERGER OF SPAR
AND PIA.
PIA Merchandising Services, Inc., which changed its name to SPAR Group, Inc.
immediately following consummation of the merger on July 8, 1999 (the "Company"
or "PIA") provides merchandising services to manufacturers and retailers
principally in grocery, mass merchandiser, chain, and discount drug stores. For
the quarter ended July 2, 1999, compared to the quarter ended July 3, 1998, the
Company generated approximately 59.5% and 56.2% of its net revenues from
manufacturer clients and 40.5% and 43.8% from retailer clients, respectively.
For the six months ended July 2, 1999, compared to six months ended July 3,
1998, the Company generated approximately 63.4% and 60.4% of its net revenues
from manufacturer clients and 36.6% and 39.6% from retailer clients,
respectively.
The Company's profitability has been adversely affected by the loss of shared
service accounts. The shared service business has historically required a
significant fixed management and personnel infrastructure. Due in part to
performance issues, industry consolidation and increased competition, the
Company lost a number of shared service accounts in the last half of 1996, which
has continued through the first three months of 1999.
During 1998, the Company restructured its operations to address the significant
fixed management infrastructure and rationalize the field organization. The
restructuring resulted in a field organization that is aligned along functional
lines of selling and execution. In addition, new scheduled deployment, labor
tracking, and work generation systems now in place will continue to have a
beneficial impact on managing the direct labor costs.
In the first six months of 1999, the Company's current fixed cost structure
continued to be disproportionate to the current level of revenues and will
require rationalization of both the fixed management and field organization
structure. PIA believes that it's recent merger with the SPAR Group specifically
addresses this issue by creating a more flexible and systems driven organization
that the Company believes will reduce fixed costs and create synergies directly
improving the Company's profitability.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
The Company has experienced a decrease in the demand for dedicated client
services, and its business has decreased significantly due to the completion of
a major drug chain's dedicated program in the fourth quarter of 1998. The net
revenues associated with dedicated clients decreased, as a percentage of overall
net revenues, from 36.6% in the second quarter of 1998 to 35.0% in the second
quarter of 1999. The net revenues associated with dedicated clients increased,
as a percentage of overall net revenues, from 33.0% in the six months ended July
3, 1998 to 30.8% in the six months ended July 2, 1999. Contracts with these
dedicated clients are expected to continue throughout 1999 and beyond; however,
revenue may not be at historical levels due to the changing mix of projects and
store initiatives and the completion of a major project in the fourth quarter of
1998. The Company, prior to acquiring, currently anticipates that revenue for
the third quarter of 1999 will be lower than the previous two quarters of 1999
and the comparable prior year period, due to the scheduled completion of several
projects, the annualized effect of business lost over the last 18 months and the
impact of the Company's internal focus on restructuring operations and the low
level of new business that has been developed.
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
requires the reset of categories as the new products gain distribution. In the
dedicated services business, PIA provides each manufacturer or retailer client
with an organization, including a management team, which works exclusively for
that client.
The amount of commissions earned by PIA under its commission-based contracts,
typically averaging 13% to 19% 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 second and fourth quarters. See "Risk Factors -
Operating Results May Fluctuate Because Commission Income is Uncertain."
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. This
transaction received regulatory and stockholder approval, and the merger was
consummated, on July 8, 1999. As a result of the merger, PIA issued an aggregate
of 12,659,487 shares of its Common Stock to the stockholders of SPAR Group. SPAR
Group was 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 with annual revenues of approximately $75 million. As a
result of the merger, the former SPAR Group stockholders own approximately 70%
of the Company's Common Stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 2, 1999 COMPARED TO THREE MONTHS ENDED JULY 3, 1998
NET REVENUES
Net revenues for the quarter ended July 2, 1999 decreased from the comparable
period of 1998 due principally to a decrease in all major business segments. For
the second quarter of 1999, net revenues were $21.2 million compared to $33.9
million in the second quarter of 1998, a 37.5% decrease.
The following table sets forth net revenues by client type as a percentage of
net revenues for the periods indicated:
Quarter Ended
---------------------------------------------
July 3, 1998 July 2, 1999
---------------- ---------------- Change
(amounts in millions) Amount % Amount % %
------- ----- ------- ----- ------
Shared service client net revenues $ 9.6 28.3% $ 7.0 33.0% (27.1)%
Project client net revenues 11.9 35.1 6.8 32.1 (42.9)
Dedicated client net revenues 12.4 36.6 7.4 34.9 (40.3)
------- ----- ------- ----- -----
Net Revenue $ 33.9 100.0% $ 21.2 100.0% (37.5)%
======= ===== ======= ===== =====
The Company's dedicated client net revenues have declined from $12.4 million in
the second quarter of 1998 to $7.4 million in the second quarter of 1999, a
40.3% decrease. The decrease in dedicated client net revenues for the second
quarter of 1999 compared to the second quarter of 1998 resulted primarily from
the completion of a major drug chain's dedicated program in the fourth quarter
of 1998. 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.
Shared service client net revenues decreased from $9.6 million in the second
quarter of 1998 to $7.0 million in the second quarter of 1999, a 27.1% decrease
due to the loss of clients in 1998 and in the first six months of 1999. Shared
service client net revenue increased as a percentage of net revenue by 4.7%.
Project client net revenues decreased from $11.9 million in the second quarter
of 1998 to $6.8 million in the second quarter of 1999, a 42.9% decrease due to
the reduction in project revenue from lost shared clients and reduced levels of
new business.
The decrease in shared service and project client net revenues for the second
quarter of 1999 compared to the second quarter of 1998 resulted from a decrease
in revenue of $10.3 million from clients no longer with the Company offset
partially by an increase in revenue from new clients of $1.4 million, and by an
increase in revenue from existing shared service and project client accounts of
$1.2 million.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
OPERATING EXPENSES
The following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
For the second quarter of 1999, field service costs decreased $8.6 million, or
30.5%, to $19.6 million, as compared to $28.2 million in the second quarter of
1998. Field service costs are comprised principally of field labor and related
costs and overhead expenses required to provide services to both shared and
dedicated service clients.
As a percentage of net revenues, field service costs in the second quarter of
1999 increased to 92.5% from 83.2% in the same period last year. The increase in
field service costs as a percentage of net revenues in the second quarter of
1999 was due primarily to the fixed cost component of field service costs.
However, total field service costs decreased by $8.6 million due to both
declining net revenues and more efficient variable field deployment.
For the quarter ended July 2, 1999, selling expenses decreased $1.0 million, or
47.6%, to $1.1 million compared to $2.1 million in the same period last year.
This decrease in costs was a result of a reduction in salaries and related
expenses resulting from a reduction in personnel. As a percentage of net
revenues, selling expenses decreased to 5.2% in the second quarter of 1999,
compared to 6.2% in the second quarter of 1998.
General and administrative expenses decreased 20.6% in the second quarter of
1999 to $2.7 million, compared to $3.4 million in the same period of 1998. The
decrease in general and administrative costs was due primarily to incentive
liabilities recorded in the first two quarters of 1998 and salary and wage staff
reductions during the quarter ended July 2, 1999. This decrease was partially
offset by a charge for pre-merger transaction costs of $0.9 million.
OTHER INCOME
Interest income decreased in the second quarter of 1999, as compared to the
second quarter of 1998, due to lower cash balances available for investment in
1999.
Interest expense increased in the second quarter of 1999 due to borrowing on the
bank revolving line of credit.
Equity in earnings of affiliate represents the Company's share of the earnings
of Alta Resources, Inc., previously known as Ameritel, Inc., a full service
telemarketing company.
INCOME TAXES
The income tax provision in the second quarters of 1999 and 1998 represent
minimum state and local taxes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
NET LOSS
The Company incurred a net loss of $2.5 million in the second quarter of 1999 or
$0.45 per basic and diluted share compared to a net profit of approximately $0.1
million, or $0.01 per basic and diluted share, in the second quarter of 1998.
The loss in the second quarter of 1999 was primarily a result of a reduction in
shared service and project client net revenues partially offset by a reduction
in field service costs and a reduction in selling and general and administrative
costs.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JULY 2, 1999 COMPARED TO SIX MONTHS ENDED JULY 3, 1998
NET REVENUES
Net revenues for the six months ended July 2, 1999 decreased from the comparable
period of 1998 due principally to a decrease in all of it's major business
segments. For the first six months of 1999, net revenues were $42.8 million
compared to $68.7 million in the first six months of 1998, a 37.7% decrease.
The following table sets forth net revenues by client type as a percentage of
net revenues for the periods indicated:
Six Months Ended
-----------------------------------------
July 3, 1998 July 2, 1999
-------------- -------------- Change
(amounts in millions) Amount % Amount % %
----- ----- ----- ----- ------
Shared service client net revenues $21.6 31.5% $15.2 35.5% (29.6)%
Project client net revenues 24.4 35.5 14.4 33.7 (41.0)
Dedicated client net revenues 22.7 33.0 13.2 30.8 (41.9)
----- ----- ----- ----- -----
Net Revenue $68.7 100.0% $42.8 100.0% (37.7)%
===== ===== ===== ===== =====
The Company's dedicated client net revenues have declined from $22.7 million in
the first six months of 1998 to $13.2 million in the first six months of 1999, a
41.9% decrease. The decrease in dedicated client net revenues for the first six
months of 1999 compared to the first six months of 1998 resulted primarily from
the completion of a major drug chain's dedicated program in the fourth quarter
of 1998. 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.
Shared service client net revenues decreased from $21.6 million in the first six
months of 1998 to $15.2 million in the first six months of 1999, a 29.6 decrease
due to the loss of clients in the first six months of 1998. Shared service
client net revenue increased as a percentage of net revenue by 4.0%.
Project client net revenues have decreased from $24.4 million in the first six
months of 1998 to $14.4 million in the first six months of 1999, a 41.0%
decrease due to the reduction in project revenue from lost shared clients and
reduced levels of new business.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
The decrease in shared service and project client net revenues for the first six
months of 1999 compared to the first six months of 1998 resulted from a decrease
in revenue of $22.3 million from clients no longer with the Company offset
partially by an increase in revenue from new clients of $2.6 million, and by an
increase in revenue from existing shared service and project client accounts of
$3.4 million.
OPERATING EXPENSES
The following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
Six Months Ended
---------------------------------------------
July 3, 1998 July 2, 1999
---------------- ---------------- Change
(amounts in millions) Amount % Amount % %
------- ----- ------- ----- ------
Field service costs $ 58.0 84.4% $ 39.7 92.7% (31.6)%
Selling expenses 4.4 6.4 2.7 6.3 (38.6)
General & administrative expenses 6.9 10.0 5.8 13.6 (15.9)
Depreciation & amortization 0.6 0.9 0.6 1.4 (0.0)
------- ----- ------- ----- -----
Total Operating Expenses $ 69.9 101.7% $ 48.8 114.0% (30.2)%
======= ===== ======= ===== =====
For the first six months of 1999, field service costs decreased $18.3 million,
or 31.6%, to $39.7 million, as compared to $58.0 million in the first six months
of 1998. Field service costs are comprised principally of field labor and
related costs and overhead expenses required to provide services to both shared
and dedicated service clients.
As a percentage of net revenues, field service costs in the first six months of
1999 increased to 92.7% from 84.4% in the same period last year. The increase in
field service costs as a percentage of net revenues in the first six months of
1999 was due primarily to the fixed cost component of field service costs.
However, total field service costs decreased by $18.3 million due to both
declining net revenues and more efficient field deployment.
For the six months ended July 2, 1999, selling expenses decreased $1.7 million,
or 38.6%, to $2.7 million compared to $4.4 million in the same period last year.
This decrease in costs was a result of a reduction in salaries and related
expenses resulting from a reduction in personnel.
General and administrative expenses decreased 15.9% in the first six months of
1999 to $5.8 million, compared to $6.9 million in the same period of 1998. The
decrease in general and administrative costs was due primarily to incentive
liabilities recorded in the first two quarters of 1998 and salary and wage staff
reductions during the six months ended July 2, 1999. This decrease was partially
offset by a charge for certain severance costs of $0.5 million and pre-merger
transaction costs of $1.2 million. As a percentage of net revenues, general and
administrative expenses increased to 13.6% in the first six months of 1999,
compared to 10.0% in the first six months of 1998.
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15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
OTHER INCOME
Interest income decreased in the first six months of 1999, as compared to the
first six months of 1998, due to lower cash balances available for investment in
1999.
Interest expense increased in the first six months of 1999 due to borrowing on
the bank revolving line of credit.
Equity in earnings of affiliate represents the Company's share of the earnings
of Alta Resources, Inc., previously known as Ameritel, Inc., a full service
telemarketing company.
INCOME TAXES
The income tax provision in the first six months of 1999 and 1998 represent
minimum state and local taxes.
NET LOSS
The Company incurred a net loss of $5.8 million in the first six months of 1999
or $1.06 per basic and diluted share compared to a net profit of approximately
$0.9 million, or $0.18 per basic and diluted share, in the first six months of
1998. The loss in the first six months of 1999 was primarily a result of a
reduction in shared service and project client net revenues partially offset by
a reduction in field service costs and a reduction in selling and general and
administrative costs.
FINANCIAL MODEL
The Company developed a financial model 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 quarters and six months ended July 3, 1998 and July 2,
1999.
Three Months Ended Six Months Ended
------------------------------------ --------------------------------------
(amounts in millions) July 3, 1998 July 2, 1999 July 3, 1998 July 2, 1999
---------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount %
------- ----- ------- ----- ------- ----- ------- -----
Net revenues $ 33.9 100.0% $ 21.2 100.0% $ 68.7 100.0% $ 42.8 100.0%
Direct business unit field expense 23.9 70.5 16.4 77.4 49.5 72.1 32.8 76.6
------- ----- ------- ----- ------- ----- ------- -----
Gross Margin 10.0 29.5 4.8 22.6 19.2 27.9 10.0 23.4
Overhead and Allocated Field Expense 5.7 16.8 3.6 17.0 11.7 17.0 7.6 17.8
------- ----- ------- ----- ------- ----- ------- -----
Business Unit Margin 4.3 12.7 1.2 5.6 7.5 10.9 2.4 5.6
Selling, General and Administrative
Expenses 4.1 12.1 3.5 16.5 8.2 11.9 7.8 18.2
------- ----- ------- ----- ------- ----- ------- -----
Earnings (loss) before interest,
taxes, depreciation and
amortization (EBITDA) $ 0.2 0.6% $ (2.3) (10.9)% $ (0.7) (1.0)% $ (5.4) (12.6)%
======= ===== ======= ===== ======= ==== ======= =====
Certain amounts within the financial model have been reclassified in prior
periods in order to conform to the current period's presentation.
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16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1997, January 1, 1999, and the first six
months of 1999, the Company incurred significant losses and experienced
substantial negative cash flow. The Company had net losses of $15.1 million for
the fiscal year ended 1997, $4.3 million for fiscal year 1998 and $5.8 million
for the six months ended July 2, 1999. The Company expects to have further
losses for the third quarter of fiscal 1999. As noted, the merger with SPAR
Group was consummated on July 8, 1999. The merger is expected to reduce fixed
costs and create synergies directly impacting the Company's profitability and
cash flow. The Company cannot guarantee, however, that it will not sustain
further losses.
The Company experienced a net decrease in cash and cash equivalents of $7.5
million for the six months ended July 2, 1999. However, with the addition of the
revolving line of credit subject to availability, timely collection of
receivables, and the Company's positive working capital position, management
believes the funding of operations over the next twelve months will be
sufficient. The Company cannot guarantee that it will not sustain further
reductions in cash.
In December 1998, two wholly owned subsidiaries 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
borrowings sufficient to maintain a minimum balance of $2.0 million. The
three-year credit facility will be used for working capital purposes and
potential acquisitions. At July 2, 1999, the Company did not comply with the
total liabilities to tangible net worth ratio, the net worth, and working
capital covenants and a forbearance was granted by the bank. The Company
anticipates that it will not be in compliance with future covenants and that
bank forbearances will be requested. The Company cannot guarantee that future
forbearances will be granted by the bank. In the event that the bank elects not
to grant a forbearance for covenant non-compliance, the bank has the ability to
immediately accelerate the maturity of the credit facility, which could have a
material adverse affect on the Company.
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 July 2, 1999,
the Company 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, 1998, and the
six months ended July 2, 1999. During the six months ended July 2, 1999, the
Company had a net decrease in cash of $7.5 million, resulting from its operating
losses, a reduction in accounts payable, and an increase in accounts receivable.
Cash and cash equivalents totaled $11.1 million at January 1, 1999, compared
with $3.6 million at July 2, 1999. At January 1, 1999 and July 2, 1999 the
Company had working capital of $13.8 million and $6.6 million, respectively, and
current ratios of 2.5 and 1.7, respectively.
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17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Net cash used in operating activities for the six months ended July 2, 1999 was
$5.4 million, compared with $3.3 million for the comparable period in 1998. This
use of cash for operating activities in 1999 resulted primarily from a decrease
in other liabilities, and a net operating loss. Net cash used in investing
activities for the six months ended July 3, 1998 and July 2, 1999 was $0.3
million and $0.1 million, respectively.
The above activity resulted in a net decrease in cash and cash equivalents of
$7.5 million for the six months ended July 2, 1999, compared to a net decrease
of $3.4 million for the comparable period in 1998.
Cash and cash equivalents and the timely collection of its receivables provide
the Company's current liquidity. However, the potential uncollectibility of
receivables due from any of the Company's major clients, or a significant
reduction in business from such clients, or the inability to acquire new clients
would have a material adverse effect on the Company's cash resources and its
ongoing ability to fund operations.
The Company may incur additional indebtedness in 1999 in connection with the
merger. SPAR Group acquired the assets of an incentive marketing company in
January 1999. A portion of the purchase price was paid through the issuance of a
promissory note in the original principal amount of $12,422,189 (plus an earn
out, if any) which matures on September 15, 1999. As of July 2, 1999, the amount
owed under the note was approximately $6.8 million, excluding the earnout
payment, if any. In addition, the stockholders of SPAR Group loaned SPAR Group
$4.3 million to facilitate the acquisition. This indebtedness was not repaid
before the merger was consummated, and the combined company has assumed these
obligations. The Company is also obligated, under certain circumstances, to pay
severance compensation to its employees in connection with the merger. Further,
the Company incurred 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 of approximately
$3.0 million. The Company is currently negotiating with major banks for a $35
million revolving line of credit to meet cash needs in connection with the
merger and future potential acquisitions in 1999. The Company cannot provide any
assurance that it will be able to secure a $35 million revolving line of credit.
YEAR 2000 SOFTWARE COSTS
Many 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. The Company
has reviewed its computer systems to identify areas that could be affected by
Year 2000 issues and has implemented a plan to resolve these issues.
The Company has substantially completed the evaluation of its information
technology infrastructure, software, hardware and communications systems and
believes that its critical hardware and software applications are currently Year
2000 compliant. Completion of the Company's plan to upgrade all hardware and
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18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
software applications to be Year 2000 compliant is expected by the end of 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 end of
third quarter of 1999. 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.
The most likely worst case scenario with respect to Year 2000 involves problems
experienced by our staffing suppliers. In such a scenario the Company's ability
to efficiently deploy the necessary staff to service its clients' needs could be
negatively affected. The Company does not anticipate that any such effects would
be of a long term nature as it has alternative methods of deploying staff that
do not involve the use of such suppliers. In the event that certain systems fail
to function properly, manual processes will be implemented. Due to the nature of
the business, the Company does not anticipate a system failure to cease the
operations, as operations are not deemed to be systems dependent. Additionally,
the Company plans to be capable of operating in the event of a systems failure
of any vendor.
The Company will utilize internal resources to reprogram, or replace and test
the software for Year 2000 modifications. The total cost of the Year 2000
project is estimated at $42,000 and is being funded through operating cash
flows. Of the total project cost, approximately $6,000 was expensed in the
fiscal year 1998, $20,000 was expensed in the first six months of 1999, and the
remaining $16,000 will be expensed in the last six months of 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 the Company
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 the Company'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 the Company. The Company is
not currently aware of any material operational issues associated with preparing
its internal systems for the Year 2000, or the adequacy of critical third party
systems. The Company 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. The Company intends to continue assessing its Year 2000 compliance,
implementing compliance plans and communicating with third parties about their
Year 2000 compliance. If the Company's continued efforts indicate that
contingency planning is prudent, it will undertake appropriate planning at that
time.
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RISK FACTORS
It is recommended that this Form 10-Q be read in conjunction with the Company's
Annual Report on Form 10-K/A for the fiscal year ended January 1, 1999. The
following risk factors should also be carefully reviewed in addition to the
other information contained in this Form 10-Q.
THE COMPANY HAS A HISTORY OF LOSSES AND MAY EXPERIENCE FUTURE LOSSES
During the years ended December 31, 1997, January 1, 1999, and the first six
months of 1999, the Company incurred significant losses and experienced
substantial negative cash flow. The Company had net losses of $15.1 million for
the fiscal year ended 1997, $4.3 million for fiscal year 1998 and $5.8 million
for the six months ended July 2, 1999. PIA expects to have further losses for
the third quarter of fiscal 1999. As noted, the merger with SPAR Group was
consummated on July 8, 1999. The merger is expected to reduce fixed costs and
return PIA profitability. The Company cannot guarantee that it will not sustain
further losses or that it will operate profitably in the future. Losses in 1997
were primarily caused by margin reductions from the loss of shared service
clients, inefficiencies in field labor execution, poor pricing decisions for
some client contracts and higher business unit overhead costs. The recognition
of $5.4 million in restructuring and other charges was also responsible for the
losses. Losses in 1998 and the first six months in 1999, were caused primarily
by margin reductions and from a decline in revenues due to loss of shared
service clients and completion of dedicated projects. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
THE COMPANY MAY HAVE DIFFICULTY MEETING IT'S FUTURE CASH NEEDS
During the first six months ended July 2, 1999, the Company experienced a
decrease in cash and cash equivalents of $7.5 million. The Company expects to
have further decreases in cash for the third quarter of fiscal 1999. Although
management believes the funding of operations over the next twelve months will
be sufficient there can be no assurance that the Company will be able to
generate sufficient cash or increase its credit line in order to operate its
business following this twelve month period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
THE COMPANY HAS LOST BUSINESS AND MAY CONTINUE TO LOSE BUSINESS
The Company's business mix has changed significantly over the last year, and is
expected to continue to change during 1999, in response to client needs, and the
evolving third party merchandising industry. Due in part to the completion of a
major dedicated client program, and the loss of several shared service clients,
sales have declined over the last 18 months, and no sizable new dedicated
business has been sold to compensate for these losses. The Company will continue
to reduce its dedicated management and personnel infrastructure.
19
20
RISK FACTORS (continued)
INDUSTRY CONSOLIDATION HAS ADVERSELY AFFECTED THE COMPANY'S BUSINESS
Because 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 retail and manufacturing industries are
undergoing consolidation processes that result in larger but fewer retailers and
suppliers. The Company's success depends in part upon its ability to maintain
its existing clients and to obtain new clients.
REVENUES DEPEND LARGELY ON A FEW CLIENTS
The Company's ten largest clients generated approximately 86% of PIA's net
revenues for the quarter ended July 2, 1999, and approximately 76% for the
quarter ended July 3, 1998. The Company believes 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 its results of operations. During the quarter ended July 2, 1999 none
of the Company's manufacturer or retailer clients accounted for greater than 10%
of net revenues other than Eckerd Drug Stores, S.C. Johnson & Sons, Inc., Buena
Vista Home Entertainment, Safeway and Ralston Purina which account for 27.8%,
12.7%, 11.8% and 11.1% and 10.7%, respectively. During the quarter ended July 3,
1998, none of the Company's manufacturer or retailer clients accounted for
greater than 10% of net revenues other than Eckerd Drug Stores, CVS Pharmacy
Incorporated, and S.C. Johnson & Sons, Inc. which accounted for 19.7%, 14.8% and
11.3% of net revenues, respectively.
For the six months ended July 2, 1999, and July 3, 1998 the Company's ten
largest clients generated approximately 82% and 75%, respectively, of the
Company's net revenue. During the six months ended July 2, 1999, none of the
Company's manufacturer or retailer clients accounted for greater than 10% of net
revenues, other than Eckerd Drug Stores, Buena Vista Home Entertainment, Safeway
and S.C. Johnson & Sons, Inc., which accounted for 22.3% and 14.1%, 12.1% and
11.9% of net revenues, respectively. During the six months ended July 3, 1998,
none of PIA's manufacturer or retailer clients accounted for greater than 10% of
net revenues other than Eckerd Drug Store and CVS Pharmacy Incorporated, which
accounted for 16.5% and 14.1% of net revenues, respectively. The majority of the
Company's contracts with its clients for shared services have multi-year terms.
OPERATING RESULTS MAY FLUCTUATE BECAUSE ITS COMMISSION INCOME IS UNCERTAIN
Approximately 17% of the Company's net revenues for the six months ended July 2,
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.
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21
RISK FACTORS (continued)
THE COMPANY IS CONTROLLED BY A FEW STOCKHOLDERS
As a result of the merger with Spar Group the former stockholders of SPAR Group
beneficially own approximately 70% of the Company'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 the Company. Such concentration of ownership could have the effect of making
it more difficult for a third party to acquire control of the Company in the
future, and may discourage third parties from attempting to do so.
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22
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk related to the variable interest rate on
the line of credit and the variable yield on it's cash and cash equivalent. The
Company's accounting policies for financial instruments and disclosures relating
to financial instruments require that the Company's consolidated balance sheets
include the following financial instruments: cash and cash equivalents, accounts
receivable, accounts payable and long term debt. The Company considers 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. The Company monitors the risks associated with interest rates and
financial instrument positions based on policies set by arrangement card
approved by the Board of Directors. The Company's investment policy objectives
require the preservation and safety of the principal, sufficient liquidity to
meet expected and unexpected cash requirements, and the maximization of the
return on investment based upon the safety and liquidity objectives.
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 in 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 for the quarter ended July 2, 1999 were approximately 5.1 % based on
outstanding investments which ranged from $1.9 million to $7.5 million. The
average yields on the Company's investments for the quarter ended July 3, 1998
were approximately 5.1% based on outstanding investments which ranged from $9.5
million to $10.9 million.
The average yields on the Company's investments for the six months ended July 2,
1999 were approximately 5.0 % based on outstanding investments which ranged from
$1.9 million to $13.1 million. The average yields on the Company's investments
for the six months ended July 3, 1998 were approximately 5.0% based on
outstanding investments which ranged from $8.2 million to $10.9 million. As of
July 2, 1999, PIA's cash and cash equivalents and investments totaled $3.6
million and consisted primarily of taxable money market instruments, corporate
bonds and tax-exempt securities with maturities of less than one year with an
average yield of approximately 4.4%. As of July 3, 1998, PIA's cash and cash
equivalents and investments totaled $9.5 million and consisted primarily of
taxable money market instruments, corporate bonds and tax-exempt securities with
maturities of less than one year and with an average yield of approximately
4.9%. If there were a 10% change in the average yield based upon the Company's
outstanding investments of $3.6 million, interest income would increase or
decrease by approximately $16,000 per annum.
22
23
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. (continued)
DEBT
The Company obtained a line of credit with Mellon Bank N.A. in December 1998 and
immediately drew down the minimum borrowing requirement of $2.0 million, and had
an outstanding balance of $2.0 million at January 1, 1999 and paid off the line
of credit as of July 2, 1999. The line of credit requires monthly interest
payments based on a variable interest rate applied to the outstanding loan
balance. The weighted average interest rate on borrowings for the quarter ended
July 2, 1999 and six months ended July 2, 1999 was 8.0% and if there were a 10%
change in the interest rate based upon the Company's minimum borrowing
requirement of $2.0 million, interest expense would increase or decrease by
$16,000 per annum.
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24
PART II: OTHER INFORMATION
ITEM 1: LEGAL 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 sought damages totaling $10.2 million.
The Company has agreed to settle the MCA lawsuit. Both parties have
agreed to drop the lawsuit for no compensation and to execute a Full
and Final Release, releasing each other from all claims.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds - The Company received $26.5 million in net proceeds
from its initial public offering in March 1996. The Company, as
originally outlined in "Use of Proceeds" in its prospectus, has used
approximately $19.9 million through the period ended July 2, 1999 for
debt repayment, capital spending and working capital requirements and
$3.0 million to repurchase PIA's Common Stock.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on July 8, 1999.
The meeting was held to elect the Board of Directors and to vote on six
other proposals. The other proposals were:
Proposal 1: Approve the issuance of shares of PIA common stock to the
SPAR Group stockholders and the issuance of options to purchase 134,114
shares of PIA common stock to the holders of SPAR Group options in
exchange for their respective shares of SPAR Group and SPAR Group
options as consideration for the merger of a subsidiary of PIA with and
into SPAR Group;
Proposal 2: Amend PIA's Certificate of Incorporation to increase the
number of authorized shares of PIA common stock from 15 million to 47
million;
Proposal 3: Amend PIA's Certificate of Incorporation to delete the
prohibition on stockholder action by written consent without a meeting
under Delaware law;
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25
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (continued)
Proposal 4: Amend PIA's Certificate of Incorporation to change the name
of PIA Merchandising Services, Inc. to "SPAR Group, Inc.;"
Proposal 5: Authorize an amendment, if deemed necessary by the Board of
Directors in its sole discretion, to PIA's Certificate of Incorporation
to effect a reverse stock split of the issued and outstanding shares of
PIA common stock, on the basis of one of the following ratios: one
share in exchange for every two issued and outstanding shares, one
share in exchange for three issued and outstanding shares or one share
for every four issued and outstanding shares, with the Board of
Directors having the discretion to determine the appropriate ratio to
use immediately prior to effecting the reverse stock split; and
Proposal 6: Amend PIA's Amended and Restated 1995 Stock Option Plan,
subject to consummation of the merger, to increase the number of shares
of PIA common stock reserved for issuance upon exercise of stock
options granted from 1.3 million to 3.5 million.
The number of votes cast for each director are set forth below.
For
---
Patrick W. Collins 3,185,241
J. Christopher Lewis 3,185,241
Terry R. Peets 3,185,241
John A. Colwell 3,190,516
Joseph H. Coulombe 3,185,341
Patrick C. Haden 3,185,341
Clinton E. Owens 3,191,623
Each of the nominees was elected to the Board of Directors. In
connection with the merger, each of the nominees other than Mr. Collins
and Mr. Lewis resigned and appointed Robert G. Brown and William H.
Bartels (the two principal stockholders of SPAR Group) and Robert O.
Aders to fill three of the remaining five vacancies. All of the
Proposals were approved by a majority of the stockholders.
ITEM 5: OTHER INFORMATION
Not applicable.
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26
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc.,
as amended.
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-Bankverine (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, as
amended.
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
(incorporated by reference to Exhibit 10.7 of the
Company's Form 10-K/A for the fiscal year ended
January 1, 1999 (the "10-K/A").
10.8 Amended and Restated Severance Compensation
Agreement dated as of October 1, 1998 between PIA
and Cathy L. Wood (incorporated by reference to
Exhibit 10.8 of the Company's 10-K/A).
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
(incorporated by reference to Exhibit 10.9 of the
Company's 10-K/A).
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.
(incorporated by reference to Exhibit 10.10 of the
Company's 10-K/A).
26
27
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (continued)
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 (incorporated by reference to Exhibit
10.11 of the Company's 10-K/A).
10.12 Amendment No 2 to Employment Agreement dated as of
February 11, 1999 between PIA and Terry R. Peets
(incorporated by reference to Exhibit 10.12 of
the Company's 10-K/A).
10.13 Special Purpose Stock Option Plan.
21.1 Subsidiaries of the Company (incorporated by
reference to the Form S-1).
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K.
Form 8-K dated July 8, 1999 and filed with the Commission on
July 23, 1999.
27
28
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/ David J. Faulds
------------------------------------
David J. Faulds
Vice President
Corporate Controller
Dated: August 16, 1999
-------------------------
28
29
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Certificate of Incorporation of SPAR Group, Inc., as amended.
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-Bankverine
(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, as amended.
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 (incorporated by reference to Exhibit
10.7 of the Company's Form 10-K/A for the fiscal year ended January
1, 1999 (the "10-K/A").
10.8 Amended and Restated Severance Compensation Agreement dated as of
October 1, 1998 between PIA and Cathy L. Wood (incorporated by
reference to Exhibit 10.8 of the Company's 10-K/A).
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 (incorporated by reference to Exhibit 10.9 of the Company's
10-K/A).
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. (incorporated by reference to Exhibit 10.10 of the
Company's 10-K/A).
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 (incorporated by reference to Exhibit 10.11 of
the Company's 10-K/A).
10.12 Amendment No 2 to Employment Agreement dated as of February 11, 1999
between PIA and Terry R. Peets (incorporated by reference to
Exhibit 10.12 of the Company's 10-K/A).
10.13 Special Purpose Stock Option Plan.
21.1 Subsidiaries of the Company (incorporated by reference to the Form
S-1).
27.1 Financial Data Schedule