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 June 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 July 31, 1997, there were 5,392,558 shares of Common Stock outstanding.
PIA Merchandising Services, Inc.
Index
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance
Sheets as of June 30, 1997 (Unaudited)
and December 31, 1996.........................................3
Condensed Consolidated Statements of Operations
(Unaudited) Three Months and Six Months Ended
June 30, 1997 and 1996........................................4
Condensed Consolidated Statement of Cash
Flows(Unaudited) Six Months Ended
June 30, 1997 and 1996........................................5
Notes to Condensed Consolidated Financial
Statements....................................................6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................................8
Risk Factors......................................................15
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders...............17
Item 6: Exhibits and Reports on Form 8-K..................................18
SIGNATURES
2
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(IN THOUSANDS)
June 30 December 31,
1997 1996
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,706 $ 19,519
Accounts receivable, net of allowance for
doubtful accounts of $909 and $583, respectively 17,834 22,630
Prepaid taxes 1,581 -
Prepaid expenses and other current assets 818 564
Deferred income taxes 669 669
--------- ----------
TOTAL CURRENT ASSETS 38,608 43,382
--------- ----------
PROPERTY AND EQUIPMENT, NET (SEE NOTE 2) 3,711 1,847
--------- ----------
INVESTMENTS & OTHER ASSETS:
Investment in affiliate 375 322
Capitalized software development costs (see note 2) - 1,987
Other assets 707 134
--------- ----------
TOTAL OTHER ASSETS 1,082 2,443
--------- ----------
TOTAL ASSETS $ 43,401 $ 47,672
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 531 $ 772
Other current liabilities (see note 3) 11,868 9,762
Income taxes payable - 111
--------- ----------
TOTAL CURRENT LIABILITIES 12,399 10,645
LONG TERM LIABILITIES 309 309
--------- ----------
TOTAL LIABILITIES 12,708 10,954
--------- ----------
STOCKHOLDERS' EQUITY:
Common stock & additional paid-in-capital 33,487 33,425
Less: Treasury stock ( 2,977) -
Retained earnings 183 3,293
--------- ----------
TOTAL STOCKHOLDERS' EQUITY 30,693 36,718
--------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 43,401 $ 47,672
--------- ----------
--------- ----------
See accompanying notes.
3
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
- -------------------------------------------------------------------------------
(UNAUDITED)
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
(In thousands, except per share amounts) 1997 1996 1997 1996
---- ---- ---- ----
Net Revenues $ 31,643 $ 26,855 $ 60,999 $ 53,114
--------- --------- --------- ---------
Operating Expenses:
Field service costs 29,638 21,845 56,007 42,108
Selling expenses 2,507 2,967 5,061 5,623
General and administrative expenses 2,236 1,853 4,685 3,593
Depreciation and amortization 262 152 459 299
--------- --------- --------- ---------
Total operating expenses 34,643 26,817 66,212 51,623
--------- --------- --------- ---------
Operating Income (Loss) ( 3,000) 38 ( 5,213) 1,491
Other Income:
Interest income, net 219 286 450 329
Equity in earnings of affiliate 28 - 52 -
Foreign currency transaction loss ( 1) - ( 1) -
--------- --------- --------- ---------
Total other income 246 286 501 329
--------- --------- --------- ---------
Income (Loss) Before Provision For Income
Taxes ( 2,754) 324 ( 4,712) 1,820
(Provision) Benefit For Income Taxes 812 ( 118) 1,602 ( 717)
--------- --------- --------- ---------
Net Income (Loss) $ ( 1,942) $ 206 $ ( 3,110) $ 1,103
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Income (Loss) Per Common And
Common Equivalent Share $ ( 0.35) $ 0.03 $ ( 0.54) $ 0.19
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted Average Common And
Common Equivalent Shares 5,531 6,454 5,714 5,692
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes.
4
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
- -------------------------------------------------------------------------------
(UNAUDITED)
For the Six Months Ended June 30,
---------------------------------
(In thousands) 1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss) $ (3,110) $ 1,103
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 459 299
Provision for doubtful receivables, net 326 169
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 4,470 (2,924)
(Increase) decrease in prepaid expenses and other (2,468) (679)
Increase (decrease) in accounts payable and other liabilities 1,865 (123)
Increase (decrease) in income taxes payable (111) (382)
----------- --------
Net cash provided by (used in) operating activities 1,431 (2,537)
----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (163) (194)
Capitalization of software development costs (note 2) (166) (200)
----------- --------
Net cash provided by (used in) investing activities (329) (394)
----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Treasury Stock (2,977) -
Payments of long term debt - (3,400)
Proceeds from issuance of common stock, net 62 26,609
----------- --------
Net cash used in financing activities (2,915) 23,209
----------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,813) 20,278
CASH AND CASH EQUIVALENTS,
Beginning of period 19,519 185
----------- --------
End of period $ 17,706 $ 20,463
----------- --------
----------- --------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest - -
Cash paid for income taxes $ 98 $ 1,637
----------- --------
----------- --------
See accompanying notes.
5
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. Operating results for the three month and six
month periods ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
2. Property and Equipment
As of the year ended December 31, 1996, the Company capitalized certain
software development costs per accounting policy. These costs were
classified in the Other Assets balance sheet classification until software
was ready for release. In the second quarter of 1997, the Company released
the software, including additions during the six months ended June 30,
1997, and has classified these costs as part of Property and Equipment,
reducing the amounts reported in Other Assets. These costs are being
amortized over a five year period. The amounts in Property and Equipment
consist of:
June 30, December 31,
1997 1996
--------- ------------
Equipment $ 3,493 $ 3,343
Furniture and fixtures 642 641
Leasehold improvements 130 118
Capitalized software development costs 2,153 -
--------- ---------
6,418 4,102
Less: Accumulated depreciation and
amortization (2,707) (2,255)
--------- ---------
$ 3,711 $ 1,847
--------- ---------
--------- ---------
6
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
3. Other Current Liabilities
Other current liabilities consist of the following:
June 30, December 31,
1997 1996
-------- ------------
Accrued salaries and other related costs $ 757 $ 944
Accrued payroll to third party 3,698 1,952
Accrued insurance 1,200 640
Deferred revenue 1,015 2,479
Amounts held on behalf of third parties 1,641 1,055
Accrued software costs 203 603
Accrued rebate 1,906 788
Other liabilities 1,448 1,301
------- -------
$11,868 $ 9,762
------- -------
------- -------
7
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
six months ended June 30, 1997, the Company generated approximately 81% and
85% of its net revenues from manufacturer clients and 19% and 15% from
retailer clients, respectively. The mix of the Company's business between
manufacturer and retailer clients historically has not had a material impact
on the Company's results of operations.
During the first half of 1997, the Company's profitability continued to be
affected by a shift in its business away from syndicated services toward
projects and dedicated services. The Company's syndicated services business
has historically required a significant fixed management and personnel
infrastructure to manage and execute service contracts. Due in part to
industry consolidation and increased competition, the Company lost a number of
syndicated services clients during 1996, causing a decrease in the
profitability of that business segment in the last two quarters of the year and
the first half of 1997. PIA has not sold any sizable new syndicated business
to offset for this loss. The Company did not act quickly enough to align its
cost structure with the changing mix of business during the first half of 1997.
The Company believes that revenues in 1997 from syndicated services will
continue to decline as a result of the wind-down of the lost business. Because
of the fixed nature of the associated costs, the loss of syndicated business
has a material adverse effect on PIA's results of operations.
The Company continues to experience a significant increase in the demand for
project services. PIA's project revenues have grown from $9.3 million in the
second quarter of 1996 to $13.5 million in the second quarter of 1997, a 45%
increase, and from $17.9 million in the first half of 1996 to $22.4 million
in the first half of 1997, a 25% increase. This increase has required an
investment in management infrastructure and systems to support this business.
The Company's dedicated services business is also increasing. During the
second quarter of 1997, revenues from dedicated services accounted for
approximately 21% of total revenues, as compared to 8% in the second quarter
of 1996. For the first half of 1997, dedicated service revenue represented
approximately 24% of total revenue, compared to 7% of total revenue in the
first half of 1996. In the dedicated services business, PIA provides each
manufacturer or retailer client with an organization, including a management
team, that works exclusively for that client.
PIA's quarterly results of operations are subject to certain variability
related to the timing of retailer-mandated activity and the receipt of
commissions. Retailer-mandated activity is typically higher in the second and
third quarters of the year due to retailer scheduling of activity in off-peak
shopping periods. In addition, new product introductions increase during such
periods which require the reset of categories as the new products gain
distribution. The amount of commissions earned by PIA under its
commission-based contracts varies seasonally, and
8
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
generally corresponds to the peak selling seasons of the clients that have
entered into these types of contracts. Historically, the Company has
recognized greater commission income in the first and fourth quarters. See
"Risk Factors -- Uncertainty of Commission Income." The Company's quarterly
results have in the past been subject to fluctuations and, thus, the
operating results for any quarter are not necessarily indicative of results
for any future period.
RESULTS OF OPERATIONS - SECOND QUARTER OF FISCAL 1997 COMPARED TO SECOND
QUARTER OF FISCAL 1996:
The following table sets forth certain financial data as a percentage of net
revenues for the periods indicated:
Three Months Ended June 30,
1997 1996
Net revenues 100.0% 100.0%
------- -------
Operating expenses:
Field service costs 93.7 81.3
Selling expenses 7.9 11.1
General and administrative expenses 7.1 6.9
Depreciation and amortization 0.8 0.6
------- -------
Total operating expenses 109.5 99.9
------- -------
Operating income (loss) (9.5) 0.1
Interest income net 0.7 1.1
Equity in earnings of affiliate 0.1 0.0
------- -------
Income (loss) before provision for income taxes (8.7) 1.2
Provision (benefit) for income taxes 2.6 (0.4)
------- -------
Net income (loss) (6.1%) 0.8%
------- -------
------- -------
Net revenue increased $4.8 million, or 18% to $31.6 million in the second
quarter of 1997, from $26.9 in the second quarter of 1996. The net increase in
revenue resulted from an increase in revenue from new clients of $7.4 million,
increased revenue from existing clients of $4.9 million, offset by a decrease
in revenue of $7.5 million from clients no longer with the Company.
9
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
For the second quarter of 1997, field service costs increased $7.8 million, or
36%, to $29.6 million, as compared to $21.8 million in the second quarter of
1996. Field service costs are comprised principally of field labor and related
costs and expenses required to provide both routed and dedicated coverage,
project activities 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 to support the increased business level
of dedicated and project services. As a percentage of net revenues, field
service costs increased to 94% in 1997 from 81% in 1996 due to the negative
leverage caused by the loss of syndicated services business and the impact of
increased project and dedicated service business mentioned above.
Selling expenses decreased $0.5 million, or 16%, to $2.5 million in the second
quarter of 1997, compared to $3.0 million in the same period last year. As a
percentage of net revenues, selling expenses decreased to 8% in the second
quarter of 1997, from 11% in the second quarter of 1996. This decrease in
costs, both in absolute amount and as a percentage of revenue, is a result of
lower staffing and travel costs.
General and administrative expenses increased $0.4 million, or 21%, to $2.2
million in the second quarter of 1997 from $1.9 million in the same period of
1996. 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 project and dedicated service levels. In addition, increased costs
were experienced due to higher provisions for uncollectible accounts,
termination costs, as well as salary increases in the ordinary course of
business. As a percentage of net revenues, general and administrative expenses
remained at 7% in the second quarter of 1997, consistent with the second
quarter of 1996.
Depreciation and amortization expenses increased as a result of depreciation
on computer hardware and software development costs for shelf technology and
for general business purposes.
Interest income decreased in the second quarter of 1997, as compared to the
second quarter of 1996, due to lower cash balances available for investment in
1997. The second quarter of 1996 included interest income on the net proceeds
from the Company's initial public offering on March 1, 1996.
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.
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Income tax benefit was approximately $0.8 million in the second quarter of
1997 compared to income tax expense of $0.1 million in the second quarter of
1996, representing an effective rate of 29% and 36%, respectively. The
effective rate for the second quarter of 1997 includes a year to date
adjustment in the rate to achieve a six month rate of 34%.
The Company incurred a net loss of approximately $1.9 million in the second
quarter of 1997, compared to net income of approximately $0.2 million in the
second quarter of 1996, primarily as a result of operating expenses
increasing at a faster rate than revenues, as discussed above.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1996:
The following table sets forth certain financial data as a percentage of net
revenues for the periods indicated:
Six Months Ended June 30,
1997 1996
Net revenues 100.0% 100.0%
------- -------
Operating expenses:
Field service costs 91.7 79.2
Selling expenses 8.3 10.6
General and administrative expenses 7.7 6.8
Depreciation and amortization 0.8 0.6
------- -------
Total operating expenses 108.5 97.2
------- -------
Operating income (loss) (8.5) 2.8
Interest income net 0.7 0.6
Equity in earnings of affiliate 0.1 0.0
------- -------
Income (loss) before provision for income taxes (7.7) 3.4
Provision Benefit for income taxes 2.6 (1.3)
------- -------
Net income (loss) (5.1%) 2.1%
------- -------
------- -------
Net revenue increased $7.9 million, or 15% to $61.0 million in the first
six months of 1997, from $53.1 in the corresponding period of 1996. The net
increase in revenue resulted from an increase in revenue from new clients of
$10.2 million, an increase in revenue from existing clients of $11.5 million,
offset by a decrease in revenue of $13.8 million from clients no longer with
the Company.
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
For the first six months of 1997, field service costs increased $13.9 million,
or 33%, to $56.0 million, as compared to $42.1 million in the first six months
of 1996. The increase in field service costs is primarily due to costs
required to execute the increased business level of dedicated and project
services. As a percentage of net revenues, field service costs increased to
92% for the first six months of 1997 from 79% in the same period of 1996 due to
the negative leverage caused by the loss of syndicated services business and
the impact of increased project and dedicated service business.
Selling expenses decreased $0.6 million, or 10%, to $5.1 million in the first
six months of 1997, compared to $5.6 million in the same period last year. As
a percentage of net revenues, selling expenses decreased to 8% in the first six
months of 1997, from 11% in the first six months of 1996. This decrease in
costs, both in absolute amount and as a percentage of revenue, is a result of
lower staffing and travel costs.
General and administrative expenses increased $1.1 million, or 30%, to $4.7
million in the first six months of 1997 from $3.6 million in the same period of
1996. The increase in general and administrative costs were primarily due to
increased staffing in recruitment and training and management information
systems that were required to support overall business growth, including the
increased project and dedicated service levels. In addition, increased costs
were experienced due to higher provisions for uncollectible accounts, workers
compensation insurance reserves, termination costs, as well as salary increases
in the ordinary course of business. As a percentage of net revenues, general
and administrative expenses were 8% in the first six months of 1997, compared
to 7% in the first six months of 1996.
Depreciation and amortization expenses increased as a result of depreciation
on computer hardware and software development costs for shelf technology and
for general business purposes.
Interest income increased for the first six months of 1997, as compared to
the first six months of 1996, due to investment of the net proceeds from the
Company's initial public offering on March 1, 1996.
Equity in earnings of affiliate represents the Company's share of the
earnings of Ameritel, Inc. During 1996, the Company exercised its option to
increase its ownership of Ameritel to 20%, and is now required to recognize
its equity interest in Ameritel's earnings.
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Income tax benefit was $1.6 million for the first six months of 1997,
compared to income tax expense of $0.7 million for the same period of 1996,
representing an effective tax rate of 34% and 39%, respectively.
The Company incurred a net loss of approximately $3.1 million in the first half
of 1997, compared to net income of approximately $1.1 million in the first half
of 1996, primarily as a result of operating expenses increasing at a faster
rate than revenues, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On March 1, 1996, the Company completed an initial public offering of its
Common Stock, raising $26.6 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 first half of 1997, the Company had a net decrease in cash balances
of $1.8 million, resulting from the operating losses and the Common Stock
repurchase program, offset partially by a reduction in accounts receivable of
$4.4 million.
In January 1997, the Company entered into a new credit agreement with a bank,
which provides for an unsecured line of credit in the maximum amount of $7.0
million. Borrowings under the line of credit bear interest at the bank's
reference rate, unless the Company elects the specified offshore rate. The
credit agreement contains various covenants which, among other things,
require compliance with certain financial tests such as working capital,
tangible net worth, leverage and profitability. In addition, the credit
agreement imposes certain restrictions on the Company, including the
incurrence of additional indebtedness, the payment of dividends and the
ability to make acquisitions. No borrowings are currently outstanding under
this facility.
In March 1997, the Company's Board of Directors approved a 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 working capital. 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.
13
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cash and cash equivalents totaled $17.8 million at June 30, 1997, compared with
$19.5 million at December 31, 1996. At June 30, 1997 and December 31, 1996,
the Company had working capital of $26.2 million and $32.7 million, and current
ratios of 3.1 and 4.1 respectively.
Net cash provided by operating activities for the six months ended June 30,
1997 was $1.4 million compared to cash used by operating activities of $2.5
million for the comparable period in 1996. This increase in cash from
operating activities for 1997 resulted primarily from a decrease in accounts
receivable of $4.5 million, offset partially by net operating losses. Net
cash used by investing activities for the six months ended June 30, 1997 was
$0.3 million compared to net cash used by investing activities of $0.4
million for the comparable period in 1996. Net cash used in financing
activities for the six months ended June 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 502,000 shares of its Common Stock for approximately $2.9
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 $1.8
million for the six months ended June 30, 1997.
The Company is currently experiencing operating losses resulting from a change
in its business mix and rising field costs and has announced a plan to
restructure its corporate and field operations during the third quarter of
1997. While management is not currently able to estimate the amount of the
restructure charge, or its effect on operational cash flow, it is expected that
these charges will be reflected in the third quarter results.
The Company's current liquidity is provided by cash and cash equivalents and
the timely collection of its receivables. Management believes that this
liquidity is sufficient to provide for on-going working capital needs and
generally fund the on-going operations of the business.
14
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 be carefully
reviewed in addition to the other information contained in this Quarterly Report
on 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 syndicated 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
$3.1 million for the first six 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 SYNDICATED BUSINESS
PIA's business mix has changed significantly over 1996 and the first half of
1997, and is expected to continue to change during the balance of 1997. Due in
part to industry consolidation and increased competition, the Company has lost a
substantial amount of syndicated services business over the last 18 months, and
has not sold enough new syndicated business to compensate for this loss. This
business has historically required a significant fixed management and personnel
infrastructure. Accordingly, the loss of syndicated business, without
offsetting gains, has a material adverse effect on the Company's results of
operations.
INDUSTRY CONSOLIDATION; CONCENTRATED CLIENT BASE
The retail 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 68% and 69%, and 55% and 59%, of the
Company's net revenues for the quarter and six month periods ended June 30, 1997
and 1996, respectively. During the second quarter, none of the Company's
manufacturer or retailer clients accounted for greater than 10% of net revenues,
other than Buena Vista Home Video, S.C. Johnson and Eckerd Drug Company, which
accounted for 19%, 12% and 11% of net revenues, respectively, for the quarter
ended June 30, 1997. For the six months ended June 30, 1997, only Buena Vista
Home Video and S. C. Johnson accounted for greater than 10% of net revenues,
with 23% 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 from any of its large clients, would have a material adverse effect
on the Company's results of operations.
15
UNCERTAINTY OF COMMISSION INCOME
Approximately 15% and 15% of the Company's net revenues for the quarter and six
months ended June 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.
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.
16
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on June 6,
1997. The stockholders elected a Board of six directors,
approved amendments to the Company's 1995 Stock Option Plan,
approved the adoption of the Employee Stock Purchase Plan and
ratified the appointment of Deloitte & Touche LLP as the
Company's independent auditors.
Results of the voting in connection with each of the matters
submitted to the stockholders were as follows:
Board of Directors For Withheld
---------------------------- ---------------- ---------------
Clinton E. Owens 3,151,645 767,983
Joseph H. Coulombe 3,151,645 767,983
John A. Colwell 3,151,645 767,983
Edwin E. Epstein 3,151,645 767,983
Patrick C. Haden 3,151,645 767,983
J. Christopher Lewis 3,151,645 767,983
For Against Abstain
---------- ------- -------
Amend Company's 1995 Stock
Option Plan 3,857,815 29,283 32,530
Adopt Company's Employee
Stock Purchase Plan 3,866,065 21,633 31,930
Ratification of the appointment
of Deloitte & Touche LLP as
independent auditors 3,913,142 2,570 3,916
Item 5: Other Information
None
17
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 Business Loan Agreement dated as of January 1, 1997 between the
Company and Bank of America National Trust and Savings Association
(incorporated herein by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996).
10.5 Employment Agreement dated as of June 25, 1997 between the Company and
Terry R. Peets.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
None.
18
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
Chief Financial Officer
By: /s/ Stephen R. Christie
--------------------------------------
Stephen R. Christie
Vice President
Corporate Controller
Dated: August 14, 1997
19