SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[ x ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1996.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission file number 0-27824
PIA MERCHANDISING SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
(State or color jurisdiction of (I.R.S. Employer Identification No.)
incorporate or organization)
19900 MacArthur Blvd., Suite 900, Irvine, CA 92715
(Address of principal executive offices)
(714) 476-2200
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: [ ] Yes [ X ] No
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Common Stock, $.01 Par Value: 5,791,626 shares as of April 30, 1996.
PIA Merchandising Services, Inc.
PART I: FINANCIAL INFORMATION PAGE
----
Item 1: Financial Statements
Condensed Consolidated Balance
Sheets as of March 31, 1996 (Unaudited)
and December 31, 1995
Condensed Consolidated Statements of
Income for the Three months ended
March 31, 1996 (Unaudited) and
March 31, 1995 (Unaudited)
Condensed Consolidated Statements of
Cash Flows for the Three months ended
March 31, 1996 (Unaudited) and
March 31, 1995 (Unaudited)
Condensed Consolidated Statement of
Stockholders' Equity (Unaudited)
Notes to Condensed Consolidated Financial
Statements
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-k
SIGNATURES
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
(IN THOUSANDS)
March 31, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $23,434 $ 185
Accounts receivable, net of allowance
for doubtful accounts 13,400 12,213
Prepaid expenses and other current assets 905 638
Deferred income taxes 493 493
------- -------
Total current assets 38,232 13,529
PROPERTY AND EQUIPMENT, net 2,030 2,110
OTHER ASSETS 284 447
------- -------
$40,546 $16,086
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 365 $ 1,838
Other current liabilities 5,497 4,105
Income taxes payable 746 455
------- -------
Total current liabilities 6,608 6,398
DEFERRED INCOME TAXES 300 300
LONG-TERM DEBT - 3,400
STOCKHOLDERS' EQUITY 33,638 5,988
------- -------
$40,546 $16,086
------- -------
------- -------
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- - --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
For the Three Months Ended March 31,
------------------------------------
1996 1995
---- ----
NET REVENUES $26,259 $23,997
OPERATING EXPENSES:
Field service costs 20,264 18,601
Selling expenses 2,655 2,496
General and administrative expenses 1,740 1,585
Depreciation and amortization 147 114
------- -------
Total operating expenses 24,806 22,796
------- -------
OPERATING INCOME 1,453 1,201
INTEREST EXPENSE (INCOME), NET (43) 118
------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,496 1,083
PROVISION FOR INCOME TAXES 599 380
------- -------
NET INCOME $ 897 $ 703
------- -------
------- -------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.18 $ 0.16
------- -------
------- -------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 4,932 4,309
------- -------
------- -------
See accompanying notes.
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
(IN THOUSANDS)
(UNAUDITED)
For the Three Months Ended March 31,
------------------------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 897 $ 703
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 147 114
Amortization of other assets and discount
on subordinated debt - 22
Provision for doubtful receivables 73 29
Changes in operating assets and liabilities (1,158) (1,204)
------- -------
Net cash used in operating activities (41) (336)
CASH FLOWS FROM INVESTING ACTIVITIES-
Capital expenditures (63) (142)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long term debt (3,400) (677)
Proceeds from issuance of common stock 26,753 0
------- -------
Net cash provided by (used in) financing
activities 23,353 (677)
------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 23,249 (1,155)
CASH AND CASH EQUIVALENTS,
beginning of period 185 1,414
------- -------
CASH AND CASH EQUIVALENTS,
end of period $23,434 $ 259
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest $ 69 $ 82
Cash paid for income taxes $ 317 $ 119
See accompanying notes.
PIA MERCHANDISING SERVICES INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
(IN THOUSANDS)
Common Stock Additional Accumulated Total
------------ paid-in earnings stockholders'
Shares Amount capital (deficit) equity
------ ------ ------- ------- ------
BALANCE, December 31, 1995 3,564 $6,454 --- ($466) $ 5,988
Reincorporation and stipulation
of $.01 par value common stock (6,418) 6,418 ---
Issuance of common stock in
initial public offering, net of
offering costs 2,138 21 26,732 26,753
Cashless exercise of warrants 87 1 (1) -
Net income 897 897
----- ------ ------- ---- -------
BALANCE, March 31, 1996 5,789 $ 58 $33,149 $431 $33,638
----- ------ ------- ---- -------
----- ------ ------- ---- -------
See accompanying notes.
PIA Merchandising Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Three Months Ended March 31, 1996
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. This financial information should be read in conjunction
with the consolidated financial statements and notes thereto for the
year ended December 31, 1995, included in the Company's Registration
Statement on Form S-1, which was declared effective on February 29,
1996. Operating results for the three month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996.
2. Net Income per Share
Net income per share is based on the weighted average number of
outstanding shares of common stock and dilutive common equivalent shares
from stock options and warrants (using the treasury stock method).
3. Initial Public Offering
In March, 1996, the Company completed its initial public offering of
2,137,800 shares of unissued common stock and 544,000 shares of
outstanding common stock that were offered by certain selling
stockholders. The Company received net proceeds of approximately $26.6
million after deducting expenses and underwriting discounts. Concurrent
with the offering, the Company was reincorporated in Delaware which
resulted in an increase in authorized preferred stock to 3,000,000
shares, an increase in authorized common stock to 15,000,000 shares and
a change in the par value of both the Company's common stock and
preferred stock from no par value to $.01 par value. This change in par
value resulted in a reclassification of $6,418,000 from common stock to
additional paid-in capital.
4. Line of credit and long-term obligations
In March 1996, $3.0 million of net proceeds from the initial public
offering were used for repayment of bank line of credit indebtedness.
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 quarters ended
March 31, 1996 and 1995, the Company generated approximately 92.3% and 87.9% of
its net revenues from manufacturer clients and 7.7% and 12.1% from retailer
clients, respectively. The mix of the Company's business between manufacturer
and retailer clients historically has not had a material impact on the Company's
cash flows or results of operations.
PIA's quarterly results of operations are subject to certain variability related
to the timing of retailer-mandated activity and the receipt of commission
overrides. Retailer-mandated activity is typically higher in the second and
third quarters of the year due to retailer scheduling of activity in off-peak
shopping periods. In addition, new product introductions increase during such
periods which require the reset of categories as the new products gain
distribution. The amount of commissions earned by PIA under its commission-
based contracts varies seasonally, and generally corresponds to the peak selling
seasons of the clients that have entered into these types of contracts.
Historically, the Company has recognized greater commission income in the first
and fourth quarters. See "Risk Factors -- Uncertainty of Commission Income."
The Company's quarterly results have in the past been subject to fluctuations
and, thus, the operating results for any quarter are not necessarily indicative
of results for any future period.
Results of Operations - First Quarter of Fiscal 1996 Compared to First Quarter
of Fiscal 1995:
The following table sets forth certain financial data as a percentage of net
revenues for the periods indicated:
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
Net revenues 100% 100%
Operating expenses:
Field service costs 77.2% 77.5%
Selling expenses 10.1% 10.4%
General and administrative expenses 6.6% 6.6%
Depreciation and amortization 0.6% 0.5%
---- ----
Total operating expenses 94.5% 95.0%
----- -----
Operating income 5.5% 5.0%
Interest expense, net (0.2%) 0.5%
----- -----
Income before provision for income taxes 5.7% 4.5%
Provision for income taxes 2.3% 1.6%
---- ----
Net income 3.4% 2.9%
---- ----
---- ----
Net revenues increased $2.3 million, or 9.4%, to $26.3 million in the first
quarter of 1996 from $24.0 million in the first quarter of 1995. The increase
in net revenues was the result of several factors including three months of
revenue in 1996 from several manufacturers who became clients in 1995, which
contributed $1.8 million, or 79.5% of the increase; new clients and increases in
revenue from existing clients in 1996, which contributed $3.0 million, or 132.9%
of the increase; and an increase in the Company's project business over first
quarter 1995 levels in the amount of $1.4 million. These increases were
partially offset by client losses of $2.3 million and the conclusion in 1995 of
a non-recurring project which contributed $1.6 million of the 1995 net revenue.
The increase in net revenues resulted from the demand by packaged goods
manufacturers for third party merchandising services as they continued to focus
on reducing their costs.
Field service costs increased $1.7 million, or 8.9%, to $20.3 million in the
first quarter of 1996 compared to $18.6 million in the first quarter of 1995.
Field service costs are comprised principally of field labor and related costs
and expenses required to provide routed coverage, project activities, key
account management and related technology costs, as well as the field overhead
required to support the activities of these groups of employees. The increase
in field service costs was primarily the result of increased operating costs
associated with the growth in net revenues. As a percentage of net revenues,
field service costs declined to 77.2% in the first quarter of 1996 from 77.5% in
the first quarter of 1995. The decline in the first quarter of 1996 resulted
from the effects of increased synergies in the routed merchandising area of the
Company's business. Also contributing to the decline was a slightly lower level
of retailer-mandated activity in the first quarter of 1996 due to unusually
harsh winter weather through a portion of the United States.
Selling expenses increased $0.2 million or 6.4%, to $2.7 million in the first
quarter of 1996 from $2.5 million in the first quarter of 1995. As a percentage
of net revenues, selling expenses decreased to 10.1% in the first quarter of
1996 from 10.4% in the first quarter of 1995 as spending increased at a slower
rate then revenue. Selling expenses increased primarily as a result of higher
payroll costs resulting from increased staffing and increased travel.
General and administrative expenses increased $0.1 million, or 9.8%, to $1.7
million in the first quarter of 1996 from $1.6 million in the first quarter of
1995. General and administrative expenses increased primarily as a result of
higher payroll costs due to increased staffing in general management and
management information services that was required to support overall business
growth, as well as salary increases in the ordinary course of business. As a
percentage of net revenues, general and administrative expenses did not change
from the first quarter of 1995 to the first quarter of 1996.
Depreciation and amortization expenses remained approximately the same from the
first quarter of 1995 to the first quarter of 1996.
Interest income, net was $43,000 during the first quarter of 1996. Interest
expense in the first quarter of 1995 was $118,000. The improvement resulted
from the investment of a portion of the Company's initial public offering
proceeds in interest bearing securities. These investments produced interest
earnings in excess of interest expense on borrowings during the first two months
of the quarter.
Income taxes were $0.6 million in the first quarter of 1996 and approximately
$0.4 million in the first quarter of 1995, representing an effective rate of
40.0% and 35.1%, respectively. The 1995 tax rate differed from an expected
combined federal and state tax rate of 40% due principally to a $0.1 million
reduction in the valuation allowance caused by the utilization of net operating
loss carryforwards. As of December 31, 1995, substantially all of the net
operating loss carryover had been utilized, which will cause the effective tax
rate to increase in the future.
Net income increased approximately $0.2 million, or 27.6%, to approximately $0.9
million in the first quarter of 1996, from approximately $0.7 million in the
first quarter of 1995, primarily as a result of the increase in net revenues
discussed above, as well as the decline in field service costs and selling
expenses as a percentage of net revenues.
RISK FACTORS
The following risk factors should be carefully reviewed in addition to the other
information contained in this Quarterly Report on Form 10-Q.
Concentrated Client Base
The Company's success is dependent in part upon its ability to maintain its
existing clients and to obtain new clients. The Company's ten largest clients
generated approximately 56.4% and 55.2% of the Company's net revenues for the
quarters ended March 31, 1996 and 1995, respectively. During these periods,
none of the company's manufacturer or retailer clients accounted for greater
than 10% of net revenues, other than S.C. Johnson Wax, which accounted for
approximately 13.1% of net revenues for the quarter ended March 31, 1996. The
majority of the Company's contracts with its clients for routed coverage have
one-year terms. PIA believes that the uncollectibility of amounts due from any
of its large clients, the loss of one or more of such clients, a significant
reduction in business from such clients, or the inability to attract new
clients, could have a material adverse effect on the Company's results of
operations.
Increase in Services Required Under Fixed Price Contracts
Manufacturers who sell their products through retail grocery stores generally
are required by the retailer to provide labor support inside these stores for a
variety of purposes, including new store sets and existing store resets,
remerchandisings, remodels and category implementations. The Company has
historically contracted with its manufacturer clients to provide these services,
among others, for a monthly flat fee or, in some cases, for a commission.
Substantially all of the Company's current contracts provide for one of these
two types of arrangements. As requests for retailer-mandated services and new
product introductions by manufacturers have increased over the past several
years, the Company's labor expense has increased without any related increase in
its revenue. Consequently, the Company has reevaluated its approach to
contracting with its clients, and is currently engaged in an effort to revise
its existing contracts upon their renewal to implement provisions that charge
for retailer-mandated services separately from traditional merchandising and
shelf maintenance tasks. In addition, the Company has recently developed a new,
standard contract that provides this activity-based approach to pricing for the
Company's more recent customers. The Company has recently renewed its contracts
with two of its major manufacturer clients using activity-based pricing, and is
currently in the process of renegotiating contracts upon their annual renewal
with certain of its other major clients. However, no assurance can be given
that PIA will be successful in renewing its other contracts on this basis. If
PIA is not successful in so renegotiating its major contracts, its margins could
be adversely affected.
Uncertainty of Commission Income
Approximately 19.3% of the Company's net revenues for the quarter ended March
31, 1996 was earned under commission-based contracts. These contracts provide
for commissions based on a percentage of the client's net sales of certain of
its products to designated retailers. Some of these
contracts also provide for a guaranteed minimum compensation to the Company.
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.
PIA Merchandising Services, Inc.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
The Company reincorporated in Delaware and amended its capital
structure. See Note 3 of the Notes to Condensed Consolidated
Financial Statements (unaudited).
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-k.
(11) Computation of Earnings Per Share
The company did not file any reports on Form 8-K during the three
months ended March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIA MERCHANDISING SERVICES, INC.
(Registrant)
By: /s/ Clinton E. Owens
---------------------------------
Clinton E. Owens
Chairman of the Board and
Chief Executive Officer
By: /s/ Robert E. Polentz
---------------------------------
Robert E. Polentz
Senior Vice President and
Chief Financial Officer
Dated: May 13, 1996
Exhibit 11
PIA MERCHANDISING SERVICES, INC.
COMPUTATION OF EARNINGS PER SHARE
- - --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
PRIMARY
Net income $ 897 $ 703
----- -----
----- -----
Common and common equivalent shares outstanding:
Weighted average shares of common stock 4,324 3,084
Options 497 175
Warrants 111 1,050
----- -----
Common and common equivalent shares used in
computing per share amounts 4,932 4,309
----- -----
----- -----
Net income per common and common equivalent
share $ .18 $ .16
----- -----
----- -----
FULLY DILUTED
Net income $ 897 $ 703
----- -----
----- -----
Common and common equivalent shares outstanding:
Weighted average shares of common stock 4,324 3,084
Options 504 175
Warrants 112 1,050
----- -----
Common and common equivalent shares used in
computing per share amounts 4,940 4,309
----- -----
----- -----
Net income per common and common equivalent
share $ .18 $ .16
----- -----
----- -----
5
0001004989
PIA MERCHANDISING SERVICES, INC.
1,000
3-MOS
DEC-31-1995
JAN-01-1996
MAR-31-1996
23,434
0
13,848
448
0
38,232
3,833
1,803
40,546
6,608
0
0
0
58
33,580
40,546
0
26,259
0
20,264
4,469
73
(43)
1,496
599
897
0
0
0
897
0.18
0.18
