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, 1997.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission file number 0-27824
PIA MERCHANDISING SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19900 MacArthur Blvd., Suite 900, Irvine, CA 92612
(Address of principal executive offices)
(714) 476-2200
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: [ X ] Yes [ ] No
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Common Stock, $.01 Par Value: 5,899,558 shares as of April 30, 1997.
1
PIA Merchandising Services, Inc.
PART I: FINANCIAL INFORMATION PAGE
Item 1: Financial Statements
Condensed Consolidated Balance
Sheets as of March 31, 1997 (Unaudited)
and December 31, 1996
Condensed Consolidated Statements of
Income for the Three Months Ended
March 31, 1997 (Unaudited) and
March 31, 1996 (Unaudited)
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 1997 (Unaudited) and
March 31, 1996 (Unaudited)
Notes to Condensed Consolidated Financial
Statements
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Risk Factors
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
2
PART I: FINANCIAL INFORMATION
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
(In Thousands)
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $21,791 $ 19,519
Accounts receivable, net of allowance
for doubtful accounts 18,914 22,630
Prepaid expenses and other current assets 1,416 564
Deferred income taxes 669 669
--------- ------------
Total current assets 42,790 43,382
PROPERTY AND EQUIPMENT, net 1,783 1,847
OTHER ASSETS 2,688 2,443
--------- ------------
$47,261 $47,672
--------- ------------
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 823 $ 772
Other current liabilities 10,517 9,762
Income taxes payable 0 111
-------- -----------
Total current liabilities 11,340 10,645
DEFERRED INCOME TAXES 309 309
STOCKHOLDERS' EQUITY 35,612 36,718
--------- ------------
$47,261 $47,672
--------- ------------
--------- ------------
See accompanying notes.
3
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------
(In thousands, except per share amounts)
(Unaudited)
For the Three Months Ended March 31,
------------------------------------
1997 1996
---- ----
NET REVENUES $29,356 $26,259
OPERATING EXPENSES:
Field service costs 26,369 20,264
Selling expenses 2,554 2,655
General and administrative expenses 2,449 1,740
Depreciation and amortization 197 147
-------- -------
Total operating expenses 31,569 24,806
-------- -------
OPERATING INCOME (LOSS) (2,213) 1,453
-------- -------
OTHER INCOME:
INTEREST INCOME, NET 231 43
EQUITY IN EARNINGS OF AFFILIATE 24 0
-------- -------
TOTAL OTHER INCOME 255 43
-------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES (1,958) 1,496
(PROVISION) BENEFIT FOR INCOME TAXES 790 (599)
-------- -------
NET INCOME (LOSS) $ (1,168) $ 897
-------- -------
-------- -------
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ ( 0.19) $ 0.18
-------- -------
-------- -------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 6,109 4,932
-------- -------
-------- -------
See accompanying notes.
4
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
(In thousands)
(Unaudited)
For the Three Months Ended March 31,
------------------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss) (1,168) $ 897
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 197 147
Provision for doubtful receivables 330 76
Changes in operating assets and liabilities 2,941 (1,161)
-------- -------
Net cash (used in) provided by
operating activities 2,300 (41)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (91) (63)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long term debt 0 (3,400)
Proceeds from issuance of common stock, net 63 26,753
-------- -------
Net cash provided by financing activities 63 23,353
-------- -------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 2,272 23,249
CASH AND CASH EQUIVALENTS,
beginning of period 19,519 185
-------- -------
CASH AND CASH EQUIVALENTS,
end of period $ 21,791 $ 23,434
-------- -------
-------- -------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest $ 0 $ 69
Cash paid for income taxes $ 86 $ 320
See accompanying notes.
5
PIA Merchandising Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Three Months Ended March 31, 1997
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. This financial information should be read in conjunction
with the consolidated financial statements and notes thereto for the
year ended December 31, 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 period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1997.
2. The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share," which is
effective for financial statements for both interim and annual periods
ending after December 15, 1997. Early adoption of the statement is not
permitted. The company has applied this statement to the 1996 first
quarter and annual results and to the 1997 first quarter results and
determined that the adoption of this statement would not have had a
material impact on the earnings per share calculations for these periods.
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, 1997 and 1996, the Company generated approximately 90.0% and
87.0% of its net revenues from manufacturer clients, and 10.0% and 13.0% from
retailer clients, respectively. The mix of the Company's business between
manufacturer and retailer clients historically has not had a material impact
on the Company's cash flows or results of operations.
The Company currently provides three principal types of services: syndicated
services, project services and dedicated services. Syndicated services
consist of regularly scheduled, routed merchandising services provided at the
store level for manufacturers, primarily under one year contracts. Project
services consist primarily of special in-store services initiated by
retailers and manufacturers, which are typically used for large scale
implementations over 30 to 60 days. Dedicated services consist of
merchandising services that are performed for a specific retailer or
manufacturer by a dedicated organization, primarily under multi-year
contracts.
6
During 1996 and the first quarter of 1997, the Company's profitability was
affected by a shift in its business from syndicated services to projects and
dedicated services. The Company's syndicated services business has
historically required a significant fixed management and personnel
infrastructure. Due in part to industry consolidation and increased
competition, the Company lost a number of syndicated services clients during
1996 and the first quarter of 1997, causing a decrease in the profitability
of that business in the last two quarters of 1996 and the first quarter of
1997. PIA has not sold any sizable new syndicated business to compensate for
this loss. The Company believes that revenues in the balance of 1997 from
syndicated services will continue to decline as a result of the wind-down of
the lost business. Because of the fixed nature of the associated costs, the
loss of syndicated business has a material adverse effect on PIA's results of
operations.
The Company continues to experience a significant increase in the demand for
project services. PIA's project revenues have grown from $7.9 in the first
quarter of 1996 to $9.0 in the first quarter of 1997. This increase has
required an investment in management infrastructure and systems to support
this business.
The Company's dedicated services business is also growing rapidly. During
the first quarter of 1997, revenues from dedicated services accounted for
26.8% of total revenues, as compared to 7.1% in the first quarter of 1996.
In the dedicated services business, PIA provides each manufacturer or
retailer client with an organization, including a management team, that works
exclusively for that client.
PIA's quarterly results of operations are subject to certain variability
related to the timing of retailer-mandated activity and the receipt of
commissions. Retailer-mandated activity is typically higher in the second and
third quarters of the year due to retailer scheduling of activity in off-peak
shopping periods. In addition, new product introductions increase during such
periods which require the reset of categories as the new products gain
distribution. The amount of commissions earned by PIA under its
commission-based contracts varies seasonally, and generally corresponds to
the peak selling seasons of the clients that have entered into these types of
contracts. Historically, the Company has recognized greater commission
income in the first and fourth quarters. See "Risk Factors -- Uncertainty of
Commission Income." The Company's quarterly results have in the past been
subject to fluctuations and, thus, the operating results for any quarter are
not necessarily indicative of results for any future period.
7
Results of Operations - First Quarter of 1997 Compared to First Quarter of
1996:
The following table sets forth certain financial data as a percentage of net
revenues for the periods indicated:
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
Net revenues 100% 100%
Operating expenses:
Field service costs 89.8 77.2
Selling expenses 8.7 10.1
General and administrative expenses 8.3 6.6
Depreciation and amortization 0.7 0.6
----- -----
Total operating expenses 107.5 94.5
----- -----
Operating income (loss) (7.5) 5.5
Interest income, net 0.8 0.2
Equity in earnings of affiliate 0.1 0.0
----- -----
Income (loss) before provision for income taxes (6.6) 5.7
(Provision) benefit for income taxes 2.7 (2.3)
----- -----
Net income (loss) (3.9)% 3.4%
----- -----
----- -----
Net revenues increased $3.1 million, or 11.8%, to $29.4 million in the first
quarter of 1997 from $26.3 in the first quarter 1996. The increase in net
revenues was the result of revenues from new clients of $9.1 million, offset
by a net decrease from other clients of $6.0 million. This net decrease is
comprised of a net decrease in revenues of $.4 million from existing clients,
and a decline in revenues of $5.6 million due to client losses.
The net revenue increase in the first quarter of 1997 was a result of an
increase in project business of $1.1 million, representing a 14.4% increase
in project revenues over the first quarter of 1996, and from an increase in
dedicated services of $6.0 million, representing a 421.0% increase in
dedicated service revenue over the first quarter of 1996. These increases
were offset by a decrease of $4.0 million, or 24.1%, in revenues from
syndicated services over the first quarter of 1996.
Field service costs increased $6.1 million, or 30.1%, to $26.4 million in the
first quarter of 1997, as compared to $20.3 million in the first 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, 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 is primarily
due to increases in revenues from dedicated and project services. As a
percentage of net revenues, field service costs increased to 89.8% in the
first quarter of 1997 from 77.2% in the first quarter of 1996 primarily due
to the negative leverage caused by the loss of syndicated services business;
salary increases in the ordinary course of business; and increased travel
costs associated with the larger work force.
8
Selling expenses decreased $0.1 million, or 3.8%, to $2.6 million in the
first quarter of 1997 from $2.7 million in the first quarter of 1996.
Selling expenses decreased primarily as a result of lower staffing and travel
costs. As a percentage of net revenues, selling expenses decreased to 8.7%
in the first quarter of 1997 from 10.1% in the first quarter of 1996.
General and administrative expenses increased $0.7 million, or 40.7%, to $2.4
million in the first quarter of 1997 from $1.7 million in the first quarter
of 1996. General and administrative expenses increased primarily as a result
of higher payroll costs due to increased staffing in recruitment and training
and management information services that were required to support overall
business growth, increased provision for uncollectible accounts, termination
costs, as well as salary increases in the ordinary course of business. As a
percentage of net revenues, general and administrative expenses amounted to
8.3% in the first quarter 1997 compared to 6.6% in the first quarter of 1996.
Depreciation and amortization expenses increased slightly as a result of
depreciation of computer hardware and software development costs for shelf
technology and for general business purposes.
Interest income increased as a result of the investment of 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.
Income tax benefit was approximately $0.8 million in the first quarter of
1997, compared to income tax expense of $0.6 million in the first quarter of
1996, representing an effective rate of 40.3% and 40.0%, respectively.
The Company incurred a net loss of approximately $1.2 million in the first
quarter of 1997, compared to net income of approximately $0.9 million in the
first quarter of 1996, primarily as a result of operating expenses increasing
at a faster rate than revenues, as discussed above.
Liquidity and Capital Resources
The Company's primary capital need has been to fund the working capital
requirements created by its growth in net revenues. On March 1, 1996, the
Company completed an initial public offering of its Common Stock, raising
$26.5 million. Prior to this offering, the Company's primary sources of
financing were senior borrowings from a bank under a revolving line of credit
and subordinated borrowings from two stockholders. During the first quarter
of 1997, the Company had a net increase in cash flow of $2.3 million
principally due to a reduction in accounts receivable.
9
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
$7,000,000. Borrowings under the line of credit bear interest at the bank's
reference rate, unless the Company elects the specified offshore rate. The
credit agreement contains various covenants which, among other things,
require compliance with certain financial tests such as working capital,
tangible net worth, leverage and profitability. In addition, the credit
agreement imposes certain restrictions on the Company, including the
incurrence of additional indebtedness, the payment of dividends, and the
ability to make acquisitions. No borrowings are currently outstanding under
this facility.
In March 1997, the Company's Board of Directors approved a stock repurchase
program under which the Company is 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 is funded by working capital. As of May 1,
1997, the Company repurchased an aggregate of 367,000 shares of Common Stock
for an aggregate price of $2,149,117.
The Company believes that it's working capital and available line of credit
are sufficient to fund its operations for the next 12 months.
RISK FACTORS
The following risk factors should be carefully reviewed in addition to the
other information contained in this Quarterly Report on Form 10-Q.
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 routed coverage in grocery
stores for relatively few clients in newly-opened regions during the
Company's continuing national expansion in 1992 and 1993, and from the
write-off of $1.7 million in goodwill in 1992. In addition, the Company
incurred a net loss of $1.2 million for the first quarter of 1997, and
expects its 1997 operating results to be substantially less than the prior
year. There can be no assurance that the Company will not sustain further
losses.
10
LOSS OF SYNDICATED BUSINESS
PIA's business mix has changed significantly over 1996 and the first quarter
of 1997, and is expected to continue to change during the balance of 1997 in
response to client needs and the evolving third party merchandising industry.
Due in part to industry consolidation and increased competition, the Company
has lost a substantial amount of syndicated services business over the last
15 months, and has not sold any sizeable new syndicated business to
compensate for this loss. This business has historically required a
significant fixed management and personnel infrastructure. Accordingly, the
loss of syndicated business, without offsetting gains, has a material adverse
effect on the Company's results of operations.
INDUSTRY CONSOLIDATION; CONCENTRATED CLIENT BASE
The retail industry is undergoing a consolidation process that is resulting
in fewer, larger retailers. The Company's success is dependent in part upon
its ability to maintain its existing clients and to obtain new clients. As a
result of industry consolidation, the Company has lost certain clients, and
this trend could continue to have a negative effect on the Company's client
base and results of operations. The Company's ten largest clients generated
approximately 74.0% and 58.4% of the Company's net revenues for the quarters
ended March 31, 1996 and 1997, respectively. During these periods, none of
the Company's manufacturer or retailer clients accounted for greater than 10%
of net revenues, other than Buena Vista Home Video and S.C. Johnson which
accounted for 25.6% and 10.7% of net revenues, respectively, for the quarter
ended March 31, 1997, and S.C. Johnson which accounted for 13.2% of net
revenues for the quarter ended March 31, 1996. 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, the loss of
one or more of such clients, a significant reduction in business from such
clients, or the inability to attract new clients, would have a material
adverse effect on the Company's results of operations.
COMPETITION
The third party merchandising industry is highly competitive and is comprised
of an increasing number of merchandising companies with either specific
retailer, retail channel or geographic coverage, and food brokers. These
competitors tend to compete with the Company primarily in the retail grocery
channel, and some of them may have a greater presence in certain of the
retailers in whose stores the Company performs its services. The Company
also competes with several companies that are national in scope, such as
Powerforce, Spar/Marketing Force, Pimms and Alpha One. These companies
compete with PIA principally in the mass merchandiser, chain drug and deep
discount drug retail channels.
The Company believes that the principal competitive factors within its
industry include quality of service, cost and the ability to execute specific
client priorities rapidly and consistently over a wide geography. If any of
the Company's major competitors were to seek to gain or retain market share
by reducing its prices, the Company could experience downward pressure on the
prices that it charges for certain elements of its services. The Company has
been forced periodically to adjust its prices to retain certain business.
There can be no assurance that these competitors will not reduce their
prices, or that in the future the Company will not face greater competition
from other national or regional merchandising companies or food brokers.
11
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 has revised certain of its
existing contracts upon their renewal to implement provisions that charge for
retailer-mandated services separately from traditional merchandising and
shelf maintenance tasks. No assurance can be given that the Company will be
successful in renewing the remaining contracts on this basis.
UNCERTAINTY OF COMMISSION INCOME
Approximately 15.0% of the Company's net revenues for the quarter ended March
31, 1997 was earned under commission-based contracts. These contracts
provide for commissions based on a percentage of the client's net sales of
certain of its products to designated retailers. Commission paid to PIA
under these contracts have had a significant effect on the Company's
profitability in certain quarters. Under certain of these contracts, the
Company generally receives a draw on a monthly or quarterly basis, which is
then applied against commissions earned. Adjustments are made on a monthly
or quarterly basis upon receipt of reconciliations between commissions earned
from the client and the draws previously received. The reconciliations
typically result in commissions owed to the Company in excess of previous
draws; however, the Company cannot predict with accuracy the level of its
clients' commission-based sales. Accordingly, the amount of commissions in
excess of or less than the draws previously received will fluctuate and can
significantly affect the Company's operating results in any quarter. In
addition, the amount of commissions earned by the Company under these
contracts varies seasonally, and generally corresponds to the peak selling
seasons of the clients that have entered into these types of contracts.
Historically, the Company has recognized greater commission income in its
first and fourth quarters due to the timing of such clients' sales.
DEPENDENCE ON SENIOR MANAGEMENT
The Company is dependent upon the services of its officers and the key
management personnel involved in its field organization. The loss of the
services of one or more of these individuals could have a material adverse
effect on the Company. The Company carries term life insurance on Clinton E.
Owens, the Company's Chairman and Chief Executive Officer.
12
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K.
(27) Financial Data Schedule
The Company did not file any reports on Form 8-K during the
three months ended March 31, 1997.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIA MERCHANDISING SERVICES, INC.
(Registrant)
By: /s/ Clinton E. Owens
----------------------------
Clinton E. Owens
Chairman of the Board and
Chief Executive Officer
By: /s/ Roy L. Olofson
----------------------------
Roy L. Olofson
Executive Vice President and
Chief Financial Officer
Dated: May , 1997
14
5
1,000
3-MOS
DEC-31-1996
JAN-01-1997
MAR-31-1997
21,791
0
19,751
837
0
42,790
4,192
2,409
47,261
11,340
0
0
0
59
33,429
47,261
0
29,356
0
26,369
4,870
330
(255)
(1,958)
790
(1,168)
0
0
0
(1,168)
(0.19)
(0.19)
