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
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made effective as of
June 25, 1997 between PIA Merchandising Services, Inc., a Delaware corporation
(the "Corporation"), and Terry R. Peets (the "Executive").
R E C I T A L
WHEREAS, the Corporation desires to employ the Executive as its Chief
Executive Officer reporting to the Corporation's Board of Directors, and the
Executive desires to accept such employment; and
WHEREAS, the Corporation desires to name the Executive as a member of
the Corporation's Board of Directors, and the Executive desires to accept such
position; and
WHEREAS, the Corporation and the Executive desire to fix the terms of
the Executive's employment with the Corporation, and have agreed upon the terms
and conditions set forth below.
A G R E E M E N T
NOW, THEREFORE, the parties hereby agree as follows:
1. EMPLOYMENT DUTIES. The Corporation hereby hires the Executive,
and the Executive hereby accepts employment with the Corporation, on the terms
set forth below. The Executive shall serve as Chief Executive Officer and shall
report to the Board of Directors. The Executive shall perform all the duties
that are usual and customary for the office to which the Executive is appointed,
subject always to the policies set by the Board of Directors or Bylaws of the
Corporation. The Executive shall perform said duties primarily at the Irvine,
California location of the Corporation and its environs. No transfer or change
in location shall be made without Executive's prior consent. The parties
hereby acknowledge that the Executive will be required to travel in connection
with the performance of his duties hereunder.
2. TERM. The Executive shall be employed at-will by the Corporation
beginning as of June 25, 1997, subject to Executive's current consulting
assignment, and ending on the date of notice of termination as provided for in
Paragraph 8 herein (the "Employment Term").
3. COMMITMENT OF EXECUTIVE. The Executive shall work for the
Corporation on a full-time basis and shall devote substantially all of his
business time, attention, knowledge and skill to the performance of his
duties herein throughout the Employment Term and shall at all times discharge
said duties faithfully and to the best of his ability, experience and
talents. Notwithstanding the foregoing, the Corporation acknowledges and
agrees that Executive may continue to serve as a director of other companies
so long as such board memberships do not conflict with or adversely affect
his performance at the Corporation. At all times during the Employment Term,
the Executive shall use his best efforts to observe and conform to all the
laws and regulations applicable to the Corporation.
1
4. COMPENSATION AND EXPENSES.
(a) FIXED SALARY. From June 25, 1997 through August 10, 1997,
the Executive shall receive a fixed salary of $1,200 per day. The Executive
shall receive a fixed salary during the Employment Term at the rate of $20,834
per month for the remainder of the first 12 months, payable in accordance with
the Corporation's payroll practices for other executive officers of the
Corporation, as such practices may change time to time. Such fixed salary shall
be adjusted on each anniversary date of this Agreement in accordance with the
percentage change in the Los Angeles-Long Beach-Anaheim Consumer Price Index for
the month of July compared to the index for the preceding July, in addition to
such other upward adjustments, if any, as may be approved by the Board of
Directors from time to time. Executive acknowledges that the Corporation will
deduct and withhold from the fixed salary payable to Executive hereunder the
amount required to be deducted and withheld under the provisions of all
applicable statutes, regulations, ordinances or orders.
(b) BONUS. The Executive shall receive a bonus, payable
annually within 15 days after receipt by the Board of Directors of the
Corporation's audited (or if no audit is prepared, unaudited) financial
statements for the applicable period, equal to 4.0% of the Corporation's annual
operating income, which is defined as earnings before interest, taxes and
amortization ("EBITA"), up to a maximum of 100% of the Executive's annual fixed
salary set forth in Paragraph 4(a) (the "Bonus"). The EBITA will exclude the
operating earnings which are acquired as a result of the Corporation entering
into an acquisition or merger ("Acquired EBITA"). The Bonus shall be payable
with respect to each partial or complete fiscal year during the Employment Term
based on the Corporation's profits during such period, commencing with the
period from July 1, 1997 through December 31, 1997.
(c) STOCK OPTION GRANT. On the date hereof, the Corporation
will grant to the Executive a stock option (the "Option") covering 250,000
shares of the Corporation's common stock, $.01 par value (the "Common Stock"),
pursuant to the Corporation's 1995 Stock Option Plan. The Option will vest at
the rate of 25% per year on each of the first four anniversaries of the date
hereof. The exercise price of the Option will be the closing price of the
Common Stock on the Nasdaq National Market on the date hereof.
(d) EXPENSES. During the Employment Term, the Executive will be
reimbursed for his reasonable and necessary expenses incurred for the benefit of
the Corporation, but only in accordance with the general policy of the
Corporation as adopted by the Corporation from time to time. With respect to
any expenses which are reimbursed by the Corporation to the Executive, the
Executive agrees to account to the Corporation in sufficient detail and with
sufficient documentary and other evidence to allow the Corporation to support a
claim for an income tax deduction for such paid item if such item is deductible.
(e) CAR ALLOWANCE. The Corporation requires the Executive to
travel in and about the Los Angeles metropolitan area and to utilize his own
vehicle for such purpose. Accordingly, during the Employment Term, the
Executive will receive an allowance for automobile expenses at a fixed rate of
$750.00 per month, payable on a monthly basis in arrears.
5. BENEFIT PLANS. The Executive shall be entitled to participate in
group plans or programs maintained by the Corporation, if any, relating to
retirement, health, dental, vision, disability, life insurance and other related
benefits as in effect from time to time generally for the other executive
officers of the Corporation. In addition to the benefit provided to other
senior executives, Executive shall receive the benefits specified in Exhibit A.
2
6. VACATION AND SICK LEAVE. On an annual basis, the Executive shall
be entitled to as many paid vacation days and as much sick leave as the
Executive, in his best judgment, deems appropriate and reasonable. The
Executive shall schedule and take such vacation days so as not to materially
disrupt or impair the operations of the Corporation.
7. COVENANT NOT TO COMPETE.
(a) GENERALLY. The Executive acknowledges and agrees that
because of the special, unique, unusual and extraordinary nature of the services
the Executive is providing, it would substantially adversely affect the business
of the Corporation were the Executive to provide the same substantially similar
services to any third party. Therefore, during the Employment Term, the
Executive agrees to be bound by the covenant not to compete set forth herein.
The Executive shall not, without the prior written consent of the Corporation,
at any time during the Employment Term in any state of the United States of
America, or in any other country or territory throughout the world, engage or
participate, directly or indirectly, in any business that is in competition in
any manner with that of the Corporation, whether as employee, agent, employer,
principal, partner, holder of equity securities (other than as a holder of less
than one percent of the outstanding equity securities of any publicly traded
company), creditor, corporate officer, corporate director or in any other
individual or representative capacity whatsoever.
(b) SEVERABLE COVENANTS. It is intended that the preceding
covenant shall be construed as a series of separate covenants, one for each
county of each state of the United States of America. If, in any judicial
proceeding, a court shall refuse to enforce any of the separate covenants
included herein, then such unenforceable covenant shall be deemed eliminated
from these provisions for the purpose of those proceedings to the extent
necessary to permit the remaining separate covenants to be enforced.
8. TERMINATION OF EMPLOYMENT.
(a) FOR CAUSE. The Corporation may terminate the employment of
the Executive for cause at any time. Termination for cause shall be effective
from the date of notice thereof to the Executive. Cause, as used herein, shall
be any one or more of the following acts of the Executive but no other act or
omission: (i) conviction for fraud, embezzlement, or any felonious offense; and
(ii) a material violation of any of the provisions of this Agreement (including
without limitation violations of Section 1 by failure to follow written policies
set by the Board of Directors, violations of Section 3 by material neglect of
duties and violations of Section 7) which continues after written notice and
reasonable opportunity (not to exceed 15 days) in which to cure. If the alleged
breach or default is of a type which cannot be cured within 15 days and the
Executive makes reasonable efforts to cure such alleged breach within such 15-
day period, then the time shall be extended as necessary to complete such cure.
Upon termination in accordance with this Paragraph 8(a), the Executive shall be
entitled to no further compensation hereunder other than the fixed salary
accrued until the date written notice is delivered to the Executive and any
Bonus accrued until the date written notice is delivered to the Executive (such
accrued Bonus, if any, shall be determined in accordance with the terms of
Paragraph 4(b) except that such determination shall be based on the unaudited
EBITA less Acquired EBITA of the Corporation reported from the beginning of the
fiscal year in which such termination occurs through the date written notice is
delivered to the Executive). The Corporation's exercise of its right to
terminate with cause shall be without prejudice to any other remedy to which it
may be entitled at law, in equity or under this Agreement.
3
(b) FOR DEATH OR INCAPACITY. This Agreement shall automatically
terminate upon the death of the Executive. In addition, if any disability or
incapacity of the Executive to perform his duties as the result of any injury,
sickness or physical, mental or emotional condition continues for a period of
180 days out of any 360 calendar day period, the Corporation may terminate the
Executive's employment upon 10 days written notice. Upon termination in
accordance with this Paragraph 8(b), the Executive (or the Executive's estate,
as the case may be) shall be entitled to no further compensation hereunder other
than the fixed salary accrued until the date of death or, in the case of
disability, the date written notice is delivered to the Executive and any Bonus
accrued until such date (such accrued Bonus, if any, shall be determined in
accordance with the terms of Paragraph 4(b) except that such determination shall
be based on the unaudited EBITA less Acquired EBITA of the Corporation reported
from the beginning of the fiscal year in which such termination occurs through
such date).
(c) WITHOUT CAUSE. The Corporation may terminate the employment
of the Executive without cause any time by serving prior written notice to the
Executive. Upon termination in accordance with this Paragraph 8(c), the
Executive shall be entitled to no further compensation hereunder other than
(i) the fixed salary accrued hereunder until the effective date of termination
specified in the notice to the Executive (the "Termination Date"), (ii) any
Bonus accrued until the Termination Date (such accrued Bonus, if any, shall be
determined in accordance with the terms of Paragraph 4(b) except that such
determination shall be based on the unaudited EBITA less Acquired EBITA of the
Corporation reported from the beginning of the fiscal year in which such
termination occurs through the Termination Date), (iii) the fixed salary at the
rate paid as of the Termination Date during the twelve (12) month period
beginning on the Termination Date, such fixed salary to be paid in equal monthly
installments in advance during such twelve month period, and (iv) the benefits
to which the Executive was entitled pursuant to Paragraph 5 and Exhibit A during
the twelve (12) month period beginning on the Termination Date.
(d) VOLUNTARY TERMINATION OR RESIGNATION. The Executive may
terminate or resign his employment at any time by serving no less than 30
business days' prior written notice to the Corporation. Upon termination or
resignation in accordance with this Paragraph 8(d), the Executive shall be
entitled to no further compensation hereunder other than the fixed salary
accrued through the date of termination specified in the notice from the
Executive and any Bonus accrued until such date (such accrued Bonus, if any,
shall be determined in accordance with the terms of Paragraph 4(b) except that
such determination shall be based on the unaudited EBITA less Acquired EBITA of
the Corporation reported from the beginning of the fiscal year in which such
termination occurs through such date).
(e) TERMINATION FOR GOOD REASON. The Executive may terminate or
resign his employment at any time for "good reason" (as defined below) by
serving no less than 30 business days' prior written notice to the Corporation.
The Executive shall have the right to terminate or resign his employment for
"good reason" if the Corporation (or any successor thereto pursuant to Paragraph
9(b) hereof) breaches an obligation set forth in Paragraph 1, 4, 5 or 6 hereof.
Upon termination in accordance with this Paragraph 8(e), a termination "without
cause" will be deemed to have occurred and the Executive shall be entitled to
the compensation set forth in Paragraph 8(c).
9. MISCELLANEOUS.
(a) AUTHORITY. Executive represents and warrants to the
Corporation that Executive is free to enter into this Agreement and has full
right, power and authority to enter into this Agreement. Executive represents
and warrants that the execution of this Agreement and the performance of the
terms and conditions hereof, will not violate any contract, agreement, document,
or understanding to which Executive is a party or by which Executive may be
bound
4
and that the execution of this Agreement and the performance of the terms and
conditions hereof will not subject the Corporation to any claims, liabilities
or litigation. Except as set forth on Schedule 1 and the board memberships
referenced in Paragraph 1, the Executive further represents that the
Executive is not a party to or otherwise bound by any agreement or
arrangement, or subject to any judgment, decree or order of any court or
administrative agency, (i) that would conflict with the Executive's
obligation to diligently promote and further the interest of the Corporation,
or (ii) that would conflict with the Corporation's business as now conducted.
The Corporation represents and warrants to the Executive that it has full
right, power and authority to enter into this Agreement.
(b) ASSIGNMENT. It is understood and the parties hereby agree
that the services to be performed by the Executive hereunder are personal,
special, unique, unusual and extraordinary in nature, and the obligations to
perform such services and the conditions and covenants of this Agreement cannot
be assigned by the Executive and any such attempted assignment is void. This
Agreement, however, shall be assignable by the Corporation to any corporation or
other business entity which succeeds to all or substantially all of the business
of the Corporation through merger, consolidation, corporation reorganization or
by acquisition of all or substantially all of the assets of Corporation and
which assumes Corporation's obligations under this Agreement and binding on the
Corporation and its successors and assigns.
(c) ATTORNEYS' FEES, COSTS. If any party shall bring an action
against the other party hereto by reason of the breach of any covenant,
warranty, representation or condition herein, or otherwise arising out of this
Agreement, whether for declaratory or other relief, the prevailing party in such
suit shall be entitled to such party's costs of suit and attorneys' fees, which
shall be payable whether or not such action is prosecuted to judgment.
(d) ENTIRE AGREEMENT. This Agreement contains the entire
agreement of the parties hereto and supersedes and replaces all prior agreements
and understandings, whether oral or written, between the parties with respect to
the subject matter herein.
(e) SEVERABILITY. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision, provided that no such severability shall be
effective if it materially changes the economic benefit of the Agreement to any
party.
(f) HEADINGS. The headings of paragraphs and
subparagraphs herein are used for convenience only and shall not affect the
meaning or contents hereof.
(g) NOTICE. Any notice, payment, report or any other
communication required or permitted to be given by one party to the other party
by this Agreement shall be in writing and either (i) served personally on the
other party, (ii) sent by express, registered or certified first-class mail,
postage pre-paid, addressed to the other party at his address as indicated next
to his signature below, or to such other address as the addressee shall have
theretofore furnished to the other party by like notice or (iii) delivered by
commercial courier to the other party. Notice shall be deemed given upon the
earlier of actual receipt or the third day after mailing if mailed pursuant to
clause (ii) above.
(h) APPLICABLE LAW. This Agreement shall be construed and
interpreted in accordance with the laws of the State of California, as such laws
are interpreted, construed and applied with respect to disputes arising in such
state between residents thereof domiciled in such state.
5
IN WITNESS WHEREOF, this Agreement has been executed by each of the
parties effective as of the day and year first above written.
CORPORATION:
PIA MERCHANDISING SERVICES, INC.
By: /s/ Clinton E. Owens
-----------------------------------
Clinton E. Owens
Chairman of the Board
EXECUTIVE:
/s/ Terry R. Peets
----------------------------------------
Terry R. Peets
Address:
327 Coral Avenue
Balboa Island, California 92662
6
EXHIBIT A
TO EMPLOYMENT AGREEMENT
BENEFIT PLANS
1. EXEC-U-CARE SUPPLEMENTAL MEDICAL. Exec-U-Care provides covered executives
with health and dental insurance over and above that offered to the
Corporation's employees. The standard health and dental plan requires
employees to pay between $50 and $105 per month for health plan coverage
for the employee and his family, and between $15 and $35 per month for
dental coverage.
2. TERM LIFE AND DISABILITY INSURANCE. The Corporation shall provide a term
life insurance policy and a disability insurance policy with policy limits
consistent with the Corporation's Chairman of the Board.
7
SCHEDULE 1
TO EMPLOYMENT AGREEMENT
RESTRICTIONS ON EMPLOYMENT ACTIVITIES
1. For the five week period from Sunday, June 29, 1997, through Saturday,
August 2, 1997, Executive will be unavailable to PIA on Monday, Tuesday and
Wednesday of each week, due to a prior consulting commitment with Randalls
Food Markets, Inc., Houston, Texas.
8
5
1,000
3-MOS
DEC-31-1997
APR-01-1997
JUN-30-1997
17,706
0
18,743
909
0
38,608
6,418
2,707
43,401
12,399
0
0
0
59
30,634
43,401
0
31,643
0
29,638
5,005
105
(219)
(2,754)
(812)
(1,942)
0
0
0
(1,942)
(0.35)
(0.35)
