<PAGE> 1
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 first quarterly period ended April 3, 1998.
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 May 8, 1998, there were 5,396,219 shares of Common Stock outstanding.
<PAGE> 2
PIA Merchandising Services, Inc.
Index
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
<S> <C>
Condensed Consolidated Balance
Sheets as of December 31, 1997, and
April 3, 1998 (Unaudited)....................................3
Condensed Consolidated Statements of Operations
Quarter Ended March 31, 1997 (Unaudited), and
April 3, 1998 (Unaudited)....................................4
Condensed Consolidated Statements of Cash Flows
Quarter Ended March 31, 1997 (Unaudited), and
April 3, 1998 (Unaudited)....................................5
Notes to Condensed Consolidated Financial
Statements (Unaudited).......................................6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................8
Risk Factors.......................................................14
PART II: OTHER INFORMATION
Item 1: Legal Proceedings..................................................16
Item 2: Changes in Securities and Use of Proceeds..........................16
Item 6: Exhibits and Reports on Form 8-K...................................17
SIGNATURES....................................................................18
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
PIA MERCHANDISING SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, April 3,
1997 1998
------------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,987 $ 8,304
Accounts receivable, net of allowance for doubtful accounts and
sales allowance of $1,451 and $1,515 for 1997 and 1998, respectively 16,053 19,469
Federal income tax refund receivable 2,905 --
Prepaid expenses and other current assets 816 949
-------- --------
TOTAL CURRENT ASSETS 32,761 28,722
PROPERTY AND EQUIPMENT, NET (NOTE 4) 2,416 2,322
-------- --------
INVESTMENTS AND OTHER ASSETS:
Investment in affiliate 418 438
Other assets 872 849
-------- --------
TOTAL OTHER ASSETS 1,290 1,287
-------- --------
TOTAL ASSETS $ 36,467 $ 32,331
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,442 $ 914
Other current liabilities 13,334 13,291
Income taxes payable 47 73
-------- --------
TOTAL CURRENT LIABILITIES 16,823 14,278
LONG-TERM LIABILITIES 966 384
-------- --------
TOTAL LIABILITIES 17,789 14,662
-------- --------
STOCKHOLDERS' EQUITY:
Common stock and additional paid-in-capital 33,488 33,503
Retained earnings (accumulated deficit) (11,806) (12,830)
Less: Treasury stock (3,004) (3,004)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 18,678 17,669
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,467 $ 32,331
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
PIA MERCHANDISING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1997, AND APRIL 3, 1998
- --------------------------------------------------------------------------------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------
March 31, April 3,
1997 1998
--------- --------
<S> <C> <C>
Net Revenues $ 29,356 $ 34,739
-------- --------
Operating Expenses:
Field service costs 26,369 29,789
Selling expenses 2,554 2,279
General and administrative expenses 2,449 3,548
Depreciation and amortization 197 282
-------- --------
Total operating expenses 31,569 35,898
-------- --------
Operating Loss (2,213) (1,159)
Other Income:
Interest income, net 231 128
Equity in earnings of affiliate 24 20
-------- --------
Total other income 255 148
-------- --------
Loss Before Benefit (Provision)
For Income Taxes (1,958) (1,011)
Benefit (Provision) For Income Taxes 790 (12)
-------- --------
Net Loss $ (1,168) $ (1,023)
======== ========
Basic and Diluted Earnings per share $ (0.20) $ (0.19)
======== ========
Basic and Diluted Weighted Average Common Shares 5,897 5,393
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
PIA MERCHANDISING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 1997, AND APRIL 3, 1998
- --------------------------------------------------------------------------------
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------
March 31, April 3,
1997 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,168) $ (1,023)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 197 282
Provision for doubtful receivables & sales allowances, net 330 694
Equity in earnings of affiliate (24) (20)
Changes in operating assets and liabilities:
Accounts receivable 3,386 (3,416)
Federal income tax refund receivable -- 2,801
Prepaid expenses and other (1,116) (110)
Accounts payable and other liabilities 806 (3,744)
Income taxes payable (111) 26
-------- --------
Net cash provided by (used in) operating activities 2,300 (4,510)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (91) (188)
-------- --------
Net cash used in investing activities (91) (188)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 63 15
-------- --------
Net cash provided by financing activities 63 15
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,272 (4,683)
CASH AND CASH EQUIVALENTS,
Beginning of period 19,519 12,987
-------- --------
End of period $ 21,791 $ 8,304
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 86 $ 10
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
PIA MERCHANDISING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 1997, included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. The results of operations for
the interim periods are not necessarily indicative of the operating
results for the year.
Certain amounts have been reclassified in the prior years' consolidated
financial statements in order to conform with the current year's
presentation.
2. Change in Accounting Periods
Effective January 1, 1998, the Company changed its accounting period for
financial statement purposes from a calendar year to a 52/53 week fiscal
year. Beginning with fiscal year 1998, the Company's fiscal year will
end on the Friday closest to December 31. Interim fiscal quarters will
end on the Friday closest to the Calendar quarter end.
The Company does not believe that this change will have a material
impact on the financial statements.
3. Restructure and Other Charges
During 1997, the Company experienced declining gross margins, and
resultant operating losses, due to service performance issues and the
loss of several shared client service accounts. These resulting margins
were insufficient to cover the field overhead structure. In the quarter
ended September 30, 1997, the Company addressed these conditions by
restructuring its operations, focusing on a more disciplined and
functional operational structure, and redirecting its technology
strategies, resulting in a $5.4 million charge for restructure and other
charges. This $5.4 million charge included $3.3 million for restructure
charges and $2.1 million for other charges. The restructure charge
consisted of $1.3 million of severance and lease costs in various
management and administrative functions, and $2.0 million in writedowns
and accruals associated with the redirection of the Company's technology
strategies.
6
<PAGE> 7
PIA MERCHANDISING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other charges consisted primarily of $1.3 million of reserves and
write-offs related to unprofitable contracts and $0.6 million of costs
associated with changes in the Company's service delivery model.
4. Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, April 3,
1997 1998
------- -------
<S> <C> <C>
Equipment $ 3,680 $ 3,831
Furniture and fixtures 662 697
Leasehold improvements 160 160
Capitalized software development costs 902 902
------- -------
5,404 5,590
Less: Accumulated depreciation and amortization (2,988) (3,268)
------- -------
$ 2,416 $ 2,322
======= =======
</TABLE>
5. Recent Accounting Pronouncements
Earnings Per Share - The Company has adopted SFAS No. 128, Earnings per
Share, which replaces the presentation of "Primary" earnings per share
with "Basic" earnings per share and the presentation of "Fully Diluted"
earnings per share with "Diluted" earnings per share. Prior periods have
been restated to reflect the change in presentation.
Basic earnings per share amounts are based upon the weighted-average
number of common shares outstanding. Diluted earnings per share amounts
are based upon the weighted-average number of common and potential
common shares for each period presented. Potential common shares include
stock options, using the treasury stock method.
New Accounting Pronouncements -In the first quarter ended April 3, 1998,
the Company adopted SFAS No. 130, Reporting Comprehensive Income. Any
difference between comprehensive income (loss) and net income (loss) for
the quarter ended April 3, 1998 was considered immaterial. For the
fiscal year ending January 1, 1999, the Company will adopt SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information and
SFAS No. 132, Employers' Disclosures About Pensions and Other
Postretirement Benefits.
7
<PAGE> 8
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, chain, and discount drug stores. For the quarter ended April 3,
1998, compared to quarter ended March 31, 1997, the Company generated
approximately 64% and 90% of its net revenues from manufacturer clients and 36%
and 10% from retailer clients, respectively.
The Company's profitability has continued to be adversely affected by the loss
of shared client service accounts (for which PIA provides syndicated and
project-type services). The shared client service business has historically
required a significant fixed management and personnel infrastructure. Due in
part to performance issues, industry consolidation and increased competition,
the Company lost a number of shared client service accounts in the last half of
1996 and continuing in 1997. PIA has not gained any sizable new shared client
accounts for on-going services to offset this loss. The Company believes that
net revenues in 1998 from shared client service accounts will continue to
decline as a result of the wind-down of the lost business.
The Company continues to experience an increase in the demand for dedicated
client services, and has significantly increased business with two major
customers. The net revenues associated with dedicated clients increased, as a
percentage of overall net revenues, from 26.5% in the first quarter of 1997 to
29.6% in the first quarter of 1998. In the dedicated services business, PIA
provides each manufacturer or retailer client with an organization, including a
management team, which works exclusively for that client.
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,
typically averaging 14% to 17% of total net revenues, varies seasonally, and
generally corresponds to the peak selling seasons of the clients that have
entered into these types of contracts. Historically, the Company has recognized
greater commission income in the first and fourth quarters. See "Risk Factors --
Uncertainty of Commission Income."
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
RESULTS OF OPERATIONS
QUARTER ENDED APRIL 3, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
NET REVENUES
Net revenues for the quarter ended April 3, 1998 increased from the comparable
period of 1997 due to an increase in shared client service account and project
net revenues and dedicated client net revenues. For the first quarter of 1998,
net revenues were $34.7 million compared to $29.4 million in the first quarter
of 1997, an 18% increase.
The following table sets forth net revenues by client type as a percentage of
net revenues for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
March 31, 1997 April 3, 1998 Change
(amounts in millions) Amount % Amount % %
---------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
Shared service and
Project client net revenues $ 21.6 73.5% $ 24.4 70.4% 13.0%
Dedicated Client Net Revenues 7.8 26.5 10.3 29.6 32.1
---------------------- -------------------------------------
Net revenues $ 29.4 100.0% $ 34.7 100.0% 18.0%
====================== =====================================
</TABLE>
The Company's dedicated client net revenues have grown from $7.8 million in the
first quarter of 1997 to $10.3 million in the first quarter of 1998, a 32.1%
increase. This increase in dedicated client net revenues resulted from two major
new clients. The increase in dedicated client net revenues for the first quarter
of 1998 compared to 1997 resulted from an increase in revenue from new clients
of $4.7 million, offset by a decrease in revenue from existing dedicated clients
of $2.2 million.
Shared client service account and project net revenues have increased from $21.6
million in the first quarter of 1997 to $24.4 million in the first quarter of
1998, a 13.0% increase. However, shared client service accounts and project
revenues as a percentage of net revenues decreased as dedicated client net
revenues continue to grow at a faster rate.
The increase in shared client service accounts and project revenues for the
first quarter of 1998 compared to 1997 resulted from an increase in revenue from
new clients of $2.4 million, an increase in revenue from existing shared client
accounts of $4.0 million, offset by a decrease in revenue of $3.6 million from
clients no longer with the Company.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
OPERATING EXPENSES
The following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
(amounts in millions) March 31, 1997 April 3, 1998 Change
Amount % Amount % %
---------------------- ---------------------- ----
<S> <C> <C> <C> <C> <C>
Field service costs $ 26.4 89.8% $ 29.8 85.7% 12.9%
Selling expenses 2.6 8.7 2.3 6.6 (11.5)
General and administrative expenses 2.4 8.3 3.5 10.2 45.8
Depreciation and Amortization 0.2 0.7 0.3 0.8 50.0
---------------------- ---------------------- ----
Total Operating Expenses $ 31.6 107.5% $ 35.9 103.3% 13.6%
====================== ====================== ====
</TABLE>
For the first quarter of 1998, field service costs increased $3.4 million, or
12.9%, to $29.8 million, as compared to $26.4 million in the first quarter of
1997. Field service costs are comprised principally of field labor and related
costs and overhead expenses required to provide services to both shared and
dedicated service clients and related technology costs.
The increase in field service costs in the first quarter of 1998 is due
primarily to costs required to provide the management and supervision necessary
to support the increased business level of dedicated clients. As a percentage of
net revenues, field service costs in the first quarter of 1998 decreased to
85.7% from 89.8% in the same period last year. This decrease resulted from the
reduction of non-payroll related costs due to a restructuring of the Company's
operations, improvement of labor productivity, initial implementation of labor
scheduling systems, reorganization of field divisions and customer
rationalization.
For the quarter ended April 3, 1998, selling expenses decreased $0.3 million, or
11.5%, to $2.3 million compared to $2.6 million in the same period last year. As
a percentage of net revenues, selling expenses decreased to 6.6% in the first
quarter of 1998, compared to 8.7% in the first quarter of 1997. This decrease in
costs, both in absolute amount and as a percentage of net revenues, is a result
of lower staffing and travel costs.
General and administrative expenses increased 45.8% in the first quarter of 1998
to $3.5 million, compared to $2.4 million in the same period of 1997. The
increase in general and administrative costs was due primarily to additional
consulting and improvements to management information systems that were required
to support the increased dedicated client base, and due to salary
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
and benefit increases in the ordinary course of business.
Depreciation and amortization expenses increased for the quarter ended April 3,
1998, as compared to the same period of 1997, as a result of additional
depreciation from completed software development in the third quarter ended
September 30, 1997.
OTHER INCOME
Interest income decreased in the first quarter of 1998, as compared to the first
quarter of 1997, due to lower cash balances available for investment in 1998.
Equity in earnings of affiliate represents the Company's share of the earnings
of Ameritel, Inc., a full service telemarketing company.
BENEFIT FROM INCOME TAXES
The income tax benefit of $0.8 million in the first quarter of 1997 represents
an effective tax rate of 40.3%. There was no material income tax impact for the
first quarter of 1998.
NET LOSS
The Company incurred a net loss of approximately $1.0 million in the first
quarter of 1998, or $0.19 per basic and diluted share, compared to a net loss of
approximately $1.2 million, or $0.20 per basic and diluted share, in the first
quarter of 1997. The loss incurred in the current year is primarily a result of
previous pricing decisions for some client contracts that were unprofitable in
the first quarter. These contracts are currently being renegotiated. However,
there is no certainty that these negotiations will result in better pricing.
NEW FINANCIAL MODEL
The Company has developed a new financial model to assist in the understanding
of the operating results and impact of various cost functions within the
organization. This model follows more standard metrics and allows the Company to
analyze and manage at the business unit level. The following table illustrates
this financial model for the quarters ended March 31, 1997 and April 3, 1998.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------
(amounts in millions) March 31, 1997 April 3, 1998
----------------------- -----------------------
Amount % Amount %
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net revenues $ 29.4 100.0% $ 34.7 100.0%
Direct business unit field expense 20.8 70.7 25.6 73.8
----------------------- -----------------------
Gross margin 8.6 29.3 9.1 26.2
Overhead and allocated field expense 7.0 23.8 6.0 17.3
----------------------- -----------------------
Business unit margin 1.6 5.4 3.1 8.9
Selling, general and administrative expenses 3.6 12.2 4.0 11.5
----------------------- -----------------------
Earnings (loss) before interest, taxes, depreciation
and amortization (EBITDA) $ (2.0) (6.8%) $ (0.9) (2.6%)
======================= =======================
</TABLE>
Management expects to continue to review the business results on the basis of
the comparable financial statement format contained in this Form 10-Q until the
first quarter ending April 2, 1999, when comparisons can be made utilizing the
new financial model.
LIQUIDITY AND CAPITAL RESOURCES
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.
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 proceeds from the initial public
offering. 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.
Cash and cash equivalents totaled $13.0 million at December 31, 1997 compared
with $8.3 million at April 3, 1998. At December 31, 1997 and April 3, 1998 the
Company had working capital of $15.9 million and $14.4 million, respectively,
and current ratios of 1.9 and 2.0 respectively.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Net cash used in operating activities for the quarter ended April 3, 1998 was
$4.5 million, compared to cash provided by operating activities of $2.3 million
for the comparable period in 1997. This use of cash for operating activities in
1998 resulted primarily from an increase in accounts receivables, a decrease in
accounts payable and other liabilities, and a net operating loss offset by a
decrease in Federal income tax refund receivable. The increase in accounts
receivable, during the first quarter ended April 3, 1998 was the result of an
increase in net revenues. Net cash used in investing activities for the quarter
ended April 3, 1998 was $0.2 million, compared to $0.1 million for the
comparable period in 1997. Net cash generated by financing activities for the
quarter ended March 31, 1997 was $0.1 million, and was immaterial for the first
quarter ended April 3, 1998.
The above activity resulted in a net decrease in cash and cash equivalents of
$4.7 million for the quarter ended April 3, 1998, compared to a net increase of
$2.3 million for the comparable period in 1997.
The Company's current liquidity is provided by cash and cash equivalents and the
timely collection of its receivables. The Company currently has no committed
credit facility available for working capital needs. Management believes that
cash and cash equivalents and the timely collection of its receivables will be
sufficient to provide for ongoing working capital needs and generally fund the
ongoing operations of the business over the next twelve months.
YEAR 2000 SOFTWARE COSTS
The Company has conducted a review of its computer systems to identify those
areas that could be affected by the "Year 2000" issues and is developing an
implementation plan to resolve these issues. The Company presently believes,
with modifications to existing software and conversions to new software, the
Year 2000 problem will not pose significant operational problems and is not
anticipated to be material to the Company's financial position or results of
operations in any given year.
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. In addition, the Company may from time to time make oral
forward-looking statements. Actual results are uncertain and may be impacted by
various factors. In particular, certain risks and uncertainties that may impact
the accuracy of the forward-looking statements include the Company's history of
losses, loss of business, concentrated client base and uncertainty of commission
income. As a result, the actual results may differ materially from those
projected in the forward-looking statements.
13
<PAGE> 14
RISK FACTORS
It is recommended that this Form 10-Q be read in conjunction with the Company's
1997 Annual Report on Form 10-K. The following risk factors should also be
carefully reviewed in addition to the other information contained in this Form
10-Q.
HISTORY OF LOSSES
During the years ended December 31, 1992, 1993, 1997, and the first quarter of
1998, the Company incurred significant losses and experienced substantial
negative cash flow. The Company had net losses of $3.2 million, $2.6 million and
$15.1 million for the years ended December 31, 1992, 1993 and 1997, respectively
and a net loss of $1.0 million for the first quarter of 1998. In 1992 and 1993,
these losses resulted primarily from additional field service costs to provide
shared service 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 1997, these losses resulted primarily from margin reductions due to the loss
of shared client service accounts, and start up expenses on dedicated client
services, inefficiencies in field labor execution, poor pricing decisions for
some client contracts, and higher business unit overhead costs and the
recognition of restructure charges and other charges. In addition, the Company
incurred a net loss of $1.0 million for the first quarter of 1998, compared to a
net loss of $1.2 million in the first quarter of 1997, and generated negative
cash flow of $4.7 million in the first quarter of 1998. There can be no
assurance that the Company will not sustain further losses.
LOSS OF BUSINESS
PIA's business mix has changed during 1997 and the first quarter of 1998. This
change is due in part to performance issues, industry consolidation and
increased competition. The Company has lost a substantial amount of shared
service business over the last 15 months, and new revenue added has been at
lower margins than the margins of the lost business. The Company has not engaged
any sizable new shared business to offset this loss. The Company has
historically required a significant fixed management and personnel
infrastructure for shared services. Accordingly, the loss of shared service
business, without offsetting gains or cost reductions, 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 large 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 74% and 76% of the Company's net revenues for
the quarter ended March 31, 1997 and April 3, 1998, respectively. During the
first quarter ended
14
<PAGE> 15
RISK FACTORS (CONTINUED)
April 3, 1998, none of the Company's manufacturer or retailer clients accounted
for greater than 10% of net revenues, other than Eckerd Drug Stores, CVS
Pharmacy Incorporated, and Buena Vista Home Video, which accounted for 13%, 13%
and 11% of net revenues, respectively. The majority of the Company's contracts
with its clients for shared services have multi-year terms. PIA believes that
the uncollectibility of amounts due from any of its large clients, a significant
reduction in business from such clients, or the inability to attract new
clients, could have a material adverse effect on the Company's results of
operations.
UNCERTAINTY OF COMMISSION INCOME
Approximately 17% of the Company's net revenues for the quarter ended April 3,
1998 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. The Company has historically experienced consistent positive
commission reconciliation income.
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.
15
<PAGE> 16
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
On February 25, 1998, the Company and its Canadian subsidiary
were served with two Statements of Claim in the Ontario Court
(General Division) of the Province of Ontario, Canada, filed by
Merchandising Consultants Associates ("MCA") asserting claims for
alleged breach of Confidentiality Agreements dated October 19,
1996 and July 17, 1997. Both of these lawsuits assert that the
Company and its subsidiary improperly used confidential
information provided by MCA as part of the Company's due
diligence concerning its proposed acquisition of MCA, including
alleged clientele, contracts, financial statements and business
opportunities of MCA. In addition, MCA contends that the Company
breached and allegedly reneged upon the terms for acquisition of
MCA contained in a Letter of Intent between the parties dated
July 17, 1997, which by its express terms was non-binding. The
Statements of Claim seek damages totaling $10.2 million. The
Company denies all wrongdoing and intends to aggressively defend
itself in this action. It is not possible to predict the outcome
of this action at this time.
Item 2: Changes in Securities and Use of Proceeds
Use of Proceeds - The Company received $26.5 million in net
proceeds from its initial public offering in March 1996. The
Company, as originally outlined in "Use of Proceeds" in its
prospectus, has used approximately $16.0 million through the
period ended April 3, 1998 for debt repayment, capital spending
and working capital requirements. In addition, $3.0 million has
been used to repurchase the Company's Common Stock.
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
16
<PAGE> 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 Employment Agreement dated as of June 25, 1997 between the
Company and Terry R. Peets (incorporated herein by reference to
Exhibit 10.5 to the Company's Form 10-Q for the 2nd Quarter ended
June 30, 1997).
10.5 Employment Agreement dated as of February 20, 1998 between the
Company and Cathy L. Wood.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
Current Report on Form 8K, filed with the Securities Exchange Commission (SEC)
concurrently herewith, which relates to the change in the Company's fiscal year.
17
<PAGE> 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 and
Chief Financial Officer
By: /s/ David J. Faulds
-----------------------------------
David J. Faulds
Vice President
Corporate Controller
Dated: May 12, 1998
18
<PAGE> 1
EXHIBIT 10.5
SEVERANCE COMPENSATION AGREEMENT
This Severance Compensation Agreement (this "Agreement") has been
entered into as of the 20th day of February, 1998 by and between PIA
Merchandising Services, Inc., a Delaware corporation ("PIA"), and Cathy L. Wood
("Executive"). It is made in the light of the following circumstances:
PIA's Board of Directors considers the establishment and
maintenance of a sound and vital management team to be essential to protecting
and enhancing the best interests of PIA and its stockholders. PIA recognizes
that the possibility of a Change of Control (as defined in this Agreement), and
the uncertainty and questions which that possibility may raise among members of
the management team, may result in the departure or distraction of management
personnel to the detriment of PIA and its stockholders. The Board of Directors
has determined that appropriate steps should be taken to reinforce and encourage
the continued attention and dedication of members of PIA's management team,
including Executive, to their assigned duties.
Accordingly, the Board of Directors has proposed to enter into
this Agreement with Executive which sets forth the severance compensation which
PIA agrees it will pay to Executive if Executive's employment with PIA should
terminate under the circumstances described below following a Change of Control
of PIA.
In the light of the foregoing the parties have agreed as follows:
1. Basic Agreement.
In order to protect Executive against certain possible
consequences of a Change in Control of PIA, and thereby to induce Executive to
continue to serve as a key employee of PIA, PIA agrees that if there is a Change
of Control of PIA, and if Executive's employment by PIA is subsequently
terminated, after, but within two years following, such Change of Control,
Executive shall be entitled to the severance compensation specified in Section 3
hereof unless such termination is (a) a result of Executive's death or
Retirement (as defined in this Agreement); (b) by PIA for Cause (as defined in
this Agreement); or (c) by Executive other than for Good Reason (as defined in
this Agreement).
As partial consideration for this Agreement, Executive
agrees that she will not voluntarily leave the employ of PIA and will continue
to perform her existing duties, or such other comparable duties as may be
assigned by PIA, for a period of at least one (1) year following any Change of
Control, subject to her right to resign for Good Reason (as provided herein).
Notwithstanding the foregoing, PIA may terminate Executive's employment at any
time, with or without cause, subject to providing the benefits hereinafter
specified in accordance with the terms hereof if such termination occurs after a
Change of Control.
<PAGE> 2
2. Term of Agreement.
This Agreement shall initially continue until the earlier
to occur of (A) the termination of Executive's employment with PIA for any
reason whatsoever, whether by action of Executive or of PIA; or (B) a Change of
Control. In the former event, all rights of Executive hereunder shall terminate
at the time of such termination of employment. In the latter case, this
Agreement shall remain effective for a full term of two (2) years from the date
of such Change of Control, and shall not thereafter be terminated until the
expiration of such period.
3. Severance Compensation.
If, during the two (2) year period following a Change of
Control, PIA shall terminate Executive's employment other than by reason of
Disability (Section 5.1), Retirement (Section 5.2) or for Cause (Section 5.3),
or if Executive shall terminate her employment for Good Reason (Section 5.4),
then PIA shall pay to Executive, as severance pay, in a lump sum, in cash, on
the 5th day following the Payment Date (as defined in Section 5.6 of this
Agreement), an amount equal to (a) one year's base compensation at the rate at
which Executive was being compensated immediately prior to such termination
(except that if the termination is based on a reduction in compensation, it
shall be the rate of compensation immediately prior to such reduction); plus (b)
the annual bonus target for the full fiscal year of PIA during which such
termination occurred.
In addition to the foregoing, PIA shall, subject to the
following sentence, under the circumstances set forth above, provide continuing
coverage of Executive under all employee benefit plans affording protection
against medical costs, including any medical, excess medical, hospitalization or
similar insurance or reimbursement plan. Such coverage shall be provided at
PIA's cost for a period of one year from the Payment Date or until Executive
obtains other employment if that shall occur before one year from the Payment
Date; provided, however, that PIA shall have no obligation to provide any such
coverage if a dispute exists pursuant to clause (2) or (3) in Section 5.6(a).
Notwithstanding the foregoing provisions of this Section
3, if the severance compensation provided in this Section 3, either alone or
together with other payments which Executive would have the right to receive
from PIA, would constitute a "parachute payment," as defined in Section 280G of
the Internal Revenue Code of 1986 (the "Code"), as in effect at the time of
payment, such payment shall be reduced to the largest amount as will result in
no portion being subject to the excise tax imposed by Section 4999 of the Code
or the disallowance of a deduction by PIA pursuant to Section 280G(a) of the
Code. The determination of the amount of any reduction pursuant to this
paragraph, and the payments or other compensation to which such reductions shall
apply, shall be made in good faith by PIA, and such determination shall be
binding on Executive.
2.
<PAGE> 3
4. Change of Control.
No benefits shall be payable hereunder unless there shall
have been a Change of Control of PIA, as defined in this Section 4 and
Executive's employment by PIA shall thereafter have been terminated as described
in Section 5 below.
4.1 For purposes of this Agreement, "Change of Control"
shall mean the happening of any of the following:
(i) The acquisition by any Holder, at any time after the
date hereof, of Beneficial Ownership of securities of PIA
representing 50% or more of the combined voting power of the then
outstanding securities of PIA.
(ii) The occurrence of a transaction requiring approval
by the stockholders of PIA for the acquisition of PIA through the
purchase of all or substantially all of PIA's securities or
assets, or by merger, or otherwise.
(iii) The election, during any period of 24 months or
less, of a majority of the members of the Board of Directors of
PIA without the approval of the nominations of such members by a
majority of the Board members who were serving as such at the
beginning of such period.
4.2 "Beneficial Ownership" or "Beneficially Owned" shall
have the meaning set forth in Rule 13d-3 under the Securities Exchange Act of
1934, as amended.
4.3 "Group" shall mean persons who act in concert as
described in Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended, and the regulations thereunder. The formation of a Group, or
any change in the membership of a Group, shall be deemed to be an acquisition by
the Group of the aggregate number of PIA securities Beneficially Owned by each
member thereof.
4.4 "Holder" shall mean any entity, person or Group other
than the Corporation, or an employee benefit plan maintained by the Corporation.
5. Termination Following Change of Control.
If there shall have been a Change of Control as defined in
Section 4 above, Executive shall be entitled to the severance compensation
provided in Section 3 hereof in the event that Executive's employment by PIA is
terminated within two (2) years thereafter; unless such termination is (a)
because of Executive's death or Retirement; (b) by PIA for Cause or Disability;
or (c) by Executive other than for Good Reason. For these purposes, the
following definitions shall apply:
3.
<PAGE> 4
5.1 "Disability" shall mean absence from full time
performance of Executive's duties with PIA for one hundred thirty (130)
consecutive business days, as a result of Executive's incapacity due to physical
or mental illness, unless within thirty (30) days after Notice of Termination
(as hereinafter defined) is given following such absence Executive shall have
returned to the full time performance of Executive's duties.
5.2 "Retirement" shall mean a termination of employment in
accordance with the retirement policy generally applicable to all salaried
employees at the time of the Change of Control.
5.3 "Cause" shall mean:
(a) the deliberate and intentional failure by
Executive to devote substantially her entire business time and efforts to the
performance of her duties (other than any such failure resulting from
Executive's incapacity due to physical or mental illness or disability);
(b) engaging by Executive in gross misconduct
materially and demonstrably injurious to PIA;
(c) Executive's commission of any crime (other than
minor traffic offenses and similar infractions); or
(d) Executive's willful failure to comply with
instructions of the Board of Directors of PIA.
5.4 "Good Reason" shall mean the occurrence of:
(a) without Executive's express written consent,
the assignment to Executive of any position, duties or responsibilities
materially and substantially less favorable than her positions, duties and
responsibilities with PIA immediately prior to the Change in Control, or a
material adverse change in her reporting responsibilities, status, titles or
offices as in effect immediately prior to a Change in Control;
(b) a reduction by PIA in Executive's base salary
as in effect at the time of the Change in Control;
(c) a failure by PIA to continue to provide
incentive compensation comparable to that provided by PIA immediately prior to
any Change in Control;
(d) the failure by PIA after a Change in Control to
continue in effect any benefit or compensation plan, stock option plan, pension
plan, health and accident plan or disability plan in which Executive is
participating immediately prior thereto (provided, however, that there shall not
be deemed to be any such failure if PIA substitutes for the discontinued plan, a
plan providing Executive with substantially similar benefits) or the taking of
any action by PIA which would adversely affect Executive's participation in or
materially reduce
4.
<PAGE> 5
Executive's benefits under any of such plans or deprive Executive of any
material fringe benefit enjoyed by Executive immediately prior to a Change in
Control (provided, however, that any act or failure to act by PIA that is on a
plan-wide basis, i.e., it similarly affects all employees of PIA or all
employees eligible to participate in any such plan, as the case may be, shall
not constitute Good Reason); or
(e) the failure of PIA to obtain the assumption of
this Agreement by any successor as contemplated in Section 7.1 hereof.
5.5 Notice of Termination. Any termination by PIA pursuant
to Sections 5.1 or 5.3 above shall be communicated by a Notice of Termination.
The term "Notice of Termination" shall mean a written notice indicating those
specific termination provisions in this Agreement relied upon and setting forth
in reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provisions so indicated and
which otherwise complies with Sections 5.1 or 5.3, as applicable. No termination
by PIA shall be effective for purposes of Sections 5.1 or 5.3 above without such
Notice of Termination.
5.6 Payment Date.
(a) The term "Payment Date" shall mean (1) if
Executive's employment is terminated by PIA without allegation that such
termination is by reason of Disability (Section 5.1), Retirement (Section 5.2)
or for Cause (Section 5.3), the actual effective date of such termination as
specified by PIA in its notice of such termination given to Executive; (2) if
Executive's employment is terminated by PIA purportedly for Cause and if (i)
within 30 days after PIA's giving of the Notice of Termination prescribed by
Section 5.5, Executive notifies PIA that a dispute exists concerning whether or
not the termination is legitimately for Cause, and (ii) it is finally
determined, whether by mutual agreement by the parties or upon final judgment,
order or decree of a court of competent jurisdiction (the time for appeal
therefrom having expired and no appeal having been perfected), that such
termination is not legitimately for Cause, the Payment Date shall be the date
the dispute is so finally determined; and (3) if Executive's employment is
terminated by Executive purportedly for Good Reason, 30 days after Executive so
notifies PIA, which notice shall fully describe the basis which the Executive
alleges to constitute Good Reason; provided, however, that if, within such
30-day period, PIA notifies Executive that a dispute exists concerning whether
or not the termination is legitimately for Good Reason, the Payment Date shall
be the date that it is finally determined (but only if so determined), whether
by mutual agreement by the parties or upon final judgment, order or decree of a
court of competent jurisdiction (the time for appeal therefrom having expired
and no appeal having been perfected), that such termination by Executive is
legitimately for Good Reason.
(b) Notwithstanding the foregoing, the definition
of "Payment Date" shall not entitle Executive to any compensation with respect
to any period during which Executive's employment has actually ceased. Rather,
such definition shall be used solely to determine the date, if applicable, upon
which severance pay becomes payable to Executive pursuant to Section 3 of this
Agreement.
5.
<PAGE> 6
6. No Obligation to Mitigate.
6.1 Executive shall not be required to mitigate damages or
the amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by Executive as the result
of employment by any other person after the termination of employment with PIA,
or otherwise, except as provided in Section 3.
6.2 The provisions of this Agreement, and any payment
provided for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish Executive's existing rights, or rights which would accrue
solely as a result of the passage of time, under any benefit plan, incentive
plan or securities plan, employment agreement or other contract, plan or
arrangement.
7. Binding on Successors.
7.1 This Agreement shall be binding on and inure to the
benefit of any successor to PIA. PIA agrees to require any successor or assign
to all or substantially all of its business and/or assets, by written agreement,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that PIA would be required to perform it if no such
transaction had taken place, except where such assignment occurs as a matter of
law (e.g., in the case of a merger or consolidation), in which case no such
formal assumption shall be required. Any failure of PIA to obtain such agreement
prior to the effectiveness of any such transaction shall be a material breach of
this Agreement and shall entitle Executive to terminate her employment for Good
Reason, but shall not otherwise affect the rights of PIA or such successor or
assign under any such agreement between them, nor invalidate any such agreement.
As used in this Agreement, "PIA" shall mean PIA as presently constituted and any
successor or assign to its business and/or assets which executes and delivers
the agreement provided for in this Section 7.1 or which otherwise becomes bound
by all the terms and provisions of this Agreement by operation of law.
7.2 This Agreement shall inure to the benefit of and be
enforceable by Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devotees and legatees. If
Executive should die while any amounts are still payable to her hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to Executive's estate.
8. Notices.
8.1 Method of Giving Notice. Any notice (which term
includes payments and communications of any sort whatsoever) required or
permitted to be delivered under this Agreement shall be in writing and shall be
delivered to the party to whom addressed in person, or by certified mail, return
receipt requested, addressed as follows:
6.
<PAGE> 7
If to Company: PIA Merchandising Services, Inc.
19900 MacArthur Boulevard
Suite 900
Irvine, California 92718
If to Executive: At her address as shown on the records of
PIA.
8.2 Change of Address. Any person whose address is
specified herein may change such address by giving notice to the other in the
manner herein provided.
8.3 Effectiveness of Notice. All notices given in
accordance with this Agreement shall, if mailed, be deemed to have been given or
delivered two (2) days after the date they are placed in the United States mail,
postage prepaid, properly addressed as herein required. If delivered personally
or by courier, they shall be deemed given when actually received.
9. Choice of Law.
This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California.
10. Severability.
The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
11. Legal Fees and Expenses.
In the event of any dispute under this Agreement, the
prevailing party shall be entitled to recover all legal fees and expenses which
it may incur in resolving such dispute.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year first above written.
PIA MERCHANDISING SERVICES, INC. EXECUTIVE:
By: /s/ Terry R. Peets /s/ Cathy L. Wood
------------------------------- ------------------------------
Terry R. Peets, Chief Executive CATHY L. WOOD
Officer and President
7.
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