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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-27824
PIA MERCHANDISING SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
19900 MacArthur Boulevard, Suite 900, Irvine, California 92715
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 476-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 21, 1997, based on the closing price
of the Common Stock as reported by the Nasdaq National Market on such date, was
approximately $18,063,208.
The number of shares of the Registrant's Common Stock outstanding as of
March 21, 1997 was 5,899,558 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of Stockholders to be
held on June 6, 1997 are incorporated by reference into Part III hereof.
PIA MERCHANDISING SERVICES, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
INDEX
Page
----
PART I
Item 1. Business 1
Item 2. Properties 17
Item 3. Legal and Administrative Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 24
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
Signatures 28
PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. THESE STATEMENTS ARE IN THE SECOND PARAGRAPH
UNDER "BUSINESS--INDUSTRY OVERVIEW--SHIFT OF MERCHANDISING SERVICES
TO MANUFACTURERS," THE SOLE PARAGRAPH UNDER "BUSINESS--INDUSTRY OVERVIEW--
INCREASE IN MERCHANDISING SERVICES REQUIRED IN OTHER RETAIL CHANNELS," THE FIRST
PARAGRAPH UNDER "BUSINESS--BUSINESS STRATEGY," THE SOLE PARAGRAPH UNDER
"BUSINESS--BUSINESS STRATEGY--STRENGTHEN THE COMPANY'S RETAILER RELATIONSHIPS,"
THE SOLE PARAGRAPH UNDER "BUSINESS--BUSINESS STRATEGY--ADAPT DIVISION OPERATING
STRUCTURE TO CHANGING MARKET DEMAND," THE SOLE PARAGRAPH UNDER "BUSINESS--
BUSINESS STRATEGY--SERVE EMERGING DEMAND FOR DEDICATED SERVICES," THE SOLE
PARAGRAPH UNDER "BUSINESS--BUSINESS STRATEGY--INCREASE THE COMPANY'S UTILIZATION
OF INFORMATION TECHNOLOGY," THE FIRST PARAGRAPH UNDER "BUSINESS--DESCRIPTION OF
SERVICES," THE THIRD, FIFTH AND SEVENTH PARAGRAPHS UNDER "BUSINESS--CUSTOMERS,"
THE SOLE PARAGRAPH UNDER "RISK FACTORS--HISTORY OF LOSSES," THE SOLE PARAGRAPH
UNDER "RISK FACTORS--LOSS OF SYNDICATED BUSINESS," THE SOLE PARAGRAPH UNDER
"RISK FACTORS--INDUSTRY CONSOLIDATION; CONCENTRATED CLIENT BASE," THE SECOND
PARAGRAPH UNDER "RISK FACTORS--COMPETITION," THE SECOND PARAGRAPH UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--OVERVIEW," AND THE SECOND PARAGRAPH UNDER "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--RESULTS OF
OPERATIONS--YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,
1995." ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET FORTH BELOW UNDER
"RISK FACTORS."
SEE THE GLOSSARY AT PAGE 15 FOR A DESCRIPTION OF CERTAIN TERMS THAT ARE
USED THROUGHOUT THIS ANNUAL REPORT ON FORM 10-K.
ITEM 1. BUSINESS.
GENERAL
PIA Merchandising Services, Inc. ("PIA" or the "Company") is a supplier of
in-store merchandising and sales services in the United States and Canada. The
Company provides these services primarily on behalf of branded product
manufacturers at approximately 20,000 retail grocery stores, 5,000 mass
merchandiser stores and 13,000 chain drug and deep discount drug stores.
The Company currently provides three principal types of services: ongoing
full services, known as syndicated services, project services and dedicated
services for specific clients.
Syndicated services consist of regularly scheduled, routed merchandising
services provided at the store level for manufacturers, primarily under one
year contracts. PIA's syndicated service organization performs services for
multiple manufacturers, including, in some cases, for manufacturers whose
products are in the same product category. Syndicated services include
checking to insure that client product items authorized for distribution are
in stock and on the shelf, cutting in products that are approved for
distribution but not present on the shelf, setting category shelves in
accordance with approved store schematics, insuring that shelf tags are in
place, checking for the overall salability of clients' products, and
performing new product and promotion selling.
Project services consist primarily of special in-store services
initiated by retailers and manufacturers, such as seasonal, new product,
special promotion and installation activities. These services are typically
used for large scale implementations over 30 to 60 days. The Company also
performs other project services, such as new store sets and existing store
resets, remerchandisings, remodels and category implementations, under
syndicated services contracts or stand-alone project contracts.
1
Dedicated services consist of merchandising services, generally as
described above, that are performed for a specific retailer or manufacturer
by a dedicated organization, including a management team, working exclusively
for that retailer or manufacturer. These services are provided primarily
under multi-year contracts.
As part of its syndicated, project and dedicated services, PIA also
collects and provides to certain clients a variety of merchandising data that is
category, product and store specific.
PIA, organized in 1943, historically has provided merchandising services in
grocery retail chains on behalf of manufacturers. Until 1989, the Company
operated exclusively in grocery retail chains in California and Arizona. In
mid-1988, Clinton E. Owens, the Company's current Chairman and Chief Executive
Officer, concluded that a national merchandising company could capitalize on
developments within the retail grocery industry by providing merchandising
services to a variety of manufacturers supplying the industry. In August 1988,
Mr. Owens and Riordan, Lewis & Haden, a private investment firm, completed an
acquisition of the Company. In 1990, PIA implemented a national expansion
strategy to cover the grocery trade, and in 1991 began providing services to
grocery retailers themselves. In 1993, the Company expanded its focus to
address additional retail channels, including mass merchandiser, chain drug and
deep discount drug stores. In 1994, PIA began offering dedicated services to
retailers and manufacturers. In 1996, the Company established a corporate and
division infrastructure for its project services business. The Company
currently performs its services primarily on behalf of approximately 180 branded
product companies, including S.C. Johnson Wax, Colgate-Palmolive, Lever
Brothers, Ralston Purina, Buena Vista Home Video and Hormel Foods. The
Company's current retailer clients include American Stores, Eckerd Drug Stores,
Wal*Mart, Kmart, Safeway, Vons, Wakefern and Edwards Super Foods.
INDUSTRY OVERVIEW
A number of trends have been impacting the retail industry and are creating
a demand for providers of third party merchandising services such as the
Company.
SHIFT OF MERCHANDISING SERVICES
Historically, merchandising functions were principally performed by
employees of retailers, manufacturers and food brokers. Retailers staffed their
stores as needed to insure in-stock conditions, the placement of new items on
the shelves, and the maintenance of shelf schematics to approved standards.
Manufacturers typically deployed their own sales personnel in an effort to
insure that their products were in distribution on the shelves and were properly
spaced and positioned. However, the primary function of these salespeople was
to sell the manufacturers' products and promotions, and not to perform
significant in-store services at the shelf level. In addition, food brokers
performed retail merchandising services on behalf of the manufacturer in
conjunction with their sales efforts. Brokers also often performed work at the
shelf level at the request of the retailer and the brokers' principal clients.
The typical grocery store carries approximately 22,000 items. In an
effort to maintain or improve their margins, grocery retailers have broadened
their product offerings and services from traditional grocery, household and
health and beauty care products to include new product categories such as
general merchandise and service departments such as bakery, deli and prepared
fast foods. The Company believes that, as a result, these retailers have
shifted employee hours away from the traditional maintenance of packaged
goods in order to support these new categories and service departments. The
Company further believes that, at the same time, retailers have converted
many hours of basic merchandising work from full-time professionals to
part-time labor, which generally is less skilled and trained. These trends
have caused unsatisfactory shelf conditions and an increasing number of
out-of-stocks, resulting in lost sales. As a result, retailers began to rely
increasingly on manufacturers and food brokers, among others, to support
their in-store needs such as new store sets and existing store resets,
remerchandisings, remodels and category implementations. As manufacturers
were required to provide these retailer-mandated merchandising services, they
initially deployed their sales professionals to perform such services.
However, manufacturers found that the deployment of sales professionals to
perform retail merchandising services was expensive and not an effective use
of their resources. As manufacturers' costs to perform these services grew
and
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shelf integrity declined, manufacturers began to outsource these merchandising
activities to third parties such as the Company.
The outsourcing trend to third party merchandisers has resulted in an
increasing number of organizations providing services to manufacturers and
retailers. In order to reduce the number of third parties they have to manage,
to achieve consistent execution of their retail merchandising strategies, and to
customize the scope of services performed on their behalf, certain retailers and
manufacturers have chosen to consolidate, and others are considering the
consolidation of, merchandising services with fewer and more dedicated
providers.
RETAILER CONSOLIDATION
The retail industry is undergoing a consolidation process that is resulting
in fewer, larger retailers. These retailers tend to have a wider geographic
distribution of stores, yet centralized procurement and decision-making
functions at their corporate headquarter. The consolidation trend is evidenced
by the acquisition of Eckerds Drug Stores by J.C. Penney, the acquisition of
Thrifty PayLess by Rite Aid, and the pending acquisition of Vons by Safeway.
INCREASE IN GROCERY MERCHANDISING SERVICES REQUIRED
As retailer-mandated activities have continued to increase both in number
and type, as well as in the amount of labor required to perform them,
manufacturers have increased their use of third party suppliers. For example,
additional category implementation activities are required to effect retailers'
in-store schematics, which are changing with increasing frequency as the result
of a growing number of new product introductions each year. Further, retailers
are continuing a high level of resets, remerchandisings and remodels of entire
stores to respond to an increasing number of changes in product mix and to keep
their stores fresh and updated in a highly competitive environment. PIA
estimates that these activities have doubled in frequency over the last five
years, so that most stores are currently remerchandised or remodeled every 24
months. In certain areas of the country and with certain retailers, these
activities are conducted annually.
INCREASE IN MERCHANDISING SERVICES REQUIRED IN OTHER RETAIL CHANNELS
Unlike the merchandising services performed for grocery retailers, work
performed by manufacturers in mass merchandiser, chain drug and deep discount
drug stores has historically been much less demanding. In these retail
channels, retailers performed most of their own merchandising work. However,
the Company believes that as these retailers have become more competitive with
the traditional grocery industry, they are attempting to maintain their margins
by increasingly requesting support from the manufacturer community to provide
merchandising services similar to those provided to the grocery retailers.
Further, these retailers have become increasingly important to manufacturers,
causing these manufacturers to provide greater retail focus and support to
insure that out-of-stock conditions are reduced, authorized items are available,
and general product conditions are favorable. The manufacturers have become
particularly sensitive to the requirements of seasonal and special promotion
activities, which require rapid and effective in-store support in order to
maximize sales results.
INCREASE IN USE OF INFORMATION TECHNOLOGIES
Information technology is playing an increasingly important role in the
retail industry, particularly in light of industry initiatives towards efficient
consumer response ("ECR") and category management. Retailers and manufacturers
have expanded their use of information technology in order to manage product
distribution in stores, item placements on the shelves, and off-shelf displays.
In particular, retailers and manufacturers are increasingly looking for causal
data (e.g., display, pricing and product adjacency information) that is category
and store specific. This information is used by both retailers and
manufacturers to make decisions regarding ECR, category management and shelf
management issues, new product and promotion plans, and enables retailers to
tailor their stores to regional demographics.
3
BUSINESS STRATEGY
PIA believes that the increasing demand for national solutions to
manufacturers' varied merchandising requirements, together with the
consolidation of the retail industry, the increase in required merchandising
services, and the increased use of information technology, will foster the
growth of those companies that can provide these solutions, have the flexibility
to respond to the changing retail environment and have the financial resources
to provide rapid deployment of merchandising resources. The Company has
developed a strategy that it believes will address these industry trends. The
major components of PIA's strategy are as follows:
POSITION THE COMPANY AS A NATIONAL, FULL SERVICE RETAIL SOLUTIONS COMPANY
PIA's objective is to strengthen its position as a leading national
supplier of retail solutions by expanding the services that it offers, including
category management, retail and secondary headquarters selling, data gathering,
interpretation and management, and telemarketing, to both its existing and
prospective manufacturer clients and its newer and prospective retailer clients,
and to offer its existing and newer services in additional retail channels.
STRENGTHEN THE COMPANY'S RETAILER RELATIONSHIPS
PIA believes that by becoming an integral part of the retailers' shelf and
category management planning programs, it will provide added value to retailers
and foster relationships that will result in additional business for the
Company. PIA is implementing this strategy by establishing retailer teams to
focus on the needs of particular retailers, such as the teams currently in place
at Wal*Mart, Kmart and American Stores. The Company also provides key
account managers to retailers, along with the shelf technology which the
retailers use in their category management departments. PIA is also providing
to retailers the use of its software program, Merchandisers Toolbox. See "--
Increase the Company's Utilization of Information Technology" below. The
Company believes that this enhanced relationship will position PIA to attract
new clients, as satisfied retailers are more likely to recommend PIA to
suppliers, and these suppliers are more likely to view PIA favorably due to its
close relationship with retailers.
ADAPT DIVISION OPERATING STRUCTURE TO CHANGING MARKET DEMAND; ENHANCE CLIENT
SERVICE
The Company believes that a more flexible field organization and applied
information technology offer opportunities to simultaneously enhance service to
syndicated clients that are demanding more customized syndicated and special
services programs, while also creating increased operational synergy with the
Company's growing project business. PIA is also committed to providing its
customers with quality service enhancements.
EXPAND THE COMPANY'S CLIENT BASE
In order to expand its client base, the Company is emphasizing new client
business development in areas outside of its traditional focus in the food,
household and health and beauty care categories. For example, PIA has
established relationships with manufacturers in the telecommunications,
information technology and home appliance industries. The Company also intends
to offer its services to prospective clients in additional retail channels,
including home improvement centers, computer/electronic stores, toy stores,
convenience stores and office supply stores. No assurance can be given that the
Company will be able to expand its business into these additional retail
channels.
SERVE EMERGING DEMAND FOR DEDICATED SERVICES
PIA believes that certain retailers and manufacturers will increasingly
prefer merchandising service on a dedicated basis, and that the significant size
of such contracts requires substantial financial, recruitment, deployment,
reporting and management capabilities. The Company believes that it is well-
positioned to serve this emerging need for dedicated services.
4
INCREASE THE COMPANY'S UTILIZATION OF INFORMATION TECHNOLOGY
PIA believes that its commitment to technology will provide it with a long-
term competitive advantage. The Company's Stor*Trak II information system is
scheduled to be deployed in the first quarter of 1997 with approximately 600
field merchandisers. Stor*Trak II will replace the Company's existing Stor*Trak
I information system and will enhance PIA's ability to provide causal data that
is category and store specific. Stor*Trak II will enable both PIA and its
manufacturer clients to have timely, actionable information regarding the status
of certain targeted products and stores. The Company believes that this
technology will present increased opportunities for PIA on project specific
requests from manufacturers. PIA also expects to use this technology to expand
its informational services consulting capabilities. Additionally, the Company
will continue to provide its proprietary software program, Merchandisers
Toolbox, to certain retailers. This program is designed to manage the
deployment of manufacturer supplied labor, to measure their performance against
the retailers' in-store deployment plans and to develop databases that include a
"blueprint" of a store by category. The Company also expects that its key
account managers will continue to use shelf technology programs which the
Company licenses from A.C. Nielsen, IRI and Intactix.
DESCRIPTION OF SERVICES
The Company provides a broad array of merchandising services on a
national, regional and local basis to manufacturers and retailers. PIA
believes that its full-line capability of developing plans at one centralized
headquarters location, executing chain wide, fully integrated national
solutions and implementing rapid, coordinated responses to needs on a real
time basis differentiates the Company from its competitors. The Company also
believes that its centralized decision-making ability, local follow-through,
ability to recruit, train and supervise merchandisers, ability to perform
large-scale initiatives on short notice and strong retailer relationships
provide it with a competitive advantage over local, regional or retailer
specific competitors.
The Company provides its merchandising and sales services primarily on
behalf of branded product manufacturers at approximately 20,000 retail
grocery stores, 5,000 mass merchandiser stores and 13,000 chain drug and deep
discount drug stores. PIA currently provides three principal types of
merchandising and sales services: syndicated, project and dedicated
services. PIA operates its syndicated and project services businesses
through two regional and eight division offices. These offices enable PIA to
interact on a local basis with its manufacturer clients and with retailers.
SYNDICATED SERVICES
Syndicated services consist of regularly scheduled, routed merchandising
services provided at the store level for manufacturers, primarily under one
year contracts. PIA's syndicated service organization performs services for
multiple manufacturers including, in some cases, manufacturers whose products
are in the same product category. Syndicated services include checking to
insure that client product items authorized for distribution are in stock and
on the shelf, cutting in products that are approved for distribution but not
present on the shelf, setting category shelves in accordance with approved
store schematics, insuring that shelf tags are in place, checking for the
overall salability of clients' products, and performing new product and
promotion selling. The Company's syndicated services are performed
principally by full-time retail sales merchandisers, retail sales
specialists, key account managers and district and division managers.
RETAIL SALES MERCHANDISERS. PIA's retail sales merchandisers ("RSM"s)
perform regularly scheduled, routed coverage services at the store level. These
services include a review of the retailer's shelves and the appropriate store
(or chain) prepared shelf schematic (a diagram that lists the specific location
and shelf space to be allocated for all items within a section) to insure that
all clients' approved products are available for sale in the store, that such
products have the approved shelf placement and number of facings (the horizontal
and vertical space occupied by a package front) on the shelf, and that the
approved shelf tag is in position. If a product is not in distribution,
5
the RSM "cuts in" the product if it is available in the store's product storage
area. If a product is unavailable, the RSM prepares a place on the shelf for
this product and a shelf tag. The presence of a shelf tag is critical to a
store's ability to reorder an individual stock keeping unit ("SKU") from the
distribution center. The RSM checks for the presence of and replaces, if
necessary, the shelf tags for all client SKUs. The RSM also reviews all SKUs
for product freshness, if appropriate, and for general salability.
KEY ACCOUNT MANAGERS. On behalf of its manufacturer clients, PIA
deploys key account managers ("KAM"s) inside most of the major retail chains.
These KAMs, who are assigned exclusively to a single retailer, work with the
corporate headquarters' staff of these retailers in the execution of category
management initiatives and in the development and implementation of shelf
schematics. The KAMs provide both the manufacturer and PIA with a
headquarter's perspective of the retailer and its primary objectives at the
store level. The KAMs work with manufacturer clients to develop and achieve
their merchandising goals, including those related to product distribution,
shelf placement, the number of facings for particular products, and product
adjacencies. The KAMs also work with manufacturer clients to gain retailer
authorization for new products and approval of new category schematics that
are compatible with the retailer's own category management strategies. PIA
generally attempts to position its KAMs within the retailer's organization in
a leadership capacity, both in category management and vendor deployment
activities. The KAM is typically placed within the retailer's shelf
technology department and is equipped with the specific shelf technology
software utilized by the retailer. Within a number of retailers, the KAMs
also operate Merchandisers Toolbox. See "--Information Technology Services."
The KAMs work with the retailer in the development of new shelf schematics,
category layouts and, in some cases, total store space plans. The Company is
also training its KAMs in category management in order to provide further
value to both the Company's manufacturer clients and to the retailer. PIA
currently employs over 200 KAMs at approximately 85 retailers nationwide.
PROJECT SERVICES
Project services consist primarily of special in-store services
initiated by retailers and manufacturers, such as seasonal, new product,
special promotion and installation activities. These services are typically
used for large scale implementations over 30 to 60 days. The Company also
performs other project services, such as new store sets and existing store
resets, remerchandisings, remodels and category implementations, under
syndicated service contracts or stand-alone project contracts.
During the fourth quarter of 1996, the Company established a corporate,
centralized project management group, and created operations, client service and
marketing functions dedicated to project work in its eight divisions. The
Company's project services are performed principally by a flex-time force of
approximately 3,000 merchandisers, known as the "Surge force," who work for the
Company on demand. The Surge force, which is also used to supplement the
Company's full-time merchandisers in the performance of syndicated services,
enables the Company to be responsive to client and retailer needs on short
notice. These merchandisers are deployed by PIA's operations managers from the
Company's various division offices, typically to accomplish services on behalf
of PIA's manufacturer clients such as new store sets and existing store resets,
remerchandisings, remodelings and category implementations, as well as a variety
of other services. The Surge force is also deployed to perform special projects
inside retail stores, such as rack construction and installation, and display
construction and maintenance. Members of the Surge force are recruited, trained
and managed by the Company. These merchandisers are entry-level personnel who
also provide the Company with a source of additional full-time RSMs. For ease
of administration, the Company pays the Surge force through a third party
payrolling service.
DEDICATED SERVICES
Dedicated services consist of merchandising services, generally as
described above, that are performed for a specific retailer or manufacturer
by a dedicated organization, including a management team, working exclusively
for that retailer or manufacturer. These services are provided primarily
under multi-year contracts.
6
The Company believes that it pioneered the concept of dedicated service
in 1994 with a program designed for Thrifty PayLess Drug Stores. The program
covered 995 stores, and PIA was responsible for implementing product
selection changes and resetting all categories to meet Thrifty PayLess'
category management plans. In implementing the program, PIA was able to
ensure that new products were placed on the shelf within five days of
availability and section changes were completed within ten days. Thrifty
PayLess was acquired by Rite Aid in 1996, and the contract was not renewed
beyond December 1996.
The Company expanded the dedicated service concept during 1996 when it
formed a dedicated group to provide merchandising services for Buena Vista
Home Video. This group works exclusively for Buena Vista at the retailer
level in providing merchandising services for Buena Vista's home video and
related products.
The Company's revenues from the Thrifty PayLess and Buena Vista contracts
accounted for 6.6% and 11.7% of net revenues, respectively, for the year ended
December 31, 1996. Revenues from the Thrifty PayLess contract accounted for
13.4% of net revenues for the year ended December 31, 1995.
INFORMATION TECHNOLOGY SERVICES
Retailers and manufacturers are expanding their use of information
technology in order to better manage product distribution in stores, item
placements on the shelves, new product and promotion plans, and off-shelf
displays. This information is used to make decisions regarding efficient
consumer response, category management and shelf management issues, which
enables retailers to tailor stores to the regional demographics of customers.
PIA currently provides information-gathering services for certain of its
retailer and manufacturer clients. Such services include the collection of
causal data in specific store groups, and a variety of other data including the
presence of new items at shelf level, the status of out-of-stocks and
distribution voids, and the number of facings and positioning of product items.
This information is currently collected by PIA personnel using hand-held data
entry devices and through the completion of specific response questionnaires,
which are then read by an electronic scanner and Interactive Voice Response.
The Company presents its results to the client in a standard or custom format
specified by the client. This information is of particular value to the
manufacturer that is making significant advertising and promotion decisions
based upon its products' status at store level. Additionally, both the retailer
and the manufacturer need to understand the level of in-store display activity
and point of sale materials usage in support of specific new item introductions
and manufacturer funded promotion activities.
The Company's ability to provide this type of information to its clients
will be enhanced and expanded with the introduction of Stor*Trak II, which is
scheduled to be deployed in the first fiscal quarter of 1997 with approximately
600 field merchandisers. The use of Stor*Trak II will enable PIA to engage in
two-way communications with its major clients, and to build models of client
sales and marketing information that PIA intends to market to its clients as a
new service. This will allow data regarding shelf and other in-store conditions
to be disseminated to the manufacturers' sales and marketing departments on
virtually a daily or more frequent basis, thus enabling the clients and PIA to
have timely, actionable category and store specific information as to the status
of certain targeted products and stores. No assurance can be given that the
Company will be successful in marketing its information services.
The Company also provides to certain retailers its proprietary software
program, Merchandisers Toolbox, which is designed to control the deployment of
vendor labor and to measure the performance of such vendors against the
retailers' deployment plans for virtually all retailer-mandated services in such
stores. The Company manages this software on behalf of the retailer and
provides scheduling, based on a fair share allocation, for new store sets and
existing store resets, remerchandisings, remodels and category implementations.
This software also provides reports to the retailer subsequent to the completion
of the project, and details actual participation against the schedule. These
features enhance the retailers' ability to complete store initiatives quickly.
Merchandisers Toolbox also provides total store mapping, which ultimately
provides the retailer with a "blueprint" of all of its stores by category.
7
RELATED SERVICES
RETAIL AND SECONDARY HEADQUARTERS SELLING SERVICES. The Company deploys
retail sales specialists to provide product selling support for certain
manufacturers at the retail store and secondary retailers headquarters buying
offices. These services are performed principally for manufacturers that choose
to outsource their sales function for calls on wholesaler-supplied individual
stores or small chains. Sales services performed by the retail sales
specialists include product sales, selling point of sale promotions, discount
and allowance programs, and shelf merchandising plans.
MARKETING AND SALES SERVICES. PIA provides marketing and sales services to
emerging manufacturers that have limited capabilities to market, sell and
merchandise their own products. The Company consults with these clients in
order to assist them in establishing a marketing program, sales collateral
material program, order entry and processing discipline, and in gaining initial
distribution within retailers. The Company also provides routed merchandising
services to some of these clients.
TELEMARKETING SERVICES. PIA owns 20% of Ameritel, Inc., a company that
performs inbound and outbound telemarketing services, including those on behalf
of certain of PIA's manufacturer clients. Ameritel provides telemarketing sales
services for manufacturers that sell directly into smaller, independent retail
stores. The Company believes that its affiliation with Ameritel provides an
additional merchandising solution for its packaged products manufacturer and
retailer clients.
SALES AND MARKETING
The Company's sales efforts are structured to develop new business in
national and local markets. At the national level, PIA's corporate business
development team directs its efforts toward the senior management of prospective
clients. At the regional level, sales efforts are principally guided by the two
regional general managers who act as a resource for PIA's eight division offices
in their efforts to attract new business. At the local level, the Company's
sales efforts are handled primarily by division managers.
The Company's client service executives play an important role in PIA's new
business development efforts within its existing manufacturer client base. The
Company currently employs 175 account executives, including corporate
account executives, division account executives and key account managers.
Primarily located in the clients' corporate headquarters, PIA's corporate
account executives play a key role in clients' sales and marketing efforts. The
corporate account executives plan merchandising and product introductions with
the manufacturer so that PIA can achieve the objectives of such clients' major
new product and promotional initiatives. In addition, the corporate account
executives present PIA's services to the sales and marketing executives of these
clients, and utilize marketing data provided by IRI, A.C. Nielsen and others in
an effort to ascertain additional market opportunities for such clients at the
local level. Division account executives are part of the Company's geographic
division teams and work with the local management of the Company's clients. The
division account executives' primary responsibility is to work with the client
to establish specific, measurable objectives for PIA, and to market additional
services. As part of this process, the division account executive is
responsible for developing retail merchandising solutions for such objectives.
The Company's KAMs are positioned within approximately 85 retailers throughout
the country, and provide schematic development and category management support
to PIA's clients. Through this relationship, the KAM has become an important
source of new business leads, and has enabled PIA to capitalize on the prospects
being directed to PIA by the retailer.
As part of retailer consolidation, retailers are centralizing most
administrative functions, including operations, procurement and category
management. In response to this centralization and the growing importance of
large retailers, many manufacturers have re-organized their selling
organizations around a retailer team concept that focuses on a particular
retailer. PIA has also responded to this emerging trend by establishing client
service
8
offices which are fully staffed to provide the PIA client and the retailer
with access to all of PIA's services. PIA currently has retailer teams in
place at Wal*Mart (Bentonville, Arkansas), Kmart (Detroit) and American
Stores (Salt Lake City).
The Company's business development process encompasses a due diligence
period to determine the objectives of the prospective client, the work to be
performed to satisfy those objectives, and the market value of the work to be
performed. PIA employs a formal cost development process which determines the
cost of each element of work required to achieve the prospective client's
objectives. These costs, together with an analysis of market rates, are used in
the development of a quotation approval form which is presented to the Company's
pricing committee for approval. The pricing must meet PIA's objectives for
profitability which are established as part of the business planning process.
After approval of this quotation by the pricing committee, a detailed proposal
is presented to the prospective client. Following agreement regarding the
elements of service and corresponding rates, a contract is prepared and
executed. See "--Customers."
CUSTOMERS
PIA currently represents approximately 295 manufacturer clients, including
approximately 180 branded product manufacturers and approximately 115 private
label manufacturers. Prior to 1993, the Company represented its manufacturer
clients primarily in the retail grocery industry. Beginning in that year, the
Company found that additional opportunities to provide its services existed
throughout the much broader marketplace, including mass merchandiser, chain drug
and deep discount drug stores, as well as in other retail establishments such as
home improvement centers, computer/electronic stores, toy stores, convenience
stores and office supply stores. As a result, the Company has contracted with a
number of manufacturers to provide services in several of these additional
retail markets, and has agreed to provide services to a number of retailers
directly, including American Stores, Eckerd Drug Stores, Wal*Mart, Kmart,
Safeway, Vons, Wakefern and Edwards Super Foods, among others. More recently,
the Company has established relationships with manufacturers in the
telecommunications, information technology and household appliances industries.
9
The following is a current list of the Company's top 20 manufacturer and
retailer clients for which the Company provides services on a regional or
national basis, listed in chronological order by year service began:
YEAR
SERVICE
CLIENT BEGAN
-------------------------------------- --------
Hershey Chocolate Co. . . . . . . . . . . . . 1966
Hormel Foods. . . . . . . . . . . . . . . . . 1970
Ralston Purina. . . . . . . . . . . . . . . . 1982
Consumer Health Care. . . . . . . . . . . . . 1984
S.C. Johnson Wax. . . . . . . . . . . . . . . 1985
Benckiser . . . . . . . . . . . . . . . . . . 1988
Colgate-Palmolive . . . . . . . . . . . . . . 1988
Gillette. . . . . . . . . . . . . . . . . . . 1990
Kellogg . . . . . . . . . . . . . . . . . . . 1990
Safeway . . . . . . . . . . . . . . . . . . . 1992
Helene Curtis . . . . . . . . . . . . . . . . 1993
Kimberly Clark. . . . . . . . . . . . . . . . 1993
Lever Brothers. . . . . . . . . . . . . . . . 1994
Kmart . . . . . . . . . . . . . . . . . . . . 1994
Efficient Market Services, Inc. . . . . . . . 1994
Coors Brewing Company . . . . . . . . . . . . 1994
Eveready. . . . . . . . . . . . . . . . . . . 1995
Gourmet Specialties . . . . . . . . . . . . . 1995
Buena Vista Home Video. . . . . . . . . . . . 1996
Eckerd Drug Stores. . . . . . . . . . . . . . 1997
During the years ended December 31, 1994, 1995 and 1996, none of the Company's
manufacturer or retailer clients accounted for greater than 10% of the Company's
net revenues, other than Thrifty PayLess, which accounted for approximately 13%
of net revenues for the year ended December 31, 1995, and Buena Vista Home Video
and S.C. Johnson which accounted for 11.7% and 10.3% of net revenues,
respectively, for the year ended December 31, 1996.
Most major packaged goods manufacturers sell numerous types of products and
brands. Often, the Company does not represent all of the products or brands of
a particular manufacturer, but rather only selected products. In addition, the
Company does not always represent manufacturers in all geographic regions of the
country. As a result, the Company believes that opportunities exist within the
Company's current client base to increase its business by expanding the number
of brands serviced and the geographic coverage provided for these clients.
The Company has traditionally sold its syndicated services to manufacturers
in a bundled format for a monthly flat fee or, in some cases, for a commission.
The Company's commission based contracts generally provide for a monthly draw
against commission earnings, which are based on a percentage of the client's net
sales to designated retailers, and for periodic reconciliation of commissions
earned against the monthly draw. Some of these contracts also provide for a
guaranteed minimum compensation to the Company. Substantially all of the
Company's current contracts for syndicated services provide for one of these two
types of arrangements. Such
10
contracts generally provide for one year terms and are terminable at the end of
such term by either party upon 60 days prior written notice.
As a result of growing retailer-mandated services, the Company bears the
risk of increased labor costs under its existing fixed-price contracts.
Accordingly, PIA has been engaged in an effort to revise its existing contracts
upon their renewal to implement provisions that charge for retailer-mandated
services separately from traditional merchandising and shelf maintenance tasks.
In addition, the Company has developed a standard contract that provides this
activity-based approach to pricing for the Company's more recent customers.
This contract form identifies the retailer-mandated activities PIA will perform
on behalf of its clients and establishes limits on those activities during the
contract period. The client can purchase activities beyond the established
limits for additional compensation. Although the Company has been successful in
revising certain of its contracts to include the activity-based approach to
pricing, no assurance can be given that PIA will be successful in renewing its
remaining contracts on this basis. This approach to pricing and the related
contract terms are expected to prevent the Company from performing activities
that were not contemplated, and is intended to stabilize the Company's margins
under individual contracts.
The Company typically performs projects under short-term contracts of
between 30 and 60 days. PIA's dedicated services are primarily performed under
multi-year contracts.
A number of the Company's largest syndicated services clients have products
that compete in the same category. The Company believes that it has
successfully met the retail objectives of these clients, and expects that its
ability to manage multiple products within a single category will continue.
However, due to the competitive nature of certain categories, the Company has
granted to some clients the right to approve the Company's ability to represent
another client with products in the same category. The Company believes that
these arrangements will not impact its long-term ability to represent other
clients in these categories.
COMPETITION
The third party merchandising industry is highly competitive and is
comprised of an increasing number of merchandising companies with either
specific retailer, retail channel or geographic coverage, as well as food
brokers. These companies tend to compete with the Company primarily in the
retail grocery channel, and some of them may have a greater presence in certain
of the retailers in whose stores the Company performs its services. The Company
also competes with several companies that are national in scope, such as
Powerforce, Spar/Marketing Force, Pimms and Alpha One. These companies compete
with PIA principally in the mass merchandiser, chain drug and deep discount drug
retail channels. The Company believes that the principal competitive factors
within its industry include breadth and quality of client services, cost and the
ability to execute specific client priorities rapidly and consistently over a
wide geography.
TRADEMARKS
PIA-Registered Trademark- is a registered trademark of the Company. In
addition, the Company has applied for a copyright on its Merchandisers
Toolbox software. Although the Company believes that its trademarks may have
value, the Company believes that its services are sold primarily on the basis
of breadth and quality of service, cost and the ability to execute specific
client priorities rapidly and consistently over a wide geography. See
"--Industry Overview" and "--Competition."
EMPLOYEES
At December 31, 1996, the Company employed approximately 1,440 full-time
employees, of whom approximately 65 worked in executive, administrative and
clerical capacities at the Company's corporate headquarters, and approximately
1,375 of whom worked in division offices nationwide. Approximately 225 of the
Company's employees are covered by contracts with labor unions. The Company
considers its relations with its employees and its employees' unions to be good.
The Company also uses the services of up to 3,000 flex-time
11
personnel who are payrolled through a company that is not affiliated with PIA.
See "Description of Services--Project Services."
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY REVIEWED IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K.
HISTORY OF LOSSES
During the years ended December 31, 1992 and 1993, the Company incurred
significant losses and experienced substantial negative cash flow. The Company
had net losses of $3.2 million and $2.6 million for the years ended December 31,
1992 and 1993, respectively. These losses resulted primarily from additional
field service costs to provide routed coverage in grocery stores for relatively
few clients in newly-opened regions during the Company's continuing national
expansion in 1992 and 1993, and from the write-off of $1.7 million in goodwill
in 1992. In addition, the Company recently announced that it expects to incur a
loss for the first fiscal quarter of 1997, and that it expects 1997 operating
results to be substantially less than the prior year. There can be no assurance
that the Company will not sustain further losses. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview."
LOSS OF SYNDICATED BUSINESS
PIA's business mix has changed significantly over the last year and is
expected to continue to change during 1997 in response to client needs and
the evolving third party merchandising industry. Due in part to industry
consolidation and increased competition, the Company has lost a substantial
amount of syndicated services business over the last 12 months, and has not
sold any sizeable new syndicated business to compensate for this loss. This
business has historically required a significant fixed management and
personnel infrastructure. Accordingly, the loss of syndicated business,
without offsetting gains, has a material adverse effect on the Company's
results of operations.
INDUSTRY CONSOLIDATION; CONCENTRATED CLIENT BASE
The retail industry is undergoing a consolidation process that is resulting
in fewer, larger retailers. The Company's success is dependent in part upon its
ability to maintain its existing clients and to obtain new clients. As a result
of industry consolidation, the Company has lost certain clients, and this trend
could continue to have a negative effect on the Company's client base and
results of operations. The Company's ten largest clients generated
approximately 59%, 56% and 57% of the Company's net revenues for the years ended
December 31, 1994, 1995 and 1996, respectively. During these periods, none of
the Company's manufacturer or retailer clients accounted for greater than 10% of
net revenues, other than Thrifty PayLess, which accounted for approximately 13%
of net revenues for the year ended December 31, 1995, and Buena Vista Home Video
and S.C. Johnson which accounted for 11.7% and 10.3% of net revenues,
respectively, for the year ended December 31, 1996. The majority of the
Company's contracts with its clients for syndicated services have one-year
terms. PIA believes that the uncollectibility of amounts due from any of its
large clients, the loss of one or more of such clients, a significant reduction
in business from such clients, or the inability to attract new clients, would
have a material adverse effect on the Company's results of operations.
12
COMPETITION
The third party merchandising industry is highly competitive and is
comprised of an increasing number of merchandising companies with either
specific retailer, retail channel or geographic coverage, and food brokers.
These competitors tend to compete with the Company primarily in the retail
grocery channel, and some of them may have a greater presence in certain of the
retailers in whose stores the Company performs its services. The Company also
competes with several companies that are national in scope, such as Powerforce,
Spar/Marketing Force, Pimms and Alpha One. These companies compete with PIA
principally in the mass merchandiser, chain drug and deep discount drug retail
channels.
The Company believes that the principal competitive factors within its
industry include quality of service, cost and the ability to execute specific
client priorities rapidly and consistently over a wide geography. If any of the
Company's major competitors were to seek to gain or retain market share by
reducing its prices, the Company could experience downward pressure on the
prices that it charges for certain elements of its services. The Company has
been forced periodically to adjust its prices to retain certain business. There
can be no assurance that these competitors will not reduce their prices, or that
in the future the Company will not face greater competition from other national
or regional merchandising companies or food brokers.
INCREASE IN SERVICES REQUIRED UNDER FIXED PRICE CONTRACTS
Manufacturers who sell their products through retail grocery stores
generally are required by the retailer to provide labor support inside these
stores for a variety of purposes, including new store sets and existing store
resets, remerchandisings, remodels and category implementations. The Company
has historically contracted with its manufacturer clients to provide these
services, among others, for a monthly flat fee or, in some cases, for a
commission. Substantially all of the Company's current contracts provide for
one of these two types of arrangements. As requests for retailer-mandated
services and new product introductions by manufacturers have increased over the
past several years, the Company's labor expense has increased without any
related increase in its revenue. Consequently, the Company has reevaluated its
approach to contracting with its clients, and has revised certain of its
existing contracts upon their renewal to implement provisions that charge for
retailer-mandated services separately from traditional merchandising and shelf
maintenance tasks. No assurance can be given that the Company will be
successful in renewing the remaining contracts on this basis.
UNCERTAINTY OF COMMISSION INCOME
Approximately 17.2% of the Company's net revenues for the year ended
December 31, 1996 was earned under commission-based contracts. These contracts
provide for commissions based on a percentage of the client's net sales of
certain of its products to designated retailers. Under certain of these
contracts, the Company generally receives a draw on a monthly or quarterly
basis, which is then applied against commissions earned. Adjustments are made
on a monthly or quarterly basis upon receipt of reconciliations between
commissions earned from the client and the draws previously received. The
reconciliations typically result in commissions owed to the Company in excess of
previous draws; however, the Company cannot predict with accuracy the level of
its clients' commission-based sales. Accordingly, the amount of commissions in
excess of or less than the draws previously received will fluctuate and can
significantly affect the Company's operating results in any quarter.
DEPENDENCE ON SENIOR MANAGEMENT
The Company is dependent upon the services of its officers and the key
management personnel involved in its field organization. The loss of the
services of one or more of these individuals could have a material adverse
effect on the Company. The Company carries term life insurance on Clinton E.
Owens, the Company's Chairman and Chief Executive Officer.
13
CONTROL BY CERTAIN STOCKHOLDERS
Riordan, Lewis & Haden, a private investment firm, beneficially owns
approximately 28% of the Company's outstanding Common Stock, and the Company's
directors and officers, in the aggregate, beneficially own approximately 18% of
the Company's outstanding Common Stock (excluding the shares owned by Riordan,
Lewis & Haden which are deemed to be beneficially owned by Mr. Haden). As a
result, such persons, if they act together, generally will be able to elect all
directors, exercise control over the business, policies and affairs of the
Company and will have the power to approve or disapprove most actions requiring
stockholder approval, including amendments to the Company's charter and by-laws,
certain mergers or similar transactions, sales of all or substantially all of
the Company's assets, and the power to prevent or cause a change in control of
the Company. In the future, this situation could make the acquisition of
control of the Company and the removal of existing management more difficult.
RESTRICTIONS ON DIVIDENDS
The Company has never paid dividends on its capital stock, and currently
intends to retain any earnings or other cash resources to finance future growth.
The Company's credit agreement also prohibits the payment of cash dividends on
the Common Stock.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BY-LAWS AND DELAWARE LAW
The Company's Board of Directors has the authority to issue up to 3,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which will prohibit the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. The application of Section 203
also could have the effect of delaying or preventing a change of control of the
Company. Further, certain provisions of the Company's Certificate of
Incorporation (e.g., the inability of stockholders of the Company to act by
written consent) and By-laws (e.g., the requirement that the holders of shares
entitled to cast no less than 30% of the votes at a special meeting of
stockholders may call such a special meeting) and of Delaware law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company, which could adversely affect the market price of the Company's Common
Stock.
14
GLOSSARY
THE FOLLOWING GLOSSARY INCLUDES DEFINITIONS OF CERTAIN GENERAL INDUSTRY
TERMS AS WELL AS TERMS RELATING SPECIFICALLY TO THE COMPANY.
CATEGORY - A segment or sub-segment of a department within a retail outlet.
For example, the health and beauty care department consists of several
categories such as oral care and shampoo; and the shampoo section is divided
into sub-categories such as salon formulas and dandruff control.
CATEGORY MANAGEMENT - A process for managing a retailer's or a
manufacturer's business that recognizes categories as strategic business units
for the purpose of planning sales and profit objectives.
CAUSAL DATA - Data that defines the factors within a retail outlet that
impact sales. These factors usually include display, pricing and product
adjacency information.
CHAIN DRUG STORE - A retail drug outlet that has conventional
non-discounted pricing structure, and a wider variety of product selection than
is found in a deep discount drug store.
CUT-IN - The process of adding a new item to a section within a retail
outlet. A cut-in often requires the implementation of a schematic.
DEEP DISCOUNT DRUG STORE - A retail drug outlet that offers everyday
discounted pricing, typically the result of volume purchases. The store offers a
more limited variety of items and sizes than is found in a chain drug store.
EFFICIENT CONSUMER RESPONSE (ECR) - A grocery industry strategy in which
retailers and manufacturers incorporate the principles of efficient
replenishment with effective assortment and promotion of products.
FACING - The horizontal and vertical space occupied by a package front
when displayed on a store shelf.
KEY ACCOUNT MANAGER (KAM) - A KAM is assigned exclusively to a single
retailer and works with that retailer's corporate headquarters staff in the
execution of category management initiatives and in the development and
implementation of shelf schematics.
MASS MERCHANDISER - The segment of retailers that offers multi-departments
in a single location, each of which is typically quite large (at least 75,000
square feet). Examples include Kmart and Wal*Mart.
NEW STORE SET - The initial merchandising of a new retail outlet that was
either built or acquired.
OUT-OF-STOCK - A situation that exists when a product normally carried by a
retailer is temporarily unavailable. This means that shelf allocation exists,
but inventory has been depleted.
REMERCHANDISING - A retail unit that is enhanced by the relocation of
sections, aisles and/or departments, and usually involves the total store.
REMODEL - A retail unit that is enhanced by enlargement and/or redesign.
Structural changes most often result in departments and/or services being added
or deleted, which requires the relocation of most products and sections within
the store.
15
RESET - Relocation of products within a given category or section of a
retail store. A reset typically involves removal of all products from the
retailer's shelves, restocking of products and reallocation of space.
RETAIL AND SECONDARY HEADQUARTERS SELLING - Refers to the selling of
products and/or taking of orders in chains which do not operate their own
warehouses and in stores having the authority to purchase and/or approve orders.
RETAIL SALES MERCHANDISER (RSM) - An RSM performs regularly scheduled,
routed coverage services at the store level. The RSM's primary responsibility is
the retail distribution of the client's products in accordance with the
retailer's schematics or agreed upon merchandising objectives.
RETAIL SALES SPECIALIST - A retail sales specialist provides product
selling support for certain manufacturers at the retail store and secondary
retailers headquarters buying offices.
RETAILER - An operator of retail stores or groups of retail stores that are
also referred to as chains.
ROUTED - A group of stores to which Company personnel are required to visit
on a regularly scheduled, recurring basis.
SCHEMATIC - A diagram that lists the specific location and shelf space to
be allocated for all items within a section. The schematic also contains data
relating to merchandising such as width, depth of shelving, shelf elevations and
height of gondola.
STOCK KEEPING UNIT (SKU) - A unit of product having its own unique
size/weight and product description.
VOID - A situation that exists when a product is not carried by a retailer
and there is no allocated space or reorder tag present.
----------------
COMPANIES NAMED IN THIS ANNUAL REPORT ON FORM 10-K
The following companies, among others, are mentioned in this Prospectus:
A.C. Nielsen Company ("A.C. Nielsen"); Alpha One; American Stores Co.
("American Stores"); Joh. A. BenckiserGmbH ("Benckiser"); Buena Vista Home
Video, Inc. ("Buena Vista Home Video" and "Buena Vista"); Colgate-Palmolive
Company ("Colgate-Palmolive"); Consumer Health Care; Coors Brewing Company;
Eckerd Corporation ("Eckerd Drug Stores"); Edwards Super Foods; Efficient
Market Services, Inc.; Eveready; The Gillette Company ("Gillette"); Gourmet
Specialties; Helene Curtis Industries, Inc. ("Helene Curtis"); Hershey Foods
Corp. ("Hershey Chocolate Co."); Geo A. Hormel & Company ("Hormel Foods");
Intactix International, Inc. ("Intactix"); IRI International Corp. ("IRI");
J.C. Penney Company, Inc. ("J.C. Penney"); Kellogg Company ("Kellogg");
Kimberly-Clark; Kmart Corporation ("Kmart"); Lever Brothers Co. ("Lever
Brothers"); Pimms; Powerforce ("Powerforce"); Ralston Purina Company
("Ralston Purina"); Rite Aid Corp. ("Rite Aid"); Safeway Inc. ("Safeway");
S.C. Johnson Wax ("S.C. Johnson Wax" or "S.C. Johnson"); Spar/Marketing
Force, Inc. ("Spar/Marketing Force"); Target; Thrifty PayLess, Inc. ("Thrifty
PayLess"); The Vons Companies, Inc. ("Vons"); Wakefern; and Wal*Mart Stores,
Inc. ("Wal*Mart").
16
ITEM 2. PROPERTIES.
The Company maintains its corporate headquarters in approximately 26,000
square feet of leased office space located in Irvine, California, under a lease
with a term expiring in February 2000.
The Company leases certain office and storage facilities for its divisions
and subsidiaries under operating leases which expire at various dates during the
next five years. Most of these leases require the Company to pay minimum rents,
subject to periodic adjustments, plus other charges including utilities, real
estate taxes and common area maintenance.
The following is a list of the locations where the Company maintains leased
facilities for its division offices and subsidiaries:
Scottsdale, Arizona Chesterfield, Missouri
Bentonville, Arkansas Edison, New Jersey
Costa Mesa, California Albuquerque, New Mexico
Irvine, California Charlotte, North Carolina
Pleasanton, California Blue Ash, Ohio
Englewood, Colorado Wilsonville, Oregon
Ridgefield, Connecticut Mars, Pennsylvania
Norcross, Georgia Tampa, Florida
Carrollton, Texas Oakwood Terrace, Illinois
Houston, Texas Overland Park, Kansas
Bountiful, Utah Natick, Massachusetts
Richmond, Virginia Southfield, Michigan
Bellevue, Washington
Although the Company believes that its existing facilities are adequate for
its current business, new facilities will be added should the need arise in the
future.
ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS.
In the ordinary course of its business, the Company may be involved in
legal proceedings from time to time. As of the date of this Annual Report on
Form 10-K, the Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq National
Market. The Common Stock commenced trading on March 1, 1996 at a price per
share of $14.00. The Common Stock is traded on the Nasdaq National Market under
the symbol "PIAM".
1996 High Low
------------------------ ------- -------
First Quarter (from
March 1, 1996) . . . . . $19.250 $14.000
Second Quarter . . . . . 28.375 11.250
Third Quarter. . . . . . 15.250 10.875
Fourth Quarter . . . . . 13.125 8.750
As of March 21, 1997, there were approximately 74 holders of record of the
Company's Common Stock.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of its business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data sets forth, for the
periods and the dates indicated, summary consolidated financial data of the
Company derived from the historical consolidated financial statements of the
Company and its subsidiaries. The selected consolidated statements of
operations data presented below with respect to the years ended December 31,
1994, 1995 and 1996, and the consolidated balance sheet data at December 31,
1995 and 1996 are derived from, and are qualified by reference to, the audited
consolidated financial statements included elsewhere in this Form 10-K. The
consolidated statements of operations data for the years ended December 31, 1992
and 1993, and the consolidated balance sheet data at December 31, 1992, 1993 and
1994, are derived from the audited consolidated financial statements of the
Company not included herein. The financial data presented below are qualified
by reference to the consolidated financial statements included elsewhere in this
Annual Report on Form 10-K and should be read in conjunction with such financial
statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
18
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996
-------- -------- -------- --------- ----------
(in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $36,089 $56,155 $80,449 $104,791 $119,940
Operating expenses:
Field service costs . . . . . . . . . . . . . . . . . . . . . 29,259 47,318 61,876 81,320 94,841
Selling expenses. . . . . . . . . . . . . . . . . . . . . . . 3,792 6,571 9,028 10,339 11,133
General and administrative expenses . . . . . . . . . . . . . 3,395 3,910 5,800 6,810 8,067
Depreciation and amortization . . . . . . . . . . . . . . . . 519 271 339 497 609
-------- -------- -------- --------- ----------
Total operating expenses . . . . . . . . . . . . . . . . . 36,965 58,070 77,043 98,966 114,650
-------- -------- -------- --------- ----------
Operating income (loss). . . . . . . . . . . . . . . . . . . . . (876) (1,915) 3,406 5,825 5,290
Interest expense (income), net . . . . . . . . . . . . . . . . . 593 640 725 465 (823)
Equity in earnings in affiliate. . . . . . . . . . . . . . . . . (72)
Write-off of excess of cost over fair value of net
assets acquired(1). . . . . . . . . . . . . . . . . . . . . . 1,704 -- -- -- --
-------- -------- -------- --------- ----------
Income (loss) before provision for income taxes. . . . . . . . . (3,173) (2,555) 2,681 5,360 6,185
Provision for income taxes . . . . . . . . . . . . . . . . . . . -- -- 101 1,829 2,426
-------- -------- -------- --------- ----------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . $(3,173) $(2,555) $ 2,580 $ 3,531 $ 3,759
-------- -------- -------- --------- ----------
Net income (loss) per common and common equivalent
share(2). . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.25) $ (0.91) $ 0.67 $ 0.88 $ 0.63
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
Weighted average common and common equivalent shares(2). . . . . 2,548 2,820 3,930 4,016 5,990
DECEMBER 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- --------- ----------
(in thousands, except per share data)
Balance Sheet Data:
Working capital. . . . . . . . . . . . . . . . . . . . . . . . . $773 $3,673 $3,642 $7,131 $32,737
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 6,532 9,181 10,224 16,086 47,672
Current portion of long-term debt. . . . . . . . . . . . . . . . 2,359 535 277 0 0
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 4,734 6,390 3,274 3,400 0
Total stockholders' equity (deficit) . . . . . . . . . . . . . . (2,650) (1,063) 2,481 5,988 36,718
- ----------------------
(1) The excess of cost over fair value of net assets acquired originated in
August 1988 in conjunction with the acquisition of the Company. In
December 1992, all unamortized amounts related to this transaction were
expensed because the Company determined that they were no longer
recoverable. The Company made this determination based upon its prior and
projected operating performance.
(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the shares used in calculating net income (loss) per share.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
PIA was organized in 1943 and operated exclusively in California and
Arizona in grocery stores through 1989. In mid-1988, Clinton E. Owens, the
Company's current Chairman and Chief Executive Officer, concluded that a
national merchandising company could capitalize on developments within the
retail grocery industry by providing merchandising services to a variety of
manufacturers supplying the industry. In August 1988, Mr. Owens and Riordan,
Lewis & Haden, a private investment firm, completed an acquisition of the
Company. See "Business--Industry Overview." In 1990, the Company began an
expansion strategy to provide syndicated services on a national basis. During
its national expansion phase, which was completed in 1993, PIA incurred
significant start-up costs which resulted in losses in 1990, 1992 and 1993,
and break-even performance in 1991. Over this same time period, the
Company's net revenues increased from $12.9 million in 1990 to $56.2 million
in 1993. In 1993, PIA began offering merchandising services in other retail
channels, including mass merchandiser, chain and deep discount drug stores.
In 1994, the Company began offering dedicated services to retailers and
manufacturers. In 1996, the Company established a corporate and division
infrastructure for its project services business.
During 1996, the Company's profitability was affected by a shift in its
business from syndicated services to projects and dedicated services. The
Company's syndicated services business has historically required a
significant fixed management and personnel infrastructure. Due in part to
industry consolidation and increased competition, the Company lost a number
of syndicated services clients during 1996, causing a decrease in the
profitability of that business in the last two quarters of the year. PIA has
not sold any sizeable new syndicated business to compensate for this loss.
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.
Over the last three years, the Company has experienced a significant
increase in the demand for project services. PIA's project revenues have grown
from $20.1 million in 1994 to $38.2 million in 1996. This increase has required
an investment in management infrastructure and systems to support this business.
The Company's dedicated services business is also growing rapidly.
During 1996, revenues from dedicated services accounted for 18.3% of total
revenues, as compared to 12.9% in 1995. The Company expects this percentage
to increase in 1997. 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.
For the years ended December 31, 1994, 1995 and 1996, the Company generated
approximately 94%, 86% and 88% of its net revenues from manufacturer clients,
and approximately 6%, 14% and 12% from retailer clients, respectively. Revenues
generated from retailer clients for 1993 and prior years were not material. The
mix of the Company's business between manufacturer and retailer clients
historically has not had a material impact on the Company's cash flows or
results of operations.
20
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
net revenues for the periods indicated:
Year Ended December 31,
-------------------------
1994 1995 1996
------ ------ ------
Net revenues . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Operating expenses:
Field service costs . . . . . . . . . . . . . 77.0 77.6 79.1
Selling expenses . . . . . . . . . . . . . . 11.2 9.9 9.3
General and administrative expenses . . . . . 7.2 6.5 6.7
Depreciation and amortization . . . . . . . . 0.4 0.5 0.5
------ ------ ------
Total operating expenses . . . . . . . . . 95.8 94.5 95.6
------ ------ ------
Operating income . . . . . . . . . . . . . . . . 4.2 5.5 4.4
Interest (expense) income, net . . . . . . . . . (0.9) (0.4) 0.6
Equity in earnings in affiliate. . . . . . . . . 0.1
------ ------ ------
Income before provision for income taxes . . . . 3.3 5.1 5.1
Provision for income taxes . . . . . . . . . . . (0.1) (1.7) (2.0)
------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . 3.2 3.4 3.1
------ ------ ------
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET REVENUES increased $15.1 million, or 14.4%, to $119.9 million in
1996 from $104.8 million in 1995. The increase in net revenues was the
result of revenues from a new client of $14.0 million, which contributed
92.7% to the increase, and a net increase from other clients of $1.1 million,
which contributed 7.3% of the increase. This net increase is comprised of
increased revenues of $12.1 million from existing clients, partially offset
by a decline in revenue of $11.0 million due to client losses.
The net revenue increase in 1996 is a result of an increase in project
business of $14.6 million, representing a 61.8% increase in project revenues
over 1995, and from an increase in dedicated services of $8.3 million,
representing a 61.4% increase in dedicated services over 1995. These
increases were offset by a decrease of $7.8 million, or 11.5%, in revenues
from syndicated services over 1995.
FIELD SERVICE COSTS increased $13.5 million, or 16.4%, to $94.8 million
in 1996, compared to $81.3 million in 1995. Field service costs are
comprised principally of field labor and related costs and expenses required
to provide routed coverage, project activities, key account management and
related technology costs, as well as the field overhead required to support
the activities of these groups of employees. The increase in field service
costs is principally due to increases in associated revenue. As a percentage
of net revenues, field service costs increased to 79.1% in 1996 from 77.6% in
1995 primarily due to the negative leverage caused by the loss of syndicated
services business; increased labor costs associated with a delayed signing of
a large new client in the second quarter of the year; salary increases in the
ordinary course of business; and increased travel costs associated with the
larger work force.
SELLING EXPENSES increased $0.8 million, or 7.7%, to $11.1 million in 1996
from $10.3 million in 1995. Selling expenses increased primarily as a result of
higher payroll costs due to increased staffing and travel costs. As a
percentage of net revenues, selling expenses decreased to 9.3% in 1996 from 9.9%
in 1995 as spending continued to increase at a slower rate than revenue.
21
GENERAL AND ADMINISTRATIVE EXPENSES increased $1.3 million, or 18.5%, to
$8.1 million in 1996 from $6.8 million in 1995. General and administrative
expenses increased primarily as a result of higher payroll costs due to
increased staffing in recruitment and training and management information
services that was required to support overall business growth, as well as salary
increases in the ordinary course of business. As a percentage of net revenues,
general and administrative expenses increased to 6.7% in 1996 from 6.5% in 1995.
DEPRECIATION AND AMORTIZATION EXPENSES increased approximately $0.1 million
to $0.6 million in 1996 from $0.5 million in 1995. The increase was principally
the result of depreciation on computer hardware and software upgrades both for
shelf technology and for general business purposes.
INTEREST INCOME was $0.8 million compared to interest expense of $0.5 in
1995. The income resulted from investments of the proceeds of the Company's
initial public offering on March 1, 1996 and payoff of borrowings of
$3.4 million.
EARNINGS IN INVESTMENT in 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 and is now required to recognize its equity
in its earnings.
INCOME TAXES were approximately $2.4 million in 1996 and $1.8 million in
1995, representing an effective rate of 39.2% and 34.1%, respectively. These
tax rates differed from an expected combined federal and state tax rate of 40%
due principally to a $0.6 million reduction in the valuation allowance caused by
the utilization of net operating loss carryforwards in 1995. As of December 31,
1995, all of the net operating loss carryover had been utilized.
NET INCOME increased approximately $0.2 million, or 6.5%, to approximately
$3.8 million in 1996, from approximately $3.5 million in 1995, primarily as a
result of the increase in net revenues discussed above, offset by the increase
in operating expenses related to the increase in net revenues.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET REVENUES increased $24.4 million, or 30.4%, to $104.8 million in
1995 from $80.4 million in 1994. The increase in net revenues was the result
of revenues from a new client of $9.3 million, which contributed 38.1% of the
increase, and a net increase from other clients of $15.1 million, which
contributed 61.9% of the increase. Revenues from existing clients increased
$25.6 million from 1994, partially offset by a decline in revenue
of $10.1 million due to client losses.
The net revenue increase in 1995 is a result of an increase in project
business of $3.6 million, or 20.0%, from 1994; from an increase in dedicated
services of $8.5 million, or 67.9%, from 1994; and an increase of $12.3
million, or 22.2%, in revenues from syndicated services from 1994.
FIELD SERVICE COSTS increased $19.4 million, or 31.4%, to $81.3 million
in 1995 compared to $61.9 million in 1994. Field service costs are comprised
principally of field labor and related costs and expenses required to provide
routed coverage, project activities, key account management and related
technology costs, as well as the field overhead required to support the
activities of these groups of employees. The increase in field service costs
was primarily the result of increased operating costs associated with the
growth in net revenues. As a percentage of net revenues, field service costs
increased to 77.6% in 1995 from 77.0% in 1994. The increase in 1995 resulted
from the effect of increased retailer-mandated services, including new store
sets, store remerchandisings and remodels and category resets, without any
related increase in the Company's revenues under its fixed-price contracts.
Also contributing to the higher percentage in 1995 was the Company's
investment in personnel servicing Wal*Mart, Kmart and Thrifty PayLess in
advance of revenue growth.
22
SELLING EXPENSES increased $1.3 million, or 14.5%, to $10.3 million in 1995
from $9.0 million in 1994. Selling expenses increased primarily as a result of
higher payroll costs due to increased staffing and travel costs. As a
percentage of net revenues, selling expenses decreased to 9.9% in 1995 from
11.2% in 1994 as spending increased at a slower rate than revenue.
GENERAL AND ADMINISTRATIVE EXPENSES increased $1.0 million, or 17.4%, to
$6.8 million in 1995 from $5.8 million in 1994. General and administrative
expenses increased primarily as a result of higher payroll costs due to
increased staffing in category management, accounting and management information
services that was required to support overall business growth, as well as salary
increases in the ordinary course of business. As a percentage of net revenues,
general and administrative expenses decreased to 6.5% in 1995 from 7.2% in 1994
as spending increased at a slower rate than revenue.
DEPRECIATION AND AMORTIZATION EXPENSES increased approximately $0.2 million
to $0.5 million in 1995 from $0.3 million in 1994. The increase was principally
the result of depreciation on recent purchases of computer hardware and software
upgrades both for shelf technology and for general business purposes.
INTEREST EXPENSE declined approximately $0.2 million to $0.5 million in
1995 from $0.7 million in 1994. The reduction was principally the result of
reduced line of credit and subordinated debt borrowings throughout 1995 which
were made possible by positive cash flow from operations.
INCOME TAXES were $1.8 million in 1995 and approximately $0.1 million in
1994, representing an effective rate of 34.1% and 3.8%, respectively. These tax
rates differed from an expected combined federal and state tax rate of 40% due
principally to a $0.6 million reduction in the valuation allowance caused by the
utilization of net operating loss carryforwards. As of December 31, 1995,
substantially all of the net operating loss carryover had been utilized, which
will cause the effective tax rate to increase in the future.
NET INCOME increased approximately $0.9 million, or 36.9%, to approximately
$3.5 million in 1995, from approximately $2.6 million in 1994, primarily as a
result of the increase in net revenues discussed above, partially offset by the
increase in operating expenses related to the increase in net revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital need has been to fund the working capital
requirements created by its growth in net revenues. On March 1, 1996, the
Company completed an initial public offering of its Common Stock, raising
$26.5 million. Prior to this offering, the Company's primary sources of
financing were senior borrowings from a bank under a revolving line of credit
and subordinated borrowings from two stockholders. During 1996, the Company
had $1.6 million in negative cash flow from operations, principally due to an
increase in accounts receivable of $10.5 million, partially offset by
increases in other current liabilities. The increase in accounts receivable
partially resulted from a delay in the completion of a major contract and
several large billings to customers for dedicated services at year end.
During 1996, the Company used $3.4 million to repay its bank debt and $2.5
million primarily for the development of Stor*Trak II and capital
expenditures.
In 1995, the Company had negative cash flow from operations of $0.3
million, due primarily to the growth in net revenues and to a $2.5 million
account receivable from one retailer client for a non-recurring project.
This receivable was collected in January 1996. The Company used $0.7 million
in 1995 primarily for capital expenditures. Subordinated debt was repaid in
1995 with new bank borrowings.
In 1994, the Company had positive cash flow from operations of $4.4
million, principally as a result of net income and increases in other current
liabilities. The Company used $0.9 million in 1994 for capital expenditures
and $2.6 million primarily for principal payments on long-term debt. The
Company's working capital as of December 31, 1994, 1995 and 1996 was $3.6
million, $7.1 million and $32.7 million, respectively.
23
In January 1997, the Company entered into a new credit agreement with a
bank, which provides for an unsecured line of credit in the maximum amount of
$7,000,000. Borrowings under the line of credit bear interest at the bank's
reference rate, unless the Company elects the specified offshore rate. The
credit agreement contains various covenants which, among other things,
require compliance with certain financial tests such as working capital,
tangible net worth, leverage and profitability. In addition, the credit
agreement imposes certain restrictions on the Company, including limitations
on the incurrence of additional indebtedness, the payment of dividends, and
the ability to make acquisitions. No borrowings are currently outstanding
under this facility.
In March 1997, the Company's Board of Directors approved a stock
repurchase program under which the Company is authorized to repurchase up to
1,000,000 shares of Common Stock from time to time in the open market,
depending on market conditions. This program will be funded by working
capital.
The Company believes that its working capital and available line of
credit are sufficient to fund its operations for the next 12 months.
INFLATION
Inflation has not had a material impact on operating results, and the
Company does not expect it to have much impact in the future. There can be no
assurance, however, that PIA's business will not be affected by inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on June 6,
1997, which will be filed with the Securities and Exchange Commission within 120
days after December 31, 1996. Such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on June 6,
1997, which will be filed with the Securities and Exchange Commission within 120
days after December 31, 1996. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on June 6,
1997, which will be filed with the Securities and Exchange Commission within 120
days after December 31, 1996. Such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on June 6,
1997, which will be filed with the Securities and Exchange Commission within 120
days after December 31, 1996. Such information is incorporated herein by
reference.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. INDEX TO FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT:
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995. . . F-2
Consolidated Statements of Income for the Years Ended December
31, 1996, 1995, and 1994. . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . F-8 through F-21
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II -- Valuation and Qualifying Accounts for the Years
Ended December 31, 1996, 1995 and 1994. . . . . . F-22
3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of the Company.*
3.2 By-laws of the Company.*
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.*
10.1 1990 Stock Option Plan.*
10.2 1995 Stock Option Plan.*
10.3 1995 Stock Option Plan for Nonemployee Directors.*
10.4 Business Loan Agreement dated as of January 1, 1997 between the
Company and Bank of America National Trust and Savings Association.
11.1 Reconciliation of Earnings Per Share.
26
21.1 Subsidiaries of the Company.*
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
- --------------
* Filed as an Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-80429) on December 14, 1995.
(B) REPORTS ON FORM 8-K.
None.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1943, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PIA MERCHANDISING SERVICES, INC.
By: /s/ CLINTON E. OWENS
------------------------------------------
Clinton E. Owens
Chairman of the Board,
Chief Executive Officer
Date: March 27, 1997
------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ CLINTON E. OWENS Chairman of the Board, Chief Executive March 27, 1997
- ------------------------ Officer (Principal Executive Officer)
Clinton E. Owens
/s/ ROY L. OLOFSON Executive Vice President, Chief March 27, 1997
- ------------------------ Financial Officer (Principal Financial
Roy L. Olofson and Accounting Officer)
/s/ JOHN A. COLWELL Director, Vice Chairman March 27, 1997
- -----------------------
John A. Colwell
/s/ JOSEPH H. COULOMBE Director March 27, 1997
- -----------------------
Joseph H. Coulombe
/s/ EDWIN E. EPSTEIN Director March 27, 1997
- -----------------------
Edwin E. Epstein
/s/ PATRICK C. HADEN Director March 27, 1997
- -----------------------
Patrick C. Haden
28
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS:
Consolidated balance sheets as of December 31, 1995 and 1996 F-2
Consolidated statements of income for each of the three years
in the period ended December 31, 1996 F-4
Consolidated statements of stockholders' equity for each
of the three years in the period ended December 31, 1996 F-5
Consolidated statements of cash flows for each of the three years
in the period ended December 31, 1996 F-6
Notes to consolidated financial statements for each of the three years
in the period ended December 31, 1996 F-8
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
PIA Merchandising Services, Inc.:
We have audited the accompanying consolidated balance sheets of PIA
Merchandising Services, Inc. and subsidiaries (the Company) as of
December 31, 1995 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in Item 14(a)2. These consolidated
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of PIA Merchandising
Services, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Costa Mesa, California
January 30, 1997
F-1
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
----------------------
1995 1996
CURRENT ASSETS:
Cash and cash equivalents $ 185 $19,519
Accounts receivable, net (Note 2) 12,213 22,630
Prepaid expenses and other current assets 638 564
Deferred income taxes (Note 5) 493 669
------- -------
Total current assets 13,529 43,382
PROPERTY AND EQUIPMENT, net (Note 2) 2,110 1,847
INVESTMENTS AND OTHER ASSETS:
Investment in affiliate (Note 3) 100 322
Capitalized software development costs, net (Note 1) 1,987
Other assets 347 134
------- -------
Total investments and other assets 447 2,443
------- -------
$ 16,086 $ 47,672
------- -------
------- -------
See notes to consolidated financial statements.
F-2
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
----------------------
1995 1996
CURRENT LIABILITIES:
Accounts payable $ 1,838 $ 772
Other current liabilities (Note 2) 4,105 9,762
Income taxes payable (Note 5) 455 111
------- -------
Total current liabilities 6,398 10,645
DEFERRED INCOME TAXES (Note 5) 300 309
LINE OF CREDIT (Note 4) 3,400
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Notes 9 and 10):
Preferred stock, no par value, $.01 par value;
3,000,000 shares authorized; none issued and
outstanding Common stock, no par value, $.01 par
value; 15,000,000 shares authorized; 3,563,929 and
5,891,451 shares issued and outstanding as of
December 31, 1995 and 1996, respectively 6,454 58
Additional paid-in capital 33,367
Retained earnings (accumulated deficit) (466) 3,293
------- -------
Total stockholders' equity 5,988 36,718
------- -------
$16,086 $47,672
------- -------
------- -------
See notes to consolidated financial statements.
F-3
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
NET REVENUES $80,449 $104,791 $119,940
OPERATING EXPENSES:
Field service costs 61,876 81,320 94,841
Selling expenses 9,028 10,339 11,133
General and administrative expenses (Notes 6, 7 and 8) 5,800 6,810 8,081
Depreciation and amortization 339 497 595
------- -------- --------
Total operating expenses 77,043 98,966 114,650
------- -------- --------
OPERATING INCOME 3,406 5,825 5,290
OTHER INCOME (EXPENSE):
Interest expense (Note 8) (729) (493) (46)
Interest income 4 28 869
Equity in earnings of affiliate (Note 3) 72
------- -------- --------
Total other income (expense) (725) (465) 895
------- -------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,681 5,360 6,185
PROVISION FOR INCOME TAXES (Notes 1 and 5) 101 1,829 2,426
------- -------- --------
NET INCOME $ 2,580 $ 3,531 $ 3,759
------- -------- --------
------- -------- --------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $0.67 $0.88 $0.63
------- -------- --------
------- -------- --------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 3,930 4,016 5,990
------- -------- --------
------- -------- --------
See notes to consolidated financial statements.
F-4
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
------------------ PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
BALANCE, January 1, 1994 2,916 $ 5,514 $ - $(6,577) $(1,063)
Issuance of common stock for
cash 20 168 168
Repurchase of common stock (3) (34) (34)
Conversion of subordinated debt
to common stock 151 830 830
Net income 2,580 2,580
----- ------- ------- ------- -------
BALANCE, December 31, 1994 3,084 6,478 (3,997) 2,481
Repurchase of common stock (3) (24) (24)
Cashless exercise of warrants
(Note 10) 483
Net income 3,531 3,531
----- ------- ------- ------- -------
BALANCE, December 31, 1995 3,564 6,454 (466) 5,988
Change in stated par value of
shares from no par to $.01 (6,418) 6,418
Stock issued to the public 2,138 21 26,499 26,520
Stock options exercised 58 1 334 335
Tax benefit related to exercise of
stock options 116 116
Cashless exercise of warrants
(Note 10) 131
Net income 3,759 3,759
----- ------- ------- ------- -------
BALANCE, December 31, 1996 5,891 $ 58 $33,367 $ 3,293 $36,718
----- ------- ------- ------- -------
----- ------- ------- ------- -------
See notes to consolidated financial statements.
F-5
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,580 $ 3,531 $ 3,759
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 339 497 595
Amortization of other assets and discount on
subordinated debt 101 89
Equity in earnings of affiliate (72)
Deferred income taxes, net (193) (167)
Provision for doubtful receivables 148 354 105
Changes in assets and liabilities:
Accounts receivable 294 (6,605) (10,522)
Prepaid expenses and other current assets (75) 97 74
Other assets (20) (187) 213
Accounts payable (173) 840 (1,066)
Other current liabilities 1,131 946 5,657
Income taxes payable 35 420 (228)
------ ------ -------
Net cash provided by (used in) operating
activities 4,360 (211) (1,652)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (859) (743) (332)
Capitalization of software development costs (1,987)
Investment in affiliate (100) (150)
------ ------ -------
Net cash used in investing activities (859) (843) (2,469)
See notes to consolidated financial statements.
F-6
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
1994 1995 1996
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (includes payments to a
stockholder of $350,000 and $845,000 in 1994 and 1995,
respectively) $(2,984) $(5,551) $(3,400)
Proceeds from long-term debt 300 5,400
Proceeds from issuance of common stock to the public 26,520
Proceeds from issuance of common stock 168 335
Repurchase of common stock (34) (24)
------- ------- -------
Net cash provided by (used in) financing activities (2,550) (175) 23,455
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 951 (1,229) 19,334
CASH AND CASH EQUIVALENTS, beginning of period 463 1,414 185
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,414 $ 185 $ 19,519
------- ------- -------
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 623 $ 390 $ 69
------- ------- -------
------- ------- -------
Cash paid for income taxes $ 66 $ 1,621 $ 2,853
------- ------- -------
------- ------- -------
See Notes 4, 9 and 10 to consolidated financial statements for description of
noncash transactions.
See notes to consolidated financial statements.
F-7
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY DESCRIPTION - PIA Merchandising Services, Inc. and subsidiaries
(the Company) provides in-store merchandising services primarily on behalf
of branded product manufacturers at retail grocery stores, mass
merchandisers, drug stores and deep discount drug stores. The Company's
in-store services include checking for authorized distribution of client
products, cutting in products that are approved for distribution but not
present on the shelf, setting category shelves in accordance with approved
store schematics, ensuring that shelf tags are in place, checking for the
overall salability of clients' products, and performing new product and
promotion selling. The Company also performs special in-store projects
such as new store sets and existing store resets, remerchandisings,
remodels and category implementations, and executes and maintains point of
purchase displays and materials. In addition, the Company collects and
provides to certain clients a variety of merchandising data that is
category and store specific. The Company is also a supplier of regularly
scheduled, routed merchandising services in the United States.
The Company was organized in 1943 and was acquired in 1988 by an individual
and a private investment firm. PIA Holding Corporation, the predecessor of
the Company, was incorporated in California. In December 1995, the
Company's Board of Directors approved a reincorporation of the Company in
the State of Delaware and a change in the Company's name to PIA
Merchandising Services, Inc. The reincorporation was effective concurrent
with the initial public offering of the Company's common stock. The
reincorporation resulted in an increase in authorized preferred stock to
3,000,000 shares, an increase in authorized common stock to 15,000,000
shares, and a change in the par value of both the Company's common stock
and preferred stock from no par value to $.01 par value. This change in
par value resulted in a reclassification of $6,418,000 from common stock to
additional paid-in capital.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of PIA Merchandising Services, Inc. and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. The equity method of accounting is used
for the Company's investment in affiliate (Note 3).
CASH EQUIVALENTS - The Company considers all highly-liquid short-term
investments with original maturities of three months or less to be cash
equivalents.
ACCOUNTS RECEIVABLE AND CREDIT RISK - During the ordinary course of the
Company's business, the Company grants trade credit to its clients, which
consist primarily of packaged goods manufacturers and retailers. The
Company's ten largest clients generated approximately 59%, 56% and 57% of
the Company's net revenues for the fiscal years ended December 31, 1994,
1995 and 1996, respectively. During the fiscal year ended December 31,
1996, two of the Company's clients accounted for 11.7% and 10.3%,
respectively, of the Company's net revenues. Given the significant amount
of net revenues
F-8
derived from certain clients, collectibility issues arising from financial
difficulties of any of these clients or the loss of any such clients could
have a material adverse effect on the Company's business.
Unbilled accounts receivable represent merchandising services performed
that are pending billing until the requisite documents have been processed
or projects have been completed (Note 2).
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and
depreciated on the straight-line method over estimated useful lives,
ranging from three to ten years. Leasehold improvements are amortized over
the estimated useful life of the asset or the term of the lease, whichever
is shorter.
SOFTWARE DEVELOPMENT COSTS - Certain software development costs are
capitalized when incurred. Capitalization of software development costs
begins upon the establishment of technical feasibility and ceases
capitalization when the product is ready for release. Research and
development costs related to software development that has not reached
technological feasibility are expensed as incurred. As of December 31,
1996, software had not reached the release stage; and, therefore,
amortization of the related costs had not begun. When the product is
available for release, the software development costs will be amortized on
a straight-line method over five years or the expected life of the product,
whichever is less.
OTHER ASSETS - Other assets consist primarily of refundable deposits.
DEFERRED REVENUE - Client payments received in advance of merchandising
services performed are classified as deferred revenue (Note 2).
AMOUNTS HELD ON BEHALF OF THIRD PARTIES - Amounts held on behalf of third
parties arise from agreements with retailers to provide services for their
private label manufacturers' products and represent amounts to be utilized
for certain future services, merchandising-related expenditures on behalf
of the retailers (Note 2). These agreements renew annually and are
cancelable on December 31 of each year or upon ninety-day written notice by
either party.
REVENUE RECOGNITION - The Company's services are provided under various
types of contracts which consist primarily of fixed fee and commission-
based arrangements. Under fixed fee arrangements, revenues are recognized
monthly based on a fixed fee per month over a service period of typically
one year, as defined in the contract.
The Company's commission-based contracts provide for commissions to be
earned based on a specified percentage of the client's net sales of certain
products to designated retail chains. In conjunction with these commission
arrangements, the Company receives draws on a monthly basis, which are to
be applied against commissions earned. These draws approximate estimated
minimum revenue to be earned on the contract and are recognized on a
monthly basis, over a service period of
F-9
typically one year. The Company recognizes adjustments on commission-based
sales in the period such amounts become determinable. Commissions are
usually owed to the Company in excess of draws received.
The Company also performs services on a specific project basis. Revenues
related to these projects are recognized as services are performed or costs
are incurred. Certain of the Company's contracts are to perform project
work over a specified period of time ranging from one to twelve months.
Revenue under these types of contracts is recognized on the percentage of
completion method using the cost-to-cost method.
FIELD SERVICE COSTS - Field service costs are comprised principally of
field labor and related costs and expenses required to provide routed
coverage, project activities, key account management and related technology
costs, as well as field overhead required to support the activities of
these groups of employees.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR
INCOME TAXES (Note 5). Under SFAS No. 109, income taxes are provided for
the tax effects of transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related primarily to
differences between the basis of assets and liabilities for financial and
tax reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes are also recognized for operating losses that are
available to offset future taxable income and tax credits that are
available to offset future income taxes. In the event the future
consequences of differences between financial reporting bases and tax bases
of the Company's assets and liabilities result in deferred tax assets, SFAS
No. 109 requires an evaluation of the probability of being able to realize
the future benefits indicated by such asset. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE - Net income per share is
computed by dividing net income by the weighted average number of common
and common equivalent shares outstanding. Weighted average common and
common equivalent shares include common shares, warrants and stock options
using the modified treasury stock method. Net income per share at
December 31, 1994 was calculated assuming the subordinated convertible note
payable had been converted and the shares were outstanding as of the
beginning of the year.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
Topic 4D, stock options granted during the twelve months prior to the date
of the initial filing of the Company's Form S-1 Registration Statement have
been included in the calculation of the weighted average common shares,
using the modified treasury stock method, as if they were outstanding for
all periods presented.
F-10
STOCK SPLIT - In December 1995, the Company effected a 1-for-1.85 reverse
stock split of its common stock. All share and per share amounts included
in the accompanying financial statements and notes have been restated to
reflect the stock split.
VENDOR CONCENTRATION - In addition to the Company's own employees, the
Company utilizes a force of trained merchandisers employed by a third
party payrolling company engaged principally in the performance of
retailer mandated and project activities. For the years ended December
31, 1994, 1995 and 1996, the Company paid this payrolling company
approximately $15,465,000, $26,917,000 and $31,145,000, respectively
(Note 2).
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.
NEW ACCOUNTING PRONOUNCEMENT - SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock (Note 10).
RECLASSIFICATIONS - Certain amounts as previously reported have been
reclassified to conform to the December 31, 1996 presentation.
F-11
2. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts receivable, net, consist of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
Trade $11,975 $21,603
Unbilled 662 1,610
------- -------
12,637 23,213
Allowance for doubtful accounts (424) (583)
------- -------
$12,213 $22,630
------- -------
------- -------
Property and equipment consist of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
Equipment $ 3,054 $ 3,343
Furniture and fixtures 614 641
Leasehold improvements 102 118
------- -------
3,770 4,102
Less accumulated depreciation and amortization (1,660) (2,255)
------- -------
$ 2,110 $ 1,847
------- -------
------- -------
F-12
Other current liabilities consist of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
Accrued salaries and other related costs $ 829 $ 944
Accrued payroll to third party 581 1,952
Accrued insurance 532 640
Deferred revenue 436 2,479
Amounts held on behalf of third parties 864 1,055
Accrued software costs 603
Accrued rebate 788
Customer deposits 358 230
Other 505 1,071
------ ------
$4,105 $9,762
------ ------
3. INVESTMENT IN AFFILIATE
During 1996, the Company increased its voting ownership in Ameritel
Corporation, a full service telemarketing company, to 20%. Accordingly,
the Company changed its method of carrying the investment from cost to
equity as required by generally accepted accounting principles. The change
in method had no cumulative effect on the carrying value of the investment
in the accompanying financial statements.
Following is a summary of condensed unaudited financial information
pertaining to Ameritel Corporation (in thousands):
DECEMBER 31,
-------------------
1995 1996
Current assets $ 478 $ 739
Noncurrent assets 701 938
Current liabilities 222 172
Long-term liabilities 84 872
Shareholders' equity (deficit) (27) 633
Income (loss) for the year (124) 361
F-13
4. LINE OF CREDIT
In December 1995, the Company entered into a line of credit agreement with
a bank which replaced its existing line of credit agreement with another
bank. The line of credit provided for maximum borrowings of $7,000,000,
was limited to 80% of eligible accounts receivable, as defined, and was
secured by substantially all of the Company's assets. The line of credit
bore interest, payable monthly, at a premium to the bank's reference rate
(8.25% at December 31, 1996). At December 31, 1996, there were no
borrowings outstanding under the line of credit agreement, and $7,000,000
was available for borrowing. All amounts outstanding under the line of
credit were due May 1, 1997. On January 1, 1997, the Company entered into
a new line of credit agreement with its existing bank. Under this
agreement, the line matures on May 1, 1998 and bears interest at the bank's
reference rate. The new line is unsecured and is no longer subject to
available accounts receivable. The new credit agreement contains certain
financial covenants related to working capital, tangible net worth,
leverage and profitability. In addition, this credit agreement imposes
certain restrictions as to additional indebtedness, and prohibits the
payment of dividends and the ability to make acquisitions. As of
January 1, 1997, the Company was in compliance with all covenants related
to this new agreement.
5. INCOME TAXES
The provision for income taxes is summarized below for the years ended
December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31,
---------------------------
1994 1995 1996
Current income taxes:
Federal $ 51 $1,538 $2,163
State 50 484 430
---- ------ ------
101 2,022 2,593
Deferred income taxes:
Federal (173) (135)
State (20) (32)
---- ------ ------
(193) (167)
---- ------ ------
$101 $1,829 $2,426
---- ------ ------
---- ------ ------
F-14
A reconciliation between the provision for income taxes as required by
applying the federal statutory rate of 35% to that included in the
financial statements is as follows (in thousands):
YEARS ENDED
DECEMBER 31,
-------------------------
1994 1995 1996
Provision for income taxes at federal statutory
rate $ 938 $1,876 $2,165
State income taxes, net of federal benefit 43 210 259
Other permanent differences 79 101 (31)
Change in valuation allowance (1,141) (565)
Other 182 207 33
-------- ------- -------
$ 101 $1,829 $2,426
-------- ------- -------
-------- ------- -------
During fiscal 1994 and 1995, the Company's valuation allowance decreased
approximately $1,141 and $565,000, respectively, due to the utilization of
net operating loss carryforwards.
The Company had a net deferred tax asset of approximately $193,000 and
$360,000 at December 31, 1995 and 1996, respectively.
DECEMBER 31,
----------------
1995 1996
Net operating loss carryforwards $ 9 $ -
State tax provision 112 28
Accrued compensation 79 182
Accrued insurance 121 196
Allowance for doubtful accounts receivable 175 251
Depreciation (300) (314)
Other (3) 17
------- ------
Net deferred taxes $ 193 $ 360
------- ------
------- ------
6. EMPLOYEE BENEFITS
PENSION PLANS - Certain of the Company's employees are covered by union-
sponsored, collectively bargained, multi-employer pension plans. Pension
expense related to these plans was approximately $82,000, $162,000 and
$172,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
F-15
The administrators have advised the Company that there were no withdrawal
liabilities as of December 1990, the most recent date for which an
analysis was made. The Company has no current intention of withdrawing from
any of these plans.
RETIREMENT PLAN - The Company has a 401(k) retirement plan covering all
employees not participating in the pension plans. Eligible employees, as
defined by the 401(k) plan, may elect to contribute up to 15% of their
total compensation, not to exceed the amount allowed by Internal Revenue
Service guidelines. The Company makes matching contributions to the 401(k)
plan each year equal to 50% of the employee contributions, not to exceed 4%
of the total compensation, and can also make discretionary matching
contributions. Employee contributions are fully vested at all times, and
the Company's matching contributions vest over five years. The Company's
matching contributions were approximately $376,000, $473,000 and $468,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
7. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating leases and also leases
certain computer and office equipment under two- to five-year operating
lease agreements. Total rent expense relating to these leases was
approximately $1,852,000, $1,913,000 and $2,756,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
The following table sets forth future minimum lease payments under
noncancelable operating leases as of December 31, 1996 (in thousands):
Year ending December 31:
1997 $ 4,751
1998 3,803
1999 2,039
2000 761
2001 480
Thereafter 92
-------
Total future minimum lease payments $11,926
-------
-------
F-16
8. RELATED PARTY TRANSACTIONS
The Company receives legal services from a law firm previously affiliated
with its principal stockholder and paid approximately $58,000, $83,000 and
$516,000 for such legal services during the years ended December 31, 1994,
1995 and 1996, respectively. Additionally, the Company paid approximately
$140,000 and $57,000 during the years ended December 31, 1994 and 1995,
respectively, in interest related to the subordinated loans payable to a
stockholder and to a partnership in which certain stockholders of the
Company are partners.
The Company has an investment in an affiliate which provides telemarketing
and related services (Note 3). During 1996, the Company paid approximately
$412,000 for such services. Approximately $51,000 was payable to the
affiliate at December 31, 1996.
In December 1995, the Company entered into an agreement with one of its
directors to provide certain consulting services to the Company for $6,500
per month, plus certain additional compensation, based on mutually agreed-
upon objectives. Effective August 1, 1996, this director became an
employee of the Company. In conjunction with this agreement, the Company
issued to this director options to purchase 8,108 shares of the Company's
common stock at $9.81 per share, which represented the estimated fair
market value of the Company's common stock at the date of grant. These
options vest ratably over a four-year period beginning December 1, 1996
(Note 10).
9. STOCK TRANSACTIONS
In December 1994, the Company's principal stockholder converted a
subordinated note payable into 151,182 shares of the Company's common stock
at a conversion price of $7.40 per share, pursuant to the terms of the
subordinated note agreement. At the date of conversion, $289,299 of a
related discount remained unamortized and was offset against the conversion
amount in stockholders' equity.
In March 1996, the Company completed an initial stock offering and sold
1,788,000 shares of its common stock at a net price of $13.02 per share.
An additional 349,800 shares of common stock were sold, also at a net
$13.02 per share, pursuant to an underwriters over-allotment provision. The
net proceeds of the approximately $26 million raised by the Company were
used in part to repay existing bank debt.
During 1996, the Company issued 57,798 shares of common stock as a result
of options which were exercised (Note 10). The income tax effect of any
difference between the market price of the Company's common stock at the
grant date and the market price at the exercise date is credited to
additional paid-in capital.
F-17
In conjunction with a subordinated convertible note payable to its
principal stockholder, in July 1993 and December 1994, respectively, the
Company issued warrants for the purchase of 43,243 and 21,621 shares of
common stock at approximately $.02 and $8.51 per share, subject to
adjustment for dilution. In December 1995, the July 1993 warrants for the
purchase of 43,243 shares of common stock were exercised through a cashless
exercise, based on the fair market value of the Company's common stock at
the date of exercise of $9.81, which reduced the shares issued to 43,162.
The December 1994 warrants expire in 2004.
During December 1995, warrants to purchase 440,433 shares of the Company's
common stock at approximately $.02 per share were exercised through a
cashless exercise, based on the fair market value of the Company's common
stock at the date of exercise of $9.81, which reduced the number of shares
issued to 439,602 (Note 9).
During February 1996, 100,000 warrants which were issued in conjunction
with a 1992 line of credit for the purchase of 152,405 shares of common
stock at $1.82 per share were exercised through a cashless exercise, based
on the estimated fair market value of the Company's common stock at the
date of exercise of $14.00, which reduced the number of shares issued to
87,000. During October 1996, the remaining warrants to purchase 52,405
shares of common stock at $1.82 per share were exercised through a cashless
exercise, based on the estimated fair value of the Company's common stock
at the date of exercise of $12.75, which reduced the number of shares
issued to 44,924.
10. STOCK OPTIONS AND WARRANTS
The Company has three stock option plans: the 1990 Stock Option Plan (1990
Plan), the 1995 Stock Option Plan (1995 Plan), and the 1995 Director's Plan
(Director's Plan).
The 1990 Plan is a nonqualified option plan providing for the issuance of
up to 810,811 shares of common stock to officers, directors and key
employees. The options have a term of 10 years and one week and are either
fully-vested or will vest ratably no later than five years from the grant
date. During 1996, the Company elected to no longer grant options under
this plan.
The 1995 Plan provides for the granting of either incentive or nonqualified
stock options to specified employees, consultants and directors of the
Company for the purchase of up to 1,000,000 shares of the Company's common
stock. The options have a term of ten years, except in the case of
incentive stock options granted to greater than ten percent stockholders of
the Company, as to which the term is five years. The exercise price of
nonqualified stock options must be equal to at least 85% of the fair market
value of the Company's common stock at the date of grant, and the exercise
price of incentive stock options must be equal to at least the fair market
value of the Company's common stock at the date of grant. At December 31,
1996, options to purchase 785,460 shares were available for grant.
F-18
The Director's Plan is a stock option plan for nonemployee directors and
provides for the purchase of up to 100,000 shares of the Company's common
stock. An option to purchase 1,500 shares of the Company's common stock
shall be granted automatically each year to each director following the
Company's annual stockholders' meeting. The exercise price of options
issued under this plan shall be not less than the fair market value of the
Company's common stock on the date of grant. Each option under this plan
shall vest and become exercisable in full on the first anniversary of its
grant date, provided that the optionee is reelected as a director of the
Company. The maximum term of options granted under the plan is ten years
and one day, subject to earlier termination following an optionee's
cessation of service with the Company. At December 31, 1996, all options
were available for grant under this plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation cost
has been recognized for the stock option plans. The impact of stock
options granted prior to 1995 has been excluded from the pro forma
calculation; accordingly, the 1996 and 1995 pro forma adjustments may
not be indicative of future period pro forma adjustments, when the
calculation will apply to all applicable future stock options. Had
compensation cost for the Company's option plans been determined based
on the fair value at the grant date for awards in 1996 consistent with
the provisions of SFAS No. 123, the Company's income and net income per
share would have been reduced to the pro forma amounts indicated below:
1995 1996
Net income, as reported $ 3,531 $ 3,759
Net income, pro forma $ 3,507 $ 3,564
Net income per share, as reported $0.88 $0.63
Net income per share, pro forma $0.87 $0.60
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1995: dividend yield of 0%;
expected volatility of 0%; risk-free interest rate of 6.4%; and expected
lives of 6 years. The following weighted average assumptions were used
for grants in 1996: dividend yield of 0%; expected weighted average
volatility of 101.7%; risk-free interest rate of 6.3%; and expected lives
of 6 years.
F-19
Information regarding these option plans is as follows:
1994 1995 1996
----------------------- ------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Options outstanding,
beginning of year 598,583 $6.01 686,002 $6.34 791,356 $ 6.76
Options granted 95,135 $8.51 110,273 $9.46 234,540 $13.57
Options exercised (3,081) $7.40 (57,798) $ 5.85
Options canceled or
expired (4,635) $7.40 (4,919) $8.51 (84,896) $ 9.25
-------- -------- --------
Options outstanding,
end of year 686,002 $6.34 791,356 $6.76 883,202 $ 8.12
-------- -------- --------
-------- -------- --------
Option price range at
end of year $2.78 to $2.78 to $2.78 to
$8.51 $9.81 $14.00
Option price range for $2.78 to
exercised shares $7.40 n/a $9.81
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1996 LIFE PRICE 1996 PRICE
$2.78 158,557 5.2 $ 2.68 158,557 $ 2.78
$7.00-$10.00 490,105 7.1 $ 7.68 337,861 $ 7.63
$13.00-$14.00 234,540 9.5 $13.57 20,000 $14.00
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$2.78 to $14.00 883,202 516,418
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F-20
Outstanding warrants are summarized below:
SHARES EXERCISE
SUBJECT TO PRICE PER
WARRANTS SHARE
Balance, January 1, 1994 710,856 $.02 - $2.78
Issuances 21,621 $8.51
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Balance, December 31, 1994 732,477 $.02 - $8.51
Exercised (483,676) $0.02
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Balance, December 31, 1995 248,801 $1.82 - $8.51
Exercised (152,405) $1.82
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Balance, December 31, 1996 96,396 $2.78 - $8.51
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The above warrants expire at various dates from 2002 through 2004.
F-21
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
Year ended December 31, 1994 -
Allowance for doubtful accounts $169 148 (177) $140
Year ended December 31, 1995 -
Allowance for doubtful accounts $140 354 (70) $424
Year ended December 31, 1996 -
Allowance for doubtful accounts $424 543 (384) $583
F-22