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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 [FEE REQUIRED]
For the Fiscal year ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-16002
ADVANCED MARKETING SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3768341-9
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5880 Oberlin Drive, Suite 400
San Diego, California 92121
(Address of principal executive offices)
Registrant's telephone number : (619) 457-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value (Title of class)
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 a 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 the Registrants 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 Registrant's voting stock held by
nonaffiliates of the Registrant at June 14, 1996 was $52,326,701.
The number of shares of the Registrant's Common Stock outstanding as
of June 14, 1996 was 5,468,199.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its July 25, 1996
Annual Meeting of Stockholders (filed June 21, 1996) are incorporated by
reference into Part III of this Form 10-K.
PART I
Item 1 - BUSINESS
General
Advanced Marketing Services, Inc. (the "Company" or "AMS") is a
leading distributor of general interest books to the membership warehouse
clubs and certain specialty retailers. General interest books include
bestsellers; basic reference books, including computer and medical books; books
regarding business and management; cookbooks; gift books, including art and
coffee table books; calendars; travel books; regional books; mass market
paperbacks; children's books; and Spanish-language books. In addition, to a
lesser extent, the Company sells prerecorded audio cassettes (books on tape),
CD-ROM titles and video cassettes. The Company provides product selection
advice, specialized merchandising and product development services, and
distribution and handling services to membership warehouse clubs operating in
the United States, Canada, Mexico and the United Kingdom.
Due to the continuous introduction of new titles by the book publishing
industry, the Company provides weekly recommendations, tailored to each
customer's marketing priorities, with respect to the new titles to be sold in
its customers' book departments. These recommendations are selected by the
Company's buyers from among the over 1,000,000 titles in print and over
50,000 new books published each year. AMS also creates unique products and
develops specially packaged book and book-related products for sale to its
customers. The Company supports its customers' inventories by maintaining
back-up inventory in its distribution centers for prompt delivery as needed to
customer locations. The Company maintains four domestic regional
distribution centers to assure timely delivery to its customers, to enhance its
customers' inventory turnover rates and to reduce its customers' handling and
holding costs. See "Properties."
The Company provides distribution service to a major warehouse club
customer in the United Kingdom and is expanding its distribution to other
retailers. In Mexico, the Company distributes products to a variety of
retailers, including warehouse clubs, hypermarkets, discount department stores
and other specialty retailers. The Company utilizes the services of third party
warehousing and distribution companies in its United Kingdom and Mexican
subsidiaries.
The Company was incorporated in 1982 in California and was reincorporated in
Delaware in June 1987. The Company's executive offices are located at
5880 Oberlin Drive, Suite 400, San Diego, California 92121; telephone
(619) 457-2500.
Membership Warehouse Club Industry
The Company's customers include for-profit membership warehouse clubs which
sell a broad range of primarily brand-name merchandise at or near wholesale
prices. Membership warehouse clubs are able to provide their individual and
business members, who commonly pay annual membership fees, substantial cost
savings on high-quality merchandise through the efficiencies of warehouse-type
facilities and a no-frills, self-service operation policy. Membership
warehouse club locations typically have approximately 100,000 square feet
(2 1/2 acres) of floor space and offer a limited selection of brand-name
products in a wide range of merchandise categories. This merchandising
approach was introduced in Southern California in 1976. Since then, the
membership warehouse club industry has experienced significant growth, with
sales estimated to be approximately $40 billion in 1995.
The following table summarizes the Company's penetration of the warehouse
club industry:
Number of Locations and Locations Served
Membership Warehouse Clubs
Fiscal Locations
Year Ended Total Number Served
March 31 of Locations by AMS
1989 291 282
1990 466 354
1991 434 402
1992 514 479
1993 651 576
1994 732 612
1995 780 612
1996 803 774
Only membership warehouse club locations to which the Company shipped more
than $50,000 per year are included as locations served in the above table. The
number of locations served is not necessarily indicative of the Company's total
sales volumes to the warehouse club industry as the volume of the Company's
shipments to a location can vary from year to year based on competitive and
other factors.
Books are well-suited to the membership warehouse club merchandising strategy
of offering recognizable, quality merchandise at substantial savings. Books
appeal to a wide range of consumers and are popular gift items. Additionally,
due to their relatively high selling price in relation to their size, books
generally provide membership warehouse clubs with above-average sales per square
foot of selling space. By offering a continually changing selection of books at
a substantial discount from suggested retail prices, membership warehouse clubs
encourage retail customers to purchase books for their enjoyment, as gifts and
for business needs or interests.
Notwithstanding the appeal of books as a product line, most membership
warehouse clubs are not able to apply their standard product purchasing and
handling procedures to their book departments. Typically, a membership
warehouse club purchases a limited selection of each product category directly
from manufacturers who ship to their retail locations. In contrast, in order to
be able to offer even a limited selection of books (typically 100 to 250 titles
at any one time), a membership warehouse club would be required to devote
considerable time and resources to selecting from among the over 1,000,000
titles in print and the over 50,000 new books published each year by more than
4,200 primary publishing houses. The membership warehouse club also would
incur high freight and handling costs to receive deliveries from, and make
returns to, the numerous vendors of such books. Thus, the unique nature of
books has led many membership warehouse clubs to rely on distributors for a
portion of their book purchases. See "Risks and Competition."
Other Customers
The Company continues to diversify its customer base through expanded
distribution to a variety of specialty retailers including office product
superstores, computer and electronic superstores, mass merchandise stores, pet
supply stores, drug stores and book stores. For many of these customers, the
Company designs and recommends media programs to satisfy the unique marketing
priorities of each retailer. By constantly updating titles offered, the
Company makes it possible for its customers to offer a targeted selection of
books and media products without having to develop media merchandising
expertise with their own work forces.
The Company supplies an assortment of primarily business and computer titles to
the three leading competitors in the office product superstore industry. The
Company is now serving several leading companies in the rapidly growing
computer and electronics superstore marketplace as well. As a result of new
business development efforts, the Company gained entry into the pet supply
industry and more recently the discount drugstore market. The Company serves a
variety of other specialty retailers in the catalog, sporting goods and
children's education businesses. See "International Business."
Retailing Operations
As of March 31, 1996, the Company owned and operated 11 small retail outlet
stores in eight states. The stores are located generally in factory outlet
malls in Gilroy and Lake Elsinore, California; Gurnee, Illinois; Hillsboro and
Conroe, Texas; Burlington and Centralia, Washington; Kenosha, Wisconsin;
Algodones, New Mexico; Silverthorne, Colorado; and Birch Run, Michigan. These
retail outlets sell both titles that were purchased on a non-returnable basis
and remain unsold after being offered for sale in the Company's customers'
locations as well as titles purchased specifically for these retail stores. In
the spring of 1996 the Company converted its Gilroy, California and Centralia,
Washington stores to a new prototype retail format that offers multimedia
products such as computer software, CD ROM and music CDs, in addition to books.
To merchandise these converted stores the Company is purchasing products
specifically for resale as well as selling its non-returnable book inventory.
The Company plans to operate approximately 13 stores by the end of fiscal 1997.
Business Strategy
The Company's primary business strategy is to provide effective book
purchasing, handling and distribution services to its customers. The Company
believes that it has achieved its position as a leading book supplier to
membership warehouse clubs as well as other specialty retailers because of its
ability to offer sound product selection advice, specialized product
development and marketing services and rapid product delivery, all at
competitive prices.
Product Selection Services and Purchasing Practices
The Company's warehouse club customers generally compete in the
retail trade book market by offering a limited selection of books (typically 100
to 250 titles compared to 10,000 to 100,000 titles at national bookstore chains
and book superstores) at prices which are generally 30% to 45% lower than
suggested retail prices. The Company provides its specialty retail customers
with book programs that range from as few as 50 titles to programs of several
thousand titles. The Company believes that one of its principal strengths is
its ability to select books that will be successful in each customer's selling
environment, which is a function of various factors such as customer base,
regional characteristics and marketing priorities. This service is important
because many of the books offered by the Company have relatively limited
sales lives (typically a few weeks to a few months) due to the relatively rapid
introduction of new books to replace titles for which demand has decreased.
Therefore, customers rely on the Company's expertise and experience to
recommend new titles to be added to their book departments.
The Company's book selection process depends on a close working
relationship between the Company's general merchandise managers and its
major vendors. The process of selecting books generally begins when a
publisher's representative submits pre-publication book summaries to the
Company's general merchandise managers. A general merchandise manager
evaluates each book on the basis of such factors as subject matter and author;
suitability for the customers' selling environments; visual appeal; the extent
of the publisher's promotion and advertising support; and the estimated number
of copies to be printed. Because the Company is a major customer of many of its
vendors, such vendors often consult with the Company during pre-publication
planning, allowing the Company to influence the design and packaging of
many of the books it purchases. After choosing titles, the general
merchandise managers, in conjunction with the general marketing managers,
determine which specific titles will be recommended to each customer on the
basis of their knowledge of the customer base, regional characteristics and
marketing priorities.
Product selection is the responsibility of the Company's Merchandising
Department, under the direction of the Vice President - Merchandising to
whom seven product development directors/general merchandise managers and
a staff of 19 associates report. Each general merchandise manager is
responsible for several categories of products which include hardcover
bestsellers, mass market paperbacks, cooking, travel, regional, computer, gift
books (including art and coffee table books), children's books, calendars, CD-
ROM products, prerecorded audio and video cassettes, computer and Spanish-
language books.
The Company usually purchases newly published or well established
back-list (previously published) titles directly from publishing houses at
standard book industry wholesale discounts, which generally exceed retail
discounts. The Company does not generally purchase remainder titles, but will
occasionally purchase close-out lots of certain titles at higher than normal
discounts. Virtually all books sold are returnable to AMS by its customers for
full credit so long as the books are in saleable condition. Approximately 90%
of the books purchased by the Company in both fiscal 1996 and 1995 were
returnable to the publisher; the balance were purchased on a non-returnable or
partially returnable basis, often at higher purchase discounts. The Company has
published a limited number of titles under its own imprints, some of which are
sold to both the Company's customers and to independent and chain book
stores.
In the years ended March 31, 1996, 1995 and 1994, customer returns represented
approximately 24%, 22% and 21%, respectively, of the Company's gross sales.
Customer return rates are impacted by the sales success of individual titles
relative to quantities ordered by customers as well as customer ordering
practices for different volume locations. Returns to publishers by AMS
represented approximately 31%, 28% and 34%, respectively, of the Company's total
purchases during the same period. Although the processing of customer and
publisher returns increases freight and labor costs, the Company maintains a
large inventory to be in a position to promptly fill and otherwise support
customer orders.
The Company's reserves for markdowns increased by approximately $983,000 in
fiscal 1996. The Company added $4 million to its reserves for markdowns as a
result of slower than expected sales of certain books which are not returnable
to the publisher and deducted $3 million for actual losses incurred on books
for which reserves had previously been made. To the extent that the Company is
unable to sell non-returnable books to its traditional customers, it sells such
books to customers where, in certain cases, it is necessary to sell at below the
Company's cost. The Company believes its reserves for markdowns are adequate
based on its past experience and present market conditions, although no
assurances can be given that actual losses will not exceed present reserves when
these non-returnable books are actually sold.
The Company purchases from publishers on varying payment terms. The Company
generally takes advantage of discounts for prompt payments, when economically
attractive. During the year ended March 31, 1996, the Company made purchases
from 320 publishers. Two publishers accounted for 10% or more of the Company's
total purchases in fiscal 1996. These included Random House and Simon &
Schuster which accounted for 17% and 10%, respectively, of purchases. The
Company continues to open accounts with new publishers and believes that
adequate sources of supply exist to meet anticipated growth. As is customary in
the industry, the Company does not maintain long-term or exclusive purchase
commitments or arrangements with any publisher.
Product Development and Marketing Services
In addition to selecting from among regularly published books, AMS provides
specially packaged book and book-related products which are generally not
available in retail bookstores. For example, the Company works with various
publishers to create specially packaged items such as combination of books,
shrink-wrapped or slipcased to sell as a single item, or packages that contain a
book and a non-book item, such as a stuffed animal with a book. The Company
also works directly with publishers to have books specially reprinted or created
for its customers.
The Company assists in the promotion of the books it sells by creating
seasonal merchandising plans and recommending titles based on themes such
as Christmas, Back to School, Father's Day and Easter. The Company also
conducts theme-oriented promotions, frequently tied to specially designed
products, such as gardening, taxes, health and fitness, and travel. Special in-
store promotions are coordinated by the Company for certain of its customers.
Customers may also take advantage of the Company's cooperative advertising
coordination service whereby the Company obtains publisher-sponsored
advertising for use by its customers.
Marketing the Company's products is under the direction of the Vice
President - Marketing to whom six general managers and a staff of 19
marketing personnel report. Members of the staff are assigned to each of the
Company's customers and present new titles, recommend promotions,
coordinate orders and shipments, and handle other customer requests.
Product Distribution and Handling Services
Because an important financial and operating goal of many of the
Company's customers is a high inventory turnover rate, a critical element of the
Company's service is its ability to respond quickly to its customers' orders.
The Company has established a national network of four regional distribution
centers to assure rapid deliveries to its customers. These distribution centers
are located in general purpose warehouse facilities in the metropolitan areas of
Sacramento, California; Indianapolis, Indiana; Baltimore, Maryland; and
Dallas, Texas. AMS seeks to maintain a six- to eight-week inventory of active
titles at its distribution centers, where it receives books from multiple
vendors and dispatches, using common and contract carriers, consolidated
shipments on a weekly basis to most customer locations. Weekly deliveries
eliminate the need for customers to stock large inventories on-site and enables
customers to utilize valuable marketing space for other products. Consolidated
shipments reduce customer handling and freight costs by eliminating the costs
associated with deliveries by multiple vendors. All of the Company's
distribution centers are linked with its computerized order processing center at
its San Diego headquarters and as a result, customer orders are generally
shipped within 24 hours of receipt. Because customer orders are generally
shipped within 24 hours of receipt, the Company's backlog at any date is usually
insignificant and not a meaningful indicator of future sales. The Company's
computer system also enables AMS to provide information and special reports to
assist customers with operations and marketing. For an additional fee, upon
request, the Company will ticket books with the customer inventory item number
and sales price. The Company believes that all of these services enhance its
customers' inventory turnover rate and reduce their handling and holding costs.
International Business
The Company operates two wholly owned foreign subsidiaries.
Advanced Marketing (UK) Limited was incorporated in September 1993 in the
United Kingdom. From its London headquarters, it provides a full range of
general interest books, audio and video products primarily to the five
Price/Costco membership warehouse club locations in the United Kingdom.
Three additional Price/Costco locations are scheduled to open during fiscal
1997. The Company is expanding its distribution of media products to other
U.K. retailers.
Advanced Marketing S. de R.L. de C.V. was incorporated in January 1994 in
Mexico. From its headquarters in Mexico City, the Company distributes books
to a variety of customers in several growing markets including membership
warehouse clubs, general and mass merchandisers, office supply superstores,
hypermarkets and other specialty retailers. Despite the current depressed
economic activity in Mexico, the Company continues to move forward with the
introduction of the concept of a one-stop customized, book program to the
retailers in the Mexican marketplace.
During fiscal 1996, the Company's Mexican subsidiary operated at a
loss and there can be no assurance of success in developing sufficient sales
volumes and gross margin contributions to generate profits, particularly given
the low level of economic activity in the Mexican consumer markets since the
December 1994 Mexican peso devaluation. The Company accrued a provision
for currency exchange loss on its investment in its Mexican subsidiary in fiscal
1995 and fiscal 1996.
To address the operating challenges in its Mexican subsidiary, the
Company has augmented its management, marketing and product capabilities in the
U.S. and Mexico with personnel with Spanish language and Mexican product
expertise. The Company has also expended significant effort in developing
relationships with Mexican publishers. The Company believes that this strategy
will assist its expansion efforts in Mexico and also create product sourcing
opportunities for the Spanish language market in the United States.
The Company utilizes third party warehousing and distribution
companies in both the United Kingdom and Mexico. No assurances can be
given that the expansion in international markets will be profitable; the
Company expects no significant profit contribution from these international
operations in fiscal 1997.
Risks and Competition
In fiscal 1996 over 94% of the Company's sales were to membership
warehouse clubs with the remainder to office product superstores, computer
superstores, mass merchandisers or other specialty retailers. There are four
major membership warehouse clubs operating over 803 locations in the United
States, Canada, Korea, Mexico and the United Kingdom. The Company serves
all four of the major membership warehouse clubs at 774 of these locations. In
the year ended March 31, 1996, two customers accounted for approximately
83% of the Company's net sales. Although the Company believes it provides
services and efficiencies that membership warehouse clubs and other retailers
would have difficulty duplicating, the Company believes that its customers
may, from time to time, increase the percentage of books they purchase
directly from publishers or from other wholesale distributors. Further, the
Company could lose customers which discontinue books as a product line,
suffer a business failure or merge or consolidate with another entity not
currently serviced by AMS. The Company has no long-term or
exclusive purchase commitments with any of its customers. Any loss of a
major customer would have a material adverse effect on the Company. Given
the relatively small number of membership warehouse club chains, the
Company's reliance on a few customers is likely to continue. See "Customers."
The Company is a leading supplier of books to the membership
warehouse club market, which is highly competitive. The Company competes
in such markets with national book distributors, some of which are larger and
have greater financial resources than the Company, and with regional book
wholesalers and local book jobbers who compete with the Company on the
basis of price and service. Certain publishers sell directly to membership
warehouse clubs, and one or more of the Company's customers could choose in
the future to purchase more of its books directly from publishers. As a result,
the Company could face additional competition from publishers in the future.
Membership warehouse clubs face competition from discount and retail
bookstore chains which indirectly affects AMS. Due to their high sales
volume, membership warehouse clubs could represent an attractive market that
book distributors may seek to enter and compete directly with the Company.
The Company believes that its principal competitive advantages are its ability
to select, package, and assort products so that they sell in high volumes; to
distribute such products rapidly; to maintain sufficient back-up inventories;
and to price products competitively.
The Company purchases certain titles on a non-returnable basis which
it in turn sells on a returnable basis. To the extent that actual sales of such
titles do not equal purchased quantities, the Company risks having inventory
remaining which it may be unable to sell at or above its cost. The Company
has developed a retail outlet chain to assist in the sale of such inventory. In
addition, the Company has implemented policies to evaluate more completely
the non-returnable inventory risk it assumes. However, the Company has
incurred substantial expense in the past to sell such excess inventory and may
incur such expense in the future.
Customers
The Company is currently servicing four membership warehouse clubs.
The Company's customers account for over 95% of the sales in the warehouse
club industry and operate approximately 803 locations throughout the United
States, Canada, Mexico and the United Kingdom. The following table sets
forth those customers who accounted for 10% or more of the Company's total
net sales in fiscal 1996.
Percentage of Net Sales
1996 1995 1994
Price/Costco, Inc. 41% 46% 49%
SAM's Club (a unit of Wal-Mart Stores, Inc.) 42% 39% 34%
Employees
At March 31, 1996, the Company had 405 employees who were
engaged in administrative, merchandising, marketing, warehousing and retail
operations. The Company also hires temporary workers, primarily during the
peak holiday season. None of the Company's employees is represented by a
labor union. The Company considers its employee relations to be good.
ITEM 2 - PROPERTIES
The Company is headquartered in approximately 34,000 square feet of
commercial space in San Diego, California. The space is leased for a six-year
term expiring in 1998 with an annual base rent of $396,000.
The Company maintains the following distribution centers from which
it ships to its customers:
Location Approximate Date
(Metropolitan Area) Square Footage Opened
Dallas, Texas 89,000 July 1984
Baltimore, Maryland 151,000 June 1986
Sacramento, California 150,000 August 1986
Indianapolis, Indiana 140,000 April 1996
Each of these distribution centers is leased, with the leases expiring
between 1996 and 2001. Annual base rental payments range from $262,000 to
$615,000. See Note 5 of Notes to Consolidated Financial Statements in Item 8
of this Form 10-K. The Company believes that its four domestic distribution
centers are adequate for the conduct of its business through at least fiscal
1997.
The Company utilizes third party warehousing and distribution
companies in both the United Kingdom and Mexico. It also leases office space
in both countries on short-term leases, the commitments under which are not
material.
ITEM 3- LEGAL PROCEDURES
The Company is not a party to any material pending legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the last quarter of the year ended March 31, 1996.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market under the
Nasdaq symbol "ADMS." The following table sets forth the high and low closing
prices of the Common Stock, as reported on the Nasdaq National Market System.
On June 15, 1996, the Company had approximately 1,500 beneficial stockholders
and 90 stockholders of record.
Fiscal Fiscal
1996 1995
FISCAL QUARTER High Low High Low
FIRST QUARTER -
ENDED JULY 1/JULY 2 7 1/4 6 1/8 5 3/4 4
SECOND QUARTER -
ENDED SEPTEMBER 30/
OCTOBER 1 8 5/8 6 5/8 7 4 7/8
THIRD QUARTER -
ENDED DECEMBER 30/
DECEMBER 31 10 7/8 7 1/4 6 3/4 5 3/4
FOURTH QUARTER -
ENDED MARCH 31 13 5/8 8 1/2 6 1/2 5 1/4
The present policy of the Company is to retain earnings to provide
funds for the operation and expansion of its business. The Company has not
paid cash dividends on its Common Stock and has no plans to do so in the
foreseeable future. There are no direct limitations or restrictions on the
payment of cash dividends under the Company's line of credit arrangement or
any other agreement. The declaration of dividends in the future will, however,
remain within the discretion of the Company's Board of Directors, which will
review its dividend policy from time to time.
On May 30, 1994, the Company announced a stock repurchase program
pursuant to which the Company may repurchase in open market transactions,
from time to time, based upon existing market conditions, up to 500,000 shares
of its Common Stock. During fiscal 1995, the Company purchased 211,000
shares of Common Stock pursuant to such repurchase program.
ITEM 6 - SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and with the consolidated financial statements and
notes thereto. No cash dividends were paid on the Company's Common Stock
in any of the periods presented.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 1993 1992
NET SALES $365,499 $303,708 $264,518 $258,390 $218,148
COST OF GOODS SOLD 328,361 274,776 242,497 236,751 199,688
GROSS PROFIT 37,138 28,932 22,021 21,639 18,460
DISTRIBUTION AND
ADMINISTRATIVE EXPENSES 28,243 24,083 22,561 17,229 15,721
INCOME (LOSS) FROM
OPERATIONS 8,895 4,849 (540) 4,410 2,739
INTEREST EXPENSE - (35) (56) (184) (360)
INTEREST AND DIVIDEND
INCOME 1,209 894 817 505 264
INCOME BEFORE PROVISION
FOR INCOME TAXES 10,104 5,708 221 4,731 2,643
PROVISION FOR INCOME TAXES 4,003 2,346 65 1,779 809
NET INCOME $ 6,101 $ 3,362 $156 $2,952 $1,834
NET INCOME PER COMMON AND
COMMON SHARE EQUIVALENT -
FULLY DILUTED $1.07 $ .60 $ .03 $ .53 $ .34
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING -
FULLY DILUTED 5,699 5,611 5,415 5,604 5,354
BALANCE SHEET DATA AS OF MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 1993 1992
WORKING CAPITAL:
CASH AND CASH EQUIVALENTS $ 8,706 $ 9,035 $ 2,928 $ 5,022 $13,960
INVESTMENTS, AVAILABLE-FOR-SALE 12,532 9,153 14,469 12,609 -
INVENTORIES, NET 72,297 69,356 62,451 65,474 63,772
ACCOUNTS RECEIVABLE AND
OTHER CURRENT ASSETS 65,767 42,075 28,569 25,125 17,813
CURRENT LIABILITIES (111,680) ( 88,794) (70,775) (71,129) (59,810)
TOTAL WORKING CAPITAL 47,622 40,825 37,642 37,101 35,735
TOTAL ASSETS 162,651 133,131 112,402 112,231 97,890
DEBT - - - - -
STOCKHOLDERS' EQUITY $50,971 $44,337 $41,627 $41,102 $38,080
BOOK VALUE PER COMMON SHARE $ 9.32 $ 8.22 $ 7.66 $ 7.65 $ 7.11
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Net income for the fiscal year ended March 31, 1996 was $6,101,000, or $1.07
per share, on net sales of $365,499,000. This compares to net income of
$3,362,000, or $0.60 per share, on net sales of $303,708,000 for the previous
fiscal year.
The 20.3 percent increase in net sales was due primarily to (1) the Company
being designated, effective June 1995, as primary book supplier to 65 additional
SAM's Club locations and (2) an increase in the extent of the Company's
participation in the book programs of SAM's Club and certain other customers
beginning in August 1995, in part as a result of a competitor filing for
bankruptcy protection. The sales growth was spread across most categories of
books that the Company offers, with particularly strong increases in the
computer and mass paperback categories.
The Company experienced a 24 percent rate of returns from customers in fiscal
1996 compared with 22 percent in fiscal 1995. To date, initiatives designed to
reduce customer returns have fallen short of plan, but the Company continues to
work with its customers and vendors to reduce the rate of returns. Reserves
have been established based on management's best estimate of expected product
returns.
Gross profit for fiscal 1996 reached $37,138,000, an increase of $8,206,000
from the fiscal 1995 level. As a percentage of sales, gross profit was 10.2
percent in fiscal 1996 compared with 9.5 percent in the previous fiscal
year. The increase in the gross profit percent resulted primarily from an
improved mix of higher margin titles and higher income from publisher incentive
programs. These increases were offset, in part, by larger provisions for
markdown expense than during the prior year on the Company's non-returnable
inventory.
Distribution and administrative expenses increased to $28,243,000 for fiscal
1996 from $24,083,000 for fiscal 1995. As a percentage of sales, however, these
expenses declined to 7.7 percent from 7.9 percent for the prior fiscal year.
This improvement was the result of freight, facilities and labor efficiencies,
stemming in part from the Company's move over the last several years to fewer,
but larger warehouses as well as from reductions in certain negotiated freight
rates. General and administrative expenses increased modestly as a percentage
of sales, primarily as a result of higher corporate office staffing costs to
handle increased sales volume from existing customers and costs associated with
serving and obtaining new customers. The Company increased its accounts
receivable reserve for adjustments and potential write-offs due, in part, to
increased incidence of disputed items with customers. The Company's foreign
exchange losses on the investment in its Mexican subsidiary increased from the
prior year due to additional devaluation of the Mexican peso.
Interest and dividend income increased to $1,209,000 in fiscal 1996 from
$894,000 in fiscal 1995 as a result of an increase in the Company's investment
balances, as well as higher yields due to a greater proportion of taxable
investment in the current fiscal year. Interest income was reduced in the
previous year due to a provision for anticipated losses on preferred stock
investments.
The Company's combined federal and state statutory tax rate is approximately
39 percent. Various adjustments, primarily due to the Company's loss on foreign
operations, caused the fiscal 1996 provision for income taxes to be $4,003,000,
or 40 percent of pre-tax income compared to $2,346,000, or 41 percent of pre-tax
income in fiscal 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net income for the fiscal year ended March 31, 1995 was $3,362,000, or $.60 per
share, on net sales of $303,708,000. This compares to net income of $156,000,
or $.03 per share, on net sales of $264,518,000 for the previous fiscal year.
The increase in net sales for fiscal 1995 resulted, in part, from increases
in the juvenile, cookbook, computer and books-on-tape categories. In addition,
in March 1994 the Company began supplying books to an additional 83 SAM's Club
locations. The Company expects its share of SAM's Club book business to further
increase in fiscal 1996 as a result of its designation as the primary book
supplier to an additional 65 locations effective June 1995. At that time, the
Company will be the primary book supplier to 356 of the 430 SAM's Club
domestic locations.
Comparable store sales declined 4 percent. The Company experienced a 22
percent rate of returns from customers in fiscal 1995 compared to a 21 percent
return rate in fiscal 1994. The continued high rate of customer returns,
particularly in the fourth quarter, contributed to more modest sales growth in
the second half of fiscal 1995 compared to the first half of fiscal 1995. Net
sales to the office product superstore industry declined 32 percent compared to
the prior year and represented approximately 3 percent of the Company's total
net sales in fiscal 1995. This decline resulted in part from the Company's
loss of market share at several office supply customers and higher customer
returns from this group of customers. The Company competes, often on a title by
title basis, with other suppliers and is unable to predict the extent to which
it will be successful in maintaining or increasing the percentage of its
customers' purchases supplied by the Company.
Gross profit for fiscal 1995 was $28,932,000, an increase of $6,911,000
from the fiscal 1994 level. As a percentage of sales, gross profit was 9.5
percent in fiscal 1995 compared to 8.3 percent in the prior fiscal year. The
increase resulted, in part, from improved inventory management and the
implementation of freight cost reduction programs offset, in part, by higher
provisions for markdown expense.
Distribution and administrative expenses increased to $24,083,000 in fiscal
1995 compared to $22,561,000 in fiscal 1994. As a percentage of sales, however,
these expenses declined to 7.9 percent compared to 8.5 percent in the prior
fiscal year. Increases in distribution expenses to handle higher shipment and
customer return volumes and other compensation increases were offset, in part,
by lower occupancy costs resulting from the consolidation of the Company's
distribution center network and net revenues from the Company's promotional
activities.
Interest expense decreased from $56,000 in fiscal 1994 to $35,000 in fiscal
1995. The decrease was primarily due to reduced commitment fees associated with
the Company's line of credit which was not utilized in fiscal 1995 or fiscal
1994. Interest and dividend income increased to $894,000 in fiscal 1995 from
$817,000 in fiscal 1994 as a result of an increase in the Company's cash and
investment balances.
The Company's combined federal and state statutory tax rate is approximately 39
percent. Various adjustments, primarily due to the Company's loss on foreign
operations, caused the fiscal 1995 provision for income taxes to be $2,346,000,
or 41 percent of pre-tax income. In fiscal 1994, the Company's modest operating
loss coupled with tax exempt interest and dividend income caused the provision
for income taxes to be $65,000, or 29 percent of pre-tax income.
SEASONALITY
The Company's net sales and earnings in the third fiscal quarter have
historically been, and are expected to continue to be, significantly higher than
in any other quarter due to the holiday season. Income from operations
during the third fiscal quarter, as a percentage of net sales, is typically
higher than in any other quarter because of product sales mix and other
economies of scale caused by the higher sales volume. The Company expects
seasonality in its operations to continue.
LIQUIDITY AND CAPITAL RESOURCES
The Company experiences significant seasonal short-term swings in its cash
position due to sales seasonality and to differences in timing of payments to
its vendors and the receipt of payments from its customers. Cash flow has been
historically greatest during the third fiscal quarter due to higher seasonal
sales. As of March 31, 1996, the Company had $8,706,000 in cash and cash
equivalents and $12,532,000 in short-term investments, available-for-sale. As
of March 31, 1995, the Company had $9,035,000 in cash and cash equivalents,
$9,153,000 in short-term investments and $1,012,000 in long-term investments,
available for sale.
The working capital required to finance inventories is directly related to
inventory turnover rate and trade credit terms provided by publishers. Trade
credit terms from the Company's vendors did not change significantly
during fiscal 1996. Inventory turnover rates increased from 4 times in fiscal
1995 to 4.5 times in fiscal 1996 due to improved inventory management.
The Company's fiscal year end receivable balances increased to $59,913,000
from $38,654,000 in the prior fiscal year primarily as a result of increased
sales and to a lesser extent, a delay in receipt of certain customer payments
and an increase in disputed items.
While inventory levels did not change significantly from year to year, accounts
payable increased from $85,236,000 at March 31, 1995 to $104,626,000 at March
31, 1996. This increase was primarily due to an increase in purchases to
support the higher sales level.
The Company has available at March 31, 1996 an unsecured bank line of credit
with a maximum borrowing limit of $10 million. The interest rate is at the
prime rate (8.25 percent at March 31, 1996). While the Company did not utilize
its line of credit during fiscal 1996 or fiscal 1995, the Company anticipates
that it will be able to extend or replace its existing line of credit when it
expires July 31, 1996.
The Company believes that its working capital, cash flows from operations,
trade credit traditionally available from its vendors and its $10 million line
of credit will be sufficient to finance its current and anticipated
level of operations.
IMPACT OF INFLATION
The Company has been subject to relatively low prevailing inflation rates in all
countries in which it operates, with the exception of Mexico, during fiscal
1996, 1995 and 1994. The Company has generally been able to adjust its selling
prices to offset increased costs of merchandise and expects to be able to
continue to do so in the foreseeable future. The continued high rates of
inflation in Mexico may cause further devaluation of the Company's investment in
its Mexican operations.
STATEMENT OF PURPOSE OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
In December 1995, the Private Securities Litigation Reform Act of 1995 (the
"Act") was enacted. The Act contains amendments to the Securities Act of 1933
and the Securities Exchange Act of 1934 which provide protection from liability
in private lawsuits for "forward-looking" statements made by persons specified
in the Act. The Company desires to take advantage of the "safe harbor"
provisions of the Act.
The Company wishes to caution readers that, with the exception of historical
matters, the matters discussed in this Annual Report on Form 10-K are
forward-looking statements that involve risks and uncertainties, including
but not limited to factors related to the highly competitive nature of the
warehouse club and retail industries and their sensitivity to changes in
general economic conditions, the Company's expansion plans, the results of
financing efforts and other factors discussed in the Company's filings with the
Securities and Exchange Commission. Such factors could affect the Company's
actual results during fiscal 1997 and beyond and cause such results to differ
materially from those expressed in any forward-looking statement made by or
on behalf of the Company.
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants 15
Consolidated Balance Sheets 16
Consolidated Statements of Income 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanced Marketing Services, Inc.:
We have audited the accompanying consolidated balance sheets of ADVANCED
MARKETING SERVICES, INC. (a Delaware corporation) and subsidiaries as of March
31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Marketing Services,
Inc. and subsidiaries as of March 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1996 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
schedule to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
San Diego, California
May 10, 1996
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1996 AND 1995
ASSETS
1996 1995
CURRENT ASSETS: (IN THOUSANDS)
CASH AND CASH EQUIVALENTS $ 8,706 $ 9,035
INVESTMENTS, AVAILABLE-FOR-SALE (NOTE 2) 12,532 9,153
ACCOUNTS RECEIVABLE - TRADE, NET OF ALLOWANCES
FOR UNCOLLECTIBLE ACCOUNTS AND SALES RETURNS
OF $4,173,000 IN 1996 AND $2,532,000 IN 1995 57,700 36,997
VENDOR AND OTHER RECEIVABLES 2,213 1,657
INVENTORIES 72,297 69,356
DEFERRED INCOME TAXES (NOTE 4) 5,279 3,111
PREPAID EXPENSES 575 310
TOTAL CURRENT ASSETS 159,302 129,619
PROPERTY AND EQUIPMENT, AT COST 7,837 6,335
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION 4,769 4,020
NET PROPERTY AND EQUIPMENT 3,068 2,315
INVESTMENTS, AVAILABLE-FOR-SALE (NOTE 2) - 1,012
OTHER ASSETS 281 185
TOTAL ASSETS $162,651 $133,131
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
CURRENT LIABILITIES: (IN THOUSANDS, EXCEPT SHARE DATA)
ACCOUNTS PAYABLE $104,626 $ 85,236
ACCRUED LIABILITIES 5,309 2,956
INCOME TAXES PAYABLE 1,745 602
TOTAL CURRENT LIABILITIES 111,680 88,794
COMMITMENTS (NOTE 5)
STOCKHOLDERS' EQUITY (NOTE 7):
COMMON STOCK $.001 PAR VALUE, AUTHORIZED 20,000,000
SHARES, ISSUED 6,174,000 SHARES IN 1996 AND
6,103,000 SHARES IN 1995. OUTSTANDING: 5,466,000
SHARES IN 1996 AND 5,395,000 SHARES IN 1995 6 6
ADDITIONAL PAID-IN CAPITAL 25,968 25,519
RETAINED EARNINGS 27,113 21,012
UNREALIZED GAIN (LOSS) ON INVESTMENTS 8 (46)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (94) (124)
LESS: TREASURY STOCK, 708,000 SHARES IN 1996
AND 1995, AT COST (2,030) (2,030)
TOTAL STOCKHOLDERS' EQUITY 50,971 44,337
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $162,651 $133,131
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1996, 1995, AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
NET SALES $365,499 $303,708 $264,518
COST OF GOODS SOLD 328,361 274,776 242,497
GROSS PROFIT 37,138 28,932 22,021
DISTRIBUTION AND ADMINISTRATIVE
EXPENSES 28,243 24,083 22,561
INCOME (LOSS) FROM OPERATIONS 8,895 4,849 (540)
INTEREST EXPENSE - (35) (56)
INTEREST AND DIVIDEND INCOME 1,209 894 817
INCOME BEFORE PROVISION FOR
INCOME TAXES 10,104 5,708 221
PROVISION FOR INCOME TAXES (NOTE 4) 4,003 2,346 65
NET INCOME $ 6,101 $ 3,362 $ 156
NET INCOME PER COMMON AND
COMMON SHARE EQUIVALENT:
PRIMARY $ 1.09 $ .60 $ .03
FULLY DILUTED $ 1.07 $ .60 $ .03
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
PRIMARY 5,619 5,588 5,415
FULLY DILUTED 5,699 5,611 5,415
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1995, AND 1994
(IN THOUSANDS)
FOREIGN
COMMON STOCK ADDITIONAL UNREALIZED CURRENCY
OUTSTANDING PAID-IN RETAINED GAIN(LOSS) TRANSL TREASURY
SHARES AMOUNT CAPITAL EARNINGS ON INVEST ADJUST STOCK TOTAL
BALANCE,
MARCH 31,
1993 5,370 $ 6 $24,482 $17,494 $ -- $ -- $(880) $41,102
EXERCISE
OF OPTIONS
TO PURCHASE
COMMON STOCK 63 -- 369 -- -- -- - 369
NET INCOME -- -- -- 156 -- -- -- 156
BALANCE,
MARCH 31,
1994 5,433 6 24,851 17,650 -- -- (880) 41,627
EXERCISE OF
OPTIONS TO
PURCHASE
COMMON STOCK 173 -- 668 -- -- -- -- 668
PURCHASE OF
TREASURY
STOCK (211) -- -- -- -- -- (1,150) (1,150)
UNREALIZED
(LOSS) ON
INVESTMENTS -- -- -- -- (46) -- -- (46)
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT -- -- -- -- -- (124) -- (124)
NET INCOME -- -- -- 3,362 -- -- -- 3,362
BALANCE,
MARCH 31,
1995 5,395 6 25,519 21,012 (46) (124) (2,030) 44,337
EXERCISE OF
OPTIONS TO
PURCHASE
COMMON STOCK 71 -- 449 -- -- -- -- 449
UNREALIZED
GAIN ON
INVESTMENTS -- -- -- -- 54 -- -- 54
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT -- -- -- -- -- 30 -- 30
NET INCOME -- -- -- 6,101 -- -- -- 6,101
BALANCE,
MARCH 31,
1996 5,466 $ 6 $25,968 $27,113 $ 8 $(94) $(2,030) $50,971
THE ACCOMPANYING NOTES ARE IN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1995, AND 1994
(IN THOUSANDS)
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 6,101 $ 3,362 $ 156
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 897 909 955
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
AND SALES RETURNS 1,922 899 578
DEFERRED INCOME TAXES (2,168) (490) (622)
PROVISION FOR MARKDOWN OF INVENTORIES 3,976 2,766 2,225
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) IN ACCOUNTS RECEIVABLE-TRADE (22,529) (14,883) (2,507)
(INCREASE) DECREASE IN VENDOR AND OTHER
RECEIVABLES (547) 437 (456)
(INCREASE) DECREASE IN INVENTORIES (6,823) (9,952) 798
(INCREASE) DECREASE IN OTHER ASSETS (361) 293 (493)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE 19,335 18,068 (396)
INCREASE (DECREASE) IN ACCRUED LIABILITIES 2,341 (191) 292
INCREASE (DECREASE) IN INCOME TAXES PAYABLE 1,140 310 (250)
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,284 1,528 280
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE/DISPOSAL OF PROPERTY AND
EQUIPMENT, NET (1,644) (1,057) (1,333)
PURCHASE OF INVESTMENTS, AVAILABLE-FOR-SALE (31,535) (67,553) (34,271)
SALE AND REDEMPTION OF INVESTMENTS,
AVAILABLE-FOR-SALE 29,222 73,361 32,861
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (3,957) 4,751 (2,743)
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISE OF OPTIONS AND
RELATED TAX BENEFITS 449 668 369
PURCHASE OF TREASURY STOCK -- (1,150) --
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 449 (482) 369
EFFECT OF EXCHANGE RATE CHANGES ON CASH (105) 310 --
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (329) 6,107 (2,094)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,035 2,928 5,022
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,706 $ 9,035 $ 2,928
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
INTEREST $ -- $ 35 $ 56
INCOME TAXES $ 4,927 $ 2,355 $ 693
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
ADVANCED MARKETING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Advanced Marketing Services, Inc., a Delaware corporation, (the "Company")
distributes general interest books, prerecorded audio cassettes (books on tape),
CD ROM and video cassettes primarily to membership warehouse clubs and other
specialty retailers. During fiscal 1994, the Company established subsidiaries
in Mexico and the United Kingdom.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
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 those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash and cash equivalents. Cash equivalents
consisting of money market funds totaled $5,046,000 and $6,839,000 as of March
31, 1996 and 1995, respectively.
INVESTMENTS, AVAILABLE-FOR-SALE
Investments, available-for-sale consist principally of highly rated corporate
and municipal bonds and preferred stock instruments. The Company accounts for
its investments in accordance with Statement of Financial Accounting Standards
No. 115 which requires the use of fair value accounting for debt and equity
securities, except in those cases where there is a positive intent and ability
to hold debt securities to maturity. See Note 2.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt and equity instruments of financial
institutions and corporations with strong credit ratings. The Company has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. These guidelines are periodically reviewed and modified
to take advantage of trends in yields and interest rates.
Approximately 84 and 77 percent of the Company's accounts receivable balances
at March 31, 1996 and 1995, respectively, were concentrated with two major
customers in the warehouse club industry.
ACCOUNTS RECEIVABLE ALLOWANCES
In accordance with industry practice, a significant portion of the Company's
products are sold to customers with the right of return. On approximately 90
percent of the Company's purchases, the Company has the right to return unsold
product to publishers. The Company has provided allowances of $2,173,000 and
$1,593,000 as of March 31, 1996 and 1995, respectively, for the gross profit
effect of estimated future sales returns after considering historical results
and evaluating current conditions. The Company has also provided allowances for
uncollectible trade accounts receivable of $2,000,000 and $939,000 as of March
31, 1996 and 1995, respectively.
VENDOR AND OTHER RECEIVABLES
Vendor and other receivables primarily consist of amounts due from vendors for
purchase rebates and for merchandise returned to vendors.
INVENTORIES
Inventories consist primarily of books, CD-ROM and pre-recorded audio and video
cassettes purchased for resale and are stated at the lower of cost (first-in,
first-out) or market. The Company's rights to return to publishers were limited
or non-existent on approximately 27 and 30 percent of the Company's inventories
at March 31, 1996 and 1995, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment are provided using the
straight-line method over the estimated useful lives (ranging from three to five
years) of the assets.
SIGNIFICANT CUSTOMERS
A substantial portion of the revenue earned by the Company is derived from a
limited number of customers. Two customers accounted for 41 and 42 percent of
net sales in fiscal 1996, 46 and 39 percent of net sales in fiscal 1995 and 49
and 34 percent of net sales in fiscal 1994. No other customers accounted for
10 percent or more of the Company's net sales during these years.
REVENUE RECOGNITION
Sales and related cost of sales are recognized upon delivery of merchandise to
customer locations. The Company provides reserves for the effect of estimated
future sales returns.
INCOME TAXES
The Company provides currently for taxes on income regardless of when such
taxes are payable. Deferred income taxes result from temporary differences in
the recognition of income and expense for tax and financial reporting purposes.
See Note 4.
PER SHARE INFORMATION
Per share information is based on the weighted average number of common shares
and, when applicable, dilutive common share equivalents outstanding during the
periods. The effects of all anti-dilutive common share equivalents are excluded
from the calculation of earnings per share. The Company's only potential
dilutive common share equivalents are stock options.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt the following Statements of Financial Accounting
Standards ("SFAS") in the year ending March 31, 1997.
SFAS No 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of" establishes accounting standards for the impairment of
long-lived assets to be held and used and for long-lived assets to be disposed
of. Long-lived assets to be held and used by the Company are required to be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Long-lived assets
to be disposed of are required to be reported generally at the lower of the
carrying amount or fair value less cost to sell. SFAS No. 121 is effective for
the Company for the fiscal year ending March 31, 1997. Management does not
anticipate SFAS No. 121 to have a material effect on the Company's financial
position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation" establishes financial
accounting and reporting standards for stock-based employee compensation plans
such as the Company's stock option plans described in Note 7. SFAS No. 123
defines and encourages the use of the fair value method of accounting for
employee stock-based compensation which results in a charge to income in the
period the awards are granted. As an alternative, SFAS No. 123 allows the
continued use of the intrinsic value based method of accounting prescribed
in Accounting Principles Board Opinion No. 25 ("APB 25") for measurement
of employee stock-based compensation with pro forma disclosures of net income
and earnings per share as if the fair value method of accounting had been
applied. SFAS No. 123 is effective for awards granted in fiscal years that
begin after December 15, 1994. The Company has determined that it will continue
to use the method of accounting prescribed in APB 25 for measurement of
employee stock-based compensation, and will begin providing the required pro
forma disclosures in its consolidated financial statements for the year ending
March 31, 1997 as permitted by SFAS No.123.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current year
presentation.
2. INVESTMENTS, AVAILABLE-FOR-SALE
Investments, available-for-sale at March 31, 1996 and March 31, 1995
are as follows (in thousands):
MARCH 31, 1996
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
DEBT SECURITIES ISSUED
BY STATES OF THE U.S.
AND POLITICAL
SUBDIVISIONS OF
THE STATES $12,524 $ 8 $ - $12,532
MARCH 31, 1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
MORTGAGE-BACKED
SECURITIES $ 3,201 $ -- $ 48 $ 3,153
DEBT SECURITIES ISSUED
BY STATES OF THE U.S.
AND POLITICAL
SUBDIVISIONS OF
THE STATES 7,010 2 - 7,012
TOTAL $10,211 $ 2 $ 48 $10,165
Investments in debt securities issued by states of the U.S. and political
subdivisions of the States as of March 31, 1996 in the amount of approximately
$12,532,000 are scheduled to mature within one year.
Proceeds from the sale of investments aggregated approximately $15,128,000 for
year ended March 31, 1996. The realized net loss on these sales totaled
approximately $42,000. Proceeds from the sale of investments during the same
period of the previous year totaled approximately $3,340,000 on which a net loss
of approximately $226,000 was realized. The Company uses the specific
identification method in determining cost on these investments. The change in
unrealized gain (loss) on investments was an increase (decrease) of
approximately $54,000 and $(46,000) for the years ended March 31, 1996 and 1995.
3. LINE OF CREDIT
The Company had available at March 31, 1996 and 1995 an unsecured bank line of
credit with a maximum borrowing limit of $10 million. The interest rate is at
prime (8.25 and 9 percent at March 31, 1996 and 1995, respectively). The
Company anticipates that it will be able to extend or replace its existing line
of credit when it expires July 31, 1996. As of and during the years ended March
31, 1996 and 1995, there were no outstanding borrowings on the Company's line of
credit.
4. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
YEAR ENDED MARCH 31,
1996 1995 1994
CURRENT:
FEDERAL $5,034 $2,282 $ 546
STATE 1,137 554 141
DEFERRED:
FEDERAL (1,775) (374) (536)
STATE (393) (116) ( 86)
$4,003 $2,346 $ 65
A reconciliation of the provision for income taxes at the statutory federal
income tax rate of 34 percent to the effective tax provision as reported is as
follows (in thousands):
YEAR ENDED MARCH 31,
1996 1995 1994
TAXES AT STATUTORY
FEDERAL RATE $3,435 $1,941 $ 74
STATE INCOME TAXES, NET
OF FEDERAL BENEFIT 470 264 85
TAX-EXEMPT INTEREST AND
DIVIDEND INCOME (102) (74) (93)
LOSS ON FOREIGN
OPERATIONS 186 131 -
OTHER 14 84 (1)
$4,003 $2,346 $ 65
The temporary differences which give rise to the deferred tax assets as
of March 31, 1996 and 1995 are as follows (in thousands):
AS OF MARCH 31,
1996 1995
INVENTORY RESERVES $ 2,519 $ 2,016
ALLOWANCES FOR SALES
RETURNS AND
UNCOLLECTIBLE ACCOUNTS 1,360 732
DEPRECIATION AND
AMORTIZATION 218 163
VACATION PAY AND ACCRUED
COMPENSATION 47 52
ACCOUNTS PAYABLE ACCRUALS 1,014 --
OTHER 121 148
$ 5,279 $ 3,111
5. COMMITMENTS
The Company leases its facilities and certain equipment under non-cancelable
operating leases. Rental expense for the years ended March 31, 1996, 1995 and
1994 was $2,834,000, $2,641,000 and $3,002,000, respectively. The leases have
initial expiration dates ranging from 1996 to 2001. Certain of the leases
contain renewal options, termination options and periodic adjustment of the
minimum monthly rental payment based upon
increases in the Consumer Price Index.
At March 31, 1996, the aggregate future minimum rentals are as
follows (in thousands):
YEAR ENDING MARCH 31, AMOUNT
1997 $2,565
1998 2,952
1999 1,190
2000 829
2001 681
$8,217
6. EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) profit-sharing plan covering substantially
all of its employees. The Company matches, at a 25 percent rate, associates'
contributions up to 4 percent of compensation. In fiscal years 1996, 1995 and
1994, the Company's matching contributions equaled $45,000, $43,000 and $46,000,
respectively. The plan also provides for discretionary Company contributions as
approved by the Board of Directors. Contributions of $251,000 and $149,000 for
the years ended March 31, 1996 and 1995, respectively, are included in
the accompanying statements of income. The Board did not authorize such a
contribution for the year ended March 31, 1994.
On March 1, 1996, the Company introduced a deferred compensation plan which
permits eligible employees and officers to defer a portion of their compensation
and requires the Company to provide certain matching amounts as defined in the
plan.
7. STOCK OPTION PLANS
In addition to the 1987 stock option plan, on July 27, 1995, the Company's
shareholders approved the 1995 stock option plan under which certain options
were previously granted subject to such approval. The two stock option plans
("the Plans") provide for the granting of incentive stock options or
nonqualified stock options to employees and directors of the Company.
Nonemployee directors are only eligible to be granted nonqualified stock
options. Incentive stock options may be granted at prices not less than 100% of
the fair market value of such shares at the date of grant (110% with respect
to optionees who are 10% or more stockholders of the Company). Nonqualified
options may be granted at prices not less than 85% of the fair market value of
such shares at the date of grant. Options granted under the Plans become
exercisable in installments as determined by the Board of Directors. There are
676,000 shares issuable under the 1987 plan and 400,000 shares issuable under
the 1995 plan. The expiration date of the options is determined by the Board of
Directors and does not exceed 10 years for incentive options (5 years with
respect to optionees who are 10% or more stockholders of the Company) and 10
years and 1 day for nonqualified options.
The changes in the number of common shares under option for the years ended
March 31, 1994, 1995, and 1996 are summarized as follows:
1995 PLAN 1987 PLAN
NUMBER OF NUMBER OF
SHARES PRICE RANGE SHARES PRICE RANGE
OUTSTANDING AS OF MARCH 31, 1993 -- --- 560,130 1.70 - 5.10
EXERCISED -- --- 63,600 4.78 - 5.10
FORFEITED -- --- 38,500 4.78 - 5.10
OUTSTANDING AS OF MARCH 31, 1994 -- --- 458,030 1.70 - 5.10
GRANTED 150,000 5.42 95,000 5.00 - 5.20
EXERCISED -- --- 173,120 2.02 - 4.78
FORFEITED -- --- 25,000 4.78 - 5.20
OUTSTANDING AS OF MARCH 31, 1995 150,000 5.42 354,910 1.70 - 5.20
GRANTED 81,500 7.44 - 11.16 39,500 4.57 -11.16
EXERCISED -- --- 70,920 1.70 - 5.20
FORFEITED -- --- 13,700 4.78 - 5.20
OUTSTANDING AS OF MARCH 31, 1996 231,500 5.42 - 11.16 309,790 2.02 -11.16
EXERCISABLE AS OF MARCH 31, 1996 30,000 5.42 215,690 2.02 - 5.20
8. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTERS (YEARS ENDED MARCH 31)
1st 2nd 3rd 4th
(IN THOUSANDS EXCEPT PER SHARE DATA)
FISCAL 1996
NET SALES $76,040 $90,318 $121,396 $77,745
COST OF SALES 68,639 81,604 109,014 69,104
NET INCOME 754 1,765 2,904 678
NET INCOME PER COMMON
AND COMMON SHARE EQUIVALENT:
PRIMARY $ .14 $ .32 $ .52 $ .12
FULLY DILUTED $ .14 $ .32 $ .51 $ .12
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING:
PRIMARY 5,519 5,568 5,637 5,700
FULLY DILUTED 5,544 5,591 5,671 5,714
FISCAL 1995
NET SALES $76,816 $76,653 $91,226 $59,013
COST OF SALES 70,053 69,962 82,390 52,371
NET INCOME 655 575 1,683 449
NET INCOME PER COMMON
AND COMMON SHARE EQUIVALENT:
PRIMARY $ .12 $ .10 $ .30 $ .08
FULLY DILUTED $ .12 $ .10 $ .30 $ .08
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING:
PRIMARY 5,564 5,622 5,644 5,533
FULLY DILUTED 5,558 5,655 5,636 5,556
FISCAL 1994
NET SALES $48,356 $64,115 $91,532 $60,515
COST OF SALES 44,029 58,504 84,137 55,827
NET INCOME (LOSS) (132) 162 1,263 (1,137)
NET INCOME (LOSS) PER COMMON
AND COMMON SHARE EQUIVALENT:
PRIMARY $ (.02) $ .03 $ .22 $ (.21)
FULLY DILUTED $ (.02) $ .03 $ .22 $ (.21)
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING:
PRIMARY 5,388 5,652 5,629 5,430
FULLY DILUTED 5,388 5,631 5,625 5,430
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Part III, Items 10, 11, 12 and 13, is hereby
incorporated by reference to the "Security Ownership of Certain Beneficial
Owners and Management," "Management," "Executive Compensation - Summary of Cash
and Other Compensation," "- Option Grants" and "- Option Exercises and
Holdings," "Certain Transactions" and "Compliance with Section 16(a) of
Exchange Act" sections of the Company's definitive Proxy Statement filed with
the Securities and Exchange Commission and mailed to stockholders on June 21,
1996.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. See Index to Consolidated Financial Statements contained in Item 8
herein.
2. See Index to Schedule to Consolidated Financial Statements included
herein.
3. See Item 14(c) for Index of Exhibits.
(b) No reports on Form 8-K filed during the fourth quarter ended
March 31, 1996.
(c) Exhibits
3.1 Registrant's Certificate of Incorporation, as amended. (1)
3.2 Registrant's Bylaws, as amended. (1)
10.1 1987 Stock Option Plan (2)
10.2 Employee Profit-Sharing Plan (3)
10.3 1995 Stock Option Plan (4)
11.0 Statement re Computation of Per Share Earnings
21.0 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27.0 Financial Data Schedule
(d) The required financial statement schedules are listed on the Index to
Schedule to Consolidated Financial Statements included herein.
___________________________
(1) Incorporated by reference to Registrant's Report on Form 8-K (File No.
0-16002) for July 25, 1991, as filed on October 18, 1991.
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K
(File No. 0-16002) for the fiscal year ended March 31, 1992, as filed
on June 26, 1992.
(3) Incorporated by reference to Registrant's Registration Statement on
Form S-1 (File No. 33-14596) filed on May 28, 1987.
(4) Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 333-01155 filed on February 22, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ADVANCED MARKETING SERVICES, INC.
Date: July 1, 1996 By: /s/ Charles C. Tillinghast, III
Charles C. Tillinghast, III
Chief Executive Officer, Chairman
of the Board and Director
(Principal Executive Officer)
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 and on the dates indicated.
Date: July 1, 1996 By: /s/ Charles C. Tillinghast, III
Charles C. Tillinghast, III
Chief Executive Officer, Chairman
of the Board and Director
(Principal Executive Officer)
Date: July 1, 1996 By: /s/ Michael M. Nicita
Michael M. Nicita
Director
Date: July 1, 1996 By: /s/ Loren C. Paulsen
Loren C. Paulsen
Director
Date: July 1, 1996 By: /s/ Jonathan S. Fish
Jonathan S. Fish
Chief Financial Officer and
Executive Vice President-Finance
(Principal Financial and
Accounting Officer)
Date: July 1, 1996 By: /s/ James A. Leidich
James A. Leidich
Director
Date: July 1, 1996 By: /s/ E. William Swanson, Jr.
E. William Swanson, Jr.
Director
Date: July 1, 1996 By: /s/ Trygve E. Myhren
Trygve E. Myhren
Director
Date: July 1, 1996 By: /s/ Lynn S. Dawson
Lynn S. Dawson
Director
Date: July 1, 1996 By: /s/ Robert F. Bartlett
Robert F. Bartlett
Director
ADVANCED MARKETING SERVICES, INC.
INDEX TO SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Schedule:
II Valuation and Qualifying Accounts 32
All other schedules are not submitted because they are not applicable, not
required or because the required information is included in the consolidated
financial statements of Advanced Marketing Services, Inc. or in the notes
thereto.
SCHEDULE II
ADVANCED MARKETING SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(In Thousands)
Balance at Additions Balance at
beginning charged end of
of period to income Deductions period
1994
Allowance for uncollectible
accounts and sales returns $1,463 $ 578 $ 55 $1,986
Reserve for markdown
of inventory $4,346 $2,225 $1,848 $4,723
1995
Allowance for uncollectible
accounts and sales returns $1,986 $ 899 $ 353 $2,532
Reserve for markdown
of inventory $4,723 $2,766 $2,585 $4,904
1996
Allowance for uncollectible
accounts and sales returns $2,532 $2,049 $ 408 $4,173
Reserve for markdown
of inventory $4,904 $4,010 $3,027 $5,887
Exhibit 11.0
ADVANCED MARKETING SERVICES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(UNAUDITED)
(in thousands except per share data)
1996 1995 1994
NET SALES $6,101 $3,362 $ 156
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Weighted average shares outstanding 5,424 5,434 5,415
Weighted average common share
equivalents-dilutive stock options:
Primary 195 154 -
Fully Diluted 275 177 -
Total Weighted Average Common and
Common Equivalent Shares:
Primary 5,619 5,588 5,415
Fully Diluted 5,699 5,611 5,415
NET INCOME PER COMMON AND
COMMON SHARE EQUIVALENT:
Primary $ 1.09 $ .60 $ .03
Fully Diluted $ 1.07 $ .60 $ .03
_____________________________
In fiscal year 1994, dilutive common stock equivalents resulted in less than a
3% change in earnings per share (EPS) and therefore are excluded from the
calculation of EPS. Furthermore, the effects of all anti-dilutive common stock
equivalents are also excluded from the calculation of EPS.
Exhibit 21.0
Subsidiaries of the Registrant
Advanced Marketing (UK) Limited - England
Advanced Marketing S. de R.L. de C.V. - Mexico
Advanced Marketing Services Investments, Inc. - California
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K into the Company's previously filed
Registration Statements, File Nos. 33-30467, 33-43792 and 333-01155.
San Diego, California ARTHUR ANDERSEN LLP
June 27, 1996