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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
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
San Diego, California 92121
(Address of principal executive offices)
Registrant's telephone number : (858) 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 March 31, 2000 was $202,213,108.
The number of shares of the Registrant's Common Stock outstanding as of
March 31, 2000 was 12,906,988.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its July 27,
2000 Annual Meeting of Stockholders (filed June 23, 2000) are incorporated by
reference into Part III of this Form 10-K.
PART I
ITEM 1 - BUSINESS
GENERAL
Advanced Marketing Services, Inc., a Delaware Corporation, provides global
customized services to book retailers and publishers. We are a leading
distributor of general interest books to the membership warehouse clubs and
certain specialty retailers, certain e-commerce companies and traditional
bookstores. 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, we sell pre-recorded
audio cassettes (books on tape), CD-ROM titles and video cassettes. We provide
product selection advice, vendor managed inventory ("VMI") services, specialized
merchandising and product development services, and distribution and handling
services to membership warehouse clubs and other retailers operating in the
United States, Canada, Mexico, the United Kingdom, Australia, and certain
Pacific Rim countries.
Due to the continuous introduction of new titles by the book publishing
industry, we provide weekly recommendations, tailored to each customer's
marketing priorities, with respect to the new titles to be sold in our
customers' book departments. These recommendations are selected by our buyers
from among the over 1,000,000 titles in print and over 50,000 new books
published each year. We also create unique products and develop specially
packaged book and book-related products for sale to our customers. We support
our customers' inventories by maintaining back-up inventory in our distribution
centers for prompt delivery as needed to customer locations. We maintain four
domestic regional distribution centers to assure timely delivery to our
customers, to enhance our customers' inventory turnover rates and to reduce our
customers' handling and holding costs. See "Properties".
We provide distribution services to a major warehouse club customer and
others in the United Kingdom and continue to expand our distribution to other
specialty retailers. In Mexico, we distribute products to a variety of
retailers, including warehouse clubs, hypermarkets, discount department stores
and other specialty retailers. In addition to providing traditional book
distribution services to independent bookstores, chain bookstores and department
store book departments, our Australian subsidiary provides contract warehousing
and direct to consumer capabilities for publishers. In Canada, through our
minority interest in Raincoast Books, we have enhanced our coverage of North
America and expanded our distribution network. See "International Business".
We were incorporated in 1982 in California and were reincorporated in
Delaware in June 1987. Our executive offices are located at 5880 Oberlin Drive,
San Diego, California 92121; telephone (858) 457-2500.
MEMBERSHIP WAREHOUSE CLUB INDUSTRY
Our 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 $56
billion in 1999.
The following table summarizes our penetration of the warehouse club
industry in the U.S. and Canada:
NUMBER OF LOCATIONS AND LOCATIONS SERVED
MEMBERSHIP WAREHOUSE CLUBS
UNITED STATES AND CANADA(1)
Fiscal Locations
Year Ended Total Number Served
March 31 of Locations by AMS
-------- ------------ ------
1993 646 571
1994 716 596
1995 742 592
1996 755 743
1997 786 776
1998 807 799
1999 832 822
2000 866 (2) 810 (2)
(1) Only U.S. membership warehouse club locations to which we shipped
more than $50,000 per year are included as locations served in the
above table.
(2) The 56 Canadian locations are currently being serviced by our
Canadian affiliate Raincoast Book Distribution, Limited. See
"International Business".
We also serve 50 warehouse club locations in Mexico, 8 in the U.K. and ship
a limited amount of product to 29 warehouse club locations in various Pacific
Rim countries. See "International Business". The number of locations served is
not necessarily indicative of our total sales volume to the warehouse club
industry as the volume of our 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 stock
keeping units (skus) 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 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
We supply an assortment of primarily business and computer titles to
certain companies in the office product superstore industry. We serve several
companies in the rapidly growing computer and electronics superstore marketplace
as well as the discount drugstore market. We also serve a variety of other
specialty retailers in the children's education and book businesses. In Fiscal
1999, we began to develop relationships with internet book retailers and now
provide product on a limited basis to several internet book retailers. As a
result of new business development efforts in Fiscal 2000, we have also begun to
supply product to the chain bookstore market.
For many of these customers, we design and recommend media programs to
satisfy the unique marketing priorities of each retailer. By constantly updating
titles offered, we make it possible for our customers to offer a targeted
selection of books and media products without having to develop media
merchandising expertise within their own organizations.
3
BUSINESS STRATEGY
Our business strategy is to continue to provide customized services to
retailers and publishers on a global basis. These services include effective
book purchasing, handling and distribution services to our customers. We believe
that we have achieved the position as a leading book supplier to membership
warehouse clubs and specialty retailers, e-commerce retailers and traditional
bookstores, because of our ability to offer sound product selection advice,
specialized product development and marketing services and rapid product
delivery, all at competitive prices. Additionally, we continue to diversify the
business by adding new accounts, making strategic acquisitions, enhancing our
capabilities in shipping direct to consumers for our customers, expanding
contract distribution and initiating digital delivery capabilities. We
internally funded the investment in our corporate infrastructure during Fiscal
2000 including adding new key positions, systems enhancement and expansion and
automation of our distribution centers. We are continually upgrading our
services and the systems we use to provide those services, including proprietary
software systems that track and forecast sales for our customers and publishers.
PRODUCTION SELECTION SERVICES AND PURCHASING PRACTICES
Our warehouse club customers generally compete in the retail trade book
market by offering a limited selection of books (typically 100 to 250 skus
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 cover price. We
provide our specialty retail customers with book programs that range from as few
as 50 titles to programs of several thousand titles. We believe that one of our
principal strengths is our 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 we offer 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 our expertise and experience to recommend new
titles to be added to their book departments.
Our book selection process depends on a close working relationship between
our general merchandise managers and our major vendors. The process of selecting
books generally begins when a publisher's representative submits pre-publication
book summaries to our 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 we are a major customer of many of our
vendors, such vendors often consult with us during pre-publication planning,
allowing us to influence the design and packaging of many of the books we
purchase. 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 our Merchandising Department,
under the direction of the Executive Vice President - Merchandising to whom 9
general merchandise managers and a staff of approximately 48 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, pre-recorded audio and video
cassettes, computer and Spanish-language books.
We usually purchase newly published or well established back-list
(previously published) titles directly from publishing houses at standard book
industry wholesaler discounts, which generally exceed retailer discounts. We do
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 us by our customers for full credit so long as the
books are in saleable condition. Approximately 90% of the books we purchased in
Fiscal 2000 and 1999 were returnable to the publisher; the balance was purchased
on a non-returnable or partially returnable basis, often at higher purchase
discounts.
We have published a limited number of titles through our in-house
publishing arm, Advantage Publishers Group, which manages our Thunder Bay,
Laurel Glen and Silver Dolphin imprints. The titles are typically sold to both
our customers and to independent and chain book stores.
4
In the years ended March 31, 2000, 1999 and 1998, customer returns
represented approximately 19%, 20%, and 21%, respectively, of our 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 represented
approximately 22%, 26%, and 27%, respectively, of our total purchases during the
same period. The publisher returns rate exceeds the customer returns rate due to
our policy of maintaining back-up inventory so that we can respond promptly to
customer orders.
Our reserves for markdowns on inventory decreased by approximately
$392,000 to $7,509,000 in Fiscal 2000. We added $3,242,000 to our reserves
for markdowns as a result of slower than expected sales of certain books
which are not returnable to the publisher and deducted $3,634,000 for actual
losses incurred on books for which reserves had previously been made. To the
extent that we are unable to sell non-returnable books to our traditional
customers, we sell such books to customers where, in certain cases, it is
necessary to sell at below our cost. We believe our reserves for markdowns
are adequate based on our 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.
We make purchases from publishers on varying payment terms. We generally
take advantage of discounts for prompt payments, when economically attractive.
During the year ended March 31, 2000, we made purchases from 317 publishers.
Three publishers individually accounted for 10% or more of our total purchases
in Fiscal 2000. These included Random House Inc., Penguin Putnam, Inc., and
Simon & Schuster, which accounted for 23%, 18%, and 10%, respectively, of our
purchases. We continue to open accounts with new publishers and believe that
adequate sources of supply exist to meet anticipated growth. As is customary in
the industry, we do 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, we provide
specially packaged book and book-related products, which are generally not
available in retail bookstores. For example, we work with various publishers to
create specially packaged items such as a 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. We also work directly with
publishers to have books specially reprinted or created for our customers.
We assist in the promotion of the books we sell by creating seasonal
merchandising plans and recommending titles based on themes such as Christmas,
Back to School, Father's Day and Easter. We also conduct theme-oriented
promotions, frequently tied to specially designed products, such as gardening,
taxes, health and fitness, and travel. We coordinate special in-store promotions
for a select number of our customers. Customers may also take advantage of our
cooperative advertising coordination service whereby we obtain
publisher-sponsored advertising for use by our customers.
The marketing of our products is under the direction of the Vice President
- - Marketing to whom 9 general managers and a staff of 25 marketing personnel
report. Members of the staff are assigned to each of our 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 our customers
is a high inventory turnover rate, a critical element of our service is our
ability to respond quickly to our customers' orders. We have established a
national network of four regional distribution centers to assure rapid
deliveries to our 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. At
our distribution centers, we receive books from multiple vendors and dispatches,
using common and contract carriers, consolidating shipments on a weekly basis to
most of our customer locations. Weekly deliveries eliminate the need for
customers to stock large inventories on-site and enable our 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 our distribution centers are linked with
our computerized order-processing center at the 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, our
backlog at any date is usually insignificant and not a meaningful indicator of
future sales. Our computer system also enables us to provide information and
special reports to assist customers with operations and marketing. For an
additional fee, upon request, we will sticker books with the customer inventory
item number and retail sales price. We believe that all of these services
enhance our customers' inventory turnover rate and reduce their handling and
holding costs.
5
In Fiscal 1997, we introduced a vendor managed inventory replenishment
system designed to reduce the customers' need to write individual location
orders and further improve their inventory turnover. The software we developed
for the VMI replenishment system is designed to forecast future book sales based
on the expected life cycle of a particular title. These forecasts, coupled with
customer point of sale information, enable us to effectively offer advice to
manage customer laydown and replenishment orders for each customer location.
To further enhance our service capabilities, we have installed new software
and material handling equipment ("Acupak") in our distribution facilities in
Indianapolis, Sacramento, and Baltimore. The Acupak system is designed to
improve our efficiency in handling customer orders, and permits us to service
additional customers requiring less than a full carton of a particular title.
We also provide in-store management of certain customers' book departments
through our network of independent service representatives.
INTERNATIONAL BUSINESS
We operate wholly-owned foreign subsidiaries in the United Kingdom, Mexico
and Australia. In addition, in September 1999 we enhanced our North American
coverage through a minority investment in Raincoast Books, a leading Canadian
book distributor and publisher.
Advanced Marketing (UK) Limited was incorporated in September 1993 in the
United Kingdom. In 1998 and 1999 we acquired two other book distributors in the
United Kingdom, Aura Books, PLC and Metrastock Limited, through our European
holding company, Advanced Marketing Europe, Limited. In order to integrate
operations, improve customer service and continue efforts to expand our
distribution services, in July 1999 we combined our distribution facilities in
the United Kingdom. Located in Bicester, Oxfordshire, our new state of the art
74,000 square-foot distribution center is designed to service not only the eight
existing warehouse club locations of a major warehouse club, national chain
department stores and the over 2,000 garden centers and specialty retail outlets
in the U.K., but also further growth through strategic acquisitions and
expansion of our customer base.
Advanced Marketing S. de R.L. de C.V. was incorporated in January 1994 in
Mexico. From our headquarters in Mexico City, we distribute books to 50
membership warehouse club locations, as well a variety of general and mass
merchandisers, office supply superstores and other specialty retailers. To
address the operating challenges in our Mexican subsidiary, we augmented our
management, marketing and product capabilities in the U.S. and Mexico with
personnel with Spanish language and Mexican product expertise. In addition, we
have expended significant effort in developing relationships with Mexican
publishers. Our belief is that this strategy will assist our expansion efforts
in Mexico and also create product-sourcing opportunities for the Spanish
language market in the United States.
During Fiscal 2000, our Mexican subsidiary reported its first operating
profit. While there can be no assurance of the continued sales volume and gross
margin contributions to generate profits, we believe that we have successfully
developed customer and publisher relationships to sustain a viable operation in
Mexico.
In an effort to increase our presence in North America, in September 1999
we acquired a 25% interest in Raincoast Books Distribution, Limited
("Raincoast") in Canada. Headquartered in Vancouver, British Columbia, Raincoast
has served the Canadian bookselling community since 1979 and has the exclusive
Canadian distribution rights for approximately 40 publishers. Raincoast also
performs wholesaling services for certain customers and has extensive publishing
operations.
In March 2000, we acquired Bookwise International in Australia.
Headquartered in Adelaide, Australia, Bookwise International is a distributor of
specialty books in a wide variety of subject areas covering fine art,
architecture, craft, photography, cooking, gardening, wine, travel, martial arts
and music. Bookwise has a trade account base of over 2,500 customers serving
traditional bookstores, chain bookstores and department stores in Australia and
New Zealand. We plan to use Bookwise as our platform for expansion into Asia and
the Pacific Rim markets.
6
RISKS AND COMPETITION
In Fiscal 2000, approximately 89% of our sales were to membership warehouse
clubs with the remainder to office product superstores, computer superstores,
mass merchandisers, internet retailers, and other specialty retailers. In the
year ended March 31, 2000, two particular warehouse club customers accounted for
approximately 81% of our net sales. Although we believe we provide services and
efficiencies that membership warehouse clubs and other retailers would have
difficulty duplicating, we believe that our customers may, from time to time,
increase the percentage of books they purchase directly from publishers or from
other wholesale distributors. Further, we could lose customers if they
discontinue books as a product line, suffer a business failure or merge or
consolidate with another entity that we do not currently service. We have no
long-term or exclusive purchase commitments with any of our customers. Any loss
of a major customer would have a material adverse effect on our business. Given
the relatively small number of membership warehouse club chains, our reliance on
a few customers is likely to continue. See "Customers".
We are a leading supplier of books to the membership warehouse club market,
which is highly competitive. We compete in such markets with national book
distributors, some of which are larger and have greater financial resources than
we do, and with regional book wholesalers and local book jobbers with whom we
compete on the basis of price and service. Certain publishers sell directly to
membership warehouse clubs, and one or more of our customers could choose in the
future to purchase more of its books directly from publishers. As a result, we
could face additional competition from publishers in the future. Membership
warehouse clubs face competition from discount and retail bookstore chains that
may indirectly affect us. Due to their high sales volume, membership warehouse
clubs may represent an attractive market that other book distributors may seek
to enter and compete directly with us. We believe that our principal competitive
advantages are the ability to select, package, and assort products so that they
sell in high volumes; to distribute such products rapidly; to electronically
interface with customers; to efficiently manage inventory; to maintain
sufficient back-up inventories; and to price products competitively.
We purchase certain titles on a non-returnable basis, which we in turn
sell on a returnable basis. To the extent that actual sales of such titles do
not equal purchased quantities, we risk having inventory remaining which we
may be unable to sell at or above our cost. We utilize a team of associates
dedicated to selling such remainder product. In addition, we have implemented
policies to evaluate more completely the non-returnable inventory risk we
assume. However, we have incurred substantial expense in the past to sell
such excess inventory and may incur such expense in the future. Although we
believe our recorded reserves are adequate to cover our exposures, we may
experience an increase in non-returnable inventory and associated markdown
costs as a result of our increased publishing activities.
CUSTOMERS
We are currently servicing four membership warehouse clubs. Our customers
account for over 95% of the sales in the warehouse club industry and operate
approximately 950 locations throughout the United States, Canada, Mexico, the
United Kingdom and certain Pacific Rim countries. Taking into account domestic
and international activities, the following table sets forth those customers who
accounted for 10% or more of our total net sales in Fiscal 2000, 1999 and 1998.
Percentage of Net Sales
-----------------------------------------
2000 1999 1998
---- ---- ----
Costco Companies, Inc. 40% 40% 44%
SAM's Club (a unit of Wal-Mart Stores, Inc.) 41% 37% 40%
EMPLOYEES
At March 31, 2000, we had approximately 561 employees who were engaged in
administrative, merchandising, marketing, and warehousing operations. We also
hire temporary workers, primarily during the peak holiday season. None of our
employees is represented by a labor union. We consider our employee relations to
be good.
7
ITEM 2 - PROPERTIES
We are headquartered in approximately 57,300 square feet of commercial
space in San Diego, California. The space is leased for a 10-year term expiring
in 2008 with an annual base rent of $719,000.
We maintain the following U.S. distribution centers from which we ship to our
U.S. customers:
Location Approximate Date
(Metropolitan Area) Square Footage Opened
------------------- -------------- ------
Dallas, Texas 145,000 November 1997
Baltimore, Maryland 160,000 March 1998
Sacramento, California 320,000 April 2000
Indianapolis, Indiana 140,000 April 1996
Each of these distribution centers is leased, with the leases expiring
between 2004 and 2010. Annual base rental payments range from $431,000 to
$1,088,000. In July 1999, we moved our United Kingdom operations into a newly
leased facility with approximately 74,000 square-feet located in Bicester,
Oxfordshire. Under the terms of the 15-year lease agreement, expiring in 2014,
we pay an annual base rent of $640,000. Our Australian operation, Bookwise
International, leases a 13,000 square-foot warehouse facility in Adelaide,
Australia. Under the terms of the five-year lease, expiring in 2005, we pay an
annual base rent of approximately $43,000. For our operations in Mexico, we use
a third party warehousing and distribution company. In addition, in Mexico and
Australia, we lease office space on short-term leases, the commitments under
which are not material.
ITEM 3 - LEGAL PROCEDURES
We are 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 our stockholders during the last
quarter of the fiscal year ended March 31, 2000.
8
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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. On March 31, 2000,
we had approximately 2,200 beneficial stockholders and 75 stockholders of
record.
Fiscal Quarter Fiscal 2000 Fiscal 1999
- --------------------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter-Ended July 3/June 27 11 1/16 8 11/16 9 1/16 7 1/16
Second Quarter-Ended October 2/September 26 15 1/4 10 1/16 8 1/3 6 15/16
Third Quarter-Ended January 1/December 26 18 15/16 11 13/16 8 1/4 7 1/4
Fourth Quarter-Ended March 31 21 15 1/4 11 13/16 7 3/4
In May 1998, we announced our Board of Directors' intent to declare and pay
dividends on our Common Stock at an annual rate of $.10 per share (pre stock
splits). On January 21, 1999, we announced that our Board of Directors had
approved the declaration of a three for two stock split on February 15, 1999 to
stockholders of record February 1, 1999. At that time, the annual dividend was
adjusted to $.067 per share. In May 1999, we announced that our Board of
Directors increased the dividend to the annual rate of $.08 per share. On
December 13, 1999, we announced that our Board of Directors had declared a
second three for two stock split on January 17, 2000 to stockholders of record
on January 3, 2000. At that time, the annual dividend was adjusted to $.053 per
share. All references to shares included in this document have been restated to
reflect both of the three for two stock splits. The declaration and payment of
dividends in the future will be subject to the discretion of our Board of
Directors and, although they currently intend to do so, no assurance can be
given that they will declare and pay dividends in the future. The determination
as to the payment of dividends will depend upon, among other things, general
business conditions, our financial condition and results of operations,
contractual, legal and regulatory restrictions relating to the payment of our
dividends and such other factors the Board of Directors may deem relevant.
On July 22, 1999, we adopted a stock repurchase program pursuant to
which we may repurchase in open market or private transactions, from time to
time, based upon existing market conditions, shares of our Common Stock
having an aggregate cost not to exceed $5 million or 300,000 shares. Under
the plan, we repurchased approximately 282,000 shares at an average market
price of approximately $14.00. As part of the repurchase program, on October
26, 1999, we purchased, in a private transaction, approximately 150,000
shares from an affiliate at a 10 percent discount from the average market
price for a specified period. On March 16, 2000, we announced that our Board
of Directors had approved a 350,000 share increase in the repurchase program.
The repurchase program has no expiration date and will be financed through
internal funds.
On April 3, 2000, we purchased 200,000 shares of our stock from our
Chairman for approximately $3.5 million, which reflects a 10 percent discount
from the average market price for a specified period. The transaction was
pursuant to an agreement which requires us to purchase up to an additional
256,100 shares by December 31, 2000.
9
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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
NET SALES $627,978 $501,071 $436,599 $385,651 $365,499
Cost of Goods Sold 549,080 440,048 390,013 347,277 328,361
-------- -------- -------- -------- --------
GROSS PROFIT 78,898 61,023 46,586 38,374 37,138
Distribution and Administrative Expenses 53,519 41,602 33,730 28,903 28,243
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS 25,379 19,421 12,856 9,471 8,895
Interest and Dividend Income, Net 2,191 1,270 1,785 896 1,209
-------- -------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND 27,570 20,691 14,641 10,367 10,104
MINORITY INTEREST INCOME
Provision for Income Taxes 10,813 8,178 5,492 3,911 4,003
-------- -------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST INCOME 16,757 12,513 9,149 6,456 6,101
Minority Interest Income, Net 335 - - - -
-------- -------- -------- -------- --------
NET INCOME $ 17,092 $ 12,513 $ 9,149 $ 6,456 $ 6,101
======== ======== ======== ======== ========
Net Income Per Share-Diluted $ 1.28 $ .95 $ .71 $ .50 $ .48
======== ======== ======== ======== ========
Weighted Average Shares Used In Calculation 13,319 13,128 12,827 12,861 12,643
======== ======== ======== ======== ========
BALANCE SHEET DATA AS OF MARCH 31,
--------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
WORKING CAPITAL:
Cash and Investments $ 36,472 $ 33,056 $ 37,050 $ 24,832 $ 21,238
Current Assets $ 253,966 $ 223,276 $ 206,842 $ 177,170 $ 159,302
Current Liabilities $ 179,502 $ 157,994 $ 150,724 $ 125,714 $ 111,680
Working Capital $ 74,464 $ 65,282 $ 56,118 $ 51,456 $ 47,622
TOTAL ASSETS $ 275,550 $ 238,396 $ 218,472 $ 183,501 $ 162,651
DEBT $ - $ - $ - $ - $ -
STOCKHOLDERS' EQUITY $ 96,048 $ 80,402 $ 67,748 $ 57,787 $ 50,971
BOOK VALUE PER COMMON SHARE $ 7.44 $ 6.31 $ 5.37 $ 4.65 $ 4.14
10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
Net income for the fiscal year ended March 31, 2000 was $17,092,000, or
$1.28 per diluted share, on net sales of $627,978,000. This compares to net
income of $12,513,000, or $.95 per diluted share, on net sales of $501,071,000
for the previous fiscal year. The 25 percent increase in net sales was primarily
due to increases in gross shipments within the juvenile, bestseller and basic
reference categories to our core customers and, to a lesser extent, increased
sales from our international subsidiaries.
We experienced a 19 percent rate of returns from customers in Fiscal 2000
compared with 20 percent in Fiscal 1999. This decrease is a result of continued
improvement in efficiency and the refinement of our proprietary VMI program with
our core customers. Consistent with our previous practices, reserves have been
established based on management's best estimate of expected future product
returns.
Gross profit for Fiscal 2000 reached $78,898,000, an increase of
$17,875,000 from the Fiscal 1999 level. As a percentage of sales, gross profit
was 12.6 percent in Fiscal 2000 compared with 12.2 percent in the previous
fiscal year. The increase in gross profit margin was primarily a result of
increased sell-through of proprietary product, reduced markdown expenses, and
increased income from publisher incentive programs.
Distribution and administrative expenses increased to $53,519,000 for
Fiscal 2000 from $41,602,000 for Fiscal 1999. As a percentage of sales, these
expenses rose to 8.5 percent from 8.3 percent for the prior fiscal year. This
increase was due to the normally higher operating expenses in our international
subsidiaries and the continued investment in our corporate infrastructure. These
infrastructure costs include hiring for key new positions, systems enhancements
and facility expansion required to strategically grow our business.
Interest and dividend income increased to $2,191,000 in Fiscal 2000 from
$1,270,000 in the previous fiscal year as a result of increased average
investment balances. See "Liquidity and Capital Resources". Our combined federal
and state effective tax rate decreased to 39.2 percent in Fiscal 2000 compared
to 39.5 percent for the prior fiscal year. The Fiscal 2000 provision for income
tax was lower primarily due to higher tax-exempt investment income.
FISCAL 1999 COMPARED TO FISCAL 1998
Net diluted income for the fiscal year ended March 31, 1999 was
$12,513,000, or $.95 per diluted share, on net sales of $501,071,000. This
compares to net income of $9,149,000, or $.71 per diluted share, on net sales
of $436,599,000 for the previous fiscal year. The 14.8 percent increase in
net sales was primarily due to increases in gross shipments within the
bestseller, mass paperback and gift book (art and coffee table books)
categories to core customers as well as sales from our U.K. subsidiary, Aura
Books, PLC, acquired in March 1998.
We experienced a 20 percent rate of returns from customers in Fiscal 1999
compared with 21 percent in Fiscal 1998. Consistent with our previous practices,
reserves have been established based on management's best estimate of expected
future product returns.
Gross profit for Fiscal 1999 reached $61,023,000, an increase of
$14,437,000 from the Fiscal 1998 level. As a percentage of sales, gross profit
was 12.2 percent in Fiscal 1999 compared with 10.7 percent in the previous
fiscal year. The increase in gross profit margin was primarily due to higher
income from publisher incentive programs and increased sales from our
international subsidiaries, which typically achieve higher gross margins while
at comparatively higher distribution and administrative expense levels.
Distribution and administrative expenses increased to $41,602,000 for
Fiscal 1999 from $33,730,000 for Fiscal 1998. As a percentage of sales, these
expenses rose to 8.3 percent from 7.7 percent for the prior fiscal year. This
increase primarily reflected the addition of Aura Books, PLC as well as
non-recurring costs associated with exiting our retail activities. The retail
outlets were originally established as cost recovery vehicles for non-returnable
residual product from our purchasing and publishing activities. In Fiscal 1998,
we continued our efforts to increase the efficiency of the disposition of
non-returnable product and began to utilize a small team of associates dedicated
to selling the remainder product. Based on the success of this relatively low
cost, low overhead effort, management decided to phase out the retail stores.
The non-recurring costs associated with exiting the retail operations were
approximately $1,000,000.
Interest and dividend income decreased to $1,270,000 in Fiscal 1999 from
$1,785,000 in the previous fiscal year as a result of reduced investment
balances. Our combined federal and state statutory tax rate increased from
approximately 39 percent in Fiscal 1998 to approximately 39.5 percent in Fiscal
1999 as a result of our higher income level. The Fiscal 1999 provision for
income tax was 39.5 percent, with tax-exempt interest income offsetting foreign
currency exchange losses. The Fiscal 1998 provision for income taxes was 37.5
percent as a result of various adjustments including the tax benefit of a loss
carryforward on one of our foreign operations as well as tax-exempt interest
income offset, in part, by foreign currency
11
exchange losses.
SEASONALITY
Our 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. We expect seasonality in operations to continue. We
experience significant seasonal short-term swings in our cash position due to
sales seasonality and to differences in timing of payments to our vendors and
the receipt of payments from our customers. Cash flow has been historically
greatest during the third fiscal quarter due to higher seasonal sales.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended March 31, 2000, $13,351,000 of cash was provided by
operating activities. In the prior year, $668,000 of cash was provided by
operating activities. At March 31, 2000, our cash and investments had
increased by $3,416,000 compared to March 31, 1999, primarily due to income
from operations offset, in part, by acquisitions, our stock repurchases and
the strategic growth of our corporate infrastructure. Trade accounts
receivable increased $2,856,000 compared to one year ago primarily due to an
increase in net sales, offset, in part, by an improvement in the number of
days sales outstanding. Inventories at March 31, 2000 increased $25,361,000
compared to March 31, 1999, due in part to increased sales activity, an
approximate 40 percent increase in sku count to address our expanding our
customer base, and the timing of returns to publishers of certain titles. The
increase in inventory was offset, in part, by an increase in accounts
payable. 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 our vendors did not change significantly
during Fiscal 2000. Inventory turns increased slightly to 4.6 times in Fiscal
2000 from 4.3 times in Fiscal 1999. The improvement in inventory turns is a
result of the reduced inventory value as a percentage of cost of sales which
is related, in part, to the purchasing efficiencies gained from a better
understanding of our customers needs through the use of our proprietary VMI
software program.
We had available at March 31, 2000 an unsecured bank line of credit with a
maximum borrowing limit of $10 million. The interest rate on bank borrowings is
based on the prime rate and "Libor" rates. The line of credit expires July 31,
2000 and we are currently reviewing terms for renewal. We did not borrow on our
line of credit during Fiscal 2000 or Fiscal 1999.
We believe that our working capital, cash flows from operations, trade
credit traditionally available from our vendors and our $10 million line of
credit will be sufficient to finance our current and anticipated level of
operations. Although we have no commitments to do so at the present time, we may
consider additional strategic acquisitions where deemed appropriate. Such
acquisitions, if any, could affect our liquidity and capital resources.
IMPACT OF INFLATION
We have been subject to relatively low prevailing inflation rates in all
countries in which we operate, with the exception of Mexico, during Fiscal
2000, 1999 and 1998. We have generally been able to adjust our selling prices
in all countries in which we operate to offset increased costs of merchandise
and we expect to be able to continue to do so in the foreseeable future.
While our Mexico operations are not a significant part of our overall
activities, the continued high rates of inflation in Mexico may result in
future foreign currency exchange losses.
COMPUTER OPERATIONS AND THE YEAR 2000
During Fiscal 1998 and Fiscal 1999, we developed a plan to address
anticipated Year 2000 issues in connection with our data processing and other
activities, including non-information technology based systems. The cost for
review, analysis, modification and testing of existing computer programs for
both internal and external software approximated $650,000 and was expensed as
incurred. Due to the fact that we primarily employed outside consultants for
Year 2000 remediation related work, there has not been any deferral of other
information technology related projects, nor was there a requirement to hire
additional personnel solely for Year 2000 compliance issues. We have not
experienced any significant Year 2000 problems.
12
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. We desire to take advantage of the "safe harbor" provisions of the
Act.
We wish to caution readers that, with the exception of historical matters,
the matters discussed in this Annual Report are forward-looking statements that
involve risks and uncertainties, including but not limited to factors related to
the highly competitive nature of the publishing industry as well as the
warehouse club and retail industries and their sensitivity to changes in general
economic conditions, our concentration of sales and credit risk with two
customers, our ability to impact customer return rates, continued successful
results from the VMI program, currency and other risks related to foreign
operations, expansion plans, the results of financing efforts, and other factors
discussed in our other filings with the Securities and Exchange Commission. Such
factors could affect our actual results during Fiscal 2001 and beyond and cause
such results to differ materially from those expressed in any forward-looking
statement.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to changes in interest rates primarily from securities
held in our investment portfolio. Fluctuations in interest rates may affect
the ending fair value of our investments, anticipated future cash flows, and
the realization of earnings from such investments. Our cash and cash
equivalents consist primarily of highly liquid short-term investments that
are typically held for the duration of the respective instrument. Due to the
short-term nature of our investments, we believe that any change in interest
rates would not have a material impact on our cash equivalents. As of March
31, 2000, our investments of approximately $3,480,000 are scheduled to mature
within one year and approximately $1,857,000 are scheduled to mature within
two years. We do not utilize derivative financial instruments or other market
risk sensitive instruments, positions, or transactions to manage exposure to
interest rate changes. Accordingly, we believe that, while the securities we
hold are subject to changes in the financial standing of the issuer of such
securities, we are not subject to any material risks arising from changes in
interest rates or other market changes that affect market risk sensitive
instruments.
We are subject to foreign currency exposure due to the operation of our
foreign subsidiaries, which generally enter into transactions denominated in
their respective functional currencies. Our primary foreign currency exposure
arises from foreign denominated revenues and profits translated into U.S.
dollars. The primarily currencies to which we have foreign currency exposure
are the British pound, Mexican peso, and the Australian dollar. We generally
view as long-term our investments in our wholly-owned foreign subsidiaries
with a functional currency other than the U.S. dollar. As a result, we do not
utilize any hedging transactions against these net investments. Our foreign
operations are not a significant part of our overall activities and we
believe that the risk associated with our foreign currency exposure is not
material on a consolidated basis.
13
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 17
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20-26
14
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, 2000 and 1999, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2000 in conformity with accounting principles generally accepted in
the United States.
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 consolidated financial statements. The schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated 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
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Diego, California
May 11, 2000
15
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999
---- ----
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 31,135 $ 27,189
Investments, Available-for-Sale (Note 3) 3,480 4,653
Accounts Receivable-Trade, Net of Allowances
For Uncollectible Accounts and Sales Returns
Of $3,971 in 2000 and $3,674 in 1999 77,035 74,179
Vendor and Other Receivables 1,888 3,739
Inventories, Net 131,421 106,060
Deferred Income Taxes (Note 5) 6,785 5,997
Prepaid Expenses 2,222 1,459
--------- ---------
TOTAL CURRENT ASSETS 253,966 223,276
PROPERTY AND EQUIPMENT, AT COST 20,869 15,311
Less: Accumulated Depreciation and Amortization 10,098 8,721
--------- ---------
NET PROPERTY AND EQUIPMENT 10,771 6,590
INVESTMENTS, AVAILABLE-FOR-SALE (Note 3) 1,857 1,214
GOODWILL AND OTHER ASSETS (Note 10) 8,956 7,316
--------- ---------
TOTAL ASSETS $ 275,550 $ 238,396
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 165,856 $ 146,972
Accrued Liabilities 10,945 10,033
Income Taxes Payable 2,701 989
--------- ---------
TOTAL CURRENT LIABILITIES 179,502 157,994
--------- ---------
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY (Note 8):
Common Stock $.001 Par Value, Authorized 20,000,000 Shares,
Issued: 14,804,000 Shares in 2000 and 14,358,000 Shares in 1999
Outstanding: 12,907,000 Shares in 2000 and 12,744,000 Shares in 1999 15 14
Additional Paid-In Capital 31,062 27,759
Retained Earnings 71,072 54,664
Cumulative Other Comprehensive Income (54) 85
Less: Treasury Stock, 1,897,000 Shares in 2000 and 1,614,000 Shares in
1999 at Cost (6,047) (2,120)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 96,048 80,402
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 275,550 $ 238,396
========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
16
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
---- ---- ----
NET SALES $627,978 $501,071 $436,599
Cost of Goods Sold 549,080 440,048 390,013
-------- -------- --------
GROSS PROFIT 78,898 61,023 46,586
Distribution and Administrative Expenses 53,519 41,602 33,730
-------- -------- --------
INCOME FROM OPERATIONS 25,379 19,421 12,856
Interest and Dividend Income, Net 2,191 1,270 1,785
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST INCOME 27,570 20,691 14,641
Provision for Income Taxes (Note 5) 10,813 8,178 5,492
-------- -------- --------
INCOME BEFORE MINORITY INTEREST INCOME 16,757 12,513 9,149
Minority Interest Income, Net 335 - -
-------- -------- --------
NET INCOME $ 17,092 $ 12,513 $ 9,149
======== ======== ========
NET INCOME PER SHARE:
Basic $ 1.33 $ .99 $ .73
======== ======== ========
Diluted $ 1.28 $ .95 $ .71
======== ======== ========
WEIGHTED AVERAGE SHARES USED IN CALCULATION:
Basic 12,832 12,678 12,508
Diluted 13,319 13,128 12,827
The accompanying notes are an integral part of these consolidated statements.
17
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS)
Common Stock Cumulative
Outstanding Additional Other
----------- Paid-In Retained Comprehensive Treasury
Shares Amount Capital Earnings Income (Loss) Stock Total
- ----------------------------- ----------- ---------- ------------ ----------- --------------- ----------- ------------
BALANCE, MARCH 31,
1997 AS ADJUSTED (Note 1) 12,422 $ 14 $ 26,311 $ 33,569 $ (77) $ (2,030) $ 57,787
Net Income - - - 9,149 - - 9,149
Foreign Currency Translation - - - - 77 - 77
Unrealized Gain (Loss) - - - - (1) - (1)
- ----------------------------- ----------- ---------- ------------ ----------- --------------- ----------- ------------
Comprehensive Income 9,225
- ----------------------------- ----------- ---------- ------------ ----------- --------------- ----------- ------------
Exercise of Options 224 - 826 - - - 826
Repurchase of Common Stock (23) - - - - (90) (90)
- ----------------------------- ----------- ---------- ------------ ----------- --------------- ----------- ------------
BALANCE, MARCH 31, 1998 12,623 14 27,137 42,718 (1) (2,120) 67,748
Net Income - - - 12,513 - - 12,513
Foreign Currency Translation - - - - 87 - 87
Unrealized Gain (Loss) - - - - (1) - (1)
- ----------------------------- ----------- ---------- ------------ ----------- --------------- ----------- ------------
Comprehensive Income 12,599
- ----------------------------- ----------- ---------- ------------ ----------- --------------- ----------- ------------
Exercise of Options 117 - 595 - - - 595
Employee Stock Purchase Plan 4 - 27 - - - 27
Cash Dividends - - - (567) - - (567)
- ----------------------------- ----------- ---------- ------------ ----------- --------------- ----------- ------------
BALANCE, MARCH 31, 1999 12,744 14 27,759 54,664 85 (2,120) 80,402
Net Income - - - 17,092 - - 17,092
Foreign Currency Translation - - - - (134) - (134)
Unrealized Gain (Loss) - - - - (5) - (5)
- ----------------------------- ----------- ---------- ------------ ----------- --------------- ----------- ------------
Comprehensive Income 16,953
- ----------------------------- ----------- ---------- ------------ ----------- --------------- ----------- ------------
Exercise of Options 434 1 3,195 - - - 3,196
Repurchase of Common Stock (282) - - - - (3,927) (3,927)
Employee Stock Purchase Plan 11 - 108 - - - 108
Cash Dividends - - - (684) - - (684)
- ----------------------------- ----------- ---------- ------------ ----------- --------------- ----------- ------------
BALANCE, MARCH 31, 2000 12,907 $ 15 $ 31,062 $ 71,072 $(54) $ (6,047) $ 96,048
- ----------------------------- ----------- ---------- ------------ ----------- --------------- ----------- ------------
The accompanying notes are an integral part of these consolidated statements.
18
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 17,092 $ 12,513 $ 9,149
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Minority Interest in Income from Raincoast, Net (335) - -
Depreciation and Amortization 2,805 2,180 1,468
Provision for Uncollectible Accounts and Sales Returns 570 209 765
Deferred Income Taxes (788) (1,075) 560
Provision for Markdown of Inventories 3,242 4,714 4,611
Changes in Assets and Liabilities
Net of Effects of Businesses acquired:
(Increase) in Accounts Receivable-Trade (4,359) (12,016) (6,653)
(Increase) Decrease in Vendor and Other Receivables 1,746 (1,165) 396
(Increase) in Inventories (28,508) (10,686) (8,435)
(Increase) in Goodwill and Other Assets (1,147) (92) (591)
Increase in Accounts Payable 20,369 3,636 17,660
Increase in Accrued Liabilities 970 1,844 2,072
Increase (Decrease) in Income Taxes Payable 1,694 606 (663)
-------- -------- --------
Net Cash Provided by Operating Activities 13,351 668 20,339
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Used in Acquisitions, Net of Cash Acquired (1,654) (967) (6,749)
Purchase of Property and Equipment, Net (6,734) (3,347) (2,082)
Purchase of Investments, Available-For-Sale (66,805) (40,261) (12,093)
Sale and Redemption of Investments, Available-For-Sale 67,330 42,462 15,264
-------- -------- --------
Net Cash Used in Investing Activities (7,863) (2,113) (5,660)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Exercise of Options and Related Tax Benefit 3,196 595 826
Proceeds from Employee Stock Purchase Plan 108 27 -
Purchase of Treasury Stock (3,927) - (90)
Dividends Paid (684) (567) -
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities (1,307) 55 736
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (235) (403) (25)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,946 (1,793) 15,390
CASH AND CASH EQUIVALENTS, Beginning of Year 27,189 28,982 13,592
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of Year $ 31,135 $ 27,189 $ 28,982
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Year For:
Income Taxes $ 7,803 $ 8,279 $ 5,093
The accompanying notes are an integral part of these consolidated statements.
19
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, provides global
customized services to book retailers and publishers. We are a leading
distributor of general interest books to the membership warehouse clubs and
certain specialty retailers, certain e-commerce companies and traditional
bookstores. 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. We provide product selection advice, specialized
merchandising and product development services, and distribution and handling
services to membership warehouse clubs and other retailers operating in the
United States, Canada, Mexico, the United Kingdom, and certain Pacific Rim
countries. References to Advanced marketing Services throughout these
Consolidated Financ ial Statements are made using the first person notations of
"we", "our", or "us".
PRINCIPLES OF CONSOLIDATION
The accompanying Consolidated Financial Statements include our accounts and
those of our wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
USE OF ESTIMATES
Our preparation of the accompanying Consolidated Financial Statements in
conformity with accounting principles generally accepted in the United States
requires us 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. Our actual results could differ from those
estimates.
FOREIGN CURRENCY TRANSLATION
The balance sheet accounts of our foreign operations are translated from their
respective foreign currencies into U.S. dollars at the exchange rate in effect
at the balance sheet date and revenue and expense accounts are translated using
an average exchange rate during the respective period. The effects of the
translation are recorded as a separate component of stockholders' equity.
Exchange gains and losses arising from the transactions denominated in foreign
currencies are recorded using the actual exchange differences on the date of the
transaction and are included in the Consolidated Statements of Income.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with an original maturity of three
months or less to be cash equivalents. Cash equivalents consist principally of
money market funds and short-term municipal instruments.
INVESTMENTS, AVAILABLE-FOR-SALE
Investments, available-for-sale consists principally of highly rated corporate
and municipal bonds. We account for our investments in accordance with Statement
of Financial Accounting Standards ("SFAS") 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 3.
20
CONCENTRATION OF CREDIT RISK
We invest our excess cash in debt and equity instruments of financial
institutions and corporations with strong credit ratings. We have 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 77 and 81
percent of our accounts receivable balances at March 31, 2000 and 1999,
respectively, were concentrated with two major customers in the warehouse club
industry.
ACCOUNTS RECEIVABLE ALLOWANCES
In accordance with industry practice, a significant portion of our products are
sold to customers with the right of return. On approximately 90 percent of our
purchases, we have the right to return unsold product to publishers. We have
provided allowances of $2,306,000 and $2,302,000 as of March 31, 2000 and 1999,
respectively, for the gross profit effect of estimated future sales returns
after considering historical results and evaluating current conditions. We also
have provided allowances for uncollectible trade accounts receivable of
$1,665,000 and $1,372,000 as of March 31, 2000 and 1999, 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 and, to a lesser extent, music CDs,
CD-ROMs and prerecorded audio cassettes purchased for resale and are stated at
the lower of cost (first-in, first-out) or market. Our rights to return to
publishers were limited or nonexistent on approximately 29 and 28 percent of our
inventories at March 31, 2000 and 1999, 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.
GOODWILL
Goodwill, representing the excess of the cost over the net tangible and
identifiable intangible assets recorded in connection with our acquisitions, is
amortized on a straight-line basis over the estimated lives of between 20 and 25
years, depending on the estimated useful life of the intangible assets acquired.
Goodwill totaled $6,465,000 and $6,291,000, net of accumulated amortization of
$511,000 and $245,000, as of March 31, 2000 and 1999, respectively.
LONG-LIVED ASSETS
On a regular basis, we evaluate and assess our assets for impairment and we make
appropriate adjustments when an asset is deemed to be impaired. In performing
this analysis, we estimate future cash flows to be generated as a result of
operations compared against the carrying value of related assets.
SIGNIFICANT CUSTOMERS
A substantial portion of the revenue earned by our operations is derived from a
limited number of customers. Taking into account domestic and international
activities, our two largest customers accounted for approximately 40 and 41
percent of net sales in Fiscal 2000, 40 and 37 percent of net sales in Fiscal
1999 and 44 and 40 percent of net sales in Fiscal 1998. No other customers
accounted for 10 percent or more of our net sales during these years.
REVENUE RECOGNITION
We recognize sales and related cost of sales upon delivery of merchandise to
customer locations. We provide reserves for the effect of estimated future sales
returns. In accordance with industry practice, we include revenues and
associated expenses related to our advertising activities in Distribution and
Administrative Expenses.
21
In December 1999, the Securities Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101").
SAB No. 101, as amended, must be adopted no later than the first quarter of
Fiscal 2001. We do not anticipate any material impact to our Consolidated
Financial Statements for the adoption of SAB No. 101.
INCOME TAXES
We provide currently for taxes on income regardless of when such taxes are
payable in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred
income taxes result from temporary differences in the recognition of income and
expense for tax and financial reporting purposes. See Note 5.
PER SHARE INFORMATION
On February 15, 1999, we effected a three for two stock split to stockholders of
record on February 1, 1999. On January 17, 2000, we effected an additional three
for two stock split to stockholders of record on January 3, 2000. Accordingly,
all references to shares and earnings per share amounts included in these
Consolidated Financial Statements have been restated to reflect the stock
splits.
The following financial data summarizes information relating to the per share
computations (in thousands, except per share data):
Years Ended March 31,
----------------------------------------------------
2000 1999 1998
---- ---- ----
Net Income $17,092 $12,513 $ 9,149
======= ======= =======
Weighted Average Common Shares Outstanding 12,832 12,678 12,508
Basic Earnings Per Share $ 1.33 $ .99 $ .73
======= ======= =======
Weighted Average Common Shares Outstanding 12,832 12,678 12,508
Dilutive Common Stock Options 487 450 319
------- ------- -------
Total Diluted Weighted Average Common Shares 13,319 13,128 12,827
------- ------- -------
Diluted Earnings Per Share $ 1.28 $ .95 $ .71
======= ======= =======
2. INDUSTRY SEGMENT AND GEOGRAPHICAL DATA
We operate in one industry segment and in several geographic regions.
Net sales by geographic region are as follows (in thousands):
Years Ended March 31,
---------------------------------------------
2000 1999 1998
---- ---- ----
United States $586,143 $465,229 $422,249
United Kingdom 37,682 33,317 11,439
Mexico 4,153 2,525 2,911
-------- -------- --------
$627,978 $501,071 $436,599
======== ======== ========
Net identifiable assets of our operations in different geographic areas are as
follows (in thousands):
As of March 31,
--------------------------------
2000 1999
---- ----
United States $251,678 $217,584
United Kingdom 19,114 19,066
Mexico 2,827 1,746
Australia 1,931 -
-------- --------
$275,550 $238,396
======== ========
22
3. INVESTMENTS, AVAILABLE-FOR-SALE
Investments, available-for-sale at March 31, 2000 and 1999 are as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
MARCH 31, 2000 Cost Gains Losses Fair Value
- ----------------------------------------------------- ----------------- ----------------- ---------------- -----------------
Debt Securities Issued by the States of the
U.S. and Political Subdivisions of the States $ 5,335 $ 6 $ 4 $ 5,337
- ----------------------------------------------------- ----------------- ----------------- ---------------- -----------------
MARCH 31, 1999
Debt Securities Issued by the States of the
U.S. and Political Subdivisions of the States $ 5,860 $ 10 $ 3 $ 5,867
- ----------------------------------------------------- ----------------- ----------------- ---------------- -----------------
Investments in debt securities issued by States of the U.S. and political
subdivisions of the States as of March 31, 2000 of approximately $3,480,000 are
scheduled to mature within one year and approximately $1,857,000 are scheduled
to mature within two years. Proceeds from the sale of investments aggregated
approximately $12,192,000 for the year ended March 31, 2000. The realized net
gain on these sales totaled approximately $4,000. Proceeds from the sale of
investments during the same period of the previous year totaled approximately
$19,159,000 on which a net gain of approximately $120,000 was realized. We use
the specific identification method in determining cost of these investments.
4. LINE OF CREDIT
We had available at March 31, 2000 and 1999 an unsecured bank line of credit
with a maximum borrowing limit of $10 million. The interest rate on bank
borrowings is based on the prime rate and "Libor" rates. The line of credit
expires July 31, 2000 and we are currently reviewing terms for renewal. As of
and during the years ended March 31, 2000 and 1999, there were no borrowings on
our line of credit.
5. INCOME TAXES
The components of the provision for income taxes are as follows (in thousands):
Years Ended March 31,
--------------------------------------------
2000 1999 1998
---- ---- ----
CURRENT:
Federal $ 9,562 $ 7,574 $ 3,990
State 2,039 1,679 941
DEFERRED:
Federal (711) (906) 458
State (77) (169) 103
-------- ------- -------
$ 10,813 $ 8,178 $ 5,492
======== ======= =======
A reconciliation of the provision for income taxes at the statutory federal
income tax rate of 35 percent in Fiscal 2000 and 1999 and 34 percent in Fiscal
1998 to the effective tax provision as reported is as follows (in thousands):
Years Ended March 31,
----------------------------------------
2000 1999 1998
---- ---- ----
Taxes at Statutory Federal Rate $ 9,767 $ 7,242 $ 4,978
State Income Taxes, Net of Federal Benefit 1,270 942 676
Tax-Exempt Interest and Dividend Income (421) (262) (318)
Loss on Foreign Operations, Net 55 346 64
Other 142 (90) 92
-------- ------- -------
$ 10,813 $ 8,178 $ 5,492
======== ======= =======
23
The temporary differences that give rise to the deferred tax assets as of March
31, 2000 and 1999 are as follows (in thousands):
AS OF MARCH 31,
----------------------
2000 1999
---- ----
Inventory Reserves $3,468 $3,261
Allowances for Sales Returns and Uncollectible Accounts 1,453 1,124
Depreciation and Amortization 228 191
Vacation Pay and Accrued Compensation 135 134
Accounts Payable Accruals 702 1,218
Other 799 69
------ ------
$6,785 $5,997
====== ======
6. COMMITMENTS
We lease facilities and some equipment under non-cancelable operating leases.
Rental expense for the years ended March 31, 2000, 1999 and 1998 was $3,982,000,
$3,867,000 and $3,115,000 respectively. The leases have initial expiration dates
ranging from 2001 to 2014. Some of the leases contain renewal options,
termination options and periodic adjustments of the minimum monthly rental
payment based upon increases in the Consumer Price Index.
At March 31, 2000, the aggregate future minimum rentals are as follows (in
thousands):
Year Ending March 31, Amount
- ------------------------------------------------------------------------- ---------------------
2001 $ 4,399
2002 3,805
2003 4,430
2004 3,742
2005 2,411
Thereafter 2,331
- ------------------------------------------------------------------------- ---------------------
$ 21,118
===============
7. EMPLOYEE BENEFIT PLANS
We have a qualified 401(k) profit-sharing plan covering substantially all of our
employees. We match, at a 25 percent rate, employee contributions up to 4
percent of compensation. In Fiscal Years 2000, 1999 and 1998, our matching
contributions were $87,000, $86,000 and $74,000, respectively. The plan also
permits us to make discretionary contributions as approved by our Board of
Directors. Our discretionary contributions were $526,000, $497,000 and $357,000
for the years ended March 31, 2000, 1999 and 1998, respectively.
On March 1, 1996, we introduced a deferred compensation plan, which permits
eligible employees, including officers, to defer a portion of their
compensation and requires us to make matching contributions and pay accrued
interest as provided in the plan. The deferred compensation liability,
including our matching contributions and accumulated interest, was
approximately $1,977,000 and $1,027,000 at March 31, 2000 and 1999,
respectively. We fund the deferred compensation plan under a trust agreement
through which we pay to the trust amounts necessary to pay premiums on life
insurance policies carried to meet the obligations under the plan. The
expense associated with the plan, including life insurance costs, was
$357,000, $236,000, and $132,000 for the years ended March 31, 2000, 1999 and
1998, respectively.
24
8. STOCK PLANS
We have two stock option plans which provide for the grant of incentive or
nonqualified stock options to employees and directors. Nonemployee directors are
only eligible for nonqualified stock options. We may grant incentive stock
options at prices not less than 100 percent of the fair market value of the
shares at the date of grant (110 percent with respect to optionees who are 10
percent or more stockholders). Nonqualified options may be granted at prices not
less than 85 percent 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 were 1,521,000 shares issuable
pursuant to options granted under our 1987 Plan and as of March 31, 1997, no
further options may be granted under this plan. As of March 31, 2000, there were
1,462,500 shares issuable pursuant to options granted under our 1995 Plan. The
expiration date of the options is determined by the Board of Directors and may
not exceed 10 years for incentive options (5 years with respect to optionees who
are 10 percent or more stockholders) and 10 years and 1 day for nonqualified
options.
We have adopted the disclosure only provision of SFAS No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation expense has been
recognized for stock options. Had compensation expense been recorded for options
granted in Fiscal Years 2000, 1999 and 1998, our net income and earnings per
share would have been reduced approximately $831,000 or $.06 per share,
$359,000, or $.03 per share, and approximately $132,000, or $.01 per share in
Fiscal 2000, 1999, and 1998, respectively. These amounts are for disclosure
purposes only and may not be representative of future calculations since
additional options may be granted in future years. The fair value for these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for Fiscal
Years 2000, 1999 and 1998, respectively: expected volatility of 56, 37 and 37
percent; risk-free interest rate of 6.5, 5.3 and 6.2 percent; expected option
life of 5 years.
The changes in the number of common shares under option for the years ended
March 31, 1998, 1999 and 2000 are summarized as follows:
1995 Plan 1987 Plan
--------------------------------------- ---------------------------------------
Number of Shares Weighted Avg. Price Number of Shares Weighted Avg. Price
---------------- ------------------- ---------------- -------------------
Outstanding as of March 31, 1997 517,500 $ 3.25 571,703 $ 2.32
Granted 246,375 4.11 - -
Exercised 6,075 4.96 217,665 1.86
Forfeited 8,100 4.96 29,700 4.19
- -----------------------------------------------------------------------------------------------------------------------
Outstanding as of March 31, 1998 749,700 3.50 324,338 2.45
Granted 497,250 9.67 - -
Exercised 35,100 3.57 81,675 2.38
Forfeited 184,500 4.31 900 2.31
- -----------------------------------------------------------------------------------------------------------------------
Outstanding as of March 31, 1999 1,027,350 4.85 241,763 2.48
Granted 430,500 10.10 -
Exercised 318,700 3.05 115,587 2.44
Forfeited 37,200 6.22 - -
- -----------------------------------------------------------------------------------------------------------------------
Outstanding as of March 31, 2000 1,101,950 $ 7.34 126,176 $ 2.51
Exercisable as of March 31, 2000 310,550 $ 5.04 115,600 $ 2.38
On July 23, 1998, we introduced an Employee Stock Purchase Plan which permits
eligible employees to defer a portion of their compensation in order to
purchase shares of our stock. The maximum number of shares that may be
purchased under the Plan is 225,000 shares, subject to adjustment under
certain circumstances. The amount of shares purchased under the plan were
approximately 11,000 and 4,000 in Fiscal 2000 and Fiscal 1999, respectively.
9. SUBSEQUENT EVENT
On April 3, 2000, we entered into a private transaction to purchase 200,000
shares of our stock from our Chairman for approximately $3.5 million, which
reflects a 10 percent discount from the average market price for a specified
period. The transaction was pursuant to an agreement which requires us to
purchase up to 456,100 shares by December 31, 2000.
25
10. ACQUISITIONS
BOOKWISE
In March 2000, we acquired certain assets and assumed certain liabilities of
the wholesale distribution business of privately held Bookwise International
of Australia for approximately $2.0 million. Subsequent to year end, under
the terms of the agreement, an additional payment of approximately $250,000
was made upon reassignment of certain contracts. Bookwise is a distributor of
specialty books in a wide variety of subject areas. We accounted for the
acquisition as a purchase and, accordingly, the assets acquired and the
liabilities assumed from Bookwise were recorded in the accompanying
Consolidated Balance Sheet as of March 31, 2000 at their estimated fair value
at the date of acquisition. The excess of the purchase price over the net
assets acquired of approximately $1.3 million is being amortized over 20
years. The operating results of Bookwise have not been included in the
accompanying Consolidated Statement of Income for the year ended March 31,
2000, as the amounts were not material and it is our policy to include the
operating results of our foreign subsidiaries as of February 28. The
operating results will be included in the Consolidated Statements of Income
in future periods.
RAINCOAST
In September 1999, we acquired a 25% minority interest in Raincoast Book
Distribution, Limited, a leading Canadian book distributor, for approximately
$900,000. Headquartered in Vancouver, British Columbia, Raincoast has the
exclusive distribution rights for approximately 40 publishers in Canada. In
addition, Raincoast, through its own proprietary imprint label, publishes a
wide variety of books. We accounted for the investment under the equity
method of accounting and consistent with our policy regarding international
subsidiaries, we include our portion of Raincoast's operating results in our
Consolidated Statements of Income one month in arrears. Our equity in the net
income of Raincoast which is included in our Fiscal 2000 Consolidated
Statement of Income was approximately $335,000.
METRASTOCK
In March 1999, we acquired the assets and assumed certain liabilities of the
wholesale distribution business of Metrastock, Ltd. for approximately $1.2
million. Metrastock is a U.K. book distributor of specialty books to the garden
center, craft and gift shop markets. We accounted for the acquisition as a
purchase and, accordingly, the assets acquired and the liabilities assumed from
Metrastock were recorded in the accompanying Consolidated Balance Sheet as of
March 31, 1999 at their estimated fair value at the date of acquisition. The
excess of the purchase price over the net assets acquired of approximately
$643,000 is being amortized over 25 years. The operating results of Metrastock
were not included in the accompanying Consolidated Statement of Income for the
year ended March 31, 1999, as the amounts were not material and it is our policy
to include the operating results of our foreign subsidiaries as of February 28.
AURA BOOKS, PLC
In March 1998, we acquired the assets and assumed certain liabilities of the
wholesale distribution business of Aura Books, PLC for approximately $6.8
million. Aura is a UK book distributor to non-traditional markets, in particular
garden centers, gift shops, department stores and other specialty retail
outlets. We accounted for the acquisition as a purchase and, accordingly, the
assets acquired and the liabilities assumed from Aura were recorded at their
estimated fair value and the operating results have been included in the
Consolidated Statements of Income since the date of acquisition. The excess of
the purchase price over the net assets acquired of approximately $4.9 million,
net of a purchase price reduction received in Fiscal 2000 of approximately $1.2
million, is being amortized over 25 years.
Unaudited pro forma consolidated results of operations for the year ended
March 31, 1998, assuming the Aura acquisition occurred as of April 1, 1997
would reflect net sales of $458,037,000, net income of $9,452,000 and diluted
earnings per share of $.74. Such pro forma amounts are not necessarily
indicative of what the actual consolidated results of operations might have
been if the acquisition had been effective at the beginning of Fiscal 1998.
Pro forma information related to the Bookwise and Metrastock acquisitions is
not presented as the amounts were not material.
26
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FISCAL QUARTERS (YEARS ENDED MARCH 31,)
(In Thousands, Except Per Share Data)
1st 2nd 3rd 4th
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
FISCAL 2000
Net Sales $130,782 $145,238 $223,622 $128,336
Cost of Sales 115,139 128,622 193,319 112,000
Net Income 2,472 3,016 9,180 2,424
Net Income Per Share:
Basic $ .19 $ .23 $ .72 $ .19
Diluted $ .19 $ .23 $ .69 $ .18
Weighted Average Shares Used in Calculation:
Basic 12,771 12,882 12,836 12,837
Diluted 13,201 13,349 13,324 13,366
- ------------------------------------------------------------------------------------------------------------------
FISCAL 1999
Net Sales $ 96,810 $116,054 $168,183 $120,024
Cost of Sales 84,929 102,804 145,749 106,566
Net Income 1,651 2,310 6,843 1,709
Net Income Per Share:
Basic $ .13 $ .18 $ .54 $ .13
Diluted $ .13 $ .18 $ .53 $ .13
Weighted Average Shares Used in Calculation:
Basic 12,630 12,667 12,690 12,728
Diluted 13,094 13,020 13,035 13,142
- ------------------------------------------------------------------------------------------------------------------
FISCAL 1998
Net Sales $ 82,080 $ 99,806 $150,522 $104,191
Cost of Sales 72,378 89,709 135,000 92,926
Net Income 1,415 1,893 4,563 1,278
Net Income Per Share:
Basic $ .11 $ .15 $ .37 $ .10
Diluted $ .11 $ .15 $ .35 $ .10
Weighted Average Shares Used in Calculation:
Basic 12,416 12,472 12,547 12,595
Diluted 12,819 12,762 12,889 12,978
- ------------------------------------------------------------------------------------------------------------------
27
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 "Section 16(a) Beneficial
Ownership Reporting Compliance" sections of the Company's definitive Proxy
Statement filed with the Securities and Exchange Commission and mailed to
stockholders on June 26, 2000.
28
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) Report on Form 8-K - None
(c) Exhibits
3.1 Certificate of Incorporation, as amended. (1)
3.2 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)
10.4 Employee Stock Purchase Plan (5)
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
Statements on Form S-8 (File No. 333-01155) filed on February
22, 1996 and (File No. 333-59343) filed on July 17, 1998.
(5) Incorporated by reference to Registrant's Registration
Statement on Form S-8 (File No. 333-59341) filed on
July 17, 1998.
29
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: June 28, 2000 By: /s/ Charles C. Tillinghast, III
-------------------------------
Charles C. Tillinghast, III
Chairman of the Board and Director
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: June 28, 2000 By: /s/ Charles C. Tillinghast, III
-------------------------------
Charles C. Tillinghast, III
Chairman of the Board and Director
Date: June 28, 2000 By: /s/ Michael M. Nicita
---------------------
Michael M. Nicita
Chief Executive Officer and Director
(Principal Executive)
Date: June 28, 2000 By: /s/ Edward J. Leonard
---------------------
Edward J. Leonard
Chief Financial Officer and Executive
Vice President
Date: June 28, 2000 By: /s/ Loren C. Paulsen
--------------------
Loren C. Paulsen
Director
Date: June 28, 2000 By: /s/ James A. Leidich
--------------------
James A. Leidich
Director
Date: June 28, 2000 By: /s/ E. William Swanson, Jr.
---------------------------
E. William Swanson, Jr.
Director
Date: June 28, 2000 By: /s/ Trygve E. Myhren
--------------------
Trygve E. Myhren
Director
Date: June 28, 2000 By: /s/ Lynn S. Dawson
------------------
Lynn S. Dawson
Director
Date: June 28, 2000 By: /s/ Robert F. Bartlett
----------------------
Robert F. Bartlett
Director
30
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.
31
SCHEDULE II
ADVANCED MARKETING SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS)
Balance at Additions Balance at
Beginning Charged End of
of Period to Income Deductions Period
- ------------------------------------------------ ------------------- ---------------------- ----------------- -----------------
1998
Allowance for
uncollectible accounts
and sales returns $ 3,782 $ 765 $ 535 $ 4,012
======= ======= ======= =======
Reserve for
markdown of
inventory $ 5,683 $ 4,611 $ 3,465 $ 6,829
======= ======= ======= =======
- ------------------------------------------------ ------------------- ---------------------- ----------------- -----------------
1999
Allowance for
uncollectible accounts
and sales returns $ 4,012 $ 209 $ 547 $ 3,674
======= ======= ======= =======
Reserve for
markdown of
inventory $ 6,829 $ 4,714 $ 3,642 $ 7,901
======= ======= ======= =======
- ------------------------------------------------ ------------------- ---------------------- ----------------- -----------------
2000
Allowance for
uncollectible accounts
and sales returns $ 3,674 $ 570 $ 273 $ 3,971
======= ======= ======= =======
Reserve for
markdown of
inventory $ 7,901 $ 3,242 $ 3,634 $ 7,509
======= ======= ======= =======
- ------------------------------------------------ ------------------- ---------------------- ----------------- -----------------
32