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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to _________
Commission file number 0-16002
ADVANCED MARKETING SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3768341-9
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5880 Oberlin Drive, Suite 400
San Diego, California 92121
(Address of principal executive offices)
Registrant's telephone number : (619) 457-2500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No____
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K:
The aggregate market value of the Registrant's voting stock held by
nonaffiliates of the Registrant at June 10, 1998 was $62,222,698.
The number of shares of the Registrant's Common Stock outstanding as of
June 10, 1998 was 5,619,839.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its July 23,
1998 Annual Meeting of Stockholders (filed June 19, 1998) are incorporated by
reference into Part III of this Form 10-K.
PART I
ITEM 1 - BUSINESS
GENERAL
Advanced Marketing Services, Inc. (the "Company" or "AMS") is a leading
distributor of general interest books to the membership warehouse clubs and
certain specialty retailers. General interest books include bestsellers;
basic reference books, including computer and medical books; books regarding
business and management; cookbooks; gift books, including art and coffee
table books; calendars; travel books; regional books; mass market paperbacks;
children's books; and Spanish-language books. In addition, to a lesser
extent, the Company sells pre-recorded audio cassettes (books on tape),
CD-ROM titles and video cassettes. The Company provides product selection
advice, specialized merchandising and product development services, and
distribution and handling services to membership warehouse clubs operating in
the United States, Canada, Mexico and the United Kingdom.
Due to the continuous introduction of new titles by the book publishing
industry, the Company provides weekly recommendations, tailored to each
customer's marketing priorities, with respect to the new titles to be sold in
its customers' book departments. These recommendations are selected by the
Company's buyers from among the over 1,000,000 titles in print and over
50,000 new books published each year. AMS also creates unique products and
develops specially packaged book and book-related products for sale to its
customers. The Company supports its customers' inventories by maintaining
back-up inventory in its distribution centers for prompt delivery as needed
to customer locations. The Company maintains four domestic regional
distribution centers to assure timely delivery to its customers, to enhance
its customers' inventory turnover rates and to reduce its customers' handling
and holding costs. See "Properties."
The Company provides distribution services to a major warehouse club
customer and others in the United Kingdom and continues to expand its
distribution to other retailers. In Mexico, the Company distributes products
to a variety of retailers, including warehouse clubs, hypermarkets, discount
department stores and other specialty retailers. The Company has utilized the
services of third party warehousing and distribution companies for its United
Kingdom and Mexican subsidiaries. In March 1998, the Company acquired Aura
Books, PLC, a wholesale book distributor located in the United Kingdom. See
"International Business."
The Company was incorporated in 1982 in California and was
reincorporated in Delaware in June 1987. The Company's executive offices are
located at 5880 Oberlin Drive, Suite 400, San Diego, California 92121;
telephone (619) 457-2500.
MEMBERSHIP WAREHOUSE CLUB INDUSTRY
The Company's customers include for-profit membership warehouse clubs
which sell a broad range of primarily brand-name merchandise at or near
wholesale prices. Membership warehouse clubs are able to provide their
individual and business members, who commonly pay annual membership fees,
substantial cost savings on high-quality merchandise through the efficiencies
of warehouse-type facilities and a no-frills, self-service operation policy.
Membership warehouse club locations typically have approximately 100,000
square feet (2 1/2 acres) of floor space and offer a limited selection of
brand-name products in a wide range of merchandise categories. This
merchandising approach was introduced in Southern California in 1976. Since
then, the membership warehouse club industry has experienced significant
growth, with sales estimated to be approximately $46 billion in 1997.
The following table summarizes the Company's penetration of the
warehouse club industry in 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
---------- ------------ ---------
1991 434 402
1992 514 479
1993 646 571
1994 716 596
1995 742 592
1996 755 743
1997 786 776
1998 807 799
- ---------------
(1) Only U.S. membership warehouse club locations to which the
Company shipped more than $50,000 per year are included as
locations served in the above table.
The Company also serves 40 warehouse club locations in Mexico, 7 in the
U.K. and ships a limited amount of product to 11 warehouse clubs in various
Pacific Rim countries. See "International Business." The number of locations
served is not necessarily indicative of the Company's total sales volumes to
the warehouse club industry as the volume of the Company's shipments to a
location can vary from year to year based on competitive and other factors.
Books are well-suited to the membership warehouse club merchandising
strategy of offering recognizable, quality merchandise at substantial
savings. Books appeal to a wide range of consumers and are popular gift
items. Additionally, due to their relatively high selling price in relation
to their size, books generally provide membership warehouse clubs with
above-average sales per square foot of selling space. By offering a
continually changing selection of books at a substantial discount from
suggested retail prices, membership warehouse clubs encourage retail
customers to purchase books for their enjoyment, as gifts and for business
needs or interests.
Notwithstanding the appeal of books as a product line, most membership
warehouse clubs are not able to apply their standard product purchasing and
handling procedures to their book departments. Typically, a membership
warehouse club purchases a limited selection of each product category
directly from manufacturers who ship to their retail locations. In contrast,
in order to be able to offer even a limited selection of books, typically 100
to 250 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
The Company supplies an assortment of primarily business and computer
titles to certain companies in the office product superstore industry. The
Company serves several companies in the rapidly growing computer and
electronics superstore marketplace. As a result of new business development
efforts, the Company is now supplying product to the pet supply industry and
the discount drugstore market. The Company serves a variety of other
specialty retailers in the sporting goods, children's education and book
businesses.
In October 1997, the Company entered into an agreement with San Diego
based International Periodical Distributors (IPD), a global distributor of
magazines, pursuant to which IPD will offer its magazine distribution
services through AMS to AMS customers and AMS will offer customized book
distribution services to IPD's customers.
3
For many of these customers, the Company designs and recommends media
programs to satisfy the unique marketing priorities of each retailer. By
constantly updating titles offered, the Company makes it possible for its
customers to offer a targeted selection of books and media products without
having to develop media merchandising expertise with their own organizations.
RETAILING OPERATIONS
As of March 31, 1998, the Company owned and operated 11 retail outlet
stores in nine states. The stores are located generally in factory outlet
malls in Camarillo and Gilroy, California; Gurnee, Illinois; Hillsboro,
Texas; Burlington and Centralia, Washington; Silverthorne, Colorado; Birch
Run, Michigan; Lee, Massachusetts; Waterloo, New York; and Phoenix, Arizona.
These retail outlets sell both titles that were purchased on a non-returnable
basis and remain unsold after being offered for sale in the Company's
customers' locations as well as titles purchased specifically for these
retail stores. During fiscal 1998, the Company introduced in four of its
retail stores its Media Merchant retail format that includes multimedia
products such as computer software, CD-ROM and music CDs, in addition to
books. To merchandise these stores the Company is purchasing products
specifically for resale as well as selling its non-returnable book inventory.
The Company plans to operate approximately 10 retail stores by the end of
fiscal 1999.
BUSINESS STRATEGY
The Company's primary business strategy is to provide effective book
purchasing, handling and distribution services to its customers. The Company
believes that it has achieved its position as a leading book supplier to
membership warehouse clubs as well as other specialty retailers because of
its ability to offer sound product selection advice, specialized product
development and marketing services and rapid product delivery, all at
competitive prices.
PRODUCT SELECTION SERVICES AND PURCHASING PRACTICES
The Company's warehouse club customers generally compete in the retail
trade book market by offering a limited selection of books (typically 100 to
250 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. The Company provides its specialty retail customers with book
programs that range from as few as 50 titles to programs of several thousand
titles. The Company believes that one of its principal strengths is its
ability to select books that will be successful in each customer's selling
environment, which is a function of various factors such as customer base,
regional characteristics and marketing priorities. This service is important
because many of the books offered by the Company have relatively limited
sales lives (typically a few weeks to a few months) due to the relatively
rapid introduction of new books to replace titles for which demand has
decreased. Therefore, customers rely on the Company's expertise and
experience to recommend new titles to be added to their book departments.
The Company's book selection process depends on a close working
relationship between the Company's general merchandise managers and its major
vendors. The process of selecting books generally begins when a publisher's
representative submits pre-publication book summaries to the Company's
general merchandise managers. A general merchandise manager evaluates each
book on the basis of such factors as subject matter and author; suitability
for the customers' selling environments; visual appeal; the extent of the
publisher's promotion and advertising support; and the estimated number of
copies to be printed. Because the Company is a major customer of many of its
vendors, such vendors often consult with the Company during pre-publication
planning, allowing the Company to influence the design and packaging of many
of the books it purchases. After choosing titles, the general merchandise
managers, in conjunction with the general marketing managers, determine which
specific titles will be recommended to each customer on the basis of their
knowledge of the customer base, regional characteristics and marketing
priorities.
Product selection is the responsibility of the Company's Merchandising
Department, under the direction of the Executive Vice President -
Merchandising to whom 6 general merchandise managers and a staff of
approximately 17 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.
The Company usually purchases 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. The
4
Company does not generally purchase remainder titles, but will occasionally
purchase close-out lots of certain titles at higher than normal discounts.
Virtually all books sold are returnable to AMS by its customers for full
credit so long as the books are in saleable condition. Approximately 90% of
the books purchased by the Company in fiscal 1998 and 1997 were returnable to
the publisher; the balance were purchased on a non-returnable or partially
returnable basis, often at higher purchase discounts.
The Company has published a limited number of titles through its
in-house publishing arm, Advantage Publishers Group, which manages the
Company's Thunder Bay, Laurel Glen and Silver Dolphin imprints. The titles
are typically sold to both the Company's customers and to independent and
chain book stores. In fiscal 1999, AMS intends to increase its activities in
this area to target distinct segments of the book market, including juvenile.
In the years ended March 31, 1998, 1997 and 1996, customer returns
represented approximately 21%, 28% and 24%, respectively, of the Company's
gross sales. Customer return rates are impacted by the sales success of
individual titles relative to quantities ordered by customers as well as
customer ordering practices for different volume locations. Returns to
publishers by AMS represented approximately 27%, 31% and 28%, respectively,
of the Company's total purchases during the same period. The publisher
returns rate exceeds the customer returns rate due to the Company's policy of
maintaining back-up inventory so that it can respond promptly to customer
orders.
The Company's reserves for markdowns on inventory increased by
approximately $1,146,000 in fiscal 1998. The Company added $4,611,000 to its
reserves for markdowns as a result of slower than expected sales of certain
books which are not returnable to the publisher and deducted $3,465,000 for
actual losses incurred on books for which reserves had previously been made.
To the extent that the Company is unable to sell non-returnable books to its
traditional customers, it sells such books to customers where, in certain
cases, it is necessary to sell at below the Company's cost. The Company
believes its reserves for markdowns are adequate based on its past experience
and present market conditions, although no assurances can be given that
actual losses will not exceed present reserves when these non-returnable
books are actually sold.
The Company purchases from publishers on varying payment terms. The
Company generally takes advantage of discounts for prompt payments, when
economically attractive. During the year ended March 31, 1998, the Company
made purchases from 295 publishers. Four publishers accounted for 10% or more
of the Company's total purchases in fiscal 1998. These included Penguin
Putnam, Inc., Random House, Bantam Doubleday Dell, and Little Brown and
Company which accounted for 15%, 12%, 12% and 11%, respectively, of
purchases. The Company continues to open accounts with new publishers and
believes that adequate sources of supply exist to meet anticipated growth. As
is customary in the industry, the Company does not maintain long-term or
exclusive purchase commitments or arrangements with any publisher.
PRODUCT DEVELOPMENT AND MARKETING SERVICES
In addition to selecting from among regularly published books, AMS
provides specially packaged book and book-related products which are
generally not available in retail bookstores. For example, the Company works
with various publishers to create specially packaged items such as
combination of books, shrink-wrapped or slipcased to sell as a single item,
or packages that contain a book and a non-book item, such as a stuffed animal
with a book. The Company also works directly with publishers to have books
specially reprinted or created for its customers.
The Company assists in the promotion of the books it sells by creating
seasonal merchandising plans and recommending titles based on themes such as
Christmas, Back to School, Father's Day and Easter. The Company also conducts
theme-oriented promotions, frequently tied to specially designed products,
such as gardening, taxes, health and fitness, and travel. Special in-store
promotions are coordinated by the Company for certain of its customers.
Customers may also take advantage of the Company's cooperative advertising
coordination service whereby the Company obtains publisher-sponsored
advertising for use by its customers.
Marketing the Company's products is under the direction of the Vice
President - Marketing to whom six general managers and a staff of 26
marketing personnel report. Members of the staff are assigned to each of the
Company's customers and present new titles, recommend promotions, coordinate
orders and shipments, and handle other customer requests.
5
PRODUCT DISTRIBUTION AND HANDLING SERVICES
Because an important financial and operating goal of many of the
Company's customers is a high inventory turnover rate, a critical element of
the Company's service is its ability to respond quickly to its customers'
orders. The Company has established a national network of four regional
distribution centers to assure rapid deliveries to its customers. These
distribution centers are located in general purpose warehouse facilities in
the metropolitan areas of Sacramento, California; Indianapolis, Indiana;
Baltimore, Maryland; and Dallas, Texas. At its distribution centers, the
Company receives books from multiple vendors and dispatches, using common and
contract carriers, consolidated shipments on a weekly basis to most customer
locations. Weekly deliveries eliminate the need for customers to stock large
inventories on-site and enables customers to utilize valuable marketing space
for other products. Consolidated shipments reduce customer handling and
freight costs by eliminating the costs associated with deliveries by multiple
vendors. All of the Company's distribution centers are linked with its
computerized order processing center at its San Diego headquarters and as a
result, customer orders are generally shipped within 24 hours of receipt.
Because customer orders are generally shipped within 24 hours of receipt, the
Company's backlog at any date is usually insignificant and not a meaningful
indicator of future sales. The Company's computer system also enables AMS to
provide information and special reports to assist customers with operations
and marketing. For an additional fee, upon request, the Company will ticket
books with the customer inventory item number and retail sales price. The
Company believes that all of these services enhance its customers' inventory
turnover rate and reduce their handling and holding costs.
In fiscal 1997, the Company introduced a Vendor Managed Inventory
("VMI") replenishment system designed to reduce the customers' need to write
individual location orders and further improve their inventory turnover. AMS
has developed software designed to forecast future book sales based on the
expected life cycle of a particular title. This forecast, coupled with
customer point of sale information, enables AMS to effectively manage
customer laydown and replenishment orders for each customer location.
To further enhance the Company's service capabilities, AMS has installed
new software and material handling equipment ("Acupak") in its distribution
facilities in Indianapolis and Sacramento. The system is designed to improve
the Company's efficiency in handling customer orders requiring less than a
full carton of a particular title.
The Company provides in-store management of certain customers' book
departments through its network of independent service representatives.
INTERNATIONAL BUSINESS
The Company operates wholly owned foreign subsidiaries in the United
Kingdom and Mexico. Advanced Marketing (UK) Limited was incorporated in
September 1993 in the United Kingdom. From its headquarters near London, it
provides a full range of general interest books, audio and music products
primarily to the seven Costco membership warehouse club locations in the
United Kingdom. The Company also services 96 other specialty retail locations
and continues its efforts to expand its distribution of media products to
other U.K. retailers.
Consistent with the Company's strategic desire to grow internally as
well as through opportunistic acquisitions, in March 1998, the Company,
through Advanced Marketing (Europe), Ltd., a newly formed U.K. subsidiary of
the Company ("AMS Europe"), acquired the assets and assumed the liabilities
of the wholesale distribution business of Aura Books, PLC ("Aura").
Headquartered outside of London, Aura is a U.K. wholesale book distributor to
non-traditional markets such as garden centers, gift shops, department stores
and other specialty retail outlets. The Aura acquisition reinforces the
Company's existing commitment to the U.K. market.
Advanced Marketing S. de R.L. de C.V. was incorporated in January 1994
in Mexico. From its headquarters in Mexico City, the Company distributes
books to 40 membership warehouse club locations, as well a variety of general
and mass merchandisers, office supply superstores and other specialty
retailers. The Company continues to move forward with the introduction of the
concept of a one-stop customized, book program to the retailers in the
Mexican marketplace.
To address the operating challenges in its Mexican subsidiary, the
Company has augmented its management, marketing and product capabilities in
the U.S. and Mexico with personnel with Spanish language and Mexican product
expertise. The Company has also expended significant effort in developing
relationships with Mexican publishers. The Company believes that this
strategy will assist its expansion efforts in Mexico and also create product
sourcing opportunities for the Spanish language market in the United States.
6
During fiscal 1998, the Company's Mexican subsidiary operated at a loss
and there can be no assurance of success in developing sufficient sales
volumes and gross margin contributions to generate profits, particularly
given the low level of economic activity in the Mexican consumer markets
since the December 1994 Mexican peso devaluation. The Company accrued a
provision for currency exchange loss on its investment in its Mexican
subsidiary in fiscal years 1996, 1997 and 1998.
The Company utilizes third party warehousing and distribution companies
in both the United Kingdom and Mexico. No assurances can be given that the
expansion in international markets will be profitable; the Company expects no
significant profit contribution from these international operations in fiscal
1999.
RISKS AND COMPETITION
In fiscal 1998, approximately 92% of the Company's sales were to
membership warehouse clubs with the remainder to office product superstores,
computer superstores, mass merchandisers or other specialty retailers. In the
year ended March 31, 1998, two warehouse club customers accounted for
approximately 84% of the Company's net sales. Although the Company believes
it provides services and efficiencies that membership warehouse clubs and
other retailers would have difficulty duplicating, the Company believes that
its customers may, from time to time, increase the percentage of books they
purchase directly from publishers or from other wholesale distributors.
Further, the Company could lose customers if they discontinue books as a
product line, suffer a business failure or merge or consolidate with another
entity not currently serviced by AMS. The Company has no long-term or
exclusive purchase commitments with any of its customers. Any loss of a major
customer would have a material adverse effect on the Company. Given the
relatively small number of membership warehouse club chains, the Company's
reliance on a few customers is likely to continue. See "Customers."
The Company is a leading supplier of books to the membership warehouse
club market, which is highly competitive. The Company competes in such
markets with national book distributors, some of which are larger and have
greater financial resources than the Company, and with regional book
wholesalers and local book jobbers who compete with the Company on the basis
of price and service. Certain publishers sell directly to membership
warehouse clubs, and one or more of the Company's customers could choose in
the future to purchase more of its books directly from publishers. As a
result, the Company could face additional competition from publishers in the
future. Membership warehouse clubs face competition from discount and retail
bookstore chains which indirectly affects AMS. Due to their high sales
volume, membership warehouse clubs may represent an attractive market that
other book distributors may seek to enter and compete directly with the
Company. The Company believes that its principal competitive advantages are
its ability to select, package, and assort products so that they sell in high
volumes; to distribute such products rapidly; to electronically interface
with customers; to maintain sufficient back-up inventories; and to price
products competitively.
The Company purchases certain titles on a non-returnable basis which it
in turn sells on a returnable basis. To the extent that actual sales of such
titles do not equal purchased quantities, the Company risks having inventory
remaining which it may be unable to sell at or above its cost. The Company
has developed a retail outlet chain to assist in the sale of such inventory.
In addition, the Company has implemented policies to evaluate more completely
the non-returnable inventory risk it assumes. However, the Company has
incurred substantial expense in the past to sell such excess inventory and
may incur such expense in the future. The Company may experience an increase
in non-returnable inventory and associated markdown costs as a result of its
increased publishing activities.
CUSTOMERS
The Company is currently servicing four membership warehouse clubs. The
Company's customers account for over 95% of the sales in the warehouse club
industry and operate approximately 825 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 the
Company's total net sales in fiscal 1998, 1997 and 1996.
PERCENTAGE OF NET SALES
-----------------------
1998 1997 1996
---- ---- ----
Costco Companies, Inc. 44% 46% 42%
SAM's Club (a unit of Wal-Mart Stores, Inc.) 40% 37% 43%
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EMPLOYEES
At March 31, 1998, the Company had approximately 490 employees who were
engaged in administrative, merchandising, marketing, warehousing and retail
operations. The Company also hires temporary workers, primarily during the
peak holiday season. None of the Company's employees is represented by a
labor union. The Company considers its employee relations to be good.
ITEM 2 - PROPERTIES
The Company is headquartered in approximately 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 $697,999.
The Company maintains the following distribution centers from which it
ships to its customers:
LOCATION APPROXIMATE DATE
(METROPOLITAN AREA) SQUARE FOOTAGE OPENED
------------------- -------------- ------
Dallas, Texas 145,000 November 1997
Baltimore, Maryland 160,000 March 1998
Sacramento, California 150,000 August 1993
Indianapolis, Indiana 140,000 April 1996
Each of these distribution centers is leased, with the leases expiring
between 2004 and 2008. Annual base rental payments range from $431,200 to
$622,400. In connection with its March 1998 acquisition of Aura, the Company
also now leases two buildings comprising approximately 25,000 square feet in
Greenford, England under the terms of a lease expiring in July 1999 at an
annual base rental of $287,360. See Note 5 of Notes to Consolidated Financial
Statements in Item 8 of this Form 10-K. The Company believes that its
distribution centers are adequate for the conduct of its business through at
least fiscal 1999.
The Company also utilizes third party warehousing and distribution
companies in both the United Kingdom and Mexico. It also leases office space
in both countries on short-term leases, the commitments under which are not
material.
ITEM 3- LEGAL PROCEDURES
The Company is not a party to any material pending legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the last quarter of the year ended March 31, 1998.
8
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market
under the Nasdaq symbol "ADMS." The following table sets forth the high and
low closing prices of the Common Stock, as reported on the Nasdaq National
Market. On June 10, 1998, the Company had approximately 1,800 beneficial
stockholders and 100 stockholders of record.
FISCAL 1998 FISCAL 1997
--------------- ---------------
HIGH LOW HIGH LOW
First Quarter - Ended June 28/June 29 10 5/8 8 5/8 16 10 7/8
Second Quarter - Ended September 27/September 28 14 1/8 9 7/8 13 3/8 9 7/8
Third Quarter - Ended December 27/December 28 14 7/8 11 1/2 11 1/4 8 7/8
Fourth Quarter - Ended March 31 20 3/4 11 7/8 11 8 3/4
In May 1998, the Company announced that its Board of Directors intends
to declare and pay dividends on the Company's Common Stock at the current
annual rate of $0.10 per share. In accordance with that policy, the Board of
Directors declared a quarterly dividend of $0.025 per share of Common Stock
payable on June 15, 1998 to stockholders of record on June 1, 1998. There are
no direct limitations or restrictions on the payment of cash dividends under
the Company's line of credit arrangement or any other agreement. The
declaration and payment of dividends by the Company in the future will be
subject to the discretion of the Board of Directors and, although it
currently intends to do so, no assurance can be given that the Company will
declare and pay dividends in the future. Determination as to the payment of
dividends will depend upon, among other things, general business condition,
the Company's financial condition and results of operations, contractual,
legal and regulatory restrictions relating to the payment of dividends by the
Company and such other factors as the Board of Directors may be deem relevant.
On May 30, 1994, the Company announced a second stock repurchase program
pursuant to which the Company may repurchase in open market transactions,
from time to time, based upon existing market conditions, up to 500,000
shares of its Common Stock. The Company purchased 211,000 shares of Common
Stock during fiscal 1995 and 10,000 shares of Common Stock in fiscal 1998
pursuant to such repurchase program.
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. No cash dividends were paid on the Company's Common Stock in
any of the periods presented.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31
- --------------------- ----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net Sales $ 436,599 $ 385,651 $ 365,499 $ 303,708 $ 264,518
Cost of Goods Sold 390,013 347,277 328,361 274,776 242,497
---------- --------- --------- --------- ---------
Gross Profit 46,586 38,374 37,138 28,932 22,021
Distribution and Administrative Expenses 33,730 28,903 28,243 24,083 22,561
---------- --------- --------- --------- ---------
Income (Loss) From Operations 12,856 9,471 8,895 4,849 (540)
Interest and Dividend Income, Net 1,785 896 1,209 859 761
---------- --------- --------- --------- ---------
Income Before Provision for Income Taxes 14,641 10,367 10,104 5,708 221
Provision for Income Taxes 5,492 3,911 4,003 2,346 65
---------- ---------- ---------- --------- ---------
Net Income $ 9,149 $ 6,456 $ 6,101 $ 3,362 $ 156
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Net Income Per Common and Common Share
Equivalent - Diluted $ 1.60 $ 1.13 $ 1.09 $ 0.60 $ 0.03
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Weighted Average Number of Common and Common
Share Equivalents Outstanding - Diluted
5,701 5,716 5,619 5,588 5,415
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
BALANCE SHEET DATA AS OF MARCH 31,
--------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Working Capital:
Cash and Cash Equivalents $ 28,982 $ 13,592 $ 8,706 $ 9,035 $ 2,928
Investments, Available-For-Sale 8,068 9,177 12,532 9,153 14,469
Inventories, Net 99,429 91,745 72,297 69,356 62,451
Accounts Receivable and Other Current 70,363 62,656 65,767 42,075 28,569
Assets
Current Liabilities (150,724) (125,714) (111,680) (88,794) (70,775)
---------- --------- --------- --------- ---------
Total Working Capital $ 56,118 $ 51,456 $ 47,622 $ 40,825 $ 37,642
Total Assets $ 218,472 $ 183,501 $ 162,651 $ 133,131 $ 112,402
Debt - - - - -
Stockholders' Equity $ 67,748 $ 57,787 $ 50,971 $ 44,337 $ 41,627
Book Value Per Common Share $12.08 $10.47 $9.32 $8.22 $7.66
10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Net income for the fiscal year ended March 31, 1998 was $9,149,000, or $1.60
per share on a diluted basis, on net sales of $436,599,000. This compares to
net income of $6,456,000, or $1.13 per share, on net sales of $385,651,000
for the previous fiscal year. The 13.2 percent increase in net sales was
related to higher sales at the Company's warehouse club customers and reduced
customer returns, particularly from one of the Company's major customers. Net
sales growth was concentrated in the basic reference and children's
categories of books.
The Company experienced a 21 percent rate of returns from customers in
fiscal 1998 compared with 28 percent in fiscal 1997. To partially address the
unfavorable trends in customer returns during the past few years, the Company
implemented its Vendor Managed Inventory (VMI) replenishment system with its
two largest customers late in fiscal 1997. During the first quarter of fiscal
1998, customer return rates rose significantly as implementation of VMI
resulted in smaller initial shipments of particular titles; however, during
the remainder of the year, return rates dropped by approximately 8 to 10
percentage points from prior year levels. Consistent with the Company's
previous practices, reserves have been established based on management's best
estimate of expected future product returns.
Gross profit for fiscal 1998 reached $46,586,000, an increase of
$8,212,000 from the fiscal 1997 level. As a percentage of sales, gross profit
was 10.7 percent in fiscal 1998 compared with 10.0 percent in the previous
fiscal year. The increase in gross profit margin resulted primarily from
increased sales of basic reference and children's books, which generally
carry higher margins, and a reduced mix of best-selling novels, which
generally carry lower margins, offset by higher markdown expense associated
with non-returnable books purchased by the Company.
Distribution and administrative expenses increased to $33,730,000 for
fiscal 1998 from $28,903,000 for fiscal 1997. As a percentage of sales, these
expenses rose to 7.7 percent from 7.5 percent for the prior fiscal year.
Modestly lower distribution expenses were offset by increases in payroll and
other staff related costs to support the Company's growth initiatives and
reductions in cash discount income. In accordance with industry practice,
revenues and associated expenses related to the Company's advertising
activities are included in distribution and administrative expenses.
Interest and dividend income increased to $1,785,000 in fiscal 1998 from
$896,000 in fiscal 1997 as a result of higher investment balances. The
Company's combined federal and state statutory tax rate was approximately 39
percent. Various adjustments, primarily due to the tax benefit of a loss
carryforward on one of the Company's foreign operations as well as tax-exempt
interest income offset, in part, by foreign currency exchange losses caused
the fiscal 1998 provision for income taxes to be $5,492,000, or 37.5 percent
of pre-tax income. The fiscal 1997 provision for income taxes was 3,911,000,
or 37.7 percent of pre-tax income, primarily due to the Company's utilization
of a foreign tax loss carryforward and tax-exempt interest income.
FISCAL 1997 COMPARED TO FISCAL 1996
Net income for the fiscal year ended March 31, 1997 was $6,456,000, or $1.13
per share on a diluted basis, on net sales of $385,651,000. This compares to
net income of $6,101,000, or $1.09 per share, on net sales of $365,499,000
for the previous fiscal year. The 5.5 percent increase in net sales was
spread among the Company's warehouse club and specialty retailer customers.
Net sales increases in the warehouse clubs were negatively impacted by higher
returns, particularly from one of the Company's major customers. Net sales
increases to specialty retailers were the result of the Company's continuing
efforts to expand its customer base. Net sales growth was concentrated in the
bestseller and mass paperback categories of books.
The Company experienced a 28 percent rate of returns from customers in
fiscal 1997 compared with 24 percent in fiscal 1996. To partially address
this unfavorable trend in customer returns, the Company implemented its
Vendor Managed Inventory replenishment system with its two largest customers
late in fiscal 1997. In addition, the Company, in conjunction with certain of
its customers, is reviewing initial laydown quantities and other factors that
affect return rates. Reserves have been established based on management's
best estimate of expected future product returns.
Gross profit for fiscal 1997 reached $38,374,000, an increase of
$1,236,000 from the fiscal 1996 level. As a percentage of sales, gross profit
was 10.0 percent in fiscal 1997 compared with 10.2 percent in the previous
fiscal year. The decline in the gross profit margin resulted primarily from a
greater mix of best-selling novels and mass paperback titles, which generally
carry lower margins. Distribution and administrative expenses increased to
$28,903,000 for fiscal 1997 from $28,243,000 for fiscal 1996. As a percentage
of sales, however, these expenses declined to 7.5 percent from 7.7 percent
for the prior fiscal year. Modestly higher distribution expenses and
increases in payroll and other staff related costs were partially offset by
higher contributions to income from the Company's promotional activities and
cash discount income. As
11
previously reported, the Company anticipated a substantial reduction in cash
discount income in fiscal 1998. In accordance with industry practice,
revenues and associated expenses related to the Company's advertising
activities are included in distribution and administrative expenses.
Interest and dividend income decreased to $896,000 in fiscal 1997 from
$1,209,000 in fiscal 1996 as a result of a reduction in the Company's
investment balances, as well as lower yields due to a greater proportion of
tax-exempt investment in the current fiscal year. The Company's combined
federal and state statutory tax rate was approximately 39 percent. Various
adjustments, primarily due to the tax benefit of a loss carryforward on one
of the Company's foreign operations as well as tax-exempt interest income
offset, in part, by foreign currency exchange losses caused the fiscal 1997
provision for income taxes to be $3,911,000, or 38 percent of pre-tax income.
The fiscal 1996 provision for income taxes was $4,003,000, or 40 percent of
pre-tax income, primarily due to the Company's loss from foreign operations.
SEASONALITY
The Company's net sales and earnings in the third fiscal quarter have
historically been, and are expected to continue to be, significantly higher
than in any other quarter due to the holiday season. Income from operations
during the third fiscal quarter, as a percentage of net sales, is typically
higher than in any other quarter because of product sales mix and other
economies of scale caused by the higher sales volume. The Company expects
seasonality in its operations to continue. The Company experiences
significant seasonal short-term swings in its cash position due to sales
seasonality and to differences in timing of payments to its vendors and the
receipt of payments from its customers. Cash flow has been historically
greatest during the third fiscal quarter due to higher seasonal sales.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended March 31, 1998, $20,339,000 of cash was provided by
operating activities. In the prior year, $5,161,000 of cash was provided by
operating activities. At March 31, 1998, the Company's cash and cash
equivalents had increased by $15,390,000 compared to March 31, 1997,
primarily due to net income generated in fiscal 1998 and by increased
accounts payable. Trade accounts receivable increased $5,888,000 compared to
one year ago as a result of an increase in net sales in the latter part of
the fourth quarter. The inventory increase of $3,824,000 is in response to
increased sales activity, further development of specialty retailer
distribution programs, the timing of receipt of individual high volume titles
and the timing of returns to publishers of certain titles. These working
capital increases were more than offset by an increase in accounts payable of
$17,660,000 from levels at March 31, 1997. The working capital required to
finance inventories is directly related to inventory turnover rate and trade
credit terms provided by publishers. Trade credit terms from the Company's
vendors did not change significantly during fiscal 1998. Inventory turnover
remained consistent between years at approximately four times.
The Company had available at March 31, 1998, an unsecured bank line of
credit with a maximum borrowing limit of $10 million. The interest rate is at
the prime rate (8.5 percent at March 31, 1998). The Company did not borrow on
its line of credit during fiscal 1998 or fiscal 1997. The line of credit
expires July 31, 1999.
The Company believes that its working capital, cash flows from
operations, trade credit traditionally available from its vendors and its $10
million line of credit will be sufficient to finance its current and
anticipated level of operations. Although the Company has no commitments to
do so at the present time, the Company may consider additional strategic
acquisitions where deemed appropriate. Such acquisitions, if any, could
affect the Company's liquidity and capital resources.
IMPACT OF INFLATION
The Company has been subject to relatively low prevailing inflation rates in
all countries in which it operates, with the exception of Mexico, during
fiscal 1998, 1997 and 1996. The Company has generally been able to adjust its
selling prices in all countries in which it operates to offset increased
costs of merchandise and expects to be able to continue to do so in the
foreseeable future. While the Mexico activities are not a significant part of
the Company's overall operations, the continued high rates of inflation in
Mexico may result in future foreign currency exchange losses.
COMPUTER OPERATIONS AND THE YEAR 2000
During the current year, the Company developed a plan to address anticipated
Year 2000 issues in connection with its data processing and other activities.
It is currently estimated that the net cost for review, analysis,
modification and testing of existing computer programs for both internal and
external software will be between $400,000 and $600,000. The Company has
incurred a portion of such expenses in the current fiscal year and it is
anticipated that a substantial portion of the total estimated cost will be
incurred over the next two years and will be expensed as incurred. Although,
based on a review of its data processing, operating and other computer based
systems, the Company does not currently believe that it will experience any
significant adverse effects or material unbudgeted costs resulting therefrom,
there can be no assurance in that regard.
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. The Company desires to take advantage of the
"safe harbor" provisions of the Act.
The Company wishes to caution readers that, with the exception of
historical matters, the matters discussed in this Annual Report 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, the Company's
concentration of sales and credit risk with two customers, the Company's
ability to impact customer return rates, continued successful results from
the VMI program, currency and other risks related to foreign operations, the
Company's expansion plans, the results of financing efforts and other factors
discussed in the Company's other filings with the Securities and Exchange
Commission. Such factors could affect the Company's actual results during
fiscal 1999 and beyond and cause such results to differ materially from those
expressed in any forward-looking statement made by or on behalf of the
Company.
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 20-25
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, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
schedule to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states, in all material respects, the financial
data required to be set forth therein in relation to the basic financial
statements taken as a whole.
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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1998 in conformity with generally
accepted accounting principles.
San Diego, California
May 12, 1998
15
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND 1997
1998 1997
--------- ---------
(In Thousands)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 28,982 $ 13,592
Investments, Available-for-Sale (Note 2) 8,068 9,177
Accounts Receivable-Trade, Net of Allowances
for Uncollectible Accounts and Sales Returns
of $4,012 in 1998 and $3,782 in 1997 61,665 53,564
Vendor and Other Receivables 2,408 2,801
Inventories 99,429 91,745
Deferred Income Taxes (Note 4) 4,922 5,482
Prepaid Expenses 1,368 809
--------- ---------
TOTAL CURRENT ASSETS 206,842 177,170
PROPERTY AND EQUIPMENT, AT COST 11,964 9,206
Less: Accumulated Depreciation and Amortization 7,043 5,445
--------- ---------
NET PROPERTY AND EQUIPMENT 4,921 3,761
INVESTMENTS, AVAILABLE-FOR-SALE (Note 2) - 2,063
GOODWILL AND OTHER ASSETS (Note 8) 6,709 507
--------- ---------
TOTAL ASSETS $ 218,472 $ 183,501
--------- ---------
--------- ---------
1998 1997
--------- ---------
(In Thousands,
Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 142,203 $ 119,507
Accrued Liabilities 8,141 5,318
Income Taxes Payable 380 889
--------- ---------
TOTAL CURRENT LIABILITIES 150,724 125,714
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY (Note 7):
Common Stock $.001 Par Value, Authorized 20,000,000 Shares,
Issued: 6,328,000 Shares in 1998 and 6,228,000 Shares in 1997
Outstanding: 5,610,000 Shares in 1998 and 5,521,000 Shares in 1997 6 6
Additional Paid-In Capital 27,145 26,319
Retained Earnings 42,718 33,569
Unrealized Gain on Investments 8 9
Foreign Currency Translation Adjustment (9) (86)
Less: Treasury Stock, 718,000 Shares in 1998 and 708,000
Shares in 1997, at Cost (2,120) (2,030)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 67,748 57,787
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 218,472 $ 183,501
--------- ---------
--------- ---------
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, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
-------- -------- --------
NET SALES $436,599 $385,651 $365,499
Cost of Goods Sold 390,013 347,277 328,361
-------- -------- --------
GROSS PROFIT 46,586 38,374 37,138
Distribution and Administrative Expenses 33,730 28,903 28,243
-------- -------- --------
INCOME FROM OPERATIONS 12,856 9,471 8,895
Interest and Dividend Income, Net 1,785 896 1,209
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 14,641 10,367 10,104
Provision for Income Taxes (Note 4) 5,492 3,911 4,003
-------- -------- --------
NET INCOME $ 9,149 $ 6,456 $ 6,101
-------- -------- --------
-------- -------- --------
NET INCOME PER COMMON AND COMMON
SHARE EQUIVALENT:
Basic $1.65 $1.18 $1.12
-------- -------- --------
-------- -------- --------
Diluted $1.60 $1.13 $1.09
-------- -------- --------
-------- -------- --------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
Basic 5,559 5,480 5,424
Diluted 5,701 5,716 5,619
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, 1998, 1997 AND 1996
(IN THOUSANDS)
COMMON STOCK UNREALIZED FOREIGN
OUTSTANDING ADDITIONAL (GAIN) LOSS CURRENCY
---------------------- PAID-IN RETAINED ON TRANSLATION TREASURY
SHARES AMOUNT CAPITAL EARNINGS INVESTMENTS ADJUSTMENT STOCK TOTAL
---------- ---------- ------------ --------- ------------- ----------- --------- --------
BALANCE, March 31, 1995 5,395 $ 6 $ 25,519 $ 21,012 $ (46) $ (124) $(2,030) $ 44,337
Exercise of Options 71 - 449 - - - - 449
Unrealized Gain on Investments - - - - 54 - - 54
Foreign Currency Translation - - - - - 30 - 30
Net Income - - - 6,101 - - - 6,101
- ---------------------------- ----------- ---------- ------------ --------- ----------- ---------- --------- ---------
BALANCE, March 31, 1996 5,466 6 25,968 27,113 8 (94) (2,030) 50,971
Exercise of Options 55 351 - - - - 351
Unrealized Gain on Investments - - - - 1 - - 1
Foreign Currency Translation - - - - - 8 - 8
Net Income - - - 6,456 - - - 6,456
- ---------------------------- ----------- ---------- ------------ --------- ----------- ---------- --------- ---------
BALANCE, March 31, 1997 5,521 6 26,319 33,569 9 (86) (2,030) 57,787
Exercise of Options 99 - - - - - 826
Repurchase of Common Stock (10) - - - - - (90) (90)
Unrealized Loss on Investments - - - - (1) - - (1)
Foreign Currency Translation - - - 77 - 77
Net Income - - 9,149 - - - - 9,149
- ---------------------------- ----------- ---------- ------------ --------- ----------- ---------- --------- ---------
BALANCE, March 31, 1998 5,610 $ 6 $ 27,145 $42,718 $ 8 $ (9) $(2,120) $ 67,748
- ---------------------------- ----------- ---------- ------------ --------- ----------- ---------- --------- ---------
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, 1998, 1997 AND 1996
(IN THOUSANDS)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,149 $ 6,456 $ 6,101
Adjustments To Reconcile Net Income To Net Cash Provided
By Operating Activities:
Depreciation & Amortization 1,468 1,289 897
Provision For Uncollectible Accounts and Sales Returns 765 749 1,922
Deferred Income Taxes 560 (203) (2,168)
Provision For Markdown of Inventories 4,611 2,979 3,976
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable-Trade (6,653) 3,343 (22,529)
(Increase) Decrease in Vendor and Other Receivables 396 (588) (547)
Increase in Inventories (8,435) (22,587) (6,823)
(Increase) in Other Assets (591) (460) (361)
Increase in Accounts Payable 17,660 15,022 19,335
Increase in Accrued Liabilities 2,072 16 2,341
Increase (Decrease) in Income Taxes Payable (663) (855) 1,140
-------- -------- --------
Net Cash Provided By Operating Activities 20,339 5,161 3,284
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Aura Books, PLC:
Accounts Receivable (2,051) - -
Inventory (3,704) - -
Prepaid Expenses (330) - -
Property and Equipment (546) - -
Goodwill (5,840) - -
Accounts Payable 4,820 - -
Accrued Liabilities 753 - -
Income Taxes Payable 149 - -
-------- -------- --------
Net Cash Used in Acquisition (6,749) - -
Purchase/Disposal of Property and Equipment, Net (2,082) (1,982) (1,644)
Purchase of Investments, Available-For-Sale (12,093) (8,672) (31,535)
Sale and Redemption of Investments, Available-For-Sale 15,264 9,965 29,222
Net Cash Used In Investing Activities (5,660) (689) (3,957)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Exercise of Options and Related Tax Benefit 826 351 449
Purchase of Treasury Stock (90) - -
-------- -------- --------
Net Cash Provided By Financing Activities 736 351 449
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (25) 63 (105)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,390 4,886 (329)
CASH AND CASH EQUIVALENTS, Beginning of Year 13,592 8,706 9,035
CASH AND CASH EQUIVALENTS, End of Year $ 28,982 $ 13,592 $ 8,706
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid During the Year For:
Income Taxes $ 5,093 $ 4,887 $ 4,927
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, (the "Company")
distributes general interest, computer and business books and books on tape
to the membership warehouse club industry and other specialty retailers. The
Company established subsidiaries in Mexico and the United Kingdom to
distribute similar media products including music (U.K. only).
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Cash equivalents consist
principally of money market funds and short-term municipal instruments as of
March 31, 1998 and principally of money market funds as of March 31, 1997.
INVESTMENTS, AVAILABLE-FOR-SALE
Investments, available-for-sale consist principally of highly rated corporate
and municipal bonds. The Company accounts for its investments in accordance
with Statement of Financial Accounting Standards No. 115 which requires the
use of fair value accounting for debt and equity securities, except in those
cases where there is a positive intent and ability to hold debt securities to
maturity. See Note 2.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt and equity instruments of
financial institutions and corporations with strong credit ratings. The
Company has established guidelines relative to diversification and maturities
that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest
rates. Approximately 84 and 80 percent of the Company's accounts receivable
balances at March 31, 1998 and 1997, respectively, were concentrated with two
major customers in the warehouse club industry.
ACCOUNTS RECEIVABLE ALLOWANCES
In accordance with industry practice, a significant portion of the Company's
products are sold to customers with the right of return. On approximately 90
percent of the Company's purchases, the Company has the right to return
unsold product to publishers. The Company has provided allowances of
$2,334,000 and $2,035,000 as of March 31, 1998 and 1997, respectively, for
the gross profit effect of estimated future sales returns after considering
historical results and evaluating current conditions. The Company has also
provided allowances for uncollectible trade accounts receivable of $1,678,000
and $1,747,000 as of March 31, 1998 and 1997, respectively.
20
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 and video cassettes purchased for resale and
are stated at the lower of cost (first-in, first-out) or market. The
Company's rights to return to publishers were limited or nonexistent on
approximately 24 and 26 percent of the Company's inventories at March 31,
1998 and 1997, 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.
LONG-LIVED ASSETS
On a regular basis, the Company evaluates and assesses its assets for
impairment under the guidelines of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for Long-Lived Assets and for
Long-Lived Assets to be Disposed of," and makes appropriate adjustments when
an asset is deemed to be impaired. In performing this analysis, the Company
estimates 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 the Company is derived from a
limited number of customers. Taking into account domestic and international
activities, the Company's two largest customers accounted for 44 and 40
percent of net sales in fiscal 1998, 46 and 37 percent of net sales in fiscal
1997 and 42 and 43 percent of net sales in fiscal 1996. No other customers
accounted for 10 percent or more of the Company's net sales during these
years.
REVENUE RECOGNITION
Sales and related cost of sales are recognized upon delivery of merchandise
to customer locations. The Company provides reserves for the effect of
estimated future sales returns. In accordance with industry practice,
revenues and associated expenses related to the Company's advertising
activities are included in Distribution and Administrative Expenses.
INCOME TAXES
The Company provides 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 4.
PER SHARE INFORMATION
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share," which has been adopted by the Company. The
statement specifies the computation, presentation and disclosure requirements
for earnings per share ("EPS"), and is effective for periods ending after
December 15, 1997. Prior year per share information is presented in
accordance with the statement. The following data summarize information
relating to the per share computations (in thousands, except per share data):
YEARS ENDED MARCH 31,
--------------------------------
1998 1997 1996
------ ------ ------
Net Income $9,149 $6,456 $6,101
------ ------ ------
------ ------ ------
Weighted Average Common Shares Outstanding 5,559 5,480 5,424
------ ------ ------
Basic Earnings Per Share $ 1.65 $ 1.18 $ 1.12
------ ------ ------
------ ------ ------
Weighted Average Common Shares Outstanding 5,559 5,480 5,424
Common Stock Options Granted 142 236 195
------ ------ ------
Total Weighted Average Common Shares and Equivalents 5,701 5,716 5,619
------ ------ ------
Diluted Earnings Per Share $ 1.60 $ 1.13 $ 1.09
------ ------ ------
------ ------ ------
21
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997 and
establishes standards for reporting and display of comprehensive income and
its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company will adopt SFAS No. 130 in
its fiscal year 1999. Management believes the adoption of SFAS No. 130 will
not have a material effect on its consolidated financial statements.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which, based on the management approach to segment reporting,
establishes requirements to report entity-wide disclosures about products and
services, major customers and material countries in which the entity holds
assets and reports revenue. SFAS requires limited segment data on a quarterly
basis. The Company will adopt SFAS No. 131 in the first quarter of fiscal
year 1999. Management believes the adoption of SFAS No. 131 will not have a
material effect on its consolidated financial statements.
2. INVESTMENTS, AVAILABLE-FOR-SALE
Investments, available-for-sale at March 31, 1998 and 1997 are as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1998 Cost Gains Losses Fair Value
- -------------- --------- ---------- ---------- ----------
Debt Securities Issued by States of the
U.S. and Political Subdivisions of the States $ 8,060 $ 8 $ - $ 8,068
March 31, 1997
- --------------
Debt Securities Issued by States of the
U.S. and Political Subdivisions of the States $11,231 $10 $ 1 $11,240
Investments in debt securities issued by States of the U.S. and political
subdivisions of the States as of March 31, 1998 in the amount of
approximately $8,068,000 are scheduled to mature within one year. Proceeds
from the sale of investments aggregated approximately $5,073,000 for year
ended March 31, 1998. The realized net gain on these sales totaled
approximately $73,000. Proceeds from the sale of investments during the same
period of the previous year totaled approximately $4,438,000 on which a net
gain of approximately $3,000 was realized. The Company uses the specific
identification method in determining cost on these investments.
3. LINE OF CREDIT
The Company had available at March 31, 1998 and 1997 an unsecured bank line
of credit with a maximum borrowing limit of $10 million. The interest rate is
at prime (8.5 percent at March 31, 1998 and 1997). The line of credit expires
July 31, 1999. As of and during the years ended March 31, 1998 and 1997,
there were no borrowings on the Company's line of credit.
4. INCOME TAXES
The components of the provision for income taxes are as follows (in thousands):
YEARS ENDED MARCH 31,
-----------------------------------
1998 1997 1996
------ ------- -------
CURRENT:
Federal $3,990 $3,348 $ 5,034
State 941 767 1,137
DEFERRED:
Federal 458 (167) (1,775)
State 103 (37) (393)
------ ------ -------
$5,492 $3,911 $ 4,003
------ ------ -------
------ ------ -------
22
A reconciliation of the provision for income taxes at the statutory federal
income tax rate of 34 percent to the effective tax provision as reported is
as follows (in thousands):
YEARS ENDED MARCH 31,
-------------------------------------
1998 1997 1996
------ ------ ------
Taxes at Statutory Federal Rate $4,978 $3,525 $3,435
State Income Taxes, Net of Federal Benefit 676 480 470
Tax-Exempt Interest and Dividend Income (318) (129) (102)
Loss on Foreign Operations 64 14 186
Other 92 21 14
------ ------ ------
$5,492 $3,911 $4,003
------ ------ ------
------ ------ ------
The temporary differences which give rise to the deferred tax assets as of
March 31, 1998 and 1997 are as follows (in thousands):
AS OF MARCH 31,
-------------------
1998 1997
------ ------
Inventory Reserves $2,680 $2,653
Allowances for Sales Returns and Uncollectible Accounts 1,126 1,184
Depreciation and Amortization 79 218
Vacation Pay and Accrued Compensation 93 59
Accounts Payable Accruals 861 1,247
Other 83 121
------ ------
$4,922 $5,482
------ ------
------ ------
5. COMMITMENTS
The Company leases its facilities and certain equipment under non-cancelable
operating leases. Rental expense for the years ended March 31, 1998, 1997 and
1996 was $3,115,000, $2,998,000 and $2,834,000 respectively. The leases have
initial expiration dates ranging from 1998 to 2008. Certain of the leases
contain renewal options, termination options and periodic adjustment of the
minimum monthly rental payment based upon increases in the Consumer Price
Index.
At March 31, 1998, the aggregate future minimum rentals are as follows (in
thousands):
YEAR ENDING MARCH 31, AMOUNT
- ----------------------------------------
1999 $ 3,817
2000 3,804
2001 2,807
2002 2,640
2003 2,485
Thereafter 10,504
- ----------------------------------------
$26,057
6. EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) profit-sharing plan covering substantially
all of its employees. The Company matches, at a 25 percent rate, employee
contributions up to 4 percent of compensation. In fiscal years 1998, 1997 and
1996, the Company's matching contributions equaled $74,000, $71,000 and
$45,000, respectively. The plan also provides for discretionary Company
contributions as approved by the Board of Directors. Company discretionary
contributions of $357,000, $262,000 and $251,000 for the years ended March
31, 1998, 1997 and 1996, respectively, are included in the accompanying
statements of income.
On March 1, 1996, the Company introduced a deferred compensation plan
which permits eligible employees and officers to defer a portion of their
compensation and requires the Company to provide certain matching amounts and
accrued interest as defined in the plan. The deferred compensation liability,
including company matching and accumulated interest, amounted to
approximately $583,000 at March 31, 1998. The deferred compensation plan is
funded under a trust agreement whereby the Company pays 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 $132,000 for fiscal 1998 and $92,000 for fiscal
1997.
23
7. STOCK OPTION PLANS
The Company has two stock option plans (the "Plans") which provide for the
grant of incentive stock options or nonqualified stock options to employees
and directors of the Company. Nonemployee directors are only eligible to be
granted nonqualified stock options. Incentive stock options may be granted at
prices not less than 100 percent of the fair market value of such shares at
the date of grant (110 percent with respect to optionees who are 10 percent
or more stockholders of the Company). 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 676,000
shares issuable under the 1987 Plan and are 400,000 shares issuable under the
1995 Plan. The expiration date of the options is determined by the Board of
Directors and does not exceed 10 years for incentive options (5 years with
respect to optionees who are 10 percent or more stockholders of the Company)
and 10 years and 1 day for nonqualified options. As of March 31, 1997, no
further options may be granted under the 1987 Plan.
The Company has 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 1998, 1997 and 1996, the
Company's net income and earnings per share would have been reduced
approximately $132,000, or $.02 per share, and approximately $85,000, or $.01
per share, in fiscal 1998 and 1997, respectively. The impact on net income
for fiscal 1996 would not have been material. 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 1998 and 1997, respectively: expected volatility of 37 and 45
percent; risk-free interest rate of 6.2 and 6.5 percent; expected option life
of 5 years; and no dividend yield.
The changes in the number of common shares under option for the years
ended March 31, 1996, 1997 and 1998 are summarized as follows:
1995 PLAN 1987 PLAN
----------------------- ------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OF SHARES AVG. PRICE OF SHARES AVG. PRICE
--------- ---------- --------- ----------
Outstanding as of March 31, 1995 150,000 $ 5.42 354,910 $ 4.60
Granted 81,500 11.16 39,500 9.18
Exercised - - 70,920 4.52
Forfeited - - 13,700 5.09
- ----------------------------------------------------------------------------------------
Outstanding as of March 31, 1996 231,500 7.44 309,790 5.18
Granted 11,500 8.94 - -
Exercised - - 54,300 5.00
Forfeited 13,000 11.16 1,400 5.02
- ----------------------------------------------------------------------------------------
Outstanding as of March 31, 1997 230,000 7.31 254,090 5.22
Granted 109,500 9.26 - -
Exercised 2,700 11.16 96,740 4.23
Forfeited 3,600 11.16 13,200 9.42
- ----------------------------------------------------------------------------------------
Outstanding as of March 31, 1998 333,200 $ 7.87 144,150 $ 5.52
Exercisable as of March 31, 1998 115,800 $ 6.65 99,450 $ 5.28
8. ACQUISITION OF AURA BOOKS, PLC
In March 1998, the Company acquired the assets and assumed the liabilities of
the wholesale distribution business of Aura Books, PLC ("Aura") 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.
The acquisition has been accounted for as a purchase and, accordingly,
the assets acquired and the liabilities assumed from Aura have been recorded
in the accompanying consolidated balance sheet as of March 31, 1998 at their
estimated fair value at the date of acquisition. The excess of the purchase
price over the net assets acquired of approximately $5.8 million is being
amortized over 25 years. The operating results of Aura have not been included
in the accompanying consolidated statement of income for the year ended March
31, 1998 as it is the Company's policy to include the operating results of
its foreign subsidiaries as of February 28. The operating results will be
included in the consolidated statements of income in future periods.
24
The following unaudited pro forma consolidated results of operations for
the years ended March 31, 1998 and 1997, assume the Aura acquisition occurred
as of April 1, 1996. 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 1997.
(UNAUDITED)
AS OF MARCH 31,
------------------------------------
1998 1997
--------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Sales $458,037 $405,270
Net Income 9,452 6,515
Earnings Per Share:
Basic $ 1.70 $ 1.19
Diluted $ 1.66 $ 1.14
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTERS (YEARS ENDED MARCH 31)
---------------------------------------------------
1ST 2ND 3RD 4TH
---------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 Common and Common Share Equivalent:
Basic $ .26 $ .34 $ .82 $ .23
Diluted $ .25 $ .33 $ .80 $ .22
Weighted Average Number of
Common and Common Share Equivalents Outstanding:
Basic 5,518 5,543 5,577 5,598
Diluted 5,697 5,672 5,729 5,768
- ------------------------------------------------------------------------------------------------------------
FISCAL 1997
Net Sales $97,797 $87,939 $112,965 $ 86,950
Cost of Sales 88,612 78,758 101,508 78,399
Net Income 1,227 1,699 2,866 664
Net Income Per Common and Common Share Equivalent:
Basic $ .22 $ .31 $ .52 $ .12
Diluted $ .21 $ .30 $ .50 $ .12
Weighted Average Number of
Common and Common Share Equivalents Outstanding:
Basic 5,468 5,471 5,481 5,501
Diluted 5,746 5,715 5,692 5,604
- ------------------------------------------------------------------------------------------------------------
FISCAL 1996
Net Sales $76,040 $90,318 $121,396 $ 77,745
Cost of Sales 68,639 81,604 109,014 69,104
Net Income 754 1,765 2,904 678
Net Income Per Common and Common Share Equivalent:
Basic $ .14 $ .33 $ .53 $ .12
Diluted $ .14 $ .32 $ .52 $ .12
Weighted Average Number of
Common and Common Share Equivalents Outstanding:
Basic 5,398 5,410 5,429 5,458
Diluted 5,519 5,568 5,637 5,700
- ------------------------------------------------------------------------------------------------------------
25
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 19, 1998.
26
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 filed March 27, 1998 -- Item 5.
(c) Exhibits
3.1 Registrant's Certificate of Incorporation, as amended. (1)
3.2 Registrant's Bylaws, as amended. (1)
10.1 1987 Stock Option Plan (2)
10.2 Employee Profit-Sharing Plan (3)
10.3 1995 Stock Option Plan (4)
11.0 Statement re Computation of Per Share Earnings
21.0 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27.0 Financial Data Schedule
(d) The required financial statement schedules are listed on the
Index to Schedule to Consolidated Financial Statements
included herein.
- -----------------------------
(1) Incorporated by reference to Registrant's Report on Form 8-K
(File No. 0-16002) for July 25, 1991, as filed on October 18,
1991.
(2) Incorporated by reference to Registrant's Annual Report on
Form 10-K (File No. 0-16002) for the fiscal year ended March
31, 1992, as filed on June 26, 1992.
(3) Incorporated by reference to Registrant's Registration Statement on
Form S-1 (File No. 33-14596) filed on May 28, 1987.
(4) Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 333-01155 filed on February 22, 1996.)
27
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 24, 1998 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 24, 1998 By: /s/ Charles C. Tillinghast, III
-------------------------------
Charles C. Tillinghast, III
Chairman of the Board and Director
Date: June 24, 1998 By: /s/ Michael M. Nicita
---------------------
Michael M. Nicita
Chief Executive Officer and Director
(Principal Executive, Financial and
Accounting Officer)
Date: June 24, 1998 By: /s/ Loren C. Paulsen
--------------------
Loren C. Paulsen
Director
Date: June 24, 1998 By: /s/ James A. Leidich
--------------------
James A. Leidich
Director
Date: June 24, 1998 By: /s/ E. William Swanson, Jr.
---------------------------
E. William Swanson, Jr.
Director
Date: June 24, 1998 By: /s/ Trygve E. Myhren
--------------------
Trygve E. Myhren
Director
Date: June 24, 1998 By: /s/ Lynn S. Dawson
------------------
Lynn S. Dawson
Director
Date: June 24, 1998 By: /s/ Robert F. Bartlett
----------------------
Robert F. Bartlett
Director
28
ADVANCED MARKETING SERVICES, INC.
INDEX TO SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Schedule:
II Valuation and Qualifying Accounts 30
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.
29
SCHEDULE II
ADVANCED MARKETING SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(In Thousands)
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED END OF
OF PERIOD TO INCOME DEDUCTIONS PERIOD
---------- --------- ---------- ---------
1996
Allowance for
uncollectible accounts
and sales returns $2,532 $2,049 $ 408 $4,173
------ ------ ------ ------
------ ------ ------ ------
Reserve for
markdown of inventory $4,904 $4,010 $3,027 $5,887
------ ------ ------ ------
------ ------ ------ ------
1997
Allowance for
uncollectible accounts
and sales returns $4,173 $ 989 $1,380 $3,782
------ ------ ------ ------
------ ------ ------ ------
Reserve for
markdown of inventory $5,887 $2,983 $3,187 $5,683
------ ------ ------ ------
------ ------ ------ ------
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
------ ------ ------ ------
------ ------ ------ ------
30