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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
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-16002
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 : (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 June 9, 1999 was $84,359,790.
The number of shares of the Registrant's Common Stock outstanding as of
June 9, 1999 was 8,533,079.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its July
22, 1999 Annual Meeting of Stockholders (filed June 17, 1999) 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, the United Kingdom, and certain Pacific Rim countries.
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 specialty 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 1999, the Company acquired
Metrastock Limited, 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, San Diego, California 92121; telephone (858)
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 $50 billion in 1998.
The following table summarizes the Company's 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
-------- ------------ ------
1992 514 479
1993 646 571
1994 716 596
1995 742 592
1996 755 743
1997 786 776
1998 807 799
1999 832 822
(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 47 warehouse club locations in Mexico, 7 in
the U.K. and ships a limited amount of product to 24 warehouse club locations
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 in 1998,
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 children's education and book businesses. In fiscal 1999, the Company began
to develop relationships with internet book retailers and now provides product
on a limited basis to several internet book retailers.
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 within their own organizations.
3
RETAILING OPERATIONS
As of March 31, 1999, the Company owned and operated 6 retail outlet
stores in six states. The stores are located generally in factory outlet malls
in Gilroy, California; Burlington, Washington; Silverthorne, Colorado; Birch
Run, Michigan; Lee, Massachusetts; and Phoenix, Arizona. The retail outlets were
originally established as cost recovery vehicles for non-returnable residual
product from the Company's purchasing and publishing activities.
In fiscal 1998, the Company continued its effort to increase the
efficiency of the disposition of non-returnable product and began to utilize a
small team of associates dedicated to just selling the remainder product. Based
on the success of this relatively low cost, low overhead effort, management
decided to phase out the retail stores. Management's estimate of the
non-recurring costs associated with exiting the retail operations was
approximately $1,000,000 which was included in distribution and administrative
costs for the fiscal 1999 third quarter. As of March 31, 1999, the Company had
successfully negotiated lease terminations for all stores remaining open at
year-end. The costs incurred related to lease cancellations have been charged to
the reserve and as of March 31, 1999, the Company believes that the reserve is
adequate to cover all costs associated with exiting its retail operations.
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.
PRODUCTION 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 8 general merchandise managers and a staff of approximately 27
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.
4
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 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 1999 and 1998 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 the years ended March 31, 1999, 1998 and 1997, customer returns
represented approximately 20%, 21%, and 28%, 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 26%, 27%, and 31%, 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 $1,072,000 in fiscal 1999. The Company added $4,714,000 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 $3,642,000 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, 1999, the Company made
purchases from 291 publishers. Five publishers individually accounted for 10% or
more of the Company's total purchases in fiscal 1999. These included Penguin
Putnam, Inc., Random House, Bantam Doubleday Dell, Simon & Schuster Macmillan,
and Little Brown and Company, which accounted for 15%, 14%, 12%, 11%, and 10%,
respectively, of purchases. The Company continues to open accounts with new
publishers and believes that adequate sources of supply exist to meet
anticipated growth. As is customary in the industry, the Company does not
maintain long-term or exclusive purchase commitments or arrangements with any
publisher.
PRODUCT DEVELOPMENT AND MARKETING SERVICES
In addition to selecting from among regularly published books, AMS
provides specially packaged book and book-related products, which are generally
not available in retail bookstores. For example, the Company works with various
publishers to create specially packaged items such as 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. 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 8 general managers and a staff of 21 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 enable
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. These forecasts, coupled with customer point
of sale information, enable 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. Advanced Marketing (UK) Limited also services 37 other
specialty retail locations and continues its efforts to expand its
distribution of media products to other U.K. retailers.
Aura Books, PLC, acquired in March 1998, is a U.K. wholesale book
distributor to non-traditional markets such as garden centers, gift shops,
department stores and other specialty retail outlets. Headquartered outside of
London, Aura services approximately 2,000 locations throughout the United
Kingdom.
Consistent with the Company's strategic desire to grow internally as
well as through opportunistic acquisitions, in March 1999, the Company,
through its European holding company Advanced Marketing (Europe), Ltd.,
acquired the assets and assumed the liabilities of Metrastock Limited
("Metrastock"). Headquartered on the southern coast of the United Kingdom,
Metrastock is a U.K. wholesale book distributor to non-traditional markets
such as garden centers, gift shops, other specialty retail outlets. The
Metrastock acquisition continues to reinforce the Company's existing
commitment to the U.K. market.
In fiscal 1999, the Company entered into a build-to-suit lease
arrangement for an expandable 74,000-square-foot warehouse in Bicester,
Oxfordshire, in order to integrate Advanced Marketing Ltd., Aura Books, PLC, and
Metrastock Ltd. into one facility. The Company plans to have all three
subsidiaries fully operational in the new facility by the end of the summer
1999.
6
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 47 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.
During fiscal 1999, 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 1997,
1998 and 1999.
The Company currently utilizes third party warehousing and
distribution companies in both the United Kingdom and Mexico (see
"Properties"). 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 2000.
RISKS AND COMPETITION
In fiscal 1999, approximately 86% 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, 1999, two warehouse club customers accounted for
approximately 77% 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 that indirectly
affect 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
utilizes a small team of associates dedicated to selling such remainder product.
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.
7
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 900 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 1999, 1998 and 1997.
Percentage of Net Sales
-----------------------------------------
1999 1998 1997
---- ---- ----
Costco Companies, Inc. 40% 44% 46%
SAM's Club (a unit of Wal-Mart Stores, Inc.) 37% 40% 37%
EMPLOYEES
At March 31, 1999, the Company had approximately 491 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 $698,000.
The Company maintains the following U.S. distribution centers from which it
ships to its 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 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. The Company currently 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. 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 $287,000. In fiscal 1999, the
Company entered into a build-to-suit lease arrangement for an expandable
74,000-square-foot warehouse in Bicester, Oxfordshire, in order to integrate
Advanced Marketing Ltd., Aura Books, PLC, and Metrastock Ltd. into one
facility. The Company plans to have all three subsidiaries fully operational
in the new facility by the end of the summer 1999. The lease is for a 15-year
term expiring in 2014 with an annual base rent of $678,000. See Note 6 of
Notes to Consolidated Financial Statements. The Company believes that its
distribution centers are adequate for the conduct of its business through at
least fiscal 2000.
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, 1999.
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, 1999, the Company had approximately 1,800 beneficial stockholders
and 100 stockholders of record.
Fiscal Quarter Fiscal 1999 Fiscal 1998
- ----------------------------------------------------------------------------------------------------
High Low High Low
---- --- ---- ---
First Quarter-Ended June 27/June 28 13 9/16 10 5/8 7 1/16 5 3/4
Second Quarter-Ended September 26/September 27 12 1/2 10 3/8 9 1/3 6 1/2
Third Quarter-Ended December 26/December 27 12 1/3 10 13/16 9 9/16 8
Fourth Quarter-Ended March 31 17 3/4 11 5/8 13 13/16 7 15/16
In May 1998, the Company announced its Board of Directors' intent to
declare and pay dividends on the Company's Common Stock at an annual rate of
$0.10 per share. On January 21, 1999, the Company announced that its Board of
Directors had approved the declaration of a three for two stock split effective
February 15, 1999. All references to shares included in this document have been
restated to reflect the three for two stock split. In accordance with the stock
split, the annual dividend was adjusted to $.067 per share. In May 1999, the
Company announced that its Board of Directors increased the dividend to the
current annual rate of $.08 per share. 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. The determination
as to the payment of dividends will depend upon, among other things, general
business conditions, 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 the Board of
Directors may deem relevant.
On June 9, 1999, the Company adopted a stock repurchase program
pursuant to which the Company may repurchase in open market transactions, from
time to time, based upon existing market conditions, shares of its Common Stock
having an aggregate cost not to exceed $5 million. To date, the Company has not
repurchased any shares of its Common Stock pursuant to the stock 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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31,
- --------------------- ---------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
NET SALES $ 501,071 $ 436,599 $ 385,651 $ 365,499 $ 303,708
Cost of Goods Sold 440,048 390,013 347,277 328,361 274,776
--------- --------- --------- --------- ---------
GROSS PROFIT 61,023 46,586 38,374 37,138 28,932
Distribution and Administrative Expenses 41,602 33,730 28,903 28,243 24,083
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS 19,421 12,856 9,471 8,895 4,849
Interest and Dividend Income, Net 1,270 1,785 896 1,209 859
--------- --------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 20,691 14,641 10,367 10,104 5,708
Provision for Income Taxes 8,178 5,492 3,911 4,003 2,346
--------- --------- --------- --------- ---------
NET INCOME $ 12,513 $ 9,149 $ 6,456 $ 6,101 $ 3,362
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net Income Per Share-Diluted $ 1.43 $ 1.07 $ .75 $ .72 $ 0.40
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted Average Shares Used in
Calculation-Diluted 8,752 8,551 8,574 8,429 8,382
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA AS OF MARCH 31,
- ------------------ ---------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
WORKING CAPITAL:
Cash and Cash Equivalents $ 27,189 $ 28,982 $ 13,592 $ 8,706 $ 9,035
Investments, Available-For-Sale 4,653 8,068 9,177 12,532 9,153
Inventories, Net 106,060 99,429 91,745 72,297 69,356
Accounts Receivable and Other Current 85,374 70,363 62,656 65,767 42,075
Assets
Current Liabilities (157,994) (150,724) (125,714) (111,680) (88,794)
--------- --------- --------- --------- ---------
Total Working Capital $ 65,282 $ 56,118 $ 51,456 $ 47,622 $ 40,825
TOTAL ASSETS $ 238,396 $ 218,472 $ 183,501 $ 162,651 $ 133,131
DEBT - - - - -
STOCKHOLDERS' EQUITY $ 80,402 $ 67,748 $ 57,787 $ 50,971 $ 44,337
BOOK VALUE PER COMMON SHARE $ 9.46 $ 8.05 $ 6.98 $ 6.22 $ 5.48
10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Net income for the fiscal year ended March 31, 1999 was $12,513,000, or
$1.43 per share on a diluted basis, on net sales of $501,071,000. This compares
to net income of $9,149,000, or $1.07 per 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 the Company's U.K. subsidiary, Aura Books, PLC,
acquired in March 1998.
The Company experienced a 20 percent rate of returns from customers in
fiscal 1999 compared with 21 percent in fiscal 1998. 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 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 the Company's
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 reflects the addition of Aura Books, PLC as well as
non-recurring costs associated with exiting the Company's retail activities. The
retail outlets were originally established as cost recovery vehicles for
non-returnable residual product from the Company's purchasing and publishing
activities. In fiscal 1998, the Company continued its effort 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 are 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 (see "Liquidity and Capital Resources"). The Company's 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 the Company's
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 the
Company's foreign operations as well as tax-exempt interest income offset, in
part, by foreign currency exchange losses.
FISCAL 1998 COMPARED TO FISCAL 1997
Net income for the fiscal year ended March 31, 1998 was $9,149,000, or
$1.07 per share on a diluted basis, on net sales of $436,599,000. This compares
to net income of $6,456,000, or $.75 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.
11
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.
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, 1999, $34,000 of cash was provided by
operating activities. In the prior year, $20,339,000 of cash was provided by
operating activities. At March 31, 1999, the Company's cash and investments had
decreased by $5,208,000 compared to March 31, 1998, primarily due to an increase
in accounts receivable and, to a lesser extent, an increase in net investment in
inventory as well as the acquisition and funding of the Company's foreign
subsidiaries. Trade accounts receivable increased $12,514,000 compared to one
year ago primarily due to the timing of customer returns and settlement of
disputed items, as well as an increase in net sales in the latter part of the
fourth quarter. Inventories at March 31, 1999 increased $6,631,000 compared to
March 31, 1998, due in part to increased sales activity, further development of
specialty retailer distribution programs 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 the Company's vendors did not change
significantly during fiscal 1999. Inventory turnover remained consistent between
years at approximately four times.
The Company had available at March 31, 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. The Company did not borrow on its line of credit during
fiscal 1999 or fiscal 1998.
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 1999, 1998 and 1997. 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.
12
COMPUTER OPERATIONS AND THE YEAR 2000
During fiscal 1998 and fiscal 1999, the Company developed a plan to
address anticipated Year 2000 issues in connection with its 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 the Company has primarily employed outside
consultants for Year 2000 related work, there has not been any deferral of other
information technology related projects, nor has there been a requirement to
hire additional personnel solely for Year 2000 compliance issues.
The Company completed the remediation portion of the Year 2000 project
and began its internal testing phase in the fourth quarter of fiscal 1999. It is
expected that the final testing phase of the Year 2000 project will be completed
by August 1999. Although there can be no assurances, management believes that
the Year 2000 Project, including a documented contingency plan, will be
completed by September 1999.
In contemplation of the possibility that the Company's vendors and
customers may experience Year 2000 related difficulties that may affect the
Company's operations, a committee of information technology and other
departmental managers has been formed to consider and develop a contingency
plan. This committee began its development of a contingency plan in the fourth
quarter of fiscal 1999, and it is expected that the documentation of such a plan
will be completed by July 1999. 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.
The failure to correct a material Year 2000 problem could result in an
interruption in or a failure of certain normal activities or operations. Such
interruptions or failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Because there is
general uncertainty about the Year 2000 problem, including uncertainty about the
Year 2000 readiness of suppliers and customers, it is not possible to predict
whether Year 2000 problems will occur or what the consequences such problems
will have on results of operations, liquidity, or financial condition. However,
the Company's plan to address Year 2000 issues is intended to minimize, to the
extent feasible, the possibility of interruptions of normal operations. There
can, however, be no assurance that the Company will be successful in doing so.
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, risks and uncertainties
associated with the failure of the Company or its suppliers or customers to be
Year 2000 compliant with regard to computer and other systems, 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
2000 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 and Comprehensive Income 17
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20-27
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, 1999 and 1998, and the related consolidated statements of income
and comprehensive income, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Marketing
Services, Inc. and subsidiaries as of March 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1999 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
schedule to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic 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
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Diego, California
May 5, 1999
15
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 27,189 $ 28,982
Investments, Available-for-Sale (Note 3) 4,653 8,068
Accounts Receivable-Trade, Net of Allowances
For Uncollectible Accounts and Sales Returns
Of $3,674 in 1999 and $4,012 in 1998 74,179 61,665
Vendor and Other Receivables 3,739 2,408
Inventories, Net 106,060 99,429
Deferred Income Taxes (Note 5) 5,997 4,922
Prepaid Expenses 1,459 1,368
---------- ----------
TOTAL CURRENT ASSETS 223,276 206,842
PROPERTY AND EQUIPMENT, AT COST 15,311 11,964
Less: Accumulated Depreciation and Amortization 8,721 7,043
---------- ----------
NET PROPERTY AND EQUIPMENT 6,590 4,921
INVESTMENTS, AVAILABLE-FOR-SALE (Note 3) 1,214 -
GOODWILL AND OTHER ASSETS (Note 9) 7,316 6,709
---------- ----------
TOTAL ASSETS $ 238,396 $ 218,472
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 146,972 $ 142,203
Accrued Liabilities 10,033 8,141
Income Taxes Payable 989 380
---------- ----------
TOTAL CURRENT LIABILITIES 157,994 150,724
---------- ----------
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY (Note 8):
Common Stock $.001 Par Value, Authorized 20,000,000 Shares,
Issued: 9,572,000 Shares in 1999 and 9,491,000 Shares in 1998.
Outstanding: 8,496,000 Shares in 1999 and 8,415,000 Shares in 1998 8 8
Additional Paid-In Capital 27,765 27,143
Retained Earnings 54,664 42,718
Unrealized Gain on Investments 7 8
Foreign Currency Translation Adjustment 78 (9)
Less: Treasury Stock, 1,076,000 Shares in 1999 and 1998, at Cost (2,120) (2,120)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 80,402 67,748
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 238,396 $ 218,472
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated balance
sheets.
16
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
---- ---- ----
NET SALES $ 501,071 $ 436,599 $ 385,651
Cost of Goods Sold 440,048 390,013 347,277
---------- ---------- ----------
GROSS PROFIT 61,023 46,586 38,374
Distribution and Administrative Expenses 41,602 33,730 28,903
---------- ---------- ----------
INCOME FROM OPERATIONS 19,421 12,856 9,471
Interest and Dividend Income, Net 1,270 1,785 896
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 20,691 14,641 10,367
Provision for Income Taxes (Note 5) 8,178 5,492 3,911
---------- ---------- ----------
NET INCOME $ 12,513 $ 9,149 $ 6,456
---------- ---------- ----------
COMPONENTS OF COMPREHENSIVE INCOME
Foreign Currency Translation Adjustments 87 77 8
Unrealized Gain (Loss) on Investments (1) (1) 1
---------- ---------- ----------
COMPREHENSIVE INCOME $ 12,599 $ 9,225 $ 6,465
---------- ---------- ----------
---------- ---------- ----------
NET INCOME PER SHARE:
Basic $ 1.48 $ 1.10 $ .79
---------- ---------- ----------
---------- ---------- ----------
Diluted $ 1.43 $ 1.07 $ .75
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE SHARES USED IN CALCULATION:
Basic 8,452 8,339 8,220
Diluted 8,752 8,551 8,574
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, 1999, 1998 AND 1997
(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, 1996
AS PREVIOUSLY REPORTED 5,466 $ 6 $ 25,968 $ 27,113 $ 8 $ (94) $ (2,030) $ 50,971
Three For Two Common
Stock Split 2,733 2 (2) - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31,
1996 AS ADJUSTED 8,199 8 25,966 27,113 8 (94) (2,030) 50,971
Exercise of Options 82 - 351 - - - - 351
Unrealized Gain on Investments - - - - 1 - - 1
Foreign Currency Translation - - - - - 8 - 8
Net Income - - - 6,456 - - - 6,456
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 8,281 8 26,317 33,569 9 (86) (2,030) 57,787
Exercise of Options 149 - 826 - - - - 826
Repurchase of Common Stock (15) - - - - - (90) (90)
Unrealized Loss on Investments - - - - (1) - - (1)
Foreign Currency Translation - - - - - 77 - 77
Net Income - - - 9,149 - - - 9,149
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 8,415 8 27,143 42,718 8 (9) (2,120) 67,748
Exercise of Options 78 - 595 - - - - 595
Employee Stock Purchase Plan 3 - 27 - - - - 27
Unrealized Loss on Investments - - - - (1) - - (1)
Foreign Currency Translation - - - - - 87 - 87
Cash Dividends - - - (567) - - - (567)
Net Income - - - 12,513 - - - 12,513
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 8,496 $ 8 $ 27,765 $ 54,664 $ 7 $ 78 $ (2,120) $ 80,402
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, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 12,513 $ 9,149 $ 6,456
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation and Amortization 2,180 1,468 1,289
Provision for Uncollectible Accounts and Sales Returns 209 765 749
Deferred Income Taxes (1,075) 560 (203)
Provision for Markdown of Inventories 4,714 4,611 2,979
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable-Trade (12,016) (6,653) 3,343
(Increase) Decrease in Vendor and Other Receivables (1,165) 396 (588)
(Increase) in Inventories (10,686) (8,435) (22,587)
(Increase) in Other Assets (726) (591) (460)
Increase in Accounts Payable 3,636 17,660 15,022
Increase in Accrued Liabilities 1,844 2,072 16
Increase (Decrease) in Income Taxes Payable 606 (663) (855)
-------- -------- --------
Net Cash Provided by Operating Activities 34 20,339 5,161
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Used in Acquisitions of Metrastock and Aura (967) (6,749) -
Purchase of Property and Equipment, Net (3,347) (2,082) (1,982)
Purchase of Investments, Available-For-Sale (40,261) (12,093) (8,672)
Sale and Redemption of Investments, Available-For-Sale 42,462 15,264 9,965
-------- -------- --------
Net Cash Used in Investing Activities (2,113) (5,660) (689)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Exercise of Options and Related Tax Benefit 1,256 826 351
Purchase of Treasury Stock - (90) -
Dividends Paid (567) - -
-------- -------- --------
Net Cash Provided by Financing Activities 689 736 351
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (403) (25) 63
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,793) 15,390 4,886
CASH AND CASH EQUIVALENTS, Beginning of Year 28,982 13,592 8,706
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of Year $ 27,189 $ 28,982 $ 13,592
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid During the Year For:
Income Taxes $ 8,279 $ 5,093 $ 4,887
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 operates 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.
INVESTMENTS, AVAILABLE-FOR-SALE
Investments, available-for-sale consists 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 3.
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 81 and 84 percent of the Company's accounts receivable
balances at March 31, 1999 and 1998, 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
$2,302,000 and $2,334,000 as of March 31, 1999 and 1998, 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 $1,372,000
and $1,678,000 as of March 31, 1999 and 1998, 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 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 28 and 24
percent of the Company's inventories at March 31, 1999 and 1998, 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 the Company's
acquisitions, is amortized on a straight-line basis over the estimated life
of 25 years. Accumulated amortization amounted to approximately $245,000 as
of March 31, 1999.
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 approximately
40 and 37 percent of net sales in fiscal 1999, 44 and 40 percent of net sales
in fiscal 1998 and 46 and 37 percent of net sales in fiscal 1997. 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 5.
21
PER SHARE INFORMATION
On January 21, 1999, the Board of Directors approved the declaration
of a three for two stock split. Accordingly, all references to shares and
earnings per share amounts have been restated to reflect the stock split.
The following financial data summarizes information relating to the
per share computations (in thousands, except per share data):
YEARS ENDED MARCH 31,
----------------------------------------------------------
1999 1998 1997
---- ---- ----
Net Income $ 12,513 $ 9,149 $ 6,456
-------- ------- -------
-------- ------- -------
Weighted Average Common Shares Outstanding 8,452 8,339 8,220
Basic Earnings Per Share $ 1.48 $ 1.10 $ .79
-------- ------- -------
-------- ------- -------
Weighted Average Common Shares Outstanding 8,452 8,339 8,220
Dilutive Common Stock Options 300 212 354
-------- ------- -------
Total Diluted Weighted Average Common Shares 8,752 8,551 8,574
-------- ------- -------
Diluted Earnings Per Share $ 1.43 $ 1.07 $ .75
-------- ------- -------
-------- ------- -------
COMPREHENSIVE INCOME
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued and
established standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. The
Company has adopted SFAS No. 130 for its fiscal year ended March 31, 1999, and
in connection with the adoption has presented prior periods to show the
components of comprehensive income.
2. INDUSTRY SEGMENT AND GEOGRAPHICAL DATA
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued, 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. The Company has adopted SFAS No.
131 for its fiscal year ended March 31, 1999. The Company operates in one
industry segment and in several geographic regions.
Net sales by geographic region are as follows (in thousands):
YEARS ENDED MARCH 31,
----------------------------------------------------
1999 1998 1997
---- ---- ----
United States $ 465,229 $ 422,249 $ 376,544
United Kingdom 33,317 11,439 7,308
Mexico 2,525 2,911 1,799
------------ ------------- ------------
501,071 $ 436,599 $ 385,651
------------ ------------- ------------
------------ ------------- ------------
Net identifiable assets of the Company's operations in different
geographic areas are as follows (in thousands):
AS OF MARCH 31,
---------------------------------
1999 1998
---- ----
United States $ 217,584 $ 198,333
United Kingdom 19,066 18,210
Mexico 1,746 1,929
----------- -----------
$ 238,396 $ 218,472
----------- -----------
----------- -----------
3. INVESTMENTS, AVAILABLE-FOR-SALE
Investments, available-for-sale at March 31, 1999 and 1998 are as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
MARCH 31, 1999 Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------
Debt Securities Issued by the States of the
U.S. and Political Subdivisions of the States $ 5,860 $ 10 $ 3 $ 5,867
- ----------------------------------------------------------------------------------------------------------------
MARCH 31, 1998
Debt Securities Issued by the States of the
U.S. and Political Subdivisions of the States $ 8,060 $ 8 $ - $ 8,068
- ----------------------------------------------------------------------------------------------------------------
Investments in debt securities issued by States of the U.S. and
political subdivisions of the States as of March 31, 1999 in the amount of
approximately $4,653,000 are scheduled to mature within one year and
approximately $1,214,000 are scheduled to mature within two years. Proceeds
from the sale of investments aggregated approximately $19,159,000 for the
year ended March 31, 1999. The realized net gain on these sales totaled
approximately $120,000. Proceeds from the sale of investments during the same
period of the previous year totaled approximately $5,073,000 on which a net
gain of approximately $73,000 was realized. The Company uses the specific
identification method in determining cost of these investments.
4. LINE OF CREDIT
The Company had available at March 31, 1999 and 1998 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. As of and during the years
ended March 31, 1999 and 1998, there were no outstanding borrowings on the
Company's line of credit.
5. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
YEARS ENDED MARCH 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
CURRENT:
Federal $ 7,574 $ 3,990 $ 3,348
State 1,679 941 767
DEFERRED:
Federal (906) 458 (167)
State (169) 103 (37)
-------- -------- --------
$ 8,178 $ 5,492 $ 3,911
-------- -------- --------
-------- -------- --------
A reconciliation of the provision for income taxes at the statutory federal
income tax rate of 35 percent in fiscal 1999 and 34 percent in fiscal 1998
and 1997 to the effective tax provision as reported is as follows (in
thousands):
YEARS ENDED MARCH 31,
-------------------------------------------------
1999 1998 1997
---- ---- ----
Taxes at Statutory Federal Rate $ 7,242 $ 4,978 $ 3,525
State Income Taxes, Net of Federal Benefit 942 676 480
Tax-Exempt Interest and Dividend Income (262) (318) (129)
Loss on Foreign Operations, Net 346 64 14
Other (90) 92 21
-------- -------- --------
$ 8,178 $ 5,492 $ 3,911
-------- -------- --------
-------- -------- --------
The temporary differences that give rise to the deferred tax assets as of
March 31, 1999 and 1998 are as follows (in thousands):
AS OF MARCH 31,
--------------------------------
1999 1998
---- ----
Inventory Reserves $ 3,261 $ 2,680
Allowances for Sales Returns and Uncollectible Accounts 1,124 1,126
Depreciation and Amortization 191 79
Vacation Pay and Accrued Compensation 134 93
Accounts Payable Accruals 1,218 861
Other 69 83
--------- --------
$ 5,997 $ 4,922
--------- --------
--------- --------
6. COMMITMENTS
The Company leases its facilities and certain equipment under
non-cancelable operating leases. Rental expense for the years ended March 31,
1999, 1998 and 1997 was $3,867,000, $3,115,000 and $2,998,000, respectively.
The leases have initial expiration dates ranging from 1999 to 2014. Certain
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, 1999, the aggregate future minimum rentals are as
follows (in thousands):
YEAR ENDING MARCH 31, AMOUNT
- ---------------------------------------------------------------
2000 $ 3,901
2001 3,095
2002 2,555
2003 3,180
2004 2,371
Thereafter 8,473
- ---------------------------------------------------------------
$ 23,575
7. 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
1999, 1998 and 1997, the Company's matching contributions equaled $86,000,
$74,000 and $71,000, respectively. The plan also provides for discretionary
Company contributions as approved by the Board of Directors. Company
discretionary contributions of $497,000, $357,000 and $262,000 for the years
ended March 31, 1999, 1998 and 1997, respectively, are included in the
accompanying consolidated statements of income and comprehensive income.
On March 1, 1996, the Company introduced a deferred compensation
plan, which permits eligible employees, including 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 $1,027,000 and $583,000 at March 31, 1999 and 1998,
respectively. 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 $236,000, $132,000, and $92,000 for the years ended March 31, 1999, 1998
and 1997, respectively.
24
8. STOCK 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 1,014,000 shares issuable pursuant to options granted under the 1987
Plan and as of March 31, 1997, no further options may be granted under this
plan. As of March 31, 1999, there were 975,000 shares issuable pursuant to
options granted 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.
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 1999, 1998 and 1997, the
Company's net income and earnings per share would have been reduced
approximately $359,000, or $.04 per share, $132,000, or $.02 per share, and
approximately $85,000, or $.01 per share in fiscal 1999, 1998, and 1997,
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 1999, 1998 and 1997,
respectively: expected volatility of 37, 37 and 45 percent; risk-free
interest rate of 5.3, 6.2 and 6.5 percent; expected option life of 5 years.
The changes in the number of common shares under option for the
years ended March 31, 1997, 1998 and 1999 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, 1996 347,250 $ 4.96 464,685 $ 3.45
Granted 17,250 5.96 - -
Exercised - - 81,450 3.33
Forfeited 19,500 7.44 2,100 3.35
- --------------------------------------------------------------------------------------------------------------------------
Outstanding as of March 31, 1997 345,000 4.87 381,135 3.48
Granted 164,250 6.17 - -
Exercised 4,050 7.44 145,110 2.82
Forfeited 5,400 7.44 19,800 6.28
- --------------------------------------------------------------------------------------------------------------------------
Outstanding as of March 31, 1998 499,800 5.25 216,225 3.68
Granted 331,500 14.51 - -
Exercised 23,400 5.35 54,450 3.58
Forfeited 123,000 6.47 600 3.47
- --------------------------------------------------------------------------------------------------------------------------
Outstanding as of March 31, 1999 684,900 $ 7.27 161,175 $ 3.71
Exercisable as of March 31, 1999 296,550 $ 5.60 123,225 $ 3.55
On July 23, 1998, the Company introduced an Employee Stock Purchase
Plan which permits eligible employees to defer a portion of their
compensation in order to purchase shares of the Company's stock. The maximum
number of shares that may be purchased under the Plan is 150,000 shares,
subject to adjustment under certain circumstances. The amount of stock
purchased was immaterial to the consolidated financial statements of the
Company.
25
9. ACQUISITIONS
METRASTOCK
In March 1999, the Company acquired the assets and assumed certain
liabilities of the wholesale distribution business of Metrastock, Ltd.
("Metrastock") for approximately $1.2 million. Metrastock is a U.K. book
distributor of specialty books to the garden center, craft and gift shop
markets. The acquisition has been accounted for as a purchase and,
accordingly, the assets acquired and the liabilities assumed from Metrastock
have been 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 have
not been included in the accompanying consolidated statement of income and
comprehensive income for the year ended March 31, 1999, as the amounts are
not material and 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 and comprehensive income in
future periods.
AURA BOOKS, PLC
In March 1998, the Company acquired the assets and assumed certain
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 been included in the accompanying consolidated statement
of income and comprehensive income for the fiscal year ended March 31, 1999.
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. The results of operations of Metrastock are not
included as they are not considered material. 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
Net Income Per Share:
Basic $ 1.13 $ .79
Diluted $ 1.11 $ .76
26
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FISCAL QUARTERS (YEARS ENDED MARCH 31,)
---------------------------------------
1ST 2ND 3RD 4TH
- -------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
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 $ .20 $ .27 $ .81 $ .20
Diluted $ .19 $ .26 $ .79 $ .20
Weighted Average Shares Used in Calculation:
Basic 8,420 8,445 8,460 8,485
Diluted 8,729 8,680 8,690 8,761
- -------------------------------------------------------------------------------------------------------------------
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 $ .17 $ .23 $ .55 $ .15
Diluted $ .17 $ .22 $ .53 $ .15
Weighted Average Shares Used in Calculation:
Basic 8,277 8,315 8,365 8,397
Diluted 8,546 8,508 8,593 8,652
- -------------------------------------------------------------------------------------------------------------------
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 Share:
Basic $ .15 $ .21 $ .35 $ .08
Diluted $ .14 $ .20 $ .34 $ .08
Weighted Average Shares Used in Calculation:
Basic 8,202 8,207 8,222 8,252
Diluted 8,619 8,573 8,538 8,406
- -------------------------------------------------------------------------------------------------------------------
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 21, 1999.
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 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)
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 25, 1999 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 25, 1999 By: /S/ CHARLES C. TILLINGHAST, III
-------------------------------------
Charles C. Tillinghast, III
Chairman of the Board and Director
Date: June 25, 1999 By: /S/ MICHAEL M. NICITA
-------------------------------------
Michael M. Nicita
Chief Executive Officer and Director
(Principal Executive)
Date: June 25, 1999 By: /S/ EDWARD J. LEONARD
-------------------------------------
Edward J. Leonard
Chief Financial Officer and Executive
Vice President-Finance
Date: June 25, 1999 By: /S/ LOREN C. PAULSEN
-------------------------------------
Loren C. Paulsen
Director
Date: June 25, 1999 By: /S/ JAMES A. LEIDICH
-------------------------------------
James A. Leidich
Director
Date: June 25, 1999 By: /S/ E. WILLIAM SWANSON, JR.
-------------------------------------
E. William Swanson, Jr.
Director
Date: June 25, 1999 By: /S/ TRYGVE E. MYHREN
-------------------------------------
Trygve E. Myhren
Director
Date: June 25, 1999 By: /S/ LYNN S. DAWSON
-------------------------------------
Lynn S. Dawson
Director
Date: June 25, 1999 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, 1999, 1998 AND 1997
(IN THOUSANDS)
Balance at Additions Balance at
Beginning Charged End of
of Period to Income Deductions Period
- ---------------------------------------------------------------------------------------------------------
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
------- ------- ------- -------
------- ------- ------- -------
- ---------------------------------------------------------------------------------------------------------
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
------- ------- ------- -------
------- ------- ------- -------
- ---------------------------------------------------------------------------------------------------------
32