SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal year ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-16002
ADVANCED MARKETING SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3768341-9
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5880 Oberlin Drive, Suite 400
San Diego, California 92121
(Address of principal executive offices)
Registrant's telephone number: (619) 457-2500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K: ____
The aggregate market value of the Registrant's voting stock held by
nonaffiliates of the Registrant at June 15, 1995 was $24,448,676.
The number of shares of the Registrant's Common Stock outstanding as of
June 15, 1995 was 5,403,679.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its July 27,
1995 Annual Meeting of Stockholders (to be filed) are incorporated by reference
into Part III of this Form 10-K.
<PAGE>
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 club and office product superstore industries. The Company
also supplies general interest books to other 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; and
children's books. In addition, to a lesser extent, the Company sells
prerecorded audio cassettes (books on tape), CD-Rom titles and video
cassettes. The Company provides product selection advice, specialized
merchandising and product development services, and distribution and
handling services to four membership warehouse clubs and five office
product superstore chains operating throughout the United States,
Canada, Mexico and the United Kingdom. The Company's customers account
for over 95 percent of the combined sales of the two industries.
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
800,000 titles in print and over 50,000 new books published each year by
more than 20,000 publishing houses. 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 in its distribution centers back-up inventory for prompt
delivery as needed to customer locations. The Company maintains four
domestic regional distribution centers to assure timely delivery to its
customers, to enhance its customers' inventory turnover rates and to
reduce its customers' handling and holding costs. See "Properties."
The Company provides distribution service to a major warehouse
club customer in the United Kingdom. In Mexico, the Company distributes
products to six retailers, many of which are owned by joint ventures
between major U.S. mass merchandisers and Mexican retailers. The Company
utilizes the services of third party warehousing companies in its United
Kingdom and Mexican subsidiaries.
The Company was incorporated in 1982 in California and was
reincorporated in Delaware in June 1987. The Company's executive
offices are located at 5880 Oberlin Drive, Suite 400, San Diego,
California 92121; telephone (619) 457-2500.
Membership Warehouse Club and Office Product Superstore Industries
The Company's customers include for-profit membership warehouse
clubs which sell a broad range of primarily brand-name merchandise at or
near wholesale prices. Membership warehouse clubs are able to provide
their individual and business members, who commonly pay annual
membership fees, substantial cost savings on high-quality merchandise
through the efficiencies of warehouse-type facilities and a no-frills,
self-service operation policy. Membership warehouse club locations
typically have approximately 100,000 square feet (2 1/2 acres) of floor
space and offer a limited selection of brand-name products in a wide
range of merchandise categories. This merchandising approach was
introduced in Southern California in 1976. Since then, the membership
warehouse club industry has experienced significant growth, with sales
estimated to be approximately $40 billion in 1994.
<TABLE>
The following table summarizes the Company's penetration of the
warehouse club industry:
<CAPTION>
Number of Locations and Locations Served
Membership Warehouse Clubs
Fiscal
Year Ended Total Number Locations Served
March 31 of Locations by AMS
<S> <C> <C>
1988 250 240
1989 291 282
1990 466 354
1991 434 402
1992 514 479
1993 651 576
1994 732 612
1995 780 612
</TABLE>
Only membership warehouse club locations to which the Company
shipped more than $50,000 per year are included as locations served in
the above table. In March 1994, the Company began shipping to 83
additional locations of a major customer and those locations are
included in both fiscal 1994 and fiscal 1995. In June 1995, the Company
began shipping to 65 additional locations of such customer. These
locations are not reflected above. The number of locations served is
not necessarily indicative of the Company's total sales volume to the
warehouse club industry. As the designated "primary book supplier" to
certain locations, the Company tends to supply a greater proportion of
total book purchases than it may have provided in prior years even
though the location may have met the $50,000 limit and been counted as
"served" in prior years.
Since its inception in 1986, the office product superstore
business has grown to an approximately $7 billion industry in 1995.
This strong and rapid growth has been supported by several trends which
are expected to continue for the foreseeable future, including an
ongoing shift from a manufacturing economy to a more service-oriented
economy; increased entrepreneurial activity; and increased automation of
the workplace. Office product superstores are operationally similar to
the membership warehouse clubs, except that many superstores do not
charge membership fees. Superstores stock office equipment and supplies
as well as an assortment of business and computer books.
The Company's market share in fiscal 1995 at certain office
product superstore customers declined compared with prior years. Based
on a $5,000 threshold in shipments per year, the Company served 853
locations in fiscal 1995, compared with 936 in fiscal 1994. Total
office product superstore locations increased from 984 to 1,172 from
March 31, 1994 to March 31, 1995. The Company cannot predict if, or the
extent to which, it will maintain its historical penetration of the
office product superstore book market.
Books are well-suited to the membership warehouse club and office
product superstore 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 and office product
superstores 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 and
office product superstores encourage 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 and office product superstores are not able
to apply their standard product purchasing and handling procedures to
their book departments. Typically, a membership warehouse club or
office product superstore purchases a limited selection of each product
category directly from manufacturers who ship to their retail locations.
In contrast, in order to be able to offer even a limited selection of
books (typically 100 to 250 titles at any one time), a membership
warehouse club or office product superstore would be required to devote
considerable time and resources to selecting from among the over 800,000
titles in print and the over 50,000 new books published each year by
more than 20,000 publishing houses. The membership warehouse club or
office product superstore would also 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 and office product superstores to rely on
distributors for a portion of their book purchases. See "Risks and
Competition."
The Company ships books to U.S., Canadian, Mexican, U.K. and
Korean membership warehouse clubs and U.S., Canadian, and Mexican office
product superstore locations.
Other Distribution Channels
As of March 31, 1995, the Company owned and operated 12 small
retail outlet stores in nine states. The stores are located, generally
in factory outlet malls, in San Leandro, Gilroy and Lake Elsinore,
California; Gurnee, Illinois; Hillsboro and Conroe, Texas; Burlington
and Centralia, Washington; Kenosha, Wisconsin; Algodones, New Mexico;
Silverthorne, Colorado; and Birch Run, Michigan. These retail outlets
generally sell titles that were purchased on a non-returnable basis and
remain unsold after being offered for sale in the Company's customers'
locations. The Company anticipates testing a new prototype retail store
format that will offer multimedia products in addition to books in up to
four locations. If the new prototype is successful, the Company may,
but has no commitments to, expand its retail operations.
The Company also supplies books and other media products to
customers operating computer and electronic superstores, mass
merchandise stores, pet supply stores, drug stores, book stores and
other types of specialty retail stores. See "International Business."
Business Strategy
The Company's primary business strategy is to provide effective
book purchasing, handling and distribution services to membership
warehouse clubs, office product superstores, computer superstores, mass
merchants and other retail chains. The Company believes that it has
achieved its position as a leading book supplier to membership warehouse
clubs because of its ability to offer sound product selection advice,
specialized product development and marketing services and rapid product
delivery, all at competitive prices.
Product Selection Services and Purchasing Practices
The Company's customers generally compete in the retail trade book
market by offering a limited selection of books (typically 100 to 250
titles compared to 10,000 to 100,000 titles at national bookstore chains
and book superstores) at prices which are generally 30% to 45% lower
than suggested retail prices. The Company 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 new books generally begins when
a publisher's representative submits pre-publication book summaries to
the Company's general merchandise managers. A general merchandise
manager evaluates each book on the basis of such factors as subject
matter and author; suitability for the customers' selling environments;
visual appeal; the extent of the publisher's promotion and advertising
support; and the estimated number of copies to be printed. Because the
Company is a major customer of many of its vendors, such vendors often
consult with the Company during pre-publication planning, allowing the
Company to influence the design and packaging of many of the books it
purchases. After choosing titles, the general merchandise managers, in
conjunction with the general marketing managers, determine which
specific titles will be recommended to each customer on the basis of
their knowledge of the customer base, regional characteristics and
marketing priorities.
Product selection is the responsibility of the Company's
Merchandising Department, under the direction of the Vice President -
Merchandising to whom six product development directors/general
merchandise managers and a staff of 13 associates report. Each general
merchandise manager is responsible for several categories of products
which include hardcover bestsellers, mass market paperbacks, basic,
reference, prerecorded audio cassettes (books on tape), calendars,
computer, cooking, travel, regional, gift books (including art and
coffee table books), children's books, CD-Rom products, and prerecorded
video cassettes.
The Company usually purchases newly published or well established
back-list (previously published) titles directly from publishing houses
at standard book industry wholesale discounts, which generally exceed
retail discounts. The Company does not generally purchase remainder
titles but will occasionally purchase close-out lots of certain titles
at higher than normal discounts. Virtually all books sold are
returnable to AMS by its customers for full credit so long as the books
are in saleable condition. Approximately 90% of the books purchased by
the Company in both fiscal 1995 and 1994 were returnable to the
publisher; the balance were purchased on a non-returnable or partially
returnable basis, often at higher purchase discounts. The Company has
published a limited number of titles under its own imprints, some of
which are sold to both the Company's traditional customers and to book
stores.
In the years ended March 31, 1995, 1994 and 1993, customer returns
represented approximately 22%, 21%, 16%, 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 28%, 34%, and 28%,
respectively, of the Company's total purchases during the same period.
Although the processing of customer and publisher returns increases
freight and labor costs, the Company maintains a large inventory to be
in a position to promptly fill and otherwise support customer orders.
The Company's reserves for markdowns increased by approximately
$181,000 in fiscal 1995. The Company added $2.8 million to its reserves
for markdowns as a result of slower than expected sales of certain books
which are not returnable to the publisher and deducted $2.6 million for
actual losses incurred on books for which reserves had previously been
made. To the extent that the Company is unable to sell non-returnable
books to its traditional customers, it sells such books to customers to
whom, 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 payment,
when economically attractive. During the year ended March 31, 1995, the
Company made purchases from approximately 259 publishers. Three
publishers accounted for more than 10% of the Company's total purchases
in fiscal 1995. These included Random House, Simon & Schuster, Inc. and
Bantam/Doubleday/Dell which accounted for 16%, 12% and 12%,
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
combinations 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
cookie baking sheet packaged with a cookbook. 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 five general marketing managers and a
staff of 17 marketing personnel report. Members of the staff are
assigned to each of the Company's customers and present new titles,
recommend promotions, coordinate orders and shipments, and handle other
customer requests.
Product Distribution and Handling Services
Because an important financial and operating goal of many of the
Company's customers is a high inventory turnover rate, a critical
element of the Company's service is its ability to respond quickly to
its customers' orders. The Company has established a national network
of four regional distribution centers to assure rapid deliveries to its
customers. These distribution centers are located in general purpose
warehouse facilities in the metropolitan areas of Sacramento,
California; Chicago, Illinois; Baltimore, Maryland; and Dallas, Texas.
AMS seeks to maintain a six to eight week inventory of active titles at
its distribution centers, where it receives books from multiple vendors
and dispatches, using common and contract carriers, consolidated
shipments on a weekly basis to most customer locations. Weekly
deliveries eliminate the need for customers to stock large inventories
on-site and 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. The Company's computer system also enables
AMS to provide information and special reports to assist customers with
operations and marketing. For an additional fee, upon request, the
Company will ticket books with the customer inventory item number and
sales price. The Company believes that all of these services enhance
its customers' inventory turnover rate and reduce their handling and
holding costs.
International Business
Prior to fiscal 1994, the Company had exported products to
customers in Canada and Mexico. While continuing such business, since
fiscal 1994 the Company has placed significant emphasis on further
developing its business internationally. During fiscal 1995, sales to
Canada declined, primarily due to the weakness of the Canadian dollar.
The Company has formed two wholly owned foreign subsidiaries.
Advanced Marketing (UK) Limited was incorporated in September 1993 in
the United Kingdom. From its London headquarters, it provides a full
range of general interest books, audio and video products to the three
Price/Costco membership warehouse club locations in the United Kingdom.
Two additional Price/Costco locations are scheduled to open during
fiscal 1996.
Advanced Marketing S. de R.L. de C.V. was incorporated in January
1994 in Mexico. From its headquarters in Mexico City, it distributes
books to individual stores of six customers, many of which are joint
ventures of U.S. and Mexican retailers. The Company continues to explore
other opportunities in Mexico and is in discussions with Mexican
retailers and others regarding the distribution of Spanish and English
language titles.
During fiscal 1995, the Company also participated with a major
Mexican retailer in a test of Company managed book programs at 10 of
such retailer's locations. Due to lower than anticipated sales,
resulting in part from the economic slowdown since the December 1994
Mexican peso devaluation and difficulties the Company experienced in
obtaining titles from certain Mexican publishers, the test was
terminated in May 1995. During fiscal 1995, 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. In addition, the Company accrued a provision for currency
exchange loss on its investment in its Mexican subsidiary.
To address the operating challenges in its Mexican subsidiary, the
Company has augmented its management, marketing and product capabilities
in the U.S. and Mexico with personnel with Spanish language and Mexican
product expertise. The Company has also expended significant effort in
developing relationships with Mexican publishers. The Company believes
that this strategy will assist its expansion efforts in Mexico and also
create product sourcing opportunities for the Spanish language market in
the United States.
The Company utilizes third party warehousing and distribution
companies in both the United Kingdom and Mexico. No assurances can be
given that the expansion in international markets will be profitable;
the Company expects no significant profit contribution from these
international operations in fiscal 1996.
Risks and Competition
In fiscal 1995 over 93% of the Company's sales were to membership
warehouse clubs with the remainder to office product superstores,
computer superstores, mass merchandisers or other retailers. There are
five major membership warehouse clubs operating over 780 locations in
the United States, Canada, Korea, Mexico and the United Kingdom. The
Company serves four of the five major membership warehouse clubs at 612
of these locations. The Company also serves five office product
superstores at 853 locations. In the year ended March 31, 1995, two
customers accounted for approximately 85% of the Company's net sales.
Although the Company believes it provides services and efficiencies that
membership warehouse clubs and other retailers would have difficulty
duplicating, the Company believes that its customers may, from time to
time, increase the percentage of books they purchase directly from
publishers or from other wholesale distributors. Further, the Company
could lose customers which discontinue books as a product line, suffer a
business failure or merge or consolidate with another entity not
currently serviced by AMS. The Company has no long-term or exclusive
purchase commitments with any of its customers. Any loss of a major
customer would have a material adverse effect on the Company. Given the
relatively small number of membership warehouse club chains, the
Company's reliance on a few customers is likely to continue. See
"Customers."
The Company is a leading supplier of books to the membership
warehouse club and office product superstore markets, each of which are
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 office product superstores 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 and office product superstores face competition from
discount and retail bookstore chains which indirectly affects AMS. Due
to their high sales volume, membership warehouse clubs could represent
an attractive market that book distributors may seek to enter and
compete directly with the Company. The Company believes that its
principal competitive advantages are its ability to select, package and
assort products so that they sell in high volume; to distribute such
products rapidly; to maintain sufficient back-up inventories; and to
price products competitively.
The Company purchases certain titles on a non-returnable basis
which it in turn sells on a returnable basis. To the extent that actual
sales of such titles do not equal purchased quantities, the Company
risks having inventory remaining which it may be unable to sell at or
above its cost. The Company has developed a retail outlet chain to
assist in the sale of such inventory. In addition, the Company has
implemented policies to evaluate more completely the non-returnable
inventory risk it assumes. However, the Company has incurred
substantial expense in the past to sell such excess inventory and may
incur such expense in the future.
Customers
The Company is currently servicing four membership warehouse clubs
and five office product superstore chains. The Company's customers
account for over 95% of the combined sales of the two industries and
operate approximately 780 and 1,172 locations, respectively, throughout
the United States, Canada, Mexico and the United Kingdom. The following
table sets forth those customers who accounted for 10% or more of the
Company's total net sales in fiscal 1995. For comparative purposes, the
historical sales of The Price Company and Costco Wholesale Corporation
are combined as are the Sam's Club and Pace Membership Warehouse's sales
in the table below.
<TABLE>
<CAPTION> Percentage of Net Sales
1995 1994 1993
<S> <C> <C> <C>
Price/Costco, Inc. 46% 49% 52%
Sam's Club (a unit of 39% 34% 33%
Wal-Mart Stores, Inc.)
</TABLE>
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.
Employees
At March 31, 1995, the Company had 407 employees who were engaged
in administrative, merchandising, marketing, warehousing and retail
operations. The Company also hires temporary workers, primarily during
the peak holiday season. None of the Company's employees is represented
by a labor union. The Company considers its employee relations to be
good.
ITEM 2 - PROPERTIES
The Company is headquartered in approximately 34,000 square feet of
commercial space in San Diego, California. The space is leased for a
six-year term expiring in 1998 with an annual base rent of $396,000.
The Company maintains the following distribution centers from which
it ships to its customers:
<TABLE>
<CAPTION>
Location Approximate Date
(Metropolitan Area) Square Footage Opened
<S> <C> <C>
Dallas, Texas 89,000 July 1984
Baltimore, Maryland 151,000 June 1986
Sacramento, California 150,000 August 1986
Chicago, Illinois 75,000 August 1987
</TABLE>
Each of these distribution centers is leased, with the leases
expiring between 1995 and 2001. Annual base rental payments range from
$262,000 to $610,000. See Note 5 of Notes to Consolidated Financial
Statements in Item 8 of this Form 10-K. The Company believes that its
four domestic distribution centers are adequate for the conduct of its
business through at least fiscal 1996.
The Company utilizes third party warehousing and distribution
companies in both the United Kingdom and Mexico. It also leases office
space in both countries on short-term leases, the commitments under
which are not material.
ITEM 3 - LEGAL PROCEEDINGS
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, 1995.<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market
under the NASDAQ symbol "ADMS". The following table sets forth the high
and low closing prices of the Common Stock, as reported on the NASDAQ
National Market System. On June 15, 1995, the Company had approximately
1,500 beneficial stockholders and 116 stockholders of record.
<TABLE>
<CAPTION>
Fiscal Fiscal
1995 1994
FISCAL QUARTER High Low High Low
<S> <C> <C> <C> <C>
FIRST QUARTER -
ENDED JULY 2/JUNE 26 5 3/4 4 9 5/8 6 5/8
SECOND QUARTER -
ENDED OCTOBER 1/SEPTEMBER 25 7 4 7/8 7 7/8 6 1/4
THIRD QUARTER -
ENDED DECEMBER 31/DECEMBER 25 6 3/4 5 3/4 7 3/4 5 7/8
FOURTH QUARTER -
ENDED MARCH 31 6 1/2 5 1/4 6 4 7/16
</TABLE>
The present policy of the Company is to retain earnings to provide
funds for the operation and expansion of its business. The Company has
not paid cash dividends on its Common Stock and has no plans to do so in
the foreseeable future. There are no direct limitations or restrictions
on the payment of cash dividends under the Company's line of credit
arrangement or any other agreement. The declaration of dividends in the
future will, however, remain within the discretion of the Company's
Board of Directors, which will review its dividend policy from time to
time.
On May 30, 1994, the Company announced a stock repurchase program
pursuant to which the Company may repurchase in open market
transactions, from time to time, based upon existing market conditions,
up to 500,000 shares of its Common Stock. As of June 15, 1995, the
Company had purchased 211,000 shares of Common Stock pursuant to such
repurchase program.
<PAGE>
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 financial statements
and notes thereto. No cash dividends were paid on the Company's Common
Stock in any of the periods presented.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
NET SALES $303,708 $264,518 $258,390 $218,148 $176,071
COST OF GOODS SOLD 274,776 242,497 236,751 199,688 162,600
GROSS PROFIT 28,932 22,021 21,639 18,460 13,471
DISTRIBUTION AND ADMINISTRATIVE
EXPENSES 24,083 22,561 17,229 15,721 15,292
INCOME (LOSS) FROM OPERATIONS 4,849 (540) 4,410 2,739 (1,821)
INTEREST EXPENSE (35) (56) (184) (360) (122)
INTEREST AND DIVIDEND INCOME 894 817 505 264 191
INCOME (LOSS) BEFORE INCOME TAXES 5,708 221 4,731 2,643 (1,752)
PROVISION (BENEFIT) FOR INCOME TAXES 2,346 65 1,779 809 (520)
NET INCOME (LOSS) $ 3,362 $ 156 $ 2,952 $ 1,834 $ (1,232)
NET INCOME (LOSS) PER COMMON AND
COMMON SHARE EQUIVALENT $ .60 $ .03 $ .53 $ .34 $ (.21)
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON SHARE EQUIVALENTS OUTSTANDING 5,588 5,415 5,548 5,354 5,760
BALANCE SHEET DATA AS OF MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994 1993 1992 1991
WORKING CAPITAL:
CASH AND CASH EQUIVALENTS $ 9,035 $ 2,928 $ 5,022 $ 13,960 $ 3,965
INVESTMENTS, AVAILABLE-FOR-SALE 9,153 14,469 12,609 - -
INVENTORIES, NET 69,356 62,451 65,474 63,772 69,980
ACCOUNTS RECEIVABLE AND
OTHER CURRENT ASSETS 42,075 28,569 25,125 17,813 11,851
CURRENT LIABILITIES (88,794) (70,775) (71,129) (59,810) (52,286)
TOTAL WORKING CAPITAL 40,825 37,642 37,101 35,735 33,510
TOTAL ASSETS 133,131 112,402 112,231 97,890 88,521
SHORT-TERM DEBT - - - - -
LONG-TERM DEBT - - - - -
STOCKHOLDERS' EQUITY $ 44,337 $ 41,627 $ 41,102 $ 38,080 $ 36,235
BOOK VALUE PER COMMON SHARE $ 8.22 $ 7.66 $ 7.65 $ 7.11 $ 6.77
OTHER SELECTED INFORMATION AS OF MARCH 31,
1995 1994 1993 1992 1991
NUMBER OF EMPLOYEES 407 334 312 301 265
</TABLE>
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1995 COMPARED TO FISCAL 1994
Net income for the fiscal year ended March 31, 1995 was $3,362,000, or
$.60 per share, on net sales of $303,708,000. This compares to net income of
$156,000, or $.03 per share, on net sales of $264,518,000 for the previous
fiscal year.
The increase in net sales for fiscal 1995 resulted, in part, from
increases in the juvenile, cookbook, computer and books-on-tape categories. In
addition, in March 1994 the Company began supplying books to an additional 83
Sam's Club locations. The Company expects its share of Sam's Club book
business to further increase in fiscal 1996 as a result of its designation as
the primary book supplier to an additional 65 locations effective June 1995.
At that time, the Company will be the primary book supplier to 356 of the 430
Sam's Club domestic locations.
Comparable store sales declined 4 percent. The Company experienced a 22
percent rate of returns from customers in fiscal 1995 compared to a 21 percent
return rate in fiscal 1994. The continued high rate of customer returns,
particularly in the fourth quarter, contributed to more modest sales growth in
the second half of fiscal 1995 compared to the first half of fiscal 1995. Net
sales to the office product superstore industry declined 32 percent compared to
the prior year and represented approximately 3 percent of the Company's total
net sales in fiscal 1995. This decline resulted in part from the Company's
loss of market share at several office supply customers and higher customer
returns from this group of customers. The Company competes, often on a title
by title basis, with other suppliers and is unable to predict the extent to
which it will be successful in maintaining or increasing the percentage of its
customers' purchases supplied by the Company.
Gross profits for fiscal 1995 were $28,932,000, an increase of $6,911,000
from the fiscal 1994 level. As a percentage of sales, gross profits were 9.5
percent in fiscal 1995 compared to 8.3 percent in the prior fiscal year. The
increase resulted, in part, from improved inventory management and the
implementation of freight cost reduction programs offset, in part, by higher
provisions for markdown expense.
Distribution and administrative expenses increased to $24,083,000 in
fiscal 1995 compared to $22,561,000 in fiscal 1994. As a percentage of sales,
however, these expenses declined to 7.9 percent of net sales compared to 8.5
percent in the prior fiscal year. Increases in distribution expenses to handle
higher shipment and customer return volumes and other compensation increases
were offset, in part, by lower occupancy costs resulting from the consolidation
of the Company's distribution center network and net revenues from the
Company's promotional activities.
Interest expense decreased from $56,000 in fiscal 1994 to $35,000 in
fiscal 1995. The decrease was primarily due to reduced commitment fees
associated with the Company's line of credit which was not utilized in fiscal
1995 or fiscal 1994. Interest and dividend income increased to $894,000 in
fiscal 1995 from $817,000 in fiscal 1994 as a result of an increase in the
Company's cash and investment balances.
The Company's combined federal and state statutory tax rate is
approximately 39 percent. Various adjustments, primarily due to the Company's
loss on foreign operations, caused the fiscal 1995 provision for income taxes
to be $2,346,000, or 41 percent of pre-tax income. In fiscal 1994, the
Company's modest operating loss coupled with tax exempt interest and dividend
income caused the provision for income taxes to be $65,000, or 29 percent of
pre-tax income.
FISCAL 1994 COMPARED TO FISCAL 1993
Net income for the year ended March 31, 1994 was $156,000, or $.03 per
share, on net sales of $264,518,000. This compares to net income of
$2,952,000, or $.53 per share, on net sales of $258,390,000 for the previous
fiscal year.
Sales for the year were adversely impacted, particularly during the
Christmas season, by the effects of the consolidations that occurred in the
warehouse club industry as well as negative comparable store sales recorded by
most warehouse club companies. In fiscal 1994, The Price Company merged with
Costco Wholesale Corporation to form Price/Costco, Inc. and Sam's Club acquired
certain Pace Membership Warehouse locations. The resulting changes in buying
staff personnel and the changeover in title selection at the affected customer
locations significantly impacted the Company's sales as well as its expense
structure. Sales of juvenile and gift book titles were most severely impacted
and were lower than fiscal 1993 levels. Comparative book sales, those to
customer locations which were in operation throughout all of fiscal 1994 and
fiscal 1993, decreased by 8 percent over the previous fiscal year. Sales to
newly opened customer locations totalled $26,322,000, or 10 percent of the
Company's total net sales. In addition, during March 1994, the Company began
shipping products to an additional 83 Sam's Club locations in a modification of
a vendor diversification strategy which Sam's Club had implemented during the
Company's 1993 fiscal year. The Company experienced a 21 percent rate of
return from customers in fiscal 1994 compared to a 16 percent return rate in
fiscal 1993. This increase resulted from lower than expected levels of book
sales at customer locations and occurred at roughly the same time as the
customers reported lower overall comparable store sales. During the fourth
quarter, the returns rate was approximately equal to that experienced in the
prior year's fourth quarter. The returns rate in the first two months of fiscal
1995 has been below the fiscal 1994 first quarter level. The Company competes,
often on a title basis, with other suppliers and is unable to predict the
extent to which it will be successful in maintaining or increasing the
percentage of its customers' purchases supplied by the Company. The Company's
sales to the office product superstore industry represented approximately 5
percent of the Company's total net sales for fiscal 1994 and 1993.
Cost of goods sold in fiscal 1994 increased to $242,497,000, or 91.7
percent of net sales, compared to $236,751,000, or 91.6 percent of net sales,
in fiscal 1993. The resulting decrease in gross profit as a percentage of
sales resulted primarily from lower margins in several book categories which
were partially offset by improved margins on juvenile books and higher margins
achieved on sales of certain gift books to book stores.
Distribution and administrative expenses increased to $22,561,000 and
represented 8.5 percent of net sales for the year ended March 31, 1994 compared
to $17,229,000, or 6.7 percent of net sales, for the previous year. The
increases came from increased staffing and facility square footage to handle
higher sales volumes, which were offset by higher returns; higher costs of
processing these customer returns; higher distribution labor expenses related
to providing an increased number of, and more complex, customer promotional
book assortments; and increased administrative expenses, in part as a result of
expansion of the Company's activities into the U.K. and Mexican markets.
Interest expense decreased from $184,000 in fiscal 1993 to $56,000 in
fiscal 1994. The decrease was primarily due to reduced commitment fees
associated with the Company's line of credit which as not utilized in fiscal
1994 or fiscal 1993. Interest and dividend income increased to $817,000 in
fiscal 1994 from $505,000 in fiscal 1993 as a result of an increase in the
Company's cash and investment balances.
The Company's modest operating loss coupled with increased tax exempt
interest and dividend income caused the provision for income taxes to be
$65,000, or 29 percent of pre-tax income. The fiscal 1993 provision for income
taxes was $1,779,000, or 38 percent of pre-tax income.
SEASONALITY
The Company's net sales and earnings in the third fiscal quarter have
historically been, and are expected to continue to be, significantly higher
than in any other quarter due to the holiday season. Income from operations
during the third fiscal quarter, as a percentage of net sales, is typically
higher than in any other quarter because of product sales mix and other
economies of scale caused by the higher sales volume. The Company expects
seasonality in its operations to continue.
LIQUIDITY AND CAPITAL RESOURCES
The Company experiences significant seasonal short-term swings in its cash
position due to sales seasonality and to differences in timing of payments to
its vendors and the receipt of payments from its customers. Cash flow is
historically greatest during the third fiscal quarter due to higher seasonal
sales. As of March 31, 1995 the Company had $9,035,000 in cash and cash
equivalents, $9,153,000 in short-term investments, available for sale and
$1,012,000 in long-term investments, available for sale. At March 31, 1994,
the Company had $2,928,000 in cash and cash equivalents, $14,469,000 in short
term investments, available for sale and $1,550,000 in long-term investments,
available for sale.
The working capital required to finance inventories is directly related to
inventory turnover rates and trade credit terms provided by publishers. Trade
credit terms from the Company's vendors did not change significantly during
fiscal 1995. Inventory turnover rates increased from 3.9 times in fiscal 1994
to 4.3 times in fiscal 1995 due to improved inventory management and a reduced
amount of slow moving inventory.
The Company's fiscal year end accounts receivable balance increased to
$38,654,000 from $25,420,000 in the prior year as a result, in part, of a
modification to its terms of sale with certain customers.
The Company had available at March 31, 1995 an unsecured bank line of
credit with a maximum borrowing limit of $10 million. The interest rate is at
the prime rate (9 percent at March 31, 1995). The line of credit expires July
31, 1996. The Company did not utilize its line of credit during fiscal 1995 or
fiscal 1994.
The Company believes that its existing working capital, cash flows from
operations, trade credit traditionally available from its vendors and its $10
million line of credit will be sufficient to finance its current and
anticipated level of operations.
IMPACT OF INFLATION
The Company has been subject to relatively low prevailing inflation rates
during fiscal 1995, 1994 and 1993. The Company has generally been able to
adjust its selling prices to offset increased costs of merchandise and expects
to be able to continue to do so in the foreseeable future.
<PAGE>
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants 17
Consolidated Balance Sheets 18
Consolidated Statements of Income 20
Consolidated Statements of Stockholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23
<PAGE>
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, 1995 and 1994, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1995 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
schedule to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Diego, California
May 12, 1995<PAGE>
<TABLE>
<CAPTION>
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1995 AND 1994
ASSETS
1995 1994
(IN THOUSANDS EXCEPT
CURRENT ASSETS: SHARE DATA)
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 9,035 $ 2,928
INVESTMENTS, AVAILABLE-FOR-SALE (NOTE 2) 9,153 14,469
ACCOUNTS RECEIVABLE - TRADE, NET OF ALLOWANCES
FOR UNCOLLECTIBLE ACCOUNTS AND SALES RETURNS
OF $2,532,000 IN 1995 AND $1,986,000 IN 1994 36,997 23,321
VENDOR AND OTHER RECEIVABLES 1,657 2,099
INVENTORIES, NET 69,356 62,451
DEFERRED INCOME TAXES (NOTE 4) 3,111 2,621
PREPAID EXPENSES 310 528
TOTAL CURRENT ASSETS 129,619 108,417
PROPERTY AND EQUIPMENT, AT COST 6,335 6,152
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION 4,020 3,977
NET PROPERTY AND EQUIPMENT 2,315 2,175
INVESTMENTS, AVAILABLE-FOR-SALE (NOTE 2) 1,012 1,550
OTHER ASSETS 185 260
TOTAL ASSETS $133,131 $112,402
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.<PAGE>
<TABLE>
<CAPTION>
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
(IN THOUSANDS EXCEPT
CURRENT LIABILITIES: SHARE DATA)
<S> <C> <C>
ACCOUNTS PAYABLE $ 85,236 $ 67,316
ACCRUED LIABILITIES 2,956 3,167
INCOME TAXES PAYABLE 602 292
TOTAL CURRENT LIABILITIES 88,794 70,775
COMMITMENTS (NOTE 5)
STOCKHOLDERS' EQUITY (NOTE 7):
COMMON STOCK, $.001 PAR VALUE, AUTHORIZED 20,000,000
SHARES, ISSUED 6,103,000 SHARES IN 1995 AND 5,930,000
SHARES IN 1994 6 6
ADDITIONAL PAID-IN CAPITAL 25,519 24,851
RETAINED EARNINGS 21,012 17,650
UNREALIZED LOSS ON INVESTMENTS (46) -
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (124) -
LESS: TREASURY STOCK, 708,000 SHARES IN 1995 AND
497,000 SHARES IN 1994, AT COST (2,030) (880)
TOTAL STOCKHOLDERS' EQUITY 44,337 41,627
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $133,131 $112,402
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
<PAGE>
<TABLE>
<CAPTION>
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994 1993
<S> <C> <C> <C>
NET SALES $303,708 $264,518 $258,390
COST OF GOODS SOLD 274,776 242,497 236,751
GROSS PROFIT 28,932 22,021 21,639
DISTRIBUTION AND
ADMINISTRATIVE EXPENSES 24,083 22,561 17,229
INCOME (LOSS) FROM OPERATIONS 4,849 (540) 4,410
INTEREST EXPENSE (35) (56) (184)
INTEREST AND DIVIDEND INCOME 894 817 505
INCOME BEFORE PROVISION
FOR INCOME TAXES 5,708 221 4,731
PROVISION FOR INCOME TAXES (NOTE 4) 2,346 65 1,779
NET INCOME $ 3,362 $ 156 $ 2,952
NET INCOME PER COMMON AND
COMMON SHARE EQUIVALENT:
PRIMARY $ .60 $ .03 $ .53
FULLY DILUTED $ .60 $ .03 $ .53
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON SHARE EQUIVALENTS OUTSTANDING:
PRIMARY 5,588 5,415 5,548
FULLY DILUTED 5,611 5,415 5,604
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993
(IN THOUSANDS)
FOREIGN
COMMON STOCK ADDITIONAL UNREALIZED CURRENCY
OUTSTANDING PAID-IN RETAINED LOSS ON TRANSLATION TREASURY
SHARES AMOUNT CAPITAL EARNINGS INVESTMENTS ADJUSTMENT STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1992 5,356 $ 6 $24,412 $14,542 $ - $ - $ (880) $38,080
EXERCISE OF OPTIONS TO
PURCHASE COMMON STOCK 14 - 70 - - - - 70
NET INCOME - - - 2,952 - - - 2,952
BALANCE, MARCH 31, 1993 5,370 6 24,482 17,494 - - (880) 41,102
EXERCISE OF OPTIONS TO
PURCHASE COMMON STOCK 63 - 369 - - - - 369
NET INCOME - - - 156 - - - 156
BALANCE, MARCH 31, 1994 5,433 6 24,851 17,650 - - (880) 41,627
EXERCISE OF OPTIONS TO
PURCHASE COMMON STOCK 173 - 668 - - - - 668
PURCHASE OF TREASURY
STOCK (211) - - - - - (1,150) (1,150)
UNREALIZED LOSS ON
INVESTMENTS - - - - (46) - - (46)
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT - - - - - (124) - (124)
NET INCOME - - - 3,362 - - - 3,362
BALANCE, MARCH 31, 1995 5,395 $ 6 $25,519 $21,012 $ (46) $ (124) $(2,030) $44,337
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.<PAGE>
<TABLE>
<CAPTION>
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993
(IN THOUSANDS)
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
NET INCOME $ 3,362 $ 156 $ 2,952
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 909 955 817
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
AND SALES RETURNS 899 578 400
PROVISION FOR MARKDOWN OF INVENTORY 2,766 2,225 2,490
DEFERRED INCOME TAXES (490) (622) (470)
CHANGES IN ASSETS AND LIABILITIES:
INCREASE IN ACCOUNTS RECEIVABLE-TRADE (14,883) (2,507) (8,940)
(INCREASE) DECREASE IN VENDOR
AND OTHER RECEIVABLES 437 (456) 1,314
(INCREASE) DECREASE IN INVENTORIES (9,952) 798 (4,192)
INCREASE (DECREASE) IN
ACCOUNTS PAYABLE 18,068 (396) 10,254
INCREASE (DECREASE) IN
ACCRUED LIABILITIES (191) 292 523
INCREASE (DECREASE) IN
INCOME TAXES PAYABLE 310 (250) 542
(INCREASE) DECREASE IN OTHER ASSETS 293 (493) 407
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,528 280 6,097
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE/DISPOSAL OF PROPERTY AND
EQUIPMENT, NET (1,057) (1,333) (496)
PURCHASE OF INVESTMENTS,
AVAILABLE-FOR-SALE (67,553) (34,271) (42,089)
SALE AND REDEMPTION OF INVESTMENTS,
AVAILABLE-FOR-SALE 73,361 32,861 27,480
PURCHASE OF TREASURY STOCK (1,150) - -
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 3,601 (2,743) (15,105)
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISE OF OPTIONS AND
RELATED TAX BENEFITS 668 369 70
NET CASH PROVIDED BY FINANCING ACTIVITIES 668 369 70
EFFECT OF EXCHANGE RATE CHANGES ON CASH 310 - -
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 6,107 (2,094) (8,938)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,928 5,022 13,960
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,035 $ 2,928 $ 5,022
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
INTEREST $ 35 $ 56 $ 184
INCOME TAXES $ 2,355 $ 693 $ 1,969
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.<PAGE>
ADVANCED MARKETING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Advanced Marketing Services, Inc. (the "Company") distributes general
interest books, prerecorded audio cassettes (books on tape) and video cassettes
primarily to membership warehouse clubs and office product superstores. During
fiscal 1994, the Company established subsidiaries in Mexico and the United
Kingdom.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. Cash
equivalents totaled $6,839,000 and $2,204,000 as of March 31, 1995 and 1994,
respectively.
INVESTMENTS, AVAILABLE-FOR-SALE
Investments, available-for-sale consist principally of highly rated
corporate and municipal bonds, funds held in managed investment funds and
preferred stock instruments. In May 1993, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The Company
adopted SFAS No. 115 on April 1, 1994 and in connection therewith reclassified
all investments as available for sale. The adoption of SFAS No. 115 had no
material impact on the Company's financial position or results of operations.
SFAS No. 115 requires the use of fair value accounting for debt and equity
securities, except in those cases where there is a positive intent and ability
to hold debt securities to maturity. See Note 2.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt 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 85 percent of the Company's account receivable balances
are concentrated with 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 91 percent of the Company's purchases, the Company has the right
to return unsold product to publishers. The Company has provided allowances of
$1,593,000 and $1,104,000 as of March 31, 1995 and 1994, respectively, for the
gross profit effect of estimated future sales returns. The Company has also
provided allowances for uncollectible trade accounts receivable of $939,000 and
$882,000 as of March 31, 1995 and 1994, respectively.
VENDOR AND OTHER RECEIVABLES
Vendor and other receivables primarily consist of amounts due from
vendors for purchase rebates and for merchandise returned to vendors.
INVENTORIES
Inventories consist primarily of books and pre-recorded audio and video
cassettes purchased for resale and are stated at the lower of cost (first-in,
first-out) or market.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment are provided
using the straight-line method over the estimated useful lives (ranging from
three to five years) of the assets.
SIGNIFICANT CUSTOMERS
A substantial portion of the revenue earned by the Company is derived
from a limited number of customers. In fiscal 1993, four customers
individually accounted for 26%, 26%, 23% and 10% of net sales. During fiscal
1994, two of these customers were either merged or acquired. The two remaining
consolidated customers accounted for 46% and 39% of net sales in fiscal 1995
and 49% and 34% of net sales in fiscal 1994. No other customers accounted for
10 percent or more of the Company's net sales during these years.
REVENUE RECOGNITION
Sales and related cost of sales are recognized upon delivery of
merchandise to customer locations. The Company provides reserves for the
effect of estimated future sales returns.
INCOME TAXES
The Company provides currently for taxes on income regardless of when
such taxes are payable. Deferred income taxes result from temporary
differences in the recognition of income and expense for tax and financial
reporting purposes. See Note 4.
PER SHARE INFORMATION
Per share information is based on the weighted average number of common
shares and, when applicable, dilutive common share equivalents outstanding
during the periods. The effects of all anti-dilutive common stock equivalents
are excluded from the calculation of earnings per share. The Company's only
potential dilutive common share equivalents are stock options.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
current year presentation.
2. INVESTMENTS, AVAILABLE FOR SALE
Investments, available for sale at March 31, 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES MARKET VALUE
<S> <C> <C> <C> <C>
MORTGAGE-BACKED $ 3,201 $ - $ 48 $ 3,153
SECURITIES
DEBT SECURITIES
ISSUED BY STATES
OF THE U.S.
AND POLITICAL
SUB-DIVISIONS OF
THE STATES 7,010 2 - 7,012
$10,211 $ 2 $ 48 $10,165
</TABLE>
Investments in debt securities issued by states of the U.S. and political
subdivisions of the States in the amount of $6,000,000 are scheduled to mature
within one year. The remaining balance of $1,012,140 is scheduled to mature
within two years. The Company's investments in mortgage-backed securities have
contracted maturities up to 30 years. The actual time of repayment, however,
may be shorter due to the prepayments made on the underlying collateral. The
contractual principal repayments of mortgage-backed securities range from 2 to
23 years.
Proceeds from the sale of investments aggregated $3,340,024. The
realized net loss on these sales totalled $225,628. The Company uses the
specific identification method in determining cost on these investments. The
change in unrealized loss on investments was approximately $46,000 for the year
ended March 31, 1995.
3. LINE OF CREDIT
The Company had available at March 31, 1995 an unsecured bank line of
credit with a maximum borrowing limit of $10 million. The interest rate is at
prime (9 percent at March 31, 1995). The line of credit expires July 31, 1996.
As of March 31, 1995 and 1994, there were no outstanding borrowings on the
Company's line of credit.
4. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1995 1994 1993
<S> <C> <C> <C>
CURRENT:
FEDERAL $2,282 $ 546 $1,811
STATE 554 141 428
DEFERRED:
FEDERAL (374) (536) (382)
STATE (116) (86) (88)
$2,346 $ 65 $1,779
</TABLE>
A reconciliation of the provision for income taxes at the statutory
federal income tax rate of 34 percent to the effective tax provision as
reported is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1995 1994 1993
<S> <C> <C> <C>
TAXES AT STATUTORY
FEDERAL RATE $1,941 $ 74 $1,609
STATE INCOME TAXES, NET
OF FEDERAL BENEFIT 264 85 289
TAX-EXEMPT INTEREST AND
DIVIDEND INCOME (74) (93) (58)
LOSS ON FOREIGN
OPERATIONS 131 - -
OTHER 84 (1) (61)
$2,346 $ 65 $1,779
</TABLE>
The temporary differences which give rise to the deferred tax assets for
fiscal years 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1995 1994
<S> <C> <C>
INVENTORY RESERVES $2,016 $1,744
ALLOWANCES FOR SALES
RETURNS AND
UNCOLLECTIBLE ACCOUNTS 732 633
DEPRECIATION AND
AMORTIZATION 163 100
VACATION PAY AND ACCRUED
COMPENSATION 52 51
OTHER 148 93
$3,111 $2,621
</TABLE>
5. COMMITMENTS
The Company leases its facilities and certain equipment under
non-cancelable operating leases. Rental expense for the years ended March 31,
1995, 1994 and 1993 was $2,641,000, $3,002,000 and $2,636,000, respectively.
The leases have initial expiration dates ranging from 1995 to 2001. Certain of
the leases contain renewal options, termination options and periodic adjustment
of the minimum monthly rental payment based upon increases in the Consumer
Price Index.
At March 31, 1995, the aggregate future minimum rentals are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, AMOUNT
<S> <C>
1996 $2,431
1997 1,775
1998 1,781
1999 637
2000 285
2001 7
$6,916
</TABLE>
6. PROFIT-SHARING PLAN (401K)
The Company has a qualified 401(k) profit-sharing plan covering
substantially all employees. The Company matches, at a 25 percent rate,
associates' contributions. In fiscal years 1995, 1994 and 1993, the Company's
matching contributions equaled $43,000, $46,000 and $7,000, respectively. The
plan also provides for discretionary Company contributions as approved by the
Board of Directors. Contributions of $149,000 and $210,000 for the years ended
March 31, 1995 and 1993, respectively, are included in the accompanying
statements of income. The Board did not authorize such a contribution for the
year ended March 31, 1994.
7. STOCK OPTION PLAN
The Company has a stock option plan which provides for the granting of
incentive stock options or nonqualified stock options to employees and
directors of the Company. Nonemployee directors are eligible to be granted
only nonqualified stock options. Incentive stock options may be granted at
prices not less than 100% of the fair market value of such shares at the date
of grant (110% with respect to optionees who are 10% or more stockholders of
the Company). Nonqualified options may be granted at prices not less than 85%
of the fair market value of such shares at the date of grant. Options granted
under the plan become exercisable in installments as determined by the Board of
Directors. There are 676,000 shares issuable under the plan. The expiration
date of the options will be determined by the Board of Directors and will not
exceed 10 years for incentive options (5 years with respect to optionees who
are 10% or more stockholders of the Company) and 10 years and 1 day for
nonqualified options.
The changes in the number of common shares under option for the years
ended March 31, 1993, 1994, and 1995 are summarized as follows:
NUMBER OF
SHARES PRICE RANGE
OUTSTANDING AS OF MARCH 31, 1992 519,430 $1.70 - $5.10
GRANTED 59,000 4.78 - 5.00
EXERCISED 13,500 1.70 - 5.10
FORFEITED 4,800 2.02 - 5.10
OUTSTANDING AS OF MARCH 31, 1993 560,130 1.70 - 5.10
EXERCISED 63,600 4.78 - 5.10
FORFEITED 38,500 4.78 - 5.10
OUTSTANDING AS OF MARCH 31, 1994 458,030 1.70 - 5.10
GRANTED 225,000 5.00 - 5.42
EXERCISED 173,120 2.02 - 4.78
FORFEITED 25,000 4.78 - 5.20
OUTSTANDING AS OF MARCH 31, 1995 484,910 1.70 - 5.42
EXERCISABLE AS OF MARCH 31, 1995 245,160 1.70 - 5.10
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," "1987 Stock Option Plan," "Profit Sharing
Plan" and "Certain Transactions" sections of the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission and mailed to
stockholders on or about June 22, 1995.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. See Index to Consolidated Financial Statements contained in
Item 8 herein.
2. See Index to Schedule to Consolidated Financial
Statements included herein.
3. See Item 14(c) for Index of Exhibits.
(b) No reports on Form 8-K filed during the fourth quarter ended March 31,
1995.
(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)
11.0 Statement re Computation of Per Share Earnings
21.0 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
(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.
<PAGE>
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 29, 1995 By: /s/ Charles C. Tillinghast, III
Charles C. Tillinghast, III
Chief Executive Officer,
Chairman of the Board and
Director (Principal
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: June 29, 1995 By: /s/ Charles C. Tillinghast III
Charles C. Tillinghast, III
Chief Executive Officer, Chairman
of the Board and Director (Principal
Executive Officer)
Date: June 29, 1995 By: /s/ Michael M. Nicita
Michael M. Nicita
President and Chief Operating
Officer
Date: June 29, 1995 By: /s/ Loren C, Paulsen
Loren C. Paulsen
Executive Vice President-Operations
and Director
Date: June 29, 1995 By: /s/ Jonathan S. Fish
Jonathan S. Fish
Chief Financial and Accounting
Officer and Executive Vice President
- Finance (Principal Financial and
Accounting Officer)
Date: June 29, 1995 By: /s/ James A. Leidich
James A. Leidich
Director
Date: June 29, 1995 By: /s/ E. William Swanson, Jr.
E. William Swanson, Jr.
Director
Date: June 29, 1995 By: /s/ Trygve E. Myhren
Trygve E. Myhren
Director
Date: June 29, 1995 By: /s/ Lynn S. Dawson
Lynn S. Dawson
Director
Date: June 29, 1995 By: /s/ Robert F. Bartlett
Robert F. Bartlett
Director
<PAGE>
ADVANCED MARKETING SERVICES, INC.
INDEX TO SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Schedule:
II Valuation and Qualifying Accounts 31
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.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
ADVANCED MARKETING SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1995, 1994 and 1993
(IN THOUSANDS)
Balance at Additions Balance
beginning charged at end of
of period to income Deductions period
1993
<S> <C> <C> <C> <C>
Allowance for
uncollectible
accounts and
sales returns $1,228 $ 400 $ 165 $1,463
Reserve for
markdown of
inventory $4,240 $2,490 $2,384 $4,346
1994
Allowance for
uncollectible
accounts and
sales returns $1,463 $ 578 $ 55 $1,986
Reserve for
markdown of
inventory $4,346 $2,225 $1,848 $4,723
1995
Allowance for
uncollectible
accounts and
sales returns $1,986 $ 899 $ 353 $2,532
Reserve for
markdown of
inventory $4,723 $2,766 $2,585 $4,904
/TABLE
<PAGE>
Exhibit 11.0
<TABLE>
<CAPTION>
ADVANCED MARKETING SERVICES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993
(UNAUDITED)
(in thousands except per share data)
1995 1994 1993
<S> <C> <C> <C>
NET INCOME $ 3,362 $ 156 $ 2,952
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING:
Weighted average common
shares outstanding 5,434 5,415 5,360
Weighted average common share
equivalents-dilutive stock
options:
Primary 154 - 188
Fully Diluted 177 - 244
Total Weighted Average
Common and Common
Equivalent Shares:
Primary 5,588 5,415 5,548
Fully Diluted 5,611 5,415 5,604
NET INCOME PER COMMON AND
COMMON SHARE EQUIVALENT
Primary $ 0.60 $ 0.03 $ 0.53
Fully Diluted $ 0.60 $ 0.03 $ 0.53
</TABLE>
In fiscal year 1994, dilutive common stock equivalents resulted in less
than a 3% change in EPS and therefore are excluded from the calculation of
EPS. Furthermore, the effects of all anti-dilutive common stock
equivalents are also excluded from the calculation of earnings per share.
<PAGE>
Exhibit 21.0
Subsidiaries of the Registrant
Advanced Marketing (UK) Limited - England
Advanced Marketing S. de R.L. de C.V. - Mexico
Advanced Marketing Services, Investments, Inc. - California
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K into the Company's previously
filed Registration Statements, File Nos. 33-30467 and 33-43792.
ARTHUR ANDERSEN LLP
San Diego, California
June 27, 1995
