SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 1996
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
(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)
(Zip Code)
Registrant's telephone number: (619) 457-2500
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
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
The number of shares of the Registrant's Common Stock outstanding as of
July 31, 1996 was 5,470,799.
ADVANCED MARKETING SERVICES, INC.
Quarterly Report on Form 10-Q
June 29, 1996
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 29, 1996 (Unaudited), March 31, 1996 and
July 1, 1995 (Unaudited) 3 - 4
Consolidated Statements of Income (Unaudited)
Three months ended June 29, 1996 and
July 1, 1995 5
Consolidated Statements of Cash Flows (Unaudited)
Three months ended June 29, 1996 and
July 1, 1995 6
Notes to Consolidated Financial Statements 7 - 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION 10
SIGNATURES 10
Page 2 of 10
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (See Note 1 for basis of presentation)
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF
JUNE 29, MARCH 31, JULY 1,
1996 1996 1995
(UNAUDITED) (UNAUDITED)
CURRENT ASSETS: (IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 490 $ 8,706 $ 7,306
INVESTMENTS, AVAILABLE-FOR-SALE 14,870 12,532 9,372
ACCOUNTS RECEIVABLE - TRADE, NET OF
ALLOWANCES FOR UNCOLLECTIBLE
ACCOUNTS AND SALES RETURNS OF $4,152,000
AT JUNE 29, 1996, $4,173,000 AT MARCH 31,
1996 AND $2,625,000 AT JULY 1, 1995 63,032 57,700 42,698
VENDOR AND OTHER RECEIVABLES 1,369 2,213 2,053
INVENTORIES, NET 82,971 72,297 73,401
DEFERRED INCOME TAXES 5,533 5,279 3,801
PREPAID EXPENSES 586 575 769
TOTAL CURRENT ASSETS 168,851 159,302 139,400
PROPERTY AND EQUIPMENT, AT COST 8,486 7,837 6,503
LESS - ACCUMULATED DEPRECIATION AND
AMORTIZATION 5,018 4,769 4,269
NET PROPERTY AND EQUIPMENT 3,468 3,068 2,234
INVESTMENTS, AVAILABLE-FOR-SALE 915 -- --
OTHER ASSETS 610 281 189
TOTAL ASSETS $173,844 $162,651 $141,823
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE SHEETS
Page 3 of 10
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AS OF
JUNE 29, MARCH 31, JULY 1,
1996 1996 1995
(UNAUDITED) (UNAUDITED)
CURRENT LIABILITIES: (IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
ACCOUNTS PAYABLE $116,085 $104,626 $ 92,692
ACCRUED LIABILITIES 4,156 5,309 2,453
INCOME TAXES PAYABLE 1,377 1,745 1,524
TOTAL CURRENT LIABILITIES 121,618 111,680 96,669
STOCKHOLDERS EQUITY:
COMMON STOCK, $.001 PAR VALUE, AUTHORIZED
20,000,000 SHARES, ISSUED 6,178,000 SHARES
AT JUNE 29, 1996, 6,174,000 SHARES AT MARCH
31, 1996 AND 6,117,000 SHARES AT JULY 1, 1996 6 6 6
ADDITIONAL PAID IN CAPITAL 26,004 25,968 25,563
RETAINED EARNINGS 28,340 27,113 21,766
UNREALIZED GAIN (LOSS) ON INVESTMENTS -- 8 (27)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (94) (94) (124)
LESS: TREASURY STOCK,708,000 SHARES,AT COST (2,030) (2,030) (2,030)
TOTAL STOCKHOLDERS' EQUITY 52,226 50,971 45,154
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY $173,844 $162,651 $141,823
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
Page 4 of 10
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 29, JULY 1,
1996 1995
<S> <C> <C>
NET SALES $ 97,797 $ 76,040
COST OF GOOD SOLD 88,612 68,639
GROSS PROFIT 9,185 7,401
DISTRIBUTION AND ADMINISTRATIVE EXPENSES 7,481 6,458
INCOME FROM OPERATIONS 1,704 943
INTEREST AND DIVIDEND INCOME 234 285
INCOME BEFORE PROVISION FOR INCOME TAXES 1,938 1,228
PROVISION FOR INCOME TAXES 711 474
NET INCOME $ 1,227 $ 754
NET INCOME PER COMMON AND COMMON SHARE
EQUIVALENT
PRIMARY $ .21 $ .14
FULLY DILUTED $ .21 $ .14
WEIGHTED AVERAGE NUMBER OF SHARES:
PRIMARY 5,746 5,519
FULLY DILUTED 5,749 5,544
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
Page 5 of 10
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION> THREE MONTHS ENDED
JUNE 29, JULY 1,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,227 $ 754
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 289 255
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
AND SALES RETURNS 127 105
PROVISION FOR MARKDOWN OF INVENTORY 475 222
DEFERRED INCOME TAXES (254) (690)
CHANGES IN ASSETS AND LIABILITIES:
INCREASE IN ACCOUNTS RECEIVABLE - TRADE (5,459) (5,806)
(INCREASE) DECREASE IN VENDOR AND
OTHER RECEIVABLES 844 (396)
INCREASE IN INVENTORIES (11,149) (4,267)
INCREASE ACCOUNTS PAYABLE 11,459 7,456
DECREASE IN ACCRUED LIABILITIES (1,153) (503)
INCREASE (DECREASE) IN INCOME TAXES PAYABLE (368) 922
INCREASE IN PREPAID EXPENSES AND OTHER ASSETS (339) (463)
NET CASH USED IN OPERATING ACTIVITIES (4,301) (2,411)
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE/DISPOSAL OF PROPERTY AND EQUIPMENT, NET (689) (174)
PURCHASE OF INVESTMENTS, AVAILABLE-FOR-SALE (34,570) (10,585)
SALE AND REDEMPTION OF INVESTMENTS,
AVAILABLE-FOR-SALE 31,308 11,397
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (3,951) 638
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISE OF OPTIONS AND RELATED
TAX BENEFITS 36 44
NET CASH PROVIDED BY FINANCING ACTIVITIES 36 44
DECREASE IN CASH AND CASH EQUIVALENTS (8,216) (1,729)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,706 9,035
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 490 $ 7,306
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
Page 6 of 10
ADVANCED MARKETING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements presented herein as of and for the three months ended
June 29, 1996 and July 1, 1995 have been prepared in accordance with
generally accepted accounting principles and with instructions to Form 10-Q.
These financial statements have not been examined by independent public
accountants, but include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of Management, necessary for a fair
presentation of the financial condition, results of operations and cash flows
for such periods.
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.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have
been omitted pursuant to requirements of the Securities and Exchange
Commission. Management believes that the disclosures included in the
accompanying interim financial statements and footnotes are adequate to make the
information not misleading. For further information, refer to the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1996.
The results of operations for the three month period ended June 29, 1996 are
not necessarily indicative of the results to be expected for the fiscal year
ending March 31, 1997. Net sales in the Company's third fiscal quarter have
historically been, and are expected to be, significantly greater than in any
other quarter of the fiscal year due to increased demand during the holiday
season.
2. INTERIM ACCOUNTING PERIODS
In accordance with wholesale distribution industry practice, net sales and
cost of goods sold for interim periods are cut off on the Saturday nearest to
the end of an accounting period. The cut-off for the fourth fiscal quarter
is March 31. This practice may result in differences in the number of
business days for which sales and cost of goods sold are recorded both as to
quarter-to-quarter comparisons, and as to comparisons of quarters between
years.
3. INVESTMENTS, AVAILABLE-FOR-SALE
"Investments, available-for-sale" consist principally of highly rated
municipal bonds and funds held in managed investment funds.
The cost and estimated fair market value of investments at June 29, 1996 and
July 1, 1995 are as follows (in thousands):
<TABLE>
<CAPTION> -------------- June 29, 1996 ----------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Debt Securities issued
by States of the U.S.
and political subdivisions
of the States $15,785 7 7 $15,785
======= ======= ======= =========
</TABLE>
Page 7 of 10
<TABLE>
<CAPTION> --------------- July 1, 1995 ---------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Mortgage-Backed Securities $ 2,898 - $ 34 $ 2,864
Debt Securities issued
by States of the U.S.
and political subdivisions
of the States 6,501 7 - 6,508
------- -------- ------- -------
$ 9,399 $ 7 $ 34 $ 9,372
======= ======== ======= =======
</TABLE>
As of June 29, 1996 investments in debt securities issued by states of the
U.S. and political subdivisions of the States in the amount of $14,870,760
are scheduled to mature within one year and $914,683 are scheduled to mature
within 2 years.
Proceeds from the sale of investments aggregated $29,307,888 for the quarter
ended June 29, 1996 and $6,000,000 for the quarter ended July 1, 1995. There
was no gain or loss realized for the first quarter of fiscal 1997 or for the
first quarter of fiscal 1996. The Company uses the specific identification
method in determining cost on these investments. The increase in unrealized
loss on investments was approximately $7,000 and the decrease in unrealized
gain on investments was approximately $1,000 for the quarter ended June 29,
1996.
4. SALES RETURNS
In accordance with industry practice, a significant portion of the Company's
products are sold to customers with the right of return. The Company has
provided allowances of $2,173,000 as of June 29, 1996, $2,173,000 as of March
31, 1996 and $1,593,000 as of July 1, 1995 for the gross profit effect of
estimated future sales returns.
5. INVENTORIES
Inventories consist primarily of books and prerecorded audio and video
cassettes purchased for resale and are stated at the lower of cost (first-in,
first-out) or market.
6. LINE OF CREDIT
The Company had available at June 29, 1996 an unsecured bank line of credit
with a maximum borrowing limit of $10 million. The interest rate is at prime
(8.25 percent at June 29, 1996). The line of credit expires July 31, 1998.
As of June 29, 1996 and July 1, 1995, there were no outstanding borrowings on
the line of credit.
7. 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.
8. PER SHARE INFORMATION
Per share information is based on the weighted average number of common shares
and, when applicable, dilutive common share equivalents outstanding during the
periods. The effects of all anti-dilutive common share equivalents are excluded
from the calculation of earnings per share. The Company's only potential
dilutive common share equivalents are stock options.
9. EMPLOYEE STOCK OPTION PLAN
Nonqualified options to purchase an aggregate of 534,090 shares of common
stock were outstanding as of June 29, 1996. The outstanding options were at
prices ranging from $2.02 to $11.16 per share.
Page 8 of 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS
Three Month Periods Ended June 29, 1996 and July 1, 1995:
During the three months ended June 29, 1995, the Company reported net income
of $1,227,000, or $.21 per share, compared with net income of $754,000, or $.14
per share, for the corresponding quarter of the previous year.
Net sales for the quarter increased nearly 29 percent to $97,797,000 compared to
$76,040,000 in the previous year's first quarter. The increase in net sales was
due in part to improved comparable retail sales recorded by the Company's
warehouse club customers during the quarter. Sales were particularly strong in
the bestseller and mass paperback categories. In addition, the Company was
designated as the primary book supplier to 65 additional Sam's Club locations,
commencing in late June 1995; therefore last year's first quarter was not
significantly impacted by these additional locations.
During the first three months of fiscal 1997, gross profit increased to
$9,185,000 from $7,401,000 in the first quarter of the previous fiscal year.
Gross profit as a percentage of net sales was 9.4 percent compared with 9.7
percent in the same period last year. The shift of the Company's sales mix
toward the lower margin bestseller and paperback categories modestly reduced
the gross profit percentage. This decline was partially offset by higher
income from publisher's incentive plans.
Distribution and administrative expenses for the quarter ended June 29, 1996
totaled $7,481,000, or 7.7 percent of net sales, compared to $6,458,000, or
8.5 percent of net sales, in the same quarter of the previous year. Continuing
efficiencies in the distribution centers contributed to the decline in these
expenses as a percentage of sales. Administrative expenses increased in
dollars, but declined as a percentage of sales, as a result of the increased
expenses incurred to handle the Company's increased sales volume and to
expand its customer base.
Interest and dividend income decreased to $234,000 in the period from $285,000
in the corresponding period of the previous year. This decrease was the result
of lower yields due to a greater proportion of tax exempt investment in the
current fiscal quarter.
B. LIQUIDITY AND SOURCES OF CAPITAL
For the quarter ended June 29, 1996, $4,301,000 of net cash was used in
operating activities. Net cash used in operating activities in the same period
of the prior year was $2,411,000. The Company's cash and investments decreased
by $403,000 compared to July 1, 1995 primarily due to an increase in accounts
receivable. Trade accounts receivable increased $20,334,000 compared to one
year ago due primarily to increased sales and, to a lesser extent, a delay in
receipt of certain customer payments and an increase in disputed items. Trade
accounts receivable increased $5,332,000 compared to March 31, 1996 due to
increased sales. Inventory increased $9,570,000 compared to July 1, 1995 and
$10,674,000 compared to March 31, 1996 to support sales growth. The increase in
inventory was more than offset by an increase in accounts payable of $11,459,000
and $23,393,000 compared to March 31, 1996 and July 1, 1995, respectively.
The funds used in operating activities were financed primarily by a decrease
in cash and cash equivalents in the quarter ended June 29, 1996.
Working capital was $47,233,000 as of June 29, 1996 compared to the July 1, 1995
level of $42,731,000 and the March 31, 1996 balance of $47,622,000. The
increase compared to July 1, 1995 was primarily a result of increases in net
operating current assets.
The Company had available at June 29, 1996 an unsecured bank line of credit with
a maximum borrowing limit of $10 million. The interest rate is at prime (8.25
percent at June 29, 1996). The line of credit expires July 31, 1998. As of
June 29, 1996 and July 1, 1995, there were no outstanding borrowings on the
line of credit.
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 levels of
operations.
Page 9 of 10
PART II. OTHER INFORMATION
ITEMS 1-3. NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Annual Meeting of Stockholders was convened on July 25, 1996.
Robert F. Bartlett (4,682,203 votes for; 6,800 abstain/withheld), Lynn S.
Dawson (4,682,203 votes for; 6,800 abstain/withheld) and Trygve E. Myhren
(4,682,203 votes for; 6,800 abstain/withheld) were elected as Class C directors
each to serve a three-year term, and will serve until their respective
successors are elected and qualified.
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11.0 Statement re Computation of Per Share Earnings
27.0 Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
August 13, 1996 By: /s/ Charles C. Tillinghast, III
Date Charles C. Tillinghast, III
Chief Executive Officer, Chairman
(Principal Executive Officer)
August 13, 1996 By: /s/ Jonathan S. Fish
Date Jonathan S. Fish
Chief Financial and
Accounting Officer, Executive
Vice President - Finance
(Principal Financial and
Accounting Officer)
Page 10 of 10
Exhibit 11.0
ADVANCED MARKETING SERVICES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 29, JULY 1,
1996 1995
<S> <C> <C>
NET INCOME $1,227 $ 754
WEIGHTED AVERAGE COMMON AND COMMON SHARE
EQUIVALENTS
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,468 5,398
WEIGHTED AVERAGE COMMON SHARE
EQUIVALENTS-DILUTIVE STOCK OPTIONS:
PRIMARY 278 121
FULLY DILUTED 281 146
TOTAL WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES:
PRIMARY 5,746 5,519
FULLY DILUTED 5,749 5,544
NET INCOME PER COMMON AND
COMMON SHARE EQUIVALENT:
PRIMARY $ .21 $ .14
FULLY DILUTED $ .21 $ .14
</TABLE>
Common share equivalents (for AMS outstanding stock options) are excluded
from earnings per share calculations when antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS OF INCOME AND CONSOLIDATED
BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-29-1996
<CASH> 490
<SECURITIES> 14,870
<RECEIVABLES> 64,401
<ALLOWANCES> 4,152
<INVENTORY> 82,971
<CURRENT-ASSETS> 168,851
<PP&E> 8,486
<DEPRECIATION> 5,018
<TOTAL-ASSETS> 173,844
<CURRENT-LIABILITIES> 121,618
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 52,220
<TOTAL-LIABILITY-AND-EQUITY> 173,844
<SALES> 97,797
<TOTAL-REVENUES> 97,797
<CGS> 88,612
<TOTAL-COSTS> 88,612
<OTHER-EXPENSES> 7,481
<LOSS-PROVISION> 254
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,938
<INCOME-TAX> 711
<INCOME-CONTINUING> 1,227
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,227
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
