<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
ADVANCED MARKETING SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------
<PAGE> 2
ADVANCED MARKETING SERVICES, INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 23, 1998
To the Stockholders of
Advanced Marketing Services, Inc.
The Annual Meeting of Stockholders of Advanced Marketing Services, Inc.
will be held on Thursday, July 23, 1998, at 10:00 a.m., P.D.T., at 5880 Oberlin
Drive, Suite 400, San Diego, California 92121 for the following purposes:
1. To elect two Class B Directors to serve for three-year terms;
2. To consider and act on a proposal to approve an amendment to the
Company's 1995 Stock Option Plan to increase from 400,000 to 650,000 the
number of shares of Common Stock issuable upon exercise of options and
to increase from 200,000 to 300,000 the number of shares of Common Stock
for which any eligible person may receive options under the 1995 Stock
Option Plan;
3. To consider and act on a proposal to approve the Company's Employee
Stock Purchase Plan, pursuant to which up to 100,000 shares of Common
Stock may be purchased by employees of the Company;
4. To transact any other business which may properly come before the
meeting and any adjournments or postponements thereof.
A proxy statement containing information for stockholders is annexed hereto
and a copy of the Annual Report of the Company for the fiscal year ended March
31, 1998 is enclosed herewith.
The Board of Directors has fixed the close of business, June 10, 1998, as
the record date for the determination of stockholders entitled to notice of and
to vote at the meeting.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE DATE AND
SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENVELOPE ENCLOSED
FOR THAT PURPOSE.
By the order of the Board of Directors
Charles C. Tillinghast, III
Chairman
San Diego, California
June 19, 1998
<PAGE> 3
ADVANCED MARKETING SERVICES, INC.
5880 OBERLIN DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 457-2500
------------------------
PROXY STATEMENT
GENERAL INFORMATION
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Advanced Marketing Services, Inc. ("AMS" or
the "Company"), a Delaware corporation, for use only at its Annual Meeting of
Stockholders to be held on Thursday, July 23, 1998, and any adjournments or
postponements thereof (the "Annual Meeting").
Shares may not be voted unless the signed proxy card is returned or other
specific arrangements are made to have shares represented at the meeting. Any
stockholder of record giving a proxy may revoke it at any time before it is
voted by filing with the Secretary of AMS a notice in writing revoking it, by
duly executing a proxy bearing a later date, or by attending the Annual Meeting
and expressing a desire to revoke the proxy and vote the shares in person.
Stockholders whose shares are held in street name should consult with their
brokers or other nominees concerning procedures for revocation. Subject to such
revocation, all shares represented by a properly executed proxy card will be
voted as directed by the stockholder on the proxy card. IF NO CHOICE IS
SPECIFIED, PROXIES WILL BE VOTED FOR THE PERSONS NOMINATED BY THE BOARD OF
DIRECTORS FOR ELECTION AS DIRECTORS, FOR APPROVAL OF THE ADOPTION OF THE
AMENDMENT TO THE 1995 STOCK OPTION PLAN AND FOR APPROVAL OF THE ADOPTION OF THE
EMPLOYEE STOCK PURCHASE PLAN.
In addition to soliciting proxies by mail, Company directors, officers and
other regular employees, without additional compensation, may solicit proxies
personally or by other appropriate means. The total cost of solicitation of
proxies will be borne by AMS. Although there are no formal agreements to do so,
it is anticipated that AMS will reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for their reasonable expenses in forwarding
any proxy soliciting materials to their principals.
Only stockholders of record at the close of business on Wednesday, June 10,
1998 are entitled to receive notice of and to vote at the Annual Meeting. On
June 10, 1998, AMS had outstanding 5,619,839 shares of common stock (the "Common
Stock"), which constituted all of the outstanding voting securities of AMS,
excluding 717,511 shares of the Common Stock held in treasury and not permitted
to be voted at the Annual Meeting. Each share is entitled to one vote. The
holders of a majority of the shares of Common Stock entitled to vote at the
Annual Meeting, present in person or by proxy, will constitute a quorum.
Directors are elected by a plurality of votes cast. Stockholders may not
cumulate their votes for any one or more nominees for election. If a quorum is
present, the affirmative vote of a majority of the shares represented and voting
is required for approval of the amendment to the 1995 Stock Option Plan,
approval of the Employee Stock Purchase Plan, and any other matters which might
be submitted to the stockholders for consideration at the Annual Meeting.
Abstentions and broker non-votes are counted for purposes of determining the
presence or absence of a quorum for the transaction of business but have the
effect of a "No" vote for purposes of determining whether a proposal has been
approved.
It is anticipated that this proxy statement and accompanying proxy card
will first be mailed to stockholders on or about June 19, 1998.
ITEM 1. ELECTION OF DIRECTORS
NOMINEES
Pursuant to the Company's Articles of Incorporation, the Board of Directors
of the Company is divided into three classes of directors, each class to be as
nearly equal in number as possible. Directors are elected to
<PAGE> 4
serve for three-year terms, with the elections staggered by class. The Board is
currently composed of eight directors; three of whom are Class A directors, two
of whom are Class B directors and three of whom are Class C directors. At the
Annual Meeting, two Class B directors are to be elected to a three-year term
until the Annual Meeting of Stockholders to be held in 2001 and until their
successors are duly elected and qualified. The Board of Directors has nominated
each of the following incumbent Class B directors for reelection as a Class B
director:
James A. Leidich
E. William Swanson
Information concerning the nominees for election as Class B directors is
set forth under the caption "Management -- Directors and Executive Officers."
The Board of Directors has no reason to believe that its nominees will be
unable or unwilling to serve if elected. However, should any nominee named
herein become unable or unwilling to accept nomination or election, the Board's
proxies will vote instead for such other person as the Board of Directors may
recommend.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ELECTION OF THE
ABOVE MENTIONED NOMINEES AS DIRECTORS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 10, 1998 with
regard to beneficial ownership of the Common Stock by (i) persons known by the
Company to be beneficial owners of more than five percent of the Common Stock,
(ii) the directors of the Company, (iii) the executive officers named in the
Summary Compensation Table below and (iv) all executive officers and directors
as a group.
<TABLE>
<CAPTION>
COMMON STOCK PERCENT OF
NAME (AND ADDRESS(1)) BENEFICIALLY OUTSTANDING
OF BENEFICIAL OWNER OWNED COMMON STOCK
--------------------- ------------ ------------
<S> <C> <C>
Charles C. Tillinghast, III..................... 902,900(2) 16.1%
Loren C. Paulsen................................ 921,200(3) 16.4%
Kahn Brothers & Co., Inc........................ 731,775 13.0%
Grace & White, Inc.............................. 686,162 12.2%
Dimensional Fund Advisors, Inc.................. 344,800 6.1%
Michael M. Nicita............................... 85,011(4) 1.5%
Kevan M. Lyon................................... 26,700(5) *
Adam R. Zoldan.................................. 2,000(6) *
E. William Swanson.............................. 25,000(7) *
James A. Leidich................................ 23,400(8) *
Trygve E. Myhren................................ 23,000(9) *
Lynn S. Dawson.................................. 8,200(10) *
Robert F. Bartlett.............................. 8,000(10) *
All executive officers and directors as a group
(15 persons).................................. 2,038,661(11) 36.3%
</TABLE>
- ---------------
* less than 1%.
(1) The address of Messrs. Tillinghast and Paulsen is c/o Advanced Marketing
Services, Inc., 5880 Oberlin Drive, San Diego, CA 92121. The address of
Kahn Brothers & Co., Inc. is 555 Madison Avenue, New York, NY 10022. The
address of Grace & White, Inc. is 515 Madison Avenue, New York, NY 10022.
The address of Dimensional Fund Advisors, Inc. ("Dimensional") is 1299
Ocean Avenue, Santa Monica, CA 90401. Dimensional, a registered investment
advisor, is deemed to have beneficial ownership of 344,800 shares, all of
which shares are held in portfolios of DFA Investment Dimensions Group
Inc., a registered open-end investment company, or in series of the DFA
Investment Trust
2
<PAGE> 5
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional Fund Advisors Inc. serves as
investment manager. Dimensional disclaims beneficial ownership of all such
shares.
(2) Mr. Tillinghast's shares are held of record by a Revocable Trust dated
April 7, 1988 of which Mr. Tillinghast and his wife are trustees. This
amount also includes 600 shares subject to options exercisable within 60
days held by Cynthia B. Tillinghast, Assistant Secretary and a General
Marketing Manager of the Company and the wife of Mr. Tillinghast. Mr.
Tillinghast disclaims beneficial ownership of such 600 shares.
(3) Of Mr. Paulsen's shares, 854,640 are held of record by a Revocable Trust
dated May 13, 1987, the trustees of which are Mr. Paulsen and his wife, and
66,560 are held of record by an Irrevocable Trust dated August 22, 1988,
the beneficiaries of which are Mr. Paulsen's children and the trustees of
which are unrelated to Mr. Paulsen. Mr. Paulsen disclaims beneficial
ownership of the 66,560 shares held by this Irrevocable Trust.
(4) Includes 84,500 shares subject to options that are exercisable within 60
days.
(5) Includes 26,000 shares subject to options that are exercisable within 60
days.
(6) Includes 2,000 shares subject to options that are exercisable within 60
days.
(7) Mr. Swanson's shares are held of record by F.W. Cygnet Pension Plan, of
which Mr. Swanson is a trustee. This amount also includes 15,000 shares
subject to options that are exercisable within 60 days.
(8) Includes 3,200 shares subject to options that are exercisable within 60
days.
(9) Includes 1,000 shares held of record by Mr. Myhren's wife and 15,000 shares
subject to options that are exercisable within 60 days.
(10) Includes 8,000 shares subject to options that are exercisable within 60
days.
(11) Includes 175,450 shares subject to options that are exercisable within 60
days.
3
<PAGE> 6
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information as of June 10, 1998 with
regard to (i) each director, including the two nominees (who currently serve as
directors), and (ii) each executive officer of the Company who is neither a
director nor a nominee.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles C. Tillinghast, III 61 Chairman of the Board of Directors
Michael M. Nicita 45 President, Chief Executive Officer, Acting
Chief Financial Officer and Director
Loren C. Paulsen 48 Executive Vice President -- Operations and
Director
Robert F. Bartlett 53 Director(1)
Lynn S. Dawson 47 Director(1)
James A. Leidich 55 Director(1)
Trygve E. Myhren 61 Director(1)
E. William Swanson 62 Director(1)
Kevan M. Lyon 39 Executive Vice President -- Merchandising
Sandra Christie 43 Vice President -- Advertising
Kenneth C. Hayes 52 Vice President -- Information Systems
Alisa R. Judge 42 Vice President -- Human Resources
John S. McGee 36 Vice President -- Operations
Sydney J. Stanley 49 Vice President -- Product Development
Adam R. Zoldan 45 Vice President -- Marketing
</TABLE>
- ---------------
(1) Member of the Compensation and Audit Committees.
Mr. Tillinghast has served as Chairman of the Board of Directors since
November 1994. He served as Chief Executive Officer of the Company from
November 1994 until December 31, 1996; prior thereto, Mr. Tillinghast served as
President, Chief Executive Officer and as a Director of the Company since its
inception in 1982. He served as President of Oak Tree Publications, Inc. from
1976 until 1981 and as President of CRM, a diversified publishing company, from
1971 through 1975. Mr. Tillinghast was employed by Boise Cascade Corporation for
10 years, where he served in various management positions, including Senior Vice
President from 1971 to 1973.
Mr. Nicita has served as Chief Executive Officer of the Company since
January 1, 1997 and as President, Chief Operating Officer and a Director of the
Company since November 1994. From 1978 to November 1994, he served in various
capacities at Golden-Lee Book Distributors, including MIS Director, Controller
and General Manager. In August 1995, Golden-Lee Book Distributors filed for
protection under the bankruptcy laws. Mr. Nicita was employed by Barnes & Noble
Book Stores, Inc. from 1977 to 1978. Mr. Nicita is the co-author of two books on
microcomputers and has also been a columnist for a national microcomputer
consumer magazine.
Mr. Paulsen has served as Executive Vice President -- Operations since
December 1989 and as a Director of the Company since its inception in 1982. From
1982 to December 1989, Mr. Paulsen served as Vice President -- Operations of the
Company. Prior thereto, he was employed by Fed Mart Corp., a discount retail
chain, for 17 years in various capacities, including sundries and book buyer.
Mr. Bartlett has been a Director of the Company since April 1994. He is
presently Managing Director of Combined Resources International, a picture frame
manufacturing company. Mr. Bartlett has many years of experience in the
warehouse club industry, having served as Vice President, Divisional Manager of
Anderson Chamberlain, a warehouse club manufacturer's representative firm
(1993-1995); Senior Vice President of Merchandising, Operations, Traffic and
Distribution, SourceClub, Inc. (1991-1993); Executive Vice Presi-
4
<PAGE> 7
dent of Merchandising and Distribution, The Wholesale Club, Inc. (1990-1991);
and Executive Vice President of Merchandising, Traffic and Distribution, The
Price Club (1989-1990).
Ms. Dawson has been a Director of the Company since April 1994. She is
presently employed as Vice President and National Sales Manager for B.H.
Smith/Samsonite. Ms. Dawson has many years of experience in department store
operations, having served in a variety of positions including Vice President,
Divisional Merchandise Manager with Foley's Department Store (1990-1991); Senior
Vice President, Broadway Department Store (1978-1990) and Buyer and Department
Manager, May Company Department Store (1972-1978).
Mr. Leidich has been a Director of the Company since November 1986. He has
served as President of Graywave, Inc., a management consulting firm, since 1983.
Since July of 1994 he has served as Chairman and Chief Executive Officer of
Bright Start, Inc., which operates child care centers. Mr. Leidich serves on the
boards of numerous privately held companies. From November 1989 to May 1993, he
served as an officer and partner in Colorado Venture Management, Inc., a venture
capital firm. Mr. Leidich was the Chairman of Children's World, Inc., a national
chain of child care centers, from 1975 to 1983. From 1980 to 1983, Mr. Leidich
was Executive Vice President of The Parker Pen Company.
Mr. Myhren has been a Director of the Company since February 1989. From
December 1990 to March 1996, he served as President and a Director of the
Providence Journal Company, a diversified media company and concurrently as
President and CEO of King Broadcasting Corporation. Since 1988 he has been
President of Myhren Media, Inc., a media investment and consultation firm. He is
a trustee of the University of Denver. His other directorships include Peapod,
Ltd., Cablelabs, Inc., J.D. Edwards, Inc., Founders Funds, Inc. and Verio, Inc.
From 1975 until originally establishing Myhren Media, Inc., he served as
President and then Chairman and Chief Executive Officer of American Television
and Communications Corporation, a publicly traded subsidiary of Time, Inc. and
known today as Time/Warner Cable. From 1981 to 1991, Mr. Myhren served as a
Director of the National Cable Television Association and was its Chairman in
1986 and 1987. He has previously served as a Director of Turner Broadcasting
Systems, Inc., American TV & Communications, Inc., Continental Cablevision,
Inc., Citizen's Bank Corp., Lifespan, Inc., and on Time's internal boards for
Home Box Office, Temple-Eastex and Time Magazine Group, and on the Federal
Communications Commission's Advisory Committee on High Definition Television.
Mr. Swanson has been a Director of the Company since April 1988. He has
served as President of F.W. Cygnet, Inc., an investment management firm, since
1986. From 1982 to 1986, Mr. Swanson was the President and Chief Executive
Officer of St. Francis Associates, a private investment management firm in San
Francisco. From 1975 through 1982, he was employed by The Parker Pen Company,
serving in various capacities, including President, Chief Executive Officer and
Chief Operating Officer.
Ms. Lyon joined the Company in 1988 as Marketing Director. In December
1989, Ms. Lyon was named Vice President -- Marketing with responsibility for
leading the sales and marketing efforts with respect to the Company's major
customers. In September 1994, Ms. Lyon became Vice President -- Merchandising
with responsibility for the Company's buying activities. In October 1997, Ms.
Lyon was promoted to Executive Vice President -- Merchandising. From 1983
through 1988, she worked for Allergan, Inc., a pharmaceutical company, in
various sales and product management positions.
Ms. Christie joined the Company in 1986. She became Director of Advertising
in 1994 and was promoted to Vice-President -- Advertising in October 1997.
Mr. Hayes joined the Company in 1986 as Director of Management Information
Systems. He was promoted to Vice President -- Information Systems in July 1991.
From 1982 until 1986, he served as Data Processing Manager for Spectragraphics
Corporation, a computer graphics manufacturing company. Prior to 1982, Mr. Hayes
served in various technical and management positions with McDonnell Douglas
Automation, San Diego Data Processing Corporation and National Semiconductor.
Ms. Judge joined the Company in May 1991 as Manager of Human Resources. She
was promoted to Director of Human Resources in October 1992 and to Vice
President -- Human Resources in July 1994.
5
<PAGE> 8
From 1986 to 1991, she worked for the Eastridge Group, an employment/temporary
agency in a variety of management positions.
Mr. McGee joined the Company in April 1994 as Distribution Center Manager
and was promoted to Vice President -- Operations in February 1996. From February
1984 until April 1994 he held a variety of positions, including Director of
Operations and Divisional General Manager with Bindagraphics, Inc., a book
bindery company.
Ms. Stanley joined the Company in November 1990 as a General Merchandise
Manager with responsibility for the juvenile book category and was promoted to
Vice President -- Product Development in November 1996. From 1974 through 1989
Ms. Stanley was employed by the City of San Diego in a variety of professional
managerial positions for the Library Department, including assignments in
children's literature and services, branch library management and fundraising.
Mr. Zoldan joined the Company in January 1995 as Vice
President -- Marketing and has responsibility for sales and relations with the
Company's major customers. From 1988 to 1995, Mr. Zoldan was General Sales
Manger for Eastman, a division of Office Depot. Prior to 1988, he served as
General Sales Manager for Office Club (now Office Depot) (1984-1986) and
District Sales Manager for McKesson Office Products (1981-1984).
Officers serve at the discretion of the Board of Directors.
BOARD OF DIRECTORS AND COMMITTEES
Directors are elected to serve staggered three-year terms and until their
successors are duly elected and qualified. Each director who is not otherwise
employed by the Company receives an annual director's fee of $10,000 plus $1,000
for each regular Board meeting attended. In addition, each outside director is
paid $500 for attendance at each special Board and Audit, Compensation or Stock
Option Committee meeting held on dates other than the regularly scheduled Board
meetings. The Company reimburses each director for reasonable out-of-pocket
expenses incurred in his capacity as a member of the Board of Directors. No
payments are made for participation in telephone meetings of the Board of
Directors or actions taken in writing. Each director attended at least 75% of
the total number of meetings of the Board of Directors and all committees
thereof on which such director served held during the year ended March 31, 1998
other than Mr. Myhren, who attended 70% of such meetings.
The members of the Audit Committee of the Board of Directors are Messrs.
Bartlett, Leidich, Myhren and Swanson and Ms. Dawson. The Audit Committee held
one meeting during fiscal 1998. The functions of the Audit Committee are
primarily to recommend the selection of the Company's independent public
accountants, discuss with them the scope of the audit, consider matters
pertaining to the Company's accounting policies and internal controls and
provide a means for direct communication between the independent public
accountants and the Board of Directors.
The members of the Compensation Committee of the Board of Directors are
Messrs. Bartlett, Leidich, Myhren and Swanson and Ms. Dawson. The Compensation
Committee held two meetings during fiscal 1998. The functions of the
Compensation Committee are to review and recommend changes in salaries and
bonuses of key employees, to review periodically, and make recommendations with
respect to, the compensation structure of the Company and to determine the
amount of contributions to the Company's profit sharing plan.
Effective February 6, 1997, the Company elected to have the Board of
Directors, acting as a whole, assume responsibility for administering the
Company's 1987 and 1995 Stock Option Plans.
The Company has no nominating committee or committee performing similar
functions.
6
<PAGE> 9
EXECUTIVE COMPENSATION
BOARD AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is composed of five outside directors. The
Compensation Committee is responsible for determining executive officer salary
and bonus compensation and determining annual contributions to the Company's
profit sharing plan. Stock option grants are determined by the Board of
Directors. The following is a report of the Compensation Committee and, as it
relates to stock options, the Board as a whole, concerning their policies and
actions in fiscal 1998 concerning executive compensation.
The Company's compensation programs are designed to (a) link executive
compensation to the performance of the Company and to stockholder value as
measured by the long-term price appreciation of the Company's common stock and
(b) attract, retain and motivate employees by providing for the vesting of
certain components of compensation over a number of years.
The Company's compensation of executive officers, including its Chief
Executive Officer, consists principally of two components: (a) annual cash
compensation, generally consisting of base salary and a bonus, and (b)
long-term, stock-based compensation. The policies governing these components, as
well as the basis for determining the compensation payable to the Chief
Executive Officer, are described below.
Annual Salary and Bonus Compensation. The salaries of executive officers
are determined on the basis of, in no particular order of importance, the
responsibilities of the position held, the prior experience and compensation of
the officer, the compensation practices of competitors, as determined from
publicly available information, discussions with knowledgeable consultants and
participants in the publishing and distribution industries and other marketplace
factors such as housing and relocation requirements. The Compensation Committee
also strives to compensate each executive officer at a level which is
appropriate in relation to the compensation of other executive officers of the
Company. The Company generally weights increases in executive compensation,
including salary and bonus, in favor of performance and, therefore, salary
increases are generally related to the tax adjusted inflation rate.
Under the Company's bonus plan, cash bonuses are earned if a minimum
targeted level of net income is attained. Bonus amounts increase if higher
target net income levels are attained. The Company's net income objectives are
established by the Compensation Committee at the commencement of each fiscal
year. For fiscal 1998, payments under the Company's bonus plan to each executive
officer were based principally upon the Company exceeding the targeted net
income objective.
Long-Term Stock Option Compensation. The Company grants stock options to
its executive officers and other employees pursuant to its 1995 Stock Option
Plan. The Company believes that such options help to more closely align the
interests of its management employees with the long-term interests of its
stockholders by providing an incentive for increasing stockholder value.
Moreover, such options are believed to be instrumental in retaining employees
over the longer term, since full benefits of appreciated options cannot be
realized until the end of the applicable vesting period, which is usually five
years.
During fiscal 1998, based on the contributions of the employees and
performance of the Company, the Board of Directors approved a grant of options
to purchase 60,000 shares of Common Stock to Mr. Michael M. Nicita. The Board of
Directors also approved a grant of options to purchase the following number of
shares of Common Stock to the following Named Executive Officers: Kevan M.
Lyon -- 15,000; and Adam R. Zoldan -- 7,500. Messrs. Tillinghast and Paulsen,
who are founders of the Company, are eligible to receive grants of options, but
their significant equity positions in the Company are currently believed to
provide them with substantial incentives to enhance stockholder value and no
options were granted to them during fiscal 1998.
CEO Compensation. The Compensation Committee establishes the base salary
and bonus, if any, payable to Mr. Michael M. Nicita, the Company's Chief
Executive Officer, since January 1, 1997, based on the same factors applicable
to executive officer compensation generally.
7
<PAGE> 10
In March 1997, the Compensation Committee reviewed Mr. Nicita's salary and
determined that his salary would be increased to $258,500, and in September 1997
the Compensation Committee further reviewed Mr. Nicita's salary and increased it
to $275,000. Mr. Nicita's salary is believed to be below the median of salaries
paid to chief executive officers of companies which have comparable sales
volumes. Because the Company exceeded the minimum net income objectives
established by the Compensation Committee, bonuses aggregating $121,250 were
awarded under the Company's bonus plan to Mr. Nicita for fiscal 1998.
Internal Revenue Code Section 162(m). Internal Revenue Code Section 162(m),
enacted in 1993, provides that a public corporation generally may not deduct
compensation in excess of $1,000,000 payable to its chief executive officer or
any of its other four most highly compensated officers. Certain
performance-based compensation is specifically exempted. Since the Compensation
Committee currently does not anticipate that any executive officer of the
Company will receive compensation in excess of the deduction limitation in
fiscal 1998, it has not yet established a policy with respect to Section 162(m).
In future years, the Compensation Committee intends to take into account the
effect of Section 162(m) if the compensation payable to an executive officer
approaches $1,000,000. However, the provisions of Section 162(m) are not
expected to preclude the award of compensation believed to be merited, even if
in excess of $1,000,000.
The tables that follow reflect the decisions included in this report.
<TABLE>
<S> <C>
THE BOARD OF DIRECTORS THE COMPENSATION COMMITTEE
(with respect to Options) James A. Leidich, Chairman
Charles C. Tillinghast, III Robert F. Bartlett
Michael M. Nicita Lynn S. Dawson
Loren C. Paulsen Trygve E. Myhren
Robert F. Bartlett E. William Swanson
Lynn S. Dawson
James A. Leidich
Trygve E. Myhren
E. William Swanson
</TABLE>
8
<PAGE> 11
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services rendered in all capacities to the Company
for the fiscal years ended March 31, 1998, 1997 and 1996 of those persons who
were, at March 31, 1998, (i) the Chief Executive Officer and (ii) the four other
most highly paid executive officers of the Company (collectively the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------ ALL OTHER
NAME AND CAPACITY FISCAL -------------------------- OPTIONS/ COMPENSATION
IN WHICH SERVED YEAR SALARY($)(1) BONUS($)(1) SARS(#) ($)(2)
----------------- ------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles C. Tillinghast, III........... 1998 267,044 121,250 0 27,295
Chairman 1997 265,635 0 0 26,350
1996 250,010 67,350 1,000(3) 9,879
Michael M. Nicita..................... 1998 267,403 121,250 60,000 27,100
Chief Executive Officer and 1997 251,658 0 0 25,680
President
1996 235,003 68,475 0 2,532
Loren C. Paulsen...................... 1998 193,878 93,750 0 20,746
Executive Vice 1997 183,757 0 0 20,461
President -- Operations
1996 172,965 57,975 0 10,346
Kevan M. Lyon......................... 1998 157,347 82,585 15,000 15,976
Executive Vice President -- 1997 137,818 446 0 17,406
Merchandising 1996 130,005 43,181 5,000 9,241
Adam R. Zoldan........................ 1998 121,886 74,500 7,500 37,024(4)
Vice President -- Marketing 1997 115,504 446 0 17,378
1996 110,005 41,681 5,000 65,960
</TABLE>
- ---------------
(1) Amounts shown include cash compensation earned and received by executive
officers as well as amounts earned and accrued but not yet paid, including
salary amounts deferred at their election under the Company's 401(k) plan
and deferred compensation plan.
(2) The amounts indicated for fiscal 1998 include, for Messrs. Tillinghast,
Nicita, Paulsen and Zoldan and Ms. Lyon respectively: profit sharing
contributions of $8,000, $8,000, $8,000, $5,493 and $6,789 (excluding the
allocable portion of accrued interest); Company matching 401(k) plan
contributions of $1,600, $1,600, $1,600, $1,192 and $1,387; and matching
contributions (excluding interest) of $17,695, $17,500, $11,146, $5,120 and
$7,800 under the Company's deferred compensation plan. The deferred
compensation plan permits an eligible employee to defer up to 50% of base
salary and 100% of any bonus. The Company is obligated to contribute an
amount equal to an employee's deferral up to a stated maximum and may, at
its discretion, make additional contributions. Company contributions
generally vest over a five-year period beginning on the date of an
employee's entry into the plan.
(3) Represents options granted to Cynthia B. Tillinghast, Assistant Secretary
and a General Marketing Manager of the Company. Mrs. Tillinghast is the wife
of Mr. Tillinghast.
(4) Includes relocation expenses of $25,219.
EMPLOYMENT AGREEMENT
Mr. Tillinghast served as Chief Executive Officer of the Company until
January 1, 1997. In March 1996, the Compensation Committee reviewed Mr.
Tillinghast's salary and determined that his salary would be increased to
$262,500 for fiscal 1997. In order to provide for an orderly transition in
management of the Company, in July 1996 the Company and Mr. Tillinghast entered
into an Employment Agreement covering the five-year period commencing January 2,
1997. Pursuant to the terms of the Employment Agreement, effective January 2,
1997, Mr. Tillinghast resigned from his position as Chief Executive Officer of
the Company, which position was filled by Mr. Michael M. Nicita who also serves
as President and a Director of the Company. During the term of the Employment
Agreement, Mr. Tillinghast agreed to serve as Chairman of the Board of Directors
(if re-elected as a director by the Company's stockholders) and to perform
certain
9
<PAGE> 12
other duties and responsibilities as requested by the Board of Directors. Mr.
Tillinghast agreed to serve the Company on a full-time basis during 1997;
thereafter, Mr. Tillinghast's services will decrease proportionately such that
during the final year of his employment, Mr. Tillinghast will only be required
to serve the Company on an approximately half-time basis, but not less than
1,000 hours per calendar year. Under the terms of the Employment Agreement, Mr.
Tillinghast's base salary was set at $275,000 for the first year, $225,000
(which was increased by the Board of Directors to $236,000) for the second year,
$175,000 for the third and fourth years and $150,000 for the fifth year of this
employment, subject to adjustment by the Board of Directors. He will be entitled
to participate in any Company compensation plan and receive fringe benefits,
generally on the same basis as other senior Company executives.
OPTION GRANTS
The following table sets forth with respect to the Named Executive Officers
certain information concerning grants of stock options in fiscal 1998. No stock
appreciation rights were granted in fiscal 1998.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZED VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE GRANT DATE PRICE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES OR BASE MARKET TERM(1)
OPTIONS IN PRICE PRICE EXPIRATION -----------------------------
GRANTED(#) FISCAL YEAR ($/SH) ($/SH) DATE 0%($) 5%($) 10%($)
---------- ----------- -------- ---------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles C. Tillinghast,
III........................ 0 -- -- -- -- -- -- --
Michael M. Nicita............ 30,000 9.7 $14.66 $17.25 3/08 77,700 412,500 961,200
Michael M. Nicita............ 30,000 9.7 9.24 10.875 9/07 49,050 260,100 606,000
Loren C. Paulsen............. 0 -- -- -- -- -- -- --
Kevan M. Lyon................ 15,000 4.9 14.66 17.25 3/08 38,850 206,250 480,600
Adam R. Zoldan............... 7,500 2.4 14.66 17.25 3/08 19,425 103,125 240,300
</TABLE>
- ---------------
(1) Amounts shown represent the potential value of granted options if the
assumed annual rates of stock appreciation are maintained over the 10-year
terms of the granted options. The assumed rates of appreciation are
established by regulation and are not intended to be a forecast of the
Company's performance or to represent management's expectations with respect
to the appreciation, if any, of the Common Stock.
OPTION EXERCISES AND HOLDINGS
The following table sets forth with respect to the Named Executive Officers
information concerning the exercise of stock options during fiscal 1998 and
unexercised options held as of the end of the fiscal year. The Company has never
granted stock appreciation rights.
AGGREGATED OPTION EXERCISES AND
FISCAL 1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER VALUE OF
OF UNEXERCISED UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES VALUE FISCAL YEAR END(#) FISCAL YEAR END($)(1)
ACQUIRED ON REALIZED --------------------------- ---------------------------
EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles C. Tillinghast, III(2)............ 0 0 600 600 5,830 4,554
Michael M. Nicita......................... 0 0 90,000 120,000 1,199,700 1,207,800
Loren C. Paulsen.......................... 0 0 0 0 0 0
Kevan M. Lyon............................. 3,000 28,825 24,000 22,000 316,160 138,320
Adam R. Zoldan............................ 4,000 45,700 2,000 18,500 15,180 166,885
</TABLE>
- ---------------
(1) Before taxes. The dollar value indicated is based on the difference between
the exercise price of the outstanding option and the closing market price of
the Common Stock on March 31, 1998 as reported by NASDAQ ($18 3/4 per
share).
(2) Represents options held by Cynthia B. Tillinghast, Assistant Secretary and a
General Marketing Manager of the Company. Mrs. Tillinghast is the wife of
Mr. Tillinghast.
10
<PAGE> 13
PERFORMANCE GRAPH
The following graph presents a comparison of the Company's stock
performance with the broad-based NASDAQ Market Index and with the Dow Jones
Industry Group OTS -- Other Specialty Retailers Index, an index compiled by
Media General Financial Services which currently covers approximately 235
specialty retail companies (including the Company).
[GRAPH]
<TABLE>
<CAPTION>
Advanced
Measurement Period Marketing Services, NASDAQ Market Dow Jones
(Fiscal Year Covered) Inc. Index Industry Group
<S> <C> <C> <C>
1993 100.00 100.00 100.00
1994 74.55 115.57 100.74
1995 89.09 122.61 98.29
1996 170.91 164.91 116.36
1997 136.36 184.50 116.71
1998 272.73 278.82 175.43
</TABLE>
The graph assumes $100 invested on April 1, 1993 in the Company's Common
Stock and $100 invested at that time in each of the indexes shown. The
comparison assumes that all dividends are reinvested.
ITEM 2. PROPOSED AMENDMENT TO 1995 STOCK OPTION PLAN
The Company's Board of Directors has approved an amendment to the Company's
1995 Stock Option Plan (the "1995 Plan"), subject to stockholder approval, to
increase (i) from 400,000 to 650,000 the number of shares of Common Stock
issuable upon exercise of options granted under the 1995 Plan and (ii) from
200,000 to 300,000 the number of shares of Common Stock for which any eligible
person may receive options under the 1995 Plan. The purpose of the amendment is
to enable the Company to grant additional options in the future in order to
attract and retain key employees. The Company currently has outstanding options
under the 1995 Plan covering 522,700 shares of Common Stock (including 199,000
options granted subject to stockholder approval of the amendment to the 1995
Plan).
DESCRIPTION OF THE 1995 PLAN
The 1995 Plan was adopted by the Board of Directors in March 1995 and
approved by the stockholders in July 1995. The Board of Directors believes that
the selective grant of stock options is an effective and efficient means of
attracting, motivating and retaining key employees, officers and directors. The
1995 Plan provides for the grant of options to purchase Common Stock either that
are intended to qualify as "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
that are not intended to so qualify ("non-qualified stock options"). All
officers, directors and employees are eligible
11
<PAGE> 14
to receive options under the 1995 Plan, except that only employees may receive
incentive stock options. The maximum number of shares available for issuance
under the 1995 Plan is 400,000 (650,000 if the proposed amendment is approved).
No person eligible to receive options under the 1995 Plan may receive options
for the purchase of more than an aggregate of 200,000 shares (300,000 if the
proposed amendment is approved).
The 1995 Plan is currently administered by the Board of Directors and may,
in the Board's discretion, be administered by a committee of the Board of
Directors appointed for that purpose (the "Committee"), which, subject to the
terms of the 1995 Plan, has the authority in its sole discretion to determine:
(a) the individuals to whom options shall be granted; (b) the time or times at
which options may be exercised; (c) the number of shares subject to each option,
the option price and the duration of each option granted; and (d) all of the
other terms and conditions of options granted under the 1995 Plan.
The exercise price of incentive stock options granted under the 1995 Plan
must be at least equal to the fair market value of the shares on the date of
grant (110% of fair market value in the case of participants who own shares
possessing more than 10% of the combined voting power of the Company) and may
not have a term in excess of 10 years from the date of grant (five years in the
case of participants who are more than 10% stockholders). The aggregate fair
market value (determined as of the time the Option is granted) of the shares
with respect to which incentive stock options (granted under all plans of the
Company or its subsidiaries) are exercisable for the first time by an optionee
in any calendar year may not exceed $100,000. Non-qualified 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 1995 Plan are not transferable other than by will
or the laws of descent and distribution. Unless otherwise determined by the
Board of Directors or the Committee in connection with the grant of any
non-qualified stock options, all stock options granted under the 1995 Plan
expire one month after the date of the optionee's termination of employment with
the Company for any reason other than death or permanent disability and six
months after the optionee's termination of employment by reason of death or
permanent disability (but not, in either case, later than the scheduled
expiration date). Upon termination of employment the number of shares with
respect to which a stock option may be exercised shall be limited to that number
of shares which could have been purchased pursuant to the option had the option
been exercised by the optionee on the date of such termination of employment. In
the case of death, options may be exercised by the person or persons to whom the
rights under the options pass by will or by the laws of descent or distribution.
Payment of the exercise price upon exercise of an option must be made in
cash or, in the discretion of the Board of Directors or the Committee, in shares
of Common Stock. Where payment is made in Common Stock, such Common Stock is
valued for such purpose at the fair market value of such shares (determined as
specified in the 1995 Plan) on the date of exercise.
If the number of outstanding shares of Common Stock is increased or
decreased, or if such shares are exchanged for a different number or kind of
shares through reorganization, merger, recapitalization, reclassification, stock
dividend, stock split, combination of shares or other similar transaction, the
aggregate number of shares available for issuance under the 1995 Plan, the
number of shares subject to outstanding options, the per share exercise price of
outstanding options and the aggregate number of shares with respect to which
options may be granted to a single participant will be appropriately adjusted by
the Board of Directors or the Committee.
No grant of options may be made under the 1995 Plan more than 10 years
after its date of adoption. The Board of Directors has authority to terminate or
to amend the 1995 Plan, subject to the approval of the Company's stockholders
under certain specified circumstances, provided that such action does not impair
the rights of any holder of outstanding options without the consent of such
holder.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the principal federal income tax
consequences of the 1995 Plan based on current provisions of the Code and
applicable regulations thereunder.
12
<PAGE> 15
Incentive Stock Options. No income is recognized by an optionee at the time
of grant of an incentive stock option or at the time of exercise of such option
while employed by the Company (or within limited periods after termination of
employment). However, the exercise of an incentive stock option may result in an
alternative minimum tax liability for the optionee. If the optionee continues to
hold the shares received upon the exercise of the option for at least two years
from the date the option was granted and one year from the date the option was
exercised, the optionee will recognize capital gain or loss when he disposes of
the shares. Such gain or loss will be measured by the difference between the
option price and the amount received for the shares at the time of disposition.
If the optionee disposes of shares acquired upon exercise of an incentive
stock option before the expiration of the one-year and two-year holding periods
described above, the optionee will recognize ordinary income in the year of
disposition, in an amount equal to the excess of the fair market value of the
shares on the date the option was exercised (or, if less, the amount received
upon disposition of the shares) over the option price. Any amount realized upon
such a disposition in excess of the fair market value of the shares on the date
of exercise will be treated as capital gain.
Non-Qualified Stock Options. An optionee recognizes no income at the time a
non-qualified stock option is granted. At the time a non-qualified stock option
is exercised, an optionee will recognize ordinary income in an amount equal to
the excess of the fair market value of the shares on the date of exercise over
the exercise price. An optionee will recognize capital gain or loss on the
subsequent sale of the option shares in an amount equal to the difference
between the amount realized and the tax basis of such shares. The tax basis will
equal the option price paid plus the amount included in the optionee's income by
reason of the exercise of the option.
Company Deductions. As a general rule, the Company will be entitled to a
deduction for federal income tax purposes at the same time and in the same
amount that an employee recognizes ordinary income from options granted under
the Plan, to the extent such income is considered reasonable compensation under
the Code. The Company will not, however, be entitled to a deduction to the
extent compensation in excess of $1 million is paid during any year to an
executive officer named in the Summary Compensation Table of the proxy statement
who was employed by the Company at year-end, unless the compensation qualifies
as "performance-based" under Section 162(m) of the Code or certain other
exceptions apply. In addition, the Company will not be entitled to a deduction
with respect to payments to employees which are deemed to constitute "excess
parachute payments" under Section 280G of the Code and do not qualify as
reasonable compensation pursuant to that Section; such payments will subject the
recipients to a 20% excise tax.
OPTIONS GRANTED SUBJECT TO STOCKHOLDER APPROVAL
Subject to stockholder approval of the proposed amendment to the 1995 Plan,
the Company granted stock options to the persons named below, effective March
19, 1998. Such options are exercisable until March 19, 2008 at a price of $14.66
per share (representing 85% of the fair market value of the Common Stock on the
date of grant), and vest as to 20% thereof on each anniversary of the date of
grant.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME UNDERLYING OPTIONS
---- ------------------
<S> <C>
Michael M. Nicita........................................... 30,000
Kevan M. Lyon............................................... 15,000
Adam R. Zoldan.............................................. 7,500
All Executive Officers as a Group (8 persons)............... 74,500
All Directors other than Executive Officers as a Group (5
persons).................................................. 25,000
All Employees other than Executive Officers as a Group (40
persons).................................................. 99,500
</TABLE>
13
<PAGE> 16
VOTE REQUIRED
Approval of the proposed amendment to the 1995 Plan requires the
affirmative vote of the holders of at least a majority of the shares of Common
Stock represented and voting at the Annual Meeting of Stockholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
THE ADOPTION OF THE AMENDMENT TO 1995 PLAN.
ITEM 3. PROPOSED 1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors has adopted the Employee Stock Purchase
Plan (the "Stock Purchase Plan"), subject to stockholder approval. The Stock
Purchase Plan is intended to enable employees (including officers) of the
Company who desire to do so to purchase Common Stock at a discount from market
price through accumulated payroll deductions. The Plan is intended to satisfy
the requirements of Section 423 of the Code.
DESCRIPTION OF THE STOCK PURCHASE PLAN
The following is a summary of the principal features of the Stock Purchase
Plan.
The Stock Purchase Plan is administered by the Board of Directors and may,
in the Board's discretion, be administered by a committee appointed by the Board
of Directors for that purpose. The Board of Directors or such committee has the
authority to interpret and apply the terms of the Stock Purchase Plan, and to
adjudicate all disputed claims thereunder.
The maximum number of shares of Common Stock which may be purchased under
the Stock Purchase Plan is 100,000. Such number may be adjusted in certain
events, such as a stock split or other changes in capitalization of the Company.
The shares delivered under the Stock Purchase Plan may be either authorized but
unissued shares or shares that have been reacquired by the Company.
All employees of the Company (and of its subsidiaries which have been
designated by the Board) who have been employed for at least six months at the
start of an Offering Period (as defined below) under the Stock Purchase Plan are
eligible to participate in the Stock Purchase Plan for that Offering Period.
However, in accordance with limitations imposed under the Code, no employee who
owns (under the Code's attribution rules) stock and options to purchase stock
having 5% or more of the of the voting power or value of the Company's stock is
eligible to participate. As of June 10, 1998, approximately 375 employees would
be eligible to participate in the Stock Purchase Plan.
The Stock Purchase Plan provides for Offering Periods of six months each,
beginning April 1 and October 1 of each year. However, the Board of Directors
has the right to change the commencement dates and duration of future Offering
Periods.
Prior to the beginning of an Offering Period, each eligible employee has
the right to authorize payroll deductions for the duration of the Offering
Period, in an amount not exceeding 10% of base pay and commissions each pay
period, which will be used to purchase Common Stock at the end of the Offering
Period. The amounts so deducted are credited to a bookkeeping account on the
Company's records for each participant and do not bear interest. During the
Offering Period a participant may elect to decrease the rate of his payroll
deductions, discontinue payroll deductions, or withdraw from the Offering Period
and have his payroll deductions for that Offering Period returned. A participant
who withdraws his payroll deductions during an Offering Period cannot resume
making payroll deductions until the start of the next Offering Period.
At the end of the Offering Period, the accumulated payroll deductions of
each participant that have not been withdrawn are automatically applied to
purchase Common Stock. The price paid for the Common Stock is 85% of the fair
market value of the stock on the first day or the last day of the Offering
Period, whichever is lower. Only whole shares are purchased, and any payroll
deductions credited to a participant's account which are not sufficient to
purchase a whole share are carried over in the participant's account to the next
Offering
14
<PAGE> 17
Period. In no case may a participant purchase more than 850 shares of Common
Stock (subject to adjustment for changes in capitalization of the Company) in
any Offering Period. In addition, no participant's right to purchase shares
under the Stock Purchase Plan may accrue at a rate greater than $25,000 worth of
stock (measured as of the beginning of each Offering Period) in any calendar
year. Payroll deductions are reduced as necessary to comply with these limits,
and any excess payroll deductions at the end of an Offering Period are returned
to the participant.
Shares purchased under the Stock Purchase Plan are not transferable by the
participant, and will be held on the participant's behalf by the Company or its
designee, until six months after the shares were purchased.
In the event of a participant's termination of employment for any reason,
including death, the payroll deductions credited to the participant's account in
the Stock Purchase Plan will be returned to the participant (or his beneficiary
in the event of death), and no stock purchase under the Stock Purchase Plan will
occur for the Offering Period in which such termination of employment occurred.
A participant's rights to purchase stock under the Stock Purchase Plan are not
transferable.
The Board of Directors may amend the Stock Purchase Plan from time to time.
Such amendments may be made without stockholder approval except to the extent
necessary to comply with Section 423 of the Code or other applicable law. The
Stock Purchase Plan will continue in effect until terminated by the Board of
Directors or until all shares authorized for issuance under the Plan have been
purchased.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the principal federal income tax
consequences of the Stock Purchase Plan based on current provisions of the Code
and applicable regulations thereunder.
An employee will recognize no federal income tax on either the grant of
purchase rights (at the commencement of an Offering Period) or the purchase of
shares under the Stock Purchase Plan.
If the employee disposes of the shares in a "qualifying disposition" (that
is, one which occurs more than two years after the start of the Offering Period
in which the shares were acquired and more than one year after the date the
shares were purchased), the employee will recognize ordinary income per share
equal to the lesser of (i) the excess of the fair market value of the Common
Stock on the first day of the applicable Offering Period over 85% of such value,
and (ii) the excess of the fair market value of the Common Stock on the date of
disposition over the employee's purchase price for the stock. If the employee
disposes of the shares before the completion of the above holding periods (a
"disqualifying disposition"), the employee will recognize ordinary income equal
to the excess of the fair market value of the Common Stock on the date of
purchase over the employee's purchase price for the stock. In either case, the
balance of the gain, if any, and any loss will be treated as a capital gain or
loss.
The Company will not be entitled to a federal income tax deduction with
respect to any shares acquired under the Stock Purchase Plan which were disposed
of in a qualifying disposition. In the case of a disqualifying disposition, the
Company will generally be entitled to a federal income tax deduction in an
amount equal to the ordinary income recognized by the employee in the year in
which the employee recognizes such income, to the extent such income is
considered reasonable compensation under the Code. However, Section 162(m) of
the Code limits the Company's deduction to the extent compensation in excess of
$1 million is paid during any year to an executive officer named in the summary
compensation table of the proxy statement who was employed by the Company at
year-end, unless such compensation qualifies as "performance-based" under
Section 162(m) of the Code or certain exceptions apply. In addition, the Company
will not be entitled to a deduction with respect to payments which are deemed to
constitute "excess parachute payments" under Section 280G of the Code and do not
qualify as reasonable compensation pursuant to that Section; such payments will
subject the recipients to a 20% excise tax.
PURCHASE RIGHTS UNDER THE STOCK PURCHASE PLAN
It is not possible to state the number of shares that will be purchased by
any employee under the Stock Purchase Plan because that decision is in the
discretion of each employee. However, no employee may
15
<PAGE> 18
purchase more than $25,000 worth of stock in any calendar year (with such value
determined as of the start of each Offering Period) or more than 1,700 shares of
Common Stock in any fiscal year. Moreover, Messrs. Tillinghast and Paulsen are
not eligible to purchase any stock under the Stock Purchase Plan since they
already own more than 5% of the Common Stock.
VOTE REQUIRED
Approval of the Stock Purchase Plan requires the affirmative vote of the
holders of at least a majority of the shares of Common Stock represented and
voting at the Annual Meeting of the Stockholders.
ADDITIONAL INFORMATION
On June 10, 1998, the last reported sale price of the Common stock as
reported by NASDAQ was $17 3/8 per share.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
THE EMPLOYEE STOCK PURCHASE PLAN.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3, 4 and 5 (and amendments thereto)
furnished to the Company during or with respect to fiscal 1998, no person who at
any time during fiscal 1998 was a director, officer or beneficial owner of more
than 10 percent of the Common Stock, failed to file on a timely basis reports
required by Section 16(a) of the Securities Exchange Act, as amended, during
fiscal 1998.
FORM 10-K
AMS will furnish without charge to each stockholder, upon written request
addressed to The Investor Relations Department of AMS at 5880 Oberlin Drive,
Suite 400, San Diego, California 92121, a copy of its Annual Report on Form 10-K
for the fiscal year ended March 31, 1998 (excluding the exhibits thereto), as
filed with the Securities and Exchange Commission.
CERTAIN TRANSACTIONS
All transactions between the Company and its officers, directors or any
affiliate of any such person have been, and all such future transactions will
be, on terms no less favorable to the Company than could be obtained from
unaffiliated parties. In connection with his relocation to San Diego, CA, in May
1996, the Company loaned $75,000 to Mr. McGee. This loan is secured by real
estate and bears interest at the rate of 5% per annum. The outstanding principal
balance of the loan as of March 31, 1998 was $68,718.
FUTURE STOCKHOLDER PROPOSALS
Any stockholder proposal intended to be presented at the 1999 Annual
Meeting of Stockholders must be submitted sufficiently far in advance so that it
is received by AMS not later than February 20, 1999.
OTHER MATTERS
The Company's independent public accountants for the fiscal year ended
March 31, 1998 were Arthur Andersen LLP, which firm has been appointed to serve
in such capacity for the current fiscal year. A representative of Arthur
Andersen LLP is expected to be present at the meeting with the opportunity to
make a statement if he or she so desires and to respond to appropriate
questions.
Neither the Company nor any of the persons named as proxies knows of
matters other than those stated above to be voted on at the Annual Meeting.
However, if any other matters are properly presented at the
16
<PAGE> 19
meeting, the persons named as proxies are empowered to vote in accordance with
their discretion on such matters.
The Annual Report of AMS for the fiscal year ended March 31, 1998
accompanies this proxy statement, but it is not to be deemed a part of the proxy
soliciting material.
PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY.
ADVANCED MARKETING SERVICES, INC.
By order of the Board of Directors
Charles C. Tillinghast, III
Chairman
San Diego, California
June 19, 1998
17
<PAGE> 20
REVOCABLE PROXY
ADVANCED MARKETING SERVICES, INC.
ANNUAL MEETING OF STOCKHOLDERS -- JULY 23, 1998
The undersigned stockholder(s) of Advanced Marketing Services, Inc. (the
"Company") hereby nominates, constitutes and appoints Charles C. Tillinghast,
III and James A. Leidich, and each of them, the attorney, agent and proxy of the
undersigned, with full power of substitution, to vote all stock of Advanced
Marketing Services, Inc. which the undersigned is entitled to vote at the Annual
Meeting of Stockholders of the Company to be held at the Company's facility at
5880 Oberlin Drive, Suite 400, San Diego, California 92121 on Thursday, July 23,
1998, at 10:00 a.m., and any and all adjournments thereof, with respect to the
matters described in the accompanying Proxy Statement and, in their discretion,
on such other matters which properly come before the meeting, as fully and with
the same force and effect as the undersigned might or could do if personally
present thereat, as follows:
1. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
[ ] AUTHORITY GIVEN [ ] WITHHOLD AUTHORITY
to vote for all nominees listed below (except to vote for all nominees.
as indicated to the contrary below).
</TABLE>
(INSTRUCTIONS): TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
James A. Leidich E. William Swanson
2. To approve an amendment to the Company's 1995 Stock Option Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To approve the Company's proposed Employee Stock Purchase Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To transact such other business as may properly come before the Meeting
and any adjournment or adjournments thereof. Management at present knows of no
other business to be presented by or on behalf of the Company or its Board of
Directors at the Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE REVOKED
PRIOR TO ITS EXERCISE.
Please sign and date on reverse side
<PAGE> 21
THE BOARD OF DIRECTORS RECOMMENDS A VOTE OF "AUTHORITY GIVEN" FOR PROPOSAL 1
AND A VOTE "FOR" PROPOSALS 2 AND 3. THE PROXY CONFERS AUTHORITY TO AND WILL BE
VOTED "AUTHORITY GIVEN" FOR PROPOSAL 1 AND "FOR" PROPOSALS 2 AND 3 UNLESS OTHER
INSTRUCTIONS ARE INDICATED, IN WHICH CASE THE PROXY WILL BE VOTED IN ACCORDANCE
WITH SUCH INSTRUCTIONS.
IF ANY OTHER BUSINESS IS PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED
IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS.
Dated: , 1998
--------------------------------
(Please print name)
--------------------------------
(Signature of Stockholder)
--------------------------------
(Please print name)
--------------------------------
(Signature of Stockholder)
(Please date this Proxy and sign
your name as it appears on your
stock certificates. Executors,
administrators, trustees, etc.,
should give their full titles.
All joint owners should sign.)
I (We) do
----------------------
do not
-------------------------
expect to attend the Meeting.
Number of Person
---------------
