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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 26, 1998
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)
(619) 457-2500
(Registrant's telephone number, including area code)
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
December 26, 1998 was 8,470,409.
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ADVANCED MARKETING SERVICES, INC.
INDEX TO FORM 10-Q
December 26, 1998
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited) ......................... 3
Consolidated Statements of Income (Unaudited) ................... 4
Consolidated Statements of Cash Flows (Unaudited) ............... 5
Notes to Consolidated Financial Statements (Unaudited) ......... 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. .............................10-13
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS ............................................... 14
ITEM 2 - CHANGES IN SECURITIES ........................................... 14
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ................................. 14
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............. 14
ITEM 5 - OTHER INFORMATION ............................................... 14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ................................ 14
SIGNATURES ............................................................... 14
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (See Note 1 for Basis of Presentation)
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 26, MARCH 31, DECEMBER 27,
1998 1998 1997
------------ --------- ------------
(UNAUDITED) (NOTE) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash And Cash Equivalents $ 35,080 $ 28,982 $ 54,857
Investments, Available-For-Sale 3,509 8,068 10,492
Accounts Receivable - Trade, Net of Allowances for Uncollectible
Accounts and Sales Returns of $3,872 at December 26, 1998,
$4,012 at March 31, 1998 and $4,217 at December 27, 1997 103,770 61,665 85,141
Vendor and Other Receivables 4,665 2,408 2,249
Inventories, Net 105,691 99,429 84,792
Deferred Income Taxes 5,874 4,922 5,013
Prepaid Expenses 1,798 1,368 1,045
--------- --------- ---------
TOTAL CURRENT ASSETS 260,387 206,842 243,589
--------- --------- ---------
PROPERTY AND EQUIPMENT, AT COST 15,314 11,964 10,854
Less - Accumulated Depreciation and Amortization 9,191 7,043 6,277
--------- --------- ---------
Net Property And Equipment 6,123 4,921 4,577
--------- --------- ---------
Investments, Available-For-Sale -- -- --
Goodwill and Other Assets 6,748 6,709 786
--------- --------- ---------
TOTAL ASSETS $ 273,258 $ 218,472 $ 248,952
--------- --------- ---------
--------- --------- ---------
LIABILITIES
CURRENT LIABILITIES:
Accounts Payable $ 179,029 $ 142,203 $ 172,872
Accrued Liabilities 11,379 8,141 7,412
Income Taxes Payable 4,111 380 2,515
--------- --------- ---------
TOTAL CURRENT LIABILITIES 194,519 150,724 182,799
--------- --------- ---------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 Par Value, Authorized 20,000,000 Shares, Issued 9,547,000
Shares at December 26, 1998, 9,492,000 Shares at March 31, 1998 and 9,457,000
Shares at December 27, 1997
10 9 9
Additional Paid In Capital 27,556 27,142 26,841
Retained Earnings 53,100 42,718 41,440
Unrealized Gain on Investments 5 8 25
Foreign Currency Translation Adjustment 188 (9) (42)
Less: Treasury Stock, 1,076,000 shares at Cost (2,120) (2,120) (2,120)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 78,739 67,748 66,153
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 273,258 $ 218,472 $ 248,952
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
NOTE: THE BALANCE SHEET AT MARCH 31, 1998 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE, BUT DOES NOT INCLUDE ALL OF THE INFORMATION
AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS.
3
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ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- -----------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $168,183 $150,522 $381,047 $332,408
Cost Of Goods Sold 145,749 135,000 333,482 297,087
----------- --------- ---------- ---------
GROSS PROFIT 22,434 15,522 47,565 35,321
Distribution and Administrative Expenses 11,519 8,832 30,659 23,998
----------- --------- ---------- ---------
INCOME FROM OPERATIONS 10,915 6,690 16,906 11,323
Interest and Dividend Income 345 611 806 1,271
----------- --------- ---------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 11,260 7,301 17,712 12,594
Provision for Income Taxes 4,417 2,738 6,908 4,723
----------- --------- ---------- ---------
NET INCOME $ 6,843 $ 4,563 $ 10,804 $ 7,871
----------- --------- ---------- ---------
----------- --------- ---------- ---------
COMPONENTS OF COMPREHENSIVE INCOME:
Foreign Currency Translation Adjustments (82) 43 197 44
Unrealized Gain on Investments (78) (26) (3) 16
----------- --------- ---------- ---------
COMPREHENSIVE INCOME: $ 6,683 $ 4,580 $ 10,998 $ 7,931
----------- --------- ---------- ---------
----------- --------- ---------- ---------
NET INCOME PER COMMON AND COMMON SHARE EQUIVALENT:
Basic $ .81 $ .55 $ 1.28 $ .95
----------- --------- ---------- ---------
----------- --------- ---------- ---------
Diluted $ .79 $ .53 $ 1.25 $ .92
----------- --------- ---------- ---------
----------- --------- ---------- ---------
NUMBER OF SHARES USED IN CALCULATION:
Basic 8,460 8,365 8,441 8,319
----------- --------- ---------- ---------
----------- --------- ---------- ---------
Diluted 8,690 8,593 8,677 8,514
----------- --------- ---------- ---------
----------- --------- ---------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
4
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ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 10,804 $ 7,871
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization 1,619 1,057
Provision for Uncollectible Accounts and Sales Returns 341 755
Provision for Markdown of Inventories 4,308 3,596
Deferred Income Taxes (952) 469
Changes in Assets And Liabilities:
Increase in Accounts Receivable - Trade (45,435) (32,332)
(Increase) Decrease in Vendor and Other Receivables (2,407) 552
(Increase) Decrease in Inventories (9,334) 3,357
Increase Prepaid Expenses And Other Assets (469) (515)
Increase in Accounts Payable 38,744 53,365
Increase in Accrued Liabilities 3,253 2,094
Increase in Income Taxes Payable 3,963 1,626
-------- --------
Net Cash Provided by Operating Activities 4,435 41,895
-------- --------
INVESTING ACTIVITIES:
Purchase/Disposal of Property and Equipment, Net (2,809) (1,873)
Purchase of Investments, Available-For-Sale (32,006) (5,533)
Sale and Redemption of Investments, Available for Sale 36,562 6,297
-------- --------
Net Cash Provided by (Used In) Investing Activities 1,747 (1,109)
-------- --------
FINANCING ACTIVITIES:
Proceeds from Exercise of Options and Related Tax Benefits 415 525
Purchase of Treasury Stock -- (90)
Dividends Paid (422) --
-------- --------
Net Cash Provided by (Used In) Financing Activities (7) 435
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (77) 44
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 6,098 41,265
CASH AND CASH EQUIVALENTS, Beginning of Period 28,982 13,592
-------- --------
CASH AND CASH EQUIVALENTS, End of Period $ 35,080 $ 54,857
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
5
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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 and nine
months ended December 26, 1998 and December 27, 1997 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
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1998.
The results of operations for the three and nine month periods ended December
26, 1998 are not necessarily indicative of the results to be expected for the
fiscal year ending March 31, 1999. 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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 the calendar month. 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.
6
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3. INVESTMENTS, AVAILABLE-FOR-SALE
"Investments, available-for-sale" consist principally of highly rated
corporate and municipal bonds. The cost and estimated fair market value of
investments at December 26, 1998, March 31, 1998 and December 27, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
December 26, 1998
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Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Debt Securities Issued by States of The U.S. And
Political Subdivisions of The States $ 3,504 $ 8 $ 3 $ 3,509
---------- ----------- ---------- ---------
---------- ----------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Debt Securities Issued by States of The U.S. And
Political Subdivisions of The States $ 8,060 $ 8 $ -- $ 8,068
---------- ----------- ---------- ---------
---------- ----------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
December 27, 1997
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Debt Securities Issued by States of The U.S. And
Political Subdivisions of The States $ 10,467 $ 25 $ -- $ 10,492
---------- ----------- ---------- ---------
---------- ----------- ---------- ---------
</TABLE>
As of December 26, 1998, investments in debt securities issued by States of
the U.S. and political subdivisions of the States in the amount of $3,509,000
are scheduled to mature within one year.
Proceeds from the sale of investments aggregated $8,152,000 for the quarter
ended December 26, 1998. There was a net gain of approximately $91,000
realized on these sales. Proceeds from the sale of investments totaled
$2,055,000 for the quarter ended December 27, 1997. There was a net gain of
approximately $51,000 realized on these sales. The Company uses the specific
identification method in determining cost on these investments. The net
decrease in unrealized gain on investments was approximately $78,000 for the
quarter ended December 26, 1998. The net decrease in unrealized gain on
investments for the quarter ended December 27, 1997 was approximately $26,000.
7
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4. SALES RETURNS
In accordance with industry practice, a significant portion of the Company's
product is sold to customers with the right of return. The Company has
provided allowances of $2,734,000 as of December 26, 1998, $2,334,000 as of
March 31, 1998 and $2,490,000 as of December 27, 1997 for the gross profit
effect of estimated future sales returns.
5. INVENTORIES
Inventories consist primarily of books and, to a lesser extent, music CD's
and prerecorded audio and videocassettes 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 December 26, 1998 an unsecured bank line of
credit with a maximum borrowing limit of $10 million. The interest rate on
bank borrowings is based on the prime rate and "Libor" rates. The line of
credit expires July 31, 2000. As of December 26, 1998, March 31, 1998 and
December 27, 1997, 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. Income taxes paid in the nine months ended December 26, 1998
totaled $3,859,000. Income taxes paid during the same period of the previous
year totaled $ 2,282,000.
8. PER SHARE INFORMATION
Basic earnings per share information is based on the weighted average number
of common shares and diluted earnings per share includes 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.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share", which has been adopted by the Company. The
statement specifies the computation, presentation and disclosure requirements
for earnings per share ("EPS"), and is effective for periods ending after
December 15, 1997. Prior year per share information is presented in
accordance with the statement.
9. EMPLOYEE STOCK OPTION AND PURCHASE PLANS
Nonqualified options to purchase an aggregate of 851,625 shares of common
stock were outstanding as of December 26, 1998. The outstanding options were
at prices ranging from $2.83 to $9.77 per share.
Effective October 1, 1998, the Company adopted an Employee Stock Purchase
Plan to provide qualified employees an opportunity to purchase shares of its
common stock at a 15 percent discount from the market price. The maximum
number of shares that may be purchased under the Plan is 150,000 shares,
subject to adjustment under certain conditions. The Plan is intended to
satisfy the requirements of Section 423 of the Internal Revenue Code.
10. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997 and
establishes standards for reporting and display of comprehensive income and
its components (revenue, expenses, gains and
8
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losses) in a full set of general-purpose financial statements. The Company
adopted SFAS No. 130 in its first quarter of fiscal year 1999.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which, based on the management approach to segment reporting,
establishes requirements to report entity-wide disclosures about products and
services, major customers, and material countries in which the entity holds
assets and reports revenue. SFAS No. 131 requires limited segment data on a
quarterly basis. The Company will adopt SFAS No. 131 for its fiscal year
ended March 31,1999.
11. SUBSEQUENT EVENT
On January 19, 1999 the Board of Directors declared a three for two stock
split. The effective date of the stock split will be February 15, 1999 to
shareholders of record at the close of business February 1, 1999. Additional
shares resulting from the split will be distributed February 15, 1999. The
Company's current annual dividend rate of $0.10 per share will be adjusted in
accordance with the three for two stock split to $0.067 per share. All
applicable share and per share data in the accompanying financial statements
have been adjusted for the stock split. On a pre-split basis, diluted
earnings per share for the three month period ended December 26, 1998 was
$1.18 and for the nine month period was $1.87.
The declaration and payment of dividends by the Company in the future will be
subject to the discretion of the Board of Directors and, although it
currently intends to do so, no assurance can be given that the Company will
declare and pay any further dividends. The determination as to the payment of
dividends will depend upon, among other things, general business conditions,
the Company's financial conditions and results of operations, contractual,
legal and regulatory restrictions relating to the payment of dividends by the
Company and such other factors the Board of Directors may deem relevant.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A. RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED DECEMBER 26, 1998 AND DECEMBER 27, 1997:
During the three month period ended December 26, 1998, the Company reported
net income of $6,843,000, or $0.79 per diluted share, compared with a net
income of $4,563,000, or $0.53 per diluted share, for the corresponding
period of the previous fiscal year.
Net sales for the three month period ended December 26, 1998 increased 12
percent to $168,183,000 compared to $150,522,000 in the corresponding period
of the previous fiscal quarter. The growth in net sales can be attributed
primarily to an increase in gross shipments within the basic reference and
children's book categories to core customers as well as sales from the
Company's U.K. subsidiary, Aura Books, PLC, acquired in March 1998. In
addition, customer return rates for the three month period ended December 26,
1998 remained at 19 percent, consistent with the corresponding period last
year.
During the three month period ended December 26, 1998, gross profit increased
45 percent to $22,434,000 from $15,522,000 in the corresponding period of the
previous fiscal year. Gross profit as a percentage of net sales increased to
13.3 percent from 10.3 percent in the same period last fiscal year. This
increase was primarily due to stronger sales in higher margin book categories
as well as increased sales from international subsidiaries, which typically
achieve higher gross margins. The strong sales of basic reference and
children's books offset lower sales of bestseller and cookbooks.
Distribution and administrative expenses for the three month period ended
December 26, 1998 increased to $11,519,000 and represented 6.8 percent of net
sales compared to $8,832,000, or 5.9 percent of net sales, in the
corresponding period of the previous fiscal year. This increase primarily
reflects the addition of Aura Books, PLC as well as estimated non-recurring
costs associated with exiting the Company's retail activities. The retail
outlets were originally established as cost recovery vehicles for
non-returnable residual product from the Company's purchasing and publishing
activities. In fiscal 1998, the Company continued its effort to increase the
efficiency of the disposition of non-returnable product and began to utilize
a small team of associates dedicated to just selling the remainder product.
Based on the success of this relatively low cost, low overhead effort,
management decided to phase out the retail stores. Management's estimate of
the non-recurring costs associated with exiting the retail operations is
approximately $1,000,000 which has been included in the distribution and
administrative costs for the fiscal 1999 third quarter.
Interest and dividend income decreased to $345,000 in the three month period
ended December 26, 1998 from $611,000 in the corresponding period of the
previous fiscal year due to reduced investment balances which were primarily
a result of the Company's acquisition of Aura Books, PLC and an increase in
the net investment in inventory.
10
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NINE MONTH PERIODS ENDED DECEMBER 26, 1998 AND DECEMBER 27, 1997:
During the nine month period ended December 26, 1998, the Company reported
net income of $10,804,000, or $1.25 per diluted share, compared with net
income of $7,871,000, or $0.92 per diluted share, for the corresponding nine
month period of the prior fiscal year.
Net sales for the nine month period ended December 26, 1998 increased 15
percent to $381,047,000 from $332,408,000 in the corresponding period of the
prior fiscal year. This increase was primarily due to increases in gross
shipments within the basic reference, gift books (art and coffee table books)
and children's book categories to core customers as well as additional sales
from the Company's U.K. subsidiary, Aura Books, PLC, acquired in March 1998.
During the nine month period ended December 26, 1998, gross profit increased
35 percent to $47,565,000 from $35,321,000 in the corresponding nine month
period of the previous fiscal year. Gross profit as a percentage of net sales
increased to 12.5 percent from 10.6 percent in the corresponding period in
the last fiscal year. This increase was primarily due to stronger sales in
higher margin book categories as well as increased sales from international
subsidiaries, which typically achieve higher gross margins.
Distribution and administrative expenses for the nine month period ended
December 26, 1998 increased 28 percent to $30,659,000 and represented 8.0
percent of net sales compared to $23,998,000, or 7.2 percent of net sales, in
the corresponding period of the previous fiscal year. The increase primarily
reflects the addition of Aura Books, PLC as well as estimated non-recurring
costs associated with exiting the Company's retail activities.
Interest and dividend income decreased to $806,000 in the nine month period
ended December 26, 1998 from $1,271,000 in the corresponding period of the
previous fiscal year due to reduced investment balances which were primarily
a result of the Company's acquisition of Aura Books, PLC and an increase in
the net investment in inventory.
B. LIQUIDITY AND SOURCES OF CAPITAL
For the nine month period ended December 26, 1998, $4,435,000 of net cash was
provided by operating activities, primarily as a result of increased net
income. Net cash provided by operating activities in the corresponding period
of the prior year was $41,895,000. The Company's cash and investments at
December 26, 1998 totaled $38,589,000, compared to $65,349,000 and
$37,050,000 as of December 27,1997 and March 31, 1998, respectively. This
change reflects the acquisition and funding of Aura Books, PLC, as well as an
increase in the net investment in inventories due to increased sales levels
as well as the timing of certain vendor payments. Trade accounts receivable
at December 26, 1998 increased $18,629,000 and $42,105,000 compared to
December 27, 1997 and March 31, 1998 respectively. The increase is primarily
due to the timing of customer remittances (payments approximating $21 million
were received shortly after closing the period ended December 26, 1998) and
the seasonal increase in sales when compared to the March 31, 1998 balance.
Inventories at December 26, 1998 increased $20,899,000 compared to December
27, 1997 and increased $6,262,000 compared to March 31, 1998 due, in part, to
shipments from publishers in the mass market category that were subsequently
shipped to customers in January 1999, and the addition of Aura Books, PLC, as
well as to support increased sales activity. The increases in inventory were
offset, in part, by increases in accounts payable of $6,157,000 and
$36,826,000
11
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compared to December 27, 1997 and March 31, 1998 respectively. Accounts
payable at December 26, 1998 increased $6,157,000 compared to December 27,
1997 due to the timing of certain vendor payments. Accounts payable at
December 26, 1998 increased $36,826,000 compared to March 31, 1998 due to
increased inventory purchases to support expected seasonal increases in third
quarter sales.
Working capital was $65,868,000 as of December 26, 1998, which increased from
the December 27, 1997 balance of $60,790,000 and from the March 31, 1998
balance of $56,118,000. The increase compared to December 27, 1997 is
primarily the result of net operating income offset, in part, by the impact
of the Aura Books acquisition in March 1998. The increase compared to March
31, 1998 is primarily a result of net income generated during the nine-month
period ended December 26, 1998.
The Company had available at December 26, 1998 an unsecured bank line of
credit with a maximum borrowing limit of $10 million. The interest rate on
bank borrowings is based on the prime rate and "Libor" rates. The line of
credit expires July 31, 2000. As of December 26, 1998 and December 27, 1997,
there were no outstanding borrowings on the line of credit.
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.
C. IMPACT OF YEAR 2000
During fiscal 1998, the Company developed a plan to address anticipated Year
2000 issues in connection with its data processing and other activities,
including non-information technology based systems. It is currently estimated
that the net cost for review, analysis, modification and testing of existing
computer programs for both internal and external software will be
approximately $600,000. The Company has incurred approximately 80 percent of
such expenses through the quarter ended December 26, 1998 and it is
anticipated that the remaining portion of the estimated cost will be incurred
during calendar 1999. The Company has completed the remediation portion of
the Year 2000 project and will be entering its testing phase during the
fourth quarter of fiscal 1999. Although there can be no assurances,
management believes that the Year 2000 project, including a documented
contingency plan, will be completed by September 1999. The Company has budgeted
for such Year 2000 compliance related work in its fiscal 1999 and fiscal 2000
budgets and has expensed these costs as incurred. Due to the fact that the
Company has primarily employed outside consultants for Year 2000 related
work, there has not been any deferral of other information technology related
projects nor has there been a requirement to hire additional personnel solely
for Year 2000 compliance issues. In contemplation of the possibility that the
Company's vendors and customers may experience Year 2000 related difficulties
that may effect the Company's operations, a committee of information
technology and other departmental managers has been formed to consider and
develop a contingency plan. It is expected that this contingency plan will be
developed over the next six months. Although, based on a review of its data
processing, operating, and other computer based systems, the Company does not
currently believe that it will experience any significant adverse effects or
material unbudgeted costs resulting therefrom, there can be no assurance in
that regard.
The failure to correct a material Year 2000 problem could result in an
interruption in or a failure of certain normal activities or operations. Such
interruptions or failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Because there is
general uncertainty
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about the Year 2000 problem, including uncertainty about the Year 2000
readiness of suppliers and customers, it is not possible to predict whether
Year 2000 problems will occur or what consequences such problems will have on
results of operations, liquidity or financial condition. However, the
Company's plan to address Year 2000 issues is intended to minimize, to the
extent feasible, the possibility of interruptions of normal operations. There
can, however, be no assurance that the Company will be successful in doing so.
D. STATEMENT OF PURPOSE OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITITES LITIGATION REFORM ACT OF 1995
In December 1995, the Private Securities Litigation Reform Act of 1995 (the
"Act") was enacted. The Act contains amendments to the Securities Act of 1933
and the Securities Exchange Act of 1934 which provide protection from
liability in private lawsuits for "forward-looking" statements made by
persons specified in the Act. The Company desires to take advantage of the
"safe harbor" provisions of the Act.
The Company wishes to caution readers that, with the exception of historical
matters, the matters discussed in this Quarterly Report on Form 10-Q are
forward-looking statements that involve risks and uncertainties, including
but not limited to factors related to the highly competitive nature of the
publishing industry as well as the warehouse club and retail industries and
their sensitivity to changes in general economic conditions, the Company's
concentration of sales and credit risk with two customers, the Company's
ability to impact customer return rates, continued successful results from
the VMI program, currency and other risks related to foreign operations, the
Company's expansion plans, the results of financing efforts, risks and
uncertainties associated with the failure of the Company or its suppliers or
customers to be Year 2000 compliant with regard to its computer and other
systems and other factors discussed in the Company's other filings with the
Securities and Exchange Commission. Such factors could affect the Company's
actual results during fiscal 1999 and beyond and cause such results to differ
materially from those expressed in any forward-looking statement made by or
on behalf of the Company.
13
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1-5.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herein or incorporate by reference:
(11.0) Statement re Computation of Per Share Earnings
(27.0) Financial Data Schedule
(b) No reports on Form 8-K were filed for the three month period ended
December 26, 1998.
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
February 5, 1999 By: /s/ Michael M. Nicita
---------------- ---------------------------------
Date Michael M. Nicita
Chief Executive Officer
(Principal Executive Officer,
Financial and Accounting Officer)
14
<PAGE>
EXHIBIT 11.0
ADVANCED MARKETING SERVICES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Income $6,843 $4,563 $10,804 $ 7,871
------ ------ ------- -------
------ ------ ------- -------
Weighted Average Common and Common Share
Equivalents:
Weighted Average 8,460 8,365 8,441 8,319
Common Shares Outstanding
Weighted Average Common Share
Equivalents-Dilutive Stock Options:
Basic -- -- -- -
--------- -------- -------- ---------
Diluted 230 228 236 195
--------- -------- -------- ---------
Total Weighted Average Common and Common
Equivalent Shares:
Basic 8,460 8,365 8,441 8,319
--------- -------- -------- ---------
--------- -------- -------- ---------
Diluted 8,690 8,593 8,677 8,514
--------- -------- -------- ---------
--------- -------- -------- ---------
Net Income Per Common and Common Share Equivalent:
Basic $ .81 $ .55 $ 1.28 $ .95
--------- -------- -------- ---------
--------- -------- -------- ---------
Diluted $ .79 $ .53 $ 1.25 $ .92
--------- -------- -------- ---------
--------- -------- -------- ---------
</TABLE>
COMMON SHARE EQUIVALENTS (OUTSTANDING STOCK OPTIONS) ARE EXCLUDED FROM EARNINGS
PER SHARE CALCULATIONS WHEN ANTIDILUTIVE. SHARE AND PER SHARE DATA HAVE BEEN
RESTATED TO REFLECT THE THREE FOR TWO STOCK SPLIT.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS OF INCOME AND CONSOLIDATED BALANCE
SHEETS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-26-1998
<CASH> 35,080
<SECURITIES> 3,509
<RECEIVABLES> 103,770
<ALLOWANCES> 3,872
<INVENTORY> 105,691
<CURRENT-ASSETS> 260,387
<PP&E> 15,314
<DEPRECIATION> 9,191
<TOTAL-ASSETS> 273,258
<CURRENT-LIABILITIES> 194,519
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 78,729
<TOTAL-LIABILITY-AND-EQUITY> 273,258
<SALES> 381,047
<TOTAL-REVENUES> 381,047
<CGS> 333,482
<TOTAL-COSTS> 333,482
<OTHER-EXPENSES> 30,659
<LOSS-PROVISION> (59)
<INTEREST-EXPENSE> 221
<INCOME-PRETAX> 17,712
<INCOME-TAX> 6,908
<INCOME-CONTINUING> 10,804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,804
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.25
</TABLE>
