<PAGE>
- ------------------------
2ND QUARTER
FISCAL 2000
FORM 10-Q
- ------------------------
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 OCTOBER 2, 1999
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
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices)
(Zip Code)
(858) 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
October 1, 1999 was 8,630,163.
1
<PAGE>
ADVANCED MARKETING SERVICES, INC.
INDEX TO FORM 10-Q
October 2, 1999
<TABLE>
PAGE
----
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)............................................3
Consolidated Statements of Income and Comprehensive 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
</TABLE>
2
<PAGE>
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 SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 2, MARCH 31, SEPTEMBER 26,
1999 1999 1998
------------ ----------- -------------
(UNAUDITED) (NOTE) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash And Cash Equivalents $ 33,164 $ 27,189 $ 17,396
Investments, Available-For-Sale 9,565 4,653 7,218
Accounts Receivable - Trade, Net of Allowances for Uncollectible
Accounts and Sales Returns of $3,399 at October 2, 1999,
$3,674 at March 31, 1999 and $3,288 at September 26, 1998 89,908 74,179 70,749
Vendor and Other Receivables 2,137 3,739 4,610
Inventories, Net 141,145 106,060 126,462
Deferred Income Taxes 6,310 5,997 5,255
Prepaid Expenses 2,127 1,459 1,356
-------- -------- --------
TOTAL CURRENT ASSETS 284,356 223,276 233,046
-------- -------- --------
PROPERTY AND EQUIPMENT, AT COST 17,271 15,311 12,839
Less: Accumulated Depreciation and Amortization 9,203 8,721 7,238
-------- -------- --------
Net Property And Equipment 8,068 6,590 5,601
-------- -------- --------
Investments, Available-For-Sale 17 1,214 2,130
Goodwill, Net and Other Assets 8,526 7,316 6,913
-------- -------- --------
TOTAL ASSETS $300,967 $238,396 $247,690
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 203,189 $146,972 $163,667
Accrued Liabilities 9,456 10,033 10,593
Income Taxes Payable 1,539 989 1,445
-------- -------- --------
TOTAL CURRENT LIABILITIES 214,184 157,994 175,705
-------- -------- --------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 Par Value, Authorized 20,000,000 Shares,
Issued 9,706,000 Shares at October 2, 1999, 9,572,000 Shares at
March 31, 1999 and 9,525,000 Shares at September 26, 1998 10 8 8
Additional Paid In Capital 29,048 27,765 27,346
Retained Earnings 59,810 54,664 46,398
Unrealized Gain (Loss) on Investments (2) 7 83
Foreign Currency Translation Adjustment 37 78 270
Less: Treasury Stock, 1,076,000 shares, at Cost (2,120) (2,120) (2,120)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 86,783 80,402 71,985
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $300,967 $238,396 $247,690
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
NOTE: THE BALANCE SHEET AT MARCH 31, 1999 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
<PAGE>
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $145,238 $116,054 $276,020 $212,864
Cost of Goods Sold 128,622 102,804 243,761 187,733
-------- -------- -------- --------
GROSS PROFIT 16,616 13,250 32,259 25,131
Distribution and Administrative Expenses 11,957 9,652 23,885 19,140
-------- -------- -------- --------
INCOME FROM OPERATIONS 4,659 3,598 8,374 5,991
Interest and Dividend Income, Net 326 147 697 461
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,985 3,745 9,071 6,452
Provision for Income Taxes 1,969 1,435 3,583 2,491
-------- -------- -------- --------
NET INCOME $ 3,016 $ 2,310 $ 5,488 $ 3,961
======== ======== ======== ========
COMPONENTS OF COMPREHENSIVE INCOME:
Foreign Currency Translation Adjustments (31) 276 (41) 279
Unrealized Gain (Loss) on Investments (4) 30 (9) 75
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 2,981 $ 2,616 $ 5,438 $ 4,315
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ .35 $ .27 $ .64 $ .47
======== ======== ======== ========
Diluted $ .34 $ .26 $ .62 $ .45
======== ======== ======== ========
WEIGHTED AVERAGE SHARES USED IN CALCULATION:
Basic 8,588 8,445 8,551 8,432
======== ======== ======== ========
Diluted 8,899 8,680 8,853 8,684
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
4
<PAGE>
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------
OCTOBER 2, SEPTEMBER 26,
1999 1998
---------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 5,488 $ 3,961
Adjustments to Reconcile Net Income to Net Cash Provided by
(Used in) Operating Activities:
Depreciation and Amortization 1,254 1,059
Provision for Uncollectible Accounts and Sales Returns (57) (522)
Provision for Markdown of Inventory 1,603 2,708
Deferred Income Taxes (313) (333)
Changes in Assets And Liabilities:
(Increase) in Accounts Receivable - Trade (16,433) (6,458)
(Increase) Decrease in Vendor and Other Receivables 1,571 (2,254)
(Increase) in Inventories (37,177) (31,539)
(Increase) in Other Assets (1,878) (192)
Increase in Accounts Payable 57,407 21,551
Increase (Decrease) in Accrued Liabilities (547) 2,464
Increase in Income Taxes Payable 515 923
-------- --------
Net Cash Provided by (Used In) Operating Activities 11,433 (8,632)
-------- --------
INVESTING ACTIVITIES:
Purchase of Property and Equipment, Net (2,754) (1,734)
Purchase of Investments, Available-For-Sale (17,349) (28,606)
Sale and Redemption of Investments, Available-For-Sale 13,625 27,401
-------- --------
Net Cash Used In Investing Activities (6,478) (2,939)
-------- --------
FINANCING ACTIVITIES:
Proceeds from Exercise of Options and Related Tax Benefits 1,285 203
Dividends Paid (342) (281)
-------- --------
Net Cash Provided by (Used In) Financing Activities 943 (78)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 77 63
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,975 (11,586)
CASH AND CASH EQUIVALENTS, Beginning of Period 27,189 28,982
-------- --------
CASH AND CASH EQUIVALENTS, End of Period $ 33,164 $ 17,396
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
5
<PAGE>
ADVANCED MARKETING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements presented herein as of and for three
and six months ended October 2, 1999 and September 26, 1998 have been
prepared in accordance with generally accepted accounting principles and with
instructions to Form 10-Q. These financial statements have not been examined
by independent public accountants, but include all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of Management,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for such periods.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have
been omitted pursuant to requirements of the Securities and Exchange
Commission. Management believes that the disclosures included in the
accompanying interim financial statements and footnotes are adequate to make
the information not misleading. For further information, refer to the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999.
The results of operations for the three and six month periods ended October
2, 1999 are not necessarily indicative of the results to be expected for the
fiscal year ending March 31, 2000. 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.
The first quarter of the current fiscal year included an additional four days
of net sales compared to the first quarter of the prior fiscal year (See
Management's Discussion and Analysis of Financial Condition in Item 2 of this
Form 10-Q).
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 October 2, 1999, March 31, 1999 and September 26, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
October 2, 1999
----------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities Issued by States of The U.S.
And Political Subdivisions of the States $ 9,584 $ -- $ 2 $ 9,582
------- ------ ------ -------
------- ------ ------ -------
March 31, 1999
----------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
----------------------------------------------------------------
Debt Securities Issued by States of The U.S.
And Political Subdivisions of the States $ 5,860 $ 10 $ 3 $ 5,867
------- ------ ------ -------
------- ------ ------ -------
September 26, 1998
----------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
----------------------------------------------------------------
Debt Securities Issued by States of The U.S.
And Political Subdivisions of the States $ 9,265 $ 83 $ -- $ 9,348
------- ------ ------ -------
------- ------ ------ -------
</TABLE>
As of October 2, 1999, investments in debt securities issued by States of the
U.S. and political subdivisions of the States in the amount of $9,565,000 are
scheduled to mature within one year.
Proceeds from the sale of investments aggregated $2,028,000 for the quarter
ended October 2, 1999. There was no gain or loss realized on these sales.
Proceeds from the sale of investments during the same period of the previous
year totaled approximately $2,412,000 on which a net loss of approximately
$2,000 was realized. The Company uses the specific identification method in
determining cost on these investments. The net increase in unrealized losses
on investments was approximately $9,000 for the quarter ended October 2,
1999. The net increase in unrealized gain on investments for the quarter
ended September 26, 1998 was approximately $30,000.
7
<PAGE>
4. SALES RETURNS
In accordance with industry practice, a significant portion of the Company's
products are sold to customers with the right of return. The Company has
provided allowances of $2,056,000 as of October 2, 1999, $2,302,000 as of
March 31, 1999 and $1,875,000 as of September 26, 1998 for the gross profit
effect of estimated future sales returns.
5. INVENTORIES
Inventories consist primarily of books and, to a lesser extent, music CDs,
CD-ROMs and prerecorded audio cassettes purchased for resale and are stated
at the lower of cost (first-in, first-out) or market.
6. LINE OF CREDIT
The Company had available at October 2, 1999 an unsecured bank line of credit
with a maximum borrowing limit of $10 million. The interest rate on bank
borrowings is based on the prime rate and "Libor" rates. The line of credit
expires July 31, 2000. As of October 2, 1999, March 31, 1999 and September
26, 1998, 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 in accordance with SFAS No, 109 "Accounting for Income
Taxes". Deferred income taxes result from temporary differences in the
recognition of income and expense for tax and financial reporting purposes.
Income taxes paid in the six months ended October 2, 1999 totaled $2,662,000.
Income taxes paid during the same period of the previous year totaled
$1,666,000.
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 potentially dilutive
securities outstanding during the periods. The Company's only potentially
dilutive securities are stock options.
On January 21, 1999, the Board of Directors approved the declaration of a
three for two stock split. Accordingly, all references to shares and earnings
per share amounts have been restated to reflect the stock split.
The following financial data summarizes information relating to the
per share computations (in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------------------------------------------
Oct 2, Sept 26, Oct 2, Sept 26,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Income $3,016 $2,310 $5,488 $3,961
------- ------- ------- -------
------- ------- ------- -------
Weighted Average Common Shares Outstanding 8,588 8,445 8,551 8,432
Basic Earnings Per Share $ .35 .27 $ .64 $ .47
------- ------- ------- -------
------- ------- ------- -------
Weighted Average Common Shares Outstanding 8,588 8,445 8,551 8,432
Dilutive Common Stock Options 311 235 302 252
------- ------- ------- -------
Total Diluted Weighted Average Common Shares 8,899 8,680 8,853 8,684
------- ------- ------- -------
Diluted Earnings Per Share $ .34 .26 $ .62 $ .45
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
8
<PAGE>
9. INDUSTRY SEGMENT AND GEOGRAPHICAL DATA
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued, which, based on the management approach to
segment reporting, establishes requirements to report entity-wide disclosures
about products and services, major customers and material countries in which
the entity holds assets and reports revenue. The Company adopted SFAS No. 131
for its fiscal year ended March 31, 1999. The Company operates in one
industry segment and in several geographic regions.
Net sales by geographic region are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ---------------------------
Oct 2, 1999 Sept 26, 1998 Oct 2, 1999 Sept 26, 1998
<S> <C> <C> <C> <C>
United States $136,058 $109,469 $257,913 $199,037
United Kingdom 7,963 6,017 16,012 12,540
Mexico 1,217 568 2,095 1,287
-------- -------- -------- --------
$145,238 $116,054 $276,020 $212,864
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Net identifiable assets of the Company's operations in different
geographic areas are as follows (in thousands):
<TABLE>
<CAPTION>
As of
-------------------------------------------------------------------------
Oct 2, 1999 March 31, 1999 Sept 26, 1998
<S> <C> <C> <C>
United States $ 275,070 $ 217,584 $ 227,491
United Kingdom 22,776 19,066 18,311
Mexico 3,121 1,746 1,888
----------- ------------ ------------
$ 300,967 $ 238,396 $ 247,690
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
10. MINORITY INTEREST
On September 17, 1999 the Company purchased 25% of the outstanding stock of
Raincoast Book Distribution Limited, a Canadian book distributor, for
approximately $848,000. In conjunction with the purchase, certain officers of
Raincoast were granted 10-year warrants for the purchase of an aggregate of
21,000 shares of the Company's common stock at $21 per share; provided,
however, that upon exercise of any warrants, the Company will not issue
shares of common stock but rather will pay in cash an amount equal to the
excess of the closing price for the common stock on the day prior to exercise
over the exercise price. These rights expire after ten years from the
transaction date. The minority interest purchased has been accounted for
under the equity method and is included in Other Assets in the Company's
consolidated financial statements. Consistent with the Company's current
procedures in accounting for its international subsidiaries, the Company's
share of net income or losses will be recorded one month in arrears. As a
result, no income or loss from the Company's interest in Raincoast was
included in the Company's Consolidated Statements of Income and Comprehensive
Income for the fiscal quarter ended October 2, 1999.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED OCTOBER 2, 1999 AND SEPTEMBER 26, 1998:
During the three months ended October 2, 1999, our net income was $3,016,000,
or $.34 per diluted share, compared with a net income of $2,310,000, or $.26
per diluted share, for the corresponding quarter of the previous fiscal year.
Net sales for the quarter ended October 2, 1999 increased 25 percent to
$145,238,000 compared to $116,054,000 in the previous fiscal year's second
quarter. The increase in quarterly net sales was primarily due to strong
increases in product shipments within the juvenile, basic, and mass
categories to core customers, as well as sales to new customers. In the
second quarter of fiscal 2000, our customer return rate remained relatively
comparable at 17% versus 16% for the corresponding quarter of the previous
fiscal year.
During the quarter ended October 2, 1999, gross profit increased 25 percent
to $16,616,000 from $13,250,000 in the second quarter of the previous fiscal
year. Gross profit as a percentage of net sales remained at 11.4 percent,
consistent with the same period last fiscal year. This consistency was
achieved primarily through increased net sales in the juvenile and basic
categories, offset in part by lower margins in the cookbook, gift, and
computer book categories.
Distribution and administrative expenses for the quarter ended October 2,
1999 increased to $11,957,000 and represented 8.2 percent of net sales
compared to $9,652,000, or 8.3 percent of net sales, in the same quarter of
the previous fiscal year. While distribution and administrative expenses as a
percent of sales decreased due to higher sales volume and contributions from
our promotional activities, increases in absolute dollar amounts were
primarily due to our continuing strategic goal to diversify the customer base.
Interest and dividend income increased to $326,000 in the second quarter of
fiscal 2000 from $147,000 in the corresponding period of the previous fiscal
year as a result of higher investment balances and a modest improvement in
interest rates.
SIX MONTH PERIODS ENDED OCTOBER 2, 1999 AND SEPTEMBER 26, 1998:
During the six months ended October 2, 1999, our net income was $5,488,000,
or $.62 per diluted share, compared with net income of $3,961,000, or $.45
per diluted share, for the first six months of the prior fiscal year.
Net sales for the first six months of fiscal 2000 increased 30 percent to
$276,020,000 from $212,864,000 in the same period of the prior fiscal year.
The first quarter of fiscal 2000 included an additional four days of net
sales as compared to fiscal 1999, which accounted for approximately $7.5
million of net sales. If the additional four days were excluded, the increase
in net sales would have been 26 percent from the comparable period last year.
This increase was primarily due to increases in gross shipments to core
customers, and to a lesser extent, increased sales from our international
subsidiaries.
10
<PAGE>
During the first six months of fiscal 2000, gross profit increased 28 percent
to $32,259,000 from $25,131,000 in the first six months of the previous
fiscal year. Gross profit as a percentage of net sales decreased to 11.7
percent from 11.8 percent in the same period in the previous fiscal year.
This decrease was primarily due to increased sales volume in the best seller
and mass market categories, which typically achieve lower margins and, to a
lesser extent, lower margins experienced in the juvenile and basic categories.
Distribution and administrative expenses for the six months ended October 2,
1999 increased 25 percent to $23,885,000 and represented 8.7 percent of net
sales compared to $19,140,000, or 9.0 percent of net sales, in the same
period of the previous fiscal year. While distribution and administrative
expenses as a percent of sales decreased due to higher sales volume and
contributions from our promotional activities, increases in absolute dollar
amounts were primarily due to our continuing strategic goal to diversify the
customer base.
Interest and dividend income increased to $697,000 in the six months ended
October 2, 1999 from $461,000 in the corresponding period of the previous
fiscal year as a result of higher yields within the investment portfolio.
B. LIQUIDITY AND SOURCES OF CAPITAL
For the six months ended October 2, 1999, $11,433,000 of net cash was
provided by operating activities, primarily due to net income, as well as
increases in working capital components. Net cash used in operating
activities in the same period of the prior year was $8,632,000. Our cash and
investments at October 2, 1999 increased by $16,002,000 compared to September
26, 1998 primarily due to net income and an increase in accounts payable,
offset in part by increases in inventory and accounts receivable. Trade
accounts receivable at October 2, 1999 increased $19,159,000 compared to
September 26, 1998 and increased $15,729,000 compared to March 31, 1999
primarily due to the seasonal increase in sales to core customers, and to a
lesser extent, new customers. Inventories at October 2, 1999 increased
$14,683,000 compared to September 26, 1998 and $35,085,000 compared to March
31, 1999 due, in part, to increased sales growth and a broader customer base.
Accounts payable at October 2, 1999 increased $39,522,000 compared to
September 26, 1998 and $56,217,000 compared to March 31, 1999 due to
increased purchases to support expected seasonal increases in third quarter
sales.
Our working capital was $70,172,000 as of October 2, 1999, which increased
from the September 26, 1998 balance of $57,341,000 and from the March 31,
1999 balance of $65,282,000. The increases in cash, investments and accounts
receivable were primarily a result of net income and higher sales volume. The
increased inventory levels were primarily due to a broader base of customers
compared to September 26, 1998. Inventory levels increased from March 31,
1999 as a result of the broader base of customers as well as preparation for
our historically higher sales volume in the third quarter. These increases in
current assets were offset in part by corresponding increases in accounts
payable.
At October 2, 1999, we had available 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 October 2, 1999, March 31, 1999, and September 26, 1998,
there were no outstanding borrowings on the line of credit.
We believe that our existing working capital, cash flows from operations,
trade credit traditionally available from our vendors and our $10 million
line of credit will be sufficient to finance our current and anticipated
level of operations. Although we have no commitments to do so at the present
time, we may consider additional strategic acquisitions where deemed
appropriate. Such acquisitions, if any, could affect our liquidity and
capital resources.
11
<PAGE>
C. COMPUTER OPERATIONS AND THE YEAR 2000
During fiscal 1998 and fiscal 1999, we developed a plan to address
anticipated Year 2000 issues in connection with our data processing and other
activities, including non-information technology based systems. The cost for
review, analysis, modification and testing of existing computer programs for
both internal and external software approximated $650,000 and was expensed as
incurred. Due to the fact that we have primarily employed outside consultants
for Year 2000 remediation related work, there has not been any deferral of
other information technology related projects, nor has there been a
requirement to hire additional personnel solely for Year 2000 compliance
issues.
The remediation portion of the Year 2000 project was finalized in
the fourth quarter of fiscal 1999. In the second quarter of fiscal 2000, we
completed our internal testing phase of the Year 2000 project.
In contemplation of the possibility that our vendors and customers
may experience Year 2000 related difficulties that may affect our operations,
a committee of information technology and other departmental managers has
been formed to consider and develop a contingency plan. This committee
completed the development and documentation of the contingency plan in the
second quarter of fiscal 2000. Although, based on a review of its data
processing, operating, and other computer-based systems, we do not currently
believe that we 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 our
results of operations, liquidity and financial condition. Because there is
general uncertainty about the Year 2000 problem, including uncertainty about
the Year 2000 readiness of suppliers and customers, it is not possible to
predict whether Year 2000 problems will occur or what the consequences such
problems will have on results of operations, liquidity, or financial
condition. However, our 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 we will be successful.
12
<PAGE>
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. We desire to take advantage of the "safe
harbor" provisions of the Act.
We wish to caution readers that, with the exception of historical matters,
the matters discussed in this Quarterly Report are forward-looking statements
that involve risks and uncertainties, including but not limited to factors
related to the highly competitive nature of the publishing industry as well
as the warehouse club and retail industries and their sensitivity to changes
in general economic conditions, our concentration of sales and credit risk
with two customers, our ability to impact customer return rates, continued
successful results from the VMI program, currency and other risks related to
foreign operations, expansion plans, the results of financing efforts, risks
and uncertainties associated with the our failure or our suppliers or
customers to be Year 2000 compliant with regard to computer and other
systems, and other factors discussed in our other filings with the Securities
and Exchange Commission. Such factors could affect our actual results during
fiscal 2000 and beyond and cause such results to differ materially from those
expressed in any forward-looking statement.
13
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1-4.
None
ITEM 5. - OTHER INFORMATION
On October 12, 1999, we announced a stock repurchase program pursuant to
which we may repurchase up to 200,000 shares of common stock. As of the date
of this report on Form 10-Q, we have repurchased 4,000 shares of common stock
under the stock repurchase program. In addition, on October 26, 1999, we also
repurchased 100,000 shares of our common stock in a privately negotiated
transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herein or incorporate by reference:
(27.0) Financial Data Schedule
(b) Report on Form 8-K filed October 12, 1999.
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
NOVEMBER 12, 1999 By: /S/ MICHAEL M. NICITA
- ----------------- -------------------------------------
Date Michael M. Nicita
Chief Executive Officer and Director
(Principal Executive Officer)
NOVEMBER 12, 1999 By: /S/ EDWARD J. LEONARD
- ------------------ -------------------------------------
Date Edward J. Leonard
Chief Financial Officer
Executive Vice President-Finance
(Principal Financial and Accounting
Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS OF INCOME AND COMPRENENSURE INCOME
AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> OCT-02-1999
<CASH> 33,164
<SECURITIES> 9,565
<RECEIVABLES> 89,908
<ALLOWANCES> 3,399
<INVENTORY> 141,145
<CURRENT-ASSETS> 284,356
<PP&E> 17,271
<DEPRECIATION> 9,203
<TOTAL-ASSETS> 300,967
<CURRENT-LIABILITIES> 214,184
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 86,773
<TOTAL-LIABILITY-AND-EQUITY> 300,967
<SALES> 276,020
<TOTAL-REVENUES> 276,020
<CGS> 243,761
<TOTAL-COSTS> 243,761
<OTHER-EXPENSES> 23,885
<LOSS-PROVISION> 233
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 9,071
<INCOME-TAX> 3,583
<INCOME-CONTINUING> 5,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,488
<EPS-BASIC> .64
<EPS-DILUTED> .62
</TABLE>
