<PAGE>
------------------------
1ST QUARTER
FISCAL 2001
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 JULY 1, 2000
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 July 1,
2000 was 12,828,163.
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ADVANCED MARKETING SERVICES, INC.
INDEX TO FORM 10-Q
July 1, 2000
<TABLE>
<CAPTION>
Page
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<S> <C>
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 - 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................................... 11 - 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.............................................................................. 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ....................................................................... 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................................ 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....................................................................................... 15
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (See Note 1 for Basis of Presentation)
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 1, MARCH 31, JULY 3,
2000 2000 1999
--------- --------- ---------
<S> <C> <C> <C>
ASSETS (UNAUDITED) (NOTE) (UNAUDITED)
CURRENT ASSETS:
Cash and Cash Equivalents $ 21,167 $ 31,135 $ 24,969
Investments, Available-For-Sale 3,145 3,480 5,140
Accounts Receivable - Trade, Net of Allowances for Uncollectible Accounts
and Sales Returns of $3,284 at July 1, 2000, $3,971 at March 31, 2000
and $3,803 at July 3, 1999 89,079 77,035 82,032
Vendor and Other Receivables 2,186 1,888 3,530
Inventories, Net 145,436 131,421 110,362
Deferred Income Taxes 6,785 6,785 6,026
Prepaid Expenses 2,957 2,222 1,944
--------- --------- ---------
TOTAL CURRENT ASSETS 270,755 253,966 234,003
--------- --------- ---------
PROPERTY AND EQUIPMENT, AT COST 22,365 20,869 16,675
Less: Accumulated Depreciation and Amortization 10,673 10,098 9,232
--------- --------- ---------
Net Property And Equipment 11,692 10,771 7,443
--------- --------- ---------
Investments, Available-For-Sale 871 1,857 1,484
Goodwill and Other Assets 10,474 8,956 7,741
--------- --------- ---------
TOTAL ASSETS $ 293,792 $ 275,550 $ 250,671
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 185,727 $ 165,856 $ 157,999
Accrued Liabilities 9,837 10,945 7,336
Income Taxes Payable 2,428 2,701 2,278
--------- --------- ---------
TOTAL CURRENT LIABILITIES 197,992 179,502 167,613
--------- --------- ---------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 Par Value, Authorized 20,000,000 Shares, Issued
14,925,000 Shares at July 1, 2000, 14,804,000 Shares at March 31, 2000
and 14,417,000 Shares at July 3, 1999 15 15 14
Additional Paid-In Capital 31,492 31,062 28,128
Retained Earnings 73,893 71,072 56,966
Cumulative Other Comprehensive Income (81) (54) 70
Less: Treasury Stock, 2,097,000 shares at July 1, 2000, 1,897,000 shares
at March 31, 2000 and 1,614,000 shares at July 3, 1999, at cost (9,519) (6,047) (2,120)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 95,800 96,048 83,058
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 293,792 $ 275,550 $ 250,671
========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
NOTE: THE BALANCE SHEET AT MARCH 31, 2000 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
-----------------------------
JULY 1, JULY 3,
2000 1999
--------- ---------
<S> <C> <C>
NET SALES $ 148,189 $ 130,782
Cost of Goods Sold 128,628 115,139
GROSS PROFIT 19,561 15,643
Distribution and Administrative Expenses 15,041 11,928
--------- ---------
INCOME FROM OPERATIONS 4,520 3,715
Interest and Dividend Income, Net 400 371
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST INCOME 4,920 4,086
Provision for Income Taxes 1,929 1,614
--------- ---------
INCOME BEFORE MINORITY INTEREST 2,991 2,472
Minority Interest Income (Loss) (5) -
NET INCOME $ 2,986 $ 2,472
======== ========
NET INCOME PER SHARE:
Basic $ .23 $ .19
======== =======
Diluted $ .23 $ .19
======== =======
WEIGHTED AVERAGE SHARES USED IN CALCULATION:
Basic 12,735 12,771
======== =======
Diluted 13,205 13,201
======== =======
</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>
THREE MONTHS ENDED
----------------------------
JULY 1, JULY 3,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,986 $ 2,472
Adjustments to Reconcile Net Income to Net Cash Used in
Operating Activities:
Minority Interest in Loss from Raincoast 5 -
Depreciation and Amortization 804 601
Provision for Uncollectible Accounts and Sales Returns (342) 346
Provision for Markdown of Inventories 665 551
Deferred Income Taxes - (29)
Changes in Assets and Liabilities
Net of Effects of Businesses Acquired:
(Increase) in Accounts Receivable - Trade (12,012) (8,301)
(Increase) Decrease in Vendor and Other Receivables (58) 203
(Increase) in Inventories (14,471) (4,923)
(Increase) in Goodwill and Other Assets (2,259) (910)
Increase in Accounts Payable 20,300 11,198
(Decrease) in Accrued Liabilities (1,113) (2,693)
Increase (Decrease) in Income Taxes Payable (305) 1,290
-------- --------
Net Cash Used In Operating Activities (5,800) (195)
-------- --------
INVESTING ACTIVITIES:
Purchase of Property and Equipment, Net (1,490) (1,452)
Purchase of Investments, Available-For-Sale (999) (1,830)
Sale and Redemption of Investments, Available-For-Sale 2,325 1,068
-------- --------
Net Cash Used In Investing Activities (164) (2,214)
-------- --------
FINANCING ACTIVITIES:
Proceeds from Exercise of Options and Related Tax Benefits 430 369
Purchase of Treasury Stock (3,472) -
Dividends Paid (165) (170)
-------- --------
Net Cash Provided by (Used In) Financing Activities (3,207) 199
EFFECT OF EXCHANGE RATE CHANGES ON CASH (797) (10)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,968) (2,220)
CASH AND CASH EQUIVALENTS, Beginning of Period 31,135 27,189
-------- --------
CASH AND CASH EQUIVALENTS, End of Period $ 21,167 $ 24,969
======== ========
</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
We have prepared the consolidated financial statements presented herein as of
and for the three months ended July 1, 2000 and July 3, 1999 in accordance with
accounting principles generally accepted in the United States and with
instructions to Form 10-Q. These financial statements were not examined by our
independent public accountants, but include all adjustments (consisting of
normal recurring adjustments) which in our management's opinion are necessary
for a fair presentation of the financial condition, results of operations and
cash flows for those periods.
The accompanying consolidated financial statements include our accounts and
those of our wholly-owned subsidiaries. Our policy is to include the operating
results of our foreign subsidiaries in our Consolidated Statements of Income one
month in arrears. We have eliminated all significant intercompany accounts and
transactions.
We have omitted certain information and footnote disclosures normally included
in financial statements in accordance with accounting principles generally
accepted in the United States pursuant to requirements of the Securities and
Exchange Commission. Our management believes that the disclosures included in
the accompanying interim financial statements and footnotes are adequate so that
the information is not misleading. For further information, refer to the
financial statements and notes included in our Annual Report on Form 10-K for
the fiscal year ended March 31, 2000.
Our results of operations for the three-month period ended July 1, 2000 are not
necessarily indicative of the results to be expected for our fiscal year ending
March 31, 2001. Our net sales in the third fiscal quarter have historically
been, and we expect them to continue to be, significantly greater than in any
other quarter of our fiscal year due to increased demand during the holiday
season.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our 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. Our actual results could differ from those
estimates.
2. INTERIM ACCOUNTING PERIODS
In accordance with wholesale distribution industry practice, our 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 our sales and cost of goods sold are recorded both as to
quarter-to-quarter comparisons, and as to comparisons of quarters between years.
Our first quarter of the current fiscal year had two less days of net sales
compared to our first quarter of the prior fiscal year. See Management's
Discussion and Analysis of Financial Condition and Results of Operations in Item
2 of this Form 10-Q.
6
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3. FOREIGN CURRENCY TRANSLATION
We translate the balance sheet accounts of our foreign operations from their
respective foreign currencies into U.S. dollars at the exchange rate in effect
at the balance sheet date and translate revenue and expense accounts using the
average exchange rate during the respective period. We record the effects of the
translation as a separate component of stockholders' equity. We record exchange
gains and losses arising from the transactions denominated in foreign currencies
using the actual exchange differences on the date of the transaction and they
are included in our Consolidated Statements of Income.
4. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income for the three months ended July 1, 2000 was
$2,959,000 and total comprehensive income for the three months ended July 3,
1999 was $2,457,000. The adjustments to income to arrive at total
comprehensive income for the three months ended July 1, 2000 and July 3, 1999
were $27,000 and $15,000, respectively, and represent foreign currency
translation adjustments and unrealized gains and losses on investments.
5. 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
July 1, 2000, March 31, 2000 and July 3, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
July 1, 2000
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
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<S> <C> <C> <C> <C>
Debt Securities Issued by States of the U.S. and
Political Subdivisions of the States $ 4,009 $ 8 $ 1 $ 4,016
======= ===== ===== =======
March 31, 2000
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------
Debt Securities Issued by States of the U.S. and
Political Subdivisions of the States $ 5,335 $ 6 $ 4 $ 5,337
======= ===== ===== =======
July 3, 1999
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------
Debt Securities Issued by States of the U.S. and
Political Subdivisions of the States $ 6,622 $ 10 $ 8 $ 6,624
======== ====== ====== =======
</TABLE>
As of July 1, 2000, we had investments in debt securities issued by States of
the U.S. and political subdivisions of the States of approximately $3,145,000
scheduled to mature within one year and
7
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approximately $871,000 scheduled to mature within two years. We received
proceeds from the sale of investments of approximately $2,325,000 for the
quarter ended July 1, 2000. We realized no gain or loss on these sales. We
received proceeds from the sale of investments during the same period of the
previous year of approximately $1,068,000 on which we realized a net gain of
approximately $4,000. We use the specific identification method in determining
cost on these investments. Our net increase in unrealized gain on investments
was approximately $5,000 for the quarter ended July 1, 2000. Our net decrease in
unrealized gain on investments for the quarter ended July 3, 1999 was
approximately $5,000.
6. ACCOUNTS RECEIVABLE ALLOWANCES
In accordance with industry practice, a significant portion of our products are
sold to customers with the right of return. We have provided allowances of
$1,730,000 as of July 1, 2000, $2,306,000 as of March 31, 2000 and $2,433,000 as
of July 3, 1999 for the gross profit effect of estimated future sales returns
after considering historical results and evaluating current conditions. We also
have provided allowances for uncollectible trade accounts receivable of
$1,554,000 as of July 1, 2000, $1,665,000 as of March 31, 2000 and $1,370,000 as
of July 3, 1999, respectively.
7. INVENTORIES
Our 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.
8. LINE OF CREDIT
We had available at July 1, 2000 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. On July 27, 2000, the bank line of credit was
increased to $12 million and extended to August 31, 2002. As of July 1, 2000,
March 31, 2000 and July 3, 1999, we had no borrowings on our line of credit.
9. INCOME TAXES
We currently provide 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. We paid income taxes in the
three months ended July 1, 2000 totaling $2,184,000. We paid income taxes paid
during the same period of the previous year of $129,000.
10. PER SHARE INFORMATION
On February 15, 1999, we effected a three for two stock split to stockholders of
record on February 1, 1999. On January 17, 2000, we effected an additional three
for two stock split to stockholders of record on January 3, 2000. Accordingly,
we have restated all references to shares and earnings per share amounts
included in these consolidated financial statements to reflect the stock splits.
8
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The following financial data summarizes information relating to the per share
computations (in thousands, except per share data):
<TABLE>
<CAPTION>
Period Ended
----------------------------------------------
July 1, 2000 July 3, 1999
<S> <C> <C>
Net Income $ 2,986 $ 2,472
====================== ====================
Weighted Average Common Shares Outstanding 12,735 12,771
Basic Earnings Per Share $ .23 $ .19
====================== ====================
Weighted Average Common Shares Outstanding 12,735 12,771
Dilutive Common Stock Options 470 430
---------------------- --------------------
Total Diluted Weighted Average Common Shares 13,205 13,201
---------------------- --------------------
Diluted Earnings Per Share $ .23 $ .19
====================== ====================
</TABLE>
11. INDUSTRY SEGMENT AND GEOGRAPHICAL DATA
We operate in one industry segment and in several geographic regions.
Net sales by geographic region are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------
July 1, 2000 July 3, 1999
<S> <C> <C>
United States $ 137,918 $ 121,855
United Kingdom 8,710 8,049
Mexico 1,054 878
Australia 507 -
------------------- -----------------
$ 148,189 $ 130,782
=================== =================
</TABLE>
Net identifiable assets of our operations in different geographic areas are as
follows (in thousands):
<TABLE>
<CAPTION>
As of
-----------------------------------------------------------------------
July 1, 2000 March 31, 2000 July 3, 1999
<S> <C> <C> <C>
United States $ 265,886 $ 251,678 $ 225,977
United Kingdom 21,317 19,114 22,217
Mexico 3,228 2,827 2,477
Australia 3,361 1,931 -
---------- --------- -------------
$ 293,792 $ 275,550 $ 250,671
========== ========= =============
</TABLE>
9
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12. MINORITY INTEREST
In September 1999, we acquired a 25 percent minority interest in Raincoast Book
Distribution, Limited, a leading Canadian book distributor, for approximately
$900,000. Headquartered in Vancouver, British Colombia, Raincoast has the
exclusive distribution rights for approximately 40 publishers in Canada. In
addition, Raincoast, through its own proprietary imprint label, publishes a wide
variety of books. We accounted for the investment under the equity method of
accounting and, consistent with our policy regarding international subsidiaries,
we include our portion of Raincoast's operating results in our Consolidated
Statements of Income one month in arrears.
13. RELATED PARTY TRANSACTION
On April 3, 2000, we entered into a private transaction to purchase 200,000
shares of our stock from our Chairman for approximately $3.5 million, which
reflects a 10 percent discount from the average market price for a specified
period. The transaction was pursuant to an agreement which requires us to
purchase up to an additional 256,100 shares by December 31, 2000.
14. SUBSEQUENT EVENT
On August 4, 2000, we acquired certain assets and the publishing rights of Uncle
John's Bathroom Reader for approximately $2.2 million. Uncle John's Bathroom
Reader is a series of "info-tainment" books that is distributed through a
variety of mass-market outlets. We will integrate this product series together
with the assets acquired with our other publishing activities from the date of
acquisition.
10
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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 JULY 1, 2000 AND JULY 3, 1999:
Net income for the three months ended July 1, 2000 increased 21 percent to
$2,986,000, or $.23 per diluted share, compared with net income of $2,472,000,
or $.19 per diluted share, for the first three months of the prior fiscal year.
Net sales for the three months ended July 1, 2000 increased 13 percent to
$148,189,000 from $130,782,000 for the comparable period last year. The first
three months of Fiscal 2001 had two less days of net sales as compared to Fiscal
2000, which represented approximately $5 million of net sales. The growth in
first quarter net sales can be attributed primarily to increases in product
shipments within the juvenile, basic, and mass market categories, as well as
sales to new customers. Customer return rates decreased to 18 percent in the
first quarter of Fiscal 2001 from 24 percent for the corresponding quarter last
year due to refinements in our proprietary Vendor Managed Inventory (VMI)
software and unusually high returns in the comparable period last year due to an
inventory realignment by a major customer.
During the first three months of Fiscal 2001, gross profit increased 25 percent
to $19,561,000 from $15,643,000 in the first three months of the previous fiscal
year. Gross profit as a percentage of net sales increased to 13.2 percent from
12.0 percent in the same period of the last fiscal year. This increase was
primarily due to increased sales volume in the higher margin juvenile and basic
categories, increased contributions from publisher incentive programs due in
part to a refinement in our method of estimating income under these programs,
and increased sales from our international subsidiaries, which historically have
had higher margins.
Distribution and administrative expenses for the three months ended July 1, 2000
increased 26 percent to $15,041,000 and represented 10.2 percent of net sales
compared to $11,928,000, or 9.1 percent of net sales, in the same period of the
previous fiscal year. Increases in distribution and administrative expenses
resulted primarily from foreign currency exchange losses due to the strength of
the U.S. dollar overseas (mainly in the United Kingdom), and to a lesser extent,
an increase in expenses related to infrastructure investments which are
consistent with our growth strategy.
Interest and dividend income increased to $400,000 in the first three months of
Fiscal 2001 from $371,000 in the same period of the previous fiscal year as a
result of higher investment yields.
11
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B. LIQUIDITY AND SOURCES OF CAPITAL
For the three months ended July 1, 2000, we used $5,800,000 of cash in operating
activities. During the same period of the prior fiscal year, we used $195,000 of
cash in operating activities. Cash and investments at July 1, 2000 decreased by
$6,410,000 compared to July 3, 1999 primarily due to stock repurchases,
increased working capital requirements, and the funding of acquisitions executed
during the past year. Trade accounts receivable increased $7,047,000 compared to
July 3, 1999 and $12,044,000 compared to March 31, 2000 primarily as a result of
increased net sales. Inventories at July 1, 2000 increased by $35,074,000
compared to July 3, 1999 and $14,015,000 compared to March 31, 2000 as a result
of increased sales activity, increased sku count to address our expanding
customer base, and the timing of returns to publishers of certain titles. This
increase was partially offset by an increase in accounts payable of $27,728,000
compared to July 3, 1999 and $19,871,000 compared to March 31, 2000.
Working capital was $72,763,000 as of July 1, 2000, consistent with the level at
March 31, 2000 of $74,464,000 and an increase from the July 3, 1999 balance of
$66,390,000. The positive impact of net operating income was offset by stock
repurchases, increased capital expenditures, and the funding of acquisitions.
We had available at July 1, 2000 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. On July 27, 2000, the bank line of credit was
increased to $12 million and extended to August 31, 2002. As of July 1, 2000,
March 31, 2000 and July 3, 1999, we had no borrowings on our line of credit.
We believe that our existing working capital, cash flows from operations,
trade credit traditionally available from our vendors and our $12 million
bank 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.
C. 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, and other factors
discussed in our other filings with the Securities and Exchange Commission. Such
factors could affect our actual results during Fiscal 2001 and beyond and cause
such results to differ materially from those expressed in any forward-looking
statement.
12
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to changes in interest rates primarily from securities held in
our investment portfolio. Fluctuations in interest rates may affect the ending
fair value of our investments, anticipated future cash flows, and the
realization of earnings from such investments. Our cash and cash equivalents
consist primarily of highly liquid short-term investments that are typically
held for the duration of the respective instrument. Due to the short-term nature
of our investments, we believe that any change in interest rates would not have
a material impact on our cash equivalents. As of July 1, 2000, our investments
of approximately $3,145,000 are scheduled to mature within one year and
approximately $871,000 are scheduled to mature within two years. We do not
utilize derivative financial instruments or other market risk sensitive
instruments, positions, or transactions to manage exposure to interest rate
changes. Accordingly, we believe that, while the securities we hold are subject
to changes in the financial standing of the issuer of such securities, we are
not subject to any material risks arising from changes in interest rates or
other market changes that affect market risk sensitive instruments.
We are subject to foreign currency exposure due to the operation of our foreign
subsidiaries, which generally enter into transactions denominated in their
respective functional currencies. Our primary foreign currency exposure arises
from foreign denominated revenues and profits translated into U.S. dollars. The
primary currencies to which we have foreign currency exposure are the British
pound, Mexican peso, and the Australian dollar. We generally view as long term
our investments in our wholly-owned foreign subsidiaries with a functional
currency other than the U.S. dollar. As a result, we do not utilize any hedging
transactions against these net investments. Our foreign operations are not a
significant part of our overall activities and we believe that the risk
associated with our foreign currency exposure is not material on a consolidated
basis.
13
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PART II. OTHER INFORMATION
ITEMS 1-3. NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on July 27, 2000. Charles
Tillinghast III (10,750,907 votes for; 712,564 abstain/withheld), Michael N.
Nicita (10,750,907 votes for; 712,564 abstain/withheld) and Loren C. Paulsen
(10,750,907 votes for; 712,564 abstain/withheld) were elected as Class A
directors to serve a three-year term, and will serve until their respective
successors are elected and qualified. In addition, the stockholders approved the
following proposals:
1. A proposal to amend our Certificate of Incorporation to increase the
authorized number of shares of our common stock from 20,000,000 to
100,000,000. There were 8,617,628 votes in favor of and 2,779,270 votes
against the adoption of this proposal, with 66,573 abstentions and no
broker non-votes.
2. A proposal to amend our 1995 Stock Option Plan to increase by 1,000,000 the
number of shares of common stock reserved for issuance. There were
6,379,688 votes in favor of and 2,358,850 votes against the adoption of
this proposal, with 65,063 abstentions and 2,659,870 broker non-votes.
3. Ratification of the selection of Arthur Andersen LLP as our independent
auditors for the fiscal year ending March 31, 2001. There were 10,736,231
votes for and 2,168 votes against ratification, with 58,477 abstentions and
no broker non-votes.
The stockholders did not approve a proposal to amend our Certificate of
Incorporation to authorize 2,000,000 shares of undesignated preferred stock.
There were 5,831,378 votes in favor of and 2,911,486 votes against the adoption
of this proposal, with 60,737 abstentions and 2,659,870 broker non-votes.
ITEM 5. OTHER INFORMATION
On July 22, 1999, we adopted a stock repurchase program pursuant to
which we may repurchase in open market or private transactions, from
time to time, based upon existing market conditions, shares of our
Common Stock having an aggregate cost not to exceed $5 million or
300,000 shares. On March 16, 2000, we announced that our Board of
Directors had approved a 350,000 share increase in the repurchase
program. On July 27, 2000, we announced that our Board of Directors
had approved an additional 350,000 share increase in the repurchase
program. As of the date of this report on Form 10-Q, we have
repurchased 496,000 shares of common stock under the stock
repurchase program. The repurchase program has no expiration date
and will be financed through internal funds.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herein or incorporated by
reference: (27.0) Financial Data Schedule
(b) No reports on Form 8-K were filed for the three months ended
July 1, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED MARKETING SERVICES, INC.
REGISTRANT
August 11, 2000 By: /s/ Michael M. Nicita
-------------------- ----------------------------------------
Date Michael M. Nicita
Chief Executive Officer and Director
(Principal Executive Officer)
August 11, 2000 By: /s/ Edward J. Leonard
-------------------- ----------------------------------------
Date Edward J. Leonard
Chief Financial Officer
Executive Vice President
(Principal Financial and Accounting Officer)
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