<PAGE>
------------------------
2ND 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 SEPTEMBER 30, 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
September 30, 2000 was 12,809,009.
1
<PAGE>
ADVANCED MARKETING SERVICES, INC.
INDEX TO FORM 10-Q
September 30, 2000
<TABLE>
<CAPTION>
Page
----
<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 - 13
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
<PAGE>
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>
SEPTEMBER 30, MARCH 31, OCTOBER 2,
2000 2000 1999
--------- --------- ---------
ASSETS (UNAUDITED) (NOTE) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 27,803 $ 31,135 $ 33,164
Investments, Available-For-Sale 4,971 3,480 9,565
Accounts Receivable - Trade, Net of Allowances for Uncollectible Accounts
and Sales Returns of $3,895 at September 30, 2000, $3,971 at March 31,
2000 and $3,399 at October 2, 1999 96,529 77,035 89,908
Vendor and Other Receivables 2,540 1,888 2,137
Inventories, Net 160,790 131,421 141,145
Deferred Income Taxes 7,395 6,785 6,310
Prepaid Expenses 4,696 2,222 2,127
--------- --------- ---------
TOTAL CURRENT ASSETS 304,724 253,966 284,356
--------- --------- ---------
Property and Equipment, At Cost 22,500 20,869 17,271
Less: Accumulated Depreciation and Amortization (10,990) (10,098) (9,203)
--------- --------- ---------
Net Property And Equipment 11,510 10,771 8,068
--------- --------- ---------
Investments, Available-For-Sale 111 1,857 17
Goodwill and Other Assets 15,929 8,956 8,526
--------- --------- ---------
TOTAL ASSETS $ 332,274 $ 275,550 $ 300,967
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 220,698 $ 165,856 $ 203,189
Accrued Liabilities 11,442 10,945 9,456
Income Taxes Payable 251 2,701 1,539
--------- --------- ---------
TOTAL CURRENT LIABILITIES 232,391 179,502 214,184
--------- --------- ---------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 Par Value, Authorized 100,000,000 Shares, Issued
14,946,000 Shares at September 30, 2000, 14,804,000 Shares at March 31,
2000 and 14,560,000 Shares at October 2,1999 16 15 10
Additional Paid-In Capital 33,564 31,062 29,048
Deferred Compensation (941) - -
Retained Earnings 77,405 71,072 59,810
Cumulative Other Comprehensive Income 76 (54) 35
Less: Treasury Stock, 2,137,000 shares at September 30, 2000, 1,897,000
shares at March 31, 2000 and 1,614,000 shares at October 2, 1999, at
cost (10,237) (6,047) (2,120)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 99,883 96,048 86,783
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 332,274 $ 275,550 $ 300,967
========= ========= =========
</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 ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES FOR COMPLETE FINANCIAL STATEMENTS.
3
<PAGE>
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 177,130 $ 145,238 $ 325,319 $ 276,020
Cost of Goods Sold 155,321 128,622 283,949 243,761
------------- ---------- ------------- ----------
GROSS PROFIT 21,809 16,616 41,370 32,259
Distribution and Administrative Expenses 16,472 11,957 31,513 23,885
------------- ---------- ------------- ----------
INCOME FROM OPERATIONS 5,337 4,659 9,857 8,374
------------- ---------- ------------- ----------
Interest and Dividend Income, Net 410 326 809 697
Equity in Net Income of Affiliate 309 - 305 -
------------- ---------- ------------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 6,056 4,985 10,971 9,071
Provision for Income Taxes 2,377 1,969 4,306 3,583
------------- ---------- ------------- ----------
NET INCOME $ 3,679 $ 3,016 $ 6,665 $ 5,488
============= ========== ============= ==========
NET INCOME PER SHARE:
Basic $ .29 $ .23 $ .52 $ .43
============= ========== ============= ==========
Diluted $ .28 $ .23 $ .50 $ .41
============= ========== ============= ==========
WEIGHTED AVERAGE SHARES USED IN
CALCULATION:
Basic 12,816 12,882 12,776 12,827
============= ========== ============= ==========
Diluted 13,248 13,349 13,228 13,280
============= ========== ============= ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS OF
INCOME.
4
<PAGE>
ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,665 $ 5,488
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Equity in Net Income of Affiliate (305) -
Depreciation and Amortization 1,821 1,254
Provision for Uncollectible Accounts and Sales Returns 318 (57)
Provision for Markdown of Inventories 2,306 1,603
Deferred Income Taxes (610) (313)
Changes in Assets and Liabilities
Net of Effects of Businesses Acquired:
(Increase) in Accounts Receivable - Trade (19,776) (16,433)
(Increase) Decrease in Vendor and Other Receivables (619) 1,571
(Increase) in Inventories (28,726) (37,177)
(Increase) in Other Assets (6,322) (1,878)
Increase in Accounts Payable 55,117 57,407
Increase (Decrease) in Accrued Liabilities 460 (547)
(Decrease) Increase in Income Taxes Payable (2,440) 515
------------ ----------
Net Cash Provided by Operating Activities 7,889 11,433
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Used in Acquisitions (5,549) -
Purchase of Property and Equipment, Net (2,188) (2,754)
Purchase of Investments, Available-For-Sale (4,138) (17,349)
Sale and Redemption of Investments, Available-For-Sale 4,392 13,625
------------ ----------
Net Cash Used In Investing Activities (7,483) (6,478)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Exercise of Options and Related Tax Benefits 1,562 1,285
Purchase of Treasury Stock (4,190) -
Dividends Paid (332) (342)
------------ ----------
Net Cash (Used In) Provided by Financing Activities (2,960) 943
------------ ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (778) 77
------------ ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,332) 5,975
CASH AND CASH EQUIVALENTS, Beginning of Period 31,135 27,189
------------ ----------
CASH AND CASH EQUIVALENTS, End of Period $ 27,803 $ 33,164
============ ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS OF
CASH FLOWS.
5
<PAGE>
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 six months ended September 30, 2000 and October 2, 1999 in
accordance with accounting principles generally accepted in the United States
and with instructions to Form 10-Q. These financial statements were not audited
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. References to Advanced Marketing Services, Inc.
throughout these Consolidated Financial Statements are made using the first
person notations of "we", "our", or "us".
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 six month period ended September 30, 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.
6
<PAGE>
The first six months of Fiscal 2001 had two less business days when compared to
the comparable period 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.
3. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income for the three months ended September 30, 2000 was
$3,836,000 and total comprehensive income for the three months ended October 2,
1999 was $2,981,000. The adjustments to net income to arrive at total
comprehensive income for the three months ended September 30, 2000 and October
2, 1999 were $157,000 and ($35,000), respectively, and represent foreign
currency translation adjustments and unrealized gains and losses on investments.
Total comprehensive income for the six months ended September 30, 2000 was
$6,795,000 and total comprehensive income for the six months ended October 2,
1999 was $5,438,000. The adjustments to net income to arrive at total
comprehensive income for the six months ended September 30, 2000 and October 2,
1999 were $130,000 and ($50,000), respectively, and represent foreign currency
translation adjustments and unrealized gains and losses on investments.
4. 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 during
the six months ended September 30, 2000 of $6,579,000. We paid income taxes
during the same period of the previous year of $2,662,000.
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
September 30, 2000, March 31, 2000 and October 2, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, 2000 (Unaudited)
----------------------------------------------------------------
Gross Gross Estimated
Amortized Cost Unrealized Unrealized Fair
Gains Losses Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities Issued by States of the U.S. and
Political Subdivisions of the States $ 5,081 $ 1 $ - $ 5,082
======== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000
----------------------------------------------------------------
Gross Gross Estimated
Amortized Cost Unrealized Unrealized Fair
Gains Losses Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities Issued by States of the U.S. and
Political Subdivisions of the States $ 5,335 $ 6 $ 4 $ 5,337
======= ===== ===== =======
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
October 2, 1999 (Unaudited)
----------------------------------------------------------------
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 $ 9,584 $ - $ 2 $ 9,582
========= ======= ======= =======
</TABLE>
As of September 30, 2000, we had investments in debt securities issued by States
of the U.S. and political subdivisions of the States of approximately $4,971,000
scheduled to mature within one year and approximately $111,000 scheduled to
mature within two years. For the quarter ended September 30, 2000, we sold no
investment prior to its maturity date. We received proceeds from the sale of
investments during the same period of the previous year of approximately
$2,028,000. We realized no gain or loss on these sales. We use the specific
identification method in determining cost on these investments. Our net decrease
in unrealized gain on investments was approximately $6,000 for the quarter ended
September 30, 2000. Our net increase in unrealized losses on investments for the
quarter ended October 2, 1999 was approximately $9,000.
6. EQUITY TRANSACTIONS
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. Our Board of Directors subsequently
approved an additional 700,000 share increase in the repurchase program. As of
the date of this report on Form 10-Q, we have repurchased approximately 543,000
shares of common stock under the stock repurchase program. The repurchase
program has no expiration date and will be financed through internal funds.
During the quarter ended September 30, 2000, we recognized deferred
compensation totaling $1,107,000 for incentive stock options granted under
our Stock Option Plan. The compensation is being amortized to expense over
the vesting period of the options and we have expensed approximately $166,000
during the three months ended September 30, 2000. The net balance of the
remaining, deferred compensation has been recorded as a separate component of
stockholders' equity.
7. 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
<PAGE>
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
-------------------------- -----------------------
Sept 30, Oct 2, Sept 30, Oct 2,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 3,679 $ 3,016 $ 6,665 $ 5,488
======== ======== ======== ========
Weighted Average Common Shares Outstanding 12,816 12,882 12,776 12,827
Basic Earnings Per Share $ .29 $ .23 $ .52 $ .43
======== ======== ======== ========
Weighted Average Common Shares Outstanding 12,816 12,882 12,776 12,827
Dilutive Common Stock Options 432 467 452 453
-------- -------- -------- --------
Total Diluted Weighted Average Common Shares 13,248 13,349 13,228 13,280
-------- -------- -------- --------
Diluted Earnings Per Share $ .28 $ .23 $ .50 $ .41
======== ======== ======== ========
</TABLE>
8. 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 Six Months Ended
----------------------------------- ------------------------------------
Sept 30, 2000 Oct 2, 1999 Sept 30, 2000 Oct 2, 1999
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
United States $ 167,970 $ 136,058 $ 305,888 $ 257,913
United Kingdom 6,994 7,963 15,704 16,012
Mexico 1,378 1,217 2,432 2,095
Australia 788 - 1,295 -
------------- ----------- ------------- -----------
$ 177,130 $ 145,238 $ 325,319 $ 276,020
============= =========== ============= ===========
</TABLE>
Net identifiable assets of our operations in different geographic areas are as
follows (in thousands):
<TABLE>
<CAPTION>
As of
---------------------------------------------------
Sept 30, 2000 March 31, 2000 Oct 2, 1999
------------- -------------- -----------
<S> <C> <C> <C>
United States $ 300,475 $ 251,678 $ 275,070
United Kingdom 25,118 19,114 22,776
Mexico 3,314 2,827 3,121
Australia 3,367 1,931 -
------------- -------------- -----------
$ 332,274 $ 275,550 $ 300,967
============= ============== ===========
</TABLE>
9
<PAGE>
9. EQUITY IN NET INCOME OF AFFILIATE
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.
10. ACQUISITIONS
UNCLE JOHN'S BATHROOM READER
In August 2000, we acquired certain net assets and the publishing rights of
Uncle John's Bathroom Reader for approximately $2.5 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. We accounted for the acquisition as a purchase and, accordingly,
the assets acquired and the publishing rights assumed from Earthworks Press Inc.
were recorded in the accompanying Consolidated Balance Sheet as of September 30,
2000 at their estimated fair value at the date of acquisition. The excess of the
purchase price over the net assets acquired of approximately $2,261,000 is being
amortized over 20 years.
ASPEN BOOK MARKETING
In August 2000, we acquired certain net assets of the wholesale distribution
business of Aspen Book Marketing for approximately $3.3 million. Aspen Book
Marketing is a distributor of specialty books to the Safeway store chain across
the UK. We accounted for the acquisition as a purchase and, accordingly, the
assets acquired from Aspen Book Marketing were recorded in the accompanying
Consolidated Balance Sheet as of September 30, 2000 at their estimated fair
value at the date of acquisition. The excess of the purchase price over the net
assets acquired of approximately $777,000 is being amortized over 20 years.
11. 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 that requires us to
purchase up to an additional 256,100 shares by December 31, 2000.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999:
Net income for the three months ended September 30, 2000 increased 22 percent to
$3,679,000, or $.28 per diluted share, compared with net income of $3,016,000,
or $.23 per diluted share, for the comparable three month period of the prior
fiscal year.
Net sales for the three months ended September 30, 2000 increased 22 percent to
$177,130,000 from $145,238,000 for the same period of the prior fiscal year. The
growth in second quarter net sales can be attributed primarily to increases in
product shipments within the juvenile, bestseller and mass-market categories, as
well as sales to new customers. Customer return rates remained unchanged at 17
percent from the corresponding quarter last year. This can be attributed to the
continuing success of our proprietary Vendor Managed Inventory (VMI) software.
Gross profit for the three months ended September 30, 2000 increased 31 percent
to $21,809,000 from $16,616,000 in the comparable three month period of the
prior fiscal year. Gross profit as a percentage of net sales increased to 12.3
percent from 11.4 percent in the same period of the prior fiscal year. This
increase was primarily due to strong sales volume in the higher margin juvenile
category.
Distribution and administrative expenses for the three months ended September
30, 2000 increased 38 percent to $16,472,000 and represented 9.3 percent of net
sales compared to $11,957,000, or 8.2 percent of net sales, in the same period
of the prior fiscal year. The increase in distribution and administrative
expenses resulted primarily from infrastructure investments, increased personnel
cost related to new business development, and operating costs associated with
recent acquisitions.
Interest and dividend income increased to $410,000 in the second three months of
Fiscal 2001 from $326,000 in the same period of the previous fiscal year as a
result of higher investment yields.
SIX MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999:
During the six months ended September 30, 2000, our net income increased 21
percent to $6,665,000, or $.50 per diluted share, compared with net income of
$5,488,000, or $.41 per diluted share, for the first six months of the prior
fiscal year.
Net sales for the first six months of Fiscal 2001 increased 18 percent to
$325,319,000 from $276,020,000 in the same period of the prior fiscal year. This
increase was primarily due to increases in gross shipments to core customers,
and to a lesser extent, increased sales to new customers. The first six months
of Fiscal 2001 had two less business days when compared to the comparable period
of the prior fiscal year.
11
<PAGE>
During the first six months of Fiscal 2001, gross profit increased 28 percent to
$41,370,000 from $32,259,000 in the first six months of the previous fiscal
year. Gross profit as a percentage of net sales increased to 12.7 percent from
11.7 percent in the same period in the previous fiscal year. This increase was
primarily due to increased sales volume in the higher margin juvenile and basic
categories and increased contributions from publisher incentive programs due in
part to a refinement in our method of estimating income under these programs.
Distribution and administrative expenses for the six months ended September 30,
2000 increased 32 percent to $31,513,000 and represented 9.7 percent of net
sales compared to $23,885,000, or 8.7 percent of net sales, in the same period
of the prior fiscal year. The increase in distribution and administrative
expenses is due primarily to our continuing goal to diversify our customer base
and our commitment to build the infrastructure required to address higher
business levels.
Interest and dividend income increased to $809,000 in the six months ended
September 30, 2000 from $697,000 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 September 30, 2000, cash provided by our operating
activities was $7,889,000. In the same period of the prior fiscal year, cash
provided by our operating activities was $11,433,000. Trade accounts receivable
increased $6,621,000 compared to October 2, 1999 and $19,494,000 compared to
March 31, 2000 primarily as a result of increased net sales. Inventories at
September 30, 2000 increased by $19,645,000 compared to October 2, 1999 and
$29,369,000 compared to March 31, 2000. The increased inventory levels compared
to October 2, 1999 were primarily due to an increased sku count to service our
expanding customer base. Inventory levels increased from March 31, 2000 due to
our broader base of customers as well as preparation for our historically higher
sales volume in the third quarter. Accounts payable increased $17,509,000
compared to October 2, 1999 and $54,842,000 compared to March 31, 2000 due to
increased purchases to support our expected seasonal increases in third quarter
sales. Cash and cash equivalents decreased by $3,332,000 compared to March 31,
2000 primarily due to stock repurchases and the funding of acquisitions,
partially offset by the positive cash impact of our operating activities.
Working capital was $72,333,000 as of September 30, 2000, a decrease from the
level at March 31, 2000 of $74,464,000 and an increase from the October 2, 1999
balance of $70,172,000.
We had available at September 30, 2000 an unsecured bank line of credit with a
maximum borrowing limit of $12 million. The interest rate on bank borrowings is
based on the prime rate and "Libor" rates. The line of credit expires on August
31, 2002. As of September 30, 2000, March 31, 2000 and October 2, 1999, we had
no borrowings on our bank 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.
12
<PAGE>
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.
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 September 30, 2000, our
investments of approximately $4,971,000 are scheduled to mature within one year
and approximately $111,000 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
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1-5. NOT APPLICABLE
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
September 30, 2000.
14
<PAGE>
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 14, 2000 By: /s/ Michael M. Nicita
----------------- ---------------------------------------------
Date Michael M. Nicita
Chief Executive Officer and Director
(Principal Executive Officer)
November 14, 2000 By: /s/ Edward J. Leonard
------------------ ---------------------------------------------
Date Edward J. Leonard
Chief Financial Officer
Executive Vice President
(Principal Financial and Accounting Officer)
15
