Advancced Marketing Services, which is the target of two investigations into its advertising practices, announced last week that it will restate its financial statements for the five-year period ended March 31, 2003, following its own internal audit, which uncovered problems in its cooperative advertising activities. The company also said that it is lowering its earnings-per-share estimates for the fiscal year ending March 31, 2004. Finally, the company said it will close the Reno, Nev., warehouse used by its Publishers Group West subsidiary and will consolidate shipping and inventory functions in its warehouse in Indianapolis.
The earnings restatement will reduce profits between $3 million and $9 million for the fiscal years March 31, 1999, through fiscal 2003, when the company reported cumulative net income of $85 million. The restatement is necessary because AMS overstated the circulation of some of its publications, such as its Pages magazine and catalogues that accept co-op advertising dollars, effectively overcharging publishers. AMS president Mike Nicita said there was a difference in estimated circulation figures and what was actually circulated. He said AMS had launched its internal review before the federal probes began and that, as a result, the company determined that a restatement was in order. To prevent a recurrence of the overcharge, AMS has restructured its advertising department and instituted new internal controls. A few employees have also resigned.
AMS is working with its customers and vendors "to reach appropriate resolutions," which could entail a refund. Nicita said talks are in progress with publishers, although he had no time frame as to when an agreement with the different companies may be reached. The head of one major house confirmed that his company was in discussions with AMS about possibly receiving a rebate or compensatory advertising space.
The restatement will not halt the investigations by the SEC and the U.S. attorney for the Southern District of California, but Nicita said it is part of a process that AMS hopes will enable it to file its delayed quarterly reports as promptly as possible.
Low-Margin Sales Up
AMS also said that it is lowering its earnings estimate for the year, due to higher-than-anticipated sales of low-margin bestsellers and mass market paperbacks. Nicita said that as recently as last summer, AMS had benefited from the bestseller halo effect, which resulted in increased sales of higher-margin items, such as children's books, cookbooks and gifts. That did not occur over the holidays, and Nicita said he "has no reason to believe" that trend will change in the near term. Bestsellers account for about 20% of AMS's sales through warehouse clubs.
The consolidation of the PGW warehouse is part of AMS's effort to improve operating margins. Nicita said the company has nearly completed the transfer of PGW's old operating system to AMS's own system, known as PkMS. Once that is done, AMS will begin the gradual migration of inventory to Indianapolis, a process that should be finished by June. Some Reno employees have already moved to Indianapolis, and Nicita said AMS plans to transfer as many of the 119 full-time Reno employees as it can.
