Saturday, January 13, 2007

A Really Good Investment

It's been a while since I've written about the publishing industry. I've been saving up.


The publishing industry is seriously screwed up. Why? I'm not sure. There is greed, of course. But one would expect greed to produce a business model that was profitable -- for someone. This rarely seems to happen in the publishing industry and I can only wonder if that isn't because the underlying business model is based on greed AND stupidity. Maybe being greedy is profitable, but being stupid and greedy isn't?

One only has to consider the recent cataclysmic bankruptcy of mega-distributor Advanced Marketing Services/Publishers Group West to get some idea of the problem. For those unfamiliar with the situation, the $200 million bankruptcy of one of the largest distributors in the US is going to result in many indie presses not receiving payment for any of their inventory placed with AMS/PGW for the entire 4th quarter of 2006. The bankruptcy court considers that inventory as 'consignment' and, therefore, the property of AMS/PGW, and subject to sale and recovery by the creditors of AMS/PGW. The kicker is that the publishers whose books they are probably won't be given priority in the recovery, resulting in their books being sold to pay PGW's other debts.

Considering that I once hoped for a distribution agreement with PGW for my own company's books, I feel fortunate that I didn't pursue this avenue. But why didn't I? It's hard to say. It's obvious that I'm overly suspicious -- because there's no way anyone could have anticipated the AMS/PGW bankruptcy. Well, except that there was -- as you can see from these excerpts from publishing industry news. Emphasis mine.

7/28/2003: Publishers Weekly, Vol. 250, Issue 30
Despite a 21% decline in net income in the first quarter ..., executives at Advanced Marketing Services remain optimistic .... The good feeling ... was tempered somewhat by news ... that the company had received a subpoena related to its advertising activities...

10/6/2003: Publishers Weekly, Vol. 250, Issue 40. "AMS Under SEC Investigation"
Advanced Marketing Services has been notified that it is under investigation by the Securities and Exchange Commission, in a matter the company believes is related to a search warrant and subpoena served to it by a federal court in July.

11/17/2003: Publishers Weekly, Vol. 250, Issue 46. "Probe of AMS Drags On"
The investigation into Advanced Marketing Services shows few signs of clearing up any time soon. The company announced .. it will delay its filing of results from the second quarter ... as a result of its inability to file its 10-Q from the first quarter, which it is holding off on as the investigation continues.

12/1/2003: Publishers Weekly, Vol. 250, Issue 48. "No News from AMS"
In a ... filing with the Securities and Exchange Commission, Advanced Marketing Services suggested that it may not file its financial reports for the quarters ended June 28 and September 27 before the end of the year. AMS has delayed filing ... because of the investigation into the company's advertising services ... Failure to file ... put AMS in default of certain bank agreements.

1/5/2004: Publishers Weekly, Vol. 251, Issue 1
Banks with which it has a standing credit agreement have agreed to allow AMS to postpone its 10-Q filings. ... That permission ... likely means that AMS will not file ... until, ... late in January. In July, the FBI subpoenaed documents relating to AMS's advertising services, and the company later was informed it was under investigation by the SEC. The company has not filed a 10-Q since then ... raising the possibility that the company will soon be three quarters behind. In the announcement, AMS also said that it had agreed to limit its borrowing to $20 million.

1/19/2004: Publishers Weekly, Vol. 251, Issue 3. "AMS Restates Earnings, Lowers Estimates"
Advanced Marketing Services, ... the target of two investigations into its advertising practices, announced ... 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 ....
The earnings restatement will reduce profits between $3 million and $9 million for the fiscal years March 31, 1999, through fiscal 2003. The restatement is necessary because AMS overstated the circulation of some of its publications ... that accept co-op advertising dollars, effectively overcharging publishers.

The restatement will not halt the investigations by the SEC and the U.S. attorney for the Southern District of California ...

5/3/2004: Publishers Weekly, Vol. 251, Issue 18
In its first significant actions since taking the helm of Advanced Marketing Services in April, the new management team has signed a new lending agreement.

Bruce Myers, AMS's new chief financial officer, said the agreement resolves AMS's tight liquidity situation under the old lending agreement. The new agreement will also make it unnecessary for AMS to seek monthly forbearances .... The forbearances were necessary because the company has been in violation of certain agreements with its banks.

6/21/2004: Publishers Weekly, Vol. 251, Issue 25
Advanced Marketing Services will not be able to file its amended quarterly reports with the Securities and Exchange Commission by the middle of June, the company disclosed in a filing with the SEC ... As a result of its inability to complete the restatement of those documents, AMS's 10-K filing for fiscal 2004 will also be delayed. AMS said it didn't know when the filings will be completed.

In its most recent filing, AMS said it is restating earnings for the seven-year period that ended in fiscal 2003, and that net income from fiscal 1997 through 2003 would be reduced by a total of $10 million, a higher number than earlier reported. The restatement is tied to AMS's co-op program, which overcharged publishers for advertising.

9/20/2004: Publishers Weekly, Vol. 251, Issue 38
... Advanced Marketing Services disclosed last week that it will have sharply lower earnings per share for the full year ended March 31, 2004. The company also reported that profits in the first two quarters of fiscal 2005 have been hurt by "substantial" expenses associated with its audit and internal review .... Publisher incentive income also declined ... A company spokesperson couldn't comment on how many settlements AMS has reached with publishers about overcharges.

10/4/2004: Publishers Weekly, Vol. 251, Issue 40. "AMS Probe Yields First Charges"
... Investigations into Advanced Marketing Services' advertising practices produced their first charges last week, with both the Securities and Exchange Commission and the U.S. Attorney's office focusing on the former AMS advertising director for creative services, Marcy Roke.

The SEC filed civil charges against Roke for what it alleges was her participation in schemes to improperly inflate the earnings of AMS. ... Roke pleaded guilty to two counts of conspiracy in connection with ... a scheme to defraud AMS customers. The criminal charges were brought by the U.S. Attorney for the Southern District of California. Despite Roke's guilty plea in the criminal case, ... the civil suit will move forward.

Roke admitted that she conspired ... in a plan to increase the profitability of the advertising department by inducing publishers to pay for promotions that the company never provided. ... that the number of postcards AMS employees told publishers that they mailed to accounts was inflated. ... that the circulation figures of magazines that publishers advertised in were also inflated.

The SEC charges also dealt with ways in which Roke allegedly cheated publishers and misled retailers. According to the charges, Roke told AMS ... personnel that instead of contacting retailers about credit due them for ... advertising and promotional services, they should hide the discrepancies ... a move that decreased AMS's advertising expenses.

According to the SEC, Roke helped to overstate AMS's pretax earnings by 9% in fiscal 2001, 10% in fiscal 2002 and 19% in fiscal 2003. And although the SEC complaint said Roke was motivated by personal gain ... her plea agreement suggests that corporate pressures played a role. "Because of the advertising departments importance in generating net income for AMS, top management at AMS placed pressure on the vice president and her staff to meet budget targets each fiscal quarter."

1/10/2005: Publishers Weekly, Vol. 252, Issue 2
Advanced Marketing Services' stock price took a hit for the third year in a row as the company's advertising accounting problems were compounded with the first indictments last year in the SEC and FBI's ongoing investigations.

1/31/2005: Publishers Weekly, Vol. 252, Issue 5
Publishers Group West is in talks with parent company Advanced Marketing Services to consolidate some back-office operations in AMS's San Diego, Calif., office.

Freese said the pending change in the back office "is about positioning PGW for continued growth," and added, "AMS has consistently invested in the sales and marketing infrastructure" since he took over 18 months ago.

3/7/2005: Publishers Weekly, Vol. 252, Issue 10
The ongoing investigation of ... Advanced Marketing Services resulted in a second indictment .... Sandra Miller Christie, former v-p of advertising, was charged with one count of conspiracy, 19 counts of wire fraud and 13 counts of falsifying the books by the U.S. attorney for the Southern District of California. The Securities and Exchange Commission filed its own charges against Christie, accusing her of helping to manipulate AMS's earnings.

The charges against Christie are similar to ones filed against former AMS advertising director for creative services Marcy Roke.... Those charges allege that both Roke and Christie manipulated earnings between 9% and 19% ... in advertising vehicles and through improper co-op credits. The scheme resulted in publisher losses of approximately $6.8 million. A third alleged co-conspirator, an AMS director of advertising for accounts, has not been charged, but ... "the case is ongoing."

3/21/2005: Publishers Weekly, Vol. 252, Issue 12
In an amendment to its bank loan agreements, [AMS] reported that for the nine months ended December 31, 2004, it had a loss of $3.3 million. The figure put AMS in violation of its loan agreement, ....

4/4/2005: Publishers Weekly, Vol. 252, Issue 14
Advanced Marketing Services has reached settlements with all but "three or four" publishers regarding the distributor's cooperative advertising irregularities. ... AMS is reducing its earnings over the last seven years by $11 million to account for the agreements, which resulted from AMS's overcharging publishers for advertising. Costs associated with the government's probe of AMS's advertising practices--which has yielded two indictments to date--as well as expenses tied to its own investigation, contributed to the loss....

11/14/2005: Publishers Weekly, Vol. 252, Issue 45
Advanced Marketing Services reported that its net loss for the fiscal year ended March 31, 2005, will be higher than previously reported. The company said the loss is now expected to be in the 96 cents to $1.06 per share range, up from 73 cents to 83 cents. The company stressed that much of the loss in fiscal '05 was due to costs associated with the ongoing investigations into its advertising accounting practices....

1/9/2006: Publishers Weekly, Vol. 253, Issue 2
Advanced Marketing Services' delisting from the New York Stock Exchange and its inability to file its long-delayed annual reports contributed to a 64.6% plunge in AMS's stock price last year.

3/27/2006: Publishers Weekly, Vol. 253, Issue 13
The seemingly endless audit of Advanced Marketing Services' financial statements took another slight turn last week, when AMS announced that it was making revisions to its 2000-2002 fiscal year reports, in addition to restatements to fiscal 2003 and 2004 (AMS's fiscal year ends in March). The additional restatements are needed,' the company said, to correct new accounting issues .... The revisions for fiscal 2000-2004 are subject to an audit...

... the company projects that in addition to a 11% decline in sales, fiscal '05 will show an earnings-per-share loss of $1-$1.10.

6/19/2006: Publishers Weekly, Vol. 253, Issue 25
Advanced Marketing Services has notified the SEC that it will terminate the registration of its common stock .... The move will eliminate the need to report financial results on a quarterly and annual basis, .... The company has still not filed its year-end report for fiscal 2004 ....

8/14/2006: Publishers Weekly, Vol. 253, Issue 32
"Advanced Marketing Services is close to settling all class action lawsuits brought against the company following the disclosure in January 2004 of accounting problems tied to AMS's advertising practices. The suits charged the company with securities fraud. Under the agreements, AMS will pay $6 million to settle claims made on behalf of all shareholders who bought AMS stock between Jan. 16, 1999, and Jan. 13, 2004. A related suit is being settled for $300,000 in cash and the issuance of 75,000 shares of stock. The agreements do not affect the SEC and Justice Department investigations, which are continuing."

8/14/2006: "Sarboxed" by Daniel Fisher, Forbes, Vol. 178, Issue 3
"Not all Sarbox victims are winners, of course. Advanced Marketing Services, a San Diego book distributor, stopped reporting in August 2003--in advance of the date Sarbox kicked in but amid the Enron fallout. It had uncovered errors in accounting for tax contingencies and product returns. The stock, once $25 a share, has been delisted from the New York Stock Exchange and now trades near $4 on the Pink Sheets.

"They went dark and never came out," says Fox, who owned the stock for a while but sold it when the company failed to unravel the accounting problems."

And the bankruptcy brings us nearly up to date. For those who weren't inclined to read the endless litany above, here's a recap:

  • Investigations of AMS launched by both the SEC and the US Attorney's office.
  • Delayed SEC filings.
  • Default on lending agreements.
  • Further delays in filings.
  • Restated five-year earnings.
  • Lowered earnings per share estimates.
  • Acknowledgment that the restatement is because AMS overcharged publishers for advertising.
  • A new lending agreement to improve liquidity.
  • Restatement of seven-year earnings; tied to overcharging publishers for advertising.
  • Announcement of "sharply lower earnings".
  • Civil charges filed by SEC against AMS' director of creative advertising services Marcy Roke.
  • Criminal charges against Roke for her part in a scheme to defraud AMS customers.
  • Guilty plea by Roke to the criminal charges in which she admitted to cheating publishers.
  • Investigations and civil suit continuing.
  • Criminal charges filed against Sandra Miller Christie, AMS' former VP of advertising.
  • Separate SEC earnings manipulation charges against Christie.
  • A loss of $3.3 million, and violation of a loan agreement.
  • Restated earnings for last 7 years -- earnings reduced by $11 million (tied to overcharging publishers).
  • Higher net loss than previously reported.
  • Investigations and civil suit continuing.
  • Stock delisted.
  • Additional restatement of earnings showing greater losses than previously reported.
  • Termination of registration of common stock (to eliminate need to report financial results).
  • Payment of $6 million to settle suit brought by stockholders.
  • Investigations by both the SEC and the US Attorney's office continuing.
COME ON. How on earth could anyone have guessed that AMS/PGW might go bankrupt and leave publishers holding the bag?



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