The surprise Chapter 11 bankruptcy filing by scandal-plagued book distributor Advanced Marketing Services (AMS) provided a sour ending to the holiday season for both the major publishers for whom AMS provided distribution into the warehouse market (Costco, etc.) and the independent publishers whose books were distributed by Publishers Group West, which AMS acquired in 2002. 


AMS has been in legal hot water since 2003 when its offices were raided by FBI agents seeking information concerning fraudulent misrepresentation of sales (see 'Book Distributor Raided By Feds').  Sandra Miller Christie, former V.P. of Advertising at AMS was recently sentenced to 36 months in prison following the earlier convictions of two other former AMS employees. 


AMS's legal expenses have been considerable, amounting to over $14 million in 2005 and $6 million in 2006. 


During 2006 the company settled a number of class action lawsuits brought by disgruntled shareholders; the terms of those settlements will not be affected by the filing. 


Because of the disputes over the exact amount of the company's sales, auditors have still not completed audits of AMS's sales for 2002, 2003 or 2004.  AMS has not filed any quarterly or annual reports for 2004, 2005, or 2006.  The company's stock, which was once traded on the New York Stock Exchange has been de-listed and plummeted some 81% in the wake of the bankruptcy filing to near 50 cents. 


AMS has received $75 million in financing to cover the bankruptcy period and is vigorously seeking a suitor.  In its filing, AMS listed assets of over $100 million and liabilities of over $100 million, which coupled with its lack of financial reporting, make it difficult to ascertain the company's precise financial position.  Is the bankruptcy simply to wash out AMS past legal and litigation difficulties to make the company easier to sell, or is the balance sheet under water, which would mean publishers would take a hit even if the company is sold. 


Even if a white knight is found to take over AMS's operations, there will be at minimum a short term effect on publishers -- and the fallout from AMS's bankruptcy will affect both large and small publishing houses.  Among major publishers Random House is owed $43.3 million, Simon & Schuster $26.4 million, Penguin $24.6 million, Hachette $22.5 million, Harper Collins $18 million and Andrews McMeel $8.6 million. 


The bankruptcy of AMS could be even more devastating for the independent publishers represented by Publishers Group West.  While PGW has assured publishers that they will be paid for post-bankruptcy sales, payments for the period of September through December, traditionally the heaviest sales period of the year, are in limbo and potentially at risk in the bankruptcy proceedings. 


While PGW is no longer representing Marvel or Viz Media, it does have a number of graphic novel publishers on its roster including Broccoli (which only went with PGW a short time ago, see 'Broccoli Goes With PGW'), Gigantic Graphic Novels, Actionopolis/Komikwerks, ibooks and Dark Horse (though PGW distributed only the Dark Horse Press prose books, not the company's manga or graphic novels).


Ironically PGW had an excellent year in 2006, with a 3% increase in unit sales and a 5.5% boost in net sales, while returns fell by over 6% to under 26%.