January 25 – February 1, 2007 Edition

S&S Loses
Bid as Lead
AMS Creditor WILMINGTON, DELEWARE/1/22/2007—Delaware’s U.S. Bankruptcy Court ruled yesterday that financial institutions which loaned money to bankrupt Advanced Marketing Services (AMS) will have preferred creditor status in bankruptcy proceedings, giving them first claim on AMS’s inventory. The move subordinates Simon & Schuster which failed to win a motion as a preferred creditor for its $5 million in inventory losses.

AMS has decided that books sold before the bankruptcy petition was filed then later returned to publishers for credit will not now be credited back to publishers’ inventory accounts, a position some lawyers say will “doom AMS to liquidation.” Many publishers, including S&S, have stopped shipping inventory to AMS to stem further losses, a move that may further hamper the company’s efforts to reorganize under Chapter 11. Without receiving new inventory from major publishers, AMS may not be able to survive, some observers said.

A hearing was set, though not completed, on January 24 to decide whether to give the company’s PGW (the distribution arm for small to medium-sized publishers) critical vendor status to get funds flowing to them for pre-petition claims. The matter is scheduled to resume on January 31.

Also on that date the court will examine AMS’s proposal to sell all or part of the company or to find new financing. Avalon Publishing Group, Inc., now owned by Perseus Books Group, will ask the court to grant the company certain security interests and superiority for expenses. But other publishers are protesting the motion, including Meredith Corporation (which owns Meredith Books), Leisure Arts, Inc., Simon & Schuster, and LearningExpress.

Perseus Books Group offered earlier this week to buy all PGW distribution contracts, giving publishers 70 cents on the dollar owed to them by AMS. Perseus this month purchased Avalon Publishing Group, which is a major distribution client of PGW. Perseus would take over distribution for as many as 30 or 40 smaller publishers if the bankruptcy court approves their motion later this week and publishers agree. Perseus is also offering to cover operating costs for PGW during a five-month transition period after the deal is approved.

Some publishers are nervous about taking the Perseus offer, but two of PGW’s largest clients, Avalon and Grove/Atlantic, have agreed to assign their distribution contracts to Perseus.

Meanwhile, Levy Home Entertainment is also working on a proposal to buy AMS’s warehouse club business.