SOURCE INTERLINK (THE ENTHUSIAST NETWORK) SETTLEMENT OFFERED TO 2600

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We've received an offer of a settlement from our distributors who took off with nearly 100 grand of our earnings last year. Needless to say, it's shockingly underwhelming.

If we agree to say that they no longer owe us anything, they might pay us between 0 and 2.5 percent of what they owe us. Yes, they're not even saying they will do that much, since the numbers could change. (But they somehow know that the numbers can't possibly change in our favor.) So we could agree to this and get absolutely nothing. By not agreeing, we would almost certainly get nothing, but we would forever be able to say that they still owe us. We've always preferred leaning towards the truth.

We understand the difficulty that bankruptcy presents. When crap like this happens, it's a miracle we can avoid it ourselves. But we seem to have a fundamental difference of opinion when it comes to integrity. We believe in paying what we owe, even when it's painful. Companies like this... well, they don't. What they do instead is something quite scandalous and shameful - but completely legal.

While the distribution arm of Source Interlink indeed closed its doors last year when they decided it wasn't going to be profitable, their publishing arm changed their name that very day from Source Interlink to TEN: The Enthusiast Network. They continued to publish highly profitable magazines like Motor Trend, Hot Rod, and Automobile. (We'd be curious to see how much of a hit those publications took when their distributor didn't pay them. We suspect some creative math likely came to the rescue.)

The corporate claim is that there is no connection between the two arms and, on paper, this is true. However, it doesn't take much to realize that there was a significant degree of coordination that continued between them. Their websites shared space, their mailing addresses were listed as the same, even their telephone switchboards allowed easy transferring from one company to the other. Concerned callers to Source Interlink were assured that the publishing arm was "flourishing" and operating under their new name. It was only the rest of us who were thrown under the bus.

While this name change occurred at the time of the closure (such "rebranding" is what any company would do if their name became polluted), the legal separation had taken place a bit earlier. This allowed both halves to plan for this eventuality and minimize the damage to themselves. The ones left out in the cold would be those who they owed money to (publishers) and, of course, their 5,000 employees.

This excerpt from their recent statement shows how familiar they are with this process:

"In October, 2013, on account of, among other things, decreased demand for print media and upcoming debt maturities, the company undertook a corporate reorganization (the "October 2013 Restructuring") pursuant to which the Debtors were separated from Source Media while equitizing approximately $436 million of debt pursuant to an out-of-court transaction with their secured lenders that, together with the 2009 Restructuring, resulted in many Holders of Holdings Interests acquiring their respective positions."

To us, it looks like they had plenty of time to prepare for a graceful exit, or to at least change their operating practices so that they wouldn't wind up hurting a lot of people. In fact, it's common knowledge that the event that led to their decision to shut down was the writing off of a debt of $7 million to Time Magazine. Time also claimed that they would be unable to collect around $19 million in sales. One might think that having a debt of this magnitude written off would be great news if you were the company that owed it. To Source Interlink, however, it only meant the loss of a big client and, with it, the loss of potential future profits. With this in mind, the following statement of theirs elicits little sympathy:

"Two of the largest legacy print platforms - newspapers and magazines - have experienced year-over-year revenue declines since 2009 due to the continuing and fundamental technological shift away from traditional consumption of print media and toward online magazines and e-book readers. Readers are migrating quickly to digital and mobile platforms, a move that has accelerated with the proliferation of tablets and smart phones. This migration has been compounded by the sluggish growth of the U.S. economy and consumers' reluctance to spend on print media. The decline in overall demand for print media also led to increased competition for retailer customers among wholesale distributors."

All of this is true, but it's not the reason Source Interlink decided to shut down. At the very least, being relieved of this massive debt should have been sufficient for them to make significant steps in paying their other debts before deciding to throw in the towel. And don't be deceived by that last sentence about competition. They were the second largest wholesaler in the United States, representing nearly a third of all newsstand business in the country. They were the primary distributor of magazines to Barnes and Noble. Source Interlink may have had problems, but competing was certainly not one of them.

"The Debtors also experienced a number of operational setbacks. In 2011, for instance, Borders Group, Inc., a key customer, filed for bankruptcy and liquidated their stores, representing a $48 million reduction in revenue for Source Distribution and a corresponding $6 million decline in EBITDA. Kroger and Albertsons, other key customers, moved their magazine supply and in-store merchandising to competitor wholesalers. These customer-specific issues were exacerbated by, among other things, increases in the costs of fuel and other raw materials, continued same store sales declines for Source Distribution, lower worldwide sales by Source International, and lower-than-expected profitability from Source Manufacturing."

We sympathize. We're in the same business, after all. Every issue related to the decline of publishing or the closing of retail outlets also affected us. The difference was that we made adjustments so that we could continue to survive. What these guys did was collect all of the money magazines like ours had earned through sales and then shut their doors without paying any of the publishers! Had they truly cared about the publishing world they were so heavily involved in, wouldn't paying the publishers have been highest on their priority list, rather than relegated to a category called "unsecured claims" with the weird label of "impaired" attached to it? We can only imagine how many publishers were driven out of business by these ill-advised and dishonorable actions.

Again, this is how the system works. They did their homework and they will likely get away with all of these legal shenanigans. Small publishers like us have been hurt the most, both financially and with reduced distribution. But one thing they can't take away is our voice - and yours. What they did here was morally reprehensible and we intend to make sure that is never forgotten. They can change their name and claim innocence, but none of that alters the way the facts played out. Despite the negative connotations that hackers are given by the mass media, we like to think that people look to us to set an example. Ways that we do that include respecting our readers by providing them with what they want, admitting when we've fallen short on that or anything else, and always paying the debts we owe and fulfilling the obligations we make. The message we get from Source Interlink/The Enthusiast Network is very different: keep making a profit until it gets hard, then pull out and let others deal with the mess, all the while preserving your own self-interests. We hope that's an example few will ever choose to follow.

If you want to express your opinions to TEN: The Enthusiast Network, good luck. Their Twitter account will quickly block you if you criticize them in any way. We suspect the same is true for their Facebook page. You can see how well they're doing at their website, but we doubt they really want your feedback over there either. We can tell you that their phone number is (310) 531-9900 (the same number as the distribution company) and their address is 831 S Douglas Street, El Segundo, California 90245, but we believe they have become quite adept at avoiding any contact with the public.

For those of you who have some legal knowledge or who simply like to suffer, we have attached a couple of the documents related to the "plan" that has been put forward (nobody said we couldn't share the details). If you find anything of interest, please let us know. Thanks, as always for your support.