Source Interlink Companies, Inc.

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Source Interlink Companies, Inc.

27500 Riverview Center Boulevard, Suite 400
Bonita Springs, Florida 34134
U.S.A.
Telephone: (239) 949-4450
Fax: (239) 949-7623
Web site: http://www.sourceinterlink.com

Public Company
Incorporated: 1995 as Source Information Management Company
Employees: 2,473
Sales: $1.7 billion (2005 est.)
Stock Exchanges: NASDAQ
Ticker Symbol: SORC
NAIC: 423990 Other Miscellaneous Durable Goods Merchant Wholesalers; 424920 Book, Periodical, and Newspaper Merchant Wholesalers; 519190 All Other Information Services; 541614 Process, Physical Distribution, and Logistics Consulting Services; 541910 Marketing Research and Public Opinion Polling; 561499 All Other Business Support Services

Source Interlink Companies, Inc. distributes magazines, CDs, DVDs, and assorted other merchandise to retailers including Kmart, Borders, Kroger, and Walgreens; processes magazine rebate claims and manages sales data for retailers and publishers; designs and makes display units for stores; and provides related services. Two of the firm's largest clients are Barnes & Noble and Borders, each of which accounts for more than a quarter of revenues. Founder S. Leslie Flegel serves as chairman and CEO of the publicly traded firm, which has grown rapidly through acquisitions.

Early Years

The beginnings of Source Interlink date to 1995, when two Missouri-based companies that provided magazine rebate services to retailers merged to form a single entity. Display Information Systems Co. was owned and run by S. Leslie Flegel, and Periodical Marketing and Management, Inc. was operated by William H. Lee. Flegel would take the titles of CEO and board chairman of the new firm, with Lee serving as its chief administrative officer. The St. Louis-based company soon became publicly traded after a reverse merger with a dormant Montana outfit called Garner Investments, taking the name Source Information Management Co.

Source's income came from relieving store owners of the often-complicated process of obtaining magazine sales rebates from publishers. Beginning in the 1950s, publishers had tried to gain better visibility for their offerings by giving retailers financial incentives, which were paid as a percentage of actual sales. The vast number of different publishers and rebate offers involved made for a large amount of paperwork, and many retailers did not collect what was due them. By the 1970s companies such as those owned by Flegel and Lee had sprung up around the country to take over the work of tallying sales and collecting checks, receiving a percentage of the proceeds for their efforts. As this brought retailers more rebate money, they began paying closer attention to magazines, which served to boost sales and bring more revenues for all concerned. More attention also was given to other products sold in checkout lanes (dubbed the "front end" of a store in the industry), which were typically items purchased on impulse such as candy, film, and batteries.

Source gave retailers two options for payment, one being to wait for checks to be issued directly by publishers, and the Advance Payment Program, in which the firm advanced retailers the money for a slightly larger commission. The company soon began acquiring competitors, including Dixon's Modern Marketing Concepts and Tri-State Stores of Chicago Heights, Illinois, in 1995, and in 1996 Magazine Marketing and Readers Choice of Ohio. In October of that year the firm also launched the Periodical Information Network (PIN), which sold sales information to magazine publishers.

The company initially had sold items including greeting cards and caps to retailers, but now de-emphasized this to concentrate exclusively on rebate processing. By early 1997 the firm was handling the processing and collection of incentive payments for approximately 6,000 magazine titles at more than 700 retail chains with close to 70,000 stores. In its second year of operation, Source recorded annual revenues of $7.3 million and a loss of $603,000.

Acquisitions continued in May 1997 with the purchase of Mike Kessler and Associates of New Jersey, and in July the company broadened its reach by taking over management of the front-end display area for retail giant Kmart. The firm subsequently formed a consulting unit called the Display Group, which assisted retailers in placing magazine display racks and selecting titles for local markets. By the end of 1997 this division was contributing 13 percent of revenues. The firm's customers now included a host of major names including Wal-Mart, Target, Food Lion, W.H. Smith, and Southland 7-Eleven.

In June 1998 the company's stock moved from the NASDAQ SmallCap Market to the National Market exchange. Shortly afterward an additional two million shares of stock were sold, a quarter of which came from existing shareholders. Funds would be used for various purposes, including acquisitions and expanding the Advance Pay Program, which required a sizable pool of money to pay retailers up front before checks from publishers arrived. Also during the summer, the company acquired Periodical Concepts, a Texas-based magazine rebate firm.

In November Source entered yet another new business area with the purchase of Chestnut Display Systems of Florida and MYCO, Inc. of Rockford, Illinois, for a total of $21 million in cash and stock. Both firms made display fixtures for stores. A short time later fixture makers Yeager Industries of Philadelphia and Brand Manufacturing Corp. of New York were purchased, along with Brand affiliates Vail Salvage Co. and T.C.E. Corp., a fixture scrap company and trucking firm, respectively. The deals brought Source a number of new clients, including Ahold USA, Kroger, and Winn Dixie. Revenues for the fiscal year, which ended January 31, 1999, were $21.1 million, and net income reached $3.9 million.

Launching ICN in 1999

In early 1999 Source introduced a new web-based subscription service called Interactive Communication Network (ICN), which offered magazine publishers data about chains' magazine rack sales and their purchasing policies. Retailers were allowed free information about publishers' latest incentive programs and could respond to them online. Early subscribers included Time Distribution Services, Ziff Davis, and Wenner Publications, with retail users including Kmart, Rite-Aid, and Walgreens. Source later expanded the service to cover other checkout lane staples and signed on candy maker Nestlé, battery manufacturer Rayovac, and others. The system helped simplify the process of updating magazine pricing information for retailers, who might receive more than 100 price changes per week via fax, phone, or sales representative visit.

Source was now expanding its presence north of the border by purchasing Canadian magazine rebate firm Promark and fixture maker Aaron Wire and Metal Products, Ltd. for a combined total of $3 million. The company now employed nearly 500, and had approximately 80 percent of the magazine rebate business in the United States. It was serving 1,000 retail chains with 100,000 stores, and handling 7,000 titles.

Acquisitions continued in the fall of 1999 with the purchase of Huck Store Fixture Co. and Arrowood, Inc., both makers of wooden store display fixtures. Huck, the larger of the two, had revenues of $18.8 million and clients that included Kmart and Borders. By year's end display manufacturing accounted for more than three-fourths of the firm's revenues.

The year 2000 saw the company busy signing on new users for its ICN service, such as Hachette Filipacchi, while it expanded ICN's data sourcing to include figures from Efficient Market Services and, later, Barnes & Noble. The company's fixtures unit also was working on major orders from Kmart, Home Depot, and Wal-Mart, for which it would build front-end displays for the North American stores. During the year Fortune magazine named Source the fifth fastest-growing company in the United States.

Purchase of Interlink in 2001

In the spring of 2001 the company entered the business of magazine distribution with the acquisition of The Interlink Companies, Inc., which operated through subsidiaries International Periodical Distributors, Inc. (IPD), and Deyco. IPD was a leading distributor to bookstore chains and independent retailers, offering 6,000 titles to more than 5,000 stores, including Borders, B. Dalton, Waldenbooks, and Barnes & Noble. Deyco contracted with printers to drop-ship magazines directly to wholesalers. Total annual revenues for the pair were $217 million, and the acquisition nearly quadrupled Source in size. The merger would increase the efficiency of IPD and Deyco (which had both been losing money) by using point-of-sale information from ICN to reduce the number of unsold magazines returned to publishers, which was sometimes half of the total printed.

Company Perspectives:

No other company that we know of has seen or tried to capitalize on the opportunity to build a new model for selling the family entertainment category at mass market retail, until now. No other company can build and install attractive fixtures and procure promotional advertising to draw attention to them, get product to almost any zip code in a timely way and replenish it quickly, provide field level service at the point of purchase to optimize product placement and sales, manage rebate and fulfillment operations on a fully outsourced basis, and then support all of that with information services that tell retailers—and content producers—what is selling and why. In the past year-plus, we have built the structure, developed the critical mass, and obtained the financial wherewithal to in effect reinvent the magazine distribution industry, and then expand it to a new category of family entertainment merchandising and marketing. As we sit here today, we believe the actions we have taken to address this opportunity signal "game over" to the old fashioned way of doing business.

The year 2001 also saw Source execute a $25.3 million sale/leaseback transaction with Bentley Forbes Group for five manufacturing and office properties, the proceeds of which would be used to reduce debt. The company's ICN unit signed a five-year agreement with A.C. Nielsen to use that firm's retail sales scan data during the year, as well. On a tragic note, company cofounder William Lee died in February at the age of 50.

For the fiscal year ending in January 2002 the firm had sales of $238 million, up dramatically from $91.7 million the year before, but also recorded a loss of $73.4 million. The flood of red ink was attributed to a reduction in the goodwill valuation of the Huck and Interlink companies to zero ($78.1 million below previous years' figures), which had been done in accordance with new accounting rules. Magazine distribution accounted for 66 percent of revenues, with in-store services making up 27 percent and manufacturing falling to 7.5 percent.

The year 2002 saw the firm boost its presence in the magazine import/export business by signing agreements to handle titles from Seymour International, Future Publishing, and Hudson Group, which helped make Source the largest importer of magazines to the United States, as well as a major exporter via Hudson. The year also saw the acquisition of Innovative Metal Fixtures, Inc. for $2.6 million, and the addition of Hearst Corp. and Condé Nast to the ICN subscriber list. A new service called Cover Analyzer was introduced as well. It allowed for comparisons of magazine sales issue by issue, and the forecasting of future sales based on cover subjects. In August, the company's name was officially changed to Source Interlink Companies, Inc.

Numbers for 2003 (ended in January of that year) showed great improvement, with revenues topping $290 million and profits back up to $7.1 million. The firm now employed 1,300. During the spring Source moved its headquarters from St. Louis, Missouri, to Bonita Springs, Florida, also relocating its claim submission and fixture billing center there from North Carolina. In March the company formed a new magazine export unit, which quickly signed a number of agreements giving it exclusive rights to distribute American magazines overseas. By year's end export of U.S. publications had grown to account for nearly 10 percent of the firm's revenues, while close to 18 percent of the publications it distributed in the United States came from foreign publishers.

Early 2004 saw Source raise $41.1 million via a new stock issue, which was used to help pay down all of its long-term debt. The company also secured a new line of credit worth $45 million during the year; signed agreements to distribute Marvel comics, Reader's Digest, and Scientific American magazines; and added candy and other front-end merchandise.

In 2004 the company broadened its magazine distribution to include convenience stores, mass merchandisers, and airport terminal stores, with the initiative soon expanded to more than 1,000 locations. Unlike many of its competitors, Source typically used overnight shipping from Federal Express to distribute goods, giving it a faster and more flexible response time than truck deliveries.

In August 2004 the firm purchased the business operations of PROMAG Retail Services LLC for $13.2 million. PROMAG was a magazine rebate-processing firm that served 14 states in the western United States. A New York-based magazine wholesaler called Empire State News Corp. was acquired in September for $5 million, and in November Source sold Deyco, its secondary wholesale magazine business. The firm also became the exclusive distributor of magazines for PRIMEDIA, Inc. to bookstores during 2004.

Merger with Alliance Entertainment Corp. in 2005

In February 2005 the company merged with Coral Springs, Florida-based Alliance Entertainment Corp. (AEC) in a deal worth $317 million. AEC, with annual revenues of $931 million, distributed CDs, DVDs, and video games to such national chains as Barnes & Noble, Borders, Kmart, Toys 'R' Us, Sears, Circuit City, Best Buy, Blockbuster, and Tower Records, as well as providing mail-order fulfillment to barnesandnoble.com, bestbuy.com, amazon.com, and others. After the merger Source was reorganized into two units, Supply Chain Management and In-Store Services. The company soon began to distribute DVDs, CDs, and other entertainment products to existing magazine markets such as grocery stores.

Shortly after completing the AEC deal, the firm arranged to buy Chas. Levy Circulating Co. for approximately $30 million. Illinois-based Levy was a leading U.S. magazine wholesaler, and the purchase would double the number of stores the firm serviced to approximately 20,000. A ten-year agreement was also signed with parent Levy Home Entertainment to distribute books. Chas. Levy had annual revenues of close to $370 million, and when added to those of Alliance, Source projected sales of more than $1.7 billion for 2005.

In the wake of these major acquisitions, the firm set about consolidating distribution sites and other operations, while reincorporating in Delaware to take advantage of that state's business-friendly laws. In April Source was tapped to distribute CDs to 400 Kmart stores, and in the summer the firm signed an agreement with Walgreens to place DVDs and music CDs in half of that company's 5,000 stores.

Key Dates:

1995:: Source Information Management is founded; acquisitions begin.
1998:: The company enters the display fixture construction business.
1999:: The Interactive Communication Network web site is launched.
2001:: The purchase of Interlink Companies moves the firm into magazine distribution.
2002:: The firm changes its name to Source Interlink Companies, Inc.
2003:: Headquarters are moved to Florida; a magazine export unit is formed.
2005:: The company merges with Alliance Entertainment Corp.; Chas. Levy Circ. Co. is purchased.

In scarcely more than a decade, Source Interlink Companies, Inc. had grown from a small regional magazine rebate firm into a multifaceted powerhouse with more than $1.7 billion in revenues. The firm was working on integrating the recently added Alliance Entertainment DVD/CD and Chas. Levy magazine distribution businesses, while continuing to serve clients in its established information services, display construction, and magazine import/export areas.

Principal Subsidiaries

Alligator Acquisition, LLC; Source Home Entertainment, Inc.; The Interlink Companies, Inc.; Source-U.S. Marketing Services, Inc.; Source-Chestnut Display Systems, Inc.; Source-Yeager Industries, Inc.; Source-Huck Store Fixtures Company; Source-MYCO, Inc.; Source Interlink International, Inc.; Primary Source, Inc.; T.C.E. Corporation; Vail Companies, Inc.; The Source-Canada Corporation; International Periodical Distributors, Inc.; David E. Young, Inc.; Brand Manufacturing Corporation; Source Interlink Canada, Inc. (Canada); Huck Store Fixture Company of North Carolina, Inc.; AEC One Stop Group, Inc.; Distribution & Fulfillment Services Group, Inc.; A.E. Land Corporation; AEC Direct, Inc.; AEC Supermarket Services Group, LLC; Chas. Levy Circulating Co.

Principal Competitors

Anderson News Co.; Anderson Merchandisers, L.P.; Hudson News Co.; News Group; Ingram Book Group, Inc.; Ingram Entertainment, Inc.; Handleman Co.; Baker & Taylor, Inc.; A.C. Nielsen Co.; Information Resources; Audit Bureau of Circulations.