A financial thriller in the publishing world

Ilana DeBare, Chronicle Staff Writer

Saturday, January 27, 2007

Bay Area small publishers like McSweeney's, Berrett-Koehler and Parallax Press don't typically print melodramatic cliff-hangers.

But this month, they've been living one.

More than 130 independent publishers across the country were hurled into financial crisis on Dec. 29 with the bankruptcy of the parent company of Publishers Group West, the Berkeley firm that distributes books from much of the small press world.

Among them are more than two dozen Bay Area publishers whose works range from Dave Eggers' novels and Deepak Chopra's inspirational writings to business books, Buddhist books and the "Here Comes the Guide" wedding planning book.

The bankruptcy hit these small presses at the worst possible time -- when Publishers Group West was holding onto its sales revenues from the three months before Christmas, its most profitable time of the year.

At the time of the bankruptcy filing, the company owed nearly $1 million to Amber-Allen, a San Rafael publisher of personal growth books such as the best-selling "The Four Agreements," by Don Miguel Ruiz. It owed $600,000 to McSweeney's Books, the San Francisco press started by Eggers.

And tiny Parallax Press, a nonprofit Buddhist publisher in Berkeley with six employees, was owed $150,000 of its total annual sales of $850,000.

"Revenues from the three most lucrative sales months of the year are not available to us," said Travis Masch, Parallax's publisher. "This has a tremendous financial impact on us."

The bankruptcy threatens the survival of many of these small presses. This week, a potential white knight appeared in the form of Perseus Books Group, a New York company that is offering to pay the book publishers 70 cents on every dollar they are owed. But the bailout is far from certain.

The bankruptcy rocked a part of the literary world that even the most avid readers don't pay much attention to -- the system that enables small presses to get their wares onto the shelves of bookstores and, eventually, into the hands of consumers.

Publishers Group West was a historic institution within the small press world. Created in the late 1970s by a young Stanford graduate named Charlie Winton, it actively promoted the work of its small press clients rather than just warehousing and shipping their books.

It gave small publishers a collective marketing voice that could rival that of a big corporation like Random House. Along the way, it helped create surprise best-sellers like Charles Frazier's "Cold Mountain" and "50 Simple Things You Can Do to Save the Earth."

"PGW was able to give small publishers access to Waldenbooks and B. Dalton -- the dominant national retail accounts of the day -- continuing on to Amazon, Barnes & Noble and Borders," said Munro Magruder, associate publisher of New World Library in Novato, which is owed about $1.7 million in the bankruptcy.

The company supported small presses in ways that were both personal and financial. Its marketing staff showed new publishers the ropes of book promotion. Unlike other distributors, it helped publishers pay for promotional displays in stores. And often it would accelerate payments to help a cash-strapped client pay bills or give an advance on royalties to an author.

"They were willing to put their money where their mouth is," Magruder said.

In 2002, Winton sold the company so he could become a full-time publisher himself with Avalon Publishing Group, based in Emeryville.

The buyer was a much larger company, a San Diego wholesaler called Advanced Marketing Services that provided books to big-box stores like Costco and Sam's Club.

Publishers Group West kept its administrative offices in Berkeley and continued to get rave reviews from its client publishers. But its parent company ran into serious legal troubles.

The FBI and the Securities and Exchange Commission began investigations into the accounting practices of Advanced Marketing Services in 2003. Three of the company's executives ended up pleading guilty to falsifying the circulation figures of promotional mailings sent on behalf of publishers between 2001 and 2003.

The company promised to restate its financial statements for those years. But it still hadn't done so by the end of 2006, so the company's lender halted its financing and on Dec. 29, Advanced Marketing Services filed for Chapter 11 bankruptcy.

Publishers Group West's clients said the bankruptcy took them by surprise, despite Advanced Marketing Services' troubled history. Some said they didn't pay much attention to events at the parent company because Publishers Group West was so autonomous, well run and financially successful.

"Our understanding was that PGW was having a very good year this year," said Karen Kreiger, chief operating officer for Amber-Allen.

But even publishers that had closely examined the finances of Advanced Marketing Services were taken aback. New World Library, for instance, sought access to the company's internal financial data last summer as part of renewing its contract with Publishers Group West. "To our accountant, the financials looked pretty good back then," Magruder said.

Until the bankruptcy, Publishers Group West's distribution process had worked the following way:

Publishers would ship their newly printed books to the group's warehouse in Indianapolis. The group would sell them to bookstores and collect payment from the stores. Then, 90 days after the end of the month when a sale was made, the group would send a check to the publisher.

The Dec. 29 bankruptcy put a hold on all payments by Advanced Marketing Services and its subsidiaries. So publishers suddenly lost access to nearly four months' worth of sales revenues that had been collected on their behalf by Publishers Group West.

Yet they still owed printing bills for those books.

Bell Springs Publishing, a six-person firm in Willits (Mendocino County) that publishes small-business accounting books, had expected to receive $50,000 from Publishers Group West to cover a $20,000 printing bill. McSweeney's had expected to receive $600,000 -- much of that from the sale of "What Is the What," Dave Eggers' new novel about a Sudanese refugee. Profits from the book had been promised to a charity helping Sudanese refugees. With the bankruptcy, those profits seemed to have vanished.

"This was probably the worst time in our history for this to happen, given the amount we are owed," said Eli Horowitz, publisher of McSweeney's. "It's a little incomprehensible how that money can just disappear."

There were also questions about the future of the publishers' own inventory. Many publishers had 90 percent of their entire book stock sitting in the Publishers Group West warehouse. Would the group continue selling books? Would the court allow the publishers to receive any money from future sales, or would those revenues also be frozen?

"We have our own small warehouse, but they have the bulk of our inventory," said Kreiger of Amber-Allen.

Rumors swirled through the blogs and Web sites of the independent book world. Meanwhile, publishers scrambled to contain the financial damage.

Parallax Press called its printer to negotiate a longer payment schedule. New World Library laid off one of its 17 employees, slashed nonessential marketing expenses like the use of outside publicists, and capped the size of the royalty advances it would offer authors for the foreseeable future.

"We went into immediate capital preservation mode," said Magruder.

Then, early in January, the publishers got a bit of good news: The bankruptcy court allowed Publishers Group West to pay publishers for new sales on a weekly rather than 90-day schedule. So publishers would have some cash coming in the door on a continuing basis.

This week, some even more promising news emerged.

Perseus Books Group -- a midsize New York publisher that has several small press imprints and recently entered the distribution arena -- offered the publishers 70 cents for every dollar owed them by Publishers Group West if they would agree to four-year distribution contracts.

"We'll pay 70 cents on the dollar to them, we'll also pay to move their books to our distribution facility in Jackson, Tenn., and we'll pay PGW to continue to operate for a five-month transition period," said David Steinberger, chief executive of Perseus, who flew out to the Bay Area this week to meet with Publishers Group West staff and clients. "In return, we're asking them to extend their contracts a little longer than (the three years that) is typical."

Steinberger put the proposal together with the support of Winton, Publishers Group West's former owner, who in a separate deal is in the process of selling Avalon Publishing to Perseus.

Winton said the offer could be a lifesaver for many small presses, whose only alternative might be to wait years for the bankruptcy case to resolve and then receive a tiny fraction of what they were owed.

"To get 70 cents on the dollar in Chapter 11 is an exceptionally positive result, and to remove yourself swiftly from the bankruptcy process is invaluable," Winton said.

The Perseus offer brought loud sighs of relief from many Publishers Group West clients.

"God bless you, 70 cents on the dollar at this point in the game would be wonderful," said Bernard Kamoroff, vice president of Bell Springs Publishing. "I'd even take 50 cents on the dollar. Just write me a check today."

Some even saw the Perseus offer as a step up. "The possibility of associating ourselves with an even larger distributor can only have benefits," Masch said.

But this cliff-hanger remains far from its final page.

For one thing, Perseus says it needs the participation of 65 percent of the Publishers Group West client base for the deal to work. The group's two largest clients -- Avalon and Grove/Atlantic -- have already agreed. But the next few weeks will determine whether the Perseus plan can attract that target 65 percent.

For another thing, the future of Publishers Group West's workforce remains up in the air. The firm as an independent institution is most likely dead. Steinberger has said he would like to hire many of its 100-person Berkeley staff and might allow them to continue working in Berkeley. "We'll need a significant number of people to make this happen, and PGW is very highly regarded," Steinberger said.

But it's not clear how many of the firm's veterans would be hired, and whether Perseus could ever replicate the culture of the old company. For better or worse, the bankruptcy may have ended an era in independent book distribution.

"The way PGW operated appealed to the renegade spirit that a lot of these smaller publishers have," said Magruder. "It was a personalized, handheld approach that I don't expect to find from a new distributor arrangement."

"What Is the What," by Dave Eggers

"The Seven Spiritual Laws of Success," by Deepak Chopra

"The Four Agreements," by Don Miguel Ruiz

"Back on the Fire," by Gary Snyder

These are some of the small publishers in Northern California affected by the bankruptcy of the parent company of Publishers Group West, plus examples of a few of their books:

Amber-Allen Publishing -- San Rafael ("The Four Agreements," by Don Miguel Ruiz)

Audio Partners -- Auburn (Placer County)

Avalon Publishing -- Emeryville ("Back on the Fire: Essays," by Gary Snyder)

Avalon Travel Publishing -- Emeryville (Moon Travel Guides)

Bell Springs Publishing -- Willits (Mendocino County)

Berkeley Hills Books -- Albany ("Ornette Coleman: His Life and Music," by Peter N. Wilson)

Berrett-Koehler Publishers -- San Francisco ("Managing by Values," by Ken Blanchard and Michael O'Connor)

Carousel Press -- Berkeley ("Weekend Adventures in San Francisco and Northern California," by Carole Terwilliger Meyers)

Children's Book Press -- San Francisco

Cleis Press -- San Francisco ("Sex Work: Writings by Women in the Sex Industry," edited by Frédérique Delacoste and Priscilla Alexander)

D.L. Hennessey Publishing -- Los Altos

Hopscotch Press -- Berkeley ("Here Comes the Guide" wedding planning book)

Hunter House -- Alameda

Live Oak Press -- Palo Alto

McSweeney's Books -- San Francisco ("What Is the What," by Dave Eggers)

Moonlight Publishing -- Lafayette

New World Library -- Novato ("The Seven Spiritual Laws of Success," by Deepak Chopra)

North Atlantic Books -- Berkeley ("Walter the Farting Dog," by William Kotzwinkle and Glenn Murray)

North Bay Books -- El Sobrante

Parallax Press -- Berkeley ("Zen Keys: A Guide to Zen Practice," by Thich Nhat Hanh)

Penngrove Publications -- Pescadero (Bay Area Bike Trails series)

The Planning Shop -- Palo Alto

PoliPoint Press -- Sausalito ("Jacked: How 'Conservatives' Are Picking Your Pocket (Whether You Voted for Them or Not)," by Nomi Prins)

RE/Search Publications -- San Francisco

Ronin Publishers -- Berkeley

Seal Press -- Emeryville ("The Black Women's Health Book," edited by Evelyn White)

Shelter Publications -- Bolinas

Ulysses Press -- Berkeley

E-mail Ilana DeBare at idebare@sfchronicle.com.