by Elaine Dewar
After the bank pulled the plug and the receivers took over, the issue of who owned what in the General warehouse made everybody crazy. Various publishers’ books that had been distributed by General were stuck in the warehouse340 for a time, cutting off publishers’ cash flows as they argued about whether they owned the books, or someone else did.
The plan of arrangement was overseen by a judge who did things that surprised the very experienced bankruptcy lawyer acting for Stoddart. The court appointed a Monitor, who also acted as trustee. It was the same gang from Deloitte & Touche Inc. who’d first taken a close look at Stoddart’s companies on behalf of his lender, the Bank of Nova Scotia, and did not like what they found.341 The trustee did things that surprised Marc Côté, once an employee of Stoddart Publishing (a subsidiary of General Publishing), then a co-owner of Cormorant Books, with offices in the General Publishing office. Côté was elected as an inspector of the bankruptcy by his fellow creditors. Stoddart and his partner were not asked for help as the trustees tried to sell assets. Instead of being sold as a going concern, General Publishing was bankrupted (Stoddart Publishing died with it), though the group’s educational publisher Irwin was sold to Thomson, Cormorant Books was sold to Marc Côté and partners, Boston Mills and Anansi were sold as well.
Stoddart had told me this story in several long phone conversations. As he talked, it had sometimes felt as if the walls were closing in because the Canadian publishing world is so cloistered that it seems as if every part of it has been, at some point, enmeshed with every other part, and each actor has had a role in every other actor’s play. His story was like so many other Canadian business stories: it reminded me of what happened to Bennett’s Principal Investments. It might have happened to M&S, too, if Bennett hadn’t taken it over from Jack McClelland, dealt with the bank, become his own lender, and then handed M&S on to the U of T and Random House just as Canadian publishing went into the tank. Bennett created an exit for himself at exactly the right time thanks to his insight and to good information gleaned from friends in high places. He had gotten himself on the right boards, made himself glamorous, befriended those who made the decisions he had to live with, recognized who could benefit most from his plan, and, as Stoddart put it, hired very able counsel. He saw danger coming long before it arrived. You will not be surprised to learn that Stoddart greatly admires Bennett’s intelligence.
I heard the concierge tell Stoddart that I was waiting for him, so I walked up to him, shook his hand. He looked a lot older than I remembered. His white hair still slicked straight back from his forehead, but the hairline itself had moved back farther than before. His eyes behind the aviators were still an arresting blue, but he was heavier and yet more tentative than I recalled. He was not dressed to impress (well why would he be when meeting me?). He was wearing an all-weather jacket, a striped shirt and a blue sweater vest—not the dapper man I remembered from that party.
We took the elevator to the apartment that he and his wife Nancy share with a friend as pied-à-terre. Stoddart doesn’t come into Toronto often. He mainly lives in Prince Edward County, Ontario’s latest wine growing region. He still lives fairly comfortably because he was never required to sign personal guarantees for his business loans—because his track record was good and his business had generally supplied its own capital. This was very unusual in the book business: the lead partner of another publishing company he invested in had been forced to use the family home as security for an operating line. That partner had to hunt for years to find Canadians willing to buy the company. The sigh of relief when an offer finally came in must have been heard from one end of Moore Park to the other. That company was shut down only a few years after the sale.
Stoddart’s pied-à-terre is in a very ordinary apartment tower in northern Rosedale, so I expected no grandeur within, but when Stoddart opened the door, my mouth fell open because the view was astounding—south over green bowers to the glistening bank towers clustered around CN’s great spire, and beyond, to the wide blue of Lake Ontario. I tried not to let the view distract me as we sat at the dining table and waited for his friend and colleague, Marc Côté. Côté is the President, Publisher, Editor and one of three owners of Cormorant Books. He is very smart man with a wicked tongue, so he has made a few enemies in the publishing community. Stoddard thinks his own memory for detail is not what it was, and wanted Côté to help.
Did I give you Michael Wernick’s name? Stoddart asked.
He’d been trying to remember the name of the lead bureaucrat at Heritage Canada when, in 1999, the Department denied permission for General to do a joint venture with American-based Ingram, the largest book distributor in the world. Ingram’s clients included Amazon. Stoddart said that that deal would have brought to Canada state-of-the-art computer systems, the Amazon database, and access to a worldwide sales and distribution network. Why was his request denied? He was told that the government was concerned that Ingram would have de facto control over the venture because Ingram wanted to appoint its Canadian lawyer to the board as a Canadian director. (The way Doug Pepper, a former Crown and Random House employee, represented the U of T on the M&S board?) The government insisted that since the lawyer’s firm had worked for Ingram, Ingram would be able to influence that lawyer. Stoddart said Ingram had pulled out in disgust, calling Canada a third-world country with loosey-goosey rules.
Brazil with snow, I found myself muttering. For my friends, anything: for my enemies, the Investment Canada Act.
I told Stoddart I had already found Michael Wernick’s name in the correspondence on the M&S gift and sale. He’s Clerk of the Privy Council now, I said.
Oh shit, he said. That’s why they’re all afraid of him. By all, he meant all the publishing people and cultural bureaucrats he’d run into at Jackie Hushion’s funeral the previous fall. (Jackie Hushion had once been executive director of the CBPC, the group that represents foreign-owned publishers.)
Côté was late, so I showed Stoddart the M&S financial reports. I had also brought the memo written by Ron Scott on the value of the tax credit receipt that was issued for Bennett’s gift of the M&S shares. We were turning pages when Côté knocked on the door and walked in. A tallish man in middle age, with a sharp sense of right and wrong, Côté was the picture of preppiness in a green sweater and chinos.
They both seemed shocked by what I had learned. Though Stoddart had guessed right in 2000 at the size of the tax credit receipt issued by the U of T, had guessed right that Random House got de facto control of the company as the deal closed, he was still surprised at the total value placed on M&S, the size of the debt M&S built up with Random House, and especially that the government had declared the new M&S to be “Canadian” with its eyes wide open. He considered Ron Scott’s way to measure the value of a Canadian publishing company at 1.25 times net sales to be plain ridiculous. Why? Canadian English language trade book publishers make almost no profits, he explained. “There was never a trade publisher sold in Canada for anywhere near annual sales. The education business worked that way. In trade publishing, no one would buy it… what did Anna Porter sell her company for? Maybe for debt.”
His father’s company had begun to make a little money in the 1960s, he said, but things had gotten much better after the government introduced its rules about Canadian ownership of publishers and distributors. Then, they were able to get exclusive distribution rights from major American publishers, such as Simon & Schuster, and British publishers as well. Even so, they still made only about 3% a year on sales. “And 1% was the norm,” said Stoddart. “We made almost all of it from foreign book distribution.”
A 1% profit on sales of $10 million is $100,000. But corporate taxes in the 1970s and early 1980s were 50%. So a company with sales of $10 million would be left with $50,000. And that’s why Stoddart had gone into the business of publishing Canadian non-fiction. First, it sells better than fiction but also “rather than giving the government half of what w
e made, we invested in important Canadian books instead of paying taxes. We showed minimal profits. But we built the most successful non-fiction list in Canada.”
Even so, his Canadian publishing business depended for its life on the distribution of foreign publishers’ works. So when Avie Bennett sold off the M&S agency business, while giving control to the U of T, he’d cut off a major revenue generator. Therefore, valuing the company at 1.25 times net sales made no sense at all.
He and Côté started to tell stories about House of Anansi, which Stoddart once owned. Anansi never made any money until they decided to publish the Massey Lectures—which CBC Radio broadcasts across the country—in paperback form. From then on, with the exception of one year, the Massey Lecture profits had funded House of Anansi, rarely selling fewer than 15,000 copies a year, once as many as 100,000. “We sold it to Scott Griffin on the way down,” said Stoddart, during the period of reorganization before the bankruptcy.
Griffin was in military equipment, Stoddart said. (Actually, one of his companies made shock absorbers and other parts for military vehicles.)342 “He wanted to be in something…”
“A glamour business?” I asked.
Griffin also happened to be a good friend of Michael Ondaatje’s (went to Bishop’s together, said Côté)343 who told him that if he wanted to do something good, he should buy Anansi. Michael Ondaatje is married to the author, Linda Spalding, whose daughter, Este Spalding, is a poet published by Anansi. Este Spalding also served on Anansi’s editorial board and was well known to Martha Sharpe, then Anansi’s Publisher. Sharpe knew that Anansi would go down if General went down and by spring of 2002, she knew that General was going down. At the first party in honour of the Griffin Poetry Prize, which Scott Griffin created and endowed, she had joked with him that he should also buy Anansi. As things grew desperate at General, she quietly asked around in the community of writers for help.344 And soon, Griffin had a meeting with Stoddart.
“The dollar figure was pulled out of the air,” said Stoddart. “I sat with him in his home. He said $1 million… He said on one condition—that Martha Sharpe went with it [Anansi]. She was to be let go the next week… I swallowed and said, you’re sure? He had a CFO with him. The CFO told him he was crazy to do it at all.”
Stoddart had sold Macfarlane, Walter & Ross to Bennett for the same amount, $1 million. Stoddart’s theory at the time about why Bennett wanted MW&R was that Bennett was paying Doug Gibson an unheard-of salary as Publisher of M&S, and Gibson was not doing as well as Bennett had hoped with non-fiction. Non-fiction was Stoddart’s specialty and Macfarlane, Walter & Ross’s total focus. But only three years later, M&S shut down Macfarlane, Walter & Ross, and in 2004, amalgamated it with M&S. Stoddart, along with others, had then developed another theory about why it had been closed, a theory I’d checked out. The belief was that M&S wanted to suppress a book in the MW&R pipeline—Stevie Cameron’s Three Amigos.
No, said Jan Walter, then the Publisher in charge of MW&R’s operations, that never happened, there’d been no interference whatsoever from M&S. Walter explained that MW&R had lost a lot of money and had no obvious winners in its pipeline, which was exactly as Doug Gibson had explained his decision to me. Walter had also shared with me that though she and Gary Ross and John Macfarlane owned 49% of Macfarlane, Walter & Ross, they had seen next to nothing of the $1 million Stoddart got for it [because, Stoddart explained, they hadn’t put in any investment, he’d financed it all]. And they had only earned bonuses of about $900 for Boom Bust & Echo, which sold 300,000 copies.
But never mind theory. The real point Stoddart was trying to get across to me is that losses have value. Even though his companies made money, things had always been arranged so as to never show a profit. One of his companies could show a loss when the other had a big gain: not showing a large profit, which attracted tax, meant money was available for other publishing ventures. The Unanimous Shareholder Agreement defined dividends as that which “will be funded from cash flow remaining after the payment of taxes, principal and interest on any outstanding debt, amortization costs, depreciation and other expenses (including any amounts paid or payable under the Administrative Services and Financial Support Agreement).”345 Other than in the first half of 2000, no profit had been shown, let alone a dividend paid. The foreign-owned publishers were very adept at this sort of tax avoidance, he said. He’d actually looked into it in the days when government reports still listed in public the taxes paid by foreign-owned entities. His competitors, the foreign-owned publishers, never paid taxes. He’d tried to interest Revenue Canada in his findings. They’d told him they might look into it if he filed a complaint.
Together, we began to parse the financial reports I had brought with me, starting with the report for the last six months of 2000 when the U of T first had possession of the M&S shares. Returns were only 26% of total sales for the period, which was pretty good, because in the spring of 2000, the returns had been awful.
“The cost of sales was $2 million, on sales of $8 million,” said Côté as if that meant something important.
So what does cost of sales mean? I asked.
“In the historical sense,” said Stoddart, “in Canada, it is the cost of paper, printings, binding and any preproduction expense” but not advances paid to authors, marketing, sales or distribution. “Royalties come out of those sales.”
This was the only report in which M&S had shown a profit—in this case retained earnings of $200,000 and a provision for tax of $100,000, which Stoddart took to mean that they had made $300,000. But the company couldn’t really have made money for the whole year.
Why not?
“In trade publishing, in the first calendar six months you lose what you won in the last six,” said Côté.
As he looked at the next years’ reports, Côté became agitated, convinced that a lot of costs were being moved into costs of sales, a category he felt could easily be manipulated. In the first full year, 2001, the fees charged for administrative services had been set by agreement at 25.7% of net sales. [Net sales were defined as gross sales less returns as determined by M&S.] Côté thought that percentage got higher in the years that followed. But when I looked hard at those numbers, I didn’t see it that way. Net revenue for 2002 was almost the same as in 2001, though gross sales had improved by about $800,000. But that was because the returns went from 25% to more than 30%. Sales and marketing expenses actually fell by about $600,000 that year, as did all the other expenses except for publishing. However, loss due to a write down of $1,447,990 greatly increased the company’s losses from $459,000 in 2001 to $1.8 million in 2002—bringing the deficit to more that $2 million from only $159,452 the year before. Was that write-down due to losses from Macfarlane, Walter & Ross? There was no note attached to this document explaining it. There had been a note in the original document, but it had not been included in the copy given to me.
There was nothing in the report for the year ended 2001 that showed $1 million moving to First Plazas Inc. to pay out its promissory note, or of Random House making a loan to M&S. However, the administrative costs that year were about $1 million higher than in the following year, 2002. This item also had a notation pointing to an explanation that must have appeared in another part of the original document, but it was not included in what was sent to me.
What seemed more important than any possible manipulation of cost was that gross revenue only improved marginally after Random House took over management of M&S. The major argument Bennett had made, and the University had accepted when he sold 25% of M&S to Random House and gave 75% to U of T, was that the M&S business would grow due to Random House’s efficiencies, its adoption of digital, its great sales and marketing, etc. But the business soon began to shrink. In 2001, gross revenue for the year ended December 31, was $16,228,000 versus $10,679,139 for the last half of 2000. It went up to $17 million in 2002, but after the shut-down of MW&R, gross revenue fell by almost
$2.5 million in 2003, and in 2004 fell again by $1.5 million. That was the year Doug Pepper took over from Doug Gibson, the year the ‘put’ was extended until 2008. In the year ended December 31, 2005, gross revenue plunged to $10 million and sales returns climbed to over 30%. Liabilities had come to the point where they equalled assets, almost legal insolvency. By then, the amount due to Random House for financing had also climbed to $10,639,928 and no interest was being paid on debt. In other words, by 2005, M&S was in deep, deep trouble and Random House could have pushed it into bankruptcy then and there, but the cause of the problem was reduced sales and the way unpaid debt accruing interest charges at 6% can become an anvil weighing down a company. As sales plummeted, the costs of sales and marketing stayed even. Order fulfillment and administrative costs actually dropped—but not as fast as sales. And somehow, the cost of publishing went up by $200,000.346
We turned to how much revenue came from grants and other income [defined as grants not tied to a specific project] over the five years for which I had reports. Only $153,418 in grants was received in the last half of 2000, but M&S and its subsidiaries got $1.8 million in grants in 2001. This was reduced to $1.2 million in 2002, but rose by $100,000 in 2003 and basically stayed at about $1.3 million in both 2004 and 2005. A note on these grants in the draft financial statement of 2005 said: “amounts received include an annual grant of $43,560 (2004: $39,780) from Ontario Arts Council and $161,200 (2004: $163,700) from Canada Council.” Oddly, the Department of Canadian Heritage grants were not mentioned. Later, I calculated the total for the period: for the four and a half years between June, 2000, and the end of December, 2005, M&S took in federal and provincial grants worth $7,309,925. The total figure for the entire 11 years must have been at least double that: the government of Ontario had also introduced its own book fund, not to mention its tax credit.