The former owner of Rhode Island Monthly magazine filed suit against the Providence Journal Company last week charging fraud, misappropriation and breach of contract in connection with the Journal’s purchase of that and other magazines from Anchor Communications last year.
Dan Kaplan maintained the Journal company failed to live up to the terms of an agreement in which he sold the publication to the Journal for what he believed was nearly $5 million. While the lawsuit does not specify an amount that Anchor (Kaplan) is seeking, Kaplan said he would hope to recover between $1 million and $2 million.
Kaplan sold Rhode Island Monthly in April 1997 to the Providence Journal Co., not long after the Journal itself was bought by A.H. Belo, a Texas based company that owns a number of television stations and newspapers. Besides Rhode Island Monthly, the purchase by the Journal included Newport Magazine, The Guest Guide to Greater Providence/Warwick, and Rhode Island Bride.
Dan Kaplan, former owner, publisher Rhode Island Monthly Kaplan, in the lawsuit, maintains that the Journal did not live up to a part of the agreement that would have given the former publisher 100 percent of the magazine’s profits for the first two and a half years after the purchase. Kaplan, who had not previously disclosed the purchase price, said he received an initial sum of $3.3 million, and based upon the magazine’s profitability had anticipated another $1.5 million over the next three years.
Instead he said the Journal Company, while showing sales revenues and circulation rising, also said profits were down 60 percent. Kaplan in the law suit maintains the Journal installed inexperienced management, and siphoned off profits for other company uses. Rhode Island Monthly’s circulation is about 38,000.
John J. Palumbo, current publisher of Rhode Island Monthly, would not comment, saying he had little do with the negotiations between the Journal Company and Kaplan. He referred questions to Mark Ryan, who he said was vice president of administration at the Journal. Ryan did not return telephone calls. However, a fax was sent to Providence Business News by Patricia A. Sullivan, a lawyer at the law firm of Edwards & Angell of Providence.
The two paragraph statement from Sullivan said: “Edwards & Angell has been engaged by the Providence Journal Company as litigation counsel in connection with a suit filed against the Journal by Anchor Communications., the former owner of Rhode Island Monthly.
“The Journal’s corporate policy is not to comment on pending litigation claims. However, Edwards & Angell has reviewed the Anchor complaint and has concluded that it has absolutely no merit. The Journal intends to defend itself vigorously.”
Kaplan is president of Anchor Publications, which also formerly published Gateways magazine, a national publication that Kaplan said focuses on stories about shorter, closer to home, vacation destinations. Kaplan said he continues to manage the magazine, although he sold it to Miller Publishing Group of Los Angeles last November. He would not disclose terms of the sale.
Before starting Rhode Island Monthly, he operated a similar magazine in Worcester, MA. for 10 years.
Meanwhile, in the suit against the Journal, Anchor Communications said that while the Journal had agreed that Kaplan would have a substantial managerial and consulting role in the operation of Rhode Island Monthly, that “the Journal froze Anchor’s President out of any involvement in the management of the business. As a consequence, the Business rapidly declined (in an otherwise buoyant economy).”
The suit maintains that the Journal “diverted profits from the Business for its own benefit,” reducing its profitability.
Kaplan’s status is clearly in contention, with the suit maintaining that the Journal, during negotiations for the purchase of the magazine, had shown Anchor Communications an organizational chart that had Kaplan “in the top management position,” reporting directly to Journal Chief Executive Officer Stephen Hamblett.
Instead, Kaplan said he was shut out of the business, never consulted for “pricing, advertising sales, circulation, promotion, production or budgeting matters, despite explicit provisions in the Consulting Agreement describing such involvement.”
Kaplan maintains that instead of relying upon him, the Journal “hired a manager who had no experience in the magazine industry.”
While the suit doesn’t name the manager, Kaplan said it was Palumbo, who, Kaplan said had no magazine experience. Palumbo had been in charge of the Journal’s promotion department and also worked as advertising manager at CVS.
Here are some of the specific allegations contained in the suit that was filed last Tuesday in Providence Superior Court:
- “As an inducement to accept payment on an ‘earn-out’ basis, the Journal told Anchor that it would hire Daniel J. Kaplan, the President of Anchor ‘Mr. Kaplan’), as a consultant to the Business with substantial involvement in the management of the Business during the first two years of the ‘earn-out’ period.”
- “After the Agreement was executed and the sale completed, it was soon apparent that the Journal did not, in actuality, intend to allow Mr. Kaplan to have substantial involvement in the management of the Business at the level described in the Consulting Agreement.”
- The suit maintains that Kaplan’s efforts to get involved in the business were “rebuffed,” and the Journal hired a manager who had no magazine experience.
- The suit contends that by hiring an “inexperienced manager” and by failing to use Kaplan, Anchor was deprived of “the protections that underlay the inducement for Anchor to accept the Earn Out Payment arrangement. Moreover, as time would tell, this course of conduct had the exact negative impact on EBITDA that Anchor had sought to prevent.” (EBITDA is an acronym for earnings before interest, depreciation, amortization and taxes.)
The suit contends that the EBITDA would be determined based on Generally Accepted Accounting Principles (GAAP). Earn-out payments were to be paid for the fiscal years ending Dec. 31 in 1997 and 1998, and for an amount equal to half of the EBITDA for the fiscal year ending Dec. 31, 1999.
The suit contends that the 1997 EBITDA, as calculated by the Journal, was “approximately $256,000,” only slightly more than a third of what it was the previous year. The suit said as a result “Anchor became suspicious” and hired the accounting firm of Suls, Westgate & Parente of Providence to review the Journal’s calculations. After review, the suit said, the accounting firm said “the Journal did not properly calculate EBITDA,” charging “capital items and other items against EBITDA in a manner that was not consistent with GAAP.”
Those items, the suit says, included:
- Charging the full cost of certain equipment purchased against the Business’s earnings, rather than depreciating the costs “in according with GAAP.”
- “$61,000 in moving costs and other charges not related to publishing and distributing the magazines.”
- “The allocation to the Business of $55,000 of the Journal’s audit costs”
- “The charging to the Business of approximately $42,000 for office supplies for 1997 (when the Business’s usage was approximately one-third of that in 1996).”
- “Causing the business to pay approximately $32,000 to $70,000 in ‘performance’ bonuses to Journal employees (when the Journal claimed that the Business had suffered a 62 percent reduction in profitability.”
When the dispute first arose, the suit contends that Anchor tried to involve the dispute resolution clause contained in the Agreement, but that the Journal was not responsive to Anchor’s efforts.
