Livent Warns of 'Significant Asset Writedowns' Following Investigation

News   Livent Warns of 'Significant Asset Writedowns' Following Investigation
 
In a statement issued Aug. 19, Toronto-based theatre producer Livent Inc. said an audit of accounting irregularities at the company may result in "significant" and "material" changes in the company's reported bottom line for the years 1996-1998, though current and planned theatre projects are still on track.

In a statement issued Aug. 19, Toronto-based theatre producer Livent Inc. said an audit of accounting irregularities at the company may result in "significant" and "material" changes in the company's reported bottom line for the years 1996-1998, though current and planned theatre projects are still on track.

Livent is producer of the current Broadway hit Ragtime and of the forthcoming Broadway productions including Fosse: A Celebration in Song and Dance and Parade. Livent released an Aug. 19 statement saying, it expects that as a result of the audit, "required adjustments will be material in the aggregate for 1996, 1997 and for the first quarter of 1998. . . Further, the company may have significant non-cash asset writedowns in the second quarter of 1998, some of which are unrelated to the irregularities discovered last week, as the company strives to present its financial position as fully and accurately as possible."

Livent said it is targeting Oct. 1998 for release of the revised balance sheets.

Livent had announced Aug. 10 that its new management team, headed by Roy Furman, had discovered "serious irregularities in the company's financial records" involving a failure to record expenses and the "improper recognition" of revenue.

As a result of the findings, Livent co-founder and former chief Garth Drabinsky was suspended, as was co-founder and former president Myron Gottlieb. A comprehensive review of the numbers is being undertaken by the accounting firm KPMG/Peat Marwick. Livent was acquired by a new team of investors headed by Michael Ovitz in April 1998, Drabinsky taking a role in show development but no longer controlling finances.

For details on the investigation, see our story Garth Drabinsky Said To Have Kept Two Sets of Books on Livent's Finances.

Livent Inc. productions have won 18 Tony Awards. Its 1993 production of Kiss of the Spider Woman won a Tony as Best Musical and went on to run more than 900 performances. Its 1995 revival of Show Boat won the Tony as Best Musical Revival and also ran more than 900 performances. It's 1997 Barrymore won a Tony for star Christopher Plummer and is touring, but its expensive 1997 revival of Candide closed after a brief run. The company spent millions to build the Ford Center for the Performing Arts on Manhattan's 42nd Street, and just two weeks ago announced it would lease and refurbish the adjacent Times Square Theatre. Other theatre building or refurbishing projects have taken place in Toronto, Chicago and Vancouver.

Here is the full text of the Aug. 19 Livent statement:

    LIVENT OUTLINES CURRENT STATUS OF INVESTIGATION AND ONGOING BUSINESS OPERATIONS Accounting Irregularities Not Expected to Have Significant Adverse Impact on Cash Flow or Business Operations

    Company Targets Late October to Issue Restated Financials

    2Q 1998 Results May Include Significant Non-Cash Asset Writedowns, Some of Which are Unrelated to Irregularities

    Livent's Core Theatrical and Merchandizing Revenues, Both Historical and Future, Expected to be Minimally Affected by the Irregularities

    Current and Planned Shows and Theaters Expected to Continue Forward Unaffected by Recent Disclosures

    TORONTO, ONTARIO, August 19, 1998 - - Livent Inc. today announced that, based on the continuing review of accounting irregularities recently discovered at the Company, it currently is targeting late October to issue restated financials and to report its financial results for the second quarter of 1998. This timeframe depends on a number of factors, including the completion of Livent's internal investigation, and the necessary audit by the Company's auditors.

    Livent still expects to restate its audited financial statements for 1996 and 1997, as well as its unaudited statements for the first quarter of 1998. It expects that the required adjustments will be material in the aggregate for 1996, 1997 and for the first quarter of 1998. In addition, as a result of matters uncovered as part of the internal investigation, it is possible that earlier years might be affected. Further, the company may have significant non-cash asset writedowns in the second quarter of 1998, some of which are unrelated to the irregularities discovered last week, as the company strives to present its financial position as fully and accurately as possible.

    Importantly, Livent does not expect that these irregularities will have a significant adverse effect on the Company's current cash flow or operations. Specifically, Livent's core theatrical and merchandizing revenues, both historical and future, appear to be minimally affected by the irregularities. Livent expects revenues for performance and merchandise sales to exceed CND$80 million (US$52.1 million) for the quarter ended June 30, 1998, as compared to CND$78.3 million (US$51 million) in the same quarter in the year previous, subject to restatement.

    It still appears that the irregularities generally involved two areas: (1) expense recognition issues involving the failure to record expenses in proper periods due to improper capitalization of costs and other means, and (2) improper recognition of revenue.

    Company's Access to Credit Facility Unaffected

    The Company also announced that it has approximately CND$35 million (US$22.8 million) available under its senior revolving credit facility with CIBC. It also has nominal amounts of other cash on hand, as is ordinary in the operation of its business. Livent continues to borrow under its credit facility with CIBC and anticipates, based on its discussions with CIBC to date, that any technical defaults that may exist under this facility will be satisfactorily resolved.

    In addition, Livent has CND$7.7 million (US$5.1 million) of escrowed cash funds earmarked for the completion of its Chicago theater.

    Livent's relationships with trade creditors have been largely unaffected by recent events, and virtually all of the Company's major trade creditors continue to work with the Company on terms consistent with past practice. Livent is paying its bills as usual and does not anticipate any changes in vendor relationships or terms.

    Expense-Related Irregularities

    Livent believes that the majority of the restatements will involve expenses that had been shifted among prior reporting periods. These items do not appear to have an effect on Livent's recorded equity as of March 31, 1998. The Company cautioned that the remaining minority of expense-related restatements is likely to reduce significantly shareholders' equity, which was reported as CND$70.6 million (US$46 million) on March 31, prior to equity investments in the second quarter of CND$54.9 million (US$35.8 million). It is too early to quantify the magnitude of any of these expense-related restatements.

    Revenue Recognition

    Livent also said that the restatement of revenue recognition appears principally to involve one of its three categories of revenues: "other," which includes, among other things, sponsorships, theater naming rights, the sale of rights in Livent shows to third parties, and the sale of exclusive booking rights to shows. These "other" revenues accounted for approximately 11% and 13% of the Company's reported net revenue in 1996 and 1997, respectively. Based on the results of the investigation to date, only a portion of these "other" revenues appears to be affected by the irregularities. Further, only some of this portion relates to actual reversals of revenues, with the remainder relating only to the timing of revenue recognition among past and future periods. It is still too early to quantify either the total amount of affected "other" revenues or how much of this affected "other" revenues may actually be reversed in its restatement of results.

    The Company's two other revenue sources are from performances, which includes ticket sales to its shows at either Livent-owned venues or third-party venues, and are by far its most significant source of revenues, and from merchandising. Only a few instances of irregularities have been uncovered affecting previously reported performance and merchandizing revenues. Those irregularities, in the aggregate, involve less than one percent of the total performance and merchandizing revenues reported during the more than two-year period of the anticipated restatements. The Company emphasized, however, that the investigation is continuing.

    Enhancing Livent's Creative Vitality and Profitability

    "All of the opportunities which the new management team believed existed when we joined Livent still exist," stated new Chairman and Chief Executive Officer Roy Furman. "In joining the Company, we saw tremendous strengths -- Livent's ability to produce shows and control distribution, an unusually talented organization of people, an exciting pipeline of new shows, and the franchises and potential franchises of existing shows. We also saw two key opportunities to increase profitability: by applying a highly disciplined approach to cost control and by expanding the creative breadth of the company through the use of Livent's unique assets and our relationships in the creative community.

    "What we have learned in the last eight weeks, since joining the company, supports our initial belief that we can combine the tremendous creative vitality of the company with sound business judgment to produce shows that are both artistic and profitable," Mr. Furman said.

    "Just since June, we have started making fundamental changes to the business. We are utilizing the full talents of one of the best management teams in the business and are reaching out to new creative talents to maximize Livent's potential. We are practicing budget accountability to achieve profitability, while continuing Livent's creative excellence. We are taking steps to see that all of our touring shows have realistic budgets and are rationalizing our schedules to ensure that tour shows are running in the right venues for the right length of time. Finally, we are focusing on the cost-effective advertising and marketing of our shows.

    "We are even more optimistic than when we first arrived in June about the strength of our current slate of shows, our development projects and, most promising of all, our ability to forge new relationships that bring us new opportunities in areas beyond those Livent has pursued in the past. Additionally, we have spoken with all of our partners in our major creative and business projects, and we don't expect any of these projects to be delayed by the recently discovered irregularities," Mr. Furman said.

    Livent Current and Future Productions

    David Maisel, President of Livent, in reviewing the Company's operations, noted the potential for additional gains in ancillary revenue for the Company' shows, which include the successful runs of "Phantom of the Opera," starting its 10th year in Toronto playing in the Company's Pantages Theatre, and "Ragtime," in the Company's Ford Center for the Performing Arts, currently Broadway's largest-grossing show. Other current productions include:

    * A second company of the Tony Award-winning show "Ragtime," which will open the Company's new Chicago theater, the Ford Center for the Performing Arts, on October 27;
    * A North American touring company of "Ragtime," now booked into the year 2000;
    * A North American touring company of the Tony Award-winning production of "Showboat," now booked into the year 2000;
    * "Fosse: A Celebration in Song and Dance" will finish its successful premiere in Toronto in two weeks and then travel to Boston and Los Angeles before moving to Broadway this winter. The creative team includes: Director, Richard Maltby, Jr.; co-director and co-choreographer, Ann Reinking; and artistic advisor, Gwen Verdon; and,
    * "Barrymore," the Tony-winning, one-man show with Christoper Plummer, continues to tour throughout North America.

    Planned productions, all of which are expected to continue forward, include:
    * "Parade," a new musical opening in New York on December 17th as a co-production with Lincoln Center. The creative team includes: Director and co-conceiver, Harold Prince; book-writer, Alfred Uhry; composer/lyricist, Jason Robert Brown;
    * A Canadian tour of "Phantom of the Opera" and a possible tour of "Joseph and the Amazing Technicolor Dreamcoat;"
    * A new version of the classic Rodgers & Hart musical "Pal Joey." The creative team includes: Ragtime's director Frank Galati, book writer Terence McNally, and lyricist Lorenz Hart;
    * A musical based on the film "The Sweet Smell of Success." The creative team includes director Nick Hytner, book writer John Guare, composer Marvin Hamlisch and lyricist Craig Carnelia; and
    * "The Seussical," a musical based on the stories of Dr. Seuss. The creative team includes: Director, Frank Galati; Ragtime's Tony-Award winning composer and lyricist, Stephen Flaherty and Lynn Ahrens; Monty Python's Eric Idle will be writing the book.

    Mr. Maisel said, "This Company has wonderful properties, exciting new projects and, most especially, a hard-working group of very talented, creative and dedicated employees with whom I am proud to be associated. Our current performance is strong -- weekly ticket sales worldwide demonstrate that the theater-going public continues to support Livent productions -- and, with a new fiscal discipline to complement the company's proven creative strengths, this company now has greater potential than ever before."

    Livent Inc. is a leading producer of theatrical entertainment internationally. Its Broadway productions have collectively won 18 Tony Awards. Livent's critically acclaimed productions include Kiss of the Spider Woman (1993), Show Boat (1995), Barrymore (1997), Candide (1997) and Ragtime (1998). In Toronto, Livent's production of Andrew Lloyd Webber's The Phantom of the Opera is entering its tenth year at the Pantages Theatre. Livent's newest production, Fosse: A Celebration in Song and Dance, opened at the Ford Centre for the Performing Arts in Toronto on August 9,1998 prior to engagements in Boston, Los Angeles and New York.

    This release contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to various known and unknown risks and uncertainties including, but not limited to, the outcome of the continuing investigation into financial irregularities referred to herein, which investigation is in its early stages; pending and potential litigation or other claims arising out of, or relating to, discovery of the financial irregularities; the profitability of the Company's present and planned productions and other projects; competition in the Company's existing and potential future lines of business; the Company's ability to address its financing requirements in light of its existing debt obligations and other risks and uncertainties; the Company's ability to attract and retain key executive and creative personnel; and other factors. These and other factors and assumptions not identified above could cause actual results to differ materially from those projected. The Company assumes no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in the factors affecting such forward-looking statements."

-- By Robert Viagas

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