Suspended Livent founder Garth Drabinsky kept two sets of financial records on the Canadian producing company, according to reports in Variety and The New York Times (Aug. 13). Both accounts cited people close to the situation who said the impresario used a second set of books to record lavish expenses while presenting to Livent's new management team a "phantom" set which painted a far rosier financial picture.
The Times quotes a statement from Drabinsky and Livent co-founder Myron Gottlieb, who was suspended along with Drabinsky on Aug. 10, which said the executives were "unaware of anything other than one set of books."
Livent's new management team, headed by Roy Furman and Michael Ovitz, revealed on Monday the existence of "serious irregularities in the company's financial records" involving a failure to record expenses and the "improper recognition" of revenue. As a result of uncovered creative accounting, the company held an emergency meeting suspending Drabinsky and Gottlieb, who were then escorted along with their secretaries off Livent premises. They have not been allowed into their offices since, said the Times.
In its Aug. 10 press release, Livent said a restating of the company's financial results for 1996, 1997, and the first quarter of 1998 was "virtually certain." Livent also plans to request an extension from Canadian securities regulators for filing its second quarter `98 findings.
Drabinsky and Gottlieb have protested their removal, saying "The company has provided few details, and no practical opportunity for us to address or respond to them.... New management was provided ample opportunity, prior to closure of the transaction, to raise any accounting concerns." Indeed, the same KPMG/Peat Marwick which has been hired to investigate the situation was brought in by Ovitz and Furman earlier this year to inspect Livent's books. "The new management team conducted [its investigation of the books] with due diligence," said a Livent spokesman (Aug. 11) who asked not to be identified. "Yes, they were looked at."
However, if the new allegations about the existence of two sets of books prove to be true, they would seem to explain how Livent's true financial standing remained hidden from Furman et al. Said the Times, a second set of books was used by Drabinsky to record expenses such as advertising costs. Drabinsky also allegedly transferred costs from one project to another in order to misrepresent profits.
The Times cited one case in which advertising expenditures were transferred to a construction project, where they were recorded as an asset. Other members of Livent's financial staff are said (according to Variety) to have known about the dual books.
To add to Livent's woes, the company has been hit by a class action suit filed by the Philadelphia firm of Berger & Montague on behalf of all holders of Livent common stock.
Berger & Montague attorney Sherrie R. Savett told Playbill On-Line (Aug. 12) that the suit was brought by an individual Livent stockholder and covers all others who purchase shares in the company between Mar. 5, 1996, and Aug. 7, 1998. Savett estimated that plaintiffs could number in the thousands. The suit alleges that the market price of Livent's stock was artificially inflated during the time in question, and the attorneys seek to recover all losses suffered by stockholders multiplied by the years over which the shares were traded.
The stock on the NYSE was routinely traded in the 7-9 range, though it rose past 12 in the days following Ragtime's successful Broadway opening. On Friday, Aug. 7, the stock closed at 6 3/4 on the NY Stock Exchange; trading was halted on the Toronto and New York Stock Exchanges pending further financial information from the organization, according to Reuters. Savett speculated that the stock would reopen in the 2-3 range.
Livent has not responded to the suit. Calls by Playbill On-Line to Livent spokesman Don Nathan have not been returned.
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Livent officials refused to speculate whether the investigation meant the end of Drabinsky's tenure at the company he created. Drabinsky's precarious situation eerily resembles his dramatic rise and fall at Cineplex Odeon, another company he formed. After building up the movie theatre giant over the course of a decade, the Canadian impresario was fired in 1989 by MCA; he had brought MCA aboard in 1986 when Cineplex was on the verge of bankruptcy.
A Yahoo/Reuters report (Aug. 10) on the suspension noted that even before the Drabinsky news, Livent was rated "double B minus" by S&P (credit) Rating Services. Ironically, the news comes just days after the New 42nd Street announced that Livent had beaten several other candidates in bidding on 42nd Street's Times Square Theatre, which would have given them a second venue on the block to along with the Ford Center. (For more information, please see the Playbill On-Line story, "Livent Beats Wrestling To Lease 42nd Street's Times Square Theatre".)
New 42nd Street President Cora Cahan told Playbill On-Line (Aug. 10), "We've had only the best of experiences with Livent. They've always paid their bills right on time, sometimes ahead of time. I have no reason to believe [this news] will affect the decision about the building, but at this point I haven't spoken to anyone at Livent." Asked if she had any inkling Livent's economics weren't what they seemed, Cahan said, "I had no reason to expect anything irregular based on our experiences with [Drabinsky], none at all." Livent officials declined to say how long the accounting investigation would take. Furman and former superagent Mike Ovitz took over the company on June 12.
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Ovitz's sudden entrance into legitimate theatre was announced in April. Under the agreement, he bought 2.5 million shares of Livent, or 12 percent, for $20 million. Ovitz brought along with him a hand-picked management team, including Furman and new president David Maisel. Livent founder Garth Drabinsky, who had run both the financial and creative sides of the theatrical concern, stepped aside to become vice chairman and chief creative director for live theatre.
Ovitz and Furman had their work cut out for them. The Canadian theatrical production company's lost $20 million during 1998's first quarter. That represents two thirds of the $30 million the company lost in all of 1997. The company plans to request an extension from Canadian securities regulators for filing its second quarter results.
Responding to the first quarter losses, Livent announced it would now focus on "productions with potentially higher margins." That translates into the axing of one of the two North American touring companies of Show Boat. The musical in question will close during 1998, and the company will write off roughly $16 million in expenses related to the show. Livent does not know at this point which of the touring productions will be closed. No one from Livent's new leadership team was immediately available for comment.
Other salient figures from the first quarter findings included a 19 percent jump in operating expenses to $45 million, and an increase in preproduction costs from $9 million to nearly $17 million. Upcoming Livent productions include Fosse: A Celebration in Song and Dance, which recently opened in Toronto for a pre-Broadway tryout, and the Jason Robert Brown-Alfred Uhry musical Parade, to open at Lincoln Center in November with Harold Prince directing.
-- By Robert Simonson
and David Lefkowitz
