NEW YORK — Legit theater concern Livent Inc. warned Wednesday it may have to take writedowns against second-quarter earnings, unrelated to the accounting irregularities discovered last week, but similar to writedowns against show investments made earlier this year.
In an update on an investigation under way into Livent’s finances, the company said it was “targeting late October” to publish restated financial statements for the past two years and to report second-quarter earnings.
Livent hinted Wednesday that the earnings restatements will be substantial and may affect earlier years more than previously thought.
The Toronto-based theater company revealed last week that a management team, installed by new controlling shareholder Michael Ovitz, had discovered accounting irregularities, which inflated earnings by millions of dollars since 1996. Livent’s vice chairman Garth Drabinsky and his longtime colleague Myron Gottlieb were suspended as a result, pending the outcome of an investigation into Livent’s financial records.
Livent said the irregularities still appear to involve mainly shifting of expenses in proper reporting periods and “improper recognition of revenue,” believed to be recognizing revenue earlier than appropriate.
Livent gave some idea of the depth of earnings restatements related to the expense accounting, noting in its statement Wednesday that those restatements will “reduce significantly shareholders’ equity, which was reported as $46 million on March 31” before the Ovitz team pumped in new equity.
Possibly of more concern to Wall Street is the disclosure of additional writedowns unrelated to the accounting problems. These charges, which will be non-cash items against second quarter earnings, will include writedowns on Livent’s investment in productions, said people familiar with the situation.
Livent took two similar writedowns totaling $43 million in the fourth quarter of last year and the first quarter of this year, both as a result of prodding from the Ovitz team.
Wall Street analysts questioned the second writedown, announced in late May, and are sure to question why the first two charges did not fully clean up the balance sheet. Livent execs declined further comment, but people familiar with the situation noted the two previous writedowns were made before Ovitz’s team took control of the company and got a detailed look at the accounts.
Livent had $42.7 million of preproduction investments on its balance sheet at March 31, when the company last reported, of which 80% was due to “Ragtime.” Having to take further writedowns could mean Livent does not expect “Ragtime” to recover its total investment.
The show is doing well on Broadway but not so well outside Broadway. Earlier this summer it closed early in Vancouver and is thought to have lost money in Los Angeles.
People familiar with the situation said the new management team wanted to quickly move the company’s resources away from nonperforming shows.
As to the ongoing investigation into accounting irregularities, Livent reiterated in Wednesday’s statement that the accounting problems are not expected to have “significant adverse effect” on its cash flow or operations. It revealed that second quarter revenue would exceed $C80 million ($52.17 million), up slightly on the revenue for the same quarter of 1997.
The company said the bulk of the revenue recognition problems relates to Livent’s licensing revenues, including theater naming rights and the sale of rights in Livent shows to “third parties,” which it said accounted for 13% of last year’s revenue. Analysts note, however, that licensing revenue carries very high profit margin so the impact on earnings would likely to be significant.
Livent said “only a few instances of irregularities have been uncovered” affecting revenue from performances although it emphasized that the investigation is continuing.
The company’s stock has been suspended from trading on the Toronto Exchange and Nasdaq since disclosure of the accounting problems last week, with the stock exchanges requesting more information to be publicized. It is not clear whether the latest information will prompt the exchanges to allow the stock to resume trading. Representatives for both exchanges were not available for comment late Wednesday.