The Cineplex Odeon Corp., a Canadian company that has rapidly become one of the largest operators of movie theaters in the United States, is embroiled in a nasty fight over both control of the company and whether its accounting is fair and accurate.
In a highly unusual development, a director of the company told a Canadian court that several members of the board had been "extremely critical" of the company's accounting practices.The director, Charles S. Paul, did not provide details and has since kept quiet.
Paul is a vice president of MCA Inc., the entertainment giant that controls nearly half of Cineplex's stock but is barred by Canadian law from exercising control.
For its part, Cineplex, which runs the second-largest theater chain in the United States, is refusing to discuss its accounting.
The controversy and questions of Quebec securities law have stalled a management-led group's plan to buy out the largest Canadian shareholding group, led by the Bronfman family of Montreal, which controls the Seagram Co.
If that purchase is completed, as management hopes, it would give Cineplex's chairman, Garth H. Drabinsky, and its vice chairman, Myron I. Gottlieb, control over 38 percent of the common stock, excluding the MCA shares. They would also gain control of the board.
The dispute has damaged Cineplex shares, which are traded in Toronto and on the New York Stock Exchange.
With investors growing more nervous over the failure of both MCA and Cineplex management to discuss the accounting question publicly, the shares have fallen to $13.25 in New York, from above $15 when Paul leveled his attack.
Some of the harshest criticism of Cineplex's accounting has come from Irving Kellogg, a Los Angeles accountant whose firm, Kellogg Associates, publishes reports on what it deems poor accounting practices.
"They have pursued aggressive accounting, with which we disagree," he said, adding that in his opinion Cineplex's accounting was not consistent with generally accepted principles.
The company's annual report was audited by Thorne Ernst & Whinney, a leading accounting firm.
David Taylor, the firm's partner in charge of the Cineplex Odeon account, said, "We strongly stand behind our opinion" that the audit was proper. He said it would be improper to discuss the company, and a spokeswoman for Cineplex said the company would not answer questions about its accounting.
Cineplex gets most of its revenues from the United States and reports its results in American dollars.
Last year, it reported net income of $40.4 million, or 85 cents a share, up from $34.6 million, or 81 cents a share, in 1987.
But a gain on the sale of a stake in a subsidiary came to $47 million, so without it the company would have reported a loss. Kellogg asserted that the profit should not have been included in operating income.
Cineplex also reported that it suffered operating losses of $4 million on theaters it plans to sell. It did not include those losses in its overall results, however, instead choosing to capitalize them.
That treatment, which involves increasing the book value of the theaters, will reduce the eventual capital gain, or increase the capital loss, to be reported when it sells them. Kellogg also challenged that accounting.
An issue cited by two Toronto analysts, who asked not to be quoted by name, involves the depreciation of "leasehold improvements" to the theaters Cineplex leases, which covers most of them.
When it installs improvements like new seats, carpets or concession stands, its policy is to capitalize the cost and write it off over the life of the lease, plus the maximum renewal option. In practice, that appears to mean about 25 years.
The analysts said they considered that overly aggressive because the useful life of the assets was far shorter.
"When was the last time you were in a theater that hadn't been refurbished for 25 years?" asked one. If the company used a shorter period, it would report lower profits.
For Drabinsky, who began Cineplex Odeon a decade ago, the furor comes at a time when he appears to be cementing his control.
If the planned sale of the Bronfman stake goes through, he and Gottlieb will control the votes of those shares for the next two years, although most of the shares will be owned by other investors.
In June the two were forced to sell a large part of their holdings to pay debts when the share price plunged to $8.
The chairman of Cineplex's audit committee, Jack Richer, is a Montreal accountant chosen by the Bronfman group.
It was he who was cited by Paul as the source of the information that alarmed him, but neither man is now willing to speak publicly about the situation.
One analyst who is bullish on the stock, Margaret Stahl of Wood Gundy, points to the men in the group buying the Bronfman stake at about $14.75 a share as being sophisticated investors.
Other analysts, who are not bullish, note that another large holder, David Fingold, sold his stock and left the board earlier this year, and that the Bronfmans are now following.
"It's not clear that the smart money is getting in," one analyst said.