PUSHING IT TO THE LIMIT : As Problems Arise for Cineplex Odeon, Heat Is on Mercurial Chairman Garth Drabinsky

On the eve of a mid-May shareholder meeting that promised to be combative, Cineplex Odeon Chairman Garth H. Drabinsky showed no trace of jitters. He appeared to be exactly where he wants to be at the age of 39: relentlessly pushing his 10-year-old company to the top ranks of movie theater chains in North America, with the goal of building an entertainment empire that includes a theme park, television production and movie distribution.

Drabinsky worked late into the night to prepare for shareholders fretting over the company’s mounting debt and plummeting stock price; meetings were also scheduled in New York and the South of France over the next four days. Between trips, he would return to Toronto for a Cineplex board meeting, his daughter’s bat mitzvah and a 240-guest party at his home.

The pace might daunt a less determined man, but on the surface, all seemed normal for Toronto-born Drabinsky, who survived childhood polio to gain renown as one of the entertainment industry’s hardest-working executives.

Yet within the week, adverse developments for Cineplex and its top executive would come to light. It is unclear whether the events pose temporary embarrassment or portend long-term problems, but Drabinsky’s detractors in Hollywood and the financial community contend that Cineplex may be courting disaster by pushing too hard, too fast, on too many fronts.

By adding a whopping $170 million in long-term debt in a six-month period ended March 31, Cineplex has exceeded the amount of debt allowed by one of its biggest lenders in relation to the company’s equity.

In an interview, Cineplex Vice Chairman Myron I. Gottlieb acknowledged that the company violated the loan agreement both at year-end and the end of the first quarter, but he called the situation “academic.”

Gottlieb said no disclosure was made to shareholders or the Securities and Exchange Commission because Cineplex expects that the lender will modify the agreement and make it retroactive.

Gottlieb and Drabinsky appeared to be under pressure on a personal level as well, as they quietly made arrangements to slash their personal stakes in Cineplex while its stock traded near a 52-week low.

Both men borrowed money last year to buy 750,000 shares each when the stock was trading at much higher levels, but Drabinsky--on the eve of the annual meeting--said they were sufficiently comfortable “to weather the storm.” After the meeting, the men disclosed that they were selling the shares at a loss of nearly $5 million (Canadian) each.

Rapid Growth Costly

As these events took place, Cineplex was scarcely midway through an ambitious three-year plan of theater construction and refurbishment, initially budgeted to cost $250 million and now projected to cost $312 million. The company is also obligated to spend an additional $58 million on a Florida theme park that it is building with the giant entertainment company MCA Inc., and Drabinsky told shareholders last month that he expects to launch a new theater chain in Britain, at an estimated cost of 50 million pounds ($94 million). The British venture, he said, will be financed as a separate company.

The cost of rapid growth clearly frightens some shareholders who recall that Cineplex narrowly avoided bankruptcy six years ago. The stock price, which had tumbled 20% since the Oct. 19 market crash, helped draw nearly 300 people to the shareholder meeting, deemed one of the season’s “testiest” by the Toronto Star. The newspaper rated Drabinsky’s performance worthy of the film “Raging Bull.” He berated those who expressed doubts about Cineplex’s rapid growth and predicted that its cash flow would more than double to $180 million by the end of 1990.

Two weeks after the annual meeting, the stock hit a new 52-week low of $7.75 on the New York Stock Exchange. Short sales of the stock escalated amid published Canadian reports that some analysts detected “liberal” accounting at Cineplex. (Selling short occurs when a speculator borrows a stock and sells it, betting that the stock price will decline and he can purchase shares at a lower price to return to the original owner.) Cineplex stock closed Friday at $8.75, off 37.5 cents.

As of March 31, Cineplex appeared to have exhausted all but $13 million of its $550 million in long-term borrowing capacity. But Drabinsky has told reporters that Cineplex expects to obtain an additional $175 million from lenders to finance its remaining construction program.

At least one securities analyst privately expressed dismay that Cineplex needs bank financing to complete its building program, since the company told prospective investors a year ago that it would finance its three-year expansion through a $26-million stock offering, internally generated cash flow and the sale of certain theater properties.

But Mara M. Balsbaugh, an analyst at Smith Barney, Harris Upham & Co. in New York, said: “Their plan has changed since then, as I understand it.” Balsbaugh noted that the company “bought more than they planned on doing” and took on additional construction. The analyst said she is recommending the stock because its current value does not reflect the likely potential of the theater chain and 50%-owned theme park.

By some accounts, Cineplex can’t afford to stop spending now. It is engaged in a race with the continent’s three other leading exhibitors--as such movie theater companies are called--to secure a significant grip on key markets. United Artists Communications, AMC Entertainment and, to a lesser extent, General Cinema are also spending large sums to build new multiscreen theaters or acquire smaller chains.

Wave of Consolidation

With greater market share, exhibitors try to exercise more bargaining power with the studios to obtain the most promising films and keep a higher share of the box-office gross.

Since 1986, the industry has been caught in a wave of consolidation, as an aging generation of theater owners has sold regional chains to national exhibitors and major film distributors. Indeed, four of the seven major studios have acquired or invested in movie theater companies since 1986, capitalizing on the deregulatory mood of the Reagan Administration. It is the distributors’ first foray into exhibition since antitrust lawsuits broke up the old studio monopolies in the late 1940s and early 1950s.

The distributors’ entry has undoubtedly speeded the exhibitors’ race to establish market share, but Drabinsky hailed their arrival. MCA, the parent company of Universal Pictures, acquired nearly half of Cineplex’s stock two years ago, providing Cineplex about $159 million for expansion. MCA remains a 48% shareholder and powerful ally.

Cineplex has become a 50% partner with MCA in Universal Studios Florida, the $450-million theme park and sound stage facility now under construction in Orlando. Drabinsky said this month that Cineplex intends to be MCA’s partner in any theme park built in Japan or Europe.

“I would characterize the relationship as very strong,” said MCA President Sidney J. Sheinberg. “Does that mean there are days when people are screaming (at one another)? There are. Of course there are.”

Sheinberg spoke several weeks after a flap over a “sneak preview” that Drabinsky gave at his annual meeting of Universal Studios Florida. The project had been closely guarded because MCA’s archrival, Walt Disney Co., is building a similar studio tour nearby. MCA executives were dumbfounded when Drabinsky showed slides and gave details of the project that had been slated for a glitzy, celebrity-studded launch next year.

Neither Sheinberg nor Drabinsky would comment on a report that MCA nixed an effort by Cineplex management to take the company private in the wake of the stock market crash.

Despite the distributors’ fresh appetite for the theater business, there are skeptics who contend that movie exhibition is not much of a growth business. For the past quarter of a century, theaters have sold about 1 billion tickets annually. And the proliferation of screens (up 46% since 1980) may create new problems for exhibitors if the now abundant supply of movies begins to shrink. Evidence of a shakeout among independent film producers has mounted since the stock market crash last October.

Drabinsky’s critics claim that Cineplex will be more vulnerable than other chains if an industry contraction occurs because of its costly acquisitions and the expense lavished on new theaters.

Cineplex officials concede that in their new construction, they outspend competitors per square foot and allow more square feet per seat. But moviegoers are spending an extraordinary $2 each at the concession stands at Cineplex’s 18-screen complex at MCA’s Universal City, Drabinsky said. “You don’t do that without having lobby space and the ability to handle all those people.”

‘Comfortable’ With Margins

Drabinsky also defended the company’s gross profit margin of 14.5% in 1987. Some leading exhibitors achieve margins closer to 20%, and private firms sometimes enjoy even higher margins. (Gross profit margin is profit from day-to-day operations--excluding real estate sales--as a percentage of operating revenue.)

“There are costs associated with a public company that aren’t the case for private companies. We’re very comfortable with our margins,” the Cineplex chief said, noting that the margin rose to 17% in the first three months of 1988.

In 1987, Cineplex reported earnings of $34 million on revenue of $520 million, reflecting a 53% gain in earnings and 46% increase in revenue over the previous year. But several analysts have concluded that Cineplex presents its financial statements in the most favorable light possible, whether in comparison to prior years or to competitors.

Marianne Godwin, a Merrill Lynch analyst in Toronto, said the company benefited by switching to U.S. currency when it reported its 1987 results. During that period, the U.S. dollar weakened against Canadian currency, so U.S.-generated revenue would have been negatively impacted if converted.

“The earnings-per-share growth that you see is more representative of the accounting changes than the real growth in the numbers,” she said, citing other accounting practices adopted in the last two years.

Analyst Pierre Panet-Raymond, with the Toronto office of McDermid St. Lawrence Ltd., characterizes Cineplex’s accounting as “very liberal, certainly in relation to their competitors. . . . As far as their depreciation schedule, as far as writing off leasehold improvements, their treatment is far less conservative than General Cinema, for example, or Famous Players up here.

“It’s within the bounds of accounting treatment as outlined under GAAP (Generally Accepted Accounting Principles),” Panet-Raymond said, but “if you recast the numbers and exclude gains on real estate sales, you’ve eliminated earnings in 1987.”

A more fundamental question is raised by a securities analyst in the United States, who expressed “deep reservations about the value of the company’s stated assets.” The analyst noted that since the beginning of 1984, when Cineplex had only $17.5 million on its books for “gross plant” (reflecting its 163-screen chain at that date), it has spent nearly $400 million on acquisitions of theaters with almost 1,400 screens.

The analyst questioned how Cineplex has spent an additional $400 million in the intervening years on construction and refurbishment, when the company showed a net gain of only 103 screens--even allowing for an undisclosed number of screens sold and closed and construction still in progress.

“I don’t have numbers in front of me, but his analysis just isn’t accurate,” Cineplex’s Gottlieb responded. “You’ve got to subtract out what we’ve sold; we’ve sold a lot of screens . . . (while) building new ones at a higher cost.”

Privately, some analysts expressed surprise that Cineplex appeared to lose track of just when it paid for one of its biggest acquisitions. In a report filed last month at the SEC, Cineplex said its long-term debt in the first quarter rose $87 million, in part because of its purchase of a Washington theater circuit. But that statement contradicted the 1987 annual report, which said the $46-million cash purchase occurred in December. Cineplex amended the first-quarter report in late May, deleting the reference to the Washington theater purchase. “It was a pure mistake,” Gottlieb said.

Likewise, some industry analysts were stunned that Cineplex’s recent SEC filings do not disclose that the company is out of compliance with a bank agreement and is negotiating for amendments.

“All of these amendments are going to be effective (retroactively) to the beginning of the year,” Gottlieb said. “All of our reporting properly reflects the situation and the relationships with our bankers.”

In defense of the company’s financial statements, Gottlieb noted that in recent weeks other Cineplex directors have bought almost 2.5 million shares of the company’s stock. “I refuse to believe that this group bought stock if they believe that there was anything that was improper,” he said.

Pendulum Swinging Back?

Still, a perception persists in Hollywood that Drabinsky is flirting with disaster because he has predicated Cineplex’s growth on the most optimistic view of exhibition’s future.

“He’s so voracious that he’s refused to recognize that there are things that are just not doable by him,” said one former business associate, who predicts trouble because, in his view, Drabinsky “overextends himself at every possible level.”

“What happens if the music slows down?” asked another former associate, who noted that exhibitors have enjoyed the upper hand in recent years because of a surplus of films, retaining more than 50% of box-office receipts. “Are we reaching a point where the pendulum is moving back?” he asked.

Indeed, there is a groundswell of anger among film distributors, who are vexed by the mounting use of promotional ticket giveaways by many exhibitors, including Cineplex. A free admission puts no money in the film distributor’s pocket, but it boosts popcorn and candy sales, and those proceeds are pocketed solely by the exhibitor.

Some distributors have privately vowed to audit theater owners to determine whether they are exceeding their contractual limit on free admissions, or “passes.” Two weeks ago, Walt Disney Co. went a step further by demanding a minimum “per-capita” payment for every moviegoer and said it would insist on receiving a portion of any promotion fees going to the exhibitor when a Disney film is playing.

But Drabinsky indicated that Cineplex feels no increased pressure. “Nothing has happened that is different, as far as I’m concerned,” he said, refusing to discuss Cineplex’s policy on promotions. “We have a very fine understanding with all of the companies that we do business with.”

Distributors disagree, although none was willing to publicly discuss relations--good or bad--with Cineplex or its oft-fiery chairman.

Drabinsky is “bright, tenacious . . . and over-optimistic, which has worked for him,” said one. If he has shortcomings, the distributor said, it is “remembering where you came from and remembering who your friends are. You have to be able to step over your ego from time to time.”

Nearly all in the industry credit the Cineplex chief for revitalizing the theater business, goading sleepier exhibitors to refurbish and re-equip old theaters while building new complexes.

But more than one distributor complains that he has been put off by Drabinsky’s manner. “Instead of romancing you a little bit, he starts to tell you how badly you do your business. It’s sort of sad,” said one executive, citing his experiences. Drabinsky tells “you how much smarter you’d be if you did what he told you to do.”

Friends and foes alike have concluded that combativeness is integral to Drabinsky’s nature. “He has a way of flying off the handle and making declarations (at) the height of the excitement of the moment,” said one longtime friend, while a foe said: “Garth needs an enemy to fuel himself up.”

Onlookers are impressed, amused or horrified by Drabinsky’s choice of fights.

His most famous battle began in 1982 and pulled Cineplex from the brink of bankruptcy. At the time, Cineplex was struggling to survive on art films and older films, while Canadian Odeon and Gulf & Western-owned Famous Players dominated the first-run business in Canada. Cineplex persuaded the Canadian government to launch an antitrust probe of Hollywood’s six largest film distributors for their practice of licensing films to the two leading Canadian chains.

In 1983, the Hollywood companies agreed to take bids from any interested theater operators on a theater-by-theater basis. Cineplex thrived under the new rules and the following year acquired Canadian Odeon, which had begun to falter after the death of its owner, Michael Zahorchak.

Canadian industry executives say Drabinsky still harbors a fierce desire to overtake Famous Players, which claims the lion’s share of Canadian box-office revenue. They cite one fight that began in 1986, when Cineplex leased half of a downtown Toronto theater then operated by Famous Players. Cineplex erected barbed wire and sent in guard dogs to barricade Famous Players from its own part of the property. (The entrance happened to be on Cineplex’s side.)

Cineplex eventually gained control of the entire theater, but to some it seemed a Pyrrhic victory. After Cineplex drafted a public apology for its earlier actions, Famous Players sold its remaining half of the property to Cineplex with the proviso that it never be used to show motion pictures. Cineplex has the option of staging live productions--while Famous Players just announced plans to build a new six-screen theater down the street.

Last December, when some spectators thought Drabinsky might be assuming a more statesmanlike mantle in keeping with his company’s growth, the Cineplex chief quarreled with a key supplier.

‘Great Deal of Respect’

Drabinsky telephoned the chairman of Tri-Star Pictures--then in the process of merging with Columbia Pictures--to object vehemently to a decision to postpone a wide release of Columbia’s “The Last Emperor,” industry sources said. “Emperor” had been booked in many Cineplex theaters for the busy Christmas season; Drabinsky reportedly retaliated by refusing to play Columbia’s “Leonard Part VI.” The two companies ceased doing business for two months until the relationship was repaired over a New York lunch.

Cineplex theaters are again showing Columbia films all over North America, and Drabinsky maintains that “there’s a great deal of respect that flows today between Columbia and Cineplex Odeon.” But he concedes that, as an upshot of the fight, his Canadian theaters no longer receive the bulk of Tri-Star’s films, which they had before Christmas.

Cineplex still reaps an occasional harvest from its scrappy ways, as it did after telling MCA two years ago that the studio was overpaying for its Canadian television production of “Alfred Hitchcock Presents.”

The criticism was apparently unfounded in MCA’s view, since it renewed the deal with the producer, Paragon Motion Pictures of Toronto. Yet when Paragon began to prepare its bid for 41 additional episodes, it decided to offer Cineplex a portion of its producer’s fee. The reason, one source said, was that Cineplex had announced its intention to enter television production and Paragon did not want to bid against a Canadian company 48%-owned by MCA.

Drabinsky, asked about Cineplex’s role in the show’s production, said Cineplex functions as an “intermediary.”

Business associates speculate that Drabinsky’s combativeness originated in a long childhood struggle with the effects of polio. Summer vacations were reserved for surgery, and Drabinsky still walks with a pronounced limp.

Yet his youngest brother Cyril has equally strong memories of a vigorous--and successful--campaign to become high school president. Drabinsky has a “tremendous amount of perseverance . . . (and) he’s always been a tremendous speaker,” said Cyril, a lawyer who now runs Film House, Cineplex’s post-production subsidiary.

While in law school at the University of Toronto, Drabinsky launched a film publication and tried unsuccessfully to enlist Nathan A. Taylor, a veteran Canadian exhibitor, as an investor. Taylor, impressed with the young law student, hired him as editor of his own biweekly, the Canadian Film Digest.

Existed on Foreign Fare

After law school, Drabinsky began practicing entertainment law and produced several motion pictures in the late 1970s when Canadian tax shelters were in vogue. But he also stayed in contact with Taylor, and in 1978, the two men founded Cineplex with $1.5 million (Canadian), including some money raised from a few other investors.

It was Taylor who dreamed of building a theater with 12 or more screens, but Drabinsky who found the first site beneath a shopping mall parking structure in downtown Toronto. Cineplex opened its first theater--boasting 18 screens--in 1979.

Because Cineplex had no access to first-run movies, the company had to forage on a diet of foreign films, giving cash advances to independent producers. To improve its chances of recouping that money, Cineplex formed a company to distribute the films to other independent theaters in Canada. Distribution fueled Cineplex’s desire to build more screens in other markets.

By mid-1982, the company had expanded to 163 screens in 13 Canadian cities and Los Angeles, but its resources were strained. In August of that year, Cineplex borrowed $3 million from 20th Century Fox Film Corp., largely through the intercession of former Fox Vice Chairman Norman Levy.

Cineplex raised money in late 1982 by going public, but two top officers--Drabinsky and Gottlieb--were soon in hot water with the Ontario Securities Commission.

In late 1983, their trading privileges were suspended for 10 days as a reprimand for the issuance of a press release earlier that year that failed to disclose a serious deterioration in working capital in October and November of 1982. At the time of the press release, Cineplex did notify regulatory authorities of the change in its financial condition.

Drabinsky brushed off the incident in a recent interview, saying “that was my lawyer screwing up. I was in Los Angeles when that happened.” The regulatory authorities “knew it was dumb. But we were highly visible, so it was nice for them to make an example.”

Looking back, Drabinsky said, “the worst mistake was allowing the company to be levered the way it was in 1981, with the inflation psychology that was rampant. And not understanding--and not willing to admit--that we needed a much stronger equity position in the company.”

Sold Shares to Landlord

Before the financial crisis ended, Cineplex sold its 14-screen Beverly Center complex in Los Angeles (although it was later repurchased), and Drabinsky and Gottlieb put in more of their own cash.

“Things got so bad (Cineplex) couldn’t pay the rent” at the Toronto mall, so Drabinsky “sold (the landlord) the idea of investing in the company,” Taylor said. The landlord was Cadillac Fairview, then controlled by Canada’s wealthy Bronfman family. Charles R. Bronfman remains a Cineplex shareholder and with his associates controls about 10.6% of the stock.

Drabinsky’s stake has declined to 3.6%, while Gottlieb’s has dropped to 3.4% since the two men sold a total of 2.5 million shares last month to remove “financial difficulty,” in Gottlieb’s words. Before the sale--to the Bronfman group and other directors--the two men together controlled 9.6%. All told, nearly 65% remains in the hands of company insiders, directors and MCA.

Although 82-year-old Taylor no longer is active in Cineplex’s daily affairs, he continues as a director, 0.9% shareholder and Drabinsky supporter. “I give him credit for being what he is,” Taylor said. “He’s a workaholic. He’s got great ideas; he works night and day. He also absorbs everything like a sponge.”

Some Hollywood executives fault Drabinsky for an insufficient display of gratitude to 20th Century Fox for its critical loan in 1982. Indeed, the Cineplex chief omitted any mention of Fox’s role in a recent interview, and Levy was not among the invited Hollywood guests at the Drabinsky daughter’s bat mitzvah.

Levy--now chairman of New Century/Vista, an independent film company--said: “We’re still friendly. We don’t necessarily spend as much time together as we may have a few years ago. He’s got a lot of other priorities at this time in his life.”

The new priorities include not just television and the proposed British theater company but film deals with such luminaries as Robert Redford, Oliver Stone and Taylor Hackford.

Drabinsky insists that he is not star-struck or intent on hobnobbing with famous actors when he journeys to Los Angeles or the Cannes Film Festival. His business style has won praise from top talent agent Jeff Berg, chairman of International Creative Management.

“I’m impressed with the speed with which (Cineplex) can commit. I think he’s a risk taker on a high-quality basis,” Berg said.

Drabinsky has gone to great lengths to assure investors that the company has not actually entered the costly business of film production. Instead, he said, Cineplex buys distribution rights to a movie and expects to presell the video, foreign theatrical or television rights to recoup 90% of any film’s cost.

“We intend to release four or five pictures (each year) in the United States,” Drabinsky said. “We’ve been very careful.”