Cineplex Warns of $39-Million Loan Default

Cineplex Odeon Corp., the Canadian movie theater chain that has been placed on the auction block by its two largest shareholder groups, said it could find itself in default on a $39-million bank loan and face accelerated payment of all of its long-term debt if its two top officers cease to be actively involved in the company’s management.

As of June 30, the company’s long-term debt still exceeded $552 million, despite the recent sale of some major assets.

The disclosure, made in a quarterly filing with the Securities and Exchange Commission, is provocative because Cineplex’s controversial chairman and chief executive, Garth H. Drabinsky, and his vice-chairman, Myron Gottlieb, have a “golden handshake” deal that could be triggered as early as Sept. 30.

Drabinsky and Gottlieb have been trying to raise money to make a bid for the Toronto-based company, but no offer has yet materialized. Other potential buyers are scrutinizing the company, and some have indicated interest in bidding for certain assets, which include more than 1,200 movie screens in the United States and more than 500 in Canada.

Power Struggle

Although Drabinsky helped found Cineplex 10 years ago and has always been its driving force, he never held a controlling stake. Four months ago, the Cineplex chairman tried to seize control by cutting a deal to buy the Cineplex holdings of Canada’s wealthy Charles R. Bronfman clan. But the company’s largest shareholder, entertainment conglomerate MCA Inc., objected vehemently and put down the attempted coup.

Since then, the Bronfmans and MCA--which together own about 65% of Cineplex’s equity--have banded together to put the company up for sale and have paved the way to fire Drabinsky and Gottlieb if they so choose.

The two Cineplex executives have accepted new employment contracts of “indefinite” duration that can be terminated by either the individual or the company on 15 days’ notice after Sept. 30. In a so-called golden handshake, the company has agreed to pay each man $8 million in Canadian currency, or $6.77 million apiece in U.S. dollars.

The Bronfmans and MCA have also forced Drabinsky to share the office of the chairman with two of their representatives and have changed some financial reporting practices.

Earlier this week, the company released its financial results for the second quarter, reporting a $39-million loss on revenue of $149 million (U.S.).

Cineplex stock closed Thursday at $11.875 a share, down 62.5 cents, on a volume of 303,600 shares in composite trading on the New York Stock Exchange.