AMC sticks to script

KANSAS CITY, Mo. -- Dark days have descended on the overbuilt movie exhibition industry. Two of the largest chains already are in the fog of bankruptcy, and more are expected to follow.

But despite industry rumors, Kansas City-based AMC Entertainment Inc. is adamant that it's not in the bankruptcy waiting line. It insists it's nowhere close.

"We are in compliance with all of our (bank agreements), and we expect to stay that way," said AMC spokesman Richard King, referring to the terms it must meet in managing its heavy debt. "We're not thinking about bankruptcy -- it's not even on our radar screen."

And Wall Street, thus far, is maintaining faith in AMC's words and deeds.

Most analysts who follow the company contend, as they have for some time, that AMC is best positioned to return to profitability once the overbuilt industry goes through the valley of restructuring. That faith endures, in spite of AMC's loss of 90 percent of its market capitalization value since July 1999, a figure similar to what other exhibitors have lost.

Already going through bankruptcy are United Artists Theatre Co., which filed for Chapter 11 protection Wednesday, and Carmike Cinemas Inc., which filed last month.

Standing in line are Regal Cinemas Inc., which has said that it's going to violate covenants of its bank agreements and that Chapter 11 is an option, and Loews Cineplex Entertainment, which also has warned that it's going to break its bank agreements.

Meanwhile, management at Cinemark USA Inc. is being tight-lipped, although Kevin Kuzio, a fixed-income analyst at KDP Investments, thinks Cinemark will probably violate terms of its lending agreements as well.

"Half the industry is on track" for bankruptcy reorganization, said Kuzio, who closely follows the exhibition industry. "The question is: Can half the industry restructure and the other half not and effectively be positioned to compete with those who have?"

At one time, companies going the Chapter 11 bankruptcy route were forever emblazoned with a scarlet B on their reputation.

But as more and more industries have gone through shakeouts similar to the retail bloodbath of the 1980s, the stigma has lessened.

Though still not a desired route, bankruptcy reorganization does have tremendous benefits. The two major opportunities presented by Chapter 11, which protects a company from its creditors while it reorganizes, are a one-time chance to walk away from leases on money- losing locations and the chance to shed millions of dollars of debt.

For instance, United Artists is getting rid of $460 million in debt and walking away from 70 poor theater locations.

Usually, one of the biggest losers in a Chapter 11 are the shareholders, who are very last in line as the company gets sliced and diced. For instance, in Payless Cashways' Chapter 11 reorganization in 1997, shareholders got one share of new stock for each 100 shares of old stock, stock that today is worth about $1.50 a share.

Another group that's vulnerable are bondholders. In United Artists' reorganization, the holders of $275 million in bonds are getting only 7 percent of the new company.

But once a company makes it through Chapter 11, it has a much better chance of returning to profitability.

"The industry dynamics will be that the half that emerge from Chapter 11 will be a lot healthier than they are today," Kuzio said.

So why does Wall Street maintain some faith in AMC? There are a couple of reasons.

First, the company has the newest circuit of theaters and the highest screen count per location. That means more of its screens are in megaplexes than its competitors.

For instance, as of June, AMC had 13.9 screens per location, the highest of the six largest theater chains. Next closest was Cinemark, probably AMC's most formidable and direct competitor, with 11.6.

The four others were Regal with 10.5, Loews with 7.6, United Artists with 7.2 and Carmike with 6.3.

That puts AMC in a better position relative to its competition. And that was always AMC's plan.

At the company's annual meeting in December 1997, company founder Stan Durwood told shareholders that in three years the company planned on having about 3,000 screens spread over 150 to 175 locations.

Now, almost three years later, AMC has 2,726 screens spread over 195 locations.

What many underestimated was the building fury that was unleashed when Durwood built a better mousetrap -- the Grand 24 in Dallas, the first megaplex.

Now, five years later, the industry has almost 36 percent more screens than it can support. And with the newer megaplex screens averaging $270,000 each to build, every big exhibitor has bled plenty of red ink.

The other factor that cheers Wall Street is that AMC has accelerated the closing of money-losing screens and cut its selling, general and administrative costs by almost $20 million.

"At a time like this, when exhibitors have weak product, that's going to be very beneficial," Kuzio said.

So what does Hollywood think about this whole mess on the exhibition side?

It seems to be pretty ho-hum. No one is stepping up and saying anything about helping the exhibition brethren.

In fact, Hollywood's take from the box office, which historically hovers right at 50-50, last year jumped to 53.3 percent of total revenue.

And at least one studio was pressuring exhibitors to include transaction fees from the sale of tickets by telephone and Internet in the total revenue pot.

And while 20 or 30 years ago almost 90 percent of Hollywood's take on a movie came from exhibition in North America, that has plummeted to around 30 percent.

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