Edwards Bankruptcy Risky for Family.

Filing for Chapter 11 bankruptcy protection is a hard-nosed decision that has put Edwards Theatres Circuit Inc. in a better position to cut some unwanted costs and ride out a withering downturn in the movie-house industry.

But it's also a risky move for the founding Edwards family, sole owners of the 70-year-old Newport Beach-based theater chain. The family may or may not emerge from the bankruptcy process with ownership control or even operating control of the company, one of the largest theater chains in the country. The outcome rests largely with Edwards' lenders, led by Bank of America.

"It depends on how aggressive Bank of America is going to be," said one person close to Edwards' operations.

Moreover, it is uncertain at this point how much, if any, equity is left in the company. Some numbers suggest that the company's obligations -- $217 million in bank loans and an estimated $20 million to $40 million in other creditor claims -- is greater than its enterprise value.

"There are scenarios that could result in the elimination or reduction in the percentage of the equity owned by the current shareholders. It's hard to say at this time," said Jeffrey M. Reisner, a partner in Irell & Manella, the law firm representing Edwards' unsecured creditors. That group includes the 28 landlords of aging and money-losing theaters that have been closed, as well as property owners whose projects Edwards has pulled out of.

And for a family that has always guarded its privacy when it comes to business matters, filing Chapter 11 has drastically changed the ground rules. Now Edwards will have to disclose virtually everything about its business operations and endure media coverage of its wrangling with creditors.

Times have changed

The current situation is a far cry from 1997, when the late movie-house industry patriarchs Stan Durwood of Kansas City, Mo.-based AMC Entertainment Inc. and James Edwards Jr. (known as "Senior") held secret talks about AMC acquiring at least a piece of Edwards Theatres. Back then, the theater business was entering a growth phase; a sale of the entire Edwards Theatres chain probably would have netted a ballpark $100 million for the family, according to an estimate of one person who has seen the company's books.

(That figure is based on an estimated $25 million a year of operating profit and a standard industry valuation multiple of six to eight times earnings. minus a "guesstimate" that the company had $75 million of debt at the time. Operating profit is defined as EBITDA -- earnings before interest, taxes, depreciation and amortization.)

Instead, later in 1997 James Edwards III ("Junior") called off the talks with AMC shortly after his father's death and proceeded with Senior's ambitious expansion plans.

That expansion was part of an industry-wide strategy of borrowing heavily in order to finance gleaming new cinema megaplexes across the country. But the industry overbuilt, and the result has taken a financial toll on virtually all of the big theater chains, including AMC.

As customers flocked to the new regional complexes, they abandoned older neighborhood theaters, strapping the chains with money-draining dinosaurs that have hampered or prevented them from meeting their new, higher debt obligations. In its Aug. 23 bankruptcy filing, Edwards noted that "industry analysts estimate that the industry needs to drop from its current level of 38,000 screens to less than 30,000."

Just days before Edwards filed for Chapter 11 protection, Carmike Cinemas Inc. of Columbus, Ga, the nation's third-largest chain, also did so. Two weeks ago, Englewood, Colo.-based United Artists Theatre Co. followed suit. Earlier, Mann Theatres and Silver Cinemas went the Chapter 11 route. Loews Cineplex and AMC have also warned of financial difficulties.

So far, the workouts have not been kind to existing stakeholders. In its filing, United Artists presented a prearranged restructuring plan in which the banks will swap their debt for a minority share of the new equity. Bondholders will get warrants for an even smaller percentage of the new shares. The company's old shareholders, primarily Merrill Lynch Capital Partners fund, will see their investments wiped out. Emerging with 55 percent control of the company will be billionaire Philip Anschutz, who recently paid 70 cents on the dollar for 21 percent of UA's $440 million face-value syndicated loan.

Future in question

Will Edwards also become prey to a vulture investor? The answer is likely to hinge on Edwards' banks, led by Bank of America, the agent for the secured-creditor bank group owed $215 million. Observers doubt the banks would want to unload a premier movie chain like Edwards for a fire-sale price, so vultures may not be welcome.

On the other hand, it's an open question how much ownership the Edwards family might have to cede in exchange for more favorable loan terms or a capital infusion, or whether the company can sell off enough or restructure enough to retain its current ownership setup. One observer wondered whether the Edwards family itself might step forward with some cash.

Neither officials at Edwards nor at the banks could be reached for comment for this story.