Theater Chains Falling Tough Times.

SAY it ain't so! Carmike Cinemas Inc., a longtime Wall Street favorite, filed for bankruptcy protection from creditors this week in a Delaware federal court, just a week after insisting that it had enough cash to make debt payments for the next 12 to 24 months.

Carmike, based in Georgia, isn't the first, nor will it likely be the last movie-theater company to file for bankruptcy during a year of intense economic pressure in the industry. But it is the first publicly traded chain to seek the court's protection, and as the No.3-ranked company in screens, it is the largest to do so.

Carmike's action was preceded by WestStar Cinemas Inc. and Silver Cinemas International Inc., two mid-sized chains that filed voluntary bankruptcy petitions in the past 11 months.

Worried investors, analysts and film distributors are asking who's next, as bigger and bigger chains disclose deepening financial problems from a costly building spree.

Regal Cinemas Inc., the nation's largest chain with 4,376 screens, said this month that it had begun discussions with its senior bank lenders to seek relief from certain bank covenants. The price of Regal's 9.5 percent senior subordinated notes sank to about 11 cents on the dollar, as bondholders and analysts glumly digested the news. The bonds sold for almost 82 cents on the dollar as recently as December.

Fifth-ranked United Artists Theatre Co., in default on $275 million of senior subordinated notes after missing an April payment, is seeking a debt and equity reorganization.

Tenth-ranked Edwards Theatres Circuit Inc., a privately held company in Newport Beach, retained a law firm in March that specializes in bankruptcy. The company has been sued by three landlords in rent disputes after Edwards shuttered some theaters.

WestStar, Silver Cinemas, Regal and United Artists all had one thing in common: They were the product of leveraged buyouts in the 1990s, when smart money men thought they could modernize and consolidate the chains to gain market clout.

Few firms safe

Carmike seemed different. It continued to be operated by the same family management that won Wall Street's confidence in the 1980s and 1990s with a strategy of being a near-monopoly operator in small and mid-sized towns.

But Carmike's bankruptcy petition suggests that few companies are immuned to the problems created by the over-expansion and hefty debt of a mature industry. Carmike, like other theater operators, has been moviegoers desert its older multiplexes to drive to new megaplexes with stadium seating -- even if the new movie palaces are farther away.

Suddenly, bankers are more important than the summer movies. Movie theater operators are concluding that the summer box office won't ease their problems, even though projected revenue of $2.7 billion is second only to last year's record $3 billion.

Going on CreditWatch

Regal recently warned analysts that its third-quarter cash flow will fall 25 percent to 30 percent from last year.

On Aug. 4, Standard & Poor's placed Regal's corporate credit, bank loan and subordinated debt ratings on CreditWatch with negative implications.

Steve Wilkinson, an analyst at Standard & Poor's, said he doesn't rule out more bankruptcies. "The whole industry is under a lot of pressure," he said.

Analysts doubt that leveraged buyout funds will put more money into many of the theater chains.

Michael Campbell, chief executive of Knoxville-based Regal Cinemas, said he doesn't expect new equity from Kohlberg Kravis Roberts & Co. and Hicks, Muse, Tate & Furst Inc., the leveraged buyout companies that each invested $500 million in 1998.

It's hard for some investors or bankers to wait patiently while cinemas companies try to close or sell underperforming theaters.

Warburg, Pincus Venutres LP tried to sell WestStar's Mann Theatres just 13 months after buying the 374-screen chain from Viacom Inc. and Time Warner Inc. for $166 million. There were no takers.

Frustrated, Encino-based WestStar filed its voluntary bankruptcy petition in September. Four months later, the Mann theaters emerged from bankruptcy with a $91 million sale to WF Cinema Holdings -- a joint venture of Time Warner and Viacom, the previous owners.

Turns out that Time Warner and Viacom were still on the hook for some Mann Theatre leases, so the two gains agreed to repurchase the chain at a steep discount. Barry Reardon, a retined Warner Bros. Film distribution executive, was hired to sell of theaters piecemeal. Reardon said the company hopes to shrink to just 13 theaters in Southern California.

With Patience and savvy, Reardon may deliver fresh profit for Viacom and Time Warner. But it's tedious work -- ill-suited, we suspect, for leveraged buyout artists. The shake-out won't be pretty.

"You have another two year of a workout. You can't clean this mess quickly," said Bishop Cheen, a high-yield bond analyst at First Union Securities Inc. in Charlotte, N.C.

Kathryn Harris is a columnist for Bloomberg News.