United Artists Struggles With Cash Flow

Despite an overall recovery trend in the movie theater industry, United Artists Theatre Circuits Inc. is struggling with cash flow problems.

Although United Artists was expected to make Friday's $12.2 million credit payment on $225 million of 9.75% senior subordinated notes due 2008 and a $50 million floating rate issue due 2007, analysts expected the company to dip into the last of its $100 million revolving credit facility to do so.

After that, the issuer will have approximately $5 million in bank credit to work with.

The financial future of the company, and how it will pay out the next coupon in six months "looks kind of hairy," said one source close to the company's financial management team. "I'd be a little worried."

Company officials did not return calls seeking comment.

"I remain fairly negative on them because bank lenders may be faced with a restructuring," said Jerry Paul, manager of the Invesco High Yield Fund. "We'll put it on our radar screen, just watching for a breakdown and shakeout."

Already, some analysts suspect, the company may be in violation of its bank covenants. Apparently, the company may not be seeing enough cash flow to satisfy its lenders.

"Liquidity is tight," said one industry watcher.

In the first quarter of this year, United Artists posted $3.6 million EBITDA, followed by $19 million in the second quarter. While these numbers suggest a definite upward trend, one analyst said the company is obligated by its banks to bring in $73 million of adjusted EBITDA by year end, and the amended covenant steps up to $83 million of adjusted EBITDA in March 2000.

Because so many of UATC's screens are clustered in metropolitan areas, they are victims of what industry analysts call competitive overbuild, the result of too many megaplexes with 20 to 30 screens too close together.

"A few years ago there was so much capital that they ruined the industry," Paul said.

Now UATC, like many movie theater chains, is focusing on building megaplexes with only 12 to 13 screens, retrofitting its old properties and getting rid of its most unprofitable sites. Some sites are losing hundreds of thousands of dollars each year in over-saturated, over-screened markets.

"The more they get rid of their negative theaters, the better, because it's killing their cash flows," said one analyst.

United Artists expects to get rid of upwards of 50 theaters this year. This however, may not be enough to keep pace with its competitors. AMC Entertainment is expected to dispose of 300 screens this year while Regal Cinemas is expected to dispose of 125 to 150 screens.

UATC will also build four new theaters this year, hoping to compete with other state-of-the-art movie screens.

Cash flow for UATC, like any movie theater chain, depends on selling tickets, bringing in audiences and building customer loyalty to a particular theater. That, in turn, depends on what appears on its screens: the movies themselves. As one analyst said, theaters "live and die by the movie product."

For theaters, year-end revenues hinge on the third quarter because of the blockbuster summer months. While theaters are due to report in mid-November on that period, one analyst indicated that September, which is always the worst month for theaters, was showing better than expected year-over-year numbers.

The fall, he added, should be even stronger. Theaters are expected to draw audiences with movies starring, Michelle Pfeiffer, Brad Pitt and Denzel Washington. Pokemon, an animated movie for children, is expected to draw crowds, as is Walt Disney's sequel to Toy Story.

Will these measures be enough to keep United Artists out of the red?

"It would be very good for them if someone just bought them out," said one analyst.

"They're a zombie company going forward," Paul said.