AMC Theater Empire Playing Real-Life Drama

For decades, Stanley H. Durwood has bent his considerable will to the task of building a movie theater empire worthy of posterity. At 67, the Harvard-educated Durwood is a company patriarch whose 87%-owned AMC Entertainment ranks as the second-largest theater chain in the nation.

But AMC now is at a crossroads, burdened by debt and the possibility that it chose the wrong cities for its aggressive expansion that more than doubled the chain to 1,493 screens in five years. Durwood’s decisions in the next few months may well determine the company’s long-term future.

AMC’s most obvious choices include the sale of some assets or a search for new investors, but Durwood has always been a builder, not a seller, of assets; a man who offered a minority stake to the public with some reluctance in 1983. As of Dec. 31, his preference for debt financing had added hefty borrowings of $378 million to a company with assets of $527 million.

“We expanded very rapidly; we have not been a company that’s been real interested in diluting the principal’s ownership, so we haven’t done a lot of equity financing,” said AMC President and Chief Operating Officer Ron D. Leslie. “We’ve gotten ourselves into a bit of a financial crack. We’re going to solve that one way or another.”

AMC runs a thrifty operation at its downtown Kansas City, Mo., headquarters, renting office space for $7 a square foot, but it spares little expense for its theater patrons in 27 states and Britain. New theaters offer wider seats and armrests with cup-holding devices to end the spills that have vexed movie-goers since paper cups were first carried down the aisle. AMC has recruited college graduates and MBAs as theater managers and sends them to six-week training academies. Last month, the company introduced a new screen technology to the industry--while still trying to offer the lowest admission prices in town.

In short, AMC theaters are dandy for consumers, but some analysts predict that AMC’s innovation and national market share won’t be enough to ensure financial success if the company continues operating in its current mode. Debt has placed AMC in a hammerlock, while smaller competitors such as Loews and Cineplex Odeon have made end runs to seize control in some of the nation’s top markets.

Of the nation’s five largest markets, AMC has no theaters in New York, Chicago or Boston, and it has a major stake only in fourth-ranked Philadelphia. In second-ranked Los Angeles, AMC has built several praiseworthy theaters but gets slimmer pickings among top-grossing movies because of Mann Theatres’ grip on the Westwood Village cluster of theaters.

“When you have a national chain with one or two theaters in every market, you don’t have any market leverage, you just have a lot of theaters,” said Gordon Crawford, senior vice president of Capital Guardian Research Co. “They don’t dominate enough key markets on a local basis,” the analyst said. “Debt is a serious problem, too.”

For the nine-month period ended Dec. 31, the company had paid $29 million in interest expense, or more than half of its $48.7 million in cash flow (earnings plus depreciation and amortization). During the same period, the company’s building program cost about $80 million. AMC reported a loss of nearly $4.7 million for the nine-month period, on revenue of $227.7 million.

Competitors Diversified

“They either have to sell some equity or sell some assets,” said Jeffrey Logsdon, director of institutional research at Crowell, Weedon & Co. in Los Angeles.

AMC, alone of the four companies that rank nationally with 1,000-plus screens, has not diversified or sold a major stake to a powerful investor. By contrast, first-ranked United Artists has sizable cable-TV holdings and is 65% owned by Tele-Communications, the nation’s largest cable-TV operator. Third-ranked General Cinema is also a soft-drink bottler and controls a retailer, Neiman-Marcus Group, while fourth-ranked Cineplex Odeon is 49% owned by MCA Inc., the parent of Universal Pictures.

Said one competitor, who insisted on anonymity: “Their balance sheet says it all. . . . They’ve got to sell equity or sell off regions of the country.”

Leslie, AMC’s president since 1986, recently advocated the formation of joint ventures in Philadelphia and Britain to obtain cash in exchange for a half-interest in AMC’s theater holdings in those two locations. If the deals were concluded, Leslie said last month, the company would “pay off over $50 million worth of debt . . . without diluting our stock.”

But Leslie--who has been with the company for 17 years--freely admitted that he was “fighting a real battle” with Durwood. “He’s not a seller and will never be any kind of a seller as far as I can see,” Leslie said. “He wants to grow something here that’s going to outlive all of us.”

AMC already has come a long way since 1920, when Durwood’s father decided to abandon his career as an actor with a traveling tent show and to lease and operate a downtown Kansas City theater. But most of the company’s growth has occurred in the past 20 years, after Durwood agreed to buy out his younger brother and sister.

From a base of just 22 screens in 1968, the newly christened American Multi-Cinema Inc. expanded by building multiscreen theaters that shared lobbies, concession stands and other support services. Although a few other chains, notably General Cinema, also built twin theaters in shopping centers, AMC (as it was renamed in 1983) led the industry in multiple screening. The company has built an average of 5.3 screens per location, compared to an industry average of 2.6.

Contrary to the views of some of his executives, Durwood insists that he is not fundamentally opposed to the sale of AMC. “We’d sell the company,” he said. “A lot would depend on my sons and my successors and what they saw in it.”

But Durwood admitted that he killed the idea of selling a half-interest in AMC’s Philadelphia theaters earlier this month. Some sources said AMC could have collected more than $45 million, realizing a significant gain over the $31 million that AMC paid 15 months ago to acquire control of the Budco theater chain in that city.

The sale would have been to a smaller competitor, Loews Theatre Management Corp., which is owned by Columbia Pictures Entertainment. As reported in January, Loews apparently wanted the power to select films for AMC’s theaters in Philadelphia.

“I felt we were losing control of our screens, and I really wasn’t happy about that. Control of the screens is the essence of the business,” Durwood said last week. “The (Columbia) people are wonderful people, so it has nothing to do with them.”

Despite his veto of the Philadelphia sale, Durwood said he is still willing to consider the partial sale of some AMC assets. “We’re looking for joint ventures in the real estate,” he said, suggesting that the company may also be studying the merits of a real estate spinoff.

Durwood also said AMC is pressing ahead with plans to form a joint venture in Britain with a U.S. competitor, United Artists Communications. Seven months have elapsed since the venture was announced, but Durwood said AMC is now reviewing a final draft of the agreement and is eager to recruit additional partners. “We would want two or three distributors in if they saw fit,” the AMC chairman said.

Durwood has previously expressed an interest in “holding hands in some way” with a major film distributor, and analysts have observed that Walt Disney Co. might be a good candidate. AMC is currently building a multiplex theater on Disney property in Florida, and analysts speculate that Disney might want to follow five other major distributors that have recently invested in the theater business.

But Durwood said no studio has proposed a major equity investment in AMC, and Disney Chairman Michael D. Eisner said flatly: “We’re not interested in exhibition. We don’t think it is something that a movie producer should have or need be in; I think there are plenty of theaters in America.”

AMC’s foray into the British market has added debt of about $25 million. The company is operating three multiplexes and is committed to building at least seven more, averaging about 10 screens apiece. The British deal “would go off our balance sheet,” reducing debt substantially, Durwood said. “The rest of our debt we’ll easily handle.”

One industry source has speculated that AMC might seek some business combination with a cash-rich company called TPI Enterprises, in which AMC owns a 25% stake. New York-based TPI has sold most of its telephone equipment business and is searching for ways to invest its cash, which totaled $151 million on Sept. 30.

But Leslie indicated that an outright merger does not appear to be in the cards. “We need equity in this company, and I don’t know whether they’re willing to take a substantial portion of their cash and invest in the movie business,” he said.

AMC found the TPI investment with the help of investment banker Philip Ean Cohen, who served on both companies’ boards and collected a fee from AMC. The movie theater company borrowed $37 million to purchase its TPI shares from Rank America.

The purpose of AMC’s investment, Leslie said, is “to work together with (TPI) management to figure out a way to profitably use the resources of both companies to do something smart for both companies. They’re in essence right now just a cash box.”

Meanwhile, AMC’s fortunes continue to be entwined with the Durwood family. As recently as September, a family entity bought 136,200 shares of common stock for nearly $1.2 million to help boost the company’s consolidated net worth--or assets minus liabilities--slightly above the $75 million required by AMC’s largest lender, Chemical Bank.

Only one of Durwood’s six children--38-year-old Edward--currently works for the company, serving as a vice president and director. But all six children are partners with their father in American Associated Enterprises, a limited partnership that billed AMC about $521,000 last year for executing film license contracts and providing related accounting and financial management services.

After AMC went public in 1983, the company ended its practice of leasing automobiles from Durwood Inc., the family entity that owns 87% of AMC’s stock.

Durwood said an analyst is correct in pointing out that the AMC chairman might benefit by keeping his AMC holdings above 80% in order to file consolidated tax returns. But he said that benefit would not stand in the way of lowering his stake below 80% if the corporate need arose.

(A consolidated return may enable a taxpayer who controls more than one company to obtain tax benefits such as offsetting one company’s losses against another’s profits).

AMC ranks as the 15th-largest company headquartered in Kansas City in terms of sales and the Durwood name means a great deal in the community. “He is really a driving force in the redevelopment of downtown Kansas City,” said Gregory S. Rutkowski, a Kansas City native who now runs AMC’s theater operations in the western United States from a Los Angeles office. Rutkowski, who was a high school freshman when he first met Durwood, describes the AMC chairman as “a measured thinker” who “works every deal.”

Amateur Astrologist

Durwood’s personal style is low-key, but he’s “a funny guy to have dinner with” and “extremely courteous,” said Rutkowski, whose father also works for AMC.

Among other civic efforts, the AMC chairman just raised $500,000 for the basketball team at the University of Missouri at Kansas City. Durwood was never a basketball player, but he is still an athlete who jogs and plays racquetball. Astrology is an admitted hobby--which bemuses associates who are aware of Durwood’s equally keen interest in formal education.

AMC identifies its directors’ college and graduate school degrees in the annual proxy statement sent to shareholders, in a practice atypical of the exhibition business, if not the rest of American industry. But it is in keeping with Durwood’s commitment to recruiting college graduates as theater managers and with AMC’s funding of five training academies for employees.

“That’s one thing Stan has really done well,” said Leslie, who also praises Durwood’s willingness to experiment with theater design and his long-term thinking about the industry in general. In the final analysis, Leslie said, the entire industry must worry about boosting attendance from the 1-billion-ticket level witnessed for the past 25 years or so.

The industry sold $4.25 billion in tickets last year, but “we played to hardly any additional bodies,” Leslie observed. “We want to get more people coming back to the theaters.”

For that reason, AMC has tried to encourage attendance by offering lower admission prices and enhancing the movie-going experience. At a recent industry trade show, AMC tried to excite competitors about a new screen technology that it developed with a Georgia Tech physicist. AMC executives say the new curved screen costs only about $300 more than conventional screens, which are flat and perforated to allow sound to travel from the speakers positioned behind the screen.

AMC’s new screen, Leslie explained, allows light from the projector to strike all surfaces simultaneously, thereby providing a better overall picture. “It gives you 50% more light; there is not a bad seat in the house,” Leslie said in describing the screen, which has been tested at AMC’s Rolling Hills theater and is scheduled to be added to the Burbank complex in May.

But Wall Street analysts use a different criteria to size up AMC--namely, the ability to book the top-grossing films in the biggest markets.

“Across the board, they’ve probably done a better job than their competitors for the movie-going public, but that doesn’t mean anything,” said Logsdon, the Crowell Weedon analyst. Moviegoers “are not going because it’s a nice theater. They’re going because there’s something on the screen they want to see,” he said. Only then does a consumer think about “time scheduling and geographic convenience,” Logsdon said.

The analyst dismissed AMC’s efforts to gain market share by offering lower prices than competitors. “You don’t choose the theater based on price. You’re not going to drive the extra five miles to get to an AMC theater because it (costs) less.”

With hindsight, at least one AMC executive privately worries about the consequences of concentrating on smaller cities instead of large metropolitan areas. AMC did not acquire larger-city circuits until 1986, when it bought theaters in Detroit as well as Philadelphia. In smaller towns, “the grosses aren’t enough to make any impact,” the insider said, adding ruefully, “I have some questions about whether that (national) strategy is really viable.” The same executive said he wishes that AMC had moved earlier to expand in the top two California markets.

In San Francisco, AMC recently remodeled a Japanese cultural center building into a stunning eight-screen complex, which draws good attendance when strong films are playing. But United Artists has a powerful presence in the city, and the AMC insider declared, “Last year we were not getting booked” with the most desirable films.

In Los Angeles, AMC has been called courageous--as well as crazy--for opening a 14-screen theater in Century City last fall, in effect challenging the powerful Mann theater chain, which has dominated the western part of the city from its Westwood stronghold.

AMC appears elated by the initial results. “We’re playing to as many people in a week at Century City 14 as all five Mann houses in Westwood play,” Leslie said.

But two distributors who privately root for AMC’s success in Century City nonetheless admit that they still prefer Westwood because film makers consider it the most prestigious site--and, according to the distributors, Westwood exhibitors usually insist that the film not be played simultaneously in Century City because they consider it too close geographically.

Durwood defends his company’s overall strategy, however, noting that AMC is in 31 of the nation’s top 50 markets. And, as an indicator of AMC’s box-office strength, he said the company probably pays the second- or third-largest sum in total film rentals to Hollywood’s distributors.

Exhibitors typically pay 50% of their box-office gross to the studios that distribute the films, but in some markets such as Manhattan, screens are scarce because of the high cost of real estate. As a result, the two dominant New York exhibitors--Loews and Cineplex--are able to keep as much as 60% of the box-office receipts, some industry sources estimate.

Without a presence in such coveted markets, AMC loses some of its luster as an acquisition target, said one Wall Street analyst.

But at Crowell Weedon, Logsdon said he still recommends the AMC stock for high-risk investors because it is trading in the $6.50 range yet could fetch $12 per share if the entire company were sold. After subtracting an estimated $300 million in debt, the company’s price would be about $180 million, Logsdon said.

For investors who seek a “pure play” in theater stock, AMC is the only national chain offering that opportunity, although the number of shares available for public trading is small because of Durwood’s holdings.

Late last summer, AMC planned to raise $75 million from the sale of debt securities that would have been convertible to stock. But “the market went to hell,” as Leslie put it. “The price was high; the stock price was dropping, and we just didn’t want to dilute the company that much . . . with the stock down around $6 or $7 a share, you don’t particularly want to put a piece of paper out there that will let you convert at $8.50.

“We think the stock’s eventually going to be worth a hell of a lot more,” Leslie said.