Frank Theatres Bayonne/South Cove, LLC – Files Chapter 11, Details Slide into Operational and Financial Horror Show

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December 20, 2018 – Frank Theatres Bayonne/South Cove, LLC and 23 affiliated Debtors (Frank Theatres” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of New Jersey, lead case number 18-34808 [Docket No. 1]. The Company, which operates pure play movie theaters, combination movie theater/family entertainment complexes, and pure play family entertainment complexes in six east coast states, is represented by Kenneth A. Rosen of Lowenstein Sandler. Further board-authorized engagements include Moss Adams LLP (“Moss”) as financial advisor and Paragon Entertainment Holdings, LLC (“Paragon”) as industry consultant.
The Company’s petition notes between 200 and 1,000 creditors; estimated assets between $10mn and $50mn; and estimated liabilities between $10mn and $50mn. Documents filed with the Court list the Company’s three largest unsecured creditors as (i) Kite Realty Group – $801,765.12 (Professional Fees), (ii) Paragon Management, LLC – $288,463.53 (Professional Fees) and (iii) Moss – $284,008.29 (Professional Fees). The presence of Moss and Paragon on a list of pre-petition unsecured creditors and a list of post-petition advisers may draw some scrutiny as the Chapter 11 process evolves.
Events Leading up to the Chapter 11 Filing
In a declaration in support of the Debtors’ Chapter 11 petition [Docket No. 17], Christopher Lang, the Company’s Chief Restructuring Officer, said the horror show began when the Company embarked on an expansion program to open several new locations, primarily in the Revolutions (bowling only format) and one additional CineBowl & Grille (combination bowling and theater) location. “Poor location choice, combined with unprofitable leases, material cost overruns, delayed opening dates, and ineffective location-based management plagued the new Revolutions and CineBowl & Grille locations from the start and required an ever-growing need for cash from the balance of the seasoned portfolio of existing theaters,” Lang detailed. 
This set off a chain reaction that rippled through the business. “While operating cash and third-party loans were being used to support the liquidity need caused by the over-budget, past-deadline, and unprofitable new locations, the remainder of the existing locations also steadily declined in general admissions and total revenues as preventative maintenance, standard course refreshes, and local marketing initiatives were reduced or abandoned altogether. In addition, landlords and critical vendors were not paid or were materially aged beyond their standard payment terms. These poor management decisions were made in most cases without the knowledge or consent of the Debtors’ capital providers,” he stated.
Things went from bad to worse, with, in some instances, the Company being evicted, locked out of its theater locations, and/or box office studios refusing to allow the theaters to exhibit key first run movies. 
With the rot setting in, the physical state of many locations began to be severely neglected under the Debtors’ prior management (pre-September 2017); Lang continues, “Much needed capital improvements were not made into maintenance or upgrades of many locations. As a result, over time, the locations became dirty and in disrepair, which ultimately deterred business and resulted in a decrease in revenue.” This was all happening as the movie theater industry in general trended toward an enhanced movie going experience, away from fleapits and toward a more “premium” experience.
Despite the aforementioned project and operational challenges, Lang maintained that the former management at the Company “executed material contracts, including employment agreements, new location leases, and vendor supply agreements, subjecting the Company to costly and recurring liabilities which were not approved by the Board.” Lang notes that the Company is currently in litigation with members of former management.
Over the course of 2017, as fresh capital continued to be required to support the Debtors’ business, the Senior Lenders and Subordinated Lenders, along with the preferred equity holders, negotiated a comprehensive restructuring of the existing capital structure. Moss was brought in as financial advisor and Paragon as industry advisor; the advisors making recommendations to effectuate a wholesale retrofit of specific locations along with prospectively managing the Company on a go forward basis. “Accordingly, the Debtors, working together with Moss and Paragon began a process in September 2017 with the goal of evaluating the Debtors’ options and implementing a strategic turnaround. The Debtors and their advisors concluded that the Company’s restructuring could best be accomplished in a jointly administered Chapter 11 proceeding for each of the Debtors (collectively, the “Chapter 11 Cases”) via a court-approved Chapter 11 plan of reorganization consistent with the terms of the Restructuring Support Agreement (“RSA”) and the Plan Term Sheet.” 

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