Financial Risks
EachAdverse economic conditions in our markets may adversely affect our financial results.
Downturns or adverse economic conditions affecting the United States economy generally, and particularly downturns or adverse economic conditions in the Midwest and in our other markets, adversely affect our results of Our Business Segments and Properties Experience Ongoing Intense Competition.
In each of our businesses we experience intense competition from national, regional and local chain and franchise operations, some of which have substantially greater financial and marketing resources than we have. Most of our facilities are located in close proximity to other facilities which compete directly with ours. The motion picture exhibition industry is fragmented and highly competitive with no significant barriers to entry. Theatres operated by national and regional circuits and by small independent exhibitors compete with our theatres, particularly with respect to film licensing, attracting patrons and developing new theatre sites. Moviegoers are generally not brand conscious and usually choose a theatre based on its location, its selection of films and its amenities. With respect to our hotels and resorts division, our ability to remain competitive and to attract and retaindivision. Poor economic conditions, including those resulting from the COVID-19 pandemic, can significantly adversely affect the demand of business and leisure travelers depends ongroup travel customers, which are the largest customer segments for our successhotels and resorts division. Specific economic conditions that may directly impact travel, including financial instability of air carriers and increases in distinguishinggas and other fuel prices, may adversely affect our results of operations. Additionally, although our theatre business has historically performed well during economic downturns as consumers seek less expensive forms of out-of-home entertainment, a significant reduction in consumer confidence or disposable income in general may temporarily affect the quality, value and efficiency of our lodging products and services from those offered by others. If we are unable to compete successfullydemand for motion pictures or severely impact the motion picture production industry, which, in either of our divisions, this couldturn, may adversely affect our results of operations.
Our businesses are heavily capital intensive and preopening and start-up costs, increasing depreciation expenses and impairment charges may adversely affect our financial results.
13Both our movie theatre and hotels and resorts businesses are heavily capital intensive. Purchasing properties and buildings, constructing buildings, renovating and remodeling buildings and investing in joint venture projects all require substantial upfront cash investments before these properties, facilities and joint ventures can generate sufficient revenues to pay for the upfront costs and positively contribute to our profitability. In addition, many growth opportunities, particularly for our hotels and resorts division, require lengthy development periods during which significant capital is committed and preopening costs and early start-up losses are incurred. We expense these preopening and start-up costs as incurred. As a result, our results of operations may be adversely affected by our significant levels of capital investments. Additionally, to the extent we capitalize our capital expenditures, our depreciation expenses may increase, thereby adversely affecting our results of operations. Several of our hotels are scheduled for reinvestment in the next two to three years.
We periodically consider whether indicators of impairment of long-lived assets held for use are present. Demographic changes, economic conditions and competitive pressures may cause some of our properties to become unprofitable. Deterioration in the performance of our properties could require us to recognize impairment losses, thereby adversely affecting our results of operations.
Adverse economic conditions, including disruptions in the financial markets, may adversely affect our ability to obtain financing on reasonable and acceptable terms, if at all, and impact our ability to achieve certain of our growth objectives.
We expect that we will require additional financing over time, the amount of which will depend upon a number of factors, including the number of theatres and hotels and resorts we acquire and/or develop, the amount of capital required to refurbish and improve existing properties, the amount of existing indebtedness that requires repayment in a given year and the cash flow generated by our businesses. Downturns or adverse economic conditions affecting the United States economy generally, and the United States equity and credit markets specifically, may adversely impact our ability to obtain additional short-term and long-term financing on reasonable terms or at all, which would negatively impact our liquidity and financial condition. As a result, a prolonged downturn in the equity or credit markets would also limit our ability to achieve our growth objectives.
We may not be able to obtain capital when desired on favorable terms, if at all, and we may not be able to obtain capital or complete acquisitions through the use of equity or without dilution to our shareholders.
We may need additional financing to execute on our current or future business strategies, including to develop new or enhance existing products and services, acquire businesses and technologies, or otherwise to respond to competitive pressures.
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and newly-issued securities may have rights, preferences or privileges senior to those of existing shareholders. If we accumulate additional funds through debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. We cannot provide assurances that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, when we desire them, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products and services, or otherwise respond to competitive pressures would be significantly limited. Any of these factors could harm our results of operations.
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We have currently suspended the payment of dividends on our common stock and, consequently, the only opportunity to achieve a return on investment in our common stock is if the price of our common stock appreciates.
We May Not Achievecurrently have suspended the Expected Benefitspayment of dividends on shares of our common stock, and Performanceour debt agreements contain restrictions on the ability of our board of directors to declare or pay dividends on shares of our common stock. Consequently, the only current opportunity to achieve a return on investment on our common stock will be if the market price of our common stock appreciates and shares are sold at a profit.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our Convertible Senior Notes due 2025 (“Convertible Notes”), depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations and have an adverse effect on our business and results of operations.
We may not have the ability to raise the funds necessary to settle conversions of the Convertible Notes in cash or to repurchase the Convertible Notes upon a fundamental change, and our current and future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Convertible Notes.
If we settle the Convertible Notes by cash, or a combination of cash and shares of our common stock upon the occurrence of a fundamental change as described in the indenture governing the Convertible Notes, we will be required to make cash payments in respect of the Convertible Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Notes being surrendered or converted. In addition, our ability to repurchase the Convertible Notes or to pay cash upon conversions of the Convertible Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Convertible Notes at a time when the repurchase is required by the indenture governing the Convertible Notes or to pay any cash payable on future conversions of the Convertible Notes as required by such indenture would constitute a default under such indenture. A default under the indenture governing the Convertible Notes or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Notes or make cash payments upon conversions of the Convertible Notes.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Notes is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
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Strategic InitiativesRisks
We may not achieve the expected benefits and Acquisitions.
performance of our strategic initiatives and acquisitions.
Our key strategic initiatives in our theatre and hotels and resorts divisions often require significant capital expenditures to implement. We expect to benefit from revenue enhancements and/or cost savings as a result of these initiatives. However, there can be no assurance that we will be able to generate sufficient cash flow from these initiatives to provide the return on investment we anticipated from the required capital expenditures.
There also can be no assurance that we will be able to generate sufficient cash flow to realize anticipated benefits from any strategic acquisitions that we may enter into, including our recent acquisition of the Movie Tavern Business.business. Although we have a history of successfully integrating acquisitions into our existing theatre and hotels and resorts businesses, any acquisition may involve operating risks, such as (1) the difficulty of assimilating and integrating the acquired operations and personnel into our current business; (2) the potential disruption of our ongoing business; (3) the diversion of management’s attention and other resources; (4) the possible inability of management to maintain uniform standards, controls, policies and procedures; (5) the risks of entering markets in which we have little or no expertise; (6) the potential impairment of relationships with employees; (7) the possibility that any liabilities we may incur or assume may prove to be more burdensome than anticipated; and (8) the possibility the acquired property or properties do not perform as expected.
Our Businesses are Heavily Capital Intensiveability to identify suitable properties to acquire, develop and Preopening and Start-Up Costs, Increasing Depreciation Expenses and Impairment Charges May Adversely Affect Our Financial Results.
Bothmanage will directly impact our movie theatre and hotels and resorts businesses are heavily capital intensive. Purchasing properties and buildings, constructing buildings, renovating and remodeling buildings and investing in joint venture projects all require substantial upfront cash investments before these properties, facilities and joint ventures can generate sufficient revenuesability to pay for the upfront costs and positively contribute to our profitability. In addition, many growth opportunities, particularly for our hotels and resorts division, require lengthy development periods during which significant capital is committed and preopening costs and early start-up losses are incurred. We expense these preopening and start-up costs currently. As a result, our results of operations may be adversely affected by our significant levels of capital investments. Additionally, to the extent we capitalize our capital expenditures, our depreciation expenses may increase, thereby adversely affecting our results of operations.
We periodically consider whether indicators of impairment of long-lived assets held for use are present. Demographic changes, economic conditions and competitive pressures may cause someachieve certain of our properties to become unprofitable. Deterioration in the performance of our properties could require us to recognize impairment losses, thereby adversely affecting our results of operations.
Our Ability to Identify Suitable Properties to Acquire, Develop and Manage Will Directly Impact Our Ability to Achieve Certain of Our Growth Objectives.
growth objectives.
A portion of our ability to successfully achieve our growth objectives in both our theatre and hotels and resorts divisions is dependent upon our ability to successfully identify suitable properties to acquire, develop and manage. Failure to successfully identify, acquire and develop suitable and successful locations for new lodging properties and theatres will substantially limit our ability to achieve these important growth objectives.
14
Our Abilityability to Identify Suitable Joint Venture Partnersidentify suitable joint venture partners or Raise Equity Fundsraise investment funds to Acquire, Developacquire, develop and Manage Hotelsmanage hotels and Resorts Will Directly Impact Our Abilityresorts will directly impact our ability to Achieve Certainachieve certain of Our Growth Objectives.
our growth objectives.
In addition to acquiring or developing hotels and resorts or entering into management contracts to operate hotels and resorts for other owners, we have from time to time invested, and expect to continue to invest, in such projects as a joint venture partner. We have also indicated that we may act as an investment fund sponsor in order to acquire additional hotel properties. A portion of our ability to successfully achieve our growth objectives in our hotels and resorts division is dependent upon our ability to successfully identify suitable joint venture partners or raise equityinvestments funds to acquire, develop and manage hotels and resorts. Failure to successfully identify suitable joint venture partners or raise equity for an investment fund will substantially limit our ability to achieve these important growth objectives.
Adverse Economic Conditions, Including Disruptions in the Financial Markets, May Adversely Affect Our Ability to Obtain Financing on Reasonable and Acceptable Terms, if at All, and Impact Our Ability to Achieve Certain of Our Growth Objectives.
We expect that we will require additional financing over time, the amount of which will depend upon a number of factors, including the number of theatres and hotels and resorts we acquire and/Investing through partnerships or develop, the amount of capital required to refurbish and improve existing properties, the amount of existing indebtedness that requires repayment in a given year and the cash flow generated by our businesses. Downturns or adverse economic conditions affecting the United States economy generally, and the United States stock and credit markets specifically, may adversely impactjoint ventures decreases our ability to obtain additional short-term and long-term financing on reasonable terms or at all, which would negatively impact our liquidity and financial condition. As a result, a prolonged downturn in the stock or credit markets would also limit our ability to achieve our growth objectives.
Investing Through Partnerships or Joint Ventures Decreases Our Ability to Manage Risk.
manage risk.
Joint venture partners may have shared control or disproportionate control over the operation of our joint venture assets. Therefore, our joint venture investments may involve risks such as the possibility that our joint venture partner in an investment might become bankrupt or not have the financial resources to meet its obligations, or have economic or business interests or goals that are inconsistent with our business interests or goals, or be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives. Consequently, actions by our joint venture partners might subject hotels and resorts owned by the joint venture to additional risk. Further, we may be unable to take action without the approval of our joint venture partners. Alternatively, our joint venture partners could take actions binding on the joint venture without our consent.
Legal, Regulatory and Compliance Risks
Our Properties are Subject to Risks Relating to ActsRecalls of God, Terrorist Activityfood products and War and Any Such Event May Adversely Affect Our Financial Results.
Acts of God, natural disasters, war (including the potential for war), terrorist activity (including threats of terrorist activity), incidents of violence in public venues such as hotels and movie theatres, epidemics (such as SARs, bird flu and swine flu), travel-related accidents, as well as political unrest and other forms of civil strife and geopolitical uncertainty mayassociated costs could adversely affect the lodging and movie exhibition industries and our results of operations. Terrorism or other similar incidents may significantly impact business and leisure travel or consumer choices regarding out-of-home entertainment options and consequently demand for hotel rooms or movie theatre attendance may suffer. In addition, inadequate preparedness, contingency planning, insurance coverage or recovery capability in relation to a major incident or crisis may prevent operational continuity and consequently impact the reputation of our businesses.
We Rely on our Information Systems to Conduct our Business, and Any Failure to Protect Our Information Systems and Other Confidential Information Against Cyber Attacks or Other Information Security Breaches or Any Failure or Interruption to the Availability of Our Information Systems Could Have a Material Adverse Effect on Our Business.
The operation of our business depends on the efficient and uninterrupted operation of our information technology systems. Our information technology systems may become unavailable or may fail to perform as anticipated, for any reason, including cyber attacks, loss of power, or human error. Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber attacks. Any significant interruption in or failure of our information systems or any breach of our information systems or other confidential information could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation expose us to litigation, increase our costs or cause losses. As cyber and other information security threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures or to investigate and remediate any information security vulnerabilities.
15
Recalls of Food Products and Associated Costs Could Adversely Affect our Reputation and Financial Condition.
financial condition.
We may be found liable if the consumption of any of the food products we sell in our theatres or hotels causes illness or injury. We are also subject to recallrecalls by product manufacturers or if the food products become contaminated. Recalls could result in losses due to the cost of the recall, the destruction of the product and lost sales due to the unavailability of the product for a period of time.
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We are Subjectsubject to Substantial Government Regulation, Which Could Entail Significant Cost.
substantial government regulation, which could entail significant cost.
We are subject to various federal, state and local laws, regulations and administrative practices affecting our business, and we must comply with provisions regulating health and sanitation standards, equal employment, environmental, and licensing for the sale of food and alcoholic beverages. Our properties must also comply with Title III of the Americans with Disabilities Act of 1990 or ADA.(the “ADA”). Compliance with the ADA requires that public accommodations “reasonably accommodate” individuals with disabilities and that new construction or alterations made to “commercial facilities” conform to accessibility guidelines unless “structurally impracticable” for new construction or technically infeasible for alterations. Non-compliance with the ADA could result in the imposition of injunctive relief, fines or an award of damages to private litigants or additional capital expenditures to remedy such noncompliance. Changes in existing laws or implementation of new laws, regulations and practices could also have a significant impact on our business. For example, a significant portion of our staff level employees are part timepart-time workers who are paid at or near the applicable minimum wage in the relevant jurisdiction. Increases in the minimum wage and implementation of reforms requiring the provision of additional benefits would increase our labor costs.
We are subject to complex taxation and could be subject to changes in our tax rates, the adoption of new tax legislation or exposure to additional tax liabilities.
We are subject to different forms of taxation in the federal, state and local jurisdictions where we operate. Current economic and political conditions make tax rates in any jurisdiction subject to significant change. Our Businessfuture effective tax rate could be affected by changes in the mix of earnings in jurisdictions with differing tax rates, changes in the valuation of deferred tax assets and Operations Couldliabilities, or changes in tax laws or their interpretation. In addition, the tax authorities may not agree with the determinations we have made and such disagreements could result in lengthy legal disputes and, ultimately, in the payment of additional amounts for tax, interest and penalties. If our effective tax rate were to increase, or if the ultimate determination of our taxes owed in the U.S. or any of our jurisdictions is for an amount in excess of amounts previously accrued, our operating results, cash flows and financial condition could be Negatively Affectedadversely affected.
Our business and operations could be negatively affected if We Become Subjectwe become subject to Any Securities Litigationany securities litigation or Shareholder Activism, Which Could Cause Usshareholder activism, which could cause us to Incur Significant Expense, Hinder Executionincur significant expense, hinder execution of Investment Strategyour business strategy and Impactimpact our Stock Price.
stock price.
While we are currently not subject to any securities litigation or shareholder activism, due to the potential volatility of our stock price and for a variety of other reasons, we may in the future become the target of securities litigation or shareholder activism. Securities litigation and shareholder activism, including potential proxy contests, could result in substantial costs and divert the attention of our management and board of directors and resources from our business.
Additionally, such securities litigation and shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation or activist shareholder matters. Further, our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation or shareholder activism.
Our stock price may be volatile, which could result in securities class action litigation against us.
Adverse Weather Conditions, Particularly DuringThe market price of our common stock could be subject to wide fluctuations in response to, among other things, the Winterrisk factors described in this report, and other factors beyond our control, such as fluctuations in the Midwestvaluation of companies perceived by investors to be comparable to us and research analyst coverage about our business.
Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, have and may continue to affect the market price of our common stock.
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In the past, many companies that have experienced volatility in Our Other Markets, May Adversely Affect Our Financial Results.
Poor weather conditions adversely affectthe market price of their stock have been subject to securities class action litigation. We may become the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. See “Risks related to our business and leisure travel plans,industry—Our business and operations could be negatively affected if we become subject to any securities litigation or shareholder activism, which directly impactscould cause us to incur significant expense, hinder execution of business strategy and impact our hotelsstock price.”
Certain provisions of our articles of incorporation and resorts division. In addition, theatre attendancebylaws and of Wisconsin law could prevent a takeover that shareholders consider favorable and could also reduce the market price of our stock.
Our articles of incorporation and our bylaws contain provisions that could delay or prevent a merger, acquisition or other change in control that shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares. These provisions may also prevent or delay attempts by shareholders to replace or remove our current management or members of our board of directors.
General Risks
We rely on our information systems to conduct our business, and any given dayfailure to protect our information systems and other confidential information against cyber attacks or other information security breaches or any failure or interruption to the availability of our information systems could have a material adverse effect on our business.
The operation of our business depends on the efficient and uninterrupted operation of our and our service providers’ information technology systems. Our information technology systems, and those of our service providers, may become unavailable or may fail to perform as anticipated, for any reason, including cyber attacks, loss of power, or human error. Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber attacks. Our and our service providers’ information technology systems have experienced, and may experience in the future, cyber attacks and other security incidents, and any significant interruption in or failure of our information systems, or those of our service providers, or any breach of our or their information systems or other confidential information could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, expose us to litigation, increase our costs or cause losses. As cyber and other information security threats continue to evolve, we may be negatively impacted byrequired to expend additional resources to continue to enhance our information security measures or to investigate and remediate any information security vulnerabilities.
Additionally, the legal and regulatory environment surrounding information security and privacy in the United States is constantly evolving. Violation or non-compliance with any of these laws or regulations, contractual requirements relating to data security and privacy, or with our own privacy and security policies, either intentionally or unintentionally, or through the acts of intermediaries could have a material adverse weather conditions. In particular, adverse weather during peak movie-going weekends or holiday periods may negatively affecteffect on our brands, reputation, business, financial condition and results of operations. Adverse winter weather conditions may also increase our snow removaloperations, as well as subject us to significant fines, litigation, losses, third-party damages and other maintenance costs in both of our divisions.liabilities.
Our Results May be Seasonal, Resulting in Unpredictable and Varied Quarterly Results.
Our first fiscal quarter typically produces the weakest operating results in our hotels and resorts division due primarily to the effects of reduced travel during the winter months. Our second and third fiscal quarters often produce our strongest operating results because these periods coincide with the typical summer seasonality of the movie theatre industry and the summer strength of the lodging business. Due to the fact that the week between Christmas and New Year’s Eve is historically one of the strongest weeks of the year for our theatre division, the specific timing of the last Thursday in December has an impact on the results of our fiscal first and fourth quarters in that division, particularly when we have a 53-week year.
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None.
Item 2. Properties. |
We own the real estate of a substantial portion of our facilities, including, as of December 27, 2018,31, 2020, The Pfister Hotel, the Hilton Milwaukee City Center, the Hilton Madison at Monona Terrace, the Grand Geneva Resort & Spa, Saint Kate-TheKate – The Arts Hotel, The Lincoln Marriott Cornhusker Hotel, The Skirvin Hilton (majority ownership), and the majority of our theatres. We lease the remainder of our facilities. As of December 27, 2018,31, 2020, we also managed one hotel for a joint venture in which we have a minority interest and 1210 hotels, resorts and other properties and one theatre that is owned by a third party. Additionally, we own properties acquired for the future construction and operation of new facilities. All of our properties are suitably maintained and adequately utilized to cover the respective business segment served.
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Our owned, leased and managed properties are summarized, as of December 27, 2018,31, 2020, in the following table:
| | | | | | | | | | | ||||||||||||||||||||
| | Total | | | | Leased | | Managed | | Managed | ||||||||||||||||||||
| | Number of | | | | from | | for | | for | ||||||||||||||||||||
| | Facilities in | | | | Unrelated | | Related | | Unrelated | ||||||||||||||||||||
| Business Segment | Total Number of Facilities in Operation | Owned(1) | Leased Parties(2) | Managed Parties | Managed Parties(2) |
| Operation |
| Owned(1) |
| Parties(2) |
| Parties |
| Parties(2) | |||||||||||||||
| Theatres: | | | | | | | | | | | ||||||||||||||||||||
| Movie Theatres | 68 | �� | 50 | 17 | 0 | 1 |
| 89 |
| 49 |
| 39 |
| 0 |
| 1 | ||||||||||||||
| Family Entertainment Center | 1 | 1 | 0 | 0 | 0 |
| 1 |
| 1 |
| 0 |
| 0 |
| 0 | |||||||||||||||
| Other Properties(3) | 1 | 1 | 0 | 0 | 0 | |||||||||||||||||||||||||
| Other Properties |
| 1 |
| 1 |
| 0 |
| 0 |
| 0 | ||||||||||||||||||||
| Hotels and Resorts: |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
| Hotels | 18 | 6 | 1 | 1 | 10 |
| 16 |
| 6 |
| 1 |
| 1 |
| 8 | |||||||||||||||
| Resorts | 2 | 1 | 0 | 0 | 1 |
| 1 |
| 1 |
| 0 |
| 0 |
| 0 | |||||||||||||||
| Other Properties | 3 | 0 | 2 | 0 | 1 | |||||||||||||||||||||||||
Other Properties(4) |
| 3 |
| 0 |
| 2 |
| 0 |
| 1 | ||||||||||||||||||||
| Total | 93 | 59 | 20 | 1 | 13 |
| 111 |
| 58 |
| 42 |
| 1 |
| 10 | |||||||||||||||
| (1) | Four of the movie theatres are on land leased from unrelated parties. One of the hotels is owned by a joint venture in which we are the principal equity partner (60% |
| (2) | The |
| (3) | Includes an 84,000 square foot retail center managed by our theatre division. |
| (4) | Includes a vacation ownership development adjacent to the Grand Geneva Resort & Spa owned by Orange Lake Resort & Country Club of Orlando, Florida for which we provide hospitality management services and twoSafeHouse restaurants located in Milwaukee, Wisconsin and Chicago, Illinois, both of which we lease from an unrelated party and which are managed by our hotels and resorts division. |
Certain of the individual properties or facilities identified above are subject to purchase money or construction mortgages or commercial lease financing arrangements, but we do not consider these encumbrances, individually or in the aggregate, to be material.
All of our operating property leases expire on various dates after the end of fiscal 20192021 (assuming we exercise all of our renewal and extension options).
All 2221 remaining Movie Tavern theatres acquired in February 2019 are leased from unrelated parties.
None.
Item 4. Mine Safety Disclosures. |
Not applicable.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE COMPANY
Each of our executive officers is identified below together with information about each officer’s age, position and employment history for at least the past five years:
Name | Position | Age | ||
Stephen H. Marcus | | Chairman of the Board | | 85 |
Gregory S. Marcus | | President and Chief Executive Officer | | 56 |
Thomas F. Kissinger | | Senior Executive Vice President, General Counsel and Secretary | | 60 |
Douglas A. Neis | | Executive Vice President, Chief Financial Officer and Treasurer | | 62 |
Rolando B. Rodriguez | | Executive Vice President of The Marcus Corporation and Chairman, President and Chief Executive Officer of Marcus Theatres Corporation | | 61 |
Stephen H. Marcus has been our Chairman of the Board since December 1991. He served as our Chief Executive Officer from December 1988 to January 2009 and as our President from December 1988 until January 2008. Mr. Marcus has worked at our company for 5759 years.
Gregory S. Marcus joined our company in March 1992 as Director of Property Management/Corporate Development. He was promoted in 1999 to our Senior Vice President – Corporate Development and became an executive officer in July 2005. He has served as our President since January 2008 and was elected our Chief Executive Officer in January 2009. He was elected to serve on our Board of Directors in October 2005. He is the son of Stephen H. Marcus, our Chairman of the Board.
Thomas F. Kissinger joined our company in August 1993 as our Secretary and Director of Legal Affairs. In August 1995, he was promoted to our General Counsel and Secretary and in October 2004, he was promoted to Vice President, General Counsel and Secretary. In August 2013, he was promoted to Senior Executive Vice President, General Counsel and Secretary. He also formerly served as interim President of Marcus Hotels & Resorts. Prior to August 1993, Mr. Kissinger was an associate with the law firm of Foley & Lardner LLP for five years.
Douglas A. Neis joined our company in February 1986 as Controller of the Marcus Theatres division and in November 1987, he was promoted to Controller of Marcus Restaurants. In July 1991, Mr. Neis was appointed Vice President of Planning and Administration for Marcus Restaurants. In September 1994, Mr. Neis was also named as our Director of Technology and in September 1995 he was elected as our Corporate Controller. In September 1996, Mr. Neis was promoted to Chief Financial Officer and Treasurer. In August 2018, Mr. Neis was promoted to Executive Vice President, Chief Financial Officer and Treasurer.
Rolando B. Rodriguez joined our company in August 2013 as our Executive Vice President and President and Chief Executive Officer of Marcus Theatres Corporation. Mr. Rodriguez served as Chief Executive Officer and President and as a board member of Rave Cinemas in Dallas, Texas for two years until its sale in May 2013. Prior to May 2011, he served in various positions with Wal-Mart for five years. He began his career in 1975 at AMC Theatres, serving for 30 years in various positions including senior vice president of North American field operations, senior vice president food & beverage group and executive vice president, North America operations service. In January 2017, Mr. Rodriguez was named Chairman of Marcus Theatres Corporation.
Our executive officers are generally elected annually by our Board of Directors after the annual meeting of shareholders. Each executive officer holds office until his successor has been duly qualified and elected or until his earlier death, resignation or removal.
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PART II
PART IIItem 5. Market for the Company’s Common Equity, Related Shareholder Matters and Issuer Repurchases of Equity Securities.
| (a) Stock Performance Graph |
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities and Exchange Act of 1934 and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.
Set forth below is a graph comparing the annual percentage change during our last five full fiscal years and the transition period beginning on May 29, 2015 and ended December 31, 2015 in our cumulative total shareholder return (stock price appreciation on a dividend reinvested basis) of our Common Shares to the cumulative total return of: (1) a composite peer group index selected by us, and (2) companies included in the Russell 2000 Index. The composite peer group index is comprised of the Dow Jones U.S. Hotels Index (weighted 40%35%) and a theatre index that we selected that includes Regal Entertainment Group and Cinemark Holdings, Inc. and AMC Entertainment Holdings, Inc. (weighted 60%65%). The results shown reflect the fact that Regal Entertainment Group ceased trading on February 28, 2018.
The indices within the composite peer group index are weighted to approximate the relative annual revenue contributions of each of our business segments to our total annual revenues over the past several fiscal years. The shareholder returns of the companies included in the Dow Jones U.S. Hotels Index and the theatre index that we selected are weighted based on each company’s relative market capitalization as of the beginning of the presented periods.
From MayDecember 31, 20132015 to December 27, 201831, 2020
Source: Zacks Investment Research, Inc.
| | | | | | | | | | | | | | | | | | |
|
| 12/31/15 |
| 12/29/16 |
| 12/28/17 |
| 12/27/18 |
| 12/26/19 |
| 12/31/20 | ||||||
The Marcus Corporation | | $ | 100.00 | | $ | 169.69 | | $ | 148.86 | | $ | 214.48 | | $ | 184.89 | | $ | 76.93 |
Russell 2000 Index | |
| 100.00 | |
| 121.85 | |
| 140.28 | |
| 122.14 | |
| 156.11 | |
| 186.36 |
Composite Peer Group Index(1) | |
| 100.00 | |
| 128.75 | |
| 130.06 | |
| 135.67 | |
| 87.68 | |
| 87.68 |
| 5/30/13 | 5/29/14 | 5/28/15 | 12/31/15 | 12/29/16 | 12/28/17 | 12/27/18 | ||||||||||||||||||||||
| The Marcus Corporation | $ | 100.00 | $ | 128.39 | $ | 153.22 | $ | 149.51 | $ | 253.70 | $ | 222.57 | $ | 320.68 | ||||||||||||||
| Composite Peer Group Index(1) | 100.00 | 116.27 | 149.88 | 125.55 | 153.85 | 180.30 | 173.16 | |||||||||||||||||||||
| Russell 2000 Index | 100.00 | 116.15 | 129.35 | 118.29 | 144.13 | 165.94 | 144.48 | |||||||||||||||||||||
(1) Weighted 40.0% for the Dow Jones U.S. Hotels Index and 60.0% for the Company-selected Theatre Index.
(1) | Weighted 35% for the Dow Jones U.S. Hotels Index and 65% for the Company-selected Theatre Index. |
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(b) Market Information
Our Common Stock, $1 par value, is listed and traded on the New York Stock Exchange under the ticker symbol “MCS.” Our Class B Common Stock, $1 par value, is neither listed nor traded on any exchange.
On February 28, 2019,March 1, 2021, there were 1,1981,138 shareholders of record of our Common Stock and 3836 shareholders of record of our Class B Common Stock.
| (c) Stock Repurchases |
The following table sets forth information with respect to purchases made by us or on our behalf of our Common Stock during the period indicated.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs(1) | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs(1) | ||||||||||||
| September 28 – October 25 | – | – | – | 2,786,700 | ||||||||||||
| October 26 – November 29 | – | – | – | 2,786,700 | ||||||||||||
| November 30 – December 27 | – | – | – | 2,786,700 | ||||||||||||
| Total | – | – | – | 2,786,700 | ||||||||||||
| | | | | | | | |
| | | | | | | | Maximum |
| | | | | | Total Number of | | Number of |
| | | | | | Shares | | Shares that May |
| | | | | | Purchased as | | Yet be |
| | Total Number of | | | | Part of Publicly | | Purchased |
| | Shares | | Average Price | | Announced | | Under the Plans |
Period | Purchased | Paid per Share | Programs(1) | or Programs(1) | ||||
September 25 – October 29 | | — | | — | | — | | 2,718,994 |
October 30 – November 26 | — | — | — | 2,718,994 | ||||
November 27 – December 31 | — | — | — | 2,718,994 | ||||
Total | — | — | — | 2,718,994 |
| (1) | Through December |
21Item 6. Selected Financial Data.
Information for Item 6, Selected Financial Data, has been omitted pursuant to SEC modernization rules that are effective as of the filing date of this report.
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Five-YearItem 7. Management’s Discussion and Analysis of Financial Summary
| F2018 | F2017(3) | F2016 | 31 Weeks Ended December 31, 2015(4) | F2015(5) | F2014(6) | |||||||||||||||||||
Operating Results (in thousands) | ||||||||||||||||||||||||
| Revenues(1) | $ | 707,120 | 653,552 | 574,324 | 341,664 | 517,832 | 476,260 | |||||||||||||||||
| Net earnings attributable to The Marcus Corporation | $ | 53,391 | 64,996 | 37,902 | 23,565 | 23,995 | 25,001 | |||||||||||||||||
| Common Stock Data(2) | ||||||||||||||||||||||||
| Net earnings per common share | $ | 1.86 | 2.29 | 1.36 | .84 | .87 | .92 | |||||||||||||||||
| Cash dividends per common share | $ | .60 | .50 | .45 | .21 | .39 | .35 | |||||||||||||||||
| Weighted-average shares outstanding (in thousands) | 28,713 | 28,403 | 27,957 | 27,917 | 27,687 | 27,150 | ||||||||||||||||||
| Book value per share | $ | 17.28 | 15.98 | 14.10 | 13.13 | 12.48 | 11.95 | |||||||||||||||||
Financial Position (in thousands) | ||||||||||||||||||||||||
| Total assets | $ | 989,331 | 1,017,797 | 911,266 | 804,701 | 805,472 | 765,001 | |||||||||||||||||
| Long-term debt | $ | 228,863 | 289,813 | 271,343 | 207,376 | 229,096 | 232,691 | |||||||||||||||||
| Shareholders’ equity attributable to The Marcus Corporation | $ | 490,009 | 445,024 | 390,112 | 363,352 | 343,779 | 326,211 | |||||||||||||||||
| Capital expenditures and acquisitions | $ | 58,660 | 114,804 | 147,372 | 44,452 | 74,988 | 56,673 | |||||||||||||||||
| Financial Ratios | ||||||||||||||||||||||||
| Current ratio | .46 | .48 | .28 | .35 | .34 | .33 | ||||||||||||||||||
| Debt/capitalization ratio | .33 | .40 | .42 | .38 | .42 | .42 | ||||||||||||||||||
| Return on average shareholders’ equity | 11.4 | % | 15.6 | % | 10.1 | % | 6.7 | % | 7.2 | % | 7.9 | % | ||||||||||||
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Results of Operations
| General |
We report our consolidated and individual segment results of operations on a 52- or 53-week fiscal year ending on the last Thursday in December. We divide our fiscal year into three 13-week quarters and a final quarter consisting of 13 or 14 weeks. Our primary operations are reported in two business segments: theatres, and hotels and resorts.
Fiscal 2016 was a 52-week year, beginning on January 1, 2016 and ending on December 29, 2016. Fiscal 2017 was a 52-week year, beginning on December 30, 2016 and ending on December 28, 2017. Fiscal 2018 was a 52-week year, beginning on December 29, 2017 and ending on December 27, 2018. Fiscal 2019 will bewas a 52-week year, which beganbeginning on December 28, 2018 and will endending on December 26, 2019. Fiscal 2020 was a 53-week year, beginning on December 27, 2019 and ending on December 31, 2020.
OurFiscal 2020 results by quarter were significantly impacted by the COVID-19 pandemic, which began late in our first fiscal quarter and impacted our results for the remainder of fiscal 2020. Under normal conditions, our first fiscal quarter typically produces the weakest operating results in our hotels and resorts division due primarily to the effects of reduced travel during the winter months. The quality of film product in any given quarter typically impacts the operating results in our theatre division. Our second and third fiscal quarters generally produce our strongest operating results because these periods coincide with the typical summer seasonality of the movie theatre industry and the summer strength of the lodging business. Due to the fact that the week between Christmas and New Year’s Eve is historically one of the strongest weeks of the year for our theatre division, the specific timing of the last Thursday in December impacts the results of our fiscal first and fourth quarters in that division, particularly when we have a 53-week year.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) generally discusses fiscal 2020 and fiscal 2019 items and year-to-year comparisons between fiscal 2020 and fiscal 2019. Discussions of fiscal 2018 items and year-to-year comparisons between fiscal 2019 and fiscal 2018 that are not included in this MD&A can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2019.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has had an unprecedented impact on the world and both of our business segments. The situation continues to be volatile and the social and economic effects are widespread. As an operator of movie theatres, hotels and resorts, restaurants and bars, each of which consists of spaces where customers and guests gather in close proximity, our businesses are significantly impacted by protective actions that federal, state and local governments have taken to control the spread of the pandemic, and our customers’ reactions or responses to such actions. These actions have included, among other things, declaring national and state emergencies, encouraging social distancing, restricting freedom of movement and congregation, mandating non-essential business closures, issuing curfews, limiting business capacity, mandating mask-wearing and issuing shelter-in-place, quarantine and stay-at-home orders.
As a result of these measures, we temporarily closed all of our theatres on March 17, 2020, and did not generate any significant revenues from our theatre operations during our fiscal 2020 second quarter and the first two months of our fiscal 2020 third quarter (other than revenues from six theatres opened on a very limited basis in June 2020 primarily to test new operating protocols, five parking lot cinemas, and some limited online and curbside sales of popcorn, pizza and other assorted food and beverage items). As of August 28, 2020, we had reopened approximately 80% of our theatres, although seating capacity at our reopened theatres has been temporarily reduced in response to COVID-19 as a way to ensure proper social distancing. In October 2020, we temporarily closed several theatres due to changes in the release schedule for new films, reducing our percentage of theatres open to approximately 66%. In November 2020, new state and local restrictions in several of our markets required us to temporarily reclose several theatres, and as a result, approximately 52% of our theatres were open as of December 31, 2020. Subsequent to year-end, several of these new restrictions were lifted and as of the date of this report, approximately 69% of our theatres are currently open with temporarily reduced seating capacity in response to COVID-19. Temporarily closed theatres are ready to quickly reopen as restrictions are lifted, new films are released and demand returns.
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We also temporarily closed all of our hotel division restaurants and bars at approximately the same time as our theatres and closed five of our eight company-owned hotels and resorts on March 24, 2020 due to a significant reduction in occupancy at those hotels. We closed our remaining three company-owned hotels in early April 2020. We re-opened four of our company-owned hotels and several of our restaurants and bars during June 2020. We reopened three additional company-owned hotels during our fiscal 2020 third quarter and we reopened our remaining company-owned hotel in November 2020. As such, as of December 31, 2020, all eight of our company-owned hotels and all but one of our managed hotels are open. The majority of our restaurants and bars in our hotels and resorts are also now open, operating under applicable state and local restrictions and guidelines. The majority of our hotels and restaurants are generating significantly reduced revenues as compared to prior years.
Maintaining and protecting a strong balance sheet has always been a core philosophy of The Marcus Corporation during our 85-year history. As a result, we believe we entered the global COVID-19 crisis with a strong financial position. At the end of fiscal 2019, our debt-to-capitalization ratio was 0.26. Despite the majority of our theatres being closed during most of the second and third quarters of fiscal 2020, our hotels being closed during most of the second quarter and portions of the third quarter of fiscal 2020, and both of our businesses operating at significantly reduced attendance and occupancy levels during the fourth quarter of fiscal 2020, our financial position remains strong. As of December 31, 2020, our debt-to-capitalization ratio was 0.37, which is equal to or lower than the same ratio we had at seven of our last 10 fiscal year-ends.
Despite our strong financial position, the COVID-19 pandemic has had and is expected to continue to have adverse effects on our business, results of operations, cash flows, financial condition, access to credit markets and ability to service our existing and future indebtedness. In light of the COVID-19 pandemic and in keeping with our core philosophies, we have been working to preserve cash and ensure sufficient liquidity to endure the impacts of the global pandemic, even if prolonged. On April 29, 2020, we entered into the First Amendment to Credit Agreement (the “First Amendment”) which amended our existing credit agreement dated January 9, 2020 (the Credit Agreement, as amended by the First Amendment and the Second Amendment, as defined below, the “Credit Agreement”). The First Amendment provided a new $90.8 million 364-day Senior Term Loan A (the “Term Loan A”) to further support our balance sheet. We used the proceeds from the Term Loan A to repay borrowings under the Credit Agreement, to pay costs and expenses related to the First Amendment, and for general corporate purposes. On July 22, 2020, we repaid $55 million of borrowings under our revolving credit facility. On September 15, 2020, we entered into the Second Amendment to Credit Agreement (the “Second Amendment”) which amended the Credit Agreement and, among other things, extended the maturity date of the Term Loan A to September 22, 2021.
In addition, on September 22, 2020, we received $100.05 million of gross proceeds from the issuance of Convertible Senior Notes due 2025 (the “Convertible Notes”). We used a portion of the proceeds from the Convertible Notes to enter into privately negotiated capped call transactions with certain financial institutions in order to reduce the potential dilution to our common stock upon any conversion of the Convertible Notes. We used the remaining proceeds from the Convertible Notes to repay borrowings under the Credit Agreement, to pay costs and expenses related to the Convertible Notes, and for general corporate purposes. Our net proceeds from this offering were approximately $78.6 million (after deducting estimated fees and expenses related to the offering and the cost of the capped call transactions). This additional financing further enhanced our liquidity, and combined with the expected receipt of income tax refunds, state grants and proceeds from the sale of surplus real estate (discussed below), we believe we are positioned to repay the Term Loan A in September 2021 and continue to sustain our operations throughout fiscal 2021 and into fiscal 2022, even if our properties continue to generate significantly reduced revenues throughout fiscal 2021. As of December 31, 2020, we had a cash balance of approximately $7 million and $220 million of availability under our $225 million revolving credit facility.
Since the COVID-19 pandemic began, we have been working proactively to preserve cash. In addition to temporarily suspending our quarterly dividend payments as required by the Credit Agreement, additional measures we took during all or portions of fiscal 2020 to enhance our liquidity included:
| ● | Discontinuing all non-essential operating and capital expenditures; |
| ● | Temporarily laying off the majority of our hourly theatre and hotel associates, in addition to temporarily reducing property management and corporate office staff levels; |
| ● | Temporarily reducing the salary of our chairman and our president and chief executive officer by 50%, as well as temporarily reducing the salary of all other executives and remaining divisional/corporate staff; |
| ● | Temporarily eliminating all board of directors cash compensation; |
| ● | Actively working with landlords and major suppliers to modify the timing and terms of certain contractual payments; |
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| ● | Evaluating the provisions of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) and utilizing the benefits, relief and resources under those provisions as appropriate; and |
| ● | Evaluating the provisions of a COVID Relief Bill signed by the President on December 27, 2020 and any subsequent federal or state legislation enacted as a response to the COVID-19 pandemic. |
After reviewing certain provisions of the CARES Act, we filed income tax refund claims of $37.4 million in the third quarter of fiscal 2020, with the primary benefit derived from several accounting method changes and new rules for qualified improvement property and net operating loss carrybacks. Early in our fiscal 2020 fourth quarter, we received $31.5 million of the requested tax refunds. We expect to receive the remaining $5.9 million of tax refunds during the first quarter of fiscal 2021. We also expect to apply a significant portion of our tax loss incurred in fiscal 2020 to prior year income, resulting in an anticipated tax refund of approximately $21.0 million in fiscal 2021 when our fiscal 2020 tax return is filed (with additional tax loss carryforwards that may be used in future years).
During the fourth quarter of fiscal 2020, a number of states elected to provide grants to certain businesses most impacted by the COVID-19 pandemic, utilizing funds received by the applicable state under provisions of the CARES Act. As a result, grants from seven states totaling $5.8 million were awarded to a significant number of our theatres and grants from two states totaling $1.2 million were awarded to several of our hotels. The $7.0 million of total grants are reported as an offset to “other operating expenses” on our earnings (loss) statement. As of December 31, 2020, we had received approximately $2.1 million of these grants, and the remaining $4.9 million was received in January 2021. Early in fiscal 2021, we were awarded an additional $1.3 million in theatre grants from another state.
In addition, 11 of our subsidiaries successfully applied for and received a cumulative total of approximately $13.5 million in funds under the CARES Act Paycheck Protection Program (PPP) that allowed our subsidiaries to rehire many of our hotel associates for eight weeks during the second quarter of fiscal 2020, as well as fund certain other qualifying expenses (described in detail in the Hotels and Resorts section of this MD&A). Approximately $10.1 million of these funds were used by our subsidiaries to fund qualifying expenses, the majority of which we would not have incurred otherwise (i.e., the rehiring of laid off hotel associates despite the underlying hotels being temporarily closed). Cumulatively, approximately $9.1 million, or 90% of the qualifying expenses paid with these PPP loan proceeds benefitted associates and did not impact the operating loss of the hotels and resorts division. The remaining approximately $1.0 million of qualified expenses paid were used by our subsidiaries to offset rent expense, utility costs and mortgage interest expense. Approximately $3.4 million of the cumulative PPP loan proceeds were not used on qualifying expenses as of December 31, 2020 and contributed to the increase in net cash provided by financing activities during fiscal 2020 compared to the prior year. We believe the portion of the PPP loan proceeds used by our subsidiaries for qualifying expenses will be forgiven under the current terms of the CARES Act. The receipt of these funds, and the forgiveness of the loans accompanying these funds, is dependent on us having initially qualified for the PPP loan proceeds and qualifying for the forgiveness of the PPP loan proceeds based on our future adherence to the forgiveness criteria established by the Small Business Administration. We believe we met the initial qualification for the loans and we believe we will continue to meet the requirements for forgiveness of qualified expenses.
The Credit Agreement also allows us to consider additional borrowings from governmental authorities under provisions of the CARES Act or any other subsequent governmental actions that we could avail ourselves of if we deemed it necessary and appropriate. Although we have sought and obtained, and intend to continue to seek, any available potential benefits under the CARES Act, including those described above, we cannot predict the manner in which such benefits will be allocated or administered, and we cannot assure that we will be able to access such benefits in a timely manner or at all. We also cannot assure that potential benefits under the CARES Act will not be amended or eliminated under any subsequent governmental actions.
It is also important to note our significant real estate ownership. In addition to our owned hotels, unlike most of our peers, we own the underlying real estate for the majority of our theatres (representing over 60% of our screens), thereby reducing our monthly fixed lease payments. We believe this real estate ownership is a significant advantage for us relative to our peers, as it enables us to quickly react to changing theatre trends without requiring landlord approval for necessary changes, keeps our monthly fixed lease payments low and provides significant underlying credit support for our balance sheet. We also own surplus real estate and other non-core real estate that may be monetized in future periods if opportunities arise. During the fourth quarter of fiscal 2020, we sold two land parcels and a former budget theatre, generating total proceeds of approximately $3.0 million. As of December 31, 2020, we had letters of intent or contracts to sell several pieces of real estate with a carrying value of $4.1 million and we believe we may receive total sales proceeds from real estate sales during the next 12-18 months totaling approximately $10-$40 million, depending upon demand for the real estate in question.
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The COVID-19 pandemic and the fact that all of our theatres and the majority of our hotels were closed as of the end of our fiscal 2020 first quarter, required us to review many of the assets on our balance sheet as of March 26, 2020. As a result, we increased our allowances for bad debts and wrote off a portion of our food inventories in both our theatre and hotels and resorts divisions. We reviewed our indefinite life trade name intangible asset and determined that, as a result of a change in circumstances, the carrying value exceeded fair value, and we reported a pre-tax impairment charge of $2.2 million during the first quarter of fiscal 2020. We reviewed our long-lived assets, including property and equipment and operating lease right-of-use assets, for impairment due to the change in circumstances and determined that an additional pre-tax impairment charge of $6.5 million was required during the first quarter of fiscal 2020 for several theatre properties. We reviewed goodwill at the theatre reporting unit level and determined that the fair value of our theatre reporting unit exceeded our carrying value as of March 26, 2020 and thus was not impaired as of that date. Additionally, we reviewed each of these asset types described above as of September 24, 2020, the end of our third quarter of fiscal 2020, and concluded that no additional impairment charges were required at that time for goodwill and our indefinite life trade name intangible asset. We did, however, conclude that an additional pre-tax impairment charge of $765,000 was required during the third quarter of fiscal 2020 for several theatre properties. During the third quarter of fiscal 2020, we determined that the fair value of our equity method investment in a hotel joint venture was less than its carrying value and recorded an other-than-temporary impairment loss of approximately $811,000. Lastly, we once again reviewed each of these asset types described above as of December 31, 2020, the end of our fiscal 2020, and concluded that an additional impairment charge of $400,000 was required for our indefinite life trade name intangible asset. We also concluded that an additional pre-tax impairment charge of $14.8 million was required during the fourth quarter of fiscal 2020 for several theatre properties, due in part to the fact that several leased theatres have not reopened yet and a planned new theatre project was abandoned. No impairment charges were required at the end of fiscal 2020 for goodwill.
As a result of temporarily closing the majority of our properties, we also incurred approximately $5.5 million of nonrecurring expenses during the first quarter of fiscal 2020 related primarily to salary continuation payments to employees temporarily laid off. We incurred an additional $3.0 million of nonrecurring expenses during the second quarter of fiscal 2020, including additional payments to and on behalf of laid off employees and additional allowances for bad debts (including the write-off of deferred expenses for a hotel tenant who vacated space because of the COVID-19 pandemic). Nonrecurring expenses during the fiscal 2020 second quarter also included extensive cleaning costs, operating supplies and employee training, among other items, related to the reopening of selected theatre and hotel properties and implementing new operating protocols (described in greater detail below). We incurred an additional $1.6 million and $1.4 million of nonrecurring expenses during the third and fourth quarters of fiscal 2020, respectively, primarily related to additional reopening costs of selected theatre and hotel properties, as well as additional payments to and on behalf of laid off employees. In total, we estimate we incurred approximately $11.5 million in nonrecurring expenses related to the above-described items during fiscal 2020.
As part of our reopening experience in our theatres, we have introduced our “Movie STAR” approach, which incorporates new health and safety measures and is in alignment with the Centers for Disease Control and Prevention (“CDC”) guidelines. Everyone can be a Movie STAR and play a role in creating a safe environment with social distancing (S); thorough cleaning (T); app and website ordering of tickets, food and concessions for no-to-low contact interactions (A); and respecting each other by following these new protocols (R). Specific measures we have implemented in conjunction with the reopening of theatres include, but are not limited to:
| ● | Initially reducing each theatre auditorium’s capacity by 50% (or lower depending upon specific local or state restrictions) and implementing a checkerboard seating pattern that will allow guests to reserve seats together with two empty seats between groups to allow for proper social distancing in accordance with CDC guidelines; |
| ● | Staggering showtimes to limit the number of people in common areas of the theatre and allowing extra time between shows for thorough cleanings; |
| ● | Requiring masks to be worn by guests except for when they are eating or drinking in the auditoriums; |
| ● | Conducting associate wellness checks and requiring the use of face masks, as well as gloves as appropriate, during the associate’s shift; |
| ● | Increasing frequency of cleaning (especially high-touch surfaces), providing hand sanitizer throughout the theatre and introducing signage to encourage proper social distancing; |
| ● | Encouraging guests to purchase their tickets online or via the Marcus Theatres app; |
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| ● | Encouraging low-contact food ordering through the Marcus Theatres app and website, with food orders picked up at a designated area within the theatre; and |
| ● | Introducing Marcus Private Cinema, allowing a guest to purchase an entire auditorium for up to 20 of their friends and family for a fixed charge. |
We expect policies and guidelines will continue to evolve with time and will be assessed and updated on an ongoing basis. We opened our initial six theatres with reduced operating days (Fridays, Saturdays, Sundays and Tuesdays) and reduced operating hours. In late August, when we initially reopened the majority of our theatres, we returned to more standard operating hours and days. As the quantity of new film releases subsided in September 2020, we began reducing our operating hours and days and currently have returned to being open only on weekends and Tuesdays (with expanded hours/days during selected holiday time periods). While we were showing and continue to show older “library” film product, admission to those movies is only $5, with no upcharges. As new movies are released, we have returned to standard pricing for those movies. As more new movies are released, we currently expect to return to standard operating days, hours and pricing, although likely with reduced seating capacity initially.
A reduction in capacity does not necessarily translate to an equal reduction in potential revenues. Reduced capacity may potentially impact attendance on $5 Tuesdays and on opening weekends of major new film releases, but other showings may be relatively unaffected given normal attendance counts. Based upon our past experience, we believe that customers impacted on those $5 Tuesdays and opening weekends may adapt to reduced seat availability by shifting their attendance to different days and times of day. In addition, as new films are first released, we anticipate dedicating a larger number of auditoriums to the blockbuster films to increase seating capacity for those movies.
We believe that the exhibition industry has historically fared well during recessions, and we remain optimistic that the industry will rebound and benefit from pent-up social demand as a large percentage of the population is vaccinated, home sheltering subsides and people seek togetherness with a return to normalcy. A return to “normalcy” may span multiple months driven by staggered theatre openings due to government limits, reduced operating hours, lingering social distancing requirements, the timing of the vaccination rollout in each state and a gradual ramp-up of consumer comfort with public gatherings. We are very encouraged by the recent performance of theatres in markets such as China and Japan, where the impact of the COVID-19 pandemic has lessened. As described further below in the Theatres section of this MD&A, a significant number of films originally scheduled to be released through March 2021 have been delayed until later in fiscal 2021 or fiscal 2022, further increasing the quality and quantity of films expected to be available during those future time periods.
There has been some speculation that the COVID-19 pandemic may result in a change in how film studios distribute their product in the future, including accelerating the release of films on alternate distribution channels such as premium video-on-demand (“PVOD”) and streaming services. In several cases, films that were scheduled to be released to theatres have instead been released directly to these alternate channels. In the case of one studio, an agreement was reached with several large exhibitors, including ourselves, that includes a 17-day PVOD window for certain films and a 31-day window for certain more successful films. The agreement with this studio did not change the window for release for “free” viewing on streaming services. In addition, recently one studio announced that it intended to release all of its 2021 films theatrically and on its proprietary streaming service on the same day and date. This studio indicated that its actions were primarily a response to the immediate circumstances of movie theatres being closed or negatively impacted by governmental restrictions worldwide (including important markets such as New York and Los Angeles) and does not necessarily reflect a change in permanent distribution plans. This same studio has subsequently announced plans to distribute several films in 2022 and 2023 exclusively in theatres. The vast majority of films with greater expected box office potential from the remaining studios have been delayed rather than released early and comments from the film community in general have been very supportive of the importance of the theatrical experience. Specific release models are negotiated with distributors and exhibitors individually and we believe any changes to the existing financial model between exhibitors and film studios would likely only become a workable industry-wide model with the support of many exhibitors and distributors after each group evaluates the potential risks and benefits appropriately. The exhibition industry is an $11-$12 billion industry in the U.S. and approximately $40 billion worldwide, and the film studios derive a significant portion of their return on investment in film content from theatrical distribution. We believe distributing films in a movie theatre will continue to be an important component of their business model.
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When we closed our hotels, it was not because of any governmental requirements to close. Our restaurants and bars within our hotels were required to close, but the hotels themselves were considered “essential businesses” under most definitions. We closed our hotels due to a significant drop in demand that made it financially prudent for us to close rather than stay open. As a result, the timing of reopening our hotels and resorts was driven by demand, as individual and business travelers began to travel more freely once again. The future economic environment will have a significant impact on the pace of our return to “normal” hotel operations. After past events such as the terrorist attacks on September 11, 2001 and the 2008 financial crisis, hotel demand softened for a period of time, particularly among business transient and group business travelers as travel budgets tightened in uncertain economic times. Whether the return to more normal demand is relatively rapid, as it was after September 11, 2001, or occurs over the course of one or more years, as it was after the 2008 financial crisis, is unknown at this time.
Late in our fiscal 2020 second quarter, we reopened several of our hotels (including several of our restaurants and bars), beginning with The Pfister® Hotel on June 8, followed by the Grand Geneva® Resort & Spa, the Hilton Madison Monona Terrace and The Skirvin Hilton hotel in subsequent weeks in June. We reopened the Hilton Milwaukee City Center hotel, the AC Hotel Chicago Downtown and The Lincoln Marriott Cornhusker Hotel during our fiscal 2020 third quarter and we reopened Saint Kate® – The Arts Hotel (the “Saint Kate”) during our fiscal 2020 fourth quarter. As expected, the primary initial customer for hotels has come from the “drive-to leisure” market, as air travel remains significantly reduced and the number of transient and group business customers will likely remain limited in the near term. We will continue to monitor market demand and adjust our operating plans as appropriate.
Overall hotel occupancy in the U.S. has slowly increased since the initial onset of the COVID-19 pandemic in March 2020. Most current demand continues to come from the drive-to leisure segment. Most organizations implemented travel bans at the onset of the pandemic and are currently only allowing essential travel, which will likely limit business travel in the near term. Our company-owned hotels experienced a significant decrease in group bookings for fiscal 2020 compared to fiscal 2019. As of the date of this report, our group room revenue bookings for fiscal 2021 - commonly referred to in the hotels and resorts industry as “group pace” - is running significantly behind where we were last year at this time for fiscal 2020, with the largest portion of that decline in Milwaukee because last year’s group bookings included bookings in anticipation of Milwaukee hosting the Democratic National Convention (“DNC”) in July 2020. Banquet and catering revenue pace for fiscal 2021 is also running behind where we were last year at this same time for fiscal 2020, but not as much as group room revenues, due in part to increases in wedding bookings. Many of our cancelled group bookings due to COVID-19 are re-booking for future dates, excluding one-time events that could not rebook for future dates such as those connected to the DNC. However, some group bookings for the first half of fiscal 2021 have subsequently canceled or postponed their event, and we cannot predict to what extent any of our hotel bookings will be canceled or rescheduled due to COVID-19 or otherwise.
Like our theatres, in response to the COVID-19 pandemic, we reopened our hotels with new operating protocols. This includes the introduction of our CleanCare Pledge that incorporates the best industry practices and protocols for operating our hotels, resorts, spas, golf courses and restaurants with an enhanced focus on cleanliness, sanitization and safety. Key elements and examples of the CleanCare Pledge include:
| ● | Introducing new processes and easy-to-use technology to create a low-to-no contact experience; |
| ● | Incorporating social distancing into processes and various spaces; |
| ● | Outfitting associates with masks and gloves, and making masks available for guests; and |
| ● | Enhanced cleaning and sanitization protocols that go beyond leading hospitality industry standards and CDC guidelines. |
We cannot assure that the impact of the COVID-19 pandemic will not continue to have a material adverse effect on both our theatre and hotels and resorts businesses, results of operations, cash flows, financial condition, access to credit markets and ability to service our existing and future indebtedness.
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Implementation of New Accounting Standards
During fiscal 2018,2019, we adopted Accounting Standards Update (ASU)(“ASU”) No. 2014-09,2016-02, Revenue from Contracts with CustomersLeases (Topic 842) (ASU, intended to improve financial reporting related to leasing transactions. ASU No. 2014-09), a comprehensive new revenue recognition model that2016-02 requires a companylessee to recognize revenuea right-of-use (“ROU”) asset and a lease liability for most leases. The new guidance requires disclosures to depicthelp investors and other financial statement users better understand the transferamount, timing and uncertainty of goodscash flows arising from the leases. Leases are now classified as finance or servicesoperating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of net earnings (loss). ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, amended ASU No. 2016-02 and allows entities the option to customersinitially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in an amount that reflects the consideration to whichperiod of adoption. We adopted the company expects to be entitled in exchange for those goods or services. We selectednew accounting standard as of the first day of fiscal 2019 using the modified retrospective method for adoption of ASU No. 2014-09 and its related ASU amendments. Under this method, we recognizedapproach, which resulted in the cumulative effect of the changes in retained earningsadoption recognized at the date of application, rather than as of the earliest period presented. As a result, no adjustment was made to prior period financial information and disclosures.
In conjunction with the adoption of the new standard, companies were able to elect several practical expedients to aid in the transition to Topic 842. We elected the package of practical expedients which permits us to forego reassessment of our prior conclusions related to lease identification, lease classification and didinitial direct costs. Topic 842 also provides practical expedients for an entity’s ongoing accounting. We elected the practical expedient to not restate prior periods.separate lease and non-lease components for all of our leases. We also made a policy election not to apply the lease recognition requirements for short-term leases. As a result, we do not recognize ROU assets or lease liabilities for short-term leases that qualify for the policy election (those with an initial term of 12 months or less which do not include a purchase or renewal option which is reasonably certain to be exercised), but instead recognize these lease payments as lease costs on a straight-line basis over the lease term.
Adoption of this new standard resulted in a material impact related to the recognition of ROU assets and lease liabilities on the consolidated balance sheet for assets currently subject to operating leases. We recognized lease liabilities representing the present value of the remaining future minimum lease payments for all of our operating leases as of December 28, 2018 of $81.5 million. We recognized ROU assets for all assets subject to operating leases in an amount equal to the operating lease liabilities, adjusted for the balances of long-term prepaid rent, favorable lease intangible assets, deferred lease expense, unfavorable lease liabilities and deferred lease incentive liabilities as of December 28, 2018.
The adoption of the new standard primarily impacted our accounting for our loyalty programs and internet ticket fee revenue. Adopting this new standard during fiscal 2018 has had the following impactdid not have a material effect on our financial statements:
We recorded a one-time cumulative effect reduction to retained earnings, net of income taxes, of approximately $2.6 million during fiscal 2018 related to the adoption of ASU No. 2014-09.
In addition, we adopted ASU No. 2017-07,Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Benefit Cost, during the first quarter of fiscal 2018. This ASU requires the service cost component of net periodic benefit cost to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period. We now present other components of the net periodic benefit cost separately in other expense outside of operating income, and we have restated our prior year results to conform to the new presentation. As a result of the adoption of ASU No. 2017-07, we excluded $2.0 million, $1.7 million and $1.5 million, respectively, of other expenses from operating income during fiscal 2018, fiscal 2017 and fiscal 2016.
Finally, beginning in the fiscal 2018 first quarter, we began appropriately presenting cost reimbursements and reimbursed costs on a gross basis and presented two new line items to the consolidated statements of earnings. We previously reported these cost reimbursements and reimbursed costs on a net basis. Reimbursed costs primarily consist of payroll and related expenses at managed properties where we are the employer and may include certain operational and administrative costs as provided for in our contracts with owners. As these costs have no added markup, the revenue and related expense have no impact on operating income or net earnings. The vast majority of our cost reimbursements relate to our hotels and resorts division due to the larger number of management contracts in that division. Cost reimbursements and reimbursed costs, which totaled $30.8 million for fiscal 2017 and $30.5 million for fiscal 2016, have been separately presented in the prior year statements of earnings to correct the prior year presentation. We believe this correction is immaterial to our consolidated financial statements.
(loss).
Consolidated Financial Comparisons
The following table sets forth revenues, operating income (loss), other income (expense), net earnings (loss) and net earnings (loss) per common share for the past three fiscal years (in millions, except for per share and percentage change data):
| Change F18 v. F17 | Change F17 v. F16 | |||||||||||||||||||||||||||
| F2018 | F2017 | Amt. | Pct. | F2016 | Amt. | Pct. | ||||||||||||||||||||||
| Revenues | $ | 707.1 | $ | 653.6 | $ | 53.5 | 8.2 | % | $ | 574.3 | $ | 79.3 | 13.8 | % | ||||||||||||||
| Operating income | 83.2 | 77.3 | 5.9 | 7.6 | % | 71.5 | 5.8 | 8.2 | % | |||||||||||||||||||
| Other income (expense) | (16.6 | ) | (9.2 | ) | (7.4 | ) | -80.5 | % | (10.9 | ) | 1.7 | 15.9 | % | |||||||||||||||
| Net earnings (loss) attributable to noncontrolling interests | 0.1 | (0.5 | ) | 0.6 | 114.5 | % | (0.4 | ) | (0.1 | ) | -40.8 | % | ||||||||||||||||
| Net earnings attributable to The Marcus Corporation | $ | 53.4 | $ | 65.0 | $ | (11.6 | ) | -17.9 | % | $ | 37.9 | $ | 27.1 | 71.5 | % | |||||||||||||
| Net earnings per common share - diluted | $ | 1.86 | $ | 2.29 | $ | (0.43 | ) | -18.8 | % | $ | 1.36 | $ | 0.93 | 68.4 | % | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Change F20 v. F19 | | | | | Change F19 v. F18 |
| ||||||
|
| F2020 |
| F2019 |
| Amt. |
| Pct. |
| F2018 |
| Amt. |
| Pct. |
| |||||
Revenues | | $ | 237.7 | | $ | 820.9 | | $ | (583.2) |
| (71.0) | % | $ | 707.1 | | $ | 113.8 |
| 16.1 | % |
Operating income (loss) | |
| (178.4) | |
| 68.2 | |
| (246.6) |
| (361.7) | % |
| 83.2 | |
| (15.0) |
| (18.0) | % |
Other income (expense) | |
| (17.4) | |
| (13.8) | |
| (3.6) |
| (26.3) | % |
| (16.6) | |
| 2.8 |
| 17.1 | % |
Net earnings attributable to noncontrolling interests | |
| — | |
| 0.1 | |
| (0.1) |
| (123.5) | % |
| 0.1 | |
| — |
| — | % |
Net earnings (loss) attributable to The Marcus Corporation | | $ | (124.8) | | $ | 42.0 | | $ | (166.8) |
| (397.1) | % | $ | 53.4 | | $ | (11.4) |
| (21.3) | % |
Net earnings (loss) per common share - diluted | | $ | (4.13) | | $ | 1.35 | | $ | (5.48) |
| (405.9) | % | $ | 1.86 | | $ | (0.51) |
| (27.4) | % |
Fiscal 20182020 versus Fiscal 20172019
Our revenues increasedRevenues, operating income (loss), net earnings (loss) attributable to The Marcus Corporation and net earnings (loss) per common share all decreased during fiscal 20182020 compared to fiscal 20172019 due to increased revenues from boththe temporary closing of all of our theatre divisiontheatres and hotels and resorts division. Oursubsequent significant reduction of revenues upon reopening a majority of our theatres and hotels as a result of the COVID-19 pandemic as described above. Both of our operating income (earnings before other income/expense and income taxes) increaseddivisions were negatively impacted by nonrecurring expenses during fiscal 20182020 and fiscal 2019. Net earnings (loss) attributable to The Marcus Corporation during fiscal 2020 was negatively impacted by increased interest expense compared to fiscal 2017 due to improved operating results2019 and benefited from our theatre division, partially offset by a decrease in operating income from our hotels and resorts division. Net earningssubstantial tax benefit provided for fiscal 2018 decreased compared to fiscal 2017 due to an increase in income tax expense and interest expense and a loss on disposition of property, equipment and other assets, partially offset by the increaseCARES Act.
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Our operating performance during fiscal 2020 was negatively impacted by nonrecurring expenses totaling approximately $11.5 million, or approximately $0.27 per diluted common share, including payments to and on behalf of laid off employees. Nonrecurring expenses during fiscal 2020 also included extensive cleaning costs, supply purchases and employee training, among other items, related to the reopening of selected theatre and hotel properties and implementing new operating protocols (described in greater detail above). In addition, impairment charges related to intangible assets and several theatre locations negatively impacted our fiscal 2020 operating income.
Operating results fromloss by approximately $24.7 million, or approximately $0.59 per diluted common share. Conversely, our theatre division wereoperating performance during fiscal 2020 was favorably impacted by increased attendance fromnonrecurring state governmental grants totaling approximately $7.0 million, or approximately $0.17 per diluted common share, and net insurance proceeds of approximately $1.8 million, or approximately $0.04 per diluted common share, related to COVID-19 pandemic related insurance claims. Our additional 53rd week of operations contributed approximately $5.1 million in revenues and did not have a stronger slate of movies during the fiscal 2018 second, third and fourth quarters compared to the second, third and fourth quarters of fiscal 2017, partially offset by reduced attendance from a weaker slate of movies during the fiscal 2018 first quarter compared to the first quarter of fiscal 2017. Increased attendance resulting from positive customer response tomaterial impact on our recent investments and pricing strategies, increased concession sales per person due to our expanded food and beverage offerings and an increased average ticket price also contributed to our improved operating resultsloss or net loss during fiscal 2018 compared to fiscal 2017. Two new theatres that2020.
On February 1, 2019, we opened during fiscal 2017 also favorably impacted revenues and operating income from our theatre division during fiscal 2018 compared to fiscal 2017.
In November 2018, our theatre division entered into an agreement to acquire a theatre circuit (which we refer to asacquired the assets of Movie Tavern®, a New Orleans-based industry leading circuit known for its in-theatre dining concept (the “Movie Tavern Acquisition”) consisting. Now branded Movie Tavern by Marcus, the acquired circuit consisted of 22 dine-in theatres with 208 screens locatedat 22 locations in nine states. A detailed descriptionstates – Arkansas, Colorado, Georgia, Kentucky, Louisiana, New York, Pennsylvania, Texas and Virginia. The purchase price consisted of this$30 million in cash, subject to certain adjustments, and 2,450,000 shares of our common stock for a total purchase price of approximately $139 million, based upon our closing share price on January 31, 2019. Excluding acquisition is included below inand preopening expenses, the “Current Plans” section of this MD&A. Increased acquisition did not have a material impact on operating income during fiscal 2019. Acquisition and preopening expenses related to the Movie Tavern acquisition duringAcquisition and the fiscal 2018 fourth quarteropening of a newly built Movie Tavern theatre in Brookfield, Wisconsin negatively impacted our operating income during fiscal 2018 compared2019 by approximately $2.5 million, or $0.06 per diluted common share. An impairment charge related to a specific theatre location negatively impacted our fiscal 20172019 operating income by approximately $1.9 million, or $0.04 per diluted common share.
We closed the InterContinental Milwaukee hotel in early January 2019 and additional acquisition and preopening expenses will negatively impactbegan a substantial renovation project that converted this hotel into an experiential arts hotel named Saint Kate – The Arts Hotel. The newly renovated hotel reopened during the first quarterweek of fiscalJune 2019
(although a portion of the rooms and food and beverage outlets didn’t fully open until later in the month). Revenues from our hotels and resorts division were favorably impacted during fiscal 2018 by increased room revenues, food and beverage revenues and other revenues, including management fees, compared to fiscal 2017. Comparisons of our operating income during fiscal 2018 to our operating income during fiscal 2017 from our hotels and resorts division2019 were favorablyunfavorably impacted by the increased revenues, strong cost controlsclosing of the hotel for nearly six months for renovation and the factnegative impact of comparing a newly-opened independent hotel (i.e., the Saint Kate) to a stabilized branded hotel (i.e., the InterContinental Milwaukee) in the prior year. Division revenues during fiscal 2019 were also negatively impacted by a major renovation that occurred at our Hilton Madison hotel during the first half of fiscal 2017 results included preopening expenses and start-up2019. Our operating losses from ourSafeHouse® restaurant and bar that we opened in downtown Chicago, Illinois, adjacent to our AC Chicago Downtown Hotel. Operating income from our hotels and resorts division during fiscal 20182019 was unfavorablynegatively impacted by preopening expenses and accelerated depreciationinitial start-up losses related to our plannedthe Saint Kate hotel closure and conversion. These costs totaled approximately $6.8 million, or $0.16 per diluted common share, during fiscal 2019 conversion of the former InterContinental Milwaukee hotel into Saint Kate-The Arts Hotel. This conversion is described in more detail below in the Current Plans section of this MD&A.
2019.
Operating losses from our corporate items, which include amounts not allocable to the business segments, increaseddecreased during fiscal 20182020 compared to fiscal 20172019 due in part to increased legal expensereduced bonus and increased pensiondonation expenses as a result of operating losses during fiscal 2020. Operating losses from corporate items also decreased during fiscal 2020 due to measures taken to increase liquidity, including reductions in corporate staff, reductions in the salaries of executives and 401(k) expenses. Increased long-term incentive compensation expenses resulting from our improved financial performancecorporate staff and stock performance during the past several years also contributed to increased operatingsuspension of board cash compensation. Operating losses from our corporate items were also favorably impacted during fiscal 2018, as did an increase in our accrual for contributions to our charitable foundation during fiscal 2018.
2020 by the net insurance proceeds of $1.8 million described above.
We recognized investment income of $208,000$564,000 during fiscal 20182020 compared to investment income of $588,000$1.4 million during fiscal 2017.2019. Investment income includes interest earned on cash and cash equivalents, as well as increases/decreases in the value of marketable securities and increases in the cash surrender value of a life insurance policy. InvestmentA significant market decline arising from the COVID-19 pandemic during the first quarter of fiscal 2020 was offset by a market recovery later in fiscal 2020, but investment income decreasedwas larger during fiscal 20182019 due to decreasesmore significant increases in the value of marketable securities. We currently do not expect investmentsecurities and due to the fact that we had more marketable securities in fiscal 2019 compared to fiscal 2020. Investment income during fiscal 2019 to2021 may vary significantly compared to fiscal 2018.2020, primarily dependent upon changes in the value of marketable securities.
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Interest expense totaled $13.1$16.3 million during fiscal 2018,2020, an increase of $1.0$4.5 million, or 8.1%38.0%, compared to interest expense of $12.1$11.8 million during fiscal 2017.2019. The increase in interest expense during fiscal 20182020 was due primarilyin part to a higherincreased borrowings and an increase in our average interest rate, as discussed in the Liquidity section of this MD&A below. In addition, interest expense increased during fiscal 2018 as a result of increases in short-term interest rates on our variable-rate debt. In addition, on March 1, 2018,2020 due to the fact that we entered into two interest rate swap agreements, effectively converting $50.0incurred approximately $2.2 million in variable-rate borrowingsnoncash amortization of debt issuance costs and discount on convertible notes, compared to a fixed rate. Conversely, we experienced a decrease in our total borrowings under long-term debt agreementsapproximately $300,000 of such costs during fiscal 2018 compared to2019. ��During fiscal 2017, partially offsetting2021, we estimate that noncash amortization of debt issuance costs will be approximately $2.0 million, excluding the impact of any new debt issuance costs. On January 1, 2021, we elected to early adopt ASU No. 2020-06 (described in the higher average interest rate“Accounting Changes” section below), which will result in the elimination of noncash discount on convertible notes during fiscal 2021. We expect our interest expense to increase during fiscal 2018.
Despite2021, however, due to increased borrowings and an expected increase in our capital expenditures during fiscal 2019, including the cash component of the Movie Tavern acquisition price, expected increases in our cash flows from operations may result in our average borrowings during fiscal 2019 being similar or even less than they were during fiscal 2018. As a result, we currently do not expect a material change in interest expense during fiscal 2019, and it is possible that our overall interest expense may decline slightly compared to fiscal 2018. Conversely, anticipated increases in our short-term interest rates may negatively impact interest expense in fiscal 2019, partially offsetting potentially reduced borrowings during the year.rate. Changes in our borrowing levels due to variations in our operating results, capital expenditures, share repurchasesacquisition opportunities (or the lack thereof) and asset sale proceeds, among other items, may impact, either favorably or unfavorably, our actual reported interest expense in future periods, as may changes in short-term interest rates.
We incurred other expense of $2.0$1.0 million during fiscal 2018, an increase2020, a decrease of approximately $300,000,$900,000, or 15.9%48.7%, compared to other expense of $1.7$1.9 million during fiscal 2017.2019. Other expense consists primarily of the non-service cost components of our periodic pension costs, as described abovecosts. During fiscal 2020, other expense was partially offset by other income of approximately $1.4 million related to the receipt of Movie Tavern Acquisition escrow funds returned to us in conjunction with a negotiated early release of remaining escrow funds to the “Implementation of New Accounting Standards” section of this MD&A. We currently do notseller. Based upon information from an actuarial report for our pension plans, we expect other expense to be approximately $2.5 million during fiscal 2019 to vary significantly compared to fiscal 2018.
2021.
We reported net gains on disposition of property, equipment and other assets of approximately $900,000 during fiscal 2020, compared to net losses on disposition of property, equipment and other assets of $1.3$1.1 million during fiscal 2018, compared to a2019. The net gaingains on disposition of property, equipment and other assets of $4.0 million during fiscal 2017.2020 were due primarily to the sale of two surplus land parcels and one theatre, partially offset by losses on items disposed of during the year by both divisions. The net losses during fiscal 20182019 were due primarily to losses related to old theatre seats and other items disposed of in conjunction with theatre renovations during fiscal 2018. The net gain during fiscal 2017 included a $4.9 million gain on the sale of our 11% minority interest in The Westin® Atlanta Perimeter North, a $600,000 gain from the sale of our interest in Movietickets.com (which was purchased by a competing ticketing service, Fandango), as well as additional gains from the sale of two theatres (one that had previously closed and one that had been operating prior to its sale) and our sale of our 15% minority interest in the Sheraton Madison Hotel. Our net gain in fiscal 2017 was partially offset by losses from our disposal of old theatre seats and other items in conjunction with our significant number of theatre renovations during fiscal 2017, as well as our write off of disposed equipment at one of our hotels during the first quarter of fiscal 2017.renovations. The timing of our periodic sales and disposals of property, equipment and other assets results in variations each year in the gains or losses that we report on dispositions of property, equipment and other assets. We anticipate the potential for additional disposition losses resulting from theatre renovations, as well as disposition gains or losses from periodic sales of property, equipment and other assets, during fiscal 20192021 and beyond. Asbeyond, as discussed in more detail in the “Current Plans” section of this MD&A, we may report gains in future years from the potential sale of existing hotel assets.
&A.
We reported a net equity losslosses from an unconsolidated joint venture of $399,000approximately $1.5 million and $274,000, respectively, during fiscal 2018 compared to net2020 and fiscal 2019. The equity earnings from unconsolidated joint ventures of $46,000losses during both fiscal 2017. The net equity loss during fiscal 2018years consisted of our pro-rata share of losses from the Omaha Marriott Downtown at The Capitol District hotel in Omaha, Nebraska (the “Omaha Marriott”) – a hotel we manage and in which we havehad a 10% minority ownership interest. The loss increased during fiscal 2020 due to increased losses from the hotel and an other-than-temporary impairment loss of approximately $811,000 in which we determined that the fair value of our equity method investment in the hotel joint venture was less than its carrying value. The Omaha hotel isMarriott has actually performingperformed well historically from an operational perspective, but is experiencinghas experienced overall losses due to depreciation and interest expense. Net earnings duringexpense, further exasperated by the COVID-19 pandemic. Early in fiscal 2017 included our pro-rata share from three hotel joint ventures in which we had minority ownership interests during portions of fiscal 2017, including the Omaha hotel. During fiscal 2017, we ceased management2021, pursuant to a recapitalization of the Sheraton Madison Hotelhotel, we surrendered our ownership interest in Madison, Wisconsin and The Westin Atlanta Perimeter North and sold our respective 15% and 11% minority ownership interests in these properties.this property. We will continue to manage the hotel. We currently do not expect significant variations in netany equity earnings or losses from unconsolidated joint ventures during fiscal 2019 compared to fiscal 2018,2021, unless we significantly increase the number of joint ventures in which we participate during fiscal 2019.
2021.
The operating results of one majority-owned hotel, The Skirvin Hilton, are included in the hotels and resorts division revenue and operating income (loss) during fiscal 20182020 and fiscal 2017,2019, and the after-tax net earnings or loss attributable to noncontrolling interests is deducted from or added to net earnings on the consolidated statements of earnings. The operating results of The Lincoln Marriott Cornhusker Hotel were also included in the hotels and resorts division revenue and operating income during fiscal 2018 and fiscal 2017, but, because this hotel was not wholly-owned during the first three quarters of fiscal 2017, the after-tax net earnings or loss attributable to noncontrolling interests for this property was deducted from or added to net earnings(loss) on the consolidated statements of earnings (loss). As a result of the noncontrolling interest balance reaching zero during the first three quarters of fiscal 2017. During the fourthsecond quarter of fiscal 2017,2020, we purchased the noncontrolling interest of The Lincoln Marriott Cornhusker Hotel from its former minority owner for $410,000. We reported net earnings attributabledo not expect to noncontrolling interests of $74,000 during fiscal 2018 compared toreport additional net losses attributable to noncontrolling interests of $511,000in future periods until the hotel returns to profitability.
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We reported an income tax benefit during fiscal 2017.
We reported income tax expense during fiscal 20182020 of $13.1$70.9 million, an increase of approximately $9.5 million, or 262.1%, compared to income tax expense of $3.6$12.3 million during fiscal 2017.2019. The large income tax benefit during fiscal 2020 was primarily the result of the significant losses before income taxes incurred as a result of the closing of the majority of our properties in March 2020 and the subsequent reduction in our operating performance due to the COVID-19 pandemic. Our fiscal 20172020 income tax expensebenefit was also favorably impacted by the reversalan adjustment of deferred income taxes of $21.2approximately $20.1 million, due to the reduction in the federal tax rate from 35% to 21%or approximately $0.65 per share, resulting from several accounting method changes, the March 27, 2020 signing of the Tax CutsCARES Act and Jobsa provision of a COVID Relief stimulus bill passed in December 2020 that allows us to deduct the $10.1 million of qualified expenses paid for by PPP loans discussed above. One of the provisions of the CARES Act allows our 2019 and 2020 taxable losses to be carried back to prior fiscal years during which the federal income tax rate was 35% compared to the current statutory federal income tax rate of 2017. We estimate that this one-time adjustment to deferred taxes favorably impacted our net earnings per share during fiscal 2017 by approximately $0.75 per share.21%. Our fiscal 2018 income tax expense was favorably impacted by excess tax benefits on share-based compensation, as well as an additional reduction in deferred tax liabilities of approximately $1.9 million related to tax accounting method changes we made subsequent to the signing of the Tax Cut and Jobs Act of 2017. Excluding the favorable adjustment to income tax expense in each year for the reduction in deferred tax liabilities, our2020 effective income tax rate, after adjusting for earnings/lossesearnings (losses) from noncontrolling interests that are not tax-effected because the entitiesentity involved areis a tax pass-through entities,entity, was 22.7%36.2% and benefitted from the adjustments described above. Excluding these favorable adjustments to income tax benefit, our effective income tax rate during fiscal 2018 and 36.2% during2020 was 26.0%. Our fiscal 2017.2019 effective income tax rate was 22.7%. We currently anticipate that our fiscal 20192021 effective income tax rate will return tomay be in the 24-26% range, depending upon the amount of excess tax benefits on share-based compensation that we recognize and excluding any potential further changes in federal or state income tax rates or other one-time tax benefits.
Weighted-average shares outstanding were 28.731.0 million during fiscal 20182020 and 28.431.2 million during fiscal 2017.2019. All per share data in this MD&A is presented on a fully diluted basis.basis, however for periods when we report a net loss, common stock equivalents are excluded from the computation of diluted loss per share as their inclusion would have an anti-dilutive effect.
Current Plans
Fiscal 2017 versus Fiscal 2016
Our revenues increased during fiscal 2017 compared to fiscal 2016 due to increased revenues from both our theatre division and hotels and resorts division. Our operating income increased during fiscal 2017 compared to fiscal 2016 due to improved operating results from our theatre division, partially offset by a decrease in operating income from our hotels and resorts division. Net earnings for fiscal 2017 increased compared to fiscal 2016 dueDue to the increase in operating income, an increased gain on disposition of property, equipment and other assets and a decrease in income tax expense, partially offset by an increase in interest expense.
New theatres favorably impacted revenues and operating income from our theatre division during fiscal 2017 compared to fiscal 2016. In October 2016, we opened a newly renovated theatre in Country Club Hills, Illinois. In mid-December 2016, our theatre division acquired Wehrenberg Theatres® (which we refer to as Wehrenberg or Marcus Wehrenberg), a Midwestern theatre circuit consisting of 14 theatres with 197 screens, plus an 84,000 square foot retail center. In April 2017, we opened a new theatre in Shakopee, Minnesota. In June 2017, we opened our first stand-alone all in-theatre dining location, branded BistroPlex® and located in Greendale, Wisconsin.
Operating results from our theatre division were unfavorably impacted by a weaker slate of movies during the fiscal 2017 second and third quarters compared to the second and third quarters of fiscal 2016, partially offset by a stronger slate of movies during the fiscal 2017 first and fourth quarters compared to the first and fourth quarters of fiscal 2016. Increased attendance resulting from positive customer response to our recent investments and pricing strategies and increased concession sales per person due to our expanded food and beverage offerings partially offset the negative impact of the weaker slate of movies during fiscal 2017 and contributed toCOVID-19 pandemic, our improved operating results during fiscal 2017 compared to fiscal 2016. Increased preopening expenses related to new theatres during the fiscal 2017 periods negatively impacted comparisons to the fiscal 2016 periods, as did the fact that our fiscal 2016 operating results included a significant one-time incentive payment from our pre-show advertising provider. Conversely, fiscal 2016 operating income was negatively impacted by one-time transaction costs related to the Wehrenberg acquisition.
Revenues from our hotels and resorts division were favorably impacted during fiscal 2017 by our newSafeHouse® restaurant and bar that we opened in March 2017 in downtown Chicago, Illinois adjacent to our AC Chicago Downtown Hotel. Increased room revenues during fiscal 2017, due in part to new villas that we opened during the second quarter of fiscal 2017 at the Grand Geneva® Resort & Spa, and increased revenue per available room for comparable hotels during fiscal 2017 compared to fiscal 2016, also contributed to the increased total revenues during fiscal 2017. Operating income from our hotels and resorts division was unfavorably impacted by preopening expenses and start-up operating losses from our newSafeHouse restaurant and bar during fiscal 2017, as well as a small decrease in our management company profits.
Operating losses from our corporate items increased during fiscal 2017 compared to fiscal 2016 primarily due in part to one-time costs associated with the retirement of two directors from our board of directors during the second quarter of fiscal 2017 and the death of a director during the third quarter of fiscal 2017. Increased long-term incentive compensation expenses resulting from our improved financial performance and stock performance during the past several years also contributed to increased operating losses from our corporate items during fiscal 2017, as did an increase in our contribution to our charitable foundation during fiscal 2017.
We recognized investment income of $588,000 during fiscal 2017 compared to investment income of $298,000 during fiscal 2016.
Interest expense totaled $12.1 million during fiscal 2017, an increase of $2.9 million, or 31.9%, compared to interest expense of $9.2 million during fiscal 2016. The increase in interest expense during fiscal 2017 was due primarily to payments we made on the approximately $24.5 million of capital lease obligations we assumed in the Wehrenberg acquisition. We also experienced an increase in our total borrowings under long-term debt agreements during fiscal 2017 compared to fiscal 2016, further contributing to our increased interest expense during fiscal 2017, partially offset by a lower average interest rate during fiscal 2017, as we had a greater percentage of lower-cost variable rate debt in our debt portfolio during fiscal 2017 compared to fiscal 2016.
We incurred other expense of $1.7 million during fiscal 2017, an increase of approximately $200,000, or 12.7%, compared to other expense of $1.5 million during fiscal 2016. Other expense consists of the non-service cost components of our periodic pension costs, as described above in the “Implementation of New Accounting Standards” section of this MD&A.
We reported a net gain on disposition of property, equipment and other assets of $4.0 million during fiscal 2017, compared to net losses on disposition of property, equipment and other assets of $844,000 during fiscal 2016. The net gain during fiscal 2017 included a $4.9 million gain on the sale of our 11% minority interest in The Westin® Atlanta Perimeter North, a $600,000 gain from the sale of our interest in Movietickets.com (which was purchased by a competing ticketing service, Fandango), as well as additional gains from the sale of two theatres (one that had previously closed and one that had been operating prior to its sale) and our sale of our 15% minority interest in the Sheraton Madison Hotel. Our net gain in fiscal 2017 was partially offset by losses from our disposal of old theatre seats and other items in conjunction with our significant number of theatre renovations during the fiscal 2017, as well as our write off of disposed equipment at one of our hotels during the first quarter of fiscal 2017. The majority of the losses during fiscal 2016 were related to old theatre seats and other items disposed of in conjunction with our significant number of theatre renovations during the year, partially offset by a gain on the sale of an unused parcel of land during fiscal 2016.
We reported net equity earnings from unconsolidated joint ventures of $46,000 and $301,000, respectively, during fiscal 2017 and fiscal 2016. Net earnings during the reported periods included our pro-rata share from four hotel joint ventures in which we had minority ownership interests during portions of fiscal 2017 and 2016. During fiscal 2017, we ceased management of the Sheraton Madison Hotel in Madison, Wisconsin and The Westin Atlanta Perimeter North and sold our respective 15% and 11% minority ownership interests in these properties. During fiscal 2016, we ceased management of The Hotel Zamora and Castile Restaurant in St. Pete Beach, Florida and sold virtually all of our 10% minority ownership interest in the property. We have agreed to sell our remaining 0.49% interest during the next several years. Conversely, the new Omaha Marriott Downtown at The Capitol District hotel in Omaha, Nebraska opened in August 2017 – a hotel we manage and in which we have a 10% minority ownership interest.
We include the operating results of two majority-owned hotels, The Skirvin Hilton and The Lincoln Marriott Cornhusker Hotel, in the hotels and resorts division revenue and operating income, and we add or deduct the after-tax net earnings or loss attributable to noncontrolling interests to or from net earnings on the consolidated statements of earnings. We reported net losses attributable to noncontrolling interests of $511,000 and $363,000, respectively, during fiscal 2017 and fiscal 2016. During the fourth quarter of fiscal 2017, we purchased the noncontrolling interest of The Lincoln Marriott Cornhusker Hotel from our former partner for $410,000.
We reported income tax expense during fiscal 2017 of $3.6 million, a decrease of approximately $19.4 million, or 84.2%, compared to income tax expense of $23.0 million during fiscal 2016. Our fiscal 2017 income tax expense was favorably impacted by the reversal of deferred income taxes of $21.2 million due to the reduction in the federal tax rate from 35% to 21% resulting from the signing of the Tax Cuts and Jobs Act of 2017. We estimate that this one-time adjustment to deferred taxes favorably impacted our net earnings per share during fiscal 2017 by approximately $0.75 per share. Excluding the one-time favorable adjustment to income tax expense, our effective income tax rate, after adjusting for losses from noncontrolling interests that are not tax-effected because the entities involved are tax pass-through entities, was 36.2% during fiscal 2017 and 37.8% during fiscal 2016.
Weighted-average shares outstanding were 28.4 million during fiscal 2017 and 28.0 million during fiscal 2016.
Current Plans
Our aggregate cash capital expenditures, acquisitions and purchases of interests in, and contributions to, joint ventures were only approximately $59$21 million during fiscal 20182020, compared to $115$94 million during fiscal 2017 and $147 million during fiscal 2016. We currently anticipate that our fiscal 2019 cash capital expenditures will be in the $105-$125 million range, including(including approximately $30 million in cash consideration paid in conjunction with the Movie Tavern acquisition described belowbelow) and excluding any presently unidentified acquisitions$59 million during fiscal 2018. We anticipate that may arisewe will continue to limit our capital expenditures during fiscal 2021, and as a result, we currently estimate that our fiscal 2021 cash capital expenditures will be in the year.$15-$25 million range. We will, however, continue to monitor our operating results and economic and industry conditions so that we may adjust our plans accordingly.
Our current strategic plans include the following goals and strategies:
Theatres
| ● | Our |
| ● | In addition to building new theatres, |
In December 2016, we acquired the assets of Wehrenberg, a family-owned and operated theatre circuit based in St. Louis, Missouri with 197 screens at 14 locations in Missouri, Iowa, Illinois and Minnesota. At the time, this acquisition increased our total number of screens by 29%. Now branded Marcus Wehrenberg, we have subsequently introduced many of our signature amenities and proprietary marketing and pricing programs at these theatres, resulting in a very favorable response from our customers.
On November 1, 2018, we entered into an asset purchase agreement to acquire the assets of Movie Tavern, a New Orleans-based industry leading circuit known for its in-theatre dining concept featuring chef-driven menus, premium quality food and drink and luxury seating. Movie Tavern consists of 208 screens at 22 locations in nine states – Arkansas, Colorado, Georgia, Kentucky, Louisiana, New York, Pennsylvania, Texas and Virginia. We closed on the acquisition on February 1, 2019, increasing our total number of screens by an additional 23%. Including the recently-acquired Movie Tavern theatres and a newUltraScreen opened in February 2019, we now own or operate 1,098 screens at 90 theatres in 17 states. Now branded Movie Tavern by Marcus, we expect to introducehave subsequently introduced new amenities to select Movie Tavern theatres, in the future, including our proprietary premium large format (PLF) screens and DreamLounger recliner seating, signature programming, such as $5 movies on Tuesdays with a free complimentary-size popcorn for loyalty members, and proven marketing, loyalty and pricing programs that will continue to benefit Movie Tavern guests in the future.
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We believe selective, disciplinedThe COVID-19 pandemic has been challenging for all theatre operators. A number of theatre operators have filed for bankruptcy relief and many others are facing difficult financial circumstances. Although we will prioritize our own finances, we will continue to consider potential acquisitions such as Wehrenberg and Movie Tavern create a compelling opportunitywell as consider management agreements which may possibly lead to expand into new growth markets and leverage our proven success. We expect the Movie Tavern acquisition will be accretiveopportunities to earnings, earnings per share and cash flow in the first 12 months following the acquisition date, and we expect a smooth integration of Movie Tavern into our existing circuit.
own. The movie theatre industry is very fragmented, with approximately 50% of United States screens owned by the three largest theatre circuits and the other 50% owned by an estimated 800 smaller operators, making it very difficult to predict when acquisition opportunities may arise. We do not believe that we are geographically constrained, and we believe that we may be able to add value to certain theatres through our various proprietary amenities and operating expertise. In addition, by using shares of our common stock as a significant component of the purchase consideration for the Movie Tavern acquisition, we believe our balance sheet remains positioned to consider additional acquisitions in the future.
| ● | We have invested |
DreamLounger recliner additions. These luxurious, state-of-the-art recliners allow guests to go from upright to a full-recline position in seconds. These seat changes require full auditorium remodels to accommodate the necessary 84 inches of legroom, resulting in the loss of approximately 50% of the existing traditional seats in an average auditorium. To date, the addition of DreamLoungers has increased attendance at each of our applicable theatres, outperforming nearby competitive theatres and growing the overall market attendance in most cases. Initially, 12 of the 22 acquired Movie Tavern theatres had recliner seating. We added DreamLounger recliner seats to sevenfour additional existing Movie Tavern theatres during fiscal 2018 (including three2019, as well as one Marcus Wehrenberg theatres).® theatre and one newly built Movie Tavern theatre. We completed the addition of DreamLounger recliner seats at two additional Movie Tavern locations during fiscal 2020 and expect to add DreamLounger recliner seats to one Marcus Wehrenberg theatre during the second quarter of fiscal 2021. As a result, as of December 27, 2018,31, 2020, we offered all DreamLounger recliner seating in 4565 theatres, representing approximately 70%76% of our company-owned, first-run theatres. Including our PLFpremium, large format (PLF) auditoriums with recliner seating, as of December 27, 2018,31, 2020, we offered our DreamLounger recliner seating in approximately 75%79% of our company-owned, first-run screens, a percentage we believe to be the highest among the largest theatre chains in the nation.
We are currently evaluating opportunities to add our DreamLounger premium seating to two additional theatres during the second half of fiscal 2019, including one Marcus Wehrenberg theatre. Currently, 12 of the 22 recently-acquired Movie Tavern theatres have recliner seating, with three additional theatres expected to be converted by the end of the first quarter of fiscal 2019. We have identified at least three additional Movie Tavern locations that we will consider converting to DreamLounger recliner seating during the second half of fiscal 2019. As a result, by the end of fiscal 2019, our percentage of total company-owned, first-run screens with DreamLounger recliner seating may be approximately 80%, including Movie Tavern theatres.
Ultra
UltraScreen DLX® andSuperScreen DLX® (DreamLounger eXperience) conversions. We introduced one of the first PLF presentations to the industry when we rolled out our proprietaryUltraScreen® concept approximatelyover 20 years ago. We later introduced ourUltraScreen DLX concept by combining our premium, large-format presentation with DreamLounger recliner seating and Dolby® Atmos™ immersive sound to elevate the movie-going experience for our guests. More recently, we began including heated DreamLounger recliner seating in our DLX auditoriums. During fiscal 2018,2019, we opened one new UltraScreen DLX at an existing Marcus Wehrenberg theatre and converted one existing screen into anUltraScreen DLX auditorium and eightat a Movie Tavern by Marcus theatre. During fiscal 2020, we converted three existing screens at three Movie Tavern by Marcus theatres and one existing screen at one Marcus Wehrenberg theatre toSuperScreen DLX auditoriumsauditoriums. During fiscal 2019, we converted 26 existing screens at seven13 Movie Tavern by Marcus theatres and two existing theatres (including fourscreens at one Marcus Wehrenberg screens).theatre to SuperScreen DLX and opened one new SuperScreen DLX auditorium at a newly built Movie Tavern by Marcus theatre. Most of our PLF screens now include the added feature of heated DreamLounger recliner seats. As of December 27, 2018,31, 2020, we had 2931 UltraScreen DLX auditoriums, one traditionalUltraScreen auditorium, and 5185 SuperScreen DLX auditoriums (a slightly smaller screen than anUltraScreen but with the same DreamLounger seating and Dolby Atmos sound) and three IMAX® PLF screens at 4666 of our theatre locations. Three of our Marcus Wehrenberg theatres feature IMAX® PLF screens. As of December 27, 2018,31, 2020, we offered at least one PLF screen in approximately 72%77% of our first-run, company-owned theatres – once again a percentage we believe to be the highest percentage among the largest theatre chains in the nation.
Our PLF screens generally have higher per-screen revenues and draw customers from a larger geographic region compared to our standard screens, and we charge a premium price to our guests for this experience. During the first quarter of fiscal 2019, we completed the addition of a newUltraScreen DLX auditoriumWe continue to a Marcus Wehrenberg theatre, and we are currently evaluatingevaluate opportunities to convert 20 or moreadditional existing screens at 14 Movie Tavern theatres toUltraScreen DLX andSuperScreen DLX auditoriums during fiscal 2019. In addition, we expect that our new theatre currently under construction in Brookfield, Wisconsin will include one PLF auditorium.auditoriums.
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Signature cocktail and dining concepts. We have continued to further enhance our food and beverage offerings within our existing theatres. We believe our 50-plus years of food and beverage experience in the hotel and restaurant businesses provides us with a unique advantage and expertise that we can leverage to further grow revenues in our theatres. The concepts we are expanding include:
| Take FiveSM Lounge, |
| Zaffiro’s® Express – |
| Reel Sizzle® – |
| Other in-lobby dining |
| In-theatre dining – As of December |
| ● | With each of these strategies, our goal continues to be to introduce and create entertainment destinations that further define and enhance the customer value proposition for movie-going. We also expect to continue to maintain and enhance the value of our existing theatre assets by regularly upgrading and remodeling our theatres to keep them fresh. To accomplish the strategies noted above, we currently anticipate that our fiscal |
| ● | In addition to the growth strategies described above, our theatre division continues to focus on multiple strategies designed to further increase revenues and improve the profitability of our existing theatres. These strategies include various cost control efforts, as well as plans to expand ancillary theatre revenues, such as pre-show advertising, lobby advertising, additional corporate and group sales, sponsorships, special film series and alternate auditorium uses. In response to the COVID-19 pandemic, we introduced Marcus Private Cinema in the fourth quarter of fiscal 2020. Under this program, a guest can reserve an entire auditorium for up to 20 people for a fixed charge, offering them a safe, fun and stress-free social gathering opportunity. |
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| ● | We also have several customer-focused strategies designed to elevate our consumer knowledge, expectation and connection, and provide us with a competitive advantage and the ability to deliver improved financial performance. These strategies include the following: |
Marketing initiatives. We offer a “$5 Tuesday” promotion at every theatre in our circuit that includes a free complimentary-size popcorn to our loyalty program members. We have seen our Tuesday attendance increase dramatically since the introduction of the $5 Tuesday promotion. We believe this promotion has increased movie going frequency and reached a customer who may have stopped going to the movies because of price, creating another “weekend” day for us without adversely impacting the movie-going habits of our regular weekend customers. We introduced our $5 Tuesday promotion with the free popcorn for loyalty members at our Marcus Wehrenberg theatres immediately upon acquisition in December 2016 and did the same thing in February 2019 with our newly acquired Movie Tavern theatres. We experienced an increase in Tuesday performance at the Marcus Wehrenberg theatres and expecthave seen a similar response from customers at our Movie Tavern theatres. WeWhen not operating with limited days of operation, we also offer a “$6 Student Thursday” promotion at 36 Marcus and Marcus Wehrenbergall of our locations that has been well received by that particular customer segment. We also introduced this promotion at 12 Movie Tavern locations late in our fiscal 2019 first quarter. In addition, we offer a $6 “Young-at-Heart” program for seniors on Friday afternoons that haswas also been introduced to our Movie Tavern locations during our fiscal 2019 first quarter.
Loyalty program. We offer what we believe to be a best-in-class customer loyalty program called Magical Movie RewardsSM. We currently have approximately 3.14.0 million members enrolled in the program. Approximately 47% of all box office transactions and 43% of total transactions in our theatres during fiscal 20182020 were completed by registered members of the loyalty program. The program allows members to earn points for each dollar spent and access special offers available only to members. The rewards are redeemable at the box office, concession stand or at the many Marcus Theatres® food and beverage venues. In addition, we have partnered with Movio, a global leader in data analysis for the cinema industry, to allow more targeted communication with our loyalty members. The software provides us with insight into customer preferences, attendance habits and general demographics, which we believe will help us deliver customized communication to our members. In turn, members of this program can enjoy and plan for a more personalized movie-going experience. The program also gives us the ability to cost effectively promote non-traditional programming and special events, particularly during non-peak time periods. We believe that this will result in increased movie-going frequency, more frequent visits to the concession stand, increased loyalty to Marcus Theatres and ultimately, improved operating results. The acquired Wehrenberg theatres offered a loyalty program to their customers that had approximately 200,000 members. We converted these members to our Magical Movie Rewards program during fiscal 2017. The recently acquired Movie Tavern theatres did not offer a loyalty program to their customers. Our current plan is to introduceWe introduced our Magical Movie Rewards program to these theatres during the second quarter of fiscal 2019 after all necessary technology requirements arewere completed.
Technology enhancements. During fiscal 2019, we expect to further enhanceWe have recently enhanced ourmarcustheatres.com web site, mobile ticketing capabilities, and our downloadable Marcus Theatres mobile application.application, and our marcustheatres.com website. We will continueadded food and beverage ordering capabilities to our mobile application at select theatres, including our recently opened Movie Tavern location in Brookfield, Wisconsin, in fiscal 2019 and expanded this feature to all of our theatres in fiscal 2020. We have continued to install additional theatre-level technology, such as new ticketing kiosks, digital menu boards and concession advertising monitors. Each of these enhancements is designed to improve customer interactions, both at the theatre and through mobile platforms and other electronic devices.
| ● | The addition of digital technology throughout our circuit (we offer digital cinema projection on 100% of our first-run screens) has provided us with additional opportunities to obtain non-motion picture programming from other new and existing content providers, including live and pre-recorded performances of the Metropolitan Opera, as well as sports, music and other events, at many of our locations. We offer weekday and weekend alternate programming at many of our theatres across our circuit. The special programming includes classic movies, live performances, comedy shows and children’s performances. We believe this type of programming is more impactful when presented on the big screen and provides an opportunity to continue to expand our audience base beyond traditional moviegoers. |
| ● | In addition, digital 3D presentation of films has continued to positively contribute to our box office receipts during the periods presented in this Annual Report on Form 10-K. As of December |
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37
Hotels and Resorts
| ● |
| ● | We also continue to pursue additional management contracts for other owners, some of which may include small equity investments similar to the investments we have made in the past with strategic equity partners. Although total revenues from an individual hotel management contract are significantly less than from an owned hotel, the operating margins are generally significantly higher due to the fact that all direct costs of operating the property are typically borne by the owner of the property. Management contracts provide us with an opportunity to increase our total number of managed rooms without a significant investment, thereby increasing our returns on equity. |
Conversely, we will occasionally lose management contracts due to various circumstances. In May 2019, we ceased managing the Heidel House Resort & Spa in Green Lake, Wisconsin, after the owners of this resort decided to close this property permanently. Early in our fiscal 2019 third quarter, the owners of the Sheraton Chapel Hill Hotel in Chapel Hill, North Carolina sold the hotel, and as a result, our contract to manage this hotel was terminated. We also ceased managing the Hilton Garden Houston NW/Willowbrook in Houston, Texas in March 2020 and the Murieta Inn and Spa in Rancho Murieta, California in July 2020.
| ● | Unlike our theatre assets where the majority of our return on investment comes from the annual cash flow generated by operations, a portion of the return on our hotel investments is derived from effective portfolio management, which includes determining the proper branding strategy for a given asset along with the proper level of investment and upgrades, as well as identifying an effective divestiture strategy for the asset when appropriate. |
| ● | We have been very opportunistic in our past hotel investments as we have, on many occasions, acquired assets at favorable terms and then improved the properties and operations to create value. We also will continue to periodically explore opportunities to monetize one or more owned hotels. We will consider many factors as we actively review opportunities to execute this strategy, including income tax considerations, the ability to retain management, pricing and individual market considerations. We evaluate strategies for our hotels on an asset-by-asset basis. We have not set a specific goal for the number of hotels that may be considered for this strategy, nor have we set a specific timetable. It is possible that we may sell a particular hotel or hotels during fiscal |
| ● | Our |
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| ● | In addition to the growth strategies described above, our hotels and resorts division continues to focus on several strategies that are intended to further grow the division’s revenues and profits. These include leveraging our food and beverage expertise for growth opportunities and growing our catering and events revenues. |
| ● | We have also invested in sales, revenue management and internet marketing strategies in an effort to further increase our profitability, as well as human resource and cost improvement strategies designed to achieve operational excellence and improved operating margins. We are focused on developing our customer service delivery and technology enhancements to improve customer interactions through mobile platforms and other customer touch points. |
Corporate
| ● | We periodically review opportunities to make investments in long-term growth opportunities that may not be entirely related to our two primary businesses (but typically have some connection to entertainment, food and beverage, hospitality, real estate, etc.). |
| ● | In addition to operational and growth strategies in our operating divisions, we will continue to seek additional opportunities to enhance shareholder value, including strategies related to our dividend policy and share |
| ● | We will also continue to evaluate opportunities to sell real estate when appropriate, allowing us to benefit from the underlying value of our real estate assets. When possible, we will attempt to avail ourselves of the provisions of Internal Revenue Code §1031 related to tax-deferred like-kind exchange transactions. We are actively marketing a significant number of pieces of surplus real estate and other non-core real estate. During the fourth quarter of fiscal 2020, we sold two land parcels and a former budget theatre, generating total proceeds of approximately $3.0 million. As of December 31, 2020, we had letters of intent or contracts to sell several pieces of real estate with a carrying value of $4.1 million and we believe we may receive total sales proceeds from real estate sales during the next 12-18 months totaling approximately $10-$40 million, depending upon demand for the real estate in question. |
The actual number, mix and timing of our potential future new facilities and expansions and/or divestitures will depend, in large part, on industry, economic and economicCOVID-19 pandemic conditions, our financial performance and available capital, the competitive environment, evolving customer needs and trends, and the availability of attractive acquisition and investment opportunities. It is likely that our growth goals and strategies will continue to evolve and change in response to these and other factors, and there can be no assurance that we will achieve our current goals. Each of our goals and strategies are subject to the various risk factors discussed above in this Annual Report on Form 10-K.
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Theatres
Our oldest and historically most profitable division is our theatre division. The theatre division contributed 63.2%55.8% of our consolidated revenues and 87.7%73.5% of our consolidated operating income (loss), excluding corporate items, during fiscal 2018,2020, compared to 61.7%67.9% and 86.2%88.4%, respectively, during fiscal 20172019 and 57.6%63.2% and 83.1%87.7%, respectively, during fiscal 2016.2018. As of December 27, 2018,31, 2020, the theatre division operated motion picture theatres in Wisconsin, Illinois, Iowa, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Arkansas, Colorado, Georgia, Kentucky, Louisiana, New York, Pennsylvania, Texas and Ohio,Virginia, a family entertainment center in Wisconsin and a retail center in Missouri. The following tables set forth revenues, operating income (loss), operating margin, screens and theatre locations for the last three fiscal years:
| | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
| | | | | | | | Change F20 v. F19 | | | | | Change F19 v. F18 |
| ||||||||||||||||||||||||||||||||||
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| F2020 |
| F2019 |
| Amt. |
| Pct. |
| F2018 |
| Amt. |
| Pct. |
| |||||||||||||||||||||||||||||||||
| Change F18 v. F17 | Change F17 v. F16 | |||||||||||||||||||||||||||||||||||||||||||||||
| F2018 | F2017 | Amt. | Pct. | F2016 | Amt. | Pct. | ||||||||||||||||||||||||||||||||||||||||||
| (in millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||
| | (in millions, except percentages) | | |||||||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 446.8 | $ | 403.4 | $ | 43.4 | 10.8 | % | $ | 330.6 | $ | 72.8 | 22.0 | % | | $ | 132.6 | | $ | 557.1 | | $ | (424.5) |
| (76.2) | | $ | 446.8 | | $ | 110.3 |
| 24.7 | % | ||||||||||||||
| Operating income | $ | 88.8 | $ | 80.4 | $ | 8.4 | 10.4 | % | $ | 71.8 | $ | 8.6 | 12.0 | % | ||||||||||||||||||||||||||||||||||
Operating income (loss) | | $ | (121.4) | | $ | 76.9 | | $ | (198.3) |
| (257.9) | | $ | 88.8 | | $ | (11.9) |
| (13.4) | % | ||||||||||||||||||||||||||||
| Operating margin | 19.9 | % | 19.9 | % | 21.7 | % | |
| (91.6) | % |
| 13.8 | % |
|
|
|
| |
| 19.9 | % |
|
|
|
| | ||||||||||||||||||||||
| Number of screens and locations at period-end(1)(2) | F2018 | F2017 | F2016 | |||||||||
| Theatre screens | 889 | 895 | 885 | |||||||||
| Theatre locations | 68 | 69 | 68 | |||||||||
| Average screens per location | 13.1 | 13.0 | 13.0 | |||||||||
| | | | | | |
Number of screens and locations at period-end (1)(2) |
| F2020 |
| F2019 |
| F2018 |
Theatre screens |
| 1,097 |
| 1,106 |
| 889 |
Theatre locations |
| 89 |
| 91 |
| 68 |
Average screens per location |
| 12.3 |
| 12.2 |
| 13.1 |
| (1) | Includes 6 screens at one location managed for another |
| (2) | Includes 22 budget screens at two locations at the end of fiscal |
The following table provides a further breakdown of the components of revenues for the theatre division for the last three fiscal years:
| | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
| | | | | | | | Change F20 v. F19 | | | | | Change F19 v. F18 |
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| F2020 |
| F2019 |
| Amt. |
| Pct. |
| F2018 |
| Amt. |
| Pct. |
| |||||||||||||||||||||||||||||||||
| Change F18 v. F17 | Change F17 v. F16 | |||||||||||||||||||||||||||||||||||||||||||||||
| F2018 | F2017 | Amt. | Pct. | F2016 | Amt. | Pct. | ||||||||||||||||||||||||||||||||||||||||||
| (in millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||
| | (in millions, except percentages) | | |||||||||||||||||||||||||||||||||||||||||||||
| Admission revenues | $ | 246.4 | $ | 227.1 | $ | 19.3 | 8.5 | % | $ | 186.8 | $ | 40.3 | 21.6 | % | | $ | 64.8 | | $ | 284.2 | | $ | (219.4) |
| (77.2) | % | $ | 246.4 | | $ | 37.8 |
| 15.3 | % | ||||||||||||||
| Concession revenues | 166.6 | 149.0 | 17.6 | 11.8 | % | 121.0 | 28.0 | 23.2 | % | |
| 56.7 | |
| 231.2 | |
| (174.5) |
| (75.5) | % |
| 166.6 | |
| 64.6 |
| 38.8 | % | |||||||||||||||||||
| Other revenues | 32.5 | 25.2 | 7.3 | 29.2 | % | 20.4 | 4.8 | 23.5 | % | |
| 10.8 | |
| 40.8 | |
| (30.0) |
| (73.6) | % |
| 32.5 | |
| 8.3 |
| 25.4 | % | |||||||||||||||||||
| 445.5 | 401.3 | 44.2 | 11.0 | % | 328.2 | 73.1 | 22.3 | % | ||||||||||||||||||||||||||||||||||||||||
| |
| 132.3 | |
| 556.2 | |
| (423.9) |
| (76.2) | % |
| 445.5 | |
| 110.7 |
| 24.8 | % | ||||||||||||||||||||||||||||
| Cost reimbursements | 1.3 | 2.1 | (0.8 | ) | -39.6 | % | 2.4 | (0.3 | ) | -12.3 | % | |
| 0.3 | |
| 0.9 | |
| (0.6) |
| (63.1) | % |
| 1.3 | |
| (0.4) |
| (32.1) | % | |||||||||||||||||
| Total revenues | $ | 446.8 | $ | 403.4 | $ | 43.4 | 10.8 | % | $ | 330.6 | $ | 72.8 | 22.0 | % | | $ | 132.6 | | $ | 557.1 | | $ | (424.5) |
| (76.2) | % | $ | 446.8 | | $ | 110.3 |
| 24.7 | % | ||||||||||||||
As described above in the “Current Plans” section of this MD&A, on NovemberFebruary 1, 2018,2019, we entered into an asset purchase agreement pursuant to which we agreed to acquire substantially all ofacquired the assets and assume certain limited liabilities of the Movie Tavern, branded movie theatre business. Movie Tavern consistsa New Orleans-based industry leading circuit known for its in-theatre dining concept featuring chef-driven menus, premium quality food and drink and luxury seating. The acquired circuit consisted of 208 screens at 22 dine-in theatres locatedlocations in nine states – Arkansas, Colorado, Georgia, Kentucky, Louisiana, New York, Pennsylvania, Texas and Virginia.
The transaction closed on February 1, 2019. The purchase price consisted of $30 million in cash, subject to certain adjustments, and 2,450,000 shares of our common stock, (157,056 of which have been placed in escrow to secure certain post-closing indemnification obligations of the seller under the asset purchase agreement), for a total purchase price of approximately $139$139.3 million, based upon our closing share price on January 31, 2019. We financedAt the cash portiontime, the acquisition of the purchase price from existing sources of cash. The share portion of the purchase price was issued out of treasury stock.
We anticipate that the acquired Movie Tavern business will be accretive to earnings, earnings per share and cash flow in the first 12 months following the closing of the transaction. The estimated impact that the Movie Tavern acquisition may have oncircuit increased our key financial measures and metrics is described further in the discussion below.total number of screens by an additional 23%.
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Fiscal 20182020 versus Fiscal 2017
2019
Our theatre division revenues and operating income (loss) decreased significantly during fiscal 2018 revenues increased by 10.8%2020 compared to fiscal 20172019 due entirely to decreased attendance as a result of the temporary closing of all of our theatres on March 17, 2020 in response to the COVID-19 pandemic. Other than six theatres that were reopened during the last week of the fiscal 2020 second quarter, all of our theatres remained closed during all of the second quarter and the majority of the third quarter of fiscal 2020. During the five-plus months that most of our theatres were closed, the only additional revenues we reported were the result of five parking lot cinemas opened during the second quarter, curbside sales of popcorn, pizza and other food items and restaurant takeout sales from our three Zaffiro’s restaurants and bars. Over the seven-day period between August 21 and August 28, 2020, we reopened a majority of our theatres in conjunction with the release of several new films, resulting in a total of 72 reopened theatres, representing 80% of our company-owned theatres. In October 2020, we temporarily closed several theatres due to increasedchanges in the release schedule for new films, reducing our percentage of theatres open to approximately 66%. In November and December 2020, new state and local restrictions in several of our markets required us to temporarily reclose several theatres, and as a result, approximately 52% of our theatres were open as of December 31, 2020. All of our reopened theatres are operating at significantly reduced attendance at comparablelevels.
Our theatres attributable to a stronger film slate, new theatreswere open for all but nine days during the first quarter of fiscal 2020 and the revenue impact of decreased attendance during that we opened during fiscal 2017,period was partially offset by an increase in our average ticket price and average concession revenues per person resulting in increased admission revenues and concession revenues, and an increase in other revenues.compared to the first quarter of fiscal 2019. In addition, our adoptionrevenues during the first quarter of fiscal 2020 included an extra month of Movie Tavern revenues (Movie Tavern theatres were not acquired until February 1, 2019) and a new Movie Tavern theatre opened in Brookfield, Wisconsin during the fourth quarter of fiscal 2019.
Our theatre division operating loss during the five-plus months our theatres were closed during fiscal 2020 primarily reflected costs that remained after we temporarily closed all of our theatres and laid off the vast majority of our hourly theatre staff, as well as a portion of our corporate staff. These costs included a certain number of salaried theatre management staff as well as the remaining corporate staff, all of whom were subject to a reduction in pay. Additional ongoing costs included utilities and repairs and maintenance (both at reduced levels), rent, property taxes and depreciation. During the last month of our fiscal 2020 third quarter, we brought back an appropriate level of theatre and corporate staff to meet anticipated reduced levels of initial new revenue recognition accounting standard discussed above underfilm supply and customer demand in our recently reopened theatres. Our theatre division operating results during fiscal 2020 were negatively impacted by nonrecurring expenses totaling approximately $5.8 million related to expenses incurred (primarily payroll continuation payments to employees temporarily laid off) due to the “Implementationclosing of New Accounting Standards” sectionall of this MD&A resultedour movie theatres during the first quarter and subsequent costs incurred for cleaning, supply purchases and employee training, among other items, related to the reopening of our theatre properties and implementing new operating protocols (described in an increase ingreater detail above). Conversely, our operating loss during fiscal 2020 was favorably impacted by approximately $5.8 million of state government grants awarded from seven states for COVID-19 relief. The additional week of operations favorably impacted our theatre division revenues of $5.7 million during fiscal 20182020 by approximately $2.6 million and did not have a material impact on our operating loss.
Although rent continued to be expensed monthly, discussions with our landlords resulted in deferral, or in a limited number of situations, abatements, of the majority of our rent payments during our fiscal 2020 second quarter. While the results of negotiations varied by theatre, the most common result of these discussions was a deferral of rent payments for April, May and June, with repayment generally expected in future periods, most often beginning in calendar 2021. We may discuss additional rent deferrals in the future if new film supply and customer demand dictate that we delay further reopening or close currently open theatres.
In addition to the significant impact the closing of our theatres during the majority of our second and third fiscal quarters had on our operating loss during fiscal 2020, our theatre division operating income (loss) and operating margin also decreased during fiscal 2020 compared to fiscal 2017.
We opened new2019 due primarily to the impact of the reduced attendance and revenues at comparable theatres in April 2017during the fiscal 2020 first quarter and June 2017 that favorablyfourth quarter. Impairment charges reported during fiscal 2020 related to intangible assets and several theatre locations also negatively impacted our admission revenuestheatre division fiscal 2020 operating loss by approximately $24.7 million. Our operating income and concession revenuesoperating margin during fiscal 20182019 was negatively impacted by approximately $2.5 million of acquisition and preopening expenses related to the Movie Tavern Acquisition and the opening of a newly built Movie Tavern theatre in Brookfield, Wisconsin.
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Total theatre attendance decreased 77.1% during fiscal 2020 compared to fiscal 2017. Excluding these two new theatres for the period they were not open during the prior year (as well as two nearby theatres that are no longer comparable to the prior year because their pricing policies were significantly changed when the new theatres opened), admission revenues and concession revenues for comparable theatres increased 7.8% and 10.6%, respectively, during fiscal 2018 compared to fiscal 2017.
Conversely, the change in how we recognize revenue related to our Magical Movie Rewards customer loyalty program2019, primarily as a result of the closure of our adoption of the new revenue recognition accounting standard (discussed above) resulted in atheatres for over five months during fiscal 2020 and subsequent reduced attendance at our reopened theatres. A significant decrease in admission revenuesthe number of approximately $1.8 millionnew films, the lack of awareness of theatres being open (due in part to limited new film advertising), ongoing state and an increaselocal capacity restrictions and customer concerns regarding visiting indoor businesses contributed to the reductions in concession revenues of approximately $2.7 millionattendance during fiscal 2018 compared to fiscal 2017. Excluding the impact of these changes in revenue recognition from the fiscal 2018 periods, admission revenues for comparable theatres increased 8.6% and concession revenues increased 8.9% during fiscal 2018 compared to fiscal 2017.
Total theatre attendance increased 5.1% and total admission revenues increased 8.5% during fiscal 2018 compared to fiscal 2017. Fiscal 2018 attendance and admission revenues at our comparable theatres, adjusted for the above-described impact of the change in accounting for revenues related to our loyalty program, increased approximately 4.7% and 8.6%, respectively, compared to the prior year.2020. The following table sets forth our percentage change in comparable theatre attendance during each of the interim periods of fiscal 20182020 compared to the same periods during fiscal 2017. In addition, the table compares the percentage change in2019. We were not able to compare our fiscal 2018 comparable theatre admission revenues, adjusted for the above-described change in accounting for revenues related to our loyalty program (comparedoverall results to the prior year) to the corresponding percentage change in the United States box office revenues (excluding new builds for the top 10 theatre circuits, with the exception of the first quarter, where new theatres were included in both the Marcus and U.S. calculations)industry during the same periods (as compiled byfinal three quarters of fiscal 2020 because of limitations on the data available to us from data received from Rentrak a(a national box office reporting service for the theatre industry).:
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| | Change F20 v. F19 |
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| 1st Qtr. (1) |
| 2nd Qtr. |
| 3rd Qtr. |
| 4th Qtr. |
| Total |
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Pct. change in Marcus theatre attendance |
| -19.5 | % | -99.8 | % | -95.6 | % | -90.1 | % | -77.1 | % |
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Pct. change in Marcus admission revenues |
| -14.8 | % | -99.8 | % | -95.5 | % | -91.5 | % | -77.2 | % |
Pct. change in U.S. box office revenues |
| -17.0 | % | | | | | | | | |
Marcus performance vs. U.S. |
| +2.2 | pts | | | | | | | | |
| Change F18 v. F17 | ||||||||||||||||||||
| 1st Qtr. | 2nd Qtr. | 3rd Qtr. | 4th Qtr. | Total | ||||||||||||||||
| Pct. change in Marcus theatre attendance | -5.9 | % | +22.8 | % | +3.0 | % | +1.5 | % | +4.7 | % | ||||||||||
| Pct. change in Marcus admission revenues | -0.4 | % | +34.2 | % | +5.5 | % | +0.5 | % | +8.6 | % | ||||||||||
| Pct. change in U.S. box office revenues | -0.6 | % | +23.5 | % | +5.7 | % | +0.6 | % | +6.8 | % | ||||||||||
| Marcus performance vs. U.S. | +0.2 | pts | +10.7 | pts | -0.2 | pts | -0.1 | pts | +1.8 | pts | ||||||||||
(1)Excludes Movie Tavern theatres, which were not acquired until February 1, 2019.
We outperformed the industryOur average ticket price decreased 0.4% during fiscal 2018 by 1.8 percentage points,2020 compared to fiscal 2019. During the fiscal 2020 third and fourth quarters, we have outperformed the industry during 16 of the last 20 quarters. The performance ofcharged our Marcus Wehrenberg theatres,normal pricing for new film releases and charged only $5.00 for older “library” film product, which we acquired in December 2016, many of which have subsequently undergone significant renovations, was particularly strong during fiscal 2018negatively impacted our average ticket price compared to the prior year, contributingyear. Our average concession revenues per person increased by 6.8% during fiscal 2020 compared to fiscal 2019. We believe a change in concession product mix, including increased sales of non-traditional food and beverage items from our increased number of Take Five Lounge, Zaffiro’s Express, Reel Sizzle and in-theatre dining outlets, contributed to our overall outperformanceincreased average concession sales per person during fiscal 2020. We also believe a portion of the industry average.increase in our average concession revenues per person during fiscal 2020 may be attributed to shorter lines at our concession stand due to reduced attendance (during periods of high attendance, some customers do not purchase concessions because the line is too long). We also believe that an increased percentage of customers buying their concessions in advance using our web site or our mobile app likely also contributed to higher average concession revenues per person, as our experience has shown that customers are more likely to purchase more items when they order and pay electronically. We currently do not expect our average ticket price to change significantly during fiscal 2021, but film mix will likely once again impact our final result. We currently expect to report a modest increase in our average concession sales per person during fiscal 2021 compared to fiscal 2020 due to the same contributing factors described above regarding fiscal 2020, although as noted above, several other factors may impact our performance relative to the industryactual results in any given quarter, including film mix, weather, changes in the competitive landscape and local sporting events. In general, we believe our overall outperformance of the industry has been attributable to the investments we have made in new features and amenities in select theatres and our implementation of innovative operating and marketing strategies that have increased attendance, including our $5 Tuesday promotion and our customer loyalty program (all of which are described in the “Current Plans” section of this MD&A).
Theatre attendance and corresponding box office revenues vary significantly from quarter to quarter due to a variety of factors. As evidenced by the change in United States box office revenues, our fiscal 2018 second, third and fourth quarter admission revenues and attendance were impacted by a stronger slate of movies compared to the same quarters during fiscal 2017. Conversely, our fiscal 2018 first quarter admission revenues and attendance were impacted by a weaker slate of movies compared to the same quarter during fiscal 2017.
The second quarter was a particularly strong quarter for the industry and included the release of four of our top five films for fiscal 2018. We believe that the film mix during the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017 may also have had a positive impact on our comparative performance versus the overall industry performance. We believe our theatres outperformed our normal share of the total box office on a film such asThe Incredibles 2, for example, as this type of film often tends to perform very well in our Midwestern markets. We also believe we outperformed the nation on many of the second tier of films that didn’t reach blockbuster status due to our various successful marketing, pricing and scheduling strategies. In addition, weather on several key weekends in May and June may have also contributed to our outperformance compared to the industry on those weekends. Historically in our Midwestern markets, rain or very warm weather on the weekends often has a favorable impact on theatre attendance. During the second quarter of fiscal 2018, weekend weather in the markets in which we operate was generally rainier and warmer than it was during the second quarter of fiscal 2017.
Conversely, we believe film mix likely had a negative impact on our performance relative to the industry during the first and third quarters of fiscal 2018. During the first quarter of fiscal 2017, we believe our Midwestern circuit outperformed our normal share of the total box office withBeauty and the Beast. Conversely, althoughBlack Pantherperformed very well in our theatres, an analysis of the top 100 markets in the United States shows that the Midwest trailed the eastern and southern portions of the United States in box office performance on this film during the first quarter of fiscal 2018. As a result, while we still outperformed the nation overall during the first quarter of fiscal 2018, the differential was relatively small. During the third quarter of fiscal 2018, one of the top films wasCrazy Rich Asians, which performed extremely well on the east and west coasts, but generally underperformed in our Midwestern markets. That contrasts with the prior year, where the top film,It, performed extremely well in our markets. We also believe that the fact that the Major League Baseball teams in three of our key markets, Milwaukee, Chicago and St. Louis, were competing for and in the playoffs during September and October 2018, had a negative impact on our attendance compared to the industry as a whole.
Finally, while our fiscal 2018 fourth quarter admission revenues were essentially in-line with the industry, the fact is that we were outperforming the industry until the final two weeks of the quarter. Historically, these final two weeks are two of the busiest weeks of the film year, which means that the percentage of films that sell out show times increases significantly. During these particular weeks where seat capacity matters more than normal, the fact that 75% of our auditoriums have recliner seating had the impact of reducing our ability to perform at the same level as the rest of the industry, where the average recliner seating penetration is significantly lower (recliner seating auditoriums generally have approximately 50% less seats than an auditorium with traditional seating). The fact that Christmas Day, historically a very strong day for movie-going, happened to be a Tuesday during fiscal 2018 also likely negatively impacted our relative fourth quarter box office performance compared to the industry, as we elected to honor our $5 Tuesday program for our customers.
metric.
Revenues for the theatre business and the motion picture industry in general are heavily dependent on the general audience appeal of available films, together with studio marketing, advertising and support campaigns and the maintenance of a reasonably lengthy “window” between the date a film is released in theatres and the date a film is released to other channels, including premium video-on-demand (“PVOD”), video on-demand (VOD)(“VOD”), streaming services and DVD. These are factors over which we have no control. Many current films are now released to ancillary markets within 75-90 days, and more than one studio has periodically discussed their interest in creating a new, shorter premium VOD window. We have expressed our concerns to the studios regarding the impact that a shortened VOD release window may have on future box office receipts. We have also indicated that we would not play films that did not respect the current theatrical exclusivity window and would seek adjustmentscontrol (see additional detail in the current financial arrangements we have with film studios in the event that the film studios implement shorter release windows.
We believe that the most significant factor contributing to variations in theatre attendance“Impact of COVID-19 Pandemic” section above). The following top five performing films during fiscal 2018, as in other periods, was the quantity and quality of films released during the respective periods compared to the films released during the same periods of the prior year. Blockbusters (generally defined as films grossing more than $100 million nationally) accounted for a similar percentage of2020, all from our total admission revenues during fiscal 2018 and fiscal 2017 - our top 15 performing films accounted for 41% of our total admission revenues during both years. The following five top performing fiscal 2018 films2020 first quarter, accounted for nearly 23%40% of the total admission revenues for our circuit:Black PantherStar Wars:TheRise of Skywalker,Avengers: Infinity WarBad Boys for Life,Incredibles 2Jumanji: The Next Level,Jurassic World: Fallen Kingdom1917 andDeadpool 2Sonic the Hedgehog. The top five performing films during fiscal 20172019 accounted for approximately 20%26% of our total admission revenues.
The quantity of wide-release Our highest grossing films, shown in our theatres and number of wide-release films provided byduring the seven major studios increased during fiscal 2018 compared to fiscal 2017. A film is generally considered “wide release” if it is shown on over 600 screens nationally, and these films generally have the greatest impact on box office receipts. We played 132 wide-release films (including 24 digital 3D films) atlimited time we reopened our theatres during the second half of fiscal 2018 compared to 124 wide-release films (including 34 digital 3D films) during fiscal 2017. In total, we played 344 films and 216 alternate content attractions at our theatres during fiscal 2018 compared to 264 films and 170 alternate content attractions during fiscal 2017. Based upon projected film and alternate content availability, we currently estimate that we may show an increased number of films and alternate content events on our screens during fiscal 2019 compared to fiscal 2018. The impact of Disney’s expected 2019 acquisition of Fox (reducing the number of major studios to six) on the overall quantity of wide release films in the future is currently unknown.
Our average ticket price increased 3.2% during fiscal 2018 compared to fiscal 2017. The increase in our average ticket price contributed approximately $7.0 million, or 30%, to our comparable theatres admission revenues during fiscal 2018, contributing to our overall increased admission revenues during fiscal 2018 compared to fiscal 2017. The increase was partially attributable to modest price increases we implemented in October 2017. In addition, the fact that we have increased our number PLF screens, with a corresponding price premium, also contributed to our increased average ticket price during fiscal 2018. Conversely, we believe that a change in film product mix had an unfavorable impact on our average ticket price during fiscal 2018 compared to fiscal 2017, as the average ticket price on our top five films during fiscal 2018 only increased 1.1% compared to the average ticket price of the top five films during fiscal 2017. The top film last year,2020, included Star Wars: The Last JediTenet, had a particularly high percentage of its admission revenues occur in our PLF auditoriums. In addition, the percentage of our total box office receipts attributable to 3D presentations during fiscal 2018 decreased compared to the percentage of our total box office receipts attributable to 3D presentations during fiscal 2017, meaning that 3D films had an unfavorable impact on our change in average ticket price during fiscal 2018 (a lower percentage of 3D films may result in a lower average ticket price due to the premium price associated with 3D). We currently expect that our average ticket price may increase again at our comparable theatres during fiscal 2019, but film mix will likely once again impact our final result, as strong PLF-friendly films such as the upcomingAvengers andStar Wars sequels (which would likely be favorable to an increased average ticket price) could be offset by a strong line-up of Disney family oriented films expected to be released during 2019, such asDumbo,Aladdin,Toy Story 4,The Lion KingCroods: A New Age andFrozen 2 (which would likely be unfavorable to an increased average ticket price). We expect the recently-acquired Movie Tavern theatres may have a very small (1%-2%) favorable impact on our overall average ticket price, as they operate in several larger markets in the East and South where market pricing tends to be higher than in our legacy Midwestern markets.
Our average concession sales per person increased 6.4% during fiscal 2018 compared to fiscal 2017. The increase in our concession sales per person contributed approximately $8.9 million, or 57%, to our comparable theatres concession revenues during fiscal 2018, contributing to our overall increased concession revenues during fiscal 2018 compared to fiscal 2017. Pricing, concession/food and beverage product mix and film product mix are the three primary factors that impact our concession sales per person. A change in concession product mix, including increased sales of higher priced non-traditional food and beverage items from our increasing number ofTake Five LoungesWonder Woman 1984,Zaffiro’s Express,Reel SizzleUnhinged and in-theatre dining outlets, as well as modest selected price increases we introduced in October 2017, were the primary reasons for our increased average concession sales per person during fiscal 2018. Conversely, we believe that the film product mix during the third quarter of fiscal 2018, whenIncredibles 2 was the top film, likely reduced the growth of our overall average concession sales per person during that particular quarter, as family-oriented films tend not to contribute to sales of non-traditional food and beverage items as much as adult-oriented films. We currently expect to report increases in our average concession sales per person at our comparable theatres during fiscal 2019 compared to fiscal 2018 due to our increased number of non-traditional food and beverage outlets, although as noted above, several factors may impact our actual results in this key metric. We expect the recently-acquired Movie Tavern theatres may have a significant (20% or more) favorable impact on our overall average concession sales per person, as the average concession sales per person at these dine-in theatres are on average more than double the average concession sales per person we generally achieve at our average theatre without a dine-in option.
Our theatre division operating income increased during fiscal 2018 compared to fiscal 2017 due primarily to the increased revenues described above, partially offset by increased depreciation, higher film costs and several one-time costs. Depreciation costs have increased due to our significant recent investments in many of our theatres. Film costs increased during fiscal 2018 primarily due to the increased percentage of our admission revenues that were derived from our top five blockbuster films during fiscal 2018 compared to fiscal 2017 (discussed above). Film costs, expressed as a percentage of admission revenues, are generally greater for the very large blockbuster films. In addition, acquisition and preopening expenses of approximately $1.7 million related to the Movie Tavern acquisition negatively impacted our operating income during fiscal 2018. Conversely, preopening expenses of approximately $800,000 related to the opening of two new theatres negatively impacted our operating income during fiscal 2017. We currently estimate that we will incur additional acquisition and preopening expenses during the first quarter of fiscal 2019 related to the Movie Tavern acquisition of approximately $1.0 million, negatively impacting our fiscal 2019 operating results.
Operating margin for our theatre division was 19.9% for both fiscal 2018 and fiscal 2017. The increase in theatre division revenues related to our adoption of the new revenue recognition standard described above and our change in the presentation of cost reimbursements for managed theatres, both without a related material change in operating income, negatively impacted our operating margin during fiscal 2018 compared to fiscal 2017. Excluding the changes related to the new revenue recognition standard and the presentation of cost reimbursements, as well as excluding acquisition and preopening expenses in both years, our theatre division operating margin during fiscal 2018 was 20.4% compared to 20.2% during fiscal 2017, an increase of 0.2 percentage points, despite the negative impact of increased depreciation and film costs. Increased attendance generally favorably impacts our operating margin, particularly because the increased attendance has the effect of increasing our high-margin concession revenues and because fixed expenses become a lower percentage of revenues. Conversely, if a greater portion of our concession revenues is the result of the sale of non-traditional food and beverage items that typically have a higher product cost compared to traditional concession items, operating margins will likely be negatively impacted.
We expect our overall operating margin for our theatre division to decrease during fiscal 2019 as a result of the Movie Tavern acquisition. As indicated in the tables above, historically the relationship between admission revenues and concession revenues for our current theatre circuit has been approximately 60/40 – 60% admission revenues and 40% concession revenues. We expect that this same relationship at our recently-acquired Movie Tavern theatres will be closer to 40/60 – 40% admission revenues and 60% concession revenues. Being dine-in theatres, these concession revenues will consist primarily of non-traditional food and beverage items with a higher product cost as described above. This will result in a lower operating margin at those theatres. Labor costs are generally higher as a percentage of revenues at dine-in theatres as well, which will also negatively impact our operating margin. In addition, we currently own the vast majority of the land and buildings of our theatres, leasing only approximately 23% of our theatre circuit. Real estate ownership favorably impacts operating margin, as depreciation on real estate is generally significantly lower than rent expense. Conversely, all 22 acquired Movie Tavern theatres are leased, and we anticipate incurring approximately $15-$16 million of rent expense annually at these theatres. As a result, approximately 38% of our new combined theatre circuit will be leased and our total combined operating margin will go down accordingly. Despite the anticipated decline in operating margins in fiscal 2019 as a result of the Movie Tavern acquisition, we expect operating income to increase in fiscal 2019.
New Mutants.
Other revenues, which include management fees, pre-show advertising income, family entertainment center revenues, surcharge revenues, rental income and gift card breakage income, may also impact operating margin. Other revenues increaseddecreased by $7.3$30.0 million during fiscal 20182020 compared to fiscal 2017. Approximately $4.9 million of the increase during fiscal 2018 related2019. This decrease was primarily due to the change in how we reportimpact of reduced attendance on internet surcharge ticketing fees. Prior to the new revenue recognition standard, we recorded these fees net of third-party commission or service fees. Under the new guidance that we adopted in the first quarter of fiscal 2018 (discussed above), we are recognizing ticket fee revenues based on a gross transaction price. This change had the effect of increasing other revenues and increasing other operating expense, but had no impact on operating income or net earnings. This change did, however, have a negative impact on operating margin. The remaining increase in other revenues is attributable primarily to increased preshow advertising income, internet surcharge ticketing revenues (excluding the impact of the accounting change) and breakage on presold discounted tickets, all of which had a favorable impact on operating margin in fiscal 2018.income. We currently expect other revenues to continue to increase in fiscal 2019 at comparable theatres. The recently-acquired Movie Tavern theatres will also contribute to an increase in our overall other revenues, likely proportionate to the number of new theatres added.
We did not add any new screens to existing theatres during fiscal 2018 or fiscal 2017. One newUltraScreen at a Marcus Wehrenberg theatre was under construction at the end of fiscal 2018 and opened during the first quarter of fiscal 2019. As noted above,2021 if attendance increases as we opened a 10-screen theatre in Minnesota in April 2017 and an eight-screen theatre in Wisconsin in June 2017. We ceased managing one five-screen theatreanticipate during the second quarterhalf of fiscal 2018,the year and as we closed and sold one eight-screen budget-oriented theatre during the fiscal 2017 second quarter. We lost one screen at a Marcus Wehrenberg theatre during the second quarter of fiscal 2018 in conjunction with a renovation that expanded the size of two adjacent auditoriums. During our fiscal 2017 third quarter, we converted an existing 12-screen first-run theatrereturn to a budget-oriented theatre.normalcy.
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Admission revenues at comparable theatres during the first quarter of fiscal 20192021 through the date of this report have decreasedcontinued to be significantly reduced compared to the prior year comparable period due primarilylevels. Sales attributable to a weaker January and February film slate compared to the prior year, which included our top performing film for fiscal 2018,Black Panther. In addition, the first quarter of fiscal 2018 benefited from several strong 2017 holdover films, such asStar Wars; The Last Jedi,Jumanji: Welcome to the Jungle andThe Greatest Showman. We did not have as many strong holdovers from 2018 that would benefit the first quarter of fiscal 2019. Snow and extreme coldMarcus Private Cinema program (discussed in the Midwest“Impact of COVID-19 Pandemic” section above) have exceeded expectations, partially offsetting reduced traditional attendance. Subsequent to year-end, local and state restrictions have been lifted in Januaryseveral of our markets and, February likely also had a negative impact on admission revenuesas of the date of this report, approximately 69% of our theatres are currently open. Our remaining temporarily closed theatres are ready to date. Conversely,quickly reopen as additional restrictions are lifted, new films such asAquaman,Glass,are released and demand returns.
The Lego Movie 2 andHow to Train Your Dragon: Hidden World have contributed positively to our early fiscal 2019 results. Comparisonsfilm product release schedule for the remainder of fiscal 2021 has been changing in response to reduced near-term customer demand and changing state and local restrictions in various key markets in the quarter may improve dueU.S. and the world as a result of the ongoing COVID-19 pandemic. In particular, restrictions in New York and California have been cited by film studios as a reason for not releasing new movies, as these markets are particularly important to anticipated strong performances froma film’s success. As a result, several films suchoriginally scheduled to be released during the first months of fiscal 2021 have been delayed or released to alternative consumer channels. We believe that asCaptain Marvel a greater percentage of the population gets vaccinated andUs. the pandemic subsides, there will be a large demand for out-of-home entertainment and the studios will once again begin releasing a significant number of films to theatres. The anticipated film slate for the remainder of fiscal 20192021, which now includes multiple films originally scheduled for fiscal 2020, is currently expected to be quitevery strong, particularly during the second half of the year. FilmsAlthough it is possible that more schedule changes may occur, films currently scheduled that have potential to perform very well during the remainder of fiscal 2021 includeDumbo,Avengers: Endgame,John Wick: Chapter Three,Aladdin,Godzilla vs. Kong, Mortal Kombat, Black Widow, Peter Rabbit 2: The Secret LifeRunaway, Free Guy, Spiral, Cruella, The Conjuring: The Devil Made Me Do It, In the Heights, Luca, Venom: Let There Be Carnage, Fast & Furious 9, Top Gun: Marerick, The Forever Purge, Shang-Chi and the Legend of Petsthe Ten Rings, Cinderella, Space Jam 2, Old, The Tomorrow War, Jungle Cruise, Hotel Transylvania 4, The Suicide Squad,,X-Men: Dark Phoenix,Toy The King’s Man, The Hitman’s Bodyguard 2, Candyman, Malignant, The Boss Baby: Family Business, A Quiet Place II, Death on the Nile, The Man From Toronto, Dune, Untitled Addams Family Sequel, No Time To Die, Halloween Kills, The Last Duel, Snake Eyes: G.I. Joe Origins, Eternals, Clifford the Big Red Dog Movie, Ghostbusters: Afterlife, Mission Impossible 7, Encanto, Gucci, West Side Story, 4,Untitled Disney Live Action, Spider-Man: Far FromNo Way Home,,The Lion KingUntitled Matrix Film ,It: Chapter Two,Joker,Frozen 2,Jumanji 3andStar Wars: Episode IX Sing 2. Generally, an increase in the quantityThe early list of films released, particularly from the seven major studios, increases the potential for more blockbusters in any given year, as does an increase in the quantity of films from established film series such as those listed above. Our goal isscheduled to continue to outperform the industry, but with the majority of our renovations now completed for our circuit, our ability to do so in any given quarter will likely be partially dependent upon film mix, weather, the competitive landscape in our markets and the impact of local sporting events.
Fiscal 2017 versus Fiscal 2016
Our theatre division fiscal 2017 revenues increased by 22.0% compared to fiscal 2016 due to the Marcus Wehrenberg theatres that we acquired during the fourth quarter of fiscal 2016 and new theatres we openedreleased during fiscal 2016 and fiscal 2017, as well as an increase2022 also appears quite strong.
We opened a new eight-screen Movie Tavern by Marcus theatre in our average ticket price and average concession revenues per person at comparable theatres, resulting in increased box admission revenues and concession revenues. Decreased attendance at comparable theatres due to a weaker film slate negatively impacted theatre division revenues and operating income during fiscal 2017 compared to fiscal 2016. Excluding the Marcus Wehrenberg theatres, the three theatres that we opened during fiscal 2016 and fiscal 2017, and cost reimbursements, comparable theatre division revenues decreased by 0.8% during fiscal 2017 compared to the prior year.
In December 2016, we acquired 14 owned and/or leased movie theatres in Missouri, Iowa, Illinois and Minnesota, along withRonnie’s Plaza, an 84,000 square foot retail center in St. Louis, Missouri, from Wehrenberg and its affiliated entities for a purchase price of approximately $65 million, plus normal closing adjustments and less a negative net working capital balance that we assumed in the transaction. We funded the transaction using available borrowings under our existing credit facility. In conjunction with this transaction, we acquired the underlying real estate for six of the theatre locations as well as the retail center. The remaining leased locations include several leases that have been classified as capital leases. Nine of the 14 acquired Wehrenberg theatres operate in the greater St. Louis area. The Marcus Wehrenberg theatres contributed approximately $5.1 million and $(450,000), respectively, to our theatre division revenues and operating income for the two weeks that we owned them during fiscal 2016. The operating loss from the acquired theatres is due to approximately $2.0 million in one-time acquisition-related expenses.
Total theatre attendance increased 19.1% and total admission revenues increased 21.6% during fiscal 2017 compared to fiscal 2016. Excluding the Marcus Wehrenberg theatres, three theatres that we opened during fiscal 2016 and fiscal 2017, and two theatres that are no longer comparable to last year because their pricing policies were significantly changed as a result of new theatres we opened nearby, fiscal 2017 attendance and admission revenues at our comparable theatres decreased approximately 3.1% and 1.0%, respectively, compared to the prior year. The following table indicates our percentage change in comparable theatre attendance during each of the interim periods of fiscal 2017 compared to the same periods during fiscal 2016. In addition, the table compares the percentage changeBrookfield, Wisconsin early in our fiscal 2017 admission revenues (compared to the prior year) to the corresponding percentage change in the United States box office receipts (excluding new builds for the top ten theatre circuits) during the same periods (as compiled by us from data received from Rentrak, a national box office reporting service for the theatre industry):
| Change F17 v. F16 | ||||||||||||||||||||
| 1st Qtr. | 2nd Qtr. | 3rd Qtr. | 4th Qtr. | Total | ||||||||||||||||
| Pct. change in Marcus theatre attendance | +8.6 | % | -3.6 | % | -17.4 | % | +0.8 | % | -3.1 | % | ||||||||||
| Pct. change in Marcus box office revenues | +9.1 | % | -4.1 | % | -15.6 | % | +6.9 | % | -1.0 | % | ||||||||||
| Pct. change in U.S. box office revenues | +7.0 | % | -4.8 | % | -13.4 | % | +1.7 | % | -2.6 | % | ||||||||||
| Marcus outperformance v. U.S. | +2.1 | pts | +0.7 | pts | -2.2 | pts | +5.2 | pts | +1.6 | pts | ||||||||||
We outperformed the industry during fiscal 2017 by 1.6 percentage points. We believe our underperformance during the third quarter of fiscal 2017 was an anomaly, as evidenced by the fact that we outperformed the industry by over five percentage points during the2019 fourth quarter of fiscal 2017. We believe our continued overall outperformance of the industry is attributableand added four new screens to the investments we have made in new features and amenities in select theatres and our implementation of innovative operating and marketing strategies that have increased attendance, including our $5 Tuesday promotion and our customer loyalty program (all of which are described in the “Current Plans” section of this MD&A).
Theatre attendance and corresponding box office revenues vary significantly from quarter to quarter due to a variety of factors. As evidenced by the change in United States box office revenues, our fiscal 2017 first and fourth quarter admission revenues and attendance were impacted by a stronger slate of movies compared to the same quarters during fiscal 2016. Conversely, our fiscal 2017 second and third quarter admission revenues and attendance were impacted by a weaker slate of movies compared to the same quarters during fiscal 2016.
The third quarter of fiscal 2017 was a very difficult period for the industry, with 10 straight weeks of decreased attendance and box office receipts in July and August, before ending with three strong weeks in September. We also believe that the particular mix of films during July 2017 was not as favorable to our Midwestern circuit as compared to the films released during July 2016. The top film during July 2016 was TheSecret Life of Pets and this family-oriented film performed particularly well in our theatres compared to the rest of the nation, contributing to our comparative underperformance to the industry in July 2017 versus July 2016. Conversely, a stronger slate of moviesan existing Movie Tavern theatre during the first quarter of fiscal 2017, including2020. We also completed the second best performing filmaddition of DreamLounger recliner seating and added a new SuperScreen DLX to that same Movie Tavern theatre during the first quarter of fiscal 2020. Early in our fiscal 2020 third quarter, we completed the addition of DreamLounger recliner seating to an existing Movie Tavern theatre. During the first quarter of fiscal 2020, we began a project that would add DreamLounger recliner seating, as well as Reel Sizzle and Take Five Lounge outlets, to a Marcus Wehrenberg theatre, but this project was temporarily put on hold as a result of the year,Beauty andCOVID-19 pandemic. We currently expect to complete this project during the Beast, and duringfirst half of fiscal 2021. During the fourth quarter of fiscal 2017, including the top performing film of fiscal 2017,Star Wars: The Last Jedi, contributed to the improvement in attendance and box office performance during those periods compared to the same periods of the prior year.
We believe that the most significant factor contributing to variations in2020, we ceased operating one six-screen Movie Tavern theatre attendance during fiscal 2017, as in other periods, was the quantity and quality of films released during the respective periods compared to the films released during the same periods of the prior year. Blockbusters (generally defined as films grossing more than $100 million nationally) accounted for a slightly decreased percentage of our total admission revenues during fiscal 2017, with our top 15 performing films accounting for 41% of our fiscal 2017 admission revenues compared to 43% during fiscal 2016. The following five top performing fiscal 2017 films accounted for nearly 20% of the total admission revenues for our circuit:Star Wars: The Last Jedi,Beauty and the Beast,Guardians of the Galaxy Vol. 2,It andWonder Woman.
The quantity of wide-release films shown in our theatres and number of wide-release films provided by the seven major studios decreased during fiscal 2017 compared to fiscal 2016. We played 124 wide-release films (including 34 digital 3D films) at our theatres during fiscal 2017 compared to 133 wide-release films (including 33 digital 3D films) during fiscal 2016. In total, we played 264 films and 170 alternate content attractions at our theatres during fiscal 2017 compared to 253 films and 144 alternate content attractions during fiscal 2016.
Excluding the Marcus Wehrenberg theatres, our average ticket price increased 2.6% during fiscal 2017 compared to fiscal 2016. The increase in our average ticket price contributed approximately $3.9 million to our comparable theatres admission revenues during fiscal 2017 compared to fiscal 2016, partially offsetting the impact of reduced attendance at comparable theatres during fiscal 2017. The increase was partially attributable to modest price increases we implemented in November 2016 and October 2017. In addition, the fact that we have increased our number of PLF screens, with a corresponding price premium, also contributed to our increased average ticket price during fiscal 2017. We also believe that a change in film product mix had a favorable impact on our average ticket price during fiscal 2017, as two of our top three films during fiscal 2016 were animated family movies (resulting in a higher percentage of lower-priced children’s tickets sold, compared to more adult-oriented and R-rated films that typically result in a higher average ticket price), compared to no animated family films among the top five films during fiscal 2017 and a particularly strong performance ofStar Wars: The Last Jedi in our PLF auditoriums. Conversely, the percentage of our total admission revenues attributable to 3D presentations during fiscal 2017 decreased compared to the percentage of our total admission revenues attributable to 3D presentations during fiscal 2016, meaning that 3D films had an unfavorable impact on our change in average ticket price during fiscal 2017 (a lower percentage of 3D films may result in a lower average ticket price due to the premium price associated with 3D).
Our average concession sales per person at comparable theatres (excluding the Marcus Wehrenberg theatres) increased 5.1% during fiscal 2017 compared to fiscal 2016. Pricing, concession/foodapproaching expiration of its lease, we sold one 7-screen budget cinema and beverage product mix and film product mix are the three primary factors that impact our concession sales per person. A change in concession product mix, including increased sales of higher priced non-traditional food and beverage items from our increasing number ofTake Five Lounges,Zaffiro’s Express andReel Sizzle outlets, as well as modest selected price increases we introduced in November 2016 and October 2017, were the primary reasons for our increased average concession sales per person during fiscal 2017. Excluding the impact of the Wehrenberg theatres and new screens added during fiscal 2017, the increase in average concession sales per person contributed approximately $4.6 million to our comparable theatres concession revenues during fiscal 2017 compared to fiscal 2016, offsetting the impact of reduced attendance at comparable theatres during fiscal 2017.
Our theatre division operating income increased during fiscal 2017 compared to fiscal 2016 due primarily to operating income from the acquired Marcus Wehrenberg theatres. Decreased attendance at comparable theatres described above and preopening expenses of approximately $800,000agreed upon terms related to the opening of two new theatres negatively impacted our operating income during fiscal 2017. Our theatre division revenues and operating income during fiscal 2017 were also negatively impacted by the fact that we had anywhere from 14 to 40 screens out of service from March through mid-November during fiscal 2017 due to renovations underway at multiple theatres. In addition, comparisons to operating income during fiscal 2016 were negatively impacted by the fact that our fiscal 2016 operating results included a significant one-time incentive payment from our pre-show advertising provider. Conversely, fiscal 2016 operating income was negatively impacted by one-time transaction costs related to the Wehrenberg acquisition.
Operating margin for our theatre division decreased to 19.9% for fiscal 2017, compared to 21.7% for fiscal 2016. The aforementioned preopening expenses, in conjunction with the weaker film slate during fiscal 2017 and higher fixed costs, such as depreciation and amortization, rent and property taxes, due in part to the Wehrenberg acquisition, negatively impacted our theatre division operating margins during fiscal 2017 compared to fiscal 2016. Decreased attendance generally negatively impacts our operating margin, particularly because the decreased attendance has the effect of decreasing our high-margin concession revenues and because fixed expenses become a higher percentage of revenues. In addition, if a greater portiontermination of our concession revenues is the result of the sale of non-traditional food and beverage items that typically haveagreement to build a higher product cost compared to traditional concession items, operating margins may be negatively impacted to a small extent. Excluding preopening expenses from the two new theatres added in fiscal 2017, the one-time incentive payment and transaction costs in fiscal 2016, and the change in accounting for cost reimbursements, our theatre division operating margin during fiscal 2017 was 20.2% compared to 21.5% during fiscal 2016. Film costs did not materially impact our operating margin during fiscal 2017 as compared to fiscal 2016.
Other revenues, which include management fees, pre-show advertising income, family entertainment center revenues, surcharge revenues, rental income and gift card breakage income, may also impact operating margin. Other revenues increased by $4.8 million during fiscal 2017 compared to fiscal 2016. Excluding $5.2 million of other income related to the Marcus Wehrenberg theatres, including preshow advertising income, internet surcharge ticketing fees and rental income from the retail center described above, the remaining decrease in other revenues of approximately $400,000, or 2.0%, during fiscal 2017 was attributable to comparable theatres and was due entirely to the fact that during fiscal 2016, we received a significant one-time $3.3 million incentive payment from our current advertising provider, Screenvision. Despite that significant one-time benefit in fiscal 2016, our other income from comparable theatres nearly equaled last year’s total primarily due to an increase in preshow advertising income, internet surcharge ticketing fees and breakage on presold discounted tickets.
We did not add any new screens to existing theatres during fiscal 2017. We opened two newUltraScreen DLX auditoriums at an existing theatre in Minnesota in February 2016 and two new screens at an existing theatre in Wisconsin in November 2016. As noted above, we also opened a new 16-screen theatre in Illinois in October 2016, a 10-screen theatre in Minnesota in April 2017 and an eight-screen theatre in Wisconsin in June 2017. We closed and sold one eight-screen budget-oriented theatre during the fiscal 2017 second quarter. On the first day of our fiscal 2017 third quarter, we converted an existing 12-screen first-run theatre to a budget-oriented theatre. We did not close any theatres during fiscal 2016.
Tacoma, Washington.
Hotels and Resorts
The hotels and resorts division contributed 36.8%44.0% of our consolidated revenues and 12.3%26.5% of our consolidated operating income (loss), excluding corporate items, during fiscal 2018,2020, compared to 38.2%32.1% and 13.8%11.6%, respectively, during fiscal 20172019 and 42.3%36.8% and 16.9%12.3%, respectively, during fiscal 2016.2018. As of December 27, 2018,31, 2020, the hotels and resorts division owned and operated three full-service hotels in downtown Milwaukee, Wisconsin, a full-facilityfull-service destination resort in Lake Geneva, Wisconsin and full-service hotels in Madison, Wisconsin, Chicago, Illinois, Lincoln, Nebraska and Oklahoma City, Oklahoma (we have a majority-ownership position in the Oklahoma City, Oklahoma hotel). In addition, the hotels and resorts division managed 1310 hotels, resorts and other properties for other owners. Included in the 1310 managed properties is one hotel owned by a joint venture in which we have a minority interest and two condominium hotels in which we own some or all of the public space. The following tables set forth revenues, operating income (loss), operating margin and rooms data for the hotels and resorts division for the past three fiscal years:
| | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
| | | | | | | | Change F20 v. F19 | | | | | Change F19 v. F18 |
| ||||||||||||||||||||||||||||||||||
|
| F2020 |
| F2019 |
| Amt. |
| Pct. |
| F2018 |
| Amt. |
| Pct. |
| |||||||||||||||||||||||||||||||||
| Change F18 v. F17 | Change F17 v. F16 | |||||||||||||||||||||||||||||||||||||||||||||||
| F2018 | F2017 | Amt. | Pct. | F2016 | Amt. | Pct. | ||||||||||||||||||||||||||||||||||||||||||
| (in millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
| (in millions, except percentages) | | |||||||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 259.9 | $ | 249.6 | $ | 10.3 | 4.1 | % | $ | 243.2 | $ | 6.4 | 2.6 | % | | $ | 104.6 | | $ | 263.4 | | $ | (158.8) |
| (60.3) | % | $ | 259.9 | | $ | 3.5 |
| 1.3 | % | ||||||||||||||
| Operating income | $ | 12.5 | $ | 12.9 | $ | (0.4 | ) | -3.2 | % | $ | 14.6 | $ | (1.7 | ) | -11.8 | % | ||||||||||||||||||||||||||||||||
Operating income (loss) | | $ | (43.9) | | $ | 10.1 | | $ | (54.0) |
| (536.7) | % | $ | 12.5 | | $ | (2.4) |
| (19.5) | % | ||||||||||||||||||||||||||||
| Operating margin | 4.8 | % | 5.2 | % | 6.0 | % | |
| (41.9) | % |
| 3.8 | % |
|
|
|
| |
| 4.8 | % |
|
|
|
| | ||||||||||||||||||||||
| Available rooms at period-end | F2018 | F2017 | F2016 | |||||||||
| Company-owned | 2,629 | 2,629 | 2,600 | |||||||||
| Management contracts with joint ventures | 333 | 333 | 611 | |||||||||
| Management contracts with condominium hotels | 480 | 480 | 480 | |||||||||
| Management contracts with other owners | 1,833 | 1,399 | 1,231 | |||||||||
| Total available rooms | 5,275 | 4,841 | 4,922 | |||||||||
43
| | | | | | |
Available rooms at period-end |
| F2020 |
| F2019 |
| F2018 |
Company-owned |
| 2,628 |
| 2,627 |
| 2,629 |
Management contracts with joint ventures |
| 333 |
| 333 |
| 333 |
Management contracts with condominium hotels |
| 480 |
| 480 |
| 480 |
Management contracts with other owners |
| 1,691 |
| 1,945 |
| 1,833 |
Total available rooms |
| 5,132 |
| 5,385 |
| 5,275 |
The following table provides a further breakdown of the components of revenues for the hotels and resorts division for the last three fiscal years:
| | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
| | | | | | | | Change F20 v. F19 | | | | | Change F19 v. F18 |
| ||||||||||||||||||||||||||||||||||
|
| F2020 |
| F2019 |
| Amt. |
| Pct. |
| F2018 |
| Amt. |
| Pct. |
| |||||||||||||||||||||||||||||||||
| Change F18 v. F17 | Change F17 v. F16 | |||||||||||||||||||||||||||||||||||||||||||||||
| F2018 | F2017 | Amt. | Pct. | F2016 | Amt. | Pct. | ||||||||||||||||||||||||||||||||||||||||||
| (in millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
| | (in millions, except percentages) | | ||||||||||||||||||||||||||||||||||||||||||||
| Room revenues | $ | 108.8 | $ | 106.9 | $ | 1.9 | 1.8 | % | $ | 105.2 | $ | 1.7 | 1.6 | % | | $ | 35.4 | | $ | 105.9 | | $ | (70.5) |
| (66.6) | % | $ | 108.8 | | $ | (2.9) |
| (2.7) | % | ||||||||||||||
| Food/beverage revenues | 72.8 | 70.6 | 2.2 | 3.0 | % | 67.6 | 3.0 | 4.6 | % | |
| 24.8 | |
| 74.7 | |
| (49.9) |
| (66.8) | % |
| 72.8 | |
| 1.9 |
| 2.6 | % | |||||||||||||||||||
| Other revenues | 45.3 | 43.4 | 1.9 | 4.6 | % | 42.4 | 1.0 | 2.1 | % | |
| 27.5 | |
| 46.5 | |
| (19.0) |
| (40.8) | % |
| 45.3 | |
| 1.2 |
| 2.7 | % | |||||||||||||||||||
| 226.9 | 220.9 | 6.0 | 2.7 | % | 215.2 | 5.7 | 2.6 | % | ||||||||||||||||||||||||||||||||||||||||
| |
| 87.7 | |
| 227.1 | |
| (139.4) |
| (61.4) | % |
| 226.9 | |
| 0.2 |
| 0.1 | % | ||||||||||||||||||||||||||||
| Cost reimbursements | 33.0 | 28.7 | 4.3 | 15.0 | % | 28.0 | 0.7 | 2.4 | % | |
| 16.9 | |
| 36.3 | |
| (19.4) |
| (53.5) | % |
| 33.0 | |
| 3.3 |
| 10.0 | % | |||||||||||||||||||
| Total revenues | $ | 259.9 | $ | 249.6 | $ | 10.3 | 4.1 | % | $ | 243.2 | $ | 6.4 | 2.6 | % | | $ | 104.6 | | $ | 263.4 | | $ | (158.8) |
| (60.3) | % | $ | 259.9 | | $ | 3.5 |
| 1.3 | % | ||||||||||||||
Fiscal 20182020 versus Fiscal 20172019
Division revenues and operating income (loss) decreased significantly during fiscal 2020 compared to fiscal 2019 due to the impact of the COVID-19 pandemic. Room revenues and food and beverage revenues began decreasing due to COVID-19 pandemic related cancellations in March 2020, even before we temporarily closed all of our hotels in late March/early April. In addition, our restaurants and bars were required to close during the last 10 days of the fiscal 2020 first quarter due to the COVID-19 pandemic. We subsequently reopened four of our company-owned hotels late in our fiscal 2020 second quarter (The Pfister Hotel, the Grand Geneva Resort & Spa, The Skirvin Hilton and the Hilton Madison Monona Terrace), three company-owned hotels during our fiscal 2020 third quarter (the Hilton Milwaukee City Center Hotel, The Lincoln Marriott Cornhusker Hotel and the AC Hotel Chicago Downtown) and our remaining company-owned hotel in our fiscal 2020 fourth quarter (Saint Kate). Once reopened, all of our company-owned hotels have operated with significantly reduced occupancies compared to prior years due to the impact of the COVID-19 pandemic. The majority of our restaurants and bars in our hotels have subsequently reopened in conjunction with the hotel reopenings beginning in June 2020, and are operating under applicable state and local restrictions and guidelines. We expect to reopen our two SafeHouse restaurants and bars later in fiscal 2021.
OurOther revenues during fiscal 2020 included ski, spa and golf revenues at our Grand Geneva Resort & Spa (golf revenues exceeded the prior year), management fees, laundry revenues, parking revenues and rental revenues. Cost reimbursements decreased during fiscal 2020 compared to fiscal 2019 due to the temporary closure and subsequent reduced revenues upon reopening of our managed hotels, partially offset by the addition of a new large management contract during fiscal 2019. As of the date of this report, nine of our 10 managed hotels and other properties have reopened.
In addition to the impact of significantly reduced revenues, our hotel division operating loss during fiscal 2020 was negatively impacted by nonrecurring expenses totaling approximately $5.7 million, related to costs associated with initially closing our hotels (primarily payments to and on behalf of laid off employees) and extensive cleaning costs, supply purchases and employee training, among other items, related to the reopening of selected hotel properties and implementing new operating protocols (described in greater detail above). Conversely, our operating loss during fiscal 2020 was favorably impacted by approximately $1.2 million of state government grants awarded from two states for COVID-19 relief. The additional week of operations favorably impacted our hotels and resorts division revenues increased 4.1% during fiscal 2018 compared to fiscal 2017 due to increased room revenues, food2020 by approximately $2.5 million and beverage revenues, other revenues and increased cost reimbursements fromdid not have a material impact on our managed hotels. Room revenues increased due primarily to increased group businessoperating loss. Our operating results during fiscal 2018 compared to fiscal 2017. Food2019 were negatively impacted by approximately $6.8 million of preopening expenses and beverage revenues increased during fiscal 2018 compared to fiscal 2017 partially due to ourSafeHouse restaurant and bar in Chicago, Illinois, which opened in March 2017. Increased catering and banquet revenues also contributedinitial start-up losses related to our overall increase in food and beverage revenues during fiscal 2018 compared to fiscal 2017. Other revenues increased during fiscal 2018 compared to fiscal 2017 due primarily to increased management fees and rental income. Cost reimbursements, described above, also increased during fiscal 2018 compared to fiscal 2017 due to an increase inconversion of the number of management contracts in this division. Excluding cost reimbursements from both years, our comparable hotels and resorts revenues increased 2.7% during fiscal 2018 compared to fiscal 2017.
Hotels and resorts division operating income and operating margin decreased by 3.2% and 0.4 percentage points (from 5.2% to 4.8%), respectively, during fiscal 2018 compared to fiscal 2017 due entirely to preopening expenses of approximately $500,000 and accelerated depreciation expense of approximately $3.7 million related to the project currently underway to convert the former InterContinental Milwaukee hotel into the Saint Kate-The Arts Hotel. Preopening expenses and startup operating losses related to the newSafeHouse Chicago negatively impacted our operating income during fiscal 2017. Excluding the preopening expenses and accelerated depreciation expense from our fiscal 2018 operating income and theSafeHouse Chicago operating results from our fiscal 2017 operating income, operating income for our comparable hotels and resorts division during fiscal 2018 actually exceeded operating income during fiscal 2017 by approximately $3.4 million, or 23.2% ($17.9 million in fiscal 2018 compared to $14.5 million in fiscal 2017). Excluding these same items, our operating margin during fiscal 2018 was 8.0% compared to 6.6% in fiscal 2017. Our comparable hotels and resorts division operating income and operating margin increased during fiscal 2018 compared to fiscal 2017 due in part to increased management fees, improved performance at several owned hotels and overall strong cost control management.Kate.
44
The following table sets forth certain operating statistics, including our average occupancy percentage (number of occupied rooms as a percentage of available rooms), our average daily room rate or ADR,(“ADR”), and our total revenue per available room or RevPAR,(“RevPAR”), for company-owned properties:
| Change F18 v. F17 | ||||||||||||||||
| Operating Statistics(1) | F2018 | F2017 | Amt. | Pct. | ||||||||||||
| Occupancy percentage | 74.5 | % | 74.4 | % | 0.1 | pts | 0.1 | % | ||||||||
| ADR | $ | 150.04 | $ | 148.07 | $ | 1.97 | 1.3 | % | ||||||||
| RevPAR | $ | 111.73 | $ | 110.17 | $ | 1.56 | 1.4 | % | ||||||||
| | | | | | | | | | | | |
| | | | | | | | Change F20 v. F19 |
| |||
Operating Statistics(1) |
| F2020 |
| F2019 |
| Amt. |
| Pct. |
| |||
Occupancy percentage |
| | 38.2 | % | | 73.6 | % | | (35.4) | pts | (48.1) | % |
ADR | | $ | 136.52 | | $ | 154.42 | | $ | (17.90) |
| (11.6) | % |
RevPAR | | $ | 52.12 | | $ | 113.65 | | $ | (61.53) |
| (54.1) | % |
| (1) | These operating statistics represent averages of our comparable |
RevPAR increased at four of our eight comparable company-owned properties during fiscal 2018 compared to fiscal 2017. According to data received from Smith Travel Research and compiled by us in order to analyze our fiscal 20182020 results, comparable “upper upscale” hotels throughout the United States experienced an increasea decrease in RevPAR of 1.9%62.0% during fiscal 2018. Data2020 compared to fiscal 2019. Although data received from Smith Travel Research for our various “competitive sets” – hotels identified in our specific markets that we deem to be competitors to our hotels – is less comprehensive due to the number of hotels closed during portions of the periods reported, data available to us indicates that these hotels also experienced an increasea decrease in RevPAR of 1.9%69.8% during fiscal 2018. We believe our slight RevPAR underperformance during fiscal 20182020 compared to fiscal 2019. Higher class segments of the hotel industry, metrics described above was likely duesuch as luxury and upper upscale, continue to experience lower occupancies compared to lower class hotel segments such as economy and midscale. Based upon the fact thatdata received and complied by us, it appears our hotels are more dependent upon group business than someproperties significantly outperformed our segment of our competitive hotelsthe hotel industry and that several hotels in our competitive sets had favorable comparisons to the prior year due to renovations and other unusual circumstances. during fiscal 2020.
The following table sets forth the change in our average occupancy percentage, ADR and RevPAR for each quarterly period of fiscal 20182020 compared to fiscal 2017:2019 (excluding the Saint Kate):
| Change F18 v. F17 | |||||||||||||||||||||||||
| 1st Qtr. | 2nd Qtr. | 3rd Qtr. | 4th Qtr. | ||||||||||||||||||||||
| | | | | | | | | | ||||||||||||||||
| | Change F20 v. F19 |
| ||||||||||||||||||||||
|
| 1st Qtr. |
| 2nd Qtr. |
| 3rd Qtr. |
| 4th Qtr. |
| ||||||||||||||||
| Occupancy percentage | -2.4 | pts | 0.4 | pts | 2.1 | pts | 0.2 | pts |
| (9.0) | pts | (59.1) | pts | (46.4) | pts | (44.7) | pts | ||||||||
| ADR | 1.2 | % | -0.8 | % | 2.5 | % | 1.6 | % |
| (0.7) | % | (3.3) | % | (5.3) | % | (16.0) | % | ||||||||
| RevPAR | -2.4 | % | -0.3 | % | 5.2 | % | 1.9 | % |
| (14.5) | % | (76.6) | % | (58.2) | % | (70.3) | % | ||||||||
As indicated inThe “drive-to leisure” travel customer provided the table above, our RevPAR performance was much strongermost demand during the second half of fiscal 2018 compared2020, with the Grand Geneva Resort & Spa and a managed condo hotel, the Timber Ridge Lodge & Waterpark, experiencing the highest demand among our open hotels, particularly on weekends. Leisure travel historically decreases during our fiscal fourth quarter as students go back to school and we experience colder weather in our predominantly Midwestern hotels. Transient business and group business travel subsequent to the first halfonset of the COVID-19 pandemic was minimal during fiscal 2018, driven primarily by variations in group business during each quarter.2020. Our company-owned hotels, and in particular our largest hotels, derivehave historically derived a significant portion of their revenues from group business, and as a result, we are more susceptible to variations in RevPAR from quarter to quarter depending upon the strength of the group business market during that particular quarter. Group business also tends to have an impact on our food and beverage revenues because groups are more likely to use our banquet and catering services during their stay. As indicated by the smaller decreases in the quarterly results above, reduced group business negatively impacted several of our hotelsADR during the first and second quarters of fiscal 2018 and increased group business favorably impacted several of our hotels during the third and fourth quarters of fiscal 2018 compared to the same periods in fiscal 2017. According to data received from Smith Travel Research and compiled by us in order to analyze our fiscal 2018 quarterly results, we outperformed our competitive sets during the first and fourth quarters of fiscal 2018 and underperformed our competitive sets2020 (particularly during the second and third quartersquarters), non-group retail pricing held relatively strong, with most of the decrease in ADR due to an overall reduction in market pricing resulting from the lack of group business and a reduction in local demand drivers (restaurants, museums, etc.) in markets with greater restrictions.
45
Looking to future periods, overall occupancy in the U.S. has slowly increased since the initial onset of the COVID-19 pandemic in March 2020. In the near term, we expect most current demand will continue to come from the drive-to leisure segment. Most organizations implemented travel bans at the onset of the pandemic and are currently only allowing essential travel, which will likely limit business travel in the near term. Our company-owned hotels have experienced a significant decrease in group bookings compared to the same period last year. As of the date of this report, our group room revenue bookings for fiscal 2021 - commonly referred to in the hotels and resorts industry as “group pace” - is running significantly behind where we were last year at this time for fiscal 2020, and a large portion of that decline is because last year’s group bookings included bookings in anticipation of Milwaukee hosting the DNC in July 2020. Banquet and catering revenue pace for fiscal 2021 is also running behind where we were last year at this same time for fiscal 2020, but not as much as group room revenues, due in part to increases in wedding bookings. Many of our cancelled group bookings due to COVID-19 are re-booking for future dates, excluding one-time events that could not rebook for future dates such as those connected to the DNC. However, some group bookings for the first half of fiscal 2018. A particular challenge2021 have subsequently canceled or postponed their event, and we cannot predict to what extent any of our hotel bookings will be canceled or rescheduled due to COVID-19 or otherwise.
Unfortunately, the DNC event in Milwaukee in August 2020 was not nearly as significant to Milwaukee and our hotels as we had originally anticipated. Another major event that we expected would benefit our Milwaukee hotels in fiscal 2020, the Ryder Cup, was originally scheduled for September 2020, but was rescheduled to September 2021. However, this event is contributing to our fiscal 2021 group pace.
Forecasting what future RevPAR growth or decline will be during the fiscal 2018 first and second quarters in our important Milwaukee market was that the comparable 2017 periods included two major NCAA basketball tournaments (fiscal 2017 first quarter) and the U.S. Open golf tournament (fiscal 2017 second quarter), bothnext 18 to 24 months is very difficult at this time. The non-group booking window is very short, with most bookings occurring within three days of which favorably impacted our results during the fiscal 2017 periods.
Our overall ADR increase in fiscal 2018 was primarily the resultarrival, making even short-term forecasts of a strong performance by our AC Hotel Chicago Downtown property – excluding this hotel, our overall ADR increase was only slightly positive. In particular, our ADR decreased during the fiscal 2018 second quarter due in large part to the comparison to the prior year period that included the U.S. Open in the Milwaukee market. Four of our eight comparable company-owned properties reported increased ADR during fiscal 2018 compared to fiscal 2017.
Group business also has an impact on our ADR. Typically, when we have substantial blocks of rooms committed to group business, we are able to raise rates with non-group business. Our two largest increases in ADR during fiscal 2018 – the third and fourth quarters – both coincided with increases in group business during the quarter. Conversely, leisure customers tend to be very loyal to online travel agencies, which is one of the reasons why we continue to experience some rate pressure. While we have been selective in choosing the online portals to which we grant access to our inventory, such portals are part of the booking landscape today, and our goal is to use them in the most efficient way possible.
Nationally, the pace offuture RevPAR growth has been declining over the past several years and many published reports by those who closely follow the hotel industry suggest that the United States lodging industry will experience very limited overall growth in RevPAR in calendar 2019, with some markets possibly experiencing small declines. Whether the relatively positive trends in the lodging industry over the last several years will continue depends in large part on the economic environment, as hoteldifficult. Hotel revenues have historically tracked very closely with traditional macroeconomic statistics such as the Gross Domestic Product. We also continueProduct, so we will be monitoring the economic environment very closely. After past shocks to monitorthe system, such as the terrorist attacks on September 11, 2001 and the 2008 financial crisis, hotel demand took longer to recover than other components of the economy. Conversely, we now anticipate that hotel supply ingrowth will be limited for the foreseeable future, which can be beneficial for our markets, as increased supply without a corresponding increase in demand mayexisting hotels. Most industry experts believe the pace of recovery will be steady, but relatively slow. In the near-term, we believe it will be very important to have a negative impactour marketing message focus on the health and safety of our results.
associates and guests. We are focused on reaching the drive-to leisure market through aggressive campaigns promoting creative packages for our guests. Overall, we generally expect our future revenue trends to track or exceed the overall industry trends for our segment of the industry, particularly in our respective markets. We are encouraged by the fact that, as of the date of this Annual Report on Form 10-K, our group room revenue bookings for future periods in fiscal 2019 – something commonly referred to in the hotels and resorts industry as “group pace” – are ahead of our group room revenue bookings for future periods as of March 13, 2018. Banquet and catering revenue pace for fiscal 2019 is also currently ahead of where we were last year at this same time. Conversely, several of our markets, including Oklahoma City, Oklahoma, Chicago, Illinois and Milwaukee, Wisconsin, have experienced an increase in room supply over the past several years that may be an impediment to any substantial increases in ADR in the near term. We believe that our hotels are less impacted by additional room supply than other hotels in the markets in which we compete, particularly in the Milwaukee market, due in large part to recent renovations that we have made to our hotels. The possible disruption of business from our renovations at the Hilton Madison at Monona Terrace (as discussed in the “Current Plans” section of this MD&A) may also have a slight negative impact on the results of that hotel during fiscal 2019.
As also discussed in the “Current Plans” section of this MD&A, we closed the InterContinental Milwaukee hotel in January 2019 and began a substantial renovation project that will convert this hotel into an experiential arts hotel in downtown Milwaukee – Saint Kate-The Arts Hotel. As noted above, our fiscal 2018 operating results were negatively impacted by preopening expenses for this project, as well as accelerated depreciation expense related to InterContinental Milwaukee assets that were disposed of in 2019 in conjunction with this major project. The hotel is currently expected to be closed for the first five months of fiscal 2019. As a result, we currently estimate that we will incur nonrecurring preopening expenses of approximately $1.2-$1.4 million during each of the first two quarters of fiscal 2019, negatively impacting our reported operating income from ourOur hotels and resorts division operating results during these periods.
In addition tofiscal 2020 benefited from a new management contract added during fiscal 2019 – the fact that we began managing the new Omaha Marriott Downtown at The Capitol District468-room Hyatt Regency Schaumburg hotel in Omaha, NebraskaSchaumburg, Illinois. Conversely, we ceased management of the Heidel House Resort & Spa in Green Lake, Wisconsin and the Sheraton Chapel Hill Hotel in Chapel Hill, North Carolina during fiscal 2019, partially offsetting the impact of the new contract. In addition, early in our fiscal 2020 second halfquarter, we ceased management of the Hilton Garden Inn Houston NW/Willowbrook in Houston, Texas and early in our fiscal 2017,2020 third quarter, we ceased management of the Murieta Inn and Spa. As of the date of this filing, our current portfolio of hotels and resorts division operating results during fiscal 2018 reflect the benefits of three new management contracts that we have recently obtained. In January 2018, we commenced management of the recently-opened Murieta Inn and Spa in Rancho Murieta, California. In April 2018, we commenced management of the DoubleTree by Hilton Hotel El Paso Downtown in El Paso, Texas. In August 2018, we commenced management of the recently-opened Courtyard by Marriott El Paso Downtown/Convention Center. These new management contracts have increased our portfolio to 21includes 18 owned and managed properties across the country.
Conversely, during fiscal 2017, we ceased management of the Sheraton Madison Hotel in Madison, Wisconsin and sold our 15% minority ownership interest in the property for a gain of approximately $300,000. Early in the fourth quarter of fiscal 2017, we ceased management of The Westin Atlanta Perimeter North in Atlanta, Georgia and sold our 11% minority interest in the property for a substantial gain of approximately $4.9 million. The loss of these management contracts has partially offset the benefits of the new management contracts described above.
As discussed in the “Current Plans” section of this MD&A, although we are consideringwill prioritize our own finances, we will consider a number of potential growth opportunities that may impact fiscal 20192021 and future period operating results. In addition, if we were to sell one or more hotels during fiscal 2019,2021, our fiscal 20192021 operating results could be significantly impacted. The extent of any such impact will likely depend upon the timing and nature of the growth opportunity (pure management contract, management contract with equity, joint venture investment, or other opportunity) or divestiture (management retained, equity interest retained, etc.).
In October 2017,During our then-currentfiscal 2020 first quarter, Michael R. Evans joined us as the new president of Marcus Hotels & Resorts. Mr. Evans is a proven lodging industry executive with more than 20 years of experience in the hospitality industry with companies such as Marriott International, Inc. and chiefMGM Resorts International. We believe that Mr. Evans’ proven development, operating officer ofand leadership experience and strong roots in the hospitality industry make him extremely qualified to build on our hotels and resorts division resigneddivision’s long history of success. Prior to pursue global opportunities.Mr. Evans joining us, Greg Marcus, our Presidentpresident and Chief Executive Officer,chief executive officer, had assumed operational oversight of this division and served as acting-president of our hotels and resorts division during fiscal 2018,2019, supported by a strong and experienced senior leadership team. We anticipate hiring a new president of our hotels and resorts division during fiscal 2019.
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Fiscal 2017 versus Fiscal 2016
Our hotels and resorts division revenues increased 2.6% during fiscal 2017 compared to fiscal 2016 due primarily to increased food and beverage revenues from our newSafeHouse restaurant and bar in Chicago, Illinois that we opened on March 1, 2017, increased room revenues at the Grand Geneva Resort & Spa due to our addition of 29 new all-season villas in May 2017, increased room revenues at our other existing company-owned hotels, increased other revenues from ourEscapeHouse Chicago and in-house web design and laundry businesses and increased cost reimbursements from our managed hotels, partially offset by a small decrease in management fee revenues. Excluding theSafeHouse Chicago,EscapeHouse Chicago, management company revenues and cost reimbursements from both years, our comparable hotels and resorts revenues increased 1.6% during fiscal 2017 compared to fiscal 2016.
Hotels and resorts division operating income and operating margin decreased by 11.8% and 0.8 percentage points (from 6.0% to 5.2%), respectively, during fiscal 2017 compared to fiscal 2016 due entirely to preopening expenses and startup operating losses related to the newSafeHouse Chicago and a reduction in profits from our management business (due in part to a small one-time favorable adjustment during the prior year). Excluding these two items, as well as the change in the accounting for certain pension expenses described above, operating income for our hotels and resorts division during fiscal 2017 actually exceeded operating income during fiscal 2016 by approximately $200,000, or 1.7%. Excluding these same items, as well as the impact of the change in accounting for cost reimbursements, our operating margin during both fiscal 2017 and fiscal 2016 was 5.3%. A small increase in revenue per available room for comparable hotels during fiscal 2017 contributed to the improved operating results for comparable hotels.
The following table sets forth certain operating statistics, including our average occupancy percentage, our ADR, and our RevPAR, for company-owned properties:
| Change F17 v. F16 | ||||||||||||||||
| Operating Statistics(1) | F2017 | F2016 | Amt. | Pct. | ||||||||||||
| Occupancy percentage | 74.4 | % | 73.9 | % | 0.5 | pts | 0.7 | % | ||||||||
| ADR | $ | 148.07 | $ | 147.67 | $ | 0.40 | 0.3 | % | ||||||||
| RevPAR | $ | 110.17 | $ | 109.16 | $ | 1.01 | 0.9 | % | ||||||||
RevPAR increased at four of our eight comparable company-owned properties during fiscal 2017 compared to fiscal 2016. According to data received from Smith Travel Research and compiled by us in order to analyze our fiscal 2017 results, comparable “upper upscale” hotels throughout the United States experienced an increase in RevPAR of 0.6% during fiscal 2017. Data received from Smith Travel Research for our various “competitive sets” – hotels identified in our specific markets that we deem to be competitors to our hotels – indicates that these hotels experienced a decrease in RevPAR of 3.0% during fiscal 2017. We believe our RevPAR increases during fiscal 2017 exceeded the United States results by 0.3 percentage points and competitive set results by 3.9 percentage points partially due to our success replacing some of the decline in group business with an increase in non-group business. The following table sets forth the change in our average occupancy percentage, ADR and RevPAR for each quarterly period of fiscal 2017 compared to fiscal 2016:
| Change F17 v. F16 | ||||||||||||||||
| 1st Qtr. | 2nd Qtr. | 3rd Qtr. | 4th Qtr. | |||||||||||||
| Occupancy percentage | 3.1 | pts | -2.0 | pts | -0.1 | pts | 0.9 | pts | ||||||||
| ADR | -0.3 | % | 1.1 | % | -0.4 | % | 1.4 | % | ||||||||
| RevPAR | 4.4 | % | -1.5 | % | -0.4 | % | 2.7 | % | ||||||||
As indicated in the table above, our RevPAR performance was much stronger during the first and fourth quarters of fiscal 2017 compared to the second and third quarters of fiscal 2017, driven primarily by variations in group business during each quarter. As indicated in the quarterly results above, reduced group business negatively impacted several of our hotels during the second and third quarters of fiscal 2017 and increased group business favorably impacted several of our hotels during the first and fourth quarters of fiscal 2017 compared to the same periods in fiscal 2016. A particular challenge during the fiscal 2017 third quarter was a decrease in group sales productivity in which an unusually high number of groups contributed less actual rooms sold than were originally booked. We believe the reduced group occupancy during the second and third quarters of fiscal 2017 was related to difficult comparisons to the prior year during several months at those particular properties.
Our overall ADR increase in fiscal 2017 was partially the result of our addition of 29 new all-season villas at the Grand Geneva Resort & Spa. These villas are generally higher-priced than other rooms at the Grand Geneva Resort & Spa. Conversely, due to the challenges in group productivity during the fiscal 2017 third quarter, we elected to accept a lower ADR in some situations to obtain additional non-group business. In addition, during our fiscal 2017 first quarter, our focus was on increasing occupancy, often at the expense of ADR (it is generally more difficult to increase ADR during our slower winter season, as overall occupancy is at its lowest). As a result, only three of our eight comparable company-owned properties reported increased ADR during fiscal 2017 compared to fiscal 2016.
As we continue to increase our visibility as a national hotel management company, we believe that one of our major strengths is the established infrastructure we bring to hotel owners and developers. This includes our highly-regarded web development team that has produced nationally recognized websites, mobile apps and social media campaigns. In addition, during our fiscal 2016 fourth quarter, we expanded the capacity of our wholly-owned laundry facility, Wisconsin Hospitality Linen Service (WHLS), to increase our ability to provide laundry services to a growing number of hotels and other hospitality businesses seeking to out-source these services and we expect to continue to grow that business.
During fiscal 2017, we ceased management of the Sheraton Madison Hotel in Madison, Wisconsin and sold our 15% minority ownership interest in the property for a gain of approximately $300,000. Early in the fourth quarter of fiscal 2017, we ceased management of The Westin Atlanta Perimeter North in Atlanta, Georgia and sold our 11% minority interest in the property for a substantial gain of approximately $4.9 million. Conversely, during fiscal 2017, we began managing the new Omaha Marriott Downtown at The Capitol District hotel in Omaha, Nebraska and the Sheraton Chapel Hill Hotel in Chapel Hill, North Carolina.
Liquidity and Capital Resources
Liquidity
Our movie theatre and hotels and resorts divisionsbusinesses, when open and operating normally, each generate significant and relatively consistent daily amounts of cash, subject to seasonality described above, because each segment’s revenue is derived predominantly from consumer cash purchases. WeUnder normal circumstances, we believe that these relatively consistent and predictable cash sources, as well as the availability of $141 million of unused credit lines, at the end of fiscal 2018, arewould be adequate to support the ongoing operational liquidity needs of our businesses during fiscal 2019.businesses. A detailed description of our liquidity situation as of December 31, 2020 is described in detail above in the “Impact of the COVID-19 Pandemic” section of this MD&A.
We are party toCredit Agreement
On January 9, 2020, we entered into the Credit Agreement with several banks, including JPMorgan Chase Bank, N.A., as Administrative Agent, and U.S. Bank National Association, as Syndication Agent. On April 29, 2020, we entered into the First Amendment, and on September 15, 2020 we entered into the Second Amendment. The Second Amendment became effective on September 22, 2020.
The Credit Agreement provides for a revolving credit agreement (the “Credit Agreement”)facility that matures on June 16, 2021January 9, 2025 with an initial maximum aggregate amount of availability of $225 million. Availability under the revolving credit facility is reduced by outstanding letters of credit ($4.8 million as of December 27, 2018). We may request toan increase in the aggregate amount of the revolving credit facility and/or term loan commitmentsavailability under the Credit Agreement including by the addition of one or more tranches of term loans, by an aggregate amount of up to $75$125 million by increasing the revolving credit facility or adding one or more tranches of term loans. Our ability to increase availability under the Credit Agreement is subject to certain conditions, which include,including, among other things, the absence of any default or event of default or material adverse effect under the Credit Agreement. On January 9, 2020, we borrowed $68 million under the revolving credit facility to refinance the outstanding balance under our then-existing credit facility and to pay certain fees and expenses incurred in connection with the closing of the Credit Agreement. In conjunction with the First Amendment, we also have an initial $90.8 million term loan facility that matures on September 22, 2021 (the maturity date was extended in conjunction with the Second Amendment). We used borrowings under the term loan facility to pay down revolving loans, to pay costs and expenses related to the First Amendment, and for general corporate purposes.
The majorityBorrowings under the Credit Agreement generally bear interest at a variable rate equal to: (i) LIBOR, subject to a 1% floor, plus a specified margin based upon our consolidated debt-to-capitalization ratio as of the most recent determination date; or (ii) the base rate (which is the highest of (a) the prime rate, (b) the greater of the federal funds rate and the overnight bank funding rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR), subject to a 1% floor, plus a specified margin based upon our other long-term debt consistsconsolidated debt-to-capitalization ratio as of senior notesthe most recent determination date. In addition, the Credit Agreement generally requires us to pay a facility fee equal to 0.125% to 0.25% of the total revolving commitment, depending on our consolidated debt-to-capitalization ratio, as defined in the Credit Agreement. However, pursuant to the First Amendment and mortgages with annual maturitiesthe Second Amendment: (A) in respect of $9.8 millionrevolving loans, (1) we are charged a facility fee equal to 0.40% of the total revolving credit facility commitment and $24.1 million(2) the specified margin is 2.35% for LIBOR borrowings and 1.35% for ABR borrowings, which facility fee rate and specified margins will remain in effect until the end of the first fiscal 2019quarter ending after the end of any period in which any portion of the term loan facility remains outstanding or the testing of any financial covenant in the Credit Agreement is suspended (the “specified period”); and 2020, respectively.(B) in respect of term loans, the specified margin is 2.75% for LIBOR borrowings and 1.75% for ABR borrowings, in each case, at all times.
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The Credit Agreement and the senior notes imposecontains various financialrestrictions and covenants applicable to The Marcus Corporationus and certain of our subsidiaries. AsAmong other requirements, the Credit Agreement (a) limits the amount of priority debt (as defined in the Credit Agreement) held by our restricted subsidiaries to no more than 20% of our consolidated total capitalization (as defined in the Credit Agreement), (b) limits our permissible consolidated debt-to-capitalization ratio to a maximum of 0.55 to 1.0, (c) requires us to maintain a consolidated fixed charge coverage ratio of at least 3.0 to 1.0 as of the end of the fiscal quarter ending September 29, 2022 and each fiscal quarter thereafter, (d) restricts our ability and certain of our subsidiaries’ ability to incur additional indebtedness, pay dividends and other distributions (the restriction on dividends and other distributions does not apply to subsidiaries), and make voluntary prepayments on or defeasance of our 4.02% Senior Notes due August 2025, 4.32% Senior Notes due February 2027, the notes or certain other convertible securities, (e) requires our consolidated EBITDA not to be less than or equal to (i) $0 as of September 30, 2021 for the fiscal quarter then ending, (ii) $20 million as of December 27, 2018,30, 2021 for the two consecutive fiscal quarters then ending, (iii) $35 million as of March 31, 2022 for the three consecutive fiscal quarters then ending or (iv) $60 million as of June 30, 2022 for the four consecutive fiscal quarters then ending, (f) requires our consolidated liquidity not to be less than or equal to (i) $125 million as of September 24, 2020, (ii) $125 million as of December 31, 2020, (iii) $100 million as of April 1, 2021, (iv) $100 million as of July 1, 2021, or (v) $50 million as of the end of any fiscal quarter thereafter until and including the fiscal quarter ending June 30, 2022; however, each such required minimum amount of consolidated liquidity would be reduced to $50 million for each such testing date if the initial term loans are paid in full as of such date, and (g) prohibits us and certain of our subsidiaries from incurring or making capital expenditures, in the aggregate for us and such subsidiaries, (i) during the period beginning on April 1, 2020 through and including December 31, 2020 in excess of the sum of $22.5 million plus certain adjustments, or (ii) during our 2021 fiscal year in excess of $50 million plus certain adjustments.
Pursuant to the Credit Agreement, we wereare required to apply net cash proceeds received from certain events, including certain asset dispositions, casualty losses, condemnations, equity issuances, capital contributions, and the incurrence of certain debt, to prepay outstanding term loans. In addition, if, at any time during the specified period, we and certain of our subsidiaries’ aggregate unrestricted cash on hand exceeds $75 million, the Credit Agreement requires us to prepay revolving loans under the Credit Agreement by the amount of such excess, without a corresponding reduction in compliancethe revolving commitments under the Credit Agreement.
In connection with the Credit Agreement: (i) we and certain of our subsidiaries have pledged, subject to certain exceptions, security interests and liens in and on (a) substantially all of the financial covenants imposed bytheir respective personal property assets and (b) certain of their respective real property assets, in each case, to secure the Credit Agreement and related obligations; and (ii) certain of our subsidiaries have guaranteed our obligations under the senior notes,Credit Agreement. The foregoing security interests, liens and we expectguaranties will remain in effect until the Collateral Release Date (as defined in the Credit Agreement).
The Credit Agreement contains customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then, among other things, the lenders may declare any outstanding obligations under the Credit Agreement to be ableimmediately due and payable and exercise rights and remedies against the pledged collateral.
4.02% Senior Notes and 4.32% Senior Notes
On June 27, 2013, we entered into a Note Purchase Agreement (the “4.02% Senior Notes Agreement”) with the several purchasers party to meetthe 4.02% Senior Notes Agreement, pursuant to which we issued and sold $50 million in aggregate principal amount of our 4.02% Senior Notes due August 14, 2025 (the “4.02% Notes”) in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). We used the net proceeds from the issuance and sale of the 4.02% Notes to reduce existing borrowings under our revolving credit facility and for general corporate purposes. On December 21, 2016, we entered into a Note Purchase Agreement (the “4.32% Senior Notes Agreement”) with the several purchasers party to the 4.32% Senior Notes Agreement, pursuant to which we issued and sold $50 million in aggregate principal amount of our 4.32% Senior Notes due February 22, 2027 (the “4.32% Notes” and, together with the 4.02% Notes, the “Notes”) in a private placement exempt from the registration requirements of the Securities Act. We used the net proceeds of the sale of the 4.32% Notes to repay outstanding indebtedness and for general corporate purposes.
On September 15, 2020 we entered into an amendment to the 4.02% Senior Notes Agreement (the “4.02% Third Amendment” and the 4.02% Senior Notes Agreement, as previously amended and as amended by the 4.02% Third Amendment, the “Amended 4.02% Senior Notes Agreement”). The modifications of the 4.02% Senior Notes Agreement under the 4.02% Third Amendment became effective on September 22, 2020. On September 15, 2020 we entered into an amendment to the 4.32% Senior Notes Agreement (the “4.32% Third Amendment” and the 4.32% Senior Notes Agreement, as previously amended and as amended by the 4.32% Third Amendment, the “Amended 4.32% Senior Notes Agreement” and, together with the Amended 4.02% Senior Notes Agreement, the “Amended Senior Notes Agreements”). The modifications of the 4.32% Senior Notes Agreement under the 4.32% Third Amendment became effective on September 22, 2020.
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Interest on the 4.02% Notes is payable semi-annually in arrears on the 14th day of February and August in each year and at maturity. Interest on the 4.32% Notes is payable semi-annually in arrears on the 22nd day of February and August in each year and at maturity. Beginning on August 14, 2021 and on the 14th day of August each year thereafter to and including August 14, 2024, we will be required to prepay $10 million of the principal amount of the 4.02% Notes. Additionally, we may make optional prepayments at any time upon prior notice of all or part of the Notes, subject to the payment of a make-whole amount (as defined in the Amended Senior Notes Agreements, as applicable). Furthermore, until the last day of the first fiscal quarter ending after the Collateral Release Date (as defined in the Amended Senior Notes Agreements, as applicable), we are required to pay a fee to each Note holder in an amount equal to 0.975% of the aggregate principal amount of Notes held by such financialholder. Such fee is payable quarterly (0.24375% of the aggregate principal amount of the Notes per quarter). The entire outstanding principal balance of the 4.32% Notes will be due and payable on February 22, 2027. The entire unpaid principal balance of the 4.02% Notes will be due and payable on August 14, 2025. The Notes rank pari passu in right of payment with all of our other senior unsecured debt.
The Amended Senior Notes Agreements contain various restrictions and covenants applicable to us and certain of our subsidiaries. Among other requirements, the Amended Senior Notes Agreements (a) limit the amount of priority debt held by us or by our restricted subsidiaries to 20% of our consolidated total capitalization, (b) limit our permissible consolidated debt to 65% of our consolidated total capitalization, (c) require us to maintain a consolidated fixed charge coverage ratio of at least 2.5 to 1.0 as of the end of the fiscal quarter ending September 29, 2022 and each fiscal quarter thereafter, (d) require our consolidated EBITDA not to be less than or equal to (i) $0 as of September 30, 2021 for the fiscal quarter then ending, (ii) $20 million as of December 30, 2021 for the two consecutive fiscal quarters then ending, (iii) $35 million as of March 31, 2022 for the three consecutive fiscal quarters then ending or (iv) $60 million as of June 30, 2022 for the four consecutive fiscal quarters then ending, (e) require our consolidated liquidity not to be less than or equal to (i) $125 million as of September 24, 2020, (ii) $125 million as of December 31, 2020, (iii) $100 million as of April 1, 2021, (iv) $100 million as of July 1, 2021, or (v) $50 million as of the end of any fiscal quarter thereafter until and including the fiscal quarter ending June 30, 2022; however, each such required minimum amount of consolidated liquidity would be reduced to $50 million for each such testing date if the initial term loans under the Credit Agreement are paid in full as of such date, and (f) prohibit us and certain of our subsidiaries from incurring or making capital expenditures, in the aggregate for us and such subsidiaries, (i) during the period beginning on April 1, 2020 through and including December 31, 2020 in excess of the sum of $22.5 million plus certain adjustments, or (ii) during our 2021 fiscal year in excess of $50 million plus certain adjustments.
In connection with the Amended Senior Notes Agreements: (i) we and certain of our subsidiaries have pledged, subject to certain exceptions, security interests and liens in and on (a) substantially all of their respective personal property assets and (b) certain of their respective real property assets, in each case, to secure the Notes and related obligations; and (ii) certain subsidiaries of ours have guaranteed our obligations under the Amended Senior Notes Agreements and the Notes. The foregoing security interests, liens and guaranties will remain in effect until the Collateral Release Date.
The Amended Senior Notes Agreements also contain customary events of default. If an event of default under the Amended Senior Notes Agreements occurs and is continuing, then, among other things, the purchasers may declare any outstanding obligations under the Amended Senior Notes Agreements and the Notes to be immediately due and payable and the Note holders may exercise their rights and remedies against the pledged collateral.
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ConvertibleNotes
On September 17, 2020, we entered into a purchase agreement (the “Purchase Agreement”) with J.P. Morgan Securities LLC, as representative of the several initial purchasers (the “Initial Purchasers”), to issue and sell $100.05 million aggregate principal amount of our 5.00% Convertible Senior Notes due 2025 (the “Convertible Notes”) of which an aggregate principal amount of $13.05 million of Notes was issued pursuant to the exercise by the Initial Purchasers of their option to purchase additional Convertible Notes. We offered and sold the Convertible Notes to the Initial Purchasers in reliance on the exemption from registration provided by Section 4(a) (2) of the Securities Act, and for resale by the Initial Purchasers to persons reasonably believed to be qualified institutional buyers pursuant to the exemption from registration provided by Rule 144A under the Securities Act. We relied on these exemptions from registration based in part on representations made by the Initial Purchasers in the Purchase Agreement. The shares of the Company’s common stock, par value $1.00 per share (the “Common Stock”), issuable upon conversion of the Convertible Notes, if any, have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. To the extent that any shares of the Common Stock are issued upon conversion of the Convertible Notes, they will be issued in transactions anticipated to be exempt from registration under the Securities Act by virtue of Section 3(a)(9) thereof because no commission or other remuneration is expected to be paid in connection with conversion of the Convertible Notes and any resulting issuance of shares of the Common Stock. The Purchase Agreement includes customary representations, warranties and covenants by us and customary closing conditions. Under the terms of the Purchase Agreement, we agreed to indemnify the Initial Purchasers against certain liabilities.
The Convertible Notes were issued pursuant to an indenture (the “Indenture”), dated September 22, 2020, between our company and U.S. Bank National Association, as trustee. The net proceeds from the sale of the Convertible Notes were approximately $78.6 million (after deducting the Initial Purchasers’ fees and our estimated fees and expenses related to the offering and the cost of the capped call transactions). We used approximately $16.9 million of net proceeds from the offering to pay the cost of the Capped Call Transactions (as defined below). We used the remainder of the net proceeds from the offering to repay borrowings under our revolving credit facility and for general corporate purposes. The Convertible Notes are senior unsecured obligations and rank (i) senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Convertible Notes; (ii) equal in right of payment to any of our unsecured indebtedness that is not so subordinated; (iii) effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
The Convertible Notes bear interest from September 22, 2020 at a rate of 5.00% per year. Interest will be payable semiannually in arrears on March 15 and September 15 of each year, beginning on March 15, 2021. The Convertible Notes may bear additional interest under specified circumstances relating to our failure to comply with our reporting obligations under the Indenture or if the Convertible Notes are not freely tradeable as required by the Indenture. The Convertible Notes will mature on September 15, 2025, unless earlier repurchased or converted. Prior to March 15, 2025, the Convertible Notes will be convertible at the option of the holders only under the following circumstances: (i) during any fiscal 2019.quarter commencing after the fiscal quarter ending on December 31, 2020 (and only during such fiscal quarter), if the last reported sale price of the Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period immediately after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Common Stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after March 15, 2025, the Convertible Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.
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Upon conversion, the Convertible Notes may be settled, at our election, in cash, shares of Common Stock or a combination thereof. The initial conversion rate is 90.8038 shares of Common Stock per $1,000 principal amount of the Convertible Notes (equivalent to an initial conversion price of approximately $11.01 per share of Common Stock), representing an initial conversion premium of approximately 22.5% to the $8.99 last reported sale price of the Common Stock on The New York Stock Exchange on September 17, 2020. If we undergo certain fundamental changes, holders of Convertible Notes may require us to repurchase for cash all or part of their Convertible Notes for a purchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if a make-whole fundamental change occurs prior to the maturity date, we will, under certain circumstances, increase the conversion rate for holders who convert Convertible Notes in connection with such make-whole fundamental change. We may not redeem the Convertible Notes before maturity and no “sinking fund” is provided for the Convertible Notes. The Indenture includes covenants customary for securities similar to the Convertible Notes, sets forth certain events of default after which the Convertible Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving our company and certain of our subsidiaries after which the Convertible Notes become automatically due and payable.
Capped Call Transactions
In connection with the pricing of the Convertible Notes on September 17, 2020, and in connection with the exercise by the Initial Purchasers of their option to purchase additional Convertible Notes on September 18, 2020, we entered into privately negotiated Capped Call Transactions (the “Capped Call Transactions”) with certain of the Initial Purchasers and/or their respective affiliates and/or other financial institutions (the “Capped Call Counterparties”). The Capped Call Transactions are expected generally to reduce potential dilution of our common stock upon any conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of such converted Convertible Notes, as the case may be, in the event that the market price per share or our common stock, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. If, however, the market price per share of our common stock, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions, there would nevertheless be dilution to the extent that such market price exceeds the cap price of the Capped Call Transactions. The cap price of the Capped Call Transactions will initially be $17.98 per share (in no event shall the cap price be less than the strike price of $11.0128), which represents a premium of 100% over the last reported sale price of the Common Stock of $8.99 per share on The New York Stock Exchange on September 17, 2020, and is subject to certain adjustments under the terms of the Capped Call Transactions. The Capped Call Transactions are separate transactions entered into by us with the Capped Call Counterparties, are not part of the terms of the Convertible Notes and will not change the rights of holders of the Convertible Notes under the Convertible Notes and the Indenture.
Summary
Our long-term debt has scheduled annual principal payments, net of amortization of debt issuance costs, of $10.5 million and $10.9 million in fiscal 2021 and fiscal 2022, respectively. We believe that the actions that have been taken will allow us to have sufficient liquidity to meet our obligations as they come due and to comply with our debt covenants for at least 12 months from the issuance date of the consolidated financial statements. However, future compliance with our debt covenants could be impacted if we are unable to resume operations as currently expected, which could be impacted by matters that are not entirely in our control, such as the continuation of protective actions that federal, state and local governments have taken and the timing of new movie releases (as described in the Impact of the COVID-19 Pandemic section of this MD&A). Future compliance with our debt covenants could also be impacted if the speed of recovery of our theatres and hotels and resorts businesses is slower than currently expected. For example, our current expectations are that our theatre division will significantly underperform during our fiscal 2021 first quarter compared to the prior year, improve during the fiscal 2021 second quarter (but still report results materially below the prior year), before beginning to progressively return to closer-to-normal performance during the second half of fiscal 2021. Our current expectations for our hotels and resorts division are that we will continue to significantly underperform during our fiscal 2021 first quarter compared to the prior year, before beginning to show improvement in each succeeding quarter compared to our current state. We do not expect to return to pre-COVID-19 occupancy levels during fiscal 2021. Even if one or both of our divisions progressively return to closer-to-normal performance and operations in the second half of fiscal 2021, it is possible that the impact of COVID-19 may be greater than currently expected across one or both of our divisions such that we may be unable to comply with our debt covenants. In such an event, we would either seek covenant waivers or attempt to amend our covenants, though there is no certainty that we would be successful in such efforts.
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Financial Condition
Fiscal 20182020 versus Fiscal 2017
2019
Net cash used in operating activities totaled $68.6 million during fiscal 2020, compared to net cash provided by operating activities totaled $137.4of $141.5 million during fiscal 2018 compared to $109.0 million during fiscal 2017, an increase2019, a decrease of $28.4 million, or 26.0%.$210.1 million. The increasedecrease in net cash provided by operating activities in fiscal 2020 was due primarily to increased depreciation and amortization and deferred income taxes in fiscal 2018, as well as the favorable timing in the payment of income taxes and the collection of accounts and notes receivable in fiscal 2018, partially offset by decreasedreduced net earnings and the unfavorable timing in the payment of accounts payable and accrued compensation, partially offset by the favorable timing in fiscal 2018.
the collection of accounts receivable.
Net cash used in investing activities during fiscal 20182020 totaled $59.3$12.1 million compared to $101.2$93.9 million during fiscal 2017,2019, a decrease of $41.9$81.8 million, or 41.4%87.1%. The decrease in net cash used in investing activities was primarily the result of the decreased$30.3 million cash consideration in the Movie Tavern Acquisition during fiscal 2019 and the fact that we have significantly reduced our capital expenditures during fiscal 2018 compared2020 due to fiscal 2017, partially offset by decreased proceedsthe impact of the COVID-19 pandemic. Proceeds received from the disposals of property, equipment and other assets and the sale of intereststrading securities also contributed to our decrease in joint venturesnet cash used in investing activities during fiscal 2018 compared to fiscal 2017. Proceeds from disposals of property, equipment and other assets of $4.5 million and sale of interests in joint ventures of $6.7 million2020. We did not incur any acquisition-related capital expenditures during fiscal 2017 included proceeds from the sale of two hotel joint ventures, two former theatres, two parcels of excess land at theatre locations and our interest in Movietickets.com.
2020.
Total cash capital expenditures (including normal continuing capital maintenance and renovation projects) totaled $58.7$21.4 million during fiscal 20182020 compared to $114.8$64.1 million during fiscal 2017,2019, a decrease of $56.1$42.7 million, or 48.9%66.7%. We incurred capital expenditures of approximately $600,000 and $23.8$1.8 million respectively, during fiscal 2018 and fiscal 20172020 related to development costs of threea proposed new theatres, twotheatre (as described above, we have subsequently abandoned plans to build this theatre) . We incurred capital expenditures of which openedapproximately $3.3 million during fiscal 2017 and2019 related to development costs of one of which is currently under construction and is scheduled to opennew theatre that opened during fiscal 2019. We did not incur any capital expenditures related to developing new hotels during either period. We incurred approximately $43.6$15.8 million and $93.7$31.5 million, respectively, of capital expenditures during fiscal 20182020 and fiscal 20172019 in our theatre division, including the aforementioned costs associated with constructing a new theatres,theatre, as well as costs associated with the addition of DreamLounger recliner seating, ourTake Five Lounge andZaffiro’s Express and food and beverage concepts, andUltraScreen DLX andSuperScreen DLX premium large format screens at selected theatres, each as described in the “Current Plans” section of this MD&A. We incurred approximately $14.9$4.7 million of capital expenditures in our hotels and resorts division during fiscal 2018, including costs associated with the renovation2020, consisting primarily of the Madison Hilton at Monona Terrace and the conversion of the former InterContinental Milwaukee hotel into Saint Kate-The Arts Hotel, as well as other maintenance capital projects at our company-owned hotels and resorts. During fiscal 2017, weWe also incurred approximately $20.6 million of capital expenditures in our hotels and resorts division includingduring fiscal 2019 of approximately $31.8 million, consisting primarily of costs associated with the developmentconversion of ourSafeHouse Chicago location, our developmentthe InterContinental Milwaukee into the Saint Kate and renovation of new villas at the Grand Geneva Resort & Spa described above and variousHilton Madison Monona Terrace, as well as normal maintenance capital projects at our owned hotels and resorts. We did not incur any acquisition-related capital expenditures during fiscal 2018 or fiscal 2017.other properties. Our current estimated fiscal 20192021 cash capital expenditures, (including acquisition-related cash capital expenditures) which we anticipate may be in the $105-$15-$12525 million range, are described in greater detail in the “Current Plans” section of this MD&A.
Net cash used in financing activities during fiscal 2018 totaled $76.9 million compared to net cash provided by financing activities of $4.2 million during fiscal 2017. The increase in net cash provided by operating activities and the decrease in net cash used in investing activities allowed us2020 totaled $69.1 million, compared to reduce our long term debt during fiscal 2018, resulting in the increase in net cash used in financing activities of $43.8 million during fiscal 2018.2019. As described above, we drew down on the full amount available under our revolving credit facility during the first quarter of fiscal 2020 (after taking into consideration outstanding letters of credit that reduce revolver availability). As also described above, we incurred $90.8 million of new short-term borrowings early in our fiscal 2020 second quarter and issued $100.05 million in convertible notes in our fiscal 2020 third quarter, the majority of which was used to repay existing borrowings under our revolving credit facility. Net cash provided by financing activities during fiscal 2020 was reduced by $16.9 million of Capped Call Transactions described above. As a result, we added $221.5 million of new short-term revolving credit facility borrowings, and we made $302.5 million of repayments on short-term revolving credit facility borrowings during fiscal 2020 (net decrease in borrowings on our credit facility of $81.0 million).
We did not issue any new long-term debt during fiscal 2019. We used excess cash during fiscal 2018 and fiscal 20172019 to reduce our borrowings under our revolving credit facility. As short-term revolving credit facility borrowings became due, we replaced them as necessary with new short-term revolving credit facility borrowings. During fiscal 2019, we also used borrowings from our revolving credit facility to fund the cash consideration in the Movie Tavern Acquisition. As a result, we added $203.0$335.0 million of new short-term revolving credit facility borrowings and we made $254.0$333.0 million of repayments on short-term revolving credit facility borrowings during fiscal 20182019 (net decreaseincrease in borrowings on our credit facility of $51.0$2.0 million) compared to $322.0.
As described in the Hotels and Resorts section of this MD&A, we received PPP loan proceeds during the second quarter of fiscal 2020, the majority of which were used for qualifying expenses during the second quarter that we believe will result in forgiveness of the loan under provisions of the CARES Act. Approximately $3.4 million of new short-term borrowingsthe PPP loan proceeds were not used for qualifying expenses as of December 31, 2020 and $332.0 million of repayments on short-term borrowings made during fiscal 2017 (net decrease in net borrowings on our credit facility of $10.0 million), accounting for a significant portion ofcontributed to the increase in net cash used in financing activities during fiscal 2018.
Also contributing to our increase in net cash used in financing activities during fiscal 2018 compared to net cash provided by financing activities during fiscal 2017 was2020 compared to the fact that we received proceeds from the issuance of long-term debt totaling $65.0 million during fiscal 2017, including the proceeds from our issuance of $50.0 million of senior notes. In addition, we repaid a mortgage note that matured in January 2017 with a balance of $24.2 million as of December 29, 2016 during fiscal 2017 and replaced it with borrowings under our revolving credit facility and the issuance of a $15.0 million mortgage note. We made principalprior year.
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Principal payments on long-term debt totaling $12.2were $9.4 million during fiscal 2018 compared to $36.32020 and included a $9.0 million final payment on senior notes that matured in April 2020. Principal payments on long-term debt were $24.6 million during fiscal 2017 (including2019 and included the repayment of a $14.6 million mortgage note repayment described above).
on a hotel. We incurred $7.6 million in debt issuance costs during fiscal 2020. We did not incur any debt issuance costs during fiscal 2019.
Our debt-to-capitalization ratio (excluding(including short-term borrowings and excluding our capitalfinance lease obligations) was 0.330.37 at December 27, 201831, 2020 compared to 0.400.26 at December 28, 2017.26, 2019. Based upon our current expectations for our fiscal 20192021 operating results and capital expenditures, we anticipate that our total long-term debt and debt-to-capitalization ratio may modestly increase slightly during fiscal 2019. Our debt-to-capitalization ratio, however, may not change significantly during fiscal 2019 compared to fiscal 2018 due to an increase in shareholders equity resulting from our issuance of common stock in conjunction with the Movie Tavern acquisition.2021. Our actual total long-term debt and debt-to-capitalization ratio at the end of fiscal 20192021 are dependent upon, among other things, our actual operating results, capital expenditures, potential acquisitions, asset sales proceeds and potential equity transactions during the year.
We repurchased approximately 83,00038,000 shares of our common stock for approximately $2.9 million$696,000 and 29,00030,000 shares of our common stock for approximately $850,000,$1.1 million, respectively, during fiscal 20182020 and fiscal 20172019 in conjunction with the exercise of stock options. As of December 27, 2018,31, 2020, approximately 2.82.7 million shares of our common stock remained available for repurchase under prior Board of Directors repurchase authorizations. Under these authorizations, we may repurchase shares of our common stock from time to time in the open market, pursuant to privately-negotiated transactions or otherwise, depending upon a number of factors, including prevailing market conditions. The Credit Agreement, as amended, currently restricts our ability to repurchase shares in the open market until such time as we have paid off the Term Loan A and returned to compliance with our prior covenants under the Credit Agreement.
In conjunction with the Movie Tavern acquisition, we issued 2,450,000 shares of our common stock to the seller during the first quarter of fiscal 2019. This non-cash transaction reduced treasury stock and increased capital in excess of par by the value of the shares at closing of approximately $109.2 million.
We paid regular quarterly dividends totaling $16.4$5.1 million and $13.5$19.3 million, respectively, during fiscal 20182020 and fiscal 2017. During2019. As described above, the Credit Agreement, as amended, required us to temporarily suspend our quarterly dividend payments for the remainder of 2020 and first two quarters of fiscal 2021. The Credit Agreement also limits the total amount of quarterly dividend payments during the four subsequent quarters beginning with the third quarter of fiscal 2018,2021, unless the Term Loan A is repaid and we increased our regular quarterly common stock cash dividend by 20.0% to $0.15 per common share. Duringare in compliance with prior financial covenants under the first quarter of fiscal 2019, we increased our regular quarterly common stock cash dividend by an additional 6.7% to $0.16 per common share. Total dividends paid during fiscal 2019 will also increase due to the issuance of 2.45 million shares of common shares in conjunction with the Movie Tavern acquisition.
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Fiscal 2017 versus Fiscal 2016
Net cash provided by operating activities totaled $109.0 million during fiscal 2017 compared to $82.7 million during fiscal 2016, an increase of $26.3 million, or 31.9%. The increase in net cash provided by operating activities was due primarily to increased net earnings and depreciation and amortization and the favorable timing in the payment of accounts payable, taxes other than income and other accrued liabilities, partially offset by a reduction in deferred taxes, the unfavorable timing in the collection of accounts and notes receivable and in the payment of income taxes and accrued compensation.
Net cash used in investing activities during fiscal 2017 totaled $101.2 million compared to $141.1 million during fiscal 2016, a decrease of $39.9 million, or 28.3%. The decrease in net cash used in investing activities was primarily the result of the purchase of the Wehrenberg theatres during fiscal 2016, partially offset by increased capital expenditures during fiscal 2017 compared to fiscal 2016. Increased proceeds from the disposals of property, equipment and other assets and the sale of interests in joint ventures during fiscal 2017 also contributed to the decrease in net cash used in investing activities during fiscal 2017 compared to fiscal 2016. Proceeds from disposals of property, equipment and other assets of $4.5 million and sale of interests in joint ventures of $6.7 million during fiscal 2017 included proceeds from the sale of two hotel joint ventures, two former theatres, two parcels of excess land at theatre locations and our interest in Movietickets.com. We also sold a partial interest in a joint venture during fiscal 2016 (the Hotel Zamora, St. Pete Beach, Florida), which reduced our net cash used in investing activities during fiscal 2016.
Total cash capital expenditures (including normal continuing capital maintenance and renovation projects) totaled $114.8 million during fiscal 2017 compared to $83.6 million during fiscal 2016, an increase of $31.2 million, or 37.3%. We incurred capital expenditures of $23.8 million and $27.9 million, respectively, during fiscal 2017 and fiscal 2016 related to real estate purchases and development costs of three new theatres, one of which opened during the fourth quarter of fiscal 2016 and two of which opened during fiscal 2017. We did not incur any capital expenditures related to developing new hotels during either period. We incurred approximately $93.7 million and $68.8 million, respectively, of capital expenditures during fiscal 2017 and fiscal 2016 in our theatre division, including the aforementioned costs associated with constructing new theatres, as well as costs associated with the addition of DreamLounger recliner seating, ourTake Five Lounge,Zaffiro’s Express andReel Sizzlefood and beverage concepts, andUltraScreen DLX andSuperScreen DLX premium large format screens at selected theatres. We incurred approximately $20.6 million of capital expenditures in our hotels and resorts division during fiscal 2017, including costs associated with the development of our new SafeHouse Chicago location, our development of new villas at the Grand Geneva Resort & Spa described above and various maintenance capital projects at our owned hotels and resorts. During fiscal 2016, we incurred approximately $14.7 million of capital expenditures in our hotels and resorts division, including costs associated with the renovation of The Skirvin Hilton andSafeHouseMilwaukee, expansion of WHLS and development of our newSafeHouseChicago, as well as other maintenance capital projects at our company-owned hotels and resorts. As described above, we incurred acquisition-related capital expenditures in our theatre division of $63.8 million during fiscal 2016 (purchase price of $65.0 million, net of a negative working capital balance that we assumed in the transaction). We did not incur any acquisition-related capital expenditures in our theatre division during fiscal 2017.
Net cash provided by financing activities during fiscal 2017 totaled $4.2 million compared to $42.5 million during fiscal 2016. The decrease in net cash provided by financing activities related primarily to a decrease in our net borrowings on our credit facility during fiscal 2017 compared to fiscal 2016, partially offset by a net increase in our long-term debt during fiscal 2017 compared to a net decrease in long-term debt during fiscal 2016.
We received proceeds from the issuance of long-term debt totaling $65.0 million during fiscal 2017, including the proceeds from our issuance of $50.0 million of senior notes. In addition, we repaid a mortgage note that matured in January 2017 with a balance of $24.2 million as of December 29, 2016 during fiscal 2017 and replaced it with borrowings under our revolving credit facility and the issuance of a $15.0 million mortgage note bearing interest at LIBOR plus 2.75%, requiring monthly principal and interest payments and maturing in fiscal 2020. We made principal payments on long-term debt totaling $36.3 million during fiscal 2017 (including the mortgage note repayment described above) compared to payments of $52.3 million during fiscal 2016. Fiscal 2016 repayments included our repayment of a $37.2 million term loan from our prior credit agreement.
We used excess cash during fiscal 2017 and fiscal 2016 to reduce our borrowings under our revolving credit facility. As short-term borrowings became due, we replaced them as necessary with new short-term borrowings. In conjunction with the execution of our Credit Agreement, in June 2016,at which point we also paid all outstanding borrowings under our prior revolving credit facility and replaced them with borrowings under our new revolving credit facility. We also used borrowings under our revolving credit facilityhave the ability to fund the Wehrenberg acquisition during fiscal 2016 prior to the issuance of the senior notes described above during fiscal 2017. As a result,declare quarterly dividend payments as we added $322.0 million of new short-term borrowings and we made $332.0 million of repayments on short-term borrowings during fiscal 2017 (net decrease in borrowings on our credit facility of $10.0 million) compared to $346.2 million of new short-term borrowings and $236.2 million of repayments on short-term borrowings made during fiscal 2016 (net increase in net borrowings on our credit facility of $110.0 million), accounting for the decrease in net cash provided by financing activities during fiscal 2017.
Our debt-to-capitalization ratio (excluding our capital lease obligations) was 0.40 at December 28, 2017 compared to 0.42 at December 29, 2016.
We repurchased approximately 29,000 shares of our common stock for approximately $850,000 in conjunction with the exercise of stock options during fiscal 2017. We repurchased approximately 334,000 shares of our common stock for approximately $6.4 million in conjunction with the exercise of stock options and the purchase of shares in the open market during fiscal 2016.
We paid regular quarterly dividends totaling $13.5 million and $12.0 million, respectively, during fiscal 2017 and fiscal 2016. During the first quarter of fiscal 2017, we increased our regular quarterly common stock cash dividend by 11.1% to $0.125 per common share. During the first quarter of fiscal 2018, we increased our regular quarterly common stock cash dividend by an additional 20.0% to $0.15 per common share. During fiscal 2017 and fiscal 2016, we made distributions to noncontrolling interests of $20,000 and $448,000, respectively.
deem appropriate.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements
The following schedule details our contractual obligations at December 27, 201831, 2020 (in thousands):
| Payments Due by Period | ||||||||||||||||||||
| Total | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | ||||||||||||||||
| Long-term debt | $ | 238,820 | $ | 9,957 | $ | 114,392 | $ | 22,080 | $ | 92,391 | ||||||||||
| Interest on fixed-rate long term debt(1) | 42,765 | 7,989 | 13,586 | 10,014 | 11,176 | |||||||||||||||
| Pension obligations | 35,640 | 1,378 | 3,080 | 2,982 | 28,200 | |||||||||||||||
| Operating lease obligations | 130,627 | 11,317 | 19,839 | 18,948 | 80,523 | |||||||||||||||
| Capital lease obligations | 31,106 | 3,073 | 5,657 | 5,436 | 16,940 | |||||||||||||||
| Construction commitments | 24,757 | 24,757 | – | – | – | |||||||||||||||
| Total contractual obligations | $ | 503,715 | $ | 58,471 | $ | 156,554 | $ | 59,460 | $ | 229,230 | ||||||||||
| | | | | | | | | | | | | | | |
| | Payments Due by Period | |||||||||||||
|
| | |
| Less Than |
| | |
| | |
| After | ||
| | Total | | 1 Year | | 1-3 Years | | 4-5 Years | | 5 Years | |||||
Long-term debt | | $ | 226,007 | | $ | 10,548 | | $ | 21,953 | | $ | 135,605 | | $ | 57,901 |
Interest on fixed-rate long term debt(1) | |
| 52,613 | |
| 11,278 | |
| 20,111 | |
| 16,529 | |
| 4,695 |
Pension obligations | |
| 48,604 | |
| 1,401 | |
| 3,235 | |
| 3,954 | |
| 40,014 |
Operating lease obligations | |
| 337,952 | |
| 30,318 | |
| 53,731 | |
| 50,814 | |
| 203,089 |
Finance lease obligations | |
| 27,516 | |
| 3,722 | |
| 6,565 | |
| 5,954 | |
| 11,275 |
Short-term borrowings | | | 87,194 | | | 87,194 | | | — | | | — | | | — |
Construction commitments | |
| 2,094 | |
| 2,094 | |
| — | |
| — | |
| — |
Total contractual obligations | | $ | 781,980 | | $ | 146,555 | | $ | 105,595 | | $ | 212,856 | | $ | 316,974 |
| (1) | Interest on variable-rate debt obligations is excluded due to significant variations that may occur in each year related to the amount of variable-rate debt and the accompanying interest rate. |
As of December 27, 2018, we had an additional capital lease obligation of $4.0 million related to digital cinema equipment. The maximum amount we could be required to pay under this obligation is approximately $6.2 million per year until the obligation is fully satisfied. We believe the possibility of making any payments on this obligation is remote. Additional detail describing this obligation is included in Note 6 to our consolidated financial statements.
Additional detail describing our long-term debt is included in Note 67 to our consolidated financial statements.
As of December 27, 2018,31, 2020, we had no additional material purchase obligations other than those created in the ordinary course of business related to property and equipment, which generally have terms of less than 90 days. We had long-term obligations related to our employee benefit plans, which are discussed in detail in Note 810 to our consolidated financial statements. We have not included uncertain tax obligations in the table of contractual obligations set forth above due to uncertainty as to the timing of any potential payments.
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As of December 27, 2018, we had approximately two years remaining on our office lease.
As of December 27, 2018,31, 2020, we had no debt or lease guarantee obligations.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates, and we manage our exposure to this market risk by monitoring available financing alternatives.
Variable interest rate debt outstanding as of December 27, 2018 was $93.731, 2020 (including short-term borrowings) totaled $87.8 million ($87.2 million net of debt issuance costs), carried an average interest rate of 3.8%3.75% and represented 39.2%27.7% of our total debt portfolio. After adjusting for outstanding swap agreements described below, variable interest rate debt outstanding as of December 27, 2018 was $43.731, 2020 (including short term borrowing) totaled $37.8 million, carried an average interest rate of 4.1%3.75% and represented 18.3%11.9% of our total debt portfolio. Our earnings aremay be affected by changes in short-term interest rates as a result of our borrowings under our revolving credit facility. Our Credit Agreement currently provides for a 1.0% LIBOR floor. Based upon the interest rates in effect on our variable rate debt outstanding as of December 27, 2018, a31, 2020, LIBOR would need to increase by approximately 81 basis points before our annual interest expense would be impacted. If that were to happen, an additional 100 basis point increase in market interest rates above the LIBOR floor would increase our annual interest expense by approximately $440,000,$378,000, taking our outstanding swap agreements into consideration.
Fixed interest rate debt totaled $145.6$229.7 million as of December 27, 2018,31, 2020, carried an average interest rate of 4.5%4.9% and represented 60.8%72.3% of our total debt portfolio. After adjusting for outstanding swap agreements described below, fixed interest rate debt totaled $195.6$279.7 million as of December 27, 2018,31, 2020, carried an average interest rate of 4.3%5.0% and represented 81.7%88.1% of our total debt portfolio. Fixed interest rate debt included the following: senior notes bearing interest semiannually at fixed rates ranging from 4.02% to 6.55%4.32% (plus a specified period fee of 0.975% described above), maturing in fiscal 20192021 through 2027; andconvertible senior notes bearing interest of 5.0%, maturing in fiscal 2025, fixed rate mortgages and other debt instruments bearing interest from 3.00% to 5.75%, maturing in fiscal 2025 and 2042.2042, and PPP loans bearing interest at 1.0%, maturing in fiscal 2024. The fair value of our fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of our fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. As of December 27, 2018,31, 2020, the fair value of our $118.0$100.0 million of senior notes was approximately $110.0$100.0 million. As of December 31, 2020, the fair value of our $100.05 million of convertible senior notes was approximately $144.7 million. Based upon the respective rate and prepayment provisions of our remaining fixed interest rate mortgage and unsecured term note at December 27, 2018,31, 2020, the carrying amounts of such debt approximated fair value as of such date.
The variable interest rate debt (including short-term borrowings) and fixed interest rate debt outstanding as of December 27, 201831, 2020 matures as follows (in thousands):
| F2019 | F2020 | F2021 | F2022 | F2023 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
|
| F2021 |
| F2022 |
| F2023 |
| F2024 |
| F2025 |
| Thereafter |
| Total | |||||||||||||||||||||||||||||||||||
| Variable interest rate | $ | 174 | $ | 14,521 | $ | 79,000 | $ | – | $ | – | $ | – | $ | 93,695 | | $ | 87,194 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 87,194 | ||||||||||||||
| Fixed interest rate | 9,925 | 9,965 | 11,015 | 11,065 | 11,117 | 92,502 | 145,589 | |
| 11,317 | |
| 11,716 | |
| 11,775 | |
| 11,835 | |
| 125,115 | |
| 57,933 | |
| 229,691 | |||||||||||||||||||||
| Debt issuance costs | (142 | ) | (57 | ) | (52 | ) | (51 | ) | (51 | ) | (111 | ) | (464 | ) | |
| (769) | |
| (769) | |
| (769) | |
| (768) | |
| (577) | |
| (32) | |
| (3,684) | ||||||||||||||
| Total debt | $ | 9,957 | $ | 24,429 | $ | 89,963 | $ | 11,014 | $ | 11,066 | $ | 92,391 | $ | 238,820 | | $ | 97,742 | | $ | 10,947 | | $ | 11,006 | | $ | 11,067 | | $ | 124,538 | | $ | 57,901 | | $ | 313,201 | ||||||||||||||
We periodically enter into interest rate swap agreements to manage our exposure to interest rate changes. These swaps involve the exchange of fixed and variable interest rate payments. Payments or receipts on the agreements are recorded as adjustments to interest expense. We had one outstanding interest rate swap agreement at December 28, 2017 covering $25.0 million that expired on January 22, 2018. Under this swap agreement, we paid a defined fixed rate while receiving a defined variable rate based on LIBOR, effectively converting $25.0 million of our borrowing under our Credit Agreement to a fixed rate. The swap agreement did not materially impact our fiscal 2018 or fiscal 2017 earnings.
On March 1, 2018, we entered into two interest rate swap agreements covering $50.0 million of floating rate debt which require us to pay interest at a defined fixed rate while receiving interest at a defined variable rate of one-month LIBOR. The first swap hashad a notional amount of $25.0 million, expiresexpired on March 1, 2021 and hashad a fixed rate of 2.559%. The second swap has a notional amount of $25.0 million, expires on March 1, 2023 and has a fixed rate of 2.687%. The interest ratesrate swaps are considered effective for accounting purposes and qualify as cash flow hedges. These swap agreements did not materially impact our fiscal 20182020 earnings and we do not expect the interest rate swaps to materially impact our fiscal 20192021 earnings.
Critical Accounting Policies and Estimates
This MD&A is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP).States. The preparation of our financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
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On an on-going basis, we evaluate our estimates associated with critical accounting policies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.
| We review long-lived assets, including |
| Periodically, we make acquisitions that may have a material impact on our consolidated financial position. Assets acquired and liabilities assumed in acquisitions are recorded at fair value as of the acquisition date. We use judgment to allocate the purchase price of the businesses acquired to the identifiable tangible and intangible assets acquired and liabilities assumed. In some cases, we may use an independent valuation firm to assist with our valuation, and our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired businesses using acceptable valuation techniques. Generally, tangible assets acquired include property and equipment, finance lease right-of-use assets and operating lease right-of-use assets. Intangible assets acquired may include tradename intangibles, non-compete agreements or goodwill in a business combination. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year following the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. During fiscal 2019, we acquired the assets of Movie Tavern for a total purchase price of approximately $139.3 million. |
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| ● | We review goodwill for impairment annually or more frequently if certain indicators arise. We perform our annual impairment test on the last day of our fiscal year. We believe performing the test at the end of the fiscal year is preferable as the test is predicated on qualitative factors which are developed and finalized near fiscal year-end. Goodwill is tested for impairment at a reporting unit level, determined to be at an operating segment level. When reviewing goodwill for impairment, we consider the amount of excess fair value over the carrying value of the reporting unit, the period of time since the last quantitative test, and other factors to determine whether or not to first perform a qualitative test. When performing a qualitative test, we assess numerous factors to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying value. Examples of qualitative factors that we assess include our share price, our financial performance, market and competitive factors in our industry, and other events specific to the reporting unit. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying value, we perform a |
Due to the COVID-19 pandemic and the temporary closing of all of our theatre locations, we determined that a triggering event occurred during the 13 weeks ended March 26, 2020 and performed a quantitative analysis. In order to determine fair value, we used assumptions based on information available to us as of March 26, 2020, including both market data and forecasted cash flows. We then used this information to determine fair value and determined that the fair value of our theatre reporting unit exceeded our carrying value by approximately 20% and deemed that no impairment was indicated as of March 26, 2020. During the 13 weeks ended June 25, 2020, we determined that there were no indicators of impairment that would require an additional quantitative analysis as of June 25, 2020. Due to the ongoing impact of the COVID-19 pandemic, the continued temporary closing of several of our theatre locations, and a reduction in our share price, we determined that a triggering event occurred during the 13 weeks ended September 24, 2020 and performed a quantitative analysis. In order to determine fair value, we used assumptions based on information available to us as of September 24, 2020, including both market data and forecasted cash flows. We then used this information to determine fair value and determined that the fair value of our theatre reporting unit exceeded our carrying value by approximately 17% and deemed that no impairment was indicated as of September 24, 2020. We also performed a quantitative analysis as of December 31, 2020. In order to determine fair value, we used assumptions based on information available to us as of December 31, 2020, including both market data and forecasted cash flows. We then used this information to determine fair value and determined that the fair value of our theatre reporting unit exceeded our carrying value by approximately 21% and deemed that no impairment was indicated as of December 31, 2020. If we are unable to achieve our forecasted cash flow or if market conditions worsen, our goodwill could be impaired at a later date. The fair value of our theatre reporting unit exceeded our carrying value for fiscal 2019 and fiscal 2018 by a substantial amount.
| ● | When accounting for the issuance of convertible debt instruments, we separate the convertible debt instrument into a liability component and an equity component. The carrying amount of the liability component is calculated by estimating the fair value using assumptions that market participants would use in pricing a similar debt instrument of similar credit quality and maturity that does not have an associated convertible feature, including market interest rates. Determining the fair value of the debt component requires the use of accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the debt component and the associated non-cash interest expense. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative if it is indexed in our |
In addition, debt issuance costs related to the issuance of convertible debt instruments are allocated to the liability and equity components based on their relative values. Debt issuance costs allocated to the liability component are amortized over the life of the convertible debt instrument as additional non-cash interest expense. The transaction costs allocated to the equity component are netted with the equity component of the convertible debt instrument in stockholders’ equity.
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On January 1, 2021, the first day of our fiscal 2021, we early adopted ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40):Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which eliminates the separation of the convertible debt instrument into a lability component and an equity component. Refer to Note 1 of the notes to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
| Depreciation expense is based on the estimated useful life of our assets. The life of the assets is based on a number of assumptions, including cost and timing of capital expenditures to maintain and refurbish the asset, as well as specific market and economic conditions. While management believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net |
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Accounting Changes
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02,Leases (Topic 842), intended to improve financial reporting related to leasing transactions. ASU No. 2016-02 requiresFor a lessee to recognize a right-of-use (ROU) asset and a lease liability for most leases. The new guidance will also require disclosures to help investors and other financial statement users better understand the amount, timing and uncertaintydescription of cash flows arising from the leases. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of net earnings. In July 2018, the FASB also issued ASU No. 2018-11,Leases (Topic 842): Targeted Improvements, which amends ASU No. 2016-02 and allows entities the option to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The new standard is effective for fiscal years beginning after December 15, 2018. We adopted the newrecent accounting standard aspronouncements, Sec Note 1 of the first day of fiscal 2019 using the modified retrospective approach, which will result in the cumulative effect of adoption recognized at the date of application, rather than as of the earliest period presented. As a result, no adjustment will be madenotes to prior period financial information and disclosures.
In conjunction with the adoption of the new standard, companies are able to elect several practical expedients to aid in the transition to Topic 842. We expect to elect the package of practical expedients which permits us to forego reassessment of our prior conclusions related to lease identification, lease classification and initial direct costs. Topic 842 also provides practical expedients for an entity’s ongoing accounting. We expect to elect the practical expedient to not separate lease and non-lease components for all of our leases. We also expect to make a policy election not to apply the lease recognition requirements for short-term leases.. As a result, we will not recognize right-of-use assets or lease liabilities for short-term leases that qualify for the policy election (those with an initial term of 12 months or less which do not include a purchase or renewal option which is reasonably certain to be exercised), but instead will recognize these lease payments as lease costs on a straight-line basis over the lease term.
We are finalizing our evaluation of the impact of the adoption of Topic 842 on our consolidated financial statements and expect a material impact related to the recognition of ROU assets and lease liabilities on the consolidated balance sheet for assets currently subject to operating leases. We will recognize lease liabilities representing the present value of the remaining future minimum lease payments for all of our operating leases as of December 28, 2018. We estimate that the amount recorded related to these liabilities will be between $75,000,000 and $100,000,000. We will recognize ROU assets for all assets subject to operating leasesincluded in an amount equal to the operating lease liabilities, adjusted for the balances of long-term prepaid rent, favorable lease intangible assets, deferred lease expense, unfavorable lease liabilities and deferred lease incentive liabilities as of December 28, 2018.
We do not believe adoption of the new standard will have a material effect on our consolidated statements of net earnings or our consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-04,Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, which eliminates Step 2 of the goodwill impairment test that had required a hypothetical purchase price allocation. Rather, entities should apply the same impairment assessment to all reporting units and recognize an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for us in fiscal 2020 and must be applied prospectively. We do not believe the new standard will have a material effect on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-04,Compensation—Retirement Benefits—Defined Benefit Plans—General, designed to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. ASU No. 2018-14 is effective for us in fiscal 2021 and early application is permitted. We are evaluating the effect that the guidance will have on our financial statement disclosures.
In August 2018, the FASB issued ASU No. 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, (ASU No. 2018-13). The purpose of ASU No. 2018-13 is to improve the disclosures related to fair value measurements in the financial statements. The improvements include the removal, modification and addition of certain disclosure requirements primarily related to Level 3 fair value measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within that year. The amendments in ASU No. 2018-13 should be applied prospectively. We do not expect ASU No. 2018-13 to have a significant impact on our consolidated financial statements.
On December 29, 2017, we adopted and applied to all contracts ASU No. 2014-09,Revenue from Contracts with Customers, a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We elected the modified retrospective method for the adoption of ASU No. 2014-09 and its related ASU amendments. Under this method, we recognized the cumulative effect of the changes in retained earnings at the date of adoption. Reported financial information for the historical comparable periods was not revised and continues to be reported under the accounting standards in effect during the historical periods.
We performed a review of the requirements of ASU No. 2014-09 and related ASUs in preparation for adoption of the new standard. We reviewed our key revenue streams and related customer contracts and have applied the five-step model of the standard to these revenue streams and compared the results to our current accounting practices. The majority of our revenues continue to be recognized in a manner consistent with historical practice. See Note 2 for further discussion.
On December 29, 2017, we adopted ASU No. 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities, which primarily affects the accounting for equity investments, financial liabilities under fair value option, and the presentation and disclosure requirements of financial instruments. Upon adoption, we made an $11,000 cumulative effect adjustment to reclassify the unrealized loss of an equity investment previously classified as available for sale from accumulated other comprehensive loss to opening retained earnings. All future changes in fair value for this equity security will be recognized through net earnings. In addition, we hold two investments that were previously accounted for under the cost method of accounting, which under ASU No. 2016-01 were deemed to not have readily determinable fair values and thus were not impacted by the adoption of ASU No. 2016-01. The adoptionPart II, Item 8 of this standard did not have a material impactannual report on such investments or our consolidated financial statements.Form 10K.
On December 29, 2017, we adopted ASU No. 2016-15,Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts
Item 7A. Quantitative and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The standard must be applied using a retrospective transition method for each period presented. The adoption of the new standard did not have an effect on our consolidated financial statements.
On December 29, 2017, we adopted ASU No. 2016-18,Statement of Cash Flows (Topic 230) - Restricted CashQualitative Disclosures About Market Risk. ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As such, restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning of period and ending of period total amount shown on the statement of cash flows. ASU No. 2016-18 was applied on a retrospective basis and prior periods were adjusted to conform to the current period’s presentation. Upon adoption, we recorded a $967,000 and $12,553,000 increase in net cash used in investing activities for fiscal 2017 and fiscal 2016, respectively, related to reclassifying the changes in our restricted cash balance from investing activities to cash and cash equivalent balances within the consolidated statement of cash flows.
On December 29, 2017, we adopted ASU No. 2017-01,Business Combinations (Topic 805) - Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance and providing a more robust framework to assist reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption of the new standard did not have an effect on our consolidated financial statements.
On December 29, 2017, we adopted ASU No. 2017-05,Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU No. 2017-05 clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance nonfinancial asset” and defines the term “in-substance nonfinancial asset.” It also covers the transfer of nonfinancial assets to another entity in exchange for a non-controlling ownership interest in that entity. The adoption of the new standard did not have an effect on our consolidated financial statements.
On December 29, 2017, we adopted ASU No. 2017-07,Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Benefit Cost. The ASU requires the service cost component of net periodic benefit cost to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost are to be presented separately, in an appropriately titled line item outside of any subtotal of operating income or disclosed in the footnotes. The standard also limits the amount eligible for capitalization to the service cost component. ASU No. 2017-07 was applied on a retrospective basis and the prior periods were adjusted to conform to the current period’s presentation. For fiscal 2017 and fiscal 2016, expense of $1,712,000 and $1,519,000, respectively, was reclassified from operating income to other expense outside of operating income in the consolidated statements of earnings.
On December 29, 2017, we adopted ASU No. 2017-09,Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, to provide clarity and reduce both the diversity in practice and cost and complexity when applying the guidance in Topic 718,Compensation - Stock Compensation. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The adoption of the new standard did not have an effect on our consolidated financial statements.
On December 29, 2017, we early adopted ASU No. 2017-12,Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification 815,Derivatives and Hedging (Topic 815). ASU No. 2017-12 is designed to improve the transparency and understandability of information about an entity’s risk management activities and to reduce the complexity of and simplifying the application of hedge accounting. The adoption of the new standard did not have an effect on our consolidated financial statements.
On December 29, 2017, we early adopted ASU No. 2018-02,Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in ASU No. 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in ASU No. 2018-02 also require certain disclosures about stranded tax effects. Upon adoption, we made a $1,574,000 cumulative effect adjustment from accumulated other comprehensive loss to opening retained earnings due to the effect of the change in the U.S. federal corporate income tax rate resulting from the Tax Cuts and Jobs Act of 2017.
The information required by this item is set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk” above.
Item 8. Financial Statements and Supplementary Data. |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control – Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 27, 2018.31, 2020. The Company’s auditors, Deloitte & Touche LLP, have issued an attestation report on our internal control over financial reporting. That attestation report is set forth in this Item 8.
Gregory S. Marcus | Douglas A. Neis |
President and Chief Executive Officer | Executive Vice President, Chief Financial Officer and Treasurer |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of The Marcus Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Marcus Corporation and subsidiaries (the "Company") as of December 27, 201831, 2020 and December 28, 2017, and26, 2019, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders' equity, and cash flows, for each of the three years in the period ended December 27, 2018,31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 27, 201831, 2020 and December 28, 2017,26, 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 27, 2018,31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 27, 2018,31, 2020, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2019,5, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 8 to the financial statements, the Company changed its method of accounting for leases in the year ended December 26, 2019 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), using the modified retrospective method.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Long-Lived Assets – Assessment and Evaluation of Impairment – Refer to Note 1 and Note 4 to the financial statements
Critical Audit Matter Description
As of December 31, 2020, the Company had $848 million of net property and equipment and $230 million of operating lease right-of-use assets. The Company assesses long-lived assets for impairment at the individual hotel or theatre property level whenever events or changes in circumstances indicate the carrying amount of an asset group may not be recoverable. During the year ended December 31, 2020, the Company recorded an impairment loss of $22.1 million.
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In assessing long-lived assets for indicators of potential impairment, the Company considered quantitative and qualitative factors, including evaluating the historical actual operating performance of the properties and assessing the impact of recent economic and industry events impacting the properties, including the COVID-19 pandemic. Evaluating whether these quantitative and qualitative factors represented an indicator of potential impairment required significant judgment by management.
When indicators of impairment were present, the Company determined if the individual hotel or theatre properties were recoverable by assessing whether the sum of the estimated undiscounted future cash flows attributable to such assets was less than their carrying amounts. In instances where the estimated undiscounted future cash flows attributable to these assets were less than the carrying amounts, the Company determined the fair value of the individual hotel or theatre properties and recorded an impairment loss based on the excess of the carrying amount over the fair value. The most significant assumption inherent in these recoverability and impairment analyses was the forecasted future cash flows (primarily driven by revenue and earnings).
We identified the assessment and evaluation of impairment of long-lived assets as a critical audit matter because of the subjectivity used by management when identifying and evaluating potential impairment indicators, and when estimating forecasted future cash flows in their recoverability and impairment analyses, which are impacted by the timing of recovery from the COVID-19 pandemic. A high degree of auditor judgment was required when performing audit procedures to evaluate whether management appropriately identified and evaluated potential impairment indicators, and when evaluating the reasonableness of management’s forecasted future cash flows that were used in their recoverability and impairment analyses.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s assessment and evaluation of impairment for long-lived assets included the following, among others:
| ● | We tested the effectiveness of internal controls over the Company’s assessment and evaluation of potential impairment for long-lived assets and over forecasted future cash flows that were used in their recoverability and impairment analyses. |
| ● | We evaluated the reasonableness of the information in the Company’s impairment indicators analyses, and the corresponding forecasted future cash flows used in their recoverability and impairment analyses, by comparing the forecasts to (1) historical actual information, (2) internal communications between management and the Board of Directors and (3) forecasted information included in analyst and industry reports for the Company and certain of its peer companies. |
| ● | We evaluated the Company’s forecasted future cash flows for consistency with evidence obtained in other areas of the audit. |
Goodwill – Theatres Reporting Unit – Refer to Note 1 to the financial statements
Critical Audit Matter Description
As of December 31, 2020, the Company had $75 million of goodwill related to the theatres operating segment. The Company assesses goodwill for impairment, at least annually, or more frequently if certain indicators arise. Goodwill is tested for impairment at a reporting unit level, determined to be at an operating segment level. During the year ended December 31, 2020, the Company performed a quantitative test by comparing the carrying value of the reporting unit to the estimated fair value at March 26, 2020, September 24, 2020, and December 31, 2020. In each case, the estimated fair value exceeded the carrying value, therefore, no impairment was recognized.
The estimated fair value was primarily determined using an income approach. Under the income approach, the Company utilized the discounted cash flow method to estimate the fair value of the reporting unit. The most significant assumptions inherent in estimating the fair value include the forecasted future cash flows for the reporting unit (primarily driven by revenue and earnings) and a discount rate that appropriately reflects the risks inherent in the future cash flows. The Company then assessed the reasonableness of the estimated fair value by comparing the sum of all reporting units’ estimated fair values to the Company’s market capitalization and calculating an implied control premium (the excess of the aggregate fair values of the reporting units over the Company’s market capitalization). In evaluating the reasonableness of this implied control premium, there are various quantitative and qualitative factors that need to be considered and could involve subjective judgment.
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We identified goodwill for the theatres reporting unit as a critical audit matter because of the significant estimates and assumptions made by the Company to estimate the fair value of this reporting unit given the uncertainty of future cash flows which are impacted by the timing of recovery from the COVID-19 pandemic. A high degree of auditor judgment was required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasted future cash flows, the selection of the discount rate, and the reasonableness of the implied control premium, which included the involvement of our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasted future cash flows, the selection of the discount rate, and the reasonableness of the implied control premium used by the Company to determine the estimated fair value of the theatres reporting unit included the following, among others:
| ● | We tested the effectiveness of internal controls over the Company’s determination of estimated fair value, including controls over the forecasted future cash flows, selection of the discount rate, and comparison of the estimated fair value to the Company’s market capitalization. |
| ● | We evaluated the reasonableness of the Company’s forecasted future cash flows by comparing the forecasts to (1) historical actual information, (2) internal communications between management and the Board of Directors and (3) forecasted information included in analyst and industry reports for the Company and certain of its peer companies. |
| ● | We evaluated the Company’s forecasted future cash flows for consistency with evidence obtained in other areas of the audit. |
| ● | With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and discount rate by (1) testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation and (2) developing a range of independent estimates and comparing those to the discount rate selected by management. |
| ● | With the assistance of our fair value specialists, we evaluated the reasonableness of the quantitative and qualitative factors considered in the reconciliation between the reporting unit’s estimated fair value and the Company’s market capitalization and implied control premium. We evaluated factors such as implied control premiums in other mergers and acquisition transactions in the industry, ownership of the Company’s common stock, and market trends. |
Convertible Senior Notes – Refer to Note 7 to the financial statements
Critical Audit Matter Description
On September 17, 2020, the Company sold $100.1 million aggregate principal amount of 5.00% Convertible Senior Notes due 2025 (the “Convertible Notes”). Upon conversion, the Convertible Notes may be settled, at the Company’s election, in cash, shares of common stock or a combination thereof.
In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by estimating the fair value of a similar debt instrument of similar credit quality and maturity that does not have an associated convertible feature. The valuation model used in determining the fair value of the liability component of the Convertible Notes includes inputs subject to management's judgment including the market interest rate. The determination of the market interest rate is complex and involves significant judgment exercised by management. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company's own stock, was determined by deducting the fair value of the liability component from the par value of the Convertible Notes.
We identified the Convertible Notes as a critical audit matter because of the complexity in applying the accounting framework for the Convertible Notes and the significant estimates and judgments made by management in the determination of the fair value of the liability component. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the appropriateness of the accounting framework and assess the reasonableness of the fair value estimates and assumptions, including the involvement of our fair value specialists.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the accounting for the Convertible Notes, including the Company’s estimates and judgments related to the fair value of the liability component, included the following procedures, among others:
| ● | We tested the effectiveness of internal controls over the Company’s accounting for the Convertible Notes and over the determination of the fair value of the liability component, including the determination of the nonconvertible borrowing rate. |
| ● | With the assistance of professionals in our firm having expertise in debt issuance accounting, we evaluated the Company’s conclusions regarding the accounting treatment applied to the Convertible Notes. |
| ● | With the assistance of our fair value specialists, we developed independent estimates of the nonconvertible borrowing rate and compared it to the rate selected by management. |
Liquidity and Going Concern – Refer to Note 2 and Note 7 to the financial statements
Critical Audit Matter Description
Due to the impacts of the COVID-19 pandemic, the Company’s performance has been significantly impacted. As an operator of movie theatres, hotels and resorts, restaurants and bars, each of which consists of spaces where customers and guests gather in close proximity, the Company’s operations are significantly impacted by protective actions that federal, state and local governments have taken to control the spread of COVID-19 and the Company’s customers’ reactions or responses to such actions. Since the COVID-19 crisis began, the Company has obtained additional financing and amended previously existing debt covenants. Such debt covenants require the Company to, among other requirements, exceed defined consolidated earnings before interest, taxes, depreciation and amortization amounts and exceed defined consolidated liquidity amounts. The Company believes that they will meet their obligations as they come due and will comply with their debt covenants for at least twelve months from the issuance date of these financial statements.
In order to assess their ability to meet their obligations as they come due and comply with their debt covenants, the Company has forecasted future financial results. Given the judgment in determining the Company’s forecasted future financial results and the resulting expected compliance with their debt covenants, especially in light of the uncertainty of continuation of protective actions that federal, state and local governments have taken which impact consumer confidence and the uncertainly of the timing of new movie releases, we deem that the evaluation and disclosure of liquidity and going concern to be subject to significant estimation.
We identified the evaluation and disclosure of liquidity and going concern as a critical audit matter because of the subjectivity used by management when determining whether the Company will meet their obligations as they come due and comply with their debt covenants for at least twelve months from the issuance date of these financial statements. A high degree of auditor judgment was required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasted future financial results.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s evaluation and disclosure of liquidity and going concern included the following, among others:
| ● | We tested the effectiveness of internal controls over the Company’s liquidity and going concern evaluation, including the inputs and assumptions used in their forecasted financial results. |
| ● | We evaluated the Company’s conclusion with regard to their ability to meet their obligations as they come due and to comply with their debt covenants for at least twelve months from the issuance date of these financial statements, including: |
| (1) | We read the Company’s amended debt agreements and reviewed the conditions between the Company and the financial institutions to assess whether these were appropriately considered when concluding on the Company’s debt covenant compliance. |
| (2) | We evaluated the reasonableness of the Company’s forecasted future financial results by comparing to (1) internal communications to management and the Board of Directors and (2) forecasted information included in analyst and industry reports for the Company and certain of its peer companies. |
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| (3) | We evaluated the reasonableness of the Company’s forecasted future financial results in comparison to various external data, including new movie release schedules. |
| (4) | We evaluated the Company’s forecasted financial results for consistency with evidence obtained in other areas of the audit. |
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 12, 2019
5, 2021
We have served as the Company's auditor since 2008.
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of The Marcus Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Marcus Corporation and subsidiaries (the “Company”) as of December 27, 2018,31, 2020, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 27, 2018,31, 2020, based on criteria established inInternal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 27, 2018,31, 2020, of the Company and our report dated March 12, 2019,5, 2021 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 12, 20195, 2021
63
THE MARCUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| December 27, 2018 | December 28, 2017 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents(Note 1) | $ | 17,114 | $ | 16,248 | ||||
| Restricted cash(Note 1) | 4,813 | 4,499 | ||||||
| Accounts and notes receivable, net of reserves(Note 5) | 25,684 | 27,230 | ||||||
| Refundable income taxes | 5,983 | 15,335 | ||||||
| Other current assets(Note 1) | 15,355 | 13,409 | ||||||
| Total current assets | 68,949 | 76,721 | ||||||
| Property and equipment,NET(Note 5) | 840,043 | 860,064 | ||||||
| Other assets: | ||||||||
| Investments in joint ventures(Note 11) | 4,069 | 4,239 | ||||||
| Goodwill(Note 1) | 43,170 | 43,492 | ||||||
| Other(Note 5) | 33,100 | 33,281 | ||||||
| Total other assets | 80,339 | 81,012 | ||||||
| Total assets | $ | 989,331 | $ | 1,017,797 | ||||
| Liabilities and shareholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 37,452 | $ | 51,541 | ||||
| Taxes other than income taxes | 18,743 | 19,638 | ||||||
| Accrued compensation | 17,547 | 15,627 | ||||||
| Other accrued liabilities (Note 1) | 59,645 | 53,291 | ||||||
| Current portion of capital lease obligations (Note 6) | 5,912 | 7,570 | ||||||
| Current maturities of long-term debt (Note 6) | 9,957 | 12,016 | ||||||
| Total current liabilities | 149,256 | 159,683 | ||||||
| CAPITAL LEASE OBLIGATIONS(Note 6) | 22,208 | 28,282 | ||||||
| Long-term debt(Note 6) | 228,863 | 289,813 | ||||||
| Deferred income taxes(Note 9) | 41,977 | 38,233 | ||||||
| Deferred compensation and other(Note 8) | 56,908 | 56,662 | ||||||
| commitments AND license rights(Note 10) | ||||||||
| equity(Note 7): | ||||||||
| Shareholders’ equity attributable to The Marcus Corporation | ||||||||
| Preferred Stock, $1 par; authorized 1,000,000 shares; none issued | – | – | ||||||
| Common Stock: | ||||||||
| Common Stock, $1 par; authorized 50,000,000 shares; issued 22,843,096 shares at December 27, 2018 and 22,655,517 shares at December 28, 2017 | 22,843 | 22,656 | ||||||
| Class B Common Stock, $1 par; authorized 33,000,000 shares; issued and outstanding 8,346,417 at December 27, 2018 and 8,533,996 shares at December 28, 2017 | 8,347 | 8,534 | ||||||
| Capital in excess of par | 63,830 | 61,452 | ||||||
| Retained earnings | 439,178 | 403,206 | ||||||
| Accumulated other comprehensive loss | (6,758 | ) | (7,425 | ) | ||||
| 527,440 | 488,423 | |||||||
| Less cost of Common Stock in treasury (2,839,079 shares at December 27, 2018, and 3,335,745 shares at December 28, 2017) | (37,431 | ) | (43,399 | ) | ||||
| Total shareholders’ equity attributable to The Marcus Corporation | 490,009 | 445,024 | ||||||
| Noncontrolling interests | 110 | 100 | ||||||
| Total equity | 490,119 | 445,124 | ||||||
| Total liabilities and shareholders’ equity | $ | 989,331 | $ | 1,017,797 | ||||
| | | | | | |
|
| December 31, 2020 |
| December 26, 2019 | ||
| | | | | | |
ASSETS |
| |
|
| |
|
CURRENT ASSETS: |
| |
|
| |
|
Cash and cash equivalents (Note 1) | | $ | 6,745 | | $ | 20,862 |
Restricted cash (Note 1) | |
| 7,343 | |
| 4,756 |
Accounts receivable, net of reserves (Note 6) | |
| 6,359 | | | 29,465 |
Government grants receivable (Note 2) | | | 4,913 | | | — |
Refundable income taxes | |
| 27,934 | |
| 5,916 |
Assets held for sale (Note 1) | | | 4,117 | | | — |
Other current assets (Note 1) | |
| 10,406 | |
| 18,265 |
Total current assets | |
| 67,817 | |
| 79,264 |
| | | | | | |
PROPERTY AND EQUIPMENT, NET (Note 6) | |
| 848,328 | | | 923,254 |
| | | | | | |
OPERATING LEASE RIGHT-OF-USE ASSETS (Note 8) | | | 229,660 | |
| 243,855 |
| | | | | | |
OTHER ASSETS: | |
|
| |
|
|
Investments in joint ventures (Note 13) | |
| 2,084 | |
| 3,595 |
Goodwill (Note 1) | |
| 75,188 | |
| 75,282 |
Other (Note 6) | |
| 31,101 | |
| 33,936 |
Total other assets | |
| 108,373 | |
| 112,813 |
Total assets | | $ | 1,254,178 | | $ | 1,359,186 |
| | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
|
| |
|
|
CURRENT LIABILITIES: | |
|
| |
|
|
Accounts payable | | $ | 13,158 | | $ | 49,370 |
Taxes other than income taxes | |
| 18,308 | |
| 20,613 |
Accrued compensation | |
| 7,633 | |
| 18,055 |
Other accrued liabilities (Note 1) | |
| 58,154 | |
| 61,134 |
Short-term borrowings | | | 87,194 | | | – |
Current portion of finance lease obligations (Note 8) | |
| 2,783 | |
| 2,571 |
Current portion of operating lease obligations (Note 8) | |
| 19,614 | |
| 13,335 |
Current maturities of long-term debt (Note 7) | |
| 10,548 | |
| 9,910 |
Total current liabilities | |
| 217,392 | |
| 174,988 |
| | | | | | |
FINANCE LEASE OBLIGATIONS (Note 8) | |
| 19,744 | |
| 20,802 |
| | | | |
| |
OPERATING LEASE OBLIGATIONS (Note 8) | | | 230,550 | |
| 232,111 |
| | | | |
| |
LONG-TERM DEBT (Note 7) | |
| 193,036 | |
| 206,432 |
| | | | |
| |
DEFERRED INCOME TAXES (Note 11) | |
| 33,429 | |
| 48,262 |
| | | | |
| |
OTHER LONG- TERM OBLIGATIONS (Note 10) | |
| 61,304 | |
| 55,133 |
| | | | | | |
COMMITMENTS AND LICENSE RIGHTS (Note 12) | |
|
| |
|
|
| | | | | | |
EQUITY (NOTE 9): | |
|
| |
|
|
Shareholders’ equity attributable to The Marcus Corporation | |
|
| |
|
|
Preferred Stock, $1 par; authorized 1,000,000 shares; NaN issued | |
| — | |
| — |
Common Stock: | | | | | | |
Common Stock, $1 par; authorized 50,000,000 shares; issued 23,264,259 at December 31, 2020 and 23,253,744 shares at December 26, 2019 | |
| 23,264 | |
| 23,254 |
Class B Common Stock, $1 par; authorized 33,000,000 shares; issued and outstanding 7,925,254 at December 31, 2020 and 7,935,769 at December 26, 2019 | |
| 7,926 | |
| 7,936 |
Capital in excess of par | |
| 153,529 | |
| 145,549 |
Retained earnings | |
| 331,897 | |
| 461,884 |
Accumulated other comprehensive loss | |
| (14,933) | |
| (12,648) |
| |
| 501,683 | |
| 625,975 |
Less cost of Common Stock in treasury (124,758 shares at December 31, 2020 and 242,853 shares at December 26, 2019) | |
| (2,960) | |
| (4,540) |
Total shareholders’ equity attributable to The Marcus Corporation | |
| 498,723 | |
| 621,435 |
Noncontrolling interests | |
| — | |
| 23 |
Total equity | |
| 498,723 | |
| 621,458 |
Total liabilities and shareholders’ equity | | $ | 1,254,178 | | $ | 1,359,186 |
See accompanying notes.
The Marcus Corporation
Consolidated Statements of
64
THE MARCUS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(in thousands, except per share data)
| Year Ended | ||||||||||||
| December 27, | December 28, | December 29, | ||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Revenues: | ||||||||||||
| Theatre admissions | $ | 246,385 | $ | 227,091 | $ | 186,768 | ||||||
| Rooms | 108,786 | 106,876 | 105,167 | |||||||||
| Theatre concessions | 166,564 | 148,989 | 120,975 | |||||||||
| Food and beverage | 72,771 | 70,627 | 67,551 | |||||||||
| Other revenues | 78,329 | 69,131 | 63,403 | |||||||||
| 672,835 | 622,714 | 543,864 | ||||||||||
| Cost reimbursements | 34,285 | 30,838 | 30,460 | |||||||||
| Total revenues | 707,120 | 653,552 | 574,324 | |||||||||
| Costs and expenses: | ||||||||||||
| Theatre operations | 217,851 | 197,270 | 160,729 | |||||||||
| Rooms | 41,181 | 40,286 | 40,213 | |||||||||
| Theatre concessions | 47,522 | 43,634 | 32,407 | |||||||||
| Food and beverage | 58,662 | 59,375 | 55,526 | |||||||||
| Advertising and marketing | 23,775 | 23,960 | 21,582 | |||||||||
| Administrative | 72,116 | 66,954 | 62,101 | |||||||||
| Depreciation and amortization | 61,342 | 51,719 | 41,832 | |||||||||
| Rent(Note 10) | 11,267 | 11,869 | 8,384 | |||||||||
| Property taxes | 19,396 | 18,815 | 16,257 | |||||||||
| Other operating expenses | 36,534 | 31,525 | 33,360 | |||||||||
| Reimbursed costs | 34,285 | 30,838 | 30,460 | |||||||||
| Total costs and expenses | 623,931 | 576,245 | 502,851 | |||||||||
| OPERATING INCOME | 83,189 | 77,307 | 71,473 | |||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||
| Investment income | 208 | 588 | 298 | |||||||||
| Interest expense | (13,079 | ) | (12,100 | ) | (9,176 | ) | ||||||
| Other expense | (1,985 | ) | (1,712 | ) | (1,519 | ) | ||||||
| Gain (loss) on disposition of property, equipment and other assets | (1,342 | ) | 3,981 | (844 | ) | |||||||
| Equity earnings (losses) from unconsolidated joint ventures, net(Note 11) | (399 | ) | 46 | 301 | ||||||||
| (16,597 | ) | (9,197 | ) | (10,940 | ) | |||||||
| Earnings before income taxes | 66,592 | 68,110 | 60,533 | |||||||||
| Income taxes(Note 9) | 13,127 | 3,625 | 22,994 | |||||||||
| NET EARNINGS | 53,465 | 64,485 | 37,539 | |||||||||
| NET EARNINGS (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 74 | (511 | ) | (363 | ) | |||||||
| NET EARNINGS ATTRIBUTABLE TO THE MARCUS CORPORATION | $ | 53,391 | $ | 64,996 | $ | 37,902 | ||||||
| net earnings per share – BASIC: | ||||||||||||
| Common Stock | $ | 1.96 | $ | 2.42 | $ | 1.41 | ||||||
| Class B Common Stock | 1.75 | 2.17 | 1.28 | |||||||||
| net earnings per share – DILUTED: | ||||||||||||
| Common Stock | $ | 1.86 | $ | 2.29 | $ | 1.36 | ||||||
| Class B Common Stock | 1.72 | 2.13 | 1.27 | |||||||||
| | | | | | | | | |
| | Year Ended | |||||||
| | December 31, |
| December 26, |
| December 27, | |||
| | 2020 | | 2019 | | 2018 | |||
REVENUES: | | |
|
| |
|
| |
|
Theatre admissions | | $ | 64,825 | | $ | 284,141 | | $ | 246,385 |
Rooms | |
| 35,386 | |
| 105,857 | |
| 108,786 |
Theatre concessions | |
| 56,711 | |
| 231,237 | |
| 166,564 |
Food and beverage | |
| 24,822 | |
| 74,665 | |
| 72,771 |
Other revenues | |
| 38,742 | |
| 87,805 | |
| 78,329 |
| |
| 220,486 | |
| 783,705 | |
| 672,835 |
Cost reimbursements | |
| 17,202 | |
| 37,158 | |
| 34,285 |
Total revenues | |
| 237,688 | |
| 820,863 | |
| 707,120 |
| | | | | | | | | |
COSTS AND EXPENSES: | |
|
| |
| | |
| |
Theatre operations | |
| 92,232 | |
| 267,741 | |
| 217,851 |
Rooms | |
| 21,243 | |
| 40,381 | |
| 41,181 |
Theatre concessions | |
| 29,747 | |
| 85,289 | |
| 47,522 |
Food and beverage | |
| 26,124 | |
| 60,812 | |
| 58,662 |
Advertising and marketing | |
| 11,074 | |
| 24,583 | |
| 23,775 |
Administrative | |
| 51,046 | |
| 73,522 | |
| 72,116 |
Depreciation and amortization | |
| 75,052 | |
| 72,277 | |
| 61,342 |
Rent (Note 8) | |
| 26,866 | |
| 26,099 | |
| 11,267 |
Property taxes | |
| 23,560 | |
| 21,871 | |
| 19,396 |
Other operating expenses (Note 2) | |
| 17,288 | |
| 41,065 | |
| 36,534 |
Impairment charges (Note 4) | | | 24,676 | | | 1,874 | | | — |
Reimbursed costs | |
| 17,202 | |
| 37,158 | |
| 34,285 |
Total costs and expenses | | | 416,110 | |
| 752,672 | |
| 623,931 |
| | | | | | | | | |
OPERATING INCOME (LOSS) | |
| (178,422) | |
| 68,191 | |
| 83,189 |
| | | | | | | | | |
OTHER INCOME (EXPENSE): | |
|
| |
|
| |
|
|
Investment income | |
| 564 | |
| 1,379 | |
| 208 |
Interest expense | |
| (16,275) | |
| (11,791) | |
| (13,079) |
Other income (expense), net | |
| (986) | |
| (1,921) | |
| (1,985) |
Gain (loss) on disposition of property, equipment and other assets | |
| 856 | |
| (1,149) | |
| (1,342) |
Equity losses from unconsolidated joint ventures, net (Note 13) | |
| (1,539) | |
| (274) | |
| (399) |
| |
| (17,380) | |
| (13,756) | |
| (16,597) |
| | | | | | | | | |
EARNINGS (LOSS) BEFORE INCOME TAXES | |
| (195,802) | |
| 54,435 | |
| 66,592 |
INCOME TAXES (BENEFIT) (Note 11) | |
| (70,936) | |
| 12,320 | |
| 13,127 |
NET EARNINGS (LOSS) | |
| (124,866) | |
| 42,115 | |
| 53,465 |
NET EARNINGS (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS | |
| (23) | |
| 98 | |
| 74 |
NET EARNINGS (LOSS) ATTRIBUTABLE TO THE MARCUS CORPORATION | | $ | (124,843) | | $ | 42,017 | | $ | 53,391 |
| | | | | | | | | |
NET EARNINGS (LOSS) PER SHARE – BASIC: | |
|
| |
|
| |
|
|
Common Stock | | $ | (4.13) | | $ | 1.44 | | $ | 1.96 |
Class B Common Stock | |
| (3.74) | |
| 1.25 | |
| 1.75 |
| | | | | | | | | |
NET EARNINGS (LOSS) PER SHARE – DILUTED: | |
|
| |
|
| |
|
|
Common Stock | | $ | (4.13) | | $ | 1.35 | | $ | 1.86 |
Class B Common Stock | |
| (3.74) | |
| 1.24 | |
| 1.72 |
See accompanying notes.
6465
THE MARCUS CORPORATION
The Marcus Corporation
Consolidated Statements ofCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| | | | | | | | | |
| | Year Ended | |||||||
| | December 31, |
| December 26, |
| December 27, | |||
| | 2020 | | 2019 | | 2018 | |||
| | | | | | | | | |
NET EARNINGS (LOSS) | | $ | (124,866) | | $ | 42,115 | | $ | 53,465 |
OTHER COMPREHENSIVE INCOME (LOSS): | |
|
| |
|
| |
|
|
| | | | | | | | | |
Pension gain (loss) arising during period, net of tax effect (benefit) of $(993), $(1,833) and $708, respectively (Note 10) | |
| (2,813) | |
| (5,484) | |
| 1,925 |
Amortization of the net actuarial loss and prior service credit related to the pension, net of tax effect of $259, $109 and $167, respectively (Note 10) | |
| 732 | |
| 327 | |
| 454 |
Fair market value adjustment of interest rate swaps, net of tax benefit of $335, $300 and $115, respectively (Note 7) | |
| (949) | |
| (853) | |
| (313) |
Reclassification adjustment on interest rate swaps included in interest expense, net of tax effect of $263, $44 and $59 respectively (Note 7) | |
| 745 | |
| 120 | |
| 164 |
Other comprehensive income (loss) | |
| (2,285) | |
| (5,890) | |
| 2,230 |
COMPREHENSIVE INCOME (LOSS) | |
| (127,151) | |
| 36,225 | |
| 55,695 |
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS | |
| (23) | |
| 98 | |
| 74 |
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE MARCUS CORPORATION | | $ | (127,128) | | $ | 36,127 | | $ | 55,621 |
| Year Ended | ||||||||||||
| December 27, | December 28, | December 29, | ||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| NET EARNINGS | $ | 53,465 | $ | 64,485 | $ | 37,539 | ||||||
| OTHER COMPREHENSIVE INCOME (LOSS): | ||||||||||||
| Change in unrealized gain on available for sale investments, net of tax effect (benefit) of $0, $(9) and $9, respectively | – | (14 | ) | 14 | ||||||||
| Pension gain (loss) arising during period, net of tax effect (benefit) of $708, $(1,685) and $(40), respectively | 1,925 | (2,559 | ) | (42 | ) | |||||||
| Amortization of the net actuarial loss and prior service credit related to the pension, net of tax effect of $167, $142 and $55, respectively | 454 | 214 | 58 | |||||||||
| Pension curtailment gain, net of tax effect of $0, $0 and $127, respectively | – | – | 134 | |||||||||
| Fair market value adjustment of interest rate swap, net of tax benefit of $115, $0 and $95, respectively(Note 6) | (313 | ) | – | (143 | ) | |||||||
| Reclassification adjustment on interest rate swap included in interest expense, net of tax effect of $59, $0 and $25, respectively(Note 6) | 164 | – | 38 | |||||||||
| Reclassification adjustment related to interest rate swap de-designation, net of tax effect of $0, $0 and $63, respectively | – | – | 96 | |||||||||
| Other comprehensive income (loss) | 2,230 | (2,359 | ) | 155 | ||||||||
| COMPREHENSIVE INCOME | 55,695 | 62,126 | 37,694 | |||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 74 | (511 | ) | (363 | ) | |||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO THE MARCUS CORPORATION | $ | 55,621 | $ | 62,637 | $ | 38,057 | ||||||
See accompanying notes.
The Marcus Corporation
66
THE MARCUS CORPORATION
Consolidated Statements of Shareholders’ EquityCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| Shareholders’ |
| | |
| | | |
| | | | | | | | | | | | | | Accumulated | | | | | Equity | | | | | | | ||
| | | | | Class B | | Capital | | | | | Other | | | | | Attributable to The | | Non- | | | | |||||
| | Common | | Common | | in Excess | | Retained | | Comprehensive | | Treasury | | Marcus | | controlling | | Total | |||||||||
| | Stock | | Stock | | of Par | | Earnings | | Income (Loss) | | Stock | | Corporation | | Interests | | Equity | |||||||||
BALANCES AT DECEMBER 28, 2017 | | $ | 22,656 | | $ | 8,534 | | $ | 61,452 | | $ | 403,206 | | $ | (7,425) | | $ | (43,399) | | $ | 445,024 | | $ | 100 | | $ | 445,124 |
Amount reclassified to retained earnings on December 29, 2017 in connection with the adoption of ASU No. 2016-01 | |
| 0 | |
| 0 | |
| 0 | |
| (11) | |
| 11 | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Amount reclassified to retained earnings on December 29, 2017 in connection with the adoption of ASU No. 2018-02 | |
| — | |
| — | |
| 0 | |
| 1,574 | | | (1,574) | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Amount reclassified to retained earnings on December 29, 2017 in connection with the adoption of ASU No. 2014-09 | |
| — | |
| — | |
| 0 | |
| (2,568) | |
| 0 | |
| 0 | |
| (2,568) | |
| 0 | |
| (2,568) |
BALANCES AT DECEMBER 29, 2017 | |
| 22,656 | |
| 8,534 | |
| 61,452 | |
| 402,201 | |
| (8,988) | |
| (43,399) | |
| 442,456 | |
| 100 | |
| 442,556 |
Cash dividends: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
$.55 per share Class B Common Stock | |
| — | |
| — | |
| — | |
| (4,603) | |
| — | |
| — | |
| (4,603) | |
| — | |
| (4,603) |
$.60 per share Common Stock | |
| — | |
| — | |
| — | |
| (11,811) | |
| — | |
| — | |
| (11,811) | |
| — | |
| (11,811) |
Exercise of stock options | |
| 0 | |
| 0 | |
| (736) | |
| 0 | |
| 0 | |
| 7,784 | |
| 7,048 | |
| 0 | |
| 7,048 |
Purchase of treasury stock | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (2,898) | |
| (2,898) | |
| 0 | |
| (2,898) |
Savings and profit-sharing contribution | |
| 0 | |
| 0 | |
| 651 | |
| 0 | |
| 0 | |
| 479 | |
| 1,130 | |
| 0 | |
| 1,130 |
Reissuance of treasury stock | |
| 0 | |
| 0 | |
| 231 | |
| 0 | |
| 0 | |
| 144 | |
| 375 | |
| 0 | |
| 375 |
Issuance of non-vested stock | |
| 0 | |
| 0 | |
| (459) | |
| 0 | |
| 0 | |
| 459 | |
| 0 | |
| 0 | |
| 0 |
Share-based compensation | |
| 0 | |
| 0 | |
| 2,691 | |
| 0 | |
| 0 | |
| 0 | |
| 2,691 | |
| 0 | |
| 2,691 |
Conversions of Class B Common Stock | |
| 187 | |
| (187) | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Distributions to noncontrolling interest | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (64) | |
| (64) |
Comprehensive income | |
| 0 | |
| 0 | |
| 0 | |
| 53,391 | |
| 2,230 | |
| 0 | |
| 55,621 | |
| 74 | |
| 55,695 |
BALANCES AT DECEMBER 27, 2018 | | | 22,843 | | | 8,347 | | | 63,830 | | | 439,178 | | | (6,758) | |
| (37,431) | | | 490,009 | | | 110 | | | 490,119 |
Cash dividends: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
$.58 per share Class B Common Stock | |
| — | |
| — | |
| — | |
| (4,648) | |
| — | |
| — | |
| (4,648) | |
| — | |
| (4,648) |
$.64 per share Common Stock | |
| — | |
| — | |
| — | |
| (14,663) | |
| — | |
| — | |
| (14,663) | |
| — | |
| (14,663) |
Exercise of stock options | |
| — | |
| 0 | |
| (205) | |
| 0 | |
| 0 | |
| 1,725 | |
| 1,520 | |
| 0 | |
| 1,520 |
Purchase of treasury stock | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (1,119) | |
| (1,119) | |
| 0 | |
| (1,119) |
Savings and profit-sharing contribution | |
| 0 | |
| 0 | |
| 810 | |
| 0 | |
| 0 | |
| 371 | |
| 1,181 | |
| 0 | |
| 1,181 |
Reissuance of treasury stock | |
| 0 | |
| 0 | |
| 267 | |
| 0 | |
| 0 | |
| 150 | |
| 417 | |
| 0 | |
| 417 |
Issuance of non-vested stock | |
| 0 | |
| 0 | |
| (527) | |
| 0 | |
| 0 | |
| 527 | |
| 0 | |
| 0 | |
| 0 |
Share-based compensation | |
| 0 | |
| 0 | |
| 3,523 | |
| 0 | |
| 0 | |
| 0 | |
| 3,523 | |
| 0 | |
| 3,523 |
Reissuance of treasury stock - acquisition | | | 0 | | | 0 | | | 77,960 | | | 0 | | | 0 | | | 31,237 | | | 109,197 | | | 0 | | | 109,197 |
Other | | | 0 | | | 0 | | | (109) | | | 0 | | | 0 | | | 0 | | | (109) | | | 0 | | | (109) |
Conversions of Class B Common Stock | |
| 411 | |
| (411) | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Distributions to noncontrolling interest | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (185) | |
| (185) |
Comprehensive income (loss) | |
| 0 | |
| 0 | |
| 0 | |
| 42,017 | |
| (5,890) | |
| 0 | |
| 36,127 | |
| 98 | |
| 36,225 |
BALANCES AT DECEMBER 26, 2019 | | | 23,254 | | | 7,936 | | | 145,549 | | | 461,884 | | | (12,648) | | | (4,540) | | | 621,435 | | | 23 | | | 621,458 |
Cash dividends: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$.15 per share Class B Common Stock | |
| — | |
| — | |
| — | |
| (1,224) | |
| — | |
| — | |
| (1,224) | |
| — | |
| (1,224) |
$.17 per share Common Stock | |
| — | |
| — | |
| — | |
| (3,921) | |
| — | |
| — | |
| (3,921) | |
| — | |
| (3,921) |
Exercise of stock options | |
| 0 | |
| 0 | |
| (67) | |
| 0 | |
| 0 | |
| 446 | |
| 379 | |
| 0 | |
| 379 |
Purchase of treasury stock | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (696) | |
| (696) | |
| 0 | |
| (696) |
Savings and profit-sharing contribution | |
| 0 | |
| 0 | |
| 299 | |
| 0 | |
| 0 | |
| 1,016 | |
| 1,315 | |
| 0 | |
| 1,315 |
Reissuance of treasury stock | |
| 0 | |
| 0 | |
| (21) | |
| 0 | |
| 0 | |
| 183 | |
| 162 | |
| 0 | |
| 162 |
Issuance of non-vested stock | |
| 0 | |
| 0 | |
| (631) | |
| 0 | |
| 0 | |
| 631 | |
| 0 | |
| 0 | |
| 0 |
Share-based compensation | |
| 0 | |
| 0 | |
| 4,385 | |
| 0 | |
| 0 | |
| 0 | |
| 4,385 | |
| 0 | |
| 4,385 |
Equity component of issuance of convertible notes, net of tax and issuance costs | | | 0 | | | 0 | | | 16,511 | | | 0 | | | 0 | | | 0 | | | 16,511 | | | 0 | | | 16,511 |
Capped call transactions, net of tax | | | 0 | | | 0 | | | (12,495) | | | 0 | | | 0 | | | 0 | | | (12,495) | | | 0 | | | (12,495) |
Other | |
| 0 | |
| 0 | |
| (1) | |
| 1 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Conversions of Class B Common Stock | |
| 10 | |
| (10) | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Comprehensive loss | |
| 0 | |
| 0 | |
| 0 | |
| (124,843) | |
| (2,285) | |
| 0 | |
| (127,128) | |
| (23) | |
| (127,151) |
BALANCES AT DECEMBER 31, 2020 | | $ | 23,264 | | $ | 7,926 | | $ | 153,529 | | $ | 331,897 | | $ | (14,933) | | $ | (2,960) | | $ | 498,723 | | $ | 0 | | $ | 498,723 |
| Common Stock | Class B Common Stock | Capital in Excess of Par | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Shareholders’ Equity Attributable to The Marcus Corporation | Non- controlling Interests | Total Equity | ||||||||||||||||||||||||||||
| BALANCES AT DECEMBER 31, 2015 | $ | 22,479 | $ | 8,711 | $ | 56,474 | $ | 325,355 | $ | (5,221 | ) | $ | (44,446 | ) | $ | 363,352 | $ | 2,346 | $ | 365,698 | ||||||||||||||||
| Cash dividends: | ||||||||||||||||||||||||||||||||||||
| $.41 per share Class B Common Stock | – | – | – | (3,560 | ) | – | – | (3,560 | ) | – | (3,560 | ) | ||||||||||||||||||||||||
| $.45 per share Common Stock | – | – | – | (8,477 | ) | – | – | (8,477 | ) | – | (8,477 | ) | ||||||||||||||||||||||||
| Exercise of stock options | – | – | 116 | – | – | 3,870 | 3,986 | – | 3,986 | |||||||||||||||||||||||||||
| Purchase of treasury stock | – | – | – | – | – | (6,389 | ) | (6,389 | ) | – | (6,389 | ) | ||||||||||||||||||||||||
| Savings and profit-sharing contribution | – | – | 304 | – | – | 601 | 905 | – | 905 | |||||||||||||||||||||||||||
| Reissuance of treasury stock | – | – | 120 | – | – | 180 | 300 | – | 300 | |||||||||||||||||||||||||||
| Issuance of non-vested stock | – | – | (368 | ) | – | – | 368 | – | – | – | ||||||||||||||||||||||||||
| Share-based compensation | – | – | 1,899 | – | – | – | 1,899 | – | 1,899 | |||||||||||||||||||||||||||
| Other | – | – | 39 | – | – | – | 39 | – | 39 | |||||||||||||||||||||||||||
| Conversions of Class B Common Stock | 11 | (11 | ) | – | – | – | – | – | – | – | ||||||||||||||||||||||||||
| Distributions to noncontrolling interest | – | – | – | – | – | – | – | (448 | ) | (448 | ) | |||||||||||||||||||||||||
| Comprehensive income (loss) | – | – | – | 37,902 | 155 | – | 38,057 | (363 | ) | 37,694 | ||||||||||||||||||||||||||
| BALANCES AT DECEMBER 29, 2016 | 22,490 | 8,700 | 58,584 | 351,220 | (5,066 | ) | (45,816 | ) | 390,112 | 1,535 | 391,647 | |||||||||||||||||||||||||
| Cash dividends: | ||||||||||||||||||||||||||||||||||||
| $.45 per share Class B Common Stock | – | – | – | (3,929 | ) | – | – | (3,929 | ) | – | (3,929 | ) | ||||||||||||||||||||||||
| $.50 per share Common Stock | – | – | – | (9,575 | ) | – | – | (9,575 | ) | – | (9,575 | ) | ||||||||||||||||||||||||
| Exercise of stock options | – | – | 105 | – | – | 2,166 | 2,271 | – | 2,271 | |||||||||||||||||||||||||||
| Purchase of treasury stock | – | – | – | – | – | (850 | ) | (850 | ) | – | (850 | ) | ||||||||||||||||||||||||
| Savings and profit-sharing contribution | – | – | 600 | – | – | 424 | 1,024 | – | 1,024 | |||||||||||||||||||||||||||
| Reissuance of treasury stock | – | – | 253 | – | – | 176 | 429 | – | 429 | |||||||||||||||||||||||||||
| Issuance of non-vested stock | – | – | (501 | ) | – | – | 501 | – | – | – | ||||||||||||||||||||||||||
| Share-based compensation | – | – | 2,411 | – | – | – | 2,411 | – | 2,411 | |||||||||||||||||||||||||||
| Purchase of noncontrolling interest | – | – | – | 494 | – | – | 494 | (904 | ) | (410 | ) | |||||||||||||||||||||||||
| Conversions of Class B Common Stock | 166 | (166 | ) | – | – | – | – | – | – | – | ||||||||||||||||||||||||||
| Distributions to noncontrolling interest | – | – | – | – | – | – | – | (20 | ) | (20 | ) | |||||||||||||||||||||||||
| Comprehensive income (loss) | – | – | – | 64,996 | (2,359 | ) | – | 62,637 | (511 | ) | 62,126 | |||||||||||||||||||||||||
| BALANCES AT DECEMBER 28, 2017 | 22,656 | 8,534 | 61,452 | 403,206 | (7,425 | ) | (43,399 | ) | 445,024 | 100 | 445,124 | |||||||||||||||||||||||||
| Amount reclassified to retained earnings on December 29, 2017 in connection with the adoption of ASU No. 2016-01 | - | - | - | (11 | ) | 11 | - | - | - | - | ||||||||||||||||||||||||||
| Amount reclassified to retained earnings on December 29, 2017 in connection with the adoption of ASU No. 2018-02 | - | - | - | 1,574 | (1,574 | ) | - | - | - | - | ||||||||||||||||||||||||||
| Amount reclassified to retained earnings on December 29, 2017 in connection with the adoption of ASU No. 2014-09 | - | - | - | (2,568 | ) | - | - | (2,568 | ) | - | (2,568 | ) | ||||||||||||||||||||||||
| BALANCES AT DECEMBER 29, 2017 | 22,656 | 8,534 | 61,452 | 402,201 | (8,988 | ) | (43,399 | ) | 442,456 | 100 | 442,556 | |||||||||||||||||||||||||
| Cash dividends: | ||||||||||||||||||||||||||||||||||||
| $.55 per share Class B Common Stock | - | - | - | (4,603 | ) | - | - | (4,603 | ) | - | (4,603 | ) | ||||||||||||||||||||||||
| $.60 per share Common Stock | - | - | - | (11,811 | ) | - | - | (11,811 | ) | - | (11,811 | ) | ||||||||||||||||||||||||
| Exercise of stock options | - | - | (736 | ) | - | - | 7,784 | 7,048 | - | 7,048 | ||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | (2,898 | ) | (2,898 | ) | - | (2,898 | ) | ||||||||||||||||||||||||
| Savings and profit-sharing contribution | - | - | 651 | - | - | 479 | 1,130 | - | 1,130 | |||||||||||||||||||||||||||
| Reissuance of treasury stock | - | - | 231 | - | - | 144 | 375 | - | 375 | |||||||||||||||||||||||||||
| Issuance of non-vested stock | - | - | (459 | ) | - | - | 459 | - | - | - | ||||||||||||||||||||||||||
| Share-based compensation | - | - | 2,691 | - | - | - | 2,691 | - | 2,691 | |||||||||||||||||||||||||||
| Conversions of Class B Common Stock | 187 | (187 | ) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Distributions to noncontrolling interest | - | - | - | - | - | - | - | (64 | ) | (64 | ) | |||||||||||||||||||||||||
| Comprehensive income (loss) | - | - | - | 53,391 | 2,230 | - | 55,621 | 74 | 55,695 | |||||||||||||||||||||||||||
| BALANCES AT DECEMBER 27, 2018 | $ | 22,843 | $ | 8,347 | $ | 63,830 | $ | 439,178 | $ | (6,758 | ) | (37,431 | ) | $ | 490,009 | $ | 110 | $ | 490,119 | |||||||||||||||||
See accompanying notes.
6667
THE MARCUS CORPORATION
The Marcus Corporation
Consolidated Statements of Cash FlowsCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended | ||||||||||||
| December 27, | December 28, | December 29, | ||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Operating activities | ||||||||||||
| Net earnings | $ | 53,465 | $ | 64,485 | $ | 37,539 | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||
| Losses (earnings) on investments in joint ventures | 399 | (46 | ) | (301 | ) | |||||||
| Distributions from joint ventures | 65 | 377 | 560 | |||||||||
| Loss (gain) on disposition of property, equipment and other assets | 1,342 | (3,981 | ) | 844 | ||||||||
| Amortization of favorable lease right | 334 | 334 | 334 | |||||||||
| Depreciation and amortization | 61,342 | 51,719 | 41,832 | |||||||||
| Amortization of debt issuance costs | 287 | 308 | 303 | |||||||||
| Share-based compensation | 2,691 | 2,411 | 1,899 | |||||||||
| Deferred income taxes | 3,247 | (6,438 | ) | 3,022 | ||||||||
| Deferred compensation and other | 3,339 | 911 | 577 | |||||||||
| Contribution of the Company’s stock to savings and profit-sharing plan | 1,130 | 1,024 | 905 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts and notes receivable | 1,546 | (8,852 | ) | (1,486 | ) | |||||||
| Other current assets | (1,946 | ) | (2,268 | ) | (2,465 | ) | ||||||
| Accounts payable | (4,232 | ) | 15,015 | (1,978 | ) | |||||||
| Income taxes | 10,297 | (13,663 | ) | (5,124 | ) | |||||||
| Taxes other than income taxes | (895 | ) | 2,377 | (373 | ) | |||||||
| Accrued compensation | 1,920 | (1,380 | ) | 4,738 | ||||||||
| Other accrued liabilities | 3,058 | 6,703 | 1,829 | |||||||||
| Total adjustments | 83,924 | 44,551 | 45,116 | |||||||||
| Net cash provided by operating activities | 137,389 | 109,036 | 82,655 | |||||||||
| Investing activities | ||||||||||||
| Capital expenditures | (58,660 | ) | (114,804 | ) | (83,606 | ) | ||||||
| Purchase of theatres, net of cash acquired and working capital assumed | – | – | (63,766 | ) | ||||||||
| Proceeds from disposals of property, equipment and other assets | 116 | 4,524 | 1,560 | |||||||||
| Decrease (increase) in other assets | (429 | ) | 911 | 3,572 | ||||||||
| Capital contribution in joint venture | (294 | ) | (111 | ) | – | |||||||
| Contribution received from local government | – | 1,545 | – | |||||||||
| Proceeds from sale of interests in joint ventures | – | 6,729 | 1,100 | |||||||||
| Net cash used in investing activities | (59,267 | ) | (101,206 | ) | (141,140 | ) | ||||||
| Financing activities | ||||||||||||
| Debt transactions: | ||||||||||||
| Proceeds from borrowings on revolving credit facility | 203,000 | 322,000 | 346,188 | |||||||||
| Repayment of borrowings on revolving credit facility | (254,000 | ) | (332,000 | ) | (236,188 | ) | ||||||
| Proceeds from issuance of long-term debt | – | 65,000 | – | |||||||||
| Principal payments on long-term debt | (12,153 | ) | (36,300 | ) | (52,335 | ) | ||||||
| Principal payments on capital lease obligations | (1,836 | ) | (1,986 | ) | – | |||||||
| Debt issuance costs | – | (418 | ) | (578 | ) | |||||||
| Equity transactions: | ||||||||||||
| Treasury stock transactions, except for stock options | (2,523 | ) | (421 | ) | (6,089 | ) | ||||||
| Exercise of stock options | 7,048 | 2,271 | 3,986 | |||||||||
| Dividends paid | (16,414 | ) | (13,504 | ) | (12,037 | ) | ||||||
| Distributions to noncontrolling interest | (64 | ) | (20 | ) | (448 | ) | ||||||
| Purchase of noncontrolling interest | – | (410 | ) | – | ||||||||
| Net cash provided by (used in) financing activities | (76,942 | ) | 4,212 | 42,499 | ||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 1,180 | 12,042 | (15,986 | ) | ||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 20,747 | 8,705 | 24,691 | |||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 21,927 | $ | 20,747 | $ | 8,705 | ||||||
| Supplemental Information: | ||||||||||||
| Change in accounts payable for additions to property and equipment | $ | (9,857 | ) | $ | 5,320 | $ | 3,417 | |||||
| Capital leases acquired | – | 6,173 | 17,511 | |||||||||
| Capital lease extensions | – | 3,675 | – | |||||||||
| | | | | | | | | |
| | Year Ended | |||||||
| | December 31, |
| December 26, |
| December 27, | |||
|
| 2020 | | 2019 | | 2018 | |||
OPERATING ACTIVITIES |
| |
|
| |
|
| |
|
Net earnings (loss) | | $ | (124,866) | | $ | 42,115 | | $ | 53,465 |
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: | |
| | |
| | |
| |
Losses on investments in joint ventures | |
| 1,539 | |
| 274 | |
| 399 |
Distributions from joint ventures | |
| 0 | |
| 200 | |
| 65 |
Loss (gain) on disposition of property, equipment and other assets | |
| (856) | |
| 1,149 | |
| 1,342 |
Impairment charges | | | 24,676 | | | 1,874 | | | 0 |
Amortization of favorable lease right | |
| 0 | |
| 0 | |
| 334 |
Depreciation and amortization | |
| 75,052 | |
| 72,277 | |
| 61,342 |
Amortization of debt issuance costs and debt discount | |
| 2,235 | |
| 285 | |
| 287 |
Share-based compensation | | | 4,385 | | | 3,523 | | | 2,691 |
Deferred income taxes | |
| (38,836) | |
| 9,111 | |
| 3,247 |
Other long-term obligations | |
| 2,969 | |
| 1,011 | |
| 3,339 |
Contribution of the Company’s stock to savings and profit-sharing plan | |
| 1,315 | |
| 1,181 | |
| 1,130 |
Changes in operating assets and liabilities: | |
| | |
| | |
| |
Accounts receivable | |
| 23,106 | |
| (3,781) | |
| 1,546 |
Government grants receivable | |
| (4,913) | |
| 0 | |
| 0 |
Other assets | |
| 3,476 | |
| 1,102 | |
| (1,946) |
Operating leases | | | 9,185 | | | (3,355) | | | 0 |
Accounts payable | |
| (32,131) | |
| 9,733 | |
| (4,232) |
Income taxes | |
| 1,467 | |
| 67 | |
| 10,297 |
Taxes other than income taxes | |
| (2,305) | |
| 1,664 | |
| (895) |
Accrued compensation | |
| (10,422) | |
| 508 | |
| 1,920 |
Other accrued liabilities | |
| (3,630) | |
| 2,541 | |
| 3,058 |
Total adjustments | |
| 56,312 | |
| 99,364 | |
| 83,924 |
Net cash provided by (used in) operating activities | |
| (68,554) | |
| 141,479 | |
| 137,389 |
| | | | | | | | | |
INVESTING ACTIVITIES | |
|
| |
|
| |
|
|
Capital expenditures | |
| (21,363) | |
| (64,086) | |
| (58,660) |
Acquisition of theatres, net of cash acquired and working capital assumed | |
| 0 | |
| (30,081) | |
| 0 |
Proceeds from disposals of property, equipment and other assets | |
| 4,485 | |
| 22 | |
| 116 |
Capital contribution in joint venture | |
| (28) | |
| 0 | |
| (294) |
Proceeds from sale of trading securities | | | 5,184 | | | 0 | | | 0 |
Purchase of trading securities | | | (801) | | | 0 | | | 0 |
Other investing activities | |
| 450 | |
| 199 | |
| (429) |
Net cash used in investing activities | |
| (12,073) | |
| (93,946) | |
| (59,267) |
| | | | | | | | | |
FINANCING ACTIVITIES | |
|
| |
|
| |
|
|
Debt transactions: | |
|
| |
|
| |
|
|
Proceeds from borrowings on revolving credit facility | |
| 221,500 | |
| 335,000 | |
| 203,000 |
Repayment of borrowings on revolving credit facility | |
| (302,500) | |
| (333,000) | |
| (254,000) |
Proceeds from short-term borrowings | |
| 90,800 | |
| 0 | |
| 0 |
Repayment on short-term borrowings | | | (2,955) | | | 0 | | | 0 |
Proceeds from convertible senior notes | |
| 100,050 | |
| 0 | |
| 0 |
Principal payments on long-term debt | | | (9,447) | | | (24,620) | | | (12,153) |
Proceeds received from PPP loans expected to be repaid | |
| 3,424 | |
| 0 | |
| 0 |
Principal payments on finance lease obligations | |
| (2,007) | |
| (2,544) | |
| (1,836) |
Debt issuance costs | |
| (7,560) | |
| 0 | |
| 0 |
Equity transactions: | |
| | |
| | |
| |
Treasury stock transactions, except for stock options | |
| (534) | |
| (702) | |
| (2,523) |
Exercise of stock options | |
| 379 | |
| 1,520 | |
| 7,048 |
Capped call transactions | | | (16,908) | | | 0 | | | 0 |
Dividends paid | |
| (5,145) | |
| (19,311) | |
| (16,414) |
Distributions to noncontrolling interest | |
| 0 | |
| (185) | |
| (64) |
Net cash provided by (used in) financing activities | |
| 69,097 | |
| (43,842) | |
| (76,942) |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| (11,530) | |
| 3,691 | |
| 1,180 |
Cash, cash equivalents and restricted cash at beginning of year | |
| 25,618 | |
| 21,927 | |
| 20,747 |
Cash, cash equivalents and restricted cash at end of year | | $ | 14,088 | | $ | 25,618 | | $ | 21,927 |
| | | | | | | | | |
Supplemental Information: | |
|
| |
|
| |
|
|
Change in accounts payable for additions to property and equipment | | $ | (4,081) | | $ | 2,185 | | $ | (9,857) |
See accompanying notes.
68
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Description of Business - The Marcus Corporation and its subsidiaries (the “Company”) operate principally in two business segments:
Theatres: Operates multiscreen motion picture theatres in Wisconsin, Illinois, Iowa, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Arkansas, Colorado, Georgia, Kentucky, Louisiana, New York, Pennsylvania, Texas and Ohio,Virginia, a family entertainment center in Wisconsin and a retail center in Missouri.
Hotels and Resorts: Owns and operates full service hotels and resorts in Wisconsin, Illinois, Oklahoma and Nebraska and manages full service hotels, resorts and other properties in Wisconsin, Illinois, Minnesota, Texas, Nevada, California and North Carolina.
Nebraska.
Principles of Consolidation - The consolidated financial statements include the accounts of The Marcus Corporation and all of its subsidiaries, including a 50% owned joint venture entity in which the Company has a controlling financial interest. The Company has ownership interests greater than 50% in one joint venture that is considered a Variable Interest Entity (VIE) that is also included in the accounts of the Company. The Company is the primary beneficiary of the VIE and the Company’s interest is considered a majority voting interest. The equity interest of outside owners in consolidated entities is recorded as noncontrolling interests in the consolidated balance sheets, and their share of earnings is recorded as net earnings (losses) attributable to noncontrolling interests in the consolidated statements of earnings (loss) in accordance with the partnership agreements. In fiscal 2017, the Company purchased the noncontrolling interest of a joint venture from its former partner.
Investments in affiliates which are 50% or less owned by the Company for which the Company exercises significant influence but does not have control are accounted for on the equity method. The Company has investments in equity investments without readily determinable fair values, which represents investments in entities where the Company does not have the ability to significantly influence the operations of the entities.
All intercompany accounts and transactions have been eliminated in consolidation.
Immaterial Restatement of Prior year Financial Statements -Beginning in the fiscal 2018 first quarter, the Company began appropriately presenting cost reimbursements and reimbursed costs on a gross basis and presented two new line items in the consolidated statements of earnings. These cost reimbursements and reimbursed costs were previously reported on a net basis. Reimbursed costs primarily consist of payroll and related expenses at managed properties where the Company is the employer and may include certain operational and administrative costs as provided for in the Company’s contracts with owners. These costs are reimbursed back to the Company. As these costs have no added markup, the revenue and related expense have no impact on operating income or net earnings. Cost reimbursements and reimbursed costs, which totaled $30,838,000 and $30,460,000 for fiscal 2017 and fiscal 2016, respectively, have been separately presented in the prior year statements of earnings to correct theprior year presentation. The Company believes this correction is immaterial to the consolidated financial statements.
Use of Estimates - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
Change in Accounting PolicyPolicies – The Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09 (ASU No. 2014-09)2016-02, Leases,Revenue from Contracts with Customers(Topic 842), on the first day of fiscal 2018.2019. These revenue recognitionlease policy updates were applied prospectively in the Company’s financial statements from December 29, 201728, 2018 forward. Reported financial information for the historical comparable periods was not revised and continues to be reported under the accounting standards in effect during the historical periods. See Note 28 for further discussion.
Cash Equivalents - The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.
Restricted Cash - Restricted cash consists of bank accounts related to capital expenditure reserve funds, sinking funds, operating reserves and replacement reserves and may include amounts held by a qualified intermediary agent to be used for tax-deferred, like-kind exchange transactions.
Restricted cash also includes funds held within the Company's captive insurance entity that are designated to pay expenses related specifically to the captive.
Fair Value Measurements - Certain financial assets and liabilities are recorded at fair value in the financial statements. Some are measured on a recurring basis while others are measured on a non-recurring basis. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. A fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
69
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
The Company’s assets and liabilities measured at fair value are classified in one of the following categories:
Level 1 - Assets or liabilities for which fair value is based on quoted prices in active markets for identical instruments as of the reporting date. At December 27, 201831, 2020 and December 28, 2017,26, 2019, respectively, the Company’s $5,302,000$1,415,000 and $4,053,000$5,825,000 of debt and equity securities classified as trading were valued using Level 1 pricing inputs and were included in other current assets.
Level 2 - Assets or liabilities for which fair value is based on valuation models for which pricing inputs were either directly or indirectly observable as of the reporting date. At December 27, 201831, 2020 and December 28, 2017,26, 2019, respectively, the $205,000$1,470,000 and $1,194,000 liability and $13,000 asset related to the Company’s interest rate hedge contracts were valued using Level 2 pricing inputs.
Level 3 - Assets or liabilities for which fair value is based on valuation models with significant unobservable pricing inputs and which result in the use of management estimates. At December 27, 201831, 2020 and December 28, 2017,26, 2019, none of the Company’s recorded assets or liabilities that are measured on a recurring basis at fair market value were valued using Level 3 pricing inputs, other than thoseinputs. Assets and liabilities that are measured on a non-recurring basis are discussed in Note 3.
4, Note 5 and Note 7.
The carrying value of the Company’s financial instruments (including cash and cash equivalents, restricted cash, accounts receivable notes receivable and accounts payable) approximates fair value. The fair value of the Company’s $118,000,000$100,000,000 of senior notes, valued using Level 2 pricing inputs, is approximately $110,022,000$99,990,000 at December 27, 2018,31, 2020, determined based upon discounted cash flows using current market interest rates for financial instruments with a similar average remaining life. The fair value of the Company's $100,050,000 of convertible senior notes, valued using Level 2 pricing inputs, is approximately $144,712,000 at December 31, 2020, determined based on market rates and the closing trading price of the convertible senior notes as of December 31, 2020 (see Note 7 for further discussion on the Company’s senior notes and convertible senior notes). The carrying amounts of the Company’s remaining long-term debt approximate their fair values, determined using current rates for similar instruments, or Level 2 pricing inputs.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
Accounts and Notes Receivable - The Company evaluates the collectibility of its accounts and notes receivable based on a number of factors. For larger accounts, an allowance for doubtful accounts is recorded based on the applicable parties’ ability and likelihood to pay based on management’s review of the facts. For all other accounts, the Company recognizes an allowance based on length of time the receivable is past due based on historical experience and industry practice.
Inventory - Inventories, consisting of food and beverage and concession items, are stated at the lower of cost or market. Cost has been determined using the first-in, first-out method. Inventories of $4,138,000$3,434,000 and $4,062,000$5,673,000 as of December 27, 201831, 2020 and December 28, 2017,26, 2019, respectively, were included in other current assets.
Assets Held for Sale – Long-lived assets that are expected to be sold within the next 12 months and meet the other relevant held-for-sale criteria are classified as assets held for sale and included within current assets on the consolidated balance sheet. Assets held for sale are measured at the lower of their carrying value or their fair value less costs to sell the asset. As of December 31, 2020, assets held for sale consists primarily of land.
Property and Equipment - The Company statesrecords property and equipment at cost. Major renewals and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the respective assets are expensed currently. Included in property and equipment are assets related to capitalfinance leases. These assets are depreciated over the shorter of the estimated useful lives or related lease terms.
70
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
Depreciation and amortization of property and equipment are provided using the straight-line method over the shorter of the following estimated useful lives or any related lease terms:
| | |
| Years | |
Land improvements | 10 - 20 | |
Buildings and improvements | 12 - 39 | |
Leasehold improvements | 3 - 40 | |
Furniture, fixtures and equipment | 3 - 20 | |
Finance lease right-of-use assets | | 4 - 15 |
Depreciation expense totaled $61,470,000, $51,542,000$75,067,000, $72,244,000 and $42,085,000$61,470,000 for fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, respectively.
Long-Lived Assets - The Company periodically considers whether indicators of impairment of long-lived assets held for use are present. This includes quantitative and qualitative factors, including evaluating the historical actual operating performance of the long-lived assets and assessing the potential impact of recent events and transactions impacting the long-lived assets. If such indicators are present, the Company determines if the long-lived assets are recoverable by assessing whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying amounts. TheIf the long-lived assets are not recoverable, the Company recognizes any impairment losses based on the excess of the carrying amount of the assets over their fair value. For the purpose of determining fair value, defined as the amount at which an asset or group of assets could be bought or sold in a current transaction between willing parties,During fiscal 2020 and fiscal 2019, the Company utilizes currently available market valuationsdetermined that indicators of similar assets in its respective industries, often expressed as a given multiple of operating cash flow. Theimpairment were present. As such, the Company evaluated the value of its property and equipment and other long-livedthe value of its operating lease right-of-use assets during fiscal 2018, fiscal 2017 and fiscal 2016 and did not report anyrecorded impairment losses during those years.
charges as discussed in Note 4.
Acquisition - The Company recognizes identifiable assets acquired, liabilities assumed and noncontrolling interests assumed in an acquisition at their fair values at the acquisition date based upon all information available to it, including third-party appraisals. Acquisition-related costs, such as the due diligence and legal fees, are expensed as incurred. The excess of the acquisition cost over the fair value of the identifiable net assets is reported as goodwill.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
Goodwill - The Company reviews goodwill for impairment annually or more frequently if certain indicators arise. The Company performs its annual impairment test on the last day of its fiscal year. The Company believes performing the test at the end of the fiscal year is preferable as the test is predicated on qualitative factors which are developed and finalized near fiscal year-end. Goodwill is tested for impairment at a reporting unit level, determined to be at an operating segment level. When reviewing goodwill for impairment, the Company considers the amount of excess fair value over the carrying value of the reporting unit, the period of time since its last quantitative test, and other factors to determine whether or not to first perform a qualitative test. When performing a qualitative test, the Company assesses numerous factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying value. Examples of qualitative factors that the Company assesses include its share price, its financial performance, market and competitive factors in its industry, and other events specific to the reporting unit. If the Company concludes that it is more likely than not that the fair value of its reporting unit is less than itsit carrying value, the Company performs a two-step quantitative impairment test by comparing the carrying value of the reporting unit to the estimated fair value. No
During fiscal 2020, the Company determined that indicators of impairment was identifiedwere present and performed quantitative tests at the end of the first and third quarters. In accordance with the Company’s accounting policy to perform an impairment analysis on the last day of the fiscal year, the Company performed a quantitative analysis as of December 27, 2018 or December 28, 2017.31, 2020. In order to determine fair value, the Company used assumptions based on information available to it as of the dates of the quantitative tests, including both market data and forecasted future cash flows (Level 3 pricing inputs). The Company has never recorded athen used this information to determine fair value. During the first, third and fourth quarters of fiscal 2020, the Company determined that the fair value of its goodwill was greater than it carrying value and no impairment loss.was required. At the end of fiscal 2019 and fiscal 2018, the Company performed qualitative tests as described above and determined that the fair value of the Company's goodwill was greater than its carrying value and thus was not impaired.
71
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
A summary of the Company’s goodwill activity is as follows:
| | | | | | | | | |
|
| December 31, |
| December 26, |
| December 27, | |||
| | 2020 | | 2019 | | 2018 | |||
| | (in thousands) | |||||||
Balance at beginning of period | | $ | 75,282 | | $ | 43,170 | | $ | 43,492 |
Acquisition | |
| 0 | |
| 32,205 | |
| 0 |
Sale | |
| 0 | |
| 0 | |
| 0 |
Deferred tax adjustment | |
| (94) | |
| (93) | |
| (322) |
Balance at end of period | | $ | 75,188 | | $ | 75,282 | | $ | 43,170 |
| December 27, 2018 | December 28, 2017 | December 29, 2016 | ||||||||||
| (in thousands) | ||||||||||||
| Balance at beginning of period | $ | 43,492 | $ | 43,735 | $ | 44,220 | ||||||
| Acquisition | – | – | – | |||||||||
| Sale | – | (105 | ) | – | ||||||||
| Other | – | – | (347 | ) | ||||||||
| Deferred tax adjustment | (322 | ) | (138 | ) | (138 | ) | ||||||
| Balance at end of period | $ | 43,170 | $ | 43,492 | $ | 43,735 | ||||||
Trade Name Intangible Asset –The Company recorded a trade name intangible asset in conjunction with the Movie Tavern acquisition (see Note 5) that was determined to have an indefinite life. The Company reviews its trade name intangible asset for impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be fully recoverable. During fiscal 2020, the Company determined that indicators of impairment were present. As such, the Company evaluated the value of its trade name intangible asset and recorded an impairment charge during fiscal 2020 as discussed in Note 4.
Capitalization of Interest - The Company capitalizes interest during construction periods by adding such interest to the cost of constructed assets. Interest of approximately $65,000, $400,000$48,000, $53,000 and $277,000$65,000 was capitalized in fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, respectively.
Debt Issuance Costs - The Company records debt issuance costs on short-term borrowings and long-term debt as a direct deduction from the related debt liability. Debt issuance costs related to the Company’s revolving credit facility are included in other long-term assets. Debt issuance costs are deferred and amortized over the term of the related debt agreements. Amortization of debt issuance costs and amortization of debt discount totaled $287,000, $308,000$2,235,000, $285,000 and $303,000$287,000 for fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, respectively, and were included in interest expense on the consolidated statements of earnings.earnings (loss).
Leases - The Company adopted ASU No. 2016-02, Leases, on the first day of fiscal 2019. See Note 8 for further discussion.
Investments – DebtThe Company has investments in debt and equity securities. These securities are stated at fair value based on listed market prices, where available, with the change in fair value recorded as investment income or loss.loss within the consolidated statements of earnings (loss). The cost of securities sold is based upon the specific identification method. Realized gains and losses and declines in value judged to be other-than-temporary are included in investment income. The Company evaluates securities for other-than-temporary impairment on a periodic basis and principally considers the type of security, the severity of the decline in fair value, and the duration of the decline in fair value in determining whether a security’s decline in fair value is other-than-temporary. The Company had no investment losses from debt and equity securities during fiscal 2018, fiscal 2017 or fiscal 2016.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
Revenue Recognition - The Company adopted ASU No. 2014-09,Revenue from Contracts with Customers, on the first day of fiscal 2018. See Note 23 for further discussion.
Advertising and Marketing Costs - The Company expenses all advertising and marketing costs as incurred.
Insurance Reserves - The Company uses a combination of insurance and self insurance mechanisms, including participation in captive insurance entities, to provide for the potential liabilities for certain risks, including workers’ compensation, healthcare benefits, general liability, property insurance, director and officers’ liability insurance, cyber liability, employment practices liability and business interruption. Liabilities associated with the risks that are retained by the company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors and severity factors.
Income Taxes -The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in the future tax returns for which the Company has already properly recorded the tax benefit in the income statement. The Company regularly assesses the probability that the deferred tax asset balance will be recovered against future taxable income, taking into account such factors as earnings history, carryback and carryforward periods, and tax strategies. When the indications are that recovery is not probable, a valuation allowance is established against the deferred tax asset, increasing income tax expense in the year that conclusion is made.
72
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
The Company assesses income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. See Note 911 - Income Taxes.
Earnings (Loss) Per Share -- Net earnings (loss) per share (EPS) of Common Stock and Class B Common Stock is computed using the two class method. Basic net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding. Diluted net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding, adjusted for the effect of dilutive stock options and convertible debt instruments using the treasury method. Convertible Class B Common Stock is reflected on an if-converted basis.basis when dilutive to Common Stock. The computation of the diluted net earnings (loss) per share of Common Stock assumes the conversion of Class B Common Stock in periods that have net earnings since it would be dilutive to Common Stock earnings per share, while the diluted net earnings (loss) per share of Class B Common Stock does not assume the conversion of those shares.
Holders of Common Stock are entitled to cash dividends per share equal to 110% of all dividends declared and paid on each share of the Class B Common Stock. As such, the undistributed earnings (losses) for each yearperiod are allocated based on the proportionate share of entitled cash dividends. The computation of diluted net earnings per share of Common Stock assumes the conversion of Class B Common Stock and, as such, the undistributed earnings are equal to net earnings for that computation.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
The following table illustrates the computation of Common Stock and Class B Common Stock basic and diluted net earnings (loss) per share and provides a reconciliation of the number of weighted-average basic and diluted shares outstanding:
| | | | | | | | | | ||||||||||||
| | Year Ended | |||||||||||||||||||
| | December 31, |
| December 26, |
| December 27, | |||||||||||||||
|
| 2020 | | 2019 | | 2018 | |||||||||||||||
| Year Ended | |||||||||||||||||||||
| December 27, 2018 | December 28, 2017 | December 29, 2016 | |||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||
| | (in thousands, except per share data) | |||||||||||||||||||
| Numerator: |
| |
|
| |
|
| |
| ||||||||||||
| Net earnings attributable to The Marcus Corporation | $ | 53,391 | $ | 64,996 | $ | 37,902 | |||||||||||||||
Net earnings (loss) attributable to The Marcus Corporation | | $ | (124,843) | | $ | 42,017 | | $ | 53,391 | ||||||||||||
| | | | | | | | | | ||||||||||||
| Denominator: | |
| | |
| | |
| | ||||||||||||
| Denominator for basic EPS | 28,105 | 27,789 | 27,551 | |
| 31,042 | |
| 30,656 | |
| 28,105 | |||||||||
| Effect of dilutive employee stock options | 608 | 614 | 406 | |
| – | |
| 496 | |
| 608 | |||||||||
| Denominator for diluted EPS | 28,713 | 28,403 | 27,957 | |
| 31,042 | |
| 31,152 | |
| 28,713 | |||||||||
| Net earnings per share – Basic: | |||||||||||||||||||||
| | | | | | | | | | ||||||||||||
Net earnings (loss) per share – Basic: | |
| | |
| | |
| | ||||||||||||
| Common Stock | $ | 1.96 | $ | 2.42 | $ | 1.41 | | $ | (4.13) | | $ | 1.44 | | $ | 1.96 | ||||||
| Class B Common Stock | $ | 1.75 | $ | 2.17 | $ | 1.28 | | $ | (3.74) | | $ | 1.25 | | $ | 1.75 | ||||||
| Net earnings per share- Diluted: | |||||||||||||||||||||
Net earnings (loss) per share- Diluted: | |
| | |
| | |
| | ||||||||||||
| Common Stock | $ | 1.86 | $ | 2.29 | $ | 1.36 | | $ | (4.13) | | $ | 1.35 | | $ | 1.86 | ||||||
| Class B Common Stock | $ | 1.72 | $ | 2.13 | $ | 1.27 | | $ | (3.74) | | $ | 1.24 | | $ | 1.72 | ||||||
OptionsFor the periods when the Company reports a net loss, common stock equivalents are excluded from the computation of diluted loss per share as their inclusion would have an antidilutive effect.
73
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
At December 31, 2020, approximately 76,000 common stock equivalents were excluded from the computation of diluted net loss per share because of the Company’s net loss. Additionally, options to purchase 15,5001,706,000 shares, 250,000324,000 shares and 14,00016,000 shares of common stock at prices ranging from $16.32 to $41.90, $38.51 to $41.90 and $38.51 to $41.35 $31.20 to $31.55 and $23.37 to $31.55 per share were outstanding at December 27, 2018,31, 2020, December 28, 201726, 2019 and December 29, 2016,27, 2018, respectively, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares, and therefore, the effect would be antidilutive.
Accumulated Other Comprehensive Loss – Accumulated other comprehensive loss presented in the accompanying consolidated balance sheets consists of the following, all presented net of tax:
| | | | | | | ||||||||
|
| December 31, 2020 |
| December 26, 2019 | ||||||||||
| December 27, 2018 | December 28, 2017 | |||||||||||||
| (in thousands) | ||||||||||||||
| Unrealized loss on available for sale investments | $ | – | $ | (11 | ) | |||||||||
| | (in thousands) | ||||||||||||
| Unrecognized loss on interest rate swap agreements | (149 | ) | – | | $ | (1,086) | | | (882) | |||||
| Net unrecognized actuarial loss for pension obligation | (6,609 | ) | (7,414 | ) | |
| (13,847) | |
| (11,766) | ||||
| $ | (6,758 | ) | $ | (7,425 | ) | |||||||||
| | $ | (14,933) | | $ | (12,648) | ||||||||
Concentration of Risk - As of December 27, 2018, 7% of the Company’s employees were covered by a collective bargaining agreement, of which 96% were covered by an agreement that will expire within one year. As of December 28, 2017, 7% of the Company’s employees were covered by a collective bargaining agreement, of which 1% were covered by an agreement that expired within one year.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements - In February 2016,On December 27, 2019, the Financial Accounting Standards Board (FASB) issuedCompany adopted Accounting Standards Update (ASU) No. 2016-02,2018-14, Leases (Topic 842)Compensation—Retirement Benefits—Defined Benefit Plans—General, intendeddesigned to improve financial reportingadd, remove and clarify disclosure requirements related to leasing transactions. ASU No. 2016-02 requires a lessee to recognize a right-of-use (ROU) asset and a lease liability for most leases. The new guidance will also require disclosures to help investorsdefined benefit pension and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from the leases. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of earnings. In July 2018, the FASB also issued ASU No. 2018-11,Leases (Topic 842): Targeted Improvements, which amends ASU No. 2016-02 and allows entities the option to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.postretirement plans. The new standard is effective for fiscal years beginning after December 15, 2018. The Company adopted the new accounting standard as of the first day of fiscal 2019 using the modified retrospective approach, which will result in the cumulative effect of adoption recognized at the date of application, rather than as of the earliest period presented. As a result, no adjustment will be made to prior period financial information and disclosures.
In conjunction with the adoption of the new standard companies are able to elect several practical expedients to aid in the transition to Topic 842. The Company expects to elect the package of practical expedients which permits the Company to forego reassessment of its prior conclusions related to lease identification, lease classification and initial direct costs. Topic 842 also provides practical expedients for an entity’s ongoing accounting. The Company expects to elect the practical expedient todid not separate lease and non-lease components for all of its leases. The Company also expects to make a policy election not to apply the lease recognition requirements for short-term leases.. As a result, the Company will not recognize right-of-use assets or lease liabilities for short-term leases that qualify for the policy election (those with an initial term of 12 months or less which do not include a purchase or renewal option which is reasonably certain to be exercised), but instead will recognize these lease payments as lease costs on a straight-line basis over the lease term.
The Company is finalizing its evaluation of the impact of the adoption of Topic 842 on its consolidated financial statements and expects a material impact related to the recognition of ROU assets and lease liabilities on the consolidated balance sheet for assets currently subject to operating leases. The Company will recognize lease liabilities representing the present value of the remaining future minimum lease payments for all of its operating leases as of December 28, 2018. The Company estimates that the amount recorded related to these liabilities will be between $75,000,000 and $100,000,000. The Company will recognize ROU assets for all assets subject to operating leases, in an amount equal to the operating lease liabilities, adjusted for the balances of long-term prepaid rent, deferred lease expense and deferred lease incentive liabilities as of December 28, 2018.
The Company does not believe adoption of the new standard will have a material effect on itsthe Company’s consolidated financial statements of earnings or its consolidated statement of cash flows.footnote disclosures.
In January 2017,On December 27, 2019, the FASB issuedCompany adopted ASU No. 2017-04,Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment,, which eliminates Step 2 of the goodwill impairment test that had required a hypothetical purchase price allocation. Rather, entities should apply the same impairment assessment to all reporting units and recognize an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for the Company in fiscal 2020 and must be applied prospectively. The Company does not believeadoption of the new standard willdid not have a material effect on itsthe Company’s consolidated financial statements.
In August 2018,On December 27, 2019, the FASB issuedCompany adopted ASU No. 2018-14,Compensation—Retirement Benefits—Defined Benefit Plans—General, designed to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. ASU No. 2018-14 is effective for the Company in fiscal 2021 and early application is permitted. The Company is evaluating the effect that the guidance will have on its financial statement disclosures.
In August 2018, the FASB issued ASU No. 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework – Framework—Changes to the Disclosure Requirements for Fair Value Measurement, (ASU No. 2018-13). The purpose of ASU No. 2018-13 is to improve the disclosures related to fair value measurements in the financial statements. The improvements include the removal, modification and addition of certain disclosure requirements primarily related to Level 3 fair value measurements. The adoption of the new standard did not have a material effect on the Company’s consolidated financial statements or footnote disclosures.
In December 2019, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-13 is effective2019-12, Income Taxes (Topic 740): Simplifying the Accounting for fiscal years beginning after December 15, 2019, including interim periods within that year.Incomes Taxes. The amendments in ASU No. 2018-13 should be applied prospectively.2019-12 are designed to simplify the accounting for incomes taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance. ASU No. 2019-12 is effective for the Company in fiscal 2021 and early application is permitted. The Company does not expect ASU No. 2018-13 tois currently evaluating the effect the new standard will have a significant impact on its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. ASU No. 2020-14 is effective as of March 12, 2020 through December 31, 2022. The Company will evaluate the effect the new standard will have on its consolidated financial statements when a replacement rate is chosen.
74
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies (continued)
On December 29, 2017,In August 2020, the Company adopted and applied to all contractsFASB issued ASU No. 2014-09,2020-06Revenue from, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts with Customers, a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customersin Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an amountEntity's Own Equity. Subtopic 470-20 is designed to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. The amendments remove the separation models in ASC 470-20 for certain contracts. As a result, embedded conversion features would not be presented separately in equity, rather, the contract would be accounted for as a single liability measured at its amortized cost. Subtopic 815-40 simplifies the analysis of whether an embedded conversion feature meets the derivative scope exception for contracts that reflectsare indexed to, and classified in, stockholders equity, as well as addresses the consideration to which the company expects to be entitled in exchangecomputation of earnings per shares for those goods or services. convertible debt instruments. ASU No. 2020-06 is effective for fiscal years beginning after December 15, 2021 and early application is permitted.
The Company electedearly adopted ASU No. 2020-06 on January 1, 2021, the first day of the Company’s fiscal 2021, using a modified retrospective method for the adoption of ASU No. 2014-09 and its related ASU amendments. Under this method,transition. As such, the Company recognized therecorded a one-time cumulative effect ofadjustment to the changes in retained earnings at the date of adoption. Reportedbalance sheet and reported financial information for the historical comparable periods waswill not be revised and continueswill continue to be reported under the accounting standardsstandard in effect during the historical periods.
Additionally, upon adoption of ASU No. 2020-06, the Company will use the if-converted method when calculating diluted earnings (loss) per share for convertible instruments.
The Company performedrecorded a review of the requirements of ASU No. 2014-09 and related ASUs in preparation for adoption of the new standard. The Company reviewed its key revenue streams and related customer contracts and has applied the five-step model of the standard to these revenue streams and compared the results to its current accounting practices. The majority of the Company’s revenues continue to be recognized in a manner consistent with historical practice. See Note 2 for further discussion.
On December 29, 2017, the Company adopted ASU No. 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities, which primarily affects the accounting for equity investments, financial liabilities under fair value option, and the presentation and disclosure requirements of financial instruments. Upon adoption, the Company made an $11,000one-time cumulative effect adjustment to reclassify the unrealized lossbalance sheet on January 1, 2021 as follows:
| | | | | | | | | |
|
| Balance at |
| Cumulative |
| Balance at | |||
| | December 31, 2020 | | adjustment | | January 1, 2021 | |||
|
| (in thousands) | |||||||
Long-term debt | | $ | 193,036 | | $ | 21,393 | | $ | 214,429 |
Deferred income taxes | |
| 33,429 | |
| (5,584) | |
| 27,845 |
Capital in excess of par | |
| 153,529 | |
| (16,511) | |
| 137,018 |
Retained earnings | |
| 331,897 | |
| 702 | |
| 332,599 |
2. Impact of COVID-19 Pandemic
The COVID-19 pandemic has had an equity investment previously classifiedunprecedented impact on the world and both of the Company’s business segments. The situation continues to be volatile and the social and economic effects are widespread. As an operator of movie theatres, hotels and resorts, restaurants and bars, each of which consists of spaces where customers and guests gather in close proximity, the Company’s businesses are significantly impacted by protective actions that federal, state and local governments have taken to control the spread of the pandemic, and its customers’ reactions or responses to such actions. These actions have included, among other things, declaring national and state emergencies, encouraging social distancing, restricting freedom of movement and congregation, mandating non-essential business closures, issuing curfews, limiting business capacity, mandating mask-wearing and issuing shelter-in-place, quarantine and stay-at-home orders.
As a result of these measures, the Company temporarily closed all of its theatres on March 17, 2020, and did not generate any significant revenues from its theatre operations during its fiscal 2020 second quarter and the first two months of its fiscal 2020 third quarter (other than revenues from 6 theatres opened on a very limited basis in June 2020 primarily to test new operating protocols, 5 parking lot cinemas, and some limited online and curbside sales of popcorn, pizza and other assorted food and beverage items). As of August 28, 2020, the Company had reopened approximately 80% of its theatres, although seating capacity at reopened theatres has been temporarily reduced in response to COVID-19 as available for sale from accumulated other comprehensive lossa way to opening retained earnings. All futureensure proper social distancing. In October 2020, the Company temporarily closed several theatres due to changes in fair valuethe release schedule for this equity security will be recognized through net earnings.new films, reducing its percentage of theatres open to approximately 66%. In addition,November 2020, new state and local restrictions in several of the Company holds two investments thatCompany’s markets required it to temporarily reclose several theatres, and as a result, approximately 52% of the Company’s theatres were previously accounted for underopen as of December 31, 2020. Subsequent to year-end, several of these new restrictions were lifted and as of the cost method of accounting, which under ASU No. 2016-01 were deemed to not have readily determinable fair values and thus were not impacted by the adoption of ASU No. 2016-01. The adoptiondate of this standard did not have a material impact on such investments orreport, approximately 69% of the Company’s consolidated financial statements.
On December 29, 2017, the Company adopted ASU No. 2016-15,Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receiptstheatres are currently open with temporarily reduced seating capacity in response to COVID-19. Temporarily closed theatres are ready to quickly reopen as restrictions are lifted, new films are released and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.demand returns. The standard must be applied using a retrospective transition method for each period presented. The adoption of the new standard did not have an effect on the Company’s consolidated financial statements.
On December 29, 2017, the Company adopted ASU No. 2016-18,Statement of Cash Flows (Topic 230) - Restricted Cash. ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally describedtheatres are generating significantly reduced revenues as restricted cash or restricted cash equivalents. As such, restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning of period and ending of period total amount shown on the statement of cash flows. ASU No. 2016-18 was applied on a retrospective basis andcompared to prior periods were adjusted to conform to the current period’s presentation. Upon adoption, the Company recorded a $967,000 and $12,553,000 increase in net cash used in investing activities for fiscal 2017 and fiscal 2016, respectively, related to reclassifying the changes in its restricted cash balance from investing activities to cash and cash equivalent balances within the consolidated statement of cash flows.years.
75
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Impact of COVID-19 Pandemic (continued)
1. DescriptionThe Company also temporarily closed all of Businessits hotel division restaurants and Summarybars at approximately the same time as its theatres and closed 5 of Significant Accounting Policies (continued)its 8 company-owned hotels and resorts on March 24, 2020 due to a significant reduction in occupancy at those hotels. The Company closed its remaining three company-owned hotels in early April 2020. It re-opened 4 of its company-owned hotels and several of its restaurants and bars during June 2020. The Company reopened three additional company-owned hotels during its fiscal 2020 third quarter and reopened its remaining company-owned hotel in November 2020. As such, as of December 31, 2020, all eight of the Company’s company-owned hotels and all but one of its managed hotels are open. The majority of the Company’s restaurants and bars in its hotels and resorts are also now open, operating under applicable state and local restrictions and guidelines. The majority of the Company’s hotels and restaurants are generating significantly reduced revenues as compared to prior years.
On December 29, 2017,Since the COVID-19 pandemic began, the Company adopted ASU No. 2017-01,Business Combinations (Topic 805) - Clarifyinghas been working proactively to preserve cash. In addition to obtaining additional financing and modifying previously existing debt covenants (see Note 7), and temporarily suspending quarterly dividend payments as required by the DefinitionCredit Agreement, additional measures the Company took during all or portions of a Business, which clarifiesfiscal 2020 to enhance its liquidity included:
| ● | Discontinuing all non-essential operating and capital expenditures; |
| ● | Temporarily laying off the majority of its hourly theatre and hotel associates, in addition to temporarily reducing property management and corporate office staff levels; |
| ● | Temporarily reducing the salary of the Company’s chairman and president and chief executive officer by 50%, as well as temporarily reducing the salary of all other executives and remaining divisional/corporate staff; |
| ● | Temporarily eliminating all board of directors cash compensation; |
| ● | Actively working with landlords and major suppliers to modify the timing and terms of certain contractual payments; |
| ● | Evaluating the provisions of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) and utilizing the benefits, relief and resources under those provisions as appropriate (see Note 11); and |
| ● | Evaluating the provisions of a COVID Relief Bill signed by the President on December 27, 2020 and any subsequent federal or state legislation enacted as a response to the COVID-19 pandemic. |
The COVID-19 pandemic and the definition of a business with the objective of adding guidance and providing a more robust framework to assist reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption of the new standard did not have an effectresulting impact on the Company’s consolidated financial statements.
On December 29, 2017,operating performance has affected, and may continue to affect, the Company adopted ASU No. 2017-05,Other Income - Gainsestimates and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidanceassumptions made by management. Such estimates and Accounting for Partial Sales of Nonfinancial Assets. ASU No. 2017-05 clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance nonfinancial asset” and defines the term “in-substance nonfinancial asset.” It also covers the transfer of nonfinancial assets to another entity in exchange for a non-controlling ownership interest in that entity. The adoption of the new standard did not have an effect onassumptions include, among other things, the Company’s consolidated financial statements.
On December 29, 2017,goodwill and long-lived asset valuations and the Company adopted ASU No. 2017-07,Compensation - Retirement Benefits (Topic 715): Improving the Presentationmeasurement of Net Periodic Pension Cost and Net Periodic Benefit Cost. The ASU requires the service cost component of net periodic benefit cost to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit costfor annual and long-term incentive plans. The Company’s estimates and assumptions are subject to be presented separately, in an appropriately titled line item outside of any subtotal of operating income or disclosed in the footnotes. The standard also limits the amount eligible for capitalization to the service cost component. ASU No. 2017-07 was applied on a retrospective basisinherent risk and the prior periods were adjusted to conform to the current period’s presentation. For fiscal 2017 and fiscal 2016, expense of $1,712,000 and $1,519,000, respectively, was reclassified from operating income to other expense outside of operating income in the consolidated statements of earnings.
On December 29, 2017, the Company adopted ASU No. 2017-09,Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, to provide clarity and reduce both the diversity in practice and cost and complexity when applying the guidance in Topic 718,Compensation - Stock Compensation. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The adoption of the new standard did not have an effect on the Company’s consolidated financial statements.
On December 29, 2017, the Company early adopted ASU No. 2017-12,Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification 815,Derivatives and Hedging (Topic 815). ASU No. 2017-12 is designed to improve the transparency and understandability of information about an entity’s risk management activities and to reduce the complexity of and simplifying the application of hedge accounting. The adoption of the new standard did not have an effect on the Company’s consolidated financial statements.
On December 29, 2017, the Company early adopted ASU No. 2018-02,Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in ASU No. 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in ASU No. 2018-02 also require certain disclosures about stranded tax effects. Upon adoption, the Company made a $1,574,000 cumulative effect adjustment from accumulated other comprehensive loss to opening retained earningsuncertainty due to the effectongoing impact of the changeCOVID-19 pandemic, and actual results could differ materially from estimated amounts.
During the fourth quarter of fiscal 2020, a number of states elected to provide grants to certain businesses most impacted by the COVID-19 pandemic, utilizing funds received by the applicable state under provisions of the CARES Act. As a result, grants from 7 states totaling $5,767,000 were awarded to a significant number of the Company’s theatres and grants from 2 states totaling $1,188,000 were awarded to several of the Company’s hotels. The $6,955,000 of total grants are reported as an offset to other operating expenses on the consolidated statement of earnings (loss) for the year ended December 31, 2020. As of December 31, 2020, the Company had received approximately $2,042,000 of these grants, and the remaining $4,913,000 was received in January 2021. Early in fiscal 2021, the U.S. federal corporate income tax rate resultingCompany was awarded an additional $1,300,000 in theatre grants from the Tax Cuts and Jobs Act of 2017.another state.
76
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Impact of COVID-19 Pandemic (continued)
2.In addition, 11 of the Company’s subsidiaries successfully applied for and received funds under the CARES Act Paycheck Protection Program (PPP) that allowed its subsidiaries to rehire many of its hotel associates for eight weeks during the second quarter of fiscal 2020, as well as fund certain other qualifying expenses (see Note 7). The Company’s Credit Agreement (see Note 7) also allows the Company to consider additional borrowings from governmental authorities under provisions of the CARES Act or any other subsequent governmental actions that it could avail itself of if it deemed it necessary and appropriate. Although the Company has sought and obtained, and intends to continue to seek, any available potential benefits under the CARES Act, including those described above, there is inherent risk and uncertainty in whether the Company will be able to access such benefits.
The Company believes that the actions that have been taken will allow it to have sufficient liquidity to meet its obligations as they come due and to comply with its debt covenants for at least 12 months from the issuance date of these consolidated financial statements. However, future compliance with the Company’s debt covenants are dependent upon the timing of new movie releases and the protective actions that federal, state and local governments have taken which impact consumer confidence and the speed of recovery of the Company’s theatres and hotels and resorts businesses. The Company’s estimates and assumptions related to future forecasted results of the Company are subject to inherent risk and uncertainty due to the ongoing impact of the COVID-19 pandemic, and actual results could differ materially from estimated amounts and impact the Company’s ability to comply with its debt covenants.
3. Revenue Recognition
Revenue Recognition Policy
Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance of obligations by transferring the promised services to the customer. A service is transferred to a customer when, or as, thecustomerobtains control of that service. A performance obligation may be satisfied over time or at a point in time.Revenuefrom a performance obligation satisfied over time is recognized by measuring the Company’s progress in satisfying the performance obligation in a manner that depicts the transfer of the services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised service. The amount of revenue recognized reflects the consideration entitled to in exchange for those services.
77
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Revenue Recognition (continued)
Thedisaggregation of revenues by business segment for fiscal 2020, fiscal 2019 and fiscal 2018 is as follows (in thousands):
| Reportable Segment | ||||||||||||||||||||||||||||
| Theatres | Hotels/ Resorts | Corporate | Total | |||||||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||
| | Fiscal 2020 | ||||||||||||||||||||||||||
|
| Reportable Segment | ||||||||||||||||||||||||||
| | Theatres |
| Hotels/Resorts |
| Corporate |
| Total | ||||||||||||||||||||
| Theatre admissions | $ | 246,385 | $ | – | $ | – | $ | 246,385 | | $ | 64,825 | | $ | — | | $ | — | | $ | 64,825 | ||||||||
| Rooms | – | 108,786 | – | 108,786 | |
| — | |
| 35,386 | |
| — | |
| 35,386 | ||||||||||||
| Theatre concessions | 166,564 | – | – | 166,564 | |
| 56,711 | |
| — | |
| — | |
| 56,711 | ||||||||||||
| Food and beverage | – | 72,771 | – | 72,771 | |
| — | |
| 24,822 | |
| — | |
| 24,822 | ||||||||||||
| Other revenues(1) | 32,563 | 45,342 | 424 | 78,329 | |
| 10,764 | |
| 27,552 | |
| 426 | |
| 38,742 | ||||||||||||
| Cost reimbursements | 1,292 | 32,993 | – | 34,285 | |
| 324 | |
| 16,878 | |
| — | |
| 17,202 | ||||||||||||
| Total revenues | $ | 446,804 | $ | 259,892 | $ | 424 | $ | 707,120 | | $ | 132,624 | | $ | 104,638 | | $ | 426 | | $ | 237,688 | ||||||||
| | | | | | | | | | | | |
| | Fiscal 2019 | ||||||||||
| | Reportable Segment | ||||||||||
|
| Theatres |
| Hotels/Resorts |
| Corporate |
| Total | ||||
Theatre admissions | | $ | 284,141 | | $ | — | | $ | — | | $ | 284,141 |
Rooms | |
| — | |
| 105,857 | |
| — | |
| 105,857 |
Theatre concessions | |
| 231,237 | |
| — | |
| — | |
| 231,237 |
Food and beverage | |
| — | |
| 74,665 | |
| — | |
| 74,665 |
Other revenues(1) | |
| 40,825 | |
| 46,547 | |
| 433 | |
| 87,805 |
Cost reimbursements | |
| 877 | |
| 36,281 | |
| — | |
| 37,158 |
Total revenues | | $ | 557,080 | | $ | 263,350 | | $ | 433 | | $ | 820,863 |
| | | | | | | | | | | | |
| | Fiscal 2018 | ||||||||||
|
| Reportable Segment | ||||||||||
| | Theatres |
| Hotels/Resorts |
| Corporate |
| Total | ||||
Theatre admissions | | $ | 246,385 | | $ | – | | $ | – | | $ | 246,385 |
Rooms | |
| – | |
| 108,786 | |
| – | |
| 108,786 |
Theatre concessions | |
| 166,564 | |
| – | |
| – | |
| 166,564 |
Food and beverage | |
| – | |
| 72,771 | |
| – | |
| 72,771 |
Other revenues(1) | |
| 32,563 | |
| 45,342 | |
| 424 | |
| 78,329 |
Cost reimbursements | |
| 1,292 | |
| 32,993 | |
| – | |
| 34,285 |
Total revenues | | $ | 446,804 | | $ | 259,892 | | $ | 424 | | $ | 707,120 |
| (1) | Included in other revenues is an immaterial amount related to rental income that is not considered contract revenue from contracts with customers under |
The Company recognizes revenue from its rooms as earned on the close of business each day. Revenue from theatre admissions, theatre concessions and food and beverage sales are recognized at the time of sale.
Revenues from advanced ticket and gift card sales are recorded as deferred revenue and are recognized when tickets or gift cards are redeemed. Gift card breakage income is recognized based upon historical redemption patterns and represents the balance of gift cards for which the Company believes the likelihood of redemption by the customer is remote. Gift card breakage income is recorded in other revenues in the consolidated statements of earnings. The adoption of ASU No. 2014-09 did not have an effect on how revenue is recognized for these arrangements.earnings (loss).
78
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Revenue Recognition (continued)
Other revenues include management fees for theatres and hotels under management agreements. The management fees are recognized as earned based on the terms of the agreements. The management fees include variable consideration that is recognized based on the Company’s right to invoice as the amount invoiced corresponds directly to the value transferred to the customer. Other revenues also include family entertainment center revenues and revenues from Hotels/Resorts outlets such as spa, ski, golf and parking, each of which are recognized at the time of sale. In addition, other revenues include pre-show advertising income in the Company’s theatres. Pre-show advertising revenue includes variable consideration, primarily based on attendance levels, that is allocated to distinct time periods that make up the overall performance obligation. The adoption of ASU No. 2014-09 did not have an effect on how revenue is recognized for these arrangements.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Revenue Recognition (continued)
Cost reimbursements primarily consist of payroll and related expenses at managed properties where the Company is the employer and may include certain operational and administrative costs as provided for in the Company’s contracts with owners. These costs are reimbursed back to the Company. As these costs have no added markup, the revenue and related expense have no impact on operating income (loss) or net earnings. The adoption of ASU No. 2014-09 did not have an effect on how revenue is recognized for these arrangements.
earnings (loss).
The timing of the Company’s revenue recognition may differ from the timing of payment by customers. However, the Company typically receives payment within a very short period of time of when the revenue is recognized. The Company records a receivable when revenue is recognized prior to payment and it has an unconditional right to payment. Alternatively, when payment precedes the provision for the related services, deferred revenue is recorded until the performance obligation is satisfied.
Revenues do not include sales tax as the Company considers itself a pass-through conduit for collecting and remitting sales tax.
Adoption of ASU No. 2014-09
Due to adoption of ASU No. 2014-09, on the first day of fiscal 2018, the Company recorded a one-time cumulative effect adjustment to the balance sheet as follows:
| Balance at December 28, 2017 | Cumulative Adjustment | Balance at December 29, 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Refundable income taxes | $ | 15,335 | $ | 945 | $ | 16,280 | ||||||
| Other accrued liabilities | 53,291 | 3,296 | 56,587 | |||||||||
| Deferred compensation and other | 56,662 | 217 | 56,879 | |||||||||
| Retained earnings | 403,206 | (2,568 | ) | 400,638 | ||||||||
The one-time cumulative effect adjustment to the balance sheet is due to a change in accounting for the Company’s loyalty programs. The Company offers a customer loyalty program to its theatre customers called Magical Movie Rewards. The program allows members to earn points for each dollar spent and access special offers available only to members. Therewards are redeemable at any Marcus Theatre box office, concession stand or food and beverage venue. The Company also offers a customer loyalty program to its Hotels and Resorts customers which allows members to earn points for each dollar spent in its restaurants. The rewards are redeemable at any of the Company’s hotel outlets including spas, restaurants, and golf. Under ASU No. 2014-09, the portion of Theatre admission revenues, Theatre concession revenues and Food and beverage revenues attributable to loyalty points earned by customers are deferred as a reduction of these revenues until related reward redemption. Through December 28, 2017, the Company recorded the estimated incremental cost of redeeming loyalty points at the time they were earned in Advertising and marketing expense. The change had the effect of an immaterial reduction of theatre admission revenues and a corresponding immaterial increase in theatre concession revenues with an offsetting increase in other long-term liabilities based upon historical customer reward redemption patterns.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Revenue Recognition (continued)
In accordance with ASU No. 2014-09, the Company has concluded that it is the principal (as opposed to agent) in the arrangement with third-party internet ticketing companies in regards to sale of internet tickets to customers, and therefore, recognizes ticket fee revenue based on a gross transaction price. As such, internet ticket fee revenue is deferred and recognized when the related film exhibition takes place on a gross transaction price basis. Through December 28, 2017, the Company recorded internet ticket fee revenues net of third-party commission or service fees. The change had the effect of increasing other revenues and other operating expense but had no impact on net earnings or cash flows from operations.
The adoption of ASU No. 2014-09 had the following effect on our fiscal 2018 consolidated statement of earnings (in thousands):
| As Reported | ASU No. 2014-09 Impact | Adjusted(1) | ||||||||||
| Revenues: | ||||||||||||
| Theatre admissions | $ | 246,385 | $ | (1,805 | ) | $ | 248,190 | |||||
| Theatre concessions | 166,564 | 2,526 | 164,038 | |||||||||
| Food and beverage | 72,771 | 19 | 72,752 | |||||||||
| Other revenues | 78,329 | 4,997 | 73,332 | |||||||||
| Total revenues | 707,120 | 5,737 | 701,383 | |||||||||
| Costs and expenses: | ||||||||||||
| Theatre operations | 217,851 | 669 | 217,182 | |||||||||
| Theatre concessions | 47,522 | 634 | 46,888 | |||||||||
| Advertising and marketing | 23,775 | (1,076 | ) | 24,851 | ||||||||
| Other operating expenses | 36,534 | 4,878 | 31,656 | |||||||||
| Total costs and expenses | 623,931 | 5,105 | 618,826 | |||||||||
| Operating income | 83,189 | 632 | 82,557 | |||||||||
| Income taxes | 13,127 | 125 | 13,002 | |||||||||
| Net earnings attributable to The Marcus Corporation | 53,391 | 507 | 52,884 | |||||||||
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Revenue Recognition (continued)
The adoption of ASU No. 2014-09 had the following effect on our consolidated balance sheet as of December 27, 2018 (in thousands):
| As Reported | ASU No. 2014-09 Impact | Adjusted(1) | ||||||||||
| Refundable income taxes | $ | 5,983 | $ | 820 | $ | 5,163 | ||||||
| Total current assets | 68,949 | 820 | 68,129 | |||||||||
| Total assets | 989,331 | 820 | 988,511 | |||||||||
| Other accrued liabilities | 59,645 | 2,782 | 56,863 | |||||||||
| Total current liabilities | 149,256 | 2,782 | 146,474 | |||||||||
| Deferred compensation and other | 56,908 | 99 | 56,809 | |||||||||
| Retained Earnings | 439,178 | (2,061 | ) | 441,239 | ||||||||
| Shareholders’ equity attributable to The Marcus Corporation | 490,009 | (2,061 | ) | 492,070 | ||||||||
| Total equity | 490,119 | (2,061 | ) | 492,180 | ||||||||
| Total liabilities and shareholders’ equity | 989,331 | 820 | 988,511 | |||||||||
The Company had deferred revenue from contracts with customers of $37,048,000$37,307,000, $43,200,000 and $36,007,000$37,048,000 as of December 31, 2020, December 26, 2019 and December 27, 2018, and December 29, 2017, respectively, which includes the one-time cumulative effect adjustment to the balance sheet on the first day of fiscal 2018.respectively. The Company had no contract assets as of December 27, 201831, 2020 and December 28, 2017.26, 2019. During fiscal 2018,2020, the Company recognized revenue of $24,840,000$13,579,000 that was included in deferred revenues as of December 29, 2017. The increase26, 2019. During fiscal 2019, the Company recognized revenue of $22,266,000 that was included in deferred revenue from December 29, 2017 torevenues as of December 27, 2018 was due to an increase in the theatre gift card liability at December 27, 2018, offset by an increase in loyalty points redeemed in the theatre division.
A significant2018. The majority of the Company’s deferred revenue is recorded in less than one year fromrelates to non-redeemed gift cards, advanced ticket sales and the original contract. Company’s loyalty program.
As of December 27, 2018,31, 2020, the amount of transaction price allocated to the remaining performance obligations under the Company’s advanced ticketsticket sales was $5,162,000$4,629,000 and is reflected in the Company’s consolidated balance sheet as part of deferred revenues, which is included in other accrued liabilities. The Company recognizes revenue as the tickets are redeemed, which is expected to occur within the next two years.
As of December 27, 2018, the amount of transaction price allocated to the remaining performance obligations under the Hotels and Resorts loyalty program was $195,000, of which, $74,000 is reflected in the Company’s consolidated balance sheet in deferred compensation and other. The Company recognizes revenue upon reward redemption, which is expected to occur within the next two years. As of December 27, 2018,31, 2020, the amount of transaction price allocated to the remaining performance obligations related to the amount of Hotels and Resorts non-redeemed gift cards was $2,626,000$3,042,000 and is reflected in the Company’s consolidated balance sheet as part of deferred revenues.revenues, which is included in other accrued liabilities. The Company recognizes revenue as the gift cards are redeemed, which is expected to occur within the next two years.
The majority of the Company’s revenue is recognized in less than one year from the original contract.
4. Impairment Charges
During fiscal 2020, the Company determined that indicators of impairment were evident at all asset groups. For certain of the theatre asset groups evaluated for impairment, the sum of the estimated undiscounted future cash flows attributable to these assets was less than their carrying amounts. The Company evaluated the fair value of the assets, consisting primarily of land, building, leasehold improvements, furniture, fixtures and equipment, and operating lease right-of-use assets less lease obligations, and determined that the fair value, measured using Level 3 pricing inputs (using estimated discounted cash flows over the life of the primary assets, including estimated sale proceeds) was less than their carrying value and recorded impaired losses of $22,076,000, reducing certain property and equipment and certain operating lease right-of-use assets. The remaining net book value of all impaired assets was $33,313,000 as of December 31, 2020, excluding any applicable remaining lease obligations.
79
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Impairment Charges (continued)
2. Revenue Recognition (continued)
As partIn fiscal 2020, the Company determined that indicators of impairment were evident related to its trade name intangible asset. The Company estimated the fair value of its trade name intangible asset using an income approach, specifically the relief from royalty method, which uses certain assumptions that are Level 3 pricing inputs, including future revenues attributable to the trade name, a royalty rate (1.0% as of December 31, 2020) and a discount rate (17.0% as of December 31, 2020). During fiscal 2020, the Company determined that the fair value of the Company’s adoptionasset was less than the carrying value and recorded a $2,600,000 impairment loss. The fair value of ASU No. 2014-09,the trade name intangible asset was $6,900,000 as of December 31, 2020.
In fiscal 2019, the Company electeddetermined that indicators of impairment were evident at a specific theatre location and that the sum of the estimated undiscounted future cash flows attributable to use the following practical expedients: (i) not to adjust the promised amount of consideration for the effects of a significant financing component whenthis asset was less than its carrying amount. As such, the Company expects, at contract inception,evaluated the ongoing value of this asset and determined that the period between the Company’s transfer offair value, measured using Level 3 pricing inputs (estimated cash flows including estimated sales proceeds), was less than its carrying value and recorded a promised product or service to a customer and when the customer pays for that product or service will be one year or less; (ii) not to assess whether promised goods or services are performance obligations if they are immaterial in the context$1,874,000 impairment loss. The fair value of the contract with the customer; (iii) to expense costsimpaired asset was $808,000 as incurred for costs to obtain contracts when the amortization period would have been one year or less, which mainly includes internal sales and development compensation; (iv) not to disclose remaining performance obligations when the remaining performance obligations have original expected durations of one year or less; and (v) not to disclose remainingDecember 26, 2019.
performance obligations when variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms a single performance obligation (which exists in the Company’s management fee contracts and its pre-show advertising contracts).
3.5. Acquisition
On December 16, 2016,February 1, 2019, the Company acquired 14 owned and/or leased movie22 dine-in theatres along withRonnie’s Plaza, an 84,000 square foot retail center 208 screens located in St. Louis, Missouri,nine Southern and Eastern states from WehrenbergVSS-Southern Theatres (“Wehrenberg”)LLC (Movie Tavern) for a total cash purchase price of $65,000,000, plus normal closing$139,310,000, consisting of $30,000,000 in cash, subject to certain adjustments, and less2,450,000 shares of the company’s Common Stock with a negative net working capital balance that was assumed invalue of $109,197,000, based on the transaction.Company’s closing share price as of January 31, 2019. The acquisition was treated as a purchase in accordance with ASC No. 805,Business Combinations, which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transaction. The Company obtained assistance from a third party valuation specialist in order to assist in the determination of fair value. The Company provided assumptions to the third party valuation firm based on information available to it at the acquisition date, including both quantitative and qualitative information about the specified assets or liabilities. The Company primarily utilized the third party to accumulate comparative data from multiple sources and assemble a report that summarized the information obtained. The Company then used the information to determine fair value. The third party valuation firm was supervised by Company personnel who are knowledgeable about valuations and fair values. The Company finalized the fair values for both tangible and intangible assets and the liabilities during the fourth quarter of fiscal 2017.2019. The following is a summary of the allocation of the purchase price:price (in thousands):
| December 29, 2016 | Changes | December 28, 2017 | ||||||||||
| Other current assets | $ | 1,408 | $ | – | $ | 1,408 | ||||||
| Property and equipment(1) | 80,205 | 11,433 | 91,638 | |||||||||
| Other (long-term assets)(2) | 2,468 | (946 | ) | 1,522 | ||||||||
| Accounts payable | (1,031 | ) | – | (1,031 | ) | |||||||
| Taxes other than income taxes | (331 | ) | – | (331 | ) | |||||||
| Other accrued liabilities | (1,442 | ) | 245 | (1,197 | ) | |||||||
| Capital lease obligations | (17,511 | ) | (7,003 | ) | (24,514 | ) | ||||||
| Deferred income taxes | – | 71 | 71 | |||||||||
| Deferred compensation and other(3) | – | (3,800 | ) | (3,800 | ) | |||||||
| Total | $ | 63,766 | $ | – | $ | 63,776 | ||||||
| | | |
Other current assets | | $ | 4,855 |
Property and equipment(1) | |
| 95,021 |
Operating lease right-of-use assets | | | 160,567 |
Deferred tax asset | | | 753 |
Other (long-term assets)(2) | |
| 9,710 |
Goodwill(3) | | | 32,205 |
Taxes other than income taxes | |
| (206) |
Other accrued liabilities | |
| (3,322) |
Operating lease obligations | | | (160,273) |
Total | | $ | 139,310 |
| (1) | Amounts recorded for property and equipment |
| (2) | Amounts recorded primarily relate to a trade name intangible asset of $9,500,000 which the Company has determined to have an indefinite life. |
| (3) | Amounts recorded for |
The purchase price paid by the Company in the acquisition resulted in recognition of goodwill because it exceeded the estimated fair value of the assets acquired and liabilities assumed. The Company paid a price in excess of estimated fair value of the assets acquired and liabilities assumed because the acquisition of Movie Tavern created an opportunity for the Company to expand into new growth markets and leverage its proven success in the theatre industry. The Company also expects to realize synergy and cost savings related to the acquisition because of purchasing and procurement economies of scale.
80
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3.5. Acquisition (continued)
The above fair values of assets acquired and liabilities assumed were determined using the income and cost approaches. In many cases, the determination of the fair values required estimates about discount rates, future estimated revenues and cash flows, and other assumptions that are judgmental. The fair value measurement of tangible and intangible assets and liabilitiesmeasurements were primarily based on significant inputs that are not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy. Level 3
A summary of the significant valuation techniques and inputs used is as follows:
Property and equipment - When estimating the fair value of property and equipment, the cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation and less any economic obsolescence adjustments.
Operating lease right-of-use assets and lease liabilities – When estimating the fair value of these lease-related balances, the Company first determined such balances under the requirement of ASC 842 (see Note 8 for further detail on accounting for leases). The operating lease right-of-use assets were then assessed for favorable and unfavorable lease terms, which were determined by comparing the rent expense-to-revenue ratio and operating cash flow margin of each lease to market comparable data. To the extent it was determined that such lease was at favorable or unfavorable terms, the adjustment to record the operating lease right-of-use assets to fair market values werevalue was determined usingthrough a varietydiscounted cash flow model and the significant assumptions include a 14% discount rate.
Trade name intangible asset – When estimating the fair value of information, includingthe trade name intangible asset, the Company used an income approach, specifically the relief from royalty method. The significant assumptions used include the estimated future cash flowsannual revenue, the royalty rate (1%), and market comparables.
a discount rate (17%).
The acquired theatres contributed approximately $5,111,000 and $(450,000)$125,839,000 to revenue and operating income, respectively, in fiscal 2016, including2019. Excluding the impact of acquisition costs.costs, the acquired theatres did not have a material impact on the Company’s fiscal 2019 net earnings. Acquisition costs related to professional fees incurred as a result of the WehrenbergMovie Tavern acquisition were approximately $1,283,000 and $1,507,000 during fiscal 20162019 and fiscal 2018, respectively, and were approximately $2,037,000expensed as incurred and were included in administrative expensesexpense in the consolidated statementstatements of earnings.
Assuming the WehrenbergMovie Tavern acquisition occurred at the beginning of fiscal 2016,2018, unaudited pro forma revenues for the Company during fiscal 2016 would have been $607,934,000.2018 were $845,662,000. The WehrenbergMovie Tavern theatres would not have had a material impact on the Company’s fiscal 20162018 net earnings. Unaudited pro forma revenues for the Company during fiscal 2019 would have been $832,349,000. The additional five weeks of Movie Tavern theatres operations would not have had a material impact on the Company’s fiscal 2019 net earnings.
4. Asset Sale
On October 20, 2017, the Company sold its 11% minority interest in The Westin® Atlanta Perimeter North in Atlanta, Georgia, and recorded a gain of $4,875,000 during the fiscal 2017 fourth quarter, which is included in Gain (loss) on disposition of property, equipment and other assets in the consolidated statement of earnings.
5.6. Additional Balance Sheet Information
The composition of accounts receivable is as follows:
| December 27, 2018 | December 28, 2017 | |||||||
| (in thousands) | ||||||||
| Trade receivables, net of allowances of $361 and $161, respectively | $ | 8,538 | $ | 11,247 | ||||
| Other receivables | 17,146 | 15,983 | ||||||
| $ | 25,684 | $ | 27,230 | |||||
| | | | | | |
|
| December 31, 2020 |
| December 26, 2019 | ||
| | (in thousands) | ||||
Trade receivables, net of allowances of $1,284 and $762, respectively | | $ | 405 | | $ | 9,327 |
Other receivables | |
| 5,954 | |
| 20,138 |
| | $ | 6,359 | | $ | 29,465 |
81
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Additional Balance Sheet Information (continued)
The composition of property and equipment, which is stated at cost, is as follows:
| | | | | | | ||||||||
|
| December 31, 2020 |
| December 26, 2019 | ||||||||||
| December 27, 2018 | December 28, 2017 | |||||||||||||
| (in thousands) | ||||||||||||||
| | (in thousands) | ||||||||||||
| Land and improvements | $ | 150,122 | $ | 146,887 | | $ | 145,671 | | $ | 152,434 | ||||
| Buildings and improvements | 771,191 | 759,166 | |
| 759,421 | |
| 761,511 | ||||||
| Leasehold improvements | 98,885 | 93,451 | |
| 163,879 | |
| 164,083 | ||||||
| Furniture, fixtures and equipment | 362,201 | 351,879 | |
| 374,253 | |
| 377,404 | ||||||
Finance lease right-of-use assets | | | 75,322 | | | 74,357 | ||||||||
| Construction in progress | 12,513 | 5,269 | |
| 3,360 | |
| 4,043 | ||||||
| 1,394,912 | 1,356,652 | |||||||||||||
| |
| 1,521,906 | |
| 1,533,832 | ||||||||
| Less accumulated depreciation and amortization | 554,869 | 496,588 | |
| 673,578 | |
| 610,578 | ||||||
| $ | 840,043 | $ | 860,064 | |||||||||||
| | $ | 848,328 | | $ | 923,254 | ||||||||
The composition of other assets is as follows:
| | | | | | | ||||||||
|
| December 31, 2020 |
| December 26, 2019 | ||||||||||
| December 27, 2018 | December 28, 2017 | |||||||||||||
| (in thousands) | ||||||||||||||
| Favorable lease right | $ | 8,818 | $ | 9,152 | ||||||||||
| | (in thousands) | ||||||||||||
Split dollar life insurance policies | | $ | 11,411 | | $ | 11,411 | ||||||||
| Intangible assets | 890 | 1,040 | |
| 7,297 | |
| 10,057 | ||||||
| Split dollar life insurance policies | 11,411 | 10,771 | ||||||||||||
| Other assets | 11,981 | 12,318 | |
| 12,393 | |
| 12,468 | ||||||
| $ | 33,100 | $ | 33,281 | |||||||||||
| | $ | 31,101 | | $ | 33,936 | ||||||||
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Additional Balance Sheet Information (continued)
The Company’s $13,353,000 favorable lease rightIncluded in intangible assets is being amortized over the expected term of the underlying lease of 40 yearsa trade name valued at $6,900,000 and is expected to result in amortization of $334,000 in each of the five succeeding fiscal years. Accumulated amortization of this favorable lease right was $4,535,000 and $4,201,000$9,500,000 as of December 27, 201831, 2020 and December 28, 2017, respectively.26, 2019, respectively, that has an indefinite life.
The intangible assets include the value of in-place leases and favorable lease rights related toRonnie’s Plaza, which are being amortized over the terms of the leases ranging from one to 13 years as of December 27, 2018.
6.7. Long-Term Debt and Capital Lease Obligations
Short-Term Borrowings
Long-term debt is summarized as follows:
| | | | | | | ||||||||
|
| December 31,2020 |
| December 26, 2019 | ||||||||||
| December 27, 2018 | December 28, 2017 | |||||||||||||
| (in thousands, except payment data) | ||||||||||||||
| | (in thousands, except payment data) | ||||||||||||
| Mortgage notes | $ | 39,852 | $ | 40,543 | | $ | 24,482 | | $ | 24,571 | ||||
| Senior notes | 118,000 | 129,143 | |
| 100,000 | |
| 109,000 | ||||||
| Unsecured term note due February 2025, with monthly principal and interest payments of $39,110, bearing interest at 5.75% | 2,432 | 2,751 | |
| 1,735 | |
| 2,093 | ||||||
Convertible senior notes | | | 100,050 | | | — | ||||||||
Payroll Protection Program loans | | | 3,424 | | | — | ||||||||
| Revolving credit agreement | 79,000 | 130,000 | |
| — | |
| 81,000 | ||||||
| Debt issuance costs | (464 | ) | (608 | ) | |
| (3,684) | |
| (322) | ||||
| 238,820 | 301,829 | |||||||||||||
| |
| 226,007 | |
| 216,342 | ||||||||
| Less current maturities, net of issuance costs | 9,957 | 12,016 | |
| 10,548 | |
| 9,910 | ||||||
| $ | 228,863 | $ | 289,813 | |||||||||||
Less debt discount | | | 22,423 | | | — | ||||||||
| | $ | 193,036 | | $ | 206,432 | ||||||||
The mortgage notes bothbear fixed rate and adjustable, bear interest from 3.00% to 5.31%5.03%, have a weighted-average rateof 4.66% 4.27%at December 27, 201831, 2020 and 4.22% at December 28, 2017,26, 2019, and mature in fiscal years 20202025 through 2043. A mortgage note was amended during fiscal 2020 and in January 2021 in order to defer certain payment obligations and waive certain financial covenants through June 2021. The mortgage notes are secured by the related land, buildings and equipment.
82
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt and Short-Term Borrowings (continued)
Credit Agreement and Short-Term Borrowings
On January 9, 2020, the Company replaced its then-existing credit agreement with several banks. On April 29, 2020, the Company entered into the First Amendment, and on September 15, 2020, the Company entered into the Second Amendment (the Credit Agreement, as amended by the First Amendment and the Second Amendment, the “Credit Agreement”). The Second Amendment became effective on September 22, 2020.
The $118,000,000Credit Agreement provides for a revolving credit facility that matures on January 9, 2025 with an initial maximum aggregate amount of availability of $225,000,000. The First Amendment provided a new $90,800,000 364-day Senior Term Loan A (the “Term Loan A”). The Company used the proceeds from the Term Loan A to repay borrowings under the Credit Agreement, to pay costs and expenses related to the First Amendment, and for general corporate purposes. In conjunction with the Second Amendment, among other things, the maturity date of the Term Loan A was extended to September 22, 2021, and various debt covenant requirements were amended as further discussed below. The $90,800,000 Term Loan A, net of amortized debt issuance costs of $651,000 and pre-payments of $2,955,000 made in conjunction with the sale of certain asset dispositions, is included in short-term borrowings on the consolidated balance sheet as of December 31, 2020 and bears interest at 3.75% as of December 31, 2020. Availability under the $225,000,000 revolving credit facility was $220,000,000 as of December 31, 2020.
Borrowings under the Credit Agreement generally bear interest at a variable rate equal to (i) LIBOR, subject to a 1% floor, plus a specified margin based upon the Company's consolidated debt to capitalization ratio as of the most recent determination date; or (ii) the base rate (which is the highest of (a) the prime rate, (b) the greater of the federal funds rate and the overnight bank funding rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR), subject to a 1% floor, plus a specified margin based upon the Company's consolidated debt to capitalization ratio as of the most recent determination date. In addition, the Credit Agreement generally requires the Company to pay a facility fee equal to 0.125% to 0.25% of the total revolving commitment, depending on its consolidated debt to capitalization ratio, as defined in the Credit Agreement. However, pursuant to the First Amendment and the Second Amendment: (A) in respect of revolving loans, (1) the Company is charged a facility fee equal to 0.40% of the total revolving credit facility commitment and (2) the specified margin is 2.35% for LIBOR borrowings and 1.35% for ABR borrowings, which facility fee rate and specified margins will remain in effect until the end of the first fiscal quarter ending after the end of any period in which any portion of the term loan facility remains outstanding or the testing of any financial covenant in the Credit Agreement is suspended (the “specified period”); and (B) in respect of term loans, the specified margin is 2.75% for LIBOR borrowings and 1.75% for ABR borrowings, in each case, at all times.
The Credit Agreement contains various restrictions and covenants applicable to the Company. Among other requirements, the Credit Agreement (a) limits the amount of priority debt (as defined in the Credit Agreement) held by the Company’s restricted subsidiaries to no more than 20% of the Company’s consolidated total capitalization (as defined in the Credit Agreement), (b) limits the Company’s permissible consolidated debt to capitalization ratio to a maximum of 0.55 to 1.0, (c) requires the Company to maintain a consolidated fixed charge coverage ratio of at least 3.0 to 1.0 as of the end of the fiscal quarter ending September 29, 2022 and each fiscal quarter thereafter, (d) restricts the Company’s ability to incur additional indebtedness, pay dividends and other distributions, and make voluntary prepayments on or defeasance of the Company’s 4.02% Senior Notes due August 2025, 4.32% Senior Notes due February 2027, the notes or certain other convertible securities, (e) requires the Company’s consolidated EBITDA not to be less than or equal to (i) $0 as of September 30, 2021 for the fiscal quarter then ending, (ii) $20,000,000 as of December 30, 2021 for the two consecutive fiscal quarters then ending, (iii) $35,000,000 as of March 31, 2022 for the three consecutive fiscal quarters then ending or (iv) $60,000,000 as of June 30, 2022 for the four consecutive fiscal quarters then ending, (f) requires the Company’s consolidated liquidity not to be less than or equal to (i) $125,000,000 as of September 24, 2020, (ii) $125,000,000 as of December 31, 2020, (iii) $100,000,000 as of April 1, 2021, (iv) $100,000,000 as of July 1, 2021, or (v) $50,000,000 as of the end of any fiscal quarter thereafter until and including the fiscal quarter ending June 30, 2022; however, each such required minimum amount of consolidated liquidity would be reduced to $50,000,000 for each such testing date if the initial term loans are paid in full as of such date, and (g) prohibits the Company from incurring or making capital expenditures, (i) during the period beginning on April 1, 2020 through and including December 31, 2020 in excess of the sum of $22,500,000 plus certain adjustments, or (ii) during the Company’s 2021 fiscal year in excess of $50 million plus certain adjustments.
83
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt and Short-Term Borrowings (continued)
Pursuant to the Credit Agreement, the Company is required to apply net cash proceeds received from certain events, including certain asset dispositions, casualty losses, condemnations, equity issuances, capital contributions, and the incurrence of certain debt, to prepay outstanding term loans. During fiscal 2020, approximately $2,955,000 in asset sale proceeds were applied to the term loan balance. In addition, if, at any time during the specified period, the Company’s unrestricted cash on hand exceeds $75,000,000, the Credit Agreement requires the Company to prepay revolving loans under the Credit Agreement by the amount of such excess, without a corresponding reduction in the revolving commitments under the Credit Agreement.
In connection with the Credit Agreement: (i) the Company has pledged, subject to certain exceptions, security interests and liens in and on (a) substantially all of its respective personal property assets and (b) certain of its respective real property assets, in each case, to secure the Credit Agreement and related obligations; and (ii) certain of the Company’s subsidiaries have guaranteed the Company’s obligations under the Credit Agreement. The foregoing security interests, liens and guaranties will remain in effect until the Collateral Release Date (as defined in the Credit Agreement).
The Credit Agreement contains customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then, among other things, the lenders may declare any outstanding obligations under the Credit Agreement to be immediately due and payable and exercise rights and remedies against the pledged collateral.
Amendments to Note Purchase Agreements
The Company’s $100,000,000 of senior notes consist of 2 Purchase Agreements maturing in 20202025 through 2027, require annual principal payments in varying installments and bear interest payable semi-annually at fixed rates ranging from 4.02% to 6.55%4.32%, with a weighted-average fixed rate of 4.53%4.17% at December 27, 201831, 2020 and 4.70%4.37% at December 28, 2017.26, 2019.
At December 27, 2018,On September 15, 2020, the Company hadand certain purchasers entered into amendments (the “Note Amendments”) to the Note Purchase Agreement, dated June 27, 2013, and the Note Purchase Agreement, dated December 21, 2016 (collectively, the “Note Purchase Agreements”). The Note Amendments amend certain covenants and other terms of the Note Purchase Agreements and are identical to the amended covenants that are referenced in the Credit Agreement section above.
Additionally, from April 29, 2020 until the last day of the first fiscal quarter ending after the Collateral Release Date (as defined in the Note Amendments), the Company is required to pay a revolving credit facility totaling $225,000,000fee to each Note holder. From April 29, 2020 through September 21, 2020, this fee was 0.7250% of the aggregate principal amount of Notes held by such holder (0.18125% quarterly). As of September 22, 2020, this amount is equal to 0.975% of the aggregate principal amount of Notes held by such holder and is payable quarterly (0.24375% of the aggregate principal amount of the Notes per quarter) commencing with the fiscal quarter ending September 24, 2020.
In connection with the Note Amendments: (i) the Company has pledged, subject to certain exceptions, security interests and liens in place under an existing credit agreement that maturesand on (a) substantially all of their respective personal property assets and (b) certain of their respective real property assets, in June 2021. There were borrowingseach case, to secure the Notes and related obligations; and (ii) certain subsidiaries of $79,000,000 outstanding on the revolving credit facility at December 27, 2018, bearing interest at LIBOR plus a margin which adjusts based onCompany have guaranteed the Company’s borrowing levels, effectively 3.46% at December 27, 2018 and 2.67% at December 28, 2017. The revolving credit facility requires an annual facility fee of 0.20% on the total commitment. AvailabilityCompany's obligations under the line at December 27, 2018 totaled $141,000,000.
Note Purchase Agreements and the Notes. The foregoing security interests, liens and guaranties will remain in effect until the Collateral Release Date.
The Company’s loan agreements include,Note Purchase Agreements contain customary events of default. If an event of default under the Note Purchase Agreements occurs and is continuing, then, among other covenants, maintenance of certain financial ratios, including a debt-to-capitalization ratiothings, all Notes then outstanding become immediately due and a fixed charge coverage ratio. The Company is in compliance with all financial debt covenants at December 27, 2018.payable and the Note holders may exercise their rights and remedies against the pledged collateral.
84
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6.7. Long-Term Debt and Capital Lease ObligationsShort-Term Borrowings (continued)
Convertible Senior Notes
On September 17, 2020, the Company entered into a purchase agreement to issue and sell $100,050,000 aggregate principal amount of its 5.00% Convertible Senior Notes due 2025 (the “Convertible Notes.”) The Convertible Notes were issued pursuant to an indenture (the “Indenture”), dated September 22, 2020, between the Company and U.S. Bank National Association, as trustee. The net proceeds from the sale of the Convertible Notes were approximately $95,421,000 after deducting the Initial Purchasers’ fees and additional fees and expenses related to the offering. The Company used $16,908,000 of net proceeds from the offering to pay the cost of the Capped Call Transactions (as described below). The remainder of the net proceeds were used to repay borrowings under the Company’s revolving credit facility and for general corporate purposes. The Convertible Notes are senior unsecured obligations and rank (i) senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Convertible Notes; (ii) equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; (iii) effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.
In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company's own stock, was determined by deducting the fair value of the liability component from the par value of the Convertible Notes. The difference between the principal amount of the Convertible Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the consolidated balance sheet and amortized to interest expense using the effective interest method over the term of the Convertible Notes. Amortization of the debt discount was $1,004,000 through December 31, 2020 and is included in the convertible senior notes balance as of December 31, 2020. The effective interest rate of the Convertible Notes is 11.25%. The equity component of the Convertible Notes is approximately $23,426,000 ($16,511,000, net of tax and issuance costs) and is included in additional paid-in capital in the consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification. The Company allocated transaction costs related to the Convertible Notes using the same proportions as the proceeds from Convertible Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability in the consolidated balance sheet and are being amortized to interest expense over the term of the Convertible Notes. Transaction costs attributable to the equity component were netted with the equity component in shareholders’ equity.
The Convertible Notes bear interest from September 22, 2020 at a rate of 5.00% per year. Interest will be payable semiannually in arrears on March 15 and September 15 of each year, beginning on March 15, 2021. The Convertible Notes may bear additional interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under the Indenture or if the Convertible Notes are not freely tradeable as required by the Indenture. The Convertible Notes will mature on September 15, 2025, unless earlier repurchased or converted. Prior to March 15, 2025, the Convertible Notes will be convertible at the option of the holders only under the following circumstances: (i) during any fiscal quarter commencing after the fiscal quarter ending on December 31, 2020 (and only during such fiscal quarter), if the last reported sale price of the Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period immediately after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Common Stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after March 15, 2025, the Convertible Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.
85
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt and Short-Term Borrowings (continued)
Upon conversion, the Convertible Notes may be settled, at the company’s election, in cash, shares of Common Stock or a combination thereof. The initial conversion rate is 90.8038 shares of Common Stock per $1,000 principal amount of the Convertible Notes (equivalent to an initial conversion price of approximately $11.01 per share of Common Stock), representing an initial conversion premium of approximately 22.5% to the $8.99 last reported sale price of the Common Stock on The New York Stock Exchange on September 17, 2020. If the Company undergoes certain fundamental changes, holders of Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes for a purchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if a make-whole fundamental change occurs prior to the maturity date, the Company will, under certain circumstances, increase the conversion rate for holders who convert Convertible Notes in connection with such make-whole fundamental change. The Company may not redeem the Convertible Notes before maturity and no “sinking fund” is provided for the Convertible Notes. The Indenture includes covenants customary for securities similar to the Convertible Notes, sets forth certain events of default after which the Convertible Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving the Company and certain of its subsidiaries after which the Convertible Notes become automatically due and payable.
Capped Call Transactions
In connection with the pricing of the Convertible Notes on September 17, 2020, and in connection with the exercise by the Initial Purchasers of their option to purchase additional Convertible Notes on September 18, 2020, the Company entered into privately negotiated Capped Call Transactions (the “Capped Call Transactions”) with certain of the Initial Purchasers and/or their respective affiliates and/or other financial institutions (the “Capped Call Counterparties”). The Capped Call Transactions are expected generally to reduce potential dilution of the Company’s common stock upon any conversion of the Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of such converted Convertible Notes, as the case may be, in the event that the market price per share of the Company’s common stock, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. If, however, the market price per share of the Company’s common stock, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions, there would nevertheless be dilution to the extent that such market price exceeds the cap price of the Capped Call Transactions. The cap price of the Capped Call Transactions will initially be $17.98 per share (in no event shall the cap price be less than the strike price of $11.0128), which represents a premium of 100% over the last reported sale price of the Common Stock of $8.99 per share on The New York Stock Exchange on September 17, 2020, and is subject to certain adjustments under the terms of the Capped Call Transactions. The Capped Call Transactions are separate transactions entered into by the Company with the Capped Call Counterparties, are not part of the terms of the Convertible Notes and will not change the rights of holders of the Convertible Notes under the Convertible Notes and the Indenture.
Paycheck Protection Program Loans
During fiscal 2020, 11 of the Company’s subsidiaries received proceeds totaling $13,459,000 under the CARES Act’s Paycheck Protection Program (PPP). The PPP loans bear interest at a fixed interest rate of 1.0%, require principal and interest payments that will begin in April 2021, and mature in fiscal 2026. The PPP loans allow for a substantial amount of the principal to be forgiven. Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs (qualified expenses). As of December 31, 2020, the Company’s subsidiaries used a cumulative total of approximately $10,035,000 of the PPP loan proceeds to pay for qualified expenses. Of the cumulative proceeds used, approximately $9,094,000 of the expenditures paid were used to cover eligible employee payroll costs which offset the payroll costs of employees rehired due to the CARES Act. The remaining approximately $941,000 of expenditures paid were used to offset rent expense, utility costs and mortgage interest expense. The Company believes the portion of the PPP loan proceeds used for qualified expenses will be forgiven under the terms of the CARES Act program and has reduced its cumulative subsidiary loan balances by this amount. The remaining loan balances that have not been used for qualified expenses and are expected to be repaid total $3,424,000 as of December 31, 2020, of which $503,000 is included in current maturities of long-term debt, and $2,921,000 is included in long-term debt on the consolidated balance sheet.
86
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt and Short-Term Borrowings (continued)
Scheduled annual principal payments on long-term debt, net of amortization of debt issuance costs, for the years subsequent to December 27, 2018,31, 2020, are:
| | | | ||||
| Fiscal Year | (in thousands) |
| (in thousands) | ||||
| 2019 | $ | 9,957 | |||||
| 2020 | 24,429 | ||||||
| 2021 | 89,963 | | $ | 10,548 | |||
| 2022 | 11,014 | |
| 10,947 | |||
| 2023 | 11,066 | |
| 11,006 | |||
2024 | |
| 11,067 | ||||
2025 | |
| 124,538 | ||||
| Thereafter | 92,391 | |
| 57,901 | |||
| $ | 238,820 | ||||||
| | $ | 226,007 | ||||
Interest paid on short-term borrowings and long-term debt, net of amounts capitalized, for fiscal 2018,2020, fiscal 20172019 and fiscal 20162018 totaled $12,655,000, $11,453,000$10,885,000, $10,281,000 and $9,105,000,$11,434,000, respectively.
The Company utilizes derivatives principally to manage market risks and reduce its exposure resulting from fluctuations in interest rates. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions.
The Company entered into two interest rate swap agreements on March 1, 2018 covering $50,000,000 of floating rate debt. The first agreement has a notional amount of $25,000,000, expires March 1, 2021, and requires the Company to pay interest at a defined rate of 2.559% while receiving interest at a defined variable rate of one-month LIBOR (2.375%(1.875% at December 27, 2018)31, 2020). The second agreement has a notional amount of $25,000,000, expires March 1, 2023, and requires the Company to pay interest at a defined rate of 2.687% while receiving interest at a defined variable rate of one-month LIBOR (2.375%(1.875% at December 27, 2018)31, 2020). The Company recognizes derivatives as either assets or liabilities on the consolidated balance sheets at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. Derivatives that do not qualify for hedge accounting must be adjusted to fair value through earnings. For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The Company’s interest rate swap agreements are considered effective and qualify as cash flow hedges. The Company assesses, both at the inception of each hedge and on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. As of December 27, 2018,31, 2020, the interest rate swaps were considered highly effective. The fair value of the interest rate swaps on December 27, 201831, 2020 was a liability of $205,000$1,470,000, of which $100,000 is included in other accrued liabilities and $1,370,000 is included in other long-term obligations in the consolidated balance sheet. The fair value of the interest rate swap on December 26, 2019, was a liability of $1,194,000 and was included in deferred compensation and other long-term obligations in the consolidated balance sheet. The Company does not expect the interest rate swaps to have a material effect on earnings within the next 12 months.
8. Leases
The Company haddetermines if an interest rate swap that expiredarrangement is a lease at inception. The Company evaluates each lease for classification as either a finance lease or an operating lease according to accounting guidance ASU No. 2016-02, Leases (Topic 842). The Company performs this evaluation at the inception of the lease and when a modification is made to a lease. The Company leases real estate and equipment with lease terms of one year to 45 years, some of which include options to extend and/or terminate the lease. The exercise of lease renewal options is done at the Company’s sole discretion. When deemed reasonably certain of exercise, the renewal options are included in January 2018.the determination of the lease term and related right-of-use asset and lease liability. The swap agreement covered $25,000,000depreciable life of floating rate debt that required the Companyasset is limited to pay interest at a defined fixed rate of 0.96% while receiving interest at a defined variable rate of one-month LIBOR.the expected term. The Company’s interest rate swap agreement was considered effective and qualified as a cash flow hedge from inception through June 16, 2016, at which time the derivative was undesignated and the balance in accumulated other comprehensive loss was reclassified into interest expense. As of June 16, 2016, the swap was considered ineffective for accounting purposes and the change in fairlease agreements do not contain any residual value was recorded as an increaseguarantees or decrease in interest expense. As such, the $13,000 decrease in fair value of the swap during fiscal 2018 was recorded to interest expense.any restrictions or covenants.
87
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Leases (continued)
6. Long-Term DebtRight-of-use assets represent the Company’s right to use an underlying asset for the lease term and Capital Lease Obligations (continued)
Capital Lease Obligations - During fiscal 2012,lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. When readily determinable, the Company entered intouses the implicit rate in the lease in determining the present value of lease payments. When the lease does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date, including the fixed rate the Company could borrow for a master licensing agreementsimilar amount, over a similar lease term with CDF2 Holdings, LLC,similar collateral. The Company recognizes right-of-use assets for all assets subject to operating leases in an amount equal to the operating lease liabilities, adjusted for the balances of long-term prepaid rent, favorable lease intangible assets, deferred lease expense, unfavorable lease liabilities and deferred lease incentive liabilities. Lease expense for operating lease payments is recognized on a subsidiarystraight-line basis over the lease term.
The majority of Cinedigm Digital Cinema Corp. (CDF2), whereby CDF2 purchasedthe Company’s lease agreements include fixed rental payments. For those leases with variable payments based on increases in an index subsequent to lease commencement, such payments are recognized as variable lease expense as they occur. Variable lease payments that do not depend on an index or rate, including those that depend on the Company’s behalf, and then deployed and licensed back to the Company, digital cinema projection systems (the “systems”) forperformance or use by the Company in its theatres. As of December 27, 2018, 642 of the Company’s screens were utilizingunderlying asset, are also expensed as incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the systems under a 10-year master licensing agreement with CDF2. Included in furniture, fixtures and equipment is $45,510,000lease term.
Total lease cost consists of the following:
| | | | | | | | |
Lease Cost |
| Classification |
| Fiscal 2020 | | Fiscal 2019 | ||
| | |
| | | | (in thousands) | |
Finance lease costs: |
|
|
| | | |
|
|
Amortization of finance lease assets |
| Depreciation and amortization |
| $ | 2,851 | | $ | 3,507 |
Interest on lease liabilities |
| Interest expense | | | 1,048 | |
| 1,247 |
| | | | $ | 3,899 | | $ | 4,754 |
| | | | | | | | |
Operating lease costs: | |
|
| | | |
|
|
Operating lease costs | | Rent expense |
| $ | 25,821 | | $ | 24,302 |
Variable lease cost | | Rent expense |
| | 724 | |
| 1,560 |
Short-term lease cost | | Rent expense | | | 321 | | | 237 |
| | |
| $ | 26,866 | | $ | 26,099 |
Additional information related to the digital systemsleases is as of December 27, 2018 and December 28, 2017, which is being amortized over the remaining estimated useful life of the assets. Accumulated amortization of the digital systems was $40,647,000 and $34,471,000 as of December 27, 2018 and December 28, 2017, respectively.follows:
| | | | | | |
Other Information | | Fiscal 2020 |
| Fisal 2019 | ||
| | (in thousands) | | | | |
Cash paid for amounts included in the measurement of lease liabilities: |
| |
| | | |
Financing cash flows from finance leases | | $ | 2,007 | | $ | 2,544 |
Operating cash flows from finance leases | |
| 1,048 | | | 1,247 |
Operating cash flows from operating leases | |
| 17,685 | | | 25,266 |
Right of use assets obtained in exchange for new lease obligations: | |
|
| | | |
Finance lease liabilities | |
| 1,417 | | | 1,726 |
Operating lease liabilities, including from acquisitions | |
| 10,957 | | | 180,103 |
Under the terms of the master licensing agreement, the Company made an initial one-time payment to CDF2. The Company expects that the balance of CDF2’s costs to deploy the systems will be covered primarily through the payment of virtual print fees (VPFs) from film distributors to CDF2 each time a digital movie is booked on one of the systems deployed on a Company screen. The Company agreed to make an average number of bookings of eligible digital movies on each screen on which a licensed system has been deployed to provide for a minimum level of VPFs paid by distributors (standard booking commitment) to CDF2. To the extent the VPFs paid by distributors are less than the standard booking commitment, the Company must make a shortfall payment to CDF2. Based upon the Company’s historical booking patterns, the Company does not expect to make any shortfall payments during the life of the agreement. Accounting Standards Codification No. 840,Leases, requires that the Company consider the entire amount of the standard booking commitment minimum lease payments for purposes of determining the capital lease obligation. The maximum amount per year that the Company could be required to pay is approximately $6,163,000 until the obligation is fully satisfied.
| | | | | | |
|
| December 31, 2020 |
| December 26, 2019 | ||
|
| (in thousands) | | (in thousands) | ||
Finance leases: | | | | | | |
Property and equipment – gross | | $ | 75,322 | | $ | 74,357 |
Accumulated depreciation and amortization | | | (55,547) | |
| (52,869) |
Property and equipment - net | | $ | 19,775 | | $ | 21,488 |
The Company’s capital lease obligation is being reduced as VPFs are paid by the film distributors to CDF2. The Company has recorded the reduction of the obligation associated with the payment of VPFs as a reduction of the interest related to the obligation and the amortization incurred related to the systems, as the payments represent a specific reimbursement of the cost of the systems by the studios. Based on the Company’s expected minimum number of eligible movies to be booked, the Company expects the obligation to be reduced by at least $3,927,000 within the next 12 months. This reduction will be recognized as an offset to amortization and is expected to offset the majority of the amortization of the systems.88
In conjunction with the Wehrenberg theatre acquisition (see Note 3), the Company became the obligor of several movie theatre and equipment leases with unaffiliated third parties that qualify for capital lease accounting. Included in buildings and improvements is $25,306,000 and $25,648,000 as of December 27, 2018 and December 28, 2017, respectively, related to these leases with accumulated amortization of $4,183,000 and $2,300,000 as of December 27, 2018 and December 28, 2017, respectively. Included in furniture, fixtures and equipment is $1,712,000 as of December 27, 2018 and December 28, 2017 related to these leases with accumulated amortization of $499,000 and $255,000 as of December 27, 2018 and December 28, 2017, respectively. The Company also leases additional equipment that qualifies as capital leases. Included in furniture, fixtures and equipment is $104,000 with accumulated amortization of $3,000 as of December 27, 2018. The assets are being amortized over the shorter of the estimated useful lives or the remaining lease terms.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Leases (continued)
6. Long-Term DebtRemaining lease terms and Capital Lease Obligations (continued)discount rates are as follows:
| | | | |
Lease Term and Discount Rate |
| December 31, 2020 | | December 26, 2019 |
Weighted-average remaining lease terms: |
|
| | |
Finance leases |
| 9 years | | 10 years |
Operating leases |
| 15 years | | 15 years |
| |
| | |
Weighted-average discount rates: |
|
| | |
Finance leases |
| 4.62% | | 4.67% |
Operating leases |
| 4.53% | | 4.56% |
Aggregate minimum futureMaturities of lease payments under these capital leases, assuming the exerciseliabilities as of certain lease options,December 31, 2020 are as follows (in thousands):
| | | | | | |
Fiscal Year |
| Operating Leases |
|
| Finance Leases | |
2021 | | $ | 30,318 | | $ | 3,722 |
2022 | |
| 28,418 | |
| 3,404 |
2023 | |
| 25,313 | |
| 3,162 |
2024 | |
| 25,381 | |
| 3,056 |
2025 | |
| 25,433 | |
| 2,897 |
Thereafter | |
| 203,089 | |
| 11,275 |
Total lease payments | |
| 337,952 | |
| 27,516 |
Less: amount representing interest | |
| (87,788) | |
| (4,989) |
Total lease liabilities | | $ | 250,164 | | $ | 22,527 |
Due to the COVID-19 pandemic, the Company temporarily closed all of its theatres on March 17, 2020 and had temporarily closed all of its company-owned hotels by April 8, 2020. At that time, the Company began actively working with landlords to discuss changes to the timing of lease payments and contract terms of leases due to the pandemic. The lease terms were negotiated on a lease-by-lease basis with individual landlords. In conjunction with these lease discussions, the Company obtained lease concessions for the majority of its leases. Substantially all of the lease concessions were for the deferral of lease payments into future periods. This resulted in the total payments required by the modified contract being substantially the same as or less than the total payments required by the original contract. In accordance with FASB Staff Q&A – Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic issued in April 2020, the Company has made the policy election to account for these lease concessions as if they were made under the enforceable rights included in the original agreement and are thus outside of the modification framework. The Company has elected to account for these concessions as if no changes to the lease contract were made and has continued to recognize rent expense during the deferral period. Deferred rent payments of approximately $6,609,000 for the Company’s operating leases have been included in the total operating lease obligations as of December 27, 2018:31, 2020, of which approximately $1,158,000 is included in long-term operating lease obligations.
| Fiscal Year | Future Minimum Lease Payments | Less Interest | Principal | |||||||||
| (in thousands) | ||||||||||||
| 2019 | $ | 3,073 | $ | 1,088 | $ | 1,985 | ||||||
| 2020 | 2,978 | 990 | 1,988 | |||||||||
| 2021 | 2,679 | 901 | 1,778 | |||||||||
| 2022 | 2,718 | 816 | 1,902 | |||||||||
| 2023 | 2,718 | 725 | 1,993 | |||||||||
| Thereafter | 16,940 | 2,458 | 14,482 | |||||||||
| $ | 31,106 | $ | 6,978 | $ | 24,128 | |||||||
7.9. Shareholders’ Equity and Stock-BasedShare-Based Compensation
Shareholders may convert their shares of Class B Common Stock into shares of Common Stock at any time. Class B Common Stock shareholders are substantially restricted in their ability to transfer their Class B Common Stock. Holders of Common Stock are entitled to cash dividends per share equal to 110% of all dividends declared and paid on each share of the Class B Common Stock. Holders of Class B Common Stock are entitled to ten votes per share while holders of Common Stock are entitled to one vote per share on any matters brought before the shareholders of the Company. Liquidation rights are the same for both classes of stock.
Through December 27, 2018,31, 2020, the Company’s Board of Directors has approved the repurchase of up to 11,687,500 shares of Common Stock to be held in treasury. The Company intends to reissue these shares upon the exercise of stock options and for savings and profit-sharing plan contributions. The Company purchasedrepurchased 37,567, 30,139 and 82,722 28,898 and 333,827 shares pursuant to these authorizations during fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, respectively. At December 27, 2018,31, 2020, there were 2,786,7002,718,994 shares available for repurchase under these authorizations.
89
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Shareholders’ Equity and Share-Based Compensation (continued)
The Company’s Board of Directors has authorized the issuance of up to 750,000 shares of Common Stock for The Marcus Corporation Dividend Reinvestment and Associate Stock Purchase Plan. At December 27, 2018,31, 2020, there were 435,726423,893 shares available under this authorization.
Shareholders have approved the issuance of up to 4,937,500 shares of Common Stock under various equity incentive plans. On February 25, 2021, the Company’s Board of Directors approved the issuance of an additional 2,500,000 shares of Common Stock under an amended equity incentive plan, which the Company will ask shareholders to approve at the Company’s May 2021 shareholder meeting. Stock options granted in May 2020 and February 2021 are contingent upon shareholder approval of the additional 2,500,000 shares of Common Stock. Stock options granted under the plans to employees generally become exercisable either 40% after two years, 60% after three years, 80% after four years and 100% after five years of the date of grant, or 50% after two years, 75% after three years and 100% after four years of the date of grant, depending on the date of grant. The options generally expire ten years from the date of grant as long as the optionee is still employed with the Company.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Shareholders’ Equity and Stock-Based Compensation (continued)
Awarded shares of non-vested stock cumulatively vest either 25% after three years of the grant date, 50% after five years of the grant date, 75% after ten years of the grant date and 100% upon retirement, or 50% after three years of the grant date and 100% after five years of the grant date, or 50% after two years of the grant date and 100% after four years of the grant date, depending on the date of grant. The non-vested stock may not be sold, transferred, pledged or assigned, except as provided by the vesting schedule included in the Company’s equity incentive plan. During the period of restriction, the holder of the non-vested stock has voting rights and is entitled to receive all dividends and other distributions paid with respect to the stock. Non-vested stock awards and shares issued upon option exercises aremay be issued from previously acquired treasury shares. At December 27, 2018,31, 2020, there were 887,191216,247 shares available for grants of additional stock options, non-vested stock and other types of equity awards under the current plan.
Stock-basedShare-based compensation, including stock options and non-vested stock awards, is expensed over the vesting period of the awards based on the grant date fair value.
The Company estimated the fair value of stock options using the Black-Scholes option pricing model with the following assumptions used for awards granted during fiscal 2018,2020, fiscal 20172019 and fiscal 2016:2018:
| Year Ended December 27, 2018 | Year Ended December 28, 2017 | Year Ended December 29, 2016 | ||||||||||
| | | | | | | | |||||
|
| Year Ended |
| Year Ended |
| Year Ended |
| |||||
| | December 31, 2020 | | December 26, 2019 | | December 27, 2018 |
| |||||
| Risk-free interest rate | 2.70 – 2.80% | 2.08 – 2.20% | 1.07 – 1.64% |
| 0.40 – 1.26% | | 2.50 – 2.60% | | 2.70 – 2.80% | | ||
| Dividend yield | 2.10% | 2.10% | 2.29% |
| 1.70 – 1.90% | | 1.70% | | 2.10% | | ||
| Volatility | 28 – 33% | 34 – 43% | 29 – 48% |
| 27 - 41% | | 27 – 32% | | 28 – 33% | | ||
| Expected life | 6 – 8 years | 7 – 8 years | 4 – 9 years |
| 6 – 8 years |
| 6 – 8 years |
| 6 – 8 years | | ||
Total pre-tax stock-basedshare-based compensation expense was $2,691,000, $2,411,000$4,385,000, $3,523,000 and $1,899,000$2,691,000 in fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, respectively. The recognized tax benefit on stock-basedshare-based compensation was $2,617,000, $1,227,000$771,000, $1,127,000 and $840,000$2,617,000 in fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, respectively. The increase in the recognized tax benefit during fiscal 2018 was primarily due to an increase in stock options exercised where the market price was significantly greater than the grant date fair value of the stock options.
90
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Shareholders’ Equity and Share-Based Compensation (continued)
A summary of the Company’s stock option activity and related information follows:
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | December 31, 2020 | | December 26, 2019 | | December 27, 2018 | ||||||||||||||||||||||||||||||||||||
| | | | | Weighted- | | | | | Weighted- | | | | | Weighted- | |||||||||||||||||||||||||||
| | | | | Average | | | | | Average | | | | | Average | |||||||||||||||||||||||||||
| | | | | Exercise | | | | | Exercise | | | | | Exercise | |||||||||||||||||||||||||||
|
| Options |
| Price |
| Options |
| Price |
| Options |
| Price | ||||||||||||||||||||||||||||||
| December 27, 2018 | December 28, 2017 | December 29, 2016 | ||||||||||||||||||||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||||||||||||||||||||
| Options | Price | Options | Price | Options | Price | |||||||||||||||||||||||||||||||||||||
| (options in thousands) | ||||||||||||||||||||||||||||||||||||||||||
|
| (options in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Outstanding at beginning of period | 1,629 | $ | 18.08 | 1,563 | $ | 15.94 | 1,707 | $ | 15.71 |
| | 1,641 | | $ | 25.46 |
| | 1,450 | | $ | 21.25 |
| | 1,629 | | $ | 18.08 | |||||||||||||||
| Granted | 336 | 27.59 | 273 | 31.08 | 185 | 19.45 |
| | 728 | |
| 23.47 |
| | 329 | |
| 41.67 |
| | 336 | |
| 27.59 | ||||||||||||||||||
| Exercised | (478 | ) | 14.74 | (133 | ) | 17.04 | (245 | ) | 16.23 |
| | (31) | |
| 12.21 |
| | (97) | |
| 15.60 |
| | (478) | |
| 14.74 | |||||||||||||||
| Forfeited | (37 | ) | 23.35 | (74 | ) | 22.37 | (84 | ) | 18.21 |
| | (104) | |
| 28.06 |
| | (41) | |
| 30.58 |
| | (37) | |
| 23.35 | |||||||||||||||
| Outstanding at end of period | 1,450 | 21.25 | 1,629 | 18.08 | 1,563 | 15.94 |
| | 2,234 | |
| 24.87 |
| | 1,641 | |
| 25.46 |
| | 1,450 | |
| 21.25 | ||||||||||||||||||
| Exercisable at end of period | 699 | $ | 15.87 | 988 | $ | 14.69 | 904 | $ | 14.28 |
| | 1,001 | | $ | 20.38 |
| | 802 | | $ | 18.22 |
| | 699 | | $ | 15.87 | |||||||||||||||
| Weighted-average fair value of options granted during the period | $ | 7.87 | $ | 10.54 | $ | 5.94 | | $ | 5.96 | | $ | 11.79 |
| $ | 7.87 | |||||||||||||||||||||||||||
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Shareholders’ Equity and Stock-Based Compensation (continued)
Exercise prices for options outstanding as of December 27, 2018,31, 2020 ranged from $10.00 to $41.35.$41.90. The weighted-average remaining contractual life of those options is 6.56.6 years. The weighted-average remaining contractual life of options currently exercisable is 4.64.3 years. There were 1,389,0002,177,000 options outstanding, vested and expected to vest as of December 27, 201831, 2020, with a weighted-average exercise price of $21.00$24.82 and an intrinsic value of $24,340,000.$547,000. Additional information related to these options segregated by exercise price range is as follows:
| | | | | | | | | | ||||||||||||
| | Exercise Price Range | |||||||||||||||||||
| | $10.00 to | | $18.35 to | | $27.01 to | |||||||||||||||
|
| $18.34 |
| $27.00 |
| $41.90 | |||||||||||||||
| Exercise Price Range | |||||||||||||||||||||
$10.00 to $18.34 | $18.35 to $26.99 | $27.00 to $41.35 | |||||||||||||||||||
| (options in thousands) | |||||||||||||||||||||
| | (options in thousands) | |||||||||||||||||||
| Options outstanding | 543 | 337 | 570 |
| | 666 |
| | 580 |
| | 988 | |||||||||
| Weighted-average exercise price of options outstanding | $ | 14.01 | $ | 19.62 | $ | 29.11 | | $ | 13.64 | | $ | 23.21 | | $ | 33.44 | ||||||
| Weighted-average remaining contractual life of options outstanding | 3.8 | 6.8 | 8.8 | |
| 4.9 | |
| 5.9 | |
| 8.1 | |||||||||
| Options exercisable | 504 | 166 | 29 | |
| 423 | |
| 415 | |
| 163 | |||||||||
| Weighted-average exercise price of options exercisable | $ | 13.68 | $ | 19.76 | $ | 31.93 | | $ | 14.17 | | $ | 22.22 | | $ | 31.77 | ||||||
The intrinsic value of options outstanding at December 27, 201831, 2020 was $25,048,000$559,000 and the intrinsic value of options exercisable at December 27, 201831, 2020 was $15,817,000.$371,000. The intrinsic value of options exercised was $10,373,000, $1,770,000$107, $2,135,000 and $1,676,000$10,373,000 during fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, respectively. As of December 27, 2018,31, 2020, total remaining unearned compensation cost related to stock options was $4,297,000,$6,357,000, which will be amortized to expense over the remaining weighted-average life of 2.92.7 years.
A summary of the Company’s non-vested stock activity and related information follows:
| | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | December 31, 2020 | | December 26, 2019 | | December 27, 2018 | |||||||||||||||||||||||||||||||||
| | | | Weighted- | | | | Weighted- | | | | Weighted- | |||||||||||||||||||||||||||
| | | | Average | | | | Average | | | | Average | |||||||||||||||||||||||||||
| | | | Fair | | | | Fair | | | | Fair | |||||||||||||||||||||||||||
|
| Shares |
| Value |
| Shares |
| Value |
| Shares |
| Value | |||||||||||||||||||||||||||
| December 27, 2018 | December 28, 2017 | December 29, 2016 | |||||||||||||||||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||||||||||||||||
| Average | Average | Average | |||||||||||||||||||||||||||||||||||||
| Fair | Fair | Fair | |||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | ||||||||||||||||||||||||||||||||||
| (options in thousands) | |||||||||||||||||||||||||||||||||||||||
| | (options in thousands) | |||||||||||||||||||||||||||||||||||||
| Outstanding at beginning of period | 137 | $ | 21.94 | 143 | $ | 19.30 | 134 | $ | 16.54 |
| 174 | | $ | 29.16 |
| 158 | | $ | 18.98 |
| 137 | | $ | 21.94 | |||||||||||||||
| Granted | 52 | 29.02 | 37 | 29.12 | 36 | 24.54 |
| 42 | |
| 31.43 |
| 39 | |
| 38.24 |
| 52 | |
| 29.02 | ||||||||||||||||||
| Vested | (31 | ) | 16.41 | (36 | ) | 18.78 | (25 | ) | 12.13 |
| (69) | |
| 26.56 |
| (23) | |
| 18.60 |
| (31) | |
| 16.41 | |||||||||||||||
| Forfeited | – | – | (7 | ) | 22.86 | (2 | ) | 18.72 |
| 0 | |
| 0 |
| — | |
| — |
| — | |
| — | ||||||||||||||||
| Outstanding at end of period | 158 | 18.98 | 137 | 21.94 | 143 | 19.30 |
| 147 | | $ | 31.02 |
| 174 | | $ | 29.16 |
| 158 | | $ | 18.98 | ||||||||||||||||||
91
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Shareholders’ Equity and Share-Based Compensation (continued)
The Company expenses awards of non-vested stock based on the fair value of the Company’s common stock at the date of grant. As of December 27, 2018,31, 2020, total remaining unearned compensation related to non-vested stock was $2,676,000,$2,863,000, which will be amortized over the weighted-average remaining service period of 3.22.4 years.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8.10. Employee Benefit Plans
The Company has a qualified profit-sharing retirement savings plan (401(k) plan) covering eligible employees. The 401(k) plan provides a matching contribution equal to 100% of the first 3% of compensation and 50% of the next 2% of compensation deposited by an employee into the 401(k) plan. Prior toDuring fiscal 2017, the plan provided for a contribution of a minimum of 1% of defined compensation for all plan participants2020, fiscal 2019 and matching of 25% of employee contributions up to 6% of defined compensation. In addition, the Company made additional discretionary contributions. During fiscal 2018, the first 2% of the matching contribution was made with the Company’s common stock. DuringRetirement savings plan expense was $1,718,000, $2,311,000 and $2,206,000 for fiscal 20172020, fiscal 2019 and fiscal 2016, the 1% and the discretionary contributions were made with the Company’s common stock.
2018, respectively.
The Company also sponsors unfunded, nonqualified, defined-benefit and deferred compensation plans. The Company’s unfunded, nonqualified retirement plan includes two components. The first component is a defined-benefit plan that applies to certain participants. The second component applies to all other participants and provides an account-based supplemental retirement benefit. During fiscal 2016, the plan was amended with an effective date of January 1, 2017, which curtailed benefits to certain participants included in the account-based supplemental plan. The curtailment resulted in a pre-tax gain of $251,000 during fiscal 2016. Pension and profit-sharing expense for all plans was $5,117,000, $4,415,000 and $3,960,000 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
The Company recognizes actuarial losses and prior service costs related to its defined benefit plan in the consolidated balance sheets and recognizes changes in these amounts in the year in which changes occur through comprehensive income.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Employee Benefit Plans (continued)
The status of the Company’s unfunded nonqualified, defined-benefit and account-based retirement plan based on the respective December 27, 201831, 2020 and December 28, 201726, 2019 measurement dates is as follows:
| | | | | | | ||||||||
|
| December 31, |
| December 26, | ||||||||||
| | 2020 | | 2019 | ||||||||||
December 27, 2018 | December 28, 2017 | |||||||||||||
| (in thousands) | ||||||||||||||
| | (in thousands) | ||||||||||||
| Change in benefit obligation: |
| |
|
| |
| ||||||||
| Benefit obligation at beginning of period | $ | 37,639 | $ | 32,523 | | $ | 43,824 | | $ | 35,640 | ||||
| Service cost | 926 | 765 | |
| 1,095 | |
| 833 | ||||||
| Interest cost | 1,364 | 1,356 | |
| 1,371 | |
| 1,485 | ||||||
| Actuarial (gain) loss | (2,633 | ) | 4,244 | |||||||||||
Actuarial loss | |
| 3,806 | |
| 7,317 | ||||||||
| Benefits paid | (1,656 | ) | (1,249 | ) | |
| (1,492) | |
| (1,451) | ||||
| Benefit obligation at end of year | $ | 35,640 | $ | 37,639 | | $ | 48,604 | | $ | 43,824 | ||||
| | | | | | | ||||||||
| Amounts recognized in the statement of financial position consist of: | |
| | |
| | ||||||||
| Current accrued benefit liability (included in Other accrued liabilities) | $ | (1,378 | ) | $ | (1,347 | ) | | $ | (1,401) | | $ | (1,400) | ||
| Noncurrent accrued benefit liability (included in Deferred compensation and other) | (34,262 | ) | (36,292 | ) | ||||||||||
Noncurrent accrued benefit liability (included in Other long-term obligations) | |
| (47,203) | |
| (42,424) | ||||||||
| Total | $ | (35,640 | ) | $ | (37,639 | ) | | $ | (48,604) | | $ | (43,824) | ||
| | | | | | | ||||||||
| Amounts recognized in accumulated other comprehensive loss consist of: | |
| | |
| | ||||||||
| Net actuarial loss | $ | 9,556 | $ | 12,874 | | $ | 19,125 | | $ | 16,373 | ||||
| Prior service credit | (515 | ) | (579 | ) | |
| (387) | |
| (451) | ||||
| Total | $ | 9,041 | $ | 12,295 | | $ | 18,738 | | $ | 15,922 | ||||
| Year Ended | ||||||||||||
December 27, 2018 | December 28, 2017 | December 29, 2016 | ||||||||||
| (in thousands) | ||||||||||||
| Net periodic pension cost: | ||||||||||||
| Service cost | $ | 926 | $ | 765 | $ | 865 | ||||||
| Interest cost | 1,364 | 1,356 | 1,406 | |||||||||
| Net amortization of prior service cost and actuarial loss | 621 | 356 | 364 | |||||||||
| Curtailment gain | – | – | (251 | ) | ||||||||
| $ | 2,911 | $ | 2,477 | $ | 2,384 | |||||||
92
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans (continued)
| | | | | | | | | |
| | Year Ended | |||||||
| | December 31, |
| December 26, |
| December 27, | |||
|
| 2020 | | 2019 | | 2018 | |||
| | (in thousands) | |||||||
Net periodic pension cost: |
| |
|
| |
|
| |
|
Service cost | | $ | 1,095 | | $ | 833 | | $ | 926 |
Interest cost | |
| 1,371 | |
| 1,485 | |
| 1,364 |
Net amortization of prior service cost and actuarial loss | |
| 990 | |
| 436 | |
| 621 |
| | $ | 3,456 | | $ | 2,754 | | $ | 2,911 |
The $6,609,000$13,847,000 loss, net of tax, included in accumulated other comprehensive loss at December 27, 2018,31, 2020, consists of the $6,985,000$14,133,000 net actuarial loss, net of tax, and the $376,000$286,000 unrecognized prior service credit, net of tax, which have not yet been recognized in the net periodic benefit cost. The $7,414,000$11,766,000 loss, net of tax, included in accumulated other comprehensive loss at December 28, 2017,26, 2019, consists of the $7,763,000$12,100,000 net actuarial loss, net of tax, and the $349,000$334,000 unrecognized prior service credit, net of tax, which have not yet been recognized in the net periodic benefit cost.
The accumulated benefit obligation was $30,576,000$43,548,000 and $31,769,000$37,474,000 as of December 27, 201831, 2020 and December 28, 2017,26, 2019, respectively.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Employee Benefit Plans (continued)
The pre-tax change in the benefit obligation recognized in other comprehensive loss during fiscal 2018 consisted of the net actuarial gain of $2,633,000, the amortization of the net actuarial loss of $685,000, and the amortization of the prior service credit of $64,000. The pre-tax change in the benefit obligation recognized in other comprehensive loss during fiscal 2017 consisted of the current year net actuarial loss of $4,244,000, the amortization of the net actuarial loss of $420,000, and the amortization of the prior service credit of $64,000. The estimated amount that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in fiscal 2019 is $435,000, of which $499,000 relates to the actuarial loss and $64,000 relates to the prior service credit.was as follows:
| | | | | | |
| | Year Ended | ||||
|
| December 31, 2020 |
| December 26, 2019 | ||
|
| (in thousands) | ||||
Net actuarial loss | | $ | 3,806 |
| | 7,317 |
Amortization of the net actuarial loss | |
| (1,055) |
| | (499) |
Amortization of the prior year service credit | |
| 64 |
| | 63 |
Total | | $ | 2,815 |
| | 6,881 |
The weighted-average assumptions used to determine the benefit obligations as of the measurement dates were as follows:
| December 27, 2018 | December 28, 2017 | ||||||||||||
| | | | | | ||||||||
|
| December 31, 2020 | | December 26, 2019 |
| ||||||||
| Discount rate | 4.15 | % | 3.60 | % |
| 2.45 | % | 3.10 | % | ||||
| Rate of compensation increase | 4.00 | % | 4.00 | % |
| 4.00 | % | 4.00 | % | ||||
The weighted-average assumptions used to determine net periodic benefit cost were as follows:
| Year Ended | |||||||||||||||||||
| December 27, 2018 | December 28, 2017 | December 29, 2016 | |||||||||||||||||
| | | | | | | | ||||||||||||
| | Year Ended |
| ||||||||||||||||
| | December 31, | | December 26, | | December 27, |
| ||||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| ||||||||||||
| Discount rate | 3.60 | % | 4.15 | % | 4.40 | % |
| 3.10 | % | 4.15 | % | 3.60 | % | ||||||
| Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % |
| 4.00 | % | 4.00 | % | 4.00 | % | ||||||
Benefit payments expected to be paid subsequent to December 27, 2018,31, 2020, are:
| | | | ||||
| Fiscal Year | (in thousands) |
| (in thousands) | ||||
| 2019 | $ | 1,378 | |||||
| 2020 | 1,605 | ||||||
| 2021 | 1,475 | | $ | 1,401 | |||
| 2022 | 1,503 | |
| 1,716 | |||
| 2023 | 1,479 | |
| 1,519 | |||
| Years 2024 – 2028 | 11,564 | ||||||
2024 | |
| 1,777 | ||||
2025 | |
| 2,177 | ||||
Years 2026 – 2030 | |
| 12,273 | ||||
91
93
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.11. Income Taxes
The components of the net deferred tax liability are as follows:
| | | | | | | ||||||||
|
| December 31, 2020 |
| December 26, 2019 | ||||||||||
| December 27, 2018 | December 28, 2017 | |||||||||||||
| (in thousands) | ||||||||||||||
| | (in thousands) | ||||||||||||
| Accrued employee benefits | $ | 13,381 | $ | 13,736 | | $ | 16,685 | | $ | 15,145 | ||||
| Depreciation and amortization | (59,296 | ) | (55,466 | ) | |
| (82,964) | |
| (69,100) | ||||
Operating lease assets | | | (58,704) | | | (62,339) | ||||||||
Operating lease liabilities | | | 64,055 | | | 62,750 | ||||||||
Net operating loss and tax credit carryforwards | | | 21,526 | | | — | ||||||||
| Other | 3,938 | 3,497 | |
| 5,973 | |
| 5,282 | ||||||
| Net deferred tax liability | $ | (41,977 | ) | $ | (38,233 | ) | | $ | (33,429) | | $ | (48,262) | ||
The Company has a federal net operating loss carryforward of $28,691,000 and a state net operating loss carryforward of $175,039,000 as of December 31, 2020. In addition, the Company has federal tax credit carryforwards of $5,074,000 as of December 31, 2020.
Income tax expense consists of the following:
| | | | | | | | | | ||||||||||||
| | Year Ended | |||||||||||||||||||
| | December 31, | | December 26, | | December 27, | |||||||||||||||
|
| 2020 |
| 2019 |
| 2018 | |||||||||||||||
| Year Ended | |||||||||||||||||||||
| December 27, 2018 | December 28, 2017 | December 29, 2016 | |||||||||||||||||||
| (in thousands) | |||||||||||||||||||||
| | (in thousands) | |||||||||||||||||||
| Current: |
| |
|
| |
|
| |
| ||||||||||||
| Federal | $ | 7,022 | $ | 8,707 | $ | 15,434 | | $ | (32,626) | | $ | 1,187 | | $ | 7,022 | ||||||
| State | 3,181 | 1,558 | 4,667 | |
| 526 | |
| 2,041 | |
| 3,181 | |||||||||
| Deferred: | |
| | |
| | |
| | ||||||||||||
| Federal | 2,815 | (7,155 | ) | 3,402 | |
| (24,751) | |
| 9,228 | |
| 2,815 | ||||||||
| State | 109 | 515 | (509 | ) | |
| (14,085) | |
| (136) | |
| 109 | ||||||||
| $ | 13,127 | $ | 3,625 | $ | 22,994 | ||||||||||||||||
| | $ | (70,936) | | $ | 12,320 | | $ | 13,127 | ||||||||||||
A tax benefit of $1,947,000 is included in the fiscal 2018 current federal income tax amount and a tax benefit of $21,240,000 is included in the fiscal 2017 deferred federal income tax amount, both of which relate to the Tax Cuts and Jobs Act of 2017.
The Company’s effective income tax rate, adjusted for earnings (losses) from noncontrolling interests, was 19.7%36.2%, 5.3%22.7% and 37.8%19.7% for fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, respectively. The Company's effective income tax rate during fiscal 2020 benefitted from several accounting method changes and the March 27, 2020 signing of the CARES Act, one of the provisions of which allows the Company's 2019 and 2020 taxable losses to be carried back to prior fiscal years during which the federal income tax rate was 35%, compared to the current statutory federal income tax rate of 21%. During fiscal 2020, the Company recorded current tax benefits of $11,976,000 and deferred tax benefits of $8,095,000 related to the CARES Act and tax accounting changes. Excluding these favorable impacts, the company’s effective income tax rate for fiscal 2020 was 26.0%. The Company does not include the income tax expense or benefit related to the net earnings or loss attributable to noncontrolling interests in its income tax expense as the entity is considered a pass-through entity and, as such, the income tax expense or benefit is attributable to its owners.
The Company has evaluated the provisions of the CARES Act. Among other things, the CARES Act includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. After reviewing these provisions, the Company filed income tax refund claims of approximately $37,400,000 in fiscal 2020, with the primary benefit derived from several accounting method changes and new rules for qualified improvement property expenditures and net operating loss carrybacks. In fiscal 2020, the Company received $31,500,000 of the requested tax refunds. The Company expects to receive the remaining $5,900,000 during the first quarter of fiscal 2021. The Company also expects to apply a significant portion of the tax loss incurred in fiscal 2020 to prior year income, which may also result in a refund that may approximate $21,000,000 in fiscal 2021 when the Company's fiscal 2020 tax return is filed (with additional tax loss carryforwards that may be used in future years).
94
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes (continued)
During fiscal 2018, the Company recorded current tax benefits of $1,947,000 related to reductions in deferred tax liabilities related to tax accounting method changes that the Company made subsequent to the Tax Cuts and Jobs Act of 2017. During fiscal 2017, the Company recorded a deferred tax benefit of $21,240,000 related to the reduction of its net deferred tax liability resulting from the reduction in the corporate tax rate enacted in December 2017 under the Tax Cuts and Jobs Act of 2017. Excluding these favorable impacts, the Company’s effective income tax ratesrate for fiscal 2018 and fiscal 2017 werewas 22.7% and 36.2%, respectively.. The Company also recorded significant current tax benefits in fiscal 2018 related to excess tax benefits on share-based compensation. The Company has not included the income tax expense or benefit related to the net earnings or loss attributable to noncontrolling interests in its income tax expense as the entities are considered pass-through entities and, as such, the income tax expense or benefit is attributable to its owners.
A reconciliation of the statutory federal tax rate to the effective tax rate on earnings attributable to The Marcus Corporation follows:
THE MARCUS CORPORATION
| | | | | | | |
| | Year Ended |
| ||||
| | December 31, | | December 26, | | December 27, |
|
|
| 2020 |
| 2019 |
| 2018 |
|
Statutory federal tax rate |
| 21.0 | % | 21.0 | % | 21.0 | % |
Tax benefit from Tax Cuts and Jobs Act of 2017 |
| 0 |
| 0 |
| (2.9) | |
Tax benefit from CARES Act and accounting method changes | | 10.3 | | — | | — | |
State income taxes, net of federal income tax benefit |
| 5.0 |
| 5.5 |
| 6.1 | |
Tax credits, net of federal income tax benefit |
| 0.2 |
| (2.7) |
| (1.1) | |
Other |
| (0.3) |
| (1.1) |
| (3.4) | |
|
| 36.2 | % | 22.7 | % | 19.7 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income Taxes (continued)
| Year Ended | ||||||||||||
December 27, 2018 | December 28, 2017 | December 29, 2016 | ||||||||||
| Statutory federal tax rate | 21.0 | % | 35.0 | % | 35.0 | % | ||||||
| Tax benefit from Tax Cuts and Jobs Act of 2017 | (2.9 | ) | (30.9 | ) | – | |||||||
| State income taxes, net of federal income tax benefit | 6.1 | 4.8 | 4.8 | |||||||||
| Tax credits, net of federal income tax benefit | (1.1 | ) | (0.8 | ) | (0.9 | ) | ||||||
| Other | (3.4 | ) | (2.8 | ) | (1.1 | ) | ||||||
| 19.7 | % | 5.3 | % | 37.8 | % | |||||||
In fiscal 2018, net income tax refunds were $218,000. Net income taxes paid (refunded) in fiscal 20172020, fiscal 2019 and fiscal 2016 totaled $23,691,0002018 were $(33,275,000), $3,062,000 and $25,017,000,$(218,000), respectively.
During Net income taxes refunded in fiscal 2017,2020 included $31,500,000 related to net operating loss carrybacks to prior years, as allowed under the Company was able to make a reasonable estimateprovisions of the impact of the Tax Cuts and Jobs Act of 2017, including the reduction in the corporate tax rate and the provisions related to executive compensation and 100% bonus depreciation on qualifying property. Following the guidance of the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin No. 118, any adjustments to the Company’s estimates within a one-year measurement period must be reported as a component of income tax expense in fiscal 2018. The Company did not make any adjustments to the estimates recorded in fiscal 2017.
CARES Act.
A reconciliation of the beginning and ending gross amounts of unrecognized tax benefit are as follows:
| | | | | | | | | | ||||||||||||
| | Year Ended | |||||||||||||||||||
| | December 31, | | December 26, | | December 27, | |||||||||||||||
|
| 2020 |
| 2019 |
| 2018 | |||||||||||||||
| Year Ended | |||||||||||||||||||||
December 27, 2018 | December 28, 2017 | December 29, 2016 | |||||||||||||||||||
| (in thousands) | |||||||||||||||||||||
| | (in thousands) | |||||||||||||||||||
| Balance at beginning of year | $ | 102 | $ | 414 | $ | 414 | | $ | 0 | | $ | 0 | | $ | 102 | ||||||
| Increases due to: | |
| | |
| | |
| | ||||||||||||
| Tax positions taken in prior years | – | – | – | |
| 0 | |
| 0 | |
| 0 | |||||||||
| Tax positions taken in current year | – | – | – | |
| 0 | |
| 0 | |
| 0 | |||||||||
| Decreases due to: | |
| | |
| | |
| | ||||||||||||
| Tax positions taken in prior years | – | – | – | |
| 0 | |
| 0 | |
| 0 | |||||||||
| Settlements with taxing authorities | (102 | ) | – | – | |
| 0 | |
| 0 | |
| (102) | ||||||||
| Lapse of applicable statute of limitations | – | (312 | ) | – | |
| 0 | |
| 0 | |
| 0 | ||||||||
| Balance at end of year | $ | – | $ | 102 | $ | 414 | | $ | 0 | | $ | 0 | | $ | 0 | ||||||
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income Taxes (continued)
During fiscal 2018, the Company settled a dispute with a state taxing authority and no longer carries an unrecognized tax benefit as ofsubsequent to December 27, 2018. The Company’s total unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate were $67,000 as of December 28, 2017 and December 29, 2016. The Company had no0 accrued interest or penalties at December 27, 2018, compared to accrued interest of $54,000 and no accrued penalties at31, 2020 or December 28, 2017.26, 2019. The Company classifies interest and penalties relating to income taxes as income tax expense. For the year ended December 27, 2018, $68,00031, 2020, $296,000 of interest income was recognized in the consolidated statement of earnings (loss), compared to $50,000$1,000 of interest expenseincome for the year ended December 28, 2017,26, 2019 and $153,000$68,000 of interest expenseincome for the year ended December 29, 2016.27, 2018.
95
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes (continued)
The Company is currently undergoing an examination by the Internal Revenue Service of its fiscal 2019 income tax return. This examination also includes the previous five fiscal years to the extent that net operating losses were carried back to those fiscal years under provisions of the CARES Act. During fiscal 2018, the Company settled, with no change, an examination by the Internal Revenue Service of its income tax return for the 31 weeks ended December 31, 2015. The Company’s federal income tax returns are no longer subject to examination prior to fiscal 2016. With certain exceptions, the Company’s state income tax returns are no longer subject to examination prior to the fiscal 2015.2016. At this time, the Company does not expect the results from any income tax audit or appeal to have a significant impact on the Company’s financial statements.
The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.
10.12. Commitments and License Rights
Lease Commitments- The Company leases real estate under various noncancellable operating leases with an initial term greater than one year that contain multiple renewal options, exercisable at the Company’s option. The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. Percentage rentals are based on the revenues at the specific rented property. Rental payments on capital leases are not recorded in rent expense but are recorded as a reduction of the capital lease obligation and interest expense (see Note 6). Rent expense charged to operations under operating leases was as follows:
| Year Ended | ||||||||||||
December 27, 2018 | December 28, 2017 | December 29, 2016 | ||||||||||
| (in thousands) | ||||||||||||
| Fixed minimum rentals | $ | 10,681 | $ | 12,027 | $ | 7,707 | ||||||
| Amortization of favorable lease right | 334 | 334 | 334 | |||||||||
| Percentage rentals | 1,188 | 708 | 343 | |||||||||
| Amortization of unfavorable leases | (936 | ) | (1,200 | ) | – | |||||||
| $ | 11,267 | $ | 11,869 | $ | 8,384 | |||||||
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments and License Rights (continued)
Aggregate minimum rental commitments under long-term operating leases, assuming the exercise of certain lease options, are as follows at December 27, 2018:
| Fiscal Year | (in thousands) | |||
| 2019 | $ | 11,317 | ||
| 2020 | 10,169 | |||
| 2021 | 9,670 | |||
| 2022 | 9,910 | |||
| 2023 | 9,038 | |||
| Thereafter | 80,523 | |||
| $ | 130,627 | |||
Subsequent to December 27, 2018, the Company acquired 22 operating leases in conjunction with the Movie Tavern acquisition, with lease terms ranging from 3 to 20 years.
Commitments-- The Company has commitments for the completion of construction at various properties totaling approximately $24,757,000$2,049,000 at December 27, 2018.
31, 2020.
License Rights –– As of December 27, 2018,31, 2020, the Company had license rights to operate three hotels using the Hilton trademark and two hotels using the Marriott trademark and one hotel using the InterContinental trademark. Under the terms of the licenses, the Company is obligated to pay fees based on defined gross sales. Subsequent to year-end, the Company ceased using the InterContinental trademark.
11.13. Joint Venture Transactions
At December 27, 201831, 2020 and December 28, 2017,26, 2019, the Company held investments with aggregate carrying values of $4,069,000$2,084,000 and $4,239,000,$3,593,000, respectively, in several joint ventures, one of which is accounted for under the equity method, and two of which are investments in equity investments without readily determinable fair values. During fiscal 2020, the Company recorded an other-than-temporary impairment loss of approximately $811,000 in which it was determined that the fair value of its equity method investment in a joint venture was less than its carrying value. The $811,000 impairment loss is included within Equity losses from unconsolidated joint ventures in the consolidated statement of earnings (loss) as of December 31, 2020. Early in fiscal 2021, pursuant to a recapitalization of this joint venture, the Company surrendered its ownership interest in this entity. The Company also sold its interest in an equity investment without a readily determinable fair value early in fiscal 2021.
96
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.14. Business Segment Information
The Company evaluates performance and allocates resources based on the operating income (loss) of each segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Following is a summary of business segment information for fiscal 2018,2020, fiscal 20172019 and fiscal 2016:2018:
| | | | | | | | | | | | | ||||||||||||||||
|
| | |
| Hotels/ |
| Corporate |
| | | ||||||||||||||||||
| | Theatres | | Resorts | | Items | | Total | ||||||||||||||||||||
| Theatres | Hotels/ Resorts | Corporate Items |
Total | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
| Fiscal 2018 | ||||||||||||||||||||||||||||
| Revenues(1) | $ | 446,804 | $ | 259,892 | $ | 424 | $ | 707,120 | ||||||||||||||||||||
| | (in thousands) | ||||||||||||||||||||||||||
Fiscal 2020 |
| |
|
| |
|
| |
|
| |
| ||||||||||||||||
Revenues | | $ | 132,624 | | $ | 104,638 | | $ | 426 | | $ | 237,688 | ||||||||||||||||
Operating loss | |
| (121,429) | |
| (43,885) | |
| (13,108) | |
| (178,422) | ||||||||||||||||
Depreciation and amortization | |
| 53,460 | |
| 21,096 | |
| 496 | |
| 75,052 | ||||||||||||||||
Assets | |
| 871,655 | |
| 309,320 | |
| 73,203 | |
| 1,254,178 | ||||||||||||||||
Capital expenditures and acquisitions | |
| 15,828 | |
| 4,669 | |
| 866 | |
| 21,363 | ||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||
Fiscal 2019 | |
| | |
| | |
| | |
| | ||||||||||||||||
Revenues | | $ | 557,080 | | $ | 263,350 | | $ | 433 | | $ | 820,863 | ||||||||||||||||
| Operating income (loss) | 88,790 | 12,480 | (18,081 | ) | 83,189 | |
| 76,903 | |
| 10,050 | |
| (18,762) | |
| 68,191 | |||||||||||
| Depreciation and amortization | 38,760 | 22,229 | 353 | 61,342 | |
| 51,202 | |
| 20,430 | |
| 645 | |
| 72,277 | ||||||||||||
| Assets | 624,512 | 306,162 | 58,657 | 989,331 | |
| 953,299 | |
| 337,206 | |
| 68,681 | |
| 1,359,186 | ||||||||||||
| Capital expenditures and acquisitions | 43,568 | 14,931 | 161 | 58,660 | |
| 61,604 | |
| 31,783 | |
| 780 | |
| 94,167 | ||||||||||||
| Fiscal 2017 | ||||||||||||||||||||||||||||
| Revenues(1) | $ | 403,431 | $ | 249,564 | $ | 557 | $ | 653,552 | ||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||
Fiscal 2018 | |
| | |
| | |
| | |
| | ||||||||||||||||
Revenues | | $ | 446,804 | | $ | 259,892 | | $ | 424 | | $ | 707,120 | ||||||||||||||||
| Operating income (loss) | 80,447 | 12,895 | (16,035 | ) | 77,307 | |
| 88,790 | |
| 12,480 | |
| (18,081) | |
| 83,189 | |||||||||||
| Depreciation and amortization | 33,448 | 17,912 | 359 | 51,719 | |
| 38,760 | |
| 22,229 | |
| 353 | |
| 61,342 | ||||||||||||
| Assets | 637,723 | 313,942 | 66,132 | 1,017,797 | |
| 624,512 | |
| 306,162 | |
| 58,657 | |
| 989,331 | ||||||||||||
| Capital expenditures and acquisitions | 93,676 | 20,604 | 524 | 114,804 | |
| 43,568 | |
| 14,931 | |
| 161 | |
| 58,660 | ||||||||||||
| Fiscal 2016 | ||||||||||||||||||||||||||||
| Revenues(1) | $ | 330,605 | $ | 243,192 | $ | 527 | $ | 574,324 | ||||||||||||||||||||
| Operating income (loss) | 71,800 | 14,619 | (14,946 | ) | 71,473 | |||||||||||||||||||||||
| Depreciation and amortization | 24,570 | 16,895 | 367 | 41,832 | ||||||||||||||||||||||||
| Assets | 561,755 | 311,738 | 37,773 | 911,266 | ||||||||||||||||||||||||
| Capital expenditures and acquisitions | 132,509 | 14,650 | 213 | 147,372 | ||||||||||||||||||||||||
Corporate items include amounts not allocable to the business segments. Corporate revenues consist principally of rent and the corporate operating loss includes general corporate expenses. Corporate information technology costs and accounting shared services costs are allocated to the business segments based upon several factors, including actual usage and segment revenues. Corporate assets primarily include cash and cash equivalents, furniture, fixtures and equipment, investments and land held for development.
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Unaudited Quarterly Financial Information(in thousands, except per share data)
| 13 Weeks Ended | ||||||||||||||||
| Fiscal 2018 | March 29, 2018 | June 28, 2018 | September 27, 2018 | December 27, 2018 | ||||||||||||
| Revenues | $ | 168,191 | $ | 193,298 | $ | 170,599 | $ | 175,032 | ||||||||
| Operating income | 17,016 | 29,107 | 22,413 | 14,653 | ||||||||||||
| Net earnings attributable to The Marcus Corporation | 9,821 | 18,619 | 16,231 | 8,720 | ||||||||||||
| Net earnings per common share – diluted | $ | 0.35 | $ | 0.65 | $ | 0.56 | $ | 0.30 | ||||||||
| 13 Weeks Ended | ||||||||||||||||
| Fiscal 2017 | March 30, 2017 | June 29, 2017 | September 28, 2017 | December 28, 2017(1) | ||||||||||||
| Revenues(2) | $ | 165,456 | $ | 160,140 | $ | 162,375 | $ | 165,581 | ||||||||
| Operating income(2) | 18,453 | 19,169 | 21,863 | 17,822 | ||||||||||||
| Net earnings attributable to The Marcus Corporation | 9,453 | 10,124 | 10,978 | 34,441 | ||||||||||||
| Net earnings per common share – diluted | $ | 0.33 | $ | 0.36 | $ | 0.39 | $ | 1.21 | ||||||||
14. Subsequent Event
On February 1, 2019, the Company acquired 22 dine-in theatres with 208 screens located in nine Southern and Eastern states from VSS-Southern Theatres LLC (Movie Tavern) for a total purchase price of $139,197,000, consisting of $30,000,000 in cash, subject to certain adjustments, and 2,450,000 shares of the Company’s Common Stock with a value of $109,197,000, based on the Company’s closing share price as of January 31, 2019. The assets acquired consist primarily of leasehold improvements, furniture, fixtures and equipment, goodwill and certain intangible assets. Acquisition costs incurred during fiscal 2018 as a result of the Movie Tavern acquisition were approximately $1,500,000 and were expensed as incurred and included in administrative expense in the consolidated statement of earnings. Assuming the Movie Tavern acquisition occurred at the beginning of fiscal 2018, unaudited, pro forma revenues for the Company during fiscal 2018 were $845,662,000. The Movie Tavern theatres would not have had a material impact on the Company’s fiscal 2018 net earnings. The Company is in the process of completing the purchase price allocation and expects to have it finalized within the 12 month measurement period.
97
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
Item 9A. Controls and Procedures. |
(a) Evaluation of disclosure controls and procedures.
Based on their evaluations, as of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or furnish under the Exchange Act is accumulated and communicated to our management and recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
(b) Management’s report on internal control over financial reporting.
The report of management required under this Item 9A is contained in the section titled “Item 8 – Financial Statements and Supplementary Data” under the heading “Management’s Report on Internal Control over Financial Reporting.”
(c) Attestation Report of Independent Registered Public Accounting Firm.
The attestation report required under this Item 9A is contained in the section titled “Item 8 – Financial Statements and Supplementary Data” under the heading “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.”
(d) Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(b) of the Exchange Act during the fourth quarter of our fiscal 20182020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
PART IIIItem 10
The information required by Item 10 is incorporated herein by reference to the relevant information set forth under the captions “Election of Directors,”Directors” and “Board of Directors and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for our 20192021 Annual Meeting of Shareholders scheduled to be held on May 7, 20196, 2021 (our “Proxy Statement”). Information regarding our executive officers may be found in Part I of this Form 10-K under the caption “Executive Officers of the Company.” Except as otherwise specifically incorporated by reference, our Proxy Statement is not deemed to be filed as part of this Form 10-K.
Item 11. Executive Compensation. |
The information required by Item 11 is incorporated herein by reference to the relevant information set forth under the caption “Compensation Discussion and Analysis” in our Proxy Statement.
98
The following table lists certain information about our two stock option plans,our 1995 Equity Incentive Plan and our 2004 Equity and Incentive Awards Plan, all of which were approved by our shareholders. We do not have any equity-based compensation plans that have not been approved by our shareholders.
| Number of securities to be issued upon the exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under current equity compensation plan (excluding securities reflected in the first column) | ||||||||
| 1,450,000 | $ | 21.25 | 887,000 | |||||||
| | | | | |
Number of securities to be | | Weighted-average | | Number of securities remaining available | |
issued upon the exercise | | exercise price of | | for future issuance under current equity | |
of outstanding options, | | outstanding options, | | compensation plan (excluding | |
warrants and rights |
| warrants and rights |
| securities reflected in the first column) | |
2,234,000 | | $ | 24.87 |
| 216,000 |
The other information required by Item 12 is incorporated herein by reference to the relevant information set forth under the caption “Stock Ownership of Management and Others” in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence. |
The information required by Item 13, to the extent applicable, is incorporated herein by reference to the relevant information set forth under the caption “Policies and Procedures Governing Related Person Transactions” in our Proxy Statement.
Item 14. Principal Accounting Fees and Services. |
The information required by Item 14 is incorporated by reference herein to the relevant information set forth under the caption “Other Matters” in our Proxy Statement.
PART IV
(a)(1)Financial Statements.
The information required by this item is set forth in “Item 8 – Financial Statements and Supplementary Data” above.
(a)(2)Financial Statement Schedules.
All schedules are omitted because they are inapplicable, not required under the instructions or the financial information is included in the consolidated financial statements or notes thereto.
(a)(3)Exhibits.
The exhibits filed herewith or incorporated by reference herein are set forth on the attached Exhibit Index. Exhibits to this Form 10-K will be furnished to shareholders upon advance payment of a fee of $0.25 per page, plus mailing expenses. Requests for copies should be addressed to Thomas F. Kissinger, Senior Executive Vice President, General Counsel and Secretary, The Marcus Corporation, 100 East Wisconsin Avenue, Suite 1900, Milwaukee, Wisconsin 53202-4125.
99
EXHIBIT INDEX
100
4.10 | | |
| | |
4.11 | | |
| | |
4.12 | | |
| ||
| Other than as set forth in Exhibits 4.1 | |
| ||
4.13 | | |
| ||
10.1* | | The Marcus Corporation Non-Employee Director Compensation Plan. |
| ||
10.2* | | |
| ||
10.3* | | |
| ||
10.4* | | |
| | |
10.5 | |
| ||
10.6* | | |
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10.7* | | |
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10.8* | | |
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10.9* | | |
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10.10* | | |
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10.11* | | |
|
101
10.12* | | |
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10.13* | | |
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10.14* | | |
| ||
10.15* | | |
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10.16* | | |
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10.17* | |
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10.18* | | |
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10.19* | | |
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10.20* | | |
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10.21* | | |
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10.22* | | |
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10.23* | | |
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10.24* | | |
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10.25 | | |
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102
10.26 | | |
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10.27 | | |
| | |
10.28 | | |
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14.1 | | |
| ||
21 | | |
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22 | | |
| | |
23 | | |
| ||
31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| ||
31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| ||
32 | | |
| ||
99 | | Proxy Statement for the |
| | |
101 | | The following materials from The Marcus Corporation’s Annual Report on Form 10-K for the fiscal year ended December |
| | |
104 | | Cover Page Interactive Data File. (Formatted as Inline XBRL and contained in Exhibit 101). |
*This exhibit is a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated.
Item 16.Form 10-K Summary. |
None.
SIGNATURES
103
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE MARCUS CORPORATION
THE MARCUS CORPORATION | | | |
| | | |
Date: March | By: | /s/ Gregory S. Marcus | |
Gregory S. Marcus, | |||
President and Chief Executive Officer | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of us and in the capacities as of the date indicated above.
| ||||
By: | /s/ Gregory S. Marcus | By: | /s/ Diane Marcus Gershowitz | |
Gregory S. Marcus, President and Chief Executive Officer (Principal Executive Officer) and Director | | Diane Marcus Gershowitz, Director | ||
| ||||
By: | /s/ Douglas A. Neis | | By: | /s/ Timothy E. Hoeksema |
Douglas A. Neis, Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Accounting Officer) | | Timothy E. Hoeksema, Director | ||
By: | ||||
/s/ Stephen H. Marcus | | By: | /s/ Allan H. Selig | |
Stephen H. Marcus, Chairman and Director | | Allan H. Selig, Director | ||
| ||||
By: | /s/ Philip L. Milstein | | By: | /s/ Brian J. Stark |
Philip L. Milstein, Director | | Brian J. Stark, Director | ||
| ||||
By: | /s/ Bruce J. Olson | | By: | /s/ David M. Baum |
Bruce J. Olson, Director | | David M. Baum, Director | ||
| ||||
By: | /s/ Katherine M. Gehl | | ||
Katherine M. Gehl, Director | |
104