Description of Business and Summary of Significant Accounting Policies

7 Months Ended

Dec. 31, 2015

Description of Business and Summary of Significant Accounting Policies

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, Ohio, Minnesota, Iowa, North Dakota and Nebraska and a family entertainment center in Wisconsin.

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, Minnesota, Texas, Nevada, Georgia, Florida and California.

Principles of Consolidation - The consolidated financial statements include the accounts of The Marcus Corporation and all of its subsidiaries, including two joint ventures in which the Company has an ownership interest greater than 50% and a 50% owned joint venture entity in which the Company has a controlling financial 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 attributable to noncontrolling interests in the consolidated statements of earnings in accordance with the partnership agreements. 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 affiliates which are 50% or less owned by the Company which it does not exercise significant influence or have a controlling financial interest that it accounts for using the cost method of accounting. All intercompany accounts and transactions have been eliminated in consolidation.

Fiscal Year-End Change - On October 13, 2015, the Company’s Board of Directors approved a change in the Company’s fiscal year-end from the last Thursday in May to the last Thursday in December. The Company reports on a 52/53-week year. In this Transition Report on Form 10-K (the “Transition Report”), references to fiscal 2015 refer to the 52-week year ended May 28, 2015, references to fiscal 2014 refer to the 52-week year ended May 29, 2014 and references to fiscal 2013 refer to the 52-week year ended May 30, 2013. As a result of the change in fiscal year-end, the consolidated financial statements include the Company’s financial results for the 31 week transition period from May 29, 2015 to December 31, 2015, which will be referred to in this Transition Report as the Transition Period. The comparative 30 weeks information provided for the period ended December 25, 2014 is unaudited as it represents an interim period during the fiscal year ended May 28, 2015. Fiscal 2016 will be a 52-week year beginning on January 1, 2016 and ending on December 29, 2016.

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.

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 includes amounts held by a qualified intermediary agent to be used for tax-deferred, like-kind exchange transactions. As of December 31, 2015, approximately $8,735,000 of net sales proceeds were held with a qualified intermediary and were included in “Investing Activities” in our Consolidated Statements of Cash Flows. Restricted cash is not considered cash and cash equivalents for purposes of the statement of cash flows.

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.

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 31, 2015, May 28, 2015 and May 29, 2014, the Company’s $70,000 of available for sale securities were valued using Level 1 pricing inputs.

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 31, 2015, May 28, 2015 and May 29, 2014, the $16,000 asset, $28,000 liability and $56,000 asset, respectively, related to the Company’s interest rate hedge contract was 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 31, 2015, May 28, 2015 and May 29, 2014, none of the Company’s recorded assets or liabilities were valued using Level 3 pricing inputs, except as noted in Note 2.

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 $101,429,000 of senior notes, valued using Level 2 pricing inputs, is approximately $104,238,000 at December 31, 2015, determined based upon discounted cash flows using current market interest rates for financial instruments with a similar average remaining life. 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.

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 are stated at the lower of cost or market. Cost has been determined using the first-in, first-out method. Inventories of $2,641,000, $2,456,000 and $2,319,000 as of December 31, 2015, May 28, 2015 and May 29, 2014, respectively, were included in other current assets.

Property and Equipment - The Company states 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.

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	15 - 39
Buildings and improvements	12 - 39
Leasehold improvements	3 - 40
Furniture, fixtures and equipment	2 - 20

Depreciation expense totaled $23,893,000 for the Transition Period and $38,368,000, $33,329,000 and $33,469,000 in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

Long-Lived Assets - The Company periodically considers whether indicators of impairment of long-lived assets held for use are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying amounts. 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, the Company utilizes currently available market valuations of similar assets in its respective industries, often expressed as a given multiple of operating cash flow. The Company evaluated the ongoing value of its property and equipment and other long-lived assets during the Transition Period, fiscal 2015, fiscal 2014 and fiscal 2013 and determined that there was no impact on the Company’s results of operations, other than the impairment charges discussed in Note 2.

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.

Goodwill - The Company reviews goodwill for impairment annually or more frequently if certain indicators arise. Prior to its change in fiscal year, the Company performed its annual impairment test on the last day of its fiscal year. Consistent with the fiscal year change, the annual impairment testing has been changed to the last day of its new fiscal year-end. The Company believes performing the test at the end of the fiscal year is preferable because it aligns the annual goodwill impairment testing with its financial planning process, which was also adjusted to align with the new fiscal year-end. The change in accounting principle does not delay, accelerate or avoid an impairment charge. The Company has prospectively applied the change in the annual goodwill impairment testing date as it is impracticable to determine objectively the estimates and assumptions necessary to perform the annual goodwill impairment test without the use of hindsight in prior periods. 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 is it more likely than not that the fair value of its reporting unit is less than its 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 impairment was identified as of December 31, 2015, May 28, 2015 or May 29, 2014. The Company has never recorded a goodwill impairment loss. A summary of the Company’s goodwill activity is as follows:

	December 31, 2015		May 28, 2015		May 29, 2014
	(in thousands)
Balance at beginning of period	$	43,720	$	43,858	$	43,997
Acquisition		581		-		-
Deferred tax adjustment		(81)		(138)		(139)
Balance at end of period	$	44,220	$	43,720	$	43,858

Capitalization of Interest - The Company capitalizes interest during construction periods by adding such interest to the cost of constructed assets. Interest of approximately $32,000, $194,000, $256,000 and $75,000 was capitalized in the Transition Period, fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

Debt Issuance Costs - The Company’s debt issuance costs are included in other assets (long-term) and are deferred and amortized over the terms of the related debt agreements. Amortization expense of $258,000, $419,000, $491,000 and $348,000 was recorded in the Transition Period, fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

Investments - Available for sale securities are stated at fair value, with unrealized gains and losses reported as a component of shareholders’ equity. 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 during the Transition Period, fiscal 2015, fiscal 2014 or fiscal 2013.

Revenue Recognition - The Company recognizes revenue from its rooms as earned on the close of business each day. Revenues from theatre admissions, concessions and food and beverage sales are recognized at the time of sale. Revenues from advanced ticket and gift certificate sales are recorded as deferred revenue and are recognized when tickets or gift certificates are redeemed. The Company had deferred revenue of $25,770,000, $18,502,000 and $16,028,000, which is included in other accrued liabilities, as of December 31, 2015, May 28, 2015 and May 29, 2014, respectively. 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.

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 and include both base fees and incentive fees. Revenues do not include sales tax as the Company considers itself a pass-through conduit for collecting and remitting sales tax.

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.

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 9 - Income Taxes.

Earnings Per Share - Net earnings per share (EPS) of Common Stock and Class B Common Stock is computed using the two class method. Basic net earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding. Diluted net earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding, adjusted for the effect of dilutive stock options using the treasury method. Convertible Class B Common Stock is reflected on an if-converted basis. The computation of the diluted net earnings per share of Common Stock assumes the conversion of Class B Common Stock, while the diluted net earnings 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 for each year 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 following table illustrates the computation of Common Stock and Class B Common Stock basic and diluted net earnings per share and provides a reconciliation of the number of weighted-average basic and diluted shares outstanding:

			(unaudited)
	31 Weeks Ended		30 Weeks Ended		Year Ended
	December 31,		December 25,		May 28,		May 29,		May 30,
	2015		2014		2015		2014		2013

	(in thousands, except per share data)
Numerator:
Net earnings attributable to The Marcus Corporation	$	23,565	$	16,782	$	23,995	$	25,001	$	17,506

Denominator:
Denominator for basic EPS		27,609		27,379		27,421		27,076		27,846
Effect of dilutive employee stock options		308		214		266		74		19
Denominator for diluted EPS		27,917		27,593		27,687		27,150		27,865

Net earnings per share - Basic:
Common Stock	$	0.88	$	0.63	$	0.90	$	0.95	$	0.68
Class B Common Stock	$	0.80	$	0.57	$	0.82	$	0.86	$	0.59
Net earnings per share- Diluted:
Common Stock	$	0.84	$	0.61	$	0.87	$	0.92	$	0.63
Class B Common Stock	$	0.79	$	0.57	$	0.81	$	0.86	$	0.59

Options to purchase 456,000 shares, 434,000 shares, 469,000 shares and 1,402,000 shares of common stock at prices ranging from $19.74 to $23.37, $18.34 to $23.37, $14.40 to $23.37 and $12.73 to $23.37 per share were outstanding at December 31, 2015, May 28, 2015, May 29, 2014 and May 30, 2013, 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, 2015		May 28, 2015		May 29, 2014
	(in thousands)
Unrealized loss on available for sale investments	$	(11)	$	(11)	$	(11)
Unrecognized gain (loss) on interest rate swap agreement		9		(17)		34
Net unrecognized actuarial loss for pension obligation		(5,219)		(5,284)		(4,581)
	$	(5,221)	$	(5,312)	$	(4,558)

Concentration of Risk - As of December 31, 2015 and May 28, 2015, 8% of the Company’s employees were covered by a collective bargaining agreement, of which 75% are covered by an agreement that will expire in one year. As of May 29, 2014, 9% of the Company’s employees were covered by a collective bargaining agreement, of which 0% were covered by an agreement that expired within one year.

New Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The guidance will replace most existing revenue recognition guidance in Generally Accepted Accounting Principles when it becomes effective. The new standard is effective for the Company in fiscal 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is evaluating the effect that the guidance will have on its consolidated financial statements and related disclosures.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. ASU No. 2015-02 clarifies how to determine whether equity holders as a group have power to direct the activities that most significantly affect the legal entity’s economic performance and could affect whether it is a variable interest entity. The new standard was effective for the Company beginning in fiscal 2016. The Company is completing its evaluation of the effect that the guidance will have on its consolidated financial statements and related disclosures and will finalize its conclusions as of the end of its fiscal 2016 first quarter.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30), which requires an entity to present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset, and requires the amortization of the costs be reported as interest expense. The new standard was effective for the Company beginning in fiscal 2016 and will not have an effect on the Company’s overall financial position or results of operations.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The new standard was effective for the Company beginning in fiscal 2016 and may be applied either prospectively or retrospectively. The adoption of this new standard will not have an effect on the Company’s overall results of operations.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements of financial instruments. The new standard is effective for the Company in fiscal 2018, with early adoption permitted for certain provisions of the statement. Entities must apply the standard, with certain exceptions, using a cumulative-effect adjustment to beginning retained earnings as of the beginning of the fiscal year of adoption. The Company is currently assessing the impact the adoption of the standard will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), intended to improve financial reporting related to leasing transactions. ASU No. 2016-02 requires a lessee to recognize on the balance sheet assets and liabilities for rights and obligations created by leased assets with lease terms of more than 12 months. The new guidance will also require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from the leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The new standard is effective for the Company in fiscal 2019 and early application is permitted. The Company is evaluating the effect that the guidance will have on its consolidated financial statement and related disclosures.