Long-Term Debt and Capital Lease Obligations

12 Months Ended

Dec. 27, 2018

Long-Term Debt and Capital Lease Obligations

6. Long-Term Debt and Capital Lease Obligations

Long-term debt is summarized as follows:

	December 27, 2018			December 28, 2017
	(in thousands, except payment data)
Mortgage notes	$	39,852		$	40,543
Senior notes		118,000			129,143
Unsecured term note due February 2025, with monthly principal and interest payments of $39,110, bearing interest at 5.75%		2,432			2,751
Revolving credit agreement		79,000			130,000
Debt issuance costs		(464	)		(608	)
		238,820			301,829
Less current maturities, net of issuance costs		9,957			12,016
	$	228,863		$	289,813

The mortgage notes, both fixed rate and adjustable, bear interest from 3.00% to 5.31%, have a weighted-average rate of 4.66% at December 27, 2018 and 4.22% at December 28, 2017, and mature in fiscal years 2020 through 2043. The mortgage notes are secured by the related land, buildings and equipment.

The $118,000,000 of senior notes maturing in 2020 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%, with a weighted-average fixed rate of 4.53% at December 27, 2018 and 4.70% at December 28, 2017.

At December 27, 2018, the Company had a revolving credit facility totaling $225,000,000 in place under an existing credit agreement that matures in June 2021. There were borrowings of $79,000,000 outstanding on the revolving credit facility at December 27, 2018, bearing interest at LIBOR plus a margin which adjusts based on 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. Availability under the line at December 27, 2018 totaled $141,000,000.

The Company’s loan agreements include, among other covenants, maintenance of certain financial ratios, including a debt-to-capitalization ratio and a fixed charge coverage ratio. The Company is in compliance with all financial debt covenants at December 27, 2018.

Scheduled annual principal payments on long-term debt, net of amortization of debt issuance costs, for the years subsequent to December 27, 2018, are:

Fiscal Year	(in thousands)
2019	$	9,957
2020		24,429
2021		89,963
2022		11,014
2023		11,066
Thereafter		92,391
	$	238,820

Interest paid, net of amounts capitalized, for fiscal 2018, fiscal 2017 and fiscal 2016 totaled $12,655,000, $11,453,000 and $9,105,000, 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% at December 27, 2018). 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% at December 27, 2018). 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, the interest rate swaps were considered highly effective. The fair value of the interest rate swaps on December 27, 2018 was a liability of $205,000 and was included in deferred compensation and other 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.

The Company had an interest rate swap that expired in January 2018. The swap agreement covered $25,000,000 of floating rate debt that required the Company to pay interest at a defined fixed rate of 0.96% while receiving interest at a defined variable rate of one-month LIBOR. 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 fair value was recorded as an increase 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.

Capital Lease Obligations

- During fiscal 2012, the Company entered into a master licensing agreement with CDF2 Holdings, LLC, a subsidiary of Cinedigm Digital Cinema Corp. (CDF2), whereby CDF2 purchased on the Company’s behalf, and then deployed and licensed back to the Company, digital cinema projection systems (the “systems”) for use by the Company in its theatres. As of December 27, 2018, 642 of the Company’s screens were utilizing the systems under a 10-year master licensing agreement with CDF2. Included in furniture, fixtures and equipment is $45,510,000 related to the digital systems 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.

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.

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.

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.

Aggregate minimum future lease payments under these capital leases, assuming the exercise of certain lease options, are as follows as of December 27, 2018:

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