Leases

3 Months Ended

Mar. 28, 2019

3. Leases

The Company determines if an arrangement 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 the determination of the lease term and related right-of-use asset and lease liability. The depreciable life of the asset is limited to the expected term. The Company’s lease agreements do not contain any residual value guarantees or any restrictions or covenants.

Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right-of-use assets and labilities 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 uses 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 similar amount, over a similar lease term with 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 straight-line basis over the lease term.

The majority of the 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 performance or use of the underlying asset, are also expensed as incurred.

The Company adopted ASC 842 on the first day of fiscal 2019 using the modified retrospective approach. Under this method, the Company was allowed to initially apply the new lease standard at the adoption date and recognize

the assets and liabilities

in the period of adoption. As such, upon adoption, no adjustments were made to prior period financial information or disclosures and the new lease standard did not result in a cumulative effect adjustment to retained earnings. Finance lease accounting remained substantially unchanged. The adoption of ASC 842 had the following effect on the Company’s financial statements as follows (all relating to operating lease right-of-use assets and obligations):

	Balance at December 27, 2018		ASC 842 Adjustments			Balance at December 28, 2018
	(in thousands)
Assets
Other current assets	$	15,355	$	(690	)	$	14,665
Operating lease right-of-use assets		-		76,178			76,178
Other assets (long term)		33,100		(8,868	)		24,232

Liabilities
Other accrued liabilities		59,645		(4,396	)		55,249
Current portion of operating lease obligations		-		5,909			5,909
Operating lease obligations		-		75,608			75,608
Deferred compensation and other		56,908		(10,501	)		46,407

As part of the Company’s adoption of ASC 842, the Company elected the following practical expedients: i) to forego reassessment of its prior conclusion related to lease identification, lease classification and initial direct costs, ii) to not separate lease and non-lease components for all of its leases, and iii) to make a policy election not to apply the lease recognition requirements for short-term leases. As a result, the Company does 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 will recognize these lease payments as lease costs on a straight-line basis over the lease term.

Total lease cost consists of the following:

Lease Cost	Classification	March 28, 2019
		(in thousands)
Finance lease costs:
Amortization of finance lease assets	Depreciation and amortization	$	891
Interest on lease liabilities	Interest expense		294
Operating lease costs	Rent expense		5,040
Variable lease cost	Rent expense		253
Short-term lease cost	Rent expense		110
Total lease costs		$	6,588

Other Information	13 Weeks Ended March 28, 2019
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases	$	587
Operating cash flows from finance leases		294
Operating cash flows from operating leases		5,213

Right of use assets obtained in exchange for new lease obligations:
Finance lease liabilities		1,566
Operating lease liabilities, including from acquisitions		159,175

	March 28, 2019
	(in thousands)
Finance leases:
Property and equipment – gross	$	74,197
Accumulated depreciation and amortization		(47,563	)
Property and equipment - net	$	26,634

Lease Term and Discount Rate	March 28, 2019

Weighted-average remaining lease terms:
Finance leases		10 years
Operating leases		16 years

Weighted-average discount rates:
Finance leases		4.88	%
Operating leases		4.64	%

Maturities of lease liabilities as of March 28, 2019 are as follows (in thousands):

Fiscal Year	Operating Leases			Finance Leases
2019 (excluding the 13 weeks ended March 28, 2019)	$	17,176		$	5,652
2020		24,638			3,532
2021		23,925			2,949
2022		24,349			2,904
2023		23,136			2,820
2024 and thereafter		218,998			16,948
Total lease payments		332,222			34,805
Less: amount representing interest		(94,804	)		(6,989	)
Total lease liabilities	$	237,418		$	27,816

Aggregate minimum lease commitments as of December 27, 2018 under Accounting Standard Codification Topic 840 are as follows (in thousands):

Fiscal Year	Operating Leases		Capital Leases
2019	$	11,317	$	3,073
2020		10,169		2,978
2021		9,670		2,679
2022		9,910		2,718
2023		9,038		2,718
2024 and thereafter		80,523		16,940
Total minimum lease payments	$	130,627		31,106
Less: amount representing interest				(6,978	)
Total present value of minimum capital lease payments			$	24,128

In fiscal 2018, the Company entered into a build-to-suit lease arrangement in which the Company is responsible for the construction of a new leased theatre and for paying construction costs during development. Construction costs will be reimbursed by the landlord up to an agreed upon amount. During construction, the Company is deemed to not have control of the assets or the leased premises and has recorded the development expenditures in other assets on the consolidated balance sheet. The lease will commence when the Company has access to the right-of-use asset, which is expected to be upon project completion.

Digital Cinema Projection Systems

- 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 March

28, 2019,

642 of the Company’s screens were utilizing the systems under a 10-year master licensing agreement with CDF2. Included in Finance lease right-of-use assets is $45,510,000 related to the digital systems as of March 28, 2019 and December 27, 2018, which is being amortized over the remaining estimated useful life of the assets. Accumulated amortization of the digital systems was $42,191,000 and $40,647,000 as of March 28, 2019 and December 27, 2018, 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 (VPF’s) 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 VPF’s paid by distributors (standard booking commitment) to CDF2. To the extent the VPF’s 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. 842,

Leases

, requires that the Company consider the entire amount of the standard booking commitment minimum lease payments for purposes of determining the finance 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 finance lease obligation is being reduced as VPF’s are paid by the film distributors to CDF2. The Company has recorded the reduction of the obligation associated with the payment of VPF’s 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 $2,675,000 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.