4. Acquisition

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 $139,310,000, 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 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 2019. The following is a summary of the allocation of the purchase price (in thousands):


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 include land, building, leasehold improvements 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 goodwill are expected to be deductible for tax purposes.

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.

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 measurements 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.

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 value was determined through a discounted cash flow model and the significant assumptions include a 14% discount rate.

Trade name intangible asset – When estimating the fair value of the trade name intangible asset, the Company used an income approach, specifically the relief from royalty method. The significant assumptions used include the estimated annual revenue, the royalty rate (1%), and a discount rate (17%).

The acquired theatres contributed approximately $125,839,000 to revenue in fiscal 2019. Excluding the impact of acquisition costs, the acquired theatres did not have a material impact on the Company’s fiscal 2019 net earnings. Acquisition costs incurred as a result of the Movie Tavern acquisition were approximately $1,283,000 and $1,507,000 during fiscal 2019 and fiscal 2018, respectively, and were expensed as incurred and included in administrative expense in the consolidated statements 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. 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.