Annual report pursuant to Section 13 and 15(d)

INVESTMENT IN NATIONAL CINEMEDIA LLC

v3.19.3.a.u2
INVESTMENT IN NATIONAL CINEMEDIA LLC
12 Months Ended
Dec. 31, 2019
NCM  
INVESTMENT IN NATIONAL CINEMEDIA LLC

7.

INVESTMENT IN NATIONAL CINEMEDIA LLC

Summary of Activity with NCM

Below is a summary of activity with NCM included in the Company’s consolidated financial statements for the periods indicated. See Note 4 for discussion of the impact of the new revenue recognition accounting pronouncement.

 

 

Investment in NCM

 

 

NCM Screen Advertising Advances

 

 

Distributions from NCM

 

 

Equity

in Earnings

 

 

Other Revenue

 

 

Interest Expense

- NCM (3)

 

 

Cash Received

 

Balance as of January 1, 2017

 

$

189,995

 

 

$

(343,928

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of common units due to annual common unit adjustment

 

 

18,363

 

 

 

(18,363

)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Revenues earned under ESA (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,274

)

 

 

 

 

 

11,274

 

Receipt of excess cash distributions

 

 

(15,093

)

 

 

 

 

 

(14,158

)

 

 

 

 

 

 

 

 

 

 

 

29,251

 

Receipt under tax receivable agreement

 

 

(2,265

)

 

 

 

 

 

(2,249

)

 

 

 

 

 

 

 

 

 

 

 

4,514

 

Equity in earnings

 

 

9,550

 

 

 

 

 

 

 

 

 

(9,550

)

 

 

 

 

 

 

 

 

 

Amortization of screen advertising advances

 

 

 

 

 

10,585

 

 

 

 

 

 

 

 

 

(10,585

)

 

 

 

 

 

 

Balance as of and for the twelve months ended December 31, 2017

 

$

200,550

 

 

$

(351,706

)

 

$

(16,407

)

 

$

(9,550

)

 

$

(21,859

)

 

$

 

 

$

45,039

 

Impact of adoption of ASC Topic 606 (2)

 

 

 

 

 

(9,288

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of common units due to annual common unit adjustment

 

 

5,012

 

 

 

(5,012

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of additional common units

 

 

78,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues earned under ESA (1) (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,867

)

 

 

19,724

 

 

 

12,143

 

Receipt of excess cash distributions

 

 

(19,786

)

 

 

 

 

 

(13,231

)

 

 

 

 

 

 

 

 

 

 

 

33,017

 

Receipt under tax receivable agreement

 

 

(2,419

)

 

 

 

 

 

(2,158

)

 

 

 

 

 

 

 

 

 

 

 

4,577

 

Equity in earnings

 

 

13,842

 

 

 

 

 

 

 

 

 

(13,842

)

 

 

 

 

 

 

 

 

 

Amortization of screen advertising advances

 

 

 

 

 

15,764

 

 

 

 

 

 

 

 

 

(15,764

)

 

 

 

 

 

 

Balance as of and for the twelve months ended December 31, 2018

 

$

275,592

 

 

$

(350,242

)

 

$

(15,389

)

 

$

(13,842

)

 

$

(47,631

)

 

$

19,724

 

 

$

49,737

 

Receipt of common units due to annual common unit adjustment

 

 

1,552

 

 

 

(1,552

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues earned under ESA (1) (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,782

)

 

 

 

 

 

13,782

 

Interest accrued related to significant financing component (2)

 

 

 

 

 

(28,624

)

 

 

 

 

 

 

 

 

 

 

 

28,624

 

 

 

 

Receipt of excess cash distributions

 

 

(23,452

)

 

 

 

 

 

(11,631

)

 

 

 

 

 

 

 

 

 

 

 

35,083

 

Receipt under tax receivable agreement

 

 

(2,492

)

 

 

 

 

 

(1,242

)

 

 

 

 

 

 

 

 

 

 

 

3,734

 

Equity in earnings

 

 

14,592

 

 

 

 

 

 

 

 

 

(14,592

)

 

 

 

 

 

 

 

 

 

Amortization of screen advertising advances (2)

 

 

 

 

 

32,064

 

 

 

 

 

 

 

 

 

(32,064

)

 

 

 

 

 

 

Balance as of and for the twelve months ended December 31, 2019

 

$

265,792

 

 

$

(348,354

)

 

$

(12,873

)

 

$

(14,592

)

 

$

(45,846

)

 

$

28,624

 

 

$

52,599

 

 

(1)

Amounts include the per patron and per digital screen theatre access fees due to the Company, net of amounts due to NCM for on-screen advertising time provided to the Company’s beverage concessionaire. The amounts due to NCM for on-screen advertising time provided to the Company’s beverage concessionaire were approximately $11,110, $11,965 and $11,478 for the years ended December 31, 2017, 2018 and 2019, respectively.

(2)

As a result of adoption of ASC Topic 606, the Company determined that the deferred revenue associated with the ESA and CUA agreement should be amortized on a straight-line basis versus the units of revenue method followed prior to adoption.  In addition, the Company determined that a significant financing component existed for the ESA.  See Note 4 for further discussion of the impact of the adoption of ASC Topic 606.

(3)

Approximately $4,828 represents screen rental revenues earned under the amendment to the ESA.  See Note 4.

In addition to the activity in the table above, the Company made payments to NCM of approximately $102, $74 and $61 during the years ended December 31, 2017, 2018 and 2019, respectively, related to certain equipment used for digital advertising, which is included in theatre furniture and equipment on the consolidated balance sheets.

Investment in National CineMedia

NCM operates a digital in-theatre network in the U.S. for providing cinema advertising. The Company entered into an Exhibitor Services Agreement with NCM (“ESA”), pursuant to which NCM primarily provides advertising to our theatres. As described in Note 6 to the Company’s financial statements as included in its 2018 Annual Report on Form 10-K, on February 13, 2007, National Cinemedia, Inc. (“NCMI”), an entity that serves as the sole manager of NCM, completed an initial public offering (“IPO”) of its common stock.  In connection with the NCMI initial public offering, the Company amended its operating agreement and the ESA. At the time of the NCMI IPO and as a result of amending the ESA, the Company received approximately $174,000 in cash consideration from NCM.  The proceeds were recorded as deferred revenue or NCM screen advertising advances and was being amortized over the term of the Amended and Restated ESA, or through February 2041.  Following the NCMI IPO, the Company does not recognize undistributed equity in the earnings on its original NCM membership units (referred to herein as the Company’s Tranche 1 Investment) until NCM’s future net earnings, less distributions received, surpass the amount of the excess distribution. The Company recognizes equity in earnings on its Tranche 1 Investment only to the extent it receives cash distributions from NCM. The Company recognizes cash distributions it receives from NCM on its Tranche 1 Investment as a component of earnings as Distributions from NCM.  The Company believes that the accounting model provided by ASC Topic 323-10-35-22 for recognition of equity investee losses in excess of an investor’s basis is analogous to the accounting for equity income subsequent to recognizing an excess distribution.

Common Unit Adjustments

In addition to the consideration received upon the NCMI IPO and ESA modification in 2007, the Company also periodically receives consideration in the form of common units from NCM.  Pursuant to a Common Unit Adjustment Agreement dated as of February 13, 2007 between NCMI and the Company, annual adjustments to the common membership units are made primarily based on increases or decreases in the number of theatre screens operated and theatre attendance generated by each Founding Member. As discussed in Note 6 to the Company’s financial statements as included in its 2018 Annual Report on Form 10-K, the common units received (collectively referred to as the Company’s “Tranche 2 Investment”) are recorded at estimated fair value as an increase in the Company’s investment in NCM with an offset to deferred revenue or NCM screen advertising advances. The Company’s Tranche 2 Investment is accounted for following the equity method, with undistributed equity earnings related to its Tranche 2 Investment included as a component of earnings in equity in income of affiliates and distributions received related to its Tranche 2 Investment are recorded as a reduction of investment basis

During March 2019, NCM performed its annual common unit adjustment calculation under the Common Unit Adjustment Agreement. As a result of the calculation, on March 29, 2019, the Company received an additional 219,056 common units of NCM, each of which is convertible into one share of NCMI common stock. The Company recorded the additional common units received at estimated fair value with a corresponding adjustment to deferred revenue of approximately $1,552. The fair value of the common units received was estimated based on the market price of NCMI common stock at the time the common units were determined, adjusted for volatility associated with the estimated time period it would take to convert the common units and register the respective shares.  The deferred revenue is recognized on a straight-line basis over the remaining term of the first amendment to the Amended and Restated ESA.

Below is a summary of common units received by the Company under the Common Unit Adjustment (“CUA”) Agreement during the years ended December 31, 2017, 2018 and 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Event

 

Date Common Units Received

 

Number of Common Units Received

 

 

Fair Value of Common Units Received

 

2017 annual common unit adjustment

 

3/31/2017

 

 

1,487,218

 

 

$

18,363

 

2018 annual common unit adjustment

 

3/29/2018

 

 

908,042

 

 

$

5,012

 

2019 annual common unit adjustment

 

3/31/2019

 

 

219,056

 

 

$

1,552

 

 

Each common unit received by the Company is convertible into one share of NCMI common stock.  The fair value of the common units received was estimated based on the market price of NCMI stock at the time that the common units were received, adjusted for volatility associated with the estimated period of time it would take to convert the common units and register the respective NCMI shares.  The fair value measurement used for the common units falls under Level 2 of the U.S. GAAP fair value hierarchy as defined by ASC Topic 820-10-35. The Company records the additional common units it receives as part of its Tranche 2 Investment at estimated fair value with a corresponding adjustment to deferred revenue.  The deferred revenue is amortized over the remaining term of the ESA.

Acquisition of Common Units

On July 5, 2018, the Company acquired 10,738,740 common units of NCM from AMC for $78,393 in cash, or approximately $7.30 per common unit.  As a result of the acquisition of these shares, the Company’s ownership of NCM increased from approximately 18% to 25%.  The amount paid for the additional common units was recorded as an increase in the Company’s Tranche 2 investment in NCM.

As of December 31, 2019, the Company owned a total of 39,737,700 common units of NCM, which represented an interest of approximately 25%. The estimated fair value of the Company’s investment in NCM was approximately $289,688 based on NCMI’s stock price as of December 31, 2019 of $7.29 per share (Level 1 input as defined in FASB ASC Topic 820), which was more than the Company’s carrying value of $265,792.

 

Exhibitor Services Agreement

As previously discussed, our domestic theatres are part of the in-theatre digital network operated by NCM under the ESA. NCM provides advertising to our theatres through its branded “Noovie” pre-show entertainment program and also handles lobby promotions and displays for our theatres.  We receive a monthly theatre access fee for participation in the NCM network and also earn screen advertising revenue on a per patron basis.   Prior to September 17, 2019, the ESA was accounted for under ASC Topic 606, Revenue from Contracts with Customers.   See Note 3 and Note 4.    Effective September 17, 2019, the Company signed an amendment to the ESA, under which the Company will provide incremental advertising time to NCM and has extended the term through February 2041.  Since the agreement was amended, the Company was required to evaluate the revised contract under ASC Topic 842, Leases, and as a result, determined that the ESA met the definition of a lease.  The Company leases nonconsecutive periods of use of its domestic theatre screens to NCM for purposes of showing third party advertising content.  The lease, which is classified as an operating lease, generally requires variable lease payments based on the number of patrons attending the showtimes during which such advertising is shown.  The lease agreement is considered short-term due to the fact that the nonconsecutive periods of use, or advertising time slots, are set on a weekly basis.  The revenues earned under the ESA, both before and after the amendment, are reflected in other revenue on the consolidated income statement.  

The recognition of revenue related to the deferred revenue or NCM screen advertising advances will continue to be recorded on a straight-line basis over the new term of the amended ESA or February 2041.

 

 

Twelve Months Ended December 31,

 

 

 

 

 

 

 

 

 

Remaining Maturity

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

 

Total

 

NCM screen advertising advances (1)

 

$

7,669

 

 

 

8,197

 

 

 

8,762

 

 

 

9,368

 

 

 

10,016

 

 

 

304,342

 

 

$

348,354

 

 

(1)

Amounts are net of the estimated interest to be accrued for the periods presented.  

Significant Financing Component

Prior to the September 17, 2019 amendment of the ESA, the Company applied a significant financing component, as required by ASC Topic 606, due to the significant length of time between receiving the NCM screen advertising advances (the $174,000 received at the NCMI IPO and the periodic common unit adjustments) and completion of the performance obligation.  Effective September 17, 2019, upon the Company’s evaluation and determination that ASC Topic 842 applies to the amended ESA, the Company determined it acceptable to apply the

significant financing component guidance from ASC Topic 606 by analogy as the economic substance of the agreement represents a financing arrangement.  

Subsequent to the issuance of the Company’s audited consolidated financial statements for the year ended December 31, 2018, the Company identified an error in the January 1, 2018 adoption of ASC Topic 606 specifically related to the significant financing component associated with the NCM ESA.   The error impacted the cumulative effect of change in accounting principle for the adoption of ASC Topic 606 at January 1, 2018 and the recorded amounts of revenue and interest expense related to the amortization of NCM screen advertising advances associated with the significant financing component during 2018 and 2019.  The Company evaluated the error and, based on an analysis of the relevant quantitative and qualitative factors, determined the impact was not material to the Company’s consolidated financial statements for any prior annual or interim period.  The consolidated balance sheet, consolidated statement of equity, and corresponding notes to consolidated financial statements as of and for the year ended December 31, 2018 have been restated from the amounts previously reported to correct the cumulative effect of change in accounting principle for the adoption of ASC Topic 606. This resulted in a $62,893 increase in NCM screen advertising advances, a $ 15,346 increase in deferred tax assets, and a corresponding $47,547 reduction of retained earnings as of the January 1, 2018 adoption date. The impact for the year ended December 31, 2018 was corrected in the fourth quarter of 2019, resulting in a $1,403 reduction in other revenues, $4,721 increase in interest expense – NCM and a $4,630 reduction of net income.

Summary Financial Information for NCM  

The tables below present summary financial information for NCM for the periods indicated:

 

 

 

Year Ended

 

 

Year Ended

 

 

Year Ended

 

 

 

December 28, 2017

 

 

December 27, 2018

 

 

December 26, 2019

 

Revenues

 

$

426,100

 

 

$

441,400

 

 

$

444,800

 

Operating income

 

$

153,900

 

 

$

154,300

 

 

$

155,700

 

Net income

 

$

101,900

 

 

$

98,400

 

 

$

98,800

 

 

 

 

As of

 

 

As of

 

 

 

December 27, 2018

 

 

December 26, 2019

 

Current assets

 

$

172,700

 

 

$

185,400

 

Noncurrent assets

 

$

726,800

 

 

$

706,600

 

Current liabilities

 

$

115,200

 

 

$

125,500

 

Noncurrent liabilities

 

$

924,900

 

 

$

947,800

 

Members' deficit

 

$

(140,600

)

 

$

(181,300

)