Annual report pursuant to Section 13 and 15(d)

Investment in National CineMedia LLC

v3.10.0.1
Investment in National CineMedia LLC
12 Months Ended
Dec. 31, 2018
NCM  
INVESTMENT IN NATIONAL CINEMEDIA LLC

6.

INVESTMENT IN NATIONAL CINEMEDIA LLC

The Company has an investment in National CineMedia, LLC (“NCM”).  NCM operates a digital in-theatre network in the U.S. for providing cinema advertising and non-film events. Upon joining NCM, the Company entered into an Exhibitor Services Agreement (“ESA”) with NCM, pursuant to which NCM provides advertising, promotion and event services to our theatres. On February 13, 2007, National CineMedia, Inc. (“NCMI”), an entity that serves as the sole manager of NCM, completed an IPO of its common stock. In connection with the NCMI initial public offering, the Company amended its operating agreement and the ESA with NCMI. The ESA modification reflected a shift from circuit share expense under the prior ESA, which obligated NCM to pay the Company a percentage of revenue, to a monthly theatre access fee, which significantly reduced the contractual amounts paid to us by NCM. The Company recorded the proceeds related to the ESA modification as deferred revenue. In consideration for NCM’s exclusive access to the Company’s theatre attendees for on-screen advertising and use of off-screen areas within the Company’s theatres for lobby entertainment and lobby promotions, the Company receives a monthly theatre access fee under the modified ESA. The theatre access fee is composed of a fixed payment per patron, initially seven cents, and a fixed payment per digital screen, which may be adjusted for certain reasons outlined in the modified ESA. The payment per theatre patron increases by 8% every five years, with the first such increase taking effect after the end of fiscal 2011, and the payment per digital screen, initially eight hundred dollars per digital screen per year, increases annually by 5%. For 2016, 2017 and 2018, the annual payment per digital screen was one thousand two hundred forty-one dollars, one thousand three hundred three dollars and one thousand three hundred sixty-eight dollars, respectively. The theatre access fee paid in the aggregate to Regal Entertainment Group (“Regal”), AMC Entertainment, Inc. (“AMC”) and the Company will not be less than 12% of NCM’s Aggregate Advertising Revenue (as defined in the modified ESA), or it will be adjusted upward to reach this minimum payment. Additionally, with respect to any on-screen advertising time provided to the Company’s beverage concessionaire, the Company is required to purchase such time from NCM at a negotiated rate. The modified ESA expires in February 2037.

As a result of the application of a portion of the proceeds it received from the NCMI initial public offering, the Company had a negative basis in its original membership units in NCM, which is referred to herein as the Company’s  Tranche 1 Investment. Following the NCMI IPO, the Company does not recognize undistributed equity in the earnings on its Tranche 1 Investment until NCM's 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 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

Pursuant to a Common Unit Adjustment Agreement dated as of February 13, 2007 between NCMI and the Company, AMC and Regal, whom we refer to collectively as the Founding Members, adjustments are made annually to the common membership units primarily based on increases or decreases in the number of theatre screens operated and theatre attendance generated by each Founding Member. To account for the receipt of additional common units under the Common Unit Adjustment Agreement, we follow the guidance in FASB ASC 323-10-35-29 (formerly EITF 02-18, “Accounting for Subsequent Investments in an Investee after Suspension of Equity Loss Recognition”) by analogy, which also refers to AICPA Technical Practice Aid 2220.14, which indicates that if a subsequent investment is made in an equity method investee that has experienced significant losses, the investor must determine if the subsequent investment constitutes funding of prior losses. The Company concluded that adding theatres to the Company’s domestic circuit, which has led to the common unit adjustments, equates to making additional investments in NCM. We evaluated the receipt of the additional common units in NCM and the assets exchanged for these additional units and have determined that the right to use our incremental new screens would not be considered funding of prior losses. We account for these additional common units, which we refer to herein as our Tranche 2 Investment, as a separate investment than our Tranche 1 Investment. Our Tranche 2 Investment is accounted for following the equity method, with undistributed equity earnings related to our Tranche 2 Investment included as equity in income of affiliates on the consolidated statements of income and distributions received related to our Tranche 2 Investment recorded as a reduction of the Company’s investment in NCM.

Below is a summary of common units received by the Company under the Common Unit Adjustment (“CUA”) Agreement during the years ended December 31, 2016, 2017 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Event

 

Date Common Units Received

 

Number of Common Units Received

 

 

Fair Value of Common Units Received

 

2016 annual common unit adjustment

 

3/31/2016

 

 

753,598

 

 

$

11,111

 

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

 

 

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, 2018, the Company owned a total of 39,518,644 common units of NCM, which represented an interest of approximately 25%. The estimated fair value of the Company’s investment in NCM was approximately $256,081 based on NCMI’s stock price as of December 31, 2018 of $6.48 per share (Level 1 input as defined in FASB ASC Topic 820), which was less than the Company’s carrying value of $275,592. The Company does not believe that the decline in NCMI’s stock price is other than temporary and therefore, no impairment of the Company’s investment in NCM was recorded during the year ended December 31, 2018. The market value of NCMI’s stock price may continue to vary due to the performance of the business, industry trends, general and economic conditions and other factors.

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 3 for discussion of impact of new revenue recognition accounting pronouncements.

 

 

Investment in NCM

 

 

Deferred Revenue

 

 

Distributions from NCM

 

 

Equity

in Earnings

 

 

Other Revenue

 

 

Interest Expense

- NCM (3)

 

 

Cash Received (Paid)

 

Balance as of January 1, 2016

 

$

183,755

 

 

$

(342,134

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of common units due to annual common unit adjustment

 

 

11,111

 

 

 

(11,111

)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Revenues earned under ESA (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,048

)

 

 

 

 

 

11,048

 

Receipt of excess cash distributions

 

 

(11,233

)

 

 

 

 

 

(11,483

)

 

 

 

 

 

 

 

 

 

 

 

22,716

 

Receipt under tax receivable agreement

 

 

(2,985

)

 

 

 

 

 

(3,173

)

 

 

 

 

 

 

 

 

 

 

 

6,158

 

Equity in earnings

 

 

9,347

 

 

 

 

 

 

 

 

 

(9,347

)

 

 

 

 

 

 

 

 

 

Amortization of deferred revenue

 

 

 

 

 

9,317

 

 

 

 

 

 

 

 

 

(9,317

)

 

 

 

 

 

 

Balance as of and for the twelve months ended December 31, 2016

 

$

189,995

 

 

$

(343,928

)

 

$

(14,656

)

 

$

(9,347

)

 

$

(20,365

)

 

$

 

 

$

39,922

 

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 deferred revenue

 

 

 

 

 

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)

 

 

 

 

 

53,605

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

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)(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 deferred revenue (2)

 

 

 

 

 

15,764

 

 

 

 

 

 

 

 

 

(15,764

)

 

 

 

 

 

 

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

 

$

275,592

 

 

$

(287,349

)

 

$

(15,389

)

 

$

(13,842

)

 

$

(47,631

)

 

$

19,724

 

 

$

49,737

 

 

(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 $10,523, $11,110 and $11,965 for the years ended December 31, 2016, 2017 and 2018, 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.  The Company recorded a reduction in the deferred revenue balance and a cumulative effect of a change in accounting principle in retained earnings.  See Note 3 for further discussion of the impact of the adoption of ASC Topic 606.

(3)

Reflects the impact of significant financing component related to amounts received in advance under the ESA and CUA agreement.  See Note 3.

The Company made payments to NCM of approximately $49, $102 and $74 during the years ended December 31, 2016, 2017 and 2018, respectively, related to certain equipment used for digital advertising, which is included in theatre furniture and equipment on the consolidated balance sheets.  

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

 

 

 

Year Ended

 

 

Year Ended

 

 

Year Ended

 

 

 

December 29, 2016

 

 

December 28, 2017

 

 

December 27, 2018

 

Revenues

 

$

447,600

 

 

$

426,100

 

 

$

441,400

 

Operating income

 

$

173,000

 

 

$

153,900

 

 

$

154,300

 

Net income

 

$

109,300

 

 

$

101,900

 

 

$

98,400

 

 

 

 

As of

 

 

As of

 

 

 

December 28, 2017

 

 

December 27, 2018

 

Current assets

 

$

174,400

 

 

$

172,700

 

Noncurrent assets

 

$

758,300

 

 

$

726,800

 

Current liabilities

 

$

123,300

 

 

$

115,200

 

Noncurrent liabilities

 

$

925,400

 

 

$

924,900

 

Members' deficit

 

$

(116,000

)

 

$

(140,600

)