Annual report pursuant to Section 13 and 15(d)

Investment in Digital Cinema Implementation Partners

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Investment in Digital Cinema Implementation Partners
12 Months Ended
Dec. 31, 2013
Investment in Digital Cinema Implementation Partners
7. INVESTMENT IN DIGITAL CINEMA IMPLEMENTATION PARTNERS

On February 12, 2007, the Company, AMC and Regal entered into a joint venture known as Digital Cinema Implementation Partners LLC (“DCIP”) to facilitate the implementation of digital cinema in the Company’s theatres and to establish agreements with major motion picture studios for the financing of digital cinema.

On March 10, 2010, the Company signed a master equipment lease agreement and other related agreements (collectively the “Agreements”) with Kasima LLC (“Kasima”), which is an indirect subsidiary of DCIP and a related party to the Company. Upon signing the Agreements, the Company contributed the majority of its U.S. digital projection systems to DCIP, which DCIP then contributed to Kasima.

The Company has a variable interest in Kasima through the terms of its master equipment lease agreement; however, the Company has determined that it is not the primary beneficiary of Kasima, as the Company does not have the ability to direct the activities of Kasima that most significantly impact Kasima’s economic performance.

As of December 31, 2013, the Company had a 33% voting interest in DCIP and a 24.3% economic interest in DCIP. The Company accounts for its investment in DCIP and its subsidiaries under the equity method of accounting. Below is a rollforward of our investment in DCIP from January 1, 2011 through December 31, 2013:

Balance as of January 1, 2011

$ 10,838

Cash contributions

1,471

Equity in income

489

Balance as of December 31, 2011

$ 12,798

Cash contributions

1,325

Equity in income

8,889

Balance as of December 31, 2012

$ 23,012

Cash contributions

3,232

Equity in income

11,241

Equity in other comprehensive income

548

Balance as of December 31, 2013 (1)

$ 38,033

(1)

Investment in DCIP is included in investments in and advances to affiliates on the consolidated balance sheets.

Below is summary financial information for DCIP as of and for the years ended December 31, 2011, 2012 and 2013.

Year ended December 31,
2011 2012 2013

Net operating revenue

$ 113,424 $ 166,017 $ 182,659

Operating income

$ 70,508 $ 102,663 $ 116,235

Net income (loss)

$ (2,510 ) $ 36,752 $ 48,959

As of
December 31, 2012 December 31, 2013

Total assets

$ 1,209,932 $ 1,264,870

Total liabilities

$ 1,070,346 $ 1,063,110

As a result of the Agreements, the Company has installed digital projection systems to a majority of its first run U.S. theatres. The digital projection systems are being leased from Kasima under an operating lease with an initial term of twelve years that contains ten one-year fair value renewal options. The equipment lease agreement also contains a fair value purchase option. Under the equipment lease agreement, the Company pays minimum annual rent of one thousand dollars per digital projection system for the first six and a half years from the effective date of the agreement and minimum annual rent of three thousand dollars per digital projection system beginning at six and a half years from the effective date through the end of the lease term. The Company may also be subject to various types of other rent if such digital projection systems do not meet minimum performance requirements as outlined in the agreements. Certain of the other rent payments are subject to either a monthly or an annual maximum. As of December 31, 2013, the Company had 3,619 digital projection systems being leased under the master equipment lease agreement with Kasima. The Company recorded equipment lease expense of approximately $5,332, $7,802 and $7,990 during the years ended December 31, 2011, 2012 and 2013, respectively, which is included in utilities and other costs on the consolidated statements of income.

The digital projection systems leased from Kasima replaced a majority of the Company’s existing 35 millimeter projection systems in its U.S. theatres. Therefore, upon signing the agreements during 2010, the Company began accelerating the depreciation of these existing 35 millimeter projection systems. The Company recorded depreciation expense of approximately $10,604 on its domestic 35 millimeter projection systems during the year ended December 31, 2011. The Company’s domestic 35 millimeter projection systems were fully depreciated as of December 31, 2011.