Quarterly report pursuant to Section 13 or 15(d)

Investment in National CineMedia

v3.8.0.1
Investment in National CineMedia
9 Months Ended
Sep. 30, 2017
NCM  
Investment in National CineMedia

6.

Investment in National CineMedia

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. Upon joining NCM, the Company entered into an Exhibitor Services Agreement with NCM (“ESA”), pursuant to which NCM provides advertising and promotions to our theatres. As described further in Note 5 to the Company’s financial statements as included in its 2016 Annual Report on Form 10-K, on February 13, 2007, National CineMedia, Inc. (“NCM, Inc.”), an entity that serves as the sole manager of NCM, completed an initial public offering (“IPO”) of its common stock. In connection with the NCM, Inc. initial public offering, the Company amended its operating agreement and the ESA. Following the NCM, Inc. 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.

Below is a summary of activity with NCM included in the Company’s condensed consolidated financial statements:

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

Deferred

 

 

from

 

 

Equity in

 

 

Other

 

 

Cash

 

 

 

in NCM

 

 

Revenue

 

 

NCM

 

 

Income

 

 

Revenue

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,446

)

 

 

8,446

 

Receipt of excess cash distributions

 

 

(10,020

)

 

 

 

 

 

(9,630

)

 

 

 

 

 

 

 

 

19,650

 

Receipt under tax receivable agreement

 

 

(2,089

)

 

 

 

 

 

(2,074

)

 

 

 

 

 

 

 

 

4,163

 

Equity in earnings

 

 

8,098

 

 

 

 

 

 

 

 

 

(8,098

)

 

 

 

 

 

 

Amortization of deferred revenue

 

 

 

 

 

7,872

 

 

 

 

 

 

 

 

 

(7,872

)

 

 

 

Balance as of and for the nine months ended September 30, 2017

 

$

204,347

 

 

$

(354,419

)

 

$

(11,704

)

 

$

(8,098

)

 

$

(16,318

)

 

$

32,259

 

 

(1)

Amount includes the per patron and per digital screen theatre access fees due to the Company, net of amounts paid to NCM for on-screen advertising time provided to the Company’s beverage concessionaire of approximately $8,382.

During the three months ended September 30, 2017 and 2016, the Company recorded equity in earnings of approximately $5,032 and $5,815, respectively. During the nine months ended September 30, 2017 and 2016, the Company recorded equity in earnings of approximately $8,098 and $7,660, respectively.

The Company made payments to NCM of approximately $75 and $41 during the nine months ended September 30, 2017 and 2016, respectively, related to installation of certain equipment used for digital advertising, which is included in theatre properties and equipment on the condensed consolidated balance sheets.  

Pursuant to a Common Unit Adjustment Agreement dated as of February 13, 2007 between NCM, Inc. and the Company, AMC Entertainment, Inc. (“AMC”) and Regal Entertainment Group (“Regal”) (collectively, “Founding Members”), 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 further discussed in Note 5 to the Company’s financial statements as included in its 2016 Annual Report on Form 10-K, the common units received are recorded at fair value as an increase in the Company’s investment in NCM with an offset to deferred revenue. The deferred revenue is amortized over the remaining term of the ESA. During March 2017, NCM performed its annual common unit adjustment calculation under the Common Unit Adjustment Agreement. As a result of the calculation, on March 30, 2017, the Company received an additional 1,487,218 common units of NCM, each of which is convertible into one share of NCM, Inc. common stock. The Company recorded the additional common units received at estimated fair value with a corresponding adjustment to deferred revenue of approximately $18,363. The fair value of the common units received was estimated based on the market price of NCM, Inc. 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 will be recognized over the remaining term of the ESA, which is approximately 19 years.

As of September 30, 2017, the Company owned a total of 27,871,862 common units of NCM, representing an ownership interest of approximately 18%. The estimated fair value of the Company’s investment in NCM was approximately $194,546 based on NCM, Inc.’s stock price as of September 30, 2017 of $6.98 per share (Level 1 input as defined in FASB ASC Topic 820), which was less than the Company’s carrying value of $204,347.  The Company does not believe that the decline in NCM, Inc.’s stock price is other than temporary and therefore, no impairment of the Company’s investment in NCM was recorded during the nine months ended September 30, 2017.  The market value of NCM, Inc.’s stock price may change due to the performance of the business, industry trends, general and economic conditions and other factors.  

Below is summary financial information for NCM for the three and six months ended June 29, 2017 (the financial information for the three and nine months ended September 28, 2017 is not yet available) and the three and nine months ended September 29, 2016:

 

 

 

Three Months

 

 

Six Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Ended

June 29, 2017

 

 

June 29, 2017

 

 

September 29, 2016

 

 

September 29, 2016

 

Gross revenues

 

$

97,042

 

 

$

168,962

 

 

$

113,476

 

 

$

305,101

 

Operating income

 

$

28,430

 

 

$

33,500

 

 

$

48,481

 

 

$

100,911

 

Net income

 

$

15,377

 

 

$

7,465

 

 

$

23,909

 

 

$

49,619