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INVESTMENT IN NATIONAL CINEMEDIA LLC | 12 Months Ended
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Dec. 31, 2012
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, or the 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, which is being amortized into other revenues over the life of the agreement using the units of revenue method. 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 2010, 2011 and 2012, the annual payment per digital screen was nine hundred twenty-six dollars, nine hundred seventy-two dollars and one thousand twenty-one 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 has, except with respect to certain limited services, a remaining term of approximately 24 years. 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 NCM, Inc. IPO, the Company does not recognize undistributed equity in the earnings on its 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 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, which we refer to collectively as the 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. 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. We concluded that the construction or acquisition of new theatres that 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. The common units received are recorded at fair value as an increase in our investment in NCM with an offset to deferred revenue. The deferred revenue is amortized over the remaining term of the ESA. Our Tranche 2 Investment is accounted for following the equity method, with undistributed equity earnings related to our Tranche 2 Investment included as a component of earnings in equity in income (loss) of affiliates and distributions received related to our Tranche 2 Investment are recorded as a reduction of our investment basis. In the event that a common unit adjustment is determined to be a negative number, the Founding Member can elect to either transfer and surrender to NCM the number of common units equal to all or part of such Founding Member’s common unit adjustment or to pay to NCM an amount equal to such Founding Member’s common unit adjustment calculated in accordance with the Common Unit Adjustment Agreement. If the Company then elects to surrender common units as part of a negative common unit adjustment, the Company would record a reduction to deferred revenue at the then fair value of the common units surrendered and a reduction of the Company’s Tranche 2 Investment at an amount equal to the weighted average cost for Tranche 2 common units, with the difference between the two values recorded as a gain or loss on sale of assets and other. During March 2010, NCM performed its annual common unit adjustment calculation under the Common Unit Adjustment Agreement. As a result of the calculation, the Company received an additional 1,757,548 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 fair value as part of its Tranche 2 Investment with a corresponding adjustment to deferred revenue of $30,683. Subsequent to the annual common unit adjustment discussed above, in May 2010, one of NCM’s other founding members completed an acquisition of another theatre circuit that required an extraordinary common unit adjustment calculation by NCM in accordance with the Common Unit Adjustment Agreement. As a result of this extraordinary common unit adjustment, the founding member was granted additional common units of NCM, which resulted in dilution of the Company’s ownership interest in NCM. The Company recognized a change of interest gain of approximately $271 during the year ended December 31, 2010 as a result of this extraordinary common unit adjustment, which is reflected in (gain) loss on sale of assets and other on the consolidated statement of income. During March 2011, NCM performed its annual common unit adjustment calculation under the Common Unit Adjustment Agreement. As a result of the calculation, the Company received an additional 549,417 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 fair value as part of its Tranche 2 Investment with a corresponding adjustment to deferred revenue of approximately $9,302. During March 2012, NCM performed its annual common unit adjustment calculation under the Common Unit Adjustment Agreement. As a result of the calculation, the Company received an additional 598,724 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 fair value as part of its Tranche 2 Investment with a corresponding adjustment to deferred revenue of approximately $9,137. As of December 31, 2012, the Company owned a total of 18,094,644 common units of NCM, which represented an approximate 16% interest. Each common unit is convertible into one share of NCMI common stock. The estimated fair value of the Company’s investment in NCM was approximately $255,677 as of December 31, 2012, using NCMI’s stock price as of December 31, 2012 of $14.13 per share. Summary of Activity with NCM Below is a summary of activity with NCM included in the Company’s consolidated financial statements:
|  | Investment in NCM |  |  | Deferred Revenue |  |  | Distributions from NCM |  |  | Equity in Earnings |  |  | Other Revenue |  |  | Cash Received |
Balance as of January 1, 2010 |  | $ | 34,232 |  |  | $ | (203,006 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Receipt of common units due to annual common unit adjustment |  | $ | 30,683 |  |  | $ | (30,683 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Change of interest gain due to extraordinary common unit adjustment (2) |  |  | 271 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Revenues earned under ESA (1) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (5,033 | ) |  |  | 5,033 |
Receipt of excess cash distributions |  |  | (4,753 | ) |  |  | — |  |  |  | (19,616 | ) |  |  | — |  |  |  | — |  |  |  | 24,369 |
Receipt under tax receivable agreement |  |  | (520 | ) |  |  | — |  |  |  | (3,742 | ) |  |  | — |  |  |  | — |  |  |  | 4,262 |
Equity in earnings |  |  | 4,463 |  |  |  | — |  |  |  | — |  |  |  | (4,463 | ) |  |  | — |  |  |  | — |
Amortization of deferred revenue |  |  | — |  |  |  | 3,116 |  |  |  | — |  |  |  | — |  |  |  | (3,116 | ) |  |  | — |
Balance as of and for the period ended December 31, 2010 |  | $ | 64,376 |  |  | $ | (230,573 | ) |  | $ | (23,358 | ) |  | $ | (4,463 | ) |  | $ | (8,149 | ) |  | $ | 33,664 |
Receipt of common units due to annual common unit adjustment |  | $ | 9,302 |  |  | $ | (9,302 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Revenues earned under ESA (1) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (5,890 | ) |  |  | 5,890 |
Receipt of excess cash distributions |  |  | (6,322 | ) |  |  | — |  |  |  | (20,023 | ) |  |  | — |  |  |  | — |  |  |  | 26,345 |
Receipt under tax receivable agreement |  |  | (729 | ) |  |  | — |  |  |  | (4,138 | ) |  |  | — |  |  |  | — |  |  |  | 4,867 |
Equity in earnings |  |  | 5,413 |  |  |  | — |  |  |  | — |  |  |  | (5,413 | ) |  |  | — |  |  |  | — |
Amortization of deferred revenue |  |  | — |  |  |  | 3,565 |  |  |  | — |  |  |  | — |  |  |  | (3,565 | ) |  |  | — |
Balance as of and for the period ended December 31, 2011 |  | $ | 72,040 |  |  | $ | (236,310 | ) |  | $ | (24,161 | ) |  | $ | (5,413 | ) |  | $ | (9,455 | ) |  | $ | 37,102 |
Receipt of common units due to annual common unit adjustment |  | $ | 9,137 |  |  | $ | (9,137 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Revenues earned under ESA (1) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (7,112 | ) |  |  | 7,112 |
Receipt of excess cash distributions |  |  | (6,503 | ) |  |  | — |  |  |  | (17,889 | ) |  |  | — |  |  |  | — |  |  |  | 24,392 |
Receipt under tax receivable agreement |  |  | (967 | ) |  |  | — |  |  |  | (2,923 | ) |  |  | — |  |  |  | — |  |  |  | 3,890 |
Equity in earnings |  |  | 4,416 |  |  |  | — |  |  |  | — |  |  |  | (4,416 | ) |  |  | — |  |  |  | — |
Amortization of deferred revenue |  |  | — |  |  |  | 4,142 |  |  |  | — |  |  |  | — |  |  |  | (4,142 | ) |  |  | — |
Balance as of and for the period ended December 31, 2012 |  | $ | 78,123 |  |  | $ | (241,305 | ) |  | $ | (20,812 | ) |  | $ | (4,416 | ) |  | $ | (11,254 | ) |  | $ | 35,394 |
(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 $10,156, $10,733 and $11,063 for the years ended December 31, 2010, 2011 and 2012, respectively.
(2) | Change in interest gain is included in (gain) loss on sale of assets and other on the consolidated statement of income.
The tables below present summary financial information for NCM for the periods indicated (information for the year ended December 28, 2012 was not yet available):
|  | Year Ended |
|  | December 31, 2009 |  |  | December 30, 2010 |  |  | December 29, 2011 |
Gross revenues |  | $ | 380,667 |  |  | $ | 427,475 |  |  | $ | 435,434 |
Operating income |  | $ | 168,146 |  |  | $ | 190,559 |  |  | $ | 193,716 |
Net income |  | $ | 128,531 |  |  | $ | 139,541 |  |  | $ | 134,524 |
|  | As of |
|  | December 30, 2010 |  |  | December 29, 2011 |
Total assets |  | $ | 425,972 |  |  | $ | 421,442 |
Total liabilities |  | $ | 932,549 |  |  | $ | 948,938 |

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