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INVESTMENT IN NATIONAL CINEMEDIA LLC | 12 Months Ended
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Dec. 31, 2015
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, 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 2013, 2014 and 2015, the annual payment per digital screen was one thousand seventy-two dollars, one thousand one hundred twenty-five dollars and one thousand one hundred eight-two 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 21 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 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, 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 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. Below is a summary of common units received by the Company under the Common Unit Adjustment Agreement during the years ended December 31, 2013, 2014 and 2015:
Event |  | Date Common Units Received |  |  | Number of Common Units Received |  |  | Fair Value of Common Units Received |
2013 Annual common unit adjustment |  |  | 03/28/13 |  |  |  | 588,024 |  |  | $ | 8,869 |
2013 Extraordinary common unit adjustment (as result of Rave Acquisition – see Note 5) |  |  | 05/29/13 |  |  |  | 5,315,837 |  |  | $ | 89,928 |
2014 Annual common unit adjustment |  |  | 03/27/14 |  |  |  | 557,631 |  |  | $ | 8,216 |
2015 Annual common unit adjustment |  |  | 03/31/15 |  |  |  | 1,074,910 |  |  | $ | 15,421 |
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 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 additional common units it receives as part of its Tranche 2 Investment at estimated fair value with a corresponding adjustment to deferred revenue. As of December 31, 2015, the Company owned a total of 25,631,046 common units of NCM, which represented an approximate 19% 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 $402,664 as of December 31, 2015, using NCMI’s stock price as of December 31, 2015 of $15.71 per share. 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:
|  | Investment in NCM |  |  | Deferred Revenue |  |  | Distributions from NCM |  |  | Equity in Earnings |  |  | Other Revenue |  |  | Other Comprehensive (Income) Loss |  |  | Cash Received |
Balance as of January 1, 2013 |  | $ | 78,123 |  |  | $ | (241,305 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Receipt of common units due to annual common unit adjustment |  |  | 8,869 |  |  |  | (8,869 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Receipt of common units due to extraordinary common unit adjustment |  |  | 89,928 |  |  |  | (89,928 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Revenues earned under ESA (1) |  |  | — |  |  |  | — |  |  |  |  |  |  |  |  |  |  |  | (7,960 | ) |  |  | — |  |  |  | 7,960 |
Receipt of excess cash distributions |  |  | (13,166 | ) |  |  | — |  |  |  | (19,374 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 32,540 |
Receipt under tax receivable agreement |  |  | (492 | ) |  |  | — |  |  |  | (1,327 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,819 |
Equity in earnings (2) |  |  | 13,753 |  |  |  | — |  |  |  | — |  |  |  | (11,578 | ) |  |  | — |  |  |  | — |  |  |  | — |
Equity in other comprehensive income |  |  | 1,838 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (1,838 | ) |  |  | — |
Amortization of deferred revenue |  |  | — |  |  |  | 5,673 |  |  |  | — |  |  |  | — |  |  |  | (5,673 | ) |  |  | — |  |  |  | — |
Balance as of and for the period ended December 31, 2013 |  | $ | 178,853 |  |  | $ | (334,429 | ) |  | $ | (20,701 | ) |  | $ | (11,578 | ) |  | $ | (13,633 | ) |  | $ | (1,838 | ) |  | $ | 42,319 |
Receipt of common units due to annual common unit adjustment |  |  | 8,216 |  |  |  | (8,216 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Revenues earned under ESA (1) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (9,249 | ) |  |  | — |  |  |  | 9,249 |
Receipt of excess cash distributions |  |  | (12,574 | ) |  |  | — |  |  |  | (14,778 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 27,352 |
Receipt under tax receivable agreement |  |  | (2,594 | ) |  |  | — |  |  |  | (3,763 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 6,357 |
Equity in earnings |  |  | 6,142 |  |  |  | — |  |  |  | — |  |  |  | (6,142 | ) |  |  | — |  |  |  | — |  |  |  | — |
Equity in other comprehensive income |  |  | 896 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (896 | ) |  |  | — |
Amortization of deferred revenue |  |  | — |  |  |  | 7,426 |  |  |  | — |  |  |  | — |  |  |  | (7,426 | ) |  |  | — |  |  |  | — |
Balance as of and for the period ended December 31, 2014 |  | $ | 178,939 |  |  | $ | (335,219 | ) |  | $ | (18,541 | ) |  | $ | (6,142 | ) |  | $ | (16,675 | ) |  | $ | (896 | ) |  | $ | 42,958 |
Receipt of common units due to annual common unit adjustment |  |  | 15,421 |  |  |  | (15,421 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Revenues earned under ESA (1) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (11,330 | ) |  |  | — |  |  |  | 11,330 |
Receipt of excess cash distributions |  |  | (14,072 | ) |  |  | — |  |  |  | (15,396 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 29,468 |
Receipt under tax receivable agreement |  |  | (2,308 | ) |  |  | — |  |  |  | (2,744 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 5,052 |
Equity in earnings |  |  | 8,510 |  |  |  | — |  |  |  | — |  |  |  | (8,510 | ) |  |  | — |  |  |  | — |  |  |  | — |
Equity in other comprehensive loss |  |  | (2,735 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,735 |  |  |  | — |
Amortization of deferred revenue |  |  | — |  |  |  | 8,506 |  |  |  | — |  |  |  | — |  |  |  | (8,506 | ) |  |  | — |  |  |  | — |
Balance as of and for the period ended December 31, 2015 |  | $ | 183,755 |  |  | $ | (342,134 | ) |  | $ | (18,140 | ) |  | $ | (8,510 | ) |  | $ | (19,836 | ) |  | $ | 2,735 |  |  | $ | 45,850 |
(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 $11,958, $11,489 and $9,819 for the years ended December 31, 2013, 2014 and 2015, respectively.
(2) | A portion of the equity in earnings recorded for the year ended December 31, 2013 was recorded as a reduction in our investment basis in a joint venture (AC JV, LLC) that the Company, along with Regal and AMC, recently formed with NCM. See Note 7.
On May 5, 2014, NCMI announced that it had entered into a merger agreement to acquire Screenvision, LLC. On November 3, 2014, the U.S. Department of Justice (“DOJ”) filed an antitrust lawsuit seeking to enjoin the proposed merger between NCMI and Screenvision, LLC. On March 16, 2015, NCMI announced that it had agreed with Screenvision, LLC to terminate the merger agreement. The termination of the merger agreement resulted in a $26.8 million termination payment to Screenvision by NCMI. NCM indemnified NCMI for the termination fee. The impact of the termination payment and related merger costs resulted in NCM not making an excess cash distribution to its shareholders during the second quarter of 2015. The Company made payments to NCM of approximately $124 and $50 during the years ended December 31, 2014 and 2015, respectively, related to installation of certain equipment used for digital advertising, which is included in theatre furniture and equipment on the consolidated balance sheets. The Company paid event fees of $8,249 to NCM for the year ended December 31, 2013, prior to the formation of AC JV, LLC, as discussed in Note 7, which are included in film rentals and advertising costs on the consolidated statements of income. The tables below present summary financial information for NCM for the periods indicated (financial information for the year ended December 31, 2015 is not yet available):
|  | Year Ended |  |  | Nine Months Ended October 1, 2015 |
|  | December 26, 2013 |  |  | January 1, 2015 |  |
Gross revenues |  | $ | 462,815 |  |  | $ | 393,994 |  |  | $ | 310,061 |
Operating income |  | $ | 202,019 |  |  | $ | 159,624 |  |  | $ | 40,442 |
Net income |  | $ | 162,870 |  |  | $ | 96,309 |  |  | $ | 38,519 |
|  | As of January 1, 2015 |  |  | As of October 1, 2015 |
Total assets |  | $ | 681,107 |  |  | $ | 700,326 |
Total liabilities |  | $ | 998,529 |  |  | $ | 1,030,243 |

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