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Investment in National CineMedia | 3 Months Ended
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Mar. 31, 2019
NCM |
Investment in National CineMedia |
8. | 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 6 to the Company’s financial statements as included in its 2018 Annual Report on Form 10-K, on February 13, 2007, National Cinemedia, Inc. (“NCMI”), an entity that serves as the sole manager of NCM, completed an initial public offering (“IPO”) of its common stock. In connection with the NCMI 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:
|  | Investment in NCM |  | Deferred Revenue |  | Distributions from NCM |  | Equity in Earnings |  | Other Revenue |  | Interest Expense - NCM (2) |  | Cash Received |
Balance as of January 1, 2019 |  | $ | 275,592 |  | $ | (287,349 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Receipt of common units due to annual common unit adjustment ("CUA") |  |  | 1,552 |  |  | (1,552 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Revenues earned under ESA (1) (2) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (7,812 | ) |  | 4,782 |  |  | 3,030 |
Receipt of excess cash distributions |  |  | (9,124 | ) |  | — |  |  | (4,548 | ) |  | — |  |  | — |  |  | — |  |  | 13,672 |
Equity in earnings |  |  | 4,394 |  |  | — |  |  | — |  |  | (4,394 | ) |  | — |  |  | — |  |  | — |
Amortization of deferred revenue |  |  | — |  |  | 3,957 |  |  | — |  |  | — |  |  | (3,957 | ) |  | — |  |  | — |
Balance as of and for the three months ended March 31, 2019 |  | $ | 272,414 |  | $ | (284,944 | ) | $ | (4,548 | ) | $ | (4,394 | ) | $ | (11,769 | ) | $ | 4,782 |  | $ | 16,702 |
(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 $2,615.
(2) | Reflects impact of significant financing component related to amounts received in advance under the ESA and CUA agreements. See Note 4.
During the three months ended March 31, 2019 and 2018, the Company recorded equity in earnings of $4,394 and $4,015, respectively. Pursuant to a Common Unit Adjustment Agreement dated as of February 13, 2007 between NCMI 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 6 to the Company’s financial statements as included in its 2018 Annual Report on Form 10-K, the common units received (collectively referred to as the Company’s “Tranche 2 Investment”) are recorded at estimated fair value as an increase in the Company’s investment in NCM with an offset to deferred revenue. The Company’s Tranche 2 Investment is accounted for following the equity method, with undistributed equity earnings related to its Tranche 2 Investment included as a component of earnings in equity in income of affiliates and distributions received related to its Tranche 2 Investment are recorded as a reduction of investment basis. During March 2019, NCM performed its annual common unit adjustment calculation under the Common Unit Adjustment Agreement. As a result of the calculation, on March 29, 2019, the Company received an additional 219,056 common units of NCM, each of which is convertible into one share of NCMI common stock. The Company recorded the additional common units received at estimated fair value with a corresponding adjustment to deferred revenue of approximately $1,552. The fair value of the common units received was estimated based on the market price of NCMI common 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 on a straight-line basis over the remaining term of the ESA. As of March 31, 2019, the Company owned a total of 39,737,700 common units of NCM, representing an ownership interest of approximately 25%. The estimated fair value of the Company’s investment in NCM was approximately $280,151 based on the price of NCMI common stock as of March 29, 2019 of $7.05 per share (Level 1 input as defined in FASB ASC Topic 820). Below is summary financial information for NCM for the periods indicated (financial information as of and for the three months ended March 28, 2019 is not yet available).
|  | Three Months Ended |
|  | March 29, 2018 |
Gross revenues |  | $ | 80,200 |
Operating income |  | $ | 11,000 |
Net income |  | $ | (3,000 | )
|  | As of |
|  | December 27, 2018 |
Current assets |  | $ | 172,700 |
Noncurrent assets |  | $ | 726,800 |
Current liabilities |  | $ | 115,200 |
Noncurrent liabilities |  | $ | 924,900 |
Members deficit |  | $ | (140,600 | )

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- Definition The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -URI http://asc.fasb.org/topic&trid=2196965 + Details
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