Summary of Activity with NCM

Below is a summary of activity with NCM included in each of Holdings’ and CUSA’s consolidated financial statements for the periods indicated. See Note 5 for discussion of related revenue recognition.


	Investment in NCM			NCM Screen Advertising Advances			Distributions from NCM (3)			Equity in Loss		Other Revenue			Interest Expense - NCM		Cash Received
Balance as of January 1, 2020	$	265.8		$	(348.4	)
Receipt of common units due to annual common unit adjustment		3.6			(3.6	)		—			—		—			—		—
Revenues earned under ESA (1)		—			—			—			—		(4.7	)		—		4.7
Interest accrued related to significant financing component		—			(23.6	)		—			—		—			23.6		—
Receipt of excess cash distributions		(12.0	)		—			(5.9	)		—		—			—		17.9
Receipt under tax receivable agreement		(2.1	)		—			(1.1	)		—		—			—		3.2
Equity in loss		(10.6	)		—			—			10.6		—			—		—
Impairment of investment in NCM (2)		(92.7	)		—			—			—		—			—
Amortization of screen advertising advances		—			31.3			—			—		(31.3	)		—		—
Balance as of and for the year ended December 31, 2020	$	152.0		$	(344.3	)	$	(7.0	)	$	10.6	$	(36.0	)	$	23.6	$	25.8
Receipt of common units due to annual common unit adjustment		10.2			(10.2	)		—			—		—			—		—
Revenues earned under ESA (1)		—			—			—			—		(12.0	)		—		12.0
Interest accrued related to significant financing component		—			(23.6	)		—			—		—			23.6		—
Receipt under tax receivable agreement		(0.2	)		—			(0.1	)		—		—			—		0.3
Equity in loss		(26.6	)		—			—			26.6		—			—		—
Amortization of screen advertising advances		—			32.1			—			—		(32.1	)		—		—
Balance as of and for the year ended December 31, 2021	$	135.4		$	(346.0	)	$	(0.1	)	$	26.6	$	(44.1	)	$	23.6	$	12.3
Receipt of common units due to annual common unit adjustment		1.3			(1.3	)		—			—		—			—		—
Revenues earned under ESA (1)		—			—			—			—		(19.9	)		—		19.9
Interest accrued related to significant financing component		—			(23.2	)		—			—		—			23.2		—
Equity in loss		(13.9	)		—			—			13.9		—			—		—
Impairment of investment in NCM (2)		(113.2	)		—			—			—		—			—		—
Amortization of screen advertising advances		—			32.3			—			—		(32.3	)		—		—
Balance as of and for the year ended December 31, 2022	$	9.6		$	(338.2	)	$	—		$	13.9	$	(52.2	)	$	23.2	$	19.9

(1)

Amounts include the per patron and per digital screen theatre access fees, 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 $2.6, $4.9 and $7.5 for the years ended December 31, 2020, 2021 and 2022, respectively. Amounts unpaid and reflected in accounts receivable were $4.5 and $4.9 as of the years ended December 31, 2021 and 2022, respectively.

(2)

Reflected in impairment of long-lived and other assets on the consolidated income statement for the year indicated. See further discussion at Fair Value of Investment in NCM below.

(3)

Excess cash distributions are restricted through December 2023 in accordance with NCM’s credit agreement amendment.

In addition to the activity in the table above, the Company made de minimus payments to NCM during the years ended December 31, 2020, 2021 and 2022, respectively, related to certain equipment used for digital advertising, which is included in theatre furniture and equipment on the consolidated balance sheets.

NCM operates a digital in-theatre network in the U.S. that provides cinema advertising. The Company entered into an ESA with NCM, pursuant to which NCM primarily provides advertising to its domestic theatres. 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. At the time of the NCMI IPO and as a result of amending the ESA, the Company received approximately $174 in cash consideration from NCM. The proceeds were recorded as deferred revenue or NCM screen advertising advances and were being amortized over the term of the Amended and Restated ESA or through February 2041. Following the NCMI IPO, the Company will 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. CUSA recognizes the 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.

In addition to the consideration received upon the NCMI IPO and ESA modification in 2007, the Company also periodically receives consideration in the form of common units from NCM. Pursuant to a Common Unit Adjustment Agreement dated as of February 13, 2007 between NCMI and the Company, AMC and Regal, collectively referred to as its 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. 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 or NCM screen advertising advances. 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 recorded as a reduction of its investment basis.

During March 2022, 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 0.5 common units of NCM. The Company recorded these additional common units at an estimated fair value of $1.3 with a corresponding adjustment to NCM screen advertising advances. The fair value of the common units received was estimated based on the market price of NCMI common stock (Level 1 input as defined in FASB ASC Topic 820) 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.

As of December 31, 2022, the Company owned a total of 43.7 common units of NCM, which represented an interest of approximately 25.4%. The estimated fair value of the Company’s investment in NCM was approximately $9.6 based on NCMI’s stock price as of December 31, 2022 of $0.22 per share (Level 1 input as defined in FASB ASC Topic 820). As the share price of NCMI was significantly below the Company’s carrying value of NCM per common unit and due to the prolonged recovery of NCM’s business, during the year ended December 31, 2022, the Company wrote-down its investment in NCM by $113.2 to its estimated fair value, with a corresponding charge to impairment expense, in accordance with ASC 323-10-35. See Note 12 for impairment expense recorded during the years ended December 31, 2020, 2021 and 2022.

As previously discussed, the Company’s domestic theatres are part of the in-theatre digital network operated by NCM, the terms of which are defined in the ESA. NCM provides advertising to its theatres through its branded “Noovie” pre-show entertainment program and also handles lobby promotions and displays for the Company’s theatres. The Company receives a monthly theatre access fee for participation in the NCM network and also earns screen advertising or screen rental revenue on a per patron basis. Effective September 17, 2019, the Company signed an amendment to the ESA, under which the Company will provide incremental advertising time to NCM, and extended the term through February 2041. At the time of the amendment, the Company determined that the amended ESA met the definition of a lease under ASC Topic 842. The Company leases nonconsecutive periods of use of its domestic theatre screens to NCM for purposes of showing third party advertising content. The lease, which is classified as an operating lease, generally requires variable lease payments based on the number of patrons attending the showtimes during which such advertising is shown. The lease agreement is considered short-term due to the fact that the nonconsecutive periods of use, or advertising time slots, are set on a weekly basis. The revenues earned under the ESA are reflected in other revenue on the consolidated income statements.

As noted above, the Company received approximately $174.0 in cash consideration from NCM at the time of NCMI’s IPO and also periodically receives consideration in the form of common units (discussed at Common Unit Adjustments above) from NCM in exchange for exclusive access to the Company’s newly opened domestic screens under the ESA. Due to the significant length of time between receiving the consideration from NCM and fulfillment of the related performance obligation, the ESA includes an implied significant financing component, as per the guidance in ASC Topic 606. The interest expense was calculated using the Company’s incremental borrowing rates at the time the cash and each tranche of common units were received from NCM, which ranged from 4.4% to 8.3%. Effective September 17, 2019, upon the Company’s evaluation and determination that ASC Topic 842 applies to the amended ESA, the Company determined it acceptable to apply the significant financing component guidance from ASC Topic 606 by analogy as the economic substance of the agreement represents a financing arrangement.