NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
Description of Business
National CineMedia, Inc. (NCM, Inc.) was incorporated in Delaware as a holding company with the sole purpose of becoming a member
and sole manager of National CineMedia, LLC (NCM LLC), an LLC owned by NCM, Inc., American Multi-Cinema, Inc. and AMC ShowPlace Theatres, Inc. (AMC), wholly owned subsidiaries of AMC Entertainment, Inc. (AMCE),
Regal Cinemas, Inc. and Regal CineMedia Holdings, LLC, wholly owned subsidiaries of Regal Entertainment Group (Regal) and Cinemark Media, Inc. and Cinemark USA, Inc., wholly owned subsidiaries of Cinemark Holdings, Inc.
(Cinemark). The terms NCM, the Company or we shall, unless the context otherwise requires, be deemed to include the consolidated entity. The Company operates the largest digital in-theatre network in
North America, allowing NCM to sell advertising (the Services) under long-term exhibitor services agreements (ESAs) with AMC, Regal and Cinemark. AMC, Regal and Cinemark and their affiliates are referred to in this document
as founding members. NCM LLC also provides the Services to certain third-party theatre circuits under network affiliate agreements referred to in this document as network affiliates, which expire at various dates.
As of March 27, 2014, NCM LLC had 128,259,925 common membership units outstanding, of which 58,716,346 (45.8%) were owned by NCM,
Inc., 25,792,942 (20.1%) were owned by Regal, 24,556,136 (19.1%) were owned by Cinemark and 19,194,501 (15.0%) were owned by AMC. The membership units held by the founding members are exchangeable into NCM, Inc. common stock on a
one-for-one basis.
On December 26, 2013, NCM LLC sold its Fathom Events business to a newly formed limited liability company
owned 32% by each of the founding members and 4% by NCM LLC, as described further in Note 4
Related Party Transactions
.
Basis
of Presentation
The Company has prepared the unaudited condensed consolidated financial statements and related notes of NCM, Inc.
in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly,
certain information and footnote disclosures typically included in an annual report have been condensed or omitted for this quarterly report. The balance sheet as of December 26, 2013 is derived from the audited financial statements of NCM,
Inc. Therefore, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys annual report on Form 10-K filed for the
fiscal year ended December 26, 2013.
In the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly in all material respects the financial position, results of operations and cash flows for all periods presented have been made. The Companys business is seasonal and for this and other reasons operating
results for interim periods may not be indicative of the Companys full year results or future performance. As a result of the various related party agreements discussed in Note 4
Related Party Transactions
, the operating results as
presented are not necessarily indicative of the results that might have occurred if all agreements were with non-related third parties.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant estimates include those related to the reserve for uncollectible accounts receivable, share-based compensation, and income taxes. Actual results could differ from those estimates.
Significant Accounting Policies
The Companys annual financial statements included in its Form 10-K filed for the fiscal year ended December 26, 2013 contain a
complete discussion of the Companys significant accounting policies.
9
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Segment Reporting
Advertising is the principal business activity of the
Company and is the Companys reportable segment under the requirements of ASC 280,
Segment Reporting
(ASC 280). Until its sale, Fathom Events was an operating segment under ASC 280, but did not meet the annual quantitative
thresholds for segment reporting. The Company does not evaluate its segments on a fully allocated cost basis, nor does the Company track segment assets separately. Therefore, the measure of segment operating income net of direct expenses presented
herein is not prepared on the same basis as operating income in the unaudited condensed consolidated statements of income and the results are not indicative of what segment results of operations would have been had it been operated on a fully
allocated cost basis. The Company cautions that it would be inappropriate to assume that unallocated operating costs are incurred proportional to segment revenue or any directly identifiable segment expenses. Refer to Note 9
Segment
Reporting
.
Concentration of Credit Risk and Significant Customers
Bad debts are provided for using the allowance
for doubtful accounts method based on historical experience and managements evaluation of outstanding receivables at the end of the period. Receivables are written off when management determines amounts are uncollectible. Trade accounts
receivable are uncollateralized and represent a large number of geographically dispersed debtors. The collectability risk is reduced by dealing with large, national advertising agencies who have strong reputations in the advertising industry and
clients with stable financial positions. As of March 27, 2014 and December 26, 2013, there were no advertising agency groups or individual customers through which the Company sources national advertising revenue representing more than 10%
of the Companys outstanding gross receivable balance. During the three months ended March 27, 2014, revenue related to NCM LLCs founding members beverage supplier accounted for 13.3% of total revenue. During the three
months ended March 28, 2013, there were no customers that accounted for more than 10% of revenue.
Share-Based
Compensation
The Company has issued stock options, restricted stock and restricted stock units. In 2014 and 2013, the Company did not grant stock options. Restricted stock and restricted stock units granted prior to 2013 vest upon the
achievement of Company performance measures and service conditions. In 2013, the Company granted restricted stock and restricted stock units that vest upon the achievement of Company performance measures and service conditions, or only service
conditions. In 2014, restricted stock grants for Company officers vest upon the achievement of Company performance measures and service conditions, or only service conditions, while non-officers grants vest only upon the achievement of service
conditions. Compensation expense of restricted stock that vests upon the achievement of Company performance measures is based on managements financial projections and the probability of achieving the projections, which require considerable
judgment. A cumulative adjustment is recorded to share-based compensation expense in periods that management changes its estimate of the number of shares expected to vest. Ultimately, the Company adjusts the expense recognized to reflect the actual
vested shares following the resolution of the performance conditions. Dividends are accrued when declared on all unvested restricted stock and are only paid with respect to shares that actually vest. During the three months ended March 27, 2014
and March 28, 2013, respectively, 247,988 and 359,528 shares of restricted stock and restricted stock units vested. During the three months ended March 27, 2014 and March 28, 2013, respectively, 21,298 and 130,615 stock options were
exercised at a weighted average exercise price of $15.35 and 10.56 per share, respectively.
In connection with the
Companys March 2014 special cash dividend of $0.50 per share and pursuant to the antidilution adjustment terms of the Companys Equity Incentive Plan, the exercise price and the number of shares of common stock subject to options held by
the Companys employees were adjusted to prevent dilution and restore their economic value that existed immediately before the special dividend. The antidilution adjustments made with respect to such options resulted in a decrease in the range
of exercise prices from $5.35$24.68 per share to $5.18$23.90 per share and an increase in the aggregate number of shares issuable upon exercise of such options by 98,589 shares, or 3.3%, of previously outstanding options. The number of
shares authorized under the Equity Incentive Plan increased by an equivalent number of shares. There were no accounting consequences for the changes made to reduce the exercise prices and increase the number of underlying options as a result of the
special cash dividend because the aggregate fair values of the awards immediately before and after the modifications were the same.
Consolidation
NCM, Inc. consolidates the accounts of NCM LLC under the provision of ASC 810, Consolidation (ASC
810). Under ASC 810, a managing member of a limited liability company (LLC) is presumed to control the LLC, unless the non-managing members have the right to dissolve the entity or remove the managing member without cause, or if
the non-managing members have substantive participating rights. The non-managing members of NCM LLC do not have dissolution rights or removal rights. NCM, Inc. has evaluated the provisions of the NCM LLC membership agreement and has concluded that
the various rights of the non-managing members are not substantive participation rights under ASC 810, as they do not limit NCM, Inc.s ability to make decisions in the ordinary course of business.
10
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the changes in NCM, Inc.s equity resulting from net income
attributable to NCM, Inc. and transfers to or from noncontrolling interests (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 27, 2014
|
|
|
March 28, 2013
|
|
Net loss attributable to NCM, Inc.
|
|
$
|
(3.1
|
)
|
|
$
|
(1.0
|
)
|
NCM LLC equity issued for purchase of intangible asset
|
|
|
7.5
|
|
|
|
32.4
|
|
Income tax and other impacts of subsidiary ownership changes
|
|
|
(2.2
|
)
|
|
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
|
Change from net loss attributable to NCM, Inc. and transfers from noncontrolling interests
|
|
$
|
2.2
|
|
|
$
|
21.3
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
Income taxes are accounted for under the asset and liability method, which
requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the
differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to be recovered or settled pursuant to the provisions of ASC 740,
Income Taxes
. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records a valuation allowance if it is deemed more likely than not that all or a portion of its deferred income tax assets will
not be realized, which will be assessed on an on-going basis. In addition, income tax rules and regulations are subject to interpretation and the application of those rules and regulations require judgment by the Company and may be challenged by the
taxation authorities. The Company follows ASC 740-10-25, which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax
positions. Only tax positions that meet the more likely than not recognition threshold are recognized.
Recent Accounting
Pronouncements
The Company has considered all recently issued accounting pronouncements and does not believe the adoption of such
pronouncements will have a material impact on its unaudited condensed consolidated financial statements.
11
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. LOSS PER SHARE
Basic earnings per share are computed on the basis of the weighted average number of common shares outstanding. Diluted
earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of potentially dilutive common stock options, and restricted stock using the treasury stock method. The components of basic and
diluted earnings per NCM, Inc. share are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 27, 2014
|
|
|
March 28, 2013
|
|
Net loss attributable to NCM, Inc. (in millions)
|
|
$
|
(3.1
|
)
|
|
$
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,618,800
|
|
|
|
54,611,614
|
|
Add: Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
58,618,800
|
|
|
|
54,611,614
|
|
|
|
|
|
|
|
|
|
|
Loss per NCM, Inc. share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
The effect of 68,575,219 and 58,229,424 exchangeable NCM LLC common units held by the founding members for the
three months ended March 27, 2014 and March 28, 2013, respectively, have been excluded from the calculation of diluted weighted average shares and earnings per NCM, Inc. share as they were antidilutive. NCM LLC common units do not
participate in NCM, Inc. dividends. In addition, there were 5,196,784 and 6,558,355 stock options and non-vested (restricted) shares for the three months ended March 27, 2014 and March 28, 2013, respectively, excluded from the calculation
due to the net loss during those periods. The Companys non-vested (restricted) shares do not meet the definition of a participating security as the dividends will not be paid if the shares do not vest.
3. INTANGIBLE ASSETS
In accordance with NCM LLCs Common Unit Adjustment Agreement with its founding members, on an annual basis NCM LLC
determines the amount of common membership units to be issued to or returned by the founding members based on theatre additions or dispositions during the previous year. During the first quarter of 2014 and 2013, NCM LLC issued 1,087,911 and
4,536,014 common membership units to its founding members, respectively, for the rights to exclusive access to net new theatre screens and attendees added by the founding members to NCM LLCs network during the previous year. NCM LLC recorded a
net intangible asset of $16.4 million and $69.0 million during the first quarter of 2014 and 2013, respectively, as a result of the Common Unit Adjustments.
In addition, NCM LLCs Common Unit Adjustment Agreement requires that a Common Unit Adjustment occur for a specific founding member if
its acquisition or disposition of theatres, in a single transaction or cumulatively since the most recent Common Unit Adjustment, results in an attendance increase or decrease in excess of two percent of the annual total attendance at the prior
date. If an existing on-screen advertising agreement with an alternative provider is in place with respect to any acquired theatres, the founding members may elect to receive common membership units related to those encumbered theatres in connection
with the Common Unit Adjustment. If the founding members make this election, they are required to make payments on a quarterly basis in arrears in accordance with certain run-out provisions pursuant to the ESAs (integration payments).
During the three months ended March 27, 2014, NCM LLC recorded a reduction to net intangible assets of $0.2 million related to integration payments due from AMC and Cinemark related to their acquisitions of theatres from Rave Cinemas that are
encumbered by an existing on-screen advertising agreement with an alternative provider. During the three months ended March 27, 2014 and March 28, 2013, AMC and Cinemark paid a total of $0.7 million and $0.0 million, respectively, in
integration payments.
The Companys intangible assets with its founding members are recorded at the fair market value of NCM,
Inc.s publicly traded stock as of the date on which the common membership units were issued. The NCM LLC common membership units are fully convertible into NCM, Inc.s common stock. In addition, the Company records intangible assets for
up-front fees paid to network affiliates upon commencement of a network affiliate agreement.
12
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Companys intangible assets have a finite useful life and the Company amortizes the assets over the
remaining useful life corresponding with the ESAs or the term of the network affiliate agreement. If common membership units are issued to a founding member for newly acquired theatres that are subject to an existing on-screen advertising agreement
with an alternative provider, the amortization of the intangible asset commences after the existing agreement expires and NCM LLC can utilize the theatres for all of its services. Integration payments are calculated based upon the advertising cash
flow that the Company would have generated if it had exclusive access to sell advertising in the theatres with pre-existing advertising agreements.
4. RELATED PARTY TRANSACTIONS
Founding Member Transactions
Following is a summary of the transactions between the Company and the
founding members (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Included in the Condensed Consolidated Statements of Income:
|
|
March 27, 2014
|
|
|
March 28, 2013
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Beverage concessionaire revenue (included in advertising revenue)
(1)
|
|
$
|
9.4
|
|
|
$
|
8.9
|
|
Advertising inventory revenue (included in advertising revenue)
(2)
|
|
|
0.1
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Theatre access fee
(3)
|
|
|
17.4
|
|
|
|
15.6
|
|
Revenue share from Fathom Events (included in Fathom Events operating costs)
(4)
|
|
|
|
|
|
|
0.9
|
|
Purchase of movie tickets and concession products (included in selling and marketing costs)
(5)
|
|
|
0.2
|
|
|
|
0.2
|
|
Non-operating expenses:
|
|
|
|
|
|
|
|
|
Interest income from notes receivable (included in interest income)
(6)
|
|
|
0.3
|
|
|
|
|
|
(1)
|
For the three months ended March 27, 2014 and March 28, 2013, the founding members purchased 60 seconds of on-screen advertising time (with a right to purchase up to 90 seconds) from NCM LLC to satisfy
their obligations under their beverage concessionaire agreements at a rate specified by the ESA at a 30 second equivalent cost per thousand (CPM).
|
(2)
|
The value of such purchases is calculated by reference to NCM LLCs advertising rate card.
|
(3)
|
Comprised of payments per theatre attendee, payments per digital screen with respect to the founding member theatres included in the Companys network and payments for access to higher quality digital cinema
equipment.
|
(4)
|
Prior to the sale of Fathom Events on December 26, 2013, these payments were at rates (percentage of event revenue) included in the previous ESAs based on the nature of the event.
|
(5)
|
Used primarily for marketing to NCM LLCs advertising clients.
|
(6)
|
On December 26, 2013, NCM LLC sold its Fathom Events business to a newly formed limited liability company (AC JV, LLC) owned 32% by each of the founding members and 4% by NCM LLC. In consideration for the
sale, NCM LLC received a total of $25.0 million in promissory notes from its founding members (one-third or approximately $8.3 million from each founding member). The notes bear interest at a fixed rate of 5.0% per annum, compounded annually.
Interest and principal payments are due annually in six equal installments commencing on the first anniversary of the closing.
|
13
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
Included in the Condensed Consolidated Balance Sheets:
|
|
March 27,
2014
|
|
|
December 26,
2013
|
|
Purchase of movie tickets and concession products (included in Prepaid expenses)
(1)
|
|
$
|
0.2
|
|
|
$
|
|
|
Current portion of notes receivablefounding
members
(2)
|
|
|
4.2
|
|
|
|
4.2
|
|
Long-term portion of notes receivablefounding members
(2)
|
|
|
20.8
|
|
|
|
20.8
|
|
Interest receivable on notes receivable
(2)
|
|
|
0.3
|
|
|
|
|
|
Common unit adjustments and integration payments, net of amortization (included in intangible assets)
(3)
|
|
|
474.7
|
|
|
|
463.4
|
|
Current payable to founding members under tax receivable agreement (4)
|
|
|
9.8
|
|
|
|
28.6
|
|
Long-term payable to founding members under tax receivable agreement (4)
|
|
|
148.5
|
|
|
|
144.0
|
|
(1)
|
Used primarily for marketing to NCM LLCs advertising clients.
|
(2)
|
Refer to the discussion of notes receivable from the founding members above.
|
(3)
|
Refer to Note 3
Intangible Assets
for further information on integration payments.
|
(4)
|
The Company paid the founding members $25.1 million in the first quarter of 2014, of which $6.7 million was net operating loss carrybacks for the 2009, 2010 and 2011 tax years and $18.4 million was for the 2013
tax year.
|
We have been granted a perpetual, royalty-free license from NCM LLCs founding members to use certain
proprietary software for the delivery of digital advertising and other content through our DCN to screens in the U.S. We have made improvements to this software since the IPO date and we own those improvements, except for improvements that were
developed jointly by us and NCM LLCs founding members.
Pursuant to the terms of the NCM LLC Operating Agreement in place since the
completion of the Companys Initial Public Offering (IPO), NCM LLC is required to make mandatory distributions on a proportionate basis to its members of available cash, as defined in the NCM LLC Operating Agreement, on a quarterly
basis in arrears. Mandatory distributions for the three months ended March 27, 2014 and March 28, 2013 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 27, 2014
|
|
|
March 28, 2013
|
|
AMC
|
|
$
|
1.7
|
|
|
$
|
2.5
|
|
Cinemark
|
|
|
2.2
|
|
|
|
2.4
|
|
Regal
|
|
|
2.3
|
|
|
|
3.1
|
|
NCM, Inc.
|
|
|
5.3
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11.5
|
|
|
$
|
15.1
|
|
|
|
|
|
|
|
|
|
|
The mandatory distributions of available cash by NCM LLC to its founding members for the three months ended
March 27, 2014 of $6.2 million is included in amounts due to founding members on the unaudited Condensed Consolidated Balance Sheets as of March 27, 2014 and will be made in the second quarter of 2014.
14
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Amounts due to founding members as of March 27, 2014 were comprised of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMC
|
|
|
Cinemark
|
|
|
Regal
|
|
|
Total
|
|
Theatre access fees, net of beverage revenues
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
|
$
|
1.2
|
|
|
$
|
2.7
|
|
Cost and other reimbursement
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
(0.3
|
)
|
Distributions payable
|
|
|
1.7
|
|
|
|
2.2
|
|
|
|
2.3
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.3
|
|
|
$
|
2.8
|
|
|
$
|
3.5
|
|
|
$
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due to founding members as of December 26, 2013 were comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMC
|
|
|
Cinemark
|
|
|
Regal
|
|
|
Total
|
|
Theatre access fees, net of beverage revenues
|
|
$
|
0.6
|
|
|
$
|
0.7
|
|
|
$
|
1.1
|
|
|
$
|
2.4
|
|
Cost and other reimbursement
|
|
|
(2.0
|
)
|
|
|
(0.7
|
)
|
|
|
(0.6
|
)
|
|
|
(3.3
|
)
|
Distributions payable, net
|
|
|
8.7
|
|
|
|
10.9
|
|
|
|
11.4
|
|
|
|
31.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7.3
|
|
|
$
|
10.9
|
|
|
$
|
11.9
|
|
|
$
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AC JV, LLC Transactions
Following is a summary of the transactions between NCM LLC and AC
JV, LLC (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Included in the Condensed Consolidated Statements of Income:
|
|
March 27, 2014
|
|
|
March 28, 2013
|
|
Transition services (included in network
costs)
(1)
|
|
$
|
0.1
|
|
|
$
|
|
|
(1)
|
In connection with the sale of Fathom Events, NCM LLC entered into a transition services agreement to provide certain corporate overhead services for a fee and reimbursement for the use of facilities and certain
services including creative, technical event management and event management for the newly formed limited liability company for a period of nine months following the closing. These fees received by NCM LLC are included as an offset to network costs
in the unaudited Condensed Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
Included in the Condensed Consolidated Balance Sheets:
|
|
March 27, 2014
|
|
|
December 26, 2013
|
|
Amounts due from AC JV, LLC (included in other current assets)
(1)
|
|
$
|
0.6
|
|
|
$
|
|
|
Investment in AC JV, LLC (included in other investments)
(2)
|
|
|
1.1
|
|
|
|
1.1
|
|
(1)
|
As described above, NCM LLC entered into a transition services agreement with AC JV, LLC for reimbursement of certain expenses and NCM LLC continued to perform back office accounting and as such, these amounts
primarily represent the settlement of AC JV, LLCs revenue and expenses.
|
(2)
|
The Company accounted for its investment in AC JV, LLC under the equity method of accounting in accordance with ASC 970-323,
InvestmentsEquity Method and Joint Ventures
(ASC 970-323) because AC
JV, LLC is a limited liability company with the characteristics of a limited partnership and ASC 970-323 requires the use of equity method accounting unless the Companys interest is so minor that it would have virtually no influence over
partnership operating and financial policies. The Company concluded that its interest was more than minor under the accounting guidance despite the fact that NCM LLC does not have a representative on AC JV, LLCs Board of Directors or any
voting, consent or blocking rights with respect to the governance or operations of AC JV, LLC. The Companys proportional share of equity in the earnings of AC JV, LLC is recorded within other non-operating income (expense) in the unaudited
Condensed Consolidated Statements of Income.
|
Related Party Affiliates
NCM LLC enters into network
affiliate agreements with network affiliates for NCM LLC to provide in-theatre advertising at theatre locations that are owned by companies that are affiliates of certain of the founding members or directors of NCM, Inc. Related party affiliate
agreements are entered into at terms that are similar to those of the Companys other network affiliates.
15
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Following is a summary of advertising operating costs in the unaudited Condensed Consolidated
Statements of Income between the Company and its related party affiliates (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Related Party Affiliate
|
|
March 27, 2014
|
|
|
March 28, 2013
|
|
Starplex
(1)
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
Other
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.5
|
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
Following is a summary of the accounts payable balance between the Company and its related party affiliates
included in the unaudited Condensed Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of March 27, 2014
|
|
Related Party Affiliate
|
|
March 27, 2014
|
|
|
December 26, 2013
|
|
Starplex
(1)
|
|
$
|
0.7
|
|
|
$
|
0.7
|
|
Other
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Starplex Operating L.P. (Starplex) is an affiliate of one of NCM, Inc.s directors.
|
Other Transactions
NCM LLC has an agreement with an interactive media company to sell some of its online inventory. One of
NCM, Inc.s directors is also a director of this media company. During the three months ended March 27, 2014 and March 28, 2013, this company generated approximately $0.1 million and $0.1 million, respectively, in revenue for NCM LLC
and there was approximately $0.6 million and $0.6 million of accounts receivable due from this company as of March 27, 2014 and December 26, 2013, respectively.
5. BORROWINGS
The following table summarizes NCM LLCs total outstanding debt as of March 27, 2014 and December 26, 2013
and the significant terms of its borrowing arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance as of
|
|
|
|
|
|
|
Borrowings ($ in millions)
|
|
March 27,
2014
|
|
|
December 26,
2013
|
|
|
Maturity
Date
|
|
Interest
Rate
|
|
Revolving Credit Facility
|
|
$
|
37.0
|
|
|
$
|
20.0
|
|
|
November 26, 2017
(1)
|
|
|
(2
|
)
|
Term Loans
|
|
|
270.0
|
|
|
|
270.0
|
|
|
November 26, 2019
|
|
|
(2
|
)
|
Senior Unsecured Notes
|
|
|
200.0
|
|
|
|
200.0
|
|
|
July 15, 2021
|
|
|
7.875
|
%
|
Senior Secured Notes
|
|
|
400.0
|
|
|
|
400.0
|
|
|
April 15, 2022
|
|
|
6.000
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
907.0
|
|
|
$
|
890.0
|
|
|
|
|
|
|
|
Less: current portion of long-term debt
|
|
|
(14.0
|
)
|
|
|
(14.0
|
)
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$
|
893.0
|
|
|
$
|
876.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
A portion of the revolving credit facility has a maturity date of December 31, 2014, as described in further detail below.
|
(2)
|
The interest rates on the revolving credit facility and term loan are described below.
|
16
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Senior Secured Credit Facility
NCM LLCs senior secured credit
facility consists of a $124.0 million revolving credit facility and a $270.0 million term loan. On May 2, 2013, NCM LLC entered into an amendment of its senior secured credit facility whereby the facility was increased from $265.0 million to
$270.0 million. In connection with the amendment, the interest rates on the revolving credit facility and term loans were reduced as described further below. The obligations under the facility are secured by a lien on substantially all of the assets
of NCM LLC.
Revolving Credit Facility
The revolving credit facility portion of NCM LLCs total borrowings is available,
subject to certain conditions, for general corporate purposes of NCM LLC in the ordinary course of business and for other transactions permitted under the senior secured credit facility, and a portion is available for letters of credit.
NCM LLCs total availability under the revolving credit facility is $124.0 million. The unused line fee is 0.50% per annum. Of the
total available, $14.0 million outstanding principal of the revolving credit facility will not be repaid in connection with any future prepayments of the revolving credit facility amounts. This portion of the revolving credit facility will be paid
in full by NCM LLC, along with any accrued and unpaid fees and interest, on December 31, 2014. The maturity date applicable to any remaining outstanding revolving credit facility principal is November 26, 2017.
Borrowings under the revolving credit facility bear interest at NCM LLCs option of either the LIBOR index plus an applicable margin or
the base rate (Prime Rate or the Federal Funds Effective Rate, as defined in the senior secured credit facility) plus an applicable margin. The applicable margin for the revolving credit facility is determined quarterly and is subject to adjustment
based upon a consolidated net senior secured leverage ratio for NCM LLC (the ratio of secured funded debt less unrestricted cash and cash equivalents, over a non-GAAP measure defined in the senior secured credit facility). On May 2, 2013, NCM
LLC entered into an amendment of its senior secured credit facility whereby the applicable margins on the $110.0 million portion of the revolving credit facility decreased by 25 basis points to the LIBOR index plus 2.00% or the base rate plus 1.00%.
The margins on the $14.0 million portion of the revolving credit facility discussed above remained unchanged at the LIBOR index plus 1.50% or the base rate plus 0.50%. The weighted-average interest rate on the outstanding balance on the revolving
credit facility as of March 27, 2014 was 2.16%.
Term Loans
In connection with the amendment of its senior secured
credit facility on May 2, 2013, the interest rate on the term loans decreased by 50 basis points to a rate at NCM LLCs option of either the LIBOR index plus 2.75% or the base rate (Prime Rate or the Federal Funds Effective Rate, as
defined in the senior secured credit facility) plus 1.75%. The weighted-average interest rate on the term loans as of March 27, 2014 was 2.91%. Interest on the term loans is currently paid monthly.
The senior secured credit facility contains a number of covenants and financial ratio requirements, with which NCM LLC was in compliance as of
March 27, 2014, including maintaining a consolidated net senior secured leverage ratio of equal to or less than 6.5 times on a quarterly basis. In addition, there are no borrower distribution restrictions as long as NCM LLCs consolidated
net senior secured leverage ratio is below 6.5 times and NCM LLC is in compliance with its debt covenants. As of March 27, 2014, NCM LLCs consolidated net senior secured leverage ratio was 3.1 times (versus the covenant of 6.5 times).
Senior Unsecured Notes due 2021
On July 5, 2011, NCM LLC completed a private placement of $200.0 million in
aggregate principal amount of 7.875% Senior Unsecured Notes (Senior Unsecured Notes) for which the registered exchange offering was completed on September 22, 2011. The Senior Unsecured Notes pay interest semi-annually in arrears on
January 15 and July 15 of each year, which commenced January 15, 2012. The notes are subordinated to all existing and future secured debt, including indebtedness under NCM LLCs existing senior secured credit facility and the
Senior Secured Notes defined below. The Senior Unsecured Notes contain certain covenants with which NCM LLC was in compliance as of March 27, 2014.
Senior Secured Notes due 2022
On April 27, 2012, NCM LLC completed a private placement of $400.0 million in aggregate
principal amount of 6.00% Senior Secured Notes (the Senior Secured Notes) for which the registered exchange offering was completed on November 26, 2012. The Senior Secured Notes pay interest semi-annually in arrears on April 15
and October 15 of each year, which commenced October 15, 2012. The Senior Secured Notes are senior secured obligations of NCM LLC, rank the same as NCM LLCs senior secured credit facility, subject to certain exceptions, and share in
the same collateral that secures NCM LLCs obligations under the senior secured credit facility. The Senior Secured Notes contain certain covenants with which NCM LLC was in compliance as of March 27, 2014.
17
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES
Legal Actions
The Company is subject to claims and legal actions in the ordinary course of business. The
Company believes such claims will not have a material effect on its financial position, results of operations or cash flows.
Minimum Revenue Guarantees
As part of the network affiliate agreements entered into in the ordinary course of business
under which the Company sells advertising for display in various network affiliate theatre chains, the Company has agreed to certain minimum revenue guarantees on a per attendee basis. If a network affiliate achieves the attendance set forth in
their respective agreement, the Company has guaranteed minimum revenue for the network affiliate per attendee if such amount paid under the revenue share arrangement is less than its guaranteed amount. The amount and term varies for each network
affiliate, but terms range from three to 20 years, prior to any renewal periods of which some are at the option of the Company. The maximum potential amount of future payments the Company could be required to make pursuant to the minimum revenue
guarantees is $40.9 million over the remaining terms of the network affiliate agreements. As of March 27, 2014 and December 26, 2013, the Company had no liabilities recorded for these obligations as such guarantees are less than the
expected share of revenue paid to the affiliate.
Income Taxes
The Company is subject to taxation in the U.S. and
various states. As of March 27, 2014 and December 26, 2013, there was no material liability or expense for the periods then ended recorded for payment of interest and penalties associated with uncertain tax positions or material
unrecognized tax positions and the Companys unrecognized tax benefits were not material.
7. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy
upon the lowest level of input that is available and significant to the fair value measurement:
Level 1
Quoted prices in
active markets for identical assets or liabilities.
Level 2
Observable inputs other than quoted prices in active markets for
identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3
Inputs that are generally unobservable and typically reflect managements estimate of assumptions
that market participants would use in pricing the asset or liability.
Non-Recurring Measurements
Certain assets are
measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. These assets include long-lived assets, intangible assets, cost and
equity method investments, notes receivable and borrowings.
Long-Lived Assets, Intangible Assets, Other Investments and
Notes Receivable
The Company regularly reviews long-lived assets (primarily property, plant and equipment), intangible assets, investments accounted for under the cost or equity method and notes receivable for impairment whenever events or
changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. When the estimated fair value is determined to be lower than the carrying value of the asset, an impairment charge is recorded to write the asset
down to its estimated fair value.
As of March 27, 2014 and December 26, 2013, the Company had other investments of $1.1
million, which was comprised of the Companys investment in AC JV, LLC. As of December 26, 2013, this investment was valued using comparative market multiples. As the inputs to the determination of fair value are based upon non-identical
18
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
assets and use significant unobservable inputs, we have classified the assets as Level 3 in the fair value hierarchy. The fair value of the investments was not estimated as of March 27, 2014
as there were no identified events or changes in circumstances that had a significant adverse effect on the fair value of the investments, and it is not practicable to do so because the equity securities are not in a publicly traded company.
As of March 27, 2014 and December 26, 2013, the Company had notes receivable totaling $25.0 million from its founding members
related to the sale of Fathom Events, as described in Note 4
Related Party Transactions
. As of December 26, 2013, these notes were valued using comparative market multiples and are classified as Level 3 in the fair value hierarchy
as the inputs to the determination of fair value are based upon non-identical assets and use significant unobservable inputs. The fair value of the notes was not estimated as of March 27, 2014 as there were no identified events or changes in
circumstances that had a significant adverse effect on the fair value of the notes receivable.
Borrowings
The carrying
amount of the revolving credit facility is considered a reasonable estimate of fair value due to its floating-rate terms. The estimated fair values of the Companys financial instruments where carrying values do not approximate fair value are
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 27, 2014
|
|
|
As of December 26, 2013
|
|
($ in millions)
|
|
Carrying Value
|
|
|
Fair Value
(1)
|
|
|
Carrying Value
|
|
|
Fair Value
(1)
|
|
Term Loans
|
|
$
|
270.0
|
|
|
$
|
269.1
|
|
|
$
|
270.0
|
|
|
$
|
269.5
|
|
Senior Unsecured Notes
|
|
|
200.0
|
|
|
|
221.4
|
|
|
|
200.0
|
|
|
|
220.4
|
|
Senior Secured Notes
|
|
|
400.0
|
|
|
|
422.3
|
|
|
|
400.0
|
|
|
|
414.0
|
|
(1)
|
The Company has estimated the fair value on an average of at least two non-binding broker quotes and the Companys analysis. If the Company were to measure the borrowings in the above table at fair value on the
balance sheet they would be classified as Level 2.
|
Recurring Measurements
The fair values of the
Companys assets and liabilities measured on a recurring basis pursuant to ASC 820-10
Fair Value Measurements and Disclosures
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
As of
March 27, 2014
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
(1)
|
|
$
|
7.4
|
|
|
$
|
2.7
|
|
|
$
|
4.7
|
|
|
$
|
|
|
Short-term marketable securities
(2)
|
|
|
51.4
|
|
|
|
4.6
|
|
|
|
46.8
|
|
|
|
|
|
Long-term marketable securities
(2)
|
|
|
10.8
|
|
|
|
10.0
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
69.6
|
|
|
$
|
17.3
|
|
|
$
|
52.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
As of
December 26, 2013
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
(1)
|
|
$
|
28.3
|
|
|
$
|
|
|
|
$
|
28.3
|
|
|
$
|
|
|
Short-term marketable securities
(2)
|
|
|
71.3
|
|
|
|
4.5
|
|
|
|
66.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
99.6
|
|
|
$
|
4.5
|
|
|
$
|
95.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1)
|
Cash Equivalents
The Companys cash equivalents are carried at estimated fair value. Cash equivalents consist of money market accounts which the Company has classified as Level 1 given the active market
for these accounts and commercial paper with original maturities of three months or less, which are classified as Level 2 and are valued as described below.
|
(2)
|
Short-Term and Long-Term Marketable Securities
The carrying amount and fair value of the marketable securities are equivalent since the Company accounts for these instruments at fair value. The
Companys government agency bonds and commercial paper are valued using third party broker quotes. The value of the Companys government agency bonds is derived from quoted market information. The inputs in the valuation are generally
classified as Level 1 given the active market for these securities; however if an active market does not exist, the inputs are recorded at a lower level in the fair value hierarchy. The value of commercial paper is derived from pricing models using
inputs based upon market information, including contractual terms, market prices and yield curves. The inputs to the valuation pricing models are observable in the market, and as such are generally classified as Level 2 in the fair value hierarchy.
For the three months ended March 27, 2014 and March 28, 2013, there was an inconsequential amount of net realized gains (losses) recognized in interest income and an inconsequential amount of net unrealized holding gains (losses) included
in other comprehensive income. Original cost of short-term marketable securities is based on the specific identification method. As of March 27, 2014 and December 26, 2013, there were no gross unrealized losses related to individual
securities that had been in a continuous loss position for 12 months or longer.
|
The amortized cost basis, aggregate fair
value and maturities of the marketable securities the Company held as of March 27, 2014 and December 26, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 27, 2014
|
|
|
|
Amortized Cost
Basis
(in millions)
|
|
|
Aggregate Fair
Value
(in millions)
|
|
|
Maturities (1)
(in years)
|
|
MARKETABLE SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term municipal
|
|
$
|
2.6
|
|
|
$
|
2.6
|
|
|
|
0.5
|
|
Short-term U.S. government agency bonds
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
0.3
|
|
Short-term commercial paper:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
34.8
|
|
|
|
34.8
|
|
|
|
0.2
|
|
Industrial
|
|
|
7.0
|
|
|
|
7.0
|
|
|
|
0.5
|
|
Utility
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term marketable securities
|
|
|
51.4
|
|
|
|
51.4
|
|
|
|
|
|
Long-term U.S. government treasury bonds
|
|
|
5.1
|
|
|
|
5.1
|
|
|
|
3.5
|
|
Long-term municipal
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
1.5
|
|
Long-term U.S. government agency bonds
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
4.1
|
|
Long-term certificates of deposit
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term marketable securities
|
|
|
10.8
|
|
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
62.2
|
|
|
$
|
62.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 26, 2013
|
|
|
|
Amortized Cost
Basis
(in millions)
|
|
|
Aggregate Fair
Value
(in millions)
|
|
|
Maturities
(1)
(in years)
|
|
MARKETABLE SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term municipal
|
|
$
|
4.5
|
|
|
$
|
4.5
|
|
|
|
0.2
|
|
Short-term commercial paper:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
50.3
|
|
|
|
50.3
|
|
|
|
0.3
|
|
Industrial
|
|
|
8.8
|
|
|
|
8.8
|
|
|
|
0.1
|
|
Utility
|
|
|
7.7
|
|
|
|
7.7
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
71.3
|
|
|
$
|
71.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Maturities
Securities available for sale include obligations with various contractual maturity dates some of which are greater than one year. The Company considers the securities to be liquid and
convertible to cash within 30 days.
|
20
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
During 2012, NCM LLC terminated interest rate swap agreements that were used to hedge its interest rate risk
associated with its term loan. Following the termination of the swap agreements, the variable interest rate on NCM LLCs $270.0 million term loan is unhedged and as of March 27, 2014 and December 26, 2013, the Company did not have any
outstanding derivative assets or liabilities. A portion of the breakage fees paid to terminate the swap agreements was for swaps in which the underlying debt remained outstanding. The balance in AOCI related to these swaps was fixed and is being
amortized into earnings over the remaining life of the original interest rate swap agreement, or February 13, 2015, as long as the debt remains outstanding. The Company considered the guidance in ASC 815,
Derivatives and Hedging
which
states that amounts in AOCI shall be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. As of March 27, 2014, there was approximately $9.1 million outstanding related to
these discontinued cash flow hedges which continues to be reported in AOCI and will be amortized into earnings in the next twelve months.
The changes in AOCI by component for the three months ended March 27, 2014 and March 28, 2013 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 27, 2014
|
|
|
March 28, 2013
|
|
|
Income Statement Location
|
Balance at beginning of period
|
|
$
|
(3.2
|
)
|
|
$
|
(6.7
|
)
|
|
|
Amounts reclassified from AOCI:
|
|
|
|
|
|
|
|
|
|
|
Amortization on discontinued cash flow hedges
|
|
|
2.5
|
|
|
|
2.5
|
|
|
Amortization of terminated
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
Total amounts reclassified from AOCI
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest on reclassifications
|
|
|
(1.4
|
)
|
|
|
(1.4
|
)
|
|
|
Tax effect on reclassifications
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of subsidiary ownership changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(2.5
|
)
|
|
$
|
(6.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. SEGMENT REPORTING
Advertising revenue accounted for 100.0% and 89.7% of consolidated revenue for the three months ended March 27, 2014
and March 28, 2013, respectively. The following tables present revenue less directly identifiable expenses to arrive at income before income taxes, net of direct expenses for the advertising reportable segment, the combined Fathom Events
operating segments (disposed on December 26, 2013), and network, administrative and unallocated costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 27, 2014 (in millions)
|
|
|
|
Advertising
|
|
|
Fathom Events
(1)
|
|
|
Network,
Administrative
and Unallocated
Costs
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
70.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
70.2
|
|
Operating costs
|
|
|
22.4
|
|
|
|
|
|
|
|
4.6
|
|
|
|
27.0
|
|
Selling and marketing costs
|
|
|
14.3
|
|
|
|
|
|
|
|
0.7
|
|
|
|
15.0
|
|
Administrative and other costs
|
|
|
0.8
|
|
|
|
|
|
|
|
6.8
|
|
|
|
7.6
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
7.8
|
|
|
|
7.8
|
|
Interest and other non-operating costs
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
|
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
32.7
|
|
|
$
|
|
|
|
$
|
(39.0
|
)
|
|
$
|
(6.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 28, 2013 (in millions)
|
|
|
|
Advertising
|
|
|
Fathom Events
(1)
|
|
|
Network,
Administrative
and Unallocated
Costs
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
73.7
|
|
|
$
|
8.5
|
|
|
$
|
|
|
|
$
|
82.2
|
|
Operating costs
|
|
|
21.3
|
|
|
|
5.8
|
|
|
|
5.0
|
|
|
|
32.1
|
|
Selling and marketing costs
|
|
|
13.7
|
|
|
|
1.1
|
|
|
|
0.6
|
|
|
|
15.4
|
|
Administrative and other costs
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
7.2
|
|
|
|
7.7
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
5.4
|
|
|
|
5.4
|
|
Interest and other non-operating costs
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
|
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
38.4
|
|
|
$
|
1.4
|
|
|
$
|
(37.3
|
)
|
|
$
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of revenues by category (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 27, 2014
|
|
|
March 28, 2013
|
|
National advertising revenue
|
|
$
|
42.7
|
|
|
$
|
51.5
|
|
Local advertising revenue
|
|
|
18.1
|
|
|
|
13.3
|
|
Founding member advertising revenue from beverage concessionaire agreements
|
|
|
9.4
|
|
|
|
8.9
|
|
Fathom Consumer revenue (1)
|
|
|
|
|
|
|
8.3
|
|
Fathom Business revenue (1)
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
70.2
|
|
|
$
|
82.2
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fathom Events was sold on December 26, 2013 as discussed in Note 4
Related Party Transactions.
|
22
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. SUBSEQUENT EVENTS
On April 30, 2014, the Company declared a cash dividend of $0.22 per share (approximately $12.9 million) on each share
of the Companys common stock (not including outstanding restricted stock which will accrue dividends until the shares vest) to stockholders of record on May 19, 2014 to be paid on June 2, 2014.
On May 5, 2014, NCM, Inc. agreed to acquire Screenvision from SV Holdco, LLC through an Agreement and Plan of Merger (the Merger
Agreement), by and among NCM, Inc., and two newly formed NCM, Inc. subsidiaries (collectively NCM Subsidiaries) and various Screenvision Holdco LLC subsidiaries (collectively SV Subsidiaries). Pursuant to the
Merger Agreement, SV Subsidiaries will be acquired by NCM, Inc. as a result of the merger of SV Subsidiaries with NCM Subsidiaries (the Merger). As consideration for the Merger, SV Holdco will receive from NCM, Inc. $375 million,
consisting of $225 million in cash and $150 million of NCM, Inc. common stock (9,900,990 shares at a fixed price of $15.15 per share). The merger consideration is subject to reduction by an amount equal to 11.8 times the amount, if any, by
which SV Subsidiarys consolidated audited Adjusted EBITDA (calculated consistent with its past practice) for the twelve months ended April 30, 2014 is less than $31.3 million. The merger consideration is also subject to an upward
adjustment by the amount of Screenvisions positive working capital at closing, up to a maximum adjustment of $10.0 million.
Consummation of the Merger is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Approval) and other
customary closing conditions, including satisfaction of representations, warranties and covenants. All necessary corporate action by NCM, Inc., SV Holdco and Screenvision to approve the Merger has occurred. NCM, Inc. intends to obtain
financing in the form of a bank loan (NCM Loan) to finance the transaction. Following the merger, NCM, Inc. will evaluate whether to contribute the Screenvision assets to NCM LLC. Although it is under no obligation to do so, NCM,
Inc. expects that it will contribute the Screenvision assets and debt incurred to finance the acquisition to NCM LLC in exchange for 9,900,990 NCM LLC membership units and that the combined operation will result in an estimated $30 million of annual
operating cost synergies. It is anticipated that NCM LLC will refinance the NCM Loan with additional NCM LLC debt that could include additional senior secured bank debt or senior secured or unsecured notes. NCM, Inc. and NCM LLC expect that such a
contribution would also include an agreement to indemnify each other with respect to potential tax and other liabilities in connection with the contribution. NCM LLCs founding members and NCM, Inc. have agreed to amend the tax receivable
agreement following the Merger. This amendment will provide that any favorable tax attributes effectively acquired by NCM, Inc. from Screenvision as a result of the Merger (including the amount of any net operating losses) will not reduce the amount
of any payments that would have otherwise been made by NCM, Inc. to NCM LLCs founding members under the tax receivable agreement if the Merger had not occurred.
The Merger Agreement requires termination payments upon termination of the Merger Agreement under specified circumstances. NCM, Inc. is
required to pay SV Holdco a termination fee of $28.84 million if HSR Approval has not been obtained or NCM, Inc. has materially breached its representations or covenants such that the closing conditions in the Merger Agreement cannot be satisfied.
If SV Holdco has materially breached its representations or covenants such that the closing conditions in the Merger Agreement cannot be satisfied, SV Holdco is required to pay NCM, Inc. a termination fee of $10 million and, if Screenvision is
subsequently sold within one year of the termination, an additional amount equal to the amount by which the sale proceeds are greater than $385 million.
23