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. AMC, Regal and Cinemark and their affiliates are referred to in
this document as founding members. 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 the founding members and certain third-party theatre circuits under network affiliate agreements referred to in this document as network affiliates, which expire at various dates.
As of June 26, 2014, NCM LLC had 128,285,768 common membership units outstanding, of which 58,742,189 (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.
Recent Transactions
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
.
On May 5, 2014,
NCM, Inc. entered into an Agreement and Plan of Merger (the Merger Agreement) to merge with Screenvision, LLC (Screenvision) for $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 adjustment based upon Screenvisions Adjusted EBITDA for the twelve months ended April 30, 2014 and Screenvisions working capital at
closing. Consummation of the merger is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) and other customary closing conditions, including satisfaction of representations, warranties and
covenants. All necessary corporate action by NCM, Inc. and Screenvision to approve the merger has occurred. During the second quarter of 2014, NCM, Inc. and Screenvision each received a request for additional information (a second
request) from the U.S. Department of Justice (the DOJ) in connection with the DOJs review of the merger. Issuance of the second request extends the waiting period under the HSR Act until 30 days after both parties have
substantially complied with the requests, unless the waiting period is terminated sooner by the DOJ or the parties otherwise agree to extend the closing date for the merger. The companies have been cooperating with the DOJ staff since shortly after
the announcement of the merger and intend to continue to work cooperatively with the DOJ staff in the review of the merger.
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, upon approval of NCM, Inc.s Board of Directors and the founding members, NCM, Inc. may contribute
Screenvision assets and NCM, Inc. debt to NCM LLC in exchange for 9,900,990 NCM LLC membership units. NCM, Inc. has secured a commitment from a group of financial institutions for a $250 million term loan to finance the $225 million portion of the
merger consideration that will be paid in cash, along with fees and expenses incurred in connection with the term loan and the merger. In addition, NCM LLC amended its senior secured credit facility to allow for the contribution of the Screenvision
assets and NCM, Inc. debt to NCM LLC following the closing of the merger. Further information regarding these financing transactions is described in Note 10
Subsequent Events
.
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
8
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
condensed or omitted for this quarterly report. Certain reclassifications have been made to the prior years financial statements to conform to the current presentation. These
reclassifications had no effect on previously reported results of operations or retained earnings. 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.
Segment Reporting
Subsequent to the sale
of the Fathom business on December 26, 2013, the sale of advertising is the sole 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 measurement 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 June 26, 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 six months ended June 26, 2014, revenue related to NCM LLCs founding members beverage supplier accounted for 11.3% of total revenue. During the three months ended
June 26, 2014 and the three and six months ended June 27, 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 to
its employees and independent directors. 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-officer grants vest only upon the achievement of service conditions. Compensation expense of restricted stock that vests upon the
achievement of Company performance
9
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and six months ended June 26, 2014 and the three and six months ended
June 27, 2013, 3,672, 251,660, 0, and 359,528 shares of restricted stock and restricted stock units vested. During the three and six months ended June 26, 2014, 23,559 and 52,447 stock options were exercised at a weighted average exercise
price of $12.73 and $13.74 per share, respectively, and during the three and six months ended June 27, 2013, 505,866 and 636,481 stock options were exercised at a weighted average exercise price of $11.84 and $11.58 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.
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):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 26, 2014
|
|
|
June 27, 2013
|
|
Net income attributable to NCM, Inc.
|
|
$
|
0.5
|
|
|
$
|
8.5
|
|
NCM LLC equity issued for purchase of intangible asset
|
|
|
7.5
|
|
|
|
73.2
|
|
Income tax and other impacts of subsidiary ownership changes
|
|
|
(2.4
|
)
|
|
|
(24.6
|
)
|
|
|
|
|
|
|
|
|
|
Change from net income attributable to NCM, Inc. and transfers from noncontrolling interests
|
|
$
|
5.6
|
|
|
$
|
57.1
|
|
|
|
|
|
|
|
|
|
|
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.
10
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Recent Accounting Pronouncements
In March 2014, the Emerging Issues Task Force (EITF) reached a final consensus on Issue 13-D,
Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period
(EITF 13-D). Under EITF 13-D, a performance target that can be achieved after the requisite service period
should be treated as a performance condition that affects vesting, rather than a condition that affects grant date fair value. Compensation cost is recognized over the requisite service period if it is probable that the performance condition will be
achieved. If necessary, compensation cost is subsequently adjusted, to reflect those awards that ultimately vest. EITF 13-D will be effective, on a prospective basis, for the Company during its first quarter of 2016, with early adoption permitted.
The adoption of this standard is not anticipated to have a material impact on the Companys unaudited Condensed Consolidated Financial Statements or notes thereto.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09,
Revenue from
Contracts with Customers (Topic 606)
(ASU 2014-09), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. The new revenue recognition standard requires entities
to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This
guidance will be effective beginning in fiscal year 2017 and early adoption is not permitted. The standard allows for either a full retrospective or a modified retrospective transition method. The Company is currently evaluating the effect that
adopting this new accounting guidance will have on its unaudited Condensed Consolidated Financial Statements or notes thereto, as well as which transition method it intends to use.
2. EARNINGS 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
|
|
|
Six Months Ended
|
|
|
|
June 26, 2014
|
|
|
June 27, 2013
|
|
|
June 26, 2014
|
|
|
June 27, 2013
|
|
Net income attributable to NCM, Inc. (in millions)
|
|
$
|
3.6
|
|
|
$
|
9.5
|
|
|
$
|
0.5
|
|
|
$
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,722,025
|
|
|
|
55,062,723
|
|
|
|
58,670,412
|
|
|
|
54,837,169
|
|
Add: Dilutive effect of stock options and restricted stock
|
|
|
278,102
|
|
|
|
654,019
|
|
|
|
335,971
|
|
|
|
456,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
59,000,127
|
|
|
|
55,716,742
|
|
|
|
59,006,383
|
|
|
|
55,293,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per NCM, Inc. share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
0.17
|
|
|
$
|
0.01
|
|
|
$
|
0.16
|
|
Diluted
|
|
$
|
0.06
|
|
|
$
|
0.17
|
|
|
$
|
0.01
|
|
|
$
|
0.15
|
|
The effect of 69,543,579, 62,418,085, 69,059,399 and 60,323,755 exchangeable NCM LLC common units held by the
founding members for the three months ended June 26, 2014 and June 27, 2013 and the six months ended June 26, 2014 and June 27, 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 84,891, 13,445, 164,038 and 31,229 stock options and non-vested (restricted) shares for the three months
ended June 26, 2014 and June 27, 2013 and the six months ended June 26, 2014 and June 27, 2013, respectively, excluded from the calculation as they were antidilutive, primarily because exercise prices were above the average
market value.
11
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 26, 2014 and June 27, 2013 and the six months ended June 26, 2014 and June 27, 2013, respectively, NCM LLC recorded a reduction to net intangible assets of $0.6 million, $0.9 million, $0.8
million and $1.1 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 June 26, 2014 and June 27, 2013 and the six months ended June 26, 2014 and June 27, 2013, AMC and Cinemark paid a total of $0.2 million, $0.2 million, $0.9 million and $0.2 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. 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.
12
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
|
|
|
Six Months Ended
|
|
Included in the Condensed Consolidated Statements of Income:
|
|
June 26,
2014
|
|
|
June 27,
2013
|
|
|
June 26,
2014
|
|
|
June 27,
2013
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beverage concessionaire revenue (included in advertising revenue)
(1)
|
|
$
|
9.8
|
|
|
$
|
11.1
|
|
|
$
|
19.2
|
|
|
$
|
20.0
|
|
Advertising inventory revenue (included in advertising revenue)
(2)
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatre access fee
(3)
|
|
|
17.9
|
|
|
|
18.1
|
|
|
|
35.3
|
|
|
|
33.7
|
|
Revenue share from Fathom Events (included in Fathom Events operating costs)
(4)
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
1.7
|
|
Purchase of movie tickets and concession products (included in Fathom Events operating costs)
(5)
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
|
Purchase of movie tickets and concession products (included in selling and marketing costs)
(6)
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.7
|
|
Non-operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from notes receivable (included in interest income)
(7)
|
|
|
0.3
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
(1)
|
For the three months ended June 26, 2014 and June 27, 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
)
|
Prior to the sale of Fathom Events on December 26, 2013, these were used primarily for marketing resale to Fathom Events customers.
|
(6)
|
Used primarily for marketing to NCM LLCs advertising clients.
|
(7)
|
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:
|
|
June 26, 2014
|
|
|
December 26, 2013
|
|
Purchase of movie tickets and concession products (included in Prepaid expenses)
(1)
|
|
$
|
0.2
|
|
|
$
|
|
|
Current portion of notes receivable (2)
|
|
|
4.2
|
|
|
|
4.2
|
|
Long-term portion of notes receivable (2)
|
|
|
20.8
|
|
|
|
20.8
|
|
Interest receivable on notes receivable (included in other current assets) (2)
|
|
|
0.6
|
|
|
|
|
|
Common unit adjustments and integration payments, net of amortization (included in intangible assets)
(3)
|
|
|
469.5
|
|
|
|
463.4
|
|
Current payable to founding members under tax receivable agreement
(4)
|
|
|
15.7
|
|
|
|
28.6
|
|
Long-term payable to founding members under tax receivable agreement
(4)
|
|
|
145.6
|
|
|
|
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 common unit adjustments and 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.
|
At the date of the Companys Initial Public Offering (IPO), we were granted a
perpetual, royalty-free license from NCM LLCs founding members to use certain proprietary software that existed at the time 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 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 and six months ended June 26, 2014 and
June 27, 2013 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2014
|
|
|
June 27,
2013
|
|
|
June 26,
2014
|
|
|
June 27,
2013
|
|
AMC
|
|
$
|
5.1
|
|
|
$
|
8.1
|
|
|
$
|
6.8
|
|
|
$
|
10.6
|
|
Cinemark
|
|
|
6.5
|
|
|
|
10.3
|
|
|
|
8.7
|
|
|
|
12.7
|
|
Regal
|
|
|
6.8
|
|
|
|
10.4
|
|
|
|
9.1
|
|
|
|
13.5
|
|
NCM, Inc.
|
|
|
15.6
|
|
|
|
23.7
|
|
|
|
20.9
|
|
|
|
30.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34.0
|
|
|
$
|
52.5
|
|
|
$
|
45.5
|
|
|
$
|
67.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The mandatory distributions of available cash by NCM LLC to its founding members for the three months ended
June 26, 2014 of $18.4 million is included in amounts due to founding members on the unaudited Condensed Consolidated Balance Sheets as of June 26, 2014 and will be made in the third quarter of 2014.
14
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Amounts due to founding members as of June 26, 2014 were comprised of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMC
|
|
|
Cinemark
|
|
|
Regal
|
|
|
Total
|
|
Theatre access fees, net of beverage revenues
|
|
$
|
0.8
|
|
|
$
|
0.8
|
|
|
$
|
1.2
|
|
|
$
|
2.8
|
|
Cost and other reimbursement
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
(0.6
|
)
|
Distributions payable to founding members
|
|
|
5.1
|
|
|
|
6.5
|
|
|
|
6.8
|
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5.4
|
|
|
$
|
7.1
|
|
|
$
|
8.1
|
|
|
$
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 to founding members
|
|
|
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
|
|
|
Six Months Ended
|
|
Included in the Condensed Consolidated Statements of Income:
|
|
June 26,
2014
|
|
|
June 27,
2013
|
|
|
June 26,
2014
|
|
|
June 27,
2013
|
|
Transition services (included in network costs)
(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
|
|
Equity in earnings of non-consolidated entities (included in other non-operating expense)
(2)
|
|
|
0.1
|
|
|
|
|
|
|
|
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.
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
Included in the Condensed Consolidated Balance Sheets:
|
|
June 26,
2014
|
|
|
December 26,
2013
|
|
Amounts due to AC JV, LLC (included in other current liabilities)
(1)
|
|
$
|
2.1
|
|
|
$
|
|
|
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. 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)
|
Refer to the discussion of the investment in AC JV, LLC above.
|
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
|
|
|
Six Months Ended
|
|
Related Party Affiliate
|
|
June 26,
2014
|
|
|
June 27,
2013
|
|
|
June 26,
2014
|
|
|
June 27,
2013
|
|
Starplex
(1)
|
|
$
|
0.8
|
|
|
$
|
0.7
|
|
|
$
|
1.3
|
|
|
$
|
1.2
|
|
Other
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
|
$
|
1.4
|
|
|
$
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Related Party Affiliate
|
|
June 26,
2014
|
|
|
December 26,
2013
|
|
Starplex
(1)
|
|
$
|
0.8
|
|
|
$
|
0.7
|
|
Other
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.9
|
|
|
$
|
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 June 26, 2014 and June 27, 2013 and the six months ended June 26, 2014 and June 27, 2013, respectively, this company generated
approximately $0.1 million, $0.0 million, $0.2 million and $0.1 million in revenue for NCM LLC and there was approximately $0.6 million of accounts receivable due from this company as of June 26, 2014 and December 26, 2013.
5. BORROWINGS
The following table summarizes NCM LLCs total outstanding debt as of June 26, 2014 and December 26, 2013 and
the significant terms of its borrowing arrangements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance as of
|
|
|
|
|
|
Borrowings
|
|
June 26,
2014
|
|
|
December 26,
2013
|
|
|
Maturity
Date
|
|
Interest
Rate
|
Revolving Credit Facility
|
|
$
|
29.0
|
|
|
$
|
20.0
|
|
|
November 26, 2019 (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
|
|
$
|
899.0
|
|
|
$
|
890.0
|
|
|
|
|
|
Less: current portion of long-term debt
|
|
|
(14.0
|
)
|
|
|
(14.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$
|
885.0
|
|
|
$
|
876.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On July 2, 2014, the maturity date of $135.0 million of the revolving credit facility was extended by two years from November 26, 2017 to November 26, 2019. The remaining $14.0 million 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.
|
Senior Secured Credit Facility
As of June 26, 2014, NCM LLCs senior secured credit facility consisted of a
$149.0 million revolving credit facility and a $270.0 million term loan. On June 18, 2014, NCM LLC entered into an incremental amendment of its senior secured credit facility whereby the revolving credit facility was increased by
16
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$25.0 million from $124.0 million to $149.0 million. In addition, on July 2, 2014, NCM LLC entered into an amendment of its senior secured credit facility whereby the maturity date
applicable to $135.0 million of the revolving credit facility was extended by two years to November 26, 2019, which corresponds to the maturity date of the $270 million term loans. The maturity date applicable to the remaining $14.0 million of
the revolving credit facility continues to be December 31, 2014. The senior secured credit facility was also amended for certain conditional amendments to allow for the contribution of Screenvision assets and debt from NCM, Inc. to NCM LLC
following the closing of the proposed merger upon the approval of the NCM, Inc. board of directors and the founding members. These amendments are discussed further in Note 10
Subsequent Events
. 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.
As of June 26, 2014, NCM LLCs total availability under the revolving credit
facility was $149.0 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. On July 2, 2014, the maturity date applicable to any
remaining outstanding revolving credit facility principal was extended by two years to November 26, 2019.
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). The applicable margins on the $135.0 million portion of the revolving credit facility are 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 are 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 June 26, 2014 was 2.13%.
Term Loans
The interest rate on the term loans is 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
June 26, 2014 was 2.90%. 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 June 26, 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 June 26, 2014, NCM LLCs
consolidated net senior secured leverage ratio was 3.3 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 non-maintenance covenants with which NCM LLC is in compliance.
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 non-maintenance covenants with which NCM LLC is in compliance.
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 $37.2 million over the remaining terms of the network affiliate agreements. As of June 26, 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 June 26, 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.
Merger Termination Payment
As described in Note 1
The Company
, on May 5, 2014, the Company entered into a Merger Agreement to merge with Screenvision. Consummation of the merger is subject to clearance under the Hart-Scott-Rodino
Antitrust Improvements Act, as well, as other customary closing conditions. If we do not receive this approval (or if we materially breach our representations or covenants such that the closing conditions in the Merger Agreement cannot be
satisfied) we will be required to pay a termination fee of approximately $28.8 million. NCM LLC would indemnify NCM, Inc. and bear a pro rata portion of this fee based upon NCM, Inc.s ownership percentage in NCM LLC, with NCM LLCs
founding members bearing the remainder of the fee in accordance with their ownership percentage in NCM LLC. If Screenvision or its affiliates materially breach their representations or covenants such that the closing conditions in the Merger
Agreement cannot be satisfied, they will be required to pay us 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 will be paid to us up to a maximum of $28.8 million (including the $10 million). As of June 26, 2014, the Company did not have a liability recorded for this termination fee as it does not believe payment to be
probable.
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.
18
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 26, 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 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 June 26, 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 June 26, 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 4Related 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 June 26, 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 June 26, 2014
|
|
|
As of December 26, 2013
|
|
|
|
Carrying Value
|
|
|
Fair Value
(1)
|
|
|
Carrying Value
|
|
|
Fair Value
(1)
|
|
Term Loans
|
|
$
|
270.0
|
|
|
$
|
266.6
|
|
|
$
|
270.0
|
|
|
$
|
269.5
|
|
Senior Unsecured Notes
|
|
|
200.0
|
|
|
|
218.8
|
|
|
|
200.0
|
|
|
|
220.4
|
|
Senior Secured Notes
|
|
|
400.0
|
|
|
|
420.8
|
|
|
|
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
June 26, 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)
|
|
$
|
9.4
|
|
|
$
|
3.0
|
|
|
$
|
6.4
|
|
|
$
|
|
|
Short-term marketable securities
(2)
|
|
|
38.7
|
|
|
|
22.6
|
|
|
|
16.1
|
|
|
|
|
|
Long-term marketable securities
(2)
|
|
|
21.6
|
|
|
|
20.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
69.7
|
|
|
$
|
46.4
|
|
|
$
|
23.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and six months ended June 26, 2014 and June 27, 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 June 26, 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 June 26, 2014 and December 26, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 26, 2014
|
|
|
|
Amortized Cost
Basis
(in millions)
|
|
|
Aggregate Fair
Value
(in millions)
|
|
|
Maturities
(1)
(in years)
|
|
MARKETABLE SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term municipal bonds
|
|
$
|
8.1
|
|
|
$
|
8.1
|
|
|
|
0.3
|
|
Short-term U.S. government agency bonds
|
|
|
14.5
|
|
|
|
14.5
|
|
|
|
0.3
|
|
Short-term commercial paper:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
8.4
|
|
|
|
8.4
|
|
|
|
0.1
|
|
Industrial
|
|
|
7.1
|
|
|
|
7.1
|
|
|
|
0.2
|
|
Short-term certificates of deposit
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term marketable securities
|
|
|
38.7
|
|
|
|
38.7
|
|
|
|
|
|
Long-term U.S. government treasury bonds
|
|
|
5.1
|
|
|
|
5.1
|
|
|
|
3.3
|
|
Long-term municipal bonds
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
1.4
|
|
Long-term U.S. government agency bonds
|
|
|
15.0
|
|
|
|
15.0
|
|
|
|
3.7
|
|
Long-term certificates of deposit
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term marketable securities
|
|
|
21.5
|
|
|
|
21.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
60.2
|
|
|
$
|
60.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 26, 2013
|
|
|
|
Amortized Cost
Basis
(in millions)
|
|
|
Aggregate Fair
Value
(in millions)
|
|
|
Maturities
(1)
(in years)
|
|
MARKETABLE SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term municipal bonds
|
|
$
|
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.
|
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 June 26, 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 June 26, 2014, there was approximately $6.5 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 six months ended June 26, 2014 and June 27, 2013 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 26, 2014
|
|
|
June 27, 2013
|
|
|
Income Statement Location
|
Balance at beginning of period
|
|
$
|
(3.2
|
)
|
|
$
|
(6.7
|
)
|
|
|
Amounts reclassified from AOCI:
|
|
|
|
|
|
|
|
|
|
|
Amortization on discontinued cash flow hedges
|
|
|
5.0
|
|
|
|
5.2
|
|
|
Amortization of terminated
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
Total amounts reclassified from AOCI
|
|
|
5.0
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest on reclassifications
|
|
|
(2.7
|
)
|
|
|
(2.8
|
)
|
|
|
Tax effect on reclassifications
|
|
|
(0.9
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income
|
|
|
1.4
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of subsidiary ownership changes
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(1.8
|
)
|
|
$
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. SEGMENT REPORTING
Advertising revenue accounted for 100.0%, 95.2%, 100.0% and 93.0% of consolidated revenue for the three and six months ended
June 26, 2014 and June 27, 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 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 26, 2014
|
|
|
|
Advertising
|
|
|
Fathom Events (
1)
|
|
|
Network,
Administrative
and Unallocated
Costs
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
99.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
99.9
|
|
Operating costs
|
|
|
24.5
|
|
|
|
|
|
|
|
4.4
|
|
|
|
28.9
|
|
Selling and marketing costs
|
|
|
13.3
|
|
|
|
|
|
|
|
0.8
|
|
|
|
14.1
|
|
Administrative and other costs
|
|
|
0.7
|
|
|
|
|
|
|
|
8.1
|
|
|
|
8.8
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
7.8
|
|
|
|
7.8
|
|
Interest and other non-operating costs
|
|
|
|
|
|
|
|
|
|
|
18.6
|
|
|
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
61.4
|
|
|
$
|
|
|
|
$
|
(39.7
|
)
|
|
$
|
21.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 27, 2013
|
|
|
|
Advertising
|
|
|
Fathom Events
(1)
|
|
|
Network,
Administrative
and Unallocated
Costs
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
116.9
|
|
|
$
|
5.9
|
|
|
$
|
|
|
|
$
|
122.8
|
|
Operating costs
|
|
|
26.2
|
|
|
|
4.2
|
|
|
|
5.1
|
|
|
|
35.5
|
|
Selling and marketing costs
|
|
|
14.4
|
|
|
|
0.7
|
|
|
|
0.6
|
|
|
|
15.7
|
|
Administrative and other costs
|
|
|
0.7
|
|
|
|
0.2
|
|
|
|
6.5
|
|
|
|
7.4
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
6.2
|
|
|
|
6.2
|
|
Interest and other non-operating costs
|
|
|
|
|
|
|
|
|
|
|
20.0
|
|
|
|
20.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
75.6
|
|
|
$
|
0.8
|
|
|
$
|
(38.4
|
)
|
|
$
|
38.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 26, 2014
|
|
|
|
Advertising
|
|
|
Fathom Events
(1)
|
|
|
Network,
Administrative
and Unallocated
Costs
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
170.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
170.1
|
|
Operating costs
|
|
|
46.9
|
|
|
|
|
|
|
|
9.0
|
|
|
|
55.9
|
|
Selling and marketing costs
|
|
|
27.6
|
|
|
|
|
|
|
|
1.5
|
|
|
|
29.1
|
|
Administrative and other costs
|
|
|
1.5
|
|
|
|
|
|
|
|
14.9
|
|
|
|
16.4
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
15.6
|
|
|
|
15.6
|
|
Interest and other non-operating costs
|
|
|
|
|
|
|
|
|
|
|
37.7
|
|
|
|
37.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
94.1
|
|
|
$
|
|
|
|
$
|
(78.7
|
)
|
|
$
|
15.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 27, 2013
|
|
|
|
Advertising
|
|
|
Fathom Events (
1
)
|
|
|
Network,
Administrative
and Unallocated
Costs
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
190.6
|
|
|
$
|
14.4
|
|
|
$
|
|
|
|
$
|
205.0
|
|
Operating costs
|
|
|
47.5
|
|
|
|
10.0
|
|
|
|
10.1
|
|
|
|
67.6
|
|
Selling and marketing costs
|
|
|
28.1
|
|
|
|
1.8
|
|
|
|
1.2
|
|
|
|
31.1
|
|
Administrative and other costs
|
|
|
1.0
|
|
|
|
0.4
|
|
|
|
13.7
|
|
|
|
15.1
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
11.6
|
|
|
|
11.6
|
|
Interest and other non-operating costs
|
|
|
|
|
|
|
|
|
|
|
39.1
|
|
|
|
39.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
114.0
|
|
|
$
|
2.2
|
|
|
$
|
(75.7
|
)
|
|
$
|
40.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of revenues by category (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 26, 2014
|
|
|
June 27, 2013
|
|
|
June 26, 2014
|
|
|
June 27, 2013
|
|
National advertising revenue
|
|
$
|
68.4
|
|
|
$
|
83.4
|
|
|
$
|
111.1
|
|
|
$
|
134.9
|
|
Local advertising revenue
|
|
|
21.7
|
|
|
|
22.4
|
|
|
|
39.8
|
|
|
|
35.7
|
|
Founding member advertising revenue from beverage concessionaire agreements
|
|
|
9.8
|
|
|
|
11.1
|
|
|
|
19.2
|
|
|
|
20.0
|
|
Fathom Consumer revenue
(1)
|
|
|
|
|
|
|
5.0
|
|
|
|
|
|
|
|
13.3
|
|
Fathom Business revenue
(1)
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
99.9
|
|
|
$
|
122.8
|
|
|
$
|
170.1
|
|
|
$
|
205.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fathom Events was sold on December 26, 2013 as discussed in Note 4
Related Party Transactions.
|
10. SUBSEQUENT EVENTS
On July 2, 2014, NCM LLC entered into an amendment (the Amendment) of its senior secured credit facility,
whereby the maturity date applicable to $135 million of the revolving credit facility was extended by two years to November 26, 2019, which corresponds to the maturity date of the $270 million term loans. The maturity date applicable to the
remaining $14 million of the revolving credit facility continues to be December 31, 2014. The Amendment also contains certain amendments (Conditional Amendments) to the senior secured credit facility that will only be effective upon
the contribution of Screenvision assets and NCM, Inc. debt to NCM LLC. Although it is under no obligation to do so, upon approval of NCM, Inc.s Board of Directors and NCM LLCs founding members, NCM, Inc. may contribute the Screenvision
assets and the new NCM, Inc. debt facility to NCM LLC in exchange for NCM LLC membership units. To allow for this potential contribution to NCM LLC, the Conditional Amendments include an increase in the amount of incremental senior secured
indebtedness permitted by the Amended Credit Facility from $160 million to $250 million. If the Screenvision contribution to NCM LLC does not occur by April 1, 2015, the Conditional Amendments will not become effective and lender consent for
the Conditional Amendments will be immediately and automatically revoked.
On July 2, 2014, in contemplation of the merger with
Screenvision, NCM, Inc. entered into a Commitment and Engagement Letter (the Commitment Letter) with certain existing NCM LLC revolving credit facility lenders. Under the Commitment Letter, subject to certain conditions, the lenders
committed to make a term loan in an aggregate principal amount of $250 million to fund the Screenvision merger and related expenses. This term loan is expected to finance the $225 million portion of the merger consideration that will be paid in
cash, along with fees and expenses incurred in connection with the term loan and the merger. The term loan will mature on the second anniversary of the funding of the term loan. NCM, Inc. has the right to contribute the Screenvision assets and the
$250 million loan to NCM LLC, at which point, the Conditional Amendments to the amended senior secured credit facility described above will become effective.
23
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 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 August 21, 2014 to be paid on September 5, 2014.
24