NCMI National CineMedia Inc

On March 16, 2017, National CineMedia, Inc. (“NCM, Inc.”), as sole manager of National CineMedia, LLC (“NCM LLC”), provided written notices setting forth the determination of common membership units due to/from the members of NCM LLC as shown in the table below, in accordance with the Common Unit Adjustment Agreement dated as of February 13, 2007, by and among NCM, Inc., NCM LLC, Regal CineMedia Holdings, LLC (“Regal”), American Multi-Cinema, Inc. (“AMC”), Cinemark Media, Inc. (“Cinemark”), Regal Cinemas, Inc. (“RCI”) and Cinemark USA, Inc.  Regal, AMC and Cinemark are referred to collectively as the “Founding Members.”   The “Founding Member Group” means, with respect to each Founding Member, the Founding Member, its ESA Party, and their Affiliates.  Any undefined capitalized term has the meaning given it in the Common Unit Adjustment Agreement.  Under the Common Unit Adjustment Agreement, the adjustment of membership units is conducted annually, except that a Common Unit Adjustment will occur for a specific Founding Member (or designee) if its acquisition or disposition of theatres, in a single transaction or cumulatively since the most recent Common Unit Adjustment, results in an extraordinary attendance increase or decrease in excess of two percent of the annual total attendance as determined on the prior adjustment date.  

On March 9, 2017, NCM, Inc. and NCM LLC entered into a binding Memorandum of Understanding (“MOU”) with AMC to effectuate aspects of a final judgment entered by the Department of Justice in connection with AMC’s acquisition of Carmike Cinemas, Inc. (“Carmike”).  Pursuant to the MOU, promptly after the MOU effective date AMC will receive NCM LLC common membership units in respect of the annual attendance at such Carmike theatres in accordance with the Common Unit Adjustment Agreement.   AMC’s acquisition of Carmike meets the criteria for a Common Unit Adjustment for this acquisition because it results in an extraordinary attendance increase of approximately 9.5%.   Further, the Final Judgment requires AMC to transfer advertising rights to 17 theatres from NCM LLC to another advertising provider (such theatres, the “Screen Transfer Theatres”).  Pursuant to the MOU, promptly after the MOU effective date, AMC will convey to NCM LLC approximately 4.7 million NCM LLC common membership units in respect of such theatres.  The 4.7 million surrendered NCM LLC common membership units are comprised of (i) 2.9 million NCM LLC common membership units pursuant to the adjustment for divested theatres in the Common Unit Adjustment Agreement and (ii) an additional 1.8 million NCM LLC common membership units valued at $25 million to compensate for NCM LLC’s lost operating income for these theaters during the 10-year term of the Final Judgment .  These Common Unit Adjustments, as well as, the annual Common Unit Adjustment for fiscal year 2016 attendance were included in the written notices provided on March 16, 2017 and each of the common membership units pursuant to these transactions are expected to be issued/surrendered on March 30, 2017, the settlement date.  

Following is a summary of the NCM LLC ownership units that will result from 1) the Annual Common Unit Adjustment related to 2016 attendance, 2) the extraordinary Common Unit Adjustment for AMC’s acquisition of Carmike and 3) the return of NCM LLC common membership units related to the Screen Transfer Theatres pursuant to the MOU.

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Following the issuance (surrender) of these common membership units pursuant to the Common Unit Adjus tment Agreement and MOU, each Founding Member Group’s ownership interest in NCM LLC will change as follows.

Pursuant to NCM, Inc.’s Amended and Restated Certificate of Incorporation and NCM LLC’s Third Amended and Restated Limited Liability Company Operating Agreement, as amended, members of NCM LLC, other than NCM, Inc., may choose to have common membership units redeemed, and NCM, Inc. may elect to issue cash or shares of its common stock on a one-for-one basis.  Therefore, the NCM LLC units issued to the Founding Members may be redeemable for an equal number of shares of NCM, Inc.’s common stock.

Neither NCM, Inc. nor NCM LLC received any cash consideration in exchange for the issuance of the units.  In addition to the issuance of the units, cash will be paid in lieu of partial units in the amounts of $14.03, $10.94 and $11.02 to AMC, Cinemark USA, Inc. and RCI, respectively.  

The units will be issued in reliance upon the exemption from the registration requirements of the Securities Act provided for by Section 4(2) thereof for transactions not involving a public offering. Appropriate legends will be affixed to the securities issued in this transaction. The Founding Members had adequate access, through business or other relationships, to information about NCM, Inc.

In accordance with the ESA by and between NCM, Inc. and AMC, all of the common units issued to AMC for the Carmike theatres are currently under contract with a third-party advertising service provider.  As required by the ESA, AMC will pay NCM LLC amounts reflecting the net amount of cash that approximates what NCM LLC would have generated if it were able to sell on-screen advertising in these theatres on an exclusive basis. These integration payments will be made on a quarterly basis in arrears in accordance with certain run-out provisions and are projected to be approximately $20 million for a full year and will continue until the earlier of (i) the date such theatres are transferred to the NCM LLC network or (ii) the expiration of AMC’s Exhibitor Services Agreement (“ESA”) with NCM LLC.   The payments will be recorded directly to intangible assets in NCM LLC’s balance sheet but are added to available cash distributions to NCM, Inc. and the founding members and will reduce NCM LLC’s leverage as calculated for debt covenant compliance purposes.

Discussion of Common Unit Adjustment Calculations

Methodology

The Common Unit Adjustment Agreement provides a mechanism for adjusting membership units held by the Founding Members, based on increases or decreases in attendance associated with new theatre construction or acquisitions and dispositions or closures by each Founding Member as discussed below.  The adjustment of membership units pursuant to this agreement are conducted annually, except that an earlier adjustment will occur for a Founding Member if its acquisition or disposition of theatres, in a single transaction or cumulatively since the most recent adjustment, will cause a change of two percent or more in the total annual attendance.

Increases in attendance associated with theatre additions are included in the unit adjustment if arising from acquisition of a theatre or opening of a newly constructed theatre, except that lease renewals and extensions are not included and acquired theatres, subject to an agreement with an alternative cinema advertising provider, will not be included until certain run out payments are made to NCM LLC by the Founding Member acquiring the theatre pursuant to its ESA or until such third party cinema advertising agreement expires.

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Decreases in attendance associated with theatre dispositions are included in the unit adjustment if arising from the closure or sale of a theatre, unless the purchaser or sublessee enters into an agreement with NCM LLC similar to t he ESA, the theatre is closed at or after the end of its lease term in effect on February 13, 2007 (the Common Unit Adjustment Agreement date), the theatre is closed at the end of an initial term of a lease entered into after February 13, 2007, or a non-di gitized theatre is closed within the last three years of the term of a lease in effect on February 13, 2007 (the closing date of NCM, Inc.’s initial public offering).

The increases in attendance for acquired theatres that were open for the full twelve months prior to the acquisition date are calculated based on the attendance for the twelve months prior to the acquisition date and decreases in attendance for theatres that were disposed are based on the attendance for the twelve months prior to the disposition date. However, if an acquired or new build theatre was not operating during the entire twelve months prior to the acquisition date (in the case of an acquired theatre), the change in annual attendance is calculated based on 75% of the projected, year 1 annual attendance for such theatre, as determined by the Founding Members’ board of directors (or other investment committee designated by the board) in approving development or acquisition.  Additionally, in the calculations for adjustment upon acquisition, new openings, closures or disposition, only 50% of the attendance is included for theatres that were not digitized.

In the case of acquired or new build theatres in which the 75% of projected, year 1 annual attendance was used in prior Common Unit Adjustments, an additional adjustment or “true-up” was made to the net increases and decreases in attendance.  This adjustment was calculated as the variance between the attendees applied in the prior Common Unit Adjustment and the actual, year 1 attendance for such theatres.

Common Unit Adjustment Calculations

Following is the detail of the Common Unit Adjustment calculations for 1) the Annual Common Unit Adjustment related to 2016 attendance, 2) the extraordinary Common Unit Adjustment for AMC’s acquisition of Carmike and 3) the return of NCM LLC common membership units related to the Screen Transfer Theatres pursuant to the MOU.

Discussion of changes in screens and attendance:

The aggregate net attendance adjustment used in calculating the Common Unit Adjustment for the 2016 fiscal year was an increase of 8,189,813 attendees as described below.

A total of 281 screens were added resulting in an average attendance per added screen of approximately 27,495.

A total of 50 screens were disposed of resulting in an average attendance per disposed screen of approximately 28,301.  

Excluded from the calculation was a 3,428,771 decrease in attendance related to theatre closures associated with expired leases in effect at February 13, 2007, of which all attendees were from digital screens.  A total of

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155 screens were excluded, due to end of lease screen closures resulting in an average attendance per excluded screen of approximately 22,121.

Calculation of the Common Unit Adjustment (1): (as of and for the fiscal year ended December 29, 2016, except as noted)  

Discussion of changes in screens and attendance:

The aggregate net attendance adjustment used in calculating the Common Unit Adjustment was an increase of 65,142,100 attendees.

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Calculation of the Common Unit Adjustment (1): (as of December 20, 2016, except as noted)  

Discussion of changes in screens and attendance:

The aggregate net attendance adjustment used in calculating the Common Unit Adjustment was a decrease of 9,534,295 attendees.

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Calculation of the Common Unit Adjustment (1): (as of March 3, 2017, except as noted)  

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