NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
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”), a limited liability company owned by NCM, Inc., American Multi-Cinema, Inc. and AMC ShowPlace Theatres, Inc., wholly owned subsidiaries of AMC Entertainment, Inc. (“AMC”), 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”. NCM LLC operates the largest digital in-theater network in North America, allowing NCM LLC to sell advertising under long-term exhibitor services agreements (“ESAs”) with the founding members (approximately 20 years remaining as of June 29, 2017) and certain third-party theater circuits, referred to in this document as “network affiliates” under long-term network affiliate agreements, which have terms from one to twenty years.
As of June 29, 2017, NCM LLC had 154,053,718 common membership units outstanding, of which 60,614,606 (39.3%) were owned by NCM, Inc., 37,992,630 (24.7%) were owned by AMC, 27,871,862 (18.1%) were owned by Cinemark and 27,574,620 (17.9%) were owned by Regal. The membership units held by the founding members are exchangeable into NCM, Inc. common stock on a one-for-one basis.
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 29, 2016 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 Company’s annual report on Form 10-K filed for the fiscal year ended December 29, 2016.
In the opinion of management, all 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 Company’s business is seasonal and for this and other reasons operating results for interim periods may not be indicative of the Company’s 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. The Company manages its business under one reportable segment of advertising.
Estimates
—The preparation of the 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 Company’s annual financial statements included in its Form 10-K filed for the fiscal year ended December 29, 2016 contain a complete discussion of the Company’s significant accounting policies. Following is additional information related to the Company’s accounting policies.
6
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Concentration of Credit Risk and Significant Customers
—Bad debts are provided for using the allowance for doubtful accounts method based on historical experience and management’s evaluation of outstanding rece
ivables 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 wit
h respect to national and regional advertising is reduced by transacting with founding members or large, national advertising agencies who have strong reputations in the advertising industry and clients with stable financial positions. The Company has smal
ler contracts with thousands of local clients that are not individually significant. As of June 29, 2017 and December 29, 2016, there were no advertising agency groups or individual customers through which the Company sources national advertising revenue r
epresenting more than 10% of the Company’s outstanding gross receivable balance. During the three and six months ended June 29, 2017 and June 30, 2016, the Company had no customers that accounted for more than 10% of revenue.
Share-Based Compensation
—The Company has issued stock options and restricted stock to certain employees and restricted stock units to its independent directors. The Company has not granted stock options since 2012. In 2016 and 2017, the restricted stock grants for Company officers vest upon the achievement of Company performance measures and/or 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 measures is based on management’s 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 of restricted stock 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 unvested restricted stock that is expected to vest and are only paid with respect to shares that actually vest. During the three and six months ended June 29, 2017 and June 30, 2016, 29,759, 25,225, 1,008,118 and 893,830 shares of restricted stock and restricted stock units vested, respectively. During the three and six months ended June 29, 2017 and three and six months ended June 30, 2016, 0, 516, 58,450 and 23,450 stock options were exercised at a weighted average exercise price of $0, $12.73, $11.04 and $13.01 per share, respectively.
Consolidation
—NCM, Inc. consolidates the accounts of NCM LLC under the provisions of ASC 810,
Consolidation
(“ASC 810”). 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 29,
2017
|
|
|
June 30,
2016
|
|
Net (loss) income attributable to NCM, Inc.
|
|
$
|
(3.5
|
)
|
|
$
|
2.5
|
|
NCM LLC equity issued for purchase of intangible asset
|
|
|
78.8
|
|
|
|
9.2
|
|
Income tax and other impacts of subsidiary ownership
changes
(1)
|
|
|
(56.6
|
)
|
|
|
(3.7
|
)
|
Change from net income attributable to NCM, Inc. and
transfers from noncontrolling interests
|
|
$
|
18.7
|
|
|
$
|
8.0
|
|
|
(1)
|
Subsequent to the issuance of the December 29, 2016 financial statements, an error was identified to the recording of related party balances between the Company and NCM LLC. As of June 29, 2017, the Company recorded an increase of approximately $3.6 million to its additional paid in capital balance and recorded an equivalent reduction to its noncontrolling interests equity balance related to the correction of out of period errors.
|
Recently Adopted Accounting Pronouncements
In the first quarter of 2017, the Company adopted Accounting Standards Update 2016-07,
Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting
(“ASU 2016-07”) on a prospective basis. ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The adoption of ASU 2016-07 did not have a material impact on the unaudited Condensed Consolidated Financial Statements or notes thereto.
In the first quarter of 2017, the Company adopted Accounting Standards Update 2016-17,
Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
(“ASU 2016-17”) on a retrospective basis to all periods since its adoption of Accounting Standards Update 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
(“ASU 2015-02”) in the first quarter of 2016. ASU 2016-17 changes the evaluation of whether a
7
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
repo
rting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under commo
n control with the reporting entity.
If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a variable interest entity), the amendments require that reporting entity, in determining w
hether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a variable interest entity and, on a proportionate basis, its indirect variable interests in a variable interest entity held through
related parties, including related parties that are under common control with the reporting entity. The adoption of ASU 2016-17 did not have a material impact on the Condensed Consolidated Financial Statements or notes thereto.
Recently Issued Accounting Pronouncements
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. In August 2015, the FASB revised the effective date for this standard to annual and interim periods beginning on or after December 15, 2017, with early adoption permitted, but not earlier than the original effective date of annual and interim periods beginning after December 15, 2016, for public entities. ASU 2014-09 allows for either a full retrospective or a modified retrospective transition method. The Company expects to adopt this guidance using the modified retrospective transition method during the first quarter of 2018. The Company expects to identify the same performance obligations under ASU 2014-09 as compared with deliverables and separate units of account previously identified. The Company has evaluated ASU 2014-09 and does not expect the effect of adopting this guidance to be material to the unaudited Condensed Consolidated Financial Statements, however, the Company does expect additional disclosures in its notes to the unaudited Condensed Consolidated Financial Statements.
In January 2016, the FASB issued Accounting Standards Update 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”), which requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in earnings (rather than reported through other comprehensive income) and updates certain presentation and disclosure requirements. The guidance is effective for reporting periods (interim and annual) beginning after December 15, 2017, for public companies and should be adopted on a prospective basis. The Company is currently evaluating the impact that adopting this guidance will have on the unaudited Condensed Consolidated Financial Statements or notes thereto.
In February 2016, the FASB issued Accounting Standards Update 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that adopting this guidance will have on the unaudited Condensed Consolidated Financial Statements or notes thereto.
In June 2016, the FASB issued Accounting Standards Update 2016-13,
Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements
(“ASU 2016-13”), which requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted and is to be adopted on a modified retrospective basis. The Company is currently evaluating the impact that adopting this guidance will have on the unaudited Condensed Consolidated Financial Statements or notes thereto.
In August 2016, the FASB issued Accounting Standards Update 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”), which provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. A retrospective transition method should be used in the application of the amendments within ASU 2016-15. If retrospective application is considered impracticable, retrospective application may be used as of the earliest date practicable.
8
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company is currently evaluating the impact that adopti
ng this guidance will have on the Condensed Consolidated Financial Statements or notes thereto.
In November 2016, the FASB issued Accounting Standards Update 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”), which requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include restricted cash and restricted cash equivalents. If restricted cash is presented separately from cash and cash equivalents on the balance sheet, companies will have to reconcile the amounts presented on the statement of cash flows to the amounts on the balance sheet. Companies will also need to disclose information about the nature of the restrictions. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact that adopting this guidance will have on the unaudited Condensed Consolidated Financial Statements or notes thereto.
The Company has considered all other 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 or notes thereto.
2. EARNINGS PER SHARE
Basic earnings per share is 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, restricted stock and restricted stock units 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 29,
2017
|
|
|
June 30,
2016
|
|
|
June 29,
2017
|
|
|
June 30,
2016
|
|
Net income (loss) attributable to NCM, Inc. (in millions)
|
$
|
1.5
|
|
|
$
|
6.8
|
|
|
$
|
(3.5
|
)
|
|
$
|
2.5
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
60,609,975
|
|
|
|
59,831,675
|
|
|
|
60,459,531
|
|
|
|
59,721,270
|
|
Add: Dilutive effect of stock options and
restricted stock
|
|
289,202
|
|
|
|
724,864
|
|
|
|
—
|
|
|
|
592,842
|
|
Diluted
|
|
60,899,177
|
|
|
|
60,556,539
|
|
|
|
60,459,531
|
|
|
|
60,314,112
|
|
Income (loss) per NCM, Inc. share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.04
|
|
Diluted
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.04
|
|
The effect of 93,439,112, 77,320,333, 86,619,629 and 76,721,038 exchangeable NCM LLC common units held by the founding members for the three and six months ended June 29, 2017 and June 30, 2016, 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 dividends paid on NCM, Inc’s common stock. In addition, there were 466,706, 677, 4,598,092 and 56,383 stock options and non-vested (restricted) shares for the three and six months ended June 29, 2017 and June 30, 2016, respectively, excluded from the calculation as they were antidilutive. The Company’s 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
Intangible assets consist of contractual rights to provide the Company’s services within the theaters of the founding members and network affiliates and are stated at cost, net of accumulated amortization. The Company’s 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 Company’s 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.
9
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Common Unit Adjustments
—In accordance with NCM LLC’s Common Unit Adjustment Agre
ement 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 theater additions or dispositions during the previous year. In addition, NCM LLC’s Co
mmon Unit Adjustment Agreement requires that a Common Unit Adjustment occur for a specific founding member if its acquisition or disposition of theaters, in a single transaction or cumulatively since the most recent Common Unit Adjustment, results in an at
tendance increase or decrease in excess of two percent of the annual total attendance at the prior adjustment date.
During the first quarter of 2017, NCM LLC issued 2,351,029 common membership units to its founding members for the rights to exclusive access to the theater screens and attendees added, net of dispositions by the founding members to NCM LLC’s network during the 2016 fiscal year. Also during the first quarter of 2017, NCM, Inc. and NCM LLC entered into a binding Memorandum of Understanding (“MOU”) with AMC to effectuate aspects of
a final judgment (the “Final Judgment”) entered into by the Department of Justice (the “DOJ”) in connection with AMC’s acquisition of Carmike Cinemas, Inc. (“Carmike”). Pursuant to the MOU, the Company issued
18,425,423 NCM LLC
common membership units to AMC in respect of the annual attendance at such Carmike theaters in accordance with the Common Unit Adjustment Agreement during the first quarter of 2017.
AMC’s acquisition of Carmike meets the criteria for a Common Unit Adjustment because it resulted in an extraordinary attendance increase of approximately 9.5%.
Further, the Final Judgment required AMC to transfer advertising rights to 17 theaters from NCM LLC to another advertising provider. Pursuant to the MOU, AMC surrendered 4,657,673 NCM LLC common membership units in respect of such theaters. The 4,657,673 NCM LLC common membership units were comprised of (i) 2,850,453 NCM LLC common membership units pursuant to the adjustment for divested theaters in the Common Unit Adjustment Agreement and (ii) an additional 1,807,220 NCM LLC common membership units valued at $25.0 million
to compensate for NCM LLC’s lost operating income for these theaters during the 10-year term of the Final Judgment
.
To facilitate the theater transfers, during the first quarter of 2017, AMC and Regal entered into an amendment of its ESA with NCM LLC and Cinemark entered into a waiver of certain rights under its ESA. NCM LLC recorded a net intangible asset of $201.8 million during the first quarter of 2017 related to these transactions.
During the first quarter of 2016, NCM LLC issued 1,416,515 common membership units to its founding members for the rights to exclusive access to the theater screens and attendees added, net of dispositions by the founding members to NCM LLC’s network during the 2015 fiscal year and NCM LLC recorded a net intangible asset of $21.1 million during the first quarter of 2016 as a result of the Common Unit Adjustment.
Integration Payments
—If an existing on-screen advertising agreement with an alternative provider is in place with respect to any acquired theaters, the founding members may elect to receive common membership units related to those encumbered theaters in connection with the Common Unit Adjustment. If the founding members make this election, then 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”). Because the Carmike theaters are subject to an existing on-screen advertising agreement with an alternative provider, AMC will make integration payments to NCM LLC. The integration payments will continue until the earlier of (i) the date the theaters are transferred to NCM LLC’s network or (ii) the expiration of the ESA. During the three and six months ended June 29, 2017 and June 30, 2016, the Company recorded a reduction to net intangible assets of $4.3 million, $0.7 million, $4.7 million and $0.8 million, respectively, related to integration payments. These integration payments are due from AMC related to their acquisitions of theaters from Carmike and Rave Cinemas and from Cinemark related to their acquisition of theaters from Rave Cinemas. During the three and six months ended June 29, 2017 and June 30, 2016, AMC and Cinemark paid a total of $0.5 million, $0.1 million, $1.5 million and $1.0 million, respectively, in integration payments (as payments are made one quarter in arrears). If common membership units are issued to a founding member for newly acquired theaters 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 theaters 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 theaters with pre-existing advertising agreements.
10
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. RELATED PARTY TRANSACTIONS
Founding Member Transactions
—In connection with NCM, Inc.’s initial public offering (“IPO”), the Company entered into several agreements to define and regulate the relationships among NCM, Inc., NCM LLC and the founding members. They include the following:
|
•
|
ESAs.
Under the ESAs, NCM LLC is the exclusive provider within the United States of advertising services in the founding members’ theaters (subject to pre-existing contractual obligations and other limited exceptions for the benefit of the founding members). The advertising services include the use of the digital content network (“DCN”) equipment required to deliver the on-screen advertising and other content included in the pre-show, use of the lobby entertainment network (“LEN”) and rights to sell and display certain lobby promotions. Further, 30 to 60 seconds of advertising included in the pre-show is sold to NCM LLC’s founding members to satisfy the founding members’ on-screen advertising commitments under their beverage concessionaire agreements. In consideration for access to the founding members’ theaters, theater patrons, the network equipment required to display on-screen and LEN video advertising and the use of theaters for lobby promotions, the founding members receive a monthly theater access fee.
|
|
•
|
Common Unit Adjustment Agreement.
The common unit adjustment agreement provides a mechanism for increasing or decreasing the membership units held by the founding members based on the acquisition or construction of new theaters or sale or closure of theaters that are operated by each founding member and included in NCM LLC’s network.
|
|
•
|
Tax Receivable Agreement.
The tax receivable agreement provides for the effective payment by NCM, Inc. to the founding members of 90% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that is actually realized as a result of certain increases in NCM, Inc.’s proportionate share of tax basis in NCM LLC’s tangible and intangible assets resulting from the IPO and related transactions.
|
|
•
|
Software License Agreement.
At the date of the Company’s IPO, NCM LLC was granted a perpetual, royalty-free license from NCM LLC’s founding members to use certain proprietary software that existed at the time for the delivery of digital advertising and other content through the DCN to screens in the U.S. NCM LLC has made improvements to this software since the IPO date and NCM LLC owns those improvements, except for improvements that were developed jointly by NCM LLC and NCM LLC’s founding members, if any.
|
11
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables provide summaries 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 29,
2017
|
|
|
June 30,
2016
|
|
|
June 29,
2017
|
|
|
June 30,
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beverage concessionaire revenue (included in advertising
revenue)
(1)
|
|
$
|
7.6
|
|
|
$
|
7.1
|
|
|
$
|
16.0
|
|
|
$
|
14.3
|
|
Advertising inventory revenue (included in advertising
revenue)
(2)
|
|
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
0.2
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theater access fee
(3)
|
|
|
18.7
|
|
|
|
18.9
|
|
|
|
39.3
|
|
|
|
37.6
|
|
Purchase of movie tickets and concession products and
rental of theatre space (included in selling and
marketing costs)
(4)
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Purchase of movie tickets and concession products and
rental of theatre space (included in advertising operating
costs)
(4)
|
|
|
0.1
|
|
|
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
Purchase of movie tickets and concession products and
rental of theatre space (included in administrative
and other costs)
(4)
|
|
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
0.1
|
|
Non-operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from notes receivable (included in
interest income)
(5)
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.4
|
|
(1)
|
For the six months ended June 29, 2017 and June 30, 2016, two of the founding members purchased 60 seconds of on-screen advertising time and one founding member purchased 30 seconds (with all three founding members having a right to purchase up to 90 seconds) from NCM LLC to satisfy their obligations under their beverage concessionaire agreements at a 30 second equivalent cost per thousand (“CPM”) rate specified by the ESA.
|
(2)
|
The value of such purchases is calculated by reference to NCM LLC’s advertising rate card.
|
(3)
|
Comprised of payments per theater attendee and payments per digital screen with respect to the founding member theaters included in the Company’s network, including payments for access to higher quality digital cinema equipment.
|
(4)
|
Used primarily for marketing to NCM LLC’s advertising clients.
|
(5)
|
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.
|
|
|
As of
|
|
Included in the Condensed Consolidated Balance Sheets:
|
|
June 29,
2017
|
|
|
December 29,
2016
|
|
Purchase of movie tickets and concession products
(included in prepaid expenses)
|
|
|
0.1
|
|
|
|
—
|
|
Current portion of notes receivable - founding members
(1)
|
|
|
4.2
|
|
|
|
5.6
|
|
Long-term portion of notes receivable - founding members
(1)
|
|
|
8.3
|
|
|
|
8.3
|
|
Interest receivable on notes receivable (included in other
current assets)
(1)
|
|
|
0.3
|
|
|
|
0.3
|
|
Common unit adjustments, net of amortization and integration
payments (included in intangible assets)
(2)
|
|
|
715.0
|
|
|
|
529.9
|
|
Current payable to founding members under tax receivable
agreement
(3)
|
|
|
9.5
|
|
|
|
18.4
|
|
Long-term payable to founding members under tax receivable
agreement
(3)
|
|
|
134.3
|
|
|
|
143.4
|
|
12
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
(1)
|
Refer to the discussion of notes receivable from the founding
members above.
|
|
(2)
|
Refer to Note 3—
Intangible Assets
for further information on common unit adjustments and integration payments.
|
|
(3)
|
The Company paid the founding members $17.3 million in the second quarter of 2017 which was for the 2016 tax year. The Company paid the founding members $23.5 million in the first quarter of 2016, of which $2.7 million was net operating loss carrybacks for the 2013 year and $20.8 million was for the 2015 tax year.
|
Pursuant to the terms of the NCM LLC Operating Agreement in place since the completion of the Company’s 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 of available cash for the three and six months ended June 29, 2017 and June 30, 2016 were as follows (in millions):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 29,
2017
|
|
|
June 30,
2016
|
|
|
June 29,
2017
|
|
|
June 30,
2016
|
|
AMC
|
|
$
|
6.2
|
|
|
$
|
3.2
|
|
|
$
|
8.2
|
|
|
$
|
3.5
|
|
Cinemark
|
|
|
4.5
|
|
|
|
2.8
|
|
|
|
6.0
|
|
|
|
3.2
|
|
Regal
|
|
|
4.5
|
|
|
|
2.8
|
|
|
|
6.0
|
|
|
|
3.2
|
|
Total founding members
|
|
|
15.2
|
|
|
|
8.8
|
|
|
|
20.2
|
|
|
|
9.9
|
|
NCM, Inc.
|
|
|
9.9
|
|
|
|
6.1
|
|
|
|
13.1
|
|
|
|
7.0
|
|
Total
|
|
$
|
25.1
|
|
|
$
|
14.9
|
|
|
$
|
33.3
|
|
|
$
|
16.9
|
|
The mandatory distributions of available cash by NCM LLC to its founding members for the three months ended June 29, 2017 of $15.2 million is included in amounts due to founding members on the unaudited Condensed Consolidated Balance Sheets as of June 29, 2017 and will be made in the third quarter of 2017. The mandatory distributions to NCM, Inc. are eliminated in consolidation.
Amounts due to founding members as of June 29, 2017 were comprised of the following (in millions):
|
|
AMC
|
|
|
Cinemark
|
|
|
Regal
|
|
|
Total
|
|
Theatre access fees, net of beverage revenues
|
|
$
|
1.6
|
|
|
$
|
1.0
|
|
|
$
|
1.5
|
|
|
$
|
4.1
|
|
Distributions payable to founding members
|
|
|
6.2
|
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
15.2
|
|
Integration payments due from founding members
|
|
|
(4.1
|
)
|
|
|
(0.2
|
)
|
|
|
—
|
|
|
|
(4.3
|
)
|
Cost and other reimbursement
|
|
|
(1.0
|
)
|
|
|
0.1
|
|
|
|
—
|
|
|
|
(0.9
|
)
|
Total amounts due to founding members
|
|
$
|
2.7
|
|
|
$
|
5.4
|
|
|
$
|
6.0
|
|
|
$
|
14.1
|
|
Amounts due to founding members as of December 29, 2016 were comprised of the following (in millions):
|
|
AMC
|
|
|
Cinemark
|
|
|
Regal
|
|
|
Total
|
|
Theatre access fees, net of beverage revenues
|
|
$
|
1.6
|
|
|
$
|
0.9
|
|
|
$
|
1.4
|
|
|
$
|
3.9
|
|
Distributions payable to founding members
|
|
|
12.3
|
|
|
|
13.6
|
|
|
|
14.0
|
|
|
|
39.9
|
|
Integration payments due from founding members
|
|
|
(0.7
|
)
|
|
|
(0.4
|
)
|
|
|
—
|
|
|
|
(1.1
|
)
|
Cost and other reimbursement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total amounts due to founding members
|
|
$
|
13.2
|
|
|
$
|
14.1
|
|
|
$
|
15.4
|
|
|
$
|
42.7
|
|
Common Unit Membership Redemption
—
The NCM LLC Operating Agreement provides a redemption right of the founding members to exchange common membership units of NCM LLC for shares of the Company’s common stock on a one-for-one basis, or at the Company’s option, a cash payment equal to the market price of one share of NCM, Inc. common stock. During the fourth quarter of 2015, AMC exercised the redemption right of an aggregate 200,000 common membership units for a like number of shares of NCM, Inc.’s common stock. These shares remained outstanding as of June 29, 2017. During the six months ended June 29, 2017, AMC received cash dividends of approximately $0.1 million on these shares of NCM, Inc. common stock.
Memorandum of Understanding with AMC
—
Pursuant to the Final Judgment, AMC is required to divest the majority of its equity interests in NCM LLC and NCM, Inc., so that by June 20, 2019 it owns no more than 4.99% of NCM LLC’s
13
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
common membersh
ip units and NCM, Inc. common stock, taken together, on a fully converted basis (“NCM’s outstanding equity interests”). AMC must complete the divestiture per the following schedule: (i) on or before December 20, 2017, AMC must own no more than 15.0% of NCM
’s outstanding equity interests, (ii) on or before December 20, 2018, AMC must own no more than 7.5% of NCM’s outstanding equity interests and (iii) on or before June 20, 2019, AMC must own no more than 4.99% of NCM’s outstanding equity interests.
Pursuan
t to the MOU, AMC also has agreed, among other things, subject to limited exceptions to retain at least 4.5% of NCM’s outstanding equity interests during the term of the Final Judgment, subject to certain exceptions which allow for certain sell downs after
the 30-month anniversary of the MOU.
AMC also agreed to reimburse the Company for its incurred and ongoing costs and expenses in connection with the Final Judgment including, but not limited to, its financial advisor and legal fees up to $1.0 million of s
uch costs and expenses. During the six months ended June 29, 2017, the Company
incurred $1.2 million of
these costs, of which $1.0 million was recorded as a reduction to “Amounts due to founding members” within the Condensed Consolidated Balance Sheets an
d the remaining $0.2 million is included in administrative costs within the Condensed Consolidated Income Statement
AC JV, LLC Transactions
—In December 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. The Company accounts for its investment in AC JV, LLC under the equity method of accounting in accordance with ASC 323-30,
Investments—Equity Method and Joint Ventures
(“ASC 323-30”) because AC JV, LLC is a limited liability company with the characteristics of a limited partnership and ASC 323-30 requires the use of equity method accounting unless the Company’s interest is so minor that it would have virtually no influence over partnership operating and financial policies. Although NCM LLC does not have a representative on AC JV, LLC’s Board of Directors or any voting, consent or blocking rights with respect to the governance or operations of AC JV, LLC, the Company concluded that its interest was more than minor under the accounting guidance. The Company’s investment in AC JV, LLC was $1.1 million and $1.0 million as of June 29, 2017 and December 29, 2016, respectively. Equity in earnings from AC JV, LLC for the three and six months ended June 29, 2017 and June 30, 2016, were $0.0 million, $0.0 million, $0.1 million and $0.0 million, respectively, and is included in non-operating expenses in the unaudited Condensed Consolidated Statements of Income.
Related Party Affiliates
—NCM LLC has an agreement with LA Live, an affiliate of The Anschutz Corporation to provide in-theater advertising. The Anschutz Corporation is a wholly-owned subsidiary of the Anschutz Company, which is the controlling stockholder of Regal. During the three and six months ended June 29, 2017 and June 30, 2016, there was $0.1 million, $0.1 million, $0.1 million and $0.1 million, respectively, included in advertising operating costs related to LA Live, and there was approximately $0.1 million and $0.1 million of accounts payable with this company as of June 29, 2017 and December 29, 2016, respectively.
Other Transactions
—NCM LLC has an agreement with AEG Live, an affiliate of The Anschutz Corporation, for AEG Live to showcase musical artists in NCM LLC’s pre-show. During the three and six months ended June 29, 2017 and June 30, 2016, NCM LLC recorded approximately $0.3 million, $0.4 million $0.6 million and $0.8 million, respectively, in revenue from AEG Live. As of June 29, 2017 and December 29, 2016, NCM LLC had approximately $0.2 million and $0.2 million, respectively, of accounts receivable from AEG Live.
5. BORROWINGS
The following table summarizes NCM LLC’s total outstanding debt as of June 29, 2017 and December 29, 2016 and the significant terms of its borrowing arrangements (in millions):
|
|
Outstanding
Balance
as
of
|
|
|
|
|
|
|
|
Borrowings
|
|
June 29,
2017
|
|
|
December 29,
2016
|
|
|
Maturity
Date
|
|
Interest
Rate
|
|
Revolving credit facility
|
|
$
|
10.0
|
|
|
$
|
15.0
|
|
|
November
26,
2019
|
|
(1)
|
|
Term loans
|
|
|
270.0
|
|
|
|
270.0
|
|
|
November
26,
2019
|
|
(1)
|
|
Senior secured notes due 2022
|
|
|
400.0
|
|
|
|
400.0
|
|
|
April
15,
2022
|
|
|
6.000%
|
|
Senior unsecured notes due 2026
|
|
|
250.0
|
|
|
|
250.0
|
|
|
August 15, 2026
|
|
|
5.750%
|
|
Total borrowings
|
|
$
|
930.0
|
|
|
$
|
935.0
|
|
|
|
|
|
|
|
Less: debt issuance costs related to term
loans and senior notes
|
|
|
(9.7
|
)
|
|
|
(10.7
|
)
|
|
|
|
|
|
|
Carrying value of long-term debt
|
|
$
|
920.3
|
|
|
$
|
924.3
|
|
|
|
|
|
|
|
|
(1)
|
The interest rates on the revolving credit facility and term loans are described below.
|
14
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Senior Secured Credit Facility
—As of June 29, 2017, NCM LLC’s senior secured credit facility consisted of a $175.0 million revolving credit facility and
a $270.0 million term loan. On May 26, 2016, NCM LLC entered into an incremental amendment of its senior secured credit facility whereby the revolving credit facility was increased by $40.0 million from $135.0 million to $175.0 million.
Revolving Credit Facility
—The revolving credit facility portion of NCM LLC’s 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 29, 2017, NCM LLC’s total availability under the $175.0 million revolving credit facility was $160.2 million, net of $4.8 million in letters of credit. The unused line fee is 0.50% per annum. Borrowings under the revolving credit facility bear interest at NCM LLC’s 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 weighted-average interest rate on the outstanding balance on the revolving credit facility as of June 29, 2017 was 4.2%.
Term Loans
—The interest rate on the term loans is a rate chosen at NCM LLC’s 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 29, 2017 was 3.8%. 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 29, 2017, 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 LLC’s consolidated net senior secured leverage ratio is below 6.5 times and NCM LLC is in compliance with its debt covenants. As of June 29, 2017, NCM LLC’s consolidated net senior secured leverage ratio was 3.3 times (versus the covenant of 6.5 times).
Senior Secured Notes due 2022
—On April 27, 2012, NCM LLC completed a private placement of $400.0 million in aggregate principal amount of 6.000% Senior Secured Notes (the “Notes due 2022”) for which the registered exchange offering was completed on November 26, 2012. The Notes due 2022 pay interest semi-annually in arrears on April 15 and October 15 of each year, which commenced on October 15, 2012. The Notes due 2022 are senior secured obligations of NCM LLC, rank the same as NCM LLC’s senior secured credit facility, subject to certain exceptions, and share in the same collateral that secures NCM LLC’s obligations under the senior secured credit facility. The Notes due 2022 contain certain non-maintenance covenants with which NCM LLC was in compliance as of June 29, 2017.
Senior Unsecured Notes due 2026
—On August 19, 2016, NCM LLC completed a private placement of $250.0 million in aggregate principal amount of 5.750% Senior Unsecured Notes (the “Notes due 2026”). The Notes due 2026 pay interest semi-annually in arrears on February 15 and August 15 of each year, which commenced on February 15, 2017. The Notes due 2026 were issued at 100% of the face amount thereof and are the senior unsecured obligations of NCM LLC and will be effectively subordinated to all existing and future secured debt, including the Notes due 2022, its senior secured credit facility and any future asset backed loan facility. The Notes due 2026 will rank equally in right of payment with all of NCM LLC’s existing and future senior indebtedness, including the Notes due 2022, NCM LLC’s existing senior secured credit facility, any future asset backed loan facility, in each case, without giving effect to collateral arrangements. The Notes due 2026 will be effectively subordinated to all liabilities of any subsidiaries that NCM LLC may form or acquire in the future, unless those subsidiaries become guarantors of the Notes due 2026. NCM LLC does not currently have any subsidiaries, and the Notes due 2026 will not be guaranteed by any subsidiaries that NCM LLC may form or acquire in the future except in very limited circumstances. The Notes due 2026 contain certain non-maintenance covenants with which NCM LLC was in compliance as of June 29, 2017.
6. INCOME TAXES
The Company is subject to taxation in the U.S. and various states. The Company has established a contingency reserve for material, known tax exposures. The Company’s reserve reflects management’s judgment as to the resolution of the issues involved if subject to judicial review or other settlement. While the Company believes its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve. With respect to the reserve, the Company’ income tax expense would include (i) any changes in tax reserves arising from material changes during the period in the facts and
15
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
circumstances (i.e., new information) surrounding a tax issue and (ii) any difference from t
he Company’s tax position as recorded in the financial statements and the final resolution of a tax issue during the period. Such resolution could materially increase or decrease income tax expense in the unaudited Condensed Consolidated Financial Stateme
nts in future periods and could impact operating cash flows.
Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in the unaudited Condensed Consolidated Financial Statements. The total amount of unrecognized tax benefits as of June 29, 2017 and December 29, 2016, was $1.6 million and $1.6 million, respectively, excluding accrued interest and penalties, which if recognized would affect the effective tax rate. The Company recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense in the unaudited Condensed Consolidated Statements of Income and records the liability in income taxes payable in the unaudited Condensed Consolidated Balance Sheets. The Company recognized an inconsequential amount in interest and penalties during the three and six months ended June 29, 2017 and June 30, 2016, respectively.
The Company has accrued $0.5 million and $0.4 million for the payment of interest and penalties as of June 29, 2017 and December 29, 2016, respectively. It is reasonably possible that the Company’s total unrecognized tax benefits will decrease by approximately $1.3 million during the next twelve months due to the expiration of certain statutes of limitations.
During the six months ended June 29, 2017, the Company recorded a reduction to its deferred tax assets of approximately $35.0 million related to the tax effective difference between the tax basis and book basis of the intangible assets recorded for the extraordinary Common Unit Adjustment, as discussed further in Note 3 –
Intangible Assets
. Further, the Company recorded a deferred tax liability of approximately $15.8 million during the six months ended June 29, 2017 related to imputed interest on the integration payments associated with the extraordinary Common Unit Adjustment. These items also resulted in a net reduction to additional paid-in capital of approximately $50.8 million.
7. 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 individually and in the aggregate 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 theater 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 one to twenty years, prior to any renewal periods of which some are at the option of the Company. As of June 29, 2017, the maximum potential amount of future payments the Company could be required to make pursuant to the minimum revenue guarantees is $62.4 million over the remaining terms of the network affiliate agreements, which calculation does not include any potential future extensions. As of June 29, 2017 and December 29, 2016, the Company had no liabilities recorded for these obligations, as such guarantees are less than the expected share of revenue paid to the network affiliate.
Theater Access Fee Guarantees
—In consideration for NCM LLC’s access to the founding members’ theater attendees for on-screen advertising and use of lobbies and other space within the founding members’ theaters for the LEN and lobby promotions, the founding members receive a monthly theater access fee under the ESAs. The theater access fee is composed of a fixed payment per patron, a fixed payment per digital screen (connected to the DCN) and a fee for access to higher quality digital cinema equipment. The payment per theater patron increases by 8% every five years, with this increase occurring for fiscal year 2017, and the payment per digital screen and for digital cinema equipment increases annually by 5%. The theater access fee paid in the aggregate to all founding members cannot be less than 12% of NCM LLC’s aggregate advertising revenue (as defined in the ESA), or it will be adjusted upward to reach this minimum payment. As of June 29, 2017 and December 29, 2016, the Company had no liabilities recorded for the minimum payment, as the theater access fee was in excess of the minimum.
16
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8
. 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 management’s 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.
Other investments consisted of the following (in millions):
|
|
As of
|
|
|
|
June 29,
2017
|
|
|
December 29,
2016
|
|
Investment in AC JV, LLC
(1)
|
|
$
|
1.1
|
|
|
$
|
1.0
|
|
Other investments
(2)
|
|
|
2.5
|
|
|
|
5.6
|
|
Total
|
|
$
|
3.6
|
|
|
$
|
6.6
|
|
|
(1)
|
Refer to Note 4—
Related Party Transactions
.
|
|
(2)
|
The Company received equity securities in privately held companies as consideration for a portion of advertising contracts. The equity securities were accounted for under the cost method and represent an ownership of less than 20%. The Company does not exert significant influence on these companies’ operating or financial activities.
|
During the three and six months ended June 29, 2017 and June 30, 2016, the Company recorded other-than-temporary impairment charges of $1.7 million, $0.7 million, $3.1 million and $0.7 million, respectively, on certain of its investments due to a significant deterioration in the business prospects of the investee or new information regarding the fair value of the investee in the second quarter of 2017. These impairment charges brought the investments to a remaining fair value of $0.1 million. The fair value of the other investments has not been estimated as of June 29, 2017 and December 29, 2016 as there were no identified events or changes in the circumstances that had a significant adverse effect on the fair value of those investments and it is not practicable to do so because the equity securities are not in publicly traded companies. As the inputs to the determination of fair value are based upon non-identical assets and use significant unobservable inputs, they have been classified as Level 3 in the fair value hierarchy.
As of June 29, 2017 and December 29, 2016, the Company had notes receivable totaling $12.5 million and $13.9 million, respectively, from its founding members related to the sale of Fathom Events, as described in Note 4—
Related Party Transactions
. These notes were initially valued using comparative market multiples. There were no identified events or changes in circumstances that had a significant adverse effect on the fair value of the notes receivable. The notes 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.
17
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Company’s financial instruments where carrying va
lues do not approximate fair value were as follows (in millions):
|
|
As of June 29,
2017
|
|
|
As of December 29,
2016
|
|
|
|
Carrying Value
|
|
|
Fair Value
(1)
|
|
|
Carrying Value
|
|
|
Fair Value
(1)
|
|
Term loans
|
|
$
|
270.0
|
|
|
$
|
270.3
|
|
|
$
|
270.0
|
|
|
$
|
272.7
|
|
Notes due 2022
|
|
|
400.0
|
|
|
|
410.6
|
|
|
|
400.0
|
|
|
|
414.5
|
|
Notes due 2026
|
|
|
250.0
|
|
|
|
243.5
|
|
|
|
250.0
|
|
|
|
256.7
|
|
|
(1)
|
The Company has estimated the fair value on an average of at least two non-binding broker quotes and the Company’s 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 Company’s 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
|
|
|
|
Fair Value as
of
June 29,
2017
|
|
|
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)
|
|
$
|
4.3
|
|
|
$
|
1.0
|
|
|
$
|
3.3
|
|
|
$
|
—
|
|
Short-term marketable securities
(2)
|
|
|
18.8
|
|
|
|
2.5
|
|
|
|
16.3
|
|
|
|
—
|
|
Long-term marketable securities
(2)
|
|
|
18.2
|
|
|
|
15.9
|
|
|
|
2.3
|
|
|
|
—
|
|
Total assets
|
|
$
|
41.3
|
|
|
$
|
19.4
|
|
|
$
|
21.9
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Fair Value as
of
December 29,
2016
|
|
|
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)
|
|
$
|
5.3
|
|
|
$
|
0.3
|
|
|
$
|
5.0
|
|
|
$
|
—
|
|
Short-term marketable securities
(2)
|
|
|
26.1
|
|
|
|
5.2
|
|
|
|
20.9
|
|
|
|
—
|
|
Long-term marketable securities
(2)
|
|
|
19.6
|
|
|
|
17.3
|
|
|
|
2.3
|
|
|
|
—
|
|
Total assets
|
|
$
|
51.0
|
|
|
$
|
22.8
|
|
|
$
|
28.2
|
|
|
$
|
—
|
|
|
(1)
|
Cash Equivalents
—The Company’s 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.
|
18
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
(2)
|
Short-Term and Long-Term Marketable Securities
—The carrying amount and fai
r value of the marketable securities are equivalent since the Company accounts for these instruments at fair value. The Company’s government agency bonds, commercial paper and certificates of deposit are valued using third party broker quotes. The value of
the Company’s 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 reco
rded at a lower level in the fair value hierarchy. The value of commercial paper and certificates of deposit 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 29, 2017 and June 30, 2016, there was an inconsequential amount of net realiz
ed 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 29, 2017 and December 29, 2016, 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 29, 2017 and December 29, 2016 were as follows:
|
|
As of June 29, 2017
|
|
|
|
Amortized
Cost
Basis
(in
millions)
|
|
|
Aggregate
Fair
Value
(in
millions)
|
|
|
Maturities
(1)
(in
years)
|
|
MARKETABLE SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term U.S. government treasury bonds
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
|
|
0.3
|
|
Short-term municipal bonds
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
—
|
|
Short-term U.S. government agency bonds
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
—
|
|
Short-term commercial paper:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
6.6
|
|
|
|
6.6
|
|
|
|
0.1
|
|
Industrial
|
|
|
7.3
|
|
|
|
7.3
|
|
|
|
0.1
|
|
Short-term certificates of deposit
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
0.3
|
|
Total short-term marketable securities
|
|
|
18.8
|
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term municipal bonds
|
|
|
1.9
|
|
|
|
1.9
|
|
|
|
2.6
|
|
Long-term U.S. government agency bonds
|
|
|
14.2
|
|
|
|
14.1
|
|
|
|
2.9
|
|
Long-term certificates of deposit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
2.1
|
|
Total long-term marketable securities
|
|
|
18.3
|
|
|
|
18.2
|
|
|
|
|
|
Total marketable securities
|
|
$
|
37.1
|
|
|
$
|
37.0
|
|
|
|
|
|
19
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
As of December 29, 2016
|
|
|
|
Amortized
Cost
Basis
(in
millions)
|
|
|
Aggregate
Fair
Value
(in
millions)
|
|
|
Maturities
(1)
(in
years)
|
|
MARKETABLE SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term U.S. government treasury bonds
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
|
|
0.8
|
|
Short-term municipal bonds
|
|
|
2.9
|
|
|
|
2.9
|
|
|
|
0.6
|
|
Short-term U.S. government agency bonds
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
0.5
|
|
Short-term commercial paper
|
|
|
13.0
|
|
|
|
13.0
|
|
|
|
0.1
|
|
Short-term certificates of deposit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
7.7
|
|
|
|
7.7
|
|
|
|
0.6
|
|
Industrial
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.9
|
|
Total short-term marketable securities
|
|
|
26.1
|
|
|
|
26.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term municipal bonds
|
|
|
1.9
|
|
|
|
1.8
|
|
|
|
2.7
|
|
Long-term U.S. government agency bonds
|
|
|
15.6
|
|
|
|
15.5
|
|
|
|
3.5
|
|
Long-term certificates of deposit
|
|
|
2.2
|
|
|
|
2.3
|
|
|
|
2.6
|
|
Total long-term marketable securities
|
|
|
19.7
|
|
|
|
19.6
|
|
|
|
|
|
Total marketable securities
|
|
$
|
45.8
|
|
|
$
|
45.7
|
|
|
|
|
|
|
(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.
|
9. SUBSEQUENT EVENT
On July 14, 2017, NCM LLC acquired Fantasy Movie League, the maker of an online and mobile game that allows moviegoers to predict the movie box office for $0.2 million in cash. The game will be featured in the Company’s new pre-show and mobile app as part of the Company’s digital strategy to reach and engage movie audiences with content, commerce and gaming beyond the movie theater screen. The preliminary purchase price allocation is in process.
On August 2, 2017, the Company declared a cash dividend of $0.22 per share (approximately $13.3 million) on each share of the Company’s common stock (not including outstanding restricted stock which will accrue dividends until the shares vest) to stockholders of record on August 12, 2017 to be paid on August 31, 2017.
20