National CineMedia, Inc.
National CineMedia, Inc. (Form: 10-K, Received: 03/28/2007 15:09:58)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K

 


 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 28, 2006

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 001-33296

 


NATIONAL CINEMEDIA, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   20-5665602
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

9110 East Nichols Avenue, Suite 200

Centennial, Colorado

  80112-3405
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (303) 792-3600

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share

(Title of class)

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 


Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   þ

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ¨     No   þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):.

Large accelerated filer   ¨     Accelerated filer   ¨     Non-accelerated filer   þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). .     Yes   ¨     No   þ

The initial public offering of National CineMedia, Inc.’s common stock, par value $0.01 per share, was completed on February 13, 2007. There was no public market for the Company’s common stock prior to that date.

As of March 22, 2007, 42,000,000 shares of the registrant’s common stock, par value of $0.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: None

 



TABLE OF CONTENTS

 

          Page
   PART I   

Item 1.

   Business    3

Item 1A.

   Risk Factors    17

Item 1B.

   Unresolved Staff Comments    28

Item 2.

   Properties    29

Item 3.

   Legal Proceedings    29

Item 4.

   Submission of Matters to a Vote of Security Holders    29
   PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    29

Item 6.

   Selected Financial Data    30

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    36

Item 7A.

   Quantitative and Qualitative Disclosures about Market Risk    55

Item 8.

   Financial Statements and Supplementary Data    56

Item 9.

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure    56

Item 9A.

   Controls and Procedures    56

Item 9B.

   Other Information    56
   PART III   

Item 10.

   Directors and Executive Officers of the Registrant    56

Item 11.

   Executive Compensation    62

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    77

Item 13.

   Certain Relationships and Related Transactions    79

Item 14.

   Principal Accountant Fees and Services    93
   PART IV   

Item 15.

   Exhibits and Financial Statement Schedules    93

Signatures

      94

 

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PART I

The information in this Form 10-K contains certain forward-looking statements, including statements related to trends in the Company’s business. The Company’s actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as those discussed elsewhere in this Form 10-K.

In this document, unless the context otherwise requires:

 

   

“NCM Inc.,” “we,” “us” or “our” refer to National CineMedia, Inc., a newly-formed Delaware corporation, and its consolidated subsidiary National CineMedia, LLC;

 

   

“NCM LLC” refers to National CineMedia, LLC, a Delaware limited liability company that is the current operating company for our business, which NCM Inc. acquired an interest in, and become a member and the sole manager of, upon completion of our initial public offering (the “offering”), which closed on February 13, 2007;

 

   

“AMC” refers to AMC Entertainment Inc. and its subsidiaries, National Cinema Network, Inc., or “NCN,” which contributed assets used in the operations of NCM LLC and formed NCM LLC in March 2005, and American Multi-Cinema, Inc., which became party to an amended and restated exhibitor services agreement with NCM LLC upon completion of the offering;

 

   

“Cinemark” refers to Cinemark Holdings, Inc. and its subsidiaries, Cinemark Media, Inc., which joined NCM LLC in July 2005, and Cinemark USA, Inc., which became party to an amended and restated exhibitor services agreement with NCM LLC upon completion of the offering; and

 

   

“Regal” refers to Regal Entertainment Group and its subsidiaries, Regal CineMedia Corporation, or “RCM,” which contributed assets used in the operations of NCM LLC, Regal CineMedia Holdings, LLC, which formed NCM LLC in March 2005, and Regal Cinemas, Inc., which became party to an amended and restated exhibitor services agreement with NCM LLC upon completion of the offering.

 

Item 1. Business

The Company

National CineMedia, Inc., a Delaware corporation organized on October 5, 2006, is a holding company that manages its consolidated subsidiary NCM LLC, but has no business operations or material assets other than its ownership interest of approximately 44.8% of the common membership units in NCM LLC in connection with the initial public offering of NCM Inc. as discussed more fully in “Corporate History” below. NCM LLC’s founding members, AMC, Cinemark and Regal, hold the remaining 55.2% of NCM LLC’s common membership units. Our only source of cash flow from operations will be distributions from NCM LLC pursuant to the NCM LLC operating agreement. We also receive management fees pursuant to a management services agreement between us and NCM LLC as reimbursement of certain administrative expenses.

NCM LLC has long-term exhibitor services agreements with NCM LLC’s founding members—AMC, Cinemark and Regal, the three largest motion picture exhibition companies in the U.S.—and multi-year agreements with several other theatre operators whom we refer to as network affiliates. The exhibitor services agreements grants exclusive rights, subject to limited exceptions, to sell advertising and meeting services and distribute entertainment programming in those theatres. The network affiliate agreements grant us exclusive rights, subject to limited exceptions, to sell advertising on their theatre screens.

During the year ended December 28, 2006, we generated pro forma revenue, operating income and adjusted EBITDA of $275.7 million, $126.8 million and $138.3 million, respectively. See the notes to “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Summary Historical and Pro Forma Financial and Operating Data” and the unaudited pro forma financial information contained elsewhere in this document for a discussion of the calculation of adjusted EBITDA. For additional financial information about our business, including factors which affect comparability of our financial results across periods, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” NCM LLC’s historical financial statements and related notes, and the unaudited pro forma financial information included elsewhere in this document. Our historical operating and pro forma results for these periods do not include payments that will be made by AMC to us pursuant to the Loews screen integration agreement as such payments will be recorded directly to our equity account for accounting purposes. These Loews payments would have been $9.6 million for the year ended December 31, 2006. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Company Following the Completion of the Offering—Loews Payments.”

 

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We maintain a website at www.ncm.com , on which we will post our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports under the heading “Investor Relations” as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. We do not incorporate the information on our website into this document and you should not consider any information on, or that can be accessed through, our website as part of this document. You may read and copy any materials we file with the Securities and Exchange Commission at the Securities and Exchange Commission Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The Securities and Exchange Commission also maintains a website that contains our reports and other information at www.sec.gov.

Description of Business

Overview

We operate the largest digital in-theatre network in North America that allows us to distribute advertisements and other content for our advertising, meetings and events businesses utilizing our proprietary digital content network. We currently derive revenue principally from the following activities:

 

   

Advertising : We develop, produce, sell and distribute a branded, pre-feature entertainment and advertising program called “ FirstLook ,” along with an advertising program for our lobby entertainment network and various marketing and promotional products in theatre lobbies; for the year ended December 28, 2006, advertising accounted for 90.7% of our total pro forma revenue;

 

   

CineMeetings : We facilitate live and pre-recorded networked and single-site meetings and corporate events in the movie theatres throughout our network; for the year ended December 28, 2006, CineMeetings accounted for 7.9% of our total pro forma revenue; and

 

   

Digital Programming Events (now known as NCM Fathom) : We distribute live and pre-recorded concerts, sporting events and other entertainment programming content to theatres across our digital network; for the year ended December 28, 2006, digital programming events accounted for 1.3% of our total pro forma revenue.

We believe that the reach, scope and digital delivery capability of our network provide an effective platform for national, regional and local advertisers to reach a young, affluent and engaged audience on a highly targeted and measurable basis. Our network is currently located in 46 states and the District of Columbia and covers all of the top 25, as well as 49 of the top 50, Designated Market Areas ® , or DMAs ® , and 154 DMAs ® in total. DMA ® is a registered trademark of Nielsen Media Research, Inc . During 2006, approximately 550 million patrons, representing 38% of the total U.S. theatre attendance, attended movies shown in theatres owned by NCM LLC’s founding members. As of December 28, 2006, we had a total of 14,081 screens in our network, as set forth in the table below:

Our Network*

(as of December 28, 2006)

 

          Screens
     Theatres    Digital    Total

Founding Members

   1,025    11,202    13,127

Network Affiliates

   88    261    954
              

Total

   1,113    11,463    14,081
              

* Excludes Loews Cineplex Entertainment Inc.

On January 26, 2006, AMC acquired the Loews theatre circuit. As of December 28, 2006, Loews operated approximately 108 theatres with 1,305 screens. The Loews screens will become part of our network on an exclusive basis beginning on June 1, 2008, subject to the run-out of certain pre-existing contractual obligations for on-screen advertising existing on May 31, 2008. During 2006, approximately 63.2 million movie patrons attended Loews’ theatres in the United States.

 

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On-Screen Advertising

Our on-screen digital pre-feature show consists of a national and regional FirstLook program and a local advertising presentation. The pre-feature show generally ranges in length from 20 to 30 minutes and ends at or about the advertised movie show time. National advertising is sold on a CPM (cost per thousand) basis, while local and regional advertising is sold on a per-screen, per-week basis. While we generally sell our network as one single national network, we also have the ability to sell portions of our network on a regional basis, offering various price points for national advertisers and expanding the range of potential buyers.

The pre-feature show begins with a three to five-minute looping segment which consists of a digital carousel of static and moving slide images. This program can loop partially or repeatedly and provides a mechanism to contract or expand the pre-feature show depending on the time between feature film presentations. The digital slides shown at the beginning of the pre-feature show represent primarily local advertising, which generally is our lowest cost advertising inventory. We often bundle time in the digital slide presentation with other local on-screen or lobby advertising inventory.

Following the conclusion of the digital carousel, the branded FirstLook program commences with a digital full-motion presentation. In January 2006, FirstLook replaced the entertainment pre-shows of AMC and Regal in order to provide a more entertaining pre-feature program for theatre patrons and a more effective advertising platform. The FirstLook program integrates advertising with entertainment content segments from our content partners.

FirstLook is comprised of up to four segments, each approximately four to seven minutes in length. Segment four, the first section of FirstLook , begins approximately 20 minutes prior to the advertised show time and generally includes local and regional advertising. Segments three and four generally compete against the spot broadcast television market for advertising spending. Segment three typically begins approximately 18 minutes prior to the advertised show time. Segment three includes a two and one-half minute entertainment content segment from our content partners and advertising spots, usually from regional advertisers or national companies with limited advertising budgets. Segment two and segment one run closest to the advertised show time and comprise our most valuable advertising inventory. Both segment two and segment one include a two and one-half minute entertainment content segment from our content partners and advertisements from national advertisers. Segment two and segment one begin approximately 13 minutes and eight minutes, respectively, before the advertised show time.

The film trailers that typically run before the feature film are not part of FirstLook . Film trailers do not begin until after the FirstLook program ends at or about the advertised showtime.

Our entertainment content segments are provided to us under multi-year contractual arrangements with leading media companies that we refer to as content partners. Under the terms of these contracts, our content partners make available to us original content segments and make long term commitments to buy a portion of our advertising inventory. These multi-year contracts represented 18.1% of our pro forma total revenue for the year ended December 28, 2006. Our content partners currently include Discovery Communications, Inc., or Discovery; NBC Universal, or NBC; Sony Pictures Entertainment, or Sony; Turner Broadcasting System Inc., or TBS; and Universal City Studios, or Universal. The original content produced by these partners typically features behind-the-scenes interviews with producers, directors and actors or “making-of” segments relating to feature films or upcoming broadcast or cable television shows.

We offer multiple versions of FirstLook each month, generally tailored to a specific film rating category. This programming flexibility provides advertisers with the ability to target specific audience demographics and gives us the ability to ensure that the content and advertising is age-appropriate for the movie audience. We rotate the entertainment content segments between theatres approximately every two weeks to ensure that frequent movie-goers are entertained by fresh content.

Our goal in creating FirstLook as a branded entertainment program is to create a new “first release window” for advertising into the marketplace, similar to the way films are released first in cinemas. To that end, we encourage advertisers to provide us with advertisements before they are shown in other media platforms or with original content that is specifically created for cinema. We also offer pre- and post-production services to our clients (primarily local) for a fee to enhance the quality of the content we display.

The FirstLook program also includes up to two minutes for founding member advertisements to promote various activities associated with the operation of the theatres, including concessions, ticketing partners, gift card and loyalty programs, special events presented by the founding member and vendors of services provided to theatres, so long as such promotion is incidental to the vendor’s service. This time is provided by us to the founding members at no charge and includes 45 seconds within 15 minutes of show time, 15 seconds of which will be placed within 11 minutes of show time, and the remainder placed at our discretion. We may move the placement of the founding member advertisements up to one minute further from the advertised movie show time if NCM LLC sells additional advertising units to third parties that follow the founding member advertisements.

 

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Under the exhibitor services agreements, the last 90 seconds of the FirstLook program will be sold to the founding members to satisfy their on-screen advertising commitments under their beverage concessionaire agreements. The arrangements with NCM LLC’s founding members relating to on-screen advertising for their beverage concessionaires and the agreements with our content partners represented approximately 34.4% of our total revenue for the year ended December 28, 2006 on a pro forma basis.

Lobby Network and Promotions

Lobby Entertainment Network. Our lobby entertainment network is a network of television and high-definition plasma screens strategically located throughout the lobbies of a majority of our digitally equipped theatres. As of December 28, 2006, we had 1,792 screens in 693 theatres connected to our digital content network. The lobby entertainment network screens are strategically placed in high-traffic locations such as concession stands and auditorium waiting areas. Programming on our lobby entertainment network consists of an approximately 30-minute loop of five branded entertainment content segments created specifically for the lobby with advertisements running between each segment. Our lobby entertainment network programming is distributed by our network operations center and has the same programming flexibility as the FirstLook on-screen programming. The lobby entertainment network is currently displaying the same program simultaneously on all screens within a given theatre, which we believe provides the maximum impact for our advertisers. A study of our lobby entertainment network conducted by RH Bruskin Marketing, Inc . in June 2005 showed that the combination of screen placement, high-impact content and advertising produced recall rates that were three times those of prime time television advertising. We sell advertising on the lobby entertainment network individually or bundled with on-screen or other lobby promotions. The lobby entertainment network programming includes up to two minutes for founding member advertisements to promote activities associated with the operation of the theatres, including concessions, ticketing partners, gift card and loyalty programs, special events presented by the founding member, vendors of services provided to theatres, so long as such promotion is incidental to the vendor’s service. Additionally, subject to certain limitations, the lobby entertainment network programming includes up to two minutes, one minute of which we provide to the founding member at no cost and one minute of which the founding member may purchase, to promote certain non-exclusive cross-marketing relationships entered into by the founding members for the purpose of increasing attendance or revenue, other than from advertising, which we call strategic programs.

Under the terms of the exhibitor services agreements, the founding members also have the right to install additional screens in their theatre lobbies, which would not display our lobby entertainment network programming, and would be used to promote their theatre concessions, ticketing partners, gift card and loyalty programs, special events presented by the founding member and vendors of services provided to theatres, so long as such promotion is incidental to the vendor’s service.

Lobby Promotions. We also sell a wide variety of advertising and promotional products in our theatre lobbies. These products can be sold individually or bundled with an on-screen or lobby entertainment network advertising package. Lobby promotions typically include:

 

   

advertising on tickets and concession items such as beverage cups, popcorn bags and kids’ trays;

 

   

coupons and promotional materials, which are customizable by film or film rating category and are distributed to ticket buyers at the box office;

 

   

product sampling and display; and

 

   

signage throughout the lobbies, including posters, banners, counter cards, danglers, floor mats, standees and window clings.

Under the terms of the exhibitor services agreements, the founding members may conduct a limited number of lobby promotions at no charge in connection with their strategic programs, however, such activities will not reduce the lobby promotions inventory available to us.

Our ability to provide in-lobby marketing and promotional placements in conjunction with our other marketing solutions allows us to provide integrated marketing products to advertisers with multiple interactions with theatre patrons throughout the movie-going experience, which we believe is a competitive advantage over other national media platforms.

CineMeetings

Our CineMeetings business facilitates live and pre-recorded networked and single-site business meetings and corporate events in movie theatres. These events are typically scheduled from Monday through Thursday during off-peak hours while theatre attendance

 

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for movies is traditionally low. Clients can communicate on a live basis to audiences located in auditoriums connected to our cinema broadcast network. As of December 28, 2006, there were 173 locations set up to accommodate live broadcasts. At all of our digital content network locations, in-person presentations or pre-recorded content can be presented. Event content broadcast over our cinema broadcast network or digital content network is encrypted to protect against piracy.

We offer meetings that enhance the educational and entertainment value of a presentation by utilizing the big screen, stadium seating, high-resolution digital projection and audio. Our network also facilitates large meetings in multiple locations across the U.S. We provide centralized event management including booking, event coordination and execution, technical support, promotional tools, advanced audio/visual technologies and catering services. We are able to offer customers a single point of contact and standardized pricing across our network, which dramatically increases the efficiency of booking multi-location events for our clients. By bundling meetings or events with the screening of a feature film, sometimes before the film opens to the general public, our “Meeting and a Movie” product represents one of the more significant points of differentiation between us and other meeting venues such as hotels. We promote our CineMeetings business throughout the theatre. Recent CineMeetings events have included corporate meetings, training seminars, product launches, religious services and sales and marketing events.

Digital Programming Events (NCM Fathom)

Our digital programming events business focuses on the licensing and distribution across our digital network of entertainment programming products and the sale of sponsorships associated with live or pre-recorded programming on an event-by-event basis or for a series of events. In January 2007, we re-branded our digital programming events business NCM Fathom. Our digital content network provides a highly attractive high-definition distribution network for this type of programming and promotional opportunities for national brands. Our digital programming events include live and pre-recorded concerts and music events, DVD product releases and marketing events, theatrical premieres, Broadway plays, live sporting events and other special events. Event content is broadcast over either our cinema broadcast network or our digital content network and encrypted for piracy protection. As of December 28, 2006, our network has the capability to deliver:

 

   

live high-definition content to 119 theatres with up to four screens per theatre;

 

   

live standard definition content to 173 theatres with up to four screens per theatre; and

 

   

high-definition pre-recorded content to virtually all of the 11,463 digital screens in our network.

We advertise digital programming events on our network either through a digital trailer shown after FirstLook or during FirstLook using unsold advertising inventory. Clients who buy event sponsorships associated with digital programming events may use any one of our other advertising services in order to market their brands or products.

In 2005, our digital programming events business held 15 events. In 2006, we held 22 events, and we have 17 events planned for the first half of 2007. We have music content and cross-marketing relationships with Live Nation and AEG Live (an affiliate of the Anschutz Corporation), two of the largest concert promoters in the world, based on the number of tickets sold worldwide in 2005. We believe these new partnerships and others with companies like Control Room (formerly Network Live) will provide us with a consistent supply of music programming and an additional marketing channel for bands, promoters and content owners. In addition, we have an agreement with the New York Metropolitan Opera to distribute live and prerecorded events across our digital network. To date these events have been well received with several market sellouts.

Sales and Marketing

In-Theatre Advertising . We sell and market our in-theatre advertising through our national and regional/local sales and marketing groups.

Our national sales staff of 29 people as of December 28, 2006, is located across the country in our four national sales offices in New York, Woodland Hills (outside Los Angeles), Chicago and Detroit. During 2006, approximately 27% of the compensation for the national sales staff was variable and commission-based, with commissions shared across the team in order to enhance coordination and teamwork. Our national sales organization is highly scalable.

Our regional and local sales staff of 112 people as of December 28, 2006, is located throughout the country, covering approximately 125 screens each and selling directly to our regional and local clients. During 2006, approximately 77% of the compensation for local sales staff is variable based on a commission of collected sales.

During 2005, we created a new senior sales position to focus exclusively on larger regional clients (such as car dealer associations, quick-service restaurant advertising co-ops and state lotteries). We believe sales to regional clients represent a significant growth opportunity and will allow us to increase utilization in the earlier segments of our pre-feature show.

 

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Over the past four years we have increased our advertising revenue base by expanding the number of clients and product categories through sales outreach. We aggressively plan meetings directly with clients and with advertising agencies to educate them on the merits of cinema advertising. We also have a three-person public relations department and a seven-person research department and have commissioned third-party market research on the effectiveness of cinema advertising. This research has provided our customers with compelling statistical evidence of the superiority of our product relative to other broadcast advertising based on metrics such as brand recognition, message recall, and likeability. We believe we are making significant progress toward establishing cinema advertising as a more accountable and effective advertising medium relative to other traditional advertising media and capturing increasing market share from those media.

CineMeetings . We have a staff of 41 people as of December 28, 2006, who are dedicated to sales and marketing of our meetings business. In fiscal 2006, we facilitated over 9,800 meetings.

Digital Programming Events (NCM Fathom) . We have a staff of nine people as of December 28, 2006, who are dedicated to sales and marketing of our digital programming events. Over the last year, we have successfully expanded this business segment from 15 events attended by approximately 88,000 patrons throughout 2005, to 22 events attended by approximately 264,000 patrons in the 2006.

Media and Creative Services

Our media and creative services division uses state of the art, proprietary technologies and practices to ensure the highest possible cinema quality presentation of all on-screen content. We believe the expertise of this group in optimizing content for cinema playback has been instrumental in our ability to provide a better experience for the theatre patron and to enhance our ability to attract and retain our on-screen advertising customers. We provide a full spectrum of production and post-production services to our clients for a fee, including audio enhancements, color correction and noise reduction, we also upconvert standard definition content to high-definition format, surround sound cinema quality that we distribute over our digital content network, ensuring a pristine, high impact presentation of our clients’ content. Our expertise in tailoring advertisements developed for television to a high-definition cinema playback format that facilitates the ability of national advertisers to display content that optimizes the big-screen format. We also offer creative services to our clients (primarily local), developing full sight, sound and motion high-definition advertisements from concept to completion. This service substantially reduces the obstacles for smaller clients to invest in cinema-quality advertising. Additionally, our media and creative services ensure the consistent image and sound quality of the pre-feature and event content distributed over our network, which we believe has a positive impact on the audience reaction to and recall of our content and advertisements, as well as the overall quality of movie-goers’ experience. NCM LLC’s founding members also engage us for the production of their on-screen advertisements.

Technology

We utilize digital media, software and network technologies to deliver high-quality cinema advertising, meeting services and digital programming events to screens at our network theatres. These technologies facilitate a higher quality entertainment experience than the slide projectors and provide a lower cost and more programming flexibility than 35 mm “rolling stock” traditionally used in cinema advertising. Moreover, our technology allows us to deliver targeted, measurable advertising messages to consumers and efficiently monitor the on-screen playback.

We employ two satellite networks to distribute content to our theatres. Our digital content network satellite, which is operated by Hughes, is used to distribute our FirstLook content to 11,463 screens, 858 theatres and over 2 million seats. Our cinema broadcast network satellite is used to support our digital programming efforts by broadcasting live feeds to 320 screens in 173 theatres and over 93,000 seats. We contract for transponder time on the cinema broadcast network satellite only when we have digital programming events to distribute over the cinema broadcast network.

The satellite technology we use to deliver data provides a cost-effective means to deliver content to theatres. We employ a variety of technologies that “wrap” around the satellite process to help ensure uninterrupted service to theatres. For example, our digital content system has automated implementation capabilities that allow for data files to be multicast to theatres over a large footprint. Our digital content system interfaced with the Hughes system also possesses the ability to dynamically control the quality, timing and completeness of content. The integrated digital content network/digital content system is controlled by our network operations center in our Centennial, Colorado headquarters, which supports and monitors over 35,000 in-theatre hardware devices and more than 143,000 alarm points on the network.

Through our network operations center, we have access to and can monitor and initiate repairs to the equipment in our entire digital network of theatres. Our network operations center operates 24 hours a day, seven days a week. The finalized content is uploaded from our network operations center through the digital content network to theatres well in advance of use. The content will be delivered via multicast technology to all theatres in our network and received by our theatre management system where it is held

 

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until displayed according to its contract terms in specified theatre auditoriums. Each theatre auditorium has a client-server architecture that controls the content to be shown in the auditoriums or in the lobby. After the theatre management system receives digital content from the digital content network, confirmation of content playback is returned via satellite to our network operations center.

We have a disaster recovery plan that will provide backup for critical applications at an off-site facility in the event of a catastrophic failure at our network operations center. This facility, located in Salt Lake City, will co-locate our servers in an environmentally secure data center, and is expected to be completed during 2008.

Our Competitive Strengths

We believe that our key competitive strengths include:

Superior, Targeted National Advertising Network

Our national advertising network delivers a young and affluent audience that we believe allows for effective targeting of marketing messages and measurable results, yielding a superior return on investment for advertisers as compared to many traditional media platforms. As a result, we are able to compete effectively for marketing spending by advertisers and have developed relationships with a diversified group of local, regional and national advertising brands and agencies throughout the United States.

 

 

 

Extensive National Market Coverage. Our contractual agreements with NCM LLC’s founding members provide exclusive access, subject to limited exceptions, to the largest network of digitally equipped theatres in the United States and allow us to sell advertising nationwide which we distribute using our digital content network. We also have contractual agreements with our network affiliates that give us the exclusive right, subject to limited exceptions, to sell advertising on their theatre screens. As of December 28, 2006, our network included 11,463 digital screens and 14,081 screens in total, located in 1,113 theatres in 46 states and the District of Columbia. The attendance of the 1,025 theatres operated by NCM LLC’s founding members totaled approximately 550 million during 2006, which represented approximately 38% of the total U.S. theatre attendance for the year, as reported by the MPAA. Our network also provides us with access to some of the most modern and highly attended theatres in the industry, as measured by screens per location and attendance per screen operated by NCM LLC’s founding members. The average screens per theatre in our network was 12.6 screens, twice the U.S. theatre industry average, and the aggregate attendance per screen of theatres operated by NCM LLC’s founding members as of December 28, 2006, was 39,163, 6% higher than the U.S. theatre industry of 37,096, as reported by the National Association of Theatre Owners, or NATO, as of December 31, 2005. Also, our theatre network has access to key media markets, including all of the top 25, as well as, 49 of the top 50, U.S. DMAs ® , and 154 DMAs ® in total. Approximately 74% of our screens are located within the top 50 U.S. DMAs ® . The addition of the Loews theatres will expand our national market coverage and presence in key U.S. DMAs ® .

 

   

Targeted, Flexible Advertising Medium. Our digital network technology gives us flexibility in distributing content to our entire audience, or to specific theatres, geographic regions, or demographic groups based on film or film rating category. As a result, our clients can deliver a targeted advertising message utilizing sight, sound and motion across our national network. Our technology also shortens distribution lead times, reduces operating costs and enables us to respond quickly to client requests to change advertising content.

 

   

Access to a Highly Attractive Demographic Segment. We offer advertisers the ability to reach young and affluent consumers. According to a Nielsen Media Research study conducted in the first quarter of 2006, typical movie-goers are young, with 45% between the ages of 12-34; affluent, with a mean household income of over $67,000 compared to a national mean of $60,523; and well-educated, 39% having a college or post-graduate degree compared to 28% of the general population. We believe that this demographic is highly sought after by advertisers and is difficult to reach effectively using traditional media platforms.

 

   

Engaged Theatre Audience. We believe that cinema advertising benefits from the visual quality and impact of the “big screen” and digital surround sound presented in a distraction-free environment. According to industry studies, theatre advertising is five to six times more effective than advertising shown on television in terms of unaided recall rates. Cinema advertising is one of the few media platforms that the viewer does not have the ability to skip or turn off.

 

   

Superior Audience Measurability. We receive film-by-film, rating-by-rating and theatre-by-theatre attendance information weekly from NCM LLC’s founding members, which allows us to report to clients the audience size that viewed an advertisement. We believe this unique ability to provide advertisers with actual audience counts gives us a distinct competitive advantage over traditional media platforms. We also provide our advertisers with information regarding the demographics of the cinema audience and the effectiveness of a given advertisement using research from

 

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several third-party research companies such as Nielsen Media Research and Arbitron . We also work closely with third-party research companies to measure the recall, likeability, and brand message of our cinema advertisements.

Innovative, Branded Digital Pre-Feature Content

We believe that our digital entertainment and advertising pre-feature program, FirstLook, provides a high-quality entertainment experience for patrons and an effective marketing platform for advertisers. We have branded our pre-feature show, FirstLook , to reinforce our goal of creating the “first release window” for advertising into the marketplace, similar to the way that films are released first in cinemas. This strategy will provide more original content for the audience and more impact for the advertiser. We have also designed the FirstLook program to ensure that advertisements of similar production quality are shown together and that all advertisements end by the advertised show time. According to customer research conducted by us and independent research companies, the production of a higher quality branded pre-feature program improves the entertainment experience for patrons and the effectiveness of the advertising message.

Integrated Marketing Products

In addition to providing on-screen advertising opportunities using our digital content network, we offer advertisers the opportunity to integrate and reinforce their on-screen advertisements with various in-lobby marketing. Our in-lobby marketing programs include advertisements sold on television or high-definition plasma screens, posters, tickets, box office coupon handouts, popcorn bags and beverage cups and on-site product sampling opportunities. By integrating our in-lobby marketing products with on-screen advertising, patrons are exposed to consistent marketing messages through multiple touch points during the entire movie-going experience. According to a study we commissioned in June 2005, movie patrons across our network theatres spend, on average, nine minutes in the theatre lobby prior to going into the auditorium, including time at the concession stand. By integrating on-screen advertising with our in-lobby marketing programs, we believe our advertisers can extend the exposure for their brands and products and create an interactive “relationship” with the consumer that is not available with broadcast television or traditional display advertising. Our marketing team assists advertisers in creating entertaining, fully integrated cinema marketing campaigns with maximum impact.

Scalable, State-of-the-Art Content Distribution Technology

Our proprietary software provides many distribution, scheduling, reporting and auditing features. The flexibility of our digital content system allows us to create different versions of the FirstLook and our lobby entertainment network programming and to distribute these programs by theatre, region, film or film rating category. Our technology also provides the ability to electronically change advertisements from our network operations center as needed by advertising clients which shortens lead times, provides increased flexibility to change messages or target specific audiences, facilitate two-way interaction amongst participants attending meetings in our auditoriums and significantly reduces the cost as compared to distributing advertisements on 35 mm film. Our network operations center, digital content system and other network software provide us with the capability to monitor over 35,000 network devices and more than 143,000 alarm points within our theatre network on a real-time 24/7 basis, providing the high network reliability and timely reporting required by our advertising clients. Our use of satellite network technology, combined with the design and functionality of our digital content system software and network operations center infrastructure make our network efficient and scalable, providing the capacity to expand as needed. While our network capabilities are now primarily used within the theatre environment, we believe they could be easily adapted to other out-of-home environments.

We believe that our business is scalable because we can add new theatres to our digital content network without incurring significant operating costs or making significant capital expenditures. Since we have already made investments in our network operations center, satellite bandwidth and other network infrastructure, a new theatre may be connected to our digital content network with the installation of a minimal amount of additional equipment.

Strong Operating Margins with Limited Capital Requirements

A significant portion of our advertising inventory is covered by multi-year contracts with our content partners and arrangements to satisfy NCM LLC’s founding members’ on-screen marketing obligations to their beverage concessionaires. These contracts accounted for 34.4% of our total pro forma revenue in the year ended December 28, 2006. Our operating margins, before circuit share expense to NCM LLC’s founding members, have been consistently strong since our inception, at 63.8% in the year ended December 28, 2006 on a pro forma basis. NCM LLC’s founding members have also invested substantial capital to deploy, expand and upgrade the network within their theatres. Due to the network investments made by NCM LLC’s founding members in new and acquired theatres and the scalable nature of our business model, we do not expect to make major capital investments to grow our operations as our network of theatres expands. The combination of our strong operating margins and our limited capital expenditures has allowed us to generate significant free cash flow (defined as net income (or loss) plus depreciation and amortization and minus

 

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capital expenditures) before distributions to NCM LLC’s founding members. In the year ended December 28, 2006, our capital expenditures were $6.6 million. We believe our expected level of free cash flow generation will provide us with the strategic and financial flexibility to pursue growth opportunities, support our debt payments and make dividend payments to our stockholders.

Experienced Management Team

Our management team has significant experience in advertising sales and marketing, theatre operations, digital network design and operations, and finance. The majority of our senior management team was assembled during the formation of RCM, one of NCM LLC’s joint predecessor companies, in early 2002 and thus has worked together for several years building our business. Our senior management has many years of experience in their respective areas of expertise. We believe that our senior management team will be able to effectively grow our business through continued operating improvement and expansion of our products and services.

Our Strategy

Our primary strategic initiatives are to:

Increase Inventory Utilization

We intend to increase our market share of U.S. advertising spending by expanding commercial relationships with our existing advertising clients and by growing our advertising client base. We also intend to continue to improve our level of client service, including the development of new research and return on investment, or ROI, measurement tools. While an increasing number of companies now make cinema advertising part of their media buying plan, there are still many large advertisers and product categories, such as packaged goods companies, quick-service restaurants, big-box retailers and financial services firms, that do not yet include meaningful cinema advertising expenditures in their marketing budgets. We believe that over time, as awareness of and third-party data on the effectiveness of cinema advertising grows, we will be able to increase our revenue from these advertising categories.

Since our formation, we increased the amount of regional advertising in our pre-feature show from those of NCM LLC’s predecessor companies and have begun to more aggressively market and grow our local and regional advertising business. For example, we recently created a new senior sales position to focus exclusively on larger regional clients such as car dealer associations, and quick-service restaurant advertising co-ops. We have also started to experiment with direct marketing campaigns to businesses within a specified radius of our network theatres, with very positive results. For example, we created a marketing plan for Six Flags, Inc. by selling advertising on screens within a 150-mile radius of all of its theme parks. This campaign was combined with theatre lobby promotions and advertising. Due to the relatively low percentage of local and regional advertising inventory sold today, we believe that a growth opportunity exists for further development of this business segment.

Increase Our National CPM

In 2005, our national on-screen advertising CPM was approximately 1.2 times the average U.S. primetime network television CPM as reported by Media Dynamics, Inc . We believe that this premium does not yet fully reflect the highly targeted nature of our impressions, higher recall rates, ability to provide informative audience data to our clients and, most importantly, the inability to turn off or skip our advertising messages. According to a World Advertising Research Center study, cinema advertising CPMs as a multiple of primetime network television CPMs in more mature cinema advertising markets such as Europe and Australia are as much as 7-8 times higher than television CPMs in these territories. Therefore, we believe that there is an opportunity for continued CPM growth, especially as our inventory utilization increases, providing a more favorable supply-demand dynamic.

Expand Our Geographic Coverage and Reach

We intend to expand the reach and geographic coverage of our national digital network by connecting additional theatres to our network that NCM LLC’s founding members buy or build and through additional network affiliate agreements with other theatre circuits. Our strategy for attracting new network affiliates is to focus primarily on larger regional circuits in the larger metropolitan areas or in geographic areas where we do not currently have significant market coverage. For example, in March 2007, we signed a network affiliate agreement with Goodrich Quality Theatres, a theatre operator with 269 screens in Michigan, Indiana and Illinois.

 

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Provide Integrated Marketing Solutions to our Clients

We strive to differentiate ourselves amongst other media platforms. Advertising clients are increasingly seeking new ways to create direct relationships and touch points with customers, which our lobby advertising facilitates. We allow clients to benefit from the brand exposure provided by the high impact of the “big screen,” while at the same time allowing theatre patrons an opportunity to actually experience the advertised product through sampling or displays in the lobbies. We believe that our ability to provide both sight, sound and motion brand advertising and direct consumer touch points on an integrated basis in the same location is something that no other advertising medium can provide as effectively. Also, since many of these lobby products have not been available across our entire network until recently, we believe that there is an opportunity to further increase the sale of these products in the future.

Increase Market Awareness Of Our CineMeetings Business to Expand Our Client Base and Increase Revenue

Our CineMeetings business provides a new type of venue for corporate meetings that offers advantages over hotels and other traditional meeting venues. Unlike traditional venues, we provide a single point of contact for national event booking and coordination and utilize digital distribution and projection technology. In addition we also have the ability to bundle meetings with the screening of a film, sometimes before the film opens to the general public, in a product known as “Meeting and a Movie. We believe we can attract more clients to our network theatres and increase the revenue of our CineMeetings business by raising market awareness of the unique benefits of hosting meetings at our locations and increasing the number of theatres equipped to host live broadcasts. We have employed several local and national marketing strategies to communicate the value proposition associated with our CineMeetings business, including advertising in theatres within the FirstLook pre-show program, improving the focus of our Internet advertising, implementing a direct mailing effort to Fortune 500 CEOs and holding demand generation seminars for meeting planners in our network theatres.

These and other marketing strategies, including more aggressive efforts by our CineMeetings sales force and cross-selling by our advertising sales force, have led to an expansion of our client base and a 88.1% and 124.6% increase in CineMeetings event sites and revenue, respectively, for the three months ended December 28, 2006 versus the three months ended December 29, 2005. In addition, during the fourth quarter of 2006, we hosted the largest event in the history of the CineMeetings business, for approximately 2,200 meeting sites for a nationally recognized company.

Expand Our Live and Pre-Recorded Digital Programming Events Businesses

We will continue to expand and improve the technical capabilities of our digital content network and cinema broadcast network. Today, virtually all of our digitally equipped screens have the capability to show pre-recorded content. We are upgrading our digital content system software so that it can handle distribution of large digital files associated with our digital programming events business. While the opportunity to participate in distribution of content in a digital cinema environment is in its infancy today, we believe that our existing network and digital content network technology position us well to be able to expand these uses of our network theatres in the future. We expect the improvements to and expansion of our network will broaden our capabilities to distribute various kinds of live and pre-recorded meeting services and entertainment programming to a larger audience. By expanding our live distribution capabilities, we believe we will be able to attract more non-film live and pre-recorded digital programming events, and, as a result, increase our event ticket and sponsorship revenue. We will also look to form strategic alliances to gain access to high quality content. For example, we have music content and cross-marketing relationships with Live Nation and AEG Live (an affiliate of the Anschutz Corporation), two of the largest concert promoters in the world, based on the number of tickets sold worldwide in 2005. We believe these new partnerships and others with companies like Control Room (formerly Network Live) will provide us with a consistent supply of music programming and an additional marketing channel for bands, promoters and content owners. In addition, we have an agreement with the New York Metropolitan Opera to distribute to distribute live and prerecorded events across our digital network. To date these events have been well received with several market sellouts.

Upgrade our Advertising Sales and Inventory Management Systems

We are currently upgrading and improving our advertising sales and inventory management systems. We believe that these upgrades and improvements will enable us to respond more promptly to client requests for proposals, and will provide real-time access to pricing and availability information that allows us to manage our inventory more efficiently, improve our management reporting and data analysis and increase the number of our network affiliates at a quicker pace.

Develop New Marketing and Distribution Platforms that Leverage Our Existing Assets

We are exploring several initiatives that are meant to leverage our existing technology, distribution platform and sales and marketing infrastructure, including the following:

Entertainment Magazine —We are currently negotiating a joint venture with a well-known entertainment magazine to create a similar entertainment magazine that will be distributed in NCM LLC’s founding members’ theatres in the United States. This magazine is already a successful publication in the film exhibition market outside of the United States. The magazine will include advertising sold by the joint venture’s sales force and by our sales force. We currently intend to launch the magazine late in 2007. In exchange for making the theatres in our network available for distribution of the magazine, we will receive an ownership interest in the venture. We expect the capital needs of the joint venture to be funded by private equity or a strategic partner.

 

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New Out-of-Home Networks —Retail businesses including department stores, convenience stores and health clubs have begun to deploy advertising networks consisting of in-store televisions and plasma screens. We believe that targeted advertising will continue to grow in importance as a percentage of advertising spending and that networks in other retail environments will continue to develop. Importantly, we believe that our distribution technology, sales force, other existing operating infrastructure and client relationships could create growth opportunities for us in these other retail environments.

Internet Sites —We have developed and maintain several web sites including our corporate site and sites for our various businesses. As we expand some of our consumer-oriented businesses such as our planned magazine business and digital programming events business, we expect that the traffic on those sites to increase to a level that could provide an opportunity to sell advertising and provide research data. For example, we plan to create a branded entertainment web site in connection with the entertainment magazine, on which we and the venture will sell advertising. By selling the advertising through our existing sales forces and bundling the Internet offerings with our existing in-theatre advertising products, we believe that a new high margin revenue stream could be developed.

Corporate History

Our business operations are conducted by NCM LLC, which was formed on March 29, 2005, by AMC and Regal as a joint venture that combined the cinema advertising and meetings and events operations of Regal’s subsidiary, RCM, and the cinema advertising operations of AMC’s subsidiary, NCN. On July 15, 2005, Cinemark joined NCM LLC as a founding member. Because Cinemark had a pre-existing contract with another cinema advertising provider, NCM LLC began selling advertising for Cinemark’s screens on an exclusive basis beginning on January 1, 2006, subject to the run-out of certain pre-existing contractual obligations for on-screen advertising through April 1, 2006. By May 2006, all of Cinemark’s digital screens were connected to our digital content network. On January 26, 2006, AMC completed the acquisition of the Loews theatre circuit. The Loews screens will become part of our national theatre network on an exclusive basis beginning on June 1, 2008, subject to the run-out of certain pre-existing contractual obligations for on-screen advertising existing on May 31, 2008, following the expiration of Loews’ pre-existing contract with another cinema advertising provider. In accordance with a Loews screen integration agreement between us and AMC, which was amended and restated in connection with the offering, AMC will pay us an amount that approximates the EBITDA we would have generated if we were able to sell advertising in the Loews theatre chain on an exclusive basis. Effective as of January 5, 2007, NCM LLC re-allocated the NCM LLC common membership units among the founding members to reflect the payments to be made by AMC pursuant to the terms of the Loews screen integration agreement. These payments will be made on a quarterly basis in arrears until May 31, 2008 and will be, for accounting purposes, recorded directly to NCM LLC’s members’ equity accounts and will not be reflected in NCM LLC’s statements of operations. On October 5, 2006, Cinemark completed the acquisition of the Century screens, which were added to our network on an exclusive basis as of November 1, 2006, subject to limited exceptions. Effective December 28, 2006, NCN merged with and into American Multi-Cinema, Inc., another AMC subsidiary which is the party to the AMC exhibitor services agreement.

On February 7, 2007, the SEC declared effective our Registration Statement on Form S-1 (File No. 333-137976) (“Registration Statement”) for our initial public offering and the offering was completed on February 13, 2007. In the offering, we sold 42,000,000 shares of our common stock, including 4,000,000 shares pursuant to the underwriters’ over-allotment option, at $21.00 per share. The offering closed on February 13, 2007. The aggregate gross proceeds from the sale of the 42,000,000 shares of our common stock were $882.0 million. The aggregate net proceeds to us were $824.7 million, after deducting an aggregate of $48.5 million in underwriting discounts and commissions paid to the underwriters, and payment of approximately $8.8 million of direct costs of the offering. NCM Inc. used $746.1 million to purchase newly issued common membership units in NCM LLC at a price per unit equal to the public offering price per share, less underwriting discounts and commissions and offering expenses, and $78.5 million of proceeds were used by NCM Inc. to purchase common membership units held by NCM LLC’s founding members on a pro rata basis at a price per unit equal to the public offering price per share, less underwriting discounts and commissions and offering expenses. We purchased a total number of NCM LLC common membership units equal to the number of shares of our common stock sold in the offering. NCM LLC used $686.3 million of the proceeds it received from us to pay the founding members for their agreeing to modify NCM LLC’s payment obligations under NCM LLC’s exhibitor services agreements. In connection with the completion of the offering, NCM LLC

 

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entered into a new $805.0 million senior secured credit facility. This facility consists of a six-year, $80.0 million revolving credit facility and an eight-year, $725.0 million term loan facility. The term loan will be due on the eighth anniversary of funding, and the revolving credit facility will be due on the sixth anniversary of funding. See further description of the Financing Transaction at “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financings – New senior secured credit facility”. The remaining $59.8 million of proceeds from the offering, together with the net proceeds of $709.7 million from a new senior secured credit facility, were used by NCM LLC to redeem all of the preferred membership units of NCM LLC for an aggregate price of $769.5 million.

Reorganization

The following transactions, which we refer to collectively as the reorganization, occurred in connection with the completion of our initial public offering of our stock that closed on February 13, 2007:

 

   

NCM LLC’s agreements with its founding members were amended and restated, including the exhibitor services agreements and the NCM LLC operating agreement each as described under “Certain Relationships and Related Party Transactions—Transactions with NCM LLC’s founding Members”;

 

   

NCM LLC entered into the amended and restated Loews screen integration agreement with AMC pursuant to which AMC will pay NCM LLC an amount that approximates the EBITDA we would have generated if we were able to sell advertising in the Loews theatre chain on an exclusive basis; such Loews payments will be made quarterly for a specified time period;

 

   

NCM LLC split the number of outstanding common membership units so that a common membership unit was acquired with the proceeds from the initial offering of one share of our common stock after underwriting discounts and commissions and offering expenses;

 

   

NCM LLC was recapitalized on a non-cash basis with a distribution to the founding members of one common membership unit and one preferred membership unit in exchange for each outstanding common membership unit;

 

   

NCM Inc. became a member and the sole manager of NCM LLC following the purchase from NCM LLC of a number of common membership units equal to the number of shares of common stock sold in the offering prior to the underwriters over-allotment; the units were purchased with $746.1 net proceeds of the offering at a price per unit equal to the public offering price per share, less underwriting discounts and commissions and offering expenses;

 

   

NCM LLC paid $686.3 million of the proceeds it received from us to NCM LLC’s founding members for their agreeing to modify our payment obligations under the exhibitor services agreements;

 

   

options to acquire our common stock were substituted for options to acquire common membership units in NCM LLC, and restricted common stock was issued in substitution for restricted units that was granted to NCM LLC option holders as “IPO awards”; and

 

   

NCM LLC redeemed all the preferred membership units in NCM LLC at an aggregate price of $769.5 million using $709.7 of net proceeds of the new $725.0 million term loan that is a part of our senior secured credit facility, as described under “Financings – New Senior Secured Credit Facility” below, together with $59.8 million of proceeds from the purchase of NCM LLC units.

NCM LLC’s Founding Members

AMC Entertainment Inc.

AMC is the second largest theatre circuit in the United States based on total number of screens. As of December 28, 2006, after giving effect to expected dispositions of certain theatres, AMC owned, operated or held interests in 382 theatres with a total of 5,340 screens globally, with approximately 87% or 4,637, of the screens in the United States (including Loews). For their fiscal year ended March 30, 2006, AMC’s theatres had total worldwide attendance of 171.4 million, including 149.1 million in the United States, and AMC had revenue of $1,730.5 million. Pro forma for the Loews acquisition, which was completed on January 26, 2006, AMC’s total attendance for the fiscal year ended March 30, 2006 was 243.5 million, and AMC had pro forma revenue of $2,388.1 million.

Cinemark, Inc.

Cinemark is the third largest theatre circuit in the United States based on total number of screens. As of December 31, 2006, Cinemark operated 396 theatres with a total of 4,488 screens globally, with approximately 78%, or 3,523, of the screens in the United States. For the year ended December 31, 2006, Cinemark’s theatres had total worldwide attendance of 178.3 million, including

 

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118.7 million in the United States, and Cinemark reported total revenue of $1,222.6 million. On October 5, 2006, Cinemark acquired the Century theatre circuit. As of that date, Century operated 77 theatres with 1,017 screens.

Regal Entertainment Group

Regal operates the largest theatre circuit in the United States based on total number of screens. As of December 28, 2006, Regal operated 539 theatres with a total of 6,403 screens, all of which are located in the United States. For the fiscal year ended December 28, 2006, Regal’s theatres had total attendance of over 247.0 million and Regal reported total revenue of $2,598.1 million.

Agreements with NCM LLC’s Founding Members

Exhibitor Services Agreements

NCM LLC has been the exclusive provider of in-theatre advertising (subject to certain pre-existing contractual obligations for on-screen advertising and other limited exceptions for the benefit of the founding members) in the founding members’ theatres pursuant to agreements entered into with AMC and Regal in March 2005 and with Cinemark in July 2005.

In connection with the completion of the offering, we entered into amended and restated exhibitor services agreements with NCM LLC’s founding members. Key provisions of the new agreements include:

 

   

a term of 30 years (the term relating to CineMeetings and NCM Fathom will be approximately five years with provisions for automatic renewal if certain financial performance conditions are met);

 

   

a five-year right of first refusal, which begins one year prior to the end of the term of the exhibitor services agreement;

 

   

exclusive rights to provide advertising for the founding members’ theatres subject to the founding members’ rights to do the following on a limited basis:

 

   

promote activities associated with theatre operations on screen, on the lobby entertainment network and in the lobby (including on additional video screens in theatre lobbies); and

 

   

promote, on the lobby entertainment network and in theatre lobbies only, certain non-exclusive cross-marketing arrangements with third parties entered into by the founding members which are designed to promote the theatres and the movie-going experience to increase attendance and revenue;

 

   

payment of a monthly theatre access fee to the founding members;

 

   

a requirement that the founding members purchase up to 90 seconds of on-screen advertising time during the pre-feature program at a negotiated rate (intended to approximate a market rate) in order to satisfy the founding members’ obligation to provide certain on-screen advertising to their beverage concessionaires pursuant to their beverage concessionaire agreements; and

 

   

primary responsibility of NCM LLC to obtain, repair, maintain and replace the equipment not included in or on the theatre necessary to operate the digital content network and primary responsibility of the founding members to fund the installation and replacement of the equipment in or on the theatre.

See further description at “Certain Relationships and Related Party Transactions—Transactions with Founding Members—Exhibitor Services Agreements”.

Intellectual Property Rights

We have been granted a perpetual, royalty-free license from NCM LLC’s founding members to use certain proprietary software for the delivery of digital advertising and other content through our digital content network to screens in certain defined territories. We have made improvements to this software and we own those improvements, except for improvements that were developed jointly by us and the founding members.

We also have licensed intellectual property that is the subject of several U.S. patent applications relating to scheduling in-theatre advertising and digital content as well as matters relating to digital projector automation. These licenses are governed by the pre-reorganization license agreement. See “Certain Relationships and Related Party Transactions—Transactions with Founding Members—Software License Agreement.”

We have applied for several U.S. trademark registrations, including for NATIONAL CINEMEDIA and FIRSTLOOK. It is our practice to defend our trademarks and the associated goodwill from infringement by others. We are aware of a number of other companies that use names and marks containing variations of the words contained in our existing trademarks. There could be

 

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potential trademark infringement claims brought against us by the users of these names and marks. If any of these infringement claims were to prove successful in preventing us from using our existing trademarks or preventing us from stopping a competitor from using our existing trademarks, our ability to build brand identity could be negatively impacted.

Customers

Advertising Customers. Our advertising business has a diverse customer base, consisting of national, regional and local advertisers. We have business relationships with many national advertisers across a wide variety of industries, such as apparel / accessories, automotive, confectionary, credit card, entertainment, personal care, retail, telecommunications and video games, as well as branches of the armed forces. We derived 77.2% of our advertising revenue from our national accounts during the year ended December 28, 2006. We also have relationships with many regional and local advertisers across the country and with advertising agencies.

Each of NCM LLC’s founding members have a relationship with a beverage concessionaire under which they are obligated to provide up to 90 seconds of on-screen advertising time as part of their agreement to purchase syrup. The exhibitor services agreements provide for the founding members’ purchase of this on-screen advertising time at a negotiated rate (intended to approximate a market rate) in order to satisfy the founding members’ obligation to provide this advertising.

Content Partners. We have contractual relationships that provide entertainment content segments in the FirstLook program and minimum annual advertising spending commitments with Discovery, NBC, Sony, TBS and Universal. These agreements generally provide that the non-commercial content segments are to be entertaining, informative or educational in nature. Each of the agreements provides for the purchase of a specified amount of advertising over a two-year period with options to renew, exercisable at the content partner’s option. Each of the five agreements expires at the end of the 2007 or 2008 calendar year.

Competition

We compete in the $240 billion U.S. advertising industry with many other forms of marketing media, including television, radio, print media, Internet and outdoor display advertising. While cinema advertising represents a small portion of the advertising industry today, we believe it is well positioned to capitalize on the shift of advertising spending away from mass media to more targeted forms of media. As the number of media platforms continues to increase, the ability to target narrow consumer demographics and to provide measurable third-party marketing information has become increasingly important. We believe that proliferation of digital technology enabling improved data collection and ROI measurement will increase advertisers’ demand for digital advertising platforms and that cinema advertising is well positioned to address these trends.

We also compete with other providers of cinema advertising, which vary substantially in size, including Screenvision and Unique Screen Media. As one of the largest providers of cinema advertising in the United States, we believe that we are able to generate economies of scale, operating efficiencies and enhanced opportunities for our customers to access a national and regional audience, giving us a competitive advantage over many of our cinema advertising competitors. Through the visual quality and impact of the “big screen” and surround sound, we are able to display high impact impressions to our audiences. According to industry studies, our cinema advertising generated recall rates five to six times greater than advertising shown on television. Given the scale and technical capabilities of our digital network, we are able to tailor our advertising programs with more flexibility and to a broader audience than other cinema advertising companies, providing a more entertaining consumer experience and a more effective platform for advertisers.

Our CineMeetings business competes with a number of venues including hotels, conference facilities, restaurants, arenas and other convention properties, as well as virtual meetings hosted on-line and across private teleconferencing networks. We believe that the combination of our ability to offer clients access to conveniently located theatres with big screens, stadium seating, high-resolution digital projection and audio in multiple locations offers customers an attractive venue for meetings. Also, we offer a single point of contact and standardized pricing for our services, which is a competitive advantage when booking multi-location events. In addition, we offer clients the ability to combine a movie with the meeting, which also differentiates us from other meeting venues.

Our digital programming events business competes with other broadcast and cable networks, large-scale public venues, including concert halls and other public meeting venues and on-demand events. We believe that the combination of our national theatre network, geographic distribution and high quality sight and sound presentation offers content owners and sponsors an effective venue for events such as concerts and sporting events.

 

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Employees

We employed 463 people as of December 28, 2006, with 264 employees engaged in overall management and general administration at our corporate headquarters in Centennial, Colorado, 68 people employed in our regional offices, 112 local advertising account executives and 19 field maintenance technicians that work primarily out of their homes. None of our employees are covered by collective bargaining agreements. We believe that our relationship with our employees is good.

Government Regulation

Currently, we are not subject to regulations specific to sale and distribution of cinema advertising that we need to comply with in our operations. We are subject to federal, state and local laws that govern businesses generally such as wage and hour and worker compensation laws.

Digital Cinema

On June 28, 2006, we announced the hiring of Travis Reid, former president and chief executive officer of Loews, as a consultant to lead our effort to create a financing model and establish agreements with major motion picture studios for the implementation of digital cinema (distribution of feature films in a digital format rather than a 35 mm format). We also engaged J.P. Morgan Securities Inc. to assist with structuring the financing. We expect that our consulting agreement with Mr. Reid and engagement letter with J.P. Morgan Securities will be assigned to a new entity formed and owned by NCM LLC’s founding members. Neither NCM Inc. nor any of our subsidiaries will have an ownership interest in this new entity. Future digital cinema developments will be managed by this new entity and are thus subject to the approval of NCM LLC’s founding members. We are discussing with NCM LLC’s founding members what role, if any, we will have in providing services to this new entity, either on a transitional or an ongoing basis. The terms of any such services will be subject to the approval of our audit committee, or another committee comprised entirely of independent members of our board. Our provision of services to this venture, if any, could provide us with several benefits, including additional revenue from the digital cinema services agreement and possibly provide us with the ability to integrate the operational and technological needs of our advertising and digital programming events businesses into the digital cinema systems that may be deployed into theatres, if we and the founding members choose that strategy, versus a side-by-side strategy using the existing digital projectors for advertising and digital programming distribution and digital cinema projectors for feature film distribution.

 

Item 1A. Risk Factors

Ownership of the common stock of the Company involves certain risks. Holders of the Company’s securities and prospective investors should consider carefully the following risks and other information in this document, including our pro forma and historical financial statements and related notes, in evaluating an investment in the Company’s common stock. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our common stock could decline, perhaps significantly.

Risks Related to Our Business and Industry

Changes in the exhibitor services agreements with, or lack of support by, NCM LLC’s founding members could damage our revenue, growth and profitability

The exhibitor services agreements with NCM LLC’s founding members will be critical to our business. The three exhibitor services agreements each have a term of 30 years and provide us with a five-year right of first refusal, which begins one year prior to the end of the term of the exhibitor services agreement. The term of the exhibitor services agreements as they relate to CineMeetings and digital programming is approximately five years with provisions for automatic renewal if certain financial performance conditions are met. NCM LLC’s founding members’ theatres represent approximately 93% of the screens in our network as of December 28, 2006. If any one of the exhibitor services agreements were terminated, not renewed at its expiration or found to be unenforceable, it would have a material adverse effect on our revenue, profitability and financial condition.

The exhibitor services agreements require the cooperation, investment and support of the founding members, the absence of which could adversely affect us. Pursuant to the exhibitor services agreements, NCM LLC’s founding members must make investments to replace digital network equipment within their theatres and equip newly constructed theatres with digital network equipment. If the founding members do not have adequate financial resources or operational strength, and if they do not replace equipment or equip new theatres to maintain the level of operating functionality that we have today, or if such equipment becomes obsolete, we may have to make additional capital expenditures or our advertising, CineMeetings and digital programming events revenue and operating margins may decline. If the founding members reject advertising or choose not to participate in certain CineMeetings or digital programming events under the terms of the exhibitor services agreements because they believe it would adversely affect their film attendance levels or the reputation of their company, our revenue from these businesses would be reduced.

 

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The exhibitor services agreements allow the founding members to engage in activities that might compete with certain elements of our business, which could reduce our revenue and growth potential

The exhibitor services agreements contain certain limited exceptions to our exclusive right to use the founding members’ theatres for our advertising business. The founding members will have the right to enter into strategic cross-marketing relationships with third-party, unaffiliated businesses for the purpose of generating increased attendance or revenue (other than revenue from the sale of advertising) and, subject to certain limits, can use one minute on the lobby entertainment network and certain types of lobby promotions, at no cost, for the purpose of promoting the products or services of those businesses while at the same time promoting the theatre circuit or the movie-going experience. Subject to certain limits, they can also purchase an additional minute of advertising on the lobby entertainment network for these cross-marketing promotions. The use of lobby entertainment network or lobby promotions by NCM LLC’s founding members for these advertisements and programs could result in the founding members creating relationships with advertisers that could adversely affect our current lobby entertainment network and lobby promotions advertising revenue and profitability as well as the potential we have to grow that advertising revenue in the future. The lobby entertainment network and lobby promotions represented 2.7% and 5.9%, respectively, of our total pro forma advertising revenue for the year ended December 28, 2006. The founding members will not have the right to use their movie screens (including the FirstLook program or otherwise) for promoting these cross-marketing relationships, and thus we will have the exclusive rights to advertise on the movie screens, except for limited advertising related to theatre operations, and to package such on-screen advertising with the lobby entertainment network advertising and lobby promotions.

The founding members also will have the right to install a second network of video monitors in the theatre lobbies in excess of those required to be installed by the founding members for the lobby entertainment network. This additional lobby video network, which we refer to as the founders’ lobby network, is to be used by the founding members to promote products or services related to operating the theatres, such as concessions and loyalty programs. The presence of the founders’ lobby network within the lobby areas could reduce the effectiveness of our lobby entertainment network, thereby reducing our current lobby entertainment network advertising revenue and profitability and adversely affecting future revenue potential associated with that marketing platform.

If the non-competition provisions of the exhibitor services agreements are deemed unenforceable, NCM LLC’s founding members could compete against us and our business could be adversely affected

With certain limited exceptions, each of the exhibitor services agreements prohibits the applicable founding member from engaging in any of the business activities that we provide in the founding member’s theatres under the exhibitor services agreement, and from owning interests in other entities that compete with us. These provisions are intended to prevent the founding members from harming our business by providing cinema advertising services directly to their theatres or by entering into agreements with third-party cinema advertising providers. However, under state and federal law, a court may determine that a non-competition covenant is unenforceable, in whole or in part, for reasons including, but not limited to, the court’s determination that the covenant:

 

   

is not necessary to protect a legitimate business interest of the party seeking enforcement;

 

   

unreasonably restrains the party against whom enforcement is sought; or

 

   

is contrary to the public interest.

Enforceability of a non-competition covenant is determined by a court based on all of the facts and circumstances of the specific case at the time enforcement is sought. For this reason, it is not possible for us to predict whether, or to what extent, a court would enforce the non-competition provisions contained in the exhibitor services agreements. If a court were to determine that the non-competition provisions are unenforceable, the founding members could compete directly against us or enter into an agreement with another cinema advertising provider that competes against us. Any inability to enforce the non-competition provisions, in whole or in part, could cause our revenue to decline.

If one of NCM LLC’s founding members declares bankruptcy, the exhibitor services agreement with that founding member may be rejected, renegotiated or deemed unenforceable or our network could be adversely affected by the disposition of theatres

Each of NCM LLC’s founding members currently has a significant amount of indebtedness which is below investment grade. Since 1999, several major motion picture exhibition companies have filed for bankruptcy. For example, each of United Artists, Edwards Theatres, Regal Cinemas, General Cinemas and Loews Cineplex filed for bankruptcy during 2000 or 2001. The industry-wide construction of larger, more expensive megaplexes featuring stadium seating in the late 1990s that rendered existing, smaller,

 

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sloped-floor theatres under long-term leases obsolete and unprofitable, were significant contributing factors to these bankruptcies. If a bankruptcy case were commenced by or against a founding member, it is possible that all or part of the exhibitor services agreement with that founding member could be rejected by a trustee in the bankruptcy case pursuant to Section 365 or Section 1123 of the United States Bankruptcy Code, or by the founding member, and thus not be enforceable. Alternatively, the founding member could seek to renegotiate the exhibitor services agreement in a manner less favorable to us than the existing agreement. In addition, the founding member could seek to sell or otherwise dispose of theatres, which might result in the removal of those theatres from our network. Because we sell advertising based on the number of theatre patrons that will view the advertisement, a reduction in the number of theatres in our network could reduce our advertising revenue.

The markets for advertising, meeting management and digital programming content are competitive and we may be unable to compete successfully

The market for advertising is intensely competitive. Cinema advertising is a small component of the overall U.S. advertising market and thus we must compete with established, larger and better known national and local media platforms and newly emerging media platforms such as the Internet. We compete for advertising directly with all media platforms, including radio and television broadcasting, cable and satellite television services, various local print media, billboards and Internet portals and search engines.

We also compete directly with other cinema advertising companies. We expect these competitors to devote significant financial and operating resources to maintaining and growing their respective positions in the cinema advertising segment. We also expect existing competitors and new entrants to the cinema advertising business to constantly revise and improve their business models in light of challenges from us or competing media platforms. If we cannot respond effectively to advances by our competitors, our business may be adversely affected.

Our CineMeetings business facilitates live and pre-recorded events in theatre auditoriums. These events are typically scheduled from Monday through Thursday during off-peak hours while theatre attendance for movies is traditionally low. This business competes for customers with a number of venues including hotels, conference facilities, restaurants, arenas and other convention properties, as well as virtual meetings hosted on-line or over private teleconferencing networks. Accordingly, our ability to increase sales in our CineMeetings business is contingent on our ability to attract new customers and compete effectively against other well-established venues.

Our digital programming events business focuses on the licensing and distribution of entertainment programming products and the sale of sponsorships associated with that programming. It includes live and pre-recorded concerts and music events, concert and DVD product releases, theatrical premieres, Broadway plays, as well as live sports and other special events. This business competes for music, sports and other entertainment programming, as well as the associated sponsorships, with other national networks, some of which offer greater geographic reach and larger audiences. Accordingly, our ability to source a consistent flow of programming is contingent on our ability to develop and sustain relationships with content owners. Sponsorships for our digital programming events may be limited by our ability to license a consistent and significant source of content that sponsors want to be associated with.

Because we rely heavily on NCM LLC’s founding members’ ability to attract customers, any reduction in attendance at founding member theatres could decrease our revenue

Our business is affected by the success of NCM LLC’s founding members, who operate in a highly competitive industry. From the late 1990s through 2002, the number of movie screens and the level of theatre attendance in the United States increased substantially, as movie theatres began to offer new amenities such as stadium seating, improved projection quality and superior sound systems. While box office attendance increased in 2006 as compared to 2005, it declined in each of 2003, 2004 and 2005. If theatre attendance declines in the future, one or more of NCM LLC’s founding members may face financial difficulties and could be forced to sell or close theatres or reduce the number of screens it builds or upgrades. Attendance may also decline if the founding members fail to maintain their theatres and provide amenities that consumers prefer, or if they cannot compete successfully on pricing. NCM LLC’s founding members also may not successfully compete for licenses to exhibit quality films and are not assured a consistent supply of motion pictures since they do not have long-term arrangements with major film distributors. Any of these circumstances could reduce our revenue because our revenue depends on the number of theatre patrons who view our advertising and pre-feature show.

Significant declines in theatre attendance could reduce the attractiveness of cinema advertising

The value of our advertising business could be adversely affected by a long term multi-year decline in theatre attendance or even the perception by media buyers that our network attendance and geographic coverage were expected to decline significantly over the next several years. Factors that could reduce attendance at our network theatres include the following:

 

   

the shortening of the “release window” between the release of major motion pictures in the theatres and release to alternative methods for delivering movies to consumers, such as DVD or HD DVD, cable television, downloads via the Internet, video discs and cassettes, video on demand, satellite, and pay-per-view services;

 

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any reduction in consumer confidence or disposable income in general that reduces the demand for motion pictures or adversely affects the motion picture production industry; and

 

   

the success of first-run motion pictures, which depends upon the production and marketing efforts of the major studios and the attractiveness of the movies to patrons.

The loss of any major content partner or advertising customer could significantly reduce our revenue

We derive a significant portion of our revenue from our contracts with our five content partners and NCM LLC’s founding members’ agreements to purchase on-screen advertising for their beverage concessionaires. NCM LLC’s or its predecessor company’s relationships with the content partners date back as far as December 2002. None of these companies individually accounted for over 10% of our pro forma revenue during the year ended December 28, 2006. However, in the aggregate they accounted for approximately 34.4% of our pro forma revenue during the year ended December 28, 2006. Because we derive a significant percentage of our total revenue from a relatively small number of large companies, the loss of any one or more of them as a customer could decrease our revenue and adversely affect our current and future operating results.

We generate our revenue almost entirely from advertising, and the reduction in spending by or loss of advertisers could have a serious adverse effect on our business

We generated approximately 90.7% of our pro forma revenue in the year ended December 28, 2006 from advertising sales. A substantial portion of our advertising inventory is covered by contracts with terms of approximately one month. Advertisers will not continue to do business with us if they believe our advertising medium is ineffective or overly expensive. In addition, large advertisers generally have set advertising budgets, most of which are focused on traditional media platforms. Reductions in the size of advertisers’ budgets due to local, regional or national economic trends or other factors could result in lower spending on cinema advertising in general or our advertising business in particular. If we are unable to remain competitive and provide value to our advertisers, they may reduce their advertising purchases or stop placing advertisements with us, which would negatively affect our revenue and ability to generate new business from advertising clients.

If we do not maintain our technological advantage, our business could fail to grow and revenue and operating margins could decline

Failure to successfully or cost-effectively implement upgrades to our software systems to maintain our technological competitiveness could limit our ability to increase our revenue and more effectively leverage our digital platform. Any failure by us to upgrade our technology to remain current with technological changes, including digital cinema, that may be adopted by other providers of cinema advertising or other advertising platforms could hurt our ability to compete with those companies. Under the terms of the exhibitor services agreements with NCM LLC’s founding members, we may request that NCM LLC’s founding members upgrade the equipment or software installed in their theatres. We must negotiate with NCM LLC’s founding members as to the terms of such upgrade, including cost sharing terms, if any. If we are not able to come to an agreement on an upgrade request, we may elect to pay for the upgrades requested which could result in our incurring significant capital expenditures, which could adversely affect our results of operations. In addition, the failure or delay in implementation of such upgrades or problems with the integration of our systems and software with the digital cinema systems, if such integration is pursued, could slow or prevent the growth of our business.

Our business and operations are experiencing rapid growth, and we may be unable to effectively manage or continue our growth

We have experienced, and continue to experience, rapid growth in our headcount and operations, which has placed, and will continue to place, significant demands on our management and operational infrastructure. If we do not effectively manage our growth, the quality of our services could suffer, which could negatively affect our brand, our relationships with our advertising clients and digital content suppliers and our operating results. To effectively manage this growth, we will need to continue to improve our digital content system distribution software and our internal management systems, including our advertising inventory optimization, management and reporting systems. These systems enhancements and improvements will require allocation of valuable financial and management resources. If the improvements are not implemented successfully in a timely manner or at all, our ability to manage our growth will be impaired and we may have to make significant additional expenditures to address these issues.

 

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Our preliminary plans for developing additional revenue opportunities may not be implemented, may require substantial expenditures and may not be achieved

In addition to our strategy to grow our advertising business, CineMeetings and digital programming events businesses, we are also considering other potential opportunities for revenue growth, which we describe in “Business—Our Strategy—Develop New Marketing and Distribution Platforms that Leverage Our Existing Assets.” For example, we may form a joint venture to create an entertainment magazine that will be distributed in NCM LLC’s founding member theatres, and a branded entertainment web site in connection with that magazine on which we and the joint venture may sell advertising. We may also decide to expand our network technology and sales capabilities outside of theatres. These plans are at an early stage, and we may not actually proceed with any of them. If we do choose to proceed with any of these plans, the resulting marketing platforms may not be profitable, despite our having made substantial investments.

Because we have a limited operating history, it is difficult to evaluate our business and prospects

NCM LLC’s predecessor company, RCM, began operations in February 2002. NCM LLC was formed on March 29, 2005, as a joint venture that combined the operations of subsidiaries of AMC and Regal. Cinemark joined as a founding member on July 15, 2005, but because it had a pre-existing contract with another cinema advertising provider, we did not begin to sell advertising in its theatres on an exclusive basis until January 1, 2006 (subject to the run-out of certain pre-existing contractual obligations for on-screen advertising through April 1, 2006), and its theatres were not fully integrated into our network until May 2006. As a result, we have a limited operating history from which you can compare corresponding periods and evaluate our business. We may encounter risks and difficulties frequently experienced by newly formed companies in rapidly evolving businesses. If we are unsuccessful in executing our business strategy, we may be unable to:

 

   

increase our revenue and expand our client base;

 

   

operate, support, expand, develop and improve our software and other systems;

 

   

continue to produce high operating income margins; and

 

   

respond to technological changes.

Our historical and pro forma financial information may not be representative of our financial results as an independent public company or our future financial performance

Our historical financial information included in this document does not reflect our financial condition, results of operations and cash flows as they would have been achieved during the periods presented as a separate, stand-alone public entity. Our historical financial statements do not necessarily reflect the costs that we would have incurred had we operated as an independent stand-alone public entity for all periods presented. These costs include higher corporate overhead, interest expense and income taxes.

Our historical financial information includes the consolidated financial statements of RCM and NCN, the joint predecessor companies of NCM LLC, for periods prior to March 2005 and does not include any information related to Cinemark. Although historical financial information on AMC’s theatre advertising subsidiary, NCN, is presented herein, there is no historical financial information on the combined operations of both AMC and Regal prior to the formation of NCM LLC. Additionally, the historical financial statements of RCM and NCN include screen access charges at different rates than those in effect after the formation of NCM LLC, which rates changed again after completion of the financing transaction and reorganization.

Because Cinemark had a pre-existing contract with another cinema advertising provider, NCM LLC began selling advertising for Cinemark’s screens on an exclusive basis beginning on January 1, 2006 (subject to the run-out of certain pre-existing contractual obligations for on-screen advertising through April 1, 2006). In addition, our historical financial information does not include any information related to theatres operated by Loews, which AMC acquired on January 26, 2006, and which will become a part of our theatre network beginning on June 1, 2008, or Century, which Cinemark acquired on October 5, 2006, and which became a part of our theatre network on an exclusive basis, subject to limited exceptions, on the closing date. The historical results of operations of NCM LLC, RCM and NCN have been significantly impacted by related party transactions that we have entered into, as further discussed in the historical financial statements included elsewhere in this document, and the future operating results of NCM Inc. will also be significantly impacted by related party transactions entered into in connection with the offering. As a result, this information may not be representative of our future financial performance.

 

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In preparing the pro forma financial information in this document, we have made adjustments to the historical financial information of NCM LLC and its predecessor companies based upon currently available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the transactions contemplated by the reorganization, the financing transaction and the offering. Some of these adjustments include, among other items, the terms of the exhibitor services agreements with NCM LLC’s founding members, adjustments to income tax provisions to account for NCM LLC’s status as a limited liability company and our status as a taxable entity, and our acquisition of common membership units of NCM LLC. However, the pro forma financial information does not include adjustments for the addition of the Cinemark, Loews or Century screens. These and other estimates and assumptions used in the calculation of the pro forma financial information in this document may be materially different from our actual experience as a separate, independent company. The pro forma financial information included elsewhere in this document does not purport to represent what our results of operations would actually have been had we operated as a separate, independent company during the periods presented, nor do the pro forma data give effect to any events other than those discussed in the unaudited pro forma financial information and related notes. See unaudited pro forma financial information included elsewhere in this document.

We depend upon our senior management and our business may be adversely affected if we cannot retain them

Our success depends upon the retention of our experienced senior management with specialized industry and technical knowledge and/or industry relationships. We might not be able to find qualified replacements for our senior management if their services were no longer available to us; accordingly, the loss of critical members of our senior management team could have a material adverse effect on our ability to effectively pursue our business strategy and our relationships with advertisers and content partners. We do not have key-man life insurance covering any of our employees.

Our technology may infringe on rights owned by others which may interfere with our ability to provide services

We may discover that the technology we use infringes patent, copyright, or other intellectual property rights owned by others. In addition, we cannot assure you that our competitors will not claim rights in patents, copyrights, or other intellectual property that will prevent, limit or interfere with our ability to provide our services either in the United States or in international markets. Further, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.

Our revenue fluctuates from quarter to quarter and may be unpredictable, which could increase the volatility of our stock price

Typically, our revenue is lowest in the first quarter of the calendar year as advertising clients scale back their advertising budgets following the year-end holiday season, and our revenue is highest during the summer and the holiday season when theatre attendance is normally highest. However, a weak advertising market, the poor performance of films released in a given quarter or a disruption in the release schedule of films could affect results for the entire fiscal year and significantly affect quarter-to-quarter results. Because our results vary widely from quarter to quarter and may be unpredictable, our financial results for one quarter cannot necessarily be compared to another quarter and may not be indicative of our financial performance in subsequent quarters. These variations in our financial results could contribute to volatility in our stock price.

Risks Related to Our Corporate Structure

We are a holding company with no operations of our own, and will depend on distributions and payments under the management services agreement from NCM LLC to meet our ongoing obligations and to pay cash dividends on our common stock

We are a holding company with no operations of our own and have no independent ability to generate revenue. Consequently, our ability to obtain operating funds depends upon distributions from NCM LLC. The distribution of cash flows and other transfers of funds by NCM LLC to us will be subject to statutory and contractual restrictions based upon NCM LLC’s financial performance, including NCM LLC’s compliance with the covenants in its senior secured credit facility and the NCM LLC operating agreement. The NCM LLC senior secured credit facility will limit NCM LLC’s ability to distribute cash to its members, including us, based upon certain leverage tests, with exceptions for, among other things, payment of our income taxes and a management fee to NCM Inc. pursuant to the terms of the management services agreement. We will be unable to pay dividends to our stockholders or pay other expenses outside the ordinary course of business if NCM LLC fails to comply with these covenants and is unable to distribute cash to us.

Pursuant to a management services agreement between us and NCM LLC, NCM LLC will make payments to us to fund our day-to-day operating expenses, such as payroll. However, if NCM LLC cannot make the payments pursuant to the management services agreement, we may be unable to cover these expenses.

 

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As a member of NCM LLC, we will incur income taxes on our proportionate share of any net taxable income of NCM LLC. We have structured the NCM LLC senior secured credit facility to allow NCM LLC to distribute cash to its members (including us and the founding members) in amounts sufficient to cover their tax liabilities and management fees, if any. To the extent we need funds to pay such taxes or for any other purpose, and NCM LLC is unable to provide such funds because of limitations in the NCM LLC senior secured credit facility or other restrictions, it could have a material adverse effect on our business, financial condition, results of operations or prospects.

NCM LLC’s substantial debt obligations could impair our financial condition or prevent us from achieving our business goals

In connection with the completion of the offering, NCM LLC borrowed $725.0 million in a term loan that is part of a new senior secured credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition and Liquidity-Financings-New senior secured credit facility.” The agreements governing NCM LLC’s debt obligations to contain restrictive covenants that will limit NCM LLC’s ability to take specified actions and prescribe minimum financial maintenance requirements that NCM LLC must meet. Because NCM LLC will be our only operating subsidiary, complying with these restrictions may prevent NCM LLC from taking actions that we believe would help us to grow our business. For example, NCM LLC may be unable to make acquisitions, investments or capital expenditures as a result of such covenants. Moreover, if NCM LLC violates those restrictive covenants or fails to meet the minimum financial requirements, it would be in default, which could, in turn, result in defaults under other obligations of NCM LLC or us. Any such defaults could materially impair our financial condition and liquidity.

Amounts payable to NCM LLC’s founding members have historically been paid as NCM LLC collected the related accounts receivable from its customers. Approximately 30 days following the closing of the offering, NCM LLC repaid the remaining amounts owed to NCM LLC’s founding members under the existing exhibitor services agreements (which were $50.8 million). We made a draw on the revolving credit facility to satisfy the amounts owed to the founding members. NCM LLC will repay the amount drawn under the credit facility for this purpose as receivables including those relating to such amounts payable to the founding members are collected. The amount outstanding under the new revolving credit facility will continue to fluctuate based on working capital needs.

If NCM LLC is unable to meet its debt service obligations, it or we could be forced to restructure or refinance the obligations, seek additional equity financing or sell assets. We may be unable to restructure or refinance these obligations, obtain additional equity financing or sell assets on satisfactory terms or at all.

In addition, NCM LLC’s indebtedness could have other negative consequences for us, including without limitation:

 

   

limiting NCM LLC’s ability to obtain financing in the future;

 

   

requiring much of NCM LLC’s cash flow to be dedicated to interest obligations and making it unavailable for other purposes;

 

   

limiting NCM LLC’s liquidity and operational flexibility in changing economic, business and competitive conditions which could require NCM LLC to consider deferring planned capital expenditures, reducing discretionary spending, selling assets, restructuring existing debt or deferring acquisitions or other strategic opportunities; and

 

   

making NCM LLC more vulnerable to an increase in interest rates, a downturn in our operating performance or a decline in general economic conditions.

NCM LLC’s founding members or their affiliates may have interests that differ from those of our public stockholders and they may be able to influence our affairs

So long as a founding member beneficially owns at least 5% of NCM LLC’s issued and outstanding common membership units, approval of at least 90% of the directors then in office (provided that if the board has less than ten directors, then the approval of at least 80% of the directors then in office) will be required before we may take any of the following actions or we, in our capacity as manager of NCM LLC, may authorize NCM LLC to take any of the following actions:

 

   

assign, transfer, sell or pledge all or a portion of the membership units of NCM LLC beneficially owned by NCM Inc.;

 

   

acquire, dispose, lease or license assets with an aggregate value exceeding 20% of the fair market value of the business of NCM LLC operating as a going concern;

 

   

merge, reorganize, recapitalize, reclassify, consolidate, dissolve, liquidate or enter into a similar transaction;

 

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incur any funded indebtedness or repay, before due, any funded indebtedness with a fixed term in an aggregate amount in excess of $15 million per year;

 

   

issue, grant or sell shares of NCM Inc. common stock, preferred stock or rights with respect to common or preferred stock, or NCM LLC membership units or rights with respect to membership units, except under specified circumstances;

 

   

amend, modify, restate or repeal any provision of NCM Inc.’s certificate of incorporation or bylaws or the NCM LLC operating agreement;

 

   

enter into, modify or terminate certain material contracts not in the ordinary course of business as defined under applicable securities laws;

 

   

except as specifically set forth in the NCM LLC operating agreement, declare, set aside or pay any redemption of, or dividends with respect to membership interests;

 

   

amend any material terms or provisions (as defined in the Nasdaq rules) of NCM Inc.’s equity incentive plan or enter into any new equity incentive compensation plan;

 

   

make any change in the current business purpose of NCM Inc. to serve solely as the manager of NCM LLC or any change in the current business purpose of NCM LLC to provide the services as set forth in the exhibitor services agreements; and

 

   

approve any actions relating to NCM LLC that could reasonably be expected to have a material adverse tax effect on the founding members.

Pursuant to a director designation agreement, so long as a founding member owns at least 5% of NCM LLC’s issued and outstanding common membership units, such founding member will have the right to designate a total of two nominees to our ten-member board of directors who will be voted upon by our stockholders. If, at any time, any founding member owns less than 5% of NCM LLC’s then issued and outstanding common membership units, then such founding member shall cease to have any rights of designation.

If any director designee to our board designated by NCM LLC’s founding members is not appointed to our board, nominated by us or elected by our stockholders, as applicable, then each of the founding members (so long as such founding member continues to own 5% of NCM LLC’s issued and outstanding common membership units) will be entitled to approve specified actions of NCM LLC as described under “Directors and Executive Officers of the Registrant-Corporate Governance Matters.”

For purposes of calculating the 5% ownership threshold for the supermajority director approval rights and director designation agreement provisions discussed above, shares of our common stock held by a founding member and received upon redemption of NCM LLC common membership units will be counted toward the threshold. Common membership units issued to NCM Inc. in connection with the redemption of common membership units by a founding member will be excluded, so long as such founding member continues to hold the common stock acquired through such redemption or such founding member has disposed of such shares of common stock to another founding member. Shares of our common stock otherwise acquired by the founding members will also be excluded, unless such shares of common stock were transferred by one founding member to another and were originally received by the transferring founding member upon redemption of NCM LLC common membership units.

Under these circumstances, our corporate governance documents will allow NCM LLC’s founding members and their affiliates to exercise a greater degree of influence in the operation of our business and that of NCM LLC and the management of our affairs and those of NCM LLC than is typically available to stockholders of a publicly-traded company. Even if NCM LLC’s founding members or their affiliates own a minority economic interest in NCM LLC, they may be able to continue exerting such degree of influence over us and NCM LLC.

Different interests among NCM LLC’s founding members or between NCM LLC’s founding members and us could prevent us from achieving our business goals

For the foreseeable future, we expect that our board of directors will include directors and executive officers of NCM LLC’s founding members and other directors who may have commercial relationships with NCM LLC’s founding members. NCM LLC’s founding members compete with each other in the operation of their respective businesses and could have individual business interests that may conflict with those of the other founding members. Their differing interests could make it difficult for us to pursue strategic initiatives that require consensus among NCM LLC’s founding members.

 

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In addition, the structural relationship we have with NCM LLC’s founding members could create conflicts of interest among the founding members, or between the founding members and us, in a number of areas relating to our past and ongoing relationships. There will not be any formal dispute resolution procedures in place to resolve conflicts between us and a founding member or between founding members. We may not be able to resolve any potential conflicts between us and a founding member and, even if we do, the resolution may be less favorable to us than if we were negotiating with an unaffiliated party.

The corporate opportunity provisions in our certificate of incorporation could enable the founding members to benefit from corporate opportunities that might otherwise be available to us

Our certificate of incorporation contains provisions related to corporate opportunities that may be of interest to both NCM LLC’s founding members and us. It provides that if a corporate opportunity is offered to us, NCM LLC or one or more of the officers, directors or stockholders (both direct and indirect) of NCM Inc. or a member of NCM LLC that relates to the provision of services to motion picture theatres, use of theatres for any purpose, sale of advertising and promotional services in and around theatres and any other business related to the motion picture theatre business (except services as provided in the exhibitor services agreements as from time to time amended and except as may be offered to one of our officers in his capacity as an officer), no such person shall be liable to us or any of our stockholders (or any affiliate thereof) for breach of any fiduciary or other duty by reason of the fact that such person pursues or acquires such business opportunity, directs such business opportunity to another person or fails to present such business opportunity, or information regarding such business opportunity, to us. This provision applies even if the business opportunity is one that we might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so.

In addition, our certificate of incorporation and the NCM LLC operating agreement expressly provide that NCM LLC’s founding members may have other business interests and may engage in any other businesses not specifically prohibited by the terms of the certificate of incorporation and exhibitor services agreements. If the parent companies of the founding members develop new media platforms they could compete for advertising dollars with our services. Further, we may also compete with the founding members or their affiliates in the area of employee recruiting and retention. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by the founding members to themselves or their other affiliates or we lose key personnel to them.

The agreements between us and NCM LLC’s founding members were made in the context of an affiliated relationship and may contain different terms than comparable agreements with unaffiliated third parties

The exhibitor services agreements and the other contractual agreements that we have with NCM LLC’s founding members were negotiated in the context of an affiliated relationship in which representatives of NCM LLC’s founding members and their affiliates comprised our entire board of directors. As a result, the financial provisions and the other terms of these agreements, such as covenants, contractual obligations on our part and on the part of NCM LLC’s founding members, and termination and default provisions may be less favorable to us than terms that we might have obtained in negotiations with unaffiliated third parties in similar circumstances.

Our certificate of incorporation and bylaws contain anti-takeover protections that may discourage or prevent strategic transactions, including a takeover of our company, even if such a transaction would be beneficial to our stockholders

Provisions contained in our certificate of incorporation and bylaws, the NCM LLC operating agreement, provisions of the Delaware General Corporation Law, or DGCL, could delay or prevent a third party from entering into a strategic transaction with us, even if such a transaction would benefit our stockholders. For example, our certificate of incorporation and bylaws:

 

   

establish supermajority approval requirements by our directors before our board may take certain actions;

 

   

authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares, making a takeover more difficult and expensive;

 

   

establish a classified board of directors;

 

   

allow removal of directors only for cause;

 

   

prohibit stockholder action by written consent;

 

   

do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; and

 

25


   

provide that the founding members will be able to exercise a greater degree of influence over the operations of NCM LLC, which may discourage other nominations to our board of directors, if any director nominee designated by the founding members is not elected by our stockholders.

These restrictions could keep us from pursuing relationships with strategic partners and from raising additional capital, which could impede our ability to expand our business and strengthen our competitive position. These restrictions could also limit stockholder value by impeding a sale of us or NCM LLC.

Any future issuance of membership units by NCM LLC and subsequent redemption of such units for common stock could dilute the voting power of our existing common stockholders and adversely affect the market value of our common stock

The common unit adjustment agreement and the exhibitor services agreements provide that we will issue common membership units of NCM LLC to account for changes in the number of theatre screens NCM LLC’s founding members operate. Historically, each of the founding members has increased the number of screens it operates. If this trend continues, NCM LLC may issue additional common membership units to the founding members to reflect their increased screen count. Each common membership unit may be redeemed in exchange for, at our option, shares of our common stock on a one-for-one basis or a cash payment equal to the market price of one share of our common stock. If a significant number of common membership units were issued to NCM LLC’s founding members, the founding members elected to redeem such units, and we elected to issue common stock rather than cash upon redemption, the voting power of our common stockholders could be diluted. Other than the maximum number of authorized shares of common stock in our certificate of incorporation, there is no limit on the number of shares of our common stock that we may issue upon redemption of a founding member’s common membership units in NCM LLC.

Our future issuance of preferred stock could dilute the voting power of our common stockholders and adversely affect the market value of our common stock

The future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of our other classes of voting stock, either by diluting the voting power of our other classes of voting stock if they vote together as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote even if the action were approved by the holders of our other classes of voting stock.

The future issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect the market price for our common stock by making an investment in the common stock less attractive. For example, investors in the common stock may not wish to purchase common stock at a price above the conversion price of a series of convertible preferred stock because the holders of the preferred stock would effectively be entitled to purchase common stock at the lower conversion price causing economic dilution to the holders of common stock.

If we or NCM LLC’s founding members are determined to be an investment company, we would become subject to burdensome regulatory requirements and our business activities could be restricted

We do not believe that we are an “investment company” under the Investment Company Act of 1940, as amended. As sole manager of NCM LLC, we will control NCM LLC, and our interest in NCM LLC is not an “investment security” as that term is used in the Investment Company Act. If we were to stop participating in the management of NCM LLC, our interest in NCM LLC could be deemed an “investment security” for purposes of the Investment Company Act. Generally, a company is an “investment company” if it owns investment securities having a value exceeding 40% of the value of its total assets (excluding U.S. government securities and cash items). Our sole material asset is our equity interest in NCM LLC. A determination that such asset was an investment security could result in our being considered an investment company under the Investment Company Act. As a result, we would become subject to registration and other burdensome requirements of the Investment Company Act. In addition, the requirements of the Investment Company Act could restrict our business activities, including our ability to issue securities.

We and NCM LLC intend to conduct our operations so that we are not deemed an investment company under the Investment Company Act. However, if anything were to occur that would cause us to be deemed to be an investment company, we would become subject to restrictions imposed by the Investment Company Act. These restrictions, including limitations on our capital structure and our ability to enter into transactions with our affiliates, could make it impractical for us to continue our business as currently conducted and could have a material adverse effect on our financial performance and operations.

We also rely on representations of NCM LLC’s founding members that they are not investment companies under the Investment Company Act. If any founding member were deemed to be an investment company, the restrictions placed upon that founding member might inhibit its ability to fulfill its obligations under its exhibitor services agreement or restrict NCM LLC’s ability to borrow funds.

 

26


Our tax receivable agreement with the founding members is expected to reduce the amount of overall cash flow that would otherwise be available to us and will increase our potential exposure to the financial condition of the founding members

We expect that the offering and related transactions will have the effect of reducing the amounts NCM Inc. would otherwise pay in the future to various tax authorities as a result of an increase in its proportionate share of tax basis in NCM LLC’s tangible and intangible assets. We have agreed in our tax receivable agreement with the founding members to pay to the founding members 90% of the amount by which NCM Inc.’s tax payments to various tax authorities are reduced. See “Certain Relationships and Related Party Transactions—Transactions With Founding Members— Tax Receivable Agreement.” After paying these reduced amounts to tax authorities, if it is determined as a result of an income tax audit or examination that any amount of NCM Inc.’s claimed tax benefits should not have been available, NCM Inc. may be required to pay additional taxes and possibly penalties and interest to one or more tax authorities. If this were to occur, and if one or more of the founding members was insolvent or bankrupt or otherwise unable to make payment under its indemnification obligation under the tax receivable agreement, then NCM Inc.’s financial condition could be materially impaired.

The substantial number of shares that will be eligible for sale in the near future could cause the market price for our common stock to decline or make it difficult for us to sell equity securities in the future

We cannot predict the effect, if any, that market sales of shares of common stock or the availability of shares of common stock for sale will have on the market price of our common stock from time to time. Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales will occur, could cause the market price of our common stock to decline or make future offerings of our equity securities more difficult. If we are unable to sell equity securities at times and prices that we deem appropriate, we may be unable to fund growth.

The 42,000,000 shares of common stock sold in the offering are freely tradable, except for 97,500 shares acquired by our affiliates. In addition, the founding members may receive up to 51,850,951 shares of common stock, which initially will be unregistered, upon redemption of their outstanding common membership units of NCM LLC. These shares of common stock will constitute “restricted securities” under the Securities Act of 1933, as amended, or the Securities Act. Provided the holders comply with the holding periods and other conditions prescribed in Rule 144 under the Securities Act, all but 96,500 of these unregistered shares of common stock cease to be restricted securities and become freely tradable.

Our officers and directors have agreed that they will not offer, sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, or publicly disclose the intention to make any such disposition, or to enter into any such arrangement, without, in each case, the prior written consent of Credit Suisse Securities (USA) LLC for a period of 180 days after the date of the offering. The founding members have also agreed to the same restrictions for a period of 180 days after the date of the offering. After the lock-up period expires, NCM LLC’s founding members will be able to exercise registration rights that we have granted them as described in “Certain Relationships and Related Party Transactions—Transactions with Founding Members—Registration Rights Agreement.” We cannot predict whether substantial amounts of our common stock will be sold in the open market in anticipation of, or following any divestiture by NCM LLC’s founding members or our directors or executive officers of their shares of our common stock.

Additionally, 268,184 shares of restricted stock are outstanding and 1,807,625 shares of our common stock will be issuable upon exercise of stock options that vest through 2012 and become exercisable beginning on January 1, 2008. We substituted 262,466 shares of restricted stock for restricted units granted to NCM LLC option holders as “IPO awards” and 1,589,625 options to acquire our common stock for options that were granted by NCM LLC throughout 2006 in connection with the completion of the offering. None of such restricted stock or options were vested as of December 28, 2006. The options issued to acquire our common stock will result in compensation expense of approximately $3.0 million per year over the vesting period of the stock options which is not a significant change in compensation expense as compared to amounts previously recognized by NCM LLC. In addition, NCM Inc. will record additional compensation expense for the restricted stock issued of approximately $1.1 million per year over the vesting period of the restricted stock. We also granted options to acquire 218,000 shares of our common stock to our employees, and 5,718 shares of restricted common stock to our non-employee directors, in connection with the completion of the offering. For these additional NCM Inc. options and restricted stock to be issued to employees and non-employee directors, NCM Inc. anticipates recording an additional $0.3 million of compensation expense per year over the vesting period. Once the options and restricted stock become vested and/or exercisable, as applicable, to the extent they are not held by one of our affiliates, the shares acquired upon vesting or exercise are freely tradable.

 

27


Our stock price may be volatile

Before the offering, there was no public market for our common stock, and an active trading market for our common stock may not continue. The stock market in general has experienced extreme price and volume fluctuations in recent years. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. Our stock price may fluctuate or decline due to a variety of factors, including:

 

   

actual or anticipated quarterly fluctuations in our operating results;

 

   

changes in expectations of future financial performance or changes in estimates of securities analysts;

 

   

changes in the market valuations of other companies;

 

   

announcements relating to actions of other media companies, strategic relationships, acquisitions or industry consolidation;

 

   

terrorist acts or wars; and

 

   

general economic, market and political conditions not related to our business.

Forward-Looking Statements

In addition to historical information, this document contains forward-looking statements. The words “forecast,” “estimate,” “project,” “intend,” “expect,” “should,” “believe” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors, including those discussed in “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the following:

 

   

national, regional and local economic conditions that may affect the markets in which we operate;

 

   

the levels of expenditures on advertising in general and cinema advertising in particular;

 

   

increased competition within cinema advertising or other segments of the advertising industry;

 

   

technological changes and innovations, including alternative methods for delivering movies to consumers;

 

   

the popularity of major motion picture releases and level of theatre attendance;

 

   

shifts in population and other demographics;

 

   

our ability to renew expiring advertising contracts at favorable rates, or to replace them with new contracts that are comparably favorable to us;

 

   

our need for, and ability to obtain, additional funding for acquisitions and operations;

 

   

risks and uncertainties relating to our significant indebtedness;

 

   

fluctuations in operating costs;

 

   

capital expenditure requirements;

 

   

changes in interest rates; and

 

   

changes in accounting principles, policies or guidelines.

This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative but not exhaustive. In addition, new risks and uncertainties may arise from time to time. Accordingly, all forward-looking statements should be evaluated with an understanding of their inherent uncertainty.

Except as required by law, we assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

Item 1B. Unresolved Staff Comments

None.

 

28


Item 2. Properties

Information with respect to our corporate headquarters and regional offices is presented below. We believe that all of our present facilities are adequate for our current needs and that additional space is available for future expansion on acceptable terms.

 

Location

  

Facility

   Size   

Monthly Rent

Payment

Centennial, CO (1)

   Headquarters (including the network operations center)    58,894 sq. ft.    $ 78,600

Chicago, IL (2)

   Regional Office    1,936 sq. ft.    $ 4,100

New York, NY (3)

   Regional Office    7,966 sq. ft.    $ 30,100

Woodland Hills, CA (4)

   Regional Office    5,700 sq. ft.    $ 11,500

Detroit, MI (5)

   Regional Office    721 sq. ft.    $ 1,100

Minneapolis, MN (6)

   Regional Office    10,363 sq. ft.    $ 15,600

(1) This facility is leased through December 31, 2013 with a termination option at December 31, 2010 and an option to extend the lease until December 31, 2018.
(2) This facility is subleased from RCM through July 31, 2009.
(3) This facility is subleased from RCM through April 30, 2010.
(4) This facility is subleased from American Multi-Cinema, Inc. through May 30, 2007. On June 6, 2006, NCM LLC entered into a lease for the property with a term from June 1, 2007 to May 31, 2012.
(5) This facility is leased through December 31, 2009.
(6) This facility is leased through December 31, 2007, with an option to extend the lease for two additional five-year periods.

 

Item 3. Legal Proceedings

We are sometimes involved in legal proceedings arising in the ordinary course of business. We are not aware of any litigation currently pending.

 

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock, $0.01 par value, is traded on The NASDAQ Global Market under the symbol “NCMI.” (The NCM LLC common membership units are not listed on any securities exchange.) There were 4 shareholders of record as of March 22, 2007. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. The following table sets forth the high and low sales prices for our common stock as reported on the NASDAQ Global Market, beginning on February 8, 2007, the first day of trading for our common stock, through March 22, 2007.

 

     Market Price
   High    Low

Period February 8, 2007 – March 22, 2007

   $ 28.23    $ 24.66

See “Security Ownership of Certain Beneficial Owners and Management” for information regarding securities authorized for issuance under our equity compensation plans.

 

29


Dividend Policy

As previously disclosed, we intend to distribute over time a substantial portion of our free cash flow in the form of quarterly dividends to our stockholders. Initially these quarterly dividends are expected to be in the range of $0.10 to $0.12 per share. We expect to declare our first dividend upon completion of the second quarter of 2007. The declaration, payment, timing and amount of any future dividends payable by us will be at the sole discretion of our board of directors who will take into account general economic and business conditions, our financial condition, our available cash, our current and anticipated cash needs, and any other factors that the board considers relevant. Under Delaware law, dividends may be payable only out of surplus, which is our net assets minus our liabilities and our capital, or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

Use of Proceeds from Sale of Registered Securities

Our initial public offering of our common stock, $0.01 par value, pursuant to our Registration Statement on Form S-1, as amended (Reg. No. 333-137976), was completed on February 13, 2007. In the offering, we sold 42,000,000 shares of our common stock, including 4,000,000 shares pursuant to the underwriters’ over-allotment option, at $21.00 per share, or an aggregate purchase price of $882.0 million.

The net proceeds received by us in the offering were $824.7 million, determined as follows (in millions):

 

Aggregate offering proceeds to NCM Inc.

   $ 882.0

Underwriting discounts and commissions

     48.5

Other fees and expenses

     8.8
      

Total expenses

   $ 57.3
      

Net proceeds to NCM Inc.

   $ 824.7
      

None of the underwriting discounts and commissions or offering expenses were incurred or paid to our directors or officers or their associates or to persons owning 10 percent or more of our common stock or to any affiliates of ours. The net proceeds to us were used to purchase membership units in NCM LLC. We used $746.1 million to purchase newly issued common membership units in NCM LLC and $78.5 million to purchase common membership units held by NCM LLC’s founding members on a pro rata basis.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Share Repurchase Program

None.

Issuer Purchases of Equity Securities

None.

Stock Performance Graph

A stock performance graph is not provided as our common stock, $0.01 par value per share, was not publicly traded prior to February 8, 2007.

Item 6. Selected Financial Data

Selected Historical Financial and Operating Data

The following table sets forth our historical selected financial and operating data for the periods indicated. The selected financial and operating data should be read together with the other information contained in this document, including “Business-Corporate History”, “Business-Reorganization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited historical financial statements and the notes thereto included elsewhere in this document, and the unaudited historical interim consolidated financial statements which are not included elsewhere in this document.

 

30


The statement of operations data for the year ended December 28, 2006, and the balance sheet data as of December 28, 2006, were derived from the audited financial statements of our predecessor NCM LLC included elsewhere in this document. The statement of operations data for the nine months ended December 29, 2005 and the balance sheet data as of December 29, 2005 were derived from the audited financial statements of our predecessor NCM LLC included elsewhere in this document. The statement of operations data for RCM, a joint predecessor of NCM LLC, for the three months ended March 31, 2005, and the year ended December 30, 2004, were derived from the audited financial statements of RCM, which are included elsewhere in this document. The balance sheet data as of December 30, 2004 and Statement of Operations data for the year ended January 1, 2004 were derived from the audited financial statements of RCM, which are not included elsewhere in this document. The statement of operations data for the period ended December 26, 2002 and the balance sheet data as of December 26, 2002, January 1, 2004 and March 31, 2005 were derived from the unaudited financial statements of RCM, which are not included in this document. The statement of operations data for NCN, a joint predecessor of NCM LLC, for the 14 weeks ended March 31, 2005 and the 38 weeks from April 2, 2004 through December 23, 2004, were derived from the audited financial statements of NCN, which are included elsewhere in this document. The balance sheet of NCN as of March 31, 2005 and Statement of Operations data for the 53 weeks ended April 1, 2004 were derived from the audited financial statements of NCN, which are not included elsewhere in this document. The statement of operations data for the 53 weeks ended April 3, 2003 and the balance sheet data as of April 3, 2003, April 1, 2004 and December 23, 2004 were derived from the unaudited financial statements of NCN, which are not included in this document. RCM was formed in April 2002 and therefore there is no information for RCM for time periods prior to 2002. As a newly formed, nominally capitalized entity, we have had no operations to date until our acquisition of our ownership interest in NCM LLC in February 2007 and, therefore, the information below is presented only for our predecessor NCM LLC and its predecessor companies.

These historical financial statements do not reflect what our results of operations and financial position would have been had we been a stand-alone, public company for the periods presented. Specifically, our historical results of operations do not give effect to the matters set forth below:

 

   

the terms of the exhibitor services agreements, which differ from NCM LLC’s prior contractual arrangements with NCM LLC’s founding members and will have on going material significance to NCM LLC’s results of operations, (i) assign legacy contracts to NCM LLC, (ii) make additional inventory of lobby promotions, CineMeetings and digital programming events available to NCM LLC on a pre-approved basis, (iii) make additional theatre advertising inventory available to NCM LLC, to sell such inventory at stated rates to the founding members in order for them to fulfill their on-screen advertising commitments to their beverage concessionaires, and (iv) change the formula for the calculation of the circuit share expense (known as the theatre access fee in the exhibitor services agreements);

 

   

adjustments to income tax provisions to account for our status as a taxable entity with an ownership interest in NCM LLC;

 

   

the elimination of non-recurring restructuring charges at NCN relating to the formation of NCM LLC;

 

   

the completion of the non-cash recapitalization of NCM LLC pursuant to which existing members of NCM LLC received one common membership unit and one preferred membership unit in exchange for each outstanding common membership unit;

 

   

the completion of the financing transaction, pursuant to which the preferred membership units issued to the founding members in a non-cash recapitalization of NCM LLC were redeemed from the proceeds of a term loan that is part of our new senior secured credit facility;

 

   

the completion of the offering and the use of proceeds therefrom as set forth in this document, including our acquisition of 44.8% of the common membership units in NCM LLC, which will be accounted for by our consolidation of NCM LLC; and

 

   

the payment by NCM LLC of a portion of the proceeds it received from us to NCM LLC’s founding members for their agreeing to modify our payment obligations under the exhibitor services agreements.

 

31


     Predecessor—National Cinema Network, Inc.     Predecessor—Regal CineMedia Corporation     National CineMedia, LLC  
     Year
Ended
April 3,
2003
    Year
Ended
April 1,
2004
    Thirty-eight
Week Period
Ended
December 23,
2004
    Fourteen
Week Period
Ended
March 31,
2005
    Period
Ended
December 26,
2002
    Year
Ended
January 1,
2004
    Year Ended
December 30,
2004
    Three
Months
Ended
March 31,
2005
    Nine Months
Ended
December 29,
2005
    Year Ended
December 28,
2006
 
Result of
Operations Data
   ($ in millions, except advertising contract value per founding member attendee)  

Revenue:

                    

Advertising

   $ 68.9     $ 69.9     $ 56.5     $ 15.5     $ 21.8     $ 65.2     $ 83.6     $ 15.6     $ 56.0     $ 188.2  

Administrative Fees—Members

     —         —         —         —         —         —         —         —         30.8       5.4  

Meetings and Events

     —         —         —         —         2.7       7.0       11.5       2.1       11.7       25.4  

Other

     —         —         —         —         —         0.2       0.2       0.1       0.3       0.3  
                                                                                

TOTAL REVENUE

     68.9       69.9       56.5       15.5       24.5       72.4       95.3       17.8       98.8       219.3  
                                                                                

Expenses:

                    

Advertising Operating Costs

     18.7       17.9       11.3       3.5       2.8       4.4       3.7       0.9       6.3       9.2  

Meetings/Events Operating Costs

     —         —         —         —         0.6       2.1       3.9       0.8       5.4       11.1  

Network Costs

     0.8       1.6       2.3       1.1       1.8       5.0       8.1       2.4       9.2       14.7  

Circuit Share/Theatre Access Fee—Members

     14.6       18.7       18.6       5.5       10.5       15.3       16.6       2.4       38.6       130.1  

Selling and Marketing

     17.6       15.1       10.0       3.2       4.1       11.7       15.9       4.4       24.9       38.2  

Administrative

     13.1       9.5       6.1       1.9       6.7       10.3       10.8       3.4       9.8       16.4  

Deferred Stock Compensation

     —         —         —         —         1.0       1.4       1.4       0.3       —         —    

Severance Plan Costs

     —         —         —         —         —         —         —         —         8.5       4.2  

Depreciation and Amortization

     4.7       2.4       0.9       1.0       0.5       0.9       1.0       0.4       3.0       4.8  

Other

     0.1       1.4       —         0.8       —         —         —         —         —         0.6  
                                                                                

TOTAL EXPENSES

     69.6       66.6       49.2       17.0       28.0       51.1       61.4       15.0       105.7       229.3  
                                                                                

Operating Income/ (Loss)

     (0.7 )     3.3       7.3       (1.5 )     (3.5 )     21.3       33.9       2.8       (6.9 )     (10.0 )

Interest Expense, Net

     —         —         —         —         —         —         —         —         —         0.5  
                                                                                

Income/(Loss) Before Income Taxes

     (0.7 )     3.3       7.3       (1.5 )     (3.5 )     21.3       33.9       2.8       (6.9 )     (10.5 )

Income Taxes

     (0.3 )     1.4       3.0       (0.6 )     (1.4 )     8.4       13.3       1.1       —         —    
                                                                                

NET INCOME (LOSS)

   $ (0.4 )   $ 1.9     $ 4.3     $ (0.9 )   $ (2.1 )   $ 12.9     $ 20.6     $ 1.7     $ (6.9 )   $ (10.5 )
                                                                                

Other Financial Data

                    

EBITDA(1)

   $ 4.0     $ 5.7     $ 8.2     $ (0.5 )   $ (3.0 )   $ 22.2     $ 34.9     $ 3.2     $ (3.9 )   $ (5.2 )

Adjusted EBITDA(1)

   $ 4.0       5.7       8.2       (0.5 )     (2.0 )     23.6       36.3       3.5       4.6       0.9  

Adjusted EBITDA Margin(1)

     5.8 %     8.2 %     14.5 %     NM       NM       32.6 %     38.1 %     19.7 %     4.7 %     0.4 %

Capital Expenditures

   $ 1.4     $ 0.1     $ —       $ —       $ 2.6     $ 1.3     $ 2.7     $ 1.4     $ 5.9     $ 6.6  

 

32


     Predecessor—National Cinema Network, Inc.    Predecessor—Regal CineMedia Corporation    National CineMedia, LLC
     Year
Ended
April 3,
2003
   Year
Ended
April 1,
2004
   Thirty-eight
Week Period
Ended
December 23,
2004
   Fourteen
Week Period
Ended
March 31,
2005
   Period
Ended
December 26,
2002
   Year
Ended
January 1,
2004
   Year Ended
December 30,
2004
   Three
Months
Ended
March 31,
2005
  

Nine

Months
Ended
December 29,
2005

  

Year

Ended
December 28,
2006

Operating Data

                             

Founding Member Screens at Period End(2)

     3,152      3,168      3,170      3,144      5,663      6,045      6,273      6,258      9,696      13,127

Total Screens at Period End(3)

     7,711      7,297      5,026      5,001      5,663      6,045      6,565      6,550      10,766      14,081

Digital Screens at Period End(4)

     162      1,173      2,523      2,523      1,765      4,584      5,303      5,674      8,713      11,463

Total Advertising Contract Value(6)

   $ 68.9    $ 69.9    $ 56.5    $ 15.5    $ 21.8    $ 65.2    $ 83.6    $ 15.6    $ 144.0    $ 205.1

Founding Member Attendance for Period (in millions)(5)

     166.7      163.3      118.5      41.5      210.0      265.6      253.8      58.6      299.3      514.1

Total Advertising Contract Value per Founding Member Attendee(6)

   $ 0.41    $ 0.43    $ 0.48    $ 0.37    $ 0.10    $ 0.25    $ 0.33    $ 0.27    $ 0.48    $ 0.40

 

     Predecessor—National Cinema Network, Inc.    Predecessor—Regal CineMedia Corporation    National CineMedia, LLC
     As of
April 3,
2003
    As of
April 1,
2004
   As of
December 23,
2004
   As of
March 31,
2005
   As of
December 26,
2002
   As of
January 1,
2004
   As of
December 30,
2004
   As of
March 31,
2005
  

As of
December 29,

2005

  

As of
December 28,

2006

                                    ($ in millions)          

Balance Sheet Data

                            

Receivables, Net

   $ 13.4     $ 14.4    $ 26.2    $ 20.1    $ 10.0    $ 20.6    $ 28.8    $ 15.8    $ 36.6    $ 63.9

Property and Equipment, Net

     3.8       2.0      0.7      0.7      2.1      2.5      4.2      5.2      10.0      12.6

Total Assets

     20.4       18.2      27.8      60.8      13.0      28.0      49.4      48.2      48.8      90.0

Borrowings

     —         —        —        —        —        —        —        —        1.3      10.0

Members’/Stockholder’s equity

     (0.6 )     1.3      5.6      0.1      6.0      18.9      39.5      41.2      9.8      3.5

 

33


Notes to the Selected Historical Financial and Operating Data

1. EBITDA, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures used by management to measure operating performance. EBITDA represents net income (loss) before net interest expense, income tax provision (benefit), and depreciation and amortization expense. Adjusted EBITDA excludes from EBITDA severance plan costs, share-based payment costs and deferred stock compensation. Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by total revenue. EBITDA and adjusted EBITDA do not reflect the Loews payments discussed in the following paragraph, which after the offering are included in the calculation of adjusted EBITDA to determine our compliance with financial covenants under our new senior secured credit facility.

On January 26, 2006, AMC completed the acquisition of Loews. Loews has a pre-existing contract with another cinema advertising provider through May 31, 2008. Therefore, the Loews screens will become part of our national theatre network on an exclusive basis beginning on June 1, 2008 (subject to the run-out of certain pre-existing contractual obligations for on-screen advertising existing on May 31, 2008). In accordance with a Loews screen integration agreement between us and AMC, AMC will pay us an amount that approximates the EBITDA we would have generated if we were able to sell on-screen advertising in the Loews theatre chain on an exclusive basis. Effective as of January 5, 2007, NCM LLC re-allocated the common membership units in NCM LLC among the founding members to reflect the payments to be made by AMC pursuant to the terms of the Loews screen integration agreement. The number of common membership units allocated to AMC was calculated by multiplying the total number of NCM LLC common membership units outstanding by a ratio of theatre screens and patrons at Loews theatres compared to the total number of theatre screens and patrons at all founding members’ theatres. These Loews payments will be made on a quarterly basis in arrears until May 31, 2008 and will be recorded directly to NCM LLC’s members’ equity accounts and it will not be reflected in NCM LLC’s statements of operations. For the year ended December 28, 2006 the Loews payment would have been $9.6 million.

We have included EBITDA, adjusted EBITDA and adjusted EBITDA margin in this document to provide investors with supplemental measures of our operating performance and information about the calculation of some of the financial covenants that will be contained in our new senior secured credit facility. We believe EBITDA, adjusted EBITDA and adjusted EBITDA margin are important supplemental measures of operating performance because they eliminate items that have less bearing on our operating performance and so highlight trends in our core business that may not otherwise be apparent when relying solely on generally accepted accounting principles, or GAAP, financial measures. We also believe that securities analysts, investors and other interested parties frequently use EBITDA, adjusted EBITDA and adjusted EBITDA margin in the evaluation of issuers, many of which present EBITDA, adjusted EBITDA and adjusted EBITDA margin when reporting their results. Also, because of the significant changes in our operating results that will result from our acquisition of an interest in NCM LLC, the changes in the exhibitor services agreements and the financing transaction, we disclose pro forma EBITDA, adjusted EBITDA and adjusted EBITDA margin in this document.

Adjusted EBITDA including the Loews payments is a material component of the covenants imposed on us by the new senior secured credit facility. Under the new senior secured credit facility, we are subject to financial covenant ratios that will be calculated by reference to adjusted EBITDA including the Loews payments. Non-compliance with the financial covenants contained in the senior secured credit facility could result in a default, an acceleration in the repayment of amounts outstanding and a termination of the lending commitments under the senior secured credit facility. For a description of required financial covenant levels and actual ratio calculations based on adjusted EBITDA including the Loews payments, see Management’s Discussion and Analysis of Financial Conditions and Results of Operations-Financial Condition and Liquidity-Financings-New senior secured credit facility.”

EBITDA, adjusted EBITDA and adjusted EBITDA margin are not presentations made in accordance with GAAP. As discussed above, we believe that the presentation of EBITDA, adjusted EBITDA and adjusted EBITDA margin in this document is appropriate. However, when evaluating our results, you should not consider EBITDA, adjusted EBITDA and adjusted EBITDA margin in isolation of, or as a substitute for, measures of our financial performance as determined in accordance with GAAP, such as net income (loss). EBITDA, adjusted EBITDA and adjusted EBITDA margin have material limitations as performance measures because they exclude items that are necessary elements of our costs and operations. Because other companies may calculate EBITDA, adjusted EBITDA and adjusted EBITDA margin differently than we do, EBITDA, adjusted EBITDA and adjusted EBITDA margin may not be comparable to similarly-titled measures reported by other companies.

 

34


The following table reconciles net income (loss) to EBITDA, adjusted EBITDA and adjusted EBITDA margin for the periods presented:

 

     Predecessor—National Cinema Network, Inc.     Predecessor—Regal CineMedia Corporation     National CineMedia, LLC  
    

Year
Ended

April 3,

2003

   

Year

Ended

April 1,

2004

   

Thirty-eight

Week Period

Ended

December 23,

2004

    Fourteen
Week Period
Ended
March 31,
2005
    Period
Ended
December 26,
2002
    Year
Ended
January 1,
2004
   

Year

Ended
December 30,
2004

    Three Months
Ended
March 31,
2005
    Nine Months
Ended
December 29,
2005
    Year Ended
December 28,
2006
 
                             ($ in millions)              

Net Income (Loss)

   $ (0.4 )   $ 1.9     $ 4.3     $ (0.9 )   $ (2.1 )   $ 12.9     $ 20.6     $ 1.7     $ (6.9 )   $ (10.5 )

Income Taxes

     (0.3 )     1.4       3.0       (0.6 )     (1.4 )     8.4       13.3       1.1       —         —    

Interest Expense, Net

     —         —         —         —         —         —         —         —         —         0.5  

Depreciation and Amortization

     4.7       2.4       0.9       1.0       0.5       0.9       1.0       0.4       3.0       4.8  
                                                                                

EBITDA

   $ 4.0     $ 5.7     $ 8.2     $ (0.5 )   $ (3.0 )   $ 22.2     $ 34.9     $ 3.2     $ (3.9 )   $ (5.2 )
                                                                                

Severance Plan Costs

     —         —         —         —         —         —         —         —         8.5       4.2  

Share-based Compensation

     —         —         —         —         —         —         —         —         —         1.9  

Deferred Stock Compensation

     —         —         —         —         1.0       1.4       1.4       0.3       —         —    
                                                                                

Adjusted EBITDA

   $ 4.0     $ 5.7     $ 8.2     $ (0.5 )   $ (2.0 )   $ 23.6     $ 36.3     $ 3.5     $ 4.6     $ 0.9  
                                                                                

Adjusted EBITDA Margin*

     5.8 %     8.2 %     14.5 %     NM       NM       32.6 %     38.1 %     19.7 %     4.7 %     0.4 %

* Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by total revenue.
2. Represents the total number of screens within our advertising network operated by NCM LLC’s founding members. Excludes Loews screens for all periods presented. Excludes Century screens for periods presented through October 2006.
3. Represents the sum of founding member screens and network affiliate screens.
4. Represents the total number of screens which are connected to our digital content network.
5. Represents the total attendance within our advertising network in theatres operated by NCM LLC’s founding members. Excludes Loews screens for all periods presented. Excludes Century screens for periods through October 2006 as presented. The Loews total attendance for the year ended December 28, 2006 was approximately 63.2 million. The Century total attendance for the year ended December 28, 2006 was approximately 48.2 million.
6. Includes advertising revenue plus legacy contract value for all historical periods.

 

35


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our historical financial statements and the related notes included elsewhere in this document. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this document.

Our historical financial data discussed below reflects the historical results of operations and financial position of our predecessor, NCM LLC, and its joint predecessors, RCM and NCN. Accordingly, the historical financial data does not give effect to the reorganization, the completion of the offering and the financing transaction. See “Business-Corporate History”, “Business-Reorganization,” “Financial Condition and Liquidity-Financings” and the unaudited pro forma financial information included elsewhere in this document.

Overview

Our revenue is principally derived from the sale of advertising and, to a lesser extent, from our CineMeetings and digital programming events businesses. We have long-term exhibitor services agreements with NCM LLC’s founding members—AMC, Cinemark and Regal, the three largest motion picture exhibition companies in the United States—and multi-year agreements with several other theatre operators that provide access to their theatres to distribute our content, whom we refer to as network affiliates. The exhibitor services agreements grant us exclusive rights, subject to limited exceptions, to sell advertising and meeting services and distribute entertainment programming in those theatres using our digital content network technology. The network affiliate agreements grant us exclusive rights, subject to limited exceptions, to sell advertising on their theatre screens. Our advertising, CineMeetings and digital programming events are distributed to theatres that are digitally equipped over our proprietary digital content network. Approximately 90% of the aggregate founding member and network affiliate attendance is included in our digital network.

Our national on-screen and lobby entertainment network advertising contracts with clients typically specify the number of theatre attendees, or impressions, to be delivered for a four- or five-week advertising campaign and the unit price per thousand impressions, or CPM, for a 30-second advertising unit. Our regional and local on-screen advertising contracts with clients typically specify the number of screens, duration of time (typically one to several weeks) and the unit price (typically a cost per screen per week) for an advertising campaign. Typically there are a minimum of 11 national 30-second advertising units and a minimum of 14 local 15-second units available in any advertising campaign within the FirstLook pre-feature program. The number of national or local units can be expanded to a certain extent depending on market demand. Programming on our lobby entertainment network consists of an approximately 30 minute loop of content segments and advertising. Our lobby promotions contracts are based on a standardized rate card for each product that typically specifies the number of impressions to be delivered. Our CineMeetings revenue is derived from the rental of theatre auditoriums, and the provision of catering services and network and audio visual services that are sold as part of our meeting and event services. Our digital programming revenue is derived from the sale of tickets to the general public for music, sporting and other entertainment events and the sale of event sponsorships for an individual event or a series of events.

Our advertising rates are generally based on either contracts with our content partners and other advertisers, or are driven by the demand in the advertising marketplace, including television and other segments of national, regional and local advertising. Our national on-screen CPMs vary by the time of year and the placement within our pre-feature program. NCM LLC’s founding members and certain of our network affiliates report to us each theatre’s attendance by film and film rating category on a weekly or monthly basis. We believe our network affiliate attendance represents approximately 5% of our total attendance. The number of people in the auditorium at the time an advertisement is presented is based on the exhibitor’s attendance reports. We calculate the number of impressions delivered against advertising contracts by multiplying the attendance data received from the exhibitors by the number of patrons in their seat at a given time prior to the advertised show time. The percentage is based on independent third-party research. If, during any contract period we under-deliver the number of contracted impressions, we will be obligated to either provide “make-good” advertising units in a subsequent period (and defer the recognition of the related revenue) or refund a pro rata portion of the contract amount in cash to the client. Historically, in the majority of cases, clients have asked us to “make-good” rather than to refund cash.

To monitor our national advertising business, our management team typically reviews the average CPMs per 30-second units sold within the FirstLook pre-feature program or lobby entertainment network and the percentage of impressions sold of total available impressions as a measure of inventory utilization. We also monitor the local and regional average rates per screen per week and number of units sold per theatre. Our primary management metrics for the CineMeetings business include the number of events and the revenue per event location. To monitor our digital programming events business revenue, we typically track the number of tickets sold, average ticket prices, revenue per location and events per given period. EBITDA, adjusted EBITDA and adjusted EBITDA margin are also measures used by management to measure operating performance.

 

36


The expenses associated with our business historically have included (i) selling and marketing expenses, (ii) network operations and maintenance costs, (iii) advertising and event costs, (iv) administrative costs and (v) “circuit share” expenses to NCM LLC’s founding members under the current agreements with NCM LLC’s founding members. Our selling and marketing expenses include the base salaries and commissions of our advertising sales staff and expenses associated with marketing, public relations and research departments. Network operations and maintenance costs relate to the personnel and other costs associated with our content production and post-production activities, costs associated with operating our network operations center, satellite bandwidth costs and maintenance of the network software and hardware. Advertising and event costs relate primarily to production and fulfillment of non-digital advertising and payments based on a sharing of revenue with our network affiliates and the direct costs associated with CineMeetings and digital programming events. Circuit share payments are the payments made to NCM LLC’s founding members for the right to provide our services in their theatres using our digital content network and prior to the offering represented substantially all of our earnings before interest, income taxes, depreciation and amortization, or EBITDA. Our administrative costs primarily consist of salaries and bonuses for our administrative staff and occupancy costs. In connection with the completion of the offering, we entered into 30-year exhibitor services agreements (with a right of first refusal, which begins one year prior to the end of the term of the agreement) with each of NCM LLC’s founding members. The exhibitor services agreements provide for the payment of a theatre access fee, in lieu of circuit share expense, comprised of a payment per theatre attendee and a payment per digital screen, both of which escalate over time, but which are expected to result in significantly lower payments as a percentage of our revenue than have been required historically.

Our operating results may be affected by a variety of internal and external factors and trends described more fully below, and as also described in “Risk Factors”:

 

   

Pre-feature show content. We have sought to make our FirstLook pre-show both entertaining for theatre audiences and an effective advertising platform for our clients. If the theatre audiences or advertisers do not respond as we anticipate to our pre-feature show format or content, our advertising revenue could be adversely affected.

 

   

Trends in advertising. As advertisers continue to shift spending to non-traditional, targeted media platforms from traditional media such as television, newspapers and billboards, our advertising business could benefit from this trend.

 

   

Theatre attendance. Theatre attendance depends to a significant degree on the quality of the motion pictures distributed by the movie studios to the film exhibitors as well as the development of other distribution platforms. Although theatre attendance declined from 2001 to 2005 and then increased in 2006, during this time, cinema advertising revenue significantly increased as a result of better visibility of the medium and the use of digital technology, which enhanced the reach and overall value proposition of cinema advertising. However, as cinema advertising matures, this trend may not continue.

 

   

Addition of theatres. As theatres are added to our digital in-theatre network (either as NCM LLC’s founding members construct or acquire theatres, such as in the case of the Century acquisition, or as we add new network affiliates), due to the scalable nature of our business, we expect our revenue to increase with minimal additional capital or operating expenditures.

 

   

Growth of our meetings and digital programming businesses. Our ability to grow our meetings and digital programming businesses depends on our success in growing our customers’ awareness of these services through effective marketing.

We have a 52-week or 53-week fiscal year ending on the first Thursday after December 25. Fiscal years 2004, 2005 and 2006 contained 52 weeks, while fiscal year 2003 contained 53 weeks. Throughout this document, we refer to our fiscal years as set forth below:

 

Fiscal Year Ended

   Reference in
this Document

December 28, 2006

   2006

December 29, 2005

   2005

December 30, 2004

   2004

 

37


Our Company Following the Completion of the Offering

Prior to the completion of the offering, NCM LLC was wholly-owned by its founding members. In connection with the offering, we purchased newly issued common membership units from NCM LLC and common membership units from the founding members, and have become a member and the sole manager of NCM LLC. We entered into several agreements to effect the reorganization and the financing transaction and to define and regulate the relationships among NCM LLC and the founding members after the completion of these transactions. For more information about the agreements discussed below and the other agreements between us, NCM LLC and the founding members, see “Certain Relationships and Related Party Transactions—Transactions with Founding Members.”

Exhibitor Services Agreements

The exhibitor services agreements that we and the founding members entered into in connection with the offering significantly change the structure of NCM LLC’s payments to the founding members. Under the contractual arrangements in place up to the completion of the offering, NCM LLC made quarterly circuit share payments to the founding members based on varying percentages of advertising revenue. Under the amended exhibitor services agreements, we make monthly theatre access fee payments to the founding members, comprised of a payment per theatre attendee of $0.07 which will increase by 8% every five years with the first such increase taking effect after the end of fiscal 2011 and a payment per digital screen of approximately $66.67 which will increase 5% per year beginning at the end of fiscal 2007. These payments will be adjusted for any advertising exhibited by some, but not all, theatres or founding members because of content objections or technical capacity. The theatre access fee paid in the aggregate to all founding members annually will not be less than 12% of NCM LLC’s aggregate annual advertising revenue as defined in the exhibitor services agreements, or it will be adjusted upward to reach this minimum payment. The theatre access fee replaces the circuit share expenses, which is expected to significantly reduce the contractual amounts paid to NCM LLC’s founding members from the historical amounts. Also, under the modified exhibitor services agreements, NCM LLC revenue will increase significantly due to the payments from the founding members for the display of up to 90 seconds of on-screen advertising under beverage concessionaire agreements at an agreed upon rate. For more information on the exhibitor services agreements, see “Certain Relationships and Related Party Transactions—Transactions with Founding Members—Exhibitor Services Agreements.”

Loews Payments

On January 26, 2006, AMC acquired the Loews theatre circuit. The Loews screen integration agreement, effective as of January 5, 2007, between NCM LLC and AMC in connection with the offering, commits AMC to cause the theatres it acquired from Loews to participate in the exhibitor services agreements beginning on June 1, 2008. These U.S.-based Loews screens will become part of our national advertising network on an exclusive basis beginning on June 1, 2008, following the expiration of Loews’ pre-existing contract with another cinema advertising provider. The Loews theatres will be subject to the following limitations: (i) during the period beginning on June 1, 2008 through November 30, 2008, the run-out of on-screen advertising and entertainment content and (ii) during the period beginning on December 1, 2008 through February 28, 2009, the right of the prior advertising provider to up to one minute of advertising during the pre-feature show, in each case, for pre-existing contractual obligations that exist on May 31, 2008. In accordance with a Loews screen integration agreement between us and AMC, which was amended and restated in connection with the offering, AMC will pay us an amount that approximates the EBITDA we would have generated if we were able to sell advertising in the Loews theatre chain on an exclusive basis. Effective as of January 5, 2007, NCM LLC re-allocated the common membership units in NCM LLC among the founding members to reflect the payments to be made by AMC pursuant to the terms of the Loews screen integration agreement. The number of common membership units allocated to AMC was calculated by multiplying the total number of NCM LLC common membership units outstanding by a ratio of theatre screens and patrons at Loews theatres compared to the total number of theatre screens and patrons at all founding member theatres. These Loews payments will be made on a quarterly basis in arrears until May 31, 2008 thereafter in accordance with certain run-out provisions. For the year ended December 28, 2006, the Loews payments would have been $9.6 million. The payments, for accounting purposes, will be recorded directly to NCM LLC’s members’ equity accounts and will not be reflected in NCM LLC’s statements of operations.

Debt Financings

In connection with entering into the senior secured credit facility under which NCM LLC borrowed $725.0 million, and entered into an $80.0 million revolving credit facility as discussed in “Financial Condition and Liquidity—Financings—New senior secured credit facility.” We drew $10.0 million on the revolving credit facility at closing, and as of March 22, 2007, $51.0 million was outstanding on the revolving credit facility. NCM LLC expects interest expense to increase significantly based on the outstanding level of the facility as compared to our historical borrowing levels.

 

38


Other

Subsequent to the completion of the offering, we expect administrative costs to increase by approximately $2.5 to $3.0 million per year compared to expenses incurred as a private company. These incremental costs include regulatory filing and compliance costs, salaries and benefits costs for additional staffing, additional insurance costs and costs of investor relations.

Summary Historical and Pro Forma Financial and Operating Data

NCM LLC was formed on March 29, 2005, by AMC and Regal as a joint venture that combined the cinema advertising and meetings and events operations of Regal’s subsidiary, RCM, and the cinema advertising operations of AMC’s subsidiary, NCN. RCM and NCN are considered to be the joint predecessors of NCM LLC. On July 15, 2005, Cinemark, through a wholly-owned subsidiary, joined NCM LLC as a founding member. Because Cinemark had a pre-existing contract with another cinema advertising provider, NCM LLC began selling advertising for Cinemark’s screens on an exclusive basis beginning on January 1, 2006, subject to the run-out of certain pre-existing contractual obligations for on-screen advertising through April 1, 2006. As a result, revenue from the sale of advertising for Cinemark’s screens began on January 1, 2006 in NCM LLC’s unaudited historical statements of operations.

NCM LLC is considered to be the predecessor of NCM Inc. The summary historical financial and operating data for the year ended December 28, 2006, and the summary balance sheet data as of December 28, 2006 hereinafter presented, were derived from the audited financial statements of NCM LLC included elsewhere in this document. The summary historical financial and operating data for the nine months ended December 29, 2005 were derived from the audited financial statements of NCM LLC included elsewhere in this document.

The summary (i) unaudited pro forma consolidated statements of operations for the year ended December 28, 2006, (ii) unaudited pro forma condensed consolidated balance sheet at December 28, 2006, both of which are included elsewhere in this document, and (iii) unaudited pro forma consolidated statement of operations for the year ended December 29, 2005, which was included in our registration statement and is not included elsewhere in this document, show the results of operations and financial position of NCM Inc. assuming the transactions and contractual arrangements discussed in “Business-Corporate History” and “Business-Reorganization” had been completed or entered into as of December 31, 2004, with respect to the pro forma statements of operations and as of December 28, 2006, with respect to the pro forma balance sheet. The pro forma adjustments are based on available information and upon assumptions that management believes are reasonable in order to reflect, on a pro forma basis, the impact on the historical financial information of NCM Inc. of the historical and the transaction adjustments as described in unaudited pro forma financial information included elsewhere in this document.

You should read this unaudited pro forma condensed consolidated financial information together with the other information contained in this document, including “Business-Corporate History” and “Business-Reorganization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited historical financial statements and the notes thereto and unaudited proforma financial information included elsewhere in this document.

The unaudited pro forma condensed consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of NCM Inc. and NCM LLC that would have occurred had they operated as separate, independent companies during the periods presented. The historical results of operations of NCM LLC, RCM and NCN have been significantly impacted by related party transactions, as discussed more fully in the historical financial statements included elsewhere in this document, and the future operating results of NCM Inc. will also be impacted by related party transactions. Historical and pro forma results of operations and financial condition are not necessarily indicative of what would have occurred had all transactions occurred with unrelated parties. Also, the pro forma condensed consolidated financial information should not be relied upon as being indicative of NCM Inc. or NCM LLC’s results of operations or financial condition had the historical adjustments and the transaction adjustments been completed on December 31, 2004, with respect to the pro forma statements of operations and as of December 28, 2006, with respect to the pro forma balance sheet. The pro forma condensed consolidated financial information also does not project our results of operations or financial position for any future period or date.

 

39


     Nine Months
Ended
December 29,
2005
Historical
   

Year Ended
December 29,
2005

Pro Forma

    Year Ended
December 28,
2006
Historical
   

Year Ended
December 28,
2006

Pro Forma

 
     ($ in millions, except net income per share and total advertising
contract value revenue per founding member attendee)
 

Result of Operations Data

        

Advertising Revenue

   $ 56.0     $ 207.4     $ 188.2     $ 250.0  

Administrative Fees—Members

     30.8       —         5.4       —    

Total Revenue

     98.8       221.6       219.3       275.7  

Operating Income (Loss)

     (6.9 )     95.7       (10.0 )     126.8  

Net Income (Loss)

     (6.9 )     8.2       (10.5 )     16.6  

Net Income (Loss) Per Basic Share

   $ (0.16 )   $ 0.20     $ (0.25 )   $ 0.39  

Net Income (Loss) Per Diluted Share

   $ (0.16 )   $ 0.20     $ (0.25 )   $ 0.40  

Other Financial Data

        

EBITDA(1)

   $ (3.9 )   $ 100.0     $ (5.2 )   $ 131.6  

Adjusted EBITDA(1)

     4.6       108.8       0.9       138.3  

Adjusted EBITDA Margin(1)

     4.7 %     49.1 %     0.4 %     50.2 %

Capital Expenditures

   $ 5.9       NA     $ 6.6       NA  

Operating Data

        

Founding Member Screens at Period End(2)

     9,696       9,696       13,127       13,127  

Total Screens at Period End(3)

     10,766       10,766       14,081       14,081  

Digital Screens at Period End(4)

     8,713       8,713       11,463       11,463  

Founding Member Attendance for Period(5) (in millions)

     299.3       395.2       514.1       514.1  

Total Advertising Contract Value(6)

   $ 144.0     $ 203.7     $ 205.1     $ 245.1  

Total Advertising Contract Value per Founding Member Attendee(6)

   $ 0.48     $ 0.52     $ 0.40     $ 0.48  

 

     December 28, 2006  
     NCM LLC
Historical
  

NCM Inc.
Pro Forma

As Adjusted

 

Balance Sheet Data

     

Cash and cash equivalents

   $ 6.7    $ 6.7  

Receivables, net

     63.9      63.9  

Property and equipment

     12.6      12.6  

Total Assets

     90.0      333.5  

Indebtedness

     10.0      735.0  

Members’/Stockholder’s Equity (Deficit)

     3.5      (601.6 )

Notes to the Summary Historical and Pro Forma Financial and Operating Data

1. EBITDA, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures used by management to measure operating performance. EBITDA represents net income (loss) before net interest expense, income tax benefit (provision), minority interest, and depreciation and amortization expense. Adjusted EBITDA excludes from EBITDA severance plan costs, non-cash unit based costs and deferred stock compensation. Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by total revenue. EBITDA and adjusted EBITDA do not reflect the Loews payments discussed in the following paragraph, which after the offering is included in the calculation of adjusted EBITDA to determine our compliance with financial covenants under our new senior secured credit facility. See further discussion of EBITDA at “EBITDA” below.

On January 26, 2006, AMC completed the acquisition of Loews. Loews has a pre-existing contract with another cinema advertising provider through May 31, 2008. Therefore, the Loews screens will become part of our national theatre network on an exclusive basis beginning on May 31, 2008, subject to the run-out of certain pre-existing contractual obligations for on-screen advertising existing on June 1, 2008. In accordance with a Loews screen integration agreement between us and AMC, AMC will pay us an amount that approximates the EBITDA we would have generated if we were able to sell advertising in the Loews theatre chain on an exclusive basis. Effective as of January 5, 2007, NCM LLC re-allocated the common membership units in NCM LLC among

 

40


the founding members to reflect the payments to be made by AMC pursuant to the terms of the Loews screen integration agreement. The number of common membership units allocated to AMC was calculated by multiplying the total number of NCM LLC common membership units outstanding by a ratio of theatre screens and patrons at Loews theatres compared to the total number of theatre screens and patrons at all founding members’ theatres. These Loews payments will be made on a quarterly basis in arrears until May 31, 2008, and for accounting purposes will be recorded in members’ equity and will not be reflected in NCM LLC’s statements of operations. For the year ended December 28, 2006, the Loews payments would have been $9.6 million.

We have included EBITDA, adjusted EBITDA and adjusted EBITDA margin in this document to provide investors with supplemental measures of our operating performance and information about the calculation of some of the financial covenants that will be contained in our new senior secured credit facility. We believe EBITDA, adjusted EBITDA and adjusted EBITDA margin are important supplemental measures of operating performance because they eliminate items that have less bearing on our operating performance and so highlight trends in our core business that may not otherwise be apparent when relying solely on generally accepted accounting principles, or GAAP, financial measures. We also believe that securities analysts, investors and other interested parties frequently use EBITDA, adjusted EBITDA and adjusted EBITDA margin in the evaluation of issuers, many of which present EBITDA, adjusted EBITDA and adjusted EBITDA margin when reporting their results. Also, because of the significant changes in our operating results that will result from our acquisition of an interest in NCM LLC, the changes in the exhibitor services agreements and the financing transaction, we disclose pro forma EBITDA, adjusted EBITDA and adjusted EBITDA margin in this document.

Adjusted EBITDA including the Loews payments is a material component of the covenants that is imposed on us by the new senior secured credit facility. Under the new senior secured credit facility, we are subject to financial covenant ratios that will be calculated by reference to adjusted EBITDA including the Loews payments. Non-compliance with the financial covenants contained in the senior secured credit facility could result in a default, an acceleration in the repayment of amounts outstanding and a termination of the lending commitments under the senior secured credit facility. For a description of required financial covenant levels and actual ratio calculations based on adjusted EBITDA including the Loews payments.

EBITDA, adjusted EBITDA and adjusted EBITDA margin are not presentations made in accordance with GAAP. As discussed above, we believe that the presentation of EBITDA, adjusted EBITDA and adjusted EBITDA margin in this document is appropriate. However, when evaluating our results, you should not consider EBITDA, adjusted EBITDA and adjusted EBITDA margin in isolation of, or as a substitute for, measures of our financial performance as determined in accordance with GAAP, such as net income (loss). EBITDA, adjusted EBITDA and adjusted EBITDA margin have material limitations as performance measures because they exclude items that are necessary elements of our costs and operations. Because other companies may calculate EBITDA, adjusted EBITDA and adjusted EBITDA margin differently than we do, EBITDA, adjusted EBITDA and adjusted EBITDA margin may not be comparable to similarly-titled measures reported by other companies.

The following table reconciles net income (loss) to EBITDA, adjusted EBITDA and adjusted EBITDA margin on a historical and pro forma basis for the periods presented:

 

     Nine Months
Ended
December 29,
2005
Historical
   

Year

Ended
December 29,
2005

Pro Forma

   

Year

Ended
December 28,
2006
Historical

   

Year

Ended
December 28,
2006

Pro Forma

 
     ($ in millions)  

Net Income (Loss)

   $ (6.9 )   $ 8.2     $ (10.5 )   $ 16.6  

Income Taxes

     —         12.3       —         24.7  

Minority Interest

     —         10.2       —         20.5  

Interest Expense

     —         65.0       0.5       65.0  

Depreciation and Amortization

     3.0       4.3       4.8       4.8  
                                

EBITDA

   $ (3.9 )   $ 100.0     $ (5.2 )   $ 131.6  
                                

Severance Plan Costs

     8.5       8.5       4.2       4.2  

Share-based Payment Costs

     —         —         1.9       2.5  

Deferred Stock Compensation

     —         0.3       —         —    
                                

Adjusted EBITDA

   $ 4.6     $ 108.8     $ 0.9     $ 138.3  
                                

Adjusted EBITDA Margin*

     4.7 %     49.1 %     0.4 %     50.2 %

* Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by total revenue .
  2. Represents the total number of screens within our advertising network operated by NCM LLC’s founding members. Excludes Cinemark operated screens for the period ended December 29, 2005. Excludes Loews screens for all periods presented. Excludes Century screens for all periods presented through October 2006.
  3. Represents the sum of founding member screens and network affiliate screens.
  4. Represents the total number of screens which are connected to our digital content network.
  5. Represents the total attendance within our advertising network in theatres operated by NCM LLC’s founding members. Excludes Cinemark attendance for the period ended December 29, 2005. Excludes Loews screens for all periods presented. The Loews total attendance for the year ended December 28, 2006 was approximately 63.2 million. Excludes Century screens through October 2006 for all periods presented. The Century total attendance for the year ended December 28, 2006 was approximately 48.2 million.
  6. Includes advertising revenue plus legacy contract value for all historical periods. Excludes $3.7 million of revenue related to the beverage concessionaire agreements for Cinemark in the pro forma period ended December 29, 2005, and $4.9 million of revenue related to the beverage concessionaire agreements for Loews in the pro forma year ended December 28, 2006, as attendees for Cinemark and Loews were not included during these periods.

 

41


Basis of Presentation

Our historical financial information discussed herein has been derived from the financial statements and accounting records of NCM LLC for the nine months ended December 29, 2005 and the year ended December 28, 2006, from the financial statements and accounting records of its joint predecessor company RCM for the fiscal years ended January 1, 2004 and December 30, 2004 and for the three months ended March 31, 2005 and from the financial statements and accounting records of its joint predecessor company NCN for the fiscal year ended April 1, 2004, the thirty-eight week period ended December 23, 2004 and the fourteen week period ended March 31, 2005. NCN’s parent company was acquired on December 24, 2004, resulting in a change in basis of accounting and the requirement to report the fiscal year 2004 results of operations in pre- and post-acquisition periods.

 

42


Results of Operations

The following table summarizes our historical results of operations and the results of operations:

 

     Predecessor-National Cinema Network, Inc.     Predecessor-Regal CineMedia Corporation    Predecessor-National CineMedia, LLC  
     Year
Ended
April 1,
2004
   Thirty-eight
Week Period
Ended
December 23,
2004
   Fourteen
Week Period
Ended
March 31,
2005
   

Year

Ended
January 1,
2004

  

Year

Ended

December 30,
2004

   Three
Months
Ended
March 31,
2005
  

Nine Months

Ended

December 29,
2005

   

Year

Ended

December 28,
2006

 
             ($ in millions)        

Revenue:

                     

Advertising

   $ 69.9    $ 56.5    $ 15.5     $ 65.2    $ 83.6    $ 15.6    $ 56.0     $ 188.2  

Administrative Fees—Members

     —        —        —         —        —        —        30.8       5.4  

Meetings and Events

     —        —        —         7.0      11.5      2.1      11.7       25.4  

Other

     —        —        —         0.2      0.2      0.1      0.3       0.3  
                                                           

TOTAL REVENUE

     69.9      56.5      15.5       72.4      95.3      17.8      98.8       219.3  
                                                           

Expenses:

                     

Operating Costs

     19.5      13.6      4.6       11.5      15.7      4.1      20.9       35.6  

Selling and Marketing Costs

     15.1      10.0      3.2       11.7      15.9      4.4      24.9       38.2  

Circuit Share Costs—Members

     18.7      18.6      5.5       15.3      16.6      2.4      38.6       130.1  

Administrative Costs

     10.9      6.1      2.7       10.3      10.8      3.4      9.8       16.4  

Deferred Stock Compensation and Severance Plan Costs

     —        —        —         1.4      1.4      0.3      8.5       4.2  

Depreciation and Amortization

     2.4      0.9      1.0       0.9      1.0      0.4      3.0       4.8  
                                                           

TOTAL EXPENSES

     66.6      49.2      17.0       51.1      61.4      15.0      105.7       229.3  
                                                           

Operating Income (Loss)

     3.3      7.3      (1.5 )     21.3      33.9      2.8      (6.9 )     (10.0 )

Interest Expense, Net

     —        —        —         —        —        —        —         0.5  
                                                           

Income/(Loss) Before Income Taxes

     3.3      7.3      (1.5 )     21.3      33.9      2.8      (6.9 )     (10.5 )

Income Taxes

     1.4      3.0      (0.6 )     8.4      13.3      1.1      —         —    
                                                           

NET INCOME (LOSS)

   $ 1.9    $ 4.3    $ (0.9 )   $ 12.9    $ 20.6    $ 1.7    $ (6.9 )   $ (10.5 )
                                                           

 

43


Factors Affecting Comparability of Results of Operations

RCM provided advertising services to the Regal theatre circuit during fiscal 2002, 2003, 2004, and the first quarter of fiscal 2005. Additionally, beginning in October 2004, RCM provided advertising services to one network affiliate. NCN provided advertising services to the AMC theatre circuits and various network affiliates during its fiscal or other periods ended 2003, 2004, 2005 and the first quarter of fiscal 2005.

NCM LLC was formed on March 29, 2005, by AMC and Regal as a joint venture that combined the cinema advertising and meetings and events operations of Regal’s subsidiary, RCM, and the cinema advertising operations of AMC’s subsidiary, NCN. On July 15, 2005, Cinemark joined NCM LLC as a founding member. Upon becoming a member of NCM LLC, each founding member entered into an exhibitor services agreement with NCM LLC, which remained in effect until the founding members entered into new exhibitor services agreements upon the completion of the offering. Because Cinemark had a pre-existing contract with another cinema advertising provider, NCM LLC began selling advertising for Cinemark’s screens on an exclusive basis beginning on January 1, 2006, subject to the run-out of certain pre-existing contractual obligations for on-screen advertising through April 1, 2006. By May 2006, all of Cinemark’s digital screens were connected to our digital content network.

In addition to the impact on comparability of the addition of the Cinemark screens during 2006, comparability of NCM LLC’s results between 2006 and 2005, and comparability of NCM LLC’s 2005 results with those of its predecessors is limited by the fact that NCM LLC began operations April 1, 2005. Thus, it had only nine months of operations for the period ended December 29, 2005, and direct comparison to the twelve month results for the year ended December 28, 2006 is not possible.

Because of NCM LLC’s formation date, there are no comparable full year periods available. On October 5, 2006, Cinemark completed the acquisition of the Century theatre circuit and the Century screens have been added to our network on an exclusive basis in November 2006. The addition of the Century theatre network will affect the comparability of future results.

At NCM LLC’s formation, each of AMC and Regal retained their pre-existing advertising contracts and we administered those contracts on behalf of those founding members for an administrative fee equal to 35% of total revenue through December 29, 2005 and 32% thereafter. Over time as these “legacy” advertising contracts were fulfilled and we entered into new contracts directly with advertisers, the administrative fees declined and our advertising revenue increased. The total underlying legacy contract value was approximately equal to our administrative fees during that period divided by the appropriate administrative fee percentage. Therefore, we believe the most meaningful metric to ascertain the growth of our advertising revenue among all historical periods presented is the total amount of our advertising revenue plus the legacy contract value. We also refer to total advertising contract value, divided by the total number of founding member attendees as total advertising contract value per founding member attendee. We believe this metric is helpful to analyze advertising revenue performance across our reporting periods, and provides a measure of revenue which is independent of the number of screens in our network for which advertising services are being provided.

The increases in the size of the network, as well as differences in the structure of circuit share expense, limit the comparability of operating expenses for all reporting periods except for fiscal 2004 and fiscal 2003 and comparisons of each joint predecessor to its own operations. Therefore, certain components of operating expenses, including selling and marketing, administrative, and depreciation expense, will be analyzed on the basis of cost per founding member attendee. Deferred stock compensation and severance plan costs are not generally related to the number of founding member attendees. Deferred stock compensation expense was recorded by RCM and relates to Regal stock option grants made to RCM employees. At the time of the formation of NCM LLC, remaining unvested in-the-money Regal stock option grants were converted to a series of cash payments to each option grantee, subject to a continuation of employment requirement, and have been accounted for as an expense by NCM LLC. These costs declined from $8.5 million during the nine months ended December 29, 2005 to $4.2 million during the year ended December 28, 2006, and will continue to decline as the participants in the severance plan receive their final payments.

Circuit share expense for the periods presented is recorded as a percentage of revenue based upon the exhibitor services agreements between NCM LLC and the founding members. Before the formation of NCM LLC, when RCM operated as a stand-alone entity, payments were made to RCM’s parent, Regal, through inter-company transfers which are described as circuit share expense in the table above. The circuit share expense for NCN prior to the formation of RCM represents payments made by NCN to other theatre circuits under agreements to display advertising at their theatres. Upon the completion of the offering, the circuit share expense currently paid by NCM LLC to the founding members was converted to a theatre access fee calculated as described above in connection with the amendment and restatement of the exhibitor services agreements. Since circuit share expense is a significant portion of operating expenses, it is discussed as a separate category in the Results of Operations discussion below.

 

44


The following table presents total advertising contract value and operating expenses per founding member attendee for the periods presented, which will be discussed further below.

 

     National Cinema Network, Inc.    Regal CineMedia Corporation    National CineMedia, LLC
     Year
Ended
April 1,
2004
   Thirty-
eight
Week
Period
Ended
December
23, 2004
   Fourteen
Week
Period
Ended
March 31,
2005
   Year
Ended
January 1,
2004
   Year
Ended
December
30, 2004
   Three
Months
Ended
March 31,
2005
   Nine
Months
Ended
December
29, 2005
   Year
Ended
December
28 ,2006

Total Advertising Contract Value ($ in millions)

   $ 69.9    $ 56.5    $ 15.5    $ 65.2    $ 83.6    $ 15.6    $ 144.0    $ 205.1

Total Advertising Contract Value per Founding Member Attendee

   $ 0.43    $ 0.48    $ 0.37    $ 0.25    $ 0.33    $ 0.27    $ 0.48    $ 0.40

Total Operating Expenses per Founding Member Attendee

   $ 0.29    $ 0.26    $ 0.28    $ 0.13    $ 0.17    $ 0.21    $ 0.20    $ 0.19

Results of Operations

Years ended December 28, 2006 and December 29, 2005

For purposes of this analysis, the year ended December 29, 2005 includes revenue, total advertising contract value, operating expenses, circuit share expense and net income (loss) of our joint predecessors, RCM and NCN for the quarter ended March 31, 2005, and the results of NCM LLC for the nine months ended December 29, 2005.

Revenue. Total revenue generated by our joint predecessors, RCM and NCN, respectively, was $17.8 million and $15.5 million during their quarter ended March 31, 2005 (prior to the formation of NCM LLC) and total revenue generated by NCM LLC from April 1, 2005 through December 29, 2005 was $98.8 million. Total revenue generated by NCM LLC for the year ended December 28, 2006 was $219.3 million. The 2006 increase versus the combined three month joint predecessor revenue and nine month NCM LLC revenue was the result of a combination of higher national advertising CPMs, which increased by 2.6% between NCM LLC’s period ended December 29, 2005 and year ended December 28, 2006, and an expansion of advertising client base and our network, including the increase in average founding member screens of 3,559, or 40.6%, primarily due to the addition of Cinemark, as well as its conversion of certain legacy contract revenue between NCM LLC’s nine month period ended December 29, 2005 and year ended December 28, 2006 to NCM LLC contracts thereby increasing our revenue, and a 84% increase in CineMeetings revenue due to an increase in event count of 43% and due to the increase in revenue per event.

Total advertising contract value of NCM LLC’s joint predecessors, RCM and NCN, respectively, was $15.6 million and $15.5 million during their quarter ended March 31, 2005 (prior to the formation of NCM LLC) and total advertising contract value of NCM LLC from April 1, 2005 through December 29, 2005 was $144.0 million. Total advertising contract value of NCM LLC for the year ended December 28, 2006 was $205.1 million. This increase versus the combined three month joint predecessor revenue and nine month NCM LLC revenue was primarily the result of the expansion of our advertising client base and network and increase in advertising CPMs, as discussed above. Total advertising contract value per founding member attendee of our joint predecessors, RCM and NCN, respectively, was $0.27 and $0.37 during their quarter ended March 31, 2005 (prior to the formation of NCM LLC) and total advertising contract value per founding member attendee of NCM LLC from April 1, 2005 through December 29, 2005 was $0.48. Total advertising contract value per founding member attendee of NCM LLC for the year ended December 28, 2006 was $0.40. This decrease versus the combined three month joint predecessor revenue and nine month NCM LLC revenue was the result of the impact of restrictions on our ability to sell national advertising on Cinemark’s screens between January 1, 2006 and April 1, 2006, coupled with slight reductions in local advertising inventory utilization as the existing Cinemark clients were transitioned to our FirstLook format, the addition of Century attendees in November 2006, the usual delay associated with absorbing these additional attendees into our sales process and the termination of our largest network affiliate agreement (in terms of advertising revenue) in November 2005.

 

45


Operating Expenses. Total operating expenses generated by our joint predecessors, RCM and NCN, respectively, were $12.3 million and $11.5 million during their quarter ended March 31, 2005 (prior to the formation of NCM LLC) and total operating expenses of NCM LLC from April 1, 2005 through December 29, 2005 were $58.6 million. Total operating expenses of NCM LLC for the year ended December 28, 2006 were $95.0 million. This increase versus the combined three month joint predecessor revenue and nine month NCM LLC revenue was primarily due to increased cost levels due to the addition of Cinemark screens to our network, increased affiliate and commission expenses related to higher revenue, and increased administrative expenses due to additional staffing and infrastructure required to support the growth of NCM LLC, as well as non-cash costs associated with our unit option plan. Direct comparison, however, is not necessarily reflective of future trends between the periods because certain expenses which were incurred by predecessor companies on a separate basis would have been duplicative during their comparative periods, including costs for administrative services including human resources, legal services, accounting services, and other managerial expenses for positions which would have been eliminated when the joint venture was formed, such as sales staff executives. Upon formation of NCM LLC, these duplicative services were eliminated.

Total operating expense per founding member attendee of our joint predecessors, RCM and NCN, respectively, was $0.21 and $0.28 during their quarter ended March 31, 2005 (prior to the formation of NCM LLC) and total operating expense per founding member attendee of NCM LLC from April 1, 2005 through December 29, 2005 was $0.20. Total operating expense per founding member attendee of NCM LLC for the year ended December 28, 2006 was $0.19. This decrease versus the combined three month joint predecessor revenue and nine month NCM LLC revenue was due to a combination of the addition of Cinemark as a founding member and the absorption of those additional screens into our sales process, as well as the elimination of certain of the duplicative expenses incurred by the joint predecessors discussed above.

Circuit share expense. Circuit share expense generated by our joint predecessors, RCM and NCN, respectively, was $2.4 million and $5.5 million during their quarter ended March 31, 2005 (prior to the formation of NCM LLC) and circuit share expense of NCM LLC from April 1, 2005 through December 29, 2005 was $38.6 million. Total circuit share expense of NCM LLC for the year ended December 28, 2006 was $130.1 million. The increase in circuit share expense was primarily due to the increase in levels of revenue during the period, as discussed above, and to a lesser extent, due to the change in the structure of the circuit share agreement which increased the circuit share rate from 65% of advertising revenue in 2005 to 68% in 2006. As noted above, upon completion of the offering, the circuit share expense currently paid to the founding members was converted to a theatre access fee, which is expected to result in significantly lower expense.

Net income (loss) . Net income (loss) generated by our joint predecessors, RCM and NCN, respectively, was $1.7 million and $(0.9) million during their quarter ended March 31, 2005 (prior to the formation of NCM LLC) and the net income (loss) of NCM LLC from April 1, 2005 through December 29, 2005 was $(6.9) million. Total net loss of NCM LLC for year ended December 28, 2006 was $(10.5) million. The higher loss for 2006 was due to the interplay of the factors for revenue and circuit share discussed above. Also, the comparability of the net income of the two periods is limited due to the addition of the Cinemark theatres to our network in 2006.

Years ended December 29, 2005 and December 30, 2004

For purposes of this analysis, the fiscal year 2004 period used for comparison to 2005 includes the results of RCM for its fiscal 2004 and the results of NCN for its thirty-eight week period ended December 23, 2004 combined with its fourteen week period ended March 31, 2005. (During its fiscal year ended March 31, 2005, NCN’s parent was acquired, resulting in its operating results being reported in pre- and post-acquisition periods.)

Revenue. Total revenue generated by our joint predecessors, RCM and NCN, respectively, was $95.3 million and $72.0 million during their 2004 fiscal year periods (described above). Total revenue generated by our joint predecessors, RCM and NCN, respectively, was $17.8 million and $15.5 million during their quarter ended March 31, 2005 (prior to the formation of NCM LLC) and total revenue generated by NCM LLC from April 1, 2005 through December 29, 2005 was $98.8 million. Total advertising contract value and advertising contract value per founding member attendee of our joint predecessors, RCM and NCN, respectively, was $83.6 million and $0.33 and $72.0 million and $0.45 during their 2004 fiscal year periods. Total advertising contract value and advertising contract value per founding member attendee of our joint predecessors, RCM and NCN, respectively, was $15.6 million and $0.27 and $15.5 million and $0.37 during their quarter ended March 31, 2005 (prior to the formation of NCM LLC) and total advertising contract value and advertising contract value per founding member attendee of NCM LLC from April 1, 2005 through December 29, 2005 was $144.0 million and $0.48. While total revenue decreased at NCM LLC for its nine month period in 2005, the advertising contract value and advertising contract value per founding member attendee increased. This increase is due to the expansion of the network between 2004 and 2005, with an increase of approximately 5% in founding member screens, as well as the impact of the expansion of our national advertising client base, accompanied by increased regional advertising revenue due to the expansion of the regional on-screen inventory and the local advertising sales team.

 

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Operating Expenses. Total operating expenses and operating expense per founding member attendee generated by our joint predecessors, RCM and NCN, respectively, were $43.4 million and $0.17 and $42.1 million and $0.26 during their 2004 fiscal year periods. Total operating expenses and operating expense per founding member attendee of our joint predecessors, RCM and NCN, respectively, were $12.3 million and $0.21 and $11.5 million and $0.28 during their periods ended March 31, 2005 and total operating expenses and operating expense per founding member attendee of NCM LLC from April 1, 2005 through December 29, 2005 were $58.6 million and $0.20. The decrease in operating expenses is due to the elimination of certain duplicative operating and administrative expenses, and despite increases in selling and marketing expenses due to growth in the local sales personnel due to the increase in the number of founding member theatres noted above.

Net Income. Net income (loss) generated by our joint predecessors, RCM and NCN, respectively, was $20.6 and $3.4 million during their 2004 fiscal year periods. Net income (loss) generated by our joint predecessors, RCM and NCN, was $1.7 million and $(0.9) million during their quarter ended March 31, 2005 (prior to the formation of NCM LLC) and the net loss of NCM LLC from April 1, 2005 through December 29, 2005 was $(6.9) million. The decrease is primarily attributable to the decrease in revenue noted above, offset by a slight decrease in expenses also discussed above, and due to the impact of the increase in the circuit share expenses, which were impacted in the nine month period for NCM LLC due to the increase in the percentage of circuit share expense, and due to the increases in deferred stock compensation expense noted previously, and increases in levels of depreciation and amortization due to the incremental growth of NCM LLC.

EBITDA

EBITDA, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures used by management to measure operating performance. EBITDA represents net income (loss) before net interest expense, income tax benefit (provision), and depreciation and amortization expense. Adjusted EBITDA excludes from EBITDA severance plan costs, non-cash unit based costs and deferred stock compensation. Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by total revenue. EBITDA and adjusted EBITDA do not reflect the Loews payments discussed above, which after the offering are included in the calculation of adjusted EBITDA including the Loews payments to determine our compliance with financial covenants under our new senior secured credit facility. AMC will make Loews payments to NCM LLC pursuant to the Loews screen integration agreement, which for the year ended December 28, 2006, would have been $9.6 million.

We have included EBITDA, adjusted EBITDA and adjusted EBITDA margin to provide investors with supplemental measures of our operating performance and because they are the basis for an important financial covenant that is contained in our new senior secured credit facility. We believe EBITDA, adjusted EBITDA and adjusted EBITDA margin are important supplemental measures of operating performance because they eliminate items that have less bearing on our operating performance and so highlight trends in our core business that may not otherwise be apparent when relying solely on generally accepted accounting principles, or GAAP, financial measures. We also believe that securities analysts, investors and other interested parties frequently use EBITDA, adjusted EBITDA and adjusted EBITDA margin in the evaluation of issuers, many of which present EBITDA, adjusted EBITDA and adjusted EBITDA margin when reporting their results. Also, because of the significant changes in our operating results that will result from our acquisition of an interest in NCM LLC, the changes in the exhibitor services agreements and the financing transaction, we disclose pro forma EBITDA, adjusted EBITDA and adjusted EBITDA margin in this document. See the unaudited pro forma financial information contained elsewhere in this document.

EBITDA, adjusted EBITDA and adjusted EBITDA margin are not presentations made in accordance with GAAP. As discussed above, we believe that the presentation of EBITDA, adjusted EBITDA and adjusted EBITDA margin is appropriate. However, when evaluating our results, you should not consider EBITDA, adjusted EBITDA and adjusted EBITDA margin in isolation of, or as a substitute for, measures of our financial performance as determined in accordance with GAAP, such as net income (loss). EBITDA, adjusted EBITDA and adjusted EBITDA margin have material limitations as performance measures because they exclude items that are necessary elements of our costs and operations. Because other companies may calculate EBITDA, adjusted EBITDA and adjusted EBITDA margin differently than we do, EBITDA, adjusted EBITDA and adjusted EBITDA margin may not be comparable to similarly-titled measures reported by other companies.

 

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The following table reconciles net income (loss) to EBITDA and adjusted EBITDA on a historical and pro forma basis for the periods presented:

 

     NCM LLC
Nine Months
Ended
December 29,
2005
Historical
    NCM LLC,
RCM, & NCN
Year Ended
December 29,
2005 Pro
Forma
    NCM LLC
Year Ended
December 28,
2005
Historical
    NCM LLC
Year Ended
December 28,
2006 Pro
Forma
 
     ($ in millions)  

Net Income (Loss)

   $ (6.9 )   $ 8.2     $ (10.5 )   $ 16.6  

Income Taxes

     —         12.3       —         24.7  

Minority Interest

     —         10.2       —         20.5  

Interest Expense

     —         65.0       0.5       65.0  

Depreciation and Amortization

     3.0       4.3       4.8       4.8  
                                

EBITDA

   $ (3.9 )   $ 100.0     $ (5.2 )   $ 131.6  
                                

Severance Plan Costs

     8.5       8.5       4.2       4.2  

Share-based Compensation Costs

     —         —         1.9       2.5  

Deferred Stock Compensation

     —         0.3       —         —    
                                

Adjusted EBITDA

   $ 4.6     $ 108.8     $ 0.9     $ 138.3  
                                

Adjusted EBITDA Margin*

     4.7 %     49.1 %     0.4 %     50.2 %
                                

* Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by total revenue.

Financial Condition and Liquidity

Liquidity and Capital Resources

Sources of capital and capital requirements. Our primary sources of liquidity and capital resources are cash flows generated by our operating subsidiary, NCM LLC, and availability of up to $80.0 million under NCM LLC’s senior secured revolving credit facility entered into in February 2007. Prior to completion of its reorganization described above, NCM LLC’s historical sources of liquidity and capital resources have been cash flows generated from its business activities, working capital from NCM LLC’s founding members, availability of up to $20.0 million under a revolving credit facility and available cash and cash equivalents.

Management believes that future funds generated from our operations and available borrowing capacity of up to $80.0 million under our new revolving credit facility will be sufficient to fund quarterly dividends, our debt service requirements, working capital requirements and capital expenditure requirements, through the next 12 months. We made a draw of $10.0 million on the new credit facility at the closing of the NCM LLC reorganization and the public offering to repay amounts outstanding under NCM LLC’s then existing revolving credit facility (which was $10.0 million as of December 28, 2006) and made a draw of $50.8 million on March 15, 2007 to repay remaining amounts owed to the founding members under the prior exhibitor services agreements that, due to timing differences, were not funded entirely by the collection by us of related receivables. The amount outstanding as of March 22, 2007 on our revolving credit facility was $51.0 million.

Our short and long term cash requirements consist of minimum annual payments under our operating leases for our headquarters and regional offices and capital expenditures. Minimum annual operating lease requirements associated with our headquarters and regional offices are included in our direct operating expenses, which have historically been satisfied by cash flow from operations. For fiscal 2007, we are committed to $1.6 million of annual operating lease payments.

Capital expenditures. Capital expenditures have typically been related to equipment required for our network operations center and content production and post-production activities, digital content system, or DCS, and “back-office” software upgrades, office leasehold improvements, desktop equipment for use by our employees, and in certain cases, the costs necessary to digitize all or a portion of a network affiliate’s theatres. NCM LLC’s capital expenditures were $5.9 million and $6.6 million for the nine months ended December 29, 2005 and year ended December 28, 2006, respectively. The capital expenditures have typically been satisfied through a combination of cash flow from operations and from financing sources. All capital expenditures related to the digital content network within NCM LLC’s founding members’ theatres have been made by the founding members under the exhibitor services agreements. We expect they will continue to be made by the founding members in accordance with the amended exhibitor services agreements.

 

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We expect to make approximately $8.0 million to $10.0 million of capital expenditures in fiscal 2007, primarily for ordinary course maintenance of our digital content system, upgrades to our distribution software and our internal management systems, including our advertising inventory optimization, management and reporting systems and for the installation of digital network and projector equipment in network affiliate theatres. We expect these upgrades and improvements, which are intended to provide additional scheduling and placement flexibility for our clients, will enhance our operating efficiencies, including allowing us to better manage our advertising inventory, and prepare us for continued growth. These capital expenditures may be increased in connection with expenditures made in theatres operated by additional network affiliates as they are added to our network. We expect that these additional expenditures, if any, would be funded in part by additional cash flows associated with those new network affiliates. The commitments associated with our operating lease requirements are included in “Contractual and Other Obligations” below.

Cash Flows

The following table summarizes our historical cash flows.

 

    

Predecessor-National Cinema

Network, Inc.

   

Predecessor-
Regal
CineMedia

Corporation

    Predecessor-National
CineMedia, LLC
 
    

38 Weeks
Ended
December

23, 2004

   

14 Weeks
Ended
March

31, 2005

   

Year

Ended
December

30, 2004

   

Nine

Months
Ended
December

29, 2005

   

Year
Ended
December

28, 2006

 
                                

Cash provided by/(used in):

          

Operating Activities

   $ (2.1 )   $ 2.5     $ 15.9     $ (2.9 )   $ 8.3  

Investing Activities

     0.4       0.1       (2.7 )     (5.9 )     (6.3 )

Financing Activities

     1.7       (2.6 )     (11.2 )     8.8       4.7  

Operating Activities

The significant growth in the number of screens for which advertising services were provided limits the comparability of operating results from period to period. However, since the formation of NCM LLC, there has been negative cash flow from operations, as compared to positive cash flow from operations for RCM and marginal cash flows and uses from NCN. This results from the higher level of circuit share payments upon the formation of NCM LLC compared to the amount and timing of inter-company transfers made by RCM to its parent, Regal, when RCM operated as a wholly-owned subsidiary of Regal and affiliate payments made by NCN, when operated prior to the formation of NCM LLC. Also, as screens have been added, as inventory utilization has increased and as legacy contracts have been replaced with our own advertising contracts, the amount of accounts receivable has grown, which has required the use of operating cash.

We believe that the cash flow related to operating activities in recent historic periods are not representative of the cash flow we expect following the completion of the offering and the entry into the amended exhibitor services agreements and senior secured credit facility. We expect our circuit share expense to be reduced as a percentage of revenue but expect our interest costs to increase. See “Liquidity and Capital Resources” above.

Investing Activities

Cash used in investing activities during all periods relates to investments in our network software and in corporate management systems and purchases of equipment necessary to service the expansion of network affiliate theatre screens and, to a lesser extent, for leasehold improvements and office equipment associated with an expansion of employee headcount. The cash provided in prior periods at NCN was due to the sale of previously held long-term assets, offset by de minimis amounts of capital expenditures.

 

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Financing Activities

Cash provided by financing activities for NCM LLC during the nine months ended December 29, 2005 was primarily related to the sale of membership units to Cinemark. Cash provided by financing activities in the other periods resulted from short-term borrowings. Cash used in financing activities by RCM resulted from remittances of excess cash to RCM’s parent company. Financing sources and uses at NCN related to repayments and advances on intercompany receivables. We believe that cash flow related to financing activities of the historic periods will not be representative of our cash flow expected after the completion of the NCM LLC reorganization, due to amendments to the exhibitor services agreements and entry into the new senior secured credit facility and other changes in financial structure that occurred in conjunction with the offering of our common stock. See further discussion at “Financings-New senior secured credit facility” below, and at “Business-Corporate History” and “Business-Reorganization.”

As of December 29, 2005 and December 28, 2006, we had the following debt outstanding and cash and equivalents (in millions of dollars):

 

     December 29, 2005    December 28, 2006

Borrowings

   $ 1.3    $ 10.0

Cash and cash equivalents

   $ —      $ 6.7

The cash balance at the end of the historical periods has been typically low, as circuit share payments are made to the founding members out of excess cash. We also expect to have relatively low cash balances in future periods due to minority interest payments to our founding members and quarterly dividends to our common shareholders we expect to pay pursuant to our dividend policy.

Financings

Demand note. On March 29, 2005, NCM LLC signed an amended and restated demand promissory note, or the demand note, with the founding members, under which NCM LLC could borrow up to $11.0 million on a revolving basis. Borrowings under the demand note were funded by the founding members pro rata to their ownership of units. Interest was payable monthly, at 200 basis points over LIBOR. Interest paid to the founding members during the three months ended June 30, 2005 was less than $0.1 million. On March 22, 2006, the demand note was cancelled and replaced by the credit facility discussed below.

Prior NCM LLC credit facility. On March 22, 2006, NCM LLC entered into a $20.0 million secured revolving credit facility, with a $2.0 million letter of credit facility, with Citicorp North America, Inc., Citigroup Global Markets Inc., Bank of America, N.A., Credit Suisse, Cayman Islands Branch and Lehman Commercial Paper Inc. Borrowings under the facility bear interest, at NCM LLC’s option, at either Adjusted LIBOR plus 1.375% or ABR plus 0.375%. “Adjusted LIBOR” means the rate at approximately 11:00 a.m., London time, two business days before the commencement of the relevant interest period, for dollar deposits with a maturity comparable to such interest period, as adjusted for reserve requirements and rounded upwards if necessary to the next 1/100 of 1%. “ABR” means the greater of the base or prime rate of Citicorp North America, Inc. and the federal funds rate, plus 1/2 of 1%. The facility is secured by a first-priority lien on certain assets of NCM LLC. The facility matures on March 22, 2008.

Covenants in the revolving portion of our credit facility include typical affirmative and negative covenants, including prompt payment of amounts owed, certain monthly, quarterly, and annual financial reporting requirements, maintenance of property and insurance and limitations on additional indebtedness. There are no financial covenants in our credit facility.

As of December 28, 2006, $10.0 million was outstanding under this facility, including none subject to outstanding letters of credit. As described below, on February 13, 2007, the balance under this facility was paid off and cancelled and replaced by the new senior secured credit facility discussed below.

New senior secured credit facility. In connection with the completion of the offering, NCM LLC entered into a new $805.0 million senior secured credit facility with a group of lenders that included affiliates of several of the underwriters. This facility consists of a six-year, $80.0 million revolving credit facility and an eight-year, $725.0 million term loan facility. The term loan will be due on the eighth anniversary of funding. The net proceeds of the term loan were used, together with $59.8 million of proceeds from the offering, to redeem all the preferred membership units of NCM LLC for an aggregate price of $769.5 million. The revolving credit facility will be 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 credit agreement. The revolving credit facility was initially drawn upon to repay amounts outstanding under NCM LLC’s existing revolving credit facility (which was $10.0 million as of December 28, 2006 and

 

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February 13, 2007). A portion of the revolving credit facility will be available for letters of credit. The obligations under the credit facility will be secured by a lien on substantially all the assets of NCM LLC and its material wholly owned subsidiaries.

Amounts payable to NCM LLC’s founding members have historically been paid as NCM LLC collected the related accounts receivable from its customers. On March 15, 2007, NCM LLC repaid the remaining amounts owed to NCM LLC’s founding members under the prior existing exhibitor services agreements (which were $50.8 million). NCM LLC will repay the amount drawn under the credit facility for this purpose as receivables are collected. The amount outstanding under the new revolving credit facility will continue to fluctuate based on working capital needs.

Borrowings under the senior secured credit facility will bear interest, at the option of the borrower, at a rate equal to an applicable margin plus either a variable base rate or a eurodollar rate. The applicable margin for the term loan facility is 0.75% with respect to base rate loans and 1.75% with respect to eurodollar loans. The applicable margin for the revolving credit facility is 0.75% with respect to base rate loans and 1.75% with respect to eurodollar loans. Commencing with the third fiscal quarter in fiscal year 2008, the applicable margin for the revolving credit facility will be determined quarterly and will be subject to adjustment based upon a consolidated net senior secured leverage ratio for NCM LLC and its subsidiaries (to be defined in the NCM LLC credit agreement as the ratio of secured funded debt less unrestricted cash and cash equivalents, over adjusted EBITDA). Upon the occurrence of any payment default, certain amounts under the senior secured credit facility will bear interest at a rate equal to the rate then in effect with respect to such borrowings, plus 2.00% per annum.

The senior secured credit facility contains a number of negative covenants that limit NCM LLC and its subsidiaries from, among other things, and with certain thresholds and exceptions:

 

   

incurring indebtedness (including guarantee obligations) or liens;

 

   

entering into mergers, consolidations, liquidations or dissolutions;

 

   

selling assets;

 

   

making investments, loans or advances;

 

   

making capital expenditures;

 

   

modifying the exhibitor services agreements, management services agreement or tax receivable agreement;

 

   

entering into transactions with affiliates;

 

   

entering into sale and leaseback transactions;

 

   

changing its fiscal year;

 

   

entering into negative pledge agreements;

 

   

entering into agreements restricting loans or distributions made by NCM LLC’s subsidiaries to NCM LLC; and

 

   

changing its line of business;

 

   

paying dividends, redeeming or repurchasing units or making other payments in respect of capital stock.

Notwithstanding the foregoing, NCM LLC shall be permitted to make quarterly dividends and other distributions in the following percentages based on the following consolidated net senior secured leverage ratios for NCM LLC and its subsidiaries (to be calculated in the NCM LLC credit agreement for this purpose as the ratio of secured funded debt less unrestricted cash and cash equivalents as of the last day of the four fiscal quarter period ending on or immediately prior to the date of such dividend or distribution (after giving effect to any such distribution and incurrence of indebtedness (if any) relating thereto, provided that the aggregate amount of revolving loans included in the calculation of secured funded debt shall not exceed the revolving commitments in effect on the date of such dividend or distribution), over adjusted EBITDA as of the four fiscal quarter period ending on or immediately prior to the date of such dividend or distribution) so long as no default or event of default shall have occurred and be continuing:

 

   

100% of “Available Cash” (defined in the NCM LLC credit agreement in a manner that is consistent with the comparable definition in the NCM LLC operating agreement) if such consolidated net senior secured leverage ratio is less than or equal to 6.5x.

 

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75% of Available Cash if such consolidated net senior secured leverage ratio is less than or equal to 7.0x.

 

   

50% of Available Cash if such consolidated net senior secured leverage ratio is less than or equal to 7.5x.

The senior secured credit facility will require mandatory prepayments of:

 

   

100% of net cash proceeds from asset sales and insurance or condemnation recovery events that yield gross proceeds to NCM LLC or any of its subsidiaries in excess of $5 million, subject to an exception for reinvestment in productive assets (not to exceed $25 million in any fiscal year) during a reinvestment period.

 

   

100% of net cash proceeds from any issuance by NCM LLC or its subsidiaries of debt securities or instruments pursuant to a public offering or private placement (excluding indebtedness permitted under the terms of the NCM LLC credit agreement).

 

   

50% of excess cash flow (to be defined in the NCM LLC credit agreement as “Available Cash” less permitted cash distributions and other restricted payments, less a dollar amount to be agreed) for each fiscal year of NCM LLC, declining to 0% when consolidated net senior leverage for NCM LLC and its subsidiaries is less than 3.0x.

The senior secured credit facility also requires the maintenance of a quarterly financial ratio, as of the last day of any period of four consecutive fiscal quarters, with respect to maximum consolidated net senior secured leverage for NCM LLC and its subsidiaries as follows:

 

Fiscal Quarter

   Maximum Consolidated Net
Senior Secured Leverage
Ratio

FQ1 2007 – FQ4 2007

   7.50:1.00

FQ1 2008 – FQ4 2008

   7.25:1.00

FQ1 2009 – FQ4 2009

   7.00:1.00

FQ1 2010 – FQ4 2010

   6.75:1.00

FQ1 2011 and thereafter

   6.50:1.00

The senior secured credit facility contains customary events of default, including:

 

   

failure to pay any principal, interest, fees, expenses or other amounts;

 

   

failure of any representation or warranty to be accurate in all material respects as of the date made or deemed made;

 

   

failure to observe any agreement, obligation or covenant included in the credit agreement or in any guaranty, pledge or security instrument;

 

   

judgments against NCM LLC or any of its subsidiaries in excess of certain allowances;

 

   

default under other indebtedness of NCM LLC or its subsidiaries in excess of a threshold amount;

 

   

certain ERISA events involving us or our subsidiaries;

 

   

bankruptcy or insolvency events involving NCM LLC or its subsidiaries;

 

   

any guaranty, pledge or security instrument shall cease to be in full and effect or any lien created thereby shall cease to be enforceable and of the same effect and priority purported to be created thereby; and

 

   

a change of control (as defined in the credit agreement).

Upon the occurrence of an event of default, among other remedies available to the lenders, all outstanding loans may be accelerated and/or the lenders’ commitments may be terminated.

Ratings

We are rated by nationally recognized rating agencies. The significance of individual ratings varies from agency to agency. However, companies assigned ratings at the top end of the range have, in the opinion of certain rating agencies, the strongest capacity for repayment of debt or payment of claims, while companies at the bottom end of the range have the weakest ability. Ratings are always subject to change and there can be no assurance that our ratings will continue for any given period of time. A downgrade of our debt ratings, depending on the extent, could increase the cost to borrow funds. Below are our latest ratings, current as of December 28, 2006.

 

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Category

   Moody’s    Standard & Poor’s

NCM LLC senior secured credit facility

   B1    B+

Critical Accounting Policies

We have established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation and presentation of NCM LLC’s financial statements. The significant accounting policies of NCM LLC are described in Note 2 of the financial statements for the nine months ended December 29, 2005, and the year ended December 28, 2006, and along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances and are evaluated on an ongoing basis. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of NCM LLC.

Allowance for doubtful accounts . The allowance for doubtful accounts represents management’s estimate of probable credit losses inherent in its trade receivables, which represent the largest asset on the balance sheet. Estimating the amount of the allowance for doubtful accounts requires significant judgment and the use of estimates related to the amount and timing of estimated losses based on historical loss experience, consideration of current economic trends and conditions and debtor-specific factors, all of which may be susceptible to significant change. Account receivable balances are charged against the allowance, while recoveries of amounts previously charged are credited to the allowance. A provision for bad debt is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. To the extent actual outcomes differ from management estimates, additional provision for bad debt could be required that could adversely affect earnings or financial position in future periods.

Revenue recognition . NCM LLC considers estimates regarding make-good provisions in advertising revenue to be a critical accounting policy that requires significant judgments, assumptions and estimates used in the preparation of its financial statements. Advertising revenue is recognized in the period in which theatre attendees (impressions) are provided. Advertising revenue is recorded net of make-good provisions to account for delivered attendance that is less than the amount contracted. The amount contracted is based on an estimate of attendees at the date the contract is signed. When actual attendance, based on amounts reported by the founding members, is less than contracted, a make-good provision is required.

Stock-based compensation . NCM LLC issued unit options to employees to acquire membership units which, in certain circumstances, would allow the employees to put the options to NCM LLC for cash. These options were accounted for as a liability plan under SFAS No. 123(R), which requires that the liability be measured at its fair value as of each reporting date. The determination of fair value of options requires that management make complex estimates and judgments. We utilize the Black-Scholes option price model to estimate the fair value of our options. This model requires that we make estimates of various factors, the most critical of which are the fair value of our equity and the expected volatility of our equity value. The determination of these is made more difficult because we are a privately held company without historical market-observable factors upon which to base our estimates. However, as our options were granted in contemplation of an initial public offering, we have used the terms of the initial public offering to estimate our equity value. We have considered volatility factors of companies we believe are comparable to us to estimate our future volatility. The annual compensation expense for the year ended December 28, 2006 is approximately $1.9 million. The use of an equity value that varied by 10% from what we have estimated or the use of a volatility factor that varied by five percentage points from what we have estimated would each individually have less than a $250,000 impact on annual compensation expense charge. In connection with the offering, NCM LLC issued restricted units as “IPO awards” to holders of outstanding unit options. Upon completion of the offering, we issued stock options to holders of outstanding unit options in substitution of the unit options and shares of restricted stock in substitution of the restricted units. See further discussion at “Executive Compensation-NCM Inc. 2007 Equity Incentive Plan-Substitution of NCM LLC Options and Restricted Units.”

 

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Recent Accounting Pronouncements

The Financial Accounting Standards Board and other bodies have issued numerous accounting pronouncements and interpretations that will be applicable in future periods. The following addresses the expected impact of accounting pronouncements and interpretations recently issued but not yet required to be adopted that could have an impact on our financial reporting. To the extent the adoption of new accounting standards materially affects financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section(s) of this discussion and the notes to the financial statements included elsewhere in this document.

During June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109.” This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. As a limited liability company, NCM LLC’s taxable income or loss is allocated to the founding members in accordance with the provisions of our operating documents. However, NCM Inc. will be a taxable entity and will be required to consider this Interpretation as it relates to both itself and NCM LLC consolidated tax position at NCM Inc. We are currently evaluating the impact the Interpretation will have on our future financial condition, results of operations and cash flows.

During October 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements.” This statement does not require any new fair value measurements but provides guidance on how to measure fair value and clarifies the definition of fair value under GAAP. The statement also requires new disclosures about the extent to which fair value measurements in financial statements are based on quoted market prices, market-corroborated inputs or unobservable inputs that are based on management’s judgments and estimates. The statement is effective for fiscal years beginning after November 15, 2007. We will apply the statement prospectively for any fair value measurements that arise after the date of adoption.

During February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are to be reported in earnings. The statement is effective for fiscal years beginning after November 15, 2007. We are current evaluating the impact the Interpretation will have on our future financial condition, results of operations and cash flows.

During September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” The statement requires entities to quantify misstatements based on their impact on each of their financial statements and related disclosures. The statement is effective as of December 31, 2006. The adoption of this standard is not expected to have an impact on out consolidated results of operations, cash flows or financial position.

Off-Balance Sheet Transactions

At December 29, 2005 and December 28, 2006, we had no off-balance sheet arrangements or obligations.

Contractual and Other Obligations

Our contractual obligations at December 28, 2006 were as follows:

 

     Payments Due by Period
     Total    2007    2008-2009    2010-2011    After 2011
     ($ in millions)

Borrowings

   $ 10.0    $  —      $ 10.0    $ —      $ —  

Office Leases

     9.5      1.6      3.1      2.5      2.3

Network Affiliate Agreements

     4.0      2.3      1.7      —        —  
                                  

Total Contractual Cash Obligations

   $ 23.5    $ 3.9    $ 14.8    $ 2.5    $ 2.3
                                  

NCM LLC will be obligated to make periodic interest payments on the loans under the senior secured credit facility entered into in February 2007, based on an interest rate equal to an applicable margin plus either a variable base rate or a eurodollar rate. The applicable margin for the term loan facility is 0.75% with respect to base rate loans and 1.75% with respect to eurodollar loans.

 

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The applicable margin for the revolving credit facility is 0.75% with respect to base rate loans and 1.75% with respect to eurodollar loans. Commencing with the third fiscal quarter in fiscal year 2008, the applicable margin for the revolving credit facility will be determined quarterly and will be subject to adjustment based upon a consolidated net senior secured leverage ratio for NCM LLC and its subsidiaries (to be defined in the NCM LLC credit agreement as the ratio of secured funded debt less unrestricted cash and cash equivalents, over adjusted EBITDA). Payments under this new facility are not included above. The terms of the new senior secured credit facility required us to hedge the cash flow variability of interest for at least 50% of the term loan. In March of 2007, NCM LLC entered into a fixed interest rate swap arrangement hedging $550.0 million of the $725.0 million senior secured credit facility at a fixed interest rate of 6.734%. In addition, we have a new variable rate revolving credit agreement that replaced our prior credit facility. Debt service requirements under this agreement will depend on the amounts borrowed and the level of the based interest rate. See further discussion of the new senior secured credit facility at “Financial Condition and Liquidity-Financings.”

In addition, the modified exhibitor services agreements entered into in February 2007 require payments based on a combination of founding member attendance and the number of digital screens of each founding member. The former factor will vary from quarter to quarter and year to year as theatre attendance varies while the latter factor will be more predictable but will also vary quarter to quarter and year to year as screens are converted to digital screens and others added or removed through acquisition, divestiture or closure activities of the founding members; however, the table above does not include amounts payable under the modified exhibitor services agreements as it was not contractually effective as of December 28, 2006. The exhibitor services agreements in effect at December 28, 2006 were based on a percentage of revenue, a variable factor not capable of precise estimation.

Seasonality

Our revenue and operating results are seasonal in nature, coinciding with the timing of marketing expenditures by our advertising clients, and to a lesser extent, to the attendance patterns within the film exhibition industry. Advertising expenditures tend to be higher during the second, third, and fourth fiscal quarters and are correlated to new product releases and marketing cycles. Theatrical attendance is generally highest during the summer and year-end holiday season coinciding with the release of blockbuster films. As a result, our first quarter typically has less revenue than the other quarters of a given year. To illustrate the seasonality of our operations, we analyzed the four consecutive quarters that we felt best represented our business on a comparable screen and attendance basis. Other quarters are less comparable due to the substantial growth in screens and attendance resulting primarily from acquisitions by founding members. This analysis is based on the combination of our quarterly advertising contract value, meetings and events and other revenue.

 

     Quarter ending  
     June 2005     September 2005     December 2005     March 2006  

% of Total

   26.5 %   25.7 %   31.4 %   16.4 %

Importantly, the results of one quarter are not necessarily indicative of results for the next or any future quarter.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

As of December 28, 2006, we had $10.0 million of total debt outstanding under our existing $20.0 million revolving credit facility. To the extent we borrow under our revolving credit facility which bears interest at floating rates based either on an ABR, as defined in the credit agreement, or LIBOR, we are exposed to market risk related to changes in interest rates. At December 28, 2006, the applicable interest rate on borrowings outstanding under the credit facility was 7.9% per year. If applicable interest rates were to increase by 200 basis points, for every $1.0 million outstanding on our revolving credit facility, our income before income taxes would be reduced by approximately $20,000 per year. We are not party to any derivative financial instruments at December 28, 2006.

In February of 2007, NCM LLC entered into a new $805.0 million senior secured credit facility, and repaid the $10.0 million outstanding under the then existing revolving credit facility. See further discussion of the new senior secured credit facility at “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition and Liquidity-Financings-New senior secured credit facility.”

 

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Item 8. Financial Statements and Supplementary Data

See Index to Financial Statements on page F-1.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A. Controls and Procedures

Management of the Company is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(b) of the Securities Exchange Act of 1934. As of December 28, 2006, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officers and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management concluded that the Company’s disclosure controls and procedures as of December 28, 2006 were effective in ensuring that information required to be disclosed in this Annual Report on Form 10-K was recorded, processed, summarized, and reported within the time period required by the Security and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended December 28, 2006 that have materially affected, or are likely to materially affect, the Company’s internal controls over financial reporting.

 

Item 9B. Other Information

Not applicable.

PART III

 

Item 10. Directors and Executive Officers of the Registrant

Set forth below is certain information with respect to NCM Inc.’s current executive officers and directors.

 

Name

   Age    Position
Kurt C. Hall    48    President, Chief Executive Officer and Chairman (Class I)
Clifford E. Marks    45    President of Sales and Chief Marketing Officer
Gary W. Ferrera    44    Executive Vice President and Chief Financial Officer
Thomas C. Galley    51    Executive Vice President and Chief Technology and Operations Officer
Ralph E. Hardy    56    Executive Vice President and General Counsel
Peter C. Brown    48    Director (Class III)
Michael L. Campbell    53    Director (Class III)
Lee Roy Mitchell    70    Director (Class III)
Lawrence A. Goodman    52    Director (Class I)
David R. Haas    65    Director (Class II)
James R. Holland, Jr.    63    Director (Class II)
Stephen L. Lanning    53    Director (Class II)
Edward H. Meyer    80    Director (Class II)
Scott N. Schneider    49    Director (Class I)

Kurt C. Hall. Mr. Hall was appointed President, Chief Executive Officer and Chairman of NCM LLC in March 2005 and assumed those positions with NCM Inc. in February 2007. He has also served as Chairman, President and Chief Executive Officer of NCM Inc. since October 2006. Prior to his current position, from May 2002 to May 2005, Mr. Hall served as Co-Chairman and Co-Chief Executive Officer of Regal Entertainment Group and President and Chief Executive Officer of its media subsidiary Regal CineMedia Corporation. Mr. Hall served as President and Chief Executive Officer of United Artists Theatre Company from March 1998 to August 2002, and a director from May 1992 to August 2002. Mr. Hall served as Chief Operating Officer of United Artists Theatre Company from February 1997 to March 1998, and as Executive Vice President and Chief Financial Officer of United Artists Theatre Company from May 1992 to March 1998.

 

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Clifford E. Marks. Mr. Marks was appointed NCM LLC’s President of Sales and Chief Marketing Officer in March 2005 and assumed those positions with NCM Inc. in February 2007. He has been an advertising, marketing and sales professional for 23 years. Prior to his current position, Mr. Marks served as president of sales and marketing with Regal Entertainment Group’s media subsidiary, Regal CineMedia Corporation, from May 2002 to May 2005. Before joining Regal CineMedia, Mr. Marks was a senior vice president at ESPN/ABC Sports where he oversaw its advertising sales organization from 1998 to May 2002. Mr. Marks joined ESPN in April 1989 and served in a variety of sales and marketing positions throughout his tenure. From 1986 through 1989, Mr. Marks was an advertising sales executive at The Nashville Network (now known as Spike TV). He began his career at the New York advertising agencies Young & Rubicam (1985-86) and BBDO (1983-85).

Gary W. Ferrera. Mr. Ferrera joined NCM LLC in May 2006 as Executive Vice President and Chief Financial Officer and assumed those positions with NCM Inc. in February 2007. Mr. Ferrera has held positions in accounting and finance since 1991. From October 2005 to May 2006, he served as an independent consultant. Mr. Ferrera served as the interim Chief Financial Officer of the German cable company iesy Hessen, GmbH (now known as Unity Media), from March to October 2005. From February 2000 to February 2005, Mr. Ferrera held positions in both the United States and Europe with Citigroup’s Global Corporate and Investment Bank where he spent the majority of that time advising and financing European media companies. Mr. Ferrera also held positions as an investment banker at Bear Stearns and as an international tax consultant at Arthur Andersen. Prior to his business career, Mr. Ferrera served for over seven years in U.S. Army Special Operations and Intelligence. Mr. Ferrera graduated magna cum laude with a BS in Accounting from Bentley College and received an MBA from the Kellogg School of Management, Northwestern University.

Thomas C. Galley. Mr. Galley joined NCM LLC in March 2005 as Executive Vice President and Chief Technology and Operations Officer and assumed those positions with NCM Inc. in February 2007. In this role, Mr. Galley oversees all operational, technical and production divisions for National CineMedia. He also manages the CineMeetings and digital programming events divisions. Mr. Galley led the original development of our digital network. Prior to his current position, after joining United Artists Theatre Company in January 2002 as Executive Vice President of Technology, Mr. Galley served as Chief Technology Officer with Regal Entertainment Group’s media subsidiary, Regal CineMedia Corporation, from January 2002 to May 2005. From 2000 to January 2002, he served as an independent consultant. From 1986 to 2000, Mr. Galley was President and Chief Executive Officer and co-founder of Internet Communications Corporation, a network (WAN/LAN) systems integration company, where he developed business applications, sales, marketing, technology, operations and revenue centers around technology.

Ralph E. Hardy. Mr. Hardy joined NCM LLC in March 2005 as Executive Vice President and General Counsel and assumed those positions with NCM Inc. in February 2007. Prior to his current position, from May 2002 to May 2005, Mr. Hardy served as Executive Vice President and General Counsel for Regal CineMedia Corporation. Previously, from September 1994 to May 2002, Mr. Hardy was Executive Vice President, General Counsel and Secretary of United Artists Theatre Circuit, Inc., and was Senior Vice President, General Counsel and Secretary of United Artists Theatre Circuit, Inc. from May 1992 to September 1994.

Peter C. Brown. Mr. Brown has served as a director of NCM Inc. since October 2006. Mr. Brown has served as a director of AMC Entertainment Inc. (AMCE) and American Multi-Cinema, Inc., a subsidiary of AMCE, since November 1992, as Chairman of the Board and Chief Executive Officer of AMCE since July 1999 and as President of AMCE since January 1997. Mr. Brown served as Co-Chairman of the Board of AMCE from May 1998 through July 1999 and as Executive Vice President of AMCE from August 1994 to January 1997. Mr. Brown is also Chairman of the Board, Chief Executive Officer and a Director of American Multi-Cinema, Inc. Mr. Brown serves as a director of Embarq Corporation, Midway Games, Inc., and MovieTickets.com. Mr. Brown is also on the Board of Directors of the National Association of Theatre Owners, is a member of the executive committee and became Vice-Chairman of the organization in January 2007.

Michael L. Campbell. Mr. Campbell has served as a director of NCM Inc. since October 2006. Mr. Campbell has served as Chairman and Chief Executive Officer of Regal Entertainment Group since May 2005 and as a director since March 2002. Prior thereto, Mr. Campbell served as Regal Entertainment Group’s Co-Chairman and Co-Chief Executive Officer. Mr. Campbell also has served as Chief Executive Officer of Regal Cinemas Corporation since January 2002. Mr. Campbell founded Regal Cinemas, Inc. in November 1989, and has served as Chief Executive Officer of Regal Cinemas, Inc. since its inception. Mr. Campbell served as a director and executive officer of Regal Cinemas, Inc. when it filed for bankruptcy on October 11, 2001 and throughout its bankruptcy proceedings. Mr. Campbell currently serves as a director of the National Association of Theatre Owners, Fandango, Inc. and Regal Entertainment Group.

 

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Lee Roy Mitchell. Mr. Mitchell has served as a director of NCM Inc. since October 2006. Mr. Mitchell has served as Chairman of the Board of Cinemark USA, Inc. since March 1996 and as a Director and Chief Executive Officer of Cinemark USA, Inc. since its inception in 1987. Mr. Mitchell has served as Chairman of the Board and Chief Executive Officer of Cinemark, Inc. since its inception in May 2002. Mr. Mitchell serves on the Board of Directors of Texas Capital Bancshares, Inc., Champions for Life and Dallas County Community College.

Lawrence A. Goodman. Mr. Goodman has served as a director of NCM Inc. since February of 2007. He founded White Mountain Media, a media consulting company, in July 2004 and has served as its president since inception. From July 2003 to July 2004, Mr. Goodman was retired . From March 1995 to July 2003, Mr. Goodman was the President of Sales and Marketing for CNN, a division of Turner Broadcasting System, Inc. Mr. Goodman currently serves as a director of Teletrax and The Westchester Institute for Human Development.

David R. Haas. Mr. Haas has served as a director of NCM Inc. since February of 2007. He has been a private investor and financial consultant since January 1995. Mr. Haas was a Senior Vice President and Controller for Time Warner, Inc. from January 1990 through December 1994. Prior thereto, Mr. Haas was at Warner Communications for 14 years and held several positions at the company. Mr. Haas served as a director of Information Holdings, Inc. from July 1988 through December 2004. Mr. Haas currently serves as a director and chair of the audit committee of Armor Holdings, Inc.

James R. Holland, Jr . Mr. Holland has served as a director of NCM Inc. since February of 2007. He has been the President and Chief Executive Officer of Unity Hunt, Inc., a diversified holding company, since September 1991, and also serves on its board of directors. He also serves as lead director of Texas Capital Bancshares, Inc., and as a director of Placid Holding Co. and Hunt Midwest Enterprises, Inc.

Stephen L. Lanning. Mr. Lanning has served as a director of NCM Inc. since February of 2007. He is a an independent consultant. Mr. Lanning was employed by the United States Air Force from June 1977 until October 2006. From July 2005 to July 2006, Mr. Lanning was a Director, Logistics and Warfighting Integration, Chief Information Officer and Chief Sustainment Officer for the United States Air Force Space Command. Mr. Lanning was a Principal Director of the Defense Information Systems Agency from July 2002 to July 2005. Mr. Lanning was a Deputy Operations Director at the United States Space Command from June 2001 to July 2002.

Edward H. Meyer . Mr. Meyer has served as a director of NCM Inc. since February of 2007. He served as Chairman, Chief Executive Officer and President of Grey Global Group, Inc., a global advertising and marketing services company, from 1970 to December 2006. Mr. Meyer joined Grey Global in 1956 and was elected President in 1968 and Chairman in 1972. He also serves as a director and member of the compensation and audit committees of Harman International Industries, Inc. and as a director of Ethan Allen Interiors Inc. and Jim Pattison Ltd.

Scott N. Schneider . Mr. Schneider has served as a director of NCM Inc. since February of 2007. He has served as Chairman, Media and Communications, of Diamond Castle Holdings, a private equity firm, since January 2004. From October 1999 to August 2004, Mr. Schneider served in various senior executive capacities including President, Chief Operating Officer and Vice Chairman of the Board of Citizens Communications Company. Prior thereto, Mr. Schneider served as Chief Financial Officer and a member of the board of directors of Centennial Communications Corp. from 1991 to 2001, and as Chief Financial Officer and a member of the board of directors of Century Communications Corp. from 1981 to 2000. Mr. Schneider currently serves as a director of Centennial Communications Corp. and, until its merger with SES during April 2006, as a director of NuSkies Holdings. He also serves on a variety of philanthropic boards.

NCM Inc.’s bylaws authorize no more than ten directors to serve on our board of directors. The directors are divided into three classes, designated as Class I, Class II and Class III. The members of each class shall serve for a staggered three-year term, except that Class I directors in the initial term immediately following the offering will serve for one year and the Class II directors in the initial term immediately following the offering will serve for two years. Each director will be elected to serve until the election of the director’s successor at an annual meeting of stockholders for the election of directors for the year in which the director’s term expires or at a special meeting called for that purpose. Directors may be removed only for cause.

Pursuant to a director designation agreement, so long as a founding member owns at least 5% of NCM LLC’s issued and outstanding common membership units, such founding member will have the right to designate a total of two nominees to our ten-member board of directors who will be voted upon by our stockholders. If at any time, any founding member owns less than 5% of NCM LLC’s then issued and outstanding common membership units, then such founding member shall cease to have any rights of designation. See “Corporate Governance Matters” below for additional details on how such 5% threshold is calculated.

 

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One of the two designees from each of the founding members must qualify as an independent director under Nasdaq rules. Independent directors Mssrs. Meyer, Lanning and Holland were designated by AMC, Regal and Cinemark, respectively.

Board Committees

Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee. Each committee operates pursuant to a written charter adopted by our Board of Directors which sets forth the committee’s role and responsibilities. The charters of these standing committees are available on our website at www.ncm.com . The board of directors also will establish such other committees as it deems appropriate, in accordance with applicable law and our certificate of incorporation and bylaws.

Audit Committee

The members of the audit committee are Messrs. Haas, Holland and Schneider, with Mr. Haas serving as chair. All of the members of the audit committee are independent, as determined in accordance with Nasdaq rules and relevant federal securities laws and regulations. Our board has determined that Mr. Haas qualifies as an “audit committee financial expert” as defined in the federal securities laws and regulations. The audit committee will assist our board of directors in monitoring the integrity of the financial statements, the independent auditors’ qualifications, independence and performance, the performance of our company’s internal audit function and compliance by our company with certain legal and regulatory requirements.

Compensation Committee

The members of the compensation committee are Messrs. Goodman, Lanning and Meyer, with Mr. Goodman serving as chair. All of the members of our compensation committee are independent, as determined in accordance with Nasdaq rules and relevant federal securities laws and regulations. The compensation committee will oversee the compensation plans, policies and programs of our company and will have full authority to determine and approve the compensation of our chief executive officer, as well as to make recommendations with respect to compensation of our other executive officers. The compensation committee also will be responsible for producing an annual report on executive compensation for inclusion in our proxy statement.

Nominating and Corporate Governance Committee

The members of the nominating and corporate governance committee are Messrs. Goodman, Lanning and Meyer, with Mr. Lanning serving as chair. All of the members of our nominating and corporate governance committee are independent as determined in accordance with Nasdaq rules and relevant federal securities laws and regulations. The nominating and corporate governance committee will assist our board of directors in promoting the best interests of our company and our stockholders through the implementation of sound corporate governance principles and practices.

Other than the director candidates designated by NCM LLC’s founding members, the nominating and corporate governance committee will identify individuals qualified to become board members and recommend to our board of directors the director nominees for each annual meeting of stockholders. It also will review the qualifications and independence of the members of our board of directors and its various committees on a regular basis and make any recommendations the committee members may deem appropriate from time to time concerning any changes in the composition of our board of directors and its committees. The nominating and corporate governance committee also will recommend to our board of directors the corporate governance guidelines and standards regarding the independence of outside directors applicable to our company and review such guidelines and standards and the provisions of the nominating and corporate governance committee charter on a regular basis to confirm that such guidelines, standards and charter remain consistent with sound corporate governance practices and with any legal, regulatory or Nasdaq requirements. The nominating and corporate governance committee also will monitor our board of directors and our company’s compliance with any commitments made to regulators or otherwise regarding changes in corporate governance practices and will lead our board of directors in its annual review of our board of directors’ performance.

Code of Business Conduct and Ethics

On February 6, 2007, the Board adopted NCM, Inc.’s Code of Business Conduct and Ethics that applies to all of our employees, including our board of directors, chief executive officer and chief financial officer. The Code of Business Conduct and Ethics sets forth the Company’s conflict of interest policy, records retention policy, insider trading policy and policies for protection of the Company’s property, business opportunities and proprietary information. Our Code of Business Conduct and Ethics is available free of charge on our website at www.ncm.com . We intend to post on our website any amendments to, or waivers from our Code of Business conduct and Ethics applicable to senior financial executives.

 

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Compensation Committee Interlocks and Insider Participation

We do not have any interlocking relationships between any member of our compensation committee or our nominating and corporate governance committee and any of our executive officers that would require disclosure under the applicable rules promulgated under the U.S. federal securities laws.

Section 16(a) Beneficial Ownership Reporting Compliance

Prior to our initial public offering, our directors, executive officers and persons beneficially holding more than 10% of our common stock were not subject to the reporting requirements of section 16 of the Exchange Act.

Corporate Governance Matters

So long as a founding member beneficially owns at least 5% of NCM LLC’s issued and outstanding common membership units, approval of at least 90% of the directors then in office (provided that if the board has less than ten directors, then the approval of at least 80% of the directors then in office) will be required before we may take any of the following actions or we, in our capacity as sole manager of NCM LLC, may authorize NCM LLC to take any of the following actions:

 

   

assign, transfer, sell or pledge all or a portion of the membership units of NCM LLC beneficially owned by NCM Inc.;

 

   

acquire, dispose, lease or license assets by NCM Inc. or NCM LLC or enter into a contract to do the foregoing, in a single transaction or in two or more transactions (related or unrelated) in any consecutive twelve-month period with an aggregate value (as determined in good faith by the board) exceeding 20% of the fair market value of the business of NCM LLC operating as a going concern (as determined in good faith by the board);

 

   

merge, reorganize, recapitalize, reclassify, consolidate, dissolve, liquidate or enter into a similar transaction;

 

   

incur any funded indebtedness (including the refinancing of any funded indebtedness) or repay, before due, any funded indebtedness (other than a working capital revolving line of credit) with a fixed term in either case, in a single transaction or in two or more transactions (related or unrelated) in an aggregate amount in excess of $15 million per year;

 

   

issue, grant or sell shares of common stock or rights with respect to common stock, except in connection with NCM Inc.’s equity incentive compensation plans or any conversion or exchange of NCM LLC membership units in accordance with the NCM LLC operating agreement;

 

   

issue, grant or sell any NCM Inc. preferred stock or rights with respect to preferred stock;

 

   

authorize, issue, grant or sell additional NCM LLC membership units or rights with respect to membership units (except as otherwise permitted in the common unit adjustment agreement or NCM Inc.’s equity incentive compensation plans);

 

   

amend, modify, restate or repeal any provision of NCM Inc.’s certificate of incorporation or bylaws or the NCM LLC operating agreement;

 

   

enter into, modify or terminate certain contracts not in the ordinary course of business of the type specified in Item 601(b)(10)(i) of Regulation S-K;

 

   

except as specifically set forth in the NCM LLC operating agreement, declare, set aside or pay any redemption of, or dividends with respect to membership interests, payable in cash, property or otherwise;

 

   

amend any material terms or provisions (as defined in the Nasdaq rules) of NCM Inc.’s equity incentive plan or enter into or consummate any new equity incentive compensation plan;

 

   

make any change in the current business purpose of NCM Inc. to serve solely as the manager of NCM LLC or any change in the current business purpose of NCM LLC to provide the services as set forth in the exhibitor services agreements; and

 

   

approve any actions relating to NCM LLC that could reasonably be expected to have a material adverse tax effect on the founding members.

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Pursuant to a director designation agreement, so long as a founding member owns at least 5% of NCM LLC’s issued and outstanding common membership units, such founding member will have the right to designate a total of two nominees to our ten-member board of directors who will be voted upon by our stockholders. If, at any time, any founding member owns less than 5% of NCM LLC’s then issued and outstanding common membership units, then such founding member shall cease to have any rights of designation. One of the two designees from each of the founding members must qualify as an independent director under Nasdaq rules at the time of designation.

If any director designee to our board designated by NCM LLC’s founding members is not appointed to our board, nominated by us or elected by our stockholders, as applicable, then each of the founding members (so long as such founding member continues to own 5% of NCM LLC’s issued and outstanding common membership units) will be entitled to approve the following actions of NCM LLC:

 

   

approving any budget or any amendment or modification of the budget;

 

   

incurring any indebtedness or entering into or consummating any other financing transaction that is not provided for in the budget;

 

   

entering into or consummating any agreements or arrangements involving annual payments by NCM LLC (including the fair market value of any barter) in excess of $5 million (subject to annual adjustment based on the Consumer Price Index), except as otherwise provided in the budget, or any material modification of any such agreements or arrangements;

 

   

entering into or consummating any agreements or arrangements involving annual receipts (including the fair market value of any barter) in excess of $20 million (subject to annual adjustment based on the Consumer Price Index), or any material modification of any such agreements or arrangements;

 

   

except as contemplated herein, declaring, setting aside or paying any redemption of, dividends on, or the making of any other distributions in respect of, any of its membership units or other equity interests in NCM LLC, as the case may be, payable in cash, stock, property or otherwise, or any reorganization or recapitalization or split, combination or reclassification or similar transaction of any of its units, limited liability company interests or capital stock, as the case may be;

 

   

amending any provision of the third restated LLC operating agreement to authorize, or to issue, any additional membership units or classes of units or other equity interests and the designations, preferences and relative, participating or other rights, powers or duties thereof;

 

   

hiring or terminating the employment of the chief executive officer, chief financial officer, chief technology officer or chief sales and marketing officer of NCM LLC, or the entering into, amendment or termination of any employment, severance, change of control or other contract with any employee who has a written employment agreement with NCM LLC;

 

   

changing the purposes of NCM LLC, or the provision by NCM LLC of any services beyond the scope of the services defined in the exhibitor services agreements, or services outside of the United States or Canada;

 

   

entering into any agreement with respect to or the taking of any material steps to facilitate a transaction that constitutes a change of control of NCM LLC or a proposal for such a transaction;

 

   

leasing (as lessor), licensing (as licensor) or other transfer of assets (including securities) (x) having a fair market value or for consideration exceeding $10 million (subject to annual adjustment based on the Consumer Price Index), taken as a whole, or (y) to which the revenue or the profits attributable exceed $10 million (subject to annual adjustment based on the Consumer Price Index), taken as a whole, in any one transaction or series of related transactions, in each case, determined using the most recent quarterly consolidated financial statement of NCM LLC;

 

   

entering into any agreement with respect to or consummating any acquisition of any business or assets having a fair market value in excess of $10 million (subject to annual adjustment based on the Consumer Price Index) taken as a whole, in any one transaction or series of related transactions, whether by purchase and sale, merger, consolidation, restructuring, recapitalization or otherwise;

 

   

settling claims or suits in which NCM LLC is a party for an amount that exceeds the relevant provision in the budget by more than $1 million (subject to annual adjustment based on the Consumer Price Index) or where equitable or injunctive relief is included as part of such settlement;

 

   

entering into, modifying or terminating any material contract or transaction or series of related transactions (including by way of barter) between (x) NCM LLC or any of its subsidiaries and (y) any member or any affiliate of any member or any person in which any founding member has taken, or is negotiating to take, a material financial interest, in each case, other than relating to the purchase or sale of products or services in the ordinary course of business of NCM LLC;

 

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entering into any agreement for NCM LLC to provide to any new member or affiliate of any new member any services similar to those set forth in the exhibitor services agreement, or admitting to NCM LLC any new member;

 

   

entering into, modifying or terminating any agreement for NCM LLC to provide any services to any person (other than a member or affiliate of a member), that requires capital expenditures or guaranteed payments in excess of $1 million annually (subject to annual adjustment based on the Consumer Price Index);

 

   

dissolution of NCM LLC; the adoption of a plan of liquidation of NCM LLC; any action by NCM LLC to commence any suit, case, proceeding or other action (i) under any existing or future law of any jurisdiction relating to bankruptcy, insolvency, reorganization or relief of debtors seeking to have an order for relief entered with respect to NCM LLC, or seeking to adjudicate NCM LLC as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding up, liquidation, dissolution, composition or other relief with respect to NCM LLC, or (ii) seeking appointment of a receiver, trustee, custodian or other similar official for NCM LLC, or for all or any material portion of the assets of NCM LLC, or making a general assignment for the benefit of the creditors of NCM LLC;

 

   

approving any significant tax matters;

 

   

valuation determinations to be made under the third restated LLC operating agreement;

 

   

amending or changing certain provisions of the third restated LLC operating agreement; and

 

   

any expenditure by NCM LLC to replace, upgrade or modify any equipment or software owned by any of the founding members or their affiliates.

For purposes of calculating the 5% ownership threshold for the supermajority director approval rights and director designation agreement provisions discussed above, shares of our common stock held by a founding member and received upon redemption of NCM LLC common membership units will be counted toward the threshold. Common membership units issued to NCM Inc. in connection with the redemption of common membership units by a founding member will be excluded, so long as such founding member continues to hold the common stock acquired through such redemption or such founding member has disposed of such shares of common stock to another founding member. Shares of our common stock otherwise acquired by the founding members will also be excluded, unless such shares of common stock were transferred by one founding member to another and were originally received by the transferring founding member upon redemption of NCM LLC common membership units. NCM LLC common membership units held by permitted transferees of a founding member will be combined with units held by the founding member for purposes of determining whether the 5% threshold has been met, and the founding member and its permitted transferees may exercise their designation rights jointly. Permitted transferees include affiliates of the founding member and entities that are owned more than 50% by the same entity or entities that ultimately control the founding member.

The issued and outstanding common membership units of NCM LLC are owned approximately 44.8% by NCM Inc., approximately 18.6% by AMC, approximately 14.0% by Cinemark and approximately 22.6% by Regal. There are 93,850,951 common membership units issued and outstanding, 21,230,712 of which are beneficially owned by Regal, 17,474,890 of which are beneficially owned by AMC, 13,145,349 of which are beneficially owned by Cinemark, and 42,000,000 of which are beneficially owned by us. The number of outstanding common membership units owned by us will at all times equal the number of shares of our outstanding common stock. With respect to any future offering of common stock, the net cash proceeds we receive, including with regard to the exercise of options issued under our equity incentive plan, will be concurrently transferred to NCM LLC in exchange for common membership units equal in number to the number of shares of common stock we issued. Pursuant to the terms of our certificate of incorporation and the third restated LLC agreement, if a member of NCM LLC, other than us, chooses to have common membership units redeemed, we may elect to issue cash or shares of our common stock on a one-for-one basis. See “Certain Relationships and Related Party Transactions—Transactions with Founding Members—NCM LLC Operating Agreement.”

 

Item 11. Executive Compensation

Compensation Discussion and Analysis

The primary goals of the compensation committee of our board of directors with respect to executive compensation are to attract, retain, motivate and reward talented executives, to tie annual and long-term compensation incentives to achievement of specified performance objectives, and to achieve the goal of long-term creation of value for our stockholders by aligning the interests of these executives with our stockholders. To achieve these goals, we intend to maintain compensation plans that tie a substantial portion of

 

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executives’ overall compensation to key strategic, operational and financial goals such as achievement of budgeted levels of revenue and EBITDA, and other non-financial goals that the board deems important. The compensation committee and the board evaluate individual executive performance with a goal of setting compensation at levels they believe, based on their general business and industry knowledge and experience, are comparable with executives in other companies of similar size and stage of development operating in the advertising sales and digital media distribution industry, while taking into account our relative performance and our own strategic goals.

NCM LLC has in the past and we intend in the future to conduct an annual review of the aggregate level of our executive compensation as part of the annual budget review and annual performance review processes, which include determining the operating metrics and non-financial elements used to measure our performance and to compensate our executive officers. This review is based on our knowledge of how other advertising sales and media companies measure their executive performance and on the key operating metrics that are critical in our effort to increase the value of our company.

Elements of Compensation

Executive compensation consists of the following elements. The compensation committee and board determine the portion of compensation allocated to each element for each individual named executive officer. Descriptions of historical practices and policies are of the practices and policies of the NCM LLC compensation committee. Our compensation committee is expected to continue these policies in the short term but will reevaluate the current policies and practices as it considers advisable.

Base Salary. Base salaries for our executives are established based on the scope of their responsibilities, taking into account competitive market compensation for similar positions, as well as seniority of the individual, our ability to replace the individual and other primarily judgmental factors deemed relevant by the board. Generally, we believe that executive base salaries should be targeted near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies, in line with our compensation philosophy. Base salaries are reviewed annually by the compensation committee and the board, and may be adjusted (upward in the case of employees with employment contracts) from time to time pursuant to such review and/or in accordance with guidelines contained in the various employment agreements or at other appropriate times, to realign salaries with market levels after taking into account individual responsibilities, performance and experience. This review began in the fourth quarter of 2006 as part of the NCM LLC annual budgeting process and was completed during the first quarter of 2007 as part of our annual performance review process.

Discretionary Annual Performance Bonus. The board has the authority to award discretionary annual performance bonuses to our executive officers. The annual incentive bonuses are intended to compensate officers for achieving financial, operational and strategic goals and for achieving individual annual performance objectives. These objectives and goals vary and are set specific to the individual executive, but have traditionally been allocated 25% to more subjective non-financial strategic factors such as the expansion of our digital network, maintenance of strong relationships with NCM LLC’s founding members and the completion of various transactions, including for 2006 and 2007 the offering, and 75% associated with financial factors such as achieving budgeted levels of revenue and EBITDA and managing levels of capital expenditures. These annual bonus amounts are intended to reward both overall company and individual performance during the year and, as such, can be highly variable from year to year.

Our discretionary annual bonus is paid in cash in an amount reviewed and approved by the compensation committee and the board and traditionally has been paid in a single installment in the first quarter following the completion of a given fiscal year once the annual audit report is issued. Pursuant to current employment agreements, each named executive officer is eligible for a discretionary annual bonus up to an amount equal to a specified percentage of such executive’s salary. However, the compensation committee and the board may increase the discretionary annual bonus paid to our executive officers using their judgment based on the company exceeding certain financial goals (“stretch bonus”). The NCM LLC compensation committee and board targeted discretionary bonus amounts for performance during 2006 at 50-100% of base salary for each of our named executive officers, with an additional “stretch bonus” amount of up to 50% of the amount awarded for performance. The actual amount of discretionary bonus, which varies by individual, is determined following a review of each executive’s individual performance and contribution to our strategic and financial goals. The compensation committee determined and approved the discretionary bonuses for 2006 for the named executive officers on February 7, 2007, and the bonus amounts were paid on February 14, 2007. See “Summary Compensation Table” for those amounts.

Long-Term Incentive Program. We believe that creating long-term value for our stockholders is achieved, in part, by aligning the interests of our executive officers with those of our stockholders. Prior to the completion of the offering, we adopted a new equity

 

63


incentive plan, the National CineMedia Inc. 2007 Equity Incentive Plan, which we refer to as the “equity incentive plan.” The equity incentive plan will not only assist us in attracting, motivating, rewarding and retaining employees, including our named executive officers, but will promote the creation of long-term value for our stockholders by aligning the interests of these individuals with the interests of stockholders. The equity incentive plan provides for the grant, at the discretion of our board and compensation committee, of stock options, stock appreciation rights, restricted stock, restricted stock units, and other equity-based and cash incentive awards to these officers, as well as directors, employees, consultants and other individuals (including board members) who perform services for us or for our affiliates. This equity incentive plan replaces the NCM LLC Unit Option Plan, discussed below.

The compensation committee and board believe based on their general business and industry experience and knowledge that the use of the combination of base salary, discretionary annual performance bonus, and long-term incentive (including stock option or other stock-based awards) offers the best approach to achieving our compensation goals, including attracting and retaining the most talented and capable executives and motivating our executives and other officers to expend maximum effort to improve the business results, earnings and overall value of our business.

In connection with the completion of the offering, options previously granted by NCM LLC to its officer employees, including our named executive officers, under the National CineMedia, LLC 2006 Unit Option Plan, which we refer to as the “NCM LLC Unit Option Plan,” that remained outstanding as of the date of the completion of the offering were substituted with options granted under the equity incentive plan. In addition, the NCM LLC Unit Option Plan, provided under certain conditions, that option holders would receive an additional equity award of options or restricted units at the time of an initial public offering, which we refer to as the “IPO awards”. The IPO awards were intended to ensure that the economic value of the NCM LLC unit options held just prior to the offering (and related debt issuance) was retained by the option holder just after the offering (and related debt issuance). NCM LLC issued IPO awards in the form of restricted units. Upon completion of the offering, we issued shares of restricted common stock in substitution of the restricted units. See “Substitution of NCM LLC Options and Restricted Units” for additional information. In addition, upon completion of the offering in February 2007, we granted options to acquire 218,000 shares of our common stock primarily to certain non-officer employees, and 5,718 shares of restricted stock to our non-employee independent directors.

The NCM LLC Unit Option Plan authorized NCM LLC to grant options to purchase units of NCM LLC to our employees, directors and consultants. NCM LLC granted unit options in conjunction with the adoption of the plan and then at the commencement of employment and, occasionally, following a significant change in job responsibilities or to meet other special retention or performance objectives. The compensation committee and board reviewed and approveed unit option awards to executive officers based upon a review of competitive compensation information, their assessment of individual performance, a review of each executive’s existing long-term incentives, and retention considerations. Periodic unit option grants were made at the discretion of the compensation committee and the board to eligible employees and, in appropriate circumstances, the compensation committee and board in their discretion consider the recommendations of members of management, primarily Mr. Hall, our Chief Executive Officer. In 2006, the named executive officers were awarded unit options in the amounts indicated in the section entitled “NCM Inc. 2007 Equity Incentive Plan-Grants of Plan Based Awards” below. These grants included grants made on April 4, 2006, in connection with the adoption of the NCM LLC Unit Option Plan and in recognition of exceptional contributions by the named executives and other NCM LLC officers since NCM LLC’s formation in March 2005, and subsequently in connection with various hiring and other retention objectives. The options granted by NCM LLC us have an exercise price equal to a fair market value formula as of the grant date, typically begin vesting after a period of one year at 20% per annum thereafter based upon continued employment over a five-year period, and generally expire fifteen years after the date of grant.

Other Compensation. Our executive officers entered into new employment agreements as discussed below, under “Employment and Other Agreements”. NCM Inc. is the employer and NCM LLC is also a party under these new employment agreements. The compensation committee and board, in the future, may change such agreements as they determine, in their discretion, that revisions to such employment agreements are required to comply with new tax or accounting rules and are not detrimental to the interest of the named executives. In addition, consistent with our compensation philosophy, we intend to continue to maintain our current benefits and perquisites for our executive officers; however, the compensation committee in its discretion may revise, amend or add to the officer’s executive benefits and perquisites if it deems it advisable. We believe these benefits and perquisites are currently comparable to the median competitive levels for comparable companies.

 

64


Summary Compensation Table

 

Name and

Principal Position

   Year    Salary
($)(6)
   Bonus
($)
   Stock
Awards
($)
   Option
Awards
($) (1)
   Non-Equity
Incentive Plan
Compensation
($) (2)
   Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings ($)
   All Other
Compensation
($) (3)
   Total ($)

Kurt C. Hall

    President, Chief Executive Officer and Chairman

   2006    $ 625,000    $ 0    $ 0    $ 629,117    $ 607,500    $ 0    $ 8,292    $ 1,869,909

Clifford E. Marks

    President of Sales and Chief Marketing Officer

   2006    $ 579,395    $ 0    $ 0    $ 326,590    $ 567,000    $ 0    $ 8,204    $ 1,481,189

Gary W. Ferrera (4)

    Executive Vice President and Chief Financial Officer

   2006    $ 176,635    $ 0    $ 0    $ 177,910    $ 190,782    $ 0    $ 1,389    $ 546,716

Thomas C. Galley

    Executive Vice President and Chief Technology and Operations Officer

   2006    $ 373,077    $ 0    $ 0    $ 193,840    $ 275,625    $ 0    $ 8,149    $ 850,691

Ralph E. Hardy

    Executive Vice President and General Counsel

   2006    $ 215,029    $ 0    $ 0    $ 69,893    $ 105,482    $ 0    $ 8,054    $ 398,458

David J. Giesler (5)

    Former Executive Vice President and Chief Financial Officer

   2006    $ 161,762    $ 0    $ 0    $ 0    $ 53,572    $ 0    $ 7,116    $ 222,450

(1) The amounts represent the portion of the fair value of the options recognized as expense for financial statement reporting purposes in accordance with SFAS No. 123(R), “Share Based Payment,” and does not represent cash payments made to the individuals or amounts realized. Under SFAS 123(R), the fair value of options granted to employees is recognized ratably over the vesting period. No portion of the options held by any named executive officer are currently vested. See details of the assumptions used in valuation of the options in Note 12 to the audited financial statements of NCM LLC contained elsewhere in this document. The Grants of Plan Based Awards table discloses the unit options granted to the named executive officers. The option expense as reflected in this table represents the calculation based on outstanding unit options and does not reflect the contemplated substitution of the unit options with stock options to be issued as discussed below.
(2) The compensation committee approved 2006 bonuses for the named executive officers on February 7, 2007, and such bonuses were paid on February 14, 2007.
(3) The balances include individual amounts, all of which are less than $10,000, reflecting contributions on behalf of the named executive officers as NCM LLC’s matching contribution to NCM LLC’s defined contribution 401(k) plan, as well as amounts related to the various life and disability insurance plans participated in by the named executives.
(4) Mr. Ferrera became NCM LLC’s Executive Vice President and Chief Financial Officer on May 1, 2006.
(5) Mr. Giesler resigned as NCM LLC’s Executive Vice President and Chief Financial Officer effective April 30, 2006 and resigned as an employee of NCM LLC on September 20, 2006. His unit option was forfeited when he resigned from NCM LLC effective September 20, 2006.
(6) During 2007, annual salary increases were approved by the NCM LLC compensation committee as reflect in “Employment and Other Agreements” below.

 

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Grants of Plan Based Awards

The board of directors approved awards under our NCM LLC Unit Option Plan to each of our named executive officers in 2006. As noted, in connection with the offering, options and restricted units previously granted under the NCM LLC Unit Option Plan were substituted with options and shares of restricted stock granted under our equity incentive plan. See further discussion at “—NCM Inc. 2007 Equity Incentive Plan”. Set forth below is information regarding awards granted during 2006:

 

         

Estimated Future Payouts Under
Non-Equity Incentive Plan

Awards

  

Estimated Future
Payouts Under
Equity

Incentive Plan
Awards -

Target/Maximum
(#)

    Exercise or
Base Price
of Option
Awards
($ per Unit)
(6)
  

Grant Date
Fair Value
of Option
Awards

($)

Name

   Grant Date    Threshold
($)(7)
   Target ($)
(7)
   Maximum
($) (7)
       

Kurt C. Hall

   April 4, 2006    $ 312,500    $ 625,000    $ 937,500    474,974  (1)   $ 16.35    $ 4,823,232

Clifford E. Marks

   April 4, 2006    $ 67,500    $ 675,000    $ 742,500    263,775  (2)   $ 16.35    $ 2,678,563

Clifford E. Marks

   September 7, 2006      n/a      n/a      n/a    37,327  (3)   $ 24.04    $ 376,639

Gary W. Ferrera

   May 1, 2006    $ 68,750    $ 137,500    $ 206,250    149,058  (4)   $ 18.01    $ 1,512,044

Thomas C. Galley

   April 4, 2006    $ 140,625    $ 281,250    $ 421,875    146,346  (1)   $ 16.35    $ 1,486,107

Ralph E. Hardy

   April 4, 2006    $ 52,500    $ 105,000    $ 157,500    52,769  (1)   $ 16.35    $ 535,850

David J. Giesler

   April 4, 2006    $ 40,440    $ 80,881    $ 121,321    —   (5)     Forfeited      —  

(1) Represents unit options granted under the NCM LLC Unit Option Plan, as adjusted under the plan for changes in capitalization, which were substituted with the same number of options granted under the equity incentive plan upon completion of the offering. The options begin vesting on January 1, 2007, and will vest at 20% per year, so long as the officer remains in continuous employment with NCM LLC through those dates.
(2) Represents a unit option granted under the NCM LLC Unit Option Plan, as adjusted under the plan for changes in capitalization, which were substituted with the same number of options granted under the equity incentive plan upon completion of the offering. The option begins vesting on January 1, 2008, and will vest at 20% per year, so long as the officer remains in continuous employment with NCM LLC through those dates.
(3) Represents a unit option granted under the NCM LLC Unit Option Plan, as adjusted under the plan for changes in capitalization, which were substituted with the same number of options granted under the equity incentive plan upon completion of the offering. The option begins vesting on January 1, 2008, and will vest at 20% per year, so long as the officer remains in continuous employment with NCM LLC through those dates.
(4) Represents a unit option granted under the NCM LLC Unit Option Plan, as adjusted under the plan for changes in capitalization, which were substituted with the same number of options granted under the equity incentive plan upon completion of the offering. The option begins vesting on January 1, 2007 and will vest at 20% per year, so long as the officer remains in continuous employment with NCM LLC through those dates.
(5) Represents a unit option granted under the NCM LLC Unit Option Plan, as adjusted under the plan for changes in capitalization, which were substituted with the same number of options granted under the equity incentive plan upon completion of the offering. The option was forfeited when Mr. Giesler resigned from NCM LLC in September 2006.
(6) There was no public market price for the units on the date of the grant. The exercise price was determined by the board as not less than the fair market value of a unit as of the grant date and as reported, includes adjustments for the reorganization.
(7) Amounts represent maximum potential cash bonus amounts if all goals and additional targets are achieved for 2006 performance for each named executive officer. The board and compensation committee may, at their complete discretion, award additional or lower amounts. The bonus amounts for Mr. Ferrera will be prorated based on his hire date, and the bonus amounts for Mr. Giesler will be prorated based on his resignation date. The compensation committee approved 2006 bonuses for the named executive officers on February 7, 2007. We paid those amounts February 14, 2007. See “Summary Compensation Table” for those amounts.

 

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Outstanding Equity Awards at December 28, 2006

 

    

Number of Securities
Underlying

Unexercised Options (#)

   Option
Exercise
Price
($)
   Option Expiration
Date (1)

Name

   Exercisable   

Unexercisable

(2)(3)

     

Kurt C. Hall

   0    474,974    $ 16.35    April 4, 2021

Clifford E. Marks

   0    263,775    $ 16.35    April 4, 2021

Clifford E. Marks

   0    37,327    $ 24.04    September 7, 2021

Gary W. Ferrera

   0    149,058    $ 18.01    May 1, 2021

Thomas C. Galley

   0    146,346    $ 16.35    April 4, 2021

Ralph E. Hardy

   0    52,769    $ 16.35    April 4, 2021

David J. Giesler

   0    0      —     

(1) Options expire prior to date if named executive officer terminates employment.
(2) The options vest for each named executive officer, excluding Mr. Marks, 20% per year commencing on January 1, 2007, subject to continuous employment.
(3) The options for Mr. Marks vest 20% per year commencing on January 1, 2008, subject to continuous employment with NCM LLC.

NCM LLC 2006 Unit Option Plan

The NCM LLC Unit Option Plan was administered by NCM LLC’s compensation committee and board. The objectives of the plan included attracting, motivating and retaining key personnel and promoting NCM LLC’s success by linking the interests of NCM LLC’s officers, directors and consultants with our success. Upon completion of the offering, the plan was terminated and no further units may be issued pursuant to the plan.

Units Subject to Plan

There were 1,224,203 units authorized for issuance under the plan. As of December 28, 2006, options covering 1,131,728 units had been granted and were outstanding under the plan, leaving 92,475 units available for issuance, excluding any units to be issued as IPO awards.

Term of Options

The term of each option is 15 years from the date of the grant of the option, unless a shorter period is established. Each of the options granted under the plan have a term of 15 years.

Vesting

The board had the authority under the plan to establish the vesting schedule for an option. The vesting schedule is set forth in each option agreement. The option agreement includes a vesting start date. Outstanding options include a vesting start date of January 1, 2007 or January 1, 2008. Options granted under the plan vest at a rate of 20% per year commencing 12 months after the vesting start date, subject to continuous employment or other service with NCM LLC or its subsidiaries. Outstanding options are scheduled to fully vest 5 years after the vesting start date. Failure to be continuously employed or in another service relationship, generally results in the forfeiture of options not vested at the time the employment or other service relationship ends. Termination of a recipient’s employment or other service relationship for cause generally results in the forfeiture of all of the recipient’s options.

IPO Awards. Upon the occurrence of an initial public offering of NCM LLC or its manager, the plan provided for additional equity awards to outstanding option holders under certain circumstances. These awards may be granted as additional options or restricted units, which we refer to as the “IPO awards.” The purpose of the IPO awards is to ensure that the economic value of outstanding unit options held just prior to an initial public offering is maintained by the option holder immediately after the offering. We issued 262,466 restricted units as IPO awards at the completion of the offering.

 

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The table below sets forth the number of restricted units issued as IPO awards to the named executive officers, other employees and the total. The restricted units were unvested when granted and are subject to forfeiture and restrictions on transfer during the restriction period. The restricted units will vest and the forfeiture and transfer restrictions will lapse at the same time as the underlying options vest, 20% per year commencing on either January 1, 2008 or January 1, 2009, as applicable, subject to continuous employment. The restricted unit award provides that the grantee will receive dividends. With completion of the offering, we substituted the restricted units with shares of restricted stock of NCM Inc. using an exchange ratio of one share to one unit.

 

Name

   Number of
Restricted Units

Kurt C. Hall

   78,430

Clifford E. Marks

   49,720

Gary W. Ferrera

   24,593

Thomas C. Galley

   24,165

Ralph E. Hardy

   8,713

Other Employees

   76,845
    

Total

   262,466
    

Adjustments and Conversion

The plan provided for adjustments to the number of units for which grants may be made under the plan, the number of units covered by an option and the option exercise price for changes in capitalization.

By the terms of the NCM LLC Plan, upon completion of the initial public offering of NCM Inc., all options under the plan were exchanged for options to acquire shares of NCM Inc.’s common stock and restricted units were exchanged for shares of restricted stock of NCM Inc.

NCM Inc. 2007 Equity Incentive Plan

Prior to the completion of the offering, we adopted the equity incentive plan. The equity incentive plan will assist us in attracting, retaining, motivating and rewarding employees, directors and consultants, and promoting the creation of long-term value for our stockholders by aligning the interests of these individuals with those of our stockholders. The equity incentive plan provides for the grant of options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based and cash awards to directors, officers, employees, consultants and other individuals who perform services for us or for our affiliates.

We will use all proceeds received by us upon the exercise of options under the equity incentive plan to acquire NCM LLC common membership units at a price per unit equal to the exercise price of such option.

Share Reserve

The total number of shares of our common stock available for issuance or delivery under the equity incentive plan is 2,576,000 shares, subject to adjustment in the event of any stock dividend or split, reorganization, recapitalization, merger, share exchange or any other similar corporate event. For purposes of determining the number of shares remaining available for issuance under the equity incentive plan, to the extent that an award expires or is canceled, forfeited, settled in cash or otherwise terminated without delivery to the participant of the full number of shares to which the award related, the undelivered shares will again be available for grant. Shares withheld in payment of the exercise price or taxes relating to an award and shares equal to the number surrendered in payment of any exercise price or taxes relating to an award will be deemed to constitute shares not delivered to the participant and will be deemed to again be available for awards under the plan. Shares issued under the equity incentive plan may be authorized and unissued shares or treasury shares. All grants under the equity incentive plan shall be proposed by the Chief Executive Officer at the end of each fiscal year and approved and priced by the compensation committee and board of directors at the first compensation committee and board of directors meeting of the following fiscal year (with the exception being if a new officer of the Company is hired and stock options or restricted stock are needed to form a part of their compensation package, as approved by the compensation committee, in which case such stock options or restricted stock grants would be approved and priced at the first compensation committee and board of directors meeting following the relevant employee’s first date of employment).

The maximum number of shares that may be covered by an award granted under the equity incentive plan to any single participant in any calendar year cannot exceed 500,000, excluding substituted awards. The maximum dollar amount that may be awarded to a single participant in any calendar year cannot exceed $5,000,000, excluding substituted awards.

 

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NCM LLC Options and Restricted Units

In connection with the completion of the offering, options previously granted by NCM LLC to its employees under the NCM LLC Unit Option Plan were replaced pursuant to the plan with options granted under the equity incentive plan. In addition, the NCM LLC Unit Option Plan provided that under certain conditions, option holders would receive an additional equity award of options or restricted units at the time of an initial public offering, the “IPO awards.” We issued options to purchase shares of our common stock under the equity incentive plan in substitution for options previously granted under the NCM LLC 2006 Unit Option Plan and shares of restricted common stock in substitution for restricted units that were granted by NCM LLC.

Administration

Generally, the compensation committee, or the committee, administers the equity incentive plan and designates those persons who will be granted awards and the amount, type and other terms and conditions of the awards. The committee has full authority to administer the equity incentive plan, including the authority to interpret and construe any provision in the plan and the terms of any award agreement and to adopt such rules and regulations for administering the plan that it may deem necessary or appropriate. Pursuant to this authority, on or after the date of grant of an award, the committee may:

 

   

accelerate the date on which the award becomes vested, exercisable or transferable;

 

   

extend the term of any award, including, without limitation, extending the period following termination of a participant’s service with us or our affiliates during which the incentive award may remain outstanding;

 

   

waive any conditions to the vesting, exercisability or transferability of an award; or

 

   

provide for the payment of dividends or dividend equivalents with respect to an award.

Significant Features of Incentive Awards

The following is a description of the significant terms that apply to each type of award issued under the equity incentive plan:

Options and Stock Appreciation Rights . Each option will entitle the holder to purchase a specified number of shares at a specified exercise price. Each option agreement will specify whether the option is an “incentive stock option” or “ISO” (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or the Code) or a nonqualified stock option. Each stock appreciation right will entitle the holder to receive, upon exercise, the excess of the fair market value of a share at the time of exercise over the base price of the stock appreciation right multiplied by the specified number of shares to which the stock appreciation right is being exercised. The exercise or base price of each option and stock appreciation right will be at least 100% of the fair market value of a share on the date the award is granted. The term of any option or stock appreciation right will not exceed ten years, except for substituted awards and the option or stock appreciation right will vest over a period determined by the committee. Each option or stock appreciation right agreement will specify the consequences to the award with respect to a termination of service with us and our affiliates.

Restricted Stock and Restricted Stock Units. The committee may grant a restricted stock award, which is a grant of actual shares subject to a risk of forfeiture and restrictions on transfer. The committee may also grant an award of restricted stock units, a contractual commitment to deliver shares at a future date. The terms and conditions of any restricted stock award or award of restricted stock units will be determined by the committee.

Other Stock-Based Awards. The committee may grant other types of stock-based awards in such amounts and subject to such terms and conditions as the committee determines. Each such award may, among other things, (i) involve the transfer of actual shares, either at the time of grant or thereafter, or payment in cash of amounts based on the value of shares; (ii) be subject to performance-based and/or service-based conditions; and (iii) be in the form of phantom stock, performance shares, deferred share units or other full value stock awards.

Performance-Based Awards

The committee may grant awards that are intended to qualify as performance-based compensation under Section 162(m) of the Code. The performance goals upon which the payment or vesting of any award that is intended to qualify as performance-based compensation may relate to one or more specified performance measures.

 

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Performance periods may not be less than one fiscal year of NCM Inc. and may be overlapping periods. The committee will establish (i) performance goals for each performance period; (ii) target awards for each participant; and (iii) an objective method for determining the applicable performance percentage to be applied to each target award.

Tax Withholding

The plan provides that participants may elect to satisfy certain federal state or local income tax withholding requirements by remitting to us cash or, subject to certain conditions, shares or by instructing us to withhold shares payable to the participant.

Amendment and Termination

Our board of directors may amend, suspend, discontinue, or terminate the equity incentive plan or the committee’s authority to grant awards under the equity incentive plan in any respect, except that, to the extent that any applicable law, regulation or rule of a stock exchange requires stockholder approval for any revision or amendment to be effective, the revision or amendment will not be effective without stockholder approval. We will not make any grants under the equity incentive plan following the tenth anniversary of the date the plan becomes effective, but awards outstanding at that time will continue in accordance with their terms.

Federal Income Tax Consequences

The following is intended only as a brief summary of the material U.S. federal income tax consequences of the equity incentive plan. The tax consequences to a participant will generally depend upon the type of award issued to the participant. In general, if a participant recognizes ordinary income in connection with the grant, vesting or exercise of an award, we will be entitled to a corresponding deduction equal to the amount of the income recognized by the participant. This summary does not address the effects of other federal taxes (including possible “golden parachute” excise taxes) or taxes imposed under state, local or foreign tax laws.

Options and Stock Appreciation Rights. In general, a participant does not have taxable income upon the grant of an option or a stock appreciation right. The participant will recognize ordinary income upon exercise of a nonqualified stock option equal to the excess of the fair market value of shares acquired on exercise over the aggregate option price for the shares. Upon exercising a stock appreciation right, the participant will recognize ordinary income equal to the cash or fair market value of the shares received. A participant will not recognize ordinary income upon exercise of an ISO, except that the alternative minimum tax may apply. If a participant disposes of shares acquired upon exercise of an ISO before the end of the applicable holding periods, the participant will recognize ordinary income. Otherwise, a sale of shares acquired by exercise of an option or a stock appreciation right generally will result in short-term or long-term capital gain or loss measured by the difference between the sale price and the participant’s tax basis in the shares. We normally can claim a tax deduction equal to the amount recognized as ordinary income by a participant in connection with an option or stock appreciation right, but no tax deduction relating to a participant’s capital gains. We will not be entitled to any tax deduction with respect to an ISO if the participant holds the shares for the applicable ISO holding periods before selling or transferring the shares.

Restricted Stock, Restricted Stock Units and Other Stock-Based Awards. If an award is subject to a restriction on transferability and a substantial risk of forfeiture (for example, restricted stock), the participant generally must recognize ordinary income equal to the fair market value of the transferred amounts at the earliest time either the transferability restriction or risk of forfeiture lapses. If an award has no restriction on transferability or is not subject to a substantial risk of forfeiture, the participant generally must recognize ordinary income equal to the cash or the fair market value of shares received. We can ordinarily claim a tax deduction in an amount equal to the ordinary income recognized by the participant, except as discussed below regarding Section 162(m). A participant may irrevocably elect to accelerate the taxable income to the time of grant of restricted stock rather than upon lapse of restrictions on transferability or the risk of forfeiture (Section 83(b) election).

Section 409A. Section 409A of the Code imposes election, payment and funding requirements on “nonqualified deferred compensation” plans. If a nonqualified deferred compensation arrangement subject to Section 409A of the Code fails to meet, or is not operated in accordance with, the requirements of Section 409A, then compensation deferred under the arrangement may become immediately taxable and subject to a 20% additional tax. Certain awards that may be issued under the plan may constitute a “deferral of compensation” subject to the requirements of Section 409A of the Code.

Section 162(m). Compensation that qualifies as “performance-based” compensation is excluded from the $1 million deduction limitation of Section 162(m) of the Code. Under the equity incentive plan, options and stock appreciation rights granted with an exercise price at least equal to 100% of the fair market value of the underlying shares on the date of grant and certain other awards

 

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that are conditioned upon achievement of performance goals are intended to qualify as “performance-based” compensation. A number of requirements must be met in order for particular compensation to qualify, and we cannot assure you that compensation under the equity incentive plan will be fully deductible by us under all circumstances.

Substitution of NCM LLC Options and Restricted Units

NCM LLC issued to its employees, options to purchase common membership units of NCM LLC. In connection with the offering, NCM LLC issued restricted units as “IPO awards” to holders of outstanding unit options. Upon completion of the offering, we issued stock options to holders of outstanding unit options in substitution of the NCM LLC unit options and shares of restricted stock in substitution of the NCM LLC restricted units under the following terms and conditions:

 

   

the individual’s rights with respect to the NCM LLC unit option and restricted units were cancelled;

 

   

the total spread (the excess of the aggregate fair market value of the units subject to the option over the aggregate option exercise price) of the option after substitution could not exceed the total spread of the option that existed immediately prior to the substitution (the “spread test”);

 

   

on a share by share comparison, the ratio of the option exercise price to the fair market value of the shares subject to the option immediately after the substitution could not be greater than the ratio of the option exercise price to the fair market value of the units subject to the option that existed immediately prior to the substitution (the “ratio test”);

 

   

the substituted option contained all of the terms of the unit option, except to the extent such terms were rendered inoperative by the corporate transaction; and

 

   

the substituted option did not provide the option holder with additional benefits that the option holder did not have under the unit option.

We provided an option substitution agreement to each NCM LLC option holder that sets forth the terms and conditions related to the substitution of the option. We provided a restricted stock agreement with each NCM LLC restricted unit holder that sets forth the terms and conditions related to the substitution of the restricted stock for the restricted units.

Pension Benefits

None of our named executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us.

Nonqualified Deferred Compensation

None of our named executive officers participate in or have account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by us. The compensation committee, which will be comprised solely of “outside directors” as defined for purposes of Section 162(m) of the Internal Revenue Code, may elect to provide our officers and other employees with non-qualified defined contribution or deferred compensation benefits if the compensation committee determines that doing so is in our best interests.

Other Employee Benefits

Our employees, including our named executive officers, are entitled to various employee benefits. These benefits include the following: medical and dental insurance; flexible spending accounts for healthcare; life, accidental death and dismemberment and disability insurance; employee assistance programs (confidential counseling); a 401(k) plan; and paid time off.

We offer a 401(k) plan to eligible employees as part of a 401(k) plan administered by NCM LLC. Under the plan, employee participants, including our named executive officers, may contribute up to 20% of their compensation, subject to Internal Revenue Code limitations. Employee contributions may be made after six months of service, and are invested in various investment funds based upon elections made by the employee. We may make discretionary matching contributions to the plan.

Employment and Other Agreements

The following is a summary of the employment agreements that are currently in effect between NCM Inc. and NCM LLC and each of the named executive officers, under which NCM Inc. is the employer.

 

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Kurt C. Hall

On February 13, 2007, NCM Inc. and NCM LLC entered into an employment agreement with Kurt C. Hall to serve as President, Chief Executive Officer and Chairman of the Board of NCM Inc., for a term running through May 24, 2009. On each May 24, beginning in 2007, one year will be added to the term of the agreement. The agreement provides that Mr. Hall be paid a base salary at the rate of $700,000 per year, subject to annual increases at the discretion of the compensation committee. In addition to base salary, Mr. Hall is eligible to receive an annual cash bonus with a target bonus amount of at least 100% of his base salary and a stretch bonus amount of at least 150% of his base salary upon attainment of performance goals determined by the compensation committee. Mr. Hall will also be reimbursed for reasonable out-of-pocket expenses. If Mr. Hall is terminated, for reasons other than permanent disability, death or cause, Mr. Hall will be entitled to severance equal to two times his base salary paid over 24 months and a prorated portion of any bonus he would have received in the fiscal year in which his termination occurs. Mr. Hall would also be entitled to continued coverage under any employee medical, health and life insurance plans for a 24-month period. If Mr. Hall resigns with good reason, as defined in the agreement, he will be entitled to severance equal to two times his base salary and one times his target bonus payable in a lump sum, and a prorated portion of any bonus he would have received in the fiscal year in which his resignation occurs. Mr. Hall would also be entitled to continued coverage under any employee medical, health and life insurance plans for a 24-month period. If, within three months before or one year after a change of control, as defined in the agreement, Mr. Hall resigns for good reason or is terminated for reasons other than permanent disability, death or cause, Mr. Hall would be entitled to severance equal to two and one half times his base salary and two times his target bonus payable in a lump sum. Mr. Hall would also be entitled to a prorated portion of any bonus he would have received for the fiscal year in which the termination occurs, and would also be entitled to continued coverage under any employee medical, health and life insurance plans for a 30-month period. Under the agreement, during his employment and for 12 months thereafter, Mr. Hall, subject to certain limitations, has agreed not to compete with NCM Inc. or any of its affiliates or subsidiaries or solicit anyone who was employed by these entities. Under the agreement, Mr. Hall has also agreed not to divulge or disclose confidential information of NCM Inc. or its affiliates or subsidiaries except while employed by NCM Inc., in the business of and for the benefit of NCM Inc., or as required by law.

Clifford E. Marks

On February 13, 2007, NCM Inc. and NCM LLC entered into an employment agreement with Clifford E. Marks to serve as the President of Sales and Chief Marketing Officer for a term running through September 30, 2008. On the last day of the term, 24 months will be added to the termination date of the agreement. Under the agreement, Mr. Marks is paid a base salary at the rate of $675,000 per year with increases of 1% annually. The compensation committee will review Mr. Marks’ salary at least annually and may increase (but not reduce) the base salary in its sole discretion. In addition to base salary, Mr. Marks is eligible to receive an annual cash bonus equal to 25% of his base salary upon attainment of certain performance goals as determined by the chief executive officer and an additional annual cash bonus up to 80% of his base salary based upon attainment of certain sales targets as determined by the chief executive officer. The compensation committee will review Mr. Marks’ bonus structure and may adjust the bonus structure in its sole discretion. If Mr. Marks is terminated, for reasons other than disability, death or cause, as defined in the agreement, or if Mr. Marks resigns for good reason, as defined in the agreement, Mr. Marks will be entitled to severance equal the greater of his base salary paid over the remaining existing term of the contract and a bonus equal to the last bonus paid per month applied against the remaining contract period or one year of base salary plus 100% of the bonus amount paid for the last full year of employment. Mr. Marks would also be entitled to continued coverage under any employee benefit plans until the date he receives equivalent coverage but not longer than the period for which his base salary is paid after termination. Under the agreement, during his employment and for 12 months thereafter, Mr. Marks has agreed not to compete with NCM Inc., its affiliates or subsidiaries, or solicit anyone who is an employee, officer or agent of these entities. Under the agreement, Mr. Marks has also agreed not to divulge or disclose customer lists or trade secrets of NCM Inc. or its affiliates or subsidiaries except in the course of carrying out his duties under the agreement or as required by law.

Gary W. Ferrera

On February 13, 2007, NCM Inc. and NCM LLC entered into an employment agreement with Gary W. Ferrera to serve as Executive Vice President and Chief Financial Officer of NCM Inc., for a term running through April 1, 2007. On the last day of the term, 12 months will be added to the termination date. The agreement provides that Mr. Ferrera be paid a base salary of $325,000 per year, subject to further annual increases at the discretion of the compensation committee. In addition to base salary, Mr. Ferrera is eligible to receive an annual bonus of up to 75% of his base salary upon attainment of certain objective financial and subjective non-financial goals as determined by the chief executive officer. If Mr. Ferrera is terminated, for reasons other than disability, death or cause, as defined in the agreement, or if Mr. Ferrera resigns for good reason, as defined in the agreement, Mr. Ferrera will be entitled

 

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to severance equal to his base salary paid over 12 months and any annual bonuses awarded but not yet paid. Mr. Ferrera would also be entitled to continued coverage under any employee medical, health and life insurance plans for a 12-month period, or the economic equivalent of such coverage. Under the agreement, during his employment and for 12 months thereafter, Mr. Ferrera has agreed not to compete with NCM Inc. or any of its affiliates or subsidiaries, or solicit any of the employees, officers or agents of these entities. Under the agreement, Mr. Ferrera has also agreed not to divulge or disclose customer lists or trade secrets of NCM Inc. or its affiliates or subsidiaries except in the course of carrying out his duties under the agreement or as required by law.

Thomas C. Galley

On February 13, 2007, NCM Inc. and NCM LLC entered into an employment agreement with Thomas C. Galley to serve as the Executive Vice President and Chief Technology and Operations Officer of NCM Inc., for a term running through May 24, 2008. On the last day of the term, 18 months will be added to the termination date. The agreement provides that Mr. Galley be paid a base salary at the rate of $415,000 per year, subject to further annual increases at the discretion of the compensation committee. In addition to base salary, Mr. Galley is eligible to receive an annual cash bonus of up to 75% of his base salary upon attainment of certain objective financial and subjective non-financial goals as determined by the chief executive officer. If Mr. Galley is terminated, for reasons other than disability, death or cause, as defined in the agreement, or if Mr. Galley resigns for good reason, as defined in the agreement, Mr. Galley will be entitled to severance equal to one and a half times his base salary paid over 18 months and any annual bonuses awarded but not yet paid. Mr. Galley would also be entitled to continued coverage under any employee medical, health and life insurance plans for an 18-month period, or the economic equivalent of such coverage. Under the agreement, during his employment and for 12 months thereafter, Mr. Galley has agreed not to compete with NCM Inc. or any of its affiliates or subsidiaries, or solicit any of the employees, officers or agents of these entities. Under this agreement, Mr. Galley has also agreed not to divulge or disclose customer lists or trade secrets of NCM Inc. or its affiliates or subsidiaries except in the course of carrying out his duties under the agreement or as required by law.

Ralph E. Hardy

On February 13, 2007, NCM Inc. and NCM LLC entered into an employment agreement with Ralph E. Hardy to serve as the Executive Vice President of NCM LLC. The term of employment terminates on each December 31, but will be considered automatically renewed unless notice of termination is given by either party. The agreement provides that Mr. Hardy be paid a base salary at the rate of $221,728 per year, subject to annual review by the board. In addition to base salary, Mr. Hardy is eligible to receive an annual bonus as determined by the board. If Mr. Hardy is terminated, for reasons other than disability, death or cause, as defined in the agreement, or if Mr. Hardy resigns for good reason, as defined in the agreement, Mr. Hardy will be entitled to severance equal to his base salary paid over 12 months and any annual bonuses awarded but not yet paid. Mr. Hardy would also be entitled to continued coverage under any employee medical, health and life insurance plans for a 12-month period, or the economic equivalent of such coverage. Under the agreement, during his employment and for so long as he is entitled to receive any benefits or payment under the agreement (but in no event less than 12 months), Mr. Hardy has agreed not to compete with NCM Inc. or any of its affiliates or subsidiaries, or solicit any of the employees, officers or agents of these entities. Under the agreement, Mr. Hardy has also agreed not to divulge or disclose customer lists or trade secrets of NCM Inc. or its affiliates or subsidiaries except in the course of carrying out his duties under the agreement or as required by law.

Potential Payments Upon Termination or Change of Control

The following summaries set forth potential payments payable to our named executive officers upon termination of their employment or a change of control of NCM Inc. under their employment agreements to be in effect following the completion of the offering and under the NCM Inc. 2007 Equity Incentive Plan. The following discussion is based on the following assumptions: <