National CineMedia, Inc.
National CineMedia, Inc. (Form: 10-K, Received: 03/07/2008 09:00:34)
Table of Contents

 

 

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 27, 2007

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

 

The NASDAQ Stock Market LLC

(Title of each class)   (Name of each exchange on which registered)

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

 

 

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

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

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   x     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨   Accelerated filer   ¨   Non-accelerated filer   x

(Do not check if a
smaller reporting company)

  Smaller reporting company   ¨

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

Based on the closing sales price on June 28, 2007, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was $1,180,393,425.

As of March 5, 2008, 42,031,164 shares of the registrant’s common stock, par value of $0.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s definitive proxy statement to be used in connection with its Annual Meeting of Stockholders and to be filed within 120 days of December 27, 2007 are incorporated by reference into Part III, Items 10-14, of this report on Form 10-K.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page
   PART I   

Item 1.

  

Business

   3

Item 1A.

  

Risk Factors

   23

Item 1B.

  

Unresolved Staff Comments

   35

Item 2.

  

Properties

   36

Item 3.

  

Legal Proceedings

   36

Item 4.

  

Submission of Matters to a Vote of Security Holders

   36
   PART II   

Item 5.

  

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

   37

Item 6.

  

Selected Financial Data

   39

Item 7.

  

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

   45

Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

   60

Item 8.

  

Financial Statements and Supplementary Data

   60

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

   60

Item 9A.

  

Controls and Procedures

   60

Item 9B.

  

Other Information

   61
   PART III   

Item 10.

  

Directors, Executive Officers and Corporate Governance

   62

Item 11.

  

Executive Compensation

   62

Item 12.

  

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

   62

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   62

Item 14.

  

Principal Accounting Fees and Services

   62
   PART IV   

Item 15.

  

Exhibits, Financial Statement Schedules

   63

Signatures

   64


Table of Contents

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.,” “the Company,” “we,” “us” or “our” refer to National CineMedia, Inc., a Delaware corporation, and its consolidated subsidiary National CineMedia, LLC;

 

   

“NCM LLC” refers to National CineMedia, LLC, a Delaware limited liability company, which commenced operations on April 1, 2005, and is the current operating company for our business, which NCM Inc. acquired an interest in, and became 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 acquired in connection with our initial public offering as discussed more fully in “Corporate History” below. NCM LLC’s founding members, AMC, Cinemark and Regal, the three largest motion picture exhibition companies in the United States, hold the remaining 55.2% of NCM LLC’s common membership units. Our primary source of cash flow from operations is 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 in exchange for our providing specific management services to NCM LLC.

NCM LLC has long-term exhibitor services agreements (“ESAs”) with NCM LLC’s founding members and multi-year agreements with several other theatre operators whom we refer to as network affiliates. The ESAs grant exclusive rights, subject to limited exceptions, to sell advertising and meeting services and to distribute entertainment programming in those theatres. The network affiliate agreements grant us exclusive rights, subject to limited exceptions, to sell advertising and meeting services and to distribute entertainment programming on their theatre screens.

 

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Description of Business

Overview

We operate the largest digital in-theatre network in North America that allows us to distribute advertising, business meetings and digital programming event services utilizing our proprietary digital content network (“DCN”) and digital broadcast network (“DBN”). 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 27, 2007, advertising accounted for 91.6% of our total pro forma revenue;

 

   

CineMeetings : We facilitate live and pre-recorded networked and single-site meetings, corporate events and church services in the movie theatres throughout our network; for the year ended December 27, 2007, CineMeetings accounted for 5.6% of our total pro forma revenue; and

 

   

Fathom Events : 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 27, 2007, digital programming events accounted for 2.8% 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 47 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 169 DMAs ® in total. DMA ® is a registered trademark of Nielsen Media Research, Inc . During 2007, approximately 542 million patrons, representing approximately 38% of the total U.S. theatre attendance, and approximately 94% of our total network attendance, attended movies shown in theatres owned by NCM LLC’s founding members. As of December 27, 2007, we had a total of 15,265 screens in our network, as set forth in the table below:

Our Network*

(As of December 27, 2007)

 

          Screens  
     Theatres    Digital    Total    % of Total  

Founding Members

   1,018    12,230    13,261    86.9 %

Network Affiliates

   202    1,024    2,004    13.1 %
                     

Total

   1,220    13,254    15,265    100.0 %
                     

 

* Excludes Loews Cineplex Entertainment Inc.

On December 10, 2007, 725 screens operated by the Kerasotes theatre circuit, the 6 th largest theatre circuit in the United States, joined our network. On January 1, 2008, approximately 125 additional screens of Colorado Cinemas (operated by the Kerasotes circuit) joined our network.

On January 26, 2006, AMC acquired the Loews theatre circuit. As of December 27, 2007, Loews operated approximately 101 theatres with 1,207 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 on the Loews screens existing on May 31, 2008. During 2007, approximately 57.5 million movie patrons attended Loews’ theatres in the United States. Once the Loews screens are added to our network, we expect to have approximately 16,500 screens, representing approximately 44% of the total indoor screens in the United States, as reported by the National Association of Theatre Owners, or NATO, as of December 31, 2006.

 

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On-Screen Advertising

Our on-screen digital FirstLook pre-feature show consists of national, regional and local advertising, as well as behind the scenes “making of” and other entertainment content. 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) impressions 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 or by movie rating, offering various price points for national advertisers and expanding the number of potential buyers. While not generally offered to our clients, our technology also has the ability to target by film.

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

Following the conclusion of the digital carousel, the branded FirstLook pre-show commences. In January 2006, FirstLook was launched throughout our digital network in order to provide a more entertaining pre-feature program for theatre patrons and a more effective advertising platform. The FirstLook program integrates full-motion local, regional and national advertising with entertainment content segments primarily provided by 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. Segment three typically begins approximately 18 minutes prior to the advertised show time and features primarily 15 or 30 second regional advertising. Segment three also includes a two and one-half minute entertainment content segment. Segment two and segment one run closest to the advertised show time and feature national advertising inventory. Both segment two and segment one include a two and one-half minute entertainment content segment from our content partners along with national 30 or 60 second (or in some cases longer) advertisements. 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 show time.

The majority of our entertainment content segments are provided to us under exclusive 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 commitments (generally two years) to buy a portion of our advertising inventory at a specified CPM. Our content partners during 2007 included 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. In addition, A&E Television Networks, or A&E and the History Channel, Warner Brothers and Walt Disney Studios, or Disney will be added as content partners for 2008. The original content produced by these content 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, 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.

 

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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, on-line 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 precede the founding member advertisements.

Under the exhibitor services agreements, the last 60-90 seconds of the FirstLook program are 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 29.3% of our total revenue for the year ended December 27, 2007 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 27, 2007, we had 2,236 screens in 1,032 founding member and network affiliate theatres connected to our DCN. 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 February 2007 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 ESAs, 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.

 

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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 the promotion of motion pictures and 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. We are also working on an expansion of our websites, which could in the future provide for an extension of the FirstLook pre-show to the internet or even wireless devices. This provides clients another advertising platform that can be packaged with our in-theatre products.

CineMeetings

Our CineMeetings business facilitates live and pre-recorded networked and single-site business meetings, corporate events and church services in movie theatres. These events are typically scheduled from Monday through Thursday during off-peak hours while theatre attendance for movies is traditionally low. Clients can communicate on a live basis to audiences located in auditoriums connected to our DBN. As of December 27, 2007, there were 293 locations set up to accommodate live broadcasts. At all of our DCN locations, in-person presentations or pre-recorded content can be distributed over our DCN and presented as part of a national presentation. Event content broadcast over our DBN may be 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 or other entertainment content, sometimes before the film opens to the general public, our “Meeting and a Movie” and “Meeting and a Fathom Event” products represent a point of differentiation between us and other meeting venues such as hotels. We promote our CineMeetings business throughout the theatre, on the internet and through other select media outlets such as trade publications. Recent CineMeetings events have included corporate meetings, training seminars, product launches, religious services and sales and marketing events.

Fathom

Our Fathom business focuses on the distribution across our digital network of entertainment programming products associated with live or pre-recorded programming on an event-by-event basis or for a series of events. Our DBN or DCN 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

 

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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 live over our DBN or on a pre-recorded basis over our DCN or DBN and may be encrypted for piracy protection. As of December 27, 2007, our network has the capability to deliver:

 

   

live high-definition content to nearly 350 theatres with, in certain cases, up to four screens per theatre;

 

   

live up-converted standard definition content to nearly 350 theatres with up to four screens per theatre; and

 

   

high-definition pre-recorded content to virtually all our 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 including posters, our lobby entertainment network, on the internet, on radio and in select publications.

We have developed content and cross-marketing relationships with several live concert promotion companies and other owners of entertainment content. We believe that these partnerships and other content owners and producers will provide us with a consistent supply of music and other programming as these relationships provide additional marketing channels for bands, promoters and content owners. The New York Metropolitan Opera (“Met”) is an example of one of our more successful events that we distribute live and on a pre-recorded basis across our digital network. During 2007 over 250,000 patrons attended live and pre-recorded Met events in our network theatres at an average ticket price of approximately $17.50.

Sales and Marketing

In-Theatre Advertising . We sell and market our in-theatre advertising through our national and regional/local sales and marketing groups. We also on occasion take out advertising in national trade publications and execute direct mail and internet marketing for our local advertising business.

Our national sales staff is located in our four national sales offices in New York City, Woodland Hills (outside Los Angeles), Chicago and Detroit. During 2007, approximately 39% of the total compensation of the national sales staff was related to commission or bonus, which is based on achieving certain sales targets, with commissions or bonuses shared across the entire team in order to enhance coordination and teamwork. Our national sales organization has proven to be highly profitable and scalable as we have not added significant sales personnel as our network has expanded.

Our regional and local sales staff is located throughout the country, covering on average approximately 125 screens each and selling directly to our regional and local clients. During 2007, approximately 78% of the compensation for local and regional sales staff was based on an individual sales commission on collected sales. However, as our network and local and regional business grows, it may require the addition of sales personnel to cover the new markets or screens.

Over the past several years we have increased our advertising revenue by expanding the number of clients and product categories through sales outreach and several marketing tactics. We aggressively market and sell directly to clients as well as advertising agencies. We have a public relations department, a marketing department and a research department and on occasion have commissioned third-party market research to assist our sales team. This research has provided our customers with compelling statistical evidence of the superiority of our advertising products relative to television and other traditional advertising mediums based on metrics such as brand recognition, message recall, and likeability. We believe we are capturing increasing market share from traditional advertising media by establishing cinema advertising as a more accountable and effective advertising medium relative to other media.

 

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CineMeetings and Fathom . We have a staff that is dedicated to sales, marketing and operations of our meetings and events business. In fiscal 2007, we facilitated approximately 8,400 CineMeetings events, and held 33 Fathom events (an increase of 50% over 2006) attended by approximately 750,000 patrons (an increase of 184% over 2006).

Media and Creative Services

Our media and creative services department uses state of the art, proprietary and non-proprietary technologies and practices to ensure the highest possible cinema quality presentation for all of our in-theatre marketing products. We believe the expertise of this group in optimizing content for cinema playback within our FirstLook pre-show 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 and network affiliates. We provide a full spectrum of production and post-production services to our clients (primarily local and regional) for a fee, including audio enhancements, color correction and noise reduction. We also up-convert standard definition content to high-definition format and quality cinema surround sound post-production that we distribute over our DCN, ensuring a high quality, high impact presentation of our clients’ content. Our expertise in tailoring advertisements developed for television to a high-definition cinema playback format 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. Certain of our founding members also engage us for the production of their on-screen concession product advertisements.

Technology and Other Corporate Branding

We utilize digital media, our proprietary DCS software and various network technologies to deliver high-quality cinema advertising, meeting services and digital programming events to screens at our network theatres. These technologies facilitate the delivery of a high quality entertainment experience and provide advertising clients a lower cost and more programming flexibility than 35 mm “rolling stock” traditionally used in cinema advertising. Moreover, our technology allows us to target various locations and movie ratings and demographic groups, measure advertising audience size and efficiently monitor and provide audit data of the on-screen playback.

We employ two satellite networks to distribute content to our theatres. Our DCN, which is the combination of a satellite distribution network operated by Hughes and a terrestrial network, is used to distribute our FirstLook content to 13,254 screens, 1,004 theatres and over 2.5 million seats. Our DBN satellite is used to support our digital programming efforts by broadcasting live feeds to 488 screens in 344 theatres and nearly 100,000 theatre seats.

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 DCS software 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 DCN (including the DCS) is controlled by our network operations center in our Centennial, Colorado headquarters, which supports and monitors nearly 45,000 in-theatre hardware devices and more than 200,000 alarm points on the network.

 

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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 DCN 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 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 DCN, confirmation of content playback is returned via satellite to our network operations center.

We are completing 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 backup facility, located in Salt Lake City, contains critical servers and data files in an environmentally secure data center that is expected to allow us to be operational within 24 hours should there be a disaster at our Denver network operations center. Due to the redundant nature of our DCN client-server architecture in the theatres, we consider this level of back-up to be more than adequate. The site is expected to be completed during the first quarter of 2008 with testing completed in the second quarter of 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 national and local media platforms. As a result, we are able to compete effectively for marketing spending by local, regional and national advertisers through our 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 DCN. 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 27, 2007, our network included 13,254 digital screens (12,230 operated by our founding members) and 15,265 screens in total (13,261 operated by our founding members) located in 1,220 theatres in 47 states and the District of Columbia. The attendance of the 1,018 theatres operated by NCM LLC’s founding members totaled approximately 542 million during 2007 which represented approximately 38% of the total U.S. theatre attendance for the year. 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 12.5 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 27, 2007, was 40,866, 8% higher than the U.S. theatre industry of indoor screens of 37,776, as reported by NATO as of December 31, 2006. Also, our theatre network has access to the larger key markets, including all of the top 25, as well as, 49 of the top 50, U.S. DMAs ® , and 169 DMAs ® in total. Approximately 74% of our screens are located within the top 50 U.S. DMAs ® and approximately 35% are located within the top 10 U.S. DMAs ® . Of the Loews theatres, approximately 70% are located within the top 10 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

 

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message utilizing sight, sound and motion across our national network. Our technology also shortens distribution lead times, reduces our and client 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 third quarter of 2007, typical movie-goers are young, with 53% 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 coveted 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 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 for each showing of a film and our pre-show. We believe this 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 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 provides more original content for the audience and more impact for the advertiser. We have also designed the FirstLook program with separate local, regional and national “pods” to ensure that advertisements of similar production quality are shown together. In addition, the design of FirstLook and our distribution technology ensures 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 DCN, 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 February 2007, movie patrons across our network theatres spend, on average, 10 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

 

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is not available with broadcast or cable television or traditional display advertising. Our marketing team assists advertisers in creating entertaining, fully integrated cinema marketing campaigns with maximum impact. We are also working on the expansion of our websites, which could in the future provide for an extension of the FirstLook pre-show to the internet or even wireless devices. This provides clients another advertising platform that can be packaged with our in-theatre products.

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

Our proprietary software provides many distribution, scheduling, reporting and auditing features. The flexibility of our DCN 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 required 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 directly monitor in-theatre network devices and various maintenance alarm technology 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 the combination of a satellite and terrestrial 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. We are currently monitoring nearly 45,000 network devices and more than 200,000 alarm points. Our digital content system distributes over 2 million files per day through integrated software and network technologies. Given the scalability of our NOC and distribution technology, the number of devices and alarm points could be increased with minimal additional expenditures. 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.

Strong Operating Margins with Limited Capital Requirements

A significant portion of our advertising inventory is acquired through 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 multi-year contracts accounted for 29.3% of our total pro forma revenue in the year ended December 27, 2007. Our adjusted EBITDA margins have been consistently strong, at 53.9% in the year ended December 27, 2007 on a pro forma basis. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—EBITDA” for a discussion of the pro forma calculation of adjusted EBITDA margin and the reconciliation to net income. 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 requirements in the ESAs to make future investments for equipment replacements and the scalable nature of our NOC and other infrastructure, 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 capital expenditures) before distributions to NCM LLC’s founding members. In the year ended December 27, 2007, our capital expenditures were $15.0 million, of which $6.5 million related to investments in network equipment in network affiliate theatres. We believe our expected level of free cash flow generation should 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, digital media production and post-production, 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

 

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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 should be able to effectively grow our business through continued operating improvement and expansion of our products and services.

Dividend Policy

Our dividend policy is described in “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend Policy”.

Our Strategy

Our primary strategic initiatives are to:

Increase Advertising 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 and expand the suite of marketing products sold to our clients. 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 that do not yet include meaningful cinema advertising expenditures in their marketing budgets. However, we have made great progress in expanding underpenetrated categories such as domestic auto, quick-service restaurants, toys, retail, packaged goods, and financial services. We believe that over time, as awareness of, and third-party data on the effectiveness of cinema advertising grows, we expect 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 employ senior sales positions to focus exclusively on larger regional clients such as car dealer associations, and quick-service restaurant advertising co-ops. We have also utilized direct marketing campaigns to businesses within a specified radius of our network theatres, with very positive results. These campaigns are often 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 growth of this business segment.

Increase Our National CPM

In 2007, our national on-screen advertising CPM was approximately 1.8 times the average U.S. primetime premium 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 measurable and informative demographic 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 continue 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

 

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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 267 screens in Michigan, Indiana and Illinois and in December 2007 we signed a network affiliate agreement with Kerasotes Theatres, the sixth largest U.S. theatre operator, with approximately 850 screens primarily in the upper mid and Western U.S., including Denver, Minneapolis, Chicago and Indianapolis.

Provide Integrated Marketing Solutions to our Clients

We strive to differentiate ourselves amongst other media platforms, in particular broadcast and cable television. 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.

In 2008, we will be testing two new in-theatre marketing products, Reatrix and Brand Experience. If our testing of these two new products during early 2008 proves successful, we may begin to sell them late in 2008 on an individual basis or packaged with our in-theatre products to further increase the effectiveness of our advertising products, providing incremental revenue at higher CPMs.

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 and customer marketing of events that offers advantages over hotels and other traditional meeting venues. Unlike traditional hotel 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 or Fathom event, sometimes before the film opens to the general public, in a product known as “Meeting” and a Movie or Fathom Event. 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 through the increase in the number of theatres equipped to host live broadcasts completed in 2007. In an effort to expand the awareness and client base, we have employed several local and national marketing strategies to communicate the value proposition associated with our CineMeetings business. Marketing strategies include advertising in theatres within the FirstLook pre-show program and internet, implementing a direct mailing effort to Fortune 500 CEOs and holding demand generation seminars for meeting planners in our network theatres. Our advertising sales group also has the opportunity to cross-sell our CineMeetings products.

Expand Our Live and Pre-Recorded Fathom Events Businesses

We will continue to expand and improve the technical capabilities of our DCN and DBN. Today, virtually all of our digitally equipped screens have the capability to show pre-recorded content. During 2007, we expanded our live broadcast capabilities to approximately 350 locations (from approximately 130 in 2006) with over 100,000 seats in all top 50 DMAs. 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 DCN and DBN technologies position us well to be able to expand these uses of our network theatres in the future as higher quality digital cinema systems are deployed. We expect the improvements to projection technology and expansion of our network will improve the quality and 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 expect to attract more non-film live and

 

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pre-recorded digital programming events, and, as a result, increase our event ticket revenue. In addition to marketing and creating direct relationships with content owners, we will also look to form strategic alliances with promoters and distributors to gain access to high quality content. For example, we have music content and cross-marketing relationships with several live concert promotion companies. We believe these partnerships and other content owner and producers should provide us with a consistent supply of music and other programming and an additional marketing channel for bands, promoters and content owners. In addition, our agreement with the New York Metropolitan Opera to distribute live and pre-recorded events nationally across our digital network has been well received by patrons across the country.

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 should enable us to respond more promptly to client requests for proposals, and should provide real-time access to pricing and availability information that allows us to manage our inventory and CPM more efficiently, improve our management reporting and data analysis and provide the ability to manage a larger network as we add network affiliates and additional theatres acquired or built by our founding members.

Expansion into Other Out-of-Home Networks

In 2007 we invested $7.0 million of cash in 6% convertible preferred stock of IdeaCast, Inc., a provider of advertising to currently over 1,000 fitness centers and health clubs throughout the United States, representing over 200 million club attendees per year. IdeaCast is an incubator of the health club network and other out-of-home advertising networks that IdeaCast is investigating, while our management team focuses on maximizing the growth opportunities within theatres. We believe that out-of-home targeted advertising networks should continue to grow in importance as a percentage of advertising spending and that networks in virtually all retail environments may continue to be developed. In addition to our initial investment we have an option at a specified valuation to acquire additional IdeaCast, Inc. common equity such that we will own 50.1% of the company, thus we may have an opportunity to benefit from the future growth of this emerging business. In addition, we believe that our distribution technology, sales force, other existing operating infrastructure and client relationships could create growth opportunities and expense and sales synergies across the IdeaCast networks.

Launch Branded Entertainment Web Site

In 2008 we plan to launch a branded entertainment web site as an extension of our FirstLook pre-show, and thereby broaden our advertising reach. By developing and operating the site through our existing media production and technology group and 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 revenue stream could be developed with little investment. We also believe that using our FirstLook pre-show and the IdeaCast networks to market the site should help drive traffic.

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 DCN. On January 26, 2006, AMC completed the acquisition of the Loews theatre circuit. The Loews screens will

 

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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. 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.

On February 7, 2007, the SEC declared effective our Registration Statement on Form S-1 (“Registration Statement”) for our initial public offering and the offering was completed on February 13, 2007. In the offering, we sold 42 million shares of our common stock, including 4 million shares pursuant to the underwriters’ over-allotment option, at $21.00 per share. The aggregate gross proceeds from the sale of the 42 million shares of our common stock were $882.0 million. The aggregate net proceeds to us were $826.2 million, after deducting an aggregate of $48.5 million in underwriting discounts and commissions paid to the underwriters, and payment of approximately $7.3 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. Remaining proceeds of approximately $1.6 million were retained by NCM, Inc. to cover future costs incurred related to the offering and related transactions. 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 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 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;

 

   

NCM LLC entered into the amended and restated Loews screen integration agreement with AMC pursuant to which AMC pays 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 are 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 $746.1million of

 

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the 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

Regal Entertainment Group

Regal operates the largest theatre circuit in the United States based on total number of screens. As of December 27, 2007, Regal operated 527 theatres with a total of 6,388 screens, all of which are located in the United States. For the fiscal year ended December 27, 2007, Regal’s theatres had total attendance of over 242 million and Regal reported total revenue of approximately $2.7 billion.

In January 2008, Regal announced an agreement to acquire Consolidated Theatres, which acquisition Regal expects to complete in the second quarter of 2008, subject to customary closing conditions and regulatory approval. Consolidated Theatres has an existing contract for on-screen advertising with another cinema advertising provider. Pursuant to the amended ESAs and Common Unit Adjustment Agreement, Regal is required to add the Consolidated Theatres to our national theatre network on an exclusive basis when the contract with the existing third-party advertiser expires, and, at the time the Consolidated Theatres are added to our network, Regal would be entitled to receive NCM LLC common units. However, if Regal elects to receive NCM LLC common units prior to the expiration of the contract with the third-party advertiser, Regal would be required to make run-out payments to us until the time of such expiration. In either case, the number of NCM LLC common units issued to Regal would be based on the attendance at Consolidated Theatres.

AMC Entertainment Inc.

AMC is the second largest theatre circuit in the United States based on total number of screens. As of December 27, 2007, AMC owned, operated or held interests in 359 theatres with a total of 5,138 screens globally, with approximately 86% or 4,435, of its screens in the United States (including Loews). For the twelve months ended December 27, 2007, AMC’s theatres had total worldwide attendance of over 235 million and AMC had revenue of $2.5 billion.

Cinemark, Inc.

Cinemark is the third largest theatre circuit in the United States based on total number of screens. As of September 30, 2007, Cinemark operated 404 theatres with a total of 4,596 screens globally, with approximately 78%, or 3,606, of its screens in the United States. For the nine months ended September 30, 2007, Cinemark’s theatres had total worldwide attendance of over 116 million and reported total revenue of $1.3 billion.

 

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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 was initially five years with provisions for automatic renewal if certain financial performance conditions are met for an additional five years);

 

   

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;

 

   

provides a right for the founding members to purchase up to 90 seconds of on-screen advertising time during the pre-feature program at a specified rate (intended to initially 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 DCN and primary responsibility of the founding members to fund the installation and replacement of the equipment in or on the theatre.

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 DCN to screens in certain defined territories. We have made improvements to this software since the IPO date and we own those improvements, except for improvements that were developed jointly by us and 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.

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 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.

 

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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. During the year ended December 27, 2007, we derived 66.9% of our advertising revenue from our national clients, 13.5% from founding member beverage agreements and 19.6% from our relationships with thousands of 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 60 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 multi-year contractual relationships that provide entertainment content segments in the FirstLook program and minimum annual advertising spending commitments with Discovery; NBC; Sony; TBS; and Universal. During 2008 we announced that A&E, the History Channel and Warner Brothers and Disney, will be added as content partners. These agreements require that the content partners will provide non-commercial content segments that are entertaining, informative or educational in nature and will purchase a specified dollar amount of advertising at a specified CPM over a two-year period with options to renew, exercisable at the content partner’s option.

Competition

We compete in the over $281 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 traditional mass media to more targeted and measurable forms of media. As the number of digital 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 may 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 (owned by Access Integrated Technologies, Inc.). 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 and allowing us to better compete with television and other national advertising networks, giving us a competitive advantage over many other cinema advertising companies. 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 IAG Research, our cinema advertising generated recall rates ranging from one and a half to four 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

 

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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 or Fathom event with the meeting, which also differentiates us from other meeting venues.

Our Fathom business competes with other broadcast and cable networks, large-scale public venues, including concert halls and other public meeting venues, and on-demand television 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 live and pre-recorded events such as concerts and sporting events.

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, EBITDA and net income than the other quarters of a given year.

Employees

We employed 535 people as of December 27, 2007, which includes employees engaged in overall management and general administration at our corporate headquarters in Centennial, Colorado, people employed in our regional sales and marketing offices and local advertising account executives and field maintenance technicians that work primarily from 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 the 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.

Available Information

We maintain a website at www.ncm.com , on which we will post free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, 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 (the “SEC”). 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 SEC at the Securities and Exchange Commission Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The SEC also maintains a website that contains our reports and other information at www.sec.gov.

 

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Executive Officers of the Registrant

Shown below are the names, ages as of December 27, 2007, and current positions of our executive officers. There are no family relationships between any of the persons listed below, or between any of such persons and any of the directors of the Company or any persons nominated or chosen by the Company to become a director or executive officer of the Company.

 

Name

   Age   

Position

Kurt C. Hall

   48    President, Chief Executive Officer and Chairman

Clifford E. Marks

   46    President of Sales and Chief Marketing Officer

Gary W. Ferrera

   45    Executive Vice President and Chief Financial Officer

Thomas C. Galley

   52    Executive Vice President and Chief Technology and Operations Officer

Ralph E. Hardy

   57    Executive Vice President and General Counsel

Kurt C. Hall. Mr. Hall was appointed President, Chief Executive Officer and Chairman of NCM Inc. in February 2007 and held those same positions with NCM LLC since March 2005. 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. Since 1988, Mr. Hall has held various executive positions with United Artists Theatre Company, and its predecessor companies, including CEO when it became part of Regal Entertainment Group in 2002. In 2007, Mr. Hall joined the board of directors of IdeaCast Inc. and serves as a member of its compensation committee.

Clifford E. Marks. Mr. Marks was appointed NCM Inc.’s President of Sales and Chief Marketing Officer in February 2007 and held those same positions with NCM LLC since March 2005. 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.

Gary W. Ferrera. Mr. Ferrera was appointed Executive Vice President and Chief Financial Officer of NCM Inc. in February 2007 and held those same positions with NCM LLC since May 2006. 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. 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 was appointed Executive Vice President and Chief Technology and Operations Officer of NCM Inc. in February 2007 and held those same positions with NCM LLC since March 2005. 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.

Ralph E. Hardy. Mr. Hardy was appointed Executive Vice President and General Counsel of NCM Inc. in February 2007 and held those same positions with NCM LLC since March 2005. 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. Since 1989, Mr. Hardy has held various legal executive positions with United Artists Theatre Company and its predecessors.

 

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Forward-Looking Statements

In addition to historical information, some of the information in this Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in this Form 10-K, including, without limitation, certain statements under “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, may constitute forward-looking statements. In some cases, you can identify these “forward-looking statements” by the specific words, including but not limited to “may,” “will,” “should,” “expects,” “forecast,” “project,” “intend,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. These forward-looking statements involve known and unknown risks and uncertainties, assumptions and other factors, including, but 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 and investments;

 

   

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 are illustrative but not exhaustive. Our actual results, performance or achievements could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under “Risk Factors” below. Our historical financial data discussed prior to the completion of the Company’s IPO reflects the historical results of operations and financial position of NCM LLC. Accordingly, historical financial data does not give effect to the reorganization and the NCM LLC senior secured credit facility completed as part of the NCM, Inc. IPO.

 

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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 are critical to our business. The three exhibitor services agreements each have an initial 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 Fathom, is approximately five years with provisions for automatic renewal of an additional five years, if certain financial performance conditions are met. NCM LLC’s founding members’ theatres represent approximately 87% of the screens and approximately 94% of the attendance in our network as of December 27, 2007. 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.

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 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 9.1% of our total pro forma advertising revenue for the year ended December 27, 2007.

 

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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 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. In 2000 and 2001, several major motion picture exhibition companies 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, 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

 

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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 if the acquirer did not agree to continue to allow us to sell advertising in the acquired theaters. 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 and well-capitalized venues.

Our Fathom business focuses on the distribution of entertainment programming products. 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 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.

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 2007 compared to 2006 and 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.

 

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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;

 

   

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 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 certain 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 27, 2007. However, the agreements with the content partners and beverage advertising with the founding members in aggregate accounted for approximately 29.3% of our pro forma revenue during the year ended December 27, 2007. 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 91.6% of our pro forma revenue in the year ended December 27, 2007 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

 

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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.

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, CineMeetings and Fathom businesses, we are also considering other potential opportunities for revenue growth, which we describe in “Business—Our Strategy—Expansion into Other Out-of-Home Networks”. For example, in 2007 we made a $7.0 million investment in 6% preferred stock of IdeaCast Inc., a provider of advertising to fitness centers and health clubs throughout the United States. We may decide to continue to expand our network technology and sales capabilities outside of theatres. Some of our plans are at an early stage, such as our internet initiative, and we may or may not actually proceed with any of them. These new marketing platforms and others that we choose to invest in 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. Our founding members have made several acquisitions including Century and Loews and we have entered into new network affiliate agreements with Kerasotes and Goodrich and may enter into more in the future. 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.

 

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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

Certain of 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. Certain of 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. 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 NCN and RCM prior to the formation of NCM LLC. Additionally, the historical financial statements of RCM and NCN include payments to their parent companies 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 our initial public offering. As a result, this information may not be representative of our future financial performance.

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 our initial public 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.

 

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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 are 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 limits 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 the management services agreement between us and NCM LLC, NCM LLC makes 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.

As a member of NCM LLC, we 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.

 

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

NCM LLC is party to a $725.0 million term loan that is part of a senior secured credit facility. The agreements governing NCM LLC’s debt obligations contain restrictive covenants that limit NCM LLC’s ability to take specified actions and prescribe minimum financial maintenance requirements that NCM LLC must meet. Because NCM LLC is 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.

The senior secured credit facility also includes an $80 million revolving credit facility. As of December 27, 2007, the amount outstanding under the revolving credit facility was $59.0 million. The amount outstanding under the revolving credit facility fluctuates based on our 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;

 

   

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;

 

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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.

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 or other relationships with NCM LLC’s founding members. NCM LLC’s founding members compete with each other in the operation of

 

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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.

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 is not any formal dispute resolution procedure 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.

 

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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

 

   

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 increase in net 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.

 

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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 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.

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 our initial public 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. 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.

 

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The substantial number of shares that are eligible for sale 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 our initial public offering are freely tradable, except for 105,800 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 105,800 of these unregistered shares of common stock cease to be restricted securities and become freely tradable.

Additionally, 271,845 shares of restricted stock are outstanding and 1,822,906 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. None of such restricted stock or options was vested as of December 27, 2007. 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.

Our stock price may be volatile

Before our initial public offering in February 2007, 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.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2 . Properties

Information with respect to our corporate headquarters and regional offices is presented below. We own no material real property. 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

Centennial, CO(1)

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

Chicago, IL(2)

   Regional Office    1,936 sq. ft.

New York, NY(3)

   Regional Office    13,299 sq. ft.

Woodland Hills, CA(4)

   Regional Office    6,062 sq. ft.

Detroit, MI(5)

   Regional Office    721 sq. ft.

Minneapolis, MN(6)

   Regional Office    5,926 sq. ft.

Centennial, CO(7)

   Temporary space    1,464 sq. ft.

 

(1) This facility is leased through December 31, 2013 with a termination option at December 31, 2010.
(2) This facility is subleased from RCM through July 31, 2009.
(3) This facility is leased through April 30, 2015.
(4) This facility is leased through May 31, 2012.
(5) This facility is leased through December 31, 2009.
(6) This facility is leased through February 29, 2012.
(7) This facility is leased on a monthly basis commencing January 21, 2008.

 

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 that would have a material adverse affect on our operating results or financial condition.

 

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

None.

 

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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” since February 8, 2007 (our IPO was effective February 13, 2007). There were approximately 16 shareholders of record as of March 5, 2008 (not including beneficial holders of shares held in “street name”). The following table sets forth the historical high and low sales prices per share for our common stock as reported on The NASDAQ Global Market for the fiscal periods indicated.

 

     Fiscal 2007
     High    Low

First Quarter (February 8, 2007 – March 29, 2007)

   $ 28.23    $ 24.66

Second Quarter (March 30, 2007 – June 28, 2007)

     29.80      25.25

Third Quarter (June 29, 2007 – September 27, 2007)

     29.05      20.98

Fourth Quarter (September 28, 2007 – December 27, 2007)

     29.70      22.22

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. We declared our first dividend of $0.15 on July 30, 2007 and subsequent dividends of $0.15 on October 30, 2007 and $0.15 on January 8, 2008. 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), declared effective by the SEC on February 7, 2007, 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 managing underwriters in the offering were Credit Suisse Securities (USA) LLC, J.P. Morgan Securities, Inc., Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated.

The net proceeds received by us in the offering were $826.2 million, determined as follows (in millions):

 

Aggregate offering proceeds to NCM Inc.

   $ 882.0

Underwriting discounts and commissions

     48.5

Other fees and expenses

     7.3
      

Total expenses

   $ 55.8
      

Net proceeds to NCM Inc.

   $ 826.2
      

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, less $1.6 million of proceeds applied to operations, 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.

 

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Unregistered Sales of Equity Securities and Use of Proceeds

None.

Share Repurchase Program

None.

Issuer Purchases of Equity Securities

None.

Equity Compensation Plan

See Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance under our equity compensation plans.

Stock Performance Graph

The following graph compares the cumulative total shareholder return on the common stock of the Company for the period February 8, 2007 (the closing price on the first trading date) through December 27, 2007 (our fiscal year end) with the Russell 2000 Index and the Dow Jones Wilshire Media Agencies Index. The comparisons in the graph below are based upon historical data and are not indicative of, or intended to forecast, future performance of our common stock.

LOGO

 

     2/8/07    12/27/07

National CineMedia Inc.

   100.00    95.09

The Russell 2000 Index

   100.00    96.81

The DJ Wilshire Media Agencies Index

   100.00    90.27

 

* $100 invested on 2/8/07 in stock or 1/31/07 in index-including reinvestment of dividends. Indexes calculated on month-end basis.

 

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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 have not been included in this document.

The statement of operations data for the years ended December 27, 2007 and December 28, 2006 are derived from the audited financial statements of NCM, Inc. and NCM LLC included elsewhere in this document. The statement of operations data for the nine months ended 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, were derived from the audited financial statements of RCM, which are included elsewhere in this document. The statement of operations data for NCN, a joint predecessor of NCM LLC, for the 14 weeks ended March 31, 2005, were derived from the audited financial statements of NCN, which are included elsewhere in this document. The balance sheet data as of December 27, 2007 and December 28, 2006, were derived from the audited financial statements of NCM, Inc. and NCM LLC included elsewhere in this document.

The balance sheet data of NCM LLC as of December 29, 2005 were derived from the audited financial statements of NCM LLC. The statement of operations data for RCM for the years ended January 1, 2004 and December 30, 2004, were derived from the audited financial statements of RCM. The balance sheet data as of December 30, 2004 were derived from the audited financial statements of RCM. The balance sheet data as of January 1, 2004 and March 31, 2005 were derived from the unaudited financial statements of RCM. The statement of operations data for NCN for the 38 weeks from April 2, 2004 through December 23, 2004 and for the 53 weeks ended April 1, 2004 were derived from the audited financial statements of NCN. The statement of operations data for the 53 weeks ended April 3, 2003 were derived from the unaudited financial statements of NCN. The balance sheet of NCN as of March 31, 2005 was derived from the audited financial statements of NCN. 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. None of these statements are included in this document.

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;

 

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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 IPO 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.

 

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Results of Operations Data ($ in millions, except per share
data)

  Post-IPO
Period
Feb. 13,
2007
through
Dec. 27,
2007*
        Predecessor—
National CineMedia, LLC
          Predecessor—
National Cinema Network, Inc.
          Predecessor—
Regal CineMedia Corporation
      Pre-IPO
Period
Dec. 29,
2006
through
Feb. 12,
2007*
    Year
Ended
Dec. 28,
2006*
    Nine
Months
Ended
Dec. 29,
2005*
          Fourteen
Week
Period
Ended
Mar. 31
2005*
    Thirty-
eight
Week
Period
Ended
Dec. 23,
2004*
  Year
Ended
Apr. 1,
2004*
  Year
Ended
Apr. 3,
2003**
          Three
Months
Ended
Mar. 31,
2005*
  Year
Ended
Dec. 30,
2004*
  Year
Ended
Jan. 1,
2004*

REVENUE:

                                 

Advertising

  $ 282.7       $ 20.6     $ 188.2     $ 56.0         $ 15.5     $ 56.5   $ 69.9   $ 68.9         $ 15.6   $ 83.6   $ 65.2

Administrative Fees—Members

    —           0.1       5.4       30.8           —         —       —       —             —       —       —  

Meetings and Events

    25.4         2.9       25.4       11.7           —         —       —       —             2.1     11.5     7.0

Other

    0.2         —         0.3       0.3           —         —       —       —             0.1     0.2     0.2
                                                                                       

TOTAL REVENUE

    308.3         23.6       219.3       98.8           15.5       56.5     69.9     68.9           17.8     95.3     72.4
                                                                                       

EXPENSES:

                                 

Advertising Operating Costs

    9.1         1.1       9.2       6.3           3.5       11.3     17.9     18.7           0.9     3.7     4.4

Meetings/Events Operating Costs

    15.4         1.4       11.1       5.4           —         —       —       —             0.8     3.9     2.1

Network Costs

    13.3         1.7       14.7       9.2           1.1       2.3     1.6     0.8           2.4     8.1     5.0

Theatre Access Fees/Circuit Share Costs—Founding Members

    41.5         14.4       130.1       38.6           5.5       18.6     18.7     14.6           2.4     16.6     15.3

Selling and Marketing

    40.9         5.2       38.2       24.9           3.2       10.0     15.1     17.6           4.4     15.9     11.7

Administrative

    19.2         2.8       16.4       9.8           1.9       6.1     9.5     13.1           3.4     10.8     10.3

Deferred Stock Compensation

    —           —         —         —             —         —       —       —             0.3     1.4     1.4

Severance Plan Costs

    1.5         0.4       4.2       8.5           —         —       —       —             —       —       —  

Depreciation and Amortization

    5.0         0.7       4.8       3.0           1.0       0.9     2.4     4.7           0.4     1.0     0.9

Other

    0.9         —         0.6       —             0.8       —       1.4     0.1           —       —       —  
                                                                                       

TOTAL EXPENSES

    146.8         27.7       229.3       105.7           17.0       49.2     66.6     69.6           15.0     61.4     51.1
                                                                                       

Operating Income (Loss)

    161.5         (4.1 )     (10.0 )     (6.9 )         (1.5 )     7.3     3.3     (0.7 )         2.8     33.9     21.3

Interest Expense, Net

    57.2         0.1       0.5       —             —         —       —       —             —       —       —  
                                                                                       

Income (Loss) Before Income Taxes

    104.3         (4.2 )     (10.5 )     (6.9 )         (1.5 )     7.3     3.3     (0.7 )         2.8     33.9     21.3

Income Taxes

    41.9         —         —         —             (0.6 )     3.0     1.4     (0.3 )         1.1     13.3     8.4

Minority interest, net

    37.6         —         —         —             —         —       —       —             —       —       —  
                                                                                       

NET INCOME (LOSS)

  $ 24.8       $ (4.2 )   $ (10.5 )   $ (6.9 )       $ (0.9 )   $ 4.3   $ 1.9   $ (0.4 )       $ 1.7   $ 20.6   $ 12.9
                                                                                       

Earnings per share, Basic and Diluted

  $ 0.59         —         —         —             —         —       —       —             —       —       —  

 

*   — Audited

 

**   — Unaudited

 

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Other Financial Data ($ in millions, except cash
dividend declared per common share)

  Post-IPO
Period
Feb. 13,
2007
through
Dec. 27,
2007
          Predecessor—
National CineMedia, LLC
          Predecessor—
National Cinema Network, Inc.
          Predecessor—
Regal CineMedia Corporation
 
      Pre-IPO
Period
Dec. 29,
2006
through
Feb. 12,
2007
    Year
Ended
Dec. 28,
2006
    Nine
Months
Ended
Dec. 29,
2005
          Fourteen
Week
Period
Ended
Mar. 31
2005
    Thirty-
eight
Week
Period
Ended
Dec. 23,
2004
    Year
Ended
Apr. 1,
2004
    Year
Ended
Apr. 3,
2003
          Three
Months
Ended
Mar. 31,
2005
    Year
Ended
Dec. 30,
2004
    Year
Ended
Jan. 1,
2004
 

EBITDA(1)

  $ 166.5         $ (3.4 )   $ (5.2 )   $ (3.9 )       $ (0.5 )   $ 8.2     $ 5.7     $ 4.0         $ 3.2     $ 34.9     $ 22.2  

Adjusted EBITDA(1)

    171.1           (2.7 )     0.9       4.6           (0.5 )     8.2       5.7       4.0           3.5       36.3       23.6  

Adjusted EBITDA Margin(1)

    55.5 %         NM       0.4 %     4.7 %         NM       14.5 %     8.2 %     5.8 %         19.7 %     38.1 %     32.6 %

Capital Expenditures

  $ 14.4         $ 0.6     $ 6.6     $ 5.9         $ —       $ —       $ 0.1     $ 1.4         $ 1.4     $ 2.7     $ 1.3  

Cash Dividend Declared per Common Share

  $ 0.30         $ —       $ —       $ —           $ —       $ —       $ —       $ —           $ —       $ —       $ —    

Operating Data ($ in millions, except advertising contract value per founding member attendee)

 

Founding Member Screens at Period End(2)

    13,261           ***       13,127       9,696           3,144       3,170       3,168       3,152           6,258       6,273       6,045  

Total Screens at Period End(3)

    15,265           ***       14,081       10,766           5,001       5,026       7,297       7,711           6,550       6,565       6,045  

Digital Screens at Period End(4)

    13,254           ***       11,463       8,713           2,523       2,523       1,173       162           5,674       5,303       4,584  

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

    474.6           67.3       514.1       299.3           41.5       118.5       163.3       166.7           58.6       253.8       265.6  

Total Advertising Contract Value(6)

  $ 282.7         $ 20.9     $ 205.1     $ 144.0         $ 15.5     $ 56.5     $ 69.9     $ 68.9         $ 15.6     $ 83.6     $ 65.2  

Total Advertising Contract Value per Founding Member Attendee(6)

  $ 0.60         $ 0.31     $ 0.40     $ 0.48         $ 0.37     $ 0.48     $ 0.43     $ 0.41         $ 0.27     $ 0.33     $ 0.25  

 

*** —  Not materially different than year ended December 28, 2006

 

Balance Sheet Data (in millions)

   As of
Dec. 27,
2007*
    As of
Dec. 28,
2006*
   As of
Dec. 29,
2005*
         Predecessor—
National Cinema Network, Inc.
           Predecessor—
Regal CineMedia Corporation
             As of
Mar. 31
2005*
   As of
Dec. 23,
2004**
   As of
Apr. 1,
2004**
   As of
Apr. 3,
2003**
           As of
Mar. 31,
2005*
   As of
Dec. 30,
2004**
   As of
Jan. 1,
2004**

Receivables, Net

   $ 93.2     $ 63.9    $ 36.6        $ 20.1    $ 26.2    $ 14.4    $ 13.4          $ 15.8    $ 28.8    $ 20.6

Property and Equipment, Net

     22.2       12.6      10.0          0.7      0.7      2.0      3.8            5.2      4.2      2.5

Total Assets

     463.6       90.0      48.8          60.8      27.8      18.2      20.4            48.2      49.4      28.0

Borrowings

     784.0       10.0      1.3          —        —        —        —              —        —        —  

Members’/Stockholders’ equity/(deficit)

     (572.4 )     3.5      9.8          0.1      5.6      1.3      (0.6 )          41.2      39.5      18.9

Total Liabilities and Equity

     463.6       90.0      48.8          60.8      27.8      18.2      20.4            48.2      49.4      28.0

 

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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 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. The Loews payments received are added to adjusted EBITDA to determine our compliance with financial covenants under our new senior secured credit facility. AMC makes Loews payments to NCM LLC pursuant to the Loews screen integration agreement, which was $11.2 million for the 2007 post-IPO period.

We have included a discussion of 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 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 to evaluate and value companies, 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 resulted from the acquisition of an interest in NCM LLC by NCM, Inc., 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 are appropriate measures of our financial performance. 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.

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 DCN.

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 years ended December 27, 2007 and December 28, 2006 was approximately 57.5 million and 63.2 million, respectively. 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.

 

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

 

($ in millions)

  Post-IPO
Period
Feb. 13,
2007
through
Dec. 27,
2007
           Predecessor—
National CineMedia, LLC
           Predecessor—
National Cinema Network, Inc.
           Predecessor—
Regal CineMedia Corporation
 
       Pre-IPO
Period
Dec. 29,
2006
through
Feb. 12,
2007
    Year
Ended
Dec. 28,
2006
    Nine
Months
Ended
Dec. 29,
2005
           Fourteen
Week
Period
Ended
Mar. 31
2005
    Thirty-
eight
Week
Period
Ended
Dec. 23,
2004
    Year
Ended
Apr. 1,
2004
    Year
Ended
Apr. 3,
2003
           Three
Months
Ended
Mar. 31,
2005
    Year
Ended
Dec. 30,
2004
    Year
Ended
Jan. 1,
2004
 

Net income (loss)

  $ 24.8          $ (4.2 )   $ (10.5 )   $ (6.9 )        $ (0.9 )   $ 4.3     $ 1.9     $ (0.4 )        $ 1.7     $ 20.6     $ 12.9  

Income taxes

    41.9            —         —         —              (0.6 )     3.0       1.4       (0.3 )          1.1       13.3       8.4  

Minority interest

    37.6            —         —         —              —         —         —         —              —         —         —    

Interest expense

    57.2            0.1       0.5       —              —         —         —         —              —         —         —    

Depreciation and amortization

    5.0            0.7       4.8       3.0            1.0       0.9       2.4       4.7            0.4       1.0       0.9  
                                                                                                      

EBITDA

  $ 166.5          $ (3.4 )   $ (5.2 )   $ (3.9 )        $ (0.5 )   $ 8.2     $ 5.7     $ 4.0          $ 3.2     $ 34.9     $ 22.2  

Severance plan costs

    1.5            0.4       4.2       8.5            —         —         —         —              —         —         —    

Share-based compensation costs/Deferred Stock Compensation

    3.1            0.3       1.9       —              —         —         —         —              0.3       1.4       1.4  
                                                                                                      

Adjusted EBITDA

  $ 171.1          $ (2.7 )   $ 0.9     $ 4.6          $ (0.5 )   $ 8.2     $ 5.7     $ 4.0          $ 3.5     $ 36.3     $ 23.6  
                                                                                                      

Total Revenue

  $ 308.3          $ 23.6     $ 219.3     $ 98.8          $ 15.5     $ 56.5     $ 69.9     $ 68.9          $ 17.8     $ 95.3     $ 72.4  

Adjusted EBITDA margin

    55.5 %          NM       0.4 %     4.7 %          NM       14.5 %     8.2 %     5.8 %          19.7 %     38.1 %     32.6 %
                                                                                                      

 

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

The following discussion and analysis should be read in conjunction with our historical financial statements and the related notes included elsewhere in this document. This discussion includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, as amended. In some cases, you can identify these “forward-looking statements” by the specific words, including but not limited to “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under the heading “Risk Factors” and elsewhere in this document.

Our historical financial data discussed below prior to the completion of the Company’s IPO reflects the historical results of operations and financial position of NCM LLC and its joint predecessors, RCM and NCN. Accordingly, historical financial data does not give effect to the reorganization and the NCM LLC senior secured credit facility completed as part of the NCM, Inc. IPO. See “Business-Corporate History”, “Business-Reorganization,” “Financial Condition and Liquidity-Financings” and the unaudited pro forma financial information included elsewhere in this document.

Overview

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 a wholly owned subsidiary of Regal and the cinema advertising operations of a wholly owned subsidiary of AMC Entertainment, Inc. (“AMCE”). 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, we began to record revenue from the sale of advertising for Cinemark’s screens on January 1, 2006 on a non-exclusive basis until April 1, 2006. Cinemark acquired Century theatres in October 2006 and NCM LLC began to sell advertising on an exclusive basis in those Century theatres in November 2006.

The results of operations data for the period December 28, 2006 through February 12, 2007 (the “2007 pre-IPO period”) give effect to allocations of revenues and expenses made using relative percentages of founding member attendance or days in each period, specific events or facts and other methods management considered to be a reasonable reflection of the results for such period. The results of operations data for the period February 13, 2007 through December 27, 2007 (the “2007 post-IPO period”) were derived from the audited consolidated financial results of NCM, Inc. The historical financial data of NCM LLC prior to the IPO may not be indicative of the Company’s post-IPO performance nor will such data reflect what its financial position and results of operations would have been had it operated as an independent publicly traded company during the pre-IPO periods presented.

Our revenue is principally derived from the sale of advertising and, to a lesser extent, from our CineMeetings business and Fathom events business. We have long-term exhibitor services agreements with NCM LLC’s founding members and multi-year agreements with several other unrelated theatre operators, whom we refer to as network affiliates. The exhibitor services agreements with the founding members and network affiliate agreements grant us exclusive rights, subject to limited exceptions, to sell advertising and meeting services and distribute entertainment programming in those theatres. Our advertising, CineMeetings and Fathom events are distributed primarily to theatres that are digitally equipped with our proprietary DCN technology. In excess of 90% of the aggregate founding member and network affiliate theatre attendance is included in our digital network.

 

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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 Fathom revenue is derived from the sale of tickets to the general public for music, sporting and other entertainment events or a series of events. CineMeetings and Fathom events are typically held on the weekdays when theatre attendance for films is lower.

Our advertising rates are generally either based on contracts with our content partners and other advertisers, or 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. Our 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. Our network affiliate attendance represented approximately 6% of our total attendance for the 2007 post-IPO period and we estimate it will be in excess of 10% for 2008. 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 may 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 agreed to “make-good” rather than to request a refund of cash.

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) theatre access fees and circuit share expenses to our 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 Fathom. Our administrative costs primarily consist of salaries and bonuses for our administrative staff, professional fees, insurance, and occupancy costs. 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 (“DCN”) and prior to the offering represented substantially all of our earnings before interest, income taxes, depreciation and amortization, or EBITDA. In the 2007 post-IPO period, under the amended and restated ESAs, theatre access fees were payable to the founding members, 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.

 

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Table of Contents

Our operating results may be affected by a variety of internal and external factors and trends described more fully below in Factors Affecting Comparability of Results of Operations 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 moderately increased in 2006 and 2007, 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.

Management focuses on several measurements that we believe provide us with the necessary ratios and key performance indicators for us to manage our business and to determine how we are performing versus our internal goals and targets, and against the performance of our competitors and other benchmarks in the marketplace in which we operate. Management confers monthly to discuss and analyze operating results and address significant variances to budget in an effort to identify trends and changes in our business. We focus on many operating metrics including changes in EBITDA, Adjusted EBITDA and Adjusted EBITDA margin, as discussed below, as some of our primary measurement metrics. In addition, we pay particular attention to our monthly advertising performance measurements, including advertising inventory utilization, pricing (CPM), advertising revenue per founding member attendee and the number of CineMeetings and Fathom event locations and revenue per location. Finally, we monitor our operating cash flow and revolving credit facility availability to ensure that debt and declared and future dividend obligations can be met.

Summary Historical and Pro Forma Financial and Operating Data

You should read this information together with the other information contained in this document, including “Business-Corporate History” and “Business-Reorganization,” and our audited historical financial statements and the notes thereto included elsewhere in this document. The summary pro forma financial information in the table below was derived from (i) unaudited pro forma consolidated statement of operations for the year ended December 27, 2007 included elsewhere in this document, (ii) unaudited pro forma consolidated statement of operations for the year ended December 28, 2006, which was included in our 2006 Form 10-K and is not 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, present the consolidated results of operations of NCM Inc. assuming the IPO, reorganization and senior secured credit facility discussed in detail elsewhere in this document has been completed and the transactions and material changes to contractual arrangements, which occurred in connection with them

 

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completion of the IPO and related transactions described had become effective as of December 31, 2004. 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 of the historical and the transaction adjustments as described in unaudited pro forma financial information included elsewhere in this document. The pro forma statements of operations do not include the full impact of additional administrative costs of a public company.

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 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. The pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.

The following table presents operating data and EBITDA on a historical and a pro forma basis. See “Item 6. Selected Financial Data—Notes to the Selected Historical Financial and Operating Data” above for a discussion of the historical calculation of adjusted EBITDA and reconciliation to net income and “—EBITDA” below for a discussion of the pro forma calculation of adjusted EBITDA and reconciliation to net income.

 

(In millions, except per share data)

   Historical     Pro Forma  
   Post-IPO
Period
Ended
Dec. 27,
2007
         Pre-IPO
Period
Ended
February 13,
2007
    Year
Ended
Dec. 28,
2006
    Nine
Months
Ended
Dec.
29,
2005
    Year
Ended
Dec. 27,
2007
    Year
Ended
Dec. 28,
2006
    Year
Ended
Dec. 29,
2005
 

Revenue

   $ 308.3          $ 23.6     $ 219.3     $ 98.8     $ 338.0     $ 275.7     $ 221.6  

Operating income (loss)

   $ 161.5          $ (4.1 )   $ (10.0 )   $ (6.9 )   $ 171.1     $ 126.8     $ 95.7  

Adjusted EBITDA

   $ 171.1          $ (2.7 )   $ 0.9     $ 4.6     $ 182.1     $ 138.3     $ 108.8  

Adjusted EBITDA margin

     55.5 %          NM       0.4 %     4.7 %     53.9 %     50.2 %     49.1 %

Net Income (Loss)

   $ 24.8          $ (4.2 )   $ (10.5 )   $ (6.9 )   $ 24.6     $ 16.6     $ 8.2  

Net Income (Loss) per Basic Share

   $ 0.59            —         —         —       $ 0.58     $ 0.39     $ 0.20  

Net Income (Loss) per Diluted Share

   $ 0.59            —         —         —       $ 0.58     $ 0.39     $ 0.20  

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. The Loews payments received are added to adjusted EBITDA to determine our compliance with financial covenants under our new senior secured credit facility.

We have included a discussion of 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 senior secured credit facility. We believe EBITDA, adjusted EBITDA and adjusted EBITDA margin are important supplemental measures of operating performance because

 

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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 to evaluate and value companies, 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 resulted from the acquisition of an interest in NCM LLC by NCM, Inc., 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.

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.

The following table reconciles pro forma net income to pro forma EBITDA and adjusted EBITDA for the periods presented (dollars in millions):

 

     Year
Ended
Dec. 27,
2007
    Year
Ended
Dec. 28,
2006
    Year
Ended
Dec. 29,
2005
 

Net income

   $ 24.6     $ 16.6     $ 8.2  

Income taxes

     42.6       24.7       12.3  

Minority interest

     38.5       20.5       10.2  

Interest expense

     65.4       65.0       65.0  

Depreciation and amortization

     5.7       4.8       4.3  
                        

EBITDA

     176.8       131.6       100.0  

Severance plan costs

     1.9       4.2       8.5  

Share-based compensation costs/Deferred stock compensation

     3.4       2.5       0.3  
                        

Adjusted EBITDA

   $ 182.1     $ 138.3     $ 108.8  
                        

Total Revenue

   $ 338.0     $ 275.7     $ 221.6  
                        

Adjusted EBITDA margin

     53.9 %     50.2 %     49.1 %
                        

Basis of Presentation

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.

The consolidated operating results discussed herein were derived from the audited financial statements of NCM, Inc. and NCM LLC and should be read in conjunction with the notes thereto. The results of operations for the period ended December 27, 2007 are presented in two periods, the 2007 pre-IPO period and the 2007

 

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post-IPO period. Separate periods have been presented because there were significant changes at the time of the IPO due to the ESA modifications and related expenses thereunder, and significant changes to revenue arrangements and contracts with the founding members.

The results of operations data for the year ended December 28, 2006 and the nine months ended December 29, 2005 were derived from the historical financial statements and accounting records of NCM LLC and from the financial statements and accounting records of NCN for the period December 24, 2004 through March 31, 2005 and RCM for the three months ended March 31, 2005. The balance sheet of NCM LLC at December 28, 2006 reflects the carryover basis of the founding members in the assets contributed by NCN and RCM.

We have a 52-week or 53-week fiscal year ending on the first Thursday after December 25. Fiscal years 2005, 2006 and 2007 contained 52 weeks. Throughout this document, we refer to our fiscal years as set forth below:

 

Fiscal Year Ended

   Reference in
this Document

December 27, 2007 (Period December 29, 2006 through February 12, 2007)

   2007 pre-IPO period

December 27, 2007 (Period February 13, 2007 through December 27, 2007)

   2007 post-IPO period

December 28, 2006

   2006

December 29, 2005

   2005

Factors Affecting Comparability of Results of Operations

RCM provided advertising services to the Regal theatre circuit and a network affiliate during the first quarter of fiscal 2005. NCN provided advertising services to the AMC theatre circuits and various network affiliates during its 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 amended and restated ESAs upon the completion of the IPO. At NCM LLC’s formation, each of AMC and Regal retained their pre-existing advertising contracts and NCM LLC administered those contracts on behalf of those founding members for an administrative fee equal to a percentage of total revenue (35% through December 29, 2005 and 32% through February 12, 2007). Over time as these “legacy” advertising contracts were fulfilled and NCM LLC 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 32% administrative fee percentage. In addition, 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 DCN. On October 5, 2006, Cinemark completed the acquisition of the Century theatre circuit, and the Century screens were added to our network on an exclusive basis in November 2006. The timing of the addition of the Cinemark and Century theatres to our network affects the comparability of results from the periods as they were not included in the results for the full year ended December 28, 2006.

On January 26, 2006, AMC acquired the Loews theatre circuit. The Loews screen integration agreement, effective as of January 5, 2007 and amended and restated as of February 13, 2007, between NCM LLC and AMC, commits AMC to cause the theatres it acquired from Loews to participate in the exhibitor services

 

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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 the Loews screen integration agreement, AMC pays us amounts based on an agreed-upon calculation to reflect the net amount of cash that approximates what NCM LLC would have generated if we were able to sell on-screen advertising in the Loews theatre chain on an exclusive basis. These Loews payments are made on a quarterly basis in arrears through May 31, 2008 in accordance with certain run-out provisions. For the 2007 post-IPO period, the Loews payment is $11.2 million and the amount included in the due to/from founding members at December 27, 2007 is $3.7 million. The Loews payment is recorded directly to NCM LLC’s members’ equity account.

We believe that one of the most meaningful metrics to ascertain the growth of our advertising revenue among all historical periods presented is the total amount of our advertising revenue, excluding advertising revenue associated with the founding member beverage concessionaire agreements, plus the legacy contract value, which we refer to as “advertising contract value”. The trend of total advertising contract value, divided by the total number of founding member attendees, which we refer to as “total advertising contract value per founding member attendee” is also a measure that we use to track our revenue performance over time. We believe that these metrics are helpful to analyze advertising revenue performance across our reporting periods, while providing a measure of revenue which is independent of the number of screens in our network and corresponding attendance for which advertising services are being provided.

Under the amended and restated ESAs that became effective on February 13, 2007, NCM LLC total advertising revenue has increased significantly due to the payments from the founding members for the display of up to 90 seconds of on-screen advertising under their beverage concessionaire agreements at an agreed upon rate. In addition, as discussed above, the conversion from circuit share to theatre access fee structure will reduce the payments made to the founding members as a percentage of advertising revenue.

The increases in the size of our network, as well as differences in the structure of circuit share expense and theatre access fee and the circuit beverage revenue limit the comparability of revenues and operating expenses for all reporting periods. Therefore, certain components of operating expenses, including selling and marketing, administrative, and depreciation expense, are analyzed on the basis of cost per founding member attendee. We also analyze on the basis of operating expense as a percentage of revenues, as this metric may provide meaningful trend analysis.

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.

 

    Period
February 13, 2007
through

December 27,
2007
        Period
December 29,
2006 through
February 12,
2007
    Year Ended
December 28,
2006
    Period
March 29,
2005 through
December 29,
2005
        Predecessor
NCN Period
December 24,
2004 through
March 31,
2005
    Predecessor
RCM Three
Months Ended

March 31,
2005
 

Total advertising contract value
($ in millions)

  $ 282.7         $ 20.9     $ 205.1     $ 144.0         $ 15.5     $ 15.6  

Total advertising contract value per founding member attendee

  $ 0.60         $ 0.31     $ 0.40     $ 0.48         $ 0.37     $ 0.27  

Total operating expense per founding member attendee

  $ 0.22         $ 0.19     $ 0.19     $ 0.20         $ 0.28     $ 0.21  

Total operating expense as a percentage of revenues

    33.7 %         54.7 %     43.3 %     59.3 %         74.2 %     69.1 %

 

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Results of Operations

2007 Post-IPO Period and the 2007 Pre-IPO Period and the Year Ended December 28, 2006

Revenue. Total revenue of the Company for the 2007 post-IPO period was $308.3 million, while total revenue for the 2007 pre-IPO period was $23.6 million, as compared to $219.3 million during the twelve months ended December 28, 2006. The increase in the aggregate 2007 periods over the 2006 period was primarily the result of payments from the founding member beverage agreements, increase in national advertising inventory utilization and CPM, an increase in local and regional advertising sales, the conversion or assignment of certain legacy contracts and increasing meetings and events revenue. The aggregate national advertising revenue for the 2007 periods increase of 72.2% related primarily to an increase in national advertising inventory utilization to 87.0% from 77.5%, a 1.6% increase in CPMs, an increase in non-inventory on-screen and lobby revenue and a 5.4% increase in founding member attendance. Local and regional advertising revenue increased by 27.4% primarily due to an increase in screens and time sold. The meeting and events revenue increase of 11.4% related to an increase in Fathom revenue due to an increase in event count of approximately 50.0%, primarily for the Met, offset by 14.2% decrease in revenue for CineMeetings due to a 15.0% decrease in event count.

Total advertising contract value per founding member attendee for the Company for the 2007 post-IPO period was $0.60, while the total advertising contract value per founding member attendee was $0.31 for the 2007 pre-IPO period and $0.40 during the year ended December 28, 2006. The approximate 40.0% increase in the advertising contract value per founding member for the combined 2007 post-IPO period and 2007 pre-IPO period versus the year ended December 28, 2006 was primarily the result of increased utilization through an increase in expenditures from certain existing clients and the expansion of our advertising client base. The increase was also due to an increase in sales of non-inventory on-screen and lobby revenue, such as the sale of branded content segments, cell phone trailer segments and lobby promotional items.

Operating expenses. Total operating expenses for the 2007 post-IPO period were $103.8 million, $12.9 million during the 2007 pre-IPO period and $95.0 million for the year ended December 28, 2006. The increase of the combined 2007 post-IPO period and 2007 pre-IPO period versus total operating expenses for the year ended December 28, 2006 was primarily the result of the increase in sales commissions and event costs associated with the increase in revenue discussed above and increased expenses due to additional staffing and infrastructure required to support the increase in the number of advertising contracts, expansion of the network and public company compliance costs.

Non-cash costs associated with our equity incentive plan also contributed to the increase in administrative expenses. Share-based compensation expense for the 2007 post-IPO period was $3.1 million, while the expense was $0.3 million for the 2007 pre-IPO period and $2.5 million for the twelve months ended December 28, 2006. The increase in share-based compensation expense is primarily due to the plan being in place for the entire 2007 post-IPO and 2007 pre-IPO periods, while it was only in place for nine months of the twelve months ended December 28, 2006 as the options were originally issued in the second quarter of 2006 and additional grants made at the time of the IPO. See the information provided under Note 9 to the consolidated financial statements included elsewhere in this document for additional details.

Total operating expenses per founding member attendee for the Company for the 2007 post-IPO period was $0.22, $0.19 for the 2007 pre-IPO period and $0.19 during the year ended December 28, 2006. The 13.1% increase in total operating expenses per founding member for the combined 2007 post-IPO period and 2007 pre-IPO period versus the year ended December 28, 2006 was primarily the result of costs associated with increased revenue and related expenses associated with the lower-margin meetings and events businesses, increased administrative costs associated with our public company compliance, offset by the fixed nature of many of our operating expenses associated with our advertising business. Operating expenses as a percentage of revenues for the 2007 post-IPO period was 33.7%, for the 2007 pre-IPO period was 54.7% and for the year ended December 28, 2006 was 43.3%. The decrease in the 2007 post-IPO period percentage is primarily the result of higher advertising revenue levels discussed above and the scalable nature of several components of our operating expenses.

 

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Circuit share expense/theatre access fee. Theatre access fees of the Company for the 2007 post-IPO period were $41.5 million, while circuit share expense was $14.4 million during the 2007 pre-IPO period and $130.1 million during year ended December 28, 2006. The decrease for the 2007 post-IPO period versus the NCM LLC 2007 pre-IPO period and the year ended December 28, 2006 was primarily the result of the amended and restated ESAs that became effective upon the completion of the IPO as discussed above. Total theatre access fees as a percentage of revenue of the Company for the 2007 post-IPO period were 13.5%, while the total circuit share expense as a percentage of revenue was 61.0% for the 2007 pre-IPO period and 59.3% during the year ended December 28, 2006. The decrease in the theatre access fee as a percentage of revenue for the 2007 post-IPO period was the result of the change in the structure of the theatre access fee as compared to the circuit share payments prior to the amendment and restatement of the ESAs, as previously discussed.

Net income (loss) . Net income generated by the Company for the 2007 post-IPO period was $24.8 million, while for the 2007 pre-IPO period there was a net loss of $4.2 million and there was a net loss of $10.5 million during the year ended December 28, 2006. The increase in the profitability of the Company for the 2007 post-IPO period versus the periods prior to the IPO was due to the increase in revenue and decrease in payments to the founding members discussed above, partially offset by an increase in interest expense associated with the new credit facilities and the income taxes and expenses associated with the tax receivable agreement and minority interest expense associated with the new corporate structure. The comparability of the net income of the periods presented is limited due to the differing lengths of the periods, size of our network and changes in the corporate structure and capitalization as discussed above.

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

 

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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 on an exclusive basis, 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) that was unprofitable in November 2005.

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 off-setting factors of increased revenue and circuit share expense 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.

 

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Financial Condition and Liquidity

Liquidity and Capital Resources

As of December 27, 2007, our cash and cash equivalents balance was $20.8 million, an increase of $14.1 million compared to the balance of $6.7 million as of December 28, 2006. In addition, we had access to an undrawn line of credit of $21.0 million for a total liquidity position of $41.8 million as of December 27, 2007. The increase in our liquidity position from December 28, 2006 was in part a result of positive cash from operating and financing activities offset by higher levels of investing activities. A substantial amount of cash has been set aside for future income tax and tax sharing payments and payments related to dividends that have been declared.

Cash Flows (in millions).

 

     Post-IPO
Period
Ended
Dec. 27,
2007
         Pre-IPO
Period
Ended
February 13,
2007
    Year
Ended
Dec. 28,
2006
    Nine
Months
Ended
Dec. 29,
2005
 

Net cash from operating activities

   $ 37.3          $ 2.2     $ 8.3     $ (2.9 )

Net cash from investing activities

   $ (30.2 )        $ (0.5 )   $ (6.3 )   $ (5.9 )

Net cash from financing activities

   $ 5.4          $ (0.1 )   $ 4.7     $ 8.8  

 

   

Operating Activities. The increase in funds provided by operating activities for the combined 2007 post-IPO period and 2007 pre-IPO period versus the year ended December 28, 2006 was primarily due to increases in revenues in the 2007 periods and lower payments to the founding members related to the transition from a circuit share to a theatre access fee structure after the IPO. See Note 7 to the consolidated financial statements included elsewhere in this document.

 

   

Investing Activities. The increase in funds used for investing activities for the combined 2007 post-IPO period and 2007 pre-IPO period versus the year ended December 28, 2006 was primarily due to $9.1 million of cash invested in auction rate securities, $7.0 million of cash invested in 6% convertible preferred stock of IdeaCast, Inc. and investments in our network software and in corporate management systems and purchases of equipment necessary to service the expansion of our network in network affiliate theatres.

 

   

Financing Activities. The increase in funds generated from financing activities for the combined 2007 post-IPO period and 2007 pre-IPO period versus the year ended December 28, 2006 was primarily due to net proceeds related to the IPO and net borrowings on our senior secured credit facility and distributions paid to the founding members offset by dividend payments.

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.

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.

Sources of capital and capital requirements. NCM, Inc’s primary source of liquidity and capital resources are distributions from NCM LLC generated by the operating, investing and financing activities of the 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.

Management believes that future funds generated from NCM LLC’s operations and distributions to NCM, Inc. and available borrowing capacity of up to $80.0 million under NCM LLC’s revolving credit facility should be sufficient to fund quarterly dividends, NCM LLC’s debt service requirements, working capital requirements

 

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and capital expenditure and other investing requirements, through the next 12 months. We made a draw of $10.0 million on the new credit facility at the closing of the IPO to repay amounts outstanding under NCM LLC’s then-existing revolving credit facility 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 funded by the collection by us of related receivables. The amount outstanding as of December 27, 2007 on our revolving credit facility was $59.0 million. Cash flows generated by NCM LLC’s distributions to NCM, Inc. can be impacted by the seasonality experienced in advertising revenues at NCM LLC and the impact to associated collections of accounts receivable.

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 and other investments that we make from time to time. 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 generated from operations. For fiscal 2008, we are committed to $1.8 million of annual operating lease payments. In addition, NCM LLC is required pursuant to terms of the operating agreement effective as of February 13, 2007 to distribute its available cash, as defined in the operating agreement, to its members, including the Company. The available cash distribution to the members of NCM LLC for the quarter ended December 27, 2007 was approximately $37.0 million, of which $16.6 million was the Company’s portion. The total available cash distribution for the 2007 post-IPO period was approximately $119.1 million, of which $53.3 million was the Company’s portion. The Company will use cash received from the available cash distributions to fund income taxes and current and future dividends as declared by the board of directors, including a dividend declared of $0.15 per share (approximately $6.3 million) which will be paid on March 26, 2008.

Capital expenditures. Capital expenditures of NCM LLC have typically been related to equipment required for our network operations center and content production and post-production facilities, digital content system and “back-office” capitalized software upgrades developed primarily by our programmers, 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 when they are added to our network. Capital expenditures for the 2007 post-IPO period were $14.4 million (including $6.5 million associated with network affiliate additions), while capital expenditures were $0.6 million, $6.6 million and $5.9 million for the 2007 pre-IPO period, the year ended December 28, 2006 and the nine months ended December 29, 2005, respectively. The capital expenditures have typically been satisfied through cash flow from operations. All capital expenditures related to the DCN 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 and restated ESAs.

We expect to make approximately $16.0 million to $17.0 million of capital expenditures in fiscal 2008 (including approximately $5.0 million associated with network affiliates), 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, our interactive initiative and network equipment in network affiliate theatres. We expect these upgrades and improvements to our management reporting systems, which are intended to provide additional advertising scheduling and placement flexibility for our clients, should 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 network affiliate theatre proposals, should additional ones be 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.

 

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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 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 a group of lenders. 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. On February 13, 2007, concurrently with the closing of the IPO of NCM, Inc., NCM LLC entered into a senior secured credit facility with a group of lenders. The facility consists of a six-year $80.0 million revolving credit facility and an eight-year, $725.0 million term loan facility. 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 term loan will be due on the eighth anniversary of the funding. The revolving credit facility portion is available, subject to certain conditions, for general corporate purposes of the Company in the ordinary course of business and for other transactions permitted under the credit agreement, and a portion is available for letters of credit. The outstanding balance of the term loan facility at December 27, 2007 was $725.0 million. The outstanding balance under the revolving credit facility at December 27, 2007 was $59.0 million. The obligations under the credit facility are secured by a lien on substantially all of the assets of NCM LLC. Borrowings under the senior secured credit facility bear interest, at the option of the Company, 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 and the revolving credit facility is 0.75% with respect to base rate loans and 1.75% with respect to eurodollar loans. As of December 27, 2007, the effective rate on the term loan was 6.77% (the interest rate swap hedged $550.0 million of the $725.0 million term loan at a fixed interest rate of 6.734% while the unhedged portion was at an interest rate of 6.87%) and the weighted-average interest rate on the revolver was 6.81%. 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 (defined in the NCM LLC credit agreement as the ratio of secured funded debt less unrestricted cash and cash equivalents, over adjusted EBITDA, as defined). 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 also contains a number of covenants and financing ratio requirements, with which, at December 27, 2007, the Company was in compliance. Upon 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.

Critical Accounting Policies

The significant accounting policies of NCM LLC are described in Note 1 of the financial statements. 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.

 

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Allowance for doubtful accounts . The allowance for doubtful accounts represents management’s estimate of probable credit losses inherent in its trade receivables, which represent a significant 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 complicated mathematical calculations used to determine the shortfall of advertising impressions delivered. 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.

Share-based compensation . The Company’s Equity Incentive Plan is treated as an equity plan under the provisions of SFAS No. 123(R), and the determination of fair value of options for accounting purposes 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 the Company make estimates of various factors used. The following assumptions were used in the valuation of the options:

 

   

Expected life of options—We are a newly public company and applied the SEC simplified method (the average of the vesting and contractual terms of the options) during 2006 and 2007 in the absence of reliable historical data of our Company or from a group of peers to estimate our expected life. We expect to continue to use this method until we have a reasonable basis upon which to estimate expected life.

 

   

Risk free interest rate—The risk-free interest rate was determined by using the applicable Treasury rates as of the grant dates, commensurate with the expected terms of the options.

 

   

Expected volatility—NCM closed its IPO on February 13, 2007. Since the length of time our shares have been publicly traded is shorter than the contractual terms of our options, we believe historical volatility may not be completely representative of future stock price trends. As a result, we estimated expected volatility based on comparable companies and industry indexes for historic stock price volatility. Until such time as we have sufficient historical information to derive an implied volatility we expect to continue to use this method as long as we believe such companies are comparable to us.

 

   

Dividend yield—The estimated dividend yield was determined using management’s expectations based on estimated cash flow characteristics and expected long-term dividend policy after the IPO.

Fair Value Estimation . NCM LLC considers estimates regarding fair value of our investment in preferred stock of IdeaCast, Inc. to be a critical accounting policy that requires significant judgments, assumptions and estimates used in the preparation of its financial statements. The Company’s preferred stock investment in IdeaCast, Inc., which is accounted for as an available-for-sale debt security, requires significant management judgment because the securities are not publicly traded and as a result there is no readily determinable fair value. The Company based its estimated fair value on factors including, but not limited to: product development activity; whether there have been significant changes, positive or negative, in the prospects for IdeaCast’s business; and the overall health of IdeaCast and its industry. In addition, should the fair value of IdeaCast decline below our cost, management judgment will be required to assess whether the investment should be considered other-than-temporarily impaired. The Company prepared a discounted cash flows model for the valuation analysis using assumptions for the number of installed clubs, capital expenditures per club installation, advertising inventory, utilization rate and CPM as significant inputs.

 

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Recent Accounting Pronouncements

For a discussion of the recent accounting pronouncements relevant to our business operations, see the information provided under Note 1 to the consolidated financial statements included elsewhere in this document.

Related-Party Transactions

For a discussion of the related-party transactions, see the information provided under Note 7 to the consolidated financial statements included elsewhere in this document.

Off-Balance Sheet Transactions

We had no off-balance sheet arrangements or obligations for the periods presented in this report. Our operating lease obligations, which primarily include office leases, are not reflected on our balance sheet. See “Contractual and Other Obligations” below for further detail. We do not believe these arrangements are material to our current or future financial condition, results of operations, liquidity, capital resources or capital expenditures.

Contractual and Other Obligations

Our contractual obligations at December 27, 2007 were as follows:

 

     Payments Due by Period
     Total    2008    2009-2010    2011-2012    After 2012
     ($ in millions)

Borrowings

   $ 725.0    $ —      $ —      $ —      $ 725.0

Future interest on borrowings

     350.5      49.2      95.8      98.7      106.8

Office leases

     9.0      1.8      3.3      2.6      1.3

Network affiliate agreements

     22.4      5.8      9.5      7.1      —  
                                  

Total contractual cash obligations

   $ 1,106.9    $ 56.8    $ 108.6    $ 108.4    $ 833.1
                                  

The amounts of future interest payments in the table above are based on the amount outstanding on the term loan, estimated rates of interest over the term of the variable rate portion and the rates in effect on our interest rate swap. 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 fixed interest rate swap arrangements 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 variable rate revolving credit agreement. Debt service requirements under this agreement depend on the amounts borrowed and the level of the based interest rate, in addition to a commitment fee on the unused portion of the revolving credit facility. See further discussion of the new senior secured credit facility at “Financial Condition and Liquidity-Financings.”

The amended and restated ESAs entered into at the completion of our IPO 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 are added or removed through acquisition, divestiture or closure activities of the founding members. The payments made to founding members also will vary due to the escalation of the rates paid for each factor pursuant to the amended and restated ESAs. The table above does not include amounts payable under the amended and restated ESAs as they are based on variable factors, which are not capable of precise estimation.

 

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Seasonality

The levels of revenue, operating income, net income, EBITDA and adjusted EBITDA 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, we typically have less revenue, operating income, net income, EBITDA and adjusted EBITDA and our operating margins are lower in the first quarter than the other quarters of a given year. 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

The primary market risk to which we are exposed is interest rate risk. An increase or decrease in interest rates would affect interest costs relating to the variable portion of our senior secured debt facility which is not covered under the hedging agreement. At December 27, 2007, there was an aggregate of $175.0 million of variable rate debt outstanding on the term portion of our facility that was not covered by interest rate swaps, and $59.0 million of variable rate debt outstanding on the revolver portion of our facility. Based on the interest rate levels in effect on the unhedged variable rate debt outstanding at December 27, 2007, a 100 basis point fluctuation in market interest rates would have increased or decreased our interest expense by approximately $2.3 million for an annual period, net of the effect on interest rate swaps.

 

Item 8. Financial Statements and Supplementary Data

See Index to Financial Statements and Supplemental Information on page F-1.

 

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

None.

 

Item 9A. Controls and Procedures

Effectiveness of Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the SEC under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to our management, including the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer) as appropriate to allow timely decisions regarding required disclosure. As of December 27, 2007, our management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the Company’s management concluded that the Company’s disclosure controls and procedures as of December 27, 2007 were effective.

Management’s Annual Report on Internal Control over Financial Reporting. This report is furnished with this Annual Report pursuant to Item 308T of Regulation S-K and shall not be deemed filed by the Company for purposes of Section 18 of the Exchange Act, as amended, or otherwise subject to the liabilities of that section, unless the Company specifically states that the report is to be considered “filed” under the Exchange Act or incorporates it by reference into a filing under the Securities Act of 1933, as amended, or the Exchange Act, as amended.

 

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Management established and maintains adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). As of December 27, 2007, our management evaluated, with the participation of the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Company’s management concluded that the Company’s internal control over financial reporting as of December 27, 2007 was effective.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

This annual report does not include an attestation report of the Company’s registered public accounting firm, Deloitte & Touche LLP, regarding internal control over financial reporting. Management’s report was not subject to attestation by Deloitte & Touche LLP pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report as of December 27, 2007.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended December 27, 2007 that have materially affected, or are likely to materially affect, the Company’s internal controls over financial reporting.

 

Item 9B. Other Information

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

For information with respect to our directors, see our definitive Proxy Statement under the heading “Board Composition”, which information is incorporated herein by reference. Information regarding our audit committee financial expert and the members of the audit committee are incorporated in this item by reference from our Proxy Statement under the heading “Meetings of the Board of Directors and Committees.”

The information required in this item regarding our executive officers is set forth in Part I of this Annual Report on Form 10-K under the heading “Executive Officers of the Registrant.”

Information regarding compliance with Section 16(a) of the Exchange Act by our directors and executive officers and holders of ten percent of a registered class of our equity securities is incorporated in this item by reference from our Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting Compliance.”

Our Board adopted a 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 under the tab “Investor Relations– Corporate Governance.” 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.

 

Item 11. Executive Compensation

The information required by this item regarding compensation of executive officers and directors is incorporated herein by reference from the Proxy Statement under the heading “Compensation of Executive Officers.”

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

For information with respect to the security ownership of directors, executive officers and holders of more than 5% of a class of our voting securities see the Proxy Statement under the heading “Beneficial Ownership”, which information is incorporated herein by reference.

For equity incentive plan information see the Proxy Statement under the heading “Equity Incentive Plan Information”, which information is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Party Transactions

For information with respect to certain relationships and related transactions, see the Proxy Statement under the heading “Certain Relationships and Related Party Transactions,” which information is incorporated herein by reference.

 

Item 14. Principal Accountant Fees and Services

The information required by this item with respect to principal accounting fees and services is incorporated herein by reference from the Proxy Statement under the heading “Fees Paid to Independent Auditors.”

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules

(a) (1) and (a) (2) Financial statements and financial statement schedules

See Index to Financial Statements on page F-1.

(b) Exhibits

See Exhibit Index, beginning on page 65.

(c) Financial Statement Schedules

Financial Statement Schedules not included herein have been omitted because they are either not required, not applicable, or the information is otherwise included herein.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

     NATIONAL CINEMEDIA, INC.
     (Registrant)
Dated:    March 7, 2008  

/s/    K URT C. H ALL        

     Kurt C. Hall
     President and Chief Executive Officer
     (Principal Executive Officer)
Dated:    March 7, 2008  

/s/    G ARY W. F ERRERA        

     Gary W. Ferrera
     Executive Vice President and Chief Financial Officer
     (Principal Accounting and Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/ S /    K URT C. H ALL        

Kurt C. Hall

   President, Chief Executive Officer (Principal Executive Officer)   March 7, 2008

/ S /    G ARY W. F ERRERA        

Gary W. Ferrera

   Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)   March 7, 2008

/ S /    P ETER C. B ROWN        

Peter C. Brown

   Director   March 7, 2008

/ S /    M ICHAEL L. C AMPBELL        

Michael L. Campbell

   Director   March 7, 2008

/ S /    L AWRENCE A. G OODMAN        

Lawrence A. Goodman

   Director   March 7, 2008

/ S /    D AVID R. H AAS        

David R. Haas

   Director   March 7, 2008

/ S /    J AMES R. H OLLAND , J R .        

James R. Holland, Jr.

   Director   March 7, 2008

/ S /    S TEPHEN L. L ANNING        

Stephen L. Lanning

   Director   March 7, 2008

/ S /    E DWARD H. M EYER        

Edward H. Meyer

   Director   March 7, 2008

/ S /    L EE R OY M ITCHELL        

Lee Roy Mitchell

   Director   March 7, 2008

/ S /    S COTT N. S CHNEIDER        

Scott N. Schneider

   Director   March 7, 2008

 

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INDEX TO EXHIBITS

 

Exhibit

  

Reference

  

Description

  3.1    (1)    Amended and Restated Certificate of Incorporation.
  3.2    (2)    Amended and Restated Bylaws.
10.1    (3)    National CineMedia, LLC Third Amended and Restated Limited Liability Company Operating Agreement dated as of February 13, 2007, by and among American Multi-Cinema, Inc., Cinemark Media, Inc., Regal CineMedia Holdings, LLC and National CineMedia, Inc.
10.2    (3)    Exhibitor Services Agreement dated as of February 13, 2007, by and between National CineMedia, Inc. and American Multi-Cinema, Inc. (Confidential treatment granted as to certain portions, which portions were omitted and filed separately with the Commission.)
10.3    (3)    Exhibitor Services Agreement dated as of February 13, 2007, by and between National CineMedia, Inc. and Cinemark USA, Inc. (Confidential treatment granted as to certain portions, which portions were omitted and filed separately with the Commission.)
10.4    (3)    Exhibitor Services Agreement dated as of February 13, 2007, by and between National CineMedia, Inc. and Regal Cinemas, Inc. (Confidential treatment granted as to certain portions, which portions were omitted and filed separately with the Commission.)
10.5    (3)    ESA Payment Letter dated as of February 13, 2007, by and among National CineMedia, Inc., American Multi-Cinema, Inc., Cinemark USA, Inc. and Regal Cinemas, Inc.
10.6    (3)    Common Unit Adjustment Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., National CineMedia, LLC, Regal CineMedia Holdings, LLC, American Multi-Cinema, Inc., Cinemark Media, Inc, Regal Cinemas, Inc. and Cinemark USA, Inc. (Confidential treatment granted as to certain portions, which portions were omitted and filed separately with the Commission.)
10.7    (3)    Tax Receivable Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., National CineMedia, LLC, Regal CineMedia Holdings, LLC, Cinemark Media, Inc., Regal Cinemas, Inc., American Multi-Cinema, Inc. and Cinemark USA, Inc.
10.8    (3)    First Amended and Restated Loews Screen Integration Agreement by and between National CineMedia, LLC and American Multi-Cinema, Inc. (Confidential treatment granted as to certain portions, which portions were omitted and filed separately with the Commission.)
10.9    (3)    Second Amended and Restated Software License Agreement dated as of February 13, 2007, by and among American Multi-Cinema, Inc., Regal CineMedia Corporation, Cinemark USA, Inc., Digital Cinema Implementation Partners, LLC and National CineMedia, LLC.
10.10    (3)    Director Designation Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., American Multi-Cinema, Inc., Cinemark Media, Inc. and Regal CineMedia Holdings, LLC.
10.11    (3)    Registration Rights Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., American Multi-Cinema, Inc., Regal CineMedia Holdings, LLC and Cinemark Media, Inc.
10.12    (3)    Management Services Agreement dated as of February 13, 2007, by and among National CineMedia, Inc. and National CineMedia, LLC.

 

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Exhibit

  

Reference

  

Description

10.13    (3)    $805,000,000 Credit Agreement dated as of February 13, 2007, by and among National CineMedia, LLC, as borrower; the Lenders (as defined therein; Lehman Brothers Inc. and J.P. Morgan Securities, Inc., as arrangers; JPMorgan Chase Bank, N.A., as syndication agent; Credit Suisse (USA) LLC and Morgan Stanley Senior Funding, Inc., as co-documentation agents; and Lehman Commercial Paper Inc., as administrative agent (including forms of Term Note, Revolving Credit Note and Swing Line Note).
10.14    (3)    Employment Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., National CineMedia, LLC and Kurt C. Hall.+
10.15    (3)    Employment Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., National CineMedia, LLC and Clifford E. Marks.+
10.16    (3)    Employment Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., National CineMedia, LLC and Gary W. Ferrera.+
10.17    (3)    Employment Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., National CineMedia, LLC and Thomas C. Galley.+
10.18    (3)    Employment Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., National CineMedia, LLC and Ralph E. Hardy.+
10.19    (4)    National CineMedia, Inc. 2007 Equity Incentive Plan.+
10.20    (5)    Form of Option Substitution Award.+
10.21    (6)    Form of Restricted Stock Substitution Award.+
10.22    (7)    Form of Stock Option Agreement.+
10.23    (8)    Form of Restricted Stock Agreement.+
10.24    (9)    Confirmation of Swap, dated as of June 12, 2007, between National CineMedia, LLC and Morgan Stanley Capital Services Inc.
10.25    (10)    ISDA Master Agreement dated as of March 2, 2007, between National CineMedia, LLC and Morgan Stanley Capital Services and Schedule.
10.26    (11)    National CineMedia, Inc. Executive Officer 2007 Performance Bonus Plan +
10.27    (12)    Confirmation of Swap, dated as of July 25, 2007, between National CineMedia, LLC and Credit Suisse International.
10.28    (13)    ISDA Master Agreement dated as of March 2, 2007, between National CineMedia, LLC and Credit Suisse International and Schedule.
10.29    (14)    Confirmation of Swap, dated as of August 6, 2007, between National CineMedia, LLC and JPMorgan Chase Bank, N.A.
10.30    (15)    ISDA Master Agreement dated as of August 6, 2007, between National CineMedia, LLC and JPMorgan Chase Bank, N.A.
10.31    (16)    Confirmation of Swap, dated as of September 14, 2007, between National CineMedia, LLC and Lehman Brothers Special Financing, Inc.
10.32    (17)    ISDA Master Agreement dated as of September 14, 2007, between National CineMedia, LLC and Lehman Brothers Special Financing, Inc.
21.1    *    List of Subsidiaries.
23.1    *    Consent of Deloitte & Touche LLP.

 

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Exhibit

  

Reference

  

Description

31.1    *    Rule 13a-14(a) Certification of Chief Executive Officer*
31.2    *    Rule 13a-14(a) Certification of Chief Financial Officer*
32.1    **    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350**
32.2    **    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350**

 

* Filed herewith.
** Furnished herewith.
+ Management contract.
(1) Incorporated by reference to Exhibit 4.1 from the Registrant’s Registration Statement on Form S-8 (File No. 333-140652) filed on February 13, 2007.
(2) Incorporated by reference to Exhibit 4.2 from the Registrant’s Registration Statement on Form S-8 (File No. 333-140652) filed on February 13, 2007.
(3) Incorporated by reference to Exhibits of the same number from the Registrant’s Current Report on Form 8-K (File No. 001-33296) filed on February 16, 2007.
(4) Incorporated by reference to Exhibit 4.3 from the Registrant’s Registration Statement on Form S-8 (File No. 333-140652) filed on February 13, 2007.
(5) Incorporated by reference to Exhibit 4.4 from the Registrant’s Registration Statement on Form S-8 (File No. 333-140652) filed on February 13, 2007.
(6) Incorporated by reference to Exhibit 4.5 from the Registrant’s Registration Statement on Form S-8 (File No. 333-140652) filed on February 13, 2007.
(7) Incorporated by reference to Exhibit 4.6 from the Registrant’s Registration Statement on Form S-8 (File No. 333-140652) filed on February 13, 2007.
(8) Incorporated by reference to Exhibit 4.7 from the Registrant’s Registration Statement on Form S-8 (File No. 333-140652) filed on February 13, 2007.
(9) Incorporated by reference to Exhibit 10.1 from the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33296) filed on August 10, 2007.
(10) Incorporated by reference to Exhibit 10.2 from the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33296) filed on August 10, 2007.
(11) Incorporated by reference to Exhibit 10.1 from the Registrant’s Current Report on Form 8-K (File No. 001-33296) filed on August 30, 2007.
(12) Incorporated by reference to Exhibit 10.1 from the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33296) filed on November 9, 2007.
(13) Incorporated by reference to Exhibit 10.2 from the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33296) filed on November 9, 2007.
(14) Incorporated by reference to Exhibit 10.3 from the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33296) filed on November 9, 2007.
(15) Incorporated by reference to Exhibit 10.4 from the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33296) filed on November 9, 2007.
(16) Incorporated by reference to Exhibit 10.5 from the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33296) filed on November 9, 2007.
(17) Incorporated by reference to Exhibit 10.6 from the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33296) filed on November 9, 2007.

 

67


Table of Contents

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION

 

     Page

National CineMedia, Inc. and Subsidiary

  

Report of Independent Registered Public Accounting Firm

   F-2

Balance Sheets as of December 27, 2007 and December 28, 2006

   F-3

Statements of Operations for the period February 13, 2007 through December 27, 2007, the period December 29, 2006 through February 12, 2007, the year ended December 28, 2006, the period March  29, 2005 through December 29, 2005, Predecessor National Cinema Network, Inc. for the period December 24, 2004 through March 31, 2005 and Predecessor Regal CineMedia Corporation for the three months ended March 31, 2005

   F-4

Statements of Stockholders’ Equity for Predecessor National Cinema Network, Inc. for the period December 24, 2004 through March  31, 2005, Predecessor Regal CineMedia Corporation for the three months ended March 31, 2005, Statements of Members’ Equity for the period March 29, 2005 through December 29, 2005, the year ended December 28, 2006, the period December 29, 2006 through February 12, 2007 and Statements of Stockholders’ Equity for the period February 13, 2007 through December 27, 2007

   F-5

Statements of Cash Flows for the period February 13, 2007 through December 27, 2007, the period December 29, 2006 through February 12, 2007, the year ended December 28, 2006 , the period March  29, 2005 through December 29, 2005, Predecessor National Cinema Network, Inc. for the period December 24, 2004 through March 31, 2005 and Predecessor Regal CineMedia Corporation for the three months ended March 31, 2005

   F-6

Notes to Consolidated Financial Statements

   F-7

National CineMedia, Inc. and Subsidiary

  

Unaudited Pro Forma Financial Information

   F-33

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

National CineMedia, Inc.

Centennial, Colorado

We have audited the accompanying consolidated balance sheet of National CineMedia, Inc. and subsidiary as of December 27, 2007 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the period February 13, 2007 through December 27, 2007, the balance sheet for National CineMedia LLC as of December 28, 2006 and the related statements of operations, members’ equity (deficit) and cash flows for the period December 29, 2006 through February 12, 2007, for the year ended December 28, 2006, and for the period March 29, 2005 through December 29, 2005, and the related statements of operations, stockholders’ equity and cash flows for National Cinema Network, Inc. for the period December 24, 2004 through March 31, 2005 and for Regal CineMedia Corporation for the three months ended March 31, 2005 (National CineMedia, Inc., National CineMedia, LLC, National Cinema Network, Inc., and Regal CineMedia Corporation are collectively referred to as the “Company”). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of National CineMedia, Inc and subsidiary as of December 27, 2007 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the period February 13, 2007 through December 27, 2007, the balance sheet for National CineMedia, LLC as of December 28, 2006 and the related statements of operations, members’ equity (deficit) and cash flows for the period December 29, 2006 through February 12, 2007, for the year ended December 28, 2006, and for the period March 29, 2005 through December 29, 2005, and the related statements of operations, stockholders’ equity and cash flows for National Cinema Network, Inc. for the period December 24, 2004 through March 31, 2005 and for Regal CineMedia Corporation for the three months ended March 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Denver, Colorado

March 6, 2008

 

F-2


Table of Contents

NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In millions)

 

     December 27,
2007
    December 28,
2006

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 20.8     $ 6.7

Short-term investments

     9.1       —  

Receivables, net of allowance of $1.5 million in 2007 and $1.1 million in 2006

     93.2       63.9

Prepaid expenses

     1.9       1.6

Income taxes receivable

     1.7       —  

Deferred tax assets

     0.4       —  
              

Total current assets

     127.1       72.2

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $17.3 million in 2007 and $12.7 million in 2006

     22.2       12.6

OTHER ASSETS:

    

Deferred tax assets

     293.8       —  

Debt issuance costs, net

     13.0       0.2

Investment in affiliate

     7.0       —  

Restricted cash

     0.3       —  

Other assets

     0.2       5.0
              

Total other assets

     314.3       5.2
              

TOTAL

   $ 463.6     $ 90.0
              

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 6.6     $ 5.4

Amounts due to founding members

     15.8       53.9

Taxes payable to founding members

     13.4       —  

Accrued payroll and related expenses

     10.2       6.4

Accrued expenses

     10.6       5.5

Deferred revenue

     3.3       3.4
              

Total current liabilities

     59.9       74.6

OTHER LIABILITIES:

    

Unit option plan payable

     —         1.9

Deferred tax liability

     55.4       —  

Taxes payable to founding members

     122.3       —  

Interest rate swap agreements and other liabilities

     14.4       —  

Borrowings

     784.0       10.0
              

Total other liabilities

     976.1       11.9
              

Total liabilities

     1,036.0       86.5
              

COMMITMENTS AND CONTINGENCIES (NOTE 11)

    

STOCKHOLDERS’ EQUITY/(DEFICIT):

    

Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding at December 27, 2007

     —         —  

Common stock, $0.01 par value; 120,000,000 shares authorized, 42,000,000 issued and outstanding at December 27, 2007

     0.4       —  

Retained earnings

     24.8       —  

Distributions in excess of additional paid in capital

     (581.1 )     —  

Dividends

     (12.6 )     —  

Accumulated other comprehensive income (loss)

     (3.9 )     —  
              

Total stockholders’ equity (deficit)

     (572.4 )     —  
              

MEMBERS’ EQUITY

     —         3.5
              

TOTAL

   $ 463.6     $ 90.0
              

See accompanying notes to consolidated financial statements.

 

F-3


Table of Contents

NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except share and per share data)

 

    Period
February 13,
2007 through

December 27,
2007
      Period
December 29,
2006 through
February 12,
2007
    Year Ended
December 28,
2006
    Period
March 29,
2005 through
December 29,
2005
        Predecessor
NCN Period
December 24,
2004 through
March 31,
2005
    Predecessor
RCM Three
Months Ended
March 31,
2005

REVENUE:

               

Advertising (including revenue from founding members of $40.9 and $0.0 for all remaining periods)

  $ 282.7       $ 20.6     $ 188.2     $ 56.0         $ 15.5     $ 15.6

Administrative fees—founding members

    —           0.1       5.4       30.8           —         —  

Meetings and events

    25.4         2.9       25.4       11.7           —         2.1

Other

    0.2         —         0.3       0.3           —         0.1
                                                   

Total

    308.3         23.6       219.3       98.8           15.5       17.8
                                                   

EXPENSES:

                   

Advertising operating costs

    9.1         1.1       9.2       6.3           3.5       0.9

Meetings and events operating costs

    15.4         1.4       11.1       5.4           —         0.8

Network costs

    13.3         1.7       14.7       9.2           1.1       2.4

Theatre access fees/circuit share costs—founding members

    41.5         14.4       130.1       38.6           5.5       2.4

Selling and marketing costs

    40.9         5.2       38.2       24.9           3.2       4.4

Administrative costs

    19.2         2.8       16.4       9.8           1.9       3.4

Severance plan costs

    1.5         0.4       4.2       8.5           —         —  

Depreciation and amortization

    5.0         0.7       4.8       3.0           1.0       0.4

Other costs

    0.9         —         0.6       —             0.8       0.3
                                                   

Total

    146.8         27.7       229.3       105.7           17.0       15.0
                                                   

OPERATING INCOME (LOSS)

    161.5         (4.1 )     (10.0 )     (6.9 )         (1.5 )     2.8

Interest Expense, Net

    57.2         0.1       0.5       —             —         —  
                                                   

INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST

    104.3         (4.2 )     (10.5 )     (6.9 )         (1.5 )     2.8

PROVISION (BENEFIT) FOR INCOME TAXES

    41.9         —         —         —             (0.6 )     1.1

MINORITY INTEREST, NET

    37.6         —         —         —             —         —  
                                                   

NET INCOME (LOSS)

  $ 24.8       $ (4.2 )   $ (10.5 )   $ (6.9 )       $ (0.9 )   $ 1.7
                                                   

EARNINGS PER SHARE:

               

Basic

  $ 0.59              

Diluted

  $ 0.59              

WEIGHTED AVERAGE SHARES OUTSTANDING:

               

Basic

    42,000,000              

Diluted

    42,182,811              

See accompanying notes to consolidated financial statements.

 

F-4


Table of Contents

NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIT)

AND COMPREHENSIVE INCOME

(In millions, except share data)

 

     Class A Common
Stock
   Additional
Paid in
Capital
(Deficit)
    Retained
Earnings
    Accum. Other
Comprehensive
Income (Loss)
    Total  
   Shares    Amount         

Predecessor NCN Stockholders’ Equity

              

Balance—December 24, 2004

   —        —        —         —         —         —    

Net income (loss)

   —        —        —       $ (0.9 )     —       $ (0.9 )

Capital Contribution—AMC Entertainment Inc.

   1,000      —      $ 1.0       —         —       $ 1.0  
                                            

Balance—March 31, 2005

   1,000      —      $ 1.0     $ (0.9 )     —       $ 0.1  
                                            

Predecessor RCM Stockholders’ Equity

              

Balance—December 30, 2004

   —        —      $ 22.5     $ 17.0       —       $ 39.5  

Net income (loss)

   —        —        —       $ 1.7       —       $ 1.7  
                                            

Balance—March 31, 2005

   —        —      $ 22.5     $ 18.7       —       $ 41.2  
                                            
                                              

Members’ Equity

              

Balance—March 29, 2005

                 —    

Issuance of initial units at inception date in exchange for contributed assets, net of liabilities assumed

               $ 0.9  

Issuance of additional units in exchange for cash

               $ 7.3  

Contribution of Severance Plan payments

               $ 8.5  

Net loss

               $ (6.9 )
                    

Balance—December 29, 2005

               $ 9.8  
                    

Capital contribution from Members

               $ 0.9  

Contribution of Severance Plan payments

               $ 4.2  

Distribution to Members

               $ (0.9 )

Net loss

               $ (10.5 )
                    

Balance—December 28, 2006

               $ 3.5  
                    

Contribution of Severance Plan payments

               $ 0.4  

Net loss

               $ (4.2 )
                    

Balance—February 12, 2007

               $ (0.3 )
                    
                                              

Stockholders’ Equity

              

Balance—February 13, 2007

   —        —        —         —         —         —    

Issuance of common stock

   42,000,000    $ 0.4    $ 825.8       —         —       $ 826.2  

Distributions to Members, net of related deferred taxes established at IPO date

   —        —      $ (1,421.2 )     —         —       $ (1,421.2 )

Contributions from Members

   —        —      $ 11.2       —         —       $ 11.2  

Comprehensive Income (loss):

              

Unrealized (loss) on cash flow hedge, net of tax of $2.6 million

   —        —        —         —       $ (3.9 )   $ (3.9 )

Net income

   —        —        —       $ 24.8       —       $ 24.8  
                    

Total Comprehensive Income, net of tax

   —        —        —         —         —       $ 20.9  

Share-based compensation expense

   —        —      $ 3.1       —         —       $ 3.1  

Cash dividends declared $0.30 per share

   —        —        —       $ (12.6 )     —       $ (12.6 )
                                            

Balance—December 27, 2007