National CineMedia, Inc.
National CineMedia, Inc. (Form: 10-Q, Received: 08/07/2015 07:27:45)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended July 2, 2015

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

 

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   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   o

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

x

 

Accelerated filer

o

 

 

 

 

 

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company

o

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

As of August 4, 2015, 61,472,476 shares of the registrant’s common stock (including unvested restricted shares), par value of $0.01 per share, were outstanding.

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

PART I

 

 

 

 

 

 

Item 1.

Financial Statements

 

2

 

Unaudited Condensed Consolidated Balance Sheets

 

2

 

Unaudited Condensed Consolidated Statements of Income

 

3

 

Unaudited Condensed Consolidated Statements of Comprehensive Income

 

4

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

5

 

Unaudited Condensed Consolidated Statements of Equity/(Deficit)

 

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

8

Item 2.

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

 

22

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

35

Item 4.

Controls and Procedures

 

35

 

 

 

 

 

PART II

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

35

Item 1A.

Risk Factors

 

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

Item 3.

Defaults Upon Senior Securities

 

36

Item 4.

Mine Safety Disclosures

 

36

Item 5.

Other Information

 

36

Item 6.

Exhibits

 

36

 

 

 

 

Signatures

 

37

 

 

 


PART I

Item 1. Financial Statements

NATIONAL CINEMEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)

(UNAUDITED)

 

 

 

July 2,

2015

 

 

January 1,

2015

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11.8

 

 

$

13.4

 

Short-term marketable securities

 

 

16.1

 

 

 

21.7

 

Receivables, net of allowance of $4.8 and $4.3, respectively

 

 

126.9

 

 

 

116.5

 

Prepaid expenses

 

 

4.2

 

 

 

3.6

 

Deferred tax assets

 

 

2.9

 

 

 

6.9

 

Income tax receivable

 

 

5.8

 

 

 

6.1

 

Current portion of notes receivable - founding members

 

 

4.2

 

 

 

4.2

 

Other current assets

 

 

0.8

 

 

 

 

Total current assets

 

 

172.7

 

 

 

172.4

 

NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $75.9 and $72.9,

   respectively

 

 

21.9

 

 

 

22.4

 

Intangible assets, net of accumulated amortization of $80.3 and $69.3, respectively

 

 

508.8

 

 

 

488.6

 

Deferred tax assets

 

 

230.0

 

 

 

227.3

 

Debt issuance costs, net of accumulated amortization of $19.1 and $17.8, respectively

 

 

14.2

 

 

 

15.5

 

Long-term notes receivable, net of current portion - founding members

 

 

16.6

 

 

 

16.6

 

Other investments

 

 

4.3

 

 

 

2.5

 

Long-term marketable securities

 

 

41.5

 

 

 

45.5

 

Other assets

 

 

0.5

 

 

 

0.6

 

Total non-current assets

 

 

837.8

 

 

 

819.0

 

TOTAL ASSETS

 

$

1,010.5

 

 

$

991.4

 

LIABILITIES AND EQUITY/(DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Amounts due to founding members

 

$

28.1

 

 

$

34.9

 

Payable to founding members under tax receivable agreement

 

 

15.4

 

 

 

19.6

 

Accrued expenses

 

 

18.9

 

 

 

19.2

 

Accrued payroll and related expenses

 

 

10.0

 

 

 

10.7

 

Accounts payable

 

 

13.2

 

 

 

13.3

 

Deferred revenue

 

 

13.4

 

 

 

8.5

 

Deferred tax liability

 

 

0.7

 

 

 

1.0

 

Total current liabilities

 

 

99.7

 

 

 

107.2

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Long-term debt

 

 

935.0

 

 

 

892.0

 

Deferred tax liability

 

 

52.0

 

 

 

54.2

 

Payable to founding members under tax receivable agreement

 

 

145.4

 

 

 

146.7

 

Total non-current liabilities

 

 

1,132.4

 

 

 

1,092.9

 

Total liabilities

 

 

1,232.1

 

 

 

1,200.1

 

COMMITMENTS AND CONTINGENCIES (NOTE 6)

 

 

 

 

 

 

 

 

EQUITY/(DEFICIT):

 

 

 

 

 

 

 

 

NCM, Inc. Stockholders’ Equity/(Deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and

   outstanding, respectively

 

 

 

 

 

 

Common stock, $0.01 par value; 175,000,000 shares authorized, 59,012,038 and

   58,750,926 issued and outstanding, respectively

 

 

0.6

 

 

 

0.6

 

Additional paid in capital/(deficit)

 

 

(248.2

)

 

 

(261.0

)

Retained earnings (distributions in excess of earnings)

 

 

(173.5

)

 

 

(147.4

)

Accumulated other comprehensive income/(loss)

 

 

-

 

 

 

(0.4

)

Total NCM, Inc. stockholders’ equity/(deficit)

 

 

(421.1

)

 

 

(408.2

)

Noncontrolling interests

 

 

199.5

 

 

 

199.5

 

Total equity/(deficit)

 

 

(221.6

)

 

 

(208.7

)

TOTAL LIABILITIES AND EQUITY/DEFICIT

 

$

1,010.5

 

 

$

991.4

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

2


NATIONAL CINEMEDIA , INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except share and per share data)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 2,

2015

 

 

June 26,

2014

 

 

July 2,

2015

 

 

June 26,

2014

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising (including revenue from founding members

   of  $9.0, $9.8, $16.7 and $19.3, respectively)

 

$

121.5

 

 

$

99.9

 

 

$

198.4

 

 

$

170.1

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising operating costs

 

 

8.3

 

 

 

6.6

 

 

 

14.1

 

 

 

11.6

 

Network costs

 

 

4.2

 

 

 

4.4

 

 

 

8.7

 

 

 

9.0

 

Theatre access fees—founding members

 

 

19.2

 

 

 

17.9

 

 

 

36.4

 

 

 

35.3

 

Selling and marketing costs

 

 

17.0

 

 

 

14.1

 

 

 

33.0

 

 

 

29.1

 

Merger termination fee and related merger costs

 

 

0.9

 

 

 

1.7

 

 

 

34.3

 

 

 

1.7

 

Administrative and other costs

 

 

8.3

 

 

 

7.1

 

 

 

17.0

 

 

 

14.7

 

Depreciation and amortization

 

 

8.2

 

 

 

7.8

 

 

 

16.2

 

 

 

15.6

 

Total

 

 

66.1

 

 

 

59.6

 

 

 

159.7

 

 

 

117.0

 

OPERATING INCOME

 

 

55.4

 

 

 

40.3

 

 

 

38.7

 

 

 

53.1

 

NON-OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on borrowings

 

 

13.1

 

 

 

13.0

 

 

 

26.2

 

 

 

26.1

 

Interest income

 

 

(0.3

)

 

 

(0.5

)

 

 

(0.9

)

 

 

(0.9

)

Accretion of interest on the discounted payable to

   founding members under tax receivable agreement

 

 

3.5

 

 

 

3.5

 

 

 

7.1

 

 

 

7.3

 

Amortization of terminated derivatives

 

 

-

 

 

 

2.5

 

 

 

1.6

 

 

 

5.0

 

Other non-operating expense

 

 

-

 

 

 

0.1

 

 

 

0.1

 

 

 

0.2

 

Total

 

 

16.3

 

 

 

18.6

 

 

 

34.1

 

 

 

37.7

 

INCOME BEFORE INCOME TAXES

 

 

39.1

 

 

 

21.7

 

 

 

4.6

 

 

 

15.4

 

Income tax expense

 

 

5.8

 

 

 

3.8

 

 

 

1.5

 

 

 

2.1

 

CONSOLIDATED NET INCOME

 

 

33.3

 

 

 

17.9

 

 

 

3.1

 

 

 

13.3

 

Less:  Net income attributable to noncontrolling

   interests

 

 

23.2

 

 

 

14.3

 

 

 

2.0

 

 

 

12.8

 

NET INCOME ATTRIBUTABLE TO NCM, INC.

 

$

10.1

 

 

$

3.6

 

 

$

1.1

 

 

$

0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER NCM, INC. COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

 

$

0.06

 

 

$

0.02

 

 

$

0.01

 

Diluted

 

$

0.17

 

 

$

0.06

 

 

$

0.02

 

 

$

0.01

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

58,974,581

 

 

 

58,722,025

 

 

 

58,931,628

 

 

 

58,670,412

 

Diluted

 

 

59,595,019

 

 

 

59,000,127

 

 

 

59,360,245

 

 

 

59,006,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.22

 

 

$

0.22

 

 

$

0.44

 

 

$

0.94

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

3


NATIONAL CINEMEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 2,

2015

 

 

June 26,

2014

 

 

July 2,

2015

 

 

June 26,

2014

 

CONSOLIDATED NET INCOME, NET OF TAX OF

   $5.8, $3.8, 1.5 AND $2.1, RESPECTIVELY

 

$

33.3

 

 

$

17.9

 

 

$

3.1

 

 

$

13.3

 

OTHER COMPREHENSIVE INCOME, NET OF TAX:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of terminated derivatives, net of tax of

   $0.0, $0.5, $0.3 and $0.9, respectively

 

 

 

 

 

2.0

 

 

 

1.3

 

 

 

4.1

 

CONSOLIDATED COMPREHENSIVE INCOME

 

 

33.3

 

 

 

19.9

 

 

 

4.4

 

 

 

17.4

 

Less: Comprehensive income attributable to noncontrolling

   interests

 

 

 

 

 

15.6

 

 

 

2.9

 

 

 

15.5

 

COMPREHENSIVE   INCOME   ATTRIBUTABLE   TO   NCM,   INC.

 

$

33.3

 

 

$

4.3

 

 

$

1.5

 

 

$

1.9

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

4


NATIONAL CINEMEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(UNAUDITED)

 

 

 

Six Months Ended

 

 

 

July 2,

2015

 

 

June 26,

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Consolidated net income

 

$

3.1

 

 

$

13.3

 

Adjustments to reconcile consolidated net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Deferred income tax expense

 

 

1.0

 

 

 

9.2

 

Depreciation and amortization

 

 

16.2

 

 

 

15.6

 

Non-cash share-based compensation

 

 

5.9

 

 

 

4.2

 

Excess tax benefit from share-based compensation

 

 

(0.1

)

 

 

0.2

 

Accretion of interest on the discounted payable to founding members

   under tax receivable agreement

 

 

7.1

 

 

 

7.3

 

Amortization of terminated derivatives

 

 

1.6

 

 

 

5.0

 

Amortization of debt issuance costs

 

 

1.3

 

 

 

1.4

 

Other

 

 

0.6

 

 

 

(0.3

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

(12.0

)

 

 

10.9

 

Accounts payable and accrued expenses

 

 

(1.8

)

 

 

(12.8

)

Amounts due to founding members

 

 

1.0

 

 

 

3.0

 

Payment to founding members under tax receivable agreement

 

 

(17.2

)

 

 

(25.1

)

Deferred revenue

 

 

4.9

 

 

 

5.7

 

Income taxes and other

 

 

(1.4

)

 

 

(1.0

)

Net cash provided by operating activities

 

 

10.2

 

 

 

36.6

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(4.8

)

 

 

(5.2

)

Purchases of marketable securities

 

 

(40.8

)

 

 

(70.2

)

Proceeds from sale and maturities of marketable securities

 

 

49.9

 

 

 

81.3

 

Purchases of intangible assets from network affiliates

 

 

(0.9

)

 

 

(0.5

)

Net cash provided by investing activities

 

 

3.4

 

 

 

5.4

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payment of dividends

 

 

(26.4

)

 

 

(55.2

)

Proceeds from borrowings

 

 

113.0

 

 

 

63.0

 

Repayments of borrowings

 

 

(70.0

)

 

 

(54.0

)

Payment of debt issuance costs

 

 

-

 

 

 

(0.1

)

Founding member integration payments

 

 

1.1

 

 

 

0.9

 

Distributions to founding members

 

 

(32.9

)

 

 

(37.2

)

Excess tax benefit from share-based compensation

 

 

0.1

 

 

 

(0.2

)

Proceeds from stock option exercises

 

 

1.1

 

 

 

0.8

 

Repurchase of stock for restricted stock tax withholding

 

 

(1.2

)

 

 

(1.3

)

Net cash used in financing activities

 

 

(15.2

)

 

 

(83.3

)

CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(1.6

)

 

 

(41.3

)

Cash and cash equivalents at beginning of period

 

 

13.4

 

 

 

54.7

 

Cash and cash equivalents at end of period

 

$

11.8

 

 

$

13.4

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

5


NATIONAL CINEMEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In millions)

(UNAUDITED)

 

 

 

Six Months Ended

 

 

 

July 2,

2015

 

 

June 26,

2014

 

Supplemental disclosure of non-cash financing and investing activity:

 

 

 

 

 

 

 

 

Purchase of an intangible asset with NCM LLC equity

 

$

31.4

 

 

$

16.4

 

Accrued distributions to founding members

 

$

25.1

 

 

$

18.4

 

Increase (decrease) in dividends not requiring cash in the period

 

$

0.8

 

 

$

(0.7

)

Increase in cost and equity method investments

 

$

1.7

 

 

$

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

24.8

 

 

$

24.5

 

Payments for income taxes, net

 

$

0.2

 

 

$

6.6

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

6


NATIONAL CINEMEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY/(DEFICIT)

(In millions, except share and per share data)

(UNAUDITED)

 

 

 

 

 

 

 

NCM, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid in

 

 

(Distribution

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Capital

 

 

in Excess of

 

 

Comprehensive

 

 

Noncontrolling

 

 

 

Consolidated

 

 

Shares

 

 

Amount

 

 

(Deficit)

 

 

Earnings)

 

 

Loss

 

 

Interest

 

Balance—January 1, 2015

 

$

(208.7

)

 

 

58,750,926

 

 

$

0.6

 

 

$

(261.0

)

 

$

(147.4

)

 

$

(0.4

)

 

$

199.5

 

Distributions to founding members

 

 

(25.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25.1

)

NCM LLC equity issued for purchase

   of intangible asset

 

 

31.4

 

 

 

 

 

 

 

 

 

14.1

 

 

 

 

 

 

 

 

 

17.3

 

Income tax and other impacts of NCM

   LLC ownership changes

 

 

(2.4

)

 

 

 

 

 

 

 

 

(5.4

)

 

 

 

 

 

 

 

 

3.0

 

Comprehensive income, net of tax

 

 

4.4

 

 

 

 

 

 

 

 

 

 

 

 

1.1

 

 

 

0.4

 

 

 

2.9

 

Share-based compensation issued

 

 

1.1

 

 

 

261,112

 

 

 

 

 

 

1.1

 

 

 

 

 

 

 

 

 

 

Share-based compensation

   expense/capitalized

 

 

4.9

 

 

 

 

 

 

 

 

 

3.0

 

 

 

 

 

 

 

 

 

1.9

 

Cash dividends declared $0.44 per

   share

 

 

(27.2

)

 

 

 

 

 

 

 

 

 

 

 

(27.2

)

 

 

 

 

 

 

Balance—July 2, 2015

 

$

(221.6

)

 

 

59,012,038

 

 

$

0.6

 

 

$

(248.2

)

 

$

(173.5

)

 

$

(0.0

)

 

$

199.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—December 26, 2013

 

$

(146.1

)

 

 

58,519,137

 

 

$

0.6

 

 

$

(271.7

)

 

$

(80.0

)

 

$

(3.2

)

 

$

208.2

 

Distributions to founding members

 

 

(24.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24.6

)

NCM LLC equity returned for purchase

   of intangible asset

 

 

16.4

 

 

 

 

 

 

 

 

 

7.5

 

 

 

 

 

 

 

 

 

8.9

 

Income tax and other impacts of NCM

   LLC ownership changes

 

 

(0.8

)

 

 

 

 

 

 

 

 

(2.4

)

 

 

 

 

 

 

 

 

1.6

 

Comprehensive income, net of tax

 

 

17.4

 

 

 

 

 

 

 

 

 

 

 

 

0.5

 

 

 

1.4

 

 

 

15.5

 

Share-based compensation issued

 

 

(0.5

)

 

 

223,052

 

 

 

 

 

 

(0.5

)

 

 

 

 

 

 

 

 

 

Share-based compensation

   expense/capitalized

 

 

4.2

 

 

 

 

 

 

 

 

 

2.9

 

 

 

 

 

 

 

 

 

1.3

 

Excess tax benefit from share-based

   compensation

 

 

0.2

 

 

 

 

 

 

 

 

 

0.2

 

 

 

 

 

 

 

 

 

 

Cash dividends declared $0.94 per

   share

 

 

(54.5

)

 

 

 

 

 

 

 

 

 

 

 

(54.5

)

 

 

 

 

 

 

Balance—June 26, 2014

 

$

(188.3

)

 

 

58,742,189

 

 

$

0.6

 

 

$

(264.0

)

 

$

(134.0

)

 

$

(1.8

)

 

$

210.9

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

7


NATIONAL CINEMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. THE COMPANY

Description of Business

National CineMedia, Inc. (“NCM, Inc.”) was incorporated in Delaware as a holding company with the sole purpose of becoming a member and sole manager of National CineMedia, LLC (“NCM LLC”), a limited liability company owned by NCM, Inc., American Multi-Cinema, Inc. and AMC ShowPlace Theatres, Inc. (“AMC”), wholly owned subsidiaries of AMC Entertainment, Inc., Regal Cinemas, Inc. and Regal CineMedia Holdings, LLC, wholly owned subsidiaries of Regal Entertainment Group (“Regal”) and Cinemark Media, Inc. and Cinemark USA, Inc., wholly owned subsidiaries of Cinemark Holdings, Inc. (“Cinemark”).  The terms “NCM”, “the Company” or “we” shall, unless the context otherwise requires, be deemed to include the consolidated entity.  AMC, Regal and Cinemark and their affiliates are referred to in this document as “founding members”.  The Company operates the largest digital in-theatre network in North America, allowing NCM LLC to sell advertising (the “Services”) under long-term exhibitor services agreements (“ESAs”) with the founding members and certain third-party theatre circuits (known as “network affiliates”) under long-term network affiliate agreements, which have terms from three to twenty years.

As of July 2, 2015, NCM LLC had 130,716,532 common membership units outstanding, of which 59,012,038 (45.2%) were owned by NCM, Inc., 26,409,784 (20.2%) were owned by Regal, 25,631,046 (19.6%) were owned by Cinemark and 19,663,664 (15.0%) were owned by AMC. The membership units held by the founding members are exchangeable into NCM, Inc. common stock on a one-for-one basis.

Recent Transactions

On May 5, 2014, NCM, Inc. entered into an Agreement and Plan of Merger (the “Merger Agreement”) to merge with Screenvision, LLC (“Screenvision”).  On November 3, 2014, the Department of Justice filed a lawsuit seeking to enjoin the merger.  On March 16, 2015, the Company announced the termination of the Merger Agreement and the lawsuit was dismissed.  After the Merger Agreement was terminated, NCM LLC reimbursed NCM, Inc. for certain expenses pursuant to an indemnification agreement among NCM LLC, NCM, Inc. and the founding members.  On March 17, 2015, NCM LLC paid Screenvision an approximate $26.8 million termination payment on behalf of NCM, Inc. This payment was $2 million lower than the reverse termination fee contemplated by the Merger Agreement.  During the six months ended July 2, 2015, NCM LLC also either paid directly or reimbursed NCM, Inc. for the legal and other merger-related costs of approximately $15.0 million ($7.5 million incurred by NCM, Inc. during the year ended January 1, 2015 and approximately $7.5 million incurred by NCM LLC during the six months ended July 2, 2015). The Company and the founding members each bore a pro rata portion of the merger termination fee and the related merger expenses based on their aggregate ownership percentages in NCM LLC.

Basis of Presentation

The Company has prepared the unaudited Condensed Consolidated Financial Statements and related notes of NCM, Inc. in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and footnote disclosures typically included in an annual report have been condensed or omitted for this quarterly report.  The balance sheet as of January 1, 2015 is derived from the audited financial statements of NCM, Inc.  Therefore, the unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s annual report on Form 10-K filed for the fiscal year ended January 1, 2015.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly in all material respects the financial position, results of operations and cash flows for all periods presented have been made.  The Company’s business is seasonal and for this and other reasons operating results for interim periods may not be indicative of the Company’s full year results or future performance. As a result of the various related party agreements discussed in Note 4— Related Party Transactions , the operating results as presented are not necessarily indicative of the results that might have occurred if all agreements were with non-related third parties.  The Company manages its business under one reportable segment: advertising.

 

 

 

 

8


NATIONAL CINEMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Estimates —The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financi al statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to the reserve for uncollectible accounts receivable, share-based compensation and income taxes. Actual results could d iffer from those estimates.

Significant Accounting Policies

The Company’s annual financial statements included in its Form 10-K filed for the fiscal year ended January 1, 2015 contain a complete discussion of the Company’s significant accounting policies. Following is additional information related to the Company’s accounting policies.

Concentration of Credit Risk and Significant Customers —Bad debts are provided for using the allowance for doubtful accounts method based on historical experience and management’s evaluation of outstanding receivables at the end of the period. Receivables are written off when management determines amounts are uncollectible. Trade accounts receivable are uncollateralized and represent a large number of geographically dispersed debtors. The collectability risk with respect to national and regional advertising is reduced by the fact that the majority of accounts receivable are with large, national advertising agencies that have strong reputations in the advertising industry and clients with stable financial positions. The Company has smaller contracts with thousands of local clients that are not individually significant.  As of July 2, 2015 and January 1, 2015, there were no advertising agency groups or individual customers through which the Company sources national advertising revenue representing more than 10% of the Company’s outstanding gross receivable balance.  During the three and six months ended July 2, 2015 and the three months ended June 26, 2014, there were no customers that accounted for more than 10% of revenue. During the six months ended June 26, 2014, revenue related to advertisements of NCM LLC’s founding members’ beverage supplier accounted for 11.3% of total revenue.

Share-Based Compensation —The Company has issued stock options and restricted stock to certain employees and restricted stock units to its independent directors. In 2015 and 2014, the Company did not grant stock options.  In 2015 and 2014, the restricted stock grants for Company officers vest upon the achievement of Company performance measures and/or service conditions, while non-officer grants vest only upon the achievement of service conditions.  Compensation expense of restricted stock that vests upon the achievement of Company performance measures is based on management’s financial projections and the probability of achieving the projections, which require considerable judgment. A cumulative adjustment is recorded to share-based compensation expense in periods that management changes its estimate of the number of shares of restricted stock expected to vest. Ultimately, the Company adjusts the expense recognized to reflect the actual vested shares following the resolution of the performance conditions. Dividends are accrued when declared on unvested restricted stock that is expected to vest and are only paid with respect to shares that actually vest.  During the three months ended July 2, 2015 and June 26, 2014 and the six months ended July 2, 2015 and June 26, 2014, 16,146, 3,672, 254,461 and 251,660 shares of restricted stock and restricted stock units vested, respectively.  During the three months ended July 2, 2015 and June 26, 2014 and the six months ended July 2, 2015 and June 26, 2014, 57,890, 23,559, 90,405 and 52,447 stock options were exercised at a weighted average exercise price of $12.15, $12.73, $12.18 and $13.74 per share, respectively.

In connection with the Company’s March 2014 special cash dividend of $0.50 per share and pursuant to the antidilution adjustment terms of the Company’s Equity Incentive Plan, the exercise price and the number of shares of common stock subject to options held by the Company’s employees were adjusted to prevent dilution and restore their economic value that existed immediately before the special dividend.  The antidilution adjustments made with respect to such options resulted in a decrease in the range of exercise prices from $5.35 - $24.68 per share to $5.18 - $23.90 per share and an increase in the aggregate number of shares issuable upon exercise of such options by 98,589 shares, or 3.3%, of previously outstanding options.  The number of shares authorized under the Equity Incentive Plan increased by an equivalent number of shares.  There were no accounting consequences for the changes made to reduce the exercise prices and increase the number of underlying options as a result of the special cash dividend because the aggregate fair values of the awards immediately before and after the modifications were the same.

Consolidation —NCM, Inc. consolidates the accounts of NCM LLC under the provisions of ASC 810, Consolidation (“ASC 810”).  Under ASC 810, a managing member of a limited liability company (“LLC”) is presumed to control the LLC, unless the non-managing members have the right to dissolve the entity or remove the managing member without cause, or if the non-managing members have substantive participating rights.  The non-managing members of NCM LLC do not have dissolution rights or removal rights.  NCM, Inc. has evaluated the provisions of the NCM LLC membership agreement and

 

9


NATIONAL CINEMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

has concluded that the various rights of the non-managing members are not substantive participation rights under ASC 810, as they do not limit NCM, Inc.’s ability to make decisions in the ordinary course of business.

The following table presents the changes in NCM, Inc.’s equity resulting from net income attributable to NCM, Inc. and transfers to or from noncontrolling interests (in millions):

 

 

 

Six Months Ended

 

 

 

July 2, 2015

 

 

June 26, 2014

 

Net income attributable to NCM, Inc.

 

$

1.1

 

 

$

0.5

 

NCM LLC equity issued for purchase of intangible asset

 

 

14.1

 

 

 

7.5

 

Income tax and other impacts of subsidiary ownership

   changes

 

 

(5.4

)

 

 

(2.4

)

Change from net income attributable to NCM, Inc. and