National CineMedia, Inc.
National CineMedia, LLC (Form: 10-Q, Received: 11/09/2016 06:09:47)

 

 

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 September 29, 2016

Commission file number:  333-176056

 

NATIONAL CINEMEDIA, LLC

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-2632505

(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       No  

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       No  

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

(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  

As of November 3, 2016, the registrant had 137,174,139 common membership units outstanding.  The common membership units are not publicly traded.

 

 

 


TABLE OF CONTENTS

 

 

 

Page

 

PART I

 

 

 

 

Item 1.

Financial Statements

1

 

Unaudited Condensed Balance Sheets

1

 

Unaudited Condensed Statements of Income

2

 

Unaudited Condensed Statements of Comprehensive Income

3

 

Unaudited Condensed Statements of Cash Flows

4

 

Notes to Unaudited Condensed Financial Statements

6

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

Item 4.

Controls and Procedures

32

 

 

 

 

PART II

 

 

 

 

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

32

 

 

 

Signatures

34

 

 

 


 

PART I

Item 1. Financial Statements

NATIONAL CINEMEDIA, LLC

CONDENSED BALANCE SHEETS

(In millions)

(UNAUDITED)

 

 

 

September 29,

2016

 

 

December 31,

2015

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1.4

 

 

$

3.0

 

Receivables, net of allowance of $6.2 and $5.6, respectively

 

 

130.9

 

 

 

148.9

 

Prepaid expenses

 

 

3.0

 

 

 

2.7

 

Prepaid administrative fees to managing member

 

 

0.8

 

 

 

0.7

 

Current portion of notes receivable - founding members

 

 

4.2

 

 

 

4.2

 

Other current assets

 

 

0.6

 

 

 

 

Total current assets

 

 

140.9

 

 

 

159.5

 

NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $64.5 and $64.1,

   respectively

 

 

28.1

 

 

 

25.1

 

Intangible assets, net of accumulated amortization of $112.0 and $91.9,

   respectively

 

 

567.7

 

 

 

566.7

 

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

 

 

12.5

 

 

 

12.5

 

Other investments

 

 

6.8

 

 

 

5.4

 

Debt issuance costs, net

 

 

2.0

 

 

 

2.3

 

Other assets

 

 

0.5

 

 

 

0.5

 

Total non-current assets

 

 

617.6

 

 

 

612.5

 

TOTAL ASSETS

 

$

758.5

 

 

$

772.0

 

LIABILITIES AND MEMBERS’ EQUITY/(DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Amounts due to founding members

 

$

27.9

 

 

$

35.5

 

Amounts due to managing member

 

 

12.9

 

 

 

22.9

 

Accrued expenses

 

 

19.1

 

 

 

18.9

 

Accrued payroll and related expenses

 

 

9.6

 

 

 

14.4

 

Accounts payable

 

 

10.8

 

 

 

11.2

 

Deferred revenue

 

 

15.4

 

 

 

10.2

 

Total current liabilities

 

 

95.7

 

 

 

113.1

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Long-term debt, net of debt issuance costs of $11.1 and $10.6, respectively

 

 

911.9

 

 

 

925.4

 

Total non-current liabilities

 

 

911.9

 

 

 

925.4

 

Total liabilities

 

 

1,007.6

 

 

 

1,038.5

 

COMMITMENTS AND CONTINGENCIES (NOTE 5)

 

 

 

 

 

 

 

 

MEMBERS’ EQUITY/DEFICIT

 

 

(249.1

)

 

 

(266.5

)

TOTAL LIABILITIES AND EQUITY/DEFICIT

 

$

758.5

 

 

$

772.0

 

 

See accompanying notes to Condensed Financial Statements.

 

 

 

 

1


 

NATIONAL CINEMEDIA, LLC

CONDENSED STATEMENTS OF INCOME

(In millions)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 29,

2016

 

 

October 1,

2015

 

 

September 29,

2016

 

 

October 1,

2015

 

REVENUE (including revenue from founding members

   of $7.6, $6.5, $22.1 and $23.2, respectively)

 

$

113.5

 

 

$

111.7

 

 

$

305.1

 

 

$

310.1

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising operating costs

 

 

7.5

 

 

 

7.8

 

 

 

20.8

 

 

 

21.9

 

Network costs

 

 

4.1

 

 

 

4.3

 

 

 

12.9

 

 

 

13.0

 

Theatre access fees—founding members

 

 

19.2

 

 

 

17.6

 

 

 

56.8

 

 

 

54.0

 

Selling and marketing costs

 

 

16.8

 

 

 

16.9

 

 

 

54.5

 

 

 

49.9

 

Merger termination fee and related merger costs

 

 

 

 

 

 

 

 

 

 

 

41.8

 

Administrative and other costs

 

 

5.6

 

 

 

5.4

 

 

 

17.1

 

 

 

15.6

 

Administrative fee—managing member

 

 

3.0

 

 

 

3.9

 

 

 

15.8

 

 

 

10.7

 

Depreciation and amortization

 

 

8.9

 

 

 

8.0

 

 

 

26.5

 

 

 

24.2

 

Total

 

 

65.1

 

 

 

63.9

 

 

 

204.4

 

 

 

231.1

 

OPERATING INCOME

 

 

48.4

 

 

 

47.8

 

 

 

100.7

 

 

 

79.0

 

NON-OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on borrowings

 

 

14.3

 

 

 

13.0

 

 

 

41.2

 

 

 

39.2

 

Interest income

 

 

(0.2

)

 

 

(0.3

)

 

 

(0.6

)

 

 

(0.8

)

Amortization of terminated derivatives

 

 

 

 

 

 

 

 

 

 

 

1.6

 

Loss on early retirement of debt

 

 

10.4

 

 

 

 

 

 

10.4

 

 

 

 

Other non-operating expense

 

 

 

 

 

0.1

 

 

 

 

 

 

0.2

 

Total

 

 

24.5

 

 

 

12.8

 

 

 

51.0

 

 

 

40.2

 

INCOME BEFORE INCOME TAXES

 

 

23.9

 

 

 

35.0

 

 

 

49.7

 

 

 

38.8

 

Income tax expense

 

 

 

 

 

0.2

 

 

 

0.1

 

 

 

0.3

 

NET INCOME

 

$

23.9

 

 

$

34.8

 

 

$

49.6

 

 

$

38.5

 

 

See accompanying notes to Condensed Financial Statements.

 

 

 

 

2


 

NATIONAL CINEMEDIA, LLC

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 29,

2016

 

 

October 1,

2015

 

 

September 29,

2016

 

 

October 1,

2015

 

NET INCOME, NET OF TAX OF $0.0, $0.2, $0.1 AND

   $0.3, RESPECTIVELY

 

$

23.9

 

 

$

34.8

 

 

$

49.6

 

 

$

38.5

 

OTHER COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of terminated derivatives

 

 

 

 

 

 

 

 

 

 

 

1.6

 

COMPREHENSIVE INCOME

 

$

23.9

 

 

$

34.8

 

 

$

49.6

 

 

$

40.1

 

 

See accompanying notes to Condensed Financial Statements.

 

 

 

 

3


 

NATIONAL CINEMEDIA, LLC

CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(UNAUDITED)

 

 

 

Nine Months Ended

 

 

 

September 29,

2016

 

 

October 1,

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

49.6

 

 

$

38.5

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

26.5

 

 

 

24.2

 

Non-cash share-based compensation

 

 

7.8

 

 

 

5.5

 

Impairment on investment

 

 

0.7

 

 

 

 

Amortization of terminated derivatives

 

 

 

 

 

1.6

 

Amortization of debt issuance costs

 

 

2.0

 

 

 

1.9

 

Redemption premium paid and write-off of debt issuance costs related to

   redemption of Senior Notes due 2021

 

 

10.4

 

 

 

 

Other

 

 

 

 

 

0.4

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

16.0

 

 

 

(9.2

)

Accounts payable and accrued expenses

 

 

(5.0

)

 

 

3.2

 

Amounts due to founding members and managing member

 

 

(5.0

)

 

 

(0.3

)

Deferred revenue

 

 

5.1

 

 

 

0.2

 

Other, net

 

 

(1.1

)

 

 

0.1

 

Net cash provided by operating activities

 

 

107.0

 

 

 

66.1

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(9.0

)

 

 

(8.0

)

Purchases of intangible assets from network affiliates

 

 

(1.6

)

 

 

(2.0

)

Net cash used in investing activities

 

 

(10.6

)

 

 

(10.0

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from borrowings under the revolving credit facility

 

 

105.0

 

 

 

166.0

 

Repayments of borrowings under the revolving credit facility

 

 

(168.0

)

 

 

(122.0

)

Proceeds from issuance of Senior Notes due 2026

 

 

250.0

 

 

 

 

Redemption of Senior Notes due 2021

 

 

(207.9

)

 

 

 

Payment of debt issuance costs

 

 

(4.7

)

 

 

 

Founding member integration payments

 

 

1.7

 

 

 

1.9

 

Distributions to founding members and managing member

 

 

(74.5

)

 

 

(106.4

)

Unit settlement for share-based compensation

 

 

0.4

 

 

 

1.2

 

Net cash used in financing activities

 

 

(98.0

)

 

 

(59.3

)

CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(1.6

)

 

 

(3.2

)

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

 

 

Beginning of period

 

 

3.0

 

 

 

10.2

 

End of period

 

$

1.4

 

 

$

7.0

 

 

See accompanying notes to Condensed Financial Statements.

 

 

 

 

4


 

NATIONAL CINEMEDIA, LLC

CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)

(In millions)

(UNAUDITED)

 

 

Nine Months Ended

 

 

September 29,

2016

 

 

October 1,

2015

 

Supplemental disclosure of non-cash financing and investing activity:

 

 

 

 

 

 

 

Purchase of an intangible asset with NCM LLC equity

$

21.1

 

 

$

31.4

 

Accrued distributions to founding members and managing member

$

44.9

 

 

$

45.1

 

Write-off of property and equipment included in accrued expenses

$

 

 

$

(0.3

)

Increase in cost and equity method investments

$

2.0

 

 

$

1.7

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

$

38.0

 

 

$

35.2

 

Cash paid for income taxes, net of refunds

$

0.3

 

 

$

0.1

 

 

See accompanying notes to Condensed Financial Statements.

 

 

 

 

5


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. THE COMPANY

Description of Business

National CineMedia, LLC (“NCM LLC”, “the Company” or “we”) commenced operations on April 1, 2005 and is owned by National CineMedia, Inc. (“NCM, Inc.”, “manager” or “managing member”), 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”).  AMC, Regal and Cinemark and their affiliates are referred to in this document as “founding members”.  NCM LLC 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 (approximately 20 years remaining as of September 29, 2016) 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 September 29, 2016, NCM LLC had 137,174,139 common membership units outstanding, of which 59,853,806 (43.6%) were owned by NCM, Inc., 27,072,701 (19.8%) were owned by Regal, 26,384,644 (19.2%) were owned by Cinemark and 23,862,988 (17.4%) 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.

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, NCM, Inc. 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, the Company paid Screenvision an approximate $26.8 million termination payment on behalf of NCM, Inc. During the nine months ended October 1, 2015, the Company 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 nine months ended October 1, 2015). NCM, Inc. 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 when the expenses were incurred.

Basis of Presentation

The Company has prepared the unaudited Condensed Financial Statements and related notes of NCM LLC in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and footnote disclosures typically included in an annual report have been condensed or omitted for this quarterly report.  The balance sheet as of December 31, 2015 is derived from the audited financial statements of NCM LLC. Therefore, the unaudited Condensed Financial Statements should be read in conjunction with the NCM LLC audited Financial Statements and notes thereto included in the Company’s annual report on Form 10-K filed for the fiscal year ended December 31, 2015.

In the opinion of management, all adjustments necessary to present fairly in all material respects the financial position, results of operations and cash flows for all periods presented have been made.  The Company’s business is seasonal and for this and other reasons operating results for interim periods may not be indicative of the Company’s full year results or future performance. As a result of the various related party agreements discussed in Note 3— Related Party Transactions , the operating results as presented are not necessarily indicative of the results that might have occurred if all agreements were with non-related third parties.  The Company manages its business under one reportable segment of advertising.

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

 

6


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Significant Accounting Policies

The Company’s annual financial statements included in its Form 10-K filed for the fiscal year ended December 31, 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 transacting with founding members or large, national advertising agencies who have strong reputations in the advertising industry and clients with stable financial positions.  The Company has smaller contracts with thousands of local clients that are not individually significant.  As of September 29, 2016 and December 31, 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 nine months ended September 29, 2016 and October 1, 2015, there were no customers that accounted for more than 10% of revenue.  

Share-Based Compensation —The management services agreement between NCM LLC and NCM, Inc. provides that NCM LLC may participate in the NCM, Inc. Equity Incentive Plan.  NCM, Inc. has issued stock options and restricted stock to certain employees and restricted stock units to its independent directors under the NCM, Inc. Equity Incentive Plan.  The Company has not granted stock options since 2012.  In 2015 and 2016, the restricted stock grants for Company officers vest upon the achievement of NCM, Inc. 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 NCM, Inc. 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.  The recognized expense, including equity based compensation costs of NCM, Inc. employees, is included in the operating results of NCM LLC.  Upon the exercise of options or the vesting of restricted stock, NCM, Inc. has the right to acquire from NCM LLC a number of common units equal to the number of NCM, Inc. shares being issued.  In consideration for such units, NCM, Inc. contributes to NCM LLC the consideration received for the exercise of options or vesting of shares of restricted stock.  During the three months ended September 29, 2016 and October 1, 2015 and nine months ended September 29, 2016 and October 1, 2015, NCM, Inc. acquired 17,407, 6,829, 614,652 and 267,941 units, respectively, due to the vesting of restricted stock and restricted stock units and exercise of stock options and contributed $0.1 million, $0.1 million, $0.4 million and $1.2 million to NCM LLC for the three months ended September 29, 2016 and October 1, 2015 and the nine months ended September 29, 2016 and October 1, 2015, respectively.

Recently Adopted Accounting Pronouncements

During the first quarter of 2016, the Company adopted Accounting Standards Update 2015-01,  Income Statement Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”) on a prospective basis, which eliminates the concept of extraordinary items from GAAP.  Under ASU 2015-01, reporting entities will no longer be required to assess whether an underlying event or transaction is extraordinary, however, presentation and disclosure guidance for items that are unusual in nature or occur infrequently are retained, and are expanded to include items that are both unusual in nature and infrequently occurring. The adoption of ASU 2015-01 did not have a material impact on the unaudited Condensed Financial Statements or notes thereto.

During the first quarter of 2016, the Company adopted Accounting Standards Update 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”) on a prospective basis.  ASU 2015-02 amends current consolidation guidance by modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminating the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with variable interest entities. The adoption of ASU 2015-02 did not have a material impact on the unaudited Condensed Financial Statements or notes thereto.

 

7


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

During the first quarter o f 2016, the Company adopted Accounting Standards Update 2015-03,  Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) on a retrospective basis, which provides guidance for simplifying the presentation of debt issuance costs.  ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums.  The Company also adopted Ac counting Standards Update 2015-15,  Interest — Imputation of Interest (“ASU 2015-15”) on a retrospective basis,   which states the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company reclassified net deferred financing costs related to the Compan y’s Term Loans, Senior Secured Notes and Senior Unsecured Notes in the Condensed Balance Sheets as a direct deduction from the carrying amount of those borrowings, while net deferred financing costs related to the Company’s Revolving Credit Facility remain ed an asset in the unaudited Condensed Balance Sheets. Upon adoption of ASU 2015-03 and ASU 2015-15, net deferred financing costs of $10.6 million in the December 31, 2015 unaudited Condensed Balance Sheet were reclassified from an asset to a reduction of the carrying value of long-term debt.

During the first quarter of 2016, the Company adopted Accounting Standards Update 2015-05, Intangibles-Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”) on a prospective basis , which provides guidance on accounting for fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The adoption of ASU 2015-05 did not have a material impact on the unaudited Condensed Financial Statements or notes thereto. 

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which was issued in August 2015, revised the effective date for this standard to annual and interim periods beginning on or after December 15, 2017, with early adoption permitted, but not earlier than the original effective date of annual and interim periods beginning after December 15, 2016, for public entities. Accounting Standards Update 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Update 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which was issued in May 2016, rescinds several SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for shipping and handling fees and freight services. Accounting Standards Update 2016-12, Revenue from Contract with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which was issued in May 2016, provides guidance to reduce the risk of diversity in practice for certain aspects of ASU 2014-09, including collectability, noncash consideration, presentation of sales tax and transition. ASU 2014-09 allows for either a full retrospective or a modified retrospective transition method. The Company is currently evaluating the effect that adopting this guidance will have on the unaudited Condensed Financial Statements or notes thereto, as well as, which transition method it intends to use. 

In January 2016, the FASB issued Accounting Standards Update 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which revises the guidance in ASC 825-10, Recognition and Measurement of Financial Assets and Financial Liabilities , and provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The guidance is effective for reporting periods (interim and annual) beginning after December 15, 2017, for public companies and should be adopted on a prospective basis. The Company is currently assessing the impact of ASU 2016-01 on the unaudited Condensed Financial Statements or notes thereto.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases ( Topic 842 ) (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on

 

8


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginnin g of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently assessing the impact of ASU 2016-02 on the unaudited Condensed Financial Statements or notes thereto.   

In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including forfeitures. ASU 2016-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the effect that adopting this guidance will have on the unaudited Condensed Financial Statements or notes thereto.

In March 2016, the FASB issued Accounting Standards Update 2016-07, Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years with early adoption permitted and is to be adopted on a prospective basis. The adoption of ASU 2016-07 is not expected to have a material effect on the unaudited Condensed Financial Statements or notes thereto.

In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements (“ ASU 2016-13”), which requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted and is to be adopted on a modified retrospective basis. The Company is currently evaluating the effect that adopting this guidance will have on the unaudited Condensed Financial Statements or notes thereto.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the effect that adopting this guidance will have on the unaudited Condensed Financial Statements or notes thereto.

The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its unaudited Condensed Financial Statements or notes thereto.

 

2. INTANGIBLE ASSETS

In accordance with NCM LLC’s Common Unit Adjustment Agreement with our founding members, on an annual basis the Company determines the amount of common membership units to be issued to or returned by the founding members based on theatre additions or dispositions during the previous year.  During the first quarter of 2016 and 2015, the Company issued 1,416,515 and 2,160,915 common membership units to our founding members, respectively, for the rights to exclusive access to the theatre screens and attendees added, net of dispositions by the founding members to NCM LLC’s network during the previous year.  The Company recorded a net intangible asset of $21.1 million and $31.4 million during the three months ended March 31, 2016 and April 2, 2015, respectively, as a result of the Common Unit Adjustments.

In addition, NCM LLC’s Common Unit Adjustment Agreement requires that a Common Unit Adjustment occur for a specific founding member if its acquisition or disposition of theatres, in a single transaction or cumulatively since the most recent Common Unit Adjustment, results in an attendance increase or decrease in excess of two percent of the annual total attendance at the prior adjustment date.  If an existing on-screen advertising agreement with an alternative provider is in place

 

9


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

with respect to any acquired theatres, the founding members may elect to receive common membership units related to those encumbered t heatres in connection with the Common Unit Adjustment.  If the founding members make this election, then they are required to make payments on a quarterly basis in arrears in accordance with certain run-out provisions pursuant to the ESAs (“integration pay ments”).  During the three months ended September 29, 2016 and October 1, 2015 and the nine months ended September 29, 2016 and October 1, 2015, the Company recorded a reduction to net intangible assets of $ 0.7 million, $0.7 million, $1.5 million and $1.8 million, respectively, related to integration payments due from AMC and Cinemark related to their acquisitions of theatres from Rave Cinemas that are encumbered by an existing on-screen advertising agreement with an alternative provider.  During the three months ended September 29, 2016 and October 1, 2015 and the nine months ended September 29, 2016 and October 1, 2015, AMC and Cinemark paid a total of $0.7 million, $0.8 million, $1.7 million and $1.9 million, respectively, in integration payments.

The Company’s intangible assets with its founding members are recorded at the fair market value of NCM, Inc.’s publicly traded stock as of the date on which the common membership units were issued.  The NCM LLC common membership units are fully convertible into NCM, Inc.’s common stock. In addition, the Company records intangible assets for up-front fees paid to network affiliates upon commencement of a network affiliate agreement. The Company’s intangible assets have a finite useful life and the Company amortizes the assets over the remaining useful life corresponding with the ESAs or the term of the network affiliate agreement.  If common membership units are issued to a founding member for newly acquired theatres that are subject to an existing on-screen advertising agreement with an alternative provider, the amortization of the intangible asset commences after the existing agreement expires and NCM LLC can utilize the theatres for all of its services.  Integration payments are calculated based upon the advertising cash flow that the Company would have generated if it had exclusive access to sell advertising in the theatres with pre-existing advertising agreements.

 

 

3. RELATED PARTY TRANSACTIONS

Founding Member and Managing Member Transactions In connection with NCM, Inc.’s initial public offering (“IPO”), the Company entered into several agreements to define and regulate the relationships among NCM LLC, NCM, Inc. and the founding members. They include the following:

 

ESAs . Under the ESAs, NCM LLC is the exclusive provider within the United States of advertising services in the founding members’ theatres (subject to pre-existing contractual obligations and other limited exceptions for the benefit of the founding members). The advertising services include the use of the digital content network (“DCN”) equipment required to deliver the on-screen advertising and other content included in the FirstLook pre-show, use of the lobby entertainment network (“LEN”) and rights to sell and display certain lobby promotions. Further, 30 to 60 seconds of advertising included in the FirstLook pre-show is sold to the founding members to satisfy the founding members’ on-screen advertising commitments under their beverage concessionaire agreements. In consideration for access to the founding members’ theatres, theatre patrons, the network equipment required to display on-screen and LEN video advertising and the use of theatres for lobby promotions, the founding members receive a monthly theatre access fee.

 

Common Unit Adjustment Agreement. The common unit adjustment agreement provides a mechanism for increasing or decreasing the membership units held by the founding members based on the acquisition or construction of new theatres or sale or closure of theatres that are operated by each founding member and included in the Company’s network.

 

Software License Agreement. At the date of NCM, Inc.’s IPO, NCM LLC was granted a perpetual, royalty-free license from the founding members to use certain proprietary software that existed at the time for the delivery of digital advertising and other content through the DCN to screens in the U.S.  NCM LLC has made improvements to this software since NCM, Inc.’s IPO date and the Company owns those improvements, except for improvements that were developed jointly by NCM LLC and the founding members, if any.

 

10


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following tables provide summaries of the transactions between the Company and the founding members (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Included in the Condensed Statements of Income:

 

September 29,

2016

 

 

October 1,

2015

 

 

September 29,

2016

 

 

October 1,

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beverage concessionaire revenue (included in

   advertising revenue) (1)

 

$

7.5

 

 

$

6.4

 

 

$

21.8

 

 

$

23.0

 

Advertising inventory revenue (included in

   advertising revenue) (2)

 

 

0.1

 

 

 

0.1

 

 

 

0.3

 

 

 

0.2

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Theatre access fee (3)

 

 

19.2

 

 

 

17.6

 

 

 

56.8

 

 

 

54.0

 

Purchase of movie tickets and concession

   products and rental of theatre space (included

   in selling and marketing costs) (4)

 

 

0.4

 

 

 

0.4

 

 

 

1.2

 

 

 

0.9

 

Purchase of movie tickets and concession

   products and rental of theatre space (included

   in other administrative costs)

 

 

 

 

 

 

 

 

0.1

 

 

 

0.1

 

Administrative fee - managing member (5)

 

 

3.0

 

 

 

3.9

 

 

 

15.8

 

 

 

10.7

 

Non-operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income from notes receivable (included

   in interest income) (6)

 

 

0.2

 

 

 

0.2

 

 

 

0.6

 

 

 

0.7

 

 

 

(1)

For the nine months ended September 29, 2016 and the three months ended October 1, 2015, two of the founding members purchased 60 seconds of on-screen advertising time and one founding member purchased 30 seconds (with all three founding members having a right to purchase up to 90 seconds) from NCM LLC to satisfy their obligations under their beverage concessionaire agreements at a 30 second equivalent cost per thousand (“CPM”) rate specified by the ESA.  For the first six months of 2015, all of the founding members purchased 60 seconds of on-screen advertising time.

 

(2)

The value of such purchases is calculated by reference to NCM LLC’s advertising rate card.

 

(3)

Comprised of payments per theatre attendee and payments per digital screen with respect to the founding member theatres included in the Company’s network, including payments for access to higher quality digital cinema equipment.

 

(4)

Used primarily for marketing to NCM LLC’s advertising clients.

 

(5)

Pursuant to the Management Services Agreement between NCM, Inc. and NCM LLC, NCM, Inc. provides certain specific management services to NCM LLC, including the services of the Chief Executive Officer, President, Chief Financial Officer, Executive Vice President and Chief Operations Officer and Chief Technology Officer and Executive Vice President and General Counsel. In exchange for these services, NCM LLC reimburses NCM, Inc. for compensation paid to the officers (including share based compensation) and other expenses of the officers and for certain out-of-pocket costs.

 

(6)

On December 26, 2013, NCM LLC sold its Fathom Events business to a newly formed limited liability company (AC JV, LLC) owned 32% by each of the founding members and 4% by NCM LLC.  In consideration for the sale, NCM LLC received a total of $25.0 million in promissory notes from its founding members (one-third or approximately $8.3 million from each founding member).  The notes bear interest at a fixed rate of 5.0% per annum, compounded annually.  Interest and principal payments are due annually in six equal installments commencing on the first anniversary of the closing.

 

 

11


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

As of

 

Included in the Condensed Balance Sheets:

 

September 29,

2016

 

 

December 31,

2015

 

Purchase of movie tickets and concession products

   (included in prepaid expenses)

 

 

0.3

 

 

 

 

Current portion of notes receivable - founding members   (1)

 

 

4.2

 

 

 

4.2

 

Long-term portion of notes receivable - founding members   (1)

 

 

12.5

 

 

 

12.5

 

Interest receivable on notes receivable (included in

   other current assets) (1)

 

 

0.6

 

 

 

 

Prepaid administrative fees to managing member (2)

 

 

0.8

 

 

 

0.7

 

Common unit adjustments and integration payments, net of

   amortization (included in intangible assets) (3)

 

 

537.1

 

 

 

535.9

 

 

 

(1)

Refer to the discussion of notes receivable from the founding members above.

 

(2)

The payments to NCM, Inc. for estimated management services related to employment are made one month in advance.  NCM LLC also provides administrative and support services to NCM, Inc. such as office facilities, equipment, supplies, payroll, accounting and financial reporting at no charge. Based on the limited activities of NCM, Inc. as a standalone entity, the Company does not believe such unreimbursed costs are significant.

 

(3)

Refer to Note 2— Intangible Assets for further information on common unit adjustments and integration payments.

On March 16, 2015, NCM, Inc. announced the termination of the Merger Agreement with Screenvision.  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, the Company paid Screenvision an approximate $26.8 million termination payment on behalf of NCM, Inc.  During the nine months ended October 1, 2015, the Company 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 nine months ended October 1, 2015). NCM, Inc. and the founding members each bore a pro rata portion of the termination fee and the related merger expenses based on their aggregate ownership percentages in NCM LLC when the expenses were incurred.

Pursuant to the terms of the NCM LLC Operating Agreement in place since the completion of NCM, Inc.’s IPO, the Company is required to make mandatory distributions on a proportionate basis to its members of available cash, as defined in the NCM LLC Operating Agreement, on a quarterly basis in arrears.  Mandatory distributions of available cash for the three and nine months ended September 29, 2016 and October 1, 2015 were as follows (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 29,

2016

 

 

October 1,

2015

 

 

September 29,

2016

 

 

October 1,

2015

 

AMC

 

$

7.8

 

 

$

6.8

 

 

$

11.3

 

 

$

13.7

 

Cinemark

 

 

8.6

 

 

 

8.8

 

 

 

11.8

 

 

 

17.8

 

Regal

 

 

8.9

 

 

 

9.1

 

 

 

12.1

 

 

 

18.3

 

Total founding members

 

 

25.3

 

 

 

24.7

 

 

 

35.2

 

 

 

49.8

 

NCM, Inc.

 

 

19.6

 

 

 

20.4

 

 

 

26.6

 

 

 

41.1

 

Total

 

$

44.9

 

 

$

45.1

 

 

$

61.8

 

 

$

90.9

 

 

Due to the merger termination fee and related merger expenses, the mandatory distributions of available cash by the Company to its founding members and NCM, Inc. for the three months ended April 2, 2015 was calculated as negative $25.5 million ($14.0 million for the founding members and $11.5 million for NCM, Inc.).  Therefore, there was no payment made in the second quarter of 2015.  Under the terms of the NCM LLC Operating Agreement, this negative amount was netted against the available cash distributions for the second quarter of 2016. The mandatory distributions of available cash by the Company to its founding members for the three months ended September 29, 2016 of $25.3 million is included in amounts due to founding members on the unaudited Condensed Balance Sheets as of September 29, 2016 and will be made in the fourth quarter of 2016.  The mandatory distributions of available cash by NCM LLC to its managing member for the three months ended September 29, 2016 of $19.6 million is included in amounts due from managing member on the unaudited Condensed Balance Sheets as of September 29, 2016 and will be made in the fourth quarter of 2016.   

 

12


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

Amounts due to founding members as of September 29, 2016 were comprised of the following (in millions):

 

 

 

AMC

 

 

Cinemark

 

 

Regal

 

 

Total

 

Theatre access fees, net of beverage revenues

 

$

1.2

 

 

$

0.8

 

 

$

1.3

 

 

$

3.3

 

Cost and other reimbursement

 

 

(0.4

)

 

 

(0.2

)

 

 

(0.1

)

 

 

(0.7

)

Distributions payable to founding members

 

 

7.8

 

 

 

8.6

 

 

 

8.9

 

 

 

25.3

 

Total amounts due to founding members

 

$

8.6

 

 

$

9.2

 

 

$

10.1

 

 

$

27.9

 

 

Amounts due to founding members as of December 31, 2015 were comprised of the following (in millions):

 

 

 

AMC

 

 

Cinemark

 

 

Regal

 

 

Total

 

Theatre access fees, net of beverage revenues

 

$

1.8

 

 

$

1.0

 

 

$

1.5

 

 

$

4.3

 

Cost and other reimbursement

 

 

(0.9

)

 

 

(0.3

)

 

 

 

 

 

(1.2

)

Distributions payable to founding members

 

 

10.2

 

 

 

10.9

 

 

 

11.3

 

 

 

32.4

 

Total amounts due to founding members

 

$

11.1

 

 

$

11.6

 

 

$

12.8

 

 

$

35.5

 

 

Amounts due to/from managing member were comprised of the following (in millions):

 

 

 

As of

 

 

 

September 29,

2016

 

 

December 31,

2015

 

Distributions payable to managing member

 

$

19.6

 

 

$

25.2

 

Cost and other reimbursement

 

 

(6.7

)

 

 

(2.3

)

Total amounts due to managing member

 

$

12.9

 

 

$

22.9

 

 

AC JV, LLC Transactions —In December 2013, NCM LLC sold its Fathom Events business to a newly formed limited liability company, AC JV, LLC, owned 32% by each of the founding members and 4% by NCM LLC.  The Company accounts for its investment in AC JV, LLC under the equity method of accounting in accordance with ASC 323-30, Investments—Equity Method and Joint Ventures (“ASC 323-30”) because AC JV, LLC is a limited liability company with the characteristics of a limited partnership and ASC 323-30 requires the use of equity method accounting unless the Company’s interest is so minor that it would have virtually no influence over partnership operating and financial policies.  Although NCM LLC does not have a representative on AC JV, LLC’s Board of Directors or any voting, consent or blocking rights with respect to the governance or operations of AC JV, LLC, the Company concluded that its interest was more than minor under the accounting guidance.  The Company’s investment in AC JV, LLC was $1.2 million and $1.2 million as of September 29, 2016 and December 31, 2015, respectively.      

Related Party Affiliates —NCM LLC enters into network affiliate agreements with network affiliates for NCM LLC to provide in-theatre advertising at theatre locations that are owned by companies that are affiliates of certain of the founding members or directors of NCM, Inc. Related party affiliate agreements are entered into at terms that are similar to those of the Company’s other network affiliates.  

The Company has an agreement with LA Live, an affiliate of The Anschutz Corporation.  The Anschutz Corporation is a wholly-owned subsidiary of the Anschutz Company, which is the controlling stockholder of Regal.  During the three months ended September 29, 2016 and October 1, 2015 and the nine months ended September 29, 2016 and October 1, 2015, there was approximately $0.1 million, $0.1 million, $0.2 million and $0.2 million, respectively, included in advertising operating costs related to LA Live, and there was approximately $0.1 million and $0.1 million of accounts payable with this company as of September 29, 2016 and December 31, 2015, respectively.

Other Transactions —The Company had an agreement with an interactive media company to sell some of its online inventory.  One of NCM, Inc.’s directors is also a director of this media company.  There was approximately $0.0 million and $0.3 million of accounts receivable due from this company as of September 29, 2016 and December 31, 2015, respectively.

NCM LLC has an agreement with AEG Live, an affiliate of The Anschutz Corporation, for AEG Live to showcase musical artists in NCM LLC’s FirstLook pre-show.  During the three months ended September 29, 2016 and October 1, 2015 and the nine months ended September 29, 2016 and October 1, 2015, NCM LLC recorded approximately $0.5 million, $0.3

 

13


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

million, $ 1.3 million and $1.2 million, respectively, in revenue from AEG Live. As of September 29, 2016 and December 31, 2015, had approximately $0.5 million and $0.4 million, respectively, of accounts receivable from AEG Live.

 

4. BORROWINGS

The following table summarizes the Company’s total outstanding debt as of September 29, 2016 and December 31, 2015 and the significant terms of its borrowing arrangements (in millions):

 

 

 

Outstanding   Balance   as   of

 

 

 

 

 

 

 

Borrowings

 

September 29,

2016

 

 

December 31,

2015

 

 

Maturity

Date

 

Interest

Rate

 

Revolving credit facility

 

$

3.0

 

 

$

66.0

 

 

November   26,   2019

 

(1)

 

Term loans

 

 

270.0

 

 

 

270.0

 

 

November   26,   2019

 

(1)

 

Senior unsecured notes due 2021

 

 

 

 

 

200.0

 

 

July   15,   2021

 

 

7.875%

 

Senior secured notes due 2022

 

 

400.0

 

 

 

400.0

 

 

April   15,   2022

 

 

6.000%

 

Senior unsecured notes due 2026

 

 

250.0

 

 

 

 

 

August 15, 2026

 

 

5.750%

 

Total borrowings

 

$

923.0

 

 

$

936.0

 

 

 

 

 

 

 

Less: debt issuance costs related to term

   loans and senior notes

 

 

(11.1

)

 

 

(10.6

)

 

 

 

 

 

 

Carrying value of long-term debt

 

$

911.9

 

 

$

925.4

 

 

 

 

 

 

 

 

 

(1)

The interest rates on the revolving credit facility and term loans are described below.

Senior Secured Credit Facility —As of September 29, 2016, the Company’s senior secured credit facility consisted of a $175.0 million revolving credit facility and a $270.0 million term loan. On May 26, 2016, the Company entered into an incremental amendment of its senior secured credit facility whereby the revolving credit facility was increased by $40.0 million from $135.0 million to $175.0 million.

Revolving Credit Facility— The revolving credit facility portion of the Company’s total borrowings 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 senior secured credit facility, and a portion is available for letters of credit.

As of September 29, 2016, the Company’s total availability under the $175.0 million revolving credit facility was $172.0 million.  The unused line fee is 0.50% per annum.  Borrowings under the revolving credit facility bear interest at the Company’s option of either the LIBOR index plus an applicable margin or the base rate (Prime Rate or the Federal Funds Effective Rate, as defined in the senior secured credit facility) plus an applicable margin. The applicable margin for the revolving credit facility is determined quarterly and is subject to adjustment based upon a consolidated net senior secured leverage ratio for the Company (the ratio of secured funded debt less unrestricted cash and cash equivalents, over a non-GAAP measure defined in the senior secured credit facility).  The weighted-average interest rate on the outstanding balance on the revolving credit facility as of September 29, 2016 was 3.79%.

Term Loans —The interest rate on the term loans is a rate chosen at the Company’s option of either the LIBOR index plus 2.75% or the base rate (Prime Rate or the Federal Funds Effective Rate, as defined in the senior secured credit facility) plus 1.75%.  The weighted-average interest rate on the term loans as of September 29, 2016 was 3.28%.  Interest on the term loans is currently paid monthly.

The senior secured credit facility contains a number of covenants and financial ratio requirements, with which the Company was in compliance as of September 29, 2016, including maintaining a consolidated net senior secured leverage ratio of equal to or less than 6.5 times on a quarterly basis.  In addition, there are no borrower distribution restrictions as long as the Company’s consolidated net senior secured leverage ratio is below 6.5 times and the Company is in compliance with its debt covenants.  As of September 29, 2016, the Company’s consolidated net senior secured leverage ratio was 3.1 times (versus the covenant of 6.5 times).

Senior Unsecured Notes due 2021 — On September 19, 2016, the Company redeemed its $200.0 million 7.875% Senior Unsecured Notes (“Notes due 2021”) at a redemption price of 103.938% of the principal amount plus accrued and unpaid interest. As a result of the redemption, the Company wrote-off approximately $2.5 million in unamortized debt

 

14


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

issuance costs and paid a redemption premium of approximately $7.9 million, which are reflected in the loss on ea rly retirement of debt on the Condensed Consolidated Statements of Income during the three and nine months ended September 29, 2016.

Senior Secured Notes due 2022 —On July 27, 2012, the Company completed a private placement of $400.0 million in aggregate principal amount of 6.000% Senior Secured Notes (the “Notes due 2022”) for which the registered exchange offering was completed on November 26, 2012.  The Notes due 2022 pay interest semi-annually in arrears on April 15 and October 15 of each year, which commenced October 15, 2012.  The Notes due 2022 are senior secured obligations of the Company, rank the same as the Company’s senior secured credit facility, subject to certain exceptions, and share in the same collateral that secures the Company’s obligations under the senior secured credit facility.

The Company may redeem all or any portion of the Notes due 2022 prior to April 15, 2017, at once or over time, at 100% of the principal amount plus the applicable make-whole premium, plus accrued and unpaid interest, if any, to the redemption date. The Company may redeem all or any portion of the Notes due 2022, at once or over time, on or after April 15, 2017 at specified redemption prices, plus accrued and unpaid interest, if any, to the redemption date. In addition, at any time prior to April 15, 2015, the Company may on any one or more occasions redeem up to 35% of the original aggregate principal amount of Notes due 2022 from the net proceeds of certain equity offerings at a redemption price equal to 106.00% of the principal amount of the Notes due 2022 redeemed, plus accrued and unpaid interest, if any, to the redemption date.  Upon the occurrence of a Change of Control (as defined in the Indenture), the Company will be required to make an offer to each holder of Notes due 2022 to repurchase all of such holder’s Notes due 2022 for a cash payment equal to 101.00% of the aggregate principal amount of the Notes due 2022 repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.

The indenture contains covenants that, among other things, restrict the Company’s ability and the ability of its restricted subsidiaries, if any, to: (1) incur additional debt; (2) make distributions or make certain other restricted payments; (3) make investments; (4) incur liens; (5) sell assets or merge with or into other companies; and (6) enter into transactions with affiliates. All of these restrictive covenants are subject to a number of important exceptions and qualifications. In particular, the Company has the ability to distribute all of its quarterly available cash as a restricted payment or as an investment, if it meets a minimum net senior secured leverage ratio.  The Company was in compliance with these non-maintenance covenants as of September 29, 2016.

Senior Unsecured Notes due 2026 —On August 19, 2016, the Company completed a private placement of $250.0 million in aggregate principal amount of 5.750% Senior Unsecured Notes (the “Notes due 2026”).  The Notes due 2026 pay interest semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2017.  The Notes due 2026 were issued at 100% of the face amount thereof and are the senior unsecured obligations of the Company and will be effectively subordinated to all existing and future secured debt, including the Notes due 2022, its senior secured credit facility and any future asset backed loan facility.  The Notes due 2026 will rank equally in right of payment with all of the Company’s existing and future senior indebtedness, including the Notes due 2022, the Company’s existing senior secured credit facility, any future asset backed loan facility, in each case, without giving effect to collateral arrangements.  The Notes due 2026 will be effectively subordinated to all liabilities of any subsidiaries that the Company may form or acquire in the future, unless those subsidiaries become guarantors of the Notes due 2026.  The Company does not currently have any subsidiaries, and the Notes due 2026 will not be guaranteed by any subsidiaries that the Company may form or acquire in the future except in very limited circumstances.

The Company may redeem all or any portion of the Notes due 2026 prior to August 15, 2021, at once or over time, at 100% of the principal amount plus the applicable make-whole premium, plus accrued and unpaid interest, if any, to the redemption date. The Company may redeem all or any portion of the Notes due 2026, at once or over time, on or after August 15, 2021 at specified redemption prices, plus accrued and unpaid interest, if any, to the redemption date. In addition, at any time prior to August 15, 2019, the Company may on any one or more occasions redeem up to 35% of the original aggregate principal amount of Notes due 2026 from the net proceeds of certain equity offerings at a redemption price equal to 105.750% of the principal amount of the Notes due 2026 redeemed, plus accrued and unpaid interest, if any, to the redemption date.  Upon the occurrence of a Change of Control (as defined in the indenture), the Company will be required to make an offer to each holder of Notes due 2026 to repurchase all of such holder’s Notes due 2026 for a cash payment equal to 101.00% of the aggregate principal amount of the Notes due 2026 repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.

 

15


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

The indenture contains covenants that, among other things, restrict the Company’s ability and the ability of its restricted subsidiaries, if any, to: (1) incur additional debt; (2) make distributions or make cert ain other restricted payments; (3) make investments; (4) incur liens; (5) sell assets or merge with or into other companies; and (6) enter into transactions with affiliates. All of these restrictive covenants are subject to a number of important exceptions and qualifications. In particular, the Company has the ability to distribute all of its quarterly available cash as a restricted payment or as an investment, if it meets a minimum net senior secured leverage ratio. The Company was in compliance with these non-maintenance covenants as of September 29, 2016.

On October 3, 2016, the Company filed a registration statement with the Securities and Exchange Commission (the “Commission”), pursuant to which the Company offered to exchange the Notes due 2026 for substantially identical notes registered under the Securities Act of 1933, as amended, that do not contain terms restricting the transfer thereof or providing for registration rights.  The registration statement was declared effective by the Commission on October 11, 2016.  After the exchange offer expires on November 8, 2016, all of the original Notes due 2026 will be exchanged.

 

5. COMMITMENTS AND CONTINGENCIES

Legal Actions — The Company is subject to claims and legal actions in the ordinary course of business.  The Company believes such claims will not have a material effect individually and in the aggregate on its financial position, results of operations or cash flows.

Minimum Revenue Guarantees ―As part of the network affiliate agreements entered into in the ordinary course of business under which the Company sells advertising for display in various network affiliate theatre chains, the Company has agreed to certain minimum revenue guarantees on a per attendee basis.  If a network affiliate achieves the attendance set forth in their respective agreement, the Company has guaranteed minimum revenue for the network affiliate per attendee if such amount paid under the revenue share arrangement is less than its guaranteed amount.  The amount and term varies for each network affiliate, but terms range from three to twenty years, prior to any renewal periods of which some are at the option of the Company.  As of September 29, 2016, the maximum potential amount of future payments the Company could be required to make pursuant to the minimum revenue guarantees is $40.2 million over the remaining terms of the network affiliate agreements, which calculation does not include any potential future extensions.  As of September 29, 2016 and December 31, 2015, the Company had no liabilities recorded for these obligations, as such guarantees are less than the expected share of revenue paid to the network affiliate.

 

6. FAIR VALUE MEASUREMENTS

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 —Quoted prices in active markets for identical assets or liabilities.

Level 2 —Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 —Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

Non-Recurring Measurements —Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. These assets include long-lived assets, intangible assets, cost and equity method investments, notes receivable and borrowings.

Long-Lived Assets, Intangible Assets, Other Investments and Notes Receivable —The Company regularly reviews long-lived assets (primarily property, plant and equipment), intangible assets, investments accounted for under the cost or equity method and notes receivable for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. When the estimated fair value is determined to be lower than the carrying value of the asset, an impairment charge is recorded to write the asset down to its estimated fair value.

 

16


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

Other investments consisted of the following (in millions):

 

 

As of

 

 

 

September 29,

2016

 

 

December 31,

2015

 

Investment in AC JV, LLC (1)

 

$

1.2

 

 

$

1.2

 

Other investments (2)

 

 

5.6

 

 

 

4.2

 

Total

 

$

6.8

 

 

$

5.4

 

 

 

(1)

Refer to Note 3— Related Party Transactions .

 

(2)

The Company received equity securities in privately held companies as consideration for a portion of advertising contracts.  The equity securities were accounted for under the cost method and represent an ownership of less than 20%. The Company does not exert significant influence on these companies’ operating or financial activities.

During the nine months ended September 29, 2016, the Company recorded an other-than-temporary impairment charge of $0.7 million on one of its investments which brought the investment to a remaining value of $0.0 million.  The fair value of the other investments has not been estimated as of September 29, 2016 and December 31, 2015 as there were no identified events or changes in the circumstances that had a significant adverse effect on the fair value of those investments and it is not practicable to do so because the equity securities are not in publicly traded companies.  As the inputs to the determination of fair value are based upon non-identical assets and use significant unobservable inputs, they have been classified as Level 3 in the fair value hierarchy.

As of September 29, 2016 and December 31, 2015, the Company had notes receivable totaling $16.7 million and $16.7 million, respectively, from its founding members related to the sale of Fathom Events, as described in Note 3— Related Party Transactions . These notes were initially valued using comparative market multiples.  There were no identified events or changes in circumstances that had a significant adverse effect on the fair value of the notes receivable. The notes are classified as Level 3 in the fair value hierarchy as the inputs to the determination of fair value are based upon non-identical assets and use significant unobservable inputs.

Borrowings —The carrying amount of the revolving credit facility is considered a reasonable estimate of fair value due to its floating-rate terms. The estimated fair values of the Company’s financial instruments where carrying values do not approximate fair value were as follows (in millions):

 

 

 

As of September 29,

2016

 

 

As of December 31,

2015

 

 

 

Carrying Value

 

 

Fair Value   (1)

 

 

Carrying Value

 

 

Fair Value  (1)

 

Term loans

 

$

270.0

 

 

$

270.7

 

 

$

270.0

 

 

$

269.3

 

Senior unsecured notes due 2021

 

 

 

 

 

 

 

 

200.0

 

 

 

208.4

 

Senior secured notes due 2022

 

 

400.0

 

 

 

418.0

 

 

 

400.0

 

 

 

414.5

 

Senior unsecured notes due 2026

 

 

250.0

 

 

 

259.2

 

 

 

 

 

 

 

 

 

(1)

The Company has estimated the fair value on an average of at least two non-binding broker quotes and the Company’s analysis. If the Company were to measure the borrowings in the above table at fair value on the balance sheet they would be classified as Level 2.

 

 

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

During 2012, the Company terminated interest rate swap agreements that were used to hedge its interest rate risk associated with its term loan.  Following the termination of the swap agreements, the variable interest rate on the Company’s $270.0 million term loan is unhedged and as of September 29, 2016 and December 31, 2015, the Company did not have any outstanding derivative assets or liabilities.

A portion of the breakage fees paid to terminate the swap agreements was for swaps in which the underlying debt remained outstanding.  The balance in AOCI related to these swaps was fixed and was amortized into earnings over the remaining period during which interest payments were hedged, or February 13, 2015.  The Company considered the guidance

 

17


NATIONAL CINEMEDIA, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

in ASC 815, Derivatives and Hedging which states that amounts in AOCI shall be reclassified into earnings in the same period or periods during which the hedged for ecasted transaction affects earnings.  As of September 29, 2016, there were no amounts outstanding related to these discontinued cash flow hedges.

The changes in AOCI by component for the nine months ended September 29, 2016 and October 1, 2015 were as follows (in millions):

 

 

 

Nine Months Ended

 

 

 

 

 

September 29,

2016

 

 

October 1,

2015

 

 

Income Statement Location

Balance at beginning of period

 

$

 

 

$

(1.6

)

 

 

Amounts reclassified from AOCI:

 

 

 

 

 

 

 

 

 

 

Amortization on discontinued cash flow

   hedges

 

 

 

 

 

1.6