UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 27, 201831, 2020
or
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________________ to __________________
Commission file number: 001-33296
NATIONAL CINEMEDIA, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | | 20-5665602 |
(State or other jurisdiction of
incorporation or organization)
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| (I.R.S. Employer
Identification No.)
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| 6300 S. Syracuse Way, Suite 300 | Centennial | Colorado | 80111 |
Centennial, Colorado | | 80111 |
| (Address of principal executive offices) | | | (Zip Code) |
Registrant’s telephone number, including area code: (303) 792-3600
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading symbol | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | NCMI | The Nasdaq Stock Market LLC |
(Title of each class) | | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No þ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 þ☒ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ¨ | Smaller reporting company | ¨☒ |
| Non-accelerated filer | ¨ | Emerging growth company | ¨ |
| Accelerated filer | þ☒ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition method for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ☒
Based on the closing sales price on June 28, 2018,25, 2020, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was $455,020,325.$176,290,673.
As of February 18, 2019, 78,601,51326, 2021, 79,652,027 shares of the registrant’s common stock (including unvested restricted stock), par value of $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s definitive proxy statement to be used in connection with its Annual Meeting of Stockholders and to be filed within 120 days of December 27, 201831, 2020 are incorporated by reference into Part III, Items 10-14, of this report on Form 10-K.
TABLE OF CONTENTS
TABLE OF CONTENTS
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| PART I | Page |
| PART I | |
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| PART II | |
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| PART III | |
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| PART IV | |
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Certain Definitions
In this document, unless the context otherwise requires:
•“NCM, Inc.,”, “NCM,” “the Company,” “we,” “us” or “our” refer to National CineMedia, Inc., a Delaware corporation, and its consolidated subsidiary National CineMedia, LLC.
•“NCM LLC” refers to National CineMedia, LLC, a Delaware limited liability company, which commenced operations on April 1, 2005, and is the current operating company for our business, which NCM, Inc. acquired an interest in, and became a member and the sole manager of, upon completion of our initial public offering, or “IPO,” which closed on February 13, 2007.
•“ESAs” refers to the amended and restated exhibitor services agreements entered into by NCM LLC with each of NCM LLC’s founding members upon completion of the IPO, which were further amended and restated on December 26, 2013 in connection with the sale of the Fathom Events business.business and, in the case of the ESAs with Cinemark and Regal, were further amended on September 17, 2019 (the “2019 ESA Amendments”) to extend the terms of the ESAs and modify the program distributed by NCM LLC through its DCN for exhibition in Cinemark and Regal theaters.
•“AMC” refers to AMC Entertainment Holdings, Inc. and its subsidiaries, National Cinema Network, Inc., or “NCN,” which contributed assets used in the operations of NCM LLC and formed NCM LLC in March 2005, AMC ShowPlace Theatres, Inc., which joined NCM LLC in June 2010 in connection with AMC’s acquisition of Kerasotes ICON Theatres, AMC Starplex, LLC which joined NCM LLC in December 2015 in connection with AMC’s acquisition of Starplex Cinemas and American Multi-Cinema, Inc., which is a party to an ESA with NCM LLC.
•“Cinemark” refers to Cinemark Holdings, Inc. and its subsidiaries, Cinemark Media, Inc., which joined NCM LLC in July 2005, and Cinemark USA, Inc., which is a party to an ESA with NCM LLC.
•“Regal” refers to Cineworld Group plc, Regal Entertainment Group and its subsidiaries, Regal CineMedia Corporation, or “RCM,” which contributed assets used in the operations of NCM LLC, Regal CineMedia Holdings, LLC, which formed NCM LLC in March 2005, and Regal Cinemas, Inc., which is a party to an ESA with NCM LLC.
•“Founding members” refers to AMC, Cinemark and Regal.
•“Network affiliates” refers to certain third-party theater circuits with which NCM LLC has long-term network affiliate agreements.
•“Adjusted OIBDA” refers to a non-GAAP financial measure, which management defines as operating income before depreciation and amortization expense.
“Adjusted OIBDA” excludes from OIBDAexpense adjusted to also exclude amortization of intangibles recorded for network theater screen leases, non-cash share basedshare-based payment costs, merger-related administrative costs, CEO transition costs, and early lease termination expense.expense and impairment of long-lived assets.
•“Adjusted OIBDA margin” is a non-GAAP financial measure calculated by dividing Adjusted OIBDA by total revenue.
•“LEN” refers to NCM LLC’s Lobby Entertainment Network.
•“CPM” is a basis for which advertising is sold by the cost per thousand viewers.
•“DCN” refers to NCM LLC’s Digital Content Network.
•“TRA” refers to the tax receivable agreement entered into by NCM, Inc. and the founding members.
Market Information
Information regarding market share, market position and industry data pertaining to our business contained in this report consists of estimates based on data and reports compiled by industry professional organizations (including, but not limited to, the Motion Picture Association of America, and the National Association of Theatre Owners) and analysts, and our knowledge of our revenues and markets. Designated Market Area® is a registered trademark of Nielsen Media Research, Inc. (“Nielsen”). We take responsibility for compiling and extracting, but have not independently verified, market and industry data provided by third parties, or by industry or general publications, and take no further responsibility for such data. Similarly, while we believe our internal estimates are reliable, our estimates have not been verified by any independent sources, and we cannot assure you as to their accuracy.
Cautionary Statement Regarding Forward-Looking Statements
In addition to historical information, some of the information in this Form 10-K includes “forward-looking statements.” All statements other than statements of historical facts included in this Form 10-K, including, without limitation, certain statements under “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” may constitute forward-looking statements. In some cases, you can identify these “forward-looking statements” by the specific words, including but not limited to “may,” “will,” “can,” “should,” “expects,” “forecast,“forecasts,” “project,“projects,” “intend,“intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. These forward-looking statements involve known and unknown risks and uncertainties, assumptions and other factors, including, but not limited to, the following:
•pandemics, epidemics or disease outbreaks can disrupt our business and the business of our founding members and network affiliates;
•potential significant declines in theater attendance;
•changes in theater patron behavior could result in declines in viewership of the NoovieNoovie® pre-show;
•we may not realize the anticipated benefits of the 2019 ESA Amendments;
•we may not be successful in increasing the number of theaters in which NCM LLC has the right to display Post-Showtime Inventory;
•changes to relationships with NCM LLC's founding members;
•our plans for developing additional revenue opportunities may not be implemented and may not be achieved;
•competition within the overall advertising industry;
•we may not maintain our technological advantage;
•national, regional and local economic conditions;
•we may not be able to grow our advertising revenue in line with the growth of our contractual costs;
•the potential loss of any major content partner or advertising customer;client;
•potential inability to retain or replace our senior management;
changes to relationships with NCM LLC’s founding members;
•founding member and network affiliate government regulation could slow growth;
•failure to effectively manage or continue our growth;
•potential failures or disruptions in our technology systems;
•possible infringement of our technology on intellectual property rights owned by others;
•the content we distribute and user information we collect and maintain through our in-theater, online or mobile services may expose us to liability;
•changes in regulations relating to the Internet, privacy or other areas of our online or mobile services;
•our revenue and Adjusted OIBDA fluctuate from quarter to quarter and may be unpredictable, which could increase the volatility of our stock price;
an ineffective system of internal controls over financial reporting could adversely affect our ability to accurately report our financial results and market confidence in our reported financial information;
•we are a holding company with no operations of our own, and we depend on distributions and payments under the NCM LLC operating and management services agreements from NCM LLC to meet our ongoing obligations and to pay cash dividends on our common stock;
•risks and uncertainties relating to our significant indebtedness and investments, including the availability and adequacy of cash flows to meet our debt service requirements and any other indebtedness that we may incur in the future;
•NCM LLC’s other members or their affiliates may have interests that differ from those of us or our public stockholders and they may be able to influence our affairs, compete with us or benefit from corporate opportunities that might otherwise be available to us;
•future issuance of membership units or preferred stock could dilute the interest of our common stockholders;
•determination that NCM, Inc. or any of NCM LLC’s founding members is an investment company;
•determination that any amount of our tax benefits under the TRA should not have been available;
•the effect on our stock price from the substantial number of our shares eligible for sale;
•the interests of our largest stockholder and NCM LLC’s other members may be different from or conflict with those of our other stockholders; and
•other factors described under “Risk Factors” or elsewhere in this Annual Report on Form 10-K.
This list of factors that may affect future performance and the accuracy of forward-looking statements are illustrative and not exhaustive. Our actual results, performance or achievements could differ materially from those indicated in these statements as a result of additional factors as more fully discussed in the section titled “Risk Factors,” and elsewhere in this Annual Report on Form 10-K. Given these uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements.
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We disclaim any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Risk Factors Summary
Ownership of the common stock and other securities of the Company involves certain risks.In addition to the summary below, you should carefully review the “Risk Factors” section of this Annual Report on Form 10-K and other information in this document, including our historical financial statements and related notes included herein. The material risks and uncertainties described in this document are not the only ones facing us.If any of the risks and uncertainties described in this document actually occur, our business, financial condition and results of operations could be adversely affected in a material way. This could cause the trading price of our common stock to decline, perhaps significantly, and you may lose part or all of your investment. Some of the more significant risks relating to our business include:
Risks Related to Our Business and Industry
•The outbreak of the COVID-19 Pandemic, which has had an adverse impact on our business, continues to materially affect our operations, liquidity and results of operations;
•Economic uncertainty or deterioration may lead to a decrease in consumer spending, reduced demand for our products or a delay in payments by our advertising clients;
•Continued declines in theater attendance and its impact on how advertisers view cinema advertising;
•Our inability to effectively manage changes to our business strategy to continue the growth of our advertising inventory and network;
•Potential loss of revenues due to decreased spending by, or loss of, a national advertising client or group of local advertising clients;
•The indebtedness of our founding members and the effect of potential bankruptcies of our founding members on our business;
•Failure to realize the anticipated benefits of the 2019 ESA Amendments;
•Potential changes to the ESAs or other changes to our relationship with our founding members;
•Changes in theater patron behavior, including advance ticket purchases for reserved seating;
•Failure to increase the number of theaters that display our Post-Showtime Inventory and other Noovie products;
•Failure to successfully continue to develop our digital revenue opportunities;
•The high level of competition within the market for advertising;
•Failure to continue to upgrade our technology and that of our founding members and network affiliates;
•The loss of any major content partner could significantly reduce our revenue;
•Whether our founding members engage in activities that might compete with elements of our business, as permitted under the ESAs;
•Our reliance on senior management personnel for the success of our business;
•The effects of government regulation on our founding members and network affiliates;
•Failure of our technological systems;
•We may be liable for infringing the intellectual property rights of others;
•Any liability arising out of our in-theater, online or mobile services and the user information that we gather through our online and mobile services;
•Changes in regulation to the Internet or other areas of our online or mobile services;
•Volatility in our stock price;
Risks Related to Our Corporate Structure
•Our status as a holding company with no operations of our own and our dependence on distributions from NCM LLC;
•NCM LLC’s substantial debt obligations could impair our financial condition;
•Any additional debt incurred by us or NCM LLC;
•Our largest stockholder and NCM LLC’s members or their affiliates may have interests that differ from those of our stockholders;
•Any potential competing interests of our founding members;
•The ability of NCM LLC’s members to potentially benefit from corporate opportunities that would otherwise be available to us;
•Differences in the terms of the agreements in place with the founding members and unaffiliated third parties;
•The anti-takeover provisions in our certificate of incorporation and bylaws, which could discourage potentially beneficial strategic transactions;
•The dilutive effect on the voting power of our common stock as a result of the future issuance of our preferred stock or future issuances or redemptions of membership units by NCM LLC;
•Any determination that we, or our founding members, qualify as an investment company under the U.S. securities laws;
•The impact of our TRA with NCM LLC on our cash flows; and
•Any effect the substantial number of shares that we have eligible for sale on the market price of our common stock.
PART I
The Company
NCM, Inc., a Delaware corporation, was organized on October 5, 2006 and began operations on February 13, 2007 upon completion of its IPO. NCM, Inc. is a holding company that manages its consolidated subsidiary, NCM LLC. NCM, Inc. has no business operations or material assets other than its cash and ownership interest of approximately 48.8%48.0% of the common membership units in NCM LLC as of December 27, 2018.31, 2020. NCM LLC’s other members, Cinemark, Regal and Regal, two ofAMC, the three largest motion picture exhibition companies in the U.S., held the remaining 51.2%52.0% of NCM LLC’s common membership units as of December 27, 2018.31, 2020. NCM, Inc.’s primary source of cash flow from operations is distributions from NCM LLC pursuant to the NCM LLC operating agreement. NCM, Inc. also receives management fees pursuant to a management services agreement with NCM LLC in exchange for providing specificspecified management services to NCM LLC.
Our Business
We are America'sAmerica’s Movie Network. As the #1 weekendlargest cinema advertising network for Millennials (age 18-34) in North America, we unite brands with the U.S.,power of movies and engage movie fans anytime and anywhere. NCM’s Noovie® pre-show is presented exclusively in 56 leading national and regional theater circuits including AMC, Cinemark, Regal and 50 network affiliate theaters as of December 31, 2020. NCM’s cinema advertising network offers broad reach and unparalleled audience engagement with over 20,400 screens in over 1,650 theaters in 190 Designated Market Areas® (“DMA®”) (including all of the top 50). NCM isdigital products go beyond the connector between brandsbig screen, extending in-theater campaigns into online and moviemobile marketing programs to reach entertainment audiences.
We currently derive revenue principally from the sale of advertising to national, regional and local businesses in Noovie, our cinema advertising and entertainment pre-show seen on movie screens across the U.S. We also sell advertising, on our Lobby Entertainment Network (“LEN”),LEN, a series of strategically-placed screens located in movie theater lobbies, as well as other forms of advertising and promotions in theater lobbies. In addition, weWe also sell digital online and mobile advertising through our Noovie Audience Accelerator product (formerly known as Cinema Accelerator) and across our suite of Noovie digital products as well as through our Cinema Accelerator digital productproperties, including Noovie.com, Noovie Trivia (including Noovie Shuffle and Name That Movie), and Noovie Arcade in order to reach entertainment audiences beyond the theater.
NCM LLC has long-term ESAs with the founding members (over 18 years remaining as of December 27, 2018) and multi-year agreements with certain third-party theater circuits, referredour network affiliates, which grant NCM LLC exclusive rights in the founding member and network affiliate theaters to sell advertising, subject to
limited exceptions. In September 2019, NCM LLC entered into amendments to the ESAs with Cinemark and Regal (collectively, the “2019 ESA Amendments”). The 2019 ESA Amendments extended the contract life of the ESAs with Cinemark and Regal by four years, resulting in this documenta weighted average remaining term of the ESAs with the founding members (based upon pre-COVID-19 attendance levels) of approximately 18.7 years as “network affiliates,” whichof December 31, 2020. The network affiliate agreements expire at various dates between March 15, 201931, 2021 and July 22, 2031. The weighted average remaining term (based upon pre-COVID-19 attendance levels) of the ESAs and the network affiliate agreements grant NCM LLC exclusive rights in their theaters to sell advertising, subject to limited exceptions.together is 16.3 years as of December 31, 2020.
We believe that the broad reach and digital delivery of our network provides an effective platform for national, regional and local advertisers to reach a large, young, engaged and affluent audience on a targeted and measurable basis.
COVID-19— Following the World Health Organization’s declaration of the COVID-19 virus as a pandemic in March 2020, the United States’ government and other state and local governments issued precautionary restrictions on travel, public gatherings and other events and issued social distancing guidelines. Beginning in mid-March 2020, each of our founding members and all of our network affiliates announced that their theaters would be temporarily closed and almost all of the theaters within our network remained closed until late August 2020. During this time, the Company generated no in-theater advertising revenue. Major motion picture releases were also delayed into 2021 or have been released directly to alternative delivery methods bypassing the theater entirely.
On September 4, 2020 we resumed advertising within the theaters that were open in our network; however in-theater advertising revenue continued to be adversely impacted as attendance at the reopened theaters has been less than normal given COVID-19 restrictions around patron capacity limitations and a continued lack of new major motion picture releases. In October 2020, Regal announced the re-closure of its theaters in the United States. Many of the open theaters are operating at reduced hours and offering a limited number of movie showtimes and attendance at open theaters has not returned to historical levels. As of December 31, 2020, 40.5% of the theaters within our network were open. As of the filing date, multiple COVID-19 vaccines have been developed and immunizations have commenced throughout the United States and cases of the COVID-19 virus are decreasing from the peak numbers experienced in late 2020. However, the COVID-19 virus does continue to spread in the United States, and there can be no assurance when theaters within our network will return to normal operations, that the theaters that have reopened will remain open or that patrons will return to theaters at historical levels. These developments will be referred to as the “COVID-19 Pandemic.” Certain information herein is provided through 2019 to reflect more normalized operations prior to the temporary theater closures due to the COVID-19 Pandemic.
Noovie®On-Screen Advertising
Noovie On-Screen—Our on-screenNooviepre-show was launched in September 2017, replacing our prior pre-show calledFirstLook.Our pre-show provides an entertaining pre-movie experience for theater patrons while serving as an incremental revenue source for our theater circuit partners.Nooviegives movie audiences a reason to arrive at the theater early to discover what’swhat's next, inwith exclusive entertainment content, in-theater gaming, and it consists ofengaging advertising from national, regional and local advertising,brands, as well as long-form entertainment and advertising content provided to us under exclusive multi-year arrangements with leading media, entertainment, technology and other companies (“content partners”).
Noovie generally rangesBeginning in length from 20 to 30 minutesNovember 2019 following the completion of the 2019 ESA Amendments, we now present two different formats of our Noovie® pre-show depending on the theater circuit in which it runs. In Regal, Cinemark and ends at or aboutcertain affiliate theaters, Noovie includes advertising inventory after the advertised show time,showtime consisting of (1) a lights down segment that runs for five minutes after the advertised showtime with trailer lighting and (2) a 30- or 60-second Platinum Spot, as further described below (“Post-Showtime Inventory”). As of December 31, 2020, theaters presenting the updated Noovie format with Post-Showtime Inventory made up approximately 58% of our network based upon pre-COVID-19 attendance levels. All other NCM network theater circuits, which make up the remaining 42% of our network based upon pre-COVID-19 attendance levels, present the Classic Noovie pre-show, which ends approximately at the advertised movie showtime when the movie trailers and feature film begin. The movie trailers that run before the feature film are not part of Noovie.
Because Noovie is customized by theater circuit, theater location/market, film rating, film genre and film title, we produce and distribute many different versions of Noovie each month. This programming flexibility provides advertisers with the ability to target specific audience demographics and geographic locations and gives us the ability to ensure that the content and advertising are age-appropriate for the movie audience. It also enables us to incorporate the branding of a specific theater circuit if desired. We rotate Noovie’s long-form content segments between theaters approximately every two weeks to ensure that frequent moviegoers are entertained by fresh content. This programming flexibility provides advertisers with the ability to target specific audience demographics and geographic locations and ensure that the content and advertising are age-appropriate for the movie audience. In 2019, we launched NCM LuxeNet, which is a specialty cinema network to connect luxury brands with cultured, affluent movie audiences. NCM LuxeNet is a carefully curated network of premium movie theaters in the top 25 DMAs® featuring contemporary lobbies, state-of-the-art auditoriums, luxury seating, expanded amenities including bars and dine-in options and a sophisticated movie slate ranging from the best independent and Oscar-nominated films to Hollywood’s biggest blockbusters.
We also have the capability to deliver three-dimensional (“3-D”) advertising campaigns within a 3-D version of the Noovie pre-show program prior to 3-D feature films.
All versions of Noovie are produced by our internal creative team, which is cost-effective and gives us significant flexibility. We also offer pre- and post-production advertising creative services to our clients (primarily local clients who may not have their own creative agency), as well as branded content creation for national brands for a fee.
Classic Noovie Show Structure—Classic Noovieis comprised of up to four segments, each approximately four to ten minutes in length. The Company revised the structure beginning November 1, 2019 and the structure below incorporates the changes made. The following graphic is for illustrative purposes and is not to exact scale.
•Segment four is the first section of Noovie and begins approximately 25 to 30 minutes prior tocontains the advertised show time. Entertainingentertaining content that is a core element of Noovie, andNoovie. NCM programs an exclusive
Noovie content pod at the beginning of the show that gives audiences a look at “what’s Noovie” in their world,Noovie?,” including movies (Noovie Backlot and Noovie Genius), music (Noovie Soundcheck), trivia (Name That Movie), local (Noovie Local, powered by ScoreStream), and more.
•Segment three typically begins approximately 21 minutes prior to the advertised show time and features primarily 15 or 30-second local, regional, or national spot advertisements by individual theaters, or across an entire Designated Market Area (“DMA”)® or geographic region, as well as a long-form entertainment content segment from one of our content partners.partners and advertising from local clients.
•Segment two begins approximately 16 minutes prior to the advertised show time and features primarily national, national spotlocal and regional advertisements, which generally range between 15 to 90 seconds, as well as a long-form entertainment content segment from one of our content partners. This segment also typically includes a 50-second spot for Noovie programming, such as Noovie ARcade slotArcade or Noovie Trivia where audiences have the opportunity to play our featured interactive augmented reality (“AR”) gamegames on the big screen using their mobile phones.
•Segment one runs closest to the advertised show time at approximately 10 minutes prior to the advertised show timeshowtime and features primarily national advertisements, which are generally 30 or 60 seconds, as well as a long-form entertainment content segment from one of our content partners. Segment one also includes an advertisement for the founding members’ beverage supplier and a public service announcement (“PSA”).
Noovie Show Structure Including Post-Showtime Inventory—The Noovie with Post-Showtime Inventoryformat is comprised of substantially the same segments included within the Classic Noovie pre-show, each approximately four to ten minutes in length, as well as two additional advertising segments after the advertised showtime as described below. The total length of the Noovie pre-show including Post-Showtime Inventory is the same as the Classic Noovie pre-show as the amount of time displayed prior to the advertised showtime is reduced by the sum of five minutes plus the aggregate length of time of the Platinum Spot, if any. The following graphic is for illustrative purposes and is not to exact scale.
•The Showcase Segment features a post-showtime lights downsegment with trailer lighting beginning at the advertised showtime with approximately 5 minutes of national advertisements which generally range between 30 or 60 seconds, followed by a PSA and one or two 30 second advertisements for the founding members' beverage supplier; and
•The Platinum Position features an additional single advertising unit that is either 30 or 60 seconds of the Noovie pre-show deeply embedded within the movie trailers at trailer level lighting and at similar volume levels, directly prior to the last one or two trailers preceding the feature film, which we refer to as the “Platinum Spot”.
References to the Noovie pre-show relate to both the Classic Noovie and Noovie including Post Showtime Inventory formats, unless specified otherwise.
National, Regional and Local Advertising—Our cinema advertising business has a diverse customer base, consisting of national, regional and local advertisers. National and regional on-screen advertising inNoovieis sold on a cost per thousand (“CPM”)CPM basis to national and regional clients. We generally sell our national advertising units across our national network by film rating or groups of ratings, or by individual film or film genre grouping. This ability to target various groups of films offers national advertisers a way to target specific audience demographics at various price points and overall cost levels, which we believe expands the number of potential clients. Local advertising is typically sold on a per-screen,per-theater, per-week basis.
Noovie pre-show inventory is also available in the FreeWheel Advertisers (formerly known as STRATA)Strata and Mediaocean systems, media buying and selling software which allows advertising agencies to buy cinema advertising in the “National Spot TV” marketplace where advertising is purchased by national advertisers in several markets of their own selection. Being able to buy both TV and cinema locally in the National Spot TV marketplace makes it significantly easier for agencies to include cinema in the media mix for their clients and allows us to tap into the pool of advertising dollars budgeted for National Spot TV.
WeAs with other premium video mediums like TV, we sell advertising timeour Noovie pre-show inventory in both the upfront and scatter markets. InUpfront is a term that describes the upfront market, advertisers buypractice of buying advertising time “up front” on an annual basis for the upcoming year, and by purchasing inventory in advance lockand locking in the advertising rates (CPM’s) they will pay. Many(CPMs). Consistent with the television industry's upfront advertisingbooking practices, a portion of our upfront commitments includehave cancellation options wherebyor options to reduce the amount that advertisers may purchase that could reduce purchasewhat is ultimately spent by clients that have made upfront commitments. InScatter refers to the scatter market, advertisers buybuying of advertising on a shorter-term basis closer to the time when the advertisements will be run, which often results in a pricing premium compared to the upfront rates. The mix between the upfront and scatter markets is based upon a number of advertising market factors, such as pricing, demand for advertising time and economic conditions. The demand in the scatter market then impacts the pricing achieved for our remaining advertising inventory. Scatter market pricinginventory not sold upfront and can vary through-outthroughout the year and from upfront pricing.year.
From February 13, 2007 through December 27, 2018, 572 national advertisers across a wide variety of industries have advertised with us. During the year ended December 27, 2018,31, 2020, we derived 71%74% of our advertising revenue from national and regional clients (including advertising agencies that represent our clients) and 24%19% of our advertising revenue from thousands of regional and local advertisers across the country (including advertising agencies that represent these clients).
Beverage Advertising. Each of the founding members has a relationship with a beverage concessionaire supplier under which they are obligated to provide on-screen advertising time as part of their agreement to purchase branded beverages sold in their theaters and we have a long-term agreement to exhibit the advertising of the founding members’ beverage concessionaires. Under the ESAs, up to 90 seconds of the Noovie® program can be sold to the founding members to satisfy their on-screen advertising commitments under their beverage concessionaire agreements. The time sold to the founding member beverage
supplier is priced equal to the greater of (1) the advertising CPM charged by NCM LLC in the previous year for the time sold to the founding member beverage supplier and (2) the advertising CPM for the previous year charged by NCM LLC to unaffiliated third parties during segment one (closest to showtime) of the Noovie pre-show in the founding member’s theaters, limited to the highest advertising CPM being then-charged by NCM LLC pursuant to the ESAs. Beginning in 2020 and in accordance with the 2019 ESA Amendments, the price for the time sold to Cinemark and Regal’s beverage suppliers increases 2% each year. The time sold to AMC’s beverage supplier continues to be priced based upon the annual increase in CPMs as outlined above.
During 2020, we sold 60 seconds to two of the founding members and 30 seconds to one of the founding members to provide on-screen advertising for their beverage concessionaires. During 2020, the beverage concessionaire revenue from the founding members’ beverage agreements was approximately 7% of our total revenue. In the instance of certain theaters that are acquired by the founding members but are not incorporated into our network because of an existing on-screen advertising agreement with an alternative provider, we remain entitled to these encumbered theater beverage payments under the terms of the ESA which are treated as a reduction to the intangible asset and not classified as revenue.
Content. Beyond the Noovie-branded content at the beginning of the pre-show, the majority of our entertainment and advertising content segments are provided to us by content partners. Under the terms of the contracts, our content partners create original long-form entertainment content segments that are entertaining, informative or educational in nature exclusively for theour Noovie programpre-show and make commitments to buy a portion of our advertising inventory at a specified CPM over a oneone- or two-year period with options to renew, exercisable at the content partner’s option. The original content produced by these content partners typically features behind-the-scenes looks at the “making-of” feature films, upcoming broadcasts, cable television shows,media programming, or technology products. In 2018,2020, the content partner segments were approximately 90 seconds in length.
PSA. In 2018,2020, we had threefour agreements to exhibit a 40-second courtesy “silence your cell phone” PSA reminding moviegoers to silence their cell phones and refrain from texting during feature films. Two of these agreements continue through 2019 and onefilms which expired at the end of 2018. We signed an additional two new agreements for 2019.2020.
3-D Advertising. We also sell 3-D advertising, which runs prior to select 3-D feature films. These 3-D advertisements are placed at the end of the Noovie pre-show, after a message instructing the movie audience to put on their 3-D glasses, so that the glasses can be kept on throughout the remainder of Noovie, the trailers and the 3-D feature film to provide for a better experience. 3-D advertisements provide average advertising CPMs that are higher than average two-dimensional (“2-D”)
pricing primarily because 3-D advertisements have heightenedrecall when compared to 2-D advertisements based on third-party research.
Noovie ARcade. Starting in 2018, movie audiences nationwide can play big screen interactive AR games on their mobile phones by using Noovie ARcade, the revolutionary new companion app for the Noovie pre-show. During 2018, Noovie ARcade games included Cinevaders, Emoji Escape, The Horror Experience, Ralph Breaks the Internet (our first studio collaboration) and Hollywood Highway. Noovie ARcade games and other Noovie AR experiences can be sponsored by advertisers or customized by brands to create unique and engaging experiences for movie audiences.
Name That Movie. During 2017, we entered into a licensing agreement authorizing the production of Name That Movie trivia segments for our Noovie pre-show, social media channels and future digital properties in order to further entertain and engage moviegoers. We also offer the opportunity for our advertising customers to sponsor the Name That Movie segments and incorporate advertising into the game.
Beverage Advertising—We have a long-term agreement to exhibit the advertising of the founding members’ beverage concessionaires. Under the ESAs, up to 90 seconds of theNoovieprogram can be sold to the founding members to satisfy their on-screen advertising commitments under their beverage concessionaire agreements at a rate intended to approximate a market rate (per the ESA, the annual CPM change equals the prior year annual percentage change in the advertising CPM charged to unaffiliated third parties during segment one (closest to the advertised show time) of theNooviepre-show, limited to the highest advertising CPM being then-charged by NCM LLC). Each of the founding members has a relationship with a beverage concessionaire supplier under which they are obligated to provide on-screen advertising time as part of their agreement to purchase branded beverages sold in their theaters. During 2018, we sold 60 seconds to two of the founding members and 30 seconds to one of the founding members. During 2018, the beverage concessionaire revenue from the founding members’ beverage agreements was 7% of our total revenue. In the instance of certain theaters that are acquired by the founding members but are not incorporated into our network because of an existing on-screen advertising agreement with an alternative provider, we remain entitled to these beverage payments under the terms of the ESA which are treated as a reduction to the intangible asset and not classified as revenue.
Theater Circuit Messaging—Messaging. TheNoovieprogram also includes time slots for the founding members and network affiliates to advertise various activities associated with the operations of the theaters, including concessions, online ticketing partners, gift card and loyalty programs, special events presented by the theater operator and vendors of services provided to theaters, so long as such promotion is incidental to the vendor’s service or products sold in the theater. This time is provided to the theater operator at no chargecharge.
Noovie® Digital Products
Noovie is a fully integrated suite of products designed to innovate the moviegoing experience in ways that help brands tap into the excitement, emotion, and generally includes 45 seconds within 15 minutes priormagic of the movies. NCM digital products take the Noovie experience beyond the big screen with editorial content on Noovie.com, our Noovie Trivia and Noovie Arcade gaming apps, and robust audience data and digital advertising capabilities to create the advertised show time, 15 secondsperfect immersive marketing solution for brands.
Noovie.com – Noovie.com, whichlaunched in 2019, is the go-to digital destination for all things movies and is a discovery platform where audiences can discover new movies and watch the latest trailers. It features a smart movie guide and a place for fans to turn to decide what to watch next, whether in theater or at home, as well as a community hub for fans to connect, discover and share their love of movies.
Noovie Trivia – Noovie Trivia is a new app that launched in 2020 which willnow unites all of our popular movie trivia games into one place.Noovie Trivia lets fans level up their movie obsession and test their movie knowledge with multiple ways and games to play, including Name That Movie, Noovie Shuffle, and Noovie Motion Picks. New challenges are added on a regular basis.
Noovie Shuffle, a collection of card-based movie-trivia mini-games, initially launched in 2019. New games and card decks are added to Noovie Shuffle on an ongoing basis to match the current film slate and keep Shuffle fresh and challenging for players. We also work closely with movie studios to create custom games and card decks that highlight specific new movie releases. In 2020 we incorporated Noovie Shuffle into our Noovie Trivia app.
Name That Movie started in 2017 as a trivia segment for our Noovie® pre-show, social media channels and digital properties in order to further entertain and engage moviegoers. We also offer the opportunity for our advertising clients to sponsor the Name That Movie segments and incorporate advertising into the game. In 2019, we developed and released Name That Movie iOS and Android mobile apps, and in 2020 we incorporated the game into our Noovie Trivia app.
Noovie Arcade – Since 2018, movie audiences nationwide have been able to play big screen interactive augmented reality (“AR”) games on their mobile phones by using Noovie Arcade, the companion app for the Noovie pre-show. Noovie Arcade games and AR experiences have included the Ball Park® Brand Hot Dog Derby (our first-ever branded game), movie studio collaborations including Ralph Breaks the Internet and It: Chapter Two, Cinevaders®, Emoji Escape, The Horror
Experience and Hollywood Highway.Noovie Arcade games can be placed within 12 minutes priorsponsored by advertisers or customized by brands to create unique and engaging experiences for movie audiences, and can also be played on Noovie.com.
Digital Advertising
NCM’s consumer-facing digital products all feature advertising opportunities that allow brands to continue to reach movie audiences across multiple platforms, including sponsorships, digital ad inventory such as leaderboards, skyscrapers, banner ads, half- and full-page ads, and a variety of digital video ad inventory. Our Noovie digital products are designed to not only provide digital advertising inventory to further enhance the advertised show time,marketability of our cinema advertising product offerings, but also to capture exclusive first-party data. As of December 31, 2020, approximately 5.1 million movie goers have downloaded our mobile apps. These downloads and the remainder placed elsewhere duringacquisition of second party data, including from geo-location services and micro-event data for moviegoers that enter theaters in our network, have resulted in first and second party data sets of over 170 million as of December 31, 2020.
Noovie Audience Accelerator – In addition to our ad-supported consumer-facing digital products, our Noovie Audience Accelerator digital product, formerly known as Cinema Accelerator, expandscinema advertising campaigns beyond the big screen to reach movie audiences wherever they seek out movie content online and on mobile devices.Noovie pre-show at Audience Accelerator identifies moviegoers through our discretion.first- and second-party data sets. We can target specific demographics, genres or layer on other data to provide our clients with a match against their target audience. Digital ads are then distributed through multiple channels, including online and mobile banners, online and mobile pre-roll video and social media newsfeeds through our owned and operated ad inventory as well as third party ad inventory across multiple platforms including OTT/CTV to reach moviegoers wherever they may be seeking entertainment information and content.
We sell NCM’s digital products through a digital sales group that is embedded as part of our national and local sales organizations to enable collaborative, integrated selling. We believe that our new and upcoming digital products can be sold in combination with in-theater advertisements as integrated marketing packages as discussed in “Business—Our Strategy”. We plan to continue to invest in our digital platform in 2021 and beyond.
Lobby Advertising
Lobby Entertainment Network—Our LEN is a network of video screens strategically located throughout the lobbies of all digitally equipped founding members’ theaters, as well as the majority of our network affiliates'affiliates’ theaters. As of December 27, 2018,31, 2020, our LEN had 3,0392,913 screens in 1,5681,499theaters in our network. The LEN screens are placed in high-traffic locations such as concession stands, box offices and other waiting areas. Programming on our LEN consists of an approximately 30-minute loop of branded entertainment content segments created specifically for the lobby with advertisements running between each segment. We have the scheduling flexibility to send different LEN programming to each theater through our DCN, and the same program is displayed simultaneously on all LEN screens within a given theater, which we believe provides the maximum impact for our advertisers. We sell national and local advertising on the LEN individually or bundled with on-screen or other lobby promotions.
The LEN programming includes up to two minutes for founding members’ advertisements to promote activities associated with the operation of the theaters, including concessions, online ticketing partners, gift card and loyalty programs, special events presented by the theater operator and vendors of services provided to theaters, so long as such promotion is incidental to the vendor’s service or products sold in the theater. Additionally, subject to certain limitations, the LEN programming includes up to two minutes (one minute of which we provide to the founding members at no cost and one minute of which the founding members may purchase) to promote certain non-exclusive cross-marketing relationships entered into by the theater operators for the purpose of increasing theater attendance, which we call “strategic programs.”
Under the terms of the ESAs, the founding members also have the right to install a second network of additional screens in their theater lobbies which would not display our LEN programming, but would be used to promote strategic programs or products sold in their theater concessions, bars and dining operations, online ticketing partner promotions, gift card and loyalty programs and special events presented by the founding member and vendors of services provided to theaters, so long as such promotion is incidental to the vendor’s service.
Lobby Promotions
—We also sell a wide variety of advertising and promotional products in theater lobbies. These products can be sold individually or bundled with on-screen, LEN or digital advertising. Lobby promotions typically include:
•advertising on concession items such as beverage cups, popcorn bags and kids’ trays;
•coupons and promotional materials, which are customizable by film and are distributed to ticket buyers at the box office or as they exit the theater;
•tabling displays, product demonstrations and sampling;
•touch-screen display units and kiosks; and
•signage throughout the lobbies, including posters, banners, counter cards, danglers, floor mats, standees and window clings.
Under the terms of the ESAs, the founding members may conduct a limited number of lobby promotions at no charge in connection with strategic programs that promote motion pictures; however, such activities will not reduce the lobby promotions inventory available to us.
Our ability to provide in-lobby marketing and promotional placements in conjunction with our cinema advertising products allows us to offer integrated marketing solutions to advertisers that provide multiple touchpoints with theater patrons throughout the movie-going experience, which we believe is a competitive advantage over other national media platforms.
Digital AdvertisingOut-of-Home Products
At its core, Noovie is NCM’s pre-show that audiences experience before the movie, but Noovie also stretches beyond the theater as an integrated digital ecosystem delivering entertaining content, purposeful commerce, and interactive gaming opportunities. The Noovie pre-show serves as a “trailer” for the Noovie digital experience, driving movie audiences from the big screen to NCM’s digital properties and back again. We believe that by creating a compelling consumer experience for moviegoers, we can further enhance the marketability of our product offerings to our advertising customers. The Noovie digital ecosystem is designed to provide digital advertising inventory and capture exclusive first party data and includes:
Gaming – During 2018, we launched our NoovieARcade app, bringing augmented reality gaming to the big screen and beyond, with nearly 1.5 million downloads as of December 27, 2018. We expect to deploy Noovie Trivia web and mobile apps throughout 2019, allowing customers to play a variety of trivia games in various formats, such as a collection of card-based movie trivia mini-games. We expect the games to interact with and enhance onscreen promotions and also be playable by customers outside of the theaters. During 2017, we acquired Fantasy Movie League, a box office predictions game that combines the fierce competition of fantasy sports with the world of entertainment and movies. Fantasy Movie League can currently be played online at FantasyMovieLeague.com or through the Fantasy Movie League iOS and Android apps, with over 200,000 downloads of the app as of December 27, 2018. Fantasy Movie League is promoted on-screen in our Noovie pre-show to help grow itsgaming audience.
Noovie.com – NCM launched an early-access version of Noovie.com in late 2018 as a search and discovery platform where audiences can discover new movies, watch the latest trailers, find theaters and showtimes, and buy tickets. NCM expects to launch the full-version in the first quarter of 2019. In subsequent releases, Noovie.com will be a smart movie guide and; a place fans turn to decide what to watch next, whether in theater or at home, as well as, a community hub for fans to connect, discover, and share their love of movies. The Noovie digital portfolio of products will also be a source of fun arcade, trivia and fantasy box office games, and unique content to keep fans entertained on the big and small screens representing all that is new and fun with movies.
NCM advertisers will also benefit as Noovie.com will connect brands to valuable movie audiences around engaging and bespoke digital experiences. Noovie.com will be a natural companion to the Noovie pre-show extending the brand, re-enforcing the on-screen offering, and creating valuable cross-platform advertising opportunities.
Cinema Accelerator – In addition to our ad-supported consumer-facing digital products, our Cinema Accelerator digital product expandscinema advertising beyond the theater environmentto reach digitally-connected moviegoers before and after the movie experience, both online and on mobile devices. Cinema Accelerator identifies moviegoers through exclusive first party data sources including geo-location services, and micro-event data for the moviegoers that enter the theaters in our network. Using the moviegoer as our filter, we can target specific demographics, genres or layer on other data to provide our clients with a match against their target audience. Digital ads are then distributed through multiple channels, including online and mobile banners, online and mobile pre-roll video and social media newsfeeds through our owned and operated ad inventory as well as third party ad inventory to reach moviegoers wherever they may be seeking entertainment information and content.
We sell NCM’s digital products through a digital salesOut-of-Home (“DOOH”) group that is embedded as part of our national and local sales organizations and was created in October 2020 to enable collaborative, integrated selling. We believe that our newfurther unite brands with the power of movies by extending movie-centric Noovie® entertainment content, trivia, and upcomingadvertising beyond movie theaters to a variety of complementary venues, including restaurants, retail locations, and office and residential buildings. NCM sells DOOH media inventory on a national, regional, local, and programmatic level in relationships with digital products can be sold
with additional in-theater advertisements as integrated marketing packages as discussed in “Business – Our Strategy”. We plan to continue to invest in our digital platform in 2019.place-based properties including Coinstar, Captivate and Ziosk.
Our Network
In-theater advertising and entertainment contentNoovie® On-Screen is distributed across NCM LLC’s national theater network — the largest digital in-theater network in North America. ThroughAmerica — through the use of our proprietary DCN and Digital Content Software (DCS). With the DCN and DCS, we are able to schedule, deliver, play and reconcile advertising and entertainment content for Noovie and the LEN on a national, regional, local, theater and auditorium level.
The DCN is the combination of a satellite distribution network and a terrestrial management network. We also employ a variety of technologies that aid in distribution where satellite delivery is not available to provide uninterrupted service to our network of theaters. The DCN is controlled by our Network OperationsCustomer Experience Center (“NOC”) located in NCM’s headquarters in Centennial, CO,Colorado, which operates 2012 hours a day, seven days a week to proactively monitor and manage our network. NCM's DCN dynamically controls the quality, placement, timing of playback and completeness of content within specific auditoriums, and it also allows us to monitor and initiate repairs to the equipment in our digital network of theaters.
Advertising and entertainment content for our Noovie pre-show and LEN is uploaded from our Network OperationsCustomer Experience Center to our satellite distribution network and is delivered via multicast technology to the theaters in our network and received by our Alternative Content Engine. The Alternative Content Engine holds the content until displayed in specified theater auditoriums and lobbies according to contract terms. Each theater auditorium and lobby has a hardware and software architecture that controls the content to be shown. After playback of content, confirmation of playback is returned via satellite to our Network OperationsCustomer Experience Center to be included in “post” reports provided to our advertising clients.
AccordingPrior to Nielsen Cinema Audience Reports for 2018,the COVID-19 Pandemic, more than 750650 million moviegoers annually attendattended theaters that are currently under contract to present the Noovie pre-show, including the founding members and over 50 leading national and regional theater network affiliates. A summary of the screens and theaters in our advertising network is set forth in the table below:
Our Network
(As of December 27, 2018)31, 2020)
|
| | | | | | | | |
| | Advertising Network |
| | Theaters | | Total Screens | | % of Total |
| Founding Members | 1,259 |
| | 16,768 |
| | 79.2 | % |
| Network Affiliates | 471 |
| | 4,404 |
| | 20.8 | % |
| Total | 1,730 |
| | 21,172 |
| | 100.0 | % |
As of December 27, 2018,31, 2020, our Noovie pre-show was displayed on 100% of network movie screens using digital projectors, with approximately 98% of thoseprojectors. Almost all screens receivingwithin our network receive content through our DCN representing approximately 98% of our total network attendance. As of December 27, 2018, 20,079, or 95%, of 21,172 total digital screensand are equipped with more powerful digital cinema projectors, with the remainder comprised of LCD projectors. Those screens not connected to our DCN display national and
regional advertisements on digital projectors with content delivered on USB drives that are shipped to the theaters via overnight delivery services.
Our TeamHuman Capital Resources
We had 536418 full-time employees and one part-time employee as of December 27, 2018.31, 2020. Given the limited attendance levels and expected delay in new movie releases since September 2020, 91 of our full-time employees were reduced to a 50-60% schedule and 71 of our full-time employees were temporarily furloughed as of December 31, 2020. Our employees are located in our Centennial, Colorado headquarters, in our advertising sales offices in New York, Los Angeles, Chicago and Detroit, our digital development offices in Los Angeles and New York and our software development office in Minneapolis. We also have many local advertising account executives and field maintenance technicians that work primarily from their homes throughout the U.S. None of our employees are covered by collective bargaining agreements. We believe that we have a good relationship with our employees.
Diversity, Equity and Inclusion (DEI)—We are committed to diversity, equity and inclusion in the workplace. We are focused on building diverse talent at all levels of the organization by recruiting high quality diverse talent and have taken steps to align our policies with recommendations promulgated by national organizations to ensure that our business practices are aligned with other top employers. We have also established a DEI Committee which is made up of a diverse set of employees and is focused on identifying and helping to implement initiatives intended to improve areas such as recruitment, retention, brand awareness and community outreach.
Organizational Development—Our Human Resources team is focused on providing training to our local sales team to provide our salespeople with the skills and confidence to sell larger contracts at a faster pace. With the exception of the current year due to the COVID-19 Pandemic, this training consists of in-person instruction. Managers and supervisors also participate in specialized training to develop management skills, encourage employee development and retention and assist the Company with succession planning by identifying top talent to be developed into future leaders. Our Human Resources department also regularly provides employees with mandatory compliance training regarding workplace diversity, our code of conduct, password management, cyber security and other personnel related courses to help them with their daily responsibilities. Compliance with mandatory training requirements is tracked by our Human Resources department and management is notified when the requirements are not met.
Total Rewards—We invest in our employees by providing comprehensive benefits and compensation packages. Our benefits packages include: comprehensive health insurance with a wellness program for all employees working 30 hours or more, parental leave for all new parents for the birth or adoption of a child or placement of foster care, 401k plan with a comprehensive financial wellness component and voluntary benefits employees can tailor to their specific needs ranging from additional life insurance to pet insurance.
Seasonality
Our revenue and operating results are seasonal in nature, coinciding with the timing of marketing expenditures by our advertising clients and to a lesser extent the attendance patterns within the film exhibition industry. Historically, both advertising expenditures and theater attendance tend to be higher during the second, third, and fourth fiscal quarters. Advertising revenue is primarily correlated with new product releases, advertising client marketing priorities and economic cycles and to a lesser extent theater attendance levels. Seasonal demand during the summer is driven by the absence of alternative attractive advertising mediums and during the winter holiday season due to high client demand across all advertising mediums. The actual quarterly results for each quarter could differ materially depending on these factors or other risks and uncertainties. Based on our historical experience, our first quarter typically has less revenue than the other quarters of a given year due primarily to lower advertising client demand and increased inventory availability in competitive advertising mediums. Given the temporary closure of our theaters due to the COVID-19 Pandemic, our 2020 quarterly results varied from the historical trend. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations in the future.
The following table reflects the quarterly percentage of total revenue for the fiscal years ended 2018, 2019 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| FY 2018 | 18.2 | % | | 25.8 | % | | 24.9 | % | | 31.1 | % |
| FY 2019 | 17.3 | % | | 24.8 | % | | 24.8 | % | | 33.1 | % |
| FY 2020 | 71.6 | % | | 4.4 | % | | 6.6 | % | | 17.4 | % |
Government Regulations
Currently, we are not subject to regulations specific to the sale and distribution of cinema advertising. We are subject to federal, state and local laws that govern businesses generally such as wage and hour, worker compensation and health and safety laws as well as federal and state privacy, information security and consumer protection-related laws and regulations. We have been and are currently in compliance with all government mandated and environmental regulations.
Competition
Our advertising business competes in the estimated $212$260.0 billion U.S. advertising industry with many other forms of marketing media, including television, radio, print, internet, mobile and outdoor display advertising. While cinema advertising represents a small portion of the overall advertising industry today, we believe it is well-positioned to capitalize on the continuing shift of advertising spending away from traditional media, in particular television where consumers can skip advertisements through DVRs and other technology, to newer and more targeted forms of media.
Our advertising business also competes with many other providers of cinema advertising, which vary substantially in size. As the largest cinema advertising network in the U.S., we believe that we are able to generate economies of scale, operating
efficiencies and enhanced opportunities for our clients to reach an engaged movie audience on both a national and local level to allow us to better compete for premium video dollars in the larger advertising marketplace.
Competitive Strengths
We believe that several strengths position us well to compete in an increasingly fragmented media landscape.
Preferred National Advertising Network
We believe that our cinema advertising network is an attractive option for advertisers on both a national, regional and local level and delivers measurable results for our clients that are comparable, and preferred, to the television, online and mobile or other video advertising networksoptions that we compete against in the marketplace.
Extensive National Market Coveragenational market coverage—Our contractual agreements with our founding members and network affiliates provide long-term exclusive access (subject to limited exceptions) to sell cinema advertising across the largest network of digitally-equipped theaters in the U.S. This allows us to offer advertisers the broad reach and national scale that they need to effectively reach their target audiences.
As of December 27, 2018:
•Our advertising network consisted of 21,17220,450 screens (16,768(16,515 operated by the founding members) located in 1,7301,656 theaters (1,259(1,231 operated by the founding members) in 47 states and the District of Columbia, including each of the top 25 and 50 DMAs®, and 187190 DMAs® in total;total, as of December 31, 2020;
Approximately 73% of our screens (approximately 77% of our attendance) were located within the top 50 U.S. DMAs® and approximately 32% of our screens (approximately 37% of our attendance) were located within the top 10 U.S. DMAs®. Theaters within•Over 650 million people attended theaters in our network represented approximatelyin 2019 and 69%, 67%,65% and 67%65% of the total theater attendance in theaters that present advertising in the top 10, top 25 and top 50 U.S. DMAs®DMAs®, respectively and 62% for61% of all DMAs®,DMAs® nationally, providing a veryan attractive platform for national advertisers who want exposure in larger markets or on a national basis;
Our total annual network theater attendance was approximately 705.1 million (approximately 580.8 million from the founding members), which increased 7.5% compared to 2017. Our network of modern theaters represented approximately 58% of the total U.S. theater attendance, with some of the most highly attended theaters in the industry, as measured by screens per location and attendance per screen;
•The average screens per theater in our network during 2020 was 12.212.3 screens, 1.7 times the U.S. theater industry average,average; and the
•The aggregate annual attendance per screen of theaters included in our network during 20182019 was 33,303,30,714, versus the U.S. theater industry average attendance per indoor screen of 29,985,28,209, using metrics reported by the National Association of Theatre Owners (“NATO”).Owners.
Over 138 million people attended theaters in our network during the portion of 2020 that the theaters were open.
Scalable, State-of-the-Art Digital Content Distribution Technologystate-of-the-art digital content distribution technology—Our use of the combination of satellite and terrestrial DCN network technology, combined with the design and functionality of our Digital Content SoftwareDCS and Network OperationsCustomer Experience Center infrastructure, makes our network efficient and scalable and also allows us to target specific audiences and provide advertising scheduling flexibility and reporting. We offer short lead times by accelerating the delivery time of media from proposal to on-screen across our network of movie theaters nationwide. National, local and regional advertisers are generally able to run their ads in theNoovieNoovie®
pre-show less than 72 hours following the proposal (comparable to TV), which is a significant improvement overcomparable to the cinema industry’s traditional turn-aroundlead time frame and givesof television advertising, giving businesses that rely on time-sensitive promotional advertising strategies such as car dealerships, retail stores and quick service restaurants, the opportunity to take advantage of the power of cinema. The Company plans to further decrease this lead time following the upgrade of our end-to-end order management and scheduling system, as further discussed below.
This scalability of our distribution technology has allowed us to expand our cinema advertising network with minimal additional capital expenditures or personnel, and we expect to benefit from this scalability in the future as we add new theaters from the founding members, our existing network affiliate relationships and the addition of new network affiliates.
Millennials, Content and Data
We believe that the Millennial audiences (age 18-34) in our network of theaters, the premium content of Hollywood films and our Noovie pre-show, and the advances we have made in cinema advertising data all give us a competitive advantage in the media marketplace.
Access to a Highly Attractive, Engaged Audiencehighly attractive, engaged audience—We offer advertisers the ability to reach highly-coveted target demographics, including young, affluent and educated “Millennial” and “Gen Z” moviegoers. According to Nielsen Cinema Audience Reports for 2018,2019, 53% of the NCM LLC audience were between the ages of 12-34, compared to 56%53% in 2017.2018, with a median age of 28 in 2019. Further, 46%45% of our moviegoers have a household income greater than $100,000 (versus 32%34% of the
general population), with a median moviegoer household income of $92,100 in 2019, and 41%42% have received a Bachelor’sbachelor’s degree or higher (versus 31% of the general population) according to the 20182019 Doublebase GfK MRI Study.
Study.
Because of the impact of cinema’s state-of-the-art immersive video and audio presentation, we also believe that movie audiences are highly engaged with the pre-show advertising and entertainment content that they view in our pre-show theater environment. According to industry research,Nielsen, cinema advertising has significantly higher recall rates than advertising shown on television, and cinema is one of the few advertising mediums where the ability to bypass the marketing messages is limited. Attribution studies conducted in 2018 and 2019 for the Company by Foursquare, a location-based services company, demonstrated that cinema advertising resulted in a 17% increase in store visits for a cellphone retailer, 20% increase in store visits to a quick service restaurant, and a 12% increase in store visits to a holiday retailer. Further, an attribution study conducted for the Company by Comscore and PlaceIQ, media management and analytics companies, demonstrated that cinema advertising resulted in a 12% increase in the intent to view a cable program. Based upon an intercept study conducted by eWorks, a market research company, in 2019, Platinum Spot advertisers experienced between a 32% and 96% increase in brand recall for a retailer, a car company and a cellphone manufacturer.
Innovative, Branded Pre-Feature ContentWorld-class entertainment and innovative, branded pre-feature content—The film content created by Hollywood studios is considered by many to be the finest entertainment content in the world, which creates a highly-desirable advertising environment for brands. We believe that our entertainment and advertising pre-featureNoovie pre-show programNoovie, provides a high-quality entertainment experience for theater audiences and an effective marketing platform for advertisers. By partnering with leading media, entertainment, technology and other companies, we are able to provide better original content for our audience andmore impact for the advertiser. Because we offer local and national “pods” within ourNooviepre-show, we are consistent with the placement of ads on television networks, which allows us to be more easily integrated into traditional sight-sound-and-motionmedia buys.
Prime Audience Measurabilitymovie audience data, measurability and Targetingtargeting—As with many other advertising mediums, we are measured by third-party research companies such ascompanies. Prior to September 2020, Nielsen Holdings PLC that provide us with the percentage ofmeasured our audience. Beginning in January 2021, Epicenter Experience LLC will measure our audience, including the total attendance that are in their seats at various times during ourNooviepre-show. What differentiates us fromAdditionally, unlike some other advertising mediums, however, is that we also receive monthly attendance information by film at least monthly, by rating and by screen for all of the founding member theaters, and by our fiscal accounting month ("flight"), and by location for the theaters operated by our network affiliates at least monthly, which allows us to report the actual audience size for each showing of a film includingwhere ourNooviepre-show.pre-show played. We believe that the ability to provide this level of detailed information to our clients gives us a distinct competitive advantage over traditional media platforms whose measurement is based only on extrapolations of a very small sample of the total audience.
In 2020, we continued to invest in the development of our cloud-based Data Management Platform (DMP) which we believe will allow us to provide even more robust audience insights and analytics to our clients. To further enhance the connection between brands and movie audiences, we accumulate exclusive first and second party audience data from several sources within our DMP. This audience data is then leveraged for the targeting of ad campaigns and can also serve to deliver closed-loop attribution reporting. We expect to continue to enhance the capabilities of the platform in 2021 by continuing to gather first and second-party data through our Noovie digital products, as well as additional second-party data sources and segments.
Integrated Marketingmarketing and Digital Productsdigital products—Our ability to bundle our on-screen advertising opportunities with integrated lobby, onlinedigital marketing and mobile marketingdigital out-of-home products allows us to offer advertisers multiple touchpoints to reach movie audiences before, duringanytime and after the filmanywhere to execute true 360-degree marketing programs. We believe these multiple marketing impressions throughout the entire entertainment experience allowsallow our advertisers to extend the exposure for their brands and products and create a more engaging relationship with movie audiences in every stage of their movie journey. Additionally, our digital products provide us with valuable, exclusive first party data which can be utilized by our advertising customersclients through our CinemaNoovie Audience Accelerator product to better reach their target audience with higher degrees of accuracy and measure business outcomes more accurately.
In 2018, we continued to invest in the development of our cloud-based Data Management Platform which we believe will allow us to provide even more robust audience insightsContractual theater circuit partner and analytics to our clients. To further enhance the connection between brands and movie audiences, we accumulate audience data from several sources within our Data Management Platform. This audience data is then leveraged for another level of targeting of ad campaigns and can also serve to deliver closed-loop attribution reporting. We expect to continue to enhance the capabilities of the platform in 2019 by continuing to gather first-party data through our Noovie digital products, as well as additional data sources and segments.
Contractual Theater Circuit Partner and Advertiser Relationshipsadvertiser relationships—Our exclusive multi-year contractual relationships with our founding members and network affiliates allow us to offer advertisers a national network with the scale, flexibility and targeting to meet their marketing needs. Our exclusive multi-year contractual relationships with our content partners and PSA sponsors, as well as our agreements to satisfy the founding members’ on-screen marketing obligations to their beverage concessionaires, provide us with a significant upfront revenue commitment, accounting for approximately 26%27% and 23% of our total revenue for the year ended December 27, 2018.31, 2020 and December 26, 2019, respectively. In addition, our participation in the annual advertising upfront marketplace has allowed us to secure significant annual upfront commitments from national advertisers looking to secure premium cinema inventory. These upfront commitments accounted for approximately 28% and 14% of our total revenue for the year ended December 31, 2020 and December 26, 2019, respectively.
Strong Operating Marginsoperating margins with Limited Capital Requirementslimited capital requirements—Our annual operating income and Adjusted OIBDA margins from our IPO through the year ended December 26, 2019 have been consistently strong, ranging from approximately 33.1% to 38.7% and 46.5% to 51.5%, respectively, over the lastprevious five years. (ReferOur annual operating income and Adjusted
OIBDA margins were (67.5%) and (21.5%) for the year ended December 31, 2020 due to the impact of the COVID-19 Pandemic on our operations. Refer to “Item 6. Selected Financial Data-Notes to the Selected Historical Financial and Operating Data” for a discussion of the calculation of Adjusted OIBDA margin, which is a non-GAAP financial measure, and thea reconciliation of Adjusted OIBDA margin to operating income.) In addition, due to the network equipment investments made in recent years by the founding members and network affiliates in new and acquired theaters and the requirements in the ESAs for the founding members to make future investments for equipment replacements, and the scalable nature of our Network Operations Center and other infrastructure, we do not expect to make major capital investments to grow our operations as our network of theaters expands.
Our capital expenditures have ranged from approximately 2%2.9% to 4%3.5% of revenues over the last five years.years through December 26, 2019. Our capital expenditures were 12.5% of revenue for the year ended December 31, 2020 due to the impact of the COVID-19 Pandemic on our operations. For the year ended December 27, 2018,31, 2020 our capital expenditures and other investments were $15.4$11.2 million, of which only $0.9 million primarily related to investments in network equipment to add new network affiliate theaters and $6.9$4.6 million was related to investments in our digital infrastructure, investment. We expect a consistent level$2.4 million related to certain implementation and prepaid costs associated with cloud computing arrangements related to the planned upgrade of investment within our digital products overend-to-end order management and scheduling system that was implemented in the next few yearsfirst quarter of 2021 and $2.0 million associated with upgrades to our existing systems related to the planned upgrade of our end-to-end order management and scheduling system. Given the impact of the COVID-19 Pandemic on our operations, our current focus is on cash containment and non-essential capital expenditures were reduced in line with2020 accordingly. Following the normalization of our strategy to expand and scale an integrated digital business as further discussed below. Weoperations, we believe our expectedhistorical level of Adjusted OIBDA and capital expenditures should provide us with the strategic and financial flexibility to pursue the
further expansion of our national theater network, invest in our digital products and other growth opportunities, opportunistically repay NCM LLC'sLLC’s debt and continue to make dividend payments to our stockholders. Further, due to the network equipment investments made in recent years by our founding members and network affiliates in new and acquired theaters, ESA provisions requiring founding members to make future investments for equipment replacements, and the scalable nature of our Customer Experience Center and other infrastructure, we do not expect to need to make major capital investments to grow our operations as our network of theaters continues to expand. As we continue to move our technology to cloud based Software as a Service (SaaS) platforms, we will continue to reduce our annual capital expenditure spending. However, operating expenses associated with the SaaS licenses will continue to increase. Certain implementation costs of our SaaS platforms are capitalized during the implementation period and will be recognized within operating income over the term of the SaaS contract after the systems are fully implemented.
Our Strategy
We are continuing to pursue a growth strategy that involves growingwe believe will create significant stockholder value following the normalization of our network affiliate partnerships, growing on-screenoperations, making NCM a unique investment vehicle by delivering a substantial dividend driven by long term revenue expanding digital product offerings, ensuring that we areand free cash flow growth. Our strategy includes the first choice for our customers, developing our peoplefollowing five pillars of growth:
Increase the Quality and capabilities, and allocating resources to strategy.Value of Our Media Inventory
Grow the Business
We intend to focuscontinue to increase the quality and value of our media inventory. Achieving one of our key initiatives in this strategy, we introduced new inventory in our Noovie® pre-show after the advertised showtime within Regal and Cinemark theaters following the 2019 ESA Amendments. This Post-Showtime Inventory consists of a total of five minutes between the lights down segment beginning just after the advertised movie showtime and including trailer lighting and the 30- or 60-second Platinum Spot deeply embedded within the movie trailers with trailer lighting and full trailer volume. We believe this inventory constitutes prized and impactful ad spots and expect these improvements to increase the value of the inventory that we can offer to our national clients. We believe our local and regional clients will also benefit from better inventory as their placement will now be closer to the advertised showtime. We introduced this new inventory at select network affiliate theaters beginning in early 2020 and plan to continue to work toward expanding the portion of our network including this new inventory. We believe this higher value inventory, combined with an entertaining and engaging pre-show program that is integrated with our Noovie digital ecosystem, provides a unique cross-platform premium video product that will stand out in the media marketplace. We also believe it will help mitigate the potential future impact of reserved seating on our business.
We are also actively continuing to work on new ways to reinvent our Noovie pre-show program to connect with today’s “Millennial” and “Gen Z” moviegoers to create an in-theater experience that will keep audiences coming back for more, as well as drive traffic to our digital properties.
Upgrade Our End-to-End Order Management and Scheduling System
We implemented the first phase of our upgraded end-to-end order management and scheduling system in the first quarter of 2021. We expect that once the system is fully implemented, we will be able to provide the more seamless digital buying experience required by today’s media buyers and solve the speed-to-market friction issues associated with our cinema product, making it easier and faster for advertisers to buy cinema advertising with NCM.
Invest in the Creation of Digital Entertainment Products and Digital Ad Inventory
We intend to continue to invest in the creation of compelling digital entertainment products and expand our Noovie digital ecosystem and user base of movie fans with NCM owned-and-operated products like Noovie.com, Noovie Trivia (including Noovie Shuffle and Name That Movie) and Noovie Arcade.These products create new ways for brands to engage with movie audiences beyond the big screen, reaching them anytime (before and after the movie) and anywhere with new
higher-margin digital ad inventory and creating valuable addressable first-party customer data. We expect to then monetize this data through advertising sales and sponsorships, as well as by leveraging our Noovie Audience Accelerator product.
For the year ended December 26, 2019, integrated on-screen and digital campaigns resulted in a 33% higher contract value compared to onscreen only contracts and is expected to be a key to future growth.
Build a Data-Driven Business
Along with growing our digital products, we plan to build a data-driven business that will allow us to meet the needs of today’s modern video advertising marketplace. We had 106.5 million and 171.0 million first- and second-party data sets as of December 26, 2019 and December 31, 2020, respectively. These valuable data sets consist of both our own NCM first-party data from our owned-and-operated digital products, as well as a variety of key second-party data addressable consumer records, including location-based data that allows us to track when our audiences go to the movie theater to see our Noovie pre-show and where they go in the following strategic ways.days and weeks afterwards. This initiative will allow us to re-target audiences with digital advertising through our Noovie Audience Accelerator product and increase the value and effectiveness of cinema campaigns for our advertisers.
GrowIt is important that we accelerate the growth and scale of our theater audience data to a critical mass to be able to effectively use that audience data to deliver value to our clients. It is that scale that we believe will make our NCM digital capabilities increasingly attractive to advertisers, and especially to national brands who buy both our national and regional inventory.
Expand Our Affiliate Partnerships—Network by Primarily Focusing on Adding Key Affiliates and Screen Counts in Select Markets
Our relationships with our exhibitors are a key and renewed focus of our business. In 2018, ourOur Affiliate PartnershipPartnerships team is dedicated to serving the needs of our founding member theater circuits and our more than 5450 network affiliates nationwide.nationwide as of December 31, 2020. We continuously seekplan to continue to expand our theater circuit customer baseaffiliate network by primarily focusing on adding key affiliates and add new network affiliate partners toscreen counts in select markets by strategically targeting priority exhibitors who are not currently part of our network thatand whose cinema advertising contracts we expect will be coming up for renewal in the next several years. This will allow us to increase our revenue by increasing the number of impressions we have available to sell to advertisers. Itadvertisers, extending our reach to additional markets to further improve our national footprint for brands looking to reach those audiences, and strengthening our reach in markets we are already in for greater saturation in those DMAs. In January 2021, we entered into an exhibitor agreement with Harkins Theaters, the fifth largest exhibitor in the U.S., increasing our network by over 500 screens and 33 theaters beginning in May 2021 through December 2037.
Another key part of our affiliate strategy going forward is also importantthe intention to note that, underincrease the number of affiliate theaters in our network showing the improved Noovie pre-show format featuring the premium Post-Showtime Inventory. While adoption across our affiliate network is expected to take some time, 26% of our network affiliates are running our Post-Showtime Inventory as of December 31, 2020, which account for approximately 3% to 5% of our total network attendance based on 2019 levels.
Under the terms of the ESAs and common unit adjustment agreement with the founding members and our network affiliate agreements, all new theaters built or acquired (subject to existing advertising sales agreements) by the founding members or network affiliates will become part of our network. Since NCM, Inc.’s February 2007 IPO, the founding members have added approximately 3,700net new screens and 50network affiliates have been added toIncluding our network with approximately 3,500screens. During 2018, we added 322net screens from the founding members and network affiliates.affiliates, our net screens have increased in nine of our last ten fiscal years prior to the year ended December 31, 2020. We believe this expansion continuedcontinues to improve our geographic coverage and enhanceenhances our ability to compete with other national advertising mediums, which allows our exhibitor customersclients to maximize the advertising value of their audiences.
Grow On-Screen Revenue—We planDiversify Our Media Assets by Offering Digital Out-of-Home Media Solutions Beyond the Movie Theaters
In October 2020, NCM's DOOH group was created to continue our successful strategy of selling our inventory like premium video in the larger advertising marketplace, once again utilizing the upfront advertising marketplace to maximize our use of inventory. This strategy has yielded positive results, and we believe that the increased market awareness among media buyers and clients raises our credibility as a medium and may allow us to gain upfront commitments traditionally made exclusively to cable and broadcast television networks, and more recently online and mobile networks. Further, we believe it will help increase our share of video advertising spending by increasing the number of clients and client industries that buy our network.Over time, this greater shift toward more upfront commitments will allow us to bundle several flights throughout the year and stabilize month-to-month and quarter-to-quarter CPM volatility by increasing overall inventory utilization and balancing that utilization throughout the year. Consistentfurther unite brands with the television industry upfront booking practices,power of movies by extending movie-centric entertainment content, trivia, and advertising beyond theaters to a portionvariety of our upfront commitments have cancellation options or optionscomplementary Digital Out-Of-Home platforms. NCM is now able to reducecombine the amountstrengths and effectiveness of Cinema, Digital, and Place-Based media together to create innovative, integrated campaigns that advertisers may purchase that could reduce what is ultimately spent by clients that have made upfront commitments and we would need to rely on the scatter market to replace those commitments.
We also intend to increase our market share of local and regional advertising spending by aggressively pursuing further integration into agency planning and buying tools, such as our relationships with FreeWheel Advertisers and Mediaocean, leaders in media buying and selling software, which allow agencies to buy cinema advertising in the "National Spot TV" marketplace. By making NCM an option in these systems and other industrywide and in-house agency planning and buying systems, we believe we can remove barriers to entry by incorporating cinema into media plans and tapping into new pools of advertising dollars.
We also plan to continue to re-imagine our Noovie pre-show to build the Noovie brand, enhance the audience experience, and maintain its commercial value.
Expand and Scale an Integrated Digital Business—We intend to continue to upgrade our existing digital offerings (Fantasy Movie League, Noovie ARcade, Noovie.com, Noovie Trivia and Cinema Accelerator) as well as expand ourNooviedigital ecosystem to support our core on-screen business by introducing additional products that will engage movie audiences with exclusivefans anytime and unique content, commerce, and gaming opportunities. During 2018 we released ourNoovieARcadeapp, which allows us to capture exclusive first party data on our audience. During 2018 we also began development of our Noovie Trivia app and Noovie.com which are expected to be released in 2019. Cinema Acceleratorcurrently identifies moviegoers’ mobile devices as they enter a theater, and re-engages them with a brand’s messages wherever they are consuming content — on mobile devices, social media, or online. As we continue to create our own NCM owned-and-operated ad inventory across our suite of digital products, we also plan to build our own foundational capabilities for digital ad buying, selling and serving through the development of “Cinema Accelerator 2.0,”an enhanced version of our existingCinema Acceleratorproduct. This upgraded version will offer increased and better quality first party data.
Be the First Choice for Customers
Our approach is to always strive to be the first choice for our customers, including our advertising and agency customers, our exhibitors, and movie studios. By offering innovative on-screen, in-lobby and digital cinema advertising solutions to connect brands to unique, engaged and valuable young adult audiences at scale, we believe we can offer our advertiser and agency customers a valuable and effective marketing option that cannot be duplicated in any other medium. As the first choice for our customers, we can continue to expand our advertising client base and increase our market share of U.S. advertising spending. Our national sales team was successful in adding 31 clients in 2018 that were first time clients or had not advertised with us since our IPO. These new clients added in 2018 included companies in the electronic stores, financial products and services, game and toy stores, health and fitness, home products, home video, hotels and resorts, import auto, insurance, internet site, liquor, movie studios, office supply, oil companies, pet food and supply, pharmaceutical, prepared foods, restaurants, telecom software, transportation, and video game softwareindustries. Despite this growth, we believe there are still thousands of potential clients that currently advertise on other mediums such as television but have yet to advertise on our network. These strategies are designed to expand our relationships with existing advertising clients and broaden our advertising client base in new and existing client industries.
Develop People and Capabilities
Our success is tied to the quality of our management and staff. In order to ensure that we retain and attract high quality personnel, we seek to foster and maintain a culture that focuses on teamwork, personal growth, inclusion and diversity. We will continue to make meaningful investments in internal and external training programs for our management and staff to ensure that our personnel have, or build, the skillsets necessary to support our evolution and growth objectives. We have also adopted a succession plan that includes short-term and long-term planning elements to allow us to successfully continue operations should any of our senior management team become unavailable to us, such as when our Chief Executive Officer resigned in November 2018.
Resources to Strategy
We will continue to assess and eliminate off-target resources for a strategic focus on the future of NCM. We will be allocating resources to continuity and growth, with a focus from our staff on financial responsibility with company resources.anywhere.
Intellectual Property Rights
We have been granted a perpetual, royalty-free license from the founding members to use certain proprietary software for the delivery of digital advertising and other content through our DCN to screens in the U.S. We have made improvements to this software since theour IPO date and we own those improvements exclusively, except for improvements that were developed jointly by us and the founding members.
We have secured U.S. trademark registrations for NCM®, National CineMedia NCM Media Networks® and Noovie. We also have U.S. trademark registrations pending for What's NoovieNoovie®. It is our practice to defend our trademarks and other intellectual property rights, including the associated goodwill, from infringement by others. We are aware that other persons or entities may use names and marks containing variations of our registered trademarks and
other marks and trade names. Potentially, claims alleging infringement of intellectual property rights, such as trademark infringement, could be brought against us by the users of those other names and marks. If any such infringement claim were to prove successful in preventing us from either using or prohibiting a competitor’s use of our registered trademarks or other marks or trade names, our ability to build brand identity could be negatively impacted.
Government Regulation
Currently, we are not subject to regulations specific to the sale and distribution of cinema advertising. We are subject to federal, state and local laws that govern businesses generally such as wage and hour and worker compensation laws as well as federal and state privacy, information security and consumer protection-related laws and regulations.
Available Information
We maintain a website at www.ncm.com, on which we will post free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports under the heading “Investor Relations” located at the bottom of the home page after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). We also regularly post information about the Company on the Investor Relations page. We do not incorporate the information on our website into this document and you should not consider any information on, or that can be accessed through, our website as part of this document. The SEC also maintains a website that contains our reports and other information at www.sec.gov.
Ownership of the common stock and other securities of the Company involves certain risks. Holders of the Company’s securities and prospective investors should consider carefully the following material risks and other information in this document, including our historical financial statements and related notes included herein. The material risks and uncertainties described in this document are not the only ones facing us. If any of the risks and uncertainties described in this document actually occur, our business, financial condition and results of operations could be adversely affected in a material way. This could cause the trading price of our common stock to decline, perhaps significantly, and you may lose part or all of your investment.
Risks Related to Our Business and Industry
Pandemics, epidemics or disease outbreaks, such as the novel coronavirus (COVID-19 virus), have disrupted and are continuing to disrupt our business and the business of our founding members and network affiliates, which has and could continue to materially affect our operations, liquidity and results of operations.
Pandemics or disease outbreaks such as the novel coronavirus (COVID-19 virus) have and are continuing to disrupt our business and the business of our founding member and network affiliates’ theaters. Following the World Health Organization’s declaration of the COVID-19 virus as a pandemic in March 2020, the United States’ government and other state and local governments issued precautionary restrictions on travel, public gatherings and other events and issued social distancing guidelines. Beginning in mid-March 2020, each of our founding members and all of our network affiliates announced that their theaters would be temporarily closed and almost all of the theaters within our network remained closed until late August 2020. The Company generated no in-theater advertising revenue for the approximate six months that the theaters were closed. As of the date of this filing, approximately 49.0% of theaters within our network are open, with 51.0% remaining closed due to local government mandates or the lack of major motion picture releases. Many of the open theaters are operating at reduced hours and offering a limited number of movie showtimes and attendance has not returned to historical levels.
During the COVID-19 Pandemic, a number of major motion picture releases were delayed until 2021 and some studios shortened the “release window” between the release of motion pictures in theaters and an alternative delivery method or released motion pictures directly to alternative delivery methods bypassing the theater entirely or releasing in theaters on the same day as the film is released on a streaming video on demand service and this may continue during the COVID-19 Pandemic and after it has subsided. For example, some studios announced plans to release all of their 2021 films on the same day they are released in theaters, and other studios announced plans to shorten the exclusive window provided to theaters for certain types of movies, regardless of the then current impact of the COVID-19 Pandemic.
The impact, extent and duration of the government-imposed restrictions on travel, public gatherings, other events and business generally, the duration of such measures, the timing and acceptance of a rollout of any approved vaccine to combat the spread of COVID-19, and studios willingness to release first-run content and cinema audience’s willingness to attend movies in theaters due to alternative availability or the COVID-19 Pandemic the overall effect of the COVID-19 Pandemic is currently unknown but has had and is continuing to have a material negative impact on our business, liquidity, financial conditions and results of operations. We cannot predict when the effects of the COVID-19 Pandemic will subside, when all of our theaters will reopen and patrons will be comfortable attending, if our business will recover at the same time as other advertising companies or the exhibition industry generally, or when the business will return to normal levels. The longer and more severe the pandemic, including repeat or cyclical outbreaks or increases in rates of infection, the more severe the adverse effects will be on our business, liquidity, financial conditions and/or results of operations. Significant impacts on our business caused by the COVID-19 Pandemic and other pandemics include and are likely to continue to include among others:
•decreased attendance in theaters after they reopen, including due to (i) continued safety and health concerns or perceived infection or health risk and social distancing requirements or (ii) a change in consumer behavior in favor of alternative forms of entertainment;
•advertisers’ perception of cinema advertising may change based on future attendance, the type and number of movies released in theaters or shortened theatrical windows, and potential impacts of film production;
•due to adverse business impacts, advertisers may be less willing to invest in advertising and may prioritize other types of investment during and after the COVID-19 Pandemic;
•advertisers may be unwilling to enter into upfront advertising arrangements with us or commit to allocate budgets to cinema advertising due to uncertainty regarding the opening of cinemas, upcoming film releases, and the availability of other advertising options;
•the bankruptcy or restructuring of our founding members or other network affiliates in which the agreement with that party may be rejected, renegotiated or deemed unenforceable;
•increased operating costs without associated revenues during periods where theaters are open but attendance has not reached historical levels;
•an inability to collect accounts receivable from small business advertisers that have been temporarily or permanently closed;
•reductions and delays associated with planned operating and capital expenditures;
•increased risk related to employee matters, including litigation and claims relating to furloughs or pay reductions and increased turnover, which increased significantly during the fourth quarter of 2020 among our employees;
•actual and potential impairment charges and additional deferred tax expense related to the increase of valuation allowances on our deferred tax assets;
•the economic impact caused by increased unemployment rates, economic conditions and reduced level of economic growth may lead to reduced consumer spending available for consumers to attend theaters;
•our ability to implement business continuity plans in a fast-moving emergency, which could have an adverse effect on our internal controls (potentially giving rise to significant deficiencies or material weaknesses) and also increase our vulnerability to information technology and other systems disruptions;
•our inability to generate significant cash flow from operations, which could lead to a substantial increase in indebtedness and negatively affect our ability to comply with the financial covenants, if applicable, in our debt agreements;
•our inability to access lending, capital markets and other sources of liquidity, if needed, on reasonable terms, or at all, or obtain amendments, extensions and waivers;
•our inability to effectively meet our short- and long-term obligations; and
•our inability to service our existing and future indebtedness.
Significant declines in theater attendance could reduce the attractiveness of cinema advertising and could reduce our revenue
Our business is affected by the level of attendance at the founding members’ theaters and to a lesser extent our network affiliates,affiliates’ theaters, who operate in a highly competitive industry and whose attendance is reliant on the presence of motion pictures that attract audiences. Over the last 2010 years prior to 2020, theater attendance has fluctuated from year to year but on average has remained relatively flat. The value of our advertising business could be adversely affected by a decline in theater attendance or even the perception by media buyers that our network is no longer relevant to their marketing plan due to the decreases in attendance and geographic coverage. Factors
During the COVID-19 Pandemic, several studios shortened or eliminated the “release window” between the release of major motion pictures to alternative delivery methods or released motion pictures directly to alternative delivery methods bypassing the theater entirely. The COVID-19 Pandemic also led to significant changes in consumer behavior; including avoiding crowds and other public indoor spaces, and governments restricted the ability of theaters to operate at normal capacity. While some research suggests the changes in consumer behavior may only be in response to the COVID-19 Pandemic, it is unclear whether consumers and studios will revert to their pre-COVID-19 Pandemic behavior or if these changes are long-term trends. Additional factors that could reduce attendance at our network theaters include the following:following, which may be accelerated by actions taken in response to the COVID-19 Pandemic:
•if NCM LLC’s network theater circuits cannot compete with other out-of-home entertainment due to an increase in the use of alternative film delivery methods (and the shortening or elimination of the “release window” between the release of major motion pictures and releasing to the alternative delivery methods)methods or releasing motion pictures directly to alternative delivery methods bypassing the theater entirely), including network, syndicated cable and satellite television and DVDs, as well as video-on-demand, pay-per-view services, video streaming and downloads via the Internet;
•theater circuits in NCM LLC’s network are expected to continue to renovate auditoriums in certain of their theaters to install new larger, more comfortable seating, which reduces the number of seats in a theater auditorium. This renovation has been viewed favorably by patrons and many theater circuits have noted an intent to continue such renovations;
•changes in theater operating policies, including adjustments to seating arrangements or restricted capacity and the number and length of trailers for upcoming films that are played prior to the start of the feature film, which if the length of trailers increases, it couldmay result in most or all of the NoovieNoovie® pre-show starting further out from the show timeactual start of the feature film;
•any reduction in consumer confidence or disposable income in general that reduces the demand for motion pictures or adversely affects the motion picture production industry;or exhibition industries;
•the success of first-run motion pictures, which depends upon the production and marketing efforts of the major studios and the attractiveness and value proposition of the movies to consumers compared to other forms of entertainment;
•if political events, such as terrorist attacks, or health-related epidemics, such as flu outbreaks and pandemics, such as the COVID-19 Pandemic, cause consumers to avoid movie theaters or other places where large crowds are in attendance or governments to restrict or prohibit the operation of and attendance at theaters;
•regulations, theater operating policies or consumer behavior that require higher levels of social distancing, including those put in place as a response to the COVID-19 Pandemic;
•if the theaters in our network fail to maintain their theaters and provide amenities that consumers prefer;prefer, including cleanliness;
•if studios begin to reduce the number of feature films produced andfor theater exhibition or their investments in producing those films or reduce the investments made to market those films;
•if future theater attendance declines significantly over an extended time period, such as a result of prolonged closures resulting from the COVID-19 Pandemic, one or more of the founding members or network affiliates may face financial difficulties and could be forced to sell or close theaters or reduce the number of screens it builds or upgrades or increase ticket prices; and
•NCM LLC’s network theater circuits also may not successfully compete for licenses to exhibit quality films and are not assured a consistent supply of motion pictures since they do not have long-term arrangements with major film distributors.pictures.
Any of these circumstances could reduce our revenue because our national and regional advertising revenue, and local advertising to a lesser extent, depends on the number of theater patrons who attend movies. Additionally, if attendance underperforms against expectations or declines significantly, the Company will be required to provide additional advertising time (makegoods) to national advertisers to reach agreed-on audience delivery thresholds. Certain of these circumstances can also lead to volatility within our utilization. We have also experienced volatility inhistorically seen our utilization over the years, with annual national inventory utilization ranging from 113.5% to 128.3% over the last five years. Wevary more than 10% on an annual basis and we experience even more substantial volatility quarter-to-quarter.
Changes in theater patron behavior could result in declines in the viewership of our Noovie preshowNoovie®pre-show which could reduce the attractiveness of cinema advertising and our revenuesrevenues.
The value of our national and regional on-screen advertising and to a lesser extent our local advertising is based on the number of theater patrons that are in their seats and thus have the opportunity to view the Noovie pre-show. Trends in patron behavior that could reduce viewership of our Noovie pre-show include the following:
•theater patrons are increasingly purchasing tickets ahead of time via on-line ticketing mediums and when available reserving a seat in the theater (offered in approximately 54.2%87% of our network as of December 27, 2018)31, 2020), which could affect how early patrons arrive to the theater and reduce the number of patrons that are in a theater seat to view most or all of the Noovie pre-show; and
•during the COVID-19 Pandemic consumers changed their behavior in order to avoid large groups and other public indoor activities, and it is unclear whether these behavior changes will become a long-term trend; and
•changes in theater patron amenities, including, online ticketing, bars and entertainment within exhibitor lobbies causing increased dwell time of patrons.
National advertising sales and rates are dependent on the methodology used to measure audience impressions. If a change is made to this methodology that reflects fewer audience impressions available during the pre-show, this could adversely affect the Company’s revenue and results of operations.
We may not realize the anticipated benefits of the 2019 ESA Amendments.
On September 17, 2019, NCM LLC entered into the 2019 ESA Amendments with affiliates of each of Cinemark and Regal. Among other things, the 2019 ESA Amendments provide that, beginning November 1, 2019, NCM LLC is entitled to display up to five minutes of the Noovie®pre-show after the scheduled showtime of a feature film and a Platinum Spot that is either 30 or 60 seconds of the Noovie pre-show in the trailer position directly prior to the “attached” trailers preceding the feature film.
We expect the 2019 ESA Amendments to ultimately result in an increase in average CPM, revenues and Adjusted OIBDA, however we may not realize any or all such benefits. Potential difficulties and uncertainties that may impair the full realization of the anticipated benefits include, among others:
•the behavior of theater patrons may change in response to the display of a portion of the Noovie pre-show after the advertised showtime, or in response to the combination of advertising and trailers before the start of the feature film, resulting in a reduction to the number of patrons that are in a theater seat to view most or all of the Noovie pre-show;
•exhibitors may encounter issues in displaying a portion of the Noovie pre-show after the advertised showtime because of technical issues, access issues with their content providers, or other issues that may arise in the future;
•potential advertisers may not view the Post-Showtime Inventory as attractive due to inability to run across our entire network or view it as a premium advertising opportunity and the average CPMs for the Noovie pre-show may not increase as much as anticipated, or at all;
•NCM LLC may not satisfy the minimum average CPM or the other restrictions which are required by the 2019 ESA Amendments for it to have the right to display the Platinum Spot for more than one concurrent advertiser;
•the extended length of time between the advertised showtime and the beginning of the feature film may decrease the average CPM for that portion of the Noovie pre-show appearing before the advertised showtime, which may partially or fully offset any increase in average CPM for the Post-Showtime Inventory; and
•the increased theater access fees payable to Cinemark and Regal in connection with the Post-Showtime Inventory and revenue share applicable to the Platinum Spot may exceed the increase, if any, in revenue resulting from the 2019 ESA Amendments.
The anticipated benefits we expect to receive as a result of the 2019 ESA Amendments are subject to factors that we do not and cannot control. Failure to realize the anticipated benefits could result in decreases in revenue and Adjusted OIBDA and diversion of management’s time and energy, and could adversely affect our business, financial condition and operating results.
We may not be successful in increasing the number of theaters in which NCM LLC has the right to display Post-Showtime Inventory.
As a result of the 2019 ESA Amendments, NCM LLC is entitled to display up to five minutes of the Noovie®pre-show after the scheduled showtime of a feature film and a Platinum Spot that is either 30 or 60 seconds of the Noovie pre-show in the trailer position directly prior to the “attached” trailers preceding the feature film. We also entered into agreements to provide similar access to inventory as the 2019 ESA Amendments with certain of our other current network affiliates. At this time NCM LLC is displaying Post-Showtime Inventory in Cinemark, Regal and a number of affiliate networks, which together constituted approximately 58% of the attendance in our network based upon pre-COVID-19 attendance levels.
While we intend to seek to enter into agreements that provide similar access to inventory as the 2019 ESA Amendments with more of our current network affiliates and other potential network affiliates, there can be no assurance that we will be successful in increasing either the number of theaters of current network affiliates or potential network affiliates in which NCM LLC has the right to display advertising, including Post-Showtime Inventory. Certain of our theater partners have previously indicated that they have no plans to introduce our post-showtime inventory in their theaters. In addition, any agreements with other network affiliates or new network affiliates may be on terms less favorable to us than the current network affiliate agreements and the 2019 ESA Amendments. If we are unable to expand the number of theaters displaying our advertising, including the Post-Showtime Inventory, we will be limited to only experiencing the benefit of our advertising in our current theaters and our post-showtime advertising, if any, in Cinemark, Regal and participating affiliate theaters.
Changes in the ESAs with, or lack of support by, the founding members could adversely affect our revenue, growth and profitability.
The ESAs with the founding members are critical to our business. The ESA with AMC has an initial term of 30 years and the ESAs with each of Cinemark and Regal (as amended by the 2019 ESA Amendments) have a term of 34 years, each such term beginning February 13, 2007. Each ESA provides NCM LLC with a five-year right of first refusal for the services that it provides to the founding members, which begins one year prior to the end of the term of each respective ESA. The founding members’ theaters represent approximately 81% of the screens and approximately 83% of the attendance in our network based upon pre-COVID-19 attendance levels. If any one of the ESAs was terminated, not renewed at its expiration or found to be unenforceable, it could have a material negative impact on our revenue, profitability and financial condition.
The ESAs require the continuing cooperation, investment and support of the founding members, the absence of which could adversely affect us. Pursuant to the ESAs, the founding members must make investments to replace network equipment within their theaters and equip newly constructed theaters with digital network equipment. If the founding members do not have adequate financial resources or operational strength, and if they do not replace equipment or equip new theaters to maintain the level of operating functionality that we have today, or if such equipment becomes obsolete, we may have to make additional capital expenditures or our advertising revenue and operating margins may decline. In addition, the ESAs give the founding members the right to object to certain content in our Noovie® pre-show, including content that competes with us or the applicable founding member. If the founding members do not agree with our decisions on what content, strategic program or partnerships are permitted under the ESAs, we may lose advertising clients and the resulting revenue, which would harm our business. On October 24, 2019, AMC redeemed 197,118 membership units in exchange for shares of our common stock, reducing its ownership percentage in NCM LLC to 0.0% as of December 26, 2019. On December 31, 2020, AMC had 1,390,566 membership units in NCM LLC which were issued in March 2020 in accordance with the terms of the common unit adjustment agreement with the founding members. AMC is eligible to be issued additional shares pursuant to the terms of the common unit adjustment agreement. We are uncertain how AMC’s minimal ownership interest in NCM LLC may affect its cooperation with us under its ESA or otherwise going forward.
Our plans for developing additional digital or digital out-of-home revenue opportunities may not be implemented and may not be achievedachieved.
We have invested significant resources in pursuing potential opportunities for revenue growth, which we describe in “Business—this annual report on Form 10-K under “Business-Our strategy.” We had 106.5 million and 171.0 million first- and second-party data sets as of December 26, 2019 and December 31, 2020, respectively. These valuable data sets consist of both our own NCM first-party data from our owned-and-operated digital products, and a variety of key second-party data addressable consumer records, including location-based data that allows us to track when our audiences go to the movie theater to see our Noovie pre-show and where they go in the days and weeks afterwards. Our Strategy.” The developmentability to increase our first- and second-party data sets requires us to invest in third-party relationships, to comply with evolving privacy and data security laws, rules and regulations and to develop innovative digital properties that will increase the number of users of our online and mobile entertainment and advertising network and mobile apps and ourapps. Our ability to collect and leverage our first and second party movie audience data from these products remains at an early stage, is under increasing competitive and regulatory pressure and may be negatively impacted by changes to advertising technology and may not deliver the future benefits that we are expecting. It is important that we achieve a critical mass of audience data to make our digital offering more attractive to advertisers, including national brands who buy both our national and regional advertising inventory.
Our digital out-of-home business remains at an early stage and is under significant competitive pressure with the proliferation of available alternatives in the digital out-of-home space and may not deliver the future benefits that we are expecting. If we are unable to develop relationships and advertising that is relevant to the marketplace that can be integrated with our core on-screen advertising products, and if these offerings are not attractive to our advertisers, then the digital out-of-home business may not provide significant revenue or a method to help expand our cinema advertising business as it matures. Additionally, the COVID-19 Pandemic has impacted the consumer traffic and available impressions at a number of locations we have the right to display digital out-of-home advertising, and the traffic has not yet recovered to historic levels. As such, there can be no assurance that we will recoup our investments made pursuing additional revenue opportunities.
If we are unable to execute on products relevant to the marketplace or integrate these digital and digital out-of-home marketing products with our core on-screen and theater lobby products, andor if these offerings or other data sources do not continue or are unable to provide relevant first party data or to grow in importance to advertising clients and agencies, they may not provide a way to help expand our cinema advertising business as it matures and begins to compete with new or improved advertising platforms including online and mobile video services. As such, there can be no assurance that we will recoup our investments made pursuing additional revenue opportunities.
The markets for advertising are competitive and we may be unable to compete successfullysuccessfully.
The market for advertising is very competitive. Cinema advertising is a small component of video advertising in the U.S. and thus, we must compete with established, larger and better known national and local media platforms such as cable, broadcast and satellite television networks and other video media platforms including those distributed on the internet and mobile networks. In addition to these video advertising platforms, we compete for advertising directly with several additional media platforms, including online, digital out-of-home and mobile, radio, various local print media and billboards. We also compete with several other local and national cinema advertising companies. We expect all of these competitors to devote significant effort to maintaining and growing their business, which may be at our expense. We also expect existing competitors and new entrants to the advertising business, most notably the online, digital out-of-home and mobile advertising companies and video media platforms distributed on the internet and mobile networks, to constantly revise and improve their business models to meet expectations of advertising clients. In addition, the pricing and volume of advertising may be affected by shifts in spending toward online, digital out-of-home and mobile offerings from more traditional media, or toward new ways of purchasing advertising, such as through automated purchasing, dynamic advertising insertion, third parties selling local advertising posts and advertising exchanges, some or all of which may not be as advantageous to the Company as current advertising methods. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions, as well as budgeting and buying patterns.patterns and may be impacted by the current economic conditions caused by the COVID-19 Pandemic. A decline in the economic prospects of advertisers, industries, such as retail or consumer products, or the economy in general could alter current or prospective advertisers’ spending priorities. If we cannot respond effectively to changes in the media marketplace, changes in response tothe advertising market, new entrants or advances by our existing competitors, our business may be adversely affected.
Additionally, the mix of film ratings of the available motion pictures, such as a higher proportion of G and PG rated films or a shift in the types of films being shown in theaters, could cause advertisers to reduce their spending with us as the theater patrons for these films domay not represent thethose advertisers’ target markets.
Advertising demand also impacts the price (CPM) we are able to charge our customers.clients. Due to increased competition from other national video networks, including online and mobile advertising platforms, television networks and other out-of-home video, combined with seasonal marketplace supply and demand characteristics, we have experienced volatility in our pricing (CPMs) over the years, with annual national CPM increases (decreases) ranging from (16.4%(4.2%) to 9.6% over the last five years. 9.7% from 2015 to 2019.
If we do not continue to upgrade our technology, our business could fail to grow and revenue and operating margins could declinedecline.
FailureIn early 2021, we implemented a new end-to-end order management and scheduling system, Advertising Accord, which is developed by a third-party vendor. This system will replace many of our internally developed systems and provide delivery optimization, inventory management and monetization, intelligent dynamic scheduling, increased flexibility, and workflow automation. The system will also interface with our accounting system thus driving client invoicing and revenue recognition. Given the pervasive impact of this new system on the Company's processes, problems with the implementation of the system or integration with our other systems and software could cause operational difficulties, lead to errors within our financial reporting and slow or prevent the growth of our business in the future. As we continue to move our technology to cloud based SaaS platforms, our operating results may be impacted as operating expenses associated with the SaaS licenses may increase as our annual capital expenditure spending may decrease and this shift in costs may exceed our current estimates.
If the recent implementation of our end-to-end order management and scheduling system does not successfully provide all of the services we expect, if we are unable to continue to successfully orand cost-effectively implement further upgrades to our in-theater advertising network and proposal and inventory control, audience targeting and other management systems could limitthe system or if we lose access to the system through termination of the agreement or otherwise, our ability to offer our clients innovative, unique, integrated and targeted marketing products may be impacted, which could limit our future revenue growth. New advertising platforms such as online, digital out-of-home and mobile networks, and traditional mediums including television networks are beginning to use new digital
technology to reach a broader audience with more targeted marketing products, and failure by us to upgrade and maintain our technology could hurt our ability to compete with those companies. Under the ESAs, the founding members are required to provide technology that is consistent with that in place at the signing of the ESA. We may request that the founding members upgrade the equipment or software installed in their theaters, but we must negotiate with the founding members as to the terms of such upgrade, including cost sharing terms, if any. If we are not able to come to an agreement on a future upgrade request, we may elect to pay for the upgrades requested which could result in our incurring significant capital expenditures whichthat could adversely affect our results. profitability.
We also have many internally developed systems which support our operations due to the unique nature of our business model. The failure to continue to develop or the failure of the system to meet our needs may require us to make significant additional investments in our infrastructure or seek alternative technology which may impact our costs and prevent our growth. The failure or delay in implementation of the system or problems with the integration with our other systems and software could cause operational difficulties and slow or prevent the growth of our business in the future. In addition, the failure or delay in implementation of such upgrades or problems with the integration of our systems and software could slow or prevent the growth of our business.
Economic uncertainty or deterioration in economic conditions may adversely impact our business, operating results or financial conditioncondition.
The financial markets have experienced extreme disruption and volatility at times. A decline in consumer confidencespending in the U.S. may lead to decreased demand for our services or delay in payments by our advertising customers.clients. As a result, our results of operations and financial condition could be adversely affected. These challenging economic conditions also may result in:
•increased competition for fewer advertising and entertainment programming dollars;
•pricing pressure that may adversely affect revenue and gross margin;
•declining attendance and thus a decline in the impressions available for our pre-show;
•reduced credit availability and/or access to capital markets;
•difficulty forecasting, budgeting and planning due to limited visibility into the spending plans of current or prospective customers;clients; or
customer•client financial difficulty and increased risk of uncollectible accounts.
Our Adjusted OIBDA is derived from high margin advertising revenue, and therevenue. The reduction in spending by or loss of a national advertiser or group of local advertisers or failure to grow our advertising revenue in line with the growth of our contractual costs could have a meaningful adverse effect on our businessbusiness.
We generatedgenerate all of our operating income and Adjusted OIBDA from our high-marginhigh margin advertising business. A substantial portion of our advertising revenue relates to contracts with terms of a month or less. Advertisers will not continue to do business with us if they believe our advertising medium is ineffective or overly expensive. In addition, large advertisers generally have set advertising budgets, most of which are focused on online and mobile networks and traditional media platforms like television and, increasingly, online and mobile networks.television. Reductions in the size of advertisers’ budgets due to local or national economic trends, epidemics, pandemics, other natural disasters or similar events, a shift in spending to new advertising mediums like the internet and mobile platforms or other factors could result in lower spending on cinema advertising.our advertising inventory. Advertisers are spending in the scatter market closer to the start date of their advertising campaign. A substantial portion of our advertising revenue relates to contracts with terms of a month or less, and clients have many video media choices and can adjust where ads are placed up until their airdates without the risk of securing desired impressions. We have previously been successful in increasing the dollar value of upfront advertising agreements, but as advertising spending shifts in the scatter market closer to the start date of advertising campaigns, our ability to maintain high CPMs in the upfront markets may decrease. Because of the high incremental margins on our individual advertising contracts, if we are unable to remain competitive and provide value to our advertising clients, they may reduce their advertising purchases or stop placing advertisements with us. Even the loss of a small number of clients on large contracts would negatively affect our Adjusted OIBDA.results.
In addition, the ESAs and certain of our network affiliate agreements include automatic annual cost or fee increases. The theater access fees under the ESAs are composed of a fixed payment per patron, increasing by 8% every five years, and a fixed payment per digital screen connected to the DCN, increases annually by 5%. The digital screen fees may exceed the traditional theater access fees in the future because of the higher rate of growth of the digital screen fees. In addition, pursuant to the 2019 ESA Amendments, we have agreed to pay a fixed payment per patron in consideration for NCM LLC’s access to certain on-screen advertising inventory after the advertised showtime of a feature film, which amount will increase by fixed amounts until November 1, 2022 and then increase by 8% every five years beginning November 1, 2027. If we are unable to grow our high margin advertising revenue at a rate at least equal to that of our contractual obligations, our margins and results would be negatively affected.
The loss of any major content partner or advertising customerclient could significantly reduce our revenuerevenue.
We derive a significant portion of our revenue from our contracts with our content partners, PSAs and NCM LLC’s founding members’ agreements to purchase on-screen advertising for their beverage concessionaires. We currently have marketing relationships with six content partners, all of which expire in 2019. We also have four PSA contracts for 2019 which expire at the end of 2019. We are not direct parties to the agreements between the founding members'members’ and their beverage concessionaires but do not expect these agreementsthat each founding member will have an agreement with a beverage concessionaire to expire inprovide advertising for the foreseeable future. None of these companies individually accounted for over 10% of our total revenue during the year ended December 27, 2018. However, the26, 2019. The agreements with the content partners, PSAs and beverage advertising with the founding members in aggregate accounted for approximately 26%, 30% and 30%23% of our total revenue during the yearsyear ended December 27, 2018,26, 2019. During the year ended December 28, 2017 and December 29, 2016, respectively.31, 2020, one content partner accounted for 14.6% of our total revenue as a result from the temporary theater closures due to the COVID-19 Pandemic. Because we derive a significant percentage of our total revenue from a relatively small number of large companies, the loss of one or more of them as a customer could decrease our revenue and adversely affect current and future operating results.
The ESAs allow the founding members to engage in activities that might compete with certain elements of our business, which could reduce our revenue and growth potential.
The ESAs contain certain limited exceptions to our exclusive right to use the founding members’ theaters for our advertising business. The founding members have the right to enter into a limited number of strategic cross-marketing relationships with third-party, unaffiliated businesses for the purpose of generating increased attendance or revenue (other than revenue from the sale of advertising). These strategic marketing relationships can include the use of one minute on the LEN per 30-minute cycle and certain types of lobby promotions and can be provided at no cost, but only for the purpose of promoting the products or services of those businesses while at the same time promoting the theater circuit or the movie-going experience. The use of LEN or lobby promotions by the founding members for these advertisements and programs could result in the founding members creating relationships with advertisers that could adversely affect our current LEN and lobby promotions advertising revenue and profitability, as well as the potential we have to grow that advertising revenue in the future. The LEN and lobby promotions represented approximately 4.7% of our total advertising revenue for the year ended December 26, 2019. The founding members do not have the right to use their movie screens (including the Noovie® pre-show or otherwise) for promoting these cross-marketing relationships, and thus we will have the exclusive rights to advertise on the movie screens, except for limited advertising related to theater operations.
The founding members also have the right to install a second network of video monitors in the theater lobbies in excess of those required to be installed for the LEN, and the founding members have exercised this right to install a significant number of video monitors in their theater lobbies. This additional lobby video network, which we refer to as the founding members’ lobby network, may be used by the founding members to promote products or services related to operating the theaters, such as concessions, bars and dining operations, online ticketing partner promotions, gift card and loyalty programs, and special events. The presence of the founding members’ lobby network within the lobby areas could reduce the effectiveness of our LEN, thereby reducing our current LEN advertising revenue and profitability and adversely affecting future revenue potential associated with that marketing platform.
We depend upon our senior management and our business may be adversely affected if we cannot retain or replace them
them.
Our success depends in part upon the retention of our experienced senior management with specialized industry, sales and technical knowledge and/or industry relationships. In November 2017, our former General Counsel resignedOur Chief Financial Officer retired on March 12, 2020 and the Company initially engaged a new General Counsel was appointednational search firm in February 2018. In November 2018, our Chief Executive Officer stepped down and our President was appointed Interim Chief Executive Officer while our Board of Directors searches fororder to identify a new Chief ExecutiveFinancial Officer. Due to the impact of the COVID-19 Pandemic, the Company temporarily postponed the search until operations normalize.
If we are not able to find qualified internal or external replacements for critical members of our senior management team, the loss of these key employees could have a material adverse effectnegative impact on our ability to effectively pursue our business strategy and our relationships with advertisers, exhibitors, media and content partners. In response to the COVID-19 Pandemic, the Company instituted a temporary pay reduction for all employees of up to 50% and each of our named executive officers agreed to a 20% reduction of their base salary. Beginning in the fourth quarter of 2020, we began to see an increase in voluntary turnover among our employees generally. If these temporary salary reductions continue and the increase in voluntary turnover continues or accelerates for an extended period of time, we may be subject to a higher rate of turnover of our senior management and other employees. Additionally, the uncertainty caused by the COVID-19 Pandemic, hiring freeze and salary reductions, may make it more difficult for the Company to find experienced replacements for senior management, including the open Chief Financial Officer position. We do not have key-man life insurance covering any of our employees.
Changes in the ESAs with, or lack of support by, the founding members could adversely affect our revenue, growth and profitability
The ESAs with the founding members are critical to our business. The three ESAs each have an initial term of 30 years beginning February 13, 2007 and provide us with a five-year right of first refusal, which begins one year prior to the end of the term of the ESA on February 13, 2037. The founding members’ theaters represent approximately 79.2% of the screens and approximately 82.4% of the attendance in our network as of December 27, 2018. If any one of the ESAs was terminated, not renewed at its expiration or found to be unenforceable, it would have a material adverse effect on our revenue, profitability and financial condition.
The ESAs require the continuing cooperation, investment and support of the founding members, the absence of which could adversely affect us. Pursuant to the ESAs, the founding members must make investments to replace digital network equipment within their theaters and equip newly constructed theaters with digital network equipment. If the founding members do not have adequate financial resources or operational strength, and if they do not replace equipment or equip new theaters to maintain the level of operating functionality that we have today, or if such equipment becomes obsolete, we may have to make additional capital expenditures or our advertising revenue and operating margins may decline. In March 2018, Regal was acquired by a U.K.-based cinema operator and we are uncertain how this new ownership of Regal may affect its financial resources or its cooperation with us under the ESA or otherwise. In July 2018 AMC closed on the sale of 100.0% of its remaining NCM LLC membership units to Cinemark and Regal. We are uncertain how AMC's lack of ownership may affect its cooperation with us under the ESA or otherwise.
If the non-competition provisions of the ESAs are deemed unenforceable, the founding members could compete against us and our business could be adversely affectedaffected.
With certain limited exceptions, each of the ESAs prohibits the applicable founding member from engaging in any of the business activities that we provide in the founding member’s theaters under the amended ESAs, and from owning interests in other entities that compete with us. These provisions are intended to prevent the founding members from harming our business by providing cinema advertising services directly to their theaters or by entering into agreements with other third-party cinema advertising providers. However, under state and federal law, a court may determine that a non-competition covenant is unenforceable, in whole or in part, for reasons including, but not limited to, the court’s determination that the covenant:
•is not necessary to protect a legitimate business interest of the party seeking enforcement;
•unreasonably restrains the party against whom enforcement is sought; or
•is contrary to the public interest.
Enforceability of a non-competition covenant is determined by a court based on all of the facts and circumstances of the specific case at the time enforcement is sought. For this reason, it is not possible for us to predict whether, or to what extent, a court would enforce the non-competition provisions contained in the ESAs. If a court were to determine that the non-competition provisions are unenforceable, the founding members could compete directly against us or enter into an agreement with another cinema advertising provider that competes against us. Any inability to enforce the non-competition provisions, in whole or in part, could cause our revenue to decline.
If one of the founding members declared bankruptcy, the ESA with that founding member may be rejected, renegotiated or deemed unenforceableunenforceable.
Each of the founding members currently has a significant amount of indebtedness. In 2000 and 2001, several major motion picture exhibition companies filed for bankruptcy including United Artists, Edwards Theatres and Regal Cinemas (which are predecessor companies topart of Regal), and General Cinemas and Loews Cineplex (which are predecessor companies topart of AMC). The industry-wide construction of larger, more expensive megaplexes featuring stadium seating in the late 1990s that rendered existing, smaller, sloped-floor theaters under long-term leases obsolete and unprofitable, were significant contributing factors to these bankruptcies. As a result of the COVID-19 Pandemic, each of the founding members temporarily closed all of their theaters in the United States and furloughed the majority of their employees for a portion of 2020 and chose to seek additional financing through various methods. If a bankruptcy case were commenced by or against a founding member, it is possible that all or part of the ESA with that founding member could be rejected by a trustee in the bankruptcy case pursuant to Section 365 or Section 1123 of the United States Bankruptcy Code, or by the founding member, and thus not be enforceable. Alternatively, the
founding member could seek to renegotiate the ESA in a manner less favorable to us than the existing agreement. Should the founding member seek to sell or otherwise liquidate or dispose of theaters or remove theaters from our network through bankruptcy or for other business reasons, if the acquirer did not agree to continue to allow us to sell advertising in the acquired theaters the number of theaters in our advertising networks would be reduced which in turn would reduce the number of advertising impressions available to us and thus could reduce our advertising revenue.
The ESAs allow the founding members to engage in activities that might compete with certain elements of our business, which could reduce our revenue and growth potential
The ESAs contain certain limited exceptions to our exclusive right to use the founding members’ theaters for our advertising business. The founding members have the right to enter into a limited number of strategic cross-marketing relationships with third-party, unaffiliated businesses for the purpose of generating increased attendance or revenue (other than revenue from the sale of advertising). These strategic marketing relationships can include the use of one minute on the LEN per 30 minute cycle and certain types of lobby promotions and can be provided at no cost, but only for the purpose of promoting the products or services of those businesses while at the same time promoting the theater circuit or the movie-going experience. The use of LEN or lobby promotions by the founding members for these advertisements and programs could result in the founding members creating relationships with advertisers that could adversely affect our current LEN and lobby promotions advertising revenue and profitability, as well as the potential we have to grow that advertising revenue in the future. The LEN and lobby promotions represented approximately 4% of our total advertising revenue for the year ended December 27, 2018. The founding members do not have the right to use their movie screens (including the Noovie pre-show or otherwise) for promoting these cross-marketing relationships, and thus we will have the exclusive rights to advertise on the movie screens, except for limited advertising related to theater operations.
The founding members also have the right to install a second network of video monitors in the theater lobbies in excess of those required to be installed for the LEN. This additional lobby video network, which we refer to as the founding members’ lobby network, may be used by the founding members to promote products or services related to operating the theaters, such as concessions, bars and dining operations, online ticketing partner promotions, gift card and loyalty programs, and special events. The presence of the founding members’ lobby network within the lobby areas could reduce the effectiveness of our LEN, thereby reducing our current LEN advertising revenue and profitability and adversely affecting future revenue potential associated with that marketing platform.
The founding members and our network affiliates are subject to substantial government regulation, which could limit their current business, slow their future growth of locations and screens and in turn impact our business and slow our growth prospects.
The founding members and our network affiliates are subject to various federal, state and local laws, regulations and administrative practices affecting their movie theater business, including provisions regulating antitrust, health, safety and sanitation standards (including in connection with the COVID-19 Pandemic), access for those with disabilities, environmental, and licensing. Some of these laws and regulations also apply directly to us and NCM LLC. Changes in existing laws or implementation of new laws, regulations and practices could have a significant impact on the founding members,members’, our network affiliates’ and our respective businesses. For example, to the extent that antitrusthealth, safety and sanitation laws, regulation and enforcement policy restrict the ability of the founding members or the network affiliates to acquire additionalopen their theaters or operate at full capacity, it may slow theimpact their current business and future growth of those founding members or network affiliatesprospects and in turn impact our business and the growth of our network.
We may be unable to effectively manage changes to our business strategy to continue the growth of our advertising inventory and networknetwork.
If we do not effectively implement the changes within our strategy, we may not be able to continue our historical growth. To effectively execute on our strategy to expand our digital offerings and continue to grow our inventory, we will need to develop additional products.products or obtain access to third party digital inventory. These enhancements and improvements could require an additional allocation of financial and management resources and acquisition of talent. High turnover, loss of specialized talent or insufficient capital could also place significant demands on management, the success of the organization, and our strategic outlook. During the COVID-19 Pandemic, our ability to invest in our existing digital business and our new digital out-of-home business have been and will continue to be negatively impacted, which may decrease the increase in growth of these businesses.
The amount of in-theater inventory we have to sell is limited by the length of the Noovie pre-show. In order to maintain in-theater growth we will need to expand the number of theaters and screens in our network. Considering our current market share, we may not be able to continue to expand our network which could negatively affect our ability to add new advertising clients. If we are unable to maintain the size of our network, or grow our network, our revenue and operating results could be adversely impacted.
Our business relies heavily on our technology systems, and any failures or disruptions may materially and adversely affect our operationsoperations.
In order to conduct our business, we rely on information technology networks and systems, some of which are managed and owned by third parties, to process, transmit and store electronic information and manage and support a variety of business processes and activities. The temporary or permanent loss of our computer equipment, andnetworks, data or software systems through cyber and other
security threats, termination of a material technology license or contract, operating malfunction, software virus, human error, natural disaster, power loss, terrorist attacks or other catastrophic events could disrupt our operations and cause a material adverse impact.negative impact and the steps that we have taken to mitigate these risks may prove to be ineffective. These problems may arise in both internally developed systems and the systems of third-party service providers. We devote significant resources to maintaining a disaster recovery location separate from our operations, and we employ network security and other measures to help protect our network from unauthorized access and misuse. However, depending on the nature and scope of a disruption, if our technology network systems were to fail and we were unable to recover in a timely way through our disaster recovery site, we would be unable to fulfill critical business functions, which could lead to a loss of customersclients and revenue and could harm our reputation. Technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements.
Our revenue and Adjusted OIBDA fluctuate from quarter to quarter and may be unpredictable, which could increase the volatility of our stock price.
A weak advertising market or the shift in spending of a major client from one quarter to another, the performance of films released in a given quarter, a disruption in the release schedule of films or changes in the television scatter market could significantly affect quarter-to-quarter results or even affect results for the entire fiscal year. In addition, our revenue and operating results are seasonal in nature, coinciding with the timing of marketing expenditures by our advertising clients and, to a lesser extent, the attendance patterns within the film exhibition industry. Advertising expenditures in our business have historically been higher during the second, third, and fourth fiscal quarters. Because our results may vary from quarter to quarter and may be unpredictable, our financial results for one quarter cannot necessarily be compared to another quarter or the same quarter in prior years and may not be indicative of our financial performance in subsequent quarters. These variations in our financial results could contribute to volatility in our stock price.
Our business, services, or technology may infringe on intellectual property rights owned by others, which may interfere with our ability to provide services or expose us to increased liability or expense, or otherwise may be affected by our efforts to protect our intellectual property or restrictions or obligations in third-party licenses., or otherwise may be affected by our efforts to protect our intellectual property or restrictions or obligations in third-party licenses.
IntellectualOur business uses a variety of intellectual property rights, of our business includeincluding the copyrights, trademarks, trade secrets, domain names and patents or patentable ideas. Those intellectual property rights relate to varying aspects of our business and in-theater, online, mobile and mobilecreative services, including the websites we operate at ncm.com and Noovie.com, our digital gaming products including Noovie® Arcade, Name That Movie and NoovieARcade mobile app, Shuffle, and the features and functionality, content, and software we make available through those websites and app.apps. We rely on our own intellectual property rights as well as intellectual property rights obtained from third parties (including through open-source licenses), to conduct our business and provide our in-theater, online, mobile and mobilecreative services. We may incur expenses, some of which may be significant, in developing, protecting, maintaining, and defending our intellectual property rights or licensing intellectual property from third parties.
In some instances, we may not be able to or may choose not to protect, maintain, or defend our intellectual property rights. Further, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the U.S.
We may discover that our business or the technology or methods we use to provide our in-theater, online, mobile, or mobilecreative services infringes patent, trademark, copyright, publicity rights, or other intellectual property rights owned by others.others or is otherwise negatively impacted by restrictions imposed by or obligations under third-party intellectual property licenses. In addition, our competitors or others may claim rights in patents, trademarks, copyrights, publicity rights, or other intellectual property rights that will prevent, limit or interfere with our ability to provide our in-theater, online, or mobile services either in the U.S. or in international markets. Further, the laws of certain foreign countriesWe may not protectincur significant costs in protecting our own intellectual property rights or defending or settling intellectual property infringement claims and may face significant damage awards (including the potential for awards of attorneys’ fees) if we are found to the same extent as do the laws of the U.S.be infringing third party intellectual property rights.
The content we distribute through our in-theater, online or mobile services may expose us to liability
Our in-theater, online, and mobile services facilitate the distribution of content. content, and we create content for others.This content includes advertising-related content, as well as movie, television, music, gaming and other media content, much of which is obtained from third parties. Our apps, websites, and social media channels also include features enabling users to upload or add their own content to the websites and modify certain content on the websites.content. As a distributor of content, we face potential liability for
negligence, copyright, patent, trademark, or trademarkpublicity infringement, or other claims based on the content that we distribute.distribute or create for others. We or entities that we license or receive content from or distribute content through may not be adequately insured or indemnified to cover claims of these types or liability that may be imposed on us.
The user information we collect and maintain through our online and mobile services may expose us to liability or cause us to incur greater operating expenses.
In order to take advantage of some of the online and mobile services we provide, users may, now or in the future, be required to establish an account on one of our websites.websites or apps. As a result, we may collect and maintain personal identifying information about those users.individuals who establish accounts or other users of our websites or apps. We also may, now or in the future, collect and maintain information about users who view certain advertising displayed through our online and mobile services and users who enter the theaters in our network.network, including places visited before entering the theater and after leaving the theater. We may also receive information from third parties to supplement or enhance the information we collect and maintain about users of our online and mobile services or individuals who view advertising or enter theaters. The collection and use of this information is governed by applicable privacy, information security and consumer protection-related laws and regulations. These laws continue to evolve and may be inconsistent from one jurisdiction to another. Compliance with all such laws and regulations may increase our operating costs and adversely impact our ability to interact with users of our online and mobile services. Our collection and use of information, including personal identifying information, regarding users of our online and mobile services could result in legal liability. For example, the failure, or perceived failure, to comply with applicable privacy information security or consumer protection-related laws or regulations or our posted privacy policies could result in actions against us by governmental entities or others. If an actual or perceived breach of our data occurs, the market perception of the effectiveness of our security measures could be harmed, and we could lose users of these services and the associated benefits from gathering such user data.
Changes in regulations relating to the Internet or other areas of our online or mobile services may result in the need to alter our business practices or incur greater operating expensesexpenses.
A number of statutes and regulations, including those referenced below, may impact our business as a result of our online or mobile services. The Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, liability for posting,online service providers when site users post or linkinglink to third-party websites that include materials that infringe copyrights or other rights. Portionscopyrights. Section 230 of the Communications Decency Act areis intended to provide statutory protections to onlineinteractive computer service providers who distributethat host third-party content.content, but there have been recent efforts to modify or eliminate the scope of protection afforded by Section 230. The Child Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of materials considered harmful to children and imposeimposes additional restrictions on the ability of online services to collect information from minors. The California Consumer Protection Act and other privacy laws give residents of certain states additional rights with regards to their personal information. The costs of compliance with these regulations, and other regulations relating to our online and mobile services or other areas of our business, may be significant. The manner in which these and other regulations may be interpreted or enforced may subject us to potential liability, which in turn could have an adverse effect on our business, results of operations, or financial condition. Changes to these and other regulations may impose additional burdens on us or otherwise adversely affect our business and financial results because of, for example, increased costs relating to legal compliance, defense
against adverse claims or damages, or the reduction or elimination of features, functionality or content from our online or mobile services. Likewise, any failure on our part to comply with these and other regulations may subject us to additional liabilities.
Our revenue and Adjusted OIBDA fluctuate from quarter to quarter and may be unpredictable, which could increase the volatility of our stock price
A weak advertising market or the shift in spending of a major client from one quarter to another, the performance of films released in a given quarter, a disruption in the release schedule of films or changes in the television scatter market could significantly affect quarter-to-quarter results or even affect results for the entire fiscal year. In addition, our revenue and operating results are seasonal in nature, coinciding with the timing of marketing expenditures by our advertising clients and, to a lesser extent, the attendance patterns within the film exhibition industry. Advertising expenditures tend be higher during the second, third, and fourth fiscal quarters. Because our results may vary from quarter to quarter and may be unpredictable, our financial results for one quarter cannot necessarily be compared to another quarter or the same quarter in prior years and may not be indicative of our financial performance in subsequent quarters. These variations in our financial results could contribute to volatility in our stock price.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and as a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required controls, or difficulties encountered in implementing new or improved controls, could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
Risks Related to Our Corporate Structure
We are a holding company with no operations of our own, and we depend on distributions and payments under the NCM LLC operating and management services agreements from NCM LLC to meet our ongoing obligations and to pay cash dividends on our common stockstock.
We are a holding company with no operations of our own and have no independent ability to generate cash flow other than interest income on cash balances. Consequently, our ability to obtain operating funds primarily depends upon distributions from NCM LLC. The distribution of cash flows and other transfers of funds by NCM LLC to us are subject to statutory and contractual restrictions based upon NCM LLC’s financial performance, including NCM LLC’s compliance with the covenants in its senior secured credit facilitySenior Secured Credit Facility and indentures, and the NCM LLC operating agreement. The NCM LLC senior secured credit facilitySenior Secured Credit Facility and indentures limit NCM LLC’s ability to distribute cash to its members, including us, based upon certain leverage tests, with exceptions for, among other things, payment of our income taxes and a management fee to NCM, Inc. pursuant to the terms of the management services agreement (incorporated in the ESA). Refer to the information provided under Note 910 to the audited Consolidated Financial Statements included elsewhere in this document for leverage discussion. The declaration of future dividends on our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including NCM LLC’s results of operations, financial condition, earnings, capital requirements, limitations in ourNCM LLC’s debt agreements and legal requirements. On March 8, 2021, NCM LLC entered into an additional amendment
to its Credit Agreement, dated as of June 20, 2018, as discussed within Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this document. This additional amendment also restricts NCM LLC’s ability to distribute cash to its members, including us, until after the delivery of a compliance certificate following the third quarter of 2022. In the event NCM LLC fails to comply with these covenants and is unable to distribute cash to us quarterly, once NCM, Inc. cash balances and investments are extinguished, we will be unable to pay dividends to our stockholders or pay other expenses outside the ordinary course of business.
Pursuant to the management services agreement between us and NCM LLC, NCM LLC makes payments to us to fund our day-to-day operating expenses, such as payroll. However, if NCM LLC has insufficient cash flow to make the payments pursuant to the management services agreement, we may be unable to cover these expenses.
As a member of NCM LLC, we incur income taxes on our proportionate share of any net taxable income of NCM LLC. We have structured the NCM LLC senior secured credit facilitySenior Secured Credit Facility and indentures to allow NCM LLC to distribute cash to its members (including us and NCM LLC’s other members) in amounts sufficient to cover their tax liabilities and management fees, if any. To the extent that NCM LLC has insufficient cash flow to make such payments, it could have a material adverse effectnegative impact on our business, financial condition, results of operations or prospects.
NCM LLC’s substantial debt obligations could impair our financial condition or prevent us from achieving our business goals
goals.
NCM LLC is party to substantial debt obligations. The senior secured credit facilitySenior Secured Credit Facility and indentures contain restrictive covenants that limit NCM LLC’s ability to take specified actions and in some instances prescribe minimum financial maintenance requirements that NCM LLC must meet.meet, which, in some cases, were made more restrictive following the second amendment to NCM LLC’s Senior Secured Credit Facility. Because NCM LLC is our only operating subsidiary, complying with these restrictions may prevent NCM LLC from taking actions that we believe would help us to grow our business. For example, NCM LLC may be unable to make acquisitions, investments or capital expenditures as a result of such covenants. Moreover, if NCM LLC violates those restrictive covenants or fails to meet the minimum financial requirements, it would be in default, which could, in turn, result in defaults under other obligations of NCM LLC. Any such defaults could materially impair our financial condition and liquidity. For further information, refer to Note 10 to the audited Consolidated Financial Statements included elsewhere in this document.
If NCM LLC is unable to meet its debt service obligations, it could be forced to restructure or refinance the obligations, seek additional equity financing or sell assets. NCM LLC may be unable to restructure or refinance these obligations, obtain additional equity financing, or sell assets on satisfactory terms or at all.all or make cash distributions. In addition, NCM LLC’s indebtedness could have other negative consequences for us, including without limitation:
•limiting NCM LLC’s ability to obtain financing in the future;
•requiring much of NCM LLC’sLLC's cash flow to be dedicated to interest obligations and making it unavailable for other purposes, including payments to its members (including NCM, Inc.);
•limiting NCM LLC’s liquidity and operational flexibility in changing economic, business and competitive conditions which could require NCM LLC to consider deferring planned capital expenditures, reducing discretionary spending, selling assets, restructuring existing debt or deferring acquisitions or other strategic opportunities; and
•making NCM LLC more vulnerable to an increase in interest rates, a downturn in operating performance or decline in general economic conditions.
Despite NCM LLC’s current levels of debt, it, or NCM, Inc. may still incur substantially more debt, including secured debt, which would increase the risks associated with NCM LLC’s level of debtdebt.
The agreements relating to NCM LLC’s debt, including the Notes due 2022,2026 and Notes due 20262028 and the senior secured credit facility,Senior Secured Credit Facility, limit but do not prohibit NCM LLC’s ability to incur additional debt, and do not place any restrictions on NCM, Inc.’s ability to incur debt. Accordingly, NCM, Inc. or NCM LLC could incur additional debt in the future, including additional debt under the senior secured credit facility,Senior Secured Credit Facility, additional senior or senior subordinated notes and additional secured debt. If new debt is added to current debt levels, the related risks that we now face, including those described above under “—NCM“NCM LLC’s substantial debt obligations could impair our financial condition or prevent us from achieving our business goals,” could intensify.
NCM LLC’s other founding members or their affiliates, as well as our largest stockholder, may have interests that differ from those of our public stockholders and they may be able to influence our affairsaffairs.
So long as either Cinemark or Regal owns at least 5% of NCM LLC’s issued and outstanding common membership units, if the two directors appointed by Cinemark or the two directors appointed by Regal to our Board of Directors (except that if either Cinemark or Regal has only appointed one director, and such director qualifies as an "independent director"“independent director” under the applicable rules of the Nasdaq Stock Market LLC, then such director) vote against any of the corporate actions listed below, we and NCM LLC will be prohibited from taking any such actions:
•assign, transfer, sell or pledge all or a portion of the membership units of NCM LLC beneficially owned by NCM, Inc.;
•acquire, dispose, lease or license assets with an aggregate value exceeding 20% of the fair market value of the business of NCM LLC operating as a going concern;
•merge, reorganize, recapitalize, reclassify, consolidate, dissolve, liquidate or enter into a similar transaction;
•incur any funded indebtedness or repay, before due, any funded indebtedness with a fixed term in an aggregate amount in excess of $15.0 million per year;
•issue, grant or sell shares of NCM, Inc. common stock, preferred stock or rights with respect to common or preferred stock, or NCM LLC membership units or rights with respect to membership units, except under specified circumstances;
•amend, modify, restate or repeal any provision of NCM, Inc.’s certificate of incorporation or bylaws or the NCM LLC operating agreement;
•enter into, modify or terminate certain material contracts not in the ordinary course of business as defined under applicable securities laws;
•except as specifically set forth in the NCM LLC operating agreement, declare, set aside or pay any redemption of, or dividends with respect to membership interests;
•amend any material terms or provisions (as defined in the Nasdaq rules) of NCM, Inc.’s equity incentive plan or enter into any new equity incentive compensation plan;
•make any change in the current business purpose of NCM, Inc. to serve solely as the manager of NCM LLC or any change in the current business purpose of NCM LLC to provide the services as set forth in the ESAs; and
•approve any actions relating to NCM LLC that could reasonably be expected to have a material adverse tax effect on NCM LLC’s founding members.
This requirement only applies to Cinemark and Regal as of December 27, 2018.
Pursuant to a director designation agreement, so long as Cinemark or Regal owns at least 5% of NCM LLC’s issued and outstanding common membership units, (Cinemark and Regal as of December 27, 2018), such NCM LLC founding member will have the right to designate a total of two nominees to our Board of Directors who will be voted upon by our stockholders. One such designee by each of Cinemark and Regal must meet the independence requirements of the stock exchange on which our common stock is listed. If, at any time, Cinemark or Regal owns less than 5% of NCM LLC’s then issued and outstanding common membership units, then such NCM LLC founding member shall cease to have any rights of designation. AMC no longer has seats on our Board of Directors or the right to nominate any person to serve on our Board of Directors.
If any director designee to our Board of Directors designated by Cinemark or Regal is not appointed to our Board of Directors, nominated by us or elected by our stockholders, as applicable, then Cinemark orand Regal (so long as such they each continue to own at least 5% of NCM LLC'sLLC’s issued and outstanding common membership units) will be entitled to approve specified actions of NCM LLC.
For purposes of calculating the 5% ownership threshold for the director veto rights and director designation agreement provisions discussed above, shares of our common stock held by a founding member and received upon redemption of NCM LLC common membership units will be counted toward the threshold. Common membership units issued to NCM, Inc. in connection with the redemption of common membership units by aan NCM LLC founding member will be excluded, so long as such NCM LLC founding member continues to hold the common stock acquired through such redemption or such NCM LLC founding member has disposed of such shares of common stock to another NCM LLC founding member. Shares of our common stock otherwise acquired by NCM LLC’s founding members will also be excluded, unless such shares of common stock were transferred by one NCM LLC founding member to another and were originally received by the transferring NCM LLC founding member upon redemption of NCM LLC common membership units.
Under these circumstances, our corporate governance documents allow NCM LLC'sLLC’s other members and their affiliates to exercise a greater degree of influence in the operation of our business and that of NCM LLC and the management of our affairs and those of NCM LLC than is typically available to stockholders of a publicly-traded company. Even if NCM LLC'sLLC’s other
members or their affiliates own a minority economic interest (but not less than 5%) in NCM LLC, they may be able to continue exerting such degree of influence over us and NCM LLC.
Further, Standard General L.P. (“Standard General”), our largest stockholder, beneficially owns 19,417,990 shares of our common stock, and as of December 31, 2020, Cinemark, and Regal held NCM LLC membership interests that are convertible into another 83,140,762 shares of our common stock. As a result, each of Regal, Cinemark and Standard General is in a position to influence or control to some degree the outcome of matters requiring stockholder approval, including the adoption of amendments to our certificate of incorporation or bylaws and the approval of mergers and other significant corporate transactions. Their influence or control of our Company and NCM LLC may have the effect of delaying or promoting a change of control of our Company and may adversely affect the voting and other rights of other stockholders. In addition, Standard General has the right to designate directors to our Board. Like the directors designated by Regal and Cinemark, these Standard General directors have the authority, subject to applicable rules and regulations, to vote in favor of issuing additional stock, implementing stock repurchase programs, declaring dividends and making other decisions.
It is possible that the interests of Regal, Cinemark and Standard General may in some circumstances conflict with our interests and the interests of our other stockholders. For example, Cinemark and Regal may have different tax positions from us, especially in light of the TRA we entered into with founding members that provides for the payment by us to the founding members of 90% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize. This could influence their decisions regarding whether and when we should dispose of assets, and whether and when we or NCM LLC should incur indebtedness. As another example, Standard General is in the business of making investments in companies and may hold, and may from time to time in the future acquire, interests in or provide advice to businesses that directly or indirectly compete with us.
Different interests among the founding members or between the founding members and us could prevent us from achieving our business goalsgoals.
For the foreseeable future, we expect that our Board of Directors will include directors and certain executive officers of Cinemark and Regal and other directors who may have commercial or other relationships with Cinemark and Regal. The majority of NCM LLC’s outstanding membership interests also are owned by Cinemark and Regal. Such members compete with each other in the operation of their respective businesses and could have individual business interests that may conflict. Their differing interests could make it difficult for us to pursue strategic initiatives that require consensus among NCM LLC’s current members. In addition, to the extent the founding members sell some or all their NCM LLC membership units, such as was the case for AMC during 2017, 2018 and 2018,2019, the founding members could have increasingly different interests because they no longer mutually benefit from an increase in NCM LLC'sLLC’s revenues or the value of the NCM, Inc. common stock into which the NCM LLC membership units are convertible.
In addition, the structural relationship we have with NCM LLC’s founding members could create conflicts of interest among NCM LLC’s founding members, or between NCM LLC’s founding members and us, in a number of areas relating to our past and ongoing relationships. These conflicts of interests could also increase upon the sale of NCM LLC membership units by a founding member because the founding member would have little incentive to agree to changes that may result in higher revenue for NCM LLC or a higher price for our common stock. There is not any formal dispute resolution procedure in place to resolve conflicts between us and an NCM LLC founding member or between NCM LLC founding members. We may not be able to resolve any potential conflicts between us and an NCM LLC founding member and, even if we do, the resolution may be less favorable to us than if we were negotiating with an unaffiliated party.
The corporate opportunity provisions in our certificate of incorporation could enable NCM LLC’s members to benefit from corporate opportunities that might otherwise be available to usus.
Our certificate of incorporation contains provisions related to corporate opportunities that may be of interest to both NCM LLC’s other members and us. It provides that if a corporate opportunity is offered to us, NCM LLC or one or more of the officers, directors or stockholders (both direct and indirect) of NCM, Inc. or a member of NCM LLC that relates to the provision of services to motion picture theaters, use of theaters for any purpose, sale of advertising and promotional services in and around theaters and any other business related to the motion picture theater business (except services as provided in the ESAs as from time to time amended and except as may be offered to one of our officers in his capacity as an officer), no such person shall be liable to us or any of our stockholders (or any affiliate thereof) for breach of any fiduciary or other duty by reason of the fact that such person pursues or acquires such business opportunity, directs such business opportunity to another person or fails to present such business opportunity, or information regarding such business opportunity, to us. This provision appliesmay apply even if the business opportunity is one that we might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so.
In addition, our certificate of incorporation and the NCM LLC operating agreement expressly provide that NCM LLC’s founding members may have other business interests and may engage in any other businesses not specifically prohibited by the
terms of the certificate of incorporation, including the exclusivity provisions of the ESAs. The parent companies of NCM LLC’s founding members could develop new media platforms that could compete for advertising dollars with our services. Further, we may also compete with NCM LLC’s founding members or their affiliates in the area of employee recruiting and retention. These potential conflicts of interest could have a material adverse effectnegative impact on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by NCM LLC’s founding members to themselves or their other affiliates or we lose key personnel to them.
The agreements between us and NCM LLC’s founding members were made in the context of an affiliated relationship and may contain different terms than comparable agreements with unaffiliated third partiesparties.
The ESAs and the other contractual agreements that we have with NCM LLC’s founding members were originally negotiated in the context of an affiliated relationship in which representatives of NCM LLC’s founding members and their affiliates comprised our entire Board of Directors. As a result, the financial provisions and the other terms of these agreements, such as covenants, contractual obligations on our part and on the part of NCM LLC’s founding members and termination and default provisions may be less favorable to us than terms that we might have obtained in negotiations with unaffiliated third parties in similar circumstances.
Our certificate of incorporation and bylaws contain anti-takeover protections that may discourage or prevent strategic transactions, including a takeover of our company,Company, even if such a transaction would be beneficial to our stockholdersstockholders.
Provisions contained in our certificate of incorporation and bylaws, the NCM LLC operating agreement, and provisions of the Delaware General Corporation Law (“DGCL”), could delay or prevent a third party from entering into a strategic transaction with us, even if such a transaction would benefit our stockholders. For example, our certificate of incorporation and bylaws:
•provide veto rights to the directors designated by Cinemark and Regal over certain actions specified in our certificate of incorporation;
•authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares, making a takeover more difficult and expensive;
•prohibit stockholder action by written consent; and
•do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates.
NCM LLC'sLLC’s operating agreement also provides that NCM LLC’s other members will be able to exercise a greater degree of influence over the operations of NCM LLC which may discourage other nominations to our Board of Directors, if any director nominee designated by NCM LLC’s other members is not elected by our stockholders.stockholders, which may discourage other nominations to our Board of Directors. In addition, we entered into a letter agreement with Standard General L.P., our largest stockholder, on June 1, 2018, that contains customary standstill provisions that may discourage a third party from seeking to enter into a strategic transaction with us.
These restrictions could keep us from pursuing relationships with strategic partners and from raising additional capital, which could impede our ability to expand our business and strengthen our competitive position. These restrictions could also limit stockholder value by impeding a sale of us or NCM LLC. Further, these restrictions could restrict or limit certain investors from owning our stock.
Any future issuance of membership units by NCM LLC and subsequent redemption of such units for common stock could dilute the voting power of our existing common stockholders and adversely affect the market value of our common stockstock.
The common unit adjustment agreement and the ESAs provide that weNCM LLC will issue common membership units of NCM LLC to account for changes in the number of theater screens NCM LLC’s founding members operate and which are made part of our advertising network. Historically, in most years each of NCM LLC’s founding members has increased the number of screens it operates.operates in most years. If this trend continues, NCM LLC may issue additional common membership units to NCM LLC’s founding members to reflect their increase in net screen count. Each common membership unit may be redeemed in exchange for, at our option, shares of our common stock on a one-for-one basis or a cash payment equal to the market price of one share of our common stock. If a significant number of common membership units were issued to NCM LLC’s founding members, NCM LLC’s founding members elected to redeem such units, and we elected to issue common stock rather than cash upon redemption, the voting power of our common stockholders could be diluted. Other than the maximum number of authorized shares of common stock in our certificate of incorporation, there is no limit on the number of shares of our common stock that we may issue upon redemption of an NCM LLC founding member’s common membership units in NCM LLC. For further information, refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document.
Our future issuance of preferred stock could dilute the voting power of our common stockholders and adversely affect the market value of our common stockstock.
The future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of our other classes of voting stock, either by diluting the voting power of our other classes of voting stock if they vote together as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote even if the action were approved by the holders of our other classes of voting stock.
The future issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect the market price for our common stock by making an investment in the common stock less attractive. For example, investors in the common stock may not wish to purchase common stock at a price above the conversion price of a series of convertible preferred stock because the holders of the preferred stock would effectively be entitled to purchase common stock at the lower conversion price causing economic dilution to the holders of common stock.
If we or NCM LLC’s founding members are determined to be an investment company, we would become subject to burdensome regulatory requirements and our business activities could be restrictedrestricted.
We do not believe that we are an “investment company” under the Investment Company Act of 1940, as amended. As sole manager of NCM LLC, we control NCM LLC, and our interest in NCM LLC is not an “investment security” as that term is used in the Investment Company Act of 1940. If we were to stop participating in the management of NCM LLC, our interest in NCM LLC could be deemed an “investment security” for purposes of the Investment Company Act of 1940. Generally, a company is an “investment company” if it owns investment securities having a value exceeding 40% of the value of its total assets (excluding U.S. government securities and cash items). Our sole material asset is our equity interest in NCM LLC. A determination that such asset was an investment security could result in our being considered an investment company under the Investment Company Act of 1940. As a result, we would become subject to registration and other burdensome requirements of the Investment Company Act. In addition, the requirements of the Investment Company Act of 1940 could restrict our business activities, including our ability to issue securities.
We and NCM LLC intend to conduct our operations so that we are not deemed an investment company under the Investment Company Act. However, if anything were to occur that would cause us to be deemed an investment company, we would become subject to restrictions imposed by the Investment Company Act of 1940. These restrictions, including limitations on our capital structure and our ability to enter into transactions with our affiliates, could make it impractical for us to continue our business as currently conducted and could have a material adverse effectnegative impact on our financial performance and operations.
We also rely on representations of NCM LLC’s founding members that they are not investment companies under the Investment Company Act. If any NCM LLC founding member were deemed an investment company, the restrictions placed upon that NCM LLC founding member might inhibit its ability to fulfill its obligations under its ESA or restrict NCM LLC’s ability to borrow funds.
Our TRA with NCM LLC’s founding members is expected to reduce the amount of overall cash flow that would otherwise be available to us and will increase our potential exposure to the financial condition of NCM LLC’s founding membersmembers.
Our initial public offering and related transactions have the effect of reducing the amounts NCM, Inc. would otherwise pay in the future to various tax authorities as a result of an increase in its proportionate share of tax basis in NCM LLC’s tangible and intangible assets. We have agreed in our TRA with NCM LLC’s founding members to pay to NCM LLC’s founding members 90% of the amount by which NCM, Inc.’s tax payments to various tax authorities are reduced as a result of
the increase in tax basis. After paying these reduced amounts to tax authorities, if it is determined as a result of an income tax audit or examination that any amount of NCM, Inc.’s claimed tax benefits should not have been available, NCM, Inc. may be required to pay additional taxes and possibly penalties and interest to one or more tax authorities. If this were to occur and if one or more of NCM LLC’s founding members was insolvent or bankrupt or otherwise unable to make payment under its indemnification obligation under the TRA, then NCM, Inc.’s financial condition could be negatively impacted.
The substantial number of shares that are eligible for sale could cause the market price for our common stock to decline or make it difficult for us to sell equity securities in the futurefuture.
We cannot predict the effect, if any, that market sales of shares of common stock by Regal, Cinemark, orAMC, Standard General or any of our significant stockholders will have on the market price of our common stock from time to time. Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales will occur, could
cause the market price of our common stock to decline or make future offerings of our equity securities more difficult. If we are unable to sell equity securities at times and prices that we deem appropriate, we may be unable to fund growth. Cinemark, Regal and RegalAMC may receive up to 80.7 million84,531,328 shares of common stock as of December 27, 201831, 2020 upon redemption of their outstanding common membership units of NCM LLC. The resale of these shares of common stock has been registered as required by the terms of the registration rights agreement between NCM, Inc. and the founding members. Standard General also owns 15.3 million19,417,990 shares that it may sell at any time. Additionally, once options and restricted stockequity awards held by our employees become vested and/or exercisable, as applicable, to the extent that they are not held by one of our affiliates, the shares acquired upon vesting or exercise are freely tradable. Refer to Note 11 to the audited Consolidated Financial Statements included elsewhere in this document.our annual report on Form 10-K.
The interests of our largest stockholder and NCM LLC’s other members may be different from or conflict with those of our other stockholders
Standard General beneficially owns 15.3 million shares of our common stock, and as of December 27, 2018, Cinemark and Regal held NCM LLC membership interests that are convertible into another 80.7 million shares of our common stock. As a result, each of Regal, Cinemark and Standard General is in a position to influence or control to some degree the outcome of matters requiring stockholder approval, including the adoption of amendments to our certificate of incorporation or bylaws and the approval of mergers and other significant corporate transactions. Their influence or control of our company and NCM LLC may have the effect of delaying or promoting a change of control of our company, and may adversely affect the voting and other rights of other stockholders. In addition, each of Regal, Cinemark and Standard General has the right to designate directors to our Board. These directors have the authority, subject to applicable rules and regulations, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions.
It is possible that the interests of Regal, Cinemark and Standard General may in some circumstances conflict with our interests and the interests of our other stockholders. For example, Cinemark and Regal may have different tax positions from us, especially in light of the TRA we entered into with founding members that provides for the payment by us to the founding members of 90% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize. This could influence their decisions regarding whether and when we should dispose of assets, and whether and when we or NCM LLC should incur indebtedness. As another example, Standard General in the business of making investments in companies and may hold, and may from time to time in the future acquire interests in or provide advice to businesses that directly or indirectly compete with us.
|
| | | | |
| Item 1B. | Unresolved Staff Comments |
None.
Information with respect to our corporateThe Company's headquarters are located in Centennial, Colorado. As of December 31, 2020, the Company also leases advertising sales offices in New York, Los Angeles, Chicago, and regionalDetroit; digital development offices is presented below as of December 27, 2018.in Los Angeles and New York, and a software development office in Minneapolis. We own no material real property. We believe that all of our present facilities are adequate for our current needs and that additional space is available for future expansion on acceptable terms.
|
| | | | |
Location | | Facility | | Size |
Centennial, CO (1)
| | Headquarters (including the NOC) | | 63,123 sq. ft. |
Chicago, IL (2)
| | Advertising Sales Office | | 3,350 sq. ft. |
New York, NY (3)
| | Advertising Sales Office | | 21,892 sq. ft. |
Woodland Hills, CA (4)
| | Advertising Sales Office | | 6,062 sq. ft. |
Minneapolis, MN (5)
| | Software Development Office | | 5,989 sq. ft. |
Newport Beach, CA (6)
| | Regional Advertising Sales Office | | 1,417 sq. ft. |
Royal Oak, MI (7)
| | Advertising Sales Office | | 200 sq. ft. |
Playa Vista, CA (8)
| | Digital Development Office | | 997 sq. ft. |
New York, NY (9)
| | Digital Development Office | | 350 sq. ft. |
| |
(1) | This facility is leased through June 30, 2028. |
| |
(2) | This facility is leased through April 30, 2028. |
| |
(3) | This facility is leased through April 30, 2032. |
| |
(4) | This facility is leased through November 30, 2019. |
| |
(5) | This facility is leased through September 30, 2022. |
| |
(6) | This facility is leased through July 31, 2019. |
| |
(7) | This facility is leased through March 22, 2020. |
| |
(8) | This facility is leased through June 30, 2019. |
| |
(9) | This facility is leased through March 31, 2019. |
We are sometimes involved in legal proceedings arising in the ordinary course of business. We are not aware of any other litigation currently pending that would have a material adverse effect on our operating results or financial condition.
|
| | | | |
| Item 4. | Mine Safety Disclosures |
Not applicable.
Information about our Executive Officers of the Registrant
Shown below are the names, ages as of the filing date of this Form 10-K, and current positions of our executive officers. There are no family relationships between any of the persons listed below, or between any of such persons and any of the directors of the Company or any persons nominated or chosen by the Company to become a director or executive officer of the Company.
|
| | | | | | | | | | | | | |
| Name | | Age | | Position |
| Thomas F. Lesinski | | 61 | | Chief Executive Officer |
| Clifford E. Marks | | 5759 | | Interim Chief Executive Officer and President |
Katherine L. Scherping | | 59 | | Chief Financial Officer |
| Sarah Kinnick Hilty | | 4850 | | SeniorExecutive Vice President, General Counsel and Secretary |
| Scott D. Felenstein | | 5052 | | Executive Vice President and Chief Revenue Officer |
Clifford E. Marks.Thomas F. Lesinski. Mr. MarksLesinski was appointed Interim Chief Executive Officer of NCM, Inc. in NovemberAugust 2019. Prior to his current position, Mr. Lesinski served as the Non-Employee Chairman of the Board of Directors of NCM, Inc. since August 2018 and as a member of the Board of Directors of NCM, Inc. since 2014. In addition to his roles on the Board of Directors of NCM, Inc., Mr. Lesinski also served as the Chief Executive Officer of Sonar Entertainment, an independent entertainment studio, from January 2016 to August 2019. Mr. Lesinski served as the founder and CEO of Energi Entertainment, a multi-media content production company, from August 2014 until December 2015. From 2013 to 2014, Mr. Lesinski was President of Digital Content and Distribution at Legendary Entertainment, a leading media company dedicated to owning, producing and delivering content to mainstream audiences with a targeted focus on the powerful fandom demographic. Prior to that role, from 2006 to 2013, Mr. Lesinski served as President, Digital Entertainment at Paramount Pictures, a global producer and distributor of filmed entertainment. Mr. Lesinski also served as President of Worldwide Home Entertainment at Paramount Pictures for three years, prior to which, he spent ten years as an Executive Vice President and General Manager at Warner Bros. Entertainment and was a Managing Director for an advertising agency.
Clifford E. Marks. Mr. Marks was appointed President in May 2016. Mr. Marks served as the Interim Chief Executive Officer of NCM, Inc., in addition to his role of President, which he has held since May 2016.from November 2018 to August 2019. Prior to his current position, Mr. Marks served as President of Sales and Marketing of NCM, Inc. since February 2007 and held those same positions with NCM LLC since March 2005. He has been an advertising, marketing and sales professional for 25 years. Mr. Marks also served as president of sales and marketing with Regal Entertainment Group’s media subsidiary, Regal CineMedia Corporation, from
May 2002 to May 2005. Before joining Regal CineMedia, Mr. Marks was a senior vice president at ESPN/ABC Sports where he oversaw its advertising sales organization from 1998 to May 2002.
Katherine L. Scherping. Ms. Scherping was appointed Chief Financial Officer in August 2016. Prior to joining NCM, Inc., Ms. Scherping served as Chief Financial Officer of QCE LLC and subsidiaries (d/b/a Quiznos) from December 2013 to July 2016 and as interim President and Chief Executive Officer from June 2016 to July 2016. From October 2011 through July 2016, Ms. Scherping was a guest faculty member at Deloitte University, providing leadership training to partners and other executives. From June 2005 to July 2011, she served as Chief Financial Officer of Red Robin Gourmet Burgers, Inc.
Sarah Kinnick Hilty. Ms. Hilty was appointed Senior Vice President, General Counsel and Secretary in February 2018.2018 and named Executive Vice President, General Counsel and Secretary in January 2020. Prior to joining NCM, Inc., Ms. Hilty served as Deputy General Counsel - Corporate of CH2M HILL Companies, Ltd. from 2006 to 2018 leading a team responsible for legal corporate enterprise matters including mergers, acquisitions, and divestitures; securities compliance; treasury and finance activities,activities; real estate,estate; and board and subsidiary governance. Prior to working at CH2M HILL Companies, Ltd., Ms. Hilty was a partner at Hogan & Hartson LLP.
Scott D. Felenstein. Mr. Felenstein was appointed Executive Vice President and Chief Revenue Officer in April 2017. Prior to joining NCM, Inc., Mr. Felenstein served as Executive Vice President, National Advertising Sales for Discovery Communications, Inc. since 2013 and Senior Vice President, National Advertising Sales for Discovery Communications, Inc. since 2000. Prior to working at Discovery Communications, Inc., Mr. Felenstein served on the digital ad sales team at Excite@Home and worked as an accountexecutive at CBS Sports.
PART II
|
| | | | |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock, $0.01 par value, is traded on The Nasdaq Global Market under the symbol “NCMI”. There were 176194 stockholders of record as of February 20, 2019March 1, 2021(does not include beneficial holders of shares held in “street name”).
Dividend Policy
We intend to distribute over time a substantial portionsubstantially all of our free cash flow (distributions from NCM LLC less income taxes and payments under the tax receivable agreement with the founding members) in the form of dividends to our stockholders. The declaration, payment, timing and amount of any future dividends payable will be at the sole discretion of our Board of Directors who will take into account general economic and advertising market business conditions, our financial condition, our available cash, our current and anticipated cash needs, including opportunities to reinvest in our business and any other factors that the Board of Directors considers relevant.relevant which includes short-term and long-term impacts to the Company related to the COVID-19 pandemic and restrictions under the NCM LLC Credit Agreement. The Company intends to pay a regular quarterly dividend for the foreseeable future at the discretion of the Board of Directors consistent with the Company’s intention to distribute substantially all its free cash flow to stockholders through its quarterly dividend. Under Delaware law, dividends may be payable only out of surplus, which is our total assets minus total liabilities less the par value of our common stock, or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.year. For tax purposes, our dividends paid in 20172019 and 20182020 were treated as a return of capitalnon-dividend distributions to stockholders.
Unregistered Sales of Equity Securities and Use of Proceeds
NCM, Inc.’s Amended and Restated Certificate of Incorporation and the Third Amended and Restated Limited Liability Company Operating Agreement, as amended, of NCM LLC provide a redemption right to the NCM LLC members to exchange common membership units of NCM LLC for shares of NCM, Inc.’s common stock on a one-for-one basis, or at NCM, Inc.’s option, a cash payment equal to the market price of one share of NCM, Inc.’s common stock. There were no redemptions during 2018. in 2020.
Issuer Purchases of Equity Securities
The table below provides information about shares delivered to the Company from restricted stock held by Company employees upon vesting for the purpose of funding the recipient’s tax withholding obligations.
|
| | | | | | | | | | | | |
| Period | | (a) Total Number of Shares Purchased | | (b) Average Price Paid Per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased under the Plans or Programs |
| September 28, 2018 through October 25. 2018 | | — |
| | $ | — |
| | — |
| | N/A |
| October 26, 2018 through November 29, 2018 | | 26,308 |
| | $ | 8.53 |
| | — |
| | N/A |
| November 30, 2018 through December 27, 2018 | | — |
| | $ | — |
| | — |
| | N/A |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | (a)
Total Number
of Shares
Purchased | | (b)
Average Price
Paid Per Share | | (c)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs | | (d)
Maximum
Number (or
Approximate
Dollar Value)
of Shares that
may yet be
Purchased under
the Plans or
Programs |
| September 25, 2020 through October 22, 2020 | | — | | | $ | — | | | — | | | N/A |
| October 23, 2020 through November 26, 2020 | | 1,679 | | | $ | 2.04 | | | — | | | N/A |
| November 27, 2020 through December 31, 2020 | | — | | | $ | — | | | — | | | N/A |
|
| | | | |
| Item 6. | Selected Financial Data |
Selected Historical Financial and Operating Data
The following table sets forth our historical selected financial and operating data for the periods indicated. The selected financial and operating data should be read in conjunction with the other information contained in this document, including “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the audited historical Consolidated Financial Statements and the notes thereto included elsewhere in this document, and historical audited Consolidated Financial Statements, which have not been included in this document.
The results of operations data for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 201626, 2019 and the balance sheet data as of December 27, 201831, 2020 and December 28, 201726, 2019 are derived from the audited Consolidated Financial Statements of NCM, Inc. included elsewhere in this document. The results of operations data for the years ended December 31, 201527, 2018, December 28, 2017 and January 1, 2015December 29, 2016 and the balance sheet data as of December 27, 2018, December 28, 2017 and December 29, 2016 December 31, 2015 and January 1, 2015 are derived from the audited Consolidated Financial Statements of NCM, Inc. that are not included in this document.
|
| | | | | | | | | | | | | | | | | | | |
| Results of Operations Data | Years Ended |
| ($ in millions, except per share data) | Dec. 27,
2018 | | Dec. 28,
2017 | | Dec. 29,
2016 | | Dec. 31,
2015 | | Jan. 1,
2015 |
| Revenue | $ | 441.4 |
| | $ | 426.1 |
| | $ | 447.6 |
| | $ | 446.5 |
| | $ | 394.0 |
|
| OPERATING EXPENSES: | | | | | | | | | |
| Advertising operating costs | 37.4 |
| | 32.4 |
| | 30.0 |
| | 30.8 |
| | 26.4 |
|
| Network costs | 13.3 |
| | 15.8 |
| | 17.1 |
| | 17.8 |
| | 18.3 |
|
| Theater access fees—founding members | 81.7 |
| | 76.5 |
| | 75.1 |
| | 72.5 |
| | 70.6 |
|
| Selling and marketing costs | 66.5 |
| | 72.0 |
| | 72.8 |
| | 72.3 |
| | 57.6 |
|
| Merger termination fee and related merger costs | — |
| | — |
| | — |
| | 34.3 |
| | 7.5 |
|
| Administrative and other costs | 48.3 |
| | 37.9 |
| | 43.8 |
| | 38.6 |
| | 29.5 |
|
| Depreciation and amortization | 39.9 |
| | 37.6 |
| | 35.8 |
| | 32.2 |
| | 32.4 |
|
| Total | 287.1 |
| | 272.2 |
| | 274.6 |
| | 298.5 |
| | 242.3 |
|
| OPERATING INCOME | 154.3 |
| | 153.9 |
| | 173.0 |
| | 148.0 |
| | 151.7 |
|
NON-OPERATING EXPENSES (INCOME) (9) | 50.6 |
| | (140.9 | ) | | 64.1 |
| | 47.9 |
| | 42.7 |
|
INCOME BEFORE INCOME TAXES (9) | 103.7 |
| | 294.8 |
| | 108.9 |
| | 100.1 |
| | 109.0 |
|
Provision for income taxes (9) | 23.5 |
| | 180.3 |
| | 14.4 |
| | 27.9 |
| | 30.6 |
|
CONSOLIDATED NET INCOME (9) | 80.2 |
| | 114.5 |
| | 94.5 |
| | 72.2 |
| | 78.4 |
|
Less: Net income attributable to noncontrolling interests | 50.4 |
| | 56.2 |
| | 61.6 |
| | 48.3 |
| | 52.2 |
|
NET INCOME ATTRIBUTABLE TO NCM, Inc. (9) | $ | 29.8 |
| | $ | 58.3 |
| | $ | 32.9 |
| | $ | 23.9 |
| | $ | 26.2 |
|
| EARNINGS PER NCM, INC. COMMON SHARE: | | | | | | | | | |
Basic (9) | $ | 0.39 |
| | $ | 0.89 |
| | $ | 0.55 |
| | $ | 0.41 |
| | $ | 0.45 |
|
Diluted (9) | $ | 0.37 |
| | $ | 0.48 |
| | $ | 0.54 |
| | $ | 0.35 |
| | $ | 0.39 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Results of Operations Data | Years Ended |
| ($ in millions, except per share data) | Dec. 31,
2020 | | Dec. 26,
2019 | | Dec. 27,
2018 | | Dec. 28,
2017 | | Dec. 29,
2016 |
| Revenue | $ | 90.4 | | | $ | 444.8 | | | $ | 441.4 | | | $ | 426.1 | | | $ | 447.6 | |
| OPERATING EXPENSES: | | | | | | | | | |
| Advertising operating costs | 10.3 | | | 38.3 | | | 37.4 | | | 32.4 | | | 30.0 | |
| Network costs | 8.6 | | | 13.5 | | | 13.3 | | | 15.8 | | | 17.1 | |
| Theater access fees and revenue share—founding members | 24.6 | | | 82.7 | | | 81.7 | | | 76.5 | | | 75.1 | |
| Selling and marketing costs | 37.6 | | | 64.9 | | | 66.5 | | | 72.0 | | | 72.8 | |
| Administrative and other costs | 30.9 | | | 43.8 | | | 48.3 | | | 37.9 | | | 43.8 | |
| Impairment of long-lived assets | 1.7 | | | — | | | — | | | — | | | — | |
| Depreciation expense | 13.1 | | | 13.6 | | | 12.6 | | | 11.0 | | | 8.8 | |
| Amortization expense | — | | | — | | | 27.3 | | | 26.6 | | | 27.0 | |
| Amortization of intangibles recorded for network theater screen leases | 24.6 | | | 26.7 | | | — | | | — | | | — | |
| Total | 151.4 | | | 283.5 | | | 287.1 | | | 272.2 | | | 274.6 | |
| OPERATING (LOSS) INCOME | (61.0) | | | 161.3 | | | 154.3 | | | 153.9 | | | 173.0 | |
| NON-OPERATING (INCOME) EXPENSE | (96.9) | | | 62.2 | | | 50.6 | | | (140.9) | | | 64.1 | |
| INCOME BEFORE INCOME TAXES | 35.9 | | | 99.1 | | | 103.7 | | | 294.8 | | | 108.9 | |
| Provision for income taxes | 162.2 | | | 12.4 | | | 23.5 | | | 180.3 | | | 14.4 | |
| CONSOLIDATED NET (LOSS) INCOME | (126.3) | | | 86.7 | | | 80.2 | | | 114.5 | | | 94.5 | |
Less: Net (loss) income attributable to noncontrolling
interests | (60.9) | | | 50.6 | | | 50.4 | | | 56.2 | | | 61.6 | |
| NET (LOSS) INCOME ATTRIBUTABLE TO NCM, Inc. | $ | (65.4) | | | $ | 36.1 | | | $ | 29.8 | | | $ | 58.3 | | | $ | 32.9 | |
| (LOSS) EARNINGS PER NCM, INC. COMMON SHARE: | | | | | | | | | |
| Basic | $ | (0.84) | | | $ | 0.47 | | | $ | 0.39 | | | $ | 0.89 | | | $ | 0.55 | |
| Diluted | $ | (0.84) | | | $ | 0.46 | | | $ | 0.37 | | | $ | 0.48 | | | $ | 0.54 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| Balance Sheet Data (in millions) | Dec. 31,
2020 | | Dec. 26,
2019 | | Dec. 27,
2018 | | Dec. 28,
2017 | | Dec. 29,
2016 |
Cash, cash equivalents and marketable securities (1) | $ | 181.8 | | | $ | 80.9 | | | $ | 75.6 | | | $ | 59.5 | | | $ | 68.7 | |
| Receivables, net | $ | 16.2 | | | $ | 170.8 | | | $ | 149.9 | | | $ | 160.6 | | | $ | 160.5 | |
| Property and equipment, net | $ | 27.5 | | | $ | 33.2 | | | $ | 33.6 | | | $ | 30.7 | | | $ | 29.6 | |
| Total assets | $ | 886.2 | | | $ | 1,130.0 | | | $ | 1,141.8 | | | $ | 1,173.1 | | | $ | 1,215.5 | |
| Borrowings, gross | $ | 1,060.3 | | | $ | 935.6 | | | $ | 931.4 | | | $ | 932.0 | | | $ | 935.0 | |
Payable to founding members under tax receivable
agreement | $ | 33.5 | | | $ | 198.0 | | | $ | 211.1 | | | $ | 232.2 | | | $ | 419.1 | |
| Equity/(deficit) | $ | (268.6) | | | $ | (121.2) | | | $ | (89.2) | | | $ | (74.8) | | | $ | (232.2) | |
| Total liabilities and equity | $ | 886.2 | | | $ | 1,130.0 | | | $ | 1,141.8 | | | $ | 1,173.1 | | | $ | 1,215.5 | |
|
| | | | | | | | | | | | | | | | | | | |
| | As of |
| Balance Sheet Data (in millions) | Dec. 27,
2018 | | Dec. 28,
2017 | | Dec. 29,
2016 | | Dec. 31,
2015 | | Jan. 1,
2015 |
Cash, cash equivalents and marketable securities (1) | $ | 75.6 |
| | $ | 59.5 |
| | $ | 68.7 |
| | $ | 85.4 |
| | $ | 80.6 |
|
| Receivables, net | 149.9 |
| | 160.6 |
| | 160.5 |
| | 148.9 |
| | 116.5 |
|
| Property and equipment, net | 33.6 |
| | 30.7 |
| | 29.6 |
| | 25.1 |
| | 22.4 |
|
Total assets (2) (9) | 1,141.8 |
| | 1,173.1 |
| | 1,215.5 |
| | 1,238.2 |
| | 1,159.0 |
|
| Borrowings, gross | 931.4 |
| | 932.0 |
| | 935.0 |
| | 936.0 |
| | 892.0 |
|
Payable to founding members under tax receivable agreement (9) | 211.1 |
| | 232.2 |
| | 419.1 |
| | 439.3 |
| | 450.1 |
|
Equity/(deficit) (9) | (89.2 | ) | | (74.8 | ) | | (232.2 | ) | | (229.9 | ) | | (269.6 | ) |
Total liabilities and equity (2) (9) | 1,141.8 |
| | 1,173.1 |
| | 1,215.5 |
| | 1,238.2 |
| | 1,159.0 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Other Financial and Operating Data | Years Ended |
| (in millions, except cash dividend declared per common share and screen data) | Dec. 27,
2018 | | Dec. 28,
2017 | | Dec. 29,
2016 | | Dec. 31,
2015 | | Jan. 1,
2015 |
OIBDA (3) | $ | 194.2 |
| | $ | 191.5 |
| | $ | 208.8 |
| | $ | 180.2 |
| | $ | 184.1 |
|
Adjusted OIBDA (3) | $ | 205.4 |
| | $ | 205.1 |
| | $ | 230.7 |
| | $ | 229.9 |
| | $ | 199.3 |
|
Adjusted OIBDA margin (3) | 46.5 | % | | 48.1 | % | | 51.5 | % | | 51.5 | % | | 50.6 | % |
| Capital expenditures | $ | 15.4 |
| | $ | 12.3 |
| | $ | 13.3 |
| | $ | 13.0 |
| | $ | 8.8 |
|
| Cash dividend declared per common share | $ | 0.68 |
| | $ | 0.88 |
| | $ | 0.88 |
| | $ | 0.88 |
| | $ | 1.38 |
|
Founding member screens at period end (4) (8) | 16,768 |
| | 16,808 |
| | 17,022 |
| | 16,981 |
| | 16,497 |
|
Total screens at period end (5) (8) | 21,172 |
| | 20,850 |
| | 20,548 |
| | 20,361 |
| | 20,109 |
|
DCN screens at period end (6) (8) | 20,741 |
| | 20,419 |
| | 20,080 |
| | 19,760 |
| | 19,251 |
|
Total attendance for period (7) (8) | 705.1 |
| | 655.8 |
| | 688.8 |
| | 694.7 |
| | 688.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Financial and Operating Data | Years Ended |
| (in millions, except cash dividend declared per common share and screen data) | Dec. 31,
2020 | | Dec. 26,
2019 | | Dec. 27,
2018 | | Dec. 28,
2017 | | Dec. 29,
2016 |
Adjusted OIBDA (2) | $ | (19.4) | | | $ | 207.5 | | | $ | 205.4 | | | $ | 205.1 | | | $ | 230.7 | |
Adjusted OIBDA margin (2) | (21.5) | % | | 46.7 | % | | 46.5 | % | | 48.1 | % | | 51.5 | % |
| Capital expenditures | $ | 11.2 | | | $ | 15.3 | | | $ | 15.4 | | | $ | 12.3 | | | $ | 13.3 | |
| Cash dividend declared per common share | $ | 0.40 | | | $ | 0.68 | | | $ | 0.68 | | | $ | 0.88 | | | $ | 0.88 | |
Founding member screens at period end (3) (6) | 16,515 | | | 16,880 | | | 16,768 | | | 16,808 | | | 17,022 | |
Total screens at period end (4) (6) | 20,450 | | | 21,208 | | | 21,172 | | | 20,850 | | | 20,548 | |
Total attendance for period (5) (6) | 138.2 | | | 651.4 | | | 705.1 | | | 655.8 | | | 688.8 | |
Notes to the Selected Historical Financial and Operating Data
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(1) | Includes short-term and long-term marketable securities. |
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(2) | During the first quarter of 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”) and Accounting Standards Update 2015-15, Interest – Imputation of Interest (“ASU 2015-15”), on a retrospective basis, which provide guidance for simplifying the presentation of debt issuance costs. In connection with the adoption of ASU 2015-03 and ASU 2015-15, the Company reclassified net deferred financing(1)Includes short-term and long-term marketable securities. (2)Adjusted OIBDA and Adjusted OIBDA margin are not financial measures calculated in accordance with GAAP in the United States. Adjusted OIBDA represents operating income before depreciation and amortization expense adjusted to also exclude amortization of intangibles recorded for network theater screen leases, non-cash share-based compensation costs, related to NCM LLC’s term loans, secured and unsecured notes in the Consolidated Balance Sheet as a direct deduction from the carrying amount of those borrowings, while net deferred financing costs related to the revolving credit facility remained an asset in the Consolidated Balance Sheet. The amounts presented above for total assets and total liabilities and equity reflect this reclassification as of December 27, 2018, December 28, 2017, December 29, 2016 and December 31, 2015. Amounts presented as of January 1, 2015 do not reflect the reclassification. If adjusted, the reclassification for ASU 2015-03 and ASU 2015-15 would reduce both total assets and total liabilities and equity shown above by $12.7 million as of January 1, 2015. |
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(3) | Operating Income Before Depreciation and Amortization (“OIBDA”), Adjusted OIBDA and Adjusted OIBDA margin are not financial measures calculated in accordance with GAAP in the United States. OIBDA represents operating income before depreciation and amortization expense. Adjusted OIBDA excludes from OIBDA non-cash share-based payment costs, the merger termination fee and related merger costs, Chief Executive Officer transition costs and early lease termination expense. Adjusted OIBDA margin is calculated by dividing Adjusted OIBDA by total revenue. Our management uses these non-GAAP financial measures to evaluate operating performance, to forecast future results and as a basis for compensation. The Company believes these are important supplemental measures of operating performance because they eliminate items that have less bearing on its operating performance and highlight trends in its core business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes the presentation of these measures is relevant and useful for investors because it enables them to view performance in a manner similar to the method used by the Company’s management, helps improve their ability to understand the Company’s operating performance and makes it easier to compare the Company’s results with other companies that may have different depreciation and amortization policies, non-cash share based compensation programs, levels of mergers and acquisitions, CEO turnover, early |
lease termination expense, Chief Executive Officer transition costs and impairments of long-lived assets. Adjusted OIBDA margin is calculated by dividing Adjusted OIBDA by total revenue. Our management uses these non-GAAP financial measures to evaluate operating performance, to forecast future results and as a basis for compensation. The Company believes these are important supplemental measures of operating performance because they eliminate items that have less bearing on its operating performance and highlight trends in its core business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes the presentation of these measures is relevant and useful for investors because it enables them to view performance in a manner similar to the method used by the Company’s management, helps improve their ability to understand the Company’s operating performance and makes it easier to compare the Company’s results with other companies that may have different depreciation and amortization policies, amounts of amortization of intangibles recorded for network theater screen leases, non-cash share-based compensation programs, CEO turnover, early lease termination expense, impairments of long-lived assets, interest rates, debt levels or income tax rates. A limitation of these measures, however, is that they exclude depreciation and amortization, which represent a proxy for the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in the Company’s business. In addition, Adjusted OIBDA has the limitation of not reflecting the effect of the Company’s amortization of intangibles recorded for network theater screen leases, share-based payment costs, costs associated with the terminated merger with Screenvision, LLC (“Screenvision”), costs associated with the resignation of the Company’s former Chief Executive Officers, or early lease termination expense. OIBDAexpense, or impairments of long-lived assets. Adjusted OIBDA should not be regarded as an alternative to operating income, net income or as indicators of operating performance, nor should they be considered in isolation of, or as substitutes for financial measures prepared in accordance with GAAP. The Company believes that operating income is the most directly comparable GAAP financial measure to Adjusted OIBDA. Because not all companies use identical calculations, these non-GAAP presentations may not be comparable to other similarly titled measures of other companies, or calculations in the Company’s debt agreement.
OIBDA and Adjusted OIBDA dodoes not reflect integration and other encumbered theater payments as they are recorded as a reduction to intangible assets. Integration payments and other encumbered theater payments received are added to Adjusted OIBDA to determine our compliance with financial covenants under our senior secured credit facility and included in available cash distributions to NCM LLC’s founding members. During the years ended December 31, 2020, December 26, 2019, December 27, 2018, December 28, 2017 and December 29, 2016, December 31, 2015 and January 1, 2015, the Company recorded integration and other encumbered theater payments of $1.4 million, $22.3 million, $21.4 million, $20.9 million $2.6 million, $2.7 million and $2.2$2.6 million, respectively, from NCM LLC’s founding members.
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(4) | Represents the total number of screens within NCM LLC’s advertising network operated by NCM LLC’s founding members. |
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(5) | Represents the total screens within NCM LLC’s advertising network. |
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(6) | Represents the total number of screens that are connected to the DCN. |
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(7) | Represents the total attendance within NCM LLC’s advertising network. |
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(8) | Excludes screens and attendance associated with certain AMC Rave, AMC Carmike Cinemas, Inc. ("Carmike") and Cinemark Rave theaters for all periods presented. Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document. |
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(9) | The prior year balances have been adjusted to reflect the adoption of a change in accounting principle in the first quarter of 2018. Refer to Note 1 to the audited Consolidated Financial Statements for discussion of the nature and impact of the change on the results of operations data for years ended December 28, 2017 and December 29, 2016 and on the balance sheet data as of December 28, 2017. For the years ended December 31, 2015 and January 1, 2015, this adjustment changed the non-operating expenses and income before income taxes by $21.0 million and $35.0 million, respectively, increased the provision for income taxes by $8.4 million and $17.0 million, respectively, and increased consolidated net income and net income attributable to NCM, Inc. balances by $12.6 million and $18.0 million, respectively. The adjustment to net income attributable to NCM, Inc. resulted in a $0.22 and $0.16 increase in basic and diluted EPS, respectively, for the year ended December 31, 2015 and a $0.31 and $0.25 increase in basic and diluted EPS, respectively, for the year ended January 1, 2015. Additionally, total assets increased by $73.0 million, $78.2 million, and $84.3 million; payable to founding members under the TRA increased by $188.4 million, $205.5 million, and $218.4 million; Equity/(deficit) decreased by $115.5 million, $127.3 million, and $134.2 million; and total liabilities and equity increased by $73.0 million, $78.2 million, and $84.3 million for the years ended December 29, 2016, December 31, 2015 and January 1, 2015, respectively. The change in accounting principle does not impact the Company’s operating income, OIBDA, or Adjusted OIBDA. |
(3)Represents the total number of screens within NCM LLC’s advertising network operated by NCM LLC’s founding members.
(4)Represents the total screens within NCM LLC’s advertising network.
(5)Represents the total attendance within NCM LLC’s advertising network as provided by our founding members and affiliate partners.
(6)Excludes screens and attendance associated with certain AMC Rave, AMC Carmike Cinemas, Inc. (“Carmike”) and Cinemark Rave theaters for certain periods presented. Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document.
The following table reconciles operating income to OIBDA and Adjusted OIBDA for the periods presented (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended |
| | Dec. 27,
2018 | | Dec. 28,
2017 | | Dec. 29,
2016 | | Dec. 31,
2015 | | Jan. 1,
2015 |
| Operating income | $ | 154.3 |
| | $ | 153.9 |
| | $ | 173.0 |
| | $ | 148.0 |
| | $ | 151.7 |
|
| Depreciation and amortization | 39.9 |
| | 37.6 |
| | 35.8 |
| | 32.2 |
| | 32.4 |
|
| OIBDA | 194.2 |
| | 191.5 |
| | 208.8 |
| | 180.2 |
| | 184.1 |
|
Share-based compensation costs (1) | 7.8 |
| | 11.2 |
| | 18.3 |
| | 14.8 |
| | 7.7 |
|
Merger-related administrative costs (2) | — |
| | — |
| | — |
| | 34.3 |
| | 7.5 |
|
CEO transition costs (3) | 3.4 |
| | 0.6 |
| | 3.6 |
| | 0.6 |
| | — |
|
Early lease termination expense (4) | — |
| | 1.8 |
| | — |
| | — |
| | — |
|
| Adjusted OIBDA | $ | 205.4 |
| | $ | 205.1 |
| | $ | 230.7 |
| | $ | 229.9 |
| | $ | 199.3 |
|
| Total revenue | $ | 441.4 |
| | $ | 426.1 |
| | $ | 447.6 |
| | $ | 446.5 |
| | $ | 394.0 |
|
| Adjusted OIBDA margin | 46.5 | % | | 48.1 | % | | 51.5 | % | | 51.5 | % | | 50.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended |
| | Dec. 31,
2020 | | Dec. 26,
2019 | | Dec. 27,
2018 | | Dec. 28,
2017 | | Dec. 29,
2016 |
| Operating (loss) income | $ | (61.0) | | | $ | 161.3 | | | $ | 154.3 | | | $ | 153.9 | | | $ | 173.0 | |
| Depreciation expense | 13.1 | | | 13.6 | | | 12.6 | | | 11.0 | | | 8.8 | |
Amortization expense (1) | — | | | — | | | 27.3 | | | 26.6 | | | 27.0 | |
Amortization of intangibles recorded for network theater screen leases (1) | 24.6 | | | 26.7 | | | — | | | — | | | — | |
Share-based compensation costs (2) | 2.2 | | | 5.5 | | | 7.8 | | | 11.2 | | | 18.3 | |
| CEO transition costs | — | | | 0.4 | | | 3.4 | | | 0.6 | | | 3.6 | |
Early lease termination expense (3) | — | | | — | | | — | | | 1.8 | | | — | |
Impairment of long-lived assets (4) | 1.7 | | | — | | | — | | | — | | | — | |
| Adjusted OIBDA | $ | (19.4) | | | $ | 207.5 | | | $ | 205.4 | | | $ | 205.1 | | | $ | 230.7 | |
| Total revenue | $ | 90.4 | | | $ | 444.8 | | | $ | 441.4 | | | $ | 426.1 | | | $ | 447.6 | |
| Adjusted OIBDA margin | (21.5) | % | | 46.7 | % | | 46.5 | % | | 48.1 | % | | 51.5 | % |
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(1) | Share-based payments costs are included in network operations, selling and marketing and administrative expense in the accompanying audited Consolidated Financial Statements. |
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(2) | Merger termination fee and related merger costs primarily include the merger termination payment and legal, accounting, advisory and other professional fees associated with the terminated merger with Screenvision. |
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(3) | Chief Executive Officer transition costs represent severance, consulting and related other costs. |
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(4) | Early lease termination expense represents an expense recorded upon the early termination of the lease of our corporate headquarters because the early termination payment made by the Company was reimbursed by the landlord of the new building. |
(1)Following the adoption of ASC 842, as discussed within Note 1 to the audited Consolidated Financial Statements included elsewhere in this document, amortization of the ESA and affiliate intangible balances is considered a form of lease expense and has been reclassified to this account as of the adoption date, December 28, 2018. The Company adopted ASC 842 prospectively and thus, prior period balances remain within amortization expense.
(2)Share-based payments costs are included in network operations, selling and marketing and administrative expense in the accompanying audited Consolidated Financial Statements. (3)Early lease termination expense represents an expense recorded upon the early termination of the lease of our corporate headquarters because the early termination payment made by the Company was reimbursed by the landlord of the new building.
(4)The impairment of long-lived assets primarily relates to the write-off of certain internally developed software.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
As discussed in Part 1, some of the information in this Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. All statements other than statements of historical facts included in this Form 10-K, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and statements related to the impact of the current COVID-19 Pandemic on our business and results, may constitute forward-looking statements. In some cases, you can identify these “forward-looking statements” by the specific words, including but not limited to “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. The following discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto included elsewhere in this document. In the following discussion and analysis, the term net income refers to net income attributable to NCM, Inc.
This section of this Form 10-K generally discusses fiscal 2020 and fiscal 2019 items and year-to-year comparisons between fiscal 2020 and fiscal 2019. Discussions of fiscal 2018 items and year-to-year comparisons between fiscal 2019 and fiscal 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2019.
Overview
We are America'sAmerica’s Movie Network. As the #1 weekendlargest cinema advertising network for Millennials (age 18-34) in the U.S., we areunite brands with the connector between brandspower of movies and engage movie audiences.fans anytime and anywhere. We currently derive revenue principally from the sale of advertising to national, regional and local businesses in NoovieNoovie®, our cinema advertising and entertainment pre-show seen on movie screens across the U.S. Beginning in mid-March 2020, each of our founding members and all of our network affiliates announced that their theaters would be temporarily closed to address the COVID-19 Pandemic and almost all of the theaters within our network remained closed until late August 2020. On September 4, 2020 the Company resumed in-theater advertising and as of December 31, 2020, 40.5% of the theaters within our network were open. As of March 5, 2021, 49.0% of theaters within our network are open. Refer to the “Recent Developments” section below for further information regarding the impact of and the Company's response to the COVID-19 Pandemic.
We also sell advertising on our LEN, a series of strategically-placed screens located in movie theater lobbies, as well asand other forms of advertising and promotions in theater lobbies. In addition, weWe also sell digital online and mobile advertising through our CinemaNoovie Audience Accelerator product and across our suite of Noovie digital productproperties, including Noovie.com, Noovie Shuffle, Name That Movie and Noovie Arcade, in order to reach entertainment audiences beyond the theater. Further, during 2018, we launchedAs of December 31, 2020, approximately 5.1 million moviegoers have downloaded our Noovie ARcademobile app which brings augmented reality to our Noovie pre-showapps. These downloads and over 1.5the acquisition of second party data have resulted in first- and second-party data sets of approximately 171.0 million movie goers have already downloaded the app as of December 27, 2018.31, 2020. We have long-term ESAs (over 18(approximately 18.7 weighted average years remaining as of December 27, 2018)based on pre-COVID-19 attendance levels) with the founding members and multi-year agreements with network affiliates, which expire at various dates between March 15, 201931, 2021 and July 22, 2031. The weighted average remaining term (based on attendance)pre-COVID-19 attendance levels) of the ESAs and the network affiliate agreements is 15.816.3 years as of December 27, 2018.31, 2020. The ESAs and network affiliate agreements grant NCM LLC exclusive rights in their theaters to sell advertising, subject to limited exceptions. Our Noovie pre-show and LEN programming are distributed predominantly via satellite through our proprietary DCN. Approximately 98% of the aggregate founding member and network affiliate theater attendance is generated by theaters connected to our DCN (the remaining screens receive advertisements on USB drives) and 100% of the Noovie pre-show is projected on digital projectors (95% digital cinema projectors and 5% LCD projectors).
Management focuses on several measurements that we believe provide us with the necessary ratios and key performance indicators to manage our business, determine how we are performing versus our internal goals and targets, and
against the performance of our competitors and other benchmarks in the marketplace in which we operate. We focus on many operating metrics including changes in revenue, OIBDA, Adjusted OIBDA and Adjusted OIBDA margin, as defined and discussed in “Notes to the Selected Historical Financial and Operating Data” above, as some of our primary measurement metrics. In addition, we monitor our monthly advertising performance measurements, including advertising inventory utilization, national and regional advertising pricing (CPM), local advertising rate per screentheater per week, national and local and regional and total advertising revenue per attendee. We also monitor free cash flow, the dividend coverage ratio, financial leverage ratio (net debt divided by Adjusted OIBDA plus integration payments and other encumbered theater payments), cash balances and revolving credit facility availability to ensure financial debt covenant compliance and that there is adequate cash availability to fund our working capital needs and debt obligations and current and future dividends declared by our Board of Directors.
Recent Developments
COVID-19—Following the World Health Organization’s declaration of the COVID-19 virus as a pandemic in March 2020, the United States’ government and other state and local governments issued precautionary restrictions on travel, public gatherings and other events and issued social distancing guidelines. Beginning in mid-March 2020, each of our founding
members and all of our network affiliates announced that their theaters would be temporarily closed and almost all of the theaters within our network remained closed until late August 2020. The Company generated no in-theater advertising revenue for the approximate six months that the theaters were closed. Major motion picture releases expected to occur during the temporary closure period were delayed until 2021 or have been released directly to alternative delivery methods bypassing the theater entirely.
On September 4, 2020 the Company resumed advertising within the theaters that were open in our network; however, in-theater advertising revenue continues to be adversely impacted as attendance at the reopened theaters has been much less than normal given COVID-19 restrictions around patron capacity limitations and a continued lack of new major motion picture releases. In October 2020, Regal announced the re-closure of its theaters in the United States. As of December 31, 2020, 40.5% of the theaters within our network had reopened. Many of the open theaters are operating at reduced hours and offering a limited number of movie showtimes and attendance at open theaters has not returned to historical levels. The results of operations for the year ended December 31, 2020 were significantly impacted by the COVID-19 Pandemic.
The Company's ability to advertise has been and will continue to be limited due to the portion of our network that remains closed or has re-closed, reduced movie schedules and patron capacities at many network theaters and the timing and frequency of major motion picture releases as compared to prior years due to the COVID-19 Pandemic. Our theater access fees, network affiliate payments and Platinum Spot revenue share payments are driven by attendance, active screens and/or in-theater advertising revenue, and therefore, were not incurred for the duration of time that the theaters were closed and attendance-based fees will be reduced for the period of time that attendance is lower than historical levels. Even though our ability to generate in-theater advertising revenue will be negatively impacted by government mandated capacity restrictions and the limited new content currently available, we are still required to pay these screen-based fees when theaters are open, which may be reduced for months where screens are in use for only part of the month. We have been working to preserve cash and ensure sufficient liquidity to endure the impacts of the COVID-19 Pandemic, even if prolonged.
During the temporary theater closures, when we were not running advertising, we temporarily furloughed approximately 30% of our staff and temporarily reduced the pay of the remaining employees by up to 50%, which in aggregate reduced our compensation expense by 50% (“Temporary Salary and Wage Reductions”). In response to the reopening of a portion of our network, we brought back most of our staff from furlough and reduced schedules by August 31, 2020. Most of the salary reductions remained in place.
Given the limited attendance levels and expected delay in new movie releases since September 2020, we have continued to re-implement a combination of temporary furloughs, permanent layoffs and further salary reductions. As of the filing date, almost 20% of our current headcount is on furlough, over 20% of our current headcount is on reduced pay and schedules of 50%-60% and almost all remaining employees are at salary reductions of up to 20%. Further, since the start of the COVID-19 Pandemic we have permanently reduced our total headcount by over 20% from pre-COVID-19 Pandemic headcount levels.
Since the start of the COVID-19 Pandemic, we have also taken the following cash preservation actions that the Company anticipates continuing until the Company’s operations normalize:
•Temporarily reduced cash compensation of the Company's Board of Directors by 20%;
•Suspended certain non-essential operating expenditures, including marketing, research, employee travel and consulting services;
•Implemented a hiring freeze on non-essential positions;
•Temporarily suspended the 401K employee match program;
•Terminated or deferred certain non-essential capital expenditures;
•Strategically worked with our vendors, and other business partners to manage, defer, and/or abate certain costs during the disruptions caused by the COVID-19 Pandemic;
•Decreased our quarterly dividend to $0.07 per share for the first three quarters of 2020 and to $0.05 for the fourth quarter of 2020 from $0.19 per share in the fourth quarter of 2019. When compared to the fourth quarter of 2019 this results in a cash savings of $10.9 million in the fourth quarter of 2020 and year to date cash savings of $39.1 million for NCM, Inc.; and
•Introduced an active cash management process, which, among other things, requires CEO approval of all outgoing payments.
The Company's ability to normalize operations is dependent upon the reopening of the remaining theaters within our network, the release of major motion pictures to the theaters, and the attendance of theater patrons. As of the filing date, multiple COVID-19 vaccines have been developed and immunizations have commenced throughout the United States and cases of the COVID-19 virus are decreasing from the peak numbers experienced in late 2020. However, there can be no assurance of
when theaters within our network will return to normal operations, that the theaters which have reopened will remain open or that patrons will return to the theaters at historical levels.
We believe that the exhibition industry has historically fared well during periods of economic stress, and we remain optimistic, though cannot guarantee, that our founding members and network affiliates will rebound and attendance figures will benefit from pent-up social demand as state and local restrictions or other social distancing orders subside and people seek togetherness with a return to normalcy. However, the ultimate significance of the COVID-19 Pandemic, including the extent of the adverse impact on our financial and operational results, will be dictated by the currently unknowable duration of the pandemic, the effect of the pandemic on the overall economy and the advertising market and responsive governmental regulations, including mandated business closures which could recur after a reopening causing subsequent closure periods, social distancing guidelines, theater capacity restrictions, shifting movie slates, voluntary theater closures and the level of theater attendance. Our business also could be significantly affected should the disruptions caused by the COVID-19 Pandemic lead to changes in consumer behavior (such as the movie audience’s willingness to return to the movie theaters and the impacts of social distancing, facemask requirements and other measures on the movie going experience), or further reductions or impacts to the customary theatrical release window. The COVID-19 Pandemic also makes it more challenging for management to estimate the future performance of our business, particularly over the near to medium term. We are monitoring the rapidly evolving situation and its potential impacts on our financial position, results of operations, liquidity and cash flows.
Financing—In March 2020, we drew down an additional $110.0 million on our revolving credit facility increasing our cash and marketable securities balance to $215.3 million as of March 26, 2020 ($132.2 million at NCM LLC). As of December 31, 2020, our cash and marketable securities balance was $181.8 million ($123.9 million at NCM LLC) and our trade accounts receivable outstanding, net of the allowance for doubtful accounts, was $16.2 million. The $123.9 million of cash at NCM LLC will be used to fund operations during the period of expected reduced cash flows. Cash at NCM, Inc. is held for future payment of dividends to NCM, Inc. shareholders, income tax payments, income tax receivable payments to NCM LLC’s founding members and other obligations.
On April 30, 2020, NCM LLC amended its Credit Agreement, dated as of June 20, 2018 (“Credit Agreement Amendment”) to allow for the automatic waiver of any non-compliance with its consolidated net senior secured leverage ratio and consolidated total leverage ratio financial covenants occurring from the quarter ending June 25, 2020 until and including the quarter ending July 1, 2021 (the “Covenant Holiday Period”). The Credit Agreement Amendment requires that, until the fiscal quarter ending July 1, 2021, NCM LLC must not permit the sum of unrestricted cash on hand at NCM LLC and availability under its revolving credit facility to be less than $55.0 million. Further, NCM LLC can make available cash distributions to its members (AMC, Cinemark, Regal and NCM, Inc.) during the Covenant Holiday Period only if trailing 12-month consolidated EBITDA (as defined in the Credit Agreement) equals or exceeds $277.0 million and outstanding loans under the revolving credit facility are equal to or less than $39.0 million. NCM LLC can make available cash distributions to its members outside of the Covenant Holiday Period so long as NCM LLC’s consolidated net senior secured leverage ratio is equal to or less than 5.00 to 1.00 and no default or event of default under the Credit Agreement has occurred and is continuing. NCM LLC may continue to reimburse NCM, Inc. for its services provided under the management services agreement during the period of the automatic waiver.
On March 8, 2021, NCM LLC entered into an additional amendment to its Credit Agreement, dated as of June 20, 2018 (“Credit Agreement Second Amendment”). Among other things, the Credit Agreement Second Amendment provides for: (i) certain modifications to the negative covenants; (ii) a waiver of non-compliance with the consolidated net total leverage and consolidated net senior secured leverage financial covenants through the quarter ended June 30, 2022; (iii) the consolidated net total leverage ratio and consolidated net senior secured leverage ratio financial covenants to be set to 6.75 to 1.00 and 5.50 to 1.00, respectively, for the quarter ending on or about September 29, 2022, and (iv) with respect to NCM LLC’s audited financial statements for the fiscal year ended December 31, 2020, a waiver of the requirement to deliver such financial statements without a “going concern” or like qualification or exception.The Credit Agreement Second Amendment also: (i) grants security interests in certain assets of NCM LLC and other potential loan parties that are not currently pledged to the lenders (the “Additional Collateral”) and (ii) increases the applicable margin of the existing term loans and revolving loans issued under the Credit Agreement in an amount equal to 1.00%.Additionally, pursuant to the terms of the Credit Agreement Second Amendment, NCM LLC is restricted from making available cash distributions until after NCM LLC delivers a compliance certificate for the quarter ending on or about September 29, 2022, and, thereafter, NCM LLC may only make available cash distributions if: (i) no default or event of default under the Credit Agreement has occurred and is continuing; (ii) the senior secured financial covenant leverage ratio is equal to or less than 4.00 to 1.00; and (iii) the aggregate principal amount of all outstanding revolving loans under the Credit Agreement is $39.0 million or less.
In addition, pursuant to the Credit Agreement Second Amendment, NCM LLC will incur new incremental term loans (the “New Incremental Loans”) in an aggregate principal amount of $50.0 million, the proceeds of which will be used for general corporate purposes.The New Incremental Loans will have substantially similar terms to the existing term loans (after giving effect the Credit Agreement Second Amendment), except that the New Incremental Loans will: (i) have a cash interest
rate of LIBOR plus 8.00%, (ii) have a maturity of December 20, 2024, and (iii) be subject to prepayment premiums if NCM LLC prepays the New Incremental Loans before maturity.
In connection with the grant of the Additional Collateral to the lenders under the Credit Agreement, NCM LLC concurrently entered into an amendment to the Security Agreement, dated as of October 8, 2019 made by NCM LLC, as issuer, in favor of JPMorgan Chase Bank, N.A., as collateral agent, relating to that certain Indenture, dated as of October 8, 2019, between NCM LLC, as issuer and Wells Fargo Bank, National Association, as trustee, relating to NCM LLC’s Senior Secured Notes due 2028.This amendment grants a security interest in the Additional Collateral for the benefit of the holders of the Secured Notes.
Taxes—On March 27, 2020, the U.S. Government enacted various relief and stimulus measures in response to the unprecedented adverse economic impacts of the COVID-19 Pandemic commonly referred to as the CARES Act. We currently have recognized or expect to recognize the following benefits under the CARES Act:
•Deferral of the payment of the 6.2% FICA portion of Company’s payroll taxes beginning on the enactment date through December 31, 2020 until the end of 2021 for one-half of the tax and the remaining half to the end of 2022. The Company deferred $1.3 million in qualifying payments in the year ended December 31, 2020, respectively; and
•A refundable Employee Retention Payroll Tax Credit for the Company’s portion of the 6.2% FICA payroll tax for certain qualifying employees from March 13, 2020 through December 31, 2020.
The Company will continue to monitor the provisions of the CARES Act and associated regulations and any other government action and intends to seek available potential benefits that would positively impact the Company.
Due to the impact of the COVID-19 Pandemic on the Company’s operations in 2020 and expected continued impact in 2021, the Company expects that it will generate a three-year cumulative pre-tax book loss during 2021. Given the associated weight assigned to this item as negative evidence within the Company’s analysis of the realizability of its deferred tax assets, the Company determined it is more-likely-than-not that the Company will not be able to realize certain of the Company’s deferred tax assets before they expire. The Company increased the valuation allowance against certain deferred tax assets, generating $139.0 million of additional income tax expense in the year ended December 31, 2020. The Company recorded a corresponding $151.9 million reduction to the ‘Payable to founding members under the tax receivable agreement’ equal to the portion of the payable related to 90% of the amortization of the expected benefits from the realization of the deferred tax assets deemed not more-likely-than-not to be realized as of December 31, 2020. The reduction to the payable to founding members under the tax receivable agreement was recorded as a gain of $151.9 million within non-operating income within the Consolidated Statements of Income. Once the Company returns to a more normal operating level and emerges from a three-year cumulative pre-tax book loss position, part or all the valuation allowance is expected to reverse, resulting in an inverse impact to the payable to founding members under the tax receivable agreement which would increase to reflect future payments to the founding members at that time.
Summary Historical and Operating Data
You should read this information in conjunction with the other information contained in this document, and our audited historical financial statements and the notes thereto included elsewhere in this document.
The prior year balances have been adjusted to reflect the adoption of a change in accounting principle in the first quarter of 2018. Refer to Note 1 to the audited Consolidated Financial Statements for discussion of the nature and impact of the change on the results of operations data for years ended December 28, 2017 and December 29, 2016.
Our Operating Data—The following table presents operating data and Adjusted OIBDA (dollars in millions, except share and margin data). Refer to “Item 6. Selected Financial Data—Notes to the Selected Historical Financial and Operating Data” for a discussion of the calculation of Adjusted OIBDA and reconciliation to operating income.
|
| | | | | | | | | | | | | | | | | |
| | Years Ended | | % Change |
| ($ in millions) | Dec. 27,
2018 | | Dec. 28,
2017 | | Dec. 29,
2016 | | 2017 to 2018 | | 2016 to 2017 |
| Revenue | $ | 441.4 |
| | $ | 426.1 |
| | $ | 447.6 |
| | 3.6 | % | | (4.8 | )% |
| Operating expenses: | | | | | | | | | |
| Advertising | 181.3 |
| | 178.0 |
| | 173.9 |
| | 1.9 | % | | 2.4 | % |
| Network, administrative and unallocated costs | 105.8 |
| | 94.2 |
| | 100.7 |
| | 12.3 | % | | (6.5 | )% |
| Total operating expenses | 287.1 |
| | 272.2 |
| | 274.6 |
| | 5.5 | % | | (0.9 | )% |
| Operating income | 154.3 |
| | 153.9 |
| | 173.0 |
| | 0.3 | % | | (11.0 | )% |
| Non-operating expenses (income) | 50.6 |
| | (140.9 | ) | | 64.1 |
| | NM | | NM |
| Income tax expense | 23.5 |
| | 180.3 |
| | 14.4 |
| | (87.0 | )% | | NM |
| Net income attributable to noncontrolling interests | 50.4 |
| | 56.2 |
| | 61.6 |
| | (10.3 | )% | | (8.8 | )% |
| Net income attributable to NCM, Inc. | $ | 29.8 |
| | $ | 58.3 |
| | $ | 32.9 |
| | (48.9 | )% | | 77.2 | % |
| | | | | | | | | | |
| Net income per NCM, Inc. basic share | $ | 0.39 |
| | $ | 0.89 |
| | $ | 0.55 |
| | (56.2 | )% | | 61.8 | % |
| Net income per NCM, Inc. diluted share | $ | 0.37 |
| | $ | 0.48 |
| | $ | 0.54 |
| | (22.9 | )% | | (11.1 | )% |
| | | | | | | | | | |
| Adjusted OIBDA | $ | 205.4 |
| | $ | 205.1 |
| | $ | 230.7 |
| | 0.1 | % | | (11.1 | )% |
| Adjusted OIBDA margin | 46.5 | % | | 48.1 | % | | 51.5 | % | | (1.6 | )% | | (3.4 | )% |
Total theater attendance (in millions) (1) | 705.1 |
| | 655.8 |
| | 688.8 |
| | 7.5 | % | | (4.8 | )% |
| | | | | | | | | | | | | | | | | |
| | Years Ended | % Change |
| ($ in millions) | Dec. 31,
2020 | | Dec. 26,
2019 | | 2019 to 2020 |
| Revenue | $ | 90.4 | | | $ | 444.8 | | | (79.7) | % |
| Operating expenses: | | | | | |
| Advertising | 61.9 | | | 177.8 | | | (65.2) | % |
| Network, administrative and unallocated costs | 89.5 | | | 105.7 | | | (15.3) | % |
| Total operating expenses | 151.4 | | | 283.5 | | | (46.6) | % |
| Operating (loss) income | (61.0) | | | 161.3 | | | (137.8) | % |
| Non-operating (income) expense | (96.9) | | | 62.2 | | | (255.8) | % |
| Income tax expense | 162.2 | | | 12.4 | | | 1208.1 | % |
| Net (loss) income attributable to noncontrolling interests | (60.9) | | | 50.6 | | | (220.4) | % |
| Net (loss) income attributable to NCM, Inc. | $ | (65.4) | | | $ | 36.1 | | | (281.2) | % |
| | | | | |
| Net (loss) income per NCM, Inc. basic share | $ | (0.84) | | | $ | 0.47 | | | (278.7) | % |
| Net (loss) income per NCM, Inc. diluted share | $ | (0.84) | | | $ | 0.46 | | | (282.6) | % |
| | | | | |
| Adjusted OIBDA | $ | (19.4) | | | $ | 207.5 | | | (109.3) | % |
| Adjusted OIBDA margin | (21.5) | % | | 46.7 | % | | (68.2) | % |
Total theater attendance (in millions) (1) | 138.2 | | | 651.4 | | | (78.8) | % |
NM = Not meaningful.
(1)Represents the total attendance within NCM LLC’s advertising network, excluding screens and attendance associated with certain AMC Rave, AMC Carmike and Cinemark Rave theaters that are currently part of another cinema advertising network for certain periods presented. Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document.
| |
(1) | Represents the total attendance within NCM LLC’s advertising network, excluding screens and attendance associated with certain AMC Rave, AMC Carmike and Cinemark Rave theaters that are currently part of another cinema advertising network for all periods presented. Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document. |
Our Network—The net screens added to our network by the founding members and network affiliates during 20182020 were as follows.
|
| | | | | | | | |
| | Number of screens |
| | Founding Members | | Network Affiliates | | Total |
| Balance as of December 28, 2017 | 16,808 |
| | 4,042 |
| | 20,850 |
|
New affiliates (1) | — |
| | 314 |
| | 314 |
|
| Openings, net of closures | (40 | ) | | 48 |
| | 8 |
|
| Balance as of December 27, 2018 | 16,768 |
| | 4,404 |
| | 21,172 |
|
| | | | | | | | | | | | | | | | | |
| | Number of screens |
| | Founding Members | | Network Affiliates | | Total |
| Balance as of December 26, 2019 | 16,880 | | | 4,328 | | | 21,208 | |
Lost affiliates, net of new affiliates (1) | — | | | (193) | | | (193) | |
Closures, net of openings (2) | (365) | | | (200) | | | (565) | |
| Balance as of December 31, 2020 | 16,515 | | | 3,935 | | | 20,450 | |
| |
(1) | Represents six new affiliates added to our network during 2018. |
On December 31, 2018 one(1)Represents the loss of five of our affiliates that did not renew their contractcontracts resulting in a reduction of 244203 affiliate screens to our network.network, offset by the addition of two new affiliates which added 10 new screens to our network during the year ended December 31, 2020.
(2)Excludes temporary theater closures in response to the COVID-19 Pandemic.
Our founding member and network affiliate agreements allow us to sell cinema advertising across the largest network of digitally equipped theaters in the U.S. We believe that adding screens and attendees to our network will provide our advertising clients with a better marketing product with increased reach and improved geographic coverage. We also believe that the continued growth of our market coverage could strengthenstrengthens our selling proposition and competitive positioning against other national, regional and local video advertising platforms, including television, online and mobile video platforms and other out of home video advertising platforms.platforms by allowing advertisers the broad reach and national scale that they need to effectively reach their target audiences.
Basis of Presentation
Prior to the completion of theour IPO, NCM LLC was wholly-owned by its founding members. In connection with the offering, NCM, Inc. purchased newly issued common membership units from NCM LLC and common membership units from NCM LLC’s founding members and became a member of and the sole manager of NCM LLC. We entered into several
agreements to effect the reorganization and the financing transaction and certain amendments were made to the existing ESAs to govern the relationships among NCM LLC and NCM LLC’s founding members after the completion of these transactions.
The results of operations data discussed herein were derived from the audited Consolidated Financial Statements and accounting records of NCM, Inc. and should be read in conjunction with the notes thereto.
We have a 52-week or 53-week fiscal year ending on the first Thursday after December 25. Fiscal years 2016, 2017 and 2018year 2019 contained 52 weeks and fiscal year 2020 contained 53 weeks. Our 20192021 fiscal year will contain 52 weeks. Throughout this document, we refer to our fiscal years as set forth below:
|
| | | | | | | |
| | Reference in |
| Fiscal Year Ended | | this Document |
December 27, 201831, 2020 | | 20182020 |
December 28, 201726, 2019 | | 2017 |
December 29, 2016 | | 20162019 |
Results of Operations
Fiscal Years 20182020 and 20172019
Revenue. Total revenue increaseddecreased$15.3354.4 million, or 3.6%79.7%, from $426.1$444.8 million for 20172019 to $441.4$90.4 million for 2018.2020. The following is a summary of revenue by category (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | $ Change | | % Change |
| | 2020 | | 2019 | | 2019 to 2020 | | 2019 to 2020 |
| National and regional advertising revenue | $ | 66.7 | | | $ | 348.9 | | | $ | (282.2) | | | (80.9) | % |
| Local advertising revenue | 17.5 | | | 66.9 | | | (49.4) | | | (73.8) | % |
Founding member advertising revenue from beverage
concessionaire agreements | 6.2 | | | 29.0 | | | (22.8) | | | (78.6) | % |
| Total revenue | $ | 90.4 | | | $ | 444.8 | | | $ | (354.4) | | | (79.7) | % |
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | $ Change | | % Change |
| | 2018 | | 2017 | | 2017 to 2018 | | 2017 to 2018 |
| National advertising revenue | $ | 312.0 |
| | $ | 296.3 |
| | $ | 15.7 |
| | 5.3 | % |
| Local and regional advertising revenue | 98.0 |
| | 99.9 |
| | (1.9 | ) | | (1.9 | )% |
Founding member advertising revenue from beverage concessionaire agreements | 31.4 |
| | 29.9 |
| | 1.5 |
| | 5.0 | % |
| Total revenue | $ | 441.4 |
| | $ | 426.1 |
| | $ | 15.3 |
| | 3.6 | % |
The following table shows data on revenue per attendee for 20182020 and 2017:
|
| | | | | | | | | | |
| | Fiscal Year | | % Change |
| | 2018 | | 2017 | | 2017 to 2018 |
| National advertising revenue per attendee | $ | 0.442 |
| | $ | 0.452 |
| | (2.1 | )% |
| Local and regional advertising revenue per attendee | $ | 0.139 |
| | $ | 0.152 |
| | (8.6 | )% |
Total advertising revenue (excluding founding member beverage revenue) per attendee | $ | 0.581 |
| | $ | 0.604 |
| | (3.7 | )% |
| Total advertising revenue per attendee | $ | 0.626 |
| | $ | 0.650 |
| | (3.7 | )% |
Total theater attendance (in millions) (1) | 705.1 |
| | 655.8 |
| | 7.5 | % |
2019: | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | % Change |
| | 2020 | | 2019 | | 2019 to 2020 |
| National and regional advertising revenue per attendee | $ | 0.483 | | | $ | 0.536 | | | (9.9) | % |
| Local advertising revenue per attendee | $ | 0.127 | | | $ | 0.103 | | | 23.3 | % |
Total advertising revenue (excluding founding member
beverage revenue) per attendee | $ | 0.609 | | | $ | 0.638 | | | (4.6) | % |
| Total advertising revenue per attendee | $ | 0.654 | | | $ | 0.683 | | | (4.2) | % |
Total theater attendance (in millions) (1) | 138.2 | | | 651.4 | | | (78.8) | % |
(1)Represents the total attendance within NCM LLC’s advertising network, excluding screens and attendance associated with certain AMC Rave, AMC Carmike and Cinemark Rave theaters for certain periods presented. Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document.
| |
(1) | Represents the total attendance within NCM LLC’s advertising network, excluding screens and attendance associated with certain AMC Rave, AMC Carmike and Cinemark Rave theaters for all periods presented. Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document. |
National and regional advertising revenue. The $15.7$282.2 million, or 5.3%80.9%, increasedecrease in national and regional advertising revenue (excluding beverage revenue from the founding members) was primarily due primarily to a 2.2% increase in national advertising CPMs (excluding beverage) and a 3.0% increase in impressions sold. The increasean 80.8% decrease in impressions sold due to the temporary closure of almost all the theaters within our network in response to the COVID-19 Pandemic preventing the Company from displaying in-theater advertising beginning in mid-March 2020 until the beginning of September 2020. Nearly 60% of our network remained closed and attendance was primarily related to a 7.5% increase in network attendance, partially offsetsignificantly below historical levels at the open theaters through the rest of 2020. National advertising CPMs for the impressions delivered for the portion of the year ended December 31, 2020 the theaters were open decreased 17.2% driven by a decreasechange in national inventory utilization, from 118.5% in 2017 to 113.5% in 2018. Inventory utilization is calculated as utilized impressions divided by total advertising impressions, which is based on eleven 30-second salable national advertising units in our Noovie pre-show, which can be expanded, should market demand dictate. The increase in national advertising CPMs was due primarily to an increase inthe mix of clients with a higher proportion of upfront clients and fewer higher CPM scatter market demand, which isand content partner clients in the year ended December 31, 2020, as compared to the year ended December 31, 2019. The scatter market represents inventory not included within an upfront or content partner commitment sold closer to the advertisement air date for typically at higher CPMs. This increase was partially offset by a decrease in content partner revenue in 2018, compared to 2017.
Local and regional advertising revenue. The $1.9$49.4 million, or 1.9%73.8%, decrease in local and regional advertising revenue was primarily due to an 8.7% decreasethe temporary closure of almost all the theaters within our network in total contract volume, partially offset by a 6.2% increaseresponse to the COVID-19 Pandemic preventing the Company from displaying in-theater advertising beginning in average contract value due to an increase in National Spotmid-March 2020 until the beginning of September 2020.
Nearly 60% of our network remained closed and other regional deals in 2018, compared to 2017. The decrease in total contract volumeattendance was primarily related to a decrease insignificantly below historical levels at the numberopen theaters through the rest of contracts over $100,000 within the automobile and airline categories in 2018, compared to 2017.2020.
Founding member beverage revenue. The $1.5$22.8 million, or 5.0%, increase in national advertising revenue from founding members' beverage concessionaire agreements was primarily due to a 6.5% increase in founding member attendance and an increase in beverage revenue CPMs in 2018, compared to 2017. The 2018 beverage revenue CPM is based on the change in CPM during segment one of our pre-show from 2016 to 2017, which increased 1.1%.
Operating expenses. Total operating expenses increased $14.9 million, or 5.5%, from $272.2 million for 2017 to $287.1 million for 2018. The following table shows the changes inoperating expense for 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | $ Change | | % Change |
| | 2018 | | 2017 | | 2017 to 2018 | | 2017 to 2018 |
| Advertising operating costs | $ | 37.4 |
| | $ | 32.4 |
| | $ | 5.0 |
| | 15.4 | % |
| Network costs | 13.3 |
| | 15.8 |
| | (2.5 | ) | | (15.8 | )% |
| Theater access fees—founding members | 81.7 |
| | 76.5 |
| | 5.2 |
| | 6.8 | % |
| Selling and marketing costs | 66.5 |
| | 72.0 |
| | (5.5 | ) | | (7.6 | )% |
| Administrative and other costs | 48.3 |
| | 37.9 |
| | 10.4 |
| | 27.4 | % |
| Depreciation and amortization | 39.9 |
| | 37.6 |
| | 2.3 |
| | 6.1 | % |
| Total operating expenses | $ | 287.1 |
| | $ | 272.2 |
| | $ | 14.9 |
| | 5.5 | % |
Advertising operating costs. Advertising operating costs increased $5.0 million, or 15.4%, from $32.4 million in 2017 to $37.4 million in 2018. This increase was primarily due to a $4.3 million increase in affiliate advertising payments related to higher revenue, a 9.2% increase in affiliate screens in our network during the year ended 2018, compared to the year ended 2017, as well as a slight increase in the associated effective revenue share percentages for the new affiliates in 2018, compared to the year ended 2017, partly due to the payment of minimum guarantees. Additionally,
there was a $1.1 million increase in personnel related expenses primarily driven by higher salary expense and accrued performance-based compensation in 2018, as compared to 2017.
Network costs. Network costs decreased $2.5 million, or 15.8%, from $15.8 million in 2017 to $13.3 million in 2018. This decrease was primarily due to a $2.5 million decrease in personnel related expenses in the year ended 2018 as compared to the year ended 2017. This decrease is primarily due to severance expense recorded in the first quarter of 2017 due to the elimination of certain positions within network operations and media production and the resulting decrease in salary expense in the year ended 2018, compared to the year ended 2017, due to the aforementioned reduction in headcount. The decrease in personnel related expenses is also driven by lower non-cash share-based compensation expense related to a decrease in the volume of awards granted in 2018, compared to prior years and a decrease in the projected vesting of performance-based awards as of December 27, 2018, compared to December 28, 2017.
Theater access fees—founding members. Theater access fees increased $5.2 million, or 6.8%, from $76.5 million in 2017 to $81.7 million in 2018. The expense associated with founding member attendance increased $2.9 million due to a 6.5% increase in attendance at founding members' theaters and $2.4 million due to an increase in the expense associated with the founding member digital screens that are connected to the DCN (nearly 100% of our screens as of December 27, 2018), including higher quality digital cinema projectors and related equipment, due to the annual 5% rate increase specified in the ESAs.
Selling and marketing costs. Selling and marketing costs decreased $5.5 million, or 7.6%, from $72.0 million in 2017 to $66.5 million in 2018. This decrease was primarily related to a $4.6 million decrease in personnel related expenses primarily due to 1) lower non-cash share-based compensation expense related to 2) a decrease in the volume of awards granted in 2018, compared to prior years and a decrease in the projected vesting of performance based awards as of December 27, 2018, compared to December 28, 2017 and a decrease in salary and commission expense in the year ended 2018, compared to 2017 due to the elimination of certain sales leadership positions in late 2017 and early 2018 and a decrease in local revenue. The decrease was also due to a $3.1 million non-cash impairment charge realized in 2017, compared to $0.4 million realized in 2018, related to investments obtained in prior years in exchange for advertising services, a $0.9 million decrease in online publisher expense related to a decrease in our agreed upon digital advertising rates, and a $0.7 million decrease in market research expense in 2018, compared to 2017. These expenses were partially offset by a $3.6 million increase in non-cash barter expense primarily related to the nature and timing of these expenses in 2018, compared to 2017.
Administrative and other costs. Administrative and other costs increased $10.4 million, or 27.4%, from $37.9 million in the year ended 2017 to $48.3 million in the year ended 2018. Administrative and other costs increased primarily due to 1) an increase of $3.5 million related to our digital service offerings for personnel related costs, consulting costs, and licensing costs, 2) a $2.9 million increase in CEO transition costs related to severance expense incurred in 2018 following the resignation of our former CEO, as well as costs related to the search to identify a permanent CEO, 3) a $1.6 million increase in other personnel related expenses due to a decrease in capitalized personnel costs resulting from the nature of the work being performed by our information technology department in 2018, as compared to 2017, 4) a $2.1 million increase in legal and professional expense driven by $1.4 million in legal and professional fees incurred related to the negotiation of the settlement agreement with a large shareholder during the second quarter of 2018, 5) a $1.0 million increase in rent expense related to the relocation of our corporate headquarters in 2018 and 6) a $0.9 million increase in consulting services in 2018, as compared to 2017. These increases in administrative and other costs were partially offset by the absence of a $1.8 million non-cash early lease termination charge for our previous corporate headquarters (the payment was reimbursed by the landlord) that occurred in 2017.
Depreciation and amortization. Depreciation and amortization expense increased $2.3 million, or 6.1%, from $37.6 million in 2017 to $39.9 million in 2018 primarily due to an increase in amortization expense of intangible assets from our annual common unit adjustment and an increase in depreciation expense primarily from new equipment and leasehold improvements associated with the relocation of our corporate headquarters.
Non-operating expenses (income). Total non-operating expenses increased $191.5 million, or 135.9%, from $140.9 million in non-operating income for 2017 to $50.6 million in non-operating expense for 2018. The following table shows the changes in non-operating expense for 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | $ Change | | % Change |
| | 2018 | | 2017 | | 2017 to 2018 | | 2017 to 2018 |
| Interest on borrowings | $ | 55.4 |
| | $ | 52.8 |
| | $ | 2.6 |
| | 4.9 | % |
| Interest income | (1.5 | ) | | (1.2 | ) | | (0.3 | ) | | 25.0 | % |
| Loss on early retirement of debt, net | 0.7 |
| | — |
| | 0.7 |
| | — | % |
(Gain) loss on re-measurement of the payable to founding members under the tax receivable agreement | (3.8 | ) | | (192.2 | ) | | 188.4 |
| | NM |
| Other non-operating (income) | (0.2 | ) | | (0.3 | ) | | 0.1 |
| | (100.0 | )% |
| Total non-operating expense (income) | $ | 50.6 |
| | $ | (140.9 | ) | | $ | 191.5 |
| | 135.9 | % |
NM = Not meaningful.
The increase in non-operating expense was due primarily to a $188.4 million decrease in the gain on the re-measurement of the payable to founding members under the TRA. The gain on the re-measurement of the payable to the founding members in 2017 was due primarily to the Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017 which made broad and complex changes to the U.S. tax code, including, the reduction of the U.S. federal corporate tax rate from 35% to 21% which resulted in the re-measurement of our payable to the founding members under the TRA as of December 28, 2017 at the lower tax rate. The increase in non-operating expense is also due to a $2.6 million increase in interest on borrowings due to a 0.33% increase in our weighted average interest rate driven by an increase in the LIBOR rate on our term loans in 2018, compared to 2017 and a $0.7 million net loss on the early retirement of debt related to the refinancing of the senior secured credit facility during the second quarter of 2018, partially offset by a gain realized in 2018 on the repurchase of some of our Notes due 2026 at a discount.
Income tax expense. Income tax expense decreased $156.8 million from $180.3 million for 2017 to $23.5 million for 2018. The decrease in income tax expense was primarily due to the Tax Act enacted in 2017 and the resulting reduction of the U.S. federal corporate tax rate from 35% to 21%, which decreased our net deferred tax assets and increased the corresponding deferred tax expense by $164.8 million during 2017. This decrease was partially offset by $6.9 million of deferred tax expense recorded in 2018 following a net decrease in the Company's deferred rate due to a change in state tax law regarding income sourcing, partially offset by new state tax apportionment rates.
Net income. Net income decreased $28.5 million from $58.3 million in 2017 to $29.8 million in 2018. The decrease was due to a $191.5 million increase in non-operating expense, partially offset by a $156.8 million decrease in income tax expense, as described above, a $5.8 million decrease in net income attributable to noncontrolling interests, and a $0.4 million increase in operating income primarily due to higher revenue in 2018 as compared to 2017.
Fiscal Years 2017 and 2016
Revenue. Total revenue decreased$21.5 million, or 4.8%, from $447.6 million for 2016 to $426.1 million for 2017. The following is a summary of revenue by category (in millions):
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | $ Change | | % Change |
| | 2017 | | 2016 | | 2016 to 2017 | | 2016 to 2017 |
| National advertising revenue | $ | 296.3 |
| | $ | 311.9 |
| | $ | (15.6 | ) | | (5.0 | )% |
| Local and regional advertising revenue | 99.9 |
| | 107.0 |
| | (7.1 | ) | | (6.6 | )% |
Founding member advertising revenue from beverage concessionaire agreements | 29.9 |
| | 28.7 |
| | 1.2 |
| | 4.2 | % |
| Total revenue | $ | 426.1 |
| | $ | 447.6 |
| | $ | (21.5 | ) | | (4.8 | )% |
The following table shows data on revenue per attendee for 2017 and 2016:
|
| | | | | | | | | | |
| | Fiscal Year | | % Change |
| | 2017 | | 2016 | | 2016 to 2017 |
| National advertising revenue per attendee | $ | 0.452 |
| | $ | 0.453 |
| | (0.2 | )% |
| Local and regional advertising revenue per attendee | $ | 0.152 |
| | $ | 0.155 |
| | (1.9 | )% |
Total advertising revenue (excluding founding member beverage revenue) per attendee | $ | 0.604 |
| | $ | 0.608 |
| | (0.7 | )% |
| Total advertising revenue per attendee | $ | 0.650 |
| | $ | 0.650 |
| | — | % |
Total theater attendance (in millions) (1) | 655.8 |
| | 688.8 |
| | (4.8 | )% |
| |
(1) | Represents the total attendance within NCM LLC’s advertising network, excluding screens and attendance associated with certain AMC Rave and Cinemark Rave theaters for all periods presented. Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document. |
National advertising revenue. The $15.6 million, or 5.0%78.6%, decrease in national advertising revenue (excluding beverage revenue from NCM LLC’s founding members) was due primarily to a 4.7% decrease in impressions sold and a 4.2% decrease in national advertising CPMs (excluding beverage) during 2017, compared to 2016. The decline was partially offset by a $8.0 million, or 19.6%, increase in other revenue not included in the inventory measured by impressions sold or CPMs, related to an increase in branded content and online and mobile revenue. The decrease in national advertising impressions sold was primarily due to lower content partner spending, partially offset by an increase scatter market demand for 2017, compared to 2016. The decrease in national advertising CPMs was due primarily to lower CPMs on revenue from upfront advertisers and unfavorable customer mix as less impressions were sold to higher CPM customers, year over year. However, national inventory utilization remained consistent at 118.4% for 2016 compared to118.5% for 2017, on a 4.8% decrease in network attendance. Inventory utilization is calculated as utilized impressions divided by total advertising impressions, which is based on eleven 30-second salable national advertising units in our Noovie pre-show, which can be expanded, should market demand dictate.
Local and regional advertising revenue. The $7.1 million, or 6.6%, decrease in local and regional advertising revenue was driven by a 6.2% decrease in the volume of contracts and a 2.8% decrease in the average contract dollar amount, primarily related to a decrease in spending within the military and tourism category in 2017, compared to 2016. Additionally, local and regional advertising revenue was adversely impacted by hurricanes Harvey and Irma due to reduced advertising spending during the recovery from the storms as well as, by the transfer of AMC theaters to another advertising provider in accordance with the Final Judgment with the DOJ (which were partially offset by the addition of theaters from new affiliates). This decrease in local and regional advertising revenue was partially offset by an increase in online and mobile revenue of approximately $1.9 million in 2017, compared to 2016.
Founding member beverage revenue. The $1.2 million, or 4.2%, increase in national advertising revenue from the founding members’ beverage concessionaire agreements was primarily due primarily to a 10.2% increase in beverage revenue CPMs, partially offset by a 6.9%79.0% decrease in founding member attendance during 2017,for the year ended December 31, 2020, as compared to 2016. The 2017 beverage revenue CPM is based on the changeyear ended December 26, 2019, due to the temporary theater closures described above related to the COVID-19 Pandemic and fewer theaters open in CPM during segment oneour network through the end of our pre-show from 2015 to 2016, which increased 10.2%.2020.
Operating expenses. expenses. Total operating expenses decreased $2.4$132.1 million, or 0.9%46.6%, from $274.6$283.5 million for 20162019 to $272.2$151.4 million for 2017.2020. The following table shows the changes inoperating expense for 20172019 and 20162020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | $ Change | | % Change |
| | 2020 | | 2019 | | 2019 to 2020 | | 2019 to 2020 |
| Advertising operating costs | $ | 10.3 | | | $ | 38.3 | | | $ | (28.0) | | | (73.1) | % |
| Network costs | 8.6 | | | 13.5 | | | (4.9) | | | (36.3) | % |
| Theater access fees and revenue share—founding members | 24.6 | | | 82.7 | | | (58.1) | | | (70.3) | % |
| Selling and marketing costs | 37.6 | | | 64.9 | | | (27.3) | | | (42.1) | % |
| Administrative and other costs | 30.9 | | | 43.8 | | | (12.9) | | | (29.5) | % |
| Impairment of long-lived assets | 1.7 | | | — | | | 1.7 | | | 100.0 | % |
| Depreciation expense | 13.1 | | | 13.6 | | | (0.5) | | | (3.7) | % |
| Amortization of intangibles recorded for network theater screen leases | 24.6 | | | 26.7 | | (2.1) | | | (7.9) | % |
| Total operating expenses | $ | 151.4 | | | $ | 283.5 | | | $ | (132.1) | | | (46.6) | % |
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | $ Change | | % Change |
| | 2017 | | 2016 | | 2016 to 2017 | | 2016 to 2017 |
| Advertising operating costs | $ | 32.4 |
| | $ | 30.0 |
| | $ | 2.4 |
| | 8.0 | % |
| Network costs | 15.8 |
| | 17.1 |
| | (1.3 | ) | | (7.6 | )% |
| Theater access fees—founding members | 76.5 |
| | 75.1 |
| | 1.4 |
| | 1.9 | % |
| Selling and marketing costs | 72.0 |
| | 72.8 |
| | (0.8 | ) | | (1.1 | )% |
| Administrative and other costs | 37.9 |
| | 43.8 |
| | (5.9 | ) | | (13.5 | )% |
| Depreciation and amortization | 37.6 |
| | 35.8 |
| | 1.8 |
| | 5.0 | % |
| Total operating expenses | $ | 272.2 |
| | $ | 274.6 |
| | $ | (2.4 | ) | | (0.9 | )% |
Advertising operating costs. Advertising operating costs increased $2.4decreased $28.0 million, or 8.0%73.1%, from $30.0$38.3 million for 2016the year ended December 26, 2019 to $32.4$10.3 million for 2017. This increasethe year ended December 31, 2020. The decrease was primarily the result ofdue to a $2.6$26.5 million increasedecrease in advertising affiliate advertising payments and a $0.8 million increaseexpense due to lower revenue in personnel related expenses. The increase in affiliate advertising payments was primarily driven by a
13.8%, or 477 screen, increase in the number of average affiliate screens2020 due to the addition of affiliates to our network for 2017, compared to 2016. The increase in personnel related expenses were primarily related to higher salary expense in 2017, compared to 2016. These increases in advertising operating costs were partially offset byCOVID-19 Pandemic, a $1.0 million decrease in personnel related expenses primarily due to the Temporary Salary and Wage Reductions implemented in response to the COVID-19 Pandemic and a $0.4 million decrease in onscreen production costsexpense related to the corresponding lower production revenue during 2017,in 2020, compared to 2016.2019.
Network costs. Network costs decreased $1.3$4.9 million, or 7.6%36.3%, from $17.1$13.5 million for 2016the year ended December 26, 2019 to $15.8$8.6 million for 2017.the year ended December 31, 2020. The decrease was primarily related to a $3.7 million decrease in personnel related expenses related to the Temporary Salary and Wage Reductions implemented in response to the COVID-19 Pandemic, a $0.6 million decrease in maintenance expense primarily related to our DCN due to the temporary closures of theaters within our network in response to the COVID-19 Pandemic and a $0.3 million decrease related to non-essential operating expenditures, including employee travel that was suspended as part of the measures taken to reduce expenses and preserve cash during the COVID-19 Pandemic.
Theater access fees and revenue share—founding members. Theater access fees and revenue share decreased $58.1 million, or 70.3%, from $82.7 million for the year ended December 26, 2019 to $24.6 million for the year ended December 31, 2020. The decrease was primarily due to a 79.0% decrease in founding member attendance for the year ended December 31, 2020, as compared to year ended December 26, 2019, and fewer active founding member screens due to the temporary closure of founding member theaters in response to the COVID-19 Pandemic. The Company did not owe the founding members any theater access fees for the period the theaters were not open. This decrease was partially offset by $1.8 million of higher expense in the year ended December 31, 2020 related to fees owed to Cinemark and Regal as compensation for post-showtime advertising in accordance with the 2019 ESA Amendments.
Selling and marketing costs. Selling and marketing costs decreased $27.3 million, or 42.1%, from $64.9 million for the year ended December 26, 2019 to $37.6 million for the year ended December 31, 2020. This decrease was primarily related to a $0.8$16.4 million decrease in personnel related expenses primarily due to lower salariesa decrease in commission and bonus expense (relatedfrom the revenue declines during 2020, as compared to 2019, as well as other lower performance against internal targets) and a $0.2 million decrease in network maintenance costspersonnel related expenses related to our DCNthe Temporary Salary and Wage Reductions implemented in 2017, compared to 2016.
Theater access fees—founding members. Theater access fees increased $1.4 million, or 1.9%, from $75.1 million for 2016 to $76.5 million for 2017. The increase was due to a $3.3 million increase due to a contractual 8% rate increase on the fee per patron (the fee per patron rate increases every five years with this increase taking place in 2017) and a $1.2 million increase in the expense associated with the founding member digital screens that are connectedresponse to the DCN related primarily to an annual 5% increase specified in the ESAs on this fee. These increases were partially offset by a decrease of $3.1 million in theater access fees due to a 6.9% decrease in founding member attendance in 2017, compared to 2016.
Selling and marketing costs.COVID-19 Pandemic. Selling and marketing costs also decreased $0.81) $5.8 million or 1.1%, from $72.8related to non-essential operating expenditures, including marketing, research, consulting and employee travel that were suspended as part of the measures taken to reduce expenses and preserve cash during the COVID-19 Pandemic, 2) $2.0 million for 2016 to $72.0 million for 2017. This decrease was primarily due to a $2.8 million decrease in personnel related expenses due primarily to lower commission basedbarter expense and lower non-cash share-based compensation expense (driven by lower revenue and lower performance against internal targets), partially offset by severance expense related to the elimination of certain sales leadership positions. Further selling and marketing costs decreased due to a $1.0 million decrease in marketing research during 2017,2020, compared to 2016. These decreases in selling and marketing costs were partially offset by a $2.42019, 3) $2.0 million increase indue to non-cash impairment expense recorded during 2017, compared to 2016,realized in the third quarter of 2019 related to investments obtained in prior years in exchange for advertising services and a $0.9 million increase in online publisher expense driven by an increase in online and mobile revenue.
Administrative and other costs. Administrative and other costs decreased $5.9 million, or 13.5%, from $43.8 million for 2016 to $37.9 million for 2017 due primarily to 1) a $3.0 million decrease in CEO transition costs because of severance expense that occurred in 2016 and 2) $2.3 million of expense related to the modification of the former CEO’s equity awards that occurred during 2016. In addition, personnel related expenses decreased approximately $1.94) $1.8 million due to a decrease in bad debt expense
and production and royalty related costs resulting from lower bonus expense and non-cash share-based compensation expense (relatedrevenue in 2020, compared to lower performance against internal targets), partially offset by severance for senior executives recorded in 2017.2019. These decreases to administrative and other costs were partially offset by a $1.8 million early lease termination charge recordedincrease in 2017 forexpense associated with our corporate headquarters (the payment of which was reimbursed by the new landlord).Noovie® Audience Accelerator service offering in 2020, compared to 2019.
DepreciationAdministrative and amortization. Depreciationother costs. Administrative and amortization expense increased $1.8other costs decreased $12.9 million, or 5.0%29.5%, from $35.8$43.8 million for 2016the year ended December 26, 2019 to $37.6$30.9 million for 2017. The increase wasthe year ended December 31, 2020. Administrative and other costs decreased primarily due to ana $9.6 million decrease in personnel related expenses due to the Temporary Salary and Wage Reductions implemented in response to the COVID-19 Pandemic and a decrease in performance-based compensation expense related to lower projected performance against internal bonus and performance-based restricted stock targets as of December 31, 2020, as compared to December 26, 2019. Administrative and other costs also decreased 1) $1.5 million due to a decrease in consulting services, 2) $0.8 million due to a decrease in non-essential operating expenditures, including employee travel that was suspended as part of the measures taken to reduce expenses and preserve cash during the COVID-19 Pandemic and 3) $0.4 million due to a decrease in CEO transition fees related to costs incurred in the year ended December 26, 2019.
Impairment of long-lived assets. Impairment of long-lived assets increased $1.7 million, or 100.0%, from $0.0 million in the year ended December 26, 2019 to $1.7 million in the year ended December 31, 2020. This increase in depreciationimpairment expense was primarily related to the write-off of certain long-lived assets during the year ended December 31, 2020.
Depreciation expense. Depreciation expense decreased $0.5 million, or 3.7%, from more software being placed into service in 2017, compared$13.6 million for the year ended December 26, 2019 to 2016$13.1 million for the year ended December 31, 2020, as assets became fully depreciated.
Amortization of intangibles recorded for network theater screen leases. Amortization of intangibles recorded for network theater screen leases decreased $2.1 million, or 7.9%, from $26.7 million for the year ended December 26, 2019, to $24.6 million for the year ended December 31, 2020, primarily due to the four-year extension of the contractual life of the intangible assets for Cinemark and an acceleration in depreciation expense on the leasehold improvements of our corporate headquarters locationRegal following the early termination2019 ESA Amendments at the end of our lease.the third quarter of 2019.
Non-operating (income) expenses. expense.Total non-operating expenses decreased $205.0income increased $159.1 million, or 319.8%255.8%, from $64.1non-operating expense of $62.2 million in 2019 to non-operating expense for 2016 to $140.9income of $96.9 million in non-operating income for 2017.2020. The following table shows the changes in non-operating (income) expense for 20172020 and 20162019 (in millions):
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | $ Change | | % Change |
| | 2017 | | 2016 | | 2016 to 2017 | | 2016 to 2017 |
| Interest on borrowings | $ | 52.8 |
| | $ | 54.0 |
| | $ | (1.2 | ) | | (2.2 | )% |
| Interest income | (1.2 | ) | | (1.5 | ) | | 0.3 |
| | (20.0 | )% |
| Loss on early retirement of debt | — |
| | 10.4 |
| | (10.4 | ) | | 100.0 | % |
(Gain) loss on re-measurement of the payable to founding members under the tax receivable agreement | (192.2 | ) | | 1.2 |
| | (193.4 | ) | | NM |
|
| Other non-operating (income) expense | (0.3 | ) | | — |
| | (0.3 | ) | | (100.0 | )% |
| Total non-operating (income) expenses | $ | (140.9 | ) | | $ | 64.1 |
| | $ | (205.0 | ) | | (319.8 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | $ Change | | % Change |
| | 2020 | | 2019 | | 2019 to 2020 | | 2019 to 2020 |
| Interest on borrowings | $ | 55.8 | | | $ | 58.0 | | | $ | (2.2) | | | (3.8) | % |
| Interest income | (0.6) | | | (2.1) | | | 1.5 | | | (71.4) | % |
| Loss on modification and retirement of debt, net | 0.4 | | | 5.6 | | | (5.2) | | | NM |
(Gain) loss on re-measurement of the payable to
founding members under the tax receivable
agreement | (152.7) | | | 1.1 | | | (153.8) | | | NM |
| Other non-operating expense (income) | 0.2 | | | (0.4) | | | 0.6 | | | 150.0 | % |
| Total non-operating (income) expense | $ | (96.9) | | | $ | 62.2 | | | $ | (159.1) | | | (255.8) | % |
NM = Not meaningful.
The decreaseincrease in non-operating income from non-operating expense was due primarily to an1) the $153.8 million increase in the gain on the re-measurement of the payable to the founding members under the TRA of $193.4 million in 2017, the absence of a $10.4 million loss on the early retirement of debt recorded in 2016 for the redemption of the senior unsecured notes and a $1.2 million decrease in interest on borrowings primarily related to a one-month period in 2016 between the issuance and redemption of notes, whereby interest was paid on both notes. The gain on the re-measurement of the payable to the founding memberswhich was due primarily to the Tax Act and the resulting reduction of the U.S. federal corporate tax rate from 35% to 21% which resulteddecrease in the re-measurement of our payable to the founding members under the TRA attax receivable agreement resulting from an increase in the lowervaluation allowance against certain of our deferred tax rate.assets, 2) a $5.2 million decrease in the loss on modification and retirement of debt, net related to a loss incurred in the fourth quarter of 2019 upon the early retirement of our Notes due 2022 and 3) a $2.2 million decrease in interest on borrowings due to a 0.65% decrease in the weighted average interest rate, partially offset by an increase in the weighted average balance of debt outstanding for the year ended December 31, 2020, compared to the year ended December 26, 2019. These decreases in non-operating expense were partially offset by a $1.5 million decrease in interest income on the Company's marketable securities due to a decrease in the outstanding balance of the underlying securities and a decrease in the rate of return.
Income tax expense. Income tax expense increased $165.9$149.8 million primarily related to an increase in the valuation allowance against certain of our deferred income tax assets recognized as of December 31, 2020 as discussed within the 'Recent Developments' section.
Net loss. Net loss increased $101.5 million from $14.4 million in 2016 to $180.3 million in 2017. The increase innet income tax expense was primarily due to the Tax Act and the resulting reduction of the U.S. federal corporate tax rate from 35% to 21%, which decreased our net deferred tax assets and increased the corresponding deferred tax expense by $164.8million during 2017.
Net income. Net income increased $25.4 million from $32.9$36.1 million for 2016the year ended December 26, 2019 to $58.3net loss of $65.4 million for 2017.the year ended December 31, 2020. The increase in net incomeloss was due to a $205.0$222.3 million decreaseincrease in non-operating expense
operating loss and a $5.4 million decrease in income attributable to noncontrolling interests, partially offset by a $165.9$149.8 million increase in income tax expense, as described above, andpartially offset by a $19.1$159.1 million decrease in operating income.non-operating expenses and a $111.5 million increase in net loss attributable to noncontrolling interests.
Known Trends and Uncertainties
COVID-19—As discussed within the 'Recent Developments' section, due to the COVID-19 Pandemic, the Company was unable to advertise in the theaters, and thus unable to generate the majority of its revenue, for the approximate six months of 2020 that the theaters were closed. The Company's ability to advertise within the reopened theaters has been and will continue to be limited due to reduced movie schedules and patron capacities at many network theaters and the timing and frequency of new major motion picture releases as compared to prior years due to the COVID-19 Pandemic. Our theater access fees, network affiliate payments and Platinum Spot revenue share payments are driven by attendance, active screens and/or revenue, and therefore, are not incurred when theaters are closed and attendance-based fees will be reduced for the period of time that attendance is lower than historical levels.
Due to the rapidly changing business environment, unprecedented market volatility, and other circumstances resulting from the COVID-19 Pandemic, we are currently unable to fully determine the extent of the COVID-19 Pandemic’s impact on our business in future periods. However, we are monitoring the rapidly evolving situation and its potential impacts on our financial position, results of operations, liquidity and cash flows.
Beverage Revenue—Under the ESAs, up to 90 seconds of theNoovieNoovie®pre-show program can be sold to the founding members to satisfy their on-screen advertising commitments under their beverage concessionaire agreements. For the years ended 20182020 and 2017,2019, two of the founding members purchased 60 seconds of on-screen advertising time and one founding member purchased 30 seconds to satisfy their obligations under their beverage concessionaire agreements. The founding members’ current long-term contracts with their beverage suppliers require the 30 or 60 seconds of beverage advertising, although such commitments could change in the future. Per the ESAs,ESA with AMC, the time sold to the founding member beverage supplier is priced equal to the greater of (1) the advertising CPM charged by NCM LLC in the previous year for the time sold to the founding member beverage supplier and (2) the advertising CPM for the previous year charged by NCM LLC to unaffiliated third parties during segment one (closest to showtime) of theNooviepre-show in the founding member’s theaters, limited to the highest advertising CPM being then-charged by NCM LLC, which in 2018 increased 0.7%. Thus, theLLC. The CPM on our beverage concessionaire revenue related to AMC in 20192021 will increase by 0.7%not change compared to 2018.2020. Beginning in 2020 and in accordance with the 2019 ESA Amendments, the price for the time sold to Cinemark and Regal’s beverage suppliers will instead increase at a fixed rate of 2.0% each year.
Theater Access Fees—In consideration for NCM LLC’s access to the founding members’ theater attendees for on-screen advertising and use of lobbies and other space within the founding members’ theaters for the LEN and lobby promotions, the founding members receive a monthly theater access fee under the ESAs. The theater access fee is composed of a fixed payment per patron and a fixed payment per digital screen (connected to the DCN). The payment per theater patron increases by 8% every five years, with the next increase occurring in fiscal year 2022. Pursuant to the ESAs, the payment per digital screen increases annually by 5%. Pursuant to the 2019 ESA Amendments, Cinemark and Regal each receive an additional monthly theater access fee beginning November 1, 2019 in consideration for NCM LLC's access to certain on-screen advertising inventory after the advertised showtime of a feature film. These fees are also based upon a fixed payment per patron beginning at $0.025 per patron on November 1, 2019, (ii) $0.0375 per patron beginning on November 1, 2020, (iii) $0.05 per patron beginning on November 1, 2021, (iv) $0.052 per patron beginning on November 1, 2022 and (v) increasing 8% every five years beginning November 1, 2027.
The ImpactPlatinum Spot—In consideration for the utilization of the Tax Reform— On December 22, 2017,theaters post-showtime for Platinum Spots, Cinemark and Regal are entitled to receive 25% of all revenue generated for the U.S. government enacted comprehensive tax legislation commonly referredactual display of Platinum Spots in their applicable theaters, subject to as the Tax Cuts and Jobs Act. The Tax Act made broad and complex changes to the U.S. tax code that affected our fiscal year ending December 27, 2018, including, but not limited to, (1) reducing the U.S. federal corporate tax rate, (2) creating full expensing of qualified property, (3) creating a new limitation on deductible interest expense; (4) changing rules related to uses and limitations of net operating loss carryforwards createdspecified minimum. If NCM LLC runs advertising in tax years beginning after December 31, 2017, and (5) limiting the amount of compensation that can be deductedmore than one concurrent advertisers’ Platinum Spot for highly compensated officers by terminating the exclusion of performance-based compensation from the $1 million per employee, per year limitation. We expect the most significant impactany portion of the Tax Act to be an annual reductionnetwork over a period of the payments made to the founding members under the TRA of approximately $8.0 to $10.0 million beginning with the payment for the year ending December 27, 2018 whichtime, NCM LLC will be made in 2019. This estimate is based on the impactrequired to satisfy a minimum average CPM for that the new lower tax rates, and other Tax Act provisions, had on our payment for the year ending December 27, 2018.period of time.
Financial Condition and Liquidity
Liquidity
Our cash balances can fluctuate due to the seasonality of our business and related timing of collections of accounts receivable balances and operating expenditure payments, as well as available cash payments (as defined in the NCM LLC Operating Agreement) to Cinemark and Regal, interest or principal payments on our term loan and the Notes due 20222026 and Notes due 2026,2028, income tax payments, TRA payments to the founding members and the amount of quarterly dividends to NCM, Inc.’s common stockholders.
As discussed within the ‘Recent Developments’ section, due to the COVID-19 Pandemic, the Company was unable to advertise in the theaters, and thus generate the majority of its revenue, for the approximate six months that the theaters were generally closed and many theaters in our network remain closed. The Company’s ability to advertise within the reopened
theaters has been and will continue to be limited due to reduced movie schedules and patron capacities at many network theaters and the timing and frequency of major motion picture releases as compared to prior years due to the COVID-19 Pandemic. The Company will have limited cash receipts until the full network of theaters reopen, major motion pictures are released and theater patrons feel comfortable returning to the theaters allowing attendance levels to normalize. Further, once the above conditions are met there will be a lag between when revenue is generated and when the Company ultimately collects the associated accounts receivable balance. The Company also has reduced cash payments during the period theaters within the Company's network are closed or attendance levels are low as expenses related to theater attendance are either not incurred or incurred at lower levels (i.e. theater access fees, Platinum Spot revenue share and network affiliate revenue share payments). The Company also implemented a number of cost-saving measures in order to preserve cash as further outlined within the ‘Recent Developments’ section above. In March 2020, we drew down an additional $110.0 million on our revolving credit facility. The $123.9 million of cash at NCM LLC will be used to fund operations during the period of expected reduced cash flows. Cash at NCM, Inc. is held for future payment of dividends to NCM, Inc. shareholders, income tax payments, income tax receivable payments to NCM LLC’s founding members and other obligations.
In accordance with the Credit Agreement Amendment and Credit Agreement Second Amendment, for the period beginning in the second quarter of 2020 through the date that NCM LLC delivers a compliance certificate for the third quarter of 2022, NCM LLC must maintain a total balance of $55.0 million of a combination of unrestricted cash on hand and availability under NCM LLC's revolving credit facility. As of December 31, 2020, NCM LLC was in compliance with the requirements of the Credit Agreement, as amended. Management believes the Company can meet its obligations, including all working capital requirements, interest and debt service payments and capital expenditures within the twelve months following the date of issuance of the accompanying financial statements, based on its current financial position and liquidity sources, including current cash balances, the additional proceeds under the term loan and forecasted future cash flows.
A summary of our financial liquidity is as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended | | $ Change |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 | | 2017 to
2018 | | 2016 to
2017 |
Cash, cash equivalents and marketable securities (1) | $ | 75.6 |
| | $ | 59.5 |
| | $ | 68.7 |
| | $ | 16.1 |
| | $ | (9.2 | ) |
Revolver availability (2) | 143.2 |
| | 158.2 |
| | 158.8 |
| | (15.0 | ) | | (0.6 | ) |
| Total liquidity | $ | 218.8 |
| | $ | 217.7 |
| | $ | 227.5 |
| | $ | 1.1 |
| | $ | (9.8 | ) |
| | | | | | | | | | | | | | | | | |
| | Years Ended | | $ Change |
| | December 31, 2020 | | December 26, 2019 | | 2019 to
2020 |
Cash, cash equivalents and marketable securities (1) | $ | 181.8 | | | $ | 80.9 | | | $ | 100.9 | |
Revolver availability (2) | 4.4 | | | 132.4 | | | (128.0) | |
| Total liquidity | $ | 186.2 | | | $ | 213.3 | | | $ | (27.1) | |
(1)Included in cash and cash equivalents as of December 31, 2020 and December 26, 2019 there was $123.9 million and $11.4 million, respectively, of cash held by NCM LLC which is not available to satisfy NCM, Inc.'s dividend payments and other NCM, Inc. obligations.
| |
(1) | Included in cash and cash equivalents as of December 27, 2018, December 28, 2017 and December 29, 2016 there was $7.2 million, $4.6 million and $10.7 million, respectively, of cash held by NCM LLC which is not available to satisfy NCM, Inc.'s dividend payments and other NCM, Inc. obligations. |
| |
(2) | The revolving credit facility portion of NCM LLC’s total borrowings is available, subject to certain conditions, for general corporate purposes of NCM LLC in the ordinary course of business and for other transactions permitted under the senior secured credit facility, and a portion is available for letters of credit. NCM LLC’s total capacity under the revolving credit facility was $175.0 million, $175.0 million and $135.0 million less $4.8 million, $4.8 million and $1.2 million, respectively, of outstanding letters of credit or $170.2 million, $170.2 million and $133.8 million, respectively, as of December 27, 2018, December 28, 2017 and December 29, 2016, respectively. |
(2)The revolving credit facility portion of NCM LLC’s total borrowings is available, subject to certain conditions, for general corporate purposes of NCM LLC in the ordinary course of business and for other transactions permitted under the Senior Secured Credit Facility, and a portion is available for letters of credit. NCM LLC’s total capacity under the revolving credit facility was $175.0 million as of December 31, 2020 and December 26, 2019. As of December 31, 2020 and December 26, 2019, the amount available under the NCM LLC revolving credit facility in the table above, was net of the amount outstanding under the revolving credit facility of $167.0 million and $39.0 million, respectively, and net letters of credit of $3.6 million and $3.6 million, respectively.
We have generated and used cash as follows (in millions): | | | | | | | | | | | |
| | Years Ended |
| | 2020 | | 2019 |
| Operating cash flow | $ | 55.3 | | | $ | 143.6 | |
| Investing cash flow | $ | 15.6 | | | $ | 1.6 | |
| Financing cash flow | $ | 53.5 | | | $ | (130.7) | |
|
| | | | | | | | | | | |
| | Years Ended |
| | 2018 | | 2017 | | 2016 |
| Operating cash flow | $ | 150.3 |
| | $ | 138.9 |
| | $ | 133.5 |
|
| Investing cash flow | (16.1 | ) | | 8.5 |
| | (4.3 | ) |
| Financing cash flow | (123.0 | ) | | (140.2 | ) | | (137.9 | ) |
Cash Flows – Fiscal Years 20182020 and 20172019
Operating Activities. The $11.4$88.3 million increasedecrease in cash provided by operating activities for 2018,2020, compared to 20172019 was primarily due primarily to 1) a $10.8$213.0 million increasedecrease in consolidated net income due the changetemporary closure of almost all the theaters within our network in accounts receivable relatedresponse to higher collections,the COVID-19 Pandemic during the period, 2) a $3.3$22.1 million increase in the change in deferred revenue, and a $3.1 million increase in the changelarger decrease in accounts payable and accrued expenses due to timing of payments. This increase was partially offset by a decrease of $3.4 million in non-cash share-based compensation due to a decrease in the volume of awards granted in 2018,during 2020 as compared to 2017 and a decrease of $3.2 million in consolidated net income less the net change in tax2019, related to non-cash items year over year.
Investing Activities. The $24.6 million increase in cash used in investing activities for 2018, compared to 2017 was due primarily to lower proceeds of marketable securities, net of purchases, of $21.4 million and a $2.8 millionthe decrease in proceeds from founding member notes receivable due to timing of payments.
Financing Activities. The $17.2operating expenses for the corresponding periods as described above, 3) a $11.9 million decrease in cash used in financing activities during 2018, compared to 2017 was primarily due to an $18.0 million increase in proceeds from borrowings, net of repayments, under our senior secured credit facility, a $9.8 million increase in founding member integration and other encumbered theater payments, and4) a $6.2 million decrease in amounts due to founding members, 5) a $5.2 million decrease in distributions to founding members, year over year. These decreases were partially offset byon the loss on modification and retirement of debt, and 6) a $14.2$3.5 million increase in cash usedthe noncash gain on the remeasurement of the payable to
founding members under the TRA, net of the increase in the repayment of our Notes due 2026 and an increase of $6.9 million in the payment of debt issuance costs related to the senior secured credit facility,income tax expense, as described within Note 10—Borrowingsabove, for 2020, compared to the audited Consolidated Financial Statements in Item 8 of this Form 10-K.
Cash Flows – Fiscal Years 2017 and 2016
Operating Activities. The $5.4 million increase2019. These decreases in cash provided by operating activities for 2017 compared to 2016 was due primarily to an increase in the change in accounts receivable of $13.4 million related to higher collections and a decrease of $6.5 million in payments to founding members under the TRA,were partially offset by a net$178.9 million larger decrease of $8.2 million in consolidated net income less the net change in taxaccounts receivable balance during 2020, as compared to 2019, related to non-cash itemsthe collection of the accounts receivable balance and an increase of $5.8 millionthe decrease in the change in accounts payable and accrued expenses due to timing of payments.revenue described above.
Investing Activities. The $12.8$14.0 million increase in cash provided by investing activities for 20172020, compared to 20162019 was primarily due primarily to lower purchasesa $13.6 million decrease in the purchase of marketable securities, net of proceeds and a $6.0 million decrease in purchases of approximately $8.7property and equipment in 2020, compared to 2019 driven by the Company's measures to preserve cash in response to the COVID-19 Pandemic, partially offset by a $5.6 million and $2.8 million higherdecrease in proceeds from the founding member notes receivable due to timing of payments.receivable.
Financing Activities.The $2.3$184.2 million increase in cash used inprovided by financing activities for 20172020, compared to 20162019 was primarily due to the net impact of a $10.5$116.0 million increase in integration and other encumbered theater paymentsproceeds from our revolving credit facility, net of repayments made early in 2020, in order to fund operations during the period of expected reduced cash flows due to more founding member acquisitions andthe temporary closure of the theaters within NCM LLC's network to address the COVID-19 Pandemic. The increase was also due to a $19.7$21.6 million increasedecrease in dividends paid related to the decrease in the dividend amounts declared from $0.68 per share during 2019 to $0.40 per share during 2020, a $35.1 million decrease in distributions to founding members.members in 2020, compared to 2019 and an $8.6 million increase related to the repurchase and repayment of the Notes due 2022 and the retired Notes due 2026, net of the issuance of the Notes due 2028.
Sources of Capital and Capital Requirements
NCM, Inc.’s primary source of liquidity and capital resources is the quarterly available cash distributions from NCM LLC as well as its existing cash balances and marketable securities, which as of December 27, 201831, 2020 were $68.4$181.8 million (excluding $7.2$123.9 million of cash held by NCM LLC). NCM LLC’s primary sources of liquidity and capital resources are its cash provided by operating activities, availability under its revolving credit facility and cash on hand. NCM LLC drew down an additional $110.0 million of its revolving credit facility in March 2020 in order to supplement the decrease in cash provided by operating activities during the period our network theaters are closed. The $123.9 million of cash at NCM LLC will be used to fund operations during the period of expected reduced cash flows. Cash at NCM, Inc. is used to fund income taxes, payments associated with the TRA with the founding members and for future payment of dividends to NCM, Inc. shareholders. Refer to Note 10 to the audited Consolidated Financial Statements included elsewhere in this document and “Financings” below for a detailed discussion of the debt transactions in 20172019 and 20182020 and the debt outstanding as of December 27, 2018.31, 2020.
Management believes that future funds generated from NCM LLC’s operations and cash on hand and availability under the revolving credit facility should be sufficient to fund working capital requirements, NCM LLC’s debt service requirements, and capital expenditures, through the next twelve months. Cash flows generated by NCM LLC’s distributions to NCM, Inc. and the founding members canwill be impacted by the seasonalitytemporary closure of advertising sales, interest on borrowings under our revolving credit agreementnetwork theaters and may be deferred through the quarter ending September 29, 2022 or longer due to a lesser extent theater attendance.the limitations instituted by the Credit Agreement Amendment and Credit Agreement Second Amendment. NCM LLC is required pursuant to the terms of the NCM LLC Operating Agreement to distribute its available cash, as defined in the operating agreement, unless prohibited by NCM LLC's Credit Agreement, quarterly to its members (Regal, Cinemark, AMC and NCM, Inc.). The available cash distribution to the members of NCM LLC for 2018the combined three months ended June 25, 2020, three months ended September 24, 2020 and three months ended December 31, 2020 was calculated as approximately $146.0negative $85.9 million, of which approximately $71.3 million was distributed to NCM, Inc.'s share is approximately negative $41.2million. Pursuant to the NCM LLC Operating Agreement and the Credit Agreement Amendment, there will be no available cash distributions made for the fourth quarter of 2020. These negative available cash distributions for 2020 are expected to be netted in accordance with the NCM LLC Operating Agreement against future positive available cash distributions after the Extended Covenant Waiver Holiday.
NCM, Inc. expects to use its cash balances and cash received from future available cash distributions and its cash balances to fund payments associated with the TRA with the founding members and current and future dividends as declared by the Board of Directors, including a dividend declared on February 21, 2019March 8, 2021 of $0.17$0.05 per share (approximately $13.1$3.9 million) on each share of the Company’s common stock (not including outstanding restricted stock) to stockholders of record on March 5, 201922, 2021 to be paid on March 19, 2019.April 5, 2021. The Company will pay Cinemark, Regal and AMC $0.2 million, $0.4 million, and $0.3 million, respectively, in the first quarter of 2021 as the final payments pursuant to the TRA for the 2019 tax year. The Company does not expect to make a TRA payment in 2021 for the 2020 tax year. The Company will also consider opportunistically using cash received for partial repayments of NCM LLC's outstanding debt balance, while ensuring the Company's financial flexibility is maintained. Distributions from NCM LLC and NCM, Inc. cash balances should be sufficient to fund payments associated with the TRA with the founding members, income taxes and its regular dividend for the foreseeable future at the discretion of the Board of Directors. The Company intends to pay a regular quarterly dividend for the foreseeable future at the discretion of the Board of Directors consistent with the Company’s intention to distribute substantially all its free cash flow to stockholders through its quarterly dividend. The declaration, payment, timing and amount of any future dividends payable will be at the sole discretion of the Board of Directors who will take into account general economic and advertising market business conditions, the Company’s financial condition, available cash, current and anticipated cash needs and any other factors that the Board of Directors considers relevant. Therelevant, which includes short-term and long-term impacts to the Company intendsrelated to pay a regular quarterly dividend for the foreseeable future atCOVID-19 Pandemic and restrictions under the discretion of the Board of Directors consistent with the Company’s intention to distribute over time a substantial portion of its free cash flow. NCM LLC Credit Agreement.
Capital Expenditures
Capital expenditures of NCM LLC include digital applications being developed primarily by our programmers and outside consultants, capitalized software development or upgrades for our Digital Content Software and advertising proposal and inventory management, audience targeting and data management systems, equipment required for our NOCCustomer Experience Center and content production and post-production facilities, office leasehold improvements, desktop equipment for use by our employees, and in certain cases, the costs necessary to install equipment at or digitize all or a portion of a network affiliate’s theaters when they are added to our network. Capital expenditures in 20182020 were $15.4$11.2 million (including $6.9$4.6 million associated with digital product development; $1.9$2.4 million in leasehold improvements atassociated with certain implementation and prepaid costs associated with Cloud Computing arrangements; $2.0 million associated with upgrades to our new corporate headquarters,existing systems related to the planned upgrade of which $1.1 million was reimbursed by the landlord for a net cash expenditure of $0.8 million;our end-to-end order management and $0.9scheduling system; and $0.2 million associated with network affiliate additions) compared to $12.3$15.3 million (including $1.9$7.6 million associated with digital product development; $2.0 million associated with certain implementation and prepaid costs associated with Cloud Computing Arrangements related to the planned upgrade of our end-to-end order management and scheduling system; and $0.8 million associated with network affiliate additions and $1.0 million associated with digital product development)additions) for the 20172019 period. The capital expenditures have typically been satisfied through cash flow from operations. All capital expenditures related to the DCN within the founding members’ theaters have been made by the founding members under the ESAs. We expect they will continue to be made by the founding members in accordance with the ESAs.
We expect to make approximately $15.0$8.0 million to $16.0$9.0 million of capital expenditures in fiscal 2019, primarily2021, including approximately $3.3 million for approximately $8.0 million of digital product development including the finalization of Noovie.com, development of a Noovie Trivia web and mobile app, further Noovie ARcade development, and enhancements to the Fantasy Movie League web and mobile apps.development. We expect these digital products to allow us to capture exclusive first party data on our movie audiences and build our own foundational capabilities for digital ad buying, selling and serving. We also expect approximately $8.0$2.3 million of capital expenditures related to upgrades to our Digital Content Software distribution and content management software and our other internal management systems, including our proposal, inventory and data management systems, reporting systems, network equipment related to currently contracted network affiliate theaters, server and storage upgrades and software licensing. We expect these upgrades and improvements to our management reporting systems, which are intended to provide additional advertising scheduling and placement flexibility for our clients, should enhance our operating efficiencies, including allowing us to better manage our advertising inventory, create more targeted buys and provide more robust campaign data for our advertising clients to help drive future growth.Our capital expenditures may increase as we add additional network
affiliates to our network. affiliates. We expect that additional expenditures, if any, would be funded in part by additional cash flows associated with those new network affiliates. The commitments associated with our operating lease requirements are included in “Contractual and Other Obligations” below.
Financings
On March 8, 2021, NCM LLC entered into an additional amendment to its Credit Agreement, dated as of June 20, 2018. Among other things, the Credit Agreement Second Amendment provides for: (i) certain modifications to the negative covenants;(ii) a waiver of non-compliance with the consolidated net total leverage and consolidated net senior secured leverage financial covenants through the quarter ended June 30, 2022; (iii) the consolidated net total leverage ratio and consolidated net senior secured leverage ratio financial covenants to be set to 6.75 to 1.00 and 5.50 to 1.00, respectively, for the quarter ending on or about September 29, 2022, and (iv) with respect to NCM LLC’s audited financial statements for the fiscal year ended December 31, 2020, a waiver of the requirement to deliver such financial statements without a “going concern” or like qualification or exception. The Credit Agreement Second Amendment also: (i) grants security interests in certain assets of NCM LLC and other potential loan parties that are not currently pledged to the lenders and (ii) increases the applicable margin of the existing term loans and revolving loans issued under the Credit Agreement in an amount equal to 1.00%. Additionally, pursuant to the terms of the Credit Agreement Second Amendment, NCM LLC is restricted from making available cash distributions until after NCM LLC delivers a compliance certificate for the quarter ending on or about September 29, 2022, and, thereafter, NCM LLC may only make available cash distributions if: (i) no default or event of default under the Credit Agreement has occurred and is continuing; (ii) the senior secured financial covenant leverage ratio is equal to or less than 4.00 to 1.00; and (iii) the aggregate principal amount of all outstanding revolving loans under the Credit Agreement is $39.0 million or less.
In addition, pursuant to the Credit Agreement Second Amendment, NCM LLC will incur new incremental term loans in an aggregate principal amount of $50.0 million, the proceeds of which will be used for general corporate purposes. The New Incremental Loans will have substantially similar terms to the existing term loans (after giving effect the Credit Agreement Amendment), except that the New Incremental Loans will: (i) have a cash interest rate of LIBOR plus 8.00%, (ii) have a maturity of December 20, 2024, and (iii) be subject to prepayment premiums if the Borrower prepays the New Incremental Loans before maturity.
In connection with the grant of the Additional Collateral to the lenders under the Credit Agreement, NCM LLC concurrently entered into an amendment to the Security Agreement, dated as of October 8, 2019 made by NCM LLC, as issuer, in favor of JPMorgan Chase Bank, N.A., as collateral agent, relating to that certain Indenture, dated as of October 8, 2019, between NCM LLC, as issuer and Wells Fargo Bank, National Association, as trustee, relating to NCM LLC’s Senior Secured Notes due 2028. This amendment grants a security interest in the Additional Collateral for the benefit of the holders of the Secured Notes.
On April 30, 2020, NCM LLC entered into the Credit Agreement Amendment to allow for the automatic waiver of any non-compliance with its consolidated net senior secured leverage ratio and consolidated total leverage ratio financial covenants occurring from the quarter ending June 25, 2020 until and including the quarter ending July 1, 2021. The Credit Agreement Amendment requires that, until the fiscal quarter ending July 1, 2021, NCM LLC must not permit the sum of unrestricted cash
on hand at NCM LLC and availability under its revolving credit facility to be less than $55.0 million. Further, NCM LLC can make available cash distributions to its members (AMC, Cinemark, Regal and NCM, Inc.) during the Covenant Holiday Period only if trailing 12-month Consolidated EBITDA (as defined in the Credit Agreement) equals or exceeds $277.0 million and outstanding loans under the revolving credit facility are equal to or less than $39.0 million. NCM LLC can make available cash distributions to its members outside of the Covenant Holiday Period so long as NCM LLC’s Consolidated Net Senior Secured Leverage Ratio is equal to or less than 5.00 to 1.00 and no default or event of default under the Credit Agreement has occurred and is continuing. As of December 31, 2020, NCM LLC was in compliance with the requirements of the Credit Agreement Amendment.
On October 8, 2019, NCM LLC completed a private offering of $400.0 million aggregate principal amount of 5.875% senior secured notes due 2028. The 2028 Notes will mature on April 15, 2028. Interest on the 2028 Notes accrues at a rate of 5.875% per annum and is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2020. NCM LLC will pay interest to those persons who were holders of record at the close of business on the April 1 and October 1 immediately preceding the interest payment date. At any time prior to April 15, 2023, NCM LLC may redeem all or any portion of the 2028 Notes at a redemption price equal to 100% of the principal amount plus a make-whole premium, plus accrued and unpaid interest, if any, to the redemption date. On or after April 15, 2023, NCM LLC may redeem all or any portion of the 2028 Notes at specified redemption prices, plus accrued and unpaid interest, if any, to the redemption date. In addition, at any time prior to April 15, 2023, NCM LLC may on any one or more occasions redeem up to 35% of the original aggregate principal amount of the 2028 Notes from the net proceeds of certain equity offerings at a redemption price equal to 105.875% of the principal amount of the 2028 Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date, provided that at least 65% of the original aggregate principal amount of the 2028 Notes remains outstanding after each such redemption and the redemption occurs within 90 days after the closing of such applicable equity offering.
On November 7, 2019, NCM LLC redeemed the entire $400.0 million aggregate principal amount of NCM LLC’s existing Notes due 2022. The redemption price for the Notes due 2022 was 101.000% of the principal amount thereof plus accrued and unpaid interest thereon, to but not including the redemption date.
In June 2018, we entered into a credit agreement to replace NCM LLC's previous senior secured credit facility. Consistent with the structure of the previous facility, the new credit agreement consists of a term loan facility and a revolving credit facility for $270.0 million and $175.0 million, respectively. The new agreement extended the maturity dates by 5.5 years to June 20, 2025 for the term loan facility and 3.5 years to June 20, 2023 for the revolving credit facility, in each case contingent upon the refinancing of the Notes due 2022 on or prior to October 30, 2021. If the Notes due 2022 are not refinanced on or prior to October 30, 2021, then both the term loan facility and the revolving credit facility will instead mature on December 30, 2021.facility. The interest rate under the term loan facility is either the LIBOR index plus 3.00% or the base rate plus 2.00% and the rate under the revolving credit facility is either the LIBOR index plus an applicable margin ranging from 1.75%-2.25% or the base rate plus an applicable margin ranging from 0.75%-1.25%. The applicable margin for the revolving credit facility is determined quarterly and is subject to adjustment based upon a consolidated net senior secured leverage ratio for NCM LLC. As of December 27, 2018,31, 2020, NCM LLC’s senior secured credit facility consisted of a $175.0 million revolving credit facility and a $269.4$266.6 million term loan, following NCM LLC's required principal amortization paymentpayments of $0.6$6.7 million which reduced the outstanding balance to $269.4$263.3 million from $270.0 million.
On August 19, 2016, NCM LLC completed a private placement of $250.0 million in aggregate principal amount of 5.750% Senior Unsecured Notes due 2026. During 2018, the Company repurchased and canceled a total of $15.0$0.0 million and $5.0 million of the Notes due 2026 at an average of 94.7% of their face amountduring 2020 and canceled such notes,2019, respectively, reducing the principal amount to $235.0$230.0 million as of December 27, 2018. This re-purchase was31, 2020. These repurchases were treated as a partial debt extinguishmentextinguishments and resulted in the realization of a non-operating gain, net of the writewritten off of debt issuance costs, of $0.6$0.0 million and $0.3 million during the yearyears ended December 27, 2018. The re-purchase is31, 2020 and December 26, 2019, respectively. As of December 31, 2020 re-purchases to date are expected to result in interest savings to maturity of approximately $6.8$8.9 million.
NCM LLC also has a private placement of $400.0 million in aggregate principal amount of 6.00% Senior Secured Notes due August 15, 2022. The Notes due 2022 pay interest semi-annually in arrears.
The Company may continue to opportunistically pay down NCM LLC's outstanding debt balance, while ensuring that the Company's financial flexibility is maintained.
The new senior secured credit facility contains a number of covenants and various financial ratio requirements, including, (i) a consolidated net total leverage ratio covenant of 6.25 times for each quarterly period (commencing with the quarterly period ending September 27, 2018) and (ii) with respect to the revolving credit facility, maintaining a consolidated net senior secured leverage ratio of equal to or less than 4.50 times on a quarterly basis for each quarterly period (beginning with the quarterly period ending September 27, 2018) in which a balance is outstanding on the revolving credit facility. In addition, NCM LLC is permitted to make quarterly dividend payments and other restricted payments with its available cash as long as NCM LLC’s consolidated net senior secured leverage ratio (after giving effect to any such payment) is below 5.50 times and no default or event of default has occurred and continues to occur under the senior secured credit facility. As of December 27, 2018, NCM LLC’s consolidated net senior secured leverage ratio was 3.2 times (versus the dividend payment restriction of 5.50 times and the covenant of 4.50 times) and NCM LLC's consolidated net total leverage ratio was 4.2 times (versus the covenant of 6.25 times).
There are no borrower distribution restrictions as long as NCM LLC’s consolidated net senior secured leverage ratio is below 6.5 times and NCM LLC is in compliance with its debt covenants. If there are limitations on the restricted payments, NCM LLC may not declare or pay any dividends, make any payments on account of NCM LLC, set aside assets for the retirement or other acquisition of capital stock of the borrower or any subsidiary, or make any other distribution for obligations of NCM LLC. When these restrictions are effective, NCM LLC may still pay the services fee and reimbursable costs pursuant to terms of the management agreement. NCM, Inc. can also make payments pursuant to the TRA in the amount, and at the time necessary to satisfy the contractual obligations with respect to the actual cash tax benefits payable to NCM LLC’s founding members.
As a result of the new senior secured credit facility, we extended the average maturities of our debt and as of December 27, 2018,31, 2020, the weighted average remaining maturity was 5.45.5 years. As of December 27, 2018,31, 2020, approximately 68%59% of our total borrowings bear interest at fixed rates. The remaining 32%41% of our borrowings bear interest at variable rates and as such, our net income and earnings per share could fluctuate with market interest rate fluctuations that could increase or decrease the interest paid on our borrowings.
Critical Accounting Policies
The significant accounting policies of the Company are described in Note 1 to the audited Consolidated Financial Statements included elsewhere in this document. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances and are evaluated on an ongoing basis. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.
Allowance for Doubtful Accounts
Nature of Estimates Required. The allowance for doubtful accounts represents management’s estimate of probable credit losses inherent in its trade receivables, which represent a significant asset on the balance sheet. Estimating the amount of the allowance for doubtful accounts requires significant judgment and the use of estimates related to the amount and timing of estimated losses based on historical loss experience, consideration of current economic trends and conditions and debtor-specific factors, all of which may be susceptible to significant change. Amounts deemed uncollectible within the account receivable balance are charged against the allowance, while recoveries of amounts previously charged are credited to the allowance. A provision for bad debt is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. To the extent actual outcomes differ from management estimates, additional provision for bad debt could be required that could adversely affect earnings or financial position in future periods.
Sensitivity Analysis. As of December 27, 2018,31, 2020, our allowance for doubtful accounts was $6.0$2.3 million, or 3.9%12.5% of the gross accounts receivable balance. A 10% difference in the allowance for doubtful accounts as of December 27, 201831, 2020 would have affected net income attributable to NCM, Inc. by approximately $0.2 million.
Share-Based Compensation
Nature of Estimates Required. NCM, Inc.’s 2020 Omnibus Equity Incentive Plan, 2016 Equity Incentive Plan and its 2007 Equity Incentive Plan, as amended (the “Equity Incentive Plans”) are treated as equity plans under the provisions of Accounting Standards Codification ASC 718 – Compensation – Stock Compensation, and the determination of fair value of options, restricted stock and restricted stock units for accounting purposes requires that management make estimates and judgments. Stock options are granted using the Black-Scholes option pricing model to estimate the fair value of stock option grants, which was affected by our stock price and a number of assumptions, including expected term, expected volatility, risk-free interest rate and expected dividends.
The fair value of restricted stock and restricted stock units isare based on the closing market price of our common stock on the date of grant. Restricted stock and restricted stock units vest upon the achievement of Company three-year cumulative performance measures and service conditions or only service conditions whereby they vest ratably over three years. Restricted stock units vest after the completion of a service period of thirteen months. Compensation expense equal to the fair value of each restricted stock award or restricted stock unit is recognized ratably over this requisite service period. For the restricted stock awards including performance vesting conditions, compensation expense is based on management’s projections and the probability of achievement of those targets, which requires considerable judgment. We record a cumulative adjustment to share-based compensation expense in periods that we change our estimate of the number of shares expected to vest. Additionally, we ultimately adjust the expense recognized to reflect the actual vested shares following the resolution of the performance conditions. Further, we estimate a forfeiture rate to reflect the potential separation of employees.
Assumptions and Approach Used. In determining the value of stock options, we estimated an expected term based upon historical actuals and company peer actuals and adjusted it by the cost of equity in order to incorporate the impact of the market condition, expected dividend yield based upon our expectation of the dividend that would be paid out on the underlying shares during the expected term of the option. Expected volatility is based on our historical stock prices using a mathematical formula to measure the standard deviation of the change in the natural logarithm of our underlying stock price over a period of time commensurate with the expected term. The risk-free interest rate is derived from the zero coupon rate on U.S. Treasury instruments with a term commensurate with the award’s expected term.
For restricted stock with vesting contingent on the achievement of Company performance conditions, the amount of compensation expense is estimated based on the expected achievement of the performance condition. This requires us to make estimates of the likelihood of the achievement of Company performance conditions, which is highly judgmental. We base our judgments as to the expected achievement of Company performance conditions based on the financial projections of the Company that are used by management for business purposes, which represent our best estimate of expected Company performance. We evaluate the assumptions used to value stock-based awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of stock-based awards, we may be required to accelerate, increase or decrease any remaining, unrecognized stock-based compensation expense. To the extent that we grant additional stock-based awards, compensation expense will increase in relation to the fair value of the additional grants. Compensation expense may be significantly impacted in the future to the extent our estimates differ from actual results. Further, we estimate a forfeiture rate of restricted stock based upon historical forfeitures. If future forfeitures differ significantly from our past experience our compensation expense may be significantly impacted.
Income Taxes
Nature of Estimates Required. We account for income taxes in accordance with ASC 740 – Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the audited Consolidated Financial Statements. Deferred tax amounts are determined using the tax rates expected to be in effect when the
taxes will actually be paid or refunds received, as provided under currently enacted tax law. Valuation allowances are to be established when necessary to reduce deferred tax assets to the amount expected to be realized. We recognizedThe Company expects that it will generate a three-year cumulative pre-tax book loss during 2021 driven by the impact of the COVID-19 Pandemic on the Company’s operations in 2020, the effect of which is expected to continue into 2021. Given the associated weight assigned to this item as negative evidence within the Company’s analysis, the Company determined it is more-likely-than-not that the Company will not be able to realize certain of the Company’s deferred tax asset associated with the basis difference in our investment in NCM LLC. However, a portion of the total basis difference will only reverse upon the sale of our interest in NCM LLC, which we expect would result in a capital loss.assets before they expire. Therefore, as of December 27, 201831, 2020 we have a valuation allowance in the amount of $80.1$212.0 million against the deferred tax asset to which this portion relates. We have incurred taxable losses in recent years due primarily to amortization of intangible assets recorded on our tax returns resulting from an election by NCM LLC made under Internal Revenue Code § 754 of the Internal Revenue Code to step-up the Company’s outside basis in its share of NCM LLC’s inside basis of assets under IRC §743(b). No valuation allowance is deemed necessary for these deferred tax assets asasset. As we expect future taxable income (as amortization of these items will cease) and we expect to be able to utilize our net operating loss carryforwards prior to their expiration. Further, we have and continue todo expect to generate pre-tax book income. On December 22, 2017,income following the U.S. government enactedresolution of the Tax Act. This legislation led to adjustments to our net deferred tax assets and payable to founding members under the TRA primarily due to the reduction in the U.S. federal corporate tax rate. Further due to our expectation of future taxable incomeCOVID-19 Pandemic, we have not recorded any impact of the Net Business Interest Expense Limitation IRC § 163(j) on our payable to founding members under the TRA.
In addition, due to the basis differences resulting from our IPO-related transactions (including the TRA with the founding members) and subsequent adjustments pursuant to the common unit adjustment agreement, we are required to make cash payments under the TRA to the founding members in amounts equal to 90% of our actual tax benefit realized from the tax amortization of the basis difference for certain deferred assets noted above. Following the increase in the valuation allowance as of December 31, 2020, the Company recorded a corresponding $151.9 million reduction to the ‘Payable to founding members under the tax receivable agreement’ equal to the portion of the payable related to 90% of the amortization of the expected benefits from the realization of the deferred tax assets deemed not more-likely-than-not to be realized as of December 31, 2020. Once the Company returns to a more normal operating level and emerges from a three-year cumulative pre-tax book loss position, part or all the valuation allowance is expected to reverse, resulting in an inverse impact to the payable to founding members under the tax receivable agreement which would increase to reflect future payments to the founding members at that time. The requirements of the TRA, as amended, are highly technical and complex and involve management’s judgment, including judgments to determine hypothetical tax outcomes exclusive of the IPO date transaction and agreements. If we were to fail to meet certain of the requirements of the TRA, we could be subject to additional payments to taxing authorities or to the founding members. We recognize the tax benefit from an uncertain tax position only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the audited Consolidated Financial Statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
For fiscal 2018,2020, our provision for income taxes was $23.5$162.2million. Changes in management’s estimates and assumptions regarding the enacted tax rate applied to deferred tax assets and liabilities, the ability to realize the value of deferred tax assets, or the timing of the reversal of tax basis differences and judgments used to determine hypothetical tax outcomes exclusive of the IPO date transaction and agreements could impact the provision for income taxes and change the effective tax rate.
Recent Accounting Pronouncements
For a discussion of the recent accounting pronouncements relevant to our business operations, refer to the information provided under Note 1 to the audited Consolidated Financial Statements included elsewhere in this document.
Related-Party Transactions
For a discussion of the related-party transactions, refer to the information provided under Note 9 to the audited Consolidated Financial Statements included elsewhere in this document.
Off-Balance Sheet Arrangements
Our operating lease obligations, which primarily include office leases, are not reflected on our balance sheet. Refer to “—Contractual and Other Obligations” for further detail. We do not believe these arrangements are material to our current or future financial condition, results of operations, liquidity, capital resources or capital expenditures.
Contractual and Other Obligations
Our contractual obligations as of December 27, 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period (in millions) |
| | Within
1 fiscal year | | 1-3
fiscal years | | 3-5
fiscal years | | Thereafter | | Total |
Borrowings (1) | $ | 2.7 |
| | $ | 5.4 |
| | $ | 432.4 |
| | $ | 490.9 |
| | $ | 931.4 |
|
Cash interest on borrowings (2) | 53.9 |
| | 106.5 |
| | 66.3 |
| | 59.1 |
| | 285.8 |
|
| Office leases | 3.5 |
| | 6.7 |
| | 6.8 |
| | 22.1 |
| | 39.1 |
|
Payable to founding members under TRA (3) | 15.5 |
| | 28.5 |
| | 36.3 |
| | 130.8 |
| | 211.1 |
|
| Total contractual cash obligations | $ | 75.6 |
| | $ | 147.1 |
| | $ | 541.8 |
| | $ | 702.9 |
| | $ | 1,467.4 |
|
| |
(1) | We have a $175.0 million variable rate revolving credit facility of which $27.0 million was outstanding as of December 27, 2018 and $4.8 million is restricted due to outstanding letters of credit. Debt service requirements under this agreement depend on the amounts borrowed and the level of the base interest rate, in addition to a commitment fee on the unused portion of the revolving credit facility. Refer to further discussion of the secured credit facility under “—Financial Condition and Liquidity-Financings” above. |
| |
(2) | The amounts of future cash interest payments in the table above are based on the amount outstanding on the Senior Secured Notes, Senior Unsecured Notes, term loans and revolving credit facility, as well as, estimated rates of interest over the term of the variable rate revolving credit facility and term loan. The Senior Secured Notes due in 2022 are at a fixed rate of 6.00%. The Senior Unsecured Notes due in 2026 are at a fixed rate of 5.750%. In addition, we have variable rate term loans and a revolving credit facility. Debt service requirements under this agreement depend on the amounts borrowed and the level of the base interest rate, in addition to a commitment fee on the unused portion of the revolving credit facility. Refer to further discussion of the secured credit facility under “—Financial Condition and Liquidity-Financings” above. |
| |
(3) | The TRA entered into at the completion of our IPO provides for the payment by us to the founding members of 90% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of certain increases in our proportionate share of tax basis in NCM LLC’s tangible and intangible assets. The payments to NCM LLC’s founding members are based, in part, on actual annual income and as such, will vary based on our operating results. The value in the table represents the estimated amounts payable under the TRA as of December 27, 2018. |
The ESAs require payments based on a combination of founding member attendance, the number of digital screens of each founding member and the number of higher quality digital cinema systems of each NCM LLC founding member. The amount relating to the attendance factor will vary from quarter to quarter and year to year as theater attendance varies, while the amount relating to the digital screens and digital cinema systems will also vary quarter to quarter and year to year as screens are converted to digital screens and other screens are added or removed through acquisition, divestiture or closure activities of the founding members. The payments made to the founding members also will vary due to the escalation of the rates paid for each factor pursuant to the amended and restated ESAs. The rate per attendee increases 8% every five years, with the next such increase taking effect for fiscal year 2022, while the rate per digital screen and digital cinema system screen increase 5% annually. The theater access fee paid in the aggregate to all founding members cannot be less than 12% of NCM LLC’s aggregate advertising revenue (as defined in the ESA), or it will be adjusted upward to reach this minimum payment. Payments to affiliates vary based on revenue attributed to the affiliate for the period and thus will vary from quarter to quarter and year to year as advertising revenue varies. 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 table above does not include amounts payable under the ESAs or to affiliates as they are based on variable factors, which are not capable of precise estimation. Refer to Note 13 to the audited Consolidated Financial Statements included elsewhere in this document for the maximum guarantee amount under the affiliate agreements.
Seasonality
Our revenue and operating results are seasonal in nature, coinciding with the timing of marketing expenditures by our advertising clients and to a lesser extent the attendance patterns within the film exhibition industry. Both advertising expenditures and theater attendance tend to be higher during the second, third, and fourth fiscal quarters. Advertising revenue is primarily correlated with new product releases, advertising client marketing priorities and economic cycles and to a lesser extent theater attendance levels. Seasonal demand during the summer is driven by the absence of alternative attractive advertising mediums and during the winter holiday season due to high client demand across all advertising mediums. The actual quarterly results for each quarter could differ materially depending on these factors or other risks and uncertainties. Based on our historical experience, our first quarter typically has less revenue than the other quarters of a given year due primarily to lower advertising client demand and increased inventory availability in competitive advertising mediums. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations in the future.
The following table reflects the quarterly percentage of total revenue for the fiscal years ended 2016, 2017 and 2018:
|
| | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| FY 2016 | 17.0 | % | | 25.8 | % | | 25.4 | % | | 31.8 | % |
| FY 2017 | 16.9 | % | | 22.8 | % | | 27.3 | % | | 33.0 | % |
| FY 2018 | 18.2 | % | | 25.8 | % | | 24.9 | % | | 31.1 | % |
|
| | | | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The primary market risk to which we are exposed is interest rate risk. The Notes due 2026 and the Notes due 20222028 bear interest at fixed rates, and therefore are not subject to market risk. As of December 27, 2018,31, 2020, the interest rate risk that we are exposed to is related to our $175.0 million revolving credit facility and our $269.4$263.3 million term loan. A 100 basis point fluctuation in market interest rates underlying our term loan and revolving credit facility would have the effect of increasing or decreasing our cash interest expense by approximately $3.0$4.3 million for an annual period on the $27.0$167.0 million and $269.4$263.3 million outstanding as of December 27, 201831, 2020 on our revolving credit facility and term loan, respectively.
In response to the COVID-19 Pandemic, the government lowered the Federal Reserve interest rate leading to historically low interest rates as of December 31, 2020 that has had the effect of reducing the Company's interest rate risk.
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| | | | |
| Item 8. | Financial Statements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS
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| National CineMedia, Inc. and Subsidiary | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
National CineMedia, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of National CineMedia, Inc. and subsidiary (the "Company"“Company”) as of December 27, 201831, 2020 and December 28, 2017,26, 2019, the related consolidated statements of income, comprehensive income, equity(deficit)equity/(deficit), and cash flows for each of the two years in the period ended December 27, 2018, December 28, 2017 and December 29, 201631, 2020 and the related notes (collectively referred to as the "financial statements"“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 27, 201831, 2020 and December 28, 2017,26, 2019, the results of its operations and its cash flows for each of the two years in the period ended December 27, 2018, December 28, 2017 and December 29, 201631, 2020 in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sCompany’s internal control over financial reporting as of December 27, 2018,31, 2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2019,March 8, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 13—Commitments and Contingencies to the Consolidated Financial Statements, the Company changed its method of accounting for leases effective December 28, 2018 due to the adoption of Accounting Standards Codification Topic 842 – Leases.
Basis for Opinion
These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which each relates.
Income Taxes – Tax Receivable Agreements— Refer to Notes 7 and 9 to the Consolidated Financial Statements
Critical Audit Matter Description
The Company and the founding members entered into the Tax Receivable Agreement (“TRA”) at the time of the Company’s initial public offering. Under the terms of this agreement, the Company will make cash payments to the founding members in amounts equal to 90% of the Company’s actual tax benefit realized primarily from the tax amortization of the intangible assets described below, which is recorded as a deferred tax asset. For purposes of the TRA, cash savings in income and franchise tax will be computed by comparing the Company’s actual income and franchise tax liability to the amount of such taxes that the Company would have been required to pay had there been no increase in the Company’s proportionate share of tax basis in National CineMedia, LLC’s tangible and intangible assets had the Company not entered into the TRA. The TRA applies to the Company’s taxable years up to and including the 30th anniversary of the IPO. During the fiscal year ended December 31, 2020, the Company paid the founding members $12.8M for the 2019 tax year. In addition, changes in the deferred tax rate and
in the Company’s realization assessment of its deferred tax assets, and therefore changes to future amounts probable to be paid under the TRA led to a re-measurement of the payable, resulting in a decrease of $152.7M during the fiscal year. At December 31, 2020, the Company’s payable to founding members under the TRA liability (“PFML”) was $33.5 million; of which $0.9 million is presented as a component of current liabilities and $32.6 million is presented as a component of non-current liabilities.
We identified the computation of adjustments to the PFML as a critical audit matter because of the complex calculations required to arrive at the correct tax basis upon which to calculate the corresponding PFML and deferred tax asset adjustments. This involved complexity in applying the tax law, and calculations of (a) incremental amortizable step-up in tax basis, (b) the iterative impact of the computation of adjustments to the PFML to owners and (c) the overall PFML. The amount of the PFML, as well as the timing of such payments, is dependent upon a number of complex items including: (i) the tax basis in the units of NCM LLC being issued as part of a common unit adjustment or exchanged for common stock of the Company, (ii) the allocation of the tax basis step up to the applicable assets, (iii) the amount and timing of taxable income the Company generates in future periods until the PFML is settled, (iv) the portion of the Company’s payments under the TRA that constitute imputed interest or give rise to depreciable or amortizable tax basis and (v) the amount and timing of tax attribute utilization on a with and without basis in accordance with the TRA.
How the Critical Audit Matter Was Addressed in the Audit
With the assistance of our income tax specialists, our audit procedures related to the computation of adjustments to the PFML included the following procedures, among others:
•We tested the effectiveness of controls over the computation of adjustments to the PFML and deferred tax asset.
•We read the individual TRA and Exhibitor Services Agreement to compare the terms in each agreement for consistency with the mathematical model used by management to calculate the adjustments to the PFML and deferred tax asset.
•We evaluated management’s computation of adjustments to the year-end balance of the PFML amount by recalculating the PFML at the end of the year, taking into account the various unit exchanges occurring during the year as well as the additions in the PFML for each Common Unit Adjustment.
•We analyzed the impact of any taxable income limitations on the PFML.
•We prepared our own model to independently recompute the PFML and compare to the recorded balance.
•We reconciled realization of tax payments and deductions to the PFML.
Income Taxes – Deferred Tax Asset Realizability— Refer to Notes 7 and 9 to the consolidated financial statements
Critical Audit Matter Description
The Company accounts for income taxes under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to be recovered or settled pursuant to the provisions of ASC 740 – Income Taxes. The Company records a valuation allowance if it is deemed more likely than not that all or a portion of its deferred tax assets will not be realized. As of December 31, 2020, the Company reported a gross deferred tax asset of $212.0 million. The Company considered both positive and negative evidence in determining whether it is more likely than not that all or some portion of its deferred tax assets will be realized under ASC 740 as of December 31, 2020. Based on all available evidence, including the Company’s expectation that it will generate a three-year cumulative pre-tax book loss during 2021, the Company concluded that it is more likely than not that the Company will not be able to realize certain of the Company’s deferred tax assets before they expire. The Company increased the valuation allowance against certain deferred tax assets by $139.0 million as of December 31, 2020.
We identified the assessment of the realizability of the remaining net deferred tax assets as a critical audit matter because of the significant judgments and complex estimates required in evaluating the need for a valuation allowance. This involved complexity in applying the tax law, considering all available evidence, and evaluating the Company’s three-year cumulative pre-tax book income (loss), including forecasted quarterly pre-tax book income (loss) through 2021. The realizability of the net deferred tax asset, as well as the need for a valuation allowance, is dependent upon a number of complex items including: (i) the weight assigned to the evidence based on the degree to which it is objectively verifiable and (ii) forecasting pre-tax book income (loss) through 2021 in a highly uncertain environment.
How the Critical Audit Matter Was Addressed in the Audit
With the assistance of our income tax specialists, our audit procedures related to the realizability of the deferred tax assets included the following procedures, among others:
•We tested the effectiveness of internal controls over the calculation of the valuation of deferred tax assets including the controls over the Company’s consideration of positive and negative evidence.
•We evaluated whether the sources of management’s positive and negative evidence were of the appropriate character and sufficient to utilize the deferred tax assets under the relevant tax law to confirm completeness.
•We tested management’s weighted forecast considerations by comparing and evaluating objectively verifiable evidence and subjective evidence.
•We evaluated management’s computation of the cumulative pre-tax book income position including actual and forecasted pre-tax book income amounts.
•We evaluated the Company’s “more likely than not” conclusion with regard to the realizability of deferred tax assets and recomputed the valuation allowance for those that were not considered realizable.
•We consulted with our accounting experts as to the appropriateness of the analysis performed and the conclusions reached.
/s/ Deloitte & Touche LLP
Denver, Colorado
February 21, 2019March 8, 2021
We have served as the Company’sCompany's auditor since 2006.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
| | | | December 27, 2018 | | December 28, 2017 | | December 31, 2020 | | December 26, 2019 |
| ASSETS | | | | ASSETS | | | |
| CURRENT ASSETS: | | | | CURRENT ASSETS: | |
| Cash and cash equivalents | $ | 41.4 |
| | $ | 30.2 |
| Cash and cash equivalents | $ | 180.3 | | | $ | 55.9 | |
| Short-term marketable securities | 24.0 |
| | 13.1 |
| Short-term marketable securities | 0.3 | | | 17.5 | |
| Receivables, net of allowance of $6.0 and $6.0, respectively | 149.9 |
| | 160.6 |
| |
| Income tax receivable | 0.3 |
| | 0.2 |
| |
| Receivables, net of allowance of $2.3 and $6.2, respectively | | Receivables, net of allowance of $2.3 and $6.2, respectively | 16.2 | | | 170.8 | |
| | Amounts due from founding members, net | 5.8 |
|
| — |
| Amounts due from founding members, net | 0 | | | 6.6 | |
| Current portion of notes receivable - founding members (related parties of $4.2 and $4.2, respectively) | 5.6 |
| | 4.2 |
| |
| Prepaid expenses and other current assets | 3.9 |
| | 4.3 |
| Prepaid expenses and other current assets | 3.1 | | | 3.5 | |
| Total current assets | 230.9 |
| | 212.6 |
| Total current assets | 199.9 | | | 254.3 | |
| NON-CURRENT ASSETS: | | | | NON-CURRENT ASSETS: | |
| Property and equipment, net of accumulated depreciation of $62.5 and $70.4, respectively | 33.6 |
| | 30.7 |
| |
| Intangible assets, net of accumulated amortization of $172.7 and $145.4, respectively | 684.5 |
| | 717.2 |
| |
| Deferred tax assets, net of valuation allowance of $80.1 and $98.1, respectively | 173.9 |
| | 186.0 |
| |
| Long-term notes receivable, net of current portion - founding members | — |
| | 4.1 |
| |
| Property and equipment, net of accumulated depreciation of $77.7 and $70.7, respectively | | Property and equipment, net of accumulated depreciation of $77.7 and $70.7, respectively | 27.5 | | | 33.2 | |
| Intangible assets, net of accumulated amortization of $223.0 and $198.9, respectively | | Intangible assets, net of accumulated amortization of $223.0 and $198.9, respectively | 627.8 | | | 643.7 | |
| Deferred tax assets, net of valuation allowance of $212.0 and $81.6, respectively | | Deferred tax assets, net of valuation allowance of $212.0 and $81.6, respectively | 0 | | | 162.1 | |
| | Other investments | 3.0 |
| | 3.5 |
| Other investments | 0.8 | | | 1.0 | |
| Long-term marketable securities | 10.2 |
| | 16.2 |
| Long-term marketable securities | 1.2 | | | 7.5 | |
| Debt issuance costs, net | 5.0 |
| | 1.3 |
| Debt issuance costs, net | 3.3 | | | 3.9 | |
| Other assets | 0.7 |
| | 1.5 |
| Other assets | 25.7 | | | 24.3 | |
| Total non-current assets | 910.9 |
| | 960.5 |
| Total non-current assets | 686.3 | | | 875.7 | |
| TOTAL ASSETS | $ | 1,141.8 |
| | $ | 1,173.1 |
| TOTAL ASSETS | $ | 886.2 | | | $ | 1,130.0 | |
| LIABILITIES AND EQUITY/(DEFICIT) | | | | LIABILITIES AND EQUITY/(DEFICIT) | | | |
| CURRENT LIABILITIES: | | | | CURRENT LIABILITIES: | |
| Amounts due to founding members, net | 30.0 |
| | 32.7 |
| Amounts due to founding members, net | $ | 2.0 | | | $ | 36.8 | |
| Payable to founding members under the TRA (related party payables of $11.2 and $19.6, respectively) | 15.5 |
| | 19.6 |
| |
| Payable to founding members under the TRA (related party payables of $0.6 and $10.3, respectively) | | Payable to founding members under the TRA (related party payables of $0.6 and $10.3, respectively) | 0.9 | | | 14.2 | |
| Accrued expenses | 21.7 |
| | 19.9 |
| Accrued expenses | 19.0 | | | 22.1 | |
| Accrued payroll and related expenses | 15.3 |
| | 11.1 |
| Accrued payroll and related expenses | 4.8 | | | 13.8 | |
| Accounts payable | 18.0 |
| | 19.3 |
| Accounts payable | 13.7 | | | 20.7 | |
| Deferred revenue | 7.3 |
| | 7.1 |
| Deferred revenue | 5.1 | | | 7.6 | |
| Short-term debt | 2.7 |
| | — |
| Short-term debt | 2.7 | | | 2.7 | |
| Other current liabilities | | Other current liabilities | 1.8 | | | 1.6 | |
| Total current liabilities | 110.5 |
| | 109.7 |
| Total current liabilities | 50.0 | | | 119.5 | |
| NON-CURRENT LIABILITIES: | | | | NON-CURRENT LIABILITIES: | |
| Long-term debt, net of debt issuance costs of $7.8 and $8.7, respectively | 920.9 |
| | 923.3 |
| |
| Income tax payable | — |
| | 0.3 |
| |
| Payable to founding members under the TRA (related party payables of $141.1 and $212.6, respectively) | 195.6 |
| | 212.6 |
| |
| Long-term debt, net of debt issuance costs of $8.0 and $9.0, respectively | | Long-term debt, net of debt issuance costs of $8.0 and $9.0, respectively | 1,049.6 | | | 923.9 | |
| | Payable to founding members under the TRA (related party payables of $23.7 and $133.5, respectively) | | Payable to founding members under the TRA (related party payables of $23.7 and $133.5, respectively) | 32.6 | | | 183.8 | |
| Other liabilities | 4.0 |
| | 2.0 |
| Other liabilities | 22.6 | | | 24.0 | |
| Total non-current liabilities | 1,120.5 |
| | 1,138.2 |
| Total non-current liabilities | 1,104.8 | | | 1,131.7 | |
| Total liabilities | 1,231.0 |
| | 1,247.9 |
| Total liabilities | 1,154.8 | | | 1,251.2 | |
| COMMITMENTS AND CONTINGENCIES (NOTE 13) |
|
| |
|
| COMMITMENTS AND CONTINGENCIES (NOTE 13) | 0 | | 0 |
| EQUITY/(DEFICIT): | | | | EQUITY/(DEFICIT): | |
| NCM, Inc. Stockholders’ Equity/(Deficit): | | | | NCM, Inc. Stockholders’ Equity/(Deficit): | |
| Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding, respectively | — |
| | — |
| Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding, respectively | 0 | | | 0 | |
Common stock, $0.01 par value; 175,000,000 shares authorized, 76,976,398 and 76,242,222 issued and outstanding, respectively | 0.8 |
| | 0.8 |
| |
Common stock, $0.01 par value; 175,000,000 shares authorized, 78,040,818 and 77,568,986 issued and outstanding, respectively | | Common stock, $0.01 par value; 175,000,000 shares authorized, 78,040,818 and 77,568,986 issued and outstanding, respectively | 0.8 | | | 0.8 | |
| Additional paid in capital (deficit) | (215.2 | ) | | (233.1 | ) | Additional paid in capital (deficit) | (207.5) | | | (209.2) | |
| Retained earnings (distributions in excess of earnings) | (153.6 | ) | | (130.2 | ) | Retained earnings (distributions in excess of earnings) | (266.4) | | | (171.1) | |
| Total NCM, Inc. stockholders’ equity/(deficit) | (368.0 | ) | | (362.5 | ) | Total NCM, Inc. stockholders’ equity/(deficit) | (473.1) | | | (379.5) | |
| Noncontrolling interests | 278.8 |
| | 287.7 |
| Noncontrolling interests | 204.5 | | | 258.3 | |
| Total equity/(deficit) | (89.2 | ) | | (74.8 | ) | Total equity/(deficit) | (268.6) | | | (121.2) | |
| TOTAL LIABILITIES AND EQUITY/DEFICIT | $ | 1,141.8 |
| | $ | 1,173.1 |
| TOTAL LIABILITIES AND EQUITY/DEFICIT | $ | 886.2 | | | $ | 1,130.0 | |
Refer to accompanying notes to Consolidated Financial Statements.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except share and per share data)
| | | | | | | | | | Years Ended |
| | Years Ended | | December 31, 2020 | | December 26, 2019 |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 | |
Revenue (including revenue from related parties of $28.4, $29.9 and $29.1, respectively) | $ | 441.4 |
| | $ | 426.1 |
| | $ | 447.6 |
| |
| Revenue (including revenue from related parties of $4.9 and $23.0, respectively) | | Revenue (including revenue from related parties of $4.9 and $23.0, respectively) | $ | 90.4 | | | $ | 444.8 | |
| OPERATING EXPENSES: | | | | | | OPERATING EXPENSES: | |
| Advertising operating costs | 37.4 |
| | 32.4 |
| | 30.0 |
| Advertising operating costs | 10.3 | | | 38.3 | |
| Network costs | 13.3 |
| | 15.8 |
| | 17.1 |
| Network costs | 8.6 | | | 13.5 | |
| Theater access fees—founding members (including fees to related parties of $69.0, $76.5 and $75.1, respectively) | 81.7 |
| | 76.5 |
| | 75.1 |
| |
Theater access fees and revenue share to founding members (including fees to related parties of $16.0 and $56.6, respectively) | | Theater access fees and revenue share to founding members (including fees to related parties of $16.0 and $56.6, respectively) | 24.6 | | | 82.7 | |
| Selling and marketing costs | 66.5 |
| | 72.0 |
| | 72.8 |
| Selling and marketing costs | 37.6 | | | 64.9 | |
| Administrative and other costs | 48.3 |
| | 37.9 |
| | 43.8 |
| Administrative and other costs | 30.9 | | | 43.8 | |
| Depreciation and amortization | 39.9 |
| | 37.6 |
| | 35.8 |
| |
| Impairment of long-lived assets | | Impairment of long-lived assets | 1.7 | | | 0 | |
| Depreciation expense | | Depreciation expense | 13.1 | | | 13.6 | |
| Amortization of intangibles recorded for network theater screen leases | | Amortization of intangibles recorded for network theater screen leases | 24.6 | | | 26.7 | |
| Total | 287.1 |
| | 272.2 |
| | 274.6 |
| Total | 151.4 | | | 283.5 | |
| OPERATING INCOME | 154.3 |
| | 153.9 |
| | 173.0 |
| |
| OPERATING (LOSS) INCOME | | OPERATING (LOSS) INCOME | (61.0) | | | 161.3 | |
| NON-OPERATING EXPENSES: | | | | | | NON-OPERATING EXPENSES: | | | |
| Interest on borrowings | 55.4 |
| | 52.8 |
| | 54.0 |
| Interest on borrowings | 55.8 | | | 58.0 | |
| Interest income | (1.5 | ) | | (1.2 | ) | | (1.5 | ) | Interest income | (0.6) | | | (2.1) | |
| Loss on early retirement of debt, net | 0.7 |
| | — |
| | 10.4 |
| Loss on early retirement of debt, net | 0.4 | | | 5.6 | |
(Gain) loss on re-measurement of the payable to founding members under the TRA | (3.8 | ) | | (192.2 | ) | | 1.2 |
| (Gain) loss on re-measurement of the payable to founding
members under the TRA | (152.7) | | | 1.1 | |
| Other non-operating income | (0.2 | ) | | (0.3 | ) | | — |
| |
| Other non-operating expense (income) | | Other non-operating expense (income) | 0.2 | | | (0.4) | |
| Total | 50.6 |
| | (140.9 | ) | | 64.1 |
| Total | (96.9) | | | 62.2 | |
| INCOME BEFORE INCOME TAXES | 103.7 |
| | 294.8 |
| | 108.9 |
| INCOME BEFORE INCOME TAXES | 35.9 | | | 99.1 | |
| Income tax expense | 23.5 |
| | 180.3 |
| | 14.4 |
| Income tax expense | 162.2 | | | 12.4 | |
| CONSOLIDATED NET INCOME | 80.2 |
| | 114.5 |
| | 94.5 |
| |
| Less: Net income attributable to noncontrolling interests | 50.4 |
| | 56.2 |
| | 61.6 |
| |
| NET INCOME ATTRIBUTABLE TO NCM, INC. | 29.8 |
| | 58.3 |
| | 32.9 |
| |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NCM, INC. | $ | 29.8 |
| | $ | 58.3 |
| | $ | 32.9 |
| |
| CONSOLIDATED NET (LOSS) INCOME | | CONSOLIDATED NET (LOSS) INCOME | (126.3) | | | 86.7 | |
| Less: Net (loss) income attributable to noncontrolling interests | | Less: Net (loss) income attributable to noncontrolling interests | (60.9) | | | 50.6 | |
| NET (LOSS) INCOME ATTRIBUTABLE TO NCM, INC. | | NET (LOSS) INCOME ATTRIBUTABLE TO NCM, INC. | (65.4) | | | 36.1 | |
| COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO NCM, INC. | | COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO NCM, INC. | $ | (65.4) | | | $ | 36.1 | |
| | | | | | | | | | |
| NET INCOME PER NCM, INC. COMMON SHARE: | | | | | | |
| NET (LOSS) INCOME PER NCM, INC. COMMON SHARE: | | NET (LOSS) INCOME PER NCM, INC. COMMON SHARE: | |
| Basic | $ | 0.39 |
| | $ | 0.89 |
| | $ | 0.55 |
| Basic | $ | (0.84) | | | $ | 0.47 | |
| Diluted | $ | 0.37 |
| | $ | 0.48 |
| | $ | 0.54 |
| Diluted | $ | (0.84) | | | $ | 0.46 | |
| | | | | | | |
| WEIGHTED AVERAGE SHARES OUTSTANDING: | | | | | | WEIGHTED AVERAGE SHARES OUTSTANDING: | |
| Basic | 76,859,087 |
| | 65,226,817 |
| | 59,788,026 |
| Basic | 77,955,675 | | | 77,345,577 | |
| Diluted | 157,403,910 |
| | 151,067,270 |
| | 60,605,570 |
| Diluted | 77,955,675 | | | 77,782,567 | |
| | | | | | | |
| Dividends declared per common share | $ | 0.68 |
| | $ | 0.88 |
| | $ | 0.88 |
| |
Refer to accompanying notes to Consolidated Financial Statements.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY/ (DEFICIT)
(In millions, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | NCM, Inc. | | |
| | | Common Stock | | Additional
Paid in
Capital
(Deficit) | | Retained
Earnings
(Distribution
in Excess of
Earnings) | | Noncontrolling
Interest |
| Consolidated | | Shares | | Amount | | | |
| Balance—December 27, 2018 | $ | (89.2) | | | 76,976,398 | | | $ | 0.8 | | | $ | (215.2) | | | $ | (153.6) | | | $ | 278.8 | |
| | | | | | | | | | | |
| Distributions to founding members | (76.4) | | | — | | | — | | | — | | | — | | | (76.4) | |
NCM LLC equity issued for purchase of
intangible asset | 7.6 | | | — | | | — | | | 3.7 | | | — | | | 3.9 | |
Income tax and other impacts of NCM LLC
ownership changes | (0.7) | | | — | | | — | | | (0.7) | | | — | | | 0 | |
| Issuance of shares to founding members | 1.7 | | | 197,118 | | | — | | | 1.7 | | | — | | | — | |
| NCM, Inc. investment in NCM LLC | (1.7) | | | — | | | — | | | (1.7) | | | — | | | — | |
| Comprehensive income, net of tax | 86.7 | | | — | | | — | | | — | | | 36.1 | | | 50.6 | |
| Share-based compensation issued | (1.3) | | | 395,470 | | | — | | | (1.3) | | | — | | | — | |
| Share-based compensation expense/capitalized | 5.7 | | | — | | | — | | | 4.3 | | | — | | | 1.4 | |
| Cash dividends declared $0.68 per share | (53.6) | | | — | | | — | | | — | | | (53.6) | | | — | |
| Balance—December 26, 2019 | $ | (121.2) | | | 77,568,986 | | | $ | 0.8 | | | $ | (209.2) | | | $ | (171.1) | | | $ | 258.3 | |
Cumulative-effect adjustment for adoption of ASU
2016-13, net of tax | 2.9 | | | — | | | — | | | — | | | 1.2 | | | 1.7 | |
| Distributions to founding members | (4.4) | | | — | | | — | | | — | | | — | | | (4.4) | |
NCM LLC equity issued for purchase of
intangible asset | 10.5 | | | — | | | — | | | 5.0 | | | — | | | 5.5 | |
Income tax and other impacts of NCM LLC
ownership changes | (0.5) | | | — | | | — | | | (3.9) | | | — | | | 3.4 | |
| Comprehensive loss, net of tax | (126.3) | | | — | | | — | | | — | | | (65.4) | | | (60.9) | |
| Share-based compensation issued | (1.0) | | | 471,832 | | | — | | | (1.0) | | | — | | | — | |
| Share-based compensation expense/capitalized | 2.5 | | | — | | | — | | | 1.6 | | | — | | | 0.9 | |
| Cash dividends declared $0.40 per share | (31.1) | | | — | | | — | | | — | | | (31.1) | | | — | |
| Balance—December 31, 2020 | $ | (268.6) | | | 78,040,818 | | | $ | 0.8 | | | $ | (207.5) | | | $ | (266.4) | | | $ | 204.5 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | NCM, Inc. | | |
| | | | Common Stock | | Additional
Paid in
Capital
(Deficit) | | Retained
Earnings
(Distribution
in Excess of
Earnings) | | Noncontrolling
Interest |
| | Consolidated | | Shares | | Amount | | | |
| Balance—December 31, 2015 | $ | (229.9 | ) | | 59,239,154 |
| | $ | 0.6 |
| | $ | (357.0 | ) | | $ | (108.8 | ) | | $ | 235.3 |
|
| Distributions to founding members | (75.1 | ) | | — |
| | — |
| | — |
| | — |
| | (75.1 | ) |
NCM LLC equity issued for purchase of
intangible asset | 21.1 |
| | — |
| | — |
| | 9.2 |
| | — |
| | 11.9 |
|
Income tax and other impacts of NCM LLC
ownership changes | (2.3 | ) | | — |
| | — |
| | (3.7 | ) | | — |
| | 1.4 |
|
| Comprehensive income, net of tax | 94.5 |
| | — |
| | — |
| | — |
| | 32.9 |
| | 61.6 |
|
| Share-based compensation issued | (4.4 | ) | | 635,258 |
| | — |
| | (4.4 | ) | | — |
| | — |
|
| Share-based compensation expense/capitalized | 18.8 |
| | — |
| | — |
| | 12.4 |
| | — |
| | 6.4 |
|
| Cash dividends declared $0.88 per share | (54.9 | ) | | — |
| | — |
| | — |
| | (54.9 | ) | | — |
|
| Balance—December 29, 2016 | $ | (232.2 | ) | | 59,874,412 |
| | $ | 0.6 |
| | $ | (343.5 | ) | | $ | (130.8 | ) | | $ | 241.5 |
|
| Distributions to founding members | (85.0 | ) | | — |
| | — |
| | — |
| | — |
| | (85.0 | ) |
NCM LLC equity issued for purchase of
intangible asset | 201.8 |
| | — |
| | — |
| | 78.8 |
| | — |
| | 123.0 |
|
Income tax and other impacts of NCM LLC
ownership changes | (23.6 | ) | | — |
| | — |
| | 28.6 |
| | — |
| | (52.2 | ) |
| Issuance of shares to founding members | 84.9 |
| | 15,600,000 |
| | 0.2 |
| | 84.7 |
| | — |
| | — |
|
| NCM, Inc. investment in NCM LLC | (84.9 | ) | | — |
| | — |
| | (84.9 | ) | | — |
| | — |
|
| Comprehensive income, net of tax | 114.5 |
| | — |
| | — |
| | — |
| | 58.3 |
| | 56.2 |
|
| Share-based compensation issued | (4.1 | ) | | 767,810 |
| | — |
| | (4.1 | ) | | — |
| | — |
|
| Share-based compensation expense/capitalized | 11.5 |
| | — |
| | — |
| | 7.3 |
| | — |
| | 4.2 |
|
| Cash dividends declared $0.88 per share | (57.7 | ) | | — |
| | — |
| | — |
| | (57.7 | ) | | — |
|
| Balance—December 28, 2017 | $ | (74.8 | ) | | 76,242,222 |
| | $ | 0.8 |
| | $ | (233.1 | ) | | $ | (130.2 | ) | | $ | 287.7 |
|
| Cumulative-effect adjustment for adoption of 2014-09 | (0.2 | ) | | — |
| | — |
| | — |
| | (0.2 | ) | | — |
|
| Distributions to founding members | (72.3 | ) | | — |
| | — |
| | — |
| | — |
| | (72.3 | ) |
NCM LLC equity issued for purchase of
intangible asset | 15.9 |
| | — |
| | — |
| | 7.7 |
| | — |
| | 8.2 |
|
Income tax and other impacts of NCM LLC
ownership changes | 9.5 |
| | — |
| | — |
| | 7.0 |
| | — |
| | 2.5 |
|
| Comprehensive income, net of tax | 80.2 |
| | — |
| | — |
| | — |
| | 29.8 |
| | 50.4 |
|
| Share-based compensation issued | (2.4 | ) | | 734,176 |
| | — |
| | (2.4 | ) | | — |
| | — |
|
| Share-based compensation expense/capitalized | 7.9 |
| | — |
| | — |
| | 5.6 |
| | — |
| | 2.3 |
|
| Cash dividends declared $0.68 per share | (53.0 | ) | | — |
| | — |
| | — |
| | (53.0 | ) | | — |
|
| Balance—December 27, 2018 | $ | (89.2 | ) | | 76,976,398 |
| | $ | 0.8 |
| | $ | (215.2 | ) | | $ | (153.6 | ) | | $ | 278.8 |
|
Refer to accompanying notes to Consolidated Financial Statements.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | Years Ended | | Years Ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 | | December 31, 2020 | | December 26, 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Consolidated net income | $ | 80.2 |
| | $ | 114.5 |
| | $ | 94.5 |
| |
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | | | | | | |
| Consolidated net (loss) income | | Consolidated net (loss) income | $ | (126.3) | | | $ | 86.7 | |
| Adjustments to reconcile consolidated net (loss) income to net cash provided by operating activities: | | Adjustments to reconcile consolidated net (loss) income to net cash provided by operating activities: | |
| Deferred income tax expense | 23.3 |
| | 181.9 |
| | 16.7 |
| Deferred income tax expense | 162.4 | | | 12.1 | |
| Depreciation and amortization | 39.9 |
| | 37.6 |
| | 35.8 |
| |
| Depreciation expense | | Depreciation expense | 13.1 | | | 13.6 | |
| Amortization of intangibles recorded for network theater screens | | Amortization of intangibles recorded for network theater screens | 24.6 | | | 26.7 | |
| Non-cash share-based compensation | 7.8 |
| | 11.2 |
| | 18.3 |
| Non-cash share-based compensation | 2.2 | | | 5.5 | |
| Impairment of long-lived assets | | Impairment of long-lived assets | 1.7 | | | 0 | |
| Impairment on investment | 0.4 |
| | 3.1 |
| | 0.7 |
| Impairment on investment | 0 | | | 2.0 | |
| Reversal of income tax reserve | (0.4 | ) | | (1.7 | ) | | (2.9 | ) | |
| Amortization of debt issuance costs | 2.6 |
| | 2.6 |
| | 2.6 |
| Amortization of debt issuance costs | 2.5 | | | 2.6 | |
| Loss on early retirement of debt, net | 0.7 |
| | — |
| | 10.4 |
| Loss on early retirement of debt, net | 0.4 | | | 5.6 | |
Non-cash (gain) loss on re-measurement of the payable to founding members under the TRA | (3.8 | ) | | (192.2 | ) | | 1.2 |
| Non-cash (gain) loss on re-measurement of the payable to founding members under the TRA | (152.7) | | | 1.1 | |
| Other | (0.5 | ) | | (0.3 | ) | | — |
| Other | 0.1 | | | (1.0) | |
| Cash distributions from non-consolidated entities | 0.2 |
| | 0.3 |
| | 0.2 |
| |
| Proceeds from lessor on purchases of property, plant, and equipment | 1.0 |
| | — |
| | — |
| |
Founding member integration and encumbered theater payments (including payments from related parties of $0.1 and $0.8, respectively) | | Founding member integration and encumbered theater payments (including payments from related parties of $0.1 and $0.8, respectively) | 9.8 | | | 21.7 | |
| Payment to founding members under the TRA | | Payment to founding members under the TRA | (12.8) | | | (15.1) | |
| Other cash flows from operating activities, net | | Other cash flows from operating activities, net | (0.1) | | | (0.4) | |
| Changes in operating assets and liabilities: | | | | | | Changes in operating assets and liabilities: | |
| Receivables, net | 10.7 |
| | (0.1 | ) | | (13.5 | ) | Receivables, net | 158.0 | | | (20.9) | |
| Accounts payable and accrued expenses | 4.8 |
| | 1.7 |
| | (4.1 | ) | Accounts payable and accrued expenses | (18.5) | | | 3.6 | |
| Amounts due to founding members, net | (0.1 | ) | | 0.3 |
| | (0.1 | ) | Amounts due to founding members, net | (4.1) | | | 2.1 | |
| Payment to founding members under the TRA | (18.4 | ) | | (18.8 | ) | | (25.3 | ) | |
| Deferred revenue | 0.2 |
| | (3.1 | ) | | — |
| Deferred revenue | (2.5) | | | 0.3 | |
| Income taxes and other | 1.7 |
| | 1.9 |
| | (1.0 | ) | |
| Other, net | | Other, net | (2.5) | | | (2.6) | |
| Net cash provided by operating activities | 150.3 |
| | 138.9 |
| | 133.5 |
| Net cash provided by operating activities | 55.3 | | | 143.6 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Purchases of property and equipment | (14.2 | ) | | (11.6 | ) | | (12.9 | ) | Purchases of property and equipment | (8.0) | | | (14.0) | |
| Acquisition of a business | — |
| | (0.2 | ) | | — |
| |
| Purchases of marketable securities | (36.8 | ) | | (34.4 | ) | | (54.7 | ) | Purchases of marketable securities | (8.2) | | | (24.5) | |
| Proceeds from sale and maturities of marketable securities | 32.2 |
| | 50.9 |
| | 62.8 |
| Proceeds from sale and maturities of marketable securities | 31.8 | | | 34.5 | |
| Proceeds from restricted cash | — |
| | 0.3 |
| | — |
| |
| Purchases of intangible assets from network affiliates | (0.1 | ) | | (2.1 | ) | | (2.3 | ) | |
| Proceeds from notes receivable - founding members (including payments from related parties of $1.4, $5.6 and $2.8, respectively) | 2.8 |
| | 5.6 |
| | 2.8 |
| |
| Net cash (used in) provided by investing activities | (16.1 | ) | | 8.5 |
| | (4.3 | ) | |
Proceeds from notes receivable - founding members (including payments from related parties of $0.0 and $4.2, respectively) | | Proceeds from notes receivable - founding members (including payments from related parties of $0.0 and $4.2, respectively) | 0 | | | 5.6 | |
| Net cash provided by investing activities | | Net cash provided by investing activities | 15.6 | | | 1.6 | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Payment of dividends | (54.4 | ) | | (58.7 | ) | | (54.6 | ) | Payment of dividends | (32.0) | | | (53.6) | |
| Proceeds from revolving credit facility | 193.2 |
| | 80.0 |
| | 126.0 |
| Proceeds from revolving credit facility | 210.0 | | | 169.0 | |
| Repayments of revolving credit facility | (178.2 | ) | | (83.0 | ) | | (177.0 | ) | Repayments of revolving credit facility | (82.0) | | | (157.0) | |
| Proceeds from term loan facility | 270.0 |
| | — |
| | — |
| |
| Repayments of term loan facility | (270.7 | ) | | — |
| | — |
| Repayments of term loan facility | (3.4) | | | (2.7) | |
| Proceeds from issuance of Senior Notes due 2026 | — |
| | — |
| | 250.0 |
| |
| Repayments of Senior Notes due 2026 | (14.2 | ) | | — |
| | — |
| |
| Redemption of Senior Notes due 2021 | — |
| | — |
| | (207.9 | ) | |
| Repayment of Senior Notes due 2022 and 2026 | | Repayment of Senior Notes due 2022 and 2026 | 0 | | | (408.6) | |
| Proceeds from issuance of Senior Notes due 2028 | | Proceeds from issuance of Senior Notes due 2028 | 0 | | | 400.0 | |
| Payment of debt issuance costs | (6.9 | ) | | — |
| | (4.8 | ) | Payment of debt issuance costs | (1.3) | | | (4.6) | |
Founding member integration and other encumbered theater payments (including payments from related parties of $17.2, $12.9 and $2.4, respectively) | 22.7 |
| | 12.9 |
| | 2.4 |
| |
| Distributions to founding members | (82.1 | ) | | (87.3 | ) | | (67.6 | ) | Distributions to founding members | (36.8) | | | (71.9) | |
| Proceeds from stock option exercises | — |
| | 0.6 |
| | 0.5 |
| |
| Repurchase of stock for restricted stock tax withholding | (2.4 | ) | | (4.7 | ) | | (4.9 | ) | Repurchase of stock for restricted stock tax withholding | (1.0) | | | (1.3) | |
| Net cash used in financing activities | (123.0 | ) | | (140.2 | ) | | (137.9 | ) | |
| CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 11.2 |
| | 7.2 |
| | (8.7 | ) | |
| Cash, cash equivalents, and restricted cash at beginning of period | 30.2 |
| | 23.0 |
| | 31.7 |
| |
| Cash, cash equivalents, and restricted cash at end of period | $ | 41.4 |
| | $ | 30.2 |
| | $ | 23.0 |
| |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 53.5 | | | (130.7) | |
| CHANGE IN CASH AND CASH EQUIVALENTS | | CHANGE IN CASH AND CASH EQUIVALENTS | 124.4 | | | 14.5 | |
| Cash and cash equivalents at beginning of period | | Cash and cash equivalents at beginning of period | 55.9 | | | 41.4 | |
| Cash and cash equivalents at end of period | | Cash and cash equivalents at end of period | $ | 180.3 | | | $ | 55.9 | |
Refer to accompanying notes to Consolidated Financial Statements.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In millions)
| | | | Years Ended | | Years Ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 | | December 31, 2020 | | December 26, 2019 |
| Supplemental disclosure of non-cash financing and investing activity: | |
| | |
| | |
| Supplemental disclosure of non-cash financing and investing activity: | | | |
| Purchase of an intangible asset with NCM LLC equity | $ | 15.9 |
| | $ | 201.8 |
| | $ | 21.1 |
| Purchase of an intangible asset with NCM LLC equity | $ | 10.5 | | | $ | 7.6 | |
| Accrued distributions to founding members | $ | 27.9 |
| | $ | 37.6 |
| | $ | 39.9 |
| |
Accrued integration and other encumbered theater payments from founding members (including accrued payments due from related parties of $0.4, $0.0 and $0.0, respectively) | $ | 7.8 |
| | $ | 9.0 |
| | $ | — |
| |
Accrued distributions to founding members (including accrued payments due from related parties of $0.0 and $32.4, respectively) | | Accrued distributions to founding members (including accrued payments due from related parties of $0.0 and $32.4, respectively) | $ | 0 | | | $ | 32.4 | |
Accrued integration and other encumbered theater payments from founding members (including accrued payments due from related parties of $0.0 and $0.1, respectively) | | Accrued integration and other encumbered theater payments from founding members (including accrued payments due from related parties of $0.0 and $0.1, respectively) | $ | 0 | | | $ | 8.4 | |
| Purchase of subsidiary equity with NCM, Inc. equity | $ | — |
| | $ | 84.9 |
| | $ | — |
| Purchase of subsidiary equity with NCM, Inc. equity | $ | 0 | | | $ | 1.7 | |
| Accrued purchases of property and equipment | $ | 1.1 |
| | $ | 0.4 |
| | $ | — |
| Accrued purchases of property and equipment | $ | 1.2 | | | $ | 0.4 | |
| Increase in cost and equity method investments | $ | — |
| | $ | — |
| | $ | 2.0 |
| |
(Decrease) increase in dividend equivalent accrual not requiring cash in the period | $ | (1.4 | ) | | $ | (1.0 | ) | | $ | 0.3 |
| (Decrease) increase in dividend equivalent accrual not requiring cash
in the period | $ | (0.1) | | | $ | 0.1 | |
| Supplemental disclosure of cash flow information: | | | | | | Supplemental disclosure of cash flow information: | |
| Cash paid for interest | $ | 54.1 |
| | $ | 49.9 |
| | $ | 52.5 |
| Cash paid for interest | $ | 54.6 | | | $ | 54.3 | |
| Cash paid for income taxes, net of refunds | $ | 0.3 |
| | $ | (1.7 | ) | | $ | 0.5 |
| Cash paid for income taxes, net of refunds | $ | 0.5 | | | $ | 0.1 | |
Refer to accompanying notes to Consolidated Financial Statements.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | |
| 1. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
NCM, Inc. was incorporated in Delaware as a holding company with the sole purpose of becoming a member and sole manager of NCM LLC, a limited liability company owned by NCM, Inc., Cinemark, Regal and Regal.AMC. The terms “NCM”, “the Company” or “we” shall, unless the context otherwise requires, be deemed to include the consolidated entity.
The Company operates the largest cinema advertising network reaching movie audiences in North America,the U.S., allowing NCM LLC to sell advertising under long-term ESAs with the founding members and certain third-party theater circuitsnetwork affiliates, under long-term network affiliate agreements. Beginning in mid-March 2020, each of the Company’s founding members and all of its network affiliates announced that their theaters would be temporarily closed to address the COVID-19 Pandemic and almost all of the theaters within the Company’s network remained closed until late August 2020. The Company generated no in-theater advertising revenue for the period that the theaters were closed. On September 4, 2020, the Company resumed advertising within the theaters that were open in its network, however, in-theater advertising revenue continues to be adversely impacted as attendance remains lower than historical levels due to government restrictions including mandated patron capacity limitations and a continued lack of new major motion picture releases. In October 2020, Regal announced the re-closure of its theaters in the United States. As of December 31, 2020, 40.5% of the theaters within the Company’s network were open.
On September 17, 2019, NCM LLC entered into the 2019 ESA Amendments. The 2019 ESA Amendments extended the contract life of the ESAs with Cinemark and Regal by four years resulting in a weighted average remaining term of the ESAs with the founding members (based on pre-COVID-19 attendance levels) of approximately 18.7 as of December 31, 2020. The network affiliate agreements referred to in this documentexpire at various dates between March 31, 2021 and July 22, 2031. The weighted average remaining term (based on pre-COVID-19 attendance levels) of the ESAs and the network affiliate agreements together is 16.3 years as “network affiliates”, which have terms from one to twenty years.of December 31, 2020.
As of December 27, 2018,31, 2020, NCM LLC had 157,637,220162,572,146 common membership units outstanding, of which 76,976,398 (48.8%78,040,818 (48.0%) were owned by NCM, Inc., 41,142,178 (26.1%42,290,694 (26.0%) were owned by Regal, 39,518,64440,850,068 (25.1%) were owned by Cinemark and 0 (0.0%1,390,566 (0.9%) were owned by AMC. The membership units held by the founding members are exchangeable into NCM, Inc. common stock on a one-for-one1-for-one basis. On July 5, 2018, AMC closed on the sale of 100.0% of its remaining NCM LLC membership units to Cinemark and Regal.
Basis of Presentation
The Company has prepared its Consolidated Financial Statements and related notes of NCM, Inc. in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain reclassifications
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 to the prior years’ financial statements to conform to the current presentation (refer to the Consolidated Balance Sheet, whereby the Company presented prepaid expensesmade. The Company’s business is seasonal and for this and other assets as one line item and Note 7—Income Taxes, whereby a certain line item previously included within the 'Other' captionreasons operating results for interim periods may not be indicative of the income tax provision reconciliation was broken out separately due to its significance in 2018).
Company’s full year results or future performance. As a result of the various related-party agreements discussed in Note 9—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.
Advertising is the principal business activity of the Company and is the Company’s only reportable segment under the requirements of ASC 280 – Segment Reporting.
Estimates—The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to the reserve for uncollectible accounts receivable, share-based compensation and income taxes. Actual results could differ from those estimates.
Significant Accounting Policies
Accounting Period—The Company has a 52-week or 53-week fiscal year ending on the first Thursday after December 25. Fiscal years 2016, 2017year 2019 contained 52 weeks and 20182020 contained 5253 weeks. Throughout this document, the fiscal years are referred to as set forth below:
|
| | | | | | | |
| Fiscal Year Ended | | Reference in
this Document
|
December 27, 201831, 2020 | | 20182020 |
December 28, 201726, 2019 | | 2017 |
December 29, 2016 | | 20162019 |
Revenue Recognition—The Company derives revenue principally from the sale of advertising business, which includes on-screento national, regional and LENlocal businesses in Noovie®, our cinema advertising and lobbyentertainment pre-show seen on movie screens across the U.S., as well
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
as on our LEN, a series of strategically-placed screens located in movie theater lobbies, as well as other forms of advertising and promotions and advertising on websitesin theater lobbies. We also sell digital online and mobile applications owned by NCM LLCadvertising through our Noovie Audience Accelerator product and other companies. Revenue is recognized over time asacross our suite of Noovie digital properties, including Noovie.com, Noovie Shuffle, Name That Movie and Noovie Arcade, in order to reach entertainment audiences beyond the customer receivestheater. The Company also has a long-term agreement to exhibit the benefits provided by NCM LLC’s advertising services andof the Company has the right to payment for the performance to date.founding members’ beverage suppliers. The Company considers the terms of each arrangement to determine the appropriate accounting treatment as more fully discussed in Note 2—Revenue from Contracts with Customers.
Operating Costs—Advertising-relatedAdvertising fulfillment-related operating costs primarily include personnel and other costs related to advertising fulfillment, payments due to unaffiliated theater circuits under the network affiliate agreements, and to a lesser extent, production costs of non-digital advertising.
Payments to the founding members of a theater access fee is comprised of a payment per theater attendee, a payment for post-showtime advertising, a payment per digital screen and a payment per digital cinema projector equipped in the theaters, all of which escalate over time.time, and payment for revenue share of the Platinum Spot. Refer to
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” included elsewhere in this document.
Network costs include personnel, satellite bandwidth, repairs, and other costs of maintaining and operating the digital network and preparing advertising and other content for transmission across the digital network.
Advertising Costs—Advertising-related costs incurred promoting the Company's digital products are included within “Selling and marketing costs” on the audited Consolidated Statements of Income. The Company recognized advertising costs of $0.2 million and $1.2 million for the years ended December 31, 2020 and December 26, 2019, respectively. These costs are expensed when incurred.
Cash and Cash Equivalents—All highly liquid debt instruments and investments purchased with an original maturity of three months or less are classified as cash equivalents and are considered available-for-sale securities. There are cash balances in a bank in excess of the federally insured limits or in the form of a money market demand account with a major financial institution. The Company has elected the fair value option for valuing its cash equivalents. The cash equivalents are valued at fair value at each balance sheet date and the change in value from the prior period is recognized within “Other non-operating income (loss)” on the audited Consolidated Statements of Income.
Marketable Securities—The Company’s marketable securities are classified as available-for-sale and are reported at fair value. The fair value of substantially all securities is determined by quoted market information and pricing models using inputs based upon market information, including contractual terms, market prices and yield curves. The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market.
Concentration of Credit Risk and Significant Customers—Bad debts are providedThe risk of credit loss related to the Company's trade receivables and unbilled receivables balances is accounted for usingthrough the allowance for doubtful accounts, method based ona contra asset account which reduces the net receivables balance. The allowance for doubtful accounts balance is determined by pooling the Company's receivables with similar risk characteristics, specifically by type of customer (national or local/ regional) and then age of receivable, and applying historical experience and management’s evaluationwrite off percentages to these pools in order to determine the amount of outstanding receivables at the endexpected credit losses as of the period. Receivablesbalance sheet date. National receivables are written off when management determines amounts are uncollectible. Trade accounts receivable are uncollateralized and represent awith 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 havewith strong reputations in the advertising industry and clients with stable financial positions.positions and good credit ratings, represent larger receivables balances per customer and have significantly lower historical and expected credit loss patterns. Local and regional receivables are with smaller companies sometimes with less credit history and represent smaller receivable balances per customer and higher historical and expected credit loss patterns. The Company has smaller contracts with thousands ofmany local clients that are not individually significant. The Company also considers current economic conditions and trends to determine whether adjustments to historical loss rates are necessary. The Company increased the expected rate of default related to local and regional customers within the calculation of the allowance for doubtful accounts as of December 31, 2020, as compared to December 26, 2019, given the expected adverse impact of the COVID-19 Pandemic on certain businesses, in particular, categories of small businesses (e.g. restaurants, travel, etc.) which the Company expects could lead to an increased rate of default. The Company also reserves for specific receivable balances that it expects to write off based on known concerns regarding the financial health of the customer. Receivables are written off when management determines amounts are uncollectible. As of December 27, 2018 and December 28, 2017,31, 2020 there were nowas one advertising agency groups or individual customersgroup through which the Company sources national advertising revenue representingthat accounted for 10.1% of the Company’s outstanding gross receivable balance. As of December 26, 2019 there was 0 advertising agency group through which the Company sources national advertising revenue that accounted for more than 10% of the Company’s outstanding gross receivable balance. During the yearsyear ended December 27, 2018,31, 2020, the Company had 1 customer that accounted for 14.6% of the Company's revenue. During the year ended December 28, 2017 and December 29, 2016,26, 2019, there were no0 customers that accounted for more than 10% of revenue.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Receivables consisted of the following (in millions): | | | | | | | | | | | |
| | As of |
| | December 31, 2020 | | December 26, 2019 |
| Trade accounts | $ | 16.6 | | | $ | 176.0 | |
| Other | 1.9 | | | 1.0 | |
| Less: Allowance for doubtful accounts | (2.3) | | | (6.2) | |
| Total | $ | 16.2 | | | $ | 170.8 | |
|
| | | | | | | |
| | As of |
| | December 27, 2018 | | December 28, 2017 |
| Trade accounts | $ | 154.0 |
| | $ | 166.4 |
|
| Other | 1.9 |
| | 0.2 |
|
| Less: Allowance for doubtful accounts | (6.0 | ) | | (6.0 | ) |
| Total | $ | 149.9 |
| | $ | 160.6 |
|
Long-lived Assets—Property and equipment is stated at cost, net of accumulated depreciation or amortization. Generally, the equipment associated with the digital network of the founding member theaters is owned by the founding members, while the equipment associated with network affiliate theaters is owned by the Company. Major renewals and improvements are capitalized, while replacements, maintenance, and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. The Company records depreciation and amortization using the straight-line method over the following estimated useful lives:
|
| | | | |
| Equipment | 4-10 years |
| Computer hardware and software | 3-5 years |
| Leasehold improvements | Lesser of lease term or asset life |
Software and website development costs developed or obtained for internal use are accounted for in accordance with ASC 350—Internal Use Software and ASC 350– Website Development Costs. The subtopics require the capitalization of certain costs incurred in developing or obtaining software for internal use. Software costs related primarily to the Company’s inventory management systems, digital products, digital network distribution system (DCS), enterprise resource planning system and website development costs, which are included in equipment, and are depreciated over three to five years. As of December 27, 201831, 2020 and December 28, 2017,26, 2019, the Company had a net book value of $17.4$10.4 million and $16.5$14.1 million, respectively, of capitalized software and website development costs. Depreciation expense related to software and website development was approximately $6.7 million, $6.0$8.1 million and $3.9$8.4 million for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, respectively. The subtopics also require the capitalization of certain implementation costs related to qualifying Cloud Computing Arrangements (“CCAs”) upon adoption of ASU 2018-15— Intangibles - Goodwill and Other - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract as of September 28, 2018. As of December 31, 2020 and December 26, 2019 the Company had a net book value of $3.0 million and $0.6 million of capitalized implementation costs for CCAs, respectively. These costs primarily relate to the Company's new hosted end-to-end order management and scheduling system which was implemented in January 2021. Since December 31, 2020 and December 26, 2019 were prior to the implementation of the system, the gross value of the capitalized implementation costs were equal to the net book value. These costs will be amortized to “Administrative and other costs” within the audited Consolidated Statements of Income over the life of the hosting arrangement beginning at implementation. For the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, the Company recorded $1.7 million, $3.6$1.9 million and $3.4$3.6 million in research and development expense, respectively.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company assesses impairment of long-lived assets pursuant with ASC 360 – Property, Plant and Equipment. This includes determining if certain triggering events have occurred that could affect the value of an asset. The Company recorded losses of $0.5 million, $0.1$0.2 million and $0.2 million related to the write-off of property, plant and equipment during the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016, respectively. These balances have26, 2019, respectively, which has been included within depreciation expense“Depreciation expense” within the respective audited Consolidated Statements of Income given the immaterial nature of the balances. The Company recorded losses of $1.7 million and $0.0 million related to the write-off of certain internally developed software during the years ended December 31, 2020 and December 26, 2019, respectively, which has been included within “Impairment of long-lived assets” within the respective audited Consolidated Statements of Income.
Intangible assetsAssets—Intangible assets consist of contractual rights to provide its services within the theatersof the founding members and network affiliates and are stated at cost, net of accumulated amortization. The Company records amortization using the straight-line method over the contractual life of the intangibles, corresponding to the term of the ESAs orthe term of the contract with the network affiliate. Intangible assets are tested for impairment at least annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value may not be fully recoverable. In its impairment testing, the Company estimates the fair value of its ESAs or network affiliate agreements by determining the estimated future cash flows associated with the ESAs or network affiliate agreements. If after determining that gross cash flows are insufficient to recover the asset, the estimated fair value is less than the carrying value, the intangible asset is written down to its estimated fair value. Significant judgment is involved in estimating long-term cash flow forecasts. Refer to Note 5—Intangible Assets to the audited Consolidated Financial Statements for discussion of the Company's consideration of the impact of the COVID-19 Pandemic within the impairment testing performed over the Company's intangible assets during the year
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ended December 31, 2020. The Company has not recorded $0.2 million and $0.1 million, respectively, in impairment charges related to intangible assets.assets during the years ended December 31, 2020 and December 26, 2019. These losses have been included within “Depreciation expense” within the respective audited Consolidated Statements of Income given the immaterial nature of the activity.
The Company has elected to capitalize extension costs on its intangible assets and thus capitalized the legal and professional costs incurred in conjunction with the 2019 ESA Amendments. During the years ended December 31, 2020 and December 26, 2019, the Company capitalized $0.0 million and $1.3 million, respectively within the intangible asset balance related to extension costs.
Amounts Due to/from Founding Members—Amounts due to/from founding members include amounts due for the theater access fee,fees and revenue share, offset by a receivable for advertising time purchased by the founding members on behalf of their beverage concessionaire, plus any amounts outstanding under other contractually obligated payments. Payments to or received from the founding members against outstanding balances are made monthly. Available cash distributions are made quarterly.
Income Taxes—Income taxes are accounted for under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to be recovered or settled pursuant to the provisions of ASC 740 –Income Taxes. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records a valuation allowance if it is deemed more likely than not that all or a portion of its deferred income tax assets will not be realized, which will be assessed on an on-going basis. Only the portion of deferred income tax assets deemed more likely than not to be realized are considered within the calculation of the payable to the founding members under the TRA which is equal to 90% of the Company’s actual tax benefit realized from the tax amortization of the basis difference for qualifying deferred income tax assets. Refer to Note 7—Income Taxes to the audited Consolidated Financial Statements for discussion of changes within the Company's valuation allowance on its deferred tax assets during the year ended December 31, 2020.
In addition, income tax rules and regulations are subject to interpretation and the application of those rules and regulations require judgment by the Company and may be challenged by the taxation authorities. The Company follows ASC 740-10-25, which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. Only tax positions that meet the more likely than not recognition threshold are recognized. In addition, income tax rules and regulations are subject to interpretation and the application of those rules and regulations require judgment by the Company and may be challenged by the taxation authorities. The Company follows ASC 740-10-25, which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. Only tax positions that meet the more likely than not recognition threshold are recognized.
The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
Debt Issuance Costs—In relation to the issuance of outstanding debt discussed in Note 10—Borrowings, there is a balance of $12.8$11.3 million and $10.0$12.9 million in deferred financing costs as of December 27, 201831, 2020 and December 28, 2017,26, 2019, respectively. The debt issuance costs are being amortized on a straight-line basis over the terms of the underlying obligations and are included in interest on borrowings, which approximates the effective interest method. Debt issuance costs are written-off in the event that the underlying debt is extinguished through partial or full repayment of the obligation.
The changes in debt issuance costs are as follows (in millions): | | | | | | | | | | | |
| | Years Ended |
| | December 31, 2020 | | December 26, 2019 |
| Beginning balance | $ | 12.9 | | | $ | 12.8 | |
| Debt issuance costs | 0.9 | | | 4.6 | |
| Amortization of debt issuance costs | (2.5) | | | (2.6) | |
| Write-off of debt issuance costs | 0 | | | (1.9) | |
| Ending balance | $ | 11.3 | | | $ | 12.9 | |
|
| | | | | | | | | | | |
| | Years Ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 |
| Beginning balance | $ | 10.0 |
| | $ | 12.6 |
| | $ | 12.9 |
|
| Debt issuance payments | 6.4 |
| | — |
| | 4.8 |
|
| Amortization of debt issuance costs | (2.6 | ) | | (2.6 | ) | | (2.6 | ) |
| Write-off of debt issuance costs | (1.0 | ) | | — |
| | (2.5 | ) |
| Ending balance | $ | 12.8 |
| | $ | 10.0 |
| | $ | 12.6 |
|
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-Based Compensation— Through 2012,During 2020 and 2019, the Company issued stock options, restricted stock and restricted stock units. Since 2013, the Company has only issued restricted stock and restricted stock units. Restricted stock and restricted stock units vest upon the achievement of Company three-yearthree-year cumulative performance measures and service conditions or only service conditions. The Company recognizes share-based compensation net of an estimated forfeiture rate. Compensation expense of restricted stock and restricted stock units that vestsvest upon the achievement of Company performance measures is basedon 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 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.
Compensation cost of stock options is based on the estimated grant date fair value using the Black-Scholes option pricing model, which requires that the Company make estimates of various factors. Under the fair value recognition provisions of ASC 718 Compensation – Stock Compensation,, the Company recognizes share-based compensation net of an estimated forfeiture rate, and therefore only recognizes compensation cost for those shares expected to vest over the requisite service period of the award. Refer to Note 11—Share-Based Compensation for more information.
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.
Consolidation—NCM, Inc. consolidates the accounts of NCM LLC under the provisions of ASC 810,Consolidation(“ASC 810”). Under Accounting Standards Update 2015-2, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-2”), a limited partnership is a variable interest entity unless a simple majority or lower threshold of all limited partners unrelated to the general partner have kick-out or 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 has concluded that the various rights of the non-managing members are not substantive participating rights under ASC 810, as they do not limit NCM, Inc.’s ability to make decisions in the ordinary course of business. As such, the Company concluded that NCM LLC is a variable interest entity and determined that NCM, Inc. should consolidate the accounts of NCM LLC pursuant to ASU 2015-2 because 1) it has the power to direct the activities of NCM LLC in its role as managing member and 2) NCM, Inc. has the obligation to absorb losses of, or the right to receive benefits from, NCM LLC that could potentially be significant provided its 48.8%48.0% ownership in NCM LLC. Prior to the prospective adoption of ASU 2015-2 in the first quarter of 2016, the Company reached the same conclusion under previous guidance in ASC 810 to consolidate NCM LLC.
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): | | | | | | | | | | | |
| | Years Ended |
| | December 31, 2020 | | December 26, 2019 |
| Net (loss) income attributable to NCM, Inc. | $ | (65.4) | | | $ | 36.1 | |
| NCM LLC equity issued for purchase of intangible asset | 5.0 | | | 3.7 | |
| Income tax and other impacts of NCM LLC ownership changes | (3.9) | | | (0.7) | |
| NCM, Inc. investment in NCM LLC | 0 | | | (1.7) | |
| Issuance of shares to founding members | 0 | | | 1.7 | |
Change from net (loss) income attributable to NCM, Inc. and transfers from
noncontrolling interests | $ | (64.3) | | | $ | 39.1 | |
|
| | | | | | | | | | | |
| | Years Ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 |
| Net income attributable to NCM, Inc. | $ | 29.8 |
| | $ | 58.3 |
| | $ | 32.9 |
|
| NCM LLC equity issued for purchase of intangible asset | 7.7 |
| | 78.8 |
| | 9.2 |
|
Income tax and other impacts of NCM LLC ownership changes | 7.0 |
| | 28.6 |
| | (3.7 | ) |
| NCM, Inc. investment in NCM LLC | — |
| | (84.9 | ) | | — |
|
| Issuance of shares to founding members | — |
| | 84.7 |
| | — |
|
Change from net income attributable to NCM, Inc. and transfers from noncontrolling interests | $ | 44.5 |
| | $ | 165.5 |
| | $ | 38.4 |
|
Recently Adopted Accounting Pronouncements
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting Pronouncements
During the first quarter of 2018,2020, the Company adopted Accounting Standards Update 2014-9, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-9”) using the modified retrospective transition method. The Company identified the same performance obligations under ASU 2014-9 as compared with deliverables and separate units of account previously identified. ASU 2014-9 impacted the accounting for barter transactions where the Company exchanges advertising time for products and services used principally for selling and marketing activities. The Company historically recognized revenue for these transactions at the estimated fair value of the advertising exchanged based on the fair value received for similar advertising from cash paying customers. In accordance with the new guidance, the Company recognized revenue for these transactions based upon the fair value of the products and services received, rather than the value of the advertising provided. The modified retrospective transition method allows entities to apply the new revenue standard prospectively and record a cumulative-effect adjustment to the opening balance of retained earnings in the period the new revenue standard is first applied. The Company elected to apply the new revenue standard only to contracts that were not completed as of the adoption date. Upon the adoption of ASU 2014-9 on December 29, 2017, the Company recorded a $0.2 million cumulative-effect adjustment related to the change in accounting for barter transactions on contracts that were not completed as of December 29, 2017 in the audited Consolidated Balance Sheet. The Company’s adoption of ASU 2014-9 did not have a material impact on the audited Consolidated Financial Statements. The Company has incorporated additional disclosures in Note 2—Revenue from Contracts with Customers to comply with ASU 2014-9.
During the first quarter of 2018, the Company adopted Accounting Standards Update 2016-1, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-1”), which requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in earnings (rather than reported through other comprehensive income) and updates certain presentation and disclosure requirements. In February 2018, the FASB issued Accounting Standards Update 2018-3, Technical Corrections and Improvements to2016-13, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2018-3”). These amendments clarify the guidance on certain topics referred to in ASU 2016-1. The Company has incorporated changes to the methodology utilized to value the Company’s investments and changes to disclosures in its notes to the audited Consolidated Financial Statements to comply with ASU 2016-1.
During the first quarter of 2018, the Company adopted Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) on a retrospective basis. ASU 2016-15 provides guidance on certain cash receipts and cash payments presented and classified in the statement of cash flows. The adoption of ASU 2016-15 did not have a material impact on the audited Consolidated Financial Statements or notes thereto.
During the first quarter of 2018, the Company adopted Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”) on a retrospective basis. ASU 2016-18 requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include restricted cash and restricted cash equivalents. The Company has adjusted the audited Consolidated Statement of Cash Flow for the years ended December 27, 2018, December 28, 2017, and December 29, 2016 to include the restricted cash balance within the aforementioned captions. The adoption of ASU 2016-18 had no other impact on the audited Consolidated Financial Statements or notes thereto.
During the first quarter of 2018, the Company adopted Accounting Standards Update 2018-4, Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (“ASU 2018-04”), which amends and supersedes various paragraphs that contain SEC guidance in ASC 320, Investments-Debt Securities and ASC 980, Regulated Operations specifically surrounding other than temporary impairments. The ASU was effective upon issuance. The adoption of ASU 2018-4 did not have a material impact on the audited Consolidated Financial Statements or notes thereto.
During the third quarter of 2018, the Company adopted Accounting Standards Update 2018-9, Codification Improvements ("ASU 2018-9”), which made minor amendments to the codification in order to clarify, correct errors in, eliminate inconsistencies and provide clarifications in current guidance. The ASU amends Subtopics 470-50, Debt-Modifications and Extinguishments and 718-740, Compensation-Stock Compensation-Income Taxes and was effective immediately. The adoption of ASU 2018-9 did not have a material impact on the audited Consolidated Financial Statements or notes thereto.
During the fourth quarter of 2018, the Company adopted Accounting Standards Update 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company early adopted ASU 2018-15 in the fourth quarter of 2018. The adoption of ASU 2018-15 did not have a material impact on the audited Consolidated Financial Statements or notes thereto.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the fourth quarter of 2018, the Company adopted a final rule issued by the SEC amending certain disclosure requirements deemed by the commission to be redundant, duplicative, overlapping, outdated or superseded. The rule also added requirements to disclose (1) the changes in each caption of stockholders’ equity and non-controlling interests for the current and comparative year-to-date periods, with subtotals for each interim period and (2) the amount of dividends per share for each class of shares. The Company believes that adopting the guidance will result in changes to the presentation of the audited Consolidated Statement of Equity as a quarter to date equity rollforward is now also required for the current and comparable period. The Company has implemented the annual amended disclosure requirements and will implement the quarterly amended disclosure requirements in the first quarter of 2019.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update 2016-2, Leases (Topic 842) (“ASU 2016-2”). ASU 2016-2 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Under the original standard, a modified retrospective transition approach was required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued Accounting Standards Update 2018-11 which allows companies to elect the “Comparatives Under 840” option where only the current period financial statements and related disclosures are presented in accordance with the new standard. The Company is still evaluating which transition approach to apply upon adoption. The Company expects to utilize the following practical expedients: (i) not being required to separate lease and nonlease components when accounting for the lease; and (ii) not accounting for short-term leases under the new standard. The Company is still evaluating the impact of the adoption of ASU 2016-2 on the ESA and affiliate agreements, and thus, whether it will have a material impact on the audited Consolidated Financial Statements. The Company will adopt the standard and its provisions effective December 28, 2018 and will incorporate additional disclosures in its notes to its audited Consolidated Financial Statements to comply with ASU 2016-2 effective in the first quarter of 2019. The Company has designed and will implement changes to certain processes and internal controls upon the adoption of ASU 2016-2.
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. Upon the adoption of ASU 2016-13 on December 27, 2019, the Company recorded a $3.2 million cumulative-effect adjustment to retained earnings related to the change in methodology surrounding the historical losses utilized in the calculation of the allowance for credit losses related to trade and unbilled accounts receivable reducing the allowance to $3.0 million as of the adoption date. The Company also recorded a corresponding $0.4 million reduction to the corresponding deferred tax asset with the offset also recorded to retained earnings. The other impacts upon adoption were immaterial to the audited Consolidated Financial Statements. The Company has incorporated additional disclosures in Note 1—The Company, Note 2—Revenue from Contracts with Customers and Accounts Receivable and Note14—Fair Value Measurements to its audited Consolidated Financial Statements to comply with ASU 2016-13. The Company has also designed and implemented changes to certain processes and internal controls related to its adoption of ASU 2016-13.
During the first quarter of 2020, the Company adopted Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements. The Company adoption of ASU 2018-13 did not have a material impact on the audited Consolidated Financial Statements or notes thereto.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which removes the following exceptions for the Company to analyze in a given period; the exception to the incremental approach for intraperiod tax allocation; the exception to accounting for basis differences when there are ownership changes in foreign investments; and the exception in interim periods income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 is effective for fiscal years beginning after December 15, 2019,2020, including interim periods within those fiscal years, with early adoption permitted and is to be adopted on a modified retrospective basis.permitted. The Company is currently evaluating the impact that adopting this guidance will have on the audited Consolidated Financial Statements or notes thereto.
In June 2018,March 2020, the FASB issued Accounting Standards Update 2018-7, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment AccountingNo. 2020-04, Reference Rate Reform (“ASU 2018-7”2020-04”), which amends Topic 718provides temporary optional guidance to include share-based paymentcompanies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions for acquiring goods and services from nonemployees. ASU 2018-7that reference LIBOR as a benchmark rate are modified. This guidance is effective for fiscal years beginningupon issuance and expires on December 15, 2018, with early adoption permitted.31, 2022. The Company does not expectis currently assessing the adoptionimpact of the LIBOR transition and ASU 2018-07 to have a material impact2020-04 on the Company’s audited Consolidated Financial Statements.
In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with partial early adoption permitted for eliminated disclosures. The method of adoption varies by the disclosure. The Company is currently evaluating the impact that adopting this guidance will have on the audited Consolidated Financial Statements or notes thereto.
The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its audited Consolidated Financial Statements or notes thereto.
Change in Accounting Principle
During the first quarter of 2018, the Company changed its method of accounting for its payable to founding members under the TRA, which requires the Company to pay to the founding members 90% of the expected cash savings of NCM, Inc. from federal, state, and local jurisdictions upon realization of amortization and other deductions specified under the TRA. At inception of the TRA in 2007, the payable was recorded at fair value by discounting the amounts expected to be payable to founding members under the TRA at the Company’s weighted average cost of capital. The Company then remeasured the present value of the payable to founding members under the TRA each subsequent reporting period.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the change in accounting principle, the payable is now stated at the undiscounted amount of all expected future payments under the agreement. The Company believes that the undiscounted presentation is preferable because it is consistent with the predominant accounting method used by other companies with such tax receivable agreements and is more consistent with the undiscounted approach used for the corresponding deferred tax assets that are subject to the TRA. Accordingly, the Consolidated Balance Sheets, Consolidated Statements of Income, Statements of Equity (Deficit) and Consolidated Statement of Cash Flows for the respective prior periods have been recast to reflect retrospective application of the change in accounting principle. Since this change in accounting principle dates back to the Company’s initial public offering ("IPO") in 2007, the Company has recorded the cumulative effect for the change in accounting principle to beginning retained earnings as of December 29, 2016.
The audited Consolidated Financial Statements and corresponding footnotes for the prior periods have been recast from the amounts previously reported to reflect the change in accounting principle as shown within the tables below.
The following table presents the effect of the change in accounting principle to the December 29, 2016 beginning retained earnings balance and additional paid in capital (deficit) ("APIC") balance (in millions):
|
| | | |
| Beginning retained earnings (distributions in excess of earnings), as of December 29, 2016 – as previously reported | $ | (248.3 | ) |
| Cumulative effect for change in accounting principle | 117.6 |
|
| Beginning retained earnings, as of December 29, 2016 – as adjusted | $ | (130.7 | ) |
|
| | | |
| Beginning additional paid in capital (deficit), as of December 29, 2016 – as previously reported | $ | (110.5 | ) |
| Cumulative effect for change in accounting principle | (233.1 | ) |
| Beginning additional paid in capital (deficit), as of December 29, 2016 – as adjusted | $ | (343.6 | ) |
The following table presents the effects of the change in accounting principle to the audited Consolidated Balance Sheet (in millions): |
| | | | | | | | | | | |
| | December 28, 2017 |
| | As Reported | | Change in Accounting Principle | | As Adjusted |
| Long-term deferred tax assets, net of valuation allowance of $98.1 | $ | 161.0 |
| | $ | 25.0 |
| | $ | 186.0 |
|
| TOTAL ASSETS | 1,148.1 |
| | 25.0 |
| | 1,173.1 |
|
| Long-term payable to founding members under the TRA | 114.0 |
| | 98.6 |
| | 212.6 |
|
| Total liabilities | 1,149.3 |
| | 98.6 |
| | 1,247.9 |
|
| Additional paid in capital (deficit) | 13.8 |
| | (246.9 | ) | | (233.1 | ) |
| Retained earnings (distributions in excess of earnings) | (303.5 | ) | | 173.3 |
| | (130.2 | ) |
| Total equity/(deficit) | (1.2 | ) | | (73.6 | ) | | (74.8 | ) |
| TOTAL LIABILITIES AND EQUITY/DEFICIT | 1,148.1 |
| | 25.0 |
| | 1,173.1 |
|
The following tables present the effects of the change in accounting principle to the audited Consolidated Statements of Income for the years ended December 28, 2017 and December 29, 2016 (in millions, except for per share data):
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | Year Ended |
| | December 28, 2017 |
| | As Reported | | Change in Accounting Principle | | As Adjusted |
| Accretion of interest on the discounted payable to founding members under the TRA | $ | 18.5 |
| | $ | (18.5 | ) | | $ | — |
|
| Gain on re-measurement of the payable to founding members under the TRA | (103.6 | ) | | (88.6 | ) | | (192.2 | ) |
| Total non-operating expenses | (33.8 | ) | | (107.1 | ) | | (140.9 | ) |
| INCOME BEFORE INCOME TAXES | 187.7 |
| | 107.1 |
| | 294.8 |
|
| Income tax expense | 129.0 |
| | 51.3 |
| | 180.3 |
|
| CONSOLIDATED NET INCOME | 58.7 |
| | 55.8 |
| | 114.5 |
|
| NET INCOME ATTRIBUTABLE TO NCM, INC. | 2.5 |
| | 55.8 |
| | 58.3 |
|
| | | | | | |
| NET INCOME PER NCM, INC. COMMON SHARE: | | | | | |
| Basic | $ | 0.04 |
| | $ | 0.85 |
| | $ | 0.89 |
|
| Diluted | $ | 0.02 |
| | $ | 0.46 |
| | $ | 0.48 |
|
|
| | | | | | | | | | | |
| | Year Ended |
| | December 29, 2016 |
| | As Reported | | Change in Accounting Principle | | As Adjusted |
| Accretion of interest on the discounted payable to founding members under the TRA | $ | 19.6 |
| | $ | (19.6 | ) | | $ | — |
|
| Loss on re-measurement of the payable to founding members under the TRA | 1.0 |
| | 0.2 |
| | 1.2 |
|
| Total non-operating expenses | 83.5 |
| | (19.4 | ) | | 64.1 |
|
| INCOME BEFORE INCOME TAXES | 89.5 |
| | 19.4 |
| | 108.9 |
|
| Income tax expense | 7.5 |
| | 6.9 |
| | 14.4 |
|
| CONSOLIDATED NET INCOME | 82.0 |
| | 12.5 |
| | 94.5 |
|
| NET INCOME ATTRIBUTABLE TO NCM, INC. | 20.4 |
| | 12.5 |
| | 32.9 |
|
| | | | | | |
| NET INCOME PER NCM, INC. COMMON SHARE: | | | | | |
| Basic | $ | 0.34 |
| | $ | 0.21 |
| | $ | 0.55 |
|
| Diluted | $ | 0.34 |
| | $ | 0.20 |
| | $ | 0.54 |
|
The following table presents the effects of the change in accounting principle to the audited Consolidated Statements of Cash Flow for the years ended December 28, 2017 and December 29, 2016 (in millions): |
| | | | | | | | | | | |
| | Year Ended |
| | December 28, 2017 |
| | As Reported | | Change in Accounting Principle | | As Adjusted |
| Consolidated net income | $ | 58.7 |
| | $ | 55.8 |
| | $ | 114.5 |
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | | | | | |
| Deferred income tax expense | 130.6 |
| | 51.3 |
| | 181.9 |
|
Accretion of interest on the discounted payable to founding
members under the TRA | 18.5 |
| | (18.5 | ) | | — |
|
Non-cash gain on re-measurement of the payable to
founding members under the TRA | (103.6 | ) | | (88.6 | ) | | (192.2 | ) |
| Net cash provided by operating activities | 138.9 |
| | — |
| | 138.9 |
|
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | Year Ended |
| | December 29, 2016 |
| | As Reported | | Change in Accounting Principle | | As Adjusted |
| Consolidated net income | $ | 82.0 |
| | $ | 12.5 |
| | $ | 94.5 |
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | | | | | |
| Deferred income tax expense | 9.8 |
| | 6.9 |
| | 16.7 |
|
Accretion of interest on the discounted payable to founding
members under the TRA | 19.6 |
| | (19.6 | ) | | — |
|
Non-cash gain on re-measurement of the payable to
founding members under the TRA | 1.0 |
| | 0.2 |
| | 1.2 |
|
| Net cash provided by operating activities | 133.5 |
| | — |
| | 133.5 |
|
The change in accounting principle resulted in a decrease of $13.9 million and $0.7 million within the activity and a decrease of $246.9 million and $233.0 million in the ending balance of the additional paid in capital (deficit) balance for the years ended December 28, 2017 and December 29, 2016, respectively. These adjustments were within the ‘Income tax and other impacts of NCM LLC ownership changes’ line of the audited Consolidated Statements of Equity included herein.
|
| | | | |
| 2. | REVENUE FROM CONTRACTS WITH CUSTOMERS |
Revenue Recognition
The Company derives revenue principally from the sale of advertising to national, regional and local businesses in Noovie, the Company’sNoovie®, our cinema advertising and entertainment pre-show. The Company also sells advertising throughpre-show seen on movie screens across the U.S., as well as on our LEN, a series of strategically-placed screens located in movie theater lobbies, as well as other forms of advertising and promotions in theater lobbies. In addition, the Company sellsWe also sell digital online and mobile advertising through our Noovie Audience Accelerator product and across our suite of Noovie digital properties, including Noovie.com, Noovie Shuffle, Name That Movie and Noovie Arcade, in order to reach entertainment audiences beyond the Cinema Accelerator digital product.theater. The Company also has a long-term agreement to exhibit the advertising of the founding members’ beverage suppliers.
National and regional advertising, including advertising under the beverage concessionaire and PSA agreements, are sold on a CPM basis. The Company recognizes national and regional advertising over time as impressions (or theater attendees) are delivered. National advertising is also sold to content partners. The content partners provide the Company with original entertainment content segments, typically 90 seconds in length, that are entertaining, informative, or educational in nature in the Noovie pre-show and they make commitments to buy a portion of the Company’s advertising inventory at a specified CPM. The Company recognizes revenue for the content segments ratably over time as the content segments air. Local advertising is sold on a per-screen, per-week basis and to a lesser extent on a CPM basis. The Company recognizes local on-screen advertising revenue over the period in which the advertising airs as dictated by the underlying sales contracts. When sold
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
separately, LEN advertising and lobby promotions are sold based on length and breadth of the promotion. The Company recognizes revenue derived from lobby network and promotions over time when the advertising is displayed in theater lobbies. The Company sells online and mobile advertising on a CPM basis. The Company recognizes revenue from branded entertainment websites and mobile applications over time as the online or mobile impressions are served.
Customer contracts often include multiple advertising services to reach the moviegoer at multiple points during a theater experience. The Company considers each of these advertising services to represent distinct performance obligations of the contract and allocates a portion of the transaction price to each service based upon the standalone selling price of the service, when available. When standalone selling prices are not available or not applicable given the nature of the customer, the Company allocates the transaction price based upon all information that is reasonably available and maximizes the use of observable inputs. Methods utilized include the adjusted market and expected cost-plus margin approaches.
The Company enters into barter transactions that exchange advertising program time for products and services used principally for selling and marketing activities. The Company records barter transactions at the estimated fair value of the products and services received. Revenue for advertising barter transactions areis recognized when advertising is provided, and products and services received are charged to expense when used. Revenue from barter transactions for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 201626, 2019 was $5.9 million, $0.8$0.6 million and $2.5$1.8 million, respectively. Expense recorded from barter transactions for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 201626, 2019 was $5.0 million, $1.4$0.1 million and $2.3$2.1 million, respectively.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This expense is included within “Selling and marketing costs” on the audited Consolidated Statements of Income.
The Company makes contractual guarantees to deliver a specified number of impressions to view the customers’ advertising. If the contracted number of impressions are not delivered, the Company will run additional advertising to deliver the contracted impressions at a later date. The deferred portion of the revenue associated with undelivered impressions is referred to as a make-good provision. In rare cases, the Company will make a cash refund of the portion of the contract related to the undelivered impressions. Given the limited history of cash settlements of the make-good provision, the Company recognizes revenue on the guaranteed contracts as the impressions are delivered and no reserve for variable consideration is recorded. The Company defers the revenue associated with the make-good until the advertising airs to the theater attendance specified in the advertising contract. The make-good provision is recorded within accrued expenses in“Accrued expenses” on the audited Consolidated Balance Sheets. As of December 27, 201831, 2020 and December 28, 2017,26, 2019, the Company had a make-good provision of $8.0$7.1 million and $5.5$8.7 million, respectively.
The Company recognizes revenue as the performance obligation for the advertising services is satisfied. Invoices are generated following the processing of each revenue contract and payment is due from the customer within 30 days of the invoice date. Customers select to pay the invoice in full at the start of a contract or through equal monthly installments over the course of the contract. The Company records deferred revenue when cash payments are received, or invoices are issued, in advance of revenue being earned. Deferred revenue is classified as a current liability as it is expected to be earned within the next twelve months.
The Company has certaindoes not have any contracts with two-year terms in excess of one year that are noncancelable following a specified date within the contract period. The estimated revenue expected to be recognized in the future related to these contracted performance obligations that are unsatisfied (or partially unsatisfied) as of December 27, 2018, was $60.3 million, which is expected to be recognized in 2019.31, 2020. Agreements with a duration less than one year are not included within this disclosure as the Company elected to use the practical expedient in ASC 606-10-50-14 for those contracts. In addition, other of the Company’s contracts longer than one year that are cancelable are not included within this disclosure.
Disaggregation of Revenue
The Company disaggregates revenue based upon the type of customer: national; local and regional; and beverage concessionaire. This method of disaggregation is in alignment with how revenue is reviewed by management and discussed with and historically disclosed to investors.
The following table summarizes revenue from contracts with customers for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016:26, 2019:
| | | | | | | | | | | |
| Years ended |
| December 31, 2020 | | December 26, 2019 |
| National and regional advertising revenue | $ | 66.7 | | | $ | 348.9 | |
| Local advertising revenue | 17.5 | | | 66.9 | |
| Founding member advertising revenue from beverage concessionaire agreements | 6.2 | | | 29.0 | |
| Total revenue | $ | 90.4 | | | $ | 444.8 | |
|
| | | | | | | | | | | |
| | Years ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 |
| National advertising revenue | $ | 312.0 |
| | $ | 296.3 |
| | $ | 311.9 |
|
| Local and regional advertising revenue | 98.0 |
| | 99.9 |
| | 107.0 |
|
| Founding member advertising revenue from beverage concessionaire agreements | 31.4 |
| | 29.9 |
| | 28.7 |
|
| Total revenue | $ | 441.4 |
| | $ | 426.1 |
| | $ | 447.6 |
|
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Revenue and Unbilled Accounts Receivable
The changes in deferred revenue for the year ended December 27, 201831, 2020 were as follows (in millions):
|
| | | |
| | Year ended |
| | December 27, 2018 |
| Balance at beginning of period | $ | (7.1 | ) |
| Performance obligations satisfied | 7.1 |
|
| New contract liabilities | (7.3 | ) |
| Balance at end of period | $ | (7.3 | ) |
| | | | | |
| Year ended |
| December 31, 2020 |
| Balance at beginning of year | $ | (7.6) | |
| Performance obligations satisfied | 7.6 | |
| New contract liabilities | (5.1) | |
| Balance at end of year | $ | (5.1) | |
Unbilled accounts receivable is classified as a current asset as it is expected to be billed within the next twelve months. As of December 27, 201831, 2020 and December 28, 2017,26, 2019, the Company had $6.0$2.5 million and $10.6$8.0 million, respectively, in unbilled accounts receivable, included within the accounts receivable balance.
Practical Expedients and Exemptions
The Company expenses sales commissions when incurred as the amortization period would have been one year or less. These costs are recorded within sales“Selling and marketing expensescosts” in the audited Consolidated Statement of Income.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
|
| | | | |
| 3. | (LOSS) EARNINGS PER SHARE |
Basic earningsloss per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earningsloss per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of potentially dilutive common stock options, restricted stock, and exchangeable NCM LLC common units using the treasury stock method. The components of basic and diluted earningsloss per NCM, Inc. share are as follows: | | | | | | | | | | | |
| | Years Ended |
| | December 31, 2020 | | December 26, 2019 |
| Net income attributable to NCM, Inc. (in millions) | $ | (65.4) | | | $ | 36.1 | |
| | | |
| Weighted average shares outstanding: | | | |
| Basic | 77,955,675 | | | 77,345,577 | |
Add: Dilutive effect of stock options, restricted stock, and exchangeable NCM LLC common membership units | 0 | | | 436,990 | |
| Diluted | 77,955,675 | | | 77,782,567 | |
| Earnings per NCM, Inc. share: | | | |
| Basic | $ | (0.84) | | | $ | 0.47 | |
| Diluted | $ | (0.84) | | | $ | 0.46 | |
|
| | | | | | | | | | | |
| | Years Ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 |
| Net income attributable to NCM, Inc. (in millions) | $ | 29.8 |
| | $ | 58.3 |
| | $ | 32.9 |
|
Net income attributable to NCM, Inc. following conversion of dilutive membership units (net of estimated taxes of $22.2, $42.5, and $0.0) | $ | 58.0 |
| | $ | 72.0 |
| | $ | 32.9 |
|
| Weighted average shares outstanding: | | | | | |
| Basic | 76,859,087 |
| | 65,226,817 |
| | 59,788,026 |
|
Add: Dilutive effect of stock options, restricted stock, and exchangeable NCM LLC common membership units | 80,544,823 |
| | 85,840,453 |
| | 817,544 |
|
| Diluted | 157,403,910 |
| | 151,067,270 |
| | 60,605,570 |
|
| Earnings per NCM, Inc. share: | | | | | |
| Basic | $ | 0.39 |
| | $ | 0.89 |
| | $ | 0.55 |
|
| Diluted | $ | 0.37 |
| | $ | 0.48 |
| | $ | 0.54 |
|
The diluted weighted average shares outstanding assumes the conversion of all founding member common units to NCM, Inc. shares for the years ended December 27, 2018 and December 28, 2017. Upon the conversion of all common units, all of consolidated NCM LLC net income would be attributable to NCM, Inc. and thus has been utilized as the numerator of the diluted EPS calculation. Consolidated NCM LLC net income has been tax effected utilizing NCM, Inc.’s effective tax rates of 44.1% and 75.6% for the years ended December 27, 2018 and December 28, 2017, respectively. The effect of the 77,020,68683,903,921 and 81,450,384 exchangeable NCM LLC common membership units held by the founding members for the yearyears ended December 29, 201631, 2020 and December 26, 2019, respectively, was excluded from the calculation of diluted weighted average shares and earnings per NCM, Inc. share as it was antidilutive in that period. NCM LLC common membership units do not participate in dividends paid on NCM, Inc.’s common shares. In addition, there were 2,141,535, 2,583,1965,193,200 and 16,6572,568,418, stock options and non-vested (restricted) shares for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, respectively, excluded from the calculation as they were antidilutive, primarily because exercise prices associated with those shares were above the average market value.antidilutive. The Company’s non-vested (restricted) shares do not meet the definition of a participating security as the dividends will not be paid if the shares do not vest.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of property and equipment, at cost less accumulated depreciation (in millions): | | | | | | | | | | | |
| | As of |
| | December 31, 2020 | | December 26, 2019 |
| Equipment, computer hardware and software | $ | 94.0 | | | $ | 93.5 | |
| Leasehold improvements | 2.9 | | | 2.4 | |
| Less: Accumulated depreciation | (77.7) | | | (70.7) | |
| Subtotal | 19.2 | | | 25.2 | |
| Construction in progress | 8.3 | | | 8.0 | |
| Total property and equipment | $ | 27.5 | | | $ | 33.2 | |
|
| | | | | | | |
| | As of |
| | December 27, 2018 | | December 28, 2017 |
| Equipment, computer hardware and software | $ | 90.8 |
| | $ | 92.9 |
|
| Leasehold improvements | 2.4 |
| | 4.0 |
|
| Less: Accumulated depreciation | (62.5 | ) | | (70.4 | ) |
| Subtotal | 30.7 |
| | 26.5 |
|
| Construction in progress | 2.9 |
| | 4.2 |
|
| Total property and equipment | $ | 33.6 |
| | $ | 30.7 |
|
For the years ended December 27, 2018, December 28, 2017 and December 29, 2016, the Company recorded depreciation expense of $12.6 million, $10.9 million, and $8.6 million, respectively.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s intangible assets consist of contractual rights to provide its services within the theaters of the founding members and network affiliates. The Company records amortization using the straight-line method over the contractual life of the intangibles, corresponding to the term of the ESAs or the term of the contract with the network affiliate. The Company’s intangible assets with the 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. The Company also records intangible assets for upfront fees paid to network affiliates upon commencement of a network affiliate agreement. Pursuant to ASC 350-10—Intangibles—Goodwill and Other, 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 contract with the network affiliate. The Company extended the useful life of the intangible asset for Cinemark and Regal in 2019 following the extension of the ESA term in conjunction with the 2019 ESA Amendments. There was no impact to the Payable to founding members under tax receivable agreement as the useful life of the intangible assets were not deemed to be extended for tax purposes and there were no changes made to the tax receivable agreements.
The Company determined that recent adverse changes in macroeconomic trends, reduced cash flows as a consequence of the temporary closure of the theaters within the Company's network in response to the outbreak of the COVID-19 Pandemic, a decline in the fair value of NCM LLC’s debt and the further sustained decline in the market price of NCM, Inc.’s common stock constituted a triggering event for its intangible assets under Accounting Standards Certification No. 360, Impairment and Disposal of Long-Lived Assets during 2020. In its impairment analysis, management considered possible scenarios in a probability-weighted estimated future undiscounted cash flow analysis, including the potential of further delays in major motion picture releases, a recurrence of the temporary theater closures and other potential adverse impacts to NCM LLC’s founding members’ and affiliates’ financial liquidity related to the COVID-19 Pandemic. The estimated future cash flows from the affiliate agreements and ESAs calculated within the probability-weighted analyses were in excess of the net book value of these intangible assets and no impairment charges were recorded in 2020. Such analysis required management to make estimates and assumptions based on historical data and consideration of future market conditions. Given the uncertainty inherent in any projection, heightened by the possibility of unforeseen additional effects of the COVID-19 Pandemic, including potential adverse impacts to NCM LLC’s founding members’ and affiliates’ financial liquidity, actual results may differ from the estimates and assumptions used, or conditions may change, which could result in impairment charges in the future.
Common Unit Adjustments—In accordance with NCM LLC’s Common Unit Adjustment Agreement with its founding members, on an annual basis NCM LLC determines the amount of common membership units to be issued to or returned by the founding members based on theater additions or dispositions during the previous year. In addition, NCM LLC’s Common Unit Adjustment Agreement requires that a Common Unit Adjustment occur for a specific founding member if its acquisition or disposition of theaters, in a single transaction or cumulatively since the most recent Common Unit Adjustment, results in an attendance increase or decrease in excess of two percent of the annual total attendance at the prior adjustment date.
Integration Payments and Other Encumbered Theater Payments—If an existing on-screen advertising agreement with an alternative provider is in place with respect to any acquired theaters, the founding members may elect to receive common membership units related to those encumbered theaters in connection with the Common Unit Adjustment. If the founding members make this election, then they are required to make payments on a quarterly basis in arrears in accordance with certain run-out provisions pursuant to the ESAs (“integration payments”). Because the Carmike and RaveCinemas, Inc. (“Carmike”) theaters acquired by AMC are subject to an existing on-screen advertising agreement with an alternative provider, AMC and Cinemark will make integration payments to NCM LLC. The integration payments will continue until the earlier of (i) the date the theaters are transferred to NCM LLC’s network or (ii) the expiration of the ESA. In 2019, AMC and Cinemark also made integration payments to NCM LLC related to their respective acquisitions of theaters from Rave Cinemas. The advertising agreements with
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
an alternative provider for these theaters ended during 2019 and the theaters were transferred to our network. Integration payments are no longer due related to these theaters. Integration payments are calculated based upon the advertising cash flow that the Company would have generated if it had exclusive access to sell advertising in the theaters with pre-existing advertising agreements. The ESA additionally entitles NCM LLC to payments related to the founding members’ on-screen advertising commitments under their beverage concessionaire agreements for encumbered theaters (“encumbered theater payments”). These payments are also accounted for as a reduction to the intangible asset. If common membership units are issued to a founding member for newly acquired theaters that are subject to an existing on-screen advertising agreement with an alternative provider, the amortization of the intangible asset commences after the existing agreement expires and NCM LLC can utilize the theaters for all of its services.
The following is a summary of the Company’s intangible asset’s activity (in millions) during 2018December 31, 2020 and 2017:December 26, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of
December 26,
2019 | | Additions (1) | | Disposals | | Amortization | | Integration and other encumbered theater payments (2) | | As of
December 31,
2020 |
| Gross carrying amount | $ | 842.6 | | | $ | 10.5 | | | $ | (0.9) | | | $ | — | | | $ | (1.4) | | | $ | 850.8 | |
| Accumulated amortization | (198.9) | | | — | | 0.5 | | | (24.6) | | | — | | (223.0) | |
| Total intangible assets, net | $ | 643.7 | | | $ | 10.5 | | | $ | (0.4) | | | $ | (24.6) | | | $ | (1.4) | | | $ | 627.8 | |
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 28, 2017 | | Additions (1) | | Amortization | | Integration and other encumbered theater payments (3) | | As of December 27, 2018 |
| Gross carrying amount | $ | 862.6 |
| | $ | 16.0 |
| | $ | — |
| | $ | (21.4 | ) | | $ | 857.2 |
|
| Accumulated amortization | (145.4 | ) | | — |
| | (27.3 | ) | | — |
| | (172.7 | ) |
| Total intangible assets, net | $ | 717.2 |
| | $ | 16.0 |
| | $ | (27.3 | ) | | $ | (21.4 | ) | | $ | 684.5 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 29, 2016 | | Additions (2) | | Amortization | | Integration and other encumbered theater payments (3) | | As of December 28, 2017 |
| Gross carrying amount | $ | 679.4 |
| | $ | 204.1 |
| | $ | — |
| | $ | (20.9 | ) | | $ | 862.6 |
|
| Accumulated amortization | (118.9 | ) | | — |
| | (26.5 | ) | | — |
| | (145.4 | ) |
| Total intangible assets, net | $ | 560.5 |
| | $ | 204.1 |
| | $ | (26.5 | ) | | $ | (20.9 | ) | | $ | 717.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of
December 27,
2018 | | Additions (3) | | Disposals | | Amortization | | Integration and other encumbered theater payments (2) | | As of
December 26,
2019 |
| Gross carrying amount | $ | 857.2 | | | $ | 8.9 | | | $ | (1.2) | | | $ | — | | | $ | (22.3) | | | $ | 842.6 | |
| Accumulated amortization | (172.7) | | | — | | 0.5 | | | (26.7) | | | — | | (198.9) | |
| Total intangible assets, net | $ | 684.5 | | | $ | 8.9 | | | $ | (0.7) | | | $ | (26.7) | | | $ | (22.3) | | | $ | 643.7 | |
| |
(1) | During the first quarter of 2018, NCM LLC issued 2,821,710 (3,736,860 issued, net of 915,150 returned) common membership units to its founding members for the rights to exclusive access to the theater screens and attendees added, net of dispositions by the founding members to NCM LLC’s network during the 2017 fiscal year and NCM LLC recorded a net intangible asset of $15.9 million during the first quarter of 2018 as a result of the Common Unit Adjustment. |
(1)During the first quarter of 2020, NCM LLC issued 3,022,959 common membership units to its founding members for the rights to exclusive access to the theater screens and attendees added, net of dispositions by the founding members to NCM LLC’s network during the 2019 fiscal year and NCM LLC recorded a net intangible asset of $10.5 million during the first quarter of 2020 as a result of the Common Unit Adjustment.
(2)Carmike and Rave Cinemas had pre-existing advertising agreements for some of the theaters it owned prior to their acquisitions by AMC and Cinemark. As a result, AMC and Cinemark will make integration and other encumbered theater payments over the remaining term of those agreements. During the years ended December 31, 2020 and December 26, 2019, NCM LLC recorded a reduction to net intangible assets of $1.4 million and $22.3 million, respectively, related to integration and other encumbered theater payments due from AMC and Cinemark. During the year ended December 31, 2020 and December 26, 2019, AMC and Cinemark paid a total of $9.8 million and $21.7 million, respectively, related to integration and other encumbered theater payments.
(3)During the first quarter of 2019, NCM LLC issued 1,044,665 common membership units to its founding members for the rights to exclusive access to the theater screens and attendees added, net of dispositions by the founding members to NCM LLC’s network during the 2018 fiscal year and NCM LLC recorded a net intangible asset of $7.6 million during the first quarter of 2019 as a result of the Common Unit Adjustment.
During 2018,the third quarter of 2019, the Company purchasedcapitalized $1.3 million of legal and professional costs incurred in conjunction with the 2019 ESA Amendments which extended the useful life of the intangible assetsasset for $0.1 million associated with network affiliate agreements.Cinemark and Regal.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
(2) | During the first quarter of 2017, NCM LLC issued 2,351,029 common membership units to its founding members for the rights to exclusive access to net new theater screens and attendees added by the founding members to NCM LLC’s network during 2016. During the first quarter of 2017, the Company issued 18,425,423 NCM LLC common membership units to AMC in respect of the annual attendance at the acquired Carmike theaters in accordance with the Common Unit Adjustment Agreement. AMC’s acquisition of Carmike meets the criteria for a Common Unit Adjustment because it resulted in an extraordinary attendance increase of approximately 9.5%. Further, the Final Judgment required AMC to transfer advertising rights to 17 theaters from NCM LLC to another advertising provider. AMC surrendered 4,657,673 NCM LLC common membership units in respect of such theaters. The 4,657,673 NCM LLC common membership units were comprised of (i) 2,850,453 NCM LLC common membership units pursuant to the adjustment for divested theaters in the Common Unit Adjustment Agreement and (ii) an additional 1,807,220 NCM LLC common membership units valued at $25.0 million to compensate for NCM LLC’s lost operating income for these theaters during the 10-year term of the Final Judgment. NCM LLC recorded a net intangible asset of $201.8 million in the first quarter of 2017 as a result of these Common Unit Adjustments. |
During 2017, the Company purchased intangible assets for $2.1 million associated with network affiliate agreements.
During 2017, the Company purchased intangible assets for $0.2 million associated with acquired software.
| |
(3) | Carmike and Rave Cinemas had pre-existing advertising agreements for some of the theaters it owned prior to their acquisitions by AMC and Cinemark. As a result, AMC and Cinemark will make integration and other encumbered theater payments over the remaining term of those agreements. During the year ended December 27, 2018 and December 28, 2017, NCM LLC recorded a reduction to net intangible assets of $21.4 million and $20.9 million, respectively, related to integration and other encumbered theater payments due from AMC and Cinemark. During the year ended December 27, 2018 and December 28, 2017, AMC and Cinemark paid a total of $22.7 million and $12.9 million, respectively, related to integration and other encumbered theater payments. |
As of December 27, 201831, 2020 and December 28, 2017,26, 2019, the Company’s intangible assets related to the founding members, net of accumulated amortization, was $657.6$608.1 million and $687.1$620.5 million, respectively, with weighted average remaining lives of 18.218.3 years and 19.220.0 years, as of December 27, 2018 and December 28, 2017, respectively.
As of December 27, 201831, 2020 and December 28, 2017,26, 2019, the Company’s intangible assets related to the network affiliates, net of accumulated amortization, was $26.9$19.7 million and $30.0$23.1 million, respectively, with weighted average remaining lives of 10.08.2 years and 11.05.4 years, as of December 27, 2018 and December 28, 2017, respectively.
As of December 27, 2018 and December 28, 2017, the Company’s intangible assets related to acquired software, net of accumulated amortization was $0.1 million and $0.1 million, respectively with weighted average remaining lives of 1.5 years and 2.5 years as of December 27, 2018 and December 28, 2017, respectively.
For the years ended December 27, 2018, December 28, 2017 and December 29, 2016, the Company recorded amortization expense of $27.3 million, $26.5 million and $27.0 million, respectively. The estimated aggregate amortization expense for each of the five succeeding years is as follows (in millions):
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | Year | | Amortization | Year | | Amortization |
| 2018 | | $ | 27.3 |
| |
| 2019 | | 27.1 |
| |
| 2020 | | 27.1 |
| |
| 2021 | | 26.8 |
| 2021 | | $ | 24.2 | |
| 2022 | | 26.4 |
| 2022 | | 23.8 | |
| 2023 | | 2023 | | 23.8 | |
| 2024 | | 2024 | | 23.8 | |
| 2025 | | 2025 | | 23.8 | |
The following is a summary of the Company’s accrued expenses (in millions):
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY | | | | | | | | | | | |
| | As of |
| | December 31, 2020 | | December 26, 2019 |
| Make-good reserve | $ | 7.1 | | | $ | 8.7 | |
| Accrued interest | 10.0 | | | 11.4 | |
| Other accrued expenses | 1.9 | | | 2.0 | |
| Total accrued expenses | $ | 19.0 | | | $ | 22.1 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | |
| | As of |
| | December 27, 2018 | | December 28, 2017 |
| Make-good reserve | $ | 8.0 |
| | $ | 5.5 |
|
| Accrued interest | 10.3 |
| | 11.6 |
|
| Deferred rent | 0.2 |
| | 0.8 |
|
| Other accrued expenses | 3.2 |
| | 2.0 |
|
| Total accrued expenses | $ | 21.7 |
| | $ | 19.9 |
|
The Company is subject to taxation in the U.S. and various states. The Company’s tax returns for the calendar years 20152017 through 20172019 remain open to examination by the IRS in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended 20142016 through 20172019 are eligible for examination by various state revenue services.
Tax Receivable Agreement—On the IPO date, NCM, Inc. and the founding members entered into a TRA. Under the terms of this agreement, NCM, Inc. will make cash payments to the founding members in amounts equal to 90% of NCM, Inc.’s actual tax benefit realized from the tax amortization of the intangible assets described below. For purposes of the TRA, cash savings in income and franchise tax will be computed by comparing NCM, Inc.’s actual income and franchise tax liability to the amount of such taxes that NCM, Inc. would have been required to pay had there been no increase in NCM, Inc.’s proportionate share of tax basis in NCM LLC’s tangible and intangible assets and had the TRA not been entered into. The TRA applies to NCM, Inc.’s taxable years up to and including the 30th anniversary date of the offering. For the 2019 tax year, the Company paid the founding members $12.8 million in the year ended December 31, 2020 and expects to pay an additional $0.9 million in the first quarter of 2021. The Company paid the founding members $18.4$14.8 million in 2018the year ended December 26, 2019 for the 20172018 tax year, $18.8 million in 2017 for the 2016 tax year, and $25.3 million in 2016 ($2.7 million was net operating loss carrybacks for the 2013 tax year and $22.6 million for the 2015 tax year).year.
NCM, Inc. recorded a long-term payable to the founding members related to the TRA. Changes inThe Company recorded a $152.7 million reduction to the ‘Payable to founding members under the tax rate each period led to a re-measurement of the payable resulting in decreases of $3.8 million and $192.2 million during the years ended December 27, 2018 and December 28, 2017, respectively, and an increase of $1.2 millionreceivable agreement’ during the year ended December 29, 2016.31, 2020. The reduction was primarily related to the portion of the payable related to 90% of the amortization of the expected benefits from the realization of the deferred tax assets deemed not more-likely-than-not to be realized as of December 31, 2020 of $151.9 million, as further discussed below. The reduction was also due to the decrease of $192.2 millionin the deferred tax rate during the year ended December 28, 201731, 2020. The reduction to the payable to founding members under the tax receivable agreement was related to Tax Reform,recorded as described further below.a gain within “Non-operating income” within the Consolidated Statements of Income.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provision for Income Taxes—The Company has provided total income taxes, as follows (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 |
| Current: | | | | | |
| Federal | $ | (0.3 | ) | | $ | (1.6 | ) | | $ | (2.5 | ) |
| State | 0.5 |
| | — |
| | 0.2 |
|
| Total current income tax (benefit)/expense | $ | 0.2 |
| | $ | (1.6 | ) | | $ | (2.3 | ) |
| Deferred: | | | | | |
| Federal | $ | 13.2 |
| | $ | 142.1 |
| | $ | 15.0 |
|
| State | 10.1 |
| | 39.8 |
| | 1.7 |
|
| Total deferred income tax expense | $ | 23.3 |
| | $ | 181.9 |
| | $ | 16.7 |
|
Total income tax provision on Consolidated Statements of Income | $ | 23.5 |
| | $ | 180.3 |
| | $ | 14.4 |
|
| | | | | | | | | | | |
| | Years Ended |
| | December 31, 2020 | | December 26, 2019 |
| Current: | | | |
| Federal | $ | (0.1) | | | $ | 0 | |
| State | (0.1) | | | 0.3 | |
| Total current income tax (benefit)/expense | (0.2) | | | 0.3 | |
| Deferred: | | | |
| Federal | 131.8 | | | 10.0 | |
| State | 30.6 | | | 2.1 | |
| Total deferred income tax expense | 162.4 | | | 12.1 | |
| Total income tax provision on Consolidated Statements of Income | $ | 162.2 | | | $ | 12.4 | |
A reconciliation of the provision for income taxes as reported and the amount computed by multiplying income before taxes, less noncontrolling interest, by the U.S. federal statutory rate of 21.0% as of December 27, 2018 and 35.0% as of December 28, 201731, 2020 and December 29, 201626, 2019 was (in millions):
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | Years Ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 |
Provision calculated at federal statutory income tax rate: | | | | | |
| Income before income taxes | $ | 21.8 |
| | $ | 102.6 |
| | $ | 37.9 |
|
| Less: Noncontrolling interests | (10.6 | ) | | (19.7 | ) | | (21.6 | ) |
| Income attributable to NCM, Inc. | 11.2 |
| | 82.9 |
| | 16.3 |
|
Current year change to enacted federal and state rate (1) | 6.5 |
| | 92.2 |
| | (2.2 | ) |
State and local income taxes, net of federal benefit | 2.6 |
| | 8.7 |
| | 2.0 |
|
| NCM LLC income taxes | 0.4 |
| | 0.2 |
| | 0.1 |
|
| Share-based compensation | 1.1 |
| | 0.8 |
| | (0.1 | ) |
Uncertain tax positions (2) | (0.4 | ) | | (1.7 | ) | | (2.9 | ) |
| Change in the valuation allowance | 0.5 |
| | (4.2 | ) | | — |
|
NCM LLC membership unit issuance to NCM, Inc. | 0.2 |
| | 0.5 |
| | 0.9 |
|
| Executive compensation | 1.4 |
| | 0.4 |
| | 0.3 |
|
| Other | — |
| | 0.5 |
| | — |
|
| Total income tax provision | $ | 23.5 |
| | $ | 180.3 |
| | $ | 14.4 |
|
| | | | | | | | | | | |
| | Years Ended |
| | December 31, 2020 | | December 26, 2019 |
| Provision calculated at federal statutory income tax rate: | | | |
| Income before income taxes | $ | 7.5 | | | $ | 20.8 | |
| Less: Noncontrolling interests | 12.8 | | | (10.6) | |
| Income attributable to NCM, Inc. | 20.3 | | | 10.2 | |
| Current year change to enacted federal and state rate | (1.4) | | | (0.7) | |
| State and local income taxes, net of federal benefit | 3.5 | | | 1.7 | |
| NCM LLC income taxes | (0.2) | | | 0.2 | |
| Share-based compensation | 0.5 | | | 0.3 | |
Change in the valuation allowance (1) | 139.0 | | | 0.9 | |
| NCM LLC membership unit issuance to NCM, Inc. | 0.3 | | | 0.2 | |
| Executive compensation | 0.6 | | | 0.4 | |
| Other | (0.4) | | | (0.8) | |
| Total income tax provision | $ | 162.2 | | | $ | 12.4 | |
| |
(1) | Refer to the discussion of the impact of the Tax Act(1)Refer to the discussion of changes to the valuation allowance during the year ended December 31, 2020 within the ‘Tax Reform’ section below. |
| |
(2) | During the year ended December 31, 2015, the Company established a reserve for material, known tax exposures of $4.9 million, including accrued interest and penalties. The reserve relates to tax exposures from prior periods (2010 through 2014). During the years ended December 27, 2018, December 28, 2017, and December 29, 2016 the Company reversed approximately $0.4 million of its reserve ($0.3 million of unrecognized tax benefits and $0.1 million of accrued interest and penalties), $1.7 million of its reserve ($1.3 million of income tax benefits and $0.4 million of accrued interest and penalties) and $2.9 million ($2.3 million of income tax benefits and $0.6 million of accrued interest and penalties), respectively, because the statute of limitations expired. Further information is provided below. |
Deferred Tax Assets table below
Deferred Tax Assets—Significant components of the Company’s deferred tax assets consisted of the following (in millions):
|
| | | | | | | |
| | Years Ended |
| | December 27, 2018 | | December 28, 2017 |
| Deferred tax assets: | | | |
Investment in consolidated subsidiary NCM LLC (1) | $ | 233.5 |
| | $ | 266.0 |
|
| Share-based compensation | 3.0 |
| | 3.7 |
|
| Net operating losses | 15.8 |
| | 12.7 |
|
| Accrued bonus | 0.5 |
| | 0.4 |
|
| Other | 1.2 |
| | 1.3 |
|
| Total gross deferred tax assets | $ | 254.0 |
| | $ | 284.1 |
|
Valuation allowance (1) | (80.1 | ) | | (98.1 | ) |
| Total deferred tax assets, net of valuation allowance | $ | 173.9 |
| | $ | 186.0 |
|
| | | | | | | | | | | |
| | Years Ended |
| | December 31, 2020 | | December 26, 2019 |
| Deferred tax assets: | | | |
Investment in consolidated subsidiary NCM LLC (1) | $ | 156.0 | | | $ | 218.9 | |
| Share-based compensation | 2.2 | | | 3.0 | |
| Net operating losses | 52.1 | | | 19.2 | |
| Accrued bonus | 0 | | | 0.4 | |
| Other | 1.7 | | | 2.2 | |
| Total gross deferred tax assets | 212.0 | | | 243.7 | |
Valuation allowance (1) | (212.0) | | | (81.6) | |
| Total deferred tax assets, net of valuation allowance | $ | 0 | | | $ | 162.1 | |
| |
(1) | The Company recognized a deferred tax asset in the amount of $233.5 million and $266.0 million as of 2018 and 2017, respectively, associated with the basis difference in our investment in NCM LLC. However, a portion of the total basis difference will only reverse upon a sale of the Company’s interest in NCM LLC, which the Company expects would result in a capital loss for which no offsetting capital gain is expected. Therefore, as of December 27, 2018 and December 28, 2017 the Company has a valuation allowance in the amount of $80.1 million and $98.1 million, respectively, against the deferred tax asset to which this portion relates. The change in the valuation allowance from |
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 2017 to December 27, 2018 was primarily driven by outside basis differences which do not impact tax expense and thus are not reflected within the rate reconciliation presented above.
During the year ended December 28, 2017, the Company recorded a reduction to its deferred tax assets of approximately $32.2 million related to the tax affected difference between the tax basis and book basis of the intangible assets recorded for the extraordinary Common Unit Adjustment and offsetting integration payments, as discussed further in Note 5 – Intangible Assets, respectively. These items also resulted in a net reduction to additional paid-in capital of approximately $32.2 million. Further, the(1)The Company recognized a deferred tax asset related to a tax basis note receivable of $27.7 million in connection with the common membership unit redemptions that occurred in the thirdamount of $156.0 million and fourth quarter of 2017, as discussed further in Note 9 – Related Party Transactions. Following the re-measurement of the deferred balances upon the application of the Tax Act, discussed further below, this deferred tax asset decreased to $18.7$218.9 million as of December 28, 2017.2020 and 2019, respectively, associated with the basis difference in our investment in NCM LLC. The Company recognized an additionalevaluated its deferred tax assetassets as of $10.3December 31, 2020 and considered both positive and negative evidence in determining whether it is more likely than not that all or some portion of its deferred tax assets will be realized. The Company expects that it will generate a three-year cumulative pre-tax book loss during 2021 driven by the impact of the COVID-19 Pandemic on the Company’s operations in 2020, the effect of which is expected to continue into 2021. Given the associated weight assigned to this item as negative evidence within the Company’s analysis, the Company determined it is more-likely-than-not that the Company will not be able to realize certain of the Company’s deferred tax assets before they expire. The Company increased the valuation allowance against certain deferred tax assets, generating $139.0 million of additional income tax expense in the third quarter of 2018 due toyear ended December 31, 2020. The increase in the sale of AMC's remaining LLC membership units to Cinemark and Regal. This increasevaluation allowance was partially offset by an $8.6 million reduction in the receipt of $3.0 millionvaluation allowance related to the principal portion of integration payments forinvestment in consolidated subsidiary NCM LLC deferred tax purposes for a balance as of December 27, 2018 of $26.0 million.
Tax Reform— On December 22, 2017, the U.S. government enacted the Tax Act which makes broad and complex changes to the U.S. tax code that affected the Company’s fiscal year ending December 27, 2018, including, but not limited to, (1) reducing the U.S. federal corporate tax rate, (2) allowing full expensing of qualified property, (3) creating a new limitation on deductible interest expense; (4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, and (5) limiting the amount of compensation that can be deducted for highly compensated officers by terminating the exclusion of performance-based compensation from the $1 million per employee, per year limitation. Following the enactment of the Tax Act, the SEC staff issued SAB 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. As of December 27, 2018,asset. Once the Company has recordedreturns to a more normal operating level and emerges from a three-year cumulative pre-tax book loss position, part or all the impact of the reduction in the corporate tax rate, bonus depreciation that will allow for immediate expensing of qualified property and the reduction in deductions relatedvaluation allowance is expected to executive compensation. The decrease in the U.S. federal corporate tax rate decreased NCM, Inc.’s blended state and federal rate from 38.58% during the year ended December 28, 2017 to 25.38% during the year ended December 27, 2018.
The Company recorded a $191.0 million reduction to the ‘Payable to founding members under the TRA’ related to the reduction of the U.S. federal corporate tax rate. The reduction was recorded as a gain of $191.0 million within non-operating income within the Consolidated Statements of Income. Additionally, the Company revalued its deferred balances utilizing the lower blended state and federal ratereverse, resulting in a reduction of the net deferred tax asset of $92.2 million. The reduction of the net deferred tax asset was recorded as an increase in deferred tax expense. The expected paymentsinverse impact to the founding members under the TRA during 2019, as presented within the current payable to founding members under the TRA balance within the Consolidated Balance Sheet, decreased $8.1 million duetax receivable agreement which would increase to reflect future payments to the decrease infounding members at that time. Once the U.S. federal corporate tax ratevaluation allowance is reversed, the payable to founding members under the Tax Act.tax receivable agreement would be increased to reflect expected future payments to the founding members at that time.
Carryforwards—As of December 27, 2018,31, 2020, the Company had gross federal net operating loss carryforwards of approximately $59.0$207.5 million, of which $47.0 million will expire in 2035between 2034 through 2038.2037 and $160.5 million will be carried forward indefinitely. As of December 27, 2018,31, 2020, the Company had gross state net operating loss carryforwards of approximately $68.0$167.9 million, of which $120.1 million will expire at various dates between 20182022 and 2038.2040 and $47.8 million will be carried forward indefinitely. As of December 27, 2018,31, 2020, the Company had gross capital loss carryforwards of approximately $0.1 million, which will expire in 2024. As of December 31, 2020, the Company had gross federal and state research and experimentation tax credit carryforwards of approximately $1.1$1.7 million, which expire at various dates between 20292030 and 2038.2040.0
Uncertain Tax Positions— The Company has established a reserve for material, known tax exposures. As of December 27, 2018 and December 28, 2017, the total amount of the tax reserve was $0.0 million and $0.3 million, including accrued interest and penalties, respectively. During the year ended December 27, 2018, the Company reversed approximately $0.4 million of its contingency reserve ($0.3 million of unrecognized tax benefits and $0.1 million of accrued interest and penalties) because the statute of limitations expired.
Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in the audited Consolidated Financial Statements. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):
|
| | | | | | | |
| | Years Ended |
| | December 27, 2018 | | December 28, 2017 |
| Balance at beginning of period | $ | 0.3 |
| | $ | 1.6 |
|
| Reductions based on the lapse of applicable statute of limitations | (0.3 | ) | | (1.3 | ) |
| Balance at end of period | $ | — |
| | $ | 0.3 |
|
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.0 million and $0.3 million as of December 27, 2018 and December 28, 2017, respectively, excluding interest and penalties. The Company has accrued $0.0 million and $0.3 million for the payment of interest and penalties as of December 27, 2018 and December 28, 2017, respectively.
The Company recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense in the Consolidated Statements of Income and records the liability in income taxes payable in the Consolidated Balance Sheets in accordance with ASC 740. The Company recognized $0.0 million, $0.0 million and $0.6 million in interest and penalties during the years ended December 27, 2018, December 28, 2017 and December 29, 2016, respectively.
As of December 27, 2018,31, 2020, the Company has authorized capital stock of 175,000,000 shares of common stock, par value of $0.01 per share, and 10,000,000 shares of preferred stock, par value of $0.01 per share. There were no0 shares of preferred stock issued or outstanding as of December 27, 2018.31, 2020. There were 76,976,39878,040,818 shares of common stock issued and outstanding as of December 27, 2018.31, 2020.
The holders of NCM, Inc. common stock are entitled to one1 vote per share on all matters submitted for action by the NCM, Inc. stockholders. Holders of common stock are entitled to share equally, share for share, in declared dividends.
The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval. These additional shares may be used for a variety of corporate purposes, including share basedshare-based compensation, future public offerings to raise additional capital, corporate acquisitions and exchange on a one-for-one basis under the founding members’ right to convert their NCM LLC membership units into Company common stock.
NCM LLC’s founding members received all proceeds from NCM, Inc.’s IPO and related issuances of debt, except for amounts needed to pay out-of-pocket costs of the financings and other expenses. The ESAs with the founding members were amended and restated in conjunction with the IPO under which NCM LLC became the exclusive provider of advertising services to the founding members for a 30-year term. In conformity with accounting guidance of the SEC concerning monetary consideration paid to promoters, such as the founding members, in exchange for property conveyed by the promoters, the excess over predecessor cost was treated as a special distribution. Because the founding members had no cost basis in the ESAs, nearly all payments to the founding members with the proceeds of the IPO and related debt, have been accounted for as distributions. The distributions by NCM LLC to the founding members made at the date of the IPO resulted in a consolidated stockholders’ deficit. As a noncontrolling interest cannot be shown as an asset, the founding members’ interest in NCM LLC’s members equity is included in distributions in excess of paid in capital in the accompanying Consolidated Balance Sheets.
|
| | | | |
| 9. | RELATED PARTY TRANSACTIONS |
Founding Member Transactions—In connection with NCM, Inc.’s IPO, the Company entered into several agreements to define and regulate the relationships among NCM, Inc., NCM LLC and the founding members which are outlined below. Following the saleAs AMC owns less than 5% of 100.0% of AMC's remaining NCM LLC membership units to Cinemark and Regal,as of December 31, 2020, AMC is no longer a related party. AMC remains a party to the ESA, Common Unit Adjustment Agreement, TRA and certain other original agreements, and AMC will continue to participate in the annual Common Unit Adjustment, receive TRA payments, receive theater access fee payments, and make payments under the beverage concessionaire agreements, among other things. AMC is not currently a member under the terms of the NCM LLC Operating Agreement and will not receive available cash distributions or allocation of earnings and losses in NCM LLC, unless it receives NCM LLC membership units pursuant to a Common Unit Adjustment. Further, the saleAMC's ownership percentage does not
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impact future integration payments and other encumbered theater payments owed to NCM LLC by AMC. AMC is considered a related party through the divestiture date (July 5, 2018) and related party transactionsit fell below the 5% ownership threshold.
The material agreements with AMC through this periodthe founding members are included within the disclosures below.as follows:
•ESAs. Under the ESAs, NCM LLC is the exclusive provider within the United States of advertising services in the founding members’ theaters (subject to pre-existing contractual obligations and other limited exceptions for the benefit of the founding members). The advertising services include the use of the DCN equipment required to deliver the on-screen advertising and other content included in the Noovie® pre-show, use of the LEN and rights to sell and display certain lobby promotions. Further, 30 to 60 seconds of advertising included in the Noovie 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’ theaters, theater patrons, the network equipment required to display on-screen and LEN video advertising and the use of theaters for lobby promotions, the founding members receive a monthly theater access fee.
In conjunction with the 2019 ESA Amendments, NCM LLC also pays Cinemark and Regal incremental monthly theater access fees and, subject to NCM LLC's use of specified inventory, a revenue share in consideration for NCM LLC's access to certain on-screen advertising inventory after the advertised showtime of a feature film beginning November 1, 2019 and the underlying term of the ESAs were extended until 2041. The ESAs and 2019 ESA Amendments are considered leases with related parties under ASC 842.•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
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
construction of new theaters or sale of theaters that are operated by each founding member and included in NCM LLC’s network.
•Tax Receivable Agreement. The TRA provides for the effective payment by NCM, Inc. to the founding members of 90% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that is actually realized as a result of certain increases in NCM, Inc.’s proportionate share of tax basis in NCM LLC’s tangible and intangible assets resulting from the IPO and related transactions.
•Software License Agreement. At the date of the Company’s IPO, NCM LLC was granted a perpetual, royalty-free license from 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 the IPO date and NCM LLC owns those improvements, except for improvements that were developed jointly by NCM LLC and the founding members, if any.
Following is a summary of the related party transactions between the Company and the founding members (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
Included in the Consolidated Statements of Income: (1) | December 27, 2018 | | December 28, 2017 | | December 29, 2016 |
| Revenue: | | | | | |
Beverage concessionaire revenue (included in advertising revenue) (2) | $ | 28.4 |
| | $ | 29.9 |
| | $ | 28.7 |
|
Advertising inventory revenue (included in advertising revenue) (3) | — |
| | — |
| | 0.4 |
|
| Operating expenses: | | | | | |
Theater access fee (4) | 69.0 |
| | 76.5 |
| | 75.1 |
|
Purchase of movie tickets and concession products and rental of theater space (included in selling and marketing costs) (5) | 1.1 |
| | 2.1 |
| | 1.6 |
|
Purchase of movie tickets and concession products and rental of theater space (included in advertising operating costs) | 0.1 |
| | 0.1 |
| | — |
|
Purchase of movie tickets and concession products and rental of theater space (included in other administrative and other costs) | — |
| | — |
| | 0.1 |
|
| Non-operating expenses: | | | | | |
Interest income from notes receivable (included in interest income) (6) | 0.3 |
| | 0.6 |
| | 0.8 |
|
| | | | | | | | | | | |
| | Years Ended |
| Included in the Consolidated Statements of Income: | December 31, 2020 | | December 26, 2019 |
| Revenue: | | | |
Beverage concessionaire revenue (included in advertising revenue) (1) | $ | 4.9 | | | $ | 23.0 | |
| Operating expenses: | | | |
Theater access fee and revenue share to founding members (2) | 16.0 | | | 56.6 | |
Selling and marketing costs (3) | 0.1 | | | 0.4 | |
Advertising operating costs (3) | 0.6 | | | 0.1 | |
| Non-operating expenses: | | | |
Interest income from notes receivable (included in interest income) (4) | 0 | | | 0.2 | |
| |
(1) | AMC is no longer considered a related party as of July 5, 2018, as described further above. As such, the figures within the table above only include related party activity with AMC for the first six months of 2018. |
| |
(2) | For the full years ended December 27, 2018, December 28, 2017 and December 29, 2016, two of the founding members purchased 60 seconds of on-screen advertising time and one founding member purchased 30 seconds (with all three founding members having a right to purchase up to 90 seconds) from NCM LLC to satisfy their obligations under their beverage concessionaire agreements at a 30 second equivalent CPM rate specified by the ESA. |
| |
(3) | The value of such purchases is calculated by reference to NCM LLC’s advertising rate card. |
| |
(4) | Comprised of payments per theater attendee, payments per digital screen with respect to the founding member theaters included in the Company’s network and payments for access to higher quality digital cinema equipment. |
| |
(5) | Used primarily for marketing to NCM LLC’s advertising clients. |
| |
(6) | Refer to the discussion of the Fathom Events sale under AC JV, LLC transactions below. |
(1)For the full years ended December 31, 2020 and December 26, 2019, Regal and Cinemark purchased 60 seconds of on-screen advertising time (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 CPM rate specified by the ESA.
(2)Comprised of payments per theater attendee, payments per digital screen with respect to the founding member theaters included in the Company’s network, payments for access to higher quality digital cinema equipment and payments to Cinemark and Regal for their portion of the Platinum Spot revenue for the utilization of the theaters post-showtime in accordance with the 2019 ESA Amendments.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3)Includes purchase of movie tickets, concession products, rental of theater space primarily for marketing to NCM LLC’s advertising clients and other payments made to the founding members in the ordinary course of business.
(4)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 bore interest at a fixed rate of 5.0% per annum, compounded annually. Interest and principal payments were due annually in six equal installments commencing on the first anniversary of the closing and ended on December 26, 2019. |
| | | | | | | |
| | As of |
| Included in the Consolidated Balance Sheets: | December 27, 2018 | | December 28, 2017 |
Current portion of note receivable (1) (2) | $ | 4.2 |
| | $ | 4.2 |
|
Long-term portion of note receivable (2) | — |
| | 4.1 |
|
Interest receivable on notes receivable (included in other current assets) (2) | 0.1 |
| | — |
|
Common unit adjustments, net of amortization and integration payments (included in intangible assets) (3) | 657.6 |
| | 687.1 |
|
Current payable to founding members under the TRA (1) (4) (5) | 11.2 |
| | 19.6 |
|
Long-term payable to founding members under the TRA (1) (4) (5) | 141.1 |
| | 212.6 |
|
| | | | | | | | | | | |
| | As of |
| Included in the Consolidated Balance Sheets: | December 31, 2020 | | December 26, 2019 |
Common unit adjustments, net of amortization and integration payments (included in intangible assets) (1) | $ | 608.1 | | | $ | 620.5 | |
Current payable to founding members under the TRA (2) | 0.6 | | | 10.3 | |
Long-term payable to founding members under the TRA (2) | 23.7 | | | 133.5 | |
Accounts payable (3) | 0.6 | | | 0 | |
| |
(1) | AMC is no longer considered a related party as of July 5, 2018, as described further above. As such, the figures within the table above only include related party activity with AMC for the first six months of 2018. |
| |
(2) | Refer to the discussion of the Fathom Events sale under AC JV, LLC transactions below. |
| |
(3) | Refer to Note 5—Intangible Assets for further information on common unit adjustments and integration payments.
|
| |
(4) | The Company paid the founding members $18.4 million in payments pursuant to the TRA during 2018 which was for the 2017 tax year. The Company paid the founding members $18.8 million in 2017 which was for the 2016 tax year. |
| |
(5) | These balances have been recast following the adoption of the change in accounting principle discussed within Note 1—Basis of Presentation and Summary of Significant Accounting Policies.
|
(1)Refer to Note 5—Intangible Assets for further information on common unit adjustments and integration payments.
(2)The Company paid Cinemark and Regal $3.2 million and $5.8 million, respectively, in payments pursuant to the TRA during 2020 which was for the 2019 tax year. The Company paid Cinemark and Regal $3.7 million and $6.7 million, respectively, in payments pursuant to the TRA during 2019 which was for the 2018 tax year.
(3)Includes other payables due to the founding members in the ordinary course of business.
At the date of the Company’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 the IPO date and NCM LLC owns those improvements, except for improvements that were developed jointly by NCM LLC and the founding members, if any.
Pursuant to the terms of the NCM LLC Operating Agreement in place since the completion of the IPO, NCM LLC is required to make mandatory distributions on a proportionate basis to its members of available cash, as defined in the NCM LLC Operating Agreement, on a quarterly basis in arrears. Mandatory distributions for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 201626, 2019 are as shown within the table below (in millions). | | | | | | | | | | | |
| | Years Ended |
| | December 31, 2020 | | December 26, 2019 |
| Cinemark | $ | 2.1 | | | $ | 37.2 | |
| Regal | 2.2 | | | 39.1 | |
| Total founding members | 4.3 | | | 76.3 | |
| NCM, Inc. | 4.1 | | | 72.5 | |
| Total | $ | 8.4 | | | $ | 148.8 | |
The amount presented withinmandatory distributions in the tables fortable above related to the distributionfirst quarter of 2020 and were paid in the second quarter of 2020.Due to AMC for the year ended December 27, 2018 represents onlyadverse impacts of the distribution forCOVID-19 Pandemic on the three months ended March 29, 2018 to AMC. AMC’s distribution forCompany’s operations, the three months ended June 28, 2018 was paid to Cinemark and Regal to accommodate agreements between AMC and each of Cinemark and Regal. Further, there was no distribution to AMC for the three months ended September 27, 2018 and December 27, 2018 as they had no ownership in these periods.
|
| | | | | | | | | | | |
| | Years Ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 |
| AMC | $ | 2.2 |
| | $ | 27.1 |
| | $ | 23.6 |
|
| Cinemark | 34.3 |
| | 29.1 |
| | 25.4 |
|
| Regal | 35.8 |
| | 28.8 |
| | 26.1 |
|
| Total founding members | 72.3 |
| | 85.0 |
| | 75.1 |
|
| NCM, Inc. | 69.1 |
| | 75.9 |
| | 57.5 |
|
| Total | $ | 141.4 |
| | $ | 160.9 |
| | $ | 132.6 |
|
The mandatory distributions of available cash by NCM LLC to its related party founding members and NCM, Inc. for the second quarter ended December 27, 2018 of $27.92020, third quarter of 2020 and fourth quarter of 2020 were calculated as negative $85.2 million is included in(including negative $21.6 million for Cinemark, negative $22.4 million for Regal and negative $41.2 million for NCM, Inc.). Under the terms of the NCM LLC Operating Agreement, these negative amounts due to founding members in the Consolidated Balance Sheets as of December 27, 2018 and will be madenetted against future positive available cash distributions after the Extended Covenant Holiday Period, contingent upon the Company's compliance with the covenants outlined within the Credit Agreement Second Amendment defined within Note 17—Subsequent Events and in accordance with the first quarter of 2019. The distributions to NCM Inc. are eliminated in consolidation.LLC Operating Agreement.
Amounts due to (from) founding members, net as of December 27, 201831, 2020 were comprised of the following (in millions):
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | Cinemark | | Regal | | Total |
Theater access fees, net of beverage revenues and other encumbered theater payments | $ | 1.0 |
| | $ | 1.5 |
| | $ | 2.5 |
|
| Distributions payable to founding members | 13.7 |
| | 14.2 |
| | 27.9 |
|
| Integration payments due from founding members | (0.4 | ) | | — |
| | (0.4 | ) |
Total amounts due (from) to founding members, net
| $ | 14.3 |
| | $ | 15.7 |
| | $ | 30.0 |
|
| | | | | | | | | | | | | | | | | |
| | Cinemark | | Regal | | Total |
Theater access fees and revenue share, net of beverage revenues
and other encumbered theater payments | $ | 0.6 | | | $ | 0.9 | | | $ | 1.5 | |
| Cost and other reimbursement | (0.1) | | | (0.1) | | | (0.2) | |
| Total amounts due to founding members, net | $ | 0.5 | | | $ | 0.8 | | | $ | 1.3 | |
Amounts due to founding members, net as of December 28, 201726, 2019 were comprised of the following (in millions):
| | | | | | | | | | | | | | | | | |
| | Cinemark | | Regal | | Total |
Theater access fees, net of beverage revenues
and other encumbered theater payments | $ | 2.0 | | | $ | 2.5 | | | $ | 4.5 | |
| Distributions payable to founding members | 15.8 | | | 16.6 | | | 32.4 | |
| Integration payments due from founding members | (0.1) | | | 0 | | | (0.1) | |
| Total amounts due to founding members, net | $ | 17.7 | | | $ | 19.1 | | | $ | 36.8 | |
|
| | | | | | | | | | | | | | | |
| | AMC | | Cinemark | | Regal | | Total |
Theater access fees, net of beverage revenues and other encumbered theater payments | $ | 1.5 |
| | $ | 1.0 |
| | $ | 1.5 |
| | $ | 4.0 |
|
| Distributions payable to founding members | 10.8 |
| | 13.5 |
| | 13.3 |
| | 37.6 |
|
| Integration payments due from founding members | (8.5 | ) | | (0.4 | ) | | — |
| | (8.9 | ) |
Total amounts due to founding members, net
| $ | 3.8 |
| | $ | 14.1 |
| | $ | 14.8 |
| | $ | 32.7 |
|
Common Unit Membership Redemption and AMC Mandatory Ownership Divestitures— The NCM LLC Operating Agreement provides a redemption right of the founding members to exchange common membership units of NCM LLC for shares of the Company’s common stock on a one-for-one1-for-one basis, or at the Company’s option, a cash payment based on the three-daythree-day variable weighted average closing price of NCM, Inc.’s common stock prior to the redemption date. In December 2016, AMC agreed to a proposed final judgment in a lawsuit brought by the DOJ in connection with AMC’s acquisition of Carmike. Pursuant to the final judgment, AMC was required to divest the majority of its equity interests in
Network Affiliate Transactions—NCM LLC paid a network affiliate owned by a family member of a director on the Company's Board of Directors $0.4 million and NCM, Inc., based upon a predetermined schedule so that by June 20, 2019 it owned no more than 4.99% of NCM LLC’s common membership units and NCM, Inc. common stock, taken together, on a fully converted basis (“NCM’s outstanding equity interests”). During the year ended December 28, 2017, AMC exercised the redemption right of an aggregate 15.6$0.6 million common membership units for a like number of shares of NCM, Inc.’s common stock. Pursuant to ASC 810-10-45, the Company accounted for the change in its ownership interest in NCM LLC as an equity transaction whereby, the issuance of shares of NCM, Inc. common stock were offset by the purchase of NCM LLC’s (a subsidiary’s) equity within the Consolidated Statement of Equity. Further, no gain or loss was recognized in the Consolidated Statements of Income. Duringcircuit share payments during the years ended December 27, 201831, 2020 and December 28, 2017, AMC sold 1.0 million and 14.8 million shares of NCM, Inc.,26, 2019, respectively. The Company did not receive any proceeds from the sale of its common stock by AMC. During the years ended December 27, 2018, December 28, 2017 and December 29, 2016, AMC received cash dividends of approximately $0.3 million, $0.1 million and $0.2 million, respectively, on its shares of NCM, Inc. common stock. AMC sold the remaining 21,477,480 NCM LLC membership units to Cinemark and Regal in July 2018. As of December 27, 2018, AMC did not own any of NCM’s outstanding equity interests.
AC JV, LLC Transactions—In December 2013, NCM LLC sold its Fathom Events business to a newly formed limited liability company, (“AC JV, LLC”)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 receivable 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. Future minimum principal payments under the notes receivable as of December 27, 2018 are $5.6 million which is due in 2019.
NCM LLC’s investment in AC JV, LLC was $0.9 million and $1.0 million as of December 27, 2018 and December 28, 2017, respectively. 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.minor under the accounting guidance. NCM LLC’s investment in AC JV, LLC was $0.7 million and $0.9 million as of December 31, 2020 and December 26, 2019, respectively. During the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, NCM LLC received a cash distributiondistributions from AC JV, LLC of $0.2 million, $0.3$0.0 million and $0.2$0.4 million, respectively. NCM LLC recorded equity in (losses) earnings for AC JV, LLC of $0.2 million, $0.3$(0.2) million and $0.0$0.4 million during the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, respectively, which are included in other“Other non-operating expenseincome” in the audited Consolidated Statements of Income.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the sale, NCM LLC entered into a transition services agreement to provide certain corporate overhead services for a fee and reimbursement for the use of facilities and certain services including creative, technical event management and event management for the newly formed limited liability company. In addition, NCM LLC entered into a services agreement with a term coinciding with the ESAs, which grants the newly formed limited liability company advertising on-screen and on the LEN and a pre-feature program prior to Fathom events reasonably consistent with what was previously dedicated to Fathom. NCM LLC has also agreed to provide creative and media production services for a fee. NCM LLC received $0.2 million, $0.3 million and $0.2 million during the years ended December 27, 2018, December 28, 2017 and December 29, 2016, respectively, for these services, which are included as an offset to network costs in the audited Consolidated Statements of Income.
The following table summarizes NCM LLC’s total outstanding debt as of December 27, 201831, 2020 and December 28, 201726, 2019 and the significant terms of its borrowing arrangements:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Outstanding Balance as of | | | | |
| Borrowings ($ in millions) | | December 31, 2020 | | December 26, 2019 | | Maturity Date | | Interest Rate |
| Revolving credit facility | | $ | 167.0 | | | $ | 39.0 | | | June 20, 2023 | | (1) |
| Term loans | | 263.3 | | | 266.6 | | | June 20, 2025 | | (1) |
| Senior unsecured notes due 2026 | | 230.0 | | | 230.0 | | | August 15, 2026 | | 5.750% |
| Senior secured notes due 2028 | | 400.0 | | | 400.0 | | | April 15, 2028 | | 5.875% |
| Total borrowings | | 1,060.3 | | | 935.6 | | | | | |
| Less: Debt issuance costs related to term loans and senior notes | | (8.0) | | | (9.0) | | | | | |
| Total borrowings, net | | 1,052.3 | | | 926.6 | | | | | |
| Less: current portion of debt | | (2.7) | | | (2.7) | | | | | |
| Carrying value of long-term debt | | $ | 1,049.6 | | | $ | 923.9 | | | | | |
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | |
| | | Outstanding Balance as of | | | | |
| Borrowings ($ in millions) | | December 27, 2018 | | December 28, 2017 | | Maturity Date | | Interest Rate |
| Senior secured notes due 2022 | | $ | 400.0 |
| | $ | 400.0 |
| | April 15, 2022 | | 6.000% |
| Revolving credit facility | | 27.0 |
| | 12.0 |
| | June 20, 2023 | | (1) |
| Term loans | | 269.4 |
| | 270.0 |
| | June 20, 2025 | | (1) |
| Senior unsecured notes due 2026 | | 235.0 |
| | 250.0 |
| | August 15, 2026 | | 5.750% |
| Total borrowings | | 931.4 |
| | 932.0 |
| | | | |
| Less: Debt issuance costs related to term loans and senior notes | | (7.8 | ) | | (8.7 | ) | | | | |
| Total borrowings, net | | 923.6 |
| | 923.3 |
| | | | |
| Less: current portion of debt | | (2.7 | ) | | — |
| | | | |
| Carrying value of long-term debt | | $ | 920.9 |
| | $ | 923.3 |
| | | | |
| | |
(1) | The interest rates on the revolving credit facility and term loan are described below. |
(1)The interest rates on the revolving credit facility and term loan are described below.
Senior Secured Credit Facility– —On June 20, 2018, NCM LLC entered into a credit agreement to replace NCM LLC's previous senior secured credit facility, dated as of February 13, 2007, as amended (the "previous facility"“previous facility”). Consistent with the structure of the previous facility, the new agreement consists of a term loan facility and a revolving credit facility. As of December 27, 2018,31, 2020, NCM LLC’s new senior secured credit facility consisted of a $175.0 million revolving credit facility and a $269.4$263.3 million term loan. The obligations under the senior secured credit facility are secured by a lien on substantially all of the assets of NCM LLC. During
On April 30, 2020, NCM LLC amended the secondCredit Agreement to allow for the automatic waiver of any non-compliance with its consolidated net senior secured leverage ratio and consolidated total leverage ratio financial covenants occurring from the quarter ending June 25, 2020 until and including the quarter ending July 1, 2021. The Credit Agreement Amendment requires that, until the fiscal quarter ending July 1, 2021, NCM LLC must not permit the sum of 2018, the Company capitalized approximately $6.5 million of debt issuance costs related to the newunrestricted cash on hand at NCM LLC and availability under its revolving credit facility to be less than $55.0 million. Further, NCM LLC can make available cash distributions to its members (AMC, Cinemark, Regal and NCM, Inc.) during the term loan. The Company also recognized $1.2Covenant Holiday Period only if trailing 12-month consolidated EBITDA (as defined in the Credit Agreement) equals or exceeds $277.0 million in non-operating loss relatedand outstanding loans under the revolving credit facility are equal to or less than $39.0 million. NCM LLC can make available cash distributions to its members outside of the write-offCovenant Holiday Period so long as NCM LLC’s consolidated net senior secured leverage ratio is equal to or less than 5.00 to 1.00 and no default or event of capitalized debt issuance costs relateddefault under the Credit Agreement has occurred and is continuing. NCM LLC entered into an additional amendment to its Credit Agreement on March 8, 2021 which further extends the previous facility and recognition of debt issuance costs that did not qualifyrestrictions on available cash distributions established within the Credit Agreement Amendment. Refer to Note 17—Subsequent Events for capitalization.more details.
Revolving Credit Facility– —The revolving credit facility portion of NCM LLC’s total borrowings is available, subject to certain conditions, for general corporate purposes of NCM LLC in the ordinary course of business and for other transactions permitted under the senior secured credit facility, and a portion is available for letters of credit. As of December 27, 2018,31, 2020, NCM LLC’s total availability under the $175.0 million revolving credit facility was $143.2$4.4 million, net of $27.0$167.0 million outstanding and $4.8$3.6 million letters of credit. The unused line fee is 0.50% per annum which is consistent with the previous facility. Borrowings under the revolving credit facility bear interest at NCM LLC’s option of either the LIBOR index plus an applicable margin ranging from 1.75% to 2.25% or the base rate plus an applicable margin ranging from 0.75% to 1.25%. The margin changed to the aforementioned range from a fixed margin of LIBOR index plus 2.00% or the base rate plus 1.00%. The applicable margin for the revolving credit facility is determined quarterly and is subject to adjustment based upon a consolidated net senior secured leverage ratio for NCM LLC (the ratio of secured funded debt less unrestricted cash and cash equivalents of up to $100.0 million, divided by Adjusted OIBDA)EBITDA for debt purposes, defined as NCM LLC's net income before depreciation and amortization expense adjusted to also exclude non-cash share-based compensation costs for NCM LLC plus integration payments received). The revolving credit facility will mature on June 20, 2023 contingent upon the refinancing of NCM LLC's Notes due 2022 (defined below, see "Senior Secured Notes due 2022") on or prior to October 30, 2021. If the Notes due 2022 are not refinanced on or prior to October 30, 2021, then the revolving credit facility will instead mature on December 30, 2021.2023. The weighted-average interest rate on the outstanding balance on the revolving credit facility as of December 27, 201831, 2020 was 4.9%3.25%.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Term Loans– —The interest rate on the term loans is a rate chosen at NCM LLC’s option of either the LIBOR index plus 3.00% or the base rate plus 2.00%. The rate increased from LIBOR index plus 2.75% or the base rate plus 1.75%. The weighted-average interest rate on the term loans as of December 27, 201831, 2020 was 5.5%4.00%. The term loan amortizes at a rate equal to 1.00% annually, to be paid in equal quarterly installments. As of December 27, 2018,31, 2020, NCM LLC has paid a principal of $0.6$6.7 million, reducing the outstanding balance to $269.4$263.3 million. The term loan will mature on June 20, 2025 contingent upon the refinancing of the Notes due 2022 on or prior to October 30, 2021. If the Notes due 2022 are not financed on or prior to October 30, 2021, then the term loan will instead mature on December 30, 2021.2025.
The senior secured credit facility contains a number of covenants and financial ratio requirements, including (i) a consolidated net total leverage ratio covenant of 6.25 times for each for each quarterly period and (ii) with respect to the revolving credit facility, maintaining a consolidated net senior secured leverage ratio of equal to or less than 4.50 times on a quarterly basis for each quarterly period in which a balance is outstanding on the revolving credit facility. In addition, NCM LLC is permitted to make quarterly dividend payments and other restricted payments with its available cash as long as NCM LLC's consolidated net senior secured leverage ratio (after giving effect to any such payment) is below 5.50 times and no default or event of has occurred and continues to occur under the senior secured credit facility. As of December 27, 2018,31, 2020, NCM LLC was in compliance with the NCM LLC’s consolidated net senior secured leverage ratio was 3.10 times (versusrequirements of the dividend payment restriction of 5.50 timesCredit Agreement Amendment described above and the covenantnoncompliance with the financial covenants was automatically waived. Refer to Note 17—Subsequent Events for details of 4.50 times) and NCM LLC's consolidated net total leverage ratio was 4.20 times (versus the covenantextension of 6.25 times).the restrictions on available cash distributions established within the Credit Agreement Second Amendment.
Senior Secured Notes due 2022– —On April 27, 2012, NCM LLC completed a private placement of $400.0 million in aggregate principal amount of 6.00% Senior Secured Notes (the “Notes due 2022”). 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 were issued at 100% of the face amount thereof and are senior secured obligations of NCM LLC, rank the same as NCM LLC’s senior secured credit facility, subject to certain exceptions, and share in the same collateral that secures NCM LLC’s obligations under the senior secured credit facility.
On November 7, 2019, NCM LLC may redeem all or any portionredeemed the entire $400.0 million aggregate principal amount of NCM LLC’s existing Notes due 2022. The redemption price for the Notes due 2022 at once or over time, on or after April 15, 2017 at specified redemption prices,was 101.000% of the
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
principal amount thereof plus accrued and unpaid interest, if any, tointerest. As a result of the redemption, date. Upon the occurrenceNCM LLC wrote-off approximately $1.9 million in unamortized debt issuance costs and paid a redemption premium of a Change of Control (as definedapproximately $4.0 million, which are reflected in the Indenture), NCM LLC will be required to make an offer to each holderloss on early retirement of Notes due 2022 to repurchase alldebt, net on the Consolidated Statements of such holder’s Notes due 2022 for a cash payment equal to 101.00% ofIncome during the aggregate principal amount of the Notes due 2022 repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.year ended December 26, 2019.
The indenture contains covenants that, among other things, restrict NCM LLC’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, NCM LLC 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. NCM LLC was in compliance with these non-maintenance covenants as of December 27, 2018.
Senior Unsecured Notes due 2026—On August 19, 2016, NCM LLC completed a private placement of $250.0 million in aggregate principal amount of 5.750% Senior Unsecured Notes due 2026 (the “Notes due 2026”) for which the registered exchange offering was completed on November 8, 2016. The Notes due 2026 pay interest semi-annually in arrears on February 15 and August 15 of each year, which commenced on February 15, 2017. The Notes due 2026 were issued at 100% of the face amount thereof and are the senior unsecured obligations of NCM LLC and will be effectively subordinated to all existing and future secured debt, including the Notes due 2022,2028, its senior secured credit facility and any future asset backed loan facility. The Notes due 2026 will rank equally in right of payment with all of NCM LLC’s existing and future senior indebtedness, including the Notes due 2022,2028, NCM LLC’s existing senior secured credit facility, any future asset backed loan facility, in each case, without giving effect to collateral arrangements. The Notes due 2026 will be effectively subordinated to all liabilities of any subsidiaries that NCM LLC may form or acquire in the future, unless those subsidiaries become guarantors of the Notes due 2026. NCM LLC does not currently have any subsidiaries, and the Notes due 2026 will not be guaranteed by any subsidiaries that NCM LLC may form or acquire in the future except in very limited circumstances. During 2018,the years ended December 31, 2020 and December 26, 2019, NCM LLC repurchased and canceled a total of $15.0$0.0 million and $5.0 million of the Notes due 2026, respectively, reducing the principal amount to $235.0$230.0 million as of December 27, 2018.31, 2020. This repurchase was treated as a partial debt extinguishment and resulted in the realization of a non-operating gain, net of written off debt issuance costs, of $0.6$0.0 million and $0.3 million during the yearyears ended December 27, 2018.31, 2020 and December 26, 2019, respectively.
NCM LLC 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. NCM LLC 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, NCM LLC 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
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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), NCM LLC will be required to make an offer to each holder of the Notes due 2026 to repurchase all of such holder’s Notes due 2026 for a cash payment equal to 101.00%101.000% of the aggregate principal amount of the Notes due 2026 repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.
The indenture contains covenants that, among other things, restrict NCM LLC’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, NCM LLC 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. NCM LLC was in compliance with these non-maintenance covenants as of December 27, 2018.31, 2020.
Senior Secured Notes due 2028—On October 8, 2019, NCM LLC completed a private offering of $400.0 million aggregate principal amount of 5.875% Senior Secured Notes due 2028 (the “Notes due 2028”) to eligible purchasers. The Notes due 2028 will mature on April 15, 2028. Interest on the Notes due 2028 accrues at a rate of 5.875% per annum and is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2020.
NCM LLC may redeem all or any portion of the Notes due 2028 prior to April 15, 2023, at a redemption price equal to 100% of the principal amount plus the applicable premium, plus accrued and unpaid interest, if any, to the redemption date. NCM LLC may redeem all or any portion of the Notes due 2028, on or after April 15, 2023, at specified redemption prices, plus accrued and unpaid interest, if any, to the redemption date. In addition, at any time prior to April 15, 2023, NCM LLC may on any one or more occasions redeem up to 35% of the original aggregate principal amount of the Notes due 2028 from the net proceeds of certain equity offerings at a redemption price equal to 105.875% of the principal amount of the Notes due 2028 redeemed, plus accrued and unpaid interest, if any, to the redemption date, provided that at least 65% of the original aggregate principal amount of the Notes due 2028 remains outstanding after each such redemption and the redemption occurs within 90 days after the closing of such applicable equity offering.
The Indenture contains covenants that, among other things, restrict NCM LLC’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 certain investments; (4) incur certain 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
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
particular, NCM LLC may distribute all of its quarterly available cash as a restricted payment or as an investment, provided that NCM LLC satisfies a minimum net senior secured leverage ratio.
Future Maturities of Borrowings – The scheduled annual maturities on the Senior Secured Credit Facility, Notes due 20222026 and Notes due 20262028 as of December 27, 201831, 2020 are as follows (in millions): | | | | | | | | |
| Year | | Amount |
| 2021 | | $ | 2.7 | |
| 2022 | | 2.7 | |
| 2023 | | 169.7 | |
| 2024 | | 2.7 | |
| 2025 | | 252.5 | |
| Thereafter | | 630.0 | |
| Total | | $ | 1,060.3 | |
|
| | | | |
| Year | | Amount |
| 2019 | | $ | 2.7 |
|
| 2020 | | 2.7 |
|
| 2021 | | 2.7 |
|
| 2022 | | 402.7 |
|
| 2023 | | 29.7 |
|
| Thereafter | | 490.9 |
|
| Total | | $ | 931.4 |
|
|
| | | | |
| 11. | SHARE-BASED COMPENSATION |
The NCM, Inc. 20162020 Omnibus Equity Incentive Plan (the “2016“2020 Plan”) reserves 4,400,000was approved by NCM, Inc.'s stockholders on April 28, 2020 and approved 7,500,000 additional shares of common stock available for issuance or delivery under the 2020 Plan. The Company began issuing shares under the 2020 Plan in the second quarter of 2020. The 2020 Plan replaced NCM, Inc.’s 2016 Equity Incentive Plan (the “2016 Plan”), which replaced the 2007 Equity Incentive Plan (the “2007 Plan”). The 2020 Plan also includes 2,148,857 shares related to the number of shares reserved for issuance under the 2016 Plan that remained available for grant as of the effective date of the 2020 Plan and the number of shares subject to awards granted under the 2007 Plan as of the effective date of the 2020 Plan, which 2,812,787can become available for grant again upon expiration, termination, cancellation or forfeiture of the original award. As of December 31, 2020, 6,969,753 shares remain available for future grants as of December 27, 2018 (assuming 100% achievement of targets on performance-based restricted stock). The Company began issuing shares under the 2016 Plan in the second quarter of 2016, following its approval by NCM, Inc.’s stockholders. The 2016 Plan replaced NCM, Inc.’s 2007 Equity Incentive Plan (the “2007 Plan”), which was set to expire by its terms in February 2017. The shares of common stock that were available for issuance under the 2007 Plan are no longer available for issuance following the approval of the 2016 Plan. Any forfeitures of shares granted pursuant to the 2007 Plan will be cancelled and not available for future grant. The types of awards that may be granted under the 20162020 Plan include stock options, stock appreciation rights, restricted stock, restricted stock units or other stock based awards. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the 20072016 Plan and the 20162020 Plan. Upon vesting of the restricted stock awards or exercise of options, NCM LLC will issue common membership units to the Company equal to the number of shares of the Company’s common stock represented by such awards.
Compensation Cost—The Company recognized $7.8 million, $11.2$2.2 million and $18.3$5.5 million for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, respectively, of share-based compensation expense within network costs, selling“Network costs”, “Selling and marketing costscosts” and administrative“Administrative and other costscosts” in the Consolidated Statements of Income as shown in the table below.below (in millions): | | | | | | | | | | | |
| | Years Ended |
| | December 31, 2020 | | December 26, 2019 |
| Share-based compensation costs included in network costs | $ | 0.2 | | | $ | 0.4 | |
| Share-based compensation costs included in selling and marketing costs | 0.8 | | | 1.4 | |
| Share-based compensation costs included in administrative and other costs | 1.2 | | | 3.7 | |
| Total share-based compensation costs | $ | 2.2 | | | $ | 5.5 | |
|
| | | | | | | | | | | |
| | Years Ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 |
Share-based compensation costs included in network costs | $ | 0.6 |
| | $ | 1.0 |
| | $ | 1.1 |
|
Share-based compensation costs included in selling and marketing costs | 2.5 |
| | 4.1 |
| | 6.0 |
|
Share-based compensation costs included in administrative and other costs (1) | 4.7 |
| | 6.1 |
| | 11.2 |
|
| Total share-based compensation costs | $ | 7.8 |
| | $ | 11.2 |
| | $ | 18.3 |
|
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
(1) | Includes $0.0 million, $0.0 million, and $2.3 million of expense associated with the modification of certain former executive equity awards during the years ended December 27, 2018, December 28, 2017, and December 29, 2016, respectively, as described further below. |
During the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, $0.2 million $0.3 million and $0.5$0.2 million was capitalized, respectively, in a corresponding manner to the capitalization of employee’s salaries for capitalized labor. The income tax benefit recognized in the income statement for share-based compensation was approximately $1.7 million, $3.0$0.3 million and $2.5$0.7 million for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, respectively. As of December 27, 2018,31, 2020, there was no$0.5 million unrecognized compensation cost related to unvested options, as stock options were fully vested aswhich will be recognized over a remaining period of December 27, 2018. 2.1 years.As of December 27, 2018,31, 2020, unrecognized compensation cost related to restricted stock and restricted stock units was approximately $5.2$4.5 million, which will be recognized over a weighted average remaining period of 1.6 years.
Stock Options—The Company has not granted stock options during 2019 and 2020 after not granting options since 2012 and as of December 27, 2018 all options are fully vested.2012. Stock options awarded under the 2007 Planin 2020 were granted with an exercise price equal to the closing market price of NCM, Inc. common stock on the date the Company’s Board of Directors approved the grant. OptionsThe stock options awarded in 2019 contained a market condition as the options were granted with an exercise price in excess of the closing market price of NCM, Inc. common stock on the date the Company’s Board of Directors approved the grant. All options have either 10-year or 15-year contractual terms. The intrinsicfair value of each option award is estimated on the date of grant using the Black-Scholes option pricing valuation model that uses the assumptions noted in the table below. Expected volatilities are based on implied volatilities from traded
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
options exercisedon the Company’s stock, historical volatility of the Company’s stock, and other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted was developed based on historical and peer company data and represents the period of time that options granted are expected to be outstanding. The expected term of the options granted during 2019 was adjusted to include the Company's cost of equity in order to incorporate the impact of the option's market condition and simulate a lattice model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were used in the valuation of the options for the year was $0.0 million, $0.1 million and $0.1 million for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016, respectively. 26, 2019:
| | | | | | | | | | | |
| Years Ended |
| | December 31, 2020 | | December 26, 2019 |
| Expected term (in years) | 6.0 | | 6.8 |
| Risk free interest rate | 0.3 | % | | 1.8 | % |
| Expected volatility | 53.9 | % | | 36.6 | % |
| Dividend yield | 10.3 | % | | 8.9 | % |
A summary of option award activity under the 2007, Plan2016 and 2020 Plans as of December 27, 2018,31, 2020, and changes during the year then ended are presented below: | | | | | | | | | | | | | | | | | | | | | | | |
| | Options | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Life (in years) | | Aggregate
Intrinsic
Value
(in millions) |
| Outstanding as of December 26, 2019 | 2,550,098 | | | $ | 14.30 | | | 3.2 | | $ | — | |
| Granted | 500,606 | | | $ | 2.71 | | | | | $ | — | |
| Forfeited | (97,761) | | | $ | 16.33 | | | | | $ | — | |
| Expired | (430,621) | | | $ | 16.00 | | | | | $ | — | |
| Outstanding as of December 31, 2020 | 2,522,322 | | | $ | 11.63 | | | 4.3 | | $ | — | |
| Exercisable as of December 31, 2020 | 1,588,250 | | | $ | 15.43 | | | 1.4 | | $ | — | |
| Vested and expected to vest as of December 31, 2020 | 2,495,775 | | | $ | 11.70 | | | 4.2 | | $ | — | |
|
| | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value (in millions) |
| Outstanding as of December 28, 2017 | 2,165,181 |
| | $ | 16.47 |
| | — | | $ | — |
|
| Forfeited | (123,953 | ) | | $ | 16.94 |
| | | | |
| Expired | (90,478 | ) | | $ | 16.14 |
| | | | |
| Outstanding as of December 27, 2018 | 1,950,750 |
| | $ | 16.45 |
| | 2.0 | | $ | — |
|
| Exercisable as of December 27, 2018 | 1,950,750 |
| | $ | 16.45 |
| | 2.0 | | $ | — |
|
| Vested and expected to vest as of December 27, 2018 | 1,950,750 |
| | $ | 16.45 |
| | 2.0 | | $ | — |
|
Restricted Stock and Restricted Stock Units—Under the non-vested stock program, common stock of the Company may be granted at no cost to officers, independent directors and employees, subject to requisite service and/or financial performance targets. As such restrictions lapse, the award vests in that proportion. The participants are entitled to dividend equivalents and to vote their respective shares (in the case of restricted stock), although the sale and transfer of such shares is prohibited and the shares are subject to forfeiture during the restricted period. Additionally, the accrued dividend equivalents are subject to forfeiture during the restricted period should the underlying shares not vest. As of December 27, 201831, 2020 and December 28, 2017,26, 2019, accrued dividend equivalents totaled $1.6$0.7 million and $3.0$1.6 million, respectively and during the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, the Company paid $2.1 million, $2.1$0.8 million and $1.9$0.9 million, respectively, for dividend equivalents upon vesting of the restricted stock and restricted stock units. The Company has issued time-based restricted stock and restricted stock units to its employees which vestsgenerally vest over a three-yearthree-year period with one-third vesting on each anniversary of the date of grant and performance-based restricted stock and restricted stock units which vestsvest following a three-yearthree-year measurement period to the extent that the Company achieves specified non-GAAP targets at the end of the measurement period. Certain other vesting periods have also been used. The Company also grants restricted stock units to its non-employee directors that vest after approximately one year. The grant date fair value of restricted stock and restricted stock units is based on the closing market price of NCM, Inc. common stock on the date of grant. An annual forfeiture rate of 2-6% was estimated to reflect the potential separation of employees. The weighted average grant date fair value of non-vested stock was $6.65, $14.34$4.13 and $15.03$7.02 for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, respectively. The total fair value of awards vested was $15.5 million, $17.3$5.8 million and $14.7$6.8 million during the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, respectively.
A summary of restricted stock award and restricted stock unit activity as of December 27, 2018,31, 2020, and changes during the year then ended are presented below:
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | |
| | Number of Restricted Shares and Restricted Stock Units | | Weighted Average Grant-Date Fair Value |
| Non-vested balance as of December 28, 2017 | 2,308,962 |
| | $ | 14.70 |
|
| Granted | 1,019,173 |
| | $ | 6.65 |
|
Vested (1) | (1,067,615 | ) | | $ | 14.55 |
|
| Forfeited | (434,537 | ) | | $ | 10.24 |
|
| Non-vested balance as of December 27, 2018 | 1,825,983 |
| | $ | 11.31 |
|
| | | | | | | | | | | |
| | Number of
Restricted
Shares and
Restricted
Stock Units | | Weighted
Average
Grant-Date
Fair Value |
| Non-vested balance as of December 26, 2019 | 1,787,218 | | | $ | 8.68 | |
| Granted | 1,736,723 | | | $ | 4.13 | |
Vested (1) | (612,619) | | | $ | 9.31 | |
| Forfeited | (240,444) | | | $ | 13.12 | |
| Non-vested balance as of December 31, 2020 | 2,670,878 | | | $ | 5.18 | |
(1)Includes 140,787 vested shares that were withheld to cover tax obligations and were subsequently canceled.
| |
(1) | Includes 333,439 vested shares that were withheld to cover tax obligations and were subsequently canceled. |
The above table reflects performance-based restricted stock granted at 100% achievement of performance conditions and as such does not reflect the maximum or minimum number of shares of performance-based restricted stock contingently issuable. An additional 535,629438,255 shares of restricted stock could be issued if the performance criteria maximums are met. As of December 27, 2018,31, 2020, the total number of restricted stock and restricted stock units that are ultimately expected to vest, after consideration of expected forfeitures and current projections of estimated vesting of performance-based restricted stock is 1,259,3081,823,001 shares.
Executive Equity Modification—On January 1, 2016, the Company’s former Chief Executive Officer resigned and in connection with his resignation, NCM, Inc. entered into a Separation and General Release Agreement and a Consulting Agreement, whereby, the executive will continue to perform consulting services through January 31, 2018 and certain modifications were made to the executive’s outstanding stock awards. The executive’s outstanding stock options were modified such that the timeframe to exercise the options was extended to the original expiration date and certain performance-based restricted stock awards were converted to time-based restricted stock, with all restricted stock continuing to vest during the consulting period.
Per ASC Topic 718-10-35-3, a modification of the terms or conditions of an equity award shall be treated as an exchange of the original award for a new award. The effects of a modification should be measured as follows: (a) incremental compensation cost shall be measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, (b) total recognized compensation cost for an equity shall at least equal the fair value of the award at the grant date unless at the date of the modification the performance or service conditions of the original award are not expected to be satisfied and (c) a change in compensation cost for an equity award measured at intrinsic value shall be measured by comparing the intrinsic value of the modified award, if any, with the intrinsic value of the original award, if any, immediately before the modification. These modifications resulted in compensation expense of $2.3 million during the year ended December 29, 2016. Further, the Company continued to recognize share-based compensation costs on the awards related to service during the consulting period and re-measured the fair value of the outstanding awards at each reporting period during the term of the consulting services, in accordance with ASC Topic 505-50, Equity-Based Payments to Non-Employees.
|
| | | | |
| 12. | EMPLOYEE BENEFIT PLANS |
The Company sponsors the NCM 401(k) Profit Sharing Plan (the “Plan”) under Section 401(k) of the Internal Revenue Code of 1986, as amended, for the benefit of substantially all full-time employees. The Plan provides that participants may contribute up to 20% of their compensation, subject to Internal Revenue Service limitations. Employee contributions are invested in various investment funds based upon election made by the employee. The Company made discretionary contributions of $1.2 million, $1.2$0.5 million and $1.3$1.2 million during the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, respectively. In response to the COVID-19 Pandemic, the Company temporarily suspended its match of a portion of employees 401(k) contributions effective April 2020 through December 31, 2020.
|
| | | | |
| 13. | 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 aggregate, on its financial position, results of operations or cash flows.
Operating CommitmentsCommitments-Facilities—The Company leases office facilitiesadopted Accounting Standards Update 2016-2 and subsequent amendments, Leases (Topic 842) (together “ASC 842”) effective December 28, 2018. The Company has entered into operating lease agreements for its corporate headquarters and other regional offices. The Company has right-of-use (“ROU”) assets of $20.5 million and short-term and long-term lease liabilities of $1.8 million and $22.6 million, respectively, on the balance sheet as of December 31, 2020 for all material leases with terms longer than twelve months. These balances are included within “Other assets”, “Other current liabilities” and “Other liabilities”, respectively, on the audited Consolidated Balance Sheets. The Company has options on certain of these facilities to extend the lease or to terminate part or all of the leased space prior to the lease end date. Certain termination fees would be due upon exercise of the early termination options as outlined within the underlying agreements. None of these options were considered reasonably certain of exercise and thus have not been recognized as part of the ROU assets and lease liabilities. As of December 31, 2020, the Company had a weighted average remaining lease term of 9.1 years on these leases.
The Company has also entered into certain short-term leases with a term of less than one year. These leases are not included within the Company’s ROU assets or lease liabilities due to the Company’s election of the practical expedient in Centennial, ColoradoASC 842-20-25-2 for short-term leases.
During the twelve months ended December 31, 2020 and also in various cities for its salesDecember 26, 2019, the Company recognized the following components of total lease cost (in millions). These costs are presented within “Selling and marketing costs” and software development personnel. Total lease expense for“Administrative and other costs” within the years ended December 27, 2018, December 28, 2017 and December 29, 2016, was $3.8 million, $2.2 million and $2.3 million, respectively. Duringaudited Consolidated Statements of Income depending upon the year ended December 28, 2017, the Company recorded a $1.8 million of expense for an early lease termination fee. The fee was reimbursed by the landlordnature of the Company’s new building, which is being treated as a lease incentive anduse of the facility.
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | |
| Year ended |
| December 31, 2020 | | December 26, 2019 |
| Operating lease cost | $ | 3.5 | | | $ | 3.2 | |
| Short-term lease cost | 0 | | | 0.2 | |
| Variable lease cost | 0.5 | | | 0.5 |
| Total lease cost | $ | 4.0 | | | $ | 3.9 | |
amortized overThe Company made lease payments for the termyear ended December 31, 2020 and December 26, 2019 of $3.7 million and $3.3 million, respectively. These payments are included within cash flows from operating activities within the new lease. Futureaudited Consolidated Statement of Cash Flows. The minimum lease payments under noncancelable operating leases as of December 27, 2018 are31, 2020 were as follows (in millions):
| | | | | | | | |
| Year | | Minimum Lease Payments |
| 2021 | | $ | 3.7 | |
| 2022 | | 3.8 | |
| 2023 | | 3.8 | |
| 2024 | | 3.8 | |
| 2025 | | 3.7 | |
| Thereafter | | 15.2 | |
| Total | | 34.0 | |
| Less: Imputed interest on future lease payments | | (9.6) | |
| Total lease liability as of December 31, 2020 per the Consolidated Balance Sheet | | $ | 24.4 | |
|
| | | | |
| Year | | Minimum Lease Payments |
| 2019 | | $ | 3.5 |
|
| 2020 | | 3.3 |
|
| 2021 | | 3.4 |
|
| 2022 | | 3.4 |
|
| 2023 | | 3.4 |
|
| Thereafter | | 22.1 |
|
| Total | | $ | 39.1 |
|
Minimum Revenue Guarantees—As partWhen measuring the ROU assets and lease liabilities recorded, the Company utilized its incremental borrowing rate in order to determine the present value of the lease payments as the leases do not provide an implicit rate. The Company used the rate of interest that it would have paid to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment. As of December 31, 2020, the Company’s weighted average annual discount rate used to establish the ROU assets and lease liabilities was 7.34%.
Operating Commitments - ESAs and Affiliate Agreements—The Company has entered into long-term ESAs with the founding members and multi-year agreements with certain network affiliates, or third-party theater circuits. The ESAs and network affiliate agreements entered intogrant NCM LLC exclusive rights in their theaters to sell advertising, subject to limited exceptions. The Company recognizes intangible assets upon issuance of membership units to the founding members in accordance with NCM LLC’s Common Unit Adjustment Agreement and upfront cash payments to the affiliates for the contractual rights to provide the Company’s services within their theaters as further discussed within Note 5—Intangible Assets. These ESAs and network affiliate agreements are considered leases under ASC 842 once the asset is identified and the period of control is determined upon the scheduling of the showtimes by the exhibitors, typically one week prior to the showtime. As such, the leases are considered short-term in nature, specifically less than one month. Within ASC 842, leases with terms of less than one month are exempt from the majority of the accounting and disclosure requirements, including disclosure of short-term lease expense. No ROU assets or lease liabilities were recognized for these agreements and no change to the balance sheet presentation of the intangible assets was necessary. However, the amortization of these intangible assets is considered lease expense and was therefore, reclassified in the ordinary coursecurrent period from “Depreciation and amortization expense” to “Amortization of business under which the Company sells advertising for display in various network affiliate theater chains, the Company has agreed to certain minimum revenue guarantees on a per attendee basis. If a network affiliate achieves the attendance set forth in their respective agreement, the Company has guaranteed minimum revenue for the network affiliate per attendee if such amount paid under the revenue share arrangement is less than its guaranteed amount. As of December 27, 2018, the maximum potential amount of future payments the Company could be required to make pursuant to the minimum revenue guarantees is $70.8 million over the remaining terms of the network affiliate agreements. These minimum guarantees relate to various affiliate agreements ranging in term from one to twenty years, prior to any renewal periods of which some are at the option of the Company. During the year ended December 27, 2018 and December 28, 2017, the Company paid $0.7 million and $0.1 million, respectively, related to these minimum guarantees. As of December 27, 2018 and December 28, 2017, the Company had $0.1 million and $0.0 million in liabilitiesintangibles recorded for these obligations, as such guarantees are less thannetwork theater screen leases” within the expected shareaudited Consolidated Statement of revenue paid to the affiliate.Income.
Theater Access Fee Guarantees—In consideration for NCM LLC’s access to the founding members’ theater attendees for on-screen advertising and use of lobbies and other space within the founding members’ theaters for the LEN and lobby promotions, the founding members receive a monthly theater access fee under the ESAs. The theater access fee is composed of a fixed payment per patron, a fixed payment per digital screen (connected to the DCN) and a fee for access to higher quality digital cinema equipment. The payment per theater patron increases by 8% every five years, with the next increase taking effect in fiscal year 2022. The payment per digital screen and for digital cinema equipment increases annually by 5%. The theater access fee paid in the aggregate to all founding members cannot be less than 12% of NCM LLC’s aggregate advertising revenue (as defined in the ESA), or it will be adjusted upward to reach this minimum payment. As of December 27, 201831, 2020 and December 28, 2017,26, 2019, the Company had no0 liabilities recorded for the minimum payment, as the theater access fee was in excess of the minimum.
Following the 2019 ESA Amendments, Cinemark and Regal receive an additional monthly theater access fee beginning November 1, 2019 in consideration for NCM LLC’s access to certain on-screen advertising inventory after the advertised
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
showtime of a feature film. These fees are also based upon a fixed payment per patron beginning at (i) $0.025 per patron on November 1, 2019, (ii) $0.0375 per patron beginning on November 1, 2020, (iii) $0.05 per patron beginning on November 1, 2021, (iv) $0.052 per patron beginning on November 1, 2022 and (v) increase 8% every five years beginning November 1, 2027. Additionally, following the 2019 ESA Amendments, beginning on November 1, 2019, NCM LLC is entitled to display an additional single unit that is either 30 or 60 seconds of the Noovie® pre-show in the trailer position directly prior to the one or two trailers preceding the feature film (the “Platinum Spot”). In consideration for the utilization of the theaters for the Platinum Spots, Cinemark and Regal is entitled to receive 25% of all revenue generated for the actual display of Platinum Spots in their applicable theaters, subject to a specified minimum. If NCM LLC runs advertising in more than one concurrent advertisers’ Platinum Spot for any portion of the network over a period of time, then NCM LLC will be required to satisfy a minimum average CPM for that period of time. The Company does not owe the founding members any theater access fees or any Platinum Spot revenue share when the theaters are not displaying the Company's pre-show or when the Company does not have access to the theaters. As such, the Company did not and will not owe these fees for the period of time the founding members' theaters were temporarily closed due to the COVID-19 Pandemic and future fees will be reduced if attendance remains lower than historical levels. The digital screen fee is calculated based upon average screens in use during each month. No digital screen fees were or will be incurred for the period of time the founding member's theaters were temporarily closed due to the COVID-19 Pandemic and future fees will be reduced for months where screens are in use for only part of the month.
The network affiliates compensation is considered variable lease expense and varies by circuit depending upon the agreed upon terms of the network affiliate agreement. The majority of agreements are centered around a revenue share where an agreed upon percentage of the advertising revenue received from a theater’s attendance is paid to the circuit. As part of the network affiliate agreements entered into in the ordinary course of business under which the Company sells advertising for display in various network affiliate theater chains, the Company has agreed to certain minimum revenue guarantees on a per attendee basis. If a network affiliate achieves the attendance set forth in their respective agreement, the Company has guaranteed minimum revenue for the network affiliate per attendee if such amount paid under the revenue share arrangement is less than its guaranteed amount. As of December 31, 2020, the maximum potential amount of future payments the Company could be required to make pursuant to the minimum revenue guarantees is $59.1 million over the remaining terms of the network affiliate agreements. These minimum guarantees relate to various affiliate agreements ranging in term from one to twenty years, prior to any renewal periods of which some are at the option of the Company. During the year ended December 31, 2020 and December 26, 2019 the Company paid $0.0 million and $0.5 million, respectively, related to these minimum guarantees. As of December 31, 2020 and December 26, 2019, the Company had $0.0 million and $0.5 million in liabilities recorded for these obligations, as such guarantees are less than the expected share of revenue paid to the affiliate. As the guaranteed minimums are based upon agreed upon minimum attendance or affiliate revenue levels, the Company did not incur minimum revenue share fees during the period of time the respective affiliate's theaters were temporarily closed due to the COVID-19 Pandemic and will not for the remaining duration an affiliate's theater attendance or revenue levels are low as the minimum levels must first be met by the affiliate.
|
| | | | |
| 14. | FAIR VALUE MEASUREMENTS |
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—As described in Note 1—Basis of Presentation and Summary of Significant Accounting Policies, the Company regularly reviews long-lived assets (primarily property, plant and equipment), intangible assets, investments accounted for under the cost or equity method and notes receivable for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. When the estimated fair value is determined to be lower than the carrying value of the asset, an impairment charge is recorded to write the asset down to its estimated fair value.
Other investments consisted of the following (in millions): | | | | | | | | | | | |
| | As of |
| | December 31, 2020 | | December 26, 2019 |
Investment in AC JV, LLC (1) | $ | 0.7 | | | $ | 0.9 | |
Other investments (2) | 0.1 | | | 0.1 | |
| Total | $ | 0.8 | | | $ | 1.0 | |
(1)Refer to Note 9—Related Party Transactions.
|
| | | | | | | |
| | As of |
| | December 27, 2018 | | December 28, 2017 |
Investment in AC JV, LLC (1) | $ | 0.9 |
| | $ | 1.0 |
|
Other investments (2) | 2.1 |
| | 2.5 |
|
| Total | $ | 3.0 |
| | $ | 3.5 |
|
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
| |
(1) | Refer to Note 9—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 years ended December 27, 2018, December 28, 201731, 2020 and December 29, 2016,26, 2019, the Company recorded impairment charges of $0.4 million, $3.1$0.0 million and $0.7$2.0 million, respectively, on certain of its investments due to a significant deterioration in the business prospects of the investee or new information regarding the fair value of the investee, which brought the total remaining value of the respective impaired investments to $0.0 million as of December 27, 2018 and $0.1 million as of December 28, 2017.31, 2020. As of December 27, 2018,31, 2020, no other observable price changes or impairments have been recorded as a result of the Company’s qualitative assessment of identified events or changes in the circumstances of the remaining investments. The investment in AC JV was initially valued using comparative market multiples. The other investments were recorded based upon the fair value of the services provided in exchange for the investment. Refer to Note 1—Basis of Presentation and Summary of Significant Accounting Policies for more details. 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 December 27, 2018 and December 28, 2017, the Company had notes receivable totaling $5.6 million and $8.3 million, respectively, from its founding members related to the sale of Fathom Events, as described in Note 9—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 are as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | As of December 27, 2018 | | As of December 28, 2017 |
| | Carrying Value | | Fair Value (1) | | Carrying Value | | Fair Value (1) |
| Term loans | $ | 269.4 |
| | $ | 261.2 |
| | $ | 270.0 |
| | $ | 270.8 |
|
| Senior Notes due 2022 | 400.0 |
| | 401.8 |
| | 400.0 |
| | 407.3 |
|
| Senior Notes due 2026 | 235.0 |
| | 211.0 |
| | 250.0 |
| | 235.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 | | As of December 26, 2019 |
| | Carrying Value | | Fair Value (1) | | Carrying Value | | Fair Value (1) |
| Term Loans | $ | 263.3 | | | $ | 217.2 | | | $ | 266.6 | | | $ | 266.9 | |
| Senior Notes due 2026 | $ | 230.0 | | | $ | 160.7 | | | $ | 230.0 | | | $ | 226.2 | |
| Senior Notes due 2028 | $ | 400.0 | | | $ | 337.5 | | | $ | 400.0 | | | $ | 426.7 | |
(1)The Company has estimated the fair value on an average of at least two non-binding broker quotes and the Company’s analysis. If the Company were to measure the borrowings in the above table at fair value on the balance sheet they would be classified as Level 2.
| |
(1) | The Company has estimated the fair value on an average of at least two non-binding broker quotes and the Company’s analysis. If the Company were to measure the borrowings in the above table at fair value on the balance sheet they would be classified as Level 2. |
Recurring Measurements—The fair values of the Company’s assets and liabilities measured on a recurring basis pursuant to ASC 820-10Fair Value Measurements and Disclosuresare as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at
Reporting Date Using |
| | Fair Value As of
December 31, 2020 | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
| ASSETS: | | | | | | | |
Cash equivalents (1) | $ | 52.8 | | | $ | 52.8 | | | $ | 0 | | | $ | — | |
Short-term marketable securities (2) | 0.3 | | | — | | | 0.3 | | | — | |
Long-term marketable securities (2) | 1.2 | | | — | | | 1.2 | | | — | |
| Total assets | $ | 54.3 | | | $ | 52.8 | | | $ | 1.5 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at
Reporting Date Using |
| | Fair Value As of
December 26, 2019 | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
| ASSETS: | | | | | | | |
Cash equivalents (1) | $ | 28.8 | | | $ | 16.8 | | | $ | 12.0 | | | $ | — | |
Short-term marketable securities (2) | 17.5 | | | — | | | 17.5 | | | — | |
Long-term marketable securities (2) | 7.5 | | | — | | | 7.5 | | | — | |
| Total assets | $ | 53.8 | | | $ | 16.8 | | | $ | 37.0 | | | $ | — | |
(1)Cash Equivalents—The Company’s cash equivalents are carried at estimated fair value. Cash equivalents consist of money market accounts which the Company has classified as Level 1 given the active market for these accounts and
|
| | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
| | Fair Value As of December 27, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| ASSETS: | | | | | | | |
Cash equivalents (1) | $ | 18.2 |
| | $ | 11.2 |
| | $ | 7.0 |
| | $ | — |
|
Short-term marketable securities (2) | 24.0 |
| | — |
| | 24.0 |
| | — |
|
Long-term marketable securities (2) | 10.2 |
| | — |
| | 10.2 |
| | — |
|
| Total assets | $ | 52.4 |
| | $ | 11.2 |
| | $ | 41.2 |
| | $ | — |
|
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
commercial paper with original maturities of three months or less, which are classified as Level 2 and are valued as described below.
|
| | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
| | Fair Value As of December 28, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| ASSETS: | | | | | | | |
Cash equivalents (1) | $ | 12.2 |
| | $ | 8.2 |
| | $ | 4.0 |
| | $ | — |
|
Short-term marketable securities (2) | 13.1 |
| | — |
| | 13.1 |
| | — |
|
Long-term marketable securities (2) | 16.2 |
| | — |
| | 16.2 |
| | — |
|
| Total assets | $ | 41.5 |
| | $ | 8.2 |
| | $ | 33.3 |
| | $ | — |
|
| |
(1) | Cash Equivalents— The Company’s cash equivalents are carried at estimated fair value. Cash equivalents consist of money market accounts which the Company has classified as Level 1 given the active market for these accounts and commercial paper with original maturities of three months or less, which are classified as Level 2 and are valued as described below.
|
| |
(2) | Short-Term and Long-Term Marketable Securities— The carrying amount and fair value of the marketable securities are equivalent since the Company accounts for these instruments at fair value. The Company’s government agency bonds, commercial paper and certificates of deposit are valued using third party broker quotes. The value of the Company’s government agency bonds and municipal bonds are derived from quoted market information. The inputs in the valuation are classified as Level 1 if there is an active market for these securities; however, if an active market does not exist, the inputs are recorded at a lower level in the fair value hierarchy. The value of commercial paper and certificates of deposit is derived from pricing models using inputs based upon market information, including contractual terms, market prices and yield curves. The inputs to the valuation pricing models are observable in the market, and as such are generally classified as Level 2 in the fair value hierarchy. For the years ended December 27, 2018 and December 28, 2017, there was an inconsequential amount of net realized gains (losses) recognized in interest income and an inconsequential amount of net unrealized holding gains (losses) included in other comprehensive income. Original cost of short term marketable securities is based onthe specific identification method. As of December 27, 2018 and December 28, 2017, there was $0.2 million and $0.2 million, respectively, of gross unrealized losses related to individual securities of $11.8 million and $8.2 million, respectively, that had been in a continuous loss position for 12 months or longer. The Company has not recorded an impairment because it has the intention and ability to hold these securities to maturity.
|
The amortized cost basis, aggregate fair value and maturities of the marketable securities the Company held as of December 27, 201831, 2020 and December 28, 201726, 2019 are as follows: | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| | Amortized
Cost Basis
(in millions) | | Aggregate
Fair Value
(in millions) | | Maturities (1) (in years) |
| MARKETABLE SECURITIES: | | | | | |
| | | | | |
| | | | | |
| Short-term certificates of deposit | $ | 0.3 | | | $ | 0.3 | | | 0.6 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total short-term marketable securities | 0.3 | | | 0.3 | | | |
| | | | | |
| | | | | |
| Long-term certificates of deposit | 1.3 | | | 1.2 | | | 2.8 |
| Total long-term marketable securities | 1.3 | | | 1.2 | | | |
| Total marketable securities | $ | 1.6 | | | $ | 1.5 | | | |
| | | | | | | | | | | | | | | | | |
| | As of December 26, 2019 |
| | Amortized
Cost Basis
(in millions) | | Aggregate
Fair Value
(in millions) | | Maturities (1) (in years) |
| MARKETABLE SECURITIES: | | | | | |
| Short-term U.S. government agency bonds | $ | 3.5 | | | $ | 3.5 | | | 0.4 |
| | | | | |
| Short-term certificates of deposit | 0.9 | | | 0.9 | | | 0.8 |
| Short-term municipal bonds | 1.2 | | | 1.2 | | | 0.5 |
| Short-term commercial paper: | | | | | |
| Financial | 8.0 | | | 7.9 | | | 0.3 |
| Industrial | 4.0 | | | 4.0 | | | 0.2 |
| Total short-term marketable securities | 17.6 | | | 17.5 | | | |
| | | | | |
| Long-term U.S. government agency bonds | 4.5 | | | 4.5 | | | 2.2 |
| Long-term certificates of deposit | 3.0 | | | 3.0 | | | 3.6 |
| Total long-term marketable securities | 7.5 | | | 7.5 | | | |
| Total marketable securities | $ | 25.1 | | | $ | 25.0 | | | |
|
| | | | | | | | | |
| | As of December 27, 2018 |
| | Amortized Cost Basis (in millions) | | Aggregate Fair Value (in millions) | | Maturities (1) (in years) |
| MARKETABLE SECURITIES: | |
| | |
| | |
| Short-term U.S. government agency bonds | $ | 3.9 |
| | $ | 3.9 |
| | 0.5 |
| Short-term U.S. government treasury bonds | 0.3 |
| | 0.3 |
| | 0.5 |
| Short-term certificates of deposit | 3.6 |
| | 3.6 |
| | 0.6 |
| Short-term municipal bonds | 0.5 |
| | 0.5 |
| | 0.1 |
| Short-term commercial paper: | | | | | |
| Financial | 3.8 |
| | 3.8 |
| | 0.1 |
| Industrial | 12.0 |
| | 11.9 |
| | 0.1 |
| Total short-term marketable securities | 24.1 |
| | 24.0 |
| | |
| Long-term municipal bonds | 1.2 |
| | 1.3 |
| | 1.5 |
| Long-term U.S. government agency bonds | 6.9 |
| | 6.8 |
| | 2.1 |
| Long-term certificates of deposit | 2.4 |
| | 2.1 |
| | 2.9 |
| Total long-term marketable securities | 10.5 |
| | 10.2 |
| | |
| Total marketable securities | $ | 34.6 |
| | $ | 34.2 |
| | |
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | |
| | As of December 28, 2017 |
| | Amortized Cost Basis (in millions) | | Aggregate Fair Value (in millions) | | Maturities (1) (in years) |
| MARKETABLE SECURITIES: | |
| | |
| | |
| Short-term U.S. government agency bonds | $ | 2.3 |
| | $ | 2.2 |
| | 0.9 |
| Short-term commercial paper | 0.9 |
| | 0.9 |
| | 0.8 |
| Short-term certificates of deposit: | | | | | |
| Financial | 6.0 |
| | 6.0 |
| | 0.3 |
| Industrial | 4.0 |
| | 4.0 |
| | 0.3 |
| Total short-term marketable securities | 13.2 |
| | 13.1 |
| | |
| Long-term municipal bonds | 1.9 |
| | 1.9 |
| | 2.1 |
| Long-term U.S. government agency bonds | 10.4 |
| | 10.2 |
| | 2.5 |
| Long-term certificates of deposit | 4.1 |
| | 4.1 |
| | 1.8 |
| Total long-term marketable securities | 16.4 |
| | 16.2 |
| | |
| Total marketable securities | $ | 29.6 |
| | $ | 29.3 |
| | |
(1)Maturities— Securities available for sale include obligations with various contractual maturity dates some of which are greater than one year. The Company considers the securities to be liquid and convertible to cash within 30 days.
| | | | |
(1)15. | Maturities— Securities available for sale include obligations with various contractual maturity dates some of which are greater than one year. The Company considers the securities to be liquid and convertible to cash within 30 days.
|
|
| |
15. | VALUATION AND QUALIFYING ACCOUNTS |
The Company’s allowance for doubtful accounts and the valuation allowance on deferred tax assets for the years ended December 27, 2018, December 28, 201731, 2020 and December 29, 201626, 2019 were as follows (in millions):
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | |
| | Years Ended |
| | December 31, 2020 | | December 26, 2019 |
| ALLOWANCE FOR DOUBTFUL ACCOUNTS: | | | |
| Balance at beginning of period | $ | 6.2 | | | $ | 6.0 | |
Adjustment upon adoption of ASU 2016-13 (1) | (3.2) | | | 0 | |
| Provision for bad debt | 0.3 | | | 1.2 | |
| Write-offs, net | (1.0) | | | (1.0) | |
| Balance at end of period | $ | 2.3 | | | $ | 6.2 | |
|
| | | | | | | | | | | |
| | Years Ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 |
| ALLOWANCE FOR DOUBTFUL ACCOUNTS: | | | | | |
| Balance at beginning of period | $ | 6.0 |
| | $ | 6.3 |
| | $ | 5.6 |
|
| Provision for bad debt | 1.6 |
| | 1.1 |
| | 2.1 |
|
| Write-offs, net | (1.6 | ) | | (1.4 | ) | | (1.4 | ) |
| Balance at end of period | $ | 6.0 |
| | $ | 6.0 |
| | $ | 6.3 |
|
| | | | Years Ended | | Years Ended |
| | December 27, 2018 | | December 28, 2017 | | December 29, 2016 | | December 31, 2020 | | December 26, 2019 |
| VALUATION ALLOWANCE ON DEFERRED TAX ASSETS: | | | | | | VALUATION ALLOWANCE ON DEFERRED TAX ASSETS: | | | |
| Balance at beginning of period | $ | 98.1 |
| | $ | 110.3 |
| | $ | 110.4 |
| Balance at beginning of period | $ | 81.6 | | | $ | 80.1 | |
Valuation allowance added (2) | | Valuation allowance added (2) | 130.4 | | | 1.5 | |
Valuation allowance reversed (1) | (18.0 | ) | | (12.2 | ) | | (0.1 | ) | 0 | | | 0 | |
| Balance at end of period | $ | 80.1 |
| | $ | 98.1 |
| | $ | 110.3 |
| Balance at end of period | $ | 212.0 | | | $ | 81.6 | |
(1)Upon the adoption of ASU 2016-13 on December 27, 2019, the Company recorded a $3.2 million cumulative-effect adjustment to the allowance for doubtful accounts and retained earnings related to the change in methodology surrounding the historical losses utilized in the calculation of the allowance for credit losses related to trade and unbilled accounts receivable reducing the allowance to $3.0 million as of the adoption date.
(2)The increase within the valuation allowance during the year ended December 31, 2020 relates to its deferred tax assets which the Company determined it is more-likely-than-not it will not be able to realize before they expire. The increase for the year ended December 26, 2019 relates to the establishment of a valuation allowance for state NOLs and investment losses that the Company no longer expects to realize prior to expiration and timing differences between the recognition of available cash distributions for book and tax purposes.
| | | | |
(1)16. | The changes within the valuation allowance during the years ended December 27, 2018 and December 28, 2017 relate to movement within the underlying residual portion of the Investment in NCM LLC deferred tax asset due primarily to timing differences between the recognition of available cash distributions for book and tax purposes. |
|
| |
16. | QUARTERLY FINANCIAL DATA (UNAUDITED) |
The following represents selected information from the Company’s unaudited quarterly Consolidated Statements of Income for the years ended December 27, 201831, 2020 and December 28, 201726, 2019 (in millions, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Revenue | | $ | 64.7 | | | $ | 4.0 | | | $ | 6.0 | | | $ | 15.7 | |
| Operating expenses | | 59.8 | | | 27.8 | | | 27.3 | | | 36.5 | |
| Operating income (loss) | | 4.9 | | | (23.8) | | | (21.3) | | | (20.8) | |
| Consolidated net loss | | (8.2) | | | (33.4) | | | (30.9) | | | (53.8) | |
| Net loss attributable to NCM, Inc. | | (3.7) | | | (13.8) | | | (12.7) | | | (35.2) | |
Loss per NCM, Inc. share, basic (1) | | (0.05) | | | (0.18) | | | (0.16) | | | (0.45) | |
Loss per NCM, Inc. share, diluted (1) | | (0.05) | | | (0.18) | | | (0.16) | | | (0.45) | |
|
| | | | | | | | | | | | | | | | |
| 2018 | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenue | | $ | 80.2 |
| | $ | 113.7 |
| | $ | 110.1 |
| | $ | 137.4 |
|
| Operating expenses | | 69.2 |
| | 73.5 |
| | 67.8 |
| | 76.6 |
|
| Operating income | | 11.0 |
| | 40.2 |
| | 42.3 |
| | 60.8 |
|
Consolidated net (loss) income (1) | | (3.5 | ) | | 17.0 |
| | 25.7 |
| | 41.0 |
|
(Loss) Net income attributable to NCM, Inc. (1) | | (1.9 | ) | | 4.2 |
| | 11.2 |
| | 16.3 |
|
(Loss) Earnings per NCM, Inc. share, basic (1) (2) | | (0.03 | ) | | 0.05 |
| | 0.15 |
| | 0.21 |
|
(Loss) Earnings per NCM, Inc. share, diluted (1) (2) | | (0.03 | ) | | 0.05 |
| | 0.14 |
| | 0.21 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Revenue | | $ | 76.9 | | | $ | 110.2 | | | $ | 110.5 | | | $ | 147.2 | |
| Operating expenses | | 66.0 | | | 72.5 | | | 70.5 | | | 74.5 | |
| Operating income | | 10.9 | | | 37.7 | | | 40.0 | | | 72.7 | |
| Consolidated net (loss) income | | (2.6) | | | 21.0 | | | 22.8 | | | 45.5 | |
| Net (loss) income attributable to NCM, Inc. | | (1.1) | | | 8.9 | | | 9.2 | | | 19.1 | |
(Loss) Earnings per NCM, Inc. share, basic (1) | | (0.01) | | | 0.11 | | | 0.12 | | | 0.25 | |
(Loss) Earnings per NCM, Inc. share, diluted (1) | | (0.01) | | | 0.11 | | | 0.12 | | | 0.24 | |
|
| | | | | | | | | | | | | | | | |
| 2017 | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenue | | $ | 71.9 |
| | $ | 97.1 |
| | $ | 116.4 |
| | $ | 140.7 |
|
| Operating expenses | | 66.8 |
| | 68.8 |
| | 66.1 |
| | 70.5 |
|
| Operating income | | 5.1 |
| | 28.3 |
| | 50.3 |
| | 70.2 |
|
Consolidated net (loss) income (1) | | (5.8 | ) | | 14.6 |
| | 36.2 |
| | 69.5 |
|
(Loss) Net income attributable to NCM, Inc. (1) | | (1.3 | ) | | 5.2 |
| | 13.7 |
| | 40.7 |
|
(Loss) Earnings per NCM, Inc. share, basic (1) (2) | | (0.02 | ) | | 0.09 |
| | 0.21 |
| | 0.54 |
|
(Loss) Earnings per NCM, Inc. share, diluted (1) (2) | | (0.02 | ) | | 0.09 |
| | 0.21 |
| | 0.30 |
|
89
| |
(1) | These balances have been adjusted to reflect the adoption of a change in accounting principle in the first quarter of 2018 as discussed within Note 1 - Basis of Presentation and Summary of Significant Accounting Policies.
|
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)Earnings per share in each quarter is computed using the weighted-average number of common shares outstanding during that quarter while earnings per share for the full year is computed using the weighted average number of common shares outstanding during the year.
| | | | | |
(2)17. | Earnings per share in each quarter is computed using the weighted-average number of common shares outstanding during that quarter while earnings per share for the full year is computed using the weighted average number of common shares outstanding during the year. |
|
| |
17. | SUBSEQUENT EVENTEVENTS |
On February 21,March 8, 2021, NCM LLC entered into an additional amendment to its Credit Agreement, dated as of June 20, 2018. Among other things, the Credit Agreement Second Amendment provides for: (i) certain modifications to the negative covenants; (ii) a waiver of non-compliance with the consolidated net total leverage and consolidated net senior secured leverage financial covenants through the quarter ended June 30, 2022; (iii) the consolidated net total leverage ratio and consolidated net senior secured leverage ratio financial covenants to be set to 6.75 to 1.00 and 5.50 to 1.00, respectively, for the quarter ending on or about September 29, 2022, and (iv) with respect to NCM LLC’s audited financial statements for the fiscal year ended December 31, 2020, a waiver of the requirement to deliver such financial statements without a “going concern” or like qualification or exception. The Credit Agreement Second Amendment also: (i) grants security interests in certain assets of NCM LLC and other potential loan parties that are not currently pledged to the lenders and (ii) increases the applicable margin of the existing term loans and revolving loans issued under the Credit Agreement in an amount equal to 1.00%.Additionally, pursuant to the terms of the Credit Agreement Second Amendment, NCM LLC is restricted from making available cash distributions until after NCM LLC delivers a compliance certificate for the quarter ending on or about September 29, 2022, and, thereafter, NCM LLC may only make available cash distributions if: (i) no default or event of default under the Credit Agreement has occurred and is continuing; (ii) the senior secured financial covenant leverage ratio is equal to or less than 4.00 to 1.00; and (iii) the aggregate principal amount of all outstanding revolving loans under the Credit Agreement is $39.0 million or less.
In addition, pursuant to the Credit Agreement Second Amendment, NCM LLC will incur new incremental term loans in an aggregate principal amount of $50.0 million, the proceeds of which will be used for general corporate purposes. The New Incremental Loans will have substantially similar terms to the existing term loans (after giving effect the Credit Agreement Second Amendment), except that the New Incremental Loans will: (i) have a cash interest rate of LIBOR plus 8.00%, (ii) have a maturity of December 20, 2024, and (iii) be subject to prepayment premiums if the Borrower prepays the New Incremental Loans before maturity.
In connection with the grant of the Additional Collateral to the lenders under the Credit Agreement, NCM LLC concurrently entered into an amendment to the Security Agreement, dated as of October 8, 2019 made by NCM LLC, as issuer, in favor of JPMorgan Chase Bank, N.A., as collateral agent, relating to that certain Indenture, dated as of October 8, 2019, between NCM LLC, as issuer and Wells Fargo Bank, National Association, as trustee, relating to NCM LLC’s Notes due 2028. This amendment grants a security interest in the Additional Collateral for the benefit of the holders of the Secured Notes.
The accompanying Consolidated Financial Statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In the third quarter of 2020, the Company’s ability to continue as a going concern was subject to uncertainty as the Company did not expect to meet certain of its financial covenants within one year following the date of issuance. As a result of the additional funding received and the extension of the automatic waiver of any non-compliance with its consolidated net senior secured leverage ratio and consolidated total leverage ratio financial covenants occurring through and including the quarter ending July 1, 2022 discussed above, substantial doubt about the Company's ability to continue as a going concern no longer exists.
On March 8, 2021, the Company declared a cash dividend of $0.17$0.05 per share (approximately $13.1$3.9 million) on each share of the Company’s common stock (not including outstanding restricted stock and restricted stock units which will accrue dividends until the shares vest) to stockholders of record on March 5, 201922, 2021 to be paid on March 19, 2019.April 5, 2021.
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| | | | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
|
| | | | |
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Exchange Act as of
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 27, 2018,31, 2020, the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management evaluated the design and operating effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, the Company's management concluded that the Company's internal control over financial reporting as of December 27, 201831, 2020 was effective.
In designing and evaluating our disclosure controls and procedures, management recognizes that any control, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Remediation of Previously Disclosed Material Weakness. During the year ended December 27, 2018, the Company enhanced the design of certain controls over accounting for income taxes under ASC 740 in accordance with the remediation plan of the material weakness disclosed in our annual report on Form 10-K for the fiscal year ended December 28, 2017 and enhanced within the Form 10-Q for the quarter ended June 28, 2018. As the additional control activities were effectively implemented in the first and second quarter of 2018, respectively, and the operating effectiveness of the resulting controls has been tested by internal audit for a sufficient period of time, the Company has concluded that the previously disclosed material weakness has been remediated.
Attestation Report of the Registered Public Accounting Firm. The effectiveness of our internal control over financial reporting as of December 27, 201831, 2020 has been attested by the Company’s registered independent public accounting firm, Deloitte & Touche LLP, as stated in its report, which appears herein.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the quarter ended December 27, 201831, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
National CineMedia, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of National CineMedia, Inc. and subsidiary (the “Company”) as of December 27, 2018,31, 2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 27, 2018,31, 2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 27, 2018,31, 2020, of the Company and our report dated February 21, 2019,March 8, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Denver, Colorado
February 21, 2019March 8, 2021
|
| | | | |
| Item 9B. | Other Information |
None.
PART III
|
| | | | |
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item with respect to our directors is incorporated herein by reference from the Company's 2021 Proxy Statement under the heading “Proposal 1- Election of Directors.”
The information required by this item regarding our executive officers is set forth in Part I of this Annual Report on Form 10-K under the heading “Executive Officers of the Registrant“Information about our Executive Officers” and is incorporated herein by this reference.”
Information regarding compliance with Section 16(a) of the Exchange Act by our directors and executive officers and holders of ten percent of a registered class of our equity securities is incorporated in this item by reference from the Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting Compliance.”
Our Board adopted a Code of Business Conduct and Ethics that applies to all of our employees, including our Board of Directors, Chief Executive Officer and principal financial officer. The Code of Business Conduct and Ethics sets forth the Company’s conflict of interest policy, records retention policy, insider trading policy and policies for protection of the Company’s property, business opportunities and proprietary information. Our Code of Business Conduct and Ethics is available free of charge on our website at ncm.com under the tab “Investor Relations– Corporate Governance.” We intend to post on our website any amendments to, or waivers from our Code of Business Conduct and Ethics applicable to senior financial executives.
|
| | | | |
| Item 11. | Executive Compensation |
The information required by this item regarding compensation of executive officers and directors is incorporated herein by reference from the Proxy Statement under the headings “Compensation of Executive Officers,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation”.
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| | | | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
For information with respect to the security ownership of directors, executive officers and holders of more than 5% of a class of our voting securities, refer to the Proxy Statement under the heading “Beneficial Ownership,” which information is incorporated herein by reference.
For Equity Incentive Plan information, refer to the Proxy Statement under the heading “Equity Compensation Plan”, which information is incorporated herein by reference.
|
| | | | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
For information with respect to certain relationships and related transactions, refer to the Proxy Statement under the heading “Certain Relationships and Related Party Transactions,” which information is incorporated herein by reference.
For information with respect to director independence, refer to the Proxy Statement under the heading “Proposal 1- Election of Directors,” which information is incorporated herein by reference.
|
| | | | |
| Item 14. | Principal Accounting Fees and Services |
The information required by this item with respect to principal accounting fees and services is incorporated herein by reference from the Proxy Statement under the heading “Fees Paid to Independent Auditors.”
PART IV
|
| | | | |
| Item 15. | Exhibits, Financial Statement Schedules |
(a) (1) and (a) (2) Financial statements and financial statement schedules
Refer to Index to Financial Statements on page 46.56.
(b) Exhibits
Refer to Exhibit Index, beginning on page 89.96.
(c) Financial Statement Schedules
Financial Statement Schedules not included herein have been omitted because they are either not required, not applicable, or the information is otherwise included herein.
INDEX TO EXHIBITS
| | | | | | | | | | | | | | | | | | | | |
| | | | Incorporation by Reference |
| Exhibit | Ref. | Description | Form | SEC File No. | Exhibit | Filing
Date |
| 3.1 | | | 8-K | 001-33296 | 3.1 | 7/6/2018 |
| | | | | | |
| 3.2 | | | 10-Q | 001-33296 | 3.1 | 11/4/2019 |
| | | | | | |
| 4.1 | | | 8-K | 001-33296 | 4.1 | 8/19/2016 |
| | | | | | |
| 4.2 | | | 8-K | 001-33296 | 4.1 | 8/19/2016 |
| | | | | | |
| 4.3 | | | 8-K | 001-33296 | 4.1 | 10/8/2019 |
| | | | | | |
| 4.4 | | | 8-K | 001-33296 | 4.1 | 10/8/2019 |
| | | | | | |
| 4.5 | | | 10-K | 001-33296 | 4.5 | 2/20/2020 |
| | | | | | |
| 10.1 | | | 8-K | 001-33296 | 10.1 | 2/16/2007 |
| | | | | | |
| 10.1.1 | | | 10-Q | 001-33296 | 10.1.1 | 8/7/2009 |
| | | | | | |
| 10.1.2 | | | 8-K | 001-33296 | 10.1 | 8/10/2010 |
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| 10.1.3 | | Third Amendment to the Third Amended and Restated Limited Liability Company Operating Agreement of National CineMedia, LLC dated September 3, 2013, by and among American Multi-Cinema, Inc., AMC ShowPlace Theatres, Inc., Cinemark Media, Inc., Regal CineMedia Holdings, LLC, Regal Cinemas, Inc. and National CineMedia, Inc. | 8-K | 001-33296 | 10.1.3 | 9/9/2013 |
| | | | | | |
| 10.1.4 | | Fourth Amendment to the Third Amended and Restated Limited Liability Company Operating Agreement of National CineMedia, LLC dated January 23, 2019, by and among Cinemark Media, Inc., Cinemark USA, Inc., Regal Cinemedia Holdings, LLC, Regal Cinemas, Inc., and National CineMedia, Inc. | 10-K | 001-33296 | 10.1.4 | 2/21/2019 |
| | | | | | |
| 10.2 | | | 10-K | 001-33296 | 10.2.4 | 2/21/2014 |
|
| | | | | | |
| | | | Incorporation by Reference |
| Exhibit | Ref. | Description | Form | SEC File No. | Exhibit | Filing Date |
| 3.1 | | | 8-K | 001-33296 | 3.1 | 7/6/2018 |
| | | | | | | |
| 3.2 | * | | | | | |
| | | | | | | |
| 4.1 | | | 8-K | 001-33296 | 4.1 | 4/30/2012 |
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| 4.2 | | | 8-K | 001-33296 | 4.1 | 4/30/2012 |
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| 4.3 | | | 8-K | 001-33296 | 4.1 | 8/19/2016 |
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| 4.4 | | | 8-K | 001-33296 | 4.1 | 8/19/2016 |
| | | | | | | |
| 10.1 | | | 8-K | 001-33296 | 10.1 | 2/16/2007 |
| | | | | | | |
| 10.1.1 | | | 10-Q | 001-33296 | 10.1.1 | 8/7/2009 |
| | | | | | | |
| 10.1.2 | | | 8-K | 001-33296 | 10.1 | 8/10/2010 |
| | | | | | | |
| 10.1.3 | | Third Amendment to the Third Amended and Restated Limited Liability Company Operating Agreement of National CineMedia, LLC dated September 3, 2013, by and among American Multi-Cinema, Inc., AMC ShowPlace Theatres, Inc., Cinemark Media, Inc., Regal CineMedia Holdings, LLC, Regal Cinemas, Inc. and National CineMedia, Inc. | 8-K | 001-33296 | 10.1.3 | 9/9/2013 |
| | | | | | | |
| 10.1.4 | * | Fourth Amendment to the Third Amended and Restated Limited Liability Company Operating Agreement of National CineMedia, LLC dated January 23, 2019, by and among Cinemark Media, Inc., Cinemark USA, Inc., Regal Cinemedia Holdings, LLC, Regal Cinemas, Inc., and National CineMedia, Inc. | | | | |
| | | | | | | |
| 10.2 | | | 10-K | 001-33296 | 10.2.4 | 2/21/2014 |
| | | | | | | | | | | | | | | | | | | | |
| | | | Incorporation by Reference |
| Exhibit | Ref. | Description | Form | SEC File No. | Exhibit | Filing
Date |
| | | | | | |
| 10.2.1 | | | 8-K | 001-33296 | 10.1 | 3/15/2017 |
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| 10.3 | | | 10-K | 001-33296 | 10.3.4 | 2/21/2014 |
| | | | | | |
| 10.3.1 | | | 8-K | 001-33296 | 10.3 | 3/15/2017 |
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| 10.3.2 | | | 8-K | 001-33296 | 10.2 | 9/17/2019 |
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| 10.4 | | | 10-K | 001-33296 | 10.4.4 | 2/21/2014 |
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| 10.4.1 | | | 8-K | 001-33296 | 10.2 | 3/15/2017 |
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| 10.4.2 | | | 8-K | 001-33296 | 10.2 | 9/17/2019 |
| | | | | | |
| 10.5 | | Common Unit Adjustment Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., National CineMedia, LLC, Regal CineMedia Holdings, LLC, American Multi-Cinema, Inc., Cinemark Media, Inc., Regal Cinemas, Inc. and Cinemark USA, Inc. (Confidential treatment granted as to certain portions, which portions were omitted and filed separately with the Commission.) | 8-K | 001-33296 | 10.6 | 2/16/2007 |
| | | | | | |
| 10.6 | | Tax Receivable Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., National CineMedia, LLC, Regal CineMedia Holdings, LLC, Cinemark Media, Inc., Regal Cinemas, Inc., American Multi-Cinema, Inc. and Cinemark USA, Inc. | 8-K | 001-33296 | 10.7 | 2/16/2007 |
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| 10.6.1 | | | 8-K | 001-33296 | 10.1 | 5/5/2008 |
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|
| | | | | | |
| | | | Incorporation by Reference |
| Exhibit | Ref. | Description | Form | SEC File No. | Exhibit | Filing Date |
| | | | | | | |
| 10.3 | | | 10-K | 001-33296 | 10.3.4 | 2/21/2014 |
| | | | | | | |
| 10.3.1 | | | 8-K | 001-33296 | 10.3 | 3/15/2017 |
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| 10.4 | | | 10-K | 001-33296 | 10.4.4 | 2/21/2014 |
| | | | | | | |
| 10.4.1 | | | 8-K | 001-33296 | 10.2 | 3/15/2017 |
| | | | | | | |
| 10.5 | | Common Unit Adjustment Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., National CineMedia, LLC, Regal CineMedia Holdings, LLC, American Multi-Cinema, Inc., Cinemark Media, Inc., Regal Cinemas, Inc. and Cinemark USA, Inc. (Confidential treatment granted as to certain portions, which portions were omitted and filed separately with the Commission.) | 8-K | 001-33296 | 10.6 | 2/16/2007 |
| | | | | | | |
| 10.5.1 | | | 8-K | 001-33296 | 10.1 | 3/15/2017 |
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| 10.6 | | Tax Receivable Agreement dated as of February 13, 2007, by and among National CineMedia, Inc., National CineMedia, LLC, Regal CineMedia Holdings, LLC, Cinemark Media, Inc., Regal Cinemas, Inc., American Multi-Cinema, Inc. and Cinemark USA, Inc. | 8-K | 001-33296 | 10.7 | 2/16/2007 |
| | | | | | | |
| 10.6.1 | | | 8-K | 001-33296 | 10.1 | 5/5/2008 |
| | | | | | | |
| 10.7 | | | 8-K | 001-33296 | 10.8 | 2/16/2007 |
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| | | | | | | | | | | | | | | | | | | | |
| | | | Incorporation by Reference |
| Exhibit | Ref. | Description | Form | SEC File No. | Exhibit | Filing
Date |
| 10.7 | | | 8-K | 001-33296 | 10.9 | 2/16/2007 |
| | | | | | |
| 10.8 | | | 8-K | 001-33296 | 10.1 | 2/16/2007 |
| | | | | | |
| 10.9 | | | 8-K | 001-33296 | 10.11 | 2/16/2007 |
| | | | | | |
| 10.10 | | | 8-K | 001-33296 | 10.12 | 2/16/2007 |
| | | | | | |
| 10.11 | | | 8-K | 001-33296 | 10.1 | 6/25/2018 |
| | | | | | |
| 10.11.1 | | | 8-K | 001-33296 | 10.1 | 5/5/2020 |
| | | | | | |
| 10.11.2 | | | 8-K | 001-33296 | 10.1 | 3/8/2021 |
| | | | | | |
| 10.12 | | | 8-K | 001-33296 | 10.1 | 6/1/2018 |
| | | | | | |
| 10.13 | | | 10-Q | 001-33296 | 10.3 | 11/4/2019 |
| | | | | | |
| 10.14 | | | 10-Q | 001-33296 | 10.1 | 5/12/2015 |
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| 10.15 | | | 10-K | 001-33296 | 10.21 | 2/21/2019 |
| | | | | | |
| 10.16 | | | 8-K | 001-33296 | 10.1 | 5/1/2020 |
| | | | | | |
| 10.17 | | | 8-K | 001-33296 | 10.1 | 2/13/2007 |
| | | | | | |
| 10.18 | |
| 10-Q | 001-33296 | 10.3 | 8/7/2018 |
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|
| | | | | | |
| | | | Incorporation by Reference |
| Exhibit | Ref. | Description | Form | SEC File No. | Exhibit | Filing Date |
| 10.8 | | | 8-K | 001-33296 | 10.9 | 2/16/2007 |
| | | | | | | |
| 10.9 | | | 8-K | 001-33296 | 10.10 | 2/16/2007 |
| | | | | | | |
| 10.10 | | | 8-K | 001-33296 | 10.11 | 2/16/2007 |
| | | | | | | |
| 10.11 | | | 8-K | 001-33296 | 10.12 | 2/16/2007 |
| | | | | | | |
| 10.12 | |
| 8-K | 001-33296 | 10.1 | 6/25/2018 |
| | | | | | | |
| 10.13 | |
| 8-K | 001-33296 | 10.1 | 6/1/2018 |
| | | | | | | |
| 10.14 | | | 8-K | 001-33296 | 10.1 | 1/5/2016 |
| | | | | | | |
| 10.15 | * | | | | | |
| | | | | | | |
| 10.16 | | | 10-Q | 001-33296 | 10.1 | 5/12/2015 |
| | | | | | | |
| 10.17 | | | 8-K | 001-33296 | 10.1 | 8/11/2016 |
| | | | | | | |
| 10.18 | | | 8-K | 001-33296 | 10.1 | 12/21/2018 |
| | | | | | | |
| 10.19 | | | 8-K | 001-33296 | 10.18 | 2/16/2007 |
| | | | | | | |
| 10.19.1 | | | 10-K | 001-33296 | 10/18/2001 | 3/6/2009 |
| | | | | | | |
| 10.19.2 | | | 8-K | 001-33296 | 10.1 | 11/7/2017 |
| | | | | | | | | | | | | | | | | | | | |
| | | | Incorporation by Reference |
| Exhibit | Ref. | Description | Form | SEC File No. | Exhibit | Filing
Date |
| 10.19 | | | 8-K | 001-33296 | 10.2 | 5/2/2013 |
| | | | | | |
| 10.20 | | | S-8 | 001-33296 | 4.1 | 4/29/2016 |
| | | | | | |
| 10.21 | | | 8-K | 001-33296 | 10.2 | 5/1/2020 |
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| 10.22 | | | S-8 | 001-33296 | 4.4 | 2/13/2007 |
| | | | | | |
| 10.23 | | | S-8 | 001-33296 | 4.6 | 2/13/2007 |
| | | | | | |
| 10.23.1 | | | 10-K | 001-33296 | 10.22.1 | 3/6/2009 |
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| 10.23.2 | | | 10-K | 001-33296 | 10.22.2 | 3/9/2010 |
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| 10.23.3 | | | 10-K | 001-33296 | 10.22.3 | 2/25/2011 |
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| 10.23.4 | | | 10-K | 001-33296 | 10.22.4 | 2/24/2012 |
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| 10.23.5 | | | 10-Q | 001-33296 | 10.4 | 11/4/2019 |
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| 10.23.6 | | | 10-Q | 001-33296 | 10.5 | 8/3/2020 |
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| | | | | | |
| 10.24.1 | (1) | | 10-K | 333-176056 | 10.24.9 | 3/14/2018 |
| | | | | | |
| 10.24.2 | (1) | | 10-K | 333-176056 | 10.24.10 | 3/14/2018 |
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| 10.24.3 | | | 10-K | 001-33296 | 10.28.9 | 2/21/2019 |
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| 10.24.4 | | | 10-K | 001-33296 | 10.28.10 | 2/21/2019 |
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| 10.24.5 | | | 10-K | 001-33296 | 10.26.8 | 2/20/2020 |
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| 10.24.6 | | | 10-K | 001-33296 | 10.26.9 | 2/20/2020 |
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| 10.24.7 | | | 10-Q | 001-33296 | 10.6 | 8/3/2020 |
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| 10.24.8 | | | 10-Q | 001-33296 | 10.1 | 11/2/2020 |
| 10.28 | | | | | | |
| 10.25 | | | 10-K | 001-33296 | 10.34 | 3/6/2009 |
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| 10.25.1 | | | S-8 | 001-33296 | 4.4 | 4/29/2016 |
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| 10.25.2 | | | 10-K | 001-33296 | 10.27.2 | 2/24/2017 |
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| 10.25.3 | | | 10-Q | 001-33296 | 10.7 | 8/3/2020 |
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| 21.1 | * | | | | | |
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| 23.1 | * | | | | | |
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| 24.1 | * | | | | | |
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|
| | | | | | |
| | | | Incorporation by Reference |
| Exhibit | Ref. | Description | Form | SEC File No. | Exhibit | Filing Date |
| | | | | | | |
| 10.20 | * | | | | | |
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| 10.21 | * | | | | | |
| | | | | | | |
| 10.22 | | | 8-K | 001-33296 | 10.1 | 2/13/2007 |
| | | | | | | |
| 10.23 | |
| 10-Q | 001-33296 | 10.3 | 8/7/2018 |
| | | | | | | |
| 10.24 | | | 8-K | 001-33296 | 10.2 | 5/2/2013 |
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| 10.25 | | | S-8 | 001-33296 | 4.1 | 4/29/2016 |
| | | | | | | |
| 10.26 | | | S-8 | 001-33296 | 4.4 | 2/13/2007 |
| | | | | | | |
| 10.27 | | | S-8 | 001-33296 | 4.6 | 2/13/2007 |
| | | | | | | |
| 10.27.1 | | | 10-K | 001-33296 | 10.22.1 | 3/6/2009 |
| | | | | | | |
| 10.27.2 | | | 10-K | 001-33296 | 10.22.2 | 3/9/2010 |
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| 10.27.3 | | | 10-K | 001-33296 | 10.22.3 | 2/25/2011 |
| | | | | | | |
| 10.27.4 | | | 10-K | 001-33296 | 10.22.4 | 2/24/2012 |
| | | | | | | |
| 10.28.1 | | | 10-K | 001-33296 | 10.23.7 | 2/26/2016 |
| | | | | | | |
| 10.28.2 | | | 10-K | 001-33296 | 10.23.8 | 2/26/2016 |
| | | | | | | |
| 10.28.3 | | | S-8 | 001-33296 | 4.2 | 4/29/2016 |
| | | | | | | |
| 10.28.4 | | | S-8 | 001-33296 | 4.3 | 4/29/2016 |
| | | | | | | |
| 10.28.5 | | | 10-K | 001-33296 | 10.26.9 | 2/24/2017 |
| | | | | | | |
| 10.28.6 | | | 10-K | 001-33296 | 10.26.10 | 2/24/2017 |
| | | | | | | |
| 10.28.7 | (1) | | 10-K | 333-176056 | 10.24.9 | 3/14/2018 |
| | | | | | | |
| 10.28.8 | (1) | | 10-K | 333-176056 | 10.24.10 | 3/14/2018 |
| | | | | | | |
| 10.28.9 | * | | | | | |
| | | | | | | |
| 10.28.10 | * | | | | | |
| | | | | | | |
| 10.29 | | | 10-K | 001-33296 | 10.34 | 3/6/2009 |
| | | | | | | |
|
| | | | | | |
| | | | Incorporation by Reference |
| Exhibit | Ref. | Description | Form | SEC File No. | Exhibit | Filing Date |
| 10.29.1 | | | S-8 | 001-33296 | 4.4 | 4/29/2016 |
| | | | | | | |
| 10.29.2 | | | 10-K | 001-33296 | 10.27.2 | 2/24/2017 |
| | | | | | | |
| 21.1 | * | | | | | |
| | | | | | | |
| 23.1 | * | | | | | |
| | | | | | | |
| 24.1 | * | | | | | |
| | | | | | | |
| 31.1 | * | | | | | |
| | | | | | | |
| 31.2 | * | | | | | |
| | | | | | | |
| 32.1 | ** | | | | | |
| | | | | | | |
| 32.2 | ** | | | | | |
| | | | | | | |
| 101.INS | * | XBRL Instance Document. | | | | |
| | | | | | | |
| 101.SCH | * | XBRL Taxonomy Extension Schema Document. | | | | |
| | | | | | | |
| 101.CAL | * | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | |
| | | | | | | |
| 101.DEF | * | XBRL Taxonomy Extension Definition Linkbase Document. | | | | |
| | | | | | | |
| 101.LAB | * | XBRL Taxonomy Extension Label Linkbase Document. | | | | |
| | | | | | | |
| 101.PRE | * | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | |
| | | | | | | | | | | | | | | | | | | | |
* | Filed herewith. | | Incorporation by Reference |
| Exhibit | Ref. | Description | Form | SEC File No. | Exhibit | Filing
Date |
| 31.1 | * | | | | | |
| | | | | | |
| 32.1 | ** | Furnished herewith. | | | | |
| | | | | | |
+101.SCH | Management contract.* | Inline XBRL Taxonomy Extension Schema Document. | | | | |
| | | | | | |
(1)
101.CAL | Incorporated by reference to the exhibit listed from NCM LLC’s Annual Report on Form 10-K.* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | |
| | | | | | |
| 101.DEF | * | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | |
| | | | | | |
| 101.LAB | * | Inline XBRL Taxonomy Extension Label Linkbase Document. | | | | |
| | | | | | |
| 101.PRE | * | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | |
| | | | | | |
| 104 | * | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | |
* Filed herewith.
** Furnished herewith.
+ Management contract.
|
| | | | |
| Item 16. | Form 10-K Summary |
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | NATIONAL CINEMEDIA, INC. |
| | | (Registrant) |
| | | |
| Date: | March 8, 2021 | | /s/ Thomas F. Lesinski |
| | | Thomas F. Lesinski |
| | | Chief Executive Officer and Director |
| | | (Principal Executive Officer and Interim Principal Financial Officer) |
| | | |
| Date: | March 8, 2021 | | NATIONAL CINEMEDIA, INC./s/ Julie L. Patterson |
| | | (Registrant)Julie L. Patterson |
| | | SVP, Controller |
Date: | February 21, 2019 | | /s/ Clifford E. Marks |
| | | Clifford E. Marks |
| | | (Interim Chief Executive Officer and President |
| | | (Principal Executive Officer) |
| | | |
Date: | February 21, 2019 | | /s/ Katherine L. Scherping |
| | | Katherine L. Scherping |
| | | Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 21st8th day of February, 2019.March, 2021.
| | | | | | | | | | | |
| Signature | | Title |
| | | |
| /s/ Thomas F. Lesinski | | Chief Executive Officer |
| Thomas F. Lesinski | | (Principal Executive Officer and Interim Principal Financial Officer) |
| | | |
| /s/ Julie L. Patterson | | SVP, Controller |
| Julie L. Patterson | | (Interim Principal Accounting Officer) |
| | | |
| * | | Chairman |
| Mark B. Segall | | |
| | | |
| * | | Director |
| David E. Glazek | | |
| | | |
| * | | Director |
| Lawrence A. Goodman | | |
| | | |
| * | | Director |
| Kurt C. Hall | | |
| | | |
| Signature* | | TitleDirector |
| Juliana F. Hill | | |
| /s/ Clifford E. Marks | | Interim Chief Executive Officer and President |
| Clifford E. Marks* | | (Principal Executive Officer)Director |
| | | |
| /s/ Katherine L. Scherping | | Chief Financial Officer |
| Katherine L. Scherping | | (Principal Financial and Accounting Officer) |
| | | |
| * | | Chairman |
| Thomas F. Lesinski | | |
| | | |
| * | | Director |
| Andrew P. Glaze | | |
| | | |
| * | | Director |
| Lawrence A. Goodman | | |
| | | |
| * | | Director |
| David R. Haas | | |
| | | |
| * | | Director |
| Kurt C. Hall | | |
| | | |
| * | | Director |
| Lee Roy Mitchell | | |
| | | |
| * | | Director |
| Mark SegallDonna Reisman | | |
| | | |
| * | | Director |
| Renana Teperberg | | |
| | | |
| *By: | /s/ Sarah Kinnick Hilty | | Attorney-in-fact |
| Sarah Kinnick Hilty | | |
