Related-Party Transactions | 3 Months Ended |
Apr. 02, 2015 |
Related-Party Transactions [Abstract] | |
Related-Party Transactions | 4. RELATED PARTY TRANSACTIONS |
Founding Member Transactions—In connection with NCM, Inc.’s initial public offering (“IPO”), the Company entered into several agreements to define and regulate the relationships among NCM, Inc., NCM LLC and the founding members. They include the following: |
| · | | ESAs. Under the ESAs, NCM LLC is the exclusive provider within the United States of advertising services in the founding members’ theatres (subject to pre-existing contractual obligations and other limited exceptions for the benefit of the founding members). The advertising services include the on-screen advertising of the FirstLook pre-show, use of the lobby entertainment network (“LEN”) and lobby promotions. Further, some advertising in the FirstLook pre-show is sold to NCM LLC’s founding members to be used to satisfy the founding members’ on-screen advertising commitments under their beverage concessionaire agreements. In consideration for access to the founding members’ theatre attendees for on-screen advertising and use of the founding members’ theatres for the LEN and lobby promotions, the founding members receive a monthly theatre access fee. | | | | | | | | | |
| · | | Common Unit Adjustment Agreement. The common unit adjustment agreement provides a mechanism for adjusting membership units held by the founding members based on increases or decreases in the number of screens operated by each founding member. | | | | | | | | | |
| · | | Tax Receivable Agreement. The tax receivable agreement 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. Refer to Note 7 – Income Taxes for further details. | | | | | | | | | |
| · | | Software License Agreement. At the date of the Company’s IPO, NCM LLC was granted a perpetual, royalty-free license from NCM LLC’s founding members to use certain proprietary software that existed at the time for the delivery of digital advertising and other content through the digital content network (“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 NCM LLC’s founding members, if any. | | | | | | | | | |
Following is a summary of the transactions between the Company and the founding members (in millions): |
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| Three Months Ended | | | | | | | |
Included in the Condensed Consolidated Statements of Loss: | 2-Apr-15 | | 27-Mar-14 | | | | | | | |
Revenue: | | | | | | | | | | | | |
Beverage concessionaire revenue (included in advertising revenue) (1) | $ | 7.6 | | $ | 9.4 | | | | | | | |
Advertising inventory revenue (included in advertising revenue) (2) | | 0.1 | | | 0.1 | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Theatre access fee (3) | | 17.2 | | | 17.4 | | | | | | | |
Purchase of movie tickets and concession products and rental of theatre space (included in selling and marketing costs) (4) | | 0.2 | | | 0.2 | | | | | | | |
Non-operating expenses: | | | | | | | | | | | | |
Interest income from notes receivable (included in interest income) (5) | | 0.3 | | | 0.3 | | | | | | | |
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| -1 | | For the three months ended April 2, 2015 and March 27, 2014, the founding members purchased 60 seconds of on-screen advertising time (with a right to purchase up to 90 seconds) from NCM LLC to satisfy their obligations under their beverage concessionaire agreements at a rate specified by the ESA at a 30 second equivalent cost per thousand (“CPM”). | | | | | | | | | |
| -2 | | The value of such purchases is calculated by reference to NCM LLC’s advertising rate card. | | | | | | | | | |
| -3 | | Comprised of payments per theatre attendee, payments per digital screen with respect to the founding member theatres included in the Company’s network and payments for access to higher quality digital cinema equipment. | | | | | | | | | |
| -4 | | Used primarily for marketing to NCM LLC’s advertising clients. | | | | | | | | | |
| -5 | | On December 26, 2013, NCM LLC sold its Fathom Events business to a newly formed limited liability company (AC JV, LLC) owned 32% by each of the founding members and 4% by NCM LLC. In consideration for the sale, NCM LLC received a total of $25.0 million in promissory notes from its founding members (one-third or approximately $8.3 million from each founding member). The notes bear interest at a fixed rate of 5.0% per annum, compounded annually. Interest and principal payments are due annually in six equal installments commencing on the first anniversary of the closing. | | | | | | | | | |
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| | As of | | | | | | |
Included in the Condensed Consolidated Balance Sheets: | | 2-Apr-15 | | 1-Jan-15 | | | | | | |
Purchase of movie tickets and concession products (included in Prepaid expenses) (1) | | $ | 0.2 | | $ | - | | | | | | |
Current portion of notes receivable - founding members (2) | | | 4.2 | | | 4.2 | | | | | | |
Long-term portion of notes receivable - founding members (2) | | | 16.6 | | | 16.6 | | | | | | |
Interest receivable on notes receivable (included in other current assets) (2) | | | 0.3 | | | - | | | | | | |
Common unit adjustments and integration payments, net of amortization (included in intangible assets) (3) | | | 484.5 | | | 458.3 | | | | | | |
Current payable to founding members under tax receivable agreement (4) | | | 9.0 | | | 19.6 | | | | | | |
Long-term payable to founding members under tax receivable agreement (4) | | | 148.4 | | | 146.7 | | | | | | |
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| -1 | | Used primarily for marketing to NCM LLC’s advertising clients. | | | | | | | | | |
| -2 | | Refer to the discussion of notes receivable from the founding members above. | | | | | | | | | |
| -3 | | Refer to Note 3—Intangible Assets for further information on common unit adjustments and integration payments. | | | | | | | | | |
| -4 | | The Company paid the founding members $17.2 million in the first quarter of 2015, of which $0.9 million was net operating loss carrybacks for the 2009, 2010 and 2011 tax years and $16.3 million was for the 2014 tax year. The Company paid the founding members $25.1 million in the first quarter of 2014, of which $6.7 million was net operating loss carrybacks for the 2009, 2010 and 2011 tax years and $18.4 million was for the 2013 tax year. | | | | | | | | | |
On March 16, 2015, the Company announced the termination of the Merger Agreement. After the Merger Agreement was terminated, NCM LLC reimbursed NCM, Inc. for certain expenses pursuant to an indemnification agreement among NCM LLC, NCM, Inc. and the founding members. During the three months ended April 2, 2015, NCM LLC paid Screenvision an approximate $26.8 million termination payment on behalf of NCM, Inc. This payment was $2 million lower than the reverse termination fee contemplated by the Merger Agreement. During the three months ended April 2, 2015, NCM LLC also either paid or reimbursed NCM, Inc. for the legal and other merger-related costs of approximately $14.1 million ($7.5 million incurred during the year ended January 1, 2015 and approximately $6.6 million incurred during the three months ended April 2, 2015). The Company and the founding members each bore a pro rata portion of the termination fee and the related merger expenses based on their aggregate ownership percentages in NCM LLC. |
Pursuant to the terms of the NCM LLC Operating Agreement in place since the completion of the Company’s 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 of available cash for the three months ended April 2, 2015 and March 27, 2014 were as follows (in millions): |
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| Three Months Ended | | | | | | | |
| 2-Apr-15 | | 27-Mar-14 | | | | | | | |
AMC | $ | - | | $ | 1.7 | | | | | | | |
Cinemark | | - | | | 2.2 | | | | | | | |
Regal | | - | | | 2.3 | | | | | | | |
Total founding members | | - | | | 6.2 | | | | | | | |
NCM, Inc. | | - | | | 5.3 | | | | | | | |
Total | $ | - | | $ | 11.5 | | | | | | | |
Due to the merger termination fee and related merger expenses, the mandatory distributions of available cash by NCM LLC to its founding members and NCM, Inc. for the three months ended April 2, 2015 was calculated as negative $25.5 million ($14.0 million for the founding members and $11.5 million for NCM, Inc.). Therefore, there will be no payment made for the second quarter of 2015. Under the terms of the NCM LLC Operating Agreement, this negative amount will be netted against the available cash distributions for the second quarter of 2016, which will be paid in the third quarter of 2016. Until the settlement in the third quarter of 2016, the remaining merger-related costs will be funded through borrowings on the NCM LLC revolving credit facility. |
Amounts due to founding members as of April 2, 2015 were comprised of the following (in millions): |
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| | AMC | | Cinemark | | Regal | | Total |
Theatre access fees, net of beverage revenues | | $ | 0.9 | | $ | 0.9 | | $ | 1.4 | | $ | 3.2 |
Cost and other reimbursement | | | -0.2 | | | -0.1 | | | - | | | -0.3 |
Total amounts due to founding members | | $ | 0.7 | | $ | 0.8 | | $ | 1.4 | | $ | 2.9 |
Amounts due to founding members as of January 1, 2015 were comprised of the following (in millions): |
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| | AMC | | Cinemark | | Regal | | Total |
Theatre access fees, net of beverage revenues | | $ | 0.8 | | | 0.8 | | | 1.2 | | $ | 2.8 |
Cost and other reimbursement | | | -0.6 | | | -0.2 | | | - | | | -0.8 |
Distributions payable to founding members | | | 9.1 | | | 11.6 | | | 12.2 | | | 32.9 |
Total amounts due to founding members | | $ | 9.3 | | $ | 12.2 | | $ | 13.4 | | $ | 34.9 |
AC JV, LLC Transactions—In December 2013, NCM LLC sold its Fathom Events business to a newly formed limited liability company, AC JV, LLC, owned 32% by each of the founding members and 4% by NCM LLC. The Company accounts for its investment in AC JV, LLC under the equity method of accounting in accordance with ASC 323-30, Investments—Equity Method and Joint Ventures (“ASC 323-30”) because AC JV, LLC is a limited liability company with the characteristics of a limited partnership and ASC 323-30 requires the use of equity method accounting unless the Company’s interest is so minor that it would have virtually no influence over partnership operating and financial policies. The Company concluded that its interest was more than minor under the accounting guidance despite the fact that 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’s investment in AC JV, LLC was $1.4 million and $1.3 million as of April 2, 2015 and January 1, 2015, respectively. Equity in earnings from AC JV, LLC was $0.1 million and $0.0 million for the three months ended April 2, 2015 and March 27, 2014, respectively and is included in non-operating expenses in the unaudited Condensed Consolidated Statements of Income. |
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Related Party Affiliates—NCM LLC enters into network affiliate agreements with network affiliates for NCM LLC to provide in-theatre advertising at theatre locations that are owned by companies that are affiliates of certain of the founding members or directors of NCM, Inc. Related party affiliate agreements are entered into at terms that are similar to those of the Company’s other network affiliates. NCM LLC has an agreement with Starplex Operating L.P. (“Starplex”), an affiliate of one of NCM, Inc.’s former directors, who served on NCM, Inc.’s board of directors during 2014. During the three months ended March 27, 2014, there was approximately $0.5 million included in advertising operating costs related to Starplex, and there was approximately $0.9 million of accounts payable with Starplex as of January 1, 2015. Following the director’s resignation from NCM, Inc.’s board of directors in 2014, Starplex is no longer a related party. |
Other Transactions—NCM LLC has an agreement with an interactive media company to sell some of its online inventory. One of NCM, Inc.’s directors is also a director of this media company. During the three months ended April 2, 2015 and March 27, 2014, this company generated approximately $0.0 million and $0.1 million, respectively, in revenue for NCM LLC and there was approximately $0.3 million and $0.3 million of accounts receivable due from this company as of April 2, 2015 and January 1, 2015, respectively. |
NCM LLC has an agreement with AEG Live, an affiliate of The Anschutz Corporation, for AEG Live to showcase musical artists in NCM LLC’s FirstLook preshow. During the three months ended April 2, 2015 and March 27, 2014, NCM LLC received approximately $0.4 million and $0.0 million, respectively, in revenue from AEG Live and as of April 2, 2015 and January 1, 2015, had $0.5 million and $0.4 million, respectively, of accounts receivable from AEG Live. |
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