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’ 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 digital content network (“DCN”) equipment required to deliver the on-screen advertising and other content included in the Noovie pre-show, use of the lobby entertainment network (“LEN”) and rights to sell and display certain lobby promotions. Further, 30 to 60 seconds of advertising included in the Noovie pre-show is sold to NCM LLC’s 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. • Common Unit Adjustment Agreement. The common unit adjustment agreement provides a mechanism for increasing or decreasing the membership units held by the founding members based on the acquisition or construction of new theaters or sale or closure of theaters that are operated by each founding member and included in NCM LLC’s network. • 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. • 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 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. The following tables provide summaries of the transactions between the Company and the founding members (in millions): Three Months Ended Nine Months Ended Included in the Condensed Consolidated Statements of Income: September 28, 2017 September 29, 2016 September 28, 2017 September 29, 2016 Revenue: Beverage concessionaire revenue (included in advertising revenue) (1) $ 6.7 $ 7.5 $ 22.7 $ 21.8 Advertising inventory revenue (included in advertising revenue) (2) — 0.1 — 0.3 Operating expenses: Theater access fee (3) 18.1 19.2 57.4 56.8 Purchase of movie tickets and concession products and rental of theater space (included in selling and marketing costs) (4) 0.4 0.4 1.2 1.2 Purchase of movie tickets and concession products and rental of theater space (included in advertising operating costs) (4) — — 0.1 — Purchase of movie tickets and concession products and rental of theater space (included in administrative and other costs) (4) — — — 0.1 Non-operating expenses: Interest income from notes receivable (included in interest income) (5) 0.2 0.2 0.5 0.6 (1) For the nine months ended September 28, 2017 and September 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 cost per thousand (“CPM”) rate specified by the ESA. (2) The value of such purchases is calculated by reference to NCM LLC’s advertising rate card. (3) Comprised of payments per theater attendee and payments per digital screen with respect to the founding member theaters included in the Company’s network, including payments for access to higher quality digital cinema equipment. (4) Used primarily for marketing to NCM LLC’s advertising clients. (5) 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. As of Included in the Condensed Consolidated Balance Sheets: September 28, 2017 December 29, 2016 Current portion of notes receivable - founding members (1) 4.2 5.6 Long-term portion of notes receivable - founding members (1) 8.3 8.3 Interest receivable on notes receivable (included in other current assets) (1) 0.1 0.3 Common unit adjustments, net of amortization and integration payments (included in intangible assets) (2) 702.2 529.9 Current payable to founding members under tax receivable agreement (3) 15.9 18.4 Long-term payable to founding members under tax receivable agreement (3) 144.2 143.4 (1) Refer to the discussion of notes receivable from the founding members above. (2) Refer to Note 3— for further information on common unit adjustments and integration payments. (3) The Company paid the founding members $17.3 million in the second quarter of 2017 which was for the 2016 tax year. The Company paid the founding members $23.5 million in the first quarter of 2016, of which $2.7 million was net operating loss carrybacks for the 2013 year and $20.8 million was for the 2015 tax year. 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 and nine months ended September 28, 2017 and September 29, 2016 were as follows (in millions): Three Months Ended Nine Months Ended September 28, 2017 September 29, 2016 September 28, 2017 September 29, 2016 AMC $ 8.1 $ 7.8 $ 16.3 $ 11.3 Cinemark 9.6 8.6 15.6 11.8 Regal 9.5 8.9 15.5 12.1 Total founding members 27.2 25.3 47.4 35.2 NCM, Inc. 25.9 19.6 39.0 26.6 Total $ 53.1 $ 44.9 $ 86.4 $ 61.8 The mandatory distributions of available cash by NCM LLC to its founding members for the three months ended September 28, 2017 of $27.2 million is included in amounts due to founding members on the unaudited Condensed Consolidated Balance Sheets as of September 28, 2017 and will be made in the fourth quarter of 2017. The mandatory distributions to NCM, Inc. are eliminated in consolidation. Amounts due to founding members as of September 28, 2017 were comprised of the following (in millions): AMC Cinemark Regal Total Theater access fees, net of beverage revenues and encumbered theater payments $ 1.2 $ 0.9 $ 1.3 $ 3.4 Distributions payable to founding members 8.1 9.6 9.5 27.2 Integration payments due from founding members (6.2 ) (0.3 ) — (6.5 ) Cost and other reimbursement (0.1 ) — — (0.1 ) Total amounts due to founding members $ 3.0 $ 10.2 $ 10.8 $ 24.0 Amounts due to founding members as of December 29, 2016 were comprised of the following (in millions): AMC Cinemark Regal Total Theater access fees, net of beverage revenues and encumbered theater payments $ 1.6 $ 0.9 $ 1.4 $ 3.9 Distributions payable to founding members 12.3 13.6 14.0 39.9 Integration payments due from founding members (0.7 ) (0.3 ) — (1.0 ) Cost and other reimbursement — (0.1 ) — (0.1 ) Total amounts due to founding members $ 13.2 $ 14.1 $ 15.4 $ 42.7 Common Unit Membership Redemption —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-one basis, or at the Company’s option, a cash payment equal to the market price of one share of NCM, Inc. common stock. During the third quarter of 2017, AMC exercised the redemption right of an aggregate 14.6 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 Condensed Consolidated Statement of Equity. Further, no gain or loss was recognized in the Condensed Consolidated Statements of Income. AMC also exercised the redemption right of an aggregate 200,000 common membership units for a like number of shares of NCM, Inc.’s common stock in December 2015. During the three months ended September 28, 2017, 12.0 million of these shares were sold and as of September 28, 2017, 2.8 million of these shares remained outstanding. The Company did not receive any proceeds from the sale of its common stock by AMC. The 2.8 million shares were subsequently sold on September 29, 2017. During the three and nine months ended September 28, 2017 and September 29, 2016, AMC received cash dividends of approximately $0.0 million, $0.0 million, $0.1 million and $0.1 million on its shares of NCM, Inc. common stock. During the nine months ended September 28, 2017, the Company recorded a reduction to deferred tax assets of $2.4 million for its additional ownership interest in NCM LLC as a result of these redemptions to reflect the tax effective difference between the tax basis and the book basis, the majority of which will be amortized over a 15-year period for federal income tax purposes. In addition, the Company recorded a decrease of $1.1 million during the nine months ended September 28, 2017 in its long-term payable to founding members for the estimated payment 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 the Company expects to realize as a result of the deferred tax asset, which is recorded at its present value. The discount on this liability is a temporary difference that resulted in the reduction of $0.4 million to the deferred tax liability during the nine months ended September 28, 2017. Memorandum of Understanding with AMC — Pursuant to the Final Judgment, AMC is required to divest the majority of its equity interests in NCM LLC and NCM, Inc., so that by June 20, 2019 it owns 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”). AMC must complete the divestiture per the following schedule: (i) on or before December 20, 2017, AMC must own no more than 15.0% of NCM’s outstanding equity interests, (ii) on or before December 20, 2018, AMC must own no more than 7.5% of NCM’s outstanding equity interests and (iii) on or before June 20, 2019, AMC must own no more than 4.99% of NCM’s outstanding equity interests. Pursuant to the MOU, AMC also has agreed, among other things, subject to limited exceptions to retain at least 4.5% of NCM’s outstanding equity interests during the term of the Final Judgment, subject to certain exceptions which allow for certain sell downs after the 30-month anniversary of the MOU. As of September 28, 2017, AMC owned 15.2% of NCM’s outstanding equity interests. AMC also agreed to reimburse the Company for its incurred and ongoing costs and expenses in connection with the Final Judgment including, but not limited to, its financial advisor and legal fees up to $1.0 million of such costs and expenses. During the nine months ended September 28, 2017, the Company incurred $1.3 million of these costs, of which $1.0 million was reimbursed through the “Amounts due to founding members” within the Condensed Consolidated Balance Sheets and the remaining $0.3 million is included in administrative costs within the Condensed Consolidated Income Statement. AC JV, LLC Transactions —In December 2013, NCM LLC sold its Fathom Events business to a newly formed limited liability company, AC JV, LLC, owned 32% by each of the founding members and 4% by NCM LLC. The Company accounts for its investment in AC JV, LLC under the equity method of accounting in accordance with ASC 323-30, Investments—Equity Method and Joint Ventures (“ASC 323-30”) because AC JV, LLC is a limited liability company with the characteristics of a limited partnership and ASC 323-30 requires the use of equity method accounting unless the Company’s interest is so minor that it would have virtually no influence over partnership operating and financial policies. Although NCM LLC does not have a representative on AC JV, LLC’s Board of Directors or any voting, consent or blocking rights with respect to the governance or operations of AC JV, LLC, the Company concluded that its interest was more than minor under the accounting guidance. The Company’s investment in AC JV, LLC was $1.1 million and $1.0 million as of September 28, 2017 and December 29, 2016, respectively. Equity in earnings from AC JV, LLC for the three and nine months ended September 28, 2017 and September 29, 2016, were $0.0 million, $0.0 million, $0.1 million and $0.0 million, respectively, and is included in non-operating expenses in the unaudited Condensed Consolidated Statements of Income. Related Party Affiliates —NCM LLC has an agreement with LA Live, an affiliate of The Anschutz Corporation to provide in-theater advertising. The Anschutz Corporation is a wholly-owned subsidiary of the Anschutz Company, which is the controlling stockholder of Regal. During the three and nine months ended September 28, 2017 and September 29, 2016, there was $0.1 million, $0.1 million, $0.2 million and $0.2 million, respectively, included in advertising operating costs related to LA Live, and there was approximately $0.1 million and $0.1 million of accounts payable with this company as of September 28, 2017 and December 29, 2016, respectively. Other Transactions —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 Noovie pre-show. During the three and nine months ended September 28, 2017 and September 29, 2016, NCM LLC recorded approximately $0.4 million, $0.5 million $1.0 million and $1.3 million, respectively, in revenue from AEG Live. As of September 28, 2017 and December 29, 2016, NCM LLC had approximately $0.1 million and $0.2 million, respectively, of accounts receivable from AEG Live. |