Attached files

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10-K - FORM 10-K - National CineMedia, Inc.d10k.htm
EX-10.23.3 - FORM OF 2011 RESTRICTED STOCK AGREEMENT - National CineMedia, Inc.dex10233.htm
EX-23.1 - CONSENT OF DELOITTE & TOUCHE LLP - National CineMedia, Inc.dex231.htm
EX-31.2 - RULE 13A-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - National CineMedia, Inc.dex312.htm
EX-31.1 - RULE 13A-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER - National CineMedia, Inc.dex311.htm
EX-10.22.3 - FORM OF 2011 STOCK OPTION AGREEMENT - National CineMedia, Inc.dex10223.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - National CineMedia, Inc.dex321.htm
EX-21.1 - LIST OF SUBSIDIARIES - National CineMedia, Inc.dex211.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - National CineMedia, Inc.dex322.htm

Exhibit 99.1

INDEX TO FINANCIAL STATEMENTS

 

     Page  

NATIONAL CINEMEDIA, LLC

  

Report of Independent Registered Public Accounting Firm

     2   

Balance Sheets as of December 30, 2010 and December 31, 2009

     3   

Statements of Operations for the years ended December 30, 2010, December 31, 2009 and January 1, 2009

     4   

Statements of Members’ Equity/(Deficit) for the years ended December 30, 2010, December 31, 2009 and January 1, 2009

     5   

Statements of Cash Flows for the years ended December 30, 2010, December 31, 2009 and January 1, 2009

     6   

Notes to Financial Statements

     8   

 

1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Members of

National CineMedia, LLC

Centennial, Colorado

We have audited the accompanying balance sheets of National CineMedia, LLC (the “Company”) as of December 30, 2010 and December 31, 2009, and the related statements of operations, members’ equity (deficit), and cash flows for the years ended December 30, 2010, December 31, 2009 and January 1, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2010 and December 31, 2009, and the results of its operations and its cash flows for the years ended December 30, 2010, December 31, 2009 and January 1, 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Denver, Colorado

February 24, 2011

 

2


NATIONAL CINEMEDIA, LLC

BALANCE SHEETS

(In millions)

 

      December 30,
2010
    December 31,
2009
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 13.8      $ 37.8   

Receivables, net of allowance of $3.7 and $3.6 million, respectively

     100.1        89.0   

Prepaid expenses

     1.7        1.5   

Prepaid management fees to managing member

     0.8        0.6   
                

Total current assets

     116.4        128.9   

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $46.4 and $39.3 million, respectively

     19.8        23.7   

INTANGIBLE ASSETS, net of accumulated amortization of $10.8 and $4.4 million, respectively

     275.2        134.2   

OTHER ASSETS:

    

Debt issuance costs, net

     7.3        9.2   

Other investment

     6.7        7.4   

Other long-term assets

     0.6        1.0   
                

Total other assets

     14.6        17.6   
                

TOTAL

   $ 426.0      $ 304.4   
                

LIABILITIES AND MEMBERS’ EQUITY/(DEFICIT)

    

CURRENT LIABILITIES:

    

Amounts due to founding members

     25.2        29.8   

Amounts due to managing member

     28.2        22.9   

Accrued expenses

     8.6        12.4   

Current portion of long-term debt

     1.2        4.3   

Current portion of interest rate swap agreements

     25.3        24.4   

Accrued payroll and related expenses

     9.3        6.6   

Accounts payable

     10.5        11.3   

Deferred revenue and other current liabilities

     3.8        2.8   
                

Total current liabilities

     112.1        114.5   

NON-CURRENT LIABILITIES:

    

Borrowings

     775.0        799.0   

Interest rate swap agreements

     45.5        30.2   

Other long-term liabilities

     0.0        0.3   
                

Total non-current liabilities

     820.5        829.5   
                

Total liabilities

     932.6        944.0   
                

COMMITMENTS AND CONTINGENCIES (NOTE 11)

    

MEMBERS’ EQUITY/(DEFICIT)

     (506.6     (639.6
                

TOTAL

   $ 426.0      $ 304.4   
                

See accompanying notes to financial statements.

 

3


NATIONAL CINEMEDIA, LLC

STATEMENTS OF OPERATIONS

(In millions)

 

     Year Ended
December 30,

2010
     Year Ended
December 31,

2009
    Year Ended
January  1,

2009
 

REVENUE:

       

Advertising (including revenue from founding members of $38.5, $38.2 and $45.6 million, respectively)

   $ 379.4       $ 335.1      $ 330.3   

Fathom Events

     48.0         45.5        38.9   

Other

     0.1         0.1        0.3   
                         

Total

     427.5         380.7        369.5   
                         

OPERATING EXPENSES:

       

Advertising operating costs

     21.7         20.0        18.7   

Fathom Events operating costs (including costs to founding members of $7.3, $6.7, and $6.0 million, respectively)

     32.4         29.1        25.1   

Network costs

     20.0         18.6        17.0   

Theatre access fees—founding members

     52.6         52.7        49.8   

Selling and marketing costs

     57.9         50.2        47.9   

Administrative costs

     17.9         14.8        14.5   

Administrative fee—managing member

     16.6         10.8        9.7   

Severance plan costs

     0.0         0.0        0.5   

Depreciation and amortization

     17.8         15.6        12.4   

Other costs

     0.0         0.7        0.7   
                         

Total

     236.9         212.5        196.3   
                         

OPERATING INCOME

     190.6         168.2        173.2   

Interest Expense and Other, Net:

       

Borrowings

     44.4         47.1        51.8   

Change in derivative fair value

     5.3         (7.0     14.2   

Interest income and other

     0.2         (2.0     (0.2
                         

Total

     49.9         38.1        65.8   

Impairment and related loss

     0.0         0.0        11.5   
                         

INCOME BEFORE INCOME TAXES

     140.7         130.1        95.9   
                         

Provision for Income Taxes

     0.5         0.8        0.6   

Equity loss from investment, net

     0.7         0.8        0.0   
                         

NET INCOME

   $ 139.5         128.5      $ 95.3   
                         

See accompanying notes to financial statements.

 

4


NATIONAL CINEMEDIA, LLC

STATEMENTS OF MEMBERS’ EQUITY/(DEFICIT)

(In millions)

 

Balance—December 27, 2007

     $ (713.8)   

Contribution of severance plan payments

     0.5   

Capital contribution from managing member

     0.6   

Capital contribution from founding members

     4.7   

Distribution to managing member

     (55.5

Distribution to founding members

     (75.5

Units issued for purchase of intangible asset

     116.1   

Comprehensive Income:

  

Unrealized (loss) on cash flow hedge

     (59.1

Net income

     95.3   
        

Total Comprehensive Income

     36.2   

Share-based compensation expense

     1.1   
        

Balance—January 1, 2009

   $ (685.6
        

Capital contribution from founding members

     0.1   

Distribution to managing member

     (57.8

Distribution to founding members

     (81.5

Units issued for purchase of intangible asset

     28.5   

Comprehensive Income:

  

Unrealized (loss) on cash flow hedge

     26.1   

Net income

     128.5   
        

Total Comprehensive Income

     154.6   

Share-based compensation expense

     2.1   
        

Balance—December 31, 2009

   $ (639.6
        

Capital contribution from managing member

     3.5   

Distribution to managing member

     (71.0

Distribution to founding members

     (85.1

Units issued for purchase of intangible asset

     151.3   

Comprehensive Income:

  

Unrealized (loss) on cash flow hedge

     (10.9

Net income

     139.5   
        

Total Comprehensive Income

     128.6   

Share-based compensation expense

     5.7   
        

Balance—December 30, 2010

   $ (506.6
        

See accompanying notes to financial statements.

 

5


NATIONAL CINEMEDIA, LLC

STATEMENTS OF CASH FLOWS

(In millions)

 

     Year Ended
December 30,
2010
    Year Ended
December 31,
2009
    Year Ended
January 1,
2009
 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 139.5      $ 128.5      $ 95.3   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     17.8        15.6        12.4   

Non-cash severance and share-based compensation

     5.6        2.0        1.5   

Non-cash impairment and related loss

     0.0        0.0        11.5   

Net unrealized loss (gain) on hedging transactions

     5.3        (7.0     14.2   

Equity loss from investment

     0.7        0.8        0.0   

Amortization of debt issuance costs

     1.9        1.9        1.9   

Other non-cash operating activities

     0.6        0.0        0.0   

Changes in operating assets and liabilities:

      

Receivables—net

     (11.1     3.0        (0.4

Accounts payable and accrued expenses

     (1.6     6.9        (0.7

Amounts due to founding members and managing member

     4.1        1.2        0.4   

Other operating

     0.8        (3.5     0.1   
                        

Net cash provided by operating activities

     163.6        149.4        136.2   
                        

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchases of property and equipment

     (10.1     (8.4     (16.6

Proceeds from sale of property and equipment to founding member

     3.0        0.0        0.0   

Increase in investment in affiliate

     0.0        (2.0     0.0   
                        

Net cash used in investing activities

     (7.1     (10.4     (16.6
                        

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from borrowings

     124.3        0.0        139.0   

Repayments of borrowings

     (152.5     (3.0     (124.0

Founding members and managing member integration payments

     3.9        3.6        10.3   

Distributions to founding members and managing member

     (159.6     (135.9     (118.3

Unit settlement for share-based compensation

     3.4        0.0        0.0   
                        

Net cash used in financing activities

     (180.5     (135.3     (93.0
                        

CHANGE IN CASH AND CASH EQUIVALENTS

     (24.0     3.7        26.6   

CASH AND CASH EQUIVALENTS:

      

Beginning of period

     37.8        34.1        7.5   
                        

End of period

   $ 13.8      $ 37.8      $ 34.1   
                        

See accompanying notes to financial statements.

 

6


NATIONAL CINEMEDIA, LLC

STATEMENTS OF CASH FLOWS (CONTINUED)

(In millions)

 

     Year Ended
December 30,
2010
     Year Ended
December 31,
2009
     Year Ended
January 1, 2009
 

Supplemental disclosure of non-cash financing and investing activity:

        

Contribution for severance plan payments

   $ 0.0       $ 0.0       $ 0.5   

Purchase of an intangible asset with subsidiary equity

   $ 151.3       $ 28.5       $ 116.1   

Settlement of put liability by issuance of debt

   $ 0.0       $ 7.0       $ 0.0   

Assets acquired in settlement of put liability

   $ 0.0       $ 2.5       $ 0.0   

Supplemental disclosure of cash flow information:

        

Cash paid for interest

   $ 49.8       $ 38.8       $ 48.3   

Cash paid for income taxes

   $ 0.5       $ 0.8       $ 0.6   

See accompanying notes to financial statements.

 

7


1. THE COMPANY

Description of Business

National CineMedia, LLC (“NCM LLC” or “the Company”) commenced operations on April 1, 2005 and operates the largest digital in-theatre network in North America, allowing NCM LLC to distribute advertising, Fathom entertainment programming events and corporate events under long-term exhibitor services agreements (“ESAs”) with American Multi-Cinema, Inc. (“AMC”), a wholly owned subsidiary of AMC Entertainment, Inc. (“AMCE”), Regal Cinemas, Inc., a wholly owned subsidiary of Regal Entertainment Group (“Regal”), and Cinemark USA, Inc. (“Cinemark USA”), a wholly owned subsidiary of Cinemark Holdings, Inc. (“Cinemark”). AMC, Regal and Cinemark and their affiliates are referred to in this document as “founding members”. NCM LLC also provides such services to certain third-party theatre circuits under “network affiliate” agreements, which expire at various dates.

At December 30, 2010, NCM LLC had 110,752,192 common membership units outstanding, of which 53,549,477 (48.3%) were owned by NCM, Inc., 21,452,792 (19.4%) were owned by Regal, 18,803,420 (17.0%) were owned by AMC, and 16,946,503 (15.3%) were owned by Cinemark. The membership units held by the founding members are exchangeable into NCM, Inc. common stock on a one-for-one basis. During the third quarter of 2010, AMC and Regal completed a common unit membership redemption and an underwritten public offering of an aggregate 10,955,471 shares of National CineMedia, Inc.’s (“NCM, Inc.” or “managing member”), common stock (see Note 7).

Basis of Presentation

The Company has prepared its financial statements and related notes 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”).

On February 13, 2007, NCM, Inc., a Company formed by NCM LLC and incorporated in the State of Delaware with the sole purpose of becoming a member and sole manager of NCM LLC, completed its initial public offering (“IPO”). The Company’s business is seasonal and for this and other reasons operating results for interim periods may not be indicative of the Company’s full year results or future performance. As a result of the various related-party agreements discussed in Note 7, 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.

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

Reclassifications Certain reclassifications of previously reported amounts within operating activities in the statement of cash flows have been made to conform to the current year presentation.

 

2. SIGNIFICANT ACCOUNTING POLICIES

Accounting Period—The Company operates on a 52-week fiscal year, with the fiscal year ending on the first Thursday after December 25, which, in certain years, results in a 53-week year, as was the case for fiscal year 2008.

Segment Reporting— Segments are accounted for under ASC 280 Segment Reporting. Refer to Note 14.

Revenue Recognition—Advertising revenue is recognized in the period in which an advertising contract is fulfilled against the contracted theatre attendees. Advertising revenue is recorded net of make-good provisions to account for delivered attendance that is less than contracted attendance. When remaining delivered attendance is provided in subsequent periods, that portion of the revenue earned is recognized in that period. Deferred revenue refers to the unearned portion of advertising contracts. All deferred revenue is classified as a current liability. Fathom Events revenue is recognized in the period in which the event is held.

Barter Transactions—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 advertising exchanged based on fair value received for similar advertising from cash paying customers. Revenues for advertising barter transactions are recognized when advertising is provided, and products and services received are charged to expense when used. The Company limits the use of such barter transactions to items and services for which it would otherwise have paid cash. Any timing differences between the delivery of the bartered revenue

 

8


and the use of the bartered expense products and services are recorded through deferred revenue. Revenue and expense from barter transactions for the year ended December 30, 2010 were $1.5 million and $1.1 million, respectively and were not material to the Company’s statement of operations for the years ended December 31, 2009 and January 1, 2009.

Operating Costs—Advertising related operating costs primarily include personnel and other costs related to advertising fulfillment, and to a lesser degree, production costs of non-digital advertising, and payments due to unaffiliated theatre circuits under the network affiliate agreements.

Fathom Events operating costs include equipment rental, catering, movie tickets acquired primarily from the founding members, revenue share under the amended and restated ESAs and other direct costs of the meeting or event.

Payment to the founding members of a theatre access fee is comprised of a payment per theatre attendee and a payment per digital screen, both of which escalate over time.

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. These costs are not specifically allocable between the advertising business and the Fathom Events business.

Leases—The Company leases various office facilities under operating leases with terms ranging from 3 to 15 years. The Company calculates straight-line rent expense over the initial lease term and renewals that are reasonably assured.

Advertising Costs—Costs related to advertising and other promotional expenditures are expensed as incurred. Due to the nature of the business, the Company has an insignificant amount of advertising costs included in selling and marketing costs on the statement of operations.

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.

Restricted Cash—At December 30, 2010 and December 31, 2009, other non-current assets included restricted cash of $0.3 million, which secures a letter of credit used as a lease deposit on NCM LLC’s New York office.

Receivables—Bad debts are provided for using the allowance for doubtful accounts method based on historical experience and management’s evaluation of outstanding receivables at the end of the period. Receivables are written off when management determines amounts are uncollectible. Trade accounts receivable are uncollateralized and represent a large number of geographically dispersed debtors. At December 30, 2010, there was two advertising agency groups through which the Company sources national advertising revenue representing approximately 17% and 21%, of the Company’s outstanding gross receivable balance, respectively; however, none of the individual contracts related to the advertising agencies were more than 10% of advertising revenue. At December 31, 2009 there was one advertising agency group through which the Company sources national advertising revenue representing approximately 19% of the Company’s outstanding gross receivable balance; however, none of the individual contracts related to the advertising agency were more than 10% of advertising revenue. The collectability risk is reduced by dealing with large, national advertising agencies who have strong reputations in the advertising industry and clients with stable financial positions.

Receivables consisted of the following, in millions:

 

     As of December 30,
2010
    As of December 31,
2009
 

Trade accounts

   $ 100.9      $ 91.6   

Other

     2.9        1.0   

Less allowance for doubtful accounts

     (3.7     (3.6
                

Total

   $ 100.1      $ 89.0   
                

 

9


Allowance for doubtful accounts consisted of the following, in millions:

 

     Years Ended  
     December 30,
2010
    December 31,
2009
    January 1,
2009
 

Balance at beginning of period

   $ 3.6      $ 2.6      $ 1.5   

Provision for bad debt

     2.3        2.4        2.3   

Write-offs, net

     (2.2     (1.4     (1.2
                        

Balance at end of period

   $ 3.7      $ 3.6      $ 2.6   
                        

Long-lived Assets—Property and equipment is stated at cost, net of accumulated depreciation or amortization. Refer to Note 4. 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 currently. In general, the equipment associated with the digital network that is located within the theatre is owned by the founding members, while equipment outside the theatre is owned by the Company. 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 web site development costs developed or obtained for internal use are accounted for in accordance with ASC Subtopic 350-40 Internal Use Software and ASC Subtopic 350-50 Website Development Costs. The subtopics require the capitalization of certain costs incurred in developing or obtaining software for internal use. The majority of software costs and web site development costs, which are included in equipment, are depreciated over three to five years. As of December 30, 2010 and December 31, 2009, the Company had a net book value of $9.2 million and $11.0 million, respectively, of capitalized software and web site development costs. Approximately $6.5 million, $6.7 million and $4.9 million was recorded for the years ended December 30, 2010, December 31, 2009 and January 1, 2009, respectively, in depreciation expense. For the years ended December 30, 2010, December 31, 2009 and January 1, 2009 the Company recorded $1.2 million, $1.6 million and $1.2 million in research and development expense, respectively.

Construction in progress includes costs relating to installations of equipment into affiliate theatres. Assets under construction are not depreciated until placed into service.

The Company assesses impairment of long-lived assets pursuant with ASC 360 Property, Plant and Equipment annually. This includes determining if certain triggering events have occurred that could affect the value of an asset. Thus far, we have recorded no impairment charges related to long-lived assets.

Intangible assets—Intangible assets consist of contractual rights and are stated at cost, net of accumulated amortization. Refer to Note 5. The Company records amortization using the straight-line method over the estimated useful life of the intangibles, corresponding to the term of the ESAs. During the year ended December 30, 2010, NCM LLC recorded an intangible asset of $111.5 million, which is amortized over a weighted average amortization period of 26.7 years, and a second addition of $39.8 million, which is amortized over a weighted average amortization period of 27.0 years. As of December 30, 2010, the gross carrying amount of the intangible assets is $286.0 million, with a remaining weighted average amortization period of 27.0 years.

Amounts Due to Founding Members—Amounts due to founding members in the 2010 and 2009 periods include amounts due for the theatre access fee, offset by a receivable for advertising time purchased by the founding members, as well as revenue share earned for Fathom Events plus any amounts outstanding under other contractually obligated payments. Payments to or received from the founding members against outstanding balances are made monthly.

Amounts Due to Managing Member—Amounts due to the managing member include amounts due under the NCM LLC Operating Agreement and other contractually obligated payments. Payments to or received from the managing member against outstanding balances are made periodically.

Income Taxes—As a limited liability company, NCM LLC’s taxable income or loss is allocated to the founding members and managing member and, therefore, the only provision for income taxes included in the financial statements is for income-based state and local taxes.

 

10


Accumulated Other Comprehensive Loss—Accumulated other comprehensive loss is composed of the following (in millions):

 

     Year Ended
December 30,
2010
    Year Ended
December 31,
2009
    Year Ended
January 1,
2009
 

Beginning Balance

   $ (47.4   $ (73.5   $ (14.4

Change in fair value on cash flow hedge

     (12.2     24.8        (59.5

Reclassifications into earnings

     1.3        1.3        0.4   
                        

Ending Balance

   $ (58.3   $ (47.4   $ (73.5
                        

Debt Issuance Costs—In relation to the issuance of long-term debt discussed in Note 8, there is a balance of $7.3 million and $9.2 million in deferred financing costs as of December 30, 2010 and December 31, 2009, respectively. These debt issuance costs are being amortized over the terms of the underlying obligation and are included in interest expense. For each of the years ended December 30, 2010, December 31, 2009, and January 1, 2009 we amortized $1.9 million.

Other Investment— Through March 15, 2010, the Company accounted for its investment in RMG Networks, Inc., (“RMG”) (formerly Danoo, Inc.) under the equity method of accounting as required by ASC 323-10 Investments – Equity Method and Joint Ventures (“ASC 323-10”) because we exerted “significant influence” over, but did not control, the policy and decisions of RMG, due to ownership of approximately 24% of the issued and outstanding preferred and common stock of RMG. During the first quarter of 2010, RMG sold additional common stock to other third party investors for cash, which reduced the Company’s ownership in RMG resulting in cost method accounting. At December 30, 2010, the Company’s ownership in RMG was approximately 19% of the issued and outstanding preferred and common stock of RMG. The investment in RMG and the Company’s share of its operating results through December 30, 2010 are not material to the Company’s financial position or results of operations and as a result summarized financial information is not presented. Refer to Note 11 and 12 for additional discussion .

Share-Based Compensation—Stock-based employee compensation is accounted for at fair value under ASC 718 Compensation – Stock Compensation. Refer to Note 9.

Derivative Instruments— Derivative Instruments are accounted for under ASC 815 Derivatives and Hedging. Refer to Note 13.

Current Liabilities—For the year ended December 31, 2009, the Company presented the liability for interest rate swap agreements in a single line on its Balance Sheet in other non-current liabilities. However, after further review, the Company determined that the current portion of the liability should be reclassified and presented with total current liabilities. As a result, the Company has restated its Balance Sheet to reflect this classification. The correction has no effect on total assets, total liabilities, total equity/(deficit), the Statements of Operations, or the Cash Flows from Operations.

The following is a summary of the effects of the restatement on our Balance Sheet as of December 31, 2009:

 

     BALANCE SHEET  
     As of
December 31, 2009
 
     As
Previously
Reported
     As
Restated
 

Current portion of interest rate swap agreements

     0.0       $ 24.4   

Total current liabilities

   $ 90.1       $ 114.5   

Interest rate swap agreements

   $ 54.6       $ 30.2   

Total non-current liabilities

   $ 853.9       $ 829.5   

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, which revises the existing multiple-element revenue arrangements guidance and changes the determination of when the individual deliverables included in a multiple-element revenue arrangement may be treated as separate units of accounting, modifies the manner in which the transaction consideration is allocated across the separately identified deliverables and expands the disclosures required for multiple-element revenue arrangements. The pronouncement is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. The Company does not expect the pronouncement to have a material effect on its financial statements.

 

11


In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements, which requires additional disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2 and 3. The Company adopted this pronouncement effective January 1, 2010 with no impact on its financial statements.

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 financial statements.

 

4. PROPERTY AND EQUIPMENT

 

     As of
December 30,
2010
    As of
December 31,
2009
 
     (in millions)  

Equipment, computer hardware and software

   $ 63.3      $ 60.6   

Leasehold Improvements

     1.7        1.6   

Less accumulated depreciation

     (46.4     (39.3
                

Subtotal

     18.6        22.9   

Construction in Progress

     1.2        0.8   
                

Total property and equipment

   $ 19.8      $ 23.7   
                

For the years ended December 30, 2010, December 31, 2009, and January 1, 2009, the Company recorded depreciation of $11.4 million, $12.5 million, and $10.2 million, respectively.

 

5. INTANGIBLE ASSETS

During the second quarter of 2010, NCM LLC issued 6,510,209 common membership units to a subsidiary of AMCE as a result of that subsidiary’s acquisition of Kerasotes Showplace Theatres, LLC (the “AMC Kerasotes Acquisition”). Such issuance provided NCM LLC with exclusive access, in accordance with the ESA, to the net new theatre screens and attendees added by AMCE to NCM LLC’s network since the date of the last annual common unit adjustment through the date of the AMC Kerasotes Acquisition. As a result, NCM LLC recorded an intangible asset at the market value of the common membership units equal to $111.5 million. During the first quarter of 2010, NCM LLC issued 2,212,219 common membership units to its founding members in exchange for the rights to exclusive access, in accordance with the ESA, to net new theatre screens and projected attendees added by the founding members to NCM LLC’s network during 2009. As a result, NCM LLC recorded an intangible asset at the market value of the common membership units equal to $39.8 million. During the first quarter of 2009, NCM LLC issued 2,126,104 common membership units to its founding members in exchange for the rights to exclusive access to net new theatre screens and projected attendees added by the founding members to NCM LLC’s network. The Company recorded an intangible asset at the market value of the common membership units equal to $28.5 million. The Company based the fair value of the intangible assets on the market value of the common membership units issued on the date of grants, which are freely convertible into the Company’s common stock.

Pursuant to ASC 350-10 Intangibles – Goodwill and Other, the intangible assets have a finite useful life and the Company amortizes the assets over the remaining useful life corresponding with the ESAs. Amortization of the asset related to Regal Consolidated Theatres will not begin until after 2011 since the Company will not have access to on-screen advertising in the Regal Consolidated Theatres until the run-out of their existing on–screen advertising agreement.

 

12


     As of
December 30,
2010
    As of
December 31,
2009
 
     (in millions)  

Beginning balance

   $ 134.2      $ 111.8   

Purchase of intangible asset subject to amortization

     151.3        28.5   

Less integration payments (1)

     (3.9     (3.2

Less amortization expense

     (6.4     (2.9
                

Total intangible assets

   $ 275.2      $ 134.2   
                

 

(1) See Note 7 for further information on integration payments.

For the years ended December 30, 2010, December 31, 2009 and January 1, 2009 the Company recorded amortization of $6.4 million, $2.9 million and $1.5 million, respectively.

The estimated aggregate amortization expense for each of the five succeeding years is as follows (in millions):

 

2011

   $ 9.9   

2012

     10.5   

2013

     10.5   

2014

     10.5   

2015

     10.5   

 

6. ACCRUED EXPENSES

 

     As of
December 30,
2010
     As of
December 31,
2009
 
     (in millions)  

Make-good reserve

   $ 2.8       $ 0.3   

Accrued interest

     2.1         9.8   

Other accrued expenses

     3.7         2.3   
                 

Total accrued expenses

   $ 8.6       $ 12.4   
                 

 

7. RELATED-PARTY TRANSACTIONS

Pursuant to the ESAs, the Company makes monthly theatre access fee payments to the founding members, comprised of a payment per theatre attendee and a payment per digital screen with respect to the founding member theatres included in our network. The total theatre access fee to the founding members for the years ended December 30, 2010, December 31, 2009 and January 1, 2009 was $52.6 million, $52.7 million and $49.8 million, respectively.

Under the ESAs, for the years ended December 30, 2010 and December 31, 2009, 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 specified 30 second equivalent cost per thousand (“CPM”) impressions. For the year ended January 1, 2009, two of the founding members purchased 90 seconds and one purchased 60 seconds of on-screen advertising time under their beverage concessionaire agreement. The total revenue related to the beverage concessionaire agreements for the years ended December 30, 2010, December 31, 2009 and January 1, 2009 was $37.2 million, $36.3 million and $43.3 million, respectively. In addition, the Company made payments to the founding members for use of their screens and theatres for its Fathom Events businesses. These payments are at rates (percentage of event revenue) included in the ESAs based on the nature of the event. Payments to the founding members for these events totaled $7.3 million, $6.7 million, and $6.0 million for the years ended December 30, 2010, December 31, 2009 and January 1, 2009, respectively.

 

13


Also, 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. Distributions for the years ended December 30, 2010, December 31, 2009, and January 1, 2009 are as follows (in millions):

 

     2010      2009      2008  

AMC

   $ 28.8       $ 25.8       $ 24.3   

Cinemark

     24.0         20.8         18.5   

Regal

     32.3         34.9         32.7   

NCM, Inc.

     71.0         57.8         55.6   
                          

Total

   $ 156.1       $ 139.3       $ 131.1   
                          

The available cash payment by NCM LLC to its founding members for the quarter ended December 30, 2010 of $25.7 million was included in amounts due to founding members at December 30, 2010 and will be made in the first quarter of 2011. The available cash payment by NCM LLC to its managing member for the quarter ended December 30, 2010 of $24.1 million was included in amounts due to managing member as of December 30, 2010 and will be made in the first quarter of 2011.

On January 26, 2006, AMC acquired the Loews Cineplex Entertainment Inc. (“AMC Loews”) theatre circuit. The Loews screen integration agreement, effective as of January 5, 2007 and amended and restated as of February 13, 2007, between NCM LLC and AMC, committed AMC to cause substantially all of the theatres it acquired as part of the Loews theatre circuit to be included in the NCM digital network in accordance with the ESAs on June 1, 2008. In accordance with the Loews screen integration agreement, prior to June 1, 2008 AMC paid the Company amounts based on an agreed-upon calculation to reflect cash amounts that approximated what NCM LLC would have generated if the Company sold on-screen advertising in the Loews theatre chain on an exclusive basis. These AMC Loews payments were made on a quarterly basis in arrears through May 31, 2008, with the exception of Star Theatres, which were paid through February 2009 in accordance with certain run-out provisions. For the years ended December 31, 2009 and January 1, 2009, the AMC Loews payment was $0.1 million and $4.7 million, respectively. The AMC Loews payment was recorded directly to NCM LLC’s members’ equity account.

On April 30, 2008, Regal acquired Consolidated Theatres and NCM issued common membership units to Regal upon the closing of its acquisition in exchange for the right to exclusive access to the theatres. The Consolidated Theatres had a pre-existing advertising agreement and, as a result, Regal must make “integration” payments pursuant to the ESAs on a quarterly basis in arrears through mid-2011 in accordance with certain run-out provisions. For the years ended December 30, 2010, December 31, 2009 and January 1, 2009, the Consolidated Theatres payment was $3.9 million, $3.2 million and $2.8 million, respectively and represents a cash element of the consideration received for the common membership units issued. The Consolidated Theatres payment of $1.2 million for the quarter ended December 30, 2010 was included in amounts due from founding members at December 30, 2010 and will be received in the first quarter of 2011.

In connection with AMC’s acquisition of Kerasotes, AMC reimbursed NCM LLC approximately $3.0 million for the net book value of NCM LLC capital expenditures invested in digital network technology within the acquired Kerasotes theatres prior to the acquisition date.

 

14


Amounts due to founding members at December 30, 2010 were comprised of the following (in millions):

 

     AMC     Cinemark     Regal     Total  

Theatre access fees, net of beverage revenues

   $ 0.5        0.4        0.5      $ 1.4   

Cost and other reimbursement

     (0.2     (0.5     (0.0     (0.7

Distributions payable, net

     8.5        7.6        8.4        24.5   
                                

Total

   $ 8.8        7.5        8.9      $ 25.2   
                                

Amounts due to founding members at December 31, 2009 were comprised of the following (in millions):

 

     AMC     Cinemark     Regal     Total  

Theatre access fees, net of beverage revenues

   $ 0.5      $ 0.4      $ 0.5      $ 1.4   

Cost and other reimbursement

     (0.5     (0.5     (0.5     (1.5

Distributions payable, net

     9.9        7.9        12.1        29.9   
                                

Total

   $ 9.9      $ 7.8      $ 12.1      $ 29.8   
                                

Other

During the years ended December 30, 2010, December 31, 2009 and January 1, 2009, AMC, Cinemark and Regal purchased $1.3 million, $1.9 million and $2.3 million respectively, of NCM LLC’s advertising inventory for their own use. The value of such purchases are calculated by reference to NCM LLC’s advertising rate card and included in advertising revenue.

Included in selling and marketing costs and Fathom Events operating costs is $2.5 million, $2.1 million and $2.7 million for the years ended December 30, 2010, December 31, 2009 and January 1, 2009 respectively, related to purchases of movie tickets and concession products from the founding members primarily for marketing to NCM LLC’s advertising clients and marketing resale to Fathom Business customers.

Related Party Affiliates

During 2009, NCM LLC entered into a digital content agreement and a Fathom agreement with LA Live Cinemas LLC (“LA Live”), an affiliate of Regal, for NCM LLC to provide in-theatre advertising and Fathom Events services to LA Live in its theatre complex. The affiliate agreement was entered into at terms that are similar to those of our other advertising affiliates. LA Live joined the NCM LLC advertising network during the fourth quarter of 2009. Included in advertising operating costs and Fathom Events operating costs is $0.1 million for the year ended December 30, 2010, for payments made to the affiliate under the agreement. As of December 30, 2010 approximately $0.1 million is included in accounts payable for amounts due to LA Live under the agreement.

During 2009, NCM LLC entered into a network affiliate agreement with Starplex Operating L.P. (“Starplex”), an affiliate of Cinemark, for NCM LLC to provide in-theatre advertising services to Starplex in its theatre locations. The affiliate agreement was entered into at terms that are similar to those of our other advertising affiliates. Starplex joined the NCM LLC advertising network in the first quarter of 2010. Included in advertising operating costs is $1.3 million for the year ended December 30, 2010, for payments made to the affiliate under the agreement. As of December 30, 2010, approximately $0.5 million is included in accounts payable for amounts due to Starplex under the agreement.

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 2010, AMC and Regal exercised the redemption right of an aggregate 10,955,471 common membership units, whereby AMC and Regal surrendered 6,655,193 and 4,300,278 common membership units to NCM LLC for cancellation, respectively. The Company contributed an aggregate 10,955,471 shares of its common stock to NCM LLC in exchange for a like number of newly issued common membership units. NCM LLC then distributed the shares of common stock to AMC and Regal to complete the redemptions. Such redemptions took place immediately prior to the closing of the underwritten public offering and the subsequent closing of the overallotment option; in each case the NCM, Inc. common stock was sold at a price to the public of $16.00 per share by AMC and Regal. NCM, Inc. did not receive any proceeds from the sale of its common stock by AMC and Regal. Pursuant to ASC 810-10-45, the Company accounted for the change in its ownership interest in NCM LLC as an equity transaction and no gain or loss was recognized in net income.

 

15


National CineMedia, Inc.

Pursuant to the NCM LLC Operating Agreement, as the sole manager of NCM LLC, NCM, Inc. provides certain specific management services to NCM LLC, including those services of the positions of president and chief executive officer, president of sales and chief marketing officer, executive vice president and chief financial officer, executive vice president and chief operations officer and executive vice president and general counsel. In exchange for the services, NCM LLC reimburses NCM, Inc. for compensation and other expenses of the officers and for certain out-of-pocket costs. During the years ended December 30, 2010, December 31, 2009 and January 1, 2009, NCM LLC paid NCM, Inc. $16.6 million, $10.8 million and $9.7 million, respectively, for these services and expenses. The payments for estimated management services related to employment are made one month in advance. At December 30, 2010 and December 31, 2009, $0.8 million and $0.6 million, respectively, has been paid in advance and is reflected as prepaid management fees to managing member in the accompanying financial statements. NCM LLC also provides administrative and support services to NCM, Inc. such as office facilities, equipment, supplies, payroll and accounting and financial reporting at no charge. Based on the limited activities of NCM, Inc. as a standalone entity, the Company does not believe such unreimbursed costs are significant. The management services agreement also provides that NCM LLC employees may participate in the NCM, Inc. equity incentive plan (see Note 9).

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

 

     As of
December 30,
2010
     As of
December 31,
2009
 

Distributions payable

   $ 24.1       $ 22.0   

Cost and other reimbursement

     4.1         0.9   
                 

Total

   $ 28.2       $ 22.9   
                 

 

8. BORROWINGS

On February 13, 2007, concurrently with the closing of the IPO of NCM, Inc., NCM LLC entered into a senior secured credit facility with a group of lenders. The facility consists of a six-year $80.0 million revolving credit facility and an eight-year, $725.0 million term loan facility. The revolving credit facility portion is available, subject to certain conditions, for general corporate purposes of the Company in the ordinary course of business and for other transactions permitted under the credit agreement, and a portion is available for letters of credit.

The outstanding balance of the term loan facility at December 30, 2010 and December 31, 2009 was $725.0 million. The outstanding balance under the revolving credit facility at December 30, 2010 and December 31, 2009 was $50.0 million and $74.0 million, respectively. As of December 30, 2010, the effective rate on the term loan was 5.61% including the effect of the interest rate swaps (both those accounted for as hedges and those that are not). The interest rate swaps hedged $550.0 million of the $725.0 million term loan at a fixed interest rate of 6.734% while the unhedged portion was at an interest rate of 2.06%. The weighted-average interest rate on the unhedged revolver was 2.01%. Commencing with the fourth fiscal quarter in fiscal year 2009, the applicable margin for the revolving credit facility is determined quarterly and is subject to adjustment based upon a net senior secured leverage ratio for NCM LLC and its subsidiaries (the ratio of secured funded debt less unrestricted cash and cash equivalents, over a non-GAAP measure defined in the credit agreement). The senior secured credit facility also contains a number of covenants and financial ratio requirements, with which the Company was in compliance at December 30, 2010, including the net senior secured leverage ratio. There are no distribution restrictions as long as the Company is in compliance with its debt covenants. As of December 30, 2010, its net senior secured leverage ratio was 3.5 times the covenant. The debt covenants also require 50% of the term loan, or $362.5 million to be hedged at a fixed rate. As of December 30, 2010, the Company had approximately $550 million or 76% hedged. Of the $550.0 million that is hedged, $137.5 million was transferred from Lehman Brothers Special Financing (“LBSF”) to Barclays Bank PLC (“Barclays”) in February 2010. See Note 13 for an additional discussion of the interest rate swaps.

NCM LLC, Lehman Brothers Holdings Inc. (“Lehman”) and Barclays entered into an agreement in March 2010 whereby Lehman resigned its agency function and restructured its outstanding $14.0 million revolving credit loan. NCM LLC and the remaining revolving credit lenders consented to the appointment of Barclays as successor administrative agent and swing line lender under the credit agreement. Additionally, the revolving credit commitments of Lehman were reduced to zero and the aggregate revolving credit commitments were reduced to $66.0 million. The $14.0 million outstanding principal

 

16


of the revolving credit loans held by Lehman will not be repaid in connection with any future prepayments of revolving credit loans, but rather Lehman’s share of the revolving credit facility will be paid in full by NCM LLC, along with any accrued and unpaid fees and interest, on the revolving credit termination date, February 13, 2013.

On March 19, 2009, the Company gave an $8.5 million note payable to Credit Suisse, Cayman Islands Branch (“Credit Suisse”) with no stated interest to settle the $10.0 million contingent put obligation and to acquire the $20.7 million outstanding principal balance of debt of IdeaCast, Inc. (“IdeaCast”) (together with all accrued interest and other lender costs required to be reimbursed by IdeaCast). Quarterly payments to Credit Suisse began on April 15, 2009 and will continue through January 15, 2011. At issuance the Company recorded the note at a present value of $7.0 million. At December 30, 2010 and December 31, 2009, $1.2 million and $4.3 million, respectively, of the balance was recorded in current liabilities. Interest on the note is accreted at the Company’s estimated incremental cost of debt based on then current market indicators over the term of the loan to interest expense. The amount of interest expense recognized on the note for the years ended December 30, 2010 and December 31, 2009 was $0.5 million and $0.7 million, respectively.

Future Maturities of Borrowings

The scheduled annual maturities on the credit facility for the next five years as of December 30, 2010 are as follows (in millions);

 

2011

   $ 1.2   

2012

     0.0   

2013

     50.0   

2014

     0.0   

2015

     725.0   
        

Total

   $ 776.2   
        

 

9. SHARE-BASED COMPENSATION

At the date of the IPO, the Company adopted the NCM, Inc. 2007 Equity Incentive Plan. As of December 30, 2010, there were 7,076,000 shares of common stock available for issuance or delivery under the Equity Incentive Plan of which 1,690,186 remain available for grants as of December 30, 2010. Options awarded under the Equity Incentive Plan are granted with an exercise price equal to the market price of NCM, Inc. common stock on the date of the grant. Upon vesting of the awards, 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. Under the fair value recognition provisions of ASC 718, the Company recognizes stock-based compensation net of an estimated forfeiture rate, and therefore only recognizes stock-based compensation cost for those shares expected to vest over the requisite service period of the award. Options and non-vested restricted stock vest annually over a three or five-year period and options have either 10-year or 15-year contractual terms. A forfeiture rate of 5% was estimated to reflect the potential separation of employees.

The recognized expense, including equity based compensation costs of NCM, Inc. employees, is included in the operating results of NCM LLC. The Company recognized $7.0 million, $3.1 million and $2.1 million for the years ended December 30, 2010, December 31, 2009 and January 1, 2009, respectively, of share-based compensation expense for these options and $0.1 million were capitalized during each of the years ended December 30, 2010, December 31, 2009 and January 1, 2009, respectively. As of December 30, 2010, unrecognized compensation cost related to nonvested options was approximately $9.1 million, which will be recognized over a weighted average remaining period of 1.70 years.

The weighted average grant date fair value of granted options was $4.84, $2.17 and $3.77 for the years ended December 30, 2010, December 31, 2009 and January 1, 2009, respectively. The intrinsic value of options exercised during the year was $2.2 million, $0.2 million and $0.2 million for the years ended December 30, 2010, December 31, 2009, and January 1, 2009, respectively. During the year ended December 30, 2010 there was $4.9 million of cash received on options exercised and an immaterial amount for the year December 31, 2009. The total fair value of awards vested during the years ended December 30, 2010 and December 31, 2009 was $3.2 million and $0.3 million, respectively.

 

17


The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, which requires that the Company make estimates of various factors. The following assumptions were used in the valuation of the options:

 

     Fiscal 2010   Fiscal 2009   Fiscal 2008

Expected life of options

   6.0 years   6.5 years   6.5 years

Risk free interest rate

   1.38% to 3.76%   2.23% to 3.70%   3.74% to 4.09%

Expected volatility

   39%   30%   30%

Dividend yield

   3.8% to 4.0%   3%   3%

Activity in the Equity Incentive Plan, as converted, is as follows:

 

     Shares     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual Life
(in years)
     Aggregate
Intrinsic
Value

(in  millions)
 

Outstanding at December 31, 2009

     3,126,560      $ 14.51         

Granted

     1,186,507        17.62         

Exercised

     (388,302     12.64         

Forfeited

     (48,541     13.36         
                                  

Outstanding at December 30, 2010

     3,876,224      $ 15.55         9.0       $ 18.1   

Exercisable at December 30, 2010

     1,030,120        16.45         9.1       $ 4.2   

Vested and Expected to Vest at December 30, 2010

     3,839,382        15.55         9.0       $ 18.0   

The following table summarizes information about the stock options at December 30, 2010, including the weighted average remaining contractual life and weighted average exercise price:

 

     Options Outstanding      Options Exercisable  

Range of Exercise Price

   Number
Outstanding
as of
Dec.
30, 2010
     Weighted
Average
Remaining
Life

(in years)
     Weighted
Average
Exercise
Price
     Number
Exercisable
as of
Dec.
30, 2010
     Weighted
Average
Exercise
Price
 

$5.35-$10.41

     908,640         8.0       $ 9.06         175,554       $ 9.02   

$10.42-$16.66

     1,250,143         10.0         16.09         578,485         16.20   

$16.67-$16.97

     973,996         9.0         16.97         0         0.0   

$16.98-$19.43

     383,079         9.2         18.79         73,330         18.70   

$19.44-$29.05

     360,366         7.5         22.74         202,751         22.78   
                                            
     3,876,224         9.0       $ 15.55         1,030,120       $ 16.45   
                                            

 

18


Non-vested (Restricted) Stock—NCM, Inc. has a non-vested stock program as part of the Equity Incentive Plan. The plan provides for non-vested stock awards to officers, board members and other key employees, including employees of NCM LLC. Under the non-vested stock program, common stock of NCM, Inc. may be granted at no cost to officers, board members and key employees, subject to a continued employment restriction and as such restrictions lapse, the award vests in that proportion. The participants are entitled to cash dividends from NCM, Inc. and to vote their respective shares, although the sale and transfer of such shares is prohibited and the shares are subject to forfeiture during the restricted period. Additionally the accrued cash dividend for the 2009 and 2010 grants are subject to forfeiture during the restricted period. The shares are also subject to the terms and provisions of the Equity Incentive Plan. Non-vested stock awards granted in 2010 include performance vesting conditions, which permit vesting to the extent that NCM, Inc. achieves specified non-GAAP targets at the end of the three-year period. Non-vested stock granted to non-employee directors vest after one year. Compensation cost is valued based on the market price on the grant date and is expensed over the vesting period.

The following table represents the shares of non-vested stock:

 

     Shares     Weighted
Average Grant-
Date Fair Value
 

Non-vested as of December 31, 2009

     590,374      $ 13.15   

Granted

     429,585        17.24   

Forfeited

     (8,011     15.84   

Vested

     (96,364     16.18   
                

Non-vested as of December 30, 2010

     915,584      $ 16.77   

The recognized expense, including the equity based compensation costs of NCM, Inc. employees, is included in the operating results of NCM LLC. The Company recorded $7.0 million, $2.4 million and $1.3 million in compensation expense related to such outstanding non-vested shares during the years ended December 30, 2010, December 31, 2009 and January 1, 2009. Of the $7.0 million in compensation expense for the year ended December 30, 2010, $1.6 million was related to NCM, Inc.’s expected over performance of the specified non-GAAP targets for the 2009 and 2010 grants. During the year ended December 30, 2010 there was $0.1 million capitalized and an immaterial amount for the years ended December 31, 2009 and January 1, 2009. As of December 30, 2010, unrecognized compensation cost related to non-vested stock was approximately $11.2 million, which will be recognized over a weighted average remaining period of 1.82 years. The weighted average grant date fair value of non-vested stock was $17.24, $9.50 and $18.97 for the years ended December 30, 2010, December 31, 2009 and January 1, 2009, respectively. The total fair value of awards vested was $1.6 million, $0.3 million and $2.1 million during the years ended December 30, 2010, December 31, 2009 and January 1, 2009.

 

10. EMPLOYEE BENEFIT PLANS

NCM LLC 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 recognized expense, including the discretionary contributions of NCM, Inc. employees, is included in the operating results of NCM LLC. The Company made discretionary contributions of $0.9 million, $0.8 million and $0.8 million during the years ended December 30, 2010, December 31, 2009 and January 1, 2009, respectively.

 

11. 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 adverse effect on its financial position or results of operations.

Operating Commitments

The Company leases office facilities for its headquarters in Centennial, Colorado and also in various cities for its sales and marketing personnel as sales offices. The Company has no capital lease obligations. Total lease expense for the years ended December 30, 2010, December 31, 2009 and January 1, 2009, was $2.2 million, $2.3 million and $2.0 million, respectively.

 

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Future minimum lease payments under noncancelable operating leases as of December 30, 2010 are as follows (in millions):

 

2011

   $ 1.6   

2012

     2.2   

2013

     2.2   

2014

     2.2   

2015

     2.1   

Thereafter

     9.1   
        

Total

   $ 19.4   
        

Contingent Put Obligation

On April 29, 2008, NCM LLC, IdeaCast, the IdeaCast lender and certain of its stockholders agreed to a financial restructuring of IdeaCast. Among other things, the restructuring resulted in the lender being granted an option to “put,” or require NCM LLC to purchase, up to $10 million of the funded convertible debt at par, on or after December 31, 2010 through March 31, 2011. The put was accounted for under ASC 460-10 Guarantees. During the fourth quarter of 2008, the Company determined that the initial investment and call right in IdeaCast were other-than-temporarily impaired due to IdeaCast’s defaults on its senior debt and liquidity issues and that the put obligation was probable. The Company estimated a liability at January 1, 2009 of $4.5 million, which represented the excess of the estimated probable loss on the put (net of estimated recoveries from the net assets of IdeaCast that serve as collateral for the convertible debt) obligation over the unamortized ASC 460-10 liability. The total amount of the impairment and related loss recorded in the fourth quarter of 2008 was $11.5 million.

On March 19, 2009, NCM LLC, IdeaCast and IdeaCast’s lender agreed to certain transactions with respect to the IdeaCast Credit Agreement. Among other things, these agreements resulted in (i) the termination of the Put and the Call; (ii) the transfer, sale and assignment by IdeaCast’s lender to NCM LLC of all of its right, title and interest under the Credit Agreement, including without limitation the loans outstanding under the Credit Agreement; (iii) the resignation of IdeaCast’s lender, and the appointment of NCM LLC, as administrative agent and collateral agent under the Credit Agreement; and (iv) the delivery by NCM LLC to IdeaCast’s lender of a non-interest bearing promissory note in the amount of $8.5 million payable through January 2011. On June 16, 2009, NCM LLC’s interest in the Credit Agreement was assigned to NCM Out-Of-Home, LLC (“OOH”), which was a wholly-owned subsidiary of NCM LLC. OOH was also appointed as administrative agent and collateral agent under the Credit Agreement. On June 16, 2009, OOH, as IdeaCast’s senior secured lender, foreclosed on substantially all of the assets of IdeaCast, consisting of certain tangible and intangible assets (primarily equipment, business processes and contracts with health clubs and programming partners). The assets were valued at approximately $8.2 million. On June 29, 2009, NCM LLC transferred its ownership interest in OOH to RMG, a digital advertising company, in exchange for approximately 24% of the equity (excluding out-of-the-money warrants) of RMG on a fully diluted basis through a combination of convertible preferred stock, common stock and common stock warrants (refer to Note 2-Other Investment). The Company’s investment in RMG was valued at the fair value of the assets contributed.

Minimum Revenue Guarantees

As part of the network affiliate agreements entered in the ordinary course of business under which the Company sells advertising for display in various theatre chains other than those of the founding members of NCM LLC, the Company has agreed to certain minimum revenue guarantees. If an affiliate achieves the attendance set forth in their respective agreement, the Company has guaranteed minimum revenue for the network affiliate per attendee if such amount paid under the revenue share arrangement is less than its guaranteed amount. The amount and term varies for each network affiliate, but initial terms range from two to five years, prior to any renewal periods. The maximum potential amount of future payments the Company could be required to make pursuant to the minimum revenue guarantees is $14.0 million over the remaining terms of the network affiliate agreements. As of December 30, 2010 and December 31, 2009 the Company had no liabilities recorded for these obligations as such guarantees are less than the expected share of revenue paid to the affiliate.

 

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12. FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents and other notes payable as reported in the Company’s balance sheets approximate their fair value due to their short maturity. The carrying amount of the revolving credit facility is considered a reasonable estimate of fair value due to its floating-rate terms. The carrying amounts and fair values of interest rate swap agreements are the same since the Company accounts for these instruments at fair value. The Company has estimated the fair value of its term loan based on an average of three non-binding broker quotes and the Company’s analysis to be $713.3 million and $688.8 million at December 30, 2010 and December 31, 2009, respectively. The carrying value of the term loan was $725.0 million as of December 30, 2010 and December 31, 2009.

The fair value of the investment in RMG networks has not been estimated at December 30, 2010 as there were no monetary equity events or changes in circumstances that may have a significant adverse effect on the fair value of the investment, and as it is not practicable to do so because RMG is not a publicly traded company. The carrying amount of the Company’s investment was $6.7 million and $7.4 million as of December 30, 2010 and December 31, 2009, respectively. Refer to Note 2 —Other Investment.

Recurring Measurements—The fair values of the Company’s assets and liabilities measured on a recurring basis pursuant to ASC 820-10 Fair Value Measurements and Disclosures are as follows (in millions):

 

           Fair Value Measurements at Reporting Date Using  
     As of
December 30,
2010
    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

LIABILITIES:

         

Current Portion of Interest Rate Swap Agreements (1)

     (25.3     0.0         (25.3     0.0   

Interest Rate Swap Agreements (1)

     (45.5     0.0         (45.5     0.0   
                                 
   ($ 70.8   $ 0.0       ($ 70.8   $ 0.0   
                                 

 

(1) Interest Rate Swap Agreements—Refer to Note 13.

 

13. DERIVATIVE INSTRUMENTS

NCM LLC has interest rate swap agreements with four counterparties that, at their inception, qualified for and were designated as cash flow hedges against interest rate exposure on $550.0 million of the variable rate debt obligations under the senior secured credit facility. The interest rate swap agreements have the effect of converting a portion of the Company’s variable rate debt to a fixed rate of 6.734%. All interest rate swaps were entered into for risk management purposes. The Company has no derivatives for other purposes.

Effective February 8, 2010, NCM LLC entered into a novation agreement with LBSF and Barclays whereby LBSF transferred to Barclays all the rights, liabilities, duties and obligations of NCM LLC’s interest rate swap agreement with LBSF with identical terms. NCM LLC accepted Barclays as its sole counterparty with respect to the new agreement. The term runs until February 13, 2015, subject to earlier termination upon the occurrence of certain specified events. Subject to the terms of the new agreement, NCM LLC or Barclays will make payments at specified intervals based on the variance between LIBOR and a fixed rate of 4.984% on a notional amount of $137.5 million. NCM LLC effectively pays a rate of 6.734% on this notional amount inclusive of the 1.75% margin currently required by NCM LLC’s credit agreement. The agreement with Barclays is secured by the assets of NCM LLC on a pari passu basis with the credit agreement and the other interest rates swaps that were entered into by NCM LLC. In consideration of LBSF entering into the transfer, NCM LLC agreed to pay to LBSF the full amount of interest rate swap payments withheld since LBSF’s default, aggregating $7.0 million, and an immaterial amount of penalty interest.

Cash flow hedge accounting was discontinued on September 15, 2008 due to the event of default created by the bankruptcy of Lehman and the inability of the Company to continue to demonstrate the swap would be effective. The Company did not elect cash flow hedge accounting and the interest rate swap with Barclays is recorded at fair value with any change in the fair value recorded in the statement of operations. There was a $4.0 million increase, $8.3 million decrease and $13.8 million increase in the fair value of the liability for the years ended December 30, 2010, December 31, 2009 and January 1, 2009, respectively, which the Company recorded as a component of interest expense and other, net.

 

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In accordance with ASC 815 Derivatives and Hedging, the net derivative loss as of September 14, 2008 related to the discontinued cash flow hedge with LBSF shall continue to be reported in accumulated other comprehensive income unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. Accordingly, the net derivative loss is being amortized to interest expense over the remaining term of the interest rate swap through February 13, 2015. The amount amortized during the years ended December 30, 2010, December 31, 2009 and January 1, 2009 were $1.3 million, $1.3 million and $0.4 million, respectively. The Company estimates approximately $1.3 million will be amortized to interest expense and other, net in the next 12 months.

Both at inception and on an on-going basis the Company performs an effectiveness test using the hypothetical derivative method. The fair values of the interest rate swaps with the counterparties other than Barclays (representing notional amounts of $412.5 million associated with a like amount of the variable rate debt) are recorded on the Company’s balance sheet as a liability with the change in fair value recorded in other comprehensive income since the instruments were determined to be perfectly effective at December 30, 2010 and December 31, 2009. There were no amounts reclassified into current earnings due to ineffectiveness during the periods presented other than as described herein.

The fair value of the Company’s interest rate swap is based on dealer quotes, and represents an estimate of the amount the Company would receive or pay to terminate the agreements taking into consideration various factors, including current interest rates and the forward yield curve for 3-month LIBOR.

As of December 30, 2010 and December 31, 2009, the estimated fair value and line item caption of derivative instruments recorded were as follows (in millions):

 

     Liability Derivatives  
     As of December 30, 2010      As of December 31, 2009  
     Balance Sheet
Location
     Fair
Value
     Balance Sheet
Location
     Fair
Value
 

Derivatives designated as hedging instruments in cash flow hedges:

           

Current portion of interest rate swap agreements

     Current Liabilities       $ 19.0         Current Liabilities       $ 18.3   

Interest Rate Swaps

     Other Liabilities       $ 34.1         Other Liabilities       $ 22.6   

Derivatives not designated as hedging instruments:

           

Current portion of interest rate swap agreements

     Current Liabilities       $ 6.3         Current Liabilities       $ 6.1   

Interest Rate Swaps

     Other Liabilities       $ 11.4         Other Liabilities       $ 7.6   
                       

Total derivatives

      $ 70.8          $ 54.6   
                       

The effect of derivative instruments in cash flow hedge relationships on the financial statements for the years ended December 30, 2010, December 31, 2009 and January 1, 2009 were as follows (in millions):

 

     Unrealized Gain (Loss)
Recognized in NCM LLC’s
OCI (Pre-tax)
           Realized Gain (Loss)
Recognized in Interest
Expense (Pre-tax)
 
     Year
Ended
Dec. 30,
2010
    Year
Ended
Dec. 31,
2009
     Year
Ended
Jan. 1,
2009
           Year
Ended
Dec. 30,
2010
    Year
Ended
Dec. 31,
2009
    Year
Ended
Jan. 1,
2009
 

Interest Rate Swaps

   ($ 30.3   $ 9.3       $ (67.9        ($ 19.4   $ (16.7   $ (8.8

There was $1.3 million, $1.3 million and $0.4 million of ineffectiveness recognized for the years ended December 30, 2010, December 31, 2009 and January 1, 2009, respectively.

The effect of derivatives not designated as hedging instruments under ASC 815 on the financial statements for the years ended December 30, 2010, December 31, 2009 and January 1, 2009 were as follows (in millions):

 

     Gain or (Loss) Recognized in Interest Expense
and Other, Net (Pre-tax) for the Years Ended
 
     December 30,
2010
    December 31,
2009
    January 1,
2009
 

Borrowings

   $ (6.2   $ (6.2   $ (1.0

Change in derivative fair value

     (5.3     7.0        (14.2
                        

Total

   $ (11.5   $ 0.8      $ (15.2
                        

 

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14. SEGMENT REPORTING

Advertising is the principal business activity of the Company and is the Company’s reportable segment under the requirements of ASC 280, Segment Reporting. Advertising revenue accounts for 88.7%, 88.0% and 89.4%, of revenue for the years ended December 30, 2010, December 31, 2009 and January 1, 2009, respectively. Fathom Consumer Events and Fathom Business Events are operating segments under ASC 280, but do not meet the quantitative thresholds for segment reporting. The following table presents revenues less directly identifiable expenses to arrive at operating income net of direct expenses for the advertising reportable segment, the combined Fathom Events operating segments, and network, administrative and unallocated costs. Management does not evaluate its segments on a fully allocated cost basis. Therefore, the measure of segment operating income net of direct expenses shown below is not prepared on the same basis as operating income in the statement of operations and the results below are not indicative of what segment results of operations would have been had it been operated on a fully allocated cost basis. Management cautions that it would be inappropriate to assume that unallocated operating costs are incurred proportional to segment revenue or any directly identifiable segment expenses. Unallocated operating costs consist primarily of network costs, general and administrative costs and other unallocated costs including depreciation and amortization. Management does not track segment assets and, therefore, segment asset information is not presented.

 

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     Year Ended December 30, 2010 (in millions)  
     Advertising      Fathom Events
and Other
     Network,
Administrative
and
Unallocated
Costs
     Total  

Revenue

   $ 379.4       $ 48.0       $ 0.1       $ 427.5   

Operating costs

     74.3         32.4            106.7   

Selling and marketing costs

     46.5         8.1         3.3         57.9   

Other costs

     3.2         0.8            4.0   
                       

Operating income, net of direct expenses

   $ 255.4       $ 6.7         

Network, administrative and other costs

           68.3         68.3   
                 

Total Operating Income

            $ 190.6   
                 
     Year Ended December 31, 2009 (in millions)  
     Advertising      Fathom Events
and Other
     Network,
Administrative
and
Unallocated
Costs
     Total  

Revenue

   $ 335.1       $ 45.5       $ 0.1       $ 380.7   

Operating costs

     72.7         29.1            101.8   

Selling and marketing costs

     40.6         8.6         1.0         50.2   

Other costs

     2.8         0.9            3.7   
                       

Operating income, net of direct expenses

   $ 219.0       $ 6.9         

Network, administrative and other costs

           56.8         56.8   
                 

Total Operating Income

            $ 168.2   
                 
     Year Ended January 1, 2009 (in millions)  
     Advertising      Fathom Events
and Other
     Network,
Administrative
and
Unallocated
Costs
     Total  

Revenue

   $ 330.3       $ 38.9       $ 0.3       $ 369.5   

Operating costs

     68.5         25.1            93.6   

Selling and marketing costs

     38.5         8.3         1.1         47.9   

Other costs

     2.8         0.8            3.6   
                       

Operating income, net of direct expenses

   $ 220.5       $ 4.7         

Network, administrative and other costs

           51.2         51.2   
                 

Total Operating Income

            $ 173.2   
                 

 

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The following is a summary of revenues by category (in millions):

 

     Years Ended  
     December 30,
2010
     December 31,
2009
     January 1,
2009
 

National Advertising Revenue

   $ 271.9       $ 236.8       $ 223.1   

Founding Member Advertising Revenue

     37.2         36.3         43.3   

Regional Advertising Revenue

     70.3         62.0         63.9   

Fathom Consumer Revenue

     31.5         28.6         20.2   

Fathom Business Revenue

     16.5         16.9         18.7   

Other Revenue

     0.1         0.1         0.3   
                          

Total Revenues

   $ 427.5       $ 380.7       $ 369.5   
                          

 

15. SUBSEQUENT EVENTS

ASC Topic 855-10, Subsequent Events (formerly SFAS No. 165, Subsequent Events) requires the Company to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued. For the year ended December 30, 2010, the Company evaluated, for potential recognition and disclosure, events that occurred prior to the inclusion of the Company’s financial statements in NCM, Inc.’s Annual Report on Form 10-K for the year ended December 30, 2010 on February 25, 2010.

 

25