National CineMedia, Inc. - Annual Report: 2019 (Form 10-K)

---

---

•	“NCM, Inc.,” “the Company,” “we,” “us” or “our” refer to National CineMedia, Inc., a Delaware corporation, and its consolidated subsidiary National CineMedia, LLC.

•	“NCM LLC” refers to National CineMedia, LLC, a Delaware limited liability company, which commenced operations on April 1, 2005, and is the current operating company for our business, which NCM, Inc. acquired an interest in, and became a member and the sole manager of, upon completion of our initial public offering, or “IPO,” which closed on February 13, 2007.

•

“ESAs” refers to the amended and restated exhibitor services agreements entered into by NCM LLC with each of NCM LLC’s founding members upon completion of the IPO, which were further amended and restated on December 26, 2013 in connection with the sale of the Fathom Events business and, in the case of the ESAs with Cinemark and Regal, were further amended on September 17, 2019 (the “2019 ESA Amendments”) to extend the terms of the ESAs and modify the program distributed by NCM LLC through its DCN for exhibition in Cinemark and Regal theaters.

•	“AMC” refers to AMC Entertainment Inc. and its subsidiaries, National Cinema Network, Inc., or “NCN,” which contributed assets used in the operations of NCM LLC and formed NCM LLC in March 2005, AMC ShowPlace Theatres, Inc., AMC Starplex, LLC and American Multi-Cinema, Inc., which is a party to an ESA with NCM LLC.

•	“Cinemark” refers to Cinemark Holdings, Inc. and its subsidiaries, Cinemark Media, Inc., which joined NCM LLC in July 2005, and Cinemark USA, Inc., which is a party to an ESA with NCM LLC.

•	“Regal” refers to Cineworld Group plc, Regal Entertainment Group and its subsidiaries, Regal CineMedia Corporation, which contributed assets used in the operations of NCM LLC, Regal CineMedia Holdings, LLC, which formed NCM LLC in March 2005, and Regal Cinemas, Inc., which is a party to an ESA with NCM LLC.

•	“Founding members” refers to AMC, Cinemark and Regal.

•	“network affiliates” refers to certain third-party theater circuits with which NCM LLC has long-term network affiliate agreements.

•	“Adjusted OIBDA” refers to a non-GAAP financial measure which management defines as operating income before depreciation and amortization expense adjusted to also exclude amortization of intangibles recorded for network theater screen leases, non-cash share-based payment costs, merger-related administrative costs, CEO transition costs and early lease termination expense.

•	“Adjusted OIBDA margin” is a non-GAAP financial measure calculated by dividing Adjusted OIBDA by total revenue.

•	“LEN” refers to NCM LLC’s Lobby Entertainment Network.

•	“CPM” is a basis for which advertising is sold by the cost per thousand viewers.

•	“DCN” refers to NCM LLC’s Digital Content Network.

•	“TRA” refers to the tax receivable agreement entered into by NCM, Inc. and the founding members.

---

•	potential significant declines in theater attendance;

•	changes in theater patron behavior could result in declines in viewership of the Noovie pre-show;

•	we may not realize the anticipated benefits of the 2019 ESA Amendments;

•	we may not be successful in increasing the number of theaters in which NCM LLC has the right to display Post-Showtime Inventory;

•	changes to relationships with NCM LLC's founding members;

•	our plans for developing additional revenue opportunities may not be implemented and may not be achieved;

•	competition within the overall advertising industry;

•	we may not maintain our technological advantage;

•	national, regional and local economic conditions;

•	we may not be able to grow our advertising revenue in line with the growth of our contractual costs;

•	the potential loss of any major content partner or advertising client;

•	potential inability to retain or replace our senior management;

•	founding member and network affiliate government regulation could slow growth;

•	failure to effectively manage or continue our growth;

•	potential failures or disruptions in our technology systems;

•	possible infringement of our technology on intellectual property rights owned by others;

•	the content we distribute and user information we collect and maintain through our in-theater, online or mobile services may expose us to liability;

•	changes in regulations relating to the Internet, privacy or other areas of our online or mobile services;

•	our revenue and Adjusted OIBDA fluctuate from quarter to quarter and may be unpredictable, which could increase the volatility of our stock price;

•	an ineffective system of internal controls over financial reporting could adversely affect our ability to accurately report our financial results and market confidence in our reported financial information;

•	we are a holding company with no operations of our own, and we depend on distributions and payments under the NCM LLC operating and management services agreements from NCM LLC to meet our ongoing obligations and to pay cash dividends on our common stock;

•	risks and uncertainties relating to our significant indebtedness and investments, including the availability and adequacy of cash flows to meet our debt service requirements and any other indebtedness that we may incur in the future;

•	NCM LLC’s other members or their affiliates may have interests that differ from those of us or our public stockholders and they may be able to influence our affairs, compete with us or benefit from corporate opportunities that might otherwise be available to us;

•	future issuance of membership units or preferred stock could dilute the interest of our common stockholders;

•	determination that NCM, Inc. or any of NCM LLC’s founding members is an investment company;

•	determination that any amount of our tax benefits under the TRA should not have been available;

•	the effect on our stock price from the substantial number of our shares eligible for sale;

•	the interests of our largest stockholder and NCM LLC’s other members may be different from or conflict with those of our other stockholders; and

---

•	other factors described under “Risk Factors” or elsewhere in this Annual Report on Form 10-K.

---

---

---

•	Segment four is the first section of Noovie and contains the entertaining content that is a core element of Noovie. NCM programs an exclusive Noovie content pod at the beginning of the show that gives audiences a look at “what’s Noovie”, including movies (Noovie Backlot and Noovie Genius), music (Noovie Soundcheck), trivia (Name That Movie) and more.

•	Segment three features a long-form entertainment content segment from one of our content partners and advertising from local clients.

•

Segment two features primarily local and regional advertisements, which generally range between 15 to 90 seconds, as well as a long-form entertainment content segment from one of our content partners. This segment also typically includes a 45-second Noovie Arcade slot where audiences have the opportunity to play our featured interactive augmented reality (“AR”) game on the big screen using their mobile phones.

•	Segment one runs closest to the advertised showtime and features primarily national advertisements, which are generally 30 or 60 seconds, as well as a long-form entertainment content segment from one of our content partners. Segment one also includes an advertisement for the founding members’ beverage supplier and a public service announcement (“PSA”).

•	A post-showtime lights down segment with trailer lighting beginning at the advertised showtime with approximately 5 minutes of national advertisements which generally range between 30 or 60 seconds, followed by a PSA and one or two 30 second advertisements for the founding members' beverage supplier; and

---

•	An additional single advertising unit that is either 30 or 60 seconds of the Noovie pre-show deeply embedded within the movie trailers at trailer level lighting and at full trailer volume, directly prior to the last one or two trailers preceding the feature film, which we refer to as the "Platinum Spot".

---

---

•	advertising on concession items such as beverage cups, popcorn bags and kids’ trays;

•	coupons and promotional materials, which are customizable by film and are distributed to ticket buyers at the box office or as they exit the theater;

•	tabling displays, product demonstrations and sampling;

•	touch-screen display units and kiosks; and

•	signage throughout the lobbies, including posters, banners, counter cards, danglers, floor mats, standees and window clings.

---

---

•	Our advertising network consisted of 21,208 screens (16,880 operated by the founding members) located in 1,734 theaters (1,267 operated by the founding members) in 47 states and the District of Columbia, including each of the top 25 and 50 DMAs®, and 190 DMAs® in total, as of December 26, 2019;

•	Over 700 million people attended theaters in our network in 2019 based on Nielsen estimates and 69%, 65% and 65% of the total theater attendance in theaters that present advertising in the top 10, 25 and 50 U.S. DMAs®, respectively and 61% of all DMAs® nationally, providing an attractive platform for national advertisers who want exposure in larger markets or on a national basis; and

•	The average screens per theater in our network during 2019 was 12.2 screens, 1.7 times the U.S. theater industry average and the aggregate annual attendance per screen of theaters included in our network during 2019 was 30,714, versus the U.S. theater industry average attendance per indoor screen of 28,209, using metrics reported by the National Association of Theatre Owners.

---

---

---

---

•	if NCM LLC’s network theater circuits cannot compete with other out-of-home entertainment due to an increase in the use of alternative film delivery methods (and the shortening of the “release window” between the release of major motion pictures to the alternative delivery methods), including network, video streaming and downloads via the Internet;

•	theater circuits in NCM LLC’s network continue to renovate auditoriums in certain of their theaters to install new larger, more comfortable seating, which reduces the number of seats in a theater auditorium. This renovation has been viewed favorably by patrons and many theater circuits have noted an intent to continue such renovations;

•	changes in theater operating policies, including the number and length of trailers for upcoming films that are played prior to the start of the feature film, which if the length of trailers increases, may result in most or all of the Noovie pre-show starting further out from the actual start of the feature film;

•	any reduction in consumer confidence or disposable income in general that reduces the demand for motion pictures or adversely affects the motion picture production industry;

•	the success of first-run motion pictures, which depends upon the production and marketing efforts of the major studios and the attractiveness and value proposition of the movies to consumers compared to other forms of entertainment;

•	if the theaters in our network fail to maintain their theaters and provide amenities that consumers prefer;

•	if studios begin to reduce the number of feature films produced for theater exhibition and their investments in those films or reduce the investments made to market those films;

•	if future theater attendance declines significantly over an extended time period, one or more of the founding members or network affiliates may face financial difficulties and could be forced to sell or close theaters or reduce the number of screens it builds or upgrades or increase ticket prices; and

•	NCM LLC’s network theater circuits also may not successfully compete for licenses to exhibit quality films and are not assured a consistent supply of motion pictures if they do not have long-term arrangements with major film distributors.

•	theater patrons are increasingly purchasing tickets ahead of time via on-line ticketing mediums and when available reserving a seat in the theater (offered in approximately 84.9% of our network as of December 26, 2019), which could affect how early patrons arrive to the theater and reduce the number of patrons that are in a theater seat to view most or all of the Noovie pre-show; and

•	changes in theater patron amenities, including, online ticketing, bars and entertainment within exhibitor lobbies causing increased dwell time of patrons.

---

•	the behavior of theater patrons may change in response to the display of a portion of the Noovie pre-show after the advertised showtime, or in response to the combination of advertising and trailers before the start of the feature film, resulting in a reduction to the number of patrons that are in a theater seat to view most or all of the Noovie pre-show;

•	exhibitors may encounter issues in displaying a portion of the Noovie pre-show after the advertised showtime because of technical issues, access issues with their content providers, or other issues that may arise in the future;

•	potential advertisers may not view the Post-Showtime Inventory as attractive due to inability to run across our entire network or view it as a premium advertising opportunity and the average CPMs for the Noovie pre-show may not increase as much as anticipated, or at all;

•	NCM LLC may not satisfy the minimum average CPM which is required by the 2019 ESA Amendments for it to have the right to display the Platinum Spot for more than one concurrent advertiser;

•	the extended length of time between the advertised showtime and the beginning of the feature film may decrease the average CPM for that portion of the Noovie pre-show appearing before the advertised showtime, which may partially or fully offset any increase in average CPM for the Post-Showtime Inventory; and

•	the increased theater access fees payable to Cinemark and Regal in connection with the Post-Showtime Inventory and revenue share applicable to the Platinum Spot may exceed the increase, if any, in revenue resulting from the 2019 ESA Amendments.

---

---

•	increased competition for fewer advertising and entertainment programming dollars;

•	pricing pressure that may adversely affect revenue and gross margin;

•	declining attendance and thus a decline in the impressions available for our pre-show;

•	reduced credit availability and/or access to capital markets;

•	difficulty forecasting, budgeting and planning due to limited visibility into the spending plans of current or prospective clients; or

•	client financial difficulty and increased risk of uncollectible accounts.

---

---

•	is not necessary to protect a legitimate business interest of the party seeking enforcement;

•	unreasonably restrains the party against whom enforcement is sought; or

•	is contrary to the public interest.

---

---

---

•	limiting NCM LLC’s ability to obtain financing in the future;

•	requiring much of NCM LLC's cash flow to be dedicated to interest obligations and making it unavailable for other purposes, including payments to its members (including NCM, Inc.);

•	limiting NCM LLC’s liquidity and operational flexibility in changing economic, business and competitive conditions which could require NCM LLC to consider deferring planned capital expenditures, reducing discretionary spending, selling assets, restructuring existing debt or deferring acquisitions or other strategic opportunities; and

•	making NCM LLC more vulnerable to an increase in interest rates, a downturn in operating performance or decline in general economic conditions.

---

•	assign, transfer, sell or pledge all or a portion of the membership units of NCM LLC beneficially owned by NCM, Inc.;

•	acquire, dispose, lease or license assets with an aggregate value exceeding 20% of the fair market value of the business of NCM LLC operating as a going concern;

•	merge, reorganize, recapitalize, reclassify, consolidate, dissolve, liquidate or enter into a similar transaction;

•	incur any funded indebtedness or repay, before due, any funded indebtedness with a fixed term in an aggregate amount in excess of $15.0 million per year;

•	issue, grant or sell shares of NCM, Inc. common stock, preferred stock or rights with respect to common or preferred stock, or NCM LLC membership units or rights with respect to membership units, except under specified circumstances;

•	amend, modify, restate or repeal any provision of NCM, Inc.’s certificate of incorporation or bylaws or the NCM LLC operating agreement;

•	enter into, modify or terminate certain material contracts not in the ordinary course of business as defined under applicable securities laws;

•	except as specifically set forth in the NCM LLC operating agreement, declare, set aside or pay any redemption of, or dividends with respect to membership interests;

•	amend any material terms or provisions (as defined in the Nasdaq rules) of NCM, Inc.’s equity incentive plan or enter into any new equity incentive compensation plan;

•	make any change in the current business purpose of NCM, Inc. to serve solely as the manager of NCM LLC or any change in the current business purpose of NCM LLC to provide the services as set forth in the ESAs; and

•	approve any actions relating to NCM LLC that could reasonably be expected to have a material adverse tax effect on NCM LLC’s founding members.

---

---

•	provide veto rights to the directors designated by Cinemark and Regal over certain actions specified in our certificate of incorporation;

•	authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares, making a takeover more difficult and expensive;

•	prohibit stockholder action by written consent; and

•	do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates.

---

---

---

---

---

---

(1)

Following the adoption of ASC 842, as discussed within Note 1 to the audited Consolidated Financial Statements included elsewhere in this document, amortization of the ESA and affiliate intangible balances is considered a form of lease expense and has been reclassified to this account as of the adoption date, December 28, 2018. The Company adopted ASC 842 prospectively and thus, prior period balances remain within amortization expense.

(2)	Includes short-term and long-term marketable securities.

(3)

During the first quarter of 2016, the Company adopted Accounting Standards Update 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) and Accounting Standards Update 2015-15, Interest – Imputation of Interest (“ASU 2015-15”), on a retrospective basis, which provide guidance for simplifying the presentation of debt issuance costs. In connection with the adoption of ASU 2015-03 and ASU 2015-15, the Company reclassified net deferred financing costs related to NCM LLC’s term loans, secured and unsecured notes in the Consolidated Balance Sheet as a direct deduction from the carrying amount of those borrowings, while net deferred financing costs related to the revolving credit facility remained an asset in the Consolidated Balance Sheet. The amounts presented above for total assets and total liabilities and equity reflect this reclassification as of December 26, 2019, December 27, 2018, December 28, 2017 and December 29, 2016. Amounts presented as of December 31, 2015 do not reflect the reclassification. If adjusted, the reclassification for ASU 2015-03 and ASU 2015-15 would reduce both total assets and total liabilities and equity shown above by $12.7 million as of December 31, 2015.

(4)

Adjusted OIBDA and Adjusted OIBDA margin are not financial measures calculated in accordance with GAAP in the United States.  Adjusted OIBDA represents operating income before depreciation and amortization expense adjusted to also exclude amortization of intangibles recorded for network theater screen leases, non-cash share based compensation costs, the merger termination fee and related merger costs, early lease termination expense and Chief Executive Officer transition costs. Adjusted OIBDA margin is calculated by dividing Adjusted OIBDA by total revenue. Our management uses these non-GAAP financial measures to evaluate operating performance, to forecast future results and as a basis for compensation. The Company believes these are important supplemental measures of operating performance because they eliminate items that have less bearing on its operating performance and highlight trends in its core business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes the presentation of these measures is relevant and useful for investors because it enables them to view performance in a manner similar to the method used by the Company’s management, helps improve their ability to understand the Company’s operating performance and makes it easier to compare the Company’s results with other companies that may have different depreciation and amortization policies, amounts of amortization of intangibles recorded for network theater screen leases, non-cash share based compensation programs, levels of mergers and acquisitions, CEO turnover, early lease termination expense, interest rates, debt levels or income tax rates. A limitation of these measures, however, is that they exclude depreciation and amortization, which represent a proxy for the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in the Company’s business. In addition, Adjusted OIBDA has the limitation of not reflecting the effect of the Company’s amortization of intangibles recorded for network theater screen leases, share-based payment costs, costs associated with the terminated merger with Screenvision, LLC (“Screenvision”), costs associated with the resignation of the Company’s former Chief Executive Officers, or early lease termination expense. Adjusted OIBDA should not be regarded as an alternative to operating income, net income or as indicators of operating performance, nor should they be considered in isolation of, or as substitutes for financial measures prepared in accordance with GAAP. The Company believes that operating income is the most directly comparable GAAP financial measure to Adjusted OIBDA. Because not all companies use identical calculations, these non-GAAP presentations may not be comparable to other similarly titled measures of other companies, or calculations in the Company’s debt agreement.

---

(5)	Represents the total number of screens within NCM LLC’s advertising network operated by NCM LLC’s founding members.

(6)	Represents the total screens within NCM LLC’s advertising network.

(7)	Represents the total number of screens that are connected to the DCN.

(8)	Represents the total attendance within NCM LLC’s advertising network as provided by our founding members and affiliate partners.

(9)	Excludes screens and attendance associated with certain AMC Rave, AMC Carmike Cinemas, Inc. (“Carmike”) and Cinemark Rave theaters for all periods presented.  Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document.

(1)

Following the adoption of ASC 842, as discussed within Note 1 to the audited Consolidated Financial Statements included elsewhere in this document, amortization of the ESA and affiliate intangible balances is considered a form of lease expense and has been reclassified to this account as of the adoption date, December 28, 2018. The Company adopted ASC 842 prospectively and thus, prior period balances remain within amortization expense.

(2)	Share-based payments costs are included in network operations, selling and marketing and administrative expense in the accompanying audited Consolidated Financial Statements.

(3)	Merger termination fee and related merger costs primarily include the merger termination payment and legal, accounting, advisory and other professional fees associated with the terminated merger with Screenvision.

(4)	Early lease termination expense represents an expense recorded upon the early termination of the lease of our corporate headquarters because the early termination payment made by the Company was reimbursed by the landlord of the new building.

---

---

(1)	Represents the total attendance within NCM LLC’s advertising network, excluding screens and attendance associated with certain AMC Rave, AMC Carmike and Cinemark Rave theaters that are currently part of another cinema advertising network for all periods presented.  Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document.

(1)	Represents the loss of three of our affiliates that did not renew their contracts resulting in a reduction of 250 affiliate screens to our network, offset by the addition of one new affiliate which added 4 new screens to our network during the year ended December 26, 2019.

---

(1)	Represents the total attendance within NCM LLC’s advertising network, excluding screens and attendance associated with certain AMC Rave, AMC Carmike and Cinemark Rave theaters for certain periods presented.  Refer to Note 5 to the audited Consolidated Financial Statements included elsewhere in this document.

---

---

---

(1)	Included in cash and cash equivalents as of December 26, 2019 and December 27, 2018 there was $11.4 million and $7.2 million, respectively, of cash held by NCM LLC which is not available to satisfy NCM, Inc.'s dividend payments and other NCM, Inc. obligations.

---

(2)

The revolving credit facility portion of NCM LLC’s total borrowings is available, subject to certain conditions, for general corporate purposes of NCM LLC in the ordinary course of business and for other transactions permitted under the senior secured credit facility, and a portion is available for letters of credit. NCM LLC’s total capacity under the revolving credit facility was $175.0 million less $3.6 million of outstanding letters of credit or $171.4 million as of December 26, 2019 and $175.0 million less $4.8 million of outstanding letters of credit or $170.2 million, as of December 27, 2018.

---

---

---

---

(1)

We have a $175.0 million variable rate revolving credit facility of which $39.0 million was outstanding as of December 26, 2019 and $3.6 million is restricted due to outstanding letters of credit.  Debt service requirements under this agreement depend on the amounts borrowed and the level of the base interest rate, in addition to a commitment fee on the unused portion of the revolving credit facility.  Refer to further discussion of the secured credit facility under “—Financial Condition and Liquidity-Financings” above.

(2)	The amounts of future cash interest payments in the table above are based on the amount outstanding on the Senior Secured Notes due 2028, Senior Unsecured Notes due 2026, term loans and revolving credit facility, as well as,

---

(3)

The TRA entered into at the completion of our IPO provides for the payment by us to the founding members of 90% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of certain increases in our proportionate share of tax basis in NCM LLC’s tangible and intangible assets.  The payments to NCM LLC’s founding members are based, in part, on actual annual income and as such, will vary based on our operating results.  The value in the table represents the estimated amounts payable under the TRA as of December 26, 2019.

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

(1)	The Company redesigned the local and regional sales teams at the end of 2017, resulting in a reallocation of sales team members and customers from the local team in 2017 to the regional team in 2018 which resulted in the large increase in regional advertising revenue and corresponding decrease in local advertising revenue from 2017 to 2018.

---

---

(1)

During the first quarter of 2019, NCM LLC issued 1,044,665 common membership units to its founding members for the rights to exclusive access to the theater screens and attendees added, net of dispositions by the founding members to NCM LLC’s network during the 2018 fiscal year and NCM LLC recorded a net intangible asset of $7.6 million during the first quarter of 2019 as a result of the Common Unit Adjustment.

(2)	During the second quarter of 2019, AMC purchased one of the Company's affiliates and the Company wrote off the related intangible asset balance and accumulated amortization. A portion of the net book balance was reimbursed by AMC. The acquired theaters will be included within the Common Unit Adjustment calculation for AMC in March of 2020.

(3)

During the first quarter of 2018, NCM LLC issued 2,821,710 (3,736,860 issued, net of 915,150 returned) common membership units to its founding members for the rights to exclusive access to net new theater screens and attendees added by the founding members to NCM LLC’s network during 2017 and NCM LLC recorded a net intangible asset of $15.9 million in the first quarter of 2018 as a result of these Common Unit Adjustments.

(4)

Carmike and Rave Cinemas had pre-existing advertising agreements for some of the theaters it owned prior to their acquisitions by AMC and Cinemark. As a result, AMC and Cinemark will make integration and other encumbered theater payments over the remaining term of those agreements.  During the years ended December 26, 2019 and December 27, 2018, NCM LLC recorded a reduction to net intangible assets of $22.3 million and $21.4 million, respectively, related to integration and other encumbered theater payments due from AMC and Cinemark. During the year ended December 26, 2019 and December 27, 2018, AMC and Cinemark paid a total of $21.7 million and $22.7 million, respectively, related to integration and other encumbered theater payments.

---

---

(1)	Refer to the discussion of the impact of the Tax Act within the ‘Tax Reform’ section below.

(2)

During the year ended December 31, 2015, the Company established a reserve for material, known tax exposures of $4.9 million, including accrued interest and penalties.  The reserve related to tax exposures from prior periods (2010 through 2014). During the years ended December 26, 2019, December 27, 2018 and December 28, 2017 the Company reversed approximately $0.0 million of its reserve, $0.4 million of its reserve ($0.3 million of income tax benefits and $0.1 million of accrued interest and penalties) and $1.7 million ($1.3 million of income tax benefits and $0.4 million of accrued interest and penalties), respectively, because the statute of limitations expired.

---

(1)

The Company recognized a deferred tax asset in the amount of $218.9 million and $233.5 million as of 2019 and 2018, respectively, associated with the basis difference in our investment in NCM LLC. However, a portion of the total basis difference will only reverse upon a sale of the Company’s interest in NCM LLC, which the Company expects would result in a capital loss for which no offsetting capital gain is expected. Therefore, as of December 26, 2019 and December 27, 2018 the Company has a valuation allowance in the amount of $80.6 million and $80.1 million, respectively, against the deferred tax asset to which this portion relates. The change in this portion of the valuation allowance from December 27, 2018 to December 26, 2019 was primarily driven by outside basis differences which do not impact tax expense and thus are not reflected within the rate reconciliation presented above.

---

•

ESAs. Under the ESAs, NCM LLC is the exclusive provider within the United States of advertising services in the founding members’ theaters (subject to pre-existing contractual obligations and other limited exceptions for the benefit of the founding members). The advertising services include the use of the DCN equipment required to deliver the on-screen advertising and other content included in the Noovie pre-show, use of the LEN and rights to sell and display certain lobby promotions. Further, 30 to 60 seconds of advertising included in the Noovie pre-show is sold to the founding members to satisfy the founding members’ on-screen advertising commitments under their beverage concessionaire agreements. In consideration for access to the founding members’ theaters, theater patrons, the network equipment required to display on-screen and LEN video advertising and the use of theaters for lobby promotions, the founding members receive a monthly theater access fee. In conjunction with the 2019 ESA Amendments, NCM LLC also pays Cinemark and Regal incremental monthly theater access fees and, subject to NCM LLC's use of specified inventory, a revenue share in consideration for NCM LLC's access to certain on-screen advertising inventory after the advertised showtime of a feature film beginning November 1, 2019 and the underlying term of the ESAs were extended until 2041. The ESAs and 2019 ESA Amendments are considered leases with related parties under ASC 842.

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

•

Tax Receivable Agreement. The TRA provides for the effective payment by NCM, Inc. to the founding members of 90% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that is actually realized as a result of certain increases in NCM, Inc.’s proportionate share of tax basis in NCM LLC’s tangible and intangible assets resulting from the IPO and related transactions.

---

•

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

(1)	AMC is no longer considered a related party as of July 5, 2018, as described further above. As such, the figures within the table above only include related party activity with AMC for the first six months of 2018 and the year ended December 28, 2017.

(2)

For the full years ended December 26, 2019, December 27, 2018 and December 28, 2017, two of the founding members purchased 60 seconds of on-screen advertising time and one founding member purchased 30 seconds (with all three founding members having a right to purchase up to 90 seconds) from NCM LLC to satisfy their obligations under their beverage concessionaire agreements at a 30 second equivalent CPM rate specified by the ESA.

(3)	Comprised of payments per theater attendee, payments per digital screen with respect to the founding member theaters included in the Company’s network, payments for access to higher quality digital cinema equipment and payments to Cinemark and Regal for their portion of the Platinum Spot revenue for the utilization of the theaters post-showtime in accordance with the 2019 ESA Amendments.

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

(5)	Refer to the discussion of the Fathom Events sale under AC JV, LLC transactions below.

(1)	AMC is no longer considered a related party as of July 5, 2018, as described further above. As such, the figures within the table above do not include AMC.

(2)	Refer to the discussion of the Fathom Events sale under AC JV, LLC transactions below.

(3)	Refer to Note 5—Intangible Assets for further information on common unit adjustments and integration payments.

---

(4)

The Company paid Cinemark and Regal $3.7 million and $6.7 million, respectively, in payments pursuant to the TRA during 2019 which was for the 2018 tax year. The Company paid AMC, Cinemark and Regal $5.4 million, $4.6 million and $8.4 million, respectively, in payments pursuant to the TRA during 2018 which was for the 2017 tax year. As AMC is no longer considered a related party as of July 5, 2018, the AMC TRA payment includes only related party activity with AMC for the six months ended June 28, 2018.

---

(1)	The interest rates on the revolving credit facility and term loan are described below.

---

---

---

---

---

(1)	Includes 185,019 vested shares that were withheld to cover tax obligations and were subsequently canceled.

---

---

(1)	Refer to Note 9—Related Party Transactions.

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

---

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

(1)	Cash Equivalents—The Company’s cash equivalents are carried at estimated fair value. Cash equivalents consist of money market accounts which the Company has classified as Level 1 given the active market for these accounts and commercial paper with original maturities of three months or less, which are classified as Level 2 and are valued as described below.

(2)

Short-Term and Long-Term Marketable Securities—The carrying amount and fair value of the marketable securities are equivalent since the Company accounts for these instruments at fair value. The Company’s government agency bonds, commercial paper and certificates of deposit are valued using third party broker quotes. The value of the Company’s government agency bonds and municipal bonds are derived from quoted market information. The inputs in the valuation are classified as Level 1 if there is an active market for these securities; however, if an active market does not

---

---

(1)	Maturities— Securities available for sale include obligations with various contractual maturity dates some of which are greater than one year. The Company considers the securities to be liquid and convertible to cash within 30 days.

(1)	The increase within the valuation allowance during the year ended December 26, 2019 relates to the establishment of a valuation allowance for state NOLs and investment losses that the Company no longer expects to realize prior to expiration and timing differences between the recognition of available cash distributions for book and tax purposes.

(2)	The decreases within the valuation allowance during the years ended December 27, 2018 and December 28, 2017 relate to movement within the underlying residual portion of the Investment in NCM LLC deferred tax asset due primarily to timing differences between the recognition of available cash distributions for book and tax purposes.

---

(1)	Earnings per share in each quarter is computed using the weighted-average number of common shares outstanding during that quarter while earnings per share for the full year is computed using the weighted average number of common shares outstanding during the year.

---

---

---

---

---

---

---

---

---

*	Filed herewith.

**	Furnished herewith.

+	Management contract.

---

---