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TMCNet:  NATIONAL CINEMEDIA, LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[May 07, 2014]

NATIONAL CINEMEDIA, LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Some of the information in this Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended. All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations", may constitute forward-looking statements.


In some cases, you can identify these "forward-looking statements" by the specific words, including but not limited to "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under the heading "Risk Factors" contained in our annual report on Form 10-K for the Company's fiscal year ended December 26, 2013. The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and notes thereto included herein and the audited financial statements and other disclosure included in our annual report on Form 10-K for the Company's fiscal year ended December 26, 2013.

Overview We operate the largest digital in-theatre network in North America, for the distribution of advertising. Our revenue is principally derived from the sale of advertising. We have long-term ESAs with our founding members (approximately 23 years remaining as of March 27, 2014) and multi-year agreements with network affiliates. The ESAs with the founding members and network affiliate agreements grant us exclusive rights, subject to limited exceptions, to sell advertising in those theatres. Our advertising FirstLook pre-show and lobby entertainment network ("LEN") programming are distributed across our proprietary digital content satellite network ("DCN"). Approximately 97% of the aggregate founding member and network affiliate theatre attendance is generated by theatres connected to our DCN and 100% of the FirstLook pre-show is projected on digital projectors (79% digital cinema projectors and 21% LCD projectors).

On December 26, 2013, we sold our Fathom Events business to a newly formed limited liability company (AC JV, LLC) owned 32% by each of the founding members and 4% by us. The Fathom Events business focused on the marketing and distribution of live and pre-recorded entertainment programming to theatre operators to provide additional programs to augment their feature film schedule.

In consideration for the sale, we received a total of $25.0 million in promissory notes from our founding members (one-third from each founding member). The notes bear interest at a fixed rate of 5.0% per annum, compounded annually. Interest and principal payments are due annually in six equal installments commencing on the first anniversary of the closing. In connection with the sale, we entered into a transition services agreement to provide certain corporate overhead services for a fee and reimbursement for the use of facilities and certain services including creative, technical event management and event management for AC JV, LLC for nine months following closing. In addition, we entered into a services agreement with a term coinciding with the digital programming ESAs, which grants AC JV, LLC advertising on-screen and on our LEN and a pre-feature program prior to Fathom events reasonably consistent with what was previously dedicated to Fathom. In addition, the services agreement provides that we will assist with event sponsorship sales in return for a share of the sponsorship revenue. We have also agreed to provide creative and media production services for the same fee available to the founding members related to the marketing of their core theatrical business.

Management focuses on several measurements that we believe provide us with the necessary ratios and key performance indicators to manage our business, determine how we are performing versus our internal goals and targets, and against the performance of our competitors and other benchmarks in the marketplace in which we operate. Senior executives hold meetings twice per quarter with officers, managers and staff to discuss and analyze operating results and address significant variances to budget in an effort to identify trends and changes in our business and adjust operating strategy and tactics as needed. We focus on operating metrics including changes in OIBDA, Adjusted OIBDA and Adjusted OIBDA margin, as defined and discussed in "Non-GAAP Financial Measures" below, as some of our primary measurement metrics. In addition, we monitor our monthly advertising performance measurements, including advertising inventory utilization, pricing (CPM), local and total advertising revenue per attendee, as well as our operating cash flow and related financial leverage and revolving credit facility availability to ensure that there is adequate cash availability to fund our working capital needs and debt obligations.

21-------------------------------------------------------------------------------- Table of Contents Our operating results may be affected by a variety of internal and external factors and trends described more fully in the section entitled "Risk Factors" in our Form 10-K filed with the SEC on March 4, 2014 for the Company's fiscal year ended December 26, 2013.

Summary Historical and Operating Data The following table presents operating data and Adjusted OIBDA (dollars in millions, except share data): Three Months Ended % Change March 27, March 28, Q1 2014 to 2014 2013 Q1 2013 Revenue: Advertising $ 70.2 $ 73.7 (4.7 %) Fathom Events - 8.5 (100.0 %) Total 70.2 82.2 (14.6 %) Operating expenses 57.4 60.6 (5.3 %) Operating income 12.8 21.6 (40.7 %) Non-operating expense 15.4 15.8 (2.5 %) Income tax expense 0.2 0.2 0.0 % Net (loss) income $ (2.8 ) $ 5.6 (150.0 %) Adjusted OIBDA $ 22.6 $ 29.1 (22.4 %) Adjusted OIBDA margin 32.2 % 35.4 % (3.2 %) Total theatre attendance (1) (2) 166.5 154.6 7.7 % (1) Represents the total attendance within NCM LLC's advertising network.

(2) Excludes screens and attendance associated with certain AMC Rave and Cinemark Rave theatres for all periods presented.

Non-GAAP Financial Measures Operating Income Before Depreciation and Amortization ("OIBDA"), Adjusted OIBDA and Adjusted OIBDA margin are not financial measures calculated in accordance with U.S. GAAP. OIBDA represents net income plus income tax expense, interest and other costs and depreciation and amortization expense. Adjusted OIBDA excludes from OIBDA non-cash share based payment costs. Adjusted OIBDA margin is calculated by dividing Adjusted OIBDA by total revenue. These non-GAAP financial measures are used by management 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 so highlight trends in its core business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes the presentation of these measures is relevant and useful for investors because it enables them to view performance in a manner similar to the method used by the Company's management, helps improve their ability to understand the Company's operating performance and makes it easier to compare the Company's results with other companies that may have different depreciation and amortization policies, non-cash share based compensation programs, interest rates or 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 share based payment costs. OIBDA or 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 net income is the 22-------------------------------------------------------------------------------- Table of Contents most directly comparable GAAP financial measure to 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.

The following table reconciles net income (loss) to OIBDA and Adjusted OIBDA for the periods presented (dollars in millions): Three Months Ended March 27, March 28, 2014 2013 Net (loss) income $ (2.8 ) $ 5.6 Income tax expense 0.2 0.2 Interest and other non-operating costs 15.4 15.8 Depreciation and amortization 7.8 5.4 OIBDA $ 20.6 $ 27.0 Share-based compensation costs (1) 2.0 2.1 Adjusted OIBDA $ 22.6 $ 29.1 Total revenue $ 70.2 $ 82.2 Adjusted OIBDA margin 32.2 % 35.4 % (1) Share-based compensation costs are included in network operations, selling and marketing, administrative expense and administrative fee - managing member in the accompanying unaudited condensed financial statements. These costs represent both non-cash charges and cash charges paid through the administrative fee with the managing member. The amount of share-based compensation costs that were non-cash were $1.2 million and $1.1 million for the three months ended March 27, 2014 and March 28, 2013.

Basis of Presentation The results of operations data for the three months ended March 27, 2014 and March 28, 2013 was derived from the unaudited condensed financial statements and accounting records of NCM LLC and should be read in conjunction with the notes thereto.

Results of Operations Three Months Ended March 27, 2014 and March 28, 2013 Revenue. Total revenue decreased $12.0 million, or 14.6%, from $82.2 million for the three months ended March 28, 2013 to $70.2 million for the three months ended March 27, 2014. The following is a summary of revenue by category (in millions).

Three Months Ended $ Change % Change March 27, March 28, Q1 2014 to Q1 2014 to 2014 2013 Q1 2013 Q1 2013 National advertising revenue $ 42.7 $ 51.5 $ (8.8 ) (17.1 %) Local advertising revenue 18.1 13.3 4.8 36.1 % Founding member advertising revenue from beverage concessionaire agreements 9.4 8.9 0.5 5.6 % Fathom Consumer revenue - 8.3 (8.3 ) (100.0 %) Fathom Business revenue - 0.2 (0.2 ) (100.0 %) Total revenue $ 70.2 $ 82.2 $ (12.0 ) (14.6 %) 23 -------------------------------------------------------------------------------- Table of Contents The following table shows data on theatre attendance and revenue per attendee for the three months ended March 27, 2014 and March 28, 2013: Three Months Ended % Change March 27, March 28, Q1 2014 to 2014 2013 Q1 2013National advertising revenue per attendee $ 0.256 $ 0.333 (23.1 %) Local advertising revenue per attendee $ 0.109 $ 0.086 26.7 % Total advertising revenue (excluding founding member beverage revenue) per attendee $ 0.365 $ 0.419 (12.9 %) Total advertising revenue per attendee $ 0.422 $ 0.477 (11.5 %) Total theatre attendance 166.5 154.6 7.7 % National advertising revenue. The $8.8 million, or 17.1%, decrease in national advertising revenue (excluding beverage revenue from NCM LLC's founding members) was due primarily to a decrease in national inventory utilization which fell from 86.0% in the first quarter of 2013 to 72.6% in the first quarter of 2014.

Inventory utilization is calculated based on eleven 30-second salable national advertising units in our pre-show, which can be expanded, should market demand dictate. Revenue and utilization decreased in part from lower content partner revenue which decreased $3.0 million, or 16.0%, in the first quarter of 2014, compared to the first quarter of 2013. The decrease in national advertising revenue was also due to a 10.1% decrease in national advertising CPMs (excluding beverage revenue) due primarily to the expansion of our client mix to new client categories that traditionally buy their television and other advertising at lower CPMs, the implementation of more aggressive seasonal and volume pricing strategies and increased competition from other national video networks, including several new online and mobile advertising platforms.

Local advertising revenue. The $4.8 million, or 36.1%, increase in local advertising revenue was driven by an increase in local advertising contract volume of 16.0% and an increase in the average contract value of 19.5% in the first quarter of 2014, compared to the first quarter of 2013. The increase in contract volume and average contract value was driven by an increase of contracts over $250,000. Revenue from contracts greater than $250,000 increased by $4.0 million, which represented growth in the number of contracts of 350% and growth in the average contract value of 18.7% during the first quarter of 2014, compared to the first quarter of 2013. The growth in these larger local contracts during the first quarter of 2014 was due in part to the growth of our network and better geographic coverage in many markets and states that increased our appeal to advertisers and attracted several large additional regional contracts in the automotive and telecommunications industries.

Founding member beverage revenue. The $0.5 million, or 5.6%, increase in national advertising revenue from NCM LLC's founding members' beverage concessionaire agreements was due primarily to an 11.8 % increase in founding member attendance in the first quarter of 2014, compared to the first quarter of 2013, partially offset by a decrease in beverage revenue CPMs, which declined because they are based on prior year realized rates during segment one of the FirstLook pre-show, which decreased year-over-year.

Fathom Events revenue. Fathom Events revenue was zero for the three months ended March 27, 2014 from $8.5 million for the three months ended March 28, 2013 due to the sale of this portion of our business on December 26, 2013.

24-------------------------------------------------------------------------------- Table of Contents Operating expenses. Total operating expenses decreased $3.2 million, or 5.3%, from $60.6 million for the three months ended March 28, 2013 to $57.4 million for the three months ended March 27, 2014. The following table shows the operating expense breakout for the three months ended March 27, 2014 and March 28, 2013 (in millions): Three Months Ended $ Change % Change March 27, March 28, Q1 2014 to Q1 2014 to 2014 2013 Q1 2013 Q1 2013 Advertising operating costs $ 5.0 $ 5.7 $ (0.7 ) (12.3 %) Fathom Events operating costs - 5.8 (5.8 ) (100.0 %) Network costs 4.6 4.8 (0.2 ) (4.2 %) Theatre access fees-founding members 17.4 15.6 1.8 11.5 % Selling and marketing costs 15.0 15.4 (0.4 ) (2.6 %) Administrative and other costs 4.7 5.1 (0.4 ) (7.8 %) Administrative fee-managing member 2.9 2.8 0.1 3.6 % Depreciation and amortization 7.8 5.4 2.4 44.4 % Total operating expenses $ 57.4 $ 60.6 $ (3.2 ) (5.3 %) Advertising operating costs. Advertising operating costs decreased $0.7 million, or 12.3%, from $5.7 million for the first quarter of 2013 to $5.0 million for the first quarter of 2014. This decrease was primarily the result of a $0.8 million decrease in affiliate advertising payments. The decrease in affiliate advertising payments was driven by lower total advertising revenue and a 12.3% decrease in the number of average affiliate screens in the first quarter of 2014, compared to the first quarter of 2013 due to the acquisition of certain affiliate screens by NCM LLC's founding members, partially offset by the addition of 512 affiliate screens related to newly constructed, acquired and signed affiliate theatres primarily driven by the addition of seven new affiliate circuits after the first quarter of 2013 and during 2014.

Fathom Events operating costs. Fathom Events operating costs decreased to zero in the three months ended March 27, 2014 from $5.8 million for the three months ended March 28, 2013 due to the sale of this portion of our business on December 26, 2013.

Network costs. Network costs decreased $0.2 million, or 4.2%, from $4.8 million for the three months ended March 28, 2013 to $4.6 million for the three months ended March 27, 2014. The decrease was primarily due to a decrease of $0.2 million in personnel expense.

Theatre access fees. Theatre access fees increased $1.8 million, or 11.5%, from $15.6 million for the first quarter of 2013 to $17.4 million for the first quarter of 2014. Approximately $1.1 million of the increase was due to the 11.8% increase in founding member attendance in the first quarter of 2014 compared to the first quarter of 2013. In addition, theatre access fees increased $0.7 million due to an increase in the number of digital screens, including higher quality digital cinema projectors and related equipment. The fees for digital screens and equipment increased due to an annual 5% rate increase specified in the ESAs and an increase of 6.1% in the number of NCM LLC's founding member theatres equipped with the higher quality digital cinema equipment year-over-year due primarily to acquisitions of new theatres by the founding members.

Selling and marketing costs. Selling and marketing costs decreased $0.4 million, or 2.6%, from $15.4 million for the first quarter of 2013 to $15.0 million for the first quarter of 2014. This decrease was primarily due to a decrease of $1.0 million in non-cash barter expense related to timing of barter transactions, partially offset by an increase of $0.8 million in commission expense due to higher local advertising revenue.

Administrative and other costs. Administrative and other costs decreased $0.4 million, or 7.8%, from $5.1 million for the three months ended March 28, 2013 to $4.7 million for the three months ended March 27, 2014. The decrease was primarily due to a decrease of $0.3 million in personnel expense from a decrease in employee benefit costs, partially offset by an increase in payroll expense from customary cost of living salary increases.

25-------------------------------------------------------------------------------- Table of Contents Administrative fee - managing member. Administrative fee-managing member increased slightly from $2.8 million for the three months ended March 28, 2013 to $2.9 million for the three months ended March 27, 2014. Amounts recorded are based on the terms of the management services agreement which states NCM LLC pays NCM, Inc. service fees which are equal to the cost of NCM, Inc. employees and any reimbursable costs incurred by NCM, Inc.

Depreciation and amortization. Depreciation and amortization expense increased $2.4 million, or 44.4%, from $5.4 million for the first quarter of 2013 to $7.8 million for the first quarter of 2014. The increase was primarily due to higher amortization of intangible assets related to new affiliate agreements and NCM LLC founding member common unit adjustments, primarily related to founding member acquisitions.

Non-operating expenses. Total non-operating expenses decreased $0.4 million, or 2.5%, from $15.8 million for the three months ended March 28, 2013 to $15.4 million for the three months ended March 27, 2014. The following table shows the non-operating expense breakout for the three months ended March 27, 2014 and March 28, 2013 (in millions): Three Months Ended $ Change % Change March 27, March 28, Q1 2014 to Q1 2014 to 2014 2013 Q1 2013 Q1 2013 Interest on borrowings $ 13.1 $ 13.3 $ (0.2 ) (1.5 %) Interest income (0.3 ) - (0.3 ) 100.0 % Amortization of terminated derivatives 2.5 2.5 - 0.0 % Other non-operating expense 0.1 - 0.1 100.0 % Total non-operating expenses $ 15.4 $ 15.8 $ (0.4 ) (2.5 %) Interest on borrowings decreased $0.2 million due primarily to lower average interest rates in 2014, compared to 2013, as a result of the Company's debt refinancing in the second quarter of 2013. Interest income increased by $0.3 million due to interest accrued on the notes receivable from NCM LLC's founding members from the sale of Fathom Events.

Net income (loss): Net income decreased $8.4 million from $5.6 million for the three months ended March 28, 2013 to a net loss of $2.8 million for the three months ended March 27, 2014. The decrease in net income was primarily due to a decrease in operating income of $8.8 million, as described further above.

Known Trends and Uncertainties Trends and Uncertainties Related to our Business, Industry and Corporate Structure Changes in the current macro-economic environment and changes in the national and local and regional advertising markets, including the expansion of new online and mobile advertising platforms, presents uncertainties that could impact our results of operations, including the timing and amount of spending from our advertising clients. The impact to our business associated with these issues could be mitigated somewhat over time due to factors including the expansion of our advertising network, the related increase in salable advertising impressions, growth in our advertising client base, the effectiveness of cinema advertising relative to other advertising mediums, and the technical quality of our network and upgrades to our inventory management and audience targeting systems that are in process. During 2013 and thus far in 2014, we have added seven new affiliate theatre circuits (with 303 screens) to our national network. In total, these contracted new affiliate theatres are expected to add approximately 8 million new attendees on a full-year pro-forma basis, which we expect will result in approximately 118 million new salable national advertising impressions (assuming 14 national advertising units of 30 seconds each). Our sales force integrates these additional impressions into the advertising sales process as they are added to our network and thus these additional attendees will provide the opportunity for expansion of our revenue, operating income and cash flow. We believe that the continued growth of our network will expand our national reach and geographic coverage will strengthen our selling proposition and competitive positioning versus other national and local video advertising platforms, including television, online and mobile video platforms and other advertising platforms. In addition, 26-------------------------------------------------------------------------------- Table of Contents during late 2012 and 2013, NCM LLC's founding members acquired 97 of our affiliate theatres (1,245 screens) making the majority of them a part of our network immediately. In addition, the founding members also acquired 14 theatres with 223 screens and annual attendance of about 10 million that had existing agreements with another cinema advertising provider. These theatres are expected to join our network in November 2018. The acquisition of existing affiliates by our founding members will increase our Adjusted OIBDA and Adjusted OIBDA margins as the theatre access fees are generally lower, as a percentage of revenue, than affiliate payments.

In 2013 and in the first quarter of 2014, we experienced a decline of 7.6% and 10.8%, respectively, in national advertising CPMs (excluding beverage revenue) due primarily to the expansion of our client mix to new client categories that traditionally buy their television and other advertising at lower CPMs, the implementation of more aggressive seasonal and volume pricing strategies and increased competition from other national video networks, including several new online and mobile advertising platforms. We expect this trend of decreasing CPMs to continue in 2014 as we further expand and diversify our client mix into client categories that have lower pricing expectations and the marketplace becomes more competitive due in part to the expansion of online and mobile video advertising platforms.

Under the ESAs, up to 90 seconds of the FirstLook program can be sold to our founding members to satisfy their on-screen advertising commitments under their beverage concessionaire agreements. During 2013, we sold 60 seconds to our founding members. We expect to continue to sell 60 seconds of time to our founding members in 2014. During 2014, certain of founding members will be renegotiating their agreements with their beverage supplier, which could change the amount of advertising time that is bought from us to satisfy those agreements. Should the amount of time acquired as part of these beverage concessionaire arrangements decline, that time will be available for sale to other clients. Through 2011, this time was priced on a CPM basis, which changed each year as specified in the ESAs. Per the ESAs, beginning in 2012, this time is priced equal to the annual percentage change in the advertising CPM for the previous year charged to unaffiliated third parties during segment one (closest to show time) of the FirstLook pre-show, limited to the highest advertising CPM being then-charged by us. Due to the lower CPMs that we realized in 2013, this reduced the CPM on our beverage concessionaire revenue during the first quarter of 2014 and will reduce the CPM on our beverage concessionaire revenue during the remainder of 2014.

In consideration for NCM LLC's access to the founding members' theatre attendees for on-screen advertising and use of lobbies and other space within the founding members' theatres for the LEN and lobby promotions, the founding members receive a monthly theatre access fee under the ESAs. The theatre access fee is composed of a fixed payment per patron and a fixed payment per digital screen. The payment per theatre patron increases by 8% every five years, with the first such increase taking effect for fiscal year 2012, and the payment per digital screen increases annually by 5%. The theatre access fee paid in the aggregate to all founding members cannot be less than 12% of NCM LLC's aggregate advertising revenue (as defined in the ESA), or it will be adjusted upward to reach this minimum payment. Pursuant to ESAs, beginning on October 1, 2010 the theatre access fee paid to the members of NCM LLC included an additional fee for access to the higher quality digital cinema systems. This additional fee will continue to increase as additional screens are equipped with the new digital cinema equipment and the fee increases annually by 5%. As of March 27, 2014 and March 28, 2013, approximately 86% of our founding member network screens were showing advertising on digital cinema projectors.

Trends and Uncertainties Related to Liquidity and Financial Performance During 2013 and 2012, we amended our senior secured credit facility to extend the maturity, expand the revolver availability and reduce the interest rate spreads, and in 2012 and 2011, we issued new Senior Unsecured Notes and Senior Secured Notes primarily to refinance outstanding bank debt. As a result of these financing transactions, we extended the average maturities of our debt by over six years. The average remaining maturity is 7.0 years as of March 27, 2014.

Interest expense related to cash borrowings decreased approximately $0.3 million for the first quarter of 2014 compared to the first quarter of 2013 related to the 2013 refinancing of our senior secured credit facility. As of March 27, 2014, approximately 66% of our total borrowings bear interest at fixed rates.

The remaining 34% of our borrowings bear interest at variable rates and as such, our net income and earnings per share could fluctuate with interest rate fluctuations related to our borrowings. Refer to Note 4-Borrowings for more information.

27 -------------------------------------------------------------------------------- Table of Contents Trends Related to Ownership In accordance with NCM LLC's Common Unit Adjustment Agreement with its founding members, on an annual basis NCM LLC determines the amount of common membership units to be issued to or returned by the founding members based on theatre additions or dispositions during the previous year. During the first quarter of 2014, NCM LLC issued 1,087,911 common membership units to its founding members for the rights to exclusive access to net new theatre screens and attendees added by the founding members to NCM LLC's network during 2013. Of these units, 432,646 related to theatre acquisitions and 655,265 related to new theatres constructed, net of closures. NCM LLC recorded a net intangible asset of approximately $16.4 million during the first quarter of 2014 as a result of the annual Common Unit Adjustment. The common unit adjustment for the first quarter of 2014 was lower than the adjustment for the first quarter of 2013 primarily due to the fact that two special common unit adjustments were made in 2013 for large acquisitions by two founding members.

Financial Condition and Liquidity Liquidity and Capital Resources Our cash balances can fluctuate due to the seasonality of our business and related timing of collections of accounts receivable balances and operating expenditure payments, as well as available cash payments (as defined in the NCM LLC Operating Agreement) to our founding members and managing member, interest or principal payments on our term loan and the Senior Secured Notes and Senior Unsecured Notes.

A summary of our financial liquidity is as follows (in millions): As of $ Change March 27, December 26, Q1 2014 to 2014 2013 Q4 2013 Cash and cash equivalents $ 2.0 $ 13.3 $ (11.3 ) Revolver availability (1) 87.0 104.0 (17.0 ) Total $ 89.0 $ 117.3 $ (28.3 ) (1) The revolving credit facility portion of our 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. Our total availability under the revolving credit facility is $124.0 million. Of the total available, $14.0 million outstanding principal of the revolving credit facility will not be repaid in connection with any future prepayments of the revolving credit facility amounts, but rather that portion of the revolving credit facility will be paid in full, along with any accrued and unpaid fees and interest, on the maturity date of December 31, 2014.

We have generated and used cash as follows (in millions): Three Months Ended March 27, 2014 March 28, 2013 Operating cash flow $ 30.6 $ 43.9 Investing cash flow $ (2.6 ) $ (3.2 ) Financing cash flow $ (39.3 ) $ (40.1 ) • Operating Activities. The $13.3 million decrease in cash provided by operating activities for the three months ended March 27, 2014 versus the three months ended March 28, 2013 was due primarily to an $8.4 million decrease in net income and an $8.1 million decrease in the change in accounts payable and accrued expenses.

28 -------------------------------------------------------------------------------- Table of Contents • Investing Activities. The $0.6 million decrease in cash used in investing activities for the three months ended March 27, 2014 compared to the three months ended March 28, 2013 was due to lower purchases of property and equipment of $0.6 million.

• Financing Activities. The $0.8 million decrease in cash used in financing activities during the three months ended March 27, 2014 compared to the three months ended March 28, 2013was dueprimarily to an increase in cash proceeds from borrowings, net of payments, of $17.0 million and an increase in founding member integration payments of $0.7 million, partially offset by an increase indistributions to NCM LLC's founding members of $16.8 million.

Sources of Capital and Capital Requirements NCM LLC's primary sources of liquidity and capital resources are its cash provided by operating activities, availability under its revolving credit facility and cash on hand. Management believes that future funds generated from our operations and cash on hand should be sufficient to fund working capital requirements, our debt service requirements, and capital expenditure and other investing requirements, through the next twelve months. Cash flows can be impacted by the seasonality of advertising sales, interest on borrowings under our revolving credit agreement and to a lesser extent theatre attendance. We are required pursuant to the terms of our operating agreement to distribute our available cash, as defined in the operating agreement, quarterly to our members (the founding members and NCM, Inc.). The available cash distribution to the members of NCM LLC for the three months ended March 27, 2014 (which will be made during the second quarter of 2014) was $11.5 million.

Critical Accounting Policies For a discussion of accounting policies that we consider critical to our business operations and understanding of our results of operations, and that affect the more significant judgments and estimates used in the preparation of our unaudited Condensed Financial Statements, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" contained in our annual report on Form 10-K filed for the fiscal year ended December 26, 2013 and incorporated by reference herein. As of March 27, 2014, there were no significant changes in those critical accounting policies.

Recent Accounting Pronouncements The Company has considered all recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its unaudited Condensed Financial Statements.

Related Party Transactions For a discussion of related party transactions, see the information provided under Note 3-Related Party Transactions to the unaudited Condensed Financial Statements in Item 1 of this Form 10-Q.

Off-Balance Sheet Arrangements Our operating lease obligations, which primarily include office leases, are not reflected on our balance sheet. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual and Other Obligations" contained in our annual report on Form 10-K for the fiscal year ended December 26, 2013 and incorporated by reference herein. We do not believe these arrangements are material to our current or future financial condition, results of operations, liquidity, capital resources or capital expenditures.

29 -------------------------------------------------------------------------------- Table of Contents Contractual and Other Obligations There were no material changes to our contractual obligations during the three months ended March 27, 2014.

Seasonality Our revenue and operating results are seasonal in nature, coinciding with the timing of marketing expenditures by our advertising clients and to a lesser extent the attendance patterns within the film exhibition industry. Both advertising expenditures and theatre attendance tend to be higher during the second, third, and fourth fiscal quarters. Advertising revenue is primarily correlated with new product releases, advertising client marketing priorities and economic cycles and to a lesser extent theatre attendance levels. The actual quarterly results for each quarter could differ materially depending on these factors or other risks and uncertainties. Based on our historical experience, our first quarter typically has less revenue than the other quarters of a given year due primarily to lower advertising client demand and lower theatre industry attendance levels. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations in the future.

The following table reflects the quarterly percentage of total revenue for the fiscal years ended 2010, 2011, 2012 and 2013.

First Second Third Fourth Quarter Quarter Quarter Quarter FY 2010 19.8% 23.2% 29.4% 27.6% FY 2011 16.3% 26.2% 31.2% 26.3% FY 2012 17.6% 24.5% 32.1% 25.8% FY 2013 17.8% 26.5% 29.2% 26.5% The following table reflects the quarterly percentage of total advertising revenue for the fiscal years ended 2010, 2011, 2012 and 2013.

First Second Third Fourth Quarter Quarter Quarter Quarter FY 2010 17.9% 23.7% 31.0% 27.4% FY 2011 15.3% 25.5% 32.9% 26.3% FY 2012 16.2% 24.7% 33.7% 25.4% FY 2013 17.3% 27.4% 29.9% 25.4%

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