Ascent Capital Group, Inc.
Ascent Capital Group, Inc. (Form: 10-Q, Received: 08/09/2013 13:02:05)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

 

FORM 10-Q

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

OR

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to           

 

Commission File Number 001-34176

 

ASCENT CAPITAL GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

State of Delaware

 

26-2735737

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

5251 DTC Parkway, Suite 1000

 

 

Greenwood Village, Colorado

 

80111

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (303) 628-5600

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

 

The number of outstanding shares of Ascent Capital Group, Inc.’s common stock as of July 26, 2013 was:

 

Series A common stock 13,395,906 shares; and

Series B common stock 736,505 shares.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

2

 

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited)

 

2

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

 

4

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

5

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

 

21

 

 

 

 

Item 4.

Controls and Procedures

 

21

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

22

 

 

 

 

Item 6.

Exhibits

 

23

 

 

 

 

 

SIGNATURES

 

24

 

 

 

 

 

EXHIBIT INDEX

 

25

 

1



Table of Contents

 

Item 1.   Financial Statements.

 

ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

Amounts in thousands, except share amounts

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

84,149

 

$

78,422

 

Restricted cash

 

2,640

 

2,640

 

Marketable securities, at fair value

 

141,438

 

142,587

 

Trade receivables, net of allowance for doubtful accounts of $1,575 in 2013 and $1,436 in 2012

 

12,114

 

10,891

 

Deferred income tax assets, net

 

3,780

 

3,780

 

Income taxes receivable

 

49

 

132

 

Prepaid and other current assets

 

12,595

 

15,989

 

Assets held for sale

 

6,119

 

7,205

 

Total current assets

 

262,884

 

261,646

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $33,399 in 2013 and $30,570 in 2012

 

54,743

 

56,491

 

Subscriber accounts, net of accumulated amortization of $393,760 in 2013 and $308,487 in 2012

 

1,020,664

 

987,975

 

Dealer network, net of accumulated amortization of $25,620 in 2013 and $20,580 in 2012

 

24,813

 

29,853

 

Goodwill

 

349,227

 

349,227

 

Other assets, net

 

25,410

 

22,634

 

Assets of discontinued operations

 

54

 

54

 

Total assets

 

$

1,737,795

 

$

1,707,880

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,398

 

$

3,664

 

Accrued payroll and related liabilities

 

3,372

 

3,504

 

Other accrued liabilities

 

28,217

 

27,181

 

Deferred revenue

 

9,704

 

10,327

 

Purchase holdbacks

 

15,725

 

10,818

 

Current portion of long-term debt

 

6,905

 

6,950

 

Liabilities of discontinued operations

 

6,907

 

7,369

 

Total current liabilities

 

76,228

 

69,813

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

Long-term debt

 

1,119,201

 

1,101,433

 

Derivative financial instruments

 

2,663

 

12,359

 

Deferred income tax liability, net

 

8,346

 

8,187

 

Other liabilities

 

5,463

 

5,990

 

Total liabilities

 

1,211,901

 

1,197,782

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued

 

 

 

Series A common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding 13,397,131 and 13,389,821 shares at June 30, 2013 and December 31, 2012, respectively

 

134

 

134

 

Series B common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 736,505 and 737,166 shares at June 30, 2013 and December 31, 2012, respectively

 

7

 

7

 

Series C common stock, $.01 par value. Authorized 45,000,000 shares; no shares issued

 

 

 

Additional paid-in capital

 

1,457,261

 

1,453,700

 

Accumulated deficit

 

(931,388

)

(934,213

)

Accumulated other comprehensive loss

 

(120

)

(9,530

)

Total stockholders’ equity

 

525,894

 

510,098

 

Total liabilities and stockholders’ equity

 

$

1,737,795

 

$

1,707,880

 

 

See accompanying notes to condensed consolidated financial statements.

 

2



Table of Contents

 

ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Amounts in thousands, except share amounts

(unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

102,273

 

83,315

 

$

202,431

 

165,196

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

15,594

 

11,391

 

30,796

 

22,450

 

Selling, general, and administrative, including stock-based and long-term incentive compensation

 

21,509

 

18,030

 

41,246

 

35,837

 

Amortization of subscriber accounts and dealer network

 

45,998

 

39,349

 

90,313

 

77,430

 

Depreciation

 

2,141

 

2,696

 

4,055

 

4,602

 

Gain on sale of operating assets, net

 

(2,065

)

(576

)

(5,456

)

(1,313

)

 

 

83,177

 

70,890

 

160,954

 

139,006

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

19,096

 

12,425

 

41,477

 

26,190

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

927

 

1,075

 

1,907

 

1,966

 

Interest expense

 

(19,485

)

(19,319

)

(40,628

)

(30,959

)

Realized and unrealized loss on derivative financial instruments

 

 

 

 

(2,044

)

Refinancing expense

 

 

(4

)

 

(6,245

)

Other income, net

 

588

 

827

 

1,458

 

1,849

 

 

 

(17,970

)

(17,421

)

(37,263

)

(35,433

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

1,126

 

(4,996

)

4,214

 

(9,243

)

Income tax expense from continuing operations

 

(914

)

(765

)

(1,688

)

(1,448

)

Net income (loss) from continuing operations

 

212

 

(5,761

)

2,526

 

(10,691

)

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Earnings (loss) from discontinued operations

 

(107

)

(1,506

)

339

 

(1,790

)

Income tax benefit (expense)

 

(40

)

74

 

(40

)

74

 

Earnings (loss) from discontinued operations, net of  income tax

 

(147

)

(1,432

)

299

 

(1,716

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

65

 

(7,193

)

2,825

 

(12,407

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

7

 

(160

)

(368

)

61

 

Unrealized holding gains (losses) on marketable securities

 

(1,468

)

(1,366

)

(2,152

)

593

 

Unrealized gain (loss) on derivative contracts

 

11,671

 

(8,835

)

11,930

 

(11,240

)

Total other comprehensive income (loss), net of tax

 

10,210

 

(10,361

)

9,410

 

(10,586

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

10,275

 

(17,554

)

$

12,235

 

(22,993

)

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.02

 

(0.41

)

$

0.18

 

(0.76

)

Discontinued operations

 

(0.01

)

(0.10

)

0.02

 

(0.12

)

Net income (loss)

 

$

0.01

 

(0.51

)

$

0.20

 

(0.88

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.01

 

(0.41

)

$

0.17

 

(0.76

)

Discontinued operations

 

(0.01

)

(0.10

)

0.02

 

(0.12

)

Net income (loss)

 

$

0.00

 

(0.51

)

$

0.19

 

(0.88

)

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Amounts in thousands

(unaudited)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

2,825

 

(12,407

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Loss (earnings) from discontinued operations, net of income tax

 

(299

)

1,716

 

Amortization of subscriber accounts and dealer network

 

90,313

 

77,430

 

Depreciation

 

4,055

 

4,602

 

Stock based compensation

 

3,783

 

2,563

 

Deferred income tax expense

 

204

 

219

 

Unrealized gain on derivative financial instruments

 

 

(6,793

)

Refinancing expense

 

 

6,245

 

Gain on the sale of operating assets, net

 

(5,456

)

(1,313

)

Long-term debt amortization

 

387

 

4,101

 

Other non-cash activity, net

 

4,556

 

4,314

 

Changes in assets and liabilities:

 

 

 

 

 

Trade receivables

 

(4,126

)

(2,165

)

Prepaid expenses and other assets

 

2,909

 

1,025

 

Payables and other liabilities

 

1,517

 

938

 

Operating activities from discontinued operations, net

 

(163

)

(1,368

)

 

 

 

 

 

 

Net cash provided by operating activities

 

100,505

 

79,107

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(3,990

)

(2,657

)

Purchases of subscriber accounts

 

(113,199

)

(78,885

)

Purchases of marketable securities

 

(1,003

)

(99,667

)

Decrease in restricted cash

 

 

51,479

 

Proceeds from the sale of operating assets

 

7,872

 

6,486

 

 

 

 

 

 

 

Net cash used in investing activities

 

(110,320

)

(123,244

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from long-term debt

 

62,100

 

967,200

 

Payments to long-term debt

 

(44,764

)

(977,375

)

Refinancing costs

 

(1,794

)

(44,114

)

Purchases and retirement of common stock

 

 

(684

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

15,542

 

(54,973

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

5,727

 

(99,110

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

78,422

 

183,558

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

84,149

 

84,448

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

State taxes paid

 

$

2,350

 

2,064

 

Interest paid

 

38,649

 

15,332

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

(1)                                  Basis of Presentation

 

On July 7, 2011, Ascent Media Corporation merged with its direct wholly owned subsidiary, Ascent Capital Group, Inc., for the purpose of changing its name to Ascent Capital Group, Inc. The accompanying Ascent Capital Group, Inc. (“Ascent Capital” or the “Company”) condensed consolidated financial statements represent the financial position and results of operations of Ascent Capital and its consolidated subsidiaries.  Monitronics International, Inc. (“Monitronics”) is the primary, wholly owned, operating subsidiary of the Company.  Monitronics provides security alarm monitoring and related services to residential and business subscribers throughout the United States and parts of Canada.  Monitronics monitors signals arising from burglaries, fires, medical alerts and other events through security systems installed by independent dealers at subscribers’ premises.

 

The unaudited interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s (the “SEC”) Regulation S-X. Accordingly, it does not include all of the information required by generally accepted accounting principles in the United States (“U.S. GAAP”) for complete financial statements. The Company’s unaudited condensed consolidated financial statements as of June 30, 2013, and for the three and six months ended June 30, 2013 and 2012, include Ascent Capital and all of its direct and indirect subsidiaries.  The accompanying interim condensed consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods.  The results of operations for any interim period are not necessarily indicative of results for the full year.  These condensed consolidated financial statements should be read in conjunction with the Ascent Capital Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 27, 2013 (the “2012 Form 10-K”).

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses for each reporting period.  The significant estimates made in preparation of the Company’s condensed consolidated financial statements primarily relate to valuation of goodwill, other intangible assets, long-lived assets, deferred tax assets, derivative financial instruments, and the amount of the allowance for doubtful accounts. These estimates are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts them when facts and circumstances change. As the effects of future events cannot be determined with any certainty, actual results could differ from the estimates upon which the carrying values were based.

 

(2)                                  Recent Accounting Pronouncements

 

There were no new accounting pronouncements issued during the six months ended June 30, 2013 that are expected to have a material impact on the Company.

 

(3)                                  Investments in Marketable Securities

 

Ascent Capital owns marketable securities consisting of diversified corporate bond funds. The following table presents the activity of these investments, which have all been classified as available-for-sale securities (amounts in thousands):

 

 

 

Six months ended June 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Beginning balance

 

$

142,587

 

40,377

 

Purchases

 

1,003

 

99,667

 

Sales (at cost)

 

 

 

Unrealized gain (loss)

 

(2,152

)

593

 

Ending balance

 

$

141,438

 

140,637

 

 

5



Table of Contents

 

The following table presents the net after-tax unrealized and realized gains on the investment in marketable securities that were recorded into Accumulated other comprehensive loss in the condensed consolidated balance sheets and in Other comprehensive income (loss) on the condensed consolidated statements of operations and comprehensive income (loss) (amounts in thousands):

 

 

 

Three months ended June 30,

 

Six months ended June 30, 2013

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

 1,983

 

2,083

 

$

 2,667

 

124

 

Gains (losses), net of income tax of $0

 

(1,468

)

(1,366

)

(2,152

)

593

 

Losses (gains) recognized into earnings, net of tax

 

 

 

 

 

Ending balance

 

$

 515

 

717

 

$

 515

 

717

 

 

(4)                                Assets Held for Sale

 

In the first quarter of 2013, the Company reclassified $1,269,000 of land and building, net of accumulated depreciation, as Assets held for sale on the condensed consolidated balance sheet.  Additionally, during the first and second quarter of 2013, the Company completed sales of certain assets held for sale with a carrying value of $2,355,000, resulting in a gain on disposition of approximately $2,204,000.  At June 30, 2013, the Company has $6,119,000 classified as assets held for sale on the condensed consolidated balance sheet.  The Company currently expects to complete the sale of these real estate properties during the next twelve months.

 

(5)                                Other Accrued Liabilities

 

Other accrued liabilities consisted of the following (amounts in thousands):

 

 

 

June 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

Interest payable

 

$

9,733

 

$

9,624

 

Income taxes payable

 

1,391

 

2,388

 

Legal accrual

 

10,350

 

9,785

 

Other

 

6,743

 

5,384

 

Total Other accrued liabilities

 

$

28,217

 

$

27,181

 

 

(6)                                  Long-Term Debt

 

Long-term debt, which is all issued by Monitronics and its subsidiaries, consisted of the following (amounts in thousands):

 

 

 

June 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

9.125% Senior Notes due April 1, 2020

 

$

410,000

 

$

410,000

 

Term loans, matures March 23, 2018, LIBOR plus 3.25%, subject to a LIBOR floor of 1.00% (a)

 

682,506

 

685,583

 

$150 million revolving credit facility, matures December 22, 2017, LIBOR plus 3.75%, subject to a LIBOR floor of 1.00% (b)

 

33,600

 

12,800

 

 

 

1,126,106

 

1,108,383

 

Less current portion of long-term debt

 

(6,905

)

(6,950

)

Long-term debt

 

$

1,119,201

 

$

1,101,433

 

 


(a)          The interest rate on the term loan was LIBOR plus 4.25%, subject to a LIBOR floor of 1.25%, until March 25, 2013.

(b)          The interest rate on the revolving credit facility was LIBOR plus 4.25%, subject to a LIBOR floor of 1.25%, until March 25, 2013.

 

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Table of Contents

 

Senior Notes

 

On March 23, 2012, Monitronics closed on a $410,000,000 privately placed debt offering of 9.125% Senior Notes due 2020 (the “Senior Notes”).  The Senior Notes mature on April 1, 2020 and bear interest at 9.125% per annum.  Interest payments are due semi-annually on April 1 and October 1 of each year, beginning on October 1, 2012.  In August 2012, Monitronics completed an exchange of the Senior Notes for identical securities in a registered offering under the Securities Act of 1933, as amended.

 

The Senior Notes are guaranteed by all of Monitronics’ existing subsidiaries.  Ascent Capital has not guaranteed any of Monitronics’ obligations under the Senior Notes.

 

Credit Facility

 

On March 23, 2012, Monitronics entered into a senior secured credit facility with the lenders party thereto and Bank of America, N.A., as administrative agent, which provided a $550,000,000 term loan at a 1% discount and a $150,000,000 revolving credit facility (the “Credit Agreement”).  Proceeds from the Credit Agreement and the Senior Notes, together with cash on hand, were used to retire all outstanding borrowings under Monitronics’ former credit facility, securitization debt, and to settle all related derivative contracts (the “Refinancing”).

 

On November 7, 2012, Monitronics entered into an amendment to the Credit Agreement (“Amendment No. 1”), which provided an incremental term loan with an aggregate principal amount of $145,000,000.  The incremental term loan was used to fund the acquisition of approximately 93,000 subscriber accounts for a purchase price of approximately $131,000,000.

 

On March 25, 2013, Monitronics entered into a second amendment to the Credit Agreement (“Amendment No. 2”). Pursuant to Amendment No. 2, Monitronics repriced the interest rates applicable to the Credit Agreement’s facility (the “Repricing”) which is comprised of the term loans and revolving credit facility noted above (the Credit Agreement together with Amendment No. 1 and Amendment No. 2, the “Credit Facility”). Concurrently with the Repricing, Monitronics extended the maturity of the revolving credit facility by nine months to December 22, 2017.

 

The Credit Facility term loans bear interest at LIBOR plus 3.25%, subject to a LIBOR floor of 1.00%, and mature on March 23, 2018.  Principal payments of approximately $1,726,000 and interest on the term loans are due quarterly.  The Credit Facility revolver bears interest at LIBOR plus 3.75%, subject to a LIBOR floor of 1.00%, and matures on December 22, 2017.  There is an annual commitment fee of 0.50% on unused portions of the Credit Facility revolver.  As of June 30, 2013, $116,400,000 is available for borrowing under the revolving credit facility.

 

At any time after the occurrence of an event of default under the Credit Facility, the lenders may, among other options, declare any amounts outstanding under the Credit Facility immediately due and payable and terminate any commitment to make further loans under the Credit Facility.  In addition, failure to comply with restrictions contained in the Senior Notes could lead to an event of default under the Credit Facility.

 

The Credit Facility is secured by a pledge of all of the outstanding stock of Monitronics and all of its existing subsidiaries and is guaranteed by all of Monitronics’ existing subsidiaries.  Ascent Capital has not guaranteed any of Monitronics’ obligations under the Credit Facility.

 

The Company recorded deferred financing costs of $24,236,000 related to the Senior Notes and Credit Facility, which are included in Other assets, net on the accompanying condensed consolidated balance sheet as of June 30, 2013, and will be amortized over the term of the respective debt instruments using the effective-interest method.

 

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As a result of the Refinancing, the Company accelerated amortization of the securitization debt premium and certain deferred financing costs related to the former senior secured credit facility, and expensed certain other refinancing costs.  The components of the Refinancing expense, reflected in the condensed consolidated statement of operations and comprehensive income (loss) as a component of Other income (expense) for the six months ended June 30, 2012, are as follows (amounts in thousands):

 

 

 

For the six
months ended

 

 

 

June 30, 2012

 

 

 

 

 

Accelerated amortization of deferred financing costs

 

$

389

 

Accelerated amortization of securitization debt discount

 

6,679

 

Other refinancing costs

 

7,628

 

Gain on early termination of derivative instruments

 

(8,451

)

Total refinancing expense

 

$

6,245

 

 

In order to reduce the financial risk related to changes in interest rates associated with the floating rate term loans under the Credit Facility, Monitronics entered into two interest rate swap agreements (each with separate counterparties) in 2012, with terms similar to the Credit Facility term loans.  On March 25, 2013, Monitronics negotiated amendments to the terms of these interest rate swap agreements (the “Swaps”) to coincide with the Repricing.  The Swaps have a maturity date of March 23, 2018 to match the term of the Credit Facility term loans.  The Swaps have been designated as effective hedges of the Company’s variable rate debt and qualify for hedge accounting.  See note 7, Derivatives, for further disclosures related to these derivative instruments.  As a result of the Swaps, the interest rate on the borrowings under the Credit Facility term loans have been effectively converted from a variable rate to a weighted average fixed rate of 5.03%.

 

The terms of the Senior Notes and Credit Facility provide for certain financial and nonfinancial covenants.  As of June 30, 2013, Monitronics was in compliance with all required covenants.

 

Principal payments scheduled to be made on the Company’s debt obligations are as follows (amounts in thousands):

 

Remainder of 2013

 

$

3,452

 

2014

 

6,905

 

2015

 

6,905

 

2016

 

6,905

 

2017

 

40,505

 

2018

 

655,976

 

Thereafter

 

410,000

 

Total principal payments

 

1,130,648

 

Less: Discount

 

4,542

 

Total debt on condensed consolidated balance sheet

 

$

1,126,106

 

 

(7)                                  Derivatives

 

The Company utilizes interest rate swap agreements to reduce the interest rate risk inherent in Monitronics’ variable rate Credit Facility term loans.  The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatility. The Company incorporates credit valuation adjustments to appropriately reflect the respective counterparty’s nonperformance risk in the fair value measurements.  See note 10, Fair Value Measurements, for additional information about the credit valuation adjustments.

 

On March 25, 2013, Monitronics negotiated amendments to the terms of its existing interest rate swap agreements to coincide with the repricing of the Credit Facility.  The Swaps, as amended, are held with the same counterparties as the existing interest rate swap agreements.  See the amended Swaps’ outstanding notional balance as of June 30, 2013 and terms below:

 

Notional

 

Effective Date

 

Fixed
Rate Paid

 

Variable Rate Received

 

 

 

 

 

 

 

 

 

$

543,125,000

 

March 28, 2013

 

1.884

%

3 mo. USD-LIBOR-BBA, subject to a 1.00% floor

 

143,912,500

 

March 28, 2013

 

1.384

%

3 mo. USD-LIBOR-BBA, subject to a 1.00% floor

 

 

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Upon entering into swap amendments on March 25, 2013, Monitronics simultaneously dedesignated its existing interest rate swap agreements and redesignated the Swaps as cash flow hedges for the underlying change in the swap terms.  The amounts previously recognized in Accumulated other comprehensive loss relating to the dedesignation will be recognized in Interest expense over the remaining life of the Swaps.  The amended Swaps are designated and qualify as cash flow hedging instruments, with the effective portion of the Swaps change in fair value recorded in Accumulated other comprehensive loss.  Any ineffective portions of the Swaps change in fair value are recognized in current earnings in Interest expense.  Changes in the fair value of the Swaps recognized in Accumulated other comprehensive loss are reclassified to Interest expense when the hedged interest payments on the underlying debt are recognized.  Amounts in Accumulated other comprehensive loss expected to be recognized in Interest expense in the coming 12 months total approximately $4,872,000.

 

The impact of the derivatives designated as cash flow hedges on the condensed consolidated financial statements is depicted below (amounts in thousands):

 

 

 

For the three months ended June 30,

 

For the six months ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Effective portion of gain (loss) recognized in Accumulated other comprehensive loss

 

$

10,473

 

(9,954

)

$

9,564

 

(12,457

)

 

 

 

 

 

 

 

 

 

 

Effective portion of loss reclassified from Accumulated other comprehensive loss into Net income (a)

 

$

(1,198

)

(1,119

)

$

(2,366

)

(1,217

)

 

 

 

 

 

 

 

 

 

 

Ineffective portion of amount of gain (loss) recognized into Net income on interest rate swaps (a)

 

$

61

 

 

$

80

 

 

 


(a)          Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

 

On March 23, 2012, in connection with the Refinancing, Monitronics terminated all of its previously outstanding derivative financial instruments and recorded a gain of $8,451,000.  These derivative financial instruments were not designated as hedges.  For the six months ended June 30, 2012, the realized and unrealized loss on derivative financial instruments includes settlement payments of $8,837,000 partially offset by a $6,793,000 unrealized gain related to the change in the fair value of these derivatives prior to their termination in March 2012.

 

(8)                                  Accumulated Other Comprehensive Income (Loss)

 

The following table provides a summary of the changes in Accumulated other comprehensive loss for the period presented (amounts in thousands):

 

 

 

Foreign
currency
translation
adjustments

 

Unrealized
holding gain
(loss) on
marketable
securities

 

Unrealized gain
(loss) on
derivatives, net (a)

 

Accumulated
other
comprehensive
income (loss)

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2012

 

$

46

 

2,667

 

(12,243

)

(9,530

)

Current period change through Accumulated other comprehensive loss

 

(368

)

(2,152

)

9,564

 

7,044

 

Reclassifications into Net income

 

 

 

2,366

 

2,366

 

As of June 30, 2013

 

$

(322

)

515

 

(313

)

(120

)

 


(a)          Amounts reclassified into net income are included in Interest expense on the condensed consolidated statement of operations.  See note 7, Derivatives, for further information.

 

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(9)                                  Basic and Diluted Earnings (Loss) Per Common Share—Series A and Series B

 

Basic earnings (loss) per common share (“EPS”) is computed by dividing net earnings (loss) by the weighted average number of Ascent Capital Series A and Series B common shares outstanding for the period.  Diluted EPS is computed by dividing net earnings (loss) by the sum of the weighted average number of Ascent Capital Series A and Series B common shares outstanding and the effect of dilutive securities such as outstanding stock options and unvested restricted stock.

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Weighted average Series A and Series B shares – basic

 

13,893,626

 

14,077,562

 

13,890,801

 

14,072,331

 

Dilutive effect of stock options

 

540,983

 

 

517,308

 

 

Dilutive effect of unvested restricted stock awards

 

238,270

 

 

238,270

 

 

Weighted average Series A and B shares – diluted

 

14,672,879

 

14,077,562

 

14,646,379

 

14,072,331

 

 

For the three and six months ended June 30, 2013, there were no anti-dilutive outstanding securities.  For the three and six months ended June 30, 2012, diluted shares outstanding excluded the effect of 967,904 stock options and unvested restricted stock awards because their inclusion would have been anti-dilutive.

 

(10)                       Fair Value Measurements

 

According to the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board Accounting Standards Codification, fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and requires that assets and liabilities carried at fair value are classified and disclosed in the following three categories:

 

·                   Level 1 - Quoted prices for identical instruments in active markets.

·                   Level 2 - Quoted prices for similar instruments in active or inactive markets and valuations derived from models where all significant inputs are observable in active markets.

·                   Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable in any market.

 

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The following summarizes the fair value level of assets and liabilities that are measured on a recurring basis at June 30, 2013 and December 31, 2012 (amounts in thousands):

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

 

 

Money market funds (a)

 

$

3,576

 

 

 

3,576

 

Investments in marketable securities (b)

 

141,438

 

 

 

141,438

 

Derivative financial instruments - assets (c)

 

 

2,587

 

 

2,587

 

Derivative financial instruments - liabilities

 

 

(2,663

)

 

(2,663

)

Total

 

$

145,014

 

(76

)

 

144,938

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

Money market funds (a)

 

$

2,705

 

 

 

2,705

 

Investments in marketable securities (b)

 

142,587

 

 

 

142,587

 

Derivative financial instruments - assets (c)

 

 

116

 

 

116

 

Derivative financial instruments - liabilities

 

 

(12,359

)

 

(12,359

)

Total

 

$

145,292

 

(12,243

)

 

133,049

 

 


(a)          Included in cash and cash equivalents on the condensed consolidated balance sheets.

(b)          Investments consist primarily of diversified corporate bond funds and are all classified as available-for-sale securities.

(c)           Included in Other assets, net on the condensed consolidated balance sheets

 

The Company has determined that the majority of the inputs used to value the Swaps fall within Level 2 of the fair value hierarchy.  The credit valuation adjustments associated with the derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by their counterparties.  As the counterparties have publicly available credit information, the credit spreads over LIBOR used in the calculations represent implied credit default swap spreads obtained from a third-party credit data provider.  However, as of June 30, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Swaps.  As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.

 

The following table presents the activity in the Level 3 balances (amounts in thousands):

 

 

 

Six months ended June 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Beginning balance

 

$

 

(16,959

)

Unrealized gain recognized

 

 

16,959

 

Ending balance

 

$

 

 

 

Carrying values and fair values of financial instruments that are not carried at fair value are as follows (amounts in thousands):

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

 

 

 

 

Long term debt, including current portion:

 

 

 

 

 

Carrying value

 

$

1,126,106

 

$

1,108,383

 

Fair value (a)

 

1,144,140

 

1,130,978

 

 


(a)          The fair value is based on valuations from third party financial institutions and is classified as Level 2 in the hierarchy.

 

Ascent Capital’s other financial instruments, including cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which approximates their fair value because of their short-term maturity.

 

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(11)                           Commitments, Contingencies and Other Liabilities

 

The Company is involved in litigation and similar claims incidental to the conduct of its business, including from time to time, contractual disputes, claims related to alleged security system failures and claims related to alleged violations of the U.S. Telephone Consumer Protection Act. Matters that are probable of unfavorable outcome to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, management’s estimate of the outcomes of such matters and experience in contesting, litigating and settling similar matters.  In management’s opinion, none of the pending actions is likely to have a material adverse impact on the Company’s financial position or results of operations.

 

Based on events occurring in the State of Georgia in 2006, a monitoring service subscriber filed suit against Monitronics and Tel-Star Alarms, Inc., a Monitronics authorized dealer, alleging negligence.  On November 16, 2011, a Georgia trial court awarded the plaintiff $8,600,000, of which $6,000,000 is expected to be covered by Monitronics’ general liability insurance policies.  In July 2013, the trial court’s ruling was affirmed by the Georgia Court of Appeals.  Monitronics intends to seek review of the Court of Appeals’ ruling in Georgia’s Supreme Court.  As of June 30, 2013, Monitronics has recorded legal reserves of approximately $9,517,000 and an insurance receivable of approximately $6,877,000, related to this matter.  In the fourth quarter of 2012, Monitronics funded approximately $2,640,000 into an escrow account for the excess liability above the insurance coverage, classified as restricted cash on the June 30, 2013 and December 31, 2012 condensed consolidated balance sheets.  This amount will be released upon settlement of the appeal.

 

(12)                           Subsequent Events

 

On July 10, 2013, Monitronics entered into a securities purchase agreement with certain funds affiliated with Oak Hill Capital Partners, certain other holders and for the limited purposes set forth therein, the Company (the “Agreement”), pursuant to which Monitronics will directly and indirectly acquire all of the equity interests of Security Networks, LLC (“Security Networks”) and certain affiliated entities (the “Security Networks Acquisition”). The estimated purchase price (the “Security Networks Purchase Price”) will consist of $487,500,000 in cash plus 253,333 shares of Ascent Capital’s Series A common stock with an agreed value of $20,000,000 (the “Ascent Shares”) based on Security Networks delivering recurring monthly revenue (as defined in the Agreement) (“Acquisition RMR”) of approximately $8,800,000 (including approximately $100,000 of wholesale monitoring revenue) as of the date of closing (the “Security Networks Closing Date”). In addition to other customary post-closing adjustments, the Security Networks Purchase Price will be adjusted based on the actual amount of Security Networks’ Acquisition RMR delivered as of the Security Networks Closing Date.  The cash portion of the Security Networks Purchase Price will be funded by cash on hand at Ascent Capital and incremental borrowings, which is to consist of $103,500,000 of 4.00% convertible senior notes due 2020 issued by Ascent Capital (the “Convertible Notes”), $175,000,000 of 9.125% senior notes due 2020 issued by Monitronics Escrow Corporation (the “New Senior Notes”) and an expected incremental term loan of $225,000,000 to be provided under Monitronics’ Credit Facility (the “Incremental Term Loan”).  As of June 30, 2013, Monitronics has incurred $1,438,000 of legal and professional services expense related to the Security Networks Acquisition, which are included in Selling, general, and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

 

The Convertible Notes offering was completed on July 17, 2013 with the notes maturing on July 15, 2020 and bearing interest at 4.00% per annum from July 17, 2013.  Interest will be payable semi-annually on January 15 and July 15 of each year.  Holders of the Convertible Notes (“Noteholders”) shall have the right, at their option, to convert all or any portion of such Convertible Note, subject to the satisfaction of certain conditions, at an initial conversion rate of 9.7272 shares of Ascent Capital Series A common stock (the “Common Stock”) per $1,000 principal amount of Convertible Notes (subject to adjustment in certain situations), which represents an initial conversion price of approximately $102.804 (the “Conversion Price”). The Conversion Price reflects a conversion premium of approximately 30%. Ascent Capital is entitled to settle any such conversion by delivery of cash, shares of Common Stock or any combination thereof at Ascent Capital’s election. In addition, Noteholders will have the right to submit Convertible Notes for conversion, subject to the satisfaction of certain conditions, in the event of certain corporate transactions.

 

The New Senior Notes offering was completed on July 17, 2013 by Monitronics Escrow Corporation (the “Escrow Issuer”), a wholly-owned subsidiary of Ascent Capital. The proceeds from this offering have been placed in escrow and will be released upon the closing of the Security Networks Acquisition.  In connection with the completion of the Security Networks Acquisition, the Escrow Issuer will be merged into Monitronics and Monitronics will assume the New Senior Notes.  The New Senior Notes will mature on April 1, 2020 and bear interest at 9.125% per annum, with interest being payable semi-annually on April 1 and October 1 of each year.  Following the completion of the Security Networks Acquisition, the New Senior Notes will be guaranteed by all of Monitronics’ subsidiaries, including Security Networks and its subsidiaries.  Ascent Capital will not be a guarantor of the New Senior Notes.

 

We expect that the Incremental Term Loan will be entered into upon the closing of the Security Networks Acquisition.  We expect that the Incremental Term Loan will mature on March 23, 2018 and will bear interest based on LIBOR plus an applicable margin to be agreed, subject to LIBOR floor to be agreed.  Quarterly required principal payments are expected to be approximately 0.25% of the principal balance.

 

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The Agreement contains certain termination rights in the event that the Security Networks Acquisition is not consummated by September 30, 2013 (subject to extension in certain circumstances), including if the failure to complete the Security Networks Acquisition by such date is attributable to certain breaches by Ascent Capital or Monitronics, Monitronics may be required to pay the sellers a $45,000,000 termination fee.  Monitronics currently expects to close the Security Networks Acquisition in mid-August 2013.

 

In connection with the issuance of the Convertible Notes, Ascent Capital entered into separate privately negotiated purchased call options (the “Bond Hedge Transactions”).  The Bond Hedge Transactions are expected to reduce the potential dilution with respect to the Common Stock, and/or offset potential cash payments Ascent Capital is required to make in excess of the principal amount of the Convertible Notes upon conversion.

 

Concurrently with the Bond Hedge Transactions, Ascent Capital also entered into separate privately negotiated warrant transactions with each of the call option counterparties (the “Warrant Transactions”).  The warrants are European options, and are exercisable in tranches on consecutive trading days starting after the maturity of the Convertible Notes.  The Warrant Transactions may have a dilutive effect with respect to the Common Stock to the extent the Warrant Transactions are settled with shares of Common Stock. Ascent Capital may elect to settle its delivery obligation under the Warrant Transactions in cash.

 

The Bond Hedge Transactions require the counterparties to offset Common Stock deliverable or cash payments made by Ascent Capital upon conversion of the Convertible Notes in the event that the volume-weighted average price of the Common Stock on each trading day of the relevant valuation period is greater than the strike price of $102.804, which corresponds to the Conversion Price of the Convertible Notes. The Warrant Transactions require Ascent Capital to deliver Common Stock or make cash payments to the counterparties on each expiration date with a value equal to the number of warrants exercisable on that date times the excess of the volume-weighted average price of the Common Stock over the strike price of $118.62, which effectively reflects a 50% conversion premium on the Convertible Notes.

 

Ascent Capital received $14,211,000 in proceeds from the sale of the warrants, resulting in a net cost for the Bond Hedge Transactions and the Warrant Transactions of approximately $6,106,000.  The Bond Hedge Transactions and Warrant Transactions are separate transactions entered into by Ascent Capital, are not part of the terms of the Convertible Notes and will not affect the Noteholders’ rights under the Convertible Notes.  The Noteholders will not have any rights with respect to the Bond Hedge Transactions or the Warrant Transactions.

 

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Table of Contents

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, the pending Security Networks Acquisition, the anticipated amendment of Monitronics’ Credit Facility in connection with the Security Networks Acquisition, new service offerings, financial prospects, and anticipated sources and uses of capital. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

 

Factors relating to the Company and its consolidated subsidiaries, as a whole:

 

·                   general business conditions and industry trends;

·                   macroeconomic conditions and their effect on the general economy and on the U.S. housing market, in particular single family homes which represent Monitronics’ largest demographic;

·                   uncertainties in the development of our business strategies, including market acceptance of new products and services;

·                   the competitive environment in which we operate, in particular increasing competition in the alarm monitoring industry from larger existing competitors and new market entrants, including telecommunications and cable companies;

·                   integration of acquired assets and businesses;

·                   the regulatory environment in which we operate, including the multiplicity of jurisdictions and licensing requirements to which Monitronics is subject and the risk of new regulations, such as the increasing adoption of false alarm ordinances;

·                   technological changes which could result in the obsolescence of currently utilized technology and the need for significant upgrade expenditures;

·                   the availability and terms of capital, including the ability of Monitronics to obtain additional funds to grow its business and to complete the anticipated financing for the Security Networks Acquisition;

·                   the outcome of any pending, threatened, or future litigation, including potential liability for failure to respond adequately to alarm activations; and

·                   availability of qualified personnel.

 

Factors relating to the business of Monitronics:

 

·                   Monitronics’ high degree of leverage and the restrictive covenants governing its indebtedness;

·                   Monitronics’ anticipated growth strategies;

·                   the ability of Monitronics to obtain additional funds to grow its business, including the terms of any additional financing with respect thereto;

·                   Monitronics’ ability to acquire and integrate additional accounts, including competition for dealers with other alarm monitoring companies which could cause an increase in expected subscriber acquisition costs;

·                   the impact of “false alarm” ordinances and other potential changes in regulations or standards;

·                   the operating performance of Monitronics’ network, including the potential for service disruptions due to acts of nature or technology deficiencies;

·                   potential liability for failure to respond adequately to alarm activations;

·                   our ability to continue to obtain insurance coverage sufficient to hedge our risk exposures, including as a result of acts of third parties and/or alleged regulatory violations;

·                   changes in the nature of strategic relationships with original equipment manufacturers, dealers and other Monitronics business partners;

·                   the reliability and creditworthiness of Monitronics’ independent alarm systems dealers and subscribers;

·                   changes in Monitronics’ expected rate of subscriber attrition;

·                   changes in technology that may make Monitronics’ service less attractive or obsolete, or require significant expenditures to update, including the phase-out of 2G networks by cellular carriers;

·                   the development of new services or service innovations by competitors; and

·                   the trend away from the use of public switched telephone network lines and resultant increase in servicing costs associated with alternative methods of communication.

 

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Table of Contents

 

Factors relating to the Security Networks Acquisition:

 

·                   the ability to complete the Security Networks Acquisition by September 30, 2013 (subject to extension in certain circumstances), or at all;

·                   the ability to complete the expected incremental term loan; and

·                   the ability to successfully integrate Security Networks into the Monitronics business.

 

For additional risk factors, please see Part I, Item 1A, Risk Factors, in the 2012 Form 10-K.  These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

 

The following discussion and analysis provides information concerning our results of operations and financial condition.  This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto included elsewhere herein and the 2012 Form 10-K.

 

Overview

 

Ascent Capital Group, Inc. (“Ascent Capital” or the “Company”) is a holding company and its assets primarily consist of its wholly-owned subsidiary, Monitronics International, Inc. (“Monitronics”).

 

The Monitronics business provides security alarm monitoring and related services to residential and business subscribers throughout the United States and parts of Canada.  Monitronics monitors signals arising from burglaries, fires, medical alerts and other events through security systems at subscribers’ premises, as well as provides customer service and technical support.  Nearly all of its revenues are derived from recurring monthly revenues under security alarm monitoring contracts purchased from independent dealers in its exclusive nationwide network.

 

Recent Developments

 

On July 10, 2013, Monitronics entered into a securities purchase agreement with certain funds affiliated with Oak Hill Capital Partners, certain other holders and for the limited purposes set forth therein, the Company (the “Agreement”), pursuant to which Monitronics will directly and indirectly acquire all of the equity interests of Security Networks, LLC (“Security Networks”) and certain affiliated entities (the “Security Networks Acquisition”). The estimated purchase price (the “Security Networks Purchase Price”) will consist of $487,500,000 in cash plus 253,333 shares of Ascent Capital’s Series A common stock with an agreed value of $20,000,000 (the “Ascent Shares”) based on Security Networks delivering recurring monthly revenue (as defined in the Agreement) (“Acquisition RMR”) of approximately $8,800,000 (including approximately $100,000 of wholesale monitoring revenue) as of the date of closing (the “Security Networks Closing Date”). In addition to other customary post-closing adjustments, the Security Networks Purchase Price will be adjusted based on the actual amount of Security Networks’ Acquisition RMR delivered as of the Security Networks Closing Date.  The cash portion of the Security Networks Purchase Price will be funded by cash on hand at Ascent Capital and new debt, which is to consist of $103,500,000 of 4.00% convertible senior notes due 2020 issued by Ascent Capital (the “Convertible Notes”), $175,000,000 of 9.125% senior notes due 2020 issued by Monitronics Escrow Corporation (the “New Senior Notes”) and an expected incremental term loan of $225,000,000 to be provided under Monitronics’ Credit Facility (the “Incremental Term Loan”).  As of June 30, 2013, Monitronics has incurred $1,438,000 of legal and professional services expense related to the Security Networks Acquisition, which are included in Selling, general, and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

 

The Agreement contains certain termination rights in the event that the Security Networks Acquisition is not consummated by September 30, 2013 (subject to extension in certain circumstances), including if the failure to complete the Security Networks Acquisition by such date is attributable to certain breaches by Ascent Capital or Monitronics, Monitronics may be required to pay the sellers a $45,000,000 termination fee.  Monitronics currently expects to close the Security Networks Acquisition in mid-August 2013.

 

Attrition

 

Account cancellation, otherwise referred to as subscriber attrition, has a direct impact on the number of subscribers that Monitronics services and on its financial results, including revenues, operating income and cash flow.  A portion of the subscriber base can be expected to cancel its service every year. Subscribers may choose not to renew or terminate their contract for a variety of reasons, including relocation, cost and switching to a competitor’s service.  The largest category of canceled accounts relate to subscriber relocation or the inability to contact the subscriber.  Monitronics defines its attrition rate as the number of canceled accounts in a given period divided by the weighted average of number of subscribers for that period.  Monitronics considers an account canceled if payment from the subscriber is deemed uncollectible or if the subscriber cancels for various reasons.  If a subscriber relocates but continues its service, this is not a cancellation.  If the subscriber relocates, discontinues its service and a new subscriber takes over the original subscriber’s service continuing the revenue stream (a “new owner takeover”), this is also not a cancellation.  Monitronics adjusts the number of canceled accounts by excluding those that are contractually guaranteed by its dealers.  The typical dealer

 

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contract provides that if a subscriber cancels in the first year of its contract, the dealer must either replace the canceled account with a new one or refund the purchase price. To help ensure the dealer’s obligation to Monitronics, Monitronics typically holds back a portion of the purchase price for every account purchased, ranging from 5-10%.  In some cases, the amount of the purchase holdback may be less than actual attrition experience.

 

The table below presents subscriber data for the twelve months ended June 30, 2013 and 2012:

 

 

 

Twelve Months Ended
June 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Beginning balance of accounts

 

711,832

 

688,119

 

Accounts purchased (a)

 

228,040

 

108,600

 

Accounts canceled (b)

 

(98,107

)

(81,747

)

Canceled accounts guaranteed to be refunded from holdback

 

(3,042

)

(3,140

)

Ending balance of accounts

 

838,723

 

711,832

 

Monthly weighted average accounts

 

787,735

 

701,515

 

Attrition rate

 

(12.5

)%

(11.7

)%

 


(a)          During the three months ended June 30, 2013 and 2012, Monitronics purchased 47,733 and 26,358 subscriber accounts, respectively.  During the six months ended June 30, 2013 and 2012, Monitronics purchased 76,193 and 50,532 subscriber accounts, respectively.  The account purchases for the three and six months ended June 30, 2013 reflect bulk buys of approximately 18,200 accounts purchased in the second quarter of 2013.

 

(b)          Net of canceled accounts that are contractually guaranteed to be refunded from holdback.

 

The attrition rate for the twelve months ended June 30, 2013 and 2012 was 12.5% and 11.7%, respectively.  Increased attrition reflects the current age of accounts in the portfolio and an increase in disconnections due to household relocations.

 

Monitronics also analyzes its attrition by classifying accounts into annual pools based on the year of purchase.  Monitronics then tracks the number of accounts that cancel as a percentage of the initial number of accounts purchased for each pool for each year subsequent to its purchase.  Based on the average cancellation rate across the pools, in recent years Monitronics has averaged less than 1% attrition within the initial 12-month period after considering the accounts which were replaced or refunded by the dealers at no additional cost to Monitronics.  Over the next few years of the subscriber account life, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool gradually increases and historically has peaked following the end of the initial contract term, which is typically three to five years.  The peak following the end of the initial contract term is primarily a result of the buildup of subscribers that moved or no longer had need for the service but did not cancel their service until the end of their initial contract term.  Subsequent to the peak following the end of the initial contract term, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool declines.

 

Adjusted EBITDA

 

We evaluate the performance of our operations based on financial measures such as revenue and “Adjusted EBITDA.”  Adjusted EBITDA is defined as net income (loss) before interest expense, interest income, income taxes, depreciation, amortization (including the amortization of subscriber accounts and dealer network), realized and unrealized gain/(loss) on derivative instruments, restructuring charges, stock-based and other non-cash long-term incentive compensation, and other non-cash or nonrecurring charges.   Ascent Capital believes that Adjusted EBITDA is an important indicator of the operational strength and performance of its business, including the business’ ability to fund its ongoing acquisition of subscriber accounts, its capital expenditures and to service its debt.  In addition, this measure is used by management to evaluate operating results and perform analytical comparisons and identify strategies to improve performance.   Adjusted EBITDA is also a measure that is customarily used by financial analysts to evaluate the financial performance of companies in the security alarm monitoring industry and is one of the financial measures, subject to certain adjustments, by which Monitronics’ covenants are calculated under the agreements governing their debt obligations.  Adjusted EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles (“GAAP”), should not be construed as an alternative to net income or loss and is indicative neither of our results of operations nor of cash flows available to fund all of our cash needs.  It is, however, a measurement that Ascent Capital believes is useful to investors in analyzing its operating performance.  Accordingly, Adjusted EBITDA should be considered in addition to, but not as a substitute for, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP.  Adjusted EBITDA is a non-GAAP financial measure.  As companies often define non-GAAP financial measures differently, Adjusted EBITDA as calculated by Ascent Capital should not be compared to any similarly titled measures reported by other companies.

 

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Results of Operations

 

The following table sets forth selected data from the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the periods indicated (dollar amounts in thousands).

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

102,273

 

83,315

 

$

202,431

 

165,196

 

Cost of services

 

15,594

 

11,391

 

30,796

 

22,450

 

Selling, general, and administrative

 

21,509

 

18,030

 

41,246

 

35,837

 

Amortization of subscriber accounts and dealer network

 

45,998

 

39,349

 

90,313

 

77,430

 

Gain on sale of operating assets, net

 

2,065

 

576

 

5,456

 

1,313

 

Interest expense

 

19,485

 

19,319

 

40,628

 

30,959

 

Realized and unrealized loss on derivative financial instruments

 

 

 

 

2,044

 

Income tax expense from continuing operations

 

914

 

765

 

1,688

 

1,448

 

Net income (loss) from continuing operations

 

212

 

(5,761

)

2,526

 

(10,691

)

Earnings (loss) from discontinued operations, net of income tax

 

(147

)

(1,432

)

299

 

(1,716

)

Net income (loss)

 

65

 

(7,193

)

2,825

 

(12,407

)

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (a)

 

 

 

 

 

 

 

 

 

Monitronics business Adjusted EBITDA

 

$

70,408

 

57,218

 

$

139,822

 

113,703

 

Corporate Adjusted EBITDA

 

816

 

(650

)

2,702

 

(1,069

)

Total Adjusted EBITDA

 

$

71,224

 

56,568

 

$

142,524

 

112,634

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA as a percentage of Revenue

 

 

 

 

 

 

 

 

 

Monitronics business

 

68.8

%

68.7

%

69.1

%

68.8

%

Corporate

 

0.8

%

(0.8

)%

1.3

%

(0.6

)%

 


(a)          See reconciliation to net income (loss) from continuing operations below.

 

Net revenue.   Net revenue increased $18,958,000, or 22.8%, and $37,235,000, or 22.5%, for the three and six months ended June 30, 2013, respectively, as compared to the corresponding prior year periods.  The increase in net revenue is attributable to the growth in the number of subscriber accounts and the related increase in recurring monthly revenue (“RMR”).  The growth in subscriber accounts reflects the effects of purchases of approximately 110,000 accounts through Monitronics’ authorized dealer program subsequent to June 30, 2013, the purchase of approximately 93,000 accounts in a bulk buy in October 2012 and other bulk buys of which approximately 18,200 accounts were purchased in the second quarter of 2013.

 

RMR increased from approximately $27,030,000 as of June 30, 2012 to approximately $33,533,000 as of June 30, 2013.  RMR purchased during the three months ended June 30, 2013 and 2012 was approximately $2,090,000 and $1,165,000, respectively.  RMR purchased during the six months ended June 30, 2013 and 2012 was approximately $3,367,000 and $2,214,000, respectively.  In addition, average monthly revenue per subscriber increased from $37.97 as of June 30, 2012 to $39.98 as of June 30, 2013.

 

Cost of services .  Cost of services increased $4,203,000, or 36.9%, and $8,346,000, or 37.2%, for the three and six months ended June 30, 2013, respectively, as compared to the corresponding prior year periods.  The increase is primarily attributable to an increased number of accounts monitored across the cellular network and having interactive and home automation services, which result in higher operating and service costs.  Cost of services as a percent of net revenue increased from 13.7% and 13.6% for the three and six months ended June 30, 2012, respectively, to 15.2% for both the three and six months ended June 30, 2013.

 

Selling, general and administrative.  Selling, general and administrative costs (“SG&A”) increased $3,479,000, or 19.3%, and $5,409,000, or 15.1% for the three and six months ended June 30, 2013, respectively, as compared to the corresponding prior year periods.  The increase is primarily attributable to increases in Monitronics SG&A costs.  The increased Monitronics SG&A costs are attributable to increased payroll expenses of approximately $616,000 and $1,571,000 for the three and six months ended June 30,

 

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2013, respectively, as compared to the corresponding prior year periods and increases in professional services expenses primarily related to $1,438,000 of Security Networks Acquisition transaction costs incurred in the three and six months ended June 30, 2013.  Additionally, the Company’s consolidated stock-based compensation expense increased approximately $692,000 and $1,220,000 for the three and six months ended June 30, 2013, respectively, as compared to the corresponding prior year periods.  This increase is related to restricted stock and option awards granted to certain employees subsequent to June 30, 2012.  SG&A as a percent of net revenue decreased from 21.6% and 21.7% for the three and six months ended June 30, 2012, respectively, to 21.0% and 20.4% for the three and six months ended June 30, 2013, respectively.

 

Amortization of subscriber accounts and dealer network.   Amortization of subscriber accounts and dealer network increased $6,649,000 and $12,883,000 for the three and six months ended June 30, 2013 as compared to the corresponding prior year periods.  The increase is primarily attributable to amortization of subscriber accounts purchased subsequent to June 30, 2012.

 

Gain on sale of operating assets, net .  During the six months ended June 30, 2013, the Company sold an equity investment which resulted in a pre-tax gain of $3,250,000.  Additionally, the Company sold certain land and building property for $4,620,000 resulting in a pre-tax gain of $2,204,000.  During the six months ended June 30, 2012, the Company sold land and building improvements for $5,066,000, resulting in a pre-tax gain of $1,845,000.  This gain was partially offset by the sale of the Company’s 50% interest in an equity method investment for $1,420,000 resulting in a pre-tax loss of $532,000.

 

Interest Expense.   Interest expense increased $166,000 and $9,669,000 for the three and six months ended June 30, 2013 as compared to the corresponding prior year period.  The increase in interest expense for the three months ended June 30, 2013 is primarily attributable to the increase in term loan debt outstanding under Monitronics’ Credit Facility offset by decreased interest rates on the outstanding term loan debt in conjunction with the March 25, 2013 repricing of the Credit Facility term loan.

 

The increase in interest expense for the six months ended June 30, 2013 is primarily due to the presentation of interest cost related to the Company’s current derivative instruments. Interest cost related to the Company’s current derivative instruments is presented in Interest expense on the statement of operations as the related derivative instrument is an effective cash flow hedge of the Company’s interest rate risk for which hedge accounting is applied.  As the Company did not apply hedge accounting on its prior derivative instruments, the related interest costs incurred prior to March 23, 2012 are presented in Realized and unrealized loss on derivative financial instruments in the condensed consolidated statements of operations and comprehensive income (loss).  This increase was offset by decreased interest rates on the Credit Facility term loans, as noted above, and a decrease in amortization of debt discount, as the debt discount related to the securitized debt structure outstanding prior to the March 23, 2012 refinancing exceeded the debt discount on the Credit Facility.  Amortization of debt discount for the six months ended June 30, 2013 and 2012 was $387,000 and $4,101,000, respectively.

 

Realized and unrealized loss on derivative financial instruments.  There was no realized and unrealized gain or loss on derivative financial instruments for the three and six months ended June 30, 2013, as hedge accounting was applied on Monitronics’ outstanding derivative instruments. Realized and unrealized loss on derivative financial instruments for the six months ended June 30, 2012 was $2,044,000, which includes settlement payments of $8,837,000 partially offset by a $6,793,000 unrealized gain related to the change in the fair value of the derivative financial instruments that were terminated on March 23, 2012.

 

Income tax expense from continuing operations.   The Company had pre-tax income from continuing operations of $1,126,000 and $4,214,000 for the three and six months ended June 30, 2013, respectively, and income tax expense of $914,000 and $1,688,000 for the three and six months ended June 30, 2013, respectively.  The Company had a pre-tax loss from continuing operations of $4,996,000 and $9,243,000 for the three and six months ended June 30, 2012, respectively, and income tax expense of $765,000 and $1,448,000 for the three and six months ended June 30, 2012, respectively.  Income tax expense for all periods presented primarily relates to state taxes recognized on the Monitronics business.

 

Earnings (loss) from discontinued operations, net of income taxes.   Earnings (loss) from discontinued operations, net of income taxes, were $(147,000) and $299,000 for the three and six months ended June 30, 2013, respectively, and $(1,432,000)  and $(1,716,000) for the three and six months ended June 30, 2012, respectively.  Earnings from discontinued operations include recoveries of prior period expenses associated with discontinued operations for the six months ended June 30, 2013.  Loss from discontinued operations includes contract termination costs and other loss contingencies for the three months ended June 30, 2013 and three and six months ended June 30, 2012.

 

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Adjusted EBITDA. The following table provides a reconciliation of total Adjusted EBITDA to net income (loss) from continuing operations (amounts in thousands):

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Total Adjusted EBITDA

 

$

71,224

 

56,568

 

$

142,524

 

112,634

 

Amortization of subscriber accounts and dealer network

 

(45,998

)

(39,349

)

(90,313

)

(77,430

)

Depreciation

 

(2,141

)

(2,696

)

(4,055

)

(4,602

)

Stock-based and long-term incentive compensation

 

(1,963

)

(1,271

)

(3,783

)

(2,563

)

Acquisition related costs

 

(1,438

)

 

(1,438

)

 

Realized and unrealized loss on derivative instruments

 

 

 

 

(2,044

)

Refinancing costs

 

 

(4

)

 

(6,245

)

Interest income

 

927

 

1,075

 

1,907

 

1,966

 

Interest expense

 

(19,485

)

(19,319

)

(40,628

)

(30,959

)

Income tax expense from continuing operations

 

(914

)

(765

)

(1,688

)

(1,448

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

212

 

(5,761

)

$

2,526

 

(10,691

)

 

Adjusted EBITDA increased $14,656,000, or 25.9%, and $29,890,000, or 26.5%, for the three and six months ended June 30, 2013 as compared to the respective prior year period.  The increase in Adjusted EBITDA was primarily due to revenue growth.  Monitronics Adjusted EBITDA was $70,408,000 and $139,822,000 for the three and six months ended June 30, 2013, respectively, as compared to $57,218,000 and $113,703,000 for the three and six months ended June 30, 2012, respectively.

 

Liquidity and Capital Resources

 

At June 30, 2013, we had $84,149,000 of cash and cash equivalents, $2,640,000 of current restricted cash, and $141,438,000 of marketable securities on a consolidated basis.  We may use a portion of these assets to decrease debt obligations, fund stock repurchases, or fund potential strategic acquisitions or investment opportunities, including the Security Networks Acquisition.

 

Additionally, our other source of funds is our cash flows from operating activities which are primarily generated from the operations of Monitronics.  During the six months ended June 30, 2013 and 2012, our cash flow from operating activities was $100,505,000 and $79,107,000, respectively.  The primary driver of our cash flow from operating activities is Adjusted EBITDA.  Fluctuations in our Adjusted EBITDA and the components of that measure are discussed in “Results of Operations” above.  In addition, our cash flow from operating activities may be significantly impacted by changes in working capital.

 

During the six months ended June 30, 2013 and 2012, the Company used cash of $113,199,000 and $78,885,000, respectively, to fund purchases of subscriber accounts net of holdback and guarantee obligations.  In addition, during the six months ended June 30, 2013 and 2012, the Company used cash of $3,990,000 and $2,657,000, respectively, to fund our capital expenditures.  In order to improve our investment rate of return, the Company purchased marketable securities consisting primarily of diversified corporate bond funds for cash of $1,003,000 and $99,667,000 during the six months ended June 30, 2013 and 2012, respectively.

 

In considering our liquidity requirements for 2013, we evaluated our known future commitments and obligations.  We will require the availability of funds to finance the strategy of Monitronics, our primary operating subsidiary, which is to grow through subscriber account purchases.  We also considered the expected cash flow from Monitronics, as this business is the driver of our operating cash flows.  In addition, we considered the borrowing capacity under Monitronics’ Credit Facility revolver, under which Monitronics could borrow an additional $116,400,000 as of June 30, 2013.  Based on this analysis, we expect that cash on hand, cash flow generated from operations and available borrowings under the Monitronics’ Credit Facility will provide sufficient liquidity to fund our anticipated current requirements.

 

On March 25, 2013, Monitronics entered into a second amendment to the Credit Facility which repriced the interest rates applicable to the Credit Facility term loans and revolving credit facility. Concurrently with the Repricing, Monitronics extended the maturity of the revolving credit facility by nine months to December 22, 2017.

 

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The existing long-term debt of Monitronics at June 30, 2013 includes the principal balance of $ 1,126,106,000 under its Senior Notes, Credit Facility, and Credit Facility revolver.  The Senior Notes have an outstanding principal balance of $410,000,000 as of June 30, 2013 and mature on April 1, 2020.  The Credit Facility term loan has an outstanding principal balance of $687,049,000 as of June 30, 2013 and requires principal payments of approximately $1,726,000 per quarter with the remaining outstanding balance becoming due on March 23, 2018.  The Credit Facility revolver has an outstanding balance of $33,600,000 as of June 30, 2013 and becomes due on December 22, 2017.

 

In considering our liquidity requirements, we also have evaluated our expected commitments and obligations in connection with the Security Networks Acquisition. The cash portion of the Security Networks Purchase Price will be funded by cash on hand at Ascent Capital and new debt, which is to consist of the $103,500,000 Convertible Notes issued by Ascent Capital, the $175,000,000 New Senior Notes issued by Monitronics and the expected Incremental Term Loan of $225,000,000 to be provided under Monitronics’ Credit Facility.

 

The Convertible Notes offering was completed on July 17, 2013 with the notes maturing on July 15, 2020 and bearing interest at 4.00% per annum from July 17, 2013.  Interest will be payable semi-annually on January 15 and July 15 of each year.  Holders of the Convertible Notes (“Noteholders”) shall have the right, at their option, to convert all or any portion of such Convertible Note, subject to the satisfaction of certain conditions, at an initial conversion rate of 9.7272 shares of Ascent Capital Series A common stock (the “Common Stock”) per $1,000 principal amount of Convertible Notes (subject to adjustment in certain situations), which represents an initial conversion price of approximately $102.804. Ascent Capital is entitled to settle any such conversion by delivery of cash, shares of Common Stock or any combination thereof at Ascent Capital’s election. In addition, Noteholders will have the right to submit Convertible Notes for conversion, subject to the satisfaction of certain conditions, in the event of certain corporate transactions.

 

The New Senior Notes offering was completed on July 17, 2013 by Monitronics Escrow Corporation (the “Escrow Issuer”), a wholly-owned subsidiary of Ascent Capital. The proceeds from this offering have been placed in escrow and will be released upon the closing of the Security Networks Acquisition.  In connection with the completion of the Security Networks Acquisition, the Escrow Issuer will be merged into Monitronics and Monitronics will assume the New Senior Notes.  The New Senior Notes will mature on April 1, 2020 and bear interest at 9.125% per annum, with interest being payable semi-annually on April 1 and October 1 of each year.  We expect that the Incremental Term Loan will be entered into upon the closing of the Security Networks Acquisition.  We expect that the Incremental Term Loan will mature on March 23, 2018 and will bear interest based on LIBOR plus an applicable margin to be agreed, subject to LIBOR floor to be agreed.  In addition, we have evaluated our borrowing capacity subsequent to the Security Networks Acquisition, upon which we expect to increase the borrowing available under Monitronics’ Credit Facility revolver by an amount equal to $75,000,000 (except that no amounts are expected to be drawn to finance the Security Networks Acquisition). Based on our analysis, we expect that cash on hand, cash flow generated from operations and available borrowings under the amended revolving credit facility will provide sufficient liquidity to fund our anticipated requirements following the Security Networks Acquisition.

 

We may seek external equity or debt financing in the event of any new investment opportunities, additional capital expenditures or if our operations require additional funds, but there can be no assurance that we will be able to obtain equity or debt financing on terms that would be acceptable to us.  Our ability to seek additional sources of funding depends on our future financial position and results of operations, which are subject to general conditions in or affecting our industry and our customers and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

 

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Table of Contents

 

Item 3.   Quantitative and Qualitative Disclosure about Market Risk

 

Interest Rate Risk

 

Due to the terms of our debt obligations, we have exposure to changes in interest rates related to these debt obligations.  Monitronics uses derivative financial instruments to manage the exposure related to the movement in interest rates.  The derivatives are designated as hedges and were entered into with the intention of reducing the risk associated with variable interest rates on the debt obligations.  We do not use derivative financial instruments for trading purposes.

 

Tabular Presentation of Interest Rate Risk

 

The table below provides information about our outstanding debt obligations and derivative financial instruments that are sensitive to changes in interest rates.  Interest rate swaps are presented at fair value and by maturity date.  Debt amounts represent principal payments by maturity date.

 

Year of Maturity

 

Fixed Rate
Derivative
Instruments,
net (a)

 

Variable Rate
Debt (a)

 

Fixed Rate
Debt

 

Total

 

 

 

Amounts in thousands

 

 

 

 

 

 

 

 

 

 

 

2013

 

$

 

3,452

 

 

3,452

 

2014

 

 

6,905

 

 

6,905

 

2015

 

 

6,905

 

 

6,905

 

2016

 

 

6,905

 

 

6,905

 

2017

 

 

40,505

 

 

40,505

 

Thereafter

 

76

 

655,976

 

410,000

 

1,066,052

 

Total

 

$

76

 

720,648

 

410,000

 

1,130,724

 

 


(a)           The derivative financial instruments include the net effect of two interest rate swaps, both with a maturity date of March 23, 2018.  As a result of these interest rate swaps, the interest rate on the borrowings under the Credit Facility term loans reflected in the variable rate debt column have been effectively converted from a variable rate to a weighted average fixed rate of 5.03%.  See notes 6, 7 and 10 to our condensed consolidated financial statements included in this quarterly report for further information.

 

Item 4.   Controls and Procedures

 

In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and chief financial officer (the “Executives”), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Executives concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2013 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

There has been no change in the Company’s internal controls over financial reporting that occurred during the three months ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, its internal controls over financial reporting.

 

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Table of Contents

 

ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES

 

PART II - OTHER INFORMATION

 

Item 2 .          Unregistered Sales of Equity Securities and Use of Proceeds.

 

(c) Purchases of Equity Securities by the Issuer

 

The following table sets forth information concerning our company’s purchase of its own equity securities (all of which were comprised of shares of our Series A common stock) during the three months ended June 30, 2013:

 

Period

 

Total number of
shares
purchased
(surrendered)(1)

 

Average price
paid per share

 

Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs

 

Maximum Number (or
Approximate Dollar
Value) or Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs

 

04/01/13 - 04/30/13

 

1,212

(2)

$

73.40

 

 

 

(1)

05/01/13 - 05/31/13

 

 

 

 

 

(1)

06/01/13 - 06/30/13

 

464

(2)

75.23

 

 

 

(1)

Total

 

1,676

 

$

73.91

 

 

 

 

 


(1)            On June 16, 2011 the Company announced that it received authorization to implement a stock repurchase program, pursuant to which it may purchase up to $25,000,000 of its shares of Series A Common Stock from time to time.  As of June 30, 2013, 504,387 Series A shares have been purchased, at an average price paid of $48.31 per share, for $24,368,000.  There were no purchases under the program for the three months ended June 30, 2013.  Approximately $632,000 of Series A Common Stock may still be purchased under the program.

 

(2)            Represents shares withheld in payment of withholding taxes by certain of our executive officers upon vesting of their restricted share awards.

 

22



Table of Contents

 

Item 6 Exhibits

 

Listed below are the exhibits which are included as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):

 

1.1

 

Underwriting Agreement, dated as of July 11, 2013, by and among Ascent Capital Group, Inc. (“Ascent”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC and Citigroup Global Markets Inc. as representatives of the several underwriters named therein (incorporated by reference to Exhibit 1.1 to Ascent’s Current Report on Form 8-K, filed with the Securities and Exchange Commission (the “SEC”) on July 17, 2013 (File No. 001-34176)).

2.1

 

Securities Purchase Agreement, dated as of July 10, 2013, by and among Monitronics International, Inc., certain funds affiliated with Oak Hill Partners, certain other holders and, for the limited purposes set forth therein, Ascent (incorporated by reference to Exhibit 2.1 to Amendment No. 2 to Ascent’s Current Report on Form 8-K/A, filed with the SEC on July 12, 2013 (File No. 001-34176)).

4.1

 

Indenture, dated as of July 17, 2013, between Ascent, as issuer, and U.S. Bank National Association, as trustee.*

4.2

 

Indenture, dated as of July 17, 2013, by and among Monitronics Escrow Corporation, as issuer, and U.S. Bank National Association, as trustee.*

10.1

 

Confirmation, dated July 11, 2013, of Base Issuer Warrant Transaction between Bank of America, N.A. and Ascent.**

10.2

 

Confirmation, dated July 11, 2013, of Base Convertible Bond Hedge Transaction between Bank of America, N.A. and Ascent.**

10.3

 

Confirmation, dated July 11, 2013, of Base Issuer Warrant Transaction between Credit Suisse Capital LLC and Ascent.**

10.4

 

Confirmation, dated July 11, 2013, of Base Convertible Bond Hedge Transaction between Credit Suisse Capital LLC and Ascent.**

31.1

 

Rule 13a-14(a)/15d-14(a) Certification. *

31.2

 

Rule 13a-14(a)/15d-14(a) Certification. *

32

 

Section 1350 Certification. ***

101.INS

 

XBRL Instance Document. ***

101.SCH

 

XBRL Taxonomy Extension Schema Document. ***

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document. ***

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document. ***

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document. ***

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document. ***

 


*                  Filed herewith.

**           Application has been made to the Securities and Exchange Commission for confidential treatment of certain provisions of this exhibit. Omitted material for which confidential treatment has been requested has been separately filed with the Securities and Exchange Commission.

***    Furnished herewith.

 

23



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

ASCENT CAPITAL GROUP, INC.

 

 

 

 

 

 

 

 

Date:

August 9, 2013

By:

/s/ William R. Fitzgerald

 

 

 

William R. Fitzgerald

 

 

 

Chairman of the Board, Director and Chief Executive Officer

 

 

 

 

 

 

 

 

Date:

August 9, 2013

By:

/s/ Michael R. Meyers

 

 

 

Michael R. Meyers

 

 

 

Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)

 

24



Table of Contents

 

EXHIBIT INDEX

 

Listed below are the exhibits which are included as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):

 

1.1

 

Underwriting Agreement, dated as of July 11, 2013, by and among Ascent Capital Group, Inc. (“Ascent”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC and Citigroup Global Markets Inc. as representatives of the several underwriters named therein (incorporated by reference to Exhibit 1.1 to Ascent’s Current Report on Form 8-K, filed with the Securities and Exchange Commission (the “SEC”) on July 17, 2013 (File No. 001-34176)).

2.1

 

Securities Purchase Agreement, dated as of July 10, 2013, by and among Monitronics International, Inc., certain funds affiliated with Oak Hill Partners, certain other holders and, for the limited purposes set forth therein, Ascent (incorporated by reference to Exhibit 2.1 to Amendment No. 2 to Ascent’s Current Report on Form 8-K/A, filed with the SEC on July 12, 2013 (File No. 001-34176)).

4.1

 

Indenture, dated as of July 17, 2013, between Ascent, as issuer, and U.S. Bank National Association, as trustee.*

4.2

 

Indenture, dated as of July 17, 2013, by and among Monitronics Escrow Corporation, as issuer, and U.S. Bank National Association, as trustee.*

10.1

 

Confirmation, dated July 11, 2013, of Base Issuer Warrant Transaction between Bank of America, N.A. and Ascent.**

10.2

 

Confirmation, dated July 11, 2013, of Base Convertible Bond Hedge Transaction between Bank of America, N.A. and Ascent.**

10.3

 

Confirmation, dated July 11, 2013, of Base Issuer Warrant Transaction between Credit Suisse Capital LLC and Ascent.**

10.4

 

Confirmation, dated July 11, 2013, of Base Convertible Bond Hedge Transaction between Credit Suisse Capital LLC and Ascent.**

31.1

 

Rule 13a-14(a)/15d-14(a) Certification. *

31.2

 

Rule 13a-14(a)/15d-14(a) Certification. *

32

 

Section 1350 Certification. ***

101.INS

 

XBRL Instance Document. ***

101.SCH

 

XBRL Taxonomy Extension Schema Document. ***

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document. ***

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document. ***

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document. ***

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document. ***

 


*                  Filed herewith.

**           Application has been made to the Securities and Exchange Commission for confidential treatment of certain provisions of this exhibit. Omitted material for which confidential treatment has been requested has been separately filed with the Securities and Exchange Commission.

***    Furnished herewith.

 

25


Exhibit 4.1

 

Execution Version

 

 

ASCENT CAPITAL GROUP, INC.

 

as Issuer

 

AND

 

U.S. BANK NATIONAL ASSOCIATION

 

as Trustee

 

INDENTURE

 

Dated as of July 17, 2013

 

4.00% Convertible Senior Notes due 2020

 

 



 

CROSS-REFERENCE TABLE

 

TIA
Section

 

Indenture
Section

310(a)(1)

 

7.09

(a)(2)

 

7.09

(a)(3)

 

N.A.

(a)(4)

 

N.A.

(a)(5)

 

7.09

(b)

 

7.08

(c)

 

N.A.

311(a)

 

7.13

(b)

 

7.13

101(c)

 

N.A.

312(a)

 

5.01

(b)

 

5.02(b)

(c)

 

5.02(c)

313(a)

 

5.03

(b)(1)

 

N.A.

(b)(2)

 

5.03

(c)

 

5.03; 14.03

(d)

 

5.03(b)

314(a)

 

4.06; 4.08

(b)

 

N.A.

(c)(1)

 

14.05

(c)(2)

 

14.05

(c)(3)

 

N.A.

(d)

 

N.A.

(e)

 

14.05

(f)

 

N.A.

315(a)

 

7.01; 7.02

(b)

 

6.10; 14.03

(c)

 

7.01

(d)

 

7.01

(e)

 

6.11

316(a)(last sentence)

 

8.04

(a)(1)(A)

 

6.09

(a)(1)(B)

 

6.09

(a)(2)

 

N.A.

(b)

 

6.04

(c)

 

8.01

317(a)(1)

 

6.04; 6.07

(a)(2)

 

6.04

(b)

 

4.04

318(a)

 

14.08

 

“N.A.” means not applicable

Note:  This Cross-Reference table shall not, for any purpose, be deemed to be part of this Indenture.

 

i



 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

ARTICLE 1

 

 

DEFINITIONS

 

 

 

 

 

Section 1.01.

 

Definitions

 

1

ARTICLE 2

 

 

ISSUE, DESCRIPTION, EXECUTION, REGISTRATION

 

 

AND EXCHANGE OF NOTES

 

 

 

 

 

Section 2.01.

 

Designation and Amount

 

11

Section 2.02.

 

Form of Notes

 

11

Section 2.03.

 

Date and Denomination of Notes; Payments of Interest

 

11

Section 2.04.

 

Execution, Authentication and Delivery of Notes

 

12

Section 2.05.

 

Exchange and Registration of Transfer of Notes; Depositary

 

13

Section 2.06.

 

Mutilated, Destroyed, Lost or Stolen Notes

 

15

Section 2.07.

 

Temporary Notes

 

16

Section 2.08.

 

Cancellation of Notes Paid, Etc.

 

16

Section 2.09.

 

CUSIP Numbers

 

16

Section 2.10.

 

Additional Notes; Repurchases

 

16

Section 2.11.

 

No Redemption; No Sinking Fund

 

17

 

 

 

 

 

ARTICLE 3

 

 

SATISFACTION AND DISCHARGE

 

 

 

 

 

Section 3.01.

 

Satisfaction and Discharge

 

17

 

 

 

 

 

ARTICLE 4

 

 

PARTICULAR COVENANTS OF THE COMPANY

 

 

 

 

 

Section 4.01.

 

Payment of Principal, Interest and Additional Interest

 

17

Section 4.02.

 

Maintenance of Office or Agency

 

17

Section 4.03.

 

Appointments to Fill Vacancies in Trustee’s Office

 

18

Section 4.04.

 

Provisions as to Paying Agent

 

18

Section 4.05.

 

Existence

 

19

Section 4.06.

 

Annual Reports

 

19

Section 4.07.

 

Stay, Extension and Usury Laws

 

20

Section 4.08.

 

Compliance Certificate; Statements as to Defaults

 

20

Section 4.09.

 

Further Instruments and Acts

 

20

 

 

 

 

 

ARTICLE 5

 

 

LISTS OF NOTEHOLDERS AND REPORTS BY

 

 

THE COMPANY AND THE TRUSTEE

 

 

 

 

 

Section 5.01.

 

Lists of Noteholders

 

20

Section 5.02.

 

Preservation and Disclosure of Lists

 

20

Section 5.03.

 

Reports by Trustee

 

21

 

ii



 

 

 

 

 

Page

 

 

 

 

 

ARTICLE 6

 

 

DEFAULTS AND REMEDIES

 

 

 

 

 

Section 6.01.

 

Events of Default

 

21

Section 6.02.

 

Acceleration

 

23

Section 6.03.

 

Additional Interest

 

23

Section 6.04.

 

Payments of Notes on Default; Suit Therefor

 

24

Section 6.05.

 

Application of Monies Collected by Trustee

 

25

Section 6.06.

 

Proceedings by Noteholders

 

26

Section 6.07.

 

Proceedings by Trustee

 

27

Section 6.08.

 

Remedies Cumulative and Continuing

 

27

Section 6.09.

 

Direction of Proceedings and Waiver of Defaults by Majority of Noteholders

 

27

Section 6.10.

 

Notice of Defaults

 

27

Section 6.11.

 

Undertaking to Pay Costs

 

28

 

 

 

 

 

ARTICLE 7

 

 

CONCERNING THE TRUSTEE

 

 

 

 

 

Section 7.01.

 

Duties and Responsibilities of Trustee

 

28

Section 7.02.

 

Reliance on Documents, Opinions, Etc.

 

30

Section 7.03.

 

No Responsibility for Recitals, Etc.

 

31

Section 7.04.

 

Trustee, Paying Agents, Conversion Agents or Registrar May Own Notes

 

31

Section 7.05.

 

Monies to Be Held in Trust

 

31

Section 7.06.

 

Compensation and Expenses of Trustee

 

31

Section 7.07.

 

Officers’ Certificate as Evidence

 

32

Section 7.08.

 

Conflicting Interests of Trustee

 

32

Section 7.09.

 

Eligibility of Trustee

 

32

Section 7.10.

 

Resignation or Removal of Trustee

 

32

Section 7.11.

 

Acceptance by Successor Trustee

 

33

Section 7.12.

 

Succession by Merger, Etc.

 

34

Section 7.13.

 

Limitation on Rights of Trustee as Creditor

 

34

Section 7.14.

 

Trustee’s Application for Instructions from the Company

 

34

 

 

 

 

 

ARTICLE 8

 

 

CONCERNING THE NOTEHOLDERS

 

 

 

 

 

Section 8.01.

 

Action by Noteholders

 

35

Section 8.02.

 

Proof of Execution by Noteholders

 

35