Ascent Capital Group, Inc.
Ascent Capital Group, Inc. (Form: 10-Q, Received: 11/10/2014 16:28:40)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
 
FORM 10-Q
 
ý            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
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 ý   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  ý   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  ý

The number of outstanding shares of Ascent Capital Group, Inc.’s common stock as of October 24, 2014 was:

Series A common stock 13,395,834 shares; and
Series B common stock 384,086 shares.


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
PART I — FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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)
 
September 30,
2014
 
December 31, 2013
Assets
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
50,594

 
$
44,701

Restricted cash
91

 
40

Marketable securities, at fair value
131,531

 
129,496

Trade receivables, net of allowance for doubtful accounts of $2,026 in 2014 and $1,937 in 2013
13,916

 
13,019

Deferred income tax assets, net
7,128

 
7,128

Income taxes receivable

 
7

Prepaid and other current assets
6,863

 
8,400

Assets held for sale
18,935

 
1,231

Total current assets
229,058

 
204,022

Property and equipment, net of accumulated depreciation of $29,537 in 2014 and $35,528 in 2013
35,700

 
56,528

Subscriber accounts, net of accumulated amortization of $677,889 in 2014 and $503,497 in 2013
1,366,250

 
1,340,954

Dealer network and other intangible assets, net of accumulated amortization of $49,132 in 2014 and $34,297 in 2013
49,800

 
64,635

Goodwill
527,502

 
527,502

Other assets, net
28,859

 
32,152

Total assets
$
2,237,169

 
$
2,225,793

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
6,871

 
$
7,096

Accrued payroll and related liabilities
5,515

 
3,602

Other accrued liabilities
42,526

 
34,431

Deferred revenue
14,719

 
14,379

Holdback liability
18,502

 
19,758

Current portion of long-term debt
9,166

 
9,166

Liabilities of discontinued operations
6,354

 
7,136

Total current liabilities
103,653

 
95,568

Non-current liabilities:
 

 
 

Long-term debt
1,626,079

 
1,572,098

Long-term holdback liability
6,239

 
6,698

Derivative financial instruments
3,330

 
2,013

Deferred income tax liability, net
19,441

 
16,851

Other liabilities
15,311

 
17,808

Total liabilities
1,774,053

 
1,711,036

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued

 

Series A common stock, $0.01 par value. Authorized 45,000,000 shares; issued and outstanding 13,396,391 and 13,672,674 shares at September 30, 2014 and December 31, 2013, respectively
134

 
137

Series B common stock, $0.01 par value. Authorized 5,000,000 shares; issued and outstanding 384,212 shares both at September 30, 2014 and December 31, 2013
4

 
4

Series C common stock, $0.01 par value. Authorized 45,000,000 shares; no shares issued

 

Additional paid-in capital
1,452,944

 
1,470,056

Accumulated deficit
(988,314
)
 
(957,179
)
Accumulated other comprehensive income (loss), net
(1,652
)
 
1,739

Total stockholders’ equity
463,116

 
514,757

Total liabilities and stockholders’ equity
$
2,237,169

 
$
2,225,793

 

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 per share amounts
(unaudited)  
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net revenue
$
136,027

 
115,844

 
$
403,587

 
318,275

Operating expenses:
 

 
 

 
 
 
 
Cost of services
24,835

 
20,155

 
69,907

 
50,951

Selling, general, and administrative, including stock-based compensation
24,336

 
23,870

 
77,609

 
65,116

Amortization of subscriber accounts, dealer network and other intangible assets
64,341

 
55,746

 
189,382

 
146,059

Depreciation
2,525

 
2,305

 
7,851

 
6,360

Restructuring charges
51

 
402

 
969

 
402

Gain on disposal of operating assets, net

 
(17
)
 
(69
)
 
(5,473
)
 
116,088

 
102,461

 
345,649

 
263,415

Operating income
19,939

 
13,383

 
57,938

 
54,860

Other income (expense), net:
 

 
 

 
 
 
 
Interest income
822

 
909

 
2,542

 
2,816

Interest expense
(29,894
)
 
(26,022
)
 
(87,761
)
 
(66,650
)
Other income (expense), net
(10
)
 
504

 
1,607

 
1,962

 
(29,082
)
 
(24,609
)
 
(83,612
)
 
(61,872
)
Loss from continuing operations before income taxes
(9,143
)
 
(11,226
)
 
(25,674
)
 
(7,012
)
Income tax benefit (expense) from continuing operations
(1,849
)
 
3,571

 
(5,207
)
 
1,883

Net loss from continuing operations
(10,992
)
 
(7,655
)
 
(30,881
)
 
(5,129
)
Discontinued operations:
 

 
 

 
 
 
 
Earnings (loss) from discontinued operations
(133
)
 
(83
)
 
(254
)
 
256

Income tax expense from discontinued operations

 

 

 
(40
)
Earnings (loss) from discontinued operations, net of income tax
(133
)
 
(83
)
 
(254
)
 
216

Net loss
(11,125
)
 
(7,738
)
 
(31,135
)
 
(4,913
)
Other comprehensive income (loss):
 

 
 

 
 
 
 
Foreign currency translation adjustments
(305
)
 
351

 
(107
)
 
(17
)
Unrealized holding losses on marketable securities, net
(1,646
)
 
(1,024
)
 
(1,500
)
 
(3,176
)
Unrealized gain (loss) on derivative contracts, net
4,355

 
(4,526
)
 
(1,784
)
 
7,404

Total other comprehensive income (loss), net of tax
2,404

 
(5,199
)
 
(3,391
)
 
4,211

Comprehensive loss
$
(8,721
)
 
(12,937
)
 
$
(34,526
)
 
(702
)
 
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share:
 

 
 

 
 
 
 
Continuing operations
$
(0.81
)
 
(0.54
)
 
$
(2.26
)
 
(0.37
)
Discontinued operations
(0.01
)
 
(0.01
)
 
(0.02
)
 
0.02

Net loss
$
(0.82
)
 
(0.55
)
 
$
(2.28
)
 
(0.35
)
 

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)
 
Nine Months Ended 
 September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net loss
$
(31,135
)
 
(4,913
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Loss (earnings) from discontinued operations, net of income tax
254

 
(216
)
Amortization of subscriber accounts, dealer network and other intangible assets
189,382

 
146,059

Depreciation
7,851

 
6,360

Stock-based compensation
5,141

 
5,535

Deferred income tax expense (benefit)
2,597

 
(4,092
)
Gain on disposal of operating assets, net
(69
)
 
(5,473
)
Long-term debt amortization
3,255

 
1,263

Other non-cash activity, net
8,679

 
7,634

Changes in assets and liabilities:
 

 
 

Trade receivables
(6,657
)
 
(6,394
)
Prepaid expenses and other assets
1,612

 
2,617

Payables and other liabilities
8,294

 
21,549

Operating activities from discontinued operations, net
(1,036
)
 
(278
)
Net cash provided by operating activities
188,168

 
169,651

Cash flows from investing activities:
 

 
 

Capital expenditures
(5,035
)
 
(6,314
)
Cost of subscriber accounts acquired
(202,429
)
 
(174,527
)
Cash paid for acquisition, net of cash acquired

 
(479,795
)
Purchases of marketable securities
(3,535
)
 
(21,770
)
Proceeds from sale of marketable securities

 
15,384

Increase in restricted cash
(51
)
 
(40
)
Proceeds from the disposal of operating assets
241

 
12,886

Other investing activities
(436
)
 

Net cash used in investing activities
(211,245
)
 
(654,176
)
Cash flows from financing activities:
 

 
 

Proceeds from long-term debt
139,500

 
594,875

Payments on long-term debt
(88,774
)
 
(90,456
)
Payments of financing costs

 
(11,079
)
Stock option exercises
719

 
10

Purchases and retirement of common stock
(22,475
)
 

Bond hedge and warrant transactions, net

 
(6,107
)
Other financing activities

 
(200
)
Net cash provided by financing activities
28,970

 
487,043

Net increase in cash and cash equivalents
5,893

 
2,518

Cash and cash equivalents at beginning of period
44,701

 
78,422

Cash and cash equivalents at end of period
$
50,594

 
80,940

Supplemental cash flow information:
 

 
 

State taxes paid, net
$
2,644

 
2,350

Interest paid
67,314

 
49,324


See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
Amounts in thousands
(unaudited)
 


 
 
 
 
 
 
 
 
Additional
 
 
 
Accumulated
other
 
Total
 
Preferred
 
Common stock
 
paid-in
 
Accumulated
 
comprehensive
 
stockholders’
 
stock
 
Series A
 
Series B
 
Series C
 
capital
 
deficit
 
income (loss)
 
equity
Balance at December 31, 2013
$

 
137

 
4

 

 
1,470,056

 
(957,179
)
 
1,739

 
514,757

Net loss

 

 

 

 

 
(31,135
)
 

 
(31,135
)
Other comprehensive loss

 

 

 

 

 

 
(3,391
)
 
(3,391
)
Stock-based compensation

 

 

 

 
5,141

 

 

 
5,141

Stock awards and option exercises

 

 

 

 
719

 

 

 
719

Value of shares withheld for tax liability

 


 

 

 
(500
)
 

 

 
(500
)
Purchases and retirement of common stock

 
(3
)
 

 

 
(22,472
)
 

 

 
(22,475
)
Balance at September 30, 2014
$

 
134

 
4

 

 
1,452,944

 
(988,314
)
 
(1,652
)
 
463,116

 
See accompanying notes to condensed consolidated financial statements.

5

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.  On August 16, 2013, Monitronics acquired all of the equity interests of Security Networks LLC (“Security Networks”) and certain affiliated entities (the “Security Networks Acquisition”). 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 September 30, 2014 , and for the three and nine months ended September 30, 2014 and 2013 , 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, 2013 , filed with the SEC on February 27, 2014 (the “2013 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
 
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) . Under the update, revenue will be recognized based on a five-step model. The core principle of the model is that revenue will be recognized when the transfer of promised goods or services to customers is made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is effective for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the impact that adopting this ASU will have on its financial position, results of operations and cash flows.
 
(3)                                  Security Networks Acquisition
 
On August 16, 2013 (the “Closing Date”), Monitronics acquired all of the equity interests of Security Networks and certain affiliated entities.  The purchase price (the “Security Networks Purchase Price”) of $500,557,000 consisted of $481,834,000 in cash and 253,333 shares of Ascent Capital’s Series A common stock, par value $0.01 per share (the "Series A Common Stock"), with a Closing Date fair value of $18,723,000 .  The Security Networks Purchase Price includes post-closing adjustments of $1,057,000 .
 
The Security Networks Acquisition was accounted for as a business combination utilizing the acquisition method in accordance with FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations ("FASB ASC Topic 805").  Under the acquisition method of accounting, the Security Networks Purchase Price has been allocated to Security Networks’ tangible and identifiable intangible assets acquired and liabilities assumed based on their estimates of fair value. In connection with the Security Networks Acquisition, the Company recognized goodwill of $177,289,000 .
 

6


The Company’s 2013 Form 10-K included an initial allocation of the purchase price based on preliminary data. Subsequent to filing the Company’s 2013 Form 10-K, an adjustment was made to increase goodwill by $989,000 , which is reflected in the revised December 31, 2013 consolidated balance sheet in accordance with FASB ASC Topic 805. The increase to goodwill was related to adjustments to the deferred income tax liabilities acquired as a result of obtaining Security Networks' final short period federal and state income tax returns for 2013, which were filed in the second quarter of 2014. There were additional adjustments to acquired deferred tax liabilities recognized in the fourth quarter of 2013 that were reflected in the consolidated financial statements in the Company's 2013 Form 10-K. The total increase to the acquired deferred income tax liabilities for these adjustments resulted in a $4,823,000 reduction in Monitronics' valuation allowance. In accordance with FASB ASC Topic 805, the corresponding decrease in income tax expense from continuing operations related to the reduction in valuation allowance has been retrospectively applied to the revised three and nine months ended September 30, 2013 consolidated statements of operations and comprehensive income (loss).

The following table includes unaudited pro forma information for the Company, which includes the historical operating results of Security Networks prior to ownership by the Company. This pro forma information gives effect to certain adjustments, including increased amortization to reflect the fair value assigned to the subscriber accounts and dealer network and other intangible assets acquired and increased interest expense relating to the debt transactions entered into to fund the Security Networks Acquisition. The pro forma results assume that the Security Networks Acquisition and the debt transactions had occurred on January 1, 2012 for all periods presented. They are not necessarily indicative of the results of operations that would have occurred if the acquisition had been made at the beginning of the periods presented or that may be obtained in the future.
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
(amounts in thousands,
except per share amounts)
As reported:
 
 
 
Net revenue
$
115,844

 
$
318,275

Net loss from continuing operations
(7,655
)
 
(5,129
)
Basic and diluted net loss from continuing operations per share
$
(0.54
)
 
$
(0.37
)
 
 
 
 
Supplemental pro forma:
 
 
 
Net revenue
$
131,951

 
$
382,789

Net loss from continuing operations
(9,530
)
 
(23,758
)
Basic and diluted net loss from continuing operations per share
$
(0.67
)
 
$
(1.68
)
 
(4)                                  Investments in Marketable Securities
 
Ascent Capital owns marketable securities primarily 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):
 
Nine Months Ended September 30,
 
2014
 
2013
Beginning balance
$
129,496

 
142,587

Purchases
3,535

 
21,770

Sales at cost basis (a)

 
(15,286
)
Realized and unrealized losses, net
(1,500
)
 
(3,176
)
Ending balance
$
131,531

 
145,895

                                    
(a)          For the nine months ended September 30, 2013, total proceeds from the sale of marketable securities were $15,384,000 resulting in a pre-tax gain of $98,000 .
 

7


The following table presents the changes in Accumulated other comprehensive income (loss) on the condensed consolidated balance sheets for unrealized and realized gains and losses of the investments in marketable securities (amounts in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Accumulated other comprehensive income (loss)
 

 
 

 
 
 
 
Beginning balance
$
1,644

 
515

 
$
1,498

 
2,667

Unrealized losses, net of income tax of $0
(1,646
)
 
(926
)
 
(1,500
)
 
(3,078
)
Realized gain recognized into earnings, net of income tax of $0 (a)

 
(98
)
 

 
(98
)
Ending balance
$
(2
)
 
(509
)
 
$
(2
)
 
(509
)
                                    
(a)          The realized gain of the sale of marketable securities for the three and nine months ended September 30, 2013 is included in Other income, net on the consolidated statements of operations and comprehensive income (loss).

(5)                                  Assets Held for Sale

In the third quarter of 2014, the Company reclassified $17,704,000 of land and building, net of accumulated depreciation, to Assets held for sale on the condensed consolidated balance sheet. At September 30, 2014 , the Company has $18,935,000 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.

(6)                                  Other Accrued Liabilities
 
Other accrued liabilities consisted of the following (amounts in thousands):
 
 
September 30,
2014
 
December 31,
2013
Interest payable
$
27,771

 
$
15,455

Income taxes payable
2,669

 
2,744

Legal accrual
1,319

 
1,378

Other
10,767

 
14,854

Total Other accrued liabilities
$
42,526

 
$
34,431


(7)                                  Long-Term Debt
 
Long-term debt consisted of the following (amounts in thousands):
 
September 30,
2014
 
December 31,
2013
Ascent Capital 4.00% Convertible Senior Notes due July 15, 2020
$
76,664

 
$
74,189

Monitronics 9.125% Senior Notes due April 1, 2020
585,259

 
585,282

Monitronics term loans, mature March 23, 2018, LIBOR plus 3.25%, subject to a LIBOR floor of 1.00% (a)
896,222

 
902,293

Monitronics $225 million revolving credit facility, matures December 22, 2017, LIBOR plus 3.75%, subject to a LIBOR floor of 1.00% (a)
77,100

 
19,500

 
1,635,245

 
1,581,264

Less current portion of long-term debt
(9,166
)
 
(9,166
)
Long-term debt
$
1,626,079

 
$
1,572,098

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


8


Convertible Notes
 
On July 17, 2013, Ascent Capital issued $103,500,000 in aggregate principal amount of 4.00% convertible senior notes due July 15, 2020 (the “Convertible Notes”) in an offering registered under the Securities Act of 1933, as amended.  The Convertible Notes are convertible, under certain circumstances, into cash, shares of Series A Common Stock or any combination thereof at Ascent Capital’s election. The Convertible Notes mature on July 15, 2020 and bear interest at a rate per annum of 4.00% .  Interest on the Convertible Notes is payable semi-annually on January 15 and July 15 of each year.
 
Holders of the Convertible Notes (“Noteholders”) have the right, at their option, to convert all or any portion of such Convertible Notes, subject to the satisfaction of certain conditions, at an initial conversion rate of 9.7272 shares of Series A Common Stock per $1,000 principal amount of Convertible Notes (subject to adjustment in certain situations), which represents an initial conversion price per share of Series A Common Stock of approximately $102.804 (the “Conversion Price”).  Ascent Capital is entitled to settle any such conversion by delivery of cash, shares of Series A Common Stock or any combination thereof at Ascent’s election. In addition, Noteholders have the right to submit Convertible Notes for conversion, subject to the satisfaction of certain conditions, in the event of certain corporate transactions.
 
In the event of a fundamental change (as such term is defined in the indenture governing the Convertible Notes) at any time prior to the maturity date, each Noteholder shall have the right, at such Noteholder’s option, to require Ascent Capital to repurchase for cash any or all of such Noteholder’s Convertible Notes on the repurchase date specified by Ascent Capital at a repurchase price equal to 100% of the principal amount thereof, together with accrued and unpaid interest, including unpaid additional interest, if any, unless the repurchase date occurs after an interest record date and on or prior to the related interest payment date, as specified in the indenture.
 
The Convertible Notes are within the scope of FASB ASC Topic 470 Subtopic 20, Debt with Conversion and Other Options (“FASB ASC 470-20”), and as such are required to be separated into a liability and equity component. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated conversion option. The carrying amount of the equity component is determined by deducting the fair value of the liability component from the initial proceeds ascribed to the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, treated as a debt discount, is amortized to interest cost over the expected life of a similar liability that does not have an associated conversion option using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification as prescribed in FASB ASC 815 Subtopic 40, Contracts in an Entity’s Own Equity (“FASB ASC 815-40”).  Accordingly, upon issuance, the Company estimated fair value of the liability component as $72,764,000 , with the remaining excess amount of $30,736,000 allocated to the equity component.

The Convertible Notes are presented on the consolidated balance sheet as follows (amounts in thousands):
 
As of
September 30,
2014
 
As of
December 31,
2013
Principal
$
103,500

 
$
103,500

Unamortized discount
(26,836
)
 
(29,311
)
Carrying value
$
76,664

 
$
74,189

 
The Company is using an effective interest rate of 10.0% to calculate the accretion of the debt discount, which is being recorded as interest expense over the expected remaining term to maturity of the Convertible Notes.  The Company recognized contractual interest expense of $1,035,000 and $3,105,000 on the Convertible Notes for the three and nine months ended September 30, 2014 , respectively.  The Company recognized contractual interest expense of $862,500 for both the three and nine months ended September 30, 2013. The Company amortized $845,000 and $2,475,000 of the Convertible Notes debt discount into interest expense for the three and nine months ended September 30, 2014 , respectively. The Company amortized $640,000 of the Convertible Notes debt discount into interest expense for both the three and nine months ended September 30, 2013.
 
Hedging Transactions Relating to the Offering of the Convertible Notes
 
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 require the counterparties to offset Series A 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 Series A Common Stock on each trading day of the relevant valuation period is

9


greater than the strike price of $102.804 , which corresponds to the Conversion Price of the Convertible Notes.  The Bond Hedge Transactions cover, subject to anti-dilution adjustments, approximately 1,007,000 shares of Series A Common Stock, which is equivalent to the number of shares initially issuable upon conversion of the Convertible Notes, and are expected to reduce the potential dilution with respect to the Series A 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 warrants cover the same initial number of shares of Series A Common Stock, subject to anti-dilution adjustments, as the Bond Hedge Transactions.  The Warrant Transactions require Ascent Capital to deliver Series A 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 Series A Common Stock over the strike price of $118.62 , which effectively reflects a 50% conversion premium on the Convertible Notes.  As such, 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 Series A Common Stock. Ascent Capital may elect to settle its delivery obligation under the Warrant Transactions in cash.
 
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.
 
Ascent Capital purchased the bond hedge call option for $20,318,000 and 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 $6,107,000 .  In accordance with FASB ASC 815-40, the fair value of the Bond Hedge and Warrant Transactions was recognized in Additional paid-in capital on the consolidated balance sheet.
 
Senior Notes
 
On July 17, 2013, Monitronics closed on a $175,000,000 privately placed debt offering of 9.125% Senior Notes (the “New Senior Notes”).  In December 2013, Monitronics completed an exchange of the New Senior Notes for identical securities in a registered offering under the Securities Act of 1933, as amended.
 
The New Senior Notes, together with the existing $410,000,000 of 9.125% Senior Notes due 2020 (collectively, the “Senior Notes”), total $585,000,000 in principal, 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.
 
The Senior Notes are guaranteed by all of Monitronics’ existing domestic subsidiaries.  Ascent Capital has not guaranteed any of Monitronics’ obligations under the Senior Notes.

Credit Facility
 
On March 25, 2013, Monitronics entered into an amendment (“Amendment No. 2”) with the lenders of its existing senior secured credit agreement dated March 23, 2012, and as amended and restated on November 7, 2012 (the “Existing Credit Agreement”).  Pursuant to Amendment No. 2, Monitronics repriced the interest rates applicable to the Existing Credit Agreement’s facility (the “Repricing”), which is comprised of the term loans and revolving credit facility noted in the table above. Concurrently with the Repricing, Monitronics extended the maturity of the revolving credit facility by nine months to December 22, 2017.
 
On August 16, 2013, in connection with the Security Networks Acquisition, Monitronics entered into a third amendment (“Amendment No. 3”) to the Existing Credit Agreement to provide for, among other things, (i) an increase in the commitments under the revolving credit facility in a principal amount of $75,000,000 , resulting in an aggregate principal amount of $225,000,000 , (ii) new term loans in an aggregate principal amount of $225,000,000 (the “Incremental Term Loans”) at a 0.5% discount and (iii) certain other amendments to the Existing Credit Agreement, each as set forth in Amendment No. 3 (the Existing Credit Agreement together with Amendment No. 2 and Amendment No. 3, the “Credit Facility”).
 
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 $2,292,000 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

10


an annual commitment fee of 0.50% on unused portions of the Credit Facility revolver.  As of September 30, 2014 , $147,900,000 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.
 
On September 30, 2014, Monitronics borrowed $27,500,000 on the Credit Facility revolver to funds its October 1, 2014 interest payment due under the Senior Notes of approximately $26,691,000 .

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 domestic subsidiaries.  Ascent Capital has not guaranteed any of Monitronics’ obligations under the Credit Facility.
 
As of September 30, 2014 , the Company has deferred financing costs, net of accumulated amortization, of $23,864,000 related to the Convertible Notes, the Senior Notes and the Credit Facility. These costs are included in Other assets, net on the accompanying consolidated balance sheet and will be amortized over the remaining term of the respective debt instruments using the effective-interest method.
 
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 has entered into interest rate swap agreements with terms similar to the Credit Facility term loans.  On March 25, 2013, Monitronics negotiated amendments to the terms of its existing swap agreements to coincide with the Repricing.  In the third quarter of 2013, Monitronics entered into additional interest rate swap agreements in conjunction with the Incremental Term Loans (all outstanding interest rate swap agreements are collectively referred to as the “Swaps”).
 
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 8, 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 5.06% .
 
The terms of the Convertible Notes, the Senior Notes and the Credit Facility provide for certain financial and nonfinancial covenants.  As of September 30, 2014 , the Company 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 2014
$
2,292

2015
9,166

2016
9,166

2017
86,266

2018
870,800

2019

Thereafter
688,500

Total principal payments
$
1,666,190

Less:
 

Unamortized discounts and premium, net
30,945

Total debt on condensed consolidated balance sheet
$
1,635,245

 
(8)                                  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

11


nonperformance risk in the fair value measurements.  See note 9, Fair Value Measurements, for additional information about the credit valuation adjustments.
 
The Swaps’ outstanding notional balance as of September 30, 2014 and terms are noted below:
Notional
 
Effective Date
 
Fixed
Rate Paid
 
Variable Rate Received
$
536,250,000

 
March 28, 2013
 
1.884%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
142,100,000

 
March 28, 2013
 
1.384%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
111,086,683

 
September 30, 2013
 
1.959%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
111,086,683

 
September 30, 2013
 
1.850%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
                                    
(a)  
On March 25, 2013, Monitronics negotiated amendments to the terms of these interest rate swap agreements to coincide with the Repricing (the “Amended Swaps”).  The Amended Swaps are held with the same counterparties as the Existing Swap Agreements.  Upon entering into the Amended Swaps, Monitronics simultaneously dedesignated the Existing Swap Agreements and redesignated the Amended Swaps as cash flow hedges for the underlying change in the swap terms.  The amounts previously recognized in Accumulated other comprehensive income (loss) relating to the dedesignation will be recognized in Interest expense over the remaining life of the Amended Swaps.
 
All of the 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 income (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 income (loss) are reclassified to Interest expense when the hedged interest payments on the underlying debt are recognized.  Amounts in Accumulated other comprehensive income (loss) expected to be recognized in Interest expense in the coming 12 months total approximately $7,315,000 .

The impact of the derivatives designated as cash flow hedges on the condensed consolidated financial statements is depicted below (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Effective portion of gain (loss) recognized in Accumulated other comprehensive income (loss)
$
1,988

 
(5,734
)
 
$
(7,617
)
 
3,830

Effective portion of gain (loss) reclassified from Accumulated other comprehensive income (loss) into Net income (loss) (a)
$
(2,367
)
 
(1,208
)
 
$
(5,833
)
 
(3,574
)
Ineffective portion of amount of gain (loss) recognized into Net income (loss) on interest rate swaps (a)
$
59

 
(50
)
 
$
56

 
30

                                    
(a)          Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
 
(9)                              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.
 
The following summarizes the fair value level of assets and liabilities that are measured on a recurring basis at September 30, 2014 and December 31, 2013 (amounts in thousands): 

12


 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2014
 

 
 

 
 

 
 

Money market funds (a)
$
13,685

 

 

 
13,685

Investments in marketable securities (b)
126,687

 
4,844

 

 
131,531

Derivative financial instruments - assets (c)

 
1,763

 

 
1,763

Derivative financial instruments - liabilities

 
(3,330
)
 

 
(3,330
)
Total
$
140,372

 
$
3,277

 
$

 
$
143,649

December 31, 2013
 

 
 

 
 

 
 

Money market funds (a)
$
27,710

 

 

 
27,710

Investments in marketable securities (b)
124,921

 
4,575

 

 
129,496

Derivative financial instruments - assets (c)

 
2,495

 

 
2,495

Derivative financial instruments - liabilities

 
(2,013
)
 

 
(2,013
)
Total
$
152,631

 
$
5,057

 
$

 
$
157,688

                                    
(a)  
Included in cash and cash equivalents on the condensed consolidated balance sheets.
(b)
Level 1 investments primarily consist of diversified corporate bond funds.  The Level 2 security represents one investment in a corporate bond.  All investments are 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.  As of September 30, 2014 , 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.
 
Carrying values and fair values of financial instruments that are not carried at fair value are as follows (amounts in thousands):
 
September 30, 2014
 
December 31, 2013
Long term debt, including current portion:
 

 
 

Carrying value
$
1,635,245

 
$
1,581,264

Fair value (a)
1,662,224

 
1,667,671

                                    
(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.
 
(10)                                  Restructuring Charges
 
In connection with the Security Networks Acquisition, management approved a restructuring plan to transition Security Networks’ operations in West Palm Beach and Kissimmee, Florida to Dallas, Texas (the “2013 Restructuring Plan”).  The 2013 Restructuring Plan provides certain employees with a severance package that entitles them to receive benefits upon completion of the transition in 2014.  Severance costs related to the 2013 Restructuring Plan were recognized ratably over the future service period.  During the three and nine months ended September 30, 2014 , the Company recorded $51,000 and $969,000 , respectively, of restructuring charges related to employee termination benefits under the 2013 Restructuring Plan. During the three and nine months ended September 30, 2013 , the Company recorded $402,000 of restructuring charges related to employee termination benefits under the 2013 Restructuring Plan. The transition of Security Networks' operations to Dallas was completed in the second quarter of 2014.
 

13


In 2008 through 2010, the Company completed a restructuring plan (the “2008 Restructuring Plan”) to align the Company’s organization with its strategic goals and how it operated, managed and sold its services.  The 2008 Restructuring Plan included severance costs from labor cost mitigation measures undertaken across all of the businesses and facility costs in conjunction with the consolidation of certain facilities in the United Kingdom and the closing of the Company’s Mexico operations.
 
The following tables provide the activity and balances of the Company’s restructuring plans (amounts in thousands):
 
December 31, 2013
 
Additions
 
Payments
 
Other
 
September 30, 2014
2013 Restructuring Plan
 

 
 

 
 

 
 
 
 

Severance and retention
$
1,570

 
969

 
(2,271
)
 

 
268

 
 
 
 
 
 
 
 
 
 
2008 Restructuring Plan
 

 
 

 
 

 
 
 
 

Excess facility costs
$
141

 

 

 

 
141

     
 
December 31, 2012
 
Additions
 
Payments
 
Other
 
September 30, 2013
2013 Restructuring Plan
 
 
 
 
 
 
 
 
 
Severance and retention
$

 
402

 

 
492

(a)
894

 
 
 
 
 
 
 
 
 
 
2008 Restructuring Plan
 

 
 

 
 

 
 
 
 

Excess facility costs
$
141

 

 

 

 
141

                                    
(a)          Amount was recorded upon the acquisition of Security Networks.

(11)                           Stockholders’ Equity
 
Common Stock
 
The following table presents the activity in Ascent Capital’s Series A and Series B common stock for the nine months ended September 30, 2014 :
 
Series A
Common Stock
 
Series B
Common Stock
Balance at December 31, 2013
13,672,674

 
384,212

Issuance of restricted stock
24,863

 

Restricted stock cancelled for forfeitures and tax withholding
(8,099
)
 

Stock option exercises
20,562

 

Repurchases and retirements of Series A shares
(313,609
)
 

Balance at September 30, 2014
13,396,391

 
384,212

 

14


Accumulated Other Comprehensive Income (Loss)
 
The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the period presented (amounts in thousands):
 
Foreign
currency
translation
adjustments
 
Unrealized
  holding
  gains
  and losses on
marketable
securities, net
 
Unrealized
  gains and
losses on
  derivative
instruments,
net (a)
 
Accumulated
other
comprehensive
income (loss)
As of December 31, 2013
$
167

 
1,498

 
74

 
1,739

Loss through Accumulated other comprehensive income (loss)
(107
)
 
(1,500
)
 
(7,617
)
 
(9,224
)
Reclassifications of loss into Net loss

 

 
5,833

 
5,833

As of September 30, 2014
$
60

 
(2
)
 
(1,710
)
 
(1,652
)
                                    
(a)  
Amounts reclassified into net income are included in Interest expense on the condensed consolidated statement of operations.  See note 8, Derivatives, for further information.
 
(12)    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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Weighted average Series A and Series B shares — basic and diluted
13,543,444

 
14,025,621

 
13,660,335

 
13,936,235

 
For the three and nine months ended September 30, 2014 , diluted shares outstanding excluded the effect of 1,496,708 stock options and unvested restricted stock awards because their inclusion would have been anti-dilutive.  For the three and nine months ended September 30, 2013 , there were 1,521,358 anti-dilutive outstanding securities.

(13)                           Commitments, Contingencies and Other Liabilities
 
The Company is involved in litigation and similar claims incidental to the conduct of its business. 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.

(14)                           Subsequent Events
 
On November 10, 2014, the Company announced the Board of Directors' authorization of an increase of $25,000,000 to the Company's stock repurchase program. The Company may purchase shares of its Series A Common Stock or shares of Ascent Capital's Series B common stock, par value $0.01 per share, under the increased program.


15


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, integration of acquired assets and businesses, 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:
 
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;
the development of new services or service innovations by competitors;
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;
integration of acquired assets and businesses, including Security Networks;
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, including the phase-out of 2G networks by cellular carriers;
the trend away from the use of public switched telephone network lines and resultant increase in servicing costs associated with alternative methods of communication;
the operating performance of Monitronics’ network, including the potential for service disruptions at both the main monitoring facility and back-up monitoring facility due to acts of nature or technology deficiencies;
the outcome of any pending, threatened, or future litigation, including potential liability for failure to respond adequately to alarm activations;
the 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;
the availability and terms of capital, including the ability of Monitronics to obtain additional funds to grow its business;
Monitronics’ high degree of leverage and the restrictive covenants governing its indebtedness; and
availability of qualified personnel.
 
For additional risk factors, please see Part I, Item 1A, Risk Factors, in the 2013 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 2013 Form 10-K.



16

Table of Contents

Overview
 
Ascent Capital Group, Inc. is a holding company and its assets primarily consist of its wholly-owned subsidiary, Monitronics International, Inc.
 
The Monitronics business provides security alarm monitoring and related services to residential and business subscribers throughout the United States and parts of Canada.  On August 16, 2013, Monitronics acquired all of the equity interests of Security Networks LLC (“Security Networks”) and certain affiliated entities (the “Security Networks Acquisition”). 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 monthly recurring revenues under security alarm monitoring contracts purchased from independent dealers in its exclusive nationwide network.
 
Ascent Capital’s attrition analysis and results of operations for the three and nine months ended September 30, 2014 include the operations of the Security Networks business.
 
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, 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 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 to Monitronics the cost paid to acquire the contract. To help ensure the dealer’s obligation to Monitronics, Monitronics typically maintains a dealer funded holdback reserve ranging from 5-10% of subscriber accounts in the guarantee period.  In some cases, the amount of the holdback liability may be less than actual attrition experience.
 
The table below presents subscriber data for the twelve months ended September 30, 2014 and 2013 :
 
 
 
Twelve Months Ended
September 30,
 
 
 
2014
 
2013
 
Beginning balance of accounts
 
1,041,740

 
717,488

 
Accounts acquired
 
155,568

 
437,860

 
Accounts canceled
 
(132,153
)
 
(106,859
)
 
Canceled accounts guaranteed by dealer and acquisition adjustments (a)
 
(8,014
)
(b)
(6,749
)
(c)
Ending balance of accounts
 
1,057,141

 
1,041,740

 
Monthly weighted average accounts
 
1,049,454

 
847,673

 
Attrition rate
 
(12.6
)%
 
(12.6
)%
 
                                    
(a)
Includes canceled accounts that are contractually guaranteed to be refunded from holdback.
(b)
Includes a net increase of 1,385 subscriber accounts related to the Security Networks Acquisition. These acquisition adjustments include a favorable adjustment of 1,503 accounts associated with multi-site subscribers that were considered single accounts prior to the completion of the Security Networks integration in April 2014. The favorable adjustment was partially offset by 118 subscriber accounts that were proactively canceled in October 2013 because they were active with both Monitronics and Security Networks. 
(c)
Includes 1,946 subscriber accounts that were proactively canceled during the third quarter of 2013 because they were active with both Monitronics and Security Networks.
 

17

Table of Contents

Monitronics analyzes its attrition by classifying accounts into annual pools based on the year of acquisition.  Monitronics then tracks the number of accounts that cancel as a percentage of the initial number of accounts acquired for each pool for each year subsequent to its acquisition.  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.

Accounts Acquired
 
During the three and nine months ended September 30, 2014 , Monitronics acquired 43,602 and 118,227 subscriber accounts, respectively. Acquired contracts for the three months ended September 30, 2014 reflect bulk buy purchases of approximately 2,500 subscriber accounts. Acquired contracts for the nine months ended September 30, 2014 reflect bulk buy purchases of approximately 5,400 subscriber accounts. During the three and nine months ended September 30, 2013 , Monitronics acquired 37,109 and 113,302 subscriber accounts, respectively, without giving effect to the Security Networks Acquisition.  Acquired contracts for the nine months ended September 30, 2013 reflect bulk buys of approximately 18,200 accounts purchased in the second quarter of 2013. There were no bulk purchases during the three months ended September 30, 2013.

Acquired contracts for the twelve months ended September 30, 2013 includes 203,898 accounts acquired in the Security Networks Acquisition, which was completed on August 16, 2013, and approximately 111,200 accounts purchased in various bulk buys throughout the period. 
 
Recurring monthly revenue ("RMR") acquired during the three and nine months ended September 30, 2014 was approximately $2,007,000 and $5,406,000, respectively. RMR acquired during the three and nine months ended September 30, 2013 was approximately $1,701,000 and $5,068,000, respectively, without giving effect to the Security Networks Acquisition.

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, dealer network and other intangible assets), restructuring charges, stock-based 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.



18

Table of Contents

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
 
2014
 
2013
 
2014
 
2013
 
Net revenue
 
$
136,027

 
115,844

 
$
403,587

 
$
318,275

 
Cost of services
 
24,835

 
20,155

 
69,907

 
50,951

 
Selling, general, and administrative
 
24,336

 
23,870

 
77,609

 
65,116

 
Amortization of subscriber accounts, dealer network and other intangible assets
 
64,341

 
55,746

 
189,382

 
146,059

 
Restructuring charges
 
51

 
402

 
969

 
402

 
Interest expense
 
(29,894
)
 
(26,022
)
 
(87,761
)
 
(66,650
)
 
Income tax benefit (expense) from continuing operations
 
(1,849
)
 
3,571

 
(5,207
)
 
1,883

 
Net loss from continuing operations
 
(10,992
)
 
(7,655
)
 
(30,881
)
 
(5,129
)
 
Net loss
 
(11,125
)
 
(7,738
)
 
(31,135
)
 
(4,913
)
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA   (a)
 
 

 
 

 
 
 
 
 
Monitronics business Adjusted EBITDA
 
$
91,138

 
77,649

 
$
270,674

 
$
217,472

 
Corporate Adjusted EBITDA
 
(2,558
)
 
(1,990
)
 
(5,604
)
 
711

 
Total Adjusted EBITDA
 
$
88,580

 
75,659

 
$
265,070

 
$
218,183

 
Adjusted EBITDA as a percentage of Net revenue
 
 

 
 

 
 
 
 
 
Monitronics business
 
67.0
 %

67.0
 %

67.1
 %

68.3
%
 
Corporate
 
(1.9
)%
 
(1.7
)%

(1.4
)%

0.2
%
 
                                    
(a)  
See reconciliation to net loss from continuing operations below.

Net revenue.   Net revenue increased $20,183,000 , or 17.4% , and $85,312,000 , or 26.8% , for the three and nine months ended September 30, 2014 , 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 increase in average RMR per subscriber.  The growth in subscriber accounts reflects the acquisition of over 200,000 accounts from the Security Networks Acquisition in August 2013 and the acquisition of over 150,000 accounts through Monitronics’ authorized dealer program subsequent to September 30, 2013 .  Average monthly revenue per subscriber increased from $40.70 as of September 30, 2013 to $41.36 as of September 30, 2014 . Net revenue for the three and nine months ended September 30, 2013 also reflects the negative impact of an approximate $2,500,000 fair value adjustment that reduced deferred revenue acquired in the Security Networks Acquisition.
 
Cost of services .  Cost of services increased $4,680,000 , or 23.2% , and $18,956,000 , or 37.2% , for the three and nine months ended September 30, 2014 , respectively, as compared to the corresponding prior year periods.  The increase is primarily attributable to subscriber growth as explained above, as well as increases in cellular and service costs.  Cellular costs have increased due to more accounts being monitored across the cellular network, which often include interactive and home automation services.  This has also resulted in higher service costs as existing subscribers upgrade their systems.  Cost of services as a percent of net revenue increased from 17.4% and 16.0% for the three and nine months ended September 30, 2013 , respectively, to 18.3% and 17.3% for the three and nine months ended September 30, 2014 , respectively.
 
Selling, general and administrative.  Selling, general and administrative costs (“SG&A”) increased $466,000 , or 2.0% , and $12,493,000 , or 19.2% , for the three and nine months ended September 30, 2014 , respectively, as compared to the corresponding prior year periods.  The increases are a result of higher Monitronics SG&A costs, which are attributable to subscriber growth over the last twelve months. In addition, for the nine months ended September 30, 2014, the Company incurred redundant staffing and operating costs at Monitronics' Dallas, Texas headquarters in advance of transitioning Security Networks' operations from Florida to Texas. This transition was completed in April 2014.  Also, professional fees incurred in relation to this transition effort totaled $2,182,000 for the nine months ended September 30, 2014 , as compared to $535,000 for the corresponding prior year period. SG&A as a percent of net revenue decreased from 20.6% and 20.5% for the three and nine

19


months ended September 30, 2013 , respectively, to 17.9% and 19.2% for the three and nine months ended September 30, 2014 , respectively.
 
Amortization of subscriber accounts, dealer network and other intangible assets .  Amortization of subscriber accounts, dealer network and other intangible assets increased $8,595,000 and $43,323,000 for the three and nine months ended September 30, 2014 , respectively, as compared to the corresponding prior year periods.  The increase is attributable to amortization of subscriber accounts acquired subsequent to September 30, 2013 and amortization of approximately $14,269,000 and $44,952,000 for the three and nine months ended September 30, 2014 , respectively, related to the definite lived intangible assets acquired in the Security Networks Acquisition.
 
Restructuring charges.  In connection with the Security Networks Acquisition, management approved a restructuring plan to transition Security Networks’ operations in West Palm Beach and Kissimmee, Florida to Dallas, Texas (the “2013 Restructuring Plan”).  The 2013 Restructuring Plan provides certain employees with a severance package that entitles them to receive benefits upon completion of the transition in 2014.  Severance costs related to the 2013 Restructuring Plan were recognized ratably over the future service period.  During the three and nine months ended September 30, 2014 , the Company recorded $51,000 and $969,000 , respectively, of restructuring charges related to employee termination benefits under the 2013 Restructuring Plan. During the three and nine months ended September 30, 2013 , the Company recorded $402,000 of restructuring charges related to employee termination benefits under the 2013 Restructuring Plan. The transition of Security Networks' operations to Dallas was completed in the second quarter of 2014.
 
In 2008 through 2010, the Company completed a restructuring plan (the “2008 Restructuring Plan”) to align the Company’s organization with its strategic goals and how it operated, managed and sold its services.  The 2008 Restructuring Plan included severance costs from labor cost mitigation measures undertaken across all of the businesses and facility costs in conjunction with the consolidation of certain facilities in the United Kingdom and the closing of the Company’s Mexico operations.
 
The following tables provide the activity and balances of the Company’s restructuring plans (amounts in thousands):
 
December 31, 2013
 
Additions
 
Payments
 
Other
 
September 30, 2014
2013 Restructuring Plan
 

 
 

 
 

 
 
 
 

Severance and retention
$
1,570

 
969

 
(2,271
)
 

 
268

 
 
 
 
 
 
 
 
 
 
2008 Restructuring Plan
 

 
 

 
 

 
 
 
 

Excess facility costs
$
141

 

 

 

 
141

     
 
December 31, 2012
 
Additions
 
Payments
 
Other
 
September 30, 2013
2013 Restructuring Plan
 
 
 
 
 
 
 
 
 
Severance and retention
$

 
402

 

 
492

(a)
894

 
 
 
 
 
 
 
 
 
 
2008 Restructuring Plan
 

 
 

 
 

 
 
 
 

Excess facility costs
$
141

 

 

 

 
141

                                    
(a)          Amount was recorded upon the acquisition of Security Networks.
 
Interest expense.   Interest expense increased $3,872,000 and $21,111,000 for the three and nine months ended September 30, 2014 , respectively, as compared to the corresponding prior year periods. The increases in interest expense is primarily attributable to increases in the Company’s consolidated debt balance related to the borrowings incurred to fund the Security Networks Acquisition.  For the nine months ending September 30, 2014, the increase is partially offset by the favorable repricing of Monitronics credit facility interest rates effective March 25, 2013.
 
Income tax benefit (expense) from continuing operations.   The Company had pre-tax loss from continuing operations of $9,143,000 and $25,674,000 for the three and nine months ended September 30, 2014 , respectively, and income tax expense of $1,849,000 and $5,207,000 for the three and nine months ended September 30, 2014 , respectively.  The Company had pre-tax loss from continuing operations of $11,226,000 and $7,012,000 for the three and nine months ended September 30, 2013 , respectively, and an income tax benefit of $3,571,000 and $1,883,000 for the three and nine months ended September 30, 2013 .  Income tax expense for the three and nine months ended September 30, 2014 is attributable to Monitronics’ state tax expense and the deferred tax impact from amortization of deductible goodwill related to the Security Networks Acquisition.  Income tax benefit for the three and nine months ended September 30, 2013 is primarily attributable to the reduction in valuation

20


allowance as a result of acquisition accounting for the Security Networks Acquisition, partially offset by Monitronics state tax expense and the deferred tax impact from amortization of deductible goodwill related to the Security Networks Acquisition.

Adjusted EBITDA. The following table provides a reconciliation of total Adjusted EBITDA to net loss from continuing operations for the periods indicated (amounts in thousands):
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
Total Adjusted EBITDA
 
$
88,580

 
75,659

 
$
265,070

 
218,183

Amortization of subscriber accounts, dealer network and other intangible assets
 
(64,341
)
 
(55,746
)
 
(189,382
)
 
(146,059
)
Depreciation
 
(2,525
)
 
(2,305
)
 
(7,851
)
 
(6,360
)
Stock-based compensation
 
(1,734
)
 
(1,752
)
 
(5,141
)
 
(5,535
)
Restructuring charges
 
(51
)
 
(402
)
 
(969
)
 
(402
)
Security Networks acquisition related costs
 

 
(1,032
)
 

 
(2,470
)
Security Networks integration related costs
 

 
(535
)
 
(2,182
)
 
(535
)
Interest income
 
822

 
909

 
2,542

 
2,816

Interest expense
 
(29,894
)
 
(26,022
)
 
(87,761
)
 
(66,650
)
Income tax benefit (expense) from continuing operations
 
(1,849
)
 
3,571

 
(5,207
)
 
1,883

Net loss from continuing operations
 
$
(10,992
)
 
(7,655
)
 
$
(30,881
)
 
(5,129
)
 
Adjusted EBITDA increased $12,921,000 , or 17.1% , and $46,887,000 , or 21.5% , for the three and nine months ended September 30, 2014 , respectively, as compared to the corresponding prior year periods.  The increase in Adjusted EBITDA was primarily due to revenue growth.  Monitronics Adjusted EBITDA was $91,138,000 and $270,674,000 for the three and nine months ended September 30, 2014 , respectively, as compared to $77,649,000 and $217,472,000 for the three and nine months ended September 30, 2013 , respectively.

Liquidity and Capital Resources
 
At September 30, 2014 , we had $50,594,000 of cash and cash equivalents, $91,000 of current restricted cash, and $131,531,000 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.
 
Additionally, our other source of funds is our cash flows from operating activities which are primarily generated from the operations of Monitronics.  During the nine months ended September 30, 2014 and 2013 , our cash flow from operating activities was $188,168,000 and $169,651,000 , 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 nine months ended September 30, 2014 and 2013 , the Company used cash of $202,429,000 and $174,527,000 , respectively, to fund subscriber account acquisitions, net of holdback and guarantee obligations.  In addition, during the nine months ended September 30, 2014 and 2013 , the Company used cash of $5,035,000 and $6,314,000 , respectively, to fund its capital expenditures. 

On September 30, 2014, Monitronics borrowed $27,500,000 on the Credit Facility revolver to funds its October 1, 2014 interest payment due under the Senior Notes of approximately $26,691,000.
  
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. On November 14, 2013, the Company’s Board of Directors authorized the repurchase of an additional $25,000,000 of its shares of Series A Common Stock.  During the nine months ended September 30, 2014 , the Company purchased 313,609 shares of Series A Common Stock pursuant to these authorizations for approximately $22,475,000 .  On November 10, 2014, the Company announced the Board of Directors' authorization of an increase of $25,000,000 to the Company's stock repurchase program, which combined with the remaining availability under the Company's existing stock repurchase program will enable the Company to purchase up to an

21


aggregate $28,150,000 of Series A Common Stock. The Company may also purchase shares of its Series B Common Stock, par value $0.01 per share, under the increased program.
 
In considering our liquidity requirements for 2014, we evaluated our known future commitments and obligations.  We will require the availability of funds to finance the strategy of our primary operating subsidiary, Monitronics, which is to grow through the acquisition of subscriber accounts.  Additionally, as a result of announcements by AT&T and certain other telecommunication providers that they intend to discontinue 2G services in the near future, we expect to incur expenditures over the next few years as we replace the 2G equipment used in many of our subscribers’ security systems.  Costs incurred and subscriber attrition resulting from the 2G phase-out will, to some extent, be dependent on the level of advance notice received from the telecommunication providers.  We expect costs associated with the phase-out to be relatively small in 2014 and then increase in 2015 and 2016.  We 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 of Monitronics’ Credit Facility revolver, under which Monitronics could borrow an additional $147,900,000 as of September 30, 2014 .  Based on this analysis, we expect that cash on hand, cash flow generated from operations and borrowings under the Monitronics’ Credit Facility will provide sufficient liquidity, given our anticipated current and future requirements.
 
The existing long-term debt of the Company at September 30, 2014 includes the principal balance of $1,666,190,000 under its Convertible Notes, Senior Notes, Credit Facility, and Credit Facility revolver.  The Convertible Notes have an outstanding principal balance of $103,500,000 as of September 30, 2014 and mature July 15, 2020.  The Senior Notes have an outstanding principal balance of $585,000,000 as of September 30, 2014 and mature on April 1, 2020.  The Credit Facility term loans have an outstanding principal balance of $900,590,000 as of September 30, 2014 and require principal payments of approximately $2,292,000 per quarter with the remaining outstanding balance becoming due on March 23, 2018.  The Credit Facility revolver has an outstanding balance of $77,100,000 as of September 30, 2014 and becomes due on December 22, 2017.
 
We may seek external equity or debt financing in the event of any new investment opportunities, additional capital expenditures or our operations requiring 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 or at all.  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.

22



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 (a)
 
Variable Rate
Debt
 
Fixed Rate
Debt
 
Total
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Remainder of 2014
 
$

 
$
2,292

 
$

 
$
2,292

2015
 

 
9,166

 

 
9,166

2016
 

 
9,166

 

 
9,166

2017
 

 
86,266

 

 
86,266

2018
 
1,567

 
870,800

 

 
872,367

2019
 

 

 

 

Thereafter
 

 

 
688,500

 
688,500

Total
 
$
1,567

 
$
977,690

 
$
688,500

 
$
1,667,757

                                    
(a)  
The derivative financial instruments reflected in this column include four interest rate swaps, all 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 have been effectively converted from a variable rate to a weighted average fixed rate of 5.06% .  See notes 7, 8 and 9 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 September 30, 2014 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 September 30, 2014 that has materially affected, or is reasonably likely to materially affect, its internal controls over financial reporting.


23

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 September 30, 2014 :
 
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
 
 
7/1/2014 - 7/31/2014
 
5,597

 
(2)
 
$
64.51

 

 
 
 
(1)
8/1/2014 - 8/31/2014
 
38

 
(2)
 
64.96

 

 
 
 
 
9/1/2014 - 9/30/2014
 
1,815

 
(2)
 
61.34

 

 
 
 
 
Total
 
7,450

 
 
 
$
63.74

 

 
 
 
 
                                    
(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.  On November 14, 2013, the Company’s Board of Directors authorized the repurchase of an additional $25,000,000 of its Series A Common Stock. As of September 30, 2014 , 817,996 shares of Series A Common Stock had been purchased, at an average price paid of $57.27 per share, pursuant to these authorizations.  On November 10, 2014, the Company announced the Board of Directors' authorization of an increase of $25,000,000 to the Company's stock repurchase program, which combined with the remaining availability under the Company's existing stock repurchase program will enable the Company to purchase up to an aggregate $28,150,000 of Series A Common Stock. The Company may also purchase shares of its Series B Common Stock, par value $0.01 per share, under the increased program.
 
(2)
Includes shares withheld in payment of withholding taxes by certain of our employees upon vesting of their restricted share awards.
 
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):
 
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.
**           Filed or furnished, as the case may be, herewith.


24

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:
November 10, 2014
 
By:
/s/ William R. Fitzgerald
 
 
 
 
William R. Fitzgerald
 
 
 
 
Chairman of the Board, Director and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
Date:
November 10, 2014
 
By:
/s/ Michael R. Meyers
 
 
 
 
Michael R. Meyers
 
 
 
 
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)


25

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):
 
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.
**           Filed or furnished, as the case may be, herewith.


26


Exhibit 31.1
 
CERTIFICATION
 
I, William R. Fitzgerald, certify that:
 
1.                                       I have reviewed this quarterly report on Form 10-Q of Ascent Capital Group, Inc.;
 
2.                                       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.                                       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
 
a)              designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
b)              designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)               evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
 
d)              disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.                                       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)              all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)              any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
November 10, 2014
 
 
 
 
 
 
 
/s/ William R. Fitzgerald
 
William R. Fitzgerald
 
Chairman, President and Chief Executive Officer
 





Exhibit 31.2
 
CERTIFICATION
 
I, Michael R. Meyers, certify that:
 
1.                                       I have reviewed this quarterly report on Form 10-Q of Ascent Capital Group, Inc.;
 
2.                                       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.                                       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
 
a)              designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
b)              designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)               evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
 
d)              disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.                                       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)              all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)              any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
November 10, 2014
 
 
 
 
 
 
 
/s/ Michael R. Meyers
 
Michael R. Meyers
 
Senior Vice President and Chief Financial Officer
 





Exhibit 32
 
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
 
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Ascent Capital Group, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
 
The Quarterly Report on Form 10-Q for the period ended September 30, 2014 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013 .
 
 
Dated:
November 10, 2014
 
/s/ William R. Fitzgerald
 
 
 
William R. Fitzgerald