Ascent Capital Group, Inc.
Ascent Capital Group, Inc. (Form: 10-Q, Received: 08/10/2015 18:07:28)
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 June 30, 2015
 
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 July 24, 2015 was:

Series A common stock 12,917,554 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)
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
7,925

 
$
12,612

Restricted cash
53

 
18

Marketable securities, at fair value
114,508

 
122,593

Trade receivables, net of allowance for doubtful accounts of $2,233 in 2015 and $2,120 in 2014
13,864

 
13,796

Deferred income tax assets, net
6,346

 
6,346

Prepaid and other current assets
9,095

 
8,546

Assets held for sale

 
18,935

Total current assets
151,791

 
182,846

Property and equipment, net of accumulated depreciation of $35,026 in 2015 and $30,030 in 2014
39,626

 
36,010

Subscriber accounts, net of accumulated amortization of $853,307 in 2015 and $736,824 in 2014
1,409,143

 
1,373,630

Dealer network and other intangible assets, net of accumulated amortization of $64,048 in 2015 and $54,077 in 2014
36,185

 
44,855

Goodwill
563,468

 
527,502

Other assets, net
27,226

 
27,520

Total assets
$
2,227,439

 
$
2,192,363

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
7,912

 
$
6,781

Accrued payroll and related liabilities
4,291

 
4,077

Other accrued liabilities
30,072

 
30,727

Deferred revenue
15,580

 
14,945

Holdback liability
17,952

 
19,046

Current portion of long-term debt
5,500

 
9,166

Liabilities of discontinued operations
6,514

 
6,401

Total current liabilities
87,821

 
91,143

Non-current liabilities:
 

 
 

Long-term debt
1,692,476

 
1,618,324

Long-term holdback liability
4,433

 
5,156

Derivative financial instruments
8,460

 
5,780

Deferred income tax liability, net
17,945

 
15,875

Other liabilities
16,791

 
16,397

Total liabilities
1,827,926

 
1,752,675

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

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

 

Series A common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding 12,918,054 and 13,162,095 shares at June 30, 2015 and December 31, 2014, respectively
129

 
132

Series B common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 384,086 shares both at June 30, 2015 and December 31, 2014
4

 
4

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

 

Additional paid-in capital
1,434,708

 
1,441,291

Accumulated deficit
(1,023,175
)
 
(994,931
)
Accumulated other comprehensive loss, net
(12,153
)
 
(6,808
)
Total stockholders’ equity
399,513

 
439,688

Total liabilities and stockholders’ equity
$
2,227,439

 
$
2,192,363

 

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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net revenue
$
141,543

 
134,696

 
$
279,959

 
267,560

Operating expenses:
 

 
 

 
 
 
 
Cost of services
28,053

 
22,982

 
53,743

 
45,072

Selling, general, and administrative, including stock-based compensation
29,685

 
26,736

 
57,281

 
53,273

Amortization of subscriber accounts, dealer network and other intangible assets
63,526

 
63,261

 
126,667

 
125,041

Depreciation
2,585

 
2,568

 
4,983

 
5,326

Restructuring charges

 
371

 

 
918

Gain on disposal of operating assets
(104
)
 
(69
)
 
(1,154
)
 
(69
)
 
123,745

 
115,849

 
241,520

 
229,561

Operating income
17,798

 
18,847

 
38,439

 
37,999

Other income (expense), net:
 

 
 

 
 
 
 
Interest income
746

 
842

 
1,262

 
1,720

Interest expense
(30,893
)
 
(29,094
)
 
(60,674
)
 
(57,867
)
Refinancing expense
(4,468
)
 

 
(4,468
)
 

Other income, net
351

 
631

 
1,277

 
1,617

 
(34,264
)
 
(27,621
)
 
(62,603
)
 
(54,530
)
Loss from continuing operations before income taxes
(16,466
)
 
(8,774
)
 
(24,164
)
 
(16,531
)
Income tax expense from continuing operations
(2,030
)
 
(1,737
)
 
(4,007
)
 
(3,358
)
Net loss from continuing operations
(18,496
)
 
(10,511
)
 
(28,171
)
 
(19,889
)
Discontinued operations:
 

 
 

 
 
 
 
Earnings (loss) from discontinued operations
87

 
233

 
(73
)
 
(121
)
Income tax expense from discontinued operations

 

 

 

Earnings (loss) from discontinued operations, net of income tax
87

 
233

 
(73
)
 
(121
)
Net loss
(18,409
)
 
(10,278
)
 
(28,244
)
 
(20,010
)
Other comprehensive income (loss):
 

 
 

 
 
 
 
Foreign currency translation adjustments
346

 
143

 
69

 
198

Unrealized holding gains (losses) on marketable securities, net
(884
)
 
(199
)
 
(1,953
)
 
146

Unrealized gain (loss) on derivative contracts, net
1,002

 
(4,468
)
 
(3,461
)
 
(6,139
)
Total other comprehensive income (loss), net of tax
464

 
(4,524
)
 
(5,345
)
 
(5,795
)
Comprehensive loss
$
(17,945
)
 
(14,802
)
 
$
(33,589
)
 
(25,805
)
 
 
 
 
 
 
 
 
Basic and diluted income (loss) per share:
 

 
 

 
 
 
 
Continuing operations
$
(1.41
)
 
(0.77
)
 
$
(2.14
)
 
(1.45
)
Discontinued operations
0.01

 
0.02

 

 
(0.01
)
Net loss
$
(1.40
)
 
(0.75
)
 
$
(2.14
)
 
(1.46
)
 

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Amounts in thousands
(unaudited)
 
Six Months Ended 
 June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(28,244
)
 
(20,010
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Loss from discontinued operations, net of income tax
73

 
121

Amortization of subscriber accounts, dealer network and other intangible assets
126,667

 
125,041

Depreciation
4,983

 
5,326

Stock-based compensation
3,182

 
3,407

Deferred income tax expense
2,050

 
1,691

Gain on disposal of operating assets
(1,154
)
 
(69
)
Long-term debt amortization
2,426

 
2,145

Refinancing expense
4,468

 

Other non-cash activity, net
8,805

 
5,658

Changes in assets and liabilities:
 

 
 

Trade receivables
(4,440
)
 
(3,967
)
Prepaid expenses and other assets
(2,195
)
 
1,566

Payables and other liabilities
(6,342
)
 
(5,019
)
Operating activities from discontinued operations, net
40

 
(960
)
Net cash provided by operating activities
110,319

 
114,930

Cash flows from investing activities:
 

 
 

Capital expenditures
(8,168
)
 
(3,212
)
Cost of subscriber accounts acquired
(129,544
)
 
(126,640
)
Cash paid for acquisition, net of cash acquired
(56,343
)
 

Purchases of marketable securities
(24,448
)
 
(899
)
Proceeds from sale of marketable securities
31,004

 

Increase in restricted cash
(35
)
 
(72
)
Proceeds from the disposal of operating assets
20,173

 
241

Other investing activities

 
(347
)
Net cash used in investing activities
(167,361
)
 
(130,929
)
Cash flows from financing activities:
 

 
 

Proceeds from long-term debt
674,050

 
75,200

Payments on long-term debt
(605,990
)
 
(57,783
)
Payments of financing costs
(6,232
)
 

Stock option exercises

 
696

Purchases and retirement of common stock
(9,473
)
 
(22,154
)
Net cash provided by (used in) financing activities
52,355

 
(4,041
)
Net decrease in cash and cash equivalents
(4,687
)
 
(20,040
)
Cash and cash equivalents at beginning of period
12,612

 
44,701

Cash and cash equivalents at end of period
$
7,925

 
24,661

Supplemental cash flow information:
 

 
 

State taxes paid, net
$
3,485

 
2,642

Interest paid
55,149

 
52,859


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
 
Loss
 
Equity
Balance at December 31, 2014
$

 
132

 
4

 

 
1,441,291

 
(994,931
)
 
(6,808
)
 
439,688

Net loss

 

 

 

 

 
(28,244
)
 

 
(28,244
)
Other comprehensive loss

 

 

 

 

 

 
(5,345
)
 
(5,345
)
Stock-based compensation

 

 

 

 
3,448

 

 

 
3,448

Value of shares withheld for minimum tax liability

 


 

 

 
(561
)
 

 

 
(561
)
Purchases and retirement of common stock

 
(3
)
 

 

 
(9,470
)
 

 

 
(9,473
)
Balance at June 30, 2015
$

 
129

 
4

 

 
1,434,708

 
(1,023,175
)
 
(12,153
)
 
399,513

 
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
 
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 February 23, 2015, Monitronics acquired LiveWatch Security, LLC ("LiveWatch"), a Do-It-Yourself home security firm, offering professionally monitored security services through a direct-to-consumer sales channel (the "LiveWatch Acquisition"). On August 16, 2013, Monitronics acquired all of the equity interest of Security Networks LLC ("Security Networks") and certain affiliated entities (the "Security Networks Acquisition").

The unaudited interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s (the “SEC”) Regulation S-X. Accordingly, it does not include all of the information required by generally accepted accounting principles in the United States (“U.S. GAAP”) for complete financial statements. The Company’s unaudited condensed consolidated financial statements as of June 30, 2015 , and for the three and six months ended June 30, 2015 and 2014 , 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, 2014 , filed with the SEC on February 27, 2015 (the “2014 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. In the third quarter of 2015, the FASB decided to defer the effective date of the standard to annual and interim periods beginning after December 15, 2017. Early adoption will be permitted 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)    LiveWatch Acquisition
 
On February 23, 2015 (the "Closing Date"), Monitronics acquired LiveWatch for a purchase price of approximately $61,550,000 (the "LiveWatch Purchase Price").  The LiveWatch Purchase Price includes approximately $3,988,000 of cash transferred directly to LiveWatch to fund transaction bonuses payable to LiveWatch employees as of the Closing Date. This cash is not included in the fair value of consideration transferred for the LiveWatch Acquisition. The LiveWatch Purchase Price also includes post-closing adjustments of $435,000 which were paid in the third quarter of 2015. The LiveWatch Acquisition was funded by borrowings from Monitronics' revolving credit facility, as well as cash contributions from Ascent Capital.

In connection with the LiveWatch Acquisition, Monitronics entered into employment agreements with certain key members of the LiveWatch management team which provide for retention bonuses of $6,000,000 (the "LiveWatch Retention Bonuses") to be paid on the second anniversary of the Closing Date, and performance based bonus arrangements payable on the fourth anniversary of the Closing Date, assuming certain performance metrics are met by LiveWatch during the first four years following the Closing Date (the "LiveWatch Performance Bonuses"). The LiveWatch Performance Bonuses are estimated to yield an aggregate payout of approximately $8,500,000 . The LiveWatch Retention Bonuses and LiveWatch Performance

6


Bonuses (together, the "LiveWatch Acquisition Contingent Bonuses") are contingent upon the continued employment of the key members of the LiveWatch management team. As such, the LiveWatch Acquisition Contingent Bonuses are expensed ratably over the service period based on the estimated value of the payouts. For the three and six months ended June 30, 2015 , the Company recognized $1,276,000 and $1,795,000 , respectively, related to the LiveWatch Acquisition Contingent Bonuses, which are included in Selling, general and administrative expense in the condensed consolidated statements of operations and comprehensive income (loss).
 
The LiveWatch Acquisition was accounted for as a business combination utilizing the acquisition method in accordance with FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations .  Under the acquisition method of accounting, the fair value of the consideration transferred has been allocated to LiveWatch's tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary estimates of fair value as follows (amounts in thousands):
Cash
$
784

Trade receivables
273

Other current assets
617

Property and equipment
362

Subscriber accounts
24,900

Other intangible asset
1,300

Goodwill
35,966

Current liabilities
(6,640
)
Fair value of consideration transferred
$
57,562


The Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 (File No. 001-34176), filed with the SEC on May 8, 2015 (the "March 2015 10-Q"), included an initial allocation of the purchase price. Subsequent to filing the Company's March 2015 10-Q, an adjustment was made to increase goodwill by $457,000 . The increase to goodwill is primarily related to the increase in the LiveWatch Purchase Price as discussed above. Other adjustments relate to working capital adjustments to LiveWatch's acquired other current assets and liabilities.

The preliminary estimates of the fair value of assets acquired and liabilities assumed are based on available information as of the date of this report and may be revised as additional information becomes available, which primarily includes the finalization of the valuation of assets and liabilities acquired.

Goodwill in the amount of $35,966,000 was recognized in connection with the LiveWatch Acquisition and was calculated as the excess of the consideration transferred over the net assets recognized and represents the value to Monitronics for LiveWatch's recurring revenue and cash flow streams and its diversified business model and marketing channel. All of the goodwill acquired in the LiveWatch Acquisition is estimated to be deductible for tax purposes.

The subscriber accounts acquired in the LiveWatch Acquisition are amortized using the 14 -year 235% declining balance method. The other intangible asset acquired, which represents LiveWatch's trademark asset, is amortized on a straight-line basis over its estimated useful life of 10 years .

As of June 30, 2015 , the Company incurred $946,000 of legal and professional services expense and other costs related to the LiveWatch Acquisition, which are included in Selling, general and administrative expense in the condensed consolidated statements of operations and comprehensive income (loss).

Ascent Capital's results of operations for the three and six months ended June 30, 2015 include the operations of LiveWatch from the Closing Date. The effect of the LiveWatch Acquisition was not material to the Company's consolidated results for the periods presented and, accordingly, proforma financial disclosures have not been presented.
 

7


(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):
 
Six Months Ended June 30,
 
2015
 
2014
Beginning balance
$
122,593

 
129,496

Purchases
24,448

 
899

Sales at cost basis (a)
(30,580
)
 

Realized and unrealized gains (losses), net
(1,953
)
 
146

Ending balance
$
114,508

 
130,541

 
(a)          For the six months ended June 30, 2015 , total proceeds from the sale of marketable securities were $31,004,000 , resulting in a pre-tax gain of $424,000 .
 
The following table presents the changes in Accumulated other comprehensive 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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Accumulated other comprehensive income (loss)
 

 
 

 
 
 
 
Beginning balance
$
(2,857
)
 
1,843

 
$
(1,788
)
 
1,498

Unrealized gains (losses), net of income tax of $0
(810
)
 
(199
)
 
(1,529
)
 
146

Realized gain recognized into earnings, net of income tax of $0 (a)
(74
)
 

 
(424
)
 

Ending balance
$
(3,741
)
 
1,644

 
$
(3,741
)
 
1,644

 
(a)          The realized gain of the sale of marketable securities for the three and six months ended June 30, 2015 is included in Other income, net on the consolidated statements of operations and comprehensive income (loss).

(5)      Assets Held for Sale

In the first and second quarters of 2015, the Company completed sales of assets held for sale with a total net book value of $18,935,000 , for gains of approximately $1,151,000 . As of June 30, 2015 , the Company had no assets classified as held for sale.

(6)      Other Accrued Liabilities
 
Other accrued liabilities consisted of the following (amounts in thousands):
 
June 30,
2015
 
December 31,
2014
Interest payable
$
15,493

 
$
15,594

Income taxes payable
2,091

 
3,577

Legal accrual
545

 
872

Other
11,943

 
10,684

Total Other accrued liabilities
$
30,072

 
$
30,727



8


(7)    Long-Term Debt
 
Long-term debt consisted of the following (amounts in thousands):
 
June 30,
2015
 
December 31,
2014
Ascent Capital 4.00% Convertible Senior Notes due July 15, 2020
$
79,332

 
$
77,531

Monitronics 9.125% Senior Notes due April 1, 2020
585,233

 
585,251

Monitronics term loans, mature April 9, 2022, LIBOR plus 3.50%, subject to a LIBOR floor of 1.00% (4.50%)
545,946

 

Monitronics term loans, mature March 23, 2018, LIBOR plus 3.25%, subject to a LIBOR floor of 1.00% (4.25%)
400,265

 
894,208

Monitronics $315 million revolving credit facility, matures December 22, 2017, LIBOR plus 3.75%, subject to a LIBOR floor of 1.00% (4.75%)
87,200

 
70,500

 
1,697,976

 
1,627,490

Less current portion of long-term debt
(5,500
)
 
(9,166
)
Long-term debt
$
1,692,476

 
$
1,618,324


Convertible Notes
 
The convertible notes total $103,500,000 in aggregate principal amount, mature on July 15, 2020 and bear interest at 4.00% per annum (the “Convertible Notes”). Interest on the Convertible Notes is payable semi-annually on January 15 and July 15 of each year. The Convertible Notes are convertible, under certain circumstances, into cash, shares of Ascent Capital's Series A Common Stock, par value $0.01 per share (the "Series A Common Stock"), or any combination thereof at Ascent Capital’s election.
 
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 Capital'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 Subtopic 470-20, Debt with Conversion and Other Options , 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 Subtopic 815-40, Contracts in an Entity’s Own Equity


9


The Convertible Notes are presented on the consolidated balance sheet as follows (amounts in thousands):
 
As of
June 30,
2015
 
As of
December 31,
2014
Principal
$
103,500

 
$
103,500

Unamortized discount
(24,168
)
 
(25,969
)
Carrying value
$
79,332

 
$
77,531

 
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 $2,070,000 on the Convertible Notes for the three and six months ended June 30, 2015 and June 30, 2014 , respectively. The Company amortized $912,000 and $ 1,801,000 of the Convertible Notes debt discount into interest expense for the three and six months ended June 30, 2015 , respectively, compared to $825,000 and $1,630,000 for three and six months ended June 30, 2014 , respectively.
 
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 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.
 
Senior Notes
  
The senior notes total $585,000,000 in principal, mature on April 1, 2020 and bear interest at 9.125% per annum (the "Senior Notes").  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 February 17, 2015, Monitronics entered into an amendment (“Amendment No. 4”) with the lenders of its existing senior secured credit agreement dated March 23, 2012, and as amended and restated on August 16, 2013, March 25, 2013 and November 7, 2012 (the “Existing Credit Agreement”).  Amendment No. 4 provided for, among other things, an increase in the commitments under the revolving credit facility in a principal amount of $90,000,000 .

On April 9, 2015, Monitronics entered into Amendment No. 5 (“Amendment No. 5”) to its Existing Credit Agreement. Pursuant to Amendment No. 5, Monitronics completed the issuance of an incremental $550,000,000 senior secured Term Loan

10


B offering at a 0.5% discount with a maturity date of April 9, 2022 (the "2022 Term Loans"). Monitronics used the net proceeds to retire approximately $492,000,000 of its existing term loans due March 2018 (the "2018 Term Loans") and repaid $49,900,000 of its revolving credit facility. Amendment No. 5 (the Existing Credit Agreement together with Amendment No. 4 and Amendment No. 5, the "Credit Facility") also incorporates certain covenant changes, including the removal of the third quarter 2015 step downs of the senior secured and total leverage ratios, both as defined in the Credit Facility.
 
The 2018 Term Loans bear interest at LIBOR plus 3.25% , subject to a LIBOR floor of 1.00% , and mature on March 23, 2018. Interest payments on the 2018 Term Loans are due quarterly with the princpal due at maturity. The 2022 Term Loans bear interest at LIBOR plus 3.50% , subject to a LIBOR floor of 1.00% . Principal payments of approximately $1,375,000 and interest on the term loans are due quarterly on the 2022 Term Loans.  The Credit Facility revolver bears interest at LIBOR plus 3.75% , subject to a LIBOR floor of 1.00% , and matures on December 22, 2017.  There is an annual commitment fee of 0.50% on unused portions of the Credit Facility revolver.  As of June 30, 2015 , $227,800,000 is available for borrowing under the revolving credit facility.
 
At any time after the occurrence of an event of default under the Credit Facility, the lenders may, among other options, declare any amounts outstanding under the Credit Facility immediately due and payable and terminate any commitment to make further loans under the Credit Facility.  In addition, failure to comply with restrictions contained in the Senior Notes could lead to an event of default under the Credit Facility.

The Credit Facility is secured by a pledge of all of the outstanding stock of Monitronics and all of its existing subsidiaries and is guaranteed by all of Monitronics’ existing domestic subsidiaries.  Ascent Capital has not guaranteed any of Monitronics’ obligations under the Credit Facility.
 
As of June 30, 2015 , the Company has deferred financing costs, net of accumulated amortization, of $22,099,000 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.

As a result of Amendment No. 5 to Monitronics Credit Facility, the Company incurred Refinancing expense of $4,468,000 for the three and six months ended June 30, 2015 , which were primarily related to bank arrangement fees and other professional fees incurred to complete the amendment.
 
In order to reduce the financial risk related to changes in interest rates associated with the floating rate term loans under the Credit Facility term loans, Monitronics has entered into interest rate swap agreements with terms similar to the Credit Facility term loans (all outstanding interest rate swap agreements are collectively referred to as the “Swaps”). The Swaps have been designated as effective hedges of the Company’s variable rate debt and qualify for hedge accounting.  As a result of these interest rate swaps, Monitronics' current effective weighted average interest rate on the borrowings under the Credit Facility term loans is 5.15% . See note 8, Derivatives, for further disclosures related to these derivative instruments. 
 
The terms of the Convertible Notes, the Senior Notes and the Credit Facility provide for certain financial and nonfinancial covenants.  As of June 30, 2015 , the Company was in compliance with all required covenants.

As of June 30, 2015 , principal payments scheduled to be made on the Company’s debt obligations are as follows (amounts in thousands):
Remainder of 2015
$
2,750

2016
5,500

2017
92,700

2018
409,284

2019
5,500

2020
694,000

Thereafter
518,375

Total principal payments
$
1,728,109

Less:


Unamortized discounts and premium, net
30,133

Total debt on condensed consolidated balance sheet
$
1,697,976

 

11


(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 nonperformance risk in the fair value measurements.  See note 9, Fair Value Measurements, for additional information about the credit valuation adjustments.

As of June 30, 2015 , the Swaps’ outstanding notional balances, effective dates, maturity dates and interest rates paid and received are noted below:
Notional
 
Effective Date
 
Maturity Date
 
Fixed
Rate Paid
 
Variable Rate Received
$
532,125,000

 
March 28, 2013
 
March 23, 2018
 
1.884%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
141,012,500

 
March 28, 2013
 
March 23, 2018
 
1.384%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
110,238,693

 
September 30, 2013
 
March 23, 2018
 
1.959%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
110,238,693

 
September 30, 2013
 
March 23, 2018
 
1.850%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
191,475,002

 
March 23, 2018
 
April 9, 2022
 
2.924%
 
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, which were entered into in March 2012 (the "Existing Swap Agreements," as amended, 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 are 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 loss.  Any ineffective portions of the Swaps' change in fair value are recognized in current earnings in Interest expense.  Changes in the fair value of the Swaps recognized in Accumulated other comprehensive loss are reclassified to Interest expense when the hedged interest payments on the underlying debt are recognized.  Amounts in Accumulated other comprehensive loss expected to be recognized in Interest expense in the coming 12 months total approximately $7,299,000 .

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Effective portion of loss recognized in Accumulated other comprehensive loss
$
(820
)
 
(6,234
)
 
$
(7,088
)
 
(9,605
)
Effective portion of loss reclassified from Accumulated other comprehensive loss into Net loss (a)
$
(1,822
)
 
(1,766
)
 
$
(3,627
)
 
(3,466
)
Ineffective portion of amount of gain (loss) recognized into Net loss on interest rate swaps (a)
$
83

 
(2
)
 
$
(1
)
 
(3
)
 
(a)          Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
 

12


(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 June 30, 2015 and December 31, 2014 (amounts in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2015
 

 
 

 
 

 
 

Money market funds (a)
$
1,064

 

 

 
$
1,064

Investments in marketable securities (b)
114,508

 

 

 
114,508

Derivative financial instruments - assets (c)

 
370

 

 
370

Derivative financial instruments - liabilities

 
(8,460
)
 

 
(8,460
)
Total
$
115,572

 
(8,090
)
 

 
$
107,482

December 31, 2014
 

 
 

 
 

 
 

Money market funds (a)
$
8,492

 

 

 
$
8,492

Investments in marketable securities (b)
117,765

 
4,828

 

 
122,593

Derivative financial instruments - assets (c)

 
1,123

 

 
1,123

Derivative financial instruments - liabilities

 
(5,780
)
 

 
(5,780
)
Total
$
126,257

 
171

 

 
$
126,428

 
(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 which was sold in the second quarter of 2015.  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 significant inputs used to value the Swaps fall within Level 2 of the fair value hierarchy.  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):
 
June 30, 2015
 
December 31, 2014
Long term debt, including current portion:
 

 
 

Carrying value
$
1,697,976

 
$
1,627,490

Fair value (a)
1,689,689

 
1,590,809

 
(a)  
The fair value is based on market quotations 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.
 

13


(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 provided certain Security Networks' employees with a severance package that entitled 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.  No restructuring charges were recognized during the three and six months ended June 30, 2015 . During the three and six months ended June 30, 2014 , the Company recognized $371,000 and $918,000 , respectively, 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.
 
The following tables provide the activity and balances of the 2013 Restructuring Plan (amounts in thousands):
 
December 31, 2014
 
Additions
 
Payments
 
June 30, 2015
2013 Restructuring Plan
 

 
 

 
 

 
 

Severance and retention
$
134

 

 
(134
)
 
$


 
December 31, 2013
 
Additions
 
Payments
 
June 30, 2014
2013 Restructuring Plan
 
 
 
 
 
 
 
Severance and retention
$
1,570

 
918

 
(2,042
)
 
$
446


(11)      Stockholders’ Equity
 
Common Stock
 
The following table presents the activity in Ascent Capital’s Series A Common Stock and Series B common stock, par value $0.01 per share (the "Series B Common Stock"), for the six months ended June 30, 2015 :
 
Series A
Common Stock
 
Series B
Common Stock
Balance at December 31, 2014
13,162,095

 
384,086

Issuance of restricted stock awards
6,285

 

Restricted stock forfeitures and tax withholding
(21,158
)
 

Repurchases and retirements of Series A shares
(229,168
)
 

Balance at June 30, 2015
12,918,054

 
384,086

 
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 (a)
 
Unrealized
  gains and
losses on
  derivative
instruments,
net (b)
 
Accumulated
other
comprehensive
income (loss)
As of December 31, 2014
$
(215
)
 
(1,788
)
 
(4,805
)
 
$
(6,808
)
Loss through Accumulated other comprehensive loss
69

 
(1,529
)
 
(7,088
)
 
(8,548
)
Reclassifications of loss (gain) into Net loss

 
(424
)
 
3,627

 
3,203

As of June 30, 2015
$
(146
)
 
(3,741
)
 
(8,266
)
 
$
(12,153
)
 
(a)  
Amounts reclassified into net loss are included in Other income, net on the condensed consolidated statement of operations.  See note 4, Investments in Marketable Securities, for further information.
(b)
Amounts reclassified into net loss are included in Interest expense on the condensed consolidated statement of operations.  See note 8, Derivatives, for further information.
 

14


(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 shares of Ascent Capital Series A and Series B Common Stock outstanding for the period.  Diluted EPS is computed by dividing net earnings (loss) by the sum of the weighted average number of shares of Ascent Capital Series A and Series B Common Stock outstanding and the effect of dilutive securities such as outstanding stock options and unvested restricted stock.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Weighted average Series A and Series B shares — basic and diluted
13,110,540

 
13,632,129

 
13,188,309

 
13,719,750

 
For all periods presented, diluted EPS is computed the same as basic EPS because the Company recorded a loss from continuing operations, which would make potentially dilutive securities anti-dilutive. For both the three and six months ended June 30, 2015 , diluted shares outstanding excluded the effect of 714,991 potentially dilutive stock options and unvested restricted stock awards because their inclusion would have been anti-dilutive.  For both the three and six months ended June 30, 2014 , diluted shares outstanding excluded the effect of 1,506,933 potentially dilutive stock options and unvested restricted stock awards because their inclusion would have been anti-dilutive.

(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.


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;
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 2014 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 2014 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 February 23, 2015 (the "Closing Date"), Monitronics acquired LiveWatch Security, LLC ("LiveWatch"), a Do-It-Yourself home security firm, offering professionally monitored security services through a direct-to-consumer sales channel (the "LiveWatch Acquisition"). On August 16, 2013, Monitronics acquired all of the equity interest 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 six months ended June 30, 2015 include the operations of the LiveWatch business from the Closing Date.
 
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.


17

Table of Contents

The table below presents subscriber data for the twelve months ended June 30, 2015 and 2014 :
 
 
Twelve Months Ended
June 30,
 
 
 
2015
 
2014
 
Beginning balance of accounts
 
1,055,701

 
838,723

 
Accounts acquired
 
188,416

 
352,973

 
Accounts canceled
 
(142,951
)
 
(125,099
)
 
Canceled accounts guaranteed by dealer and acquisition adjustments (a)
 
(9,083
)
 
(10,896
)
(b)
Ending balance of accounts
 
1,092,083

 
1,055,701

 
Monthly weighted average accounts
 
1,069,860

 
1,014,809

 
Attrition rate - Unit
 
(13.4
)%
 
(12.3
)%
 
Attrition rate - RMR (c)
 
(13.2
)%
 
(12.0
)%
 
 
(a)
Includes canceled accounts that are contractually guaranteed to be refunded from holdback.
(b)
Includes a net reduction of 963 subscriber accounts related to the Security Networks Acquisition. These acquisition adjustments include 2,064 subscriber accounts that were proactively canceled following the acquisition of Security Networks in August 2013 because they were active with both Monitronics and Security Networks. The impact of these cancellations was partially offset by a favorable adjustment of 1,101 accounts associated with multi-site subscribers that were considered single accounts prior to the completion of the Security Networks integration in April 2014.
(c)
The recurring monthly revenue ("RMR") of canceled accounts follows the same definition as subscriber unit attrition as noted above. RMR attrition is defined as the RMR of canceled accounts in a given period, adjusted for the impact of price increases or decreases in that period, divided by the weighted average of RMR for that period.
 
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 months ended June 30, 2015 and 2014 , Monitronics acquired 40,742 and 42,851 subscriber accounts, respectively. During the six months ended June 30, 2015 and 2014 , Monitronics acquired 106,816 and 74,625 subscriber accounts, respectively. Accounts acquired for the six months ended June 30, 2015 includes 31,919 accounts from the LiveWatch Acquisition in February 2015. Accounts acquired for the three and six months ended June 30, 2014 reflect a bulk buy of approximately 2,900 accounts.

RMR acquired during the three months ended June 30, 2015 and 2014 was $1,884,000 and $1,948,000, respectively. RMR acquired during the six months ended June 30, 2015 and 2014 was approximately $4,373,000 and $3,399,000, respectively. RMR acquired for the six months ended June 30, 2015 includes approximately $909,000 of RMR from the LiveWatch Acquisition in February 2015.

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

18

Table of Contents

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.

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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net revenue
$
141,543

 
134,696

 
$
279,959

 
267,560

Cost of services
28,053

 
22,982

 
53,743

 
45,072

Selling, general, and administrative
29,685

 
26,736

 
57,281

 
53,273

Amortization of subscriber accounts, dealer network and other intangible assets
63,526

 
63,261

 
126,667

 
125,041

Restructuring charges

 
371

 

 
918

Interest expense
(30,893
)
 
(29,094
)
 
(60,674
)
 
(57,867
)
Income tax expense from continuing operations
(2,030
)
 
(1,737
)
 
(4,007
)
 
(3,358
)
Net loss from continuing operations
(18,496
)
 
(10,511
)
 
(28,171
)
 
(19,889
)
Net loss
(18,409
)
 
(10,278
)
 
(28,244
)
 
(20,010
)
 
 
 
 
 
 
 
 
Adjusted EBITDA   (a)
 

 
 

 
 
 
 
Monitronics business Adjusted EBITDA
$
89,974

 
90,702

 
$
181,641

 
179,977

Corporate Adjusted EBITDA
(2,431
)
 
(1,715
)
 
(3,379
)
 
(3,046
)
Total Adjusted EBITDA
$
87,543

 
88,987

 
$
178,262

 
176,931

Adjusted EBITDA as a percentage of Net revenue
 

 
 

 
 
 
 
Monitronics business
63.6
 %

67.3
 %
 
64.9
 %
 
67.3
 %
Corporate
(1.7
)%
 
(1.3
)%
 
(1.2
)%
 
(1.1
)%
 
(a)  
See reconciliation to net loss from continuing operations below.

Net revenue.   Net revenue increased $6,847,000 , or 5.1% , and $12,399,000 , or 4.6% , for the three and six months ended June 30, 2015 , 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 148,000 accounts through Monitronics’ authorized dealer program subsequent to June 30, 2014 , as well as 31,919 accounts acquired in the LiveWatch Acquisition in February 2015.  Average monthly revenue per subscriber increased from $41.26 as of June 30, 2014 to $41.62 as of June 30, 2015 . Excluding accounts acquired through the LiveWatch Acquisition, which had an average monthly revenue per subscriber of $28.46, Monitronics' average monthly revenue per subscriber was $42.02 as of June 30, 2015 .

Cost of services .  Cost of services increased $5,071,000 , or 22.1% , and $8,671,000 , or 19.2% , for the three and six months ended June 30, 2015 , respectively, as compared to the corresponding prior year periods.  The increase is attributable to the inclusion of LiveWatch, which expenses equipment costs associated with new subscribers. The increase is also attributable to the growth in the number of accounts being monitored across the cellular network, including home automation accounts, and service costs to upgrade existing subscribers' equipment.  Service costs for the three and six months ended June 30, 2015 also

19


include $450,000 and $973,000 , respectively, incurred in relation to the Radio Conversion Program, which was implemented in 2014 to upgrade subscribers' alarm monitoring systems that communicate across certain 2G networks that are expected to be discontinued in the near future. Radio conversion costs of $441,000 were incurred for both the three and six months ended June 30, 2014 . Cost of services as a percent of net revenue increased from 17.1% and 16.8% for the three and six months ended June 30, 2014 to 19.8% and 19.2% for the three and six months ended June 30, 2015 , respectively.
 
Selling, general and administrative.  Selling, general and administrative costs (“SG&A”) increased $2,949,000 , or 11.0% , and $4,008,000 , or 7.5% , for the three and six months ended June 30, 2015 , respectively, as compared to the corresponding prior year periods.  The increase is attributable to SG&A incurred at LiveWatch, including marketing and sales costs related to the creation of new subscribers, and one-time costs incurred by Monitronics of $946,000 for the six months ended June 30, 2015 , which were related to professional services rendered in connection with the LiveWatch Acquisition. For the three and six months ended June 30, 2015 , LiveWatch SG&A also includes $1,276,000 and $1,795,000 , respectively, in LiveWatch Acquisition Contingent Bonuses payable to LiveWatch's key members of management in accordance with the employment agreements entered into in connection with the LiveWatch Acquisition. These increases were partially offset by decreases in Monitronics' staffing and operating costs incurred at its Dallas, Texas headquarters as a result of the Security Networks' integration being completed in April 2014. SG&A for the three and six months ended June 30, 2014 includes approximately $1,123,000 and $2,182,000 , respectively, of costs incurred in connection to the Security Networks' integration. SG&A as a percent of net revenue increased from 19.8% and 19.9% for the three and six months ended June 30, 2014 to 21.0% and 20.5% for the three and six months ended June 30, 2015 , respectively.
 
Amortization of subscriber accounts, dealer network and other intangible assets .  Amortization of subscriber accounts, dealer network and other intangible assets increased $265,000 and $1,626,000 for the three and six months ended June 30, 2015 , respectively, as compared to the corresponding prior year periods.  The increase is attributable to amortization of subscriber accounts acquired subsequent to June 30, 2014 .
 
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 provided certain Security Networks' employees with a severance package that entitled 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.  No restructuring charges were recognized during the three and six months ended June 30, 2015 . During the three and six months ended June 30, 2014 , the Company recognized $371,000 and $918,000 , respectively, 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.
 
The following tables provide the activity and balances of the 2013 Restructuring Plan (amounts in thousands):
 
December 31, 2014
 
Additions
 
Payments
 
June 30, 2015
2013 Restructuring Plan
 

 
 

 
 

 
 

Severance and retention
$
134

 

 
(134
)
 
$


 
December 31, 2013
 
Additions
 
Payments
 
June 30, 2014
2013 Restructuring Plan
 
 
 
 
 
 
 
Severance and retention
$
1,570

 
918

 
(2,042
)
 
$
446

 
Interest expense.   Interest expense increased $1,799,000 and $2,807,000 for the three and six months ended June 30, 2015 , respectively, as compared to the corresponding prior year periods. The increase in interest expense is primarily attributable to increases in the Company’s consolidated debt balance related to the revolver borrowings incurred to fund the LiveWatch Acquisition and subsequent amendment to its Credit Facility term loans in April 2015. 
 
Income tax expense from continuing operations.   The Company had pre-tax loss from continuing operations of $16,466,000 and $24,164,000 for the three and six months ended June 30, 2015 , respectively, and income tax expense of $2,030,000 and $4,007,000 for the three and six months ended June 30, 2015 , respectively.  The Company had pre-tax loss from continuing operations of $8,774,000 and $16,531,000 for the three and six months ended June 30, 2014 , respectively, and income tax expense of $1,737,000 and $3,358,000 for the three and six months ended June 30, 2014 , respectively.  Income tax expense for the three and six months ended June 30, 2015 and 2014 is attributable to Monitronics’ state tax expense and the deferred tax impact from amortization of deductible goodwill related to Monitronics' recent acquisitions. 


20


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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Total Adjusted EBITDA
$
87,543

 
88,987

 
$
178,262

 
176,931

Amortization of subscriber accounts, dealer network and other intangible assets
(63,526
)
 
(63,261
)
 
(126,667
)
 
(125,041
)
Depreciation
(2,585
)
 
(2,568
)
 
(4,983
)
 
(5,326
)
Stock-based compensation
(1,557
)
 
(1,745
)
 
(3,182
)
 
(3,407
)
Restructuring charges

 
(371
)
 

 
(918
)
Radio conversion costs
(450
)
 
(441
)
 
(973
)
 
(441
)
LiveWatch acquisition related costs

 

 
(946
)
 

LiveWatch acquisition contingent bonus charges
(1,276
)
 

 
(1,795
)
 

Security Networks integration related costs

 
(1,123
)
 

 
(2,182
)
Interest income
746

 
842

 
1,262

 
1,720

Interest expense
(30,893
)
 
(29,094
)
 
(60,674
)
 
(57,867
)
Refinancing expense
(4,468
)
 

 
(4,468
)
 

Income tax expense from continuing operations
(2,030
)
 
(1,737
)
 
(4,007
)
 
(3,358
)
Net loss from continuing operations
$
(18,496
)
 
(10,511
)
 
$
(28,171
)
 
(19,889
)
 
Adjusted EBITDA decreased $1,444,000 , or 1.6% , and increased $1,331,000 , or 0.8% , for the three and six months ended June 30, 2015 , respectively, as compared to the corresponding prior year periods.  Adjusted EBITDA is negatively impacted for the three and six months ended June 30, 2015 due to LiveWatch's direct-to-consumer business, which requires it to recognize certain revenue and expenses associated with the acquisition of subscriber accounts. This is in contrast to Monitronics' dealer business, which capitalizes payments to dealers to acquire accounts and amortizes those payments to amortization expense over the life of the accounts.  Monitronics' consolidated Adjusted EBITDA was $89,974,000 and $181,641,000 for the three and six months ended June 30, 2015 , respectively, as compared to $90,702,000 and $179,977,000 for the three and six months ended June 30, 2014 , respectively.

Liquidity and Capital Resources
 
At June 30, 2015 , we had $7,925,000 of cash and cash equivalents, $53,000 of current restricted cash, and $114,508,000 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 six months ended June 30, 2015 and 2014 , our cash flow from operating activities was $110,319,000 and $114,930,000 , respectively.  The primary driver of our cash flow from operating activities is Adjusted EBITDA.  Fluctuations in our Adjusted EBITDA and the components of that measure are discussed in “Results of Operations” above.  In addition, our cash flow from operating activities may be significantly impacted by changes in working capital.
 
During the six months ended June 30, 2015 and 2014 , the Company used cash of $129,544,000 and $126,640,000 , respectively, to fund subscriber account acquisitions, net of holdback and guarantee obligations.  In addition, during the six months ended June 30, 2015 and 2014 , the Company used cash of $8,168,000 and $3,212,000 , respectively, to fund its capital expenditures. 

In February 2015, Monitronics paid cash of $56,343,000 for the acquisition of LiveWatch, net of the transfer of $3,988,000 to LiveWatch upon the Closing Date to fund LiveWatch employees' transaction bonuses and LiveWatch cash on hand of $784,000 . The LiveWatch Acquisition was funded by borrowings from Monitronics expanded Credit Facility revolver as well as cash contributions from Ascent Capital. An additional $435,000 in cash was paid in the third quarter of 2015 for post-closing purchase price adjustments for the LiveWatch Acquisition.
  
On June 16, 2011, the Company announced that it received authorization to implement a share 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

21


Stock.  On November 10, 2014, the Company announced the Board of Directors' authorization of a further increase of $25,000,000 to the Company's share repurchase program (the "Share Repurchase Authorizations").

During the six months ended June 30, 2015 , the Company repurchased 229,168 shares of Series A Common Stock pursuant to the Share Repurchase Authorizations for approximately $9,473,000 .  These repurchased shares were all canceled and returned to the status of authorized and unissued. As of June 30, 2015 , the remaining availability under the Company's Share Repurchase Authorizations will enable the Company purchase up to an aggregate of approximately $5,422,000 of Series A Common Stock. The Company may also purchase shares of its Series B Common Stock under the remaining availability of the Share Repurchase Authorizations.

On April 9, 2015, Monitronics entered into Amendment No. 5 (“Amendment No. 5”) to its existing senior secured credit agreement dated March 23, 2012, and as amended and restated on February 17, 2015, August 16, 2013, March 25, 2013 and November 7, 2012 (the “Existing Credit Agreement”). Pursuant to Amendment No. 5, Monitronics completed the issuance of an incremental $550,000,000 senior secured Term Loan B offering at a 0.5% discount with a maturity date of April 9, 2022. Monitronics used the net proceeds to retire approximately $492,000,000 of its existing Term Loans, due March 2018, and repaid $49,900,000 of its revolving credit facility. Amendment No. 5 (the Existing Credit Agreement together with Amendment No. 5, the "Credit Facility") also incorporates certain covenant changes, including the removal of the third quarter 2015 step downs of the senior secured and total leverage ratios, both as defined in the Credit Facility.

The existing long-term debt of the Company at June 30, 2015 includes the principal balance of $1,728,109,000 under its Convertible Notes, Senior Notes, Credit Facility term loans, and Credit Facility revolver.  The Convertible Notes have an outstanding principal balance of $103,500,000 as of June 30, 2015 and mature July 15, 2020.  The Senior Notes have an outstanding principal balance of $585,000,000 as of June 30, 2015 and mature on April 1, 2020.  The Credit Facility term loans have an outstanding principal balance of $952,409,000 as of June 30, 2015 and require principal payments of approximately $1,375,000 per quarter with $403,784,000 becoming due on March 23, 2018 and the remaining amount becoming due on April 9, 2022.  The Credit Facility revolver has an outstanding balance of $87,200,000 as of June 30, 2015 and becomes due on December 22, 2017.

In considering our liquidity requirements for the remainder of 2015 and 2016, 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. In 2014, Monitronics implemented a Radio Conversion Program in response to one of the nation's largest carriers announcing that it does not intend to support its 2G cellular network services beyond 2016. In connection with the Radio Conversion Program, Monitronics could incur incremental costs of $10,000,000 to $12,000,000 for the remainder of 2015 and $20,000,000 to $24,000,000 in 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 $227,800,000 as of June 30, 2015 .  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.

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 their fair value liability (asset) and by maturity date as of June 30, 2015 .  Debt amounts represent principal payments by maturity date as of June 30, 2015 .
 
Year of Maturity
 
Fixed Rate
Derivative
Instruments, net (a)
 
Variable Rate
Debt
 
Fixed Rate
Debt
 
Total
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Remainder of 2015
 
$

 
$
2,750

 
$

 
$
2,750

2016
 

 
5,500

 

 
5,500

2017
 

 
92,700

 

 
92,700

2018
 
8,188

 
409,284

 

 
417,472

2019
 

 
5,500

 

 
5,500

2020
 

 
5,500

 
688,500

 
694,000

Thereafter
 
(98
)
 
518,375

 

 
518,277

Total
 
$
8,090

 
$
1,039,609

 
$
688,500

 
$
1,736,199

 
(a)  
The derivative financial instruments reflected in this column include four interest rate swaps with a maturity date of March 23, 2018 and one interest rate swap with a maturity date of April 9, 2022.  As a result of these interest rate swaps, Monitronics' current effective weighted average interest rate on the borrowings under the Credit Facility term loans is 5.15% .  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 June 30, 2015 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
There has been no change in the Company’s internal controls over financial reporting that occurred during the three months ended June 30, 2015 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 shares withheld in payment of withholding taxes during the three months ended June 30, 2015 . The Company did not purchase any of its own equity securities during the three months ended June 30, 2015
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
 
 
4/1/2015 - 4/30/2015
 
1,625

 
(2)
 
$
40.31

 

 
 
 
 
5/1/2015 - 5/31/2015
 

 
 
 

 

 
 
 
 
6/1/2015 - 6/30/2015
 
4,585

 
(2)
 
42.56

 

 
 
 
 
Total
 
6,210

 
 
 
$
41.97

 

 
 
 
 
 
(1)
   On June 16, 2011, the Company announced that it received authorization to implement a share repurchase program, pursuant to which it may purchase up to $25,000,000 of its shares of Series A Common Stock, par value $0.01, 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. On November 10, 2014, the Company announced the Board of Directors' authorization of a further increase of $25,000,000 to the Company's share repurchase program. As of June 30, 2015 , 1,290,864 shares of Series A Common Stock had been purchased, at an average price paid of $53.90 per share, pursuant to these authorizations.  As of June 30, 2015 , the remaining availability under the Company's existing share repurchase program will enable the Company to purchase up to an aggregate of approximately $5,422,000 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 remaining availability of the program.
 
(2)
Represents shares withheld in payment of withholding taxes upon vesting of employees' restricted share awards.
 

24

Table of Contents

Item 6 Exhibits
 
Listed below are the exhibits which are included as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):
 
4.1
 
Form of Amendment No. 5 to the Credit Agreement, dated April 9, 2015, by and among Monitronics International, Inc., Bank of America, N.A., individually and as administrative agent, and the certain lenders party thereto (incorporated by reference to Exhibit 4.1 to the Ascent Capital Group, Inc.'s (the "Company") Current Report on Form 8-K (File No. 001-34176) filed with the Securities and Exchange Commission on April 15, 2015).
10.1
 
Employment Agreement, effective as of April 20, 2015, between the Company and Richard G. Walker.*
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.
**
Furnished herewith.





25

Table of Contents

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
ASCENT CAPITAL GROUP, INC.
 
 
 
 
 
 
 
 
 
 
Date:
August 10, 2015
 
By:
/s/ William R. Fitzgerald
 
 
 
 
William R. Fitzgerald
 
 
 
 
Chairman of the Board, Director and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
Date:
August 10, 2015
 
By:
/s/ Michael R. Meyers
 
 
 
 
Michael R. Meyers
 
 
 
 
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)


26

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):
 
4.1
 
Form of Amendment No. 5 to the Credit Agreement, dated April 9, 2015, by and among Monitronics International, Inc., Bank of America, N.A., individually and as administrative agent, and the certain lenders party thereto (incorporated by reference to Exhibit 4.1 to the Ascent Capital Group, Inc.'s (the "Company") Current Report on Form 8-K (File No. 001-34176) filed with the Securities and Exchange Commission on April 15, 2015).
10.1
 
Employment Agreement, effective as of April 20, 2015, between the Company and Richard G. Walker.*
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.
**
Furnished herewith.



27


Exhibit 10.1


EMPLOYMENT AGREEMENT
This Employment Agreement (the “Agreement”), dated as of April 20, 2015, is entered into by and between Ascent Capital Group, Inc., a Delaware corporation (the “Company”), and Richard G. Walker (“Executive”).
INTRODUCTION
The Company, through its subsidiaries (“Affiliates”), is engaged primarily in the business of providing security alarm monitoring and related services to residential and business subscribers throughout the United States and parts of Canada. The Company desires to employ Executive, and Executive desires to accept such employment, under the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I

EMPLOYMENT, TERM, DUTIES
1.1 Employment . Upon the terms and conditions hereinafter set forth, the Company hereby employs Executive, and Executive hereby accepts employment, as Executive Vice President, Strategy and Corporate Development, of the Company.

1.2 Term . Subject to Article IV below, Executive’s employment hereunder shall be for a term of three (3) years commencing effective as of April 20, 2015 (the “Commencement Date”), and terminating at the close of business on April 19, 2018, or such earlier date as provided for herein (the “Term”).

1.3 Duties . During the Term, Executive shall perform such executive duties for the Company and/or its Affiliates, consistent with his position hereunder, as may be assigned to him from time to time by the individual(s) set forth in Section 1.4 below. Executive shall devote his entire productive business time, attention and energies to the performance of his duties hereunder. Executive shall use his best efforts to advance the interests and business of the Company and its Affiliates. Executive shall abide by all rules, regulations and policies of the Company and its Affiliates, as may be in effect from time to time. Notwithstanding the foregoing, Executive may act for his own account in passive-type investments as provided in Section 5.3, or as a member of boards of directors of other companies, where the time allocated for those activities does not interfere with or create a conflict of interest with the discharge of his duties for the Company and its Affiliates, including continued service as chair or a member of the board of directors of Readers Digest Association, Inc.

1.4 Reporting . Executive shall report directly to the Chief Executive Officer of the Company or a designated member of the Board of Directors.

1.5 Location . Except for services rendered during business trips as may be reasonably necessary, Executive shall render his services under this Agreement primarily from the offices of the Company in the Greater Denver, Colorado metropolitan area.

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1.6 Exclusive Agreement . Executive represents and warrants to the Company that there are no agreements or arrangements, whether written or oral, in effect which would prevent Executive from rendering his exclusive services to the Company and its Affiliates during the Term.

ARTICLE II

COMPENSATION
2.1 Compensation . For all services rendered by Executive hereunder and all covenants and conditions undertaken by him pursuant to this Agreement, the Company shall pay, and Executive shall accept, as full compensation, the amounts set forth in this Article II.

2.2 Base Salary . The base salary shall be an annual salary of $415,000 (the “Base Salary”), payable by the Company in accordance with the Company’s normal payroll practices. Beginning as of the first anniversary of the Commencement Date, the Base Salary shall be reviewed on an annual basis during the Term for increase in the sole discretion of the compensation committee (the “Committee”) of the Board of Directors of the Company.

2.3 Bonus . For each fiscal year during the Term, commencing with the 2016 fiscal year, in addition to the Base Salary, Executive shall be eligible for an annual bonus (the “Bonus”) of 60% of Executive’s annual Base Salary (the “Target Bonus”). (The Company’s fiscal year is currently January 1 through December 31 of each year.) Such bonus opportunity may exceed the 60% Target Bonus but is not expected to exceed 75% of Executive’s annual Base Salary. Executive’s entitlement to any Bonus will be determined by the Committee in its good faith discretion, based upon the achievement of key performance indicators to be established by the Committee in its good faith discretion with respect to each fiscal year of the Term. Nothing in this Agreement shall be construed to guarantee the payment of any Bonus to Executive. Executive shall be eligible for a pro-rated bonus for the period of the Commencement Date through December 31, 2015, to be determined in the good faith discretion of the Committee in a manner consistent with the terms of this Section 2.3.

2.4 Equity . As an incentive for commencement of employment with the Company, the Company agrees to award Executive a grant of 30,000 restricted stock units, subject to the terms and conditions set forth in that certain Performance Based Restricted Stock Units Award Agreement, a copy of which is attached hereto as Exhibit A (the “Equity Award”). If Shareholder approval of the Ascent Capital Group, Inc., 2015 Omnibus Incentive Plan is not obtained on May 29, 2015, then the Company shall make a replacement equity award to Executive, the terms and conditions of which shall, in all material respects, match the Equity Award.

2.5     Deductions . The Company shall deduct from the compensation described in Sections 2.2, 2.3 and 2.4, and from any other compensation payable pursuant to this Agreement, any federal, state or local withholding taxes, social security contributions and any other amounts which may be required to be deducted or withheld by the Company pursuant to any federal, state or local laws, rules or regulations.
2.6     Disability Adjustment . Any compensation otherwise payable to Executive pursuant to Sections 2.2 and 2.3 in respect of any period during which Executive is Disabled (as defined, and determined in accordance with, in Section 4.5) shall be reduced by any amounts payable to Executive for loss of earnings or the like under any insurance plan or policy sponsored by the Company.

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ARTICLE III

BENEFITS, EXPENSES
3.1 Benefits . During the Term, Executive shall be entitled to participate in such group life, health, accident, disability or hospitalization insurance plans, retirement plans, and any other plan as the Company may make available to its other similarly situated executive employees as a group, subject to the terms and conditions of any such plans. Executive’s participation in all such plans shall be at a level, and on terms and conditions, that are commensurate with his positions and responsibilities at the Company. The Company will pay for Executive’s health insurance premiums consistent with its practice for other similarly situated senior executives, and Executive understands and acknowledges that any such payments made by the Company on behalf of Executive will be deemed and reported as taxable income to Executive.

3.2 Expenses . The Company agrees that Executive is authorized to incur reasonable and appropriate expenses in the performance of his duties hereunder and in promoting the business of the Company in accordance with the terms of the Company’s Travel & Entertainment Policy (as the same may be modified or amended by the Company from time to time in its sole discretion) and the Company shall reimburse Executive for such expenses.

3.3 Vacation . Executive shall accrue a total of one hundred sixty (160) hours of vacation per year following the date of this Agreement.  If, at any time during the Term, Executive accumulates two hundred forty (240) hours of earned but unused vacation time (the “Accrual Cap”), Executive will not accrue additional vacation time until he has taken a portion of the previously earned vacation.  Executive will again accrue paid vacation time when his accumulated amount of earned but unused vacation time falls below the Accrual Cap.  Upon termination of Executive’s employment, any accrued but unused vacation time will be paid to Executive.

3.4 Key Man Insurance . The Company may secure in its own name or otherwise, and at its own expense, life, health, accident and other insurance covering Executive alone or with others, and Executive shall not have any right, title or interest in or to such insurance other than as expressly provided herein. Executive agrees to assist the Company in procuring such insurance by submitting to the usual and customary medical and other examinations to be conducted by such physicians as the Company or such insurance company may designate and by signing such applications and other written instruments as may be required by the insurance companies to which application is made for such insurance. Executive’s failure to submit to such usual and customary medical and other examinations shall be deemed a material breach of this Agreement.

ARTICLE IV

TERMINATION, DEATH, DISABILITY
4.1 Termination of Employment For Cause . In addition to any other remedies available to the Company at law, in equity or as set forth in this Agreement, the Company shall have the right, upon written notice to Executive, to terminate Executive’s employment hereunder at any time for “Cause” (a “Termination For Cause”). In the event of a Termination For Cause, Executive’s employment will terminate and the Company shall have no further liability or obligation to Executive (other than the Company’s obligation to pay Base Salary and vacation time, in each case, accrued but unpaid as of the date of termination and reimbursement of expenses incurred prior to the date of termination in accordance with Section 3.2 above).

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For purposes of this Agreement, “Cause” shall mean: (a) any material act or omission that constitutes a breach by Executive of any of his material obligations under this Agreement; (b) the continued failure or refusal of Executive (i) to substantially perform the material duties required of him as an Executive of the Company and/or (ii) to comply with reasonable directions of the individual(s) set forth in Section 1.4 above; (c) any material violation by Executive of any (i) material policy, rule or regulation of the Company or any of its Affiliates or (ii) any material law or regulation applicable to the business of the Company or any of its Affiliates; (d) Executive’s material act or omission constituting fraud, dishonesty or misrepresentation, occurring subsequent to the commencement of his employment with the Company; (e) Executive’s gross negligence in the performance of his duties hereunder; (f) Executive’s conviction of, or plea of guilty or nolo contendere to, any crime (whether or not involving the Company) which constitutes a felony or crime of moral turpitude, provided , however , that nothing in this Agreement shall obligate the Company to pay Base Salary or any bonus compensation or benefits during any period that Executive is unable to perform his duties hereunder due to any incarceration, and provided , further , that nothing shall prevent Executive’s termination under any other subsection of this Section 4.1 if it provides independent grounds for termination; or (g) any other misconduct by Executive that is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or any of its Affiliates.

Notwithstanding the foregoing, no purported Termination For Cause pursuant to (a), (b), (c), (d), (e) or (g) of the preceding paragraph of this Section 4.1 shall be effective unless all of the following provisions shall have been complied with: (i) Executive shall be given written notice by the Company of its intention to effect a Termination For Cause, such notice to state in detail the particular circumstances that constitute the grounds on which the proposed Termination For Cause is based; and (ii) Executive shall have ten (10) business days after receiving such notice in which to cure such grounds, to the extent such cure is possible, as determined in the sole discretion of the Company.
4.2 Termination of Employment Without Cause . During the Term, the Company may at any time, in its sole discretion, terminate the employment of Executive hereunder for any reason (other than those set forth in Section 4.1 above) upon written notice (the “Termination Notice”) to Executive (a “Termination Without Cause”). In such event, the Company shall pay Executive an amount in cash equal to the sum of the following:

(a) any Base Salary and vacation time, in each case, accrued but unpaid as of the date of termination;

(b) subject to Sections 4.6, 4.7, 4.8, 4.9, 5.3 and 5.4 below an amount (the “Severance Payment”) equal to:

(i) if the termination of Executive’s employment occurs prior to a Change in Control (as defined in Section 4.4), the product of (i) the sum of Executive’s Annual Base Salary plus the Target Bonus, both as in effect immediately prior to such Termination Without Cause, multiplied by (ii) 1; or

(ii) if the termination of Executive’s employment occurs concurrently with or following a Change of Control, the product of (i) the sum of Executive’s Annual Base Salary plus the Target Bonus, both as in effect immediately prior to such Termination Without Cause, multiplied by (ii) 2;

(c) any Bonus to which Executive has become entitled for the calendar year prior to the year in which such Termination Without Cause occurs but which remains unpaid at the date of termination (“Unpaid Bonus”); and


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(d) any reimbursement for expenses incurred in accordance with Section 3.2.
Subject to Section 4.9, any Severance Payment to which Executive becomes entitled under this Section 4.2 or Section 4.3 shall be payable in a lump sum on the sixtieth (60th) day following the date of termination of Executive’s employment (or, if such day is not a business day, on the first business day thereafter).
In addition, subject to Sections 4.6, 4.7, 4.8, 4.9, 5.3 and 5.4 below, to the extent such coverage is available and is elected by Executive under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), the Company shall contribute to the health insurance plan maintained by the Company and covering the Executive and his dependents as of the date of termination, or any successor plan maintained by the Company, that amount that reflects the proportionate part of the premium for such coverage that is paid by the Company as of the date of termination (the “Benefits Payments”), such Benefits Payments to be made monthly in accordance with the Company’s normal procedures for the payment of health insurance premiums, throughout the period beginning on the date of termination and ending on the earlier of the 12-month anniversary of the date of termination and the expiration of the coverage period specified in COBRA, such period to be determined as of the date of termination (the “Reimbursement Period”) (i.e., Executive shall bear responsibility for that portion of the health insurance premiums in excess of the Benefits Payments), or, alternately, in the Company’s sole discretion, the Company shall reimburse Executive the amount of the Benefits Payment on a monthly basis during the Reimbursement Period, upon Executive’s submission to the Company of adequate proof of payment of the full COBRA premium by Executive; provided , however , that if Executive becomes employed with another employer during the Reimbursement Period and is eligible to receive health and/or medical benefits that are substantially comparable to those offered by the Company under such other employer’s plans, the Company’s payment obligation under this paragraph shall end. Notwithstanding the foregoing, in the event that the Company’s group health plan is insured and under applicable guidance the reimbursement of COBRA premiums causes the Company’s group health plan to violate any applicable nondiscrimination rule, the Company and Executive agree to negotiate in good faith a mutually agreeable alternative arrangement. For the avoidance of doubt, Executive shall be responsible for paying any U.S. federal or state income taxes associated with the Benefits Payments.
At least ninety (90) days prior to the expiration of the Term, the Company shall deliver a written notice to Executive stating either (i) that the Company does not intend to offer Executive a new employment agreement to take effect at the expiration of the Term (a “Non-Renewal Notice”) or (ii) that the Company offers Executive a new employment agreement to take effect at the expiration of the Term upon terms (other than the length of the term of such new employment agreement) that are, in material respects, taken as a whole, at least as favorable to Executive as the terms of this Agreement, and the material terms of such offer shall be summarized or set forth in the notice (“Renewal Notice”). If the Company delivers a Non-Renewal Notice, or if the Company fails to deliver either a Renewal Notice or a Non-Renewal Notice on a timely basis as provided in the immediately preceding sentence, Executive’s employment shall be terminated at the expiration of the Term (or at such earlier date as may be set forth in the Non-Renewal Notice), and such termination shall be a Termination Without Cause, whereupon, subject to Sections 4.6, 4.7, 4.8, 4.9, 5.3 and 5.4 below, Executive shall be entitled to receive the amounts and benefits as provided under this Section 4.2.
Executive acknowledges that the payments and benefits referred to in this Section 4.2, together with any rights or benefits under any equity award or written plan or agreement which have vested on or prior to the termination date of Executive’s employment under this Section 4.2, constitute the only payments which Executive shall be entitled to receive from the Company or any of its Affiliates hereunder in the event of any termination of his employment pursuant to this Section 4.2, and the Company and its Affiliates shall have no further liability or obligation to him hereunder or otherwise in respect of his employment.

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4.3 Termination of Employment With Good Reason . In addition to any other remedies available to Executive at law, in equity or as set forth in this Agreement, Executive shall have the right during the Term, upon written notice to the Company, to terminate his employment hereunder upon the occurrence of any of the following events: (a) a material diminution in Executive’s then current Base Salary without the prior written consent of Executive; (b) a material diminution in Executive’s authority, duties or responsibilities, or a requirement that Executive report to a supervisor other than those described in Section 1.4; (c) the Company relocates the principal office at which Executive performs services on behalf of the Company to a location more than 75 miles from its present location; or (d) a material breach by the Company of any material provision of this Agreement without the prior written consent of Executive (a “Termination With Good Reason”).

Notwithstanding the foregoing, no purported Termination With Good Reason pursuant to this Section 4.3 shall be effective unless all of the following provisions shall have been complied with: (i) Executive shall give the Company a written notice of Executive’s intention to effect a Termination With Good Reason, such notice to state in detail the particular circumstances that constitute the grounds on which the proposed Termination With Good Reason is based and to be given no later than ninety (90) days after the initial occurrence of such circumstances; (ii) the Company shall have thirty (30) days after receiving such notice in which to cure such grounds, to the extent such cure is possible; and (iii) if the Company fails to cure such grounds within such thirty (30) -day period, Executive elects to terminate his employment hereunder by delivering written notice to the Company within 5 business days of the expiration of such thirty (30) -day period.
In the event that a Termination With Good Reason occurs, then, subject to Sections 4.6, 4.7, 4.8, 4.9, 5.3 and 5.4 below, Executive shall have the same entitlement to the amounts and benefits as provided under Section 4.2 for a Termination Without Cause.
Executive acknowledges that the payments and benefits referred to in this Section 4.3, together with any rights or benefits under any written plan or agreement which have vested on or prior to the termination date of Executive’s employment under this Section 4.3, constitute the only payments which Executive shall be entitled to receive from the Company or any of its Affiliates hereunder in the event of any termination of his employment pursuant to this Section 4.3, and the Company and its Affiliates shall have no further liability or obligation to him hereunder or otherwise in respect of his employment.
4.4 Change of Control. “Change in Control” means any of the following that otherwise meets the definition of a “change in ownership,” a “change in effective control” or a “change in ownership of a substantial portion of the assets” of the Company within the meaning of Section 409A:

(a) the acquisition by any person or group, (excluding John C. Malone, and/or any family member(s) of the foregoing and/or any company, partnership, trust or other entity or investment vehicle controlled by such persons or the holdings of which are for the primary benefit or any of such persons (collectively, the “Permitted Holders”)) of ownership of stock of the Company that, together with stock already held by such person or group, constitutes more than 50% of the total fair market value or more than 50% of the total voting power of the stock of the Company;
(b) the acquisition by any person or group (other than the Permitted Holders), in a single transaction or in multiple transactions all occurring during the twelve (12)-month period ending on the date of the most recent acquisition by such person or group, assets from the Company that have a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions; or

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(c) the acquisition by any person or group (other than the Permitted Holders), in a single transaction or in multiple transactions all occurring during the twelve (12)-month period ending on the date of the most recent acquisition by such person or group, of ownership of stock of the Company possessing 30% or more of the total voting power of the stock of Company or the replacement of a majority of the Company’s Board of Directors during any twelve (12)-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board of Directors before the date of appointment or election.
 
4.5 Death, Disability . In the event that Executive dies or becomes Disabled during the Term, Executive’s employment shall terminate either (i) when such death occurs, or (ii) upon written notice by the Company at any time after Disability occurs (provided that, in the event of any Disability, the Company shall have the right, but not the obligation, to terminate this Agreement), and, in either event, the Company shall pay Executive (or his legal representative, as the case may be) in a single lump sum cash payment within thirty (30) days of such termination of employment, an amount equal to the sum of:

(a) any Base Salary and vacation time, in each case, accrued but unpaid as of the date of death or termination for Disability;

(b) any Bonus to which Executive has become entitled for the calendar year prior to the year in which such death or termination for Disability occurs but which remains unpaid at the date of death or such termination; and

(c) any reimbursement for expenses incurred in accordance with Section 3.2.

For the purposes of this Agreement, Executive shall be deemed to be “Disabled” or have a “Disability” if, because of Executive’s physical or mental disability, he has been substantially unable to perform his duties hereunder for 180 days in any twelve (12) month period. Executive shall be considered to have been substantially unable to perform his duties hereunder only if he is either (a) unable to reasonably and effectively carry out his duties with reasonable accommodations by the Company or (b) unable to reasonably and effectively carry out his duties because any reasonable accommodation which may be required would cause the Company undue hardship. In the event of a disagreement concerning Executive’s perceived Disability, Executive shall submit to such examinations as are deemed appropriate by three (3) practicing physicians specializing in the area of Executive’s Disability, one selected by Executive, one selected by the Company, and one selected by both such physicians. The majority decision of such three physicians shall be final and binding on the parties. Nothing in this paragraph is intended to limit the Company’s right to invoke the provisions of this paragraph with respect to any perceived Disability of Executive.
Notwithstanding the foregoing, to the extent and for the period required by any state or federal family and medical leave law, upon Executive’s request (i) he shall be considered to be on unpaid leave of absence and not terminated, (ii) his group health benefits shall remain in full force and effect, and (iii) if Executive recovers from any such Disability, at that time, to the extent required by any state or federal family and medical leave law, upon Executive’s request, he shall be restored to his position hereunder or to an equivalent position, as the Company may determine, and the Term of Executive’s employment hereunder shall be reinstated effective upon such restoration. The Term shall not be extended by reason of such intervening leave of absence, nor shall any compensation or benefits accrue in excess of those required by law during such intervening leave of absence. Upon the expiration of any such rights, unless Executive has been restored to a position with the Company, he shall thereupon be considered terminated by reason of Disability.

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Executive acknowledges that the payments referred to in this Section 4.5, together with any rights or benefits under any equity award or written plan or agreement which have vested on or prior to the termination date of Executive’s employment under this Section 4.5, constitute the only payments which Executive (or his legal representative, as the case may be) shall be entitled to receive from the Company or any of its Affiliates hereunder in the event of a termination of his employment for death or Disability, and the Company and its Affiliates shall have no further liability or obligation to him (or his legal representatives, as the case may be) hereunder or otherwise in respect of his employment.
4.6 No Mitigation by Executive . Except as otherwise expressly provided herein, Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for herein be reduced by any compensation earned by Executive as the result of employment by another employer; provided , however , that if Executive becomes employed with another employer and is eligible to receive health and/or medical benefits that are substantially comparable to those offered by the Company under such other employer’s plans, Executive’s continued benefits and/or plan coverage as set forth in Section 4.2 or 4.3, as the case may be, shall end.

4.7 Severance Agreement and Release . In the event that Executive’s employment hereunder is terminated pursuant to (i) a Termination Without Cause (as defined in Section 4.2 above) or (ii) a Termination With Good Reason (as defined in Section 4.3 above), payment by the Company of the amounts described in said sections shall be subject to the execution and delivery to the Company by Executive of a severance agreement and release (the “Release”) in a form substantially and materially similar to Attachment A hereto within the applicable time period described below.

The Release shall be delivered to Executive, in the case of a Termination Without Cause, at the time of delivery of the Termination Notice, and, in the case of a Termination With Good Reason, upon delivery of written notice by Executive to the Company. Executive shall have a period of twenty-one (21) days (or, if required by applicable law, a period of forty-five (45) days) after the effective date of termination of Executive’s employment hereunder (the “Consideration Period”) in which to execute and return the original, signed Release to the Company. If Executive delivers the original, signed Release to the Company prior to the expiration of the Consideration Period and does not thereafter revoke such Release within any period of time provided therefor under applicable law, Executive shall, subject to Sections 4.8, 4.9, 5.3 and 5.4 below, be entitled to receive the Severance Payment at the same time and in the same form as specified in Section 4.2 or 4.3, as applicable.
If Executive does not deliver the original, signed Release to the Company prior to the expiration of the Consideration Period, or if Executive delivers the original, signed Release to the Company prior to the expiration of the Consideration Period and thereafter revokes such Release within any period of time provided therefor under applicable law, then:
the Company shall pay Executive an amount equal to the sum of (i) any Base Salary and vacation time, in each case, accrued but unpaid as of the date of termination, plus (ii) any reimbursement for expenses incurred in accordance with Section 3.2, plus (iii) any Unpaid Bonus; and

the Company shall have no obligation to pay to Executive any Severance Payment or make any Benefits Payments.

4.8 Continued Compliance . Executive and the Company hereby acknowledge that any Severance Payments and Benefits Payments payable by the Company under Section 4.2 or 4.3 are part of the

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consideration for Executive’s undertakings under Article V below. Such amounts are subject to Executive’s continued compliance with the provisions of Article V. If Executive violates the provisions of Article V, then the Company will have no obligation to make any of the Severance Payments or Benefits Payments that remain payable by the Company under Section 4.2 or 4.3 on or after the date of such violation.

4.9 Timing of Payments Under Certain Circumstances . With respect to any amount that becomes payable to or for the benefit of Executive under this Agreement upon Executive’s Separation from Service (as defined below) for any reason, the provisions of this Section 4.9 will apply, notwithstanding any other provision of this Agreement to the contrary. If the Company determines in good faith that Executive is a “specified employee” within the meaning of Section 409A of the Code, any Treasury regulations promulgated thereunder and any guidance issued by the Internal Revenue Service relating thereto (collectively, “Code Section 409A”), then to the extent required under Code Section 409A, payment of any amount of deferred compensation that becomes payable to or for the benefit of Executive upon Separation from Service (other than by reason of the death of Executive) and that otherwise would be payable during the six (6) -month period following Executive’s Separation from Service shall be suspended until the lapse of such six-month period (or, if earlier, the date of Executive’s death). A “Separation from Service” of Executive means Executive’s separation from service, as defined in Code Section 409A, with the Company and all other entities with which the Company would be considered a single employer under Internal Revenue Code Section 414(b) or (c), applying the 80% threshold used in such Internal Revenue Code Sections or any Treasury regulations promulgated thereunder. Any payment suspended as provided in this Section 4.9, unadjusted for interest on such suspended payment, shall be paid to Executive in a single payment on the first business day following the end of such six-month period or within 30 days following the death of Executive, whichever occurs sooner, provided that the death of Executive during such six-month period shall not cause the acceleration of any amount that otherwise would be payable on any date during such six-month period following the date of Executive’s death.

ARTICLE V

OWNERSHIP OF PROCEEDS OF EMPLOYMENT, NON-DISCLOSURE,
NON-COMPETITION
5.1 Ownership of Proceeds of Employment .

The Company shall be the sole and exclusive owner throughout the universe in perpetuity of all of the results and proceeds of Executive’s services, work and labor in connection with Executive’s employment by the Company, free and clear of any and all claims, liens or encumbrances. Executive shall promptly and fully disclose to the Company, with all necessary detail for a complete understanding of the same, any and all developments, client and potential client lists, know how, discoveries, inventions, improvements, conceptions, ideas, writings, processes, formulae, contracts, methods, works, whether or not patentable or copyrightable, which are conceived, made, acquired, or written by Executive, solely or jointly with another, while employed by the Company (whether or not at the request or upon the suggestion of the Company) and which are substantially related to the business or activities of the Company, or which Executive conceives as a result of his employment by the Company, or as a result of rendering advisory or consulting services to the Company (collectively, “Proprietary Rights”).

Executive hereby assigns and transfers, and agrees to assign and transfer, all his rights, title, and interests in the Proprietary Rights to the Company or its nominee. In addition, Executive shall deliver to the Company any and all drawings, notes, specifications, and data relating to the Proprietary Rights. All

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copyrightable Proprietary Rights shall be considered to be “works made for hire.” Whenever requested to do so by the Company, Executive shall execute and deliver to the Company or its nominee any and all applications, assignments and other instruments and do such other acts that the Company shall request to apply for and obtain patents and/or copyrights in any and all countries or to otherwise protect the Company’s interest in the Proprietary Rights and/or to vest title thereto to the Company or its nominee; provided , however , the provisions of this Section 5.1 shall not apply to any Proprietary Rights that Executive developed entirely on his own time without using the Company’s equipment, supplies, facilities or proprietary information, except for Proprietary Rights that (a) at the time of conception or reduction to practice of the Proprietary Rights, relate to the business of the Company, or actual or demonstrably anticipated research or development of the Company, or (b) result from any work performed by Executive for the Company.

Executive shall assist the Company in obtaining such copyrights and patents during the Term, and any time thereafter on reasonable notice and at mutually convenient times, and Executive agrees to testify in any prosecution or litigation involving any of the Proprietary Rights; provided , however , Executive shall be reasonably compensated for his time and reimbursed for any out-of-pocket expenses incurred in rendering such assistance or giving or preparing to give such testimony.

5.2 Non-Disclosure of Confidential Information . As used herein, “Confidential Information” means any and all information affecting or relating to the business of the Company, including without limitation, financial data, customer lists and data, licensing arrangements, business strategies, pricing information, product development, intellectual, artistic, literary, dramatic or musical rights, works, or other materials of any kind or nature (whether or not entitled to protection under applicable copyright laws, or reduced to or embodied in any medium or tangible form), including without limitation, all copyrights, patents, trademarks, service marks, trade secrets, contract rights, titles, themes, stories, treatments, ideas, concepts, technologies, art work, logos, hardware, software, and as may be embodied in any and all computer programs, tapes, diskettes, disks, mailing lists, lists of actual or prospective customers and/or suppliers, notebooks, documents, memoranda, reports, files, correspondence, charts, lists and all other written, printed or otherwise recorded material of any kind whatsoever and any other information, whether or not reduced to writing, including “know-how”, ideas, concepts, research, processes, and plans. “Confidential Information” does not include information that is in the public domain, information that is generally known in the trade, or information that Executive can prove he acquired wholly independently of his employment with the Company. Executive shall not, at any time during the Term or thereafter, directly or indirectly, disclose or furnish to any other person, firm or corporation any Confidential Information, except in the course of the proper performance of his duties hereunder or as required by law (in which event Executive shall give prior written notice to Company and shall cooperate with Company and Company’s counsel in complying with such legal requirements). Promptly upon the expiration or termination of Executive’s employment hereunder for any reason or whenever the Company so requests, Executive shall surrender to the Company all documents, drawings, work papers, lists, memoranda, records and other data (including all copies) constituting or pertaining in any way to any of the Confidential Information.

5.3 Non-Competition . In consideration of the Company disclosing and providing access to Confidential Information after the date hereof, and other good and valuable consideration (including the severance entitlements payable under Section 4.2) , the receipt and sufficiency of which are hereby acknowledged, Executive and the Company, intending to be legally bound, hereby agree as follows. Executive shall not, during Executive’s employment hereunder or for a period of twelve months following a Termination Without Cause (as defined in Section 4.2 above) or a Termination With Good Reason (as defined in Section 4.3 above) directly: (a) compete with the Company; or (b) have an interest in, be employed by, be engaged in or participate in the ownership, management, operation or control of, or act in any advisory or other capacity for, any Competing Entity which conducts its business within the Territory (as such terms are

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hereinafter defined); provided , however , that notwithstanding the foregoing, Executive may make solely passive investments in any Competing Entity the common stock of which is “publicly held,” and of which Executive shall not own or control, directly or indirectly, in the aggregate securities which constitute more than one (1%) percent of the voting rights or equity ownership of such Competing Entity; or (c) solicit or divert any business or any customer from the Company or assist any person, firm or corporation in doing so or attempting to do so; or (d) cause or seek to cause any person, firm or corporation to refrain from dealing or doing business with the Company or assist any person, firm or corporation in doing so or attempting to do so.

For purposes of this Section 5.3, (i) the term “Competing Entity” shall mean any entity which presently or during the period referred to above engages in any business activity in which the Company is then engaged; and (ii) the term “Territory” shall mean any geographic area in which the Company conducts business during such period.

Notwithstanding the foregoing, in the event that Executive elects (a “Competitive Election”), during the Consideration Period, to either (a) compete with the Company, or (b) have an interest in, be employed by, be engaged in or participate in the ownership, management, operation or control of, or act in any advisory or other capacity for, any Competing Entity which conducts its business within the Territory (the foregoing subsections (a) and (b), collectively, the “Competitive Activities”), then, at least ten (10) business days prior to commencing any such Competitive Activities, Executive shall deliver to the Company a written notice (the “Competition Notice”) advising the Company of (i) Executive’s intent to commence Competitive Activities, and (ii) the commencement date for such Competitive Activities (the “Effective Date”). No such Competitive Election during the Consideration Period will be deemed a breach of this Agreement; rather, in the event Executive makes a Competitive Election prior to the expiration of the Consideration Period, then (x) Executive shall forfeit any Severance Payment and Benefits Payments otherwise payable pursuant to Section 4.2 or 4.3 above, and (y) the Company shall have no obligation to make any Severance Payment or Benefits Payments to Executive under Section 4.2 or 4.3 for any periods beyond the Effective Date.

5.4 Non-Solicitation . In consideration of the Company disclosing and providing access to Confidential Information, after the date hereof, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Executive and the Company, intending to be legally bound, hereby agree as follows. Executive shall not, for a period of eighteen (18) months from the date of any termination or expiration of his employment hereunder, solicit, directly or indirectly, or cause or permit others to solicit, directly or indirectly, (a) any person employed by the Company (a “Current Employee”) to leave employment with the Company or (b) any dealer (a “Dealer”) of the Company’s wholly-owned subsidiary, Monitronics International, Inc. (“Monitronics”), to leave the Monitronics dealer network (the “Dealer Network”) or sell alarm monitoring contracts to another alarm monitoring company. The term “solicit” includes, but is not limited to the following (regardless of whether done directly or indirectly): (i) requesting that a Current Employee change employment or that a Dealer leave the Dealer Network, (ii) informing a Current Employee that an opening exists elsewhere or inform a Dealer that alternative dealer arrangements are available, (iii) assisting a Current Employee in finding employment elsewhere or a Dealer in finding alternative distribution opportunities elsewhere, (iv) inquiring if a Current Employee “knows of anyone who might be interested” in a position elsewhere or if a Dealer “knows of anyone who might be interested” in joining an alternative dealer network, (v) inquiring if a Current Employee might have an interest in employment elsewhere or if a Dealer might have an interest in joining an alternative dealer network, (vi) informing others of the name or status of, or other information about, a Current Employee or Dealer, or (vii) any other similar conduct, the effect of which is that a Current Employee leaves the employment of the Company or that a Dealer leaves the Dealer Network.

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5.5 Breach of Provisions . In the event that Executive shall breach any of the provisions of this Article V, or in the event that any such breach is threatened by Executive, in addition to and without limiting or waiving any other remedies available to the Company at law or in equity, the Company shall be entitled to immediate injunctive relief in any court, domestic or foreign, having the capacity to grant such relief, without the necessity of posting a bond, to restrain any such breach or threatened breach and to enforce the provisions of this Article V. Executive acknowledges and agrees that there is no adequate remedy at law for any such breach or threatened breach and, in the event that any action or proceeding is brought seeking injunctive relief, Executive shall not use as a defense thereto that there is an adequate remedy at law.

5.6 Reasonable Restrictions . The parties acknowledge that the foregoing restrictions, the duration and the territorial scope thereof as set forth in this Article V, are under all of the circumstances reasonable and necessary for the protection of the Company and its business.

5.7 Definition . For purposes of this Article V, the term “Company” shall be deemed to include (i) any predecessor to, or successor of the Company, (ii) any subsidiary of the Company (including, without limitation, any entity in which the Company owns 50% or more of the issued and outstanding equity), and (iii) any entity that is under the control or common control of the Company (including, by way of illustration and not as a limitation, any joint venture to which the Company or one of its subsidiaries is a party).

5.8 Third Party Trade Secrets . In the same way that the Company endeavors to protect its own Confidential Information, the Company endeavors not to engage in any conduct which would violate the legal protection afforded to the trade secret information of third parties. Under no circumstances will the Company accept the improper disclosure of other parties’ trade secrets. Therefore, in rendering Executive’s services hereunder, Executive agrees not to disclose to the Company or utilize in any manner trade secret information in Executive’s possession belonging to any other party.

ARTICLE VI

MISCELLANEOUS
6.1 Binding Effect . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, heirs, distributees, successors and assigns.

6.2 Assignment . The Company may assign this Agreement to any successor in interest to its business, or to any Affiliate of the Company, and Executive hereby agrees to be employed by such assignee as though such assignee were originally the employer named herein. 

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