UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-34176
ASCENT CAPITAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
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State of Delaware |
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26-2735737 |
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(State or other jurisdiction of |
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(I.R.S. Employer Identification No.) |
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incorporation or organization) |
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5251 DTC Parkway, Suite 1000 |
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Greenwood Village, Colorado |
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80111 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (303) 628-5600
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of outstanding shares of Ascent Capital Group, Inc.’s common stock as of October 28, 2013 was:
Series A common stock 13,646,379 shares; and
Series B common stock 384,371 shares.
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Page |
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PART I — FINANCIAL INFORMATION |
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1 |
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1 |
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Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) |
2 |
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3 |
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Condensed Consolidated Statement of Stockholders’ Equity (unaudited) |
4 |
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5 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
17 |
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24 |
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24 |
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25 |
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26 |
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27 |
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28 |
ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
(unaudited)
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September 30, |
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December 31, |
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2013 |
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2012 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
80,940 |
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$ |
78,422 |
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Restricted cash |
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2,680 |
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2,640 |
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Marketable securities, at fair value |
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145,895 |
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142,587 |
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Trade receivables, net of allowance for doubtful accounts of $1,913 in 2013 and $1,436 in 2012 |
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13,621 |
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10,891 |
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Deferred income tax assets, net |
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3,780 |
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3,780 |
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Income taxes receivable |
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49 |
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132 |
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Prepaid and other current assets |
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14,497 |
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15,989 |
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Assets held for sale |
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1,231 |
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7,205 |
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Total current assets |
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262,693 |
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261,646 |
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Property and equipment, net of accumulated depreciation of $32,925 in 2013 and $30,570 in 2012 |
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55,334 |
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56,491 |
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Subscriber accounts, net of accumulated amortization of $445,773 in 2013 and $308,487 in 2012 |
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1,338,401 |
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987,975 |
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Dealer network and other intangible assets, net of accumulated amortization of $29,353 in 2013 and $20,580 in 2012 |
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69,580 |
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29,853 |
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Goodwill |
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522,260 |
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349,227 |
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Other assets, net |
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32,310 |
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22,634 |
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Assets of discontinued operations |
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— |
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54 |
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Total assets |
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$ |
2,280,578 |
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$ |
1,707,880 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
6,318 |
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$ |
1,532 |
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Accrued payroll and related liabilities |
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5,393 |
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3,504 |
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Other accrued liabilities |
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52,639 |
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29,313 |
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Deferred revenue |
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14,331 |
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10,327 |
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Purchase holdbacks |
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19,429 |
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10,818 |
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Current portion of long-term debt |
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9,166 |
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6,950 |
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Liabilities of discontinued operations |
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6,876 |
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7,369 |
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Total current liabilities |
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114,152 |
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69,813 |
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Non-current liabilities: |
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Long-term debt |
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1,574,164 |
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1,101,433 |
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Long-term purchase holdbacks |
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6,756 |
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— |
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Derivative financial instruments |
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6,491 |
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12,359 |
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Deferred income tax liability, net |
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8,909 |
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8,187 |
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Other liabilities |
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17,942 |
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5,990 |
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Total liabilities |
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1,728,414 |
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1,197,782 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued |
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— |
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— |
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Series A common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding 13,647,210 and 13,389,821 shares at September 30, 2013 and December 31, 2012, respectively |
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137 |
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134 |
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Series B common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 736,105 and 737,166 shares at September 30, 2013 and December 31, 2012, respectively |
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7 |
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7 |
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Series C common stock, $.01 par value. Authorized 45,000,000 shares; no shares issued |
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— |
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— |
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Additional paid-in capital |
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1,501,288 |
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1,453,700 |
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Accumulated deficit |
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(943,949 |
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(934,213 |
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Accumulated other comprehensive loss, net |
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(5,319 |
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(9,530 |
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Total stockholders’ equity |
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552,164 |
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510,098 |
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Total liabilities and stockholders’ equity |
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$ |
2,280,578 |
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$ |
1,707,880 |
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See accompanying notes to condensed consolidated financial statements.
ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Amounts in thousands, except share amounts
(unaudited)
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Three months ended
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Nine months ended
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2013 |
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2012 |
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2013 |
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2012 |
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Net revenue |
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$ |
115,844 |
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84,667 |
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$ |
318,275 |
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249,863 |
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Operating expenses: |
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Cost of services |
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20,155 |
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12,881 |
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50,951 |
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35,331 |
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Selling, general, and administrative, including stock-based and long-term incentive compensation |
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23,870 |
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18,256 |
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65,116 |
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54,093 |
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Amortization of subscriber accounts, dealer network and other intangible assets |
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55,746 |
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40,815 |
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146,059 |
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118,245 |
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Depreciation |
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2,305 |
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2,084 |
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6,360 |
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6,686 |
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Restructuring charges |
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402 |
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— |
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402 |
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— |
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Loss (gain) on sale of operating assets, net |
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(17 |
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15 |
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(5,473 |
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(1,298 |
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Loss on pension plan settlements |
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— |
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6,571 |
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— |
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6,571 |
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102,461 |
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80,622 |
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263,415 |
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219,628 |
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Operating income |
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13,383 |
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4,045 |
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54,860 |
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30,235 |
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Other income (expense): |
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Interest income |
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909 |
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1,042 |
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2,816 |
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3,008 |
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Interest expense |
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(26,022 |
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(19,299 |
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(66,650 |
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(50,258 |
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Realized and unrealized loss on derivative financial instruments |
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— |
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— |
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— |
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(2,044 |
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Refinancing expense |
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— |
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— |
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— |
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(6,245 |
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Other income, net |
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504 |
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1,091 |
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1,962 |
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2,940 |
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(24,609 |
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(17,166 |
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(61,872 |
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(52,599 |
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Loss from continuing operations before income taxes |
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(11,226 |
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(13,121 |
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(7,012 |
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(22,364 |
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Income tax expense from continuing operations |
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(1,252 |
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(604 |
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(2,940 |
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(2,052 |
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Net loss from continuing operations |
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(12,478 |
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(13,725 |
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(9,952 |
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(24,416 |
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Discontinued operations: |
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Earnings (loss) from discontinued operations |
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(83 |
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(1,202 |
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256 |
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(2,992 |
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Income tax expense |
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— |
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(680 |
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(40 |
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(606 |
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Earnings (loss) from discontinued operations, net of income tax |
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(83 |
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(1,882 |
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216 |
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(3,598 |
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Net loss |
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(12,561 |
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(15,607 |
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(9,736 |
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(28,014 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments |
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351 |
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222 |
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(17 |
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283 |
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Unrealized holding gains (losses) on marketable securities |
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(1,024 |
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2,031 |
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(3,176 |
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2,624 |
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Unrealized gain (loss) on derivative contracts |
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(4,526 |
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(2,539 |
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7,404 |
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(13,779 |
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Pension liability adjustments |
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— |
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4,690 |
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— |
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4,690 |
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Total other comprehensive income (loss), net of tax |
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(5,199 |
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4,404 |
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4,211 |
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(6,182 |
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Comprehensive loss |
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$ |
(17,760 |
) |
(11,203 |
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$ |
(5,525 |
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(34,196 |
) |
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Basic and diluted earnings (loss) per share: |
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Continuing operations |
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$ |
(0.89 |
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(0.98 |
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$ |
(0.71 |
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(1.74 |
) |
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Discontinued operations |
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(0.01 |
) |
(0.13 |
) |
0.01 |
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(0.25 |
) |
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Net loss |
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$ |
(0.90 |
) |
(1.11 |
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$ |
(0.70 |
) |
(1.99 |
) |
See accompanying notes to condensed consolidated financial statements.
ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Amounts in thousands
(unaudited)
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Nine months ended |
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September 30, |
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2013 |
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2012 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(9,736 |
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(28,014 |
) |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Loss (earnings) from discontinued operations, net of income tax |
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(216 |
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3,598 |
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Amortization of subscriber accounts, dealer network and other intangible assets |
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146,059 |
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118,245 |
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Depreciation |
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6,360 |
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6,686 |
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Stock based compensation |
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5,535 |
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3,928 |
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Deferred income tax expense |
|
731 |
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361 |
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Unrealized gain on derivative financial instruments |
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— |
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(6,793 |
) |
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Refinancing expense |
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— |
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6,245 |
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Gain on the sale of operating assets, net |
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(5,473 |
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(1,298 |
) |
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Long-term debt discount amortization |
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1,263 |
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4,285 |
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Loss on pension plan settlements |
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— |
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6,571 |
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Other non-cash activity, net |
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7,634 |
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6,595 |
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Changes in assets and liabilities: |
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Trade receivables |
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(6,394 |
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(4,464 |
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Prepaid expenses and other assets |
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2,617 |
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(377 |
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Payables and other liabilities |
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21,549 |
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12,358 |
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Operating activities from discontinued operations, net |
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(278 |
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(1,481 |
) |
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Net cash provided by operating activities |
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169,651 |
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126,445 |
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Cash flows from investing activities: |
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Capital expenditures |
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(6,314 |
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(3,591 |
) |
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Purchases of subscriber accounts |
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(174,527 |
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(128,407 |
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Cash paid for acquisition, net of cash acquired |
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(479,795 |
) |
— |
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Purchases of marketable securities |
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(21,770 |
) |
(99,667 |
) |
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Proceeds from sale of marketable securities |
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15,384 |
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— |
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Decrease (increase) in restricted cash |
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(40 |
) |
51,603 |
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Proceeds from the sale of operating assets |
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12,886 |
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6,515 |
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Net cash used in investing activities |
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(654,176 |
) |
(173,547 |
) |
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Cash flows from financing activities: |
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Proceeds from long-term debt |
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594,875 |
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998,100 |
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Payments of long-term debt |
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(90,456 |
) |
(979,650 |
) |
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Payments of financing costs |
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(11,079 |
) |
(44,239 |
) |
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Stock option exercises |
|
10 |
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327 |
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Purchases and retirement of common stock |
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— |
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(4,658 |
) |
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Bond hedge and warrant transactions, net |
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(6,107 |
) |
— |
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Other financing activities |
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(200 |
) |
— |
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Net cash provided by (used in) financing activities |
|
487,043 |
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(30,120 |
) |
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|
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|
|
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Net increase (decrease) in cash and cash equivalents |
|
2,518 |
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(77,222 |
) |
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Cash and cash equivalents at beginning of period |
|
78,422 |
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183,558 |
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|
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Cash and cash equivalents at end of period |
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$ |
80,940 |
|
106,336 |
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Supplemental cash flow information: |
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State taxes paid |
|
$ |
2,350 |
|
2,072 |
|
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Interest paid |
|
49,324 |
|
23,149 |
|
|
See accompanying notes to condensed consolidated financial statements.
ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
Amounts in thousands
(unaudited)
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Accumulated |
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Additional |
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other |
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Total |
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Preferred |
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Common Stock |
|
paid-in |
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Accumulated |
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comprehensive |
|
stockholders’ |
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|||||
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stock |
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Series A |
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Series B |
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Series C |
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capital |
|
deficit |
|
income (loss) |
|
equity |
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Balance at December 31, 2012 |
|
— |
|
134 |
|
7 |
|
— |
|
1,453,700 |
|
(934,213 |
) |
(9,530 |
) |
510,098 |
|
|
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(9,736 |
) |
— |
|
(9,736 |
) |
|
|
Other comprehensive income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
4,211 |
|
4,211 |
|
|
|
Stock-based compensation |
|
— |
|
— |
|
— |
|
— |
|
5,535 |
|
— |
|
— |
|
5,535 |
|
|
|
Stock awards and option exercises |
|
— |
|
— |
|
— |
|
— |
|
10 |
|
— |
|
— |
|
10 |
|
|
|
Value of shares withheld for tax liability |
|
— |
|
— |
|
— |
|
— |
|
(427 |
) |
— |
|
— |
|
(427 |
) |
|
|
Stock issued as consideration for the Security Networks Acquisition |
|
— |
|
3 |
|
— |
|
— |
|
18,720 |
|
— |
|
— |
|
18,723 |
|
|
|
Value of beneficial conversion option on the issuance of 4.00% Convertible notes, net of the equity component of debt issuance costs |
|
— |
|
— |
|
— |
|
— |
|
29,857 |
|
— |
|
— |
|
29,857 |
|
|
|
Bond Hedge and Warrant Transactions, net |
|
— |
|
— |
|
— |
|
— |
|
(6,107 |
) |
— |
|
— |
|
(6,107 |
) |
|
|
Balance at September 30, 2013 |
|
$ |
— |
|
137 |
|
7 |
|
— |
|
1,501,288 |
|
(943,949 |
) |
(5,319 |
) |
552,164 |
|
See accompanying notes to condensed consolidated financial statements.
ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(1) Basis of Presentation
On July 7, 2011, Ascent Media Corporation merged with its direct wholly owned subsidiary, Ascent Capital Group, Inc., for the purpose of changing its name to Ascent Capital Group, Inc. The accompanying Ascent Capital Group, Inc. (“Ascent Capital” or the “Company”) condensed consolidated financial statements represent the financial position and results of operations of Ascent Capital and its consolidated subsidiaries. Monitronics International, Inc. (“Monitronics”) is the primary, wholly owned, operating subsidiary of the Company. On August 16, 2013, Monitronics acquired all of the equity interests of Security Networks LLC (“Security Networks”) and certain affiliated entities (the “Security Networks Acquisition”). Monitronics provides security alarm monitoring and related services to residential and business subscribers throughout the United States and parts of Canada. Monitronics monitors signals arising from burglaries, fires, medical alerts and other events through security systems installed by independent dealers at subscribers’ premises.
The unaudited interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s (the “SEC”) Regulation S-X. Accordingly, it does not include all of the information required by generally accepted accounting principles in the United States (“U.S. GAAP”) for complete financial statements. The Company’s unaudited condensed consolidated financial statements as of September 30, 2013, and for the three and nine months ended September 30, 2013 and 2012, include Ascent Capital and all of its direct and indirect subsidiaries. The accompanying interim condensed consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with the Ascent Capital Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 27, 2013 (the “2012 Form 10-K”).
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses for each reporting period. The significant estimates made in preparation of the Company’s condensed consolidated financial statements primarily relate to valuation of goodwill, other intangible assets, long-lived assets, deferred tax assets, derivative financial instruments, and the amount of the allowance for doubtful accounts. These estimates are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts them when facts and circumstances change. As the effects of future events cannot be determined with any certainty, actual results could differ from the estimates upon which the carrying values were based.
The Company has reclassified certain prior period amounts to conform to the current period’s presentation.
(2) Recent Accounting Pronouncements
There were no new accounting pronouncements issued during the nine months ended September 30, 2013 that are expected to have a material impact on the Company.
(3) Investments in Marketable Securities
Ascent Capital owns marketable securities consisting of diversified corporate bond funds. The following table presents the activity of these investments, which have all been classified as available-for-sale securities (amounts in thousands):
|
|
|
Nine months ended September 30, |
|
|||
|
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
142,587 |
|
40,377 |
|
|
Purchases |
|
21,770 |
|
99,667 |
|
|
|
Sales at cost basis (a) |
|
(15,286 |
) |
— |
|
|
|
Realized and unrealized gains (losses), net |
|
(3,176 |
) |
2,624 |
|
|
|
Ending balance |
|
$ |
145,895 |
|
142,668 |
|
(a) For the nine months ended September 31, 2013, total proceeds from the sales of marketable securities were $15,384,000, resulting in a pre-tax gain of $98,000.
The following table presents the net after-tax unrealized and realized gains and losses on the investment in marketable securities that were recorded into Accumulated other comprehensive loss in the condensed consolidated balance sheets and in Other comprehensive income (loss) on the condensed consolidated statements of operations and comprehensive income (loss) (amounts in thousands):
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
||||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
||
|
Beginning balance |
|
$ |
515 |
|
717 |
|
$ |
2,667 |
|
124 |
|
|
Unrealized gains (losses), net of income tax of $0 |
|
(926 |
) |
2,031 |
|
(3,078 |
) |
2,624 |
|
||
|
Realized gains recognized into earnings, net of income tax of $0 (a) |
|
(98 |
) |
— |
|
(98 |
) |
— |
|
||
|
Ending balance |
|
$ |
(509 |
) |
2,748 |
|
$ |
(509 |
) |
2,748 |
|
(a) The realized gain on the sale of marketable securities for the three and nine months ended September 30, 2013 is included in Other income, net on the condensed consolidated statements of operations and comprehensive income (loss).
(4) Assets Held for Sale
In 2013, the Company reclassified $2,500,000 of land and building, net of accumulated depreciation, to Assets held for sale on the condensed consolidated balance sheet. Additionally, for the nine months ended September 30, 2013, the Company completed sales of certain assets held for sale with a carrying value of $8,474,000, resulting in a gain on disposition of approximately $2,221,000. At September 30, 2013, the Company has $1,231,000 classified as assets held for sale on the condensed consolidated balance sheet. The Company currently expects to complete the sale of these real estate properties during the next twelve months.
(5) Security Networks Acquisition
On August 16, 2013 (the “Closing Date”), Monitronics acquired all of the equity interests of Security Networks and certain affiliated entities. The purchase price (the “Security Networks Purchase Price”) of $501,614,000 consisted of $482,891,000 in cash and 253,333 shares of Ascent Capital’s Series A common stock (par value $0.01 per share) with a Closing Date fair value of $18,723,000.
The cash portion of the Security Networks purchase price was funded by cash on hand at Ascent Capital, the proceeds of Ascent Capital’s July issuance of $103,500,000 in aggregate principal amount of 4.00% Senior Convertible Notes due 2020, the proceeds of Monitronics’ July issuance of $175,000,000 in aggregate principal amount of 9.125% Senior Notes due 2020 (in connection with the merger of Monitronics Escrow Corporation, the issuer of these notes, with and into Monitronics on the Closing Date) and the proceeds of incremental term loans of $225,000,000 million issued under Monitronics’ existing
credit facility. See note 7, Long-Term Debt for further information on the debt obligations. The Security Networks Purchase Price will be adjusted for customary post-closing adjustments.
The Security Networks Acquisition was accounted for as a business combination utilizing the acquisition method in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Under the acquisition method of accounting, the Security Networks Purchase Price has been allocated to Security Networks’ tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary estimates of fair value as follows (amounts in thousands):
|
Cash |
|
$ |
3,096 |
|
|
Trade receivables |
|
1,305 |
|
|
|
Other current assets |
|
1,759 |
|
|
|
Property and equipment |
|
1,404 |
|
|
|
Subscriber accounts |
|
307,700 |
|
|
|
Dealer network and other intangible assets |
|
48,500 |
|
|
|
Goodwill |
|
173,033 |
|
|
|
Purchase holdbacks, current and non-current |
|
(9,615 |
) |
|
|
Other current and non-current liabilities |
|
(25,568 |
) |
|
|
Fair value of consideration |
|
$ |
501,614 |
|
The preliminary estimates of fair value of assets acquired and liabilities assumed are based on available information as of the date of this report and management assumptions, and may be revised as additional information becomes available. Any post-closing adjustments may change the purchase price or the allocation of the purchase price, which could affect the fair values assigned to the assets and liabilities and could result in a change to the condensed consolidated financial information, including a change to goodwill.
Goodwill in the amount of $173,033,000 was recognized in connection with the Security Networks Acquisition and was calculated as the excess of the consideration transferred over the net assets recognized, including deferred taxes, and represents the value to Monitronics for Security Networks’ recurring revenue and cash flow streams and its unique business strategy of partnering with independent dealers to obtain customers. Approximately $132,000,000 of the goodwill is estimated to be deductible for tax purposes.
The subscriber accounts acquired in the Security Networks Acquisition are amortized using the 14-year 235% declining balance method. The dealer network and other intangible assets acquired, which consist of non-compete agreements, are amortized on a straight-line basis over their estimated useful lives of five years.
Ascent Capital’s results of operations for the three and nine months ended September 30, 2013 include the operations of the Security Networks business from the Closing Date. For the three and nine months ended September 30, 2013, net revenue and operating loss attributable to Security Networks was $11,494,000 and $1,591,000, respectively. Net revenue attributable to Security Networks for the three and nine months ended reflects the negative impact of an approximate $2,500,000 fair value adjustment that reduced deferred revenue acquired in the Security Networks Acquisition.
As of September 30, 2013, Ascent Capital has incurred $2,470,000 of legal and professional services expense and other costs related to the Security Networks Acquisition, which are included in Selling, general, and administrative expense in the condensed consolidated statements of operations and comprehensive income (loss).
The following table includes unaudited pro forma information for Ascent Capital, which includes the historical operating results of Security Networks prior to ownership by Monitronics. This unaudited pro forma information gives effect to certain adjustments, including increased amortization to reflect the fair value assigned to the subscriber accounts and dealer network and other intangible assets acquired and increased interest expense relating to the debt transactions entered into to fund the Security Networks Acquisition. The unaudited pro-forma results assume that the Security Networks Acquisition and the debt transactions had occurred on January 1, 2012 for all periods presented. They are not necessarily indicative of the results of operations that would have occurred if the acquisition had been made at the beginning of the periods presented or that may be obtained in the future.
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
||||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
||
|
|
|
(amounts in thousands, except per share amounts) |
|
||||||||
|
As reported: |
|
|
|
|
|
|
|
|
|
||
|
Net revenue |
|
$ |
115,844 |
(a) |
84,667 |
|
$ |
318,275 |
(a) |
249,863 |
|
|
Net loss from continuing operations |
|
(12,478 |
) |
(13,725 |
) |
(9,952 |
) |
(24,416 |
) |
||
|
Basic and diluted net loss from continuing operations per share |
|
(0.89 |
) |
(0.98 |
) |
(0.71 |
) |
(1.74 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Supplemental pro-forma: |
|
|
|
|
|
|
|
|
|
||
|
Net revenue |
|
$ |
131,951 |
|
105,587 |
|
$ |
382,789 |
|
303,483 |
(b) |
|
Net loss from continuing operations (c) |
|
(9,530 |
) |
(24,974 |
) |
(23,758 |
) |
(66,509 |
) |
||
|
Basic and diluted net loss from continuing operations per share |
|
(0.67 |
) |
(1.75 |
) |
(1.68 |
) |
(4.65 |
) |
||
(a) As reported net revenue for the three and nine months ended September 30, 2013 reflects the negative impact of an approximate $2,500,000 fair value adjustment that reduced deferred revenue acquired in the Security Networks Acquisition.
(b) Pro-forma net revenue for the nine months ended September 30, 2012 reflects the negative impact of an approximate $2,700,000 fair value adjustment that would have reduced deferred revenue acquired in the Security Networks Acquisition.
(c) The pro-forma net loss from continuing operations amounts for the three and nine months ended September 30, 2013 include non-recurring acquisition costs incurred by Monitronics of $1,032,000 and $2,470,000, respectively.
(6) Other Accrued Liabilities
Other accrued liabilities consisted of the following (amounts in thousands):
|
|
|
September 30,
|
|
December 31,
|
|
||
|
|
|
|
|
|
|
|
|
|
Interest payable |
|
$ |
27,516 |
|
$ |
9,624 |
|
|
Income taxes payable |
|
2,109 |
|
2,388 |
|
||
|
Legal accrual |
|
10,906 |
|
9,785 |
|
||
|
Other |
|
12,108 |
|
7,516 |
|
||
|
Total Other accrued liabilities |
|
$ |
52,639 |
|
$ |
29,313 |
|
(7) Long-Term Debt
Long-term debt consisted of the following (amounts in thousands):
|
|
|
September 30,
|
|
December 31,
|
|
||
|
|
|
|
|
|
|
||
|
Ascent Capital 4.00% Convertible Senior Notes due July 15, 2020 |
|
$ |
73,404 |
|
$ |
— |
|
|
Monitronics 9.125% Senior Notes due April 1, 2020 |
|
580,000 |
|
410,000 |
|
||
|
Monitronics term loans, matures March 23, 2018, LIBOR plus 3.25%, subject to a LIBOR floor of 1.00% (a) |
|
904,326 |
|
685,583 |
|
||
|
Monitronics $225 million revolving credit facility, matures December 22, 2017, LIBOR plus 3.75%, subject to a LIBOR floor of 1.00% (b) |
|
25,600 |
|
12,800 |
|
||
|
|
|
1,583,330 |
|
1,108,383 |
|
||
|
Less current portion of long-term debt |
|
(9,166 |
) |
(6,950 |
) |
||
|
Long-term debt |
|
$ |
1,574,164 |
|
$ |
1,101,433 |
|
(a) The interest rate on the term loan was LIBOR plus 4.25%, subject to a LIBOR floor of 1.25%, until March 25, 2013.
(b) The interest rate on the revolving credit facility was LIBOR plus 4.25%, subject to a LIBOR floor of 1.25%, until March 25, 2013.
Convertible Notes
On July 17, 2013, Ascent Capital issued $103,500,000 in aggregate principal amount of 4.00% convertible senior notes due July 15, 2020 (the “Convertible Notes”), in an offering registered under the Securities Act of 1933, as amended. The Convertible Notes will be convertible, under certain circumstances, into cash, shares of Ascent Capital’s Series A common stock, par value $.01 per share (the “Common Stock”), or any combination thereof at Ascent Capital’s election. The Convertible Notes will mature on July 15, 2020 and bear interest at a rate per annum of 4.00%. Interest on the Convertible Notes is payable semi-annually on January 15 and July 15 of each year.
Holders of the Convertible Notes (“Noteholders”) shall 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 Common Stock per $1,000 principal amount of Convertible Notes (subject to adjustment in certain situations), which represents an initial conversion price of approximately $102.804 (the “Conversion Price”). Ascent Capital is entitled to settle any such conversion by delivery of cash, shares of Common Stock or any combination thereof at Ascent’s election. In addition, Noteholders will have the right to submit Convertible Notes for conversion, subject to the satisfaction of certain conditions, in the event of certain corporate transactions.
In the event of a fundamental change (as such term is defined in the indenture governing the Convertible Notes) at any time prior to the maturity date, each Noteholder shall have the right, at such Noteholder’s option, to require Ascent Capital to repurchase for cash any or all of such Noteholder’s Convertible Notes on the repurchase date specified by Ascent Capital at a repurchase price equal to 100% of the principal amount thereof, together with accrued and unpaid interest, including unpaid additional interest, if any, unless the repurchase date occurs after an interest record date and on or prior to the related interest payment date, as specified in the indenture.
The Convertible Notes are within the scope of FASB ASC Topic 470 Subtopic 20, Debt with Conversion and Other Options (“FASB ASC 470-20”), and as such are required to be separated into a liability and equity component. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated conversion option. The carrying amount of the equity component is determined by deducting the fair value of the liability component from the initial proceeds ascribed to the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, treated as a debt discount, is amortized to interest cost over the expected life of a similar liability that does not have an associated conversion option using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification as prescribed in FASB ASC 815 Subtopic 40, Contracts in an Entity’s Own Equity (“FASB ASC 815-40”). Accordingly, the Company estimated fair value of the liability component as $72,764,000, with the remaining excess amount of $30,736,000 allocated to the equity component. The Convertible Notes are presented on the condensed consolidated balance sheet as follows (amounts in thousands):
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
103,500 |
|
|
Unamortized discount |
|
(30,096 |
) |
|
|
Carrying value |
|
$ |
73,404 |
|
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 $862,500 on the Convertible Notes for both the three and nine months ended September 30, 2013. The Company amortized $640,000 of the Convertible Notes debt discount into interest expense for both the three and nine months ended September 30, 2013.
Hedging Transactions Relating to the Offering of the Convertible Notes
In connection with the issuance of the Convertible Notes, Ascent Capital entered into separate privately negotiated purchased call options (the “Bond Hedge Transactions”). The Bond Hedge Transactions require the counterparties to offset Common Stock deliverable or cash payments made by Ascent Capital upon conversion of the Convertible Notes in the event that the volume-weighted average price of the Common Stock on each trading day of the relevant valuation period is greater than the strike price of $102.804, which corresponds to the Conversion Price of the Convertible Notes. The Bond Hedge Transactions cover, subject to anti-dilution adjustments, approximately 1,007,000 shares of 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 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 Common Stock, subject to anti-dilution adjustments, as the Bond Hedge Transactions. The Warrant Transactions require Ascent Capital to deliver Common Stock or make cash payments to the counterparties on each expiration date with a value equal to the number of warrants exercisable on that date times the excess of the volume-weighted average price of the Common Stock over the strike price of $118.62, which effectively reflects a 50% conversion premium on the Convertible Notes. 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 Common Stock. Ascent Capital may elect to settle its delivery obligation under the Warrant Transactions in cash.
The Bond Hedge Transactions and Warrant Transactions are separate transactions entered into by Ascent Capital, are not part of the terms of the Convertible Notes and will not affect the Noteholders’ rights under the Convertible Notes. The Noteholders will not have any rights with respect to the Bond Hedge Transactions or the Warrant Transactions.
Ascent Capital purchased the bond hedge call option for $20,318,000 and received $14,211,000 in proceeds from the sale of the warrants, resulting in a net cost for the Bond Hedge Transactions and the Warrant Transactions of $6,107,000. In accordance with FASB ASC 815-40, the fair value of the Bond Hedge and Warrant Transactions was recognized in Additional paid-in capital on the condensed consolidated balance sheet.
Senior Notes
On March 23, 2012, Monitronics closed on a $410,000,000 privately placed debt offering of 9.125% Senior Notes due 2020 (the “Existing Senior Notes”). In August 2012, Monitronics completed an exchange of the Existing Senior Notes for identical securities in a registered offering under the Securities Act of 1933, as amended.
On July 17, 2013, an additional $175,000,000 of 9.125% Senior Notes (the “New Senior Notes”) were issued by Monitronics Escrow Corporation (the “Escrow Issuer”), a wholly-owned subsidiary of Ascent Capital. The proceeds from this offering were placed in escrow and were released upon the Closing Date. Upon the Closing Date, the Escrow Issuer was merged into Monitronics and Monitronics assumed the New Senior Notes (the New Senior Notes, together with the Existing Senior Notes, are collectively referred to as the “Senior Notes”). Monitronics has offered to exchange the New Senior Notes for identical securities in a registered offering under the Securities Act of 1933, as amended. The exchange offer is expected to expire on December 4, 2013. See note 14, Subsequent Events, for further information.
The Senior Notes mature on April 1, 2020 and bear interest at 9.125% per annum. Interest payments are due semi-annually on April 1 and October 1 of each year, beginning on October 1, 2012.
The Senior Notes are guaranteed by all of Monitronics’ existing subsidiaries. Ascent Capital has not guaranteed any of Monitronics’ obligations under the Senior Notes.
In the third quarter of 2013, Ascent Capital purchased $5,000,000 in aggregate principal amount of Monitronics’ Senior Notes (“Ascent Acquired Senior Notes”). As a result of this transaction, the Ascent Acquired Senior Notes and the related interest components have been eliminated in the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2013. Furthermore, a loss of $200,000 was recognized as a result of the premium paid upon purchasing the Ascent Acquired Senior Notes. The loss is presented in Other income, net on the condensed consolidated statements of operations and other comprehensive income (loss) for the three and nine months ended September 30, 2013.
Credit Facility
On March 23, 2012, Monitronics entered into a senior secured credit facility with the lenders party thereto and Bank of America, N.A., as administrative agent, which provided a $550,000,000 term loan at a 1% discount and a $150,000,000 revolving credit facility (the “Credit Agreement”). Proceeds from the Credit Agreement and the Senior Notes, together with cash on hand, were used to retire all outstanding borrowings under Monitronics’ former credit facility, securitization debt, and to settle all related derivative contracts (the “Refinancing”).
On November 7, 2012, Monitronics entered into an amendment to the Credit Agreement (“Amendment No. 1”), which provided an incremental term loan with an aggregate principal amount of $145,000,000. The incremental term loan was used to fund the acquisition of approximately 93,000 subscriber accounts for a purchase price of approximately $131,000,000.
On March 25, 2013, Monitronics entered into a second amendment to the Credit Agreement (“Amendment No. 2”). Pursuant to Amendment No. 2, Monitronics repriced the interest rates applicable to the Credit Agreement’s facility (the “Repricing”) which is comprised of the term loans and revolving credit facility noted above. Concurrently with the Repricing, Monitronics extended the maturity of the revolving credit facility by nine months to December 22, 2017.
On August 16, 2013, in connection with the Security Networks Acquisition, Monitronics entered into a third amendment (“Amendment No. 3”) to the Credit Agreement to provide for, among other things, (i) an increase in the commitments under the revolving credit facility in a principal amount of $75,000,000, resulting in an aggregate principal amount of $225,000,000 at a 0.5% discount, (ii) new term loans in an aggregate principal amount of $225,000,000 (the “Incremental Term Loans”) and (iii) certain other amendments to the Credit Agreement, each as set forth in Amendment No. 3 (the Credit Agreement together with Amendment No. 1, Amendment No. 2 and Amendment No. 3, the “Credit Facility”).
The Credit Facility term loans bear interest at LIBOR plus 3.25%, subject to a LIBOR floor of 1.00%, and mature on March 23, 2018. Principal payments of approximately $2,292,000 and interest on the term loans are due quarterly. The Credit Facility revolver bears interest at LIBOR plus 3.75%, subject to a LIBOR floor of 1.00%, and matures on December 22, 2017. There is an annual commitment fee of 0.50% on unused portions of the Credit Facility revolver. As of September 30, 2013, $199,400,000 is available for borrowing under the revolving credit facility.
At any time after the occurrence of an event of default under the Credit Facility, the lenders may, among other options, declare any amounts outstanding under the Credit Facility immediately due and payable and terminate any commitment to make further loans under the Credit Facility. In addition, failure to comply with restrictions contained in the Senior Notes could lead to an event of default under the Credit Facility.
On September 28, 2013, Monitronics borrowed $25,600,000 on the Credit Facility revolver to fund its October 1, 2013 interest payment due under the Senior Notes of approximately $26,691,000.
The Credit Facility is secured by a pledge of all of the outstanding stock of Monitronics and all of its existing subsidiaries and is guaranteed by all of Monitronics’ existing subsidiaries. Ascent Capital has not guaranteed any of Monitronics’ obligations under the Credit Facility.
As of September 30, 2013, the Company has deferred financing costs, net of accumulated amortization, of $28,355,000 related to the Convertible Notes, the Senior Notes and the Credit Facility. These costs are included in Other assets, net on the accompanying condensed consolidated balance sheet and will be amortized over the remaining term of the respective debt instruments using the effective-interest method. In accordance with FASB ASC 470-20, we allocated approximately $879,000 of the Convertible Notes issuance costs to the equity component and recorded the amount as a reduction of Additional paid-in capital on the condensed consolidated balance sheet.
As a result of the Refinancing, the Company accelerated amortization of the securitization debt premium and certain deferred financing costs related to the former senior secured credit facility, and expensed certain other refinancing costs. The components of the Refinancing expense, reflected in the condensed consolidated statement of operations and comprehensive income (loss) as a component of Other income (expense) for the nine months ended September 30, 2012, are as follows (amounts in thousands):
|
|
|
For the nine
|
|
|
|
|
|
September
|
|
|
|
|
|
|
|
|
|
Accelerated amortization of deferred financing costs |
|
$ |
389 |
|
|
Accelerated amortization of securitization debt discount |
|
6,679 |
|
|
|
Other refinancing costs |
|
7,628 |
|
|
|
Gain on early termination of derivative instruments |
|
(8,451 |
) |
|
|
Total refinancing expense |
|
$ |
6,245 |
|
In order to reduce the financial risk related to changes in interest rates associated with the floating rate term loans under the Credit Facility, Monitronics entered into two interest rate swap agreements (each with separate counterparties) in 2012, with
terms similar to the Credit Facility term loans (the “Existing Swap Agreements”). On March 25, 2013, Monitronics negotiated amendments to the terms of the Existing Swap Agreements to coincide with the Repricing. In the third quarter of 2013, Monitronics entered into two additional interest rate swap agreements in conjunction with the Incremental Term Loans (all outstanding interest rate swap agreements are collectively referred to as the “Swaps”).
The Swaps have a maturity date of March 23, 2018 to match the term of the Credit Facility term loans. The Swaps have been designated as effective hedges of the Company’s variable rate debt and qualify for hedge accounting. See note 8, Derivatives, for further disclosures related to these derivative instruments. As a result of the Swaps, the interest rate on the borrowings under the Credit Facility term loans have been effectively converted from a variable rate to a weighted average fixed rate of 5.06%.
The terms of the Convertible Senior Notes, the Senior Notes and the Credit Facility provide for certain financial and nonfinancial covenants. As of September 30, 2013, the Company was in compliance with all required covenants.
Principal payments scheduled to be made on the Company’s debt obligations are as follows (amounts in thousands):
|
Remainder of 2013 |
|
$ |
2,292 |
|
|
2014 |
|
9,166 |
|
|
|
2015 |
|
9,166 |
|
|
|
2016 |
|
9,166 |
|
|
|
2017 |
|
34,767 |
|
|
|
2018 |
|
870,800 |
|
|
|
Thereafter |
|
683,500 |
|
|
|
Total principal payments |
|
1,618,857 |
|
|
|
Less: |
|
|
|
|
|
Unamortized discount on the Convertible Notes |
|
30,096 |
|
|
|
Unamortized discount on the Credit Facility term loans |
|
5,431 |
|
|
|
Total debt on condensed consolidated balance sheet |
|
$ |
1,583,330 |
|
(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 12, Fair Value Measurements, for additional information about the credit valuation adjustments.
The Swaps’ outstanding notional balance as of September 30, 2013 and terms are noted below:
|
Notional |
|
Effective Date |
|
Fixed
|
|
Variable Rate Received |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
541,750,000 |
|
March 28, 2013 |
|
1.884 |
% |
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor(a) |
|
|
143,550,000 |
|
March 28, 2013 |
|
1.384 |
% |
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor(a) |
|
|
|
112,217,337 |
|
September 30, 2013 |
|
1.959 |
% |
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor |
|
|
|
112,217,337 |
|
September 30, 2013 |
|
1.850 |
% |
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor |
|
|
(a) On March 25, 2013, Monitronics negotiated amendments to the terms of these interest rate swap agreements to coincide with the Repricing (the “Amended Swaps”). The Amended Swaps are held with the same counterparties as the Existing Swap Agreements. Upon entering into the Amended Swaps, Monitronics simultaneously dedesignated the Existing Swap Agreements and redesignated the Amended Swaps as cash flow hedges for the underlying change in the swap terms. The amounts previously recognized in Accumulated other comprehensive loss relating to the dedesignation will be recognized in Interest expense over the remaining life of the Amended Swaps.
All of the Swaps are designated and qualify as cash flow hedging instruments, with the effective portion of the Swaps change in fair value recorded in Accumulated other comprehensive 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 $6,911,000.
The impact of the derivatives designated as cash flow hedges on the condensed consolidated financial statements is depicted below (amounts in thousands):
|
|
|
For the three months ended September
|
|
For the nine months ended September
|
|
||||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Effective portion of gain (loss) recognized in Accumulated other comprehensive loss |
|
$ |
(5,734 |
) |
(3,668 |
) |
$ |
3,830 |
|
(16,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
||
|
Effective portion of loss reclassified from Accumulated other comprehensive loss into Net income (a) |
|
$ |
(1,208 |
) |
(1,129 |
) |
$ |
(3,574 |
) |
(2,346 |
) |
|
|
|
|
|
|
|
|
|
|
|
||
|
Ineffective portion of amount of gain (loss) recognized into Net income on interest rate swaps (a) |
|
$ |
(50 |
) |
— |
|
$ |
30 |
|
— |
|
(a) Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
On March 23, 2012, in connection with the Refinancing, Monitronics terminated all of its previously outstanding derivative financial instruments and recorded a gain of $8,451,000. These derivative financial instruments were not designated as hedges. For the nine months ended September 30, 2012, the realized and unrealized loss on derivative financial instruments includes settlement payments of $8,837,000 partially offset by a $6,793,000 unrealized gain related to the change in the fair value of these derivatives prior to their termination in March 2012.
(9) 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 “Security Networks Restructuring Plan”). The Security Networks Restructuring Plan provides certain employees with a severance package that entitles them to benefits upon completion of the transition in 2014. Severance costs related to the Security Networks Restructuring Plan are recognized ratably over the future service period. During the three and nine months ended September 30, 2013, the Company recorded $402,000 of restructuring charges related to employee termination benefits.
Additionally, in connection with Security Networks Restructuring Plan, the Company allocated approximately $492,000 of the Security Networks Purchase Price to accrued restructuring in relation to the Security Networks’ severance agreement entered into with its former Chief Executive Officer.
The following table provides the activity and balances of the Security Networks Restructuring Plan (amounts in thousands):
|
|
|
Nine months ended September 30, 2013 |
||||||||||
|
|
|
Opening
|
|
Additions |
|
Deductions |
|
Other |
|
Ending balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and retention |
|
$ |
— |
|
402 |
|
— |
|
492 |
(a) |
894 |
|
(a) Amount was recorded upon the acquisition of Security Networks.
(10) Stockholders’ Equity
Common Stock
The following table presents the activity in the Series A and Series B common stock:
|
|
|
Series A
|
|
Series B
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012 |
|
13,389,821 |
|
737,166 |
|
|
Conversion from Series B to Series A shares |
|
1,061 |
|
(1,061 |
) |
|
Issuance of restricted stock |
|
13,065 |
|
— |
|
|
Restricted stock cancelled for forfeitures and tax withholding |
|
(10,275 |
) |
— |
|
|
Stock option exercises |
|
205 |
|
— |
|
|
Stock issued as consideration for the Security Networks Acquisition |
|
253,333 |
|
— |
|
|
Balance at September 30, 2013 |
|
13,647,210 |
|
736,105 |
|
Accumulated Other Comprehensive Loss, net
The following table provides a summary of the changes in Accumulated other comprehensive loss, net for the period presented (amounts in thousands):
|
|
|
Foreign
|
|
Unrealized
|
|
Unrealized gain
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012 |
|
$ |
46 |
|
2,667 |
|
(12,243 |
) |
(9,530 |
) |
|
Current period change through Accumulated other comprehensive loss |
|
(17 |
) |
(3,078 |
) |
3,830 |
|
735 |
|
|
|
Reclassifications into net income |
|
— |
|
(98 |
) |
3,574 |
|
3,476 |
|
|
|
As of September 30, 2013 |
|
$ |
29 |
|
(509 |
) |
(4,839 |
) |
(5,319 |
) |
(a) Amounts reclassified into net income are included in Other income, net on the condensed consolidated statement of operations. See note 3, Investments in Marketable Securities, for further information.
(b) Amounts reclassified into net income are included in Interest expense on the condensed consolidated statement of operations. See note 8, Derivatives, for further information.
(11) Basic and Diluted Earnings (Loss) Per Common Share—Series A and Series B
Basic earnings (loss) per common share (“EPS”) is computed by dividing net earnings (loss) by the weighted average number of Ascent Capital Series A and Series B common shares outstanding for the period. Diluted EPS is computed by dividing net earnings (loss) by the sum of the weighted average number of Ascent Capital Series A and Series B common shares outstanding and the effect of dilutive securities such as outstanding stock options, unvested restricted stock and the effect of the Convertible Notes and related Bond Hedge and Warrant Transactions. However, since the Company recorded a loss from continuing operations for all periods presented, diluted EPS is computed the same as basic EPS.
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Series A and Series B shares — basic and diluted |
|
14,025,621 |
|
14,050,689 |
|
13,936,235 |
|
14,064,785 |
|
Diluted shares outstanding excluded 1,521,358 stock options and unvested restricted stock units for both the three and nine months ended September 30, 2013, because their inclusion would have been anti-dilutive. Diluted shares outstanding also excluded the potential share impacts of the Convertible Notes and related Bond Hedge and Convertible Warrant Transactions as any issuance of common stock under those securities would have been anti-dilutive. See note 7, Long-Term Debt, for further information about the Convertible Notes and related Bond Hedge and Convertible Warrant Transactions. Diluted
shares outstanding excluded 1,047,044 stock options and unvested restricted stock units for both the three and nine months ended September 30, 2012, because their inclusion would have been anti-dilutive.
(12) Fair Value Measurements
According to the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board Accounting Standards Codification, fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and requires that assets and liabilities carried at fair value are classified and disclosed in the following three categories:
· Level 1 - Quoted prices for identical instruments in active markets.
· Level 2 - Quoted prices for similar instruments in active or inactive markets and valuations derived from models where all significant inputs are observable in active markets.
· Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable in any market.
The following summarizes the fair value level of assets and liabilities that are measured on a recurring basis at September 30, 2013 and December 31, 2012 (amounts in thousands):
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013 |
|
|
|
|
|
|
|
|
|
|
|
Money market funds (a) |
|
$ |
3,199 |
|
— |
|
— |
|
3,199 |
|
|
Investments in marketable securities (b) |
|
141,370 |
|
4,525 |
|
— |
|
145,895 |
|
|
|
Derivative financial instruments - assets (c) |
|
— |
|
1,954 |
|
— |
|
1,954 |
|
|
|
Derivative financial instruments - liabilities |
|
— |
|
(6,491 |
) |
— |
|
(6,491 |
) |
|
|
Total |
|
$ |
144,569 |
|
(12 |
) |
— |
|
144,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
Money market funds (a) |
|
$ |
2,705 |
|
— |
|
— |
|
2,705 |
|
|
Investments in marketable securities (b) |
|
142,587 |
|
— |
|
— |
|
142,587 |
|
|
|
Derivative financial instruments - assets (c) |
|
— |
|
116 |
|
— |
|
116 |
|
|
|
Derivative financial instruments - liabilities |
|
— |
|
(12,359 |
) |
— |
|
(12,359 |
) |
|
|
Total |
|
$ |
145,292 |
|
(12,243 |
) |
— |
|
133,049 |
|
(a) Included in cash and cash equivalents on the condensed consolidated balance sheets.
(b) Level 1 investments consist primarily of diversified corporate bond funds. The Level 2 security represents one investment in a corporate bond. All investments are classified as available-for-sale securities.
(c) Included in Other assets, net on the condensed consolidated balance sheets
The Company has determined that the majority of the inputs used to value the Swaps fall within Level 2 of the fair value hierarchy. The credit valuation adjustments associated with the derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by their counterparties. As the counterparties have publicly available credit information, the credit spreads over LIBOR used in the calculations represent implied credit default swap spreads obtained from a third-party credit data provider. However, as of September 30, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Swaps. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.
The following table presents the activity in the Level 3 balances (amounts in thousands):
|
|
|
Nine months ended September 30, |
|
|||
|
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
— |
|
(16,959 |
) |
|
Unrealized gain recognized |
|
— |
|
16,959 |
|
|
|
Ending balance |
|
$ |
— |
|
— |
|
Carrying values and fair values of financial instruments that are not carried at fair value are as follows (amounts in thousands):
|
|
|
September 30, 2013 |
|
December 31, 2012 |
|
||
|
|
|
|
|
|
|
||
|
Long term debt, including current portion: |
|
|
|
|
|
||
|
Carrying value |
|
$ |
1,583,330 |
|
$ |
1,108,383 |
|
|
Fair value (a) |
|
1,644,920 |
|
1,130,978 |
|
||
(a) The fair value is based on valuations from third party financial institutions and is classified as Level 2 in the hierarchy.
Ascent Capital’s other financial instruments, including cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which approximates their fair value because of their short-term maturity.
(13) Commitments, Contingencies and Other Liabilities
The Company is involved in litigation and similar claims incidental to the conduct of its business, including from time to time, contractual disputes, claims related to alleged security system failures and claims related to alleged violations of the U.S. Telephone Consumer Protection Act. Matters that are probable of unfavorable outcome to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, management’s estimate of the outcomes of such matters and experience in contesting, litigating and settling similar matters. In management’s opinion, none of the pending actions is likely to have a material adverse impact on the Company’s financial position or results of operations.
Based on events occurring in the State of Georgia in 2006, a monitoring service subscriber filed suit against the Company and Tel-Star Alarms, Inc., a Monitronics authorized dealer, alleging negligence. On November 16, 2011, a Georgia trial court awarded the plaintiff $8,600,000, of which $6,000,000 is expected to be covered by the Company’s general liability insurance policies. The Company funded approximately $2,640,000 into an escrow account for the excess liability above the insurance coverage, classified as restricted cash on the September 30, 2013 and December 31, 2012 condensed consolidated balance sheets. In July 2013, the trial court’s ruling was affirmed by the Georgia Court of Appeals. The Company was seeking review of the Court of Appeals’ ruling in Georgia’s Supreme Court, which was subsequently denied on November 4, 2013. As of September 30, 2013, the Company has recorded legal reserves of approximately $9,653,000 and an insurance receivable of approximately $7,013,000, related to this matter.
(14) Subsequent Events
On November 4, 2013, Monitronics commenced an exchange offer (the “Exchange Offer”) in which up to $175,000,000 aggregate principal amount of exchange notes (the “Exchange Notes”) registered under the Securities Act were offered in exchange for the same principal amount of the outstanding New Senior Notes. The terms of the Exchange Notes and the outstanding New Senior Notes are substantially identical, except that the transfer restrictions and registration rights relating to the New Senior Notes do not apply to the Exchange Notes. The Exchange Offer was commenced in order to satisfy Monitronics’ obligations under the registration rights agreement related to the outstanding New Senior Notes. The Exchange Offer is expected to expire on December 4, 2013.
On October 25, 2013, the Company purchased 351,734 shares of Ascent Capital’s Series B common stock (the “Purchased Shares”) from Dr. John Malone for aggregate cash consideration of approximately $32,700,000. Following the transaction, Dr. Malone will continue to beneficially own 351,734 Ascent Series B shares and 199,789 Ascent Series A shares, which together represent approximately 21% of the Company’s outstanding voting power. The Purchased Shares will be cancelled and returned to the status of authorized and unissued.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, the completion of the Monitronics Exchange Offer, new service offerings, financial prospects, and anticipated sources and uses of capital. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
Factors relating to the Company and its consolidated subsidiaries, as a whole:
· general business conditions and industry trends;
· macroeconomic conditions and their effect on the general economy and on the U.S. housing market, in particular single family homes which represent Monitronics’ largest demographic;
· uncertainties in the development of our business strategies, including market acceptance of new products and services;
· the competitive environment in which we operate, in particular increasing competition in the alarm monitoring industry from larger existing competitors and new market entrants, including telecommunications and cable companies;
· integration of acquired assets and businesses;
· the regulatory environment in which we operate, including the multiplicity of jurisdictions and licensing requirements to which Monitronics is subject and the risk of new regulations, such as the increasing adoption of false alarm ordinances;
· technological changes which could result in the obsolescence of currently utilized technology and the need for significant upgrade expenditures;
· the availability and terms of capital, including the ability of Monitronics to obtain additional funds to grow its business;
· the outcome of any pending, threatened, or future litigation, including potential liability for failure to respond adequately to alarm activations; and
· availability of qualified personnel.
Factors relating to the business of Monitronics:
· Monitronics’ high degree of leverage and the restrictive covenants governing its indebtedness;
· Monitronics’ anticipated growth strategies;
· the ability of Monitronics to obtain additional funds to grow its business, including the terms of any additional financing with respect thereto;
· Monitronics’ ability to acquire and integrate additional accounts, including competition for dealers with other alarm monitoring companies which could cause an increase in expected subscriber acquisition costs;
· the impact of “false alarm” ordinances and other potential changes in regulations or standards;
· the operating performance of Monitronics’ network, including the potential for service disruptions at both the main monitoring facility and back-up monitoring facility due to acts of nature or technology deficiencies;
· potential liability for failure to respond adequately to alarm activations;
· our ability to continue to obtain insurance coverage sufficient to hedge our risk exposures, including as a result of acts of third parties and/or alleged regulatory violations;
· changes in the nature of strategic relationships with original equipment manufacturers, dealers and other Monitronics business partners;
· the reliability and creditworthiness of Monitronics’ independent alarm systems dealers and subscribers;
· changes in Monitronics’ expected rate of subscriber attrition;
· changes in technology that may make Monitronics’ service less attractive or obsolete, or require significant expenditures to update, including the phase-out of 2G networks by cellular carriers;
· the development of new services or service innovations by competitors;
· the trend away from the use of public switched telephone network lines and resultant increase in servicing costs associated with alternative methods of communication; and
· the ability to successfully integrate Security Networks into the Monitronics business.
For additional risk factors, please see Part I, Item 1A, Risk Factors, in the 2012 Form 10-K. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto included elsewhere herein and the 2012 Form 10-K.
Overview
Ascent Capital Group, Inc. (“Ascent Capital” or the “Company”) is a holding company and its assets primarily consist of its wholly-owned subsidiary, Monitronics International, Inc. (“Monitronics”). On August 16, 2013, Monitronics acquired all of the equity interests of Security Networks LLC (“Security Networks”) and certain affiliated entities (the “Security Networks Acquisition”). Monitronics provides security alarm monitoring and related services to residential and business subscribers throughout the United States and parts of Canada. Monitronics monitors signals arising from burglaries, fires, medical alerts and other events through security systems installed by independent dealers at subscribers’ premises. Nearly all of Monitronics consolidated revenues are derived from recurring monthly revenues under security alarm monitoring contracts purchased or originated from independent dealers in its exclusive nationwide network.
Ascent Capital’s, attrition analysis and results of operations for the three and nine months ended September 30, 2013 include the operations of the Security Networks business from August 16, 2013 (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 (a “new owner takeover”), this is also not a cancellation. Monitronics adjusts the number of canceled accounts by excluding those that are contractually guaranteed by its dealers. The typical dealer contract provides that if a subscriber cancels in the first year of its contract, the dealer must either replace the canceled account with a new one or refund the purchase price. To help ensure the dealer’s obligation to Monitronics, Monitronics typically maintains a dealer funded holdback reserve ranging from 5-10% of subscriber accounts in the guarantee period. In some cases, the amount of the purchase holdback may be less than actual attrition experience.
The table below presents subscriber data for the twelve months ended September 30, 2013 and 2012:
|
|
|
Twelve Months Ended
|
|
||
|
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
Beginning balance of accounts |
|
717,488 |
|
697,581 |
|
|
Accounts purchased |
|
437,860 |
|
106,582 |
|
|
Accounts canceled |
|
(106,859 |
) |
(84,523 |
) |
|
Canceled accounts guaranteed by dealer and acquisition adjustment (a) (b) |
|
(6,749 |
) |
(2,152 |
) |
|
Ending balance of accounts |
|
1,041,740 |
|
717,488 |
|
|
Monthly weighted average accounts |
|
847,673 |
|
706,752 |
|
|
Attrition rate |
|
(12.6 |
)% |
(12.0 |
)% |
(a) Canceled accounts that are contractually guaranteed to be refunded from holdback.
(b) Includes 1,946 subscriber accounts that were proactively cancelled during the third quarter of 2013 which were active with both Monitronics and Security Networks, upon acquisition.
The attrition rate for the twelve months ended September 30, 2013 and 2012 was 12.6% and 12.0%, respectively. Increased attrition reflects the current age of accounts in the portfolio and an increase in disconnections due to household relocations.
Monitronics also analyzes its attrition by classifying accounts into annual pools based on the year of purchase. Monitronics then tracks the number of accounts that cancel as a percentage of the initial number of accounts purchased for each pool for each year subsequent to its purchase. Based on the average cancellation rate across the pools, in recent years Monitronics has averaged less than 1% attrition within the initial 12-month period after considering the accounts which were replaced or refunded by the dealers at no additional cost to Monitronics. Over the next few years of the subscriber account life, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool gradually increases and historically has peaked following the end of the initial contract term, which is typically three to five years. The peak following the end of the initial contract term is primarily a result of the buildup of subscribers that moved or no longer had need for the service but did not cancel their service until the end of their initial contract term. Subsequent to the peak following the end of the initial contract term, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool declines.
Accounts Purchased
During the three and nine months ended September 30, 2013, Monitronics purchased 37,109 and 113,302 accounts, respectively, without giving effect to the Security Networks Acquisition. In addition, Monitronics acquired 203,898 accounts in the Security Networks Acquisition, which was completed on August 16, 2013. Account purchases for the nine months ended September 30, 2013 reflect bulk buys of approximately 18,200 accounts purchased in the second quarter of 2013. During the three and nine months ended September 30, 2012, Monitronics purchased 31,187 and 81,719 subscriber accounts, respectively.
Recurring monthly revenue (“RMR”) purchased during the three and nine months ended September 30, 2013 was approximately $1,701,000 and $5,068,000, respectively, without giving effect to the Security Networks Acquisition. In addition, RMR of approximately $8,861,000 was acquired in the Security Networks Acquisition. RMR purchased during the three and nine months ended September 30, 2012 was approximately $1,387,000 and $3,601,000, respectively.
Adjusted EBITDA
We evaluate the performance of our operations based on financial measures such as revenue and “Adjusted EBITDA.” Adjusted EBITDA is defined as net income (loss) before interest expense, interest income, income taxes, depreciation, amortization (including the amortization of subscriber accounts and dealer network), realized and unrealized gain/(loss) on derivative instruments, restructuring charges, stock-based and other non-cash long-term incentive compensation, and other non-cash or nonrecurring charges. Ascent Capital believes that Adjusted EBITDA is an important indicator of the operational strength and performance of its business, including the business’ ability to fund its ongoing acquisition of subscriber accounts, its capital expenditures and to service its debt. In addition, this measure is used by management to evaluate operating results and perform analytical comparisons and identify strategies to improve performance. Adjusted EBITDA is also a measure that is customarily used by financial analysts to evaluate the financial performance of companies in the security alarm monitoring industry and is one of the financial measures, subject to certain adjustments, by which Monitronics’ covenants are calculated under the agreements governing their debt obligations. Adjusted EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles (“GAAP”), should not be construed as an alternative to net income or loss and is indicative neither of our results of operations nor of cash flows available to fund all of our cash needs. It is, however, a measurement that Ascent Capital believes is useful to investors in analyzing its operating performance. Accordingly, Adjusted EBITDA should be considered in addition to, but not as a substitute for, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Adjusted EBITDA is a non-GAAP financial measure. As companies often define non-GAAP financial measures differently, Adjusted EBITDA as calculated by Ascent Capital should not be compared to any similarly titled measures reported by other companies.
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 |
|
Nine months ended |
|
||||||
|
|
|
September 30, |
|
September 30, |
|
||||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Net revenue |
|
$ |
115,844 |
(a) |
84,667 |
|
$ |
318,275 |
(a) |
249,863 |
|
|
Cost of services |
|
20,155 |
|
12,881 |
|
50,951 |
|
35,331 |
|
||
|
Selling, general, and administrative |
|
23,870 |
|
18,256 |
|
65,116 |
|
54,093 |
|
||
|
Amortization of subscriber accounts, dealer network and other intangible assets |
|
55,746 |
|
40,815 |
|
146,059 |
|
118,245 |
|
||
|
Restructuring charges |
|
402 |
|
— |
|
402 |
|
— |
|
||
|
Loss (gain) on sale of operating assets, net |
|
(17 |
) |
15 |
|
(5,473 |
) |
(1,298 |
) |
||
|
Interest expense |
|
26,022 |
|
19,299 |
|
66,650 |
|
50,258 |
|
||
|
Realized and unrealized loss on derivative financial instruments |
|
— |
|
— |
|
— |
|
2,044 |
|
||
|
Income tax expense from continuing operations |
|
1,252 |
|
604 |
|
2,940 |
|
2,052 |
|
||
|
Net loss from continuing operations |
|
(12,478 |
) |
(13,725 |
) |
(9,952 |
) |
(24,416 |
) |
||
|
Earnings (loss) from discontinued operations, net of income tax |
|
(83 |
) |
(1,882 |
) |
216 |
|
(3,598 |
) |
||
|
Net loss |
|
(12,561 |
) |
(15,607 |
) |
(9,736 |
) |
(28,014 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Adjusted EBITDA (b) |
|
|
|
|
|
|
|
|
|
||
|
Monitronics business Adjusted EBITDA |
|
$ |
77,649 |
|
57,420 |
|
$ |
217,472 |
|
171,123 |
|
|
Corporate Adjusted EBITDA |
|
(1,990 |
) |
(1,449 |
) |
711 |
|
(2,518 |
) |
||
|
Total Adjusted EBITDA |
|
$ |
75,659 |
|
55,971 |
|
$ |
218,183 |
|
168,605 |
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Adjusted EBITDA as a percentage of Revenue |
|
|
|
|
|
|
|
|
|
||
|
Monitronics business |
|
67.0 |
% |
67.8 |
% |
68.3 |
% |
68.5 |
% |
||
|
Corporate |
|
(1.7 |
)% |
(1.7 |
)% |
0.2 |
% |
(1.0 |
)% |
||
(a) Net revenue for the three and nine months ended September 30, 2013 reflects the negative impact of an approximate $2,500,000 fair value adjustment that reduced deferred revenue acquired in the Security Networks Acquisition.
(b) See reconciliation to net income (loss) from continuing operations below.
Net revenue. Net revenue increased $31,177,000, or 36.8%, and $68,412,000, or 27.4%, for the three and nine months ended September 30, 2013, respectively, as compared to the corresponding prior year periods. The increase in net revenue is attributable to the growth in the number of subscriber accounts and the increase in average monthly revenue per subscriber. The growth in subscriber accounts reflects the effects of the acquisition of Security Networks in August 2013, which included over 200,000 subscriber accounts, purchases of over 120,000 accounts through Monitronics’ authorized dealer program subsequent to September 30, 2012, and the purchase of approximately 111,000 accounts in various bulk buys over the last 12 months. In addition, average monthly revenue per subscriber increased from $38.28 as of September 30, 2012 to $40.70 as of September 30, 2013. Net revenue for the three and nine months ended September 30, 2013 also reflects the negative impact of an approximate $2,500,000 fair value adjustment that reduced deferred revenue acquired in the Security Networks Acquisition.
Cost of services . Cost of services increased $7,274,000, or 56.5%, and $15,620,000, or 44.2%, for the three and nine months ended September 30, 2013, respectively, as compared to the corresponding prior year periods. The increase for both the three and nine months ended September 30, 2013 is primarily attributable to an increased number of accounts monitored across the cellular network and having interactive and home automation services, which result in higher operating and service costs. In addition, cost of services for the three and nine months ended September 30, 2013, includes Security Networks monitoring costs of $2,673,000. Cost of services as a percent of net revenue increased from 15.2% and 14.1% for the three and nine months ended September 30, 2012, respectively, to 17.4% and 16.0% for the three and nine months ended September 30, 2013, respectively.
Selling, general and administrative. Selling, general and administrative costs (“SG&A”) increased $5,614,000, or 30.8%, and $11,023,000, or 20.4% for the three and nine months ended September 30, 2013, respectively, as compared to the corresponding prior year periods. The increase is primarily attributable to increases in Monitronics SG&A costs of $3,065,000 and $8,077,000 for the three and nine months ended September 30, 2013, respectively, as compared to the corresponding prior periods and the inclusion of Security Networks SG&A costs of $2,148,000 for both the three and nine months ended September 30, 2013. The increased Monitronics SG&A costs are attributable to increased payroll expenses of approximately $581,000 and $2,152,000 for the three and nine months ended September 30, 2013, respectively, as compared to the corresponding prior year periods, and acquisition and
integration costs related to professional services rendered and other costs incurred in connection with the Security Networks Acquisition. Acquisition costs recognized in the three and nine months ended September 30, 2013 are $1,032,000 and $2,470,000, respectively. Integration costs recognized in both the three and nine months ended September 30, 2013 are $535,000. Additionally, the Company’s consolidated stock-based compensation expense increased approximately $387,000 and $1,607,000 for the three and nine months ended September 30, 2013, respectively, as compared to the corresponding prior year periods. This increase is related to restricted stock and option awards granted to certain employees subsequent to September 30, 2012. SG&A as a percent of net revenue decreased from 21.6% for both the three and nine months ended September 30, 2012 to 20.6% and 20.5% for the three and nine months ended September 30, 2013, respectively.
Amortization of subscriber accounts, dealer network and other intangible assets. Amortization of subscriber accounts, dealer network and other intangible assets increased $14,931,000 and $27,814,000 for the three and nine months ended September 30, 2013 as compared to the corresponding prior year periods. The increase for both the three and nine months ended September 30, 2013 is primarily attributable to amortization of subscriber accounts purchased subsequent to September 30, 2012. Additionally, the three and nine months ended includes amortization of approximately $7,650,000 related to the definite lived intangible assets acquired in the Security Networks Acquisition.
Restructuring charges. In connection with the Security Networks Acquisition, management approved a restructuring plan to transition Security Networks operations in West Palm Beach and Kissimmee, Florida to Dallas, Texas (the “Security Networks Restructuring Plan”). The Security Networks Restructuring Plan provides certain employees with a severance package that entitles them to benefits upon completion of the transition in 2014. Severance costs related to the Security Networks Restructuring Plan are recognized ratably over the future service period. During the three and nine months ended September 30, 2013, the Company recorded $402,000 of restructuring charges related to employee termination benefits.
Additionally, in connection with Security Networks Restructuring Plan, the Company allocated approximately $492,000 of the Security Networks Purchase Price to accrued restructuring in relation to the Security Networks’ severance agreement entered into with its former Chief Executive Officer.
The following table provides the activity and balances of the Security Networks Restructuring Plan (amounts in thousands):
|
|
|
Nine months ended September 30, 2013 |
|
|||||||||
|
|
|
Opening
|
|
Additions |
|
Deductions |
|
Other |
|
Ending balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and retention |
|
$ |
— |
|
402 |
|
— |
|
492 |
(a) |
894 |
|
(a) Amount was recorded upon the acquisition of Security Networks.
Gain on sale of operating assets, net . During the nine months ended September 30, 2013, the Company sold an equity investment which resulted in a pre-tax gain of $3,250,000. Additionally, the Company sold certain land and building property for $9,634,000 resulting in a pre-tax gain of $2,221,000. During the nine months ended September 30, 2012, the Company sold land and building improvements for $5,095,000, resulting in a pre-tax gain of $1,847,000. This gain was partially offset by the sale of the Company’s 50% interest in an equity method investment for $1,420,000 resulting in a pre-tax loss of $532,000.
Interest Expense. Interest expense increased $6,723,000 and $16,392,000 for the three and nine months ended September 30, 2013 as compared to the corresponding prior year period. The increase in interest expense for the three months ended September 30, 2013 is primarily attributable to the increases in debt related to the transactions entered into in connection with the Security Networks Acquisition and other amendments to Monitronics’ Credit Facility entered into subsequent to September 30, 2012. These increases are offset by decreased interest rates on the outstanding Credit Facility term loan debt in conjunction with the March 25, 2013 repricing of the Credit Facility term loan.
The increase in interest expense for the nine months ended September 30, 2013 is due to the presentation of interest cost related to the Company’s current derivative instruments and increases in the Company’s consolidated debt balance. Interest cost related to the Company’s current derivative instruments is presented in Interest expense on the statement of operations as the related derivative instrument is an effective cash flow hedge of the Company’s interest rate risk for which hedge accounting is applied. As the Company did not apply hedge accounting on its prior derivative instruments, the related interest costs incurred prior to March 23, 2012 are presented in Realized and unrealized loss on derivative financial instruments in the condensed consolidated statements of operations
and comprehensive income (loss). These increases were offset by decreased interest rates on the Credit Facility term loans, as noted above, and a decrease in amortization of debt discount, as the debt discount related to the securitized debt structure outstanding prior to the March 23, 2012 refinancing exceeded debt discounts on the current outstanding debt. Amortization of debt discount for the nine months ended September 30, 2013 and 2012 was $1,263,000 and $4,285,000, respectively. Amortization of debt discount for the nine months ended September 30, 2013 includes the impact of the debt discount related to the beneficial conversion feature of Ascent Capital’s Convertible Notes issued in the third quarter of 2013.
Realized and unrealized loss on derivative financial instruments. There were no amounts classified as realized and unrealized gain or loss on derivative financial instruments for the three and nine months ended September 30, 2013, as hedge accounting was applied on Monitronics’ outstanding derivative instruments. Realized and unrealized loss on derivative financial instruments for the nine months ended September 30, 2012 was $2,044,000, which includes settlement payments of $8,837,000 partially offset by a $6,793,000 unrealized gain related to the change in the fair value of the derivative financial instruments that were terminated on March 23, 2012.
Income tax expense from continuing operations. The Company had pre-tax loss from continuing operations of $11,226,000 and $7,012,000 for the three and nine months ended September 30, 2013, respectively, and income tax expense of $1,252,000 and $2,940,000 for the three and nine months ended September 30, 2013, respectively. The Company had a pre-tax loss from continuing operations of $13,121,000 and $22,364,000 for the three and nine months ended September 30, 2012, respectively, and income tax expense of $604,000 and $2,052,000 for the three and nine months ended September 30, 2012, respectively. Income tax expense for all periods presented primarily relates to state taxes recognized on the Monitronics business.
Earnings (loss) from discontinued operations, net of income taxes. Earnings (loss) from discontinued operations, net of income taxes, were $(83,000) and $216,000 for the three and nine months ended September 30, 2013, respectively, and $(1,882,000) and $(3,598,000) for the three and nine months ended September 30, 2012, respectively. Earnings from discontinued operations include recoveries of prior period expenses associated with discontinued operations for the nine months ended September 30, 2013. Loss from discontinued operations includes contract termination costs and other loss contingencies for the three months ended September 30, 2013 and three and nine months ended September 30, 2012.
Adjusted EBITDA. The following table provides a reconciliation of total Adjusted EBITDA to net loss from continuing operations (amounts in thousands):
|
|
|
Three months ended |
|
Nine months ended |
|
||||||
|
|
|
September 30, |
|
September 30, |
|
||||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Total Adjusted EBITDA |
|
$ |
75,659 |
|
55,971 |
|
$ |
218,183 |
|
168,605 |
|
|
Amortization of subscriber accounts dealer network and other intangible assets |
|
(55,746 |
) |
(40,815 |
) |
(146,059 |
) |
(118,245 |
) |
||
|
Depreciation |
|
(2,305 |
) |
(2,084 |
) |
(6,360 |
) |
(6,686 |
) |
||
|
Restructuring charges |
|
(402 |
) |
— |
|
(402 |
) |
— |
|
||
|
Stock-based and long-term incentive compensation |
|
(1,752 |
) |
(1,365 |
) |
(5,535 |
) |
(3,928 |
) |
||
|
Security Networks acquisition related costs |
|
(1,032 |
) |
— |
|
(2,470 |
) |
— |
|
||
|
Security Networks integration related costs |
|
(535 |
) |
— |
|
(535 |
) |
— |
|
||
|
Loss on pension plan settlements |
|
— |
|
(6,571 |
) |
— |
|
(6,571 |
) |
||
|
Realized and unrealized loss on derivative instruments |
|
— |
|
— |
|
— |
|
(2,044 |
) |
||
|
Refinancing costs |
|
— |
|
— |
|
— |
|
(6,245 |
) |
||
|
Interest income |
|
909 |
|
1,042 |
|
2,816 |
|
3,008 |
|
||
|
Interest expense |
|
(26,022 |
) |
(19,299 |
) |
(66,650 |
) |
(50,258 |
) |
||
|
Income tax expense from continuing operations |
|
(1,252 |
) |
(604 |
) |
(2,940 |
) |
(2,052 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Net loss from continuing operations |
|
$ |
(12,478 |
) |
(13,725 |
) |
$ |
(9,952 |
) |
(24,416 |
) |
Adjusted EBITDA increased $19,688,000, or 35.2%, and $49,578,000, or 29.4%, for the three and nine months ended September 30, 2013 as compared to the respective prior year period. The increase in Adjusted EBITDA was primarily due to revenue growth. Monitronics Adjusted EBITDA was $77,649,000 and $217,472,000 for the three and nine months ended September 30, 2013, respectively, as compared to $57,420,000 and $171,123,000 for the three and nine months ended September 30, 2012, respectively.
Liquidity and Capital Resources
At September 30, 2013, we had $80,940,000 of cash and cash equivalents, $2,680,000 of current restricted cash, and $145,895,000 of marketable securities on a consolidated basis. We may use a portion of these assets to decrease debt obligations, fund stock repurchases, or fund potential strategic acquisitions or investment opportunities.
Additionally, our other source of funds is our cash flows from operating activities which are primarily generated from the operations of Monitronics. During the nine months ended September 30, 2013 and 2012, our cash flow from operating activities was $169,651,000 and $126,445,000, 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.
In the third quarter of 2013, the Company paid cash, net of cash acquired, of $479,795,000 to purchase Security Networks. The Security Networks Acquisition was funded by the proceeds of Ascent Capital’s July issuance of $103,500,000 in aggregate principal amount of 4.00% Senior Convertible Notes due 2020, the proceeds of Monitronics’ issuance of $175,000,000 in aggregate principal amount of 9.125% Senior Notes due 2020 (in connection with the merger of Monitronics Escrow Corporation, the issuer of these notes, with and into Monitronics on the Closing Date) and the proceeds of incremental term loans of $225,000,000 million issued under Monitronics’ existing credit facility, and approximately $20,000,000 of cash on hand. In addition to the cash paid, the purchase price also consisted of 253,333 shares of Ascent Capital’s Series A common stock (par value $0.01 per share) with a Closing Date fair value of $18,723,000.
During the nine months ended September 30, 2013 and 2012, the Company also used cash of $174,527,000 and $128,407,000, respectively, to fund purchases of subscriber accounts net of holdback and guarantee obligations. In addition, during the nine months ended September 30, 2013 and 2012, the Company used cash of $6,314,000 and $3,591,000, respectively, to fund our capital expenditures. In order to improve our investment rate of return, the Company purchased marketable securities consisting primarily of diversified corporate bond funds for cash of $21,770,000 and $99,667,000 during the nine months ended September 30, 2013 and 2012, respectively. In addition, the Company sold marketable securities for proceeds of approximately $15,384,000 during the nine months ended September 30, 2013.
In considering our liquidity requirements for 2013, we evaluated our known future commitments and obligations. We will require the availability of funds to finance the strategy of Monitronics, our primary operating subsidiary, which is to grow through subscriber account purchases. We also considered the expected cash flow from Monitronics, as this business is the driver of our operating cash flows. In addition, we considered the borrowing capacity under Monitronics’ Credit Facility revolver, under which Monitronics could borrow an additional $199,400,000 as of September 30, 2013. Based on this analysis, we expect that cash on hand, cash flow generated from operations and available borrowings under the Monitronics’ Credit Facility will provide sufficient liquidity to fund our anticipated current requirements.
The existing long-term debt of the Company at September 30, 2013 includes the principal balance of $ 1,618,857,000 under its Convertible Notes, Senior Notes, Credit Facility, and Credit Facility revolver. The Convertible Notes have an outstanding principal balance of $103,500,000 as of September 30, 2013 and mature July 15, 2020. The Senior Notes have an outstanding principal balance of $580,000,000 as of September 30, 2013 and mature on April 1, 2020, which includes the impact of eliminating $5,000,000 in aggregate principal amount of the Senior Notes that were purchased by Ascent Capital. The Credit Facility term loan has an outstanding principal balance of $909,757,000 as of September 30, 2013 and requires principal payments of approximately $2,292,000 per quarter with the remaining outstanding balance becoming due on March 23, 2018. The Credit Facility revolver has an outstanding balance of $25,600,000 as of September 30, 2013 and becomes due on December 22, 2017.
On October 25, 2013, we purchased 351,734 shares of Ascent Capital’s Series B common stock (the “Purchased Shares”) from Dr. John Malone for aggregate cash consideration of approximately $32,700,000. The Purchased Shares will be cancelled and returned to the status of authorized and unissued.
We may seek external equity or debt financing in the event of any new investment opportunities, additional capital expenditures or if our operations require additional funds, but there can be no assurance that we will be able to obtain equity or debt financing on terms that would be acceptable to us. Our ability to seek additional sources of funding depends on our future financial position and results of operations, which are subject to general conditions in or affecting our industry and our customers and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Risk
Due to the terms of our debt obligations, we have exposure to changes in interest rates related to these debt obligations. Monitronics uses derivative financial instruments to manage the exposure related to the movement in interest rates. The derivatives are designated as hedges and were entered into with the intention of reducing the risk associated with variable interest rates on the debt obligations. We do not use derivative financial instruments for trading purposes.
Tabular Presentation of Interest Rate Risk
The table below provides information about our outstanding debt obligations and derivative financial instruments that are sensitive to changes in interest rates. Interest rate swaps are presented at fair value and by maturity date. Debt amounts represent principal payments by maturity date.
|
Year of Maturity |
|
Fixed Rate
|
|
Variable Rate
|
|
Fixed Rate
|
|
Total |
|
|
|
|
|
Amounts in thousands |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
$ |
— |
|
2,292 |
|
— |
|
2,292 |
|
|
2014 |
|
— |
|
9,166 |
|
— |
|
9,166 |
|
|
|
2015 |
|
— |
|
9,166 |
|
— |
|
9,166 |
|
|
|
2016 |
|
— |
|
9,166 |
|
— |
|
9,166 |
|
|
|
2017 |
|
— |
|
34,767 |
|
— |
|
34,767 |
|
|
|
Thereafter |
|
(4,537 |
) |
870,800 |
|
683,500 |
|
1,549,763 |
|
|
|
Total |
|
$ |
(4,537 |
) |
935,357 |
|
683,500 |
|
1,614,320 |
|
(a) The derivative financial instruments include the net effect of four interest rate swaps, all with a maturity date of March 23, 2018. As a result of these interest rate swaps, the interest rate on the borrowings under the Credit Facility term loans reflected in the variable rate debt column have been effectively converted from a variable rate to a weighted average fixed rate of 5.06%. See notes 7, 8 and 12 to our condensed consolidated financial statements included in this quarterly report for further information.
Item 4. Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and chief financial officer (the “Executives”), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Executives concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2013 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There has been no change in the Company’s internal controls over financial reporting that occurred during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, its internal controls over financial reporting.
ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Item 2 . Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Purchases of Equity Securities by the Issuer
The following table sets forth information concerning our company’s purchase of its own equity securities (all of which were comprised of shares of our Series A common stock) during the three months ended September 30, 2013:
|
Period |
|
Total number of
|
|
Average price
|
|
Total Number of
|
|
Maximum Number (or
|
|
|
|
07/01/13 - 07/31/13 |
|
1,225 |
(2) |
$ |
79.80 |
|
— |
|
|
(1) |
|
08/01/13 - 08/31/13 |
|
— |
|
— |
|
— |
|
|
(1) |
|
|
09/01/13 - 09/30/13 |
|
1,384 |
(2) |
78.56 |
|
— |
|
|
(1) |
|
|
Total |
|
2,609 |
|
$ |
79.14 |
|
— |
|
|
|
(1) On June 16, 2011 the Company announced that it received authorization to implement a stock repurchase program, pursuant to which it may purchase up to $25,000,000 of its shares of Series A Common Stock from time to time. As of September 30, 2013, 504,387 Series A shares have been purchased, at an average price paid of $48.31 per share, for $24,368,000. There were no purchases under the program for the three months ended September 30, 2013. Approximately $632,000 of Series A Common Stock may still be purchased under the program.
(2) Represents shares withheld in payment of withholding taxes by certain of our executive officers upon vesting of their restricted share awards.
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):
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2.1 |
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Securities Purchase Agreement, dated as of July 10, 2013, by and among Monitronics International, Inc., certain funds affiliated with Oak Hill Partners, certain other holders and, for the limited purposes set forth therein, Ascent (incorporated by reference to Exhibit 2.1 to Amendment No. 2 to Ascent’s Current Report on Form 8-K/A, filed with the SEC on July 12, 2013 (File No. 001-34176)). |
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4.1 |
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Indenture, dated as of July 17, 2013, between Ascent, as issuer, and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to Ascent’s Quarterly Report on Form 10-Q, filed with the SEC on August 9, 2013 (File No. 001-34176) (the “Ascent 10-Q”)). |
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4.2 |
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Supplemental Indenture, dated as of August 16, 2013, by and among Monitronics International, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 of Monitronics International, Inc., filed with the SEC on October 18, 2013 (File No. 333-191805) (the “S-4”)). |
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4.3 |
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Second Supplemental Indenture, dated as of August 26, 2013, by and among Monitronics International, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.3 to the S-4). |
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4.4 |
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Form of Amendment No. 3 to the Credit Agreement and Amendment No. 1 to Guaranty Agreement, dated August 16, 2013, by and among Monitronics International, Inc., Bank of America, N.A., individually and as administrative agent, and the certain lenders party thereto.* |
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10.1 |
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Confirmation, dated July 11, 2013, of Base Issuer Warrant Transaction between Bank of America, N.A. and Ascent (incorporated by reference to Exhibit 10.1 to the Ascent 10-Q).** |
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10.2 |
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Confirmation, dated July 11, 2013, of Base Convertible Bond Hedge Transaction between Bank of America, N.A. and Ascent (incorporated by reference to Exhibit 10.2 to the Ascent 10-Q).** |
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10.3 |
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Confirmation, dated July 11, 2013, of Base Issuer Warrant Transaction between Credit Suisse Capital LLC and Ascent (incorporated by reference to Exhibit 10.3 to the Ascent 10-Q).** |
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10.4 |
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Confirmation, dated July 11, 2013, of Base Convertible Bond Hedge Transaction between Credit Suisse Capital LLC and Ascent (incorporated by reference to Exhibit 10.4 to the Ascent 10-Q).** |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification. * |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification. * |
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32 |
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Section 1350 Certification. *** |
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101.INS |
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XBRL Instance Document. *** |
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101.SCH |
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XBRL Taxonomy Extension Schema Document. *** |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document. *** |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document. *** |
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101.LAB |
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XBRL Taxonomy Extension Labels Linkbase Document. *** |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document. *** |
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* |
Filed herewith. |
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** |
Pursuant to the Commission’s Orders Granting Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended, or Rule 24(b)-2 under the Securities Exchange Act of 1934, as amended, certain confidential portions of this Exhibit were omitted by means of redacting a portion of the text. |
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*** |
Furnished herewith. |
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.
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ASCENT CAPITAL GROUP, INC. |
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Date: |
November 12, 2013 |
By: |
/s/ William R. Fitzgerald |
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William R. Fitzgerald |
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Chairman of the Board, Director and Chief Executive Officer |
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Date: |
November 12, 2013 |
By: |
/s/ Michael R. Meyers |
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Michael R. Meyers |
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Senior Vice President and Chief Financial Officer (Principal Accounting Officer) |
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):
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2.1 |
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Securities Purchase Agreement, dated as of July 10, 2013, by and among Monitronics International, Inc., certain funds affiliated with Oak Hill Partners, certain other holders and, for the limited purposes set forth therein, Ascent (incorporated by reference to Exhibit 2.1 to Amendment No. 2 to Ascent’s Current Report on Form 8-K/A, filed with the SEC on July 12, 2013 (File No. 001-34176)). |
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4.1 |
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Indenture, dated as of July 17, 2013, between Ascent, as issuer, and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to Ascent’s Quarterly Report on Form 10-Q, filed with the SEC on August 9, 2013 (File No. 001-34176) (the “Ascent 10-Q”)). |
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4.2 |
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Supplemental Indenture, dated as of August 16, 2013, by and among Monitronics International, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 of Monitronics International, Inc., filed with the SEC on October 18, 2013 (File No. 333-191805) (the “S-4”)). |
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4.3 |
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Second Supplemental Indenture, dated as of August 26, 2013, by and among Monitronics International, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.3 to the S-4). |
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4.4 |
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Form of Amendment No. 3 to the Credit Agreement and Amendment No. 1 to Guaranty Agreement, dated August 16, 2013, by and among Monitronics International, Inc., Bank of America, N.A., individually and as administrative agent, and the certain lenders party thereto.* |
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10.1 |
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Confirmation, dated July 11, 2013, of Base Issuer Warrant Transaction between Bank of America, N.A. and Ascent (incorporated by reference to Exhibit 10.1 to the Ascent 10-Q).** |
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10.2 |
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Confirmation, dated July 11, 2013, of Base Convertible Bond Hedge Transaction between Bank of America, N.A. and Ascent (incorporated by reference to Exhibit 10.2 to the Ascent 10-Q).** |
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10.3 |
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Confirmation, dated July 11, 2013, of Base Issuer Warrant Transaction between Credit Suisse Capital LLC and Ascent (incorporated by reference to Exhibit 10.3 to the Ascent 10-Q).** |
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10.4 |
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Confirmation, dated July 11, 2013, of Base Convertible Bond Hedge Transaction between Credit Suisse Capital LLC and Ascent (incorporated by reference to Exhibit 10.4 to the Ascent 10-Q).** |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification. * |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification. * |
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32 |
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Section 1350 Certification. *** |
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101.INS |
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XBRL Instance Document. *** |
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101.SCH |
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XBRL Taxonomy Extension Schema Document. *** |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document. *** |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document. *** |
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101.LAB |
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XBRL Taxonomy Extension Labels Linkbase Document. *** |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document. *** |
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* |
Filed herewith. |
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** |
Pursuant to the Commission’s Orders Granting Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended, or Rule 24(b)-2 under the Securities Exchange Act of 1934, as amended, certain confidential portions of this Exhibit were omitted by means of redacting a portion of the text. |
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*** |
Furnished herewith. |
Exhibit 4.4
FORM OF
AMENDMENT NO. 3 TO CREDIT AGREEMENT AND AMENDMENT NO. 1 TO GUARANTY AGREEMENT
This Amendment No. 3 to Credit Agreement and Amendment No. 1 to Guaranty Agreement (this “ Amendment ”) is entered into as of August 16, 2013 by and among Monitronics International, Inc., a Texas corporation (“ Borrower ”), Bank of America, N.A., individually and as administrative agent (in its capacity as administrative agent, the “ Administrative Agent ”), and the certain lenders party hereto.
RECITALS
A. Borrower, the Administrative Agent and the Lenders (as defined in the hereinafter defined Credit Agreement) are party to that certain Credit Agreement dated as of March 23, 2012, as amended by Amendment No. 1 to Credit Agreement and Consent dated as of November 7, 2012 and Amendment No. 2 to Credit Agreement dated as of March 25, 2013 (the “ Credit Agreement ”).
B. Pursuant to Sections 2.16 and 2.15, respectively, of the Credit Agreement, the Borrower has requested (i) new Term Loans (the “ Incremental Term Loans ”) pursuant to new Term Commitments in the aggregate principal amount of $225 million (the “ Incremental Term Commitment ”) and (ii) new Revolving Commitments (the “ Additional Revolving Credit Commitments ”) in the aggregate principal amount of $75 million as set forth in Schedule A to this Amendment.
C. Subject to the satisfaction of the conditions set forth in Section 7(a) of this Amendment, Bank of America, N.A. (the “ Incremental Term Lender ”) will make Incremental Term Loans in an amount up to its Incremental Term Commitment on the Amendment No. 3 Effective Date (defined below) to the Borrower;
D. The proceeds of the Incremental Term Loans will be used to partially finance the acquisition of all of the equity interests of Security Networks, LLC (“ Security Networks ”) and certain affiliated entities (the “ Security Networks Acquisition ”) pursuant to that certain securities purchase agreement (the “ Securities Purchase Agreement ”) dated as of July 10, 2013 by and among the Borrower, certain funds affiliated with Oakhill Capital Partners, and certain individual holders.
E. Subject to the terms of this Amendment, each Lender and Eligible Assignee that executes and delivers this Amendment as an Additional Revolving Credit Lender (defined below) shall commit to provide Additional Revolving Credit Commitments on the Amendment No. 3 Effective Date to the Borrower in the amounts set forth in Schedule A of this Amendment;
F. The Borrower and the Loan Parties have requested to make certain other amendments set forth in Section 5, (1) to the Credit Agreement, as authorized by Section 10.01 of the Credit Agreement and (2) to the Guaranty Agreement, as authorized by Section 14 of the Guaranty Agreement and Section 10.01 of the Credit Agreement.
Now, therefore, in consideration of the mutual execution hereof and other good and valuable consideration, the parties hereto agree as follows:
1. Defined Terms . Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to such terms in the Credit Agreement.
2. Interpretation . The rules of interpretation set forth in Section 1.02 of the Credit Agreement shall be applicable to this Amendment and are incorporated herein by this reference.
3. Increase in Term Commitments . Subject to the satisfaction of the conditions set forth under Section 7(a) of this Amendment, the Credit Agreement is hereby amended as follows:
(a) The defined term “Term B Commitment” in Section 1.01 of the Credit Agreement is hereby deleted and replaced with the following:
“ Term B Commitment ” means, with respect to a Lender, (i) such Lender’s Additional Term B Commitment, (ii) such Lender’s agreement to convert the principal amount of its Term Loans (as set forth in such Lender’s Consent (as defined in Amendment No. 2)) for an equal principal amount of Term B Loans on the Amendment No. 2 Effective Date and/or (iii) such Lender’s New Term B Commitment.
(b) The defined term “Term B Lender” in Section 1.01 of the Credit Agreement is hereby deleted and replaced with the following:
“ Term B Lender ” means each Additional Term B Lender, Converting Term Lender and New Term B Lender.”
(c) The defined term “Term B Loan” in Section 1.01 of the Credit Agreement is hereby deleted and replaced with the following:
“ Term B Loan ” means (i) any Loan converted or made pursuant to clauses (i) or (ii) of Section 2.01(c), respectively, and (ii) any Loan made pursuant to Section 2.01(d).
(d) The defined term “Term Borrowing” in Section 1.01 of the Credit Agreement is hereby deleted and replaced with the following:
“ Term Borrowing ” means a borrowing consisting of simultaneous Term Loans of the same Type and, in the case of Eurodollar Rate Loans, having the same Interest Period made by each of the Term Lenders pursuant to Section 2.01(a) , Section 2.01(c) , Section 2.01(d) and/or pursuant to the applicable Joinder Agreement delivered in connection with an issuance of Term Loans pursuant to Section 2.16 of this Agreement.
(e) The defined term “Term Commitment” in Section 1.01 of the Credit Agreement is hereby deleted and replaced with the following:
“ Term Commitment ” means, as to each Term Lender, (a) its obligation to make Term Loans to the Borrower pursuant to Section 2.01(a) in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender’s name on Schedule 2.01 under the caption “Term Commitment” or opposite such caption in the Assignment and Assumption pursuant to which such Term Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement, (b) its Term B Commitment, (c) its New Term B Commitment and/or (d) its commitment to make Term Loans pursuant to the applicable Joinder Agreement delivered in connection with an issuance of Term Loans pursuant to Section 2.16 of this Agreement.
(f) The defined term “Term Facility” in Section 1.01 of the Credit Agreement is hereby deleted and replaced with the following:
“ Term Facility ” means, at any time, (a) the aggregate principal amount of the Term Loans of all Term Lenders outstanding at such time, including, without limitation, the Term B Loans advanced or converted on the Amendment No. 2 Effective Date, the New Term B Loans advanced on the Amendment No. 3 Effective Date and any other Term Loans issued pursuant to Section 2.16 of this Agreement and (b) prior to the issuance of any Term Loans, the aggregate principal amount of the Term Commitments with respect to such Term Loans.
(g) The defined term “Term Lender” in Section 1.01 of the Credit Agreement is hereby deleted and replaced with the following:
“ Term Lender ” means at any time, (a) on or prior to the Closing Date, any Lender that has a Term Commitment at such time and (b) at any time after the Closing Date, any Lender that holds Term Loans at such time, including, without limitation, the Term B Lenders, the New Term B Lender, any other Lenders issuing Term Loans pursuant to Section 2.16 of this Agreement and any Person that becomes a party hereto as a Term Lender pursuant to an Assignment and Assumption.
(h) The defined term “Term Loan” in Section 1.01 of the Credit Agreement is hereby deleted and replaced with the following:
“ Term Loan ” means an advance made by any Term Lender under the Term Facility, including, without limitation, the Term B Loans advanced or converted on the Amendment No. 2 Effective Date, the New Term B Loans advanced on the Amendment No. 3 Effective Date (as applicable to Section 7(a) of Amendment No. 3) and any other Term Loans issued pursuant to Section 2.16 of this Agreement.
(i) Section 1.01 of the Credit Agreement is amended by adding the following definitions in the appropriate alphabetical order:
“ Amendment No. 3 ” means Amendment No. 3 to this Agreement dated as of August 16, 2013.
“ Amendment No. 3 Effective Date ” has the meaning given to such term in Section 7 of Amendment No. 3.
“ New Term B Commitment ” means, with respect to the New Term B Lender, the commitment of the New Term B Lender to make a New Term B Loan on the Amendment No. 3 Effective Date (as applicable to Section 7(a) of Amendment No. 3) in an amount of up to $225 million.
“ New Term B Lender ” means the Incremental Term Lender (as defined in Amendment No. 3).
“ New Term B Loan ” means a Loan that is made in respect of a New Term B Commitment pursuant to Section 2.01(d)(i) on the Amendment No. 3 Effective Date (as applicable to Section 7(a) of Amendment No. 3).
“ New Term B Commitment Termination Date ” has the meaning specified in Section 2.05(d).
(j) Section 2.01 of the Credit Agreement is hereby amended by adding the following clause (d) at the end thereof to read in full as follows:
“(d) Subject to the terms and conditions set forth herein and in Amendment No. 3:
(i) The New Term B Lender agrees to make a New Term B Loan to the Borrower on the Amendment No. 3 Effective Date (as applicable to Section 7(a) of Amendment No. 3) in an aggregate principal amount not to exceed its New Term B Commitment.
(ii) The New Term B Loans shall have the same terms as the Term B Loans as set forth in the Credit Agreement and Loan Documents, shall constitute the same tranche and class of Term Loans as such Term B Loans, shall vote together with the Term B Loans and shall be treated the same in all respects, except that the initial Interest Period for all New Term B Loans that are Eurodollar Rate Loans shall commence on the date of borrowing thereof and shall end on the last day of the Interest Period for any then existing Borrowing of Term B Loans. For the avoidance of doubt, the New Term B Loans (and all principal, interest and other amounts in respect thereof) will constitute “Obligations” under the Credit Agreement and the other Loan Documents and shall have the same rights and obligations under the Credit Agreement and Loan Documents as the Term B Loans.”
(k) Section 2.05 of the Credit Agreement is hereby amended by adding the following clause (d) at the end thereof:
“(d) The New Term B Commitment of the New Term B Lender shall automatically terminate upon the earlier of (i) the borrowing of the New Term B Loans and (ii) the later of (x) October 31, 2013 and (y) the termination or expiration of the Securities Purchase Agreement as in effect on July 10, 2013 (such date the “ New Term B Commitment Termination Date ”).”
(l) Section 2.06(a) of the Credit Agreement is hereby amended by deleting the first sentence therein and replacing it with the following sentence:
“ The Borrower shall repay to the Term Lenders on the last day of each quarter an amount equal to (x) 0.25% of the aggregate principal amount of Term B Loans outstanding immediately after giving effect to Amendment No. 2 plus (y) 0.251256291% of the aggregate principal amount of New Term B Loans outstanding immediately after giving effect to Amendment No. 3, in each case which amounts shall be reduced as a result of the application of prepayments in accordance with the order of priority set forth in Section 2.04 or Section 2.17 . For avoidance of doubt as of the Amendment No. 3 Effective Date this will result in the quarterly amortization payment to be shared by all Term Lenders being an aggregate of $2,291,579.85 subject to reduction as a result of future prepayments in accordance with the order of priority set forth in Section 2.04 or Section 2.17 .”
4. Increase in Revolving Commitments .
(a) Subject to the satisfaction of the conditions set forth under Section 7(b) of this Amendment, each Lender or Eligible Assignee with an Additional Revolving Credit Commitment who executes and delivers this Amendment (an “ Additional Revolving Credit Lender ”) shall
automatically become a Revolving Credit Lender under the Credit Agreement with respect to its Additional Revolving Credit Commitment and shall automatically have a Revolving Credit Commitment under the Credit Agreement in the amount of its Additional Revolving Credit Commitment on the Amendment No. 3 Date in addition to any Revolving Credit Commitment it has prior to the Amendment No. 3 Effective Date. With respect to each Additional Revolving Credit Lender, the commitment of such Additional Revolving Credit Lender to make Revolving Credit Loans and to acquire participations in Letters of Credit under the Credit Agreement, shall be in an amount proportionate to its share of the aggregate Revolving Credit Commitments (after giving effect to the Additional Revolving Credit Commitments). The aggregate amount of the Additional Revolving Credit Commitments shall equal $75 million. The Additional Revolving Credit Commitments and Revolving Credit Loans thereunder established pursuant to this Section shall respectively constitute Revolving Credit Commitments and Revolving Credit Loans under, and shall be entitled to all the benefits afforded by, the Credit Agreement and the other Loan Documents.
(b) On the Amendment No. 3 Effective Date, as the same applies to this Section 4, the reallocation envisioned by the last sentence of Section 2.15(d) shall be deemed to have automatically occurred.
(c) On the Amendment No. 3 Effective Date, as the same applies to this Section 4, the section in Schedule 2.01 of the Credit Agreement under the caption “Revolving Credit Commitments” shall be deleted and replaced in its entirety with Schedule A to this Amendment.
(d) The Additional Revolving Credit Commitments established under this Amendment shall have identical terms as the Revolving Credit Commitments in existence under the Credit Agreement prior to the Amendment No. 3 Effective Date and each reference to a “Revolving Credit Commitment” or “Revolving Credit Commitments” in the Credit Agreement shall be deemed to include the Additional Revolving Credit Commitments in effect on the Amendment No. 3 Effective Date with respect to this Section 4.
5. Other Amendments .
(a) Section 1.01 of the Credit Agreement is hereby amended by deleting the definitions of each of the following terms and replacing them in their entirety with the following:
“ Consolidated EBITDA ” means, for any period, an amount equal to Consolidated Net Income of the Borrower and its Subsidiaries on a consolidated basis plus , without duplication, (a) the following to the extent deducted in calculating such Consolidated Net Income: (i) Consolidated Interest Charges, (ii) the provision for Federal, state (including Texas margin tax), local and foreign income taxes payable, (iii) depreciation and amortization expense, (iv) non-cash or non-recurring (even if cash) costs, expenses, charges and other items reducing such Consolidated Net Income, (v) reasonable cash fees and expenses incurred in connection with the Transaction incurred prior to April 15, 2012 and other Transaction Costs deducted in determining such Consolidated Net Income, (vi) severance costs and charges, closure costs, relocation costs, expenses or fees and restructuring costs and charges, to the extent deducted in determining such Consolidated Net Income, (vii) without duplication of any pro forma adjustments to Consolidated EBITDA due to such actions, any salary, benefits and other cost savings and other synergies in connection with acquisitions permitted under Section 7.03(g) that (A) are a result of actions taken or expected to be taken in
connection with such an acquisition and are realized or expected to be realized by the Borrower in good faith in each case within eighteen (18) months of the consummation of such acquisition, (B) are in an aggregate amount in any period not to exceed 15% of Consolidated EBITDA for such period (calculated prior to giving effect to this clause (vii) and any pro forma adjustments for such period) and (C) are reasonably identifiable, factually supportable and certified by a financial officer of the Borrower on behalf of the Borrower in a certificate delivered to the Administrative Agent, (viii) expenses and charges not to exceed $2,700,000 in the aggregate incurred prior to December 31, 2012 in connection with the “Paradox Lawsuit”, and (ix) Creation Costs expensed during such period, and minus , without duplication, (b) the following to the extent included in calculating such Consolidated Net Income: (i) Federal, state (including Texas margin tax), local and foreign income tax credits and (ii) all non-cash items increasing Consolidated Net Income or non-recurring (even if cash) gains and other items increasing such Consolidated Net Income (in each case of or by the Borrower and its Subsidiaries for such period). For purposes of the computation of the Consolidated Total Leverage Ratio, Consolidated Senior Secured Leverage Ratio and the Consolidated Interest Coverage Ratio (a) for any period during which a purchase or other acquisition is made by any Loan Party pursuant to Section 7.03(g) or (h) , Consolidated EBITDA shall be calculated on a pro forma basis as if such purchase or other acquisition was consummated (and any related Indebtedness incurred) on the first day of such period and (b) for any period during which a Subsidiary or business was Disposed of, Consolidated EBITDA shall be calculated on a pro forma basis as if such Subsidiary or business had been Disposed of on the first day of such period. Notwithstanding the foregoing, the adjustment made under clause (a)(vii) for any period of determination shall be the lesser of (A) 28 multiplied by Gross RMR Created for such period and (B) the actual Creation Costs for such period associated with the creation of any Gross RMR Created, less capitalized Creation Costs.
“ Dealer Program ” means a program by which the Loan Parties or their Subsidiaries generate, purchase or otherwise acquire alarm contracts or service relationships on an ongoing basis from Approved Alarm Dealers and which reasonably satisfies the following requirements: (i) the Approved Alarm Dealer retains no “equity” or other continuing interest in the alarm contracts or the customer accounts relating thereto (provided, that this shall not prohibit the Loan Parties or their Subsidiaries from offering retention bonuses as incentives to Approved Alarm Dealers), (ii) the Approved Alarm Dealer has no right to repurchase the alarm contract or customer account relating thereto; provided that those accounts that are non-performing under the applicable Approved Alarm Purchase Agreement may be rejected by the Loan Parties or their Subsidiaries, as applicable, and repurchased by the selling Approved Alarm Dealer and (iii) the Approved Alarm Dealer has no right to withdraw alarm contracts already submitted and purchased.
“ Guarantors ” means, collectively, (a) the Subsidiaries of the Borrower that are “Guarantors” as of the Amendment No. 3 Effective Date and the Subsidiaries of the Borrower as are or may from time to time become guarantors pursuant to Section 6.12 and (b) with respect to (i) Obligations owing by any Loan Party or any Subsidiary of a Loan Party (other than the Borrower) under any Secured Hedge Agreement or any Secured Cash Management Agreement
and (ii) the payment and performance by each Specified Loan Party (as defined in the Guaranty Agreement) of its obligations under its Guarantee with respect to all Swap Obligations, the Borrower. For the avoidance of doubt, the definition of Guarantors does not include the Parent.
“ Monitoring Contract ” means a contract for providing central station monitoring and/or similar services for security alarm and/or similar equipment or devices to residential or commercial customers and including all recurring monthly revenue from maintenance, service and warranty contracts with customers who are party to such monitoring contracts, but excluding all contracts providing for guard, patrol or response services. All “Monitoring Contracts” shall be duly executed written contracts, including usual and customary provisions for the security alarm industry (including, without limitation, that they shall be freely assignable and contain standard industry limits of liability), except that 2% of the Monitoring Contracts (measured by RMR) may be oral; provided that they are covered by the Loan Parties’ errors and omissions insurance.
“ Monitoring Contract Documents ” means each original Monitoring Contract and any promissory notes, chattel paper, purchase money security agreements or security agreements evidencing or securing a customer’s performance of a Monitoring Contract or evidencing or securing financing for the installation of an Alarm System executed by customers in connection with any Monitoring Contract, together with, if applicable, all such original documents, instruments and agreements effecting an assignment of such documents of customers acquired by a Loan Party, to such Loan Party.
“ Obligations ” means all advances to, and debts, liabilities, obligations, covenants and duties of, any Loan Party arising under any Loan Document or otherwise with respect to any Loan, Letter of Credit, Secured Cash Management Agreement or Secured Hedge Agreement, in each case whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against any Loan Party in any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding; provided that the “Obligations” shall exclude any Excluded Swap Obligations.
(b) Clause (d) of the definition of “Defaulting Lender” in the Credit Agreement is hereby amended by inserting the phrase “since the Amendment No. 3 Effective Date” after the phrase “has, or has a direct or indirect parent company that has”;
(c) Clause (d) of the definition of “Indebtedness” in the Credit Agreement is hereby deleted and replaced in its entirety with the following:
(d) all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business, payments under Approved Alarm Purchase Agreements and agreements providing for indemnification, contribution, earnout, adjustment of purchase price, holdback or similar obligations, in each case, incurred or assumed in connection with acquisitions or
dispositions permitted under this Agreement, including acquisitions of Monitoring Contracts);
(d) Section 1.01 of the Credit Agreement is amended by adding the following definition in the appropriate alphabetical order:
“ Commodity Exchange Act ” means the Commodity Exchange Act (7 U.S.C. § 1 et seq .), as amended from time to time, and any successor statute.
“ Excluded Swap Obligation ” means, with respect to any Guarantor, any Swap Obligation if, and to the extent that, all or a portion of the guarantee of such Guarantor of, or the grant by such Guarantor of a security interest to secure, such Swap Obligation (or any guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Guarantor’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act and the regulations thereunder (determined after giving effect to Section 22 of the Guaranty Agreement and any other “keepwell, support or other agreement” for the benefit of such Guarantor and any and all guarantees of such Guarantor’s Swap Obligations by other Loan Parties) at the time such guarantee or grant of a security interest by such Guarantor becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such guarantee or security interest is or becomes excluded in accordance with the first sentence of this definition.
“ Swap Obligations ” means with respect to any Guarantor any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of Section 1a(47) of the Commodity Exchange Act.
“ Transaction Costs ” means all transaction fees, cost, expenses, charges and other amounts related to this Agreement, the incurrence of Indebtedness permitted under Section 7.02, any acquisitions permitted under Section 7.03 or any dispositions permitted under Section 7.05 (including, without limitation, any financing fees, merger and acquisition fees, legal fees and expenses, due diligence fees or any other fees and expenses in connection therewith).
(e) Section 2.04(a)(ii) of the Credit Agreement is hereby deleted and replaced with the following:
(ii) In the event that, on or prior to March 31, 2014, the Borrower (x) prepays, refinances, substitutes or replaces any Term Loans in connection with a Repricing Transaction or (y) effects any amendment of this Agreement resulting in a Repricing Transaction, the Borrower shall pay to the Administrative Agent, for the ratable account of each of the Term Lenders, (I) in the case of clause (x), a prepayment premium of 1.00% of the aggregate principal amount of the Term Loans so prepaid, refinanced, substituted or replaced and (II) in the case of clause (y), a fee equal to 1.00% of the aggregate principal amount of the Term Loans outstanding immediately prior to such amendment which are the subject of such Repricing Transaction. Such amounts shall be due and payable on the date of effectiveness of such Repricing Transaction.
(f) Clause (ii) of the proviso in each of Section 2.15(a) and 2.16(a) of the Credit Agreement is deleted and clause (iii) of the proviso and related references are renumbered accordingly. Further, the parenthetical clause appearing directly after 2.75:1.00 in each of Section 2.15(a) and 2.16(a) is amended to add the phrase “in reliance on the Consolidated Senior Secured Leverage Ratio (as opposed to the $150,000,000 basket)” after the phrase “date of determination” and prior to the phrase “were fully drawn on such date”.
(g) Clause (h) of Section 7.02 of the Credit Agreement is hereby deleted in its entirety and replaced with the phrase “Intentionally Deleted” and any references to such clause are similarly deleted.
(h) Clause (g) of Section 7.03 of the Credit Agreement is hereby amended by inserting the phrase “direct or indirect” after the phrase “Acquisitions of any” and before the phrase “Equity Interests of”.
(i) Clause (e) of Section 7.05 of the Credit Agreement is hereby deleted in its entirety and replaced with the following:
(e) Dispositions permitted by Sections 7.01 , 7.03 , 7.04 and 7.06 .
(j) The proviso at the end of Section 7.05 of the Credit Agreement is hereby amended by replacing the reference to “ Section 7.05(a) through (c) and (e) through (g)” with a reference to “ Section 7.05(a) through (c) and (f) through (g) .”
(k) Section 7.15 is hereby deleted in its entirety and replaced with the phrase “Intentionally Deleted” and any references to such Section are similarly deleted.
(l) Each reference in clauses (e) and (h) of Section 8.01 of the Credit Agreement to the amount of “$20,000,000” shall be replaced with a reference to the amount of “$40,000,000.”
(m) Each reference in clause (i) of Section 8.01 of the Credit Agreement to the amount of “$5,000,000” shall be replaced with a reference to the amount of “$15 ,000,000.
(n) The following paragraph is added at the end of Section 8.03:
“ Excluded Swap Obligations with respect to any Guarantor shall not be paid with amounts received from such Guarantor or its assets, but appropriate adjustments shall be made with respect to payments from other Loan Parties to preserve the allocation to Obligations otherwise set forth above in this Section 8.03 .”
(o) The Guaranty Agreement is hereby amended as follows:
(i) Section 2 of the Guaranty Agreement is hereby amended by adding the following language after “ Guaranteed Obligations ” and before “)” at the end of the first sentence of such Section:
; provided , with respect to any Guarantor at any time, the definition of “Guaranteed Obligations” shall exclude Excluded Swap Obligations with respect to such Guarantor at such time
(ii) The Guaranty Agreement is hereby amended by adding the following paragraph as a new Section 22:
22. Keepwell . Each Loan Party that is a Qualified ECP Guarantor at the time the Guaranty or the grant of the security interest under the Loan Documents, in each case, by any Specified Loan Party, becomes effective with respect to any Swap Obligation, hereby jointly and severally, absolutely, unconditionally and irrevocably undertakes to provide such funds or other support to each Specified Loan Party with respect to such Swap Obligation as may be needed by such Specified Loan Party from time to time to honor all of its obligations under this Guaranty and the other Loan Documents in respect of such Swap Obligation (but, in each case, only up to the maximum amount of such liability that can be hereby incurred without rendering such Qualified ECP Guarantor’s obligations and undertakings under this Section 22 voidable under applicable law relating to fraudulent conveyance or fraudulent transfer, and not for any greater amount). The obligations and undertakings of each Qualified ECP Guarantor under this Section shall remain in full force and effect until the Obligations have been indefeasibly paid and performed in full. Each Qualified ECP Guarantor intends this Section to constitute, and this Section shall be deemed to constitute, a guarantee of the obligations of, and a “keepwell, support, or other agreement” for the benefit of, each Specified Loan Party for all purposes of the Commodity Exchange Act.
“ Qualified ECP Guarantor ” shall mean, at any time, each Loan Party with total assets exceeding $10,000,000 or that qualifies at such time as an “eligible contract participant” under the Commodity Exchange Act and can cause another person to qualify as an “eligible contract participant” at such time under §1a(18)(A)(v)(II) of the Commodity Exchange Act.
“ Specified Loan Party ” means any Loan Party that is not an “eligible contract participant” under the Commodity Exchange Act (determined prior to giving effect to Section 22).”
6. Representations and Warranties of Borrower . Borrower represents and warrants as of the Amendment No. 3 Effective Date that:
(a) The execution, delivery and performance by Borrower of this Amendment have been duly authorized by all necessary corporate action and this Amendment and the Credit Agreement (as amended hereby) constitute the legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity regardless of whether considered in a proceeding in equity or at law;
(b) The representations and warranties of Borrower contained in Article V of the Credit Agreement or any other Loan Document are true and correct in all material respects (or with respect to representations and warranties qualified by materiality, in all respects) on and as of the Amendment No. 3 Effective Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date in all material respects (or with respect to representations and warranties qualified by materiality, in all respects), except that the representations and warranties contained
in Sections 5.05(a) and (b) of the Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant to Sections 6.01(a) and (b) of the Credit Agreement, respectively; and
(c) No Default exists.
7. Conditions to Effectiveness and Funding .
This Amendment shall become effective (the “ Amendment No. 3 Effective Date ”):
(a) In the case of Section 3 when:
(i) The Administrative Agent (or its counsel) receives of a counterpart of this Amendment signed by each of the Administrative Agent, the Borrower and the Incremental Term Lender;
(ii) The Administrative Agent shall have received such certificates of resolutions or other action, incumbency certificates and/or other certificates of Borrower as the Administrative Agent may require evidencing the identity, authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer in connection with this Amendment;
(iii) The Administrative Agent shall have received such documents and certifications as the Administrative Agent may reasonably require to evidence that each Loan Party is validly existing and in good standing in its jurisdiction of organization;
(iv) The Administrative Agent shall have received a certificate of the Borrower signed by a Responsible Officer of the Borrower in accordance with Section 2.16(d) of the Credit Agreement;
(v) The Administrative Agent and the lead arrangers shall have received all fees and expenses due to be paid to them pursuant to written agreement and the Borrower shall pay to the Administrative Agent for the account of each New Term B Lender, and the Administrative Agent shall have received, a fee of 0.50% of its New Term B Commitment;
(vi) The Administrative Agent shall have received a certificate of the Borrower attesting to the Solvency of the Loan Parties and their Subsidiaries taken as a whole before and after giving effect to the Security Networks Acquisition and the funding of the Incremental Term Loans, signed by the Borrower’s chief financial officer in form and substance acceptable to the Administrative Agent;
(vii) The Administrative Agent shall have received a favorable opinion of Baker Botts LLP, counsel to the Loan Parties and the Parent, addressed to the Administrative Agent and each Lender party hereto, in form and substance acceptable to the Administrative Agent;
(viii) Substantially contemporaneously, the Security Networks Acquisition shall be consummated;
(ix) The Incremental Term Lender and the Administrative Agent shall have received all documentation and other information about the Loan Parties and the Parent required under applicable “know your customer” and anti-money laundering rules and regulations, including the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) that has been requested in writing at least 5 Business Days prior to the Amendment No. 3 Effective Date; and
(x) The Administrative Agent shall have received, in form and substance satisfactory to it, customary lien searches.
(b) In the case of Section 4 when:
(i) The conditions in Section 7(a) shall have been satisfied (other than Section 7(a)(i), (a)(iv), (a)(v) and (a)(viii));
(ii) The Administrative Agent shall have received a certificate of the Borrower signed by a Responsible Officer of the Borrower in accordance with Section 2.15(d) of the Credit Agreement;
(iii) The Administrative Agent and the lead arranger shall have received all fees and expenses due to be paid to them pursuant to written agreement and the Borrower shall pay to the Administrative Agent for the account of each Additional Revolving Credit Lender, and the Administrative Agent shall have received, a fee of 0.50% of its Additional Revolving Credit Commitment; and
(iv) The Administrative Agent (or its counsel) shall have received a counterpart of this Amendment signed by each of the Administrative Agent, the Borrower and each Additional Revolving Credit Lender.
(c) In the case of Section 5 immediately prior to Sections 3 and 4 and when the Administrative Agent (or its counsel) shall have received a counterpart of this Amendment signed by each of the Administrative Agent and Borrower and consents in the form of Exhibit A hereto or otherwise acceptable to the Administrative Agent signed by the Required Lenders (prior to giving effect to Sections 3 and 4).
8. Reference to and Effect Upon the Credit Agreement .
(a) Except as specifically amended above, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed.
(b) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Administrative Agent or any Lender under the Credit Agreement or any Loan Document, nor constitute a waiver of any provision of the Credit Agreement or any Loan Document, except as specifically set forth herein. On the Amendment No. 3 Effective Date, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of similar import shall mean and be a reference to the Credit Agreement as amended hereby.
9. Reservation of Rights . Borrower acknowledges and agrees that neither the execution nor the delivery by the Administrative Agent and the Lenders of this Amendment, shall be deemed to create a
course of dealing or otherwise obligate the Administrative Agent or any Lender to execute similar documents under the same or similar circumstances in the future.
10. Costs and Expenses . Borrower hereby affirms its obligation under Section 10.04 of the Credit Agreement to reimburse the Administrative Agent for all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates in connection with the preparation, negotiation, execution and delivery of this Amendment, including but not limited to the reasonable fees, charges and disbursements of counsel for the Administrative Agent with respect thereto.
11. Governing Law; etc. This Amendment shall be governed by, and construed in accordance with, the law of the State of New York. This Amendment is subject to the provisions of Sections 10.14 and 10.15 of the Credit Agreement relating to submission to jurisdiction, venue, service of process and waiver of right to trial by jury, the provisions which are by this reference incorporated herein in full.
12. Headings . Section headings herein are included for convenience of reference only and shall not constitute a part hereof for any other purpose or be given any substantive effect.
13. Counterparts . This Amendment may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Amendment by telecopy or other electronic imaging means (including “.pdf”) shall be effective as delivery of a manually executed counterpart of this Amendment.
14. Severability . If any provision of this Amendment or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Amendment and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
[signature pages follow]
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and year first above written.
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MONITRONICS INTERNATIONAL, INC. |
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GUARANTORS: |
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MIBU SERVICER INC. |
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MI FUNDING GP, LLC |
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MI FUNDING HC, LLC |
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MI FUNDING LP, LLC |
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MI SERVICER GP, LLC |
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MI SERVICER HC, LLC |
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MI SERVICER LP, LLC |
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MONITRONICS CANADA, INC. |
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MONITRONICS FUNDING LP |
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MONITRONICS SECURITY LP |
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PLATINUM SECURITY SOLUTIONS, INC. |
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BANK OF AMERICA, N.A., |
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as Administrative Agent |
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BANK OF AMERICA, N.A., |
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as Incremental Term Lender |
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[ ], |
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as an Additional Revolving Credit Lender |
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Omitted Schedule and Exhibit
The following schedule and exhibit to the Form of Amendment No. 3 to Credit Agreement and Amendment No. 1 to Guaranty Agreement, dated August 16, 2013, by and among Monitronics International, Inc., Bank of America, N.A., individually and as administrative agent, and the certain lenders party thereto, have not been provided herein:
Schedule A: Revolving Credit Commitments
Exhibit A: Consent to Amendment No. 3
The undersigned registrant hereby undertakes to furnish supplementally a copy of the omitted schedule and exhibit to the Securities and Exchange Commission upon request.
Exhibit 31.1
CERTIFICATION
I, William R. Fitzgerald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ascent Capital Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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November 12, 2013 |
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/s/ William R. Fitzgerald |
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William R. Fitzgerald |
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Chairman, President and Chief Executive Officer |
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Exhibit 31.2
CERTIFICATION
I, Michael R. Meyers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ascent Capital Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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November 12, 2013 |
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/s/ Michael R. Meyers |
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Michael R. Meyers |
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Senior Vice President and Chief Financial Officer |
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Exhibit 32
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Ascent Capital Group, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Quarterly Report on Form 10-Q for the period ended September 30, 2013 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012.
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Dated: |
November 12, 2013 |
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/s/ William R. Fitzgerald |
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William R. Fitzgerald |
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Chairman, President and Chief Executive Officer |
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Dated: |
November 12, 2013 |
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/s/ Michael R. Meyers |
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Michael R. Meyers |
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Senior Vice President and Chief Financial Officer |
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(Principal Accounting Officer) |
The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.