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ASCMA > SEC Filings for ASCMA > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for ASCENT CAPITAL GROUP, INC.

Form 10-K for ASCENT CAPITAL GROUP, INC.


27-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 consolidated financial statements and the notes thereto included elsewhere herein.

At December 31, 2013, our assets consisted primarily of our wholly-owned operating subsidiary, Monitronics.

Monitronics and Subsidiaries

On December 17, 2010, we acquired 100% of the outstanding capital stock of Monitronics, through the merger of Mono Lake Merger Sub, Inc., a direct wholly-owned subsidiary of Ascent Capital established to consummate the merger, with and into Monitronics, with Monitronics as the surviving corporation in the merger (the "Monitronics Acquisition"). On August 16, 2013, Monitronics acquired all of the equity interests of Security Networks and certain affiliated entities in the Security Networks Acquisition.

Monitronics provides security alarm monitoring and related services to residential and business subscribers throughout the U.S. and parts of Canada. Monitronics monitors signals arising from burglaries, fires, medical alerts and other events through security systems


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at subscribers' premises. Nearly all of its revenues are derived from monthly recurring revenues under security alarm monitoring contracts acquired through its exclusive nationwide network of independent dealers.

Revenues are recognized as the related monitoring services are provided. Other revenues are derived primarily from the provision of third-party contract monitoring services and from field technical repair services. All direct external costs associated with the creation of subscriber accounts are capitalized and amortized over fourteen to fifteen years using a declining balance method beginning in the month following the date of acquisition. Internal costs, including all personnel and related support costs incurred solely in connection with subscriber account acquisitions and transitions, are expensed as incurred.

Account cancellation, otherwise referred to as subscriber attrition, has a direct impact on the number of subscribers that Monitronics services and on its financial results, including revenues, operating income and cash flow. A portion of the subscriber base can be expected to cancel its service every year. Subscribers may choose not to renew or terminate their contract for a variety of reasons, including relocation, cost and switching to a competitor's service. The largest category of canceled accounts relate to subscriber relocation or the inability to contact the subscriber. Monitronics defines its attrition rate as the number of canceled accounts in a given period divided by the weighted average of number of subscribers for that period. Monitronics considers an account canceled if payment from the subscriber is deemed uncollectible or if the subscriber cancels for various reasons. If a subscriber relocates but continues its service, this is not a cancellation. If the subscriber relocates, discontinues its service and a new subscriber takes over the original subscriber's service continuing the revenue stream, this is also not a cancellation. Monitronics adjusts the number of canceled accounts by excluding those that are contractually guaranteed by its dealers. The typical dealer contract provides that if a subscriber cancels in the first year of its contract, the dealer must either replace the canceled account with a new one or refund to Monitronics the cost paid to acquire the contract. To help ensure the dealer's obligation to Monitronics, Monitronics typically maintains a dealer funded holdback reserve ranging from 5-10% of subscriber accounts in the guarantee period. In some cases, the amount of the holdback liability may be less than actual attrition experience.

The table below presents subscriber data for the twelve months ended December 31, 2013 and 2012:

                                                       Twelve Months Ended
                                                           December 31,
                                                       2013            2012

Beginning balance of accounts                           812,539         700,880
Accounts acquired                                       354,541         202,379
Accounts cancelled                                     (111,889 )       (89,724 )
Canceled accounts guaranteed by dealer and
acquisition adjustment (a) (b)                           (9,036 )          (996 )
Ending balance of accounts                            1,046,155         812,539
Monthly weighted average accounts                       908,921         732,694
Attrition rate                                            (12.3 )%        (12.2 )%



(a) Canceled accounts that are contractually guaranteed to be refunded from holdback.

(b) Includes 2,064 subscriber accounts that were proactively cancelled during 2013 because they were active with both Monitronics and Security Networks upon acquisition.

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


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Accounts Acquired

During the three months ended December 31, 2013 and 2012, Monitronics acquired 37,341 and 120,660 subscriber accounts. Subscriber accounts acquired for the three months ended December 31, 2012 include approximately 93,000 accounts purchased in a bulk buy on October 25, 2012. In addition, acquired contracts for the twelve months ended December 31, 2013 include 203,898 accounts acquired in the Security Networks Acquisition, which was completed on August 16, 2013.

Recurring monthly revenue ("RMR") acquired during the three and twelve months ended December 31, 2013 was approximately $1,704,000 and $6,772,000, respectively, without giving effect to RMR acquired in the Security Networks Acquisition. RMR of approximately $8,681,000 was acquired in the Security Networks Acquisition. RMR acquired during the three and twelve months ended December 31, 2012 was approximately $5,661,000 and $9,262,000, respectively, which includes purchased RMR of approximately $4,400,000 from the October 25, 2012 bulk buy.

Adjusted EBITDA

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


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Results of Operations

The following table sets forth selected data from the accompanying consolidated statements of operations for the periods indicated. The results of operations for Security Networks are included from August 16, 2013, the date of the Security Networks Acquisition (amounts in thousands).

                                                     Years ended December 31,
                                                  2013          2012         2011

Net revenue                                    $  451,033 (a)   344,953      311,898 (b)
Cost of services                                   74,136        49,978       40,699
Selling, general, and administrative               92,002        73,868       77,364
Amortization of subscriber accounts, dealer
network and other intangible assets               208,760       163,468      159,619
Restructuring charges                               1,111             -        4,258
Loss (gain) on sale of operating assets,
net                                                (5,473 )      (8,670 )        565
Interest expense                                   95,836        71,467       42,856
Realized and unrealized loss on derivative
financial instruments                                   -         2,044       10,601
Income tax expense from continuing
operations                                          4,206         2,594        2,498
Net loss from continuing operations               (22,536 )     (25,001 )    (28,901 )
Earnings (loss) from discontinued
operations, net of income taxes                       129        (4,348 )     48,789
Net income (loss)                                 (22,407 )     (29,349 )     19,888

Adjusted EBITDA (c)
Monitronics business Adjusted EBITDA           $  305,250       235,675      213,820
Corporate Adjusted EBITDA                            (776 )       3,096      (12,052 )
Total Adjusted EBITDA                          $  304,474       238,771      201,768

Adjusted EBITDA as a percentage of Revenue
Monitronics business                                 67.7 %        68.3 %       68.6 %
Corporate                                            (0.2 )%        0.9 %       (3.9 )%



(a) Net revenue for the year ended December 31, 2013 reflects the negative impact of a $2,715,000 fair value adjustment that reduced deferred revenue acquired in the Security Networks Acquisition.

(b) Net revenue for the year ended December 31, 2011 reflects the negative impact of a $2,295,000 fair value adjustment that reduced deferred revenue acquired in the Monitronics Acquisition.

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

Net Revenue. Revenue increased $106,080,000, or 30.8%, for the year ended December 31, 2013 as compared to the corresponding prior year. 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 Security Networks Acquisition in August 2013, which included over 200,000 subscriber accounts, acquisition of over 136,000 accounts through Monitronics' authorized dealer program subsequent to December 31, 2012, and the purchase of approximately 18,200 accounts in various bulk buys over the last 12 months. In addition, average monthly revenue per subscriber increased from $39.50 as of December 31, 2012 to $40.90 as of December 31, 2013. Net revenue for the year ended December 31, 2013 also reflects the negative impact of a $2,715,000 fair value adjustment that reduced deferred revenue acquired in the Security Networks Acquisition.

Revenue increased $33,055,000, or 10.6%, for the year ended December 31, 2012 as compared to the corresponding prior year. The increase is attributable to the increase in the number of subscriber accounts from 700,880 as of December 31, 2011 to 812,539 as of December 31, 2012. Approximately 93,000 accounts were purchased in a bulk buy on October 25, 2012, which provided approximately $9,640,000 in increased revenue. Average monthly revenue per subscriber increased from $37.49 as of December 31, 2011 to $39.50 as of December 31, 2012. Furthermore, the increase is partially attributable to a $2,295,000 fair value adjustment associated with deferred revenue acquired in the Monitronics Acquisition, which reduced net revenue for the year ended December 31, 2011.

Cost of Services. Cost of services increased $24,158,000 or 48.3%, for the year ended December 31, 2013 as compared to the corresponding prior year. The increase is primarily attributable to increases in cellular and service costs. Cellular costs have increased due to more accounts being monitored across the cellular network, which often include interactive and home automation


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services. This has also resulted in higher service costs as existing subscribers upgrade their systems. In addition, cost of services for the year ended December 31, 2013, includes Security Networks costs of $8,233,000. Cost of service as a percent of net revenue increased from 14.5% for the year ended December 31, 2012 to 16.4% for the year ended December 31, 2013.

Cost of services increased $9,279,000 or 22.8%, for the year ended December 31, 2012 as compared to the corresponding prior year. The increase is attributable to an increased number of accounts monitored across the cellular network and an increase in interactive and home automation services, which resulted in higher operating and service costs. Cost of service as a percent of net revenue increased from 13.0% for the year ended December 31, 2011 to 14.5% for the year ended December 31, 2012.

Selling, General and Administrative. Selling, general and administrative expense ("SG&A") increased $18,134,000, or 24.5%, for the year ended December 31, 2013 as compared to the corresponding prior year. The increase is attributable to increases in Monitronics SG&A costs of $10,652,000 and the inclusion of Security Networks SG&A costs of $6,456,000 for the year ended December 31, 2013. The increased Monitronics SG&A costs are attributable to increased payroll expenses of approximately $2,379,000 and other increases due to Monitronics' subscriber growth in 2013. Monitronics also incurred acquisition and integration costs of $2,470,000 and $1,264,000, respectively, related to professional services rendered and other costs incurred in connection with the Security Networks Acquisition. Additionally, the Company's consolidated stock-based compensation expense increased approximately $2,876,000 for the year ended December 31, 2013, as compared to the corresponding prior year periods. This increase is related to restricted stock and option awards granted to certain executives in late 2012 and throughout 2013. SG&A as a percent of net revenue decreased from 21.4% for the year ended December 31, 2012 to 20.4% for the year ended December 31, 2013.

SG&A decreased $3,496,000, or 4.5%, for the year ended December 31, 2012 as compared to the corresponding prior year. The decrease is primarily attributable to decreased administrative and corporate expenses related to the reorganization of the Company in 2010 and 2011 with the acquisition of Monitronics and disposition of the Content Services and Creative Services businesses. Additionally, the decrease is attributable to a non-recurring $2,640,000 charge related to an ongoing litigation matter recorded for the year ended December 31, 2011. The decrease was partially offset by an increase in Monitronics SG&A costs. The increased Monitronics SG&A costs were driven by increased payroll, marketing and stock-based compensation expenses of approximately $3,525,000 as compared to the corresponding prior year period. The increase in stock-based compensation expense is related to restricted stock and stock option awards granted to certain employees during 2011 and 2012. SG&A as a percent of net revenue decreased from 24.8% for the year ended December 31, 2011 to 21.4% for the year ended December 31, 2012.

Amortization of Subscriber Accounts, Dealer Network and Other Intangible Assets. Amortization of subscriber accounts, dealer network and other intangible assets increased $45,292,000 and $3,849,000 for the years ended December 31, 2013 and 2012, respectively, as compared to the corresponding prior years. The 2013 increase is attributable to amortization of subscriber accounts acquired subsequent to December 31, 2012, including amortization of approximately $23,599,000 related to the definite lived intangible assets acquired in the Security Networks Acquisition. The 2012 increase is primarily attributable to amortization of subscriber accounts acquired subsequent to December 31, 2011.

Restructuring Charges. In connection with the Security Networks Acquisition, management approved a restructuring plan to transition Security Networks operations in West Palm Beach and Kissimmee, Florida to Dallas, Texas (the "2013 Restructuring Plan"). The 2013 Restructuring Plan provides certain employees with a severance package that entitles them to benefits upon completion of the transition in 2014. Severance costs related to the 2013 Restructuring Plan are recognized ratably over the future service period. During the year ended December 31, 2013, the Company recorded $1,111,000 of restructuring charges related to employee termination benefits.

Additionally, in connection with the 2013 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.

There were no restructuring charges recorded in continuing operations for the year ended December 31, 2012. During 2011, the Company completed certain restructuring activities and recorded charges of $4,258,000. The 2011 restructuring charges were in relation to 2010 and 2008 restructuring plans (the "2010 Restructuring Plan" and "2008 Restructuring Plan," respectively). The 2010 Restructuring Plan began in the fourth quarter of 2010, in conjunction with the expected sales of the Creative/Media and Content Distribution businesses. The 2010 Restructuring Plan was implemented to meet the changing strategic needs of the Company, as it sold most of its media and entertainment assets and acquired Monitronics, an alarm monitoring business. Such charges include retention costs for employees to remain employed until the sales were complete, severance costs for certain employees and costs for facilities that were no longer being used by the Company due to the Creative/Media and Content Distribution sales.


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The 2008 Restructuring Plan was implemented to align the Company's organization with its strategic goals and how it operated, managed and sold its services. The 2008 Restructuring Plan charges included severance costs from labor cost mitigation measures undertaken across all of the businesses and facility costs in conjunction with the consolidation of certain facilities in the United Kingdom and the closing of the Company's Mexico operations.

The following table provides the activity and balances of the Company's restructuring plans (amounts in thousands):

                                          Year ended December 31, 2013
                           Opening
                           balance    Additions   Deductions   Other     Ending balance

2013 Restructuring Plan
Severance and retention   $       -       1,111          (33 )   492 (a)          1,570

2008 Restructuring Plan
Excess facility costs     $     141           -            -       -                141




                                           Year ended December 31, 2012
                          Opening
                          balance    Additions   Deductions (b)   Other   Ending balance

2010 Restructuring Plan
Severance and retention   $  1,886           -           (1,886 )     -                -

2008 Restructuring Plan
Excess facility costs     $    236           -              (95 )     -              141




                                           Year ended December 31, 2011
                          Opening
                          balance    Additions   Deductions (a)   Other   Ending balance

2010 Restructuring Plan
Severance and retention   $  3,590       4,186           (5,890 )     -            1,886

2008 Restructuring Plan
Severance                 $      9           -               (9 )     -                -
Excess facility costs          211          72              (47 )     -              236
Total                     $    220          72              (56 )     -              236



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

(b) Primarily represents cash payments.

Loss (Gain) on the Sale of Assets. During the year ended December 31, 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 year ended December 31, 2012, the Company sold land and buildings for approximately $15,860,000, resulting in pre-tax gains of approximately $9,202,000. In addition, the Company sold its 50% interest in an equity method investment for $1,420,000, resulting in a pre-tax loss of $532,000. During the year ended December 31, 2011, the Company disposed of certain property and equipment, resulting in a pre-tax loss of $565,000.

Interest Expense. Interest expense increased $24,396,000 and $28,611,000 for the years ended December 31, 2013 and 2012, respectively, as compared to the corresponding prior years. The increase in interest expense for the year ended December 31, 2013 and 2012 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). The 2013 increases were offset by decreased interest rates on the Credit Facility term loans due to the March 2013 amendment to the Credit Facility agreement. Additionally, increases in 2013 and 2012 interest expense are offset by decreases 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 year ended December 31, 2013, 2012 and 2011 was $2,302,000 and $4,473,000 and $16,985,000, respectively. Amortization of debt discount for the year ended December 31, 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.


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Realized and Unrealized Loss on Derivative Financial Instruments. Realized and unrealized loss on derivative financial instruments was $2,044,000 and $10,601,000 for the years ended December 31, 2012 and 2011, respectively. The decrease in 2012 is attributable to the March 23, 2012 settlement of Monitronics' prior derivative instruments for which the Company did not apply hedge accounting.

For the year ended December 31, 2012, the realized and unrealized loss on the derivative financial instruments includes settlement payments of $8,837,000 partially offset by a $6,793,000 unrealized gain related to the change in fair value of the derivative instruments before their termination on March 23, 2012. For the year ended December 31, 2011, the realized and unrealized loss on derivative financial instruments includes settlement payments of $38,645,000 partially offset by a $28,044,000 unrealized gain related to the change in the fair value of these derivatives.

Income Taxes from Continuing Operations. For the year ended December 31, 2013, we had a pre-tax loss from continuing operations of $18,330,000 and income tax expense from continuing operations of $4,206,000. For the year ended December 31, 2012, we had a pre-tax loss from continuing operations of $22,407,000 and income tax expense from continuing operations of $2,594,000. For the year ended December 31, 2011, we had a pre-tax loss from continuing operations of $26,403,000 and an income tax expense from continuing operations of $2,498,000. Income tax expense from continuing operations for the year ended December 31, 2013, is attributable to Monitronics' state tax expense and the deferred tax impact from amortization of deductible goodwill attributable to the Security Networks Acquisition, offset by the reduction in valuation allowance as a result of acquisition accounting for the Security Networks Acquisition. Income tax expense from continuing operations for the year ended December 31, 2012, and 2011 is primarily attributable to Monitronics' state tax expense. . . .

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