Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2014

 

OR

 

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

 

For the transition period from            to           

 

Commission File Number 333-110025

 

MONITRONICS INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 

State of Texas

 

74-2719343

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

2350 Valley View Lane, Suite 100

 

 

Dallas, Texas

 

75234

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (972) 243-7443

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of May 14, 2014 Monitronics International, Inc. is a wholly owned subsidiary of Ascent Capital Group, Inc.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

2

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited)

2

 

 

 

 

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

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

4

 

 

 

 

Condensed Consolidated Statement of Stockholder’s Equity (unaudited)

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

22

 

 

 

Item 4.

Controls and Procedures

22

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 6.

Exhibits

23

 

 

 

 

SIGNATURES

24

 

 

 

 

EXHIBIT INDEX

25

 

1



Table of Contents

 

Item 1.  Financial Statements.

 

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

Amounts in thousands, except share amounts

(unaudited)

 

 

 

March 31,
2014

 

December 31,
2013

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

31,443

 

$

4,355

 

Restricted cash

 

119

 

40

 

Trade receivables, net of allowance for doubtful accounts of $1,664 in 2014 and $1,937 in 2013

 

13,896

 

13,019

 

Deferred income tax assets, net

 

8,530

 

8,530

 

Prepaid and other current assets

 

6,869

 

6,319

 

Total current assets

 

60,857

 

32,263

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $19,893 in 2014 and $17,514 in 2013

 

24,109

 

24,561

 

Subscriber accounts, net of accumulated amortization of $560,310 in 2014 and $503,497 in 2013

 

1,336,123

 

1,340,954

 

Dealer network and other intangible assets, net of accumulated amortization of $39,242 in 2014 and $34,297 in 2013

 

59,690

 

64,635

 

Goodwill

 

526,513

 

526,513

 

Other assets, net

 

29,053

 

29,611

 

Total assets

 

$

2,036,345

 

$

2,018,537

 

 

 

 

 

 

 

Liabilities and Stockholder’s Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,179

 

$

6,895

 

Accrued payroll and related liabilities

 

3,338

 

3,179

 

Other accrued liabilities

 

45,224

 

33,454

 

Deferred revenue

 

15,081

 

14,379

 

Holdback liability

 

19,227

 

19,758

 

Current portion of long-term debt

 

9,166

 

9,166

 

Total current liabilities

 

97,215

 

86,831

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

Long-term debt

 

1,613,598

 

1,597,627

 

Long-term holdback liability

 

6,253

 

6,698

 

Derivative financial instruments

 

3,193

 

2,013

 

Deferred income tax liability, net

 

18,456

 

17,579

 

Other liabilities

 

15,135

 

16,065

 

Total liabilities

 

1,753,850

 

1,726,813

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholder’s equity:

 

 

 

 

 

Common stock, $.01 par value.1 share authorized, issued and outstanding at March 31, 2014 and December 31, 2013, respectively

 

 

 

Additional paid-in capital

 

337,331

 

337,038

 

Accumulated deficit

 

(53,239

)

(45,388

)

Accumulated other comprehensive income (loss)

 

(1,597

)

74

 

Total stockholder’s equity

 

282,495

 

291,724

 

Total liabilities and stockholder’s equity

 

$

2,036,345

 

$

2,018,537

 

 

See accompanying notes to condensed consolidated financial statements.

 

2



Table of Contents

 

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Amounts in thousands, except share amounts

(unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net revenue

 

$

132,864

 

100,158

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Cost of services

 

22,090

 

15,202

 

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

 

22,972

 

15,903

 

Amortization of subscriber accounts, dealer network and other intangible assets

 

61,780

 

44,315

 

Depreciation

 

2,383

 

1,488

 

Restructuring charges

 

547

 

 

 

 

109,772

 

76,908

 

 

 

 

 

 

 

Operating income

 

23,092

 

23,250

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

Interest expense

 

29,344

 

21,127

 

 

 

29,344

 

21,127

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(6,252

)

2,123

 

Income tax expense

 

1,599

 

774

 

Net income (loss)

 

(7,851

)

1,349

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

Unrealized gain (loss) on derivative contracts, net

 

(1,671

)

259

 

Total other comprehensive income (loss), net of tax

 

(1,671

)

259

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(9,522

)

1,608

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Amounts in thousands

(unaudited)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(7,851

)

1,349

 

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

 

 

 

 

 

Amortization of subscriber accounts, dealer network and other intangible assets

 

61,780

 

44,315

 

Depreciation

 

2,383

 

1,488

 

Stock-based compensation

 

414

 

361

 

Deferred income tax expense

 

877

 

109

 

Long-term debt amortization

 

263

 

192

 

Other non-cash activity, net

 

2,872

 

2,406

 

Changes in assets and liabilities:

 

 

 

 

 

Trade receivables

 

(2,719

)

(1,876

)

Prepaid expenses and other assets

 

(793

)

1,233

 

Payables and other liabilities

 

9,985

 

10,123

 

 

 

 

 

 

 

Net cash provided by operating activities

 

67,211

 

59,700

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(1,938

)

(1,265

)

Cost of subscriber accounts acquired

 

(53,789

)

(46,043

)

Increase in restricted cash

 

(79

)

 

Other investing activities

 

(25

)

 

 

 

 

 

 

 

Net cash used in investing activities

 

(55,831

)

(47,308

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from long-term debt

 

42,900

 

24,700

 

Payments on long-term debt

 

(27,192

)

(17,738

)

Payments of financing costs

 

 

(1,746

)

 

 

 

 

 

 

Net cash provided by financing activities

 

15,708

 

5,216

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

27,088

 

17,608

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

4,355

 

3,433

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

31,443

 

21,041

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

State taxes paid

 

$

6

 

 

Interest paid

 

11,963

 

10,437

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholder’s Equity

Amounts in thousands, except share amounts

(unaudited)

 

 

 

Common Stock

 

Additional
paid-in

 

Accumulated
other
comprehensive

 

Accumulated

 

Total
stockholder’s

 

 

 

Shares

 

Amount

 

capital

 

income (loss)

 

deficit

 

equity

 

Balance at December 31, 2013

 

1

 

 

337,038

 

74

 

(45,388

)

291,724

 

Net loss

 

 

 

 

 

(7,851

)

(7,851

)

Other comprehensive income

 

 

 

 

(1,671

)

 

(1,671

)

Stock-based compensation

 

 

 

414

 

 

 

414

 

Value of shares withheld for tax liability

 

 

 

(121

)

 

 

(121

)

Balance at March 31, 2014

 

1

 

 

337,331

 

(1,597

)

(53,239

)

282,495

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

(1)                                 Basis of Presentation

 

Monitronics International, Inc. and its subsidiaries (collectively, the “Company” or “Monitronics”) are wholly owned subsidiaries of Ascent Capital Group, Inc. (“Ascent Capital”).  On August 16, 2013, the Company acquired all of the equity interests of Security Networks LLC (“Security Networks”) and certain affiliated entities (the “Security Networks Acquisition”).  The Company provides security alarm monitoring and related services to residential and business subscribers throughout the United States and parts of Canada.  The Company monitors signals arising from burglaries, fires, medical alerts and other events through security systems at subscribers’ premises, as well as provides customer service and technical support.

 

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 March 31, 2014, and for the three months ended March 31, 2014 and 2013, include Monitronics 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 Monitronics Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 4, 2014 (the “2013 Form 10-K”).

 

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

 

(2)                                 Recent Accounting Pronouncements

 

There were no new accounting pronouncements issued during the three months ended March 31, 2014 that are expected to have a material impact on the Company.

 

(3)                                 Security Networks Acquisition

 

On August 16, 2013 (the “Closing Date”), the Company acquired all of the equity interests of Security Networks and certain affiliated entities.  The purchase price (the “Security Networks Purchase Price”) of $500,557,000 consisted of $481,834,000 in cash and 253,333 shares of Ascent Capital’s Series A common stock (par value $0.01 per share) with a Closing Date fair value of $18,723,000.  The Security Networks Purchase Price includes post-closing adjustments of $1,057,000.

 

The cash portion of the Security Networks Purchase Price was funded by cash contributions from Ascent Capital, the proceeds of the Company’s issuance of $175,000,000 in aggregate principal amount of 9.125% Senior Notes due 2020, the proceeds of incremental term loans of $225,000,000 issued under the Company’s existing credit facility and the proceeds of a $100,000,000 intercompany loan from Ascent Capital.

 

6



Table of Contents

 

The Security Networks Acquisition was accounted for as a business combination utilizing the acquisition method in accordance with Financial Accounting Standards Board Accounting Standards Codification 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

 

1,677

 

Property and equipment

 

1,404

 

Subscriber accounts

 

307,800

 

Dealer network and other intangible assets

 

48,500

 

Goodwill

 

176,300

 

Holdback liability, current and non-current

 

(9,620

)

Deferred income tax liabilities

 

(4,108

)

Other current and non-current liabilities

 

(25,797

)

Fair value of consideration

 

$

500,557

 

 

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 may be revised as additional information becomes available, which primarily includes obtaining the Security Networks final short period federal and state income tax returns for 2013, which are expected to be filed in the second quarter of 2014.

 

The following table includes unaudited pro forma information for the Company, which includes the historical operating results of Security Networks prior to ownership by the Company. This pro forma information gives effect to certain adjustments, including increased amortization to reflect the fair value assigned to the subscriber accounts and dealer network and other intangible assets acquired and increased interest expense relating to the debt transactions entered into to fund the Security Networks Acquisition. The pro-forma results assume that the Security Networks Acquisition and the debt transactions had occurred on January 1, 2012 for all periods presented. They are not necessarily indicative of the results of operations that would have occurred if the acquisition had been made at the beginning of the periods presented or that may be obtained in the future.

 

 

 

Three months ended
March 31, 2013

 

 

 

(amounts in thousands,
except per share amounts)

 

As reported:

 

 

 

Net revenue

 

$

100,158

 

Net income

 

1,349

 

 

 

 

 

Supplemental pro-forma:

 

 

 

Net revenue

 

$

123,414

 

Net loss

 

(5,805

)

 

(4)          Other Accrued Liabilities

 

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

 

 

 

March 31,
2014

 

December 31,
2013

 

 

 

 

 

 

 

Interest payable

 

$

28,945

 

$

17,258

 

Income taxes payable

 

3,375

 

2,647

 

Legal accrual

 

375

 

705

 

Other

 

12,529

 

12,844

 

Total Other accrued liabilities

 

$

45,224

 

$

33,454

 

 

7



Table of Contents

 

(5)          Long-Term Debt

 

Long-term debt consisted of the following (amounts in thousands):

 

 

 

March 31,
2014

 

December 31,
2013

 

 

 

 

 

 

 

9.125% Senior Notes due April 1, 2020

 

$

585,000

 

$

585,000

 

9.868% Promissory Note to Ascent Capital due October 1, 2020

 

100,000

 

100,000

 

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

 

900,264

 

902,293

 

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

 

37,500

 

19,500

 

 

 

1,622,764

 

1,606,793

 

Less current portion of long-term debt

 

(9,166

)

(9,166

)

Long-term debt

 

$

1,613,598

 

$

1,597,627

 

 


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

 

Senior Notes

 

On July 17, 2013, the Company closed on a $175,000,000 privately placed debt offering of 9.125% Senior Notes (the “New Senior Notes”).  In December 2013, the Company completed an exchange of the New Senior Notes for identical securities in a registered offering under the Securities Act of 1933, as amended.

 

The New Senior Notes, together with the $410,000,000 “Existing Senior Notes” (the “Senior Notes”), total $585,000,000 in principal, mature on April 1, 2020 and bear interest at 9.125% per annum.  Interest payments are due semi-annually on April 1 and October 1 of each year.

 

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

 

Ascent Intercompany Loan

 

On August 16, 2013, in connection with the Security Networks Acquisition, the Company executed and delivered a Promissory Note to Ascent Capital in a principal amount of $100,000,000 (the “Ascent Intercompany Loan”).  The entire principal amount under the Ascent Intercompany Loan is due on October 1, 2020.  The Company may prepay any portion of the balance of the Ascent Intercompany Loan at any time from time to time without fee, premium or penalty (subject to certain financial covenants associated with the Company’s other indebtedness).  Any unpaid balance of the Ascent Intercompany Loan bears interest at a rate equal to 9.868% per annum, payable semi-annually in cash in arrears on January 12 and July 12 of each year, commencing on January 12, 2014.  Borrowings under the Ascent Intercompany Loan constitute unsecured obligations of the Company and are not guaranteed by any of the Company’s subsidiaries.

 

Credit Facility

 

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

 

8



Table of Contents

 

Amendment No. 3 (the Existing Credit Agreement together with Amendment No. 2 and Amendment No. 3, the “Credit Facility”).

 

The Credit Facility term loans bear interest at LIBOR plus 3.25%, subject to a LIBOR floor of 1.00%, and mature on March 23, 2018.  Principal payments of approximately $2,292,000 and interest on the term loans are due quarterly.  The Credit Facility revolver bears interest at LIBOR plus 3.75%, subject to a LIBOR floor of 1.00%, and matures on December 22, 2017.  There is an annual commitment fee of 0.50% on unused portions of the Credit Facility revolver.  As of March 31, 2014, $187,500,000 is available for borrowing under the revolving credit facility.

 

On March 31, 2014, the Company borrowed $33,000,000 on the Credit Facility revolver to fund its April 1, 2014 interest payment due under the Senior Notes of approximately $26,691,000 and other business activities.

 

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

 

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

 

As of March 31, 2014, the Company has deferred financing costs, net of accumulated amortization, of $24,251,000 related to the Senior Notes and the Credit Facility. These costs are included in Other assets, net on the accompanying consolidated balance sheet and will be amortized over the remaining term of the respective debt instruments using the effective-interest method.

 

In order to reduce the financial risk related to changes in interest rates associated with the floating rate term loans under the Credit Facility, the Company has entered into interest rate swap agreements, with terms similar to the Credit Facility term loans.  On March 25, 2013, the Company negotiated amendments to the terms of its existing swap agreements to coincide with the Repricing.  In the third quarter of 2013, the Company entered into additional interest rate swap agreements in conjunction with the Incremental Term Loans (all outstanding interest rate swap agreements are collectively referred to as the “Swaps”).

 

The Swaps have a maturity date of March 23, 2018 to match the term of the Credit Facility term loans.  The Swaps have been designated as effective hedges of the Company’s variable rate debt and qualify for hedge accounting.  See note 6, 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 Senior Notes and Credit Facility provide for certain financial and nonfinancial covenants.  As of March 31, 2014, the Company was in compliance with all required covenants.

 

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

 

Remainder of 2014

 

$

6,875

 

2015

 

9,166

 

2016

 

9,166

 

2017

 

46,666

 

2018

 

870,800

 

2019

 

 

Thereafter

 

685,000

 

Total principal payments

 

1,627,673

 

Less:

 

 

 

Unamortized discount on the Credit Facility term loans

 

4,909

 

Total debt on condensed consolidated balance sheet

 

$

1,622,764

 

 

9



Table of Contents

 

(6)           Derivatives

 

The Company utilizes interest rate swap agreements to reduce the interest rate risk inherent in the Company’s 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 7, Fair Value Measurements, for additional information about the credit valuation adjustments.

 

The Swaps’ outstanding notional balance as of March 31, 2014 and terms are noted below:

 

Notional

 

Effective Date

 

Fixed
Rate Paid

 

Variable Rate Received

 

 

 

 

 

 

 

 

 

$

539,000,000

 

March 28, 2013

 

1.884

%

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

 

142,825,000

 

March 28, 2013

 

1.384

%

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

 

111,652,010

 

September 30, 2013

 

1.959

%

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

 

111,652,010

 

September 30, 2013

 

1.850

%

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

 

 


(a)         On March 25, 2013, the Company 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, the Company 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 income (loss).  Any ineffective portions of the Swaps change in fair value are recognized in current earnings in Interest expense.  Changes in the fair value of the Swaps recognized in Accumulated other comprehensive income (loss) are reclassified to Interest expense when the hedged interest payments on the underlying debt are recognized.  Amounts in Accumulated other comprehensive income (loss) expected to be recognized in Interest expense in the coming 12 months total approximately $6,054,000.

 

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 March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

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

 

$

(3,371

)

(909

)

 

 

 

 

 

 

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

 

$

(1,700

)

(1,168

)

 

 

 

 

 

 

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

 

$

(1

)

19

 

 


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

 

(7)                             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:

 

10



Table of Contents

 

·                  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 March 31, 2014 and December 31, 2013 (amounts in thousands):

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

 

 

 

 

 

 

 

 

Derivative financial instruments — assets (a)

 

$

 

2,099

 

 

2,099

 

Derivative financial instruments - liabilities

 

 

(3,193

)

 

(3,193

)

Total

 

$

 

(1,094

)

 

(1,094

)

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

Derivative financial instruments - assets (a)

 

$

 

2,495

 

 

2,495

 

Derivative financial instruments - liabilities

 

 

(2,013

)

 

(2,013

)

Total

 

$

 

482

 

 

482

 

 


(a)         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 March 31, 2014, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Swaps.  As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.

 

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

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Long term debt, including current portion:

 

 

 

 

 

Carrying value

 

$

1,622,764

 

$

1,606,793

 

Fair value (a)

 

1,664,568

 

1,656,797

 

 


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

 

The Company’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.

 

(8)           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 three months ended March 31, 2014, the Company recorded $547,000 of restructuring charges related to employee termination benefits.

 

11



Table of Contents

 

There were no restructuring charges recorded for the three months ended March 31, 2013.

 

The following table provides the activity and balance of the Company’s restructuring plan (amounts in thousands):

 

 

 

December 31, 2013

 

Additions

 

Payments

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

2013 Restructuring Plan

 

 

 

 

 

 

 

 

 

Severance and retention

 

$

1,570

 

547

 

(504

)

1,613

 

 

(9)           Accumulated Other Comprehensive Income (Loss)

 

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

 

 

 

Accumulated
other
comprehensive
income (loss)

 

 

 

 

 

As of December 31, 2013

 

$

74

 

Unrealized loss on derivatives recognized through Accumulated other comprehensive income (loss)

 

(3,371

)

Reclassifications of unrealized loss on derivatives into net income (a)

 

1,700

 

As of March 31, 2014

 

$

(1,597

)

 


(a)         Amounts reclassified into net income are included in Interest expense on the condensed consolidated statement of operations.  See note 6, Derivatives, for further information.

 

(10)                          Commitments, Contingencies and Other Liabilities

 

The Company is involved in litigation and similar claims incidental to the conduct of its business. Matters that are probable of unfavorable outcome to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, management’s estimate of the outcomes of such matters and experience in contesting, litigating and settling similar matters.  In management’s opinion, none of the pending actions is likely to have a material adverse impact on the Company’s financial position or results of operations.

 

(11)                          Consolidating Guarantor Financial Information

 

The Senior Notes were issued and the Credit Facility was entered into by Monitronics (the “Parent Issuer”) and both are guaranteed by all of the Company’s existing domestic subsidiaries (“Subsidiary Guarantors”).  Ascent Capital has not guaranteed any of the Company’s obligations under the Senior Notes or Credit Facility.

 

Consolidating guarantor financial information has not been presented for the three months ended March 31, 2013, as substantially all of the Company’s operations were conducted by the Parent Issuer entity. The Company believes that disclosing such information would not provide investors with any additional information that would be material in evaluating the sufficiency of the guarantees.

 

The unaudited condensed consolidating financial information for the Parent Issuer, the Subsidiary Guarantors and the non-guarantors as of and for the three months ended March 31, 2014, as well as the condensed consolidated balance sheet financial information as of December 31, 2013, are as follows:

 

12



Table of Contents

 

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

(unaudited)

 

 

 

As of March 31, 2014

 

 

 

Parent Issuer

 

Subsidiary
Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

 

 

 

(amounts in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,305

 

2,138

 

 

 

31,443

 

Restricted cash

 

119

 

 

 

 

119

 

Trade receivables, net

 

12,418

 

1,478

 

 

 

13,896

 

Deferred income tax assets, net

 

6,763

 

1,767

 

 

 

8,530

 

Prepaid and other current assets

 

6,139

 

1,968

 

 

(1,238

)

6,869

 

Total current assets

 

54,744

 

7,351

 

 

(1,238

)

60,857

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in subsidiaries

 

500,660

 

 

 

(500,660

)

 

Property and equipment, net

 

23,560

 

549

 

 

 

24,109

 

Subscriber accounts, net

 

1,021,199

 

314,924

 

 

 

1,336,123

 

Dealer network and other intangible assets, net

 

17,253

 

42,437

 

 

 

59,690

 

Goodwill

 

350,213

 

176,300

 

 

 

526,513

 

Other assets, net

 

28,956

 

97

 

 

 

29,053

 

Total assets

 

$

1,996,585

 

541,658

 

 

(501,898

)

2,036,345

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholder’s Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,229

 

950

 

 

 

5,179

 

Accrued payroll and related liabilities

 

2,943

 

395

 

 

 

3,338

 

Other accrued liabilities

 

40,664

 

5,798

 

 

(1,238

)

45,224

 

Deferred revenue

 

11,046

 

4,035

 

 

 

15,081

 

Holdback liability

 

15,973

 

3,254

 

 

 

19,227

 

Current portion of long-term debt

 

9,166

 

 

 

 

9,166

 

Total current liabilities

 

84,021

 

14,432

 

 

(1,238

)

97,215

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

1,613,598

 

 

 

 

1,613,598

 

Long-term holdback liability

 

 

6,253

 

 

 

6,253

 

Derivative financial instruments

 

3,193

 

 

 

 

3,193

 

Deferred income tax liability, net

 

10,655

 

7,801

 

 

 

18,456

 

Other liabilities

 

2,623

 

12,512

 

 

 

15,135

 

Total liabilities

 

1,714,090

 

40,998

 

 

(1,238

)

1,753,850

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholder’s equity

 

282,495

 

500,660

 

 

(500,660

)

282,495

 

Total liabilities and stockholder’s equity

 

$

1,996,585

 

541,658

 

 

(501,898

)

2,036,345

 

 

13



Table of Contents

 

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

(unaudited)

 

 

 

As of December 31, 2013

 

 

 

Parent Issuer

 

Subsidiary
Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

 

 

 

(amounts in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,775

 

2,580

 

 

 

4,355

 

Restricted cash

 

40

 

 

 

 

40

 

Trade receivables, net

 

11,374

 

1,645

 

 

 

13,019

 

Deferred income tax assets, net

 

6,763

 

1,767

 

 

 

8,530

 

Prepaid and other current assets

 

9,916

 

1,003

 

 

(4,600

)

6,319

 

Total current assets

 

29,868

 

6,995

 

 

(4,600

)

32,263

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in subsidiaries

 

498,820

 

 

 

(498,820

)

 

Property and equipment, net

 

23,572

 

989

 

 

 

24,561

 

Subscriber accounts, net

 

1,025,605

 

315,349

 

 

 

1,340,954

 

Dealer network and other intangible assets, net

 

19,773

 

44,862

 

 

 

64,635

 

Goodwill

 

350,213

 

176,300

 

 

 

526,513

 

Other assets, net

 

29,611

 

 

 

 

29,611

 

Total assets

 

$

1,977,462

 

544,495

 

 

(503,420

)

2,018,537

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholder’s Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,491

 

1,404

 

 

 

6,895

 

Accrued payroll and related liabilities

 

2,649

 

530

 

 

 

3,179

 

Other accrued liabilities

 

27,137

 

10,917

 

 

(4,600

)

33,454

 

Deferred revenue

 

11,037

 

3,342

 

 

 

14,379

 

Holdback liability

 

16,640

 

3,118

 

 

 

19,758

 

Current portion of long-term debt

 

9,166

 

 

 

 

9,166

 

Total current liabilities

 

72,120

 

19,311

 

 

(4,600

)

86,831

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

1,597,627

 

 

 

 

1,597,627

 

Long-term holdback liability

 

 

6,698

 

 

 

6,698

 

Derivative financial instruments

 

2,013

 

 

 

 

2,013

 

Deferred income tax liability, net

 

10,577

 

7,002

 

 

 

17,579

 

Other liabilities

 

3,401

 

12,664

 

 

 

16,065

 

Total liabilities

 

1,685,738

 

45,675

 

 

(4,600

)

1,726,813

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholder’s equity

 

291,724

 

498,820

 

 

(498,820

)

291,724

 

Total liabilities and stockholder’s equity

 

$

1,977,462

 

544,495

 

 

(503,420

)

2,018,537

 

 

14



Table of Contents

 

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

(unaudited)

 

 

 

Three months ended March 31, 2014

 

 

 

Parent Issuer

 

Subsidiary
Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

 

 

 

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

104,093

 

28,771

 

 

 

132,864

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

17,782

 

4,308

 

 

 

22,090

 

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

 

19,032

 

3,940

 

 

 

22,972

 

Amortization of subscriber accounts, dealer network and other intangible assets

 

45,263

 

16,517

 

 

 

61,780

 

Depreciation

 

1,908

 

475

 

 

 

2,383

 

Restructuring charges

 

 

547

 

 

 

 

547

 

 

 

83,985

 

25,787

 

 

 

109,772

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

20,108

 

2,984

 

 

 

23,092

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

Equity in income of subsidiaries

 

(1,858

)

 

 

1,858

 

 

Interest expense

 

29,046

 

298

 

 

 

29,344

 

 

 

27,188

 

298

 

 

1,858

 

29,344

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(7,080

)

2,686

 

 

(1,858

)

(6,252

)

Income tax expense

 

771

 

828

 

 

 

1,599

 

Net income (loss)

 

(7,851

)

1,858

 

 

(1,858

)

(7,851

)

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative contracts

 

(1,671

)

 

 

 

(1,671

)

Total other comprehensive loss

 

(1,671

)

 

 

 

(1,671

)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(9,522

)

1,858

 

 

(1,858

)

(9,522

)

 

15



Table of Contents

 

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Cash Flows

(unaudited)

 

 

 

Three months ended March 31, 2014

 

 

 

Parent Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantors

 

Eliminations

 

Consolidated

 

 

 

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

53,546

 

13,665

 

 

 

67,211

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(1,903

)

(35

)

 

 

(1,938

)

Cost of subscriber accounts acquired

 

(39,742

)

(14,047

)

 

 

(53,789

)

Increase in restricted cash

 

(79

)

 

 

 

(79

)

Other investing activities

 

 

(25

)

 

 

(25

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(41,724

)

(14,107

)

 

 

(55,831

)

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

42,900

 

 

 

 

42,900

 

Payments on long-term debt

 

(27,192

)

 

 

 

(27,192

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

15,708

 

 

 

 

15,708

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

27,530

 

(442

)

 

 

27,088

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,775

 

2,580

 

 

 

4,355

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

29,305

 

2,138

 

 

 

31,443

 

 

16



Table of Contents

 

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

 

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

 

Factors relating to the Company and its consolidated subsidiaries:

 

·                  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 the Company’s largest demographic;

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

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

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

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

·                  integration of acquired assets and businesses, including Security Networks;

·                  the regulatory environment in which the Company operates, including the multiplicity of jurisdictions and licensing requirements to which it is subject and the risk of new regulations, such as the increasing adoption of “false alarm” ordinances;

·                  technological changes which could result in the obsolescence of currently utilized technology and the need for significant upgrade expenditures, including the phase-out of 2G networks by cellular carriers;

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

·                  the operating performance of the Company’s network, including the potential for service disruptions at both the main monitoring facility and back-up monitoring facilities due to acts of nature or technology deficiencies;

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

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

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

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

·                  changes in the Company’s expected rate of subscriber attrition;

·                  the availability and terms of capital, including the ability to obtain additional funds to grow its business;

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

·                  availability of qualified personnel.

 

For additional risk factors, please see Part I, Item 1A, Risk Factors, in the 2013 Form 10-K.  These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

 

The following discussion and analysis provides information concerning our results of operations and financial condition.  This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto included elsewhere herein and the 2013 Form 10-K.

 

17



Table of Contents

 

Overview

 

The Company provides security alarm monitoring and related services to residential and business subscribers throughout the United States and parts of Canada.  On August 16, 2013, the Company acquired all of the equity interests of Security Networks LLC (“Security Networks”) and certain affiliated entities (the “Security Networks Acquisition”).  The Company monitors signals arising from burglaries, fires, medical alerts and other events through security systems at subscribers’ premises, as well as provides customer service and technical support.  Nearly all of the Company’s revenues are derived from recurring monthly revenues under security alarm monitoring contracts purchased from independent dealers in its exclusive nationwide network.

 

Attrition

 

Account cancellation, otherwise referred to as subscriber attrition, has a direct impact on the number of subscribers that the Company 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.  The Company 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.  The Company 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.  The Company 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 the Company the cost paid to acquire the contract. To help ensure the dealer’s obligation to the Company, the Company 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 March 31, 2014 and 2013:

 

 

 

Twelve Months Ended
March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Beginning balance of accounts

 

818,335

 

706,881

 

Accounts acquired

 

357,855

 

206,665

 

Accounts cancelled

 

(118,688

)

(92,696

)

Canceled accounts guaranteed by dealer and acquisition adjustment (a) (b)

 

(10,717

)

(2,515

)

Ending balance of accounts

 

1,046,785

 

818,335

 

Monthly weighted average accounts

 

962,527

 

759,180

 

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 following the acquisition of Security Networks in August 2013 because they were active with both Monitronics and Security Networks.

 

We analyze our attrition by classifying accounts into annual pools based on the year of acquisition.  We then track 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 we have 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 us.  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.

 

18



Table of Contents

 

Accounts Acquired

 

During the three months ended March 31, 2014 and 2013, the Company acquired 31,774 and 28,460 subscriber accounts, respectively.  Acquired contracts for the twelve months ended March 31, 2014 include 203,898 accounts acquired in the Security Networks Acquisition, which was completed on August 16, 2013.  In addition, subscriber accounts acquired for the twelve months ended March 31, 2013 include approximately 93,000 accounts purchased in a bulk buy on October 25, 2012.

 

Recurring monthly revenue acquired during the three months ended March 31, 2014 and 2013 was approximately $1,451,000 and $1,277,000, 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.   The Company 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 our 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 the Company 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 the Company 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

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net revenue

 

$

132,864

 

100,158

 

Cost of services

 

22,090

 

15,202

 

Selling, general, and administrative

 

22,972

 

15,903

 

Amortization of subscriber accounts, dealer network and other intangible assets

 

61,780

 

44,315

 

Restructuring charges

 

547

 

 

Interest expense

 

29,344

 

21,127

 

Income tax expense

 

1,599

 

774

 

Net income (loss)

 

(7,851

)

1,349

 

 

 

 

 

 

 

Adjusted EBITDA (a)

 

$

89,275

 

69,414

 

Adjusted EBITDA as a percentage of Revenue

 

67.2

%

69.3

%

 


(a)         See reconciliation to net income (loss) below.

 

Net revenue.  Net revenue increased $32,706,000, or 32.7%, for the three months ended March 31, 2014 as compared to the corresponding prior year period.  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 135,000 accounts through the

 

19



Table of Contents

 

Company’s authorized dealer program subsequent to March 31, 2013, 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 $39.74 as of March 31, 2013 to $41.15 as of March 31, 2014.

 

Cost of services.  Cost of services increased $6,888,000, or 45.3%, for the three months ended March 31, 2014 as compared to the corresponding prior year period.  The increase is primarily attributable to subscriber growth over the last twelve months, as well as increases in cellular and service costs.  Cellular costs have increased due to more accounts being monitored across the cellular network, which often include interactive and home automation services.  This has also resulted in higher service costs as existing subscribers upgrade their systems.  Cost of services as a percent of net revenue increased from 15.2% for the three months ended March 31, 2013 to 16.6% for the three months ended March 31, 2014.

 

Selling, general and administrative.  Selling, general and administrative costs (“SG&A”) increased $7,069,000, or 44.5%, for the three months ended March 31, 2014 as compared to the corresponding prior year period.  The increase is primarily attributable to subscriber growth over the last twelve months.  Increased SG&A costs are also attributable to redundant staffing and operating costs at our Dallas, Texas headquarters and integration costs incurred in advance of transitioning Security Networks’ operations from Florida to Texas.  This transition was completed in April 2014.  Integration costs for the three months ended March, 31, 2014, were $1,059,000, which primarily relate to professional services rendered.  SG&A as a percent of net revenue increased from 15.9% for the three months ended March 31, 2013 to 17.3% for the three months ended March 31, 2014.

 

Amortization of subscriber accounts, dealer network and other intangible assets.  Amortization of subscriber accounts, dealer network and other intangible assets increased $17,465,000 for the three months ended March 31, 2014 as compared to the corresponding prior year period.  The increase is attributable to amortization of subscriber accounts acquired subsequent to March 31, 2013, including amortization of approximately $16,517,000 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 “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 three months ended March 31, 2014, the Company recorded $547,000 of restructuring charges related to employee termination benefits.

 

There were no restructuring charges recorded for the three months ended March 31, 2013.

 

The following table provides the activity and balance of the Company’s restructuring plan (amounts in thousands):

 

 

 

December 31, 2013

 

Additions

 

Payments

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

2013 Restructuring Plan

 

 

 

 

 

 

 

 

 

Severance and retention

 

$

1,570

 

547

 

(504

)

1,613

 

 

Interest expense.  Interest expense increased $8,217,000 for the three months ended March 31, 2014 as compared to the corresponding prior year period. The increase in interest expense is primarily attributable to increases in the Company’s consolidated debt balance related to the borrowings incurred to fund the Security Networks Acquisition.  This increase is partially offset by the favorable repricing of the Company’s credit facility interest rates effective March 25, 2013.

 

Income tax expense.  The Company had a pre-tax loss of $6,252,000 and income tax expense of $1,599,000 for the three months ended March 31, 2014.  The Company had pre-tax income of $2,123,000 and income tax expense of $774,000 for the three months ended March 31, 2013.  Income tax expense for the three months ended March 31, 2014 is attributable to Texas state margin tax incurred on the Company’s operations and the deferred tax impact from amortization of deductible goodwill related to the Security Networks Acquisition.  Income tax expense for the three months ended March 31, 2013 is primarily attributable to Texas state margin tax incurred on the Company’s operations.

 

20



Table of Contents

 

Adjusted EBITDA. The following table provides a reconciliation of total Adjusted EBITDA to net income (loss):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

Total Adjusted EBITDA

 

$

89,275

 

69,414

 

Amortization of subscriber accounts, dealer network and other intangible assets

 

(61,780

)

(44,315

)

Depreciation

 

(2,383

)

(1,488

)

Stock-based compensation

 

(414

)

(361

)

Restructuring charges

 

(547

)

 

Security Networks integration costs

 

(1,059

)

 

Interest expense

 

(29,344

)

(21,127

)

Income tax expense

 

(1,599

)

(774

)

 

 

 

 

 

 

Net income (loss)

 

$

(7,851

)

1,349

 

 

Adjusted EBITDA increased $19,861,000, or 28.6%, for the three months ended March 31, 2014 as compared to the respective prior year period.  The increase in Adjusted EBITDA was primarily due to revenue growth.

 

Liquidity and Capital Resources

 

At March 31, 2014, we had $31,443,000 of cash and cash equivalents and $119,000 of current restricted cash.  Our primary sources of funds are our cash flows from operating activities which are generated from alarm monitoring and related service revenues.  During the three months ended March 31, 2014 and 2013, our cash flow from operating activities was $67,211,000 and $59,700,000, respectively.  The primary driver of our cash flow from operating activities is Adjusted EBITDA.  Fluctuations in our Adjusted EBITDA and the components of that measure are discussed in “Results of Operations” above.  In addition, our cash flow from operating activities may be significantly impacted by changes in working capital.

 

During the three months ended March 31, 2014 and 2013, we used cash of $53,789,000 and $46,043,000, respectively, to fund subscriber account acquisitions, net of holdback and guarantee obligations.  In addition, during the three months ended March 31, 2014 and 2013, we used cash of $1,938,000 and $1,265,000, respectively, to fund our capital expenditures.

 

On March 31, 2014, we borrowed $33,000,000 on the Credit Facility revolver to fund the April 1, 2014 interest payment due under the Senior Notes of approximately $26,691,000 and other business activities.

 

In considering our liquidity requirements for 2014, we evaluated our known future commitments and obligations.  We will require the availability of funds to finance our strategy to grow through the acquisition of subscriber accounts.  Additionally, as a result of announcements by AT&T and certain other telecommunication providers that they intend to discontinue 2G services in the near future, we expect to incur expenditures over the next few years as we replace the 2G equipment used in many of our subscribers’ security systems.  Costs incurred and subscriber attrition resulting from the 2G phase-out will, to some extent, be dependent on the level of advance notice received from the telecommunication providers.  We expect costs associated with the phase-out to be relatively small in 2014 and then increase in 2015 and 2016.  In addition, we considered the borrowing capacity of our Credit Facility revolver, under which we could borrow an additional $187,500,000 as of March 31, 2014.  Based on this analysis, we expect that cash on hand, cash flow generated from operations and borrowings under our Credit Facility will provide sufficient liquidity, given our anticipated current and future requirements.

 

The existing long-term debt at March 31, 2014 includes the principal balance of $1,627,673,000 under our Senior Notes, the Ascent Intercompany Loan, our Credit Facility, and our Credit Facility revolver.  The Senior Notes have an outstanding principal balance of $585,000,000 as of March 31, 2014 and mature on April 1, 2020.  The Ascent Intercompany Loan has an outstanding principal balance of $100,000,000 and matures on October 1, 2020.  The Credit Facility term loans have an outstanding principal balance of $905,173,000 as of March 31, 2014 and require principal payments of $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 $37,500,000 as of March 31, 2014 and becomes due on December 22, 2017.

 

We may seek capital contributions from Ascent Capital or debt financing in the event of any new investment opportunities, additional capital expenditures or our operations requiring additional funds, but there can be no assurance that we will be able to obtain capital

 

21



Table of Contents

 

contributions from Ascent Capital or debt financing on terms that would be acceptable to us or at all.  Our ability to seek additional sources of funding depends on our future financial position and results of operations, which are subject to general conditions in or affecting our industry and our customers and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

 

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

 

Tabular Presentation of Interest Rate Risk

 

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

 

Year of Maturity

 

Fixed Rate
Derivative
Instruments (a)

 

Variable Rate
Debt

 

Fixed Rate
Debt

 

Total

 

 

 

Amounts in thousands

 

 

 

 

 

 

 

 

 

 

 

Remainder of 2014

 

$

 

6,875

 

 

6,875

 

2015

 

 

9,166

 

 

9,166

 

2016

 

 

9,166

 

 

9,166

 

2017

 

 

46,666

 

 

46,666

 

2018

 

1,094

 

870,800

 

 

871,894

 

2019

 

 

 

 

 

Thereafter

 

 

 

685,000

 

685,000

 

Total

 

$

1,094

 

942,673

 

685,000

 

1,628,767

 

 


(a)         The derivative financial instruments reflected in this column include four interest rate swaps, all with a maturity date of March 23, 2018.  As a result of these interest rate swaps, the interest rate on the borrowings under the Credit Facility term loans have been effectively converted from a variable rate to a weighted average fixed rate of 5.06%.  See notes 5, 6 and 7 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 March 31, 2014 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

There has been no change in the Company’s internal controls over financial reporting that occurred during the three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, its internal controls over financial reporting.

 

22


 


Table of Contents

 

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES

 

PART II - OTHER INFORMATION

 

Item 6Exhibits

 

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

 

31.1

 

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

31.2

 

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

32

 

Section 1350 Certification. *

101.INS

 

XBRL Instance Document. **

101.SCH

 

XBRL Taxonomy Extension Schema Document. **

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document. **

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document. **

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document. **

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document. **

 


*                 Filed herewith.

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

 

23


 


Table of Contents

 

SIGNATURES

 

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

 

 

MONITRONICS INTERNATIONAL, INC.

 

 

 

 

Date: May 14, 2014

By:

/s/ Michael R. Haislip

 

 

Michael R. Haislip

 

 

President and Chief Executive Officer

 

 

 

 

 

 

Date: May 14, 2014

By:

/s/ Michael R. Meyers

 

 

Michael R. Meyers

 

 

Chief Financial Officer, Vice President and Assistant Secretary

 

 

(Principal Financial and Accounting Officer)

 

24


 


Table of Contents

 

EXHIBIT INDEX

 

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

 

31.1

 

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

31.2

 

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

32

 

Section 1350 Certification. *

101.INS

 

XBRL Instance Document. **

101.SCH

 

XBRL Taxonomy Extension Schema Document. **

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document. **

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document. **

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document. **

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document. **

 


*                 Filed herewith.

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

 

25