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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
 
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
 
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)
 
 
1990 Wittington Place
 
 
Farmers Branch, 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 ý  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act.
Large accelerated filer 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 ý

As of August 10, 2016, Monitronics International, Inc. is a wholly owned subsidiary of Ascent Capital Group, Inc.



Table of Contents

TABLE OF CONTENTS
 
 
 
Page
PART I — FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Item 1.  Financial Statements.
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
(unaudited)
 
June 30,
2016
 
December 31,
2015
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
2,131

 
$
2,580

Restricted cash

 
55

Trade receivables, net of allowance for doubtful accounts of $2,530 in 2016 and $2,762 in 2015
13,884

 
13,622

Prepaid and other current assets
8,140

 
9,890

Total current assets
24,155

 
26,147

Property and equipment, net of accumulated depreciation of $31,057 in 2016 and $27,057 in 2015
26,388

 
26,654

Subscriber accounts, net of accumulated amortization of $1,094,016 in 2016 and $975,795 in 2015
1,410,669

 
1,423,538

Dealer network and other intangible assets, net of accumulated amortization of $78,493 in 2016 and $73,578 in 2015
21,739

 
26,654

Goodwill
563,549

 
563,549

Other assets, net
3,508

 
3,725

Total assets
$
2,050,008

 
$
2,070,267

Liabilities and Stockholder's Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
8,059

 
$
8,621

Accrued payroll and related liabilities
3,363

 
3,479

Other accrued liabilities
31,263

 
32,522

Deferred revenue
16,202

 
16,207

Holdback liability
14,212

 
16,386

Current portion of long-term debt
5,500

 
5,500

Total current liabilities
78,599

 
82,715

Non-current liabilities:
 

 
 

Long-term debt
1,673,160

 
1,739,147

Long-term holdback liability
3,614

 
3,786

Derivative financial instruments
30,073

 
13,470

Deferred income tax liability, net
15,296

 
13,191

Other liabilities
12,235

 
16,893

Total liabilities
1,812,977

 
1,869,202

Commitments and contingencies


 


Stockholder's equity:
 

 
 

Common stock, $.01 par value. 1,000 shares authorized, issued and outstanding both at June 30, 2016 and December 31, 2015

 

Additional paid-in capital
450,455

 
361,228

Accumulated deficit
(183,336
)
 
(146,617
)
Accumulated other comprehensive loss
(30,088
)
 
(13,546
)
Total stockholder's equity
237,031

 
201,065

Total liabilities and stockholder's equity
$
2,050,008

 
$
2,070,267

 

See accompanying notes to condensed consolidated financial statements.

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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Amounts in thousands
(unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net revenue
$
143,656

 
141,543

 
$
286,924

 
279,959

Operating expenses:
 

 
 

 
 
 
 
Cost of services
27,637

 
27,603

 
57,112

 
52,770

Selling, general, and administrative, including stock-based compensation
29,203

 
25,697

 
57,816

 
49,121

Radio conversion costs
7,596

 
450

 
16,675

 
973

Amortization of subscriber accounts, dealer network and other intangible assets
61,937

 
63,526

 
123,259

 
126,667

Depreciation
2,025

 
2,484

 
4,000

 
4,781

  Gain on disposal of operating assets

 

 

 
(3
)
 
128,398

 
119,760

 
258,862

 
234,309

Operating income
15,258

 
21,783

 
28,062

 
45,650

Other expense:
 

 
 

 
 
 
 
Interest expense
30,024

 
31,291

 
61,248

 
61,531

Refinancing expense

 
4,468

 

 
4,468

 
30,024

 
35,759

 
61,248

 
65,999

Loss before income taxes
(14,766
)
 
(13,976
)
 
(33,186
)
 
(20,349
)
Income tax expense
1,743

 
2,011

 
3,533

 
3,972

Net loss
(16,509
)
 
(15,987
)
 
(36,719
)
 
(24,321
)
Other comprehensive loss:
 

 
 

 
 
 
 
Unrealized (loss) income on derivative contracts, net of tax
(4,697
)
 
1,002

 
(16,542
)
 
(3,461
)
Total other comprehensive (loss) income, net of tax
(4,697
)
 
1,002

 
(16,542
)
 
(3,461
)
Comprehensive loss
$
(21,206
)
 
(14,985
)
 
$
(53,261
)
 
(27,782
)
 
See accompanying notes to condensed consolidated financial statements.


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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Amounts in thousands
(unaudited)
 
Six Months Ended 
 June 30,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net loss
$
(36,719
)
 
(24,321
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Amortization of subscriber accounts, dealer network and other intangible assets
123,259

 
126,667

Depreciation
4,000

 
4,781

Stock-based compensation
1,189

 
829

Deferred income tax expense
2,105

 
2,050

Amortization of debt discount and deferred debt costs
3,513

 
3,106

Bad debt expense
5,133

 
4,645

Gain on disposal of operating assets

 
(3
)
Refinancing expense

 
4,468

Other non-cash activity, net
1,457

 
2,346

Changes in assets and liabilities:
 
 
 
Trade receivables
(5,395
)
 
(4,440
)
Prepaid expenses and other assets
1,762

 
(2,642
)
Subscriber accounts - deferred contract costs
(1,294
)
 

Payables and other liabilities
(8,109
)
 
(6,185
)
Net cash provided by operating activities
90,901

 
111,301

Cash flows from investing activities:
 

 
 

Capital expenditures
(3,100
)
 
(8,165
)
Cost of subscriber accounts acquired
(106,805
)
 
(129,544
)
Cash paid for acquisition, net of cash acquired

 
(56,343
)
Decrease (increase) in restricted cash
55

 
(35
)
Proceeds from the disposal of operating assets

 
3

Net cash used in investing activities
(109,850
)
 
(194,084
)
Cash flows from financing activities:
 

 
 

Proceeds from long-term debt
88,200

 
674,050

Payments on long-term debt
(69,700
)
 
(605,990
)
Payments of financing costs

 
(6,232
)
Contribution from Ascent Capital

 
22,690

Net cash provided by financing activities
18,500

 
84,518

Net increase in cash and cash equivalents
(449
)
 
1,735

Cash and cash equivalents at beginning of period
2,580

 
1,953

Cash and cash equivalents at end of period
$
2,131

 
3,688

 
 
 
 
Supplemental cash flow information:
 

 
 

State taxes paid
$
2,745

 
3,485

Interest paid
60,031

 
57,952

 

See accompanying notes to condensed consolidated financial statements.

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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholder’s Equity
Amounts in thousands, except share amounts
(unaudited)
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated Deficit
 
Total
Stockholder’s Equity
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2015
1,000

 
$

 
361,228

 
(13,546
)
 
(146,617
)
 
$
201,065

Net loss

 

 

 

 
(36,719
)
 
(36,719
)
Other comprehensive loss

 

 

 
(16,542
)
 

 
(16,542
)
Stock-based compensation

 

 
1,310

 

 

 
1,310

Value of shares withheld for minimum tax liability

 

 
(83
)
 

 

 
(83
)
Contribution from Ascent Capital

 

 
88,000

 

 

 
88,000

Balance at June 30, 2016
1,000

 
$

 
450,455

 
(30,088
)
 
(183,336
)
 
$
237,031

 
See accompanying notes to condensed consolidated financial statements.


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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 February 23, 2015, the Company acquired LiveWatch Security, LLC ("LiveWatch"), a Do-It-Yourself home security firm, offering professionally monitored security services through a direct-to-consumer sales channel (the "LiveWatch Acquisition"). 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 June 30, 2016, and for the three and six months ended June 30, 2016 and 2015, 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, 2015, filed with the SEC on March 7, 2016 (the "2015 Form 10-K").
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses for each reporting period.  The significant estimates made in preparation of the Company’s condensed consolidated financial statements primarily relate to valuation of goodwill, other intangible assets, long-lived assets, deferred tax assets, derivative financial instruments, and the amount of the allowance for doubtful accounts. These estimates are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts them when facts and circumstances change. As the effects of future events cannot be determined with any certainty, actual results could differ from the estimates upon which the carrying values were based.

The Company has reclassified certain prior period amounts related to Radio conversion costs to conform to the current period's presentation. These costs were previously reported in Cost of services on the Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss). Radio conversion costs represent all direct costs incurred during the subscribers' alarm monitoring system upgrade in relation to the Radio Conversion Program as well as indirect retention costs for impacted subscribers. The Radio Conversion program was implemented in 2014 in response to one of the nation's largest carriers announcing that it does not intend to support its 2G cellular services beyond 2016.
 
(2)    Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). Under the update, revenue will be recognized based on a five-step model. The core principle of the model is that revenue will be recognized when the transfer of promised goods or services to customers is made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. Additional guidance was issued in May 2016 which clarified, among other items, revenue collectability, presentation of sales tax and other similar taxes from customers and non-cash consideration. In the third quarter of 2015, the FASB deferred the effective date of the standard to annual and interim periods beginning after December 15, 2017. Early adoption will be permitted for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the impact that adopting this ASU will have on its financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), ("ASU 2016-02"). ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet and eliminates the current requirements for a company to use bright-line tests in determining lease classification. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 and requires a modified retrospective approach. The Company is currently evaluating the impact that adopting ASU 2016-02 will have on its financial position, results of operations and cash flows.

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In March 2016, the FASB issued ASU 2016-09, Compensation--Stock Compensation (Topic 718): Improvements to Employee Share Based Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory tax withholding requirements as well as classification of certain elements in the statement of cash flows. Adoption requirements are different for each change in the reporting method and may be prospective, retrospective and/or modified retrospective. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company plans to adopt the standard in its annual report for the period ending December 31, 2016. The adoption is not expected to have a material impact on the Company's financial position, results of operations and cash flows.

(3)    LiveWatch Acquisition

On February 23, 2015 ("the Closing Date"), the Company acquired LiveWatch for a purchase price of approximately $61,550,000 (the "LiveWatch Purchase Price"). The LiveWatch Purchase Price includes approximately $3,988,000 of cash transferred directly to LiveWatch to fund transaction bonuses payable to LiveWatch employees as of the Closing Date. This cash is not included in the fair value of consideration transferred for the LiveWatch Acquisition. The LiveWatch Purchase Price also includes post-closing adjustments of $435,000 which were paid in the third quarter of 2015. The LiveWatch acquisition was funded by borrowings from Monitronics' revolving credit facility, as well as cash contributions from Ascent Capital.

Goodwill in the amount of $36,047,000 was recognized in connection with the LiveWatch Acquisition and was calculated as the excess of the consideration transferred over the net assets recognized and represents the value to Monitronics for LiveWatch's recurring revenue and cash flow streams and its diversified business model and marketing channel. All of the goodwill acquired in the LiveWatch Acquisition is estimated to be deductible for tax purposes.

The effect of the LiveWatch Acquisition was not material to the Company's consolidated results for the periods presented and, accordingly, proforma financial disclosures have not been presented.

(4)    Other Accrued Liabilities
 
Other accrued liabilities consisted of the following (amounts in thousands): 
 
June 30, 2016
 
December 31, 2015
Interest payable
$
15,456

 
$
18,226

Income taxes payable
1,283

 
2,603

Legal accrual
411

 
145

LiveWatch acquisition retention bonus
3,634

 

Other
10,479

 
11,548

Total Other accrued liabilities
$
31,263

 
$
32,522



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(5)    Long-Term Debt
 
Long-term debt consisted of the following (amounts in thousands):
 
June 30,
2016
 
December 31,
2015
9.125% Senior Notes due April 1, 2020 with an effective interest rate of 9.4%
$
577,150

 
$
576,241

Promissory Note to Ascent Capital due October 1, 2020 with an effective rate of 12.5% (a)
12,000

 
100,000

Term loans, mature April 9, 2022, LIBOR plus 3.50%, subject to a LIBOR floor of 1.00%, with an effective rate of 5.1%
539,896

 
542,420

Term loans, mature March 23, 2018, LIBOR plus 3.25%, subject to a LIBOR floor of 1.00% with an effective rate of 5.0%
396,792

 
394,938

$315 million revolving credit facility, matures December 22, 2017, LIBOR plus 3.75%, subject to a LIBOR floor of 1.00% with an effective rate of 5.9%
152,822

 
131,048

 
1,678,660

 
1,744,647

Less current portion of long-term debt
(5,500
)
 
(5,500
)
Long-term debt
$
1,673,160

 
$
1,739,147

 
(a)
The effective rate was 9.868% until February 29, 2016.
 
Senior Notes
 
The senior notes total $585,000,000 in principal, mature on April 1, 2020 and bear interest at 9.125% per annum (the "Senior Notes").  Interest payments are due semi-annually on April 1 and October 1 of each year. The Senior Notes are guaranteed by all of the Company's existing domestic subsidiaries.  Ascent Capital has not guaranteed any of the Company's obligations under the Senior Notes. As of June 30, 2016, the Senior Notes had deferred financing costs, net of accumulated amortization of $7,850,000.
 
Ascent Intercompany Loan
 
On February 29, 2016, the Company retired the existing intercompany loan with an outstanding principal amount of $100,000,000 and executed and delivered a Promissory Note to Ascent Capital in a principal amount of $12,000,000 (the "Ascent Intercompany Loan"), with the $88,000,000 remaining principal to be a capital contribution.  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 12.5% per annum, payable semi-annually in cash in arrears on January 12 and July 12 of each year, commencing on January 12, 2014.  The effective rate was 12.5% as of June 30, 2016 and 9.868% as of December 31, 2015. 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

The Company has senior secured term loans totaling $946,909,000 in principal with $403,784,000 maturing in March 2018 (the "2018 Term Loans") and $543,125,000 maturing in April 2022 (the "2022 Term Loans"). Monitronics also has a $315,000,000 revolving credit facility, maturing December 22, 2017 of which $154,500,000 is outstanding as of June 30, 2016 (the senior secured term loans together with the revolving credit facility, the "Credit Facility").
 
The 2018 Term Loans bear interest at LIBOR plus 3.25%, subject to a LIBOR floor of 1.00%, and mature on March 23, 2018. Interest payments on the 2018 Term Loans are due quarterly with the principal due at maturity. The 2022 Term Loans bear interest at LIBOR plus 3.50%, subject to a LIBOR floor of 1.00% and mature on April 9, 2022. Interest and principal payments of approximately $1,375,000 are due quarterly on the 2022 Term Loans with the remaining principal due at maturity.  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. 

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

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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 June 30, 2016, the Company has deferred financing costs and unamortized discounts, net of accumulated amortization, of $11,899,000 related to the Credit Facility.

In order to reduce the financial risk related to changes in interest rates associated with the floating rate term loans under the Credit Facility term loans, the Company has entered into interest rate swap agreements with terms similar to the Credit Facility term loans (all outstanding interest rate swap agreements are collectively referred to as the “Swaps”). The Swaps have been designated as effective hedges of the Company’s variable rate debt and qualify for hedge accounting.  As a result of these interest rate swaps, the Company's current effective weighted average interest rate on the borrowings under the Credit Facility term loans is 5.15%. See note 6, Derivatives, for further disclosures related to these derivative instruments. 
  
The terms of the Senior Notes and Credit Facility provide for certain financial and nonfinancial covenants.  As of June 30, 2016, the Company was in compliance with all required covenants.

As of June 30, 2016, principal payments scheduled to be made on the Company’s debt obligations are as follows (amounts in thousands):
Remainder of 2016
$
2,750

2017
160,000

2018
409,284

2019
5,500

2020
602,500

2021
5,500

Thereafter
512,875

Total principal payments
1,698,409

Less:
 

Unamortized deferred debt costs and discounts
19,749

Total debt on condensed consolidated balance sheet
$
1,678,660


(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.


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As of June 30, 2016 the Swaps’ outstanding notional balances, effective dates, maturity dates and interest rates paid and received are noted below:
Notional
 
Effective Date
 
Maturity Date
 
Fixed
Rate Paid
 
Variable Rate Received
$
526,625,000

 
March 28, 2013
 
March 23, 2018
 
1.884%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
139,562,500

 
March 28, 2013
 
March 23, 2018
 
1.384%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
109,108,040

 
September 30, 2013
 
March 23, 2018
 
1.959%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
109,108,040

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

 
March 23, 2018
 
April 9, 2022
 
2.924%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
250,000,000

 
March 23, 2018
 
April 9, 2022
 
2.810%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
50,000,000

 
March 23, 2018
 
April 9, 2022
 
2.504%
 
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, which were entered into in March 2012 (the "Existing Swap Agreements," as amended, the “Amended Swaps”).  The Amended Swaps are held with the same counterparties as the Existing Swap Agreements.  Upon entering into the Amended Swaps, Monitronics simultaneously dedesignated the Existing Swap Agreements and redesignated the Amended Swaps as cash flow hedges for the underlying change in the swap terms.  The amounts previously recognized in Accumulated other comprehensive loss relating to the dedesignation are recognized in Interest expense over the remaining life of the Amended Swaps.
 
All of the Swaps are designated and qualify as cash flow hedging instruments, with the effective portion of the Swaps' change in fair value recorded in Accumulated other comprehensive loss.  Any ineffective portions of the Swaps' change in fair value are recognized in current earnings in Interest expense.  Changes in the fair value of the Swaps recognized in Accumulated other comprehensive loss are reclassified to Interest expense when the hedged interest payments on the underlying debt are recognized.  Amounts in Accumulated other comprehensive loss expected to be recognized in Interest expense in the coming 12 months total approximately $7,067,000.
 
The impact of the derivatives designated as cash flow hedges on the condensed consolidated financial statements is depicted below (amounts in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Effective portion of loss recognized in Accumulated other comprehensive loss
$
(6,506
)
 
(820
)
 
$
(20,163
)
 
(7,088
)
Effective portion of loss reclassified from Accumulated other comprehensive loss into Net loss (a)
$
(1,809
)
 
(1,822
)
 
$
(3,621
)
 
(3,627
)
Ineffective portion of amount of loss recognized into Net loss on interest rate swaps (a)
$
(19
)
 
83

 
$
(77
)
 
(1
)
 
(a) 
Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
 

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(7)    Fair Value Measurements
 
According to the FASB ASC Topic 820, Fair Value Measurement, fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and requires that assets and liabilities carried at fair value are classified and disclosed in the following three categories:

Level 1 - Quoted prices for identical instruments in active markets. 
Level 2 - Quoted prices for similar instruments in active or inactive markets and valuations derived from models where all significant inputs are observable in active markets.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable in any market.

The following summarizes the fair value level of assets and liabilities that are measured on a recurring basis at June 30, 2016 and December 31, 2015 (amounts in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2016
 

 
 

 
 

 
 

Derivative financial instruments - liabilities
$

 
(30,073
)
 

 
$
(30,073
)
Total
$

 
(30,073
)
 

 
$
(30,073
)
December 31, 2015
 

 
 

 
 

 
 

Derivative financial instruments - liabilities
$

 
(13,470
)
 

 
$
(13,470
)
Total
$

 
(13,470
)
 

 
$
(13,470
)
 
The Company has determined that the significant inputs used to value the Swaps fall within Level 2 of the fair value hierarchy.  As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.
 
Carrying values and fair values of financial instruments that are not carried at fair value are as follows (amounts in thousands):
 
June 30, 2016
 
December 31, 2015
Long term debt, including current portion:
 

 
 

Carrying value
$
1,678,660

 
$
1,744,647

Fair value (a)
1,559,409

 
1,603,375

 
(a)
T he fair value is based on market quotations 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.


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Table of Contents

(8)    Accumulated Other Comprehensive Loss
 
The following table provides a summary of the changes in Accumulated other comprehensive loss for the period presented (amounts in thousands):
 
 
Accumulated
other
comprehensive
loss
As of December 31, 2015
$
(13,546
)
Unrealized loss on derivatives recognized through Accumulated other comprehensive loss
(20,163
)
Reclassifications of unrealized loss on derivatives into net income, net of income tax of $0 (a)
3,621

As of June 30, 2016
$
(30,088
)
 
(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.
 
(9)    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.

(10)     Reportable Business Segments

Description of Segments

The Company operates through two reportable business segments according to the nature and economic characteristics of its services as well as the manner in which the information issued internally by the Company's key decision maker, who is the Company's Chief Executive Officer. The Company's business segments are as follows:

Monitronics

The Monitronics segment is primarily engaged in the business of providing security alarm monitoring services: monitoring signals arising from burglaries, fires, medical alerts and other events through security systems at subscribers' premises, as well as providing customer service and technical support. Monitronics outsources the sales, installation and most of its field service functions to its dealers. By outsourcing the low margin, high fixed-cost elements of its business to a large network of independent service providers, Monitronics is able to allocate capital to growing its revenue-generating account base rather than to local offices or depreciating hard assets.

LiveWatch

LiveWatch is a do-it-yourself ("DIY") home security provider offering professionally monitored security services through a direct-to-consumer sales channel. LiveWatch offers a differentiated go-to-market strategy through direct response TV, internet and radio advertising. When a customer initiates the process to obtain monitoring services, LiveWatch pre-configures the alarm monitoring system based on customer specifications. LiveWatch then packages and ships the equipment directly to the customer. The customer self-installs the equipment on-site and activates the monitoring service over the phone.

As they arise, transactions between segments are recorded on a arm's length basis using relevant market prices. Prior to the acquisition of LiveWatch in February 2015, Ascent Capital had one operating segment. Therefore, the LiveWatch segment only includes amounts incurred from the purchase date. The following table sets forth selected data from the accompanying condensed consolidated statements of operations for the periods indicated (amounts in thousands):


12

Table of Contents

 
 
Monitronics
 
LiveWatch
 
Consolidated
 
 
Three months ended June 30, 2016
Net revenue
 
$
138,174

 
$
5,482

 
$
143,656

Depreciation and amortization
 
$
62,877

 
$
1,085

 
$
63,962

Net loss before income taxes
 
$
(9,703
)
 
$
(5,063
)
 
$
(14,766
)
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2015
Net revenue
 
$
137,436

 
$
4,107

 
$
141,543

Depreciation and amortization
 
$
64,902

 
$
1,108

 
$
66,010

Net loss before income taxes
 
$
(9,306
)
 
$
(4,670
)
 
$
(13,976
)
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016
Net revenue
 
$
276,270

 
$
10,654

 
$
286,924

Depreciation and amortization
 
$
125,029

 
$
2,230

 
$
127,259

Net loss before income taxes
 
$
(22,854
)
 
$
(10,332
)
 
$
(33,186
)
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2015
Net revenue
 
$
274,337

 
$
5,622

 
$
279,959

Depreciation and amortization
 
$
129,898

 
$
1,550

 
$
131,448

Net loss before income taxes
 
$
(13,943
)
 
$
(6,406
)
 
$
(20,349
)

The following table sets forth selected data from the accompanying condensed consolidated balance sheets for the periods indicated (amounts in thousands):

 
 
Monitronics
 
LiveWatch
 
Eliminations
 
Consolidated
 
 
Balance at June 30, 2016
Subscriber accounts, net of amortization
 
$
1,388,366

 
$
22,303

 
$

 
$
1,410,669

Goodwill
 
$
527,502

 
$
36,047

 
$

 
$
563,549

Total assets
 
$
2,069,519

 
$
62,983

 
$
(82,494
)
 
$
2,050,008

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
Subscriber accounts, net of amortization
 
$
1,400,515

 
$
23,023

 
$

 
$
1,423,538

Goodwill
 
$
527,502

 
$
36,047

 
$

 
$
563,549

Total assets
 
$
2,033,180

 
$
63,267

 
$
(26,180
)
 
$
2,070,267


(11)    Consolidating Guarantor Financial Information

The Senior Notes were issued by Monitronics (the “Parent Issuer”) and are fully and unconditionally guaranteed, on a joint and several basis, 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. The unaudited condensed consolidating financial information for the Parent Issuer, the Subsidiary Guarantors and the non-guarantors are as follows:

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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
(unaudited)
 
 
As of June 30, 2016
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,195

 
936

 

 

 
2,131

Trade receivables, net
13,380

 
504

 

 

 
13,884

Prepaid and other current assets
38,400

 
1,985

 

 
(32,245
)
 
8,140

Total current assets
52,975

 
3,425

 

 
(32,245
)
 
24,155

 
 
 
 
 
 
 
 
 
 
Investment in subsidiaries
33,920

 

 

 
(33,920
)
 

Property and equipment, net
25,034

 
1,354

 

 

 
26,388

Subscriber accounts, net
1,375,610

 
35,059

 

 

 
1,410,669

Dealer network and other intangible assets, net
20,612

 
1,127

 

 

 
21,739

Goodwill
527,191

 
36,358

 

 

 
563,549

Other assets, net
3,496

 
12

 

 

 
3,508

Total assets
$
2,038,838

 
77,335

 

 
(66,165
)
 
2,050,008

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholder's Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
6,622

 
1,437

 

 

 
8,059

Accrued payroll and related liabilities
2,962

 
401

 

 

 
3,363

Other accrued liabilities
27,206

 
36,302

 

 
(32,245
)
 
31,263

Deferred revenue
15,031

 
1,171

 

 

 
16,202

Holdback liability
13,639

 
573

 

 

 
14,212

Current portion of long-term debt
5,500

 

 

 

 
5,500

Total current liabilities
70,960

 
39,884

 

 
(32,245
)
 
78,599

 
 
 
 
 
 
 
 
 
 
Non-current liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
1,673,160

 

 

 

 
1,673,160

Long-term holdback liability
3,614

 

 

 

 
3,614

Derivative financial instruments
30,073

 

 

 

 
30,073

Deferred income tax liability, net
14,053

 
1,243

 

 

 
15,296

Other liabilities
9,947

 
2,288

 

 

 
12,235

Total liabilities
1,801,807

 
43,415

 

 
(32,245
)
 
1,812,977

 
 
 
 
 
 
 
 
 
 
Total stockholder's equity
237,031

 
33,920

 

 
(33,920
)
 
237,031

Total liabilities and stockholder's equity
$
2,038,838

 
77,335

 

 
(66,165
)
 
2,050,008


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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
(unaudited)
 
 
As of December 31, 2015
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,513

 
1,067

 

 

 
2,580

Restricted cash
55

 

 

 

 
55

Trade receivables, net
13,224

 
398

 

 

 
13,622

Prepaid and other current assets
30,542

 
1,807

 

 
(22,459
)
 
9,890

Total current assets
45,334

 
3,272

 

 
(22,459
)
 
26,147

 
 
 
 
 
 
 
 
 
 
Investment in subsidiaries
43,920

 

 

 
(43,920
)
 

Property and equipment, net
25,842

 
812

 

 

 
26,654

Subscriber accounts, net
1,390,493

 
33,045

 

 

 
1,423,538

Dealer network and other intangible assets, net
25,462

 
1,192

 

 

 
26,654

Goodwill
527,191

 
36,358

 

 

 
563,549

Other assets, net
3,718

 
7

 

 

 
3,725

Total assets
$
2,061,960

 
74,686

 

 
(66,379
)
 
$
2,070,267

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholder's Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
7,383

 
1,238

 

 

 
8,621

Accrued payroll and related liabilities
2,894

 
585

 

 

 
3,479

Other accrued liabilities
32,224

 
22,757

 

 
(22,459
)
 
32,522

Deferred revenue
15,151

 
1,056

 

 

 
16,207

Holdback liability
15,986

 
400

 

 

 
16,386

Current portion of long-term debt
5,500

 

 

 

 
5,500

Total current liabilities
79,138

 
26,036

 

 
(22,459
)
 
82,715

 
 
 
 
 
 
 
 
 
 
Non-current liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
1,739,147

 

 

 

 
1,739,147

Long-term holdback liability
3,786

 

 

 

 
3,786

Derivative financial instruments
13,470

 

 

 

 
13,470

Deferred income tax liability, net
12,391

 
800

 

 

 
13,191

Other liabilities
12,963

 
3,930

 

 

 
16,893

Total liabilities
1,860,895

 
30,766

 

 
(22,459
)
 
1,869,202

 
 
 
 
 
 
 
 
 
 
Total stockholder's equity
201,065

 
43,920

 

 
(43,920
)
 
201,065

Total liabilities and stockholder's equity
$
2,061,960

 
74,686

 

 
(66,379
)
 
2,070,267



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Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
(unaudited)
 
Three Months Ended June 30, 2016
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
137,212

 
6,444

 

 

 
143,656

 
 
 
 
 
 
 
 
 
0

Operating expenses:
 

 
 

 
 

 
 

 
0

Cost of services
24,504

 
3,133

 

 

 
27,637

Selling, general, and administrative, including stock-based compensation
22,857

 
6,346

 

 

 
29,203

Radio conversion costs
7,542

 
54

 

 

 
7,596

Amortization of subscriber accounts, dealer network and other intangible assets
60,482

 
1,455

 

 

 
61,937

Depreciation
1,939

 
86

 

 

 
2,025

 
117,324

 
11,074

 

 

 
128,398

Operating income (loss)
19,888

 
(4,630
)
 

 

 
15,258

Other expense:
 

 
 

 
 

 
 

 
 

Equity in loss of subsidiaries
4,860

 

 

 
(4,860
)
 

Interest expense
30,019

 
5

 

 

 
30,024

 
34,879

 
5

 

 
(4,860
)
 
30,024

(Loss) income before income taxes
(14,991
)
 
(4,635
)
 

 
4,860

 
(14,766
)
Income tax expense
1,518

 
225

 

 

 
1,743

Net (loss) income
(16,509
)
 
(4,860
)
 

 
4,860

 
(16,509
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

 
 

Unrealized loss on derivative contracts
(4,697
)
 

 

 

 
(4,697
)
Total other comprehensive loss
(4,697
)
 

 

 

 
(4,697
)
Comprehensive (loss) income
$
(21,206
)
 
(4,860
)
 

 
4,860

 
(21,206
)



16

Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
(unaudited)
 
 
Three Months Ended June 30, 2015
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
137,051

 
4,492

 

 

 
141,543

 
 
 
 
 
 
 
 
 
0

Operating expenses:
 

 
 

 
 

 
 

 
0

Cost of services
24,938

 
2,665

 

 

 
27,603

Selling, general, and administrative, including stock-based compensation
20,630

 
5,067

 

 

 
25,697

Radio conversion costs
450

 

 

 

 
450

Amortization of subscriber accounts, dealer network and other intangible assets
62,233

 
1,293

 

 

 
63,526

Depreciation
2,463

 
21

 

 

 
2,484

 
110,714

 
9,046

 

 

 
119,760

Operating income (loss)
26,337

 
(4,554
)
 

 

 
21,783

Other expense:
 

 
 

 
 

 
 

 
 

Equity in loss of subsidiaries
4,773

 

 

 
(4,773
)
 

Interest expense
31,280

 
11

 

 

 
31,291

Refinancing expense
4,468

 

 

 

 
4,468

 
40,521

 
11

 

 
(4,773
)
 
35,759

(Loss) income before income taxes
(14,184
)
 
(4,565
)
 

 
4,773

 
(13,976
)
Income tax expense
1,803

 
208

 

 

 
2,011

Net (loss) income
(15,987
)
 
(4,773
)
 

 
4,773

 
(15,987
)
Other comprehensive income:
 

 
 

 
 

 
 

 
 

Unrealized gain on derivative contracts
1,002

 

 

 

 
1,002

Total other comprehensive income
1,002

 

 

 

 
1,002

Comprehensive (loss) income
$
(14,985
)
 
(4,773
)
 

 
4,773

 
(14,985
)

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Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
(unaudited)
 
 
Six Months Ended June 30, 2016
 
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net revenue
 
$
274,519

 
12,405

 

 

 
286,924

 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
Cost of services
 
50,746

 
6,366

 

 

 
57,112

Selling, general, and administrative, including stock-based compensation
 
45,388

 
12,428

 

 

 
57,816

Radio conversion costs
 
16,621

 
54

 

 

 
16,675

Amortization of subscriber accounts, dealer network and other intangible assets
 
120,310

 
2,949

 

 

 
123,259

Depreciation
 
3,849

 
151

 

 

 
4,000

Gain on disposal of operating assets
 

 

 

 

 

 
 
236,914

 
21,948

 

 

 
258,862

Operating income (loss)
 
37,605

 
(9,543
)
 

 

 
28,062

Other expense:
 
 
 
 
 
 
 
 
 
 
Equity in loss of subsidiaries
 
10,001

 

 

 
(10,001
)
 

Interest expense
 
61,239

 
9

 

 

 
61,248

Refinancing expense
 

 

 

 

 

 
 
71,240

 
9

 

 
(10,001
)
 
61,248

(Loss) income before income taxes
 
(33,635
)
 
(9,552
)
 

 
10,001

 
(33,186
)
Income tax expense
 
3,084

 
449

 

 

 
3,533

Net (loss) income
 
(36,719
)
 
(10,001
)
 

 
10,001

 
(36,719
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
Unrealized gain on derivative contracts
 
(16,542
)
 

 

 

 
(16,542
)
Total other comprehensive loss
 
(16,542
)
 

 

 

 
(16,542
)
Comprehensive (loss) income
 
$
(53,261
)
 
(10,001
)
 

 
10,001

 
(53,261
)


18

Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
(unaudited)
 
 
Six Months Ended June 30, 2015
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
273,651

 
6,308

 

 

 
279,959

 
 
 
 
 
 
 
 
 
0

Operating expenses:
 

 
 

 
 

 
 

 
0

Cost of services
49,123

 
3,647

 

 

 
52,770

Selling, general, and administrative, including stock-based compensation
42,130

 
6,991

 

 

 
49,121

Radio conversion costs
973

 

 

 

 
973

Amortization of subscriber accounts, dealer network and other intangible assets
124,741

 
1,926

 

 

 
126,667

Depreciation
4,754

 
27

 

 

 
4,781

Gain on disposal of operating assets
(3
)
 

 

 

 
(3
)
 
221,718

 
12,591

 

 

 
234,309

Operating income (loss)
51,933

 
(6,283
)
 

 

 
45,650

Other expense:
 

 
 

 
 

 
 

 
 

Equity in loss of subsidiaries
6,704

 

 

 
(6,704
)
 

Interest expense
61,518

 
13

 

 

 
61,531

Refinancing expense
4,468

 

 

 

 
4,468

 
72,690

 
13

 

 
(6,704
)
 
65,999

(Loss) income before income taxes
(20,757
)
 
(6,296
)
 

 
6,704

 
(20,349
)
Income tax expense
3,564

 
408

 

 

 
3,972

Net (loss) income
(24,321
)
 
(6,704
)
 

 
6,704

 
(24,321
)
Other comprehensive loss:
 

 
 

 
 

 
 

 
 

Unrealized loss on derivative contracts
(3,461
)
 

 

 

 
(3,461
)
Total other comprehensive loss
(3,461
)
 

 

 

 
(3,461
)
Comprehensive (loss) income
$
(27,782
)
 
(6,704
)
 

 
6,704

 
(27,782
)



19

Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
(unaudited)
 
 
Six Months Ended June 30, 2016
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net cash provided by operating activities
$
86,581

 
4,320

 

 

 
90,901

Investing activities:
 

 
 

 
 

 
 

 
 

Capital expenditures
(2,408
)
 
(692
)
 

 

 
(3,100
)
Cost of subscriber accounts acquired
(103,046
)
 
(3,759
)