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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 September 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 November 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)
 
September 30,
2016
 
December 31,
2015
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
28,686

 
$
2,580

Restricted cash

 
55

Trade receivables, net of allowance for doubtful accounts of $2,635 in 2016 and $2,762 in 2015
13,673

 
13,622

Prepaid and other current assets
9,634

 
9,890

Total current assets
51,993

 
26,147

Property and equipment, net of accumulated depreciation of $33,115 in 2016 and $27,057 in 2015
26,159

 
26,654

Subscriber accounts, net of accumulated amortization of $1,153,651 in 2016 and $975,795 in 2015
1,405,064

 
1,423,538

Dealer network and other intangible assets, net of accumulated amortization of $80,951 in 2016 and $73,578 in 2015
19,282

 
26,654

Goodwill
563,549

 
563,549

Other assets, net
3,573

 
3,725

Total assets
$
2,069,620

 
$
2,070,267

Liabilities and Stockholder's Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
9,266

 
$
8,621

Accrued payroll and related liabilities
5,173

 
3,479

Other accrued liabilities
44,808

 
32,522

Deferred revenue
15,554

 
16,207

Holdback liability
15,005

 
16,386

Current portion of long-term debt
11,000

 
5,500

Total current liabilities
100,806

 
82,715

Non-current liabilities:
 

 
 

Long-term debt
1,692,587

 
1,739,147

Long-term holdback liability
2,955

 
3,786

Derivative financial instruments
32,511

 
13,470

Deferred income tax liability, net
16,349

 
13,191

Other liabilities
12,187

 
16,893

Total liabilities
1,857,395

 
1,869,202

Commitments and contingencies


 


Stockholder's equity:
 
 
 
Common stock, $.01 par value. 1,000 shares authorized, issued and outstanding both at September 30, 2016 and December 31, 2015

 

Additional paid-in capital
451,110

 
361,228

Accumulated deficit
(206,338
)
 
(146,617
)
Accumulated other comprehensive loss
(32,547
)
 
(13,546
)
Total stockholder's equity
212,225

 
201,065

Total liabilities and stockholder's equity
$
2,069,620

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net revenue
$
142,765

 
141,846

 
$
429,689

 
421,805

Operating expenses:
 
 
 
 
 
 
 
Cost of services
29,049

 
28,245

 
86,161

 
81,015

Selling, general, and administrative, including stock-based compensation
29,727

 
27,937

 
87,543

 
77,058

Radio conversion costs
1,263

 
3,570

 
17,938

 
4,543

Amortization of subscriber accounts, dealer network and other intangible assets
62,156

 
66,958

 
185,415

 
193,625

Depreciation
2,084

 
2,717

 
6,084

 
7,498

  Gain on disposal of operating assets

 
(1
)
 

 
(4
)
 
124,279

 
129,426

 
383,141

 
363,735

Operating income
18,486

 
12,420

 
46,548

 
58,070

Other expense:
 
 
 
 
 
 
 
Interest expense
30,211

 
31,853

 
91,459

 
93,384

Refinancing expense
9,348

 

 
9,348

 
4,468

 
39,559

 
31,853

 
100,807

 
97,852

Loss before income taxes
(21,073
)
 
(19,433
)
 
(54,259
)
 
(39,782
)
Income tax expense
1,929

 
1,981

 
5,462

 
5,953

Net loss
(23,002
)
 
(21,414
)
 
(59,721
)
 
(45,735
)
Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized loss on derivative contracts, net of tax
(2,459
)
 
(8,946
)
 
(19,001
)
 
(12,407
)
Total other comprehensive loss, net of tax
(2,459
)
 
(8,946
)
 
(19,001
)
 
(12,407
)
Comprehensive loss
$
(25,461
)
 
(30,360
)
 
$
(78,722
)
 
(58,142
)
 
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)
 
Nine Months Ended 
 September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(59,721
)
 
(45,735
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of subscriber accounts, dealer network and other intangible assets
185,415

 
193,625

Depreciation
6,084

 
7,498

Stock-based compensation
1,870

 
1,430

Deferred income tax expense
3,158

 
3,076

Amortization of debt discount and deferred debt costs
5,312

 
4,850

Bad debt expense
7,855

 
7,036

Gain on disposal of operating assets

 
(4
)
Refinancing expense
9,348

 
4,468

Other non-cash activity, net
2,218

 
3,566

Changes in assets and liabilities:
 
 
 
Trade receivables
(7,906
)
 
(7,203
)
Prepaid expenses and other assets
99

 
(4,735
)
Subscriber accounts - deferred contract costs
(2,080
)
 
(1,181
)
Payables and other liabilities
7,307

 
6,546

Net cash provided by operating activities
158,959

 
173,237

Cash flows from investing activities:
 

 
 

Capital expenditures
(5,071
)
 
(10,034
)
Cost of subscriber accounts acquired
(160,117
)
 
(205,050
)
Cash paid for acquisition, net of cash acquired

 
(56,778
)
Decrease (increase) in restricted cash
55

 
(42
)
Proceeds from the disposal of operating assets

 
4

Net cash used in investing activities
(165,133
)
 
(271,900
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
1,249,000

 
749,550

Payments on long-term debt
(1,200,009
)
 
(640,465
)
Payments of financing costs
(16,711
)
 
(6,477
)
Contribution from Ascent Capital

 
22,690

Net cash provided by financing activities
32,280

 
125,298

Net increase in cash and cash equivalents
26,106

 
26,635

Cash and cash equivalents at beginning of period
2,580

 
1,953

Cash and cash equivalents at end of period
$
28,686

 
28,588

 
 
 
 
Supplemental cash flow information:
 
 
 
State taxes paid, net
$
2,747

 
3,491

Interest paid
76,411

 
76,848

 

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

 

 

 

 
(59,721
)
 
(59,721
)
Other comprehensive loss

 

 

 
(19,001
)
 

 
(19,001
)
Stock-based compensation

 

 
1,991

 

 

 
1,991

Value of shares withheld for minimum tax liability

 

 
(109
)
 

 

 
(109
)
Contribution from Ascent Capital

 

 
88,000

 

 

 
88,000

Balance at September 30, 2016
1,000

 
$

 
451,110

 
(32,547
)
 
(206,338
)
 
$
212,225

 
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 "MONI") 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 September 30, 2016, and for the three and nine months ended September 30, 2016 and 2015, include MONI 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 MONI 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.

(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.

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

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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 MONI's 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 MONI 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 prior 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): 
 
September 30, 2016
 
December 31, 2015
Interest payable
$
27,305

 
$
18,226

Income taxes payable
2,159

 
2,603

Legal accrual
658

 
145

LiveWatch acquisition retention bonus
4,312

 

Other
10,374

 
11,548

Total Other accrued liabilities
$
44,808

 
$
32,522


(5)    Long-Term Debt
 
Long-term debt consisted of the following (amounts in thousands):
 
September 30,
2016
 
December 31,
2015
9.125% Senior Notes due April 1, 2020 with an effective interest rate of 9.4%
$
577,615

 
$
576,241

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

 
100,000

Term loan, matures September 30, 2022, LIBOR plus 5.50%, subject to a LIBOR floor of 1.00% with an effective rate of 7.2%
1,067,899

 

$295 million credit facility, matures September 20, 2021, LIBOR plus 4.00%, subject to a LIBOR floor of 1.00% with an effective rate of 5.3%
46,073

 

Term loan, matures April 9, 2022, LIBOR plus 3.50%, subject to a LIBOR floor of 1.00%, with an effective rate of 5.1%

 
542,420

Term loan, matures March 23, 2018, LIBOR plus 3.25%, subject to a LIBOR floor of 1.00% with an effective rate of 5.0%

 
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%

 
131,048

 
1,703,587

 
1,744,647

Less current portion of long-term debt
(11,000
)
 
(5,500
)
Long-term debt
$
1,692,587

 
$
1,739,147

 
(a)
The effective rate was 9.868% until February 29, 2016.

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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 September 30, 2016, the Senior Notes had deferred financing costs, net of accumulated amortization of $7,385,000.
 
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.  The effective rate was 12.5% as of September 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

On September 30, 2016, the Company entered into an amendment ("Amendment No. 6") with the lenders of its existing senior secured credit agreement dated March 23, 2012, and as amended and restated on April 9, 2015, February 17, 2015, August 16, 2013, March 25, 2013, and November 7, 2012 (the "Existing Credit Agreement"). Amendment No. 6 provided for, among other things, the issuance of a new $1,100,000,000 senior secured term loan at a 1.5% discount and a new $295,000,000 super priority revolver (The Existing Credit Agreement together with Amendment No. 6, the "Credit Facility").

The Company used the net proceeds from the new term loan to retire $403,784,000 of its existing term loan due in March 2018 and $543,125,000 of its existing term loan due in April 2022. Additionally, the Company retired its existing $315,000,000 revolving credit facility in the amount of $138,900,000.

On September 30, 2016, the Company borrowed $48,400,000 on the new Credit Facility revolver to fund its October 1, 2016 interest payment due under the Senior Notes of $26,691,000 as well as other refinancing fees.

As a result of the refinancing, the Company accelerated amortization of certain deferred financing costs and debt discounts related to the extinguished term loans, and expensed certain other refinancing costs. The components of the refinancing expense is reflected below (amounts in thousands):
 
For the Three and
Nine Months Ended
September 30, 2016
Accelerated amortization of deferred financing costs
$
4,160

Accelerated amortization of debt discount
3,416

Other refinancing costs
1,772

Total refinancing expense
$
9,348


As of September 30, 2016, the Credit Facility term loan has a principal amount of $1,100,000,000 maturing on September 30, 2022. The term loan requires quarterly interest payments and quarterly principal payments of $2,750,000. The term loan bears interest at LIBOR plus 5.5%, subject to a LIBOR floor of 1.0%. The Credit Facility revolver has a principal amount outstanding of $48,400,000 as of September 30, 2016 and matures on September 30, 2021. The Credit Facility revolver bears interest at LIBOR plus 4.0%, subject to a LIBOR floor of 1.0%. There is a commitment fee of 0.5% on unused portions of the Credit Facility Revolver. As of September 30, 2016, $246,600,000 is available for borrowing under 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 September 30, 2016, the Company has deferred financing costs and unamortized discounts, net of accumulated amortization, of $34,428,000 related to the Credit Facility.

In order to reduce the financial risk related to changes in interest rates associated with the floating rate term loan 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 loan is 7.15%. See note 6, Derivatives, for further disclosures related to these derivative instruments. 

The terms of the Senior Notes and the Credit Facility provide for certain financial and nonfinancial covenants.  As of September 30, 2016, the Company was in compliance with all required covenants.

As of September 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
11,000

2018
11,000

2019
11,000

2020
608,000

2021
59,400

Thereafter
1,042,250

Total principal payments
1,745,400

Less:
 
Unamortized deferred debt costs and discounts
41,813

Total debt on condensed consolidated balance sheet
$
1,703,587


(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 September 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
$
525,250,000

 
March 28, 2013
 
March 23, 2018
 
1.884%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
139,200,000

 
March 28, 2013
 
March 23, 2018
 
1.384%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
108,825,377

 
September 30, 2013
 
March 23, 2018
 
1.959%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
108,825,377

 
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
 
3.110%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
250,000,000

 
March 23, 2018
 
April 9, 2022
 
3.110%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
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 and September 30, 2016, the Company negotiated amendments to the terms of these interest rate swap agreements (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, MONI 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 $6,985,000.
 
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Effective portion of loss recognized in Accumulated other comprehensive loss
$
(4,284
)
 
(10,784
)
 
$
(24,447
)
 
(17,872
)
Effective portion of loss reclassified from Accumulated other comprehensive loss into Net loss (a)
$
(1,825
)
 
(1,838
)
 
$
(5,446
)
 
(5,465
)
Ineffective portion of amount of gain (loss) recognized into Net loss (a)
$
16

 
(142
)
 
$
(61
)
 
(143
)
 
(a) 
Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
 

10

Table of Contents

(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 September 30, 2016 and December 31, 2015 (amounts in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2016
 
 
 
 
 
 
 
Derivative financial instruments - liabilities
$

 
(32,511
)
 

 
$
(32,511
)
Total
$

 
(32,511
)
 

 
$
(32,511
)
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):
 
September 30, 2016
 
December 31, 2015
Long term debt, including current portion:
 
 
 
Carrying value
$
1,703,587

 
$
1,744,647

Fair value (a)
1,703,338

 
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.


11

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
Balance at December 31, 2015
(13,546
)
Unrealized loss on derivatives recognized through Accumulated other comprehensive loss
(24,447
)
Reclassifications of unrealized loss on derivatives into net income, net of income tax of $0 (a)
5,446

Net current period other comprehensive income
(19,001
)
Balance at September 30, 2016
(32,547
)
 
(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:

MONI

The MONI 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. MONI 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, MONI 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 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.


12

Table of Contents

As they arise, transactions between segments are recorded on an 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):
 
 
MONI
 
LiveWatch
 
Consolidated
 
 
Three Months Ended September 30, 2016
Net revenue
 
$
136,910

 
$
5,855

 
$
142,765

Depreciation and amortization
 
$
63,117

 
$
1,123

 
$
64,240

Net loss before income taxes
 
$
(15,238
)
 
$
(5,835
)
 
$
(21,073
)
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
Net revenue
 
$
137,461

 
$
4,385

 
$
141,846

Depreciation and amortization
 
$
68,535

 
$
1,140

 
$
69,675

Net loss before income taxes
 
$
(13,879
)
 
$
(5,554
)
 
$
(19,433
)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
Net revenue
 
$
413,180

 
$
16,509

 
$
429,689

Depreciation and amortization
 
$
188,146

 
$
3,353

 
$
191,499

Net loss before income taxes
 
$
(38,092
)
 
$
(16,167
)
 
$
(54,259
)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
Net revenue
 
$
411,798

 
$
10,007

 
$
421,805

Depreciation and amortization
 
$
198,433

 
$
2,690

 
$
201,123

Net loss before income taxes
 
$
(27,822
)
 
$
(11,960
)
 
$
(39,782
)

The following table sets forth selected data from the accompanying condensed consolidated balance sheets for the periods indicated (amounts in thousands):
 
 
MONI
 
LiveWatch
 
Eliminations
 
Consolidated
 
 
Balance at September 30, 2016
Subscriber accounts, net of amortization
 
$
1,382,961

 
$
22,103

 
$

 
$
1,405,064

Goodwill
 
$
527,502

 
$
36,047

 
$

 
$
563,549

Total assets
 
$
2,093,414

 
$
64,120

 
$
(87,914
)
 
$
2,069,620

 
 
 
 
 
 
 
 
 
 
 
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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Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
(unaudited)
 
 
As of September 30, 2016
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
27,569

 
1,117

 

 

 
28,686

Trade receivables, net
13,119

 
554

 

 

 
13,673

Prepaid and other current assets
46,037

 
2,913

 

 
(39,316
)
 
9,634

Total current assets
86,725

 
4,584

 

 
(39,316
)
 
51,993

 
 
 
 
 
 
 
 
 
 
Investment in subsidiaries
28,376

 

 

 
(28,376
)
 

Property and equipment, net
24,669

 
1,490

 

 

 
26,159

Subscriber accounts, net
1,367,864

 
37,200

 

 

 
1,405,064

Dealer network and other intangible assets, net
18,188

 
1,094

 

 

 
19,282

Goodwill
527,191

 
36,358

 

 

 
563,549

Other assets, net
3,555

 
18

 

 

 
3,573

Total assets
$
2,056,568

 
80,744

 

 
(67,692
)
 
2,069,620

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholder's Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
7,637

 
1,629

 

 

 
9,266

Accrued payroll and related liabilities
4,624

 
549

 

 

 
5,173

Other accrued liabilities
39,923

 
44,201

 

 
(39,316
)
 
44,808

Deferred revenue
14,290

 
1,264

 

 

 
15,554

Holdback liability
14,458

 
547

 

 

 
15,005

Current portion of long-term debt
11,000

 

 

 

 
11,000

Total current liabilities
91,932

 
48,190

 

 
(39,316
)
 
100,806

 
 
 
 
 
 
 
 
 
 
Non-current liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
1,692,587

 

 

 

 
1,692,587

Long-term holdback liability
2,955

 

 

 

 
2,955

Derivative financial instruments
32,511

 

 

 

 
32,511

Deferred income tax liability, net
14,884

 
1,465

 

 

 
16,349

Other liabilities
9,474

 
2,713

 

 

 
12,187

Total liabilities
1,844,343

 
52,368

 

 
(39,316
)
 
1,857,395

 
 
 
 
 
 
 
 
 
 
Total stockholder's equity
212,225

 
28,376

 

 
(28,376
)
 
212,225

Total liabilities and stockholder's equity
$
2,056,568

 
80,744

 

 
(67,692
)
 
2,069,620


14

Table of Contents

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



15

Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
(unaudited)
 
Three Months Ended September 30, 2016
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
135,710

 
7,055

 

 

 
142,765

 
 
 
 
 
 
 
 
 
0

Operating expenses:
 

 
 

 
 

 
 

 
0

Cost of services
25,809

 
3,240

 

 

 
29,049

Selling, general, and administrative, including stock-based compensation
22,459

 
7,268

 

 

 
29,727

Radio conversion costs
1,157

 
106

 

 

 
1,263

Amortization of subscriber accounts, dealer network and other intangible assets
60,582

 
1,574

 

 

 
62,156

Depreciation
1,981

 
103

 

 

 
2,084

 
111,988

 
12,291

 

 

 
124,279

Operating income (loss)
23,722

 
(5,236
)
 

 

 
18,486

Other expense:
 

 
 

 
 

 
 

 
 

Equity in loss of subsidiaries
5,544

 

 

 
(5,544
)
 

Interest expense
30,206

 
5

 

 

 
30,211

Refinancing expense
9,348

 

 

 

 
9,348

 
45,098

 
5

 

 
(5,544
)
 
39,559

(Loss) income before income taxes
(21,376
)
 
(5,241
)
 

 
5,544

 
(21,073
)
Income tax expense
1,626

 
303

 

 

 
1,929

Net (loss) income
(23,002
)
 
(5,544
)
 

 
5,544

 
(23,002
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

 
 

Unrealized loss on derivative contracts
(2,459
)
 

 

 

 
(2,459
)
Total other comprehensive loss
(2,459
)
 

 

 

 
(2,459
)
Comprehensive (loss) income
$
(25,461
)
 
(5,544
)
 

 
5,544

 
(25,461
)



16

Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
(unaudited)
 
 
Three Months Ended September 30, 2015
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
136,872

 
4,974

 

 

 
141,846

 
 
 
 
 
 
 
 
 
0

Operating expenses:
 
 
 
 
 
 
 
 
0

Cost of services
25,144

 
3,101

 

 

 
28,245

Selling, general, and administrative, including stock-based compensation
22,079

 
5,858

 

 

 
27,937

Radio conversion costs
3,570

 

 

 

 
3,570

Amortization of subscriber accounts, dealer network and other intangible assets
65,548

 
1,410

 

 

 
66,958

Depreciation
2,684

 
33

 

 

 
2,717

Gain on disposal of operating assets
(1
)
 

 

 

 
(1
)
 
119,024

 
10,402

 

 

 
129,426

Operating income (loss)
17,848

 
(5,428
)
 

 

 
12,420

Other expense:
 

 
 
 
 
 
 
 
 
Equity in loss of subsidiaries
5,638

 

 

 
(5,638
)
 

Interest expense
31,849

 
4

 

 

 
31,853

Refinancing expense

 

 

 

 

 
37,487

 
4

 

 
(5,638
)
 
31,853

(Loss) income before income taxes
(19,639
)
 
(5,432
)
 

 
5,638

 
(19,433
)
Income tax expense
1,775

 
206

 

 

 
1,981

Net (loss) income
(21,414
)
 
(5,638
)
 

 
5,638

 
(21,414
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
Unrealized gain on derivative contracts
(8,946
)
 

 

 

 
(8,946
)
Total other comprehensive income
(8,946
)
 

 

 

 
(8,946
)
Comprehensive (loss) income
$
(30,360
)
 
(5,638
)
 

 
5,638

 
(30,360
)



17

Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
(unaudited)
 
 
Nine Months Ended September 30, 2016
 
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net revenue
 
$
410,229

 
19,460

 

 

 
429,689

 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
Cost of services
 
76,555

 
9,606

 

 

 
86,161

Selling, general, and administrative, including stock-based compensation
 
67,847

 
19,696

 

 

 
87,543

Radio conversion costs
 
17,778

 
160

 

 

 
17,938

Amortization of subscriber accounts, dealer network and other intangible assets
 
180,892

 
4,523

 

 

 
185,415

Depreciation
 
5,830

 
254

 

 

 
6,084

Gain on disposal of operating assets
 

 

 

 

 

 
 
348,902

 
34,239

 

 

 
383,141

Operating income (loss)
 
61,327

 
(14,779
)
 

 

 
46,548

Other expense:
 
 
 
 
 
 
 
 
 
 
Equity in loss of subsidiaries
 
15,545

 

 

 
(15,545
)
 

Interest expense
 
91,445

 
14

 

 

 
91,459

Refinancing expense
 
9,348

 

 

 

 
9,348

 
 
116,338

 
14

 

 
(15,545
)
 
100,807

(Loss) income before income taxes
 
(55,011
)
 
(14,793
)
 

 
15,545

 
(54,259
)
Income tax expense
 
4,710

 
752

 

 

 
5,462

Net (loss) income
 
(59,721
)
 
(15,545
)
 

 
15,545

 
(59,721
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
Unrealized gain on derivative contracts
 
(19,001
)
 

 

 

 
(19,001
)
Total other comprehensive loss
 
(19,001
)
 

 

 

 
(19,001
)
Comprehensive (loss) income
 
$
(78,722
)
 
(15,545
)
 

 
15,545

 
(78,722
)



18

Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
(unaudited)
 
 
Nine Months Ended September 30, 2015
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
410,523

 
11,282

 

 

 
421,805

 
 
 
 
 
 
 
 
 
0

Operating expenses:
 
 
 
 
 
 
 
 
0

Cost of services
74,268

 
6,747

 

 

 
81,015

Selling, general, and administrative, including stock-based compensation
64,209

 
12,849

 

 

 
77,058

Radio conversion costs
4,543

 

 

 

 
4,543

Amortization of subscriber accounts, dealer network and other intangible assets
190,289

 
3,336

 

 

 
193,625

Depreciation
7,438

 
60

 

 

 
7,498

Gain on disposal of operating assets
(4
)
 

 

 

 
(4
)
 
340,743

 
22,992

 

 

 
363,735

Operating income (loss)
69,780

 
(11,710
)
 

 

 
58,070

Other expense:
 
 
 
 
 
 
 
 
 
Equity in loss of subsidiaries
12,341

 

 

 
(12,341
)
 

Interest expense
93,367

 
17

 

 

 
93,384

Refinancing expense
4,468

 

 

 

 
4,468

 
110,176

 
17

 

 
(12,341
)
 
97,852

(Loss) income before income taxes
(40,396
)
 
(11,727
)
 

 
12,341

 
(39,782
)
Income tax expense
5,339

 
614

 

 

 
5,953

Net (loss) income
(45,735
)
 
(12,341
)
 

 
12,341

 
(45,735
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Unrealized loss on derivative contracts
(12,407
)
 

 

 

 
(12,407
)
Total other comprehensive loss
(12,407
)
 

 

 

 
(12,407
)
Comprehensive (loss) income
$
(58,142
)
 
(12,341
)
 

 
12,341

 
(58,142
)




19

Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
(unaudited)
 
 
Nine Months Ended September 30, 2016
 
Parent Issuer
 
Subsidiary
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net cash provided by operating activities
$
151,350

 
7,609