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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 March 31, 2019
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 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
None
 
None
 
None
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
 
Smaller reporting company o
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 May 14, 2019, 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 (unaudited)
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
(unaudited)
 
March 31,
2019
 
December 31,
2018
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
23,931

 
2,188

Restricted cash
118

 
189

Trade receivables, net of allowance for doubtful accounts of $3,239 in 2019 and $3,759 in 2018
12,438

 
13,121

Prepaid and other current assets
34,388

 
28,178

Total current assets
70,875

 
43,676

Property and equipment, net of accumulated depreciation of $43,685 in 2019 and $40,531 in 2018
37,154

 
36,539

Subscriber accounts and deferred contract acquisition costs, net of accumulated amortization of $1,670,228 in 2019 and $1,621,242 in 2018
1,176,776

 
1,195,463

Deferred income tax asset, net
783

 
783

Operating lease right-of-use asset
19,720

 

Other assets
25,606

 
29,307

Total assets
$
1,330,914

 
1,305,768

Liabilities and Stockholder's Deficit
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
12,942

 
12,099

Other accrued liabilities
47,393

 
31,085

Deferred revenue
12,698

 
13,060

Holdback liability
12,041

 
11,513

Current portion of long-term debt
1,838,900

 
1,816,450

Total current liabilities
1,923,974

 
1,884,207

Non-current liabilities:
 

 
 

Long-term holdback liability
1,979

 
1,770

Derivative financial instruments
9,287

 
6,039

Operating lease liabilities
16,550

 

Other liabilities
2,899

 
2,727

Total liabilities
1,954,689

 
1,894,743

Commitments and contingencies


 


Stockholder's deficit:
 
 
 
Common stock, $.01 par value. 1,000 shares authorized, issued and outstanding both at March 31, 2019 and December 31, 2018

 

Additional paid-in capital
437,149

 
439,711

Accumulated deficit
(1,068,064
)
 
(1,036,294
)
Accumulated other comprehensive income, net
7,140

 
7,608

Total stockholder's deficit
(623,775
)
 
(588,975
)
Total liabilities and stockholder's deficit
$
1,330,914

 
1,305,768

 

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 
 March 31,
 
2019
 
2018
Net revenue
$
129,606

 
133,753

Operating expenses:
 
 
 
Cost of services
26,764

 
32,701

Selling, general and administrative, including stock-based and long-term incentive compensation
31,222

 
32,014

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
49,145

 
54,411

Depreciation
3,154

 
2,615

 
110,285

 
121,741

Operating income
19,321

 
12,012

Other expense:
 
 
 
Interest expense
37,433

 
36,873

Unrealized loss on derivative financial instruments
7,773

 

Refinancing expense
5,214

 

 
50,420

 
36,873

Loss before income taxes
(31,099
)
 
(24,861
)
Income tax expense
671

 
1,346

Net loss
(31,770
)
 
(26,207
)
Other comprehensive income (loss):
 
 
 
Unrealized gain (loss) on derivative contracts, net
(468
)
 
14,406

Total other comprehensive income (loss), net of tax
(468
)
 
14,406

Comprehensive loss
$
(32,238
)
 
(11,801
)
 
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)
 
Three Months Ended 
 March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(31,770
)
 
(26,207
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
49,145

 
54,411

Depreciation
3,154

 
2,615

Stock-based and long-term incentive compensation
535

 
(12
)
Deferred income tax expense

 
662

Amortization of debt discount and deferred debt costs

 
1,789

Unrealized loss on derivative financial instruments
7,773

 

Refinancing expense
5,214

 

Bad debt expense
3,335

 
3,017

Other non-cash activity, net
(267
)
 
(852
)
Changes in assets and liabilities:
 
 
 
Trade receivables
(2,652
)
 
(2,672
)
Prepaid expenses and other assets
48

 
580

Subscriber accounts - deferred contract acquisition costs
(863
)
 
(898
)
Payables and other liabilities
14,890

 
17,921

Net cash provided by operating activities
48,542

 
50,354

Cash flows from investing activities:
 

 
 

Capital expenditures
(2,999
)
 
(3,310
)
Cost of subscriber accounts acquired
(28,850
)
 
(24,560
)
Net cash used in investing activities
(31,849
)
 
(27,870
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
43,100

 
50,000

Payments on long-term debt
(18,400
)
 
(47,750
)
Payments of financing costs
(14,720
)
 

Value of shares withheld for share-based compensation
(1
)
 
(42
)
Dividend to Ascent Capital
(5,000
)
 

Net cash provided by financing activities
4,979

 
2,208

Net increase in cash, cash equivalents and restricted cash
21,672

 
24,692

Cash, cash equivalents and restricted cash at beginning of period
2,377

 
3,302

Cash, cash equivalents and restricted cash at end of period
$
24,049

 
27,994

Supplemental cash flow information:
 
 
 
State taxes paid, net
$

 

Interest paid
24,672

 
21,735

Accrued capital expenditures
1,322

 
830

 

See accompanying notes to condensed consolidated financial statements.

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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholder’s Deficit
Amounts in thousands, except share amounts
(unaudited)
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive
Income (Loss)
 
Total Stockholder’s Deficit
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018
1,000

 
$

 
439,711

 
(1,036,294
)
 
7,608

 
$
(588,975
)
Net loss

 

 

 
(31,770
)
 

 
(31,770
)
Other comprehensive loss

 

 

 

 
(468
)
 
(468
)
Dividend paid to Ascent Capital

 

 
(5,000
)
 

 

 
(5,000
)
Contribution from Ascent Capital

 

 
2,250

 

 

 
2,250

Stock-based compensation

 

 
189

 

 

 
189

Value of shares withheld for minimum tax liability

 

 
(1
)
 

 

 
(1
)
Balance at March 31, 2019
1,000

 
$

 
437,149

 
(1,068,064
)
 
7,140

 
$
(623,775
)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive
Income (Loss)
 
Total Stockholder’s Equity
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
1,000

 
$

 
444,330

 
(334,219
)
 
(7,375
)
 
$
102,736

Impact of adoption of Topic 606

 

 

 
(22,720
)
 

 
(22,720
)
Impact of adoption of ASU 2017-12

 

 

 
(605
)
 
605

 

Adjusted balance at January 1, 2018
1,000

 

 
444,330

 
(357,544
)
 
(6,770
)
 
80,016

Net loss

 

 

 
(26,207
)
 

 
(26,207
)
Other comprehensive income

 

 

 

 
14,406

 
14,406

Stock-based compensation

 

 
47

 

 

 
47

Value of shares withheld for minimum tax liability

 

 
(42
)
 

 

 
(42
)
Balance at March 31, 2018
1,000

 
$

 
444,335

 
(383,751
)
 
7,636

 
$
68,220

 
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, "Monitronics" or the "Company", doing business as Brinks Home SecurityTM) are wholly owned subsidiaries of Ascent Capital Group, Inc. ("Ascent Capital").  Monitronics provides residential customers and commercial client accounts with monitored home and business security systems, as well as interactive and home automation services, in the United States, Canada and Puerto Rico.  Monitronics customers are obtained through our direct-to-consumer sales channel (the "Direct to Consumer Channel") or our exclusive authorized dealer network (the "Dealer Channel"), which provides product and installation services, as well as support to customers. Our Direct to Consumer Channel offers both Do-It-Yourself and professional installation security solutions.

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 ("GAAP") for complete financial statements. The Company’s unaudited condensed consolidated financial statements as of March 31, 2019, and for the three months ended March 31, 2019 and 2018, 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, 2018, filed with the SEC on April 1, 2019.

The preparation of financial statements in conformity with 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 subscriber accounts and valuation of deferred tax assets. 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)    Going Concern

The Company has substantial indebtedness at March 31, 2019, including $585,000,000 principal of senior notes, maturing on April 1, 2020 (the "Senior Notes"), and an existing credit facility with a term loan in principal of $1,072,500,000 as of March 31, 2019, maturing September 30, 2022, and a revolving credit facility with an outstanding balance of  $181,400,000 as of March 31, 2019, maturing September 30, 2021 (the term loan and the revolver, together, the "Credit Facility").

The maturity date for each of the term loan and the revolving credit facility under the Credit Facility is subject to a springing maturity 181 days prior to the scheduled maturity date of the Senior Notes, or October 3, 2019, if Monitronics is unable to refinance the Senior Notes by that date. Furthermore, Monitronics received a going concern qualification in connection with its standalone external audit report of its Annual Report on Form 10-K, for the year ended December 31, 2018, which constitutes a default under Monitronics’ Credit Facility (the "Going Concern Default"), and will report that its Consolidated Senior Secured Eligible RMR Leverage Ratio (as defined in the Credit Facility) exceeds the limits provided in the Credit Agreement for the quarter ended March 31, 2019 (the “Financial Covenant Default”), which constitutes an event of default under Monitronics’ Credit Facility. Any default under the Credit Facility may, upon the passage of time, mature into an event of default. At any time after the occurrence of an event of default under the Credit Facility, the lenders thereunder may, among other options, declare any amounts outstanding under the Credit Facility immediately due and payable and the revolving loan lenders thereunder may terminate any commitment to make further loans under the revolving credit facility under the Credit Facility. Any such acceleration may constitute an event of default under the indenture governing the Senior Notes.

Additionally, in connection with management's negotiations with its creditors, we did not make our Senior Notes interest payment of $26,691,000 due on April 1, 2019. The indenture governing the Senior Notes provides for a 30-day cure period on past due interest payments (the non-payment of the interest following the expiration of the 30-day cure period, the "Senior Notes Default"). The 30-day cure period under the indenture governing the Senior Notes has expired.

We have obtained a waiver (as amended, the “Credit Facility Waiver”), from the required revolving lenders under the Credit Facility, which expired May 10, 2019, with respect to, among other things, the Going Concern Default and the Senior Notes

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Default, subject to the terms and conditions of the Credit Facility Waiver. The Credit Facility Waiver obtained from the Credit Facility revolving loan lenders allowed us to continue to borrow under the revolving credit facility under the Credit Facility, up to $195,000,000 at an alternate base rate plus 3.00%. We are seeking to amend and extend the Credit Facility Waiver including a waiver with respect to the Financial Covenant Default and such discussions are ongoing.

We have obtained a forbearance, as amended, from the required term lenders under the Credit Facility, through May 15, 2019, with respect to, among other things, the Going Concern Default, the Senior Notes Default and the Financial Covenant Default, subject to the terms and conditions of the forbearance. The forbearance obtained from the Credit Facility term lenders provides that the term loan lenders will not exercise remedies with respect to an event of default that may occur from the Going Concern Default, the Senior Notes Default or the Financial Covenant Default. Despite the forbearance obtained from the Credit Facility term lenders, the Going Concern Default, the Senior Notes Default and the Financial Covenant Default, and any resulting event of default under the Credit Facility, are continuing, and will continue, absent a waiver from the required revolving and term loan lenders, as applicable.

Additionally, we have obtained a forbearance from the required holders of Senior Notes, through May 15, 2019, with respect to, among other things, the Senior Notes Default, subject to the terms and conditions of the forbearance. The forbearance obtained from the holders of Senior Notes provides, subject to the terms of the forbearance, that the holders of Senior Notes will not exercise remedies with respect to the Senior Notes Default.

Given these factors, management continues to conclude there is substantial doubt regarding our ability to continue as a going concern within one year from the issuance date of these condensed consolidated financial statements. 

We have engaged financial and legal advisors to assist us in considering potential alternatives to address the issues described above. As of the issuance date of these condensed consolidated financial statements, we have not refinanced the Senior Notes and there can be no assurance that any refinancing, or an alternative restructuring of our outstanding indebtedness will be possible on acceptable terms, if at all.

Our failure to refinance the Senior Notes or to reach an agreement with our stakeholders on the terms of a restructuring would have a material adverse effect on our liquidity, financial condition and results of operations and may result in us filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring plan.

Our condensed consolidated financial statements as of March 31, 2019 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

(3)    Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the "FASB") issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. The Company adopted ASU 2016-02 using a modified retrospective approach at January 1, 2019, as outlined in ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this method of adoption, there is no impact to the comparative condensed consolidated statements of operations and condensed consolidated balance sheets. The Company determined that there was no cumulative effect adjustment to beginning Accumulated deficit on the condensed consolidated balance sheets. The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in Accounting Standards Codification Topic 840, "Leases". In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications.

Adoption of this standard did not materially impact the Company's Loss before income taxes and had no impact on the condensed consolidated statements of cash flows. Upon adoption as of January 1, 2019, the Company recognized an Operating lease right-of-use asset of $20,240,000 and a total Operating lease liability of $20,761,000. The difference between the two amounts were due to decreases in prepaid rent and deferred rent recorded under prior lease accounting in Prepaid and other current assets and Other accrued liabilities, respectively, on the condensed consolidated balance sheets. See note 11, Leases, for further information.



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(4)    Other Accrued Liabilities
 
Other accrued liabilities consisted of the following (amounts in thousands): 
 
March 31,
2019
 
December 31,
2018
Accrued payroll and related liabilities
$
6,044

 
$
4,459

Interest payable
27,648

 
14,446

Income taxes payable
3,396

 
2,742

Operating lease liabilities
3,728

 

Other
6,577

 
9,438

Total Other accrued liabilities
$
47,393

 
$
31,085


(5)    Debt
 
Long-term debt consisted of the following (amounts in thousands):
 
March 31,
2019
 
December 31,
2018
9.125% Senior Notes due April 1, 2020 with an effective interest rate of 9.1%
$
585,000

 
$
585,000

Ascent Intercompany Loan due October 1, 2020 with an effective rate of 12.5%

 
12,000

Term loan, matures September 30, 2022, LIBOR plus 5.50%, subject to a LIBOR floor of 1.00%, with an effective rate of 8.3%
1,072,500

 
1,075,250

$295 million revolving credit facility, matures September 30, 2021, LIBOR plus 4.00%, subject to a LIBOR floor of 1.00%, with an effective rate of 5.7%
181,400

 
144,200

 
1,838,900

 
1,816,450

Less current portion of long-term debt
(1,838,900
)
 
(1,816,450
)
Long-term debt
$

 
$


Senior Notes
 
The Senior Notes total $585,000,000 in principal, mature on April 1, 2020 and bear interest at 9.125% per annum.  Interest payments are due semi-annually on April 1 and October 1 of each year. Ascent Capital has not guaranteed any of the Company's obligations under the Senior Notes.

In connection with management’s negotiations with its creditors, the Company did not make its Senior Notes interest payment of $26,691,000 due on April 1, 2019. The indenture governing the Senior Notes provides for a 30-day cure period on past due interest payments, which has expired, resulting in the Senior Notes Default. As such, the outstanding debt of the Senior Notes as of March 31, 2019 has been classified as Current portion of long-term debt in the condensed consolidated balance sheets. See note 2, Going Concern for further information.

The Senior Notes are guaranteed by all of the Company's existing domestic subsidiaries. See note 12, Consolidating Guarantor Financial Information for further information.

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 being treated as 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.  Borrowings under the Ascent Intercompany Loan constitute unsecured obligations of the Company and are not guaranteed by any of the Company’s subsidiaries.


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In January 2019, the Company repaid $9,750,000 of the Ascent Intercompany Loan and $2,250,000 was contributed to our stated capital.
 
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 $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").

As of March 31, 2019, the Credit Facility term loan has a principal amount of $1,072,500,000, 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 $181,400,000 and an aggregate of $1,000,000 under two standby letters of credit issued as of March 31, 2019, maturing on September 30, 2021. The Credit Facility revolver typically 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 discussed in note 2, Going Concern, we obtained the Credit Facility Waiver, which expired May 10, 2019, with respect to, among other things the Going Concern Default and the Senior Notes Default, subject to certain terms and conditions. The Credit Facility Waiver, among other things, allowed us to continue to borrow under the revolving credit facility under the Credit Facility for up to $195,000,000 at an alternate base rate plus 3.0%. We are seeking to amend and extend the Credit Facility Waiver including a waiver with respect to the Financial Covenant Default. However, there can be no assurance that we will receive such a waiver and therefore, there can be no assurance that we will have availability of additional borrowings under the Credit Facility revolver. See note 2, Going Concern for further information.

The maturity date for each of the term loan and the revolving credit facility under the Credit Facility is subject to a springing maturity 181 days prior to the scheduled maturity date of the Senior Notes, or October 3, 2019, if we are unable to refinance the Senior Notes by that date. Furthermore, we were not in compliance with certain financial covenants under the Credit Facility as of March 31, 2019. See note 2, Going Concern for further information.

Given the factors discussed above, the outstanding debt of the Credit Facility term loan and the Credit Facility revolver as of March 31, 2019 continues to be classified as Current portion of long-term debt in the condensed consolidated balance sheets.

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.

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 loan, the Company has entered into interest rate swap agreements with terms similar to the Credit Facility term loan (all outstanding interest rate swap agreements are collectively referred to as the “Swaps”). Prior to December of 2018, all of the Swaps were designated as effective hedges of the Company's variable rate debt and qualified for hedge accounting. However, in December of 2018, given the potential for changes in the Company's future expected interest payments that the Swap hedged, all of the Swaps no longer qualified as a cash flow hedge and were de-designated as such. As a result of these interest rate swaps, the Company's effective weighted average interest rate (excluding the impacts of non-cash amortization of deferred debt costs and discounts) on the borrowings under the Credit Facility term loan was 8.04% as of March 31, 2019. In April of 2019, subsequent to March 31, 2019, all of the outstanding Swaps were settled and terminated with their respective counterparties. See note 6, Derivatives, for further disclosures related to the settlement of these derivative instruments.

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As of March 31, 2019, principal payments scheduled to be made on the Company’s debt obligations, assuming certain accelerated maturities due to potential events of default and subsequent transactions, are as follows (amounts in thousands):
Remainder of 2019
$
1,838,900

2020

2021

2022

2023

2024

Thereafter

Total principal payments
1,838,900

Less:
 
Unamortized deferred debt costs and discounts

Total debt on condensed consolidated balance sheet
$
1,838,900


(6)    Derivatives
 
The Company utilizes Swaps to reduce the interest rate risk inherent in the Company's variable rate Credit Facility term loan. 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.

Prior to December of 2018, all of the Swaps were designated and qualified as cash flow hedging instruments, with the effective portion of the Swaps' change in fair value recorded in Accumulated other comprehensive income (loss). However, in December of 2018, given the potential for changes in the Company's future expected interest payments that these Swaps hedged, all of the Swaps no longer qualified as a cash flow hedge and were de-designated as such. Before the de-designation, changes in the fair value of the Swaps were recognized in Accumulated other comprehensive income (loss) and were reclassified to Interest expense when the hedged interest payments on the underlying debt were recognized. After the de-designation, changes in the fair value of the Swaps are recognized in Unrealized loss on derivative financial instruments on the condensed consolidated statements of operations and comprehensive income (loss). For the three months ended March 31, 2019, the Company recorded an Unrealized loss on derivative financial instruments of $7,773,000. Amounts recognized in Accumulated other comprehensive income (loss) as of the de-designation date will be amortized to Interest expense on the condensed consolidated statements of operations and comprehensive income (loss) over the remaining term of the hedged forecasted transactions of the Swaps which were 3 month LIBOR interest payments. Amounts in Accumulated other comprehensive income (loss) expected to be recognized in Interest expense in the coming 12 months total approximately $2,005,000.

As of March 31, 2019, 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
$
189,013,883

 
March 23, 2018
 
April 9, 2022 (a)
 
3.110%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
246,875,000

 
March 23, 2018
 
April 9, 2022 (a)
 
3.110%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
49,375,000

 
March 23, 2018
 
April 9, 2022 (a)
 
2.504%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
372,287,500

 
March 23, 2018
 
September 30, 2022 (a)
 
1.833%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
 
(a)        On April 30, 2019, the various counterparties and the Company agreed to settle and terminate all of the outstanding swap agreements, which required us to pay $8,767,000 in termination amount to certain counterparties and required a certain counterparty to pay $6,540,000 in termination amount to us.


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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 
 March 31,
 
2019
 
2018
Effective portion of gain recognized in Accumulated other comprehensive income (loss)
$

 
13,668

Effective portion of loss reclassified from Accumulated other comprehensive income (loss) into Net loss (a)
$
(468
)
 
(738
)
 
(a)        Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

(7)    Fair Value Measurements
 
According to the 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 March 31, 2019 and December 31, 2018 (amounts in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2019
 
 
 
 
 
 
 
Interest rate swap agreements - assets (a)
$

 
6,027

 

 
6,027

Interest rate swap agreements - liabilities (a)

 
(9,287
)
 

 
(9,287
)
Total
$

 
(3,260
)
 

 
(3,260
)
December 31, 2018
 
 
 
 
 
 
 
Interest rate swap agreements - assets (a)
$

 
10,552

 

 
10,552

Interest rate swap agreements - liabilities (a)

 
(6,039
)
 

 
(6,039
)
Total
$

 
4,513

 

 
4,513

 
(a)
Swap asset values are included in non-current Other assets and Swap liability values are included in non-current Derivative financial instruments on the condensed consolidated balance sheets.
 
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):
 
March 31, 2019
 
December 31, 2018
Long term debt, including current portion:
 
 
 
Carrying value
$
1,838,900

 
1,816,450

Fair value (a)
1,196,619

 
1,218,606

 
(a) 
The 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 Income (Loss)
 
The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the three months ended March 31, 2019 (amounts in thousands):
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance at December 31, 2018
$
7,608

Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (a)
(468
)
Balance at March 31, 2019
$
7,140

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

The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the three months ended March 31, 2018 (amounts in thousands):
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance at December 31, 2017
$
(7,375
)
Impact of adoption of ASU 2017-12
605

Adjusted balance at January 1, 2018
(6,770
)
Unrealized gain on derivatives recognized through Accumulated other comprehensive income (loss), net of income tax of $0
13,668

Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (a)
738

Net current period Other comprehensive income
14,406

Balance at March 31, 2018
$
7,636

 
(a) 
Amounts reclassified into Net loss are included in Interest expense on the condensed consolidated statements of operations.

(9)    Commitments, Contingencies and Other Liabilities
 
The Company was named as a defendant in multiple putative class actions consolidated in U.S. District Court (Northern District of West Virginia) on behalf of purported class(es) for persons who claim to have received telemarketing calls in violation of various state and federal laws. The actions were brought by plaintiffs seeking monetary damages on behalf of all plaintiffs who received telemarketing calls made by a Monitronics Authorized Dealer, or any Authorized Dealer's lead generator or sub-dealer. In the second quarter of 2017, the Company and the plaintiffs agreed to settle this litigation for $28,000,000 ("the Settlement Amount"). In the third quarter of 2017, the Company paid $5,000,000 of the Settlement Amount pursuant to the settlement agreement with the plaintiffs. In the third quarter of 2018, the Company paid the remaining $23,000,000 of the Settlement Amount. The Company recovered a portion of the Settlement Amount under its insurance policies held with multiple carriers. In the fourth quarter of 2018, we settled our claims against two such carriers in which those carriers agreed to pay us an aggregate of $12,500,000. In April of 2019, Monitronics settled a claim against one such carrier in which that carrier agreed to pay the Company $4,800,000.

In addition to the above, the Company is also involved in litigation and similar claims incidental to the conduct of its business, including from time to time, contractual disputes, claims related to alleged security system failures and claims related to alleged violations of the U.S. Telephone Consumer Protection Act. Matters that are probable of unfavorable outcome to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, management's estimate of the outcomes of such matters and experience in contesting, litigating and settling similar matters. In management's opinion, none of the pending actions are likely to have a material adverse impact on the Company's financial position or results of operations. The Company accrues and expenses legal fees related to loss contingency matters as incurred.


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Table of Contents

(10)    Revenue Recognition

Disaggregation of Revenue

Revenue is disaggregated by source of revenue as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2019
 
2018
Alarm monitoring revenue
$
121,479

 
124,840

Product and installation revenue
6,534

 
8,147

Other revenue
1,593

 
766

Total Net revenue
$
129,606

 
133,753


Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
 
March 31,
2019
 
December 31,
2018
Trade receivables, net
$
12,438

 
13,121

Contract assets, net - current portion (a)
13,072

 
13,452

Contract assets, net - long-term portion (b)
14,634

 
16,154

Deferred revenue
12,698

 
13,060

 
(a)        Amount is included in Prepaid and other current assets in the unaudited condensed consolidated balance sheets.
(b)        Amount is included in Other assets in the unaudited condensed consolidated balance sheets.

(11)    Leases

The Company primarily leases buildings and equipment. The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right of use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised. Certain real estate leases contain lease and non-lease components, which are accounted for separately.

Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.

All of the Company's leases are currently determined to be operating leases.

Components of Lease Expense

The components of lease expense were as follows (in thousands):
 
Three Months Ended March 31, 2019
Operating lease cost (a)
$
131

Operating lease cost (b)
996

Total operating lease cost
$
1,127

 
(a)        Amount is included in Cost of services in the unaudited condensed consolidated statements of operations.
(b)        Amount is included in Selling, general and administrative, including stock-based and long-term incentive compensation in the unaudited condensed consolidated statements of operations.


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Table of Contents

Remaining Lease Term and Discount Rate

The following table presents the weighted-average remaining lease term and the weighted-average discount rate:
 
As of March 31, 2019
Weighted-average remaining lease term for operating leases (in years)
10.4

Weighted-average discount rate for operating leases
11.8
%

All of the Company's lease contracts do not provide a readily determinable implicit rate. For these contracts, the Company's estimated incremental borrowing rate is based on information available either upon adoption of ASU 2016-02 or at the inception of the lease.

Supplemental Cash Flow Information

The following is the supplemental cash flow information associated with the Company's leases (in thousands):
 
For the Three Months Ended 
 March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
1,069


Maturities of Lease Liabilities

As of March 31, 2019, maturities of lease liabilities were as follows:
Remainder of 2019
$
2,790

2020
3,593

2021
3,195

2022
3,069

2023
3,087

Thereafter
20,329

Total lease payments
$
36,063

Less: Interest
(15,785
)
Total lease obligations
$
20,278


Disclosures Related to Periods Prior to Adoption of ASU 2016-02

The Company adopted ASU 2016-02 using a modified retrospective method at January 1, 2019 as described in note 3, Recent Accounting Pronouncements. As required, the following disclosure is provided for periods prior to adoption. Minimum lease commitments as of December 31, 2018 that have initial or remaining noncancelable lease terms in excess of one year are as follows (in thousands):
Year Ended December 31:
 
2019
$
4,628

2020
4,207

2021
3,093

2022
3,068

2023
3,087

Thereafter
20,329

Minimum lease commitments
$
38,412



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Table of Contents

(12)    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 March 31, 2019
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
23,547

 
384

 

 

 
23,931

Restricted cash
118

 

 

 

 
118

Trade receivables, net
12,286

 
152

 

 

 
12,438

Prepaid and other current assets
71,289

 

 

 
(36,901
)
 
34,388

Total current assets
107,240

 
536

 

 
(36,901
)
 
70,875

 
 
 
 
 
 
 
 
 
 
Property and equipment, net
37,154

 

 

 

 
37,154

Subscriber accounts and deferred contract acquisition costs, net
1,162,903

 
13,873

 

 

 
1,176,776

Deferred income tax asset, net
783

 

 

 

 
783

Operating lease right-of-use asset
19,720

 

 

 

 
19,720

Other assets, net
25,606

 

 

 

 
25,606

Total assets
$
1,353,406

 
14,409

 

 
(36,901
)
 
1,330,914

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholder's Deficit
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
12,938

 
4

 

 

 
12,942

Other accrued liabilities
47,407

 
36,887

 

 
(36,901
)
 
47,393

Deferred revenue
12,587

 
111

 

 

 
12,698

Holdback liability
11,878

 
163

 

 

 
12,041

Current portion of long-term debt
1,838,900

 

 

 

 
1,838,900

Total current liabilities
1,923,710

 
37,165

 

 
(36,901
)
 
1,923,974

 
 
 
 
 
 
 
 
 
 
Non-current liabilities:
 
 
 
 
 
 
 
 
 
Long-term holdback liability
1,979

 

 

 

 
1,979

Derivative financial instruments
9,287

 

 

 

 
9,287

Operating lease liabilities
16,550

 

 

 

 
16,550

Other liabilities
25,655

 

 

 
(22,756
)
 
2,899

Total liabilities
1,977,181

 
37,165

 

 
(59,657
)
 
1,954,689

 
 
 
 
 
 
 
 
 
 
Total stockholder's deficit
(623,775
)
 
(22,756
)
 

 
22,756

 
(623,775
)
Total liabilities and stockholder's deficit
$
1,353,406

 
14,409

 

 
(36,901
)
 
1,330,914


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Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
(unaudited)
 
 
As of December 31, 2018
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,697

 
491

 

 

 
2,188

Restricted cash
189

 

 

 

 
189

Trade receivables, net
12,362

 
759

 

 

 
13,121

Prepaid and other current assets
118,119

 
4,042

 

 
(93,983
)
 
28,178

Total current assets
132,367

 
5,292

 

 
(93,983
)
 
43,676

 
 
 
 
 
 
 
 
 
 
Property and equipment, net
34,960

 
1,579

 

 

 
36,539

Subscriber accounts and deferred contract acquisition costs, net
1,160,698

 
34,765

 

 

 
1,195,463

Deferred income tax asset, net
783

 

 

 

 
783

Other assets, net
29,270

 
37

 

 

 
29,307

Total assets
$
1,358,078

 
41,673

 

 
(93,983
)
 
1,305,768

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholder's Deficit
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
11,110

 
989

 

 

 
12,099

Other accrued liabilities
29,016

 
96,052

 

 
(93,983
)
 
31,085

Deferred revenue
11,357

 
1,703

 

 

 
13,060

Holdback liability
11,342

 
171

 

 

 
11,513

Current portion of long-term debt
1,816,450

 

 

 

 
1,816,450

Total current liabilities
1,879,275

 
98,915

 

 
(93,983
)
 
1,884,207

 
 
 
 
 
 
 
 
 
 
Non-current liabilities:
 
 
 
 
 
 
 
 
 
Long-term holdback liability
1,770

 

 

 

 
1,770

Derivative financial instruments
6,039

 

 

 

 
6,039

Other liabilities
59,969

 

 

 
(57,242
)
 
2,727

Total liabilities
1,947,053

 
98,915

 

 
(151,225
)
 
1,894,743

 
 
 
 
 
 
 
 
 
 
Total stockholder's deficit
(588,975
)
 
(57,242
)
 

 
57,242

 
(588,975
)
Total liabilities and stockholder's deficit
$
1,358,078

 
41,673

 

 
(93,983
)
 
1,305,768


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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 March 31, 2019
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
128,260

 
1,346

 

 

 
129,606

 
 
 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

 
 
Cost of services
26,683

 
81

 

 

 
26,764

Selling, general, and administrative, including stock-based compensation
31,164

 
58

 

 

 
31,222

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
48,572

 
573

 

 

 
49,145

Depreciation
3,154

 

 

 

 
3,154

 
109,573

 
712

 

 

 
110,285

Operating income
18,687

 
634

 

 

 
19,321

Other expense (income):
 

 
 

 
 

 
 

 
 

Equity in income of subsidiaries
(634
)
 

 

 
634

 

Interest expense
37,433

 

 

 

 
37,433

Unrealized loss on derivative financial instruments
7,773

 

 

 

 
7,773

Refinancing expense
5,214

 

 

 

 
5,214

 
49,786

 

 

 
634

 
50,420

Income (loss) before income taxes
(31,099
)
 
634

 

 
(634
)
 
(31,099
)
Income tax expense
671

 

 

 

 
671

Net income (loss)
(31,770
)
 
634

 

 
(634
)
 
(31,770
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

 
 

Unrealized loss on derivative contracts
(468
)
 

 

 

 
(468
)
Total other comprehensive loss
(468
)
 

 

 

 
(468
)
Comprehensive income (loss)
$
(32,238
)
 
634

 

 
(634
)
 
(32,238
)


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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 March 31, 2018
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
124,295

 
9,458

 

 

 
133,753

 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
Cost of services
28,299

 
4,402

 

 

 
32,701

Selling, general, and administrative, including stock-based compensation
22,803

 
9,211

 

 

 
32,014

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
52,237

 
2,174

 

 

 
54,411

Depreciation
2,385

 
230

 

 

 
2,615

 
105,724

 
16,017

 

 

 
121,741

Operating income (loss)
18,571

 
(6,559
)
 

 

 
12,012

Other expense:
 

 
 
 
 
 
 
 
 
Equity in loss of subsidiaries
6,740

 

 

 
(6,740
)
 

Interest expense
36,873

 

 

 

 
36,873

 
43,613

 

 

 
(6,740
)
 
36,873

Loss before income taxes
(25,042
)
 
(6,559
)
 

 
6,740

 
(24,861
)
Income tax expense
1,165

 
181

 

 

 
1,346

Net loss
(26,207
)
 
(6,740
)
 

 
6,740

 
(26,207
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Unrealized gain on derivative contracts
14,406

 

 

 

 
14,406

Total other comprehensive income
14,406

 

 

 

 
14,406

Comprehensive loss
$
(11,801
)
 
(6,740
)
 

 
6,740

 
(11,801
)


19

Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
(unaudited)
 
 
Three Months Ended March 31, 2019
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net cash provided by operating activities
$
48,344

 
198

 

 

 
48,542

Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
(2,999
)
 

 

 

 
(2,999
)
Cost of subscriber accounts acquired
(28,545
)
 
(305
)
 

 

 
(28,850
)
Net cash used in investing activities
(31,544
)
 
(305
)
 

 

 
(31,849
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from long-term debt
43,100

 

 

 

 
43,100

Payments on long-term debt
(18,400
)
 

 

 

 
(18,400
)
Payments of financing costs
(14,720
)
 

 

 

 
(14,720
)
Value of shares withheld for share-based compensation
(1
)
 

 

 

 
(1
)
Dividend to Ascent Capital
(5,000
)
 

 

 

 
(5,000
)
Net cash provided by financing activities
4,979

 

 

 

 
4,979

Net increase (decrease) in cash, cash equivalents and restricted cash
21,779

 
(107
)
 

 

 
21,672

Cash, cash equivalents and restricted cash at beginning of period
1,886

 
491

 

 

 
2,377

Cash, cash equivalents and restricted cash at end of period
$
23,665

 
384

 

 

 
24,049


 
Three Months Ended March 31, 2018
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net cash provided by operating activities
$
50,059

 
295

 

 

 
50,354

Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
(3,004
)
 
(306
)
 

 

 
(3,310
)
Cost of subscriber accounts acquired
(24,328
)
 
(232
)
 

 

 
(24,560
)
Net cash used in investing activities
(27,332
)
 
(538
)
 

 

 
(27,870
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from long-term debt
50,000

 

 

 

 
50,000

Payments on long-term debt
(47,750
)
 

 

 

 
(47,750
)
Value of shares withheld for share-based compensation
(42
)
 

 

 

 
(42
)
Net cash provided by financing activities
2,208

 

 

 

 
2,208

Net increase (decrease) in cash, cash equivalents and restricted cash
24,935

 
(243
)
 

 

 
24,692

Cash, cash equivalents and restricted cash at beginning of period
2,705

 
597

 

 

 
3,302

Cash, cash equivalents and restricted cash at end of period
$
27,640

 
354

 

 

 
27,994



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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, new service offerings, the availability of debt refinancing, obtaining or maintaining any requested waiver of forbearance with respect to the Credit Facility and Senior Notes (each as defined below), the ability of Ascent Capital and Monitronics to continue as going concerns, potential restructurings and strategic transactions, financial prospects and anticipated sources and uses of capital. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
 
general business conditions and industry trends;
the availability and terms of capital, including our ability to refinance our existing debt or obtain future financing to grow our business;
our ability to refinance the Senior Notes or to reach an agreement on the terms of a restructuring with our stakeholders.
our high degree of leverage and the restrictive covenants governing its indebtedness;
macroeconomic conditions and their effect on the general economy and on the U.S. housing market, in particular single family homes, which represent our largest demographic;
uncertainties in the development of our business strategies, including the rebranding to Brinks Home Security and market acceptance of new products and services;
the competitive environment in which we operate, in particular, increasing competition in the alarm monitoring industry from larger existing competitors and new market entrants, including technology, telecommunications and cable companies;
the development of new services or service innovations by competitors;
our ability to acquire and integrate additional accounts, including competition for dealers with other alarm monitoring companies which could cause an increase in expected subscriber acquisition costs;
technological changes which could result in the obsolescence of currently utilized technology with the need for significant upgrade expenditures, including the phase out of 3G and CDMA networks by cellular carriers;
the trend away from the use of public switched telephone network lines and the resultant increase in servicing costs associated with alternative methods of communication;
the operating performance of our network, including the potential for service disruptions at both the main monitoring facility and back-up monitoring facility due to acts of nature or technology deficiencies, and the potential of security breaches related to network or customer information;
the outcome of any pending, threatened, or future litigation, including potential liability for failure to respond adequately to alarm activations;
the ability to continue to obtain insurance coverage sufficient to hedge our risk exposures, including as a result of acts of third parties and/or alleged regulatory violations;
changes in the nature of strategic relationships with original equipment manufacturers, dealers and other of our business partners;
the reliability and creditworthiness of our independent alarm systems dealers and subscribers;
changes in our expected rate of subscriber attrition;
availability of, and our ability to retain, qualified personnel;
integration of acquired assets and businesses; and
the regulatory environment in which we operate, including the multiplicity of jurisdictions, state and federal consumer protection laws and licensing requirements to which we and/or our dealers are subject and the risk of new regulations, such as the increasing adoption of "false alarm" ordinances;

For additional risk factors, please see Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Form 10-K").  These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
 
The following discussion and analysis provides information concerning our results of operations and financial condition.  This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto included elsewhere herein and the 2018 Form 10-K.

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Overview
 
Monitronics International, Inc. and its subsidiaries (collectively, "Monitronics" or the "Company", doing business as Brinks Home SecurityTM) provides residential customers and commercial client accounts with monitored home and business security systems, as well as interactive and home automation services, in the United States, Canada and Puerto Rico. Monitronics customers are obtained through our direct-to-consumer sales channel (the "Direct to Consumer Channel") or our exclusive authorized dealer network (the "Dealer Channel"), which provides product and installation services, as well as support to customers. Our Direct to Consumer Channel offers both Do-It-Yourself and professional installation security solutions.
 
Attrition
 
Account cancellation, otherwise referred to as subscriber attrition, has a direct impact on the number of subscribers that the Company services and on its financial results, including revenues, operating income and cash flow.  A portion of the subscriber base can be expected to cancel its service every year. Subscribers may choose not to renew or to terminate their contract for a variety of reasons, including relocation, cost, switching to a competitor's service and limited use by the subscriber and thus low perceived value.  The largest categories of canceled accounts relate to subscriber relocation or the inability to contact the subscriber.  The Company defines its attrition rate as the number of canceled accounts in a given period divided by the weighted average of number of subscribers for that period.  The Company considers an account canceled if payment from the subscriber is deemed uncollectible or if the subscriber cancels for various reasons.  If a subscriber relocates but continues its service, this is not a cancellation.  If the subscriber relocates, discontinues its service and a new subscriber takes over the original subscriber's service continuing the revenue stream, this is also not a cancellation.  The Company adjusts the number of canceled accounts by excluding those that are contractually guaranteed by its dealers.  The typical dealer contract provides that if a subscriber cancels in the first year of its contract, the dealer must either replace the canceled account with a new one or refund to the Company the cost paid to acquire the contract. To help ensure the dealer's obligation to the Company, the Company typically maintains a dealer funded holdback reserve ranging from 5-8% of subscriber accounts in the guarantee period.  In some cases, the amount of the holdback liability is less than actual attrition experience.

The table below presents subscriber data for the twelve months ended March 31, 2019 and 2018:
 
 
Twelve Months Ended
March 31,
 
 
2019
 
2018
Beginning balance of accounts
 
958,719

 
1,036,794

Accounts acquired
 
111,376

 
87,957

Accounts canceled
 
(164,221
)
 
(159,845
)
Canceled accounts guaranteed by dealer and other adjustments (a)
 
(4,681
)
 
(6,187
)
Ending balance of accounts
 
901,193

 
958,719

Monthly weighted average accounts
 
936,430

 
998,137

Attrition rate - Unit
 
17.5
%
 
16.0
%
Attrition rate - RMR (b)
 
17.0
%
 
13.9
%
 
(a)
Includes canceled accounts that are contractually guaranteed to be refunded from holdback.
(b)
The recurring monthly revenue ("RMR") of canceled accounts follows the same definition as subscriber unit attrition as noted above. RMR attrition is defined as the RMR of canceled accounts in a given period, adjusted for the impact of price increases or decreases in that period, divided by the weighted average of RMR for that period.

The unit attrition rate for the twelve months ended March 31, 2019 and 2018 was 17.5% and 16.0%, respectively. The RMR attrition rate for the twelve months ended March 31, 2019 and 2018 was 17.0% and 13.9%, respectively. Contributing to the increase in unit and RMR attrition were fewer customers under contract or in the dealer guarantee period for the twelve months ended March 31, 2019, as compared to the prior period, increased non-pay attrition as well as some impact from competition from new market entrants. The increase in the RMR attrition rate for the twelve months ended March 31, 2019 was also impacted by a less aggressive price increase strategy in the first quarter of 2019.

We analyze our attrition by classifying accounts into annual pools based on the year of acquisition.  We then track the number of accounts that cancel as a percentage of the initial number of accounts acquired for each pool for each year subsequent to its acquisition.  Based on the average cancellation rate across the pools, the Company's attrition rate is very low within the initial 12 month period after considering the accounts which were replaced or refunded by the dealers at no additional cost to the

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Company. Over the next few years of the subscriber account life, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool gradually increases and historically has peaked following the end of the initial contract term, which is typically three to five years.  Subsequent to the peak following the end of the initial contract term, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool declines.

Accounts Acquired
 
During the three months ended March 31, 2019 and 2018, the Company acquired 20,003 and 21,547 subscriber accounts, respectively, through our Dealer and Direct to Consumer Channels. The decrease in accounts acquired for the three months is due to year over year decline in accounts acquired from the Direct to Consumer Channel partially offset by year over year growth in accounts acquired from the Dealer Channel.

RMR acquired during the three months ended March 31, 2019 and 2018 was $964,000 and $987,000, respectively.

Strategic Initiatives

Given the recent decreases in the generation of new subscriber accounts in our Dealer Channel and trends in subscriber attrition, the Company has implemented several initiatives related to account growth, creation costs, attrition and margin improvements.

Account Growth

We believe that generating account growth at a reasonable cost is essential to scaling our business and generating stakeholder value. In recent years, acquisition of new subscriber accounts through our Dealer Channel has declined due to the attrition of large dealers, efforts to acquire new accounts from dealers at lower purchase prices, changes in consumer buying behavior and increased competition from technology, telecommunications and cable companies in the market. The Company currently has several initiatives in place to improve account growth, which include:

Enhancing our brand recognition with consumers, which was recently bolstered by the rebranding to Brinks Home Security,
Recruiting high quality dealers into the Monitronics Authorized Dealer Program,
Assisting new and existing dealers with training and marketing initiatives to increase productivity,
Acquiring bulk accounts to supplement account generation,
Offering third party equipment financing to consumers which is expected to assist in driving account growth at lower creation costs, and
Growing the Direct to Consumer Channel under the Brinks Home Security brand.

Creation Costs

We also consider the management of creation costs to be a key driver in improving the Company's financial results, as lower creation costs would improve the Company's profitability and cash flows. The initiatives related to managing creation costs include:

Growing the Direct to Consumer Channel, including further leveraging our partnership with Nest Labs, Inc., with expected lower creation cost multiples,
Expanding the use and availability of third party financing to all of our sales channels, which will drive down net creation costs, and
Negotiating lower subscriber account purchase price multiples in our Dealer Channel.

Attrition

While we have also experienced higher subscriber attrition rates in the past few years, we have continued to develop our efforts to manage subscriber attrition, which we believe will help drive increases in our subscriber base and stakeholder value. The Company currently has several initiatives in place to reduce subscriber attrition, which include:

Maintaining high customer service levels,
Effectively managing the credit quality of new customers,
Using predictive modeling to identify subscribers with a higher risk of cancellation and engaging with these subscribers to obtain contract extensions on terms favorable to the Company, and

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Implementing effective pricing strategies.

Margin Improvement

We have also adopted initiatives to reduce expenses and improve our financial results, which include:

Reducing our operating costs by right sizing the cost structure to the business and leveraging our scale,
Implementing more sophisticated purchasing techniques, and
Increasing use of automation.

While the uncertainties related to the successful implementation of the foregoing initiatives could impact the Company's ability to achieve net profitability and positive cash flows in the near term, we believe they will position the Company to improve its operating performance, increase cash flows and create stakeholder value over the long-term.

Adjusted EBITDA

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


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Results of Operations
 
The following table sets forth selected data from the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the periods indicated (dollar amounts in thousands).
 
Three Months Ended 
 March 31,
 
2019
 
2018
Net revenue
$
129,606

 
133,753

Cost of services
26,764

 
32,701

Selling, general and administrative, including stock-based and long-term incentive compensation
31,222

 
32,014

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
49,145

 
54,411

Interest expense
37,433

 
36,873

Income tax expense
671

 
1,346

Net loss
(31,770
)
 
(26,207
)
 
 
 
 
Adjusted EBITDA (a)
$
73,739

 
70,039

Adjusted EBITDA as a percentage of Net revenue
56.9
%
 
52.4
%
 
 
 
 
Expensed Subscriber acquisition costs, net
 
 
 
Gross subscriber acquisition costs
$
7,315

 
11,690

Revenue associated with subscriber acquisition costs
(1,703
)
 
(1,512
)
Expensed Subscriber acquisition costs, net
$
5,612

 
10,178

 
(a) 
See reconciliation of Net loss to Adjusted EBITDA below.
 
Net revenue.  Net revenue decreased $4,147,000, or 3.1%, for the three months ended March 31, 2019, as compared to the corresponding prior year period. The decrease in net revenue is attributable to the lower average number of subscribers in the first quarter of 2019. This decrease was partially offset by an increase in average RMR per subscriber due to certain price increases enacted during the past twelve months. Average RMR per subscriber increased from $44.76 as of March 31, 2018 to $45.28 as of March 31, 2019. In addition, the Company recognized a $1,693,000 decrease in revenue for the three months ended March 31, 2019, as compared to a $325,000 increase in revenue for the three months ended March 31, 2018 related to changes in Topic 606 contract assets.
 
Cost of services.  Cost of services decreased $5,937,000, or 18.2%, for the three months ended March 31, 2019, as compared to the corresponding prior year period. The decrease for the three months ended March 31, 2019 is primarily attributable to decreased field service costs due to a lower volume of retention and move jobs being completed and a decrease in expensed subscriber acquisition costs. Subscriber acquisition costs, which include expensed equipment and labor costs associated with the creation of new subscribers, decreased to $1,794,000 for the three months ended March 31, 2019, as compared to $3,610,000 for the three months ended March 31, 2018. Cost of services as a percent of net revenue decreased from 24.4% for the three months ended March 31, 2018 to 20.7% for the three months ended March 31, 2019.
 
Selling, general and administrative.  Selling, general and administrative costs ("SG&A") decreased $792,000, or 2.5%, for the three months ended March 31, 2019, as compared to the corresponding prior year period. The decrease is primarily attributable to reduced subscriber acquisition costs in SG&A associated with the creation of new subscribers. Subscriber acquisition costs decreased to $5,521,000 for the three months ended March 31, 2019, as compared to $8,080,000 for the three months ended March 31, 2018. Additionally, there was $892,000 of rebranding expense that was recognized in the three months ended March 31, 2018 with no corresponding costs incurred in the three months ended March 31, 2019. These decreases are partially offset by increased consulting fees on integration / implementation of company initiatives. Other increases in SG&A contributing to the overall change period over period include deferred and incentive-based compensation costs and Topic 606 contract asset impairment costs. SG&A as a percent of net revenue increased from 23.9% for the three months ended March 31, 2018 to 24.1% for the three months ended March 31, 2019.
 
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets.  Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets decreased $5,266,000, or 9.7%, for the three months ended March 31, 2019, as compared to the corresponding prior year period. The decrease is related to a lower number

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of subscriber accounts purchased in the last twelve months ended March 31, 2019 compared to the prior corresponding period as well as the timing of amortization of subscriber accounts acquired prior to the first quarter of 2018, which have a lower rate of amortization in 2019 based on the applicable double declining balance amortization method.
 
Interest expense.  Interest expense increased $560,000, or 1.5%, for the three months ended March 31, 2019, as compared to the corresponding prior year period. The increase in interest expense is attributable to increased interest costs on the Credit Facility revolver due to a higher outstanding balance at March 31, 2019, and higher interest rates in the current year, as compared to the corresponding prior year period.
 
Income tax expense.  The Company had pre-tax loss of $31,099,000 and income tax expense of $671,000 for the three months ended March 31, 2019.  The Company had pre-tax loss of $24,861,000 and income tax expense of $1,346,000 for the three months ended March 31, 2018. Income tax expense for the three months ended March 31, 2019 is attributable to the Company's state tax expense incurred from Texas margin tax. Income tax expense for the three months ended March 31, 2018 is attributable to the Company's state tax expense incurred from Texas margin tax and the deferred tax impact from amortization of deductible goodwill related to the Company's business acquisitions.

Net loss. The Company had net loss of $31,770,000 for the three months ended March 31, 2019, as compared to $26,207,000 for the three months ended March 31, 2018. The increase in net loss is primarily attributable to the unrealized loss on derivative financial instruments and refinancing expense, partially offset by a decrease in operating expenses, of which the major components are discussed above.

Adjusted EBITDA. The following table provides a reconciliation of Net loss to total Adjusted EBITDA for the periods indicated (amounts in thousands):
 
Three Months Ended 
 March 31,
 
2019
 
2018
Net loss
$
(31,770
)
 
(26,207
)
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
49,145

 
54,411

Depreciation
3,154

 
2,615

Stock-based compensation
189

 
47

Long-term incentive compensation
286

 

LiveWatch acquisition contingent bonus charges
63

 
62

Rebranding marketing program

 
892

Integration / implementation of company initiatives
1,581

 

Interest expense
37,433

 
36,873

Unrealized loss on derivative financial instruments
7,773

 

Refinancing expense
5,214

 

Income tax expense
671

 
1,346

Adjusted EBITDA
$
73,739

 
70,039


Adjusted EBITDA increased $3,700,000, or 5.3%, for the three months ended