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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

 

FORM 10-K

 

x

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

 

For the fiscal year ended December 31, 2011

 

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 001-34176

 

ASCENT CAPITAL GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

 

State of Delaware

 

26-2735737

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

 

 

5251 DTC Parkway, Suite 1000

 

 

Greenwood Village, Colorado

 

80111

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (303) 628-5600

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class

 

Name of exchange on which registered

 

 

Series A Common Stock, par value $.01 per share

 

The Nasdaq Stock Market LLC

 

 

Securities registered pursuant to Section 12(g) of the Act:

Series B Common Stock, par value $.01 per share

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.  Yes  x  No  o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.  Yes  o  No  x

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o
(Do not check if a smaller reporting company).

 

Smaller reporting company  o

 

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

 

The aggregate market value of the voting stock held by nonaffiliates of Ascent Capital Group, Inc. computed by reference to the last sales price of such stock, as of the closing of trading on June 30, 2011, was approximately $708 million.

 

The number of shares outstanding of Ascent Capital Group, Inc.’s common stock as of February 17, 2012 was:

Series A common stock 13,470,323 shares; and Series B common stock 739,894 shares.

 

 

 



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Documents Incorporated by Reference

 

The Registrant’s definitive proxy statement for its 2012 Annual Meeting of Stockholders is hereby incorporated by reference into Part III of this Annual Report on Form 10-K.

 

ASCENT CAPITAL GROUP, INC.

2011 ANNUAL REPORT ON FORM 10-K

Table of Contents

 

 

 

Page

 

 

 

 

Part I

 

 

 

 

Item 1.

Business

3

Item 1A.

Risk Factors

12

Item 1B.

Unresolved Staff Comments

22

Item 2.

Properties

22

Item 3.

Legal Proceedings

22

Item 4.

Mining Safety Disclosures

22

 

 

 

 

Part II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

23

Item 6.

Selected Financial Data

25

Item 7.

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

26

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 8.

Financial Statements and Supplementary Data

36

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

36

Item 9A.

Controls and Procedures

36

Item 9B.

Other Information

37

 

 

 

 

Part III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

71

Item 11.

Executive Compensation

71

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

71

Item 13.

Certain Relationships and Related Transactions, and Director Independence

71

Item 14.

Principal Accounting Fees and Services

71

 

 

 

 

Part IV

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

71

 

 

 

 

Signatures

74

 

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ITEM 1.   BUSINESS

 

(a)  General Development of Business On July 7, 2011, Ascent Media Corporation merged with its direct wholly owned subsidiary, Ascent Capital Group, Inc. (“Ascent Capital” or the “Company”), for the purpose of changing its name to Ascent Capital Group, Inc. Ascent Capital was incorporated in the state of Delaware on May 29, 2008 as a wholly-owned subsidiary of Discovery Holding Company (“DHC”). On September 17, 2008, DHC completed the spin-off of Ascent Capital to DHC’s shareholders and we became an independent, publicly traded company. In the spin-off, each holder of DHC common stock received 0.05 of a share of our Series A common stock for each share of DHC Series A common stock held and 0.05 of a share of our Series B common stock for each share of DHC Series B common stock held. 13,401,886 shares of our Series A common stock and 659,732 shares of our Series B common stock were issued in the spin-off, which was intended to qualify as a tax-free transaction.

 

At December 31, 2011, our assets consist primarily of our wholly-owned operating subsidiary, Monitronics International, Inc. (“Monitronics”), investments in marketable securities, real estate properties and cash and cash equivalents. At December 31, 2011, we had investments in marketable securities and cash and cash equivalents, on a consolidated basis, of $40,377,000 and $183,558,000, respectively.

 

During 2010 and the beginning of 2011, there were substantial changes in our operations.  Historically, our principal asset was our wholly-owned operating subsidiary Ascent Media Group, LLC (“AMG”).  AMG was primarily engaged in the business of providing content distribution and creative services to the media and entertainment industries.  The businesses of AMG were organized into two operating segments: businesses that provide content management and delivery services (“Content Services”), and businesses that provide creative services (“Creative Services”). The Content Services segment was in turn divided into three business units: (i) the content distribution business unit (“Content Distribution”), (ii) the media management services business unit (“Media Services”) and (iii) the systems integration business unit (“Systems Integration” or “SI”).

 

On December 31, 2010, pursuant to a definitive agreement with Deluxe Entertainment Services Group Inc. (“Deluxe”) dated November 24, 2010, the Company completed the sale of 100% of its Creative Services business unit and 100% of its Media Services business unit (which is referred to collectively as “Creative/Media”), for an aggregate purchase price of $69 million in cash. Historically, the creative services business unit was a separate reportable segment and the media services business unit was included in the Content Services group reportable segment. The Company recorded a pre-tax loss on the sale of $27,110,000 and $7,587,000 of related income tax benefit for the year ended December 31, 2010. For further information regarding this transaction, see the MD&A section of this Annual Report. The Company has accounted for the disposition of the Creative/Media business as discontinued operations in the consolidated financial statements for all periods presented.

 

On December 17, 2010, we acquired 100% of Monitronics, a leading national security alarm monitoring company. The transaction value comprised $397 million of cash consideration and we also assumed $795 million of net debt (which we define as the principal amount of such debt less Monitronics cash) of Monitronics.  For more information about the Monitronics business, please see “—Narrative Description of the Business—Monitronics International, Inc.” below. The fiscal year 2010 financial statements of the Company included in this Annual Report on Form 10-K include the financial position of Monitronics in the Company’s consolidated balance sheet as at December 31, 2010, and the results of operations of Monitronics on a consolidated basis for the period from December 17, 2010 through December 31, 2010.

 

In February 2010, AMG consummated the sale of the assets and operations of its Chiswick Park facility in the United Kingdom, which was previously included in the Content Services group, to Discovery Communications, Inc., for net cash proceeds of approximately $35 million.  AMG recognized a pre-tax gain of approximately $25.5 million from the sale.  For further information regarding this transaction, see the MD&A section of this Annual Report.  The results of operations of the Chiswick Park facility have been treated as discontinued operations in the consolidated financial statements for all periods presented in this Annual Report.

 

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Recent Developments

 

As of June 30, 2011, the Company shut down the operations of the Systems Integration business.  In connection with ceasing its operations, the Company recorded exit costs of $1,119,000 related to employee severance.  For further information regarding this transaction, see the MD&A section of this Annual Report.  The results of operations of Systems Integration have been treated as discontinued operations in the consolidated financial statements for all periods presented in this Annual Report.

 

On February 28, 2011, we completed the sale of 100% of the Content Distribution business to Encompass Digital Media, Inc. and its wholly owned subsidiary (together “Encompass”).  The Company received cash proceeds of approximately $104 million and recorded a pre-tax gain of approximately $66.1 million and related income tax expense of approximately $2.9 million.  For further information regarding this transaction, see the MD&A section of this Annual Report.  The results of operations of Content Distribution have been treated as discontinued operations in the consolidated financial statements for all periods presented in this Annual Report.

 

* * * * *

 

Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, integration of acquired businesses, new service offerings, the availability of debt refinancing, financial prospects and anticipated sources and uses of capital. In particular, statements under Item 1. “Business,” Item 1A. “Risk Factors”, Item 2. “Properties,” Item 3. “Legal Proceedings,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” contain forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

 

Factors relating to the Company and its consolidated subsidiaries, as a whole:

 

·                  general economic and business conditions and industry trends;

·                  the regulatory and competitive environment of the industries in which we operate;

·                  uncertainties inherent in the development of new business lines and business strategies, including market acceptance;

·                  integration of acquired businesses;

·                  rapid technological changes;

·                  the availability and terms of capital;

·                  the outcome of any pending or threatened litigation;

·                  availability of qualified personnel;

·                  changes in the nature of key strategic relationships; and

·                  competitor and overall market response to our products and services including acceptance of the pricing of such products and services.

 

Factors relating to the business of Monitronics:

 

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

·                  Monitronics’ anticipated growth strategies;

·                  Monitronics’ ability to acquire and integrate additional accounts, including competition for dealers with other alarm monitoring companies;

·                  the operating performance of Monitronics’ network of independent alarm systems dealers;

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

·                  changes in Monitronics’ expected rate of subscriber attrition;

·                  Monitronics’ ability to continue to control costs and maintain quality;

·                  the impact of “false alarm” ordinances and other potential changes in regulations or standards;

 

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·                  changes in technology that may make Monitronics’ services less attractive or obsolete, or require significant expenditures to upgrade;

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

·                  potential liability for failure to respond adequately to alarm activations;

·                  the potential for system failure as a result of a catastrophic event or natural disaster, including potential failure of back-up arrangements;

·                  the trend away from the use of public switched telephone network lines;

·                  the ability of Monitronics to obtain additional funds to grow its business, including the terms of any additional financing with respect thereto; and

·                  the ability of Monitronics to refinance its existing debt on attractive terms, or at all.

 

These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Annual 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. When considering such forward-looking statements, you should keep in mind the factors described in Item 1A, “Risk Factors” and other cautionary statements contained in this Annual Report. Such risk factors and statements describe circumstances which could cause actual results to differ materially from those contained in any forward-looking statement.

 

(b)  Financial Information About Reportable Segments

 

We identify our reportable segments based on financial information reviewed by our chief operating decision maker. We report financial information for our consolidated business segments that represent more than 10% of our consolidated revenue or earnings before income taxes.

 

Based on the foregoing criteria, and due to the sale of our Content Distribution business during 2011, we only have one reportable segment as of December 31, 2011.

 

(c)  Narrative Description of Business

 

Ascent Capital Group, Inc., a Delaware corporation, is a holding company whose principal assets consisted of our wholly owned operating subsidiary, Monitronics International, Inc. (“Monitronics”), investments in marketable securities, real estate properties, and cash and cash equivalents as of December 31, 2011.  Our principal executive office is located at 5251 DTC Parkway, Suite 1000, Greenwood Village, Colorado 80111, telephone number (303) 628-5600.  The results of operations of our former Creative/Media business, Content Distribution business, and Systems Integration business have been treated as discontinued operations in the consolidated financial statements for all periods presented in this Annual Report.

 

We are also currently exploring opportunities to dispose of or monetize our owned real property, which is not required for our operations.

 

Monitronics International, Inc.

 

Through our wholly-owned subsidiary, Monitronics, we are primarily engaged in the business of providing security alarm monitoring services: monitoring signals from burglaries, fires, medical alerts, and other events, as well as, providing customer service and technical support.  Monitronics is the third largest alarm monitoring company in the United States, with over 700,000 subscribers under contract. With subscribers in all 50 states, the District of Columbia, Puerto Rico, and Canada, Monitronics provides a wide range of mainly residential security services including hands-free two-way interactive voice communication with the monitoring center, cellular options, and an interactive service option which allows the customer to control their security system remotely using a computer or smart phone. Monitronics was incorporated in 1994 and is headquartered in Dallas, Texas.

 

Operations

 

Unlike many of its national competitors, Monitronics outsources the sales, installation and field service functions to its dealers. By outsourcing the low margin, high fixed-cost elements of its business to a large network of independent

 

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service providers, Monitronics is able to allocate capital to growing its revenue-generating account base rather than to local offices or depreciating hard assets.

 

During 2011, Monitronics purchased alarm monitoring contracts from more than 375 dealers. Monitronics generally enters into alarm monitoring purchase agreements with dealers only after a thorough review of the dealer’s qualifications, licensing and financial situation. Once a dealer has qualified, Monitronics generally obtains rights of first refusal to purchase all accounts sold by that dealer for a period of three years.

 

Revenue is generated primarily from fees charged to customers under alarm monitoring contracts.  The initial contract term is typically three years, with automatic renewal on a month-to-month basis.  Monitronics generates incremental revenue from retail customers by providing additional services, such as maintenance.  Monitronics also generates revenue from fees charged to other security alarm companies for monitoring their accounts on a wholesale basis.

 

Monitronics’ authorized independent dealers are typically single-location businesses that sell and install alarm systems.  These dealers focus on the sale and installation of security systems and generally do not retain the monitoring contracts for their customers and do not have their own facilities to monitor such systems due to the large upfront investment required to create the account and build a monitoring station.  They also do not have the scale required to operate a monitoring station efficiently.  These dealers typically sell the contracts to companies who have monitoring stations and outsource the monitoring function for any accounts they retain. We have the ability to monitor signals from nearly all types of residential security systems. We generally enter into exclusive contracts with dealers under which the dealers sell and install security systems and we have a right of first refusal to purchase the associated alarm monitoring contracts. We seek to attract dealers from throughout the U.S. rather than focusing on specific local or regional markets in order to maximize revenues.  In evaluating the quality of potential participants for our dealer program, Monitronics conducts an internal due diligence review and analysis of each dealer using information obtained from third party sources.  This process includes:

 

·                  lien searches and background checks on the dealer; and

·                  a review of the dealer’s licensing status and creditworthiness.

 

Once a dealer is approved and signed as a Monitronics Authorized Dealer, the primary steps in creating an account are as follows:

 

1.               Dealer sells an alarm system to a homeowner or small business.

2.               Dealer installs the alarm system, which is monitored by Monitronics central monitoring center, trains the customer on its use, and receives a signed three to five year contract for monitoring services.

3.               Dealer presents the account to Monitronics for purchase.

4.               Monitronics performs diligence on the alarm monitoring account to validate quality.

5.               Monitronics acquires the customer contract at a formula-based price.

6.               Customer becomes a Monitronics account.

7.               All future billing and customer service is conducted through Monitronics.

 

Monitronics believes its ability to maximize its return on invested capital is largely dependent on the quality of the accounts purchased.  The company conducts a review of each account to be purchased from the dealer.  This process typically includes:

 

·                  Subscriber credit score reviews;

·                  Telephone surveys to confirm satisfaction with the installation and security systems;

·                  An individual review of each alarm monitoring contract;

·                  Confirmation that the customer is a homeowner; and

·                  Confirmation that each security system has been programmed to Monitronics’ central monitoring station prior to purchase.

 

Monitronics generally pays its dealers a purchase price for each new customer account based on a multiple of the account’s monthly recurring revenue. The dealer contract generally provides that, if a customer account acquired by Monitronics is terminated within the first 12 months, the dealer must replace the account or refund the purchase price

 

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paid by Monitronics. To secure the dealer’s obligation, Monitronics typically holds back a percentage of the purchase price for a 12 month period.

 

Monitronics believes that this process, which includes both clearly defined customer account standards and a consistently applied due diligence process, contributes significantly to the high quality of its subscriber base. For each of its last seven calendar years, the average credit score of accounts purchased by Monitronics was in excess of 700 on the FICO scale.

 

Approximately 94% of Monitronics subscribers are residential homeowners and the remainder are small commercial accounts. Monitronics believes by focusing on residential homeowners rather than renters it can reduce attrition, because homeowners relocate less frequently than renters.

 

Monitronics provides monitoring services as well as billing and 24-hour telephone support through its central monitoring station, located in Dallas, Texas. This facility is Underwriters Laboratories (“UL”) listed.  To obtain and maintain a UL listing, an alarm monitoring center must be located in a building meeting UL’s structural requirements, have back-up and uninterruptable power supplies, have secure telephone lines and maintain redundant computer systems.  UL conducts periodic reviews of alarm monitoring centers to ensure compliance with their requirements.  Monitronics’ central monitoring station in Dallas has also received the Central Station Alarm Association’s (“CSAA”) prestigious Five Diamond Certification. According to the CSAA, less than 4% of all central monitoring stations in the U.S. have attained Five Diamond Certified status. Monitronics also has a back-up facility located in McKinney, Texas that is capable of supporting monitoring, billing and customer service operations in the event of a disruption at its primary monitoring center. A call center in Mexico provides telephone support for Spanish-speaking subscribers.

 

Monitronics’ telephone systems utilize high-capacity, high-quality, digital circuits backed up by conventional telephone lines. When an alarm signal is received at the monitoring facility, it is routed to an operator. At the same time, information concerning the subscriber whose alarm has been activated and the nature and location of the alarm signal are delivered to the operator’s computer terminal. The operator is then responsible for following standard procedures to contact the subscriber or take other appropriate action, including, if the situation requires, contacting local emergency service providers.  Monitronics never dispatches its own personnel to the subscriber’s premises.  If a subscriber lives in an area where the emergency service provider will not respond without verification of an actual emergency, Monitronics will contract with an independent third party responder if available in that area.

 

Monitronics seeks to increase subscriber satisfaction and retention by carefully managing customer and technical service. The customer service center handles all general inquiries from subscribers, including those related to subscriber information changes, basic alarm troubleshooting, alarm verification, technical service requests and requests to enhance existing services. Monitronics has a proprietary centralized information system that enables it to satisfy over 85% of subscriber technical inquiries over the telephone, without dispatching a service technician. If the customer requires field service, Monitronics relies on its nationwide network of over 550 service dealers to provide such service on a time and materials basis.  Monitronics closely monitors service dealer performance with customer satisfaction forms, follow-up quality assurance calls and other performance metrics.

 

Monitronics also provides central station monitoring services on a wholesale basis for other independent alarm companies that do not have the capability to monitor systems for their customers.

 

Intellectual Property

 

The Company has a registered service mark for the Monitronics name and a service mark for the Monitronics logo. It owns certain proprietary software applications that are used to provide services to its dealers and subscribers. Monitronics does not hold any patents or other intellectual property rights on its proprietary software applications.

 

Sales and Marketing

 

General.  We believe Monitronics’ nationwide network of authorized dealers is the most effective way for Monitronics to market alarm systems.  Locally-based dealers are often an integral part of the communities they serve and understand the local market and how best to satisfy local needs. By combining the dealer’s local presence and

 

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reputation with Monitronics’ high quality service and support, Monitronics is able to cost-effectively provide local services and take advantage of economies of scale where appropriate.

 

Agreements with dealers provide for the purchase of the dealer’s subscriber accounts on an ongoing basis. The dealers install the alarm system and arrange for subscribers to enter into a multi-year alarm monitoring agreement in a form acceptable to Monitronics. The dealer then submits this monitoring agreement for Monitronics’ due diligence review and purchase.

 

Dealer Network Development.  Monitronics remains focused on expanding its network of independent authorized dealers. To do so, Monitronics has established a dealer program that provides participating dealers with a variety of support services to assist them as they grow their businesses. Authorized dealers may use the Monitronics brand name in their sales and marketing activities and on the products they sell and install. Monitronics authorized dealers benefit from their affiliation with Monitronics and its national reputation for high customer satisfaction, as well as the support they receive from Monitronics. Authorized dealers benefit by generating operating capital and profits from the sale of their accounts to Monitronics.  Monitronics also provides authorized dealers with the opportunity to obtain discounts on alarm systems and other equipment purchased by such dealers from original equipment manufacturers, including alarm systems labeled with the Monitronics logo.  Monitronics also makes available sales, business and technical training, sales literature, co-branded marketing materials, sales leads and management support to its authorized dealers.  In most cases these services and cost savings would not be available to security alarm dealers on an individual basis.

 

Currently, Monitronics employs sales representatives to promote its authorized dealer program, find account acquisition opportunities and sell Monitronics monitoring services. Monitronics targets independent alarm dealers across the U.S. that can benefit from the Monitronics dealer program services and can generate high quality monitoring customers for Monitronics. Monitronics uses a variety of marketing techniques to promote the dealer program and related services. These activities include direct mail, trade magazine advertising, trade shows, internet web site marketing, publicity and telemarketing.

 

Dealer Marketing Support.  Monitronics offers its authorized dealers an extensive marketing support program. Monitronics focuses on developing professionally designed sales and marketing materials that will help dealers market alarm systems and monitoring services with maximum effectiveness. Materials offered to authorized dealers include:

 

·                  sales brochures and flyers;

·                  yard signs;

·                  window decals;

·                  customer forms and agreements;

·                  sales presentation binders;

·                  door hangers;

·                  lead boxes;

·                  vehicle graphics;

·                  trade show booths; and

·                  clothing bearing the Monitronics brand name.

 

These materials are made available to dealers at prices that management believes would not be available to dealers on an individual basis.

 

Monitronics’ sales materials promote both the Monitronics brand and the dealer’s status as a Monitronics authorized dealer. Dealers often sell and install alarm systems which display the Monitronics logo and telephone number, which further strengthens consumer recognition of their status as Monitronics authorized dealers. Management believes that the dealers’ use of the Monitronics brand to promote their affiliation with one of the nation’s largest alarm monitoring companies boosts the dealers’ credibility and reputation in their local markets and also assists in supporting their sales success.

 

Customer Integration and Marketing.  The customer’s awareness and identification of the Monitronics brand as the monitoring service provider is further supported by the distribution of Monitronics-branded materials by the dealer to the customer at the point of sale. Such materials may include Monitronics yard signs, brochures, instruction cards, and other promotional items. Monitronics’ dealers typically introduce customers to Monitronics in the home when describing Monitronics’ central monitoring station.

 

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Following the purchase of a monitoring agreement from a dealer, the customer is sent a brochure notifying them that Monitronics has assumed responsibility for all their monitoring and customer service needs.  All materials focus on the Monitronics brand and the role of Monitronics as the single source of support for the customer.

 

Negotiated Account Acquisitions.  In addition to the development of Monitronics’ dealer network, Monitronics occasionally acquires alarm monitoring accounts from other alarm companies in bulk on a negotiated basis. Monitronics’ management has extensive experience in identifying potential opportunities, negotiating account acquisitions and performing thorough due diligence, which helps facilitate execution of new acquisitions in a timely manner.

 

Strategy

 

Corporate Strategy

 

Ascent Capital actively seeks opportunities to leverage our strong capital position through strategic acquisitions in the security alarm monitoring industry as well as acquisitions in other industries.  As part of this strategy, we divested the businesses that were historically operated by our former operating subsidiary, AMG, and acquired Monitronics, a subscription-based business that delivers solid, predictable revenue and cash flow and has what we believe is a scalable and leveragable business model.

 

We continue to evaluate acquisition opportunities that we believe offer the opportunity for attractive returns on equity. In evaluating potential acquisition candidates we consider various factors, including among other things:

 

·                  financial characteristics, including recurring revenue streams and free cash flow;

·                  growth potential;

·                  potential return on investment incorporating appropriate financial leverage, including the target’s existing indebtedness and opportunities to restructure some or all of that indebtedness;

·                  risk profile of business; and

·                  the presence of a strong management team.

 

We consider acquisitions utilizing cash, leverage and potentially Ascent Capital stock. In addition to acquisitions, we consider majority ownership positions, minority equity investments and, in appropriate circumstances, senior debt investments that we believe provide either a path to full ownership or control, the possibility for high returns on investment, or significant strategic benefits.

 

Our acquisition strategy entails risk. While our preference is to build our presence in the security alarm monitoring industry through acquisitions, we will also consider potential acquisitions in other industries, which could result in further changes in our operations from those historically conducted by us.  Please see “Risk Factors” below.

 

Monitronics Strategy

 

Monitronics’ goal is to maximize return on invested capital, which we believe can be achieved by pursuing the following strategies:

 

Maximize Subscriber Retention. We seek to maximize subscriber retention by continuing to acquire high quality accounts and to increase the average life of an account through the following initiatives:

 

·                  Maintain the high quality of our subscriber base by continuing to implement our highly disciplined account acquisition program;

·                  Continue to incentivize our dealers to sell us only high-quality accounts through quality incentives built into the purchase price and by having a performance guarantee on substantially all dealer accounts;

·                  Provide superior customer service on the telephone and in the field; and

·                  Actively identify subscribers who are relocating, the number one reason for account cancellations, and target retention of such subscribers.

 

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Maximize Economics of Business Model. Due to the scalability of our operations and the low fixed and variable costs inherent in our cost structure, we believe our Adjusted EBITDA margins may increase as these costs are spread over larger recurring revenue streams. We believe our cash flows may also benefit from our continued efforts to increase subscriber retention rates and reduce response times, call duration and false alarms.  As used in this annual report, the term “Adjusted EBITDA” means earnings before interest, taxes, depreciation, amortization, realized and unrealized loss on derivatives, restructuring charges, and stock-based and other non-cash long term incentive compensation, and “Adjusted EBITDA margin” means Adjusted EBITDA as a percentage of revenue.

 

Expand Our Network of Dealers. We plan to continue to expand our dealer network by targeting dealers that can benefit from our dealer program services and that can generate high quality subscribers for us. We believe we are an attractive partner for dealers for the following reasons:

 

·                  We provide our dealers with a full range of services designed to assist them in all aspects of their business, including sales leads, sales training, technical training, comprehensive on-line account access, detailed weekly account summaries, sales support materials and discounts on security system hardware purchased through our strategic alliances with security system manufacturers;

·                  Individual dealers retain local name recognition and responsibility for day-to-day sales and installation efforts, thereby supporting the entrepreneurial culture at the dealer level and allowing us to capitalize on the considerable local market knowledge, goodwill and name recognition of our dealers; and

·                  We are a reliable purchaser of accounts at competitive rates.

 

For a description of the risks associated with the foregoing strategies, and with Ascent Capital’s business in general, see “Risk Factors” section beginning on page 12.

 

Industry; Competition

 

The security alarm industry is highly competitive and fragmented, and competitors include four other major firms with nationwide coverage and numerous smaller providers with regional or local coverage.  The four other security alarm companies with coverage across the United States are as follows:

 

·                  ADT Security Services, Inc., a subsidiary of Tyco International, Ltd (“ADT”);

·                  Protection One, Inc.;

·                  Stanley Security Solutions, a subsidiary of The Stanley Works; and

·                  Vivint, Inc.

 

The security alarm industry has remained highly competitive and fragmented over time without any material change to market concentration.  Competition in the security alarm industry is based primarily on reputation for quality of service, market visibility, services offered, price and the ability to identify subscriber accounts. We believe we compete effectively with other national, regional and local alarm monitoring companies due to our reputation for reliable monitoring, customer and technical services, the quality of services, and our low cost structure.  The dynamics of the security alarm industry often favor larger alarm monitoring companies with a nationwide focus that have greater capital and benefit from economies of scale in technology, advertising and other expenditures.  Some of these larger alarm monitoring companies have also adopted, in whole or in part, a dealer program similar to that of Monitronics.  In these instances, Monitronics must also compete with these programs in recruiting dealers.  We believe we compete effectively with other dealer programs due to our competitive account purchase terms and the quality of our dealer support services.  The alarm monitoring companies that compete with Monitronics for alarm system dealers in this manner include ADT, which is significantly larger and has more capital.

 

Seasonality

 

Monitronics’ operations are subject to a certain level of seasonality.  Since more household moves take place during the second and third calendar quarters of each year, Monitronics’ disconnect rate and expenses related to retaining customers are typically higher in those calendar quarters than in the first and fourth quarters.  There is also a

 

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slight seasonal effect resulting in higher new customer volume and related cash expenditures incurred in investment in new subscribers in the second and third quarters.

 

Regulatory Matters

 

Monitronics’ operations are subject to a variety of laws, regulations and licensing requirements of federal, state and local authorities. In certain jurisdictions, Monitronics is required to obtain licenses or permits, to comply with standards governing employee selection and training and to meet certain standards in the conduct of its business.  The security industry is also subject to requirements imposed by various insurance, approval, listing and standards organizations. Depending upon the type of subscriber served, the type of security service provided and the requirements of the applicable local governmental jurisdiction, adherence to the requirements and standards of such organizations is mandatory in some instances and voluntary in others.

 

Although local governments routinely respond to panic and smoke/fire alarms, there are an increasing number of local governmental authorities that have adopted or are considering various measures aimed at reducing the number of false burglar alarms. Such measures include:

 

·                  subjecting alarm monitoring companies to fines or penalties for false alarms;

·                  imposing fines on alarm subscribers for false alarms;

·                  imposing limitations on the number of times the police will respond to false alarms at a particular location;

·                  requiring additional verification of intrusion alarms by calling two different phone numbers prior to dispatch (“Enhanced Call Verification”); and

·                  requiring visual verification of an actual emergency at the premise before the police will respond to an alarm signal.

 

Enhanced Call Verification has been implemented as standard policy by Monitronics.  See “Operations—Monitoring Services.”

 

Monitronics’ alarm monitoring business utilizes telephone lines, internet connections, cellular networks and radio frequencies to transmit alarm signals. The cost of telephone lines, and the type of equipment which may be used in telephone line transmission, are currently regulated by both federal and state governments. The operation and utilization of cellular and radio frequencies are regulated by the Federal Communications Commission and state public utility commissions.

 

Employees

 

At December 31, 2011, Ascent Capital, together with its subsidiaries, has approximately 689 full-time employees and an additional 33 employees that are employed on a part-time or freelance basis, all of which are located in the United States.

 

(c)   Financial Information About Geographic Areas

 

Monitronics performs monitoring services for subscribers located in all 50 states, the District of Columbia, Puerto Rico, and Canada.

 

(d)   Available Information

 

All of our filings with the Securities and Exchange Commission (the “SEC”), including our Form 10-Ks, Form 10-Qs and Form 8-Ks, as well as amendments to such filings are available on our Internet website free of charge generally within 24 hours after we file such material with the SEC. Our website address is www.ascentcapitalgroupinc.com.

 

Our corporate governance guidelines, code of business conduct and ethics, compensation committee charter, nominating and corporate governance committee charter, and audit committee charter are available on our website. In addition, we will provide a copy of any of these documents, free of charge, to any shareholder who calls or submits a

 

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request in writing to Investor Relations, Ascent Capital Group, Inc., 5251 DTC Parkway, Suite 1000, Greenwood Village, Colorado 80111.  Telephone No. (303) 352-2039.

 

The information contained on our website is not incorporated by reference herein.

 

ITEM 1A.  RISK FACTORS

 

In addition to the other information contained in this Annual Report on Form 10-K, you should consider the following risk factors in evaluating our results of operations, financial condition, business and operations or an investment in our stock.

 

Although we describe below and elsewhere in this Annual Report on Form 10-K the risks we consider to be the most material, there may be other unknown or unpredictable economic, business, competitive, regulatory or other factors that also could have material adverse effects on our results of operations, financial condition, business or operations in the future. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

 

If any of the events described below, individually or in combination, were to occur, our businesses, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected.

 

Factors Relating to Our Corporate History and Strategy

 

We have substantially changed the businesses in which we operate. Accordingly, it may be difficult to evaluate our performance based on our operating history. Our financial statements for periods prior to February 2011 include the financial position and results of operations of the business units formerly operated by AMG. We completed the sale of all of these businesses on or before February 28, 2011 and shut-down the last of these businesses in June 2011.  The businesses of AMG, accordingly, are reflected as discontinued operations in our financial statements. We acquired our current principal operating subsidiary, Monitronics, on December 17, 2010.  Hence, the results of operations of Monitronics are only included in our consolidated financial statements for the year ended December 31, 2010 with respect to the stub period December 17, 2010 through December 31, 2010, and for the year ended December 31, 2011.  We had previously included in our Current Report on Form 8-K/A filed December 28, 2010 and Current Report on Form 8-K filed October 14, 2011, the following:

 

·        the audited consolidated financial statements of Monitronics for the fiscal years ended June 30, 2010, 2009 and 2008, and for the three months ended June 30, 2010;

 

·        the unaudited consolidated financial statements of Monitronics for the three months ended September 30, 2010 and 2009;

 

·        an unaudited pro forma condensed combined balance sheet as of September 30, 2010, giving effect to the acquisition of Monitronics and the dispositions of the Creative/Media and Content Distribution businesses, on a pro forma basis, as if such transactions had occurred on that date; and

 

·        an unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2010 and the year ended December 31, 2009, giving effect to the acquisition of Monitronics and the dispositions of the Creative/Media and Content Distribution businesses, on a pro forma basis, as if such transactions had occurred on January 1, 2009.

 

However, the historical financial information of Monitronics included in these reports generally reflect its results of operations, financial condition and cash flows with respect to time periods during which it was a stand-alone entity, rather than part of a public company, and may not necessarily reflect what such results would have been if Monitronics had been a subsidiary of our company during the periods presented. Moreover, the unaudited pro forma financial

 

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statements included in the December 2010 report do not purport to represent, and are not necessarily indicative of, what our financial position or results of operations would have been had such transactions occurred on the dates indicated.

 

We have a history of losses and may incur losses in the future. The primary AMG business unit, which was disposed of in February 2011, incurred losses in each of the five fiscal years preceding its sale, and Monitronics incurred losses in each of its last three full fiscal years. In future periods, we may not be able to achieve or sustain profitability on a consistent quarterly or annual basis. Failure to maintain profitability in future periods may materially and adversely affect the market price of our common stock.

 

Our acquisition strategy may not be successful. One focus of our corporate strategy is to seek opportunities to grow free cash flow through strategic acquisitions, which may include leveraged acquisitions. However, there can be no assurance that we will be able to consummate that strategy, and if we are not able to invest our capital in acquisitions that are accretive to free cash flow it could negatively impact the growth of our primary operating business. Our ability to consummate such acquisitions may be negatively impacted by various factors, including among other things:

 

·        failure to identify attractive acquisition candidates on acceptable terms;

 

·        competition from other bidders;

 

·        inability to raise any required financing; and

 

·        antitrust or other regulatory restrictions, including any requirements that may be imposed by government agencies as a condition to any required regulatory approval.

 

If we engage in any acquisition, we will incur a variety of costs, and may never realize the anticipated benefits of the acquisition. Our business strategy includes the future acquisition of businesses that we believe are strategically attractive and that we expect will be accretive to consolidated free cash flow. If we undertake any acquisition, the process of operating such acquired business on a stand-alone basis, or, if applicable, of integrating any acquired business with Monitronics, may result in unforeseen operating difficulties and expenditures. Moreover, we may fail to realize the anticipated benefits of any acquisition as rapidly as expected or at all. Future acquisitions could reduce our current stockholders’ ownership percentage, cause us to incur debt and expose us to liabilities. Further, we may incur significant expenditures and devote substantial management time and attention in anticipation of an acquisition that is never realized. Lastly, while we intend to implement appropriate controls and procedures as we integrate any acquired companies, we may not be able to certify as to the effectiveness of these companies’ disclosure controls and procedures or internal control over financial reporting within the time periods required by United States federal securities laws and regulations.

 

We are a holding company and derive substantially all of our revenue and cash flow from our primary operating subsidiary, Monitronics. Monitronics and its subsidiaries are separate and independent legal entities and have no obligation to make funds available to us, whether in the form of loans, dividends or otherwise. The ability of these subsidiaries to pay dividends to us is subject to, among other things, their compliance with covenants in their respective credit agreements, the availability of sufficient earnings and funds in such subsidiaries, and applicable state laws. As of December 31, 2011, Monitronics had consolidated indebtedness of $952,718,000 (including the current portion of long-term debt of $60 million).  Claims of creditors of Monitronics and its subsidiaries have priority as to the assets of these companies over our claims and those of our creditors and shareholders.  See the risk factors relating to Monitronics titled, “The terms of Monitronics’ securitization facility limit its access to the cash generated by a substantial portion of its alarm monitoring contracts,” and “If we do not refinance or repay the existing Monitronics securitization facility by July 2012, our borrowing costs under that facility will increase substantially and Monitronics’ access to the cash of its subsidiaries will be significantly reduced.”

 

An inability to access capital markets at attractive rates could materially increase our expenses.  Although we currently have sufficient cash and investments available to meet our anticipated capital requirements for the

 

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foreseeable future, we may in the future require access to capital markets as a source of liquidity for investments and expenditures. In any such event, there can be no assurance that we would be able to obtain financing on terms acceptable to us or at all. If our ability to access required capital were to become significantly constrained, we could incur material borrowing costs, our financial condition could be harmed and future results of operations could be adversely affected.

 

We may have substantial indemnification obligations under certain inter-company agreements we entered into in connection with the spin-off of our company from Discovery Holding Company (“DHC”), a subsidiary of Discovery Communications, Inc. Pursuant to our tax sharing agreement with DHC, we have agreed to be responsible for all taxes attributable to us or any of our subsidiaries, whether accruing before, on or after the spin-off (subject to specified exceptions). We have also agreed to be responsible for and indemnify DHC with respect to (i) certain taxes attributable to DHC or any of its subsidiaries (other than Discovery Communications, LLC) and (ii) all taxes arising as a result of the spin-off (subject to specified exceptions). Our indemnification obligations under the tax sharing agreement are not limited in amount or subject to any cap. Pursuant to the reorganization agreement we entered into with DHC in connection with the spin-off, we assumed certain indemnification obligations designed to make our company financially responsible for substantially all non-tax liabilities that may exist relating to the business of our former subsidiary, AMG, whether incurred prior to or after the spin-off, as well as certain obligations of DHC. Any indemnification payments under the tax sharing agreement or the reorganization agreement could be substantial.

 

Factors Relating to our Common Stock

 

It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders. Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a change in control of our company that our shareholders may consider favorable. These provisions include the following:

 

·        a capital structure with multiple series of common stock: a Series B that entitles the holders to ten votes per share, a Series A that entitles the holders to one vote per share, and a Series C that, except in such limited circumstances as may be required by applicable law, entitles the holders to no voting rights;

 

·        authorizing the issuance of “blank check” preferred stock, which could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;

 

·        classifying our board of directors with staggered three-year terms, which may lengthen the time required to gain control of our board of directors through a proxy contest or exercise of voting rights;

 

·        limiting who may call special meetings of shareholders;

 

·        prohibiting shareholder action by written consent (subject to certain exceptions), thereby requiring such action to be taken at a meeting of the shareholders;

 

·        establishing advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by shareholders at shareholder meetings;

 

·        requiring shareholder approval by holders of at least 80% of our voting power or the approval by at least 75% of our board of directors with respect to certain extraordinary matters, such as a merger or consolidation of our company, a sale of all or substantially all of our assets or an amendment to our certificate of incorporation;

 

·        requiring the consent of the holders of at least 75% of the outstanding Series B Common Stock (voting as a separate class) to certain share distributions and other corporate actions in which the voting power of the Series B Common Stock would be diluted, for example by issuing shares having multiple votes per share as a dividend to holders of Series A common stock; and

 

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·        the existence of authorized and unissued stock which would allow our board of directors to issue shares to persons friendly to current management, thereby protecting the continuity of its management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us.

 

In addition, John C. Malone, a member of our board of directors and our largest shareholder in terms of voting power, beneficially owns shares of our common stock that represent approximately 30% of the aggregate voting power of our outstanding common stock.

 

We have adopted a shareholder rights plan in order to encourage anyone seeking to acquire our company to negotiate with our board of directors prior to attempting a takeover. While the plan is designed to guard against coercive or unfair tactics to gain control of our company, the plan may have the effect of making more difficult or delaying any attempts by others to obtain control of our company in a transaction that our shareholders may find favorable.

 

Holders of a single series of our common stock may not have any remedies if an action by our directors has an adverse effect on only that series of our common stock.  Principles of Delaware law and the provisions of our certificate of incorporation may protect decisions of our board of directors that have a disparate impact upon holders of any single series of our common stock. Under Delaware law, the board of directors has a duty to act with due care and in the best interests of all of our shareholders, including the holders of all series of our common stock. Principles of Delaware law established in cases involving differing treatment of multiple classes or series of stock provide that a board of directors owes an equal duty to all common shareholders regardless of class or series and does not have separate or additional duties to any group of shareholders. As a result, in some circumstances, our directors may be required to make a decision that is viewed as adverse to the holders of one series of our common stock. Under the principles of Delaware law and the business judgment rule, holders may not be able to successfully challenge decisions that they believe have a disparate impact upon the holders of one series of our stock if our board of directors is disinterested and independent with respect to the action taken, is adequately informed with respect to the action taken and acts in good faith and in the honest belief that the board is acting in the best interest of all of our stockholders.

 

Our Series B Common Stock trades on the OTC Bulletin Board, which is often characterized by volatility and illiquidity. The OTC Bulletin Board tends to be highly illiquid, in part, because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make markets in particular stocks. There is also a greater chance of market volatility for securities that trade on the OTC Bulletin Board as opposed to a national exchange or quotation system. This volatility is due to a variety of factors, including a lack of readily available price quotations, lower trading volume, absence of consistent administrative supervision of “bid” and “ask” quotations, and market conditions. The potential for illiquidity and volatility with respect to our Series B Common Stock may also be exacerbated by the relatively small number of shares of our Series B Common Stock held by persons other than our officers and directors and the relatively small number of such unaffiliated shareholders.

 

Factors relating to Monitronics

 

Monitronics faces risks in acquiring and integrating new subscribers. The acquisition of alarm monitoring agreements (“AMAs”) by Monitronics involves a number of risks, including the risk that the purchased AMAs may not be profitable due to higher than expected account attrition, lower than expected revenues from the AMAs or lower than expected recoveries from dealers when applicable.  The purchase price Monitronics pays a dealer for an AMA is affected by the monthly recurring revenue generated by the AMA, as well as several other factors, including the level of competition, its prior experience with AMAs purchased from the dealer, the number of AMAs purchased, the subscriber’s credit score and the type of security equipment used by the subscriber.  To the extent that the servicing costs or the attrition rates are higher than expected or the revenues from the AMAs or the recoveries from dealers, when applicable, are lower than expected, Monitronics’ business and results of operations could be materially and adversely affected.

 

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Monitronics is subject to credit risk and other risks associated with its subscribers.  Substantially all of Monitronics’ revenues are derived from the recurring monthly revenue due from subscribers under the AMAs.  Monitronics is therefore dependent on the ability and willingness of subscribers to pay amounts due under the AMAs on a monthly basis in a timely manner.  Although subscribers are contractually obligated to pay amounts due under an AMA and are prohibited from canceling the AMA for the initial term of the AMA (typically three years), subscribers’ payment obligations to Monitronics are unsecured, which could impair the ability of Monitronics to collect any unpaid amounts from its subscribers.  To the extent defaults by subscribers of their obligations under the AMAs are greater than anticipated, Monitronics’ business and results of operations could be materially and adversely affected.

 

Monitronics relies on a significant number of its subscribers remaining with it as subscribers for an extended period of time.  Monitronics pays a significant upfront purchase price for each new subscriber.  It requires a substantial amount of time, typically exceeding the initial term of the related AMA, for it to receive cash payments (net of its variable cash operating costs) from a particular subscriber that are sufficient to offset this upfront cost. Accordingly, Monitronics’ long-term performance is dependent on its subscribers remaining with it as subscribers for as long as possible.  This requires Monitronics to minimize its rate of subscriber cancellations, or attrition. Factors that can increase cancellations include subscribers who relocate and do not reconnect, problems with service quality, competition from other alarm monitoring companies, equipment obsolescence, adverse economic conditions and the affordability of its service.  If Monitronics fails to keep the subscribers for a sufficiently long period of time, attrition rates would be higher than expected and Monitronics’ financial position and results of operations could be materially and adversely affected.

 

Monitronics is subject to credit risk and other risks associated with its dealers.  Under the standard alarm monitoring purchase agreement (“AMPA”) that Monitronics enters into with its dealers, if an AMA terminates its service with Monitronics during the first twelve months after the AMA has been purchased, the dealer is typically required to elect between substituting another AMA for the terminating AMA or compensating Monitronics in an amount based on the original purchase price of the terminating AMA.  Monitronics is subject to the risk that dealers will breach their obligation to provide a comparable substitute AMA for a terminating AMA.  Although Monitronics withholds specified amounts from the purchase price paid to dealers for AMAs (holdback), which may be used to satisfy or offset these and other applicable dealer obligations under the AMPA, there can be no guarantee that these amounts will be sufficient to satisfy or offset the full extent of the default by a dealer of its obligations under an AMPA.  If the holdback does prove insufficient to cover dealer obligations, Monitronics is also subject to the credit risk that the dealers may not have sufficient funds to compensate Monitronics when substitute AMAs are unavailable or that any such dealer will otherwise breach its obligation to compensate Monitronics for a terminating AMA.  To the extent defaults by dealers of their obligations under the AMPAs are greater than anticipated, Monitronics’ financial condition and results of operations could be materially and adversely affected.

 

The alarm monitoring business is subject to macroeconomic factors that may negatively impact Monitronics’ results of operations, including prolonged downturns in the housing market.  The alarm monitoring business is dependent in part on national, regional and local economic conditions.  In particular, where disposable income available for discretionary spending is reduced (such as by higher housing, energy, interest or other costs or where the actual or perceived wealth of customers has decreased because of circumstances such as lower residential real estate values, increased foreclosure rates, inflation, increased tax rates or other economic disruptions), the alarm monitoring business could experience increased attrition rates and reduced consumer demand.  In mid-2007 an extreme downturn began in the credit markets and other financial markets in the United States resulting in a decline in business and consumer confidence and increased unemployment and precipitating a deep economic recession with what currently appears to be a slow recovery. Although Monitronics has continued to grow its business during this downturn, no assurance can be given that it will be able to continue acquiring quality AMAs or that it will not begin to experience higher attrition rates. Further, the housing market in the United States continues to be particularly adversely affected by the economic recession and has not improved at the same pace as other aspects of the economy.  Any further deterioration in new construction and sales of existing single family homes could reduce opportunities to make sales of new security systems and services and reduce opportunities to take over existing security systems that had previously

 

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been monitored by Monitronics’ competitors.  If macroeconomic conditions in the United States do not improve or materially worsen, Monitronics’ financial position and results of operations could be materially and adversely affected.

 

Adverse economic conditions in States where Monitronics’ subscribers are more heavily concentrated may negatively impact Monitronics’ results of operations.  Even as economic conditions may improve in the United States as a whole, this improvement may not occur or further deterioration may occur in the regions where Monitronics’ subscribers are more heavily concentrated (such as Texas, California, Florida and Arizona). Although Monitronics has a geographically diverse subscriber base, adverse conditions in one or more States where Monitronics’ business is more heavily concentrated could have a significant adverse effect on its financial position and results of operations.

 

If the insurance industry were to change its practice of providing incentives to homeowners for the use of alarm monitoring services, Monitronics’ may experience a reduction in new customer growth or an increase in its subscriber attrition rate.  It has been common practice in the insurance industry to provide a reduction in rates for policies written on homes that are covered by alarm monitoring contracts.  There can be no assurance that insurance companies will continue to offer these rate reductions.  If these incentives were reduced or eliminated, new homeowners who otherwise may not feel the need for alarm monitoring services would be removed from Monitronics’ potential customer pool, which could hinder the growth of Monitronics’ business, and existing subscribers may choose to disconnect or not renew their service contracts, which could increase Monitronics’ attrition rates.  In either case, Monitronics’ results of operations and growth prospects could be adversely affected.

 

Risks of liability from Monitronics’ business and operations may be significant.  The nature of the services provided by Monitronics potentially exposes it to greater risks of liability for employee acts or omissions or system failures than may be inherent in other businesses.  If subscribers believe that they incurred losses as a result of an action or a failure to act by Monitronics, the subscribers could bring claims against Monitronics, and Monitronics has been subject to lawsuits of this type from time to time.  Similarly, if dealers believe that they incurred losses or were denied rights under the AMPAs as a result of an action or a failure to act by Monitronics, the dealers could bring claims against Monitronics. Substantially all of Monitronics’ AMAs and AMPAs contain provisions limiting Monitronics’ liability to subscribers and dealers, respectively, in an attempt to reduce this risk.  However, in the event of any such litigation, no assurance can be given that these limitations will be enforced, and the costs of such litigation or the related settlements or judgments could have a material adverse effect on Monitronics’ financial condition. In addition, there can be no assurance that Monitronics is adequately insured for these risks. Certain of its insurance policies and the laws of some States may limit or prohibit insurance coverage for punitive or certain other types of damages or liability arising from gross negligence.  If significant uninsured damages are assessed against Monitronics, the resulting liability could have a material adverse effect on Monitronics’ financial condition.

 

Future litigation could result in adverse publicity for Monitronics.  In the ordinary course of business, from time to time, Monitronics is the subject of complaints or litigation from subscribers, sometimes related to alleged violations of state consumer protection statutes, negligent dealer installation and negligent service of alarm monitoring systems.  Monitronics may also be subject to employee claims based on, among other things, alleged discrimination, harassment or wrongful termination claims.  In addition to diverting Monitronics’ management resources, adverse publicity resulting from such allegations may materially and adversely affect Monitronics’ reputation in the communities it services, regardless of whether such allegations are unfounded.  Such adverse publicity could result in higher attrition rates and greater difficulty in attracting new subscribers on terms that are attractive to Monitronics or at all.

 

A disruption to Monitronics’ monitoring facility and its back-up monitoring facility could adversely affect its business.  A disruption to both the monitoring facility and the back-up monitoring facility could affect Monitronics’ ability to provide alarm monitoring services to its subscribers. A disruption could occur for many reasons, including fire, natural disasters, weather, transportation interruption, malicious acts or terrorism. Monitronics has taken reasonable precautions to mitigate this risk, and its main monitoring facility holds Underwriters’ Laboratories listings as protective signaling services stations and maintains certain standards of building integrity, redundant computer and

 

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communications facilities and backup power, among other safeguards.  However, no assurance can be given that both of Monitronics’ monitoring facilities will not be impacted by a disruption, including one from a catastrophic event or natural disaster.  Any such disruption, particularly one of a prolonged duration, could have a material adverse effect on Monitronics’ business.

 

Monitronics relies on third parties to transmit signals to its monitoring facilities.  Monitronics relies on various third-party telecommunications providers and signal processing centers to transmit and communicate signals to its monitoring facilities in a timely and consistent manner.  These telecommunications providers and signal processing centers could fail to transmit or communicate these signals to the monitoring facilities for many reasons, including due to disruptions from fire, natural disasters, weather, transmission interruption, malicious acts or terrorism.  The failure of one or more of these telecommunications providers or signal processing centers to transmit and communicate signals to the monitoring facilities in a timely manner could affect Monitronics’ ability to provide alarm monitoring services to its subscribers.  There can be no assurance that third-party telecommunications providers and signal processing centers will continue to transmit and communicate signals to the monitoring facilities without disruption. Any such disruption, particularly one of a prolonged duration, could have a material adverse effect on Monitronics’ business.

 

The alarm monitoring business is subject to technological innovation over time.  Monitronics’ monitoring services depend upon the technology (both hardware and software) of security alarm systems located at subscribers’ premises. Monitronics may be required to implement new technology either to attract and retain subscribers or in response to changes in land-line or cellular technology or other factors, which could require significant expenditures.  To the extent competitors of Monitronics have greater capital and other resources to dedicate to responding to technological innovation over time, the products and services offered by Monitronics may become less attractive to current or future subscribers thereby reducing demand for their products and services and increasing attrition over time.  Those competitors that benefit from the capital available to them as part of an affiliated group of companies may be at a particular advantage to Monitronics in this respect.  If Monitronics is unable to adapt in response to changing technologies, market conditions or customer requirements in a timely manner, such inability could adversely affect Monitronics’ business by increasing its rate of subscriber attrition.  Monitronics also faces potential competition from improvements in self-monitoring systems, which enable current or future subscribers to monitor their home environments without third-party involvement, which could further increase attrition rates over time and hinder the acquisition of new AMAs.

 

Shifts in customer selection of telecommunications services could adversely impact Monitronics’ financial condition.  Monitronics’ operating model relies to some degree on its subscribers’ continued use of traditional, land-line telecommunications services, which Monitronics uses to communicate with monitoring equipment at the subscribers’ locations. Although Monitronics’ offers alarm systems that can communicate signals to the monitoring facility using various wireless and/or internet-based communication technologies, such solutions are presently more expensive than alarm communicators based on the traditional land-line network. In order to continue to service existing subscribers who cancel their land-line telecommunications services and to service new customers who do not subscribe to land-line telecommunications services, subscribers may be required to upgrade to more expensive technologies. Higher costs may reduce the market for new customers of alarm monitoring services, and the trend away from traditional land-lines to alternatives may mean more existing subscribers will cancel service with Monitronics. Continued shifts in customer preferences regarding telecommunications services could have a material and adverse impact on Monitronics’ subscriber attrition rates and financial condition.

 

A loss of experienced employees could adversely affect Monitronics. The success of Monitronics has been largely dependent upon the active participation of its officers and employees.  The loss of the services of key members of Monitronics’ management for any reason may have a material adverse effect on the operations of Monitronics and the ability of Monitronics to maintain and grow its business.  Monitronics depends on the managerial skills and expertise of its management and employees to provide customer service by, among other things, monitoring and responding to alarm signals, coordinating equipment repairs, administering billing and collections under the AMAs and administering and providing dealer services under the AMPAs.  There is no assurance that Monitronics will be able to retain its current

 

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management and other experienced employees or replace them satisfactorily to the extent they leave the employ of Monitronics.  The loss of any such experienced employees’ services and expertise could materially and adversely affect Monitronics’ business.

 

The high level of competition in Monitronics’ industry could adversely affect its business.  The security alarm monitoring industry is highly competitive and fragmented.  As of December 31, 2011, Monitronics was the third largest alarm monitoring company in the United States when measured by the total number of subscribers under contract.  Monitronics faces competition from other alarm monitoring companies, including companies that have more capital than it has and that may offer higher prices and more favorable terms to dealers for AMAs purchased or charge lower prices for its monitoring services.  Monitronics also faces competition from a significant number of small regional competitors that concentrate their capital and other resources in targeting local markets and from new marketing channels that may displace the existing alarm system dealer channels for acquiring AMAs.  This competition could reduce the acquisition opportunities available to Monitronics, thus slowing its rate of growth, or requiring it to increase the price it pays for such AMAs, thus reducing its return on investment and negatively impacting its revenues and results of operations.

 

Monitronics’ credit facility and securitization facility impose many restrictions.  The agreements governing Monitronics’ indebtedness restrict our ability to, among other things:

 

·  incur additional indebtedness;

·  pay dividends and make distributions;

·  issue common and preferred stock of any future subsidiaries;

·  make certain investments;

·  create liens;

·  enter into transactions with affiliates;

·  merge or consolidate;

·  transfer and sell assets; and

·  acquire certain types of alarm monitoring contracts.

 

Monitronics must also comply with certain financial covenants under the credit facility and the securitization facility.  Credit facility covenants include those that relate to capital expenditure limits, maximum total Monitronics debt to EBITDA (as defined therein), maximum Monitronics fixed charge coverage ratio, and if we have not refinanced the securitization facility by June 30, 2012, a maximum recurring revenue leverage ratio.  Securitization covenants include maximum total Monitronics debt to EBITDA ratio, a debt interest coverage ratio, attrition rate maximums and average recurring monthly revenue minimums.  If Monitronics cannot comply with any of these financial covenants, it may not be able to make additional draw downs under the revolving credit facility.  In addition, failure to comply with the restrictions contained in the credit facility or the securitization facility could lead to an event of default, which could result in the acceleration of a substantial amount of indebtedness.

 

The terms of Monitronics’ securitization facility limit its access to the cash generated by a substantial portion of its alarm monitoring contracts.  The long-term debt of Monitronics at December 31, 2011, includes $838 million in principal in secured notes under a securitization facility.  These notes were issued by Monitronics Funding LP, a subsidiary of Monitronics, which we refer to as “Funding”.  Pursuant to the terms of the securitization facility, alarm monitoring contracts for approximately 616,000 of Monitronics subscriber accounts are owned by Funding, representing approximately 87% of the total number of subscriber accounts of Monitronics and its subsidiaries as of December 31, 2011.  Such alarm monitoring agreements, and the monthly recurring revenue and other proceeds thereof, are pledged as collateral to secure the obligations of Funding under the securitization facility. As a result of this arrangement, the cash generated by these accounts is not available for distribution up to Monitronics and is instead used for the payment of servicing fees to Monitronics Security LP (another subsidiary of Monitronics, which we refer to as “Security”), interest payments, and the purchase of new alarm monitoring contracts, and the payment of a marketing fee to Monitronics.  Any new alarm monitoring contracts acquired with these funds must be pledged as collateral to the securitization debt.  The securitization facility also requires that Funding maintain a portion of its cash in an interest reserve account.  At

 

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December 31, 2011, Funding held approximately $51 million in restricted cash, of which $28 million was held in an interest reserve account and $23 million was held in satisfaction of its other obligations under the securitization facility.  Absent the repayment or refinancing of the securitization facility, Monitronics will not have access to the cash generated by the alarm monitoring contracts that support the securitization facility. While we expect Monitronics will be able to refinance or amend the terms of the securitization facility, there can be no assurances that such a refinancing or amendment will be available to Monitronics on terms acceptable to us or at all.

 

If we do not refinance or repay the existing Monitronics securitization facility by July 2012, our borrowing costs under that facility will increase substantially and Monitronics’ access to the cash of its subsidiaries will be significantly reduced.  If Monitronics does not refinance the securitization facility by July 2012, additional interest will begin to accrue at the rate of 5% per annum (including 0.5% of fees) on the two variable funding notes under the securitization facility, which have an aggregate principal balance of $288 million.  The effective interest rate payable by the Company under $550 million notional amount of swaps relating to the term notes under the securitization facility would also increase by 5% per annum (including 0.5% of fees) beginning July 2012.  Although such additional interest will not be payable in cash until all the securitization debt has been paid off, the increased leverage resulting from the accrual of such additional interest could reduce the amount of additional financing available to Monitronics and may therefore reduce Monitronics’ ability to acquire new subscriber accounts.  Also, under the terms of the securitization facility, Funding currently pays Security for monitoring and servicing the subscriber accounts owned by Funding, at an effective rate of $12.00 per active subscriber account per month plus reimbursement for field service costs related to customer moves and certain cellular monitoring costs.  As such fees exceed the aggregate out-of-pocket cost to Security of monitoring and servicing these subscriber accounts, the amount of this excess is available currently for distribution to Monitronics and may be used for other corporate purposes, including the purchase of additional subscriber accounts outside of the securitization facility.  Funding also pays Monitronics a dealer marketing fee of 1.5x recurring monthly revenue for new alarm monitoring contracts purchased by Funding.  Under the terms of the securitization facility, beginning July 2012, the amount of the monthly servicing fees payable by Funding to Security will decrease from a rate of $12.00 per active subscriber account per month to $7.50 per active subscriber account per month and the reimbursement for customer moves and cellular costs will be eliminated.  Furthermore, the dealer marketing fee will be eliminated since Funding will no longer be permitted to purchase alarm monitoring contracts.  These reductions will instead be used to make principal repayments at Funding and will substantially reduce or eliminate the excess cash that has been available at Security for distribution to Monitronics as well as the dealer marketing fee currently distributed to Monitronics.  If Monitronics does not repay or refinance the securitization facility by July 2012, the decrease in servicing fees and elimination of marketing fees could have a substantially adverse effect on its liquidity and reduce the capital resources available to Monitronics for purchasing AMAs.  While we expect Monitronics will be able to refinance or amend the terms of the securitization facility before July 2012, there can be no assurances that such a refinancing or amendment will be available to Monitronics on terms acceptable to us or at all.

 

We may be unable to obtain additional funds to grow Monitronics’ business.  Monitronics intends to continue to pursue growth through the acquisition of subscriber accounts through its authorized dealer program, among other means. To continue its growth strategy, Monitronics may be required to make additional draw downs under its credit facility, seek financing through new credit arrangements or the possible sale of new securities or refinance its existing securitization facility, any of which may lead to higher leverage or result in higher borrowing costs. An inability to obtain funding through external financing sources on favorable terms or at all is likely to adversely affect Monitronics’ ability to continue or accelerate its subscriber account acquisition activities.

 

Third party claims with respect to Monitronics’ intellectual property, if decided against Monitronics, may result in competing uses of Monitronics’ intellectual property or require the adoption of new, non-infringing intellectual property.  Monitronics has received and may continue to receive notices claiming it committed intellectual property infringement, misappropriation or other intellectual property violations and third parties have claimed, and may, in the future, claim that Monitronics does not own or have rights to use all intellectual property rights used in the conduct of its business. While Monitronics does not believe that any of the currently outstanding claims are material, there can be no assurance that third parties will not assert future infringement claims against Monitronics or claims that

 

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Monitronics’ rights to its intellectual property are invalid or unenforceable, and Monitronics cannot guarantee that these claims will be unsuccessful.  Any claims involving rights to use the “Monitronics” mark could have a material adverse effect on the alarm monitoring business, if such claims were decided against Monitronics and it were precluded from using or licensing the “Monitronics” mark or others were allowed to use it.  If Monitronics were required to adopt a new name, it would entail marketing costs in connection with building up recognition and goodwill in such new name.  In the event that Monitronics was enjoined from using any of its other intellectual property, there would be costs associated with the replacement of such intellectual property with developed, acquired or licensed intellectual property.  There would also be costs associated with the defense and settlement of any infringement or misappropriation allegations and any damages that may be awarded.

 

Factors relating to Regulatory Matters

 

“False Alarm” ordinances could adversely affect Monitronics’ business and operations.  Significant concern has arisen in certain municipalities about the high incidence of false alarms. In some localities, this concern has resulted in local ordinances or policies that restrict police response to third-party monitored burglar alarms. In addition, an increasing number of local governmental authorities have considered or adopted various measures aimed at reducing the number of false alarms, including:

 

·        subjecting alarm monitoring companies to fines or penalties for transmitting false alarms;

 

·        imposing fines on alarm monitoring services customers for false alarms;

 

·        imposing limitations on the number of times the police will respond to alarms at a particular location; and

 

·        requiring further verification of an alarm signal, such as visual verification or verification to two different phone numbers, before the police will respond.

 

Enactment of these measures could adversely affect Monitronics’ future operations and business.  For example, numerous cities or metropolitan areas have implemented verified response ordinances for residential and commercial burglar alarms. A verified response policy means that police officers generally do not respond to an alarm until someone else (e.g., the resident, a neighbor or a security guard) first verifies that it is valid.  Some alarm monitoring companies operating in these areas hire security guards or use third-party guard firms to verify an alarm.  If Monitronics needs to hire security guards or use third-party guard firms, it could have a material adverse effect on its business through either increased servicing costs, which could negatively affect the ability of Monitronics to fund properly its ongoing operations, or increased costs to its customer, which may limit its ability to attract new customers or increase our subscriber attrition rates. In addition, the perception that police departments will not respond to third-party monitored burglar alarms, may reduce customer satisfaction with traditional monitored alarm systems, which may also result in increased attrition rates or decreased customer demand. Although Monitronics has less than 35,000 subscribers in these areas, a more widespread adoption of such a policy or similar policies in other cities or municipalities could materially and adversely affect its business.

 

Monitronics’ business operates in a regulated industry.  Monitronics’ business, operations and employees are subject to various U.S. federal, state and local consumer protection, licensing and other laws and regulations. While there are no U.S. federal laws that directly regulate the security alarm monitoring industry, the advertising and sales practices of Monitronics are subject to regulation by the U.S. Federal Trade Commission in addition to state consumer protection laws that have general application that extend to Monitronics’ business.  Most states in which Monitronics operates have licensing laws directed specifically toward the monitored security services industry. Monitronics’ business relies heavily upon wireline and cellular telephone service to communicate signals. Wireline and cellular telephone companies are currently regulated by both federal and state governments. Changes in laws or regulations could require Monitronics to change the way it operates, which could increase costs or otherwise disrupt operations. In addition, failure to comply with any applicable laws or regulations could result in substantial fines or revocation of Monitronics’ operating permits and licenses. If laws and regulations were to change or Monitronics failed to comply, Monitronics’ business, financial condition and results of operations could be materially and adversely affected.

 

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Increased adoption of statutes and governmental policies purporting to void automatic renewal provisions in the AMAs, or purporting to characterize certain charges in the AMAs as unlawful, could adversely affect Monitronics’ business and operations. The AMAs typically contain provisions automatically renewing the term of the contract at the end of the initial term, unless a cancellation notice is delivered in accordance with the terms of the contract. If the customer cancels prior to the end of the contract term, other than in accordance with the contract, Monitronics may charge the customer the amounts that would have been paid over the remaining term of the contract, or charge an early cancellation fee.  Several states have adopted, or are considering the adoption of, consumer protection policies or legal precedents which purport to void or substantially limit the automatic renewal provisions of contracts such as the AMAs, or otherwise restrict the charges that can be imposed upon contract cancellation. Such initiatives could negatively impact Monitronics’ business. Adverse judicial determinations regarding these matters could increase legal exposure to customers against whom such charges have been imposed, and the risk that certain customers may seek to recover such charges through litigation. In addition, the costs of defending such litigation and enforcement actions could have an adverse effect on Monitronics business and operations.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.  PROPERTIES

 

Currently, the Company leases approximately 90,000 square feet in California and 20,000 square feet in New York.  All locations are 100% subleased to third parties.  The Company leases approximately 35,000 square feet in New Jersey and the space is being marketed for sublease.  The Company leases approximately 4,000 square feet in Colorado.  In addition, the Company owns approximately 290,000 square feet of real estate of which approximately 270,000 square feet is leased to third parties.  The Company is currently exploring opportunities to dispose of or monetize such real property.

 

Monitronics leases approximately 110,000 square feet in Dallas, Texas to house its executive offices, monitoring center, sales and marketing and data retention functions.  Approximately 98,000 square feet of the 110,000 square feet is under an eleven-year lease expiring May 31, 2015 and 12,000 square feet is under a seven-year lease expiring January 31, 2015.  Monitronics also leases approximately 13,000 square feet for the McKinney, Texas back-up monitoring facility.

 

ITEM 3.  LEGAL PROCEEDINGS

 

From time to time, the Company is involved in litigation and similar claims incidental to the conduct of its business.  Although no assurances can be given, in the opinion of management, none of the pending actions is likely to have a material adverse impact on the Company’s financial position or results of operations, either individually or in the aggregate.

 

ITEM 4.  MINING SAFETY DISCLOSURES

 

None.

 

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PART II.

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

We have two series of common stock outstanding.  Holders of our Series A common stock are entitled to one vote for each share held, and holders of our Series B common stock are entitled to 10 votes for each share held, as well as a separate class vote on certain corporate actions.  Each share of the Series B common stock is convertible, at the option of the holder, into one share of Series A common stock; the Series A common stock is not convertible.  Except for such voting rights, conversion rights and designations, shares of Series A common stock and Series B common stock are substantially identical.

 

Our Series A common stock trades on the NASDAQ Global Select Market under the symbol ASCMA.  Our Series B common stock is eligible for quotation on the OTC Bulletin Board under the symbol ASCMB, but it is not actively traded.  The following table sets forth the quarterly range of high and low sales prices of shares of our Series A common stock for the years ended December 31, 2011 and 2010.  High and low bid information for our Series B common stock is not available.

 

 

 

Series A

 

 

 

High

 

Low

 

 

 

 

 

 

 

2011

 

 

 

 

 

First quarter

 

49.85

 

37.12

 

Second quarter

 

53.05

 

42.90

 

Third quarter

 

58.37

 

38.38

 

Fourth quarter

 

52.74

 

35.88

 

 

 

 

 

 

 

2010

 

 

 

 

 

First quarter

 

28.43

 

24.66

 

Second quarter

 

30.53

 

25.26

 

Third quarter

 

28.85

 

25.27

 

Fourth quarter

 

39.12

 

26.73

 

 

Holders

 

As of January 31, 2012, there were approximately 1,121 and 64 record holders of our Series A common stock and Series B common stock, respectively (which amounts do not include the number of shareholders whose shares are held of record by banks, brokerage houses or other institutions, but include each institution as one shareholder).

 

Dividends

 

We have not paid any cash dividends on our common stock and have no present intention to do so.  Any payment of cash dividends in the future will be determined by our Board of Directors in light of our earnings, financial condition, alternative uses for cash and other relevant considerations.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Information required by this item is incorporated by reference to our definitive proxy statement for our 2012 Annual Meeting of shareholders.

 

Stock Performance Graph

 

The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent we specifically incorporate it by reference into such filing.

 

The following graph sets forth the percentage change in the cumulative total shareholder return on our Series A common stock for the period beginning September 18, 2008 and ended December 31, 2011 as compared to the

 

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NASDAQ Stock Market Index over the same period.  The graph assumes $100 was originally invested on September 18, 2008 and that all subsequent dividends were reinvested in additional shares.

 

The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our Series A common stock.

 

 

 

 

9/18/08

 

12/31/08

 

12/31/09

 

12/31/10

 

12/31/11

 

ASCMA Series A

 

$

100.00

 

$

80.37

 

$

93.83

 

$

142.45

 

$

186.40

 

 

 

 

 

 

 

 

 

 

 

 

 

NASDAQ Stock Market Index

 

$

100.00

 

$

71.71

 

$

103.19

 

$

120.63

 

$

118.46

 

 

Purchases of Equity Securities By the Issuer

 

The following table sets forth information concerning our company’s purchase of its own equity securities (all of which were comprised of shares of our Series A common stock) during the three months ended December 31, 2011:

 

Period

 

Total number of
shares
purchased
(surrendered)

 

Average price
paid per share

 

Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs

 

Maximum Number (or
Approximate Dollar
Value) or Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs

 

10/01/11 - 10/31/11

 

1,657

(1)

$

36.65

 

 

 

11/01/11 - 11/30/11

 

13,865

(2)

$

41.52

 

13,865

 

 

(2)

12/01/11 - 12/31/11

 

3,154

(1)

$

47.75

 

 

 

Total

 

18,676

 

$

42.14

 

13,865

 

 

 

 


(1)             Represents shares withheld in payment of withholding taxes by certain of our executive officers upon vesting of their restricted share awards.

 

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(2)             On June 16, 2011 the Company announced that it received authorization to implement a stock repurchase program, pursuant to which it may purchase up to $25,000,000 of its shares of Series A Common Stock from time to time.  As of December 31, 2011, up to $13,512,000 of Series A Common Stock remains to be purchased under the program.

 

ITEM 6. SELECTED FINANCIAL DATA

 

The following tables present selected historical information relating to our financial condition and results of operations for the past five years.  The following data should be read in conjunction with our consolidated financial statements. (amounts in thousands, except per share amounts)

 

 

 

December 31,

 

 

 

2011

 

2010

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

289,893

 

240,686

 

416,891

 

490,042

 

362,725

 

Property and Equipment, net

 

$

74,697

 

78,211

 

63,721

 

65,806

 

77,441

 

Total assets

 

$

1,625,959

 

1,644,882

 

682,987

 

745,304

 

830,986

 

Current liabilities

 

$

114,313

 

93,906

 

70,872

 

91,202

 

119,571

 

Long-term debt

 

$

892,718

 

896,733

 

 

 

 

Stockholders’ equity

 

$

560,327

 

547,740

 

582,596

 

625,310

 

686,896

 

 

 

 

Years ended December 31,

 

 

 

2011

 

2010

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

311,898

 

$

9,129

 

 

 

 

Operating income (loss)

 

$

23,006

 

$

(33,490

)

(32,557

)

(22,681

)

(23,149

)

Net loss from continuing operations

 

$

(28,152

)

$

(33,501

)

(55,805

)

(7,664

)

6,041

 

Net income (loss), (a)(b)(c)

 

$

20,637

 

$

(38,494

)

(52,897

)

(64,619

)

(132,331

)

Basic and diluted income (loss) per common share (d)

 

$

1.45

 

$

(2.71

)

(3.76

)

(4.60

)

(9.41

)

 


(a)          Includes impairment of goodwill of $165,347,000 for the year ended December 31, 2007.  This impairment charge is included in discontinued operations as it relates to the Content Services group which is included in discontinued operations for all periods presented.

(b)         Includes impairment of goodwill of $95,069,000 for the year ended December 31, 2008.  This impairment charge relates to the Creative/Media business which is included in discontinued operations for all periods presented.

(c)          Includes a gain on the sale of Content Distribution of $66,136,000 and related income tax expense of $2,906,000 for the year ended December 31, 2011.  The gain and related tax expense is included in discontinued operations for all periods presented.

(d)         Basic and diluted net income (loss) per common share is based on (1) the actual number of basic and diluted shares for all periods subsequent to the spin off and (2) 14,061,618 shares, which is the number of shares issued in the spin off, for 2007.

 

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

 

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

 

At December 31, 2011, our assets consisted primarily of our wholly-owned operating subsidiary, Monitronics International, Inc. (“Monitronics”).

 

Monitronics

 

On December 17, 2010, we signed and closed an agreement to acquire 100% of the outstanding capital stock of Monitronics, through the merger of our wholly owned subsidiary, Mono Lake Merger Sub, Inc., with and into Monitronics, with Monitronics surviving such merger. The cash consideration paid in connection with the merger was $397,088,000.  We also assumed approximately $795,000,000 in net debt (which we define as the principal amount of such debt less Monitronics cash) of Monitronics.  In connection with the acquisition, Monitronics entered into a credit agreement, which provides for a $60,000,000 term loan and a $115,000,000 revolving credit facility.  Ascent Capital has guaranteed payment of the term loan up to the first $30,000,000 of obligations thereunder.  At closing, Monitronics borrowed the full amount of the term loan and $45,000,000 under the revolving credit facility, for total initial borrowings under the credit facility of $105,000,000. The proceeds of such loans, after repayment of $5,000,000 outstanding under a previously existing credit facility, and payment of certain fees and expenses relating to the credit facility, were used to fund a portion of the aggregate merger consideration payable in connection with the acquisition of Monitronics. The remaining cash consideration paid was funded by cash on hand.

 

Monitronics is primarily engaged in the business of providing security alarm monitoring services:  monitoring signals from burglaries, fires, medical alerts, and other events, as well as providing customer service and technical support.  Nearly all of its revenues are derived from monthly recurring revenues under security alarm monitoring contracts purchased from independent dealers in its exclusive nationwide network.

 

Revenues are recognized as the related monitoring services are provided. Other revenues are derived primarily from the provision of third-party contract monitoring services and from field technical repair services.  All direct external costs associated with the creation of subscriber accounts are capitalized and amortized over fifteen years using a 220% declining balance method beginning in the month following the date of purchase. Internal costs, including all personnel and related support costs incurred solely in connection with subscriber account acquisitions and transitions, are expensed as incurred.

 

Account cancellation, otherwise referred to as subscriber attrition, has a direct impact on the number of subscribers that Monitronics services and on its financial results, including revenues, operating income and cash flow.  A portion of the subscriber base can be expected to cancel its service every year. Subscribers may choose not to renew or terminate their contract for a variety of reasons, including relocation, cost, switching to a competitors’ service, and service issues.  The largest category of canceled accounts relate to subscriber relocation or the inability to contact the subscriber.  Monitronics defines its attrition rate as the number of canceled accounts in a given period divided by the weighted average of subscribers for that period.  Monitronics considers an account canceled when a subscriber terminates in accordance with the terms of the contract or if payment from the subscriber is deemed uncollectible.  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 (a “new owner takeover”), this is also not a cancellation.  Monitronics adjusts the number of canceled accounts by excluding those that are contractually guaranteed by its dealers.  The typical dealer contract provides that if a subscriber cancels in the first year of its contract, the dealer must either replace the canceled account with a new one or refund the purchase price. To help ensure the dealer’s obligation to Monitronics, Monitronics holds back a portion of the purchase price for every account purchased, typically 5-10%.  In some cases, the amount of the purchase holdback may be less than actual attrition experience.

 

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The table below presents subscriber data for the twelve months ended December 31, 2011 and 2010:

 

 

 

Twelve Months Ended
December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Beginning balance of accounts Content Services group

 

670,450

 

621,186

 

Accounts purchased

 

114,691

 

126,619

 

Accounts cancelled (a)

 

(76,067

)

(71,501

)

Accounts guaranteed to be refunded by dealer

 

(8,194

)

(5,854

)

Ending balance of accounts

 

700,880

 

670,450

 

Monthly weighted average accounts

 

688,774

 

643,157

 

Attrition rate (a)

 

(11.0

)%

(11.1

)%

 


(a)          Net of canceled accounts that are contractually guaranteed by the dealer.

 

Monitronics also analyzes its attrition by classifying accounts into annual pools based on the year of purchase. Monitronics then tracks the number of accounts that cancel as a percentage of the initial number of accounts purchased for each pool for each year subsequent to its purchase.  Based on the average cancellation rate across the pools, in recent years Monitronics has averaged less than 1% attrition within the initial 12-month period after considering the accounts which were replaced or refunded by the dealers at no additional cost to Monitronics.  Over the next three 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 between the third and fourth years.  The peak between the third and fourth years is primarily a result of the buildup of subscribers that moved or no longer had need for the service prior to the third year but did not cancel their service until the end of their three-year contract.  After the fourth year, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool declines.

 

Adjusted EBITDA

 

Beginning in the first quarter of 2011, Ascent Capital changed one of the key financial measures that it uses to evaluate its performance.  Ascent Capital now uses net income (loss) before interest expense, interest income, income taxes, depreciation, amortization (including the amortization of subscriber accounts and dealer network), realized and unrealized gain/(loss) on derivative instruments, non-cash or non-recurring restructuring charges and stock-based and other non-cash long-term incentive compensation (which is referred to as “Adjusted EBITDA”) instead of adjusted operating income before depreciation and amortization, and stock-based and other non-cash long-term incentive compensation (which is referred to as “Adjusted OIBDA”).  Ascent Capital made this change as a result of the sale of most of its historical operating subsidiaries and the acquisition of Monitronics, a security alarm monitoring company, which is now its primary operating subsidiary.  Financial information for prior periods has been revised to retrospectively reflect Ascent Capital’s change in this financial measure.

 

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

 

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Results of Operations

 

The following table sets forth selected data from the accompanying consolidated statements of operations for the periods indicated.  The results of operations for Monitronics are included from December 17, 2010, the date of acquisition (dollar amounts in thousands).

 

 

 

Years ended December 31,

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Net revenue

 

$

311,898

 

9,129

 

$

 

Cost of services

 

40,553

 

1,422

 

 

Selling, general, and administrative

 

76,845

 

30,314

 

27,451

 

Amortization of subscriber accounts and dealer network

 

159,619

 

5,980

 

 

Restructuring charges

 

4,258

 

4,604

 

695

 

Depreciation

 

7,052

 

3,067

 

4,259

 

Interest expense

 

42,813

 

2,672

 

102

 

Income tax expense from continuing operations

 

2,457

 

270

 

28,721

 

Realized and unrealized loss on derivative financial instruments

 

10,601

 

1,682

 

 

Net loss from continuing operations

 

(28,152

)

(33,501

)

(55,805

)

Income (loss) from discontinued operations, net of income tax

 

48,789

 

(4,993

)

2,908

 

Net income (loss)

 

20,637

 

(38,494

)

(52,897

)

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

 

 

 

 

Monitronics business Adjusted EBITDA

 

$

214,485

 

5,577

 

$

N/A

 

Corporate Adjusted EBITDA

 

(12,052

)

(20,259

)

(22,261

)

Total Adjusted EBITDA

 

$

202,433

 

(14,682

)

$

(22,261

)

 

 

 

 

 

 

 

 

Adjusted EBITDA as a percentage of Revenue

 

 

 

 

 

 

 

Monitronics business

 

68.8

%

61.1

%

N/A

 

Corporate

 

(3.9

)%

N/A

 

N/A

 

 

Net revenue.  Revenue increased $302,769,000 and $9,129,000 for the years ended December 31, 2011 and 2010, respectively, as compared to the corresponding prior year.  Revenue is generated from alarm monitoring operations within the Monitronics business, which was acquired on December 17, 2010.  The 2011 increase in revenue is primarily attributable to a full year’s operations in 2011 as compared to 15 days in 2010.  Furthermore, 2011 revenue increased as a result of a 7.1% increase in monthly weighted average subscriber accounts from 643,157 for the twelve months ended December 31, 2010 to 688,774 for the twelve months ended December 31, 2011.  As Ascent Capital did not own Monitronics in 2009, there was no revenue for the respective period as businesses existing in 2009 have been included in discontinued operations.

 

Cost of Services.  Cost of services increased $39,131,000 and $1,422,000 for the years ended December 31, 2011 and 2010, respectively, as compared to the corresponding prior year.  Cost of services includes costs incurred from alarm monitoring operations within the Monitronics business, which was acquired on December 17, 2010.  The 2011 increase in cost of services is attributable to a full year’s operations in 2011 as compared to 15 days in 2010.  As Ascent Capital did not own Monitronics in 2009, there was no cost of services for the respective period as businesses existing in 2009 have been included in discontinued operations.

 

Selling, General and Administrative. Selling, general and administrative expense (SG&A) was $76,845,000, $30,314,000 and $27,451,000 for the years ended December 31, 2011, 2010 and 2009, respectively.  SG&A expense increased $46,531,000 and $2,863,000 for the years ended December 31, 2011 and 2010, respectively, as compared to the corresponding prior year.  For 2011, the increase was mainly due to increased SG&A expense related to Monitronics, which was acquired on December 17, 2010.  Monitronics SG&A expenses were $57,170,000 for the year ended December 31, 2011 as compared to $2,130,000 for the year ended December 31, 2010.  For 2010, the increase was mainly due to SG&A expenses from the Monitronics business which was acquired on December 17, 2010, increased stock-based compensation and long-term incentive compensation of $1,781,000, and transaction costs related to the acquisition of Monitronics of approximately $1,300,000.  The increases in 2011 and 2010 were partially offset by lower labor and other administrative costs, which declined due to the implementation of restructuring and cost mitigation measures.

 

Stock-based and Long-term Incentive Compensation.  Stock-based and long-term incentive compensation was $4,456,000, $4,182,000, and $2,401,000 for the years ended December 31, 2011, 2010 and 2009, respectively, and is included in SG&A in our consolidated statements of operations.  The expense for the year ended December 31, 2011, was related to restricted stock and stock options for awards granted to certain executives. The expense for the

 

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year ended December 31, 2010, was related to restricted stock, stock options and cash distributions for awards granted in 2010 under the amended 2006 Long-Term Incentive Plan (“2006 LTIP”).  In addition, the 2010 amount also includes approximately $425,000 of accelerated vesting of restricted stock and stock options related to the death benefits of our chief operating officer pursuant to the terms of the Ascent Capital Group, Inc. 2008 Incentive Plan.  The expense for the year ended December 31, 2009, was related to restricted stock and stock option awards granted to certain executives.

 

Amortization of Subscriber Accounts and Dealer Network.  Amortization expense was $159,619,000 and $5,980,000 for the years ended December 31, 2011 and 2010, respectively.  For 2011, the increase in amortization expense of $153,639,000 is primarily due to a full year’s amortization occurring in 2011 as compared to 15 days in 2010.  The Company had no such assets in 2009, thus no amortization was recorded for that year.

 

Restructuring Charges.  During 2011, 2010 and 2009, we completed certain restructuring activities and recorded charges of $4,258,000, $4,604,000 and $695,000, respectively, which relate to our continuing operations.

 

In the fourth quarter of 2010, we began a new restructuring plan (the “2010 Restructuring Plan”) in conjunction with the expected sales of the Creative/Media and Content Distribution businesses.  The 2010 Restructuring Plan was implemented to meet the changing strategic needs of the Company as we sold most of our media and entertainment services assets and acquired Monitronics, an alarm monitoring business.  Such charges included retention costs for employees to remain employed until the sales are complete, severance costs for certain employees that were not retained by the buyers and facility costs that were no longer being used by us due to the sales.

 

Before we implemented the 2010 Restructuring Plan, we had just completed a restructuring plan that was implemented in 2008 and concluded in September 2010 (the “2008 Restructuring Plan”).  The 2008 Restructuring Plan was implemented to align our organization with our strategic goals and how we operate, manage and market our services.  The 2008 Restructuring Plan charges included severance costs from labor cost mitigation measures undertaken across all of the businesses and facility costs in conjunction with the consolidation of certain facilities in the United Kingdom and the closing of our Mexico operations.

 

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The following table provides the activity and balances of the 2010 Restructuring Plan and the 2008 Restructuring Plan.

 

 

 

Opening
 Balance

 

Additions

 

Deductions (a)

 

Ending
 Balance

 

 

 

Amounts in thousands

 

 

 

 

 

 

 

 

 

 

 

2010 Restructuring Plan

 

 

 

 

 

 

 

 

 

Severance and retention

 

$

 

3,994

 

(404

)

3,590

 

Excess facility costs

 

 

 

 

 

December 31, 2010

 

$

 

3,994

 

(404

)

3,590

 

 

 

 

 

 

 

 

 

 

 

Severance and retention

 

$

3,590

 

4,186

 

(5,890

)

1,886

(b)

Excess facility costs

 

 

 

 

 

December 31, 2011

 

$

3,590

 

4,186

 

(5,890

)

1,886

 

 

 

 

 

 

 

 

 

 

 

2008 Restructuring Plan

 

 

 

 

 

 

 

 

 

Severance

 

$

404

 

647

 

(830

)

221

 

Excess facility costs

 

60

 

48

 

(15

)

93

 

December 31, 2009

 

$

464

 

695

 

(845

)

314

 

 

 

 

 

 

 

 

 

 

 

Severance

 

221

 

477

 

(689

)

9

 

Excess facility costs

 

93

 

133

 

(15

)

211

 

December 31, 2010

 

$

314

 

610

 

(704

)

220

 

 

 

 

 

 

 

 

 

 

 

Severance

 

9

 

 

(9

)

 

Excess facility costs

 

211

 

72

 

(47

)

236

(b)

December 31, 2011

 

$

220

 

72

 

(56

)

236

 

 


(a) Primarily represents cash payments.

(b) Substantially all of this amount is expected to be paid in 2012.

 

Depreciation.  Depreciation expense was $7,052,000, $3,067,000 and 4,259,000 for the years ended December 31, 2011, 2010, and 2009, respectively.  Depreciation expense increased $3,985,000 and decreased $1,192,000 for the years ended December 31, 2011 and 2010, respectively, as compared to the corresponding prior year.  The increase in 2011 is mainly due to depreciation expense related to Monitronic’s assets which were acquired on December 17, 2010.  The 2010 decrease in depreciation expense is due to decreased corporate assets as compared to the prior year, partially offset by deprecation of property and equipment acquired in the Monitronics acquisition.

 

Interest Expense.  Interest expense was $42,813,000, $2,672,000, and $102,000 for the years ended December 31, 2011, 2010, and 2009, respectively.  The increase in 2011 interest expense of $40,141,000 and $2,570,000 as compared to the respective prior year is due to the increase in debt associated with the acquisition of Monitronics on December 17, 2010.  Interest expense includes amortization of debt discount of $16,985,000 and $780,000 for the years ended December 31, 2011 and 2010.

 

Realized and unrealized loss on derivative financial instruments.  Realized and unrealized loss on derivative financial instruments was $10,601,000, $1,682,000, and $0 for the years ended December 31, 2011, 2010, and 2009, respectively.  The increase in 2011 is attributable to a full year’s operations in 2011 as compared to 15 days in 2010.  For year ended December 31, 2011, the realized and unrealized loss on derivative financial instruments in the consolidated statements of operations includes settlement payments of $38,645,000 partially offset by a $28,044,000 unrealized gain related to the change in the fair value of these derivatives.  For year ended December 31, 2010, the realized and unrealized loss on derivative financial instruments in the consolidated statements of operations includes settlement payments of $1,504,000 partially and a $178,000 unrealized loss related to the change in the fair value of these derivatives.  As the Company did not have derivative financial instruments in 2009, there was no related realized and unrealized loss on derivative financial instruments for that year.

 

Income Taxes from Continuing Operations.  For the year ended December 31, 2011, we had a pre-tax loss from continuing operations of $25,695,000 and an income tax expense from continuing operations of $2,457,000.  For the year ended December 31, 2010, we had a pre-tax loss from continuing operations of $33,231,000 and an income tax

 

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expense from continuing operations of $270,000.  For the year ended December 31, 2009, we had a pre-tax loss from continuing operations of $27,084,000 and an income tax expense from continuing operations of $28,721,000.

 

The Company incurred tax expense for the year ended December 31, 2009 due to the establishment of a valuation allowance against its deferred tax assets.  In 2011 and 2010, the Company continues to have a valuation allowance against its deferred tax assets.

 

Earnings from Discontinued Operations, Net of Income Taxes. We recorded earnings (losses) from discontinued operations, net of income taxes of $48,789,000, $(4,993,000) and $2,908,000 for the years ended December 31, 2011, 2010 and 2009, respectively.  These amounts included the earnings of the discontinued operations and the gain or loss on the sales.  See further information about the discontinued operations below.

 

Adjusted EBITDA.  The following table provides a reconciliation of total Adjusted EBITDA to loss from continuing operations before income taxes.

 

 

 

Year Ended December 31,

 

 

 

2011

 

2010

 

2009

 

 

 

Amounts in thousands

 

 

 

 

 

 

 

 

 

Total Adjusted EBITDA

 

$

202,433

 

(14,682

)

(22,261

)

Amortization of subscriber accounts and dealer networks

 

(159,619

)

(5,980

)

 

Depreciation

 

(7,052

)

(3,067

)

(4,259

)

Stock-based and long-term incentive compensation

 

(4,456

)

(4,182

)

(2,443

)

Restructuring charges

 

(4,258

)

(4,604

)

(695

)

Realized and unrealized loss on derivative instruments

 

(10,601

)

(1,682

)

 

Interest income

 

671

 

3,638

 

2,676

 

Interest expense

 

(42,813

)

(2,672

)

(102

)

Income tax expense from continuing operations

 

(2,457

)

(270

)

(28,721

)

Loss from continuing operations before income taxes

 

$

(28,152

)

(33,501

)

(55,805

)

 

The Monitronics business Adjusted EBITDA as a percentage of revenue was 68.8% and 61.1% for the years ended December 31, 2011 and 2010, respectively.  The Monitronics business Adjusted EBITDA was $214,485,000 and $5,577,000 for the years ended December 31, 2011 and 2010, respectively.

 

Discontinued Operations

 

The following businesses have been treated as discontinued operations in the consolidated financial statements for all periods presented.

 

Systems Integration

 

As discussed above, the Company shut down the operations of the Systems Integration business in June 2011.  In connection with ceasing its operations, the Company recorded exit costs of $1,119,000 related to employee severance.

 

Content Distribution

 

As discussed above, the Company sold the Content Distribution business to Encompass on February 28, 2011.  We recorded a pre-tax gain on the sale of $66,136,000 and income tax expense of $2,906,000.  The gain and related income tax expense are included in income (loss) from discontinued operations in the accompanying condensed consolidated statement of operations for the year ended December 31, 2011.

 

Creative/Media

 

As discussed above, the Company sold the Creative/Media business to Deluxe on December 31, 2010.  We recorded a pre-tax loss on the sale of $27,110,000 and an income tax benefit of $7,587,000.  The loss and related income tax benefit are included in income (loss) from discontinued operations in the accompanying condensed consolidated statement of operations for the year ended December 31, 2010.

 

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GMX

 

In September 2010, the Company shut down the operations of the Global Media Exchange (“GMX”), which was previously included in the Content Services group.  Ascent Capital recorded a charge of $1,838,000 to write off the assets and recorded severance costs in connection with the shutdown for the year ended December 31, 2010.

 

Chiswick Park

 

In February 2010, the Company completed the sale of the assets and operations of the Chiswick Park facility in the United Kingdom, which was previously included in the Content Services group, to Discovery Communications, Inc.  The net cash proceeds on the sale were $34,800,000.  We recorded a pre-tax gain on the sale of $25,498,000 and $3,423,000 of related income tax expense.  The gain and related income tax expense are included in income (loss) from discontinued operations in the accompanying condensed consolidated statement of operations for the year ended December 31, 2010.

 

Liquidity and Capital Resources

 

At December 31, 2011, we have $183,558,000 of cash and cash equivalents, $31,196,000 of current restricted cash, and $40,377,000 of marketable securities.  We may use a portion of these assets to decrease debt obligations, fund stock repurchases, or fund potential strategic acquisitions or investment opportunities.

 

Additionally, our other source of funds is our cash flows from operating activities.  In 2011, the operating cash flows were primarily generated from the operations of Monitronics, which was acquired in December 2010.  In 2010 and in prior years, the operating cash flows were primarily generated from the Creative/Media, Content Distribution and Systems Integration businesses.  Since we have sold both the Creative/Media and Content Distribution business and shutdown the operations of the Systems Integration business, future operating cash flows will be generated almost entirely from the operations of Monitronics.  During the years ended December 31, 2011, 2010 and 2009, our cash flow from operating activities was $131,238,000, $50,300,000 and $35,974,000, respectively.  The primary driver of our cash flow from operating activities is Adjusted EBITDA.  Fluctuations in our Adjusted EBITDA are discussed in “Results of Operations” above.  In addition, our cash flow from operating activities may be significantly impacted by changes in working capital.

 

During the years ended December 31, 2011 and 2010, we used cash of $162,714,000 and $4,214,000, respectively, to fund purchases of subscriber accounts.  In addition, during the years ended December 31, 2011, 2010 and 2009, we used cash of $4,242,000, $139,000 and $1,420,000, respectively, to fund our capital expenditures. In December 2010, we paid cash of $388,401,000 to acquire Monitronics, net of Monitronics cash on hand of $7,475,000, to fund a portion of the purchase price on Monitronics.

 

On June 16, 2011, our Board of Directors authorized the repurchase of up to $25,000,000 of our Series A common stock.  During 2011, we repurchased 269,659 shares of our Series A common stock at an average purchase price of $42.60 per share for a total of approximately $11,488,000 pursuant to this authorization. These shares were returned to authorized and unissued, reducing the number of our shares outstanding.

 

During 2011, we purchased marketable securities primarily consisting of diversified corporate bond funds for cash of $40,253,000 in order to improve our investment rate of return. During 2010, we purchased marketable securities consisting of diversified corporate bond funds for cash of $41,757,000 and sold all of the marketable securities we held in December 2010 for cash proceeds of $96,685,000 to fund the acquisition of Monitronics.  During 2009, we purchased marketable securities consisting of diversified corporate bond funds for cash of $68,126,000 in order to improve our investment rate of return.  We sold a portion of these securities for cash proceeds of $16,309,000.

 

As part of the Monitronics acquisition, we assumed Monitronics long-term debt with a principal balance of $838 million at December 31, 2010.  Such indebtedness is the obligation of Monitronics and certain of its subsidiaries and is not guaranteed by us or any of our other subsidiaries.  In addition to the Monitronics’ cash on hand, we also acquired restricted cash which totaled $51 million at December 31, 2010.  Also, in order to partially fund the cash consideration used for the Monitronics acquisition, Monitronics entered into a Credit Agreement with the lenders party thereto and Bank of America, N.A., as administrative agent (the “Credit Facility”).  The Credit Facility provides a $60,000,000 term loan and an $115,000,000 revolving credit facility, under which Monitronics has borrowed $65,300,000 as of December 31, 2011.  The term loan matures on June 30, 2012, and requires principal installments of $20,000,000 on the first day of business on or after December 31, 2011 and March 31, 2012.  The revolving credit facility matures on December 17, 2013.  The Credit Facility is currently subject to certain financial and nonfinancial

 

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covenants which include maximum leverage ratios and minimum fixed charge coverage ratios, and beginning June 30, 2012 will become subject to a recurring monthly revenue leverage ratio.  Ascent Capital guaranteed $30,000,000 of the aggregate principal amount of the term loan outstanding under the Credit Facility.

 

In considering our liquidity requirements for 2012, we evaluated our known future commitments and obligations.  We will require the availability of funds to finance the strategy of Monitronics, our primary operating subsidiary, which is to grow through subscriber account purchases.  In addition, additional cash will be needed to meet Monitronics’ debt service obligations on its long-term debt, any settlement of Monitronics’ derivative financial instruments in advance of their scheduled terms, and capital expenditures.  We also considered the expected cash flow from Monitronics, as this business will be the primary driver of our operating cash flows.  In addition, we considered the borrowing capacity of Monitronics’ Credit Facility, under which Monitronics could borrow approximately $49,700,000 as of December 31, 2011.  Based on this analysis, we expect that cash on hand, cash flow generated from operations and borrowings under the Monitronics’ Credit Facility will provide sufficient liquidity, given our anticipated current and future requirements.

 

The existing long-term debt of Monitronics at December 31, 2011 includes the principal balance of $838 million under a securitization facility.  The Class A-1 term notes issued under the securitization facility in the aggregate outstanding principal amount of $450,000,000 are due in full on July 15, 2027; all other notes issued under the facility, including the variable funding notes described below, are due on July 15, 2037.  However, certain terms of such securitization facility may impact our liquidity and capital structure in 2012.

 

As of December 31, 2011, alarm monitoring agreements for approximately 616,000 of Monitronics subscriber accounts are owned by Monitronics Funding LP, a subsidiary of Monitronics, which we refer to as “Funding”.  Such alarm monitoring agreements, and the monthly recurring revenue and other proceeds thereof, are pledged as collateral to secure the obligations of Monitronics under the securitization facility.  Under the terms of such facility, Issuer currently pays Monitronics Security LP (another subsidiary of Monitronics, which we refer to as “Security”) for monitoring and servicing the subscriber accounts owned by Funding, at an effective rate of $12.00 per active subscriber account plus reimbursement for field service costs related to customer moves and certain cellular monitoring cost.  Fees paid from Funding to Security can be distributed to Monitronics, but cash balances at Funding must be used to service the securitization indebtedness.  As the servicing fees paid by Funding to Security currently exceed the aggregate out-of-pocket costs of monitoring and servicing such subscriber accounts, the amount of such excess is available to Monitronics for other corporate purposes, including the purchase of additional subscriber accounts.  However, under the terms of the securitization facility, effective July 2012, the amount of the servicing fees payable by Funding to Security will decrease from an effective rate of $12.00 per active subscriber account to $7.50 per active subscriber account and the reimbursement for field service costs related to customer moves and certain cellular monitoring cost will be eliminated.  This decrease will substantially reduce or eliminate the excess cash available to Security for distribution to Monitronics.  Accordingly, if Monitronics does not repay or refinance the securitization facility by July 2012, the decrease in fees could have a substantially adverse effect on our liquidity and reduce the capital resources available to Monitronics for purchasing alarm monitoring accounts.  Monitronics is currently exploring opportunities to refinance or amend the terms of its securitization facility to avoid such potential adverse effects on its liquidity and capital resources.  While we expect Monitronics will be able to refinance or amend the terms of the securitization facility before July 2012, there can be no assurances that such a refinancing or amendment will be available to Monitronics on terms acceptable to us, or on any terms.

 

In addition, if Monitronics does not repay or refinance the securitization facility by July 2012, contingent additional interest will begin to accrue at the rate of 5% per annum (including 0.5% of fees) on the two variable funding notes (or “VFNs”) under the securitization facility, which have an aggregate principal balance of $288,000,000.  The effective interest rate payable by Monitroinics under $550 million notional amount of swaps relating to the term notes under the securitization facility would also increase by 5% per annum (including 0.5% of fees) beginning July 2012, if such swaps are then outstanding.  Although such additional interest will not be payable in cash until all of the securitization debt has been paid off, the accrued amount would reduce the borrowing base available to Monitronics under its new credit facility and may indirectly reduce Monitronics’ ability to acquire new subscriber accounts.

 

We may seek external equity or debt financing in the event of any new investment opportunities, additional capital expenditures or our operations requiring additional funds, but there can be no assurance that we will be able to obtain equity or debt financing on terms that would be acceptable to us or at all.  Our ability to seek additional sources of funding depends on our future financial position and results of operations, which are subject to general conditions in or affecting our industry and our customers and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

 

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Contractual Obligations

 

Information concerning the amount and timing of required payments under our contractual obligations at December 31, 2011 is summarized below:

 

 

 

Payments Due by Period

 

 

 

Less than
1 Year

 

1-3 Years

 

3-5 Years

 

After 5
Years

 

Total

 

 

 

 

 

Amounts in thousands

 

 

 

 

 

Operating leases

 

$

5,663

 

9,338

 

6,652

 

2,467

 

24,120

 

Long-term debt (a)

 

60,000

 

65,300

 

 

838,000

 

963,300

 

Other

 

12,286

 

30

 

314

 

1,110

 

13,740

 

Total contractual obligations

 

$

77,949

 

74,668

 

6,966

 

841,577

 

1,001,160

 

 


(a)          Amounts reflect principal amounts owed and therefore excludes discount of $10,582,000.  Amounts also exclude interest payments which are based on variable interest rates.

 

We have contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible we may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements.

 

Off-Balance Sheet Arrangements

 

None.

 

Critical Accounting Policies and Estimates

 

Valuation of Subscriber Accounts.  Subscriber accounts, which totaled $838,441,000 at December 31, 2011, relate to the cost of acquiring portfolios of monitoring service contracts from independent dealers.  The subscriber accounts acquired in the Monitronics acquisition were recorded at fair value under the acquisition method of accounting.  Subscriber accounts purchased subsequent to the acquisition are recorded at cost.  All direct external costs associated with the creation of subscriber accounts are capitalized.  Internal costs, including all personnel and related support costs, incurred solely in connection with subscriber account acquisitions and transitions are expensed as incurred.

 

The costs of subscriber accounts acquired in the Monitronics acquisition are amortized using the 14-year 235% declining balance method.  The costs of subscriber accounts acquired subsequent to the acquisition are amortized using the 15-year 220% declining balance method, beginning in the month following the date of purchase.  The amortization methods were selected to provide an approximate matching of the amortization of the subscriber accounts intangible asset to estimated future subscriber revenues based on the projected lives of individual subscriber contracts.  The realizable value and remaining useful lives of these assets could be impacted by changes in subscriber attrition rates, which could have an adverse effect on our earnings.

 

We review the subscriber accounts for impairment or a change in amortization period whenever events or changes indicate that the carrying amount of the asset may not be recoverable or the life should be shortened. For purposes of recognition and measurement of an impairment loss, we view subscriber accounts as a single pool because of the assets’ homogeneous characteristics, and because the pool of subscriber accounts is the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities.  This treatment results from the due diligence program that we have implemented in which a contract must meet certain purchase criteria before we purchase the account.  All of our customers contract for essentially the same service and we are consistent in providing that service regardless of the customers’ locations.  If we determine that an impairment has occurred, we write the subscriber accounts down to their fair value.

 

Valuation of Long-lived Assets and Amortizable Other Intangible Assets.  We perform impairment tests for our long-lived assets if an event or circumstance indicates that the carrying amount of our long-lived assets may not be recoverable. In response to changes in industry and market conditions, we may also strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses. Such activities could result in impairment of our long-lived assets or other intangible assets. We are subject to the possibility of impairment of long-lived assets arising in the ordinary course of business. We regularly consider the likelihood of impairment and may

 

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recognize impairment if the carrying amount of a long-lived asset or intangible asset is not recoverable from its undiscounted cash flows in accordance with the Property, Plant and Equipment Topic of the FASB ASC.  Impairment is measured as the difference between the carrying amount and the fair value of the asset. We use both the income approach and market approach to estimate fair value. Our estimates of fair value are subject to a high degree of judgment since they include a long-term forecast of future operations. Accordingly, any value ultimately derived from our long-lived assets may differ from our estimate of fair value.

 

Valuation of Trade Receivables.  We must make estimates of the collectability of our trade receivables.  We perform extensive credit evaluations on the portfolios of subscriber accounts prior to purchase and require no collateral on the accounts that are acquired.  We establish an allowance for doubtful accounts for estimated losses resulting from the inability of subscribers to make required payments.  Factors such as historical-loss experience, recoveries and economic conditions are considered in determining the sufficiency of the allowance to cover potential losses.  Our trade receivables balance was $10,973,000, net of allowance for doubtful accounts of $1,815,000, as of December 31, 2011.  As of December 31, 2010, our trade receivables balance was $11,092,000, net of allowance for doubtful accounts of $250,000.

 

Valuation of Deferred Tax Assets.  In accordance with the Income Taxes Topic of the FASB ASC, we review the nature of each component of our deferred income taxes for the ability to realize the future tax benefits.  As part of this review, we rely on the objective evidence of our current performance and the subjective evidence of estimates of our forecast of future operations.  Our estimates of realizability are subject to a high degree of judgment since they include such forecasts of future operations.  After consideration of all available positive and negative evidence and estimates, we have determined that it is more likely than not that we will not realize the tax benefits associated with our United States deferred tax assets and certain foreign deferred tax assets, and as such, we have a valuation allowance which totaled $29,248,000 and $33,347,000 as of December 31, 2011 and 2010, respectively.

 

Valuation of Goodwill.  As of December 31, 2011, we had goodwill of $349,227,000, which represents approximately 21% of total assets.  This goodwill was recorded in connection with the acquisition of Monitronics on December 17, 2010.  We are required to test goodwill annually for impairment and record an impairment charge if the carrying amount exceeds the fair value. Recoverability of goodwill for the reporting unit is measured using a discounted cash flow model incorporating discount rates commensurate with the risks involved, which is classified as a Level 3 measurement under FASB ASC Topic 820, Fair Value Measurements and Disclosures. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment.

 

We perform our annual goodwill impairment analysis during the fourth quarter of each fiscal year.  In the event that we are not able to achieve expected cash flow levels, or other factors indicate that goodwill is impaired, we may need to write off all or part of our goodwill, which would adversely impact our operating results and financial position.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign Currency Risk

 

We continually monitor our economic exposure to changes in foreign exchange rates and may enter into foreign exchange agreements where and when appropriate. Substantially all of our foreign transactions are denominated in foreign currencies, including the liabilities of our foreign subsidiaries.  Although our foreign transactions are not generally subject to significant foreign exchange transaction gains or losses, the financial statements of our foreign subsidiaries are translated into United States dollars as part of our consolidated financial reporting. As a result, fluctuations in exchange rates affect our financial position and results of operations.

 

Interest Rate Risk

 

As of December 31, 2011, we have variable interest rate debt with principal amounts of $963,300,000.  As a result, we have exposure to changes in interest rates related to these debt obligations.  Monitronics uses derivative financial instruments to manage the exposure related to the movement in interest rates.  As of December 31, 2011, we have a derivative financial instrument liability of approximately $36,279,000, which represented the derivative’s fair value at that date.  The derivatives are not designated as hedges and were entered into with the intention of reducing the risk

 

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associated with variable interest rates on the debt obligations.  We do not use derivative financial instruments for trading purposes.

 

Tabular Presentation of Interest Rate Risk

 

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

 

Year of Maturity

 

Swaps (a)

 

Variable Rate
Debt

 

Total

 

 

 

Amounts in thousands

 

2012

 

$

16,959

 

60,000

 

76,959

 

2013

 

 

 

 

2014

 

19,320

 

65,300

 

84,620

 

2015

 

 

 

 

2016

 

 

 

 

Thereafter

 

 

838,000

 

838,000

 

Total

 

$

36,279

 

963,300

 

999,579

 

 

 

 

 

 

 

 

 

Fair Value

 

$

36,279

 

$

952,718

 

$

988,997

 

 


(a)          The average interest rate paid on the Swaps is 6.48% and the average interest rate received is the 1-month LIBOR rate plus 0.9%.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our consolidated financial statements are filed under this Item, beginning on Page 38.  The financial statement schedules required by Regulation S-X are filed under Item 15 of this Annual Report on Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and with the participation of management, including its chairman, president and principal accounting officer (the “Executives”), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Executives concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2011 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

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There has been no change in the Company’s internal control over financial reporting identified during the three months ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Ascent Capital’s management is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements and related disclosures in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements and related disclosures in accordance with generally accepted accounting principles; (3) provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (4) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements and related disclosures.

 

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

The Company assessed the design and effectiveness of internal control over financial reporting as of December 31, 2011.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework .

 

Based upon our assessment using the criteria contained in COSO, management has concluded that, as of December 31, 2011, Ascent Capital’s internal control over financial reporting is effectively designed and operating effectively.

 

The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by KPMG LLP, the independent registered public accounting firm that audited our financial statements.  Their report appears on page 38 of this Annual Report on Form 10-K.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

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Report of Independent Registered Public Accounting Firm

 

 

The Board of Directors and Stockholders

Ascent Capital Group, Inc.:

 

We have audited the internal control over financial reporting of Ascent Capital Group, Inc. as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Management of the Company is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Ascent Capital Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ascent Capital Group, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income (loss), cash flows and stockholders’ equity for each of the years in the three-year period ended December 31, 2011, and our report dated February 29, 2012 expressed an unqualified opinion on those consolidated financial statements.

 

 

/s/ KPMG LLP

Dallas, Texas

 

February 29, 2012

 

 

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Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Ascent Capital Group, Inc.:

 

We have audited the accompanying consolidated balance sheets of Ascent Capital Group, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income (loss), cash flows and stockholders’ equity for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ascent Capital Group, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Ascent Capital Group, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/ KPMG LLP

 

Dallas, Texas
February 29, 2012

 

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ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2011 and 2010

Amounts in thousands, except share amounts

 

 

 

2011

 

2010

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

183,558

 

149,857

 

Restricted cash (note 2)

 

31,196

 

28,915

 

Trade receivables, net

 

10,973

 

11,092

 

Deferred income tax assets, net (note 13)

 

5,881

 

9,070

 

Investments in marketable securities (note 8)

 

40,377

 

 

Assets of discontinued operations (note 5)

 

 

22,990

 

Income taxes receivable

 

308

 

8,798

 

Prepaid and other current assets

 

17,600

 

9,964

 

Total current assets

 

289,893

 

240,686

 

 

 

 

 

 

 

Restricted cash (note 2)

 

28,000

 

35,000

 

Property and equipment, net (note 6)

 

74,697

 

78,211

 

Subscriber accounts, net (note 2)

 

838,441

 

822,811

 

Dealer network, net (note 2)

 

39,933

 

50,013

 

Goodwill

 

349,227

 

349,227

 

Assets of discontinued operations (note 5)

 

62

 

62,420

 

Other assets, net (note 2)

 

5,706

 

6,514

 

Total assets

 

$

1,625,959

 

$

1,644,882

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

3,987

 

7,059

 

Accrued payroll and related liabilities

 

5,149

 

8,510

 

Other accrued liabilities

 

19,000

 

14,366

 

Deferred revenue

 

6,803

 

3,382

 

Purchase holdbacks

 

12,273

 

9,818

 

Current portion of long-term debt (note 9)

 

60,000

 

20,000

 

Liabilities related to assets of discontinued operations (note 5)

 

7,101

 

30,771

 

Total current liabilities

 

114,313

 

93,906

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

Long-term debt (note 9)

 

892,718

 

896,733

 

Derivative financial instruments

 

36,279

 

64,745

 

Deferred income tax liability, net (note 13)

 

9,793

 

12,798

 

Other liabilities

 

12,529

 

18,282

 

Liabilities related to assets of discontinued operations (note 5)

 

 

10,678

 

Total liabilities

 

1,065,632

 

1,097,142

 

 

 

 

 

 

 

Commitments and contingencies (note 17)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued

 

 

 

Series A common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding 13,471,594 and 13,553,251 shares at December 31, 2011 and 2010, respectively

 

135

 

136

 

Series B common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 739,894 and 733,599 shares at December 31, 2011 and 2010, respectively

 

7

 

7

 

Series C common stock, $.01 par value. Authorized 45,000,000 shares; no shares issued

 

 

 

Additional paid-in capital

 

1,461,671

 

1,467,757

 

Accumulated deficit

 

(896,710

)

(917,347

)

Accumulated other comprehensive loss

 

(4,776

)

(2,813

)

Total stockholders’ equity

 

560,327

 

547,740

 

Total liabilities and stockholders’ equity

 

$

1,625,959

 

$

1,644,882

 

 

See accompanying notes to consolidated financial statements.

 

40


 


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ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income (loss)

Years ended December 31, 2011, 2010 and 2009

Amounts in thousands, except per share amounts

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Net revenue

 

$

311,898

 

9,129

 

 

Operating expenses:

 

 

 

 

 

 

 

Cost of services

 

40,553

 

1,422

 

 

Selling, general, and administrative, including stock-based and long-term compensation (note 14)

 

76,845

 

30,314

 

27,451

 

Amortization of subscriber accounts and dealer network

 

159,619

 

5,980

 

 

Depreciation

 

7,052

 

3,067

 

4,259

 

Restructuring charges (note 12)

 

4,258

 

4,604

 

695

 

Loss (gain) on sale of operating assets, net

 

565

 

(2,768

)

152

 

 

 

288,892

 

42,619

 

32,557

 

Operating Income (loss)

 

23,006

 

(33,490

)

(32,557

)

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

671

 

3,638

 

2,676

 

Interest expense

 

(42,813

)

(2,672

)

(102

)

Realized and unrealized loss on derivative financial instruments

 

(10,601

)

(1,682

)

 

Other income (expense), net

 

4,042

 

975

 

2,899

 

 

 

(48,701

)

259

 

5,473

 

Loss from continuing operations before income taxes

 

(25,695

)

(33,231

)

(27,084

)

Income tax expense from continuing operations (note 13)

 

(2,457

)

(270

)

(28,721

)

Net loss from continuing operations

 

(28,152

)

(33,501

)

(55,805

)

Discontinued operations:

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

48,836

 

(12,077

)

(6,682

)

Income tax (expense) benefit from discontinued operations

 

(47

)

7,084

 

9,590

 

Income (loss) from discontinued operations, net of income taxes

 

48,789

 

(4,993

)

2,908

 

Net income (loss)

 

$

20,637

 

(38,494

)

(52,897

)

Other comprehensive income (loss) (note 15):

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(2,950

)

4,026

 

4,693

 

Unrealized holding gain (loss), net of income tax

 

124

 

(1,352

)

1,352

 

Pension liability adjustment

 

863

 

(1,870

)

(1,709

)

Other comprehensive income (loss)

 

(1,963

)

804

 

4,336

 

Comprehensive income (loss)

 

$

18,674

 

$

(37,690

)

(48,561

)

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share (note 2)

 

 

 

 

 

 

 

Continuing operations

 

$

(1.98

)

(2.36

)

(3.97

)

Discontinued operations

 

3.43

 

(0.35

)

0.21

 

Net income (loss)

 

$

1.45

 

(2,71

)

(3.76

)

 

See accompanying notes to consolidated financial statements.

 

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ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2011, 2010 and 2009

Amounts in thousands

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

20,637

 

(38,494

)

(52,897

)

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

 

 

 

 

 

 

 

Loss (income) from discontinued operations, net of income tax

 

(48,789

)

4,993

 

(2,908

)

Amortization of subscriber accounts and dealer network

 

159,619

 

5,980

 

 

Depreciation

 

7,052

 

3,067

 

4,259

 

Stock-based compensation

 

4,732

 

3,148

 

2,443

 

Deferred income tax expense

 

181

 

747

 

22,194

 

Unrealized (gain) loss on derivative financial instruments

 

(28,044

)

1,682

 

 

Long term debt amortization

 

16,985

 

780

 

 

Loss (gain) on sale of assets, net

 

565

 

(2,768

)

152

 

Other non-cash activity, net

 

6,428

 

(1,874

)

2,145

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Trade receivables

 

(5,365

)

1,806

 

 

Prepaid expenses and other assets

 

225

 

4,368

 

(3,535

)

Payables and other liabilities

 

(4,546

)

12,388

 

(6,695

)

Operating activities from discontinued operations, net

 

1,558

 

54,477

 

70,816

 

Net cash provided by operating activities

 

131,238

 

50,300

 

35,974

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(4,242

)

(139

)

(1,420

)

Purchases of subscriber accounts

 

(162,714

)

(4,214

)

 

Purchases of marketable securities

 

(40,253

)

(41,757

)

(68,126

)

Decrease (increase) in restricted cash

 

4,719

 

(13,318

)

 

Cash paid for acquisitions, net of cash acquired

 

 

(388,401

)

 

Proceeds from sales of marketable securities

 

 

96,685

 

16,309

 

Proceeds from the sale of discontinued operations

 

99,488

 

92,121

 

 

Proceeds from the sale of operating assets

 

 

6,201

 

23

 

Other investing activities, net

 

 

54

 

 

Investing activities from discontinued operations, net

 

(3,196

)

(37,553

)

(31,674

)

Net cash used in investing activities

 

(106,198

)

(290,321

)

(84,888

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from long-term debt

 

78,800

 

110,300

 

 

Payments of long-term debt

 

(59,800

)

(9,000

)

 

Payment of deferred financing costs

 

 

(2,388

)

 

Stock option exercises

 

1,291

 

 

2,121

 

Purchases (and retirement) of common stock

 

(11,488

)

 

 

Other

 

 

2

 

 

Financing activities from discontinued operations, net

 

(142

)

(1,950

)

(1,810

)

Net cash provided by financing activities

 

8,661

 

96,964

 

311

 

Net increase (decrease) in cash and cash equivalents

 

33,701

 

(143,057

)

(48,603

)

Cash and cash equivalents at beginning of year

 

149,857

 

292,914

 

341,517

 

Cash and cash equivalents at end of year

 

$

183,558

 

149,857

 

292,914

 

 

See accompanying notes to consolidated financial statements.

 

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ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Years ended December 31, 2011, 2010 and 2009

Amounts in thousands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

other

 

Total

 

 

 

Preferred

 

Common Stock

 

paid-in

 

Accumulated

 

comprehensive

 

stockholders

 

 

 

stock

 

Series A

 

Series B

 

Series C

 

capital

 

deficit

 

income (loss)

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008

 

 

134

 

7

 

 

1,459,078

 

(825,956

)

(7,953

)

625,310

 

Net loss

 

 

 

 

 

 

(52,897

)

 

(52,897

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

4,336

 

4,336

 

Stock-based compensation

 

 

 

 

 

2,443

 

 

 

2,443

 

Stock option exercises (note 14)

 

 

 

 

 

2,121

 

 

 

2,121

 

Shares withheld for tax liability

 

 

 

 

 

(263

)

 

 

(263

)

Other

 

 

 

 

 

1,546

 

 

 

1,546

 

Balance at December 31, 2009

 

 

134

 

7

 

 

1,464,925

 

(878,853

)

(3,617

)

582,596

 

Net loss

 

 

 

 

 

 

(38,494

)

 

(38,494

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

804

 

804

 

Stock-based compensation

 

 

2

 

 

 

3,146

 

 

 

3,148

 

Shares withheld for tax liability

 

 

 

 

 

(314

)

 

 

(314

)

Balance at December 31, 2010

 

 

136

 

7

 

 

1,467,757

 

(917,347

)

(2,813

)

547,740

 

Net loss

 

 

 

 

 

 

20,637

 

 

20,637

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

(1,963

)

(1,963

)

Stock repurchases (note 15)

 

 

(2

)

 

 

(11,486

)

 

 

(11,488

)

Stock-based compensation

 

 

 

 

 

4,732