News Column

ASCENT CAPITAL GROUP, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 27, 2014

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, 2013, our assets consisted primarily of our wholly-owned operating subsidiary, Monitronics.

Monitronics and Subsidiaries



On December 17, 2010, we acquired 100% of the outstanding capital stock of Monitronics, through the merger of Mono Lake Merger Sub, Inc., a direct wholly-owned subsidiary of Ascent Capital established to consummate the merger, with and into Monitronics, with Monitronics as the surviving corporation in the merger (the "Monitronics Acquisition"). On August 16, 2013, Monitronics acquired all of the equity interests of Security Networks and certain affiliated entities in the Security Networks Acquisition.

Monitronics provides security alarm monitoring and related services to residential and business subscribers throughout the U.S. and parts of Canada. Monitronics monitors signals arising from burglaries, fires, medical alerts and other events through security systems

25



--------------------------------------------------------------------------------

Table of Contents



at subscribers' premises. Nearly all of its revenues are derived from monthly recurring revenues under security alarm monitoring contracts acquired through its exclusive nationwide network of independent dealers.

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 fourteen to fifteen years using a declining balance method beginning in the month following the date of acquisition. 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 and switching to a competitor's service. 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 number of subscribers for that period. Monitronics considers an account canceled if payment from the subscriber is deemed uncollectible or if the subscriber cancels for various reasons. If a subscriber relocates but continues its service, this is not a cancellation. If the subscriber relocates, discontinues its service and a new subscriber takes over the original subscriber's service continuing the revenue stream, this is also not a cancellation. 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 to Monitronics the cost paid to acquire the contract. To help ensure the dealer's obligation to Monitronics, Monitronics typically maintains a dealer funded holdback reserve ranging from 5-10% of subscriber accounts in the guarantee period. In some cases, the amount of the holdback liability may be less than actual attrition experience.

The table below presents subscriber data for the twelve months ended December 31, 2013 and 2012: Twelve Months Ended December 31, 2013 2012 Beginning balance of accounts 812,539 700,880 Accounts acquired 354,541 202,379 Accounts cancelled (111,889 ) (89,724 ) Canceled accounts guaranteed by dealer and acquisition adjustment (a) (b) (9,036 ) (996 ) Ending balance of accounts 1,046,155 812,539 Monthly weighted average accounts 908,921 732,694 Attrition rate (12.3 )% (12.2 )%



--------------------------------------------------------------------------------

(a) Canceled accounts that are contractually guaranteed to be refunded from holdback.

(b) Includes 2,064 subscriber accounts that were proactively cancelled during 2013 because they were active with both Monitronics and Security Networks upon acquisition.

Monitronics analyzes its attrition by classifying accounts into annual pools based on the year of acquisition. Monitronics then tracks the number of accounts that cancel as a percentage of the initial number of accounts acquired for each pool for each year subsequent to its acquisition. Based on the average cancellation rate across the pools, in recent years 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 few years of the subscriber account life, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool gradually increases and historically has peaked following the end of the initial contract term, which is typically three to five years. The peak following the end of the initial contract term is primarily a result of the buildup of subscribers that moved or no longer had need for the service but did not cancel their service until the end of their initial contract term. Subsequent to the peak following the end of the initial contract term, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool declines.

26



--------------------------------------------------------------------------------

Table of Contents Accounts Acquired



During the three months ended December 31, 2013 and 2012, Monitronics acquired 37,341 and 120,660 subscriber accounts. Subscriber accounts acquired for the three months ended December 31, 2012 include approximately 93,000 accounts purchased in a bulk buy on October 25, 2012. In addition, acquired contracts for the twelve months ended December 31, 2013 include 203,898 accounts acquired in the Security Networks Acquisition, which was completed on August 16, 2013.

Recurring monthly revenue ("RMR") acquired during the three and twelve months ended December 31, 2013 was approximately $1,704,000 and $6,772,000, respectively, without giving effect to RMR acquired in the Security Networks Acquisition. RMR of approximately $8,681,000 was acquired in the Security Networks Acquisition. RMR acquired during the three and twelve months ended December 31, 2012 was approximately $5,661,000 and $9,262,000, respectively, which includes purchased RMR of approximately $4,400,000 from the October 25, 2012 bulk buy.

Adjusted EBITDA



We evaluate the performance of our operations based on financial measures such as revenue and "Adjusted EBITDA." Adjusted EBITDA is defined as net income (loss) before interest expense, interest income, income taxes, depreciation, amortization (including the amortization of subscriber accounts and dealer network), realized and unrealized gain/(loss) on derivative instruments, restructuring charges, stock-based and other non-cash long-term incentive compensation, and other non-cash or nonrecurring charges. 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 Monitronics' covenants are calculated under the agreements governing their debt obligations. Adjusted EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles ("GAAP"), should not be construed as an alternative to net income or loss and is indicative neither of our results of operations nor of cash flows available to fund all of our cash needs. It is, however, a measurement that 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.

27



--------------------------------------------------------------------------------

Table of Contents 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 Security Networks are included from August 16, 2013, the date of the Security Networks Acquisition (amounts in thousands).

Years ended December 31, 2013 2012 2011 Net revenue $ 451,033 (a) 344,953 311,898 (b) Cost of services 74,136 49,978 40,699 Selling, general, and administrative 92,002 73,868 77,364 Amortization of subscriber accounts, dealer network and other intangible assets 208,760 163,468 159,619 Restructuring charges 1,111 - 4,258 Loss (gain) on sale of operating assets, net (5,473 ) (8,670 ) 565 Interest expense 95,836 71,467 42,856 Realized and unrealized loss on derivative financial instruments - 2,044 10,601 Income tax expense from continuing operations 4,206 2,594 2,498 Net loss from continuing operations (22,536 ) (25,001 ) (28,901 ) Earnings (loss) from discontinued operations, net of income taxes 129 (4,348 ) 48,789 Net income (loss) (22,407 ) (29,349 ) 19,888 Adjusted EBITDA (c) Monitronics business Adjusted EBITDA $ 305,250 235,675 213,820 Corporate Adjusted EBITDA (776 ) 3,096 (12,052 ) Total Adjusted EBITDA $ 304,474 238,771 201,768 Adjusted EBITDA as a percentage of Revenue Monitronics business 67.7 % 68.3 % 68.6 % Corporate (0.2 )% 0.9 % (3.9 )%



--------------------------------------------------------------------------------

(a) Net revenue for the year ended December 31, 2013 reflects the negative impact of a $2,715,000 fair value adjustment that reduced deferred revenue acquired in the Security Networks Acquisition.

(b) Net revenue for the year ended December 31, 2011 reflects the negative impact of a $2,295,000 fair value adjustment that reduced deferred revenue acquired in the Monitronics Acquisition.

(c) See reconciliation to net loss from continuing operations below.

Net Revenue. Revenue increased $106,080,000, or 30.8%, for the year ended December 31, 2013 as compared to the corresponding prior year. The increase in net revenue is attributable to the growth in the number of subscriber accounts and the increase in average monthly revenue per subscriber. The growth in subscriber accounts reflects the effects of the Security Networks Acquisition in August 2013, which included over 200,000 subscriber accounts, acquisition of over 136,000 accounts through Monitronics' authorized dealer program subsequent to December 31, 2012, and the purchase of approximately 18,200 accounts in various bulk buys over the last 12 months. In addition, average monthly revenue per subscriber increased from $39.50 as of December 31, 2012 to $40.90 as of December 31, 2013. Net revenue for the year ended December 31, 2013 also reflects the negative impact of a $2,715,000 fair value adjustment that reduced deferred revenue acquired in the Security Networks Acquisition.

Revenue increased $33,055,000, or 10.6%, for the year ended December 31, 2012 as compared to the corresponding prior year. The increase is attributable to the increase in the number of subscriber accounts from 700,880 as of December 31, 2011 to 812,539 as of December 31, 2012. Approximately 93,000 accounts were purchased in a bulk buy on October 25, 2012, which provided approximately $9,640,000 in increased revenue. Average monthly revenue per subscriber increased from $37.49 as of December 31, 2011 to $39.50 as of December 31, 2012. Furthermore, the increase is partially attributable to a $2,295,000 fair value adjustment associated with deferred revenue acquired in the Monitronics Acquisition, which reduced net revenue for the year ended December 31, 2011.

Cost of Services. Cost of services increased $24,158,000 or 48.3%, for the year ended December 31, 2013 as compared to the corresponding prior year. The increase is primarily attributable to increases in cellular and service costs. Cellular costs have increased due to more accounts being monitored across the cellular network, which often include interactive and home automation

28



--------------------------------------------------------------------------------

Table of Contents



services. This has also resulted in higher service costs as existing subscribers upgrade their systems. In addition, cost of services for the year ended December 31, 2013, includes Security Networks costs of $8,233,000. Cost of service as a percent of net revenue increased from 14.5% for the year ended December 31, 2012 to 16.4% for the year ended December 31, 2013.

Cost of services increased $9,279,000 or 22.8%, for the year ended December 31, 2012 as compared to the corresponding prior year. The increase is attributable to an increased number of accounts monitored across the cellular network and an increase in interactive and home automation services, which resulted in higher operating and service costs. Cost of service as a percent of net revenue increased from 13.0% for the year ended December 31, 2011 to 14.5% for the year ended December 31, 2012.

Selling, General and Administrative. Selling, general and administrative expense ("SG&A") increased $18,134,000, or 24.5%, for the year ended December 31, 2013 as compared to the corresponding prior year. The increase is attributable to increases in Monitronics SG&A costs of $10,652,000 and the inclusion of Security Networks SG&A costs of $6,456,000 for the year ended December 31, 2013. The increased Monitronics SG&A costs are attributable to increased payroll expenses of approximately $2,379,000 and other increases due to Monitronics' subscriber growth in 2013. Monitronics also incurred acquisition and integration costs of $2,470,000 and $1,264,000, respectively, related to professional services rendered and other costs incurred in connection with the Security Networks Acquisition. Additionally, the Company's consolidated stock-based compensation expense increased approximately $2,876,000 for the year ended December 31, 2013, as compared to the corresponding prior year periods. This increase is related to restricted stock and option awards granted to certain executives in late 2012 and throughout 2013. SG&A as a percent of net revenue decreased from 21.4% for the year ended December 31, 2012 to 20.4% for the year ended December 31, 2013.

SG&A decreased $3,496,000, or 4.5%, for the year ended December 31, 2012 as compared to the corresponding prior year. The decrease is primarily attributable to decreased administrative and corporate expenses related to the reorganization of the Company in 2010 and 2011 with the acquisition of Monitronics and disposition of the Content Services and Creative Services businesses. Additionally, the decrease is attributable to a non-recurring $2,640,000 charge related to an ongoing litigation matter recorded for the year ended December 31, 2011. The decrease was partially offset by an increase in Monitronics SG&A costs. The increased Monitronics SG&A costs were driven by increased payroll, marketing and stock-based compensation expenses of approximately $3,525,000 as compared to the corresponding prior year period. The increase in stock-based compensation expense is related to restricted stock and stock option awards granted to certain employees during 2011 and 2012. SG&A as a percent of net revenue decreased from 24.8% for the year ended December 31, 2011 to 21.4% for the year ended December 31, 2012.

Amortization of Subscriber Accounts, Dealer Network and Other Intangible Assets. Amortization of subscriber accounts, dealer network and other intangible assets increased $45,292,000 and $3,849,000 for the years ended December 31, 2013 and 2012, respectively, as compared to the corresponding prior years. The 2013 increase is attributable to amortization of subscriber accounts acquired subsequent to December 31, 2012, including amortization of approximately $23,599,000 related to the definite lived intangible assets acquired in the Security Networks Acquisition. The 2012 increase is primarily attributable to amortization of subscriber accounts acquired subsequent to December 31, 2011.

Restructuring Charges. In connection with the Security Networks Acquisition, management approved a restructuring plan to transition Security Networks operations in West Palm Beach and Kissimmee, Florida to Dallas, Texas (the "2013 Restructuring Plan"). The 2013 Restructuring Plan provides certain employees with a severance package that entitles them to benefits upon completion of the transition in 2014. Severance costs related to the 2013 Restructuring Plan are recognized ratably over the future service period. During the year ended December 31, 2013, the Company recorded $1,111,000 of restructuring charges related to employee termination benefits.

Additionally, in connection with the 2013 Restructuring Plan, the Company allocated approximately $492,000 of the Security Networks Purchase Price to accrued restructuring in relation to the Security Networks' severance agreement entered into with its former Chief Executive Officer.

There were no restructuring charges recorded in continuing operations for the year ended December 31, 2012. During 2011, the Company completed certain restructuring activities and recorded charges of $4,258,000. The 2011 restructuring charges were in relation to 2010 and 2008 restructuring plans (the "2010 Restructuring Plan" and "2008 Restructuring Plan," respectively). The 2010 Restructuring Plan began in the fourth quarter of 2010, 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 it sold most of its media and entertainment assets and acquired Monitronics, an alarm monitoring business. Such charges include retention costs for employees to remain employed until the sales were complete, severance costs for certain employees and costs for facilities that were no longer being used by the Company due to the Creative/Media and Content Distribution sales.

29



--------------------------------------------------------------------------------

Table of Contents

The 2008 Restructuring Plan was implemented to align the Company's organization with its strategic goals and how it operated, managed and sold its 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 the Company's Mexico operations.

The following table provides the activity and balances of the Company's restructuring plans (amounts in thousands):

Year ended December 31, 2013 Opening balance Additions Deductions Other Ending balance 2013 Restructuring Plan Severance and retention $ - 1,111 (33 ) 492 (a) 1,570 2008 Restructuring Plan Excess facility costs $ 141 - - - 141 Year ended December 31, 2012 Opening balance Additions Deductions (b) Other Ending balance 2010 Restructuring Plan Severance and retention $ 1,886 - (1,886 ) - - 2008 Restructuring Plan Excess facility costs $ 236 - (95 ) - 141 Year ended December 31, 2011 Opening balance Additions Deductions (a) Other Ending balance 2010 Restructuring Plan Severance and retention $ 3,590 4,186 (5,890 ) - 1,886 2008 Restructuring Plan Severance $ 9 - (9 ) - - Excess facility costs 211 72 (47 ) - 236 Total $ 220 72 (56 ) - 236



--------------------------------------------------------------------------------

(a) Amount was recorded upon the acquisition of Security Networks. (b) Primarily represents cash payments.



Loss (Gain) on the Sale of Assets. During the year ended December 31, 2013, the Company sold an equity investment which resulted in a pre-tax gain of $3,250,000. Additionally, the Company sold certain land and building property for $9,634,000 resulting in a pre-tax gain of $2,221,000. During the year ended December 31, 2012, the Company sold land and buildings for approximately $15,860,000, resulting in pre-tax gains of approximately $9,202,000. In addition, the Company sold its 50% interest in an equity method investment for $1,420,000, resulting in a pre-tax loss of $532,000. During the year ended December 31, 2011, the Company disposed of certain property and equipment, resulting in a pre-tax loss of $565,000.

Interest Expense. Interest expense increased $24,396,000 and $28,611,000 for the years ended December 31, 2013 and 2012, respectively, as compared to the corresponding prior years. The increase in interest expense for the year ended December 31, 2013 and 2012 is due to the presentation of interest cost related to the Company's current derivative instruments and increases in the Company's consolidated debt balance. Interest cost related to the Company's current derivative instruments is presented in Interest expense on the statement of operations as the related derivative instrument is an effective cash flow hedge of the Company's interest rate risk for which hedge accounting is applied. As the Company did not apply hedge accounting on its prior derivative instruments, the related interest costs incurred prior to March 23, 2012 are presented in Realized and unrealized loss on derivative financial instruments in the condensed consolidated statements of operations and comprehensive income (loss). The 2013 increases were offset by decreased interest rates on the Credit Facility term loans due to the March 2013 amendment to the Credit Facility agreement. Additionally, increases in 2013 and 2012 interest expense are offset by decreases in amortization of debt discount, as the debt discount related to the securitized debt structure outstanding prior to the March 23, 2012 refinancing exceeded debt discounts on the current outstanding debt. Amortization of debt discount for the year ended December 31, 2013, 2012 and 2011 was $2,302,000 and $4,473,000 and $16,985,000, respectively. Amortization of debt discount for the year ended December 31, 2013 includes the impact of the debt discount related to the beneficial conversion feature of Ascent Capital's Convertible Notes issued in the third quarter of 2013.

30



--------------------------------------------------------------------------------

Table of Contents

Realized and Unrealized Loss on Derivative Financial Instruments. Realized and unrealized loss on derivative financial instruments was $2,044,000 and $10,601,000 for the years ended December 31, 2012 and 2011, respectively. The decrease in 2012 is attributable to the March 23, 2012 settlement of Monitronics' prior derivative instruments for which the Company did not apply hedge accounting.

For the year ended December 31, 2012, the realized and unrealized loss on the derivative financial instruments includes settlement payments of $8,837,000 partially offset by a $6,793,000 unrealized gain related to the change in fair value of the derivative instruments before their termination on March 23, 2012. For the year ended December 31, 2011, the realized and unrealized loss on derivative financial instruments 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.

Income Taxes from Continuing Operations. For the year ended December 31, 2013, we had a pre-tax loss from continuing operations of $18,330,000 and income tax expense from continuing operations of $4,206,000. For the year ended December 31, 2012, we had a pre-tax loss from continuing operations of $22,407,000 and income tax expense from continuing operations of $2,594,000. For the year ended December 31, 2011, we had a pre-tax loss from continuing operations of $26,403,000 and an income tax expense from continuing operations of $2,498,000. Income tax expense from continuing operations for the year ended December 31, 2013, is attributable to Monitronics' state tax expense and the deferred tax impact from amortization of deductible goodwill attributable to the Security Networks Acquisition, offset by the reduction in valuation allowance as a result of acquisition accounting for the Security Networks Acquisition. Income tax expense from continuing operations for the year ended December 31, 2012, and 2011 is primarily attributable to Monitronics' state tax expense.

Earnings (Loss) from Discontinued Operations, Net of Income Taxes. Earnings (loss) from discontinued operations, net of income taxes were $129,000, $(4,348,000) and $48,789,000 for the years ended December 31, 2013, 2012 and 2011, respectively. These amounts included the earnings and expenses of operations disposed of in prior years and the related gains or losses on those disposals. 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 (amounts in thousands): Year Ended December 31, 2013 2012 2011 Total Adjusted EBITDA $ 304,474 238,771 201,768 Amortization of subscriber accounts, dealer network and other intangible assets (208,760 ) (163,468 ) (159,619 ) Depreciation (8,941 ) (8,404 ) (7,052 ) Loss on pension plan settlements - (6,571 ) - Stock-based and long-term incentive compensation (8,174 ) (5,298 ) (4,456 ) Restructuring charges (1,111 ) - (4,258 ) Security Networks acquisition related costs (2,470 ) - - Security Networks integration related costs (1,264 ) - - Impairment of assets held for sale - (1,692 ) - Realized and unrealized loss on derivative instruments - (2,044 ) (10,601 ) Refinancing costs - (6,245 ) - Interest income 3,752 4,011 671 Interest expense (95,836 ) (71,467 ) (42,856 ) Income tax expense from continuing operations (4,206 ) (2,594 ) (2,498 )



Net loss from continuing operations $ (22,536 ) (25,001 ) (28,901 )

Adjusted EBITDA increased $65,703,000, or 27.5% for the year ended December 31, 2013 as compared to the corresponding prior year. The increase in Adjusted EBITDA was primarily due to revenue growth. Adjusted EBITDA increased $37,003,000, or 18.3% for the year ended December 31, 2012 as compared to the corresponding prior year. The increase in Adjusted EBITDA was primarily due to revenue growth. The Monitronics business' Adjusted EBITDA was $305,250,000, $235,675,000and $213,820,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

31



--------------------------------------------------------------------------------

Table of Contents Discontinued Operations



The consolidated financial statements and accompanying notes of Ascent Capital have been prepared reflecting the following businesses as discontinued operations for all years presented in accordance with FASB ASC Topic 205, Presentation of Financial Statements. These businesses were operated by our wholly-owned subsidiary 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").

In June 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 the year ended December 31, 2011.

On February 28, 2011, Ascent Capital completed the sale of 100% of the Content Distribution business to Encompass Digital Media, Inc. ("Encompass"). Ascent Capital received cash proceeds of approximately $104,000,000 and recorded a pre-tax gain of $66,136,000 and $6,716,000 of related income tax expense for the year ended December 31, 2011. The Creative Services business and the Media Services business units were disposed of in 2010.

Liquidity and Capital Resources

At December 31, 2013, we have $44,701,000 of cash and cash equivalents and $129,496,000 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, which are primarily generated from the operations of Monitronics. During the years ended December 31, 2013, 2012 and 2011, our cash flow from operating activities was $212,233,000, $146,790,000 and $131,238,000, 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, 2013, 2012 and 2011, we used cash of $234,914,000, $304,665,000 and $162,714,000, respectively, to fund subscriber account acquisitions, net of holdback and guarantee obligations. In addition, during the years ended December 31, 2013, 2012 and 2011, we used cash of $9,939,000, $6,076,000, and $4,242,000, respectively, to fund our capital expenditures.

In 2013, we paid cash of $478,738,000 as part of the purchase price paid to acquire Security Networks, net of Security Networks cash on hand of $3,096,000. The Security Networks Acquisition was funded by the proceeds of Ascent Capital's July issuance of $103,500,000 in aggregate principal amount of 4.00% Senior Convertible Notes due 2020, the proceeds of Monitronics' issuance of $175,000,000 in aggregate principal amount of 9.125% Senior Notes due 2020 and the proceeds of incremental term loans of $225,000,000 million issued under Monitronics' existing credit facility, and approximately $20,000,000 of cash on hand. In addition to the cash paid, the purchase price also consisted of 253,333 shares of Ascent Capital's Series A common stock (par value $0.01 per share) with a Closing Date fair value of $18,723,000.

During 2013, 2012 and 2011, in order to improve our investment rate of return, we purchased marketable securities primarily consisting of diversified corporate bond funds for cash of $21,770,000, $99,667,000 and $40,253,000, respectively. In addition, the Company sold marketable securities for proceeds of approximately $33,415,000 during the year ended December 31, 2013.

On November 14, 2013, the Company's Board of Directors authorized the repurchase of an additional $25,000,000 of its Series A common stock. No shares had been repurchased in 2013 pursuant to this authorization.

On October 25, 2013, we purchased 351,734 shares of Ascent Capital's Series B common stock (the "Purchased Shares") from Dr. John Malone for aggregate cash consideration of approximately $33,436,000. The Purchased Shares were cancelled and returned to the status of authorized and unissued.

32



--------------------------------------------------------------------------------

Table of Contents

On June 16, 2011, our Board of Directors authorized the repurchase of up to $25,000,000 of our Series A common stock. During the year ended December 31, 2012 we repurchased 234,728 shares of our Series A common stock for a total of approximately $12,880,000. During the year ended December 31, 2011, we repurchased 269,659 shares of our Series A common stock for a total of approximately $11,488,000. These shares were returned to authorized and unissued, reducing the number of our shares outstanding.

In considering our liquidity requirements for 2014, we evaluated our known future commitments and obligations. We will require the availability of funds to finance the strategy of our primary operating subsidiary, Monitronics, which is to grow through the acquisition of subscriber accounts. Additionally, as a result of announcements by AT&T and certain other telecommunication providers that they intend to discontinue 2G services in the near future, we expect to incur expenditures over the next three fiscal years as we begin replacing the 2G equipment used in many of our subscribers' security systems. We expect that these costs will be relatively small in 2014 and then increase incrementally in 2015 and 2016. We considered the expected cash flow from Monitronics, as this business is the driver of our operating cash flows. In addition, we considered the borrowing capacity of Monitronics' Credit Facility revolver, under which Monitronics could borrow an additional $205,500,000 as of December 31, 2013. 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 the Company at December 31, 2013 includes the principal balance of $1,615,466,000 under its Convertible Notes, Senior Notes, Credit Facility, and Credit Facility revolver. The Convertible Notes have an outstanding principal balance of $103,500,000 as of December 31, 2013 and mature July 15, 2020. The Senior Notes have an outstanding principal balance of $585,000,000 as of December 31, 2013 and mature on April 1, 2020. The Credit Facility term loans have an outstanding principal balance of $907,466,000 as of December 31, 2013 and require principal payments of approximately $2,292,000 per quarter with the remaining outstanding balance becoming due on March 23, 2018. The Credit Facility revolver has an outstanding balance of $19,500,000 as of December 31, 2013 and becomes due on December 22, 2017.

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.

Contractual Obligations Information concerning the amount and timing of required payments under our contractual obligations at December 31, 2013 is summarized below (amounts in thousands): Payments Due by Period Less than After 5 1 Year 1-3 Years 3-5 Years Years Total Operating leases $ 5,857 7,587 356 2,941 16,741 Long-term debt (a) 9,166 18,333 899,467 688,500 1,615,466 Other 19,868 220 522 8,900 29,510 Total contractual obligations $ 34,891 26,140 900,345 700,341 1,661,717



--------------------------------------------------------------------------------

(a) Amounts reflect principal amounts owed and therefore exclude unamortized discount and premiums, net, of $34,202,000. 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. 33



--------------------------------------------------------------------------------

Table of Contents

Critical Accounting Policies and Estimates

Valuation of Subscriber Accounts

Subscriber accounts, which totaled $1,340,954,000 net of accumulated amortization, at December 31, 2013, relate to the cost of acquiring portfolios of monitoring service contracts from independent dealers. The subscriber accounts acquired in the Monitronics and Security Networks acquisitions were recorded at fair value under the acquisition method of accounting. Subscriber accounts not acquired as part of a business combination 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 and Security Networks acquisitions, as well as certain accounts acquired in bulk purchases, are amortized using the 14-year 235% declining balance method. The costs of all other subscriber accounts are amortized using the 15-year 220% declining balance method, beginning in the month following the date of acquisition. 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.

The Company reviews the subscriber accounts for impairment or a change in amortization method and 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.

Valuation of Long-lived Assets and Amortizable Other Intangible Assets

We perform impairment tests for our long-lived assets, primarily property and equipment, if an event or circumstance indicates that the carrying amount of our long-lived assets may not be recoverable. 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 recognize impairment if the carrying amount of a long-lived asset or intangible asset is not recoverable from its undiscounted cash flows. 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 acquisition 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 $13,019,000, net of allowance for doubtful accounts of $1,937,000, as of December 31, 2013. As of December 31, 2012, our trade receivables balance was $10,891,000, net of allowance for doubtful accounts of $1,436,000.

Valuation of Deferred Tax Assets

In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 740, Income Taxes, 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 $41,208,000 and $53,339,000 as of December 31, 2013 and 2012, respectively.

34



--------------------------------------------------------------------------------

Table of Contents Valuation of Goodwill



As of December 31, 2013, we had goodwill of $526,513,000, which represents approximately 24% of total assets. Goodwill was recorded in connection with the Monitronics and Security Networks acquisitions. The Company accounts for its goodwill pursuant to the provisions of FASB ASC Topic 350, Intangibles - Goodwill and Other ("FASB ASC Topic 350"). In accordance with FASB ASC Topic 350, goodwill is not amortized, but rather tested for impairment at least annually.

To the extent necessary, 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 Measurement. 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.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools