e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31,
2011
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
001-34176
ASCENT MEDIA
CORPORATION
(Exact name of Registrant as
specified in its charter)
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State of Delaware
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26-2735737
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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12300 Liberty Boulevard
Englewood, Colorado
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80112
(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(720) 875-5622
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(Section 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company, as defined in
Rule 12b-2
of the Exchange Act.
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting
company
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The number of outstanding shares of Ascent Media
Corporations common stock as of April 29, 2011 was:
Series A
common stock 13,666,344 shares; and
Series B common stock 731,852 shares.
TABLE OF CONTENTS
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Amounts in thousands, except share
amounts
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March 31,
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December 31,
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2011
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2010
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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231,825
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149,857
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Restricted cash
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29,915
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28,915
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Trade receivables, net
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21,768
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20,381
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Deferred income tax assets, net
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10,182
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9,083
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Assets of discontinued operations (note 3)
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413
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15,808
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Income taxes receivable
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8,400
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9,018
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Prepaid and other current assets
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6,290
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7,624
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Total current assets
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308,793
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240,686
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Restricted cash
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35,000
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35,000
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Property and equipment, net
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77,303
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78,962
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Subscriber accounts, net
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826,801
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822,811
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Dealer network, net
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47,492
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50,013
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Goodwill
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349,936
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349,936
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Other assets, net
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6,058
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6,576
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Assets of discontinued operations (note 3)
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61,607
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Total assets
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$
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1,651,383
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1,645,591
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Current portion of long-term debt
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$
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40,000
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20,000
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Accounts payable
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5,937
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8,098
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Accrued payroll and related liabilities
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8,140
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8,846
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Other accrued liabilities
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18,733
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16,568
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Deferred revenue
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7,552
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4,610
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Purchase holdbacks
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12,053
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9,818
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Liabilities related to assets of discontinued operations
(note 3)
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905
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26,675
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Total current liabilities
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93,320
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94,615
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Non-current liabilities:
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Long-term debt (note 7)
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881,236
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896,733
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Derivative financial instruments
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55,520
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64,745
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Deferred income tax liability, net
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13,940
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14,261
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Other liabilities
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17,872
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19,932
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Liabilities related to assets of discontinued operations
(note 3)
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7,565
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Total liabilities
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1,061,888
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1,097,851
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Commitments and contingencies (note 10)
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Stockholders equity:
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Preferred stock, $.01 par value. Authorized
5,000,000 shares; no shares issued
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Series A common stock, $.01 par value. Authorized
45,000,000 shares; issued and outstanding
13,644,884 shares at March 31, 2011
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137
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136
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Series B common stock, $.01 par value. Authorized
5,000,000 shares; issued and outstanding
731,852 shares at March 31, 2011
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7
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7
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Series C common stock, $.01 par value. Authorized
45,000,000 shares; no shares issued
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Additional paid-in capital
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1,468,276
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1,467,757
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Accumulated deficit
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(862,160
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(917,347
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Accumulated other comprehensive loss
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(16,765
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(2,813
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Total stockholders equity
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589,495
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547,740
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Total liabilities and stockholders equity
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$
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1,651,383
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1,645,591
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See accompanying notes to condensed consolidated financial
statements.
2
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss)
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Three Months Ended
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March 31,
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2011
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2010
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Amounts in thousands,
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except per share amounts
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(Unaudited)
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Net revenue
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$
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77,746
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5,770
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Operating expenses:
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Cost of services
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12,306
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4,544
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Selling, general, and administrative, including stock-based and
long-term incentive compensation
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21,903
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8,190
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Amortization of subscriber accounts and dealer network
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37,717
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Restructuring charges (note 4)
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4,382
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45
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Loss on sale of operating assets, net
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459
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8
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Depreciation
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2,068
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717
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78,835
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13,504
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Operating loss
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(1,089
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(7,734
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Other income:
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Interest income
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190
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682
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Interest expense
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(10,400
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(8
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Realized and unrealized loss on derivative financial instruments
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(474
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Other income, net
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926
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96
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(9,758
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770
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Loss from continuing operations before income tax
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(10,847
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(6,964
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Income tax benefit from continuing operations
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2,434
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464
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Net loss from continuing operations
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(8,413
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(6,500
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Discontinued operations (note 3):
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Earnings from discontinued operations
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66,596
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22,959
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Income tax expense
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(2,996
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(6,549
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Earnings from discontinued operations, net of income tax
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63,600
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16,410
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Net income
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55,187
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9,910
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Other comprehensive earnings (loss):
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Foreign currency translation adjustments (note 3)
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(13,952
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)
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(1,853
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)
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Unrealized holding gains, net of income tax
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239
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Pension liability adjustment
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68
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Other comprehensive loss
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(13,952
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(1,546
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)
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Comprehensive income
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$
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41,235
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8,364
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Basic and diluted earnings (loss) per share (note 6)
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Continuing operations
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$
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(0.59
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)
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(0.46
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Discontinued operations
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4.47
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1.16
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Net income
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$
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3.88
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0.70
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See accompanying notes to condensed consolidated financial
statements.
3
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
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Three Months Ended
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March 31,
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2011
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2010
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Amounts in thousands
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(Unaudited)
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Cash flows from operating activities:
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Net income
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$
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55,187
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9,910
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Earnings from discontinued operations, net of income tax
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(63,600
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)
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(16,410
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)
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Amortization of subscriber accounts and dealer network
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37,717
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Depreciation
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2,068
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717
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Stock based compensation
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627
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655
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Deferred income tax expense
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(1,420
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)
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2,883
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Unrealized gain on derivative financial instruments
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(9,162
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)
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Long-term debt amortization
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4,103
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Other non-cash activity, net
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1,249
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(1,647
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)
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Changes in assets and liabilities:
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Trade receivables
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(1,387
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)
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1,715
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Prepaid expenses and other assets
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2,019
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1,869
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Payables and other liabilities
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(434
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)
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2,263
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Operating activities from discontinued operations, net
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(2,856
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)
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3,165
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Net cash provided by operating activities
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24,111
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5,120
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Cash flows from investing activities:
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Capital expenditures
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(743
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)
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(131
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Purchases of subscriber accounts
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(36,951
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)
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Purchases of marketable securities
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(9,999
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)
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Net proceeds from sale of discontinued operations
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99,488
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34,828
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Increase in restricted cash
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(1,000
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)
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Other investing activities, net
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55
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Investing activities from discontinued operations, net
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(3,196
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)
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(5,775
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)
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Net cash provided by investing activities
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57,598
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18,978
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Cash flows from financing activities:
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Proceeds from long-term debt
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400
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Other
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1
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1
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Financing activities from discontinued operations, net
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(142
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)
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(474
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)
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Net cash provided by (used in) financing activities
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259
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(473
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)
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Net increase in cash and cash equivalents
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81,968
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23,625
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Cash and cash equivalents at beginning of period
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149,857
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292,914
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Cash and cash equivalents at end of period
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$
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231,825
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316,539
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See accompanying notes to condensed consolidated financial
statements.
4
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
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(1)
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Basis of
Presentation
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The accompanying Ascent Media Corporation (Ascent
Media or the Company) condensed consolidated
financial statements represent the financial position and
results of operations of Ascent Media and its consolidated
subsidiaries. The Company has two reportable segments: the
Monitronics business and the Content Services group. The
Monitronics business provides security alarm monitoring and
related services to residential and business subscribers
throughout the United States and parts of Canada. Monitronics
monitors signals arising from burglaries, fires and other events
through security systems installed by independent dealers at
subscribers premises. The Content Services group includes
the System Integration business, which provides program
management, engineering design, equipment procurement, software
integration, construction, installation, maintenance and support
services for advanced technical systems for the media and
telecommunications industries and other customers.
The Content Services group had historically also included the
Content Distribution business, which provided facilities and
services necessary to archive, manage, and reformat media assets
for distribution, as well as the infrastructure to assemble
programming content and to distribute media signals via
satellite and terrestrial networks. This business was sold to
Encompass in February 2011 and has been treated as a
discontinued operation for all periods presented. See
Note 3 for further information.
The unaudited interim financial information of the Company has
been prepared in accordance with Article 10 of the
Securities and Exchange Commissions, or the SEC,
Regulation S-X.
Accordingly, it does not include all of the information required
by generally accepted accounting principles in the U.S., or
U.S. GAAP, for complete financial statements. The
Companys unaudited condensed consolidated financial
statements as of March 31, 2011, and for the three months
ended March 31, 2011 and 2010, include Ascent Media and all
of its direct and indirect subsidiaries. The accompanying
interim condensed consolidated financial statements are
unaudited but, in the opinion of management, reflect all
adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the results for such periods. The
results of operations for any interim period are not necessarily
indicative of results for the full year. These condensed
consolidated financial statements should be read in conjunction
with the Ascent Media Annual Report on
Form 10-K
for the year ended December 31, 2010 (the 2010
Form 10-K).
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles
(GAAP) requires management to make estimates and
assumptions that affect the reported amounts of revenue and
expenses for each reporting period. The significant estimates
made in preparation of the Companys consolidated financial
statements primarily relate to valuation of goodwill, other
intangible assets, long-lived assets, deferred tax assets, and
the amount of the allowance for doubtful accounts. These
estimates are based on managements best estimates and
judgment. Management evaluates its estimates and assumptions on
an ongoing basis using historical experience and other factors
and adjusts them when facts and circumstances change. As the
effects of future events cannot be determined with any
certainty, actual results could differ from the estimates upon
which the carrying values were based.
|
|
(2)
|
Acquisition
of Monitronics
|
On December 17, 2010, Ascent Media completed the
acquisition of 100% of the outstanding capital stock of
Monitronics International Inc. and subsidiaries
(Monitronics). The cash consideration paid by Ascent
Media was approximately $397,088,000. The consideration was
funded by a $60 million term loan, a draw of
$45 million on a $115 million revolving credit
facility and cash on hand. The goodwill recorded in the
acquisition reflects the value to Ascent Media of
Monitronics recurring revenue and cash flow streams and
its unique business strategy of partnering with independent
dealers to obtain customers. The goodwill balance is not
deductible for tax purposes and will be included in the
Monitronics business segment.
Under the acquisition method of accounting, the purchase price
has been allocated to Monitronics tangible and
identifiable intangible assets acquired and liabilities assumed
based on preliminary estimates of fair value. The
5
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Continued)
excess of the purchase price over those fair values was recorded
as goodwill. The allocation of the purchase price in the
Monitronics acquisition to the assets acquired and liabilities
assumed from Monitronics is based on preliminary estimates and
assumptions. These estimates and assumptions are subject to
future adjustments upon completion of the valuation, including
the subscriber accounts, purchase holdbacks, certain other
current and noncurrent liabilities and deferred revenue
accounts, and these valuations could change from the preliminary
estimates, as additional information and analysis is required.
Ascent Medias results of operations include the operations
of Monitronics from the date of acquisition.
The purchase price of Monitronics has been allocated on a
preliminary basis as follows:
Amounts
in thousands
|
|
|
|
|
Estimated fair value of assets acquired and liabilities assumed:
|
|
|
|
|
Restricted cash
|
|
$
|
43,597
|
|
Accounts receivable
|
|
|
10,694
|
|
Subscriber accounts
|
|
|
824,158
|
|
Property and equipment
|
|
|
20,802
|
|
Dealer network
|
|
|
50,433
|
|
Other current and non-current assets
|
|
|
14,419
|
|
Goodwill
|
|
|
349,936
|
|
Purchase holdbacks
|
|
|
(9,954
|
)
|
Long-term debt
|
|
|
(814,653
|
)
|
Derivative instruments
|
|
|
(64,623
|
)
|
Deferred income tax liability
|
|
|
(4,057
|
)
|
Other current and noncurrent liabilities
|
|
|
(23,664
|
)
|
|
|
|
|
|
Cash consideration paid
|
|
$
|
397,088
|
|
|
|
|
|
|
The Companys 2010
Form 10-K
included an initial allocation of the purchase price based on
preliminary data. Subsequent to filing the Companys
Form 10-K,
an adjustment was made to increase goodwill by $262,000. The
increase to goodwill, which is reflected in the revised
December 31, 2010 consolidated balance sheet in accordance
with Accounting Standards Codification (ASC) Topic 805, Business
Combinations, is related to the finalization of certain
assumptions and estimates used to determine the fair value of
acquired assets and assumed liabilities. These adjustments
resulted in a $5,542,000 decrease to subscriber accounts, a
$33,000 increase to dealer networks, a $5,342,000 decrease to
deferred revenue, a $336,000 decrease to purchase holdbacks, a
$781,000 decrease to certain accrued liabilities, and customary
post-closing adjustments to the purchase price of $1,212,000.
The adjustment to acquired deferred revenue resulted in a
$3,047,000 reduction to revenue recognized during the quarter
ended December 31, 2010. The reduction in revenue has been
retrospectively applied to the revised December 31, 2010
condensed consolidated balance sheet.
During the first quarter of 2011, the Company completed its
evaluation of the useful life of subscriber accounts based on
current subscriber attrition data. Based on the evaluation,
amortization of subscriber accounts acquired in the Acquisition
was changed from a
10-year 135%
declining balance method to a
14-year 235%
declining balance method. In accordance with ASC Topic 805, the
incremental subscriber account amortization of $1,187,000
related to the quarter ended December 31, 2010 is reflected
in the revised December 31, 2010 condensed consolidated
balance sheet included in this quarterly report. In addition,
new subscriber accounts will be amortized based on a
15-year 220%
declining balance method. The amortization methods were selected
to provide a matching of amortization expense to individual
subscriber revenues.
6
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Continued)
The following table includes pro forma information for Ascent
Media which includes the historical operating results of
Monitronics prior to ownership by Ascent Media. This pro forma
information gives effect to certain adjustments, including
increased amortization to reflect the fair value assigned to the
subscriber accounts and dealer network, increased depreciation
to reflect the fair value assigned to property and equipment and
increased interest expense, including amortization of the
discount recorded to reflect the fair value of the long-term
debt. The pro-forma results assume that the acquisition had
occurred on January 1, 2010 for all periods presented. They
are not necessarily indicative of the results of operations that
would have occurred if the acquisition had been made at the
beginning of the periods presented or that may be obtained in
the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
|
Amounts in thousands
|
|
|
|
As reported:
|
|
|
|
|
|
|
|
|
|
|
Revenue(a)
|
|
$
|
77,746
|
|
|
|
|
5,770
|
|
|
Net loss from continuing operations(b)
|
|
$
|
(8,413
|
)
|
|
|
|
(6,500
|
)
|
|
Basic and diluted loss per share
|
|
$
|
(0.59
|
)
|
|
|
|
(0.46
|
)
|
|
Supplemental pro-forma:
|
|
|
|
|
|
|
|
|
|
|
Revenue(a)
|
|
$
|
77,746
|
|
|
|
|
73,986
|
|
|
Net loss from continuing operations(b)
|
|
$
|
(8,413
|
)
|
|
|
|
(16,077
|
)
|
|
Basic and diluted loss per share
|
|
$
|
(0.59
|
)
|
|
|
|
(1.13
|
)
|
|
|
|
|
(a) |
|
Monitronics revenue for the three months ended March 31,
2011 reflects the negative impact of a $2,295,000 fair value
adjustment that reduced deferred revenue acquired in the
Monitronics acquisition. |
|
(b) |
|
The 2011 amount includes the following non-recurring amounts:
restructuring charges of $4,382,000 and a loss on sale of
operating assets of $459,000. The 2010 amount includes
non-recurring restructuring charges of $45,000. |
|
|
(3)
|
Discontinued
Operations
|
On February 28, 2011, Ascent Media completed the sale of
100% of the Content Distribution business to Encompass Digital
Media, Inc. (Encompass). Ascent Media received cash
proceeds of approximately $104 million, which is subject to
adjustment based on final working capital adjustments as of the
closing date and other balance sheet items, plus the assumption
of certain liabilities and obligations relating to the Content
Distribution business. Ascent Media recorded a gain on the sale
of $66,136,000 and the related income tax expense of $2,906,000
for the quarter ended March 31, 2011. As part of the sale,
Ascent Media removed $14,751,000 from the foreign currency
translation amount in AOCI, which related to the foreign
operations that were included in the sale. The Content
Distribution business has been treated as a discontinued
operation in the condensed consolidated financial statements for
all periods presented.
On December 31, 2010, Ascent Media completed the sale of
100% of its creative services business and media services
business (Creative/Media) to Deluxe Entertainment
Services Group Inc. for the purchase price of $69 million
in cash, subject to post-closing adjustments. As such
transaction was completed in 2010, the Creative/Media operations
are included in discontinued operations in the condensed
consolidated financial statements for the three months ended
March 31, 2010.
In September 2010, the Company shut down the operations of the
Global Media Exchange (GMX), which was previously
included in the Content Services group. These operations are
included in discontinued operations in the condensed
consolidated financial statements for the three months ended
March 31, 2010.
7
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Continued)
In February 2010, Ascent Media 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 $34.8 million. In the quarter ended
March 31, 2010, the Company recorded a gain on the sale of
$25,498,000 and $6,357,000 of related income tax expense. As
such transaction was completed in 2010, the Chiswick Park
operations are included in discontinued operations in the
condensed consolidated financial statements for the three months
ended March 31, 2010.
The following table presents the results of operations of the
discontinued operations that are included in earnings from
discontinued operations on the condensed consolidated statement
of operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2011
|
|
|
March 31, 2010
|
|
|
|
Amounts in thousands
|
|
|
Revenue
|
|
$
|
17,945
|
|
|
$
|
101,281
|
|
Earnings before income taxes(a)
|
|
$
|
66,596
|
|
|
$
|
22,959
|
|
|
|
|
(a) |
|
The 2011 amount includes a $66,136,000 gain on the sale of the
Content Distribution business. The 2010 amount includes a
$25,498,000 gain on the sale of the Chiswick Park facility. |
|
|
(4)
|
Restructuring
Charges
|
The Company recorded restructuring charges in continuing
operations of $4,382,000 and $45,000, during the three months
ended March 31, 2011 and 2010, respectively.
In the fourth quarter of 2010, the Company 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 it sold most of its media and entertainment assets and
acquired Monitronics, an alarm monitoring business. Such changes
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.
Before the Company implemented the 2010 Restructuring Plan, it
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 the Companys 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 Companys Mexico operations.
8
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Continued)
The following table provides the activity and balances of the
2010 and 2008 Restructuring Plans. At March 31, 2011,
substantially all of the combined ending liability balance is
included in other accrued liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Additions
|
|
|
Deductions(a)
|
|
|
March 31, 2010
|
|
|
|
Amounts in thousands
|
|
|
2008 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
354
|
|
|
|
45
|
|
|
|
(223
|
)
|
|
|
176
|
|
Excess facility costs
|
|
|
143
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
497
|
|
|
|
45
|
|
|
|
(285
|
)
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
Additions
|
|
|
Deductions(a)
|
|
|
March 31, 2011
|
|
|
|
Amounts in thousands
|
|
|
2010 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and retention
|
|
$
|
3,590
|
|
|
|
4,382
|
|
|
|
(2,836
|
)
|
|
|
5,136
|
(b)
|
2008 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
9
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
Excess facility costs
|
|
|
211
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
206
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
220
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Primarily represents cash payments. |
|
(b) |
|
Substantially all of this amount is expected to be paid in 2011. |
|
|
(5)
|
Stock-Based
and Long-Term Incentive Compensation
|
In the first quarter of 2011, certain key employees were granted
awards for a total of 83,236 shares of restricted stock
that vest quarterly over varying periods from one year to five
years. The fair values for the restricted stock awards were the
closing prices of the Ascent Media Series A common stock on
the applicable dates of grant. The weighted average fair value
of the restricted stock on an aggregate basis for all such
grants was $44.91 per share.
In the first quarter of 2011, four non-employee directors were
granted a combined total of 9,168 shares of restricted
stock awards that vest quarterly over two years. The restricted
stock had a fair value of $43.08 per share which was the closing
price of the Ascent Media Series A common stock on the date
of grant.
In the first quarter of 2011, certain key employees were granted
a total of 99,794 options to purchase Ascent Media Series A
common stock for an exercise price of $48.15 per share, which
was the closing price on the date of grant. Such options vest
quarterly over four to five years from the date of grant,
terminate 7 years from the date of grant and had a
weighted-average fair value at the date of grant of $20.32, as
determined using the Black-Scholes Model. The assumptions used
in the Black-Scholes Model to determine grant date fair value
were a volatility factor of 35%, a risk-free interest rate of
2.88%, an expected life of 7 years and a dividend yield of
zero.
|
|
(6)
|
Basic and
Diluted Earnings (Loss) Per Common Share
Series A and Series B
|
Basic earnings (loss) per common share (EPS) is
computed by dividing net earnings (loss) by the weighted average
number of Series A and Series B common shares
outstanding for the period. Diluted EPS is computed by dividing
net earnings (loss) by the sum of the weighted average number of
Series A and Series B common shares outstanding and
the effect of dilutive securities such as outstanding stock
options and unvested restricted stock.
However, since the Company recorded a loss from continuing
operations for all periods presented, diluted EPS is computed
the same as basic EPS.
9
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Continued)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2011
|
|
|
March 31, 2010
|
|
|
Weighted average Series A and Series B shares
|
|
|
14,226,185
|
|
|
|
14,183,139
|
|
Long-term debt, which is all issued by Monitronics and its
subsidiaries, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Class A-1a
Term Notes (mature July 2027), LIBOR plus 1.8%(a)
|
|
$
|
340,193
|
|
|
$
|
338,478
|
|
Class A-1b
Term Notes (mature July 2027), LIBOR plus 1.7%(a)
|
|
|
97,064
|
|
|
|
96,551
|
|
Class A-2
Term Notes (mature July 2037), LIBOR plus 2.2%(a)
|
|
|
97,734
|
|
|
|
97,338
|
|
Class A-3
Variable Funding Note (matures July 2037), LIBOR plus 1.8%(a)
|
|
|
252,367
|
|
|
|
251,032
|
|
Class A-4
Variable Funding Note (matures July 2037), LIBOR plus 1.8%(a)
|
|
|
27,178
|
|
|
|
27,034
|
|
Term Loan (matures June 30, 2012)(b)
|
|
|
60,000
|
|
|
|
60,000
|
|
$115 million revolving credit facility (matures
December 17, 2013), LIBOR plus 4%
|
|
|
46,700
|
|
|
|
46,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
921,236
|
|
|
|
916,733
|
|
Less current portion of long-term debt
|
|
|
(40,000
|
)
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
881,236
|
|
|
$
|
896,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The interest rate on the Term Notes and VFNs includes 1.0% of
other fees. |
|
(b) |
|
The interest rate on the Term Loan is LIBOR plus 3.50% until
July 1, 2011, then LIBOR plus 4.00% until January 1,
2012, then LIBOR plus 4.50% thereafter. The term loan matures on
June 30, 2012, and requires principal installments of
$20,000,000 on December 31, 2011 and March 31, 2012.
Ascent Media has guaranteed $30 million of this Term Loan. |
Securitization
Debt
Monitronics completed a financing transaction of the type
commonly referred to as a whole business securitization in
August of 2007. Under the securitization, Monitronics Funding LP
(Funding), a newly formed, wholly owned subsidiary
of Monitronics, issued the following debt instruments, which are
included in the table of long-term debt above:
|
|
|
|
|
|
|
Principal
|
|
|
|
Amounts in
|
|
|
|
Thousands
|
|
|
Class A-1a
Term Notes
|
|
$
|
350,000
|
|
Class A-1b
Term Notes
|
|
|
100,000
|
|
Class A-2
Term Notes
|
|
|
100,000
|
|
Class A-3
Variable Funding Note
|
|
|
260,000
|
|
Class A-4
Variable Funding Note
|
|
|
28,000
|
|
Principal payments under the Term Notes and Variable Funding
Notes (VFNs) are payable monthly beginning August
2012 in accordance with the priority of payments established in
the securitization. Available cash remaining after paying
higher-priority items is allocated ratably between the
Class A Term Notes and the
10
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Continued)
VFNs. Amounts allocated to the Class A Term Notes are paid
first to the
Class A-1
Term Notes until their outstanding amount has been paid in full,
and second to the
Class A-2
Term Notes. Amounts allocated to the VFNs are paid ratably
between the
Class A-3
VFN and the
Class A-4
VFN.
Monitronics is charged a commitment fee of 0.2% on the unused
portion of the VFNs. Interest incurred on borrowings is payable
monthly. The securitization debt has an expected repayment date
of July 2012. If the securitization debt is still outstanding at
that time, contingent additional interest payments will accrue
on $550 million notional amount of Swaps (see Note
8) and $288 million of VFNs at a rate of 5% per annum
(including 0.5% of other fees), in addition to the interest
rates currently applicable.
In connection with the 2007 securitization, Monitronics
transferred substantially all of its then-existing subscriber
assets, dealer alarm monitoring purchase agreements, and
property and equipment related to its backup monitoring center,
to Funding. Monitronics also transferred substantially all of
its other property and equipment, dealer service agreements,
contract monitoring agreements, and employees to Monitronics
Security LP (Security), which also was a newly
formed, wholly owned subsidiary of Monitronics. Following such
transfers, Security assumed responsibility for the monitoring,
customer service, billing, and collection functions of Funding
and Monitronics. Funding, Security and Monitronics are distinct
legal entities. Fundings assets are available only for
payment of the debt and satisfaction of the other obligations
arising under the securitization facility and are not available
to pay Monitronics other obligations or the claims of its
other creditors. Securitys assets are available only for
the satisfaction of obligations arising under the securitization
facility and are not available to pay Monitronics other
obligations or the claims of its other creditors; provided that,
subject to compliance with applicable covenants, Security may
distribute any excess cash to Monitronics greater than
$1 million. In total, 92% of the subscriber account
contracts, all of the wholesale monitoring contracts and
$20.1 million of the property and equipment are unavailable
to pay Monitronics other obligations or the claims of its
other creditors.
On the closing date of the securitization agreement, Funding
also entered into several interest rate swap agreements with
similar terms in an aggregate notional amount of
$550.0 million in order to reduce the financial risk
related to changes in interest rates associated with the
floating rate term notes (collectively the Swaps).
The Swaps have an expected repayment date of August 2012 to
match the expected refinancing of the securitization debt. The
Company entered into three interest rate cap agreements with
staggered durations with notional amounts of $100.0 million
effective August 15, 2008 through August 15, 2009,
$260.0 million effective August 15, 2009 through
August 15, 2010, and $240.0 million effective
August 15, 2010 through May 15, 2014 and an interest
rate floor with a notional amount of $260.0 million
effective from October 15, 2007 through May 15, 2014,
to reduce the financial risk related to changes in interest
rates associated with the floating rate variable funding notes.
None of these derivative financial instruments are designated as
hedges but, in effect, they act as hedges against the variable
interest rate risk of the debt obligations. The
Class A-1a
Term Notes were effectively converted from floating to fixed
with such derivative instruments at a rate of 7.5%. The
Class A-1b
Term Notes were effectively converted from floating to fixed
with such derivative financial instruments at a rate of 7.0%.
The
Class A-2
Term Notes were effectively converted from floating to fixed
with such derivative instruments at a rate of 7.6%. See
Note 8 for further information regarding these derivatives.
As of March 31, 2011, Monitronics has $28 million of
the
Class A-4
VFN held as restricted cash, which continues to be available to
Monitronics. No amounts are available to be drawn from the VFNs.
The securitization debt has certain financial tests, which must
be met on a monthly basis. These tests include maximum attrition
rates, interest coverage, and minimum average recurring monthly
revenue. Indebtedness under the securitization is secured by all
of the assets of Funding. As of March 31, 2011, the Company
was in compliance with all required financial tests.
11
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Continued)
Credit
Facility
On December 17, 2010, in order to partially fund the cash
consideration paid for the Monitronics acquisition and provide
for growth capital, 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, which are included in
the table of long-term debt above. There is a LIBOR floor of
1.50%, and a commitment fee of 0.50% on unused portions of the
revolving credit facility. Upon any refinancing of the notes
issued by Funding, Monitronics must prepay the term loan. At any
time after the occurrence of an event of default under the
Credit Facility, the lenders may, among other options, declare
any amounts outstanding under the Credit Facility immediately
due and payable and terminate any commitment to make further
loans under the Credit Facility. In addition, failure to comply
with restrictions contained in our existing securitization
indebtedness could lead to an event of default. The obligations
under the Credit Facility are secured by a security interest on
substantially all of the assets of Monitronics and its wholly
owned subsidiary, Monitronics Canada, Inc., as well as a pledge
of the stock of Monitronics. Ascent Media has guaranteed the
term loan up to $30,000,000.
The terms of the Credit Facility provide for certain financial
tests and covenants which include maximum leverage ratios and
minimum fixed charge coverage ratios. As of March 31, 2011,
Monitronics was in compliance with all required financial tests.
The Company utilizes various derivative financial instruments,
acquired in the Monitronics acquisition, to reduce the interest
rate risk inherent in the Monitronics variable rate debt.
The valuation of these instruments is determined using widely
accepted valuation techniques, including discounted cash flow
analysis on the expected cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives,
including the period to maturity, and uses observable
market-based inputs, including interest rate curves and implied
volatilities. The fair values of interest rate caps are
determined using the market standard methodology of discounting
the future expected cash receipts that would occur if variable
interest rates rise above the strike rate of the caps. The
variable interest rates used in the calculation of projected
receipts on the cap are based on an expectation of future
interest rates derived from observable market interest rate
curves and volatilities. The Company incorporates credit
valuation adjustments to appropriately reflect the respective
counterpartys nonperformance risk in the fair value
measurements.
At March 31, 2011, derivative financial instruments include
one interest rate cap with an aggregate fair value of
$0.4 million, that constitutes an asset of the Company, an
interest rate floor with a fair value of $19.1 million that
constitutes a liability of the Company, and the Swaps with an
aggregate fair value of $36.4 million that constitute
liabilities of the Company. The interest rate cap is included in
Other assets on the consolidated balance sheet, while the
interest rate floor and Swaps are included in Derivative
financial instruments on the consolidated balance sheet. The
interest rate caps, floor and Swaps have not been designated as
hedges. For the three months ended March 31, 2011, the
realized and unrealized loss on derivative financial instruments
in the consolidated statements of operations includes monthly
settlement payments of $9.6 million partially offset by a
$9.2 million unrealized gain related to the change in fair
value of these derivatives.
For purposes of valuation of the Swaps, the Company has
considered that certain provisions of the Term Notes and VFNs
provide for significant adverse changes to interest rates and
uses of cash flows if this debt is not repaid by July 2012. In
addition, the Swaps can be terminated with no penalty, subject
to compliance with certain make-whole obligations in accordance
with the terms thereof in connection with any termination of the
Swaps before April 2012. If the Term Notes and the VFNs are not
repaid in full by July 2012, the Company would incur additional
interest and other costs and be restricted from making
subscriber account purchases at Funding, until the Term Notes
and VFNs were repaid in full. Management believes it is highly
likely the Company will be able to refinance
and/or repay
the Term Notes and VFNs in full by July 2012, and the valuation
considers adjustments for termination dates before and
12
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Continued)
after July 2012 on a probability weighted basis. The valuation
of the Swaps is based principally on a July 2012 maturity of the
Term Notes less a credit valuation adjustment.
All of the Companys debt obligations have variable
interest rates. The objective of the Swaps was to reduce the
risk associated with these variable interest rates. In effect,
the Swaps convert variable interest rates into fixed interest
rates on $550 million of borrowings. It is the
Companys policy to offset fair value amounts recognized
for derivative instruments executed with the same counterparty
under a master netting agreement. As of March 31, 2011, no
such amounts were offset.
The Companys Swaps are as follows:
|
|
|
|
|
|
|
Notional
|
|
Rate Paid
|
|
|
Rate Received
|
|
$350,000,000
|
|
|
6.56
|
%
|
|
1 mo. USD-LIBOR-BBA plus 0.85%
|
100,000,000
|
|
|
6.06
|
%
|
|
1 mo. USD-LIBOR-BBA plus 0.75%
|
100,000,000
|
|
|
6.64
|
%
|
|
1 mo. USD-LIBOR-BBA plus 1.25%
|
Monitronics executed its derivative contracts with a single
counterparty.
|
|
(9)
|
Fair
Value Measurements
|
According to the Fair Value Measurements and Disclosures Topic
of the FASB Accounting Standards Codification, fair value is
defined as the amount that would be received for selling an
asset or paid to transfer a liability in an orderly transaction
between market participants and requires that assets and
liabilities carried at fair value are classified and disclosed
in the following three categories:
|
|
|
|
Level 1
|
Quoted prices for identical instruments in active markets.
|
|
|
Level 2
|
Quoted prices for similar instruments in active or inactive
markets and valuations derived from models where all significant
inputs are observable in active markets.
|
|
|
Level 3
|
Valuations derived from valuation techniques in which one or
more significant inputs are unobservable in any market.
|
The following summarizes the fair value level of assets and
liabilities that are measured on a recurring basis at
March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
Amounts in thousands
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds(a)
|
|
$
|
220,014
|
|
|
|
|
|
|
|
|
|
|
|
220,014
|
|
Derivative financial instruments assets
|
|
|
|
|
|
|
384
|
|
|
|
|
|
|
|
384
|
|
Derivative financial instruments liabilities
|
|
|
|
|
|
|
(19,080
|
)
|
|
|
(36,440
|
)
|
|
|
(55,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
220,014
|
|
|
|
(18,696
|
)
|
|
|
(36,440
|
)
|
|
|
164,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments assets
|
|
$
|
|
|
|
|
447
|
|
|
|
|
|
|
|
447
|
|
Derivative financial instruments liabilities
|
|
|
|
|
|
|
(21,810
|
)
|
|
|
(42,935
|
)
|
|
|
(64,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
(21,363
|
)
|
|
|
(42,935
|
)
|
|
|
(64,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in cash and cash equivalents on the condensed
consolidated balance sheet. |
The Company has determined that the majority of the inputs used
to value its interest rate cap and floor derivatives fall within
Level 2 of the fair value hierarchy. The Company has
determined that the majority of the
13
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Continued)
inputs used to value its Swaps fall within Level 3 of the
fair value hierarchy, including managements estimates of
the refinancing date of the Term Notes, which affects the
termination date of the Swaps as the notional amount of the
Swaps is directly linked to the outstanding principal balance of
the Term Notes. The credit valuation adjustments associated with
its derivatives also utilize Level 3 inputs, such as
estimates of current credit spreads to evaluate the likelihood
of default by its counterparties. For counterparties with
publicly available credit information, the credit spreads over
LIBOR used in the calculations represent implied credit default
swap spreads obtained from a third-party credit data provider.
However, as of March 31, 2011, the Company has assessed the
significance of the impact of the credit valuation adjustments
on the overall valuation of its derivative positions and has
determined that the credit valuation adjustments are not
significant to the overall valuation of its interest rate caps
and floor derivatives, but are significant for the Swaps. As a
result, the Company has determined that its derivative
valuations on its interest rate caps and floor are classified in
Level 2 of the fair value hierarchy and its derivative
valuation on its Swaps are classified in Level 3 of the
fair-value hierarchy.
The following table presents the activity in the Level 3
balances:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Amounts in thousands
|
|
|
Beginning balance
|
|
$
|
(42,935
|
)
|
|
|
|
|
Unrealized gain recognized
|
|
|
6,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(36,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ascent Medias financial instruments, including cash and
cash equivalents, accounts receivable and accounts payable are
carried at cost, which approximates their fair value because of
their short-term maturity.
(10) Commitments,
Contingencies and Other Liabilities
The Company is involved in litigation and similar claims
incidental to the conduct of its business. In managements
opinion, none of the pending actions is likely to have a
material adverse impact on the Companys financial position
or results of operations.
(11) Information
About Reportable Segments
Beginning in the first quarter of 2011, Ascent Media changed the
financial measure that it uses to evaluate the performance of
each of its reportable segments. Ascent Media now uses earnings
before interest, taxes, depreciation, amortization, gain/(loss)
on derivative instruments, and restructuring charges (which is
referred to as adjusted EBITDA) instead of adjusted
operating income before depreciation and amortization (which is
referred to as adjusted OIBDA). Ascent Media made
this change as a result of the sale of most of its historical
operating subsidiaries and the acquisition of Monitronics, an
alarm monitoring company, which is now its primary operating
subsidiary. Financial information for prior periods has been
revised to retrospectively reflect Ascent Medias change in
its financial measure.
Ascent Media defines adjusted EBITDA as net income
before interest expense, interest income, income taxes,
depreciation, amortization (including the amortization of
subscriber accounts and dealer networks), realized and
unrealized gain/(loss) on derivative instruments, restructuring
charges and stock-based and long-term incentive compensation,
and defines segment adjusted EBITDA as adjusted
EBITDA as determined in each case for the indicated operating
segment or segments. Ascent Media believes that adjusted EBITDA
is an important indicator of the operational strength and
performance of its businesses, including the businesses
ability to fund their ongoing acquisition of subscriber
accounts, their capital expenditures and to service their debt.
In addition, this measure is used by management to evaluate
operating results and perform analytical comparisons and
identify strategies to
14
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Continued)
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, 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 Media believes
is useful to investors in analyzing its operating performance.
Accordingly, adjusted EBITDA and segment 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 and segment adjusted EBITDA are non-GAAP
financial measures. As companies often define non-GAAP financial
measures differently, adjusted EBITDA and segment adjusted
EBITDA as calculated by Ascent Media should not be compared to
any similarly titled measures reported by other companies.
Summarized financial information concerning the Companys
reportable segments is presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
Monitronics
|
|
|
Content
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
Services
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
Group
|
|
|
Group
|
|
|
Other(a)
|
|
|
Total
|
|
|
|
|
|
|
Amounts in thousands
|
|
|
|
|
|
Three months ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers(b)
|
|
$
|
73,870
|
|
|
|
3,876
|
|
|
|
|
|
|
|
77,746
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
51,653
|
|
|
|
(1,401
|
)
|
|
|
(5,621
|
)
|
|
|
44,631
|
|
|
|
|
|
Capital expenditures
|
|
$
|
712
|
|
|
|
|
|
|
|
31
|
|
|
|
743
|
|
|
|
|
|
Three months ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
|
|
|
|
5,770
|
|
|
|
|
|
|
|
5,770
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
|
|
|
|
(1,031
|
)
|
|
|
(5,190
|
)
|
|
|
(6,221
|
)
|
|
|
|
|
Capital expenditures
|
|
$
|
|
|
|
|
13
|
|
|
|
118
|
|
|
|
131
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts shown in Other provide a reconciliation of total
reportable segments to the Companys consolidated total.
Included in Other is corporate SG&A expenses and capital
expenditures incurred at a corporate level. |
|
(b) |
|
Monitronics revenue for the three months ended March 31,
2011 reflects the negative impact of a $2,295,000 fair value
adjustment that reduced deferred revenue acquired in the
Monitronics acquisition. |
15
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Continued)
The following table provides a reconciliation of total adjusted
EBITDA to net loss from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Amounts in thousands
|
|
|
Total adjusted EBITDA
|
|
$
|
44,631
|
|
|
|
(6,221
|
)
|
Amortization of subscriber accounts and dealer network
|
|
|
(37,717
|
)
|
|
|
|
|
Depreciation
|
|
|
(2,068
|
)
|
|
|
(717
|
)
|
Stock-based and long-term incentive compensation
|
|
|
(627
|
)
|
|
|
(655
|
)
|
Restructuring charges
|
|
|
(4,382
|
)
|
|
|
(45
|
)
|
Realized and unrealized loss on derivative financial instruments
|
|
|
(474
|
)
|
|
|
|
|
Interest income
|
|
|
190
|
|
|
|
682
|
|
Interest expense
|
|
|
(10,400
|
)
|
|
|
(8
|
)
|
Income tax benefit from continuing operations
|
|
|
2,434
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(8,413
|
)
|
|
|
(6,500
|
)
|
|
|
|
|
|
|
|
|
|
Information as to the Companys operations in different
geographic areas is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Amounts in thousands
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
77,626
|
|
|
|
5,770
|
|
Other countries
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77,746
|
|
|
|
5,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Amounts in thousands
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
70,302
|
|
|
|
72,181
|
|
Other countries
|
|
|
7,001
|
|
|
|
6,781
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77,303
|
|
|
|
78,962
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Certain statements in this Quarterly Report on
Form 10-Q
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including
statements regarding our business, marketing and operating
strategies, integration of acquired businesses, new service
offerings, financial prospects, and anticipated sources and uses
of capital. Where, in any forward-looking statement, we express
an expectation or belief as to future results or events, such
expectation or belief is expressed in good faith and believed to
have a reasonable basis, but there can be no assurance that the
expectation or belief will result or be achieved or
accomplished. The following include some but not all of the
factors that could cause actual results or events to differ
materially from those anticipated:
|
|
|
|
|
general economic and business conditions and industry trends;
|
|
|
|
the regulatory and competitive environment of the industries in
which we, and the entities in which we have interests, 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, including the ability of
Monitronics to obtain additional funds to grow its business;
|
|
|
|
the outcome of any pending or threatened litigation;
|
|
|
|
availability of qualified personnel;
|
|
|
|
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 Monitronics expected rate of subscriber
attrition;
|
|
|
|
potential liability for failure to respond adequately to alarm
activations;
|
|
|
|
the trend away from the use of public switched telephone network
lines; and
|
|
|
|
the ability of Monitronics to refinance its existing debt on
attractive terms.
|
For additional risk factors, please see our Annual Report on
Form 10-K
for the year ended December 31, 2010. These forward-looking
statements and such risks, uncertainties and other factors speak
only as of the date of this Quarterly Report, and we expressly
disclaim any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement contained
herein, to reflect any change in our expectations with regard
thereto, or any other change in events, conditions or
circumstances on which any such statement is based.
The following discussion and analysis provides information
concerning our results of operations and financial condition.
This discussion should be read in conjunction with our
accompanying condensed consolidated financial statements and the
notes thereto included elsewhere herein and our Annual Report on
Form 10-K
for the year ended December 31, 2010.
Overview
Ascent Media Corporation is a holding company and our assets
consist of our wholly-owned subsidiary, Monitronics
International, Inc. (Monitronics) and the Content
Services group.
17
Monitronics
The Monitronics business provides security alarm monitoring and
related services to residential and business subscribers
throughout the United States and parts of Canada. Monitronics
monitors signals arising from burglaries, fires and other events
through security systems at subscribers premises. Nearly
all of its revenues are derived from monthly recurring revenues
under security alarm monitoring contracts purchased from
independent dealers in our exclusive nationwide network. The
results of operations for Monitronics are included from
December 17, 2010, which was the date of acquisition.
Attrition
Account cancellation, otherwise referred to as subscriber
attrition, has a direct impact on the number of subscribers that
Monitronics serves 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 competitors 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 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 subscribers 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 dealers obligation to Monitronics, Monitronics
holds back a portion of the purchase price for every account
purchased, typically 10%. In some cases, the amount of the
purchase holdback may be less than actual attrition experience.
In recent years, Monitronics achieved 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.
The table below presents subscriber data for the twelve months
ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Beginning balance of accounts Content Services group
|
|
|
626,869
|
|
|
|
565,861
|
|
Accounts purchased
|
|
|
133,957
|
|
|
|
132,761
|
|
Accounts canceled(a)
|
|
|
(73,311
|
)
|
|
|
(66,835
|
)
|
Canceled accounts guaranteed to be refunded from holdback
|
|
|
(6,865
|
)
|
|
|
(4,918
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance of accounts
|
|
|
680,650
|
|
|
|
626,869
|
|
|
|
|
|
|
|
|
|
|
Monthly weighted average accounts
|
|
|
656,667
|
|
|
|
603,694
|
|
|
|
|
|
|
|
|
|
|
Attrition rate
|
|
|
(11.2
|
)%
|
|
|
(11.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Does not include canceled accounts that are guaranteed to be
refunded from holdback. |
Monitronics trailing twelve-month attrition rate remained
almost flat at 11.1% for the period ended March 31, 2010
and 11.2% for the period ended March 31, 2011.
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, Monitronics achieves less
than 1% attrition in the first year net of canceled accounts
that were replaced or refunded by dealers during the guarantee
period at no additional cost to Monitronics. In the next three
years, the number of subscribers that cancel as a percentage of
the initial number of subscribers in that pool gradually
18
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.
The following table includes pro forma information for Ascent
Media, which includes the historical operating results of
Monitronics prior to ownership by us. This pro forma information
gives effect to certain adjustments resulting from the
acquisition method of accounting, including increased
amortization to reflect the fair value assigned in the
acquisition to the subscriber accounts and dealer network,
increased depreciation to reflect the fair value assigned in the
acquisition to property and equipment and increased interest
expense, including amortization of the discount recorded to
reflect the fair value of the long-term debt. The pro-forma
results assume that the acquisition had occurred on
January 1, 2010. They are not necessarily indicative of our
results of operations that would have occurred if the
acquisition had been made at the beginning of the period
presented or that may be obtained in the future.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Amounts in thousands
|
|
|
Pro-forma revenue(a)
|
|
$
|
77,746
|
|
|
|
73,986
|
|
Pro-forma net loss from continuing operations(b)
|
|
$
|
(8,413
|
)
|
|
|
(16,077
|
)
|
Pro-forma basic and diluted loss per share
|
|
$
|
(0.59
|
)
|
|
|
(1.13
|
)
|
|
|
|
(a) |
|
Amounts include Monitronics revenue of $73,870,000 and
$68,216,000 for the three months ended March 31, 2011 and
2010, respectively. The increase in Monitronics revenue of
$5,654,000 is due to an 8.6% increase in subscriber accounts as
well as increased average revenue per subscriber. The increase
was partially offset by the negative impact of a $2,295,000 fair
value adjustment for the three months ended March 31, 2011,
that reduced deferred revenue acquired in the Monitronics
acquisition. |
|
(b) |
|
The 2011 amount includes the following non-recurring amounts:
restructuring charges of $4,382,000 and a loss on sale of
operating assets of $459,000. The 2010 amount includes
non-recurring restructuring charges of $45,000. |
Content
Services Group
The Content Services group includes the System Integration
business, which provides program management, engineering design,
equipment procurement, software integration, construction,
installation, maintenance and support services for advanced
technical systems for the media and telecommunications
industries and other customers. In the second quarter of 2011,
Ascent Media plans to shut down the System Integration business
and record a restructuring charge between $1 to $2 million
primarily for abandoned leases under the 2010 Restructuring
Plan. The Content Services group had historically also included
the Content Distribution business, which provided facilities and
services necessary to archive, manage, and reformat media assets
for distribution, as well as the infrastructure to assemble
programming content and to distribute media signals via
satellite and terrestrial networks. This business was sold to
Encompass Digital Media, Inc. (Encompass) in
February 2011 and has been treated as a discontinued operation
for all periods presented. See Discontinued Operations below for
further information.
Adjusted
EBITDA
Beginning in the first quarter of 2011, Ascent Media changed the
financial measure that it uses to evaluate the performance of
each of its reportable segments. Ascent Media now uses earnings
before interest, taxes, depreciation, amortization, gain/(loss)
on derivative instruments, and restructuring charges (which is
referred to as adjusted EBITDA) instead of adjusted
operating income before depreciation and amortization (which is
referred to as adjusted OIBDA). Ascent Media made
this change as a result of the sale of most of its historical
operating subsidiaries and the acquisition of Monitronics, an
alarm monitoring company, which is now its primary operating
19
subsidiary. Financial information for prior periods has been
revised to retrospectively reflect Ascent Medias change in
its financial measure.
Ascent Media defines adjusted EBITDA as net income
before interest expense, interest income, income taxes,
depreciation, amortization (including the amortization of
subscriber accounts and dealer networks), realized and
unrealized gain/(loss) on derivative instruments, restructuring
charges and stock-based and long-term incentive compensation,
and defines segment adjusted EBITDA as adjusted
EBITDA as determined in each case for the indicated operating
segment or segments. Ascent Media believes that adjusted EBITDA
is an important indicator of the operational strength and
performance of its businesses, including the businesses
ability to fund their ongoing acquisition of subscriber
accounts, their capital expenditures and to service their 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, 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 Media believes
is useful to investors in analyzing its operating performance.
Accordingly, adjusted EBITDA and segment 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 and segment adjusted EBITDA are non-GAAP
financial measures. As companies often define non-GAAP financial
measures differently, adjusted EBITDA and segment adjusted
EBITDA as calculated by Ascent Media should not be compared to
any similarly titled measures reported by other companies.
Results
of Operations
Our operations are organized into the following reportable
segments: the Monitronics business and the Content Services
group. The results of operations for Monitronics are included
from December 17, 2010, which was the date of acquisition.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Dollar amounts in thousands
|
|
|
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
77,746
|
|
|
|
5,770
|
|
Net loss from continuing operations
|
|
$
|
(8,413
|
)
|
|
|
(6,500
|
)
|
Net income
|
|
$
|
55,187
|
|
|
|
9,910
|
|
Segment Result of Operations
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Monitronics business(a)
|
|
$
|
73,870
|
|
|
|
|
|
Content Services group
|
|
$
|
3,876
|
|
|
|
5,770
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
Monitronics business segment adjusted EBITDA
|
|
$
|
51,653
|
|
|
|
|
|
Content Services group segment adjusted EBITDA
|
|
|
(1,401
|
)
|
|
|
(1,031
|
)
|
Corporate general and administrative expenses
|
|
|
(5,621
|
)
|
|
|
(5,190
|
)
|
|
|
|
|
|
|
|
|
|
Total adjusted EBITDA(b)
|
|
$
|
44,631
|
|
|
|
(6,221
|
)
|
|
|
|
|
|
|
|
|
|
Segment adjusted EBITDA as a percentage of Revenue
|
|
|
|
|
|
|
|
|
Monitronics business
|
|
|
69.9
|
%
|
|
|
|
|
Content Services group
|
|
|
(36.1
|
)%
|
|
|
(17.9
|
)%
|
20
|
|
|
(a) |
|
Monitronics revenue for the three months ended March 31,
2011 reflects the negative impact of a $2,295,000 fair value
adjustment that reduced deferred revenue acquired in the
Monitronics acquisition. |
|
(b) |
|
See reconciliation to net loss from continuing operations below. |
Revenue. Our consolidated revenue increased
$71,976,000 for the three months ended March 31, 2011, as
compared to the corresponding prior year period. The increase in
revenue was due to revenue of $73,870,000 from the Monitronics
business, which was acquired in December 2010. This increase was
partially offset by a decrease in the Content Services group
revenue of $1,894,000 due to a lower volume of system
integration projects.
Cost of Services. Cost of services increased
$7,762,000 for the three months ended March 31, 2011, as
compared to the corresponding prior year period. The increase in
cost of sales was primarily due to cost of sales of $9,130,000
incurred by the Monitronics business which was acquired in
December 2010. This increase was partially offset by a decrease
of $1,599,000 in the Content Services group due to a lower
volume of system integration projects.
Selling, general and administrative. Selling,
general and administrative costs (SG&A)
increased $13,713,000 for the three months ended March 31,
2011, compared to the corresponding prior year period. The
increase in SG&A was due to the SG&A incurred by the
Monitronics business which was acquired in December 2010.
Stock-based and long-term incentive compensation, which is
included in SG&A, was $627,000 and $655,000 for the three
months ended March 31, 2011 and 2010, respectively. This
expense was related to restricted stock and stock option awards
granted to certain executives.
Amortization of Subscriber Accounts and Dealer
Network. Amortization expense was $37,717,000 for
the three months ended March 31, 2011. This amount is the
amortization related to subscriber accounts and dealer networks
intangibles that were acquired in the Monitronics acquisition in
December 2010.
Restructuring Charges. We recorded
restructuring charges in continuing operations of $4,382,000 and
$45,000 during the three months ended March 31, 2011 and
2010, respectively.
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 changes 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 us due to the
Creative/Media and Content Distribution 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
operated, managed and sold 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.
The following table provides the activity and balances of the
restructuring reserve (all amounts are in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
Additions
|
|
|
Deductions(a)
|
|
|
2010
|
|
|
2008 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
354
|
|
|
|
45
|
|
|
|
(223
|
)
|
|
|
176
|
|
Excess facility costs
|
|
|
143
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
497
|
|
|
|
45
|
|
|
|
(285
|
)
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
Additions
|
|
|
Deductions(a)
|
|
|
2011
|
|
|
2010 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and retention
|
|
$
|
3,590
|
|
|
|
4,382
|
|
|
|
(2,836
|
)
|
|
|
5,136
|
(b)
|
2008 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
9
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
Excess facility costs
|
|
|
211
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
206
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
220
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Primarily represents cash payments. |
|
(b) |
|
Substantially all of this amount is expected to be paid in 2011. |
Depreciation. Depreciation expense increased
$1,351,000 for the three months ended March 31, 2011,
compared to the corresponding prior year period. The increase is
the result of the depreciation expense recorded by the
Monitronics business which was acquired in December 2010.
Income Taxes from Continuing Operations. For
the quarter ended March 31, 2011, we had a pre-tax loss
from continuing operations of $10,847,000 and an income tax
benefit of $2,434,000. For the quarter ended March 31,
2010, we had a pre-tax loss from continuing operations of
$6,964,000 and a income tax benefit of $464,000. For the quarter
ended March 31, 2011 and 2010, we recorded charges of
$986,000 and $2,285,000, respectively, to increase the valuation
allowance which reduced our net income tax benefit from
continuing operations.
Earnings from Discontinued Operations, Net of Income
Taxes. We recorded earnings from discontinued
operations, net of income taxes, of $63,600,000 and $16,410,000
for the three months ended March 31, 2011 and 2010,
respectively. These amounts included the results of the Content
Distribution business which was sold at the end of February
2011, the Creative/Media business which was sold at the end of
December 2010 and the Global Media Exchange which was shut down
at the end of September 2010. The 2011 amount also includes the
gain on sale of the Content Distribution business of
$66,136,000 million and the related income tax expense of
$2,906,000. The 2010 amount also includes the gain on sale of
the Chiswick Park facility of $25,498,000 and the related income
tax expense of $6,357,000.
Adjusted EBITDA. The following table provides
a reconciliation of total adjusted EBITDA to net loss from
continuing operations.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Amounts in thousands
|
|
|
Total adjusted EBITDA
|
|
$
|
44,631
|
|
|
|
(6,221
|
)
|
Amortization of subscriber accounts and dealer network
|
|
|
(37,717
|
)
|
|
|
|
|
Depreciation
|
|
|
(2,068
|
)
|
|
|
(717
|
)
|
Stock-based and long-term incentive compensation
|
|
|
(627
|
)
|
|
|
(655
|
)
|
Restructuring charges
|
|
|
(4,382
|
)
|
|
|
(45
|
)
|
Realized and unrealized loss on derivative instruments
|
|
|
(474
|
)
|
|
|
|
|
Interest income
|
|
|
190
|
|
|
|
682
|
|
Interest expense
|
|
|
(10,400
|
)
|
|
|
(8
|
)
|
Income tax benefit from continuing operations
|
|
|
2,434
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(8,413
|
)
|
|
|
(6,500
|
)
|
|
|
|
|
|
|
|
|
|
Monitronics business segment adjusted EBITDA as a percentage of
revenue was 69.9% for the three months ended March 31,
2011. Content Services group segment adjusted EBITDA as a
percentage of revenue was (36.1)% and (17.9)%. Content Services
group segment adjusted EBITDA declined by $370,000 for the three
months ended March 31, 2011, compared to the prior year
end, due to lower revenues from system integration projects.
22
Discontinued
Operations
On February 28, 2011, Ascent Media completed the sale of
100% of the Content Distribution business to Encompass. Ascent
Media received cash proceeds of approximately $104 million,
which is subject to adjustment based on final working capital
adjustments as of the closing date and other balance sheet
items, plus the assumption of certain liabilities and
obligations relating to the Content Distribution business.
Ascent Media recorded a gain on the sale of $66,136,000 and the
related income tax expense of $2,906,000 for the quarter ended
March 31, 2011. The Content Distribution business has been
treated as a discontinued operation in the consolidated
financial statements for all periods presented.
On December 31, 2010, Ascent Media completed the sale of
100% of its creative services business and media services
business (Creative/Media) to Deluxe Entertainment
Services Group Inc. for the purchase price of $69 million
in cash, subject to post-closing adjustments. As such
transaction was completed in 2010, the Creative/Media operations
are included in discontinued operations in the condensed
consolidated financial statements for the three months ended
March 31, 2010.
In September 2010, the Company shut down the operations of the
Global Media Exchange (GMX), which was previously
included in the Content Services group. These operations are
included in discontinued operations in the condensed
consolidated financial statements for the three months ended
March 31, 2010.
In February 2010, Ascent Media 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 $34.8 million. In the quarter ended
March 31, 2010, the Company recorded a gain on the sale of
$25,498,000 and $6,357,000 of related income tax expense. As
such transaction was completed in 2010, the Chiswick Park
operations are included in discontinued operations in the
condensed consolidated financial statements for the three months
ended March 31, 2010.
Liquidity
and Capital Resources
At March 31, 2011, we have $231,825,000 of cash and cash
equivalents and $29,915,000 of current restricted cash on a
consolidated basis. We may use a portion of the cash and cash
equivalents to fund potential strategic acquisitions or
investment opportunities.
Additionally, our other source of funds is our cash flows from
operating activities. In 2010 and in prior years, the operating
cash flows were generated from the Creative/Media, Content
Distribution and SI businesses. Since we have sold both the
Creative/Media and Content Distribution business and acquired
the Monitronics business, cash flows in 2011 are primarily
generated from the operations of Monitronics. During the three
months ended March 31, 2011 and 2010, our cash flow from
operating activities was $24,111,000 and $5,120,000,
respectively. The primary driver of our cash flow from operating
activities is segment adjusted EBITDA. Fluctuations in our
segment adjusted EBITDA and the components of that measure are
discussed in Results of Operations above. In
addition, our cash flow from operating activities is
significantly impacted by changes in working capital, which are
generally due to the timing of purchases and payments for
equipment and the timing of billings and collections for
revenue, as well as corporate general and administrative
expenses, which are not included in segment adjusted EBITDA.
During the three months ended March 31, 2011, we used cash
of $36,951,000 to fund purchases of subscriber accounts. In
addition, during the three months ended March 31, 2011 and
2010, we used cash of $743,000 and $131,000, respectively, to
fund our capital expenditures. We purchased marketable
securities consisting of diversified corporate bond funds for
cash of $9,999,000 during 2010 in order to improve our
investment rate of return.
As part of the Monitronics acquisition, we assumed Monitronics
long-term debt with a principal balance of $838 million at
March 31, 2011. Such indebtedness is the obligation of
Monitronics and certain of its subsidiaries and is not
guaranteed by us or any of our subsidiaries other than
Monitronics. In addition to the Monitronics cash on hand,
we also acquired restricted cash which totaled $52 million
at March 31, 2011. 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
23
borrowed $46,700,000 as of March 31, 2011. The term loan
matures on June 30, 2012, and requires principal
installments of $20,000,000 on December 31, 2011 and
March 31, 2012. The revolving credit facility matures on
December 17, 2013. We have guaranteed $30,000,000 of the
aggregate principal amount outstanding under the Credit Facility
Our liquidity requirements for 2011 and beyond have
significantly changed from the prior year. In considering our
liquidity requirements for 2011, 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 make-whole obligation incurred in connection
with any settlement of Monitronics derivative financial
instruments prior to April 2012, 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 under
Monitronics Credit Facility, under which Monitronics could
borrow approximately $68,000,000. 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 to fund our anticipated current and
foreseeable requirements.
The existing long-term debt of Monitronics at March 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 March 31, 2011, alarm monitoring agreements for
approximately 623,904 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. 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. 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 servicing fees could have
a substantially adverse affect on our liquidity and reduce the
capital resources available to Monitronics for purchasing alarm
monitoring accounts, further adversely affecting
Monitronics business model and potential profitability.
Monitronics is currently exploring opportunities to refinance or
amend the terms of its securitization facility to avoid such
potential adverse effect on its liquidity and capital resources.
However, 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 Monitronics securitization facility,
which have an aggregate principal balance of $288,000,000. 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, if
such swaps are then outstanding. Although such additional
interest would 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.
24
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. 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.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosure about Market Risk
|
Interest
Rate Risk
As part of the acquisition of Monitronics on December 17,
2010, we assumed variable interest debt obligations with
principal amounts of $838 million. In addition, we incurred
an additional $106 million of variable rate debt in
December 2010, primarily to partially fund the cash
consideration paid for the Monitronics acquisition. Therefore,
we now 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. The derivatives are not designated as hedges and
were entered into with the intention of reducing the risk
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 and other
derivative financial instruments are presented at fair value and
by maturity date. Debt amounts represent principal payments by
maturity date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
|
|
|
|
|
|
|
|
Derivative
|
|
|
|
|
|
|
|
Year of Maturity
|
|
Instruments(a)
|
|
|
Variable Rate Debt
|
|
|
Total
|
|
|
|
Amounts in thousands
|
|
|
2011
|
|
$
|
|
|
|
|
20,000
|
|
|
|
20,000
|
|
2012
|
|
|
36,440
|
|
|
|
40,000
|
|
|
|
76,440
|
|
2013
|
|
|
|
|
|
|
46,700
|
|
|
|
46,700
|
|
2014
|
|
|
18,696
|
|
|
|
|
|
|
|
18,696
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
838,000
|
|
|
|
838,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,136
|
|
|
|
944,700
|
|
|
|
999,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The derivative financial instruments reflected in this column
include one interest rate cap with an aggregate fair value of
$0.4 million that constitutes an asset of the Company, one
interest rate floor with a fair value of $19.1 million that
constitutes a liability of the Company, and three interest rate
swaps with an aggregate fair value of $36.4 million that
constitute liabilities of the Company. 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%. See Notes 7, 8 and 9 to our
consolidated financial statements included in this quarterly
report for further information. |
|
|
Item 4.
|
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 chief
executive officer 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 Companys disclosure controls and procedures were
effective as of March 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 Commissions rules
and forms.
There has been no change in the Companys internal controls
over financial reporting that occurred during the three months
ended March 31, 2011 that has materially affected, or is
reasonably likely to materially affect, its internal controls
over financial reporting.
25
ASCENT
MEDIA CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds.
(c) Purchases of Equity Securities by the Issuer
During the three months ended March 31, 2011,
2,518 shares of Series A common stock were surrendered
by certain of our officers and employees to pay withholding
taxes and other deductions in connection with the vesting of
their restricted stock, as set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
Average Price
|
|
Period
|
|
Purchased (Surrendered)
|
|
|
Paid per Share
|
|
|
01/01/11 - 01/31/11
|
|
|
|
|
|
|
|
|
02/01/11 - 02/28/11
|
|
|
|
|
|
|
|
|
03/01/11 - 03/31/11
|
|
|
2,518
|
(a)
|
|
$
|
42.40
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,518
|
(a)
|
|
$
|
42.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents 1,806 shares withheld from Mr. Fitzgerald
and 712 shares withheld from Mr. Orr. |
Listed below are the exhibits which are included as a part of
this Report (according to the number assigned to them in
Item 601 of
Regulation S-K):
|
|
|
|
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification*
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification*
|
|
32
|
|
|
Section 1350 Certification**
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ASCENT MEDIA CORPORATION
|
|
|
|
By:
|
/s/ William
R. Fitzgerald
|
William R. Fitzgerald
Chairman, President and Chief Executive Officer
Date: May 9, 2011
|
|
|
|
By:
|
/s/ George
C. Platisa
|
George C. Platisa
Executive Vice President and
Chief Financial Officer
Date: May 9, 2011
27
EXHIBIT INDEX
Listed below are the exhibits which are included as a part of
this Report (according to the number assigned to them in
Item 601 of
Regulation S-K):
|
|
|
|
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification*
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification*
|
|
32
|
|
|
Section 1350 Certification**
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |