Goal | | Revenue (in thousands) | | Adjusted EBITDA
We evaluate the performance of our operations based on financial measures such as revenue and "Adjusted EBITDA." Adjusted EBITDA is a non-GAAP financial measure and is defined as net income (loss) before interest expense, interest income, income taxes, depreciation, amortization (including the amortization of subscriber accounts, dealer network and other intangible assets), restructuring charges, stock-based compensation, and other non-cash or non-recurring charges. We believe that Adjusted EBITDA is an important indicator of the operational strength and performance of our business. In addition, this measure is used by management to evaluate operating results and perform analytical comparisons and identify strategies to improve performance. Adjusted EBITDA is also a measure that is customarily used by financial analysts to evaluate the financial performance of companies in the security alarm monitoring industry and is one of the financial measures, subject to certain adjustments, by which our covenants are calculated under the agreements governing our debt obligations. Adjusted EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles in the United States ("GAAP"), should not be construed as an alternative to net income or loss and is indicative neither of our results of operations nor of cash flows available to fund all of our cash needs. It is, however, a measurement that we believe is useful to investors in analyzing our operating performance. Accordingly, Adjusted EBITDA should be considered in addition to, but not as a substitute for, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. As companies often define non-GAAP financial measures differently, Adjusted EBITDA as calculated by Monitronics should not be compared to any similarly titled measures reported by other companies.
Results of Operations
For a discussion of our results of operations for the year ended December 31, 2017, including a year-to-year comparison between 2018 and 2017, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our final prospectus filed pursuant to Item 424(b)(3) on January 9, 2020.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Fresh Start Accounting Adjustments. With the exception of interest expense, the Company's operating results and key operating performance measures on a consolidated basis were not materially impacted by the reorganization. We believe that certain of our consolidated operating results for the period from January 1, 2019 through August 31, 2019, when combined with our consolidated operating results for the period from September 1, 2019 through December 31, 2019, is comparable to certain operating results from the comparable prior year period. Accordingly, we believe that discussing the non-GAAP combined results of operations and cash flows of the Predecessor Company and the Successor Company for the year ended December 31, 2019 is useful when analyzing certain performance measures.
The following table sets forth selected data from the accompanying consolidated statements of operations and comprehensive income (loss) for the periods indicated (dollar amounts in thousands).
| | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Non-GAAP Combined Year Ended December 31, 2019 | | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | | Year Ended December 31, 2018 | Net revenue | $ | 504,505 |
| | | $ | 162,219 |
| | | $ | 342,286 |
| | $ | 540,358 |
| Cost of services | 112,274 |
| | | 36,988 |
| | | 75,286 |
| | 128,939 |
| Selling, general and administrative, including stock-based and long-term incentive compensation | 132,509 |
| | | 52,144 |
| | | 80,365 |
| | 118,940 |
| Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets | 200,484 |
| | | 69,693 |
| | | 130,791 |
| | 211,639 |
| Interest expense | 134,060 |
| | | 28,979 |
| | | 105,081 |
| | 180,770 |
| Income (loss) before income taxes | 567,561 |
| | | (32,627 | ) | | | 600,188 |
| | (690,302 | ) | Income tax expense (benefit) | 2,479 |
| | | 704 |
| | | 1,775 |
| | (11,552 | ) | Net income (loss) | 565,082 |
| | | (33,331 | ) | | | 598,413 |
| | (678,750 | ) | | | | | | | | | | | Adjusted EBITDA (a) | $ | 266,460 |
| | | $ | 79,087 |
| | | $ | 187,373 |
| | $ | 289,448 |
| Adjusted EBITDA as a percentage of Net revenue | 52.8 | % | | | 48.8 | % | | | 54.7 | % | | 53.6 | % | | | | | | | | | | | Expensed Subscriber acquisition costs, net | | | | | | | | | | Gross subscriber acquisition costs | $ | 38,325 |
| | | $ | 13,381 |
| | | $ | 24,944 |
| | $ | 47,874 |
| Revenue associated with subscriber acquisition costs | (7,769 | ) | | | (2,282 | ) | | | (5,487 | ) | | (4,678 | ) | Expensed Subscriber acquisition costs, net | $ | 30,556 |
| | | $ | 11,099 |
| | | $ | 19,457 |
| | $ | 43,196 |
|
| | (a)
| See reconciliation of Net income (loss) to Adjusted EBITDA below. |
Net revenue. Net revenue decreased $35,853,000, or 6.6%, for the year ended December 31, 2019, as compared to the prior year. The decrease in net revenue is primarily attributable to a decrease in alarm monitoring revenue of $31,418,000 due to the lower average number of subscribers in 2019. Additionally, average RMR per subscriber decreased from $45.27 as of December 31, 2018 to $45.12 as of December 31, 2019 due to changing mix of customers generated through the Direct to Consumer Channel that typically have lower RMR as a result of the elimination of equipment subsidy. Monitoring revenue also reflects the negative impact of a $5,331,000 fair value adjustment that reduced deferred revenue upon the Company's emergence from bankruptcy in accordance with ASC 852. Product, installation and service revenue decreased $6,673,000 largely due to the decline in accounts acquired in the Direct to Consumer Channel in 2019 and a decrease in pre-emergence field service jobs associated with contract extensions. These decreases were partially offset by an increase in other revenue of $2,238,000 as a result of the full year impact of paper statement fees implemented in the fourth quarter of 2018.
Cost of services. Cost of services decreased $16,665,000, or 12.9%, for the year ended December 31, 2019, as compared to the prior year. The decrease for the year ended December 31, 2019 is primarily attributable to lower labor costs due to year over year decline in customers as well as other pre-emergence cost saving measures. Subscriber acquisition costs, which include expensed equipment and labor costs associated with the creation of new subscribers, decreased to $8,977,000 for the year ended December 31, 2019, as compared to $14,722,000 for the year ended December 31, 2018, due to lower product sales volume in the Company's Direct to Consumer Channel as discussed above. Cost of services as a percentage of net revenue, excluding the effect of the fair value adjustment, decreased from 23.9% for the year ended December 31, 2018 to 22.0% for the year ended December 31, 2019.
Selling, general and administrative. Selling, general and administrative costs ("SG&A") increased $13,569,000, or 11.4%, for the year ended December 31, 2019, as compared to the prior year. The increase is primarily attributable to increased consulting fees on integration and implementation of various company initiatives and increased duplicative labor costs due to the outsourcing of a customer care call center for a portion of 2019. Additionally, the Company received a $4,800,000 insurance settlement in 2019 as compared to an aggregate settlement of $12,500,000 received in 2018 from multiple carriers. These insurance receivable settlements related to coverage provided by our insurance carriers in the 2017 class action litigation of alleged violation of telemarketing laws. These increases are partially offset by decreases in rebranding expense and severance expense. Rebranding expense and severance expense recognized in the year ended December 31, 2018 was $7,410,000 and $1,059,000, respectively, with no corresponding expenses in the year ended December 31, 2019. Subscriber acquisition costs included in SG&A decreased to $29,348,000 for the year ended December 31, 2019, as compared to $33,152,000 for the year ended December 31, 2018, due to reduced subscriber acquisition selling and marketing costs associated with the creation of new subscribers. SG&A as a percentage of net revenue, excluding the effect of the fair value adjustment, increased from 22.0% for the year ended December 31, 2018 to 26.0% for the year ended December 31, 2019.
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets. Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets decreased $11,155,000, or 5.3%, for the year ended December 31, 2019, as compared to the prior year. The decrease is related to a lower number of subscriber accounts purchased in the last year ended December 31, 2019, compared to the prior year. This decrease is partially offset by the impact of the fresh start adjustments, in which the existing subscriber accounts as of August 31, 2019 were stated at fair value and set up on the 14-year 235% double-declining curve. This curve is shorter than the methodology utilized on newly generated subscriber accounts, due to the various aged vintages of the Company's subscriber base at August 31, 2019. The shorter amortization curve results in higher amortization expense per period. Additionally contributing to the offset is amortization on the newly established Dealer Network asset recognized upon the Company's emergence from bankruptcy.
Interest expense. Interest expense decreased $46,710,000, or 25.8%, for the year ended December 31, 2019, as compared to the prior year. The decrease in interest expense is attributable to the Company's decreased outstanding debt balances upon the reorganization, primarily related to the retirement of the Company's 9.125% Senior Notes, and the impact of accelerated amortization of deferred financing costs and debt discount related to the Company's predecessor debt agreements of $26,085,000 recognized in interest expense in the fourth quarter of 2018. Offsetting the decreases seen in the successor period of 2019 were increases in interest expense prior to and in the bankruptcy, due to higher debt outstanding and higher interest rates.
Income tax expense (benefit). The Company had pre-tax income of $567,561,000 and income tax expense of $2,479,000 for the year ended December 31, 2019. The driver behind the pre-tax income for the year ended December 31, 2019 is the gain on restructuring and reorganization of $669,722,000 recognized during the year ended December 31, 2019, primarily due to gains recognized on the conversion from debt to equity and discounted cash settlement of the Predecessor Company's high yield senior notes in accordance with the Company's bankruptcy Plan. There are no income tax impacts from this gain due to net operating loss carryforwards available for the 2019 tax year. Income tax expense for the year ended December 31, 2019 is attributable to the Company's state tax expense incurred from Texas margin tax. The Company had pre-
tax loss of $690,302,000 and income tax benefit of $11,552,000 for the year ended December 31, 2018. The income tax benefit for the year ended December 31, 2018 is attributable to the deferred tax impact of the goodwill impairment of $563,549,000, partially offset by the Company's state tax expense incurred from Texas margin tax.
Net income (loss). The Company had net income of $565,082,000 for the year ended December 31, 2019, as compared to a net loss of $678,750,000 for the year ended December 31, 2018. Net income for the year ended December 31, 2019 is attributable to the gain on restructuring and reorganization of $669,722,000. The gain on restructuring and reorganization is primarily due to gains recognized on the conversion from debt to equity and discounted cash settlement of the Predecessor Company's high yield senior notes in accordance with the Company's bankruptcy plan. This gain was offset by net loss generated from normal operations as discussed above. The net loss for the year ended December 31, 2018 was primarily attributable to the goodwill impairment of $563,549,000 and net losses generated from normal operations.
Adjusted EBITDA
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table provides a reconciliation of Net income (loss) to total Adjusted EBITDA for the periods indicated (amounts (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Non-GAAP Combined Year Ended December 31, 2019 | | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | | Year Ended December 31, 2018 | Net income (loss) | $ | 565,082 |
| | | $ | (33,331 | ) | | | $ | 598,413 |
| | $ | (678,750 | ) | Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets | 200,484 |
| | | 69,693 |
| | | 130,791 |
| | 211,639 |
| Depreciation | 11,125 |
| | | 3,777 |
| | | 7,348 |
| | 11,434 |
| Radio conversion costs | 4,196 |
| | | 3,265 |
| | | 931 |
| | — |
| Stock-based compensation | 42 |
| | | — |
| | | 42 |
| | 474 |
| Long-term incentive compensation | 774 |
| | | 184 |
| | | 590 |
| | — |
| LiveWatch acquisition contingent bonus charges | 63 |
| | | — |
| | | 63 |
| | 250 |
| Legal settlement reserve (related insurance recovery) | (4,800 | ) | | | — |
| | | (4,800 | ) | | (12,500 | ) | Severance expense (a) | — |
| | | — |
| | | — |
| | 1,059 |
| Rebranding marketing program | — |
| | | — |
| | | — |
| | 7,410 |
| Integration / implementation of company initiatives | 12,545 |
| | | 7,702 |
| | | 4,843 |
| | 516 |
| Gain on revaluation of acquisition dealer liabilities | (1,886 | ) | | | (1,886 | ) | | | — |
| | (240 | ) | Loss on goodwill impairment | — |
| | | — |
| | | — |
| | 563,549 |
| Gain on restructuring and reorganization, net | (669,722 | ) | | | — |
| | | (669,722 | ) | | — |
| Interest expense | 134,060 |
| | | 28,979 |
| | | 105,081 |
| | 180,770 |
| Realized and unrealized (gain) loss, net on derivative financial instruments | 6,804 |
| | | — |
| | | 6,804 |
| | 3,151 |
| Refinancing expense | 5,214 |
| | | — |
| | | 5,214 |
| | 12,238 |
| Income tax expense (benefit) | 2,479 |
| | | 704 |
| | | 1,775 |
| | (11,552 | ) | Adjusted EBITDA | $ | 266,460 |
| | | $ | 79,087 |
| | | $ | 187,373 |
| | $ | 289,448 |
|
| | | Cash Plan Award Earned | Threshold (96.5% - 97.4%) | | $496,829 | | $275,491 | | 50% | Target (range 97.5% - 98.9%) | | $501,978 | | $278,346 | | 75% | Maximum (range 99.0% - 100.4%) | | $509,701 | | $282,628 | | 100% |
| | (a)
| Severance expense for the year ended December 31, 2018 related to a reduction in headcount event. |
Adjusted EBITDA decreased $22,988,000, or 7.9%, for the year ended December 31, 2019, as compared to the prior year period. The decrease for the year ended December 31, 2019 is primarily the result of decreased revenue, including the effect of the $5,331,000 fair value adjustment for 2019, partially offset by favorable decreases in cost of services and Subscriber Acquisition Costs.
Expensed Subscriber Acquisition Costs, net. Subscriber acquisition costs, net decreased to $30,556,000 for the year ended December 31, 2019, as compared to $43,196,000 for the year ended December 31, 2018. The decrease in subscriber acquisition costs, net is primarily attributable to a decrease in planned spend while the Company was going through its restructuring.
Liquidity and Capital Resources
As of December 31, 2019, we had $14,763,000 of cash and cash equivalents. Our primary sources of funds is our cash flows from operating activities which are generated from alarm monitoring and related service revenues. During the years ended December 31, 2019 and 2018, our cash flow from operating activities was $114,135,000 and $104,503,000, respectively. The primary drivers of our cash flow from operating activities are the fluctuations in revenues and operating expenses as discussed in "Results of Operations" above. In addition, our cash flow from operating activities may be significantly impacted by changes in working capital.
During the years ended December 31, 2019 and 2018, we used cash of $111,139,000 and $140,450,000, respectively, to fund subscriber account acquisitions, net of holdback and guarantee obligations. In addition, during the years ended December 31, 2019 and 2018, we used cash of $11,623,000 and $14,903,000, respectively, to fund our capital expenditures. Our capital expenditures are primarily related to computer systems and software.
Our existing long-term debt at December 31, 2019 includes an aggregate principal balance of $986,444,000 under the Successor Takeback Loan Facility, Successor Term Loan Facility and the Successor Revolving Credit Facility. The Successor Takeback Loan Facility has an outstanding principal balance of $820,444,000 as of December 31, 2019 and requires principal payments of $2,056,250 per quarter, beginning December 31, 2019, with the remaining amount becoming due on March 29, 2024. The Successor Term Loan Facility has an outstanding principal balance of $150,000,000 as of December 31, 2019 and becomes due on July 3, 2024. The Successor Revolving Credit Facility has an outstanding balance of $16,000,000 as of December 31, 2019. We also had an aggregate of $1,000,000 available under two standby letters of credit issued as of December 31, 2019. One letter of credit for $400,000 expired as of January 31, 2020 and was not renewed. The maturity date of the loans made under the Successor Term Loan Facility and Successor Revolving Credit Facility is July 3, 2024, subject to a springing maturity of March 29, 2024, or earlier, depending on any repayment, refinancing or changes in the maturity date of the Successor Takeback Loan Facility.
Radio Conversion Costs
Certain cellular carriers of 3G and CDMA cellular networks have announced that they will be retiring these networks between February and December of 2022. As of December 31, 2019, we have approximately 415,000 subscribers with 3G or CDMA equipment which may have to be upgraded as a result of these retirements. Additionally, in the month of September of 2019, other certain cellular carriers of 2G cellular networks have announced that the 2G cellular networks will be sunsetting as of December 31, 2020. As of December 31, 2019, we have approximately 24,000 subscribers with 2G cellular equipment which may have to be upgraded as a result of this retirement. While we are in the early phase of offering equipment upgrades to our 3G and 2G population, we currently estimate that we will incur approximately $70,000,000 to $90,000,000 between 2020 and the second half of 2022 to complete the required upgrades of these networks. For the year ended December 31, 2019, the Company incurred radio conversion costs of $4,196,000. Total costs for the conversion of such customers are subject to numerous variables, including our ability to work with our partners and subscribers on cost sharing initiatives, and the costs that we actually incur could be materially higher than our current estimates.
Liquidity Outlook
In considering our liquidity requirements for the next twelve months, we evaluated our known future commitments and obligations. We will require the availability of funds to finance our strategy to grow through the acquisition of subscriber accounts. We considered our expected operating cash flows as well as the borrowing capacity of our Successor Revolving Credit Facility, under which we could borrow an additional $128,000,000 as of December 31, 2019, excluding a minimum liquidity requirement of $25,000,000 under the terms of the Company's credit agreements. As of March 31, 2019, we borrowed an incremental $50,000,000 under our Successor Revolving Credit Facility in response to uncertainties surrounding the COVID-19 outbreak. Based on this analysis, we expect that cash on hand, cash flow generated from operations and available borrowings under the Successor Revolving Credit Facility will provide sufficient liquidity for the next twelve months, given our anticipated current and future requirements.
Subject to restrictions set forth in our credit agreements, we may seek 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 debt financing on terms that would be acceptable to us or at all. Our ability to seek additional sources of funding depends on our future financial position and results of operations, which are subject to general conditions in or affecting our industry and our customers and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.
Contractual Obligations
Information concerning the amount and timing of required payments under our contractual obligations as of December 31, 2019 is summarized below (amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | Payments Due by Period | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | After 5 Years | | Total | Operating leases | $ | 3,963 |
| | $ | 6,693 |
| | $ | 6,152 |
| | $ | 17,264 |
| | $ | 34,072 |
| Long-term debt (a) | $ | 8,225 |
| | $ | 16,450 |
| | $ | 961,769 |
| | $ | — |
| | $ | 986,444 |
| Interest payments on long-term debt (b) | $ | 80,107 |
| | $ | 158,167 |
| | $ | 97,468 |
| | $ | — |
| | $ | 335,742 |
| Other (c) | $ | 8,301 |
| | $ | 220 |
| | $ | 568 |
| | $ | 3,724 |
| | $ | 12,813 |
| Total contractual obligations | $ | 100,596 |
| | $ | 181,530 |
| | $ | 1,065,957 |
| | $ | 20,988 |
| | $ | 1,369,071 |
|
(a)Amounts reflect principal amounts owed.
(b)Interest payments are based on variable interest rates. Future interest expense is estimated using the interest rate in effect on December 31, 2019.For purposes of Mr. Gardner’s award, Revenue was defined as total revenue excluding the impact of changes in contract assets related to ASC 606 and impacts from deferred revenue Fresh Start adjustments. Adjusted EBITDA was defined as Adjusted EBITDA as defined in our 2019 Form 10-K, but excluding impacts from changes in contract assets related to ASC 606, impacts from Fresh Start adjustments and bonus accruals. To the extent earned, Mr. Gardner’s award would vest quarterly
| | (c) | Primarily represents our holdback liability whereby we withhold payment of a designated percentage of acquisition cost when we acquire subscriber accounts from dealers. The holdback is used as a reserve to cover any terminated subscriber accounts that are not replaced by the dealer during the guarantee period. At the end of the guarantee period, the dealer is responsible for any deficit or is paid the balance of the holdback. |
We have contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible we may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
Valuation of Subscriber Accounts
Subscriber accounts, which totaled $1,064,311,000 net of accumulated amortization, at December 31, 2019, relate primarily to the cost of acquiring monitoring service contracts from independent dealers. The subscriber accounts balance was adjusted to fair value in connection with the Company's application of fresh start accounting under ASC 852 upon the Company's emergence from Chapter 11. The valuation of subscriber accounts was based on the projected cash flows to be generated by the existing subscribers as of the Effective Date. Subscriber accounts acquired after the Company's emergence from bankruptcy are recorded at cost. All direct and incremental costs, including bonus incentives related to account activation in the Direct to Consumer Channel, associated with the creation of subscriber accounts, are capitalized (the "subscriber accounts asset"). Upon adoption of ASC 606, all Moves Costs are expensed, whereas prior to adoption, certain Moves Costs were capitalized on the balance sheet.
The fair value of subscriber accounts as of the Company's emergence from Chapter 11, as well as certain accounts acquired in bulk purchases, are amortized using the 14-year 235% declining balance method. The costs of all other subscriber accounts are amortized using the 15-year 220% declining balance method, beginning in the month following the date of acquisition. The amortization methods were selected to provide an approximate matching of the amortization of the subscriber accounts intangible asset to estimated future subscriber revenues based on the projected lives of individual subscriber contracts. The
realizable value and remaining useful lives of these assets could be impacted by changes in subscriber attrition rates, which could have an adverse effect on our earnings.
The Company has processes and controls in place, including the review of key performance indicators, to assist management in identifying events or circumstances that indicate the subscriber accounts asset may not be recoverable. If an indicator that the asset may not be recoverable exists, management tests the subscriber accounts asset for impairment. For purposes of recognition and measurement of an impairment loss, we view subscriber accounts as a single pool because of the assets’ homogeneous characteristics, and the pool of subscriber accounts is the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. If such assets are considered to be impaired, the impairment loss to be recognized is measured as the amount by which the carrying value of the assets exceeds the estimated fair value, as determined using the income approach.
In addition, the Company reviews the subscriber accounts asset amortization methodology annually to ensure the methodology is consistent with actual experience.
Valuation of Deferred Tax Assets
In accordance with FASB ASC Topic 740, Income Taxes, we review the nature of each component of our deferred income taxes for the ability to realize the future tax benefits. As part of this review, we rely on the objective evidence of our current performance and the subjective evidence of estimates of our forecast of future operations. Our estimates of realizability are subject to judgment since they include such forecasts of future operations. After consideration of all available positive and negative evidence and estimates, we have determined that it is more likely than not that we will not realize the tax benefits associated with our United States deferred tax assets and certain foreign deferred tax assets, and as such, we have a valuation allowance which totaled $24,457,000 and $148,419,000 as of December 31, 2019 and 2018, respectively.
Valuation of Goodwill
As of December 31, 2019, we had goodwill of $81,943,000, which represents approximately 6% of total assets. Goodwill was recorded in connection with the Company's application of fresh start accounting under ASC 852 upon the Company's emergence from Chapter 11. The Company accounts for its goodwill pursuant to the provisions of FASB ASC Topic 350, Intangibles — Goodwill and Other. In accordance with FASB ASC Topic 350, goodwill is not amortized, but rather tested for impairment at least annually.
To the extent necessary, recoverability of goodwill for the reporting unit is measured using a discounted cash flow model incorporating discount rates commensurate with the risks involved, which is classified as a Level 3 measurement under FASB ASC Topic 820, Fair Value Measurement. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment.
The Company assesses the recoverability of the carrying value of goodwill during the fourth quarter of its fiscal year, based on October 31 financial information, or whenever events or changes in circumstances indicate that the carrying amount of the goodwill of a reporting unit may not be fully recoverable. The Company has one reporting unit, Brinks Home Security, and recoverability is measured at the reporting unit level based on the provisions of FASB ASC Topic 350.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We have exposure to changes in interest rates related to the terms of our debt obligations. The Company uses an interest rate cap derivative instrument to manage the exposure related to the movement in interest rates. The derivative is designated as a cash flow hedge and was entered into with the intention of reducing the risk associated with the variable interest rates on the Successor Takeback Loan Facility. We do not use derivative financial instruments for trading purposes.
Tabular Presentation of Interest Rate Risk
The table below provides information about our outstanding debt obligations that are sensitive to changes in interest rates. Debt amounts represent principal payments by stated maturity date as of December 31, 2019 (amounts in thousands): | | | | | | Year of Maturity | | Variable Rate Debt | 2020 | | $ | 8,225 |
| 2021 | | 8,225 |
| 2022 | | 8,225 |
| 2023 | | 8,225 |
| 2024 | | 953,544 |
| Thereafter | | — |
| Total | | $ | 986,444 |
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements are filed under this Item, beginning on page 40. The financial statement schedules required by Regulation S-X are filed under Item 15 of this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Monitronics International, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Monitronics International, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income (loss), cash flows, and stockholders’ equity (deficit), for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, in 2018, the Company has changed its method of accounting for revenue transactions with customers due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, as amended.
As discussed in Note 5 to the consolidated financial statements, in 2019, the Company has changed its method of accounting for leases due to the adoption of Accounting Standards Update No. 2016-02, Leases.
Fresh Start Accounting
As described in Note 1 to the consolidated financial statements, the Company filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on June 30, 2019. The Company's plan of reorganization became effective and the Company emerged from bankruptcy protection on August 30, 2019. In connection with its emergence from bankruptcy, the Company adopted the guidance for fresh start accounting in conformity with FASB ASC Topic 852, Reorganizations. Accordingly, the Company's consolidated financial statements prior to December 31, 2019 are not comparable to its consolidated financial statements for periods after December 31, 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
| | | | /s/ KPMG LLP | | | We have served as the Company's auditor since 2011. | | | | Dallas, Texas | | March 30, 2020 | |
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Amounts in thousands, except share amounts
| | | | | | | | | | | Successor Company | | | Predecessor Company | | December 31, 2019 | | | December 31, 2018 | Assets | |
| | | |
| Current assets: | |
| | | |
| Cash and cash equivalents | $ | 14,763 |
| | | $ | 2,188 |
| Restricted cash | 238 |
| | | 189 |
| Trade receivables, net of allowance for doubtful accounts of $3,828 in 2019 and $3,759 in 2018 | 12,083 |
| | | 13,121 |
| Prepaid and other current assets | 25,195 |
| | | 28,178 |
| Total current assets | 52,279 |
| | | 43,676 |
| Property and equipment, net of accumulated depreciation of $3,777 in 2019 and $40,531 in 2018 | 42,096 |
| | | 36,539 |
| Subscriber accounts and deferred contract acquisition costs, net of accumulated amortization of $61,771 in 2019 and $1,621,242 in 2018 | 1,064,311 |
| | | 1,195,463 |
| Dealer network and other intangible assets, net of accumulated amortization of $7,922 in 2019 and $0 in 2018 | 136,778 |
| | | — |
| Goodwill | 81,943 |
| | | — |
| Deferred income tax asset, net | 684 |
| | | 783 |
| Operating lease right-of-use asset | 19,277 |
| | | — |
| Other assets | 21,944 |
| | | 29,307 |
| Total assets | $ | 1,419,312 |
| | | $ | 1,305,768 |
| Liabilities and Stockholders' Equity (Deficit) | |
| | | |
| Current liabilities: | |
| | | |
| Accounts payable | $ | 16,869 |
| | | $ | 12,099 |
| Other accrued liabilities | 24,954 |
| | | 31,085 |
| Deferred revenue | 12,008 |
| | | 13,060 |
| Holdback liability | 8,191 |
| | | 11,513 |
| Current portion of long-term debt | 8,225 |
| | | 1,816,450 |
| Total current liabilities | 70,247 |
| | | 1,884,207 |
| Non-current liabilities: | |
| | | |
| Long-term debt | 978,219 |
| | | — |
| Long-term holdback liability | 2,183 |
| | | 1,770 |
| Derivative financial instruments | — |
| | | 6,039 |
| Operating lease liabilities | 16,195 |
| | | — |
| Other liabilities | 6,390 |
| | | 2,727 |
| Total liabilities | 1,073,234 |
| | | 1,894,743 |
| Commitments and contingencies |
|
| | |
|
| Stockholders' equity (deficit): | | | | | Predecessor common stock, $.01 par value. 1,000 shares authorized, issued and outstanding at December 31, 2018 | — |
| | | — |
| Predecessor additional paid-in capital | — |
| | | 439,711 |
| Predecessor accumulated deficit | — |
| | | (1,036,294 | ) | Predecessor accumulated other comprehensive income, net | — |
| | | 7,608 |
| Successor preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued | — |
| | | — |
| Successor common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding 22,500,000 shares at December 31, 2019 | 225 |
| | | — |
| Successor additional paid-in capital | 379,175 |
| | | — |
| Successor accumulated deficit | (33,331 | ) | | | — |
| Successor accumulated other comprehensive income, net | 9 |
| | | — |
| Total stockholders' equity (deficit) | 346,078 |
| | | (588,975 | ) | Total liabilities and stockholders' equity (deficit) | $ | 1,419,312 |
| | | $ | 1,305,768 |
|
See accompanying notes to consolidated financial statements.
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
Amounts in thousands
| | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | Net revenue | $ | 162,219 |
| | | $ | 342,286 |
| | $ | 540,358 |
| | $ | 553,455 |
| Operating expenses: | | | | | | | | | Cost of services | 36,988 |
| | | 75,286 |
| | 128,939 |
| | 119,193 |
| Selling, general and administrative, including stock-based and long-term incentive compensation | 52,144 |
| | | 80,365 |
| | 118,940 |
| | 155,902 |
| Radio conversion costs | 3,265 |
| | | 931 |
| | — |
| | 450 |
| Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets | 69,693 |
| | | 130,791 |
| | 211,639 |
| | 236,788 |
| Depreciation | 3,777 |
| | | 7,348 |
| | 11,434 |
| | 8,818 |
| Loss on goodwill impairment | — |
| | | — |
| | 563,549 |
| | — |
| | 165,867 |
| | | 294,721 |
| | 1,034,501 |
| | 521,151 |
| Operating (loss) income | (3,648 | ) | | | 47,565 |
| | (494,143 | ) | | 32,304 |
| Other (income) expense: | | | | | | | | | Gain on restructuring and reorganization, net | — |
| | | (669,722 | ) | | — |
| | — |
| Interest expense | 28,979 |
| | | 105,081 |
| | 180,770 |
| | 145,492 |
| Realized and unrealized loss, net on derivative financial instruments | — |
| | | 6,804 |
| | 3,151 |
| | — |
| Refinancing expense | — |
| | | 5,214 |
| | 12,238 |
| | — |
| | 28,979 |
| | | (552,623 | ) | | 196,159 |
| | 145,492 |
| (Loss) income before income taxes | (32,627 | ) | | | 600,188 |
| | (690,302 | ) | | (113,188 | ) | Income tax expense (benefit) | 704 |
| | | 1,775 |
| | (11,552 | ) | | (1,893 | ) | Net (loss) income | (33,331 | ) | | | 598,413 |
| | (678,750 | ) | | (111,295 | ) | Other comprehensive (loss) income: | | | | | | | | | Unrealized gain (loss) on derivative contracts, net | 9 |
| | | (940 | ) | | 14,378 |
| | 1,582 |
| Total other comprehensive income (loss), net of tax | 9 |
| | | (940 | ) | | 14,378 |
| | 1,582 |
| Comprehensive (loss) income | $ | (33,322 | ) | | | $ | 597,473 |
| | $ | (664,372 | ) | | $ | (109,713 | ) | | | | | | | | | | Basic and diluted income per share: | | | | | | | | | Net loss | $ | (1.48 | ) | | | $ | — |
| | $ | — |
| | $ | — |
|
See accompanying notes to consolidated financial statements.
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Amounts in thousands
| | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | Cash flows from operating activities: | | | | | | | | | Net (loss) income | $ | (33,331 | ) | | | $ | 598,413 |
| | $ | (678,750 | ) | | $ | (111,295 | ) | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | | Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets | 69,693 |
| | | 130,791 |
| | 211,639 |
| | 236,788 |
| Depreciation | 3,777 |
| | | 7,348 |
| | 11,434 |
| | 8,818 |
| Stock-based and long-term incentive compensation | 459 |
| | | 912 |
| | 310 |
| | 3,183 |
| Deferred income tax expense (benefit) | 99 |
| | | — |
| | (14,087 | ) | | (4,026 | ) | Non-cash legal settlement reserve (related insurance recovery) | — |
| | | — |
| | (2,750 | ) | | 23,000 |
| Amortization of debt discount and deferred debt costs | — |
| | | — |
| | 33,452 |
| | 6,819 |
| Gain on restructuring and reorganization, net of cash payments | (8,143 | ) | | | (705,559 | ) | | — |
| | — |
| Unrealized loss on derivative financial instruments, net | — |
| | | 4,577 |
| | 3,151 |
| | — |
| Refinancing expense | — |
| | | 5,214 |
| | 12,238 |
| | — |
| Bad debt expense | 3,828 |
| | | 7,558 |
| | 12,300 |
| | 11,014 |
| Loss on goodwill impairment | — |
| | | — |
| | 563,549 |
| | — |
| Other non-cash activity, net | 160 |
| | | (462 | ) | | 24 |
| | (4,291 | ) | Changes in assets and liabilities: | | | | | | | | | Trade receivables | (4,077 | ) | | | (6,271 | ) | | (12,776 | ) | | (9,790 | ) | Prepaid expenses and other assets | (4,664 | ) | | | 2,760 |
| | (11,046 | ) | | (2,160 | ) | Subscriber accounts - deferred contract acquisition costs | (585 | ) | | | (2,193 | ) | | (5,418 | ) | | (3,064 | ) | Payables and other liabilities | 7,141 |
| | | 36,690 |
| | (18,767 | ) | | (4,792 | ) | Net cash provided by operating activities | 34,357 |
| | | 79,778 |
| | 104,503 |
| | 150,204 |
| Cash flows from investing activities: | | | | |
| | |
| | | Capital expenditures | (4,523 | ) | | | (7,100 | ) | | (14,903 | ) | | (14,393 | ) | Cost of subscriber accounts acquired | (27,325 | ) | | | (83,814 | ) | | (140,450 | ) | | (142,909 | ) | Net cash used in investing activities | (31,848 | ) | | | (90,914 | ) | | (155,353 | ) | | (157,302 | ) | Cash flows from financing activities: | | | | | | | | | Proceeds from long-term debt | 21,000 |
| | | 253,100 |
| | 248,800 |
| | 187,950 |
| Payments on long-term debt | (28,556 | ) | | | (379,666 | ) | | (184,100 | ) | | (175,250 | ) | Purchase of interest rate cap | (3,020 | ) | | | — |
| | — |
| | — |
| Proceeds from equity rights offering | — |
| | | 161,497 |
| | — |
| | — |
| Cash contributed by Ascent Capital | — |
| | | 24,139 |
| | — |
| | — |
| Payments of restructuring and reorganization costs | (1,572 | ) | | | (13,249 | ) | | — |
| | — |
| Payments of refinancing costs | — |
| | | (7,404 | ) | | (9,682 | ) | | — |
| Value of shares withheld for share-based compensation | — |
| | | (18 | ) | | (93 | ) | | (477 | ) | Dividend to Ascent Capital | — |
| | | (5,000 | ) | | (5,000 | ) | | (5,000 | ) | Net cash (used in) provided by financing activities | (12,148 | ) | | | 33,399 |
| | 49,925 |
| | 7,223 |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (9,639 | ) | | | 22,263 |
| | (925 | ) | | 125 |
| Cash, cash equivalents and restricted cash at beginning of period | 24,640 |
| | | 2,377 |
| | 3,302 |
| | 3,177 |
| Cash, cash equivalents and restricted cash at end of period | $ | 15,001 |
| | | $ | 24,640 |
| | $ | 2,377 |
| | $ | 3,302 |
|
See accompanying notes to consolidated financial statements.
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
Amounts in thousands, except share amounts | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity (Deficit) | | Shares | | Amount | | | | | Balance at December 31, 2016 (Predecessor Company) | 1,000 |
| | $ | — |
| | $ | 446,826 |
| | $ | (222,924 | ) | | $ | (8,957 | ) | | $ | 214,945 |
| Net loss | — |
| | — |
| | — |
| | (111,295 | ) | | — |
| | (111,295 | ) | Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 1,582 |
| | 1,582 |
| Dividend paid to Ascent Capital | — |
| | — |
| | (5,000 | ) | | — |
| | — |
| | (5,000 | ) | Stock-based compensation | — |
| | — |
| | 2,981 |
| | — |
| | — |
| | 2,981 |
| Value of shares withheld for minimum tax liability | — |
| | — |
| | (477 | ) | | — |
| | — |
| | (477 | ) | Balance at December 31, 2017 (Predecessor Company) | 1,000 |
| | $ | — |
| | $ | 444,330 |
| | $ | (334,219 | ) | | $ | (7,375 | ) | | $ | 102,736 |
| Impact of adoption of Topic 606 | — |
| | — |
| | — |
| | (22,720 | ) | | — |
| | (22,720 | ) | Impact of adoption of ASU 2017-12 | — |
| | — |
| | — |
| | (605 | ) | | 605 |
| | — |
| Adjusted balance at January 1, 2018 (Predecessor Company) | 1,000 |
| | $ | — |
| | $ | 444,330 |
| | $ | (357,544 | ) | | $ | (6,770 | ) | | $ | 80,016 |
| Net loss | — |
| | — |
| | — |
| | (678,750 | ) | | — |
| | (678,750 | ) | Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 14,378 |
| | 14,378 |
| Dividend paid to Ascent Capital | — |
| | — |
| | (5,000 | ) | | — |
| | — |
| | (5,000 | ) | Stock-based compensation | — |
| | — |
| | 474 |
| | — |
| | — |
| | 474 |
| Value of shares withheld for minimum tax liability | — |
| | — |
| | (93 | ) | | — |
| | — |
| | (93 | ) | Balance at December 31, 2018 (Predecessor Company) | 1,000 |
| | $ | — |
| | $ | 439,711 |
| | $ | (1,036,294 | ) | | $ | 7,608 |
| | $ | (588,975 | ) | Net income | — |
| | — |
| | — |
| | 598,413 |
| | — |
| | 598,413 |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (940 | ) | | (940 | ) | Dividend paid to Ascent Capital | — |
| | — |
| | (5,000 | ) | | — |
| | — |
| | (5,000 | ) | Contribution from Ascent Capital | — |
| | — |
| | 2,250 |
| | — |
| | — |
| | 2,250 |
| Stock-based compensation | — |
| | — |
| | 43 |
| | — |
| | — |
| | 43 |
| Value of shares withheld for minimum tax liability | — |
| | — |
| | (18 | ) | | — |
| | — |
| | (18 | ) | Cancellation of Predecessor equity | (1,000 | ) | | — |
| | (436,986 | ) | | 437,881 |
| | (6,668 | ) | | (5,773 | ) | Issuance of Successor common stock | 22,500,000 |
| | 225 |
| | 379,175 |
| | — |
| | — |
| | 379,400 |
| Balance at August 31, 2019 (Predecessor Company) | 22,500,000 |
| | $ | 225 |
| | $ | 379,175 |
| | $ | — |
| | $ | — |
| | $ | 379,400 |
| | | | | | | | | | | | | | | | | | | | | | | | | Balance at September 1, 2019 (Successor Company) | 22,500,000 |
| | $ | 225 |
| | $ | 379,175 |
| | $ | — |
| | $ | — |
| | $ | 379,400 |
| Net loss | — |
| | — |
| | — |
| | (33,331 | ) | | — |
| | (33,331 | ) | Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 9 |
| | 9 |
| Balance at December 31, 2019 (Successor Company) | 22,500,000 |
| | $ | 225 |
| | $ | 379,175 |
| | $ | (33,331 | ) | | $ | 9 |
| | $ | 346,078 |
|
See accompanying notes to consolidated financial statements.
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Basis of Presentation
Monitronics International, Inc. and its subsidiaries (collectively, "Monitronics" or the "Company", doing business as "Brinks Home SecurityTM") were wholly owned subsidiaries of Ascent Capital Group, Inc. ("Ascent Capital") until August 30, 2019. On December 17, 2010, Ascent Capital acquired 100% of the outstanding capital stock of the Company through the merger of Mono Lake Merger Sub, Inc., a direct wholly owned subsidiary of Ascent Capital established to consummate the merger, with and into the Company, with the Company as the surviving corporation in the merger.
Monitronics provides residential customers and commercial client accounts with monitored home and business security systems, as well as interactive and home automation services, in the United States, Canada and Puerto Rico. Monitronics customers are obtained through our direct-to-consumer sales channel (the "Direct to Consumer Channel"), which offers both Do-It-Yourself and professional installation security solutions and our exclusive authorized dealer network (the "Dealer Channel"), which provides product and installation services, as well as support to customers.
As previously disclosed, on June 30, 2019 (the "Petition Date"), Monitronics and certain of its domestic subsidiaries (collectively, the "Debtors"), filed voluntary petitions for relief (collectively, the "Petitions" and, the cases commenced thereby, the "Chapter 11 Cases") under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court"). The Debtors' Chapter 11 Cases were jointly administered under the caption In re Monitronics International, Inc., et al., Case No. 19-33650. On August 7, 2019, the Bankruptcy Court entered an order, Docket No. 199 (the "Confirmation Order"), confirming and approving the Debtors' Joint Partial Prepackaged Plan of Reorganization (including all exhibits thereto and, as modified by the Confirmation Order, the "Plan") that was previously filed with the Bankruptcy Court on June 30, 2019. On August 30, 2019 (the "Effective Date"), the conditions to the effectiveness of the Plan were satisfied and the Company emerged from Chapter 11 after completing a series of transactions through which the Company and its former parent, Ascent Capital, merged (the "Merger") in accordance with the terms of the Agreement and Plan of Merger, dated as of May 24, 2019 (the "Merger Agreement"). Monitronics was the surviving corporation and, immediately following the Merger, was redomiciled in Delaware in accordance with the terms of the Merger Agreement.
Upon emergence from Chapter 11 on the Effective Date, the Company applied Accounting Standards Codification ("ASC") 852, Reorganizations ("ASC 852"), in preparing its consolidated financial statements (see Note 3, Emergence from Bankruptcy and Note 4, Fresh Start Accounting). The Company selected a convenience date of August 31, 2019 for purposes of applying fresh start accounting as the activity between the convenience date and the Effective Date did not result in a material difference in the financial results. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, a new entity for financial reporting purposes was created. References to "Successor" or "Successor Company" relate to the balance sheet and results of operations of Monitronics on and subsequent to September 1, 2019. References to "Predecessor" or "Predecessor Company" refer to the balance sheet and results of operations of Monitronics prior to September 1, 2019. With the exception of interest and amortization expense, the Company's operating results and key operating performance measures on a consolidated basis were not materially impacted by the reorganization. As such, references to the "Company" could refer to either the Predecessor Company or Successor Company periods, as defined.
Subsequent to the Petition Date and before the Effective Date, all expenses, gains and losses directly associated with the restructuring and reorganization proceedings are reported as Gain on restructuring and reorganization, net in the accompanying consolidated statements of operations and comprehensive income (loss). Additionally, Liabilities subject to compromise during the pendency of the Chapter 11 Cases are distinguished from liabilities of the Company that are not expected to be compromised, including post-petition liabilities, in the accompanying consolidated balance sheets.
The consolidated financial statements contained in this Annual Report have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for all periods presented.
Going Concern
In accordance with the requirements of Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40), and ASC 205-40, the Company has the responsibility to evaluate at each reporting period, including interim periods, whether conditions and events, considered in the aggregate, raise substantial doubt about its ability to meet its future financial obligations. During the pendency of the Chapter 11 Cases, the Company’s ability to continue as a going concern was contingent upon a variety of factors, including the Bankruptcy Court’s approval of the Plan and the Company’s ability to successfully implement the Plan. As a result of the effectiveness of the Plan and the Company’s current financial condition and liquidity sources, the Company believes it has the ability to meet its obligations for at least one year from the date of issuance of this Form 10-K.
(2)Summary of Significant Accounting Policies
Consolidation Principles
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries over which the Company exercises control. All intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers investments with original purchased maturities of three months or less when acquired to be cash equivalents.
Restricted Cash
Restricted cash is cash that is restricted for a specific purpose and cannot be included in the cash and cash equivalents account.
Trade Receivables
Trade receivables consist primarily of amounts due from subscribers for recurring monthly monitoring services over a wide geographical base. The Company performs extensive credit evaluations on the portfolios of subscriber accounts prior to acquisition and requires no collateral on the accounts that are acquired. The Company has established an allowance for doubtful accounts for estimated losses resulting from the inability of subscribers to make required payments. Factors such as historical-loss experience, recoveries and economic conditions are considered in determining the sufficiency of the allowance to cover potential losses. The allowance for doubtful accounts as of December 31, 2019 and 2018 was $3,828,000 and $3,759,000, respectively.
A summary of activity in the allowance for doubtful accounts is as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | Balance Beginning of Period | | Charged to Expense | | Write-Offs and Other | | Balance End of Period | Period from September 1, 2019 through December 31, 2019 (Successor Company) | $ | — |
| | $ | 3,828 |
| | $ | — |
| | $ | 3,828 |
| Period from January 1, 2019 through August 31, 2019 (Predecessor Company) | $ | 3,759 |
| | $ | 7,558 |
| | $ | (11,317 | ) | | $ | — |
| Year Ended December 31, 2018 (Predecessor Company) | $ | 4,162 |
| | $ | 12,300 |
| | $ | (12,703 | ) | | $ | 3,759 |
| Year Ended December 31, 2017 (Predecessor Company) | $ | 3,043 |
| | $ | 11,014 |
| | $ | (9,895 | ) | | $ | 4,162 |
|
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable. The Company performs extensive credit evaluations on the portfolios of subscriber accounts prior to acquisition and requires no collateral on the subscriber accounts that are acquired. Concentrations of credit risk with respect to trade accounts receivable are generally limited due to the large number of subscribers comprising the Company's customer base.
Fair Value of Financial Instruments
Fair values of cash equivalents, current accounts receivable and current accounts payable approximate their carrying amounts because of their short-term nature. The Company's debt instruments are recorded at amortized cost on the consolidated balance sheet. See Note 10, Derivatives and Note 11, Fair Value Measurements for further fair value information on the Company's debt instruments.
Inventories
Inventories consist of security system components and parts and are stated at the lower of cost (using the weighted average costing method) or net realizable value. Inventory is included in Prepaid and other current assets on the consolidated balance sheets and was $5,242,000 and $4,868,000 at December 31, 2019 and 2018, respectively.
Property and Equipment
Property and equipment are carried at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the underlying lease. Estimated useful lives by class of asset are as follows:
| | | Leasehold improvements | 15 years or lease term, if shorter | Computer systems and software | 3 - 5 years | Furniture and fixtures | 5 - 7 years |
Management reviews the realizability of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the value and future benefits of long-term assets, their carrying value is compared to management’s best estimate of undiscounted future cash flows over the remaining economic life. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the estimated fair value of the assets. If necessary, the Company would use both the income approach and market approach to estimate fair value.
Subscriber Accounts
Subscriber accounts primarily relate to the cost of acquiring monitoring service contracts from independent dealers. The subscriber accounts balance was adjusted to fair value in connection with the Company's application of fresh start accounting under ASC 852 upon the Company's emergence from Chapter 11 (see Note 4, Fresh Start Accounting for further information). The valuation of subscriber accounts was based on the projected cash flows to be generated by the existing subscribers as of the Effective Date. Subscriber accounts acquired after the Company's emergence from bankruptcy are recorded at cost. All direct and incremental costs, including bonus incentives related to account activation in the Direct to Consumer Channel, associated with the creation of subscriber accounts, are capitalized. Upon adoption of Accounting Standards Update ("ASU") 2014-19, Revenue from Contracts with Customers (Topic 606), as amended ("ASC 606"), all costs on new subscriber contracts obtained in connection with a subscriber move ("Moves Costs") are expensed, whereas prior to adoption, certain Moves Costs were capitalized on the balance sheet.
The fair value of subscriber accounts as of the Company's emergence from Chapter 11, as well as certain accounts acquired in bulk purchases, are amortized using the 14-year 235% declining balance method. The costs of all other subscriber accounts are amortized using the 15-year 220% declining balance method, beginning in the month following the date of acquisition. The amortization methods were selected to provide an approximate matching of the amortization of the subscriber accounts intangible asset to estimated future subscriber revenues based on the projected lives of individual subscriber contracts. Amortization of subscriber accounts for the Successor Company period September 1, 2019 through December 31, 2019, the Predecessor Company period January 1, 2019 through August 31, 2019, the Predecessor Company year ended December 31, 2018 and the Predecessor Company year ended December 31, 2017 was $61,771,000, $130,411,000, $204,130,000 and $226,697,000, respectively.
Based on subscriber accounts held at December 31, 2019, estimated amortization of subscriber accounts in the succeeding five fiscal years ending December 31 is as follows (amounts in thousands): | | | | | 2020 | $ | 178,117 |
| 2021 | $ | 148,323 |
| 2022 | $ | 123,515 |
| 2023 | $ | 102,858 |
| 2024 | $ | 85,657 |
|
The Company has processes and controls in place, including the review of key performance indicators, to assist management in identifying events or circumstances that indicate the subscriber accounts asset may not be recoverable. If an indicator that the asset may not be recoverable exists, management tests the subscriber accounts asset for impairment. For purposes of recognition and measurement of an impairment loss, we view subscriber accounts as a single pool because of the assets' homogeneous characteristics, and the pool of subscriber accounts is the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. If such assets are considered to be impaired, the impairment loss to be recognized is measured as the amount by which the carrying value of the assets exceeds the estimated fair value, as determined using the income approach.
Dealer Network and Other Intangible Assets
Upon the adoption of fresh start accounting on August 31, 2019, the fair value of our dealer network as of that date was determined and recorded as an intangible asset. Furthermore, a fair value adjustment related to the Company's leasehold agreement was recorded as an other intangible asset. See Note 4, Fresh Start Accounting for further information.
The Predecessor Company dealer network was an intangible asset that related to the dealer relationships that were acquired as part of the acquisition of Security Networks, LLC ("Security Networks"). Other Predecessor Company intangible assets consisted of non-compete agreements signed by the seller of Security Networks and certain key Security Networks executives. These Predecessor Company intangible assets were amortized on a straight-line basis over their estimated useful lives of 5 years. These Predecessor Company intangible assets were fully amortized during 2018. The LiveWatch trade mark asset was initially to be amortized over 10 years. Upon the rollout of the Brinks Home Security brand in the second quarter of 2018, it was determined that the LiveWatch trade mark asset had no remaining useful life and the remaining asset balance was amortized.
Amortization of dealer network and other intangible assets for the Successor Company period September 1, 2019 through December 31, 2019, the Predecessor Company period January 1, 2019 through August 31, 2019, the Predecessor Company year ended December 31, 2018 and the Predecessor Company year ended December 31, 2017 was $7,922,000, $0, $6,994,000 and $9,830,000, respectively.
Goodwill
The Company accounts for its goodwill pursuant to the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350, Intangibles-Goodwill and Other ("FASB ASC Topic 350"). In accordance with FASB ASC Topic 350, goodwill is not amortized, but rather tested for impairment at least annually, or earlier if an event occurs, or circumstances change, that indicate the fair value of a reporting unit may be below its carrying amount.
The Company assesses the recoverability of the carrying value of goodwill during the fourth quarter of its fiscal year, based on October 31 financial information, or whenever events or changes in circumstances indicate that the carrying amount of the goodwill of a reporting unit may not be fully recoverable. In early June 2018, the reportable segments known as MONI and LiveWatch were combined and presented as Brinks Home Security. As a result of the change in reportable segments, goodwill assigned to these former reporting units was reallocated and combined under the Brinks Home Security reporting unit. Recoverability is measured at the reporting unit level based on the provisions of FASB ASC Topic 350.
To the extent necessary, recoverability of goodwill at a reporting unit level is measured using a discounted cash flow model incorporating discount rates commensurate with the risks involved, which is classified as a Level 3 measurement under FASB ASC Topic 820, Fair Value Measurements and Disclosures. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management
judgment. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value.
Holdback Liability
The Company typically withholds payment of a designated percentage of the acquisition cost when it acquires subscriber accounts from dealers. The withheld funds are recorded as a liability until the guarantee period provided by the dealer has expired. The holdback is used as a reserve to cover any terminated subscriber accounts that are not replaced by the dealer during the guarantee period. At the end of the guarantee period, the dealer is responsible for any deficit or is paid the balance of the holdback.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage exposure to movement in interest rates. The use of these financial instruments modifies the exposure of these risks with the intention of reducing the risk or cost. The Company does not use derivatives for speculative or trading purposes. The Company recognizes the fair value of all derivative instruments as either assets or liabilities at fair value on the consolidated balance sheets. Fair value is based on market quotes for similar instruments with the same duration. For derivative instruments that qualify for hedge accounting under the provisions of FASB ASC Topic 815, Derivatives and Hedging, unrealized gains and losses on the derivative instruments are reported in Accumulated other comprehensive income (loss), to the extent the hedges are effective, until the underlying transactions are recognized in earnings. Derivative instruments that do not qualify for hedge accounting are marked to market at the end of each accounting period with the change in fair value recorded in earnings.
Revenue Recognition - for Periods Commencing January 1, 2018
The Company offers its subscribers professional alarm monitoring services, as well as interactive and home automation services, through equipment at the subscriber's site that communicates with the Company’s alarm monitoring station and interfaces with other equipment at the site and third-party technology companies for interactive and home automation services. These services are typically provided under alarm monitoring agreements ("AMAs") between the Company and the subscriber. The equipment at the site is either obtained independently from our Dealer Channel or from our Direct to Consumer Channel. The Company also offers equipment sales and installation services and, to our existing subscribers, maintenance services on existing alarm equipment. Additionally, the Company collects fees for contract monitoring, which are services provided to other security alarm companies for monitoring their accounts on a wholesale basis and other fees from subscribers for late fee or insufficient fund charges.
Revenue under subscriber AMAs is allocated to alarm monitoring revenue and, if applicable, product and installation revenue based on the stand alone selling prices ("SSP") of each performance obligation as a percentage of the total SSP of all performance obligations. Allocated alarm monitoring revenue is recognized as the monthly service is provided. Allocated product and installation revenue is recognized when the product sale is complete or shipped and the installation service is provided, typically at inception of the AMA. Product and installation revenue is not applicable to AMA's acquired from the Dealer Channel in their initial term. Any cash not received from the subscriber at the time of product sale and installation is recognized as a contract asset at inception of the AMA and is subsequently amortized over the subscriber contract term as a reduction of the amounts billed for professional alarm monitoring, interactive and home automation services. If a subscriber cancels the AMA within the negotiated term, any existing contract asset is determined to be impaired and is immediately expensed in full to Selling, general and administrative expense on the consolidated statements of operations and comprehensive income (loss).
Maintenance services are billed and recognized as revenue when the services are completed in the home and agreed to by the subscriber under the subscriber AMA. Contract monitoring fees are recognized as alarm monitoring revenue as the monitoring service is provided. Other fees are recognized as other revenue when billed to the subscriber which coincides with the timing of when the services are provided.
Revenue Recognition - for Periods Prior to January 1, 2018
The Company adopted ASC 606, effective January 1, 2018, using the modified retrospective transition method. Under the modified retrospective transition method, the Company evaluated active AMAs on the adoption date as if each AMA had been accounted for under ASC 606 from its inception. Some revenue related to AMAs originated through our Direct to Consumer Channel or through extensions that would have been recognized in future periods under FASB ASC Topic 605, Revenue Recognition ("ASC 605") were recast under ASC 606 as if revenue had been accelerated and recognized in prior periods, as it
was allocated to product and installation performance obligations. A contract asset was recorded as of the adoption date for any cash that has yet to be collected on the accelerated revenue. As this transition method requires that the Company not adjust historical reported revenue amounts, the accelerated revenue that would have been recognized under this method prior to the adoption date was recorded as an adjustment to opening retained earnings and, thus, will not be recognized as revenue in future periods as previously required under ASC 605. Therefore, the comparative information has not been adjusted and continues to be reported under ASC 605.
Under ASC 605, revenue provided under the AMA was recognized as the services were provided, based on the recurring monthly revenue amount billed for each month under contract. Product, installation and service revenue generally was recognized as billed and incurred. Under ASC 606, the Company concluded that certain product and installation services sold or provided to our customers at AMA inception are capable of being distinct and are distinct within the context of the contract. As such, when the Company initiates an AMA with a customer directly and provides equipment and installation services, each component is considered a performance obligation that must have revenue allocated accordingly. The allocation is based on the SSP of each performance obligation as a percentage of the total SSP of all performance obligations multiplied by the total consideration, or cash, expected to be received over the contract term. These AMAs may relate to new customers originated by the Company through our Direct to Consumer Channel or existing customers who agree to new contract terms through customer service offerings. For AMAs with multiple performance obligations, management notes that a certain amount of the revenue billed on a recurring monthly basis is recognized earlier under Topic 606 than it was recognized under ASC 605, as a portion of that revenue is allocated to the equipment sale and installation, which is satisfied upon delivery of the product and performance of the installation services at AMA inception.
Revenue on AMAs originated through the Authorized Dealer program are not impacted by ASC 606 in their initial term, as the customer contracts for the equipment sale and installation separately with the Authorized Dealer prior to the Company purchasing the AMA from the Authorized Dealer. Revenue on these customers is recognized as the service is provided based on the recurring monthly revenue amount billed for each month of the AMA. Maintenance service revenue for repair of existing alarm equipment at the subscribers' premises will continue to be billed and recognized based on their SSP at the time the Company performs the services.
ASC 606 also requires the deferral of incremental costs of obtaining a contract with a customer. Certain direct and incremental costs were capitalized under Topic 605, including on new AMAs obtained in connection with Moves Costs. Under ASC 606, Moves Costs are expensed as incurred to accompany the allocated revenue recognized upon product and installation performance obligations recognized at the AMA inception. There are no other significant changes in contract costs that are capitalized or the period over which they are expensed.
Income Taxes
The Company accounts for income taxes under FASB ASC Topic 740, Income Taxes ("FASB ASC Topic 740"), which prescribes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than proposed changes in the tax law or rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
FASB ASC Topic 740 specifies the accounting for uncertainty in income taxes recognized in a company's consolidated financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In instances where the Company has taken or expects to take a tax position in its tax return and the Company believes it is more likely than not that such tax position will be upheld by the relevant taxing authority, the Company records the benefits of such tax position in its consolidated financial statements.
Stock-Based Compensation
The Company accounts for stock-based awards pursuant to FASB ASC Topic 718, Compensation-Stock Compensation ("FASB ASC Topic 718"), which requires companies to measure the cost of employee services received in exchange for an award of equity instruments (such as stock options and restricted stock) based on the grant-date fair value of the award, and to recognize that cost over the period during which the employee is required to provide service (usually the vesting period of the award). Forfeitures of awards are recognized as they occur. There are no outstanding or unvested stock-based compensation awards as of December 31, 2019.
Successor Company Basic and Diluted Earnings (Loss) Per Common Share
Basic earnings (loss) per common share ("EPS") is computed by dividing net income (loss) by the weighted average number of shares of Common Stock outstanding for the period. Diluted EPS is computed by dividing net income (loss) by the sum of the weighted average number shares of Common Stock outstanding and the effect of dilutive securities. For the period from September 1, 2019 through December 31, 2019, there were no anti-dilutive securities outstanding. The weighted average number of basic and diluted shares of Common Stock was 22,500,000 for the period from September 1, 2019 through December 31, 2019. There were no public shares of Common Stock outstanding prior to September 1, 2019.
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of revenue and expenses for each reporting period. The significant estimates made in preparation of the Company's consolidated financial statements primarily relate to valuation of subscriber accounts, deferred tax assets and goodwill. These estimates are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts them when facts and circumstances change. As the effects of future events cannot be determined with any certainty, actual results could differ from the estimates upon which the carrying values were based.
Supplemental Cash Flow Information
| | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | State taxes paid, net | $ | — |
| | | $ | 2,637 |
| | $ | 2,569 |
| | $ | 2,713 |
| Interest paid | $ | 28,467 |
| | | $ | 72,710 |
| | $ | 147,632 |
| | $ | 138,339 |
| Accrued capital expenditures | $ | 1,804 |
| | | $ | 1,405 |
| | $ | 552 |
| | $ | 272 |
|
(3) Emergence from Bankruptcy
On August 7, 2019, the Bankruptcy Court entered the Confirmation Order confirming the Plan. On the Effective Date, the conditions to the effectiveness of the Plan were satisfied and the Company emerged from Chapter 11 after completing a series of transactions through with the Company and its former parent, Ascent Capital, merged in accordance with the terms of the Merger Agreement. Monitronics was the surviving corporation and, immediately following the Merger, was redomiciled in Delaware in accordance with the terms of the Merger Agreement.
Cancellation of Certain Prepetition Obligations
On the Effective Date, by operation of the Plan, all outstanding obligations under (i) the 9.125% Senior Notes due April 2020 (the "Predecessor Senior Notes") and the indenture governing the Predecessor Senior Notes and (ii) the Company’s prepetition credit facility (the "Predecessor Credit Facility") were terminated, as described in further detail below.
Additional Matters Contemplated by the Plan
On the Effective Date, the Company also completed a series of transactions through which the Company’s debt was restructured as follows:
(i) terminating the Company’s $245,000,000 secured debtor-in-possession revolving credit facility (the "Predecessor DIP Facility") and replacing it with a $145,000,000 senior secured revolving credit facility (the "Successor Revolving Credit Facility") and $150,000,000 in senior secured term loans (the "Successor Term Loan Facility" and together with the Successor Revolving Credit Facility the "Successor Credit Facilities"),
(ii) exchanging $1,072,500,000 of outstanding term loans under the Company's Predecessor Credit Facility for (A) $150,000,000 in cash received from the equity rights offering described below, (B) $100,000,000 in shares of Common Stock (as defined below), and (C) term loans under an $822,500,000 takeback term loan facility (the "Successor Takeback Loan Facility"), and
(iii) cancelling the Company’s $585,000,000 outstanding Predecessor Senior Notes and exchanging the Predecessor Senior Notes for, at the option of each holder of the Predecessor Senior Notes (the "Noteholders"), (A) cash in an amount equal to 2.5% of the principal and accrued but unpaid interest due under the Senior Notes held by such Noteholder or (B) to the extent that such Noteholder elects not to receive cash, its pro rata share of 18.0% of the Common Stock (as defined below) issued and outstanding as of the Effective Date.
See Note 9, Debt for further information regarding these debt transactions.
The Company also received $200,000,000 in cash from a combination of an equity rights offering to the Noteholders and $23,000,000 of a deemed contribution of cash on hand through a merger with Ascent Capital (as discussed below). This cash was used to repay Predecessor Term Loan debt.
The foregoing description of certain matters effected pursuant to the Plan, and the transactions related to and contemplated thereunder, is not intended to be a complete description of, or a substitute for, a full and complete reading of the Plan.
Ascent Capital Merger
As previously announced, on May 24, 2019, the Company and Ascent Capital entered into the Merger Agreement. On August 21, 2019, in connection with, and prior to the completion of the Merger, the stockholders of Ascent Capital approved the Merger Agreement at a special meeting of the stockholders. On August 30, 2019, the Company completed the Merger with Ascent Capital in accordance with the Merger Agreement. The Company was the surviving corporation and, immediately following the Merger, was redomiciled in Delaware. The Company’s certificate of incorporation adopted in accordance with the Plan authorized the issuance of 45,000,000 shares of Common Stock, par value $0.01 per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value $0.01 per share ("Preferred Stock"). For more information, see Note 14, Stockholders' Equity.
Under the terms of the Merger Agreement, the Company issued and reserved a total of 1,309,757 shares of common stock, par value $0.01 per share ("Common Stock"), to Ascent Capital's stockholders at a ratio of 0.1043086 shares of Common Stock for each share of Ascent Capital common stock (the "Exchange Ratio"). The Exchange Ratio was determined through negotiations between the Company and Ascent Capital.
Immediately after the Merger, there were approximately 22,500,000 shares of Common Stock issued and outstanding.
Immediately after the Merger, the former stockholders of Ascent Capital owned approximately 5.82% of the outstanding Common Stock. No fractional shares of Common Stock were issued in connection with the Merger. The Common Stock commenced trading on the OTCQX Best Market under the ticker symbol "SCTY" on September 4, 2019.
(4) Fresh Start Accounting
In connection with the Company’s emergence from Chapter 11 on the Effective Date, the Company qualified for fresh start accounting under ASC 852 as (1) the holders of voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company and (2) the reorganization value of the Company’s assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims. ASC 852 requires that fresh start accounting be applied when the Bankruptcy Court enters a confirmation order confirming a plan of reorganization, or as of a later date when all material conditions precedent to the effectiveness of a plan of reorganization are resolved, which for Monitronics was August 30, 2019. The Company selected a convenience date of August 31, 2019 for purposes of applying fresh start accounting as the activity between the convenience date and the Effective Date did not result in a material difference in the financial results.
Upon the application of fresh start accounting, Monitronics allocated the reorganization value to its individual assets based on their estimated fair values in conformity with ASC 805, Business Combinations (“ASC 805”). Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities. Liabilities existing as of the Effective Date, other than deferred taxes, were recorded at the value of amounts expected to be paid. Deferred taxes were determined in conformity with applicable accounting standards. Predecessor Company accumulated depreciation, accumulated amortization, and accumulated deficit were eliminated. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the Company’s consolidated financial statements after August 31, 2019 are not comparable to the Company’s consolidated financial statements as of or prior to that date.
Reorganization Value
As set forth in the Plan, the enterprise value of the Successor Company was estimated to be between $1,350,000,000 and $1,550,000,000, which was confirmed by the Bankruptcy Court. Based on the estimates and assumptions discussed below, Monitronics estimated the enterprise value to be $1,373,400,000.
We estimated the enterprise value of the Successor Company by applying the discounted cash flow method. To estimate enterprise value applying the discounted cash flow method, we established an estimate of future cash flows for the period 2019 to 2026 with a terminal value and discounted the estimated future cash flows to present value. The expected cash flows for the period 2019 to 2026 with a terminal value were based upon certain financial projections and assumptions provided to the Bankruptcy Court. The expected cash flows for the period 2019 to 2026 were derived from revenue projections and assumptions regarding growth and profit margin, as applicable. We calculated a terminal value using an exit multiple based on subscriber monthly RMR in the terminal period.
The Company’s enterprise value represents the fair value of its interest-bearing debt and equity capital, while the reorganization value is derived from the enterprise value by adding back non-interest bearing liabilities. The following table reconciles the enterprise value to the estimated reorganization value as of the Effective Date (dollars in thousands):
| | | | | Enterprise value | $ | 1,373,400 |
| Plus: Fair value of non-interest bearing current liabilities | 61,188 |
| Plus: Fair value of non-interest bearing long-term liabilities | 26,060 |
| Reorganization value | $ | 1,460,648 |
|
Consolidated Balance Sheet
The adjustments set forth in the following consolidated balance sheet as of August 31, 2019 reflect the consummation of the transactions contemplated by the Plan (reflected in the column "Reorganization Adjustments"), transactions recorded to complete the merger with Ascent Capital (reflected in the column "Ascent Capital Merger") as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column "Fresh Start Adjustments"). The explanatory notes highlight methods used to determine fair values or other amounts of the assets and liabilities as well as significant assumptions or inputs (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | As of August 31, 2019 | | | Predecessor Company | | Reorganization Adjustments | | Ascent Capital Merger | | Fresh Start Adjustments | | Successor Company | Assets | | |
| | | | | | | | | Current assets: | | |
| | | | | | | | | Cash and cash equivalents | | $ | 19,862 |
| | $ | 3,604 |
| (1) | $ | 1,139 |
| (9) | $ | — |
| | $ | 24,605 |
| Restricted cash | | 35 |
| | — |
| | — |
| | — |
| | 35 |
| Trade receivables, net | | 11,834 |
| | — |
| | — |
| | — |
| | 11,834 |
| Prepaid and other current assets | | 23,825 |
| | — |
| | 27 |
| (9) | — |
| | 23,852 |
| Total current assets | | 55,556 |
| | 3,604 |
| | 1,166 |
| | — |
| | 60,326 |
| Property and equipment, net | | 37,143 |
| | — |
| | — |
| | 3,808 |
| (10) | 40,951 |
| Subscriber accounts and deferred contract acquisition costs, net | | 1,151,322 |
| | — |
| | — |
| | (55,936 | ) | (11) | 1,095,386 |
| Dealer network and other intangible assets | | — |
| | — |
| | — |
| | 144,700 |
| (12) | 144,700 |
| Goodwill | | — |
| | — |
| | — |
| | 81,943 |
| (13) | 81,943 |
| Deferred income tax asset, net | | 783 |
| | — |
| | — |
| | — |
| | 783 |
| Operating lease right-of-use asset | | 19,222 |
| | — |
| | 90 |
| (9) | — |
| | 19,312 |
| Other assets | | 17,932 |
| | — |
| | — |
| | (685 | ) | (14) | 17,247 |
| Total assets | | $ | 1,281,958 |
| | $ | 3,604 |
| | $ | 1,256 |
| | $ | 173,830 |
| | $ | 1,460,648 |
| Liabilities and Stockholder's Equity (Deficit) | | |
| | | | | | | | | Current liabilities: | | |
| | |
| | | | | | | Accounts payable | | $ | 13,713 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13,713 |
| Other accrued liabilities | | 30,571 |
| | (1,070 | ) | (2) | 241 |
| (9) | 4,427 |
| (15) | 34,169 |
| Deferred revenue | | 12,646 |
| | — |
| | — |
| | (5,331 | ) | (16) | 7,315 |
| Holdback liability | | 12,516 |
| | — |
| | — |
| | (6,525 | ) | (17) | 5,991 |
| Current portion of long-term debt | | — |
| | 8,225 |
| (3) | — |
| | — |
| | 8,225 |
| Total current liabilities | | 69,446 |
| | 7,155 |
| | 241 |
| | (7,429 | ) | | 69,413 |
| Non-current liabilities: | | |
| | | | | | | | | Long-term debt | | 199,000 |
| | 786,775 |
| (4) | — |
| | — |
| | 985,775 |
| Long-term holdback liability | | 1,817 |
| | — |
| | — |
| | — |
| | 1,817 |
| Operating lease liabilities | | 16,055 |
| | — |
| | — |
| | — |
| | 16,055 |
| Other liabilities | | 2,175 |
| | — |
| | — |
| | 6,013 |
| (15) | 8,188 |
| Total non-current liabilities | | 219,047 |
| | 786,775 |
| | — |
| | 6,013 |
| | 1,011,835 |
| Liabilities subject to compromise | | 1,722,052 |
| | (1,722,052 | ) | (5) | — |
| | — |
| | — |
| Total liabilities | | 2,010,545 |
| | (928,122 | ) | | 241 |
| | (1,416 | ) | | 1,081,248 |
| Commitments and contingencies | | | | | | | | | | | Stockholder's equity (deficit): | | | | | | | | | | | Predecessor additional paid-in capital | | 436,986 |
| | (436,986 | ) | (6) | — |
| | — |
| | — |
| Predecessor accumulated other comprehensive income, net | | 6,668 |
| | — |
| | — |
| | (6,668 | ) | (18) | — |
| Successor common stock | | — |
| | 225 |
| (7) | — |
| | — |
| | 225 |
| Successor additional paid-in capital | | — |
| | 379,175 |
| (7) | — |
| | — |
| | 379,175 |
| (Accumulated deficit) retained earnings | | (1,172,241 | ) | | 989,312 |
| (8) | 1,015 |
| (9) | 181,914 |
| (18) | — |
| Total stockholder's equity (deficit) | | (728,587 | ) | | 931,726 |
| | 1,015 |
| | 175,246 |
| | 379,400 |
| Total liabilities and stockholder's equity (deficit) | | $ | 1,281,958 |
| | $ | 3,604 |
| | $ | 1,256 |
| | $ | 173,830 |
| | $ | 1,460,648 |
|
Reorganization adjustments
1. Reflects cash contributions and debt principal and interest payments from the implementation to the Plan as follows (dollars in thousands):
| | | | | Equity rights offering proceeds from Noteholders | $ | 177,000 |
| Equity rights offering proceeds from Ascent Capital | 23,000 |
| Payment of Predecessor Credit Facility principal and interest | (165,619 | ) | Payment of Predecessor DIP Facility principal and interest | (28,570 | ) | Payment of Predecessor Senior Notes principal and interest | (2,207 | ) | Net cash contribution | $ | 3,604 |
|
2. Represents payment of Predecessor DIP Facility accrued interest.
3. Represents the Current portion of long-term debt based on the repayment terms of the Successor Takeback Loan Facility.
4. Represents the net increase in Long-term debt as follows (dollars in thousands):
| | | | | Long-term portion of Successor Takeback Term Loan | $ | 814,275 |
| Payment of Predecessor DIP Facility principal | (27,500 | ) | Net increase in Long-term Debt | $ | 786,775 |
|
5. Liabilities subject to compromise immediately prior to the Effective Date consisted of the following (dollars in thousands):
| | | | | Predecessor Term Loan | $ | 1,072,500 |
| Predecessor Senior Notes | 585,000 |
| Predecessor Term Loan accrued interest | 15,619 |
| Predecessor Senior Notes accrued interest | 48,933 |
| Total Liabilities subject to compromise | $ | 1,722,052 |
|
Liabilities subject to compromise have been settled as follows in accordance with the Plan (dollars in thousands):
| | | | | Liabilities subject to compromise | $ | 1,722,052 |
| Payment of Predecessor Term Loan principal and interest | (165,619 | ) | Payment of Predecessor Senior Notes principal and interest | (2,207 | ) | Issue Successor Takeback Term Loan | (822,500 | ) | Fair value of common stock issued to Predecessor Term Loan and Predecessor Senior Notes holders | (171,989 | ) | Gain on settlement of Liabilities subject to compromise | $ | 559,737 |
|
6. Pursuant to the Plan, all equity interests of the Predecessor that were issuable or issued and outstanding immediately prior to the Effective Date were cancelled. The elimination of the carrying value of the cancelled equity interests was recorded as an offset to retained earnings (accumulated deficit).
7. Pursuant to the Plan, the Company issued new common stock through an equity rights offering to the Noteholders, the exchange of Ascent Capital common shares for Monitronics common shares pursuant to the Merger, the partial equitization of the Predecessor Term Loan and the cancellation of the outstanding Predecessor Senior Notes, to the extent each Noteholder elected not to receive cash. See Note 3, Emergence from Bankruptcy for further information regarding these transactions. As of the Effective Date, there were 22,500,000 common shares issued and outstanding that have a par value of $0.01 per share.
8. Adjustment made to Retained earnings (accumulated deficit) consisted of the following (dollars in thousands):
| | | | | Cancellation of Predecessor additional paid-in capital | $ | 436,986 |
| Loss on equity rights offering discount, net | (7,411 | ) | Gain on settlement of Liabilities subject to compromise | 559,737 |
| Total adjustment to Retained earnings (accumulated deficit) | $ | 989,312 |
|
Ascent Capital Merger
9. Represents the transfer of the Ascent Capital final balances to Monitronics to complete the Merger.
Fresh Start Adjustments
10. Reflects the increase in net book value of property and equipment to the estimated fair value as of the Effective Date. The following table summarizes the components of Property and equipment, net as of August 31, 2019, and the fair value as of the Effective Date (dollars in thousands):
| | | | | | | | | | | | | Estimated Useful Life | | Successor Company | | | Predecessor Company | Leasehold improvements | 9 years | | $ | 353 |
| | | $ | 771 |
| Computer systems and software | 2 to 4 years | | 39,320 |
| | | 83,238 |
| Furniture and fixtures | 5 years | | 1,278 |
| | | 2,009 |
| | | | 40,951 |
| | | 86,018 |
| Accumulated depreciation | | | — |
| | | (48,875 | ) | Property and equipment, net | | | $ | 40,951 |
| | | $ | 37,143 |
|
To estimate the fair value of property and equipment, the Company utilized an cost approach by applying the reproduction cost method. The Successor property and equipment will be depreciated using the straight-line method over the estimated useful lives of the assets.
11. Represents the fair value adjustment of the subscriber accounts. The fair value of the subscriber accounts was determined based on the excess earnings method, a derivation of the income approach, that considers cash flows to the subscriber accounts after accounting for a fair return to the other supporting assets of the business. The valuation of the subscriber accounts is based on the projected cash flows to be generated by the existing subscribers as of the Effective Date. The Successor subscriber accounts will be amortized using the 14-year 235% double-declining balance method. The amortization methods were selected to provide an approximate matching of the amortization of the subscriber accounts intangible asset to estimated future subscriber revenues based on the projected lives of individual subscriber contracts.
12. The Company recorded an adjustment to dealer network and other intangible assets as follows (dollars in thousands):
| | | | | Dealer network | $ | 140,000 |
| Leasehold interest | 4,700 |
| Total Dealer network and other intangible assets | $ | 144,700 |
|
The fair values of dealer network and other intangible assets were determined as follows:
a. The fair value of the dealer network was determined based on the excess earnings method, a derivation of the income approach, that considers cash flows related to the dealer network after accounting for a fair return to the other supporting assets of the business. The valuation of the dealer network is based on the cash flow, net of purchase price, to be earned from subscribers purchased in the future from the current dealer network. The Successor dealer network will be amortized on a straight-line basis over the estimated useful life of six years.
b. The leasehold interest was valued using an income approach by applying the discount cash flow method based on the contractual lease rate and market lease rates. The Successor leasehold interest will be amortized on a straight-line basis over the remaining life of the lease.
13. The amount recognized for goodwill represents the amount of the reorganization value, after the fresh start accounting adjustments, left over after allocating to the fair value of acquired assets and liabilities.
14. Represents the elimination of the carrying value of dealer assets. The fair value adjustment of these assets is included in the valuation of the dealer network.
15. Represents the fair value adjustment of the bonus purchase price and revenue sharing liabilities based on estimated future cash payments.
16. Represents the fair value adjustment of deferred revenue to remove gross margin costs from the balance sheet.
17. Represents the fair value adjustment of the holdback liability based on estimated future cash payments.
18. Reflects the cumulative impact of the fresh start accounting adjustments discussed above on retained earnings (accumulated deficit) as follows (dollars in thousands):
| | | | | Property and equipment fair value adjustment | $ | 3,808 |
| Subscriber accounts fair value adjustment | (55,936 | ) | Dealer network and other intangible assets fair value adjustment | 144,700 |
| Goodwill | 81,943 |
| Other assets and liabilities fair value adjustments | 731 |
| Predecessor accumulated other comprehensive income, net | 6,668 |
| Net gain on fresh start adjustments | $ | 181,914 |
|
Gain on restructuring and reorganization, net
Gain on restructuring and reorganization recognized as a result of the Chapter 11 Cases is presented separately in the accompanying consolidated statements of operations and comprehensive income (loss) as follows (dollars in thousands)beginning on March 31, 2020, with the final installment vesting on December 1, 2021, subject to his continued employment. In 2019, we achieved revenue, as defined in the award, of $513,532,000 and Adjusted EBITDA, as defined in the award, of $279,931,000, which resulted in a payout equal to $875,000 for Mr. Gardner. In connection with his separation from the Company in February 2020, the earned portion of this award became fully vested, and the performance-based award granted to Mr. Gardner that related to the 2020 - 2021 performance period became fully vested, each in accordance with their terms.
The portion of the Graffam Performance-Based Award that was earned over the 2019 performance period was earned based on the achievement of a pre-established Monitronics Pre-SAC Adjusted EBITDA goal of $312,007,000. The threshold, target and maximum performance goals, and the corresponding payout at each level, were as follows (with straight-line interpolation between target/threshold and threshold/maximum): | | | | | | | Period from January 1, | | | | Monitronics Pre-SAC Adjusted EBITDA Achieved (of Goal) | | Graffam Performance-Based Award (2019) | 96.5% - 97.4% | | $37,500 | 97.5% - 98.4% | | $56,250 | 98.5% | | $75,000 |
Pre-SAC Adjusted EBITDA was defined as Adjusted EBITDA as defined in our 2019 Form 10-K, but excluding subscriber acquisition costs, the impact of changes in contract assets related to ASC 606, impacts from deferred revenue Fresh Start adjustments and bonus accruals. We achieved a Pre-SAC Adjusted EBITDA in 2019, as defined in the award, of $310,484,000; therefore, Mr. Graffam earned 100% of this portion award, which vested and was paid in 2020.
The Graffam Time-Based Award has an aggregate value of $225,000 that vests in substantially equal one-third installments on each of the first three anniversaries of the grant date (or, January 1, 2019), subject to his continued employment through the applicable settlement date.
Graffam Cash Plan Phantom Units
In 2018, Ascent granted Mr. Graffam awards of phantom units under the Cash Plan; one award vests based solely on continued service in three equal annual installments beginning on March 29, 2019, subject to Mr. Graffam’s employment through the applicable settlement date (the "CFO service award") while the other award may be earned by Mr. Graffam based on the attainment of certain performance metrics to be established by the compensation committee annually over the applicable three-year performance period (the "CFO performance award"). In addition, in respect of each phantom unit (if any) that becomes vested in accordance with its terms, Mr. Graffam is eligible to receive an amount equal to all dividends and other distributions payable to stockholders in respect of a share of our common stock (which we refer to as "dividend equivalents").
The Cash Plan phantom unit awards granted to Mr. Graffam in 2018, based on the value of Ascent Series A common stock, are set forth in the following table: August 31, 2019
| Gain on settlement of Liabilities subject to compromise (a) | 559,737 |
| Gain on fresh start adjustments (b) | 181,914 |
| Loss on equity rights offering discount (c) | (8,325 | ) | Restructuring and reorganization expense (d) | (63,604 | ) | Gain on restructuring and reorganization, net | 669,722 |
| | | | | | Phantom Unit Award | | Phantom Units (#) | | Vesting | CFO Performance Award | | 61,141 | | Performance-Vesting (2018-2020) (1) | CFO Service Award | | 61,142 | | Time-Vesting |
(a)Gain recognized primarily on Predecessor Senior Notes converted from debt to equity and Predecessor Senior Notes settled at a discount in accordance with | | (1) | In 2019, the Plan.(b)Revaluation of certain assets and liabilities upon the adoption of fresh start accounting.
(c)In accordance with the Plan, Noteholders that participated in the equity rights offering purchased Monitronics common stock at a discount.
(d)Legal, financial advisory and other professional costs directly associated with the restructuring and reorganization process.
(5) Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. The Company adopted ASU 2016-02 using a modified retrospective approach at January 1, 2019, as outlined in ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this method of adoption, there is no impact to the comparative consolidated statements of operations and comprehensive income (loss) and consolidated balance sheets. The Companycompensation committee determined that there was no cumulative effect adjustment to beginning Accumulated deficit on20,381 phantom units from the consolidated balance sheets. The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in Accounting Standards Codification Topic 840, "Leases". In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications.
Adoption of this standard had no impact on the Company's Loss before income taxes and the consolidated statements of cash flows. Upon adoption as of January 1, 2019, the Company recognized an Operating lease right-of-use asset of $20,240,000 and a total Operating lease liability of $20,761,000. The difference between the two amounts were due to decreases in prepaid rent and deferred rent recorded under prior lease accounting in Prepaid and other current assets and Other accrued liabilities, respectively, on the consolidated balance sheets. See Note 18, Leases for further information.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in FASB ASC Topic 740 and becomes effective on January 1, 2021. The adoptionfirst tranche of the new guidance is not expected to have a material impact on the Company's consolidated financial statements.
(6)Property and Equipment
Property and equipment consist of the following (amounts in thousands):
| | | | | | | | | | | Successor Company | | | Predecessor Company | | December 31, 2019 | | | December 31, 2018 | Property and equipment, net: | |
| | | |
| Leasehold improvements | $ | 397 |
| | | $ | 771 |
| Computer systems and software | 43,915 |
| | | 73,283 |
| Furniture and fixtures | 1,561 |
| | | 3,016 |
| | 45,873 |
| | | 77,070 |
| Accumulated depreciation | (3,777 | ) | | | (40,531 | ) | | $ | 42,096 |
| | | $ | 36,539 |
|
Depreciation expense for the Successor Company period September 1, 2019 through December 31, 2019, the Predecessor Company period January 1, 2019 through August 31, 2019, the Predecessor Company year ended December 31, 2018 and the Predecessor Company year ended December 31, 2017 was $3,777,000, $7,348,000, $11,434,000 and $8,818,000, respectively.
In connection with the application of fresh start accounting on August 31, 2019, the Company recorded fair value adjustments disclosed in Note 4, Fresh Start Accounting. Accumulated depreciation was therefore eliminated as of that date.
(7)Goodwill
The following table provides the activity and balances of goodwill by reporting unit (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | MONI | | LiveWatch | | Brinks Home Security | | Total | Balance at December 31, 2017 (Predecessor Company) | | $ | 527,502 |
| | $ | 36,047 |
| | $ | — |
| | $ | 563,549 |
| Goodwill impairment | | (214,400 | ) | | — |
| | — |
| | (214,400 | ) | Reporting unit reallocation | | (313,102 | ) | | (36,047 | ) | | 349,149 |
| | — |
| Goodwill impairment | | — |
| | — |
| | (349,149 | ) | | (349,149 | ) | Balance at December 31, 2018 (Predecessor Company) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Period activity | | — |
| | — |
| | — |
| | — |
| Balance at August 31, 2019 (Predecessor Company) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Impact of fresh start accounting | | — |
| | — |
| | 81,943 |
| | 81,943 |
| Balance at August 31, 2019 (Successor Company) | | $ | — |
| | $ | — |
| | $ | 81,943 |
| | $ | 81,943 |
| Period activity | | — |
| | — |
| | — |
| | — |
| Balance at December 31, 2019 (Successor Company) | | $ | — |
| | $ | — |
| | $ | 81,943 |
| | $ | 81,943 |
|
The Company accounts for its goodwill pursuant to the provisions of FASB ASC Topic 350, Intangibles - Goodwill and Other ("FASB ASC Topic 350"). In accordance with FASB ASC Topic 350, goodwill is not amortized, but rather tested for impairment annually, or earlier if an event occurs, or circumstances change, that indicate the fair value of a reporting unit may be below its carrying amount.
As of May 31, 2018, the Company determined that a triggering event had occurred due to a sustained decrease in Ascent Capital's share price. In response to the triggering event, the Company performed a quantitative impairment test for both the MONI and LiveWatch reporting units. Fair value was determined using a combination of an income-based approach (using a discount rate of 8.50%) and a market-based approach for the MONI reporting unit and an income-based approach (using a discount rate of 8.50%) for the LiveWatch reporting unit. Based on the analysis, the fair value of the LiveWatch reporting unit substantially exceeded its carrying value, while the carrying amount of the MONI reporting unit exceeded its estimated fair value, which indicated an impairment at the MONI reporting unit.
The Company early adopted ASU 2017-04, which eliminated Step 2 from the goodwill impairment test, and as such, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. Applying this methodology, we recorded an impairment charge of $214,400,000 for the MONI reporting unit during the three months ended June 30, 2018. Factors leading to this impairment are primarily the experience of overall lower account acquisition in recent periods. Using this information, we adjusted the growth outlook for this reporting unit, which resulted in reductions in future cash flows and a lower fair value calculation under the income-based approach. Additionally, decreases in observable market share prices for comparable companies in the quarter reduced the fair value calculated under the market-based approach.
In early June 2018, the reportable segments known as MONI and LiveWatch were combined and presented as Brinks Home Security. Refer to Note 2, Summary of Significant Accounting Policies for further discussion on the change in reportable segments. As a result of the change in reportable segments, goodwill assigned to these former reporting units of $313,102,000 and $36,047,000, for MONI and LiveWatch, respectively, have been reallocated and combined as of June 30, 2018 under the Brinks Home Security reporting unit.
In connection with the Company's annual goodwill impairment assessment for the year ended December 31, 2018, in which the Company performed a quantitative test in the fourth quarter of its fiscal year, based on October 31 balances, the carrying amount of the Brinks Home Security reporting unit exceeded its estimated fair value. Fair value was determined using an income-based approach (using a discount rate of 8.50%) for the Brinks Home Security reporting unit. Since the carrying amount exceeded the reporting unit's fair value, we recorded an additional impairment charge of $349,149,000, the amount of the remaining carrying value of goodwill. This impairment is primarily attributable to projected decreasing cash flows resulting from a declining customer base. The Company's projections were revised based on recent historical trends as well as other various outlook considerations, which resulted in reductions in future cash flows and enterprise valuation.
Upon the application of fresh start accounting on August 31, 2019, the Company recorded fair value adjustments disclosed in Note 4, Fresh Start Accounting. The amount recognized for goodwill represented the amount of the reorganization value, after the fresh start accounting adjustments, left over after allocating to the fair value of acquired assets and liabilities.
The Company's annual impairment assessment of goodwill is performed as of October 31st. Assessment of goodwill impairment is at the Brinks Home Security entity level as we operate as a single reporting unit. The fair value of the Company's reporting unit was estimated based on a discounted cash flow model and multiple of earnings. Assumptions critical to our fair value estimates under the discounted cash flow model include the discount rate, projected average revenue growth and projected long-term growth rates in the determination of terminal values. The results of the quantitative assessment in 2019 indicated that the fair value of the reporting unit was in excess of the carrying value, including goodwill. Therefore, goodwill was not impaired as of our annual testing date.
(8) Other Accrued Liabilities
Other accrued liabilities consisted of the following (amounts in thousands):
| | | | | | | | | | | Successor Company | | | Predecessor Company | | December 31, 2019 | | | December 31, 2018 | Accrued payroll and related liabilities | $ | 5,908 |
| | | $ | 4,459 |
| Interest payable | 291 |
| | | 14,446 |
| Income taxes payable | 2,603 |
| | | 2,742 |
| Operating lease liabilities | 3,725 |
| | | — |
| Contingent dealer liabilities | 3,274 |
| | | — |
| Other | 9,153 |
| | | 9,438 |
| Total Other accrued liabilities | $ | 24,954 |
| | | $ | 31,085 |
|
(9) Debt
Debt consisted of the following (amounts in thousands): | | | | | | | | | | | Successor Company | | | Predecessor Company | | December 31, 2019 | | | December 31, 2018 | Successor Takeback Loan Facility, matures March 29, 2024, LIBOR plus 6.50%, subject to a LIBOR floor of 1.25%, with an effective rate of 8.9% | $ | 820,444 |
| | | $ | — |
| Successor Term Loan Facility, matures July 3, 2024, LIBOR plus 5.00%, subject to a LIBOR floor of 1.50%, with an effective rate of 7.3% | 150,000 |
| | | — |
| Successor Revolving Credit Facility, matures July 3, 2024, LIBOR plus 5.00%, subject to a LIBOR floor of 1.50%, or base rate (with a floor of 4.5%) plus 4.0%, with an effective rate of 12.0% | 16,000 |
| | | — |
| 9.125% Senior Notes due April 1, 2020 with an effective interest rate of 9.1% | — |
| | | 585,000 |
| Ascent Intercompany Loan due October 1, 2020 with an effective rate of 12.5% | — |
| | | 12,000 |
| Term loan, matures September 30, 2022, LIBOR plus 5.50%, subject to a LIBOR floor of 1.00%, with an effective rate of 8.6% | — |
| | | 1,075,250 |
| $295 million revolving credit facility, matures September 30, 2021, LIBOR plus 4.00%, subject to a LIBOR floor of 1.00%, with an effective rate of 7.5% | — |
| | | 144,200 |
| | $ | 986,444 |
| | | $ | 1,816,450 |
| Less: Current portion of long-term debt | (8,225 | ) | | | (1,816,450 | ) | Long-term debt | $ | 978,219 |
| | | $ | — |
|
Successor Takeback Loan Facility
On the Effective Date, pursuant to the terms of the Plan, the Debtors entered into the Successor Takeback Loan Facility with the lenders party thereto, and Cortland Capital Market Services, LLC. as administrative agent. In exchange for its Predecessor Credit Facility term loans under the Company's Predecessor Credit Facility, each term lender thereunder (other than term lenders equitizing their term loans) received, pursuant to the terms of the Plan, its pro rata share of (i) $150,000,000 in cash from the proceeds of a rights offering (which, together with the equitization of $100,000,000 of the Predecessor Credit Facility term loans, resulted in an aggregate reduction of term loans by $250,000,000 in principal amount) and (ii) term loans under the $822,500,000 Successor Takeback Loan Facility.
The maturity date of the Successor Takeback Loan Facility is March 29, 2024 and requires quarterly interest payments and, beginning December 31, 2019, quarterly principal payments of $2,056,250. Interest on loans made under the Successor Takeback Loan Facility accrues at an interest rate per year equal to the LIBOR rate (with a floor of 1.25%) plus 6.5% or base rate plus 5.5%. The Successor Takeback Loan Facility, subject to certain exceptions, is guaranteed by each of the Company's existing and future domestic subsidiaries and is secured by substantially all the assets of the Company and such subsidiary guarantors. See Note 20, Consolidating Guarantor Financial Information for further information. The Successor Takeback Loan Facility contains customary representations, warranties, covenants and events of default and related remedies.
Successor Credit Facilities
On the Effective Date, pursuant to the terms of the Plan, the Debtors entered into Successor Credit Facilities with the lenders party thereto, KKR Capital Markets LLC as lead arranger and bookrunner, KKR Credit Advisors (US) LLC as Structuring Advisor and Encina Private Credit SPV, LLC as administrative agent, swingline lender and L/C issuer. Under the Successor Credit Facilities, the Company has access to $295,000,000 which includes $150,000,000 in term loans under the Successor Term Loan Facility and up to $145,000,000 under the Successor Revolving Credit Facility (including a $10,000,000 swingline loan). As of December 31, 2019, the Company had an aggregate of $1,000,000 available under two standby letters of credit issued. One letter of credit for $400,000 expired as of January 31, 2020 and was not renewed. As of December 31, 2019, $128,000,000 is available for borrowing under the Successor Revolving Credit Facility, subject to certain financial covenants.
The maturity date of loans made under the Successor Credit Facilities is July 3, 2024, subject to a springing maturity of March 29, 2024, or earlier, depending on any repayment, refinancing or changes in the maturity date of the Successor Takeback Loan Facility. Interest on loans made under the Successor Credit Facilities accrues at an interest rate per year equal to the LIBOR rate (with a floor of 1.5%) plus 5.0% or base rate (with a floor of 4.5%) plus 4.0%, dependent upon the type of borrowing requested by the Company. There is a commitment fee of 0.75% on unused portions of the Successor Revolving Credit Facility.
The Successor Credit Facilities, subject to certain exceptions, are guaranteed by each of the Company's existing and future domestic subsidiaries and are secured by substantially all the assets of the Company and such subsidiary guarantors. See Note 20, Consolidating Guarantor Financial Information for further information. The Successor Credit Facilities contain customary representations, warranties, covenants and events of default and related remedies.
The terms of the Successor Takeback Loan Facility and the Successor Credit Facilities provide for certain financial and nonfinancial covenants. As of December 31, 2019, the Company was in compliance with all required covenants under these financing arrangements.
Predecessor Senior Notes
The Predecessor Senior Notes totaled $585,000,000 in principal, were scheduled to mature on April 1, 2020 and bore interest at 9.125% per annum. Interest payments were due semi-annually on April 1 and October 1 of each year. On the Effective Date, by operation of the Plan, the Company cancelled all outstanding obligations under the Predecessor Senior Notes and exchanged the Predecessor Senior Notes, at the option of each Noteholder, (A) cash in an amount equal to 2.5% of the principal and accrued but unpaid interest due under the Senior Notes held by such Noteholder or (B) to the extent that such Noteholder elects not to receive cash, its pro rata share of 18.0% of the Common Stock to be issued and outstanding as of the Effective Date. See Note 3, Emergence from Bankruptcy for further information.
In conjunction with the failed refinancing of the Senior Notes during 2018, Ascent Capital allocated $5,214,000 of refinancing expense to Monitronics in March of 2019.
Predecessor Ascent Intercompany Loan
On February 29, 2016, the Company retired the existing intercompany loan with an outstanding principal amount of $100,000,000 and executed and delivered a Promissory Note to Ascent Capital in a principal amount of $12,000,000 (the "Ascent Intercompany Loan")CFO performance award (i.e., with the $88,000,000 remaining principal being treated as a capital contribution. The entire principal amount under the Ascent Intercompany Loan would haverespect to 2018 performance) had been due on October 1, 2020. The Ascent Intercompany Loan bore interest at a rate equal to 12.5% per annum, payable semi-annually in cash in arrears on January 12 and July 12 of each year. Borrowings under the Ascent Intercompany Loan constituted unsecured obligations of the Company and were not guaranteedearned by any of the Company’s subsidiaries.
In January 2019, the Company repaid $9,750,000 of the Ascent Intercompany Loan and $2,250,000 was contributed to our stated capital.
Predecessor Credit Facility
The Predecessor Credit Facility term loan had an outstanding prepetition principal balance of $1,072,500,000 and was scheduled to mature on September 30, 2022. The Credit Facility term loan required quarterly interest payments and quarterly principal payments of $2,750,000. The Credit Facility term loan bore interest at LIBOR plus 5.5%, subject to a LIBOR floor of 1.0%. On the Effective Date, by operation of the Plan, the Company cancelled all outstanding obligations under the Predecessor Credit Facility and exchanged the outstanding principal balance for (A) $150,000,000 in cash, (B) $100,000,000 in shares of Common Stock and (C) new term loans under an $822,500,000 takeback term loan facility (the Successor Takeback Loan Facility discussed above). See Note 3, Emergence from Bankruptcy and Note 14, Stockholders' Equity for further information.
The Predecessor Credit Facility revolver had a prepetition principal amount outstanding of $181,400,000 and an aggregate of $1,000,000 available under two standby letters of credit issued and was scheduled to mature on September 30, 2021. The Credit Facility revolver typically bore interest at LIBOR plus 4.0%, subject to a LIBOR floor of 1.0%. There was a commitment fee of 0.5% on unused portions of the Predecessor Credit Facility revolver. In conjunction with negotiations around certain defaults under the Predecessor Credit Facility in the first quarter of 2019, the Predecessor Credit Facility revolver lenders allowed us to continue to borrow under the revolving credit facility for up to $195,000,000 at an alternate base rate plus 3.0% and the Predecessor Credit Facility term loan lenders allowed the term loan to renew with interest due on an alternate base rate plus 4.5%. Additionally, for the period of April 24, 2019 through May 20, 2019, an additional 2.0% default interest rate was accrued and paid on the Predecessor Credit Facility term loan and revolver. On July 3, 2019, with approval from the Bankruptcy Court, the Predecessor Credit Facility revolver principal and interest was repaid in full with proceeds from the Predecessor DIP Facility. On the Effective Date, the Predecessor DIP Facility was replaced with the Successor Credit Facilities (as discussed above). See Note 3, Emergence from Bankruptcy for further information.
In order to reduce the financial risk related to changes in interest rates associated with the floating rate term loan under the Predecessor Credit Facility term loan and Successor Takeback Loan Facility, the Company enters into derivative financial instruments. For the Predecessor Credit Facility term loan, the Company had entered into interest rate swap agreements with terms similar to the Predecessor Credit Facility term loan (all outstanding interest rate swap agreements are collectively referred to as the “Swaps”). Prior to December of 2018, all of the Swaps were designated as effective hedges of the Company's variable rate debt and qualified for hedge accounting. However, in December of 2018, given the potential for changes in the Company's future expected interest payments that the Swap hedged, all of the Swaps no longer qualified as a cash flow hedge and were de-designated as such. In April of 2019, all of the outstanding Swaps were settled and terminated with their respective counterparties. For the Successor Takeback Loan Facility, the Company has entered into an interest rate cap agreement. The critical terms of the interest rate cap were designed to mirror the terms of the Successor Takeback Loan Facility and are highly effective at offsetting the cash flows being hedged. See Note 10, Derivatives for further disclosures related to the settlement of these derivative instruments.
As of December 31, 2019, principal payments scheduled to be made on the Company’s debt obligations are as follows (amounts in thousands): | | | | | 2020 | $ | 8,225 |
| 2021 | 8,225 |
| 2022 | 8,225 |
| 2023 | 8,225 |
| 2024 | 953,544 |
| Thereafter | — |
| Total debt principal payments | $ | 986,444 |
|
(10) Derivatives
Interest Rate Cap
In November of 2019, the Company entered into an interest rate cap agreement to reduce the interest rate risk inherent in the Company's variable rate Successor Takeback Loan Facility. The interest rate cap agreement provides the right to receive cash if the reference interest rate rises above a contractual rate. The premium paid for the interest rate cap agreement was $3,020,000, which was the initial fair value of the interest rate cap recorded on the consolidated balance sheets.
The critical terms of the interest rate cap were designed to mirror the terms of the Company's variable rate Successor Takeback Loan Facility and are highly effective at offsetting the cash flows being hedged. The Company designated the interest rate cap as a cash flow hedge of the variability of the LIBOR-based interest payments on $750,000,000 of principal of the Successor Takeback Loan Facility. The interest rate cap agreement will expire on December 31, 2023. The effective portion of the interest rate cap's change in fair value is recorded in Accumulated other comprehensive income (loss). Any ineffective portions of the interest rate cap's change in fair value are recognized in current earnings in Interest expense.
During the Successor Company period from September 1, 2019 through December 31, 2019, interest expense of $71,000 was reclassified from Accumulated other comprehensive income (loss) to Interest expense on the consolidated statements of operations and comprehensive income (loss). The Company expects to similarly reclassify approximately $739,000 from Accumulated other comprehensive income (loss) to Interest expense on the consolidated statements of operations and comprehensive income (loss) in the next twelve months.
The fair value of the interest rate cap was $2,959,000 at December 31, 2019, and constituted an asset of the Company. The fair value of the interest rate cap is included in non-current Other assets, net on the consolidated balance sheets based on the maturity date of the derivative instrument. See Note 11, Fair Value Measurements for related fair value disclosures.
Interest Rate Swaps
Historically, the Company utilized Swaps to reduce the interest rate risk inherent in the Company's variable rate Credit Facility term loan. The valuation of these instruments was determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate curves and implied volatility. The Company incorporated credit valuation adjustments to appropriately reflect the respective counterparty's nonperformance risk in the fair value measurements. See Note 11, Fair Value Measurements for additional information about the credit valuation adjustments.
Prior to December of 2018, all of the Swaps were designated and qualified as cash flow hedging instruments, with the effective portion of the Swaps' change in fair value recorded in Accumulated other comprehensive income (loss). However, in December of 2018, given the potential for changes in the Company's future expected interest payments that these Swaps hedged, all of the Swaps no longer qualified as a cash flow hedge and were de-designated as such. Before the de-designation, changes in the fair value of the Swaps were recognized in Accumulated other comprehensive income (loss) and were reclassified to Interest expense when the hedged interest payments on the underlying debt were recognized. After the de-designation, changes in the fair value of the Swaps are recognized in Unrealized loss on derivative financial instruments on the consolidated statements of operations and comprehensive income (loss). For the period from January 1, 2019 through August 31, 2019, the Company recorded an Unrealized loss on derivative financial instruments of $4,577,000. On April 30, 2019, the various counterparties and the Company agreed to settle and terminate all of the outstanding swap agreements, which required us to pay $8,767,000 in
termination amount to certain counterparties and required a certain counterparty to pay $6,540,000 in termination amount to us, resulting in a Realized net loss on derivative financial instruments of $2,227,000. There are no derivatives outstanding as of December 31, 2019.
Amounts recognized in Accumulated other comprehensive income (loss) as of the de-designation date were to be amortized to Interest expense on the consolidated statements of operations and comprehensive income (loss) over the remaining term of the hedged forecasted transactions of the Swaps which were 3 month LIBOR interest payments. The remaining amount recognized in Accumulated other comprehensive income (loss) was evaluated to have no fair value upon the application of fresh start accounting pursuant to the Plan. The carrying value of this amount was expensed to Gain on restructuring and reorganization, net in the Predecessor period.
The impact of the derivatives designated as cash flow hedges on the consolidated financial statements is depicted below (amounts in thousands):
| | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | Effective portion of gain (loss) recognized in Accumulated other comprehensive income (loss) | $ | (62 | ) | | | $ | — |
| | $ | 12,882 |
| | $ | (3,842 | ) | Effective portion of loss reclassified from Accumulated other comprehensive income (loss) into Net income (loss) (a) | $ | 71 |
| | | $ | (940 | ) | | $ | (1,496 | ) | | $ | (5,424 | ) | Ineffective portion of amount of gain recognized into Net income (loss) on interest rate swaps (a) | $ | — |
| | | $ | — |
| | $ | — |
| | $ | 88 |
|
Mr. Graffam. |
Upon the merger of Ascent into Monitronics on August 30, 2019, the remaining 40,761 of unvested CFO performance award phantom units and 40,760 of unvested CFO service award phantom units based on the value of Ascent Series A common stock were converted to 4,252 phantom units based on the value of Monitronics' common stock for each of the CFO performance award and the CFO service award. The portion of the CFO performance award that was earned over the 2019 performance period was earned based on the achievement of a pre-established Monitronics Pre-SAC Adjusted EBITDA goal of $312,007,000. The threshold, target and maximum performance goals, and the corresponding payout at each level, were as follows (with straight-line interpolation between target/threshold and threshold/maximum): | | | | Monitronics Pre-SAC Adjusted EBITDA Achieved (of Goal) | | CFO Performance Award (2019) (#) | 96.5% - 97.4% | | 1,063 | 97.5% - 98.4% | | 1,595 | 98.5% | | 2,126 |
For purposes of the CFO performance award, Pre-SAC Adjusted EBITDA was defined as Adjusted EBITDA as defined in our 2019 Form 10-K, but excluding subscriber acquisition costs, the impact of changes in contract assets related to ASC 606, impacts from deferred revenue Fresh Start adjustments and bonus accruals. We achieved a Pre-SAC Adjusted EBITDA in 2019, as defined in the award, of $310,484,000; therefore, Mr. Graffam earned 100% of this portion award, which vested in 2020. On the settlement date, the fair market value of any vested phantom units and dividend equivalents, as determined by the compensation committee, shall be paid to Mr. Graffam in cash.
Retention Bonus
On January 4, 2019, the compensation committee approved a retention program for certain eligible employees in order to incent their continued service with the Company through the restructuring. Mr. Graffam was the only named executive officer to have participated in this program for 2019. Under the program, Mr. Graffam received a retention bonus award, pursuant to his retention bonus agreement with the Company, in an aggregate amount of $250,000. The retention bonus is payable in three equal installments (in April 2019, on January 1, 2020 and on July 1, 2020), subject to his continued employment with us. The first installment of the retention bonus would have been repayable by Mr. Graffam in the event his employment was terminated prior to July 1, 2019 either for “cause” or without “good reason” (each as defined in the retention bonus agreement).
Equity Incentive Compensation Consistent with our compensation philosophy, we historically have sought to align the interests of our named executive officers with those of our stockholders by awarding equity‑based incentive compensation, ensuring that our executives have a continuing stake in the long‑term success of our Company and our subsidiaries.
In 2019, Ascent maintained the Ascent Capital Group, Inc. 2015 Omnibus Incentive Plan (the “Ascent Incentive Plan”), which provided for the grant of a variety of incentive awards, including non‑qualified stock options, stock appreciation rights, restricted shares, restricted stock units, cash awards and performance awards and are administered by Ascent’s compensation committee. The Ascent compensation committee did not approve the grant of awards to our named executive officers in 2019. In connection with the Merger, outstanding performance restricted stock units, or PRSUs, were forfeited without payment. In addition, the Bankruptcy Court approved the vesting of: (i) 59,443 Ascent restricted stock units held by Mr. Gardner, (ii) 28,743 Ascent restricted stock units held by Mr. Niles and (iii) 8,504 Ascent restricted shares held by Mr. Graffam.
Severance Benefits
Effective August 30, 2019, Mr. Niles’ employment with Ascent terminated and he received the following severance payments and benefits pursuant to the terms of his original employment agreement with Ascent, in exchange for a release of claims: (i) a cash severance payment of $3,000,000, (ii) continued subsidized healthcare coverage for up to 24 months and (iii) a payment of $69,231 with respect to accrued but unused vacation and personal holidays.
Each of the employment agreements of our named executive officers, and each of our incentive plans, provides (or provided) for rights upon certain termination events, with adjustments to be made to the amounts payable to certain named executive officers if the termination occurs concurrently with or following a change of control of our Company. For additional information on such rights, see “—Summary Compensation Table-Potential Payments Upon Termination or Change-in-Control” below.
Effective February 27, 2020, Mr. Gardner resigned from his role as President and Chief Executive Officer and, pursuant to Mr. Gardner’s employment agreement, he received the following severance payments and benefits, in exchange for a release of claims: (i) a cash severance payment of $2,160,000; (ii) a payment of $875,000, reflecting the earned portion of his 2019 Cash Plan award; (iii) a payment of $500,000, reflecting the full vesting of his Cash Plan award for the 2020-2021 performance period; (iv) a payment of $136,228, reflecting the earned portion of his 2019 MIP payment; (v) continued subsidized healthcare coverage for up to 18 months and (vi) a payment of $62,308 with respect to accrued but unused vacation and personal holidays.
Perquisites and Personal Benefits
For the year ended December 31, 2019, the limited perquisites and personal benefits provided to our named executive officers consisted generally of term life and accidental death & dismemberment insurance premiums, 401(k) matching contributions and a reimbursement from our Company relating to health insurance premiums paid by each such individual. We
offer our named executive officers other benefits that are also available on the same basis to all of our salaried employees, such as medical and disability insurance premiums.
In addition, Mr. Niles received a one-time relocation payment of $231,800 in connection with his relocation from Colorado to Texas in 2019.
Clawback Policy
We maintain a clawback policy that allows us to recover or “clawback” performance-based cash and equity compensation from certain employees in the event of a material restatement of our financial results. Under the policy, if the material restatement would result in any performance-based cash or equity compensation paid during the three years preceding the restatement to have been lower had it been calculated based on such restated results, we may recover the amounts in excess of what would have been paid under the restatement, from any executive who received such performance-based cash or equity compensation who is determined to have engaged in intentional or unlawful misconduct that materially contributed to the need for such restatement. The compensation committee has the sole authority to enforce this policy, and it is limited by applicable law.
In addition, pursuant to the Cash Plan, if the applicable participant holds the position of a "vice president" or above in the Company, following a material restatement of any financial statement in the Company due to material noncompliance with any financial reporting requirement under applicable securities laws, which noncompliance is a result of the participant's misconduct, the participant will be required to repay to the Company any benefits received by the participant in connection with the vesting of the participant's award(s) under the Cash Plan within the 12 month period beginning on the date of the applicable financial statement's (a) public issuance or (b) filing with the Securities and Exchange Commission, whichever is first to occur.
Tax/Accounting Considerations
Section 409A of the Internal Revenue Code Section 409A of the Internal Revenue Code (the “Code”) requires that “nonqualified deferred compensation” be deferred and paid under plans or arrangements that satisfy the requirements of the statute with respect to the timing of deferral elections, timing of payments and certain other matters. Failure to satisfy these requirements can expose employees and other service providers to accelerated income tax liabilities, penalty taxes and interest on their vested compensation under such plans. Accordingly, as a general matter, it is our intention to design and administer our compensation and benefits plans and arrangements for all of our employees and other service providers, including our named executive officers, so that they are either exempt from, or satisfy the requirements of, Section 409A of the Code. Section 280G of the Internal Revenue Code Section 280G of the Code disallows a tax deduction with respect to excess parachute payments to certain executives of companies that undergo a change in control. In addition, Section 4999 of the Code imposes a 20% penalty on the individual receiving the excess payment. Parachute payments are compensation that is linked to or triggered by a change in control and may include, but are not limited to, bonus payments, severance payments, certain fringe benefits, and payments and acceleration of vesting from long-term incentive plans including stock options and other equity-based compensation. Excess parachute payments are parachute payments that exceed a threshold determined under Section 280G of the Code based on the executive’s prior compensation. In approving the compensation arrangements for our named executive officers in the future, the compensation committee will consider all elements of the cost to the Company of providing such compensation, including the potential impact of Section 280G of the Code. However, the Compensation Committee may, in its judgment, authorize compensation arrangements that could give rise to loss of deductibility under Section 280G of the Code and the imposition of excise taxes under Section 4999 of the Code when it believes that such arrangements are appropriate to attract and retain executive talent. Accounting Standards ASC Topic 718 requires us to calculate the grant date “fair value” of our stock-based awards using a variety of assumptions. ASC Topic 718 also requires us to recognize an expense for the fair value of equity-based compensation awards. Grants of awards under our equity incentive award plans will be accounted for under ASC Topic 718. We have elected to account for forfeitures of awards as they occur. The compensation committee will regularly consider the accounting implications of significant compensation
decisions, especially in connection with decisions that relate to our equity incentive award plans and programs. As accounting standards change, we may revise certain programs to appropriately align the accounting expense of our equity awards with our overall executive compensation philosophy and objectives.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serve on the board of directors or compensation committee of a company that has an executive officer who serves on our board or compensation committee. No member of our board is an executive officer of a company in which one of our executive officers serves as a member of the board of directors or compensation committee of that company.
Compensation Committee Report
The compensation committee has reviewed and discussed with the Company’s management the “Compensation Discussion and Analysis” included under “Executive Compensation” above. Based on such review and discussions, the compensation committee recommended to our Company’s Board that the “Compensation Discussion and Analysis” be included in this Form 10-K/A.
Submitted by the Members of the Compensation Committee Stephen Escudier (chairman) Patrick J. Bartels, Jr. Mitchell G. Etess
SUMMARY COMPENSATION TABLE
Summary Compensation Table
The following table sets forth information regarding the compensation paid to our named executive officers during the years ended December 31, 2019, 2018 and 2017 for services to Monitronics and Ascent. | | | | | | | | | | | | | | | | | | | | | | Name and Principal Position | | Year | | Salary ($) | | Bonus ($) (1) | | Stock Awards ($) (2) | | Non-Equity Incentive Plan Compensation ($) (3) | | All Other Compensation ($) (4)(5)(6)(7) | | Total ($) | | | | | | | | | | | | | | | | Jeffery R. Gardner | | 2019 | | 540,000 |
| | — |
| | — |
| | 342,103 |
| | 11,548 |
| | 893,651 |
| President & Chief Executive Officer | | 2018 | | 540,000 |
| | — |
| | 1,500,000 |
| | 131,000 |
| | 11,022 |
| | 2,182,022 |
| | 2017 | | 540,000 |
| | — |
| | 1,500,000 |
| | — |
| | 10,139 |
| | 2,050,139 |
| | | | | | | | | | | | | | | | Fred A. Graffam III | | 2019 | | 383,250 |
| | 106,328 |
| | 75,000 |
| | 131,111 |
| | 11,548 |
| | 707,237 |
| Chief Financial Officer | | 2018 | | 365,000 |
| | — |
| | 300,000 |
| | 91,884 |
| | 5,581 |
| | 762,465 |
| | | 2017 | | 84,231 |
| | 50,538 |
| | 150,000 |
| | — |
| | 37,959 |
| | 322,728 |
| | | | | | | | | | | | | | | | William E. Niles | | 2019 | | 540,442 |
| | 7,019 |
| | — |
| | 528,372 |
| | 3,317,218 |
| | 4,393,051 |
| Executive Vice President, General Counsel | | 2018 | | 486,923 |
| | 25,000 |
| | 368,000 |
| | 375,000 |
| | 14,421 |
| | 1,269,344 |
| | 2017 | | 449,616 |
| | 270,000 |
| | — |
| | — |
| | 13,265 |
| | 732,881 |
|
(a)Amounts are included | | (1) | The amounts in Interest expensethis column include the portion of the 2019 bonuses earned by Messrs. Graffam and Niles based on their individual performance, as determined by the compensation committee in its discretion. In addition, it includes the consolidated statementsportion of operations and comprehensive income (loss)Mr. Graffam's retention bonus paid in 2019 ($83,333). UponIn accordance with SEC rules, the adoptioncolumn does not include the value of ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities on January 1, 2018, ineffectiveness is no longer measured or recognized.
(11) Fair Value Measurements
Accordingthe Graffam Time-Based Award; the value of this award will be reporting with respect to the year in which the applicable performance condition (i.e. continued employment) is achieved.
|
| | (2) | The aggregate grant date fair value of phantom unit awards made in 2019 has been computed in accordance with FASB ASC Topic 820, Fair Value Measurement, fair value is defined as the718, but (pursuant to SEC regulations) without reduction for estimated forfeitures. 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 disclosedincluded 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 December 31, 2019 and December 31, 2018 (amounts in thousands):
| | | | | | | | | | | | | | | | | | Level 1 | | Level 2 | | Level 3 | | Total | December 31, 2019 (Successor Company) | | | | | | | | Interest rate cap agreement - asset (a) | $ | — |
| | $ | 2,959 |
| | $ | — |
| | $ | 2,959 |
| Interest rate swap agreements - assets (b) | — |
| | — |
| | — |
| | — |
| Interest rate swap agreements - liabilities (b) | — |
| | — |
| | — |
| | — |
| Total | $ | — |
| | $ | 2,959 |
| | $ | — |
| | $ | 2,959 |
| December 31, 2018 (Predecessor Company) | | | | | | | | Interest rate cap agreement - asset (a) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Interest rate swap agreements - assets (b) | — |
| | 10,552 |
| | — |
| | 10,552 |
| Interest rate swap agreements - liabilities (b) | — |
| | (6,039 | ) | | — |
| | (6,039 | ) | Total | $ | — |
| | $ | 4,513 |
| | $ | — |
| | $ | 4,513 |
|
| | (a) | Interest rate cap asset value is included in non-current Other assets on the consolidated balance sheets. |
| | (b) | Swap asset values are included in non-current Other assets and Swap liability values are included in non-current Derivative financial instruments on the consolidated balance sheets. |
The Company has determined that the significant inputs used to value the Swaps fall within Level 2 of the fair value hierarchy. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.
Carrying values and fair values of financial instruments that are not carried at fair value are as follows (amounts in thousands):
| | | | | | | | | | | Successor Company | | | Predecessor Company | | December 31, 2019 | | | December 31, 2018 | Long term debt, including current portion: | | | | | Carrying value | $ | 986,444 |
| | | $ | 1,816,450 |
| Fair value (a) | $ | 857,717 |
| | | $ | 1,218,606 |
|
| | (a)
| The fair value is based on market quotations from third-party financial institutions and is classified as Level 2 in the hierarchy. |
The Company’s other financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable are carried at cost, which approximates their fair value because of their short-term maturity.
(12)Income Taxes
The Company's Income tax expense (benefit) is as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | Current: | |
| | | |
| | | | | Federal | $ | — |
| | | $ | — |
| | $ | — |
| | $ | (426 | ) | State | 604 |
| | | 1,775 |
| | 2,535 |
| | 2,559 |
| | $ | 604 |
| | | $ | 1,775 |
| | $ | 2,535 |
| | $ | 2,133 |
| Deferred: | | | | |
| | |
| | |
| Federal | $ | — |
| | | $ | — |
| | $ | (12,892 | ) | | $ | (4,593 | ) | State | 100 |
| | | — |
| | (1,195 | ) | | 567 |
| | $ | 100 |
| | | $ | — |
| | $ | (14,087 | ) | | $ | (4,026 | ) | Total Income tax expense (benefit) | $ | 704 |
| | | $ | 1,775 |
| | $ | (11,552 | ) | | $ | (1,893 | ) |
On December 22, 2017, new tax reform legislation that significantly reforms the Internal Revenue Code of 1986, as amended, was enacted (the "2017 Tax Act"). The 2017 Tax Act includes numerous changes to existing tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%. The rate reduction is effective for the Company as of January 1, 2018.
Total Income tax expense (benefit) differs from the amounts computed by applying the U.S. federal income tax rate of 21% for 2019 and 2018 and 35% for 2017 as a result of the following (amounts in thousands):
| | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | Computed expected tax expense (benefit) | $ | (6,852 | ) | | | $ | 126,039 |
| | $ | (144,963 | ) | | $ | (39,616 | ) | Change in valuation allowance affecting income tax expense | 6,958 |
| | | 16,769 |
| | 52,916 |
| | 39,499 |
| Cancellation of debt income not taxable | — |
| | | (117,545 | ) | | — |
| | — |
| Other restructuring and reorganization income not resulting in tax impact | — |
| | | (36,453 | ) | | — |
| | — |
| Non-deductible bankruptcy costs | — |
| | | 8,808 |
| | — |
| | — |
| Goodwill impairment not resulting in tax impact | — |
| | | — |
| | 78,869 |
| | — |
| Other expense (income) not resulting in tax impact | 42 |
| | | 2,755 |
| | 568 |
| | 1,211 |
| Tax amortization of indefinite-lived assets | — |
| | | — |
| | — |
| | 4,001 |
| 2017 Federal tax reform enactment | — |
| | | — |
| | — |
| | (9,020 | ) | State and local income taxes, net of federal income taxes | 556 |
| | | 1,402 |
| | 1,058 |
| | 2,032 |
| Total Income tax expense (benefit) | $ | 704 |
| | | $ | 1,775 |
| | $ | (11,552 | ) | | $ | (1,893 | ) |
Components of deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows (amounts in thousands): | | | | | | | | | | | Successor Company | | | Predecessor Company | | December 31, 2019 | | | December 31, 2018 | Accounts receivable reserves | $ | 1,008 |
| | | $ | 1,205 |
| Accrued liabilities | 4,395 |
| | | 3,564 |
| Net operating loss ("NOL") carryforwards | 111,512 |
| | | 194,976 |
| Derivative financial instruments | — |
| | | 1,770 |
| Other deferred tax assets | 7,540 |
| | | 1,911 |
| Valuation allowance | (24,457 | ) | | | (148,419 | ) | Total deferred tax assets | $ | 99,998 |
| | | $ | 55,007 |
| Intangible assets | (96,204 | ) | | | (52,161 | ) | Property, plant and equipment | (3,110 | ) | | | (2,063 | ) | Total deferred tax liabilities | $ | (99,314 | ) | | | $ | (54,224 | ) | Net deferred tax assets | $ | 684 |
| | | $ | 783 |
|
For the year ended December 31, 2019, the valuation allowance decreased by $123,962,000. The change in the valuation allowance is primarily attributable to the impact of the cancellation of debt income on the Company's NOLs, which decreased the valuation allowance by $127,571,000, and other deferred tax impacts that decreased the valuation allowance $40,863,000, primarily related to the fresh start accounting adjustments. These decreases were offset by an increase in valuation allowance of $23,727,000 related to current federal income tax expense and the deferred tax impact of the Ascent downstream merger which increased the valuation allowance $20,745,000.
At December 31, 2019, the Company has $308,257,000 and $215,985,000 in NOLs for federal and state tax purposes, respectively. The federal net operating losses recognized through December 31, 2017 of $250,538,000 expire at various times from 2027 through 2037. The state net operating loss carryforwards will expire through 2039. Approximately $510,000 of the Company’s net operating losses are subject to Internal Revenue Code Section 382 limitations. The Company has $213,000 of alternative minimum tax credits ("AMT") which will be refunded upon filing the 2020 through 2021 federal tax returns. The Company also has $684,000 of state credits that will expire through 2027.
As of December 31, 2019, the 2016 to 2019 tax years remain open to examination by the IRS and the 2015 to 2019 tax years remain open to examination by certain state tax authorities.
A reconciliation of the beginning and ending amount of uncertain tax positions, which is recorded in other long term liabilities, is as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | As of the beginning of the year | $ | 5,629 |
| | | $ | 205 |
| | $ | 204 |
| | $ | 208 |
| Increases for tax positions of current years | — |
| | | — |
| | 7 |
| | — |
| Reductions for tax positions of prior years | — |
| | | — |
| | (6 | ) | | (4 | ) | Increase from Ascent downstream merger | — |
| | | 5,424 |
| | — |
| | — |
| As of the end of the year | $ | 5,629 |
| | | $ | 5,629 |
| | $ | 205 |
| | $ | 204 |
|
When the tax law requires interest to be paid on an underpayment of income taxes, the Company recognizes interest expense from the first period the interest would begin accruing according to the relevant tax law. Any accrual of interest and penalties related to underpayment of income taxes on uncertain tax positions is included in Income tax expense in the accompanying consolidated statements of operations and comprehensive income (loss). As of December 31, 2019, accrued interest and penalties related to uncertain tax positions were approximately $143,000. The Company does not expect a significant change in uncertain tax positions in the next twelve months.
(13)Stock-Based and Long-Term Compensation
During the Successor Company period September 1, 2019 through December 31, 2019, there were no stock-based awards granted or outstanding. During the Predecessor Company period January 1, 2019 through August 31, 2019, the Predecessor Company year ended December 31, 2018 and the Predecessor Company year ended December 31, 2017, certain employees of the Company were granted stock-based awards of Ascent Capital Series A Common Stock under Ascent Capital's 2008 Incentive Plan and Ascent Capital's 2015 Omnibus Incentive Plan. All outstanding awards accelerated vesting or were cancelled as of the Effective Date. There are no outstanding or unvested stock-based compensation awards as of December 31, 2019.
Stock Options
Ascent Capital awarded non-qualified stock options for Ascent Capital Series A Common Stock to the Company's executives and certain employees. The exercise price was typically granted as the closing share price for Ascent Capital Series A Common Stock as ofAwards column reflect the grant date. The awards generally had a life of five to seven years and vested over two to four years. The grant-datedate fair value of the Ascent Capital stock options grantedmaximum number of phantom units that may be earned by Mr. Graffam.
|
| | (3) | The amounts in this column with respect to Brinks Home Security's employees was calculated using2019 include the Black-Scholes model. There were no options granted inportion of the 2019 2018bonuses earned by Messrs. Gardner, Graffam and 2017.
The following table presents the number and weighted average exercise price ("WAEP") of outstanding options to purchase Ascent Capital Series A Common Stock granted to certain Brinks Home Security employees: | | | | | | | | | Series A Common Stock Options | | WAEP | Outstanding at January 1, 2019 (Predecessor Company) | 14,600 |
| | $ | 50.47 |
| Granted | — |
| | $ | — |
| Exercised | — |
| | $ | — |
| Forfeited | (3,000 | ) | | $ | 50.47 |
| Expired | (11,600 | ) | | $ | 50.47 |
| Outstanding at August 31, 2019 (Predecessor Company) | — |
| | $ | — |
| Exercisable at August 31, 2019 (Predecessor Company) | — |
| | $ | — |
|
As of December 31, 2019, there was no compensation cost related to unvested stock option awards to be recognized in the consolidated statements of operations and comprehensive income (loss) over the next twelve months.
Restricted Stock Awards and Restricted Stock Units
Ascent Capital made awards of restricted stock for its common stock to the Company's executives and certain employees. Substantially all of these awards were for Ascent Capital Series A Common Stock. The fair values for the restricted stock awards and restricted stock units wasNiles based on the closing priceachievement of pre-determined corporate performance goals at either Ascent Capital Series A Common Stock onor Monitronics. In accordance with SEC rules, this column does not include the value of the Graffam Performance-
|
Based Award; the value of this award will be reported with respect to the year in which the applicable performance condition is achieved. | | (4) | Includes the following term life and AD&D insurance premiums for 2019: |
| | | | | Name | | Amounts ($) | Jeffery R. Gardner | | 45 |
| Fred A. Graffam III | | 45 |
| William E. Niles | | 685 |
|
| | (5) | Includes the following matching contributions to the applicable grant dates.
Upon the grant of a restricted stock award, the recipient received a stock certificatenamed executive officer’s 401(k) account for the number of restricted shares granted. The stock could not be transferred or sold until the vesting criteria was met. Upon the grant of a restricted stock unit award, the recipient received the right to receive a number of shares at vesting and, as such, shares of stock were not issued until the vesting criteria was met. The awards generally vested over two to five years.
The following table presents the number and weighted average fair value ("WAFV") of unvested restricted stock awards granted to certain Brinks Home Security employees: 2019: |
| | | | | | | | | Series A Restricted Stock Awards | | WAFV | Outstanding at January 1, 2019 (Predecessor Company) | 15,023 |
| | $ | 15.20 |
| Granted | — |
| | $ | — |
| Vested | (15,023 | ) | | $ | 15.20 |
| Cancelled | — |
| | $ | — |
| Outstanding at August 31, 2019 (Predecessor Company) | — |
| | $ | — |
|
| | | | | Name | | Amounts ($) | William E. Niles | | 2,438 |
|
There were no outstanding Ascent Capital Series A or Series B restricted stock awards as of December 31, 2019.
The following table presents the number | | (6) | Includes a reimbursement paid to Messrs. Gardner, Graffam and WAFV of unvested restricted stock units granted to certain Brinks Home Security employees: | | | | | | | | | Series A Restricted Stock Units | | WAFV | Outstanding at January 1, 2019 (Predecessor Company) | 487,489 |
| | $ | 5.52 |
| Granted | — |
| | $ | — |
| Vested | (8,438 | ) | | $ | 22.39 |
| Cancelled | (479,051 | ) | | $ | 5.22 |
| Outstanding at August 31, 2019 (Predecessor Company) | — |
| | $ | — |
|
As of December 31, 2019, there was no compensation cost related to unvested restricted stock and stock unit awards to be recognized in the consolidated statements of operations and comprehensive income (loss) over the next twelve months.
Cash Incentive Plan
In 2017 and 2018, the Company made awards to certain employees under its 2017 Cash Incentive Plan (the “2017 Plan”). The 2017 Plan provides the terms and conditions for the grant of, and paymentNiles with respect to phantom units grantedhealth insurance premiums paid by each and a reimbursement paid to certain officersMr. Niles for continued health care coverage pursuant to COBRA.
|
| | (7) | Includes a $3,000,000 lump sum severance payment, and other key personnela payment of the Company. When each award was originally granted, the value of a single phantom unit (“phantom unit value”) was tied$69,231 with respect to accrued but unused vacation and personal holidays pursuant to the value of Ascent Capital Series A Common Stock. Upon completion of the Merger, the number of outstanding phantom units was converted using the Exchange Ratio. Following the Merger, the phantom unit value is tiedseverance agreement and general release entered into between Mr. Niles and Ascent. In addition, includes a $231,800 relocation payment made to the value of Common Stock. The 2017 Plan is administered by a committee (the "committee") whose members are designated by the Compensation Committee of Monitronics' Board of Directors. Grants are determined by the committee, with the first grant occurring on January 1, 2017 and a second grant occurring on January 1, 2018. There were 16,977 phantom units outstanding as of December 31, 2019. The phantom units vest annually over a three-year period beginning on the grant date and are payableMr. Niles in cash at each vesting date. The Company records a liability and a charge to expense based on the phantom unit value and percent vested at each reporting period. As of December 31, 2019, $76,000 was accrued for the estimated vested value of the phantom awards.
(14) Stockholders' Equity
Prior to the Merger, the Company had one thousand shares of common stock issued and outstanding to Ascent Capital. Upon completion of the Merger, these shares were cancelled. Pursuant to the Company's certificate of incorporation adopted in accordance with the Plan, the Company is authorized to issue an aggregate of 50,000,000 shares of stock consisting of: (i) 45,000,000 shares of Common Stock and (ii) 5,000,000 shares of Preferred Stock.
Successor Common Stock
Holders of Common Stock are entitled to one vote for each share held. Common Stock will vote as a single class on all matters on which stockholders are entitled to vote, except as otherwise provided in the certificate of incorporation or as required by law. Generally, all matters to be voted on by stockholders, other than the election of directors, must be approved by a majority of the Common Stock, then-issued and outstanding. Subject to the rights of the holders of any series of Preferred Stock to elect directors under certain circumstances, directors shall be elected by a plurality of the voting power present in person or represented by proxy and entitled to vote generally in the election of directors. No stockholder shall be entitled to exercise the right of cumulative voting.
In connection with the Company’s emergencehis relocation from Chapter 11 and in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), pursuantColorado to Section 1145 of the Bankruptcy Code, the Company issued a total of 22,500,000 shares of Common Stock on August 30, 2019.
As of December 31, 2019, the Company had 22,500,000 issued and outstanding shares of Common Stock.
Successor Preferred Stock
The board of directors of the Company has the authority, without action by its stockholders, to designate and issue preferred stock of the Company in one or more series and to designate the rights, powers, preferences and privileges of each series and any qualifications, limitations or restrictions thereof, which may be greater or less than the rights of the Common Stock. As of December 31, 2019, no shares of preferred stock were issued.
Accumulated Other Comprehensive Income (Loss)
The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the periods presented (amounts in thousands): | | | | | | Accumulated Other Comprehensive Income (Loss) | Balance at December 31, 2016 (Predecessor Company) | $ | (8,957 | ) | Unrealized loss on derivatives recognized through Accumulated other comprehensive income (loss), net of income tax of $0 (a) | (3,842 | ) | Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (b) | 5,424 |
| Net period other comprehensive income | 1,582 |
| Balance at December 31, 2017 (Predecessor Company) | $ | (7,375 | ) | Impact of adoption of ASU 2017-12 | 605 |
| Adjusted balance at January 1, 2018 (Predecessor Company) | $ | (6,770 | ) | Unrealized gain on derivatives recognized through Accumulated other comprehensive income (loss), net of income tax of $0 (a) | 12,882 |
| Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (b) | 1,496 |
| Net period other comprehensive income | 14,378 |
| Balance at December 31, 2018 (Predecessor Company) | $ | 7,608 |
| Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (b) | (940 | ) | Balance at August 31, 2019 (Predecessor Company) | $ | 6,668 |
| Impact of fresh start accounting (c) | (6,668 | ) | Balance at August 31, 2019 (Successor Company) | $ | — |
| Unrealized loss on interest rate cap recognized through Accumulated other comprehensive income (loss), net of income tax of $0 (a) | (62 | ) | Interest cost of interest rate cap reclassified into Net loss, net of income tax of $0 (b) | 71 |
| Net period other comprehensive income | 9 |
| Balance at December 31, 2019 (Successor Company) | $ | 9 |
|
Texas. |
Employment Agreements
Named Executive Officers
Prior to the Merger, each named executive officer was party to an employment agreement with Ascent. In April 2018, Ascent entered into an amended and restated employment agreement with Mr. Niles in connection with his employment as Chief Executive Officer, General Counsel and Secretary, which was later amended in February 2019 (to be effective January 1, 2019). In connection with the Merger, Monitronics assumed the contracts for Messrs. Gardner and Graffam, and Mr. Niles terminated employment with Ascent. In September 2019, Monitronics entered into a new employment letter with Mr. Niles in connection with the commencement of his employment with us following the Merger as Executive Vice President and General Counsel. Mr. Gardner left the Company in February 2020.
The material terms of the employment agreements of Messrs. Niles, Gardner and Graffam in effect during 2019 are described below.
Term. The term of Mr. Niles’ Ascent employment agreement was scheduled to expire on February 28, 2020 and, under Mr. Niles' Monitronics employment agreement, Mr. Niles' employment is at-will and will continue until terminated at any time by either party. The term of Mr. Gardner’s employment agreement was scheduled to expire on September 9, 2020. The term of Mr. Graffam’s employment agreement is scheduled to expire on October 9, 2020.
Base Salary. Pursuant to their respective employment agreements, each of our named executive officers receives a base salary that is (or was) subject to an annual review for increase by the compensation committee. Mr. Niles’ annual base salary with Ascent was $600,000; his annual base salary with Monitronics is $385,000 (pro-rated for 2019), which was increased in February 2020 to $550,000 in connection with his appointment as Interim Chief Executive Officer. Pursuant to Mr. Niles' Monitronics employment agreement, any increases to Mr. Niles' base salary will be based on his performance at the discretion of the compensation committee.
Bonus. Each of our named executive officers is (or was) eligible to receive a bonus under our bonus program in a certain range based on percentages of the applicable named executive officer’s base salary (75% to 175% in the case of Mr. Gardner and 60% in the case of Mr. Graffam). Mr. Niles’ target bonus with Ascent was 100% of his base salary; his target bonus with Monitronics is 60% of his annual base salary (and pro-rated for 2019), which was increased in February 2020 to 150% in connection with his appointment as Interim Chief Executive Officer. Each named executive officer’s entitlement to receive such bonus, and the actual amount thereof, is (or was) determined by the compensation committee in its sole discretion based on the applicable named executive officer’s achievement of certain performance criteria as the compensation committee may establish in its sole discretion.
Cash Plan Awards. Under Mr. Graffam's employment agreement, beginning in 2018, he became eligible to receive an annual incentive award of equity or cash with a fair value of $450,000. A portion of Mr. Graffam’s annual incentive award is subject to the satisfaction of performance criteria to be determined by the compensation committee. In addition, Mr. Graffam received a one-time incentive award of equity or cash with a fair value of $150,000.
Equity Incentive Awards. Under his employment agreement, Mr. Gardner was eligible to receive an annual $1.5 million grant of PRSUs under the Ascent Incentive Plan (or successor plan). One‑third of Mr. Gardner’s annual PRSU award, or $500,000, was set to be earned based on satisfaction, as determined by the compensation committee, of certain quantitative performance criteria for a 36‑month performance period, and if earned, such PRSUs will vest immediately. Two‑thirds of Mr. Gardner’s annual PRSU award, or $1 million, was set to be earned based on satisfaction, as determined by the compensation committee, of certain quantitative performance criteria for a 12‑month performance period, and if earned, such earned PRSUs will vest on a quarterly basis during the two year period beginning on January 1 of the year following the expiration of the respective performance period. In addition, under Mr. Niles' Monitronics employment agreement, he is eligible to receive grants of awards that are no less favorable than awards made to similarly situated senior executives of the Company, as determined by the compensation committee in good faith.
Health and Welfare. Pursuant to their respective employment agreements, each named executive officer is eligible to participate in the health and welfare benefit plans and programs maintained by us for the benefit of our employees.
Termination. The terms and conditions of compensation payable upon termination of the employment of each named executive officer are summarized in “—Potential Payments Upon Termination or Change in Control” below.
Restrictive Covenants. Each employment agreement for our named executive officers contains (or contained) customary confidentiality provisions, as well as standard non-compete restrictions effective during employment (and for 21 - 45 days thereafter in the case of Messrs. Gardner and Graffam) and standard non-solicitation restrictions effective during employment (and for 18 months thereafter in the case of Messrs. Gardner and Graffam). Mr. Niles’ non-compete and employee non-solicitation restrictions with Ascent were effective during employment and for two years thereafter (for the non-compete) and 18 months thereafter (for the non-solicit); his non-compete and employee non-solicitation restrictions with us are effective during employment and for 12 months thereafter.
Grants of Plan-Based Awards The following table contains information regarding plan-based incentive awards granted during the year ended December 31, 2019 to our named executive officers. | | (a) | No income taxes were recorded on the unrealized gain / (loss) on derivative instrument amounts for 2019, 2018 and 2017 because the Company is subject to a full valuation allowance. |
| | (b) | Amounts reclassified into Net loss are included in Interest expense on the consolidated statements of operations and comprehensive income (loss). See Note 10, Derivatives for further information. |
| | (c) | The remaining amount recognized in Accumulated other comprehensive income (loss) was evaluated to have no fair value upon the application of fresh start accounting pursuant to the Plan. See Note 4, Fresh Start Accounting for further information. |
(15)Employee Benefit Plans
The Company offers a 401(k) defined contribution plan covering its full-time employees. The plan is funded by employee and employer contributions. Total 401(k) plan expense for the Successor Company period September 1, 2019 through December 31, 2019, the Predecessor Company period January 1, 2019 through August 31, 2019, the Predecessor Company year ended December 31, 2018 and the Predecessor Company year ended December 31, 2017 was $124,000, $204,000, $172,000 and $179,000, respectively.
(16) Commitments, Contingencies and Other Liabilities
The Company was named as a defendant in multiple putative class actions consolidated in U.S. District Court (Northern District of West Virginia) on behalf of purported class(es) for persons who claim to have received telemarketing calls in violation of various state and federal laws. The actions were brought by plaintiffs seeking monetary damages on behalf of all plaintiffs who received telemarketing calls made by a Monitronics Authorized Dealer, or any Authorized Dealer's lead generator or sub-dealer. In the second quarter of 2017, the Company and the plaintiffs agreed to settle this litigation for $28,000,000 ("the Settlement Amount"). In the third quarter of 2017, the Company paid $5,000,000 of the Settlement Amount pursuant to the settlement agreement with the plaintiffs. In the third quarter of 2018, the Company paid the remaining $23,000,000 of the Settlement Amount. The Company recovered a portion of the Settlement Amount under its insurance policies held with multiple carriers. In the fourth quarter of 2018, we settled our claims against two such carriers in which those carriers paid us an aggregate of $12,500,000. In April of 2019, Monitronics settled a claim against one such carrier in which that carrier paid the Company $4,800,000 which is included in Selling, general and administrative, including stock-based and long-term incentive compensation on the consolidated statements of operations and comprehensive income (loss).
In addition to the above, the Company is also involved in litigation and similar claims incidental to the conduct of its business, including from time to time, contractual disputes, claims related to alleged security system failures and claims related to alleged violations of the U.S. Telephone Consumer Protection Act. Matters that are probable of unfavorable outcome to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, management's estimate of the outcomes of such matters and experience in contesting, litigating and settling similar matters. In management's opinion, none of the pending actions are likely to have a material adverse impact on the Company's financial position or results of operations. The Company accrues and expenses legal fees related to loss contingency matters as incurred.
(17) Revenue Recognition
Disaggregation of Revenue
Revenue is disaggregated by source of revenue as follows (in thousands):
| | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | Alarm monitoring revenue | $ | 147,646 |
| | | $ | 319,172 |
| | $ | 498,236 |
| | $ | 537,399 |
| Product, installation and service revenue | 12,671 |
| | | 19,111 |
| | 38,455 |
| | 12,308 |
| Other revenue | 1,902 |
| | | 4,003 |
| | 3,667 |
| | 3,748 |
| Total Net revenue | $ | 162,219 |
| | | $ | 342,286 |
| | $ | 540,358 |
| | $ | 553,455 |
|
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
| | | | | | | | | | | Successor Company | | | Predecessor Company | | December 31, 2019 | | | December 31, 2018 | Trade receivables, net | $ | 12,083 |
| | | $ | 13,121 |
| Contract assets, net - current portion (a) | $ | 12,070 |
| | | $ | 13,452 |
| Contract assets, net - long-term portion (b) | $ | 14,852 |
| | | $ | 16,154 |
| Deferred revenue | $ | 12,008 |
| | | $ | 13,060 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | Estimated Future Payouts under Non-Equity Incentive Plan Awards (1) | | Estimated Future Payouts under Equity Incentive Plan Awards (2) | Name | | Grant Date | | Threshold ($) | | Target ($) | | Maximum ($) | | Threshold (#) | | Target (#) | | Maximum (#) | Jeffery R. Gardner | | | | | | | | | | | | | | | Q1/Q2 MIP | | 1/4/2019 | | — |
| | 270,000 |
| | 472,500 |
| | — |
| | — |
| | — |
| Q3/Q4 MIP | | 1/4/2019 | | — |
| | 270,000 |
| | 472,500 |
| | — |
| | — |
| | — |
| 2019 Performance-Vesting Cash Plan Award (3) | | 3/31/2019 | | 500,000 |
| | 750,000 |
| | 1,000,000 |
| | — |
| | — |
| | — |
| | | | | | | | | | | | | | | | Fred A. Graffam III | | | | | | | | | | | | | | | Q1/Q2 MIP | | 1/4/2019 | | — |
| | 103,478 |
| | 157,803 |
| | — |
| | — |
| | — |
| Q3/Q4 MIP | | 1/4/2019 | | — |
| | 103,478 |
| | 157,803 |
| | — |
| | — |
| | — |
| 2019 Performance-Vesting Phantom Award (4) | | 1/4/2019 | | — |
| | — |
| | — |
| | 1,063 |
| | 1,595 |
| | 2,126 |
| 2019 Performance-Vesting Cash Plan Award (5) | | 1/4/2019 | | 37,500 |
| | 56,250 |
| | 75,000 |
| | — |
| | — |
| | — |
| | | | | | | | | | | | | | | | William E. Niles | | | | |
| | |
| | |
| | | | | | | Q1 Ascent Bonus Program | | 1/25/2019 | | — |
| | 45,000 |
| | 68,625 |
| | — |
| | — |
| | — |
| Q2 Ascent Bonus Program | | 1/25/2019 | | — |
| | 45,000 |
| | 68,625 |
| | — |
| | — |
| | — |
| Ascent Bonus Program - Litigation and Convertible Debt Goals | | 1/25/2019 | | — |
| | 240,000 |
| | 240,000 |
| | — |
| | — |
| | — |
| Ascent Bonus Program - Insurance Recovery Goals | | 1/25/2019 | | — |
| | 180,000 |
| | 180,000 |
| | — |
| | — |
| | — |
| Q3/Q4 MIP | | 9/9/2019 | | — |
| | 69,300 |
| | 105,683 |
| | — |
| | — |
| | — |
|
(a)Amount is included | | (1) | Represents the dollar value that our named executive officers are eligible to earn at threshold, target and maximum levels of performance under the applicable incentive plan. |
| | (2) | Represents the total number of phantom units that Mr. Graffam was eligible to earn at threshold, target and maximum levels of performance with respect to the 2019 CFO performance award. |
| | (3) | Represents Mr. Gardner's Cash Plan award granted to him in Prepaid and other current assets2019 that relates to the 2019 performance period. |
| | (4) | Represents the second tranche of Mr. Graffam’s CFO performance award that was eligible to vest in 2019 (2,126 phantom units) based on the consolidated balance sheets.(b)Amount is included in Other assets inattainment of applicable performance metrics established by the consolidated balance sheets.
(18) Leases
The Company primarily leases buildings and equipment. The Company determines if a contract is a lease at the inceptionour common stock) of the arrangement. The Company reviews all optionsphantom units earned by Mr. Graffam in 2019 will be paid to extend, terminate, or purchase its right of use assets athim in cash.
|
| | (5) | Represents the inceptionfirst tranche of the lease and accounts for these options when they are reasonably certain of being exercised. Certain real estate leases contain lease and non-lease components, which are accounted for separately.
Leases with an initial term of 12 months or less are not recordedGraffam Performance-Based Award that was eligible to vest in 2019 based on the consolidated balance sheet. Lease expense for these leases is recognized on a straight-line basis overattainment of applicable performance metrics established by the lease term.
All of the Company's leases are currently determined to be operating leases.
Components of Lease Expense
The components of lease expense were as follows (in thousands):
| | | | | | | | | | | Successor Company | | | Predecessor Company | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | Operating lease cost (a) | $ | 160 |
| | | $ | 321 |
| Operating lease cost (b) | 1,281 |
| | | 2,595 |
| Total operating lease cost | $ | 1,441 |
| | | $ | 2,916 |
|
compensation committee. |
Outstanding Equity Awards at Fiscal Year-End The following table contains information regarding phantom unit awards under our Cash Plan which were outstanding as of December 31, 2019 and held by our named executive officers. Only Mr. Graffam held outstanding phantom units on December 31, 2019. | | | | | | | | | | | | | | | | Stock Awards | Name | | Number of Shares or Units of Stock That Have Not Vested (#) | | Market Value of Shares or Units of Stock That Have Not Vested ($) | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | Jeffery R. Gardner | | — |
| | — |
| | — |
| | — |
| | | | | | | | | | Fred A. Graffam III | | | | | | | | | (1) CFO Performance Award | | — |
| | — |
| | 4,252 |
| | 36,142 |
| (2) CFO Service Award | | 4,252 |
| | 36,142 |
| | — |
| | — |
| | | | | | | | | | William E. Niles | | — |
| | — |
| | — |
| | — |
|
(a)Amount is included | | (1) | Represents the phantom units that may be earned by Mr. Graffam under the Cash Plan pursuant to his CFO performance award. In the first quarter of 2020, the compensation committee determined that Mr. Graffam had earned 2,126 phantom units with respect to the second tranche of the CFO performance award, which will result in Cost of servicesa cash payment to be made to Mr. Graffam in May 2020. |
| | (2) | Represents the consolidated statements of operations and comprehensive income (loss).(b)Amount is includedphantom units granted to Mr. Graffam under the Cash Plan with respect to the CFO service award that vest in Selling, general and administrative, including stock-based and long-term incentive compensation in the consolidated statements of operations and comprehensive (loss).
Remaining Lease Term and Discount Rate
The following table presents the weighted-average remaining lease term and the weighted-average discount rate:three equal annual installments beginning on March 29, 2019, subject to Mr. Graffam’s employment on each vesting date.
|
Option Exercises and Stock Vested The following table sets forth information regarding the vesting of phantom units, as well as Ascent restricted stock or restricted stock units held by our named executive officers, in each case, during the year ended December 31, 2019. None of our named executive officers had any exercises of option awards during the year ended December 31, 2019. | | | | | As of December 31, 2019 | Weighted-average remaining lease term for operating leases (in years) | 9.5 |
| Weighted-average discount rate for operating leases | 11.7 | % |
All of the Company's lease contracts do not provide a readily determinable implicit rate. For these contracts, the Company's estimated incremental borrowing rate is based on information available either upon adoption of ASU 2016-02 or at the inception of the lease.
Supplemental Cash Flow Information
The following is the supplemental cash flow information associated with the Company's leases (in thousands):
| | | | | | | | | | | Successor Company | | | Predecessor Company | | Period from September 1, 2019 through December 31, 2019 | | | Period from January 1, 2019 through August 31, 2019 | Cash paid for amounts included in the measurement of lease liabilities: | | | | | Lease payments included in cash flows from operating activities (a) | $ | 1,404 |
| | | $ | 2,804 |
| Right-of-use assets obtained in exchange for new: | | | | | Operating lease liabilities | $ | 543 |
| | | $ | 91 |
|
| | | | | | | | | | Stock Awards | Name | | Number of Units and/or Ascent Shares Acquired on Vesting (#)(1) | | Value Realized on Vesting ($) | Jeffery R. Gardner | | | | | Ascent Series A Common Stock | | 72,779 |
| | 56,443 |
| Fred A. Graffam III | | | | | Ascent Series A Common Stock | | 8,504 |
| | 6,591 |
| Phantom Stock (2) | | 40,762 |
| | 28,562 |
| William E. Niles | | | | | Ascent Series A Common Stock | | 58,055 |
| | 43,709 |
|
(a)Cash flow impacts from Operating lease right-of-use assets | | (1) | Includes shares withheld in payment of withholding taxes at election of holder. |
| | (2) | Represents the number of phantom units valued based on Ascent Series A Common Stock and Operating lease liabilities are presented net on the cash flow statement in changes in Payables and other liabilities.
Maturities of Lease Liabilities
As of December 31, 2019, maturities of lease liabilities were as follows:
| | | | | 2020 | $ | 3,963 |
| 2021 | 3,416 |
| 2022 | 3,277 |
| 2023 | 3,087 |
| 2024 | 3,065 |
| Thereafter | 17,264 |
| Total lease payments | $ | 34,072 |
| Less: Interest | (14,152 | ) | Total lease obligations | $ | 19,920 |
|
Disclosures Related to Periods Prior to Adoption of ASU 2016-02
The Company adopted ASU 2016-02 using a modified retrospective method at January 1, 2019 as described in note 5, Recent Accounting Pronouncements. As required, the following disclosure is provided for periods prior to adoption. Minimum lease commitments as of December 31, 2018 that have initial or remaining noncancelable lease terms in excess of one year are as follows (in thousands): | | | | | 2019 | $ | 4,628 |
| 2020 | 4,207 |
| 2021 | 3,093 |
| 2022 | 3,068 |
| 2023 | 3,087 |
| Thereafter | 20,329 |
| Total lease payments | $ | 38,412 |
|
(19)Quarterly Financial Information (Unaudited - see accompanying accountants' report)
The following tables represent the Company's selected unaudited quarterly results for each of the periods and quarters during 2019 and 2018 (amounts in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | Predecessor Company | | | Successor Company | | 1st Quarter | | 2nd Quarter | | Period from July 1, 2019 through August 31, 2019 | | | Period from September 1, 2019 through September 30, 2019 | | 4th Quarter | 2019: | |
| | |
| | |
| | | | | |
| Net revenue | $ | 129,606 |
| | $ | 128,091 |
| | $ | 84,589 |
| | | $ | 36,289 |
| | $ | 125,930 |
| Operating income (loss) | $ | 19,321 |
| | $ | 19,133 |
| | $ | 9,111 |
| | | $ | (3,129 | ) | | $ | (519 | ) | Net loss | $ | (31,770 | ) | | $ | (54,202 | ) | | $ | 684,385 |
| | | $ | (10,807 | ) | | $ | (22,524 | ) | Basic and diluted net loss per common share | $ | — |
| | $ | — |
| | $ | — |
| | | $ | (0.48 | ) | | $ | (1.00 | ) |
| | | | | | | | | | | | | | | | | | Predecessor Company | | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | 2018: | |
| | |
| | |
| | |
| Net revenue | $ | 133,753 |
| | $ | 135,013 |
| | $ | 137,156 |
| | $ | 134,436 |
| Operating income (loss) | $ | 12,012 |
| | $ | (201,845 | ) | | $ | 12,280 |
| | $ | (316,590 | ) | Net loss | $ | (26,207 | ) | | $ | (241,792 | ) | | $ | (33,840 | ) | | $ | (376,911 | ) | Basic and diluted net loss per common share | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
(20) Consolidating Guarantor Financial Information
Monitronics (the "Parent Issuer") entered into the Successor Takeback Loan Facility and the Successor Credit Facilities and both are guaranteed by all of the Company's existing domestic subsidiaries. Consolidating guarantor financial information has not been presented in this Form 10-K as substantially all of the Company's operations are now conducted by the Parent Issuer entity. The Company believes that disclosing such information would not provide investors with any additional information that would be material in evaluating the sufficiency of the guarantees.
(21) Subsequent Events
In March 2020, the COVID-19 pandemic continues to spread throughout the United States. We borrowed $50,000,000 on our Successor Revolving Credit Facility to provide liquidity during this crisis.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The required certifications of our chief executive officer and chief financial officer are included in Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of our disclosure controls and procedures, management’s report on internal control over financial reporting and changes in internal control over financial reporting referred to in those certifications. Those certifications should be read in conjunction with this Item 9A for a more complete understanding of the matters covered by the certifications.
Disclosure Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of management, including its chairman, chief executive officer and chief financial officer (the "Executives"), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the Executives concluded that the Company's disclosure controls and procedures were not effective as of December 31, 2019 due to the material weakness in our internal control over financial reporting, as described below.
Despite the identified material weakness, management concluded that the consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, the financial position, results of operations and cash flows for the periods disclosed in conformity with GAAP. KPMG LLP, the Company’s independent registered public accounting firm, has issued an unqualified opinion on our consolidated financial statements as of and for the year ended December 31, 2019. This material weakness has no impact on our consolidated financial statements in prior years.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Brinks Home Security's management is responsible for establishing and maintaining adequate internal control over the Company's financial reporting. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements and related disclosures in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements and related disclosures in accordance with generally accepted accounting principles; (3) provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (4) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the consolidated financial statements and related disclosures.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
The Company’s management assessed the design and effectiveness of internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2019 due to the material weakness described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management has identified a material weakness in the Company’s internal control over financial reporting related to the failure to adequately respond to changes in our business that significantly impacted risks and our system of internal control. Specifically, the Company did not completely identify and evaluate the risks of misstatement associated with the accounting and reporting of significant non-routine transactions, including certain aspects of the application of fresh start accounting in accordance with Accounting Standards Codification ("ASC") 852, Reorganizations, and as a result failed to make the necessary modifications to the system of internal control to respond to these risks. In addition, these non-routine transactions created resource constraints that resulted in certain deficiencies in the performance of the Company’s control activities in other non-routine and less technical processes. This material weakness resulted in immaterial misstatements that were correctedvested prior to the issuance of the Company’s financial statements. Nevertheless, this material weakness creates a reasonable possibility that a material misstatement of the financial statements could occur without being prevented or detected on a timely basis.
Remediation Plan for Material Weakness in Internal Control Over Financial Reporting
Management is taking steps to remediate this material weakness, including revamping our risk assessment process to better respond to accounting and process risks created by future changes in the business and other non-routine transactions, increasing the depth and experience within our accounting and finance organization and designing and implementing improved processes and internal controls. However, we are unable to currently estimate how long full remediation will take, and our efforts to remediate this material weakness may not be effective or prevent any future material weakness or significant deficiency in our internal control over financial reporting. If our efforts are not successful, or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence and cause the market price of our common stock to decline.
Changes in Internal Control Over Financial Reporting
Except for the identification of the material weaknesses previously described and the initiation of related remediation steps, there were no changes to our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 and 15d-15 of the Exchange Act that occurred during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
Information required by Items 10, 11, 12, 13 and 14 of Part III will be filed as an amendment to this Annual Report on Form 10-K not later than 120 days after December 31, 2019.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
Included in Part II of this Annual Report:
Monitronics International, Inc.:
(a) (2) Financial Statement Schedules
(i) All schedules have been omitted because they are not applicable, not material or the required information is set forth in the consolidated financial statements or notes thereto.
(a) (3) Exhibits
Listed below are the exhibits which are filed as a part of this report:
| | | | 2.1 | | | 2.2 | | | 2.3 | | | 3.1 | | | 3.2 | | | 3.3 | | | 10.1 | | | 10.2 | | | 10.3 | | | 10.4 | | | 10.5 | | Senior Secured Credit Agreement dated as of August 30, 2019, among Monitronics International, Inc., the guarantors party thereto, Encina Private Credit SPV, LLC as administrative agent, swingline lender and L/C issuer, KKR Capital Markets LLC as lead arranger and bookrunner, KKR Credit Advisors (US) LLC as structuring advisor and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2019). | 10.6 | | | 10.7 | | | 21 | | | 24 | | | 31.1 | | | 31.2 | | | 32 | | | 101.INS | | XBRL Instance Document. * | 101.SCH | | XBRL Taxonomy Extension Schema Document. * | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. * | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. * | 101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document. * | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. * |
77
Potential Payments Upon Termination or Change-in-Control Each of the employment agreements of our named executive officers, as in effect on December 31, 2019, and each of our incentive plans provides for rights upon certain termination events, with adjustments to be made to the amounts payable to certain named executive officers if the termination occurs concurrently with or following a change of control of our Company. This section sets forth the potential payments to Messrs. Niles, Gardner and Graffam if their employment had terminated or a change in control had occurred, in each case, as of December 31, 2019.
Employment Agreements Termination Without Cause or for Good Reason
If our Company terminated the employment of Mr. Niles without cause or if Mr. Niles resigned for “good reason” (as defined in his Monitronics employment agreement), in either case, on December 31, 2019, our Company would become obligated to pay Mr. Niles all accrued and unpaid base salary and vacation time, all approved and unpaid bonus amounts, all incurred and unpaid expenses, as well as a severance payment (subject to his timely execution and non-revocation of a general release of claims in favor of the Company) equal to:
| | (i) | if termination occurs prior to a change of control, the product of 1.5 times the sum of (A) Mr. Niles’ base salary plus (B) his target bonus; or |
| | (ii) | if termination occurs concurrently with or following a change of control, the product of 2 times the sum of (A) Mr. Niles’ base salary plus (B) his target bonus. |
In either case, he would also be eligible to receive 12 months’ of healthcare coverage reimbursement.
If our Company terminated the employment of Messrs. Gardner or Graffam without “Cause” or if Messrs. Gardner or Graffam resigned for “Good Reason” (each as defined in their respective employment agreements), in either case, on December 31, 2019, our Company would become obligated to pay the applicable named executive officer all accrued and unpaid base salary and vacation time, all approved and unpaid bonus amounts and all incurred and unpaid expenses, as well as a severance payment (subject to his timely execution and non-revocation of a general release of claims in favor of the Company, and continued compliance with restrictive covenants described above) equal to:
| | (i) | in the case of Mr. Gardner, (A) if a termination occurs prior to a “change of control” (as defined in his employment agreement), an amount equal to two times his annual base salary or (B) if a termination occurs concurrently with or following a change of control, an amount equal to four times his annual base salary; and |
| | (ii) | in the case of Mr. Graffam, (A) if a termination occurs prior to a “change of control” (as defined in his employment agreement), an amount equal to 1.5 times the sum of his annual base salary and target bonus or (B) if a termination occurs concurrently with or following a change in control, an amount equal to two times the sum of his annual base salary and target bonus. |
In any case, Messrs. Gardner and Graffam would also be eligible to receive Company-subsidized healthcare coverage at the same levels as in effect on the date of termination for up to 18 months (for Mr. Gardner) and up to 12 months (for Mr. Graffam) following the applicable date of termination.
Death or Disability
In the event any of Messrs. Gardner and Graffam dies or becomes disabled during such named executive officer’s term of employment, we become (or would have become) obligated to pay such named executive officer (or his legal representative, as applicable) all accrued and unpaid base salary and vacation time, all approved and unpaid bonus amounts and all incurred and unpaid expenses. In addition, Mr. Gardner would have been entitled to a lump sum amount equal to his annual base salary in effect on the date of termination.
Non-Renewal
Each of the employment agreements of Messrs. Gardner and Graffam provides (or provided) that, if (i) we do not offer the applicable executive a new employment agreement beyond the term of his existing employment agreement or (ii) we do offer the applicable executive such a new employment agreement but it is generally not as favorable, in all material respects, as
his existing employment agreement, then such named executive officer will be deemed terminated without Cause and entitled to the severance benefits described under “—Termination Without Cause” above.
Cash Incentive Plan
Phantom Units
Mr. Graffam is the only named executive officer who holds outstanding phantom unit awards under the Cash Plan. Pursuant to the terms of the Cash Plan, under certain conditions, including the occurrence of certain approved transactions, a board change or a control purchase (all as defined in the Cash Plan), phantom units and unpaid dividend equivalents subject to outstanding awards under the plan will become vested and any related cash amounts will be adjusted as provided for in the individual agreement, unless individual agreements state otherwise. Pursuant to Mr. Graffam’s respective award agreements, the CFO service award and the CFO performance award under the Cash Plan would have been be treated as follows in connection with Mr. Graffam’s termination of employment on December 31, 2019:
If Mr. Graffam’s employment is terminated by the Company without “cause” or by Mr. Graffam for “good reason” (each as defined in his respective award agreements), in either case, then the CFO service award and the CFO performance award may vest in full in the discretion of the committee appointed to administer the Cash Plan. With respect to the below table, we have assumed that such committee determined to vest the CFO service award and the CFO performance award in full.
If Mr. Graffam’s employment is terminated due to his death or “disability” (as defined in the Cash Plan), the CFO service award and the CFO performance award will vest in full.
Cash Awards
Mr. Graffam and Mr. Gardner are the only named executive officers who hold outstanding cash awards under the Cash Plan. The Graffam Time-Based Award and the Graffam Performance-Based Award under the Cash Plan would have been treated as follows in connection with his termination of employment on December 31, 2019: If Mr. Graffam’s employment is terminated by the Company without “cause” or by Mr. Graffam for “good reason” (each as defined in his respective award agreement), in either case, prior to a “change in control” (as defined in the Cash Plan), then the Graffam Time-Based Award will vest in full and the Graffam Performance-Based Award may vest in full in the discretion of the committee appointed to administer the Cash Plan. With respect to the below table, we have assumed that such committee determined to vest the Graffam Time-Based Award and the Graffam Performance-Based Award in full.
If Mr. Graffam’s employment is terminated by the Company without cause or by Mr. Graffam for good reason, in either case, within 12 months following a change in control, then the Graffam Time-Based Award and the Graffam Performance-Based Award will vest in full.
If Mr. Graffam’s employment is terminated due to his death or disability, the Graffam Time-Based Award and the Graffam Performance-Based Award will vest in full.
Mr. Gardner’s 2019 Cash Plan awards would have been treated as follows in connection with his termination of employment on December 31, 2019: If Mr. Gardner’s employment was terminated by the Company without “cause” or by Mr. Gardner for “good reason” (as defined in his respective award agreements), in either case, then each of Mr. Gardner’s awards (i) would have vested based on the earned and unvested portion of the award multiplied by the full number of calendar quarters elapsed from January 1, 2019 through the date of termination divided by 12 or (ii) assuming Mr. Gardner’s achievement of the applicable key performance indicators, the award may vest in full in the discretion of the committee appointed to administer the Cash Plan. With respect to the below table, we have assumed that such committee determined to vest Mr. Gardner’s 2019 Cash Plan awards in full.
If Mr. Gardner’s employment was terminated by the Company without cause or by Mr. Gardner for good reason, in either case, within 12 months following a change in control, then assuming Mr. Gardner’s achievement of the applicable key performance indicators, any earned and unvested portion of Mr. Gardner’s awards may vest
in full in the discretion of the committee appointed to administer the Cash Plan. With respect to the below table, we have assumed that such committee determined to vest Mr. Gardner’s 2019 Cash Plan awards in full.
If Mr. Gardner’s employment was terminated due to his death or disability, each of Mr. Gardner’s 2019 Cash Plan awards would have vested in full.
Retention Bonus
Pursuant to his retention bonus agreement, Mr. Graffam’s retention bonus will become payable in full in a single lump sum payment upon a termination without "cause", for "good reason" or due to his death or "long-term disability" (each as defined in the retention bonus agreement), subject to his execution and non-revocation of a release of claims.
Management Incentive Plans
Pursuant to the MIPs, upon terminations of employment as a result of a reduction in force, death or disability, the participant may, at the discretion of the Company, receive a prorated payment of his or her award under the applicable MIP, subject to the execution, delivery and non-revocation of a general release of claims in favor of the Company.
Benefits Payable Upon Termination or Change in Control
The following table sets forth benefits that would have been payable to Messrs. Gardner, Graffam and Niles if the employment of each such named executive officer had been terminated on December 31, 2019 and assumes that all salary, vacation, bonus and expense reimbursement amounts accrued and payable on or before December 31, 2019 had been paid in full as of such date. The amounts provided in the tables with respect to phantom stock are based on the fair market value of our common stock on December 31, 2019, the last trading day of such year, which was $8.50 per share. | | | | | | | | | | | | | | | | | | | | | | | | | | | Name | | Voluntary Termination | | Termination for Cause | | Termination Without Cause or for Good Reason (After a Change in Control) | | Termination Without Cause or for Good Reason (Without a Change in Control) | | Death | | Disability | | Jeffery R. Gardner | | | | | | | | | | | | | | Severance | | — |
| | — |
| | 2,160,000 |
| | 1,080,000 |
| | 540,000 |
| | 540,000 |
| | Performance-Vesting Cash Plan Award | | — |
| | — |
| | 1,000,000 |
| | 1,000,000 |
| | 1,000,000 |
| | 1,000,000 |
| | Time-Vesting Cash Plan Award | | — |
| | — |
| | 500,000 |
| | 500,000 |
| | 500,000 |
| | 500,000 |
| | Healthcare | | — |
| | — |
| | 34,000 |
| (2) | 34,000 |
| (2) | — |
| | — |
| | Total | | $ | — |
| | $ | — |
| | $ | 3,694,000 |
| (3) | $ | 2,614,000 |
| (3) | $ | 2,040,000 |
| | $ | 2,040,000 |
| | Fred A. Graffam III | | | | | | | | | | | | | | Severance | | — |
| | — |
| | 1,226,400 |
| | 919,800 |
| | — |
| | — |
| | Retention Bonus | | — |
| | — |
| | 166,667 |
| | 166,667 |
| | 166,667 |
| | 166,667 |
| | Phantom Units | | — |
| | — |
| | 72,284 |
| (1) | 72,284 |
| (1) | 72,284 |
| (1) | 72,284 |
| (1) | Performance-Vesting Cash Plan Award | | — |
| | — |
| | 225,000 |
| | 225,000 |
| | 225,000 |
| | 225,000 |
| | Time-Vesting Cash Plan Award | | — |
| | — |
| | 225,000 |
| | 225,000 |
| | 225,000 |
| | 225,000 |
| | Healthcare | | — |
| | — |
| | 22,667 |
| (2) | 22,667 |
| (2) | — |
| | — |
| | Total | | $ | — |
| | $ | — |
| | $ | 1,938,018 |
| (3) | $ | 1,631,418 |
| (3) | $ | 688,951 |
| | $ | 688,951 |
| | William E. Niles | | | | | | | | | | | | | | Severance | | — |
| | — |
| | 1,232,000 |
| | 924,000 |
| | — |
| | — |
| | Healthcare | | — |
| | — |
| | 22,667 |
| (2) | 22,667 |
| (2) | — |
| | — |
| | Total | | $ | — |
| | $ | — |
| | $ | 1,254,667 |
| | $ | 946,667 |
| | $ | — |
| | $ | — |
| |
| | (1) | Based on the number of unvested phantom stock units held by Mr. Graffam at year-end. For more information, see “—Outstanding Equity Awards at Fiscal Year-End” above. We have assumed that the committee that administers the Cash Plan would determine to vest the CFO service award and CFO performance award in full upon Mr. Graffam’s termination without cause absent a change in control. |
| | (2) | Heathcare coverage based on the monthly estimated Company-subsidized healthcare coverage reimbursement amount and the number of months each named executive officer would be eligible to receive the benefit as discussed above. |
| | (3) | Amounts payable to Messrs. Gardner and Graffam are conditioned upon continued compliance with the terms of the non-competition and non-solicitation covenants contained in his employment agreement. |
Pay Ratio Information
As required under and calculated in accordance with Item 402(u) of Regulation S-K (the "Pay Ratio Rule"), we have determined a reasonable estimate of the pay ratio for 2019 of our CEO and the median of the annual total compensation of all of our employees was 26:1. This ratio was calculated as described below using the annual total compensation of Mr. Gardner, our Chief Executive Officer on December 31, 2019, as reported in the Total column of our 2019 Summary Compensation Table, of $893,651 compared to the median of the annual total compensation of all employees excluding Mr. Gardner for 2019 of $34,457. We note that our median employee did not receive any equity awards during 2019 and that our calculation of our median employee’s compensation does not include elements of our employee compensation package, such as health insurance and other benefits, that are generally applicable to all employees. We also did not annualize any employee’s compensation or apply any adjustments, including cost-of-living adjustments to identify our median employee or to calculate our median employee’s annual total compensation for 2019. We identified the median employee by examining 2018 income reported in Box 5 of the Form W-2s of persons employed by us on December 31, 2018. Under the Pay Ratio Rule, the median employee may be identified once every three years if there has been no significant change in a company’s employee population or compensation arrangements, and we believe there were such no such changes for 2019. As a result of our methodology for determining the pay ratio, our pay ratio may not be comparable to the pay ratios of other companies in our industry or in other industries because the SEC rules allow companies to use estimates, assumptions, adjustments and unique definitions of compensation to identify the median employee that differ from those that we used to determine our pay ratio.
Equity Compensation Plan Information Table
We have excluded tabular and narrative disclosure regarding existing equity compensation plans and arrangements that would otherwise be required under Item 201(d) of Regulation S-K since we did not have an outstanding equity compensation plan as of December 31, 2019.
Compensation of Directors The following describes the compensation paid by Ascent and by Monitronics to our directors in 2019. For 2019, Ascent’s non-employee directors (prior to the Merger) were Philip J. Holthouse, Thomas P. McMillin, Michael J. Pohl and William R. Fitzgerald. For 2019, Monitronics’ non-employee directors were Marc A. Beilinson and Sherman K. Edmiston III. Since the completion of the Merger, our non-employee directors have been Patrick J. Bartels, Jr., Stephen Escudier, Mitchell G. Etess, Michael J. Kneeland, Michael R. Meyers and Dick Seger.
Directors who also are employees of our company (or, prior to the Merger, Ascent) received no additional compensation for their services as directors. Each non‑employee director received compensation for services as a director and, as applicable, for services as a member of any Board committee, as described below. All directors were reimbursed for travel expenses relating to their attendance at board or committee meetings.
Compensation Policy. For 2019, each Ascent non-employee director was eligible to receive an annual cash retainer fee of $160,000, other than Mr. Fitzgerald whose annual retainer as non-executive Chairman of the Board was $400,000, in each case, payable quarterly in arrears. Fees for service on each of our compensation and nominating and corporate governance committee are $5,000 per committee (chairs receive $15,000). Fees for service on our audit committee are $7,500 (chair receives $20,000).
In addition, the pre-Merger Monitronics directors, Marc A. Beilinson and Sherman K. Edmiston III, each was eligible to receive a $25,000 monthly retainer. Each ceased providing services on our board of directors following the Merger.
For post-Merger Monitronics, each non-employee Director was eligible to receive an annual cash retainer fee of $80,000, other than Mr. Kneeland whose annual retainer as Chairman of the Board was $140,000, and Mr. Escudier who received no compensation from the Company for his services. Fees and services on each of our compensation, strategy and audit committees are $5,000 per committee (chairs receive $10,000), excluding Mr. Kneeland who received no compensation for his service on the strategy committee. Fees are payable quarterly.
No equity awards were granted to Ascent’s or Monitronics’ non-employee directors with respect to services in 2019.
Director Compensation Table The following table sets forth compensation paid to Ascent's and our non-employee directors during the year ended December 31, 2019. | | | | | | | | Name | | Fees Earned or Paid in Cash ($) | | Total ($) | Ascent Directors | | | | | Philip J. Holthouse | | 126,319 |
| | 126,319 |
| Thomas P. McMillin | | 114,684 |
| | 114,684 |
| Michael J. Pohl | | 124,657 |
| | 124,657 |
| Pre-Merger Monitronics Directors | | | | | Marc A. Beilinson | | 175,000 |
| | 175,000 |
| Sherman K. Edmiston III | | 175,000 |
| | 175,000 |
| Post-Merger Monitronics Directors | | | | | Patrick J. Bartels, Jr. | | 45,000 |
| | 45,000 |
| Stephen Escudier | | — |
| | — |
| Mitchell G. Etess | | 45,000 |
| | 45,000 |
| Michael J. Kneeland | | 70,000 |
| | 70,000 |
| Michael R. Meyers | | 45,000 |
| | 45,000 |
| Dick Seger | | 22,500 |
| | 22,500 |
|
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management The table below sets forth information, as of February 29, 2020, the amount and percentage of our outstanding shares of common stock beneficially owned by (i) each person known by us to own beneficially more than 5% of our outstanding common stock, (ii) each director, (iii) each of our executive officers, and (iv) all of our directors and executive officers as a group. The percentages reflect beneficial ownership, as determined in accordance with the SEC's rules, as of February 29, 2020, and are based on 22,500,000 shares of common stock outstanding. All information with respect to beneficial ownership has been furnished by the respective 5% or more stockholders, directors, director nominees or executive officers, as the case may be.
| | | | | | | | Name | | Beneficial Ownership | | % of Total | 5% Shareholders | | | | | CRF3 Investments I S.á.r.l.(1) | | 9,660,549 |
| | 42.94 | % | Brigade Capital Management, LP(2) | | 6,176,110 |
| | 27.45 | % | Ensign Peak Advisors, Inc.(3) | | 2,174,988 |
| | 9.67 | % | AllianceBernstein Accounts(4) | | 1,239,887 |
| | 5.51 | % | Directors and Executive Officers | | | | | Jeffery R. Gardner | | 14,469 |
| | * |
| Fred A. Graffam | | 1,006 |
| | * |
| William E. Niles | | 7,237 |
| | * |
| Patrick J. Bartels | | — |
| | * |
| Stephen Escudier | | — |
| | * |
| Mitchell G. Etess | | — |
| | * |
| Michael J. Kneeland | | — |
| | * |
| Michael R. Meyers | | 341 |
| | * |
| Dick Seger | | — |
| | * |
| All executive officers and directors as a group (9 persons)(5) | | 23,053 |
| | * |
|
| | (1) | The address of this beneficial owner is 26A Boulevard Royal, L‑2449, Luxembourg. EQT Partners UK Advisors LLP may be deemed to have voting and investment power with respect to, and may be deemed to be the beneficial owner of, the shares of common stock owned by CRF3 Investments I S.à.r.l. |
| | (2) | The address of this beneficial owner is 399 Park Avenue, Suite 1600, New York, NY 10022. The entirety of the shares are owned by funds and accounts managed by Brigade Capital Management, LP (collectively, the “Brigade Funds”). Brigade Capital Management, LP has voting and investment power with respect to the shares of common stock owned by the foregoing entities and may be deemed to be the beneficial owner of the shares of common stock owned by the Brigade Funds. |
| | (3) | The address of this beneficial owner is 60 East South Temple Street, Suite 400, Salt Lake City, UT 84111. |
| | (4) | The address of this beneficial owner is 1345 Avenue of the Americas, New York, NY 10105. Consists of (i) 257,529 shares owned by AB High Income Fund, Inc., (ii) 522 shares owned by AB Bond Fund, Inc.-AB FlexFee High Yield Portfolio, (iii) 35,682 shares owned by AllianceBernstein Global High Income Fund, Inc., (iv) 745 shares owned by AB SICAV I‑Multi‑Sector Credit Portfolio, (v) 812,814 shares owned by AB FCP I‑Global High Yield Portfolio, (vi) 2,309 shares owned by AB SICAV I‑Global Income Portfolio, (vii) 1,489 shares owned by AB SICAV I-All Market Income Portfolio, (viii) 2,532 shares owned by AB SICAV I‑US High Yield Portfolio, (ix) 1,229 shares owned by AB Unconstrained Fund, Inc., (x) 13,223 shares owned by AllianceBernstein LP, on behalf of Kaiser Foundation Hospitals, (xi) 9,348 shares owned by AllianceBernstein LP, on behalf of Kaiser Perm Group Trust, (xii) 4,469 shares owned by The AB Portfolios-AB All Market Total Return Portfolio, (xiii) 68,348 shares owned by AB Bond Fund, Inc-AB Income Fund, (xiv) 6,220 shares owned by AB Collective Investment Trust Series-AB US High Yield Collective Trust, (xv) 5,847 shares owned by AllianceBernstein LP, on behalf of The State of Connecticut, and (xvi) 17,581 shares owned by AllianceBernstein LP, on behalf of Teachers’ Retirement System of Louisiana (collectively, the “AllianceBernstein Accounts”). AllianceBernstein L.P. is investment advisor to the AllianceBernstein Accounts. AllianceBernstein L.P. and Neil Ruffell, in his position as Head of Portfolio Administration of AllianceBernstein L.P., may be deemed to have voting and investment power with respect to the common stock owned by the AllianceBernstein Accounts, and may be deemed to be the beneficial owner of the shares of common stock owned by the AllianceBernstein Accounts. |
| | (5) | The address of directors and officers is in care of Monitronics International, Inc., 1990 Wittington Place, Farmers Branch, Texas 75234. |
Changes in Control We know of no arrangements, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of our Company.
Securities Authorized for Issuance Under Equity Compensation Plans
As of December 31, 2019, there are no shares of our common stock authorized for issuance under equity compensation plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Review and Approval of Related Party Transactions We adopted a code of ethics and corporate governance guidelines to govern the review and approval of related party transactions. Under our code of ethics, any transaction which may involve an actual or potential conflict of interest and is required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC must be approved by the audit committee or another independent body of our Board designated by our Board. Under our corporate governance guidelines, if a director has an actual or potential conflict of interest, the director must promptly inform our Chief Executive Officer and the chair of our audit committee. All directors must recuse themselves from any discussion or decision that involves or affects their personal, business or professional interests. In addition, an independent committee of our Board, designated by our Board, will resolve any conflict of interest issue involving a director, our Chief Executive Officer or any other executive officer. No related party transaction (as defined by Item 404(a) of Regulation S-K promulgated by the SEC) may be effected without the approval of such independent committee.
The following are certain transactions, arrangements and relationships with our directors, executive officers and stockholders owning 5% or more of our outstanding common stock since January 1, 2019.
Registration Rights Agreement
We are party to a Registration Rights Agreement with the holders of our common stock named therein to provide for resale registration rights for the holders' Registrable Securities (as defined in the Registration Rights Agreement).
Pursuant to the Registration Rights Agreement, the holders have customary underwritten offering and piggyback registration rights, subject to the limitations set forth therein. Under their underwritten offering registration rights, one or more holders holding, collectively, at least 25% of the aggregate number of Registrable Securities or Registrable Securities with an anticipated aggregate gross offering price (before deducting underwriting discounts and commissions) of at least $40 million have the right to demand that we file a registration statement with the SEC, and further have the right to demand that we effectuate the distribution of any or all of such holder's Registrable Securities by means of an underwritten offering pursuant to an effective registration statement, subject to certain limitations described in the Registration Rights Agreement. The holders' piggyback registration rights provide that, if at any time we propose to undertake a registered offering of our common stock, whether or not for our own account, we must give at least 10 business days' notice to all holders of Registrable Securities to allow them to include a specified number of their shares in the offering.
These registration rights are subject to certain conditions and limitations, including our right to delay or withdraw a registration statement under certain circumstances. We will generally pay all registration expenses in connection with our obligations under the Registration Rights Agreement, regardless of whether any Registrable Securities are sold pursuant to a registration statement. The registration rights granted in the Registration Rights Agreement are subject to customary indemnification and contribution provisions, as well as customary restrictions such as blackout periods and, if an underwritten offering is contemplated, limitations on the number of shares to be included in the underwritten offering that may be imposed by the managing underwriter.
Director Nominating Agreement
In connection with our emergence from Chapter 11, we entered into director nominating agreements that provide affiliates of EQT the right to nominate: (i) three Class III directors so long as EQT and its affiliates own at least 27.5% of the total voting power of the Company; (ii) two Class III directors so long as EQT and its affiliates own at least 17.5% of the total voting power of the Company and (iii) one Class III director so long as EQT and its affiliates own at least 10% of the total voting power of the Company, and provide affiliates of Brigade the right to nominate (i) one Class I directors so long as
Brigade and its affiliates own at least 17.5% of the total voting power of the Company and (ii) one Class II director so long as Brigade and its affiliates own at least 10% of the total voting power of the Company. In connection with our emergence, Stephen Escudier, Andrew Konopelski and Michael J. Kneeland were nominated as directors by EQT, and Michael R. Meyers and Mitchell Etess were nominated as directors by Brigade. Dick Seger was subsequently nominated by EQT to replace Andrew Konopelski, who resigned from the board of directors.
Indemnification Agreements
We have indemnification agreements with our directors and certain officers. These indemnification agreements are intended to permit indemnification to the fullest extent now or hereafter permitted by applicable law. It is possible that the applicable law could change the degree to which indemnification is expressly permitted.
The indemnification agreements cover expenses (including attorneys' fees) incurred as a result of the fact that such person, in his or her capacity as a director or officer, is made or threatened to be made a party to any suit or proceeding. The indemnification agreements will generally cover claims relating to the fact that the indemnified party is or was an officer, director, employee or agent of us or any of our affiliates, or is or was serving at our request in such a position for another entity. The indemnification agreements will also obligate us to promptly advance expenses incurred in connection with any claim. The indemnification provided under the indemnification agreements is not exclusive of any other indemnity rights; however, double payment to the indemnitee is prohibited.
We also maintain director and officer liability insurance for the benefit of each of the above indemnitees.
Director Independence Our board of directors uses the independence standards under the rules of the OTC Group applicable to issuers listed on the OTCQX Best Market. The OTC Group's definition of independence requires that the director is not an executive officer or employee of the Company and does not have any relationship, in the opinion of the Company's board, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The board has determined that Dick Seger, Michael J. Kneeland, Michael R. Meyers, Mitchell G. Etess and Patrick J. Bartels, Jr. are independent under the OTC Group rules and the rules and regulations promulgated by the SEC for purposes of service on the board of directors. There are no family relationships among any of our directors or executive officers.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees and All Other Fees The following table presents fees for professional audit services rendered by KPMG LLP for the audit of our consolidated financial statements for 2019, the audit of Ascent and Monitronics consolidated financial statements for 2018, the review of unaudited interim financial statements included in our quarterly reports on Form 10-Q and fees billed for other professional services rendered by KPMG LLP in each of the last two fiscal years: | | | | | | | | | | | | 2019 | | 2018 | Audit fees | | $ | 1,819,000 |
| | $ | 1,488,000 |
| Audit related fees | | — |
| | — |
| Audit and audit related fees | | $ | 1,819,000 |
| | $ | 1,488,000 |
| Tax fees | | — |
| | — |
| Other fees | | — |
| | — |
| Total fees | | $ | 1,819,000 |
| | $ | 1,488,000 |
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Our audit committee has considered whether the provision of services by KPMG LLP to our Company other than auditing is compatible with KPMG LLP maintaining its independence and believes that the provision of such other services is compatible with KPMG LLP maintaining its independence.
Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor Our audit committee adopted a policy, dated September 25, 2019, regarding the pre-approval of all audit and permissible non-audit services provided by our independent auditor. Pursuant to this policy, our audit committee has approved the engagement of our independent auditor to provide the following services (all of which are collectively referred to as "pre-approved services"): •audit services as specified in the policy, including (i) financial audits of our Company and our subsidiaries, (ii) services associated with our periodic reports, registration statements and other documents filed or issued in connection with a securities offering (including comfort letters and consents), (iii) attestations of our management’s reports on internal controls and (iv) consultations with management as to accounting or disclosure treatment of transactions;
•audit-related services as specified in the policy, including (i) due diligence services, (ii) financial audits of employee benefit plans, (iii) consultations with management as to accounting or disclosure treatment of transactions not otherwise considered audit services, (iv) attestation services not required by statute or regulation, (v) certain audits incremental to the audit of our consolidated financial statements, (vi) closing balance sheet audits related to dispositions and (vii) general assistance with implementation of SEC rules or listing standards; and
•tax services as specified in the policy, including federal, state, local and international tax planning, compliance and review services, and tax due diligence. Notwithstanding the foregoing general pre-approval, any individual project involving the provision of pre-approved services that is likely to result in fees in excess of $100,000 requires the specific prior approval of our audit committee. Any engagement of our independent auditors for services other than the pre-approved services requires the specific approval of our audit committee. Our audit committee has delegated the authority for the foregoing approvals to the chairman of the audit committee, subject to his subsequent disclosure to the entire audit committee of the granting of any such approval. Michael R. Meyers currently serves as the chairman of our audit committee. Our pre-approval policy prohibits the engagement of our independent auditor to provide any services that are subject to the prohibition imposed by Section 201 of the Sarbanes-Oxley Act. All services provided by our independent auditor during 2018 and 2019 were approved either by the audit committee or in accordance with the terms of a pre-approval policy approved by the audit committee.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (3) Exhibits The following exhibits to this Amendment No. 1 on Form 10-K are meant to supplement the Exhibits listed and/or filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2019, as amended: | | | | 10.8 | | | 10.9 | | | 10.10 | | | 10.11 | | | 10.12 | | | 10.13 | | | 10.14 | | | 10.15 | | | 10.16 | | | 31.3 | | | 31.4 | | |
| | * | Filed herewith. | ** | Furnished herewith. |
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. | | | | | | | MONITRONICS INTERNATIONAL, INC. | | | | | Dated: | March 30,May 8, 2020 | ByBy: | /s/ William E. Niles | | | | William E. Niles | | | | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
| | | | | | Signature | | Title | | Date | | | | | | /s/ William E. Niles | | Chief Executive Officer (principal executive officer) | | March 30, 2020 | William E. Niles | | | | | | | | | | Dated: | May 8, 2020 | By: | /s/ Patrick J. Bartels, Jr. | | Director | | March 30, 2020 | Patrick J. Bartels, Jr. | | | | Fred A. Graffam | | | | | | /s/ Stephen Escudier | | Director | | March 30, 2020 | Stephen Escudier | | | | Fred A. Graffam | | | | | | /s/ Mitchell G. Etess | | Director | | March 30, 2020 | Mitchell G. Etess | | | | | | | | | | /s/ Michael J. Kneeland | | Director | | March 30, 2020 | Michael J. Kneeland | | | | | | | | | | /s/ Michael R. Meyers | | Director | | March 30, 2020 | Michael R. Meyers | | | | | | | | | | /s/ Dick Seger | | Director | | March 30, 2020 | Dick Seger | | | | | | | | | | /s/ Fred A. Graffam | | Chief Financial Officer, Executive Vice President and Assistant Secretary (principal financial officer and principal accounting officer) | | March 30, 2020 | Fred A. Graffam | | | |
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