UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-K

 

 

Commission File Number 001-34176

ASCENT MEDIA CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(720) 875-6672

 

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

 

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

The aggregate market value of the voting stock held by nonaffiliates of Ascent Media Corporation computed by reference to the last sales price of such stock, as of the closing of trading on June 30, 2010, was approximately $340 million.

 

The number of shares outstanding of Ascent Media Corporation’s common stock as of February 28, 2011 was: Series A common stock 13,554,998 shares; and Series B common stock 731,852 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The Registrant’s definitive proxy statement for its 2011 Annual Meeting of Stockholders is hereby incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

ASCENT MEDIA CORPORATION
2010 ANNUAL REPORT ON FORM 10-K

Table of Contents

 

 

 

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

 

We are a holding company. At December 31, 2010, our assets consist primarily of our wholly-owned operating subsidiary, Monitronics International, Inc. (“Monitronics”), the Content Distribution business, cash and cash equivalents. At December 31, 2010, we had cash and cash equivalents, on a consolidated basis, of $149,857,000. We also own assets used in the operation of our corporate and support functions and other non-core assets including certain real estate interests primarily in the United States and the Systems Integration business described below. The Content Distribution business was subsequently sold on February 28, 2011.

 

During 2010, there were substantial changes in our operations. Historically, our principal asset was our wholly-owned operating subsidiary Ascent Media Group, LLC (“AMG”). AMG was primarily engaged in the business of providing content and creative services to the media and entertainment industries. AMG provided a wide variety of creative services and content management and delivery services to the media and entertainment industries from facilities in the United States, the United Kingdom and Singapore. AMG provided solutions for the creation, management and distribution of content to major motion picture studios, independent producers, broadcast networks, programming networks, advertising agencies and other companies that produce, own and/or distribute entertainment, news, sports and advertising content. AMG also provided solutions for the management and distribution of content to multichannel video programming distributors such as cable operators and IPTV providers. Services were marketed to target industry segments through AMG’s internal sales force, which were sold on both a bundled and an individual basis.

 

The businesses of AMG were organized into two operating segments: businesses that provide content management and delivery services (“Content Services”), and businesses that provide creative services (“Creative Services”). The Content Services segment was in turn divided into three business units: (i) the content distribution business unit (“Content Distribution”), (ii) the media management services business unit (“Media Services”) and (iii) the systems integration business unit (“Systems Integration” or “SI”).

 

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

 

On November 24, 2010, the Company entered into an agreement to sell the assets and operations of the Creative Services and Media Services business units (the “Creative/Media business”) to Deluxe Entertainment Services Group Inc. and its wholly-owned subsidiary. This sale closed on December 31, 2010 for net cash proceeds of approximately $69 million, subject to customary post-closing adjustments. Based on the estimated purchase price, the Company recognized a net pre-tax loss of approximately $27 million from the sale of the Creative/Media business. For further information regarding this transaction, see the MD&A section of this Annual Report. The Creative/Media business results of operations have been treated as discontinued operations in the consolidated financial statements for all periods presented in this Annual Report.

 

On December 2, 2010, we entered into an agreement to sell the assets and operations of the Content Distribution business unit to Encompass Digital Media, Inc. and its wholly owned subsidiary (together “Encompass”). For more information regarding this sale, please see “— Recent Developments” and the MD&A sections below. The financial statements of the Company included in this Annual Report on Form 10-K

include the financial position and results of operations of the Content Distribution business on a consolidated basis for all periods reflected.

 

On December 17, 2010, we acquired 100% of Monitronics, a leading national security alarm monitoring company. The transaction value comprised $396 million of cash consideration and we also assumed $795 million of net debt (which we define as the principal amount of such debt less cash) of Monitronics. Monitronics provides monitored business and home security system services to more than 665,000 subscribers in the United States and Canada, through a nationwide network of independent authorized dealers. For more information about the Monitronics business, please see “— Narrative Description of the Business — Monitronics International, Inc.” below. The financial statements of the Company included in this Annual Report on Form 10-K include the financial position of Monitronics in the Company’s consolidated balance sheet as at December 31, 2010, and the results of operations of Monitronics on a consolidated basis for the period from December 17, 2010 through December 31, 2010.

 

Recent Developments

 

On February 28, 2011, the Company and Encompass consummated the sale of the Content Distribution business. The Company received net cash proceeds of approximately $104 million. The Company expects to recognize an estimated pre-tax gain of approximately $65 million from the sale, subject to customary post-closing adjustments. The Content Distribution results of operations will be treated as discontinued operations in our consolidated financial statements starting in the first quarter of 2011. For further information regarding this transaction, see the MD&A section of this Annual Report.

 

* * * * *

 

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

 

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

 

 

 

Factors relating to the business of Monitronics:

 

 

These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Annual Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based. When considering such forward-looking statements, you should keep in mind the factors described in Item 1A, “Risk Factors” and other cautionary statements contained in this Annual Report. Such risk factors and statements describe circumstances which could cause actual results to differ materially from those contained in any forward-looking statement.

 

 

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

 

Based on the foregoing criteria, our two reportable segments at December 31, 2010 are our Content Services group and our Monitronics business. Financial information related to our reportable segments can be found in note 19 to our consolidated financial statements in Part II of this Annual Report.

 

 

Ascent Media Corporation, a Delaware corporation, is a holding company. Our principal executive office is located at 12300 Liberty Boulevard, Englewood, Colorado 80112, telephone number (720) 875-6672. At

December 31, 2010, following the consummation of the sale of our Creative/Media business, our principal assets consisted of our wholly owned operating subsidiary, Monitronics International, Inc. (“Monitronics”), the Content Distribution and System Integration businesses described below, and cash and cash equivalents. The financial statements included in this Form 10-K include (i) the historical financial information for our Content Distribution business, which was sold on February 28, 2011, (ii) the historical financial information for our Systems Integration business and (iii) financial information for Monitronics at December 31, 2010, and for the period from December 17, 2010 through December 31, 2010. The results of operations of the Creative/Media business have been treated as discontinued operations in the consolidated financial statements for all periods presented in this Annual Report. For further historical financial information with regard to Monitronics, please see our Current Report on Form 8-K/A filed with the SEC on December 28, 2010.

 

The Content Distribution business was sold on February 28, 2011. We are currently exploring opportunities to dispose of the Systems Integration business, which we consider non-core. There can be no assurances that the disposition of the SI business will be completed in the near term and/or on terms favorable to Ascent Media, or on any terms.

 

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

 

Content Services

 

The Content Services group provided the services to archive, optimize, transform, and repurpose completed media assets for global distribution via satellite, fiber, the Internet and freight, as well as the post-production facilities, technical infrastructure, and operating staff necessary to assemble programming content for cable and broadcast networks and to distribute media signals via satellite and terrestrial networks. The Content Services group was operated from facilities located in California, Connecticut, Minnesota, New York, New Jersey, Virginia, the United Kingdom and Singapore.

 

The Content Services group historically included the Media Services business, the Content Distribution business and the Systems Integration business. The Media Services business was sold in 2010 and therefore is not included in the description below. The Content Distribution business described below was sold in a recent transaction to Encompass. For more information regarding this sale, see “— Recent Developments” above.

 

The Content Distribution Business

 

The key services provided by the Content Distribution business included the following:

 

Network origination, playout and master control.  The Content Distribution business provided outsourced network origination services to cable, satellite and pay-per-view programming networks. This suite of services involved the digitization and management of client-provided media assets (programs, advertisements, promotions and secondary events) and their aggregation into a continuous linear playout stream in accordance with the client’s programming schedule. More than one hundred programming feeds — running 24 hours a day, seven days a week — were supported by the Content Distribution business’s facilities in the United States, London and Singapore. Network origination services were provided from large-scale technical platforms with integrated asset management, hierarchical storage management (a data storage technique which automatically moves data between high-cost and low-cost storage media), and broadcast automation capabilities. These platforms, which are designed, built, owned and operated by the Content Distribution business, require incorporation and integration of hardware and software from multiple third-party suppliers into a coordinated service solution. Associated services included cut-to-clock and compliance editing, tape library management, ingest & quality control, format conversion, and tape duplication. For multi-language television services, the Content Distribution business facilitated the collection, aggregation, and playout of language-specific materials, including subtitles and foreign language dubs. On-air graphics and other secondary events were also integrated with the content. In conjunction with network origination services, the Content Distribution business operated television production studios and provided complete post-production services for on-air promotions for some clients.

Transport and connectivity.  The Content Distribution business operated satellite earth station facilities in Singapore, California, New York, New Jersey, Minnesota and Connecticut. The Content Distribution business’s facilities were staffed 24 hours a day and used for uplink, downlink and turnaround services. The business accessed various distribution points, including basic and premium cable, broadcast syndication, direct-to-home and DBS markets and resold transponder capacity for both occasional and full-time use. The Content Distribution business’s “teleports” were high-bandwidth communications gateways with video switches and facilities for satellite, optical fiber and microwave transmission. The business’s facilities offered satellite antennae capable of transmitting and receiving feeds in both C-Band and Ku-Band frequencies. The Content Distribution business also operated a global fiber network to carry real-time video and data services between its various locations in the US, London, and Singapore. This network was used to provide full-time program feeds and ad hoc services to clients and to transport files and real-time signals between the Content Distribution business’s locations. The Content Distribution business also operated industry-standard encryption and compression systems as needed for customer satellite transmission. The Content Distribution business’s transport and connectivity services could be directly associated with network origination services or could be provided on a stand-alone basis.

 

The Systems Integration Business

 

The System Integration business designs, builds, installs and services advanced technical systems for production, management and delivery of rich media content to the worldwide broadcast, cable television, broadband, government and telecommunications industries. The System Integration business operates out of facilities in New Jersey, California and Virginia, and services global clients including major broadcasters, cable and satellite networks, telecommunications providers, and corporate television networks, as well as numerous production and post-production facilities. Services offered include program management, engineering design, equipment procurement, software integration, construction, installation, service and support. The Company considers the Systems Integration business unit to be a non-core asset and is currently exploring opportunities to dispose of that business.

 

Monitronics International, Inc.

 

Through our wholly-owned subsidiary, Monitronics, we are primarily engaged in the business of providing security alarm monitoring services: monitoring signals from burglaries, fires and other events, as well as, providing customer service and technical support. Monitronics is the third largest alarm monitoring company in the United States, with over 665,000 subscribers under contract. With subscribers in all 50 states, the District of Columbia, Puerto Rico, and Canada, Monitronics provides a wide range of mainly residential security services including hands-free two-way interactive voice communication with the monitoring center, cellular options, and an interactive service option which allows the customer to control their security system remotely using a computer or smart phone. Monitronics was incorporated in 1994 and is headquartered in Dallas, Texas.

 

Operations

 

Unlike many of its national competitors, Monitronics outsources the sales, installation and field service functions to its dealers. By outsourcing the low margin, high fixed-cost elements of its business to a large network of independent service providers, Monitronics is able to allocate capital to growing its revenue-generating account base rather than to local offices or depreciating hard assets.

 

During 2010, Monitronics purchased alarm monitoring contracts from more than 400 dealers. Monitronics generally enters into alarm monitoring purchase agreements with dealers only after a thorough review of the dealer’s qualifications, licensing and financial situation. Once a dealer has qualified, Monitronics generally obtains rights of first refusal to purchase all accounts sold by that dealer for a period of three years.

 

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

generates revenue from fees charged to other security alarm companies for monitoring their accounts on a wholesale basis.

 

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

 

 

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

 

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

 

 

3. Dealer presents the account to Monitronics for purchase.

 

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

 

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

 

6. Customer becomes a Monitronics account.

 

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

 

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

 

 

Monitronics generally pays its dealers a purchase price for each new customer account based on a multiple of the account’s monthly recurring revenue. The purchase terms are provided for in the dealer contract. The dealer contract generally provides that, if a customer account acquired by Monitronics is terminated within the first 12 months, the dealer must replace the account or refund the purchase price paid by Monitronics. To secure the dealer’s obligation, Monitronics typically holds back a percentage of the purchase price for a 12 month period.

 

Monitronics believes that this process, which includes both clearly defined customer account standards and a consistently applied due diligence process, contributes significantly to the high quality of its subscriber base. For

each of its last five calendar years, the average credit score of accounts purchased by Monitronics, was in excess of 700 on the FICO scale.

 

Approximately 93% of Monitronics subscribers are residential homeowners and the remainder are small commercial accounts. Monitronics believes by focusing on residential homeowners rather than renters it can reduce attrition, because homeowners relocate less frequently than renters.

 

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

 

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

 

Monitronics seeks to increase subscriber satisfaction and retention by carefully managing customer and technical service. The customer service center handles all general inquiries from subscribers, including those related to subscriber information changes, basic alarm troubleshooting, alarm verification, technical service requests and requests to enhance existing services. Monitronics has a proprietary centralized information system that enables it to satisfy over 85% of subscriber technical inquiries over the telephone, without dispatching a service technician. If the customer requires field service, Monitronics relies on its nationwide network of over 400 service dealers to provide such service on a time and materials basis. Monitronics closely monitors service dealer performance with customer satisfaction forms, follow-up quality assurance calls and other performance metrics.

 

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

 

Intellectual Property

 

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

 

Sales and Marketing

 

General.  We believe Monitronics’ nationwide network of authorized dealers is the most effective way for Monitronics to market alarm systems. Locally-based dealers are often an integral part of the communities they serve and understand the local market and how best to satisfy local needs. By combining the dealer’s local presence and reputation with Monitronics’ high quality service and support, Monitronics is able to cost-effectively provide local services and take advantage of economies of scale where appropriate.

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

 

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

 

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

 

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

 

 

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

 

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

 

Customer Integration and Marketing.  The customer’s awareness and identification of the Monitronics brand as the monitoring service provider is further supported by the distribution of Monitronics-branded materials by the

dealer to the customer at the point of sale. Such materials may include Monitronics yard signs, brochures, instruction cards, and other promotional items. Monitronics’ dealers typically introduce customers to Monitronics in the home when describing Monitronics’ central monitoring station.

 

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

 

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

 

Strategy

 

Corporate Strategy

 

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

 

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

 

 

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

 

Our acquisition strategy entails substantial risk. We consider potential acquisitions in a variety of industries, which could result in significant additional changes in our operations from those historically conducted by us. Please see “Risk Factors” below.

 

Monitronics Strategy

 

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

 

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

 

 

 

Maximize Economics of Business Model.  As we continue to grow our subscriber base, we believe the attractiveness of our business model will increase. Due to the scalability of our operations and the low fixed and variable costs inherent in our cost structure, we believe our EBITDA margins may increase as these costs are spread over larger recurring revenue streams. We believe our cash flows may also benefit from our continued efforts to increase subscriber retention rates and reduce response times, call duration and false alarms. As used in this annual report, the term “EBITDA” means earnings before interest, taxes, depreciation and amortization, and “EBITDA margin” means EBITDA as a percentage of revenue.

 

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

 

 

For a description of the risks associated with the foregoing strategies, and with Ascent Media’s business in general, see “Risk Factors” section beginning on page 14.

 

Industry; Competition

 

The security alarm industry is highly competitive and highly fragmented. We compete with several major firms and with numerous smaller providers. Competitors for alarm subscribers with national scope include the following:

 

 

Certain alarm service companies have adopted, in whole or in part, a strategy similar to ours that entails the purchase of alarm monitoring accounts through an authorized dealer program. A competitor for dealers with national scope includes ADT.

 

Competition in the security alarm industry is based primarily on reputation for quality of service, market visibility, services offered, price and the ability to identify prospective dealers and subscriber accounts. We believe that we compete effectively with other national, regional and local alarm monitoring companies due to our reputation for reliable monitoring, customer and technical services, the high quality services and benefits we offer to dealers in our authorized dealer program and our low cost structure. However, we compete with several companies that have account acquisition and loan programs for independent dealers, and one of those competitors is significantly larger than we are and has more capital.

 

Seasonality

 

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

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

 

Regulatory Matters

 

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

 

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

 

 

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

 

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

 

Employees

 

At December 31, 2010, Ascent Media, together with its subsidiaries, has approximately 1,330 full-time employees and an additional 100 employees that are employed on a part-time or freelance basis. Approximately 1,060 of the employees are employed in the United States, with the remaining amount employed outside the United States, principally in the United Kingdom and the Republic of Singapore.

 

 

For financial information related to our geographic areas in which we do business, see note 19 to our consolidated financial statements found in Part II of this Annual Report.

 

 

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

 

Our corporate governance guidelines, code of business conduct and ethics, compensation committee charter, nominating and corporate governance committee charter, and audit committee charter are available on our website.

In addition, we will provide a copy of any of these documents, free of charge, to any shareholder who calls or submits a request in writing to Investor Relations, Ascent Media Corporation,12300 Liberty Boulevard, Englewood, Colorado 80112. Telephone No. (720) 875-6672.

 

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

 

 

The risks described below and elsewhere in this Annual Report are not the only ones that relate to our businesses or our common stock. The risks described below are considered to be the most material. However, there may be other unknown or unpredictable economic, business, competitive, regulatory or other factors that also could have material adverse effects on our businesses. If any of the events described below were to occur, our businesses, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected.

 

Factors Relating to Our Corporate Strategy

 

We have substantially changed the businesses in which our subsidiaries operate. Accordingly, it may be difficult to evaluate our performance based on our operating history.

 

The financial statements included in this Annual Report on Form 10-K include the financial position and results of operations of the Content Distribution business unit formerly operated by AMG. We completed the sale of the Content Distribution business unit on February 28, 2011, and such business unit will be reflected as discontinued operations in future filings. We acquired our current principal operating subsidiary Monitronics on December 17, 2010, so the results of operations of Monitronics are only included in our consolidated operating statement for the period December 17, 2010 through December 31, 2010, inclusive. Our Current Report on Form 8-K/A filed December 28, 2010, includes

 

 

However, the historical financial information included in such Current Report reflects the results of operations, financial condition and cash flows of Monitronics with respect to time periods during which it was a stand-alone entity, rather than part of a public company, and may not necessarily reflect what such metrics would have been if Monitronics had been a subsidiary of Ascent Media Corporation during the periods presented. Moreover, the unaudited pro forma condensed combined financial statements included in such report do not purport to represent, and are not necessarily indicative of, what our financial position or results of operations would have been had such transactions occurred on the dates indicated. Past results may not be indicative of future performance.

 

Our acquisition strategy may not be successful.

 

One focus of our corporate strategy is to seek opportunities to grow free cash flow through strategic acquisitions, which may include leveraged acquisitions. However, there can be no assurance that we will be able to consummate that strategy, and if we are not able to invest our capital in acquisitions that are accretive to free cash

flow it could negatively impact the growth of our business. Our ability to consummate such acquisitions may be negatively impacted by various factors, including among other things:

 

 

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

 

We are a holding company and derive substantially all of our revenue and cash flow from our subsidiaries.

 

Our subsidiaries are separate and independent legal entities and have no obligation to make funds available to us, whether in the form of loans, dividends or otherwise. The ability of our subsidiaries to pay dividends to us is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, and their compliance with covenants in their respective credit facilities. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and our creditors and shareholders.

 

An inability to access capital markets at attractive rates could materially increase our expenses.

 

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

 

Disruptions in worldwide credit markets may increase the risk of default by the issuers of instruments in which we invest cash and other financial institutions. The failure of any banking institution in which we deposit funds or the failure of banking institutions to operate in the ordinary course could have a material adverse effect on our financial position and operating results.

 

Recent conditions in global credit and other financial markets resulted in significant volatility and disruptions in the availability of credit and in some cases pressured the solvency or liquidity of financial institutions. Although we seek to manage the credit risks associated with our cash and investments, we are exposed to a risk that financial institutions may fail or that our counterparties may default on their obligations to us.

Factors Relating to our Common Stock

 

We have a history of losses and may incur losses in the future, which could materially and adversely affect the market price of our common stock.

 

Our subsidiaries incurred losses in each of our last five fiscal years, and Monitronics incurred losses in two of its last three full fiscal years. In future periods, we may not be able to achieve or sustain profitability on a consistent quarterly or annual basis. Failure to maintain profitability in future periods may materially and adversely affect the market price of our common stock.

 

Our stock price may fluctuate significantly.

 

We cannot predict the prices at which either series of our common stock may trade. The market price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:

 

 

It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders.

 

Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a change in control of our company that a shareholder may consider favorable. These provisions include the following:

 

 

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

 

We have adopted a shareholder rights plan in order to encourage anyone seeking to acquire our company to negotiate with our board of directors prior to attempting a takeover.

 

While the plan is designed to guard against coercive or unfair tactics to gain control of our company, the plan may have the effect of making more difficult or delaying any attempts by others to obtain control of our company.

 

Holders of a single series of our common stock may not have any remedies if an action by our directors or officers has an adverse effect on only that series of our common stock.

 

Principles of Delaware law and the provisions of our certificate of incorporation may protect decisions of our board of directors that have a disparate impact upon holders of any single series of our common stock. Under Delaware law, the board of directors has a duty to act with due care and in the best interests of all of our shareholders, including the holders of all series of our common stock. Principles of Delaware law established in cases involving differing treatment of multiple classes or series of stock provide that a board of directors owes an equal duty to all common shareholders regardless of class or series and does not have separate or additional duties to any group of shareholders. As a result, in some circumstances, our directors may be required to make a decision that is adverse to the holders of one series of our common stock. Under the principles of Delaware law referred to above, you may not be able to challenge these decisions if a majority of our board of directors is disinterested, independent and adequately informed with respect to their decisions and acts in good faith, and in the honest belief that it is acting in the best interest of all of our stockholders.

 

Our Series B common stock trades on the OTC Bulletin Board, which is often characterized by volatility and illiquidity.

 

The OTC Bulletin Board tends to be highly illiquid, in part, because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make markets in particular stocks. There is also a greater chance of market volatility for securities that trade on the OTC Bulletin Board as opposed to a national exchange or quotation system. This volatility is due to a variety of factors, including a lack of readily available price quotations, lower trading volume, absence of consistent administrative supervision of “bid” and “ask” quotations, and market conditions. The potential for illiquidity and volatility with respect to our Series B common stock may also be adversely affected by (i) the relatively small number of shares of our Series B common stock held by persons other than our officers, directors and persons who hold in excess of 10% of the Series B common stock outstanding, (ii) the relatively small number of such unaffiliated shareholders, and (iii) the low trading volume of such shares on the OTC Bulletin Board.

 

Other Factors Relating to Ascent Media Corporation

 

We may have substantial indemnification obligations under certain inter-company agreements we entered into in connection with the spin-off of Ascent Media from DHC.

 

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

If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or our internal control over financial reporting is not effective, the reliability of our financial statements may be questioned and our stock price may suffer.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires any company subject to the reporting requirements of the United States securities laws to do a comprehensive evaluation of its and its consolidated subsidiaries’ internal control over financial reporting. To comply with this statute, we are required to document and test our internal control procedures, our management is required to assess and issue a report concerning our internal control over financial reporting, and our independent auditors are required to issue an attestation regarding our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex, subject to change, and require significant documentation, testing and possible remediation to meet the detailed standards under the rules. During the course of its testing, our management may identify material weaknesses or deficiencies which may not be remedied in time to meet the deadline imposed by the Sarbanes-Oxley Act. If our management cannot favorably assess the effectiveness of our internal control over financial reporting or our auditors identify material weaknesses in our internal control, investor confidence in our financial results may weaken, and our stock price may suffer. Timely compliance with Section 404 of the Sarbanes-Oxley Act may be made more difficult by the complexities inherent in acquiring and integrating Monitronics and disposing of the operating businesses of AMG.

 

Factors relating to Monitronics

 

Monitronics has a substantial amount of indebtedness, which could have a material adverse effect on its financial condition and operations.

 

Monitronics has and will continue to have a significant amount of indebtedness. At December 31, 2010, the principal balance of our total indebtedness was approximately $944 million, of which $106 million was outstanding under Monitronics’ senior secured credit facility and $838 million was outstanding under Monitronics’ existing securitization facility. Ascent Media has guaranteed only $30 million of the term loan included in the senior secured credit facility. Monitronics level of indebtedness could limit its ability to operate its business and impair its competitive position. For example, it could:

 

 

Despite its current levels of indebtedness, Monitronics still may be able to incur substantially more debt. The terms of the agreements relating to its existing indebtedness permit it to incur additional indebtedness, subject to compliance with certain financial and other covenants. At December 31, 2010, the credit facility included a $115 million revolving credit facility, of which approximately $69 million was undrawn and available for future borrowing subject to the satisfaction of applicable covenants. If its current debt levels are increased as a result of new borrowings and/or refinancings, the related risks it now faces could intensify.

 

Monitronics’ credit facility and securitization indebtedness impose many restrictions on it.

 

The agreements governing Monitronics’ indebtedness restrict our ability to, among other things:

 

 

 

In addition, Monitronics must comply with certain financial covenants under the credit facility and the securitization indebtedness, including those that relate to capital expenditure limits, maximum total debt to EBITDA, maximum total senior liabilities to EBITDA, senior debt interest coverage fixed charge coverage, attrition rate maximums and average recurring monthly revenue minimums. If Monitronics cannot comply with such financial covenants, it may not be able to borrow under the revolving credit facility. In addition, failure to comply with the restrictions contained in the credit facility or the existing securitization indebtedness could lead to an event of default, which could result in an acceleration of indebtedness.

 

The terms of Monitronics’ securitization facility limit its access to the cash generated by a substantial portion of its alarm monitoring contracts.

 

The long-term debt of Monitronics at December 31, 2010, includes $838 million in principal in secured notes under a securitization facility. These notes were issued by Monitronics Funding LP, a subsidiary of Monitronics, which we refer to as “Funding”. Pursuant to the terms of the securitization facility, alarm monitoring contracts for approximately 622,000 of Monitronics subscriber accounts are owned by Funding, representing approximately 93% of the total number of subscriber accounts of Monitronics and its subsidiaries as of December 31, 2010. Such alarm monitoring agreements, and the monthly recurring revenue and other proceeds thereof, are pledged as collateral to secure the obligations of Funding under the securitization facility, and the cash generated by such accounts is accordingly restricted. In that connection, at December 31, 2010, Funding held approximately $51 million in restricted cash as a reserve for interest payments and other obligations of Monitronics under the facility. Under the terms of the securitization, Funding currently pays Monitronics Security LP (another subsidiary of Monitronics, which we refer to as “Security”) for monitoring and servicing the subscriber accounts owned by Funding, at an effective rate of $12.00 per active subscriber account per month. As such servicing fees currently exceed the aggregate out-of-pocket cost to Security of monitoring and servicing such subscriber accounts, the amount of such excess is available to Monitronics for other corporate purposes, including the purchase of additional subscriber accounts. However, under the terms of the securitization facility, effective July 2012, the amount of the monthly servicing fees payable by Funding to Security will decrease from an effective rate of $12.00 per active subscriber account per month to $7.50 per active subscriber account per month. This decrease will substantially reduce or eliminate the excess cash available to Security for distribution to Monitronics. If Monitronics does not repay or refinance the securitization facility by July 15, 2012, the decrease in servicing fees could have a substantially adverse affect on its liquidity and reduce the capital resources available to Monitronics for purchasing alarm monitoring accounts, which could have a material adverse effect on Monitronics. There can be no assurances that such a refinancing or amendment will be available to Monitronics on terms acceptable to it, or on any terms.

 

If we do not refinance or repay the existing Monitronics securitization facility by July 2012, our borrowing costs under that facility will increase substantially.

 

If Monitronics does not repay or refinance the securitization facility by July 2012, contingent additional interest will begin to accrue at the rate of 5% per annum (including 0.5% of fees) on the two variable funding notes (or “VFNs”) under the Monitronics securitization facility, which have an aggregate principal balance of $288,000,000. The effective interest rate payable by the Company under $550 million notional amount of swaps relating to the term notes under the securitization facility would also increase by 5% per annum (including 0.5% of fees) beginning July 2012, if such swaps are then outstanding. Although such additional interest will not be payable in cash until all the securitization debt has been paid off, the increased leverage resulting

from the accrual of such additional interest could reduce the amount available for borrowing by Monitronics under its new credit facility and may indirectly reduce Monitronics’ ability to acquire new subscriber accounts.

 

We may be unable to obtain additional funds to grow Monitronics’ business.

 

Monitronics intends to continue to pursue growth through the acquisition of subscriber accounts through its authorized dealer program. To continue its growth strategy, Monitronics will be required to make additional draw downs under its credit facility or seek additional financing through new loans or from the possible sale of additional securities in the future, or a refinancing of its existing securitization facility, which may lead to higher leverage. Monitronics could also use its operating cash to fund its growth. An inability to obtain funding through external financing is likely to adversely affect Monitronics’ ability to continue or accelerate its subscriber account acquisition activities. Monitronics cannot be assured that it will be able to obtain external funding. Even if it obtains external financing, there is no assurance that it will be able to do so on attractive terms. Obtaining financing on terms less favorable than what is in place today may have an adverse affect on cash flows and operations.

 

Monitronics relies on our authorized dealers to generate subscriber growth.

 

Monitronics experiences loss of dealers from its dealer program due to various factors, such as dealers becoming inactive or discontinuing their electronic security business, non-renewal of dealer contracts and competition from other alarm monitoring companies. If Monitronics experiences a significant loss of dealers from its dealer program or if Monitronics is unable to replace or recruit dealers in accordance with its business plans, its future operating results may be adversely affected.

 

Monitronics may be unable to manage its growth effectively.

 

A principal element of its business strategy is to grow through the acquisition of subscriber accounts purchased through its authorized dealer program. This expansion has placed and will continue to place substantial demands on its management and operational resources, including its information systems. Monitronics’ future operating results will depend in large part on its ability to grow and manage this growth effectively.

 

Monitronics faces risks in acquiring and integrating subscriber accounts.

 

Acquisitions of subscriber accounts involve a number of risks, including the possibility of unanticipated problems not discovered prior to the acquisition and the risk that the purchase may not be profitable due to account attrition, higher than expected servicing costs or lower than expected revenues from the acquired accounts. The purchase price Monitronics pays for a subscriber account is affected by the monthly recurring revenue generated by that account, as well as several other factors, including the level of competition, its prior experience with accounts purchased from the dealer, the geographic location of the account, the number of accounts purchased, the subscriber’s credit score and the type of security equipment used by the subscriber. In purchasing accounts, Monitronics relies on management’s knowledge of the industry, due diligence procedures and representations and warranties of the dealers. Monitronics cannot assure you that in all instances the representations and warranties made by the dealers are true and complete or, if the representations and warranties are inaccurate, that Monitronics due diligence procedures will be able to detect the problem or that Monitronics will be able to recover damages from the dealers in an amount sufficient to fully compensate us for any resulting losses. Monitronics expects that future account acquisitions will present the same risks to it as our prior account acquisitions.

 

The high level of competition in Monitronics’ industry could adversely affect its business.

 

The security alarm monitoring industry is highly competitive and highly fragmented. Monitronics faces competition from other alarm monitoring companies, including companies that have more capital than it has and that may offer higher prices and more favorable terms to dealers for subscriber accounts purchased, or charge lower prices for monitoring services provided. This competition could reduce the acquisition opportunities available to Monitronics, thus slowing its rate of growth, or require it to increase the price it pays for such account acquisitions, thus reducing its return on investment and negatively impacting its revenues and results of operations. Monitronics

cannot assure that it will be able to purchase subscriber accounts on favorable terms in the future. These uncertainties and other measures could have a materially adverse effect on Monitronics and cause its revenues to decrease.

 

Monitronics also faces potential competition from improvements in self-monitoring systems, which enable subscribers to monitor their home environment without third-party involvement. Advances in self-monitoring systems could progress to the point where Monitronics could be at a competitive disadvantage. Similarly, it is possible that one or more of its competitors could develop a significant technical advantage over it that allows them to provide additional service or better quality service or to lower their price, which could put Monitronics at a competitive disadvantage. Either development could adversely affect its growth and results of operations.

 

Monitronics relies on a significant number of its subscribers remaining with it as subscribers for long periods of time.

 

Monitronics incurs significant upfront cash costs for each new subscriber. It requires a substantial amount of time for it to receive cash payments (net of its variable cash operating costs) from a particular subscriber that are sufficient to offset this upfront cost, which often exceeds the initial term of the subscriber agreement. Accordingly, Monitronics’ long-term profitability is dependent on its subscribers remaining with it as subscribers for as long as possible. This requires that Monitronics minimize its rate of subscriber disconnects, or attrition. Factors that can increase disconnects include subscribers who relocate and do not reconnect, problems with service quality, competition from other alarm monitoring companies, adverse economic conditions and the affordability of its service. If it fails to keep its subscribers for a sufficiently long period of time, Monitronics’ financial position and results of operations could be adversely affected.

 

Monitronics relies on technology that may become obsolete, which could require significant expenditures.

 

Monitronics’ monitoring services depend upon the technology (both hardware and software) of security alarm systems located at its subscribers’ premises. Monitronics may be required to implement new technology either to attract and retain subscribers or in response to changes in land-line or cellular technology or other factors, which could require significant expenditures. Monitronics may not be able to successfully implement new technologies or adapt existing technologies to changing market demands. If it is unable to adapt in response to changing technologies, market conditions or customer requirements in a timely manner, such inability could adversely affect its business.

 

Shifts in customer selection of telecommunications services could increase attrition rates and could adversely impact Monitronics’ earnings and cash flow.

 

Monitronics’ operating model relies to some degree on its subscribers’ continued use of traditional, land-line telecommunications services, which Monitronics uses to communicate with its monitoring operations. Although it offers alarm systems that can communicate signals to its central stations using various wireless and/or Internet-based communication technologies, such solutions are presently more expensive than alarm communicators based on the traditional Public Switched Telephone Network or PSTN. In order to continue to service existing subscribers who cancel their land-line telecommunications services and to service new customers who do not subscribe to PSTN services, subscribers may be required to upgrade to more expensive technologies. Higher costs may reduce the market for new customers of alarm monitoring services, and the trend away from traditional land lines to alternatives which may mean more existing subscribers will cancel service with Monitronics. Continued shifts in customer preferences regarding telecommunications services could continue to have an adverse impact on its earnings, cash flow and subscriber attrition rates.

 

Monitronics depends on its relationships with alarm system manufacturers and suppliers. If it is not able to maintain or renew these strategic alliances, or enter into new alliances, it may be unable to fully implement its growth strategy, which could negatively impact its revenues.

 

Monitronics currently has agreements with certain alarm system manufacturers and suppliers of hardware to offer purchase discounts to its dealers. These relationships:

 

 

 

Monitronics may not be able to maintain or renew its existing strategic alliances on terms and conditions favorable to it or enter into alliances with additional manufacturers and suppliers. If it is unable to maintain or renew its existing strategic alliances or enter into new alliances, it may not be able to fully implement its growth strategy.

 

“False alarm” ordinances could adversely affect Monitronics’ operations.

 

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

 

 

Enactment of these measures could adversely affect Monitronics’ future business, operations and financial results. For example, 20 cities or metropolitan areas have implemented verified response ordinances for residential and commercial burglar alarms. A verified response policy means that police officers generally do not respond to an alarm until someone else (e.g., the resident, a neighbor or a security guard) first verifies that it is valid. Some alarm monitoring companies operating in these areas hire security guards or use third-party guard firms to verify an alarm. If Monitronics needs to hire security guards or use third-party guard firms, it could have a material adverse effect on its business through either increased costs to Monitronics or increased costs to its customer which may limit its ability to attract new customers. Although Monitronics has less than 17,000 subscribers in these areas, a more widespread adoption of such a policy or similar policies in other cities or municipalities could adversely affect its business. In addition, such limitations, or the perception that police departments will not respond to third-party monitored burglar alarms, may reduce customer satisfaction with traditional monitored alarm systems, which may result in increased attrition rates or decreased customer demand.

 

Future government regulations could adversely affect Monitronics’ operations.

 

Monitronics operations are subject to a variety of laws, regulations and licensing requirements of federal, state and local authorities. In certain jurisdictions, Monitronics is required to obtain licenses or permits, to comply with standards governing monitoring station employee selection and training and to meet certain standards in the conduct of our business. The loss of these licenses in jurisdictions where it has significant business, or the imposition of conditions to the granting or retention of these licenses, could have a material adverse effect on Monitronics. If these laws, regulations and/or licensing requirements change, it could require Monitronics to modify its operations or to utilize resources to maintain compliance with such rules and regulations. There can be no assurance that new laws or regulations that increase its costs or otherwise have a material adverse effect on its results of operations will not be implemented in the future.

 

Monitronics’ business operates in a regulated industry.

 

Monitronics operations and employees are subject to various U.S. federal, state and local consumer protection, licensing and other laws and regulations. Most states in which Monitronics operates have licensing laws directed specifically toward the monitored security services industry. Its business relies heavily upon wireline and cellular telephone service to communicate signals. Wireline and cellular telephone companies are currently regulated by both the federal and state governments. Monitronics’ Canadian operation is subject to comparable regulation. Changes in laws or regulations could require it to change the way it operates, which could increase costs or

otherwise disrupt operations. In addition, failure to comply with any applicable laws or regulations could result in substantial fines or revocation of its operating permits and licenses. If laws and regulations were to change or Monitronics failed to comply, its business, financial condition and results of operations could be materially and adversely affected.

 

Risks of liability from Monitronics operations are significant.

 

The nature of the services Monitronics provides potentially exposes it to greater risks of liability for employee acts or omissions or system failure than may be inherent in other businesses. Substantially all of its alarm monitoring contracts contain provisions limiting its liability to subscribers and dealers in an attempt to reduce this risk. However, in the event of litigation with respect to these matters, Monitronics cannot assure that these limitations will be enforced, and the costs of such litigation or the related settlements could have a material adverse effect on it. In addition, there can be no assurance that Monitronics is adequately insured for these risks. Certain of its insurance policies and the laws of some states may limit or prohibit insurance coverage for punitive or certain other types of damages or liability arising from gross negligence.

 

An interruption to its monitoring facilities from a disaster could adversely affect Monitronics’ business.

 

A disruption to its monitoring facilities could affect its ability to provide alarm monitoring services and serve its subscribers which could have a material adverse effect on Monitronics’ business. Any such disruption could occur for many reasons, including fire, natural disasters, weather, disease, transportation interruption, or terrorism. These risks are mitigated by having a back-up monitoring facility. In the event of an emergency at its main monitoring facility, all monitoring operations can be quickly transferred to the back-up facility. While we have taken reasonable precautions to mitigate the risk, there is no assurance that the back-up facility won’t be impacted by the same catastrophic event or natural disaster. The main monitoring facility holds Underwriters’ Laboratories (“UL”) listings as protective signaling services stations and maintains certain standards of building integrity, redundant computer and communications facilities and backup power, among other safeguards.

 

Monitronics is dependent upon its experienced senior management, who would be difficult to replace.

 

The success of the Monitronics business is largely dependent upon the active participation of its executive officers, who have extensive experience in the industry. The loss of service of one or more of such officers or the inability to attract or retain qualified personnel for any reason may have an adverse effect on its business.

 

 

None.

 

 

At December 31, 2010, the operations of the Content Distribution business, which is part of the Content Services group, were conducted at approximately 17 properties. In the United States, the Content Distribution business utilized owned and leased properties in California, Connecticut, Minnesota, New Jersey and New York. Internationally, the Content Distribution business utilized owned and leased properties in the United Kingdom, in London and Milton Keynes. In addition, the Content Distribution business operated two facilities in Singapore. Worldwide, the Content Distribution business leased approximately 296,000 square feet and owned another 75,000 square feet, for a total of 371,000 square feet. The SI business, which is the remaining portion of the Content Services group, utilized 72,000 square feet, with the remaining 45,000 square feet utilized by Corporate.

 

Monitronics leases approximately 120,000 square feet in Dallas, Texas to house its executive offices, monitoring center, sales and marketing and data retention functions, of which approximately 10,000 square feet is currently under lease expiring on February 28, 2011, and remains on a month to month lease. Approximately 98,000 square feet of the remaining 110,000 square feet is under an eleven-year lease expiring May 31, 2015 and 12,000 square feet is under a seven-year lease expiring January 31, 2015. Monitronics also leases approximately 13,000 square feet for the McKinney, Texas back-up monitoring facility.

As part of the reorganization process that was completed prior to the two sales, the Company assumed certain leases for the space utilized for corporate functions. Currently, the Company leases approximately 40,000 square feet in California. All other properties leased by the Content Distribution business were included in the sale of the Content Distribution business to Encompass.

 

In addition, the Company owns approximately 290,000 square feet of real estate that is leased to third parties. The Company is currently exploring opportunities to dispose of or monetize such real property.

 

 

Ascent Media and its subsidiaries are party to various legal proceedings and claims arising in the ordinary course of our business from time to time. Although no assurance can be given, in the opinion of management, such proceedings and claims are not expected to have a material impact on our business, financial position or results of operations, either individually or in the aggregate.

 

 

 

Market Information

 

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

 

Our Series A common stock trades on the NASDAQ Global Select Market under the symbol ASCMA. Our Series B common stock is eligible for quotation on the OTC Bulletin Board under the symbol ASCMB, but it is not actively traded.

 

The following table sets forth the quarterly range of high and low sales prices of shares of our Series A common stock for the years ended December 31, 2010 and 2009. High and low bid information for our Series B common stock is not available.

 

 

Holders

 

As of January 31, 2011, there were approximately 1,190 and 66 record holders of our Series A common stock and Series B common stock, respectively (which amounts do not include the number of shareholders whose shares are held of record by banks, brokerage houses or other institutions, but include each institution as one shareholder).

 

Dividends

 

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

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Information required by this item is incorporated by reference to our definitive proxy statement for our 2011 Annual Meeting of shareholders.

Stock Performance Graph

 

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

 

The following graph sets forth the percentage change in the cumulative total shareholder return on our Series A common stock for the period beginning September 18, 2008 and ended December 31, 2010 as compared to the S&P Media Index and the NASDAQ Stock Market Index over the same period. The graph assumes $100 was originally invested on September 18, 2008 and that all subsequent dividends were reinvested in additional shares.

 

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

 

 

 

Purchases of Equity Securities By the Issuer

 

During the three months ended December 31, 2010, 3,092 shares of Series A common stock were surrendered by certain of our officers and employees to pay withholding taxes and other deductions in connection with the vesting of their restricted stock, as set forth in the table below.

 

 

 

 

 

The following tables present selected historical information relating to our financial condition and results of operations for the past five years. The following data should be read in conjunction with our consolidated financial statements.

 

 

 

 

 

 

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

 

Overview

 

At December 31, 2010, our assets consisted of our wholly-owned operating subsidiary, Monitronics International, Inc. (“Monitronics”) and the Content Services group, which is comprised of the Content Distribution business and the System Integration business. The Content Distribution business was subsequently sold on February 28, 2011.

 

Content Services Group

 

The Content Services group is comprised of two business units: the Content Distribution business unit (“Content Distribution”) and the System Integration business unit (“System Integration” or “SI”).

Content Distribution includes the facilities, technical infrastructure, and operating staff necessary to assemble programming content and to distribute media signals via satellite and terrestrial networks. The key services provided by Content Distribution include network origination, playout and control services provided to cable, satellite and pay-per-view programming networks. Content Distribution also provides transport and connectivity services by operating satellite earth station facilities which are used for uplink, downlink and turnaround services. In addition, it operates a global fiber network which carries video and data services between its various locations. Content Distribution operates from facilities located in California, Connecticut, Minnesota, New York, New Jersey, Virginia, the United Kingdom and Singapore.

 

System Integration designs, builds, installs and services advanced technical systems for production, management and delivery of rich media content to the worldwide broadcast, cable television, broadband, government and telecommunications industries. SI operates out of facilities in New Jersey, California and Virginia, and services global clients including major broadcasters, cable and satellite networks, telecommunications providers, and corporate television networks, as well as numerous production and post-production facilities. Services offered include program management, engineering design, equipment procurement, software integration, construction, installation, service and support.

 

The Content Services group’s revenue consists primarily of fees relating to facilities and services necessary to optimize, archive, manage, reformat and repurpose completed media assets for global distribution via freight, satellite, fiber and the internet. For the year ended December 31, 2010, approximately 83% of the Content Services group’s revenue relates to Content Distribution services. Most Content Distribution revenue is earned monthly under long-term contracts ranging generally from one to seven years, with a portion earned for occasional services. The remaining Content Services group revenue relates to systems integration and engineering services that are provided on a project basis over terms generally ranging from three to twelve months.

 

On December 2, 2010, we entered into a definitive agreement with Encompass Digital Media, Inc. (“Encompass”), pursuant to which we agreed to sell to Encompass, and Encompass agreed to purchase, 100% of the Content Distribution business. The sale of the Content Distribution business was completed on February 28, 2011, for a purchase price of $104 million in cash, subject to adjustment based on final working capital adjustments as of the closing date and other balance sheet items, plus the assumption of certain liabilities and obligations relating to the Content Distribution business. Such cash purchase price reflects the base purchase price under the purchase agreement of $113,250,000, as reduced or increased by the following adjustments provided for in the purchase agreement:

 

 

In addition, the purchase price included $300,000 paid by Encompass for certain licenses pursuant to the purchase agreement. We did not treat the Content Distribution business as a discontinued operation for any periods presented in this Annual Report on Form 10-K because shareholder approval of the sale did not occur until February 24, 2011. The Content Distribution business will be treated as a discontinued operation beginning in the first quarter of 2011.

 

Monitronics

 

On December 17, 2010, we signed and closed an agreement to acquire 100% of the outstanding capital stock of Monitronics, through the merger of our wholly owned subsidiary, Mono Lake Merger Sub, Inc., with and into Monitronics, with Monitronics surviving such merger. The cash consideration paid in connection with the merger was $395,876,000. We also assumed approximately $795,000,000 in net debt (debt less cash) of Monitronics. In connection with the acquisition, Monitronics entered into a Credit Agreement, which provides a $60,000,000 term loan and a $115,000,000 revolving credit facility. The obligations under the credit facility are secured by a security

interest on substantially all the assets of Monitronics and its wholly owned subsidiary, Monitronics Canada, Inc., as well as a pledge by Ascent Media Corporation of all outstanding stock of Monitronics. Ascent Media Corporation has guaranteed payment of the term loan up to the first $30,000,000 of obligations thereunder. At closing, Monitronics borrowed the full amount of the term loan and $45,000,000 under the revolving credit facility, for total initial borrowings under the credit facility of $105,000,000. The proceeds of such loans, after repayment of $5,000,000 outstanding under a previously existing credit facility, and payment of certain fees and expenses relating to the credit facility, were used to fund a portion of the aggregate merger consideration payable in connection with the acquisition of Monitronics. The remaining cash consideration paid was funded by cash on hand.

 

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

 

Revenues are recognized as the related monitoring services are provided. Other revenues are derived primarily from the provision of third-party contract monitoring services and from field technical repair services. All direct external costs associated with the creation of subscriber accounts are capitalized and amortized over ten years using a 135% declining balance method. Internal costs, including all personnel and related support costs incurred solely in connection with subscriber account acquisitions and transitions, are expensed as incurred.

 

Account cancellation, otherwise referred to as subscriber attrition, has a direct impact on the number of subscribers that Monitronics serves and on its financial results, including revenues, operating income and cash flow. A portion of the subscriber base can be expected to cancel its service every year. Subscribers may choose not to renew or terminate their contract for a variety of reasons, including relocation, cost, switching to a competitors’ service, and service issues. A majority of canceled accounts result from subscriber relocation or the inability to contact the subscriber. Monitronics defines its attrition rate as the number of canceled accounts in a given period divided by the weighted average of subscribers for that period. Monitronics considers an account canceled when a subscriber terminates in accordance with the terms of the contract or if payment from the subscriber is deemed uncollectible. If a subscriber relocates but continues its service, this is not a cancellation. If the subscriber relocates, discontinues its service and a new subscriber takes over the original subscriber’s service continuing the revenue stream (a “new owner takeover”), this is also not a cancellation. Monitronics adjusts the number of canceled accounts by excluding those that are contractually guaranteed by its dealers. The typical dealer contract provides that if a subscriber cancels in the first year of its contract, the dealer must either replace the canceled account with a new one or refund the purchase price. To help ensure the dealer’s obligation to Monitronics, Monitronics holds back a portion of the purchase price for every account purchased, typically 10%. In some cases, the amount of the purchase holdback may be less than actual attrition experience. In recent years, a substantial portion of the accounts that canceled within this initial 12-month period were replaced or refunded by the dealers at no additional cost to Monitronics.

 

Monitronics also analyzes its attrition by classifying accounts into annual pools based on the year of purchase. Monitronics then tracks the number of accounts that cancel as a percentage of the initial number of accounts purchased for each pool for each year subsequent to its purchase. Based on the average cancellation rate across the pools, Monitronics achieves nearly 0% attrition in the first year net of canceled accounts that are contractually guaranteed by the dealers. In the next three years, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool gradually increases and historically has peaked between the third and fourth years. The peak between the third and fourth years is primarily a result of the buildup of subscribers that moved or no longer had need for the service prior to the third year but did not cancel their service until the end of their three-year contract. After the fourth year, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool declines. As a result, Monitronics believes its attrition rate decreases as the age of the accounts increases.

The table below presents subscriber data for the twelve months ended December 31, 2010 and 2009:

 

 

 

 

Monitronics’ trailing twelve-month attrition rate decreased from 11.6% for the period ended December 31, 2009 to 11.1% for the period ended December 31, 2010. The improvement in the attrition rate was due to several factors, including Monitronics’ focus on customer service and higher credit scores for customers acquired over the past several years.

 

The following table includes pro forma information for Ascent Media, which includes the historical operating results of Monitronics prior to ownership by us. This pro forma information gives effect to certain adjustments resulting from the acquisition method of accounting, including increased amortization to reflect the fair value assigned in the acquisition to the suscriber accounts and dealer network, increased depreciation to reflect the fair value assigned in the acquisition to property and equipment and increased interest expense, including amortization of the discount recorded to reflect the fair value of the long-term debt. The pro-forma results assume that the acquisition had occurred on January 1, 2009 for all periods presented. They are not necessarily indicative of our results of operations that would have occurred if the acquisition had been made at the beginning of the periods presented or that may be obtained in the future.

 

 

 

 

Sale of Creative and Media Businesses

 

On December 31, 2010, Ascent Media, pursuant to a definitive agreement with Deluxe Entertainment Services Group Inc. (“Deluxe”), completed the sale of 100% of its creative services business unit and 100% of its media services business unit (which is refered to collectively as “Creative/Media”), for an aggregate purchase price of $69 million in cash, subject to adjustments based on net working capital on the closing date and other balance sheet items, plus the assumption of certain capital leases. Historically, the creative services business unit was its own reportable segment and the media services business unit was included in the Content Services group reportable segment. We have accounted for the disposition of the Creative/Media business as discontinued operations in the

consolidated financial statements for all periods presented in this Annual Report. We recorded a pre-tax loss on the sale of $27,110,000 and $7,587,000 of related income tax benefit, which is also included in discontinued operations.

 

Adjusted OIBDA

 

We evaluate the performance of our operating segments based on financial measures such as revenue and adjusted operating income before depreciation and amortization (which we refer to as “adjusted OIBDA”). We define “adjusted OIBDA” as revenue less cost of services and selling, general and administrative expense (excluding stock-based and long-term incentive compensation and accretion expense on asset retirement obligations) and define “segment adjusted OIBDA” as adjusted OIBDA as determined in each case for the indicated operating segment or segments only. We believe these non-GAAP financial measures are important indicators of the operational strength and performance of our businesses, including each business’s ability to fund its ongoing capital expenditures and service any debt. In addition, this measure is used by management to evaluate operating results and perform analytical comparisons and identify strategies to improve performance. Adjusted OIBDA excludes depreciation and amortization, stock-based and long-term incentive compensation, accretion expense on asset retirement obligations, restructuring and impairment charges, gains/losses on sale of operating assets and other income and expense that are included in the measurement of earnings (loss) before income taxes pursuant to GAAP. Accordingly, adjusted OIBDA and segment adjusted OIBDA should be considered in addition to, but not as a substitute for, earnings (loss) before income taxes, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Because segment adjusted OIBDA excludes corporate and other SG&A (as defined below), and does not include an allocation for corporate overhead, segment adjusted OIBDA should not be used as a measure of our liquidity or as an indication of the operating results that could be expected if either operating segment were operated on a stand-alone basis. Adjusted OIBDA and segment adjusted OIBDA are non-GAAP financial measures. As companies often define non-GAAP financial measures differently, adjusted OIBDA and segment adjusted OIBDA as calculated by Ascent Media should not be compared to any similarly titled measures reported by other companies.

 

Results of Operations

 

Our operations are organized into the following reportable segments: the Content Services group and the Monitronics business as discussed above.

 

 

 

 

Revenue.  Our consolidated revenue decreased $15,009,000 or 9.7% and $105,754,000 or 40.6% for the years ended December 31, 2010 and 2009, respectively, as compared to the corresponding prior year. In 2010, Content Services revenue decreased by $27,185,000 or 17.6% due to a decrease of $27,474,000 in system integration services as customers reduced their spending on system integration projects, with one customer, Motorola, accounting for $17.0 million of the decease and (ii) a decrease of $1,165,000 due to lower revenues for content distribution and transport services in the United States and Singapore. These decreases were partially offset by favorable changes in foreign currency rates of $1,192,000. In 2009, Content Services revenue decreased by $105,754,000 or 40.6% due to (i) a decrease of $95,511,000 in system integration services revenue due to a significant number of large projects in the United States and the United Kingdom in the prior year with one customer, Motorola, accounting for $47.8 million of the decrease, and a decline in system integration projects in 2009 as customers reduced their spending in response to a weaker economic climate, (ii) $7,282,000 due to lower content origination and transport services in the United States and the United Kingdom and (iii) unfavorable changes in foreign currency exchange rates of $3,826,000.

 

Monitronics revenue was $12.2 million for the year ended December 31, 2010, which represents revenue earned from alarm monitoring operations from the date of acquisition, December 17, 2010.

 

Cost of Services.  Our cost of services decreased $25,539,000 or 23.7% and $94,007,000 or 46.6% for the years ended December 31, 2010 and 2009, respectively, as compared to the corresponding prior year. A significant portion of the 2010 decrease related to lower production material costs mainly resulting from lower volumes of system integration services in the Content Services group. Further, we restructured the Company starting at the end of 2008, by combining facilities and reducing the number of employees at certain locations, which resulted in a reduction in labor and facility costs for the year ended December 31, 2010, compared to the prior year. We also had lower outside services expenses due to our efforts to reduce costs.

 

A significant portion of the 2009 decrease related to lower production material costs mainly resulting from lower volumes of system integration services in the Content Services group. Labor costs also declined as a result of the lower volumes of system integration services and the restructuring activities. We also had lower production equipment and outside services expenses due to our efforts to reduce costs. In addition, cost of services decreased as a result of favorable changes in foreign currency exchange rates of $3,538,000 for the year ended December 31, 2009.

 

As a percent of revenue, cost of services was 59.1%, 69.9% and 77.4% for the years ended December 31, 2010, 2009 and 2008, respectively. The 2010 decrease in cost of services as a percent of revenue is mainly a result of revenue mix as system integration projects, which incur higher production material costs, were significantly lower in 2010 compared to 2009. In addition, the 2010 revenue amount included $12.2 million of revenue from the Monitronics business which incurs significantly less cost of services than the Content Services group. The 2009 decrease in cost of services as a percent of revenue is mainly a result of revenue mix as system integration projects were significantly lower in 2009 as compared to 2008. The percentage decrease was also the result of the 2008 restructuring and cost mitigation measures that were implemented across both segments.

 

Selling, General and Administrative.  Our selling, general and administrative expenses (“SG&A”) are comprised of the following:

 

 

 

 

SG&A, excluding stock-based and long-term incentive compensation, accretion expense on asset retirement obligations and participating residual interest change in fair value, increased $620,000 or 1.5% and decreased $6,090,000 or 12.5% for the years ended December 31, 2010 and 2009, respectively, as compared to the corresponding prior year. For 2010, the increase was mainly due to SG&A expenses from the Monitronics business which was acquired on December 17, 2010 and transaction costs of $1.3 million incurred for the acquisition. These increases were partially offset by lower labor and other administrative costs, which declined due to the implementation of restructuring and cost mitigation measures. For 2009, the decrease was mainly driven by lower administrative and labor costs, which declined due to the implementation of the 2008 restructuring and cost mitigation measures and lower bad debt expense. In addition, SG&A was impacted by favorable changes in foreign currency exchange rates of $1,317,000 for the year ended December 31, 2009. As a percent of revenue, our SG&A, excluding stock-based and long-term incentive compensation, accretion expense on asset retirement obligations and participating residual interest change in fair value, was 31.0%, 27.6% and 18.7% for the years ended December 31, 2010, 2009 and 2008, respectively.

 

Stock-based and Long-term Incentive Compensation.  Stock-based and long-term incentive compensation was $4,182,000, $2,401,000 and $2,764,000 for the years ended December 31, 2010, 2009 and 2008, respectively, and is included in SG&A in our consolidated statements of operations. The expense for the year ended December 31, 2010, was related to restricted stock, stock options and cash distributions for awards granted in 2010 under the amended 2006 Long-Term Incentive Plan (“2006 LTIP”). In addition, the 2010 amount also includes approximately $425,000 of accelerated vesting of restricted stock and stock options related to the death benefits of our chief operating officer pursuant to the terms of the Ascent Media Corporation 2008 Incentive Plan. The expense for the year ended December 31, 2009, was related to restricted stock and stock option awards granted to certain executives. The expense for the year ended December 31, 2008, relates primarily to awards granted under the 2006 LTIP, for which a cash distribution was made to certain executives in connection with the sale of AccentHealth in September 2008.

 

Participating Residual Interest Change in Fair Value.  For the years ended December 31, 2010 and 2009, participating residual interest change in fair value was a credit of $134,000 and $4,092,000, respectively. These amounts relate to a reduction in the fair value of a participating residual interest liability related to a portion of our system integration business that was acquired in 2003. See footnote 17 in the financial statements for further information.

 

Restructuring Charges.  During 2010, 2009 and 2008, we completed certain restructuring activities and recorded charges of $5,713,000, $4,845,000 and $3,257,000, respectively.

 

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

 

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

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

 

 

 

 

Gain on Sale of Operating Assets, net.  The 2010 amount includes the gain on sale of $2,736,000 for the sale of real estate in California for net cash proceeds of $6,176,000. The 2008 amount includes a gain on sale of $10,174,000 for the sale of real estate in the United Kingdom for net cash proceeds of $16,215,000.

 

Depreciation and Amortization.  Depreciation expense decreased $3,478,000 or 12.3% and $102,000 or 0.4% for the years ended December 31, 2010 and 2009, respectively, as compared to the corresponding prior year. The 2010 decrease is due to the impact of an impairment charge of $972,000 recorded in 2009 related to a content services facility and a decrease in depreciation expense for the Content Services group. The decrease was partially offset by depreciation on the property and equipment that was acquired in the Monitronics acquisition. The 2009 decrease was due to the impact of favorable changes in foreign currency exchange rates of $1,428,000 for the year ended December 31, 2009. This increase was partially offset by the $972,000 impairment charge recorded in 2009 for a content services facility and the lower level of property and equipment in 2009 as more assets were fully depreciated.

 

Amortization of Subscriber Accounts and Dealer Network.  Amortization expense was $4,793,000 for the year ended December 31, 2010. The 2010 amount is the amortization related to subscriber accounts and dealer networks intangibles that were acquired in the Monitronics acquisition.

 

Income Taxes from Continuing Operations.  For the year ended December 31, 2010, we had a pre-tax loss from continuing operations of $24,908,000 and an income tax expense from continuing operations of $1,487,000. For the year ended December 31, 2009, we had a pre-tax loss from continuing operations of $24,535,000 and an income tax expense from continuing operations of $27,690,000. For the year ended December 31, 2008, we had a pre-tax loss from continuing operations of $8,035,000 and an income tax benefit from continuing operations of $1,122,000.

 

For 2010, we incurred income tax expense despite a pre-tax loss from operations mainly due to an increase in the valuation allowance of $7,487,000. For 2009, we incurred income tax expense despite a pre-tax loss from operations due to an increase in the valuation allowance of $34,839,000. For 2008, we recorded a $1,122,000 income tax benefit mainly due to tax expense of $1,512,000 recorded at our foreign operations.

Earnings from Discontinued Operations, Net of Income Taxes.  We recorded losses from discontinued operations, net of income taxes of $7,865,000, $672,000 and $57,706,000 for the years ended December 31, 2010, 2009 and 2008, respectively. These amounts included the earnings of the discontinued operations and the gain or loss on the sales. See further information about the discontinued operations below.

 

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

 

 

 

 

Content Services group segment adjusted OIBDA as a percentage of revenue was 19.9%, 15.2% and 12.1% for the years ended December 31, 2010, 2009 and 2008, respectively. The increase in the Content Services group adjusted OIBDA margin for the year ended December 31, 2010, was due to lower labor costs as a result of our cost mitigation measures and lower material costs due to the decrease in system integration revenues. The increase in the Content Services group segment adjusted OIBDA margin for the year ended December 31, 2009, was due to lower labor and other administrative costs as a result of our cost mitigation measures and a $2.7 million loss that was recorded in 2008 on a system integration contract.

 

In 2009, the primary cost components for the Content Services group were labor and materials, with these costs comprising about 62% of the segment revenue. Due to the decline in revenue from the system integration business, which incurs high material costs, the primary cost components for the Content Services group in 2010 are labor and facilities costs. These costs comprise about 62% of the segment revenues in 2010. The other cost components for the Content Services group are production equipment and general and administrative expense.

 

Content Services group segment adjusted OIBDA increased $1,828,000 or 7.8% for the year ended December 31, 2010, compared to the prior year. This increase was due to an increase of (i) $2,211,000 in the content distribution business, which reduced operating costs more than its decline in revenues and (ii) favorable changes in foreign currency exchange rates of $473,000. These increases were partially offset by a decrease of $1,293,000 from lower system integration revenues.

 

Content Services group segment adjusted OIBDA decreased $7,845,000 or 25.0% for the year ended December 31, 2009, compared to the prior year. This decrease was due to (i) a decrease of $8,529,000 from lower system integration revenues and (ii) a decrease of $1,223,000 from lower content distribution revenues. These decreases were partially offset by cost reductions of $1,718,000 for development of new business in 2009 compared to 2008.

 

The Monitronics adjusted OIBDA as a percentage of revenue was 70.8% for the year ended December 31, 2010. The Monitronics business adjusted OIBDA was $8.6 million for the year ended December 31, 2010, which

represents adjusted OIBDA recognized from alarm monitoring operations from the date of acquisition, December 17, 2010.

 

Discontinued Operations

 

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

 

Creative/Media

 

As discussed above, we sold our Creative/Media business to Deluxe on December 31, 2010. For the year ended December 31, 2010, the Creative/Media business generated $296 million in revenue and contributed $19 million of adjusted OIBDA. We recorded a pre-tax loss on the sale of $27.1 million and recorded an income tax benefit of $7.6 million.

 

GMX

 

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

 

Chiswick Park

 

In February 2010, we completed the sale of the assets and operations of the Chiswick Park facility in the United Kingdom, which was previously included in the Content Services group, to Discovery Communications, Inc. The net cash proceeds on the sale were $34.8 million. We recorded a pre-tax gain on the sale of $25,498,000 and $3,423,000 of related income tax expense. The gain and related income tax expense are included in earnings (loss) from discontinued operations in the accompanying condensed consolidated statement of operations for the year ended December 31, 2010.

 

AccentHealth

 

AccentHealth, which was acquired in January 2006, operated an advertising-supported captive audience television network in doctor office waiting rooms nationwide. AccentHealth was part of the Content Services group. On September 4, 2008, we completed the sale of 100% of the ownership interests in AccentHealth to an unaffiliated third party for net cash proceeds of $118,641,000. Our board of directors determined that AccentHealth was a non-core asset, and that the sale of AccentHealth would be consistent with our strategy of continuing to invest in core business operations while seeking opportunities to divest our non-core assets. We recognized a pre-tax gain on the sale of $63,929,000 and $35,046,000 of income tax expense on the gain in the year ended December 31, 2008.

 

Palm Bay

 

Ascent Media Systems & Technology Services, LLC, located in Palm Bay, Florida (“Palm Bay”), provided field service operations through an on-staff network of field engineers located throughout the United States and was part of the Content Services group. On September 8, 2008, AMG sold Palm Bay to an unaffiliated third party for net cash proceeds of $7,040,000. AMG recognized a gain on this sale of $3,370,000, and income tax expense of $2,463,000 on such gain in the year ended December 31, 2008.

 

Visiontext

 

Visiontext Limited (“Visiontext”) operated a post-production subtitling business in the United Kingdom and United States and was part of the Creative Services group. On September 30, 2008, AMG sold Visiontext to an unaffiliated third party for net cash proceeds of $2,150,000. AMG recognized a gain on this sale of $1,777,000, and income tax expense of $498,000 on such gain in the year ended December 31, 2008.

Liquidity and Capital Resources

 

At December 31, 2010, we have $149,857,000 of cash and cash equivalents on a consolidated basis. We may use a portion of these assets to fund potential strategic acquisitions or investment opportunities. On February 28, 2011, we closed the sale of the Content Distribution business and received net cash proceeds of $104 million, subject to post-closing adjustments.

 

Additionally, our other source of funds is our cash flows from operating activities. In 2010 and in prior years, the operating cash flows were generated from the Creative/Media, Content Distribution and SI businesses. Since we have sold both the Creative/Media and Content Distribution business and acquired the Monitronics business, future operating cash flows will be generated primarily from the operations of Monitronics. The Creative/Media business is treated as discontinued operations in the financial statements included in this annual report on Form 10-K. During the years ended December 31, 2010, 2009 and 2008, our cash flow from operating activities was $50,300,000, $35,974,000 and $21,041,000, respectively. The primary driver of our cash flow from operating activities is segment adjusted OIBDA. Fluctuations in our segment adjusted OIBDA are discussed in “Results of Operations” above. In addition, our cash flow from operating activities is significantly impacted by changes in working capital, which are generally due to the timing of purchases and payments for equipment and the timing of billings and collections for revenue, as well as corporate general and administrative expenses, which are not included in segment adjusted OIBDA.

 

During the years ended December 31, 2010, 2009 and 2008, we used cash of $20,492,000, $12,862,000 and $12,293,000, respectively, to fund our capital expenditures. These expenditures related to the purchase of new equipment, the upgrade of facilities and the buildout of our existing facilities to meet specific customer contracts of the Content Distribution, which were capitalized as additions and remained our property (not that of the customer) until the sale of the Content Distribution business. In December 2010, we paid cash of $395,876,000 to purchase the Monitronics business, which included cash on hand of $7,475,000. During 2010, we purchased marketable securities consisting of diversified corporate bond funds for cash of $41,757,000 in order to improve our investment rate of return and then sold all of these securities in December 2010 for cash proceeds of $96,685,000 to fund the acquisition of Monitronics. During 2009, we purchased marketable securities consisting of diversified corporate bond funds for cash of $68,126,000 in order to improve our investment rate of return. We sold a portion of these securities for cash proceeds of $16,309,000. During 2008, we sold marketable securities for cash of $23,545,000.

 

As part of the Monitronics acquisition, we assumed Monitronics long-term debt with a principal balance of $838 million at December 31, 2010. Such indebtedness is the obligation of Monitronics and certain of its subsidiaries and is not guaranteed by us or any of our subsidiaries other than Monitronics. In addition to the Monitronics’ cash on hand, we also acquired restricted cash which totaled $51 million at December 31, 2010. Also, in order to partially fund the cash consideration used for the Monitronics acquisition, Monitronics entered into a Credit Agreement with the lenders party thereto and Bank of America, N.A., as administrative agent (the “Credit Facility”). The Credit Facility provides a $60,000,000 term loan and an $115,000,000 revolving credit facility, under which Monitronics has borrowed $46,300,000 as of December 31, 2010. The term loan matures on June 30, 2012, and requires principal installments of $20,000,000 on December 31, 2011 and March 31, 2012. The revolving credit facility matures on December 17, 2013. We have guaranteed $30,000,000 of the aggregate principal amount outstanding under the Credit Facility.

 

Our liquidity requirements for 2011 and beyond have significantly changed from the prior year. In considering our liquidity requirements for 2011, we evaluated our known future commitments and obligations. We will require the availability of funds to finance the strategy of Monitronics, our primary operating subsidiary, which is to grow through subscriber account purchases. In addition, additional cash will be needed to meet Monitronics’ debt service obligations on its long-term debt, any settlement of Monitronics’ derivative financial instruments in advance of their scheduled terms, and capital expenditures. We also considered the expected cash flow from Monitronics, as this business will be the primary driver of our operating cash flows. In addition, we considered the borrowing capacity under Monitronics’ Credit Facility, under which Monitronics could borrow approximately $69,000,000. Based on this analysis, we expect that cash on hand, cash flow generated from operations and borrowings under the Monitronics’ Credit Facility will provide sufficient liquidity, given our anticipated current and future requirements.

The existing long-term debt of Monitronics at December 31, 2010 includes the principal balance of $838 million under a securitization facility. The Class A-1 term notes issued under the securitization facility in the aggregate outstanding principal amount of $450,000,000 are due in full on July 15, 2027; all other notes issued under the facility, including the variable funding notes described below, are due on July 15, 2037. However, certain terms of such securitization facility may impact our liquidity and capital structure in 2012.

 

As of December 31, 2010, alarm monitoring agreements for approximately 622,000 of Monitronics subscriber accounts are owned by Monitronics Funding LP, a subsidiary of Monitronics, which we refer to as “Funding”. Such alarm monitoring agreements, and the monthly recurring revenue and other proceeds thereof, are pledged as collateral to secure the obligations of Monitronics under the securitization facility. Under the terms of such facility, Issuer currently pays Monitronics Security LP (another subsidiary of Monitronics, which we refer to as “Security”) for monitoring and servicing the subscriber accounts owned by Funding, at an effective rate of $12.00 per active subscriber account. Fees paid from Funding to Security can be distributed to Monitronics, but cash balances at Funding must be used to service the securitization indebtedness. As the servicing fees paid by Funding to Security currently exceed the aggregate out-of-pocket costs of monitoring and servicing such subscriber accounts, the amount of such excess is available to Monitronics for other corporate purposes, including the purchase of additional subscriber accounts. However, under the terms of the securitization facility, effective July 2012, the amount of the servicing fees payable by Funding to Security will decrease from an effective rate of $12.00 per active subscriber account to $7.50 per active subscriber account. This decrease will substantially reduce or eliminate the excess cash available to Security for distribution to Monitronics. Accordingly, if Monitronics does not repay or refinance the securitization facility by July 2012, the decrease in servicing fees could have a substantially adverse affect on our liquidity and reduce the capital resources available to Monitronics for purchasing alarm monitoring accounts, further adversely affecting Monitronics’s business model and potential profitability. Monitronics is currently exploring opportunities to refinance or amend the terms of its securitization facility to avoid such potential adverse on its liquidity and capital resources. However, there can be no assurances that such a refinancing or amendment will be available to Monitronics on terms acceptable to us, or on any terms.

 

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

 

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

Contractual Obligations

 

Information concerning the amount and timing of required payments under our contractual obligations at December 31, 2010 is summarized below:

 

 

 

 

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 $829,540,000 at December 31, 2010, relate to the cost of acquiring portfolios of monitoring service contracts from independent dealers. The subscriber accounts acquired in the Monitronics acquisition were recorded at fair value under the acquisition method of accounting. Subscriber accounts purchased subsequent to the acquisition are recorded at cost. All direct external costs associated with the creation of subscriber accounts are capitalized. Internal costs, including all personnel and related support costs, incurred solely in connection with subscriber account acquisitions and transitions are expensed as incurred. The cost of subscriber accounts is currently amortized using the 10-year 135% declining balance method. We continue to assess the useful life and appropriate amortization method for the subscriber accounts.

 

Currently, a 10-year 135% declining balance amortization method is used to provide a matching of amortization expense to individual subscriber revenues based on historical performance of our subscriber base. The realizable value and remaining useful lives of these assets could be impacted by changes in subscriber attrition rates, which could have an adverse effect on our earnings.

 

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

Valuation of Long-lived Assets and Amortizable Other Intangible Assets.  We perform impairment tests for our long-lived assets if an event or circumstance indicates that the carrying amount of our long-lived assets may not be recoverable. In response to changes in industry and market conditions, we may also strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses. Such activities could result in impairment of our long-lived assets or other intangible assets. We are subject to the possibility of impairment of long-lived assets arising in the ordinary course of business. We regularly consider the likelihood of impairment and may recognize impairment if the carrying amount of a long-lived asset or intangible asset is not recoverable from its undiscounted cash flows in accordance with the Property, Plant and Equipment Topic of the FASB ASC. Impairment is measured as the difference between the carrying amount and the fair value of the asset. We use both the income approach and market approach to estimate fair value. Our estimates of fair value are subject to a high degree of judgment since they include a long-term forecast of future operations. Accordingly, any value ultimately derived from our long-lived assets may differ from our estimate of fair value.

 

Valuation of Trade Receivables.  We must make estimates of the collectability of our trade receivables. For the Content Service group receivables, our management analyzes the collectability based on historical bad debts, customer concentrations, customer credit- worthiness, current economic trends and changes in our customer payment terms. We record an allowance for doubtful accounts based upon specifically identified receivables that we believe are uncollectible. In addition, we also record an amount based upon a percentage of each aged category of our trade receivables. These percentages are estimated based upon our historical experience of bad debts. For the Monitronics business, we perform extensive credit evaluations on the portfolios of subscriber accounts prior to purchase and require no collateral on the accounts that are acquired. We establish an allowance for doubtful accounts for estimated losses resulting from the inability of subscribers to make required payments. Factors such as historical-loss experience, recoveries and economic conditions are considered in determining the sufficiency of the allowance to cover potential losses. Our trade receivables balance was $32,318,000, net of allowance for doubtful accounts of $825,000, as of December 31, 2010. As of December 31, 2009, our trade receivables balance was $23,535,000, net of allowance for doubtful accounts of $1,305,000.

 

Valuation of Deferred Tax Assets.  In accordance with the Income Taxes Topic of the FASB ASC, we review the nature of each component of our deferred income taxes for the ability to realize the future tax benefits. As part of this review, we rely on the objective evidence of our current performance and the subjective evidence of estimates of our forecast of future operations. Our estimates of realizability are subject to a high degree of judgment since they include such forecasts of future operations. After consideration of all available positive and negative evidence and estimates, we have determined that it is more likely than not that we will not realize the tax benefits associated with our United States deferred tax assets and certain foreign deferred tax assets, and as such, we have a valuation allowance which totaled $33,347,000 and $24,047,000 as of December 31, 2010 and 2009, respectively.

 

Valuation of Goodwill.  As of December 31, 2010, we had goodwill of $349.7 million, which represents almost 21% of our total assets. This goodwill was recorded in connection with the acquisition of Monitronics on December 17, 2010. We are required to test goodwill annually for impairment and record an impairment charge if the carrying amount exceeds the fair value. We will use a discounted cash flow approach as well as other methods to determine the fair value used in our test for impairment of goodwill. The results of this methodology will depend upon a number of estimates and assumptions relating to cash flows, discount rates and other matters. Accordingly, such testing is subject to various uncertainties, which could cause the fair value of goodwill to fluctuate from period to period.

 

We will perform our annual goodwill impairment analysis in the fourth quarter of 2011. In the event that we are not able to achieve expected cash flow levels, or other factors indicate that goodwill is impaired, we may need to write off all or part of our goodwill, which would adversely impact our operating results and financial position.

 

 

Foreign Currency Risk

 

We continually monitor our economic exposure to changes in foreign exchange rates and may enter into foreign exchange agreements where and when appropriate. Substantially all of our foreign transactions are denominated in foreign currencies, including the liabilities of our foreign subsidiaries. Although our foreign

transactions are not generally subject to significant foreign exchange transaction gains or losses, the financial statements of our foreign subsidiaries are translated into United States dollars as part of our consolidated financial reporting. As a result, fluctuations in exchange rates affect our financial position and results of operations.

 

Interest Rate Risk

 

As part of the acquisition of Monitronics on December 17, 2010, we assumed variable interest debt obligations with principal amounts of $838 million. In addition, we incurred an additional $106 million of variable rate debt in December 2010 primarily to partially fund the cash consideration paid for the Monitronics acquisition. Therefore, we now have exposure to changes in interest rates related to these debt obligations. Historically, Monitronics used derivative financial instruments to manage the exposure related to the movement in interest rates. At the date of Ascent Media’s acquisition of Monitronics, we recorded a derivative financial instrument liability of approximately $65 million, which represented the derivative’s fair value at such acquisition date. The derivatives are not designated as hedges and were entered into with the intention of reducing the risk associated with variable interest rates on the debt obligations. We do not use derivative financial instruments for trading purposes.

 

Tabular Presentation of Interest Rate Risk

 

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

 

 

 

 

 

Our consolidated financial statements are filed under this Item, beginning on Page 43. The financial statement schedules required by Regulation S-X are filed under Item 15 of this Annual Report on Form 10-K.

 

 

None.

 

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and with the participation of management, including its chairman, president and principal accounting officer (the “Executives”), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Executives concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2010 to provide reasonable assurance that information required to

be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

There has been no change in the Company’s internal control over financial reporting identified during the three months ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

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

 

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

 

The Company assessed the design and effectiveness of internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework .

 

Based upon our assessment using the criteria contained in COSO, management has concluded that, as of December 31, 2010, Ascent Media’s internal control over financial reporting is effectively designed and operating effectively.

 

The Company acquired Monitronics on December 17, 2010, and management excluded from its assessment of the effectiveness of Ascent Media Corporation’s internal control over financial reporting as of December 31, 2010, Monitronics’ internal control over financial reporting associated with total assets of $1.38 billion and total revenues of $12.2 million included in the consolidated financial statements of Ascent Media Corporation and subsidiaries as of and for the year ended December 31, 2010.

 

Ascent Media’s independent registered public accountants audited the consolidated financial statements and related disclosures in the Annual Report on Form 10-K and have issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. This report appears on page 43 of this Annual Report on Form 10-K.

 

 

None.

 

The Board of Directors and Stockholders

Ascent Media Corporation:

 

We have audited the internal control over financial reporting of Ascent Media Corporation as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management of the Company is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

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

 

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

 

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

 

In our opinion, Ascent Media Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by COSO.

 

Ascent Media Corporation acquired Monitronics International, Inc. (Monitronics) on December 17, 2010, and management excluded from its assessment of the effectiveness of Ascent Media Corporation’s internal control over financial reporting as of December 31, 2010, Monitronics’ internal control over financial reporting associated with total assets of $1.38 billion and total revenues of $12.2 million included in the consolidated financial statements of Ascent Media Corporation and subsidiaries as of and for the year ended December 31, 2010. Our audit of internal control over financial reporting of Ascent Media Corporation also excluded an evaluation of the internal control over financial reporting of Monitronics.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ascent Media Corporation and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive loss, cash flows and stockholders’ equity for each of the years in the three-year period ended December 31, 2010, and our report dated March 14, 2011 expressed an unqualified opinion on those consolidated financial statements.

 

 

Los Angeles, California

 

March 14, 2011

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Ascent Media Corporation:

 

We have audited the accompanying consolidated balance sheets of Ascent Media Corporation and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive loss, cash flows and stockholders’ equity for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

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

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ascent Media Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Ascent Media Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

Los Angeles, California

 

March 14, 2011

ASCENT MEDIA CORPORATION AND SUBSIDIARIES

 

Consolidated Balance Sheets

December 31, 2010 and 2009

 

 

See accompanying notes to consolidated financial statements.

ASCENT MEDIA CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Operations and Comprehensive Loss

Years ended December 31, 2010, 2009 and 2008

 

 

See accompanying notes to consolidated financial statements.

ASCENT MEDIA CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

Years ended December 31, 2010, 2009 and 2008

 

 

See accompanying notes to consolidated financial statements.

 

ASCENT MEDIA CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity
Years ended December 31, 2010, 2009 and 2008