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8-K/A - AMENDMENT TO FORM 8-K - Ascent Capital Group, Inc.a13-19123_18ka.htm

Exhibit 99.3

 

SECURITY NETWORKS, LLC AND SUBSIDIARIES

 

Consolidated Financial Statements

(Unaudited)

 

For the Three and Six Months Ended June 30, 2013 and 2012

 

 

Page

Contents

 

 

 

Independent Auditors’ Review Report

2

 

 

Consolidated Balance Sheet (unaudited)

3-4

 

 

Consolidated Statements of Operations (unaudited)

5

 

 

Consolidated Statement of Member’s Equity (unaudited)

6

 

 

Consolidated Statements of Cash Flows (unaudited)

7

 

 

Notes to Consolidated Financial Statements

8

 

1



 

Independent Auditors’ Review Report

 

The Board of Directors

Security Networks, LLC:

 

We have reviewed the accompanying consolidated balance sheet of Security Networks, LLC and its subsidiaries as of June 30, 2013, and the related consolidated statements of operations for the three and six-month periods ended June 30, 2013 and 2012, member’s equity for the six-month period ended June 30, 2013, and cash flows for the six-month periods ended June 30, 2013 and 2012.

 

Management’s Responsibility

 

The Company’s management is responsible for the preparation and fair presentation of the interim financial information in accordance with U.S. generally accepted accounting principles; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with U.S. generally accepted accounting principles.

 

Auditors’ Responsibility

 

Our responsibility is to conduct our reviews in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.

 

Conclusion

 

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with U.S. generally accepted accounting principles.

 

 

 

/s/ KPMG LLP

 

 

Dallas, Texas

 

August 15, 2013

 

 

2



 

SECURITY NETWORKS, LLC AND SUBSIDIARIES

Consolidated Balance Sheet

 (unaudited)

 

 

 

June 30,

 

 

 

2013

 

Assets

 

 

 

Current assets:

 

 

 

Cash

 

$

1,886,285

 

Accounts receivable, net of allowance of $439,965

 

1,635,889

 

Accounts receivable other

 

143,967

 

Parts inventory

 

477,107

 

Deposits

 

60,347

 

Prepaid expenses

 

499,426

 

Total current assets

 

4,703,021

 

 

 

 

 

Fixed assets:

 

 

 

Furniture and fixtures

 

375,697

 

Computer software and equipment

 

4,256,863

 

Equipment

 

7,626

 

Leasehold improvements

 

205,783

 

Total fixed assets

 

4,845,969

 

Accumulated depreciation

 

(2,741,499

)

Total fixed assets, net

 

2,104,470

 

 

 

 

 

Other assets:

 

 

 

Acquired/originated contracts, net of accumulated amortization of $56,744,360

 

239,650,565

 

Deferred financing costs, net of accumulated amortization of $3,621,955

 

4,856,824

 

Trademarks

 

3,600,000

 

Goodwill

 

54,628,747

 

Total other assets

 

302,736,136

 

 

 

 

 

Total assets

 

$

309,543,627

 

 

See accompanying notes to consolidated financial statements.

 

3



 

SECURITY NETWORKS, LLC AND SUBSIDIARIES

Consolidated Balance Sheet

 (unaudited)

 

 

 

June 30,

 

 

 

2013

 

Liabilities and Member’s Equity

 

 

 

Current liabilities:

 

 

 

Accounts payable

 

$

1,645,230

 

Accrued expenses

 

3,440,996

 

Accrued interest

 

1,178,478

 

Deferred revenues

 

3,778,065

 

Due on acquired contracts — short term

 

2,681,338

 

Total current liabilities

 

12,724,107

 

 

 

 

 

Noncurrent liabilities:

 

 

 

Notes payable

 

237,971,742

 

Due on acquired contracts — long term

 

6,551,527

 

Total noncurrent liabilities

 

244,523,269

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

Total member’s equity

 

52,296,251

 

 

 

 

 

Total liabilities and member’s equity

 

$

309,543,627

 

 

See accompanying notes to consolidated financial statements.

 

4



 

SECURITY NETWORKS, LLC AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenues:

 

 

 

 

 

 

 

 

 

Monitoring revenue, retail

 

$

24,424,868

 

18,027,412

 

$

46,973,698

 

$

34,143,713

 

Monitoring revenue, wholesale

 

317,709

 

339,689

 

643,342

 

669,054

 

Service and other

 

408,227

 

308,078

 

790,052

 

601,944

 

Total revenues

 

25,150,804

 

18,675,179

 

48,407,092

 

35,414,711

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Monitoring

 

2,121,237

 

1,405,725

 

4,018,615

 

2,641,928

 

Service and other

 

1,824,672

 

1,384,595

 

3,728,114

 

2,720,418

 

Selling, general and administrative

 

6,255,883

 

4,973,455

 

12,283,648

 

9,593,082

 

Amortization of customer accounts

 

7,881,537

 

5,534,880

 

15,012,984

 

10,403,920

 

Depreciation

 

334,533

 

275,884

 

620,709

 

537,363

 

Total operating expense

 

18,417,862

 

13,574,539

 

35,664,070

 

25,896,711

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

6,732,942

 

5,100,640

 

12,743,022

 

9,518,000

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

Interest expense (including amortization of deferred financing fees of $415,114 and $850,666 for 2013 and $371,352 and $673,014 for 2012)

 

5,128,923

 

3,784,688

 

10,010,242

 

6,842,788

 

Other expense

 

2,480,267

 

81,515

 

2,518,000

 

82,134

 

Total other expense

 

7,609,190

 

3,866,203

 

12,528,242

 

6,924,922

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(876,248

)

1,234,437

 

$

214,780

 

2,593,078

 

 

See accompanying notes to consolidated financial statements.

 

5



 

SECURITY NETWORKS, LLC AND SUBSIDIARIES

Consolidated Statement of Member’s Equity

(unaudited)

 

 

 

Contributed
Capital

 

Distributions

 

Accumulated
Deficit

 

Total Member’s
Equity

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

$

56,836,061

 

$

 

$

(4,951,736

)

$

51,884,325

 

 

 

 

 

 

 

 

 

 

 

Adjustment for stock-based compensation

 

197,146

 

 

 

197,146

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

214,780

 

214,780

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2013

 

$

57,033,207

 

$

 

$

(4,736,956

)

$

52,296,251

 

 

See accompanying notes to consolidated financial statements.

 

6



 

SECURITY NETWORKS, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

214,780

 

2,593,078

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

620,709

 

537,363

 

Amortization

 

15,863,649

 

11,076,934

 

Provision for uncollectible accounts receivable

 

1,119,705

 

760,532

 

Stock-based compensation expense

 

197,146

 

191,216

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(1,160,824

)

(652,149

)

Accounts receivable - other

 

21,077

 

(11,938

)

Deposits

 

35,370

 

(9,410

)

Prepaid expenses

 

(139,484

)

(432,363

)

Accounts payable and accrued expenses

 

2,850,135

 

597,636

 

Accrued Interest

 

139,621

 

33,453

 

Deferred revenue

 

621,999

 

634,727

 

 

 

 

 

 

 

Net cash provided by operating activities

 

20,383,883

 

15,319,079

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(828,855

)

(598,349

)

Purchase of inventory

 

(36,366

)

(25,954

)

Origination of customer contracts

 

(49,075,761

)

(47,596,082

)

Deferred holdbacks paid/held

 

729,894

 

2,114,604

 

 

 

 

 

 

 

Net cash used in investing activities

 

(49,211,088

)

(46,105,781

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on capital leases

 

(2,552

)

(23,057

)

Borrowings under senior lending facilities

 

29,835,088

 

33,457,889

 

Payments of deferred financing fees

 

 

(2,084,500

)

 

 

 

 

 

 

Net cash provided by financing activities

 

29,832,536

 

31,350,332

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

1,005,331

 

563,630

 

 

 

 

 

 

 

Cash at beginning of period

 

880,954

 

598,603

 

 

 

 

 

 

 

Cash at end of period

 

$

1,886,285

 

1,162,233

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



 

SECURITY NETWORKS, LLC AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

Note 1 — Basis of Presentation

 

Security Networks, LLC and subsidiaries (the “Company”) is a Florida limited liability company in West Palm Beach, Florida founded in April 2000.  The Company is a full service life safety solutions company, specializing in maintenance and monitoring of commercial and residential burglar alarms and fire alarms throughout the United States.  Security Networks Acceptance, LLC (“SNA”) is a wholly-owned subsidiary where a portion of the Company’s security alarm contracts are held.  The Company has two other wholly-owned subsidiaries, SNMCM, LP and SNCA, LLC, which have no operations and were created to facilitate licensing in certain states.  The Company has one other wholly-owned subsidiary, SN Puerto Rico, Inc., which is part of the consolidation and their activity is included in the accompanying financial statements.

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.

 

The accompanying interim consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments (consisting of normal recurring items) necessary for a fair presentation of the results for such periods.  The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.  These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2012.

 

Note 2 — Recent Accounting Pronouncements

 

There were no new accounting pronouncements issued during the six months ended June 30, 2013 that are expected to have a material impact on the Company.

 

Note 3 — Acquired/Originated Contracts, Net

 

The following is an analysis of the changes in acquired/originated customer contracts for the six months ended June 30, 2013:

 

Balance at December 31, 2012

 

$

205,587,788

 

Origination of customer accounts from affiliates

 

49,075,761

 

Amortization of customer accounts

 

(15,012,984

)

Impairment of customer contracts

 

 

Balance at June 30, 2013

 

$

239,650,565

 

 

8



 

SECURITY NETWORKS, LLC AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

Note 4 - Notes Payable

 

Notes payable consisted of the following:

 

 

 

June 30, 2013

 

 

 

 

 

$10 million subordinated note matures November 5, 2017, 12% per annum cash interest and 2% per annum compounded quarterly for interest capitalization

 

$

10,552,609

 

$10 million subordinated note matures November 5, 2018, 12% per annum cash interest and 2% per annum compounded quarterly for interest capitalization

 

10,552,609

 

Subordinated notes maturing November 5, 2018, 11% per annum cash interest and 1.75% compounded quarterly for interest capitalization

 

14,177,356

 

$220 million multi term loan matures November 5, 2016, LIBOR plus applicable margin, subject to a LIBOR floor of 1.5%

 

173,500,000

 

$30 million revolving commitment matures November 5, 2016, LIBOR plus applicable margin, subject to a LIBOR floor of 1.5%

 

29,189,168

 

 

 

237,971,742

 

Less current portion of Notes payable

 

 

Long-term Notes payable

 

$

237,971,742

 

 

Subordinated Notes

 

On November 5, 2010, the Company entered into a $10,000,000 subordinated note with Bank of New York Mellon-Alcentra Mezzanine Partners and a $10,000,000 subordinated note with Northwestern Mutual Capital Mezzanine Fund II, LP. The first note matures on November 5, 2017 and the second on November 5, 2018. The notes shall bear interest on the aggregate adjusted principal amount outstanding at a rate of 12% per annum payable quarterly in arrears in cash on the last day of the quarter in each year and at a rate of 2% per annum compounded quarterly on each interest payment date by capitalizing such interest by an increase in the aggregate adjusted principal amount of the notes outstanding.

 

On September 6, 2012, the Company entered into a $2,046,571 subordinated note and a $714,286 subordinated note with Northwestern Mutual Life Insurance Company. The Company entered into a $96,286 subordinated note with Northwestern Mutual Capital Mezzanine Fund II, LP.  The Company entered into a $1,142,857 subordinated note with United Insurance Company of America.  On October 29, 2012, the Company entered into a $5,116,428 subordinated note and a $1,785,714 subordinated note with Northwestern Mutual Life Insurance Company. The Company entered into a $240,714 subordinated note with Northwestern Mutual Capital Mezzanine Fund II, LP and a $2,857,143 subordinated note with United Insurance Company of America. These notes mature on November 5, 2018. The notes shall bear interest on the aggregate adjusted principal amount outstanding at a rate of 11.00% per annum payable quarterly in arrears in cash on the last day of the quarter in each year and at a rate of 1.75% per annum compounded quarterly on each interest payment date by capitalizing such interest by an increase in the aggregate adjusted principal amount of the notes outstanding.

 

9



 

SECURITY NETWORKS, LLC AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

Per the agreements, the following financial loan covenants are required:

 

Maximum Consolidated Capital Expenditures

 

$

1,800,000

 

Maximum Creation Multiple

 

41.80

 

Maximum Total Leverage Ratio

 

33.00:1.00

 

Maximum Senior Leverage Ratio

 

27.50:1.00

 

Maximum Attrition Rate

 

15.40

%

Minimum Consolidated Liquidity

 

$

900,000

 

 

Management believes that the Company is in compliance with all covenants as of June 30, 2013.

 

Credit Facility

 

On November 5, 2010, the Company entered into a $120,000,000 multi-term loan and a $30,000,000 revolving commitment with Goldman Sachs Specialty Lending Group, LP and Barclays Private Credit Partners, LLC (the Lenders). As of April 17, 2012, the Company extended the total revolver up to $250,000,000, which is made up of a total $220,000,000 on the multi-term loan and $30,000,000 for the revolving commitment. Under the terms of these agreements, funds borrowed under these facilities will accrue interest at a rate equal to LIBOR with floor at 1.5% plus the applicable margin as defined in the agreements. Interest is paid monthly in arrears.

 

The agreement is secured by a first priority lien on substantially all of its assets, including a pledge of all of the capital stock of each of its domestic subsidiaries and 65% of all of the capital stock of its foreign subsidiaries.  This agreement will mature on November 5, 2016.

 

Per the agreement, the following financial loan covenants are required:

 

Maximum Consolidated Capital Expenditures

 

$

1,500,000

 

Maximum Creation Multiple

 

38.00

 

Maximum Total Leverage Ratio

 

30.00:1.00

 

Maximum Senior Leverage Ratio

 

25.00:1.00

 

Maximum Attrition Rate

 

14.00

%

Minimum Consolidated Liquidity

 

$

1,000,000

 

 

Management believes that the Company is in compliance with all covenants as of June 30, 2013.

 

Estimated maturities of notes payable as of June 30, 2013 are as follows:

 

Remainder of 2013

 

$

 

2014

 

 

2015

 

 

2016

 

202,689,168

 

2017

 

10,552,609

 

2018

 

24,729,965

 

Thereafter

 

 

Total payments

 

$

237,971,742

 

 

10



 

SECURITY NETWORKS, LLC AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

Note 5 — Commitments and Contingencies

 

The Company experiences routine litigation in the normal conduct of its business.  The Company believes that any such pending litigation will not have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations.

 

ADT, LLC vs. Security Networks, LLC

 

As of June 30, 2013, the Company is involved with litigation alleging that affiliates had violated federal and state law by making deceptive sales statements to certain ADT customers. The likelihood of an unfavorable outcome or an amount of potential loss is not currently estimable.

 

Note 6 - Subsequent Events

 

On July 10, 2013, the holders of the equity interests of the Company entered into a securities purchase agreement with Monitronics International, Inc. (“Monitronics”), the wholly-owned operating subsidiary of Ascent Capital Group, Inc. (“Ascent Capital”), pursuant to which Monitronics will directly and indirectly acquire all of the equity interests of Security Networks, LLC and certain affiliated entities for a total estimated purchase price, subject to closing adjustments, of $487,500,000 in cash plus 253,333 shares of Ascent Capital’s Series A common stock, with an agreed value of $20,000,000.  Under the transaction, the Company’s existing debt and associated accrued interest will be paid off.  The transaction is expected to close in mid-August 2013.

 

Management evaluated the activity of the Company through August 15, 2013 (the date the financial statements were available to be issued) and concluded that no subsequent events have occurred that would require recognition in the Financial Statements or disclosure in the Notes to the Financial Statements, other than those presented above.

 

11