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Mandatorily Redeemable Preferred Securities
3 Months Ended
Mar. 31, 2018
Other Liabilities Disclosure [Abstract]  
Mandatorily Redeemable Preferred Securities
Mandatorily Redeemable Preferred Securities
In connection with the ADT Acquisition, the Company issued 750,000 shares of the Koch Preferred Securities. On January 23, 2018, in connection with the IPO, the Company deposited $750 million of the net proceeds into a Segregated Account for the purpose of redeeming the Koch Preferred Securities at a future date. Funds held in the Segregated Account are reported as noncurrent restricted cash and cash equivalents in the Condensed Consolidated Balance Sheet as of March 31, 2018.
The Koch Preferred Securities accrue and accumulate preferential cumulative dividends in arrears on the then current stated value of the Koch Preferred Securities. Dividends are payable quarterly, in cash, at a rate equal to the daily five-year treasury rate plus 9.00% per annum. In the event that dividends for any quarter are not paid in cash, dividends for such quarter will accrue and accumulate at a rate equal to the daily five-year treasury rate, plus 9.75% per annum, and will be added to the then current stated value of the Koch Preferred Securities at the end of such quarter.
The dividend obligation associated with the Koch Preferred Securities is reflected in interest expense, net in the Condensed Consolidated Statements of Operations. During the three months ended March 31, 2018, in lieu of declaring and paying a dividend on the Koch Preferred Securities, the Company elected to increase the accumulated stated value of such securities, which increased mandatorily redeemable preferred securities on the Condensed Consolidated Balance Sheet as of March 31, 2018 by approximately $25 million. During the three months ended March 31, 2017, the Company paid $21 million to meet the dividend obligation of the Koch Preferred Securities.
Refer to Note 1Basis of Presentation and Summary of Significant Accounting Policies” for information on the fair value of the Koch Preferred Securities.
Investor Rights Agreement
Prior to the consummation of the IPO, the Company, Prime Security Services TopCo Parent GP, LLC as the general partner of Ultimate Parent (“Parent GP”), Ultimate Parent, and affiliate of Koch Industries, Inc. (the “Koch Investor”), entered into an Amended and Restated Series A Investor Rights Agreement and a Second Amended and Restated Series A Investor Rights Agreement, which contain certain other designations, rights, preferences, powers, restrictions, and limitations that could require the Company to redeem all or a portion of the Koch Preferred Securities or require that the Company obtains the consent of the holders of a majority of the Koch Preferred Securities before taking certain actions or entering into certain transactions. Prior to the redemption of the Koch Preferred Securities in full, the Company and its subsidiaries are subject to certain affirmative and negative covenants, such as engaging in transactions with affiliates and paying dividends on its common stock, among other things, under the certificate of designation and other definitive agreements governing the Koch Preferred Securities. Additionally, the Company is required to offer to redeem all the Koch Preferred Securities in cash upon the occurrence of (i) any liquidation, dissolution, winding up or voluntary or involuntary bankruptcy of AP VIII Prime Security Services Holdings, L.P. (“AP VIII Prime Security LP”) which is the sole member of Parent GP and a limited partner of TopCo Parent, Parent GP, Ultimate Parent, the Company, Prime Security Services Borrower, LLC (a subsidiary), or any material subsidiary of the foregoing; (ii) an acceleration of any long term indebtedness of the Company; or (iii) a change in control, which, as defined in the certificate of designations governing the Koch Preferred Securities, includes (a) a change in control in Parent GP, Ultimate Parent, or the Company, (b) the Company’s Sponsor ceasing to have the power to appoint a majority of the directors or manager of Parent GP, Ultimate Parent, or the Company, and (c) the beneficial ownership of the Company’s Sponsor in Ultimate Parent or the Company falling below approximately 30%, in each case subject to certain exceptions.